Is Public Procurement a Hindering Factor in the Uptake of Innovation?

Abstract

End users in the security sector often perceive public procurement as hindering innovation uptake. The chapter debates the role of public procurement in security research and innovation, presents the steps that the project iProcureNet is taking to promote innovation and offers suggestions of public procurement practices to public buyers that can promote innovation, such as joint cross-border public procurement, preliminary market consultation, value engineering and functional specifications. This chapter aims to analyse some of the public procurement instruments that can potentially promote innovation and presents practical suggestions on how public buyers, end users and researchers can utilise public procurement so that it no longer hinders innovation uptake.

iProcureNet at the Heart of Security Innovation

End users in the security sector often perceive public procurement as hindering innovation uptake. The iProcureNet project conducted an internal survey among the consortium on the main obstacles to innovation uptake. Several answers indicated that end users observe the procurement as an obstacle to obtaining innovative solutions for their needs.

To battle with the opinion that public procurement is a hindering factor of innovation uptake, the iProcureNet project envisaged creating an ecosystem of procurers, prescribers, legal advisors and other key stakeholders of security procurement to share and analyse procurement trends and needs, developing common and standardised practices from the technical, legal and financial perspectives, and open pathways for joint cross-border public procurement (JCBPP).

One of the activity lines is establishing pathways for JCBPP of innovative and new-to-market solutions, research services and commercial off-the-shelf (COTS) products in the field of internal security, that is, JCBPP of products or services acquired by the internal security sector such as border guard to perform their tasks.

Furthermore, iProcureNet dedicated its activities to promoting innovation in security procurement and supporting European procurers in JCBPP and innovation procurement. These actions should convince policymakers and end users that it is essential to turn the narrative into a more innovative procurement in the security sector, ultimately promoting the idea that procurement can catalyse innovation.

Procurement Instruments to Promote Innovation

There are already well-established mechanisms to promote innovation in the case of solutions that are not yet on the market or not commercially available. These are pre-commercial procurement (PCP) and public procurement of innovative solutions (PPI). Except these, the chapter will identify other public procurement instruments that can promote innovation even in the case of procurement of COTS, such as preliminary market consultation, value engineering and functional specifications.

Joint Cross-Border Public Procurement

Joint cross-border public procurement (JCBPP) is regulated in art. 39 of Directive 2014/24/EU and art. 57 of the Directive 2014/25/EU. According to both directives, the JCBPP can take three different forms: (a) JCBPP by using a central purchasing body located in another member state; (b) JCBPP where several contracting authorities from different member states procure jointly the same subject of the tender based on the procurement done by lead procurer and (c) JCBPP where several contracting authorities from different member states procure through a joint entity which they set up for this purpose.

Joint cross-border public procurement (JCBPP) is an innovative way of procurement. A promising mechanism of efficient purchasing as well as a strategic tool for the positive use of purchasing power on the market, it enables the sharing of costs, securing economies of scale and developing innovation. [1]

Promoting competition, providing incentives for companies to enter new markets, as well as development, standardisation and sharing of good procurement practices are among other benefits of JCBPP [2].

On the other hand, JCBPP is a complex public procurement process with many issues that the contracting authorities should be aware of before deciding to participate. According to the European Commission team leader on innovation procurement, Ivo Locatelli, ‘the challenges to be faced by contracting authorities can be legal, cultural, linked to the coordination effort required, using a foreign language in the procedure’ [3].

Without a doubt, the benefits of JCBPP prevail against the perils that inevitably accompany it. Even though there are still few examples of JCBPP, it is ‘gaining unexpected interest from a range of stakeholders: large cities, cross-border projects involving administrations, near borders, projects aiming at using public procurement to develop innovative products or services, inherently cross-border applications such as satellite services’ [3].

The respondents to the online survey conducted by the iProcureNet project have chosen the following main benefits of JCBPP (Fig. 40.1).

Fig. 40.1

Main benefits of JCBPP according to respondents to the iProcureNet survey

Pre-commercial Procurement and Public Procurement of Innovative Solutions

PCP can be described as a specific approach to procuring R&D services that involve competitive development in phases, risk–benefit sharing under market conditions and where there is a clear separation between the PCP and the deployment of commercial volumes of end products (potential follow-up PPI) [4].

On the other hand, public procurement of innovative solutions (PPIs) means procurement where contracting authorities act as a launch customer of goods or services that are not yet available on a large scale [4]. PPIs are part of public procurement tenders because they are done according to the rules of directives on public procurement.

