A Merchant Bank

A Merchant Bank

Private Sector Investment in Challenging Locations

Mission

The objective is the creation of a flexible and nimble new entity that will, in policy-selected markets, initiate/sponsor ventures and infrastructure; ensure their reliable feasibility assessment occurs; structure transactions with selected investors and operators; identify, in the process, the real impediments and arrange for reasonable de-risking techniques, including, where appropriate, negotiating with authorities for policy accommodations for the purpose - taking responsibility for all aspects of a transaction to drive a project from conception to investment and to maximize the proportion funded by private sector capital, including by co-investing where needed.

Scope and Agenda

Although rising from the importance of development and investment for the drawing of private sector capital and activity to the challenging locations and conditions of host communities to provide gainful employment and durable solutions, the ‘Merchant Bank’ proposal has wider application – and its capacities could be directed to efforts in any difficult location that social policy dictates. The funders might choose to serve one or more policy goals by the locations selected and make use of a single Merchant Bank’s capacities for multiple policy purposes – e.g. mobilizing projects in comparably challenging locations that address displacement, SDGs, or clean energy development. In fact, single projects may often serve more than one objective at the same time.

In its solution-oriented recommendations, the World Commission on Forced Displacement emphasizes the need for development and investment to stimulate gainful and durable employment in the Global South where some 85% of the world’s 68.5 million forcibly displaced are located.

This initiative seeks to define the methods, methodologies and corporate structure appropriate to the task of deploying the limited available public funds to remove impediments to commercial investment and to fill gaps in the missions of development institutions that leave needy communities short of the commercial market conditions and sustainable projects required for private sector capital to invest in the locations at issue.

A central proposal for that purpose is that of a purpose-built ‘Merchant Bank’ to channel limited public resources available to create commercial conditions that would mobilize private sector capital for this public interest need. If this draws a very small percentage, but a large absolute amount, of the excess savings in the private sector (earning low to negative returns), to the application, it would make a significant investment impact, realizing better returns and public benefit in multiple targeted locations of need and opportunity, particularly in the Global South. This investment would benefit economically the donors, investors, and host communities wherever deployed. It would improve stability, security and social cohesion globally, eventually replacing some humanitarian (and even security) expenditures and permitting greater shared North/South political interests. This private sector participation is essential in light of grossly inadequate public funds for the scale of the need and opportunity and the fact that the necessary funds and capacities are in the private sector.

This would best be an additional – and additive - method and mechanism to those at work today that have not alone been able to achieve anything like the volume of private sector capital and activity needed in target locations, if development is to be maximized. Private sector funds gathered expressly for this purpose go almost entirely unused in the absence of the fulfilling of the functions proposed for the Merchant Bank. Without criticism, market gaps and deficiencies exist. Even as international and development financial institutions fulfil an important role. The current institutions are:

  • rarely proactive initiators or holistically responsible developers of ventures, rather, more often responding to sponsored proposals. They are generally unavailable for the most risky, but required, careful feasibility assessments in low and middle income locations (where projects take longer to develop, and succeed less frequently, making these expenditures risky, often beyond commercial tolerance);
  • often ill-suited to numerous small projects, even if most appropriate in a location; some are more directed to public sector borrowers; and many are not designed or encouraged by the shareholders to be concessionary financiers.

A Merchant Bank with such facilities would drive more private investment to areas of need and opportunity to the benefit of investors, donors, displaced and host communities.

The Foundation has explored this proposal through the work of the World Commission on Forced Displacement that it convened

World Commission and Steering Committee Members

Related Pages

Status

  • The Merchant Bank concept has been well received in discussions with thought leaders in the finance and development space.
  • Consultations are underway with policy makers and financial professionals to further movement toward creation of a Merchant Bank with the facilities outlined.
Copyright: Dominic Chavez: World Bank
Copyright: ABBAS Farzami Rumi Consultancy: World Bank
Copyright: Peter Kapuscinski: World Bank
Copyright: ABBAS Farzami Rumi Consultancy: World Bank
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