The effect of electricity supply on Nigeria economy in Oyo state - Dissertation Example

The effect of electricity supply on Nigeria economy in Oyo state Abstract The Nigerian economy is a developing economy and a major portion of its gross domestic product is a contribution from the small enterprises operating indigenously. For big commercial purposes as well as for small scale businesses in the modern day scenario electricity is indispensible. There is a unidirectional relationship between electricity consumption of a country and gross domestic product of that country. Nigeria has been plagued with perennial problems of energy crises for almost two decades now; problems are erratic supply of electricity power is prominent among them. This research focuses on the small scale businesses to study the effect of electricity supply in one of the states in Nigeria, Oyo. Primary research has been conducted to collect information and make quantitative analysis of the data. The inference drawn from this analysis suggests that there are a number of problems that augment the problem of power supply in the country and hinder the development of these enterprises in the country. The country has to make structural reforms in the power generating sector and improve the political and economic scenario of the country in order to allow these firms to make swift movements along the path of development. Table of Contents Table of Contents 2 Project Aim 3 Project approach 4 Literature Review 5 Critical analysis and evaluation 9 Discussion 21 Conclusion 24 References 26 Appendix 30 Project Aim According to the reports published by the government of Nigeria only 45 percent of the population in the country can consume electricity in their daily needs. Among them a meagre 25 percent are rural dwellers. There are vast potentials for development in the country for growth in terms of setting up provisions of electricity. The rural states in the country, such as, Oyo are yet to have enough access to electricity (Jacob, 2010). This necessitates a study on electricity supply in the states in Nigeria. This study takes Oyo as a representative of the rural areas in the economy to conduct a research on this state regarding the level of consumption of electricity by the country’s small businesses. The main aim of this research is to gain insights on the condition of electricity in the Oyo State of Nigeria. This study has been made to find answer to the following questions: How has monopolization in the power sector by the government affected availability of electricity in the country? Has liberalization led to greater access to electricity at the commercial levels in the state? Therefore the main research question can be stated as “How has the supply of electricity in Oyo State in Nigeria affected the small businesses in the state?” The study would be conducted following a guideline of certain specific objectives. These objectives would help the researcher concentrate on the aim of conducting the research thereby helping her to complete the research successfully. The research objectives are as mentioned below: To study the level of electricity supply in the rural areas in Nigeria To understand the extent to which commercial and industrial activities in these areas are dependent on electric power To study how modern policy changes have affected power supply in the rural areas in the country Project approach This section of this project is dedicated to present a summarized project plan. The aim of this project is to study a serious issue that has far reaching effects in the social, political and economic spheres in the country. However, this research work is constrained by several factors, such as time and resources, and therefore devising an appropriate project plan is very much necessary (Blackwell, n.d.). This plan sets the context of the research, the design of research and the methodology to be followed (Bangor University, 2013). The project plan is made taking into consideration the theme of the project and the competence of the researcher who is going to execute the relevant activities that the study would necessitate. For this project the researcher has decided to conduct primary survey on a set of 100 respondents to collect first hand data on the effects of electricity supply in the Oyo state in Nigeria. While conducting this survey the researcher would identify the ethical problems associated with this research and take care to follow the ethical guidelines. The researcher would avoid any sensitive issues related to caste or gender. This study would also not require the participants to reveal any of their personal information such as their name or any other information related to their personal lives. The researcher would make a literature review before conducting the primary survey. The existing information gathered from the secondary sources and the fresh information gathered from the primary sources would be critically evaluated to reach the final conclusion. Literature Review Energy leads to economic and technological development of a country (Adeyeye, 2008). It is the responsibility of governments of developing economies to make energy products available in reasonable price-quantity combinations to run the economy smoothly (William and Pinto, 2000.). Two different forms of energy are available and they are classified as non renewable and renewable forms of energy (Ogunniyi, Adepoju and Olapade-Ogunwole, 2012; Ajani, 1996). Electricity is generated from both renewable and non-renewable sources depending on the way resources are exploited. There is a unidirectional relationship between electricity consumption of a country and gross domestic