Financial Deepening Challenge Fund Strategic Project Review

Financial Deepening Challenge Fund
Strategic Project Review
Jointly funded by
UK Department for International Development
(Financial Sector Team, Policy Division),
and
Bill and Melinda Gates Foundation, USA
December 2005
Acknowledgements
We are very grateful to all of the projects that we visited, to whom we were yet
another reviewer looking at the FDCF, and yet gave freely and generously of their
time. Many thanks to Enterplan who co-operated fully in providing us with access to
all of their extensive documentation, to answer all of our detailed questions patiently
and to provide office space for our researcher. Thank you too to all the other
stakeholders that we interviewed, who were thoughtful and insightful in their
responses. Most importantly, thank you to Sukhwinder Arora and all his colleagues
at DFID for their unstinting support, questions and feedback.
The review was undertaken by David Irwin and David Porteous supported by a
research assistant, Pooja Mall. The review was jointly funded by DFID and the Bill
and Melinda Gates Foundation. The opinions expressed in this review do not
necessarily represent official policies.
Irwin Grayson Associates, Unit 3, Hindley Hall, Stocksfield, Northumberland, NE43 7RY
Tel +44 (0)20 7193 9984 e-mail [email protected]
2
Contents
Acknowledgements............................................................ 2
Contents ........................................................................... 3
Abbreviations .................................................................... 4
SUMMARY ............................................................................ 5
Introduction.......................................................................... 5
Review of the programme ..................................................... 5
Review of programme management...................................... 6
Lessons ................................................................................ 7
Recommendations ................................................................ 8
MAIN REPORT .................................................................... 10

1. Introduction ............................................................... 10
2. Background ............................................................... 11
3. Review methodology .................................................. 18
4. Review of the programme .......................................... 19
5. Review of programme management ........................... 30
6. Management cost ...................................................... 40
7. Lessons...................................................................... 43
8. Conclusions............................................................... 49
9. Recommendations ..................................................... 50
Appendix 1 People & organisations consulted ................ 51
Appendix 2 Documents consulted .................................. 53
Appendix 3 The process ................................................ 54
Appendix 4 Other challenge funds................................. 57
3
Abbreviations
AECF Africa Enterprise Challenge Fund
BLCF Business Linkages Challenge Fund
BOP Bottom of Pyramid/ Base of Pyramid
CfA Commission for Africa
CFSI Centre for Financial Service Innovation
CSR Corporate social responsibility
DFID Department for International Development
FDCF Financial Deepening Challenge Fund
GSB Growing Sustainable Business (UNDP program)
HCF Health Care Facility (KDA)
ICF Investment Climate Facility
IPR Intellectual Property Rights
MTR Mid-term review
NGO Non government organisation
PPIC Pro-Poor Innovation Challenge (CGAP)
ROE Return on Equity
VC Venture capital
4
Financial Deepening Challenge Fund – Output to Purpose Review
Summary
Introduction
Launched in 2000, the £18.5m Financial Deepening Challenge Fund (FDCF)
built on DFID’s recognition that the private sector could contribute to poverty
alleviation and development. The fund provided grants of £50,000-£1m to share
risks with private sector firms in a competitive and transparent manner for
projects which met clearly defined criteria reflecting DFID’s priorities to improve
access to financial services. DFID hoped that the fund would help to change the
behaviour of private companies – both those who received support and also
others wanting to replicate the successes observed. Today, there is much talk of
the corporates serving the ‘bottom of the pyramid’. In creating FDCF when it did,
DFID showed commendable foresight.
The outcomes to date suggest that FDCF is likely to make progress towards
largely achieving its purpose in the remainder of its life till 2008. It has done so
at a cost level which is not excessive for the management of relatively small
venture or challenge-type funds.
Review of the programme

FDCF attracted 1,157 enquiries which ultimately resulted in 36 approved
projects, of which 29 proceeded (with one yet to start), worth a total of £72m
spread over 12 countries in sub-Saharan Africa and south Asia. We visited more
than half the projects by value and scored them for their actual or likely financial
viability, market impact and pro-poor impact. Our weighted average score of
2.61 is close to the 2.3 of the fund manager on the projects visited. This score
suggests that the outcome on the portfolio of projects is somewhere between
likely to be ‘largely’ and ‘partly’ achieved (section 4.1).
In our view, only a small number of firms that received support would have gone
ahead anyway.
FDCF required a leverage ratio of at least one. The fund achieved a leverage of
1.7 (and 3.9 overall if one includes the special case of Deutsche Bank). This
latter figure compares well with UK domestic challenge funds 2.7-3.7 (section
4.2.4)
Our analysis suggests that FDCF worked well (section 4.3) when:
The lead applicant sought out useful partnerships
Top management of participating companies bought into projects from the
outset;
The process was aligned with or brought about change in the corporate
culture;
The fund manager and panels flexibly applied the criterion of innovation;
1
Using the DFID scale of 1 to 5 where 1 is likely to be completely achieved and 5 is unlikely to be realised
Strategic Project Review 5

Those funded had not been previously donor funded;
Bidders perceived that there was a real competition for funds;
There was genuine risk sharing by a private partner;
Experience from the UK perhaps suggests that it is unrealistic to expect to achieve
fundamental changes in the short term (section 2.5). Nevertheless, FDCF has
largely met, or is expected to meet, the outputs described in the log frame,
though the focus is on inputs and outputs rather than on outcomes such as
change in behaviour of companies; the ultimate number of poor beneficiaries; or
the cost of making a difference compared to other donor funded projects. As a
result, the formal measurement by log frame targets fails to capture some key
outcomes, which is unfortunate as some are very positive. Nevertheless, on the
stated objectives, our overall assessment for the programme is “2: likely to be
largely achieved” (section4.4).
Review of programme management

The fund managers generally performed satisfactorily when measured against
the requirements of the terms of reference for the first phase (to 2004), and the
initial part of the second phase which started in January 2005.
After a general start through country launches and advertising, the marketing of
FDCF became more targeted and effective, resulting in better quality applications
(section 5.2). The fund managers and panels needed time to learn.
The time from submitting an enquiry to getting approval could be as long as 9
months; contract negotiations and detailed planning typically added a further 6-
12 months. This is long relative to other challenge type mechanisms, but FDCF
grants are larger, longer and more complex, requiring more care in approval
and subsequent contracting (section 5.4).
The country managers were expected to undertake an independent appraisal of
applications – which can sit uncomfortably with the role they also played of
providing advice to bidders. The risks inherent in this blurring of roles were, to
some extent, overcome by having independent panels which adjudicated the
awards – but the panels were still reliant on the recommendation provided by the
country manager. Splitting the roles of appraiser and advisor would add to the
cost, but the process would have been more transparent (section 5.4).
There has been relatively little emphasis to date on effective dissemination of
lessons learned although a quarter of the projects have been completed (section
5.10).
We found the financial management system complex and somewhat elementary
for a programme of this size, making it easy for errors to creep in and difficult to
extract summary information (section 5.11).
The mid-term review commented unfavourably on what was described as a high
level of management cost. We have benchmarked management costs against
other challenge funds and against norms in the venture capital fund sector. This
comparison suggests fund management costs are typically in the range 12 (low
end of WB norm) – 24 per cent; FDCF’s cost (excluding evaluation costs) is 20
6 Financial Deepening Challenge Fund

per cent, so the costs are not out of line. Whilst there may be some savings to be
made through more streamlined processes, it is unlikely that these could reduce
the cost of managing future challenge funds by more than a couple of
percentage points. FDCF was not, and could not have been, a light touch
mechanism (section 6).
Lessons
As one of the larger, older challenge-type mechanisms around, FDCF yields
lessons and insights into how such mechanisms can work best. Our conclusion
from the projects undertaken is that the private sector can be a driving force for
development and can respond to suitable opportunities and that challenge-type
mechanisms can be effective in catalysing and accelerating pro-poor investment
and innovation by the private sector. A number of lessons have been drawn
(section 7), many of which may help the designers of future challenge funds:
Whilst the number of good quality applications was substantially below the
target and the number of approved proposals was also below target, FDCF
did succeed in allocating all of its budget;
There are advantages in having one multi-country fund – monies can be
allocated to the countries where demand is greatest; fixed transactional costs
can be kept down; and there is scope to promote cross border projects;
Programme marketing needs to be precisely targeted;
The log frame needs to be designed so that there are clearer links between
the outputs and objectives;
A focus on achieving the outcome of commercially sustainable financial
services which target the poor would allow any organisation (including not for
profits) to bid and manage a project and might have provided a better way to
assess proposals;
Local panels add local expertise and knowledge, particularly of bidders and
potential partners, and bring a local perspective; the international panel
brings a broader knowledge, especially of what works, what had been tried
elsewhere, and where the pitfalls might be;
One of the selection criteria was that projects should be ‘innovative’ – this can
be helpful if it is applied flexibly (it does not necessarily require that a project
is brand new; it may have been tried in another country for example);
The projects that had a new technology development dimension appeared
more likely to have problems;
There is nothing inherently wrong with using a challenge fund approach for
enabling environment projects – but mixing them with other projects, with
different criteria and panels that don’t really understand, is not sensible;
Challenge funds can complement other DFID activities and can provide a
useful mechanism to which to refer private sector enquirers looking for
support;
Fund managers can both support bidders and advise a decision making
panel provided they are clear about which hat they are wearing at the time;

