FAQ

Innovation procurement happens when public procurers procure the development or deployment of pioneering innovative solutions to address specific mid-to-long term public sector needs. It is a tool to provide tax payers with public services of the best possible quality and efficiency. In some cases, public sector challenges can be addressed by innovative solutions that are nearly or already in small quantity on the market and don’t need new research and development (R&D). This is when Public Procurement of Innovative solutions (PPI) can be used to get solutions deployed. In other cases, public sector challenges require improvements that are so technologically demanding that there are no near-to-the-market solutions yet and new R&D is needed. Pre-Commercial Procurement (PCP) can then be used to compare the pros and cons of alternative competing approaches and to de-risk the most promising innovations step-by-step via solution design, prototyping, development and first product testing. By developing a forward-looking innovation procurement strategy that uses PCP and PPI in a complementary way, public procurers can drive innovation from the demand side. This enables the public sector to modernise public services faster while creating opportunities for companies in Europe to obtain a first customer reference and gain international leadership in new markets.

Innovation procurement involves 3 stages and several steps per stage: 1. Preparatory stage (before procurement), covering the following steps:

• identification and assessment of the needs of the procurer (and end-users);
• verification of the needs against what already exists (prior art analysis & patent search);
• verification of the needs against what the market can deliver (open market consultation);
• formulation of the business-case for the procurer to start an innovation procurement (how to set the functionality/price requirements on the innovative solutions so the procurement achieves a positive cost/benefit outcome for the procurer);
• drafting the tender documents (including setting IPR, confidentiality and standardisation requirements).

2. Tendering stage (procurement), covering the following steps:

• conducting the tender procedure (publication of tender documentation, tendering, evaluation of offers, awarding the contract);
• in case of PPI, conformance testing ^[1] may take place before or during the tendering stage.

3. Contract implementation stage (after procurement), covering the following steps:

• continuous monitoring and assessing the final results of the R&D (PCP) or deployment (PPI), payment of supplier(s);
• in case of PCP, this is repeated for every PCP phase and is followed by a selection of the R&D providers that continue to the next R&D Phase.

[1] Conformance testing is only optional and happens before contract award, so before contract implementation stage. The purpose of conformance testing is to test whether solutions of potential suppliers are compliant with minimum requirements that need to be met for offers to be eligible (e.g. conformance with standards, certification requirements) so this needs to be done before contract award.

The boundaries of what R&D may cover under PCPs are set by the following two legal frameworks:

• the 2014 EU State aid framework for research, development and innovation (R&D&I)^[1]; and
• the WTO Government Procurement Agreement (GPA).

According to the 2014 EU State aid framework for research, development and innovation (R&D&I), in order for PCP to exclude State aid, the object of a PCP contract must fall within one or several categories of research and development defined in this framework and must be of limited duration. Additionally, it may include the development of prototypes or limited volumes of first products or services in the form of test series, but the purchase of commercial volumes of products or services must not be an object of the same contract. The R&D categories defined in the State aid framework that may be covered by PCP are:

• ‘fundamental research‘ means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any direct commercial application or use in view;
• ‘industrial research‘ means the planned research or critical investigation aimed at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It comprises the creation of components parts of complex systems, and may include the construction of prototypes in a laboratory environment or in an environment with simulated interfaces to existing systems as well as of pilot lines, when necessary for the industrial research and notably for generic technology validation;
• ‘experimental development‘ means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills with the aim of developing new or improved products, processes or services. This may also include, for example, activities aiming at the conceptual definition, planning and documentation of new products, processes or services. Experimental development may comprise prototyping, demonstrating, piloting, testing and validation of new or improved products, processes or services in environments representative of real life operating conditions where the primary objective is to make further technical improvements on products, processes or services that are not substantially set. This may include the development of a commercially usable prototype or pilot which is necessarily the final commercial product and which is too expensive to produce for it to be used only for demonstration and validation purposes. Experimental development does not include routine or periodic changes made to existing products, production lines, manufacturing processes, services and other operations in progress, even if those changes may represent improvements;

