Challenge funds and matching grants

Description

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.[1] 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.[2]

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.[3]
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Insurance Programs

Description

Insurance programs for the BOP empower them to participate in markets by protecting them against risks, such as illness, injury, damage, or loss. The BOP are often more vulnerable to such risks because they are less able to cope with the financial burden caused by unexpected occurrences. Despite this, the BOP are typically ignored by mainstream commercial insurers.

Governments can share the risk of covering BOP communities by:  providing fully or partially subsidized coverage for specific services; or paying customers’ premiums and entrusting private sector insurers with the operation of the scheme.

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End-user subsidies

Description

Subsidies are typically provided to stimulate demand for products that have socially desirable outcomes. In the past, subsidies on goods have often been provided to the companies that produce them. Governments are increasingly seeking to bolster market forces and stimulate competition among firms by providing subsidies directly to the products’ users. These kinds of subsidies may also drive user-oriented innovation and efficiency gains. Subsidies can also play an important role when users need some initial experience in order to grasp a product’s benefits or where positive external effects exist. As consumers adapt to the new product, subsidies can be rolled back or discontinued.

Vouchers are one method by which to administer “smart” subsidies to end customers. Vouchers have the advantage as compared to cash transfers that their use is predefined, thus directing expenditure towards the specific products or services with the desired social benefits. Moreover, voucher schemes can represent a partial subsidy, which – unlike giving out products for free – allows firms to gauge user demand and willingness to pay. The level of the subsidy can subsequently be reduced over time as customers start to recognize the value of the products.

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