Demand driven innovation through public procurement

Lieve BosEuropean Commission

DG CONNECT (Communication Networks) F2 unit (“Innovation”)

Policy debate that lead to EC activity on public Policy debate that lead to EC activity on public procurement driving research & innovationprocurement driving research & innovation

• 2006: Aho report recommended EC actions driving demand for innovations through public procurement

• 2007: Lead Markets Initiative and PCP communication

• 2008-today: Council conclusions and EP resolutions asking EC to support public procurement of research and innovative solutions

• 2010: Digital Agenda for Europe, Innovation Union and Regional EU2020 flagships calling also Member States for more PCP & PPI

• DAE: PCP key to double annual public ICT R&D spending from 5,5 to 11 €Bn• Innovation Union: from 2011, MS dedicate €10Bn per year on PCP and PPI• Regional flagship: calls on regions to do PCP & PPI also via structural funds

• 2011: Revised industrial policy communication calling for innovation procurement in support of European industrial policy

Health care Climate Change Energy Efficiency Transport Security Public sector efficiency…

Why? To get best value for money solutions Why? To get best value for money solutions developed for public sector challengesdeveloped for public sector challenges

• Public sector is faced with important challenges.• Addressing these, often requires public sector transformations for

which no commercially stable solutions exist yet.• In many cases, solutions are near the market and would be provided if clear

requirements/sufficient demand expressed by the market (PPI) • In other cases, still R&D required to de-risk technology, still different competing

solution approaches to compare before committing to deploy (PCP)

• Public procurement is 'the tool' that enables the buyers to steer industrial R&I to its needs. However, public procurement driving R&I from demand side is underutilised in EU.

Why? To shorten time to market & provide first Why? To shorten time to market & provide first customer reference for innovationscustomer reference for innovations

Market Share %

Innovators2,5%

Early Adopters13,5%

Early Majority34%

25%

50%

75%

100%

Late Majority34%

Laggards 16%

PCPH2020, SF

PPIH2020, SF

PPICEF, SF

Normally functioning procurement market (e.g. in US, Asia): 2,5% of ‘innovator’ type customers (PCP) Who invest in R&D with suppliers ($50Bn/Y in US <-> €2,5Bn/Y in EU)

16% of ‘early adopters’ (PPI)

ICT public procurement market in Europe:0,5% of ‘innovator’ customers (PCP)5% of ‘early adopters’ of new tech in e-gov (PPI)

CEF = Connecting Europe FacilitySF = Structural/Cohesion FundsH2020 = Horizon 2020

Lack of awareness of how to optimise risk-benefit balance for procurer and supplier

Unclear how within the legal framework for R&D procurement

Fragmentation of demand

5

Overcoming Overcoming the barriersthe barriers

Phased approach, separate procurement of R&D from procurement of commercial vollumes of end-solutions, IPR sharing at market price

Commission PCP communication COM(2007)799 & SEC(2007)1668

Cooperation among procurers (share PCP/PPI experience/cost), EU support for cross-border PCPs/PPIs

Supplier B

Supplier C

Supplier D

Phase 1 Solution design

Phase 2 Prototype

development

Phase 3 Original development

of limited volumeof first test products /

servicesSupplier A

Supplier B

Supplier C

Supplier D

Supplier B

Phase 0 Curiosity

DrivenResearch

Applied R&D / Pre-commercial Procurement (PCP)

Phase 4 Deployment of commercial

end-productsDiffusion of newly developed

products / services

Supplier D

Public Procurement of Innovative Solutions (PPI)

• PCP to steer the development of solutions towards concrete public sector needs, whilst comparing/validating alternative solution approaches from various vendors

• PPI to act as launching customer / early adopter / first buyer of innovative commercial end-solutions newly arriving on the market

Supplier(s) A,B,C,Dand/or X

Also normally multiple sourcing here to keep competition going

Why? To create growth and jobs 'in Europe'Why? To create growth and jobs 'in Europe'How? PCP-PPI comboHow? PCP-PPI combo

Because of split between PCP and PPI:•PCP falls outside WTO rules & proc directives (can encourage job creation 'in Europe'), even if the large scale PPI that may come afterwards would not be exempted

PCP Pre-Commercial ProcurementPCP Pre-Commercial Procurement

When– Challenge requires R&D to get new solutions developed. Problem

clear, but pros / cons of several potential competing solutions not compared / validated yet. No commitment to deploy (PPI) yet.