As explained in the R&D&I State aid framework^[2], the different R&D categories can also be considered to correspond to Technology Readiness Levels 1 (fundamental research), 2-4 (industrial research) and 5-8 (experimental development). As PCP is driven by a specific procurement need (with a concrete use case in mind), fundamental research is not the aim of a PCP. However it is possible that in order to complete the industrial R&D needed for the PCP, some fundamental research aspects need to be further elaborated as well. Thus, PCPs typically cover activities such as solution exploration and design, prototyping, up to the original development of a limited volume of first products or services in the form of a test series. According to Article XV (1)(e) of WTO GPA 1994 and Article XIII(1)(f) of the revised WTO GPA 2014 that defines original development as the boundary of where R&D stops, original development of a first product or service may include limited production or supply in order to incorporate the results of field testing and to demonstrate that the product or service is suitable for production or supply in quantity to acceptable quality standards, but does not include quantity production or supply to establish commercial viability or to recover R&D costs [1] Commission, ‘Framework for state aid for research and development and innovation’ C(2014) 3282. [2] See footnote 1

An unmet need or a challenge in a PCP or PPI is a “ requirement or set of requirements that (…) [procurers] have now or (preferably) one that (…) [they] will have in the future, that current products, services or arrangements cannot meet, or can only do so at excessive cost or with unacceptable risk.”^[1]An unmet need or challenge often becomes apparent whenever a procurer has to solve a problem that negatively impacts the efficiency of its internal operations or the quality of the service of public interest it offers to citizens or whenever a procurer has to implement policy objectives or legislations. [1] : See Department for Business Innovation & Skills, “Delivering best value through innovation. Forward Commitment Procurement. Practical Pathways to Buying Innovative Solutions”, November 2011, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32446/11-1054-forward-commitment-procurement-buying-innovative-solutions.pdf

An open market consultation is an open dialogue between procurer(s) and the market, in which the procurers ask for the view of the market to identify the ability thereof to meet the needs of the procurer(s). All potentially interested economic operators on the market are invited to attend the open market consultation (via announcement of the open market consultation in the European Tender Database). An open market consultation will reveal whether the need is met by a readily available commercial solution or whether R&D (PCP) or close-to-market innovation (PPI) is needed to meet the need. When the solution to the need is not readily available, the open market consultation will help the public procurer to choose the right form of innovation procurement. If R&D is still required to meet the need, a PCP is the suitable choice (potentially followed by a PPI). If there are already suitable innovative solutions close to the market that have already passed the R&D stage and are ready for commercial deployment by a launch customer, a PPI is the suitable choice.

PCP is a public procurement of Research and Development (R&D) services involving risk-benefit sharing under market conditions and competitive development in phases, where there is a clear separation between the procurement of the R&D from the deployment of commercial volumes of end-products. Let’s clarify this definition step by step in questions Q4 – Q8 below:

Separation of PCP from the deployment of commercial volumes of end-products refers to the complementarity of PCP, which focuses on the R&D phase before commercialisation (the purchase of R&D services), and PPI, which does not focus on R&D but on the commercialisation/diffusion of solutions (the purchase of innovative products that are ready for commercial deployment).

It is an R&D phase in the PCP. In general, there are 3 phases in a PCP project. Phase 1 comprises solution exploration, Phase 2 comprises prototyping, and Phase 3 comprises original development and testing of a limited volume of first products or services in the form of a test series.

Competitive development in phases refers to the competitive approach used in PCP by procurers to buy R&D from several competing R&D providers in parallel to compare and identify the best value for money solutions on the market to address the PCP challenge. The R&D is also split in phases (solution design, prototyping, original development and validation / testing of the first products). The number of competing R&D providers is reduced after each PCP phase subsequent to intermediate evaluations. The phased approach reduces the investment risk for the public procurer, facilitates the participation of smaller innovative companies (SMEs) and rewards the most competitive solutions. Evidence also shows that competitive development in phases that is clearly separated from later deployment contracts, generates significant quality improvements and on average 20% cost reduction in first products for procurers

Separation from the deployment of commercial volumes of end-products refers to the complementarity of PCP, which focuses on the R&D phase before commercialisation, and PPI, which does not focus on R&D but on the commercialisation/diffusion of solutions.

Risk-benefit sharing under market conditions refers to the approach in PCP where procurers share with suppliers, at market price, the benefits and risks related to the IPRs resulting from the R&D. More information is provided under the answers to questions Q11, Q12 and Q13.

PCP falls outside the scope of application of the European public procurement directives. This is because in PCP the procurer does not reserve all the benefits of the R&D exclusively for himself: in PCP the procurer leaves the IPR ownership rights attached to results generated by the R&D providers with the R&D providers. Accordingly, PCP is exempted from the EU public procurement directives based on Article 16(f) of the Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (Public Sector Directive), Article 24(e) of the Directive 2004/17/EC coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (Utilities Directive) and EU legislation replacing these, namely: Article 14 of Directive 2014/24/EU on public procurement and repealing Directive 2004/18/EC and, respectively, Article 32 of Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC, as well as article 13(f)(j) of Directive 2009/81/EC (Defence/Security Directive) which state that: “this Directive shall only apply to public service contracts for research and development services […] provided that both of the following conditions are fulfilled:

• the benefits accrue exclusively to the contracting authority for its use in the conduct of its own affairs, and
• the service provided is wholly remunerated by the contracting authority/entity”.

