Insight, Industrial Policy
Europe has proposed letting public buyers weigh quality, resilience and European supply chains against price across €2.6 trillion of annual procurement. The gap it addresses is real. The reason it exists is that being first is a cost to one buyer and a benefit to everybody else.
The European Commission has proposed an overhaul of public procurement rules that would allow authorities to place considerably more weight on quality, sustainability, resilience and European supply chains rather than treating price as the dominant criterion, including minimum quality weightings and stronger tools against suppliers from countries without reciprocal access (as reported). EU public procurement is worth roughly 2.6 trillion euros annually.
The gap this addresses is genuine and well known. Europe funds research and demonstration effectively and then a technology reaches a commercial void: a factory cannot reduce costs without volume, and buyers will not commit until costs have fallen.
What is less often stated is why that void is so persistent, because it is not simply that buyers are conservative.
Consider a municipality deciding whether to buy a low-carbon construction material, an electric municipal vehicle or a novel water treatment system that has completed a demonstration and has no operating track record.
If it works, the municipality gets a functioning asset. It also produces something considerably more valuable that it does not capture: proof. The next twenty buyers now have a reference installation, a cost figure from a real order, an operating history and somebody to phone. The supplier moves down its cost curve on the back of that order, and the price the second buyer pays is lower than the price the first one paid.
If it fails, the municipality gets a failed asset, an audit, a local news story and an official whose career carries it.
So the first buyer bears the full cost of the risk and captures a small fraction of the benefit. Everything else accrues to subsequent buyers, to the supplier and to the public generally. That is a positive externality in the strict sense, and the standard consequence of a positive externality is under-provision. Nobody wants to be first. Everybody would like to be second.
That is a structural explanation rather than a cultural one, and it matters because the two imply different remedies. If procurement officials are simply risk-averse, the answer is training and guidance. If being first is genuinely a bad individual deal that produces a large collective good, the answer is to change the deal.
Lowest-price award has a specific property in this context. It is defensible. An official who awards to the cheapest compliant bid has a complete answer to any subsequent challenge, and that answer does not depend on the outcome.
An official who awards to a more expensive bid on grounds of quality, resilience or supply chain has taken a position that has to be justified, and will be re-examined if anything goes wrong. The asymmetry is not about the rules. It is about what is defensible afterwards.
Allowing non-price criteria therefore does something necessary and insufficient. It removes a prohibition. It does not remove the personal exposure of the person exercising the new discretion, and discretion that carries personal risk without personal reward tends not to be exercised.
The measures that would change behaviour are duller than the proposal and mostly sit below it. Standardised evaluation frameworks that make a quality-weighted award the default rather than a deviation. Central framework agreements so that the risk of first purchase is taken once, by an institution built to take it, rather than repeatedly by small buyers. Explicit indemnity or insurance for first-of-a-kind installations. And published guidance that an official can point to.
We made a version of this argument about small municipalities and adaptation: the clearance points do not scale with the size of the organisation, and a discretion that requires legal capacity to exercise is available only to buyers who have legal capacity.
The proposal bundles two things that deserve separating, because they have different justifications and different evidence bases.
Weighting quality, durability and lifecycle cost against purchase price is a straightforward correction of a well documented distortion. Lowest-price tendering systematically favours assets that are cheap to buy and expensive to own, and public buyers have been complaining about it for decades.
Weighting European supply chain content is an industrial policy instrument with a different logic and a different set of costs. It may well be justified on resilience or strategic grounds. But it raises the price of what the public sector buys, which is a real cost borne by taxpayers or by service levels, and it invites reciprocal treatment elsewhere. Those trade-offs are arguable in both directions and they should be argued rather than absorbed into a quality criterion.
The risk in combining them is that the first is used to justify the second, and that the resulting instrument is evaluated on neither.
First-of-a-kind purchases, counted. How many public contracts in a year go to a supplier with no prior installation of the technology in question. This is the direct measure of whether the void is closing, and it is derivable from procurement records that already exist across the Union.
What happened to the second buyer's price. If the first-buyer mechanism works, prices should fall measurably for subsequent purchasers. That is the whole theory and it is checkable.
Challenge and litigation rates under quality-weighted awards. If non-price awards are challenged substantially more often, the discretion is being purchased with delay, and officials will learn that faster than any guidance can teach them otherwise.
Where European content requirements changed the winner, and what it cost. The difference between the winning bid and the cheapest compliant bid, aggregated, is the price of the industrial policy. It is calculable and publishing it would make the debate honest.
Europe has spent years funding the demonstration and then asking why nothing scales. The answer has been sitting in the procurement file, and it is not a shortage of ambition. It is that the person who goes first pays for the people who go second, and nobody has yet made that a good deal.
The Lab works on this in local manufacturing and on the distance between a working prototype and an operating system through entering a new context.
If you are designing an innovation procurement programme and want the first-buyer problem addressed rather than assumed away, tell us what you need to know.
This is an independent insight piece by Transitions Lab. For the Lab's applied work, see Local Manufacturing & Supply Chains. See also The Municipality Is the Instrument on why discretion is only available to organisations with capacity to exercise it, and Strategic Is Not the Same as Financeable on the decision bar that a subsidy does not move. To discuss a study, see Contact.