Introduction

When US President Joe Biden, announced the ending of the Zimbabwe sanctions program, a wave of euphoria quickly spread across the country. The lifting of sanctions provided renewable energy investors with access to the previously closed international capital markets. Many projects were struggling to reach financial close as funders were unwilling to risk inadvertently violating US sanctions by financing Zimbabwean projects. While sanctions opened up international markets, Basel III Endgame could spoil the party for the over 100 Independent Power Producers (“IPP”), who are licensed to generate electricity in the country but are failing to obtain financing.

Basel III Endgame

The Basel Committee on Banking Supervision (“Basel Committee”) was established in 1974 to enhance financial stability by improving the quality of bank supervision. It is the primary global standard-setter for the prudential regulation of banks. It however, has no legal authority to impose the minimum standards to which it sets. Basel III is a set of measures developed by the Basel Committee after the 2008 global financial crisis. The measures seek to strengthen the regulation, supervision, and risk management of banks. Basel III Endgame is the latest set of rules, proposed by U.S regulators on the Basel Committee. The rules focus on the amount of capital that banks must have against the credit, operational, and market riskiness of banking.

Basel III Endgame, introduces extensive changes, especially in the calculation of risk-weighted assets. These alterations will significantly impact business models thereby compelling banks to reconsider their capital allocation. Large U.S banks, or those with US$100 billion or more in total assets, will be required to increase their capital to between 20-25% of their assets. The rules will reduce a bank’s ability to use its own models for calculating loan capital requirements and instead require the use of a standard measure. Banks will be required to have more capital for risks posed by operations and trading activities.  Furthermore, banks with assets of US$100 billion or more will have to reflect in their capital calculations any gains and losses in portfolios deemed “available for sale,” as opposed to securities the bank plans to hold until maturity. This would increase the capital required for a crucial source of funding for renewable energy, thus making them expensive for banks.

The Endgame and Infrastructure Finance

While Basel III Endgame will be applied to some 37 US banks, its effects go beyond those banks. Many of these banks are Global Systematically Important Banks, regulatory changes over them will have a global impact as experienced in the 2008 global financial crisis. Moreso, U.S capital markets are the largest in the world and are the most efficient, liquid and deepest. The increased capital that banks would be required to hold would make it more expensive to hedge risk. It would also force banks to reduce the amount of inventory they are able to maintain, affecting liquidity. Increased capital requirements mean renewable energy project loans become less attractive because they already receive the least amount of infrastructure financing globally.

U.S Banks have pushed back against the reforms during the comment period stating they will make debt more expensive for them. Basel III Endgame reforms reduce the attractiveness of infrastructure loans for banks because the risk weights will be significantly higher. Additionally, infrastructure assets are not recognized as a distinct asset class under the Basel framework meaning that bank loan regulations are not aligned with unique infrastructure risks. Banks have already started withdrawing from infrastructure investments which is concerning. As banks become more risk averse in lending to infrastructure projects so will private capital which raises capital from banking activity. Infrastructure funding raised in US markets will be more expensive. This will inadvertently affect emerging market renewable energy projects which are at the tail end of global funding. For example, Africa attracts only 3% of global investment in energy and 2% of all investments in green energy.

Endgame and Zimbabwe’s Renewable Energy Projects

Zimbabwean regulators will not be implementing Basel III Endgame. Given the low level of complex transactions in the Zimbabwean market, the Reserve Bank will continue implementing Basel II. Nonetheless the effects of Basel III Endgame will be felt by renewable energy projects in Zimbabwe. Renewable energy projects already face incredibly high country and currency risks which make financing local projects expensive. Investors will now need to source funding from a constrained market, even if financing is not coming from U.S banks. Local projects, which often rely on hard currency financing will need to source funds from alternative markets, including local markets despite the current liquidity crisis. To reduce the costs of renewable energy projects the Government will also need to adjust its renewable energy policy so it absorbs risks associated with new capital costs.

U.S banks have between 1 July 2025 and 2028 to implement Basel III Endgame, this may result in a slow down of privately financed renewable energy projects in Zimbabwe. As a consequence, financing renewable energy projects in Zimbabwe may rise depending on how U.S banks navigate the new regulations. Local IPPs may look to raise funds through European, regional and local markets. However, local currency places an expensive risk premium and limits the raising of funds on European and regional markets. Local markets are an option available to investors. One option to raise funds locally is the Victoria Falls Stock Exchange (“VFEx”), a local bourse designated by law as an international financial centre which can trade in US Dollars. Local construction company Exodus and Co is set to issue a USD42 million bond on VFEx as part of the Kanyemba highway and border post project. The Government also plans to issue a USD400 million bond on VFEx as well. Buoyed by the Bond Markets Association of Zimbabwe recently launched by the VFEx and the introduction of Contracts For Differences, IPPs may explore capital raising on VFEx. Bonds could be general bonds, sustainability linked bonds or green bonds. Issuing the later may attract foreign impact investors thereby increasing the pool of investors available.

Real Estate Investments Trusts (“REITS”) have been a success story on the local currency bourse, the Zimbabwe Stock Exchange (“ZSE”). Both local and foreign investors have been quite receptive to REITS listed on the ZSE. Investors may also explore Infrastructure REITS as a capital raising option in both local and hard currency until at least December 2030. In terms of the prevailing currency regime, local transactions may be settled in either ZiG or US Dollars.

Conclusion

While Basel III Endgame will be implemented in the US, its effects will be global and will increase the cost of capital for infrastructure projects. Consequently, renewable energy projects which receive the smallest share of available infrastructure finance may face a constrained capital market. If this becomes reality when Basel III Endgame is implemented in 2025 or prior, local renewable energy investors may need to explore alternative capital markets to U.S markets. Infrastructure REITS and the VFEx are some local avenues that IPPs may select.