The previous article on the topic introduced and discussed the high cost of running a business enterprise in Nigeria presents serious obstacles to the growth and development of the country.
In this edition, the Lagos Chamber of Commerce and Industry (LCCI) shares insights on what drives the cost of doing business in Nigeria.
Here the key points below:
Inadequate power supply
Electricity supply through the public system is largely insufficient to drive business activities.
The average consumer obtains as low as 100 – 150KWh per month through the grid to service an average monthly demand of about 500 kWh.
Nigerian businesses experience an average of 239 hours of power outages per month, accounting for nearly seven percent of lost sales.
Most private enterprises are forced to resort to self-generation at a high cost to themselves and the economy (about ?72 – ?108 per kWh3 as compared to the current grid-based tariff of between ?24 and ?394).
The higher cost of alternative electricity generation constitutes not less than 30% of total cost of running a business in Nigeria which could be higher depending on the size and scale of operation with power efficiencies distorted particularly when production is at the peak.
Poor Road Network and Connectivity
Production of goods and services entails chains of related economic activities involving dynamic and complex distributive undertakings that require effective and efficient transport system.
Movement of human and goods through the road transportation system has become highly important in Nigeria due to the total collapse of rail transportation as well as the failure of government to develop the inland waterways for economic uses.
The poor state of major highways, state and local roads, has exacerbated the cost of moving freight, raw materials and finished goods from one point to another.
Rampant incidences of trucks accident, traffic gridlocks which prolong travel time, fuel cost, frequency of maintenance, fleet management and poor traffic management results in a high cost of transportation which presents a significant burden to optimization
High Cost of Credit
Efforts by the Central Bank of Nigeria (CBN) to provide credits to businesses at single digit interest rate are yet to deliver intended outcomes.
As at 2019, the weighted average prime lending rates was 15% while the maximum lending rates was 31%5.
These are indications that cheap credits to business enterprise remain largely elusive.
High interest rate constitutes a severe burden on businesses because the cost is incurred up front at the point of procuring the loan facility.
It does not correspond with production volumes and cycles or other supply chain shocks that may alter production schedules and timelines.
Therefore, this has severe implications on productivity, profitability and sustainability, as businesses operating in Nigeria are competitively disadvantaged against their counterparts in countries where maximum lending rates to businesses are within single digit.
Security Challenges
Escalation of security challenges in Nigeria constitute a significant additional deadweight on business and economic activities.
Virtually, in all the thirty-six (36) states and the FCT, there is the entrenched structure of contagious security concerns which affect economic activities.
The direct cost includes additional private security guards, special police forces, convoy operations, ransom payments to free hostage workers, additional air transportation by workers instead of land and marine transportation for security reasons; additional costs in the protection of personnel and assets of oil producing companies.
The indirect cost of security manifest in form of interception of freight and goods on the road by armed robbers, disruption to production process and temporal shutdown of production plants arising from community unrest, delayed delivery of goods and cost of uncertainties.
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