GUIDELINES

Challenge Funds
A guide based on Sida’s and other actors work using Challenge
Funds in development assistance/as a method for development.

1.
Introduction Table of Contents
The purpose of this note is to encourage the Swedish embas- 1. Introduction
sies and different departments in Sida to understand and con- 1.2. What is a Challenge Fund?
1.3. The rationale behind Challenge Funds
sider the use of challenge funds (CF) as a method to achieve 2. Sida´s work with Challenge Funds
development results. The note gives examples of different kinds 2.1. Demo Environment
of CFs, provides lessons learned from early and on-going pro- 2.2. Innovations Against Poverty
2.3. The Africa Enterprise Challenge Fund
jects, discusses some principles which are essential in setting 3. How to design a Challenge Fund
up and managing such funds and provides practical guidelines 3.1. The purpose
for establishing CFs. Even if this note is focusing on challenge 3.2. Applying different windows
3.3. Who is eligible to apply?
funds set up by donors, this could be a financing mechanism 3.4. Eligibility criteria
for any organization willing to solve a specific problem with 3.5. Selected countries
innovative solutions. Swedish Embassies/Sida could therefore 3.6. Additionality
3.7. Specific targeting
consider, if suitable, supporting a partner country to set up a 3.8. Fund size and donor costs
challenge fund as an alternative to the Embassy. 3.8.1. Fund period
3.8.2. Maximum grant size
3.8.3. Minimum grant
1.2. What is a Challenge Fund? 3.8.4. Repayable loans
A challenge fund is a financing mechanism to allocate (donor) 3.8.5. Cost-sharing
3.9. What are project costs?
funds for specific purposes using competition among organiza-
3.9.1. Dealing with ‘sunk’ costs
tions as the lead principle. A challenge fund invites for proposals 3.9.2. How should costs be calculated?
from companies, organizations and institutions working in a 3.9.3. Cash contributions
3.10. Technical assistance
targeted field to submit project proposals. Challenge funds are 3.11. Number of ‘openings’ per year
always set up to meet specific objectives – such as extending 3.11.1. The application process
financial services to poor people; finding solutions to a specific 3.11.2 Using online applications
3.12. Fund management
health problem in developing countries; as a means of trig- 3.12.1. Management costs
gering investment to certain high-risk markets; to stimulate 3.12.2. Performance based fees
innovation for effective use of water resources, etc. The scope 3.12.3. Investment committees
3.13. Marketing
of using CF for creative problem-solving in development is very 3.14. Avoiding corruption and malpractices
wide. 3.15. Monitoring
Proposals are assessed against transparent and pre-deter- 3.16. Results-analysis and impact assessment
3.17. Systemic impact
mined criteria. Successful applicants must usually match a cer- 4. A potential Sida Grand Challenge Fund?
tain percentage of the grant with own financing. The CF awards 5. Lessons learned from challenge funds
grants to those projects that best meet the objectives of the fund 6. ANNEX 1: Examples of donor funded Challenges Funds
and fulfill various pre-established eligibility criteria.

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 Challenge funds have been applied by donors since the late 2.
1990s and there are a variety of such funds. The management of
challenge funds is usually subcontracted by donors to special-
Sida´s work with
ist organizations through a competitive bidding process. Some Challenge Funds
challenge funds are also used outside development assistance.1 Sida has so far established two challenge funds on its own:
1) Demo Environment which started as a pilot phase 2007 and is
1.3. The rationale behind Challenge Funds currently operating for 2012-13; and
Several factors drive the interest in the donor community for 2) Innovation Against Poverty (IAP) which started in 2011 for
challenge funds: an initial 3-year period. Since 2012, Sida is also co-financing a
• Development assistance tries to engage more actors than in large, multi-donor fund, the Africa Enterprise Challenge Fund
the past, in particular the business community. (AECF). These are described more in detail below.
• Competition is increasingly seen as a method of accomplish-
ing development through triggering a search for smart and
cost-effective solutions.
• Innovation is moving up the development agenda as a means
of solving major societal problems, including poverty and
environmental issues. Innovation lends itself to the challenge
fund concept.
• Challenge funds provide leverage of donor funds by engaging
private capital in matching financing of projects.
• Challenge funds are a mechanism that allows for directly
working with commercial players without creating market
distortions.
• Challenge funds are different from conventional competitive 2.1. Demo Environment started as a pilot project in 2007
bidding processes as CFs seek to provide generic results covering about 40 countries in a phase ending in 2010. After
rather than specific; they focus on a desired outcome or result
a review it was somewhat modified and is currently operat-
but are not prescribing the means of how such results should
ing for the period 2012-13. The objective of the new Demo
be achieved, and they allow several winners.
Environment is to promote sustainable growth and a stronger
business sector in the area of environmental technology that
1.4. W
 ho applies challenge funds in
contributes to better living conditions in selected Sida partner
development cooperation?
countries.Two forms of grants are provided, one for planning
British DFID was a pioneer in setting up challenge funds for
purposes (mainly for a company to explore markets) of up to
development purposes in the late 1990s. The first efforts
SEK 284,000 and one for demonstration projects with a grant
included four CFs for business linkages, financial deepening,
of up to SEK 1,8 million and with a minimum level of SEK 0,5
tourism and civil society. The Consultative Group to Assist the
million. Demo Environment is only open to Swedish Small and
Poorest (CGAP) launched a competitive innovation fund in 2002,
Medium Enterprises (SMEs), NGOs and Swedish public entities
the ProPoor Innovation Challenge, providing grants to micro-
such as authorities and universities. In terms of the demon-
finance organizations for innovative methodologies to deepen
stration grants, the potential customer of the environmental
rural poverty outreach and impact. Australian aid and Canadian
technology in any of the target countries must apply. Demo
aid followed, and USAid is also increasingly engaged in large
Environment is open in seven countries: Botswana, Namibia,
scale challenge funds.
South Africa, India, Indonesia, China and Vietnam. The program
Some of the challenge funds are very large, for example
has been implemented on behalf of Sida by Tillväxtverket since
Grand Challenge Canada, a CF focusing on innovations in health
2007. Demo Environment has a budget of SEK 48 million for the
with a fund of C$ 225 million (SEK 1,5 billion). Others are small,
period 2012-20132.
for example a DFID/ADB fund in Vietnam of USD 3 million (SEK
20 million).
2.2. Innovations Against Poverty was launched in 2011.
Annex 1 provides examples of challenge funds undertaken
The program, which took its inspiration from the Base of the
by UN, DFID, AusAid, USAid, Canadian aid and a less well known
Pyramid concept, functions as a risk-sharing mechanism for
organization as the Mohammed bin Rashid Al Maktoum Foun-
business ventures (commercial companies or market oriented
dation. These examples are far from exhaustive, but included to
organizations) which have a strong potential to reduce poverty,
show a range of different applications.
and which operates in developing countries. There are two

