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Fin

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gs

221December 2002

Findings reports on ongoing operational, economic, and sector work carried out by the WorldBank and its member governments in the Africa Region. It is published periodically by theKnowledge and Learning Center on behalf of the Region. The views expressed in Findings arethose of the author/s and should not be attributed to the World Bank Group.

Private Sector and Infrastructure

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Public and Private Elec t ric ity

Prov is ion as a Barrie r t o

Manufacturing Competitiveness

Nige ria

iger ian fi rms complain abou t

the h igh cos t of man u fac tur -i ng . Ni ne t y - f ou r pe r cen t o f

them repor t tha t infras t ru c ture i s

the i r b igges t problem (2 .5 t imes

more worr isome th an fina nce), an d

97 p ercent of firms own genera tors.

This a r t i c le , which explores the

na ture a nd cos t s of the pr oblem, i s

bas ed on a sam ple of 232 firm s with

a detailed examination of 26 elec-

tricity accoun ts. (In considering th e

cost of electricity, one sh ou ld note

that both publ icly- and pr ivately-

produ ced electr icity is s u bsidised.NEPA, the publ ic provider , pro-

duces power for 11US cents per

KwH but on ly cha rges 3-5 US cents

per KwH while diesel fuel, which

accoun ts for 75 percent of pr ivate

costs , i s su bsidised).

Costs of public and privateelectricity provision

Ma nufa cturers res pon s es to

electricity deficienciesKyu Sik Lee et al.,1999, repor t tha t

fi rms m ight respon d to infrast ru c-

tu re deficiencies throu gh bu siness

relocat ion, factor s u bst i tu t ion, pr i -

va te provis ion an d/ or outp u t re -

du ct ion. The s tu dy from which th is

ar t icle is d er ived, foun d th at th ere

was a fur th er response mechan ism,

i .e . , p roduct subs t i tu t ion . These

mech an ism s are considered below.

Relocation .There wa s n o eviden ce

of f i rms relocat ing to obtain im-p r oved supp l yl i t t l e wou l d be

gained as evidenced by the s l ight

var iat ion (from 96 to 98 percent)

in the incidence of generators in

firms in th e differen t regions of Ni-

geria. Firm s did, h owever, n ote en -

cou ra gin g NEPA to load -sh ed else-

where.

Factor subst i tut ion. Ther e was

much evidence of factor subst i tu-

t ion , e .g . , ad jus t ing the mode of

prod u ction in favor of less electric-

i ty- in tens ive inputs . F i rms com-m o n l y r e p o r t e d t h a t t h e y w e r e

avoiding m ach ines with electronic

controls which were observed to be

more suscept ible to damage from

power f l uc t ua t i ons and ou t ages .

Typically, it m igh t ta ke t hr ee weeks

to import par ts and f ix electroni-

cal ly-control led machines. (Phar-

maceut ical f i rms were commonly

affected, losing up t o 180,00 0 ta b-

le t s per machine-hour ) . Because

older m ach ines ar e no longer avail-able, firm s a re bu ying m odern ones

and conver t ing them to mechani -

cal or electrical operation. In such

cases, f i rms may have to modify

t h e i r r a w m a t e r i a l s s o t h a t t h e

down-graded m achines could pr o-

cess th e inpu ts . A leading l ight ing

m a n u f a c t u r e r n o t e d t h a t b e t t e r

electricity su pply in a similar -sized

Malaysian fi rm ena bled au tomated

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Table 1: Demand Charge as a Percentage of Consumption Charge

Firm typeFurniture Tires Plastic containers

Date of bill (mm/yy) 02/01 07/00 02/01 02/01 11/00 09/00Consumption: units (KwH) 1,938 489 185 33,550 17,180 13,970Consumption: cost (N.) 9,186 2,317 877 159,027 81,433 66,219Demand charge: units 135 180 70 150 150 150

Demand charge: cost (N.) 31,050 41,400 16,100 34,500 34,500 34,500Fixed charge (N.) 240 240 240 240 240 240Total cost per KwH of consumption (N) 20.89 89.89 93.06 5.78 6.76 7.23Demand charge as % of consumption charge. 338 1,787 1,836 22 42 52

