South Africa has a massive infrastructure backlog, constraining economic growth and job creation. The country’s water infrastructure alone needs about R400bn to be repaired. This underlines the scale of the problem.
With public finances constrained, attention has naturally fallen on the private sector to fill in the investment vacuum. To this end, the government in 2023 moved to amend regulation 28, which allowed pension funds and other investors to invest up to 45% of assets under management in infrastructure.
However, this has yet to deliver the desired results, with asset allocators complaining about the lack of bankable projects. All this while the country continues to underspend on infrastructure despite setting itself a target of at least 30% of GDP by 2030, resulting in the country lagging behind other faster-growing economies in infrastructure spending.
The irony is that South Africa is home to Africa’s largest banking sector, with deep capitalisation and strong balance sheets. This key sector has, however, been constrained from investing in infrastructure by Basel III rules, which, according to critics, disproportionately put high-risk weights on infrastructure investments.
Basel III was meant to make banks safer and prevent a replay of the 2008 global financial crisis. Banks are required to hold a minimum amount of capital to remain solvent and protect their depositors’ investments. To determine how much capital to maintain, banks assign risk to every type of asset.
Under the present Basel III rules, risk weightings are usually assigned 100%-150%, depending on credit quality, maturity and external ratings. For example, a higher-rated project might get a risk weighting of 75%, while those rated below investment grade could attract a risk weighting of more than 100%. This has discouraged banks and insurers from allocating capital to long-term projects. The National Treasury seems to be alive to this stark reality.
The department in its 2026 Budget Review indicated that it is working with the South African Reserve Bank’s Prudential Authority, alongside industry bodies, to explore whether the “current implementation of the Basel committee on banking supervision framework in South Africa affects the country’s ability to attract infrastructure investment”.
The Budget Review goes on to state that a review on this is expected by mid-year.
“This exercise seeks to establish if the observed risk in relation to infrastructure finance is reflected in current capital rules. Based on the outcome of the engagements with industry bodies, strategic policy discussions will be held with the Basel committee on the implementation of the Basel committee’s standards to make it easier to mobilise infrastructure investment and achieve other developmental objectives, especially in a developing country context.”
The task force made the point that, if risk weights for long-term infrastructure were reduced, this would free up billions in infrastructure investments for the continent.
With South African banking majors as big players on the continent, a successful review of the implementation of the Basel Committee’s standards will also be a boon for the continent facing an annual financing gap of $68bn to $170bn required to upgrade energy systems, railways and ports.
The review by the National Treasury comes just months after South Africa concluded its historic presidency of the G20.
The B20 South Africa finance and infrastructure task force, chaired by Standard Bank CEO Sim Tshabalala, made a big push for the G20 to relax Basel III capital requirement rules in a bid to give banks more room to invest in infrastructure projects to reignite Africa’s economy and integration.
The task force made the point that, if risk weights for long-term infrastructure were reduced, this would free up billions in infrastructure investments for the continent.
A recent International Finance Corporation (IFC) study shows that its long-term investments in infrastructure projects in emerging markets have outperformed the S&P 500. The research note by the IFC, the investment arm of the World Bank and the largest global development institution focused on the private sector in developing countries, found infrastructure financing in emerging markets presents a compelling investment case.
“Uninformed views on the risk-return profile of investing in developing economies may be more pessimistic than warranted by the actual track record of emerging market investments. Better information and transparency can thus help,” the research note said.
Having cash available, but putting forward well thought out projects is another. This is where the next challenge will come from.
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