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A. Cepilovs: EU procurement directives = innovation?
After number of years since the Commission proposed revision of procurement directives from 2004, on February 11, 2014 the Council finally adopted the new procurement directives (2014/24/EU and 2014/25/EU) as well as a directive on concessions contracts (2014/23/EU). The Member States are expected to transpose the new directives into national legislation by April 2016, providing some time for adjustment. The new directives come in conjunction with the most recent European framework programme for research and innovation Horizon 2020, where public procurement plays no small part, as a demand-side innovation policy instrument. In fact, public procurement has for almost a decade been on agenda of numerous governments across Europe. Given the size of public procurement budgets – which according to some estimates on average amount to close to 20% of GDP (for public procurements covered by the EU directives this number is lower and constitutes around 3.4% of EU GDP based on 2011 figures) - public procurement can and does play an important role in stimulating innovation, and can also be an instrument to drive sustainable development. Why did the old directives have to be replaced by the new ones, and what are the benefits that the new directives offer?
Key changes
Two of the most important proposals for revision of the directives that resulted from public consultation were simplification of public procurement procedures as well as strategic use of public procurement, as outlined in the green paper. The new directives were developed taking into account the suggestions made and introduced a wide range of improvements targeting both simplification and strategic use of public procurement in line with Horizon 2020 and the general focus on societal challenges.
Revisions thus can be roughly divided in two groups:
1. focusing on simplification and flexibility of public procurement procedures; 2. focusing on strategic use of public procurement as a policy instrument to drive innovation and sustainable development.
While simplified rules are important for both purchasing authorities and suppliers, the benefits of simplification are clearly outlined by the commission here and here. What I would like to focus on here is the strategic use of public procurement aiming at supporting innovation and sustainability.
Strategic use of public procurement
Environmental and social sustainability are two of the core challenges on the agenda of both the EU and individual member states. The new procurement rules provide for better integration of both environmental and social considerations in public procurement procedures. First, all enterprises performing public contracts have to comply with the applicable obligations of national, EU and international law. Focusing on abnormally low bids, the enterprises submitting the best tender (on the basis of price) can be excluded if it does not comply with environmental and social obligations.
The new rules also promote a life-cycle costing approach and require using economically most advantageous offer instead of simply price. Life-cycle costing includes all costs related to the life cycle of procured works, supplies and services, from resource extraction to recycling or disposal. Life-cycle costing can also include environmental and other externalities if their monetary value can be identified and verified. The new directives also provide a possibility to encourage social inclusion through reserving procurement procedures for ‘sheltered workshops’ that employ disadvantaged people. Procuring authorities can also consider the process by which the good, services and works are produced and award contracts to a company that employs the greatest number of disadvantaged, such as long-term unemployed, or disabled.
Finally, the new directives put a great emphasis on innovation as one of the objectives of public procurements, especially in the sectors where public sector plays an important role, namely health services, education and firefighting, among others. The new directives will retain all the instruments that were available earlier, such as functional requirements, accepting alternative solutions and pre-commercial procurement, adding a number of new mechanisms to encourage innovation. First, the new directives require using most economically advantageous offer throughout, and encourage using life-cycle costing as a criterion in evaluating tender proposals. This provides more space for innovative bids with potentially higher initial costs, but lower costs throughout the life cycle and therefore contributing to the overall sustainability objectives of the public sector. Also, for particularly technically and financially complex projects competitive dialogue procedure has been simplified. Finally, in addition to all other instruments aimed at facilitating innovation in the public sector, there is a new procedure called innovation partnership, which allows to select partners on a competitive basis to develop innovative solutions for the needs of the public sector. This procedure includes both research and development as well as commercial phase, which distinguishes it from pre-commercial procurement procedure which was exempted from the earlier directives.
The new directives therefore are there to help purchasing authorities procure goods and services satisfying their needs, as well as help authorities address sustainability concerns (social, economic and environmental) and use procurement to stimulate innovation in the private sector. The question however is, whether all we need to have more innovative and sustainable procurement are new directives or is there more to it?
