Centralized Public Procurement? What does it mean for startups?

A recent publication by the Israeli State Comptroller has once again brought the issue of smart city implementation to the forefront.

The report highlights a fundamental reality: cities are similar in many aspects, and therefore face similar challenges. Logically, this should enable shared solutions and collective progress. Yet, one of the key issues raised is the absence of “piggy-backing” in Israeli public procurement. In practice, this means municipalities cannot leverage decisions, tenders, or vendor selections made by others - forcing each city to repeat lengthy and costly processes independently.

The result is clear: duplication of efforts and inefficient use of public funds.

The report also outlines broader structural barriers to adopting advanced technologies in local government, including cumbersome procurement processes, bureaucratic inertia, limited technological expertise in many municipalities, and significant disparities in resources between cities. Its central conclusion points toward the need for a more coordinated, state-level approach.

On the surface, the logic is compelling. A centralized procurement model could drive efficiency, reduce costs, and accelerate deployment of proven solutions.

But there is another side to this story - one that is less visible in formal audits, yet critical for decision-makers, especially in a country like Israel, whose economy is deeply rooted in innovation.

From the perspective of entrepreneurs, selling to government is already one of the most challenging markets. Despite this, we are seeing a growing number of startups entering the urban tech space, drawn by the opportunity to solve real-world city challenges.

A fully centralized procurement approach could unintentionally undermine this trend.

For startups and their investors, market size and accessibility are fundamental. Today, Israel’s 257 municipalities represent a distributed market with multiple entry points. If procurement authority were concentrated in a single national entity, the market could quickly shift to a “winner-takes-all” dynamic.

While this may create significant upside for a small number of vendors, it would also dramatically increase risk for early-stage companies. The likelihood of securing meaningful market share would shrink, bargaining power would shift toward the public sector, and the space could consolidate around large corporates.

The unintended consequence: fewer startups, less experimentation, and a weaker innovation pipeline in the urban tech sector.

As discussions around centralization gain momentum, the question is not only how to improve efficiency in public procurement, but also how to preserve and nurture the innovation ecosystem that depends on it.

If the state moves toward a more centralized model, it must do so carefully, designing mechanisms that maintain market openness, enable experimentation, and ensure that startups still have a viable path to scale.

Because in the long run, efficiency alone is not the goal - innovation is.