What– Public sector buys R&D to steer development of solutions to its

needs, gather knowledge about pros / cons of alternative solutions, to avoid supplier lock-in later (create competitive supply base)

How– Public sector buys R&D from several suppliers in parallel (comparing

alternative solution approaches), in form of competition evaluating progress after critical milestones (design, prototyping, test phase), risks & benefits of R&D (in casu IPRs) shared with suppliers to maximise incentives for wide commercialisation

Difference between PCPand PPI

PCP event, Budapest,

11-12 April 2011: slide

8

IPR valuation at market price IPR valuation at market price principle principle

Tangible results R&D

Service contract

Intangibles (all IPR rights)

Exclusive development contractsProcurer asks for all outcomes

of R&D service contract

Procurer pays supplier full R&D cost(incl. IPR ownership rights)

Procurer pays for filing/maintaining IPRs, litigation and acquiring background IPRs

Procurer has full control over IPRs, but also full cost, legal liability and exploitation responsibility of IPRs

Pre-commercial ProcurementProcurer does not ask all outcomes

(no IPR ownership rights)

Procurer pays supplier exclusive dev. price – financial compensation

for relinquishing IPR ownership rights

ownership rights

PRICE PAIDR&D service contract

FINANCIAL COMPENSATION

ownership rightsProcurer sells exploitation license

to suppliers ‘at market price’

(e.g. auction)

Tangible results R&D

Service contract

PRICE PAIDR&D service contract

Intangibles (all – IPR

ownership rights)

Supplier pays for filing/maintaining IPRs,

litigation, and acquiring background IPRs

Procurer keeps level of IPR 'control' to ensurecompetitive supply chain: rights to use, licensing

rights, call back option, rights to publish key results

PCP based on good practice

• Procure R&D in steps (solutions, prototypes, test series) to reduce risk and give also SMEs a chance

Grow size of tasks gradually, make bridge from ideas to first test product, procurer = first customer reference

• Risk-benefit/IPR sharing with suppliers Less risk procurer, commercialisation opportunity suppliers

• Competing development with multiple suppliers Better value for money. US reports: in-development

competition reduces first unit acquisition cost with 20-30%*

• Sharing R&D costs with other procurers Cooperation across borders can help develop a European

market, common standards etc

* 'Competitive Dual Sourcing', Jacques Gansler, 7/10/2007. Based on analysis from Annex G, 'International Armaments Cooperation in a era of coalition security', report US Defence Science Board, August 1996

PCP Win-win for all stakeholders

- New lead markets- Increase export

- Quality of public services- Focus on political priorities- Improve innovation climate- Attract foreign investment- Increase employment

- Reduce cost of procurement

Procurers

Pre-commercialProcurement

-Shared risks & benefits-First buyer in early R&D

- Global competitiveness

PoliticiansSuppliers

Get the ‘Best Product’… … at the ‘Lowest Price’

- Address ‘public market innovation failure’- Shape product development to public needs- Increase technology knowledge- Reduce risk in commercial tendering- Favour supplier competition

- Pooling of resources- Economies of scale- No licensing costs - ‘First time right’ product - ‘EU interoperable’- Attractive to venture capitalists - Reduce unforeseen expenditure

- Better products- Economies of scale- Wider market size- Shorter Time to market

- Reduce risk of innovation

PPI – Public Procurement of Innovative SolutionsPPI – Public Procurement of Innovative Solutions When

– Challenge requires solution which is almost on the market or already on the market in small quantity but not meeting public sector requirements for large scale deployment yet. No R&D involved (R&D already done, or no R&D needed to solve problem)

What– Public sector acts as launching customer / early adopter / first

buyer for innovative products and services that are newly arriving on the market (not widely commercially available yet)

How– Public sector acts as facilitator establishing a buyers group with

critical mass that triggers industry to scale up its production chain to bring products on the market with desired quality / price ratio within a specific time. After potentially a test and/or certification, the buyers group purchases a significant volume of products.

