Driving Innovation Through Public Procurement: A Policy Debate to Transform the Public Sector

1. Demand driven innovation through public procurementLieve BosEuropean CommissionDG CONNECT (Communication Networks) F2 unit (“Innovation”)

2. Policy debate that lead to EC activity on public procurement 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

3. Why? To get best value for money solutions developed for public sector challenges • Health care • Climate Change • Energy Efficiency • Transport • Security • Public sector efficiency… • 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.

4. Why? To shorten time to market & provide first customer reference for innovations Market Share % 100% 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) 75% CEF = Connecting Europe Facility SF = Structural/Cohesion Funds H2020 = Horizon 2020 50% PPI CEF, SF 25% PPI H2020, SF PCP H2020, SF Innovators 2,5% Early Adopters 13,5% Early Majority 34% Late Majority 34% Laggards 16%

5. Overcoming the 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 • 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

6. Why? To create growth and jobs 'in Europe' How? PCP-PPI combo • 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 Public Procurement of Innovative Solutions (PPI) Applied R&D / Pre-commercial Procurement (PCP) Phase 0 Curiosity Driven Research Phase 1 Solution design Phase 4 Deployment of commercial end-products Diffusion of newly developed products / services Phase 2 Prototype development Phase 3 Original development of limited volume of first test products / services Supplier A Supplier B Supplier B Supplier B Supplier(s) A,B,C,D and/or X Supplier C Supplier C Supplier D Supplier D Supplier D Also normally multiple sourcing here to keep competition going • Because of split between PCP and PPI: • PCP fallsoutside WTO rules & proc directives (can encourage job creation 'in Europe'), • evenif the large scale PPI thatmay come afterwardswould not beexempted

7. Difference between PCPand PPI PCP 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

8. IPR valuation at market price principle Exclusive development contracts Pre-commercial Procurement Procurer does not ask all outcomes (no IPR ownership rights) Procurer pays supplier exclusive dev. price – financial compensation for relinquishing IPR ownership rights Procurer 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 FINANCIAL COMPENSATION ownership rights Procurer sells exploitation license to suppliers ‘at market price’ (e.g. auction) ownership rights Intangibles (all – IPR ownership rights) Intangibles (all IPR rights) PRICE PAID R&D service contract PRICE PAID R&D service contract Tangible results R&D Service contract Tangible results R&D Service contract Supplier pays for filing/maintaining IPRs, litigation, and acquiring background IPRs Procurer keeps level of IPR 'control' to ensure competitive supply chain: rights to use, licensing rights, call back option, rights to publish key results PCP event, Budapest, 11-12 April 2011: slide 8

9. 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

10. PCP Win-win for all stakeholders Politicians Suppliers • Quality of public services • Focus on political priorities • Improve innovation climate • Attract foreign investment • Increase employment • Better products • Economies of scale • Wider market size • Shorter Time to market - New lead markets • Increase export • Global competitiveness • First buyer in early R&D Pre-commercial Procurement • Reduce cost of procurement • Shared risks & benefits - Reduce risk of innovation … at the ‘Lowest Price’ Get the ‘Best Product’… • Pooling of resources • - Economies of scale • No licensing costs • ‘First time right’ product • ‘EU interoperable’ • Attractive to venture capitalists • - Reduce unforeseen expenditure • Address ‘public market innovation failure’ • Shape product development to public needs • Increase technology knowledge • Reduce risk in commercial tendering • Favour supplier competition Procurers

11. Difference between PCPand PPI PPI – 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.

12. EC 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

13. PCP related calls so far 2013 2009 2011-12 DG CNECT(CP-CSAs) FP7-ICT-2013 €32,5M FP7-INFRA-2013 max €19,5M Co-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 INFSO (CSAs) FP7-ICT-2009 €1,5M 3 €500K networking actions for procurers (ICT for health, transport, egov for NMS) DG INFSO (CP-CSAs) FP7-ICT-2011/12 €24M FP7-INFRA-2012 €4,5M Co-financing 6 cross border PCPs: (in robotics for ageing well, mobile health services, traffic management, embedded ICT for fire fighter garments,energy efficient supercomputing) PCP DG ENTR (CP-CSAs) FP7-SEC-2013 €18M Co-financing 2 bottom-up cross border joint PCPs on land and maritime border surveillance) DG ENTR (CP-CSAs) FP7-SEC-2012 €10M Co-financing 1 joint PCP: (maritime border surveillance)

