This report proposes creating a Regional Development Financing Initiative (RDFI) to make private capital available for important projects in Israel’s Galilee and Negev regions. Despite decades of philanthropic and public contributions to regional development, there has been little improvement in the economic prospects for these economically distressed regions. Nevertheless, there are new opportunities for growth due to the Israel Defense Force’s upcoming transfer of major training activities to the Negev; a new medical school at Bar-Ilan University’s Safed campus in the Galilee; recent investments in roads, rail, water, and other regional infrastructure; and new initiatives in health services, energy, agriculture technologies, and tourism. Capital is needed to build on these initiatives and help the regions realize their potential.

The RDFI includes new techniques to leverage capital market investments to fuel regional growth and development through a permanent capital vehicle. In the proposed financial model, philanthropic investments and government funding provide a limited guarantee for pools of strategic projects. The guarantee lowers the cost of issuing bonds to capital market investors in Israel and abroad, and it acts as an investment incentive by lowering the investors’ risk. The bonds are repaid, and the guarantee is recycled for new pools of projects. The initiative—based on research and development work done in partnership with the Ministry of Economy (formerly the Ministry of Industry, Trade and Labor) after a 2007 Milken Institute Financial Innovations Lab® in the wake of the Second Lebanon War—is intended to spark discussion among government agencies and philanthropic and private investors about a financial solution to mainstream what is known as Israel’s “periphery.”