Source: Interviews with typical firms, Nigeria Firm Survey, World Bank,

Table 2: Cost of PubliclyCompared to Privately-Provided Electricity (N. per KwH, US cents per KwH)

Publicly provided Privately provided

Lowest (N. per KwH) 5.36 9.00Highest (N. per KwH) 20.76 39.60Mean (N. per KwH) 7.86 19.05Mean (US cents per KwH) 6.5 15.9

Source: Study of 26 billings of firms in eight sectors, Nigeria Firm Survey, World Bank, 2001.

ma chinery to be us ed there which

resul ted in th ree t imes th e outpu t .

There is relief for some firms in

the recent avai labi l i ty of natural

gas , a l thou gh they s ta ted th a t i t is

ha rd to get perm iss ion to h ire for-

eign gas-power techn icians, wh ose

sk ills are u n available in Nigeria

Private p rovision.Alth ough n early

all Nigerian firms can genera te th eir

own power , they are not s t r i c t ly

su bst i tu t ing pu bl ic for pr ivate p ro-

visionthey have to pay for the

pr ovision of both in pa ra llel .

NEPA s b i l l s cons i s t o f t h r ee

c h a r g e s : t h e c o n s u m p t i o n , t h e

f ixed, and the demand (based on

the installed capacity of the firm)

charge. The last two charges are

levied whether the f i rm uses pub-

l ic power or n ot . In some firm s, th e

deman d cha rge is cons ta nt , whi lein other f irm s i t ma y be in inverse

proport ion to the amount of fuel

consu med, as shown in Table 1 . In

this table, a furni ture f i rm in one

m on t h consu m ed 1 ,938 KwH and

t he dem and cha r ge was f o r 135

uni t s ; in another month , the con-

sumption was lower at 489 KwH

w h i l e t h e d e m a n d c h a r g e w a s

higher a t 1 80 u ni t s . In th e case of

a p las t i cs f i rm, in one month the

c o n s u m p t i o n w a s 3 3 , 5 5 0 u n i t s

while the deman d un it s nu mbered

1 5 0 ; a n d i n a n o t h e r m o n t h , t h e

c o n s u m p t i o n w a s 1 3 , 9 7 0 u n i t s ,

wit h t h e dem and un it s cons t an t a t

150 u ni ts . The examp les tab led i l-

l u s t r a t e t ha t t he dem and cha r ge

can vary from 22 to 1 ,836 percent

o f t he consum pt i on cha r ge . The

table also shows that the cost of

public-provided electricity can vary

from N5.7 8 to N93.06 per KwH de-

pend i ng on t he r e l a t i onsh i p be -

t ween consum pt i on and dem and

u ni ts (1 US$ = ap proxima tely 131

Naira at t oda ys ra tes).

Some firm s operate th eir genera-

tors even when publ ic supply i s

availab le. For exam ple, a large plas -

t ics packaging f i rm reported that

NEPA was available only for 1-2

hou rs per day and a s the firm op-e r a t e s a con t i nuous m anuf ac t u r -

ing process i t cannot switch from

one source to the other becau se the

switch-over process would cau se i t

to lose 3-4 tonn es of raw m ater ial

each t ime.

Although pr ivate generators are

e s sen t i a l , cons t r a i n t s have been

placed in th e way of firm s a cquir -

ing them. Since 2001, genera tor

imp orters ha ve to get perm ission t

import from NEPA, a llegedly beca u s

th ey were conn ivin g with NEPA sta

to obstruct pu blic su pply.

Outpu t red uction. Firms reporte

outpu t redu ct ions (commonly up t

30 percent) due to deficiencies i

the public provision of electricity

A top man u fac turer s t a ted tha t it

s teel sh eet mach ine is constra ine

by th e lack of power, an d by wea

an d tear du e to cons tan t power in

te r rupt ions . The machine has th

capac i ty to make 480 shee t s pe

da y, but it tak es five days t

make them because of th

outages; some 20 m inu te

start-u p each time power

restored; and repairs cau seby the ou tages. This resu lt

i n a n 8 0 p e r c e n t o u t p u

l o s s v a l u e d a t s o m

N173m. per year, excludin

repair costs.

