Discussion Papers .. ' 56890 The Cost of Electricity in Nigeria Analysis from RPED Survey Data Gerald Tyler September 2001 RPED Paper # 115 The views and interpretations expressed in this study are solely those of the authors. They do not necessarily represent the views of the World Bank or its member countries and should not be attributed to the World Bank or its affiliated organizations The Cost of Electricity in Nigeria: Analysis from RPED Survey Data Gerald Tyler Introduction Nigerian firms complain about increasing competition from imported goods and commonly place much of the blame on the high cost of manufacture. They report that their most serious business problem is the state of infrastructure, and the biggest infrastructure problems is electricity. This paper sets out to show why this is so. In undertaking the research into the supply of infrastructure, all 232 firms were asked a short series of questions while in the case of a small sample of firms, a more detailed investigation was undertaken in which NEP A bills were examined and the costs of self-generated power were generally validated by putting the same questions to several managers. Firms in Nigeria feel very hostile to NEPA, the electricity provider, and commonly provide knee-jerk reactions to questions about electricity. This paper, particularly in the case of the small sample, seeks to look deeper into the electricity deficiencies than provided by the instant reactions of firms. In considering the cost of electricity, one has to bear in mind that in both the case of publicly- and privately-provided power the prices are distorted by government subsidy. In the case of publicly-provided power, it is reported that NEPA produces electricity at a relatively high cost of 11 USCentslKwH compared to an international average of about 5-6 cents/KwHo The company is allowed to charge only 3.5 centslKwH with the rest supposed to come as a government subsidy. Yet NEPA's account receivables run into billions of naira as private and public consumers fail to pay sometimes due to frustrations with the poor service and often inaccurate billing.") In the case of privately-provided electricity, there is a government subsidy too, as some 75 percent of the cost is represented by the cost of fuel which benefits from subsidy. The Inddence of Electricity Deficiencies by Firm Size, Region, and Sector Virtually all the firms have the facility to generate their own power as shown in Table 1. About 93 percent of the smallest firms (20-49 employees) surveyed do; some 97 percent of the small firms (50-99 employees) do; all the firms with between 100 and 999 employees have their own generators; and, finally, 66.7 percent ofthe largest firms (with over 1,000 employees) do. Only one finn in the East did not have a generator for production machinery, though it did for other pUrpOSI:!S I Economic Strategy and Policy: The Way Forward, July 2000, DFID. Table 1: Percentage of Firms with Private Generators Employment size Location East North South All 20-49 93.3 91.7 94.1 93.4 50-99 100.0 100.0 94.2 97.4 100-199 100.0 100.0 100.0 100.0 200-499 100.0 100.0 100.0 100.0 500-999 100.0 100.0 100.0 100.0 1000 and over 66.7 a 100.0 100.0 94.1 All 95.7 98.2 97.7 97.4 a One of the four firms in this category did not have a generator for production, but for other purposes. Of all the business problems affecting firms in Nigeria, problems over the infrastructure are by far the biggest (as shown elsewhere). In fact, infrastructure problems are nearly two-and-a-half times worse than the next biggest problem - which is finance. And deficiencies in the supply of electricity is by far the biggest infrastructure problem faced by firms. Overall some 94 percent of firms reported this is the case as shown in Table 2. Table 2: Percentage of Firms which Reported Electricity as their Biggest Infrastructure Problem Employment size Location East North South All 20-49 100.0 91.7 90.1 93.3 50-99 88.9 100.0 94.1 94.9 100-199 90.0 91.2 92.9 92.0 200-499 87.5 91.0 100.0 96.0 500-999 100.0 100.0 100.0 100.0 1000 and over 66.7 80.0 100.0 88.2 All 91.5 92.9 95.3 93.9 Costs of Public and Private Electricity Provision Manufacturers' Responses to Electricity DefiCiencies Kyu Sik Lee et ai, 1999, report that there are "essentially four ways in which firms might respond to infrastructural deficiencies. These are: relocation; factor substitution; private provision; and, output reduction." In our study, we found that there was a further response mechanism, i.e., product substitution. These response mechanisms are discussed below. Relocation. There was no evidence of firms relocating to other areas in order to obtain an improved electricity supply. As Table 1 indicates, there is little variation in the incidence of generators in the different regions, implying there is little reason to move from one area to another. However, there is evidence that firm do contemplate moving to overcome business environment problems. For example, This Day, 12 April 2001, reported that the multi-national firm Siemens was considering