PRIVATE SECTOR DEVELOPMENT INITIATIVES: Challenge Funds and other Cost-Sharing Mechanisms

DEMONSTRATING ADDITIONALITY IN PRIVATE SECTOR DEVELOPMENT INITIATIVES
A Practical Exploration of Good Practice for Challenge Funds and other Cost-Sharing Mechanisms

By Melina Heinrich, The Donor Committee for Enterprise Development (DCED)
April 2014, 47 pages

Donors are increasingly interested in sharing the costs and risks of private investments in developing countries – by giving money directly to businesses, paying for or providing in-kind services.

One possible model to do this is through competitive challenge funds and other matching grant or cost-sharing mechanisms that invite applications from businesses.

Matching grants are also a possible tool used by market system development programmes that aim to stimulate changes to a company’s business model.What these approaches have in common is the aim to bring about pro-poor private investments which would not happen (at all or in the same way, extent or time) without public support. While this means that there must be significant barriers to such investments, these are then typically expected to achieve sustainable and scalable commercial and development results and be replicated by other companies within fairly short time frames.

The key objective of this document is to explain practical ways of how to assess and enhance additionality before a cost-sharing partnership begins. Specifically, it aims

• to allow donors and implementing staff to credibly determine that the private investment and associated development impacts would be unlikely to happen (in the same way, time or extent) without public support;
• to help implementing staff to articulate clearly the specific way(s) in which they expect public support to change the company’s course of action;
• to suggest a process that is manageable for both implementing agencies and companies, considering time and capacities constraints; and
• to offer a common point of reference against which ‘good practice’ can be reported.

The document also describes appropriate monitoring of additionality in ongoing partnerships as well as ex-post assessments, i.e. after project completion. Further, it suggests ways in which the design of cost-sharing mechanisms with businesses may be improved to allow for better additionality assessments. The recommendations are based on a literature review and interviews with a range of practitioners.

These guidelines are based on inputs from 24 experts from 18 agencies and programmes. They provide a synthesis of the key elements (assessment criteria and principles) that can form the basis of good practice in demonstrating additionality.

Related PAEPARD blog posts:

• East Africa Agribusiness Investment Summit
• Setting-up an equity fund for SMEs agribusinesses in Uganda

Related:

African Agribusiness Academy

Status: In progress
Start project: May 1, 2010 End project: April 30, 2015

Client(s): Ministry of Foreign Affairs / Private sector companies

Partners:
Wageningen UR Centre for Development Innovation

Other parties involved: Sokoine University of Agriculture, Department of Agricultural Economics and Agribusiness (Tanzania)

• The Africa Agribusiness Academy (AA Academy) was founded in 2010 by 15 small- and medium- scale entrepreneurs from Kenya, Uganda and Tanzania. They sought co-operation with the aim to expand and strengthen their role in the food- and agribusiness sector.
• The active business platform stimulates individual entrepreneurial skills and commercial activities and fosters the development of small and medium scale (SME) agribusiness firms in Africa.
• Innovation, the sharing of knowledge and experience and the attraction of investors are important means to raise the decisiveness and enhance the quality of the entrepreneurs. Ultimately, the AA Academy aims to contribute to economic growth, optimization of rural income and the increase of food security in Africa.