How power generator killing Nigerian manufacturing sector
By Charles Nwaoguji
Manufacturing in Nigeria is beset with challenges; among them is power supply. Most firms rely on “emergency” power generators to run seamless operations, adding to costs. The cost of running the generator was a major challenge facing manufacturing sector.
The challenges faced by manufacturers are probably best put by Engr. Mansur Ahmed, president of the Manufacturers’ Association of Nigeria, in remarks to the media in January 2019: “A situation where you generate your own power for production does not make you competitive, because whatever is produced in this country is produced at a higher cost when compared to other parts of the world.
The same goes for the transportation system as we still move our goods via roads, even the heavy duty goods. Such goods which should go by rail, lack enough rail lines to carry them. There is a need to develop the transportation sector to the point where it can support the manufacturing sector and also support the economy.”
For more light on these challenges, a report on the Nigerian manufacturing sector by the National Bureau of Statistics (NBS) in 2014 put them as follows: inadequate and epileptic power supply, high taxes, poor infrastructure, and supply variability of rain-dependent agricultural inputs. There are some strengths, the NBS observes; labour is cheap, domestic demand is buoyant, and some inputs are available and cheaper domestically.
Without adequate power supply, the economic hardship currently being experienced by many Nigerians may not ease soon as most businesses and operations are planning to shut down owing to lack of fund to power their generating sets with petroleum products.
Big and small businesses too many to mention have become moribund over the years in Nigeria due to acute power shortage and many more, according to the Chairman, Manufacturers Association of Nigeria, Kwara/Kogi states Branch, Mrs. Omolola Olabayo, agreed that many big companies had collapsed due to the country’s acute power shortage.
Olabayo , will follow. This brings to mind the case of Dunlop Nigeria Plc, the tyre manufacturing giant that collapsed under the weight of power shortage among other factors.
It will be recalled that Dunlop moved its production line out of Nigeria in 2006 leaving an N8bn tyre manufacturing plant, and other facilities in its Oba Akran Road, Ikeja complex, lying fallow.
After over four decades of production in Nigeria, Dunlop could not continue paying over $800,000 annually on self-generating electricity and paying half the amount as tariff for grid-supplied power, which was at best very erratic.
As such, a plant with a capacity to produce 300,000 tyres per annum and keep several thousands of Nigerians employed has become a yesterday’s pride.
Perhaps, other factors had contributed to the troubles of the company; it probably could have survived if power supply had been stable.
It is no longer a secret that majority of the multinational fast moving consumer goods industries have relocated a significant part of their production activities to neighbouring countries because of the acute power deficit Nigeria is suffering from.
The unfortunate situation is also denying Nigeria the inflow of investment in critical areas. For instance, a major telecoms equipment manufacturer chose Ghana ahead of Nigeria for the location of a regional technology hub because of the former’s electricity quagmire. Whereas, its biggest customers are in Nigeria.
The major challenge is inadequate supply and exorbitant cost of generating electricity. Energy cost constitutes about 40 per cent of production cost. This is the reason why Nigerian products are not competitive.
For instance, the average number of power outages per day across MAN industrial zones in 2014 is five times, while that of the number of hours that electricity was supplied per day was six hours in 2014. These are major constraints that impede competitiveness and exert overbearing pressure on the bottom-line of manufacturing concerns.”
MAN, claimed that electricity generation showed slight improvement in Q1, 2015 hovering around 4,000MW. It, however, decried that transmission and distribution of available electricity output were abysmal due to long time of systemic infrastructure decay.
These scenarios, MAN lamented, contrast with the huge energy need of the industrial sector including manufacturing. To manufacturers, the promise of adequate and stable electricity for industrial production as embedded in the objectives of the power sector reform remains regrettably elusive, according to Jacobs.
The review document said, “Ironically, in spite of the poor energy situation in the country, the Nigerian Electricity Regulatory Committee has maintained increase in electricity charges not considering its implication on the economy, especially the productive sector.
