CHAPTER TWO: LITERATURE REVIEW

2.0 Introduction

In this study, the researcher is interested in investigating: the impact of load shading on (Small
and medium-sized enterprises(SMEs) in Zambia. Literature review provides an overview of the
current knowledge of a problem under study (Silverman, 2010). This chapter reviews literature
related to the impact of power outages on SMEs in Zambia.

The main topics to be discussed include load shading and power outages in Zambia, benefits of
SMEs to the Zambian economy and to find out how load shading has affected profitability and
productivity of SMEs. The closing section of the chapter is a summary of the chapter.

2.1 EFFECTS OF LOAD SHEDDING ON THE ZAMBIAN ECONOMY

2.1.1 History of Power in Zambia

The Zambian electricity power system is operated as part of an interconnected power system
linking South Africa, Zimbabwe, and the DRC. The Zambia Electricity Supply Industry was
predominantly a market run by a single state owned company, the Zambia Electricity Supply
Corporation (ZESCO) prior to the liberalization of the sector through an Act of Parliament in
1995 so as to attract private sector companies to participate in the generation, transmission and
distribution of electricity in the country. In order to promote this policy, the Government set up
two new institutions; Energy Regulation Board (ERB) and the Office for the Promotion of
Private Power Investors (OPPPI) to regulate operations and pricing, and promote new players to
the electricity market respectively (Zesco Limited, 2009).

Currently, power supply is still dominated by ZESCO. It has an installed hydro-based generation
capacity of 2,178 MW and its main generation stations are Kafue Gorge Power Station with 990
MW capacity; Kariba North Bank Power Station with 1080MW capacity and Victoria Falls
Power Station with 108 MW capacity (Zambia Development Agency, 2014).

The following are some of the sources that produce power in Zambia in order to meet the
demand of power consumption for domestic and industrial use;
 mini-hydro power plants with total capacity of 24MW and nine diesel power plants with
a capacity of 6.3MW, which serve isolated mini grids in rural areas (Zesco Limited,
2009).
 Another important sector participant is Copperbelt Energy Corporation (CEC), a private
company based in Kitwe that purchases bulk power from ZESCO and supplies the copper
mines and neighboring population.
 Another is Lunsemfwa Hydro Power Company based in Kabwe which is an independent
power producer
 generating about 56 MW of power that it sells to ZESCO Limited under a Power
Purchase Agreement.

Zambia has abundant renewable and non-renewable energy resources, these Include Vast water
reserves for hydro power generation, Industrial minerals such as coal, Agricultural land to
support bio-fuels, Ample forest for biomass, Abundant wind for wind energy, Zambia also has
long and intense hours of annual sunlight to support solar energy generation.

2.1.2 Shortage of electricity

The shortage of electricity has been building for some time but has become more pronounced
with reduced water levels at Kariba North Bank Power Station, Kafue Gorge Power Station and
Victoria Falls Power Station (Zambian Economist, 2015). In many nations, electric power has
served as a catalyst for economic growth and development, and the provision of an adequate,
affordable, accessible and sustainable electricity supply is critical to the broad goals.

The development of new mines and the rapid growth of the economy after the year 2000 saw a
36 percent demand increase for power between 2001 and 2005. From 2005 to date, the demand
growth has been in line with ZESCO’s 2006–16 projections of a further 100MW per annum. The
power shortfall means that 26 percent of the country is now affected by load shedding at peak
times and, to bridge the shortfall, Zambia relies on imports with 100MW of power coming from
the South African grid. By the second week of February 2012, Zambia had already imported
100MW of power from Mozambique to offset the deficit. (Zambia mining guide, 2016). load
shedding management was being carried out to protect the generation equipment, which would
automatically shut down should there be an overload, a situation he said would be costly
(Mundende, 2012)

Consequently, Zambia`s business sector has been hit hard by electricity load shedding which is
seen as a solution to the inability of the power utility to supply electricity to meet demand. This
is because the current power deficit has resulted in prolonged load shedding and power cuts, and
has occasionally affected trade and production, and business in general. A manifestation of this
problem can be seen in the large number of reports in the popular press of high incidence of
outages/load shedding and protests, by not only the domestic and commercial, but also industrial
consumers. The quality and reliability of electricity supply is an important factor both for the
decision to connect and for the impact on business performance (Attigah and Mayer-Tasch,
2013).

