House of Lords - Public procurement as a tool to stimulate innovation

Public procurement as a tool to stimulate innovation - Science and Technology Committee Contents

Chapter 5: Tightening the link between innovation and procurement

95. During the course of this inquiry a number of issues emerged which impact on the link between innovation and public procurement. Some involve fundamental aspects of the Government's approach to governing, such as the current localism and efficiency agendas. Others involve mechanisms such as the SBRI and the FCP. We also consider the role of SMEs and the TSB.

Localism

96. Some witnesses expressed concern about the diffuse character of procurement budgets. Professor Georghiou, Professor Edler and Dr Uyarra told us that "the procurement landscape in the UK is fragmented and complex. The OGC estimates that there are over 40,000 points of procurement across the public sector, with complex layers of policy, regulation, best practice and partnerships, as well as a multitude of buying organisations and consortia that seem to compete with each other over similar geographies or service offerings".[118] Colin Cram argued that:

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97. Despite this diffusion, we received some evidence of communication between national and local authorities. Ginny Clarke gave us an example of how information is shared between the HA and local authorities under the UK Roads Liaison Group: "we use that forum for sharing knowledge, and I need to acknowledge, some local authorities have given us ideas; it is not always about the HA generating ideas. Looking at, particularly, challenges on climate change, I think is very much all of us looking for the best approach that can be identified however that is".[120]

98. Professor Collins, however, was critical of the current state of the dissemination of information to local authorities and confusion over responsibilities for procurement at different levels. In his experience, he said, local authorities found it difficult to access information on the innovation potential available to them. He told us: "I think we need to re-examine the governance issue in a political sense ... of how we manage the balance between national, regional, local and cities".[121] What was needed, he said, was "an open debate about how we construct a different governance mechanism from the one we have at the moment, which allows more innovation to be more likely to occur".[122] Birmingham Science City also commented on the absence of connectedness between different levels of government:

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99. In this context we asked Francis Maude MP how a commitment to innovation would be promulgated to all levels of government and the public sector. We were surprised by his answer. He said:

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100. The Government's laissez faire approach to the dissemination of best practice in procurement from central to local government appears to be overly optimistic. We recommend that the Government should put in place a system whereby examples of procurement of innovative solutions can be shared across central and local government. The Government should set out what steps, and when, they will take to implement a system of dissemination and indicate how they will assess its effectiveness.

Efficiency agenda

101. The relationship between innovation and efficiency is complex. Some of the evidence we received suggested they were in conflict with the effect that, in the current economic climate, innovation would be driven out by the need to save money. TfL said: "there is currently very little incentive for the public sector to use procurement as a means to stimulate innovation. Public sector buyers are not rewarded for procuring innovation. Generally, the focus is upon savings or doing more with less. Innovation can be a way of achieving both of these goals, but this is often not explicit and there is conflict with short-term savings targets".[125] Sally Collier, the Director of Procurement Policy and Capability at the CO, told us that "there is an absolute driver—there has been since the new administration—on using public procurement to seek value for money".[126] Professor Georghiou feared that the current demands for efficiency and short-term cash savings "could take us to the lowest common denominator and towards off-the-shelf goods rather than innovative ones".[127]

102. The Manchester Institute of Innovation Research, however, suggested that one of the justifications for using public procurement to stimulate innovation was that the procurement of innovative solutions made public services more effective and efficient. They argued that "the current austerity budgets may at first sight go against this rationale, as the entry cost of innovations tend to be higher than when procuring an established product or service" but this, they pointed out, would be to fail to take appropriate account of "life-cycle costing and enhanced benefit (long term cost-benefit)".[128] The Association of Independent Research and Technology Organisations (AIRTO) advocated "more comprehensive economic comparisons involving whole-life costing".[129] They suggested that "potential suppliers are competing on immediate price against offers that do not embody the same innovation and functionality and this price tends to be an over-riding consideration, rather than whole-life cost".[130]

103. When we asked Frances Maude MP about the apparent tension between savings and innovation, he took a positive view: "in order to drive the much better value for money that is essential in the current fiscal climate we need to enlist innovative solutions ... that is a kind of basic proposition that we have to articulate clearly much more vividly than we have done thus far".[131]

104. We welcome the Government's recognition that efficiency and innovation can be complementary and that this message should be communicated throughout the public sector, including local government. Getting this message across is part of the wider issue of a need for a root and branch cultural change in attitude towards adopting innovative solutions to which we have already referred in this report.

