The Cunliffe Review: What does it mean for DPC?

The publication of the eagerly-awaited final report by the Independent Water Commission (the “Report”) is the latest and most comprehensive set of a series of reforms proposed for the water sector in England and Wales. 

The Report published by the Commission – which was chaired by Sir Jon Cunliffe, a senior civil servant and former deputy governor of the Bank of England – runs to more than 450 pages and includes 88 recommendations, covering everything from planning issues to drinking water quality and which, taken together, constitute a prospectus for the wholesale renewal of the sector. Head of Water, Mike Barlow’s article provides a review of the wider implications of the Report including the plans to abolish the economic water regulator Ofwat and replace it with a new, “single, powerful regulator responsible for the entire water sector.

What is DPC?

The Report follows an already significant set of changes in recent months to the administration of the water sector in England and Wales which we outlined in our previous article on AMP 8. Among the most important of these was that, as of April 1 this year, Ofwat required the Direct Procurement for Customers (“DPC”) regime to be the default method of delivery for all discrete water projects with a whole-life expenditure (“totex”) of £200 million or more.  

The over-arching aim of DPC is to permit water and wastewater companies to put large infrastructure projects which are discrete from their network out to a competitive tender to allow a third party (known as a competitively appointed provider or “CAP”) to design, build, finance, operate and maintain such infrastructure.  

However, in light of the planned abolition of Ofwat, what are the implications for the use of DPC?

What does the Report say about DPC?

In short, DPC is still seen as being an important part of delivering the vital infrastructure upgrades required to ensure water security and environmental protection. In fact, the Report explicitly states that the Commission believes that competitive delivery can be an effective approach for large and complex infrastructure projects and that, given the potential benefits using DPC and SIPR can offer, addressing known difficulties with these schemes is important.

As anticipated, the Commission noted “early teething issues” in the administration of the DPC and the Specified Infrastructure Projects Regulations (SIPR) regime (which allows ministers to insist that particular infrastructure projects are put out to competitive tender) but has suggested that of DPC is allowed “further time to bed in” before it is modified any further and that they “would caution against introducing further changes beyond existing plans without significant consideration. Letting current regulatory changes become embedded and subsequently reviewing how pipeline projects are progressing would be a pragmatic approach for this nascent market”.  

The Commission’s report identified three particular “issues”:

1. Administrative burden and cost

Construction companies have raised concerns that the regulator and water companies “have not yet enough experience of DPC to progress projects without delays”, the report notes. While it is acknowledged this is “to be expected given the scheme is relatively new and a limited number of projects have been started”, work should continue to reduce the administrative burden and costs related to DPC – with one suggestion being the production of standard form project templates to streamline document management and negotiation. 

Supply chain pressures across the water and wider infrastructure market are growing. Capacity, in addition to a timeline of factors including Covid, geopolitical instability and trading wars is impacting supply chain appetite for risk and water companies’ procurement in respect of their wider capital works. Some of the projects anticipated to be procured using DPC, which include but are not limited to reservoir building and water transfer schemes, have a higher risk profile than the last round of water PFI projects, which predominantly focussed on wastewater treatment plants. The extent to which CAPs will be able to transfer construction risk for these projects to their supply chain, in this risk averse market, which would need to be factored into the development of any standard form documentation remains to be seen. Complex projects of this nature will always require project specific risks to be catered for, but a baseline of template project documentation would provide a useful starting point. 

      2. Need for government support

The high-profile Thames Tideway Tunnel is being delivered with the benefit of a government support package under the SIPR regime and the Commission noted that it has heard “some commentary on whether government support is needed for DPC”. It goes on to note that Water UK, the trade association for the water industry, “are equivocal on DPC” and that in its response to the call for evidence for the report Water UK stated that “it remains to be seen whether these projects will attract sufficient interest and will provide sufficient predictability and simplicity to attract investors”. It is Water UK’s stated preference that incumbent companies be allowed to bid for DPC projects. 

3. Fragmentation risks 

The report’s authors note that “some concern has been expressed in relation to these large projects causing fragmentation of the sector”. In particular, they note, the Welsh Government have been clear they “do not view DPC… as a priority” and have expressed concern the new regime will “increase complexity by increasing the number of participants involved in the sector”. A further concern related to the transfer of liabilities for DPC projects – one water company had expressed concern that without appropriate risk transfer arrangements to ensure the CAP under the DPC regime can assume or appropriately transfer liability for water quality and Reservoirs Act obligations then such projects “will become less investible”. 

These points reflect some of the issues which we spoke on in more detail in our recent interview series Future of Water: Understanding DPC which also covers some of the other practical issues faced in implementing DPC such as the fact that the current water industry security regime which only envisages projects delivered by licensees and undertakers as appointed by Ofwat or the Secretary of State – does not cater for the involvement of new third parties (see our Future of water: Understanding DPC interview with Planning Partner Liz Dunn for a summary of this point and other consenting issues).

What Next?

Given the scale of the change the Commission has recommended elsewhere in the sector, its hands-off approach to the DPC regime is likely to be welcomed by stakeholders currently navigating the process.   

 Whilst it has described as “early teething issues”, the Commission has made clear that it is not proposing any major changes to DPC and limited itself to a single recommendation (Recommendation 65):

“The regulator in England should continue the essential steps that Ofwat is taking to address issues with DPC and SIPR. A full evaluation of both schemes should be undertaken in 5 years when a broader evidence base has been accumulated. The Commission recognises that given different views on the benefits of DPC and SIPR, the Welsh Government may decide not to pursue these reforms.”

Therefore, for now at least, it appears to be a case of water companies and potential CAPs continuing to test the water with this new delivery model and learning from implementation (both in this sector and from similar project structures in other areas). In our view, this means that open and honest engagement between all of those who have an interest in delivering potential DPC projects – particularly on the issues highlighted in the Report – will be vital to its success.

If you are considering the use of DPC, bidding for a DPC project or simply want to know more about the delivery model, then please contact our market-leading water team led by Michael Barlow. This Article was written with support from Mark Summers (Senior Associate).

competitive delivery can be an effective approach for large and complex infrastructure projects and that, given the potential benefits using DPC and SIPR can offer, addressing known difficulties with these schemes is important.