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| Chapters: 1-5
| Pages: 65
IMPACT OF POWER OUTAGE ON SMALL AND MEDIUM ENTERPRISE IN NIGERIA
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). 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).
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, a case study of Decoy electronics enterprise Akure. The specific objectives of this study include the following:
1. To find the prevalence of power outage among manufacturing organization in Akure.
2. To ascertain the influence of power outrage on the productivity of Decoy electronics enterprise Akure.
3. To examine the influence of power outrage on customers’ satisfaction in Decoy electronics enterprise Akure.
4. To determine the cost of alternative sources of power supply and its impact on the profit margins of Decoy electronics enterprise Akure.
5. To examine the effect of erratic power supply on competiveness of Decoy electronics enterprise Akure.
1.4 RESEARCH QUESTIONS
The relevant research questions related to this study include the following:
1. What is the prevalence of power outage among manufacturing organization in Akure?
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). 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).
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, a case study of Decoy electronics enterprise Akure. The specific objectives of this study include the following:
1. To find the prevalence of power outage among manufacturing organization in Akure.
2. To ascertain the influence of power outrage on the productivity of Decoy electronics enterprise Akure.
3. To examine the influence of power outrage on customers’ satisfaction in Decoy electronics enterprise Akure.
4. To determine the cost of alternative sources of power supply and its impact on the profit margins of Decoy electronics enterprise Akure.
5. To examine the effect of erratic power supply on competiveness of Decoy electronics enterprise Akure.
1.4 RESEARCH QUESTIONS
The relevant research questions related to this study include the following:
1. What is the prevalence of power outage among manufacturing organization in Akure?
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