Impact of Electricity on Performance of SMES in Nigeria
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 INTRODUCTION
This chapter reviews the literature on the the impact of electricity on performance of SMEs in Nigeria. It discusses issues arising from the topic of discuss as viewed from different perspectives, with a view of giving a theoretical and empirical foundation to the study.
2.2 LITERATURE REVIEW
They are plethora of literature on the interaction of electricity crisis, industrial growth and economic development. Odell (1995) argued that for Columbia to industrialize, electricity supply and demand are important elements of the process. Iwayemi (1988) argued for the importance of energy Sector in the socio-economic development of Nigeria. He submitted that strong demand and increased supply would stimulate increased income and higher living standards. Okafor (2008) used descriptive analysis to corroborate the views of these authors by arguing that poor and inefficient electricity supply has adverse implication for industrial development in Nigeria. Oke (2006) attributed the non-competitiveness of Nigeria’s export goods to poor infrastructure especially electricity supply, which drives the running cost of firms. Archibong (1997) argued that the positive side of SAP could not be fully established due to administrative bottlenecks, rigidities and poor infrastructure, especially electricity supply. This undermined the effectiveness of fiscal and other incentives designed to stimulate the growth and diversification of the economy. Ndebbio (2006) argued that electricity supply drives industrialization process. He submitted that one important indicator whether a country is industrialized or not is the megawatt of electricity consumed. He further argued that a country’s electricity consumption per-capita in kilowatt hours (KWH) is proportional to the state of industrialization of that country.Ukpong (1976) established the existence of a positive relationship between electricity consumption and economic development. In addition, he submitted that the expansion of energy sector on the demand side is important factor in accelerating the growth of the industrial sector. Ekpo (2009) elaborated on the folly of running a generator economy and its adverse effects on investment. He strongly argued that for Nigeria to jump start and accelerate the pace of economic growth and development, the country should fix power supply problem. Aigbokan (1999) argued in his paper that fixing the energy sector is tantamount to shifting the production possibility curve of the country’s economy. Adenikinju (2005) provided a strong argument to support the importance of energy supply. The poor nature of electricity supply in Nigeria, he argued, has imposed significant cost on the industrial sector of the economy. This result corroborates the survey of the Manufacturers International Global Journal of Management and Business research (IGJMBR) Vol.2 Issue 4, feb. 2015 12 Association of Nigeria (MAN) 2005. In that survey MAN indicated that the costs of generating power constitute about 36 percent of production.
Electricity and business has a symbolic relationship (Velasquez & Pichler, 2010). The reason being that, it is used for different purposes ranging from production, storage, powering of equipment and display of product. The use of electricity consequently serves as input for production and a critical resource needed to make products. Electricity is therefore an essential commodity for all industries, including the manufacturing, service and distribution. Enormous amount of electricity is used by many sectors like manufacturing and transport for operation processes including storage and production. Electricity as a transformed unity in this respect serves as a commodity (Haanes et al, 2011). Ohio, Connecticut, Michigan, Vermont, Massachusetts, and New York all in the United States in August 14, 2003 experienced blackout that caused an estimated loss of $6.4 billion (Anderson & Geckil, 2003). Bental & Ravid (1982) researched on a simple method for evaluating the marginal cost of unsupplied electricity and assumed the cost of power outage to organizations using data on backup generators. It was the first study to indicate the cost of power outages to organizations. It was also estimated that decision makers act rationally and hedge by investing in backup generating plants in order to ensure themselves against part or total damages that can result from power outage or electricity failure. It was also assumed in their study that corporations are competitively risk neutral, and will equate at the margin, (the expected cost of self-generation of a kWh to the expected benefit from that kWh). Marginal cost of unsupplied electricity for Israel and the US was measured. The study incorporated risk aversion phenomenon in computing cost of power outages and also differentiates between absolute, unmitigated costs, and mitigated cost of power outages. Findings from the research paper indicated that the cost of power outage varies proportionally with reliability (low power outage time). US’s (United State) reliability is higher than that of Israel where reliability is lower but power outage cost tends to be higher in the US. Beenstock (1991) stated that there should be a refinement of the methodology proposed by Bental & Ravid (1982). Bental & Ravid (1982) said customers would be prepared to invest in backup as service becomes less reliable but would face a discontinuity (stop operating) at a point when risks associated with additional loss of service appear to be unimportant. Tambunan (2009) investigated on SME in Asian developing countries and found that power among the many obstacles to development of SMEs was mentioned by 62% of the 180 respondents used for the studies as being the prime obstacle to the development of SMEs. Deficiency