The cost of doing business in Nigeria is said to be among the highest worldwide. With the on-going privatisation of public firms, the power and banking reforms, among others, expectations are that things will change for the better. EMEKA UGWUANYI, TOBA AGBOOLA and SULAIMAN SALAWUDEEN, examine the development.
The primary objective of setting up a business enterprise is to provide quality goods and services at very competitive prices and earn reasonable profit, but unstable power supply has largely made this goal unachievable in Nigeria. Power is central to industrialisation and overall development of any country.
The first step to becoming a developed economy, according to the Nigerian Institution of Electrical and Electronics Engineers (NIEEE), is by getting the power sector right.
However, in well over a decade, the Federal Government has been striving to fix the power sector because of its aspiration to become the commercial hub in sub-Sahara Africa, and also its desire to be among the 20 leading economies in the world in 2020. Notwithstanding, its objective options it adopted for tackling the power problem seem not to have achieved results. The government has promised to deliver on the sector’s privatisation considering that most of the factors hampering business development have to do with power.
Reports have it that Nigeria ranks among the costliest countries in the world to do business, and that the exit of Dunlop and Michelin, two tyre producing firms, from Nigeria, as well as the collapse of the textile industry, which some years ago was booming, appeared to buttress the report .
Apart from inconsistent government policies, insecurity, difficulty in accessing funds and poor infrastructure, are identified as being intrinsically connected to jacking up the cost of doing business locally. For instance, it is argued that if there was stable power supply, everywhere would be well-illuminated, which would deter criminals from carrying out their acts, as technologies, such as close-circuit television (CCTV) can be applied at all times to monitor and track criminals. Besides, there would be jobs as people will be engaged in various vocations that steady power supply would engender.
Aside from power, Nigeria’s banks are also culpable in hiking the cost of doing business on account of the high interest rates attached to credit for borrowers. Besides, there are several associated charges that banks railroad into the cost quotient that have ballooned the cost of loans, and by extension, adding to the cost of doing business in Nigeria. But they also have their reasons. They hold the absence of power as one reason they are helpless in controlling their operational cost.
Many firms provide them power to preserve their production process. It is in view of this development that some rich companies, such as Dangote Plc and the multinational oil companies build mini and big power plants depending on the size of the operation or the facility. However, the fact remains that the end-user of a product or service suffers at last by bearing the entire cost.
Power supply
Power generation level has substantially increased in the past two years from about 3000MW at the beginning of 2011 to 4,517MW as at the end of last year.
To sustain the tempo, Vice President Namadi Sambo, had directed the Niger Delta Power Holding Company (NDPHC) to ensure that all contractors handling projects in the National Integrated Power Project (NIPP), complete them by the end of the year, which would eventually add at least 4100 megawatts to the grid.
A member of the Presidential Task Force on Power (PTFP), Simeon Atakulu, gave an update on the status of generation. In his report, he said a cumulative generation capacity of about 10,362MW is expected at the end of this year.
He said a combine 846MW is expected from IPPs and another 1,130MW from Agip’s Okpai plant in Delta State and Shell’s Afam VI in Rivers State, while the NIPP will be generating 4147MW and PHCN’s hydro and thermal plants would be generating 4239MW. He noted, however, that although there would be 10,362MW, only about 7,175MW would be be delivered, citing some constraints.
Apart from Shell and Agip’s power plants and two other IPPs, which were built where they have access to adequate gas supply, operators of the NIPP, PHCN and other assets, lament the dearth of gas supply. Besides, if something strategic is not done to strengthen the transmission network; there is fear that it wouldn’t be able to wheel more than 5,000MW. Therefore, the government should focus on the construction of gas infrastructure to supply gas to thermal stations, as well as strengthen the transmission network.
Cost of epileptic power supply
During the Lagos State Economic Summit known as Ehingbeti 2012, a partner at KPMG, Kunle Elebute, warned that if the poor power supply situation should linger till 2020, Nigeria stands to lose about $130 billion. He urged the Federal Government to tackle the issue of lack of electricity infrastructure, such as gas pipelines, transmission lines and transformers. He said the government should provide a conducive investment environment and incentives, among others, to attract the private sector into the power sector. He said poor supply poses serious challenge to industrial and overall economic development of the country despite the huge potential in the country to actualise its energy needs.
