The public sector continues to finance the bulk of infrastructure in Asia and the Mekong region, although the private sector is increasingly involved through public-private partnerships (PPPs) and privatisation. This chapter explores alternative finance mechanisms that harness digital technologies (e.g. Fintech) to fund infrastructure, including crowdfunding and tokenisation. It suggests such platforms can help transcend the limits of traditional banks, providing a lower entry cost for retail investors. They can also build community support, sending a reassuring signal to larger institutional investors. The chapter also highlights the use of crowdfunding and blockchain tokens to support a variety of projects, including in real estate, energy, parks, transport and water. Despite these successful case studies, the use of Fintech to finance public infrastructure remains marginal.
Innovation for Water Infrastructure Development in the Mekong Region
2. The potential of digital infrastructure financing: Fintech and blockchain
Abstract
Introduction
The private sector is increasingly engaged in financing infrastructure in Asia, primarily through partnerships with the public sector and via privatisation, though the public sector continues to fund most infrastructure in the region. Alternative finance mechanisms are emerging, however, that harness digital technologies (e.g. Fintech) to fund infrastructure. Such platforms, including crowdfunding and tokenisation, can help transcend the limits of traditional banks, providing a lower entry cost for retail investors. They can also demonstrate community interest, sending a reassuring signal to larger institutional investors. This chapter highlights the use of crowdfunding and blockchain tokens to support a variety of projects, including in real estate, energy, parks, transport, and particularly water. Despite several success stories, the use of digital platforms to finance infrastructure is in its infancy.
The infrastructure financing gap calls for alternative and innovative funding channels
Asia, including the Mekong region, has substantial financing needs for physical infrastructure, but struggles to obtain suitable funding from sources beyond the public sector (OECD, 2018[1]). The gap is particularly glaring in less-developed economies in the region relative to their economic size (Asian Development Bank, 2017[2]). Asia needs more alternative and innovative channels to fill this gap in infrastructure funding.
The public sector still accounts for the largest share in capital outlays (Hansakul and Levinger, 2016[3]; UN ESCAP, 2017[4]). 70% of Asian infrastructure funding comes directly from the public sector. The private sector contributes 20%, while multilateral agencies, such as international development banks, provide the remainder (Aladdin D. and Zulfiqar, 2017[5]). In Asia, the public sector participates in infrastructure financing by drawing from tax and non-tax revenues, as well as borrowing (e.g. national and municipal bonds). Governments also draw on loans from multilateral institutions to augment the fund pool.
The private sector invests in infrastructure mostly through bank loans
Private-sector participation in infrastructure (PPI) comes mainly through privatisation and public-private partnerships (PPPs). Table 2.1 shows that the percentage of private ownership in publicly awarded projects is now effectively equal among the world’s regions. Transport projects in sub-Saharan Africa have a lower private ownership share than those in other regions. Emerging economies in Asia and in Latin America and the Caribbean have private ownership shares in excess of 95%, while other regions have average shares between 90% and 92%. Emerging economies in Asia and in Latin America and the Caribbean have larger proportions of projects in land transport as a segment of the transportation sector. Conversely, in other regions, less than half of transport projects are for land transport. The Middle East and North Africa region does not have any land transport projects in the database for the selected financial closure timeframe.
Table 2.2 indicates an increase in average project size for all countries in Asia, except Malaysia. Cambodia’s USD 1 billion investment in transport PPI is for a single airport project. Sectoral information is not available for Lao People’s Democratic Republic (hereafter “Lao PDR”), while subsector-level data are absent for Myanmar. Thailand has a pair of railway projects in the database. Indonesia has allocated nearly half of its outlay for a single rail project, while using the remainder for road projects.
Private sector participation leans more on the debt market, especially bank lending. Commercial bank loans, specifically syndicated loans, are the primary mechanism to fund infrastructure; the bond market is still developing (Yoshino, Helble and Abidhadjaev, 2018[6]). Equity issuance and corporate bonds represent another source, mostly for entities directly involved in infrastructure sectors such as utilities, transportation and mining. Several listed infrastructure companies in the region and Asia-focused infrastructure equity indices have a relatively strong presence in the market.1 Their unlisted counterparts are also gaining some attention.
Institutional investors such as sovereign wealth funds, pension funds, and insurance companies have increasing interest in infrastructure as an asset, but current policy fails to encourage this mechanism (Yoshino, Helble and Abidhadjaev, 2018[6]). Investor regulation is deemed to be one of the primary constraints. The market for securities is also generally at an early stage of development in many countries.
Table 2.1. Infrastructure project with private sector participation (by region), 2010-19
Note: Not all projects have data on investment level and/or private ownership. Average private ownership only considers projects for which data are available. The years refer to financial closure years listed in the World Bank PPI Database.
Source: World Bank PPI Database.
Table 2.2. Infrastructure projects with private sector participation by sector in Emerging Asia, 2010-19
Note: Not all projects have data on investment level. Average private ownership only considers projects for which data are available. The years refer to financial closure years listed in the World Bank PPI Database.
