Guest post - Stimulating SME participation in procurement

ICLEI Europe is selected contractor to implement the SPIN4EIC powered by EIC Innovation Procurement Programme, an initiative of the European Innovation Council. The views expressed in this article are those of ICLEI Europe and do not necessarily reflect the official position of the European Innovation Council or any associated bodies.

Stimulating SME participation in procurement 

In July 2024, President Ursula von der Leyen presented the Political Guidelines for the next European Commission 2024-2029 to the European Parliament.  In her address, she emphasised the role of public procurement as "one of the main levers available to develop innovative goods and services and create lead markets in clean and strategic technologies”. She also announced that she would propose a revision of the Public Procurement Directive to "modernise and simplify our public procurement rules, particularly with EU start-ups and innovators in mind.”

The challenge

Von der Leyen’s intervention reflects the recommendations of the EU’s 2019 analysis of small and medium-sized enterprise (SME) participation in public procurement which noted that SME success rates in public tenders are significantly lower than their contribution to GDP. The analysis  identified several challenges facing SMEs and startups when seeking to access public procurement markets, such as the size of many contracts overwhelming an SME’s financial or technical resources, insufficient access to information on business opportunities or the public procurement procedures, excessive bureaucracy and administrative burden, limited experience in bidding for contracts, expensive standards and certification requirements, and lack of dialogue and feedback from public buyers. It also encourages public procurement bodies to take into account SME needs and specificities when designing and implementing SME-friendly measures, particularly due to such businesses’ smaller sizes and tendencies to be innovation-driven.

Furthermore, the European Court of Auditors released a 2023 special report on public procurement in the EU which declared that despite the intentions of the current procurement directives to expand SME participation in public procurement markets, the share of contracts awarded to SMEs from 2016 - 2021 has not experienced an overall increase. For this reason, the report recommends developing measures to make public contracts more attractive to smaller businesses.

Good practices across Europe

Across Europe many countries are taking action to promote SME participation in public procurement, including through the division of larger contracts lots, operation of e-procurement tools, and use of innovative procurement procedures.

Breaking down larger tenders into lots is often considered one of the most important practices for encouraging SME and start-up participation in public procurement as it reduces a bid to a more manageable size, thereby minimising both the technical and financial requirements of the tenderer. In Germany, for example, large contracts are legally obligated to be split into lots to give SMEs easier access to contract opportunities. Although this requirement can be challenging for contracting authorities, it has been credited with increasing SME participation. However, other elements of the country’s procurement system still create barriers to SME entry, such as the use of bid security payments which make it harder for smaller companies with less financial resources to bid, as well as the reluctance of many contracting authorities to embrace digitalisation due to security concerns.

E-procurement is seen as a convenient method for all enterprises, particularly SMEs, as it simplifies the procurement process and reduces transaction costs. For example, the Netherlands has introduced TenderNed, which enables SME’s to only enter their data once, streamlining the administrative process. An easily navigable and functional procurement portal that avoids tedious administrative efforts can encourage SMEs to participate in public tenders. Another e-procurement tool is public invoice factoring. Ukraine’s Factoring Hub is a special portal dedicated to providing SMEs with advances on their public sector invoices. The system allows (state) financiers to take over the pursuit of payment from the public contractor, so that SMEs never have to repay their advances. Factoring Hub also connects to the e-tender platform ProZorro, where banks can see public contract details and assess the creditworthiness of SMEs, facilitating their participation in tenders.

High-quality training of the public procurement workforce is key for improving contract performance and can help foster the inclusion of SMEs by enhancing supportive measures. From 2018-2023, the Federal Procurement Agency (BBG) of Austria conducted a series of training for public buyers from Central Purchasing Bodies (CPBs) across Europe called the Public Procurement Excellence Programme which covered topics such as the ‘Importance of SMEs as Drivers of Economic Growth’, ‘Inclusion of SMEs in the Public Tendering Market’ and ‘Innovation in Public Procurement’. Upon its conclusion, the European Commission launched the PPE+ Europe 2024-2028 programme  to  further professionalise  public procurement experts from CPBs. Beyond training, just procurers, the sharing of guidance materials, helpdesk support, and other support measures to SMEs and start-ups can lead to time-saving, reduce irregularities or errors in the procurement process, and inspire complementary actions such as the simplification of documentation requirements.  Austria, for example, has published guidelines for SMEs that offer step-by-step advice on how to apply for a tender and use the e-procurement system. As will be detailed in the following section, other programmes, such as those hosted by the European Innovation Council, can support both the buyers and suppliers in driving innovation.

