Politicians and project-sponsors often present infrastructure projects as promised growth, mobility, jobs, or cleaner energy. After the ribbon-cutting a harder question remains: who pays when something goes wrong?
In infrastructure and project finance, advisors and lenders describe this as a technical question of “risk allocation.” And in politics, it surfaces as corruption scandals, fiscal crises which force austerity, and public protests over tolls and tariffs. Infrastructure is not uniquely corrupt or uniquely mismanaged. But infrastructure projects concentrate gains up front and push fiscal uncertainty into the future. Incumbent politicians reap the political benefits early on through visible services, contracts, and patronage. Later governments, users, or banks, however, inherit the cost overruns, demand shortfalls, and exchange-rate hits. “Political risk” is not a mysterious probability meant to spook investors, then, but rather a hidden and postponed fight over which group absorbs the losses when the original story no longer works.
Public-private partnerships (PPPs) or privately financed concessions are often sold to policy-makers or the public as a way to transfer risk into the private sector: investors build and operate while taxpayers avoid the bill. The World Bank has spent years trying to kill this fantasy, warning governments that such partnerships are not “free infrastructure.” Long-term commitments or contingent liabilities which don’t look like debt on day one can still become significant cash demands during downturns.
The International Monetary Fund (IMF) has made the same point even more bluntly: guarantees “are not usually subject to the same degree of scrutiny through the budget process as regular spending,” even though the consequences of these guarantees can be severe. There is a strong political implication here: when executives can grant guarantees without a regular fight over appropriations, they are given a valuable instrument for coalition-building. Politicians can deliver projects now, keep the headline deficit clear, and let future officials deal with any consequences. The clear takeaway for infrastructure politics is that risk doesn’t disappear; governments repackage it into guarantees, tariffs, foreign-exchange clauses, minimum-revenue undertakings, step-in rights, or implicit understandings that states won’t let projects fail.
One abstract calculation shows how fiscal language can mislead. Suppose a finance ministry signs off on an explicit guarantee with a potential payout of $2.5 billion during an economic downturn. On paper, an expected cost like this might look manageable. But this ignores the reality of fiscal guarantees, which are likely to hit when the economy is already struggling, revenues are already falling, and other liabilities are already surfacing. The political problem surfaces here: a contingent promise begins to compete with salaries, pensions, or debt services, and the cabinet or budget authorities have to decide which claims are honoured and paid first. The resulting loss allocation is never politically neutral.
How does private risk turn into public losses? Consider the toll road program in Mexico during the early 1990s. As a massive undertaking, it required significant financing.
According to the World Bank, when Mexico’s program unraveled, domestic banks were left with non-performing loans in the range of $4.5-$5.5 billion, while the government faced “severe pressure to inject scarce financial resources to rescue investors” and users had “some of the most expensive road tolls in the world.” This is an example of political risk in practice: a project which was sold as private finance became an issue of banking stability and public obligation.
This is not just a cherry-picked example — take a look at Argentina’s utilities regime after the 2001 crisis, when the currency peg broke. Throughout the 1990s, many regulated utility tariffs were effectively dollar-linked and indexed — which in a low-inflation, hard-peg world — made sense to investors. Once devaluation and recession hit, the government took emergency measures to freeze tariff increases and “pesify” contracts so that charges that had been set in dollars were converted into pesos. By freezing and “pesifying,” the government shifted the immediate fiscal burdens away from households and toward the private sector and lenders. This was a political choice about whether consumers or investors should absorb the shocks , and the resulting furor spilled over into international arbitration.
These political risks can manifest in macroeconomically dangerous ways. During the Asian Financial Crisis, the collapse of the rupiah made foreign-currency debts and payment obligations impossible. The Indonesian state electric utility PLN was selling electricity in local currency to a very price-sensitive set of consumers. PLN was suddenly unable to service its debts, pay for fuel, or meet contracted obligations without either massive rate hikes or fiscal support, both of which would be politically fraught during an economic downturn. The World Bank project report on the Java-Bali system states that this devaluation transformed PLN into an entity “unable to meet its obligations” for foreign-currency debt service, forcing loss-allocation debates over negotiating contracts, raising tariffs, or subsidising.
None of these cases are “about finance” in a narrow technical sense. They explicitly force political choice over tariffs, budget disclosures, or on cost-bearing agents. Even rich democracies can’t escape these questions, despite the temptation to treat this as an issue in developing country governance. While advanced economies often allocate such losses through different channels like litigation, ballot constraints or intergovernmental bargaining, the underlying problems remain the same. Recent reporting on California’s high-speed rail project, for example, illustrates how megaprojects in rich democracies still become political struggles. The original cost estimate for the project of $40 billion has now more than tripled to $128 billion, while no single section of the transport link is operating for passengers. California is not uniquely incompetent. Megaprojects incentivise a governance structure wherein project proposers present optimistic baselines in order to win approvals, while overruns are ultimately paid for by taxpayers or future governments.
What would a more honest politics require? If political risk is about who pays, then managing risk involves institutional designs which force conflicts into the open early on, when choices are still choices rather than inevitabilities. What follows are a few ways to achieve this.
First, guarantees and off-budget commitments should be treated as political choices rather than footnotes. The IMF is right that danger arises when guarantees sit away from budgets and outside of parliamentary approval.
If institutional designs allow commitments to move billions in downsides without any legislative debate, then this is a mechanism for postponing accountability. Governments should require that major guarantees be authorized transparently, disclosed in public-facing budget documents, and tied to explicit limits.
Second, risks should be priced in a way which makes the existing bargains more visible. Although charging guarantee fees, requiring capital reserves, stress-testing exposures, or publishing fiscal risk statements is framed as “best practice,” it is more than that. These mechanisms change the distribution of power by strengthening finance ministries and central banks against ministries, contractors, and sponsors who strongly benefit from optimistic baselines. The World Bank’s lesson is that the problem is not just miscalculation but rather governments that enter contracts without fully understanding — or worse, purposefully without confronting — fiscal implications.
Third, policy-makers must prioritize and empower institutions that can say no. Infrastructure often serves as a political trophy. This is precisely why the ability to refuse bad risk is scarce. A finance ministry that can block any unfunded guarantees or a regulator insulated enough to set independent and credible tariffs are not institutions blocking growth; instead, they are the only institutions that can make claims of growth fiscally honest.
Infrastructure without risk, financial or political, does not exist. The real choice is over whether risk is allocated deliberately, through visible political decision making, or by surprise, through crisis. Politics cannot be blamed for poor finance, nor vice versa. Instead, politicians and financiers must admit that infrastructure finance has always been a contest, over whether the government, private sector, or households stand behind promises.
Sergey Shkolnikov is a Philosophy, Politics, and Economics student at the University of Oxford