ASSESSMENT OF THE EFFECT OF FUEL PRICE HIKE ON BUSINESS OPERATIONS (A CASE STUDY OF GOURMET PIZZA COMPANY, ABUJA)
CHAPTER TWO
LITERATURE REVIEW
2.0 INTRODUCTION
Our focus in this chapter is to critically examine relevant literatures that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
2.1 conceptual framework
Fuel
Fuel is a combustible substance, containing carbon as a main constituent, which on proper burning gives large amount of heat, which can be used economically for domestic and industrial purpose. According to Ezeh (2012), fuel in Nigeria is an inelastic product both at demand and supply sides, which means that it is very difficult for consumers to find alternatives to the use of it in their daily lives. Alternatives such as electric trains, solar heaters and cookers are non-existent in Nigeria and hydropower and dams are not dependable sources of power in Nigeria
FUEL Subsidy
Fuel subsidy According to the Academics Dictionary of Economics (2006), subsidy can be defined as the cash incentive given by the government to an industry with a view to lower the price of the product of the concerned industry and to raise its competitive power. This may be given as a counter balancing measure to the imposition of the custom duty (In the nature of protection duty) by an importing country government. One important objective of subsidy is to keep its prices below the cost of production. Moreover, subsidy can also be defined as any measure that keeps prices consumers pay for a goods or products below market levels for consumers or for producers above market. Subsidies take different forms. Some subsidies have a direct impact on price. These include grants, tax reductions and exemptions or price controls. Others affect prices or costs indirectly, such as regulations that skew the market in favor of a particular fuel, government sponsoring technology, or research and development. Thus, there are two major classes of subsidies 1. Production subsidies: These form is associated with developed countries and; 2. Consumer subsidies: This is found mainly in developing countries like Nigeria. A subsidy is a reverse tax. It is a deliberate attempt by government to support a chosen economic agent a consumer and a producer and it can be applied in any market that involves the buying and selling of products and or services. Furthermore, according to OECD, subsidy is basically government action that decreases the consumption price of the consumer and or increases the selling price of the producer. Subsidies enjoy widespread use in several countries and several commodities such as petroleum products, food or farm inputs liker fertilizer and machinery (UNEP, 2002). Fuel subsidy is a government programme created to reduce how much Nigerians have to pay for petroleum motor spirit (PMS), automotive Gas Oil (Diesel), and to protect the citizens from crude oil volatility on the international market. Fuel subsidy can also be referred to the effort by the government to pay for the difference between the price of fuel in the pump and the actual cost of the product. So by paying the difference, the government enables fuel to be sold at a lower price so that it will help alleviate the burden on its people especially the lower income group. Fuel subsidy in Nigeria was before the coming of the Buhari’s administration, it is a policy of federal government meant to assist the people of Nigeria to cushion the effects of their economic hardship. Conceptually, fuel subsidy seeks to enhance financial capacity but also to accept the implied financial losses by it in the sprint of its national responsibility to ensure the well being of the populace (Emeh, 2012).
2.2 HISTORICAL OVERVIEW OF FUEL SUBSIDY REMOVAL IN NIGERIA
According to the Centre for Public Policy Alternatives (2011), the executive arm of the Federal Government has taken the view that subsidy removal is an important element in the larger scheme to accelerate Nigeria economic development. The history of fuel subsidy removal in Nigeria is rather a long one particularly with the negative effects it has on the polity. Specifically the story of subsidy removal dates back to 1978 when the then military government of Gen. Olusegun Obasanjo reviewed upward the pump price of fuel which was at 8.4 kobo to 15.37 kobo. The concern was for government to generate enough money to run the administration particularly when it was preparing for the 1979 democratic elections and also to carter for the social needs of Nigerians (Ering and Akpan, 2012). Moreover, Gen. Olusegun Obasanjo second coming as a civilian president did not help matters as he unleashed a reign of terror on Nigerians. In his eight years reign, the nation witnessed several rounds of fuel price increases. The first started on 1st June, 2000, where the petrol price per litre was raised to ₦30.00 but only to be reduced to ₦25 one week after due to massive protests by organized labour, civil society organizations and the ordinary Nigerians. Five days later, on 13th June, 2000, the pump price was further adjusted to ₦22.00 per litre (George et al., 2014). On 1st January, 2002, Obasanjo regime increased the price from ₦22.00 to ₦26.00 and to ₦40.00on 23rd June, 2003 just one year after. In June, 2007, also the same regime raised the price of fuel per litre to ₦70, and later to over ₦100 per liter. In a statement delivered by Dr. Kachikwu, on May, 2016, it is on record that when the late President Umaru Musa Yar’Adua assumed office in May 2007, the Nigeria Labour Congress (NLC) resisted the increase and forced him to revert to ₦65 per litre. In January, 2012, the government of former President Goodluck Jonathan attempted to remove the acclaimed subsidy but this was stoutly resisted and the commodity whch was billed to sell for ₦97 per litre was later pegged to ₦87 per litre (Vanguard News, 25th May, 2016). The statement further stated that during President Buhari’s administration in 2015 to present, Nigerians have been asked to buy the product at a peak price of ₦145 per litre. Government said it decision in this regard is informed by the fact that despite the decline in the price of crude oil in the international market, marketers are finding it increasingly difficult importing refined petroleum products due to scarcity of foreign exchange (Vanguard News, 25th May, 2016).