product of that country (Akinlo, 2009; Gado, 2012). The economy of most states in Nigeria has been plagued with perennial problems of energy crises for almost two decades now (Kennedy-Darling et al, 2008). This problem has been manifested in various ways; four of the prominent problems are erratic supply of electricity power, acute shortages in stock of petroleum products faced on numerous occasions, sharp price increase of the fuel products, and the last but most concerning conflicts arising frequently among the population of the country. These conflicts occur between the movements led by labour organizations and the Government regarding the proper constitution of prices of petroleum or other commodities form which energy is obtained (CBN, 2000). There have also been conflicts over infrastructural development in the state. Provision of infrastructure undergoes two types of inefficiencies. The first type is that the public sector makes significant level of capital investment in the energy sector but cannot perform up to the desired level. The second problem is faced by the investors as a result of the first problem. Investors incur unnecessary costs to arrange their own infrastructural facilities privately, for example making arrangements of alternative power sources (Lee and Anas, 1989). Electricity is undoubtedly the prime source of energy for all industrial activities (Simpson, 1969). For big commercial purposes as well as for small scale businesses in the modern day scenario electricity is indispensible. Technical developments in almost every field in the economy, irrespective of whether the nation is developed or underdeveloped, are dependent on electrical power (Okoro, 2004). Development at all levels; national, state or local requires adequate supply of electricity. Electricity generation is a capital-intensive activity since it requires huge amounts of monetary funds, natural resources as well as human resources. Proper “generation, transmission and distribution” (Sambo, 2012, p. 1050) of electricity facilitates various activities in the country (Igbinovia and Odiase, 2009). Efficiency is not only a matter of maintaining high demand, but also, managing production and distribution of power (Adenikinju, 2008). However, most of the developing countries experience a shortage in supply of electric power compared to the total supply of demand in those countries. Nigeria is also among these countries. State monopoly over electricity in Nigeria has made the problem more complex rather than resolving the crisis of energy in the economy. This failure is physically represented by the National Electric Power Authority (NEPA) in Nigeria (Okoro and Chikuni, 2007; Iwayemi, 1994). Established in 1972, NEPA had the responsibility of maintaining state monopoly in power sector in the country. However, monopolization has resulted in production of less than the required level of power and inefficient distribution of electricity throughout the country. Productivity determines return on investment and less productivity leads to lesser returns (Adebayo, 2010). With the advent of the 21st century along with other enterprises owned by the state NEPA has been targeted to be brought under reform measures. Recently attempts have been made to privatize these enterprises and also take policies of liberalization or deregulation (Ayodeji, 2004). Hence it justifies the development of electricity generation infrastructure in the country. The scenario in Oyo, like many other states in Nigeria is not very eye-soothing. Power generation by the government sector in the country has been dwindling coupled with low participation by the private sector in this industry. In such circumstances, where availability of funds is constricted, the most probable solution to this acute problem of power supply would be brought by innovative and creative ideas (Sambo et al., 2012). Provision of adequate power supply is necessary to make sure that Nigeria finds itself listed as one of the industrialized nations of the world. To achieve this objective the nation has to effectively achieve three critical activities. These are; generation of adequate amount of power; ensuring that safe and effective transmission of power to all the parts of the nation and finally make sure that the power is distributed efficiently to all consumers irrespective of their social and economic status. Being a developing country, population growth in Nigeria portrays a highly dynamic feature. Therefore these activities have to be carefully handled in a creative and logical manner. The socio economic status in the state of Oyo has not yet reached a stable state. In most Nigerian cities, wood fuel is the most common form of energy for the average population (Ogunniyi, Adepoju and Olapade-Ogunwole, 2012). However, consumption of wood as fuel varies across the country according to seasons. Hence, the most reliable form of power that can be used regularly is electricity. Yet, electric power is available in scarce amounts and is so expensive that small business firms cannot make maximum use of electricity. Ability to consume electricity fluctuates widely among the developing countries and also within them. It depends largely on the per capita income in the state and the extent up to which urbanization has taken place. This is because rapid growth in electrification rates in the state reflects the level and effect of urbanization and the impact of programmes for rural electrification (Ishiguro and Akiyama, 1995). In the developing countries urbanization acts as critical factor that determine the quantity of fuel consumed and more importantly the type of fuel that is consumed by the majority of