Who Pays for Strategic Redundancy?

PART 2 OF 4 | Financing Global Resilience: Infrastructure and Capital in Multipolar Order

Weak infrastructure raises transport costs and reduces trade volumes. That finding, from Limão and Venables, has held for more than two decades.¹ It says nothing, though, about capacity a country builds and hopes never to use.

Part 1 of the series, "Financing Strategic Infrastructure: The Resilience Imperative," argued that infrastructure should be assessed not only by its efficiency in normal conditions, but also by the economic activity it preserves when established trade routes are disrupted. Access to markets, energy, food, raw materials and critical inputs can no longer be taken for granted.

This creates a financing dilemma. Strategic resilience requires infrastructure whose full economic value is not captured by utilization rates or financial returns. Conventional project finance looks at expected cash flows, and on that measure spare capacity that preserves connectivity during disruption is undervalued. Resilience appraisal captures the wider value by estimating the economic losses such capacity could prevent.² The gap between project-level returns and broader economic benefits raises a central question: how should capacity that appears commercially suboptimal in normal conditions, yet becomes indispensable during disruption, be valued and financed?

Part 1 also proposed that strategic infrastructure is more likely to strengthen resilience when its financing recognizes system-wide benefits, allocates risks to those best able to bear them, and combines state-backed support with private capital. The working hypothesis is that ownership or guarantees alone are insufficient to secure these outcomes. This analysis develops that proposition by asking a narrower question: who should pay for strategic redundancy, and for which risks?

The question is particularly relevant for strategically exposed economies. These are states whose growth, fiscal position or economic security depends materially on reliable access to external markets, critical inputs or a limited number of transport routes. Exposure can arise from geography, concentration of trade through chokepoints, dependence on transit jurisdictions, or shifts in established trading relationships. Across these settings the underlying proposition is the same. Trade access is economically valuable but cannot be taken for granted.

The six-dimensional lens introduced in Part 1 remains relevant to Parts 2 and 3, because financing choices cannot be separated from whether redundancy will work in practice. As the analysis has developed, several dimensions have been refined:

1. Strategic rationale for redundancy, including whether resilience benefits justify state support.

2. Governance and coordination required to keep a route usable across jurisdictions.

3. Economic viability of the alternative capacity, including whether sufficient commercial demand exists.

4. Financing structure, including who provides capital, bears risk and captures benefits, and the role of sovereign and state-backed capital.

5. Dependencies that remain or emerge through transit states, chokepoints, infrastructure nodes, political relationships or financing.

6. Resilience outcomes, meaning whether the corridor delivers genuine redundancy, partial redundancy, or simply shifts dependency elsewhere.

WHO FINANCES INFRASTRUCTURE?

Infrastructure has historically been associated with the state because of its high fixed costs, long asset lives, network effects and, in some sectors, characteristics of a natural monopoly. Its benefits also extend beyond revenues captured by the asset owner. A railway can lower exporters' costs; a port can change the location of industrial activity; and reliable logistics can raise productivity across firms that never invest in the infrastructure directly. Contemporary infrastructure finance nevertheless draws on several categories of capital with different mandates, horizons and risk-bearing capacity. The relevant distinction is therefore between the financial return captured by an investor and the wider economic benefit generated by the asset. Four are particularly relevant.

First are multilateral development banks (MDBs) and their private-sector arms, including institutions such as IFC and EBRD. Their role is not simply to add capital. They can prepare and structure projects, mitigate risks, establish standards and mobilize commercial investors. MDBs and development finance institutions reported mobilizing $278.5 billion of private finance in 2024, including $108.7 billion in low- and middle-income countries.³

Second are sovereign and state-backed investors. Sovereign wealth funds generally pursue long-term financial mandates, although the balance between commercial and strategic objectives differs by institution. National development funds and development banks pursue domestic development priorities by providing equity, debt, guarantees and export-credit facilities, and by assuming risks that commercial lenders may be unwilling to absorb efficiently. British International Investment, the UK Government development finance institutions investing across Africa & Asia, for example, committed over £635 million to infrastructure in 2025 and deployed capital through debt, direct and intermediated equity, guarantees and other instruments.⁴

Recent work on sovereign capital adds an important perspective. Jared Cohen and George Lee describe capital from sovereign wealth funds as ‘instrumental capital’ implying it’s deployed with a dual mandate of financial returns and strategic purpose. Their argument captures a wider shift in which governments act not only as regulators and fiscal sponsors but also as consequential asset owners and capital allocators. For strategic infrastructure, this matters because sovereign capital can occupy positions in the capital structure that purely commercial investors may not accept, while still imposing investment discipline.⁵