The main parties of the WTO Government Procurement Agreement, including the EC, have excluded R&D services from the scope of the WTO GPA (Article IV of the GPA). Therefore PCP is exempted from the WTO GPA on condition that the PCP is limited to original development (see question on what is covered by R&D) as defined in WTO GPA 1994 Article XV (1)(e) and in Article XIII(1)(f) of the revised WTO GPA 2014. However, these exempted R&D services still need to be procured in compliance with:

• the fundamental principles of the Treaty for the Functioning of the European Union (TFEU) and the principles deriving therefrom^[1];
• the European Economic Area (EEA) and Stabilisation and Association Agreements with partner countries^[2] of the European Neighbourhood Policy. In Horizon 2020 funded PCP projects, compliance needs to be ensured also with the Horizon 2020 association agreements.
• the EU competition rules, including in particular the conditions to ensure that PCP does not involve State aid that are defined in Article 33 of the R&D&I state aid rules.
• the provisions in WTO GPA 1994 Article XV (1)(e) and in Article XIII(1)(f) of the revised WTO GPA 2014 regarding subsequent supply contracts after the PCP has been completed.

As the TFEU principles and above mentioned EEA/Stabilisation and Association Agreements principles remain applicable, the public procurer must allow all interested bidders from all EU Member States, EEA and partners countries in the context of the European Neighbourhood policy to compete on equal terms for the PCP contracts, based on transparent and fair rules.   According to WTO GPA 1994 Article XV (1)(e) and Article XIII(1)(f) of the revised WTO GPA 2014, the use of limited tendering in the PCP is not allowed to be employed to avoid maximum possible competition or discriminate among suppliers of other WTO Parties or to protect domestic suppliers in follow-up contracts for the supply. Consequently, with regards to bidders from other countries that are WTO signatory countries, the public procurer has two choices:

• If the public procurer does not allow bidders from those countries to submit offers for the PCP, the public procurer cannot limit the tendering for the purchase of the prototypes or first products/services developed during the PCP to the contractors from the PCP.
• If the public procurer allows bidders from those countries to submit offers for the PCP, the public procurer can limit the tendering for the purchase of the prototypes or first products/services developed during the PCP to the contractors from the PCP. Note that in this case, it is still possible to use a place of performance requirement that requires suppliers to perform a relevant part of the R&D services for the PCP contract in the territory defined by the EU, the EEA, and partner countries in the context of the European Neighbourhood policy. Please note that in Horizon 2020 funded PCP projects, the scope of the place of performance condition is even broader and includes also all countries associated to Horizon 2020^[3] that are not in the EEA or in the European Neighbourhood policy. Because of the EEA and stabilisation/association agreements, it is not allowed to restrict the place of performance clause to R&D to be performed in the EU Member States. Because of the EU Treaty principles and competition rules, it is also not allowed to restrict the place of performance clause to R&D to be performed in a specific Member State, region or city in the EU.

The PCP Communication^[4] and the PCP Staff Working Document^[5] define an approach to implement PCP that is fully compliant with the applicable European and worldwide legal framework. [1] What needs to be complied with in particular include: the fundamental TFEU principles on the free movement of goods and workers, the freedom to provide services, the freedom of establishment and the free movement of capital, as well as the principles deriving there from, such as the principles of non-discrimination, transparency and equal treatment. [2] A list of countries with whom the EU has signed and association agreements on public procurement in the context of the EU Neighborhood Policy is available here: http://ec.europa.eu/growth/single-market/public-procurement/international/european-neighborhood-policy/index_en.htm [3] A list of countries associated with Horizon 2020 is available here: http://ec.europa.eu/research/participants/data/ref/h2020/grants_manual/hi/3cpart/h2020-hi-list-ac_en.pdf. [4] The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Region, “Pre-commercial procurement: driving innovation to ensure sustainable high quality public services in Europe”, COM(2007) 799 final, 14.12.2007. [5] Commission’s Staff Working Document, SEC(2007) 1668, Example of a possible approach for procuring R&D services applying risk-benefit sharing at market conditions, i.e. pre-commercial procurement, 14 December 2007.

