Supply Chain Analysis for Rural Sanitation Products and Services in Lao pdr


Supply Chain Strategies – Guiding Principles



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Supply Chain Strategies – Guiding Principles


Notwithstanding that where there are market failures there could be a role for government, in general interventions should be as market-based or ‘hands-off’ as possible. The following principles should be observed:

Facilitation rather than delivery


It is rare to have all the resident expertise that can provide assistance for a diverse set of constraints or training for a wide range of competencies. Furthermore, investment in program delivery personnel and assets makes it more difficult to react proactively to changing market demands. A facilitation role that can utilise a coordinating position in the supply chain would therefore be more consistent with market-based and sustainability principles. It enables government or its development partners to more effectively work with private sector organizations in the delivery of services.

Services rather than products


The emphasis needs to be on responsive services that enable the supply chains to function, not on replicating parts of the supply chain or on the direct provision of latrines (or latrine components). Government strategy should try to provide services (or encourage others to provide services) that help the market reach poor households.

Treat supply chain actors and households as customers not program beneficiaries


Key to providing meaningful support is to view the supply chain actors as customers rather than beneficiaries, and to be responsive to their needs. Facilitating the provision of services that are needed - either by actors seeking specific skills or in areas where suppliers’ demand for product and services is real - is critical to long-term sustainability and success. It is therefore important to understand the desires of and constraints faced by the supply chain businesses. This means engaging with them regularly, listening to them and responding accordingly – allowing the businesses to drive the services that will meet their needs, not the other way around. A focus on actors’ needs will encourage more of them to become involved in a sanitation program and also will improve longer-term sustainability.

In this approach, it is also important to be flexible, going where ‘customers’ require. Provide services where they are most useful, where they are least disruptive, and in ways which focus on improving businesses’ bottom line.

The sustainability of the small scale sanitation providers is always vulnerable making the need for a supportive, flexible and understanding relationship with the private sector an essential factor for success. It is imperative that the they are represented in programme design decision making processes.”

- Jenkins & Sudgen 2006, p.28.

Government and DPs should therefore be willing to see and to encourage competition within the supply chain. The overall goal is to increase the number of household’s accessing improved sanitation facilities. It should not matter if this is being delivered by fewer, larger suppliers or more, smaller suppliers.58

Working with a larger number of actors is advisable, as there can be greater risks of market distortion by picking one or two ‘winners’. No promises should be made that there will be a certain sized market for actors participating in a program. However, market intelligence, such as the size of the potential market and the expectation that it will grow (because of demand-side activities) should encourage actors to attempt to capture some of this growth.

Private sector focus rather than NGO/Government


Finally, it is imperative that interventions invoke a private sector, customer-facing, results-oriented culture. Government sanitation officials and development partners should seek to encourage the private sector and facilitate it where possible.
    1. Actions to address specific findings


Suggested actions to address the findings of this report are summarised below. These actions are then discussed in turn.

Finding

Response

2

Businesses rely on other sources of income – they don’t view themselves as part of the sanitation supply chain

Increase awareness of market opportunities. e.g. the potential market size from offering more affordable latrine options



17

The potential rural market for low-cost options is 150,000 to 200,000 latrines

14

Latrines most commonly built by the supply chain are very expensive

Pay in instalments with the involvement of a bank or MFI.



27

Businesses have concerns about customers’ late or non-payment.

12

Most (82%) non-latrine owners do not want to borrow to obtain a latrine

Change this mindset by:

  1. Including a finance organisation in consumer sanitation education; and/or

  2. Coordination role to link a finance organisation with actors such that actors can offer latrines on credit

24

Transport costs – for multiple orders - add 20% or more to cost of a latrine

Facilitate bulk ordering. Village chiefs may be used as a trusted party for coordinating this.

On-site casting of bulk orders also helps reduce transport costs (and breakage)


23

Suppliers provide delivery for larger orders but not for smaller orders.

13

68% of households travel to buy materials for a latrine (to a district capital or bigger cities)

8

Passive sales approach and very little marketing (and there is almost no use of sales agents)

Design generic marketing materials that are low-cost and easy for small businesses to carry and distribute.