Source: World Bank PPI Database.
The central role of banks creates challenges
The centrality of banks in funding infrastructure poses three challenges: lending duration, volume of loanable capital and community engagement. First, since banks’ loanable funds are largely composed of demand deposits, the tenor of their investments is limited. Second, performance and asset quality ratios demanded of banks in a well-supervised environment limit the volume of loanable capital. Finally, traditional lending by banks gives limited attention to community needs and interests.
Technologies that enable financial intermediation could help narrow the financing gap both directly and indirectly. Such platforms could reach retail investors more efficiently than traditional mechanisms, where the cost of investor entry is high. In its current forms, fundraising through these channels is generally suitable for small-scale infrastructure projects. However, beyond the capital raised, the participation of retail investors in infrastructure finance can be a valuable indicator of the project’s social acceptance and future use.
Highly favourable feedback from participating communities could help attract larger institutional investors. When the general public participates in infrastructure fundraising, it can give rise to a new network of trust within the local community (Davis and Cartwright, 2019[7]). It is further posited that engaging local stakeholders from the start is paramount to secure community support and ensure that key messages are communicated well to residents. The extent of community awareness could also enhance transparency for project disbursements.
Technology-enabled financing platforms empower retail investor base
Technology-enabled financing platforms have grown substantially in the last few years. Since the global financial crisis, these platforms have become a popular choice for small projects that would have had difficulty securing capital from traditional creditors. Moreover, they serve as an alternative investment option for individuals with savings.
Crowdfunding
Crowdfunding is one way for individuals, or participants at large, to pool funds to finance businesses, projects, or other needs of enterprises or other individuals (De Buysere et al., 2012[8]; Jenik, Lyman and Nava, 2017[9]). Crowdfunding can take the form of debt, equity, royalty, reward, or donation. However, in some instances, it refers to equity sales to distinguish it from peer-to-peer lending. The online alternative finance market volume in the Asia-Pacific region has grown by a factor of more than 15 since 2014 to more than EUR 320 billion in 2017. This dwarfs the volume in Europe and the Americas. The People’s Republic of China (hereafter “China”) accounted for over 99% of the total volume in the Asia-Pacific region (Ziegler et al., 2019[10]).
In crowdfunding, fundraising mainly involves the investor, the capital recipient or the borrower, and the marketplace platform (Figure 2.1). The link between the investor and the capital recipient is more direct compared to the banking system (Box 2.1). Crowdfunding instruments can either be equity, debt or loan, or donation. In lending transactions (also called peer-to-peer lending), loan originators are also part of the equation; in many cases, they are akin to mortgage brokers. The loan originator can be a bank or a non-bank financial institution that seeks out borrowers willing and eligible to raise funds in the marketplace. The loan originators are effectively sellers of the loans. However, unlike in bank lending, the investors are the ones bearing the direct credit risk. At most, buyback guarantees are made available in certain cases, wherein the originator covers or buys the loan in the event of non-payment by the borrower. To facilitate mutual understanding, the platforms set the rules of engagement. They also release the project information of the proponents (for equity and donation), provide credit risk assessment to investors (for loans) and facilitate payment, clearing and settlement. There are platforms that also provide access to a secondary market. This allows investors to dispose of their assets subject to regulations governing the platform – even before the date of maturity in the case of loans.
Figure 2.1. Basic crowdfunding model (simplified representation)
Source: Authors.
Box 2.1. Traditional bank lending
Banks’ lending operations are generally funded by short-term deposits (Figure 2.2). In certain countries in Asia, banks offer their depositors an interest on their deposits to incentivise placements. Deposit insurance is also used to protect the depositors to some degree in case of a bank run. On the other hand, lending rates are charged by banks on borrowers. To mitigate risk taking, the central bank typically imposes a reserve requirement ratio that sets the amount of deposit reserves that banks should maintain in a fractional reserve system. This is accompanied by other mandated ratios to safeguard banking stability. Another key feature of the traditional banking system is the clear division between banks’ deposit-taking and lending operations. This places depositors outside of the banks’ lending decisions; thus depositors cannot dictate to banks who can receive loans. The system also does not give the depositors readily available access to the information pertaining to the banks’ borrowing clients and their activities.
Figure 2.2. Bank lending model (simplified representation)
Source: Authors.
Crowdfunding is somewhat similar to the traditional securities markets, such as those for equities and bonds (Figure 2.3). One of the key differences between the two is the cost of entry to participate directly in the primary market activity. Crowdfunding platforms make it easier for small projects or businesses to enter into the marketplace compared to the traditional securities markets, despite the initiatives of the latter to broaden their portfolio of non-large enterprises. Crowdfunding marketplaces customarily have lower investor entry cost than traditional securities markets, albeit online securities trading platforms for retail investors have proliferated. Additionally, the investors know of specific projects as opposed to general corporate needs in the traditional securities markets; recent innovations such as infrastructure bonds might be an exception. Effectively, in equity share or civic project donation crowdfunding campaigns, investor participation indicates the degree of community approval, if not support. The credit risk assessment practices are also different. While in the traditional securities market external parties take part in the risk assessment (e.g. underwriting institutions), crowdfunding risk assessment is done by the platform. It is an internal process similar to bank lending risk evaluation, although it may differ in the details of the assessment.
