Can Challenge Funds Change the way Markets Work?
October 18, 2013
A working market system reduces poverty and increases access to vital services. This can be seen all over the world, from Somali pastoralists selling cattle to the Middle East, to Nepali parents purchasing medicine in remote villages.
However, markets don’t always work. Many farmers in developing countries are unable to purchase seeds and fertiliser, or to sell their crops at a fair price. Millions of people around the world are unable to find jobs, afford healthcare, or buy enough food.
One way to improve markets is through challenge funds, which provide grants or concessional loans to projects proposed by businesses with the potential to solve a defined development issue, such as providing employment, services, or additional income for the poor.
Proponents argue that challenge funds are effective vehicles for improving market systems. Profitable new business ideas might be copied by other companies, reaching far more people than the original business could. For example, the runaway success of M-Pesa, a mobile banking platform in Kenya which now has almost twenty million subscribers, has inspired similar businesses across the world.
By supporting successful projects, challenge funds hope to demonstrate to the private sector and financial institutions that profitable opportunities exist in developing countries. This is expected to increase investment and access to finance for the private sector, changing the market system and increasing the number of opportunities and services available to residents of developing countries.
Critics contend that challenge funds are a limited instrument, and unlikely to create market wide changes alone. Dysfunctional markets have many causes – governance, financial institutions, infrastructure, etc. – and an injection of cash will do very little to change this. At best, challenge funds are seen as a tool which can be useful in some situations. Critics point to the lack of evidence to show that challenge funds have led to significant change.
The critics have a point. Challenge funds award grants through an open competition, which typically attracts proposals from a wide range of sectors and markets. Perhaps they should restrict funding to markets which have a real potential to change. For example, this might be because other pre-requisites for a functioning market, such as good governance and infrastructure, are present.
Alternatively, perhaps challenge funds should move beyond their core purpose to conduct other activities aimed at improving the environment for businesses. For example, they may actively disseminate innovative business practices, or advocate on specific business environment issues.
Unfortunately, we know very little about which approaches suit which situations, because very few challenge funds have examined their impact on the market. This lack of information gives ammunition to critics, and restricts the ability of challenge funds to learn and evolve. Consequently, a priority for current challenge funds should be to clearly define their goals for improving markets, critically assess the extent to which it is achieved, and better understanding what part challenge funds can play.
The Donor Committee for Enterprise Development (DCED) has published new guidance for measuring results in challenge funds using the DCED Standard, a practical framework for programmes to monitor progress towards their objectives. Designed for private sector development programmes, the Standard has a particular focus on measuring market-wide changes, and the guidelines contain advice and examples of what challenge funds are doing in this area.
The guidelines also contain practical advice on topics including the selection of indicators, how to design a practical results measurement system, and how to share responsibilities between the business and the fund manager. They are applicable to other forms of partnership with the private sector. Download the guidelines here, and please share your experiences of challenge funds and market-wide changes with us at Results@Enterprise-Development.org.
Adam Kessler is a Results Measurement Consultant. He is the author of the DCED’s new guidance note on measuring the impact of challenge funds and is based in the United Kingdom. Contact him at firstname.lastname@example.org
 David Elliot, 2013, Exploding the myth of Challenge Funds – a start at least… Also see Heinrich, M., 2013, Donor Partnerships with Business for Private Sector Development: What can we learn from experience? Donor Committee for Enterprise Development.