14. PCP-PPI related calls so far 2013 2009 2011-12 DG RTD FP7-ENV-WATER-INNO-DEMO CSA for PCP in EIP on water mgt FP7 2013 FOOD/AGRIWP CP (€6M) on opening market for bio-based products via procurement DG RTD (CSAs) FP7-COH-2012 €2M Transport & health procurer network DG ENTR CIP-EIP-2009 Lead Markets Networks €3M) 3 €1M networks of Procurers (healthcare, embedded textiles firefighters, sustainable construction) FP7 2013 TRANSPORTWP CP to demonstrate electric buses should facilitate PCP PPI DG ENTR & ENV (PPI Pilot) CIP-EIP-2011/12 €17M Co-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 €12M PPIs in health/active ageing Thematic networks preparing PPIs in ICT for sustainable mobility, energy efficient servers for cities DG ENER CIP-IEE (2008…) Networks of procurers on sustainable energy procurement

15. Status of PCP implementation across Europe Update April 2013 status Framework identified and/or Pilots in preparation Awareness Raising Exploring possibilities Working on framework Pilots started Malta SILVER Denmark Latvia DECIPHER Finland Spain Lithuania Romania V-CON Sweden Ireland Cyprus Poland CHARM Italy Netherlands Luxembourg Bulgaria Iceland UK Belgium Greece Hungary Slovakia Slovenia France Czech Republic Estonia Germany Portugal PRACE 3IP Switzerland Austria SMART@FIRE Norway 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) More Info about national PCP initiatives in Member States: http://cordis.europa.eu/fp7/ict/pcp/msinitiatives_en.html More info about EU funded cross border PCP projects:http://cordis.europa.eu/fp7/ict/pcp/projects_en.html

16. Example projects in Healthcare NHS UK Lombardia Italy Potential £19m p.a. saving Potential £30m p.a. saving Potential £160m p.a. saving 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). PCP Niguarda Hospital – Lombardyregion Easy-to-use automateduniversalsystem for moving hospital beds, with anti-collision and safetysystems, notneeding guide lines or trackseven on non rectilinearroutes PCP call for tender open £4,000 per HCAI avoided 16

17. PCP example on CO2 emissions Large projectCarbon capture – Norway attracting large firmsStatoil/Gassanova • 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

18. Example EU funded cross-border PCP www.silverpcp.eu • 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) !

19. PPI examples In Europe Low carbon healthcare PPI started 2006 Introducing more energy efficient LEDs in network of over 20 hospitals in 8 EU countries (cross border PPI cooperation funded by EC/DG ENTR) • 30% energy consumption saving • 88% maintenance savings Total cost savings enable take-in of +10% patients For more info:http://lowcarbon-healthcare.eu/ UK brand name for PPI = Forward Commitment Procurement (FCP) Swedish environmental/energy efficiency PPIs done 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 (PPI is called teknikupphandling in Sweden) Result: Reduced the SE dependency on nuclear energy with 15% through PPIs in combination with product certification/labeling, take-up subsidies & tax incentives More on UK & SE PPI cases: http://cordis.europa.eu/fp7/ict/pcp/msinitiatives_en.html

20. Example EU funded PPI procurers network (DG ENER) www.smart-spp.eu • 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.

21. How does PCP-PPI support look like today PCP and PPI in the ICT part ofFP7 and CIP 2013 work program

22. Activities CP-CSA for PCP grants FP7-ICT-2013-11 • 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. 22

23. Financial implicationsPCP for purchasers How to use CP-CSA for PCP grant • 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) • 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

24. Financial implicationsfor suppliers Example CP-CSA for PCP grant • 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 of €5-7 Mio PCP 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 suppliers P1 P5 P2 Preparation Joint PCP One Joint PCP call for tender Supplier A Supplier B P3 P4 Supplier B Supplier B Consortia of public procurers P1->P5 (min 3) Supplier C Supplier C Supplier D Supplier D Supplier D Supplier E Supplier E Supplier E

25. Example PPI pilotsCIP-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)

26. Example PPI pilot 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 One Joint or several separate but coordinated PPI call for tenders (based on jointly defined tender specs) Public Procurement of Innovative Solutions (PPI) Phase 4 Deployment of commercial end-products Early adoption of new to the market products / services P1 P10 Preparation Joint or coordinated PPIs P2 Procurer 1 buying e.g. €2 Mio solutions from supplier A … Procurer 2 buying e.g. €1,5 Mio solutions from supplier B P4 P3 Procurer 3 buying e.g. €5 Mio solutions from supplier D Consortia of procurers e.g. P1->P10 (min 3) Procurer 4 buying e.g. €2 Mio solutions from supplier E … … Procurer 10 buying e.g. €2 Mio solutions from supplier X

27. Background Info 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 possibility http://ec.europa.eu/digital-agenda/en/news/cip-information-day-specific-workshop-health-ageing-well-and-inclusion-objectives-31-33-0 On this site:onlinevideostreaming + 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