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IMPACT OF POWER OUTAGE TO 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?
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