1) Examples of this are found in health (e.g. treatment for cancer); forestry management, education, etc.
2) S
 ee further www.tillvaxtverket.se

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application processes; one for small grants up to EUR 20,000 “AECF has developed rapidly with impressive achievements
and one for large grants EUR 20,000 - 200,000. (SEK 170,000 in the first three years. The Fund management has developed
– 1,7 million). Grants are awarded to the best business plans effective systems for attracting applicants, selecting the best
which meet the criteria of the program. IAP also contains a third business ideas and managing an exciting and diverse portfolio.
element, allowing for guarantees in line with Sida’s guarantee This has been underpinned by an effective investment commit-
programme. The IAP is managed for Sida by a consortia led by tee. The existing portfolio has the potential to deliver significant
Price Waterhouse, who won the management contract through development impact, systemic change and learning.”
an international bidding process. Since the launching, two
rounds of competitions have been concluded. IAP has an initial Nevertheless, the review also had some critical points:
funding of SEK 51 million for 2011-13. IAP has so far not been • The governance body comprising donors and AGRA has not
subject to any independent review3. IAP funded 35 companies its functioned as envisaged, and had drifted into micro-manage-
first 18 months of operations. ment rather than strategic oversight;
• The fund management was considered too risk-avoiding,
partly as a result of insufficient donor understanding of busi-
ness risks;
• There were too few indigenous African entrepreneurs par-
ticipating (versus e.g. multinationals), probably due to the
minimum size of the matching grant.

3.
2.3. The Africa Enterprise Challenge Fund which started op-
How to design a
erations in 2008 provides grants and conditional loans4 to busi- Challenge Fund
nesses who wish to implement innovative, commercial viable, Important design and management issues to be considered in
high impact projects in (sub-Sahara) Africa. The AECF supports setting up a challenge fund are elaborated below:
businesses working in agriculture, financial services, renewable
energy and technologies for adapting to climate change. It also 3.1. The purpose It is critical that the rationale for the CF is
supports initiatives in media and information services where clear and explicit both to justify donor funding and to provide a
they relate to these sectors. AECF has several windows with dif- high degree of transparency in the application and selection
ferent focus, criteria and application rounds, some of which are process. As can be seen in the examples in annex 1, the purpos-
country specific, other that are focused on themes such as agro es of a CFs can vary widely. A leading principle in defining the
businesses. For example, there are windows for South Sudan; purpose of a CF should be that it addresses a key development
Agribusiness Tanzania; Renewable energy; Agribusiness Africa; issue which otherwise is not addressed by market forces, and
and Post-conflict countries. Applications are assessed during also that there is a clear benefit in applying the CF model versus
competitive rounds which each have their own entry criteria. other forms of donor support. CFs tend to be administratively
Grants and repayable loans are provided between USD 250,000 demanding to manage, hence there should be clear advantages
to 1.5 million (SEK 1,7 million – 10 million.) The competition for a CF as compared to other modes of donor support to justify
is open to companies from anywhere in the world provided the costs implied in it. Three generic criteria which should be
the business idea is implemented in Africa. Thus, companies applied in the design are:
might be large multinational corporations. The fund is financed • systemic impact (that there is potential impact beyond the
by AusAid, Danida, DFID, the Netherlands Ministry of Foreign micro level, for example in structural changes in an economy
Affairs and Sida with a total funding of USD 120 million. The fund through innovations or demonstration) ,
is a special partnership between Alliance for a Green Revolution • additionality (it should be clear that the development would not
in Africa (AGRA)5 and the donors. AECF has appointed KPMG as have taken place anyway, for example through market forces
fund manager. Sida’s contribution to the USD 120 million AECF and/or commercial financing); and
is SEK 130 million for the period 2012-20176. • positive externalities (that the positive effects and benefits of
AECF was reviewed in early 2011 after 3 years of operation a project goes beyond what can be captured by a commercial
by independent consultants (Slegtenhorst & Whiteside). By then entity). ‘
investments had been made in 48 projects in 16 countries. The
review concluded that:

3) See further www.sida.se/iap or www.innovationsagainstpoverty.org M  elina and Bill Gates Foundation, Rockefeller Foundation, Millennium Challenge Corporation, etc.,
4) Interest free loans which are repayable when the underlying project is successful (a model which has with the purpose to achieve a food secure and a prosperous Africa through the promotion of rapid,
been used by Sida in the past in different context, and innovated by Swedcorp in early 1990s) sustainable agricultural growth based on smallholder farmers.
5) AGRA is a USD 400 million multi-donor facility with support from DFID, Danida, Sida, FAO, IFAD, IFC, 6) See further www.aecfafrica.org

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3.2. Applying different windows Some large CFs, such as the 3.4. Eligibility criteria in terms of a proven record by a com-
AECF and Grand Challenges Canada, have established different pany or organization, a certain time in existence, a clean legal
windows under their broad purposes in order to tailor the fund and ethical record etc., are general among CFs and necessary in
to specific targets. The advantage with such an approach is that order to reduce risk for fraud, improve the chance the applicants
a CF can be larger, thereby reducing management and transac- have capacity to succeed and to reduce reputation risks for the
tion costs, yet have clear targets in its applications. It can also donor. Common minimum criteria for participation might, for
allow less frequent rounds of competitions for specific purposes example, be that the organization has judiciary form; that it has
if the supply of applications is limited. While a large fund can been in existence for a minimum of 2-3 years, it has audited
reduce the share of management costs, there are, on the other accounts for that period; is not placed in bankruptcy; it has an
hand, issues in governance especially if several funders partici- established CSR policy, not engaged in activities such as arm
pate. AECF is an example of this. production or tobacco, and has a financial position which makes
it likely to be able to sustain a project, etc.

