Poor rural households cannot afford a latrine that costs 2.8 million LAK. For households at the official rural poverty line (180,000 LAK (US$22.50) per person per month, which equates to 900,000 LAK (US$112.50) for the typical five-person household), the commonly-built latrine would cost at least three months’ income. Many target households earn even less: 85% of poor rural households surveyed in the South have a monthly income of less than 500,000 LAK (US$63); and transport costs make the latrine even more expensive. The commonly-built latrine would cost these households more than six months’ income.
The potential market for a lower-cost latrine is around 150,000 to 200,000 latrines, depending on the latrine price and assuming there were no problems in distribution to households. The basis for this estimate is that 414,000 rural households in Lao do not use an improved facility and 46% of rural households without a latrine are willing to pay 500,000 kip (US$62.50) to obtain one (WSP – Sanitation Consumer Behaviour Study), which is 190,500 households.
Many supply chain actors are able to obtain formal credit. Around 50% of material suppliers interviewed have had a bank or MFI loan. The average interest rate is around 13% per year (ranging from 6% to 15%) and the term is 1 or 3 years. About 22% of concrete producers interviewed have had a bank loan, typically paying 14% interest for a term of 1 year. Masons do not access formal credit, perhaps because they need it less but also because they may not be able to provide collateral. If masons borrow, it is likely to be from informal money lenders.
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%).
Problems with labor availability and quality are particularly acute for concrete producers and masons because their business is more labour-intensive than material supply: Nearly 40% of concrete producers and masons face problems with labour availability. Also, 21% of masons cited staff and training problems (many also citing absenteeism and wage costs as issues). 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. For example, in 2011 18% of businesses in Lao PDR reported inadequate skills as a primary constraint (World Bank 2011).
Customers not paying (30% of materials suppliers) and insufficient demand (35% of concrete producers and 41% of masons) are important constraints limiting the financial attractiveness of the sanitation businesses. Access to finance is reported as a problem by 28% of material suppliers and 38% of concrete producers. It is quite common for small businesses to cite access to finance as a constraint. In 2011, 20% of all Lao companies reported access to finance as a primary constraint (World Bank 2011), and 57% of micro businesses and 45% of small businesses said that lack of capital is a “big” or “very big” constraint (GIZ 2012).
Concrete producers in the South report much lower sales of products for latrines than in the north and center
Businesses in south much more likely to rely on other business activities
Businesses in the south are less likely to have business plans
Market intelligence dissemination
The potential rural market for a lower-cost latrine (below 700,000 LAK) is around 150,000 to 200,000 latrines, assuming there were no problems in distributing the latrines. The fact that entrepreneurs are not taking steps to serve this demand suggests that it is either not profitable or there is some form of market failure, such as information asymmetries. Government and its development partners should seek to overcome any such information gaps by publishing market information (potential size, etc) to encourage more investment or the entry of new actors, as well as informing the market that demand-side interventions are being undertaken in order to encourage actors about the possibility for demand growth.
Information should be disseminated about the types of latrine options that can satisfy currently unmet demand. These more affordable designs should also be quicker and easier to install. More affordable designs already exist such as the low-cost latrine (costing around US$50 excluding superstructure) that WSP, through its implementing partner PSI, is attempting to scale in Champasak and Sekong provinces.
Direct subsidy should be discouraged but other financing arrangements are possible such as instalment schemes with MFI and/or other financial institutions.
Being able to pay in instalments makes latrines more affordable for many. However, the businesses in the supply chain are unlikely to be able to manage instalment schemes themselves. 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). 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 tactic would have to overcome the hesitancy of consumers to incur debt for latrines, and lenders to take on potential non-performing loans. This resistance can be addressed by a combination of stakeholders, the Government, donor partners, and NGOs who all have an interest and participated in the supply chain study. In particular, the involvement of village chiefs (see below) can help limit loan default.
Village chiefs as champions and coordinators
Village chiefs should have a role as local sanitation champions. They 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 reduce the problem of high transport costs – although transport costs are still significant for bulk orders.
Direct bulk purchases by government or donor partners are discouraged however, because they create distortions and remove the relationship between the supplier and the consumer. Bulk purchasing might also enable on-site casting. On-site casting of bulk orders helps reduce transport costs (and breakage).
Supply chain actors do very little, or no, marketing of their products and services — not only sanitation marketing but any kind of 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.
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.
The complete latrine
Latrine costs are dominated by material costs and transport. Bundling (having all materials available as a package from a single location) may be one way to lower the cost of a latrine. This reduces transaction costs for households (who currently often have to visit at least two actors to obtain necessary materials). It reduces the fragmentation of the supply chain by providing a single-priced final latrine product, rather than a collection of materials. When combined with a cheaper latrine design (provided it is a design that is still appealing to consumers), this model can provide a product that satisfies more of the potential market.
Reinventing supply chain businesses such that selling a bundled latrine becomes their primary (or only) activity may address some of the supply chain problems. However, the main problem is not the businesses themselves. Changes to businesses (such as changing their product offering to include a complete latrine, or changing their sales approach to include marketing or sales agents) may achieve incremental improvements in the supply chain, but some major issues will not be resolved. For example, delivery of latrines to some areas will still be difficult and expensive.
How can businesses do better with a product (latrines) that is a slow-moving consumer durable (i.e. low-frequency, lumpy sales) in an environment with high transport costs? There is no simple solution. Change will take time. Letting businesses grow organically – in response to demand-side initiatives – may not deliver large immediate results, but will be more sustainable and will involve much lower per-latrine government and DP program costs.