IPPC6

1. Peter Hall and Robert Wylie
University of New South Wales, Canberra
IPPC6, Dublin: August 2014

2. Overview
 Types of public procurement: with and
without innovation
 Relevance to defence environment
 Procurement process: external
determinants, effects on innovation, VFM
 Procurement process: internal factors,
effects on innovation, VFM
 Case study: radar systems Australia, Sweden

3. Types of Public Procurement
Technology (T) Innovation Procurement
Implications Type
Existing T
satisfies user(s) None Simple
Existing T requires Adapt existing T Simple innovation:
update/modification (Niche?) Adaptive
Existing T unable to Develop new T Complex innovation:
meet changing user(s) - agency-specific
needs, goals - generic (multiple
agencies)

4. Defence relevance
Defence departments are major agents of public
procurement in most countries
 Simple procurement:
 socks, jocks and stationery
 Adaptive procurement (simple innovation):
 defence-customised civil software (modification);
 incremental improvements to weapons systems (updates)
 Complex procurement:
 New, R&D-generated systems for single-country strategic edge
 New R&D-generated solutions for allied group challenge

5. VFM implications
 Simple procurement:
 “Narrow” financial VFM focus - cost efficiency
 Potential for wider focus if local content/preference. Cost efficiency
sacrifice?
 Adaptive procurement:
 VFM interpreted to allow costs for maintaining performance in face
of ageing and incremental tech chg.
 Issues around optimal rate/type of updating/modification
 Complex procurement:
 VFM uncertain ex ante (and, sometimes, ex post)
 Focus on wider outcomes - domestic research/knowledge
base/capability; domestic industry; ally arrangements.

6. Externally determined factors
 Source selection options:
 Competitive
 Sole source/dual source
 Contract type options:
 Fixed/firm price (FP)
 Cost-reimbursement (CR); cost plus (CP)
 Cost-sharing (CS)
 Industry policy options
 Local content
 Defence Offsets

7. Implications of choices (1)
“One-size-fits-all” approach likely to be
non-0ptimal for innovation and VFM
Example: Competitive sourcing + FPP + local content
requirement
 Internally inconsistent (comp. sourcing for cost efficiency
undermined by local content requirement)
 May work well for simple procurement but competition at
arm’s length implies absence of govt-industry collaboration
helpful for innovation
 FPP inflexible, undermines quality in innovation work

8. Implications of choices (2)
Price-based competition
 Focus on price competition for “narrow” VFM may
encourage under-bidding and lead to “winner’s curse” ...
Possibly forcing exit of potentially innovative supplier.
 Seasoned - potentially innovative - campaigners may see
dangers of “success” in price-based competition and not
bid at all.
Contracting for innovation
 Procurement of innovation (potentially specifiable) may
benefit from tighter contractual conditions than
procurement for innovation (hard-to-specify in advance).
 Relationship arrangements trump arm’s length contracts
where outcomes hard to specify in advance.

9. Internal arrangements
 Relevant to pursuing:
 Agency-specific product innovations (e.g. new weapons)
 Institutional process innovation: joint procurement of
generic (e.g. multiple-ally, “club”) new technology
 Public-sector risk-taking constraints anchored in
decision-by-decision public accountability (c.f mean
return criterion for private business)
 To encourage innovation-related risk-taking,
incentives must be relatively high to compensate for
public-servant risk aversion. But principal/agent
problem because of unobservability of risk-aversion.

10. Case study: Complex defence
procurement in two countries
Radar broad-area surveillance
innovations in Sweden (airborne
ERIEYE) and Australia (ground-based
JORN)
ERIEYE came in (much) faster and
(significantly) cheaper than JORN

11. Case study: External constraints
Procurement
characteristic
 Source selection
strategy
 Contract type
 Industry policy
objectives
Sweden Australia
 Sole source Open tender
(Ericssons) (Qualified)
 Hybrid: FP/CP Hybrid: CS/FP.
Flexible FP emphasis
 Support armed Self-reliance;
neutrality. Innovation
Neutral T’gy. Capab’ty-build’g

12. Case study: Internal conditions
 Australian procurement agency an integral part of
a state department. Officials at arm’s length from
suppliers. Risk-averse: unwilling/unable to
intervene in problems.
 Swedish defence procurement agency (FMV)
largely autonomous but closely networked with
suppliers: corporatism, relationships. Officials
prepared to experiment and learn collaboratively
throughout procurement process.