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In 2010, the government began a program to reform Palau's water and sanitation sector in order to address issues effecting public and environmental health as well as constraining tourism development, Palau's major economic driver. Palau has made substantial progress in the reform, as well as in addressing the drivers for the reforms. Prior to the reform, Palau's water and sanitation sector was characterized by (i) an inadequate legal and regulatory framework, (ii) low water tariffs and high water consumption, (iii) fragmented management and service delivery responsibilities within the sector, (iv) inefficient operations and management, (v) insecure water supply systems with projected water shortage in Koror, where more than 60% of Palau's population resides, resulting from excessive demand growth and high system losses; and (vi) frequent uncontrolled overflows from the dilapidated Koror sewer system and unsuitable soils in Arai for on-site wastewater treatment and disposal which are causing environmental and health issues with serious impacts on the economy. The limited capacity of the Koror sewer network also discourages tourism investments, particularly proposed hotels in Malakal as Palau's Environmental Quality Protection Board requires all new hotel developments in Koror to treat wastewater on site until Koror's sewerage system is rehabilitated and augmented.

The legal and regulatory frameworks to create an independent and autonomous water and sewerage authority operating on commercial principles and targeting full cost recovery have been established. 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, PWSC and the Palau Public Utilities Corporation (PPUC), Palau's electricity utility, were consolidated under the Utilities Consolidation Act (RRPL No. 9-4, 2013) to form an independent and autonomous electricity, water, and sewerage corporation to improve cost efficiencies in the delivery of such services. Within the PPUC, the Water and Wastewater Operations division (WWO) was established to deliver public water and sanitation services. PPUC is governed by a Board of Directors comprising 7 members who are appointed by President of Palau with the advice and consent of the Palau Senate.

A new water and sewerage tariff structure was introduced on 7 February 2011. Water and sewerage tariffs have been incrementally increased annually and PPUC is on track to achieve full recovery of its water supply and sewerage operations and maintenance, debt servicing and depreciation costs by the FY2017.

Palau has embarked on an ambitious investment program to address inadequate sanitation infrastructure in Koror and Airai and to improve the security and reliability of the water supply systems servicing Koror and Airai. ADB approved loans in the amount of $28.8 million equivalent for the Koror-Arai Sanitation Project (KASP) on 19 November 2013. The target impact of KASP is improved environmental and public health in Koror and Airai and the target outcome is improved delivery of sanitation services by the Palau Public Utilities Corporation (PPUC). KASP will implement high priority components of the Koror Airai Sanitation Master Plan including (a) rehabilitation of the sewerage network in Koror, (b) provision of new sewage treatment facilities in Koror and Airai, and (c) construction of a sewer network to service Kesabelau in Airai. The Japan International Cooperation Agency (JICA), on 28 May 2015, signed a grant agreement to the Government of Palau in the amount of up to 1.843 billion yen ($15.3 million equivalent) for the Koror-Airai Water Supply Improvement Project (KAWIP) which will improve the water transmission mains, reform water distribution zones, and replace water distribution pipelines in Koror and Airai.

PPUC Water and Wastewater Capacity. Until the consolidati