Title: Meeting the challenge: how can enterprise challenge funds be made to work better?
Author: Adam Brain, Nilima Gulrajani and Jonathan Mitchell
An EPS-PEAKS Working Paper
Enterprise challenge funds made a spectacular entrance onto the development landscape with early experiments providing direct support to the private sector in the late 1990s. In the past 15 years a number of donors – principally the Department for International Development (DFID), but also Australia’s Department of Foreign Affairs and Trade (DFAT) and the Swedish International Development Agency (SIDA) – have spent about £850m on this aid modality. A large proportion of this spend has been disbursed through challenge funds in social sectors (such as the massive £355 million Girls Education Challenge) – but our focus here is the type of funds which have private sector grantees that are intended to create jobs and incomes. Specifically, this topic guide seeks to explain:
- the evolution of challenge funds;
- the conceptual rationale for their use;
- their use in practice;
- findings on the effectiveness of challenge funds; and
- how the lessons learned should inform future challenge funds.
The first generation of DFID enterprise challenge funds in the late 1990s were designed to incentivise corporates to establish partnerships with DFID and leverage the corporates’ own resources and local knowledge. A competitive and transparent selection process was adopted to ensure that only the best projects were funded. This also helped protect DFID from charges that it was favouring particular private sector firms with public grant funding. More recently, challenge funds have emphasised innovation and have sought a broader impact than just the individual businesses supported – through inclusive scale-up and replication. These objectives have become an important element of the rationale for using public funds to finance private sector organisations.
In practice, enterprise challenge funds have been used to support diverse projects in a wide variety of areas. Funds can be constructed in many different ways, including a varied focus on geography, sector, management style and the type of assistance provided. Some funds specialise on one geographical area (in some cases just one country), and others focus upon one or more sectors of the economy. The role of the fund manager varies considerably in terms of the intensity of involvement. It can take a “light touch” arrangement, restricted to marketing the fund, managing the selection process and managing the funds. Conversely it can also be much more intensive, such as providing guidance in the writing of applications, and technical support during project implementation. Grant funds can be provided as financial contribution, or be used to cover the expense of technical assistance. Most challenge funds are managed, for a fee, by private sector or NGO entities. To date almost all challenge funds have provided financial contributions matched with some form of financial or in-kind contribution from the grantee.
Our assessment of the impact of challenge funds reveals the dearth of rigorous evaluation of the impact of this modality. In place of proper evaluation are a plethora of reviews which often do not take account of basic evaluation requirements such as an assessment of additionality, attribution or impacts (whether positive or negative) beyond the funded project. As such it is not possible to conclude with any confidence what has been the development impact of the public funds spent through challenge funds. However, there are recent and real signs that the assessment of impact is improving. In terms of monitoring the impact of challenge funds, the DCED Standard is introducing some rigour into the process. In addition, DFID is committing significant resources to the monitoring and evaluation (M&E) of challenge funds.
We conclude this topic guide with suggestions to improve the next generation of challenge funds. We suggest that challenge funds in the future should:
Recognise that poorly designed funds can cause damage to local economies, and adopt a “do no harm” principle;
- Significantly improve monitoring and evaluation of challenge funds, through:
- considering the applicability of the DCED Standard to challenge funds, and in particular the nuanced application of the standard across a programme’s portfolio; and
- selecting priority challenge funds where M&E resources can be best directed to conduct in-depth analyses and generate lessons. This could provide the foundations for a cluster evaluation that would improve understanding of the necessary context and conditions for successful challenge fund implementation, as well as draw comparisons with other aid modalities.
- Recognise that pushing fund manager fees below 20% of the grant value may be a false economy that could constrain the ability of funds to have catalytic effects;
- Consider a broader range of financing options than matching grants; and
- Not be used as a short-cut to good development practice and require strategic frameworks, plausible results chains, results chains and theories of change.
So it seems there are fewer reasons not to answer the fundamental question of whether, and how, challenge funds work. Before long, we may even be able to assess with some confidence how their performance compares to other approaches to stimulating private sector development.
Dr Nilima Gulrajani is Senior Researcher at the Global Economic Governance Programme at the University of Oxford and Visiting Fellow at the London School of Economics and Political Science (LSE).