Cost of Capital Commission: A Proposal

The policy brief argues that African countries face a crisis of 'debt that is too expensive' rather than too much debt, which hinders human development and the energy transition. It proposes a Cost of Capital Commission composed of high-level experts to recommend reforms to credit rating agency methodologies, Basel III macro-prudential regulations, and the integration of natural capital and remittances into debt sustainability analyses.

• African countries are experiencing a debt crisis characterized by excessively high borrowing costs rather than excessive debt volumes. General government net debt as a proportion of GDP in countries like Kenya (70%), South Africa (69%), Nigeria (45%), and Ethiopia (35%) remains low compared to advanced economies such as the US (96%) and Japan (155%).
• Borrowing from capital markets is significantly more expensive for African governments than financing through the International Bank for Reconstruction and Development, costing 500% more. This resulted in an additional $56 billion in costs for debt raised from capital markets in the five years prior to 2021, exceeding the total official development assistance (ODA) to the continent in 2022 ($53.5 billion).
• High financing costs are a major barrier to the energy transition in emerging markets. In 2023, 90% of battery storage investments were concentrated in China, the US, and Europe; for every dollar invested in these regions, only one cent was invested in other emerging markets and developing economies.
• Current credit rating methodologies used by the 'big three' agencies (Fitch, S&P, and Moody's) are criticized for bias and subjectivity. The UNDP suggests that African countries could save up to $74.5 billion if ratings were based on less subjective assessments.
• The Basel III framework's capital liquidity requirements may inhibit private investment in emerging market and developing economies (EMDEs) because risk-weight determinations and capital requirements are often higher for EMDEs than for advanced economies.
• Integrating remittance flows into debt sustainability analyses could lower borrowing costs. For countries rated B or below by S&P, including remittances in the debt-to-export ratio could improve a sovereign rating by one notch and reduce borrowing costs by 100 basis points.

APA

MCNAIR, D. (2024). Cost of Capital Commission: A Proposal. South African Institute of International Affairs. https://saiia.org.za/wp-content/uploads/2024/09/SAIIA_PN_4_G20CostCapital.pdf

Chicago

MCNAIR, DAVID. Cost of Capital Commission: A Proposal. South African Institute of International Affairs, 2024. https://saiia.org.za/wp-content/uploads/2024/09/SAIIA_PN_4_G20CostCapital.pdf.

Wikipedia

{{cite report |last1=MCNAIR |first1=DAVID |title=Cost of Capital Commission: A Proposal |publisher=South African Institute of International Affairs |date=4 September 2024 |url=https://saiia.org.za/wp-content/uploads/2024/09/SAIIA_PN_4_G20CostCapital.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{mcnair2024cost, author = {MCNAIR, DAVID}, title = {{Cost of Capital Commission: A Proposal}}, institution = {South African Institute of International Affairs}, year = {2024}, month = sep, url = {https://saiia.org.za/wp-content/uploads/2024/09/SAIIA_PN_4_G20CostCapital.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }