Ofwat has launched a new consultation on its proposed modifications to the conditions of appointment of five water and sewerage companies and one water only company to give effect to the delivery of large infrastructure projects under Ofwat's Direct Procurement for Customers (DPC) initiative.

Water and wastewater companies can use the DPC process 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 (CAP).

Ofwat says that DPC will result in the companies competitively procuring more aspects of an infrastructure project, including financing for the project.

In the 2019 price review (PR19) methodology Ofwat said that it expected the water companies’ AMP7 Business Plans to consider DPC, where this was likely to deliver the greatest value for customers.

Ofwat’s PR24 final methodology continued with the DPC model and stated that companies should use DPC by default for any discrete projects with a whole life totex over £200 million.

The water sector regulator now proposes to make the licence modifications for all companies delivering DPC projects in the 2025 – 2030 period that do not already have the provisions in their licences.

Table: list of companies Ofwat proposes the amendments will apply to initially

Ofwat is currently only proposing amendments to the licences of those companies where DPC schemes are being or are likely to be procured within the 2025-2030 control period. However, this does not preclude other companies agreeing to the introduction of the licence provisions now if they consider they are likely to have a DPC scheme in the future.

“Outsourcing delivery of infrastructure projects using DPC ... can achieve significant benefits for customers”

Introducing the consultation paper, Ofwat said:

“We believe that by outsourcing the delivery of infrastructure projects using DPC, Appointees can achieve significant benefits for customers. This includes both through innovation and lower whole life costs of the project. DPC promotes innovation and resilience by allowing new participants to bring fresh ideas and approaches to the delivery of key projects.”

The consultation paper summarises the regulator’s reasons for making the modifications as follows:

• to protect customers, the new Condition U puts appropriate controls in place, giving Ofwat oversight over the delivery of a DPC project;
• Ofwat consent is required at various points in a DPC project, to check that best value for customers is being achieved;
• the licence changes are necessary as they provide the mechanism for companies to charge customers for the charges of the appointed CAP;
• the licence amendments introduce a new interim determination which will provide companies with certainty that they will be funded if a DPC project is brought back in-house in full or part.

In March 2023 Ofwat published its final guidance - ‘Guidance for appointees delivering direct procurement for customers projects‘ setting out that Ofwat will extend the DPC licence provisions for those companies that will be delivering DPC projects in the AMP8 2025 – 2030 investment period.

The consultation paper says there has been a significant increase from PR19 to PR24 in the number of major projects in the water sector that have been proposed to be delivered by DPC.

Overview of the proposed licence changes

Licence Change 1 – new Condition U

The first proposed licence modification will establish the framework for the DPC procurement process - the new condition will specify the process which companies must follow in carrying out a DPC procurement. In particular it will have the following key features:

• Ofwat agreement will be required for the company to undertake a DPC procurement;
• Ofwat agreement will be required for the company to enter into a contract with the third party provider (the CAP Agreement);
• It will provide for an Allowed Revenue Direction to be issued by Ofwat allowing the company to collect CAP charges from customers. Once the Allowed Revenue Direction has been issued, Ofwat will not be able to vary it without the agreement of the company.

Licence Change 2 – Amendment to Condition B for recovery of CAP Charge

The second proposed modification will allow the company to recover from its customers, outside of price controls, the designated charges that the company has to pay to the CAP for services. These services will normally include the design, build, financing, maintenance and operation of assets.

Ofwat says the CAP charges for these services have not been included in price controls as these will be determined through a competitive tender. The consultation paper says:

“Ofwat will safeguard customer interests and ensure that value for money is achieved as the decision to proceed with a DPC project will be taken through a rigorous procurement process with gated decisions.”

Licence Change 3 – Amendment to Condition B for DPC Interim Determination

The third licence change will be an amendment to the Interim Determination provisions in Condition B to allow for a bespoke interim determination. This will apply in a number of circumstances, including the return of the project to an in-house delivery.

Condition U requires that, where the company plans, procures, manages, and carries out activities in respect of a DPC Delivered Project, it must obtain a number of consents from Ofwat. It also allows for Ofwat (with the company’s consent ) to designate an infrastructure project as a DPC Delivered Project, modify or revoke a designation.

It also specifies that a company must not commence or undertake any DPC Procurement Process without the prior written consent of the regulator. It also provides for Ofwat to withhold consent, including where it considers that a DPC Procurement Process is not likely to achieve best value for customers. This includes:

• any relevant proposed procurement documents
• any proposed selection and evaluation criteria
• any proposed procurement plans
• the form and provisions of the proposed CAP Agreement to be put out to tender

In addition, without the prior written consent of Ofwat a company must not assign, novate or transfer its interest in an Approved CAP Agreement, whether in part or in whole.

Companies are also not allowed without the prior written consent of Ofwat:

• to bid in their own DPC Procurement Process;
• to permit an Associated Company to bid in the DPC Procurement Process;
• to award a CAP Agreement to an Associated Company.

This includes a company submitting a bid in its own name, being part of any consortium or group of entities submitting a bid or being named (including as a contractor or sub-contractor of any tier) in any bid as the entity undertaking the DPC Delivered Project.

In relation to each DPC Delivered Project the company must also appoint an Independent Technical Adviser approved by Ofwat. The Independent Technical Adviser will also have a duty of care to Ofwat, a right which must be directly enforceable by the regulator.

Deadline to submit comments or make representations on the consultation is 5:00pm on Friday 22nd March 2024. Ofwat will then consider the responses and decide whether to proceed with modifying the appointment conditions of the six companies listed above. Click here to download the consultation document.