Loans (particularly no-recourse, participating loans) might offer a more
flexible support instrument than grants;
Programmes need an incentive mechanism to ensure organisations retain a
pro-poor focus rather than allowing them to drift upmarket;
The funding should be contracted in local currency;
Reporting & monitoring requirements should be limited to clear targets
agreed upfront which are as close as possible to bidders’ existing reporting
arrangements;
Participating companies will be more likely to provide reports on time if
accounting and reporting requirements reflect their normal reporting cycles;
The fund management role changes over time, moving from marketing
through support for bidders to support for successful applicants allied with
close monitoring;
The enquiry, appraisal, monitoring and financial management could have
been much more efficient (for fund managers as well as applicants and
panellists) if a (web enabled) database system had been set up at the
beginning in order to reduce paperwork and transaction costs for fund
managers and applicants;
The private sector expects to move quickly and becomes frustrated when
others are unable to move at the same speed.
There are some additional lessons specific to Africa Enterprise Challenge Fund2
(AECF):
Sector focus: even within one sector, it has been quite challenging for FDCF
to manage diverse areas (such as mobile banking, insurance, leasing etc); If
AECF is to address more than one sector, it will need sector expertise to
assess proposals and provide support to applicants;
In the financial sector in Africa, the environment is changing fast as new
donor programs have been established at country level; hence gaps for
donors must be carefully considered on the basis of trends observed on the
ground;
There is the potential for linkages with newer programs to achieve greater
pipeline and leverage.
Recommendations
Each of the lessons implies a recommendation for future challenge fund
designers. In addition, we have made a small number of recommendations
specific to the final stages of the management of the FDCF (section 9):
Dissemination strategy: Part of the ultimate systemic or market changing
impact of FDCF is through the demonstration effect of projects financed.
While a start has been made in developing and implementing a
2
Building on the FDCF and Business Linkages Challenge Fund, the Commission for Africa has
recommended a $100 million multi donor challenge fund for Africa to work with the private sector in
financial and non financial sector. This review is part of the design process for AECF

dissemination strategy, this should be given more focus and attention in the
time remaining. This should include the following:
The FDCF Website could be upgraded further
On knowledge creation: there should be more rigorous production of
independent business school-type case studies – not to be confused or
conflated with evaluations or publicity of FDCF funded programmes
Panel feedback: Reconvene all panels for report back since this will engender
goodwill in the targeted countries and form part of the dissemination process
Intellectual Property Rights: Review how technology related IPR can be actively
deployed elsewhere, especially on failed projects, using DFID worldwide
licence in the agreement.

Financial Deepening Challenge Fund – Output to Purpose Review
Main report
1. Introduction
DFID has long recognised that although the private sector has the potential to
make a material contribution to poverty alleviation and development, it needs
some encouragement. A consequence of this was the launch by DFID in 2000 of
the Financial Deepening Challenge Fund (FDCF) as one of a number of
challenge funds. FDCF was designed to promote partnerships with the private
sector and to harness its resources to develop and implement innovative and
commercially viable financial services that benefit the poor and lead to high
levels of pro-poor economic growth. Specifically, it was intended to make a
difference to poor people by improving access to financial services which would
lead to more opportunities to ensure sustainable livelihoods.
The fund provided grants of £50,000-£1m to private sector firms in a
competitive and transparent manner for project proposals which met clearly
defined criteria reflecting DFID’s priorities to improve access to financial services.
Firms had to be willing at least to match the money and, more importantly, to
engage in a project that (i) would otherwise not have been pursued and (ii) which
had the potential to be commercially sustainable after the support ended, thus
continuing to provide better financial services to poor people. In other words, the
fund was intended to change the behaviour of large companies – in those who
received support and by others wanting to replicate the successes observed. The
total budget, including administrative costs, was £18.5m.
Reaching into rural communities

FDCF has funded several projects which have sought to extend the reach of the banking system
in various countries into smaller and more rural communities.
In Kenya, Equity Bank (then Building Society) was one of the earliest FDCF recipients for its
mobile banking project. As Kenyan retail banks were closing branches in smaller towns at the
beginning of the decade, Equity used FDCF funding to purchase vehicles and develop systems
to support a mobile banking model. Banking outposts were opened in remote towns and
villages on particular days of the week, providing services to clients who would otherwise have
had to travel substantial distances to the nearest town with a full bank branch. The mobile
branches have proven highly viable; indeed, some mobile units have proven that the demand in
certain areas was sufficient to warrant the establishment of a full branch.
In Namibia, Bank Windhoek received an FDCF grant to roll out a new model of smaller, viable
community branches which provide full services in remote areas of northern and southern
regions of Namibia which lack banking presence. Early indications are that these some of these
new branches will be viable sooner than expected. The Bank also used FDCF funding to develop
the credit scoring process to support the development of a new loan product targeting informal
business.

This output to purpose review was commissioned by DFID in order to:
assess the programme and review its progress against the original objectives
and indicate the likelihood of it fulfilling its purpose;
review the management performance; and
identify lessons that might inform the design of challenge funds in the future,
including specifically the proposed AECF.
FDCF was one of the earliest large donor-backed competitive mechanisms for
providing funding directly to private sector. There is much talk these days of the
‘bottom of the pyramid’ and the work of the UN’s Private Sector Commission,
but DFID was ahead of all this and, as a result, has received much kudos.
Although only seven of the 29 projects which started were complete at the time of
review, five years of implementation provide useful lessons and insights into the
value of challenge fund type processes and how they can be improved in future.
Table 1: Highlights FDCF 2000/5

Enquiries 1,157
Concept notes 746
Applications 59
Approvals 36
Starts (incl. UTI, which is about to start) 30
Expected to complete 27
Average grant £517,000
Final commitment £15m
Leverage £58m
Countries covered 12
2. Background
2.1 The case for challenge funds
The case for challenge funds was set out in 1999 in the project submission for
the Financial Deepening Challenge Fund. It was noted that a challenge fund
approach had been used for a number of years by other UK Government
Departments as a way of promoting innovation in service delivery and greater
efficiency. These included, inter alia, Urban Programme, Inner City Task Force
Funds, City Challenge, EU Structural Funds and the Single Regeneration Budget.
Challenge funds are a means of allocating donor money to private sector
projects. Specifically, they were seen by DFID as a way of initiating partnerships
which might contribute to the achievement of development targets and also
benefit business. It was envisaged that challenge funds provided:
A transparent and competitive process for allocating public funds;
Local solutions for local problems with the responsibility for making choices
devolved to where the impact would be felt;
An opportunity for capacity building;

A stimulus for innovation and risk taking allied with a desire to disseminate
good practice and promote replication;
A partnership approach, including co-funding of projects and the sharing of
skills and experience.
Challenge funds exist alongside other concessionary instruments such as direct
accountable grants or social venture capital3, but can be differentiated as shown
in Table 2 below:
Table 2: Challenge Funds in perspective

Features Discretionary grants Challenge-type fund Social Venture Capital
Deal flow Identified by project Advertised—open to all Usually, solicited via
officers, often from who qualify networks
unsolicited approaches
Selection In line with program Eligibility criteria Eligibility
mechanism Competition (in rounds) Due diligence
Decision- By donor according to Panel of some sort Investment committee/
making size board
Matching Varies Varies Typically minority share
only i.e. >1:1
Monitoring Ranges from light touch Ranges from light touch Intensive engagement ex
to quite intensive to medium touch post
It is important to note that FDCF was envisaged as a classic challenge fund but,
over the course of its life and in response to experience on the ground, has
evolved to become more like a social venture capital fund: specifically, the fund
manager had to become more active in soliciting quality proposals and
providing more support during project implementation. We do not see this
evolution as problematic: on the contrary, the fund should be congratulated for
responding entrepreneurially to the circumstances experienced in practice.
However, FDCF remains differentiated from pure social venture capital in that it
continued openly to solicit applications through a competitive funding process.
This means that it still belongs in the challenge fund-type sector.
But what is the challenge fund-type sector? In course of this review, we came
across numerous characteristics of challenge-type funds. We boiled them down
to a short list of five characteristics shown in Table 3 but even then, we found that
there was considerable variation across the five challenge-type funds surveyed in
this review. Some believed that challenge funds had to be competitive (i.e. they
rationed funds even if bidders were eligible for funding) but FDCF in practice was
not; some, but not all, argued that explicit private sector match funding was
required. These differences are reflected in the table below.
3
Social venture capital takes the principles of venture capital and applies them to philanthropy. It aims to
assist non-profit organizations and leaders of social change by providing financial support, often though not
always, in the form of grants. Unlike normal charitable giving, however, there is an expectation that
management and technical support will accompany the finance – so that the recipients really can transform
socially valuable ideas into implementable and sustainable projects.

Table 3: Challenge type funds1
Fund ProPoor FDCF (DFID) Centre for BLCF (DFID) Development
Innovation Financial Marketplace
Challenge Service (World Bank)
(CGAP) Innovation
(Ford)
Years of 2000- 2001-2006 2003-2006 2001-2006 1998-present
operation present
Deal flow Advertised: Advertised: Advertised: Advertised: Advertised:
open to all open to all open to all open to all open to all
Selection Competition Competition Competition Competition Competition
mechanism (in theory) (in theory)
Decision Internal External Mainly External panel Mixed panel
making panel panels external panel
Match No Yes No Yes No
required
Monitoring Light touch Medium touch Light-medium Medium touch Light touch
approach2 touch
Notes: 1. We reviewed other challenge funds; the Civil Society Challenge Fund is included in appendix 5, but
excluded here because the main beneficiaries are NGOs rather than the private sector.
2. Monitoring approach: this is our assessment of the extent and nature of procedures required to process
applications and then monitor and oversee successful projects.
The differences among these challenge-type funds have led us to conclude that
there are really only two essential characteristics of a challenge-type fund:
There is public solicitation of applications i.e. open to all which meet its
criteria (as opposed to by invitation only); and
There are multiple rounds i.e. not one off.
Despite their differences, the five funds cited in Table 3 meet these criteria.
Appendix 4 gives further detail on the processes, turnaround times, and costs of
the five funds. We consider the additional four to be the most directly relevant
challenge fund comparators for FDCF.
Whilst FDCF was competitive in theory in that, if there were more eligible
proposals than its capacity to fund, it would have chosen among them on a
competitive basis, in fact FDCF was never in the position of being constrained
from funding proposals considered desirable. This differentiated it somewhat
from some of the others above which receive large numbers of eligible
applications and fund only a small proportion.
Whilst not all funds require it, we believe that requiring leverage or matching by
bidders is of crucial importance in ensuring their commitment (see below).
2.2 Conceptual framework for challenge funds
Private companies exist to make a profit for their shareholders. Some companies
may seek to maximise profit in the short term; others may recognise that the
route to long term success is through making steady profits. Some companies
take a more responsible approach to their business recognising that they have
obligations to their customers, suppliers and staff as well as to the wider

