As discussed in the Transport section above, the low quality of roads limits the potential market for sanitation products by increasing prices (through high transportation costs) and preventing access to many villages. Market penetration of the supply chain is therefore limited, consistent with the literature relating sanitation coverage to road access.
Material suppliers cited bad roads as a constraint more often than any other (31% of suppliers reported this was a main constraint). It was also a significant issue for concrete producers (19% of which indicated “transportation” as one of the biggest problem in the supply of materials. Masons, who do not need to transport products and often work locally, were less likely to report roads as a problem.
“Especially in the rainy season, cannot go to pick up the product to sell.” – Material supplier
“Difficult to deliver the products to the clients.” – Concrete producer
Availability of labor
Problems with labor availability and quality are particularly acute for concrete producers and masons (work that is more labor-intensive than material supply). For masons, around 40% said labor availability was a main constraint and a further 21% cited staff and training problems (many also citing absenteeism and wage costs as issues). Nearly 41% of concrete producers face problems with labor availability.
“We don't have enough labor so we cannot produce on schedule.” “If more customers, I cannot cope with the demand.” – Concrete producer
“We need more skilled workers” but “skilled workers are too expensive.”; “I am afraid that I will pay more and more wages for labor”- Mason
Labor constraints are not a problem unique to the sanitation supply chain problem. It is not unusual for businesses in Lao to face labor constraints. The problem is for both skilled and unskilled labour. For example, 64.5% of services businesses and 57% of manufacturing businesses complain that they had no or few applicants for “elementary” jobs (World Bank 2014). Furthermore, in 2011 18% of businesses in Lao PDR reported inadequate skills as a primary constraint (World Bank 2011). An “inadequately educated workforce” is now the top investment climate constraint in the country (World Bank 2013b).
A number of actors report problems with customers not paying (most offer limited credit to their customers). This is more a problem for material suppliers (30% of suppliers) and is just behind bad roads as the most-oft cited constraint. Because they often offer their customers better trade terms than they receive from their suppliers, this constraint can affect their working capital requirements. Access to sufficient working capital is a common constraint for most small businesses regardless of industry.
Access to finance
As noted in the earlier section on Finance, many actors interviewed have had a loan from a bank. However, 28% of material suppliers and 38% of concrete producers also say that access to finance is a main constraint to their business. It is less of a problem for masons (19%), partly because they have lower capital requirements. However, as discussed above, small businesses typically report problems with access to finance (and that this may actually be a sign of a well-functioning finance system, rather than a problem).
“Difficult to borrow money from the Bank, we must have a warranty before the loan is approved” – Material supplier
“Have difficulty to access to the money due to the high interest rate” – Material supplier
“I don’t have enough money to buy better machinery and expand my business” – Concrete producer
“I have no access to finance because I have no property”- Mason
Over a third (35%) of concrete producers and 41% of masons said that their business had problems of insufficient demand. These actors often have to rely on other sources of income, and may only work on request.
This suggests that there is spare supply capacity in this part of the chain that can respond to any increase in demand arising from consumer awareness and behavior change programs.
For concrete producers, the use of bricks for pit lining (discussed above) is a related issue. That is, preferences for lining pits with bricks mean less demand for their concrete rings.
Although not a major constraint, some actors did mention that competition is a threat to their business (12% of suppliers, 15% of concrete producers and 8% of masons). One retailer in Bokeo said that it has many competitors, with ten suppliers along the same road over a stretch of 120km. The competition includes legal competition from other businesses and illegal competition (smuggling) from both businesses and individual customers that avoid taxes and import duties. Masons reported illegal competition from neighboring countries, mainly Vietnam: reportedly the oversupply of labor in these countries push skilled and unskilled masons to Lao PDR, where allegedly they are able to undercut the local labor force.
The fact that few actors report competition as a threat suggests that there may be some issues with insufficient competition in the supply chain (see separate section on competition above).
“I am afraid that better and bigger shops will come”; “If better roads, customer will prefer to go and buy at bigger and cheaper shops, they come to me because of the bad road.”
“Competition from Vietnam is increasing, they are cheaper than us.”
There are mixed views among supply chain actors on the ease of importing and associated costs. Retailers state that they telephone their order to Thai supplies and delivery occurs quickly. One retailer reported that there are two deliveries per week from Thailand in the dry season and one to two per month in the wet season. Some Thai suppliers ship their product to the Lao border, and the Lao buyers arranges transport from the border back to their business since most Lao material suppliers have their own truck (at least 68%). Some reported that Thai suppliers provide transport all the way to their shop (implying that the Thai company deals with all customs issues at the border).
