Governments of countries with emerging economies usually are not very successful in providing safe and sufficient potable water and adequate wastewater services to their citizens. The reasons vary from inadequate institutional structures to chronic under-investment in water infrastructure. To address this, governments embark on reforms based on commonly accepted principles of good governance such as: separation of policy, regulation and service delivery; protecting customer interests; and ensuring financial viability of water utilities and restructuring them so as to benefit from economies of scale and economies of scope. Kosova initiated water sector reforms in 2000 based on five pillars: (i) establishment of a legal and institutional framework, (ii) consolidation of 30 municipal water utilities into seven regional entities, (iii) incorporation in line with corporate governance principles, (iv) establishment of an independent economic regulator and (v) ownership and pushing of reforms by government. The paper describes the challenges encountered in implementing these reforms which, as far as the institutional and legislative framework is concerned, were successfully completed by 2008. Also, the difficulties associated with consolidation of newly created institutions resulting from the reform and defining their roles in the water services sector are described in the paper.