THE BIRTH OF FUEL PRICE HIKE IN 2021
Acoording to Ossai(2021) Nigeria’s state oil company ruled out higher gasoline prices this month, less than a day after the fuel regulator signaled the first increase since November.The reversal means that government-owned Nigerian National Petroleum Corp., the nation’s sole importer of gasoline, will continue to bear the cost of subsidizing fuel in Africa’s biggest economy. It’s the second time in as many weeks that policy makers have sent out contradictory signals, after the central bank on March 4 set aside plans announced by one of its officials to bar foreigners from some debt auctions. The Petroleum Products Pricing Regulatory Agency published an announcement late Thursday saying gasoline should retail for 209.6-212.6 naira ($0.51) a liter, almost 30% higher than current rates. On Friday, the NNPC insisted there would be no increase in March, reiterating a statement published at the start of the month.Based on the PPPRA data, the NNPC is making a loss of at least 47 naira a liter on the current retail price of 165 naira.
The Petroleum Products Pricing Regulatory Agency (PPPRA) announced on Thursday 11th March, 2021 that the Nigerian government has increased the pump price of petrol to N212.61 per litre. According to the agency, the landing cost stands at N189.61 per litre while fuel depot owners will sell to marketers at N206.42, (Premium Times reports).This announcement comes days after Nigerians suspected there would be a hike in fuel price as depot owners were reportedly hoarding the product, and increasing prices with expectations of fuel price increment by the government, even though the NNPC responded to the speculations via a statement by its Group General Manager, Group Public Affairs Division, Kennie Obateru.
EFFECT OF THE RECENT INCREASES IN FUEL PRICES ON ECONOMIC GROWTH IN NIGERIA
It is a common knowledge today that fuel scarcity worsens inflation and poverty in Nigeria and many workers will lose their jobs as companies will find it difficult to cope.Arinze (2011)itemized theeffect as follows:
i. Fuel crisis paralyzed social and economic activities, it brings about socio-economic unrest which result in increase in transport fare, sky rocketing of market prices and prices of building materials. ii. High rate of inflation: this leads to increased spending both by government and private individuals.
Fuel scarcity creates inflation in both public and private life with a consequent increase in prices of goods and services.
iii. Excessive corruption and mismanagement: Fuel crisis bring about corruption by both government and private individual. Corruption however, discourages foreign direct investment.
iv. Retardation in economic growth: It slows down the pace of economic development because of its negative impact on the socio-economic life of the people.
v. Importationcost of fuel: It leads to huge and excessive public expenditure on importation of fuel to augment local production which in itself is an indication of an unhealthy economy resulting in accumulated balance of payments deficit of a country. The attendant consequences of this includes abandonment of several on-going economic and infrastructural development projects to meet the foreign exchange requirements for the purchase of refined petroleum products from overseas countries to augment local consumption, poverty and underdevelopment.
vi. Fire disaster: During fuel scarcity, the product becomes more available in the hands of unauthorized road-side dealers (black marketers) who take undue advantage of the unfortunate situation to sell the product at exorbitant prices and engage in profiteering. The unauthorized dealers also engage in reckless storage of this product in exposed tanks, drums and buckets roadside to extort money from members of the public. This however has resulted in several economic losses, deepening underdevelopment and poverty in our society as in some cases, the exposed tanks get exploded into flames that have burnt people’s houses and vehicles and even loss of life in the process.