Figure 2.3. Basic equity and bonds market model (simplified representation)
Source: Authors.
Tokenisation
Tokenisation through blockchain carries promise in complementing, if not advancing, the manner of crowdfunding (Box 2.2).2 Coin or token offerings attracted almost USD 20 billion in capital globally in 2018, up from less than USD 1 million in 2013 (Strategy&, 2019[11]). Total cryptocurrency market capitalisation stood at around USD 200 billion in December 2019 (CoinMarketCap, 2019[12]), although it breached the USD 800 billion threshold in January 2018. Fraud and speculation may have dented the growth in fundraising through coin offerings following a strong 2017; however, the concept of tokenisation can still potentially raise capital for infrastructure either through debt or equity (OECD, 2019[13]).
In essence, tokenisation means less reliance on traditional intermediaries in the flow of funding. After government-issued funds (fiat money) are converted into tokens, payment, clearing and settlement would no longer pass through banks, custodians and clearinghouses. This lowers the cost and financial barriers to investor participation (Uzsoki, 2019[14]). At the same time, relative to crowdfunding, decoupling the ledger of assets from the platform reduces the market power of these intermediaries (Roth, Schär and Schöpfer, 2019[15]). Singapore, the United States and the United Kingdom – being the global financial centres – lead in fundraising by geographic jurisdiction (ICObench, 2019[16]).
Box 2.2. Crowdfunding, tokens and project financing
Crowdfunding can be categorised in two ways, depending on the type of return offered to investors. Financial return-oriented crowdfunding pertains to equity sales that offer possibility of dividends, capital gains from resale in the secondary online market; and to peer-to-peer lending with a pre-set interest rate and tenor. Non-financial return-oriented crowdfunding pertains to donations and capital raising in exchange for non-financial rewards (e.g. publicising names of donors or giving out tokens of appreciation). The latter is usually associated with community-led or civic initiatives. In these cases, crowdfunding becomes a tool to gauge the sentiment of community members about the project.
In a way, fundraising through blockchain is a tokenised version of crowdfunding. Blockchain technology-based projects generally offer utility or financial security through tokens to raise financing. Utility tokens, largely issued through initial coin offerings (ICOs) and initial exchange offerings (IEOs), give investors access to protocols or applications. On the other hand, security tokens can take the form of equity in a project, ownership in a certain type of asset like real estate or commodity, or debt. In recent years, this type of equity has been mainly distributed through security token offerings (STOs).
The origins of ICOs can be traced back to 2013 with the issuance of Mastercoin or Omni Layer (Lahajnar and Rožanec, 2018[17]). ICO fundraising has picked up since then, particularly in 2017, though the sentiment has subsided and oscillated since then. Between February 2014 and October 2018, the cumulative value of ICOs rose by over a factor of 12 500 to over USD 22 billion (CoinDesk, 2019[18]). The number of ICOs and the average amount of capital raised per ICO increased sharply during this period. ICOs cover mainly utility tokens, though there are grey area cases (i.e. difficulty in distinguishing whether a token is for utility or an asset). Utility tokens are viewed as a way for start-ups to take advantage of relatively lighter regulations to raise funds. This is because ICO placements may not be classified as investments, but as donations (Ante and Fiedler, 2019[19]).
Security tokens were first offered in 2017, when Blockchain Capital tokenised its investment fund (Newtown Partners, 2019[20]). Broadly, this category includes the financial rights to instruments such as equity, debt and dividends, as well as rights to profit sharing, voting and buyback. Identifying asset categories had been contentious in the past, owing to implications on regulatory compliance. It took an investigation from the US Securities Commission to declare the tokens issued by The Dao as securities (US SEC, 2017[21]). However, as failures hound ICOs, regulatory oversight became an attractive feature of STOs’ credibility. The underlying blockchain technology in STOs is noted for transparency and pseudo-anonymity; transactions and ownership are broadcast to the network (Ante and Fiedler, 2019[19]). Cumulative fundraising has risen by more than a factor of 30 to over USD 330 million since the Blockchain Capital issuance (Newtown Partners, 2019[20]).
Meanwhile, IEO was introduced to the market in late 2017. In IEO, a crypto-centralised exchange platform conducts an ICO on the exchange as opposed to on the issuer’s platform. This mode essentially merges the fundraising and listing process, interposing the exchanges between the token issuer and the investors. IEOs effectively re-introduced centralisation in the vetting process, where exchanges serve as evaluators of projects. While relatively nascent compared to traditional ICOs and STOs, capital raising through IEOs gained considerable momentum in 2019 (Strategy&, 2019[11]). In the first half of 2019, IEO projects collected more than USD 1.6 billion (Inwara, 2019[22]).
