Creative Models for Economic Development: Lessons From Israel Wednesday, May 4, 2011 2:30 PM - 3:45 PM
Carl Kaplan Managing Director Koret Israel Economic Development Funds (KIEDF) Philanthropy for Economic Development
Koret Israel Economic Development Funds (KIEDF) Philanthropy for economic development SME & Microfinance Philanthropic Funds 9,500 + loans to date - 6.25-7 : 1 leverage $265,000,000 facilitated financing NIS 1 Billon + 45,000 jobs created / supported Credit Portfolio NIS 250,000,000 Model for government SME programs Total SME costs 4% of facilitated financing
KIEDF - philanthropy for economic development Investing philanthropy in a business-like manner Leveraging philanthropy for multiple, long-term returns Social investment bank-type lending initiatives Focus on job creation (SMEs), poverty reduction (Microfinance) Emphasis on peripheral development & minority populations
KIEDF OPIC INITIATIVE Negev North development program $10,000,000 OPIC second loss guarantee to Bank Leumi 7-year lending program 3,000 loans: $15,000 - $350,000 $140,000,000 + facilitated financing $22m to date (3/2011) Projected net program cost - $2,700,000 Projected cost to credit facilitated 2.5% Funding: Assets, donations, PRIs, investment income OPIC commitment for second $10m tranche to double program
KIEDF Philanthropy for economic development Microfinance for poverty reduction in Israel Microfinance = poverty reduction. Only national programs in Israel Programs for 60% + unable to secure business credit 2,500 loans to $8,500 with Bank Hapoalim 2011-2013 SAWA Negev Bedouin loan fund 1,750 - $8m to date Joint KIEDF-Min. of Trade and Industry expanded SAWA initiative for Israeli Arab women - 2,700 loans from $3k-$10k (2011-2013) Designated KIVA Israel user loans to $3,000
Dr. Karnit Flug Research Director, Bank of Israel Incoming Deputy Governor, Bank of Israel Israel's Growth Strategy and Challenges Ahead
Share of ICT value added in the business sector output 2008 Source: CBS and OECD data
National Expenditure on R&D As a percentage of GDP, 2008 * Data for 2008 or last available year. Source: OECD Stat
Share of the population ages 25-64 with tertiary-level education, 2008 Source: Education at a Glance, 2010
Revealed comparative advantage in exports of High-Tech goods and services, 2007 Revealed comparative advantage for exports - the share of exports of technology intensive services in total exports of goods and services in Israel divided by this share for all OECD countries Source: CBS and OECD Stat
Strengths and Weaknesses IMD World Competitiveness Index, 2010 Rank in each category out of 58 countries Source: IMD World Competitiveness Yearbook 2010
Challenges in the real economy Labor market Education Inequality Demographics
International comparison: employment rates Ages 25-64, 2009 *Excluding Israeli Arabs and Haredim Source: OECD and Israel Labor Force Surveys
Israeli achievements in reading, math and sciences, PISA, 2009
Rate of relative poverty by group 1997, 2003 & 2009 * Not including the Arab population of East Jerusalem. Source: Based on data from Central Bureau of Statistics and Income Surveys
Steven Zecher Project Finance Research Advisor, Koret-Milken Institute Fellows Program/ Milken Institute Israel Center Creating a Financing Vehicle for the Galilee and Negev
Current Situation: Few projects with limited financing potential Lack of critical mass Limited results Low leverage Limited sustainability Limited revenues Few developers Development risks Long lead times/ regulation Limited business opportunity High development costs Limited revenue base Government exposure One-off financial models High transaction cost Lack of competition Limited track record Fragmented and sporadic investments/ contributions
New Approach: Feasible projects attracting competitive financing Critical mass Results Leverage Sustainability Business plans Robust market Managed Risks Long lead times/ regulation Regional priorities based on business models Lower marginal development costs Pledgeable revenues Credit enhancements Lower marginal transaction costs More financing choices Off-the-shelf models
What will the financing vehicle do? Open access to public and private capital markets Create a reserve fund to enhance credits of regional projects Leverage government credit using philanthropic and mission-related investments Strengthen the regional capacity to package financially-feasible and sustainable projects
What are some examples of projects and related revenue? Categories Project Examples Possible Revenues Industry and Technology Tourism-related developments (including environmental projects) Education and healthrelated projects Teradyon Technology Center Business and Technology Incubator Kiryat Shmona Shelomi Resort Hotel Tiberius Roman Center & Commercial Revitalization Basalt Spa, Upper Galil Eco-tourism Megiddo Bioregion Montfort Commercial Center Zfat Medical College Beit Shean Environmental Studies Center Infrastructures Misgav Solid Waste Treatment Water & Sewer Treatment Source: Milken Institute, 2007-2011 Tax Increments Impact Fees Rents Education Sales Co-Marketing Revenues Use Fees Licensing Fees Benefit Taxes Use Taxes Development Rights Impact Fees Benefit Taxes Tax Increments User Fees Sales
