1. Making business inclusive:
are enterprise challenge funds
useful tools?
Robin Davies, Associate Director
Kerri Elgar, Visiting Fellow
Development Policy Centre
Crawford School of Public Policy

2. What is an enterprise challenge fund?
• In developing countries, targeted subsidies are sometimes needed to
overcome barriers for businesses on the threshold of making
investment decisions that are likely to benefit poor people as
employees, suppliers or consumers.
• Enterprise challenge funds (ECFs) are main instrument used by
bilateral aid agencies for providing such targetted subsidies to
inclusive business ventures.
• Pros and cons…but increasing in popularity.
2

3. 3/10

4. ECF working group
Established July 2013 ‘to examine the rationale for the use of ECFs, reflect on
experience to date and develop principles-based recommendations to
development agencies on their use in the future’
Four ‘big-picture’ questions:
• rationale for the use of ECFs
• their place in a broader array of approaches
• their partnership structure
• their impact
And four more practical but still broad questions bearing on the design of ECFs:
• geographical and sectoral scope
• the manner in which financing is made available
• the role of complementary services
• fund administration
4/10

5. Fault lines
5/10

6. Ten characteristics of an ECF
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Offers firm-specific incentives: it offers incentives to particular firms to invest in business
creation, reconfiguration or expansion
Issues a challenge: the incentives are used for a specific purpose of the proponent’s own
devising, sometimes within broad parameters defined by the fund
Employs competitive allocation: firms are selected through open competition
Requires additionality: an investment must be one that would not otherwise have made
Requires risk-sharing: incentives are set at a level, determined by a matching ratio, that only partially
compensates for market or government failures
Seeks benefits for the poor: investments confer benefits on poor people associated with beneficiary
firms as suppliers, employees or customers
Seeks sustainability: it is intended that such benefits be provided on an ongoing basis, beyond the
consumption of the incentive
Values competitive neutrality: incentives compensate for government or market failures without seeking
to give beneficiary firms a long-term competitive advantage
Values demonstration effects: it is intended that similar benefits are subsequently experienced by other
groups of poor people through the replication or scaling-up of investments, whether by the beneficiary
firm or copycats
Values systemic impact: it is intended that such replication or scaling-up occur with less or no need for
the provision of further incentives
6/10

7. Poverty reduction through private sector
development: objectives
1. Strengthening enabling environments: helping to develop legal and regulatory
frameworks, infrastructure, workforce skills and consumer knowledge in order
to promote the growth of the private sector for the general benefit of a region
or country
2. Fostering enterprise development: helping to establish or expand particular
enterprises in order to deliver general economic benefits for a region or
section of the population, often with an eye to those enterprises’ direct impact
on poor people as suppliers, employees or consumers
3. Stimulating inclusive investment: helping to reconfigure particular enterprises
or extend them into new markets in order to promote the beneficial
engagement of poor people with those enterprises as suppliers, employees or
consumers
7/10

8. Assistance types
• Confidence: temporary subsidies to reduce business expenditure or increase
revenue, or support for research on the characteristics, skills and preferences of
the target population of poor people, or the ‘good offices’ of the sponsoring
agency
• Context: physical infrastructure with public-goods characteristics, or general
workforce skills development, or consumer education
>==============================<
• Capital: grants, equity, loans or guarantees (including within blended financing
packages negotiated with banks or multilateral development financing
institutions)
• Capacity: business planning and management capacity, business-specific
workforce skills development, or equipment
8/10

9. Decision tree
Poverty reduction
through private sector
development
ASSESS:
Objective
General environment
Weak general enabling
environment?
STOP
Weak project enabling
environment?
ASSESS:
Project environment
Firm strength
Intervention type
Adequate general
enabling environment?
ASSESS:
Strong firm?
PROVIDE:
Weak firm?
STOP
Confidence (temporary
subsidies, intelligence,
association)
Context (public goods)
Strong project enabling
environment?
ASSESS:
Weak firm?
PROVIDE:
Capital (direct or by
guarantee)
Strong firm?
STOP
Capacity (technical
assistance)
9/10

10. Two fund types
• Enterprise development (ED): supports the establishment or
expansion of small-to-medium-scale enterprises to achieve
positive general or sector-specific development impacts, by
providing investment financing or increasing firm capacity
• Inclusive business (IB): supports the expansion or
reconfiguration of large-scale, often multinational,
enterprises to increase their beneficial engagement with
poor people as suppliers, employees or consumers, by
providing risk reduction financing, information and good
offices
10/10

11. Eight observations on…
1.
2.
3.
4.
5.
6.
7.
8.
Giving money to strong firms: sometimes risk reduction, sometimes to support a project
champion—but the beneficiaries are the suppliers, employees, customers
Geographic and sectoral scope: open for IB funds and more restricted for ED funds—but the
latter should be organised in hub-and-spoke fashion if possible
Which firms get assistance: open for ED funds but IB funds could reasonably target a donor
country’s own firms, with care
Fund scope: housing ED and IB funds under one roof does not make much sense (different
clients, offerings and stances)
Lightness of touch: ED funds operate in the market and work with fragile firms, so need strong
TA and market intelligence capacity; IB funds have no need of this but must be capable of highlevel business engagement and persuasion
Financing terms: for IB funds, use grants; for ED funds use grants or guarantees within blended
finance packages or else equity, quasi-equity or debt
Measuring results: where payments are for risk reduction, make them proportional to specific
results automatically measured by the firm (inputs purchased, units sold, wages paid)
Semantic niceties: while any fund that places the onus on some entity other than the donor to
come up with pro-poor business ideas can reasonably be called an ‘enterprise challenge fund’,
better to talk about IB funds and ED funds
11/10

12. Making business inclusive:
are enterprise challenge funds
useful tools?
Robin Davies, Associate Director
Kerri Elgar, Visiting Fellow
Development Policy Centre
Crawford School of Public Policy