Context
The current Government’s overriding priority is to promote economic growth in the face of the legacy of the dire state of public services, infrastructure and public finances. Unsustainably high public debt and debt servicing costs require radical remedies. Defra have appointed Dan Corry1 to review the regulatory landscape and recommend how to make environmental regulations drive economic growth while protecting the environment.2
So, how could integrated water management affect economic growth?3
The chancellor and HM Treasury (HMT) focus on increasing (tax paying) economic activities — as summarised in GDP. This is understandable; it is essential to fund the restoration of public services. Nevertheless, HMT’s Green Book for appraising Government actions and assessing their efficiency still must be based on enhancing welfare — not just growth in economic activities — since ignoring people’s concerns about the impacts of water problems on their welfare could otherwise lead to a backlash, with demands for costly stringent actions on particular problems (e.g. sewage discharges).
Environmental management inevitably involves significant uncertainties which, as with climate change and other public policy matters, require careful assessment. Table 1 presents Donal Rumsfeld’s4 customary four groups of uncertainties.
Table 1: Four uncertainties
| Known Knowns | Known Unknowns |
| Unknown Knowns | Unknown Unknowns |
Source: The Rumsfeld Matrix (Chapter 13) – The Climate Demon, Saravanan R., Cambridge University Press (2021). Online ISBN 9781009039604, DOI https://doi.org/10.1017/9781009039604
Row 1 requires the comprehensive spending review that the Government is now doing and which the previous Government ducked. This will require a long-term review of public expenditure pressures to prompt innovative delivery and funding — as Portillo (then Chief Secretary to the Treasury) carried out in response to the recession and public finance problems in 1992. This led to innovative funding such as the fuel duty escalator5 to lower future public debt and ease debt servicing costs that threatened to become unsustainable. The last quadrant of Unknown Unknowns requires greater economic, environmental and social resilience, which integrated water and flood risk management can enhance.
State of water infrastructure
Up to 2015, water companies spent many billions of pounds to upgrade their infrastructure to comply with the EU Urban Waste Treatment Directive (UWWT)6 which was supposed to provide a water infrastructure ‘fit for the 21st century’. The main reasons for the current failures to deliver this include:
- Insufficient investment and maintenance by the water companies;
- Developers not paying for the additional costs of supplying water and sewage treatment for their new houses;
- Inadequate monitoring and regulation by the Environment Agency (EA) in the wake of the 58% cut in its Grant in Aid budget in 2015; and
- Defra’s silo-based rather than integrated water management policies.
Unfortunately, now, lack of sustainable water supplies has constrained economic development in the case of South East Water and in key growth areas such as Cambridge.7 Similarly, inadequate sewage treatment capacity has constrained economic and housing development near Oxford.8
Better regulation – not deregulation
A bonfire of environmental regulations will not increase economic growth. On the contrary, an effective water regulatory system is needed to secure water supplies and sewerage treatment infrastructure. This is essential to enable and sustain economic development, especially in water stressed catchments — which comprises most of the South East England — where development opportunities are most pronounced. Enhancing infrastructure is a key element in the Government’s 7 drivers of economic growth (See Figure 1).
Figure 1. HM Treasury’s Drivers of Economic Growth
Moreover, sound water regulations can provide the clear basis needed to enable and enhance business investment. Likewise, effective flood risk management reduces the risks and consequences of flooding for businesses and enhances their confidence to invest.
Here are principles for regulations to improve its economic impacts. These are based on the literature and best practice guidance.9
a. Develop regulations in collaboration with other countries to maximise potential trading benefits for UK companies and share knowledge and experience.
b. Focus on outcomes, not prescribed technologies, which can discourage innovation.
c. Have ambitious objectives to induce innovative changes.
d. But allow flexibility on how to achieve them.
e. Base regulations on a sound economic and financial appraisal to ensure they are efficient and affordable and do not impose excessive costs on businesses.
f. Integrate regulations. Move from single media and piecemeal approaches to integrated tackling of all problems, which can lead to more innovative and efficient solutions.
