Crowdfunding for the Public Sector




Many projects undertaken by community energy groups require substantial capital, so that business models and fund raising methods can be of interest. Following their declarations of climate emergencies, some local authorities are discussing cooperative action with community energy groups, making project funding an issue of joint concern.

The authors of a report on crowdfunding for the public sector [1] refer to the development of a strong UK alternative finance sector since the 2008 banking crisis, with a significant contribution from regulated investment-based crowdfunding. They note that at the time of writing their report  the only local authority to use this form of financing has been Swindon Borough Council, and ask whether the public sector more generally could benefit from it.

Grant funding “enabled a cross-sector research team to work with six public sector organizations to assess the suitability of crowdfunding for socially and/or environmentally beneficial infrastructure projects”.

The organisations were Bristol City Council Energy Efficiency, Isle of Wight Council Urban Redevelopment, Leeds City Council Roof-Top Solar PV, Dudley Clinical Commissioning Group Community ‘Health Hub’, Kings College Trust Institute of Haematology (Research Centre and Hospital), and Royal Devon and Exeter Trust Elderly Care Facility.

The authors believe that their research results show that investment based crowdfunding could offer the public sector a new model of finance, while engaging with residents “in a way that builds new local networks of trust.”

Such investment is seen as necessary in the light of demands on local authorities for decarbonisation, the building of social housing, and providing effective social care to an ageing population.

Crowdfunding is described as “a process by which people provide money to projects, companies or organisations via a website (platform)”. The reward of donation-based crowdfunding is non-financial, that of investment-based crowdfunding is financial. The UK Government has developed a regulatory framework which has brought investment based crowdfunding into the ISA investment framework. Crowdfunding to the public sector “opens up opportunities for more people to invest directly in the projects they care about (locally or in a specific place) at a scale that is meaningful and accessible for both local authorities and local ‘citizen investors’ alike.” 

The two forms of crowdfunding above are compared further, and the model of municipal bonds is introduced.

Donation-based crowdfunding can fund non-core Local Authority services or “support the development of assets that might have value to a specific section of the community but less value for the wider community”, such as a skate park. This method can “encourage wealthier sections of a community to contribute funds to provide additional facilities for poorer areas.”

Investment-based, or debt crowdfunding can “allow a council to transfer project risk or ownership to non-state actors” (whether not-for-profit or for-profit).The project procurement process could direct bidders to consider crowdfunding as it does not increase project costs for the council. Deriving social value from the financing of local projects “could help to localize the economic benefit of project development, while also building better community engagement.”

The Community Municipal Bond is a new model of public sector crowdfunding, with the potential to provide low cost capital for local authorities while delivering socially and environmentally positive outcomes. The report regards these bonds as a means of mobilizing capital from civic-minded investors to facilitate low carbon and social housing infrastructure projects. They are issued by the council corporate body and administered by a crowdfunding platform, with resident and general public investors purchasing the bonds. The research indicated that there was a multi-billion market of retail investment money that could be directed into local authority funding in this way, with “the potential to reduce borrowing costs for a council”. The bonds can be delivered with a minimum investment of £5 and are ISA and pension eligible.

The report found that the uptake of investment-based crowdfunding was hindered by a lack of experience within local authorities, and a decision tool in the form of a flow chart is presented “as a summary of how the different crowdfunding models could be used for different project types.” The Local Authority Guide is based on the full report, FINANCING FOR SOCIETY Assessing the Suitability of Crowdfunding for the Public Sector [2].

Research was carried out in partnership with Abundance Investment [3] and Local Partnerships [4]. Abundance Investment, a member of SocialRES [5] a research and innovation project funded by the European Union, produced a survey [6] which sought reaction to proposed Community Municipal Bonds which would pay an annual interest rate of 2 - 2.5%, have an investment term of up to 20 years, and could be sold early via a dedicated marketplace.

Local Partnerships, which is jointly owned by the Local government Association, HM Treasury and the Welsh government, describes its purpose as being to help public sector organisations meet rising demand with shrinking budgets.

References

[1] FINANCING FOR SOCIETY Assessing the Suitability of Crowdfunding for the Public Sector

LOCAL AUTHORITY GUIDE

Davis, M., Cartwright, L., 2019

University of Leeds

https://baumaninstitute.leeds.ac.uk/wp-content/uploads/sites/134/2019/04/FinancingForSociety-LocalAuthorityGuide.pdf

[2] FINANCING FOR SOCIETY Assessing the Suitability of Crowdfunding for the Public Sector

Davis, M., Cartwright, L., 2019

University of Leeds

http://eprints.whiterose.ac.uk/145481/

[3] Abundance Investment  https://www.abundanceinvestment.com/

[4] Local Partnerships  https://localpartnerships.org.uk/about/

[5] SocialRES  http://socialres.eu/

[6] Abundance survey on behalf of SocialRES / Trinity College Dublin

 https://www.surveymonkey.co.uk/r/QGXRMZY?

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