accounted to 21%, sales limitation was 36%, deficiency was 21% and high production capacity accounted for 25% in the same studies. Burlando (2010) wrote on the impact of electricity on work and health: evidenced from a blackout in Zanzibar. Researcher established that, the large reduction in household income among those employed in organizations that required electricity for their operation was as a result of a month-long power outage in Zanzibar a town in Tanzania. Production hours or work hours had to be reduced for workers relying on electricity in order to perform their task by an average of 8% per day during blackout period. Amponsah & Braimah (2012) investigated the causes and effects of the frequent and unannounced blackouts on the operations of MSI in Kumasi. A sample of 320 MSI from three industrial clusters within Kumasi Metropolis were interviewed, seven institutions and two groups of apprentices. The research showed that MSI require constant supplies of power for their activities and that power plays a major role in MSI’s operations in Kumasi. The study for example, identified that cold stores need 168 hours, grinding mills need 70 hours, wood processing firms require 60 hours and printing presses require about 46.2 hours, of constant supply of power per week, sachet water producing firms need 37.2 hours, straightening and welding firms required 36 hours, spraying firms need 33, and dressmaking firms require 32.4 hours constant supply of power per every week for their operations. Meanwhile electricity supply in the country has lagged behind demand (less supply than demand). Researchers also recorded a 5.3% reduction in the quantity of power consumed by the MSI as against what they required for uninterrupted activities. Lack of alternative source of power during blackout hours rendered about 44% of workers of the MSI redundant (idle).
2.3 CONCEPT AND DEFINITIONS OF SMES
The use of any single definition of SMEs for multiple countries in diverse stages of growth and development can lead to policy distortion (Gibson & Van der Vaart, 2008). In spite of the aforementioned belief, there have been several attempts to arrive at a single and unifying definition for SMEs around the world. Some define SMEs in terms of firm size while others use skill of labour and turn over level. Still, others use the legal status and method of production of the firm (Abor & Quartey, 2010). SMEs are categorized differently from country to country and within countries depending on the objectives of various regulatory and incentive systems (UNIDO, 1999). The U.S considers SMEs to include firms with fewer 500 employees. Small firms are those usually with fewer than 50 employees whereas micro enterprises have at most about 10 workers. In Canada, SMEs are defined as businesses with fewer than 500 employees. Small businesses are those with fewer than 100 paid employees while medium sized enterprises have at least a 100 paid employees but fewer than 500 paid employees. Canada and the U.S have the same upper limits for medium sized enterprises but different upper limits for small businesses. The disparity in the definition of SMEs between these two countries is a recognizable trait in the definitions formulated by different international bodies and organizations such as UNIDO, the European Commission and the World Bank. UNIDO defines SMEs in terms of the number of workers the firm employs. But the definition of what of an SME is in developing countries is differentiated from that of developed countries. The definition of SMEs in developing countries is as follows: Large – firms with 100 or more workers; Medium – firms with 20-99 workers; Small – firms with 5-19 workers; Micro – firms with less than 5 workers. And for developed countries, UNIDO classified SMEs as follows: Large – firms with 500 or more workers; Medium – firms with 100-499 workers; Small – firms with 99 or less workers. The World Bank and the European Commission on the other hand defined SMEs based on their annual turnover level, asset base and the number of persons that the firm employs. The World Bank defined SMEs as firms with a maximum of 300 employees with an annual turnover level and asset base of not more than 15 million US dollars. While SMEs, according to the European Commission are firms with no more than 250 employees with an annual turnover level that does not exceed 50 million Euros and an annual balance sheet less than 43 million Euros. A further break down of the EC definition of SMEs definition in relation to the number of employees’ criteria is as follows: Micro-enterprises have up to 10 employees; Small enterprises have up to 50 employees; Medium-sized enterprises have up to 250 employees. As international organizations have tried to come up with a single encompassing definition for SMEs, individual authors and scholars have also come up with various descriptions of what SMEs are. Authors including Van der Wijst (1989), Jordan et al (1998), Michaelas et al (1999), and López and Aybar (2000) variously described SMEs either in terms of the number of employees, annual turnover level or both (Abor & Quartey, 2010). Gibson and Van der Vaart (2008) instead drew up a definition for SMEs that uses only the annual turnover level and uses neither the asset base of SMEs nor their employment level. They believed that the practice of using employment level and asset base leads to distortions in policy and if applied to any other sector may lead to numerous firms being categorized as small whereas it could lead a different result when the same size or definition is applied to different sector. Thus according to Gibson and Van dr Vaart (2008), an SME is a formal enterprise with annual turnover in U.S dollar terms of between 10 and 1000 times the mean per capita gross nation income at the purchasing power parity of the country in which it operates.
