PCP is a R&D services contract in which the public procurer shares the risks and the benefits related to the IPRs with the R&D provider. The public procurer should ensure that the PCP contracts with R&D providers contain a financial compensation according to market conditions compared to exclusive development price for assigning IPR ownership rights to participating R&D providers, in order for the PCP call for tender not to involve State aid. 

The financial compensation compared to exclusive development price should reflect the market value of the benefits received and the risks assumed by the participating R&D provider. The market price of the benefits should reflect the commercialisation opportunities opened up by the IPRs to the R&D provider. The associated risks assumed by the R&D provider comprise, for instance, the cost carried by the R&D provider for maintaining the IPRs and commercialising the products. If the price paid by the public procurer does not reflect the benefits received and the risks assumed by the participating R&D providers, the PCP contract will normally be regarded as State aid. According to the new 2014 State aid framework for research, development and innovation a ‘market price’ is presumed whenever the PCP is conducted in compliance with several cumulative conditions.[1]

[1]See section 2.3 of the Framework for state aid for research and development and innovation.

Pre-Commercial Procurement (PCP) concerns the phase before commercial exploitation, namely the procurement of R&D. PCP is used to drive technological innovation up to the development of a limited batch of first products or services in the form of a test series. The subsequent commercialisation of the results of the PCP generated by the R&D providers in the PCP is up to the R&D providers themselves (for an unlimited period of time if compliant with the PCP conditions or until the call-back clause is called for). Commercial exploitation of the PCP results by R&D providers that participate in the PCP can be defined as marketing a commercial application of the results directly by the R&D provider or by any of its potential subcontractors or licensees. This can include marketing a commercial application (through direct sales or licensing or transfer of ownership) of all types of results from the PCP (including information, data, IPRs, products/services/processes resulting from the PCP). 

Commercialisation of products/services resulting from the PCP covers the production, distribution, marketing, sales and customer support required to achieve commercial success. As a strategy, commercialisation of products/services requires developing a marketing plan, determining how the product or service will be supplied to the market and anticipating and managing barriers to success. 
The public procurer may support the commercialisation process by launching a PPI procurement after the PCP to purchase the results of the PCP, in particular to deploy products/services resulting from the PCP. If the PPI covers only the purchase of the limited set of prototypes or first test products/services developed during the PCP, then the PPI procurement can be limited to the R&D providers that participate in the PCP on condition that the PCP procurement was open not only to bidders from the 28 Member States, EEA and countries in the EU Neighbourhood policy but also to all bidders from WTO signatory countries. According to the EU and WTO legal framework, a PPI procurement to buy commercial volumes of final end-products may not be reserved to (one of) the R&D providers that participated in the PCP and has to be open beyond the 28 Member States, EEA and countries in the EU Neighbourhood policy also bidders from all WTO signatory countries for all types of purchases covered by the WTO GPA.

IPRs represent the bundles of property rights over intangible knowledge products, such as copyrights on documents and software, patents on technical inventions, and trademarks for branding. It means patents, inventions (whether or not patentable or capable of registration), trademarks, service marks, copyrights, topography rights, design rights and database rights, (whether or not any of them are registered or registerable and including applications for registration, renewal or extension of any of them), trade secrets and rights of confidence, trade or business names and domain names and all rights or forms of protection of a similar nature which have an equivalent effect to any of them which may now or in the future exist anywhere in the world. 
Results is a term that covers more than just IPR rights. Results includes any tangible or intangible output, such as data, knowledge or information, that is generated in the PCP (meaning in activities described in the PCP contracts), whatever its form or nature, whether or not it can be protected, as well as any rights attached to it, including IPRs (foreground IPRs). Note that results equals foreground and, therefore, do not include background (generated before the PCP) or side ground (generated during the timespan of the PCP but not in the activities covered by the PCP). 

