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Cablegate: Cambodia Water and Sanitation Assessment

VZCZCXYZ0009
PP RUEHWEB

DE RUEHPF #1924/01 2961010
ZNR UUUUU ZZH
P 231010Z OCT 06
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 7502
INFO RUEHBK/AMEMBASSY BANGKOK 1893

UNCLAS PHNOM PENH 001924

SIPDIS

SIPDIS

STATE FOR EAP/MLS, EAP/RSP, OES/PCI--SALZBERG AND BLAINE
BANGKOK FOR REO-JIM WALLER
STATE PLEASE PASS TO USAID FOR MILLER AND DEELY

E.O. 12958: N/A
TAGS: ESTH SENV EWWT CB
SUBJECT: CAMBODIA WATER AND SANITATION ASSESSMENT

REF: STATE 128229

1. Summary: Over the last decade, the Phnom Penh Water Supply
Authority (PPWSA) has become a commercially viable public enterprise
regarded as a model across Southeast Asia. Unfortunately, access to
improved water supply in rural areas is severely limited and,
throughout Cambodia, sanitation is a critical problem with a direct
impact on environmental quality. Promoting relatively small,
decentralized sanitation systems in rural areas; using water
revolving funds and "multi-tranche" funding to increase access to
investment capital; and strengthening the regulatory and policy
framework for rural water supply will all help to encourage the
development of improved water and sanitation facilities. End
Summary.

2. This report, a response to reftel request for a review of
Cambodia's water and sanitation needs and opportunities for
strengthening U.S. engagement on these issues, is a collaborative
effort between the Embassy in Phnom Penh, USAID/Cambodia and
USAID/RDMA in Bangkok.

Water and Sanitation Conditions in Cambodia
-------------------------------------------

3. Access to improved water supply in Cambodia is among the lowest
in the Asia. According to UNICEF, only 34% of Cambodian households
have access to improved drinking water and only 6% have household
connections. Urban residents have slightly better conditions with
approximately 56% having access to improved water supply and 31%
with household connections. Only 29% of the rural population has
access to improved water with only 1% of rural residents having
household connections.

4. Improved sanitation coverage is similarly low in Cambodia with
only 16% of the population having access. Approximately 53% of
urban residents have access to improved sanitation; however, only 8%
of rural residents have access.

5. Water resources are generally adequate in Cambodia. The Mekong
and Tonle Sap Rivers provide substantial surface water resources
utilized for fisheries, agriculture, industry and domestic supply.
Total freshwater resources are estimated to be more than 35,000
cubic meters per capita (nearly 6 times the regional average).
Seasonal flooding is common in Cambodia and can be followed by
periods of drought, particularly in southeastern and northwestern
regions of the country. Drought impacts are most significant to the
agriculture sector which accounts for 94% of freshwater withdrawals;
however, seasonal droughts can affect local domestic water supply.

6. The Department of Potable Water of the Ministry of Mines,
Industry and Energy (MIME) has the primary responsibility for urban
water supply in Cambodia's provincial cities. Since the 1991 peace
accord, the RGC has experimented with several different service
delivery models for urban areas including private concessions. By
far the most successful service model is the Phnom Penh Water Supply
Authority (PPWSA), a public enterprise with autonomous management
and financial controls. The Ministry of Rural Development (MRD) is
responsible for rural water supply.

7. The responsibility for sanitation service in urban areas
generally falls to the municipal government. However, the Ministry
of Public Works and Transportation (MPWT) plays an important and
substantial role in the development of wastewater infrastructure,
particularly centralized sewerage and wastewater treatment systems.
The MPWT was the responsible government counterpart on recent Asian
Development Bank (ADB) investments in wastewater infrastructure in
Sihanoukville.

Needs Assessment
----------------

8. With the successful reform of the PPWSA into a commercially
viable, utility operation, the RGC has a demonstrated model for
successful urban water service delivery. Current government plans
call for similar reform initiatives for Siem Reap, where financial
autonomy, performance management techniques and operational
transparency will be employed to achieve necessary service
improvement and expansion. The RGC further plans to enter into
performance contracts with other provincial waterworks offering
future financial autonomy as incentive for performance improvement.
Donors including the World Bank and the Japanese International
Cooperation Agency (JICA) are presently implementing capacity
building projects to support further provincial waterworks reform.
Additional support to these capacity building efforts could be
coordinated to assure that both the functional (policy and
operational) and personal leadership aspects of the PPWSA success
are transferred to provincial counterparts.