IAP criteria 3.5. Selected countries The geographical areas or countries

that are open for a CF might range from narrow definitions of
1. Clear commercial driver and
only one country to all developing countries. DFID, for example,
potential for commercial viability
has or has had funds specializing on a single country (Ghana,
2. Potential to reach scale Vietnam, and Afghanistan). (Sub-Sahara) Africa tends to be the
3. Managed by a company or a focal point in some CFs, reflecting development needs of the
market oriented organisation continent. Some CFs have a different regional focus on selected
4. Poor people benefit (income, countries and poorer regions in countries, such as the AusAid
products, environment, Enterprise Challenge Fund with nine defined countries in Asia-
opportunities, gender equality) Pacific. The Sawaed Programme is open for 22 countries in the
5. Avoid negative effects (environmental, market Arab League, while the Enterprise Innovation Challenge Fund
distortion) is specialized on the Caribbean. As noted above, the Sida CFs
have different focuses: Demo Environment is focused on seven
6. Clearly defined elements of
partnership countries; IAP focuses on all LDCs and low income
cost-sharing (With the company itself providing at a
countries; and AECF all countries in Sub-Sahara Africa. (Also
minimum 50% - which should not come from other
note that IAP has set up a special window for the MENA region.)
public financing)
CFs specializing on a narrow geographical region or a single
7. Innovative; going beyond what country, have the advantages of a potentially greater impact
exists now, in terms of the product /service, the locally, tend to be more easy to manage and supervise, but run
delivery mechanism/business model and/or market the risk of having too few applications of sufficient quality. The
reach targeting of countries/regions will of course have a bearing on
8. Project would not take place at the same scale or the size of the CF and other criteria.
have the same development impact without IAP
funding 3.6. Additionality The criteria against which applications are
judged and rated must transparent and clear. The IAP criteria
provides a good example of donor rationale, see box. Especially
additionality is a key criteria: a fund that provides grant financ-
3.3. Who is eligible to apply? The criteria for who is eligible to ing to projects which anyway would have taken place through
apply for the CF vary to a great extent among existing CFs. Thus private capital has wasted its resources. Additionality is often
there are CFs open only to for-profit private companies, such linked to risk, i.e. a private company would not engage in the
as the AECF, while Sida’s IAP allows both companies and other project alone due to high perceived risk. The willingness of a CF
organizations with a commercial orientation to apply. There to take risks tends therefore to be a key issue of the develop-
are examples of CFs only for NGOs. Some CFs allow only own ment performance of a CF. Development effects are of course
country organizations to apply (such as Sida’s Demo Environ- the main rationale for a CF where potential for systemic impact
ment and some smaller DFID CFs as indicated in the annex 1), and positive externalities are generic criteria as mentioned
while for example IAP and AECF are open to applicants globally. above.
In some CFs, applicants residing in developed countries are
eligible to participate, but are obliged to spend a certain share of
the funds in the targeted developing country for the CF.

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3.7. Specific targeting Some CFs define specific targeted There is nothing to prevent also smaller grants within rea-
challenges within the overall framework of the CF for a round. sonable transaction costs if the application process and handling
This is, for example the case with the DFID Vietnam fund and of applications are streamlined and simple. There might be a
the Sawaed program (see details in annex 1). Such additional merit for smaller, simple application processes in a CF focusing
targeting adds value in the sense of making applications more on earlier stages in commercial processes where risk often is
easy to compare and rank. perceived as high. As shown in annex 1, the model applied by
USAid’s Development Innovation Ventures is based on a three
3.8. Fund size and donor costs There are two key types of stage process with at least in theory small support from early
costs involved in a challenge fund for a donor: 1) the total feasibility to large scale support for the global distribution of a
amount which will be provided as awards over the time of the specific project or idea. In the review of the AECF it was conclud-
fund; and 2) the management cost of the CF, including market- ed that a high lower limit (in this case USD 250,000) might favor
ing, cost of an independent investment committee, a potential multinational companies and discourage indigenous African
independent monitoring and/or evaluation team, etc. As noted entrepreneurs (due to the required matching funding).
in the examples in annex 1 the total budgets vary from about
SEK 20 million to SEK 1,5 billion. DFID had in its earlier CFs 3.8.4. Repayable loans The CF might not only provide outright
budgets of about GP 15 million (or SEK 150 million). grants, but also other forms of contributions. Repayable loans
meaning that a loan is due to be repaid only if a project is com-
3.8.1. Fund period For practical reasons, CFs are limited in mercially successful, otherwise it is written off, is one model ap-
time, for example they will be operating for 3 years with a plied by the AECF. While such a model is administratively more
specific number of challenge rounds. There is nothing to prevent complicated that a grant, and might have a ‘perverse incentive’
a fund to be extended in time (possibly requiring additional fund- (as an applicant might have an incentive to show failure), it adds
ing). donor leverage (in the sense that a donor budget can support
more projects). The conditional loan has also a value in a sense
3.8.2. Maximum grant size Challenge funds undertaken by of making commercial risk-taking explicit.
DFID, AusAid and USAid award grants of up to USD 1,5 million
(about SEK 10 million) per project, and even more as is the case 3.8.5. Cost-sharing All business oriented CFs apply a cost-
in one of USAid’s CFs which in a three stage process can provide sharing formula, most of those included in annex 1 stipulate
a grants of up to USD 15 million for a project ( see annex 1). that the applicants must provide at least 50% of the ‘project
Sida applies a much more restrictive upper limit of EUR 200,000 cost’ from own resources. There are variations, however, includ-
(appr. SEK 1,8 million) in both the IAP and Demo Environ- ing up to 80% funding by some CFs (for example the Sawaed
ment, using the formula for allowed limit for public support to fund. In the IAP the degree of cost-sharing is a criteria in the
commercial entities within the EU legal framework. However, competition. In Sida’s Demo Environment there are different
indirectly in Sida’s support to AECF, the upper limit of USD 1,5 criteria applied whether the applicant is a private company
million applies also for EU registered companies. The legal or a public institution with more requirements on the private
aspects are unclear in this respect for EU companies under the company.7 Cost-sharing is applied as it creates commitment by
AECF. A challenge fund is a competition among applicants for the applicant and also provides leveraging of donor funding. An
a specific development objective, hence it could be argued that essential matter to keep in mind is that for example in innova-
there is no more market distortion in a CF than in any competi- tion processes, there tends to be heavy investments required
tive bidding process undertaken by a government authority for a in post-laboratory and trial stages in establishing marketing,
specific project. distribution etc., requiring capital muscles of a company.