The role of SMEs and large companies in stimulating innovation

105. "There are 4.7 million SMEs in the United Kingdom, constituting 99.9% of all businesses; they employ 59% of the private sector workforce and are responsible for 52% of business turnover."[132] Many witnesses commented on the positive contribution that SMEs make to the economy and their important role in encouraging innovation. Some witnesses however felt that the Government has placed too great an emphasis on their role in stimulating innovation within current policies.

106. In November 2010 the Government published a document entitled Backing Small Business[133] which outlined how they intend to promote small business to drive competition and innovation in markets. The package of improvements supports the Government's aspiration that 25% of government contracts should be awarded to SMEs. The recently published Blueprint for Technology[134] and the first report of the Growth Review, The Plan for Growth[135] (see paragraph 21 above)include further commitments to use procurement as a lever to support innovation in new technologies by continuing investments through the SBRI and other measures.

107. Andrew Wolstenholme, Director of Innovation and Strategic Capability at Balfour Beatty, told us that "many of the great inventions have come from SMEs with only half a dozen people".[136] David Connell also emphasised the importance of SMEs in stimulating innovation: "new markets are rarely large enough to attract the ... attention [of large corporations]. I would point also to data on patenting, job-creation, high technology employment and exports from the United States Small Business Administration. ... This data shows that small firms play a pivotal role as agents of innovation in the US".[137]

108. Colin Cram, however, argued that "we have had a preoccupation of SMEs in Government policies, wrongly ... we've focused on SMEs when we should have been focusing on innovation, because SMEs are possibly one vehicle for innovation".[138] He added that "there is little evidence to support assumptions that greater use of SMEs will lead to more innovation. The Government's target for use of SMEs has probably been exceeded for many years, but this has not necessarily brought the anticipated benefits".[139] Work commissioned by Colin Cram on local-level procurement showed that that "the proportion of public sector contracts let to SMEs is unlikely to be less than 30% ... it seems that this percentage has remained reasonably stable for many years".[140]

109. In 2008 the then Chancellor of the Exchequer set up an advisory committee, led by Anne Glover, to report on action needed to reduce barriers to SMEs when competing for public sector contracts. In November 2008, the committee published its report, Accelerating the SME economic engine: through transparent, simple and strategic procurement (the "Glover Report"). Professor Georghiou, a member of the advisory committee, told us that "there is not very strong evidence that SMEs are more innovative than large firms, it needs to be said. I think we cited some data in the Glover Report that they spend a smaller proportion on their R&D, for example, but they do have a slightly bigger percentage of new products and services in their turnover: 9% compared to 7%". He went on to say that "where we thought [SMEs] were important and why it is important to stimulate innovation in that sector is that they do give us a greater variety and competition that should, in itself, support innovation, and they are willing to go into smaller niche markets that large firms might neglect. But it's not an overwhelming case to say that they are more innovative, and therefore schemes that encourage all sizes of firms to get involved in innovation through procurement are very welcome".[141]

110. With regard to the Government's 25% aspiration for SME contracts, Professor Georghiou commented that "our conclusions were ... that there should not be a quota. We believe that this would distort certain sectors and in fact be very difficult to measure, and if you count supply chains we might already be over the quota that is currently proposed".[142] Intellect supported this view: "our SME members (in accordance with the results of the Glover Review) have stated that they prefer to not have such market distortions and simply desire a level playing field on which to compete. The UK government therefore needs to ensure clarity of information and opportunities and make the procurement process as fast and cheap as possible".[143]

