Swedish Experiences of Challenge Funds: Case of Innovations Against Poverty

Sida’s experience of challenge funds covers both funds established by the Swedish International Development Cooperation Agency (Sida), such as, Innovation Against Poverty (IAP)(1) and The Challenge(2) (in Bosnia), as well as funds set up through co-financing with other donors, such as the Africa Enterprise Challenge Fund (AECF)(3), Securing Water for Food(4), Powering Agriculture(5) and Making All Voices Count.(6)

IAP was run as a pilot until December 2013, and managed by a consortium led by PriceWaterhouse Coopers (PwC). The programme had an active monitoring component, which has allowed for some initial learnings and conclusions to be drawn from it. We therefore focus this article on lessons learnt from IAP, along with some additional reflections made by Sida and PwC based on their experience with challenge funds.

1. A background to challenge funds

When engaging with the private sector, public development assistance needs to ensure that this is done in a manner where the assistance provides the smartest and most cost-efficient solutions without creating market distortion. With innovation increasingly being seen as a solution to major poverty and environmental problems, using a mechanism that allows the widest possible canvassing of innovative ideas is therefore seen as essential in order to harness private sector creativity to tackle development challenges. Challenge funds have emerged over the last few decades as a funding mechanism that allows for all of these elements to be taken into account. As successful applicants are also required to match the grant provided by a certain percentage with own funds, it also offers a mechanism for leveraging private capital for development assistance.

Challenge funds are always set up to meet specific objectives in the form of generic results rather than specific outcomes. Proposals are assessed against transparent and pre-determined criteria, where grants are awarded to the projects that best meet the objectives of the fund and fulfill various pre-established eligibility criteria. By backing many different projects the assumption is that there is a higher likelihood that you will have a number of projects that are likely to provide substantial impact for the end beneficiaries.

2. The example of Innovations Against Poverty

Unlike many other challenge funds, IAP was neither geographically nor sectorially limited.  Applications for funding were received in two cycles per year from a total of 71 countries for ventures in 80 countries in Africa, Asia and Latin America. Key sectors for poverty alleviation, such as agriculture, renewable energy, health and education were all prominent in the applications.

Two types of grants were provided. Small grants of up to €20,000 that were essentially aimed at funding feasibility studies, initial pilots and other preparatory work, and large grants of €20,000-200,000 aimed at full scale pilots, implementation of piloted approaches and scaling up of successful business models.

Technical assistance (TA) was not foreseen to be any major component at the outset, in reality TA had to be provided both on programme procedures and on business skills and sector knowledge. In order to be able to offer tailored TA, IAP cooperated with Challenges Worldwide(7), a mentoring network offering a flexible low cost TA solution.

Differentiating features of the IAP programme from other challenge funds were an integrated approach to monitoring and evaluation (M&E) and a strong emphasis on sharing of lessons learnt through an active knowledge exchange (KE) component. More than a third of the management input was dedicated to these elements of the programmes. KE was done both through two learnings reports and two conferences, and through an internet hub co-hosted with DfID.(8)

After five funding cycles the IAP portfolio consists of some 65 ventures in 26 countries in a wide variety of sectors. The total grant amount was twice what was originally foreseen as other larger grants were provided.

3. Summary of some key lessons learnt

The IAP learnings report from November 2013, titled From Paper to Practice(9), summarises a number of lessons drawn by the projects funded, which are useful for other Inclusive Business practitioners. In this article we focus on key learnings from a donor’s perspective.

Sida’s objective with the fund was to share the entrepreneurs’ risk of developing and testing innovative, sustainable business ideas that can meet essential needs of people at the Base of the Pyramid. Through the embedded M&E component of the programme, IAP has already been able to see some clear indicators of development impact after only 1-2 years of implementation. Commercially the success has been mixed with some ventures showing promising signs of growing sales, and even wider impact through duplication by other entrepreneurs, while others have already concluded that their models will not work. By capturing the reasons for this lack of success and making them available to the wider IB community, IAP has ensured that value is derived also from such “failures”.

Through its focus on innovation, IAP managed to harness private sector innovation. Keeping the fund open to a variety of sectors probably lead to more innovative projects as innovation often arises in the cross-section between sectors rather than within the boundaries of one sector. IT and mobile phone technology were often used as enabling platforms for ventures in other sectors.

