Innovation Procurement

1. Introduction

Investment in innovation procurement, including both Pre-Commercial procurement and the public procurement of innovative solutions, represents about 10% of total public procurement expenditures in the EU. One of the difficulties that a city can encounter on the path to digitalization is the lack of technical background to ensure interoperability and data control in a Smart city. Furthermore, digitalization often requires solutions for which there is a lack of supply in the market and that might need to be created or adapted to a specific need. Therefore, the collaboration in deploying solution between public administration and economic operators is important and to this scope, innovation procurement can facilitate the widespread adoption of the procured solutions necessary to become a smart city1 .

2. Why opt for Innovation Procurement

Innovative procurement helps modernise public services, improving their quality and efficiency, by supporting innovative companies achieve economies of scale.

With Innovation Procurement, public authorities can steer supply towards innovative solutions, influencing the market through public demand. The collaboration between the public and private sectors, facilitated by innovative public procurement, not only promotes research and the development of new ideas but also enables the creation of solutions that are not yet available on the market. Additionally, it helps anticipate and address long-term needs. Furthermore, innovative procurement stimulates the competitiveness of the private sector by incentivizing the creation of tailored products and services that specifically address public needs, while simultaneously enhancing the efficiency, sustainability, and resilience of the implemented solutions.

3. Innovation procurement procedures

Innovative procurement includes pre-commercial procurement and public procurement of innovative solutions. Pre-commercial procurement is excluded from the scope of the Public Procurement Directives (Directives 2014/24/EU and 2014/25/EU), while public procurement procedures for innovative solutions are regulated by the Directive 2014/24/EU2 .

3.1 Pre-commercial Procurement (PCP)

Pre-Commercial Procurement is a procurement procedure for research and development services aimed at creating innovative goods and services that are not available on the market and not yet suitable for commercial use. Indeed, "Pre-commercial procurement" means procurement of research and development (R&D) services, up to the prototyping or first trial production phases. The R&D services covering activities such as solution exploration and design, prototyping, up to a test phase of a limited volume of first products or services. PCP is therefore complementary to Public Procurement of Innovative Solutions (PPI). In fact, the actual commercial volume of the final products procured is determined in the PPI.

Process:

In pre-commercial procurement (PCP), a call for proposals is published for 3 different phases: solution exploration, prototyping and test production. These phases are implemented via three different specific contracts to multiple operators for each phase. The contracting authority should also sign a framework contract with each selected supplier covering the whole PCP.

The R&D services work begins with selected candidates and involves payments for the exploratory phase, followed by a decision on whether to proceed with prototyping. After prototype production, a decision is made whether to move to the test phase, with further payments for prototyping and limited product production. The final phase includes evaluation, publication, and standardisation of results, with a final payment.

Figure - Pre-commercial procurement process3

3.2 Public Procurement of Innovative Solutions (PPI)

In Public Procurement of Innovative Solutions (PPI) the contracting authority acts as a launch customer for innovative goods or services that are not yet available on a large-scale commercial basis. In these procedures, solutions may be almost or already available in small quantities on the market.

The Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement regulates the purchasing procedures for public sector buyers and includes provisions for PPI. The European Directive outlines the following three procedures for PPI:

Competitive procedure with negotiation (art. 29)
Innovation partnership (art.30)
Competitive dialogue (art. 31)

Competitive procedure with negotiation and Competitive Dialogue

The two procedures are very similar. The main difference between them are as follows:

Competitive dialogue is used when contracting authorities do not know the technical specifications of what they wish to purchase, and a dialogue phase is needed to develop a technical specification.
In the competitive dialogue with negotiation, technical specifications are already set, but the offer can be negotiated until the final submission.
Another difference is that in the competitive dialogue is mandatory the use of the most economically advantageous offer criterion.