Difference between PCPand PPI

EC support to PCP & PPIEC support to PCP & PPI

• Why EC support needed?– PCP /PPI in some EU countries but not spread across rest of Europe– Defragmenting demand side for challenges of common European

interest (common requirements setting, de facto standard creation)

• 2009: First EU calls for proposals creating European networks of public procurers on PPI (LMI CIP) and on PCP (ICT theme FP7)

• 2011-2013: EC support for PCP via FP7 and for PPI via CIP– DG CNECT and ENTR are piloting support to PCPs by procurers

(FP7 grant: co-financing up to 75% of the price of procured R&D)– DG ENTR, ENV and CNECT are piloting support to PPIs done by

public procurers (via CIP grant: co-financing up to 20% of the price of the innovative solutions procured/deployed)

• 2014-2020: Horizon 2020 (+ possibilities in SF & CEF)– EC can co-finance PCPs/PPIs carried out by grant beneficiaries– EC or EU funding bodies (e.g. agencies) can carry out PCPs/PPIs on

their own behalf or jointly with Member States

PCP

2009 2011-12 2013

DG INFSO (CSAs)FP7-ICT-2009

€1,5M3 €500K networking actions for procurers

(ICT for health, transport,

egov for NMS)

DG INFSO (CP-CSAs)FP7-ICT-2011/12

€24MFP7-INFRA-2012

€4,5MCo-financing 6 cross

border PCPs:(in robotics for ageing

well, mobile health services, traffic

management, embedded ICT for fire fighter

garments, energy efficient supercomputing)

DG CNECT(CP-CSAs)FP7-ICT-2013 €32,5M

FP7-INFRA-2013 max €19,5MCo-financing 7-8 cross border PCPs:

(€8M health/active ageing,€5,5M elearning, €4M open call

€5M digital preservation,€10M cloud computing,

Up to €x19,5M DANTE, GEANT)

DG ENTR (CP-CSAs)FP7-SEC-2012 €10M

Co-financing 1 joint PCP:

(maritime border surveillance)

DG ENTR (CP-CSAs)FP7-SEC-2013 €18MCo-financing 2 bottom-upcross border joint PCPs on

landand maritime border

surveillance)

PCP related calls so farPCP related calls so far

PCP-PPI related calls so farPCP-PPI related calls so far

PPI

DG ENTRCIP-EIP-2009Lead Markets

Networks €3M)3 €1M networks of

Procurers (healthcare,embedded textiles

firefighters, sustainable construction)

DG RTD FP7-ENV-WATER-INNO-

DEMOCSA for PCP in EIP on water mgt

FP7 2013 FOOD/AGRI WP CP (€6M) on opening market for bio-based products via procurement

DG ENTR & ENV (PPI Pilot)

CIP-EIP-2011/12 €17MCo-financing cross border PPIs: 8 on areas of EIPs (climate change, active

ageing, energy efficiency, mobility, health working

conditions) & 1 on eco-innovation

DG ENTR (PPI Pilot)CIP-EIP-2013 €6,3M

(sustainable construction, recycling, clean vehicles)

DG CNECT (PPI pilot & TN)

CIP-PSP-2013 €12MPPIs in health/active ageing

Thematic networks preparing PPIs

in ICT for sustainable mobility, energy efficient servers for

cities

DG RTD (CSAs)FP7-COH-2012

€2MTransport & health procurer network

2009 2011-12 2013

FP7 2013 TRANSPORT WP CP to demonstrate electric buses should facilitate PCP

DG ENERCIP-IEE (2008…)

