Centralized Public Procurement? What does it mean for startups?

It has been published yesterday that the Israeli State Comptroller’s 2020 report includes an inspection of smart city projects on a national scale.

The report claims that cities are similar in many aspects, and therefore face similar challenges. If that is the case, solutions can also be shared between cities. One problem stated in the report, is that there is no “piggy-backing” in Israeli public procurement, meaning that cities essentially can’t just follow the footsteps of other cities that have concluded an analysis and selected a solution and a vendor, but the process needs to be replicated. The fact each city invests in its own solutions, is testimony to the waste of tax payers’ money.

The report points out the main challenges around the implementation of advanced technologies in local governments, including inapt procurement processes and bureaucracy, lack of technological expertise in many of the local governments, and the gap between cities in terms of available resources. The conclusion of the audit focuses on the lack of a more centralized approach at the state level.

Obviously, there could be many potential benefits and greater efficiency can be achieved when cities procure together. However, there is a different angle to this story, which probably shouldn’t be reflected in the report, but needs to be taken into account by decision makers, especially in Israel, whose economy relies so much on innovation.

Analyzing the situation from the perspective of young entrepreneurs, generally speaking, selling to government is hard. And yet, we do see a growth in the number of startups focusing on solutions for local government. You can read more about why it’s so hard, and why founders still find interest in this vertical here.

A centralized approach, such as suggested in the report, could mean a deadly blow to this trend.

Number of potential customers is critical in any TAM analysis done by aspiring entrepreneurs, as well as their investors. We have 257 municipalities in Israel. What happens if a single organization takes procurement decisions for all of them? A winner-takes-all market would on the one hand present a very attractive upside to the winner (although the vendors’ bargaining power reduces significantly), but it would also turn urban tech into a much riskier industry, as chances of obtaining a significant enough market share have reduced dramatically. This could potentially lead to market consolidation, leaving only the big corporates playing in the field, scaring away bright and innovative, but rather earlier stage entrepreneurs.

Should central government expropriate tech procurement from local government, much attention should be given to the mechanism required in order to enable the growth of this young sector in the Israeli innovation ecosystem.