Process:

1. Competitive dialogue (art.30 of the Directive 2014/24/EU):

Selection phase: The process begins with the publication of a contract notice, allowing only those economic operators invited by the contracting authorities, based on their initial evaluations, to participate in the dialogue.
Dialogue phase: This dialogue can be conducted in successive phases, gradually refining the technical part of the offers and narrowing down the solutions. Once the authorities identify a viable approach to meet their requirements, they close the dialogue and invite each supplier to submit a final offer with the technical consideration reached during the dialogue phase.
Award phase: The contracting authority will award the contract to the supplier by applying the award criteria fixed in the contract notice.

2. Competitive procedure with negotiation (art.29)

Selection phase: The process begins with the publication of a contract notice, allowing only those economic operators invited by the contracting authorities, based on their initial evaluations, to participate in the negotiation. In a ‘Competitive procedure with negotiation’, only economic operators invited by the contracting authority following its evaluation of the information provided may submit an initial offer which constitutes the basis for subsequent negotiations.
Negotiation phase: as for competitive dialogue, the suppliers are presenting offers which can be subject to negotiation. During this phase, the number of candidates may be reduced by selecting those who meet a greater number of the requirements and award criteria set by the contracting authority. The remaining suppliers are invited to submit final offers after the contracting authority has declared its intention to close the negotiations.
Award phase: Finally, the authorities evaluate these final offers according to the award criteria outlined in the contract notice.

Innovation partnership

The innovation partnership established in the art. 31 of the Directive 2014/24/EU and aims to develop innovative products, services or works and to subsequently purchase the supplies, services or works that operate therefrom, if they correspond to the performance levels and maximum costs agreed between the contracting authorities and the participants to the procedure.

Process:

The innovation partnership process takes place in three phases:

Selection phase: the selection phase takes place at the beginning of the procedure. After a call for tenders, one or more most suitable partners are selected based on their skills and abilities, and a contract is concluded with them. For this procedure, the directive specifies that contracts must be awarded solely based on the MEAT criterion.
Research and development phase: in the next phase, the partners develop the new solution in collaboration with the public buyer. This research and development phase can be further divided into several phases designated for concept evaluation, prototype development and/or performance testing. The number of partners can be reduced during each phase based on pre-defined criteria.
Commercial phase: in the commercial phase, the partners deliver the digital solution based on the list of objects of procurement provided in Guideline on selection of objects of procurement and templates.

4. Innovation procurement process: Checklist

The following is a checklist of activities to be followed when implementing an Innovation procurement, according to the toolkit provided by the EU Commission for designing PCP and PPI strategies4 , which we invite you to consult in detail:

1 Identifying and assessing needs5 :

The first step is the identification of a need. This can be conducted by E.g. survey, face to face needs assessments meetings and interviews internal to the public authority. Refer to Guideline on needs identification to have more details on this.
Once a need is identified, often through a comprehensive needs assessment, it becomes essential to define the specific areas of the public authority's requirements, even if details and budgets are not fully established.
Business case: analyse the costs and benefits of launching an innovation procurement for each verified and prioritised unmet need.
Market analysis: the public buyer conducts a functional analysis to understand the organization’s needs, including those of its partners and users, while pinpointing any existing issues or areas for improvement. This analysis helps determine if the current equipment and services remain suitable or if updates are necessary.

2 Joint Procurement:

Check if other administrations have the same need. To know more about joint procurement, see the details in Guideline on needs identifications.

3 Preliminary market consultation

It is a way to analyse the market before launching a tender. Article 40 of Directive 2014/24/EU states that public authorities can seek advice from independent experts, authorities or market participants, provided this does not have the effect of distorting competition and does not result in a breach of the principles of non-discrimination and transparency. Refer to the Guideline on Information on how to encourage participation of SMEs to read more about this.

The first step involves researching and drafting a consultation framing note, in which the buyer determines the most suitable type of market consultation. This could include methods such as online questionnaires, "meet the buyer" events (either group or individual meetings), online or in-person meetings, hackathons, and challenges.
The second step is to prepare for the consultation by publishing a prior information notice (PIN) to formally announce the consultation.
Following this, the third step consists of organizing and conducting the interviews or meetings with potential suppliers. Afterwards, the buyer reviews and utilises the results gathered.
Finally, it is advisable to maintain a detailed record of the entire consultation process.