the small scale businesses. Indigenous industries in a state depend largely on the people’s income pattern and the type of fuel available at affordable prices in the economy. In general, the process of urbanization takes small businesses to higher levels of operations. The pattern of energy consumption in these firms changes. Small cottage firms located in rural areas use traditional forms of fuel. The impacts of urbanization facilitate business operations and therefore bring about increases in the level of income. The positive impacts of urbanization are manifold; however, one of the serious effects can be felt through the overall increase in the income level of these business enterprises (Oladosu and Adegbulugbe, 1994). With increase in disposable income available in the hands of people the pattern of energy consumption changes, taking these firms to a new level of performance. The change is visible through movements from consumption of convenient fuel resources, such as, biomass, to usage of more high-priced fuel, such as, kerosene and charcoal, to eventually the most modern and convenient energy type; electricity. Electricity is also among the costliest form of energy. The primary determinant of demand for power in small businesses are price of the electricity, efficiency of the machines that are run on electricity, ease of availability of electricity and also the social practices of the region (Leitmann, 1996). Critical analysis and evaluation The respondents for this questionnaire are the managers working in 5 small firms operating indigenously in Nigeria. Since they are working in the small firms themselves the researcher has chosen the respondents from these employees. The firms have been chosen from 5 different sectors so as to study the effect of electricity supply on these industries. These sectors are the agricultural sector, textile sector, transportation sector, information and communication technology and green energy and technology. The firms are poultry farming, uniform sewing firms, outsourced bus services, e-services firm and waste management firm. One staff, working in the managerial level, from each of these organizations has been selected to collect information from them. The respondents have been interviewed with the help of a set of close-ended questions, since the responses of close ended questions would be easy to analyse and represent using quantitative methods (Smartpsych, 2004; Vaivio, 2008, Kumar, 2011). Which entity is the main driver for the state’s power sector? The respondents have been asked to give their opinion about the major driver of the power sector in the economy of Oyo. They have been provided with the three options, such as, large industries, medium businesses and small enterprises. The respondents have been asked this question since they are best positioned to answer questions related to the small business information gathered from the answers would help the researcher gain insights about the power sector in the state. 60 percent of the respondents have agreed that the small businesses act as the primary drivers of power sector in the economy. 35 percent of the respondents have agreed that the medium enterprises have the demand for electricity that act as the most important customers for the power stations. 5 percent of the respondents have agreed that the large enterprises put forth the major demand from the power suppliers. Analysis Small scale enterprises are in general thought of as catalysts operating actively towards the process of economic growth of any nation. Although national development in the developed countries are largely carried forward by the large scale industrial activities, small enterprises play a significant role in the holistic development of any nation, irrespective of its existing level of economic development (Fatai, 2011). The corporate sector has not still achieved a developed state and the government sector is not competent enough to take a decisive role in the growth of the whole economy. This is the composite scenario in the whole of Nigeria and Oyo is also a part of it. Hence the small enterprises in the state act as a facilitator of growth in the economic and help in economic recovery and development. A vast proportion of employment generation occurs due to the small firms. Functions of the small businesses can be run in an advanced manner if they get uninterrupted flow of power. Since these industries are a major driver of growth in the economy, potential demand from these industries would also be a driver to the power sector. Figure 1 Is the current driver effective enough for accelerating the growth of the economy? The managers have been asked whether the current driver to the energy sector is effective enough to accelerate the growth of the economy. According to the responses of the majority of the participants, the current driver is effective enough for the growth of the economy. 85 percent of the participants have opined that the small business enterprises are the growth drivers in the Nigerian economy. The remaining 15 percent of the participants have however not agreed that these small enterprises are the primary growth drivers in the economy. These participants are the ones that had opined that the medium and the large enterprises are the primary drivers of the economy. Analysis The majority of responses reveal faith on the small enterprises that are considered a backbone of the economy. Hence electricity supply is crucial for the development of this industry. Since the state does not have the opportunity to start large new projects due to socio-economic-political factors, the current driver of the economy has to be preserved. Figure 2 Which one of the following, the political and economic factors in the economy or the technical factors of the firms or the capacity of the firms, require maximum transformation and development in order to augment the electricity supply in Oyo State? The respondents have been asked this question in order to understand the views of the organizational leaders in the small enterprises about the prospective development path of the firms. According to the replies of the respondents the political and economic factors are in urgent need to be transformed. 