It is recommended to allow any type of legal entity that is interested and is able to commercialise R&D results (in particular IPRs) to tender for the PCP either alone or in consortium with others, including SMEs (also start-ups), universities^[1], associations, foundations. To be eligible, all tenderers^[2] should show a clear route to the market. Since PCP phase 3 on-site testing work consumes typically the majority of the PCP budget, it is recommended to request interested bidders to perform the majority of the R&D and operational activities covered by the PCP contract in the European Economic Area or in a country having concluded a Stabilisation and Association Agreement under the EU Neighbourhood policy. For Horizon 2020 funded PCP projects this extends to all countries associated to Horizon 2020. [1] Universities on their own should also be able to apply if they are able to commercialise IPRs. [2] In case of offers submitted by a consortium, please note that not every legal entity separately in the consortium needs to show this, but the consortium as a whole.

IPRs represent the bundles of property rights over intangible knowledge products, such as copyrights on documents and software, patents on technical inventions, and trademarks for branding. It means patents, inventions (whether or not patentable or capable of registration), trademarks, service marks, copyrights, topography rights, design rights and database rights, (whether or not any of them are registered or registerable and including applications for registration, renewal or extension of any of them), trade secrets and rights of confidence, trade or business names and domain names and all rights or forms of protection of a similar nature which have an equivalent effect to any of them which may now or in the future exist anywhere in the world. Results is a term that covers more than just IPR rights. Results includes any tangible or intangible output, such as data, knowledge or information, that is generated in the PCP (meaning in activities described in the PCP contracts), whatever its form or nature, whether or not it can be protected, as well as any rights attached to it, including IPRs (foreground IPRs). Note that results equals foreground and, therefore, do not include background (generated before the PCP) or side ground (generated during the timespan of the PCP but not in the activities covered by the PCP). In PCP, procurers do not reserve the R&D results exclusively for their own use. Each R&D provider that generates results in the PCP owns the IPRs attached to its own results (together with the responsibility and the costs for protecting those IPRs). The public procurer obtains license free rights to use the R&D results for its own use, and the right to require participating R&D providers to grant non-exclusive licenses to third parties to exploit the results under fair and reasonable market conditions without any right to sublicense. A call back provision ensures that if an R&D provider fails to commercially exploit the results within a given period after the PCP as identified in the PCP contract (minimum 4 years in the case of Horizon 2020 funded PCP projects) or uses the results to the detriment of the public interest (including security interests), it shall transfer any ownership of results to the procurers upon the request thereby. As the PCP procurement does not procure the generation of background or side ground, the procurers obtain access to background and side ground of R&D providers under fair and reasonable market conditions, except for background needed by the procurers to implement their own tasks during the PCP (this is obtained license free). Procurers also retain the right to publish information – after consultation with each participating R&D provider – public summaries of the results of the PCP, including information about key R&D results attained and lessons learnt by the procurers during the PCP (e.g. on the feasibility of the explored solution approaches to meet the procurers’ requirements and lessons learnt for potential future deployment of solutions). Details should not be disclosed that would hinder application of the law, would be contrary to the public interest, would harm the legitimate business interests of the R&D providers involved in the PCP (e.g. regarding IPR protected specificities of their individual solution approaches) or would distort fair competition between the participating R&D providers or others on the market. For the public procurers, this approach safeguards a future competitive supply chain and cheaper prices for the R&D and resulting products as the participating R&D providers can commercialise the results of the PCP – including the resell of the developed solutions – to wider markets.

PCP concerns the phase before commercial exploitation, namely the procurement of R&D. PCP is used to drive technological innovation up to the development of a limited batch of first products or services in the form of a test series. The subsequent commercialisation of the results of the PCP generated by the R&D providers in the PCP is up to the R&D providers themselves (for an unlimited period of time if compliant with the PCP conditions or until the call-back clause is called for). Commercial exploitation of the PCP results by R&D providers that participate in the PCP can be defined as marketing a commercial application of the results directly by the R&D provider or by any of its potential subcontractors or licensees. This can include marketing a commercial application (through direct sales or licensing or transfer of ownership) of all types of results from the PCP (including information, data, IPRs, products/services/processes resulting from the PCP). Commercialisation of products/services resulting from the PCP covers the production, distribution, marketing, sales and customer support required to achieve commercial success. As a strategy, commercialisation of products/services requires developing a marketing plan, determining how the product or service will be supplied to the market and anticipating and managing barriers to success. The public procurer may support the commercialisation process by launching a PPI procurement after the PCP to purchase the results of the PCP, in particular to deploy products/services resulting from the PCP. If the PPI covers only the purchase of the limited set of prototypes or first test products/services developed during the PCP, then the PPI procurement can be limited to the R&D providers that participate in the PCP on condition that the PCP procurement was open not only to bidders from the 28 Member States, EEA and countries in the EU Neighbourhood policy but also to all bidders from WTO signatory countries. According to the EU and WTO legal framework, a PPI procurement to buy commercial volumes of final end-products may not be reserved to (one of) the R&D providers that participated in the PCP and has to be open beyond the 28 Member States, EEA and countries in the EU Neighbourhood policy also bidders from all WTO signatory countries for all types of purchases covered by the WTO GPA.