From the above snapshot, the market is leaning towards a more reassuring system that considers the extent of information asymmetry. Myalo and Glukhov (2019[23]) provide a useful comparison of these modes. Nonetheless, failures still happen, including those already listed in exchanges. Indeed, exchanges themselves crash. With this backdrop, governments in Asia are fast-tracking regulations pertaining to digital coins. Understandably, the coverage and tightness of these regulations vary in many respects across countries. China, Hong Kong (China), Korea, the Philippines, Singapore and Thailand, among others, have released new regulatory guidelines (Lewis and Cheng, 2019[24]; Ezquer, 2020[25]). A number of outstanding regulatory issues remain, pertaining to listing, trading, custody, post-trading and fraud clearance (Deloitte, 2019[26]). Since digital coins involve cross-border transactions, collaboration in the delivery of regulations is vital.
Tokenisation in the context of infrastructure divides the value of assets or the underlying securities (debt or equity) into smaller parcels before they are offered to potential investors. The basic set-up is depicted by Figure 2.4. The tokens come in digital format to represent a claim on the physical asset or security. They are launched on blockchains guided by the terms of the smart contracts. The smart contracts backstop the creation of the tokens and outline their characteristics. The newly created digital tokens are usually purchased with another token, typically that of the host blockchain. The Ethereum ecosystem, for instance, is a commonly used launchpad for the new tokens wherein ether is used as the native token. Notably, tokens can also be exchanged for either another token or fiat currency (where the legal system permits) in token exchanges. Custody of tokens is either through a hard wallet or digital wallets built into the trading exchange, host blockchain or a third party service provider. Blockchain applications such as tokenisation are deemed to foster liquidity in an asset market that is customarily illiquid, such as real estate (Smith et al., 2019[27]). Moreover, tokens carry relatively lower transaction costs than traditional securities; their digital nature makes their usage more efficient, while blockchain technology enhances transparency (Uzsoki, 2019[14]). Much like crowdfunding, tokenisation of assets or projects also directly involves participating investors.
Figure 2.4. Basic tokenisation model (simplified representation)
Source: Authors.
Risk assessment
The adequacy of risk assessment, particularly for large transactions like infrastructure projects, is a key consideration in promoting alternative finance. Infrastructure as an asset typically has substantial upside. However, the experience of banks in India indicates it can also be a drag on the balance sheet of lenders if vetting is weak. Based on the Indian central bank’s data, the stressed advances ratio of banks to the infrastructure sector rose to over 22% in March 2018, before falling to slightly less than 18% in March 2019 (RBI, 2019[28]). The participation of local government in raising capital through alternative finance platforms demands a sound framework. This can mitigate the accumulation of contingent liabilities on the part of national governments. The existence and depth of secondary markets for transactions coursed through alternative channels is another important factor to exploit in broadening the use of these platforms in an effective manner.
Private projects are getting a boost from alternative platforms
The variety of projects financed through crowdfunding and blockchain tokens is quite extensive. Crowdfunding has supported projects in agriculture, arts, health, fashion, retail goods, comics, technology, etc. (Gałkiewicz and Gałkiewicz, 2018[29]; Huang et al., 2018[30]). Capital inflow from coin offerings is spread across similar domains. This is the case despite the heavy concentration of funding in digital platforms and digital infrastructure related to finance and business services in 2018 (ICObench, 2019[16]).
Private real estate
Crowdfunding is emerging as one of the key sources of debt funding for private real estate developments in the Asia-Pacific region (PWC and Urban Land Institute, 2018[31]). Figure 2.5 shows a trend of growth in this market. Crowdfunding also expands access to investment opportunities in commercial real estate. In the past, real estate investment was almost entirely residential, often the home the investor lived in. Real estate crowdfunding lowers the cost of entry into the real estate market. People previously unable to invest in real estate due to the high initial costs will now be able to do so.
The region has also launched tokens that give direct interest in property projects and to those linked to real estate investment trust funds (REITs). The investment market for real estate – which, as described by Don et al. (2019[32]), is immense but dominated by a closed network of firms and hampered by transactional friction and opacity – is poised to extract gains from tokenisation. Most campaigns for durable capital outlays, including those related to utilities, are for private projects and partly for community-driven or civic projects.
Tokenisation of real estate assets is particularly being pushed in developed economies. An example of this is Aspen coin, which was issued to sell equity of an already operational St. Regis Aspen Resort in Colorado (Carroll, 2018[33]; Kennelly, 2018[34]). Investors in the resort had to be accredited and meet the minimum level of investment. In 2018, an apartment in New York was also tokenised to offer fractional ownership to the project (Wolfson, 2018[35]; Zhao, 2018[36]). Ownership in a South Carolina student housing complex was being partially tokenised in 2018 through a REIT; however, the deal broke down due to disagreements (Young, 2018[37]; Marek, 2019[38]). Meanwhile, the United Kingdom rolled out its first real-estate-backed STO in October 2019 (Bloomberg, 2019[39]); this is estimated to tokenise USD 640 million worth of projects over the next few years.
