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PUBLISHED DATE: - 20-11-2024
DOI: -
https://doi.org/10.37547/tajmei/Volume06Issue11-06
THE IMPACT OF ELECTRIC POWER OUTAGE
ON THE PROFITABILITY OF SMALL
BUSINESSES IN NIGERIA: A CASE STUDY OF
GWAGWALADA TOWN
Omolara Adebimpe Adekanbi
University of Abuja, Nigeria
INTRODUCTION
Background to the Study
Electric power, a critical component of global
energy consumption, has long been the backbone
of economic activities worldwide. Its pivotal role as
a driver of economic growth and productivity is
extensively documented in the literature. Studies
have shown that electricity significantly influences
productivity across various sectors, underscoring
its importance in sustaining economic growth. For
instance, sustained economic expansion is largely
contingent upon an uninterrupted and reliable
energy supply (Atif et al., 2010).
Electricity is indispensable for industrial growth,
economic development, and the overall well-being
of a nation. Reliable electricity supply is especially
vital for the survival and growth of small
businesses, with future business expansion relying
on affordable and accessible energy sources
RESEARCH ARTICLE
Open Access
Abstract
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(Babatunde & Shuaibu, 2008). Beyond powering
industries, electricity drives advancements in
communication, fosters innovation in science and
technology, enhances healthcare delivery, and
elevates living standards. Its impact extends across
infrastructure and socio-economic activities,
including transportation, communication, and
construction, thereby shaping the quality of life
(Adedokun, 2014).
In the Nigerian context, electricity plays a
significant role in economic development. The
nation's economy is heavily reliant on energy, with
stable electricity supply deemed essential for
Nigeria to achieve its ambition of becoming one of
the 20 most developed economies globally.
Unfortunately, the persistent electricity crisis
remains a significant impediment, with no
apparent resolution in sight (Ademola & Afeiwana,
2013). Power outages continue to hinder
development, underscoring the inefficiencies in the
country's electricity sector (Usunamlele, 2011).
Efforts to reform the electricity sector, such as the
privatization and unbundling of the Power Holding
Company of Nigeria (PHCN), were expected to
enhance efficiency. However, these reforms have
yet to translate into adequate and stable electricity
supply for consumers (Subair & Oke, 2014).
Reliable electricity is central to wealth creation and
serves as the engine of growth across all sectors of
the economy. Its development and utilization
profoundly affect socio-economic activities and, by
extension, the living standards of citizens
(Adenikinju & Iwayemi, 2012).
The inadequacy of electricity supply and frequent
power outages remain among the most frustrating
challenges for businesses and society. This
situation is paradoxical given Nigeria’s abundant
primary energy resources, including coal, natural
gas, solar, and hydroelectricity. Despite its
substantial reserves
—
35 billion barrels of crude
oil, 185 trillion cubic feet of natural gas, and 2.75
billion metric tons of coal
—
Nigeria suffers from
"energy poverty" amidst plenty. Furthermore,
while Nigeria is a major exporter of liquefied
natural gas (LNG), the country’s gas
-dominated
electricity grid frequently collapses due to
inadequate gas supply, compounded by issues such
as pipeline vandalism and wasteful gas flaring,
which contributes to environmental degradation
(Ademola & Afeiwana, 2013).
Billions of dollars have been invested in expanding
electricity generation and transmission, yet the
outcomes remain poor, with frequent outages and
voltage fluctuations. This has led to widespread
reliance on polluting generators, which adversely
affect environmental quality and public health.
Despite decades of reforms, beginning with the
Structural Adjustment Program (SAP) in 1986, the
electricity crisis persists.
This study seeks to empirically assess the impact of
electricity supply fluctuations on the profitability
of small businesses in Gwagwalada, providing
insights into how power instability affects local
economic development.
Statement of the Problem
Despite Nigeria's abundant oil resources, a
significant portion of its citizens lack access to
reliable and uninterrupted electricity. The country
has an installed electric generating capacity of
approximately 5,900 megawatts (MW), yet
frequent power outages and suboptimal
performance have kept the power sector operating
well below its potential capacity. A primary issue is
the disparity between the installed capacity and
the actual generating capacity of the Nigerian
power sector, necessitating reforms aimed at
improving power generation and distribution.
Key reforms include the establishment of the
National Electricity Regulatory Commission
(NERC), the unbundling of the Power Holding
Company of Nigeria (PHCN), and the introduction
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of Independent Power Producers (IPP). These
initiatives were designed to enhance power
generation and distribution while meeting
residential electricity demand. However, the
anticipated improvements have not materialized,
as power outages continue to hinder the country’s
development.
