Advance Market Commitments: The Future of Government Procurement?

In the realm of government procurement, a paradigm shift is underway — one that goes beyond the traditional focus on cost-effectiveness to embrace strategic procurement for larger public policy goals. One powerful approach gaining traction is the use of advance market commitments (AMCs), a tool that not only secures value for taxpayers but also fosters innovation, environmental sustainability and economic development.

The public sector typically solicits bids and awards contracts based on the best value for a product or service, primarily considering price, quality, and past performance. This approach works well for commercially available products. However, this approach falls short in cases where an innovation needs a boost to shift into production or scale its production to reduce its unit cost. This is where AMCs step in, offering a strategic alternative to promote the greater public good.

WHAT IS AN AMC?

An AMC is a contractual agreement between a government entity and a supplier, wherein the government commits to purchasing a significant and specified quantity of a product at predetermined terms and prices years in advance. By providing this commitment, the government mitigates supplier risk, incentivizing private investment for research and development (R&D) and unlocking capital necessary for large-scale production.

AMCs shine in specific scenarios:

• Innovation and risk: For innovative products requiring funding for large-scale production, AMCs provide financial guarantees that spur production — but still limit risk to government, which pays only upon receipt of products purchased.
• Market uncertainty: When the market undervalues the long-term benefit of a product, government intervention as an “early adopter” can spur innovation and production.
• High initial production costs: AMCs offer a win-win solution for products with significantly lower unit costs when produced at scale.
• Need for speed: In cases where swift production and procurement are essential, AMCs provide a faster path compared to market forces alone.

LOWER RISK, GREATER POTENTIAL

But AMCs are not without risk. Sometimes suppliers fail to produce. In some cases, the AMC price that government pays may be higher than what can be purchased on the market eventually.

Even so, let’s put this in perspective. Compared to a government grant, an AMC offers less risk. With a grant, the government provides funding to a grantee with the hopes they spend it effectively. But that’s not a given. With an AMC, however, the supplier must produce to the government’s predetermined requirements — or the government doesn’t pay.

And as for price, if the public pays less for a new, innovative product than what the government initially paid, isn’t that proof of the AMC’s success? That is, the AMC may be the reason the product was developed in the first place, and it may be why the supplier can scale production and sell to the public at a lower cost.

SUCCESSFUL EXAMPLES OF AMC UTILIZATION

AMCs have proven successful when government needs something that hasn’t yet been produced. Take, for example, vaccine development. Governments typically contract in advance for a specified volume of vaccines at a set price. This commitment incentivizes pharmaceutical companies to invest in R&D necessary for rapid development of vaccines. We all benefited from this during the pandemic.

California’s recent AMC with Civica RX for low-cost insulin production is another notable example. The $50 million, 10-year contract provided market certainty, allowing Civica RX to invest in the necessary infrastructure for production and achieve economies of scale, ultimately reducing the unit cost of insulin.

EXPANDING AMC USE TO PROMOTE INNOVATION

While AMCs have seen success, there is untapped potential for their broader application in government procurement. For instance, in the realm of climate change technologies, AMCs could incentivize the development of innovative solutions — from decarbonized cement to green steel, solar-powered portable EV chargers to commercial battery storage, wind and other renewable energy sources, or low carbon fuels like hydrogen. Companies with groundbreaking technologies could benefit from the market certainty provided by AMCs, driving innovation without extensive government R&D investment.

Fortunately, the federal government is already moving in this direction. The Department of Energy published its Pathways to Commercial Liftoff Reports in April 2022 to promote AMCs and other measures to promote the commercialization of innovative green technologies. This also is happening at the state level. When I served as director of the California Department of General Services, the department utilized a power purchase agreement (PPA) as a form of AMC for renewable energy. This agreement provided market certainty, enabling our local utility to invest in a large-scale solar installation, reducing their renewable energy generation costs and encouraging further adoption by both the city of Sacramento and Sacramento County.

ENCOURAGING AMC ADOPTION

To unlock the full potential of AMCs, several steps can be taken:

• Education and awareness: Government should learn about successful uses of AMCs, including their benefits and mechanics, to foster a deeper understanding of their potential.
• Capacity building: Government should strengthen the negotiation and implementation capabilities of procurement agencies to address perceived complexities in AMC adoption.
• Public-private collaboration: Government should foster collaboration between governments, international organizations, and private entities to design and implement AMCs that address shared global challenges.
• Transparency: Government can promote public confidence in AMCs by ensuring transparency in the AMC process, building trust and dispelling concerns related to budgetary constraints.

As we stand at the intersection of policy development and procurement innovation, embracing AMCs can be the key to unlocking a world of possibilities, driving innovation in critical sectors, and addressing global challenges like climate change. The shift towards purpose-driven procurement is not just an evolution but a revolution — one that can reshape the future of public policy and procurement alike.