Figure 2.5. Global real estate crowdfunding market size
Source: Global Real Estate Crowdfunding (adopted from EY, March (2019[40])).
Energy, parks and transport
Apart from real estate, fundraising through alternative financial platforms has supported projects related to power supply, water management, parks, roads and bicycle lanes, among others. Specialised platforms also link investors and specific undertakings (e.g. solar energy projects). WeShareSolar facilitates crowdfunding for solar energy projects by investing in solar shares in the Netherlands (Smart City Embassy, n.d.[41]). Citizenergy provides an avenue for cross-border investment in sustainable energy projects; most of its funded campaigns are in the European Union and partly in Africa (Citizenergy, n.d.[42]).
InfraShares is a US-based platform similar to Citizenergy, but with a wider target coverage. This includes roads, bridges, airports, schools and mass transit, in addition to water systems and renewable energy (InfraShares, n.d.[43]). The portfolio of projects, however, is still limited to one successful campaign to date: Matrix Materials Working Capital Loan for Fairfax County Pilot Projects. Matrix Materials Inc., an Australian firm, secured a loan for USD 40 000 through InfraShares. It was intended to jumpstart the road paving projects in Fairfax County, Virginia, using waste materials. The loan has a tenor of six months and carries an interest rate of 6%.
In 2019, over 1 000 people crowdfunded to buy an 800-hectare plot of wilderness that was being sold by its private owner in Princess Louisa Inlet, British Columbia, Canada. The land is rich in mature conifers and was likely to be sold to a logging firm. However, thanks to the charitable efforts of the BC Parks Foundation, the participants met the CAD 3 million asking price. The wilderness will be retained first as private land, and eventually integrated into neighbouring Crown (government) land as a provincial park. A private entrepreneur provided the final CAD 100 000 to meet the goal on the final day of the crowdfunding campaign.
Crowdfunding for transport infrastructure and real estate
Crowdfunding and tokenisation remain marginal as methods to finance public infrastructure. They are mainly used for last-mile needs and are largely based on donations. Nonetheless, progress in using alternative financing schemes to develop transport power, water projects, and real estate could set the stage for broader usage of these platforms in general public infrastructure financing in the coming years. The United States hosts most of the current instances of these practices.
Mini-bonds for general infrastructure
The city of Denver, Colorado, has partly financed public infrastructure through crowdfunding (Gasparro, 2015[44]). Mini-bonds were floated to supplement the general infrastructure fund in 2014 (Box 2.3). The debt papers were rated and sold to Colorado residents, although they cannot be traded. The USD 550 million campaign, run via the city’s website, achieved its aim of collecting 2% (USD 12 million) through crowdfunding. About 1 000 individuals invested. The mini-bonds, sold at USD 500 each, had tenors of 9 and 14 years and were rated Aaa by Moody’s. The municipal bond float was intended to respond to the tightening of banking and financial market regulations. Over 300 public-focused projects were funded through the Better Denver programme, which include restoring buildings and constructing recreational centres.
Box 2.3. Crowdfunding mini-bonds
Mini-bonds are debt instruments that offer smaller increments compared to traditional bonds. They allow the issuers to directly tap investors, typically retail investors, for a pre-established fixed rate of return and tenor. They are usually issued by small companies, start-ups or enterprises having difficulty securing funds from institutional investors and traditional channels. In some cases, mini-bonds can be viewed as a parcelled version of municipal bonds or mini-bond (Fu, 2016[45]). Mini-bonds are typically issued by sub-national governmental entities for everyday obligations and for projects such as school buildings, sewer systems and highways (US SEC, 2012[46]). Mini-bonds tend to offer high returns considering the much higher investment risks (FCA, 2019[47]). Crowdfunding has become a staple mode to sell mini-bonds in recent years. Even in countries such as the United Kingdom, however, regulations are still catching up (King, 2016[48]). The increasing popularity of the debt paper coupled with perceived opaqueness and high-level of risk has prompted the UK Financial Conduct Authority to ban mass marketing of speculative mini-bonds to retail consumers, effective January 2020 (FCA, 2019[49]).
Crowdfunding for bicycle lanes
In 2014, Denver resorted to donation crowdfunding to generate last-mile financing for the construction of bicycle lanes in the downtown area. The Arapahoe initiative, crowdfunded through the Ioby platform, responds to a plan announced in 2007 to create bicycle facilities and enhance the downtown area. The crowdfunding exceeded its target of USD 35 000, corresponding to more than 22% of the total funding target of USD 155 000. Approximately USD 120 000 was secured from traditional investment. The protected bicycle lane network will be expanded in phases to accommodate the increase in the number of cyclists and to enhance their safety. Beyond the financial windfall, the crowdfunding serves as a barometer of the community’s sentiment towards the project (Gasparro, 2015[44]).
