Discount Rates for African Infrastructure in 2026
The discount rate a sponsor picks for their NPV calculation is the single most consequential assumption in a bankability workbook. A project with an NPV of R 500 million at 8 percent has an NPV of R 100 million at 10 percent and negative NPV at 12 percent. The recommendation the credit committee sees, and the funding they approve, sits on the number the sponsor puts into the discount rate cell.
Sponsors who pick discount rates carelessly, or who pick them to produce the desired answer, expose themselves to two failure modes: the credit committee rejects the submission on the rate's indefensibility, or the credit committee accepts it and the project fails later because the true cost of capital was different from the rate assumed.
This piece sits under the m2 pillar on bankability and viability. It sets out where the discount rate comes from in theory, where the textbook approach breaks down in African markets, and how DFIs and commercial banks actually pick rates in practice.
The textbook approach, weighted average cost of capital
The textbook prescription is the weighted average cost of capital (WACC). WACC is a blend of the cost of debt and the cost of equity, weighted by the target capital structure:
WACC equals the cost of equity times the equity weight, plus the cost of debt times one minus the tax rate times the debt weight.
The cost of equity is derived from the Capital Asset Pricing Model (CAPM): the risk-free rate plus a beta-weighted equity risk premium. The cost of debt is the yield on comparable debt. The tax rate is the effective corporate tax rate applicable to the project. Each input has a defensible source; when all are pulled from recognised benchmarks, the WACC emerges as a mathematically-consistent single number (Brealey, Myers, and Allen, 2020).
Where the WACC approach works well is in developed-market corporate finance settings with liquid capital markets, active equity beta data, and stable macroeconomic parameters. In those settings, sponsors, analysts, and credit committees can converge on a WACC within a narrow range and disagreements are second-order.
Where WACC breaks in African markets
Three problems recur when applying the textbook WACC approach to African infrastructure projects.
The risk-free rate is not really risk-free. The CAPM formulation assumes the availability of a genuinely risk-free asset (typically a long-dated government bond in the domestic currency). In many African markets, government bond yields carry material country-risk premia that are not "risk-free" in the sense the theory assumes. Using the domestic government bond yield as the risk-free rate double-counts country risk when the equity risk premium is then added on top.
The equity beta is not observable. CAPM requires an equity beta for the project's industry, derived from listed comparable companies. In many African markets and industries, there are too few listed comparables to derive a reliable beta. Sponsors who use US or European industry betas as a substitute are importing a risk profile from a different market context, and the substitution needs to be justified.
The equity risk premium is contested. The equity risk premium is the additional return investors demand for holding equity over the risk-free asset. In developed markets there is at least a plausible historical basis for estimates around 5 to 7 percent. In emerging African markets, historical data is sparser and the estimates range widely (Damodaran maintains widely-referenced country estimates that some practitioners rely on and others contest; see Damodaran, updated periodically). Choice of equity risk premium can move the WACC by two or three percentage points on its own.
The consequence is that a mathematically-correct WACC calculation for an African infrastructure project can produce anything from 10 percent to 18 percent depending on the choices made at each input step. That range is too wide for the WACC to serve as a credible single-number answer.
What DFIs and commercial banks actually do
Because textbook WACC produces such a wide range in African contexts, funders in practice tend to work backwards from observed transaction hurdle rates rather than forwards from CAPM.
Development finance institutions typically set project-level hurdle rates by reference to their own cost of funds plus a project-risk margin plus a country-risk margin. The numbers vary by DFI: the World Bank IDA blended-concessional rates, the African Development Bank's non-concessional pricing, the DBSA's project finance rates for South African infrastructure, and the Nordic Development Fund's blended finance offerings all sit in defined ranges that a sponsor can research directly (World Bank, 2017).
Commercial banks typically price debt from their internal cost of funds plus a credit-margin schedule, and expect equity IRRs at a level that reflects the project's risk. A commercial bank credit committee reviewing an infrastructure project in Southern Africa typically expects: senior debt margins of Prime plus 3 to 5 percent depending on the project's risk profile, and equity IRRs of 15 to 22 percent depending on the sector and the risk-return trade-off.