Effects of Fuel Price Hike on Purchasing Power
There is no doubt that the recent increase in the price of fuel by 49 per cent, from N65 to N97, by the Federal Government of Nigeria has started to trim down the purchasing power of the people, especially the poor masses, who have always been at the receiving end of every harsh economic policy introduced by government. Cyoh (2012) has argued that an increase of such magnitude in the current Nigerian economic context is, without doubt, a process that is either inadvertently or deliberately conceived to take money away from the pockets of all Nigerian income earners, with over 70 per cent of Nigerians who live on below N360 per day, as the prime victims.In reality, anyone in this category will end up with over 50 per cent of his daily income, which is about N155 per day, inevitably dedicated to transport costs, while the remaining is expected to cater for family feeding, health, education and other social expenses. Olorunfemi (2012) predicted that inflation rate would fluctuate between 13 and 14 per cent for most part of 2012.An investment and research firm, Renaissance Capital said it expected inflation to rise from a projected 10 per cent to between 13 and 14 per cent between January and March and average about 15 per cent for the year, 2012.It, however, said that should the government be persuaded to phase the removal of petrol subsidy as a means of easing the burden of price increases, then the increase in inflation could be lesser than 15 per cent for the year.The inflation rate had been source of worry for the Central Bank of Nigeria, which struggled throughout 2011 to reduce the figure to a single digit rate.Nigeria’s inflation rates experienced a wavy flow for most parts of 2011, from January till December 2011. Although, the National Bureau of Statistics attributed the development to the upward and downward movement in the prices of food items, it also linked the movement to increase in the price of kerosene across the country. Inflationary figure for January 2011 was 12.1 per cent as against 11.8 per cent recorded in December 2010. This, according to the NBS, was due to hike in the price of kerosene experienced across the country and increase in the prices of some household items and building materials.In the month of February, inflation declined to 11.1 per cent. As the country was trying to regain its balance, the rate yet increased to 12.8 per cent in March, the highest in the year, as a result of the major determinant, according to the monthly release by NBS.April inflation rate was put at 11.3 per cent which was slightly lower than the 12.8 recorded in March.There was a huge jump again in May from 11.3 per cent recorded earlier to 12.4 per cent. The statistical data in May revealed that the percentage increase which was higher than the corresponding level a year ago was as a result of the planting season in the country.In June, the inflation reduced to 10.2 per cent as against the corresponding month which was 12.4 per cent. The CBN’s expected single digit inflation rate was recorded for the first time in the country in July as it declined to 9.4 per cent from the June rate of 10.2 per cent.From the first single digit recorded in July, the rate also declined with 0.1 per cent as it dropped to 9.3 per cent in August.In the month of September, the inflation rate rose to 10.3 per cent as against 9.3 per cent recorded in August. The inflation rate for October 2011 rose to 10.5 per cent as against 10.3 per cent recorded in the preceding month, and was maintained at 10.5 per cent in November.The usual seasonal hike in commodity prices during Christmas was unable to push up Nigeria’s inflation which rather moderated to 10.3 per cent in December 2011, slightly lower than the 10.5 per cent recorded in November. Analysts believe that the inflation rate this year would shoot up to at least 15 per cent, even as the CBN agreed that inflation would accelerate to 14 per cent or 15 per cent by mid-year, from 10.5 per cent in November, however, taking into account the initial full removal of fuel subsidy on January 1. The Managing Director, Sotice Investment Company Limited, Mr. AdedayoToluwase, said several millions of Nigerians would live poorer and suffer more than they had ever done in recent history in 2012.He said, “More than ever in the history of the country, more Nigerians will sink further below the poverty line. The prices of goods and services have increased at the same time that wages remain stagnant and unemployment remains a nationwide scourge. More than 70 per cent of Nigerians lack the usual or socially acceptable amount of money or material possessions needed to live a happy life. This unfortunate category of Nigerians lack material comfort and in plain language they live from hand to mouth. “The increase in the price of fuel will automatically reduce the purchasing power of Nigerians. It will increase their fears and deteriorate their health status. Food, water and housing are three important parameters to measure the values of our lives and these things have become elusive to the masses in Nigerians. With the increase from N65 per litre to N97 per litre, Nigeria is now the most expensive place to buy petrol in all oil producing nations.”It is rather paradoxical that the CBN would lend support to any policy that would instigate the rate of inflation to such an oppressive level. In successful economies elsewhere, an inflation rate above four per cent is considered as socially and economically oppressive and offensive, and government policies would be recognised to have failed. Indeed, with inflationary rate of up to 15 per cent, motivation for savings becomes meaningless.Government, however, has said that a lot of the concerns about inflation were a bit exaggerated. Forex reserves will improve because we spend so much money importing petroleum products. If our reserves don’t go up, then everybody believes that the naira is going to be weaker and we will have pressure on the currency. So, the savings from fuel subsidy will increase reserves, reduce the pressure on the currency and improve our ability to contain inflation. We may even have enough reserves to strengthen the naira.”Similarly, the Managing Director, Financial Derivatives Company Limited, Mr. BismarkRewane, said in an interview, “Life may be harder for the people but I don’t subscribe to the opinion of some analysts that inflation will shoot up above 20 per cent (CBN, 2005.