The same strategy was employed in the earlier construction of bicycle lanes in Memphis (the Hampline project). The project aimed to bolster activity in the downtown area, which had become lethargic over the years, and to improve its image as a city for bicyclists (Ioby, 2014[50]). The funding exercise in 2013 set a target of USD 4.5 million. Proponents resorted to crowdfunding, partly through the Ioby platform, to fill the remaining gap of more than USD 68 000. They managed to surpass the crowdfunding threshold after a few weeks, attracting donations from over 700 people.
In Boston, Massachusetts, a private citizen crowdfunded nearly USD 7 000 from 180 donors to place potted flowers and traffic cones in the buffer zone of an unprotected bike lane. Shortly after the flowers and cones were put in place, the city added flexible posts, offering protection for riders from vehicular traffic. While city authorities did not cite the private campaign as the catalyst for their action, coverage of the events in The Boston Globe implied the municipal government was responding to the campaign. A similar project in a portion of San Francisco, California, on the Tilt crowdfunding platform raised just over USD 900 around the same time for makeshift flexible posts. The city agreed to leave them in place until it could add official ones.
Crowd support inspires local government to finance pedestrian bridge
In the Netherlands, I Make Rotterdam used crowdfunding to finance the construction of the 400-metre long Luchtsingel pedestrian bridge in Rotterdam in 2011 (AIA and Massolution, 2013[51]). Deemed by De Voldere and Zeqo (2017[52]) to be the first crowdfunded public infrastructure project in the world, the project raised approximately EUR 100 000 (Max Borka, 2020[53]). In return, the names of the donors who contributed at least EUR 25 were etched on the planks used to construct the bridge. More than 8 000 planks were sold during the fundraising campaign. Akin to the bicycle lane project in Memphis, Tennessee, the crowdfunding outcome became a measure of public support for the project. It was deemed to have helped convince the local government to fund the bulk of the project cost amounting to EUR 4 million, paving the way for completion of the project in the summer of 2015 (The Urban Web, 2016[54]).
Crowdfunding and debt to establish solar farms
A town in the southwest of England (United Kingdom) also resorted to crowdfunding to bankroll the establishment of solar farms. The Swindon Borough Council’s campaign, which offered tax-free interest-earning debt, attracted about GBP 1.8 million in five months through the Abundance Investment platform (Davis and Cartwright, 2019[7]). The crowd investment supplemented the Council’s own outlay of about GBP 3 million. The project was in line with the town’s objective of shifting towards renewable energy.
For its part, the local government of London launched “Crowdfund London” in 2014 for various projects (London Government, 2019[55]). As of this writing, total pledges have amounted to about GBP 4 million. Of this amount, GBP 1.8 million came from the mayor’s office and GBP 2.2 million came from the crowd. More than 100 projects had successful campaigns. These include construction and refurbishment of markets, community kitchens, public spaces, gardens and parks, community centres, village halls and small bridges, among others.
Digital infrastructure financing for water-related projects: Case studies
Digital financing based on Fintech and blockchain is already applied to support water-related infrastructure. The following case studies describe such projects – both government and civic initiated – recently implemented in Asia and OECD countries.
The Pitak Project
Site: Tubao, la Union, Northern Philippines
Components: Purchasing and installation of a solar-powered deep well pump, water storage, and distribution system
Total amount: USD 14 000 (approximate)
Execution: FREZITE
The Pitak Project, a civic/community-driven project led by women, promoted sustainable and regenerative living in the municipality of Tubao, in part through natural building and permaculture. This involved independence from both electricity and water grids. As the community water supply was unreliable, the project envisioned a solar-powered deep well to draw water for both immediate use and storage. To obtain this equipment, the project partnered with a supplier and initiated a crowdfunding campaign. Between 2 March and 16 April 2015, it raised USD 14 211 – 108% of the USD 13 121 target.
Two major success factors were transparency and promotion.
Transparency: While “Earth care” is a widespread concern that generates large amounts of both activism and action, permaculture itself is a niche interest. The blog post announcing the campaign was concise (under 1 000 words), but dense with information. It addressed the philosophy of permaculture, and the purpose and precise needs of the project. It outlined steps already taken and where financial assistance was needed. Costs were itemised at the component level, giving donors a transparent view of goal setting and fund allocation. It included a plan for using excess donations of USD 3 192 to buy a tilling machine. This may have also assured donors, but its impact is unclear as the campaign did not reach the level of excess donations.
Promotion: The campaign went beyond the project blog, and was shared with other outlets with similar interests. These included permaculture or alternative agriculture; Earth care; and poverty alleviation, especially among marginalised groups. Also, niche celebrities made videos to endorse the campaign. These promotion efforts allowed the campaign to increase the pool of potential donors beyond word-of-mouth. At the same time, they could target donors more likely to be interested than the general population, or even the population of those willing to support crowdfunding campaigns as a whole.
Water purification
Site: Branson, Colorado, United States
Components: Purchasing and installation of water filtration system
Total amount: USD 100 000 (crowdfunding and grants)
Execution: Innovative Water Technologies
In Branson, Colorado, crowdfunding was used to install a water purification system. This remote community (population 55 in 2019) is close to several springs, so a pump-free water system feeds the town and nearby agricultural land. However, the springs were deemed at risk of surface water contamination, requiring changes. Despite the need for regulatory compliance, the state government did not make traditional funding available (Simpson, 2019[56]). Consequently, Branson sought alternative finance.
