Strategic Public Procurement for the Long-Term Growth of the European Union

CASE
CASE
Oct 28 · 6 min read

By: Kateryna Karunska, CASE Economist

Although the European Union (EU) public procurement framework was originally designed to establish a level playing field for all EU companies as well as to ensure competitiveness and efficiency of the public sector, the ongoing shift of the EU strategic priorities towards circular economy also calls for the inclusion of an extra-economic rationale in the award and execution of public contracts. In this regard, the Strategic Public Procurement, an all-embracing concept designed to reconcile economic, social, environmental, and innovation factors within the procurement system, provides an alternative framework that is inspired by the broader Europe 2020 strategy. The growing political interest in the concept from international organisations (e.g. OECD) and individual Member States is vindicated by the concept’s intrinsic potential to create new market opportunities (particularly for small and medium-sized enterprises — SMEs), and stimulate growth and innovation while fostering broader socio-economic objectives of the EU.

Strategic Public Procurement as a guiding principle of the European public policy

Despite the ever expanding scope of the procurement framework, the inclusion of the most economically advantageous tender (MEAT) principle in 2014, and continuous efforts to ensure higher flexibility and accessibility of the system, the application of one of the core principles of the EU public procurement — maximisation of value for public money — remains confined to orthodox economic efficiency considerations. Indeed, while the MEAT principle was designed specifically to account for extra-monetary merits of tenders, an important number of contracting authorities still award contracts based on the lowest price criteria exclusively. As evidenced by the 2018 Single Market Scoreboard, the rate remains high throughout the EU, reaching above 60% in 15 Member States and above 80% in 8 Member States (see Figure 1).

As targeted initiatives such as the mandatory inclusion of non-price criteria have failed to address the structural weaknesses of the procurement system (e.g. bid rigging and dumping practices), both scholars and policy makers discuss the importance of directing the long-term policy orientations to the structural transformation of the procurement culture and of the mindset of both contracting authorities and bidders. In this regard, as highlighted by the experience of some Member States (e.g. Austria, Denmark), special attention should be given to the build-up of strategic procurement practices that accommodate quality and the long-cycle approach as prime award criteria.

In fact, the need for extra-economic considerations has already been envisioned in the 2004/18/EC Directive, which underlined the importance of social and environmental considerations within the tendering procedures. Furthermore, in line with the broader Europe 2020 strategy and the resulting conceptualisation of the horizontal industrial policy, the European Commission has promoted modernisation of the procurement market to support the shift towards resource-efficient and low-carbon economy. Yet, it was only following the signature of the 2015 Paris Agreement and the implementation of the 2014 European Public Procurement Reform that the sustainability paradigm and the so-called ‘strategic’ approach came to be recognised as among the guiding principles of the EU public policy in public procurement.

Specifically, alongside digitalisation and improvements in the procurement environment of SMEs, the main novelties introduced by the Reform fostered the following aspects of public contracts: 1) the environmental, including ‘life-cycle costing’ (LCC) tools and eco-labels; 2) the social, such as social inclusion and responsibility; and 3) the innovation-oriented, including ‘innovation partnerships’. In this light, strategic procurement appears as a broad policy orientation that strives to reconcile economic and environmental components while fostering innovation and higher social standards. Furthermore, to promote the development and implementation of new elements, the 2014 Directive was supported by several EU‑level initiatives and instruments.[1]

At the national level, significant divergences persist. Thus, while a number of Member States (e.g. Austria, Denmark, France, Spain) stand out as long-established pioneers of green and innovation procurement systems, the majority of countries still lack a comprehensive regulatory framework. Moreover, as highlighted by the 2019 DG CONNECT study cited above, public procurement’s innovation-supporting capacity in the majority of Member States remains incipient, with only about 27.4% of the available potential on average put to use within the EU (see Figure 2).

The role of SMEs and start-ups within the public procurement system

Accounting for 99% of all EU businesses and about 86% of the net job creation within the EU on average, the SME sector is of great importance for the long-term growth, competitiveness, and sustainable development of the EU. SMEs’ intrinsic potential for innovation, socio-economic significance, and key role in the post-2008 crisis recovery (as evinced by their 47% share in the growth of valued added between 2008 and 2017) have secured their position as a backbone of the EU growth, making them a strong focus of the EU public policy for years. Yet, despite a number of initiatives[2] fostered over the last decades, access to finance remains one of the main bottlenecks to growth and internationalisation of the European SMEs. Public procurement, in this context, appears as a crucial mechanism that could allow to expand market presence and support sustainable business models that contribute to a higher financial and operational stability of SMEs. The Strategic Public Procurement, in turn, is a significant lever to promote green and social economy widely represented in the SME sector. Additionally, a more dynamic organisational culture, less hierarchical structure, and higher flexibility of the SMEs make them uniquely suited to tackle new business opportunities and capture new markets created by the Strategic Public Procurement through eco‑entrepreneurship and eco-innovation.

Start-ups, as a particular category of SMEs that are designed to grow fast, require special considerations in the design of a public procurement framework in order to account for their recency on the market and their intrinsic focus on innovations. As a result of their limited market experience as well as restricted capital and human resources, start-ups face unique challenges to involvement with public authorities. Indeed, as highlighted by a recent survey, only 20% of Polish start-ups were involved in public procurement, while only 4% would describe themselves as regular participants. Among the causes of such underrepresentation are a lack of knowledge on the tendering procedures, significant time constraints, as well as the self‑perceived unsuitability of own products for the public sector. Yet, as suggested by the experience of some Member States, there exists a large room for mutually beneficial and long‑lasting synergies between start-ups and the public sector. An exemplary case of such cooperation is govtech (a portmanteau of ‘government’ and ‘technology’) — a mechanism designed to engage start-ups in the development of solutions to specific challenges faced by the public authorities (e.g. deployment of AI in border protection). In the long term, the insights from such synergies can redefine public procurement practices and fuel structural modernisation of the public sector itself. Furthermore, some experts point out to the benefits of the ‘functional procurement as a way to unleash the innovation potential and clear the bottlenecks to SME involvement. The concept, as referred to in the recital 74 of the Directive 2014/24/EU, focuses on the functional description of the product instead of the product‑based approach, which may block innovation by pre‑specifying the product’s features. The functional approach is particularly relevant with regard to the transition towards the Strategic Public Procurement as it allows innovative and sustainable solutions to enter the market.

Wrapping up

The significant economic weight of the public sector turns public procurement into a strategic tool in the transition towards sustainable consumption and innovation‑driven growth. In this light, further policy actions are needed to adapt and open up the EU public procurement system to innovations, as well as to incentivise for the development of national strategic procurement practices.

[1] See for example:

European Commission (2016) Buying Green! — A Handbook on green public procurement. 3rd edition. Available at: https://ec.europa.eu/environment/gpp/pdf/Buying-Green-Handbook-3rd-Edition.pdf; and

European Commission (2018) Guidance on Innovation Procurement. Available at: https://ec.europa.eu/transparency/regdoc/rep/3/2018/EN/C-2018-3051-F1-EN-MAIN-PART-1.PDF

[2] As European Charter for Small Enterprises (2000), Small Business Act (2008), COSME — Competitiveness of Enterprises and Small and Medium-sized Enterprises (2014), and others.

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CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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