Unlocking infrastructure and project finance in EMDEs: The case for prudential carifications and reform

Environment and sustainability

Unlocking infrastructure and project finance in EMDEs: The case for prudential carifications and reform

• 27 August 2026

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Despite US$2 trillion in global clean energy investment projected for this year by the International Energy Agency, the infrastructure and energy transition finance gap in the Global South remains as wide as ever.

The binding constraint is not the absence of global liquidity, but rather the cost of capital, which remains structurally higher in EMDEs than in advanced markets. There is a compelling need to understand the issues behind these dynamics, including looking at the well-intentioned Basel III rules and how certain aspects of the framework may unintentionally limit private capital for essential infrastructure and clean energy projects in EMDEs.

In practice, project finance is treated conservatively. Recognition of guarantees and other credit-risk-mitigation tools is often restricted or inconsistent and country-risk overlays can blunt the benefits of robust collateral and multilateral development bank (MDB) participation. The result is a higher capital cost for banks - passed through as higher borrowing costs - that suppresses otherwise bankable projects.

This paper sets out a practical agenda for reform with a clear, two-stage approach. It distinguishes between technical adjustments that can be made through straightforward clarifications to Basel III implementation and structural reforms that may require broader analysis and coordination between regulators.

Technical adjustments and clarifications

Small, targeted adjustments to the Basel III framework could unlock substantial additional financing - by way of new guidance or 'frequently asked questions' from the Basel Committee on Banking Supervision. Such clarifications should ideally seek to:

• Update credit risk mitigation guidance to accommodate the real-world mechanics of multilateral development banks and development finance institutions (MDB/DFI) and private credit enhancement tools, including political risk insurance (PRI);
• Clarify time limits for credit risk mitigants by recognising that contracts with defined arbitration periods (e.g. under 180 days) or subject to the established claims procedures of MDBs/DFIs can provide functionally timely payouts and should qualify for capital relief;
• Allow the application of blended risk weights to exposures covered by partial guarantees to reflect the real risk reduction offered by these tools;
• Allow for automatic recognition of MDBs/DFIs with credit ratings at or above AA-; and
• Provide clear guidance on the treatment of borrower-level risk mitigants in project finance transactions (both during pre-operation and operational phases).

Structural reforms

Building on these initial measures, ICC recommends that the Basel Committee is mandated to establish new work programmes to:

• Refine the treatment of project finance to reflect its proven performance based on available market data;
• Review Basel's approach to country risk to better differentiate between sovereign and project-level risk. This should permit risk weight adjustments where exposures are highly secure or mitigated by credible guarantees/involve MDB participation; and
• Consider the potential introduction of a scaling factor for high-quality, infrastructure projects in EMDEs - similar to the existing Supporting Factor for Small and Medium Sized Enterprises under Basel III or the Infrastructure Supporting Factor within the European Union's Capital Requirements Regulation.

Neither category of proposals is intended to weaken prudential safeguards. Instead, they are designed to ensure that capital requirements are better aligned with real-world risk, lowering financing costs and unlocking private investment for essential EMDE infrastructure.