By: Ogundipe Titilope

By: Ogundipe Titilope Electricity Challenges, Power Sector Reforms and Performance of the Nigerian Manufacturing Sector

Content • Executive Summary • The Energy Sector thus far • Various power sector Reforms • Snap Shot of the Manufacturing Sector • Possible Impact of reforms on the sector? • Literature Review • Theoretical Framework and Methodology • Findings Recommendation and conclusion

Data Acknowledgement • CBN – Central Bank of Nigeria • NBS – National Bureau of Statistics • EIA – Energy Information Administration • MAN – Manufacturers Association of Nigeria • PHCN – Power Holding Company of Nigeria

Executive summary- Power Sector reforms so far having no significant impact • Constant power supply is the hall mark of any developed country, the absence of this prolongs development process. • Various attempt at reforming - mere changes in name of the power authority and tariffs; • the sector is yet to be efficient • The total installed capacity is 7940MW • The “laudable” operating capacity is 4003.3MW from in 3804MW in 2012, for a country of about 170million population.

Executive summary- Power Sector reforms so far having no impact • Only about 40% have access to the erratic power that is supplied • The cost of generating individual electricity is almost N60/Kwh • Jan 2012 subsidy removal and the looming subsidy removal, probably the final one lurking around the corner- further increase in cost • The privatisation process behind schedule • the will power of FGN is being doubted • How long will Nigerians continue to bear the brunt of poor power supply?

Executive summary-Manufacturing Sector; worst hit by Power Sector failure • The cost of power as a proportion of total production ranges between 30%-35% in Nigeria, however it ranges between 5%-10% on the average in other countries (Adenikinju, 2005). • This reduces the competitive edge of manufacturing firms

Nigeria’s Power Sector

Power Sector- Nigeria and her trading partners • At 125 kWh per capita, electricity consumption in Nigeria is one of the lowest in the world • it is just 7% of Brazil’s and 3% of South Africa’s • Contribution to GDP barely above 3.5% • The spike in 2001 from 0.3% to 3.5%

…Power Sector- Nigeria and her trading partners • Brazil has 100,000 MW of grid-based generating capacity for a population of 201million people, • South Africa has 40,000 MW of grid-based generating capacity for a population of 50million people. • IMF- WEO revised global growth downwards from 3.5% to 3.3% • Possibility of BRINCS, very low without an efficient Power Sector.

The Power Sector thus far • Between 1992 and 1996 nothing significant was invested in the power sector • Installed capacity relatively constant explaining the poor performance

Nigeria’s ManufacturingSector

Snap shot of the Manufacturing Sector • Manufacturing sector has been a lagging sector in the economy with an average growth of 8.69% over the past decade • The pick up in growth from 5% in 2003 is as a result of the growth in cement industry from 3.8 to 10.1 in 2004 • The manufacturing sector grew from 7.63% in 2011 to 7.70% growth in the sector was

Snap shot of the Manufacturing Sector • The rule of thumb for any economy to be said to be industrialized • the manufacturing sector should contribute at least 15% to GDP. • Nigeria- contribution has hovered around 4% for the past decade Problems facing Manufacturing Firms

Brief Literature Review

Literature Review • Altinay & Karagol, (2005) and Ferguson, (2000) examined the existence of a long run relationship between energy use (electricity) and economic growth using a time series procedure with secondary data • Performance of the manufacturing firm is very low (Bamjoko (2009); Famade (2010) and Ikpeze et al, (2001)). • Larossi & Clarke (2011) and Malik, et al (2006) in their survey on Nigerian firms identified poor power supply as a major constraint to the performance of manufacturing firms • Efficacy of the power sector reforms- Okoro & Chikuni (2007) and Maduekwe, (2010) were historical, Nnaji (2011) was a bit descriptive

Theoretical Review • Romer (1986) states that production function of a firm is in the following form: • Y = A(R) F(Ri, Ki, Li) • Where: Y = Output; K = Capital ; L = Labour; A = technology; R = Research • Productivity and technology go hand in hand (Shaikh & Moudad) • Gbadebo and Okonkwo (2009) explained that Technology which is an endogenous factor is related to energy (electricity). • Technology is powered by electricity for it to be effective and efficient. • Electricity might not be the sole determinant of technology but is a necessary factor to ensure that technology is being utilized.

