Challenging the Challenge Fund!

Authors: Shiv Kumar and N.Raghunathan

There is a new concept rising in popularity today—Challenge Funds. Considered as alternatives (or complements) to traditional “Requests for Proposals (RFPs)” released by funding agents,Challenge Funds are financing mechanisms that allocate donor funds to specific purposes using competition between organizations.

Led by the UK’s Department for International Development (DfID) in the late 1990s, Challenge Funds are now used by the United Nations, AusAid, USAID, Canadian Aid, the Bill and Melinda Gates Foundation, and others to diversify applicants and generate new ideas to solve development problems.

Challenge Funds pose a challenge to applicants and then evaluate their solutions. They may call on organizations or institutions working in a certain “target” field  (i.e. raising rural incomes), but are often open to various sectors, in order to receive a variety of ideas. Challenge Funds use the competition spurred with the “challenge” as a catalyst for generating innovative ideas. The goal of this type of mechanism is to drive a sense of competition among the organizations involved and find the most suitable organization to match the fund and its objectives.

Challenge Funds (CF) have been known for their efforts to reduce poverty through social enterprises, but as donors and ideals have diversified over time, this mission has also expanded. When DfID started releasing CFs, they did so to encourage private sector partnerships with DfID, so that funds could be leveraged in a mutually beneficial way. The public and transparent nature of the challenge allowed DfID to avoid preferring certain private groups over others. While CFs are set up to be transparent in their marketing and selection of recipients, the characteristics that make them different from other financing mechanisms is not always clear.

O’Riodan et al. conducted an analysis of 50 CFs across the development sector and developed the following 7-point outline of characteristics:

  1. Challenge Funds have a grant or subsidy component as part of funding.
  2. The funder publicly specifies the goal in advance of the call.
  3. There is typically an inter-agency agreement as part of the relationship
  4. There is competition among applicants in their eligibility for funds; expected bid value is typically greater than the fund value, but part of the competition evaluates cost effectiveness of proposal and leveraging funds.  
  5. The guidelines and procedures for screening and selection of recipients are clearly publicized for transparency.
  6. Applicants are encouraged to be innovative, so the guidelines for program development are often loose and the grantee will have autonomy in how the design is carried out. A third party typically carries out the Monitoring and Evaluation component.
  7. The funders and grantees will share in the risk in order to promote innovation.


There are a few key elements that really make Challenge Funds stand out from other, more traditional financing mechanisms aimed at supporting academic and non-profits entities. One big element is openness to fund private sector, for-profit entities as a way of catalysing growth and benefitting the poor. For example, the Africa Enterprise Challenge Fund (AECF) is only open to for-profit entities in an effort to stimulate growth in markets for the poor.

While many funders seek to elicit innovative approaches to solving problems, Challenge Funds are actually built to ensure innovation. Through the competitive and transparent process, applicants can span across the development space and provide solutions to global issues through varying mechanisms and strategies. The USAID Development Innovation Ventures (DIV) Challenge Fund, for example, markets its mission as seeking “applicants with innovative ideas that address development challenges more efficiently and cost-effectively than the competition’s, and that have the potential to scale to reach millions of beneficiaries.”

The innovation aspect of Challenge Funds is captured well in this quote from The Consultative Group to Assist the Poor (CGAP): “This (the ability to stimulate pro-poor innovation and investment in poor communities, and to test a diversity of ideas and approaches), ultimately, reflects the compound value of the Challenge Fund – both as an innovative mechanism itself, and in its ability to catalyze innovation amongst its grantees. By doing so, Challenge Funds are able to hone in on powerful models and methods for improving social outcomes.”

Donors and grantees are also encouraged, in many cases, to take risks that might break the mould of traditional programming designs in order to try potentially high-impact and uncommon solutions, particularly in the case of private enterprises. Challenge Funds also stand apart, in some cases, with their rigorous Monitoring and Evaluation (M&E) frameworks, where funds are not released until certain goals and objectives of the projects have been met. This element adds to the transparent goals of Challenge Funds and makes donors of the fund feel more comfortable with money spent.  

Are CFs solving Development Dilemmas?

There is no doubt that the Challenge Fund mechanism has introduced a new way to solve difficult development issues. After over 20 years of action, the real question is: how well have Challenge Funds been able to achieve their overall objectives? Unfortunately, even with the mandatory M&E frameworks, very little evidence exists on the impact that Challenge Funds have been able to make a difference.

Having spent over two decades in social development working across various sectors, we wonder if Challenge Funds would work differently if the gender-lens changes? For example, no fund has challenged the Pharmaceutical industry to look at women’s chronic health issues, like severe menstrual pain or discomfort. It is also interesting to note some other cases that use the Challenge Fund concept.  In India today, there are new awards and challenges every week. It is difficult to differentiate between genuine and ingenuine Challenge Funds – many of us in the sector are aware that some Challenge Funds are announced only to assess the competition and ideas received are used elsewhere! Despite the focus on innovation, we are also aware of instances where models have been rejected due to lack of precedence i.e. too innovative. So there may be appetite for innovation but there may also pre-defined boundaries what innovation is acceptable.

Even within a genuine Challenge Fund, there are issues that crop up after the fund has been bid for and won. A range of problems from procurement and poor quality implementation to ideological differences, and power equations emerge. In some cases, lack of a thorough due diligence process of the grantee prior to the release of funds, means that the solution/innovation does not get implemented the way it was designed and/or results are not achieved.

Another barrier to high impact results is the inherent clash of “innovation” with government cooperation. Some Challenge Funds are created to strengthen public-private partnerships towards supporting the poor and marginalized populations and to leverage private funding to fill the gaps left by public funds. Even without the focus on PPPs, when talking about identifying innovations and scaling them up at a national level, support from the government is necessary. In our experience, the government and innovation don’t necessarily go together.  While working with two-state Government departments on change management plans, we found that the majority did not like ambiguity, and considered the private sector to be “thieves”.

Risk and ambiguity are part of the package of ‘innovative mechanisms’ and this is exactly what the government is sceptical about. Do we see these two starkly contrasting ideologies converge any time soon in the future? Or is there a possibility for scale-up without government buy-in?

Challenge Funds additionally expect costs to be matched (or at least supported) by the recipient, which often adds to its list of limitations. Eligible recipients may be limited to companies already turning a profit. This structure limits applicants to those who are already established entities and have the funds available to match. Companies needing financial support may not be as competitive

While M&E measures are becoming more stringent for Challenge Fund grantees, there seems to be agreement in the field that the overall impact of funds should be more carefully evaluated at the Fund level rather than the project only. While individual grantees are monitored and evaluated closely, the overall Fund and how it is achieving the larger objectives are hardly studied. So while individual grantees (or projects) may achieve their results, are the CFs really solving the questions they set out to solve and how?

Finally, we want to question our understanding of innovations itself. Are innovations triggered only when funds are made available? If we want to incentivise people to start thinking creatively and to bring innovations to the table: isn’t this already happening? Are Challenge Funds any different than an impact investor? Thousands of innovations have been supported across the world in the past decade, and it is essential that we analyse the evolution of these innovations. What has happened to them now? Are Challenge Funds another set of flex funds, or a better way of spending when one is unclear at the design level of where to invest? While we are fascinated with “newness” in innovation, there is often a tendency to overlook the time needed to achieve significant results. 

There is still much research to be done to prove the effectiveness of Challenge Funds, and their impact to the private health sector.



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