BUSINESS OPERATION
According CFI journal (2019) Business operations refer to activities that businesses engage in on a daily basis to increase the value of the enterprise and earn a profit. The activities can be optimized to generate sufficient revenues to cover expenses and earn a profit for the owners of the business. Employees help accomplish the business’ goals by performing certain functions such as marketing, accounting, manufacturing, etc.
Business operations evolve as the business grows, and the management should plan to accommodate the changes to prevent glitches occurring in the system. For example, as a small business grows, it must be ready to handle arising challenges such as legal, marketing, and capacity issues. If the business does not evolve with the changes in business operations, glitches such as errors and omissions will emerge.
Business Operations in Different Industries
The operations of a business vary across industries, and they are structured according to the requirements of the specific industries. Mastering the operations of a specific industry can help the business achieve success. Here is an analysis of business operations in different industries:
1. Retail industry
One of the main goals of a retail business is to stock products that customers are looking for and at a price that the customers are willing to pay. This means that the business must maintain an efficient inventory system so that it knows what is in stock at any given time, while reducing instances of dead stock. Deadstock refers to products that the company has in stock but that are not in high demand.
In order to maximize revenues, the business should stock fast-moving items that customers are willing and happy to pay for. The business should also negotiate friendly credit terms with suppliers so that they can get the required products on credit to prevent stock-outs.
2. Service industry
The business operations of a service business are divided into the front-end and back-end side of the business. The management must ensure that the two divisions are running efficiently to prevent laxity on one side, which can hinder the achievement of the company’s objectives. On the front end, the business should focus on streamlining the service delivery to customers to increase their satisfaction. It should also formulate a means of receiving feedback and complaints from customers to know their expectations and how to improve service delivery.
On the back end, the management should employ the right people in each department. For example, the company should appoint trained and experienced staff to prepare forecasts for client projects to prevent the actual costs from exceeding client budgets.
3. Manufacturing industry
Manufacturing companies are involved in turning raw materials into physical products, which are then sold to consumers. One of the things that a manufacturing company can do to achieve efficiency is to source quality raw materials from credible suppliers. For perishable and edible products, the business should look into how raw materials are stored, processed, and shipped to consumers.
The company can also eliminate bottlenecks that increase processing times to save time during manufacturing and shipping. If the company is struggling with shipping logistics, it can outsource shipping and concentrate on other areas of the business that it excels in.
4. Technology industry
The key to streamlining operations of a technology company is hiring the right staff and training them on how to execute the tasks they are assigned. This means that the company should put a hiring criterion in place that helps them hire the best candidates for the job. The company should also come up with an internal training and mentorship program where senior staff works hand-in-hand with junior staff to help them perfect their skills.
Another way of increasing efficiency is by collaborating the different tools such as apps, websites, and systems that the company uses. The company’s management should continually monitor internal and external processes to spot any glitches and address these issues quickly.
How to Improve Business Operations
The following are some suggestions that businesses can use to improve business operations:
1. Measure performance
A business should come up with realistic and actionable means of measuring its business milestones. The process of measuring performance starts from the goal-setting stage. The company’s management should set achievable objectives with clear targets. For example, the goal of achieving a 30% increase in revenues is more actionable than setting a goal to make more money in the next financial period. The company should then implement a measurement system that determines how well the business is doing against the goal targets.
2. Keep up with the latest trends
A business should stay up to date with what happens in the industry to get ideas on how to get better than the competition. Trends can take the form of new innovation, changing state and federal laws, or changes in the local economy. Knowing the latest trends and changes in operations can help the company find new systems that improve performance and cut costs, or that help the company stay compliant with new regulations.