9. The lack of a formal policy and regulatory environment governing
provision of rural water supply has fostered the development of
small-scale, private water supply vendors. This market-driven
service delivery model has resulted in incremental expansion of
service to Cambodia's rural population. Nevertheless, accessible,
adequate water supply is still lacking in rural communities.
Additional policy and regulatory activities should be undertaken to
safeguard the rural public from over-pricing and ensure healthful
service delivery standards are met. Incentives for further rural
water supply expansion should be considered to promote further
private sector investment and the organization of community service
providers, joint service councils, or other delivery organizations.
Financial incentives to be considered may include the development of
revolving funds which mobilize local finance for service delivery
expansion. Formal service agreements and concessions with private
sector vendors could also be utilized to regulate and provide
incentives for rural water service delivery.

10. Sanitation conditions in Cambodia must be considered a priority
problem. The vast majority of domestic wastewater is discharged to
natural waterways and the environment without treatment, directly
impacting inland and coastal fisheries important to the national
economy. The ADB has made recent investments in a wastewater
treatment plant in Sihanoukville. The European Commission has also
funded construction of a wastewater treatment system in Battambang.
These projects provide much needed treatment capacity, but have thus
far addressed only a small percentage of treatment requirements. A
sustainable business model for provision of sanitation services has
not yet been demonstrated in Cambodia. Additional investments in
decentralized treatment systems for priority sanitation issues and
progress toward generating adequate revenue for sanitation system
operation and maintenance are recommended to have immediate and
sustainable impact on sanitation conditions.

11. Given the general lack of water and sanitation infrastructure
throughout Cambodia, and especially in rural areas, meeting
Millennium Development Goal targets will require substantial capital
investment to complement sector reform initiatives. Major
development banks including the World Bank, ADB and the Japanese
Bank for International Cooperation (JBIC) have provided grants and
loan packages for water and sanitation in recent years. These
investments have targeted large projects in major provincial areas.
Additional capital investment for secondary provincial cities and
rural areas is required. Different financing tools, including
pooled financing mechanisms and municipal bonding should be
considered to mobilize local financial capital for small to medium
sized projects not covered by development bank loan packages.
Additionally, these mechanisms could provide sustainable sources of
capital financing for future service improvements and expansion.

Current Activities
------------------

12. The RGC has taken important reform initiatives since 1991. With
the support of World Bank, the Phnom Penh Water Supply Authority
(PPWSA) was established in 1997. The PPWSA has introduced automated
systems for accounting management and billing, incorporated a
profit-sharing system for employees, increased metering and fines
for illegal connections and introduced innovative technology to
reduce system leakages. Given full financial autonomy and a reform
agenda, the PPWSA has developed into one of the best models for
urban water supply in all of Asia. The PPWSA has successfully
repaid all of its loans for infrastructure improvement early and
currently borrows on the open market without need for sovereign
guarantee. The Cambodian government has recently launched an
initiative to implement a similar reform agenda with the Siem Reap
waterworks. Other provincial waterworks will be encouraged to
reform through signature of management contracts with MIME outlining
service delivery milestones. Good performance will be rewarded with
additional operational autonomy for the waterworks.

13. The donor community has played a significant role in achieving
incremental improvements in water supply and sanitation coverage in
Cambodia. The World Bank has funded two major projects since 1998.
From 1998 to 2004 the Cambodia Urban Water Supply Project was
supported by a $31 million loan from the World Bank to improve
infrastructure in Phnom Penh and Sihanoukville. In addition to
service expansion, the project supported a revolving fund for
increasing connections to the poor and supported national policy
development for both urban and rural water supply. The Provincial
and Peri-Urban Water and Sanitation Project is a follow-on program
funded with a $19.9 million loan from the World Bank primarily to
assist Phnom Penh and other provincial centers with extension of
their management responsibility to peri-urban areas of the province.
This program is planned to continue through 2008 and utilizes
output based aid (OBA) approaches for certain project elements and
is intended to support policy reform on tariffs and subsidies and
public-private partnerships. The Water Supply and Sanitation
Program (WSP) of the World Bank continues to operate in Cambodia
supporting rural water supply policy implementation and awareness
raising activities related to both water and sanitation.

14. The ADB has also supported development of the water and
sanitation sector in Cambodia with various loan and grant packages
to the RGC. From 1997 to 2003, the Phnom Penh Water Supply and
Drainage project was supported by a $18 million loan from the ADB
and focused on master planning and infrastructure development. An
additional $18 million loan was issued to support the Rural Water
Supply and Sanitation Project to provide both hardware and software
support for improved water and sanitation in three provinces. Most
recently, in 2005, the ADB loaned $18 million for the Tonle Sap
Rural Water Supply and Sanitation program to support improved water
and sanitation in 5 provinces including Siem Reap.