Networks of procurers on sustainable energy

procurement

Status of PCP implementation Status of PCP implementation across Europe across Europe Update April 2013 status Update April 2013 status

More info about EU funded cross border PCP projects: http://cordis.europa.eu/fp7/ict/pcp/projects_en.html

More Info about national PCP initiatives in Member States: http://cordis.europa.eu/fp7/ict/pcp/msinitiatives_en.html

Pilots started

Framework identified and/orPilots in preparation

Hungary

Belgium

Netherlands

Awareness RaisingExploring possibilities

Denmark

Austria

FinlandSweden

Poland

Working onframework

GermanyFrance

Luxembourg

IrelandCyprus

Romania

Slovenia

Slovakia

Bulgaria

Czech Republic

Estonia

Greece

Latvia LithuaniaMalta

Portugal

Spain

Norway

Switzerland

Italy

Projects in dotted-line are cross-border EC funded PCP projects that have started:SILVER: started January 2012 (Supporting Independent Living of Elderly through Robotics)CHARM: started September 2012 (Common Highways Agency / Rijkswaterstaat Model for traffic management of the future)V-CON: started October 2012 (Virtual Construction / Modelling of Roads)SMART@FIRE: started Nov 2012 (Integrated ICTs for Smart Personal Protective Equipment for Fire Fighters and First Responders)DECIPHER: started February 2013 (new applications based on Distributed EC Individual Personal Health Records) PRACE 3IP: started July 2012 (PRACE 3rd phase on high energy efficient high performance computing)

SILVER

UKIceland

CHARM

V-CON

SMART@FIRE

DECIPHER

PRACE 3IP

16

Potential £160m p.a. saving

Potential £30m p.a. saving

£4,000 per HCAI avoided

Potential £19m p.a. saving

Example projects in Example projects in HealthcareHealthcare

Potential Value PCP-like projects to NHS: Improve the quality of the patient experience and generate significant cost savings (£236m).Value to the economy: A number of innovations have been able to attract significant extra investment (£290m).

NHS UKNHS UKLombardia ItalyLombardia Italy

PCP Niguarda Hospital – Lombardy region

Easy-to-use automated universal system for moving hospital beds, with anti-collision and safety systems, not needing guide lines or tracks even on non rectilinear routes

PCP call for tender open

Regulatory requirement to seriously reduce CO2 emissions by 2016 without negative effects on health/environment, beyond what market is able to offer

PCP started in 2011, currently comparing solution approaches of 5 vendors, time-to-market shortened

Follow-up procurement for deployment in preparation for 2014 (open to whole market)More info on this case on: http://cordis.europa.eu/fp7/ict/pcp/docs/statoil-pcp-case-v2.pdf

PCP example on CO2 emissions Large projectPCP example on CO2 emissions Large projectCarbon capture – Norway attracting large firmsCarbon capture – Norway attracting large firmsStatoil/GassanovaStatoil/Gassanova

Example EU funded cross-border PCP Example EU funded cross-border PCP

7 Local and regional contracting authorities from 5 EU Member States carrying out this PCP jointly:

city of Odense and region of Southern Denmark (Denmark), city of Västerås (Sweden), city of Vantaa and

Oulu (Finland), city of Stockport (UK), city of Eindhoven (Netherlands).

SILVER contracting authorities procure R&D services via the PCP to get robotics solutions developed and

tested in the 5 participating countries that will allow by 2020 to care for 10% more elderly people living

independently at home with the same amount of care staff.

