Output loss of firms due to power outage in Bangladesh

Rakshanda ZIhan#
2015-2-88-015
Department of Economics, East West University
A/2, Aftab Nagar, Dhaka-1212, Bangladesh

This paper attempts to estimate explanatory independent variables of output loss due to
power outage from firm level cross-sectional data. In Production function cost of factor inputs:
Electricity, Raw Material and Labor are measured to estimate output loss due to power outage
through Ordinary Least Square model. Results show that increasing cost of electricity
increases output loss due to power outage but costs of labor and raw material have opposite
relationship with output loss due to power outage. Model significantly varies across industry
and firm size.

JEL Codes: D24, L11, L94, O12

Keywords: Power outages, Output loss, Manufacturing Productivity

One of the potential contributors to the output loss of firms in developing countries is low quality
infrastructure, and one of the examples of infrastructure failures is power outages in Bangladesh.
In the 2013 World Bank Enterprise Survey, more than one-fourth of Bangladeshi business
managers mentioned poor electricity supply as their second biggest barrier to business operation
followed by access to finance (24%).

This paper studies the effects of electricity shortages on manufacturing plants in Bangladesh. One
potential prior is that because electricity is an essential input - most factories cannot produce
anything without electricity for lights, motors, and machines - shortages could significantly
reduce output (Hunt Allcott, 2014). Due to large potential loss many firms would try to insure
themselves against power outages by using generators or other means like grid electricity. Foster
and Steinbuks (2009), Zuberi (2012), and others argue that the cost of self-generation is relatively
small, and Alam (2013), Fisher-Vanden, Mansur, and Wang (2013), and others highlight ways in
which plants substitute away from electricity when shortages worsen. The standard production
function model needs to be adapted for the case of input shortages, besides necessary data are
difficult to acquire from available enterprise surveys which do not have useful questions on
energy produced from generators as shortages have very different effects on firms with vs.
without generators. Meanwhile, countries that have electricity shortages are often the same
types of countries that do not record or disclose high-quality data on the performance of public
infrastructure. Also shortages are not exogenous to productivity (Hunt Allcott, 2014). For
example, high economic growth could increase electricity demand which leads to shortages, poor
management could lead to insufficient power supply and also reduce productivity. Either of these
two mechanisms would bias causal estimates of shortages, albeit in opposite directions.
If we consider the background of electricity shortages in Bangladesh and industrial usage of
electricity we may see a variation across districts due to location of factory which will be tested
in this paper. Due to economy of scale in generator capacity, self-generation may increase with
plant size which can be determined by the size of workforce.
We use a production function model in which output is the loss due to electricity shortage and
inputs are cost of capital: electricity, raw materials and labor. Firms that use generators face an
increase in electricity costs (the input cost effect). This enters the profit function like an output
tax and thus reduces demand for other inputs (the output tax effect). Even if these firms never
stop production during shortages, productivity is lower due to the input variation effect: using
different bundles of fully flexible inputs during outage vs. non-outage periods is less efficient than
having a constant flow of production. Firms without generators shut down during shortages,
which reduces output and causes waste of non-storable inputs (the shutdown effect). The waste
reduces demand for non-storable inputs when firms foresee periods of higher shortages (the
shutdown tax effect). (Hunt Allcott, 2014)

Empirical analysis is done based on World Banks enterprise Survey data of 2013. The effects of
shortages vary in ways predicted by the model. Only plants that self-generate experience an
increase in total energy costs, while non-generators experience much larger revenue losses. As
detail data on electricity produced from generators are not available, output loss due to power
outages is measured as a function of cost of electricity input which also includes cost of
generators for firms which use generators as substitute.

Literature Review

Latest papers on impact of power outages on firms have taken cost of alterative electricity sources as the
outage cost. However, our data set does not give the details of generator cost which did not allow us to
use that as outage cost. Firms are found to invest in self-generation capacity at the expense of more
productive capital (Reinikka R., 2002) and out-source part of the production process (Fisher-Vanden et al.,
2012). Alby et al. (2013) find that the average firm size of electricity-intensive sectors increases in response
to power outages. So we use firm size to find out impact of power outage on large vs small firms. Bental
and Ravid (1982) were the first to point out that data on back-up generators may be used to infer
outage costs. Pasha, Ghaus and Malik (1990) show that in Pakistan investment in back-up
generators did indeed mitigate the reported cost (self-assessments) of power outages. Though
our dataset has indication of back-up generators and percentage of electricity that comes from
backup generators but the cost of electricity.
Controlling for economic growth at a fine geographic level is important since districts within
Bangladesh have been shown to grow unevenly (Chauduri and Ravallion, 2006). So we compare
our model across region to find out the locational impact.

Model

Dependent variable of our model is the output loss due to power outage. Independent variables
are cost of input factors of production which includes labor and capital. If we consider input factor
prices capital includes cost of electricity and raw material and cost of labor. This model can be
derived from production function of output before power outage and after power outage.

= ( , ) (Output without power outage)

= ( , ) (Output after power outage)

= ( , ) (Output loss due to power outage)

Y = = +

= + +

Output loss due power outage = Cost of Capital (cost of lands and buildings, cost of electricity r,)
+ Cost of Labor (w)

We also estimate the relationship between output loss and firm size by considering number of
labor and industry type. We estimate the relationship between output loss and geographical
location using Anova table.

