Councils are now exploring the ‘untapped’ potential of crowdfunding

Over the past decade, there has been a surge in public crowdfunding campaigns which has helped to fruition everything from virtual reality headsets, community pubs and a host of other projects that may have struggled to access traditional finance following the financial crash.

Under pressure councils are increasingly looking for alternative forms of financing to fund infrastructure projects — and a report from the University of Leeds says crowdfunding has ‘untapped’ potential for local authorities.

Yet investment-based crowdfunding is rarely utilised by the public sector — largely due to a lack of knowledge on how it works and concerns that the model is any better than existing forms of public sector borrowing such as the Public Works Loan Board (PWLB), which is part of the Treasury.

So earlier this year the Bauman Institute at the University of Leeds created a model for a new community municipal bond structure. It was designed so local authorities could raise capital quickly and cost-effectively, whilst also increasing transparency and civic engagement.

Report co-author Mark Davis, an economic sociologist from the University of Leeds, says crowdfunding means investors get more than just an economic return — their money will have social and environmental returns too.

‘What we do with our money really matters,’ he told NewStart.

‘We focus on how we get money but we don’t think about the consequences of what we do with it.’

The concept

Swindon Council were the first to use an infrastructure crowdfunding model and residents raised just under £5m for a solar farm, suggesting that crowdfunding could be a powerful way of engaging residents, particularly around low carbon and environmentally-friendly projects.

Bristol is now considering using the Bauman Institute’s model for a range of energy-efficiency projects in social housing buildings across the city.

Under the ‘Community Municipal Bond’ model, investor capital would be transferred from the investors to the sponsoring crowdfunding platform and on to the council, which would then spend the funds on projects to be carried out either by the local authority or a third party contractor.

In the 1980s, Leeds was the last local authority to issue municipal bonds, a similar method of raising money that was used regularly throughout the early and mid-20th century, but fell into disuse due to high running costs and central government-introduced controls over capital finance.

‘A lot of the thinking around what crowdfunding may do, some local authorities went quite far, quite quickly, because they had some institutional memory of how similar schemes had worked in the past,’ says Bruce Davis of crowdfunding platform Abundance, who worked with the Bauman Institute for the pilot model.

However, Davis says local authorities still have to overcome misconceptions of what crowdfunding is to the public, who will often think it means donation or gift-based finance.

‘It’s making the case that this is an investment product like what a bank would offer,’ he says.

‘But whereas mainstream banking products look opaque and low yield, crowdfunding you know exactly where you’re money is going.’

Richard Lowe of Bristol City Council says they are ‘delving deep’ into the legal and financial mechanisms on how best to deliver a crowdfunding offer.

The council believes there is around £2bn of residents’ money benignly sitting in ISAs —  or being invested outside of the city. So crowdfunding could be a way of keeping some of that local wealth within Bristol.

‘The challenge is developing a business case that has a clear profit and positive cash flow proposition quite quickly,’ he says.

‘Energy projects lend themselves well to that, as principally you are trying to reduce energy use or switching your generation to a clean source of energy and not buying energy from the grid.’

Value for money

Photo Credit – Headingley Development Trust

There have been many high profile community crowdfunding campaigns in recent years, including one in Headingley, Leeds, which NewStart reported on last year.

Headingley Development Trust invited local people and interested parties to purchase shares whilst receiving a healthy 2% return on their investment, with the money going to support the trust with its various community projects.

It bypassed the council entirely ⁠— which, to those who grumble about council tax rises or potholes not being fixed, could be a preferable model.

However, with the number of people saying their council provides good value for money hovering at just 50%, crowdfunding might be a way of building bridges between residents and their local authority — and increasing knowledge of how a council spends its money.

Bruce Davis says community-run crowdfunding projects are often sporadic and rely on volunteers to coordinate — and it’s hit and miss in terms of which projects actually get crowdfunded.

He believes some of these challenges could be solved if they were coordinated by a local authority who has an oversight across a whole region to provide support.

‘There is an additional benefit that people build trust with the council and become more civically engaged and understand the challenges councils have,’ he adds.

‘Spending on street lighting or road cleaning is one thing but many people just don’t know that councils are investors.’

‘People still think it’s the council tax that funds everything the council does without thinking about how they borrow — there’s a lot of misunderstanding.’

The Swindon crowdfunding scheme was advertised in the council tax newsletter and Bruce says it helped to contextualise how the council is spending money and investing in the community.

‘Councils will have to find ways to bring residents along with them on things like decarbonisation and with crowdfunding, you’re investing with the council rather than giving them money to spend.’

Wealth not a skillset

For every Clifton in Bristol or Headingley in Leeds, there are areas of entrenched poverty with people who just don’t have the liquid income to spend on investments.

It could mean that only those with money would have the power to influence what infrastructure was built in their town or city, further deepening inequalities.

So for their model, the Bauman Institute have set a low barrier to entry of just £5 which Mark Davis hopes will mean everyone can feel like they participate.

He also believes that because the local authority is the co-ordinator, they could repurpose money raised from a ‘richer’ area into other parts of the city in need of investment.

Bruce Davis of Abundance adds that ‘wealth is not a skillset when it comes to investment’.

‘Lots of people can do investing — and you don’t need a lot of money to do it,’ Davis said. ‘But when you open up that conversation with people the main barrier is they are not seeing where their money is going.

‘If you can show them that, and local authorities can do, then people will put their money to work in a more productive way than just sitting in a saving account and not knowing what it’s doing.

Read the Bauman Institute’s report here.