Crowdfunding is a financing solution that uses web-based platforms to allow small scale individual investors to connect directly with individuals or businesses looking to raise money. It is a relatively new industry, enabled by recent internet and cloud technologies, with likely applicability to new areas as the investor base matures and grows. Crowdfunding and crowdsourcing techniques are becoming more heavily utilised in the technology sector and are beginning to be applied across other business-to-business (B2B) and business-to-consumer (B2C) industries. The application of crowdfunding in the infrastructure sector has, however, been limited to date.
The aims of this project were to gain a better understanding of the crowdfunding concept and platforms, determine market opportunities and challenges, and examine the applicability of the crowdfunding model to infrastructure projects. The suitability of such platforms to facilitate financing of small-scale infrastructure projects, as well as investment in medium to larger-scale projects was examined. The research focused on two different markets, the US and China, to showcase crowdfunding in the context of both mature and developing capital markets.
In this project, we developed a working knowledge of the crowdfunding market, key players and the regulatory environment. We determined the factors influencing the success of such an approach for different project sizes. Where crowdfunding was assessed as unsuitable for primary infrastructure development, secondary opportunities were identified. We obtained knowledge that allows us to identify ways in which Arup can begin to facilitate the use of this new source of capital over the longer term by offering advice and due diligence services to both investors and project developers, while positioning ourselves as a thought leader in the infrastructure space.
In developed capital markets (using the US as an example):
- Existing infrastructure crowdfunding platforms are primarily focused on small-scale projects, showing a willingness of investors to contribute to their communities. Such projects still require significant public sector involvement for funding and delivery.
- Crowdfunding can also be used for medium- to large-scale projects. However, these projects do not have the 'community-based' appeal of smaller projects and so investor returns need to be more commercial.
- Given that the infrastructure crowdfunding market may not achieve significant scale in the short- to medium- term, any crowdfunded capital would need to supplement existing channels of finance (such as subordinated debt, which may be able to balance investor return expectations with the smaller scale of crowdfunding contributions).
- Crowdfunding can increase community engagement and transparency in infrastructure delivery. However, political and/or developer support is key, particularly if the structuring complexity would outweigh benefits, or if there was adequate financing available from traditional sources.
In developing markets (using China as an example):
- Investor protection is a key area of concern for governments and the regulatory environment continues to develop as a result.
- Relatively high returns and short investment horizons offered by small business issuers (who are struggling to raise capital through traditional means) may deter investor appetite for more complex infrastructure financing opportunities.
- Crowdfunding is currently not being considered for infrastructure project delivery and this is not likely to change soon.
- Crowdfunding may be more applicable to secondary infrastructure market investments, until these markets and supporting regulation have further developed.
Knowledge generated in this project enables Arup to promote crowdfunding as a possible solution for projects of all sizes, to both private developers and public sector sponsors, by:
- Incorporating crowdfunding into the analysis of the possible financing mix for private-sector sponsors;
- Assisting public-sector clients in assessing the potential benefits of crowdfunding, including for public-private partnerships (PPP) projects; and
- Being able to develop a strategic program for launching crowdfunding campaigns, by undertaking market assessments and evaluating public response to proposed infrastructure projects.
For developers, the public sector and society as a whole, crowdfunding is an alternative potential source of financing for urban infrastructure that:
- Allows individual investors access to a type of investment that has historically been unavailable to them.
- Enables communities to drive their own infrastructure agenda rather than rely on political and governmental processes.
- Creates a sense of 'ownership' and responsibility for crowdfunded infrastructure among communities.
- Supports the realisation of projects that normally may otherwise be delayed or not get funded due to constraints of available public budgets.
- Helps the budget-constrained public sector raise a new form of capital, allowing otherwise unfinanced projects to go ahead.