“The most detrimental is the so called fixed electricity charge which stood astronomically high across distribution zones with Kaduna at N580,600; Jos, N370,760; Yola, N358,331; and Abuja, N243,168 per month in MYTO 2.0 for D3 category.
“Manufacturers are faced with payment for electricity not consumed. In spite of the current high tariff from NERC, industry spends huge funds on alternative energy sources for production. The implication of the development was increase in the average cost of production in the sector, which lowers the competitiveness of locally-produced goods against imported close substitutes.” MAN, therefore, recommended that the government should revisit the power sector reform so as to ease-out the current stagnation and make the sector functional.
“MAN will continue to pay electricity charges based on the NERC’s MYTO 2.0 but not any other arrangement that will further burden manufacturers,” it added.
According to the Senior Manager, Transaction Advisory Services, Ernst & Young, Damilola Aloba, SMEs with access to electricity tend to be more productive than those without.
Practically speaking, she said about 86 per cent of SMEs in Nigeria rely on generators to run their businesses amid a very high cost of acquiring and running the generators.
“The cost is aggravated by the declining generation capacity in the country and lately scarcity of petrol and diesel, which is now being sold by some marketers above pump price,” she explained.
Aloba decried that SMEs in Nigeria cannot attain their full capacity if power generation fluctuates between 1,500MW and 2,500MW.
She recalled that most SMEs had obtained bank loans with very high interest rates, while some had contributed their savings or received contributions from family and friends to run their businesses.
With the high finance costs, she said they would need to make adequate returns to service the loans before even thinking of making profit.
“Unfortunately, most of them run at a loss due to unfavourable operating environment caused by epileptic power supply and high cost of electricity. SMEs are more likely to fail in this instance,” she warned.
According to her, SMEs cannot operate effectively without a conducive business environment with stable power supply, at the very minimum, among other needs.
Nigeria, she advised, must generate at least 10,000MW of power to provide the necessary launch pad for its SMEs to grow in leaps and bounds.
She said, “Nigeria needs at least 10,000MW to start with, in order to begin to unlock the potential of its SMEs. Of course, this will need to increase gradually above the stated 10,000MW.”
A political economist, Prof. Pat Utomi, recently , lamented that Nigeria had yet to see the result of the huge resources invested in the power sector by successive governments in the last 16 years.
He said, “There is a problem of project management in Nigeria. Much equipment was imported for Independent Power Projects and the equipment is still lying at Ikorodu terminal. Why?
They planned this programme without considering the fact that the bridges along that axis could not carry equipment of that nature.
“We must therefore courageously switch to decentralisation of power generation. Also, proper competition will lead to cost being driven down.
Private sector investment should be encouraged across the value chain whether in power generation or transmission or distribution.”
In proffering solutions to the country’s power crisis, Utomi recommended renewable energy as reliable alternative electricity while urging President Muhammadu Buhari’s administration to ensure that the ongoing reforms in the power sector achieve desired results and particularly ensure drastic improvement in power generation.
The National President, Association of Small Business Owners of Nigeria, Dr. Femi Egbesola, said though access to finance is the most talked about challenge facing SMEs in Nigeria, erratic power supply is a major drawback limiting SMEs growth in the country.
While some list erratic power supply among the first 10 challenges facing entrepreneurs, I see it as the number one or the main of all challenges facing us.
According to him, the impact of the power crisis is such that the extra funds spent on the alternative sources of power supply increases the cost of production thus raising the market costs of products and services.
This, he explained, could make the products to underperform in the market if there are similar products in the market imported from countries with regular power supply.
For SMEs, Egbesola said power crisis increases the cost of starting a new business or running an already existing one in the nation.
He said, “It becomes more difficult considering the financial constraints and difficulty in accessing start-up funding. This has stifled life out of many businesses and with the overall effect of reducing the SMEs contribution to the nation’s GDP.”
Egbesola said, “While we may not be able to give the exact figure of dying businesses due to erratic power supply, I can tell you that about 60 per cent businesses go under due to the power challenge. About 104 of the 140 textile companies in the country have stopped production, with over 200,000 workers losing their jobs. Most of the retrenched employees are now commercial motorcycle riders.”