He said Nigeria has the potential to become an energy-sufficient country if only it could adequately utilise the abundant resources in the country. The former Secretary for Energy and two-term Governor of New Mexico, United States, Bill Richardson, also corroborated him, adding that Nigeria has abundant alternative clean energy.
He said the success of the telecoms sector is a clear indication that the same feat can be repeated in the power sector, if the right regulatory and operating framework are put in place, adding that building a 21st century electricity facility is possible and urged the government to fast-track the privatisation process in a transparent and accountable manner.
“Nigeria can choose a clean path in providing electricity. You have abundant gas resources; have the opportunity to provide renewable energy. You also have hydro resources; you have wind energy and other renewable energy sources,” he added.
Manufacturing sector
The Chairman, Infrastructure Committee of the Manufacturers Association of Nigeria (MAN), Reginald Odiah, an engineer, said power, which is usually five per cent to 10 per cent of production cost in most countries, constitutes between 30 per cent and 40 per cent of cost of production in Nigeria. He said a recent survey conducted by the association reveals that on the average, PHCN supplies only 31 per cent of total energy required by manufacturers, while 69 per cent is generated in-house through self electricity generation.
He said an audit survey recently conducted by MAN on 1,500 manufacturing companies nationwide, revealed that members of the association spend about N954 million for the maintenance of their plants, while an average of 8,679,638 litres of diesel is consumed weekly in running these plants.
He noted that the much-needed capital for maintaining and increasing production at factories and production lines are locked up in purchasing generators. He said the manufacturing sector of the economy requires about 4,000MW of electricity to keep the factories running at installed capacity.
A report from MAN also showed that some companies in Ikeja spend N5 million on diesel weekly and at least N20 million monthly.
The Director-General, Nigerian Textiles Manufacturers Association, Jayeola Olarewaju, said money is just a small percentage of the problems of local textiles manufacturing, adding that power is a major challenge. He said between 30 and 35 per cent of their cost of production go to power generation.
President, Cement Manufacturers Association of Nigeria (CMAN), Joseph Makoju, said energy cost accounts for over 35 per cent of production in Nigeria, whereas it is 10 per cent in China.
Hospitality and SMEs’ sectors
Investigation in Ekiti State showed that the hospitality industry and the small and medium enterprises (SMEs) are worst hit by poor electricity supply situation. Midas Hotel, a newly-built four-star hotel in Ado-Ekiti just opened for business on February 9, 2013, but the management said that it has discovered that to remain in business means more than putting in place first class structures and facilities.
According to the Director of the hotel, Mr Ayeni, the greatest challenge has been running on diesel-powered electricity generating sets all day. He said the hotel requires a minimum of N60,000 to sustain all-round electricity generation for a day. Of course, it means that we would be spending a minimum of N1,800,000 monthly.
“I am not saying the PHCN does not give us light at all. But we know what it means when such a standard hotel like Midas with high patronage gets supply for a maximum of 30 minutes on a good day. For now, we supply our own electricity. Experiences across other hotels aren’t much different.
Investigation by The Nation also showed that artisans such as barbers, hairdressers, technicians, welders and others are equally suffering poor power supply. According to Dolapo, an electrician, the effect has devastated our business and has sent many temporarily out of business. “I lose customers and money every day in past few months. It is either you are ready to burn fuel for a whole day or you are out of business. But I cannot afford the cost of powering the generator a whole day. Unfortunately, I cannot increase the cost of my service because I use generator lest the few customers that still patronise me may leave,” he said.
The spokesman of PHCN in Ekiti State, Mr Kayode Brown, assured there would be improved supply in the that very soon noting that the poor state of power has been as a result of fault from main source outside the state, which is being handled by the concerned section of PHCN. Brown noted that the development has affected not only Ekiti but even parts of Ondo and Osun states, adding that the problem had to do with transmission from Osogbo.
Lack of industrialisation
The former Minister of Power, Prof. Barth Nnaji, had explained how poor power supply compelled him to develop interest in championing efforts at addressing electricity problems in Nigeria. He said: “It was the fledging auto industry in Nnewi, Anambra State, which inspired me in the late 1990s to take steps to establish in Nigeria a state-of-the -art company to manufacture auto parts, including engines.