The town partnered with a company specialising in filtration on small projects, which provided the system with USD 76 000. Donations ranging from USD 10 to USD 5 000 came from locals, other American residents and community organisations. Media coverage even mentioned a donation from a Branson native living in England (United Kingdom).
The campaign raised under one-third of its USD 100 000 goal. However, the effort, along with the decision to power the system off-grid using solar and wind energy, qualified the project for several government grants to cover the shortfall. In awarding the grants, authorities noted the crowdfunding aspect of the project met or exceeded the matching contribution required, and also made the project more attractive to decision makers.
This is a critical example of how crowdfunding, albeit secondarily, can signal local desire to stimulate political will for a project. It may serve as a model for other infrastructure projects in communities that feel neglected politically (though this may not actually be the case) and are likely facing more imminent needs for development.
Improving water quality in an Aboriginal community
Site: Buttah Windee, Mid-West Region, West Australia, Australia
Components: Purchasing and installation of a solar photovoltaic panel-powered hygroscopic water collection system, storage and distribution. Funds diverted to reverse-osmosis water purification system after donation
Total amount: AUD 26 000 (Australian dollar)
Execution: Zero Mass Water
In Buttah Windee, Australia, a crowdfunded water infrastructure project is credited with helping save lives, and also preserving the liberty of a marginalised community. Despite having been on their land for generations, the Aboriginal community in mid-western Australia has only been legally recognised since 1993.
Unsafe levels of uranium in the water supply appeared in 2009 and began to displace the community. Ingestion of uranium has been demonstrated to cause multiple forms of organ damage, or organ failure, as well as to increase the risk of cancers or of producing offspring with birth defects.
The state government considered the problem too costly to fix, offering instead to help the remaining families to resettle. In response, a local couple reached out to a company offering a technology to draw water vapour from air. The technology relies on solar hydropanels. Fans take in air, and an absorbent material extracts water vapour from that air. Solar heat then converts the water vapour into pure liquid water, which is finally mineralised for taste and stored.
The couple started a crowdfunding campaign to bear the costs. However, upon learning about the community’s dire situation, the company donated the solar panels free of charge. The crowdfund, which had reached AUD 26 000, was diverted to fund construction of a reverse-osmosis water treatment plant. This allowed for further expansion of the safe water supply and development of a fish farm. The fish farm, in turn, provides nutrition and employment to the community, along with a source of external income. The community has been able to stay on their ancestral lands, preserving their way of life and traditions. With this in mind, it is reasonable to call the crowdfunding endeavour a success, even if the target amount is unknown, as it was not mentioned by the source. As in other examples, the key to success in this project was a desire or need expressed by the community.
Water for Arubot
Site: Arubot, Kavrepanchok District, Nepal
Components: Pre-feasibility study, feasibility study and implementation
Total amount: THB (Thai baht) 100 000 combined for the studies
Arubot, a village of approximately 400 people located 90 kilometres west of Kathmandu, lacks reliable water supply. The village relies solely on rainfall, although it is located 600 metres from a river. A group of trekkers heard about the difficult situation from members of the village who work as guides. They devised a three-phase plan to help them secure a water supply: a pre-feasibility study, a feasibility study and implementation. In the pre-feasibility study, the group will visit the village to gain an understanding of the water source, water demand, rough geographical estimates and other available resources. They will use this knowledge to develop a short list of potential technologies to solve the issue. A robust feasibility study will develop detailed plans of needed infrastructure such as amounts and types of tanks, pumps and pipes. A cost-benefit analysis will also be undertaken. If the plan meets community approval, the project will proceed to implementation, which will require a second round of fundraising. Non-governmental organisations with relevant expertise will be consulted in all phases of this project. As of 6 March 2020, the crowdfunding on GoGetFunding had raised THB 38 450. The crowdfund owner reported that the site visit for the pre-feasibility study occurred on 28-29 December 2019. (No further updates are available at the time of writing.).
Flint Community Water Lab
Site: Flint, Michigan, United States
Components: Water quality testing laboratory
Total amount: USD 70 000 (USD 35 000 crowdfunded, plus USD 35 000 matching grant)
Execution: Evergreen and Freshwater Future
The Flint water crisis began in spring 2014, when a change in the water source for the city of Flint, Michigan, led to bacterial contamination of the drinking water supply. Further complicating matters, the change of source also led to a change in oversight. The newly appointed officials neglected to include (non-toxic) corrosion inhibitor in the water supply, resulting in the leaching of lead and other toxic metals into the water supply. Many people became either acutely or chronically ill. Twelve deaths are attributed to the crisis, though this number does not include the long-term mortality effects of heavy metal exposure. After trust in public officials was broken, two advocacy groups worked to establish an independent laboratory to test water quality. Following a successful pilot programme in the summer of 2018, the organisations crowdfunded USD 35 000 through Patroncity for a full-scale programme in North Flint, the most-affected area of the city. Local residents would receive job training to operate and staff the laboratory, located in the North Flint community centre. This would allow them to parlay their concern for the community into a career. Water testing would be offered to local residents free of charge (and to others in surrounding areas at a cost). Open House days would allow them to visit and learn about the facility, thereby maintaining transparency. The campaign lasted from 6 May to 1 August 2019. Reaching the goal on 31 July 2019 qualified the project for a matching grant from the Michigan Economic Development Corporation, a PPP. This grant covered the remainder of the cost, which was undisclosed. The laboratory opened in March 2020, and donors of USD 25 or more had their names posted on a wall of the laboratory, either in a general list or with an individual plaque depending on their donation level.
