Challenge funds and matching grants
Enterprise challenge funds award grants or subsidies through a competitive process to private sector organizations that submit solutions with an explicit public purpose. Companies working within a specific sector are invited to submit project proposals for inclusive businesses that aim to solve a stated development problem and generate high pro-poor impact. Challenge funds can trigger new ideas and innovative solutions or promote the scale-up or growth of existing solutions. Proposals are assessed against transparent and pre-determined criteria. Successful applicants must often match a certain percentage of the grant with own financing and/or in-kind contributions.
The number and volume of funds has grown rapidly since the 1900s. Funds ranges from approximately $1.5 million or less up to $207 million and can address a variety of issues, sectors, or countries or on just one sector or country. Companies are attracted to challenge funds due to their risk-willing capital, rather than the access to subsidies.
Points to consider
- Management requirements: Enterprise challenge funds tend to be administratively demanding with management costs accounting for approximately 20-50 percent of total budget allocation. The delegation of fund management to an independent organization is an option.
- Evaluation requirements: Enterprise challenge funds lack adequate impact measurement systems. Critics point out that there are still very few evaluations of challenge funds to date. Furthermore, those evaluations seem to be focused too much on management issues and not enough on the evidence for the additionality of the funding and on the systemic pro-poor impact.
Global: Incentivizing innovation in Agriculture, Health, and Nutrition
In 2012, nearly 870 million people worldwide suffered from chronic undernourishment. While cereal yields in developed countries average 5.1 tons per hectare, average yields in Africa are only 1.2 tons per hectare. To keep pace with the growing agricultural needs of developed and developing countries, Australia, Canada, the United Kingdom, and the United States, in partnership with the Bill and Melinda Gates Foundation, launched AgResults, a $118 million multilateral initiative incentivizing and rewarding high-impact agricultural innovations.
AgResults incentivizes private sector investment and innovation in the field of smallholder agriculture through prizes that promote the uptake of new technologies. These prizes are awarded to the private sector based on the achievement of pre-defined results and are intended to overcome existing failures that impede the development of sustainable commercial markets for such technologies. By enabling the private sector to promote new technologies, significant development outcomes can be achieved in heightened food security, increased smallholder incomes, and improved health and nutrition. In addition to uncovering solutions to bolster food security, the fund aims to test the effectiveness and efficiency of pull financing in the promotion and adoption of innovative agricultural technologies.
AgResults’ portfolio of pilot projects represents a diverse mix of agriculture and food security issues, focusing on either the adoption of existing technologies or the development and adaptation of new research and technologies. Current pilots focus on Aflatoxin reduction, improved on-farm storage, and bio-fortified maize for smallholder farmers. The pilots are being implemented in Zambia, Nigeria, and Kenya. While the pilots have shown early promise, there are issues with uptake as smallholder farmers are risk-averse and less willing to adopt unknown technologies. Another issue is finding private sector partners with sufficient expertise and access to capital to adequately pilot these innovations.
- Brain, A.; Gulrajani, N.; & Mitchell, J. (2014): Meeting the challenge: How can enterprise challenge funds be made to work better? EPS-PEAKS Working Paper.
- Pompa, C. (2013). Understanding Challenge Funds. London: Overseas Development Institute.
- Swedish International Development Agency (SIDA). (2012). Challenge Funds: A guide based on SIDA’s and other actors work using Challenge Funds in development assistance/as a method for development. SIDA Guidelines. Stockholm: SIDA.
 Additionality means that challenge funds are channeling resources to the private sector that result in investments and activities which would not otherwise have happened (at all, or in the same way, extent, or time).