Local authorities could use crowdfunding as an alternative to traditional borrowing, researchers have claimed.
A government-backed study by the University of Leeds concluded that online fundraising is a ‘viable and significant opportunity for public bodies seeking additional models of finance’.
The research concluded it could be a viable alternative to the Public Works Loans Board (PWLB) for major projects.
Crowdfunding originated in the rock music industry where fans donate money to cover recording or promotion costs for a band.
The research used six pilot schemes at three local authorities and three NHS bodies: Bristol City Council, Isle of Wight Council and Leeds City Council plus Dudley NHS Commissioning Group, King’s College NHS Trust and Royal Devon and Exeter NHS Trust.
An online tool was created as the gateway for local people to invest in projects such as solar panel installation following a communications campaign to highlight the benefits for the local area.
Researchers found crowdfunding offered a better, safer rate of investment for local people and a cheaper finance option for councils.
Highlighting projects also raised awareness of the range of work done by the public sector.
The report, Financing for Society, was funded by the Department for Digital, Culture, Media, and Sport (DCMS) as part of work to find ways to grow local engagement between the public sector and their community.
Researchers concluded 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.
The risk mechanisms in the PWLB designed to protect institutional investors, means additional costs are created.
By going direct to local people, researchers claimed councils can save time and under-cut the costs of PWLB.
At least two of the pilot organisations are considering taking the initiative forward.
Report author, Dr Mark Davis, associate professor of sociology at University of Leeds, said: “At a time when public sector finances are under increasing pressure, crowdfunding – still mistakenly seen as being just another form of charitable giving – has the potential to offer this radical alternative via an investment-based business model that generates social, environmental and economic returns.”
To enable the pilot schemes to go UK-wide, researchers advised ministers:
- Create a new national policy framework for public sector engagement
- Open up the Community Municipal Bond product for Innovative Finance ISA investors so that the product can become more accessible to community investors
- Create meaningful marketing and communications strategies, at both the national and local level, to signal investment-based crowdfunding is a normal and legitimate model of finance for the public sector
- Create an underwriting or bridging fund facility for projects
Dr Davis said: “This shows how crowdfunding can be utilised to create new forms of civic engagement with local residents and service users.
The public sector is yet to make the most of crowdfunding and to realise the financial and non-financial benefits it has been shown to generate.
A partner in the project, Abundance Investment, has been advising on how LAs can borrow money from residents but within a structure which fits with local authority treasury management practice.
Karl Harder, founder and joint managing director of Abundance Investment, told Room151 “Crowdfunding still has to comply with relevant legislation and the Prudential code, but the research shows that the model has the potential to beat PWLB rates while also engaging resident investors with the activities of the local authority”