“I was then the ALCOA Foundation Professor of Manufacturing Engineering at the University of Pittsburgh, on a leave of absence from the University of Massachusetts as distinguished Professor of Industrial and Mechanical Engineering and Director of the Automation and Robotics Laboratory.
“I was keenly interested in how the Nigerian domestic auto industry could be assisted to produce world class parts, which would be exported to even developed countries. The dream was suspended on account of the worsening electricity crisis in Nigeria. So, I naturally turned attention to how to address the perennial power problem.”
Like Nnaji, noble dreams of many Nigerians, which could have taken the country to the next level, were aborted because of power supply. Some companies built in the cities were originally planned to be constructed in the rural areas but for lack of power, they crowded in the cities jostling for the limited supply from public power supply.
Government’s efforts
A Chinese firm, Sepco111 and a Nigerian company, Pacific Energy Limited, had last year said they were preparing to construct 1,200 megawatts (MW) coal power plant worth $4 billion in Benue State, but nothing has happened since then.
Prof. Nnaji had said that the government planned to diversify the sources of electricity generation through the building of three coal power plants in Enugu, Benue and Kogi States.
The Federal Government also signed some memoranda of understandings (MoUs) with a few world class energy companies. For instance, the General Electric (GE), which agreed to provide $10 billion for the construction some power plants as well as with South Korea and others, but these MoUs are not yet translating into tangible results.
The Federal Government also support IPPs by buying off their generated power, for instance, 135MW from Dangote Group, which has excess generation from the two power plants built for the Obajana and Ibeshe cement factories in Kogi and Ogun states. The two power plants have combined total generation of 257MW, but the two cement factories can only consume 122MW leaving an unused 135MW.
The government also said it would stop direct building power generation plants by end of next year as the subsequent power plants would be built by the private sector. The Minister of Power, Prof. Chinedu Nebo, said the government is reviewing the power sector roadmap to reflect realities.
The Lagos State Government in the past few years has begun to focus on construction captive power plants to supply steady electricity to some designated facilities and areas such as the Central Business District.
Way forward
The President of the German Federal Environment Agency, Jochen Flasbarth, during his visit to Abuja was reportedly said to have advised Nigeria not to depend on the 4000MW generation or its economy would flop. He advised the government not only to embrace renewable energy as an alternative source of power supply. He said it would be impossible to provide the country with electricity through a centralised electricity supply structure, and called for the decentralisation. He said the grid system of power supply is costly and expensive to maintain, especially when it is used to cover the country. He said the grid system should be used when the source of electricity supply is near while off-grid system should be where the source of generation is very far from the grid.
With the commencement of finalisation of negotiations of transaction documents between the government and the preferred bidders for PHCN successor generation companies (Gencos) and successor distribution companies (Discos) in January this year, it seems the solution to the power problem is in sight as private sector entrepreneurs take over management and control of the 11 and six Discos and Gencos.
The Director-General of Bureau of Public Enterprises (BPE) Benjamin Dikki said following the receipt of bank guarantees for 15 per cent of the transaction value within the November, last year deadline, that the BPE can confirm that its bankers have verified all the bank guarantees provided by the preferred bidders. Thus, the preferred bidders are qualified to enter this stage of the privatisation process which is the finalisation of negotiation between the Federal Government and the bidders.
He noted that 15 business days after signing of the Sale and Purchase Agreement or the Shareholders’ Agreement, whichever is earlier, or at a mutually agreed earlier date, the bidders should make a down payment of 25 percent of the share sales purchase price. It is after finalisation of negotiations that transaction documents would be executed. As Nigerians wait for this historic period, sincerity of purpose must be ensured even post-handover of these power assets. As it is believed that privatisation is the only tonic for getting the power sector right, politics and partisan patronage must be sacrificed for competence, probity and accountability.
He noted that the reform processes being taken by the government doesn’t mean the power sector issues are over but it marks the beginning of a strategic transition to a common national aspiration.
“This does not mean that the electricity industry in Nigeria is out of the woods. It is still facing some challenges in all segments of the value chain. These challenges include low generation capacity, inadequate transmission and distribution infrastructure, poor operational performance, poor revenue collection, inadequate metering, poor billing and electricity theft.
“Others are poor maintenance culture, inappropriate industry and market structure, unclear delineation of roles and responsibilities. These are the issues that give rise to the reform initiatives that led us to the process we are undertaking,” he said.