community and to the environment. But all companies take care over investing in
new products and services. Most large companies will think carefully about the
possible risks and expected return that they will make on any individual
investment. Many define acceptable risks and returns by setting a ‘hurdle rate’.
Proposals for investment need first to clear the hurdle rate – and then are
competing with other proposals for limited investment funds.
Whilst the acceptable risk/ reward ratio will be different for different firms, they
will all have a risk-return threshold. It is quite possible for firms to have great
ideas but not to progress them because their risk is perceived to be too high for
the expected return. The provision of some external finance, intended to share
the risk in some way, can push change the arithmetic and push projects above
the threshold – encouraging businesses to implement a project which they would
otherwise not pursue.
Where there is the potential for positive social impact on poor people, DFID
desires to align the incentives for private companies by reducing the financial risk
sufficiently for the project to proceed. Coincidentally, being seen to have DFID
alongside appeared to have reduced reputational risk and was seen by
successful bidders as important. It will neither support projects where the social
impact is too low nor those which are sufficiently attractive to the firm and would
go ahead anyway. So, 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. This can be represented graphically in the figure below, as moving a
project from the bottom right quadrant (projects which meet DFID’s desire for
social impact) to the top right quadrant (projects which meet the business’s desire
for financial return).
Figure 1: Moving attitudes to risk
Minimum impact
required by DFID
High
Risk weighted financial return
Minimum level of return

required by company
Low
Low High
Market/ social impact
The test of success of a challenge fund is therefore the extent to which it has
achieved this on its portfolio of funded projects. As corollaries of this

Rejected projects should be either of low market/ social impact (that is, to the
left of the line representing minimum acceptable impact) or already
potentially self sustaining, therefore not needing grant funding (that is, above
the horizontal line representing minimum level of return);
A failed project is one which either fails to convert to become financially
sustainable as shown by the arrow, or which, even if it becomes profitable, in
practice fails to achieve an acceptable level of social or market impact (i.e.
ends up in the top left quadrant).
2.3 FDCF’s defined objectives
The purpose of the FDCF was originally defined as being to “widen the range of
products available in poor countries, extend services to the poor and improve the
efficiency of financial intermediation”.4 The defined outcome of the challenge
funds being proposed was improved access by the poor to resources, markets
and sustainable livelihoods.
In the revised log frame, however, the purpose was defined far more clearly: “to
improve access to financial services for poor and previously excluded groups in
Africa and south Asia”.
More specifically, the planned outcomes were described as:
The development and introduction of new financial products and broadened
markets;
Strengthened capacity in local financial institutions for more effective financial
intermediation; and
Improved organisational infrastructure, and regulatory and legislative
framework, in the financial sector.
These outcomes were translated into detailed log frame indicators which are
assessed in Section 4.
2.4 Private sector engagement in “Bottom of the pyramid”
We sought to anchor the review of FDCF in the prevailing thinking of pro-poor

engagement by the private sector. The discourse has developed notably since the
FDCF was launched in 2000.
A leading figure, responsible for much of the publicity in the past two years, has
been C.K. Prahalad, author of the much discussed book, The Fortune at the
Bottom of the Pyramid. In it, Prahalad argues that it is possible for private
companies to make a significant impact on poverty whilst also making a good
return on their investment. Specifically he argues for the need to mobilise “the
resources, scale and scope of large firms to co-create solutions to the problems
at the bottom of the pyramid, those four billion people who live on less than $2 a
day”.
4
DFID, “Challenge Funds for Business Partnerships”, PEC (99)12, 1999, p1

Figure 2: Global Economic Pyramid
Source: Prahalad & Hart and reproduced in Grayson & Hodges, "Corporate Social Opportunity – Seven Steps to make
Corporate Social Responsibility work for your business", Greenleaf, 2004
The poor in every country are disadvantaged: they want to buy in small quantities
so are charged a premium; because they have no transport, they are often
restricted to shopping at the local, smaller stores which charge more; if they can
get a loan at all, they are seen as a credit risk so are charged a higher rate of
interest. Yet the poor do have money. As Professor Michael Porter has shown,
often the disposable income in deprived areas is higher than in prosperous areas
– if considered as disposable income per square mile rather than disposable
income per capita.
Hence developing the right services delivered in the right way can be a profitable
proposition. Prahalad argues that “when the poor are treated as consumers, they
can reap the benefits of respect, choice and self-esteem and have an opportunity
to climb out of the poverty trap”.
This thinking is entirely consistent with the logic behind challenge funds, and the
FDCF in particular. Indeed, FDCF has in some sense been ahead of its time as a
mechanism of donor engagement with the private sector which seeks to
incentivise these types of win-win outcomes at the bottom of the pyramid. Several
donors with whom we spoke recognised and praised this forward thinking aspect
of FDCF.
Apart from Prahalad, many other voices have been raised on the issue of private
sector engagement with development and poverty. Perhaps the most prominent
has been the publication in 2004 of the report “Unleashing Entrepreneurship” by
the UN Commission on the Private Sector and Development (of which Prahalad
was in fact a member). This Commission underlined the special role which the
private sector can play in achieving the Millennium Development Goals.

The key UN programme to take forward this initiative is the Growing Sustainable
Business (GSB) program of the UNDP5. We consulted with the global manager
and a country manager of this program as part of the review. GSB does not
provide capital to the private sector but instead seeks to promote “business-led
enterprise solutions to poverty” by providing brokerage and information services
in country. These link local and international companies to projects with high
developmental impact. GSB country programs are now live in a number of
countries, including two in which FDCF operated: Tanzania and Kenya.
Various academic institutes and think tanks have also developed a powerful
presence in this space. Among them are:
The William Davidson Institute at Prahalad’s university (University of Michigan
Business School) runs a BOP research programme6;
The Washington-based World Resources Institute, which has convened major
fora, such as the Poverty and Profit Conference in San Francisco in December
2004, and pursues research and dissemination7; and
The Base of the Pyramid (BOP) Learning Laboratory, a joint program of two
US universities which, inspired by Prahalad’s work, “explores the
opportunities and challenges associated with entering base of the pyramid
markets”.8
These institutes and others are producing a fast growing volume of research and
writing in this sector. Conclusions to date strongly support the underlying core
assumption and philosophy of FDCF, namely that private sector innovation can
have positive impact on poverty.
However, there has been less published research to date on how publicly funded
mechanisms can support and fund this. Hence, the relevance of this review of the
FDCF as one approach which has been implemented for more than five years.
Indeed, Ted London, Director of the Base of the Pyramid Research Initiative at the
William Davidson Institute and a faculty member of the University of Michigan
Ross School of Business, sees challenge funds like FDCF as potentially “a very
important mechanism to encourage the private sector” in BOP markets.
2.5 The UK experience of challenge funds
There have been a number of challenge fund regimes in the UK, largely intended
to provide monies for economic regeneration including substantial programmes
such as the Single Regeneration Budget. One of these programmes, City
Challenge, has been thoroughly evaluated and has some lessons which may be
pertinent.
There were 31 City Challenge Partnerships which ran in deprived urban areas
between 1992 and 1998. Each partnership, led by a city authority, was eligible
to bid for £37.5m over five years.
5
See www.undp.org/business/gsb/
6
See wdi.umich.edu/ResearchInitiatives/BasePyramid/Resources/
7
See www.nextbillion.org
8
See www.johnson.cornell.edu/sge/boplab.html

Seven key findings emerged from the evaluation:
Get the strategy right: clear linkages need to be established between need
and opportunity; recognise that it may not be realistic to expect to achieve
fundamental changes in the short term – limited-life programmes are
important in raising interest and concentrating effort;
Get the right people and leadership: successful partnerships need good
practitioners;
Involve the community in developing and implementing projects;
Work with Partners: City Challenge created some successful partnerships,
enabling local areas to benefit from the know-how, resources and enthusiasm
of a range of public, private and voluntary sector organisations;
Get the right projects and the right project mix: Flagship projects can assist in
developing momentum and demonstrating early success;
Effective delivery and forward planning is important if projects are to succeed;
Creating a programme infrastructure: ensure the programme infrastructure is
right at the start; flexibility given to Partnerships to develop their own systems
led to a significant waste of resources through a duplication of effort; much
time and energy went on monitoring and evaluating – there would be
benefits from more standardisation and from the use of simple computerised
systems.
Every £1 of expenditure by City Challenge levered in a further £3.78 of private
sector funding and £1.45 from other public sector partners. For every £1 million
of public expenditure the City Challenge Programme generated 27 additional
jobs as well as a number of other outcomes: 1,215 sq. m of business and
commercial floor space built or improved, 44 people trained who obtained a
qualification, 8 new dwellings completed, 29 dwellings improved, and two
community facilities established or improved. The competitive nature of City
Challenge galvanized cross-sectoral involvement, required commitment to future
delivery and produced more positive and imaginative proposals for change.
The Single Regeneration Budget was the main source of support for local area
regeneration in England over the period 1995-2001. The evidence suggests that
every £1 of SRB funds levered an additional £2.70 of private sector spend.
3. Review methodology
In completing this review, we
Visited 13 approved bidders, including three (of the 7) completed projects, in
South Africa, Kenya, Tanzania and India, as well as ‘global’ projects based in
UK and US, representing 36 per cent of approved projects, 40 per cent of
projects by commitment and 49 per cent by disbursement;
Interviewed by telephone a further 7 approved bidders, representing a further
27 per cent by value of committed funds and a further 23 per cent by
disbursement;
Interviewed one bidder who subsequently withdrew after commencing and
two bidders who were declined;