relocating its factory from one state to another to avail of lower local government taxes. Some firms reported making payments to encourage NEPA to "relocate" 2 their load-shedding elsewhere. One, with huge refrigerated storage capacity, paid a regular sum to ensure it had a continuing supply. However, ifthere was an outage approaching two hours duration, the firm took additional measures to ensure the disruption was minimized. In our more detailed interviews with a small sample of firms, we asked firms about the advantages and disadvantages of being located on an industrial estate in respect of the supply of electricity. On balance, there seem to be more problems being located on an industrial estate than otherwise. Some firms noted that ifNEPA wanted to load shed, it could pull one lever and shed more power quickly than getting an equivalent shedding from non-industrial-estate areas. Other firms put a countervailing position noting that firms in an industrial estate "could put up more of a hue and cry." Firms, whether on an industrial estate or elsewhere, also noted that their location near residential areas resulted in complaints and legal action as a result of noise pollution from the operation of private generators. Factor substitution. There was much evidence of factor substitution, e.g., adjusting the mode of production in favor of less electricity-intensive inputs. Firms commonly reported that they were avoiding machines with electronic controls which were observed to be more susceptible to damagf! from power fluctuations and outages. (It should be noted that one of the most experienced electrical engineers in Nigeria opined that electronic machinery could be protected with simple rewiring, but that "there are no good electrical workshops in Nigeria"). In the case of one pharmaceuticals firm, it was noted that repairs to the electronic monitoring equipment on its tablet-making machines was beyond the capability of the firm, and damage might lead to getting an engineer from Italy for up to two weeks per incidence of damage. Another pharmaceutical firm, with multi-national partners, confirmed by observing that it could take a week to repair such broken equipment through a series of "hand-holding" phone calls with the European suppliers; that it was not uncommon then to find that the resources were not available locally to undertake the repair; and that replacement parts were needed from Europe resulting in a machine being out of action for up to three weeks. When some machines are capable of processing 180,000 tables per hour, this is a sizeable loss. In some cases, older types of machine are no longer available, so firms are buying modern machines and then converting them from electronic to mechanical or electrical operation. In such cases, firms may have to modify their raw materials so that the down-graded machines could process the inputs. At least one firm reported wanting to overcome the problems of getting servicing skills in Nigeria by operating machinery which was linked by satellite and continuously monitored in real time by the European suppliers. However, this was impractical because it required a continuous supply of electricity. (Another firm which had installed such technology in order to be internationally competitive and supply locally-based multinationals with their packaging could not use it all the tit:ne because of telecommunications infrastructure problems)! While the cost implications of electricity supply deficiencies will be dealt with further below, it is worth noting at this point in the context of factor substitution that a Nigerian firm making lighting fixtures, and negotiating a joint-venture with a Malaysian firm, reported that better electricity supply in Malaysian firms which enabled automated machinery to be used resulted in three times the output in a similar-sized factory. 3 The need to use sub-optimal technology because of electricity-supply problems is not limited to production technology. Most firms, other than the largest and the multi-national firms, complained about maintenance problems on the IT hardware they had, or were installing. Part of the difficulty is that local consultants are unable to maintain equipment which is affected by electricity-supply deficiencies. For example, one firm reported embarking on a computerisation program which was planned to take six months, has taken 12 months to date and is on-going, and has required the hire of a second consultancy to deal with the maintenance problems. There is relief at hand for some firms in the form of natural gas. Several of the firms interviewed in the more-detailed survey reported that firm-specific studies have been undertaken by natural gas firms with the objective of making proposals to switch to gas. One ofthe largest textiles firms hoped to be the second firm in Nigeria to switch from electricity to natural gas and get a 30 percent reduction in energy costs. A substantial steel-pipes' firm is making the change, but notes it will have a need for at least one foreign gas-power technician to