Impact Of Electricity On Performance Of SMEs In Nigeria

Project and Seminar Material for Entrepreneurship

Abstract

Electricity provision in Nigeria has been marred by low generation, poor supply and frequent power outages. The situation has compelled firms to adopt strategies to cope with this poor public supply of power for their business. To this end, this study analysed the effect of power outage on the performance of small scale industries: The study employed questionnaire for data collection. Data collected was analysed using frequencies and percentages and the two hypotheses tested using chi-square. The results show that, the presence of power outages in Kano state negatively affected firms’ performance (profitability). The study therefore recommends that government should implement policies and programs such as power mix approach and renewable energy and bring in private sector participation to install competition and efficiency.

Chapter One

Introduction

1.1 Background to the Study

Access to electricity and its accompanied high tariffs poses a greater challenge to SMEs growth and performance in lower income countries like Nigeria, as compared with those in higher income countries. This assertion is confirmed in a research by Scott et al (2014) which reveals that, the proportion of SMEs in high-income countries citing electricity as a major constraint is half of their counterparts in the Sub-Saharan African and Asia countries. Cost and time spent on acquiring electricity were also higher in the Less Developed Countries compared with that of High-Income Countries. However, this study is examining the effect of electricity on the performance of SMEs in Nigeria.

The effect of electricity power outage on SMEs in Nigeria posited that, the current electricity crises in the country were costing the SMEs over US $686.4 million of annual sales. The SMEs continued to record a huge loss day by day as a result of poor electricity supply. These have been partly blamed on market and state failures, which have led to the poor electricity supply.

In the interim, a lot has equally been said with regards to the appalling state of Nigeria’s epileptic power sector according to Akuru and Okoro (2009). Energy consumers do not get electricity supplied to them because the local utility companies do not get power transmitted to them from the electric grid. The managers of electric transmission are quick to accuse the generating stations of insufficient generating MW capacity. And as if trading of blame has become routine with each of these sectors, the generating stations either claim they do not get enough gas to power their plants or they turn around and claim that the transmission companies themselves cannot boast of a strong transmission backbone to transmit what is being generated.

Indeed, modern energy services can impact on the development of SMEs to a great extent. Issues that can affect the development of SMEs such as gross undercapitalization, decrepit infrastructural services, high start-up costs, corruption, and government indifference have been identified by Oboh (2002). A particular finding revealed the high cost of providing back-up energy (partly infrastructural) for SMEs which sometimes is as critical as three times the cost of publicly supplied electricity as discussed elsewhere (Adenikinju, 2003; Essien, 2001).

In Nigeria and perhaps generally, SMEs classification have been done on the basis of capital investment and employed labour force while other criteria could be the annual turnover or gross output as mentioned by Anyanwu (2001). Until very recently, energy was rarely cited as one of the problems militating against the performance of SMEs in Nigeria and elsewhere.

Several policies has been formulated by government at all levels (Federal, States and local government) in Nigeria to enhance growth and development of the SMEs as they contribute significantly to the GDP of the nation. This policies and objectives can only be realized when there is adequate power supply to the small business. Currently in Nigeria, managers of small business spend huge sums in procuring generating sets, fuel and the maintenance of the generators to operate their business successfully. This has however skyrocketed the operational cost and reduced their performance.

1.2 Statement of the Problem

The numerical value of Nigeria’s GDP as at 2004 (and by all standards, now, because there have been no noticeable improvements) is a consequence of its poor electricity structure and this has affected the performance of SMEs, which is considered as a yardstick for economic independence of nations. However, a number of options that can be used to checkmate this unfortunate development exist.

For instance, if the Nigerian government should consider the criticality of SMEs and fast-track programmes on the expansion and optimal operation of the current energy mix; within a very short time frame, these could be measured as an effort towards relief. SMEs villages/clusters can be built to promote industrial activities on the basis that such basic infrastructure like electricity, which is needed for spin-off as well as for sustainable operation, is collectively and affordably provided by the relevant host authorities to investors and operators.

Standalone renewable energy (RE) systems are increasingly getting better than generating sets which still requires expensive and pollution-prone fossil fuels for their operation. Hence, efforts are needed by relevant authorities, tasked with the promotion of SMEs in Nigeria, to facilitate the provision and subsidized costs of procuring these renewable energy systems – some of which are readily available for small-scale use.

