AN INVESTIGATION OF THE EFFECT OF HIKE IN ELECTRICITY TARIFF ON PERFORMANCE OF INFANT MANUFACTURING COMPANIES IN OGUN STATE

CHAPTER ONE

INTRODUCTION

Background of the study 

Historically, tariffs were a significant portion of government revenue and were implemented to supplement income from direct taxes, which were the primary sources of government funds at the time. Tariff, as defined by Oluwole (2021), is a mechanism used by the government to generate money and enhance the well-being of its citizens. It can also function as a form of protection for emerging businesses. Tariffs decrease imports by increasing prices. Tariffs result in a doubling of the price of imported items (Enebong, 2023). The primary justification for tariffs and other forms of trade restrictions implemented by many developing nations is to safeguard emerging industries or maintain control over non-essential imports, while simultaneously promoting the importation of capital goods and other important commodities (Adebayo, 2019).

According to the International Energy Agency (IEA) in 2020, around 592 million individuals in Africa do not have access to electricity. The continent has the lowest electrification rates worldwide, with only 39% of the overall population and 28% of the rural population having access to electricity (IEA et al., 2020). The chronic instability and intermittency of the power supply, experienced by individuals connected to the grid, hinder economic progress and contribute to a continued dependence on more polluting fuels (Herman et al., 2017; Mensah, 2018). On the other hand, the cost of providing 1 kWh of electricity in Sub-Saharan Africa is higher compared to other low- and middle-income countries (LMICs). Additionally, residential and industrial electricity rates in the region can be equal to or even higher than the prices in Organisation for Economic Co-operation and Development (OECD) countries (Eberhard and Shkaratan, 2012; Global Petrol Prices, 2021). African governments are forced to subsidise the costs of supplying power due to the financial unsustainability of the power sectors. However, despite these subsidies, families and enterprises still experience high prices and unreliable power supply. This situation has led to governments incurring increasing quasi-fiscal deficits (Kojima and Trimble, 2016; Batinge et al., 2019). 

An indispensable need for enhancing productivity in the industrial industry is the provision of cost-effective and sufficient electricity. The power sector is a primary provider of energy generation and distribution, which fuels the operation of machinery and equipment for the manufacturing of various items to meet consumer demands (Olayemi, 2022). Mohammed (2023) highlights the significance of the power sector in his theory of unbalanced growth. He suggests that investing in specific sectors, such as electricity, can stimulate and catalyse investment in industries like manufacturing, ultimately facilitating economic progress. 

Electricity has traditionally been recognised as a catalyst for promoting economic growth in developing nations. Access to cost-effective power can stimulate a nation's economic development by enabling businesses to leverage it for the adoption of productivity-enhancing technologies, the majority of which depend on electricity. The potential advantages of electricity have led to increased investment in electrical projects in poor nations, with the World Bank's lending for energy projects increasing from $3.9 billion in 2017 to $8.2 billion in 2021 (World Bank, 2022). Despite the augmented investment in energy, electrification rates in most developing nations have improved. However, enterprises still face substantial electricity prices. As a result of expensive power, companies may change the types of products they produce to focus on those that consume less electricity and are less technologically advanced (Olawale and Garvwe, 2020). 

Industrial users in most industrialised countries benefit from reduced electricity tariffs compared to other user groups, as reported by the International Energy Agency in 2018. The decrease in pricing is a direct result of the reduced expenses associated with providing electricity to industrial consumers. This is due to their consistent and predictable electricity consumption patterns, as well as their capacity to use electricity at higher voltages, which eliminates the need for the power utility to pay additional costs for voltage reduction. According to the 2021 World Bank survey, a significant number of Indian industrial enterprises, namely over 36 percent, identified power as the primary obstacle to their operations (World Bank, 2021). 

The survey conducted by the Manufacturing Association of Nigeria (MAN) in the first quarter of 2018 presented a bleak outlook on the difficulties faced by the Nigerian Manufacturing Sector. The study verified that a mere 10 percent of manufacturing enterprises in Nigeria were capable of functioning at 48.8% of their maximum capacity. Out of the companies in operation, 60 percent were able to cover their average variable costs, while 30 percent were compelled to cease operations entirely due to exorbitant electricity tariffs (Ogunjobi, 2022). The provision of consistent and cost-effective electricity is a fundamental driver of technological and social progress. Virtually every enterprise and facet of human growth relies on energy in some capacity. Therefore, this study is necessary to address this demand.

