Impact Of Power Outage To Small And Medium Enterprise In Nigeria

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Impact Of Power Outage To Small And Medium Enterprise In Nigeria


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 in Nigeria.


Table of Contents


Preliminary Page(s)

  • Title Page
  • Declaration
  • Approval
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of Content

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, www.agcs.allianz.com). 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.


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

This study analyzed the impact of power outage on small and medium enterprises in Nigeria. The study applied survey technique. One strong outcome of the study is that the poor state of electricity supply in Nigeria has imposed significant costs on the business sector of the Nigerian economy.

The bulk of these costs come in the form of acquisition of very expensive backup power. However, the decision to acquire a backup is actually a rational decision on the part of the firm in order to insure it from larger losses arising from frequent and long power fluctuations.

The continuation of the existing state of power supply will no doubt continue to have a negative impact on the attempt by the government to diversify the production and export base of the economy away from oil. A situation where firms spend as much as 25% to 40% of initial investment on the acquisition of facilities to enhance electricity supply reliability has a significant negative impact on the cost competitiveness of the manufacturing sector.

Furthermore, as the results of our analysis have shown, small-scale operators are more heavily affected by the infrastructure failures. In many instances they are unable to finance the cost of backup necessary to mitigate the negative impact of frequent outages. Hence, they have to bear the full burden of electricity failures. Small-scale operators that could afford to back up their operations have to spend a significant proportion of their investment outlay on this.


5.2 Recommendations

Based on the result obtained from the research work and conclusion drawn, the following recommendations will put more emphases on increasing the level of power supply in Nigeria.

  1. Government should increase its funding of the electricity sector to at least 15-25 percent on annual budget. This is also in recognition of the fact that government expenditure are constrained by scarce resources available to its executing budget. But the upward review of funds to the power supply and small scale enterprise sectors has the capacity of generating a great impact in terms of economic growth. Therefore, priority should also be given to power supply sector.
  2. For small and medium scale enterprise survive in the Nigeria business environment that is becoming more and more competitive, it has to apply the result of scientific and technological revolution in its production. In other to progress, there is the need for investors to acquire technology know how, in Nigeria for instance, the national office of industrial property (NOIP)
  3. There is also a need for an opening of the market for greater competition in the supply and distribution of power. Increase in the levels of competition would yield quality and efficiency in supply and service delivery. Since 1962 till date, the electricity supply market has not been opened up to competition. It has been dominated by a state monopoly, Electricity Distribution Companies of various states. However, a more competitive environment, where features such as price, efficiency and service quality would characterize the criteria for operation would contribute to the reliability in power supply.
  4. After looking through the problems and all the inefficacies of Electricity Distribution Companies, we draw conclusion that because of these set back in the power sector, it has a negative effect on productivity. This is because of the cost of doing business when there is power outage. The challenges for policy options towards attainment of sustainable thus including putting in place measures that will successfully address the demand and supply constraints. The measures should also facilitate the adoption and implementation of specific renewable energy resource such as solar for areas where the national grip system could not reach or not economically viable.
  5. The study recommends that regulatory bodies responsible for the energy sector must set some standards for the generation, distribution and costing of electric power where preference would be given to key sectors of the economy such as SMEs since they are known to provide jobs for a large number of people and contribute significantly to the economic growth of the country. Standards in the distribution of power are also critical to ensure continuous supply of power to industries. Two approaches for setting standards are recommended. Firstly, there is a need for the setting of a penalty for each standard power distributor that does not meet the required supply level agreed. Such penalties would be effective if they are compulsory and automatic (Waddams et al., 2002). Secondly, it is essential to create incentive scheme to reward power distribution companies’ that ensures the standards are being maintained and also eliminate the waste in energy supply (Bowdery, 1994).
  6. The government and other policy makers would have to place greater emphasis on facilitating equity capital. Equity capital provides a base for further borrowing, reduces businesses’ sensitivity to economic cycles, and provides SMEs with access to syndicates of private and institutional venture capital suppliers. There could also be policies aimed at encouraging SMEs to access public equity capital through the reduction of listing requirements and subsidizing flotation cost. These policy prescriptions could go a long way to improve Nigerian SMEs’ access to long-term financing to spur up growth.

Impact Of Power Outage To Small And Medium Enterprise In Nigeria


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Frequently Asked Questions


How do power outages affect businesses?

The responses are a clear indication that power outages business. to consider. Although this may have less o f an effect on impact on other businesses is clear. Some businesses make use petrol or diesel f

What is the power outage map?

Power Outage Map is an ongoing project created to track, record, and aggregate power outages across the United States. 

Are you prepared for a power outage?

