Missing middle of infrastructure finance: Risk, and why capital stops

By Chidi Nwafor

The term sheet had already circulated. A mid-sized power project in a fast-growing emerging market, strong resource fundamentals, credible sponsor, tariff structure that penciled out comfortably above the fund’s hurdle rate. The investment team liked it. The economics liked it. Then, three weeks before the credit committee meeting, a currency analyst attached a single paragraph to the file: the project’s revenues would be earned in local currency, its debt service in dollars, and the country’s central bank had no forward market deep enough to hedge the tenor the deal required. Nothing about the project had changed. The power still needed to be built, the tariff was still bankable in nominal terms, the sponsor was still credible. But the risk that had always been there, quietly, in the currency mismatch, was now named, and naming it was enough. The deal did not die. It stalled, indefinitely, in the space reserved for opportunities that are good but not yet investable.

This is the moment that determines more infrastructure outcomes than any pledging conference or capital-raising round: not the discovery that risk exists, everyone in the room already knew that, but the discovery that no one had yet decided who should carry it, on what terms, and at what price. Article 1 in this series established that the global infrastructure gap is not primarily a shortage of capital but a shortage of deployable projects. This article asks the next question directly. If the capital exists and the opportunity is real, why does it stop moving at exactly this moment? The answer is risk, but not in the way the term is usually invoked.

Risk Is Not the Obstacle. Unallocated Risk Is.

Infrastructure investing has never been risk-free, and no serious investor expects it to be. Political risk, currency risk, regulatory risk, sovereign risk, offtaker risk, construction risk, demand risk, refinancing risk, operational risk, governance risk, these are not anomalies in infrastructure finance. They are the asset class. Every institution active in the space prices for some combination of them as a matter of course, and every credit committee in the world has approved transactions carrying meaningful exposure to several at once.

What stalls capital is not, therefore, the presence of risk. It is risk that has not been decided, a category of exposure that exists in the project without having been assigned to a party equipped to hold it, priced for holding it, or compensated for holding it. The currency mismatch in the power project above was not fatal because currency risk is unusual in emerging-market infrastructure. It is common, and there are instruments built specifically to address it. It was fatal, provisionally, because no one at the point of structuring had decided whose problem it was: the sponsor’s, the offtaker’s, the lender’s, or a guarantor’s not yet engaged. An investment committee will approve a project carrying substantial, well-allocated risk far more readily than one carrying modest, ambiguous risk. Ambiguity, not exposure, is what stops capital.

Four Different Things Get Called “Managing Risk”

Part of the confusion in the infrastructure risk conversation comes from treating four distinct operations as though they were one. Risk removal takes a specific exposure off the table entirely, a fixed-price construction contract removes much of the construction-cost risk from a sponsor’s balance sheet by shifting it contractually to a contractor equipped to price and manage it. Risk allocation does something different: it decides, deliberately, which party in a transaction is best positioned to hold a given risk, and structures the deal so that party bears it, whether that is a government absorbing regulatory risk it controls, a development finance institution absorbing early-stage political risk a commercial lender will not touch, or a sponsor absorbing operational risk within its core competence. Risk pricing puts a number on exposure that cannot or should not be removed, compensating whoever holds it through a return premium, a spread, or a fee. And risk absorption is the deliberate use of concessional or public capital to take a specific, identified risk fully off a project’s economics rather than merely pricing it, freeing commercial capital to enter at commercial terms.

Confusing these operations produces bad structuring. A government that tries to remove sovereign risk by declaration rather than allocating it through a genuine credit enhancement mechanism has not solved anything; it has merely asserted a solution the market will not believe. A blended-finance facility that prices concessional capital as though it were absorbing risk, without a clear mechanism for what specific exposure the concessionality is targeting, dilutes scarce public capital across a project’s entire risk profile instead of neutralizing the one or two risks actually keeping commercial capital away. The discipline that mature infrastructure markets have built, and that many emerging markets are still building, is the discipline of identifying precisely which risk in a transaction needs which of these four operations, applied by which party, at which stage of the project’s life.

Who Should Hold What, and Why

The allocation question has a defensible answer in most cases, even though it is rarely applied with discipline. Risks that a party can control or influence should generally sit with that party: a government retains regulatory and permitting risk because it is the author of the regulation; a contractor retains construction risk because it prices and manages the build; a sponsor retains operational risk because operating the asset is its core business. Risks that no transaction party can control, currency devaluation, political upheaval, sovereign default, are better held by parties built specifically to price and diversify them across many transactions: political-risk insurers, multilateral guarantee facilities, credit-enhancement structures backed by callable capital. Asking a private developer to absorb sovereign risk it has no ability to influence is not conservative structuring. It is a way of guaranteeing the deal never closes.

The stage matters as much as the party. Early-stage development risk, the risk that a feasibility study reveals the project is not viable at all, is appropriately absorbed by development capital willing to lose money on projects that do not proceed, because that is the economic function development finance exists to perform. Late-stage operational risk, once a plant is built and generating predictable cash flow, is appropriately priced into commercial debt at commercial terms, because the uncertainty that justified concessional support has already been resolved. Applying development-stage risk tolerance to an operating asset overprices capital that should be cheap by then. Applying operating-stage risk tolerance to a pre-feasibility concept guarantees capital never arrives at all.

Risk Translation

There is a more precise way to describe what the strongest infrastructure institutions actually do, and it is worth naming directly: risk translation, the deliberate process through which public, institutional or financial architecture converts a risk that commercial capital will not accept in its raw form into a risk that commercial capital can underwrite. A partial-risk guarantee from a multilateral institution does not remove sovereign risk. It translates an unrateable government payment obligation into an instrument with the guarantor’s credit standing behind it, something a commercial bank’s risk committee can actually price. Political-risk insurance does not eliminate expropriation risk in a frontier market. It translates that risk into a premium a project can afford to pay, transferring the exposure to an insurer with a diversified global book able to absorb it. Long-term offtake contracts do not remove demand risk. They translate it into a counterparty credit exposure, which is a very different, and usually much more financeable, problem.

This is the mechanism, more than any single instrument, that the Missing Middle identified in Article 1 depends on. Project preparation facilities, guarantee structures, blended-finance platforms and standardised documentation are not simply capital-mobilisation tools. They are the machinery of risk translation, and where that machinery is absent or thin, as it is across much of the infrastructure landscape in emerging and frontier markets, well-priced, well-allocated risk simply has nowhere to go before it reaches an investment committee, and the committee, quite rationally, declines to hold what no one has translated for it.

Nwafor is founder and lead strategist at De-Lazuli Consult. He writes from Lagos and Abuja and can be reached at chidi.nwafor@de-lazuliconsult.com