IMPACT OF POWER OUTAGE ON SMALL AND MEDIUM ENTERPRISES IN NIGERIA
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Abstract
Power Outage has been identified as the key constraint to manufacturing sector development in Nigeria. Hence, this study analysed the cost of power outages to the business sector of the Nigerian economy using both a survey technique and regression analysis. One strong outcome of the study is that the poor state of electricity supply in Nigeria has imposed significant costs on the manufacturing sector. The bulk of these costs relate to the firms’ acquisition of very expensive backup capacity to cushion them against the even larger losses arising from frequent and long power fluctuations. Small- scale operators are more heavily affected by the power outage as they are unable to finance the cost of backup power necessary to mitigate the impact of frequent outages. The small-scale operators that could afford to back up their operations have to spend a significant proportion of their investment outlay on this. The study suggests for institutional reforms of the power supply sector inNigeria.
Table of contents Page(s)
Abstract
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research Questions
1.5 Significance of the Study
1.6 Scope of the Study
1.7 Organization of Study
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Introduction
2.2 Conceptual Framework
2.2.1 Electricity
2.2.2 Concept and Definitions of SMEs
2.2.3 Characteristics of SMEs in Ghana
2.2.4 The role of electricity in SMEs activities
2.2.5 The Manufacturing Sector
2.2.6 Structure of the electricity market in Nigeria
2.3 Review of Theories
2.3.1 The Big Push Theory
2.3.3 The Theory of Unbalance Growth
2.3 Empirical review
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design
3.2 Sampling and Population
3.3 Data collection
3.4 Method of analysis
CHAPTER FOUR
RESULTS AND DISCUSSION
4.1 Analysis of survey findings
4.2 Electricity consumption
4.3 Power outage costs
4.4 Causes of power outages and solutions to inefficient supply of power
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION
5.1 CONCLUSION
5.2 Recommendations
References
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Electricity is a significant component of virtually any production process. As such, limited supply has the potential to, directly and/or indirectly, affect the economic activities of firms. In documenting such a crucial economic role of energy, a common approach in the literature is to measure the output loss associated with electricity outages (Uchendu, 1993).
Most of the operations carried out for example in Nigeria depends on power. Power is needed by the mining sector, service providers (sector) and the manufacturing industry in order to carry out their operations. Industries, families, civil society, individuals and the state as a whole will be affected as a result of unavailability of electricity (AdjeiMantey, 2013). A short or long-term loss of electric power to an area can be termed as power outages (also called power failure, power cut or power blackout). There are many causes of power failure in an electricity network, fault at power stations, damage of electric transmission lines, substations or other parts of distribution system and overloading of electric mains are some examples of such causes. Sites where public safety and the environment are at risk are particularly critical to power outages. Manufacturing is being put to the sword over the last seven (7) years due to the lack of conscious effort. Contribution of the manufacturing industry in 2006 to Nigeria’s GDP (Gross Domestic Product) was 10.2%, it reduced in 2010 to 6.8% and reduced in 2011 to 6.7%. This reduction in GDP can be attributed to unreliable power supply (www.Nigeriaweb.com).
Many firms are often not aware of the true costs and impact that outages have on their operations because they are mostly not prepared for business disruption caused by power blackouts (Bruch & Hunter, . Energy (electricity) supply in Nigeria has not been reliable despite its importance to many industries and the household. Power usually goes off often without prior notification from the Electricity Company of Nigeria (ECG) to its customers. The most affected industry by this frequent power outages is the manufacturing industry. The manufacturing industry because of the persistent erratic power supply in the fourth quarter of 2014 suffered a dipping growth of unprecedented negative 8% eroding confidence in the business society. AGI’s (Association of Nigeria Industries) president, warned in a communiqué that Nigeria risks losing its industrial base if government policies do not quickly address the challenge of power outages in order to revive the sector because the manufacturing sector continues to shrink (Laary, 2015). Hence this study looks at the effect of power outages on performance of selected manufacturing firms on the Nigeria Stock Exchange. Most research on effect of power outages was conducted on medium and SMEs like Asamoah & Doe (2014), Amponsah & Barimah (2012) and Cissokho1 & Seck (2013) and many researchers estimated cost of power outage to firms by using data on backup generators. This paper will fill the gap by providing adequate results by analyzing the effects of electricity outages on performance of manufacturing sector in Nigeria by quantifying the magnitude of the problem. This is important because while policymakers and government are well aware that shortages are a problem, quantifying the losses from this, empirically is less established in the context of developing country like Nigeria.
