REUTERS | Jim Young

Innovation partnership – does it offer a genuine breakthrough?

Regulation 31 of the new procurement regulations (SI 2015/102) (PCR 2015) introduces a completely new procurement procedure called “innovation partnership” where there is a need for “an innovative product, service or works that cannot be met by (those) … already available on the market” (regulation 31(2)). Generally new procedures are to be welcomed because they offering something different and better than the previous procedures. Is this the case here?

Successive governments have encouraged the public sector to be more innovative in its use of procurement. In 2009, the former OGC published guidance on “Driving innovation through public procurement. In that guidance it recommended the use of the “competitive dialogue” procedure to drive innovation. That procedure was introduced in the Public Contracts Regulations 2006 and has been extensively used in the UK and across the EU (and as recital 42 of Directive 2014/24/EU accepts, it is particularly suitable for innovative projects).

The scope to use competitive dialogue has arguably been extended by regulation 26 of the PCR 2015. The grounds for using the competitive negotiated procedure and competitive dialogue are the same; one of these is where the procurement will “include design or innovative solutions” (regulation 26(4)(a)(ii)). This therefore begs the questions, why has a new procedure been introduced for “innovation” and does it offer a clear advantage over competitive dialogue or competitive negotiation?

The reason for the introduction of innovation partnership is linked to the Europe 2020 strategy. Recital 47 of Directive 2014/24/EU specifically refers to the strategy and indicates the need for innovation to address “major societal challenges”. It acknowledges existing procurement models but says that the new directive should facilitate innovation. Recital 49 therefore refers to a “specific procurement procedure … (to) allow contracting authorities to establish a long-term innovation partnership for the development and subsequent purchase of a new, innovative product, service or works provided that such innovative product or service or innovative works can be delivered to agreed performance levels and costs, without the need for a separate procurement procedure for the purchase”.

How the Innovation Partnership compares to the competitive dialogue and competitive negotiated procedures

One of the problems with the use of existing competitive dialogue or competitive negotiated procedures has been in identifying, costing and describing (at least in outline terms) the need for an “innovative” solution; whilst being reliant on economic operators to suggest that very innovation. Whilst it is common to outline the problem faced (rather than the solution) there still remains the need for a degree of precision in estimating the contract value, in describing the technical specification and in describing the contract flexibilities sufficiently transparently to avoid the risk that planned changes during the life of the contract are not be deemed to be materially different to the arrangement originally advertised. Unfortunately, regulation 31 does not seem to have removed these difficulties.

Regulation 31(2) requires the contracting authority to identify the need for an innovative product/service and its minimum requirements. The detail must be “sufficiently precise” to enable economic operators to identify the nature and scope of the solution and decide whether or not to participate (regulation 31(3)). The key element that is new with innovation partnerships is that it expressly deals with the structuring of the contractual position after contract award, not just the award procedure itself.

Regulations 31 (10) and (11) indicate that the innovation partnership shall be structured in “successive stages”; with “intermediate targets” and remuneration in instalments. Such a partnership therefore opens up the possibility to enter into an agreement in the form of an incremental contractual arrangement using two distinct stages – the first being the “R&D” or design stage to develop the solution; followed by the service contract that delivers the solution. The ability to incorporate both a research and a commercial phase in a single procurement may have been the driver for the introduction of this process though, being a common law jurisdiction, our contracts already allow for this flexibility. The procedure may also feature the termination of the partnership after each phase (regulation 31(12)).

The regulation expressly permits the partnership to be entered into with “several partners” (regulation 31(4)). While there is nothing to prevent any other procurement process resulting in the award of more than one contract, this new procedure seems to offer the flexibility to set up a contractual “partnership” with a limited number of chosen providers, then ask them each to develop component parts of an overall solution to a complex problem, before awarding a delivery contract or contracts to the partners that deliver the “best” solution at that design stage. It is difficult to find clear examples of when the innovation partnership may be used. However, it could be helpful in designing a technology-based multi-agency business transformation project, or a waste project involving recycling, landfill and waste to energy technologies. Or even in the design and commissioning of innovative surgical techniques.

This all assumes the arrangement is commercially attractive both to contracting authorities and economic operators (after all, designing new solutions is not cheap and the management of the IP rights complex).

However regulation 31 does not overcome the difficulties previously faced. The OJEU notice will still have to include the estimated value of the procurement (regulation 6), there is need for a degree of precision in the specification (regulation 42(11)(a)), and the contract that is awarded cannot be changed materially.

Regulation 72 has now regulated the ability to modify contracts during their term. It does not include any particular exemption for “innovation partnerships”. Therefore it would appear that any changes during the life of the partnership will have to fall within those that are permitted within regulation 72(1), probably those that are transparently provided for in the initial procurement documentation. In which case, it would seem the same difficulties in structuring contractual arrangements will apply to the use of innovation partnerships as to those previously faced by the use of competitive dialogue/competitive negotiation.

Since the PCR 2015 came into force, no contracting authorities have published OJEU notices inviting suppliers to participate in a proposed innovation partnership. However, it is early days and it remains to be seen if practitioners will move away from tried and tested procedures to a new procedure that appears to have similar limitations. The grounds for using competitive dialogue or competitive negotiated (innovation, complexity or inability to specify) would seem to overlap with the grounds for innovation partnerships. All processes arguably offer the same flexibility during the procurement process, and all the processes have difficulties both commercially and with the limitations on changing contracts after award. The justification for the introduction of this new procedure may rest, at least partly, on its branding rather than any real differences it offers from that which can be achieved through one of the other procurement routes.

John Bennett

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