Use village chiefs as sanitation champions.

Encourage suppliers to forge relationships with village chiefs. May include commission paid to chief for latrine orders.


15

Labor can double the cost of a latrine

Educate households about models that allow self-installation (though households still prefer solid superstructure)

10

Households prefer to use own labor

38

Businesses in the south are less likely to have business plans

Capacity building through business mentoring: business plans, financial management.

29

Government and NGO programs are part of the chain.

Government should discourage NGO programs that involve direct subsidies (to stop consumers waiting for provision and to provide incentive for businesses to market to households).

30

Government officials appear to view all rural latrine supply as part of government programs (when only 24% is).

Training to change the mindset of officials from that of being a provider of latrines to a business and market facilitator/coordinator.
      1. Market intelligence dissemination


The main constraint to the scaling up of private sanitation to the poor and realization of the market’s potential is the fact that enterprises are not offering households products and services they want to buy. Many poor (and not-so-poor) people are unwilling [or unable] to pay for the kinds of improved sanitation solutions currently available. As currently structured, the supply chain delivering these solutions appears unable to offer better value (Sy & Warner 2014).

“In a market economy, where there is effective demand (willingness and ability to pay) for a product or service, entrepreneurs will take steps to make profits by serving the demand” (IDE 2007). In Lao there is considerable effective demand for latrines below 700,000 LAK. As discussed above, the fact that entrepreneurs are not taking steps to serve this demand suggests that either: it would not be profitable to do so; or there is some form of market failure. This market failure is most likely in the form of information asymmetries. Government and its development partners should seek to overcome such information asymmetries by publishing market information (potential size, etc) to encourage more investment or the entry of new actors, particularly bigger players.

Further, informing the market that demand-side interventions are being undertaken will encourage actors about the possibility for demand growth. Supply chain actors should be given information on which villages in their area will be subject to CLTS or other behavior change programs and the timing of these activities. They can then plan for capitalising on this increase in demand.

Also, information should be disseminated about the types of latrine options that can satisfy the currently unserved demand. Given high labor costs, these more affordable designs should also be quicker and easier to install. More affordable designs already exist and are being tested in certain areas (or have been tested, such as in Cambodia). WSP (2012b) identified two cost-effective products:



  • a pour-flush latrine with a retail price 375,000 LAK (US$47); and

  • a waterless latrine, a basic model of which had a retail price 100,000 LAK (US$12.50), or a model with tiles for 155,000 LAK (US$19.42).

In Lao PDR, WSP, through its implementing partner PSI, is attempting to scale and strengthen the marketing and supply of a low-cost latrine (costing around US$50) in Champasak and Sekong provinces. It has a direct-drop pit (to keep costs down). Similarly, in Cambodia a pilot project developed a US$35 latrine (excluding labor and superstructure) that was designed to be simply and easily installed by consumers (WSP 2012c). This now costs US$45 and has been rolled out more widely. Superstructure costs can be reduced by using zinc or fibro-cement sheeting with a metal or bamboo frame, instead of bricks.59

However, it must be kept in mind that the margins from selling these products must make it worth the actors’ while. Latrines compete with not only the demand priorities of the consumer but also the sales priorities of the businesses. A latrine that is profitable to sell is not enough ­– it must be sufficiently profitable. That is, more profitable than the alternative for the business, which may be to spend their time and resources selling non-latrine products. As discussed, some actors believe that they have opportunities elsewhere to earn a better return on their capital.

It is unlikely that the very poor in remote areas can be served profitably. Hence, dry pit latrines should also be considered as part of the strategy (although they not a supply chain product): WSP (2013) found that in Lao “[t]he high net benefits of low-cost sanitation options, such as wet pit latrines in urban areas and dry pit latrines in rural areas, also suggest that these technologies should be at the center of national plans for sanitation improvements, especially where funds are scarce.” Furthermore, WSP stated that shared facilities should not be ruled out.

      1. Financing arrangements


In general, direct subsidy that removes the link between supplier and consumer should be discouraged (see below). But other financing arrangements are possible.