The distinction is important because, in the case of PCP, more precisely, procurement of R&D, one is not obliged to follow the rules stated in Directive 2014/24/EU. However, in the case of PPI, the procurer has to follow the public procurement rules stated in Directive 2014/24/EU, specifically the rules of public procurement of the applicable legal regime (jurisdiction).

The PCP procedure allows procurers to be more flexible when designing the tender. Still, it is essential to mention that even though PCP is exempt from the application of the Directive 2014/24/EU, it remains subject to

• The TFEU principles and derived principles (e.g. transparency, non-discrimination, equal treatment)

• The EU competition rules include specific provisions to exclude state aid

• Any applicable national public procurement provisions that apply to PCP specifically or public procurements are exempted from the EU public procurement directives

Preliminary Market Consultation as a Legal and Flexible Way to Communicate with Suppliers

One of the effective ways to promote innovation and learn about new innovative solutions is to conduct open-market consultation or, as stated in article 40 of the Directive 2014/24/EU, preliminary market consultation (PMC). According to Voda and Jobse, specifically in innovation procurement, market consultation plays a crucial role because the innovation cycle is usually longer than the procurement cycle [5].

PMC can be described as a formalised dialogue between the contracting authority and other entities (economic operators, suppliers or independent experts), aiming to obtain answers to how the contracting authority’s problems can be solved.

Another possible definition is that ‘the concept of preliminary market consultation roughly encompasses a multi-faceted query whereby a contracting authority asks experts and market operators to offer their contributions to make up the object of the contract and to define the other feature of the procedure’ [6].

You can conduct PMC anytime during the pre-tender phase of public procurement. In JCBPP, it is advised to do PMC after the collaboration agreement is drafted so that the collaborating parties know their roles in procurement. Also, conducting PMC before writing the final technical description is recommended as the conclusion from PMC will probably affect writing the technical description.

PMC is a cornerstone of innovation procurement, providing advance notice to the market of opportunities and the unmet needs of their customers, allowing both time and valuable insights to suppliers to direct their business plans. On the other side, buyers will understand the market’s appetite, capacity and capability to meet their needs and the time frames involved. Experience from prior market engagement and consultations conducted is that it is welcomed by suppliers who find the process and access to customers beneficial.

The Reasons for Organising PMC

The reasons for organising PMC are numerous, and we are stating the ones we consider most crucial from the point of view of public buyers.

• The contracting authority does not know how it would be possible to ensure the realisation of its unmet need; for example, how to increase the capacities of the police force when analysing video streams from CCTV cameras

• Identification of the suitable suppliers on the market

• Obtaining information about existing technical solutions, their prices and conditions of performance

• Priming the market for new needs and demands of the buyer

• Promoting innovation in the market by giving innovative suppliers the possibility to present public buyers with their innovative solutions

• Verification of non-discriminatory qualification criteria and conditions for the performance of the contract

• Minimisation of imminent risks in the implementation and operation of the subject of tender

• Minimising the risk of review procedures within public procurement

It is essential to mention that suppliers can also benefit if they participate in the PMC organised by public buyers. To persuade the suppliers about the benefits of PMC must be of utmost importance to the public buyers to secure their presence on PMC; this is especially true due to the cost of suppliers they may have with participating in the PMC.

Suppliers can benefit from PMC in the following ways:

• A better understanding of the situation and problems of the public buyer and a better understanding of their need for innovation

• Suppliers have a legal way of ‘influencing’ the preparation of the tender

• Have an opportunity to present innovations, ideas and thoughts

• Can draw attention to discriminatory conditions without the need to use the review procedure

• Can decide faster whether the tender is interesting for the supplier and whether it is important to further deal with the prepared public tender

Within the iProcureNet project, we asked the respondents for their views on the benefits of conducting PMC. The answers are shown in Fig. 40.2.

Fig. 40.2

Benefits of the PMC according to the respondents of the iProcureNet survey

Appropriate Measures in the Context of PMC

Article 41 of Directive 2014/24/EU states the rules concerning the prior involvement of candidates or tenderers specifying that

the contracting authority shall take appropriate measures to ensure that competition is not distorted by the participation of that candidate or tenderer.

How can these appropriate measures be secure? For example, the CA publishes all the PMC minutes and the information you gather on your profile in the e-procurement system or web page. It is also possible to post the final technical description of the tender, qualification criteria, evaluation criteria and other parts of the tender document.

In the tender documents related to the public tender itself, the CA shall mention that all information gathered from the PMC is published in the e-procurement system or web page and add its link.

