Could crowdfunding work for the public sector?

UK Local Authorities are on the front line of some of the biggest social and environmental challenges we face.

But central government funding has declined significantly under austerity (around a 60% reduction in real terms).

The UK is also the world’s leading creator and innovator of investment-based crowdfunding, part of a national alternative finance sector valued at £6.2 billion. Could this unique ecosystem offer new capacity for local authorities to raise finance, to invest in local infrastructure and face those challenges?

Why crowdfunding?

While the political fight to end austerity continues, public sector finance remains under increasing pressure. Funding is needed now.

Local authorities are still able to borrow money, via the Public Works Loan Board (PWLB) and various forms of project finance, but different sources of funding come with different values and expectations attached.

Crowdfunding – still mistakenly seen as only a form of donation or gift-making – is proven to deliver social and economic benefits to communities. Investment-based crowdfunding also provides investors with a financial return through debt or equity business models.

At a time of breakdown in public trust, more people are moving their money out of traditional finance and allocating their capital to specific projects via crowdfunding platforms in order to achieve higher levels of social and environmental value.

Can crowdfunding work for the public sector?

In May, I published a report assessing the suitability of investment-based crowdfunding as a new model of finance.

I looked at if crowdfunding can offer a competitively-priced source of capital at scale, and if it could increase levels of civic engagement.

Working with Abundance Investment and Local Partnerships, we researched six case studies:

• 3 UK local authorities (Bristol, Leeds, and the Isle of Wight)
• 3 NHS bodies (Dudley CCG, Kings College Hospital, and Royal Devon and Exeter Trusts)

to test crowdfunding against a range of project delivery scenarios.

The report aimed to demystify the process of using crowdfunding as a public body. We worked with the ground-breaking teams at Bristol and Leeds City Councils to develop a new structure for the public sector to use crowdfunding - Community Municipal Bonds (CMB).

The CMB structure, being trialled in Leeds as a ‘Green Bond’ later this year, uses the crowdfunding approach to create an efficient and lower-cost alternative to normal council funding sources.

Read Financing for Society: Assessing the Suitability of Crowdfunding for the Public Sector

“This could be a game-changer for the public sector”

Our report concludes that investment-based crowdfunding could raise between a quarter of a million to several million pounds for individual projects. (Either through a single issue, or a series of bond sales.)

There is local money available for local projects. For example, based on ONS and HMRC data, citizens within the City of Leeds are estimated to hold a staggering £15 billion of cash and investments. At the moment a lot of this money leaves Leeds and goes into national and international funds.

Redirecting a small and appropriate portion of this money back into the local community to finance projects that benefit the local community could transform local economies.

Having a stake could help reconnect citizens with their local areas. And in the longer term, there is the potential to offer cheaper financing to local authorities than the Public Works Loan Board – allowing them to keep more cash for front-line services.

Recent reports by both Nesta and Social Enterprise UK have identified the potential of crowdfunding to deliver social value for communities.

Innovative thinking is underway to source capital at a competitive rate and suitable scale, whilst also engaging effectively with local people. Our report shows unequivocally that investment-based crowdfunding could be a valuable weapon in the public sector’s armoury.

The public’s perception of crowdfunding as a donation is a key challenge for public sector crowdfunding

Of course, this approach needs support from central government to develop a policy framework that normalises crowdfunding as a legitimate finance option available to public sector projects.

But another key challenge is overcoming the public’s perception of crowdfunding as simply gift-giving.

In stressing that investment-based crowdfunding provides a financial return at the same time as allowing people to support local projects they care about, we can compete with investment products offered by traditional banks. Local crowdfunding can make these traditional products look low-yield and opaque.

Our report argues strongly that this product will compete with other investment options and should not be seen simply as an extension of philanthropy.

In that way, we can also make clear the separation between the public sector borrowing to invest in infrastructure and taxation to provide day-to-day essential services.

Is your money making a difference?

How and where we decide to spend, borrow, save, and invest makes a material difference to the type of social world that we are creating for ourselves and for future generations. What we do with our money really matters.

If we want a radically different world to the one we now see around us – if we want that world to be fairer, more equitable, and more sustainable – then we are going to have to do radically different things with our money. Supporting local projects could be one way.

Read Financing for Society: Assessing the Suitability of Crowdfunding for the Public Sector

Register for our local authority training workshop to be held in Leeds on Tuesday 18th June.

The research was funded by a grant from the Government’s Inclusive Economy Unit (GIEU) and was led by the University of Leeds working with Abundance Investment and Local Partnerships. Find out more about the Financing for Society project.

Mark Davis is Associate Professor of Sociology at the University of Leeds, UK. He is currently working on a Horizon 2020 project with colleagues across Europe researching how innovative financing and business models can support ‘prosumerism’ as part of the EU’s green energy transition.