Reviving Economic Thinking on the Right

Sam Bowman and Stian Westlake have just published a pamphlet about what the right should be doing in terms of economic thinking. I have not read it fully, but spent some quality time with the procurement section, which focus on procurement of innovation.

Bowman and Westlake do not seem overly keen in the whole idea, a view Westlake confirmed on twitter. Their assession of tight budgets and lack of connections with entrepreneurs rings true as does the assertion that adding further procurement goals are orthogonal to the act of procurement itself. In this, their view of additional procurement goals is virtually identical to mine (paper).

They are also correct in mentioning risk-aversion as a disincentive for more innovative or risky public procurement.

It is a shame then that in terms of proposals their suggestion is simply of picking a few political wishes and pipelining it into an innovation friendly environment with real procurement at the end. It is not that different from existing challenges but goes a step further (and rightly so) by elevating the whole thing at a political level. Again, that is in line with my own views and in the past I have suggested a mixed incubator + innovation partnership model to incentivise innovative procurement. A key difference of my proposal was the inclusion of some equity for the state in the startups going through the programme.

I think it is a shame that Smith and Westlake decided to simply focus on innovation in terms of public procurement. They understand the importance of competition for economic growth and their assessment of the limitations of procurement in general are correct. In addition, the argument they are making about the orthogonality of objectives between economic efficiency/other policy objectives is a defining issue for public procurement.

Public procurement represents a significant percentage of GDP in the UK and elswhere, so I feel there is a lot more that a view from the right should be doing to improve it for the benefit of the economy. In addition to the usual suspects (resources, professionalisation and incentive alignment) I would add lowering barriers to entry and transaction costs as well.

As the left seems smitten with additional procurement goals and (the right as well) industrial policy making a comeback, it is important to keep the discussion alive about the importance of procurement being used for its primary goal.

Commission publishes guidance on procurement of innovation

The European Commission has just published earlier today a lengthy guidance document on procurement of innovation. It is welcome since procurement of innovation is the kind of approach (policy? idea?) that is useful mostly for the top 1% of procurers and even then, just some of the time. As such, guidance is required to make it easier for it to be deployed. 

Here's the blurb:

"The 2014 modernised public procurement directives 2 adjusted the public procurement framework to the needs of public buyers and economic operators arising from technological developments, economic trends and increased societal focus on sustainable public spending.

Public procurement rules are no longer only concerned with “how to buy” – they provide scope for incentives on “what to buy”, without prescribing them. The objective of spending taxpayers’ money well is gaining new dimensions, beyond merely satisfying the primary needs of public entities. With each public purchase, the public opinion is rightly interested to know whether the procured solution is not only formally compliant, but also whether it brings the best added value in terms of quality, cost-efficiency, environmental and social impact and whether it brings opportunities for the suppliers’ market."

The more we try to achieve with procurement the more complex it becomes. Remember when the next cycle of complaints about procurement complexity comes about.

Links I Liked [Public Procurement]

1. Portuguese Audit Court unimpressed with PFI/PPP hospital (Portuguese only). The Audit Court analysed the first couple of years of the Loures privately managed hospital in Portugal and did not find significant management improvements in comparison with the best publicly managed hospitals. Its management is better than average for the country, but that is pretty much it. (NB: I was involved in a minor capacity as a lawyer on the original tender procedure back in 2004/2005, which was never concluded. I was not involved in the final one.)

2. Conflict of interest in health procurement in Yorkshire. Very interesting. As Albert mentioned on Twitter, if only the Public Contracts Regulations 2015 were applicable to this case... (his comment; my comment). PS: This situation would be dead easy to solve in Portugal...

3. How technology and a small team is changing procurement in the US. Well, not only procurement but Government in general.

4. Sidney adopts e-ink for some traffic signs. Now that is innovation. Well done. Oh, and Sheffield is creating a SmartLab to find new solutions for problems the city have. Now if only they matched the design/development stage with actual procurement...

5. No water cannons for Boris Johnson. At least he did some savvy procurement by getting the water cannons second hand from Germany. They may be useful as mobile fountains during this scorcher Summer we are having...

6. Speaking of Boris...More on the Roastmaster, sorry Routemaster. Great write up by the Guardian on the Routemaster bus. Some great insight about the difficulties of doing procurement of innovation well and how costs can quickly spiral out of control. I am still puzzled by the assumption that the bus could be sold in other markets and if that happened (it did not) it would have an effect on the price TFL would pay for the bus. Wondering what kind of intellectual property agreement exists between TFL and Wrightbus. In any event, there is no innovation without risk. There is no innovation without failure.