operate the system which will not be easy because of procedures over the hire of expatriates. Private provision. As noted earlier, nearly all Nigerian firms have made private provision for the generation and supply of electricity to substitute for the public provision. As noted by Kyu Sik Lee et ai, 1999, "by providing their own infrastructural services, firms are substituting internal capital in the form of equipment and machinery, as well as labor in the form of maintenance personnel, for the publicly provided infrastructure services which are not forthcoming." Not only this, firms have to pay operating costs for both public and for private provision. NEPA's electricity bills are made up of three charges: the consumption charge- which is a charge measured in the number of units of actual consumption (kilowatts per hour- KwH); the fixed charge - which is a standard (but insignificant) charge payable whether or not the service is used; and the demand charge - which is a charge based on the installed [power- using] capacity of the firm. The demand charge is levied on the firm no matter what the KwH consumption of the firm is. In some firms, the demand charge is constant, while in other firms it can be in inverse proportion to the amount of fuel consumed, as shown in Table 3. In this table, a furniture firm in one month consumed 1,938 KwH and the demand charge was for 135 units; in another month, the consumption was 489 KwH and the demand charge was for 180 units. In the case of a plastic container firm, in one month the consumption was 33,550 units while the number of demand units was 150; and in another month, the consumption was 13,970 units, while the demand units was constant at 150 units. This table shows that the demand charge can vary from 5 to 461 percent of the consumption charge and that the firm is paying a charge to the public provider whether it uses the service a little or a lot. The table also shows that the cost of electricity from the public provider can vary from N5.78 to N93.06 per KwH according to the units of consumption relative to the installed capacity of the firm. 4 Table 3: Demand Charge as a Percentage of Consumption Charge. Furniture Plastic containers Date of bill (mmlyy) 02/01 07/00 02/01 02/0 I 11100 09/00 Consumption: units(KwH) 1,938 489 185 17,180 13,970 Consumption: cost (N.) 9,186 2,317 877 159,027 81,433 66,219 Demand charge: units 135 180 70 150 150 150 Demand charge: cost (N.) 31,050 41,400 16,100 34,500 34,500 34,500 Fixed charge 240 240 240 240 240 240 Total cost per KwH of consumption 20.76 89.40 93.06 5.78 6.76 7.23 Demand charge as percentage of 30 6 5 461 236 192 It is n01: uncommon for firms to operate their generators even when the public supply is available. To take one case in which a small foam mattress firm observed that it would have to abort the whole production batch if there was a power failure during production. This would cost N30,000 in materials and it would take one hour to clean the equipment before reuse. One of the largest plastics packaging firms reported that NEPA operates only for 1-2 hours per day and as the firm operates a continuous manufacturing process it cannot switch from one source to the other because the switch-over process would cause it to lose 3-4 tonnes of raw material about half the material being processed at the time. It is becoming more difficult for firms to provide their own power as a substitute to public deficiencies as importers of generators now have to get permission from NEP A to import them. In the 2001 budget, it was reported that the government "as part of measures to forestall sabotage ofNEPA's operations has directed ... that ... importation of all types of generating sets must be approv(;!d by NEPA ... One of the factors which prompted the introduction were allegations of deliberate frustrations ofNEPA's ability to improve power supply. Importers of generating sets are said to be conniving with some NEP A officials to stall the authority's efforts and boost their business. The [government] was said to be particularly worried because of the threat this group of importers pose to the country's dream of pushing up electricity generation .... ,,2 The Minister of State for Power and Steel, on the other hand, was reported as saying that "NEPA was merely interestc;d in knowing the importers 'in case oftrouble.,J One of the firms interviewed noted that "permission is hard to get" to import generators and it had established a factory to import components and manufacture generators in Nigeria. Output reduction. Firms commonly reported output reductions due to deficiencies in the public provision of electricity, not uncommonly a loss of up to 30 percent. One of the largest sufferers, a leading manufacturer of steel sheet, reported that its BRC machine is constrained by the lack of power and the wear and tear on the 20-year old machine by the constant power interruptions- even though the firm makes informal payments to NEPA to load-shed in its favor. The machine has the eapacity to make 480 sheets per day of black EMlO the firm's most popular product- and the firm reports a demand for the machine's entire potential output. However, because of the 2 Business Times, 9-15 April 2001. 