Within Ofwat's PR19 plans is the recommendation that Direct Procurement be considered for major schemes over £100m TOTEX.
"What's Direct Procurement?" you ask? It's a procurement model which includes options for private finance and operation to run water infrastructure on license - a prime target will be energy from sludge schemes where there's a financial return to be made from the power and heat generated from digestion of sludge, a waste product that is produced when sewage is treated.
The aim of Direct Procurement is to encourage innovation and cost reduction, but I believe it comes with significant risk.
Firstly, Water Companies will need to upskill and develop new tools and processes to manage these whole-life contracts, not an easy thing to do within the constraints of the regulated utilities market. As we saw with PFI and other public/private partnership arrangements, lack of scrutiny and challenge can lead to the public sector losing out over the long term, with the TOTEX (total expenditure) being significantly greater than originally forecast.
The risk of energy-from-waste schemes is also a big consideration. A number of companies in our sector have struggled with the volatility of that market, and whilst sludge can be a relatively consistent product, the attraction of combining sludge with other more inconsistent products to generate more power and heat will be something the water companies need to monitor.
The water industry must keep innovating and pushing boundaries.
As water becomes a more and more valuable resource, the industry is under increased pressure to deliver value for money for bill payers. Innovative procurement and delivery models will help the industry transform, but they must be supported by investment in client-side teams and skillsets in order to make them a success.
The regulator is strongly encouraging a new delivery model for investment in capital and operational projects: direct procurement. This model enables private companies to tender for a project for its whole lifetime, including finance, design, build and operation. The PR19 methodology stipulates that direct procurement should be considered for any project worth £100m (capital plus operating expenditure).