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

2

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

3

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.

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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?

5

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

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Nigeria’s Power Sector

•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%

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USA

Germ

any

UK

S.Africa

Brazil

China

Egypt

India

Indonesia

Ghana

Nigeria

0500

100015002000250030003500

Capacity Generation in relation to Electricity Consumption per

capital

WATTS PER CAPITA

Power Sector- Nigeria and her trading partners

1995

1997

1999

2001

2003

2005

2007

2009

2011-200

0

200

400

600

800

1000

1200

Growth Rate % Share of Total Gdp

• 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.

GDP Growth: Nigeria and her Trading Partners

  IMF Diff. from Jan. 2013 WEO

  2012 2013F 2013F

World Output 3.2 3.3 -0.2

Advanced Economies 1.2 1.2 -0.1

Emerging Market and Developing Economies 5.1 5.3 -0.2

Eurozone -0.6 -0.3 -0.2

USA 2.2 1.9 -0.2

Japan 2 1.6 0.4

Brazil 1 3 -0.5

China 7.8 8 -0.1

India 4 5.7 -0.2

Nigeria 6.3 7.2 0.5

South Africa 2.5 2.8 0

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…Power Sector- Nigeria and her trading partners

• Between 1992 and 1996 nothing significant was invested in the power sector▫ Installed capacity

relatively constant explaining the poor performance

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1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

012345678

Total Electricity Installed Capacity (Million Kilowatts)

1974

-1976

1976

-1978

1978

-1980

1980

-1982

1982

-1984

1984

-1986

1986

-1988

1988

-1990

1990

-1992

1992

-1994

1994

-1996

1996

-1998

1998

-2000

2000

-2002

2002

-2004

2004

-2006

050

100150200250300350400

Investment in US$millions

The Power Sector thus far

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

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

050,000

100,000150,000200,000

The Industrial Component of Real GDP

IndustryCrude Petroleum & Nat-ural GasManufacturing

Source: NBS, Researcher’s Computation

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

05

10152025

ManufacturingReal GDP

%

Growth

Source: NBS, Researcher’s Com-putation

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•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

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Snap shot of the Manufacturing Sector

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

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• 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.

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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.

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Theoretical Review

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

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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

Mean

Median

Mode

Range

Min Max

Duration of Unexpected interruptions(hrs)

6 5 5 24 0 24

No. of Outages in a day5 5 5 8 0 8

Extent of Use of Alternative Energy sources (%)

85 80 80 60 40 100

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PercentNone 7.7Less than 1hr 7.71 hrs< x > 6 hrs 53.87 hrs< x > 24 hrs 30.8

Total 100.0

Data Presentation•Performance of

Firms▫Materials lost

70%▫Delay in

production- 1 Hour

▫69% had changed production techniques

Mean Median Mode Range Min Maxi

Materials Lost (%)

70 0 0 75 0 75

Delay in Production (mins)

60 0 0 80 0 80

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Changes in Production Technique PercentNo 23.1Yes 69.2Total 92.3

7.7

100.0

•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

Perception

(4) (3) (2) (1) (0)Changes In power supply (%) (2001 -2010)

30.8 23.1 7.7 7.7 30.8

Customer relationship (%)

46.2 7.7 23.1 0 15.4

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Data Presentation

•In support of the reform▫46.2%▫Reservation about

their cost of production

▫Will power of government doubted

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Data Presentation

Not at all Very little Some What To a good extent

Yes Fully0

10

20

30

40

50FREQUENCY (%)

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..

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• 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. 26

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

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Findings

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

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• 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.

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Conclusion

Thank You for Listening