Water firms to retain some exposure to direct procurement risk, Moody’s reports

Water companies using the Direct Procurement for Customers (DPC) route to procure major infrastructure will retain some exposure to the risk of the Competitively Appointed Provider underperforming, according to Moody’s.

In Ofwat's DPC framework – construction risk will weigh on project credit quality, a note published last week, Moody’s noted both that the asset in question would be owned by the water company off-taker, and that Ofwat was unlikely to allow all costs relating to any underperformance to be passed to customers under all circumstances.

Moody’s also compared the DPC model with Specified Infrastructure Projects Regulation (SIPR), under the auspices of which the Thames Tideway Tunnel is being built. The note said: “We believe that the off-taker's responsibility to the DPC is stronger than under SIPR, because SIPR creates its own licensed entity responsible for a critical service provision. Moreover, the only current example of a SIPR project is protected by a material government support package with regard to cost overrun and termination compensation, with no recourse to the off-taker."

Elsewhere in the report, Moody’s discussed how construction risk will constrain DPC credit quality, but may be mitigated by contractor strength and experience as well as risk-sharing approach. It observed: “Complex DPC projects may benefit from additional regulatory protections that allow significant cost overruns to be shared with customers, which could be credit-enhancing.” It further noted the novelty and emerging nature of the DPC framework.

Weighing more positively was the essential nature of the assets in question, the strength of water company off-takers, and transparent and predictable regulation. The agency said all of these will support DPC credit quality.