65 percent of the participants have responded that the economic and political factors have to be transformed in order to augment the electricity generation and its supply throughout the economy. 25 percent the respondents have opined that the technical factors of the firms have to be improved in order to efficiently utilize the electricity power. The remaining 10 percent have said that capacity of the firms have to be improved in order to efficiently utilize the available supply of power. Analysis Performance of the firms is dependent on the political and economic factors prevalent in the economy, the level of technological advancement of the firm and also the capacity of the firms to operate at a scale that would bring them the desired profit level relative to the industry. A lag in any of these factors would lead to a lesser performance by the firms. Hence transformation and development of these factors would be urgent. The responses of the participants point towards the fact that economic and political state of the state are acting as hurdles in the path of development of the small enterprises (Ehwarieme, 2010). Political conflicts are evident in the economy, which have to be done away with for making development in electricity supply in Oyo. Figure 3 Do you think development in the power sector in Nigeria is a co-operative process? The structure of the power sector is important in deciding the future path of the business enterprises in the country. Since power is one of the essential ingredients for the growth and proper running of any business organization, the managers have been asked about their opinion regarding the power supply structure in the economy. 85 percent of the respondents have not agreed to the statement that the power sector in Oyo State runs in a cooperative manner between the government and the private sector. 12 percent of the respondents have however said that the power sector is a cooperative enterprise between the government and the private sector. Analysis The government has recognised that the electricity sector has to be rehabilitated if it has to match the demand of the citizens. The Obasanjo-led-government has taken steps to restructure the national electricity body (NEPA) of the country and privatize the power supply industry (Ayodele, 2001). Lack of efficiency has led to inappropriate allocation and distribution of electricity. The government has therefore taken actions to deregulate and privatize this sector expecting to restore efficiency in this sector (Subair and Oke, 2008). Private players have been invited to invest in the power industry. In this situation the objective of the government is to improve the health of the industry by bringing in investments of high amounts and also of stable nature from the private entrepreneurs. It is thus an enterprise primarily by the private players and not much cooperative effort is noticed in the industry. Figure 4 Is the current electricity tariff affecting small businesses adversely? Currently the electricity tariff in Nigeria has increased to exorbitant rates. Therefore the managers of the small organizations have been questioned about their opinion on this phenomenon. 100 percent of the respondents have unanimously agreed that the current tariff rates are putting serious negative effects on the performance of their organizations. Analysis Electricity is an indispensible part of all growth oriented organization. The inception of Multi Year Tariff Order (MYTO) policy on the small and medium scale enterprises has led to a rise in tariff rates in the range of 70 percent to 440 percent in a single month (Agabi, 2012). If electricity tariffs are exorbitantly high, the producers would not be able to consume the desired level of electricity to produce at the optimum level. This is cutting the level of production short of the desired level that is required to maintain a profitable growth rate. Although rates are high, power supply is erratic. In order to save outage costs in any case of power failure, the firms need to make considerable investment on making arrangements for alternative sources of power and maintaining backup (Adenikinju, 2003). This drives up variable costs further to record high levels. The small firms are the worse sufferers of the problem of erratic power supply. Figure 5 Is the existing structure of Oyo’s power sector is effective enough to meet the needs of the small businesses in the state? The managers of small business have been asked whether existing structure of Oyo’s power sector is effective enough to meet the needs of the small businesses in the state. Responses of 65 percent of the participants show disagreement with the statement. 7 percent of these respondents strongly disagree. 