Table 39: Potential finance approaches for onsite sanitation



Source: WSP 2012d, p. 27.

Being able to pay in instalments makes latrines more affordable for many. Instalments have proven to be attractive with households as part of sanitation programs in Cambodia and Indonesia. However, the businesses in the supply chain are unlikely to be able to manage instalment schemes themselves. Furthermore, the businesses already complain about customers’ late or non-payment. Such concerns are likely to be even greater when selling to customers in poor rural areas.

By partnering with a bank or MFI, actors are able to supply latrines on formal credit with the payments spread over time (which is attractive to consumers) and do no bear credit risk from non-payment (attractive to the businesses). This model has been used in Cambodia, for example (“SanFin”; see Path 2013). Households agree to buy a latrine and apply for a loan at the same time, the MFI approves the loan and pays the business, and the household repays the MFI over time. This model may involve a commission paid to the loan officer, increasing their incentive to find latrine customers.

An issue is how to make it attractive to the MFI. They have experience dealing with credit risk in rural areas. Many MFIs have found group loans to be one effective way to manage this. Another might be to involve a trusted local (i.e. the village chief) in the transaction. The MFI takes comfort that the chief has vouched for the borrower, and the borrower is more likely to repay when the chief is involved. Greater involvement of village chiefs in sanitation marketing is discussed more below.

      1. Village chiefs as champions and coordinators


Village chiefs should have a role as local sanitation champions. The supply chain actors will value have a trusted promoter. Supply chain actors should be encouraged to form relationships with village chiefs. Using chiefs help build trust: trust from suppliers that villagers are more likely to pay; and trust from the villagers that the supplier is vouched for by the chief.

Village chiefs can play a role in coordinating bulk orders. Bulk purchases can increase the size of the market and take advantage of any scale benefits. This helps overcome the problem of high transport costs. Suppliers may not deliver for small orders, but delivering can be attractive to customers60. Direct bulk purchases by government or DPs are discouraged however, for the same reasons that direct subsidies are not favored but also because they remove the relationship between the supplier and the consumer. However, by only playing a coordinating role in helping a group to simultaneously acquire latrines, the relationship between customers and businesses remains intact. Local suppliers should be used where possible, with purchasing at market prices.

Bulk purchasing might also enable on-site casting. On-site casting of bulk orders also helps reduce transport costs (and breakage). However, even with multiple deliveries, transport costs can still be high. Only a limited number of latrines (or their components) can be delivered per truck; and only smaller trucks are able to access some villages.

The role for government and development partners is to introduce officials to the concept and facilitate their interaction with the supply chain. This should be coordinated with demand-side activities (that is, roll it out in CLTS villages for example), ensuring that group orders are resulting from demand creation or behavior change strategies.


      1. Marketing and sales


Supply chain actors do very little, or no, marketing of their products and services — not only sanitation marketing but any kind of marketing.61 The generic nature of the materials, and small size of most suppliers, means that sanitation does not lend itself to branding. Coordinated marketing is beyond many businesses in the supply chain. Few businesses have the desire or skill to invest in marketing.

By making village chiefs champions of sanitation, they can take on some of the role of promoting latrine products, and recommending suppliers. One option is to work with businesses so that they become comfortable with paying village chiefs a commission for the sale of latrine products. Village chiefs would then be incentivised to promote latrine use. As discussed, the actors have very little experience with sales agents or paying commission so there is a role for government or development partners in initially promoting this approach.

However, getting the supply chain to understand the benefits of marketing is important for longer-term sustainability. Involving respected upstream partners in marketing has proven is helpful in other development programs62. Lao Cement, Nayobay Bank and ACLEDA Bank have indicated potential willingness to be involved. The first two are part owned by the Lao Government, and so may be willing to be involved in Government sanitation efforts. Both have extensive distributions networks throughout the country, which could be used to disseminate marketing information. They might feel that being involved in a large sanitation project is good for their brand. Lao Cement has been involved in development projects previously, such as the construction of schools in remote areas. Similarly, ACLEDA Bank stated is willing to be involved in social projects. The Bank has an extensive marketing network in Lao PDR, with field officers in rural areas (each credit officer is responsible for 5 to 10 villages). Using these organisations’ distribution channels, and being associated with their strong brands, could provide novel and effective means of improving knowledge.

