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How can state purchasing power foster innovation?

Bringing innovation into public procurement is an essential measure to enhance public administration and improve the quality of life for the population. Innovation leads to greater efficiency in public purchasing, enables access to higher-quality products and services, and generates savings for public finances by optimizing resources and reducing unnecessary expenses. Brazil serves as an exemplary case for the region, with flexible public procurement instruments based on innovation.

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The Role of the State in Innovation

Nearly all advanced countries have well-established policies in science, technology, and innovation (STI). In recent years, this type of policy has gained greater prominence due to the evidence brought forth by the pandemic. Countries with scientific and technological capabilities are recovering more robustly from the crisis, and there is increasing international pressure to address the effects of climate change and rethink green growth.

The global challenge of energy transition represents, for some countries, a concentrated effort similar to that of the pandemic: the efficient, systematic, continuous, and persistent use of all instruments of innovation policies and scientific and technological policies, both on the supply and demand sides. In this context, the state's purchasing power plays a crucial role in inducing additional private investment in innovation, altering market behavior and expectations, and establishing mechanisms for sharing the technological risk inherent in innovation activities.

In recent years, Brazil has developed important instruments and processes to turn innovation in public procurement from theory into practice, positioning itself as a model for other Latin American countries. Brazil's public procurement instruments are flexible and cover the entire spectrum of the innovation process and technological development, offering the potential to significantly improve public service efficiency, transparency, equality, and create a virtuous cycle where the public sector moves at the speed of the private sector in solving concrete problems that demand integrated, holistic, and multidisciplinary perspectives. The pursuit of innovative solutions can bring greater efficiency to public purchases and enable the acquisition of higher-quality products and services.

Here are three recent instruments associated with the use of the state's purchasing power to promote innovation in Brazil, along with discussions on progress and prospects for strengthening this theme in the region.


Technological Commission

The technological commission is the main instrument for public procurement of innovation in Brazil. Aligned with international best practices and enabling a "mission-oriented" approach, it allows for the direct hiring, without the need for bidding, of the specific technical solution or innovative product, service, or process that involves technological risk.

This is especially useful when developing solutions not yet available in the market, where uncertainty is high, and the possibility of failure needs to be shared between the contracting authority and the contractor. A recent example is the collaboration between FIOCRUZ and AstraZeneca for the development of the COVID-19 vaccine.

"Pre-commercial procurement" is a critical instrument in the United States and the European Union. Many of the products we use today, such as smartphones, are the result of government investments in procurements similar to technological commission, but its use remains limited. For instance, Brazil and Colombia are the only Latin American countries with specific legislation for pre-commercial procurement in the public administration. Even in Brazil, where such legislation exists, legal uncertainty regarding oversight bodies' actions and risk-averse behavior of public managers reluctant to take risks keep the use of technological commission well below its potential. The primary challenge is its practical implementation.


Competitive Dialog

Inspired by the European Union's procurement procedures, the competitive dialog was introduced by the New Bidding and Contracts Law in April 2021 and became an additional option for enabling public procurement for innovation in Brazil.

In summary, the competitive dialog is structured in three main phases. In the first stage, a call is published containing the pre-selection requirements for interested parties to participate in the procedure. The second phase involves the actual dialog between the administration and the participants, negotiating and defining the best technical characteristics for the object to be contracted. After the pre-selection and dialog stages, the process moves to a competitive third phase where the final proposals from bidders are received and analyzed, leading to the selection of the winning contractor.

The competitive dialog appears to be an indisputable advancement, especially for innovation procurements without technological risk, i.e., for solutions already introduced but still not widely disseminated in the market. It also innovates by allowing a negotiated procurement procedure, reducing information asymmetry by focusing more on defining the object rather than solely on selection criteria based on value, such as the lowest price.


Public Contract for Innovative Solutions (PCIS)

Approved in June 2021, the Legal Framework for Startups and Innovative Entrepreneurship created a special bidding modality specifically aimed at testing innovative solutions by the Public Authority. Until then, one of the major dilemmas in the relationship between the state and startups was the difficulty of formalizing contracts for solutions tested in open innovation programs, especially due to the paradox of having to bid for a proven, validated, and jointly developed solution.

PCIS resolves this issue by creating a special procedure for contracting the testing of innovative solutions, with or without technological risk, capable of solving a problem faced by the Public Authority. Instead of describing the object to be contracted, PCIS correctly focuses on the problem to be solved, leaving it to the bidders to present solutions. Moreover, if the test is successful, it is possible to scale up the solution, limited to R$8 million and a duration of 48 months.

This bidding modality has gained attention in the public sector in recent years. In less than 24 months, over 20 tenders have been launched using this new approach to innovation in public procurement in different governments and sectors. Notable examples include Petrobras' Connections for Innovation program, EMPREL's EITA! Recife program, and the Impulsionar program that supported three municipal education networks.

Petrobras used this bidding modality in projects for early detection of faults and remote automated inspection with robots, among other examples. EMPREL's EITA! Recife program issued challenges in areas like mobility, animal protection, and sustainability, seeking solutions to relevant city issues and ensuring transparency and equity in the process. Lastly, the coordination of different education networks carried out by Impulsionar, using the bidding modality created by the Legal Framework for Startups, supported equity in education and the reduction of learning gaps with the use of EdTech technologies.


The Role of Oversight Bodies

In the Brazilian case, the active participation of oversight bodies is notable, especially the Federal Court of Auditors (TCU), through coLAB-i (Innovation and Co-participation Laboratory), which has been supporting Public Procurements for Innovation (CPIN) in the country since 2019. In partnership with the IDB, it was possible to understand the challenges and journey of public managers in a CPIN. The support model for public procurement of innovation spans from diagnosing the origins of the main difficulties in contracting innovation in the Brazilian public administration to designing solutions to help public managers overcome barriers. This understanding allowed coLAB-i to produce knowledge and tools to reduce barriers and promote the improvement of public services through the effective implementation of CPIN. The latest product is the CPIN Platform, developed to enhance the proper use of public procurement instruments for innovation by public managers to address public challenges, consolidating various instruments, analysis matrices, legislation, and best practices produced by the TCU and its partners.


Lessons for Latin America and the Caribbean

While CPIN has made progress in Brazil, this reality is not yet common in several countries in the region. Here are three key recommendations to promote the advancement of public procurement for innovation in the region:

  • Strengthen public innovation policies, especially by developing effective and country-specific public procurement instruments for innovation that are clear, straightforward, accessible to all public managers, and allow the participation of companies with innovative products, including small and medium-sized enterprises and startups.
  • Implement practical success cases that can inspire public managers, demonstrating the benefits and opportunities that public procurement for innovation can bring to the public sector and society as a whole. These cases should be well-documented and widely disseminated as references and models for other projects.
  • Create guides and documents that facilitate the implementation of CPIN, possibly in collaboration with oversight and control entities, to ensure transparency and efficiency in the process. These guides should provide clear guidance on the process stages, best practices, available funding sources, and other relevant aspects. Regular updates and continuous efforts to improve the effectiveness of public procurement policies and instruments for innovation are also essential.


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