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 subsidies, as well as the selection of environmentally damaging fuels and technologies. These problems emerged after 2010 as contracts began to be signed in closed-door negotiations between the government and individual investors. To mitigate risks in high-risk contexts, governments have to provide subsidies to change incentives. This solved the investment problem but at a high cost and with much higher subsidies. Versions of competitive risk-mitigation subsidies continued in a few projects. The study uses data from 58 private power plants in Bangladesh from 2008 to 2016 to show that even in an overall collusive environment, the provision of relatively small risk-mitigation subsidies resulted in a 62% reduction in plant-level prices in these projects, adjusting for fuel type, generation capacity and age. The analysis of risk perceptions and potential competition provides a plausible explanation for this huge price effect. The evidence and analysis suggest a feasible and effective anti-collusion strategy for the power sector. Given the powerful interests at play, we looked for and identified an instrument that is not opposed by powerful players and yet is effective in changing their behaviour. It also suggests that a full subsidy withdrawal strategy will not solve collusion and corruption problems in developing-country power sectors. In fact, the collusion problem emerged as a result of an untimely withdrawal of some subsidies.
Authors: Khan, Mushtaq; Matin, Maria; Zahan, Iffat; Ashraf, Zeeshan; Ajefu, Joseph
Type: Working Paper
Year: 2020