g. Set clear and consistent long term goals with well-defined phase-in periods. Linking these to an industry’s capital investment cycles can enable firms to integrate the environmental controls in investments for new plants and equipment. This can facilitate development and adoption of innovative technologies that are better in economic, environmental and resource terms, and less costly than end-of-pipe controls.10
h. Make the regulatory process more stable and predictable so that businesses can integrate environmental considerations in their development and implementation of new plants, equipment and technologies.
i. Involve stakeholders early on. We need more collaboration with greater positive role for environmental managers and less resorting to litigation by (expensive) lawyers.
j. Use market-based incentives to lead to more efficient solutions and provide continuing incentives for business to develop and apply innovative solutions.11
k. Minimise the time and resources involved in the regulatory process so that it does not hinder or discourage innovation and investments.
l. Enhance capabilities of regulators to better understand the businesses they regulate and communicate on how best to tackle the environmental problems in an ordered way.
m. Transparency. We need clear information on the scale and significance of current and future environmental problems and their causes. This should encourage business to respond innovatively with long-term solutions. Moreover, clear information is also required on the measures needed and their costs and benefits.
n. The environmental regulators need to have strong links with the Industrial strategy being developed by the Departments for Business and Trade and Energy Security and Net Zero and Innovate UK’s work to promote innovation and technical change.
Integrated water management and the Water Framework Directive (WFD) regulations12 are well in line with these principles. They require implementation — as the Office for Environmental Protection (OEP)13 recommend. For this, the EA needs to be resourced and trained so that better integrated water management can enhance economic growth by reducing costs and burdens on business — as EA did in RBMP2.14
There are valid complaints that draconian enforcement of nutrient neutrality provisions under the Habitats Directive15 has been restricting housing and economic developments. MHCLG and Defra’s current proposal16 for a nature restoration fund is definitely suitable for natural habitat impacts; but nutrient neutrality concerns require a separate fund for nutrient management (for which the EA is the competent and responsible authority). Developers need to pay in to this fund, which should be operated by the Environment Agency as part of River Basin Management Planning to seek the most efficient reductions in all sources of nutrients – including catchment-based trading that Natural England tried to engender.
Recommendations
The Government has asked its regulators to ‘come up with five ‘ideas’ to promote growth’. So here are a suite of practical measures to enhance the impacts of integrated water management on sustainable economic growth.
I. First, it is essential to restore the EA’s capacity and capability for integrated catchment management that was decimated by the cuts in 2015. The EA needs to regain its respect as expert risk-based environmental managers instead of the worrying recent trends of it becoming a risk-averse regulator in the face of possible legal action regarding failure to achieve specific targets due to the potentially high compliance costs.
II. The spending review will be particularly challenging for unprotected Departments like Defra that are not priorities as for health and defence. Hence EA’s increased resources needed (in Point I above) will have to come largely from greater cost recovery charges rather than its Grant in Aid (GIA) from Defra which will be severely constrained. Defra Secretary of State stated that ‘The Environment Agency will get new powers to recover the costs of their enforcement activity from water companies, and ensure the Environment Agency has the resources, including staff, to take the enforcement action needed to hold polluters to account.’17 This must be extended to cover work on monitoring and integrated development of efficient plans and programmes. But these functions are currently not eligible costs within current cost recovery legislation, which needs amending. The Government should retain exemption from such charges for small farms on pragmatic grounds that they would be too costly to collect.
III. Defra and the EA should apply its Partnership funding of flood risk management to increase payments by local beneficiaries — in line with the beneficiary pays principle — and reduce pressures for residual central funding.
IV. The EA needs to learn from its successes in the second RBMP and failures in the third RBMP to demonstrably streamline its catchment management and RBMPs as follows:
- The EA’s current consultation on working together for river basin plans18 proposes 100 catchments (similar to RBMP2) rather than the many sub catchments in RBMP3 which were too many for the EA to be able to service.
- Focus appraisal work on priorities determined by consultation on cost-effectiveness of options to tackle main pressures.
