This document discusses public procurement processes and their impact on innovation. It examines procurement for existing, adapted, and new technologies. Defence procurement aims to balance value for money with domestic industry and research goals. External factors like contracting and local content policies can impact innovation, as shown in a case study comparing radar procurement in Australia and Sweden. Sweden's internal relationships and willingness to take risks led to faster, cheaper results than Australia's more risk-averse, arm's-length approach.
1. Peter Hall and Robert Wylie
University of New South Wales, Canberra
IPPC6, Dublin: August 2014
2. Overview
Types of public procurement: with and
without innovation
Relevance to defence environment
Procurement process: external
determinants, effects on innovation, VFM
Procurement process: internal factors,
effects on innovation, VFM
Case study: radar systems Australia, Sweden
3. Types of Public Procurement
Technology (T) Innovation Procurement
Implications Type
Existing T
satisfies user(s) None Simple
Existing T requires Adapt existing T Simple innovation:
update/modification (Niche?) Adaptive
Existing T unable to Develop new T Complex innovation:
meet changing user(s) - agency-specific
needs, goals - generic (multiple
agencies)
4. Defence relevance
Defence departments are major agents of public
procurement in most countries
Simple procurement:
socks, jocks and stationery
Adaptive procurement (simple innovation):
defence-customised civil software (modification);
incremental improvements to weapons systems (updates)
Complex procurement:
New, R&D-generated systems for single-country strategic edge
New R&D-generated solutions for allied group challenge
5. VFM implications
Simple procurement:
“Narrow” financial VFM focus - cost efficiency
Potential for wider focus if local content/preference. Cost efficiency
sacrifice?
Adaptive procurement:
VFM interpreted to allow costs for maintaining performance in face
of ageing and incremental tech chg.
Issues around optimal rate/type of updating/modification
Complex procurement:
VFM uncertain ex ante (and, sometimes, ex post)
Focus on wider outcomes - domestic research/knowledge
base/capability; domestic industry; ally arrangements.
6. Externally determined factors
Source selection options:
Competitive
Sole source/dual source
Contract type options:
Fixed/firm price (FP)
Cost-reimbursement (CR); cost plus (CP)
Cost-sharing (CS)
Industry policy options
Local content
Defence Offsets
7. Implications of choices (1)
“One-size-fits-all” approach likely to be
non-0ptimal for innovation and VFM
Example: Competitive sourcing + FPP + local content
requirement
Internally inconsistent (comp. sourcing for cost efficiency
undermined by local content requirement)
May work well for simple procurement but competition at
arm’s length implies absence of govt-industry collaboration
helpful for innovation
FPP inflexible, undermines quality in innovation work
8. Implications of choices (2)
Price-based competition
Focus on price competition for “narrow” VFM may
encourage under-bidding and lead to “winner’s curse” ...
Possibly forcing exit of potentially innovative supplier.
Seasoned - potentially innovative - campaigners may see
dangers of “success” in price-based competition and not
bid at all.
Contracting for innovation
Procurement of innovation (potentially specifiable) may
benefit from tighter contractual conditions than
procurement for innovation (hard-to-specify in advance).
Relationship arrangements trump arm’s length contracts
where outcomes hard to specify in advance.
9. Internal arrangements
Relevant to pursuing:
Agency-specific product innovations (e.g. new weapons)
Institutional process innovation: joint procurement of
generic (e.g. multiple-ally, “club”) new technology
Public-sector risk-taking constraints anchored in
decision-by-decision public accountability (c.f mean
return criterion for private business)
To encourage innovation-related risk-taking,
incentives must be relatively high to compensate for
public-servant risk aversion. But principal/agent
problem because of unobservability of risk-aversion.
10. Case study: Complex defence
procurement in two countries
Radar broad-area surveillance
innovations in Sweden (airborne
ERIEYE) and Australia (ground-based
JORN)
ERIEYE came in (much) faster and
(significantly) cheaper than JORN
11. Case study: External constraints
Procurement
characteristic
Source selection
strategy
Contract type
Industry policy
objectives
Sweden Australia
Sole source Open tender
(Ericssons) (Qualified)
Hybrid: FP/CP Hybrid: CS/FP.
Flexible FP emphasis
Support armed Self-reliance;
neutrality. Innovation
Neutral T’gy. Capab’ty-build’g
12. Case study: Internal conditions
Australian procurement agency an integral part of
a state department. Officials at arm’s length from
suppliers. Risk-averse: unwilling/unable to
intervene in problems.
Swedish defence procurement agency (FMV)
largely autonomous but closely networked with
suppliers: corporatism, relationships. Officials
prepared to experiment and learn collaboratively
throughout procurement process.