One of the analytical frameworks used is a production function in which electricity contributes directly to firms’ output as a separate input, and indirectly as a determinant of the extent to which other direct inputs such as capital equipment is used (Adenikinju, 2005).
An alternative approach, a subjective method, is based on self-assessment by which surveys ask firms to quantify the loss they incur due to power outages. This approach relies on the assumption that firms well positioned to provide relatively accurate valuation of how much it cost them to replace more frequently or to repair damaged machinery or equipment, or to assess the lost output due to idled inputs. A simple approach to evaluate the costs of power outages consist of just aggregating the cost amounts provided in the survey. However, many biases can plague the outcome, since firms may have the tendency to overestimate the incurred costs, hence, over-emphasizing the constraint that electricity poses to their business activity (Uchendu, 1993).
Over the years, the manufacturing sector has been noted to be a key vehicle of economic development in any economy. Admittedly, Olayemi (2012) posits that manufacturing sector plays an instrumental role in economic development as it acts as a catalyst that accelerates the pace of structural transformation and diversification of the economy; it enables a country to fully utilize its factor endowment and to depend less on foreign supply of finished goods or raw materials for its economic growth, development and sustenance. Accordingly, Nigerian government has been putting efforts to increase and sustain the productivity of manufacturing sector in the economy through budgetary allocations, policies and pronouncements (Anyanwu, 1996). Coupled with the fact that there has been consistent decline in the oil revenue, which over the time has been the major source of income for the country, attention has been drawn to diversify the economy; to stimulate the manufacturing sector productivity. In this sense, Subair and Oke (2008) admitted that electricity supply which is mainly utilized for driving machines for the production of various items is a strong factor that will catalyze the productivity of manufacturing sector and thereby contribute significantly to the development of the economy. By way of responding to this discovery, successive Nigerian governments have been committing huge amount of resources into the electricity sub-sector, yet it appears that, this has not translate to a commensurate increased productivity of manufacturing sector in the country. Manufacturing sector in Nigeria is yet faced with the challenges of erratic power supply from the Nigerian Electricity Power Authority (NEPA), now called Power Holding Company of Nigeria (PHCN) and consequently, high cost of electricity generation from private electricity power generators (Onugu, 2005; Aremu and Adeyemi, 2011). Not all manufacturing firms would be able to run profitably on power generating sets in a highly competitive and open economy like Nigeria because of the high costs of fuel and maintenance. Ordinarily, the power generating sets which have now become the primary source of electricity supply to industries that could afford them ought to serve as backups or standby in the event of disruption from government sources (Okereke, 2010). But because of government inefficiency, the backups are serving as the primary source.
Small and medium enterprises contribute significantly to the economic development of many developing and developed countries in the area of job or employment creation and revenue generation. Data shows that about 90 percent of companies registered in Nigeria are SMEs. “The Nigerian private sector consists of about 300,000 SMEs, which employ more than 80 percent of the workforce and contribute about half of the country’s GDP and therefore have catalytic impacts on the economic growth, income and employment” (Mensah, 2004).
In India, which has about 30 million SME businesses, SMEs contribute about 20 percent to GDP, 45 percent of industrial output, 40 percent exports, employ 60 million people, create 1.3 million jobs every year and produce more than 8,000 quality products for the Indians and international market (Frimpong,2013). In the work of Sanders and Wegener (2006), one would not dither in agreeing with the fact that small businesses play a central role in any economy in terms of employment, income, innovation and development of local markets and supply chains. In developing countries, the social value and economic role of SMEs are even more significant. In these developing countries, employment and better income effects translate directly to fulfillment of basic human needs like health services, education, better homes and buffers for risk, etc. These also happen in developed economies as well.
According to Antoine et al., (2013) SMEs use a combination of innovation and improvisation to develop local products and services for local needs using local resources. Their impact on the poorer in the community is greater simply due to their local activity radius through employment, procurement and sales. Small businesses often succeed in transforming informal activities into formal ones, directly contributing to economic health of the market environment.
