How high energy cost hampers manufacturers’ productivity

Energy is a critical element in achieving economic growth, reducing inequality, and boosting employment. Recognizing the importance of energy, most industrialized economies in the world today, including emerging markets like India, take bold steps to achieve energy efficiency.

However, over the years, issues around energy and electricity availability in Nigeria have been on the rise especially among local manufacturers as they are forced to either pay heavy tariffs for electricity or generate power for themselves, equally at high costs.

The 2019 annual report of the Manufacturers Association of Nigeria (MAN) noted that inadequate electricity supply and incessant increases in tariff without a commensurate improvement in generation, transmission, and distribution remain a key challenge of the sector, adding that in 2019, manufacturers spent over N67. 38 billion on self- generated electricity with energy cost accounting for 38 percent of production cost.

This was evident in the financials of some quoted manufacturing companies that affirmed that claim, showing that these companies pay heavily for electricity used. In 2019, Lafarge Africa Plc, one of the largest cement makers in the country spent N42.7 million on fuel alone, Fidson pharmaceuticals spent N66.4 million, while Glaxosmithkline Nigeria Plc (GSK) spent N70 million.

In its Q4 2020 CEO Confidence Index ( MCCI), MAN revealed that high cost of power due to increase in electricity tariff, poor electricity supply, increase in the cost of selfgenerated electricity due to the increase in fuel prices were major challenges encountered in the business environment which significantly reduced productivity.

In its economic review for H1 2020, MAN noted that electricity supply since the first half of 2018 stabilized at 10 hours per day while power outage was estimated at 4 times per day in the first half of 2020 as against 5 times in the corresponding half of 2019. In H1 2020, expenditure on alternative energy was N24.16 billion as manufacturers spent N9.45 billion on diesel; N8.64 billion on Gas; N3.04 billion on Generator; and N3.03 billion on other sources and accessories such as inverter, UPS according to survey done by MAN.

MAN recalls that some flourishing companies in Nigeria have relocated to neighbouring countries due to poor power supply in the country, noting that the consequences of such action are under development, job losses, bad international reputation, among others.

According to United States Agency for International Development USAID’S energy sector review, Nigeria’s growth and economic development is limited despite its large economy, which is linked to constraints in the power sector. Nigeria has the ability to generate 12,522 megawatts ( MW) of electric power from existing plants, but it is only able to distribute around 4,000 MW, leaving local manufacturers to self-generate around 13,000MW through alternative sources of energy in order to stay afloat.

Mansur Ahmed, MAN president, told Businessday at a business forum that poor power supply has been constrained the productivity and full capacity utilization of many businesses. He added that it has also contributed to the collapse of many business activities especially for those in the manufacturing space, and the cost of alternative electricity generation alone constitutes about 40 percent of production cost.

“With such high costs, madein-nigeria products will hardly be competitive,” he said. “For manufacturers, studies consistently confirm that energy is the single most important constraint to productivity and competitiveness of the sector in Nigeria. The impact is felt across micro, small and medium as well as large manufacturers

One critical challenge before us is inadequate energy supply for industrial use. As manufacturers, we cannot achieve competitiveness with the current state of our electricity supply. It is thus, expedient that government scale-up its plan for the energy sector to reduce cost, improve processes, maximize value addition and generate employment,” said Ahmed.

The MAN president also said that the country ’s energy projection and currently generated supply is below the expected level required to drive an industrialized economy therefore limiting the chances of achieving an industrialized Nigeria adding that the narrative can only be changed if the electric power challenge is resolved.

Nigeria ranked 169 in the getting electricity metric, scoring 47.4 points on the World Bank’s ease of doing business and a zero in the reliability of power supply. Experts say that the high-energy cost of these companies threatens the existence and continuity of the businesses as they are forced to produce at a higher cost and are unable to transfer the cost to cash-strapped consumers causing them to incur debts.

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 in the local and global market.

In addition, epileptic power supply is majorly responsible for low productivity in the sector and reduces the chances of locally produced products in a competitive market, as such many manufacturers are forced to compromise quality for quantity in order to adjust to the energy cost.

With the implementation of the African Continental Free Trade Area (AFCFTA) local manufacturers will be forced to ramp up production and also improve the quality of products to enjoy improved sales in a wider market. This calls for the need to be properly equipped in order to be competitive in a wider market.

Experts say regular power supply reduces manufacturers’ production costs and enables them to meet the needs of a majorly poor population, adding that it would traditionally enable these firms to employ more people in an economy where almost one out of four people are jobless.

“For we manufacturers, electricity is paramount and we incur huge cost when we have to generate it ourselves. We need better power supply to reduce our cost of production and the issue of tariffs should be properly addressed, we also need protective policies to create an enabling and competitive environment,” Funmilayo Bakare Okeowo, Chief Executive Officer of FAE Limited said in a phone interview.

Similarly, MAN also advised that it is necessary to reverse the current increment in electricity tariff and focus more on improving generation, distribution and efficient use of available electricity.

‘ For we manufacturers, electricity is paramount and we incur huge cost when we have to generate it ourselves. We need better power supply to reduce our cost of production and the issue of tariffs should be properly addressed