Fixing epileptic power supply in Nigeria could reduce ballooning costs borne by manufacturers, which have hindered their competitiveness and downed capacity utilisation.
Many manufacturers cannot produce on a larger scale and export to other countries because they struggle to get cheap alternative energy sources in the face of poor power supply from energy distribution companies.
In 2017, manufacturing companies in Nigeria spent as much as N117.38 billion in fuelling their plants to run daily operations, according to data from the Manufacturers Association of Nigeria (MAN).
This affected their ability to expand operations, acquire new machinery to produce more in order to give juicy returns to shareholders. More worrisome is the fact that the money was spent basically on alternative energy sources.
“The biggest challenge facing manufacturing companies as well as small- and medium-scale enterprises is power. This has led the deaths of many businesses in the country,” Muda Yusuf, director general, Lagos Chamber of Commerce and Industry, told BusinessDay.
The nexus between increased power supply and productivity is clear. When there is steady energy supply, operating costs of manufacturers fall, leading to the production of cheap products that can compete locally. This is not the case today as locally made products are much more expensive that imported ones owing to high production costs. When manufacturers produce competitively, they export and earn foreign exchange. Rather than seek foreign exchange to import inputs, they earn enough to buy inputs and also free it for the economy.
Today, Nigerian manufacturers are in a dilemma as they face cash-strapped and poverty-ravaged consumers, half of who earn N21, 000 or less. All the poverty indices show that Nigerian consumers are getting poorer.
Brookings Institute said in 2018 that 87 million Nigerians, or around half of the country’s population, were extremely poor or lived on less than $1.90 a day.
Just recently, the United Nations Development Programme (UNDP) said slightly over 98 million Nigerians are living in multidimensional poverty.
Data from the National Bureau of Statistics on Gross Domestic Product (GDP) by Income and Expenditure approach at 2010 purchaser’s values show that consumption expenditure of households has been declining at varying pace since it rose by 1.5 per cent in 2015. This has a far reaching implication for these companies with regard to sales.
Final consumption of households has declined by 8 percent from N43.1 trillion in 2014 to N39.66 trillion in 2018. Although the figures provided for 2018 by the state-funded data agency was limited to Q2 2018, BusinessDay arrived at a full-year estimated on an annualised basis.
Year on Year, the decline in household spending rose 1.45 percent to N43.7 trillion in 2015 but as Nigeria entered its first recession in more than two decades, household spending fell 5.74 percent to N41 trillion in 2016. While the rate of decline slowed in 2017 as households spent N40.78 trillion, the estimates for 2018 suggest a plunge to 2.75 percent.
Regular power supply could, perhaps, have cut manufacturers’ production costs to enable them meet the needs of a majorly poor population.
Availability of energy would traditionally enable these firms to employ more of this population. The National Bureau of Statistics says 23.1 percent of Nigerians are jobless, but the manufacturing companies cannot engage the unemployed population as they struggle in the face of high production costs.
According to USAID’s energy sector review, Nigeria has the ability to generate 12,522 megawatts (MW) of electric power from existing plants, but it is able to distribute around 4,000 MW.
Currently, manufacturers are beginning to seek energy themselves. They in self-generate a little over 13,000MW through alternative sources of energy in order to stay afloat.
In 2016, the Manufacturers Association of Nigeria, through its recently formed MAN Power Development Company, signed an agreement with Tower Energy Solution & Systems Limited for the supply of six to 10 megawatts (MW) of electricity to Henry Carr Industrial Cluster in Ikeja, Lagos. The impact of these agreements is yet to be known.
In major advanced economies of the world, the manufacturing sector takes the front burner in driving investment, raking in higher taxes, creating jobs and reducing poverty. The reverse has been the case for Africa’s largest economy as many firms have either been squeezed out of business, or produce below capacity.
In the first quarter of 2019, growth in the manufacturing sector slowed to 0.18 percent from the 2.35 percent growth in the previous quarter, based on NBS data. Even though the percentage share of foreign exchange earnings got from the sector grew, it still accounts for a meagre 10.9 percent of total foreign receipt in the period under review. Analysts argue that the sector has a great potential to grow if the challenge of power is fixed
“If this problem is solved, it would help in driving the needed investment that will boost liquidity in the economy,” Yusuf explained.
Manufacturing companies in Africa’s biggest oil producer suffered greatly from a recession that occurred in 2016 owing to a global collapse in oil prices. The fall in the oil prices caused a huge dollar shortage for the oil dependent nation which gets 90 percent of its foreign earnings from oil.
The dollar shortage caused the Central bank to devalue the naira, which dealt a bigger blow on most manufacturing companies since many of their raw materials are sourced abroad.
In August 2016, MAN and NOI Polls reported that 222 small-scale businesses closed shops, including 54 manufacturers, leading to 180,000 job losses.
The situation was bad for most companies especially given the high inflation—which rose to as high as 18.7 percent in January 2017—and slow economic growth that cut consumers demand.
A recent report by the NBS and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) shows that the number of medium scale enterprises dropped by 61 percent, from 4,670 in 2013 to 1,793 in 2017.
Analysts say the decline was as a result of the increasing operating cost affecting the growth of businesses as well as a reflection of the Nigerian economy in the last six years—particularly in periods of negative or sluggish growth in 2016/2017.
Power supply serves as an indispensable input in the MSME activities. Apart from its necessity for running many industrial machines, its role from productivity to human capital is enormous.
All business activity, especially industrial units, requires constant and effective flow of electricity. Electricity contributes greatly to product marketing. Constant electricity plays a vital role in storing finished goods ahead for demands thereby enhancing consumer satisfaction.
Many developed countries in the world became competitive on the basis of regular energy access. Many have also long embraced energy mix. Today, a number of firms ranging from those in China to Indonesia are employing energy mix to increase output and cut costs.
In September 2017, a report by David Gardiner and Associates, a strategic advisor to organisations seeking a sustainable future, reviewed 160 of the largest global manufacturing firms in the United States. According to the report, entitled, ‘The Growing Demand for Renewable Energy Among Major US and Global Manufacturers’, 25 percent of manufacturers, including General Motors, Anheuser-Busch InBev, and Mars, have renewable energy targets while 83 percent have greenhouse gas reduction goals.
The report says that renewable energy, particularly wind and solar, is now among the cheapest and cleanest generation resources. It stated that manufacturers were pursuing that type of energy to help reduce costs.
As reported by Alyssa Danigelis of energymanagertoday.com, of the 160 companies surveyed, 18 have 100 percent renewable energy targets.
Even though some may dismiss this as an American example, the fact remains that this is happening across the world and manufacturing concerns world over are working towards being energy efficient.
The International Energy Agency predicts that renewable energy will comprise 40 percent of global power generation by 2040.
Nigeria has an advantage over the US, China and many countries in Europe, in that it is located in the sub-Saharan Africa where sunshine and wind are not in short supply. More so, solar panels are becoming increasingly cheaper, though reduction in cost will be determined by how much number Nigerian businesses and homes can buy.
Experts say Nigerian manufacturers must begin to take energy mix more seriously to bring down costs in the long-term.
Renewable energy may have shortcomings, but it is the future. More so, analysts believe that Nigerian economy needs radical policies that will cut poverty and enhance earnings. Such polices will empower the consumers and make manufacturers ready for the upcoming African Continental Free Trade Area.
Michael Ani