3.8.3. Minimum grant sizes are established to reduce unfa-

vorable transaction costs for both parties. There is in general
a high cost involved in managing CFs and in the processing of
a grant whether small or large. The applicants also have an
administrative cost of filling applications, managing a project
and reporting, making too small grants of limited interest. AECF
has a lower limit of USD 250,000 (about SEK 1,7 million) while
Sida’s IAP has no such lower limit and rather encourage smaller
applications through its small grant facility (with EUR 20,000 as
an upper limit). IAP stands out among the examples in annex
1as a CF with an overall small grant level.

7) A private company cannot include own labor as an element in the calculation of own input,
nor include this in the costs covered by the grant.

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 3.9.2. How should costs be calculated? When cost-sharing is
IAP (instructions) required a technical issue is how the applicants’ contributions
Core business costs (e.g. existing staff time, planned should be calculated. Often these costs are provided in-kind,
new staff time, or other costs that are already committed not least inputs of management and professional time. How
to or planned) should such professional time inputs be calculated and at what
External advisory costs (e.g. consultancy support, hourly or weekly rate? If the applicant is providing material and
advisory inputs etc.) factory/office space, how should such costs be enumerated?
Other expenses (travel, workshops etc.) We would A standard rule is that time inputs are calculated pro-rata, i.e.
expect Capital Expenditure to be largely funded by the the real cost to the company. Making it clear and explicit in the
company application process what costs which are eligible and which
are not, how such costs should be calculated, etc., will reduce
uncertainty and transaction costs in the process.

3.9. What are project costs? 3.9.3. Cash contributions A linked question to the one above is
An important question is what are the costs that can be calcu- whether the CF should require a minimum cash contribution as
lated as a basis for an application, i.e. what can be counted as a requirement in the co-financing or not. In some of the funds
a ‘project cost’ and be (part) financed through the grant. In the discussed in annex 1, such a criteria is applied. Cash contribu-
IAP the instruction are fairly open, while in a DFID fund, there is tions might be seen as a sign of commitment by the applicant
a more restrictive list of what cannot be included as indicated to the project and such contributions are also more easy to
below: calculate.

3.9.1. Dealing with ‘sunk’ costs In almost all cases, applicants 3.10. Technical assistance A CF might have a complemen-
have ‘sunk costs’ for a project i.e. investments undertaken prior tary technical assistance component as a means of assisting
to an application, but which are necessary for the project as far applicants in developing business plans, streamlining project
as it has been developed. As a general rule in CFs, sunk costs proposals, or providing general business advice. The IAP has
cannot be included in an application, neither as a part of the an element of this by including a limited number of hours of
applicants matching fund, nor for refunding. Such rules must be business advisory offered to large grant of applicants free of
made explicit in the application process. charge. The Sawaed program has an explicit support to appli-
cants from the fund manager, but also from a predetermined list
DFID fund list of what of business mentors (paid for by the fund). The use of technical
cannot be included: assistance or not, depends to a large extent on the fund. If the
• Land purchase majority of applicants are smaller companies and organizations,
• Property purchase or construction costs a technical assistance window make good sense.
• Major capital expenditure
3.11. Number of ‘openings’ per year A challenge fund must
• Inflation must not be included as a stand alone, sepa-
have specific closing dates for applications. The number of such
rate budget line
rounds varies between the examples in annex 1, but tends to be
• Core costs (both UK and overseas): These are costs
once or twice per annum. A limited number of closings makes
which are not directly related to the implementation of
a CF simpler to administer and might also be justified due to the
the project, e.g. costs for staff and office rent beyond
what can be associated with the project. number of potential applications. It must be recognized that an
application process has several (time-consuming) stages in the
• Contingencies: Unforeseen costs arising during the
announcing – review – supervision process, also a reason for
project implementation will be considered on a case by
case basis and must not be included as a separate item limited number of rounds.
in the budget
3.11.1 The application process Challenge funds are based on
• Depreciation: This is a bookkeeping transaction rather
than an actual cost and must not be included competition, hence require clear and transparent systems for
applying and selecting of winners. Many CFs have a two stages
• Debt Repayment
process in order to reduce administrative costs. Thus, the first
• Design costs, baseline surveys etc.
stage usually requires a simple application (such as a 1-2 page
concept note) from which a short-list is made by the fund (or
an investment committee). The short-listed candidates are then
asked to put in full-fledged applications, often with a business

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plan as a format. Among the full-fledged applications, an invest- and reporting. Secondly, setting up all processes and struc-
ment committee, sometimes including donor representative, tures aslo have a relatively high initial cost (since this is mainly
selects the winners based on the criteria established. a fixed cost it makes the % management fee high for a small
Below is the application and approval process applied in a CF fund) which is not reflected in the current management fees of
operated by the Bill and Melinda Foundation Grand Challenges for example AECF where they have passed this stage. The high
Explorations initiative (see details in annex 1): relative cost in IAP may be explained by the fact that it includes
some technical support to applying companies by the manage-
ment company, and also that IAP - as compared to AECF and
ECF- is small with on the average quite small grants to entre-
preneurs and companies. A designer of a CF might choose in a
competitive bidding process of predetermine the management
cost, or use this is a part of the competition.

3.12.2. Performance based fees Fees can be linked partly to

performance, which is the case in the AECF. Such performance
fees can be related to output (level of grants), performance
indicators established beforehand, annual targets, etc.

