How cities can flex their purchasing power to stimulate innovation

City governments spend $6 trillion annually buying goods and services from private sector suppliers, amounting to 8% of world GDP in 2021. These delivery contracts represent a huge commercial opportunity for suppliers, but also a policy tool for local authorities to shape markets and steer private sector research and development towards priority policy goals – from environmentally sustainable mobility, improvements in public health, safe and affordable housing, to resilient infrastructure.

But in many countries, public procurement is widely perceived to be a barrier to innovation and improvement, a necessary evil to be navigated with caution. There is some truth to this perception. The UK government’s national Innovation Strategy (2021) notes that public procurement culture is characterized by “a low appetite for risk and experimentation” due to “the overall culture, expertise and incentive structure of the public sector”.

Consequently, many entrepreneurial suppliers simply do not seek to compete for public sector contracts. Between January 2021 and January 2023, 20% of openly competed UK public tenders only received one bid.

This is bad news for taxpayers who miss out on potential improvements to public services. But the “power of the purse” can be a game-changer.

In recent years, local and national leaders have been rediscovering the power of public procurement and dismantling the legislative and cultural barriers that have limited its potential. Analysis by the OECD endorsed public procurement as a strategic instrument that can be used by government to promote innovation, facilitate diversity of thought and address societal challenges.

The UK government’s national Innovation Strategy identifies public procurement as a powerful tool for catalyzing the innovation economy, both in sparking new products and by providing the commercial funding that enables businesses to scale. Place leaders across the EU, UK, United States and elsewhere now have access to innovation-friendly procurement procedures though national legislation.

A growing number of city authorities are using these powers to drive not just delivery but transformation:

Awareness of the tools available is now the greatest hurdle to the adoption of best practice by city authorities. In response to this, various nations have established centres of excellence to advocate for innovation-friendly procurement and equip local leaders to embrace new behaviours. These include KEINO (Competence Centre for Sustainable and Innovative Public Procurement) in Finland, LaunchVic in Australia, and the Innovation Procurement Empowerment Centre (IPEC) in the UK.

In 2022, the G20 Global Smart Cities Alliance launched a new taskforce working to pool international best practice and insights on innovation-friendly procurement. The taskforce has engaged civic leaders, private sector representatives and academics to map global pioneering practice from Barcelona to Belfast, Helsinki to Long Beach.

The members of the taskforce compiled these insights into a new model policy, Innovation Friendly Procurement, which provides practical steps for cities worldwide to spark innovation through procurement. The model policy aims to help city stakeholders to embrace new purchasing behaviours and harness the transformative power of private sector innovation. It is not only for procurement professionals, but anyone interested in delivering better outcomes in local services.

The recommendations in the model policy are grouped into three areas, which can be summarized as:

One added benefit of embracing a new approach to procurement is that it transforms cities’ existing spend into fuel for innovation, rather than requiring additional public resources. Innovation funding alone can sometimes deliver limited pilots with no pathway to implementation; innovation-friendly procurement connects innovators to service managers with pressing needs and real budgets to spend. If city governments across the world committed to allocating 5% of their total contract spend in this way, it would inject $300 billion into the innovation economy, equivalent to 73 times the funding given to DARPA in 2023.

Cities have always been engines of innovation, inspiring and implementing new solutions to the challenges of the day. In the wake of COVID, and in the face of the climate emergency and global demographic pressures, we must use all the tools at our disposal to accelerate the development and deployment of solutions that will make our cities safe, sustainable and prosperous for years to come.