Sponsors and analysts working within these funder expectations tend to converge on discount rates that fall within a defined range for the project type. Rather than defending a WACC number from first principles, the defensible approach is to show the discount rate sits within the range consistent with recent funded transactions of comparable shape.
Building a defensible discount rate
The pragmatic approach for a bankability submission is to:
Start from observed transaction rates for comparable projects. Where recent transactions of similar shape have closed at named rates, those rates are prima facie defensible for the submission. Sponsors and advisors should have visibility into recent transaction rates through their existing relationships with lenders and advisors.
Build a WACC as a cross-check, not as the primary answer. The WACC calculation should sit in the workbook as a cross-check. Where the observed-rate approach and the WACC calculation produce numbers within 100 basis points of each other, both approaches are supporting the same answer. Where they diverge materially, the divergence needs to be understood before the discount rate is finalised.
Show a sensitivity around the base rate. The sensitivity analysis should include a discount rate shock of at least plus and minus 200 basis points. A project whose NPV survives a 200-basis-point upward shock in the discount rate is a project whose bankability does not depend on a fragile rate assumption.
Document the rate's source. The assumptions register should show the rate, the source (whether observed-transaction or WACC), the components of the calculation, and the comparable transactions or benchmark inputs referenced.
The 2026 environment
At the time of writing, the interest rate environment in most African markets remains elevated relative to the pre-2022 period. South African Reserve Bank policy rates, other African central bank rates, and the corresponding cost-of-funds for commercial lenders have all shifted upward. Sponsors who continue to work with pre-2022 discount rate assumptions understate their true cost of capital and produce bankability numbers that will not be recognised by contemporary funders.
The rate levels applicable to any given transaction move with the macroeconomic environment. Sponsors preparing submissions in the current environment should consult contemporary funder pricing rather than historical benchmarks, and should update their discount rate assumptions at least annually.
Cross-border considerations
Cross-border infrastructure projects add currency and country-risk dimensions to the discount rate question. The standard approach is to calculate the WACC in the currency of the debt (typically USD or EUR for internationally-financed projects), incorporating a country risk premium relevant to the host country of the project.
The Damodaran country risk premium estimates are widely referenced in this context, though sponsors should treat any single source as an input rather than as an answer and should cross-reference against observed transaction spreads for the country of operation.
For projects with revenues in local currency and debt in foreign currency, the discount rate should reflect the hedged or unhedged nature of the foreign exchange exposure. Unhedged exposures require additional risk premium; hedged exposures require the hedging cost to be reflected in the operating cash flows rather than in the discount rate.
What good looks like
A well-built discount rate is defensible against three questions: is it sourced from observed comparable transactions or from a WACC cross-check; is it within the range that contemporary funders would recognise for the project's type; is it stable under a 200-basis-point sensitivity.
A poorly-built discount rate is defensible against none of the three. Credit committees who spot the weakness typically reject the submission on that basis; committees who miss it often approve projects that fail because the true cost of capital differed from the rate assumed.
The CentraSolve Bankability and Viability module supports the discount rate discipline: the WACC cross-check is built into the workbook, the observed-transaction range is a documented reference, and the sensitivity across the rate range is generated automatically. The rate is not a cell the analyst fills in and hopes for the best; it is a first-class artefact of the analysis.
References
Textbook and framework sources
Brealey, R. A., Myers, S. C., and Allen, F. (2020). Principles of corporate finance (13th ed.). New York: McGraw-Hill Education.
World Bank Group. (2017). Public-private partnerships reference guide (Version 3.0). Washington, DC: World Bank.
Yescombe, E. R., and Farquharson, E. (2018). Public-private partnerships for infrastructure: principles of policy and finance (2nd ed.). Oxford: Butterworth-Heinemann.
Practitioner reference sources
Damodaran, A. (updated periodically). Country risk premium estimates and equity risk premium data. Stern School of Business, New York University. http://pages.stern.nyu.edu/~adamodar/
South African framework sources
National Treasury, Republic of South Africa. (2019). Budget Facility for Infrastructure: guidelines and templates. Pretoria: National Treasury.