3.12.3. Investment committees/external review panels Inde-

3.11.2 Using online applications All documents required for pendent of the fund manager and the donors are often estab-
the application, including eligibility criteria, forms, etc. should lished by the CFs to judge and select among applications. Such
be available online for downloading and preferably also for committees should preferably include specialists in the field
direct electronic submission. It should be taken into account of the fund. Such a committee can also add prestige to a fund,
that there is a trade-off between complicated application forms hence attract more and better applications. The committee must
allowing detailed information for the fund to make decision, base its decisions to be fully independent of both donor and fund
and the appetite for a company to apply, especially for smaller manager on clear criteria and professional judgments. Espe-
grants. Some CFs apply an unorthodox process in application, cially if there is a performance payment to the fund manager,
for example using YouTube videos such as Grand Challenges of independence is critical.
Canada.
3.13. Marketing Challenge funds depend on attracting good
3.12. Fund management Donors often outsource the manage- applications from a wide range of organizations and businesses,
ment of the challenge funds to outside organizations in view of possibly in a global setting, require active marketing to make
the fact that the funds are demanding in administrative resourc- the fund known. Such marketing can be done by donors and by
es. Such outsourcing is normally done through competitive fund managers in combination, and even by using specialized
bidding. In the case of DFID, major UK based consultancy firms marketing agents. Cost for marketing can be considered a man-
such as KPMG, Landon Mills, Coffey International and Nathan agement fee of the CF. Publishing the availability of a CF on a
Associates are fund managers for the various funds. In the two donor’s web-page is not sufficient as the CF normally is targeted
‘Swedish’ CF’s, the IAP was subcontracted to Price Waterhouse at organizations organizations who have no or limited exposure
after a competitive bidding process, while in Demo Environment to these organizations. IAP has applied a ‘road show’ approach
the management has been subcontracted to Tillväxtverket. with some success. A well-developed and easy to find web page
is also a must.
3.12.1. Management costs The cost of management is gener-
ally not transparent in the public information. In the AECF the 3.14. Avoiding corruption and malpractices A CF must have
fund management fee is 20% of the total budget, with 17% of zero tolerance of corruption which should be clearly signaled in
which an additional 3% for AGRA management. In the AusAid publicity materials and contracts. An anonymous fraud reporting
ECF, the management fee, including costs for an independ- procedure for example with button on the website, can reinforce
ent monitoring team and marketing of the fund, is 30% of the such message. The ‘due diligence’ of granted projects and the
total fund over a 6 year period. In the IAP the management fee applicants is a critical procedure to minimize the risk of fraud.
to PwC is about 50% of the total donor funding over a 3 year Minimum standards for accepted applicants which are followed
period. Two more important reasons are that IAP is mostly at- up before a grant is awarded are also a means of reducing risks
tracting young companies as well as NGOs to apply, which are for corruption.
relatively inexperienced, needing a lot of support for contracting

7
3.15. Monitoring Fairly complex systems for M&E tent to be 4.
established for CFs, reflecting both the delegation to external
organizations and that private sector development have their
A potential Sida Grand
own issues. In the AECF an elaborate, hands-on system has Challenge Fund?
evolved. Fund management should have a lead role in monitor- The Challenge fund concept is an innovative and potentially
ing of the CF in the sense of follow up of supported projects, to cost-effective means of development assistance. However, they
the extent these deliver in line with expectations and reasons can be administratively demanding to do right and the CF design
for deviations. Fund management should also have the fiduci- and management is also an ‘art’ in rapid development. In the
ary monitoring responsibility. Monitoring should be seen as an light of that, we propose the following:
integral management tool and need to be complemented by a Establishing a detailed general Sida framework for CFs,
system to assess development impact, cost effectiveness and possibly in the form of a Grand Sida Challenge Fund. The latter
learning. would have different windows where specific ideas and needs
can be applied by departments in Sida and/or the Swedish em-
3.16. Results-analysis and impact assessment A CF should bassies as these emerge. This framework (or Grand CF) would
ultimately not be judged on the applications which are granted provide a common administrative and management structure
awards, but on what the projects achieve in terms of systemic with the purposes of: 1) stimulating the use of CFs in Swedish
development impact with a bearing on poverty (or other over- development assistance; 2) reducing the administrative burden
riding developmental objectives). There is obviously a time lag on designing and implementing CFs; and 3) assuring that that
in this in the sense that the ultimate results will not be available ‘best practices’ are applied and 4) facilitating that there is sys-
until some years after the provision of the grants. Information tem of in-built learning in the use of CFs.
for results analysis should be provided by the fund manage- The framework (or Grand CF) would provide detailed guide-
ment, but the assessment has to be independent. The standard lines and templates for required forms. If the Grand CF model is
evaluation criteria should apply, i.e. relevance (are the funded applied, it could also provide an overall management structure
projects addressing the purpose of the fund?), impact and ef- for running the various windows under it. Such management
fectiveness (what is in fact achieved along the purpose of the would be sub-contracted through a competitive bidding process.
fund?); efficiency, or even better cost-effectiveness (the ratio Another feature of the framework would be provision of
between the donor inputs, including all management costs and technical back-stopping to the specialized CF windows. If the
the value of the achievements), sustainability (if the projects are Grand CF concept is used, such technical support would be an
likely to be self-sustained commercially). The Australian ECF integrated part of the management.
is a good example of CF which has taken impact assessment Ultimately, any embassy or department in Sida, should be
seriously by funding an independent monitoring team parallel free to focus on the development issue for which a CF could be
to the fund management; initiated an independent mid-term used, provide thoughts on criteria and targeting, but not to have
review after 3 years, and also providing public annual reports of to spend considerable time and resources to learn the tech-
the fund. niques and to set up complicated procedures for implementa-
tion.
3.17. Systemic impact CFs are dealing with projects at the ‘mi- To facilitate the process and test the validity of the Frame-
cro-level’. Even if a project is successful both in delivering com- work/Grand CF, your idea on development issues for CFs are
mercial returns to the applicant and development effects at the most welcome.
micro level (such as added employment) this is rarely sufficient
to justify donor funding. CFs must strive for systemic impact,
i.e. a project must have the potential for development impact at 5.
a ‘higher’ society level, preferably at macro level. Examples of
this are that a CF supports an innovative break-through which
Lessons learned from
is replicated by other organizations. Assessing systemic impact challenge funds
can be done both ex-ante and thus influence investment deci-
Key lessons learned from the CFs over the last decade are sum-
sions (what are the likelihood for such systemic impact?) and
marized below:8
ex-post (to what extent has systemic impact occurred?) • CFs have evolved to include a variety of approaches, from
small specialized CFs focusing on a single country (for exam-
ple in Afghanistan , Vietnam and Ghana) or a narrow theme
(such as labor conditions in the garment industry) to large
scale Grand CFs with broad purposes and several funding
windows. Both kinds have been designed recently. There is an