Data and Methodology

The World Banks enterprise survey data of Bangladesh for 2007, 2010 and 2013 have been used
in this paper. Enterprise Survey is a firm-level survey of a representative sample of an economys
private sector; covers a broad range of business environment topics including access to finance,
corruption, infrastructure, crime, competition, and performance measures. Since 2002, the
World Bank has collected this data from face-to-face interviews with top managers and business
owners in over 155,000 companies in 148 economies. (http://www.enterprisesurveys.org)

Approximately 2600 private firms responded to the dataset used for Bangladesh. The dataset is
a mixture of panel and crosssection, there are 360 panel identification marker and rest are
cross-section data. So different pooling and cross-section techniques can be used; inflation from
2007 to 2013 has been taken care of to eliminate measurement error of real vs nominal values.

Dataset has large enough sample sizes for selected industries to conduct statistically robust
analyses with levels of precision at a minimum 7.5% precision for 90% confidence intervals about:
i. Estimates of population proportions (percentages), at the industry level; and ii. Estimates of
the mean of log of sales at the industry level. Enterprise Surveys and Indicator Surveys are
stratified following 3 criteria: sector of activity, firm size, and geographical location. Overall
sample sizes for both Enterprise Surveys and Indicator Surveys are determined by the degree of
stratification of the sample

Stratified Random sampling method was used to create more panels, the random character over
specific geographic location or sector might be lacking. To take care of this, sampling weights are
introduced to adjust for selection biases that create unequal probability of selection across one
or more selection criteria. In this paper, 2013 Cross-Sectional Dataset for Bangladesh is used to
estimate our models.

Main drawbacks of using this dataset is that most of the questions are designed to address a
different need in mind which did not necessarily contained the details required for this paper.
Thus more generic questions had to be used as representative of independent variables. Large
number of missing observations is another major concern reduces the robustness of the results
due to asymptotic constraints.

From the dataset we use annual losses that resulted from power outages either as a percentage
of total annual sales or as total annual losses as output losses. For input data total annual cost of
labor including wages, salaries, bonuses, social security payments represents cost of labor, total
annual costs of electricity, Total annual cost of raw materials.

Estimation

Our model is estimated using Ordinary Least Square method, with robust standard error
correction:

. reg LnOutput_Loss elect_cost LnLabor, robust

Linear regression Number of obs = 854

F( 2, 851) = 11.53
Prob > F = 0.0000
R-squared = 0.0130
Root MSE = 6.5203

Robust
LnOutput_L~s Coef. Std. Err. t P>|t| [95% Conf. Interval]

elect_cost 2.639779 1.593415 1.66 0.098 -.4877057 5.767264

LnLabor -6.53e-09 1.47e-09 -4.45 0.000 -9.41e-09 -3.65e-09
_cons 3.441599 .2603402 13.22 0.000 2.930615 3.952583

= + +

The estimate suggest that the percentage cost of electricity of total capital cost increases leads
to increased output loss due to power outage indicated by positive coefficients in the statistically
significant production function model. But the cost of labor is negatively related which is
suggestive of the fact that firms may pay labor only during the productive hours only thus with
the reduced output, cost of labors goes down. However further explanation of such results
requires more data on nature of employees.
We used robust standard errors to deal with heteroskedasticity in cross-sectional data, which
had only minimal impact (when compared to normal standard errors).

. reg output_loss_ Lnelect Lnlab Ln_Rawmat, robust

Linear regression Number of obs = 1530

F( 3, 1526) = 34.70
Prob > F = 0.0000
R-squared = 0.0552
Root MSE = .08025

Robust
output_loss_ Coef. Std. Err. t P>|t| [95% Conf. Interval]

Lnelect .0007701 .0014001 0.55 0.582 -.0019763 .0035164

Lnlab -.0099051 .0014995 -6.61 0.000 -.0128463 -.0069638
Ln_Rawmat -.0009403 .0011589 -0.81 0.417 -.0032134 .0013329
_cons .2093233 .0158542 13.20 0.000 .1782249 .2404216

We regress percentage of output loss of annual sales due to power outage with electricity cost,
labor cost and raw material cost, only fifty percent of the variance is explained by the model.
Electricity cost has positive but very low coefficient. On the other hand labor and raw material
both have negative coefficients. Which indicate that lack of electricity leads to less utilization of
raw material and labor.

We can conclude that electricity cost increase as firms invest in generators to mitigate output
loss due to power outage. However output loss may vary based on usage of generator and
electricity dependence of firms or industry type.
To test the variation of output loss due to power outage across industry type, region of
establishment and firm size ANOVA Tests (F-Test) shows the following results:

. anova output_loss_ industry_type industry_region firm_size

Number of obs = 1247 R-squared = 0.1347

Root MSE = .060813 Adj R-squared = 0.1134

Source Partial SS df MS F Prob > F

Model .700246737 30 .023341558 6.31 0.0000

industry_~e .410553269 24 .017106386 4.63 0.0000

industry_~n .01634825 3 .005449417 1.47 0.2201
firm_size .08704238 3 .029014127 7.85 0.0000

Residual 4.49701413 1216 .003698202

Total 5.19726087 1246 .004171156

We conclude that output loss due to power outage show statistically significant positive
relationship with industry type and firm size but not with region of establishment. Larger firms
are more impacted by power outages compared to smaller firm. Also power outage across
industry varies significantly.
References
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Electricity." Bell Journal of Economics 8(4): 249-253
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and Environmental Effects of Electricity Shortages, National Bureau of Economic Research,
Working Paper No. 17741.
C. Hunt Allcott, A. C.-W. (2014). How Do Electricity Shortages Affect Productivity? Evidence from
India.
D. Pasha, H.A., A. Ghaus and S. Malik (1990). "The Economic Cost of Power Outages in the
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