THE EFFECT OF LACK OF BASIC INFRASTRUCTURE ON THE PRODUCTION CAPACITY AND GROWTH OF SMALL SCALE PRODUCING FIRMS IN NIGERIA (A CASE STUDY OF SELECTED PRODUCING FIRMS IN IMO STATE)
This chapter will review existing literature on small scale enterprises role in economic development of Ukata Pure Water Company. The review is organized under the following:
- Definition of small-scale enterprises
- Problems of small scale enterprises in Nigeria
- The role of small scale enterprises to economic development in Nigeria.
- Government contribution to small scale enterprises.
2.1 DEFINITION OF SMALL-SCALE ENTERPRISES
There is universally accepted definition of small-scale enterprises. Existing definitions vary widely from country to country and state. The supposed differences in definition arise mainly because of difference in industrial organization of states of different level of economic advancement or differences in economic development in parts of the same state. For instance, a firm which could be regarded as small business in terms of size may be large-scale in some third world countries (Sule, 1986:25).
In the credit guidance to banks, the Central Bank of Nigeria states that in the case of commercial banks, small-scale enterprises are those with turnover not exceeding N500.000 in the case of merchant banks. They are enterprises with capital investment not exceeding N2million Naira (excluding cost of land) or with maximum turnover not more than five (5m) Naira only.
The Federal Ministry of Industry’s guidelines to the Nigerian Bank for Commerce and Industry (NBCI), small-scale enterprises is defined as those with total cost not more than N500,000 (excluding cost of land but individual working capital). The NBCI in its regular operations has adoptetd the definition of small-scale as those with cost of capital not in excess of N750,00 exchange cost of land but including working capital.
The Center for Industrial Research and Development (CIRD) at the Obafemi Awolowo University, Ile-Ife defines small-scale as those enterprises with total assets in capital equipment, plant and working capital not exceeding N250,000 and employing not more than fifty time workers. The Nigeria Industrial Development Bank (NIDB) defines small-scale enterprises with project cost (investing and working capital not exceeding N750,000. The Federal Ministry of Industries guidelines (Emi, 1975) defines small-scale enterprises as any manufacturing company.
2.2 CHARACTERISTICS OF SMALL-SCALE ENTERPRISES
Small business like Ukata Pure Water are characterized by a simple location, simple management, small capital induced and production techniques. Some of their characteristics includes the following:
- The small business owner handles or supervises the financing, production, marketing and personnel of the enterprises.
- The manager does not raise short or long term capital needs of his business from the organized financial market instead he relied heavily on personal savings or loan from friends etc.
- The entrepreneur confines his vision to the local community in which he carried on his business, ignore under and more distance markets.
- The enterprises is generally poor equipped, as the small industrialists feels relevant to accept outside help owing to prejudice or fear that information about the enterprises might reach the tax authorities or nearby competitions.
- The level of education of the owner proprietor is usually low with consequent low level of business management, technical skills and market information.
- The rate of business mortality is high probably because strong mutual distrust which militate against formation partnership or limited liability companies.
2.3 ENVIRONMENTAL FACTORS AFFECTING SMALL-SCALE BUSINESS
The business environmental factors that affects small –scale industries include:
- Economic/Market Environment: There are many economic factors affecting a business in a particular environment. These include the distribution of income, general price level, availability of cheap fund, level of inflation etc. The market of a firm represents a variety of consumers. This could be divided into a number of segments based on factors like age, sex, income, location and social status.
- Social Cultural Environment: Sociological and cultural factors of environment that affects a business include the habit of the people, their attitude and their general way of life. There are customs and beliefs of people in a particular geographical region. Region is one of the factors that shapes the culture of a group of people. Certain types of food and animals are not taken in certain areas. This means that any business firm that engages in producing something that is not consumed in a particular area may not get any patronage in that area. The mode of dressing, type of food eaten, attitudes et c are culturally based.
- Political Factor/Environment: Politics affects the business climate be cause the ruling party makes a decision, which affects the life of the people, their business and social life.
- Legal Environment Factor: These are laws enacted by the government to guide the operation of the business. Government impose tariff, import quotas, exchange controls, export duties and also restricts the importation of foreign goods to provide sanity, justice and equity in business organization.
- Technical Environment: This includes system of production, machines and tools available, used wealth of knowledge etc. Technology is adopted to improve productivity in small-scale enterprises like Ukata Pure Water. It determines the level of capacity and the quality of goods and services produced.
2.4 ADVANTAGES OF SMALL-SCALE ENTERPRISES
- Independence: As an entrepreneur, you are self employed and free of dull routine such as coming to work early in the morning and staying on duty until the official closing hour. Decisions are taken by the owner of the business. He is not accountable to any other person.
- Money Making: The entrepreneur makes unlimited money, particularly when the business is successful unlike paid employment. An entrepreneur has no limit to his income.
- Job Security: There is a job security in small-scale business. This is a rare opportunity in paid employment. Paid employees are given instruction, directives on how they ought to behave in the organization.
