Supply Chain Analysis for Rural Sanitation Products and Services in Lao pdr
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RecommendationsThis Study aims to provide “strategic recommendations and options for improving the supply/value chain for rural sanitation” and to identify “possible business models and support services, which have potential to scale up the availability of aspirational and affordable sanitation products and services to rural low-income households.”53 One of the main causes of problems for the sanitation supply chain is a lack of scale. Most sanitation supply chain problems appear to stem from this. The latrine market is simply too small.54 Lack of scale is not particular to latrines, it is a problem faced by many industries in Lao because population density is low55, but it is even more acute in latrines, given the nature of the product (infrequent purchases) and current low penetration. Hence many actors supply other products and/or services besides latrines. There is not enough business from latrines alone for most of them to specialize. The potential market for a lower-cost latrine is around 150,000 to 200,000 latrines, assuming there were no problems in distributing the latrines. At lower latrine prices, the market increases slightly (Figure 24). The basis for this estimate is that about 414,000 rural households in Lao do not use an improved facility56. Around 46% of rural households without a latrine are willing to pay 500,000 kip (US$62.5) to obtain one (based on WSP – Sanitation Consumer Behaviour Study), which is 190,500 households. Figure 24: Potential rural latrine market size (number of latrines) 
For more poor households to have latrines, demand-side interventions are most important. The local latrine supply chain should respond to an increase in demand, because: The private market is already supplying most latrines; Barriers to entry are not too high; The required capital to start a small business is not excessive and formal finance is available, There are few or no regulatory barriers; and According to businesses, the latrine market has been growing. However, past evidence from CLTS programs shows that supply does not respond adequately to demand-only strategies. The possible reasons for this are summarised in the diagram below. If there is demand for latrines but the supply chain is not serving that demand then it is either not sufficiently profitable to do so, or the market is failing, or the government (or others) is preventing the market from functioning efficiently. 
It is possible that some of the potential market cannot be profitably served, particularly given transportation difficulties in remote areas. Further, some supply chain actors indicated that sanitation products were less profitable than their other activities (FGDs). In general, the sanitation supply chain market does appear to function efficiently. Margins are reasonable and there is not strong evidence of significant market power and lack of competition. However, there may be some information asymmetry, with actors unaware of cheaper latrine options and the potential demand for them. There are externalities in the provision of sanitation (positive spillovers57) — though this does not explain the problem of unmet demand. No evidence was gathered of any significant regulatory barriers to market entry or other government action inhibiting the business environment. No actor suggested the government could improve the business environment. Subsidies are, and have been, present in the market, which does create some distortions. These are more likely to have affected demand (people waiting for a latrine) than to have detrimentally altered the supply of sanitation products and services. It is possible that some suppliers do not engage in marketing, preferring to wait for programs to create demand for them, though none said this explicitly. Hence, while demand-side initiatives are paramount it remains important to augment demand-side strategies with some supply chain actions.
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