3. Streamline processes
Another way of improving business operations is to evolve with changes in the industry to increase productivity. The management should continually be on the lookout for new tools, software, and equipment that improve and ease critical processes.
For example, where the business uses manual methods to manage inventory, the management can acquire an inventory management software program that automates most of the processes and saves both time and costs.
The Effects Of Rising Gas Prices On Business operation
Business operators are often hit hard, and in multiple ways, during periods of soaring gas prices. They must make a series of decisions to sustain their business models, as fuel costs impact their supply and overhead expenses, service territories, staffing, and the pricing of their products and services.
Supply and Overhead Costs
Prolonged periods of spiking fuel prices raise the everyday costs of doing business, especially if a company has vendors and suppliers that must regularly transport goods or deliver services crucial to daily operations. For example, in 2012 testimony before a congressional committee, a Pennsylvania horse farm operator pointed to severe impacts from rising costs for the farm’s hay and feed suppliers. Transportation costs limit her farm’s ability to travel to showcase and breed horses, cutting into income opportunities.
Service Areas
Companies that are focused on delivery and transportation are heavily impacted by the price of gas. If they wish to save on fuel costs, they often must either trim their geographic target service regions, or find other ways to reduce costs in their existing service areas, by altering routes or driving practices. In Los Angeles, for example, online grocer Pink Dot reduced its service area nearly in half to trim fuel consumption, and a gourmet food truck operator began concentrating his lunch and dinner stops in the same neighborhood, rather than traveling all over town.
Jobs
If fuel prices make it difficult for a business to make ends meet, and other cost cutting has been tried but found to be insufficient, the company likely will look at staffing levels. A workforce trimming may be unavoidable, meaning layoffs or reduced work hours.
Pricing
If fuel costs rise for a long period, and the business has otherwise made all the cuts it can to trim overhead, that business eventually will be under pressure to pass costs on to its customers. Whether the company can feasibly do so, without losing customers, depends on the industry and the competition. At the congressional hearing, a Baltimore plumber said many potential customers refused to pay an $11 surcharge he placed on service calls, after his gas prices rose 29 percent over the prior two years. Businesses must balance the need to meet rising fuel costs with the risk of losing revenue.
Other effect of fuel price hike on business operation according to Anyanwu E. (2021) include:
- Decrease in productivity
- Decrease in business performance
- Reduced efficiency and effectiveness
- Loss of job and increase in unemployment
2.3 EMPIRICAL STUDIES
According to Afolabi (1999), it has been shown in the past, that any significant increase in the fuel price often cause economic recession, such as witnessed in year 1973, year 1979 and year 2016. One way in which the government had made fuel sufficiently available and affordable to the low income earner is through subsidy. The introduction of subsidy indirectly promotes economic growth and development as a result of the affordability of the price of goods which provides an enabling point for the middle class citizen to contribute significantly to the economy. He also stated that lesson derived from China shows how subsidy had contributed significantly to economic growth and development. The success could be attributed to the affordability of energy and hence an increase in its demand. Furthermore, in the perspective of Nwosu (2009), subsidy removal though will play significant role in nation building it is not the absolute resort to improve the economy. While it looks significantly important, there are other measures that could be adopted even without subsidy removal which would improve the economy significantly. And the presence of subsidy will play a pivotal role to the accomplishment of this measure as is being witnessed in china. Moreover, in the perspective of Onwioduokitanda and Adenuga (2012), removing fuel subsidy at the same time devaluing Naira would result into increasing cost of production for the few companies that are still in existence. This would results into more job losses (as the companies would be forced to down-size in order to survive) in addition to the unavoidable increase in the cost of the companies’ products is the increase in the cost of providing services. Additionally, Ering and Akpan (2012) stated that increasing fuel costs as a result of fuel subsidy removal force people to rethink on their life style and mode of transportation as a strategy for surviving the hard times. For instance, people now ride on horse powered taxis, some choose cow-powered land cruisers and even do motorcycle powered tourist wagon, all in an attempt to avoid the use of petrol and its cost. Increases in transportation costs always have ripple effects on other social issues. The prices of food stuff also went up. The result of fuel price increase results into increase transportation costs, increase production cost and marketers had to factor in the increment in order to make marginal gain.