CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Power supply whether to large corporations or SMEs is a very critical factor for ensuring performance. Access to a reliable power supply is widely considered as vital to the operations of most small and medium-scale businesses. Surveys suggest that, in most developing countries, firms themselves consider access to electricity to be one of the biggest constraints to their business. Inadequate electricity services can constrain business operations because a supply of electricity may simply be unavailable and, if it is available, securing a connection may be difficult and the supply unreliable, even before its cost is considered. High quality and accessible infrastructure encourages productivity, business growth and investment, but when it is poor and unreliable, businesses’ productivity and growth suffer. An unreliable electricity supply – electricity insecurity – can affect several aspects of business operations. The most significant impacts to productivity can be due to forced and unexpected halts in manufacturing processes, including running assembly lines, using machine tools, or producing textiles. Communications, delivery times, lighting and refrigeration are also affected by electricity insecurity, with consequences for the routine operation of businesses and their ability to ensure delivery times.

Research on SME problems in Nigeria have so far concentrated on variables such as product and service development challenges, difficulties in accessing finance, competitiveness of SMEs and government policy and intervention in the area of SME development (Abdullah, 2013; Olumuyiwa and Mnse (2008). Whiles these variables were studied independently, there is a relationship between other variables like the price of energy (electric power) and an SME’s capacity toproduce optimally, its sales volume and labour cost. For SMEs in particular and for national economic development in general, the activities of electric power providers are vital and they need to be monitored because “in the utilities industry, where fully/sufficiently competitive environments are not achieved, the general public’s interests are at risk, either through development in general, the activities of electricity power providers are vital price exploitation, or through the degradation of quality of supply and customer services” (Chau, 2009).

Nigeria has an abundant supply of energy sources. It is endowed with thermal, hydro, solar, and oil resources, and yet it is described as an energy-poor country because the sector is relatively under-developed. The statistics available show that only about one third of Nigeria or approximately 40 per cent of the population has access to electricity. The distribution of electricity shows great disparities between rural and urban, and between residential and industrial areas in the urban centers (Ali-Akpajia and Pyke, 2003). The very poor quality of power supply in recent years has been a major constraint on the performance of most industries in the economy.

In this regard, adequate supply and distribution of electricity constitute a central development issue which cannot be over-emphasized. Apart from serving as the pillar of wealth creation in Nigeria, it is also the nucleus of operations and subsequently the engine of growth for all sectors of the economy(Ayodele, 2001). In recognition of the consolidating linkage between the energy sector and the other sectors of the economy, electricity development and utilization therefore have pervasive impacts one range of socio-economic activities and consequently on the economic progressiveness and wellbeing of citizens of the country. It is in the light of this facts that Okonkwo (2002) stated that there is a correlation between electricity supply, industrialization, and business growth in Nigeria.

However, Considerable efforts have been made to establish the relationship between energy consumption and economic growth. Very few studies have been carried out to investigate the relationship between the energy sub-sector (electricity supply) and economic development in Nigeria. Even the studies in this energy sub-sector and growth tend to be descriptive (Ayodele, 2001; Adegbulugbe and Akinbami, 2002), while others focus on electricity consumption (Ukpong, 1976; Subair and Oke, 2008) rather than supply (which is the bane of economic growth). One of the studies (Udah, 2010) that focused on electricity supply suffered from model mis-specification.  The present study hopes to fill the gap by correctly specifying the model and assessing the relationship between power supply and the performance of SMEs in Nigeria.

 1.2 STATEMENT OF PROBLEM

The role of electricity in Nigeria’s economy is prodigiously significant for growth and development. The need for a reliable supply of electricity to the SMEs is indeed an important factor for reducing their alternative cost (Ofosu-Ahenkorah,2008). This is because there is hardly any type of business in Nigeria that operates without electricity supply. In fact, electricity serves as raw material for most small businesses (Watson, Viney and Schomaker, 2002). However, Nigeria has recorded a very high rate of power instability over the years, and this has been a major panacea in most industries. As a result of this poor power supply, many small and medium-scale enterprises invest in their own stand-by generators to ensure an electricity supply, but these are often expensive compared to electricity from the grid. Generators also require some technical expertise as well as reliable supplies of fuel and spare parts. Yet, in sub-Saharan Africa and elsewhere own-generation by firms is reported to have increased in recent years.

Firms investing on alternative sources of power supply have discovered that it is quite expensive and in most cases, capital intensive to operate on a constant generator power supply.  Incidentally, in Nigeria, electricity as an essential service enjoys protection from competition and consumers really have little or no choice (Chau, 2009; Watson et al., 2002). Economically, this implies that if there are difficulties along the supply chain of electricity, then the nation’s growth and development will be vulnerable. Secondly, the interests of the general public, especially those who rely significantly on electricity, will be put to risk through price hikes and “degradationof quality of supply and customer service”(Chau, 2009). As a result of the above observations, a study of the effect of power supply on the performance small and medium scale enterprises (SMEs) is therefore a crucial and necessary step for informed government action on power supply. 

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to investigate the impact of power supply on the performance of SMEs in Nigeria. However, the specific objectives are as follows;

1. To determine the impact of power supply on the productivity of SMEs in Nigeria
2. To determine the impact of power supply on the profitability of SMEs in Nigeria
3. To determine the impact of power supply on the cost competitiveness of SMEs in Nigeria.

1.4  RESEARCH QUESTIONS

For the purpose of achieving the objectives of this study, answers will be provided for the following research questions listed below:

1. Does power supply have any significant effect on the productivity of SMEs in Nigeria?
2. Is the impact of power supply on the profitability of SMEs in Nigeria significant?
3. Does power supply have any significant impact on the cost-competitiveness of SMEs in Nigeria?

1.5  RESEARCH HYPOTHESES

For the purpose of this study which seeks to investigate the impact of power supply on the performance of SMEs in Nigeria, the following hypotheses have been formulated and will be tested based on the data that will be gathered by the researcher.

Ho1:   Power supply has no significant impact on the productivity of SMEs in Nigeria

Ho2:   Power supply has no significant impact on the profitability of SMEs in Nigeria

Ho3:   Power supply has no significant impact on the cost-competitiveness of SMEs in Nigeria