SMEs are considered important contributors to innovation due to their less hierarchical structures and can be part of innovation procurement strategies or demand-side innovation policies. Whether procuring the process of innovation or the result of innovation, contracting authorities benefit from investing in novel solutions. The EU recognises this opportunity and has issued a guidance document for innovation procurement highlighting the benefits of boosting economic recovery, resilience and the green and digital transition, delivering higher quality public services on an optimal budget, addressing arising needs, modernising public services and helping start-ups and innovative SMEs launch and grow. In particular, the EU recognises the benefits for attracting start-ups as they can introduce more agile ways of working, identifying high-quality offers from new solutions, offering innovative companies the opportunity to test solutions in real-life conditions and eventually scale up their impact to a city/regional level, diversifying the economy and gain better knowledge on emerging players and market trends. One notable EU-funded innovation procurement project was the AI4Cities, which provided 4.6 million euros budget (total) to contract suppliers who took part in a Pre-Commercial Procurement (PCP)  with a Buyers group consisting of  six European cities: Helsinki, Amsterdam, Copenhagen, Paris, Stavanger, Tallinn. This allowed the public authorities to develop through R&D procurement AI-based solutions that reduced CO2 emissions in the mobility and energy sectors offering at the same time concrete business opportunities to the SMEs that took part in the PCP as suppliers/contractors. AI-driven solutions are transforming energy use in cities. For example, the BEE System helps shift energy consumption in buildings to timeframes when there is more renewable energy available and was piloted in Helsinki and Stavanger. Another example is C-in.City, which was piloted in Copenhagen and the Greater Paris Region and provides cities with a near real-time carbon emission management platform that monitors and manages all urban emissions (housing, commercial, public institutions, transportation, industries, power production) at 3 actionable scales. Holoni was also piloted in Copenhagen and helps cities assess their solar surplus by leveraging AI to predict and analyze solar surplus potential across the city and Distributed Ledger Technologies (DLT) to automate result-based reward and incentive schemes for urban solar prosumers. Finally, the MPAT Tool which was piloted in Amsterdam and Tallin seeks to optimise the CO2 emission-reduction potential of city mobility policies, beginning with shared micro-mobility by using AI to forecast demand for low-carbon micro-mobility trip growth and calculating shared mobility’s CO2.

Opportunities with the EIC

When public procurers purchase the outcomes of innovation, they act as early adopters by buying a product or service that is new to the market and contains “substantially novel characteristics.” Many of these leading innovators are part of the European Innovation Council, the EU’s flagship innovation programme for identifying, developing and scaling-up breakthrough technologies and game-changing innovations. As the EIC seeks to stimulate strong collaboration between top-notch innovators and public as well as private buyers, it has introduced a new Innovation Procurement Programme which aims to facilitate increased market opportunities for innovative EIC SMEs and start-ups and contribute to their scaling up.

Within this EIC Innovation Procurement Programme, the  Strategic Use of Innovation Procurement initiative has been introduced which provides EIC beneficiaries the opportunity to expand their business prospects, discover new markets and clients, receive assistance with tender submissions, and increase their capabilities to identify business opportunities arising from public (and private) procurement. Through an end to end holistic approach, this flagship initiative of the EIC Innovation Procurement programme puts emphasis also on the demand side by offering to  public buyers assistance to purchase innovative solutions instead of off the shelf goods or services. Both EIC beneficiaries and buyers from the public and private sector can actively participate in communities of procurers with similar challenges and get the opportunity to modernise their services through cutting-edge solutions. Finally, the newly launched InnoMatch programme supports the pilot testing of EIC innovative solutions for public and private procurement customers to mainstream the uptake of innovation procurement. It is thus clear that the EIC has developed a unique Innovation Procurement programme that offers a variety of services aimed at stimulating demand on the supply side that is also tailored to the needs of different stakeholders.

Conclusion

As public procurement is responsible for 14% of the EU’s GDP, it can be a strategic tool to create a more innovative, social, sustainable and resilient continent, as also echoed by Mario Draghi’s recent report on how to boost the EU’s competitiveness. The EU’s efforts to shape a better understanding between public buyers and innovative market actors can play a pivotal role in harnessing that potential.