- Streamline the work by a catchment manager making best use of AI information on the various pressures provided digitally and by the respective EA leads.
- Ensure that the plans actually lead to efficient measures being implemented.
The costs of such a streamlined efficient catchment management service would be low compared with total compliance costs (e.g. £56 billion for sewage spills) and could be offset by the savings in these compliance costs from realising more efficient solutions. Ofwat in its final determination for PR24, found £11 billion of savings through more efficient and environmentally preferable alternatives to capital intensive “solutions”.19
V. This streamlined integrated water catchment management service can be well in line with the principles for better regulation set out here and the Department for Business and Trade’s proposed seven key behaviours of Smarter Regulation.20 This involves being consistent, proportionate, targeted and efficient with well-defined timescales and being implemented collaboratively by experienced environmental managers. The WFD regulation’s provisions contain these features and require better implementation — as the Office for Environmental Protection21 has recommended.
VI. Local Planning Authorities need to make major new housing developments pay fully for their costs of additional sewage treatment and water supply and any increased flood risks through full CIL payments — in line with the “Polluter Pays Principle”.22
Figure 2 shows that the current high premium residual value for development land (top bar in blue) dwarfs the current provision for infrastructure costs under the Community Infrastructure Levy (CIL – second bar in green).
Figure 2. Land value vs CIL provisions for housing developments
Full payments for water infrastructure could reduce this current excessive premium for development of agricultural land and would not necessarily increase the price of affordable houses. It needs to be a central part of Defra’s land use framework. This would provide a market-based approach for land use that leads to development on lower quality land and retains good quality agricultural land for agricultural production, which would have more beneficial impacts on economic growth than its conversion for housing.
Conclusion
Effective integrated water management is needed to secure the water supplies, sewage treatment and flood risk management that are essential for sustainable economic growth. Developers should pay fully for the additional costs of supplying water and treating the sewage from their new houses for their developments to be truly sustainable.
Better environmental regulation not deregulation is needed to enhance sustainable economic growth. This requires restoring the EA’s capacity and capability for integrated catchment management that was decimated by the cuts in 2015. This includes implementing the WFD regulations that are proportionate, efficient and targeted with well-defined timescales and conform well to better regulations principles set out in this note.
The tight spending review needed to tackle the dire state of public finances and public service will constrain the EA’s Grant in Aid. Therefore, the extra resources needed will have to be provided by widening the scope of the EA’s cost recovery charges, and by developers paying to a nutrient management fund instead of the current stringent application of Habitats Directive’s provisions regarding their houses’ additional nutrient discharges.
Dr Jonathan Fisher is a freelance environmental economist with almost 50 years’ experience of delivering practical applied economic analyses of environmental matters, including 25 years on water and flood risk management.
FWR Analysis Articles are designed to provide a view on topical issues across the water sector. This is an opinion article and does not necessarily reflect the views of the FWR, IES or the author’s current or past affiliated organisations.
References
[1] UK Government (2024) Dan Corry appointed to lead Defra regulation review. https://www.gov.uk/government/news/dan-corry-appointed-to-lead-defra-regulation-review (Accessed: 21 February 2025).
[2] As Defra did after the financial crash of 2007. See HM Government (2011) Enabling the transition to a green economy: government and business working together. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/183417/Enabling_the_transition_to_a_Green_Economy__Main_D.pdf (Accessed: 21 February 2025).
[3] For further detailed assessment see Fisher, J.C.D, (2024) Integrated water management and sustainable economic growth. Foundation for Water Research. https://fwr.org/publication/integrated-water-management-and-sustainable-economic-growth/ (Accessed: 21 February 2025).
[4] Wikipedia (no date) There are known unknowns. https://en.wikipedia.org/wiki/There_are_unknown_unknowns (Accessed: 21 February 2025).
[5] This could have been extended if the companion road pricing proposition to pay for national highways building programme had not been subsequently ditched.
[6] European Union (1991) Urban Wastewater Treatment Directive. http://data.europa.eu/eli/dir/1991/271/oj (Accessed: 17 February 2025).
