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September 8, 2016updated 10 Nov 2017 10:20am

Crowdfunding London’s public transport: is it possible?

As the population grows and the budget for big infrastructure projects faces numerous cuts, there is an incentive to seek alternative funding to deliver a reliable and modern transport network. A recent report puts forward crowdfunding as a novel concept: but how could this mechanism successfully be used to finance new and existing transport infrastructure projects?

By Eva Grey

The public conversation surrounding the transport systems in the UK is currently fraught with outrage and controversy. While existing networks are subject to complaints about subpar performance, new and upcoming projects struggle to justify their ballooning costs to disenchanted taxpayers.

One thing that is not up for debate however, is the very urgent need for more capacity to relieve congestion. Just looking at London, the capital is growing faster than any other European city, with its current population of 8.6 million expected to become nine million by 2018, and ten million by 2030.

At the same time, the Department for Transport’s budget cuts of 37% by 2020 have hit Transport for London (TfL) hard, resulting in its entire operational budget of almost £700m a year being wiped out before the end of the decade.

Adding to this, London’s new Mayor Sadiq Khan pledged to freeze all TfL fares for four years, which is estimated to amount to a loss of £640m by 2020.

Khan’s transport manifesto acknowledged these tough economic circumstances, promising to “plan the next major infrastructure projects for the long-term…while exploring additional sources of funding for major projects”.

One such source could be crowdfunding, says a new report published in June by Keith Prince, Havering & Redbridge Conservative candidate for the London Assembly.

Crowdfunding enjoys huge popularity, but not in transport

By definition, crowdfunding is ’the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet’.

Due to the rise of social media, the trend has exploded in popularity in recent years. In 2015, the global fundraising volume reached $34bn and over the course of this year the crowdfunding industry is expected to account for more investment than venture capital, according to a report by international marketing firm Massolutions.

What’s interesting about the idea of crowdfunding, Prince says, is that it can make projects possible, especially those which wouldn’t otherwise have the financial pathways to be implemented.

But such endeavours in funding public transport, especially successful ones, are few and far between.

“If people think there’s something that’s worth having, then they might well be willing to put money into it.”

One example comes from German rail operator Locomore, which in January this year reached its €460,000 crowdfunding target to launch its Stuttgart – Berlin service.

Under the scheme, called ’crowd ticketing’, each donor effectively purchased an advance ticket which can be used flexibly without restriction when the service is launched. The funds raised from the crowdfunding campaign will be used to cover start-up costs.

In February, a more tongue-in-cheek request from Bostonian Janssen McCormick asked the public to contribute $30bn to modernise Boston Transit, a campaign which reach only $1,585 of its goal.

“If people think there’s something that’s worth having, then they might well be willing to put money into it,” Prince says. “If they are not willing to put in any money into it, then maybe the demand isn’t as strong as what the modelling had suggested.”

But as the Boston example shows, the endeavour must be realistic.

How would it work?

The concept of crowdfunding transport schemes is based in establishing the benefit-to-cost ratio (BCR) required in order for each project to go forward.

In order for a project to be considered viable, a BCR of 1:1:4 is needed, which means that for every £1m of investment, the profit would have to stand at £1.4m. Anything below that margin renders a project poor value for money.

The answer lies in figuring out how much the project would have to cost for the desired ratio to be met.

One current example Prince mentions is the Thames Garden Bridge, which has a £175m cost that’s one-third funded by the government, with the rest coming from individuals and charitable trusts.

“By bringing in crowdfunding, by bringing in money from outside, it means they are more viable,” Prince says. “If your project is innovative and interesting and exciting enough, people may be willing to contribute.”

“Crowdfunding should not be seen as a replacement for the government-backed capital funding.”

The most popular option, particularly suited to public transport projects, is following Locomore’s recipe for success and pre-selling tickets at today’s prices for future use once the network is build.

“Essentially this is an extreme form of pre-booking but it creates the opportunity for TfL to draw forward funds that the project would go on to make,” the report reads.

As for the practical part, it recommends that TfL should set-up a dedicated website listing the cost and BCR analysis of all the projects it would support being built, and include the chance for Londoners to pledge money to pre-buy tickets for a project when it is complete.

Finally, when a project reaches its pre-determined target, it would gain approval and the money pledged would be allocated to it.

Apart from bringing in a new funding stream, the report argues that crowdfunding would help assess the demand for a project more accurately and bypass lengthy waits for government approval.

Justifying the expense

There are of course challenges.

Some would argue that tax revenues should fulfil exactly this purpose: building new and improving existing networks in the community. Asking taxpayers to reach into their pockets yet again could be a tough sell.

“I don’t think it needs to be justified, to be perfectly honest,” Prince says. “No one is forcing anyone to do anything.”

“You can’t choose whether to pay taxes, but you can certainly choose what to do and a lot of people are willing to give money to all sorts of projects like that ridiculous bridge they’re proposing. So why not give it to something that’s actually practical and people can benefit from?”

The other challenge is giving people realistic expectations. Prince highlights that this project’s aim won’t be to raise hundreds of millions of pounds and it will have its limits.

The report also makes clear the fact that crowdfunding “should not be seen as a replacement for the government-backed capital funding that the vast majority of projects will require,” but rather “it should be an available option that could act as a ‘top-up’ and make projects that might otherwise not happen, happen.”

“We’ve spoken to some people who run crowdfunding companies and charities and the idea has been well-received there,” Prince says. “People we’ve spoken to think it is worth trying.”

Since the publication of the report, Prince met with Deputy Mayor for Transport Val Shawcross to discuss the concept, and a meeting with Sadiq Khan is also on the agenda.

“Maybe there are opportunities outside the world of transport,” he says. “It is anticipated that public sector funding will be tight for quite a long time and any opportunities there are to find different approaches is something I hope people will welcome.”

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