It's funny that city living is described as economical, ecological, and scalable compared to suburban & rural living because of infrastructure & transport costs. And here you're arguing the exact opposite.

So how is it? Dig up the street and build taller flats (oh no, digging up streets is expensive!), or commit to suburban sprawl (oh no, spreading infrastructure wide is expensive!). Pick your poison; either way people are going to have the infrastructure they need in one place or another, unless you kill them off.

Nevermind the the third and obvious alternative of expanding the city with high density buildings and new infrastructure to support it. You don't have to interconnect every sewer pipe in town just because.

In addition to what clarry said: do it piecemeal, and upgrade the sewers when you would be doing maintenance on them anyway.

Also: if necessary, do charge the developers, and use that to finance the upgrading work and perhaps some modest handouts to existing residents to compensate them for the trouble. (Perhaps have different parts of the city compete in an auction on who would accept the smallest handout to be upgraded first. Allow negative bids as well, in case some parts of the city positively want the upgrade.)