Interviewed the chairman of the international panel, one other member of the
international panel and three chairman of regional panels;
Interviewed two country managers and two former country managers;
Interviewed four DFID country offices and a number of staff at DFID in
London;
Interviewed five interested stakeholders;
Interviewed the managers responsible for four other challenge-type funds
closest to FDCF;
Reviewed a wide range of documents made available to us by the Fund
Manager;
Reviewed, in brief, the financial transactions from documents made available
to us by Enterplan and interviewed the administrators and the auditor;
Contacted private equity fund and social venture capital fund managers and
others in order to undertake a benchmarking exercise and review of
management costs.
The names of all the people interviewed are listed by country in Appendix 1.
Field work was completed in August and September 2005.
4. Review of the programme

4.1 Project portfolio
FDCF is, in essence, a portfolio of investments in pro-poor innovation: 29 have

proceeded to disbursement and one is about to start. We believe that its
performance should be considered as a portfolio which is somewhat like venture
capital in its risk profile. As such, our expectation from long established venture
capital (VC) norms is that it would include a few exceptional ‘stars’, some ‘dogs’
and a bulk of ‘average performers’. The absence of ‘stars’ would be
problematic, since they yield the most return; and the absence of ‘dogs’ would
suggest that not enough risks were taken.
A major difference with a VC fund, however, is that VC success is measured
entirely in terms of financial return to the fund; for FDCF, the ‘return’ is
measured through the creation of financially sustainable projects which have,
and continue to have after the financial support ends, a pro-poor impact. This
social impact is much harder to measure, especially prospectively, before the
completion of a large enough sample.
The fund manager periodically ‘scores’ each of the projects, using the DFID scale
of 1 to 5, where 1 indicates that a project is likely to achieve completely its
objectives as agreed in the initial contract, and 5 indicates that it is unlikely to be
realised. This is tracked and reported for each project. We use here the score
reported by Enterplan in the April 2005 progress report for each project as the
most recent fund manager score available.
In visiting the projects, we attempted to assess each of them more broadly and to
award our own three part score, using the same 1 to 5 metric, for:

financial viability: whether they have, or are likely to, achieve financial
sustainability within the organisation,
market impact, that is, the systemic effect in the local or wider market as
defined, which is connected to the scale potential & the competition created
through the demonstration effect; and
pro-poor impact, which we took to be the percentage of clients reached or
likely to be reached who were poor in local terms.
Our rationale for this was (i) to tease out key dimensions of the programme and,
since we were unable to visit all projects; and, (ii) to test the reliance we could
place on the fund managers’ scores for the portfolio as a whole.
Our scoring is by necessity impressionistic, since our scope of work did not
include detailed reviews of the projects. We therefore had to rely on Enterplan’s
& the bidders’ project reports and our own knowledge of the relevant markets to
support the views that we formed during relatively short meetings with the
bidders.
Furthermore, almost three quarters of FDCF projects are still underway,
scheduled to complete in the next two years, hence our assessment is a
projection – a ‘likely to…’ in DFID language.
We have included in our scoring all projects on which disbursement took place,
even if they subsequently cancelled and withdrew before completion: two
withdrew after the first disbursement and another, Mahila Nagrik was suspected
of fraud and effectively suspended so these qualify as failed projects. Our
weighting takes into account only the disbursed amount on these projects
however, whereas on all projects still underway, the amount awarded (which is
expected to be disbursed) was used. This requires careful adjustment of numbers
reported by fund managers as shown below.
Table 4: Reconciliation of portfolio baseline numbers
Number Value
As reported by Enterplan:
Total Projects approved 36 £17,548,000
Less: projects withdrawn 6
Less: projects cancelled after start 3
Project agreed but yet to start 1
Enterplan reported live projects 26 £14,925,000
Our sampling universe (ie, live + withdrawn) 29 £15,017,000
In Table 5 below, we show both the fund manager’s and our own scores
covering the projects that we visited, but excluding the enabling environment
projects. We concluded that interviews by telephone, whilst providing good
qualitative material, did not provide sufficient confidence to allocate scores. For
each project, we calculated a single score simply by averaging the three
individual scores. The simple average is then the arithmetic mean for all of the
projects visited. For the projects that started but were cancelled (including Mahila
Nagrik) we imputed scores of 5 to the fund manager. On this basis, the fund

manager has an overall score of 2.3; ours is close but slightly higher (i.e. lower
achievement) at 2.6, suggesting that the portfolio of project is on average
somewhere between likely to be ‘largely’ and ‘partly’ achieved.
Table 5: Portfolio overview
Simple average Weighted average
Our score – overall 2.9 2.6
Enterplan – score for visited projects 2.5 2.25
Enterplan – overall 2.7 2.33
As suggested earlier, the spread of outcomes matters in a VC-type environment.

The range of scoring is shown in the histogram below.
Figure 3: Distribution of scores
70%
60%
50%
40%
%
30%
20%
10%
0%
1-1.9 2-2.9 3-3.9 4-4.9 5
Band
Rev - TOTAL Enterplan Rev - financial Rev - market impact Rev - pro-poor impact
This figure shows a shape close to what might be expected for a private equity
fund – 20:50:30 – that is, a small percentage of stars, the majority middling and
a relatively substantial failure tail.
In the figure, we also show the scores for the three dimensions we used; note that
the relative failure is higher on the direct pro-poor dimension. This is discussed
further in 4.2.2 below.
As another way of depicting the portfolio, we have plotted all the projects on a
bubble chart in Figure 4 below. The horizontal axis averages the market impact
and pro-poor impact score in which DFID is interested, and in line with the
framework shown in Figure 1 earlier. The size of the bubble represents the grant
commitment; red bubbles represent completed projects, where it is easier to
draw firm conclusions.

Figure 4: Plotting of portfolio: viability by impact
High
Financial viability
Low
Market/ social impact
Low High
This Figure shows a clustering of projects in the top right quadrant, reflecting our
view that there are likely to be a number of real successes, although only one has
been completed to date. There are failures and likely failures too: some may
have become viable but with little impact (top left quadrant); or failed altogether
(bottom left quadrant).
This figure reinforces our general conclusions about the portfolio of projects
created by the FDCF programme: that it has generated an expected spread of
projects, including some high potential impact ones, with an average between
likely to largely and somewhat success. We are, therefore, relatively positive
about the programme. Furthermore, our weighted overall score is close to that of
the fund manager, therefore we believe that we can in general rely on their score
for the projects that we did not visit.
4.2 Issues arising
4.2.1 Scale
FDCF grants averaging £517,000 are larger than other challenge-type funds
but, spread across 12 countries with no single country receiving more than 16
per cent, the programme as a whole is still relatively small to achieve market
impact in any country. Therefore it must rely on demonstration effect to achieve
market impact. This is why the dissemination of knowledge and learning from
projects – successful and failed – is so important, a theme to which we will return
later.
Interestingly, there were no complaints from bidders that available grants were
too small, even though some were minute relative to the revenue or cost base of
certain recipients (vide Vodafone, ITC). A commonly heard view was that any

project larger than £2m (i.e. £1m matched) in the low income space would have
been considered too risky, at least at the time.
4.2.2 Poverty linkage
Financial sector support is often indirect in terms of poverty impact, except for
direct microfinance programmes. Nonetheless, the financial sector can have a
high market impact as it touches a range of firms and those firms touch a wide
range of people. This is reflected in the higher average scores we have awarded
for market impact than for pro-poor impact above. However, market impact
could well result in greater pro-poor impact over time, but this may be hard to
pick up in the timeframe of the project. Direct pro-poor impact is also quite
expensive to monitor accurately.
This does not invalidate the programme; on the contrary, there may be some
tension between achieving financial sustainability on a new product and going
down market with it, as opposed to serving more lucrative middle markets which
are unserved. In other words, existing financial institutions should be viable
before they can sustainably push down market. The smart card projects
supported in Africa represent this trade-off well.
This observation does suggest the need to recognise the likelihood of more
indirect pro-poor impact in less developed financial systems.
Notwithstanding these limitations, to be regarded as successful, the ultimate
impact of challenge funds must be pro-poor. One limitation inherent in the
nature of the challenge fund as a one off grant is that is does not address the risk
of ‘mission drift’. This is the risk that an entity may receive money for pro-poor
product or process, but having developed it, then moves upmarket, with no
further incentive or penalty as a result of serving a different market from that
intended. To our minds, this suggests the need to consider other types of
instruments, such as conditional loans, which may be repayable in circumstances
such as these. This will be discussed further in the lessons section.
Mega Top
ITC has been working with farmers in India for many years. It noted that farmers generally
failed to get the best price possible for their soybeans and other produce and started to consider
a new approach – the eChoupal.
Choupal is the Hindi word for a meeting place, one which typically provides an opportunity to
come together at the end of the day to exchange news and views and is an important part of
Indian farmers’ culture.
ITC developed the concept of the eChoupal based on the knowledge sharing found in a
traditional Choupal, but utilising a computer and web connection located in a home in the
village. That is quite a challenge in rural India. The computers are equipped with an
uninterruptible power supply together with a solar cell powered battery charger; they are linked
to the internet via VSAT.
Essentially, the eChoupals provided a new and relatively low cost way of assisting farmers by
providing better access to information about the daily price of soybeans, so they can decide
where and how much to sell, and so get better prices for their produce; coincidentally, it also
allows ITC to pay less and encourages the farmers to raise the quality of the produce that they
sell.
With support from FDCF, ITC has established Mega Top Insurance which is utilising the

eChoupal network to sell affordable life insurance and savings schemes in rural Madhya
Pradesh. This not only provides a much needed financial service to people who previously had
difficulty accessing life insurance but also provides commission back to the ‘sanchalaks’ at the
centre of each eChoupal.
4.2.3 Additionality
An important question is whether firms that received support from FDCF would
have gone ahead anyway. This proves to be difficult to answer definitively. For
one thing, as expected, almost all recipients said that FDCF money was essential,
or at least important, to their project going ahead. Interestingly, the converse was
also true: i.e. the two failed bidders interviewed did not go ahead when they
were declined. In the absence of FDCF funding, some recipients said that they
would have sought other donor sources. These tended to be among the majority
group (15 out of 29) of FDCF recipients which had previously received donor
funding.
Closer analysis of FDCF projects suggests two main types of additionality:
Catalysis: i.e. where FDCF genuinely supported something which would not
have happened.
Acceleration: where the project might have happened in time but FDCF
accelerated or boosted the process
We believe that both of these occurred amongst successful bidders.
Table 6: Examples of additionality
Catalyst Accelerator Could have happened without
FDCF support
JSE Bank Windhoek Coop Bank
Tata AIG CRDB Equity
Teba 1 Megatop KDA
Vodafone SOCREMO
Teba 2
Additionality
Tata AIG does not promote innovation within the company; rather they simply expect to utilise
products and processes provided by AIG. FDCF gave the opportunity to a determined member
of staff to offer low cost insurance through a totally new delivery mechanism. Other parts of the
company are now exploring whether they too can use this new delivery mechanism.