The CA should consider the risks of unequal treatment of economic operators and provide measures for mitigating such risks. First, the CA must ensure that participation in the consultation would not cause the economic operator to be later excluded from the procurement [7].

Functional Specification Versus Descriptive Requirements

According to the EC notice ‘Guidance on Innovation Procurement’, the public buyer prescribes the detailed solution with descriptive technical specifications and bears full responsibility for its quality and performance levels [8].

On the other hand, when it comes to functional specifications, the public buyer shifts the responsibility for achieving better results in the market. The public buyer sets minimum requirements to avoid an abnormally low-performing tender but is not overly prescriptive regarding the means of achieving a desired outcome. Economic operators enjoy openness and flexibility to reach the optimal performance [8].

Functional specifications should be preferred over technical specifications because they focus on long-term needs. It was mentioned in the online survey conducted by iProcureNet as a suggestion of good practice when referring specifically to PCP. Still, it can also be applied to public procurement tenders if the contracting authority wants to promote innovation. According to the EC Guidance Notice on Innovation Procurement, ‘functional requirements are far more innovation-friendly’. This approach of using functional specifications was followed by 80% of the five EC-funded innovation procurement projects in the security sector mentioned in the assessment report on the performance of EC-funded innovation procurement projects in the security sector [8].

Does this mean that using descriptive requirements is unsuitable for attracting innovation? No. According to the mentioned assessment report, even descriptive requirements may attract innovative solutions, but ‘this becomes easier to be achieved through the use of functional requirements that focus only on the description of the need, leaving the market free to come up, through competition, with solutions fit for the challenge in question’ [8].

However, formulating sound functional requirements is not an easy task to do and presents a challenge. This challenge can be overcome by ‘good knowledge of the market potential and most suitable technologies. Such knowledge is crucial for setting ambitious but realistic requirements and can be collected through a preliminary market consultation’ [9].

The topic of the functional specification was also discussed on the second day of the 2021 Annual Conference of iProcureNet. Here are some of the most interesting conclusions:

• To be able to write functional specifications, you need special people who have strong technical knowledge and an excellent knowledge of the operational environment. Functional requirements are something in between. They explain what we need to buy without entering into technical details. They have to be understood by both end users and suppliers.

• The procuring organisation should establish a collaborative ecosystem to provide access to the right people knowledgeable about innovation and know what innovators are working on today. Short-term politics will not work. It must be a long-term collaboration, a trusted environment where you can establish dialogue and access information.

• The practice of using functional specifications varies from state to state. Using variant proposals in public tenders can be a perfect way to boost innovation. In the years before the 2004 EU Directive and before the 2008 crisis, variants were used a lot in Portugal. In Slovakia, we can see less use of functional specifications or variants because of the risks involved.

Promoting Innovation by Value Engineering

The iProcureNet project discussed on many occasions how we can promote innovation, even in the case of COTS products. One of the answers to this question is using value engineering. Value engineering consists of ‘activities and actions that can be used during contract implementation to improve or preserve the functions of the innovative solution while reducing the costs’. Value engineering clauses typically incentivise vendors to continue improving their solution’s quality/cost ratio by awarding part of the additional cost savings/quality improvements achieved after the contract signature to the vendor [10].

CAs should, when drafting the tender documents and the contractual clauses, consider using the value engineering clauses to promote innovation. In the procurement of COTS, the use of value engineering would be, for example, advisable in contracts where maintenance is a significant part of the value of the contract. For instance, in the case of tender for higher-value drones, the maintenance cost should be considered when evaluating supplier offers. Suppose the value engineering clauses are used in the tender for drones when the supplier presents how to make maintenance more practical and cheaper during the contract. In that case, the savings should be split between the contracting authority and the supplier.

The CA ‘needs to announce the intention to use value engineering in the tender documents to ensure compliance with the principles of equal treatment, non-discrimination and transparency. Moreover, the procurement contract should clearly define the conditions for applying the value engineering approach to prevent unwarranted modifications to the procurement contract’ [10].

For more information about value engineering, the CAs shall look into the Toolkit prepared by the EAFIP project, more specifically Module 2: an operational module addressed to public procurers aimed at clarifying the pre-requisites and key steps to design and implement an innovation procurement process (PCP and PPI).

Conclusions

In this chapter, we debated the role of public procurement in security research and presented several procurement instruments that can promote innovation uptake. The frustration of end users complaining about public procurement as an obstacle to innovation could be addressed by procurement departments by explaining these instruments. It is also vital to the success of innovation procurement that the end users are involved in these procurement instruments. For example, they should be part of the team responsible for conducting preliminary market consultations.