In PCP, procurers do not reserve the R&D results exclusively for their own use. Each R&D provider that generates results in the PCP owns the IPRs attached to its own results (together with the responsibility and the costs for protecting those IPRs). The public procurer obtains license free rights to use the R&D results for its own use, and the right to require participating R&D providers to grant non-exclusive licenses to third parties to exploit the results under fair and reasonable market conditions without any right to sublicense. 
A call back provision ensures that if an R&D provider fails to commercially exploit the results within a given period after the PCP as identified in the PCP contract (minimum 4 years in the case of Horizon 2020 funded PCP projects) or uses the results to the detriment of the public interest (including security interests), it shall transfer any ownership of results to the procurers upon the request thereby. 
As the PCP procurement does not procure the generation of background or side ground, the procurers obtain access to background and side ground of R&D providers under fair and reasonable market conditions, except for background needed by the procurers to implement their own tasks during the PCP (this is obtained license free). Procurers also retain the right to publish information – after consultation with each participating R&D provider – public summaries of the results of the PCP, including information about key R&D results attained and lessons learnt by the procurers during the PCP (e.g. on the feasibility of the explored solution approaches to meet the procurers’ requirements and lessons learnt for potential future deployment of solutions). 
Details should not be disclosed that would hinder application of the law, would be contrary to the public interest, would harm the legitimate business interests of the R&D providers involved in the PCP (e.g. regarding IPR protected specificities of their individual solution approaches) or would distort fair competition between the participating R&D providers or others on the market. For the public procurers, this approach safeguards a future competitive supply chain and cheaper prices for the R&D and resulting products as the participating R&D providers can commercialise the results of the PCP – including the resell of the developed solutions – to wider markets.

It is recommended to allow any type of legal entity that is interested and is able to commercialise R&D results (in particular IPRs) to tender for the PCP either alone or in consortium with others, including SMEs (also start-ups), universities[1], associations, foundations. 

To be eligible, all tenderers[2] should show a clear route to the market. Since PCP phase 3 on-site testing work consumes typically the majority of the PCP budget, it is recommended to request interested bidders to perform the majority of the R&D and operational activities covered by the PCP contract in the European Economic Area or in a country having concluded a Stabilisation and Association Agreement under the EU Neighbourhood policy. For Horizon 2020 funded PCP projects this extends to all countries associated to Horizon 2020. 

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[1] Universities on their own should also be able to apply if they are able to commercialise IPRs. 

[2] In case of offers submitted by a consortium, please note that not every legal entity separately in the consortium needs to show this, but the consortium as a whole.

PCP falls outside the scope of application of the European public procurement directives. This is because in PCP the procurer does not reserve all the benefits of the R&D exclusively for himself: in PCP the procurer leaves the IPR ownership rights attached to results generated by the R&D providers with the R&D providers. Accordingly, PCP is exempted from the EU public procurement directives based on Article 16(f) of the Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (Public Sector Directive), Article 24(e) of the Directive 2004/17/EC coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (Utilities Directive) and EU legislation replacing these, namely: Article 14 of Directive 2014/24/EU on public procurement and repealing Directive 2004/18/EC and, respectively, Article 32 of Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors and repealing Directive 2004/17/EC, as well as article 13(f)(j) of Directive 2009/81/EC (Defence/Security Directive) which state that: “this Directive shall only apply to public service contracts for research and development services […] provided that both of the following conditions are fulfilled:

• the benefits accrue exclusively to the contracting authority for its use in the conduct of its own affairs, and
• the service provided is wholly remunerated by the contracting authority/entity”.

The main parties of the WTO Government Procurement Agreement, including the EC, have excluded R&D services from the scope of the WTO GPA (Article IV of the GPA). Therefore PCP is exempted from the WTO GPA on condition that the PCP is limited to original development (see question on what is covered by R&D) as defined in WTO GPA 1994 Article XV (1)(e) and in Article XIII(1)(f) of the revised WTO GPA 2014. However, these exempted R&D services still need to be procured in compliance with:

• the fundamental principles of the Treaty for the Functioning of the European Union (TFEU) and the principles deriving therefrom[1];
• the European Economic Area (EEA) and Stabilisation and Association Agreements with partner countries[2] of the European Neighbourhood Policy. In Horizon 2020 funded PCP projects, compliance needs to be ensured also with the Horizon 2020 association agreements.
• the EU competition rules, including in particular the conditions to ensure that PCP does not involve State aid that are defined in Article 33 of the R&D&I state aid rules.
• the provisions in WTO GPA 1994 Article XV (1)(e) and in Article XIII(1)(f) of the revised WTO GPA 2014 regarding subsequent supply contracts after the PCP has been completed.