111. Although there were differences in opinion about the relative importance of SMEs in stimulating innovation, there was general agreement that, at present, there were significant barriers to SMEs taking part in procurement which needed to be addressed. They include lack of transparency and availability of contract opportunities, and an overly bureaucratic, complex and costly bidding process. The Glover Report suggested that opportunities should be transparent, the process as simple as possible, and that a strategic approach to procurement should encourage innovation. The previous Government accepted the recommendations in full, including the main recommendation that there should not be a quota of government contracts awarded to SMEs.[144]

112. SMEs and large companies both have a role in developing innovative solutions. However, given the conflicting evidence about the contribution of SMEs in promoting innovation, we invite the Government to explain their current policy on SMEs, particularly the aspiration that 25% of government contracts should be awarded to SMEs.

OPPORTUNITIES FOR SMES TO INNOVATE THROUGH THE SUPPLY CHAIN

113. Particular issues arise for the significant number of SMEs which sub-contract to government through larger companies. These were highlighted in the Glover Report.

114. Andrew Wolstenholme told us that for large infrastructure projects "delivery partners [contracts] are normally awarded to large organisations able to draw on resources from large pools and with a depth and breadth that would be able to demonstrate experience of projects of a similar scale and nature''. The challenge was therefore to allow SMEs to interact with these companies. Mr Wolstenholme noted that "it is still possible to design a procurement strategy that accommodates both large and small companies to deliver innovation—even on large transport projects".[145]

He added that

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115. However, Professor Georghiou, Professor Edler and Dr Uyarra, in their submission, said that "despite existing OGC guidance on these issues, contracting authorities tend to lack the more sophisticated approach to supply chain management which could promote innovation. Again, this is especially pertinent for SMEs, which tend to suffer unfavourable terms and conditions when operating within the supply chain".[147]

116. Happold Consulting noted that "currently procurement only engages with the principal supplier with whom the client will enter into the contract. However, a great deal of service is delivered by the supply chain and much of the innovation is driven by these specialists sub-contractors. If these lower tier suppliers were actively engaged ... from an earlier stage in the process then more innovative solutions can be brought out and incorporated into the contract".[148]

117. TfL told us that "a possible way forward is in public sector buyers managing their supply chain so that SMEs get the chance to pitch to tier one suppliers (prime contractors). TfL use the web-based portal CompeteFor to advertise lower value opportunities to SMEs and are requiring tier one suppliers to do the same".[149]

118. The Government should set out what support they are giving to SMEs acting as sub-contractors, and what they are doing to improve contract management across the supply-chain to encourage innovation.

The role of the Technology Strategy Board

119. The TSB describes itself as "the prime channel through which the Government incentivises business-led technology innovation".[150] It was established in 2004 as an advisory board to government on business research, technology and innovation priorities for the UK, including the allocation of funding across priorities. Currently the TSB operates as a non-departmental public body with BIS as its sponsor. The TSB is a business-focused body. Its mission is "to promote and support research into and development and exploitation of science, technology and new ideas for the benefit of business, in order to increase sustainable economic growth and improve the quality of life".[151] The TSB fulfils its mission by a combination of collaborative research and a range of networking programmes such as Knowledge Transfer Partnerships (KTP) and Knowledge Transfer Networks (KTN).

120. KTNs were set up to improve the transfer of knowledge within and between specific technology areas. KTNs are funded by government, industry and academia. According to a 2008 survey conducted by the TSB, "the most highly rated functions of KTNs, [were] monitoring and reporting on technologies, applications and markets; providing high quality networking opportunities; and identifying and prioritising key innovation related issues and challenges".[152]

121. Fergus Harradance of BIS told us that the Government envisage a wider role for the TSB: "the Technology Strategy Board will assume the functions of the Regional Development Agencies (RDAs) and will become, in effect, the innovation agency for the UK. It will not be the only public sector agency responsible for innovation, but it will be the only one with a cross-economy, entirely cross-sectoral remit, covering the whole United Kingdom. I see it playing an increasingly pivotal role within the innovation system".[153] Juice Technology, a company which provides innovative solutions to manufacturers of LED lighting, thought that this move was a positive step that was already yielding results: "the centralisation of [the RDAs] innovation function within the TSB has already shown improvement and will move further other the coming years".[154]