Water Vending Machine
Site: Ngomai, Tanzania
Components: Paid-use water pump
Total amount: EUR 16 000
Execution: A local entrepreneur with Simavi and Ufundiko
In the community of Ngomai, Tanzania, pumps frequently run dry, forcing women to walk for hours to retrieve water that may not be potable, at the expense of their health and education. A local entrepreneur designed a smart water pump that dispenses water for a small, manageable fee from a “water vending machine”. The fee is used to self-finance the maintenance of the pump. The fee is paid by means of coins or tokens that dispense the precise amount to fill a standard water can. A group of local women set the price, and free tokens are distributed to those who cannot afford to pay. This ensures the entire community of approximately 7 000 people benefit from the system. The pump is solar-powered, and excess solar energy stored in batteries allows the pump to provide lighting in the area, protecting the women collecting water after dark. The excess solar energy also allows the pump to play messages recorded by local celebrities that educate the community on health and safety matters. The pump collects accurate data on users and revenues, which are recorded on an online dashboard. This will also notify the community if water is lost to leakage or if the pump is malfunctioning in some way. The entrepreneur trains local workers to make minor repairs to the machine, for which they are paid. People benefitting from this training can also apply their knowledge in other areas, possibly opening up a career path. The fund raised EUR 17 690 in the second half of 2018 on the entrepreneur’s own platform.
Building dams to address water scarcity
Pakistan’s Supreme Court used crowdfunding to help build the Diamer-bhasha and Mohmand dams (Supreme Court of Pakistan, 2019[57]; The Nation, 2019[58]). The construction of the dams, which aims to alleviate water scarcity in the country, is estimated at close to USD 20 billion. The sizeable amount does not augur well with the national government’s austerity measures (Janjua, 2018[59]). Proposed in July 2018, a dam fund, which can be easily tracked by donors on the Supreme Court website, was established to receive proceeds. The website also doubles as a portal for donations. Nearly PKR 11.4 billion (Pakistani rupee), or roughly USD 73.2 million, have been contributed as of 21 November 2019. These contributions have come from both the public and private sectors, including Pakistanis living overseas (The Nation, 2019[58]).
Conclusion
Asia needs more innovative channels to fill its gap in infrastructure funding. In response, alternative mechanisms are emerging that harness digital technologies (Fintech) to fund infrastructure. Such platforms, including crowdfunding and tokenisation, can help transcend the limits of traditional banks, providing a lower entry cost for retail investors. They can also indicate community support, sending a reassuring signal to larger institutional investors.
Fintech has grown substantially in recent years, particularly since the global financial crisis of 2007‑08. Crowdfunding, for example, has become a popular choice for small projects that otherwise would have struggled to secure capital from traditional creditors. It has supported projects related to real estate, power supply, water management, parks, roads and bicycle lanes, among others. Fundraising through blockchain is a tokenised version of crowdfunding. By replacing sensitive data with a random number, tokenisation can enhance security, while relying less on traditional intermediaries like banks. For its part, blockchain technology allows for verification without the need for third parties. Tokenisation through blockchain carries promise in complementing, if not advancing, the manner of crowdfunding.
Despite some success stories, the use of crowdfunding and tokenisation to finance public infrastructure remains marginal. It is mainly for last-mile needs and largely based on donations. Nonetheless, progress in using alternative financing schemes to develop real estate, transport, power and water projects could set the stage for broader usage of these platforms in general public infrastructure financing in the coming years. Continued growth of Fintech will depend on adequacy of risk assessment, especially for large transactions like infrastructure projects. The availability and depth of secondary markets for transactions is another important factor to broaden the use of alternative platforms.
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Notes
← 1. The Dow Jones Brookfield Asia/Pacific Infrastructure Index, MSCI all-country Asia (excluding Japan) Infrastructure Index, S&P Bombay Stock Exchange India Infrastructure Index, Financial Times Stock Exchange–Infrastructure Development Finance Company Limited India Infrastructure Index, Indxx China Infrastructure Index and Shanghai Stock Exchange Infrastructure Index are examples of listed indices.
← 2. Tokenisation replaces sensitive data, such as a credit card number, with a random number to enhance security. Blockchain technology allows for verification without the need for third parties; no single authority has access to data.