4.2.4 Leverage
Leverage is the measure of private sector investment unlocked by FDCF

investment. FDCF required a leverage ratio of at least one. Other challenge-type
funds we surveyed often have no such requirement at a project level, although
they may require a project to demonstrate that it is viable.
We reviewed the leverage achieved to date and the expected final leverage. The
overall calculation of leverage is no different to the fund managers and is based
on the final budgets agreed with the successful bidders.
Figure 5: FDCF expenditure analysis
IT i/ s t ruc t ure & h/ wa re
Lo a n/ e quit y pro g
P e rs o nne l
C a pit a l e quipm e nt
O t he r o pe ra t ing e xs
P ro duc t d/ m e nt , s e t up
Le a s e dis burs e m e nt s
M a rk e t ing
S o f t wa re ( +ins t a l)
T ra ining
C o ns ult a nt s
V e hic le
T ra v e l
0 500 1,000 1,500 2,000 2,500 3,000

Thousands
Figure 6: Private sector contribution budget analysis
E quipm e nt
IT i/ s t ruc t ure & h/ wa re
P e rs o nne l
Lo a n pro gra m m e
M a rk e t ing
O t he r o v e rhe a ds
O t he r F Is
P ro duc t de v e lo pm e nt
Wo rk ing c a pit a l re q' t
Le a s e dis burs e m e nt s
C a rd purc ha s e
S o f t wa re
T ra ining
F ina nc ia l c ha rge s
0 500 1,000 1,500 2,000 2,500 3,000

Thousands

As well as looking at leverage, we analysed the expenditure, both for the FDCF
support and for the matching contributions. The fund manager did not use a
standardised classification for expenditure, so we have reclassified as far as
possible (from nearly 500 different expenditure descriptions to around 40,of
which the largest are shown) to give an impression of where the money is going.
In many cases, it is difficult to tell how much of the private sector contribution was
being provided as cash, and how much is the time of staff who are already
employed or other types of in-kind support, such as costing in the provision of an
office which already exists. Given that the highest costs are for equipment, IT
infrastructure, personnel, capitalising loan and equity funds and marketing, we
concluded that most expenditure by successful bidders is genuine additional
expenditure.
However, our analysis did reveal some questionable contributions: one company
suggested that it was providing £934,000 as a working capital requirement –
presumably if genuinely working capital they will get this back, so it is dubious
whether it should count as leverage; one company claimed they were
contributing £192,000 as interest on the provision of their internal funds; one
allowed £168,000 for ‘doubtful receivables’, SOCREMO had considerable
support from other donors, which does not count as private sector leverage,
though in fact the log frame makes no distinction.
One project, Deutsche Bank, involved the provision of first tier equity to a
leveraged commercial microfinance fund which meant that they achieved an
unexpectedly high leverage. The fund manager seems faintly embarrassed by
this and tends to exclude it when quoting their overall leverage. Our view is that
all portfolios should have some stars and all should count – which means that
the FDCF achieved a leverage of 3.9 which compares well with UK domestic
challenge funds 2.7-3.7.
Deutsche Bank
Deutsche Bank is one of the world’s largest private financial institutions. It has in the past
supported microfinance entities through the activities of its corporate Foundation. However,
responding to the demand for funding and the improved risk profile, Deutsche Bank set about
in 2004 creating a Commercial Microfinance Facility. The Facility, to be managed by Deutsche
Bank, provides local currency financing to microfinance institutions across the world. At its
closing in November 2005, the facility had attracted $75m from a consortium of leading
institutional investors, many of whom had not invested directly in microfinance instruments
before, and other development agencies. The facility has a three tier structure, with an FDCF
grant of £833,000 ($1.5m) constituting part of the first tier equity. This tier enhances the risk
profile, and hence the rating and the price, of the institutional investors bonds at the third tier.
Hence, FDCF’s investment has helped to gear commercial and quasi-commercial funding worth
50 times, in one of the first commercially funded microfinance facilities which has attracted
mainstream institutional investment.

4.3 Critical success factors across portfolio
We have attempted to identify the critical success factors for the FDCF.
Specifically, we think that the FDCF worked well when:
The lead applicant sought out useful partnerships e.g. Tata AIG; identifying a
good NGO with which to work and then identifying more NGOs as their
project developed;
Top management bought into projects from the outset, such as in Mega Top;
conversely, examples like the Coop Bank project where they did not;
The FDCF process was aligned with or else brought about change in the
corporate culture: for example, following FDCF interaction, Vodafone has
started a social products unit in the mainstream business and has established
a small internal challenge-type fund to support proposals with high social
impact which might not otherwise be funded through the internal product
development process;
The fund manager and the panels applied the criterion of innovation on a
flexible basis, for example allowing aspects of Bank Windhoek’s rollout that
were only innovative in the local context for banks;
Those funded had not been previously donor funded – they were seemingly
more grateful for the support, more apologetic when projects progressed
slowly and more determined to demonstrate success; conversely, it was not
the case that ‘donor darlings’ always failed – we rate the completed Equity
mobile banking project highly for impact – but there does appear to be a
correlation;
Bidders perceived that there was a challenge and that they were competing
for funds – this meant that the winners felt better and that the losers felt less
bad;
There was genuine risk sharing by private partner – with organisations having
a sufficient financial commitment themselves to be committed to making the
project a success.
FDCF’s approach to funding worked less well when:
In the enabling environment window: The applications here were rushed,
somewhat contrived to fit, and rejection by the panel led to some of the most
negative comments we heard about FDCF from a failed bidder; the panels
didn’t have the experience to assess; and outcomes of these are not very
clear;
Applicants pulled together partnerships that were ineffective, perhaps
because one partner was not really interested or committed, such as KDA with
K-Rep Bank, or some of the projects that were approved but never proceeded
because the lead partner was not the driving force for the proposal;
Projects required the development of new technology since the technology
aspects often overwhelmed the organization’s capacity to manage them
(Teba Bank) or even the clear business case: the latter is not clear even in the
Vodafone project, which we rate highly as an example of internal corporate
culture change;

The assumption was made that, merely because they were regulated, banks
would be more reliable funding partners and would have the capacity to
implement. Several examples (TEBA, Coop Bank, K-Rep Bank) show that this
was not the case.
FDCF and technology

IT is at the heart of modern banking. FDCF has financed a number of projects in which banks
developed and/ or deployed new technology in order to extend the reach of financial services.
However, technology projects can be expensive and risky. FDCF’s experience of impact from
these projects to date has been mixed.
In South Africa, TEBA Bank, a small bank with a focus on banking unbanked people, developed
a pre-paid debit card offering known as the A-Card in partnership with an IT company. The A-
Card has the functionality of a smart card, even though it is acquired on line through wireless
point of sale devices. Using new and innovative technology to reduce the cost per transaction,
the A Card would make cash accessible to card holders not only through existing POS devices
but also in remote areas where there is wireless connectivity. While a pilot roll out has shown
reasonable take-up of the product to date, there have been long delays in full rollout; and the
technology partnership between TEBA Bank and its IT partner was recently ended.
In Tanzania, CRDB Bank is one of the largest retail banks. With FDCF support, CRDB developed
and rolled out an offline debit/ smart card payment card called TemboCard, which can be
utilised at Automated Teller machines (ATMs), Branch Teller Terminal (BTTs) and Points of Sale
(POS). The take-up of cards by urban and middle income customers has been strong, and the
product proved highly viable. However, the component of the project which envisaged installing
point of sale devices to load and withdraw cash in rural SACCOs has been much less
successful, in part due to the high cost of the cards and the limited network at which to use them
at present.
In Kenya, Co-op Bank aimed to provide standardized technology to enable SACCOs’ Front
Office Service Associations (FOSAs) to offer Co-op Bank-supported retail products under a
franchising model, including deposit accounts, credit facilities and current accounts. In addition,
other services were offered by Co-op Bank to SACCOs, including staff training on banking
operations and supervision of the FOSA operations. While there has been good take-up of
certain franchised products by SACCOs, it has proven difficult to deploy the standardised
banking package purchased under the project and Co-op Bank has recently decided not to
offer the technology.
4.4 Progress measured against log frame indicators
The original FDCF log frame defined the goal as “economic, social and
environmental benefits of business in low income countries lead to sustainable
and equitable income growth for the poor”. It defined the outcome (the verifiable
indicator) as “increase in number of companies actively involved in more
responsible ways of doing business”. We would argue that responsibility is
irrelevant and, in any event, is impossible to verify. Companies can be totally
responsible in their business activities without delivering more or better services to
poor people.
The log frame defined the purpose as “to broaden access to sustainable
livelihood opportunities for poor and previously excluded groups by establishing
win-win partnerships/ alliances between UK, EU and local private sectors,
Government, NGOs and other relevant bodies”. The verifiable indicators were
an increased number of partnerships and producer groups perceive
improvements in living conditions.