Produ ct su bs titution. Several firm

noted tha t the products th ey ma d

were inf lu enced by th e power sup

ply. A ph ar m aceu tical firm, for ex

am ple, ha s redu ced its ran ge from

26 p rodu cts to th e five fas test-m ov

ing ones b ecau se of outa ges affec

ing refr igerated s torage in th e su pply cha in.

Capital costs and their incidence

F ir m s s p e n d a c on s i d e r a b l

amount of capi ta l on the pr iva t

pr ovision of electricity. On a verage

the cost of generators and acces

sories, an d the an nu al cost of ma in

t enance , am oun t s t o 22 pe r cen

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Table 3: Cost of Fuel, Staff, Servicing and Depreciation as aPercentage of Total Cost of Privately-Provided Power

Cost item % of total cost

Fuel 75

Staff 4

Servicing 12

Depreciation 10

Source: Interviews with 15 firms.

Table 4: Cost of Production in Nigeria Compared with India for Paracetemol

Nigerian production costItemActual Estimated cost with Indian

infrastructure

Indian production cost

Box of 96 Paracetamol tablets (Naira) 45 36 38

Source: Firm interview, Nigeria Firm Survey, World Bank, 2001.

and 3 percent respect ively of the

total value of ma chinery an d equ ip-

ment . F irms want to run the ir en-

t ire plan t du ring outages, but m an y

can not becau se of th e capi tal cost .

The impa ct of th ese costs can be

considerable on f irm s, threa tening

their developmen t . In th e case of a

new auto-par t s man ufac turer, the

Indian engineers (who were prac-t iced in tu rn -key operat ions in sev-

eral cou ntr ies) plann ed for produ c-

tion to be rolled in ph as es, with on -si te spare par ts dedicated to each

ph ase. However , becau se of power

deficiencies d u ring th e trial period,

spares dedicated to the f i rs t two

phases had t o be u sed , and t hen

the f irm ha d to ca nn ibal ize second -

pha se equipment for spares . In the

fir s t th ree months , an un expected

U S D 2 5 , 0 0 0 i n p a r t s h a d b e e n

u sed; th e lead t ime in get t ing m ore

spa res threa tened the rol l-out ; and

the management en tered an un-

dream t-of inventory men tal ity.

The private cost as a measure of

willingness to pay for reliable

services

Overal l, f irm s are u sing generators

for 67 percent of the product ion

t ime cau sing sub stan t ial addi t ional

cost . Table 2 shows that the cost

of privately-provided electricity is

2 .42 t imes more than tha t cha rged

by NEPAN19.05 per KwH com-

par ed with N7.86 p er KwH. It a lso

shows the considerable var iat ion

between th e ext remes in both th e

cas e of privately an d pu blicly-pro-

vided electricity even after ou tliers

have been removed. The h ighes t

cost of pu blicly-provided electricity

per KwH is 3.9 t imes the lowestcost, while the highest cost of pri-

vately-provided electr ici ty is 4.4

t imes th e lowest cost .

Var iation in th e cost of pu blicly-

provided p ower is ma inly du e to the

dem and cha r ge wh i ch , a s no t ed

earl ier , may vary between 22 and

1,836 p ercent of the consu mpt ion

charge . On th e o ther han d, var ia -

t ion in the cost of pr ivately-pro-

vided electricity depen ds mos tly on

th e var iat ion in th e cost of fu el and

the e f f i c iency of the genera tors .

Fuel , a t an average of 75 percent

of total cost, is six times h igh er, asshown in Table 3, than servicing,

the next highest cost .

While the official price of diesel

is N21 per l i tre, the average price

paid was N31.29 . Few firms ca n ob-

ta in diesel at th e official price an d

ma ny paid u p to N50 per l it re . One

of Africas biggest multi-nationals

got fuel for N21 in Lagos, while its

plant in Aba paid N40, leading to

privately-provided power cost ing

N9.00 per KwH an d N13.5 resp ec-

tively in th e two locations .

