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A Challenge Fund (also referred to as enterprise challenge fund) is a competitive financing facility to disburse donor funding for international development projects, typically utilizing public sector or private foundation funds for market-based or incentive driven solutions. As Irwin and Porteous (2005) observed, ‘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.’ Applicant qualifications differ widely among challenge funds, but typically focus on non-state actors.

Typically, a donor agency (such as UK’s Department for International Development (DfID), the Inter-American Development Bank (IADB), Swedish International Development Cooperation Agency (SIDA), and the Canadian International Development Agency (CIDA)) hires a development contractor (such as KPMG or Palladium International) to host the funding competition around a broader sector (such as food trade, agriculture, or education in a specific geography) to solicit innovative proposals that otherwise may not be discovered through more traditional grant-making or funding mechanisms. Alternatively, challenge funds are often used as ways to address what development partners describe as a Grand Challenge, which is a challenge fund focused on soliciting proposals around a very 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.

Typical features of a challenge fund include open competition, innovative or evidence-based proposals, proposals are evaluated based on a fixed scoring criteria, and a governance structure that incorporates an voting committee to approve funding decisions. Other common features include a focus on innovation, leveraging other resources, and local solutions. Research performed by TripleLine Consulting identified seven characteristics of challenges funds: ‘(1) provides grants or subsidies (2) with an explicit public purpose (3) between independent agencies (4) with grant recipients selected competitively (5) on the basis of advertised rules and processes (6) who retain significant discretion over formulation and execution of their proposals and (7) share risks with the grant provider.’

Academia, medical research, and the social sectors have used challenge funds for several decades; however, what is now mostly referred to as challenge funds are a byproduct of DFID’s efforts beginning in the 1990s. Early challenge funds in the social sector supported the use of public–private partnerships, were in the UK and tarted urban issues, including the City Challenge, Rural Challenge and Single Regeneration Budget Challenge Funds.

By 1997, over 50 challenge funds were operating in the UK, disbursing £3,390 million. Of these, the largest was the Single Regeneration Budget (SRB). The first challenge fund within the British overseas development assistance program (now DFID or UKAid) was the 1997 Business Sector Challenge Fund, followed in 2000 by the Financial Deepening Challenge Fund and the Business Linkages Challenge Fund that were tested in East Africa and later expanded to other regions.

The effectiveness of challenge funds has been evaluated, in part, but donors, consultants, and implementers with varying opinions as to their value for money and effectiveness. Standards have been developed by the DECD for measuring the effectiveness of challenge funds. Additionally, certain donors such as SIDA have established guidelines to ensure challenge funds are as effective as possible at delivering the intended social impact.

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

Africa Enterprise Challenge Fund The Africa Enterprise Challenge Fund (AECF) is a multiple window funding platform funded by DFID and managed by KPMG with challenge funds in agriculture and energy in Africa (including Kenya, Tanzania, and South Sudan). AECF focuses on supporting businesses and raising the income of the rural poor.

Emprender Paz Emprender Paz is a SIDA supported challenge fund in Columbia focused on private sector solutions for peace-building.

Enterprise Challenge Fund The Enterprise Challenge Fund (ECF) (2007-2013) was an Australian government challenge fund that ran from 2007-13. ECF was the backbone for the development of the DECD standards for evaluating challenge funds. Numerous reports and evaluations have been developed by or based on ECF.

Financial Education Fund Managed by Cardno, the Financial Education Fund (FEF) was a DFID challenge fund established in 2008 focusing on financial literacy and access to financial services in Africa

Girls Education Challenge Fund” Established in 2012 and currently scheduled through 2016, the Girls Education Challenge Fund (GEC) is a GBP 300 million fund managed by PwC, focusing the quality and access to education for girls in 22 countries in Asia and Africa.

Human Development Innovation Fund Palladium International manages the Human Development Innovation Fund (HDIF), which is a GBP 30 million DFID challenge fund seeking to identify innovations in education, health and water, sanitation and hygiene (WASH) across Tanzania. HDIF also engages in activities to ‘foster a thriving innovation eco-system in Tanzania’ and support a government partner in building this eco-system, Commission for Science and Technology (COSTECH).

“LIFT” Managed by TradeMark East Africa (TMEA), The Logistics Innovation for Trade (LIFT) challenge fund is a $16 million DFID fund for reducing the cost of transport and logistics in East Africa.

Seed Alliance Seed Alliance is a challenge fund focusing in internet and digital innovation.

Vietnam Business Challenge Fund The Vietnam Business Challenge Fund (VBCF) focusing on developing ‘inclusive businesses’ working in agriculture, low carbon growth, infrastructure, and basic services.

Sakchyam Access to Finance Challenge Fund also known as AFP Challenge Fund is focusing on increasing access to finance in Nepal.