Third are private infrastructure investors like infrastructure funds, pension funds, insurers and large alternative asset managers. As of June 2026, Blackstone and KKR alone report infrastructure platforms exceeding $90 billion and $119 billion of assets under management respectively; their stated strategies emphasize long-duration assets and, for core infrastructure, regulated or contracted cash flows. Their mandate requires expected cash flows to provide sufficient returns to compensate for construction, operating, demand, regulatory, political and liquidity risks.⁶

Finally, strategic corporate investors can combine capital with operating expertise, technology, procurement capability and commercial relationships. Japanese trading houses and financial institutions have played this role internationally for decades. Marubeni, for example, has co-sponsored investment vehicles through which institutional investors acquire interests in operating overseas infrastructure, illustrating how mature assets can move from development-intensive ownership toward long-term institutional capital.⁷

These categories overlap. A single project may combine government equity, MDB or DFI participation, commercial project debt, private infrastructure equity and strategic corporate investment. The question is therefore which sources of capital are best suited to fund each stage of strategic infrastructure and bear the associated risks.

THE ECONOMICS OF REDUNDANCY

Strategic redundancy aims to preserve economic activity when a primary route or network is disrupted. Alternative capacity can therefore be valuable even when underused in normal conditions, offering benefits of an option or insurance product that become apparent during disruption.

The central financing challenge is that an asset’s financial return may not reflect its full value to the economy. Commercial investors focus on the cash flow it generates, while the state must also consider the losses avoided by keeping trade moving during disruption. Yet redundancy has a real economic cost, and governments can overinvest in resilience just as markets can underinvest. Project returns alone therefore give an incomplete picture when the benefits extend beyond the asset owner through positive spillovers to the wider economy.⁸

The recent IFC work by Anusha Chari, Peter Blair Henry and Paolo Mauro provides a useful analytical foundation. Using six decades of IFC-backed infrastructure equity investments in emerging and developing economies, they find that infrastructure investment need not entail a systematic sacrifice of financial return. More importantly here, their analysis supports Gardner and Henry's Dual Hurdle Framework, under which infrastructure should be both socially productive and commercially bankable.⁹

Building on the Dual Hurdle framework, this analysis proposes the third hurdle: does socially valuable, commercially bankable infrastructure provide sufficient capacity to meet the state’s resilience requirements?

The three tests can diverge as economic value, commercial returns and resilience do not always align. An asset may generate high social returns but insufficient private returns; another may satisfy both hurdles yet add little resilience because it shares a point of failure with existing infrastructure. Conversely, alternative capacity may generate weak stand-alone returns but protect substantial economic (country-wide or regional) activity during disruption. The financing gap arises when these wider benefits justify capacity that cannot be financed on commercial terms.

IF RESILIENCE HAS PUBLIC VALUE, MUST THE STATE PAY?

In part, but not necessarily for the entire asset. The state has a distinctive role because it determines the level of resilience it considers strategically and economically required. Private investors cannot be expected to finance benefits accruing to firms, consumers or national economic security if those benefits cannot be captured through project revenues.

Who determines the need for redundancy, who finances construction, who owns the asset, who operates it and who bears its risks are nevertheless separate questions. Direct budget or sovereign financing may be appropriate where strategic externalities dominate commercial revenues, or uncertainty cannot be transferred efficiently. At the other end, infrastructure with sufficiently predictable revenues can be financed predominantly by commercial capital.

Between these poles lies a broad range of public-private partnerships (PPPs), concessions and blended structures. A PPP is, in the World Bank's broad definition, a long-term contract under which a private party provides a public asset or service, bears significant risk and management responsibility, and is remunerated based on performance. Depending on the structure, governments may fund project preparation, an MDB or DFI may provide credit enhancement or political-risk mitigation, and private capital may finance construction and operation. Strategic ownership can remain public while operating rights are granted under a long-term concession.¹⁰

The financing structure should address what is holding investment back by allocating each risk to those best placed to manage it. Where construction risk is the obstacle, a capable private contractor may be best placed to bear it. Where the challenge is maintaining spare capacity for resilience, the state may need to pay to keep it available. If exceptional political risk is deterring investment, an MDB, DFI, sovereign guarantee institution or specialist insurer may be better placed to absorb it or share it with reinsurers and other market participants.

FROM PHYSICAL INFRASTRUCTURE TO INVESTABLE CASH FLOWS

Private investors are not primarily purchasing roads, airport terminals or pipelines as physical objects. They are acquiring claims on long-duration cash flows. Mature infrastructure becomes investable when those cash flows are sufficiently visible through leases, concessions, regulated tariffs, availability payments or predictable user charges. A long-term airport terminal, toll-road or port concession can therefore offer duration and relatively predictable cash flow with a return premium for illiquidity, operations, and potential regulatory risk over a conventional fixed income instrument.

