THE IMPACT OF INCREASE OF ELECTRICITY TARIFF ON THE OPERATION OF SMALL SCALE ENTERPRISES IN UTAKO, ABUJA

CHAPTER ONE

INTRODUCTION

 Background of the Study 

Small-scale firms play a crucial role in providing employment opportunities in the United States, as they employ over half of the country's workforce. Additionally, they constitute 66% of the total human resources of the European Union (Takats, 2018). SMEs can be likened to an automated tool that propels the engine of an economy, facilitating growth and development (Oladele, Olowookere & Akinruwa, 2019). Ghandi and Amissah (2018) argued that SMEs have a significant worldwide impact, serving as a central point for economic growth and fostering the development of the private sector. 

Small scale enterprises encompass a wide range of business activities, extending beyond the borders of Nigeria. These enterprises encompass a variety of industries such as local agricultural tool manufacturing, bar ownership, vehicle repair, tailoring, transportation services, iron production, internet cafes, laundry services and software creation, among others. In the local context, a significant number of Small and Medium-Sized Enterprises (SMEs) are found in the private sector. These SMEs make up over ninety percent of enterprises in the Federal Republic of Nigeria and are recognised for creating more than 50% of the employment opportunities(Olowookere et al., 2021).

The significance of SMEs in Nigeria is increasing as they contribute to the development of available resources for industry and consumption, hence enhancing the nation's economic wellbeing. (Aderemi et al., 2020:1; Micah and Manzo, 2014) The significance of Small and Medium-Sized Enterprises (SMEs) for economic growth in a developing country such as Nigeria cannot be overstated. This is due to their broad and diverse impact, as well as their ability to accelerate progress towards achieving macroeconomic goals such as income distribution and full employment. Therefore, the presence of SMEs is essential and unavoidable. (Aderemi et al., 2019; and Ezema, 2014). Similarly, it directly enhances economic growth and sustenance in developing nations due to its labor-intensive production methods, resulting in a more equitable distribution of revenue and increased employment opportunities (Olowookere et al., 2021). Therefore, in economies that rely on agriculture, livelihood chances are created by engaging in uncomplicated processing activities that enhance value and foster entrepreneurship. Socially responsible enterprises (SMEs) establish a productive capacity that fosters a resilient economy by facilitating the collaboration between small and large business. Small and medium-sized enterprises (SMEs) play a crucial role in the economies of developing countries, supporting the livelihoods of a significant portion of the population(Adade, 2022).

Past empirical research have found that several factors have an impact on the success of small and medium-sized enterprises (SMEs). These issues include financial constraints, inadequate people management, ineffective marketing strategies, subpar management practices, a limited entrepreneurial skill base, lack of infrastructure, and an unfavourable power tariff policy (Evbuomwan, Ikpi, Okoruwa & Akinyosoye 2013, World Bank, 2014, and Aderemi et al., 2020).

Electricity has always been seen as a catalyst for promoting economic growth in developing nations. Access to electricity may significantly stimulate a country's economic development by enabling enterprises to leverage it for the adoption of productivity-enhancing technologies, most of which heavily depend on power. The potential advantages of electricity have prompted increased investment in electricity initiatives in poor nations, with the World Bank's funding for energy projects rising from $7.9 billion in 2017 to $15.2 billion in 2021 (World Bank, 2022). While the augmented investment in energy has enhanced electrification rates in the majority of emerging nations, electricity expenses persist to be elevated, particularly for small-scale enterprises. SMEs may adjust their product assortment to prioritise less technologically complex items that have lower power requirements for manufacture, as a response to the elevated electricity costs (Adewale and Garba, 2020).

Industrial consumers in most industrialised countries enjoy preferential electricity pricing relative to other users, as reported by the IEA 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 electricity consumption patterns and 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 study, Indian manufacturing enterprises were asked to identify the primary factor that hindered their operations. Over 36 percent of the firms identified power as the major limitation (World Bank, 2021).

Utako, Abuja's small-scale industries also encounter the issue of exorbitant electricity tariffs. Despite the presence of several constraints such as insufficient money, limited technical and managerial expertise, environmental impacts, and government laws that impact business operations in Utako, these obstacles are not being given much consideration. A significant number of small-scale enterprises (SMEs) in Utako currently produce their own electricity internally in order to enhance their productivity. 