Electricity supply in Nigeria remains plagued by
frequent power failures and load shedding. Poor
access to electricity has been a significant barrier
to the nation’s economic growth. According to
statistics from the National Bureau of Statistics
(NBS, 2014), only about one-third of Nigerians, or
roughly 40% of the population, have access to
electricity. The distribution of electricity is marked
by substantial disparities between rural and urban
areas, as well as between residential and industrial
zones within urban centers (Ali-Akpajiak and Pyke,
2013).
In recent years, the persistently poor quality of
electricity supply has become a major constraint on
economic performance, particularly for small
businesses, which rely heavily on stable and
affordable power to sustain their operations.
Research Questions
The following questions has guided this study and
the methodology employed to understand the
relationship between the variables in this study:
What are the electricity costs of operating small
businesses in Gwagwalada town?
What is the impact of electricity fluctuation on level
of profit in Gwagwalada town?
Objective of the study
The broad objective of the study is to determine the
impact of electric power fluctuation on profitability
of small businesses in Gwagwalada town. The
specific objectives are to:
•
ascertain electricity costs of operating small
businesses in Gwagwalada town.
•
assess the impact of electricity fluctuation on
level of profit in Gwagwalada town.
Hypotheses of the Study
The hypotheses of the study are stated as follows:
𝑯
𝟎
𝟏
: Electricity costs of operating small business
has no significant impact on profitability of small
businesses in Gwagwalada town.
𝑯
𝟎
𝟐
: Electric power fluctuation has no significant
impact on
profitability of small businesses in Gwagwalada
town.
Significance of the study
This study is significant as it provides an empirical
analysis of the impact of electric power fluctuations
on the profitability of small businesses in
Gwagwalada town. The findings are expected to
assist policymakers and energy economists in
formulating effective strategies to enhance the
performance of Nigeria's power sector.
The study employs the Logit model to empirically
examine the relationship between electric power
fluctuations and the profitability of small
businesses
in
Gwagwalada.
Second,
by
incorporating time-series variables, the study
conducts unit root tests to avoid the issue of
spurious regression, ensuring robust and reliable
inferences.
Furthermore, the findings aim to contribute to the
growing div of literature on the relationship
between electric power fluctuations and small
business profitability in Nigeria. They also serve as
a valuable reference for future research in this
area.
Scope of the Study
The study is confined to impact of electric power
fluctuation on profitability of small businesses in
Gwagwalada town. Fifty (50) small businesses
were used as case study.
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Organization of the Study
This study is structured as follows: The
introduction includes the background to the study,
the statement of the problem, research questions,
objectives, hypotheses, significance, scope,
organization of the study, and an overview of
stylized facts about the Gwagwalada Area Council.
The literature review encompasses a conceptual
review, a theoretical review, an empirical review,
and the study's theoretical framework.
The methodology section outlines the sources and
methods of data collection, the model specification,
the definitions of variables used in the model, and
the methods of data analysis. This is followed by
the presentation, analysis, and interpretation of
results. The study concludes with a summary of
major findings, conclusions, recommendations,
and a discussion of the study's limitations
alongside suggestions for future research.
Stylized Facts about Gwagwalada Area Council
Before the establishment of the Federal Capital
Territory (FCT), Gwagwalada was part of the Kwali
District under the former Abuja Emirate, now
known as the Suleja Emirate. The Gwagwalada
Area Council was officially created on October 15,
1984. Its previously reported population of
150,000 has since become outdated. The relocation
of Nigeria’s capital from Lagos to Abuja in 1992 and
the subsequent demolition of illegal structures in
the Federal City Center triggered a significant
influx of people into Gwagwalada. This influx has
made it one of the fastest-growing urban centers in
the FCT, with its population increasing to over
1,000,000 as of 2015 (FCTA, 2015).
The rural population in Gwagwalada Area Council
relies primarily on subsistence agriculture. Major
crops cultivated include sorghum, maize, yam,
millet, cassava, rice, and beniseed. The area is also
suitable for livestock production due to the
availability of vast grazing lands. The headquarters
of the Area Council, Gwagwalada town, is
strategically located, just a 25-minute drive from
Nnamdi Azikiwe International Airport and about
45 minutes from the city center. Its accessibility to
neighboring councils like Kuje, Abaji, Abuja
Municipal, and Suleja in Niger State further
underscores its strategic importance.
Public utilities such as road networks, potable
water, electricity, and telephone services are
available in Gwagwalada. Additionally, the Area
Council hosts notable FCT and federal institutions,
including the University of Abuja, a specialist
hospital, the Custom, Immigration, and Prisons
Pension Board, the Sharia Court of Appeal, the FCT
School of Nursing, and the FCT College of
Education. There are also more than ten branches
of commercial banks operating within the council.
The government's liberal policies have encouraged
the establishment of these institutions and
supported residents in pursuing economic
activities. Plans are also underway to relocate the
market for fairly used vehicles (Tokunbo) to Tunga
Maje in Gwagwalada, which is expected to further
boost economic activities in the area. Moreover,
Gwagwalada boasts historical relics, artifacts, and
tourist attractions such as Dadabiri Hills, Tsauni
Hills, Wumi Natural Forest, the Giri Pottery Center,
traditional weaving centers at Angwa Teshi, and
calabash crafting centers in Zuba and Gwagwalada.
As designated in the FCT master plan, Gwagwalada
is intended to serve as the industrial zone of the
territory, making it an attractive location for
industries. Small-scale businesses are predominant
in Gwagwalada and include hair salons, business
centers, cybercafés, supermarkets, printing
presses, computer gadget shops, pharmacies,
boutiques, fashion design stores, hotels,
restaurants, pure water factories, and block-
making industries.
The town is home to a mix of residents, including
working-class middle-income earners, job seekers,
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petty traders, and small business owners. Many
businesses depend heavily on the presence of
students from the University of Abuja. Until 2014,
electricity supply in Gwagwalada was extremely
poor, with residents receiving fewer than four
hours of power daily. This forced many businesses
to close temporarily, especially during university
holidays or strikes, due to losses incurred from
relying on generators and paying for electricity
they did not consume. However, after the
privatization of electricity in Nigeria in July 2014,
the supply improved significantly to over nine
hours per day, providing much-needed relief to
residents and businesses.
LITERATURE REVIEW
Conceptual Review
Concept of Small Business
The definition of small-scale business varies by
country, but generally, it refers to a privately
owned enterprise operated by an individual or a
small group, typically employing between 1 and 20
workers. For instance, a business is classified as
small-scale when it employs up to 100 workers in
the United States, whereas in the European Union,
the threshold is 50 employees.
The Oxford English Dictionary defines a small-scale
business as a company with relatively small market
capitalization. These businesses are often
characterized by owner-management, locally
sourced capital, and operations confined to specific
communities. In more specific terms, a small-scale
business is independently owned and managed,
financed internally, driven by personalized
interests, and operates with a relatively low sales
turnover.
Small-scale businesses play a crucial role in
national economies by increasing per capita
income, fostering competition in the market, and
reducing monopolies. They also encourage the use
of local resources, help minimize rural-urban
migration, and promote the even distribution of
industrial activities. Furthermore, they contribute
to the development of industrial skills, technology,
and leadership in the marketplace (Ijeoma, 2011).
In Nigeria, the definition of small-scale businesses
has evolved over time. The 1988 Monetary Policy
Circular No. 22 from the Central Bank of Nigeria
(CBN) categorized small-scale businesses as those
with an annual turnover not exceeding ₦500,000
(approximately €2,269 as of February 6, 2014).
Similarly, the Federal Government’s 1990 budget
defined small-scale businesses as enterprises with
an annual turnover of up to ₦500
,000 for
commercial bank loans or up to ₦2 million in
capital investment (excluding land) for merchant
bank loans, with a maximum threshold of ₦5
million. By 1992, the National Economic
Reconstruction Fund (NERFUND) revised this
definition to include businesses with an annual
turnover of up to ₦10 million (Ekpenyong and
Nyong, 1992).
These definitions, however, present challenges for
many Nigerians attempting to establish small
businesses, as most small ventures, such as hair
salons, barbershops, restaurants, cybercafés, or
printing services, do not require or have access to
such high levels of startup capital. A more recent
industrial policy in Nigeria defines small-scale
businesses as those with total investments ranging
from ₦100,000 to ₦2 million (approx
imately
€9,076 as of February 6, 2014), excluding capital
costs but including working capital (NERFUND,
2005).
The criteria for defining small-scale businesses
often vary depending on the perspective of authors,
scholars, and policymakers. Factors such as capital
outlay, number of employees, sales turnover, fixed
capital investment, available plant and machinery,
market share, and the country’s level of
development are commonly used. For example, in
the United States, the United Kingdom, and
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European countries, small and medium enterprises
(SMEs) are primarily defined based on turnover
and employee numbers.
In Nigeria, small businesses are classified based on
capital employed, turnover, and workforce size.
According to the CBN communiqué No. 69 from a
special monetary policy committee meeting held
on April 15, 2010, a business with an asset base
(excluding land) of ₦5 million to ₦500 million and
a workforce of 11 to 300 employees falls within the
SME sub-sector. This definition was adopted by the
Small and Medium Enterprises Credit Guarantee
Scheme (SMECGS). For the Small and Medium
Enterprises Equity Investment Scheme (SMEEIS),
an SME is defined as a business with a maximum
asset base of ₦1.5 billion (excluding land and
working capital), with no specified limits on staff
size.
The National Council on Industry (1992) classified
SMEs as businesses with fixed assets exceeding ₦1
million but not exceeding ₦10 million, including
working capital but excluding land costs. Medium-
scale enterprises were defined as those with fixed
assets exceeding ₦10 million but not exceeding ₦40
million, excluding land costs but including working
capital. Similarly, the Industrial Development Bank
(1996) categorized SMEs as enterprises with total
costs (including working capital but excluding land
costs) between ₦1 million and ₦40 million,
employing 11 to 35 workers. Medium-scale
enterprises were defined as businesses with a
workforce of 36 to 100 employees and total costs
exceeding ₦40 million.
Concept of Electric Power
Electric power is globally recognized as a versatile,
relatively affordable, and cost-effective energy
source essential for any nation's development. It
operates through three main hierarchical stages:
generation, transmission, and distribution. As an
indispensable driver of industrial and economic
growth, electricity plays a pivotal role in advancing
modern economies.
Electricity is a crucial energy form driving
production and facilitating services. Its flexibility
and high demand make it a vital infrastructure
component for economic growth. Both households
and businesses rely heavily on electricity, with
demand driven by factors such as industrialization,
urbanization, population growth, and improving
living standards. A key policy objective for any
nation is to foster sustainable economic growth to
enhance the quality of life for its citizens, with
electricity serving as a cornerstone in achieving
this goal.
In Nigeria, electricity as a commercial energy
source remains insufficient to meet the demands of
a rapidly growing population. It contributes less
than 1% to the nation’s GDP, and demand
significantly exceeds supply. Currently, fewer than
40% of Nigerians have access to electricity, and the
power sector is plagued by high energy losses (30-
35%) and low revenue collection rates. This
inefficiency stems from aging and damaged
infrastructure, vandalism, and poor management
typical of public enterprises in Nigeria.
Additionally, government energy subsidies, while
making electricity more affordable, have hindered
revenue generation necessary for maintaining
infrastructure and expanding supply.
The unreliability of electricity supply imposes
significant economic burdens on the nation. Poor
energy quality discourages the adoption of efficient
technologies that rely on stable power. Sanchis
(2007) highlights the importance of electricity to
production, noting its impact on factors of
production and capital accumulation. According to
his findings, increased electricity availability
enhances manufacturing capacity, drives industrial
production, increases output, and reduces
unemployment. This underscores the importance
of
prioritizing
electricity
production
in
policymaking.
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The relationship between the energy sector and
economic development has been a subject of
analysis since the mid-19th century. Interest in this
connection surged during the energy crisis of the
1970s, prompting studies on energy costs in
production and their impact on industry and the
broader economy (Jiang, Chen, and Zhou, 2011). In
the 21st century, energy remains crucial to
economic activity, with economic growth strongly
influenced by a nation’s energy resources
(Velasquez and Pichler, 2010).
Electricity and business share a symbiotic
relationship, with energy supplies significantly
impacting economic activities (Velasquez and
Pichler, 2010). Electricity is essential across
various sectors, including manufacturing, services,
and distribution, for operations such as production,
storage, and office functions. It acts as a critical
input for production, making it an indispensable
resource for all industries. For small and medium-
sized enterprises (SMEs), electricity is a
standardized input vital for production and
meeting customer demands. The reliability of
electricity supply directly influences SMEs’ abilit
y
to operate competitively, highlighting its role in
mitigating supply risks and ensuring business
continuity (Haanes et al., 2011).
While small-scale businesses are often the
foundation upon which larger industries are built,
numerous challenges hinder their growth in
Nigeria. Issues such as limited access to finance,
credit facilities, raw materials, and electricity have
slowed their development. Specifically, Nigeria’s
unstable electricity generation has discouraged
small businesses, as acquiring and maintaining
self-generated electricity imposes a significant
financial burden. This lack of reliable energy
creates barriers for small-scale businesses, limiting
their capacity to grow and compete effectively in
the market.
Theoretical Review
Classical economists did not consider energy a
factor of production in the production process, nor
did the neoclassical economists. However, Alam
(2006), in his work Economic Growth with Energy,
found that energy not only serves as a factor of
production but also acts as a catalyst for national
growth.
In modern economics, models have been
developed to incorporate the role of resources,
including energy, in the growth process. Time
series analyses have demonstrated that energy
consumption and Gross Domestic Product (GDP)
are co-integrated, and energy use Granger-causes
GDP when additional variables such as energy
prices or other production inputs are included. The
primary driver of economic growth is productivity
growth, which is defined as the ratio of economic
output to inputs such as capital, labor, energy,
materials, and services (KLEMS). This recognition
has prompted criticism of neoclassical economic
theories and other growth models, particularly
regarding their failure to account for the
implications of thermodynamics for economic
production and the economy's long-term
sustainability. Consequently, there has been a
paradigm shift toward incorporating energy into
modern growth models, reflecting its critical role in
the economy. Stern (1999) emphasizes that energy
is a non-reproducible factor of production, a
sentiment echoed by Hall et al. (2003). In extreme
cases, energy use rather than goods output has
been proposed as an indicator of economic
development, as seen in Kardashev’s (1964)
framework.
Prior to Romer
’s (1994) growth theory, several
other growth theories were developed, including
the Solow-Swan model, also known as the
exogenous growth model. This model explains
long-run economic growth by focusing on
productivity, capital accumulation, population
growth, and technological progress. Its foundation
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lies in the neoclassical Cobb-Douglas aggregate
production function, which connects the model to
microeconomic principles (Acemoglu, 2009).
The Solow-Swan model assumes diminishing
returns to labor and capital, constant returns to
scale, a competitive market equilibrium, and a fixed
savings rate derived from the Domar model. A key
feature of the Solow model is its explanation of
long-run per capita growth as being driven by the
rate of technological progress, which is considered
an exogenous factor outside the model.
By the mid-1980s, dissatisfaction with exogenous
growth theories grew among economists, leading
to the emergence of endogenous growth theory.
This new approach addressed the shortcomings of
exogenous
growth
models
by
explicitly
incorporating the determinants of growth within
the model itself. Romer’s (1994) endogenous
growth theory posits that economic growth results
primarily from endogenous factors such as
investment in human capital, innovation, and
knowledge, rather than external forces.
Endogenous growth theory emphasizes the
significance of positive externalities and spillover
effects in a knowledge-based economy as drivers of
economic development. Unlike exogenous growth
models, which leave the savings rate and
technological progress unexplained, endogenous
models are grounded in microeconomic
foundations. In these models, households
maximize utility subject to budget constraints,
while firms maximize profits. Human capital and
technological innovation are central to these
models, serving as the primary engines of growth.
The simplest formulation, such as the AK model,
assumes constant returns to scale in production,
while more complex setups incorporate spillover
effects, increasing varieties of goods, and
improvements in quality.
A key assumption of endogenous growth theory is
that the marginal product of capital does not
diminish at the aggregate level, or at least does not
approach zero. This does not imply that larger
firms are more productive than smaller ones, as
diminishing marginal returns to capital still apply
at the firm level. Consequently, while endogenous
growth models can accommodate perfect
competition, many such models relax this
assumption, allowing for some degree of monopoly
power. This adjustment reflects the real-world
dynamics of innovation and market competition.
Empirical Review
There is a substantial div of empirical research
examining the impact of electricity on small
businesses. Studies such as ADB (1999) and
Oshikoya et al. (1999) underscore the critical
importance
of
infrastructure,
particularly
electricity, in reducing poverty. They argue that
new or improved infrastructure can alleviate
poverty through direct enhancement of economic
activities and indirect improvements in the quality
of life.
Findings by the United Nations Industrial
Development Organization (UNIDO, 2009) reveal
that only 26% of households in Africa have access
to electricity, making the continent the lowest
globally in terms of electricity penetration.
Approximately 547 million people in Africa lack
access to electricity. Various factors contribute to
this situation, including poor performance in
electricity supply and service delivery, an inability
to meet the growing demand for electricity, and
insufficient managerial and technical skills.
Governments across the continent struggle to fund
infrastructure expansion or refurbishment and to
attract private sector investment in the power
sector. Additionally, inadequate maintenance of
existing facilities due to financial and technical
constraints has led to reliability issues. Politically
influenced tariffs, often set below marginal costs,
have compounded the problem, as have poor
governance, unstable governments affected by
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regional and ethnic conflicts, and weak economic
conditions, particularly in sub-Saharan Africa.
Ineffective revenue collection mechanisms,
insufficient rainfall in hydropower-dependent
regions leading to power rationing, and other
structural problems have all culminated in
inadequate electricity supply.
