Pulling demand for productivity enhancing and sustainable solutions

These experimental efforts at the pre-commercial stage need to be accompanied by public procurement enabling scaling-up and diffusion. These can have a significant demand-pull effect on innovation, stimulating and rewarding technologically competent suppliers, and creating demand that drives down costs and creates economies of scale for innovative solutions. Studies have found that public sector contracts can be a more effective way of supporting product innovation than other forms of financial support, such as R&D grants or tax credits.

In sectors where the public sector is an important buyer, such as transport, education, or housing, public demand can influence not just the rate but also the direction of innovation towards more sustainable goals. For instance, Greater Manchester has set a goal to make the city region’s bus fleet 50% electric by 2027 and 100% electric within a decade, which would reduce carbon emissions by 1.1 million tonnes. The city of Amsterdam is part of a network of cities that collaboratively procure more sustainable public transport. In Norway, the procurement of electric-powered ferries to replace old diesel ferries has cut emissions by 95% and costs by 80%.

Shaping markets for emerging technologies

The public sector can also shape markets for new, potentially transformative technologies, where the private sector is likely to underinvest in innovations that can lead to higher productivity growth. Often a market failure exists preventing private sector investment due to the market being uncertain or fragmented, to a lack of clear regulatory frameworks or generally because the direction or travel is not there to provide the right incentives for industry. Public procurement, in combination with other measures such as changes in regulation, new or updated standards, infrastructure and skills, can help unlock investment in new technologies and assets.

Low carbon hydrogen is one example of this challenge, another one is the more mundane, yet equally wicked problem of housing retrofit, requiring strong articulation of demand across a fragmented housing sector, a clear long-term strategy and the right strategies in relation to standard setting and skills provision. A recent paper discusses how the government of the Galicia region in Spain mobilised €160 million worth of public and private funding through public demand for public services, alongside investment in infrastructure, training, and R&D in order to unlock private investment and advance regulatory development for unmanned aerial vehicle (UAV) technology, with the aim of diversifying regional industry.

Social value and levelling up

The public sector is a key customer in many markets and has the power to drive diffusion of more sustainable and socially responsible innovations and business practices.

It can lead by example if it is an intelligent and socially responsible buyer, for instance ensuring that companies working with the public sector conform to ethical practices and standards such as paying the real living wage or closing the gender pay gap among its suppliers. There are some advances here. For instance, since September 2020, an explicit evaluation of social value has become mandated across central government and, under a new government plan, potential bidders to major government contracts have to first demonstrate that they have a plan for net zero carbon reduction by 2050.

The recently published Levelling Up White Paper includes plans to put social value at the heart of government spending and to simplify procurement processes (following the Cabinet Office’s ‘Transforming Public Procurement’ Green Paper), making it easier for small businesses and social enterprises to bid for and win public contracts. This is significant because the tendency by central government departments to favour large, aggregated contracts has in the last few years led to an increased concentration of spending in a reduced number of large strategic suppliers, as well as geographically in London and the south-east of England, according to data from Tussell.

Recent announcements should not be seen as a panacea however, and there are challenges linked with the use of public procurement to support innovation, productivity and levelling up. So where do we start?

• Building capacity is key, including capacity to articulate key societal and public sector needs and commercial skills to understand, and engage with, the market so it can adequately respond to these needs. There is ample evidence that risk aversion capacity constraints are critical factors limiting the use of public procurement for innovation. This is particularly challenging at the local authority level, where there has been a hollowing out of resources, skills, and experienced personnel after years of austerity.
• A long-term perspective is needed. Public procurement is more effective in unlocking innovation when demand is clearly articulated and signalled to the market so that suppliers are aware of these spending pipelines allowing them to invest early and compete effectively. Further, this strategic direction should be supported by policy coordination across different policy departments (regeneration, skills, industrial policy) and levels of government (local, sub-national, national, supra-national) to improve consistency in public procurement.
• A more spatially sensitive approach to procurement by central government departments is needed if the levelling up objectives are to succeed. Joined up thinking includes bringing together anchor organisations to align needs and practices, and encouraging the formation of consortia and alliances where SMEs, universities and the voluntary sector can jointly bid for contracts. This would help strengthen the supply side of innovative markets and create lively ecosystems that can meet the needs of public sector.

Public procurement data is a black box

All of this needs to be supported by better data and evidence, including the sharing of good practice cases.
A more rigorous monitoring and evaluation of public procurement practices and their impact on innovation and productivity has until now been constrained by lack of suitable data and comparative methodologies. This could involve the creation of a centre for best practice, similar to initiatives that already exist in countries such as Finland.

Policy recommendations

• Use existing tools (such as SBRI) to encourage experimentation and co-creation of innovative solutions for place-based challenges.
• Adopt a coordinated, strategic and long-term perspective that enables the shaping of markets for innovation.
• Address capacity and skills constraints in government departments so they can leverage public spending to achieve their strategic goals.
• Adopt a spatially sensitive approach to public procurement, facilitating the engagement of SMEs and a more diverse supply base.

This article was originally published in On Productivity, a collection of thought leadership pieces and expert analysis addressing the gaps in economic performance across the UK, published by Policy@Manchester.

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