Wisdom of crowds: public services and crowdfunding

When Isle of Wight Council withdrew funding for school crossings, Cowes Primary School set up a page on the Crowdfunder site to raise £13,500 for a new one. In Liverpool, local people have raised money through crowdfunding site Spacehive to turn a derelict flyover into an urban park. The Royal National Orthopaedic Hospital in London has launched a crowdfunding platform to raise £400,000 for its spinal injuries unit.

These are not isolated cases: with the public sector reeling from spending cuts, local authorities, schools and hospitals are turning to crowdfunding to raise money. Spacehive, launched in 2012 to fund local projects, has so far raised more than £6m, and can number the mayor of London, Essex County Council and Manchester City Council among its enthusiastic adopters. Lewisham Council has used the site to crowdfund local projects, pledging up to £10,000 to support the most popular ones. Its initiative has been so successful that the model has since been adopted by other local organisations, including social housing provider Lewisham Homes.

Because crowdfunding is being taken increasingly seriously as an alternative source of finance for public projects, the Local Government Information Unit (LGIU) has published a guide on how local authorities can benefit from it.

Some projects are ideally suited to the model, says Jennifer Glover, LGIU policy researcher and author of the guide: “The ones that are working best are the ones that have quite a strong local connection because people can get really excited about it. The thing that councils want to avoid at all costs is to be seen to be adding more taxation onto people, so it has to be something that people see as additional and exciting on top of their core services.” The Liverpool flyover project is a particularly good example, she says.

Does crowdfunding represent a realistic alternative to central government funding – and is it sustainable? Not everyone is an enthusiast. Harry Quilter-Pinner, research fellow at think-tank IPPR, says he can see a role for it in certain cases, but worries that it could be used to replace funding for essential services.

Greater Manchester’s new metro mayor Andy Burnham’s announcement that he would kickstart a new fund for the homeless by donating 15% of his own salary is indicative of a disturbing trend, Quilter-Pinner suggests: “That’s a sign that the state has stepped away from its obligations and other people are having to fill in those obligations.

“We’re one of the richest countries in the world – the state is more than capable of making sure people have basic human rights such as a roof over their head. If we’re having to crowdfund for those kinds of things at the scale we are now, then we’re in dodgy territory.”

He argues that a move towards crowdfunding will increase inequality: “Where is crowdfunding going to work best? My instinct tells me it’s going to be much easier to crowdfund in west London than it is in east London, or the south than it is in the north.”

He fears there is a risk that Britain might follow the example of the US, where schools patronised by wealthier parents can afford to fund swimming pools and after-school clubs, while schools serving poorer parents have to do without.

Asking for contributions from local people is only one model of crowdfunding, however. The LGIU guide notes two other main types. One is peer-to-peer lending, a way of lending and borrowing money by bypassing banks or brokers. The loan is made through a peer-to-peer platform that takes care of the administration.

Councils, says Glover, “could look at lending to businesses in their area strategically to promote local economic growth in the sectors they want to support”. In principle, they could also use it to borrow money and, last year, Warrington Borough Council set up a peer-to-peer lending platform with TradeRisks, a wholesale corporate finance and investment firm, that will enable local authorities and other government bodies to lend to each other.

Through a wholly owned company, Public Power Solutions, Swindon Borough Council has adopted a version of peer-to-peer lending by making bonds available for its three solar farms. The first bond raised £1.8m from community investors, while the second, in the form of an ISA, with an average rate of return of 6% over 20 years, raised £2.4m within six weeks. The project was recently recognised in the Public Finance Innovation Awards. The council plans to install 200MW of renewable capacity by 2020, and is already 80% of the way there.

Bernie Brannan, the company’s managing director as well as the council’s corporate director of communities and place, says that the enthusiastic response has been partly due to support for renewable energy, and partly because there is the sense that a council project represents a safe bet: “The fact that local government’s involved does give a certain reassurance for local people. Much as they knock the local councils, when it comes down to investing, there’s a security blanket there.” Other local authorities have shown an interest in following Swindon’s example, he adds.

The third type of crowdfunding Glover identifies is equity funding, which enables councils to invest in local companies as a way of supporting local economic growth. Lancashire County Council became the first council to try this, she says, when it used the Crowdcube platform to invest in local businesses. She warns, however: “There’s a high political risk, so you have to have the right story around it – play into the narrative of job creation and a more vibrant startup community. It’s quite a careful line they’ve got to walk.”

Councils looking for alternative ways of funding expensive projects are turning to other methods that fall under the broad rubric of crowdfunding.

Communities are not limited to cash when it comes to backing local amenities – they can put in the time and skills to campaign for and run them.
In Swindon, the council could no longer afford to run the historic Lydiard House and Park. Although the introduction of car parking charges made a dent in the £480,000 annual running costs, the council planned to hand over management to a private company – until public opposition forced it to rethink. Subsequently, two rival community groups put in bids to run it.

Kevin Fisher, a trustee of the Lydiard Park Heritage Trust, which won the bid, says: “For a private organisation, the number one priority is to make money, and the surplus wouldn’t necessarily be reinvested back in the park.” There was also a concern, he says, that a commercial company might maximise the profits by, for example, building a large hotel or a golf course on the grounds.

Fisher is confident that the trust, whose trustees include the former finance director of a multinational and a former director of Chiswick House, can run the house and park at a surplus while protecting its integrity. Plans being considered include building a visitor centre, refurbishing the hotel rooms and introducing mobile food outlets on the park. The council, he says, has been supportive and helpful, and Fisher believes the model could work elsewhere in the country.

Another variant is offering community shares, in which local people can invest in businesses that serve a community purpose, such as pubs, village halls or renewable energy initiatives, some of which might previously have expected to draw funding from the local authority.

People who buy community shares are given a shareholder vote, but the value of the shares can never rise higher than the price paid for them. Ged Devlin, programmes manager at Power to Change, a charitable trust that supports community businesses, says: “The notion that underpins community shares is, ‘What I can afford to invest is a lot more than I could afford to give away for nothing, but I’m quite philanthropically motivated by what I’m investing in’.”

Power to Change is now running a programme with the Community Shares Unit (a government-funded body that promotes these schemes) to match funding raised by community shares for projects, up to the value of £100,000.

Because people buy community shares to support a community purpose rather than make a financial gain, community share offers are not regulated. Devlin says it’s a good way to support community businesses that find it difficult to attract funding from conventional sources.

“Community shareholders invest in local enterprises that provide goods and services that meet local needs,” he says. “They only expect a fair or modest return on their investment and the share capital doesn’t alter the membership structure, so it’s one member one vote, not one share one vote. So there is a long-term alignment of the interests of the owners, investors and customers who can actually all be one and the same.”

Devlin says that Power to Change has seen a lot of interest around heritage assets, where the underlying business model is predicated on footfall: “If that footfall is predicated on minimum spend, then the minimum spend might be increased by the sustainability of having your owners as your investors and customers.”

Stepping in to support initiatives that the state cannot or will not fund has its attractions – helping to fund a job creation programme, taking over the management of a run-down park or investing in a local renewable energy scheme – can give local people a sense of ownership and pride in their community.

Quilter-Pinner believes that there is a risk, however, that, as the state cuts public spending, we may rely more and more on the goodwill of citizens to fund essential services such as social care and specialist healthcare: “The overarching trend we’re seeing at the moment is the state stepping away from obligations and charitable activities having to step in.”

This article first appeared in Public Finance.

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