As the TFEU principles and above mentioned EEA/Stabilisation and Association Agreements principles remain applicable, the public procurer must allow all interested bidders from all EU Member States, EEA and partners countries in the context of the European Neighbourhood policy to compete on equal terms for the PCP contracts, based on transparent and fair rules.   According to WTO GPA 1994 Article XV (1)(e) and Article XIII(1)(f) of the revised WTO GPA 2014, the use of limited tendering in the PCP is not allowed to be employed to avoid maximum possible competition or discriminate among suppliers of other WTO Parties or to protect domestic suppliers in follow-up contracts for the supply. Consequently, with regards to bidders from other countries that are WTO signatory countries, the public procurer has two choices:

• If the public procurer does not allow bidders from those countries to submit offers for the PCP, the public procurer cannot limit the tendering for the purchase of the prototypes or first products/services developed during the PCP to the contractors from the PCP.
• If the public procurer allows bidders from those countries to submit offers for the PCP, the public procurer can limit the tendering for the purchase of the prototypes or first products/services developed during the PCP to the contractors from the PCP. Note that in this case, it is still possible to use a place of performance requirement that requires suppliers to perform a relevant part of the R&D services for the PCP contract in the territory defined by the EU, the EEA, and partner countries in the context of the European Neighbourhood policy. Please note that in Horizon 2020 funded PCP projects, the scope of the place of performance condition is even broader and includes also all countries associated to Horizon 2020[3] that are not in the EEA or in the European Neighbourhood policy. Because of the EEA and stabilisation/association agreements, it is not allowed to restrict the place of performance clause to R&D to be performed in the EU Member States. Because of the EU Treaty principles and competition rules, it is also not allowed to restrict the place of performance clause to R&D to be performed in a specific Member State, region or city in the EU.

The PCP Communication[4] and the PCP Staff Working Document[5] define an approach to implement PCP that is fully compliant with the applicable European and worldwide legal framework. 

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[1] What needs to be complied with in particular include: the fundamental TFEU principles on the free movement of goods and workers, the freedom to provide services, the freedom of establishment and the free movement of capital, as well as the principles deriving there from, such as the principles of non-discrimination, transparency and equal treatment. 

[2] A list of countries with whom the EU has signed and association agreements on public procurement in the context of the EU Neighborhood Policy is available here: http://ec.europa.eu/growth/single-market/public-procurement/international/european-neighborhood-policy/index_en.htm 

[3] A list of countries associated with Horizon 2020 is available here: http://ec.europa.eu/research/participants/data/ref/h2020/grants_manual/hi/3cpart/h2020-hi-list-ac_en.pdf. 

[4] The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Region, “Pre-commercial procurement: driving innovation to ensure sustainable high quality public services in Europe”, COM(2007) 799 final, 14.12.2007. 

[5] Commission’s Staff Working Document, SEC(2007) 1668, Example of a possible approach for procuring R&D services applying risk-benefit sharing at market conditions, i.e. pre-commercial procurement, 14 December 2007.

Risk-benefit sharing under market conditions refers to the approach in PCP where procurers share with suppliers, at market price, the benefits and risks related to the IPRs resulting from the R&D. 

Separation from the deployment of commercial volumes of end-products refers to the complementarity of PCP, which focuses on the R&D phase before commercialisation, and PPI, which does not focus on R&D but on the commercialisation/diffusion of solutions.

Competitive development in phases refers to the competitive approach used in PCP by procurers to buy R&D from several competing R&D providers in parallel to compare and identify the best value for money solutions on the market to address the PCP challenge. 
The R&D is also split in phases (solution design, prototyping, original development and validation / testing of the first products). The number of competing R&D providers is reduced after each PCP phase subsequent to intermediate evaluations. 
The phased approach reduces the investment risk for the public procurer, facilitates the participation of smaller innovative companies (SMEs) and rewards the most competitive solutions. Evidence also shows that competitive development in phases that is clearly separated from later deployment contracts, generates significant quality improvements and on average 20% cost reduction in first products for procurers.

It is an R&D phase in the Pre-Commercial Procurement (PCP). In general, there are 3 phases in a PCP project. 
Phase 1 comprises solution exploration/ solution design

Phase 2 comprises prototype development and prototype testing, and 

Phase 3 comprises original development and testing of a limited volume of first products or services in the form of a test series.

Separation of Pre-Commercial Procurement (PCP) from the deployment of commercial volumes of end-products refers to the complementarity of PCP, which focuses on the R&D phase before commercialisation (the purchase of R&D services), and PPI, which does not focus on R&D but on the commercialisation/diffusion of solutions (the purchase of innovative products that are ready for commercial deployment).

Pre-Commercial Procurement (PCP) is a public procurement of Research and Development (R&D) services involving risk-benefit sharing under market conditions and competitive development in phases, where there is a clear separation between the procurement of the R&D from the deployment of commercial volumes of end-products. 
In the questions and answers below this definition is clarified step by step.