What is the distribution of projects being considered? Total Investment (000) Percentage Distribution of Total Investment Financing Demand (000) Percentage Distribution of Financing Demand Project Area 435,470 6.2% 430,570 14.0% Solid Waste 384,079 5.5% 332,833 11.0% Tourism 650,000 9.3% 650,000 22.0% Energy 311,638 4.4% 263,138 9.0% Commercial 145,875 2.1% 124,875 4.0% Industrial 99,202 1.4% 74,202 2.0% Quality of Life 30,000 0.4% 30,000 1.0% Residential 367,048 5.2% 342,603 11.0% Education 10,000 0.1% 6,000 0.2% Sport 153,000 2.2% 108,000 4.0% Water & Sewer 4,437,500 63.2% 647,500 22.0% Transportation 7,023,812 100.0% 3,009,721 100.0% Totals Source: Milken Institute, 2007
How Will it Work? A conceptual diagram for a regional finance vehicle Business development projects Financing Pool Dollars purchase asset-backed bonds That yield market return Credit Reserve Fund* Market rate investors Banks Insurance companies Pension funds Corporations Concessionary investors Below Market rate returns Foundations Federations Religious institutions Source: Milken Institute, 2011 Philanthropic guarantors Government guarantors Dollars contributed to capitalize the reserve fund Charitable contributors *The credit reserve fund may yield below market returns
Model: Heritage Asset Financing Project Uses Planning & Development Site Work Site Restoration Site Maintenance Education & Training Operations & Management Heritage Asset Cluster Financial Tools Market Loans Subordinated Loans Deferred Loans Micro Loans Recoverable Grants Project Revenues Use Fees Licenses Entry Fees Co-marketing Revenues Tax Increments Impact Fees Benefit Assessments Capital Sources Public & Private Bonds Private Equity Government Appropriations Source: Milken Institute, 2011 Other Capital Market Rate Reserve Reserve Fund Charitable Contributions Mission-Related Investments Government Investments
Source: Milken Institute
Source: Milken Institute
Source: Milken Institute
Tax-exempt or taxable private activity bonds Tax-Exempt Debt Investors Reserve Fund Debt Service Proceeds of Debt Issuer Project Costs Project Use or Lease Agreement Operating Concession Source: Flanagan and Seltzer, 2000 Private Sector Operator Commercial Risks, Incentivized Compensation Net Operating Revenues
State revolving fund model Source: George Ames, U.S. EPA, 2004
Conceptual model RLF for solid waste Capital Market Borrowing Pledged to debt Bond Reserve Fund Fees and taxes to be used by Municipality to repay loan Debt placed or sold based projected loan volume Repayments of bond debt Set-aside based on capital raised Ministry of Environmental Protection Initial Capitalization (%-age) Revolving Loan Fund Loan Proceeds based on Eligible Projects Municipal Authority Loan to Solid Waste Operator for Capital and Operations Portion of Repayments for loan Direct Repayments on Portion of Loan Allocation of Fees Based on Loan Receivables (to repay loans outstanding) Loan Loss Reserve Fund Payments based on Tonnage Solid Waste Fund Gate and Tipping Fees/ Ton Energy Revenues* does not include packaging fee allocation User Fees & Taxes Services Solid Waste Services Recycling Revenues*
Bond Banks Summary State or regional conduit bond issuer that aggregates municipal bond projects and issues bond of their behalf Typical Terms Negotiable terms lengths; longer amortizations with balloon payments; no longer than depreciable life of the assets Interest fixed or variable; may be converted Amount is based on debt capacity of the municipality and/or revenues generated by the project Typical Uses of Bond Proceeds Roads, parking, solid waste, water & sewer Recreation/cultural/entertainment amenities General government operations Credit Issues Project feasibility and delivery Revenues collection and management Ratings based on credit enhancement, if any Losses are spread across portfolio; lessening bond risk Risks & Costs Shared risk among municipalities in pool Interest Rate Liquidity Costs paid through fees Market Public capital markets may be expanded because of the mix and diversity in the bond pools Private placements negotiated pricing
Bond Bank Examples
Eran Heimer Senior Deputy Accountant General, Ministry of Finance State of Israel
Innovative Financing Models A government safety net ensuring returns for High-Tech investments Government- Private Biotech Funds The Manof Funds New financial tools for exporters through the local ECA Reinsurance for export trade risks short/medium term with the private sector
Innovative Financing Models Designated Banks in credit funds for SMEs in the Arabic sector Designated Banks in credit funds for SMEs in the Ultra- Orthodox Jewish sector The Jerusalem Fund The Minorities Sector Investment Fund with the private sector
Main Principles of Action Not to nationalize the private sector Creating multipliers Sharing risks with the private sector Helping market forces Focused and measured interference
Creative Models for Economic Development: Lessons From Israel Applying Israel s Venture Capital Success to Archaeological Heritage Assets Brent Lane Kenan-Flagler Business School University of North Carolina
