IMPACT OF INSECURITY ON THE PROFITABILITY OF SOME SELECTED CONSTRUCTION FIRMS IN THE NIGERIAN NIGER DELTA REGION

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IMPACT OF INSECURITY ON THE PROFITABILITY OF SOME SELECTED CONSTRUCTION FIRMS IN THE NIGERIAN NIGER DELTA REGION

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Organizations exist in and inter-relate with the society or environment. The organization’s environment is the sum total of all variables and happenings that surround and influence it; including both internal and external factors. The interactions between the business enterprise and the environment that it operates is very significant. Firstly, organizations are major stakeholders in the environment. Not only are they dominant stakeholders in every environment but they significantly affect the behavior and actions of other institutions and stakeholders in the locality where they exist. Secondly, what goes on in the environment where the business entity exists has a way of influencing the business. Organizations therefore must be very sensitive and reactive to the dynamics of the environment where it exists and carries out its business operations for it not only to survive, but to thrive.

The insecurity environment or insecurity environmental factor of business refers to security factors or issues that affect the smooth operations and performance of the business enterprise; in which it has little or no control over. Insecurity, is one of the elements in the business environment just like others (such as good technological innovations, favourable economic climate, etc.), enhance and optimize business operations. King (2016) argued that in Nigeria, the insecurity factors range from theft and armed robbery to other social vices such as kidnapping/hostage taking and demand for ransom, assassination, militancy, youth restiveness and constant invasion and disruption of business operations, lack of employment, limited accessibility to basic means of livelihood, bombing and repeated destruction of pipelines. All these constitute forms of insecurity and crimes which have affected the Nigerian business environment very hostile and unpleasant for the smooth operation of businesses. The fortunes of construction companies in the Niger Delta region in terms of operations and performance have not been smooth due to insecurity. There have been several recorded cases where Construction companies were either forced to abandon their contracts or delay the execution of their jobs due to insecurity. A notable case was the abandonment of the contract for the construction of the ever busy and important East West Road due to the activities of Niger Delta militants and other insecurity issues. In one year alone, Julius Berger was alleged to have paid about 430 million naira as ransom to kidnappers and militants (Oyibo 2008). Shonekan (2001) opined that youth restiveness and ethnic militancy in the Niger Delta, out of alleged feelings of abandonment by the government and seeming discontent by youths, arising largely from the poor economy and unemployment is responsible for some of the negative profitability indices being recorded by construction companies operating in the region.

Statement of the problem

Previous empirical studies have been carried out on security challenges and the implications for business activities in Nigeria by Okonkwo et al (2015), Nwogwugwu et al (2012); Arong & Egbere (2013); Olusola, (2013), Adeagbo (2014). However, none have actually dealt with the influence of insecurity costs on the profitability of construction companies in Nigeria’s Niger Delta region. Therefore, this study is unique, and aims at filling that knowledge gap by empirically examining the relationship between insecurity costs and profitability of construction companies in Nigeria, particularly the Niger Delta region.

There are several security challenges affecting Nigeria’s Niger Delta region, among others include;

Kidnapping/Hostage taking: Kidnapping and hostage has been a major tool used by Niger Delta youths and militants or agitators to drive home their demand. Though criminal in approach, their major targets have been oil and construction workers of major companies. Expatriates and other Nigerian workers are usually kidnapped for ransom. This has left very serious negative marks not only in terms of development of the region but also the profitability of the companies in question, as their operations were disrupted. Nwankwo (2012), posits, that kidnapping is now used as avenue for settling social and political scores. Again, the pecuniary gains accruing from the money-making business collected from the victims of the illegal trade, usually in multimillions of dollars and naira, many agitating youths in the region are now using kidnapping as a tool of making money by kidnapping and taking hostage staff of construction companies for ransom. The result of this is that such ransom paid for the release of their staff are not tax deductible and therefore eats deep into their contract sum. The overall implication is that their profitability is affected negatively.

