Start-ups shrink as energy cost bites

by Odinaka Anudu

January 1, 2018 | 2:11 am
  |     |     |   Start Conversation

Ademola Ogundesi runs a bakery at Ejigbo, a suburb of Lagos. He started this business in 2015 after his National Youth Service Corps (NYSC) in Kogi, one of the Nigeria’s six north-central states.

After saving up N100, 000 from his monthly stipends at the NYSC, he got N5 million from an angel investor who opted to own 40 percent equity in the business.

The 27-year-old Ogundesi wakes up early every three days in search of major raw materials—sugar and flour. These two commodities are locally produced but their prices have doubled since early 2017. A 50 kg of wheat flour cost less than N6,500 in early 2016 but is now closer to N12,000. The same size of sugar, which went for N8, 000 within the same period, now costs about N18, 000. High cost of these raw materials is down to the weaker status of naira, Nigeria’s official currency. Though sugar and flour are locally produced majorly by multinationals, these companies also import raw materials for these commodities, including wheat and raw sugar. Naira exchange rate to dollar, which was around N199/$ in 2015, is now N305 officially and N360 at the parallel market.

But this is not Ogundesi’s only headache. To fuel his three generators, he needs petrol, which is now scarce and sells between N300 and N400 per litre.

The young entrepreneur runs his bakery close to the petrol depots of major marketers and the Nigerian National Petroleum Corporation (NNPC) but cannot get fuel now at N145, which had been the official price before gasoline scarcity started.

He needs at least 20 litres of fuel each day to run his factory but cannot get it at N145. Fuel is sold mostly at night to ‘black market’ racketeers who mainly sleep at petrol stations. The racketeers, who buy higher than N145 official rate, re-sell to desperate people like Ogundesi at N300 to N400 in the morning.

Ogundesi’s case is not helped by the state of energy supply in his Ejigbo area. In the past three weeks, the young baker has only seen electricity supply from power supply distributors, popularly called DisCos, twice. And in these two occasions, power only lasted for about six hours.

In fact, power supply to Ogundesi’s area at Ejigbo has gone from bad to worse since September 2017. Since that time to December 28, power has not been supplied by Ikeja DisCo to his area for more than six times.

So, Ogundesi now spends at least N6, 000 each day on petrol rather than N2, 900.

He produces two sizes of bread and sells them at N100 and N250 per loaf respectively, but rising production cost is making it impossible for him to continue to sell at these prices.

“It is difficult to produce at a high rate and compete with superstores like Shoprite,” he said.

“My business is on the edge,” he lamented.

High energy cost is hurting small businesses and start-ups in Africa’s most populous country. Nigeria is now characterised by recurring fuel crises, pushing start-ups out of their offices at productive hours in search of petrol.

The situation has been worsened by poor electricity supply from DisCos, which leaves small businesses and start-ups with no option than to acquire generators to power their businesses.

However, this has serious consequences on start-ups and small businesses in the country where one out of three fails within two years of set-up.

Dead business

Gab Maduekwe ran a small-scale nylon production factory in Onitsha, Anambra State between 2012 and 2014. Despite having two generator sets, his business packed up in early 2015 when he could no longer compete price-wise in the local market due to high production cost.

Gab would produce hundreds of packs of nylon but would not sell them because buyers wanted cheaper options.

“I produced black and white nylons. But after production, my cost price would even be higher than the market prices of imported nylons,” Mmaduekwe, who ran a small factory at Ochanja Market, told this newspaper.

“Today, I am no longer in that business,” he said, regrettably.

“I am not the only one that shut down. Two of us on the same line also closed down and are doing for something else.”

A generator economy

Many entrepreneurs have acquired different sizes of generators to power their businesses.

The generators range from small to medium and to big sizes. The number of generators acquired depends on the nature of business. Small businesses in light manufacturing such as Ogundesi’s acquire two or three while others can either get one or two.

Jason Njoku of iROKO, a web platform that provides paid-for Nigerian films on-demand, spent $100,000 on power-generating equipment, including installing a transformer at a cost of around $30,000-$40,000.

Njoku took this step because of the unreliability of power supply by DisCos.

Ginika Okafor produces Yili footwear. A lawyer, Okafor came back to Nigeria after studying at the University of Leicester, the United Kingdom.

Now a manufacturer, the once UK-based Nigerian has a large-sized generator with which she makes footwear. This surprises her a lot, having come from a country where electricity is taken for granted.

“I have to turn on the generator each time to produce because there is no electricity. This increases the cost of production and air pollution always,” Ginika, whose factory is located at Iyana Oworo, Lagos, told this newspaper.

Chuks Samuel Okorie started Camnzee Water, a company that produces sachet water, two years ago.

Today, Okorie is hurt by recurring power failures and generator break-down.

“We have been running on generators for the past two weeks. So, what we do is that we work at night most times because the light stays longer at night,” he said.

John Haruna runs a fashion and design firm in Kano. Like other entrepreneurs, John has one Tiger and one Sumec generators.

Hugo Obi, who steers the wheel of Maliyo Games, told The Economist in 2015 that power was calculated on the basis of what was spent on generators.

“Power is unreliable so you depend on some kind of generator. It is literally 60-70 percent of the time. When you are calculating power costs, you do that based on running the diesel generator, not the cost from the power companies,” Obi said.