A small number of material suppliers complained about exchange rate issues. Since Thai companies require payment in baht but they have to sell in LAK (particularly when NGO programs are involved), fluctuations in the exchange rate can seriously affect their profitability by eroding their margins. Particularly for slow-moving items such as latrine pans, the time between purchase from Thailand and sale locally can be long, allowing for significant change in the exchange rate. This also reduces the incentive to carry much stock of these items.50
Given their proximity and shared border, Thailand, Viet Nam and China are the easiest countries for Lao PDR to trade with. Non-tariff trade costs add 48% to the cost of goods imported from Thailand, 79% from Vietnam and 130% from China. This encompasses all additional costs other than import duties involved in trading goods bilaterally rather than domestically. Indirect costs such as cumbersome import procedures are included. However, Lao PDR trade with Thailand is less costly than Cambodian Trade with Thailand. (UN ESCAP 2012 Report on the Comprehensive Trade Costs of Lao People’s Democratic Republic, June 2012. United Nations Economics and Social Commission for Asia and the Pacific)
Import duty and fees
Some suppliers complained about having to pay import duty on products. It appears to be a bigger issue in the North than elsewhere: about 20% of Northern construction material suppliers, 5% of Central, and 3% of Southern declared that they are facing challenges with import taxes and related processes.
Some of the complaint relates to items that are not sanitation-specific. But given that the majority of the cost of a latrine is general construction materials, these import duties are still relevant.
Illegal imports from Thailand and Vietnam, either by individual households or small retailers, reportedly affect the overall profitability of some businesses. When imported as a single item, no import duty is said to be paid, but when suppliers import larger quantities into Lao PDR, they must pay duty, which increases the overall sales price.
One construction material supplier said they pay 170,000 LAK (US$21) import duty for importing 10 tonnes of cement (equivalent to about 2%). This would appear to be lower than the official import. Bigger shops appear to have less problems with import duties. This might be because they are better able to afford the duties; or because they have larger volumes over which to spread the fixed component of import fees (that is, informal fees that may be required by Customs officials)51; or perhaps because they face less competition and are hence better able to pass on the duties to their customers.
Because cement and steel are designated as national protected products52, before importing, importers should go to the MOIC first for quota, then payment for tax and VAT is required by the Ministry of Finance.
Table 38: Current Import Tariff and VAT Rates in Lao PDR (%)
Source: Tax Department, Ministry of Finance
Imports that are part of an officially-approved sanitation program are exempt from import duty. However anecdotal evidence suggests that the exemption can result in significant delays for clearing the goods through Customs.
However, in reality the importing process is very blurry. In practice, importers in Vientiane do not need to go to MOIC for other construction materials; in the provinces, before going to the Provincial Finance Office, importers might need to go to the Provincial Office of Industry and Commerce (POIC) for quota.
The size and the importance of informal fees should not be underestimated, as well as the business practice of paying a lump sum for importing a certain amount of different materials. For example, in the Northern region, 10–12 million LAK (US$1,250–US$1,500) is charged for a 10- and 12-wheel trucks or 100,000 to 400,000 LAK for importing by boat. Sometimes, for a cargo of materials valued about 2.5 million LAK, some importers reported paying total fees of 100,000 LAK (4% of total value).
Summary of Findings
Many of this study’s findings are consistent with studies of sanitation supply chains in other countries (such as that no actor sells a complete latrine). The findings in this report are summarised below. These have been discussed in the various sections above. Suggested actions to address certain findings are presented in the following section.
No actor sells a complete latrine (except in some pilot programs such as PSI/WSP) – the chain is fragmented.
Businesses rely on other sources of income – they don’t view themselves as part of the sanitation supply chain.
Female ownership rates for material suppliers appears high (62%) but is consistent with other micro businesses.
Most businesses are small and unregistered (and much less likely to be registered outside of capital districts).
One-quarter of concrete producers report having a marketing plan, which appears high.
Masons can be transient, travelling far to work for extended periods.
Concrete producers are busier in wet season, the opposite of masons and material suppliers.
Businesses do very little marketing (and there is almost no use of sales agents).
Masons are better informed about household requirements.
Households prefer to use own labor.
Consumers (83% of non-owners) are happy to pay more for brick superstructure.
Most (82%) non-latrine owners do not want to borrow to obtain a latrine.
68% of households travel to buy materials for a latrine (to a district capital or bigger cities).
Latrine options and costs
Latrines most commonly built by the supply chain are very expensive – costing six months’ income for poor households.
Labor can double the cost of a latrine.
Pit lining with bricks instead of rings is becoming more common.
The potential rural market for low-cost options is 150,000 to 200,000 latrines.