Ofwat has set out its expectations for high quality and well evidenced proposals for direct procurement for customers (DPCs) in the water companies' PR19 business plans for the upcoming Price Review in 2019.

As part of PR19 the regulator introduced the Direct Procurement for Customers (DPC) process for water companies to competitively tender for a third party (a competitively appointed provider, or CAP) to design, build, finance, operate and maintain infrastructure.

Ofwat believes the 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.

At PR19 companies will be expected to consider the use of DPC for relevant large-scale enhancement projects projected to cost over £100 million, based on whole-life totex.

Ofwat has already set out high-level guidance on the types of issues the companies must consider to determine the suitability of a scheme, including the KPMG technical review findings to assess technical suitability.

The companies will also have to use value for money (VfM) assessments for delivering a project through DPC against an in-house delivery approach.

The guidance emphasises that robust value for money assessment will be critical to the successful delivery of schemes by DPC over the life of the contract - the companies will be expected to provide high quality and well-evidenced VfM assessments to support their business plans. Suitable projects will need to be backed up through a robust and iterative business case.

Ofwat has suggested the Treasury five case model as an example of an iterative business case, although the water companies are not required to follow the model, which consists of ther following five cases:

• the strategic case
• the commercial case
• the economic case
• the financial case
• the management case.

In making the strategic case, Ofwat expects companies to look at whether the scheme being delivered through DPC will meet both strategic and operational needs.

The aim of the economic case is to determine the optimal delivery approach that offers best value for money for customers. Companies will also need to assess the different tender models, justify the choice of tender model in their business plans, and explain how it provides the best value for customers compared to other options.

The purpose of the commercial case is to assess the commercially feasibility of the proposed approach to DPC, including the attractiveness of the proposed approach to procurement to those interested in becoming competitively appointed providers.

For the financial case, the companies will be expected to provide forecasts of the capital and operating costs and revenue profiles of each option, alongside considering the impact of revenue streams for each option on customer bills.

In making the management case, the companies will need to identify relevant risks and issues and provide a clear plan on how the project can be successfully delivered through to the end of the contract where an asset may either be re-tendered or brought back in-house.

In its initial assessment of the PR19 business plans (IAP), Ofwat will be looking at the extent to which a company has clearly demonstrated that it has considered whether all relevant projects are technically suitable for direct procurement for customers.

Ofwat concludes by saying:

“A high quality, ambitious and innovative plan will, in summary, need to demonstrate a high quality approach to DPC together with a sector leading strategy and plan (supported by strong evidence) for delivering qualifying projects through DPC, where value for money assessment indicates a direct procurement approach will provide value for customers.”