Ofwat has published its final Guidance for Appointees delivering Direct Procurement for Customers projects.

The guidance sets out Ofwat’s regulatory and commercial expectations where water companies are developing projects to be delivered using Direct Procurement for Customers (DPC). The guidance also sets out principles for how they should assess value for money (VfM) for DPC compared to what Ofwat describes as “the inhouse counterfactual.”

The regulator introduced Direct Procurement for Customers (DPC) at PR19 as a process for water companies to competitively tender for a third-party (a competitively appointed provider) to design, build, finance, operate and maintain infrastructure.

Introducing the Guidance, Ofwat says:

“This initiative has the potential to provide significant benefits for customers through promoting innovation and enabling capital and operational cost savings as well as a reduction in financing costs.”

For PR19, companies were required to consider DPC for discrete, large-scale enhancement schemes expected to cost over £100 million, based on whole life totex.

Ofwat’s PR24 final methodology continues the development of the DPC model - moving forward, companies will be required to use the DPC mechanisms, by default, for all discrete projects above a size threshold of £200 million whole life totex.

The regulator says it is also reserving the right to explore the use of DPC for major projects below this size threshold “where it may offer value for money for customers to do so."

The guidance sets out Ofwat’s expectations for the commercial model applicable to DPC projects and its approval and assurance processes to support DPC projects.

The detailed 88 page final Guidance document states:

“The purpose of the guidance is to:

• provide confidence in the regulatory framework: Appointees and investors can understand Ofwat's requirements for DPC projects and the regulatory framework underpinning it;
• enable flexibility in the framework: while the guidance sets out our expectations for DPC projects, we are open to different approaches where the Appointee can explain why an alternative approach may be more appropriate and can demonstrates how this achieves best value for customers; and
• be a living document: the guidance will continue to evolve as more projects proceed as DPC projects and we commit to reviewing the document on a regular basis to ensure it remains relevant and useful to Appointees.”

Image: prinicipal parties to a DPC project

The guidance sets out:

• the regulatory framework for DPC projects and how this interacts with the commercial arrangements;
• the approvals process and Appointee assurance processes for DPC projects;
• a standard, efficient risk allocation for DPC projects;
• the commercial arrangements including incentives on the CAP and the Appointee; and
• the assessment of value for money for DPC projects.

Click here to download Ofwat's final Guidance for Appointees delivering DPC projects