PCP is an R&D services contract in which the public procurer shares the risks and the benefits related to the IPRs with the R&D provider. The public procurer should ensure that the PCP contracts with R&D providers contain a financial compensation according to market conditions compared to exclusive development price for assigning IPR ownership rights to participating R&D providers, in order for the PCP call for tender not to involve State aid. The financial compensation compared to exclusive development price should reflect the market value of the benefits received and the risks assumed by the participating R&D provider. The market price of the benefits should reflect the commercialisation opportunities opened up by the IPRs to the R&D provider. The associated risks assumed by the R&D provider comprise, for instance, the cost carried by the R&D provider for maintaining the IPRs and commercialising the products. If the price paid by the public procurer does not reflect the benefits received and the risks assumed by the participating R&D providers, the PCP contract will normally be regarded as State aid. According to the new 2014 State aid framework for research, development and innovation a ‘market price’ is presumed whenever the PCP is conducted in compliance with several cumulative conditions.^[1] [1] See section 2.3 of the Framework for state aid for research and development and innovation.

PPI is a public procurement in which public procurers act as a launch customer – also called early adopter – of innovative goods or services that are close or even already available on the market in small quantity but not yet deployed on a large scale commercial basis. PPI does not include the procurement of R&D but may include before the purchase of a test to verify if solutions on the market can conform with the deployment requirements, i.e. conformance testing.

In Horizon 2020 PPI projects, innovative solutions are innovative goods or services with better than best available performance levels which suppliers are called to meet through production innovation. This includes solutions that typically have already been (partially) technically demonstrated with success on a small scale, and may be nearly or already in small quantity on the market, but which, owing to residual risk of market uncertainty, have not been produced at large enough scale yet to meet mass market price/quality requirements and have therefore not widely penetrated the market segment of the procurers yet. This also includes solutions based on existing technologies that are to be utilised in a new and innovative way. PPI does not include the procurement of R&D.

In Horizon 2020 PPI projects, launch customer – also called early adopters- refers to the first approx. 20% customers on the EU Internal Market in the market segment of the procurers that are deploying innovative solutions to tackle the challenge addressed by the PPI procurement. PPI shall result in the first application/commercialisation of innovative solutions, meaning that the solutions have to be new to the procurers’ market segment or new to the EU Internal Market, and relevant to procurers in other Member States and/or countries associated to Horizon 2020.^[1] [1] See Annex E. Specific requirements for innovation procurement (PCP/PPI) supported by Horizon 2020 grants, available at http://ec.europa.eu/research/participants/data/ref/h2020/wp/2014_2015/annexes/h2020-wp1415-annex-e-inproc_en.pdf.

PPI falls under the scope of the EU Public Procurement Directives and the WTO GPA rules whenever these are applicable to the procurer and the product/service procured in question.

A cross-border collaboration is a collaboration between two or more procurers from different countries (‘buyers group’), where they may co-finance the procurement and/or they may undertake the procurement jointly. The cross-border collaboration may take different forms. For example, a joint PCP or PPI will entail the identification of a shared need of all participating contracting authorities, the release of one joint call for tender, the joint evaluation of offers, and the award of (some or all of) the procurement contract(s) by a lead procurer in the name and on behalf of the buyers group.

Cross-border collaboration between contracting authorities presents several advantages:

• it enables public procurers to share the costs and the risks of innovation procurement;
• it enables public procurers to create the basis for interoperable solutions; and
• it creates a critical mass of demand for innovative solutions, which incentivises private investments in the development of the innovative solution and triggers growth in the defined markets.

This question is answered on the Assistance page on the eafip website: http://eafip.eu/assistance/

This question is answered on the Assistance page on the eafip website: http://eafip.eu/assistance/