35 percent of the respondents have said that the existing structure of the power sector is competent enough to meet the needs of the small enterprises in the economy. Analysis Common opinion shows the existing infrastructure of electricity stations and substations in the Oyo state is not very effective and in the past has failed to meet the demand of the growing small business sector in the economy. In a developing state development of infrastructure is the responsibility of the government (Adenikinju, 2005). Due to infrastructural insufficiency, distribution of power has been highly erratic, due to which the small firms have not had good access to electric power. Besides faulty infrastructure, the power sector has been governed by inefficient authority. Therefore the needs of the budding businesses have not been taken good care of, which has dwindled faith of the consumers. However, there are a group of population that still thinks that the structure of the state’s power sector is effective enough to meet the needs of the small businesses in the state. This might be the optimistic behaviour on part of the consumers about the recent policy changes that are occurring in the sector. New resources by private investors would increase the number of substations and also generate higher units of electricity. Strict and efficient management is an expectation from the private players. Hence the consumers or small business managers that have said that they consider the current structure of the power sector to be competent enough to serve the needs of the small enterprises have been supportive of the changes occurring in the industry. Figure 6 Does lack of government support hinder the growth process in the small businesses in the state? The small enterprises are run by private investors from the state independently. However, this question has been asked to the managers of these businesses in order to understand the effect of government’s regulations on the activities and performance of these firms. The managers have revealed that in the state lack of government support cats as a hurdle in the normal growth path of the firms. 70 percent of the respondents have provided similar opinion. Among the other 28 percent, 10 respondents somewhat disagreed and 18 percent plainly disagreed to the statement. Analysis Government support is an important part of success of any small enterprise operating in a developing economy. Although the firms are operating independently, since the power sector is still not totally privatized, the firm needs support of the government in order to be able to perform efficiently. The government acts as a coordinating force among the different forces operating in the economy that cohesively lead the firm to success. Figure 7 Do you think here are barriers to investment by international companies in the power sector in the state? With the current shift in policies from monopoly in the power sector towards privatisation the leaders in the small organizations have been asked to provide their own opinion regarding this matter. According to the poll 68 percent of the respondents have opined that there are barriers to investment by foreign investors. Analysis According to a majority of the respondents, foreign investors face barriers to investment in Oyo. As per the study made on the economy of Oyo the researcher has been able to infer that the barriers faced by the foreign investor is partly political and partly the state of technical infrastructure in the country. A basic good infrastructure helps an investor to build up on that infrastructure. Figure 8 Discussion This research has been conducted with the aim of studying the effects of supply of electricity to the small business firms in Nigeria. In order to obtain some concise results, the researcher has chosen a particular state to conduct primary survey on the respondents. It has been found form the existing sources of data that Nigeria is a developing country and it faces a plethora of problems (U. S. Department of State, n.d.). Availability of energy is one of the many problems faced by the country. One of the reasons that the country is facing constraints in electricity supply is inefficient distribution of power (Hall, 2006). Nigeria has a history of monopolization of the power sector. For approximately forty years the NEPA has been solely overseeing the energy sector. Public monopoly has been one of the key reasons behind infrastructural backwardness of the country’s power sector (Anas, Lee and Murray, 1996). However, this enterprise by the government has been utterly a failure in building a good effect on the industrial, commercial and domestic spheres. This lag has been created due to lack of supervision and financial and bureaucratic challenges (PPDC, 2013). The urban areas in Africa have good accessibility to electric power and the urban population accustomed to the utilization of modern fuels, such as, electricity. However, consumption of fuel depends on two important factors; adequate supply and level of incomes of the consumers. In the developing country population in urban areas are rising constantly and cities are rapidly growing larger. Hence in the face of rising demand limited supply is often a constraint. Since the economic condition in most of the Nigerian states shows a declining trend, investment activities in the energy sector are being limited. While the economic growth rates are not very good, population growth rates are quite high. High population growth rate coupled with low economic growth rate leads to decline in the real income rates. Hence level of investment also falls. Small scale investors cannot afford to pay the prices for the modern fuel. This is a relatively contradictory picture, since on one hand the demand for electricity is rising due to agglomeration of large cities in the state, and on the other hand, fall in real income is limiting purchasing power of the consumers. This situation has been explained by Karekezi and Majaro (2002) in terms of ‘urban poverty’. They have claimed that there is a growing