At inception, the expectation was that a total of 100 applications would be received annually. In reality the programme received 400-450 applications. Over the five cycles of the project a total of 1,059 applications were received. It is clear that IAP has filled a gap in the funding of innovative IB ventures and that there is an overwhelming demand for funding. The gap between incubation and fully commercially fundable enterprises is, however, still big. Indeed, pioneers in the IB area, such as the Shell Foundation, point out that it takes between 10 and 15 years for an innovative venture to reach full commercial operation. A more continuous supply of patient capital, with a greater variety in terms of blending of grants and loans, rather than time-limited, grants-only programmes, should therefore be considered.

To ensure maximum impact, the support to early stage, innovative IB ventures needs to come in a package with both financial and tailored technical assistance. While TA in most cases does not have to be provided by international experts it does, however, have to be individually tailored.

Sharing of useful learning to the wider public is essential to justify the use of public funds. For such knowledge exchange to be filled with useful content it is important to keep the M&E and KE as ongoing activities that are part of the programme rather than as external ex-post elements.

In their completion reports, IAP grantees have been invited to reflect on improvements on the design of similar funds for the future. Apart from a wish for financial grants to be available over a longer time period, and for such funding to be complemented by technical support, the grantees also would have liked to see other forms of non-financial direct involvement by the donor. An area where such involvement would have been welcome was in the leveraging of relationships with local governments, potential partners and development agencies.

The IAP grantees also react to the logistics involved in contracting and disbursement, feeling that the timeline from application to actually getting the funding was too long, creating difficulties for the companies on the ground. They also felt that the reporting requirements should be less onerous. Through the IAP pilot, Sida has endeavoured to streamline both contracting and reporting, but these comments show that more needs to be done to ensure that the flexibility and pragmatism essential to small innovative entrepreneurs is delivered.

4. Some generic lessons of the impact of challenge funds

Both Sida and PwC have summarised lessons learnt from the organisations’ work with challenge funds. Sida published Guidelines for Challenge Funds(10) in 2013 and PwC issued a lessons report(11) on the DfID funded BIF-programme in December 2013 and held a meeting on challenge funds where key issues common to most, if not all challenge funds, were discussed. Some of the key conclusions drawn in this work are:

▪ Challenge funds appear to be effective in terms of the projects funded achieving the stated objectives and of the funder being able to stimulate development which otherwise would not have happened. This is especially the case in terms of the funds’ ability to harness the private sector to drive and effectively deliver innovation in development.

▪ These conclusions are, however, primarily based on success stories rather than hard facts. More work is needed to improve the results measurement of the funds, which will require more resources to be set aside for M&E within the programmes. "Donors also need to contribute to the establishment of best practice/benchmarks in the field, especially in relation to systemic development impact beyond the micro level, and impact measurement in heterogeneous portfolios".

▪ Discussions on challenge funds hosted by PwC UK in January highlighted that one reason for the lack of evidence of additionality of the donor input is that the grant catalyses more effective development of private sector capital and creativity, making the causal factor hard to ascertain.

A key advantage of the challenge fund mechanism is that it provides a transparent and accountable process for selecting which private sector projects to finance. On the other hand, more hands-on development of the projects selected, through TA and a closer relationship between grantees and managers, also appears to lead to better projects. Delegation of fund management to independent organisations appears overall to have worked well to ensure professional management of the funds. Some reviews highlight management issues, primarily linked to the donors’ role, including a tendency for micro-management.

▪ The funds are successful in leveraging private capital in a ratio of from 1:1 to 1:4, with the higher rates seen where multinationals or other larger companies are involved. Companies appear to apply for funding in order to access risk-willing capital, rather than to access subsidised or ‘free’ money, which would imply that repayment might be less of an issue. Alternatives to grants, such as conditional loans, could therefore be used to increase leverage of limited donor funding.

"If the purpose of the intervention is to support innovation, challenge funds appear to be effective instruments that encourage the private sector to implement innovative projects where the social impact is high, but the financial return is uncertain". To ensure that as much benefit as possible is derived from such funding, much effort is however needed to mentor the grantees and to develop good evaluation practices.

Ola Möller and Jenny Åkerbäck are Senior Advisor at the Unit for Private Sector Cooperation and ICT, Sida. Lena Eriksson-Åshuvud is a Development Finance Consultant at PwC

Footnotes