The ASBON boss said that the cost of power alone accounts for about 60 per cent of the operational costs for start-ups in Nigeria.
He lamented, “Due to the poor electricity supply, a business owner in Nigeria would spend more than what was being generated from the business. It is discouraging. You end up spending more than what you make.
“Creativity is killed, because you wonder how long it would take to complete a project, and when it takes an awful lot of time to complete projects because of poor power supply, you eventually lose interest and the project dies.”
Egbesola, the ASBON President, said it is imperative for Buhari to declare a state of emergency in the power sector and do all within his powers to resolve its problems.”
He said, “That is the only way we can really and truly diversify from oil. Our sure bet of developing our economy is to focus more on SMEs and make all necessary infrastructure available, affordable and accessible to them among which electricity reigns supreme.”
Egbesola also canvassed the adoption of energy conservation policies whereby the government will outlaw the use of electric gadgets and devices that waste electricity and encourage the use of energy saving appliances.
He said, “As a matter of urgency, the default billing system adopted by the defunct PHCN and is still currently being used by the new power distribution companies should be outlawed as it is exploitative and destructive.
He urged the new investors that took over power generation and distribution assets in the country to embark on immediate upgrading of their facilities.
Egbesola, said “It is becoming disheartening that the bulk of our production is carried out overseas and shipped back to this country as finished goods. This does not portray Nigeria as a productive economy in any way.”
Nigeria’s economic revival, according to the experts quoted above, will be achieved if power generation increases..
The Chairman of Manufacturers Association of Nigeria Export Promotion Group (MANEG), Mr. Ede Dafinone, couldn’t provide the number of industries that had closed down due to epileptic power supply in his state of operations, but he remarked that the erratic electricity normally eats into manufacturers’ profits and growth is stunted.
He said, “Even if the companies are not shutting down due to erratic power supply, the cost of running businesses on generators definitely eats into their profits and does not allow them to expand. This may, at times, affect prompt payment of workers’ salaries.”
On his part, the Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr Muda Yusuf, said members of the Chambers, be it multi nationals or Medium, Small or Micro Entrepreneurs (MSMEs) have all resorted to alternative source of energy, ranging from gas, diesel or PMS, which he said is affecting their cost of operation and over all effectiveness.
“Some of the big companies have completely cut off from national grid to private gas supply as means of providing power for their operation. This is because some of their operations and productions cannot work with the epileptic power we are experiencing in the country. All the multinationals are generating their power themselves right now.”
Yusuf said though some of the companies still manage to operate on public electricity, but noted that they have to revert to diesel to power their generators anytime there is an outage, which he said is more expensive.
He lamented that with the present scenario of fuel scarcity, companies expenses on alternative source of power has doubled.
“Those that suffer most now are the SME and the micro operators that rely on generators, more so now that the fuel is not even available, their problems have been compounded”, he said.
With a remarkable increase in operational cost and poor purchasing power of consumers, the manufacturing companies have had to lay off thousands in the last six months, with about three million still to go.
Looking at his own sector, the Chairman of Toiletries and Cosmetics Manufacturers Group, Mr. Ikpong Umoh, said ‘ hopes were dashed following the inability of the power generation companies (Gencos) and Distribution Companies (Discos) to provide the power supply needs of the citizens two years after the privatisation exercise. He observed that the role of manufacturing in a developing country like Nigeria cannot be trivialised.
He called on the President Muhammadu Buhari led government to urgently save the manufacturing sector from total collapse by providing constant power supply.
Also, speaking in the vein, the National President of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Chief Bassey Edem, said that despite the privatisation of the power sector, there is still epileptic power supply in the country.
He lamented that the country generates less than 5,000 megawatts (MW) of electricity for its over 170 million population.
This, Edem said, does not go anywhere in meeting the requirement of the Nigerian people. He stated that many Nigerians that are out of job today would have been employed, directly or indirectly, if there is reasonable power supply, adding that manufacturing industries would operate well, expand their capacities and employ more people. As a way forward, he said that government, through Discos, should constantly put checks on marketers and stop them from engaging touts.