3 The Guardian, 13 April 2001. 5 outages, the 20 minutes' start-up time when the power is re-established, and the repairs which have to be made to the machine it takes five days to make 480 sheets, resulting in a potential loss to the firm of 80 percent of output -leading to a potential revenue loss ofN173m per year as shown in Table 3.2. (In addition, there is damage to the machine of some Nlm. per year). Table 4: Potential Sales Loss of EMIO Sheets Due to Electricity Deficiencies Sheets per day Sheets per year Sale price of sheet Sales per year (N.) Machine capacity 480 120,000 1,800 216,000,000 Actual output 96 24,000 1,800 43,200,000 Potential loss 384 96,000 172,800,000 Source: Firm interview. A leading foreign-managed manufacturer of cartons, supplying most of the multi-nationals in the food sector noted that it loses 25 percent of production due to deficient power supply. Several of its machines are electronically-controlled and when they stop, the whole batch of products has to be scrapped. It also estimates that it loses 10 percent of its materials' inventory because of such stoppages. One of the most dynamic firms interviewed which operates three shifts per day, seven days per week, month after month, except for a two-week closedown at Christmas uses privately and publicly-provided power. It had converted its machines from electronic operation to mechanical operation to make them less susceptible to damage, yet still estimated its production loss at 10 percent - mostly due to equipment damage caused by power-supply problems. Product substitution. A couple of pharmaceuticals firms, within the more detailed survey, noted that the mix of products they produced was influenced at least in part by the power deficiencies. One, for example, traditionally produced a range of 26 products, but because of the limited shelf-life of items such as vitamins it has concentrated on a range of five products which are faster moving and in which the demands of refrigerated storage down the supply-chain are less critical. Capital Costs and Their Incidence Firms are spending a considerable amount of capital on the private provision of electricity. As shown in Table 5, on average some 22 percent of the total value of equipment and machinery is represented by generators and accessories, such as cabling. This figure varies from region to region, with the North having the lowest percentage (at 17 percent), the East the highest percentage (at 30 percent), with the South in the middle (at 21 percent). There is no general bias by firm size within the regions, except that the highest percentages are the preserve of the largest firms. 6 Table 5: Value of Generators and Accessories as a Percentage of Total Value of Equipment and Machinery Employment size Location East North South All 20-49 16.6 21.7 23.3 20.9 50-99 55.3 12.7 17.9 27.2 100-199 31.8 14.0 16.1 18.9 200-499 7.0 8.9 18.8 14.9 500-999 61.2 21.1 19.6 29.2 1000 and over 11.2 35.8 44.1 37.5 All 30.3 16.7 20.6 21.9 The overall average of some 22 percent is more than double the finding observed in the 1988 World Bank Infrastructure Project Establishment Survey, at which time the overall average was 9.96 pe:rcent, with the small firms having an average of22.1 percent, and the larger ones an average of9.65 percent. Firms have an on-going capital cost in the maintenance of their equipment and machinery. Damage in one firm caused by electricity deficiencies resulted in spending on new machines and parts of some N75m. per year. As shown in Table 6, on average damage to equipment and machinery accounts for 3.3 percent of total value of equipment and machinery. Regional variations are consistent with the findings in Table 5 in the East, the damage per year is the highest and equal to 6.9 percent of the total value, while in the North it is the lowest (0.8 percent), and in the South in the middle at 2.7 percent. Table 6: Damage to Equipment as a Percentage of TotaI Value of Equipment and Machinery Employment size Location East North South All 20-49 0.9 O.l 1.5 1.0 50-99 15.9 0.9 1.6 6.1 100-199 3.5 1.0 1.1 1.5 200-499 1.1 0.8 5.4 3.6 500-999 24.8 4.3 0.2 10.9 1000 and over 0.6 0.2 3.4 1.2 6.9 0.8 2.7 3.3 Clearly firms want to provide sufficient standby capacity to run their entire plant during outages. Howevc:::r, most cannot because of the capital cost (which as noted above represents some 22 percent ofthe total value of equipment and machinery) and firms frequently only operate key producti.on processes during outages. It is unusual as noted in Table 1 where one of the four firms in the East with over 1000 employees only used its generator for non-production purposes during outages. 