1.2 Statement of the problem
During the past decade, the Nigeria economy has undergone a major crisis in the electricity sector. Failed privatizations, the increased cost of fuel, and lack of public investments are the main factors that led to a poor electricity supply that shows in the daily occurrences of power outages. This environment has undoubtedly affected economic activities, particularly industrial production. In Nigeria, the industrial sector contributes approximately 20 percent to GDP and employs around 12% of the labor force (YENIYF, 2009). Small and Medium Enterprises (SMEs), which constitute 95 percent of total businesses, play an increasing economic role, with a contribution to overall gross domestic product (GDP) going from 17 and 21 percent between 2003 and 2006 (World Bank, 2007).
In Nigeria, poor electricity supply is perhaps one of the greatest problems confronting the manufacturing sector. The typical Nigerian firm experiences power failure or voltage fluctuations about ten times per week, each lasting for about two hours, without the benefit of prior warning. This imposes a huge cost on the firm arising from idle workers, spoiled materials, lost output, damaged equipment and restart costs. The overall impact is to increase business uncertainty and lower returns on investment. For the aggregate economy, this has seriously undermined Nigeria’s growth potential and the attractiveness of the economy to external investors.
The inefficiency of PHCN imposes a huge cost on the economy. In 1990, the World Bank estimated the economic loss to the country from PHCN’s inefficiency at about N1billion. There are essentially five ways by which firms may respond to unreliable electricity supply. These are choice of location, factor substitution, private provision, choice of business and output reduction.
Power outages can affect businesses activities through a variety of channels, which eventually lead to negative effects on productivity (Antoine et al., 2013). First, there is the efficiency channel, through which discontinuous power provision is synonymous with disruption in the production process, causing productive resources to lie idle, resulting in lower output level. Second, there are the costs associated with the replacement or repair of broken machines and equipment on the one hand, and the cost related to the spoilage of finished products or inventory on the other. Further, power shortages lead to extra cost to firms, because they often have to rely on alternative sources of energy, like rented or self-owned generators. Third, there is the quality channel, which is related to the rush to meet deadlines due to anticipated power outages, spoiled inventories, or malfunctioning machines.
These phenomena could all affect the quality of a good or service produced by a business. This means businesses have to produce more goods to replace the low-quality units, or discarded units. Consequently, production cost further increases. Fourth, there is the uncertainty channel, which comes about because businesses could not predict with any accuracy the occurrence of power outages. This situation translates into uncertainty in meeting deadlines, getting materials from suppliers on time, or profiting from new market opportunities. In the end, it could lead businesses to idle more capital, and hire fewer workers consequently.
1.3 Objectives of the study
The general objective of this study is to examine the impact of power outage to small and medium Enterprise in Nigeria. The specific objectives of this study include the following:
1. To find the prevalence of power outage among manufacturing organization.
2. To ascertain the influence of power outrage on the productivity electronics enterprise.
3. To examine the influence of power outrage on customers’ satisfaction.
4. To determine the cost of alternative sources of power supply and its impact on the profit margins.
5. To examine the effect of erratic power supply on competiveness of electronics enterprises.
1.4 Research Questions
1. What is the prevalence of power outage among manufacturing organization?
2. What is the influence of power outrage on the productivity?
3. What is the influence of power outrage on customers’ satisfaction?
4. What is the cost of alternative sources of power supply and its impact on the profit margins?
5. What is the effect of erratic power supply on competiveness?
1.5 Significance of the Study
The outcome of this study will assist government parastatals and it agencies like the Ministry of power, who are the policy makers and regulatory bodies and also the electricity distribution company scattered across the country for decision and policy making as regards improving the state of small and medium scale enterprise.
This study will create awareness to the government to see the extent to which neglect of infrastructural facilities such as electricity is hampering the performance of SMEs in meeting the potentials of providing employment per unit investment capital, facilitating the development of indigenous entrepreneurships, enhancing local resources utilization and value added, expanding non-oil exports at competitive prices, improving balance of payment position and bring about overall growth and development of the state economy.
It will add to the available literature on the areas of study while also providing the platform for other researchers to further this study.
1.6 Scope of the Study
The research work is concerned basically with the roles to lay emphasis on power outage and the performance of small and medium scale enterprise in the state and will cover those SMEs in state that have electricity as relevant infrastructure for their production process. The study is therefore limited to the Lagos/Ibadan axis, the Kano/Kaduna axis and the Onitsha/Nnewi/Aba axis.
1.7 Organization of Study
The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.
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