The European public sector is facing significant challenges, including the need to modernise internal operations while delivering high quality public services. Market fragmentation and a lack of economies of scale often cause problems that hinder suppliers (especially SMEs) to enter the market, even when they have attractive solutions to offer. Innovation procurement can deliver solutions to these challenges and Information and Communication Technologies (ICTs) play a major role in this.
The EU research and innovation programmes FP7 and CIP, now grouped under Horizon 2020, offer support to innovation procurement in two complementary ways:
- In some cases, public sector challenges can be addressed by innovative solutions that are nearly or already in small quantity on the market and don't need new research and development (R&D). This is when Public Procurement of Innovative solutions (PPI)1 can be used effectively.
- In other cases, the required improvements are so technologically demanding that there are no near-to-the-market solutions yet and new R&D is needed. Pre-Commercial Procurement (PCP)2 can then be used to compare the pros and cons of alternative competing approaches and to de-risk the most promising innovations step-by-step via solution design, prototyping, development and first product testing.
By developing a forward-looking innovation procurement strategy that uses PCP and PPI in a complementary way, public procurers can drive innovation from the demand side. This enables the European public sector to modernize public services faster while creating opportunities for companies in Europe to obtain a first customer reference and gain international leadership in new markets
Thus, the justifications and rationales for the use of public procurement to spur innovation relate to three levels:
• First, public procurement is a major part of “local” demand, which constitutes a major factor in the location decision and in the inclination to generate innovations in each location.
• Second, there is a range of market and system failures affecting the translation of needs into functioning markets for innovative products, and public procurement can prove effective in redressing this.
• Thirdly, the purchase of innovative solutions offers a strong potential for improving public infrastructure and public services in general.
Public purchasers must be aware of the needs and of the readiness of consumers to purchase an innovation, and design their measure accordingly. The more a public policy is designed to change behaviour of consumers, the more catalytic procurement must be accompanied by further demand measures.