Study: Collusive energy contracts cost Bangladesh as much as $1 billion a year

Research shows how the government paid politically connected businesses huge amounts of money even when they did not produce electricity.

Study: Collusive energy contracts cost Bangladesh as much as $1 billion a year
Electricity pylons of Bangladesh's national grid. Photo: Muhammad Mostafigur Rahman/Alamy 

As Bangladesh grapples with an acute electricity crisis brought about through the country having insufficient foreign reserves to purchase the fuel necessary to operate the plants, a study by researchers from SOAS University of London and BRAC Institute of Governance and Development (BIGD) offers a window into why the costs of electricity in Bangladesh are so high.

Titled “De-risking private power in Bangladesh: How financing design can stop collusive contracting,” the study published in the September 2022 edition of Energy Policy was conducted by Mushtaq Khan and Mitchell Watkins from SOAS and Iffat Zahan from BIGD.

The study concludes that the government has paid up to $1 billion every year in subsidies to private power plant owners — primarily blaming “collusive contracting” with “politically connected” investors.

“Collusive contracting with private power plants in Bangladesh has resulted in high power prices that cost the taxpayer up to US$1 billion a year in subsidies, as well as the selection of environmentally damaging fuels and technologies,” it concluded.

Researchers acknowledged that in developing countries like Bangladesh, private investors are often dissuaded by the high risks that come with investing in the power sector. They however argue that it chose the wrong strategy in mitigating the high risk environment.

To attract private investors, the Awami League government adopted a “targeted risk absorption strategy.” That strategy entails a guaranteed quicker return on private investment by offering targeted subsidies and lucrative prices for electricity.

The strategy was given legal protection by the Quick Enhancement of Electricity and Energy Supply (Special Provisions) Act 2010. The controversial law essentially guaranteed that deals made with private investors could not be challenged in any courts while offering indemnity for government officials.

The law also allowed direct negotiations between the government and investors to set prices and conditions, which ended up favoring private investors. Although the act was meant to be temporary, it was renewed multiple times and is still in effect today.

Rising energy costs and collusive contracts

On behalf of the government, Bangladesh Power Development Board (BPDB) mainly purchases electricity generated from these private power producers. The electricity is then sold to distributors at wholesale rates.

The researchers collected data on prices paid by the BPDB to 58 private power companies from 2014 to 2017.

The average plant-level price per kilowatt/hour (kWh) was BDT 9.30, ranging from BDT 1.41 to BDT 24.81. However, electricity is sold in Bangladesh at a price ranging from BDT 3.75-11.46. That means the government buys electricity from private producers at a high price but sells them to consumers at lower prices. This deficit is then compensated by a high level of subsidies by taxpayers.

And, that deficit grew from around USD 87 million in 2008 to more than USD 1 billion in 2015 and 2019. At the same time, the average price of private electricity generation more than doubled from 2010 to 2018, the study found.

This is reflected by the budget allocations for the energy sector as well. In 2009, the government set aside BDT 26.77 billion or USD 390 million for the energy sector. In ten years, that budget grew to BDT 277 billion or USD 2.8 billion — ten times the 2009 budget.

If the government awarded the private power plants project through competitive bidding, it could have saved USD 1.4 billion, the study concluded, referring to a previous study.

“These systematic anomalies show that overpriced contracts generated rents that were used to influence further distortions and generate more rents,” the paper reads.

Some are more equal than others

As part of the “targeted risk absorption” strategy, the Bangladesh government not only agreed to purchase electricity at a higher price from private investors but also agreed to pay them even if they do not produce any electricity due to low demand. That payment was called “capacity charge”.

“Contracts with high-cost power plants often stipulated that if they were not given orders for power, they would still be paid for 60% of the power they could have produced,” the study added.

These attractive terms were repeatedly renewed for some companies with strong political connections.

For example, plants owned by the Summit Group received 12.57% of the total capacity charge paid to around 50 power plants in the country between July 2019 and March 2022. Summit Group is a family conglomerate owned by Aziz Khan, whose brother is a senior Awami League decision-maker and former minister.

On the other hand, the British company Aggreko had their contracts renewed with “no power, no payment” clauses. That signifies that “plants without political connections were treated differently.”

The report suggests that an alternative strategy to the government’s “targeted risk absorption strategy” would have been competitive risk-mitigation that provides contestable subsidies from development finance institutions such as preferential finance and partial risk guarantees. Contestable subsidies work, the report says, by reducing risks of unconnected investors, encouraging their participation to make collusion more difficult, and constraining mark-ups.●

Aaqib Md Shatil studies sustainable development at the University of Sussex.