Utilising Crowdfunding mechanism for Urban Infrastructure Development

WHAT IS CROWDFUNDING

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a business or project, makes easy accessibility of a vast number of people, funds can be raised beyond the traditional circle of owners.

Developing countries like India requires investments of over US$ 4.5 trillion by 2040 for developing its urban infrastructure according to the Economic Survey 2017-18. Hence, there is a call to think of many innovative solutions to finance the infrastructure projects in India which can be combined with other models. Crowdfunding can act such innovative tool to finance public infrastructure in India by collaborating it with various other models like a hybrid annuity, PPP, EPC, BOT, TOT etc. Crowdfunding can fund about 5-25% of total project cost and even more depending on type & scale of urban infrastructure project and what amount of earnings it can generate. Urban Infrastructure projects such as highways, urban mass transit system, dedicated rail freight corridors, gas transmission, ports project, electricity power plant have huge concession period and generate a huge amount of earnings throughout their lifetime. People can invest in such projects by putting their small amounts in form of crowdfunding. The ultimate goal of urban infrastructure project is to serve people of society, so why shouldn’t we create such a financial model which can also generate income for people and can also help in financing the project.

HOW IT WORKS

 There are four different forms of crowdfunding that can work in Infrastructure sector: -

1.      Rewards-based crowdfunding 

Investors contribute typically small amounts of money in exchange for a reward. The reward can be given in form of the discount on various type of usage of public utility or infrastructure services, the particular project in which investor has invested. By giving discounts on water tax, highway toll tax, gas utility service of city, electricity bill etc. It will encourage people to invest in such project which can provide them rewards over usage of such facility.

2.      Donation-based crowdfunding

People invest simply because they believe in the cause, donors generally donate very small amounts. Returns are considered intangible. Donors have a social or personal motivation for putting their money in and expect nothing back, except perhaps to feel good about helping the project.

Spacehive is U.K based crowdfunding platform solely for projects aimed at improving local civic and community spaces. Spacehive was launched in March 2012, its mission is to "empower people to create & fund projects that make local places better". As of November 2016, 245 projects have been successfully funded on the platform, raising ￡6.1 million.

3.      Debt-based crowdfunding

Investors make a loan with the expectation to get paid back the principal plus interest. So, it’s a lot like a loan from the bank, but instead of borrowing one larger amount of money from one bank, you borrow smaller amounts of money from multiple people, called peer-to-peer lending or lend-to-save, it allows for the lending of money while bypassing traditional banks. This type of crowdfunding can work out very well for investors who can invest a large sum of money.

4.      Equity crowdfunding

People invest in an opportunity in exchange for equity. Money is exchanged for a share in the business, project or venture. Earnings from the urban infrastructure project can be trickle down to the investors in the form of quarterly, monthly or yearly dividends. Urban infrastructure projects such as Metro Rail Projects, Electricity Power Plant, Gas Transmission etc., can share their earnings in the form of dividends with investors. Equity-based crowdfunding is the best tool which provides good returns to investors as a fixed income over a period of a lifespan of a project.

 FEW SUCCESS STORIES OF CROWDFUNDING

BD Bacatá Skyscraper, Colombia

A 66 stories tower, 216 meters high, above the city of Bogotá. The 1.2 million square foot development will include office space, retail, apartments and a 364-room hotel, rents from these spaces will trickle down to the investors in the form of quarterly dividends. The structure was not financed by a few real estate tycoons and a couple of large banks but by over 3,800 ordinary Colombians. Real estate developer Rodrigo Ni?o has a problem with commercial real estate development. The immense amount of wealth it generates, he argues, falls into the hands of too few people. People like him. Prodigy Network was founded by real estate entrepreneur Rodrigo Ni?o, Prodigy Network’s portfolio valuation stands at around $600 million today involving over 5200 investors.

Liverpool Flyover, Great Britain

The new project would provide 200,000 individuals with a new area for pedestrian/cyclist activity, event programming, outreach and education. New construction would also provide new opportunities for local businesses to use the space to expand their services. The project was successfully funded by 337 crowd funders at reaching its target goal of ￡40,844 and exceeding it by ￡2,880. The project total cost covered the feasibility plan, specifically the design, surveying, and planning phases of the project. More than half of the amount was funded by individuals, whereas the other 50% was raised by four private partners via in-kind and monetary donations.