What Are Impact Fees?
A reliable water supply — and a plan for the waste it generates — is essential to every development project.
Although the National Water Commission (NWC) is the premier provider of water and sewerage services in Jamaica, a number of private entities are licensed by the Office of Utilities Regulation (OUR) to provide services in specific areas, and the various Parish Councils are also involved in water services islandwide.
Most development projects can connect to existing NWC facilities by mutual agreement. Some, however, can't be served from the existing network — these need either new facilities (built by NWC or the developer) or an expansion of what's already there.
Like in many other countries, Impact Fees — also called System Development Charges (SDCs) — are negotiated by the NWC to recover a proportion of the capital cost required to improve, expand, or create the water and/or sewerage facilities a new development needs.
Not unique to Jamaica
Per the American Water Works Association (AWWA): "A growing number of water utilities employ system development charges to assign to future customers the capital cost responsibility of system capacity that is or will be available for future customers." Special charges for new developments date back to the 1930s, and SDCs assign the cost of growth to those causing it, rather than to existing customers.
The Need for Impact Fees
Major infrastructure projects are often funded by loans — Impact Fees help pay them back.
The need to set Impact Fees arises where the NWC has either recently done, or would need to do, major infrastructure development to provide water and/or wastewater services to a development. These projects are often funded by loans the NWC takes on the basis that capital costs will at least be partially recovered to repay them.
Recently funded infrastructure
Logwood Water Supply Project
Development of a 7.5 mgd water treatment plant, plus expansion and refurbishing of the distribution network serving areas from Negril to Lucea.
Great River / Lucea Water Supply Project
Expansion of the Great River Treatment Plant from 10 mgd to 15 mgd, and construction of a 22-mile trunk main from the plant to Lucea.
Martha Brae to Braco Water Supply
Comprehensive refurbishing of the Martha Brae Water Treatment Plant, restoring capacity from 3 mgd to 6 mgd, plus a trunk main with two storage tanks to Braco and system improvements across Trelawny, St. James, Hanover, and parts of Westmoreland.
Braco to Runaway Bay
Extension of a 23-mile trunk main and storage tank from Braco in Trelawny to Runaway Bay in St. Ann.
Given that water delivery rates alone don't recover capital costs, the NWC wouldn't be able to develop or expand its systems in time to meet developers' needs without Impact Fees. In other words, Impact Fees (or SDCs) enable the NWC to put the required infrastructure in place to facilitate developers and their development plans.
Benefits of Impact Fees
A structured way to finance water and sewerage projects that benefits existing customers, the utility, developers, and the country.
Principles Governing Impact Fees
The calculation of Impact Fees is guided by two core principles.
Rational Nexus
- There must be a reasonable connection between the need for additional facilities and the growth resulting from the new development.
- There must be a reasonable connection between how the fees collected are spent and the benefit received by the development paying them.
Rough Proportionality
- Fees charged must reflect a proportionate share of the cost of providing for that development. Fees vary based on service demand, infrastructure cost, the economics of providing it, and the type of development — commercial, residential, etc.
How Impact Fees Are Calculated and Applied
A five-step process, from least-cost infrastructure planning through to payment.
- Determine the least-cost solution for the infrastructure needed to reliably meet expected demand.
- Factoring in capital cost, O&M (Operations & Management) cost, and expected revenue, determine the additional capital required to make the project viable. Based on international practice, a 12% Internal Rate of Return (IRR) is considered reasonable for establishing the viability of water supply projects.
- Divide that additional capital among all beneficiaries of the project, in proportion to their respective demand.
- Where Impact Fees for a development exceed $100M, NWC may consider a discount of up to 15%.
- Payment arrangements can be negotiated with NWC to minimize the upfront impact of the fees.
The System Development Charges (Impact Fees) applied by the NWC on new developments give an equitable, structured way to recover a proportionate share of the capital cost of building new or expanded facilities to serve them. With these funds, the NWC commits to putting the required infrastructure in place to provide adequate water and/or wastewater service — facilitating planned developments across Jamaica.