Militancy and Youth Restiveness: Militancy and Youth restiveness is also another mode of insecurity existing in the region and sometimes beyond. It constitutes one of the multiple effects of the critical problem of insecurity in Nigeria’s Niger Delta region (Ejumodo,2014). Militancy and youth restiveness means the alleged matters of youth agitations over the issues of negligence, marginalization and deprivation, due to feelings of dissatisfaction. It entails a situation whereby youths get agitated, and becomes quite difficult to control. It can also be seen as youths’ agitations over for the settlement of their rights through self-seeking and criminality or criminal activities.

Nigeria, adjudged Africa’s most populous country whose main source of income is revenue from crude oil, has recently witnessed very alarming level of insecurity. This may not be unconnected with its size, overdependence of oil, high level of poverty and unemployment among its citizens, etc. All these variables have contributed to prevailing crimes and constitute insecurity to business enterprises in Nigeria; making the Nigerian security environment to be complex. Regrettably, investors are not willing or ready to put their monies where their investments are not secured.

Over the past few years, the case of the Niger Delta Region is really pathetic and severe, as construction companies now see the high risk or rate of insecurity in the region as one of the factors posing threats to their survival and investments; as many companies and businesses in the Niger Delta region have stopped operation due to insecurity caused by activities of militants and other security challenges. Sad enough, the cost of lives and material resources loss in the region due to these security problems cannot be quantified. Poor security in the region has also caused increases in the costs of doing business, in the form hiring of private security companies, hire of police and military escorts, hire of patrol vans, building fences, or installation of security alarm systems by companies operating in the region. These costs impede business growth and profitability. For instance, Julius Berger, a notable construction giant, left the Niger Delta region in 2015 citing insecurity reasons as the major factor. Aside that, there were also other reported cases of project abandonments and avoidable delays by construction companies operating in the region due to one security problem or the other. These had negative implications not on the company’s turnover, operations, and finances but also the economy and infrastructural development of the region.

No known research has been carried out on the impact of such ‘insecurity costs’ on the profitability or corporate financial performance of Construction Companies in Nigeria. It is based on the foregoing that the researcher sought to carry out this study.

Purpose of the study

The broad objective of the study was to investigate the impact of insecurity costs on corporate profitability of construction companies in the Niger Delta States of Nigeria. Specifically, the objectives were:

1. To determine how Kidnaping/hostage taking costs affect Gross Profit Margin of construction companies in the Niger Delta region.

2. To establish the relationship between Kidnaping/hostage taking costs and Operating Profit

Margin of construction firms in Nigeria’s Niger Delta region;

3. To assess the effects of Militancy/ youth restiveness costs on Gross Profit Margin of construction firms in the Niger Delta.

4. To determine the effect of Militancy/ youth restiveness costs on the Operating Profit Margin of construction firms.

5. To establish the effect of Effective policing by security agents on the relationship between insecurity costs and profitability of construction firms in the Niger Delta of Nigeria.

Research Questions

The following research questions guided the study:

1. To what extent does kidnaping/hostage taking costs affect Gross Profit Margin of construction companies in the Nigeria’s Niger Delta region?

2. To what extent does kidnaping/hostage taking costs affect Operating Profit Margin of construction firms in Nigeria’s Niger Delta region?

3. To what extent does militancy/youth restiveness costs affect Gross Profit Margin of construction firms in the Niger Delta?

4. To what extent does militancy/ youth restiveness costs affect the Operating Profit Margin of construction firms?

5. To what extent does effective security framework/policing by security agents affect the relationship between insecurity costs and profitability of construction firms in the Niger Delta?

Development of Hypotheses

From the above, the following hypotheses were formulated;

H01: There is no significant relationship between Kidnaping/ hostage taking costs and Gross Profit

Margin of construction companies in the Niger Delta region

H02: There is no significant relationship between Militancy/ youth restiveness costs and Gross Profit Margin of construction firms in the Niger Delta.

H03: Kidnaping/hostage taking costs does not significantly affect Operating Profit Margin of construction firms in Nigeria’s Niger Delta region

H04: Militancy/ youth restiveness costs does not significantly affect Operating Profit Margin of construction firms in Nigeria’s Niger Delta region.

