South Africa’s Regulation 28: Unlocking Infrastructure Investment Amidst Basel III Constraints

South Africa faces a significant infrastructure backlog, hindering economic growth and job creation. With an estimated R400 billion needed to repair the nation’s water infrastructure alone, the country is increasingly looking to the private sector to fill the investment gap. Amendments to Regulation 28, introduced in 2023, aimed to facilitate this by allowing pension funds to invest up to 45% of their assets under management in infrastructure. However, progress has been slower than anticipated, with asset allocators citing a lack of viable projects. Simultaneously, South Africa continues to fall short of its goal of allocating at least 30% of GDP to infrastructure spending, lagging behind faster-growing economies.

Regulation 28 and Infrastructure Investment

Regulation 28, issued under the Pension Funds Act, is designed to protect retirement fund members’ savings by limiting investment concentration and promoting diversification. The recent changes to the regulation, effective January 3, 2023, included defining infrastructure investment and setting an overall exposure limit of 45% (with a 25% limit per investment). The amendments also prohibit investment in crypto assets, citing their volatility and unregulated nature [Momentum]. The regulation split hedge funds and private equity to encourage investment in infrastructure and economic development, increasing the private equity investment limit to 15% and the hedge fund limit to 10% [Momentum]. The aggregate limit for unlisted securities was raised from 35% to 45%, with the sub-limit for unlisted shares and private equity funds increasing from 15% to 20%.

The Basel III Challenge

Despite the amendments to Regulation 28, unlocking significant infrastructure investment has proven challenging. A key constraint lies in the application of Basel III rules, which govern bank capital requirements. These rules, intended to enhance banking stability following the 2008 financial crisis, assign risk weightings to different asset classes. Critics argue that the current implementation of Basel III in South Africa disproportionately increases the risk weighting for infrastructure investments, discouraging banks and insurers from allocating capital to long-term projects.

Under Basel III, risk weightings typically range from 100% to 150%, depending on credit quality, maturity and external ratings. Higher-rated projects may receive a weighting of 75%, while those below investment grade could face weightings exceeding 100%. This effectively increases the capital banks must hold against infrastructure investments, reducing their capacity to fund such projects.

Government Review and Potential Adjustments

The National Treasury recognizes this issue and is actively working with the South African Reserve Bank’s Prudential Authority and industry bodies to assess whether the current implementation of Basel III hinders infrastructure investment. A review, expected by mid-2026, will examine whether the observed risks associated with infrastructure finance are accurately reflected in existing capital rules [South African Government]. The goal is to determine if reducing risk weights for long-term infrastructure projects could free up billions in investment capital, not only for South Africa but also for the wider African continent.

G20 Advocacy and Continental Impact

South Africa, during its 2023 G20 presidency, actively advocated for relaxing Basel III capital requirements to encourage bank investment in African infrastructure. The B20 South Africa finance and infrastructure task force, led by Standard Bank CEO Sim Tshabalala, pushed for this change to stimulate economic growth and integration across the continent [South African Government]. A successful review of Basel III implementation in South Africa could significantly benefit the continent, which faces an annual infrastructure financing gap of $68 billion to $170 billion.

The Case for Emerging Market Infrastructure Investment

Research from the International Finance Corporation (IFC) supports the argument for increased investment in emerging market infrastructure. An IFC study found that its long-term infrastructure investments in emerging markets have outperformed the S&P 500, suggesting that perceptions of risk may be overly pessimistic [South African Government]. The IFC emphasizes that better information and transparency can help to unlock investment in these projects.

However, simply having available capital is not enough. The availability of well-structured, bankable projects remains a critical challenge.