The revised log frame, adopted after the mid-term review, rewrote the goal as
the original purpose and wrote a new purpose: “to improve access to financial
services for poor and previously excluded groups in Africa and South Asia”. This
was a dramatic improvement and reflected what the FDCF was actually trying to
do. The revised verifiable indicators (increased productivity and new business
start ups; commercial rates of return; introduction of new and innovative
financial products and services; continuing sustainability of new products and
services; speed of implementation of supported projects) were also a
considerable improvement in that they reflected the objectives more closely but
also stood more chance of being accurately measured.
However, we are still critical of the log frame. In particular, the objectively
verifiable indicators focus on inputs and outputs rather than on outcomes. For
example, they require a specific number of approved projects, a number of
organisations who have not previously received donor support, etc, rather than
focusing on, ideally, change in behaviour of companies – both supported
companies and companies who are keen to emulate what they see happening;
the ultimate number of poor beneficiaries; or the cost of making a difference
compared to other donor funded projects.
As a result, the OVIs fail to capture facts such as:
that Vodafone saw the value in the process with the result that they have now
created their own internal mini-challenge fund, worth about £1m, to support
further projects;
Tata AIG is not traditionally a company that promotes innovation, instead
focusing on products developed by AIG, but the development of a new
delivery channel has been watched by other divisions who now want to start
making use of it.
These changes inside corporations are more likely to result in sustained impact
over time, than the volume of applications per se.
Individual projects have targets for the number of people to be supported by the
time that FDCF support ceases. However, there is no overall outcome target
defined in the log frame, so it is difficult to assess how much impact the
programme is really having in addressing pro-poor issues. One can look at
beneficiaries and size of populations and think that the impact looks small. One
way round this might be to look at cost per ultimate beneficiary which might tell a
more convincing story. For example, Tata AIG has “only” reached about 7,200
beneficiaries so far, but FDCF has only contributed £50,000, so the cost is about
£7 per head, which is likely to fall dramatically over the rest of the project.
We are particularly critical of the OVI for the goal which refers to “increased
productivity and new business start ups in the small and micro-enterprise sector
targeted by challenge projects” since most projects had nothing to do with
encouraging small business start ups.
These comments could be considered as criticism of designing and managing
projects around a log frame. This is not the case. The debate that takes place in
completing a well designed log frame should ensure that the entire project is

coherent – in that the successful achievement of individual project activities,
measured by appropriate indicators – will inevitably lead to the achievement of
the purpose.
Using a weighting of scores across individual OVIs, we assess overall against log
frame as 2: likely to be largely achieved. This is in line with the overall portfolio
rating of 2.6 reported earlier. It is more positive, however, since the log frame
reflects more process related targets which have been largely achieved.
In addition to log frame targets, we believe that there are some uncaptured
benefits to DFID:
Kudos has been received from other stakeholders who have recognised the
forward thinking role of DFID in this respect;
There were very positive feelings from indigenous firms in developing
countries who felt able to apply on their own terms, rather than have to fit
with a particular donor programme;
FDCF provided an outlet or ‘pressure valve’ for DFID country offices to refer
private sector applicants to an impartial mechanism, when they could not or
would not fund them directly.
5. Review of programme management
5.1 Introduction
In our interviews with approved projects, we encountered generally positive

comments about the global fund managers – who were helpful and supportive,
even adding value to some bidders because of their local knowledge. However,
we do have a number of comments and insights about aspects of the fund
management process.
The original terms of reference sets out the detailed roles and responsibilities of
the Fund Manager to January 2005, when a new TOR for the final phase was
agreed. We have focussed on the original TOR since most of the activities
reviewed here have taken place in this period.
Our assessment is that the fund managers generally performed satisfactorily
when measured against the requirements of the terms of reference.
5.2 Marketing
Marketing was done initially through advertising, leaflets, press stories and
country launch events but only reached “the usual suspects”; the fund manager
found it difficult to get to a wider audience of organisations who were previously
untouched by donors. Note however, that undertaking such general advertising
is an important part of the challenge fund principle of being open to all who
qualify; hence these generic strategies cannot be dismissed simply on the basis of
not being effective.
In the early rounds, the fund managers would only accept proposals from
financial institutions. The eligibility criteria articulated in the concept note
information pack does not impose this restriction, though the log frame does
make reference specifically to supporting financial institutions. The international

panel, however, took the view, supported by DFID, that financial institutions were
large and dependable and that, as this was a financial deepening project, it
made sense for bids to be led by financial institutions; there sees to have been
some comfort derived from the fact that financial institutions all operate in
regulated environments perhaps reinforcing the view of dependability. As a
result, the fund manager screened out bids that did not come from financial
institutions or else tried to promote suitable partnerships. However, it seemed
that few financial institutions were interested in bidding. Furthermore, a number
of partnerships pulled together with a financial institution to take the lead fell
apart largely, it seems, because of lack of commitment by the financial
institution.
By round four, FDCF had begun to generate significant interest amongst
corporates other than financial institutions, so the fund manager went back to the
international panel and sought clarification from DFID that they, too, could bid
for support. In addition, from round 4, the fund manager drew up a ‘hit list’ and
engaged in more targeted marketing aiming at international banks, big
insurance companies, and large corporates, which is how they interested
Vodafone and Deutsche Bank.
Non profit organisations were never allowed to lead bids (except for the enabling
environment window) – on the grounds that maximum additionality and learning
would come from for-profits taking the lead. We think that alternative
approaches need to be considered. It is true that many non-profits would have
had difficulty in leading a bid but some are adept at pulling together funds from
a variety of sources and of managing complex projects. In the same way that
FDCF was trying to promote behaviour change amongst the private sector, it
might have encouraged non-profits to understand that they do not always have
to rely on philanthropy but can increasingly earn at least a part of their income
from trading. Furthermore, many NGOs recognise the need to make a profit,
differentiating themselves from the private sector in that they apply any profit for
community benefit rather than distributing it to shareholders.
A focus on outcomes might have provided a better way to assess project
proposals – with a specific outcome that projects should be commercially
sustainable irrespective of the type of organisation(s) implementing them.
It has to be recognised that marketing a programme such as this is difficult and
the fund managers were eventually successful in attracting the target number of
projects and in fully committing to the fund. But it is worth considering ways in
which this might be improved. Good case studies can help. Targeting CSR
departments may offer a way into larger firms, though the objective is for
projects to be placed in mainstream business units. Some effort was made by the
fund manager to target CSR managers though, with the notable exception of
Vodafone, this was unsuccessful. This difficulty might be at least partially
overcome by working through a trusted intermediary such as Business in the
Community or the International Business Leaders’ Forum.
One possibility might be to organise “bottom of the pyramid” conferences to
spread the word and share good practice.

Good press coverage in influential newspapers is essential, though we recognise
it is not always easy. The fund manager has met with a number of key UK
journalists but has been unable to provide stories that are sufficiently eye-
catching to warrant publication.
Working through business membership organisations, particularly trade
associations, is likely to make a difference. And having the Secretary of State host
the occasional dinner for Chairman and Chief Executives could provide a
mechanism to spread the word.
Once the fund had been committed, the panels stopped meeting, yet every panel
member that we interviewed commented that they would have liked to have been
kept in touch and would like to know what had happened to projects that they
had approved.
Feedback from DFID in Africa and India suggested that DFID too would have
liked more contact. It is clearly part of the remit of the new country managers to
communicate with DFID about FDCF, though the country managers gave the
impression that this was not the case. It is fair to say that there have been a
number of staff changes in the country offices and fewer people around who
know about FDCF. As a result, there was a general criticism about poor
communications at country level.
5.3 Country managers
To provide a local presence, the fund manager appointed “country” managers,

though two were responsible for regions – southern Africa and east Africa with
Pakistan and India having one each. Until the end of the grant commitment
phase, Deloitte staff acted as country managers; in phase two, they were
replaced by country managers working directly with Enterplan.
For a project like this, the role of the country managers clearly changes over
time. Initially, they have a big role in marketing the project; they need to help
applicants with at least some level of technical assistance to develop concepts
and detailed application; they need to appraise propositions; they need to assist
successful bidders with implementation; and they need to monitor and evaluate.
It is easy to say in retrospect that more thought should have been put into how
the role changed which might have led to different arrangements, but there is
perhaps a lesson here for the designers of future challenge funds.
5.4 The application process
The application process was relatively long and drawn out – requiring the
submission of a concept note, to determine eligibility, and then a detailed
application to determine viability. This is summarised in the figure below and is
explained in more detail in Appendix 3.

Securing approval for a concept note could take up to six months. Writing the
application and getting approval added a further three months. Most bidders
waited until they had an offer letter before they began to think about
implementation, so contract negotiations and planning could add 6-12 months
before implementation commenced.
This is long relative to other challenge type mechanisms, but then again, FDCF
grants are larger, requiring more care in approval and subsequent contracting.
Many bidders thought that the application process was too long and complicated
though one bidder did say that it had forced him to think things through more
clearly. One (successful) bidder said that it was not sufficiently clear what was
required of them, though perhaps this raises more questions about their
competence to implement a project successfully.
Some bidders, at least, received considerable support in preparing the concept
notes and detailed applications though several, including some of those that had
received support, said that they would have liked much more help during the
application process.
Some bidders suggested that funding could be made available to help prepare
the concept note. As it happens, there was scope for the FM to provide a small
development grant to contribute to the costs of preparing a detailed application.
In the end, however, just three grants were provided in this way – largely on the
basis that it was large financial institutions submitting proposals and that if they
needed such a grant then they were unlikely to be able to implement the
proposed project.
Table 7: Technical assistance grants
Entrepreneurs’ Development Trust 3,684
Corporate Africa Ltd 2,146
New Building Society 2,600
8,430
All three organisations submitted proposals but, despite the help that they
received, none were approved.
5.5 Appraisal of propositions
The country managers were expected to undertake an independent appraisal of

