When a 30-year hydro dam is risk-rated like a subprime mortgage, banks pull out.
Standard Bank’s Sim Tshabalala, as chair of one of the specialised working groups under B20 SA, is urging G20 regulators to carve out a “development supporting factor” in Basel III regulations. Do it, and Africa’s colossal $85bn annual infrastructure gap suddenly looks bridgeable.
Basel III was born to tame the casino finance after the 2008 hangover. Fair enough. But when you slap a 150% capital charge on transmission lines you’re telling lenders, “Don’t bother”, or telling investors that Africa’s roads and rails aren’t worth the paper they’re printed on.
A R100m loan today requires R12.75m of equity. At 50% risk weight it only demands R4.25m. Triple lending capacity on the same capital. That’s leverage Africa can actually bank on.
Of course, prudential purists sniff moral hazard. Lower buffers mean bigger hits if projects go south. And any carve-out risks become a Trojan horse for wider regulatory arbitrage: what stops lenders from rebranding consumer credit or small and medium enterprise (SME) loans as “infrastructure”? Fair enough.
Even so, regulators already allow special treatment for green bonds. Why treat a road that unlocks a dollar of GDP like a Lehman-style credit monster? Why should a solar farm face the same capital squeeze as collateralised debt obligation (CDO)? A tweak could be ring-fenced to multilateral development bank-backed (MDB) projects, slapped with a sunset clause. That tames bogus deals without snuffing out real ones.
MDBs like the African Development Bank and the World Bank already shepherd billions in guarantees and first-loss facilities. Why not bake these derisking effects into capital calculations? If MDBs already wear the risk hat, why should commercial banks be saddled with capital weights fit for junk debt?
By formally accounting for these guarantees, regulators kill two birds with one stone: moral hazard is clipped, and private capital finally flows, with a purpose. It’s a cheat code G20 regulators need to keep the door open for real development, not a parade of white elephant malls.
China’s Belt & Road strides ahead, filling Africa’s potholes — and its coffers — with zero questions asked. Western banks, on the other hand, bicker over governance and margins, so projects go unfunded or are funded at extortionate rates. A smart tweak to Basel III would signal that Africa’s infrastructure is no tail risk afterthought but a legitimate asset class, one whose returns spark jobs, clinics and even study lamps for 600-million off-grid souls.
To be clear, robust regulation is in Africa’s interest. No-one gains from fragile banks prone to collapse. SA ranks among the world’s most rigorous Basel adopters. Its banks weathered the 2008 crisis unscathed thanks to conservative rules and tight supervision. Regulation is meant to be an ice-cold bulwark. But cooled too far, it freezes progress.
A bank can be perfectly capitalised on paper and still fail its economy by refusing to fund anything but government bills and trade loans. True financial stability is not only about avoiding bank failures, it is also about ensuring the financial system fulfils its role in prosperity creation.
A car idling in the garage isn’t likely to crash, but it won’t win any races either. In the same vein, African banks kept ultraconservative may never crash, but nor will they propel the economy forward.
There’s precedent for regulatory evolution. Post-crisis orthodoxy once forbade capital relief for government bonds. Today sovereigns bundle guarantees and tax exemptions into structured vehicles that regulators grudgingly accept as low risk. The same pragmatism can be extended to development finance. A measured carve-out for long-dated infrastructure is less a deregulation than a sane calibration.
If G20 regulators baulk at nuance, they expose a bigger truth. That they’d rather cling to arithmetic purity than confront the continent’s real needs. Books balanced robotically are no substitute for bridges that don’t get built.
Basel may make the rules, but it’s time we tagged “development exception” in its margins. Because while regulators debate risk weights in Geneva, African children study by candlelight — and that’s a cost no spreadsheet should ignore.
• Motsoeneng is Business Day acting editor.
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