Links I Liked [Public Procurement]

1. My old job at Bangor University is up for grabs. Excellent place to start an academic career in public procurement...if you are motivated and willing to work very hard. Dermot is a great boss for those first years when we're freshly out of the Ph.D and has that important quality of protecting his team. Limited backstabbing and/or academic bitchiness too.

2. The European Procurement Law Group held its annual meeting earlier this week at Birmingham University. Thank you Martin Trybus for the warm welcome. The next book in our series (about qualification, selection and exclusion) is coming along nicely and we have some news to share in the near future. PS: Some of my colleagues have contributed case reviews for Concurrences e-Bulletin.

3. Some news about corruption in public procurement in Greece.

4. New Commission initiative to kickstart procurement of innovation. I remain sceptical that raising awareness is what is needed to get more (public) procurement of innovation. It has never been a problem of "tools" either. My view is that it comes down to (lack of) incentives and (lack of) risk tolerance, not to mention (lack of) money.

5. Someone does not like "open" procurement rules. Someone should read the rules with care and attention.

Public Contracts Regulations 2015 - Regulation 31

Regulation 31 - Innovation Partnership

In Regulation 31 we can find the new innovation partnership "procedure" introduced in Article 31 of Directive 2014/24/EU. The purpose of this new "procedure" is to allow for the public and private sector to establish partnerships with the aim of developing an innovative solution. The contracting authority sets what it wants to solve and then works with partners to develop the innovative solution(s).

The innovation partnership raises a number of issues (grounds, structure, intellectual property, confidentiality and state aid) that need to be addressed, but these are too far and too many to touch here today. For a detailed overview of the procedure, please see the chapter myself and Luke Butler wrote about the public procurement procedures under the Directive 2014/24/EU. You should also check two articles published by Marta Andrecka and Pedro Cerqueira Gomes, both in the Public Procurement Law Review over the last few months. Albert's entry for today is also full of valuable insight, so if you are interested to know more about the intricacies of the innovation partnership, start here. My commentary today will focus instead on the rationale behind why the procedure exists and why I view this procedure as a Trojan horse.

The unknown unknowns of the innovation partnership

I have to confess that I was very puzzled when I saw the procedure for the first time and honestly could not see a way for it to be used in practice, but I can say I was (naively) wrong. As Donald Rumsfeld would have said, I fell into a "unknown unknown" trap.

With the information I had then available, the procedure made no sense. Probably all you can do with it related to innovation, can be done with competitive dialogue or the competitive procedure with negotiation. Why creating a third procedure for this then? It does not seem to add much value in comparison with the other tools on the toolkit. When I see a legal rule out of the ordinary (such as the confidentiality I mentioned yesterday) I try to identify who had an interest in getting such rule into the law. With the innovation partnership I simply could not find a logical reason for a constituency to push hard for this to be included. Who could have spent political capital and/or lobbying money to get the innovation partnership in?

This was my view about the procedure until a couple of months ago when someone much smarter than me showed me the obvious answer: this procedure is tailored for the private sector. It is the private sector who tends to benefit the most from this procedure. How may you ask?

#1 - It can run with a single supplier

The first piece of the Trojan horse puzzle is that the innovation partnership is the only procedure where it is stated from the start that it can be run from start to finish with a single supplier. Yes, technically you can run a competitive dialogue or a restricted procedure with less than 3 or 5 suppliers, but you need to set out from the start with at least those numbers are a ballpark figure. And if 3 or 5 good enough suppliers turn up, they are entitled to participate.

Not so with the innovation partnership as Regulation 31(4) clearly states that the innovation partnership may be set up with one or more participants. Although para. 7 refers to the rules of Regulation 65 in terms of limiting candidates, the damage is already done: Regulation 31(4) is a special rule whereas Regulation 65 is a general one. It is probably no coincidence either that Regulation 65 addresses specifically the cases of restricted procedure, competitive dialogue and competitive procedure with negotiation but not the innovation partnership. Why?

Picture this: a supplier with access to a contracting authority offers an innovative solution for a problem and hey the contracting authority does not even have to waste money doing a competitive dialogue or a restricted procedure. They can use this cool new thing call innovation partnership legally from the start with a single supplier. It is even transparent as a call is made, it is not as seedy as the negotiated procedure, oh no. (Remember that this procedure can be used for anything falling under the definition of innovation under Regulation 1 and that is, in my view, a very low threshold.)