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 argument among CF practioneers that more specialized funds • Sida applies a much more restrictive across-the-board upper
have a merit in the sense of management and professional limit on grants in its ‘own’ funds (Demo Environment and
inputs. On the other hand, a too narrow focus – for example IAP) based on Sida’s interpretation of the EU regulations on
on a single country - might not attract sufficient quality in accepted state support to commercial entities, which other EU
applications. For example a CF promoted by DFID in Ghana members do not apply (such as DFID). The application of the
in the early 2000s had to be closed down prematurely for that EU rules to challenge funds is not fully clear. As the support is
reason. provided in a competitive setting where all market actors are
eligible to participate, an argument could be that EU regula-
• There seems overall to be a positive assessment of the CFs in tions should not apply.
the sense that most of the funded projects are achieving stated
objectives. Additionality (i.e. that the CF is stimulating develop-
ment which otherwise would not have happened) appears to
6.
be satisfactory. However, there is yet little evidence on sys- ANNEX 1: Examples of donor
temic development impact beyond the micro level, i.e. to what funded Challenges Funds
extent the supported projects stimulate structural changes in
the economies with potential impact on poverty. The challenge funds listed below are presented in chronological
order:
• Leverage of private capital through the CFs varies greatly
from 1:1 to 1:4, to a large extent dependent on the size of the Financial Deepening Challenge Fund (FDCF) is one of the first
companies participating. CFs engaging multinationals (such as DFID challenge funds, operating between 1999 and 2007. Its
most of the DFID funds) have overall a much higher leverage purpose was to increase access to finance for poor people in
than those focusing on SMEs. selected countries in Africa and Asia through innovative, com-
mercially viable financial products, including insurance, house
• The focus of the available reviews of CFs so far is more on financing, pensions, etc. It was open to financial institutions,
management issues than impact analysis of underlying including banks and multinational companies on a cost-sharing
projects. To some extent this is due to the time-lag required basis (with at least 50% provided by the applicants). The fund
for projects to mature to allow impact analysis. Some reviews was in total £15 million and grants were provided in the range
highlight significant management issues, for example in the of £ 0,5 million to £ 1 million per project. The fund was open to
AECF and the ECF, both started in 2007-08. all developing countries. A two-step process was involved, first
a short concept note, then a full application. FDCF was one of
• Delegation of fund management to independent organizations DFID’s first challenge funds.
such as consultancy firms through competitive bidding pro- 28 projects in 15 countries were funded. Of these 19 were
cesses appear overall to have worked well to ensure profes- in Africa. The average grant size was £ 0,5 million, and the fund
sional management of the funds; any management issues had a leverage effect of mobilizing £ 56 million in private funds.
seem rather to have emerged in the donors’ role. Most of the companies awarded grants were multinationals
such as Vodaphone; Tata, AIG and Deutche Bank. There are
• Well marketed CFs usually receives a large number of applica- claims by the companies that the projects would not have taken
tions per round of which only a small number can be selected place without the CF due to risk. Of the 29 projects funded, 9
due to funding restrictions. A ratio of 1- 2 awards to 50 applica- achieved high social impact combined with high financial re-
tions seems not uncommon. This requires an efficient mecha-
turns whilst the majority achieved a combination of reasonable
nism for screening applications to minimize transaction costs
social and financial returns according to external assessment.
both for the CF and the applicants. The dual system of an initial
concept followed by fully developed proposals based on short- Examples of project details are provided on web-page.
listing is generally applied. The management of the funds is,
nevertheless, demanding, implying management cost in the Business Linkage Challenge Fund funded by DFID operated
order of 20–50% of the total budget allocation. between 2000 and 2008. It made grants for the development of
business linkages that improve competitiveness and benefitted
• An important rationale for companies to participate in chal- the poor. Linkage projects were eligible for support provided
lenge funding appears to be access to risk-willing capital, that the linkages demonstrate real innovation and help the poor
rather than the access to subsidized or ‘free’ money. Hence for example by transferring skills, information and technology,
repayment might be less of an issue, making alternatives to improving sourcing, product supply and market access. The
grant such as conditional loans of interest in order to increase fund provided grants from £ 50,000 up to £ 1 million. The £ 15
leverage of limited donor funding. million Fund was open to any registered private sector enter-

