Results-Based Financing in Action: Getting Clean Drinking Water to Rural Cambodia
With a small budget and a big goal, a small team of DAI staff was tasked in October 2008 with expanding drinking water in rural Cambodia to 10,000 households in 20 months.
The reasons the challenge was so daunting: only 5 percent of Cambodia’s rural households were connected to piped water, private sector water service providers (WSPs) had zero incentive to upgrade, and the one-time connection fee was prohibitive for consumers. Armed with $1.2 million from the Cambodia MSME project, we went straight to source and made a simple offer to the WSPs: cash rebates for connecting houses. This results-based financing approach attacked the business challenge for private WSPs. And statistics showed that, once connected, even poor households are able to pay monthly water bills.
The rebate incentives allowed the WSPs to manage their own pricing and investment in areas that needed more piping and treatment to reach the poorest of households. To reach their targets and get their rebates, the WSPs had to figure out how to get poor people to connect to newly upgraded and expanded systems, and they created a range of solutions. Once the connection fees became affordable to enough people, the decision to connect effectively became a community decision: If one or two neighbors signed on, their neighbors tended to sign on too.
The results were impressive: Within 12 months of signing agreements, 17 WSPs connected 11,000 households (50,000 people) to clean drinking water in Cambodia; after 18 months, 67,000 people. The average investment was $152 per house, of which the WSPs got an average rebate of $70 per household hook-up—about 70 percent lower than the cost of most donor-funded piped-water initiatives. More than 130,000 mostly poor rural Cambodians have benefited from the operational improvements spurred by the program.
Did the rush to connect customers and collect rebates come at the expense of water quality? Quite the opposite. The payments were conditional on meeting the Ministry of Industry’s standards for clean drinking water. At first, the WSPs greeted this requirement with skepticism. For example, during the initial field visits, only one of 17 WSPs provided water with residual chlorine at acceptable levels throughout the pipe network.
Common excuses for not providing properly disinfected water were “people don’t like chlorine,” “those houses are too far away,” and “clear water is good enough in rural areas.”
Some providers doubted they could ever meet the standard and assumed the bar would eventually be lowered. However, after missing their first milestones the WSPs realized we were serious. For the first time, some WSPs started flushing out and regularly cleaning old pipes, installing new blow-off valves, or using automated equipment to assist with proper chemical dosing. Every WSP started monitoring water quality. After a few months, all 17 WSPs were providing tested safe drinking water to Cambodia throughout their systems.
This trial-by-fire approach helped build confidence among WSPs that they could deliver safe water to every customer. And unlike traditional training programs, this approach required every operator, manager, and owner to take quality seriously and work together to ensure standards were consistently met. In rapidly building internal capacity, this approach also built trust with consumers, local officials, and regulators.
Is this success sustainable after the project comes to an end? We think so. Previously, many of the WSPs were losing money because they could not connect enough households, but now all 17 have expanded customer bases to keep profits flowing. Continued investments and growth are anticipated: Several WSPs have invested in additional piping, two have built new treatment plants, and others have offered further limited-time-only discounts for new connections. Growing the amount of drinking water delivered to Cambodians is in everybody’s interest.
For USAID, the results-based financing approach ensured that the desired results were delivered before any funds were released—we did not pay out until the households involved had invested in the connection and received safe drinking water. On top of that, the WSPs bore almost all the risk in these expansion deals, thereby mitigating the donor’s exposure. This approach proved to be an efficient and effective way to achieve significant impact.