Ofwat’s direct procurement reform creates the potential for water companies to win wholesale business from areas outside of their own patches, according to Pennon Group chief executive Chris Loughlin.

As part of its Water 2020 reforms, Ofwat proposed that infrastructure schemes of suitably high value will be opened up to competition. It said this ‘direct procurement’ approach would require water companies to secure services from a third party for a project over £100 million whole-life totex, as was taken in the case of the Thames Tideway Tunnel.

Loughlin told Utility Week: “There are opportunities if you are an efficient company, and we think we are, if you can deliver capital schemes efficiently, which we think we can, and focus on what customers need. There are opportunities out of that as well as concerns.”

He said the fact this will apply on a whole-life totex basis would “reduce the threshold for what schemes will be caught by this new arrangement”.

“The whole-life costs include the operating costs for the whole life of the assets, so it isn’t £100 million capex, it might be £50 million or something even less than that,” he said. “That means there will be a lot more schemes potentially open to this new arrangement.”

He added that it was “an interesting proposition” from Ofwat, but would need further consideration.

“It does mean there is potential for companies who are efficient and can deliver schemes well to be able to win some of the wholesale business from areas outside of their own patch,” he added.

Ofwat said a possible consequence of direct procurement is that water companies may not design, build and finance as many large projects or operate the new assets as they would under existing methods.

Consequently, water companies and their shareholders may feel they are losing out, the regulator said, “but this will be offset by gains for other private companies and customers”.

The regulator estimates the net benefits of a direct procurement approach to be between £400 million and £850 million.