Friday, July 3, 2020

Crowd funding as an alternative source of project financing

It is possible that the pace of infrastructural development could have been largely inhibited by the restricted path of funding. Outside funding of infrastructure development projects by financial institutions, a large chunk of development projects are determined by the national budget.

Due to the constrained nature of government’s financial resources a sizeable number of projects are often shelved, which retards the pace of development. Had alternative avenues opened up early on, a more robust and thriving infrastructural landscape would have evolved in Botswana. The Public Private Partnership (PPP) policy was adopted by Parliament in 2009 to serve as an alternative source of financing for large scale projects such as roads, hospitals and schools. PPPs allow for procurement and financing of public infrastructural projects through allocation and use of resources between the public and private sectors. Over time, the benefits of PPPs in Botswana have proven to be illusory as this initiative has never really taken off. But PPPs remain relevant because of the increasing pressure to deliver public services infrastructure to meet the growing demands of communities.

Recently, there has emerged a ‘newer’ form of financing, termed crowd funding. Carlos Chima, Chief Marketing Officer of Realty Africa argues however that crowd funding is not necessarily new as it has been practised within the African community set-up. The difference today, he says, is just the use of the term ‘crowd funding.’ To illustrate his point, Chima gave an example of the University of Botswana (UB), an institution that was initially funded through contributions by Batswana of various items (goats, maize meal and cows) that were translated to monetary value. Crowd funding entails funding a project through monetary contributions pooled from a large number of people. Realty Africa therefore provides an online market place where property developers and investors can interact, the result of which is property developments. On his visit to Botswana, Chima identified property development opportunities which he later said in an interview with Sunday Standard can be exploited through Realty Africa.

“What we offer is an alternative funding approach. Wherein, the developer is able to pitch their idea to the broader community so they can invest in their project. The power of technology enables Batswana to access property development opportunities and alternative funding options,” he said.

Chima said there’s a great deal of interest by the local market to pursue these opportunities. Given that mobilization of resources takes place within an online market, consideration of the risk involved in the flow of funds from investors to property developers is important. Chima explained in that regard that Realty Africa has put measures in place to minimize the risk.

“We do this by using third party independent service providers such as Deloitte to conduct checks on the developer and the viability of the project. We also hold the title deeds through a fiduciary agent to protect the investor. To further enhance investor protection we make use of Barclays Bank’s escrow accounts. What this does is ensure that investor funds cannot be mishandled by both Realty Africa and the developers. This is because escrow accounts must have pre-agreed terms for the funds to be accessed. In addition, we have an independent third party in the form of independent assessors to check the progress of the build and sign off at each stage. Therefore funds are disbursed in tranches,” explained Chima.

He further said returns to investors are determined strictly by the developer, which generally must reflect country risk profile and must be in line with market conditions as demonstrated by the business proposal. The minimum investment amount is US$ 1,000, which however depends on the size of the project. Crowd funding covers any viable property developments which includes cluster homes, eco-lodges, hotels, student housing, gas stations and museums. Chima highlighted that Realty Africa accepts investors’ contributions in their respective currencies, making it the world’s first multi-currency property crowd funding platform.

“What this means is that a developer has three months to raise funding. During this period the funds will be held in an escrow account in currency of origin as long as they are USD, EUR, GBP, ZAR and HKD. In the event that a project is not successful, investors who provided the initial funding will be reimbursed,” he said.

Realty Africa offers alternative funding options for various infrastructural projects in a market where funding limitations, coupled with inadequacies in the national budget and failure of PPPs to take off have resulted in deprivation of communities. Perhaps other forms of funding outside the traditional funding methods should seriously be considered, starting with Realty Africa.

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Sunday Standard June 28 – 4 July

Digital copy of Sunday Standard issue of June 28 - 4 July, 2020.