122. However, Fergus Harradance acknowledged that the TSB has been given responsibility for an increasing number of high-profile Government initiatives and cautioned "we need to ensure that we equip the TSB with the wherewithal to deliver the programmes that we're asking them to deliver for us".[155]

123. The TSB has an important role in innovation and that role is about to be expanded. We invite the Government to explain how the TSB will discharge its extra responsibilities within current resources and also what steps they will take to ensure that the work of the TSB is used by government departments to improve their capabilities for innovation procurement.

Schemes designed to promote public procurement as a tool to stimulate innovation

124. Two public procurement mechanisms which have been used to stimulate innovative solutions were drawn to our attention by several witnesses. They are the SBRI and FCP.[156]

THE SMALL BUSINESS RESEARCH INITIATIVE

125. The SBRI enables innovation in products and services through the public procurement of R&D. It was launched in 2001 but the uptake was very poor. It was subsequently re-launched in April 2009 following recommendations by the Sainsbury review. It is a pre-commercial procurement process which provides 100% funded R&D contracts. It does not involve state aid. The SBRI process comprises the following stages: identifying a challenge where existing solutions are not available or not good enough; communicating the challenge through TSB channels following which an open competition is run; those companies with promising solutions are awarded R&D contracts to test the feasibility of their solutions (phase 1 funding); companies passing the feasibility test can then apply for further funding to develop a working prototype (phase 2 funding); finally, the resulting commercial product or service is taken to market and open to competitive procurement.[157] The scale of the SBRI is relatively small: the total value of SBRI competitions has been running at less than £25m a year[158] in the context of a total public sector spend of £236 billion.

BOX 2

Examples of procurement through the SBRI

· In July 2009 the DfT and the HA ran a competition through the SBRI programme to explore ways in which synthetic environments (virtual reality) could be applied in the transport industry to model and manage complex traffic problems on motorways. Nine viable competition entries were received and three companies were awarded £100,000 contracts to develop a prototype model. One of the prototypes produced was a simulator which combines a traffic flow model of a 17km section of the M42 with a virtual reality version of the route. The behaviour of lorries, cars, vans and motorcycles are simulated for a range of scenarios including different weather conditions, lane closures, speed limits, road debris and accidents with a view of managing congestion and incidents. This prototype has been identified as a practical and innovative solution with potential for further exploitation.[159]

· In April 2009 the Home Office and the Design Council ran a competition to develop innovative and marketable solutions to make mobile phone handsets and the data stored on them, harder or less desirable to steal. A total of £400,000 was offered to winning teams of designers and technology specialists to develop their products. Three different solutions have been found: innovative encryption systems; a key card associated to the mobile telephone to make payment transactions; and a blue tooth device that helps protect against physical loss of an electronic device. "As a result of the competition Proxama, one of the successful companies, is now working closely with both MasterCard and Visa, who believe that the mobile phone will eventually be used as a wallet where multiple cards are kept. This has obvious security implications. The work with Visa also focuses on the forthcoming Olympics, where they are expanding the wallet concept, so that vouchers and tickets to events can be sent to mobile phones."[160]

126. Despite its very small scale, witnesses have generally been positive about the SBRI. David Connell, for example, commented that the SBRI was "the only procurement-based innovation policy that is systematically producing tangible results, albeit at modest expenditure levels ... [Departmental] budgets are focused on delivery and value for money and there is little incentive for officials to get involved in funding innovative technology other than as a component of large scale systems procurements".[161] NESTA said that the SBRI "has played a vital role in stimulating innovation in the procurement process ... departments and agencies are learning how to communicate their needs more effectively to the private sector with genuinely interesting solutions going to market that would not have been reached by other means"—although they also suggested that it would "be most effective as part of a comprehensive framework for leveraging demand for innovation to pull new technology to market".[162] Colin Cram similarly acknowledged that the work of the SBRI: "it does support some innovation and it is measurable", but also noted that "50% of its support has been for companies supplying to the MoD and 25% to the NHS. I am not sure that this bias was the intention behind the initiative".[163]