Never underestimate the market's ability, interest or incentive in restricting competition.

#2 - It can last for years

The second Trojan horse leg is what the Regulation 31 says about the duration of the partnership. Well, it does not say anything about the duration. In other words, a resulting partnership can last for a long time before anyone can start asking question. Although effectively only framework agreements are technically limited in time to four years, even in that case whatever the procedure used to create the framework implies the possibility of more than one supplier being qualified at the selection stage.

Truth be told, Regulation 31(26) includes a limitation on value (already prevalent in the Directive): the value of the contract cannot be disproportionate to the investment required for its development. Whomever wrote this either understands nothing of R&D costs or, conversely, knows a lot about it.

At face value, this looks like a reasonable limitation imposed by the Directive. However, the language is vague enough so that a lot of costs can be attributed to the "investment required for its development". Case in point: adapting the tooling of a factory for a slightly modified product to be produced for a client implies that the "investment cost" will include not only the adaptation but also the original tooling and eventually the capital costs for the factory. No original tool, no adaptation. No factory, no product.

Another potential exploit of the "investment required for its development" is intellectual property. It is no secret that many companies are internally organised so that their intellectual property sits on a low-tax jurisdiction and is licensed to subsidiaries elsewhere. Let's look at software for example: a multinational company takes part in a software development innovation partnership, with the contracting authority agreeing to pay £1M/year for the innovative solution. By coincidence the underlying IP is owned by a subsidiary based in Ireland which licenses it to the English subsidiary for the purposes of this contract for £5M. Presto, we have just easily justified 6-8 years of a contract to cover for the "investment cost".

Even a tighter definition of R&D costs would not provide full respite, although it would certainly make the financial shenanigans more difficult to pull of. The reason for my scepticism is that the fair development costs   can be multiple times bigger than the price a single client will be paying for a product. Do you think Microsoft charges the full Windows development cost to a single customer? Of course it does not.

Innovation Partnership's redeeming quality: flexibility

After all the negativity and concerns about how the procedure can be used, I want to finish on a higher note. The innovation partnership has a redeeming quality and it is its flexibility. The kernel of enabling potential change in a few procurement processes is actually there, and as with the competitive dialogue 10 years ago, the innovation partnership will be what the leading contracting authorities make of it.

I have long argued that whatever you can do with the innovation partnership, you can do with competitive dialogue or even the competitive procedure with negotiation. I am not yet ready to change the spots on this particular leopard, but have been able to reconsider at least a scenario where the innovation partnership actually can lead to something completely new.

My idea (hopefully the basis for a research project or something more sustainable, hint hint) is that it can solve a particular problem tech based startups have in public procurement: access to public contracts and also the ability to develop their products hand in hand with what the customer wants.

My road to Damascus moment was looking into the work being done in Philadelphia to develop a local startup ecosystem AND connect it to the needs the city have as a client with the Fast FWD project. Something that matches an acceleration programme for startups with a procurement process was not possible under the old rules, but in my view it is entirely possible with the innovation partnership. I am not sure larger companies would like it, but that is a different story. Anyone interested in doing this in Europe?


Links I Liked [Public Procurement]

1. More data about England's Mystery Shopper Service. I still think it should morph into a proper Procurement Ombudsman a la Canadian.

2. NESTA's 6 ideas how procurement stifles innovation. Sound about right but for me reasons 4 (incentives) and 6 (skills) are the most important. Regulation is just a red herring hiding bad practice, lack of incentives and skills. There are barely any truly national procurement regulations in the UK and for the ones following this blog the Public Contracts Regulations 2015 simply copies and paste Directive 2014/24/EU for the most of it.

3. Central Government is piloting ex post (contract award) transparency. I am huge fan of contract award transparency and the more the better. Albert will caveat this with the argument it facilitates collusion (and it does, in the right markets) but I still think we will be better off in the long run. Plus, as Gianluigi Albano argued last week during Procurement Week: all that a cartel needs to know its agreement was not enforced is looking at the names in the machinery being used in a public works.

4. Scotland allegedly owes SMEs £120M. That is a lot of lolly as my former flatmate would say

5. American Universities should look into improving their procurement practice. I would say that this is sound advice also on this side of the pond.

6. Spendmatters excellent coverage about Procurement Week. Peter Smith has been blogging about what he learned and thought about Procurement Week. After trying to get him to come since 2012 it was great to finally have him there.