However, the cost of providing in-house power supply for enterprises' productivity accounts for around 36 percent of the entire production cost (Ogunjobi, 2018). Similarly, Ubi, Effiom, and Okon (2022) and Mohammed (2023) have also found that certain small-scale Nigerian companies have allocated a significant portion of their total capital expenditure to meet 50 percent of their electricity needs, whereas larger companies heavily depend on self-generated electricity to ensure uninterrupted production with 100 percent reliability. 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.

1.2 Statement of the problem

The availability of an inexpensive and dependable electrical source is widely seen as crucial for the sustainability of small-scale enterprises (World Bank Enterprise Surveys, 2023). Small enterprises 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. Small enterprises must devise strategies to properly handle this financial burden. 

According to Delmar, Davidson, and Gartner (2023), scholars utilise different growth measures, such as assets, market share, physical output, and earnings, to SMEs corporate performance. The sole means by which small and medium-sized enterprises (SMEs) can transform into larger organisations is through their aspiration for business expansion. Small enterprises function with narrow profit margins, and elevated electricity costs might exacerbate their financial burden. Elevated tariffs result in a direct correlation with augmented operational expenses, which in turn diminish profit margins and restrict the resources accessible for expansion and long-term viability. Small enterprises must devise strategies to properly handle this financial burden. 

Moreover, Finance plays a crucial role in all forms of economic operations. The expansion of any industry is heavily contingent upon the timely availability of sufficient financial resources (Sushma, 2021). Small firms already confront intense competition from larger enterprises, and elevated electricity costs might exacerbate this challenge. Small busineess face challenges in absorbing higher costs due to their limited financial resources, which can result in a significant disadvantage in pricing, marketing, and overall competitiveness (Adade, 2022). In such instances, it becomes imperative to find strategies to maintain competitiveness in the market. This study will analyse the impact of an increase in energy cost on the operation of small-scale firms in Utako, Abuja. 

1.3 Objectives of the Study 

The primary objective of this study is to critically analyze the impact of increase of electricity tariff on the operation of small scale enterprises in Utako, Abuja. Specifically the study seeks:

To find out whether there is a relationship between adequate electricity and operation of small scale enterprises.

To assess the extent to which tariff has affected access to electricity among small scale enterprises in Utako, Abuja.

To analyze the effects of increased electricity tariff on the operation of small scale enterprises in Utako, Abuja.

To assess the extent increased electricity tariff affects the continuity of small scale enterprises in Utako, Abuja.

1.4 Research Questions

The following research questions will be answered in this study:

Is there a relationship between adequate electricity and operation of small scale enterprises?

What is the extent to which tariff increase has affected access to electricity among small scale enterprises in Utako, Abuja?

What are the effects of increased electricity tariff on the operation of small scale enterprises in Utako, Abuja?

What is the extent to which increased electricity tariff affects the continuity of small scale enterprises in Utako, Abuja?

1.5 Research Hypothesis

The following null hypothesis will validate this study:

Ho: Increase in electricity tariff has no significant negative effect on the operation of small scale enterprises in Utako, Abuja.

Ha: Increase in electricity tariff has a significant negative effect on the operation of small scale enterprises in Utako, Abuja.

1.6 Significance of the study

This study will be of interest to scholars, small scale entrepreneurs, managers, the regulators, and government. Academically, 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.

This study will be of importance to small scale entrepreneurs 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 wealth. 

1.7 Scope of the study

The study aims to carry out a critical analysis on the impact of increase of electricity tariff on the operation of small scale enterprises in Utako, Abuja. Empirically, this study will explore the various ways increase of electricity tariff affects the overall performance of small scale businesses in Nigeria. 

This study will be carried out in Utako, Abuja.

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 are no much data on the topic of increase of electricity tariff; 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 Utako. Thus findings of this study cannot be used for generalization for other regions within Nigeria. 

Additionally, the researcher will simultaneously engage in this study with other academic work which will impede 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.

1.9 Definition of terms

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.

Small scale enterprise: A small scale enterprise, or more simply, a small business, is one marked by a limited number of employees and a limited flow of finances and materials.