The Evolving Risk Profile of Infrastructure

Having been in the industry for 20 years, I have had a ringside seat from which to view the evolving risk profile in Infrastructure Finance.

On the one hand the past two decades could be seen as a steady evolution up the risk curve from what were seen as ‘safe’ PPP/PFI assets that typically featured highly rated (Investment Grade ‘IG’) fully amortising, availability-based deals with monopolistic features and with repayment risk sitting with sovereign or quasi-sovereign entities and with lender-friendly covenants.

This is in marked contrast to the current environment which consists primarily of ‘riskier’ corporate-type; sub-IG, highly leveraged, bullet repayment structures that are usually covenant-‘lite’.

Whilst this may be the case, very few infrastructure deals have ever been entirely risk-free.

In the UK, PPP/PFIs are now entering the mature phase with projects reaching the end of concession periods and being handed back to the public sector with the potential for significantly increased costs to remedy lifecycle works to ensure that the asset is returned to an ‘acceptable standard’, which in itself is open to interpretation unless clearly defined within the underlying project agreements.

Whilst this phase is still in its early stages with limited case history, both equity and debt investors will need to be attuned to the latent risks inherent in some projects, particularly if they have been poorly maintained and the costs to repair at hand-back could be significant, which may become a liability that sits with equity sponsors or, in extreme cases, with debt providers.

Additionally, with several local authorities and governmental entities looking at cost savings and value for money, many have turned to 3rd-party PPP consultants to ensure that private sector operators are performing their duties precisely in accordance with the underlying PPP contracts. Failure to do so can quickly lead to ratcheting financial penalties/deductions, warning notices, and ultimately can lead in some cases to termination of the PPP contract resulting in lenders and equity investors taking significant financial hits, in some cases even a total loss of the original investment. These occurrences are rare. However, investors should be attuned to them, and the maintenance of good working relationships should be encouraged, as should early resolution of problems as they arise and before they escalate. Investors should maintain a watching brief and visit the projects regularly to take the temperature of both the condition of the asset and key stakeholder relationships.

In comparison, newer corporate-type structured Infrastructure deals may seem (prima facie) inherently riskier. However, in stress or downside scenarios investors often have more options, particularly in workout situations, given that investors rarely own physical security over buildings in PPPs. In PPPs lender security is typically wrapped up in the future cash flows of a concession
agreement that will cease if it is terminated, whereas in a corporate structure you typically have physical security and therefore may have more recovery options.

Viewed from this lens, which one of the two is riskier, a PPP or a corporate-type structure? My view is that both carry risks but also have underlying strengths in deal structuring which compensate for this. Overall, it is often a ‘swings and roundabouts’ situation.

In the renewables space, whilst there has traditionally been strong sovereign support in the form of 100% revenue subsidies (FiTs, ROCs, CfDs), this has since moved to a mix of subsidy and merchant risk or in some cases pure merchant risk. This has been challenging in the past 12–18 months with general volatility in power prices, which were negative for some sustained periods during 2025 in the European market, and continuing recently with the Middle East/Iran conflict. Battery storage (BESS) co-location on renewables facilities, which for many years was seen as the solution to harvesting previously lost output from wind or solar, has not been without its teething problems, specifically grid capacity issues, but it is an important development for the overall renewables offering.

In other developments we are seeing the long-expected consolidation of fibre across Europe, with high-profile casualties along the way.

The AI-driven surge in data centres is likely to continue to grow at pace to match the ever-increasing AI demand, as will the debate around the overall sustainability credentials of this sector’s energy and water consumption.

In the UK, Labour came to power in 2024 bringing with it high expectations within the infrastructure sector of the development of a new PPP funding model, although this has yet to progress in any meaningful way.

As can be seen, Infrastructure finance is a diverse and exciting sector. Always evolving. Ever challenging and complex.

Although we have focused here on evolving risks in the sector over the past two decades, Infrastructure remains a fundamentally resilient asset class when compared to investment alternatives. The ultimate (stress) test came during the COVID pandemic in 2020 which really tested the inherent project strengths and where many volume-based projects (airports, toll roads etc) proved to be robust through a mix of strong underlying deal structuring as well as sponsor/shareholder support.

Infrastructure is also a responsible source of investment with projects delivering essential and transformational benefits to communities and the general population. Think of the shiny new train, electric bus, road, bridge or tunnel you used to get to work today. Think of the wind or solar farm that powers your home.

Given our unparalleled access to clients spread across multiple jurisdictions, at Mount Street we have a unique view of the evolving Infrastructure risk environment.

It may be thought that risk is viewed homogeneously through a single lens by all investors across the infrastructure space. However, we understand that our clients have their own individual risk focuses and as a trusted partner to them Mount Street offers bespoke solutions to meet these needs.

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