 Statement of the problem

As it is today, the manufacturing sector, which is the engine of growth, is still struggling as a result of the inclement production environment in Nigeria. Care should be taken to avoid introducing burdensome measures that will further strangulate the manufacturing sector and the whole economy. The availability of an inexpensive and dependable electrical source is widely seen as crucial for the sustainability of infant manufacturing companies (World Bank Enterprise Surveys, 2023). A further rise in electricity tariff will directly increase the cost of production, leading to a higher probability of activities paralysis, a potential decline in revenue collection, the recession of manufacturing activities and a reduction in the sector’s competitiveness.

Data from MAN shows that on average manufacturers spent at least N144.5 billion on sourcing alternative energy in 2022, up from N77.22bn in 2021. This translates to about 87 percent increase in the cost of access to alternative energy sources by manufacturers within a year (MAN, 2023). The availability of an inexpensive and dependable electrical source is widely seen as crucial for the sustainability of infant manufacturing companies (World Bank Enterprise Surveys, 2023). Infant manufacturing company function with narrow profit margins, and elevated electricity costs might exacerbate the financial burden they face. Elevated tariffs result in a direct correlation with heightened operational expenses, which in turn diminishes profit margins and restricts the allocation of resources for expansion and long-term viability. Infant manufacturing companies in Ogun State must devise strategies to properly handle this financial burden, else they may be forced to close down due to the high electricity tariff. In such instances, it becomes imperative to find strategies to maintain competitiveness in the market. This study will investigate the effect of hike in electricity tariff on performance of infant manufacturing companies in Ogun state. 

 1.3 Objectives of the Study 

The primary objective of this study is to critically investigate the effect of hike in electricity tariff on performance of infant companies in Ogun state. Specifically the study seeks:

To find out whether there is a relationship between hike in electricity tariff and performance of infant manufacturing companies.

To examine the extent hike of electricity tariff affects operational effectiveness of infant manufacturing companies in Ogun State.

To determine the extent to which hike in electricity tariff affects the continuity of infant manufacturing companies in Ogun State.

To determine the extent to which hike in electricity tariff affects the productivity of infant manufacturing companies in Ogun State.

1.4 Research Questions

The following research questions will be answered in this study:

Is there a relationship between hike in electricity tariff and performance of infant manufacturing companies?

What is the extent hike of electricity tariff affects operational effectiveness of infant manufacturing companies in Ogun State?

What is the extent to which hike in electricity tariff affects the continuity of infant manufacturing companies in Ogun State?

What is the extent to which hike in electricity tariff affects the productivity of infant manufacturing companies in Ogun State?

1.5 Research Hypothesis

The following null hypothesis will validate this study:

Ho: There is no relationship between hike in electricity tariff and performance of infant manufacturing companies

Ha: There is a relationship between hike in electricity tariff and performance of infant manufacturing companies.

1.6 Significance of the study

This study will be of interest to scholars, small scale entrepreneurs, manufacturer, the regulators, and government. This study will be of importance to small scale entrepreneurs and manufacturers as it will expand their scope of knowledge, which serves as the foundation for decision making, particularly in relation to hike in tariffs and can enhance their personal and organizational wealth.

The study will also assist managers in the infant manufacturing companies in making decisions regarding tariff increase so as to maximise their company's growth through improved production and marketing operations. As a scholar, this study will contribute to the existing body of knowledge in this area, while also serving as a valuable source of empirical reference and literature review. It will also provide a foundation for further research to the scholar.

1.7 Scope of the study

The study aims to carry out an investigation on the effect of the hike in electricity tariff on performance of infant manufacturing companies in Ogun State. This study will be carried out among factories in Agbara industrial zone, Ogun State.

1.8 Limitation of the study

The researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing that there was little data on hike in electricity thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size covering only residents of Ogun State. Thus findings of this study cannot be used for generalization for other regions outside Ogun state. Additionally, the researcher will simultaneously engage in this study with other academic work which impeded maximum devotion to the research. Howbeit, despite the constraint encountered during the research, all factors were downplayed in other to give the best and make the research successful.

Furthermore, the roads leading to infant production enterprises in Ogun state are in a deplorable condition, making it arduous to reach every infant manufacturing company in the state.

1.9 Definition of terms

Hike: Hike a sharp increase, especially in price.

Electricity: Electricity is the set of physical phenomena associated with the presence and motion of matter possessing an electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as described by Maxwell's equations. Common phenomena are related to electricity, including lightning, static electricity, electric heating, electric discharges and many others

Tariff: A tariff is a tax imposed by one country on the goods and services imported from another country to influence it, raise revenues, or protect competitive advantages.  

 Infant Industry: an infant industry is a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad

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