15. JICA has taken a very active role in water sector capacity
building. From 2003 through 2006, JICA has implemented a capacity
building program to provide operations and maintenance training to
PPWSA staff and to establish a training system that can be accessed
by provincial waterworks staff. JICA is presently working with MIME
to extend capacity building success with Phnom Penh to other
provincial cities. Initial focus will be on Siem Reap. In
addition, JICA has supported implementation of a water treatment
system in Siem Reap and rural water supply infrastructure in Kampong
Cham province. JBIC is also presently considering the development
of a wastewater master plan for Phnom Penh.

16. USAID has recently initiated activities in Cambodia under the
Environmental Cooperation - Asia (ECO-Asia) Program. This program
provides technical support, small grant assistance and exchange
support to water and sanitation service providers. The program
focuses assistance in five reform areas: 1) innovative models for
expanding access to the poor, 2) increased access to innovative
financing, 3) improved corporate governance and management by
service providers, 4) increasing enabling conditions for water and
sanitation services and 5) sustainable sanitation solutions.
Specific interventions and activities in Cambodia are presently
under consideration; however, initial discussions with program
counterparts indicate that the ECO-Asia program will focus on
sustainable sanitation in Phnom Penh and improved corporate
governance in Siem Reap. Additionally, PPWSA will serve as a mentor
for the regional service provider twinning program which aims to
catalyze service reform through facilitated programs and sustained
relationships between Asian utilities or service providers.
Finally, the ECO-Asia program will consider support to the
development of a Cambodian Waterworks Association which would serve
as a national platform for sharing experience and best practices and
would feed into the Southeast Asia Water Utilities Network (SEAWUN)
or similar regional association.

USG Engagement
--------------

17. The PPWSA is a recognized model water service provider in Asia.
Achievements of the PPWSA can serve as the foundation for urban
water service delivery reform across Cambodia. Capacity building
programs of the World Bank and JICA will help to replicate
successful service delivery in Siem Reap and other provincial
cities. In coordination with these programs, additional USG support
is recommended to support priority water service delivery issues not
yet addressed including sustainable models for servicing the urban
poor and extension of service to peri-urban areas. Given adequate
resources, USAID's ECO-Asia program is well-positioned to provide
technical assistance to service provider reform and to facilitate
twinning and mentoring programs between PPWSA and other provincial
waterworks. Additional support to the establishment of a Cambodia
Waterworks Association is recommended in order to catalyze the water
sector reform agenda, create a platform for professional exchange
and best practice sharing and support water sector professional
development and regional exchange.

18. Access to improved water supply in rural areas is very limited
in Cambodia. Lack of government regulation and intervention in rural
communities has fostered a private sector service model in many
areas which can be used as the basis for service expansion. Further
USG engagement should focus on supporting a policy and regulatory
framework which promotes expansion of service by private sector
suppliers while safeguarding residents from overpricing and poor
service quality. Development of minimum service standards for
service delivery and support to efforts to establish a regulatory
body for water service providers is recommended. In addition,
development and implementation of financing mechanisms, including
water revolving funds, accessible to private water service providers
is necessary to support capital investments in service expansions.

19. There is widespread need for addressing sanitation conditions
in Cambodia. However, sanitation system sustainability must be
addressed prior to implementation. Further engagement of the USG
should focus on building business models for sanitation service
delivery where sustainable revenue streams meet or exceed
operational costs. Small to medium-scale decentralized treatment
approaches are effective in addressing priority community issues.
These systems have the further advantage of being generally more
manageable than larger centralized treatment plants in terms of
financing and operations. Decentralized systems address the
immediate need for treatment capacity in priority areas and help to
build local capacity for sustainable operations of sanitation
systems. USAID's ECO-Asia program plans one sustainable sanitation
pilot activity in Cambodia. Additional USG engagement to extend the
capacity and impact of participatory, community-based, decentralized
sanitation solutions is recommended.

20. The ADB and other development lending agencies have experienced
difficulty in providing small borrowers access to financing for
small to medium sized investments (less than $5 million). A
notional idea to develop a "multi-tranche" financing mechanism has
been raised by the ADB to allow smaller borrowers, meeting certain
performance and credit-worthiness criteria to take small loans
through a larger line of credit issued to the national government.
In the case of Cambodia, the USG could assist the ADB in developing
the lending criteria and framework for a multi-tranche financing
mechanism for water and wastewater infrastructure development.
Further support through a capacity building program should then be
focused on helping Cambodian waterworks to achieve requisite
criteria for borrowing via the multi-tranche financing mechanism.

21. All water and sanitation development investments by the USG
should be performed within an integrated water resources management
framework. Economic growth and urbanization in Cambodia are
increasing pressures on demand and affecting water quality.
Individual activities should be designed and implemented with
awareness of the wider impact on water resources management,
including upstream and downstream needs and uses. Special attention
should be given to water conservation and demand-side management.

MUSSOMELI

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