De-risking private power in Bangladesh: How financing design can stop collusive contracting

Collusive contracting with private power plants in Bangladesh has resulted high prices that cost the taxpayer around U$1 billion subsidies. The main driver of collusive is unwillingness politically unconnected firms to engage a high-risk environment. To attract investment, government adopted targeted risk absorption strategy negotiates mark-ups interested firms. We argue this cannot discover minimum mark-up would induce investment. Moreover, because only connected investors are likely be bidding and negotiating, approach encourages set mark-ups. An alternative competitive risk-mitigation provides contestable subsidies from development finance institutions (DFIs), such as preferential partial guarantees. Contestable work by reducing risks investors, encouraging their participation make collusion more difficult, constraining test our hypothesis, we collect dataset on plant-level DFI support 58 2004 2017. Our empirical analysis finds financing instruments DFIs associated 26% reduction controlling for plant capacity, size, fuel type.