DISADVANTAGES OF SMALL SCALE ENTERPRISES
- Capital: Capital may not be easy to raise in small-scale business. It will require sacrifice by way of savings, borrowing at a cost, selling assets, etc. Capital is necessary to sustain the business and enable it go grow.
- Small Scale Business Involves Risk: There is no certainty that a particular type of business will succeed in business conditions and unforeseen circumstances may even force a booming business to fold or wind up.
- The final responsibility lies with the owner of the business. The owner has to carry the burdens and problems resulting from operations of the business. In extreme difficulties situations, employees may resign or abandon their jobs but the owner cannot abandon his firm. He bears the ultimate hardship just as he takes the gains of the business.
- The owner of a small-scale business must be prepared to take some hard decisions such as sacking s ome one from job, avoiding employing relations and who are not qualified and implementing disciplinary measures on workers. One who is always influenced by sentiments and personal relationship on crucial matters may not be courageous enough to take some hard decisions necessary to keep the business afloat.
2.5 SYMPTOMS/CAUSES OF BUSINESS FAILURE
Business failure can be seen from different perspective. According to Dockery and Husbank (1972), a business is unsuccessful when it fails to earn a profit. The failure of business is a misfortune to the investors, the employees and the customers. The following are the symptoms/causes of business failure:
- Bad Management: When a firm exhibits a high degree of inefficient management, it leads to business failure. The most crucial factor responsible for the success or failure of any enterprises is the quality of its management. Managers are often required to appraise and decide on business issues taking into consideration such forces as the stage and trend of the business cycle, the political, economic, social politics of government, tends in the market, its immediate and future implications when managers are not futuristic.
- Economic Recession/Melt Down: There exist fluctuation in business sometimes. Business experience boom and recession. Recession is characterized by depressed or low business activities which lead to low profit, low incomes, low saving, investment etc.
- Inadequate Capital: No business can operate profitably without injection of adequate capital resource. Most business hardly has access to funds especially long term funds. Most business firms use short term funds to finance long term investments. This always have finance long term investments. This can also be seen as a result of the public and the cost of funds at the money market. This leads to escalating cost of products and hence low returns on the investments in general.
- Poor Planning: This also leads to failure in business. Any business without a plan will definitely collapse. Every business usually starts with the conception of project idea. The project idea must be such that satisfies a self need of the business or an existing market in which demand exceeds supply or the products can successful compete with existing products.
- Lack of Skill: You must have the skill of managing the business firm. This does not necessarily mean all business skill, such as accounting, but those that w ill be needed to run the business successfully. There is no problem of moving into areas of business where you have a limited amount of skills to contribute so long that you have the staff that can make up for your lack of skills and that they remain loyal to the management of the business.
2.6 PROBLEMS OF SMALL ENTERPRISES IN NIGERIA
Despite the fact that small scale enterprises have sprung up most part of the state and the numbers are increasing every day, it has not been rosy for them. Many have been forced to close down because of numbers playing their operations. Some of the problems hindering the progress of small-scale enterprises are going to be discussed in details.
- Lack of Finance: One of the fundamental problems of business enterprises in Nigeria is the lack of adequate finance to state and continue doing business enterprises, especially the small-scale type are almost always the one man business and manager as well. The bulk of funds available to him are usually small, probably because such funds either come from his as personal savings or borrowings from relatives and friends. His ability to borrow is limited by the small amount of assets owned and the fact that he cannot raise capital from an organized capital market like the stock exchange. Borrowing from investment finance institution is very difficult and whenever possible. The cost of such loans are much higher, always reflecting the leaders estimate of risk and uncertainly attached to the contract (Orestu, 1985:180). Diaku (1989:143-144) has established the financial houses tend to favour large loans to large companies than small enterprises. Again an additional rational for lies is the fact that the small of an enterprises is though to have a bearing on its efficiency and competitive ability through scale economics.
- The Unavailability of Skilled Personnel: The unavailability of adequate skilled and dedicated personal is a problem for most Nigerian Small-scale enterprises. The small business enterprises is often than not in the need of cash that it cannot infect hire the services of available skilled personnel for consultancy services in connection with feasibility studies before and when in business. They often make lot of assumption about their ability to manage an enterprise. They do a lot of unscientific calculations about projected return on investment.
- The Problem of Raw Materials: Even in recent times, when government has shifted emphasis to the local sourcing of industrial raw materials and a raw material research and development council of Nigeria set up in 1985, it is not yet easy for business firms like small-scale enterprises to find in commercial quantities the right type of raw and intermediate material are available, the enterprises still have the problem of having to re-tool the wheel of their machines in line with the available materials since they are not initially designed for such raw material. Of course, the small-scale business enterprise cannot afford to withstand his additional problem.