2.1.3 Electricity Consumption by Economic Sector

In 2014, national electricity consumption reduced marginally by 1.2 percent from 10,845.7GWh
in 2013 to 10,720.5GWh in 2014. The reduction was mainly on account of the slowdown in
mining activities and outages for non-mining customers. The largest consumers of electric
energy were the mining industry and followed by domestic sector (residential) which accounted
for 54.8 percent and 30.3 percent of total consumption in 2014, respectively. The rest of the
economic sectors collectively consumed the 14.9 percent balance. (ERB, 2014)

2.2 BENEFITS OF SMES TO THE ZAMBIAN ECONOMY

Development of sub-Saharan economies depend on the investment in developing SMEs and this
can be made possible with committed funding from traditional commercial banks and micro
finance institutions. The financial education given to investors in small start-ups is very crucial
(Olalekan and Oluwaseun, 2010).

According to Bank of Zambia (2014), there are currently 40 MFIs all engaged in Micro financing
and they are all registered in Lusaka and their main purpose is financing of SMEs. It is clear
research has been done by quite a number of researchers and its virtue has been identified.
However, it is vital to research on how SMEs has really impacted on the economies like Zambia
and hence the justification for this research.
Small and medium enterprises (SMEs) are a tested tool in improving economic development of a
country. Economies like Pakistan have done well because of SMEs totaling to more than 3.2
million and are a source of employment for more than 78 percent of the population and their
contribution to GDP is 30 percent (Hussain, Farook and Akhtar, 2012)

Such development and benefits of SMEs can be seen in the case of Napal, 98 percent of the
enterprises are SMEs contributing significantly to country’s GDP, in Bangladesh, SMEs employ
up to 82 percent of the population and generally Asia is developing quite steadily due to the
contribution of SMEs (Hussain, Farook and Akhtar, 2012). Countries continue to realize the pace
of development will largely be dependent of the development of SMEs; African Blocs should
strive hard to ensure that development of SMEs in Africa becomes a top agenda item for all its
gatherings and to ensure that all the problems faced by SMEs are addressed as this is a sure way
to accelerate economic development thus proving employment for the people, increase revenue
generation, increased effective demand among other advantages for the states and the people.

In the Tanzanian consideration, an SME is viewed as one that employs at least 4 persons and
with a capital of TZ Shillings 5 million and the majority of the SMEs fall in the informal sector.
It is however possible that you find some SMEs with capital of between 200- 800 million
employing above 49 employees (Hamisi, 2011). From such examples, Zambia as a country
would look for ways of improving the SMEs market since it is evident from these studies, that
they are can be a good source of jobs creation, taxes for the government among other benefits.

According to UNIDO (2006), there is a strong relationship between existence of SMEs and
contribution to a country’s GDP and in the case of Zambia they contribute about 13% percent
and this would have been better if the SMEs are operating efficiently and a full friendly business
environment (Calcopietro and Massawe, 1999). (Add something two to three lines)

Small and Medium Enterprises (SMEs) play crucial roles in employment creation and income
generations. All over the world and Zambia in particular it is easy to establish SME’s since their
requirements in terms of capital and managements are not as demanding as it is in the case for
large enterprises (Zambia Economic Bulletin, 2009). For example, a hair salon does not need as
much investment as would a mine (large scale enterprise) when starting up.Small and Medium
Enterprises both urban and rural have been one of the major areas of concern to many policy
makers in an attempt to accelerate the rate of growth in low income countries.They are potential
sources of employment and income in many developing countries. It is estimated that Small and
Medium Enterprises (SMEs) employ 22% of the adult population in developing countries
(Daniels and Ngwira, 1993)

Due to their flexible nature, SMEs are able to withstand adverse economic conditions. They are
more labour intensive than larger firms and therefore, have lower capital cost associated with job
creation (Anheir and Seibel, 1987). Therefore, SMEs perform useful roles in ensuring income
stability, growth and employment.

Since SMEs are labour intensives, they are more likely to succeed in smaller urban and rural
areas, where they can contribute to the more even distribution of economic activity in a region
and can help to slow the flow of migration to large cities. Because of their regional and labor
intensity, the argument goes, small scale production can promote a more equitable distribution of
income than large firms. They also improve the efficiency of domestic markets and make
productive use of resources, thus facilitating long term economic growth (Rosemary, 2001).

2. 2. 1 Challenges Facing SME’s in Zambia

Having looked at literature based on the benefits of SMEs it is also significant to look at the
challenges facing SMEs in Zambia.

According to Sony (2005) the major obstacles Small and Medium Enterprises (SMEs) face all
over the world are the competitive environment, regulations and availability of a skilled
workforce, the cost of finance, international expansion, lack of knowledge about markets,
bureaucracy, political and social instability. Despite the immense opportunities for developing
Micro, Small and Medium Enterprises, almost all have remained informal or semi-formal,
serving the low income segment of the population for which there is very stiff business
competition.

