WATER GLOBAL PRACTICE Water in Circular Economy and Resilience (WICER) The Case of Phnom Penh, Cambodia Improving Operational Efficiency and Reducing Nonrevenue Water This case study is part of a series prepared by the NRW World  Bank’s Water Global Practice to highlight Minimize existing experiences in the water sector. The purpose waste Operations of the series is to showcase one or more of the Y P PL efficiency elements that can contribute toward a Water in Circular SU US Economy and Resilience (WICER) system. This case E focuses on the experience of Phnom Penh, Cambodia. RE ER ST Two of the main pillars of a circular economy are OV OR C RE E resource efficiency and zero (or minimum) waste. By significantly reducing water losses and improving operational efficiency, the Phnom Penh Water Supply Authority (PPWSA) is embracing circular economy principles toward a more sustainable future. Context The city’s population growth rate is 3.2 percent, nearly triple the national average. The city’s geographical Phnom Penh is the capital city of Cambodia, which, like area has more than doubled since the late 1990s. This other countries in the region, has experienced rapid rapid growth and expansion have led to challenges in population growth, urbanization, and economic devel- the provision of water supply. opment over the last three decades. The city’s popu- lation grew from less than 1 million in 1993 to around The Phnom Penh Water Supply Authority (PPWSA) is 2.1 million people in 2019, accounting for 14  percent the water service provider for the capital city. In 1993, of the total population of the country (Census 2019). PPWSA was a poor-performing utility serving only 1 25  percent of the city’s residents and covering only Lower water losses were achieved thanks to efforts around 40 percent of the city’s neighborhoods. Water across multiple fronts. First, major infrastructure quality was generally not fit for consumption, and sup- investments were needed to replace old pipes in a ply was intermittent, adding up to around 10  hours state of disrepair and to restore production facilities a day. Water treatment plants were operating at only operating below their optimal capacity. Second, PPWSA 45 percent of their installed capacity due to degraded launched a campaign to register all water consumers in facilities resulting from decades of neglect and fre- the city to build up a customer database and to build quent electricity shortages, and revenue from tar- public support for legalizing and paying for water iffs covered only half of operational expenses. The supply connections. The campaign enabled PPWSA rate of nonrevenue water (NRW) reached as high as to install meters in every household, along with the 72 percent, most of it caused by leaky pipes, low bill implementation of strict measures against illegal con- collection rates, and illegal connections across the city. nections—disciplinary measures against staff engaged in illegal connections and the strict application of a water disconnection policy for customers—and the Solution provision of support to poor households through sub- In order to provide better water services, a utility sidized connections. As a result, all connections were improvement program was introduced by the govern- metered by 2000. Third, the distribution network was ment in 1993. This case study highlights the key inter- divided into 42 district metered areas (DMAs) equipped ventions undertaken that resulted in PPWSA becoming with pressure and flow rate data transmitters to detect a world-renowned utility, as its operational efficiency big leaks in the system. Fourth, a leak repair team was improved over the course of more than a decade of set up to function 24/7 with the mandate to detect and reform and capacity building. repair water leaks and avoid water theft for each DMA. One notable innovation undertaken by PPWSA was the The utility improvement program aimed to turn the implementation of an internal service contract in 2001 utility around and improve the quality of its water with the leak repair team—its own staff—with clear per- supply service to customers by improving operational formance metrics and rewards. A target for water losses performance through the reduction of NRW and by reduction was set for each team within its respective increasing coverage. It focused on a number of key zone (each zone covering several DMAs), upon assess- areas, including: (1) mandated metering of existing ing water losses at baseline. The reduction in water customers and the creation of a customer database losses in each zone would be the basis for determining to improve revenue collection; (2) rehabilitation of the financial reward, following a set of principles that the water supply network and production facilities, was transparently communicated to the utility’s staff. and, later, efforts to increase production capacity and This approach significantly contributed to the reduc- expand the network through massive infrastructure tion of NRW from 35.5 percent in 2000 to single-digit investment; and (3) improvements in the PPWSA’s gov- levels in 2005. ernance structure that allow the utility to operate like a business. In addition to reducing physical water losses, efficiency improvements in bill collection helped reduce NRW. Nonrevenue Water Reduction The bill collection ratio jumped from 48 percent in Reducing NRW by lowering water losses and increasing 1993 to 99 percent in 2005, and was being maintained revenue collection has been the core focus of PPWSA at that level up to the year 2020. As PPWSA achieved since the start of its utility improvement program. a high rate of metered connections, it also focused on 2 Water in Circular Economy and Resilience (WICER) regulating water meter reading and bill collection. For achieved such a low NRW rate that has continued example, it set up a system for ensuring the transpar- across decades has allowed the tariff to remain the ency of meter readers—(the utility staff responsible same since 2001 and still cover the full cost of service. for meter reading, delivering bills to customers, and reporting any irregularity caused by leakages on a cus- tomer’s property, meter malfunctions, or illegal con-  olicy, Institutional, and Regulatory P nections). Incentives and