Overview Although Phnom Penh is endowed with abundant water resources, the city struggled in the past to provide clean water for drinking and domestic purposes. In the 1990s, the Phnom Penh Water Supply Authority (PPWSA) had problems with service delivery and coverage and suffered financial losses. In 1993, the PPWSA undertook a sector reform that changed institutional arrangements and management practices with water tariff reform as a central component. This case study demonstrates how a successful water tariff reform can improve the provision of water services, as well as the conditions under which this can occur. Today, Cambodia has one of the best-performing water utilities among developing countries and even outperforms some utilities in developed countries in terms of minimizing water losses. Context Cambodia is a country rich in water resources. As of 2018, its total renewable water resources per capita is 29.3 million cubic meters (m3) per inhabitant per year because of its three major rivers (the Mekong, Bassac, and Tonle Sap), high annual rainfall, and abundant sources of quality groundwater. Before the late 1960s, many residents of Phnom Penh, the capital of Cambodia, had uninterrupted supply of clean water (Biswas and Tortajada 2010). Challenge After the late 1960s, there were no investments made in water infrastructure. Water systems were not maintained or operated due to lack of skilled personnel (Biswas and Tortajada 2010). In 1979, most of the pipes were 70 years old (the newest pipes being over 40 years old), and production totaled 65,000 m3/day, or only 45% of the initial capacity (Chan 2009). By the 1980s, the PPWSA faced institutional and financial challenges. Staff had low salaries and 80% worked for less than 2 hours per day. In 1992, the office only had five engineers, and most of the staff were unable to correctly read meters (Biswas and Tortajada 2010). Nonrevenue water often exceeded 80% because of leaks, system losses, thousands of illegal connections, and non-payments (Araral 2008). Illegal connections were sold for KR4.2 million ($1,000) per connection (Das et al. 2010). Most connected households received no water due to low pressure in the system (Biswas and Tortajada 2010 and Chan 2009). Solution The Government of Cambodia decided to treat water as an economic and social good and enabled the PPWSA to run as a financially self-sufficient and independent business-like institution (Biswas and Tortajada 2010). The political will to make these reforms, in part, came from the urban poor asking for substantial improvements in water supply, in exchange for their willingness to pay for cost recovery (Araral 2008). The PPWSA established tariff and collection reforms to maximize its income. It proposed a three-step increase in the water tariff over 7 years, paired with service improvements. The first two steps were achieved in 1997 and 2001, while the third one was not needed because of the increased collection ratio and drop in nonrevenue water (Chan 2009). Metering was required to implement volumetric tariffs, prompting a change to a system of all metered connections. The billing system was also completely restructured to ensure timely production and delivery. The PPWSA developed a fully computerized and up-to-date database in 1996 (Chan 2009). Further system improvements in 2001 enabled processing of financial transactions and operations. The PPWSA also worked to improve the bill collection ratio by using disincentives for late or no payment. Customers who do not pay their bills on time get disconnected. Conditions for reconnection included paying the water bill, penalty, and reconnection fees. The PPWSA trained collectors in meter reading, customer relations, and explaining the billing data when necessary. Bill collectors had incentives and penalties based on their collection rates (Chan 2009). The department also focused on reducing nonrevenue water and improving staff efficiency through human resource enhancement like salary increases, training rollouts, and incentive payments; social contracts with communities to identify leaks in the system and to reduce losses in exchange for subsidized connection fees (Araral 2008); and technical solutions improvement like the implementation of a telemeter system that detects high leaks and illegal connections. PPWSA also adopted several innovations to improve performance and production. They installed an integrated system with GIS, equipped with a knowledge information system, supervisory control and data acquisition system, and water loss management system. This is to manage water production and quality control, meter reading, spot-billing system, and other services to drive commercial activities. PPWSA also modernized its treatment system with safety and cost-saving measures, such as replacing alum and lime with polyaluminum chloride and replacing chlorine gas with liquid chlorine (Sitha 2021). Results The water tariff and the other reforms improved the PPWSA’s water services and cost recovery, as well as the satisfaction of the people in the city over its services. From 1993 to 2008, the PPWSA was able to increase its annual water production by 437%, distribution network by 557%, system pressure by 1260%, and customer base by 662% (Biswas and Tortajada 2010). In 2009, 90% of Phnom Penh had service coverage, compared to only 20% in 1993, and the water quality meets World Health Organization standards (Das et al. 2010). As of end of 2020, PPWSA continued to show growth, servicing 407,779 connections, including 17,712 new house connections The per capita