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Challenge funds are a financing facility for funding projects, typically utilizing public sector funds for international development programs or private sector product and service enhancement.

Challenge funds are often used as ways to address what development partners describe as a Grand Challenge, which is a specific critical barrier that, if removed, would help solve an important health problem in the developing world, with a high likelihood of global impact through widespread implementation.

“a competitive mechanism to allocate financial support to innovative projects, to improve market outcomes with social returns that are higher/more assured than private benefits but with the potential for commercial viability.”

A definition shared by the UK’s Department for International Development (DfID), the Inter-American Development Bank (IADB) and the Canadian International Development Agency (CIDA) describes them as ‘a competitive mechanism to allocate financial support to innovative projects, to improve market outcomes with social returns that are higher/more assured than private benefits, but with the potential for commercial viability’. The Swedish International Development Cooperation Agency (SIDA) defines a challenge fund as ‘a financing mechanism to allocate (donor) funds for specific purposes using competition among organisations as the lead principle’.

The essential elements of a challenge fund are that it: Issues a challenge in the public domain open to all to compete, to bid and achieve; Requires innovation from bidders in meeting their challenge and supports their ideas; Has a governance structure through which decisions are made by an independent panel/committee based on an established set of transparent criteria.

As Irwin and Porteous (2005) observe: ‘In practice, the objective of a challenge fund is to provide the smallest possible financial contribution to a socially worthwhile project consistent with making it less risky and more financially sustainable to the private promoter.’

A challenge fund is a financing mechanism to allocate funds for specific purposes using competition among organizations as lead principle. A challenge fund invites companies, organisations or institutions working in a targeted field to submit their proposals.

Challenge funds are often set up to meet specific objectives – such as extending financial services to people in poverty; finding solutions to a specific health problem in developing countries; as a means of triggering investment to certain high-risk markets; to stimulate innovation for effective use of water resources, etc. The scope of using challenge funds for creative problem- solving in development is very wide and holds considerable potential.

Proposals are assessed against transparent and pre-determined criteria. The challenge fund awards grants to projects that best meet the objectives of the fund. Challenge funds are defined in time, for example they can operate for 3 years with a specific number of challenge rounds. The challenge fund might not only provide outright grants, but also other forms of contributions, such as technical support. Another model of support, used by for example the African Enterprise Challenge Fund (AECF) is repayable loans, meaning that a loan is due to be repaid only if a project is commercially successful, otherwise it is written off. All business oriented challenge funds apply a cost-sharing formula. Cost-sharing is applied as it creates commitment by the applicant as well as risk-sharing. Also, it provides leverage of donor funding.

The most important feature of the challenge fund is the ‘challenge’, which must be widely promoted and have clear eligibility criteria if it is to elicit a wide array of applicants from the private sector. The goal is to produce a large pool of intelligent and unconventional solutions to longstanding problems in development by tapping the ingenuity of private enterprise. Challenge funds call for companies, organisations and institutions working in a specific field to submit project proposals. While the funds are usually set up to meet specific goals – such as extending financial services to the poor, finding solutions to health problems, nurturing investment in high-risk markets, stimulating innovative use of resources, and so on – their applicability in creative problem-solving in developing countries is very wide. Firstly, proposals are evaluated against transparent and pre-determined criteria; successful applicants usually match a percentage of the grant with their own financing; and the challenge fund provides grants to projects that best meet its objectives, while still fulfilling the eligibility criteria.

Key Characteristics

Challenge funds are similar in some respects to other funding instruments, such as direct accountable grants and social venture capital, but there are important differences as shown in Table 1: Features Discretionary grants Challenge-type fund Social venture capital Deal flow Identified by project officers, often from unsolicited approaches Advertised and open to all who qualify Usually solicited via networks Selection mechanism In line with programme Eligibility criteria Competition (in rounds) Eligibility Due diligence Decision-making By donor according to size By panel Investment committee/ board Matching Varies Varies Typically minority share Only. i.e. >1:1 Monitoring Ranges from light touch to quite intensive Ranges from light touch to medium touch Intensive engagement ex post

Challenge funds vary in size: Grand Challenge Canada, which focusses on innovations in health, has a budget of C$225 million while the DfID/Asian Development Bank (ADB) fund in Vietnam is only US$3 million.

