Principal Investigator: Dr Mark Davis
Grant Value: £375K
End date: 31 January 2019
Funder: UK Government’s Department for Digital, Culture, Media and Sport
Evidence from our research indicates that investment-based crowdfunding offers the potential to deliver a competitive new model of finance for the public sector, while also providing a new way to engage and communicate with residents in a way that builds new local networks of trust.
Since the 2008 banking crisis, the UK financial sector has innovated and diversified and now boasts a world leading alternative finance sector which provided more than £3BN into the real economy in 2017. Regulated investment-based crowdfunding has made a significant contribution to that change delivering longer term patient capital (debt and equity finance) for private businesses.
Against a background of overall borrowing prudence and austerity, UK local authorities are being asked to lead on some of the biggest issues facing the country, including decarbonisation, the building of social housing, and providing effective social care to an ageing population. Delivering on this agenda within such constraints requires service and operational innovation whilst maintaining the support and trust of local residents, which Local Government Association research has shown to have fallen significantly over the past five years.
If Local Authorities are to meet these grand challenges over the coming decade, sourcing competitive capital and working with residents to find solutions will be essential.
What is Crowdfunding?
When thinking about finance, knowing the social value of different types of money matters. Assuming the overall cost of capital to be equivalent, if there is a higher social value in one form of capital than another, we would prefer to see this option selected.
Crowdfunding is a process by which people provide money to projects, companies or organisations via a website (platform). Depending on the nature of the financial arrangement, people receive a return that is either financial (investment-based) or non-financial (donation-based).
Perceptions of crowdfunding amongst the general public still reflect its roots in financing creative and social projects via donations. The UK, however, is a global leader and innovator in creating regulated investment-based crowdfunding that brings together individuals as investors and lenders with businesses and projects to meet a range of finance needs.
The UK Government has led the way by developing an innovative and robust regulatory framework for the sector, including bringing investment-based crowdfunding (i.e. debt) into the flagship ISA investment framework that is the mainstream mechanism for saving and investing in the UK beyond pension.
The result of these policy innovations is that the UK enjoys the most diverse ecosystem of alternative finance and crowdfunding in the world. The application of crowdfunding to the public sector, therefore, 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 public sector experience of crowdfunding has mainly been donation-based crowdfunding (sometimes called civic crowdfunding). To date, Swindon Borough Council is the only local authority to use investment-based crowdfunding to finance projects in their local economy. The council built a 4.8MW solar park by crowdfunding £1.8m, of which £500,000 was invested by the local community. Local people could invest as little as £5 and it took 5 months to raise the full amount.
The question raised by the Swindon example was to what extent the public sector could also benefit from investment-based crowdfunding, both as an additional form of finance and a new way of engaging local citizens?
In 2018, the Government’s Inclusive Economy Unit (GIEU) within the Department for Digital, Culture, Media and Sport awarded a medium-sized research grant to establish the Financing for Society project at the University of Leeds.
With Dr Mark Davis as Principal Investigator, this grant enabled a cross-sector research team – comprising of the University of Leeds, Abundance Investment and Local Partnerships – to work with six public sector organizations to assess the suitability of crowdfunding for socially and/or environmentally beneficial infrastructure projects . This work was facilitated by the provision of a ‘pilot fund’ for the six case studies to work with the research team and to contract with professional services firms to provide technical and independent advice, including Archus Ltd., BDO, KPMG and Walker Morris.
As a research team, we wanted to build the knowledge base around crowdfunding, to understand where and how crowdfunding can work best, for which infrastructure projects, and how it can best deliver tangible benefits to local communities.
Led by the University of Leeds, Financing for Society was an independent project funded by a research grant from the UK Government’s Department for Digital, Culture, Media, and Sport (DCMS).
The grant enabled the project team – comprising the University of Leeds; Local Partnerships; and the crowdfunding platform, Abundance Investment – to work with public sector bodies to assess the suitability of investment-based crowdfunding to finance socially-beneficial public infrastructure projects.
The research sought to test whether or not:
- investment-based crowdfunding could offer better value to the public sector;
- the process as a whole could mirror that for the Public Works Loan Board (PWLB) or via Public Private Partnership (PPP) project finance, as common sources of public sector funding; and if
- it could provide material opportunities for people to realise a more ‘blended return’ of positive social, environmental and economic outcomes from investing directly in their community.
Our research has shown that there are a number of opportunities for the UK’s public sector to utilise crowdfunding as a new model of finance for public infrastructure projects.
Financing for Society ran from 7th January 2018 until its close on 31st January 2019.
The final report from the project was published on 1st May 2019.