The bond analogy is useful but has limits, as equity investment in infrastructure carries risks that conventional bondholders do not bear. The broader point is that a strategically important asset can offer commercial investors attractive financial returns while allowing the state to retain control and access needed to safeguard its strategic interests.

This also creates scope for asset capital recycling. Once operating performance and revenues are established, a state can grant a concession, lease an asset or monetize economic interest in mature infrastructure, then redeploy the proceeds to projects where greater uncertainty makes public risk-bearing capacity more valuable. OECD work on quality infrastructure highlights Australia’s asset-recycling model, which transfers operating assets to private investors and reinvests the proceeds in new infrastructure. Public and private capital can therefore play different roles over an asset’s lifecycle rather than compete to finance it on identical terms.¹¹

ALLOCATE RISK, NOT SIMPLY CAPITAL

Strategic redundancy, as used in this series, means the deliberate provision of alternative routes, reserve capacity or diversified networks that remain available when primary systems are disrupted. Its defining problem is that the state may require more capacity or optionality than expected commercial demand alone would support.

The objective should therefore be neither to maximize private financing nor to maximize sovereign ownership. It should be to allocate each material risk to the actor able to control it, mitigate its consequences or absorb it at the lowest economic cost. This is also the core principle of PPP risk allocation: transferring risk creates value when the receiving party can manage it more efficiently, not merely when a liability moves from the public to the private balance sheet.¹²

The critical distinction is between capacity supported by commercial demand and capacity required to maintain connectivity during disruption. If commercial demand supports less capacity than the state requires for resilience, shifting utilization risk to private investors does not make the cost disappear. Investors will price risk, seek contractual protection, reduce exposure or simply decline to participate.

Public support should therefore target the strategic externality rather than subsidize the entire project. Instruments may include project-preparation funding, targeted capital contributions, availability or minimum-volume payments, guarantees, concessional finance, sovereign cornerstone investment and narrowly defined political-risk cover. The choice of instruments should address the specific risk preventing an otherwise justified investment from reaching financial close.

These mechanisms do not eliminate risk. Guarantees create contingent liabilities; availability payments oblige the state to make regular payments for keeping infrastructure available at agreed service standards, regardless of how much it is used; concessional finance carries opportunity cost; and sovereign equity ties up capital that could be used elsewhere. IMF analysis emphasizes that PPPs can create both firm and contingent public liabilities, including minimum revenue guarantees and termination obligations, even when financing is presented as private. The relevant comparison is therefore how different arrangements allocate economic risks and what fiscal and economic costs are.¹³

SO, WHO PAYS?

As set out above, the answer is usually more nuanced than either “the state” or “the market.” The state ultimately bears the cost of resilience that it requires but that markets cannot economically monetize. Private capital should finance risks and cash flows that can be efficiently priced. MDBs, DFIs and sovereign investors can bridge the gap where projects create wider economic value but remain difficult to finance commercially.

The appropriate capital structure will vary by asset. A commercially established toll road may require little sovereign capital; a strategically necessary but structurally underutilized railway may require continuing public support; an airport terminal may remain publicly owned while its operating rights and revenues are privately financed for decades. As uncertainty declines, institutional or private capital can replace public risk-bearing capital where project economics permit.

This is where sovereign capital may have its greatest strategic relevance. Its comparative advantage is not necessarily permanent ownership, but selective participation where markets cannot efficiently price early-stage, political, coordination or strategic-capacity risks, followed by mobilization or recycling once those risks diminish. Cohen and Lee’s instrumental-capital lens is useful here, but it also raises a question of investment discipline. If labeling an investment “strategic” exempts it from commercial scrutiny and rigorous evaluation, it can mask poor capital allocation and lead to disappointing performance.

For economies with substantial sovereign resources but vulnerable trade and export routes, including those in the GCC and Eurasia, the policy challenge is to deploy public capital where it delivers the greatest resilience. Sovereign capital is most justified where strategically necessary capacity exceeds what commercial investors can finance on viable terms. Private capital can fund components with predictable revenues, if financing arrangements preserve strategic access to trade routes, transport networks and export gateways. Each financing decision should therefore weigh resilience gained against the risks assumed, public funding required and potential liabilities borne by the state.

FROM ASSETS TO CORRIDORS

This analysis has treated strategic redundancy mainly as a financing and risk-allocation problem at the asset level. Yet resilience is ultimately a property of systems. An alternative railway has limited value if its connecting port lacks capacity. A new port does not diversify access if vessels remain exposed to the same maritime chokepoint. A cross-border connection may be physically complete but unusable if legal access, customs arrangements, insurance or political cooperation fail.