Competitive process: at their core challenge funds are an instrument for competitively tendering matching grants. A challenge is issued in the public domain which is open to all who are willing to compete, bid and achieve. Competitive allocation of funds guarantees that only the best projects are funded. Since challenge funds provide once-only funding, winning companies are free to plan their exit strategies – which are clearly defined and time-bound – minimising any anti-competitive effect. • Innovation: challenge funds require innovation from bidders if they are to win support for their ideas. Applicants are invited to submit potentially transformational business plans that can contribute to achieving development objectives. Since an underlying assumption is that innovation carries risk, one of the challenge fund’s main goals is to hedge against loss, promote innovation and, in doing so, to increase access and choice for the poor. • Leverage: challenge funds provide co-financing for successful projects on a grant basis. Successful applicants match a certain percentage of the grant with their own funds. This promotes ownership and commitment, and ensures public funds go further. Partnerships: challenge funds are useful for bringing together partners from the private, public and not-for-profit sectors in a framework of cooperation for mutual benefit. • Local solutions to local problems: challenge funds encourage bidders to develop ideas that provide local solutions to local problems, stimulating ownership and greater innovation.

History

Challenge funds have been widely used in medical and academic research, as well as the social sectors. Some of the first challenge funds were for inner-city regeneration in the UK – the City Challenge, Rural Challenge and Single Regeneration Budget Challenge Funds – launched in the early and mid-1990s. All were built on the need to stress tripartite partnership between the public, private and community sectors. One of the most controversial features of the funds was the distribution of resources according to competitive bidding, rather than socioeconomic indices. DfID pioneered the use of challenge funds in development as a means of engaging the private sector more directly as partners. The UK government, in general, and DfID in particular, saw the funds as an effective and competitive mechanism to persuade the private sector into leveraging DfID’s core funding. According to this view, the private sector is increasingly considered a key partner in finding solutions to poverty reduction. According to Irwin and Porteous (2005), DfID envisaged that challenge funds would provide: • A transparent and competitive process for the allocation of public funds • Local solutions to local problems with responsibility for choice devolved to where the impact would be most felt • An opportunity for capacity building • A stimulus for innovation and risk-taking that also provides motivation to disseminate good practices and promote replicability • A partnership approach that includes co-funding of projects, and sharing of skills and experience.

Eligibility

Eligibility criteria vary from fund to fund. Some, such as AECF, are only open to private companies; some, like Innovation against Poverty (IAP), are open to companies and other entities with a commercial orientation; while others are open only to NGOs. Some funds cater only to own-country organisations, such as SIDA’s Demo Environment and some of DfID’s smaller funds. By contrast, AECF and IAP are open to applicants globally. Some funds allow developed-country companies to apply, but they must spend a percentage of the finance in the fund’s country of operation. Some of the most common eligibility criteria that challenge funds use are: • Proven track record by the company and/or organisation • Proven track record of legal and ethical operations • By-law and at least two or three years in operation • Financial solvency • Audited accounts • Corporate social responsibility policy • Not involved in unethical activities, such as arms production or tobacco.

Effectiveness

&see Coffey and DCED&

Although considerable funding has been allocated through the mechanism of challenge funds, there is little evidence of their long-term effectiveness. As Heinrich (2013) points out, results tend to be anecdotal, focusing more on individual narratives than ultimate impact. The Donor Committee for Enterprise Development (2013) argues that there is no conclusive evidence that challenge funds generate systemic change, and this poses a risk in the future of challenge funds. Evaluations by the Emerging Markets Group and Irwin and Porteous – for the BLCF and FDCF, respectively – found that both funds demonstrated positive results in helping the private sector to overcome the initial risk of projects through the provision of cost-sharing grants. According to Isenman et al (2010), while these evaluations did not rigorously separate correlation from causality, or take full account of the preparation costs of projects that were not approved, the analyses seem reasonable and the results credible. To some extent, all challenge funds should be viewed as investment portfolios, with some specialising in pro-poor innovations. Many such portfolios have been evaluated for financial viability, market impact and/or pro-poor impact, but most evaluations failed to assess them in terms of market segment. It can be argued that this was due to the design of challenge funds.

Example Challenge Funds

Below are a few examples of challenges funds, which are funded by one or more donor agency:

&ACT, Food Trade, Bangladesh, Ghana&

DfID created the Financial Deepening Challenge Fund (FDCF) and the Business Linkages Challenge Fund (BLCF) in 1999 as a means of providing financial support to business. The funds were piloted in East Africa before being rolled out to Southern Africa, South Asia and the Caribbean. Thereafter, other donors recognised that such funds could complement their own approaches. In 2002, the Consultative Group to Assist the Poorest (CGAP) launched the Pro-Poor Innovation Challenge (PPIC) to provide grants to microfinance institutions with innovative methodologies to deepen rural-poverty outreach and impact. AusAID and CIDA soon established funds, and the United States Agency for International Development (USAID) launched large-scale efforts, such as the Public Private Partnership Challenge Fund and the Gender Challenge Fund.

