Water industry - ministerial objectives and principles of charging statement: partial BRIA

Section 1: Background, aims and options

Background to policy issue

Scotland’s water industry is entering a period of significant challenge and transformation. The Scottish Ministers have powers to direct Scottish Water as regards the exercise of their functions, and in particular, set objectives regarding the standard of services to be provided by Scottish Water in the exercise of its functions. The Scottish Ministers are also required under the Water Industry (Scotland) Act 2002 to set the Principles of Charging for each regulatory period. The SRC for 2027-33 will determine how Scottish Water is funded to deliver essential water and wastewater services, while ensuring that customer charges remain affordable and fair.

The Scottish Government is seeking to address a range of interlinked challenges facing the water industry:

• Ageing infrastructure: much of Scotland’s water and wastewater infrastructure is reaching the end of its operational life. Without sustained investment, there is a risk to service reliability, water quality, and environmental performance.
• Climate change adaptation: the impacts of climate change are already being felt, with more frequent extreme weather events, droughts, and flooding. Scottish Water’s Climate Change Adaptation Plan 2024 outlines the scale of the challenge, estimating that between £2 billion to £5 billion of investment will be required over the next 25 years to adapt assets and services to a changing climate.
• Population change: according to the National Records of Scotland, Scotland’s population is projected to grow by 6.2% between mid-2022 and mid-2047. This will place additional pressure on infrastructure and service delivery in certain regions.
• Affordability and water poverty: ensuring that water and wastewater charges remain affordable is a key priority. A Consumer Scotland report published in October 2024 found that around 11% of Scottish households are in water poverty, with some facing charges exceeding 5% of disposable income.

The current policy framework is set out in the Ministerial Objectives and Principles of Charging for the 2021-27 regulatory period. These documents define the strategic direction for the industry and the approach to customer charging. Scottish Water operates under a statutory framework that includes the Sewerage (Scotland) Act 1968, Water (Scotland) Act 1980, Water Industry (Scotland) Act 2002, Water Services etc. (Scotland) Act 2005, Water Resources (Scotland) Act 2013, and associated regulations.

Several ongoing and forthcoming policy initiatives are relevant to the SRC for 2027-33:

• The Scottish Government’s 2023 consultation on water, wastewater, and drainage policy explored how the industry can adapt to climate change and deliver sustainable services.
• In the European Union the recast EU Urban Waste Water Treatment Directive (Directive (EU) 2024/3019) and the recast Drinking Water Directive (Directive (EU) 2020/2184) introduce new standards for pollution control, monitoring, and public health protection, with alignment in Scotland still being considered by Scottish Ministers and Parliament.
• The Cunliffe Review of the water sector in England and Wales, published in 2025, recommends significant reforms to regulation, governance, and investment planning. While the review applies to a different jurisdiction, its findings may offer insights for Scotland’s own strategic planning.
• Ministers are consulting on options for council tax reform. Any reform of council tax would significantly affect household water charges, e.g. requiring Scottish Water to recalculate charges for households.

The current exercise does not propose new or alternative policy action. Rather, the Scottish Ministers have powers and duties under the Water Industry (Scotland) Act 2002 to set out their Ministerial Objectives and Principles of Charging for each regulatory period. The SRC for 2027-33 is the mechanism through which the Scottish Government ensures that Scottish Water is appropriately financed to meet its statutory duties and long-term challenges, while protecting customers from unaffordable charges.

Purpose/ aim of action and desired effect

The SRC for the 2027-33 regulatory period represents a critical opportunity for the Scottish Government to set the direction for the water industry in Scotland, ensuring that Scottish Water continues to deliver high-quality services while making meaningful progress towards the long-term Water Sector Vision. The Scottish Government provides this direction through establishing clear Ministerial Objectives and Principles of Charging that will guide Scottish Water’s investment planning and delivery over the regulatory period, ensuring alignment with statutory duties, customer expectations, and national strategic priorities.

The Scottish Government seeks to ensure that Scottish Water:

• Builds on its current strong performance, with targeted improvements in areas identified by Ministers, such as its understanding of the condition of its asset base, climate resilience (particularly in relation to water resources), continued support for economic growth, mindful of the challenges presented by climate change and a growing population, and its monitoring and reporting of overflows from its wastewater network.
• Demonstrates accountability and transparency to Ministers, regulators, and customers by evidencing progress against the Ministerial Objectives.
• Delivers best value for money, ensuring that every investment made yields the maximum possible improvement in outcomes relative to cost.
• Collaborates effectively with stakeholders, including Consumer Scotland, DWQR, SEPA, and WICS, to balance delivery of its statutory duties and the Ministerial Objectives with the affordability of customer charges.
• Charges its customers according to the Principles of Charging which sets out Ministers’ five fundamental principles for charges and how charges for different customers should be implemented.