gap between the poor and the rich in the states in Nigeria. This gap is visible in the urban areas more distinctly than in the rural areas. With widening of this gap between the rich and the poor, the proportion of poor population is rising in the entire urban population. There are two classes of population in the cities in Oyo; one group that are the rich class that can make maximum utilization of the supply of electricity in the state while the other lesser income group cannot afford to make enough consumption of the modern fuel. However, since the rich class is of a comparatively smaller size, investment activities are limited. Electricity has been found to be the most reliable form of power in the state. Hence there is a huge opportunity for growth in terms of supplying electric power in the country. With reducing interference by the government into the energy sector the private entrepreneurs have huge scope for investment in this sector. It opens up new avenues of development in the country. For development to be holistic the pattern of growth in the country should involve the entire range of population starting from the lowest income group to the high income population group. Also, this research shows that the entrepreneurs in Oyo state do not possess enough capital for investing in the energy sector. Production of power is a capital intensive activity and it requires huge amount of capital investment. The process also involves indivisible inputs which necessities production at a large in order to make the production a profitable one. Hence, the most viable option available is inflow of foreign capital. Foreign direct investment augments the process of growth in a less developed country. However, in order to take full advantage of the benefits rendered by foreign direct investments, the political as well as economic situation of the country as to undergo a vast change. Problems of incompetent management, corruption in top positions in corporate and political levels and lack of proper infrastructure does not allow the country to savour the benefits of inflow of foreign capital completely. In the Nigerian economy small enterprises contribute a major share to the growth figures in the economy. While foreign direct investment boosts the economic performance of the states, investment of foreign capital depends to a large extent on the economic health of the state (Portnoy, 2012). Conclusion The enterprises in Nigeria have undergone a phase of liberalization. The managers are therefore trusted with the responsibility to determine the ways in which it can reinforce the policies taken. The organizational leaders in Oyo State must visualise the ways to make electrification on a large scale so as to cover the entire state including the rural areas (Melodi and Ajeiigbe, 2012). The major sectors are the agricultural industry, the textile industry, the transportation sector, the information and communication technology and green energy and technology (Martins, 2013). The organizational leaders in these industries are therefore the prime consumers of the energy sector. According to a report published by The World Bank (1993) the energy crisis faced by Nigeria can be attributed to several factors. Some of these factors are inadequate supply and allotment of energy; inappropriate pricing policies for the energy products; conflicts within the planning system, scarce manpower and inadequate training for staff, among others. Several factors play their part in the supply of electric power. The level in which electricity is generated and the technology used in production of electric power, capacities of the sub stations, demand for power, pricing policy and institutional framework and its operational efficiency (Ayodele, 2001). The factors discussed above show that the there is an urgent need to review the country’s energy policies (Ikeme and Ebohon, 2005). Recently the Federal Government has made efforts to invite foreign capital and encourage private investment in the country’s energy sector. The capacities possessed by the existing networks of power stations and sub-stations are not adequate to meet the impending demand for power made by the Oyo State. Slowly with development demand for power by rural areas in the state is also rising (Melodi and Ajeiigbe, 2012). Improvements can be made in the distribution capacity of the networks of power stations by upgrading the voltage of power station networks existing at present. It would also solve the overloading as well as voltage fluctuation problems. Installation of few more substations would bring relief to the existing overloaded power stations. 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Yes No Don’t know 3. Which of the following factors requires maximum transformation and development in order to augment the electricity supply in Oyo State? Political and economic factors Technical factors Capacity of the power stations 4. Development in the power sector in Oyo is a co-operative process? Strongly disagree Disagree Somewhat disagree Neutral Somewhat agree Agree Strongly agree 5. Is the current electricity tariff affecting small businesses adversely? Yes No 6. The existing structure of Oyo’s power sector is effective enough to meet the needs of the small businesses in the state. Strongly disagree Disagree Somewhat disagree Neutral Somewhat agree Agree Strongly agree 7. Lack of government support hinders the growth process in the small businesses in the state. Strongly disagree Disagree Somewhat disagree Neutral Somewhat agree Agree Strongly agree 8. Do you think here are barriers to investment by international companies in the power sector in the state? Yes No Read More