disciplinary measures were Environment implemented by which performance targets were set It should be noted that at the early stage of the reform for each meter reader, both in terms of the amount in the 1990s, there was limited regulation of the of revenue collected (against the billed amount) and water sector; thus, most of PPWSA’s achievements the number of customers paying the bill. The higher can be largely attributed to self-regulation. In 1996, the collection rate, the higher the bonus. Moreover, PPWSA became an autonomous utility, a state-owned punitive measures were also put in place against col- enterprise operating like a business, with sufficient lusion in meter reading and illegal connections, desk authority to develop its own payment structure and ­ readings, and other inappropriate behaviors. This has staff enhancement program to respond to the ever-­ significantly changed the working culture within increasing customer demand. The autonomous status PPWSA. PPWSA also invested in professionalizing the ­ tility of PPWSA was an important factor allowing the u workforce through a technical capacity-building pro- to undertake the needed reform that has brought gram in which each staff member has received on aver- success to date. While working toward achieving its ­ age 12 days of training each year. In addition, a stronger financial self-sufficiency, PPWSA first focused on opti- ­ human resource policy was also put in place to retain mizing efficiency in its operations and improving the talent including an eight-year remuneration plan, the ­ariffs. quality of service, instead of only increasing t introduction of a best performance award, medical Tariff increases were then carefully introduced in 1997 benefits, and financial support to staff facing financial and 2001 after improvements in service were wit- difficulties. An independent disciplinary committee nessed by customers and trust had been built. was also established to transparently implement disci- The water supply and sanitation sector policy became plinary measures in case of staff misconduct. available only in 2003 and included the provision Alongside the utility improvement program, a tariff of (1)  a full-cost-recovery water supply tariff, (2) increase was introduced to cover the cost of operation scope for private sector participation in the water and maintenance in the short term and to achieve full supply sector, (3) support for increased connections cost recovery in the medium and long term. The first among poor households through a connection sub- tariff increase was introduced in 1997 with an average sidy, (4) financial autonomy to public water utilities, increase of 312 percent (from US$0.06) after PPWSA and (5)  establishment of a water regulator. The legal became autonomous, requiring the utility to gener- framework to support the implementation of the pol- ate enough revenue to cover the costs of service and icy has not been developed to date, however, con- the service improvements that had been made. As straining its full-fledged implementation. Considering a result, the collection rate reached 97 percent and the lack of a legal framework, several key ministerial around 90 percent of connections were metered. The regulations including the licensing of water service second tariff increase was implemented in 2001 with providers and setting of water supply tariffs have been an average increase of 115 percent, and has remained established. Efforts to prepare a water supply law are unchanged until now (2020). The fact that PPWSA ongoing, especially as Cambodia accelerates its efforts Water in Circular Economy and Resilience (WICER) 3 to expand water supply access to meet the Sustainable However, the impacts achieved through the listing Development Goals. have not been as anticipated. The sources of financing for most of infrastructure investment in PPWSA remain development partners, as Cambodia has been, until Financial and Contract Arrangements recently, still eligible for concessional loans. The ten- At the early stage of its development, the development sion between the public goal of reaching more people of water infrastructure in Phnom Penh had relied solely with low tariffs and motive to maximize profit for on official development assistance. Accessing com- shareholders remains. The listing has, to some extent, mercial finance was impossible during the 1990s due promoted corporate governance with improved trans- to the poor status of the utility and the nascent condi- parency using international accounting standards, that tion of the country’s financial market. In 1993, PPWSA could open the possibility of further improvement in started to receive international financial assistance efficiency and the maintenance of a low level of NRW. from development agencies in the form of conces- sional loans and grants to rebuild its ravaged infra- It should be noted that PPWSA’s operating cost structure and restore its services. Between 1993  and coverage has markedly improved over time from a low 2013, PPWSA received financial assistance estimated level of 66 percent in 1993 to 170 percent in 2019. The at US$266.7 million (62  percent being from conces- utility was able to reach full cost recovery in 2004. sional loans) from multiple development partners including the World Bank, Asian Development Bank, Benefits French Agency for Development, Japan International PPWSA is now a world leader in efficiency, after bringing Cooperation Agency, and United Nations Development down NRW from 72 percent in 1993 to 6.9  percent in Programme. The financial assistance contributed not 2013. PPWSA has managed to stay within the band of only to the development of the utility’s infrastructure, 6–9 percent of NRW up to 2020, even with a 15-fold but also to capacity building and improved governance increase in the number of its customers (as of 2019) and and management. While NRW reduction has been at 24/7 supply. It is currently supplying water to 390,000 the center of the utility improvement program, it is connections in the city, serving 97 percent of the popu- not possible to assess the amount of investment to be lation of Phnom Penh (census of 2019). attributed only to this program. It was estimated that the reduction in NRW in Upon turning into an autonomous utility