These outcomes are not only essential for the effective functioning of the water industry but are also directly aligned with the Scottish Government’s broader strategic aims as articulated in the First Minister’s four priorities in the Programme for Government 2025 to 2026:

• Eradicating child poverty: by keeping water charges affordable and ensuring equitable access to high-quality water services, the policy supports low-income households and contributes to reducing financial pressure on families.
• Growing the economy: investment in water infrastructure underpins sustainable economic development, enabling housing growth, business expansion, and job creation across Scotland.
• Tackling the climate emergency: the Ministerial Objectives will drive Scottish Water to enhance its climate resilience, reduce emissions, and adapt its infrastructure to future climate risks, contributing to Scotland’s net zero ambitions.
• Ensuring high quality and sustainable public services: the Ministerial Objectives and Principles of Charging will ensure that Scottish Water remains a high-performing public service provider, delivering reliable, safe, sustainable, and affordable services to all customers.

The ideal outcome is that the Ministerial Objectives and Principles of Charging are set at a level that enables Scottish Water to make substantial progress towards the Water Sector Vision in the 2027-33 regulatory period, while continuing to deliver high-quality services, adapting to climate challenges, supporting economic growth, and maintaining affordability. The necessary minimum acceptable outcome is that Scottish Water is, in general, able to maintain current service levels and statutory compliance, while making incremental progress in priority areas without placing undue financial burden on customers.

Outcomes will be measured through a robust governance framework. WICS’ methodology establishes outcome measures linked to the Ministerial Objectives, against which Scottish Water must forecast its performance. Progress will be monitored by water industry stakeholders through the Water Industry Investment Group, which will evaluate delivery against forecasts and other performance indicators. This ensures accountability and enables timely intervention if progress deviates from expectations. Furthermore, WICS’ annual reports on Scottish Water’s performance will comment on its progress towards the Ministerial Objectives and delivery of the investment programme in line with the final determination.

Scottish Water’s investment programme is not fixed at the start of the regulatory period and is able to flex (i.e. projects or programmes can be added or removed) in response to emerging priorities. Scottish Water uses the Investment Planning and Prioritisation Framework, which was co-created by water industry stakeholders ahead of the current regulatory period 2021-27, to identify investment needs and then plan, prepare, and deliver them. As requested by Ministers in the Commissioning Letter^[3], WICS and Scottish Water are leading work with water industry stakeholders to produce an updated framework, consistent with WICS’ methodology, which will be used in the next regulatory period in 2027-33.

Options (considered so far/ still open)

In preparing for the SRC for 2027-33, a range of options have been considered to determine the most appropriate framework for setting the Ministerial Objectives and Principles of Charging. These options reflect varying degrees of continuity and change from the current arrangements in place for the 2021-27 regulatory period. The assessment of options has been informed by policy, regulatory, and operational considerations, as well as alignment with the Scottish Government’s Better Regulation principles.

Three options have been considered:

The first option considered was to replicate the Ministerial Objectives and Principles of Charging for the 2021-27 regulatory period exactly with no changes. While this approach offers simplicity and would limit the need for stakeholder re-engagement, it does not reflect the evolving policy landscape, emerging challenges (e.g. climate resilience, affordability), or lessons learned from implementation in the 2021-27 regulatory period. It may also fail to address areas where greater clarity or refinement is needed.

• Type of action: continuation of current approach
• Status: considered but not preferred
• Justification: Better Regulation alignment:
• Transparent: limited, as it does not reflect updated policy priorities
• Accountable: weak, as it does not respond to stakeholder feedback
• Proportionate: potentially disproportionate given changing context
• Consistent: strong, but risks stagnation
• Targeted: lacks responsiveness to emerging needs

The second option considered was to evolve the Ministerial Objectives and Principles of Charging for the 2021-27 regulatory period. This option involves retaining the core structure and intent of the current framework while introducing targeted refinements to improve clarity, responsiveness, and alignment with current Ministerial priorities. These changes may include updates to language, emphasis on specific outputs or outcomes (e.g. asset maintenance, sustainable economic growth, climate adaptation), and adjustments to reflect lessons learned during the current regulatory period. This is the preferred option and balances continuity with adaptability and is consistent with the Scottish Government’s Better Regulation principles.

• Type of action: evolution of current approach
• Status: preferred and under active development
• Justification: Better Regulation alignment:
• Transparent: enhances clarity and stakeholder understanding
• Accountable: reflects Ministerial direction and stakeholder input
• Proportionate: adjusts framework without overhauling it
• Consistent: builds on established regulatory precedent
• Targeted: focuses on areas of improvement and strategic priority

The third option considered would involve a fundamental redesign of both the Ministerial Objectives (e.g. more prescriptive Ministerial Objectives and consequently a less flexible investment programme) and the Principles of Charging (e.g. redesign of affordability support). This option has not been investigated in detail, as it is inconsistent with the direction set out in the Commissioning Letter from the Scottish Ministers. Pursuing this option would require extensive consultation and a longer lead-in period than is available.

• Type of action: major change in current approach
• Status: Not investigated
• Justification: misaligned with Ministerial intent and commissioning scope
• Better Regulation alignment:
• Transparent: would require significant stakeholder engagement
• Accountable: potentially high, but not feasible within current scope
• Proportionate: likely disproportionate to current needs
• Consistent: breaks with established regulatory trajectory
• Targeted: too narrow and focused (or broad and unfocused) for current commissioning context

Sectors/ Groups affected

The proposed changes to Ministerial Objectives and Principles of Charging will affect different groups in different ways.

Clearly Scottish Water – as the publicly owned company responsible for delivering public water and wastewater services across Scotland – will be directly affected. As reported in its 2024/25 Annual Report and Accounts, Scottish Water directly employed 4,849 people across Scotland. A further economic impact report undertaken for Scottish Water in July 2025 showed that Scottish Water supports more than 21,000 jobs directly and indirectly. Among the reports other conclusions were that:

• For every £1 invested by Scottish Water, £3 in value is generated for the Scottish economy, reflecting strong economic returns on infrastructure spending and totalling £4.5 billion annually
• Each direct job Scottish Water creates, supports four jobs in Scotland, meaning water investment has a bigger multiplier effect on the Scottish economy than oil, gas and power sectors
• Nearly 90% of Scottish Water’s direct supply chain spending is with companies operating in Scotland

The Ministerial Objectives and Principles of Charging will affect both what Scottish Water needs to deliver over the period, and how it charges for it. Scottish Water’s final business plan for 2027-33 will need to demonstrate how it will deliver on both the Ministerial Objectives and Principles of Charging. Because the final Ministerial Objectives and Principles of Charging will not be confirmed until after Scottish Water submits its final business plan, Scottish Water has prepared its plan on the basis of the draft Ministerial Objectives and Principles of Charging in the Commissioning Letter issued by Ministers in April 2024. If there are any significant changes, Scottish Water would need to respond to this in their Delivery Plan.

WICS must determine the lowest overall reasonable cost for Scottish Water to deliver the Ministerial Objectives, consistent with the Principles of Charging. If there are significant changes to these, WICS may need to request further information from Scottish Water beyond that included in its final business plan to enable it to issue its draft and final determinations.

The Ministerial Objectives and Principles of Charging should have no significant impact on DWQR or SEPA, Scottish Water’s independent drinking water and environmental quality regulators, respectively, because they do not affect their functions as regulators. Similarly there should be no significant impact on Consumer Scotland

The proposed changes will also directly affect Scottish Water’s customers. These include 2.67 million household customers and 160,297 business premises, for whom 22 Licensed Providers provide retail services with Scottish Water as the wholesaler. Significant changes to the Ministerial Objectives could increase or reduce the need for investment by Scottish Water. This could result in an increase or decrease in customer charges. The Principles of Charging determine how these charges are allocated across the customer base and significant changes to these could increase or decrease the charges, for both households and businesses.

Household customers are charged based on their council tax band, with discounts applied when applicable. The Ministerial Objectives and Principles of Charging will affect the level of charges under the maximum amount determined by WICS. Furthermore, the Principles of Charging establish how charges are apportioned (i.e. via council tax band) and how they are implemented (e.g. collected by Local Authorities).

The Principles of Charging also set out the affordability support that Ministers expect Scottish Water to provide to households with their water bills. Local Authorities administer charges for household customers and the associated affordability measures. As such any significant changes would require changes in the arrangements with Local Authorities. No changes to the current approach are being proposed.

Licensed Providers operate in the competitive retail market for non-household water and wastewater services. There are currently 22 active Licensed Providers listed on WICS’ Register of Licences. Licenced Providers purchase water from the wholesaler (Scottish Water), with the wholesale charge also being governed by the SRC process and subject to the maximum amounts of charges determined by WICS. The maximum retail charges that Licensed Providers can charge is determined by WICS (the Default Direction). The Ministerial Objectives and Principles of Charging will, therefore, also affect what Licensed Providers charge businesses for the services they provide.

The Principles of Charging set out the support that Ministers expect Scottish Water and Licenced Providers to provide to business, e.g. the exemption scheme that applies to small charities and community amateur sports clubs. No changes to the current approach are being proposed.

The scale and nature of Scottish Water’s investment activity in the 2027-33 regulatory period - determined by the Ministerial Objectives - will have direct implications for its supply chain. As set out above Scottish Water supports over 21,000 jobs directly and indirectly, with nearly 90% of its supply chain spending directed to companies operating in Scotland.

The supply chain encompasses a wide range of sectors, including:

• Construction
• Engineering
• Technology
• Environmental services

These businesses operate across Scotland, including in remote and rural communities, and contribute to local employment, particularly in areas of high deprivation. Directly and indirectly, the water industry is a significant employer in areas of socio-economic deprivation. In Glasgow, 55% of its workforce is based in the most deprived SIMD 1-2 communities. In the Highlands, 62% of its workforce is based in the most deprived SIMD 1-2 communities.

Beyond the immediate supply chain, other businesses may be indirectly affected through:

• Shifts in infrastructure investment priorities
• Impacts on local economies due to construction and service delivery activities

These effects may be particularly pronounced in sectors that rely on water-intensive processes or are located near major infrastructure projects.