[7] UK Government (2024) Addressing water scarcity in Greater Cambridge: update on government measures. https://www.gov.uk/government/publications/addressing-water-scarcity-in-greater-cambridge-update-on-government-measures/addressing-water-scarcity-in-greater-cambridge-update-on-government-measures (Accessed: 18 February 2025).
[8] For further discussion of these cases see Fisher, J.C.D, (2024) Integrated water management and sustainable economic growth. Foundation for Water Research. https://fwr.org/publication/integrated-water-management-and-sustainable-economic-growth/ (Accessed: 21 February 2025).
[9] Department for Business and Trade (2024) Smarter regulation: regulating for growth. https://www.gov.uk/government/publications/smarter-regulation-delivering-a-regulatory-environment-for-innovation-investment-and-growth (Accessed: 18 December 2024).
[10] Aldersgate Group (2018) Help or hindrance: Environmental regulations and competitiveness. Buro Happold Engineering. https://www.aldersgategroup.org.uk/content/uploads/2022/03/Help-or-hindrance-Environmental-regulations-and-competitiveness.pdf (Accessed: 21 February 2025).
[11] Wagner, M. (2003) The porter hypothesis revisited: A literature review of theoretical models and empirical tests. Public Economics. Lüneburg: Centre for Sustainability Management https://econwpa.ub.uni-muenchen.de/econ-wp/pe/papers/0407/0407014.pdf (Accessed: 21 February 2025).
[12] UK Government (2017) Water Environment (Water Framework Directive) (England and Wales) Regulations 2017. https://www.legislation.gov.uk/uksi/2017/407/contents/2020-12-31 (Accessed: 21 February 2025).
[13] Office for Environmental Protection (2024) A review of implementation of the Water Framework Directive Regulations and River Basin Management Planning in England
[14] Environment Agency (2015) Update to the river basin management plans for England’s water environment: Impact Assessment. https://assets.publishing.service.gov.uk/media/5a80222ded915d74e33f8a46/Impact_assessment_update_to_the_RBMPs_for_England_s_water_environment__2015_.pdf (Accessed: 21 February 2025).
[15] European Union (1992) Habitats Directive. https://environment.ec.europa.eu/topics/nature-and-biodiversity/habitats-directive_en (Accessed: 17 February 2025).
[16] Ministry of Housing, Communities and Local Government and Department for Environment, Food & Rural Affairs (2024) Planning Reform Working Paper: Development and Nature Recovery.https://www.gov.uk/government/publications/planning-reform-working-paper-development-and-nature-recovery (Accessed: 9 January 2025).
[17] UK Government (2024) Steve Reed speech on the Water (Special Measures) Bill. https://www.gov.uk/government/speeches/steve-reed-speech-on-the-water-special-measures-bill (Accessed: 21 February 2025).
[18] Environment Agency (2024) River basin planning: working together 2024. https://www.gov.uk/government/consultations/river-basin-planning-working-together-2024 (Accessed: 21 February 2025).
[19] Ofwat (2024) Our final determinations for the 2024 price review: Sector summary. https://www.ofwat.gov.uk/wp-content/uploads/2024/12/PR24-FD-sector-summary.pdf (Accessed: 30 December 2024).
[20] Department for Business & Trade (2024) Smarter regulation: regulating for growth. https://assets.publishing.service.gov.uk/media/655e18c45395a900124635f1/consultation-on-the-growth-duty-draft-statutory-guidance.pdf (Accessed: 21 February 2025).
[21] Office for Environmental Protection (2024) A review of implementation of the Water Framework Directive Regulations and River Basin Management planning in England. https://www.theoep.org.uk/sites/default/files/reports-files/A%20review%20of%20the%20implementation%20of%20River%20Basin%20Management%20Planning%20in%20England_Accessible.pdf (Accessed: 21 February 2025).
[22] UK Government (2023) Environmental principles policy statement. https://www.gov.uk/government/publications/environmental-principles-policy-statement/environmental-principles-policy-statement (Accessed: 17 February 2025).
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