New DCED publication: Demonstrating Additionality in Private Sector Development Initiatives – A practical exploration of good practice for challenge funds and other cost-sharing mechanisms

"Why [are] some of Britain’s most successful and highly profitable firms being given taxpayers’ cash for projects they could easily fund themselves?”[1], asks a recent popular newspaper article. It is the type of question that agencies are increasingly asked to respond to in order to justify their support to businesses investing in developing countries. And the central issue being questioned has a name: we are talking about ‘additionality’.

Additionality, simply put, is asking whether a business could and would implement the project anyway, or in the same way, without outside support. More technically, it can be defined as the net positive difference that results from a donor-business partnership aimed at sharing the costs and risks of private investments in developing countries - through cash grants or technical support.

We all frequently read that additionality is a formal requirement of donor support to business. In practice, however, assessment criteria are often limited or vague; assessment processes are often confined to brief justifications from businesses; and there are typically no overarching internal guidelines within agencies on how additionality is considered. In sum, this means that agencies are frequently unable to make a credible and convincing argument for the additionality of their support.

You may say that there is no way to ‘prove’ or ‘exactly measure’ additionality, and that’s correct. Still, member agencies of the Donor Committee for Enterprise Development (DCED) saw the need to explore what good practice in demonstrating additionality could look like – based on the experiences and lessons of practitioners and funders of challenge funds and other cost-sharing mechanisms. The resulting report summarises the key elements that would help agencies to enhance additionality assessments in practical ways and maximise the added value of public funds. It encourages agencies to ‘do as much as possible’ to use the criteria and principles outlined, but offers the flexibility for agencies to adapt the exact scope and depth of their assessment to their specific context, resources and objectives.

Eight Criteria for assessing additionality

Now, let’s have a closer look at what that means: As a first step, the agency must establish at least one of the following: the company cannot self-finance the project (within a reasonable time frame); it does not have the knowledge or skills to the implement the project alone; and/or it is unwilling to implement the project because it perceives the costs or risks to be higher than the benefits. As a second step, the agency needs to get a good estimate on resources available from others: If the company lacks the finance or knowledge for the project, the agency should establish with reasonable credibility that the company is most likely unable to access equivalent support from a commercial provider. Ideally, it would also make a convincing case that the cost-shared project is unlikely to displace other companies operating or ready to enter the market. Finally, the agency should be able to show that it does not duplicate other donor-funded support.

The case for additionality may be reinforced if the agency can also demonstrate that it will leverage in funds from other public or private parties or that it is likely to bring about improvements beyond the cost-shared project or partner business, such as in the standards applied in wider operations of the company or in the broader business environment. Ways to assess the level of innovation and risk of a project should also be clearly documented by the agency; the higher it is, the more likely it is that donor support is additional.

In the guidelines, you can find more detailed explanations of these criteria, proxy indicators for assessing them, as well as practical examples.

Eight Principles for assessing and enhancing additionality

While we won’t go into detail of all principles named in the guidelines, a few are useful to point out here: For example, it is critical that agencies are sensitive and creative in requesting information related to additionality from companies – to make it more likely that the answers they receive are honest and comprehensive. If possible, they should also maximise personal interaction with companies during the application or design process, especially to address doubts about additionality. Agencies should do as much as they can to triangulate information (e.g. by speaking separately to different company staff and a range of other stakeholders) and to involve experts in the review and decision-making process. To do so, agencies can choose from, or combine, a range of different expert consultation methods.

To connect all information relevant for additionality, agencies should develop a clear, transparent narrative on the theory of change underlying the collaboration. This would capture an overall assessment of the counterfactual, i.e. what would happen anyway, and a clear articulation of how the collaboration is expected to change the company’s activities. Such an approach is preferred to complicated indices or other quantitative measures of additionality. More generally, it is useful for agencies to document internally the additionality assessment criteria and processes used, to inform staff and to enhance external communication and accountability.

Further suggestions for enhancing additionality assessments

After project completion, agencies can use qualitative business surveys to deepen or revise their initial understanding of their additionality. A few agencies have done this internally, and independent assessments of this kind could also be considered. Similarly, and although more difficult to do, it could be valuable for more agencies to explore ex-post evaluations of a selection of rejected projects that are roughly comparable to others that did get support.

More generally, it would be easier for agencies to work towards good practices in additionality assessments if these are considered in the design of cost-sharing mechanisms upfront. A number of options of how to do so are highlighted in the guidelines.

You can download the full guidelines here. If you would like to share any feedback or make suggestions of further practical examples, please email Melina Heinrich at the DCED Secretariat.

[1] Daily Mail, 28 January 2014: www.dailymail.co.uk/news/article-2546863/High-street-giants-includi...