When hurricanes, snowstorms, or thunderstorms strike and take out the power, it’s good to be prepared with alternative power sources to run the day-to-day necessities such as heat or to keep the refrigerator going. Shopping for a generator can be difficult as there are so many choices.

How long will the power be off?

We just have blind faith it will be there when we need it. How long will your power be off? U.S. national averages show for minor events, which excludes natural disasters, you can expect wait from 80 – 100 minutes for your power to be restored.

What should you do when your power goes out?

When the power goes out it can be frustrating, to say the least. Not knowing when your power will be restored can be even more frustrating. Be patient, maintain communication with your utility company, report any damaged equipment/lines in your area, and begin to assemble your plan for safety, food, and water.

What caused the power outages in Gauteng?

The initiative will first be tested in Aspen Hills, Gauteng, before being introduced to other areas. Officials said most outages were caused by cable and steel theft. Johannesburg City Power officials worked through the night to restore electricity to a number of areas.

Why is there no power in Johannesburg right now?

Many residents are without electricity this evening in the northern parts of Johannesburg after the delta substation lost power due to lightning. The city has confirmed technicians are working to restore power. City Power says the outage is due to a faulty cable at the Hopfield substation in Lenasia.

Why are there power blackouts in South Africa?

The real reasons for power blackouts in South Africa. The real reasons why South Africans are experiencing power blackouts are the delay in the completion of the Medupi and Kusile power stations, and the poor state of Eskom’s local power distribution network.

Where are you affected by power cuts in Johannesburg?

Joburg City Power says an unexpected power outage has affected some areas including Thembelihle, Rietfontein and Lenasia. City Power says the latest incidents of cable theft in Johannesburg have led to power cuts in the Booysens Reserve, Aeroton and Nasrec showgrounds.

How long does food last in a power outage?

There are two figures to keep in mind when the power goes out and you’re assessing whether to keep your food: 4 hours and 48 hours. If the doors remain closed, the refrigerator will keep food cold for about 4 hours. If a freezer is full, it will keep the temperature cool enough for approximately 48 hours.

How long will my battery last if the power goes out?

But many of our customers have asked us, “How long will my battery last if my power goes out?” Good news: Your battery backup system could give you power for several weeks, while continuing to charge from your solar panels … even while the power is out. Let’s talk about that.

How to prepare your home for a power outage?

Have a cooler and frozen gel packs handy in case you have to remove your food from the refrigerator to keep it cold. Buy dry ice or block ice to keep your food cold in the refrigerator, if you think the power will be out for a long time. Keep refrigerator and freezer doors closed.

How much energy does a home battery use during a power outage?

During a power outage, assuming you have a fully charged home battery, you will be able to use almost all of the 10 kWh of stored energy. The reason why you cannot use 100% of this energy is that due to the chemical composition of many home batteries, there must always be a minimum charge present fuel in order to run. The longer the power outage, the more fuel is needed to keep the generator running.

How many businesses complete the power outage survey?

The questions then if damages to equipment occurred due to power outages. The and the cost involved in using these measures. Not all small the study. A number of businesses declined to participate due to the income-related questions in the questionnaire. Other in the survey. A total of 54 businesses completed the

Why are there so many power outages in Johannesburg?

Although load shedding is mostly something of the past, ageing infrastructure, lack of maintenance and cable theft cause almost daily power outages in the City of Johannesburg (CoJ). It is especially the north western parts of CoJ that have a high incidence of power outages that impact small businesses.

How long does a power outage last?

Time length, the power outages appear to be shorter in length. between one and three hours long. 4). Although 20.4 per cent of all businesses stated that it had problems of electricity supply can still be seen. Another 20.4 per between two to three weeks ago.

How do power outages affect business downtime?

Downtime as a result of power outages can cost your business a significant amount of money. Power outages can impact your bottom line and affect ongoing business operations. Monetary losses due to downtime can vary based on the industry, length of the outage, time of day, and the number of people.

How much do power outages cost your business?

Power outages can impact your bottom line and affect ongoing business operations. Monetary losses due to downtime can vary based on the industry, length of the outage, time of day, and the number of people. ITIC reported that 98 percent of organizations say one hour of downtime costs over $100,000.

What happens to businesses when the power goes out?

Financial Corporations: Companies involved in the stock market can lose out on millions of dollars in a fraction of a second if a power outage occurs. Because transactions happen every second, even a short-term outage can have a drastic impact on businesses.

What are the different types of power outages?

Power outages can include short-term or long-term loss of electric power to a specific area. Outages can affect homes, businesses or entire cities. There are a few types of power outages that your business may experience: 1. Brownout: The voltage drops and causes dim lights. Brownouts can cause electrical equipment to malfunction.  

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