H05: Effective security framework/policing by security agencies does not impact the relationship between insecurity costs and profitability of construction firms in the Niger Delta.

Limitations to the Study

Empirical research of this nature requires the use of established data from the company’s financial statements or data from relevant agencies of government and not questionnaire only. However, this research is probably one of the very few initial works on insecurity accounting in Nigeria. Hence data on insecurity costs incurred by companies are limited, resulting to the use of questionnaire only. Another limitation was that the sample size considered for this research was too small to generalize and conclude for all construction companies operating in the Niger Delta region of Nigeria. There is therefore room for further research in this area.

Scope of the Study

Insecurity costs or problem in Nigeria is vast, looking at the country as a whole and the construction industry, in particular. This study focuses on known construction companies operating in the Niger Delta region of Nigeria. It examined the effects of insecurity costs on corporate performance of construction companies, particularly their profitability.

It is believed that the study will contribute to existing literature by examining the relationship between Insecurity costs and profitability of construction companies in the Niger Delta States of Nigeria. The study also is a peculiar deviation from previous studies in scope (covering only the costs associated with insecurity costs and its influence on the profitability of construction companies in the Niger Delta.

The greatest limitation encountered by the researcher was that of lack of literature on the subject matter. There was no much literature on accounting for insecurity costs, as the area had not been well explored by previous researchers.

Another major problem faced by the researcher was the complexity of the research itself in terms of the locations, statements and companies selected for the study. Cost of transportation and other logistics, to a great extent affected the researcher; particularly the risk of plying the nooks and cranny of the entire Niger Delta region was a huge task.

Again, the present insecurity problem in the Niger Delta region was a limitation. Aside that, distance, time, financial constraints and language barriers were some of the limitations the affected the study.

Finally, getting necessary data from the right source was also a limitation. Some respondents chose to be economical with the truth by not giving the right information that would be useful for the research.

Significance of the study

Crime and insecurity are hindrances not only to the society but businesses particularly. A business environment that is not secured drives away existing and potential investors. It increases business risks and uncertainty. Tackling insecurity is therefore a major step toward alleviating the challenge facing businesses in Nigeria.

Over the years, several researchers have carried out studies on similar subjects, but not on the influence of insecurity costs on the profitability of construction companies in Nigeria’s Niger Delta region. This study contributes to existing literature and in no small measure, will be of great importance to other researchers.

The study x-rayed the various dimensions to insecurity in the Niger Delta, stating their causes, effects, and possible solutions. This will be of immense benefits to investors, the government, and other policy makers to achieving a more secured nation; as the study recommended practical steps to be used to tackle the problem of insecurity in the country, particularly the Niger Delta.

Finally, the study will boost the scanty literature on insecurity in Nigeria as it relates to the construction sector. It is believed that the study will therefore be a reference point to upcoming researchers in the construction and security sectors of the economy.

Definition of terms

The following terms were defined during the study:

Security- Security was defined as a state of being secured or being free from threats fear or anxiety. It entails an environment devoid of threats and insecurity issues.

Insecurity- Insecurity refers to a state of not being secured. It is described as “the state of fear or anxiety, stemming from a concrete or alleged lack of protection.” It refers to a situation of no freedom. It means a state of danger.

Niger Delta- These are the areas of the southern part of Nigeria geographically characterized predominantly characterized by deltaic features.

Kidnapping- Is an unlawful and criminal method of confinement of persons against their will. It entails holding a person hostage, either for ransom or other reasons, against their will and the law.

Youth Restiveness- Youth restiveness refers to youth agitations over the issues of negligence, deprivation and marginalization.

Militancy- Is the use of violent or confrontational means to fight a cause. It entails unlawfully taking arms against the state, criminally.

Profitability- profitability entails a type of performance measurement. It means the organization’s ability to make profit There are several measures of firm’s profitability including; Gross profit margin, Operating profit margin, Earnings per share, return on assets, return on equity and Return on capital employed.

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