MANILA, PHILIPPINES - The Asian Development Bank (ADB) is to help Palau carry out broad reforms to improve the sustainability and cost effectiveness of its water and sanitation services.

The ADB Board of Directors approved loan funds equivalent to $16 million for the Water Sector Improvement Program, which will address regulatory, management, technical and pricing problems that currently result in high non-revenue water losses and undermine cost recovery. It is the first loan agreement between ADB and Palau.

"The program will help establish an independent government-owned corporate entity, which will provide sustainable and efficient water and sewerage services throughout Palau and, over time, fully recover the cost of supply," said Robert Wihtol, Director General of ADB's Pacific Department.

The government currently subsidizes the bulk of the cost of water and this is placing a heavy burden on its finances. Growing demand from tourism - which accounts for almost half of the country's GDP - is also putting a strain on water resources, requiring a new strategy to meet an estimated supply gap of around 1.4 million gallons a day by 2020.

ADB will help prepare the policy and legal groundwork for the establishment of the new entity, the Palau Water and Sewer Corporation, which will gradually take over the assets and responsibilities of current sector agencies. It will have benchmark targets for improving bill collections, including cutting non-revenue water losses from current levels of 43% of production to around 25% by fiscal year to September 2015, and progressively increase tariffs to achieve full cost recovery by the same date. Sewerage tariffs will also be introduced for the first time.

"The shift to full cost recovery won't penalize the poor as the first 5,000 gallons of water supplied will still be priced below the cost of production to ensure affordability, while the average total household water and sewerage bill will increase by less than 2% of average household income over the 4 years," said Anthony Gill, Country Specialist for ADB's Pacific Department.

During the transition to full cost recovery the corporation will post losses, which will be offset by government financial assistance as well as program support to cover the difference between tariff revenue and actual costs. ADB will also provide management and technical skills training to ensure the new agency is professionally managed and operated.

ADB's assistance includes a $12.6 million, 15-year loan from ordinary capital resources with a 3-year grace period and interest determined in accordance with its LIBOR-based lending facility. A further $3.4 million equivalent loan will be extended from ADB's concessional Asian Development Fund. It has a 24-year term, with an 8-year grace period carrying an interest charge of 1%, rising to 1.5% for the balance of the period.

The Ministry of Finance is the executing agency for the program, which is due for completion by September 2014.

Palau became a developing member country of ADB in 2003.