Israel: Heritage Wealth One of the highest concentrations of archaeological resources in the world More than 30,000 archaeological sites mapped and identified within its borders 3.45 million tourist arrivals in 2010
Archaeology: R&D of Heritage Archaeology provides authenticity Authenticity commands a market premium
Heritage Cluster Source: Brent Lane, University of North Carolina
Anemic Heritage Economy Many Israel areas lack the economic capacity to benefit from heritage assets
Heritage s Value Proposition Apply proven economic tools to heritage cluster Enhanced heritage tourism offerings Entrepreneurship in traded heritage products and services Intellectual property media revenue
Mosaics Filling need for skilled craftsmen in conservation creates numerous heritage economic opportunities
Workforce training Crafts Tourism Artisan replicas Mosaic tiles retailing Graphic arts licensing
Archaeology s not a treasure hunt. Archaeology is a knowledge hunt. Bernard Frischer, University of Virginia
Building a Regional Development Financing System A Partnership between Ministry of Industry, Trade & Labor And Milken Institute, Israel Center
Background and Context Security issues battered the Galilee and Negev from 2006-2008 Government pledged support to rebuild and reinvest Philanthropic donations pledged following the second Lebanon war Milken Institute held a Financial Innovations Lab in 2007. Recommending: To leverage new financing for small and medium enterprises To design and introduce new financing vehicles to facilitate capital formation for regional projects Lab outcomes: KIEDF launched $10M SME fund with OPIC guarantee Ministry of Industry, Trade & Labor launched a joint venture with the Milken Institute Israel Center for designing a regional financial vehicle 48
Focus Areas: The Galilee and The Negev 49
Key Economic Development Challenges Missing essential infrastructure to support development Lack of regional capacity to carryout important projects Projects are not designed and ready for the market Slow Business Development & Growth Fragmented access for philanthropic and market investors What is Needed? New approach to capital for economic development Not able to capture & reinvest incremental value from development Fragmented local and regional authorities with diffuse and competing interests Current project funding is limited and not innovative 50
What Types of Project Can Be Done? Types Regional centers BioPharm Renewable Energy Industrial Development Tourism Cluster Development Solid Waste to Energy Examples Industrial clusters, technologies clusters, business centers Industrial clusters, technology clusters, and research centers New technology demonstration facilities Industry incubators, research centers, industrial zones, and regional marketing Heritage Asset Districts, ecotourism, heritage preservation Integrated systems, source separation, materials recovery, new treatment and energy source technologies
Regional Financing: What Should It Do? Provide a conduit to new sources of capital Create a vehicle to focus market-rate and philanthropic investment to important regional projects Compete for investors by offering attractive financing investments, including secure, credit-enhanced, and competitive bonds Maintain itself financially by creating sustainable revenue sources Increase financial service and resources for local and regional authorities and regional businesses 52
How Will it Work? a conceptual diagram Business development projects Financing Pool Credit Reserve Fund* Dollars purchase asset-backed bonds That yield market return Market rate investors Banks Insurance companies Pension funds Corporations Concessionary investors Below Market rate returns Foundations Federations Religious institutions Philanthropic guarantors Government guarantors Dollars contributed to capitalize the reserve fund Charitable contributors *The credit reserve fund may yield below market returns
Benefits Independent, innovative financing framework Conduit for new money to the regions (enlarging the pie, not just dividing it up) Accountable structure for financing projects Market-based solutions that must prove efficiency and effectiveness Win-Win-Win-Win solutions for regional business, local/regional councils, investors, and national government
Milken Institute Project Plan: 2011 Involve local, regional & national stakeholders; Identify project needs Prepare models that answer project needs, test feasibility, and develop guidelines for project financing Identify structure, legal and financial requirements; identify capacity and roles for regional stakeholders Identify and test investor requirements; specify financial terms and conditions; prepare financial plan and projection Prepare Implementation Plan: Who, what, how, and when?
Why Milken Institute? world-wide leader in innovative financial technologies Demonstrated commitment and a year-round presence in Israel Direct experience with the issues, challenges and solutions relevant to this project, including the Financial Innovations Labs and related regional and national policies Staff has direct hands-on experience in state-of-the-art financial models, programs, and projects in the U.S. and Israel 56