SILVER call for tender is 'OPEN NOW'. Potentially invited tenderers are invited to info meetings in March-April

and to make offers by 12 June (see SILVER website and tender publication in OJEU) !

www.silverpcp.eu

For more info: http://lowcarbon-healthcare.eu/ UK brand name for PPI = Forward Commitment Procurement (FCP)

Low carbon healthcare PPI started 2006Introducing more energy efficient LEDs innetwork of over 20 hospitals in 8 EU countries(cross border PPI cooperation funded by EC/DG ENTR)• 30% energy consumption saving• 88% maintenance savingsTotal cost savings enable take-in of +10% patients

Swedish environmental/energy efficiency PPIsdone by NUTEK/STEM agency:

• heating-ventilation-cooling of buildings• public transportation (hydrogen busses)• office blocks (sun shading, lighting)• white appliances (washing machines, fridges)• wind energy parks

Result: Reduced the SE dependency on nuclear energy with 15% through PPIs incombination with product certification/labeling, take-up subsidies & tax incentivesMore on UK & SE PPI cases: http://cordis.europa.eu/fp7/ict/pcp/msinitiatives_en.html

PPI examplesPPI examplesIn Europe In Europe

(PPI is called teknikupphandling in Sweden)

Example EU funded PPI procurers network (DG Example EU funded PPI procurers network (DG ENER)ENER)

5 local authorities have lead this project on early market engagement to encourage sustainable energy

Public procurement (low carbon emission technologies): Barcelona (ES), Kolding (DK), Cascais (PT), London

borough of Bromley and the Eastern Shires Purchasing Organisation (UK).

Result: successful PPI procurement deploying various innovative products such as LEDs (over 20.000 units),

indoor and street lighting, energy efficient vending machines and electric mobility (e.g. electric mini bus),

representing a total budget of around €80 million and involving over 200 municipal staff. The technical

solutions retained will reduce energy consumption and CO2 emissions by 30-90%, accounting for an

estimated reduction of 5.3 GWh/a.

www.smart-spp.eu

How does PCP-PPI support look like today PCP and PPI in the ICT part of

FP7 and CIP 2013 work program

22

CSA part grant– Defining joint specs + setting up/managing joint PCP procurement process– Awareness Raising, experience sharing (incl. training for public purchasers),

dissemination of results, contribution to standards/regulation to remove obstacles for introducing PCP innovations in the market

CP part grant– Execution of 1 joint cross-border PCP tender (addressing 1 jointly agreed

challenge, procurers in consortium sharing the costs to finance R&D together, one entity in consortium executing the PCP procurement)

– To explore possible alternative solution paths for the targeted improvements in public sector services + testing of the solutions against a set of jointly defined performance criteria.

Activities Activities CP-CSA for PCP grants CP-CSA for PCP grants FP7-ICT-2013-11FP7-ICT-2013-11

Financial implicationsFinancial implicationsPCP for purchasersPCP for purchasers

Example: €5 Mio CP-CSA for PCP grant Max 25-30% (check call) (e.g. €1,5 Mio) for coordination costs - 100% funded Other €3,5 Mio = EC contribution to the ICT R&D procured through the joint PCP

• Funding rate 75% for some, 50% for other contracting authorities (CAs)

How to use CP-How to use CP-CSA for PCP CSA for PCP grantgrant

Consortium brings €1,16-3,5 Mio (+VAT) for €4,93-7 Mio PCP If consortium of CAs all eligible for 75% rate, and joint PCP e.g. under BE law then

• VAT = 21% (€ 0,98 Mio) -> consortium invests € 2,14 Mio If consortium of 5 CAs, and PCP phase 1-3 spread over 3 years

• Then each project partner/CA invests €143K on average/Y over 3 years in the PCP

Cross-border cooperation + EC funding reduces risk/cost for CAs Joint PCP cheaper than buying R&D from one supplier on your own as CA

• Comparing various solution approaches from different vendors• Defragmenting market to get in long run also cheaper large volume purchases• Sharing R&D cost/experience with other procurers & EC

Financial implicationsFinancial implicationsfor suppliersfor suppliers

Supplier B

Supplier C

Supplier D

Phase 1: Solution design ~10-15% PCP budget~100-250K/supplier

~4-10 suppliers

Phase 2: Prototyping~30-40% PCP budget~500-750K/supplier

~3-6 suppliers

Phase 3: Original development – operational testing

~50-60% PCP budget~800K-2,3M/supplier

~2-4 suppliersSupplier A

Supplier B

Supplier C

Supplier D

Supplier B

Example of €5-7 Mio PCP

Supplier D

Example CP-CSA Example CP-CSA for PCP grantfor PCP grant

Supplier ESupplier E

Supplier E

PreparationJoint PCP

P1

P2

P3P4

P5

Consortia of public procurersP1->P5 (min 3)

One Joint PCP call for tender

Example: €5-7 Mio for PCP spread over # suppliers & phases Consider how many suppliers needed at start to get competitive supply chain at end Typically cost increases with each phase, but less suppliers per phase Typically €5-7 Mio PCP can finance €1-3Mio of R&D per supplier (gradually increasing financing/phase also feasible for SMEs to bring product to market)

Example Example PPI pilotsPPI pilotsCIP-PSP-ICT-2013CIP-PSP-ICT-2013

Preparation phase

Defining common specs (functional/performance requirements).

Open market consultation, announcing intention to buy critical mass of innovative solutions if market able to meet solution requirements by pre-set date (published as PIN in OJEU).

Optional: test / certification / labelling by end of date pre-set in PIN before buying, to check whether market really meets solution requirements.

Implementation phase

Implementation during project of 1 joint or several separate but coordinated PPI procurements based on above common specs

Publication of call for tender(s) in OJEU Tenders as open as international agreements require Evaluation of tenders on best value for money (not just lowest price)

Deployment and operation of procured solutions (min 6 months)Evaluation & dissemination of results (pro-actively involving e.g. other procurers beyond project partners)

Phase 4 Deployment of commercial end-products

Early adoption of new to the market products / services

Public Procurement of Innovative Solutions (PPI)

Procurer 1 buying e.g. €2 Mio solutions from supplier A

Example PPI Example PPI pilot grantpilot grant

Example: €3 or 5 Mio PPI pilot grant Max 30% up to max €1 Mio for coordination costs - 100% funded Remaining €2-4 Mio = EC contribution to the ICT solutions procured / deployed through

one joint or several coordinated PPIs based on jointly defined specs• Reimbursement rate 20% for public and private contracting authorities -> value

total amount of PPI procurements by all procurers in consortium = €10-20 Mio

PreparationJoint or

coordinated PPIs

P1

P2

P3P4

P10

Consortia of procurers

e.g. P1->P10 (min 3)

One Joint or severalseparate but

coordinated PPI call for tenders (based on jointly

defined tender specs)

Procurer 2 buying e.g. €1,5 Mio solutions from supplier B

Procurer 3 buying e.g. €5 Mio solutions from supplier D

Procurer 4 buying e.g. €2 Mio solutions from supplier E

Procurer 10 buying e.g. €2 Mio solutions from supplier X

…

… …

CNECT website on PCP and PPI: Info on open calls, EU funded projects, background docs, FAQs, PCP/PPI cases around Europe: http://cordis.europa.eu/fp7/ict/pcp/home_en.html

For latest PPI call, see CIP PSP ICT 2013 Call 7 page: http://ec.europa.eu/research/participants/portal (search for callIdentifier=CIP-ICT-PSP-2013-7)Read section 4.1.5 in Work Program and Guide for applicants for PPI pilots!Make use of pre-proposal check possibilityhttp://ec.europa.eu/digital-agenda/en/news/cip-information-day-specific-workshop-health-ageing-well-and-inclusion-objectives-31-33-0On this site:online videostreaming + ppt slides explaining PPI pilot instrument

For latest PCP call, see FP7 ICT 2013 Call 11 page:http://ec.europa.eu/research/participants/portal/ (search for callIdentifier=FP7-ICT-2013-11)Read section 11.1 and appendix 6 in WP and Guide for applicants for CP-CSA for PCP grants!Make use of pre-proposal check possibility

Background Background InfoInfo