The Water and Sanitation Health (WASH) Project has been closely involved with the highly successful USAID-funded Water and Sanitation Sector Project in Sri Lanka for the past ten years. This involvement has provided WASH the unique opportunity to follow the project over time and derive lessons in developing and implementing institutional development projects over the long term. The overall purpose of the project was to strengthen the National Water Supply and Drainage Board (NWSDB), the national water authority in Sri Lanka. The primary project activities included an organization-wide restructuring program, development of commercial and financial systems, and increased attention to operations and maintenance. WASH involvement began with the design of the project in 1984. WASH conducted the project start-up workshop in 1985 as well as six subsequent annual project monitoring and evaluation exercises. WASH also conducted a five-phase management development program for the 30 top managers and designed a three-phase management development program for plant superintendents. From time to time, WASH also provided targeted TA to supplement the institutional contractor's team. The most recent activity was a final impact evaluation to determine if the gains made had been sustained in the two years (1991-93) following the end of the project. The following are lessons learned. (1) The establishment and evolution of a clear vision of what the NWSDB needed to become was essential to project success. (2) The management development program served to build a shared understanding of the responsibility for the future of NWSDB and created a senior leadership team. (3) The project developed over a ten-year period, a reasonable length of time to absorb or assimilate new ways of operating. (4) The primary engine of change within the NWSDB was a core group of 20 senior managers. Their influence on others paved the way for organizational change. (5) Continuity in the short-term and long-term TA teams resulted in relationships of trust and allowed the counterparts to develop the necessary skills. (6) The ultimate success of the project is evident in the NWSDB's ability to discover and correct problems without resorting to outside consultants. (7) The changes made during the project period would not have been possible without an evolving level of political support. (8) The close cooperation of the external support agencies (USAID, the World Bank, and the Asian Development Bank) was key to moving the institutional agenda along. (9) When the reward structures and the incentives changed within NWSDB, it was clear that the innovation would be sustained. The lessons learned are directly applicable to institutional development projects for water utilities. They will also be directly applicable to other commercially oriented organizations such as electricity and telephone companies. They will be relevant to other institution-building projects provided there is strong government commitment to change and a project design which addresses the entire institution and not just a part. (Author abstract)