Finally, any public sanitation marketing and education campaigns should include materials that can be used by small-scale providers of private sanitation services.


      1. Capacity Building – particularly for the South


The sanitation supply chain is weaker in the South, particularly in certain provinces and districts, where there are fewer actors at most levels. Furthermore, businesses in the chain in the South are much more likely to rely on other sources of income, and are less likely to have business plans. Finally, latrines are more expensive in the Southern provinces.

Hence it is not surprising that it is the South of Lao PDR that has the lowest levels of improved sanitation coverage. However, the direction of causality is not obvious. Are there fewer latrines in the south because the supply chain is weaker there, or is the supply chain weaker in the south because household demand is lower?

Hence there could be a role for capacity building through business mentoring to help rural businesses with planning and financial management. Improving the efficiency of businesses in the supply chain could help lower their production costs, allowing cheaper latrines to be produced while maintaining margins.

Furthermore, workshops hosted and/or sponsored by large private sector providers (such as Lao Cement), or visits to other businesses can increase market and technical knowledge while also fosterer links through the supply chain. Closer links to larger actors could also result in agency, distribution or sub-contracting networks, helping address some capacity and commercial challenges.


      1. Changing the way officials think and work


Nam Saat or other officials should be encouraged to play a supporting role connecting businesses and customers – and to move away from the mindset that they are the providers of latrines. As already discussed above, there are coordinating activities and roles for government within the supply chain (consistent with the guiding principles outlined above).

Officials might therefore require capacity building private sector facilitation and in the principles outlined above. For example, foreign competition, although a complaint of a number of actors, should not necessarily be viewed negatively. The primary goal of sanitation programs should be more latrines, not necessarily supporting local business. More competition is generally a good thing.

Further, Government should discourage the use of subsidies in programs. This will stop consumers waiting for free provision of latrines and will provide incentives for businesses to market to households. The Lao PDR government has realized that subsidies are not necessarily effective and while some rural areas have significant coverage in terms of access to toilets, they were not used and remain broken and not useable. The government has adopted the position to move away from direct subsidies and they “…should only be considered for use if needed to target villages and households defined as being ‘poor’ or ‘vulnerable’ (single parent households, disabled supported elderly households)” (Lao Ministry of Health 2012).

      1. Business environment improvements and national-level policies/strategy


The business environment does not appear to be constraining investment in the chain. Few actors mentioned government regulations or fees as a constraint. None suggested the government could improve the business or investment environment.

One small area of concern is import tariffs and VAT. These add to the cost of latrines, and some suppliers (particularly in the North) complained about importing fees.

WSP (2012e) found that “a supportive enabling environment was an essential element of large-scale rural sanitation programs” as “the countries with the strongest enabling environment made the most progress”. There are number of reforms and other policies that could help the sanitation supply chain. Generally these involve improving the business environment. In particular, Nam Saat or the Ministry of Health should be encouraged to discuss issues of import procedures, import tariffs and VAT for sanitation products with the Tax and Customs departments.

The single biggest action that would improve sanitation in Lao would be investment in roads. The Ministry of Public Works and Transport (MPWT) is the national government agency primarily responsible for expansion and maintenance of the transport infrastructure Lao PDR. The Asian Development Bank is also a major funder of road infrastructure in Lao. Unfortunately “MPWT's multi-criteria mechanism for prioritizing projects gives more weight to funding regional projects connecting the international borders than the projects providing access to remote areas within the country.” And ADB’s focus follows suit. Furthermore, “While the quality of outputs [ADB rural road projects] has generally been satisfactory, there is inadequate capacity at the provincial level to implement these projects.”

It is unrealistic to expect sanitation policy to influence investment in roads, but the importance of roads cannot be ignored. Where possible, senior Ministry of Health officials could remind officials at MPWT and the Ministry of Rural Development of the wider importance and impact of continued investment in roads.



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