Africa Enterprise Challenge Fund The Africa Enterprise Challenge Fund (AECF) supports profitable ways of raising rural incomes by developing markets for products and services that meet the needs of the rural poor. AECF has an agribusiness window as well as a special window for post-conflict countries.

"Climate Challenge Fund" The Climate Challenge Fund supports communities across Scotland to take action on climate change and move to low carbon living. The Fund supports projects which reduce carbon, are community led and create a legacy of low carbon behaviour assets.

The Climate Challenge Fund has awarded over £61 million of funding to 696 projects in 512 communities across Scotland since its launch in 2008 and is a grant scheme administered within the Sustainable Action Fund.

The Scottish Government remains committed to supporting Scottish communities through the Climate Challenge Fund. In response to growing demand from communities and the quality of applications coming forward, the Minister for Environment and Climate Change increased the budget for 2014-15 from £10.3 million to £11.8 million. The budget for 2015-16 is £10.3 million. A proportion of the funding also supports projects run by and for young people under the Junior Climate Challenge Fund (for young people up to age 21).

"Enterprise Innovation Challenge Fund"

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Emprender Paz Innovation for Peace – Emprender Paz is a Columbian challenge fund promoting and mobilizing private sector contributions to peace-building. The objective is to result in more companies being committed and actively participating in the development of peace-building initiatives as part of their core business.

Enterprise Challenge Fund By July 2012, AusAID’s Enterprise Challenge Fund (ECF) had affected 348,460 poor people, of who 50,053 benefitted from increased earnings and reduced costs, equivalent to an increase of A$1.5 million in annual net incomes.

Financial Education Fund DfID’s Financial Education Fund (FEF) was created in 2008 to increase financial literacy and access to financial services among poor people in Sub-Saharan Africa. Evaluations found that recipients of financial education demonstrated increased awareness of key financial issues, made less risky financial decisions and showed other improvements in their financial management.

"Girls Education Challenge Fund" --- (GEC)---

Human Development Innovation Fund GRM Futures Group

"LIFT" A US$ 16 million challenge fund has been opened for innovators who can devise a strategy to crack the code into reducing the cost of transport and logistics in East Africa. The Logistics Innovation for Trade (LIFT) challenge fund will provide grants ranging from US$ 200,000 to US$ 750,000 to winning proposals from innovators from across the world but whose ideas will be implemented in East Africa.

LIFT is managed by TradeMark East Africa (TMEA) Challenge Fund with funding support from UK-DFID; and seeks to trigger and introduce innovative approaches to tackling freight and transport costs in East Africa region. East Africa is reported to have the highest freight and transport costs in the world; over 50% higher than the USA and Europe per kilometre. Indeed, transport costs for land locked countries in the region can be as high as 75% of the value of exports. Transit times have the most significant effect on exports and also result in firms having to carry higher levels of stocks making them less efficient. Successful LIFT project applicants will contribute to TradeMark East Africa (TMEA) objective of reducing transport time along the main East Africa transport corridors by 15% by 2016.

Seed Alliance Seed Alliance is a challenge fund aimed at Internet Development and Digital Innovation. This funds supports initiatives that utilizes new technologies to make pro-poor projects more effective and inclusive. The main focus of the fund is; openness, inclusion, rights and access. Learn more on Seed Alliance in this broschure (pdf)).

Vietnam Business Challenge Fund The Ford Foundation’s Vietnam Business Challenge Fund (VBCF), organised through the Vietnam Chamber of Commerce and Industry, advertised through small-business associations at provincial level. Applications, therefore, tended to come from small businesses. As the VBCF’s fund manager pointed out, SME involvement largely depends on a fund’s objectives. The VBCF’s goal, for example, is to maximise systemic change, which can more easily be achieved through medium-to-large enterprises. Nonetheless, about 25% of VBCF’s portfolio is composed of small businesses. For small businesses to succeed in a challenge fund, they need to have proven technical expertise and capacity. As the VBCF’s manager explained, the fund is willing to share risk in new markets and products/services, but not in technical expertise/capability.

Grand Challenges

Challenges fund approach has been ----. "Grand Challenges is a family of initiatives fostering innovation to solve key global health and development problems."

A grand challenge is a specific critical barrier that, if removed, would help solve an important health problem in the developing world, with a high likelihood of global impact through widespread implementation.

The first grand challenge was introduced over a century ago in Germany, when Dr. David Hilbert issued 23 challenges in mathematics. By doing so, he inspired a generation of mathematicians. His efforts were successful: nearly all of his challenges have been solved. Grand Challenges Canada will bring the same focus and energy to defining and addressing global health issues.

