Collusive contracting with private power plants in Bangladesh has resulted in high power prices that cost the taxpayer around US$1 billion a year in indirect subsidies to power plants through the power purchaser/distributor, as well as the use of environmentally damaging fuels and technologies. Furthermore, plants with higher prices are often prioritised in dispatch orders and supplies of fuel by the power purchaser, perhaps because their high mark- ups allow them to corruptly influence decisions.
Private investors in power generation in developing countries typically have high risk perceptions in contexts of weak contract enforcement. They have to lay out large sums up front and recover returns over long periods based on contracts underwritten by the government. In high-risk environments bidders without close connections to government stay away, leaving the field to connected companies generating overpriced power using dirtier technologies. Strengthening the rule of law can improve the risk environment, but these improvements take a long time to achieve and intermediate solutions have to be found in the meantime.
This briefing paper summarises our analysis of the effects of different risk mitigation strategies on the price of private generation in Bangladesh (Khan et al., 2020). We put forward a solution using contestable direct subsidies –in particular lower-cost finance and partial risk guarantees – to reduce risks for potential investors regardless of their connections, thereby enhancing competition. This is an effective method of reducing the price of power generation, improving the environmental quality of new investment, and reducing corruption in the sector.
Read the Working Paper.