- Infrastructural Problems: Economists are not yet settled as to the appropriate and agreeable definition of the word “infrastructural” but we can define infrastructure as those facilities that aid in the proper execution of projects. Such facilities include power, water supply, roads and communication networks. The fact that electrical energy for instance it is an important component of industrialization, and hence manufacturing of goods is not in doubts. Electrical is materials needed in any business. The state of most Nigeria roads is poor. The associated delays in having to sort out the ever motorable road networks and the damages done to vehicles as a result of important consideration. Not left out in this barriage of problems is the poor communication networks. The telex facilities are quite unreliable where they exist at all.
- The Problem of Equipment: The factor makes small-scale enterprise suitable to fill this gap is their ability to produce spare machine components, certain simple equipment and simple hardware of some industrial such sector at much lower cost. This advantage derived from specialization in production, should not be neglected if the assembly plants, electronic and electrical industries are to be fully integrated into the Nigeria economy. This method which has been adopted successfully in many development countries, has guaranteed a steady supply of industrial compounds both to the domestic industries like Ukata Pure Water and for expert. It is never too late for Nigeria as a developing country to adopt their inevitable techniques of industrialization by starting to produce less sophisticated machines, spare parts and components of complementary imports. It could then move to the stage of adaptation of and improvements on technological gap, manifested in the shortages in vital areas of production and engineering design can be rapidly eliminated through this approach.
2.7 THE IMPORTANCE OF SMALL-SCALE ENTERPRISES
To the economic development of Nigeria, the importance os small-scale industries in the economy cannot be overemphasized. Government recognizes this importance and for the purpose of their sustained promotion allocates a certain percentage of commercial and merchant banks total credit to these categories of industries. In 1993, the percentage allocated due to the importance to the growth of a nation, many researchers have tried to point out the gains to be derived from establishing small-scale enterprises. The gains/benefits are:
- Nigeria is currently experiencing problems of unemployment and rural-urban migration. A diagnosis of the type of people unemployed due to retrenchment of workers who have acquired some measures of industrial expertise and school leavers and graduates of universities and technical colleges, who for a couple of years have been joining the labour market in large numbers. The role of small scale enterprises in the solution of the unemployment problems appears obvious. With minimum encouragement and financial assistance, many of the unemployed labour force in the first category and the technical colleges graduates can start their own business using the already acquired industrial and technical skills. In fact, as more people operate their own business, they will employ more of the school-leavers and reduce the level of unemployment.
- As a result of small number of people and low amount of capital required for the operation of small-scale enterprises encouragement of small enterprise could facilitate decentralization of industrial processes. In this way, the promotion of small enterprises could assit in providing a lasting solution to the current problem of imbalance in the distribution of industries between the rural and urban areas and this check the primal rural-urban drift which has heightened social tension in Nigeria cities.
- Small-scale industries released big industries of small extra function thereby increasing the efficiency of big firms. Small-scale industries can do this when they concentrate efforts in providing these odd parts that are usually in constant demand by the big firms. For example, science monograph, universities of Nigeria Brewery can save the big firm the labour and cost to import these costs for Nigeria brewery when small-scale industries concentrate on producing these types of things. It enables the large scale industries to pay attention to functions that are more demanding economically and financially, and this measures help in he rapid development of the country. One cannot help but agreeing with Iwuoha considering the fact that the industrial sector involves many processes and stages and if large scale industries decided to provide or make or import all they need for production, their cost of production will be high and they will find it difficult to concentrate on their real business, but now that we have small-scale enterprises who manufactures raw materials for big firms, large scale enterprises have had their cost of production reduced.
2.8 GOVERNMENT CONTRIBUTION TO SMALL-SCALE ENTERPRISES.
The Nigerian government, both federal and state government has contributed immensely to the development of small-scale enterprises in the country. Some of these points are discussed below:
- Working for Your Programme (WEYP): This scheme was introduced by the federal ministry of Industries assisted by the International Labour Organization (ILO) and by the British Council. WEYP aims at development entrepreneurial skill and at putting innovative ideas to function. Under the working for yourself programme, a six-week intensive course is conducted at designated centers to train and assist private small industrialist, start up or find their business. It was formerly launched in Akure, Ondo State on 23rd February, 1987. Other centers have since been opened in other states. Nigeria bank for Commerce and Industry is the financial intermediary for the scheme.
- Funds for Small Scale Industries (FUSSI): In 1971, the Imo State government introduced FUSSI, and it was established to encourage private entrepreneurs to undertake industrial investment. It main role is to boost the economy of the state, provide job opportunities for the school leavers as well as to make its products available at affordable prices to its customers.
- Industrial Development Centre Scheme (IDCS): Federal government’s active participation in promoting small-scale enterprises is treaceable to the setting up of the first industrial development center in Owerri in 1967 by then Eastern Nigeria Ministry of Trade and Industry and to the taking over of the Owerri IDC in 1970 by the federal military government. In the second National Development Plan (1970-1975), N8000.00 was allocated for setting up IDC throughout Nigeria. Essentially, IDCS are aimed at providing extension services to small-scale enterprises in terms of technical appraisal of loan application, training of entrepreneurs, management assistance, product development and production planning control and other extension services.