2.4 THE ROLE OF ELECTRICITY IN SMES PERFORMANCE
Mayer-Tasch (2013) asserted that the most dominant use of electricity among SMEs is for lighting and communication purposes. However, SMEs, especially manufacturing ones, have other major uses of electricity ranging from production and storage to powering of machines and office equipment. Within straightening and welding SMEs, electricity powers machines that aid in the production of metallic gates, canopies, scaffolds and anti-burglary devices. Sachet water producers use electricity to power machines that fill polythene bags with water, cut and then seal them. Food processing firms also use various machines that require electricity to power them for the produce to their product. Likewise, dressmakers use electricity to power machines that they use to sew dresses and shirts. The primary use of electricity within manufacturing SMEs is thus to power machines that are usually critical to their respective production process. There is symbiotic relationship between electricity and business. Energy supplies have a significant impact on economic activities (Velasquez & Pichler, 2010). In fact the manufacturing sub- sector consumes about 14% of generated electricity annually (Energy Commission, 2006).
There is a symbiotic relationship between electricity and business. Energy supplies have a significant impact on economic activities (Velasquez and Pichler, 2010). This is because it is used for varied purposes ranging from production, storage, powering of office equipment and product display. Consequently, the use of electricity serves as input for production. This makes electricity an essential commodity for all industry types- manufacturing, service and distribution. Various sectors of the economy such as manufacturing and transport use enormous amounts of electricity (Haanes et al., 2011) for operation processes including storage, production. It is a critical resource needed to make products. In this respect, electricity as a “transformed unity” serves as a commodity. Consequently, suppliers of electricity have a strong influence on the buying organisation’s ability to gain a competitive advantage and provide solutions to their clients. This is because operators of SMEs have a high dependency on electricity as a standardized input, with-out it they cannot produce to satisfy their customers. This dependency on suppliers therefore explains the value of electricity to SME operations along two trajectories namely: supply risk and reliability of supply (Haanes et al., 2011) The supply risk trajectory is a critical factor along the perception of electricity as a resource for the operation of SMEs (Halldorsson and Svanberg, 2013) In a report by UNIDO (2009), it was revealed that, in spite of the abundant resources Africa is endowed with, it still struggles with supply challenges in electricity. According to the UNIDO (2009) finding, only 26% of house-holds have electricity making Africa the lowest in electricity penetration in all the continents. UNIDO (2009) reported that, an estimate of 547 million people in Africa lack access to electricity. Many reasons have been put forward by researchers and practitioners as the causes of such a predicament.
2.5 SMEs CONTRIBUTION TO EECONOMIC DEVELOPMENT AND GROWTH
Significant players to national growth, whether one contemplates the state of a developed economy or a developing economy. Aside being vital sources of employment and income in many emerging countries, SMEs with their malleable nature have a better flexibility to fluctuating market situations, making them better suited to withstand recurring downturns. The scattering of SMEs across the country also encourages better supply of revenue, and creates extra value in raw materials and products, even as they bring about effectiveness in domestic markets. Small businesses nonetheless thrive because larger public companies create opportunities through forward and backward linkages, and governments serve as operational institutional support for creating market access and providing a favorable environment.
“Electricity is today’s most important energy form for small and medium, and large-scale businesses. Secure supply of electricity at transparent market prices, and high and well defined quality standards are crucial to economic growth and our whole way of life. Energy supplies have a significant impact on economic activities” (Velasquez and Pitcher, 2010). This is because it is used for diverse purposes extending from production, storage, powering of office equipment and product display. Access to power enlarges the number and diversity of business and job prospects available. Electricity means that businesses, such as hair salons, bakery and welders, all of which rely on energy to function. Energy also leads to the formation of new markets, businesses and job openings, which offer more opportunities for individuals to earn an income and lift them, their families and their communities out of poverty. Electricity provides business owners with access to online information and resources. Power provides business owners with information that is critical to operating their business successfully, whether that information is about local or national markets, new economic policies or tax regulations. This allows small business owners in rural areas to involve the wider business community and learn best practices from other individuals working in the same industry. A lack of a “consistent access to reliable power costs businesses and the economy as a whole. Even with access to energy, unreliable power makes operating a business even more challenging than usual. African manufacturing enterprises experience power outages 56 days a year on average. As a result, firms lose six percent of sales revenues in the informal sector. Where back-up generators are limited, losses can be as high as 20 percent. These losses have severe consequences for the health and growth of the wider economy, not to mention the dramatic impact in achieving other development objectives outlined by the Millennium Development Goals”(Gretchen, 2013).
