Impact of Nigerian power outages on small and medium-sized businesses
1.1 INTRODUCTION TO THE STUDY
Electricity is an integral part of practically every production procedure. Therefore, limited supply has the ability to disrupt the direct and/or indirect economic operations of businesses. In the literature, a frequent method for demonstrating the vital economic importance of energy is to calculate the output loss associated with electrical interruptions (Uchendu, 1993). Electricity contributes directly to enterprises’ output as a separate input, and indirectly as a factor of the extent to which other direct inputs, such as capital equipment, are utilized (Adenikinju, 2005).
An alternative approach, based on self-assessment, is a subjective process in which enterprises are surveyed and asked to quantify the loss they incur due to power outages. This approach is predicated on the premise that enterprises are in a position to provide relatively accurate valuations of how much it costs them to replace machinery or equipment more frequently or to repair damaged machinery or equipment, as well as to assess the lost production resulting from idled inputs. A straightforward method for calculating the cost of power outages consists of summing the figures supplied in the survey. Nonetheless, numerous biases may affect the outcome, since enterprises may have a tendency to overestimate the costs spent, so overemphasizing the constraint that electricity poses to their business activities (Uchendu, 1993).
Over the years, it has been recognized that the manufacturing sector is a vital driver of economic growth in any economy. According to Olayemi (2012), the manufacturing sector plays a crucial role in economic development because it acts as a catalyst that accelerates the pace of structural transformation and diversification of the economy; it allows a country to fully utilize its factor endowment and to rely less on foreign supply of finished goods or raw materials for its economic growth, development, and sustenance. Through financial allocations, policies, and proclamations, the Nigerian government has been attempting to boost and maintain the economic productivity of the industrial sector (Anyanwu, 1996). In addition to the constant drop in oil revenues, which have historically been the country’s primary source of income, efforts have been made to diversify the economy and increase industrial sector productivity. In this regard, Subair and Oke (2008) acknowledged that the electricity supply, which is mostly used for powering machinery in the production of various goods, is a crucial aspect that will boost the manufacturing sector’s productivity and contribute significantly to the economic growth. In response to this discovery, successive Nigerian governments have invested vast sums of money in the electrical subsector, but it appears that this has not resulted in a proportional improvement in the industrial sector’s productivity. The manufacturing sector in Nigeria still faces the issues of unpredictable power supply from the Nigerian Energy Power Authority (NEPA), currently known as the Power Holding Company of Nigeria (PHCN), and as a result, the high cost of electrical generation from private electricity power generators (Onugu, 2005; Aremu and Adeyemi, 2011). In a highly competitive and open economy like Nigeria, not all industrial enterprises could operate successfully on power generating sets due to the high cost of fuel and maintenance. Typically, the power generating sets that have become the principal source of electricity supply for industries who can afford them should function as backups or standby power in the event that government sources are interrupted (Okereke, 2010). However, due to inefficiency on the part of the government, the backups serve as the primary source.
Small and medium-sized businesses contribute considerably to the economic development of many developing and established nations through the creation of jobs and the generation of money. Data indicates that over ninety percent of companies registered in Nigeria are small and medium-sized enterprises. “The Nigerian private sector is comprised of approximately 300,000 small and medium-sized enterprises (SMEs), which employ more than 80 percent of the country’s workforce and contribute roughly half of the country’s gross domestic product (GDP), and therefore have catalytic effects on economic growth, income, and employment” (Mensah, 2004).
20 percent of India’s GDP, 45 percent of industrial output, and 40 percent of exports are generated by the country’s 30 million small and medium-sized enterprises (SMEs), which also employ 60 million people, generate 1.3 million new jobs annually, and produce more than 8,000 high-quality goods for the Indian market (Frimpong,2013). According to the research of Sanders and Wegener (2006), small firms play a crucial role in any economy in terms of employment, income, innovation, and the development of local marketplaces and supply networks. In emerging nations, the social and economic significance of SMEs is heightened. In these developing nations, the effects of employment and higher income transfer directly into the satisfaction of fundamental human needs such as health care, education, better housing, and risk buffers, etc. These occurrences also occur in industrialized economies.
According to Antoine et al. (2013), small and medium-sized enterprises (SMEs) use a combination of creativity and improvisation to develop local products and services to meet local demands with local resources. Their impact on the poorest members of the community is stronger due to the proximity of their employment, procurement, and sales activities. Frequently, small enterprises are able to transition informal activities into formal ones, contributing directly to the economic health of the market environment.
The power sector of the Nigerian economy has had a serious issue over the past decade. Failures in privatization, the rising cost of fuel, and a lack of public investment are the primary causes of the poor energy supply that manifests itself in regular power outages. This climate has unquestionably had an effect on economic activities, especially industrial output. The industrial sector contributes around 20% to Nigeria’s GDP and employs approximately 11% of the working force (YENIYF, 2009). Small and Medium-Sized Enterprises (SMEs), which make up 95 percent of all firms, play an increasingly important economic role, with their contribution to the gross domestic product (GDP) increasing from 17 to 21 percent between 2003 and 2006. (World Bank, 2007).
Several channels can be impacted by power outages, ultimately resulting in severe consequences on corporate productivity (Antoine et al., 2013). First, there is the efficiency channel, where discontinuous power supply equates to disturbance in the manufacturing process, resulting in idle productive resources and a reduced output level. Second, there are the expenses connected with the replacement or repair of broken machines and equipment, as well as the costs associated with the rotting of finished items or inventory. Moreover, power shortages result in additional costs for businesses, since they frequently must rely on alternate energy sources, such as hired or privately owned generators. Thirdly, there is the quality channel, which relates to the push to achieve deadlines in the face of predicted power outages, ruined inventory, or malfunctioning machines.
These occurrences could all impact the quality of a company’s product or service. This means that enterprises must develop additional goods to replace the defective or discarded units. Consequently, production costs grow further. Fourth, there is the uncertainty channel, which arose because firms were unable to foresee power interruptions with precision. This circumstance creates uncertainty on completing deadlines, obtaining goods from suppliers, and capitalizing on new market opportunities. In the end, it could cause businesses to idle more capital and thus recruit fewer employees.
1.3 OBJECTIVES OF THE STUDY
The purpose of this study is to analyze the impact of power outages on small and medium-sized businesses in Nigeria, using the Decoy electronics enterprise in Akure as a case study. Among the specific aims of this study are the following:
Determine the frequency of power outages in Akure’s manufacturing organizations.
Determine the impact of power outages on the output of the Decoy electronics firm in Akure.
Determine the price of alternative power sources and their effect on the profit margins of the Decoy electronics firm in Akure.
1.4 RESEARCH QUESTIONS
The following are the pertinent research questions linked to this study:
What is the frequency of power outages among Akure’s manufacturing companies?
Impact of Nigerian power outages on small and medium-sized businesses