applications – which sits uncomfortably with the role of being consultant and
advocate for proposals. This was, to some extent, overcome by having
independent and anonymous panels – but the panels were still largely reliant on
the information, appraisal and recommendation provided by the country
manager. Splitting the roles would add to the cost, but the process would have
been more transparent.
Country managers only undertook limited due diligence on applicants. In some
cases, the personal knowledge of the members of the regional panel was a good
substitute. In some cases, it is likely that more effective due diligence would have
resulted in grants not being offered to projects which subsequently failed. We are
not saying that this would prevent all failures – indeed, our view is that if there

are no failures, then there have not been enough risks – but we are suggesting
that this is an important part of the process.
Whilst the fund was intended to be competitive, with project proposals competing
for limited resources, until the last two rounds there was enough money to
support any project deemed worthy of support. We do not see this as a problem,
though genuine competition may raise the quality of the applications. What was
important was that applicants thought that it was competitive – so ‘winners’ felt
particularly pleased and ‘losers’ didn’t feel so bad.
5.6 The panels
There were four regional panels: east Africa, central Southern Africa, India and
Pakistan and an international panel. Members of the regional panels received an
honorarium; members of the international panel were unpaid.
Overall, the panels seemed to be effective. The regional panels were able to take
decisions on applications up to £100,000, but for larger awards they simply
made a recommendation which then went to the international panel. This was
not a rubber-stamping exercise; the international panel often turned down
positive recommendations from the regional panels – on the basis that they was
a lack of revenue, a lack of sustainability, or simply a request for a pure subsidy.
The regional panel Chairs said that they were happy with this split, citing broader
experience and knowledge as an acceptable reason for an international panel.
Certainly the international panel was able to impose some consistency on the
decision making process. The existence of the international panel did mean that,
on two occasions, proposals which had been rejected by the regional panel were
then approved by the international panel. To our mind, this would have
undermined the regional panels, except that these reversals occurred in the last
round.
All panel members were grateful for the anonymity of the panels but all were
critical of the large amount of paper and the consequent time commitment which
averaged two days per meeting.
There was a positive spin off in that local champions were made more
knowledgeable about innovation in financial services in their regions.
5.7 Reporting on performance by bidders
The mid-term review suggested that there should be common indicators for
projects; the fund manager agreed that wherever possible common indicators
are used, but noted that all indicators are defined against common strategic
objectives. However, the only indicator of interest to successful private bidders
that is common is their return on investment. Other indicators are justification for
financial support rather than indicators for performance that would normally be
used by the private sector. As far as possible, we believe, indicators should reflect
what the bidders would expect to measure to assess their own performance.
The application guidance explained that bidders should define performance
measures and targets carefully. In other words, within reason, bidders were free
to set the performance measures that they thought were appropriate, yet some

bidders complained that there were being forced into using a standard set of
measures, which were inappropriate for their project. This may be partly due to
the fact that the application form had some broad headings for measures,
though bidders could, if they wished, make specific suggestions for measures
appropriate for their project.
Bidders are asked to provide qualitative and quantitative reports every quarter.
Almost without exception, bidders complained that this was too onerous and too
repetitive. There was recognition that reporting quantitatively on a quarterly basis
was acceptable, but a feeling that it was difficult to find much new to say about a
project every three months and that perhaps the qualitative report could be
provided six monthly. We have reviewed the quarterly reporting requirements; in
our view, whilst a little repetitive, they are not overly onerous though there is
some scope for simplification. To be fair, a couple of organisations, Equity and
Bank Windhoek, both thought that the reporting was reasonably straightforward.
There was criticism also of the reporting periods which were rescheduled to
satisfy a DFID need to finalise financial claims in March, so the reporting periods
became March-May, June-August, September-November and December-
February which didn’t fit anybody’s reporting periods and added to the hassle as
they were reporting internally on other timescales.
5.8 External monitoring and evaluation
In addition to the bidders’ reports, the country managers prepare reports,

intended to add further detail – and the fund managers commission detailed
evaluation reports, intended to identify other impacts and, perhaps, better ways
of measuring impact. The evaluation methodology was agreed after the first
projects had been approved – leading to the proposal to add “several additional
indicators”. Whilst some of this work was to be undertaken by the M&E specialist,
some additional burden was placed on the bidders. Although we recognise that
there is value in evaluating the projects, we are concerned that the evaluation
imposes additional workload on bidders – one bidder for example reported that
a number of their staff had been asked to participate in a two day evaluation
workshop – and suspect that reports that are 60-100 pages long will not be
read.
We have only seen one project-completion report – for Equity – which was written
by Equity staff though it is on an Enterplan report template. We felt that it was too
long and too difficult to extract the interesting results, suggesting that substantial
editing may be required.
5.9 Peer group interaction
Feedback during interviews with Indian projects suggests that at least some
successful bidders would like more interaction including workshops and sharing
of lessons. This was recommended by the mid-term review but rejected by the
fund managers on the basis of “desire for commercial confidentiality”. Our
assessment is that bidders would like the opportunity to meet with each other and
to learn from each other and that this outweighs any thoughts of commercial
confidentiality.

5.10 Dissemination of knowledge
There is a difference between marketing, intended to stimulate applications, and

dissemination, which is intended to transfer knowledge – to policy makers, to
policy influencers and to other firms wishing to emulate the successes of
participating companies. The fund managers, at times, have confused
dissemination with marketing.
5.10.1 Objective
In order to have systemic impact beyond merely funding a handful of firms on

relatively small projects across large and varied local markets, FDCF relies on a
demonstration effect. The demonstration comes through the results of the funded
projects (successes and failures) influencing other market players, policy makers
and indeed, donors, to act in such a way that a broader effect than the project
alone. Therefore, dissemination has an especially important role to play in a
project like FDCF beyond the usual desire for ‘lesson learning’ common in donor
funded programs.
5.10.2 Terms of reference
The terms of reference for the second phase of the project (2005-2008) explicitly
recognises this role for the fund managers as one of four key responsibilities
outlined. The TOR further specifies this role as involving:
Developing and executing a clear dissemination strategy to communicate the
benefits of the FDCF to key audience.
Promoting the achievements of the Fund to DFID, other international
development agencies, and the financial services sector in the UK and in
developing countries.
Provide guidance and support to a few initiatives in developing countries
seeking support to mainstream FDCF lessons in existing or new initiatives.
Periodic review of systems and materials to review and assess effectiveness –
and revision as necessary.
Hence the TOR identifies two key aspects of dissemination:
promoting the lessons of the FDCF as a mechanism within DFID and other
donors;
promoting the application of knowledge created by the FDCF projects in
developing countries.
In this review, we have considered the extent to which the Fund Managers have
played this role as well as what the elements of an appropriate dissemination
strategy should be for this stage in the life of the FDCF.
5.10.3 Strategy and work to date
The FDCF dissemination strategy was developed in 2003 in response to DFID’s

request. We were given an update on activities against the target entities. The
strategy identifies 8 target groups – from DFID UK and country offices to the
private financial sector in the developed and developing world and the general
media. The update seeks to measure outcomes and opportunities arising in each
category.

As part of dissemination, the fund managers have developed a number of
media:
Website (www.financialdeepening.org): this was upgraded recently, and
contains background on FDCF, a static background on each project funded,
and some more general published work relevant to specific projects or
themes
A periodic news e-bulletin, the most recent of which, dated Summer 2005,
arrived in October as we were undertaking the review
Project Completion and Post-Completion Reports: prepared by the applicants
directly after and a year after completion respectively, of which we saw one
draft (for Equity Mobile Banking, the earliest project to finish) as well as the
template
Case studies & published pieces: for example, a case study (by MicroSave of
Equity Mobile Banking) is provided on the website
Presentations: of which we gathered several have been presented to various
groups
Press and magazine articles: of which various are referenced on the site; two
FDCF supported projects received a fleeting mention in an Economist
supplement published in October.
5.10.4 Evaluation
While there has clearly been effort and activity in this area by the fund managers,
there is still little evidence that dissemination is being given the strategic focus
which we believe it deserves for this phase in the project. For example:
There is no evidence that the strategy itself has been developed or refined
since 2003, although the TOR calls for ‘periodic reviews of systems and
material for effectiveness’.
Within DFID, there seems to have been little close following of the results of
the projects; and some of the scepticism we encountered about challenge
funds was surprising, given our relatively positive assessment of the outcomes
to date.
We encountered a surprisingly high level of ignorance within the informed
broader stakeholder community about FDCF: while some knew of its
existence, few knew much about it and some queried the extent to which
disclosure had been made about projects. This is surprising to us in that since
2003, much of the debate around ‘bottom of the pyramid’ type strategies has
achieved broad profile in business schools, donors and corporates.
This leads us to the main conclusion that the FDCF approach to dissemination
needs to be reviewed and redeveloped as a core activity, not an add-on, to the
current phase.
In this review, an important question raised by the fund managers relate to how
best to disseminate: they suggest for example, that publicity by the individual
applicant firm (e.g. the launch of the forthcoming Deutsche Bank Microfinance
Fund) is more effective. We agree. But this tends to confuse publicity (e.g. a
launch/ newspaper article) with dissemination of knowledge and learning. While

individual applicants are likely to have a strong interest in the former, they may
not in the latter, yet it is this aspect which is core to the argument for public
support to FDCF.
Hence, in our opinion, a review of the dissemination would encompass an
independent inventory of the knowledge resources created by FDCF projects to
date. The existing fund managers may be too close to the details projects to
extract this themselves, hence may need to hire an outside resource to support
them in this. This inventory would be categorised at a theme level (e.g. banks
working with NGOs, or smart cards in Africa) as well as at country or regional
level. The key work here is separating idiosyncratic aspects of projects from more
general learning.
The next step would be to assess the relevance of the knowledge within the local,
regional and international contexts. In particular, it would be necessary to assess
in each local market, the extent to which others – market players, competitors
and policy makers – are aware of the lessons from a particular project. To the
extent that they are not, targeted dissemination actions need to be developed in
that market at least. This could take the form of briefing industry associations,
conferences talks as well as publications. As an example of this, the First
National Bank Village Banking project in South Africa failed in 2003 but is still
highly relevant to debates there about co-operative and link banking. Indeed,
another bank is now embarking on a similar course of action in 2005. It is not
clear that all or even some of the learning has been placed in a form which
would enable them or others to access it.
While it is not in the scope of this review to redefine the dissemination strategy,
we suggest the following as additional pointers:
Not ignoring the failed projects for lessons;
Starting at a local level and working up to internationally transferable themes
(there will be far more of the former than the latter);
Ignoring project updates such as the bulletin, which reports activities of FDCF,
which are hardly relevant to anyone beside a narrow group within DFID;
Identifying universities with an interest in BOP-type projects (there are now a
number) and cultivating relationships to the point that MBA or other students
may receive small scholarships from FDCF to undertake relevant case studies
of FDCF projects as part of their work; and
Case studies should be done in the traditional business school format i.e.
presenting relevant facts (positive and negative), inviting questions, in a way
which can be taught and discussed, rather than tending to be hagiographical
as we sense somewhat in the Equity example.
5.11 Financial management
5.11.1 Extracting information
The finances are managed through a series of spreadsheets. The fund managers
had aimed to start with a relatively light touch accounting system but have had to
make it more complex to satisfy increasing demands from DFID’s accountants.