7 The impact of these capital costs can be considerable on firms, threatening their whole development. In the case of a new auto-parts manufacturer, reported to be the first of its kind in Nigeria, a substantial amount of planning was undertaken by Indian engineers who are used to designing similar turnkey operations in other countries. The new firm is operating on a trial basis, with all the resources including equipment and machinery in place for the roll-out in phases of increased capacity. The capital equipment for each of the phases is supported by an appropriate on-site stock of spare parts as recommended by the Indian project engineers. Problems due to electricity deficiencies started immediately - the first time the equipment in the laboratory was turned on the rheometer broke. Soon all the spare parts earmarked for the production line in the trial phase were used up, the spare parts for second phase were consumed, and parts then had to be "stolen" from the second-phase machinery. In the first three months, an unexpected USD25,000 of spare parts had been consumed, and the lead time in getting additional parts has threatened the planned roll-out. The firm reports "we are having to move to a totally different frame of mind - we are now going onto an undreamt of inventory mentality." An Indian-managed manufacturer of plastic pipes observed that once a year the phasing of the electricity would go into reverse and damage all the motors in the factory, bringing the complete business to a standstill until they could be replaced or repaired. Not only do firms need back-up stocks in spares, but they also need back-up generators. It is not uncommon for the capital cost of generators to be duplicated so firms can switch from one to another when there are break-downs. In several cases, firms operate one generator for a period of time, and then switch to another in order to allow each to rest. In some cases, there is a tripling of capital costs as firms may have three surge protectors per machine to cope with operating conditions beyond what the protectors were designed for. The Private Cost as a Measure of Willingness to Pay for Reliable Services The capacity utilization of firms' generators in Nigeria is high, as measured by the proportion of time they are being operated over the period of time the firm is operating. Table 7 indicates that on average all firms are privately providing electricity for some 67 percent of the time. There is an insignificant variation between the East and South regions (at around 70 percent) while in the North region they are used for 56 percent of the time. In general, there is little variation by size of firm - firms over 1000 employees use them the least (at 63 percent of the time) while firms with 100-199 employees use them the most (at 69.5 percent of the time). 8 Tablle 7: Percentage of Total Demand for Electricity in Firms which is Privately Provided Emplo:rment size Location East North South All 20-49 68.9 49.0 68.9 65.5 50-99 77.8 54.3 71.2 67.2 100-199 67.6 66.7 71.2 69.5 200-499 74.5 58.6 68.6 67.3 500-999 77.5 38.3 69.3 64.2 1000 and over 53.3 53.2 72.5 62.9 All 70.7 55.9 70.0 66.8 There is a substantial difference between the cost of publicly- and privately-provided electricity as documented in Table 8. On average, the cost of privately-provided electricity is 2.42 times more than that provided by NEPA-N19.0S per KwH compared with N7.86 per KwH. This figure approximates to the view of the electrical engineer mentioned earlier who reports that privately-provided power is some 2.5 times more expensive than publicly-provided power. He opined that in a typical textiles factory in Nigeria, the cost of publicly-provided electricity represents about 2 percent of sales, while privately-provided electricity represents 5 to 8 percent of sales. The table also shows the variation between the extremes in both the case of privately and publicly-provided electricity even though outliers have been removed. It was noted earlier that the variation between the cost per KwH of publicly-provided electricity is due to the demand charge which can vary from 5 to 461 percent of the consumption charge. (The standard consumption charge is NA.74 or USD 0.04 per KwH). In Table 8, the highest cost of electricity per KwH is 3.89 times the lowest cost, while the highest cost of privately-provided electricity is 4.4 times the lowest cost. Table 8: Cost of Publicly Compared to Privately-Provided Electricity (N. per KwH) Publicly provided Privately provided Lowest (N. per KwH) 5.36 9.00 Highest (N. per KwH) 20.76 39.60 Mean (N. per KwH) 7.86 19.05 Mean (USD. per KwH) 0.07 0.16 Variation in the cost of privately-provided electricity depends mostly on the variation in the cost of fuel and the efficiency of the generators - which is heavily dependent on the age of the generator and the quality of the servicing and operation. The costs of privately-provided electricity, shown in Table 9, are made up of the fuel cost, staff to run the generator(s), servicing costs (including maintenance personnel, oil changes, and running repairs), and depreciation. Fuel, at an average of75 percent of total cost is six times higher than the next highest cost, namely, servicing. The average price paid for diesel fuel among the firms which were