4 Drafting the tender documentation:

Chose the type of procedure to be followed: PCP or PPI
- PCP: Even if PCP is not covered within the Directive 2014/24/EU, it is desirable to conduct this through an open procedure to guarantee maximum competition, transparency, and equal treatment of suppliers.
- PPI: after conducting a market consultation, the contacting authority should be aware of the right procedure between the PPI procedure analysed in the par. 2.2.
Prior information notice (PIN): according to art. 48 of Directive 2014/24/EU, the PIN can be used not also for inform suppliers about the upcoming open consultation market but also to make known in a transparent manner to all potentially interested bidders on the market their intention to launch a procurement in the future. The PIN may also announce specific compliance tests to evaluate its readiness solutions/technologies for commercial implementation in PPI.
Publish Contract notice: the main information of the procedure must be described such as the needs and requirements, the indicative duration of the procedure, the exclusion and selection requirements, the award criteria.
Technical specification: after having defined the object of the procurement, it is necessary to deal with the drafting of the technical specifications. As regards the technical specifications, please refer to the consultation of the templates relating to these which was ordered by object of procurement of interest. Furthermore, as regards the inclusion of minimum interoperability mechanisms as technical specifications, more information is available in Guideline on Compliance with MIMs, standards, specifications and certifications. Please note that in innovative procurement, the technical specifications are often the subject of further specifications that must therefore be defined in the context of the dialogue with suppliers.
Exclusion criteria: The Public Procurement Directives explicitly provide for several mandatory exclusion criteria to be included in the procurement documents. Optional exclusion criteria may also be included if national legislation transposing the Procurement Directives requires it if they comply with the aims of the directive. The same exclusion criteria are often used for PCPs as well.
Selection criteria: In PCP (Pre-Commercial Procurement), there are no legal requirements obliging the public prosecutor to apply specific selection criteria. Relevant experience and skills related to the contract, such as the ability to conduct research and development and having qualified personnel, may be considered. However, it is not advisable to include strict requirements on financial capacity or professional qualifications, as the tender concerns the development of innovative solutions not yet available in the market. Requiring references or annual turnover could hinder the participation of innovative SMEs. It is preferable to allow participation from all interested parties (companies, start-ups, universities, etc.) that can demonstrate a clear path to market. For PPI, the art.58 of Directive 2014/24/EU defines several categories of selection criteria that the public procurer is allowed to use such as professional activity, economic requirements, technical requirements. For more information on selection criteria in the procurement process refer to section “pre-award actions” of Guideline on effective procurement evaluation processes and negotiations.
Award criteria: For PPI tenders, as we have already had the opportunity to address in the previous par.2, in some cases such as for the competitive dialogue and the innovation partnership, the EU Directive provides for the exclusive use of the MEAT (Most Economically Advantageous Tender) criterion. This is not specified for the competitive procedure with negotiation. In the case of the competitive procedure with negotiation and for what concerns the pre-commercial procurement there is no specific regulation on the use of the award criterion, but it is clear that for the purposes of quality, implementation and impact it is recommended to evaluate the offer not only for the price but also for the quality.

5 Evaluating offers and awarding contracts:

In this section you need to select suppliers by applying the exclusion, selection and award criteria and finally publish a Contract Award Notice. For more information see the Guidelines on Effective procurement evaluation processes and negotiation.

6 Contract performance and monitoring:

For this purpose, specific clause and related penalties and key perfor mance indicators (KPIs) can be used to monitoring the contracts performance to PCP or PPI contracts.

5. Conclusion

We have analysed different types of innovative procurement and outlined the stages of each related procedure. Additionally, we have provided a checklist of actions to be taken for each type of chosen innovative procurement procedure. We hope this will help clarify the value of these still underutilized innovation procurement, which are strategic for identifying and implementing innovative solutions on the path to becoming a smart city.

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