Institutional factors as preconditions
Max Rolfstam – one of the scholars working actively on public procurement of innovation – has argued earlier, that it is not the directives that are unaccommodating towards innovation and sustainability, but it is a range of institutional factors that hampers wider use of all available instruments. I also argued earlier on the basis of a case study conducted in Latvia, that it is institutional factors and not directives or the national procurement rules as such that serve as constraints to more creative use of public procurement budgets. A discussion that followed the presentations at the seminar organized by the Estonian Social Enterprise Network on “How to get the most value out of public procurement” also suggested that there are several institutional obstacles on the way to more innovative and sustainable procurement.
One of the most prominent obstacles is the focus of purchasing authorities on price as a single criterion in evaluation of tender proposals. There are several reasons for this. First, procurement function is often dispersed across all kinds of public entities, from comparatively large central authorities, or city council procurement offices, to small organisations and local municipalities. The small size of the entity responsible for procurement can often mean limited capacity to undertake complex procurement procedures, due to a very simple fact that they physically may lack the technical expertise as well as time to carry out pre-procurement negotiations and have the capacity to draft detailed and technically correct procurement specifications.
One of the ways to deal with this is to use joint procurement, where several municipalities can assess their needs and join their efforts in order to both augment their market power and also enhance their capacity in procurement process.
Another instrument that can be helpful here is to collect good practices from across the country in form of case studies and distribute those across procurement authorities in order to raise awareness regarding both opportunities available and approaches used to maximise sustainability and innovation benefits through procurement process. Educating procurement officials not in only about correct application of procurement rules and directives, but also about procedures and ways of conducting procurement of innovative and sustainable goods, works and services, is absolutely essential in order to make it work. There are examples of such courses on innovation procurement already available, but at least part of learning can also be done through cross-border procurement and regional experience exchange. Another reason for relying on lowest price as a single or most important criterion is the reluctance of national authorities involved in resolving disputes to accept qualitative criteria that can be used in case of most economically advantageous offers. In this case, the only solution in the current situation is to draft tender evaluation and contract award criteria in such a way that all qualitative criteria related to the goods, works or services procured are objective and quantifiable, and therefore reduce the space for abuse by the contracting authorities, as well as for challenge from the side of unsuccessful tenderer. For example, a contracting authority can include provision of work for long-term unemployed in its tender evaluation and contract award criteria in case of public works or social services. In this case, the contracting authority will support employment of the local disadvantaged groups using the criterion that is objective and easily verifiable using the local or national tax office system. The same applies to sustainability criteria, where life-cycle costing methods provide instruments for evaluation of carbon footprint or waste that result from the procured goods or services throughout the life-cycle. There are, of course, many more other ways that can help purchasing authorities introduce qualitative criteria in their tender specifications, but for the sake of space I will avoid discussing those here.
The process, however, does not end with procuring authorities alone, and needs to address the other side of the equation, namely suppliers. Whereas many large companies have already implemented corporate social responsibility strategies, also in their approaches to public procurement, and therefore can actively respond to the emerging interest of the public sector in more innovative and sustainable public procurement, this is not the case with SMEs. SMEs are the life blood of the economy, representing up to 99% of the population of firms and contributing up to 90% of jobs, with some variation across countries. However, SMEs, particularly those on the S-end of the spectrum (e.g. companies with up to 50 employees) often lack the capacity to implement CSR strategies, and therefore need additional information on how to adjust to the new requirements for innovation and sustainability. The new directives, for example, allow public authorities to use sustainability labels as part of contract award criteria. This can potentially put SMEs at a disadvantage, given that SMEs often lack funds for acquiring such labels (e.g. ISO 14000 environmental certification). In this case purchasing authorities should provide some flexibility and allow SMEs to prove compliance with the requested standard in other verifiable way.
Finally, very few of all the innovative and sustainable outcomes from public procurement will be possible if innovation and sustainability will not be an integral part of the political agenda on all levels – from central government down to a small local municipality.
Aleksandrs Cepilovs is a Junior Research Fellow at the Chair of Innovation Policy and Technology Governance at the Ragnar Nurkse School of Innovation and Governance. This article was originally published in the Nurkse School Ideas Bank.
