## **Generators can mitigate short‐term losses but reduce other investments**

Using a set of Enterprise Survey observations restricted to eight Sub‐Saharan African countries in 2007, Oseni and Pollitt (2015) show unmitigated losses due to outages range between US$ 2‐24 per kWh for firms possessing generators and US$ 1.5‐32 per kWh for firms without generators. These figures, however, do not reveal all differences between the two sets of firms as those owning generators are also more likely to be exposed to outages and more reliant on electricity. And while generators can prove to be effective in mitigating short term losses, they are also linked to lower longer‐term productivity due to higher marginal costs, thus limiting investments into other input factors (Mensah, 2016). Furthermore, scarcity in electricity supply has been found to increase production cost via spending on alternative inputs and even lead to the outsourcing of production to firms with reliable electricity supply in a large panel of Chinese firms (Fisher‐Vanden, Mansur and Wang, 2015).

## **The high cost of generators changes industry composition in power‐intensive sectors and disadvantages small firms**

Aside from increased operational costs, unreliable power networks can drastically increase the initial investments required to start a business. In Nigeria, small firms have to spend between 10 and 30 percent of their start‐up cost on technologies for self‐generation (Adenikinju, 2003, 2008). In industries that require a large amount of electricity for production, small firms might be unable to finance such investments and thus be shut out of the market, leading to overall efficiency losses. Indeed, Alby et al. (2013) use Enterprise Survey data for 77 countries to show that energy‐intensive sectors (e.g. chemical and textile industries) have a significantly lower share of small firms in countries with frequent outages. In these circumstances, large firms are more likely to be able to mobilize sufficient funds for investing in generators, while smaller firms are pushed out of the market. And unreliable electricity supply also affects entrepreneurship. An analysis of Enterprise Survey data for 23 African countries finds that, power outages diminish the probability that individuals start their own business by 32%, an effect that even rises to 44% when considering only the non‐farm sector (Mensah, 2018).

# 5. Conclusion

The literature reviewed in this section demonstrates the positive effects of provision of electricity, water, transportation, and ICT infrastructure on economic development. It stresses the crucial role that infrastructure quality plays in increasing the productivity of firms, even though further research is needed assessing the impacts of ICT quality upgrades, such as improving internet speeds.

At the same time, there is ample evidence how infrastructure disruptions hurt firms. In analyzing the consequences of infrastructure disruptions, most of the literature focusses on direct effects such as foregone production. Indirect effects have been quantified to a lesser degree. This does not, however, mean that they are less important. Disruptions such as power outages reduce investment through several channels; firm‐level adaptation measures such as procurement of self‐generating capacity crowd out investments that would increase the productivity of capital, and investment in infrastructure‐dependent sectors is more likely to flow to regions with fewer disruptions. Outages also distort the sectoral allocation of firms, leading, for example, to macroeconomic efficiency losses due to a lack of small firms in energy‐ intensive sectors.

The total effect of these and other indirect impacts of infrastructure disruptions on economic growth is unknown. In the long term, they may even exceed the short‐term direct impacts and lead to costs that 16