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prise, as well as to business and civil-society organizations in for fund management. An independent monitoring team was
the UK and selected countries in Africa and the Caribbean. Fund also part of the set-up. 30% of the fund was allocated fund man-
management was undertaken by the Emerging Markets Group. agement, monitoring and marketing costs. The ECF provides
BLCF was also one of the earliest DFID challenge funds. considerable public information through annual reports, a web-
The fund financed 59 projects in agriculture; health care, site and an independent review in 2009, placed on the web. See
manufacturing and tourism in 27 countries in Africa, Asia and further www.enterprisechallengefund.org
the Caribbean; it was claimed to have created 9,000 jobs and ECF was subject for a mid-term review in 2009 conducted by
100,000 indirect jobs. The leverage effect was 1:2 with private the UK based Springfield Centre. While by then 21 projects had
sector investment of about £35 million. Initially open only to been awarded grants, the results of these were yet too early to
SMEs, but later changed. Companies such as Unilever partici- assess according to the review. As a result of this assessment,
pated. The BLCF receives approximately 200 Concept Notes per AusAid concluded that it:
bidding round. The Panel recommends 5-10 per round be al-
lowed to proceed to Full Application, and approves 3–7 of these, “agrees with the review’s recommendations not to invest
i.e. there was a ratio of 1 grant to about 50 applications. any further funds into the current ECF until project impacts are
better known. It will continue to track development impacts of
ProPoor Innovation Challenge (PPIC) is a challenge fund projects through annual impact data provided via its independ-
established by CGAP in 2002. It funded smaller institutions that ent monitoring team and a further independent review (sched-
demonstrate effective models and methodologies for deepening uled for late 2011). AusAID will also explore how support for
poverty outreach and impact, while working toward sustain- challenge funds which have a tighter regional and/or sectorial
ability. The PPIC awards, of up to $50,000 to five institutions focus may provide opportunities to strengthen Australia’s devel-
per round, were to be used for technical assistance and other opment outcomes.”
expenses related to the specific pro-poor program. A parallel
fund was the Rural ProPoor Innovation Challenge in which IFAD In the end of 2011 a second review took place, a report which
joined CGAP. CGAP and IFAD jointly selected the winners based has not yet been made official.9 As of 2012, ECF has 21 projects
on the following criteria: depth of outreach; innovation and effec- in its portfolio and have used the full grant sum of AUS 14,5
tiveness in client identification; delivery methodology; product/ million. About half of the projects are in agro business. ECF’s
service design; and demonstrated commitment to both the annual report 2011 claims employment creation of about 35,000
proposed project and eventual sustainability. Rural innovation directly and with an outreach of 150,000. 15 of the 21 projects
was the particular, although not exclusive, focus of this funding are meeting the established targets. The assessment is that
round. By 2008 PPIC had gone through nine rounds. only 2 projects are poor performers. For the annual report 2011,
see 2011 Annual Report.
The Enterprise Challenge Fund (ECF) was set up in 2007 by
AusAid and focuses on the Asia Pacific region. The Fund was The Food Retail Industry Challenge Fund (FRICH) was set
planned to operate for 6 years with a total allocation of AUSD up in 2007 by DFID and is still ongoing. FRICH aims to improve
20,5 million. It provided matching grants (up to 50%) to com- the lives of these farmers and workers, by increasing Euro-
mercial companies for poverty oriented projects in new markets. pean imports of food from countries north of South Africa and
Grants between AUS 100,000 to AUS 1,5 million were awarded. south of the Sahara. FRICH supports new ideas that connect
The fund was open to nine countries or part of countries in the African farmers with global retailers in innovative business
Asia Pacific region, including Lao, Cambodia, parts of Indonesia partnerships. The fund is managed by the UK consultancy group
and the Philippines, and small island states such as Fiji, Vanauta Nathan Associates. FRICH has so far after 3 rounds supported
and Solomon islands. Any business could apply for funding 11 innovative partnerships, in Kenya, Democratic Republic
providing they legally operate in the country where the business of Congo, Malawi, Rwanda, São Tomé and Principé, Ghana,
project will be implemented. The key criteria for grants were: Uganda, Zimbabwe and Ethiopia. These partnerships focus on
tea, coffee, a chocolate drink, fresh produce, berry fruits, juice/
• Business growth and sustainability of the project. A key criteria smoothies, flowers, tilapia fish and vanilla. The granted projects
is that a supported project can be sustainable within three include large UK partners such as Sainsbury and Marks and
years. Spenser. Projects displayed on the web.
• Increased social and equitable development for project benefi-
ciaries. Enterprise Innovation Challenge Fund (EICF) is a specialized
• Wider systemic impacts including replication, crowding in and fund on the Caribbean region supported by IDB, Canada and
scaling up. DFID in partnership with Caribbean Development Bank. Any
The ECF was outsourced to Coffey International Development private firm or partnership of firms that includes at least one

10
company registered in the Caribbean can apply. International countries under this facility. Through the calls, more than 600
firms can be involved as partners in projects. The firms must applications were submitted and over 60 organizations have al-
have an innovative business idea that meets the challenge and ready been selected for COOPAfrica grants, for a total funding of
have resources available to match the amount requested (be- approximately US$ 3,000,000. Examples of projects are provided
tween USD $100,000 and USD $500,000). There are two stages, on ILO’s web-page.
one for the development of the Project Concept Note and the
other for the preparation of the Innovative Business Project. The Financial Education Fund (FEF) began in 2009 and is still in
Enterprise Innovation Challenge Fund is a matching grant facil- operation. It is designed to support innovations which improve
ity, which provides an opportunity for businesses in the CARIFO- financial literacy to increase access to financial services for the
RUM region to enhance efficiency, productivity and innovative- poor in Sub-Saharan Africa. The fund aims to encourage in-
ness. The EICF-SCI has two distinct means of providing grants novative ideas. Grants of up to £250 000 are awarded. Financial
to firms that are registered in beneficiary countries. Financial education can be delivered through a range of channels, from
support is given to: Clusters and sectors’ value chain to improve those targeting the general public to interventions targeting
their capacity and performance; and to Small and Medium En- smaller groups. However, projects must have the potential to
terprise (SMEs) to improve their competiveness at the regional reach large numbers of people, directly or through multiplying
and global levels through product/service development, innova- factors. The first round was open to eight Sub-Saharan African
tion and diversification. www.competecaribbean.org countries: Botswana, Ghana, Kenya, Namibia, South Africa,
Tanzania, Uganda and Zambia. The FEF awarded grants to 15
Grand Challenges Canada (GCC) In 2008 the Government recipients in eight African countries. The Financial Education
of Canada established the Development Innovation Fund to Fund is conceived as a multi-donor fund with initial start-up
“support the best minds in the world as they search for break- capital from DFID over three years.
throughs in global health and other areas that have the potential
to bring about enduring changes in the lives of the millions of Vietnam Market Participation Challenge Fund was estab-
people in poor countries.” The Government of Canada commit- lished by DFID and ADB in 2009 to operate for two years with a
ted C$225 million over five years to the Fund. It is implemented total fund of USD 3 million. The fund awarded grants for up to
by the non-profit organization Grand Challenges Canada. It 49% of the project cost between USD 30,000 – 250,000. The CF
has the objective of identifying global grand challenges, fund is a part of a larger and longer term Market for the Poor initia-
a global community of researchers and related institutions on tive by ADB and DFID. The fund, open to any company, NGO or
a competitive basis to address them, and support the imple- organization registered in Vietnam, supports innovative projects
mentation/commercialization of the solutions that emerge. benefitting the poor in agriculture, with some specific challenges
It is open to Canadian applicants and applicants from low and in the first round such as ‘increased participation in higher value
middle income countries in different windows. There are two agriculture for exports.’ In its first round it received 200 applica-
basic funding mechanisms; 1) Proof-of-concept proposals with tions, and awarded 12 projects.
grants of up to C$100,000; and 2) scale-up grants of up to C$1
million. Co-funding is required, and for Canadian applicants at The Sawaed Programme is a CF established 2009 and run by
least 30% should be spent in developing countries. There are the Mohammed bin Rashid Al Maktoum Foundation focusing
four windows in GCC, called ‘Stars in global health; Point of care on the Arab world. The CF seeks to support and develop the
diagnosis; Maternal, neonatal and child health; and Non com- capabilities of talented Arab entrepreneurs by awarding non-re-
municable diseases. See further www.grandchallenges.ca fundable grants to regional projects that make a positive contri-
bution to Arab World development. The fund is open to com-
COOP Africa Challenge Fund, operated by ILO with a total fund panies in 22 countries in the Arab league. Each year, Sawaed
of USD 3 million, started in 2008. It is set up to be a demand- addresses a specific regional challenge, inviting participants to
driven program, giving national cooperative movements submit business concepts dedicated to meeting that challenge.
influence on how to invest the funds available. Cooperatives, The will select winning business concepts and will help fund
cooperative apex organizations and other cooperative support these concepts as per certain timelines. An example of such a
agencies from the project countries can apply for a grant in the challenge is “access to high quality online Arabic content and
size of USD 20,000 to USD 50,000. Also smaller projects below ICT resources that support education and learning and which
USD 20,000 can apply for funds throughout the year. Application promote Arab culture.” The Sawaed Programme offers grants to
forms, budget templates etc are available on-line. See further eligible applicants ranging from AED 100,000 to AED 1,000,000
www.ilo.org Since its inception in June 2008, the COOPAfrica (appr. SEK 190,000 to SEK 1,9 million). The applicants must
Challenge Fund has funded about 70 projects in Eastern and provide a minimum of 20% own financing. The fund uses a two
Southern Africa. COOPAfrica held fifth calls for proposals in 8 stage process (concept note and full application) and provides