interviewed in more detail was N31.29, ranging from a low ofN25.00 and a high ofN40.00 per litre. This compares with an official price for diesel ofN21 per litre while the highest price reported was N50. Few firms can 9 get diesel at the official price. One of the biggest multi-nationals in Nigeria obtains fuel as the official price in Lagos, while at its plant in Aba, even with its purchasing power, it was paying N40 at the time ofthe interview and hoped the price would fall back to N30-32. This price variation resulted in the cost of private generation in Aba being N13.5 per KwH, while in Lagos it was N9.00. Table 9: Cost of Fuel, Staff, Sen''icing and Depreciation as a Percentage of Total Cost Cost item % of total cost 7S Staff 4 Servicing 12 Depreciation 10 A cost which firms were unable to quantify was the cost of searching for fuel. Most firms reported on the difficulties. One firm, which needed two 200 litre drums per day, and was willing to pay the high price ofN40 per litre, spent from 5-48 hours getting fuel to run the generator for a day. In addition to the search costs for the fuel, some firms reported that suppliers of fuel would not supply on account and they spent long periods obtaining cash for the fuel, and that these costs were compounded by providing security for the cash collector and the fear that both collector and security guard would abscond with the money. In many cases, generators are aged and are being operated at beyond the endurance levels envisaged in their design leading to above-normal maintenance costs. Sometimes the fuel is adulterated and many firms reported having to purchase small quantities of fuel and testing it before buying it for use in production. Production Cost Increases The erratic public supply and the cost of private supply is adding considerably to the overall cost of production in firms as touched upon already. One of the largest paint firms stated that the bad infrastructure, of which electricity is the biggest component, "doubles the cost of production." In the case of pipes' manufacturers, poor supply of electricity, pushes up production costs by 33 percent, and by 7 percent in the case of steel pipes and plastics pipes manufacture respectively. Pharmaceutical firms believed that the poor power supply increased production costs by 20 percent. In a specific instance, charted in Table 10, a firm observed that it had stopped production of Paracetemol tablets when the cost of production at N45 was N7 higher in Nigeria than in India. The firm estimated that if it enjoyed the same standard of infrastructure, particularly electricity, as enjoyed in India, its production costs would be N210wer than in India. 10 · · Table 10: Cost of Production in Nigeria Compared with India for Paracetemol Item Nigerian production cost Indian Actual .Estimated cost with production cost Indian infrastructure Box of 96 paracetemol tablets (Naira) 45 36 38 Conclusions While most of the imported competition firms report facing comes from suppliers in Southern and South-East Asia, they are most worried about competition from Ghana within the region, particularly within the context ofECOWAS.lt is interesting to compare the views on the electricity supply of Nigerian firms with those of Ghana, which were obtained by the World Bank in late-20004 , on the supply of electricity and on the utility provider. In Ghana, a multi- national reported that its electricity cost was USDO.07 per KwH, a figure which is identical to the average! figure reported in Table 8. However, whereas in Nigeria firms relied on average on self- generated power for 67 percent of the time, in Ghana firms could report using self-generated power :ror up to 10 percent of the time. Furthermore, there are striking differences in the attitude of the power generators and the firms to each other. In Nigeria, one firm reported that it rarely received NEPA bills, but regularly received disconnection notices. The only way it could get a discomlection threat withdrawn was to take an old bill to NEPA, pay it for the second time and get it rt::ceipted for the second time. It noted it had never been able to query a bill - it was told to pay Hrst, and when the bill was paid, NEPA still refused to answer the query. In another case, a firm was so worried about not receiving a bill and being disconnected without notice that it was in credit to NEPA by the equivalent on one year's supply of electricity. In Ghana some firms do report problems with the electricity supply, noting that up to 10 percent of power is privately provided and that it adds some 5 percent to the production costs. However, the attitude of the provider seems to be different with firms reporting that "if one complains about water or electricity, the authorities do something about it" and that the authority informs it of potential outages. Firms would prefer to pay twice the price for a stable supply. 4 Observations which were obtained in the preparation of GHANA: International Competitiveness - Opportunities and Challenges Facing Non-Traditional Exports, 2001. 11 ,