Fi rms , addi t iona l ly , have h igh

search an d t rans ac t ion cos t s . One

firm, wh ich n eeded 4 00 litres of die-

sel per day a nd was willing to pay

N 4 0 p e r l i t r e , s p e n t f r o m 5 - 4 8

hours get t ing fuel to run the gen-erat or for a da y. Moreover, ther e are

problems over a du l terated fu el, in

obtaining cash to pay for it , an d in

providin g secu rity for th e cash col-

lectorwith the possibi l i ty that

both secur i ty and cash col lec tor

wou ld a bscond!

The cos t and inconvenience of

pr ovidin g electr icity privately lead s

f i rms despa i r ingly to opine tha t

they would pay twice the price for

a s ta ble pu bl ic su pply.

Production cost increases

Power supply is adding consider-ably to the overall cost of produc-

t i o n i n f i r m s a s t o u c h e d u p o n

above . Pa in t f i rms s ta te tha t the

bad i n f r a s t r uc t u r e doub l e s t he

cost of produ ct ion. In th e case of

p l a s t i c p i p e s a n d s t e e l p ip e s

m a n u f a c t u r e r s , p o o r e l e c t r i c i t y

su pply increase cos t s by 7 percent

and by 33 pe r cen t r e spec t i ve l y .

Wi th car ton manufac turers , pro-

d u c t i o n c o s t s a r e i n c r e a s e d b y

some 25 percent , not including a

10 percen t loss of ma ter ials . Phar -ma ceut ical fi rms bel ieve th at poor

supply increases product ion costs

by arou nd 20 percen t . In a specific

ins tan ce, char ted in Table 4, a firm

observed tha t i t had s topped pro-

d u c t i o n o f P a r a c e t a m o l t a b l e t s

when the cost of produ ct ion a t N45

was N7 higher in Nigeria than in

India. The firm estimated that if i t

en joyed the same s tandard of in-

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fras t ru ctu re, p ar t icular ly electr ic-

i ty, as enjoyed in India, i ts pr odu c-

t ion costs would be N2 lower tha n

in India.

Conclusions

While most of the imported com-

petition firm s face cu rren tly comesfrom su ppl iers in Sou th an d South -

Eas t Asia, within th e region firm s

are m ost worried ab out comp etition

from Gh an a. It is reported th at elec-

t r ici ty there costs 7 US cents per

KwH,* ab out th e sa me a s p u bl icly-

p r o v i d e d p o w e r i n N i g e r i a , a s

shown in Table 2, but that f i rms

use self-generated electr ici ty for

less than 10 percent of the t ime

(n early one-sevent h of th e Nigerian

figu re).

High production costs in Nigeria

resul t in large measure from poor

pu blic provision of electricity. Th is

requ ires 9 7 p ercent of fi rms to de-

pend on privately-provided power

for 67 percent of th e t ime to gener -

ate electr ici ty cost ing 2.42 t imes

more than would have been pa id

with reliab le pu blic pr ovision. Th isc lear ly put s Niger ian f i rms a t a

c o m p e t i t i v e d i s a d v a n t a g e c o m -

p a r e d w i t h G h a n a i a n , l e t a l o n e

As i an f i r m s . Ni ge r i an f i r m s a r e

r i gh t t o cons i de r i n f r a s t r uc t u r e ,

particularly the cost of electricity,

as th eir biggest bu siness pr oblem.

* Tyler Biggs, et al. Ghana: In

tern ational Competitivenes sOpp

t u n i t i e s a n d C h a l l e n g e s F a c i n

Non-Tradi t ional Exports , Worl

Bank repor t no . 2241-GH, 2001.

This article w as w ritten by GeraTy ler, Cons ultan t, Regiona l Progra

for En te rpris e Develop m en t (RPED

Tyler Ass ociates , Lucca, Marino A

en ue Wes t, Killiney , Coun ty Dubli

Irela nd ; e -m ail: t y ler@iol.ie

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