Grand Challenges Canada works closely with its Scientific Advisory Board, Board of Directors, and key experts and decision-makers in the area of global health to identify and select Grand Challenges. Grand Challenges Canada’s Board of Directors approves all Grand Challenge topics.

Gates

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The Grand Challenges in Global Health initiative fosters scientific and technological innovation to solve key health problems in the developing world. The initiative includes the Grand Challenges in Global Health grant program and the newer Grand Challenges Explorations grant program.

"Grand Challenges in Global Health" The Grand Challenges in Global Health grant program, launched in 2003, began with the award of 45 grants totaling $458 million to scientists from 33 countries. Grants target an expanding set of Grand Challenges.

"Grand Challenges Explorations" The Grand Challenges Explorations grant program funds early-stage discovery, awarding initial grants of $100,000 and potential follow-on grants of up to $1 million. Grants target an expanding set of topics.

Canada

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USAID Under the Grand Challenges for Development initiative, USAID will focus on defining problems, identifying constraints, and providing evidence based analysis. Addressing these challenges will require the creation and support of self-perpetuating systems, rather than one-off inventions or interventions.

Six Grand Challenges have been launched.

Fighting Ebola USAID and the Office of Science and Technology are coordinating the launch of a Grand Challenge to help healthcare workers on the front lines provide better care and stop the spread of Ebola. USAID is asking for a range of solutions that should enable longer work periods; require less personal protective equipment (PPE) and fewer transitions; provide cleaner work environments; and generate less infectious waste and/or offer enhanced protection for disposal of waste. Solutions should:

Improve upon standard practice (required); Be “off the beaten track,” daring in premise (ideal);
 Enhance acceptability and provide for sustained use; Be low-cost or highly cost-effective;
 Can be produced at large scale rapidly; Are able to be monitored, measured and evaluated. For more information visit: Fighting Ebola: A Grand Challenge for Development

Securing Water for Food USAID and Sweden are looking for scientific and technological innovations to more effectively use and manage the water required to produce food in developing and emerging countries. We are focusing on three areas that are critical to reducing water scarcity in the food value chain:

Water reuse and efficiency, Water capture and storage, and Salinity For more information, visit: http://www.securingwaterforfood.org/

Saving Lives at Birth USAID, the Government of Norway, the Bill & Melinda Gates Foundation, Grand Challenges Canada, The World Bank, and the U.K. Department for International Development (DfID) call for groundbreaking prevention and treatment approaches for pregnant women and newborns in poor, low resource communities around the 48 hours of delivery through:

Science and technology advances that prevent, detect or treat maternal and newborn problems at the time of birth; New approaches to delivering high-quality care at the time of birth; and Empowering and engaging pregnant women and their families. For more information, visit: www.savinglivesatbirth.net

All Children Reading Launched in 2011 by USAID, World Vision, and the Australian Government, All Children Reading: A Grand Challenge for Development (ACR GCD) solicits creative, cost-effective innovations from the global science, technology, education and broader development communities to improve reading for children in early grades.

Round two of ACR GCD combines grants with a series of prizes to seek out technology-based innovations that support improvements in basic reading skills with a focus on mother tongue instruction and reading materials, family and community engagement, and children with disabilities.

Learn more and submit your solution at: www.AllChildrenReading.org

"Making All Voices Count" Making All Voices Count is a challenge fund jointly funded by Sida, USAID, DFID and Omidyar Network aiming to create and apply innovations that support people-centered, open government. Through financial and technical support the challenge fund supports efforts of citizens and governments in emerging democracies to work together.

Making All Voices Count will support people and governments to use innovation, web and mobile technologies to improve government performance and accountability. This unique partnership will amplify the voices of citizens and enable governments to open up, listen and respond.

Link to site: www.makingallvoicescount.org

Powering agriculture The agricultural sector is the most important source of income for many people living in low-income countries, but lack of access to reliable, clean energy is a major barrier to its development. Powering Agriculture: An Energy Grand Challenge for Development is a grand challenge for development that encourages innovative technological and financing solutions for providing reliable and clean energy to the agricultural sector in developing countries.

Launched in June 2012, Powering Agriculture: An Energy Grand Challenge for Development will overcome critical barriers to agricultural electric energy access through innovative clean energy technologies and financing mechanisms. The effort will bring global attention to the persistent energy access issues that confront farmers throughout the developing world in agricultural production, processing, and storage.

This Grand Challenge for Development encourages innovators to find new ways to bring clean energy to farmers through sustainable and scalable solutions that will create more and better quality food for farmers, their families, and their communities. It is also expected that these innovations will create new economic opportunities in agricultural communities in the developing world.

For more information, visit: www.PoweringAg.org.

See also

• Economic Development
• Development Assistance

External links

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