in December PPWSA between 1993 and 2013 resulted in savings of 1996, PPWSA was granted enough independence to US$150 million (i.e., deferred investment in new plants develop its own payment structure, develop a human to increase production) and US$18 million in income resources plan to motivate its staff, and utilize the that would have been otherwise lost due to NRW. revenue to pay for its infrastructure development and debt servicing. The utility was the first entity listed in The minimization of water losses in the system has the Cambodia Stock Exchange in 2012, which had three also helped PPWSA to be more resilient, as most of potential benefits: an injection of finance for invest- the water produced reaches customers. As the region ment projects; a strong framework to sustain good is facing the consequences of climate change with fre- governance and transparency; and incentives to raise quent prolonged droughts, the efficient management efficiency and profitability, transmitted through the of water resources is crucial, especially as PPWSA relies stock price. only on one source of water—the Mekong River. 4 Water in Circular Economy and Resilience (WICER) Lessons Learned into an autonomous utility was an important milestone that allowed the utility to operate like an ­ Reducing NRW in PPWSA has been a backbone of the ­ independent business without any political interfer- utility’s turnaround program and the main action ence, pushing the utility to work toward achieving undertaken among efforts to adopt a circular econ- financial self-sufficiency, among which reducing omy approach. Multiple interventions were put in NRW and improving efficiency were key. place to address NRW through physical intervention, governance and organization reform, tariff revision • The utility’s success has depended on aggressive to achieve cost recovery, and mobilization of social metering and community outreach. PPWSA imple- support. From PPWSA’s experience, we can highlight mented a program to meter all connections by several factors that contributed to the success of the soliciting public support through community out- NRW reduction program: reach and education and building up a customer • Interventions are best sequenced for greatest impact. database. At the beginning, public support was not While multiple interventions were implemented as warranted due to the erosion of trust in the utili- part of the utility improvement process, the sequence ty’s service. It took time for PPWSA to build trust of activities is worth noting. First, it started with the among citizens through an incremental increase in metering of existing customers, although infrastruc- the quality of service and the implementation of a ture was not yet in good shape. Such early aggressive system for handling complaints and feedback from metering signaled to all customers that water supply customers that included an information desk and is a service that needs to be paid for. Second, the util- round-the-clock hotline to deal with customer’s ity gradually rebuilt the water supply service through questions and reports, an increase in routine com- major rehabilitation of its degraded network and pro- munity outreach and education on safe water, and duction infrastructure to ensure that customers got a mechanism for the on-site testing of water quality what they paid for. Third, a governance reform was at customers’ request. As a result, metered connec- introduced to strengthen organizational performance tions sharply increased from less than 13 percent in and accountability. This phase has been recognized 1993 to 100 percent in 2000, and were being main- as an important turning point for the utility, setting tained at that level as of 2020. the foundation for long-term sustainability. A tar- • Setting up DMAs and a dedicated team for leak repairs iff increase was also introduced in tandem with the is invaluable. Like many other utilities, PPWSA set up governance restructuring to achieve the recovery of DMAs to control water losses, either physical or com- operational costs. Fourth, major expansion of the mercial. An additional ingredient of success is the distribution network and production capacity took internal service contract arrangement with the leak place after the utility’s governance was better orga- repair team in each DMA, where clear performance nized and operational efficiency had improved. The ratings and incentives were transparently spelled performance of PPWSA continues to improve, and out and strictly implemented. Such an arrangement over time has gained public recognition, which is key motivates the PPWSA staff to constantly detect and to the reform’s success to date. fix the pipe leakages in the distribution network. • The autonomous status of a utility is important during On average, the team has been able to respond to reform. The government decision to turn PPWSA reported leakages within two hours. Water in Circular Economy and Resilience (WICER) 5 • Leadership focused on staff performance and disci- and minimizing water losses can strengthen a utility’s pline. The success of PPWSA’s reform is also due is financial status, delay the need for additional water its leadership, which paid much attention to har- treatment plants, and improve a utility’s resilience nessing staff knowledge and capabilities along with to economic and, to some extent, climate shocks. putting in place a clear performance framework and disciplinary measures. This approach has enabled Background Documents staff at all levels to commit to the common vision ADB (Asian Development Bank). 2006. “Pulling the Plug on Nonrevenue of a utility supplying water to citizens sustainably. Water.” Ending illegal connections and accurately reading Biswas, A. K., and C. Tortajada. 2010. “Water Supply of Phnom Penh: An water meters were among the achievements made Example of Good Governance.” International Journal of Water Resources Development 26 (20): 157–72. through the staff enhancement program. • PPWSA’s significant reduction of NRW over the past Interview with His Excellency Ek Sonn Chan, former General Director of Phnom Penh Water Supply Authority. He is now the Minister Attached to two decades exemplifies how improving efficiency the Prime Minister of the Royal Government of Cambodia. 6 6