Sambo (2008) emphasizes that adequate and
reliable electricity is a fundamental input for
socioeconomic development. In his analysis,
inadequate
electricity
supply
restricts
socioeconomic activities to meeting basic needs,
limits economic growth, and adversely affects the
quality of life. Several studies have investigated the
relationship between energy supply and economic
growth. Some, such as Yu and Hwang (1984), found
no evidence of causality between growth and
energy consumption. Others have demonstrated
that developing energy resources can stimulate
economic growth through multiplier effects and by
providing the infrastructure needed for broader
development.
Ukpong (1976), in a pioneering study on electricity
consumption in Nigeria, used regression analysis
to demonstrate a strong positive relationship
between electricity consumption, economic
development, and industrialization. However, his
study did not clarify whether this relationship was
bidirectional. He also noted that the level of
electricity supply in Nigeria fell significantly short
of potential demand.
Adenikinju (2005) employed surveys and revealed
preference approaches to estimate the costs
associated with inadequate electricity in Nigeria.
He found that unreliable electricity imposes
substantial costs on businesses, with firms
allocating as much as 20 to 30 percent of their
initial investments to acquiring facilities to ensure
supply reliability. This situation significantly
undermines the cost competitiveness of Nigeria's
manufacturing sector.
Alayande and Ekone (2001), using a multivariate
approach, observed a unidirectional causality from
economic growth to energy consumption but found
no evidence of causality in the opposite direction.
This suggests that energy consumption does not
provide information about fluctuations in
economic growth in Nigeria.
Stephen and Wasiu (2013) highlighted the
challenges small-scale business operators face due
to unreliable electricity supply in Nigeria. Their
study found that this issue discourages small
businesses from adopting productivity-enhancing
technologies,
as
even
generator-powered
alternatives often fail to meet energy demands.
This inability to meet energy needs has been
attributed to deeper structural issues within
Nigeria’s ele
ctricity sector. These include
inadequate gas supplies to power plants, labor
unrest, insufficient power generation capacity,
inefficient utilization of existing capacity, lack of
capital for investment, high technical losses,
sabotage of power infrastructure, insufficient
transmission and distribution facilities, and an
inappropriate industry and market structure.
The inadequacy of Nigeria's electricity sector has
far-reaching
implications,
impacting
both
businesses and the daily lives of Nigerians. The
inability to provide reliable electricity for domestic
and business needs remains a significant challenge,
one that has stifled economic growth and
diminished the quality of life for many.
Theoretical Framework
The theoretical framework utilized in this study is
the Deadweight Loss Theory. This theory posits
that a consumer and producer surplus is lost due to
state ownership of infrastructure service
providers, primarily because of external factors
that impose restrictions on output.
Poor and unreliable infrastructure services lead to
increased production costs for firms, either by
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forcing them to incur higher expenses in
substituting public infrastructure with private
alternatives or by causing output losses for firms
unable to bear the additional costs. This scenario
shifts the supply curve to the left, as illustrated in
the diagram below, indicating that producers are
only willing to supply each previous level of output
at a higher price. Consequently, the higher market
price reduces both consumer and producer
surplus.
Inadequate and poor-quality infrastructure
—
such
as unreliable electricity
—
poses a significant
barrier to industrial production and overall
economic growth. The economic loss caused by
such inefficiencies can be conceptualized as a
deadweight loss, reflecting the reduction in
consumer and producer surplus (Iwayemi, 1991).
Enhancing the quality and quantity of
infrastructural
services
with
substantial
economies of scale, such as electricity, would shift
the supply curve outward and to the right. This
improvement
would
stimulate
increased
production, lower industrial costs, and create a
more competitive industrial environment capable
of meeting the challenges of the global market.
Firms that are forced to meet infrastructure needs
through self-provision face significant expenses.
Over time, equipment designed for standby use
often requires costly replacements due to
continuous operation. These additional costs
unnecessarily increase the price paid by
consumers (Iwayemi, 1991).
METHODOLOGY
Sources and Methods of Data Collection
The data for this study were obtained from both
primary and secondary sources through
administered structured questionnaire and
available records kept by the small businesses.
The study utilized the investigative survey
research approach (ISRA) in collecting relevant
data. The ISRA for obtaining data entails the
schedule of a series of visits to the small businesses
of interest. The tasks accomplished during such
visits include the following: interviewing owners of
these small businesses, administering structured
questionnaires to them and obtaining relevant
information from the available records kept by the
owners of these small businesses.