The Manufacturers Association of Nigeria (MAN) said in 2017 that their members, 70 percent of which are small and medium businesses, spent N129.95 billion on fuel and diesel in 2016, 121 percent jump from N58.82 billion spent in 2015.

These businesses spent N62.96 billion on petrol and diesel in the second half (H2) of 2016 as against N66.99 billion expended in the first half (H1).

Small businesses in Nigeria at a disadvantage

A small businesses and start-ups in Nigeria are disadvantaged at the point of establishment owing to the failure of the power sector.

Chike Okafor, a Nigerian who runs a supermarket around Oxford Road, Melrose, Johannesburg, South Africa, told this writer on November 13, 2017, that there had not been power cut in his area for almost one month.

“It is cheaper for me to run a shop here. You can even produce here and send it down to Nigeria,” Okafor said.

According to Ade Ayeyemi, group chief executive officer of Ecobank, Nigerian start-ups have a short-life span because they spend over 50 percent of their capital on providing basic infrastructure such as power.

“A start-up in our environment has a high probability of failure. And part of that failure is not only due to the person but also due to the circumstances in the environment. If you don’t have power; if there is no water and you need $5,000 to set up a barber’s shop today, you spend more than half of that money on generator and diesel,” Ayeyemi said on the sidelines of the 23rd Nigerian Economic Summit held in Abuja recently.

“If you are in Accra, you spend all your $5,000 on renting in the right places, having a good environment and buying the right clippers to attract your clients,” he stated.

Crisis situation

As of December 26, 2017, Nigeria sent out 4,108 megawatts (MW) of electricity, according to data from the Nigerian Electricity System, operator of the Transmission Company of Nigeria (TCN).

Out of the 4,108MW achieved on December 26th, 1095MW was lost to gas constraint while 466MW was lost to water constraint.

Nigeria’s national grid collapsed 16 times between January and July of 2017. The failure to create a framework for micro grids investments in industrial clusters by the Nigerian Electricity Regulatory Commission (NERC) has intensified calls for alternative energy solutions, chiefly solar power.

A recent KPMG report on sub-Saharan Africa Energy Outlook for 2016 identified transmission as the weakest link in Nigeria’s power value chain, calling for a shift of investments from power generation to transmission infrastructure characterised by weak lines and failing national grid.

Solar energy to the rescue?

Amid these challenges, will solar energy rescue 37 million small businesses in the country which are hard hit by high energy cost?

A report by The Economist in 2015 says that Nigeria has the ingredients for a vibrant solar energy market—including sunny weather and a growing consumer need. The report shows that investment is flowing and that solar is already being exploited by the telecoms industry.

However, solar energy is expensive for small businesses, costing millions in naira nterms.

“Where will I get N10 million to install a solar panel?” Samuel Adekunle, a start-up owner Lagos, asked.

But Sulaiman Yusuf, managing director of Blue Camel Energy, believes that solar can be cheaper and affordable for small and medium businesses if only certain steps are taken.

“Solar is not captured under critical areas that can access foreign exchange at official rate. Batteries, the more expensive components of solar installation, have 20 percent custom duty, while solar panel is five percent. If energy is critical to the nation, why don’t we make it all zero percent? This is further going to drop down the cost of deployment,” Yusuf said.

Look elsewhere

Some small business owners are looking elsewhere. Already, the Manufacturers Association of Nigeria has abandoned DisCos for private companies that can provide 24-hour incremental and quality electricity at cheaper rates.

Through its recently formed MAN Power Development Company, MAN has signed an agreement with Tower Energy Solution & Systems Limited for the supply of six to 10 megawatts (MW) of electricity to Henry Carr Industrial Cluster in Ikeja, Lagos.

MAN has also agreed with Negris Group for the supply of up to 80 MW of electricity to Odogunyan in Ikorodu industrial cluster.

The organisation is also talking with solar power supply firms in the northern Nigeria, where there is limited gas supply to enable clusters in Kaduna, Kano and other parts of the area to have incremental power at cheaper rates. Similarly, a negotiation is on the pipeline with Sahara Energy, Geogrid LighTec Limited and other companies for the supply of power to industrial clusters, according to Ibrahim Usman, chairman of MAN Power Development Company Limited of the Manufacturers Association of Nigeria

This is where most small businesses in the manufacturing sector are looking at.

“We are looking at something similar to that to cut our costs,” Charles Udom, a start-up paint maker, told this newspaper.

For Chijioke Ude, owner of food production and distribution firm, such an arrangement will go a long way to ameliorating the energy plights of start-ups.

Chijioke Mama, energy analyst, suggested that the best way to go is the use of mini-grid model.

“The problem of failing national grid has buttressed the long overdue necessity to aggressively develop off-grid and mini –grids, so there will be less dependent on the national grid,” Mama said.

Nigeria, a country with over 180 million people, privatised its power sector in late 2013 but is yet to see light at the end of the tunnel. Most private power players today did not carry out proper studies before making investments in the sector.

Lack of fund for investment, shortage of gas, and poor supply of meters are key issues hurting the industry.


Odinaka Anudu

by Odinaka Anudu

January 1, 2018 | 2:11 am
  |     |     |   Start Conversation

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