Most government health facilities in Cambodia perform poorly, due to lack of funds, inadequate management and inefficient use of resources, but mostly due to poor motivation of staff. This paper describes contracting as a possible tool for Ministries of Health to improve health service delivery more rapidly than the more traditional reform approaches. In Cambodia, the Ministry of Health started an experiment with contracting in eight districts, covering 1 million people. Health care management in five districts was sub-contracted to private sector operators, and their results were compared with three control districts. Both internal and external reviews showed that after 3 years of implementation, the utilization of health services in the contracted districts improved significantly, in comparison with the control districts. There was adequate competition in awarding the contracts. A Ministry of Health Project Co-ordinating Unit measured the performance of the contractors, and contributed pro-actively. There was no evidence of rent-seeking practices by either the contracting agency or the contractors. This paper describes in more detail the successes and failures in one of the contracted districts, where HealthNet International applied the contracting approach. Despite significantly increased official user fees, constituting 16% of recurrent costs, the utilization of services was equally increased. Patients thought the fees were reasonable because they were still lower than the fees demanded if government health workers charged informally. They also thought that the services were of better quality than in the unregulated private sector. Another important result was that combining strict monitoring with performance-based incentives demonstrates a decrease in total family health expenditure of some 40% from US dollars 18 to US dollars 11 per capita per year. Innovative and decisive management proved to be essential, which is more likely to be achieved by a contracted manager than by regular government managers with life-long employment. This paper discusses how the contractor addressed the deeply rooted problems of informal private activities of government health workers. The NGO district management experimented with two management systems: first by individual contracts with health workers, and secondly by sub-contracting directly with the health centre chiefs and hospital directors. A reason for concern is that poli-pharmacy and excessive use of injectables continued. Also, the participation of the central level of the Ministry of Health was positive in the contracting process, but the role and participation of the provincial level of the Ministry was more tentative.