Ofwat has issued its final guidance on the assessment of the technical discreteness of projects to be delivered by Direct Procurement for Customers (DPC )– the regulator expects water companies to use the updated guidance in their PR24 business plans and within RAPID schemes.

Ofwat first introduced Direct Procurement for Customers (DPC) at the 2019 price review. The DPC process requires water companies to competitively tender for services in relation to the delivery of certain large infrastructure projects, resulting in the selection of a third-party competitively appointed provider. The CAP would design, build, finance, (and in some cases operate and maintain) infrastructure of the project. According to Ofwat, the DPC initiative has the potential to provide customers with significant benefits by promoting competition in monopolies with the aim of delivering large infrastructure projects at a competitive market price.

For the 2024 Price Review, the guidance says DPC "will apply by default for all discrete projects above a size threshold of £200 million whole life totex." It will also apply to all parts of the water and wastewater value chain, apart from bioresources.

Ofwat is also reserving the right to explore the use of DPC for major projects below the £200 million size threshold "where it may offer value for money for customers to do so."

Describing technical discreteness as a spectrum, Ofwat says that most DPC projects are likely to sit between two extremes:

• at one end, wholly independent, separate projects
• at the other end, projects that are heavily integrated with existing assets and operations

The updated guidance follows on from a review by Jacobs of the DPC guidance for PR19, which concluded that it did not reflect current understanding of what might be achieved through commercial arrangements and what is seen elsewhere internationally on threee types of projects, namely:

• DBFO – Design, Build, Finance, Operate
• DBFM – Design, Build, Finance, Maintain
• DBFOM – Design, Build, Finance, Operate, Maintain

Jacobs then developed the following three tests with a ‘yes’ or ‘no’ response which the water companies will need to consider in their PR24 business plans to assess project suitability for the DPC procurement model.

1. Programme Scalability Test - in applying the programme scalability test, the water companies will be required to demonstrate to Ofwat’s satisfaction why they are unable to amalgamate a system of assets, or similar small projects over one or more price control periods to create a programme of over £200 million in value. It is expected that companies should consider bundling schemes, even when individual projects are over £200 million to provide even more cost-effective solutions.

The guidance says: “This test applies for projects regardless of whether they separately meet the threshold of £200 million whole life totex.”

2. Construction Risk Test – the aim is for water companies to clearly identify the construction risks associated with a single project or programme of projects and consider whether and how construction risks can be effectively transferred to the CAP.. Water companies typically outsource all construction projects, which includes risk around delivery of the project. The guidance says that “most projects can be developed to allow the transfer of construction risk.” Ofwat therefore considers that such projects are capable of being undertaken by a CAP.

The question water companies will be required to consider is:

“Is there any significant reason why most construction risks cannot be effectively transferred to the CAP and/or managed or mitigated through contractual arrangements, or by adapting the project scope for delivery by DPC?”

3. Operations & Maintenance Risk Test – under this test the companies will be required to assess the ability to transfer the maintenance and/or operations to the CAP. Where unable to do so, they will need to provide “clear and sufficient evidence” as to why it cannot be transferred.

In most cases, Ofwat expects the operations and maintenance risk to be able to be transferred to the CAP and managed through contractual arrangements. The regulator says it recognises that in a small number of instances, there may be project-specific issues or barriers identified which may make transferring risk to a CAP prohibitive. The water companies will be required to demonstrate to Ofwat’s satisfaction why the project or programme cannot be considered DPC by default under this test and explain the risks that are unable to be transferred to a CAP to manage.

The final guidance supersedes any prior guidance or briefing notes issued by Ofwat in relation to technical guidance of DPC projects.

Click here to download the final guidance