11
 technical support in filling in application both through the fund Grand Challenges for Development Initiative (GCDI) is a
management and a special mentor program. See further www. new USAid initiated CF, focusing on removing critical barriers
mbrfoundation.ae to development progress and facilitates innovative approaches,
particularly those based in science and technology. It is ‘meta’
The Responsible and Accountable Garment Sector Challenge fund, envisaged to include a series of different CFs. Example of
Fund (RAGS) funded by DFID which started in 2010, supports these is a challenge fund for Powering agriculture. It will focus
projects aimed at improving conditions of vulnerable workers on identifying and overcoming specific, critical barriers to off-
in the ready-made garment production sector. The fund aims grid access to clean energy for agricultural processing, pump-
to benefit workers in low- and lower-middle-income countries ing, and storage in energy poor communities in the developing
in Asia and Sub-Saharan Africa that supply the UK market. The world. The Fund aims to provide USD 25-30 million from several
fund provide matching funds to non-governmental organiza- donors. The Grand Challenges for Development Initiative also
tions, both for-profit and not-for-profit, associated with labor includes a fund called Saving Lives at Birth focusing on mater-
conditions in the garment sector in poorer African and Asian nal and child health. It was launched in 2011 with funding from
countries supplying the UK market. The fund manager is the UK USAid, Norway and DFID. The All Children Reading Grand Chal-
consultancy group Maxwell Stamp. Performance criteria has lenge for Development is another Fund under launching with
been defined as To monitor progress of supported projects and support by World Vision and AusAID.
to gauge their impact, the following ILO Decent Work indicators
will be used to track performance together with other project- Afghanistan Business Innovation Fund www.imurabba.org
specific indicators: (ABIF) is a new private sector investment challenge fund for
Afghanistan financed by DFID, which has committed £4.8 million
• number of workers affected/reached (measured by type of
to incentivise private sector investment that will meet the Fund’s
work and gender of worker)
• percentage of workers receiving at least minimum wage (as strategic objectives. The Fund was launched in October 2011,
defined in the relevant country of intervention) and is due to run for 30 months. ABIF is managed by Landell
• percentage of workers receiving overtime due Mills, an international consultancy firm. The first deadline for
• percentage of workers working more than 60 hours per week submission of concept notes was January 2012, resulting in
• percentage of workplaces audited showing incidence of child more than 350 concept notes against the published eligibility
labour and assessment criteria. After undertaking limited due dili-
RAGS has so far supported 12 projects in Bangladesh, India, gence, the fund arrived at a final shortlist of 13 applicants.
Nepal and Lesotho. See further www.dfid.gov.uk/ragschal-
lengefund An example on a well-established CF not focussing on private
sector development is Grand Challenges Explorations initia-
Development Innovation Ventures (DIV) In 2010 USAID tive, a CF initiated by Bill & Melinda Gates Foundation. Grand
launched the DIV which awards grants to new development Challenges Explorations fosters innovation in global health
solutions, tests them, and helps scale those that are proven research started in 2008. The Bill & Melinda Gates Foundation
successful. The Fund works in three competitive stages: stage has committed $100 million to encourage scientists worldwide
one provide grants of up to USD 100,000 to support proof of to expand the pipeline of ideas to fight our greatest health
concept and feasibility; stage 2 provides grants up to USD 1 challenges. The grant program is open to anyone from any
million for support of transition of innovations to widespread discipline, from student to tenured professor, and from any
adoption throughout one country and/or additional adoption organization – colleges and universities, government laborato-
in other countries; and stage 3 have grants between USD 1-15 ries, research institutions, non-profit organizations and for-profit
million for scaling up proven, successful projects to be main- companies. The initiative uses an accelerated grant-making
streamed around the world or at least throughout a continent. process with short two-page applications and no preliminary
In all stages the principle is competition between projects. DIV data required. Applications are submitted online, and winning
“seeks solutions that are several times more cost effective than grants are chosen approximately 4 months from the submis-
current practice. These ideas do not have to be technological sion deadline. Initial grants of $100,000 are awarded two times
solutions, but also new business models, new processes, or a year. Successful projects have the opportunity to receive a
even novel combinations of tried and true techniques... solutions follow-on grant of up to $1 million. Grants have already been
potential to scale big, to tens of millions of beneficiaries within awarded to 602 researchers from 44 countries. It is currently on
ten years.” The DIV is open to enterprises, universities and other round 9.
organizations globally with US political restrictions. See www.
usaid.gov.div
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