Mitigating risk in EU innovation procurement : methodologies and impacts

Porpiglia, Francesco; Piller, Frank Thomas (Thesis advisor); Dimitri, Nicola (Thesis advisor)

Aachen : RWTH Aachen University (2022)
Dissertation / PhD Thesis

Dissertation, Rheinisch-Westfälische Technische Hochschule Aachen, 2022

Abstract

Throughout recent decades, we have witnessed a continuous rise in the importance of the role of procurement in private organisations. Once considered a mere administrative role, it has now found a critical position not only as a cost-reduction enabler, but also as an innovation driver. The public sector in Europe has followed this trend with some delay, and only recently has it realised the importance of Public Procurement as an economic policy tool. In academia, concrete research efforts in the domain started in the early 2000s.Public Procurement has also been recognised as a tool to address new and more pressing societal challenges, such as climate change, security and defence threats, and unsustainable healthcare systems. To fulfil this role, in 2007, the European Commission created a specific legal instrument to stimulate innovation through the procurement of research and development (R&D) activities: Pre-Commercial Procurement (PCP). PCP, together with its natural follow-up, Public Procurement of Innovation (PPI), are jointly referred to as E.U. Innovation Procurement. Currently, the adoption of these tools remains far from the target set by the member states. This represents a missed opportunity for the public sector, which struggles to modernise and to reap the benefits of the new technologies. Similarly, the academic literature also suffers from a limited debate around the topic of procuring innovation in the public sector, specifically as it regards E.U. Innovation Procurement. In fact, the existing literature focusses primarily on the policy impacts of utilising procurement as innovation leverage. Managerial aspects, however, have been mostly neglected. In particular, research on risk management in Innovation Procurement is limited and dated. This is unexpected, given the traditional risk aversion of public procurers, which may be exacerbated due to the technological risks affecting any type of innovative project, such as PCP. The need to fill this research gap has also been confirmed by recent E.U. data, which stress an insufficient adoption of innovation among public buyers while concurrently calling for a stronger capacity building within Public Procurement authorities. Therefore, the goal of this dissertation is to enhance extant research in Innovation Procurement by discussing methodologies which aim to mitigate the impact of the technological (or R&D) risk of procuring innovation through E.U. Innovation Procurement. Conceptually, this dissertation discusses non-traditional subjects to the practice of Public Procurement to respond to the research questions, such as free riding and venture capital (VC). Methodologically, this work employs a mix of research methods such as a qualitative assessment of expert interviews, analysis of quantitative data on PCP, or microeconomic modelling to provide a more concrete response to the research questions. The thesis consists out of a synopsis and three independent research papers. The first paper explores a potential free-riding behaviour by public buyers at the expenses of other public buyers. First, the study examines the issue and its causes, such as the existence of a public good and the public officials’ aversion to the R&D risk in Pre-Commercial Procurement. Then, through a series of interviews with public buyers, I investigate the actual occurrence of such behaviour and its impact, the different views according to the environment in which public buyers operate, as well as the preferences of these actors towards this behaviour. Finally, the article investigates the reasons underlying different views among public buyers around this topic and examines potential mitigation methodologies to reduce this risk and increase demand aggregation. The second paper addresses a specific methodology to reduce the R&D risk or the risk of failure in E.U. Innovation Procurement. More explicitly, it considers the participation of venture capital funds in the PCP schemes. In particular, the paper first theoretically discusses the attractive factors for venture capitalists to invest in firms participating in PCP and the potential impact of these investments on the project’s success. Then, it examines the theoretical backgrounds through a round of interviews with public buyers, as well as by a roundtable with members of the venture community. The goal of these inquiries is to examine the synergies between these two worlds and to derive a set of recommendations to improve the current practise of Innovation Procurement. The third paper explores a new model, which transfers the R&D risk to a VC fund in a modified version of a public-private partnership. First, the article examines the policies in favour of small and medium enterprises (SMEs) in Public Procurement, specifically focussing on preference and set-aside schemes around the world. Then, the article builds a modified version of a public-private partnership, which allows the public buyers to transfer the R&D risk to a selected VC fund while concurrently restricting the participation to SMEs, which are the traditional investment target for venture funds. Overall, the results of the research papers support the improvement of the risk management literature in the practice of E.U. Innovation Procurement, responding, at the same time, to the call of a new capacity-building effort in support of public buyers which seek to and lag in adopting innovative practice within their public organizations.