daily water consumption in Phnom Penh doubled. Payment collection rates increased from around 50% in 1993 (with only 28% of produced water billed) to close to 100% in 1999. Total revenues become higher than the operating cost. As of December 2020, PPWSA reported total revenues of KHR324,367,856 ($79,927.82), against expenses of KHR194,781,184 ($47,996.23), generating over KHR88 million ($21,684.17) in profit. The success of PPWSA led to the development of the “Clean Water for the Poor” program to assist lower-income communities in accessing piped water connections, providing subsidized services and installment plans based on financial need. From 1999 to 2020, there were 37,451 total connections under this program. Lessons PPWSA's successful reforms were the result of several factors. Chief among these is government support, including improving the institutional framework to enable the PPWSA to operate with commercial practices and strong political will to implement reforms. Significant donor support, including Agence Française de Développement, Asian Development Bank, Japan International Cooperation Agency, United Nations Development Programme, and the World Bank, also facilitated reforms and enabled PPWSA to innovate and operate independently (Das et al, 2010). Asking consumers to pay higher tariffs in exchange for promises of service improvements may not always be acceptable or perceived as credible. This highlights the importance of sequencing. The water system was already undergoing rehabilitation, and the benefits of reform were already visible and felt by the customers prior to the introduction of the tariffs, which enabled them to perceive the increases to be reasonable and within their capacity to pay (Araral 2008 and Biswas and Tortajada 2010). Right governance is needed to make reforms independent from political and other outside influence. While PPWSA was given the autonomy to implement radical reforms, it is required to prepare an annual investment plan that has to be approved by its Board of Directors and then the Ministry of Industry, Mine, and Energy and the Ministry of Finance (Chan 2009). Additionally, with the PPWSA operating on commercial principles, there are clear guidelines on its accountability to consumers and its Board of Directors for commercially viable water service and on evaluation through performance measurements, commercial accounting principles, and tying budgets to user charges (Araral 2008). Pricing reform has many components requiring cooperation from various parties, including customers, communities, employees, politicians, and other people in power. Performance and social contracts need to be aligned and can be aided by technology and appropriate human resource management practices (Araral 2008). Metering, billing, collections, and corruption must be addressed and reformed to implement pricing reforms. Implementing technology solutions to maintain an accurate, up-to-date database of consumers enabled the PPWSA to keep track of consumers and handle all financial transactions and operations, enabling the improvement of financial management practices. As an additional indirect benefit, the automated system contributed to the elimination of corruption and abuse of power (Biswas and Tortajada 2010). Comprehensive sector reform frequently comes together with water tariff reform. Comprehensive sector reform likely requires a new institutional framework with necessary changes in tariff levels, as well as a structure implemented by new organizations, including both regulatory agencies and private sector providers (Whittington 2002). Where water services are poor, water pricing reform alone may not be enough because of the many complementary reforms required to implement pricing reforms. Thoughtful and effective tariff reform, therefore, has the most scale-up potential in locations where comprehensive sector reforms are already occurring. Resources A. Biswas and C. Tortajada. 2010. Water Supply of Phnom Penh: An Example of Good Governance. International Journal of Water Resources Development. 26 (2). pp. 157–172. B. Das et al. 2010. Sharing the Reform Process: Learning from the Phnom Penh Water Supply Authority (PPWSA). Mekong Water Dialogue Publication No. 4. Gland, Switzerland: International Union for Conservation of Nature and Natural Resources. C. J. Perry. 2001. Potential Role of Water Pricing in Irrigation: The Example of India. Proceedings of the Conference on Sustainable Water Management. New Delhi. November 2000. C. Nauges and D. Whittington. 2017. 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Ask the Experts Pham Khanh Nam Dean of the School of Economics, University of Economics Ho Chi Minh City Pham Khanh Nam has published his work in peer-reviewed journals, including Journal of Public Economics, Journal of Economic Psychology, and Land Use Policy. His research interests focus on environmental and experimental economics. Isao Endo Environment Specialist, Climate Change, Resilience, and Environment Cluster, Climate Change and Sustainable Development Department, Asian Development Bank Isao Endo is an Environment Specialist working on natural resource management at ADB. He manages technical assistance to promote natural capital investments with a focus on nature-based solutions and market-based instruments, supporting ADB’s operation to integrate these innovative approaches into project design. He holds a bachelor’s degree in Economics from Sophia University and a master's degree in Environmental Management from Yale University. 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