Authors: Erdem Ovacik, Founder of Impact Market and Julienne Chen, Head of City Partnerships, EIT Urban Mobility.
Together, cities in Europe spend more than €2 trillion a year on public services and goods.
The European Commission says that even a 1% increase in efficiency will result in savings of €20 billion in public contracting.
But what exactly do we mean by ‘savings’? And what are we getting out of the other €1.98 trillion that’s being spent?
We are being facetious here. We are fervent believers in municipal government, and deeply grateful to the civil servants that work in city hall every day to make sure our systems function. It feels like a miracle to have our trash, recycling and compost picked up and transported to a place where it then magically disappears. This is just one of hundreds if not thousands of government services that touch our lives. Some are internally organised, while many are externally contracted or require the additional purchase of goods and services – like recycling bins.
But the world is changing. Cities are changing. Climate is changing.
And so the way local governments buy those goods and services – also known as public procurement – needs to change too.
Why public procurement must change
There is a growing sentiment that public services are not innovating at the pace needed in order to manage our collective goods.
In the traditional model, a government entity will issue a tender with detailed specifications to be delivered. Private suppliers will respond with how they will meet those specifications, and the “best bid” will be rewarded and receive payment based on a detailed and pre-defined payment schedule.
In the new world, we don’t know what the best solutions are. We don’t know if they even exist yet. We don’t know how to price them, if they’ll work well, and if people will accept them. We also need to consider what type of maintenance and operations will be needed and what unintended consequences or implications will arise.
What we do know is that when creating a new service, the start-up costs will be higher until the service gets established and can reach economies of scale.
There is risk. But there’s also huge potential.
To make this more tangible, let’s look at the example of bike share – a mobility service that many cities are offering to increase cycling mode share and decrease car emissions. The impact can be huge. In Paris for example, 160,000 trips are taken per day on average across the city’s public bike share system and private bike share operators.
However, enabling this type of service is not so straightforward, despite its alignment with most cities’ climate plans. Below are just a few of the procurement challenges to implement bike share that we’ve heard from cities across the EU:
- A traditional contract often provides a fixed amount to a bike share operator to run the entire system, regardless of usage. This creates the perverse situation where the bike share operator may be incentivised in the short-run to have a system that people do not want to use – with poor bikes, poor maintenance, poor customer service – as each trip generates additional costs for them.
- Contracts can be fixed for 10 to 15 years, locking the city into outdated technology or other specifications and locking innovative solutions out of the market. This also prevents flexibility for the city to adapt the terms based on its evolving needs – for instance, changing the pricing, location or availability of the bicycles.
- Contracts are awarded usually based on the supplier’s ability to meet detailed specifications and criteria. These can prioritise the “lowest price” and fail to incentivise suppliers to propose innovative practices and solutions that may deliver a better service. For Instance, to ensure that bicycles are parked in the right location and do not obstruct the footpath.
- Many public transport authorities cannot pay for anything that isn’t specifically public transport – and this definition often excludes bike share, even though bike share can be a significant driver of public transport usage by bridging the “last mile” gap.
- Smaller cities do not have sufficiently allocated budgets to pay for a robust fixed bike share system, and also don’t have the density or population for private bike share operators to be profitable there, often resulting in these areas having no service at all.
- If the city has entered into a contract with one supplier, they may have standard clauses that forbid them from working with any other bike sharing service, for instance, to expand the services to include e-bike share or cargo bike sharing.
All solutions should come from a real problem to solve. In the case of bike share, the problem that almost all cities are facing is how to create attractive options for people to cycle or use shared mobility, so that they don’t feel forced into driving their private car.
A standard bike share model exists, which predominantly involves a single provider that the city pays to provide and manage shared bikes for the city. However, there is also a lot of innovation happening in this space – and cities and regions are learning every day what is needed to refine and hone their system to maximise the desired goal: more cycling trips, more bicycle riders, and above all – fewer car trips that pollute and take up public space.
Yet, the examples above illustrate how difficult it can be to achieve this within the current procurement paradigm.
What should be the path forward?
We advocate for funding instruments and contractual arrangements that allow cities and regions to:
- Provide public incentives for companies to deliver the desired impact, and give companies the ability to define the solutions.
- Incorporate more data-driven, iterative evaluation of the impact of public funding, and use the learnings to update the incentives in a continuous and agile way.
- Define ‘risk’ to public authorities as their funds not delivering the desired social impact, rather than being sued or accused of not following pre-existing protocol.
Yes, there is good work happening with innovative public procurement initiatives across the EU. However, the uptake on-the-ground is still lacking in large part due to entrenched legal and financial frameworks that make change feel extraordinarily difficult.
With the clock ticking on climate change, we need to be bold and cities will need to capitalise on and spur the innovation and ideas of the private sector if we are to make great strides forward. This requires a shift from only paying for pre-defined solutions to also setting clear goals and targets that protect and prioritise the public good, and rewarding the private sector to experiment, launch and scale new services that can meet them.
The era of aggressive VC-driven business models (remember Uber?) and the culture of “don’t ask for permission but forgiveness” have made public authorities especially cautious to work with tech companies for good reason. But times are changing, and especially in Europe, where both innovation and a strong public sector are given, there is a good case for prioritising the real implementation of new contractual arrangements to bring the best of both worlds together.