Model Specification
To assess the impact of electric power fluctuation
on the profitability of small businesses in
Gwagwalada town, the study utilized the Logit
Probability Model given as follows:
𝐿 =
𝐼𝑛(𝑃)
𝐼𝑛(1 − 𝑃)
= 𝛽
0
+ 𝛽
1
𝐸𝑃𝐺 + 𝛽
2
𝐸𝑋𝑃 + 𝜇
Here, P= 1, if electric power fluctuation reduces the profitability of small businesses in Gwagwalada town;
(1-P), if otherwise. Here, the dependent variable is a dummy variable. The independent variables in the
model are admixture of quantitative and qualitative variabl
es, while β_0, β_1 and β_2 are the parameters
of the model to be estimated. The error term, μ which represents unobserved values, is assumed to be
normally distributed, with zero mean and constant variance.
Definition of Variables used in the Model
Variables
Description
L:
P=1: If electric power fluctuation reduces
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the profitability of small businesses in
Gwagwalada town; (1-P), if otherwise.
EPG:
EPG=1: If there is constant electric power
fluctuation in Gwagwalada town; EPG=0: If otherwise
EXP: Expenses on Alternative Electricity Power Supply
METHOD OF DATA ANALYSIS
The Maximum Likelihood (ML) method is used to obtain estimates for the specified Logit probability
model. The justification for using ML method is due to the fact that neither the ordinary least squares
(OLS) nor the weighted least square (WLS) is helpful or adequate for estimating the Logit model.
Moreover, that the Logit model is a nonlinear model. The parameter estimates of the specified Logit
model are not directly interpretable with respect to magnitudes of effect but only interpretable with
respect to the direction of effect on probability (Gujarati, 2003).
DATA PRESENTATION, ANALYSIS AND INTERPRETATION OF RESULTS
Data Presentation
In order to assess the impact of electric power fluctuation on the profitability of small businesses in
Gwagwalada town, Logit model estimation was carried out using both qualitative and quantitative
based on fifty (50) small businesses that served as respondents of the administered questionnaire in
appendix II. See also appendix I for the regression table.
DATA ANALYSIS
The estimated Logit regression model is given as follows:
Dependent Variable: L
Method: ML - Binary Logit (Quadratic hill climbing)
Date: 10/19/15 Time: 20:23
Sample: 1- 50
Included observations: 50
Convergence achieved after 4 iterations
Covariance matrix computed using second derivatives
Variable
Coefficient
Std. Error
z-Statistic
Prob.
C
0.178752
0.780292
0.229084
0.8188
EPG
-0.180206
0.719746
-0.250375
0.8023
EXPP
0.001914
0.001474
1.297906
0.1943
McFadden R-squared
0.832087 Mean dependent var
0.740000
S.D. dependent var
0.443087 S.E. of regression
0.444311
Akaike info criterion
1.229339 Sum squared resid
9.278377
Schwarz criterion
1.344060 Log likelihood
-27.73347
Hannan-Quinn criter.
1.273025 Deviance
55.46693
Restr. Deviance
57.30569 Restr. log likelihood
-28.65285
LR statistic
18.38761 Avg. log likelihood
-0.554669
Prob(LR statistic)
0.000006
Obs with Dep=0
13 Total obs
50
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Obs with Dep=1
37
Source: Computed using E-Views 7 Software
Interpretation of Results
The Logit estimate above revealed that the mean of
the dependent variable is 0.740000 while the
standard error of regression is 0.444311. These
suggest adequacy of the estimated Logit model.
More so, the model selection criteria such as Akaike
information criterion (AIC), Schwarz information
criterion (SIC) and Hannan-Quinn criterion (HQC)
with respective low values of 1.229339, 1.344060
and 1.273025 indicate that the estimated Logit
model is adequately specified.
The likelihood ratio (LR) statistic value of 18.38761
with probability (LR stat) value of 0.000006 which
is significant at 5% level of significance, suggests
the absence of autocorrelation. The McFadden R-
squared value of 0.832087 implies that about 83
percent of the change in the dependent variable
was explained by the explanatory variables of the
model. It also shows that the model has a good fit.
From the estimated Logit model above, we also
observed that electricity power fluctuation (EPG)
had negative impact on the profitability of the small
businesses in Gwagwalada town; indicating that
the probability of change in profitability of the
small businesses in Gwagwalada town with respect
to changes in electricity power fluctuation (EPG)
reduces by 18.03%. On the other hand, small
businesses expenses on alternative electricity
power supply (EXP) had positive impact on the
profitability variable of the small businesses;
implying that the probability of change in small
businesses’ profitability with respect to changes in
their alternative electricity power supply (EXP)
increases by 4.1%.