Their access to formal market and incidence of upward mobility is quite limited. There are many
reasons for this state of affairs. This include limited awareness and capacity of operators, limited
access to financial and other support services and absence of enabling business environment in
terms of legal and regulatory frameworks (Zambia Economic Bulletin, 2009).
The Zambian SME development policy (2008) explains that, SMES face unique problems
including heavy cost of compliance resulting from their size. Insufficient working premises and
limited access to finance. Business training, marketing, technology development and
information. Institutions and Associations supporting SMEs are weak, fragmented partly due to
lack of clear guidance and policy for the development of the sector.

2.3 HOW LOAD SHADING HAS AFFECTED PROFITABILITY AND PRODUCTIVITY

Generally, power sector plays a key role in economic development. Many scholars have stated
and others have found the electricity sector to be a key driver of economic growth of any given
country, Zambia in particular. Each segment of modern society is dependent heavily on power,
from domestic, agriculture and industrial to service and governmental operations, all require
electricity and energy to function, without which the world, regardless of a specific sector, would
come to a standstill (Federation of Indian Chambers of Commerce and Industry, 2012).

Literature further adds that access to reliable, affordable energy is an essential input to economic
growth. Agriculture, manufacturing, shops, transportation, and construction including SMEs are
all engines of economic growth and all require energy such as electricity to function efficiently.
Electricity is also an essential building block for fighting poverty and promoting sustainable
development. In Zambia, electricity has been accorded prominence in the country’s poverty
reduction strategy (Wang, 2007).

The ability of a country to meet its wider development objectives is largely affected by access to
reliable energy. In Zambia, demand for energy, in particular electricity, has rising due to
economic activity in the country shading and unannounced power cuts have characterized
Zambia’s economy more commonly from 2015. Zambia business sector, both formal and formal
has not been spared and has been crippled and hit hard by electricity load shading which is seen
as a solution to the inability of power utility to supply electricity to meet demand.

It has led to lose of jobs in many sectors that depend on power in order to boost production of
their products. This increases the profits made by SMEs in order to cover for their workers. As a
result, Glencore is among the companies that have cut back drastically in Zambia in recent
months, suspending operations at its Mopani copper mine and announcing plans to lay off 3,800
workers at the mine, in which First Quantum has a 16.9 per cent ownership stake (The Globe and
Mail, 2016).

Moreover, the International Labor Organization (ILO) reports that African economic growth rate
in 2013 proved too low to generate sufficient employment opportunities for a rapidly growing
population, (ILO, 2014).

Production in the first half of 2015 rose by a mere 2.1%, compared with the same period in 2014,
helped by a ramp-up in May and June following the resolution of tax disputes between the
government and mining operators. Given the power shortages, annual production growth in 2015
turned negative, thus continuing the downward production trend observed since 2011.

The struggles in the mining sector, exacerbated by low copper prices, will also be felt in the
wider economy as workers are laid off, recruitment frozen and contracts to suppliers trimmed.
Moreover, as efforts are made to spare the mining sector, other parts of the economy will bear
the brunt of the power rationing. Opportunities for irrigated farming will be reduced and
manufacturers forced to operate at below capacity.

Daily Mail Newspaper published a story in titled “Load shedding worries business houses”. It
read in part that “various stakeholders have expressed concern over the ripple effects of load-
shedding citing loss of business amounting to millions of Kwacha daily, among others.” (daily
mail, 2012). The Poultry Association of Zambia (PAZ), Dairy Association of Zambia (DAZ),
small medium enterprises such as restaurants and salon owners all complained of losing business
due to what they term the indiscriminate and inconsistent load shedding by ZESCO.

Coming back to what Ketelhodt and Wöcke (2008) called “The Cape Town electricity crisis”,
Ketelhodt and Wöcke (2008) reported that there were various reports covering the extent of the
damage to businesses and households. Examples of this include damaged computers, traffic
congestion, perishables damaged in refrigerators, non-delivery to clients, and an oil refinery
unable to operate.

This was similar to what was contained in the Daily Mail Newspaper published story, in titled
“Load-shedding worries business houses”. The Daily Mail story reported that DAZ said farmers
are losing about K12.5 million per day because of power outages, especially that they deal in
fresh products, PAZ said that the poultry industry has also been adversely affected as it is one
sector that is centered on power and water with regards hatching, breeding, processing and
storage, while the Zambia Environmental Management Agency (ZEMA) expressed concern at
the impact that load shedding has on the environment (daily mail, 2012)

According to the World Bank’s Doing Business report (Attigah and Mayer-Tasch, 2013) firms in
low-income countries are affected by electricity supply interruptions on average 18 times in a
typical month. Business managers interviewed for the Doing Business project in Malawi which
was done in various countries by World Bank estimated that losses due to electricity outages
amount to an average of 3.2 % of annual sales and as much as 22.6 %. These resulting workflow
interruptions and the combined damage of sensitive electrical equipment such as computers
caused by voltage fluctuations can surely curtail profits significantly.