127. The current scheme has been in operation for less than two years and, given the long lead times for some of the projects, has yet to be evaluated. Professor Georghiou and Professor Edler, however, called for a rigorous evaluation because "much of the present debate is founded upon anecdote and vignettes." "An important starting point" was, they said, "to address the capacity of the SBRI to affect the UK's innovation performance in terms of its scale. The issue here is that with the most optimistic budget forecasts it will still be a small effort, particularly when compared with the enormous scale of procurement of goods and services".[164]

128. In the EU the UK is seen as a leader in implementing the SBRI model and the UK actively participates in EU projects designed to adopt a more strategic approach to innovation (see Appendix 5).

FORWARD COMMITMENT PROCUREMENT

129. The FCP model involves providing the market with advance information on future needs in outcome terms, early engagement with potential suppliers and the incentive of a forward commitment: "an agreement to purchase a product or service that currently may not exist, at a specified future date, providing it can be delivered to agreed performance levels and costs".[165] Initially developed in partnership between DIUS (now BIS) and the OGC to address the particular barriers to market faced by environmental innovations, the approach is also suitable for the procurement of innovative solutions in other markets.[166] BIS told us that it is difficult to estimate the size of the FCP in terms of yearly investment. However, "to date FCP has been has been operating on a much smaller scale than SBRI with most projects yet to reach the procurement stage. The only completed FCP project is the HM Prison Service procurement of a fully managed Zero Waste Mattress system" (see Box 3 below).[167]

BOX 3

Examples of Forward Commitment Procurement

· HM Prison Service used this model in 2007 to procure a mattress and pillow solution that avoided disposal of waste mattresses and pillows into landfill and incineration. HMPS articulated their unmet need and consulted the market to find a solution. The result was innovative new covers that will reduce turnover and a fully recyclable mattress with cost savings estimated to be in the region on £5 million over the life of the contract. In addition, there is an opportunity of adoption across the wider public sector, for example to the NHS.[168]

· Another example which was drawn to our attention is the Ultra Efficient Lighting project, part of a seven year programme of ward reconfiguration by the Rotherham NHS Foundation Trust aimed to procure a highly efficient, smart lighting system that could deliver carbon reduction in a cost effective way and contribute to a pleasant and healthy environment for patients and staff. The solution offers biodynamic lighting[169] with local and intuitive controls with a forecast energy consumption saving of 30% and maintenance savings of 88%. The project is now in the final stages of the procurement process and a demonstration unit will be built at Rotherham hospital in 2011.[170]

130. In November 2008, DIUS launched an Innovation for Sustainability Competition with the aim of increasing awareness of FCP across government and launching pilot projects. A number of projects were chosen and are receiving support and advice. Completion of these procurement projects is expected in 2011. The aim of the competition was to develop in-house FCP capability in the private sector.[171]

131. Johnson Matthey believed that "expanding the use of FCP across the public sector will more effectively stimulate innovation within industry than conventional procurement approaches".[172] The Institution of Engineering and Technology was also positive: "FCP is small in scale but has proved effective. Through FCP, government has created a credible procurement process to develop and buy innovative products and services".[173]

132. Cundall, a multidisciplinary consulting engineering practice, is one of the bidders involved in the Rotherham energy efficiency project (see Box 3). They were enthusiastic about FCP. Through FCP, they said,

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133. BIS is planning an evaluation of SBRI and FCP in 2012. Professor Georghiou and Professor Edler told us that such an evaluation would be challenging. The Government should ensure this review is robust and takes into account the issues raised by Professor Georghiou and Professor Edler. We look forward to seeing the outcome of the evaluation.

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