Hypothesis testing is based on Z-statistic. The Logit
estimates above show that both electricity power
fluctuation (EPG) and small and medium scale
firms expenses on alternative electricity power
supply in Gwagwalada town (EXP) had
insignificant impact on the profitability variable of
the small businesses. This position is supported by
the low Z-value and its corresponding high
probability value (i.e., p>0.05).
SUMMARY,
CONCLUSION
AND
RECOMMENDATIONS
Summary of Major Findings
This study examined the impact of electric power
fluctuation on the profitability of small businesses
in Nigeria using 50 randomly selected small
businesses in Gwagwalada town as case study.
Logit regression model was adopted containing
admixture of qualitative and quantitative variables.
The maximum likelihood (ML) estimation method
was utilized in estimating the Logit model.
Findings from the estimated Logit model show that
electricity power fluctuation had negative impact
on the profitability of the small businesses in
Gwagwalada town while small businesses
expenses on alternative electricity power supply
had positive impact on the profitability variable of
the small businesses. However, both electricity
power fluctuation and small businesses’ expenses
on alternative electricity power supply in
Gwagwalada town had insignificant impact on
profitability variable of the small businesses.
Furthermore, findings of the study revealed that
PHCN has contributed in power supply in Nigeria;
however, power shortage and outage is still wide
spread in Nigeria. In the review of literature, it was
observed that steady supply of power is regarded
as essential propelling economic activities aimed at
increasing general output in an economy. An
increase in output is expected to encourage the
income of the factors of production.
CONCLUSION
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The use of electric power is taken as a close
indicator of industrial activity and a significant
index of standard of living. In the developing
countries of the world, no activity is more basic to
the fuller utilization of their resources than the
development of the energy industries. Electricity,
rather than the steam engine drives the developing
industries of modern Africa. Nigeria, with the
largest population in Africa and an energy resource
base by African standards, both rich and varied,
demonstrates many of the problems and
potentialities of electricity production in the
developing countries of the tropical world.
Electricity in Nigeria has been fluctuating. This is
one of the major problems affecting the Nigerian
economy. It has been pointed out that Nigeria has
installed a generating capacity of over 8GW but is
presently having an output of 2.5GW as at that date.
At December 2014, it rose to an average of 3.5 GW.
As a result, there is inconsistency in the daily power
supply.
Nigeria has been described as belonging to the
category of countries that are non-
industrial. It’s a
fact that Nigeria is richly endowed with various
energy sources such as crude oil, natural gas, coal,
hydropower, solar energy, fissionable materials for
nuclear energy. Yet, it is described as an energy
poor country because the sector is relatively
underdeveloped. The PHCN, a government
parastatal, has the sole responsibility for managing
the generating plants as well as distribution of
power nationally. The total generating capacity is
about 3000MW, approximately thrice the current
level of national demand. However, the actual
power available at any given time is less that 40
percent of the total capacity due to poor
maintenance and inadequate infrastructure; hence
there is a perennial shortage. This situation is
exacerbated by a grossly inefficient, poorly
maintained distribution system.
RECOMMENDATIONS
Based on the findings of the study, several
recommendations were proposed to address
Nigeria's electricity challenges. First, the
government should conduct a national demand
study to ascertain electricity requirements for
short, medium, and long-term needs. To ensure
efficient system deployment, an integrated least-
cost system expansion plan must be developed.
Additionally, initiatives should be pursued to
diversify electricity generation and enhance supply
security, alongside strategies to generate
electricity closer to demand centers to minimize
technical losses.
It is essential to complete projects aimed at
transforming the radial transmission network into
a robust grid with appropriate dispatch and control
systems. Moreover, upgrades and reinforcements
of the transmission and distribution networks are
necessary to support anticipated increases in
electricity generation. The development of an
appropriate gas policy is critical to encourage gas
production and supply for power generation,
supported by suitable pricing regimes and
incentives to attract investment and ensure
efficient operations. Finally, measures must be
explored to secure a long-term gas supply for
electricity generation, making it a national priority.
Limitations of the Study and Suggestions for
Further Studies
This study has raised a lot of vital and important
issues that could not be addressed in a single study
of this nature. Hence, it may be useful to note some
limitations and possible extensions associated with
the current study. One of the main features of this
study is that it utilized logit modelling approach.
Future studies could utilize the probit and tobit
models.
Furthermore, studies of this nature can decide to
expand on the number of selected explanatory
variables used. Some variables could be substituted
with others. These suggestions are expected to
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provide a more detailed examination of the impact
of electric power fluctuation on the profitability of
small businesses in Nigeria than has been achieved
by the current study.
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