The Impact of Sewerage Infrastructure Charges on Developers

With housing and construction being at the forefront of the UK’s post-pandemic economic recovery, access to water and sewerage infrastructure will be crucial if those responsible for delivering new homes are to succeed. Water & Sewerage Companies must be seen to be fulfilling their statutory obligation in ensuring there is adequate infrastructure capacity to meet Developer needs and expectations.

There are those who may consider this to be a comparatively low-key issue, but in reality, the influential link to sewerage infrastructure charges makes it a matter of fundamental importance for all Developers.

TDS Group has produced an Independent Information Paper, written by two experienced and respected consultants, which will begin to explain why. Relying on evidence in the public domain, the cost implications for Developers, prior to and after 1st April 2018, are likely to be considerable – evidence to this effect is already in existence, as revealed later in the paper.

Repeal of important sections of the Water Industry Act 1991, following the coming into force of the Water Act 2014, handed to Ofwat unprecedented legislative power to introduce a series of radical charging reforms. These took effect on 1st April 2018, the date when each Water & Sewerage Company finally disclosed their respective costs and charges for the provision of water and sewerage infrastructure, i.e., sector-wide New Charging Rules (Ofwat) and New Charging Arrangements (Water & Sewerage Companies). Crucially, at no time did costs and/or their evidential financial basis form part of any consultation.  

Mindful of the monopoly position held by all Water & Sewerage Companies, the reforms were underpinned by earlier (January 2016) statutory guidance issued by Defra to Ofwat. Crucially, Ofwat’s New Charging Rules were expected to meet every aspect of Defra’s guidance – it remains moot whether this principal requirement has actually been met – see later sections of this paper.

Cost Increases In Excess of Inflation Levels

There is no denying the fact that the charging reforms instigated by Ofwat have had a profound effect on what Developers are now expected to pay for essential water and sewerage infrastructure. Moreover, 3-years on from their inception, unequivocal evidence exists confirming the Developer Community is now paying significantly more. An outcome contrary to Defra’s expectation of reduced costs for Developers, or at least cost neutrality being maintained. By way of an example, in Thames Water alone Developers will pay an additional £1050/dwelling in 2021/22, when compared to the charges levied in 2020/21. Cost increases far in excess of the underlying level of inflation are prevalent in most Water and Sewerage Companies.   

Throughout 2015/16 Defra created a series of Task and Finish Groups to consider a number of key issues relating to various aspects of the New Charging Rules/Charging Arrangements. One such Group was tasked with looking at the historic and vexed issue of infrastructure charges. In addition, it was called upon to consider how off-site network reinforcement was or should be determined and thereafter, how the cost of apportioned ‘in consequence’ network reinforcement was to be justified for inclusion in what was to become a new sewerage infrastructure charge.  

Determining Water and Sewerage Network Capacity

Whilst the reforms introduced on 1st April 2018 finally clarified the long-standing issue associated with the purpose and applicability of infrastructure charges, one critical area was left unresolved, namely, how water and sewerage network capacity was to be determined. Likewise, how it was expected to justifiably influence (in monetary terms) the network reinforcement element of the new combined infrastructure charge. The methodology and parameters used by Sewerage Companies to determine foul sewer network capacity was of particular concern – an issue integral to the principal focus of this Information Paper.

Initial evidence presented to Defra in October 2016, (at one of the dedicated Task & Finish Group meetings) revealed a Sector approach to foul sewer capacity assessment that was incredibly diverse, subjective, and clearly unrepresentative. Moreover, there was little in the way of what could be described as reasonable evidence-based consistency. The revelations were such that the matter was considered to be of such intrinsic importance that both Defra and Ofwat committed to the issue being included in subsequent reform consultations – it never happened.

A Lack of Industry Standards

More recent evidence, referenced in this Information Paper, has identified the approach to foul sewer network capacity assessment remains largely unchanged, i.e., there are no industry standards. It is still inherently subjective. It is also being allowed to be managed within the confines of Sewerage Company collective preferences, without any authoritative regulatory challenge.

Capacity assessments of public foul sewer networks still persist in an evidential vacuum, accompanied by Sector reluctance to disclose. It therefore raises two principal questions, namely, does it represent a clear breach of Defra’s statutory guidance, likewise, the need to ensure there is adequate cost transparency?

As a result of the reforms that have been allowed to evolve the Developer Community faces the distinct possibility of:

  1. Before 1st April 2018 – Substantial payments for illegitimate, unrepresentative, and excessively inflated off-site sewer network reinforcement costs
  2. Sector skewed and inequitable sewerage infrastructure charges being applied from 1st April 2018 onward

Mindful that Developers have already handed over to Water Sewerage Companies c.£2.7 Billion in infrastructure charges since sector privatisation, this Paper distils the outcome of a ‘deep dive’ into the facts and evidence. It concludes with a series of highly pertinent questions, albeit who can provide the authoritative leadership whilst taking cognisance of what has been allowed to evolve, is not as straight forward as you would expect – see question 1 at Section 9 in the full paper below.

To continue reading this independent paper, please click here. To view our comprehensive presentation on the Comparisons of Water and Sewerage Companies and Water only Companies Infrastructure Charges, Income Offsets, Asset Payments and Net Contributions, click here.

If you have any comments and would like to discuss this paper in further detail or find out more about TDS Group’s involvement in previous important Ofwat Determinations, please contact your local regional office here.