Palau: Water Sector Improvement Program

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Lessons

Delays in the implementation of policy−based loans require greater attention to identifying potential risks and building measures to mitigate such risks.

There were significant delays in the disbursement of the two tranches of this policy−based loan. The first tranche disbursement was delayed by 12 months due to Congress’ late action on an act creating the Palau Water and Sewer Corporation (PWSC) and the act authorizing the President of Palau to sign the loan agreements. The delay with the second tranche was a consequence of the first tranche delay but also reflected political changes, including parliamentary elections that brought a new government into power, and the subsequent government personnel changes that disrupted the reform agenda. To avoid delays, greater attention is required to identify potential risks and to build measures, possibly through additional time-bound policy actions, to mitigate such potential risks.

Incorporating in the design mechanisms to ensure the implementation of agreed reforms in a changing political environment enables the successful completion of reform programs.

Progress in program implementation was satisfactory after the PWSC was established. Regular meetings of the program steering committee (PSC), providing overall guidance and oversight functions, took place and the PWSC undertook both monitoring and monthly reporting. However, effective program implementation came to a stop after Presidential Executive Order No. 324 was issued, instructing the PWSC to halt all incorporation and start-up activities while its merger with the Palau Public Utilities Corporation (PPUC) was being examined. While the Asian Development Bank (ADB) and the Water and Sewer Task Force advised against a merger at the time, Congress and the President of Palau authorized the merger in June 2013, with the PPUC taking over as implementing agency. After the merger, no meetings of the PSC took place and the PPUC did not provide monthly progress reports. The PPUC also did not provide a program completion report at the end of the program. To avoid a repeat of this experience, ADB must include in the design of future similar programs mechanisms to ensure that agreed reforms can be implemented in a changing political environment. Such a design measure will also help ensure the implementation of reform programs as envisaged.

Background

During the appraisal of this program, Palau’s water and sanitation sector was characterized by (i) an inadequate legal and regulatory framework, (ii) low tariffs and high consumption, (iii) fragmented management and service delivery responsibilities, (iv) inefficient operations and management, and (v) a projected water shortage due to excessive demand growth and high system losses. To address the situation, the government requested for assistance from the Asian Development Bank (ADB), which approved a $ 12.6 million loan for the Water Sector Improvement Program in November 2010.

The program supported the government’s policy reforms, including divesting itself of responsibility for services delivery and moving to a user pays system for these services. Its anticipated impact was sustainable water and sewerage services. Its expected outcome was met demand for water and sewerage services. It had 4 planned outputs: (i) legal and policy frameworks for water sector improvements, (ii) an independent and autonomous public corporation that delivers improved water and sewerage services, (iii) full−cost recovery in the water and sanitation sector, and (iv) effective consultation on water and sanitation issues.

The output of establishing a legal and regulatory framework to create an autonomous water and sewerage authority operating on commercial principles and targeting full−cost recovery, although delayed by a year, was completely delivered in December 2011. Before this and following the adoption of the Water and Sewer Corporation Act of 2010, the Palau Water and Sewer Corporation (PWSC), was established in September 2011 and started operating in August 2012.

In June 2013, the PWSC and the Palau Public Utilities Corporation (PPUC), Palau’s electricity utility, were merged into an independent and autonomous electricity, water, and sewerage corporation. ADB advised against the merger as it would create confusion and a further diffusion of services delivery responsibility, without generating near-term cost savings. The merger went ahead anyway, was completed in June 2013, and legalized by the Utilities Consolidation Act of 2013.

Regulations to implement fees and charges for water and wastewater services were issued in December 2010. Water charges started to be increased yearly since 2012, except for certain outlying states that continued to be charged flat rates until program completion. Revenue losses due to these flat rates continued to be absorbed by the government through a community service obligation it has been paying to the PPUC. While the government has been underwriting sector losses through yearly subsidies, these subsidies have declined dramatically over recent years, with the implementation of a user pays policy since 2013.

The user pays policy mandates (i) the identification and immediate disconnection of illegal connections, (ii) semiannual auditing of the PPUC customer database and implementation of a leak-detection program, and (iii) universal metering of all customers and application of volumetrically based water and sewerage services. It holds the key to achieving the full−cost recovery being continually pursued by the program beyond its 2015−target completion.

ADB’s Pacific Department rated the project successful. The Ministry of Finance (MOF) was the executing agency. The MOF, the Ministry of Public Infrastructure, Industry, and Commerce, the PWSC, and eventually the PPUC were the implementing agencies.

Project Information

Project Name:

Water Sector Improvement Program

Report Date:

February, 2017

Main Sector:

Water and Other Urban Infrastructure and Services

Country:

Palau

Project Number:

44031-013

Report Type: