Public procurement: the untapped multibillion-euro instrument for scaling up innovation
Author: Marie-Anne de Gier
The Dutch central government purchases around €20 billion worth of products and services each year. This enormous purchasing power is still not being used to its full potential to advance technological innovation. Many successful tech start-ups fail to scale, and innovative solutions often struggle to reach businesses and other customers after their first application.
The Wennink report underlines that the Netherlands is not making full use of its innovation potential, and that innovation and scale-up are essential to our future prosperity and competitiveness. This also calls for a more active role for government as a buyer. That ambition is consistent with the new Vision for Central Government Procurement in which the Dutch central government intends to use its purchasing power more explicitly to promote innovation, digital autonomy and economic development, among other aims.
Public procurement can take innovation from development to application
Public procurement can be a powerful complementary instrument for innovation. While grants primarily encourage technology development, procurement can support the transition to application and scale-up. When government purchases innovative solutions, companies have an opportunity to prove and further develop their technology in practice. A first major customer can also build confidence among other customers and investors, opening the way to a larger market.
Attention to this strategic role for public procurement is growing in several quarters. The Taskforce on Future Prosperity sees opportunities to support start-ups and scale-ups in this way. The Rathenau Instituut emphasises procurement’s role in digital autonomy. At European level, work is also under way on new procurement rules that should provide greater scope to use public procurement to achieve strategic objectives.
‘In practice, the use of these instruments for innovation procurement remains limited, even though the legal possibilities are there.’
Marie-Anne de Gier, Consultant and researcher Digital & Sustainability
Scope for innovation is created before the tendering process begins
Procurement often focuses on the tendering process: the procedure, selection criteria and choice of supplier. However, the scope for innovation is frequently determined at an earlier stage, when the contract is being defined. What societal problem needs to be solved, and what outcome does the government want to achieve? Does a solution already exist, or is further development needed?
Early collaboration between policy officers, commissioning authorities and procurement professionals is therefore important. This makes it possible to take procurement options into account when defining the contract. The way the requirement is described also matters: specifying a particular technology restricts the scope for innovation, whereas focusing on the desired outcome creates room for innovative solutions. Tools such as market consultations, functional specifications and innovation partnerships can help.
In practice, these tools for innovation-oriented procurement remain underused, even though the legal options exist. In its country report on innovation procurement in the Netherlands, the European Commission concludes that the Netherlands has expertise and support available through PIANOo, but lacks an up-to-date national action plan, ambitious spending targets and systematic monitoring.
Why is this scope not always used?
Two factors contribute to the underuse of innovation-oriented procurement:
- Incentives are not always geared towards innovation. Legal compliance, cost control and procedural certainty carry considerable weight. If innovation barely features in the assessment of results, a familiar and manageable approach is the obvious choice. Yet this is not necessarily the most effective solution to the societal challenge. Explicitly incorporating innovation into objectives and evaluations creates more scope for novel solutions.
- Costs and benefits do not always fall in the same place. Innovation requires additional preparation, collaboration and a willingness to take risks. The organisation making the investment bears the costs and effort, while the societal benefits may also be realised elsewhere. Linking procurement to policy objectives at an early stage makes it clearer how these investments contribute to societal challenges.
How procurement can help successful innovations progress
If government makes better use of the scope for innovation in procurement, it can remove barriers to scale-up and help successful technologies progress to the next stage. Is demand too limited to make investment commercially viable? Is public purchasing too fragmented? Or do regulations and established working practices impede adoption? Depending on the obstacle, government can use its purchasing power in three ways:
1. Market acceleration: becoming the first customer
A first public-sector customer helps companies put an innovation into practice. The purchase creates the prospect of follow-on contracts and can also give other customers and investors confidence.
Practical example: Erasmus MC needed to replace an energy- and labour-intensive installation used to wash and disinfect bed linen. Through Forward Commitment Procurement, the hospital began engaging with the market more than three years in advance. Suppliers were able to develop solutions step by step, reducing risks and giving a more sustainable alternative a better chance of success.
2. Market creation: aggregating demand
By aggregating demand, public-sector organisations create sufficient volume and certainty. This gives companies a stronger basis for developing and scaling up innovative solutions.
Practical example: The technology for bio-based wooden bridges and biocomposites exists, but widespread scale-up has been held back by uncertainty about quality, service life and costs. Through Building Balance, TNO is bringing public commissioning authorities together to align requirements and provide a credible prospect of future purchases. This gives companies greater certainty to invest and scale up production.
3. Market transformation: adapting the framework conditions
Sometimes regulations, infrastructure or established working practices impede the adoption of an innovation. Government can encourage scale-up by adapting these framework conditions.
Practical example: Autonomous transport can help address staff shortages and make transport more efficient, but self-driving lorries are currently used only in controlled environments in the Netherlands. Minister Karremans has stated the ambition of enabling self-driving lorries to operate on public roads in the Netherlands before 2029. This will require changes to legislation, regulation and infrastructure, among other things, to allow their permanent use. This matters because short permit periods and uncertainty about future deployment make companies reluctant to invest.
Realising the potential of public procurement requires a more targeted approach
Public procurement is not a silver bullet. Not every societal challenge calls for innovation-oriented procurement, and not every innovation is suitable for government to act as the first customer. Nevertheless, government can use its purchasing power to stimulate innovation when the market does not move of its own accord or when other innovation instruments are insufficient. This requires closer alignment between policy, innovation and procurement, as well as attention to how successful innovations can continue to scale after their first application.
Research into the role of public procurement in innovation and scale-up
At TNO Vector, we investigate when public procurement genuinely contributes to innovation and scale-up. Using data, practical cases and examples, we examine the position of start-ups and the role of government in developing new markets, among other topics. Have you seen an innovative solution that was, or was not, scaled up after a successful pilot? We would like to hear what helped, what stood in the way and what role government played as a buyer.