That shifts the question. At the asset level, the test is whether each risk sits with the party best able to carry it. At the corridor level, the test is whether the capacity being financed produces a route a state can actually use when it needs one. A corridor can be fully funded, fully built and still fail that test. Paying for redundancy is the easier half of the problem.

COMING NEXT

Part 3, "Financing Strategic Corridors: Connectivity, Statecraft, or Dependency?" applies the framework to corridors at different stages of development and with different financing models. These include the International North-South Transport Corridor (INSTC), which tests north-south redundancy; the Trans-Caspian International Transport Route, or Middle Corridor, which tests east-west redundancy; Vostok Oil's export infrastructure linked to the Northern Sea Route; and Gulf railway and port connectivity, which tests regional network redundancy and diversification of maritime access. The aim is to assess whether and how sovereign capital anchors infrastructure financing, mobilizes private investment, and creates practical strategic options while limiting fiscal, operational and geopolitical dependencies. Ultimately, the test is whether the resilience gained justifies the economic cost of redundancy, and how sovereign capital can help deliver it.¹⁴ ¹⁵

ABOUT THIS SERIES

Financing Global Resilience: Infrastructure and Capital in a Multipolar Order is a four-part series on how the infrastructure of international trade is financed, and on what that financing means for the security of the states that depend on it. Ports, railways, shipping lanes, pipelines, energy terminals and undersea cables carry the goods, energy and information that national economies run on. Access to them can no longer be assumed.

From the early 1990s until the late 2010s, this infrastructure was largely left to markets. Trade found its way, and the arrangements underneath it were rarely a matter of state. That has changed. Disruption in recent years has shown how quickly access can narrow, and how much of a country's economic life can rest on a small number of routes it does not control.

Governments are now responding, and the responses are costly. Building alternatives means committing public money to capacity that may never be needed, and persuading private investors into projects whose value is hardest to demonstrate in ordinary times. Those decisions are being taken in most regions of the world at once, and together they will shape how open, or how divided, the next stage of the international economy turns out to be.

This series asks how those choices are made and who carries their cost. They are questions of trade, law and security at the same time, which is the ground this Council works on. They also tend to be handled separately, in economic policy on one side and strategic affairs on the other. The series sets out to treat them as a single question.

NOTES

1. Nuno Limão and Anthony J. Venables, "Infrastructure, Geographical Disadvantage, Transport Costs, and Trade," World Bank Economic Review 15(3) (2001)

2. OECD, Infrastructure for a Climate-Resilient Future (2024)

3. MDB/DFI Working Group, Mobilization of Private Finance by Multilateral Development Banks and Development Finance Institutions 2024, IFC (2026)

4. British International Investment, Annual Review 2025, Investments

5. Jared Cohen and George Lee, "The New Wealth of Nations," Goldman Sachs Global Institute, 9 December 2025; originally published in Foreign Policy, 3 December 2025

6. Blackstone, Infrastructure (as of 30 June 2026); KKR, Infrastructure (as of 30 June 2026)

7. Marubeni Corporation, Establishment of Infrastructure Fund for Institutional Investors (2019)

8. Economic cost is used here in the opportunity-cost sense: the value of resources committed to redundancy, including fiscal capacity, land, capital and risk-bearing capacity, relative to their best alternative use. It therefore includes costs that may not appear as current budget expenditure, such as the expected fiscal value of guarantees or capital tied up in low-utilization assets.

9. Anusha Chari, Peter Blair Henry and Paolo Mauro, "Financial Returns on Equity Investments in Infrastructure in Emerging Markets and Developing Economies," IFC, November 2025; Camille Gardner and Peter Blair Henry, "The Global Infrastructure Gap: Potential, Perils, and a Framework for Distinction," Journal of Economic Literature 61(4) (2023), pp. 1318-1358

10. World Bank Group, PPP Reference Guide, Introduction

11. OECD, Implementation Handbook for Quality Infrastructure Investment (2021)

12. World Bank Group, PPP Online Reference Guide, Risk Allocation

13. International Monetary Fund, Mastering the Risky Business of Public-Private Partnerships in Infrastructure, Departmental Paper No. 2021/010; IMF and World Bank, PPPs and PFRAM

14. Rosneft, Vostok Oil Project Commissioned (6 September 2026); Rosneft, Vostok Oil (2 June 2021)

15. Government of Armenia and Government of the United States, Joint Statement on the Armenia-U.S. Implementation Framework for TRIPP (14 January 2026)