Theoretical Review • The theoretical basis for estimating electricity outages. • Consumer welfare loss when there is electric power failure (Adenikinku, 2005). • Five main approaches are used in literature to infer welfare losses from power outages. • Production function approach (Panel Analysis?) • Self assessment analysis • Economic welfare analysis • Contingent valuation • Revealed preference approach.

Methodology and Data Presentation -Industrial Survey -Descriptive Statistics

Methodology and Data Presentation • Two subsections • Analsis of Power Sector and Efficacy of Reforms- Secondary data- descriptive statistics (charts) • Analysis of Industrial Survey–Pilot study; Questionnaires & Interviews (Closed and Open ended) • Electricity Challenges • Performance of manufacturing firms • Perception towards ongoing privatisation • Sensitivity analysis Sampling • Three main industrial Zones: Lagos/Ibadan axis, Kano/Kaduna axis and Onitsha/Nnewi/Aba axis- 66% of electricity consumption. Lagos/Ibadan axis more than half • Multi stage sampling method-(Existing firms in Ibadan registered with MAN (Ibadan Branch) • Stratified sampling method- size and product category • Population -60 (2012) • Sample- 33% of Population • Questionnaires retrieved- 65% of sample

Data Presentation • Analysis of Electricity challenges • Duration of outage between 1-6hrs • Number outage 5 times a day • Extent of use of alternative energy 85% • 2 firms with direct lines had power supplied to them 23hours

Data Presentation • Performance of Firms • Materials lost • 70% • Delay in production- • 1 Hour • 69% had changed production techniques

Data Presentation • Knowledge about the reform • 92% to a good extent • Changes in power supply • 30.8% yes; 30.8% not at all • Customer relationship 46.2% yes 15.4% not at all

Data Presentation • In support of the reform • 46.2% • Reservation about their cost of production • Will power of government doubted

Findings, Recommendation and Conclusion

Findings • Manufacturing firms need to be on top of their game to stay in business • Though at a higher cost; employ various production techniques in order to minimise direct losses from the unexpected power supply • Manufacturers have changed their production technique such that there have been able to minimise their losses. varying production materials, • reducing the quality of products • planning work before production starts which saves cost of fuelling generators and cuts other costs, • publishing companies outsource printing of books to other firms -production of intellectual work with their computer system..

Findings • Impact of the Electricity Challenges on the Performance of Manufacturing Firms • The power supply has not changed since 2001 • The small-scale firms are worst hit by the electricity crisis because their complaints are not attended to. This is unlike the large scale firms that get responses within 1 day to 6 months. • The small-scale firms also cannot afford to get “direct-lines” from the power distribution office. • a maximum duration of 45mins • It was also discovered that the efficacy of power supply differ according to location of firms.

Findings • 69.3% of the respondents are in support of this Power Sector Reform at least to a good extent. However those in support of the system are skeptical about the effect it will have on the cost of production. • The basis for this is that with privatisation, there would be increases in electricity tariff. 53.77% of the respondents indicated that as far as the sector is efficient they do not mind the cost. • None of the respondents indicated that they opposed the reform. • some reservations, • 46.15% of the firms believe that the on-going reform will contribute very little in decreasing the cost of production, • 30.77% were indifferent, • only about 23% indicated that the reform might actually contribute to a reduction in cost of production and these firms where the large firms

Recommendations • Government will need to serve as a watch dog to the private investor • Committee of technocrats independent from government to assess tariffs made by NERC before it is published or made law. • An independent body should be established to receive customers’ complaint about the lackadaisical attitude of any distributing companies in attending to them, and report directly to NERC • A large percentage of manufacturing firms would prefer having a full day on Monday, then on other days power can be supplied between 8am till 12 noon and 2pm to 4pm • use of a prepaid billing syatem • Monthly meetings should be held with a representative of the firm as it regards electricity supply until the power supply is relatively stable

Conclusion • Significant changes in the performance of the manufacturing sector were not as a result of reforms in the power sector. • the manufacturers have adopted various production techniques to be able to still make profit. • The various Power Sector reforms over the years have not been effective and the power sector is deteriorating as supply cannot meet demand. • If the recommendations are adhered to, the nation might be some steps to becoming one of the industrialized nations, this may not be feasible in the year 2020 but it will still come to light.

Thank You for Listening

By: Ogundipe Titilope