1.3 Objectives of the Study

The following are the objectives of this study:

To examine the impact of electricity on the performance of SMEs in Nigeria.
To identify the effectiveness of the electricity generating and distributing companies in Nigeria.
To examine other factors affecting the performance of SMEs in Nigeria.

1.4 Research Hypothesis

Hypotheses One

Ho: Poor electricity supply does not significantly constrain the operational performance of small scale businesses
Hi: Poor electricity supply significantly constrains the operational performance of small scale businesses

Hypothesis Two

Ho: There is no significant relationship between electrical power outage and operational performance of small scale industries.
H1: There is significant relationship between electrical power outage and operational performance of small scale industries.

1.5 Significance of the Study

The study is expected to bring to the fore the challenges small scale businesses face due to unreliable supply of electricity in the region as a way of attracting the needed policy attention that could go to alleviate their plight. It is also expected to highlight on the investment potentials for electricity generation, transmission and distribution infrastructure that the private sector could take opportunity of in closing the prevailing deficit. This is especially important considering the recent introduction of electricity market reform in Nigeria.

1.6 Scope and Limitation of the Study

This study is primary concerned with the the impact of electricity on performance of SMEs in Nigeria. This study/project work covers Kano State Nigeria. The researcher encountered some constraints, which limited the scope of the study. These constraints include but are not limited to the following

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7 Definition of Terms

Electricity:

Is the set of physical phenomena associated with the presence and flow of electric charge.

Power Outage:

Is a short or longterm loss of the electric power to an area.

Operational Performance:

Firm’s performance measured against standard or prescribed indicators of effectiveness, efficiency, and environmental responsibility such as, cycle time, productivity, waste reduction, and regulatory compliance.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concerned with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
Chapter three deals on the research design and methodology adopted in the study.
Chapter four concentrate on the data collection and analysis and presentation of finding.
Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain a critical analysis of the impact of electricity on performance of SMEs in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations are made, which in the opinion of the researcher will be of benefit in addressing the challenges of power outage in Nigeria

5.2 Summary

This study aimed at having a critical analysis of ascertain a critical analysis of the the impact of electricity on performance of SMEs in Nigeria. Three objectives were raised. These objectives include: To determine the impact of electricity supply on the operational performance of small scale businesses in North West Nigeria, to evaluate the state of power supply in the country, to ascertain the relationship between electrical power outage and operational performance of small scale industries.

5.3 Conclusion

Based on the above findings pertaining to the objectives of the study the following conclusions are drawn.
The impact of electricity insecurity on SMEs’ productivity is clearly variable, and depends on factors related to both the external context that a firm is operating in and to its internal capabilities. Variation in the findings between countries appears to be related to differences in geography, structure of the economy and SME sector, and the overall business environment. This is consistent with the findings of previous research (World Bank, 2010; Cissokho and Seck, 2013). The statistical analysis, however, does not explain the difference between perceptions, amounting to aconventional wisdom, that electricity insecurity is a major constraint on SMEs’ operations and growth and the empirical evidence that its impact on productivity is limited. The Enterprise Surveys themselves show that firms see the quality of electricity as a major business challenge, though between the two categories of informants in this study, SMEs and stakeholders, it was stakeholders who perceived outages as a bigger problem. Hallward-Driemeier and Aterido (2009) suggest that firm characteristics affect the importance of perceived constraints. It is also possible that perceptions are influenced by the binary nature of electricity supply, either you have it or you do not have it, and by the frustration of managing with outages which may not be reflected in measurable costs.

5.4 Recommendation

Based on the findings of the research, the following recommendations have been drawn:

Government should seek ways to support SMEs and provide the needed infrastructures such as education to aid their survival and also SMEs should work on ways to attract government interest and attention.
SMEs should also do more to educate its employees entrepreneurially in order to enhance their performance and thereby the survival of the enterprise.
Entrepreneurs should also locate their businesses where there is higher proximity to power supply as it will boost their productivity and profitability.
Government should try as much as possible to provide another means of transportation apart from road as this will ultimately lead to more effective product/service delivery.
SMEs should outsource for and utilize more sophisticated technology in its operations as this will increase their sales and give them an edge over their competitors.

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