We found the system complex, with a large number of unlinked spreadsheets
and the consequent possibility of errors creeping in when figures were transferred
to other sheets, and the further problem that only the project administrator,
Wendy Wilkin, and Enterplan’s accountant, Jeff Pudney, seem to have a grasp of
all the complexities of the system.
5.11.2 Advances
At the commencement of the programme, DFID was insistent that successful

bidders should be able to draw down support in advance of their expenditure,
despite the fact that all the bidders were relatively large companies and that the
project expenditure was small compared to their turnover. And some early
bidders did choose this option. This requirement, together with the need
subsequently to reconcile actual expenditure (up to two quarters after receiving
the advance), and DFID’s inability to regard advances as expenditure until there
was evidence that the money had been defrayed, was a major reason for the
complexity.
In an effort to simplify the accounting, most bidders were told by the fund
manager that they could only receive monies in arrears.
If bidders need the money in advance, we would question whether they are of
sufficient financial standing to make a success of their project. Paying everyone in
arrears, provided that it is done promptly, would simplify the accounting
arrangements considerably, and satisfy DFID’s need that all monies are defrayed
before they are ‘claimed’.
5.11.3 Claim forms
Bidders seemed to have considerable difficulty with their claims: many were
unable to complete the claim form accurately with figures brought down from the
previous quarter, so the fund manager resorted to sending claim forms partially
completed, adding to the work load for the fund manager.
Several bidders were unable to set up a separate accounting code in their own
accounting systems which made it difficult for them to complete and justify their
claim forms, though others reported that this had not been a problem and that
completing the claims was easy.
It would have been relatively straightforward to have designed an Excel based
system that did all this automatically rather than having to resort to expensive
staff time to do every quarter. Advances in web-based front ends for databases
would now easily cope with this complexity, providing companies and the fund
manager with a complete claim history and allowing companies to enter their
figures directly into a web based form. Ideally, such a system could also be used
by DFID, both for notification when transfers are needed and to fulfil their own
accounting requirements.
5.11.4 Forex
Grants were awarded in pounds sterling, with a fixed exchange rate agreed at
the point of signing the contract. However, if the exchange rate moved by more
than 5 per cent, the fund manager reserved the right to change the amount of
grant.

For many countries with depreciating currencies, this meant that organisations
received more in local currency than they were originally awarded. In at least
one case, South Africa, the local currency appreciated strongly between grant
and disbursement. This placed some financial stress on one of the major
recipients there, which had to increase its own contribution to make up the
difference.
5.11.5 Audit
The purpose of auditing financial statements is to ensure that what is being

claimed by projects and by the fund managers is fair and accurate and that there
is no evidence of financial mismanagement. We applaud the desire for a light
touch, but are concerned that the touch may be too light.
Projects are required to provide an annual audit certificate – provided by the
company’s own auditor. Successful bidders were critical that they had to pay for
this, exacerbated by the fact that the project year was a different year to their
normal accounting year.
Furthermore, the last audit, inevitably, comes after the last payment has been
made so there is no leverage over the applicant if there turns out to be a
problem.
To some extent, this light touch is supported by the fact that the fund managers
reserve the right to undertake an “independent financial review” and have done
so on two occasions, though they did not find any financial problems.
The audit requirements of EU structural funds dispersed in the UK may provide a
better model – whereby all funds are paid in arrears, irrespective of the size of
the organisation, and the final payment is held back until an audit certificate has
been produced by the project.
Enterplan’s own auditors audit the project finances, checking bank transactions
against claim forms and requiring organisations to confirm how much they have
received by way of grant. This appears to be satisfactory though the auditor has
complained that every year they have a problem with getting verification from
DFID in a timely manner.
6. Management cost
What is a reasonable cost for running a mechanism like FDCF? Despite no
formal benchmarking, the mid-term review commented unfavourably on ‘the
high level of management cost’ compared to private equity fund management
and implied that the costs of managing FDCF were much higher than the costs of
managing a venture capital fund. Some of those we consulted in this review also
raised cost as a question.
This section benchmarks costs of similar mechanisms in order to draw
conclusions about FDCF’s management costs.
Whilst there are some clear differences, we believe that there are sufficient
similarities between managing FDCF and managing a private equity fund for
private equity to provide a reasonable benchmark – both have a capital sum to

invest over a period of around five years; both have to continue managing the
fund after that period (in the case of FDCF to continue disbursing grants and to
undertake evaluation; in the case of private equity to realise the investments);
both are looking for a decent return (in the case of private equity, it is entirely a
financial return; in the case of FDCF, it is a social return).
In making comparisons, however, it is important to measure costs properly.
Venture capital fund management costs are typically quoted as a percentage per
annum of invested funds. However, given different disbursement profiles and, to
some extent, different expenditure profiles, during the period the only sensible
way to compare is to look at total management costs over the life of the fund as
a percentage of the total invested. It should be noted that management costs are
affected by average deal size and the intensity of the assessment process.
Other challenge-type funds, such as CGAP’s PPIC and CFSI, run inexpensive
light touch mechanisms giving small ($50-150k) grants with an internal process
designed to minimise staff time cost. Larger challenge-type mechanisms estimate
that management costs up to 15 per cent of the grants but they are still relatively
light touch ex post. FDCF may seem a little high by these measures, though it is
worth noting that BLCF costs about the same.
However, FDCF and BLCF are much more like VC processes: they have much
heavier upfront costs (marketing; public application process to screen) and a
requirement to undertake detailed evaluation which private equity fund
managers would never do.
We have looked in some detail at management costs and disbursements and
have benchmarked these against other challenge funds and against private
equity funds.
To cover costs, managers of private equity funds generate income in a number of
ways, including charging fees for the funds under management, charging
arrangement fees and directors’ fees, and from the carried interest (that is, their
share of the profit when the investment is realised and which usually generates
the biggest reward). However, they generally try to ensure that their costs are
roughly equal to the fees that they charge investors together with the
arrangement fees. The fees charged to investors depend on a wide range of
factors but will typically be around 2.5 per cent of committed capital for a fund of
£15-25m, though it could be much higher for a fund investing in emerging
markets, with the fee dropping for the second half of a typical 10 year fund.
The graphs below shows the typical profiles for investment (all invested within the
first five years with investments realised during the following five years); costs
which are lowest at the beginning and at the end) and the ratio of cumulative
cost to cumulative investment – showing a final figure of about 24 per cent.

Figure 7: Profiles of venture capital investment and expenditure
C u mu l a t i v e i n v e s t me n t ( £ 'm) C u mu l a t i v e c o s t s ( £ 'm) C u mu l a t i v e c o s t / c u mu l a t i v e i n v e s t me n t
16 4 25%
14 3.5
20%
12 3
10 2.5
15%
8 2
6 1.5 10%
4 1
5%
2 0.5
0 0 0%
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
These figures have been derived by talking to a number of equity fund managers
and the British Venture Capital Association. In addition, we have data for some
specific funds: two equity funds managed by a fund manager, NStar, who invest
in science and technology businesses in the north east of England; and Northern
Enterprise Ltd’s mezzanine debt fund (which, as a loan fund, one would expect to
have much lower costs)
FDCF shows somewhat different profiles. Whilst commitments may be made
early, monies are disbursed over a three year period – or longer if projects ask
for extensions which several have. High levels of expenditure – for example with
marketing early in the programme and evaluation late in the programme – give
a different profile to the expenditure and to the cumulative cost/ cumulative
disbursement ratio, which will be around 22 per cent at the end of the
programme. Private equity funds would generally not have high levels of
marketing cost, but may have high costs associated with raising their fund in the
first place. They would definitely not have evaluation costs which accounts for
around two percentage points of disbursed funds.
Figure 8: Profile of FDCF disbursements and expenditure
C u mu l a t i v e d i s b u r s e me n t ( £ 'm) C umul a t i v e c os t s ( £ ' m) C u mu l a t i v e c o s t / c u mu l a t i v e d i s b u r s e me n t
16 3. 50 50%
14 45%
3. 00
40%
12
2. 50 35%
10
30%
2. 00
8 25%
1. 50 20%
6
1. 00 15%
4
10%
2 0. 50
5%
0 0. 00 0%
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
The shape of these curves is typical of other challenge funds.

We considered the costs of other challenge funds, specifically the Business
Linkages Challenge Fund, CGAP, CFSI and the World Bank’s Development
Marketplace; as well as FIRST, a fund that provides small grants for technical
assistance in the financial sector on a non-challenge basis.
We also looked at UK domestic challenge funds such as the Single Regeneration
Budget. This gives away much larger grants and has neither the marketing costs

associated with FDCF, nor the costs of managing a fund operating in emerging
markets and in several countries.
These are all shown together in the graph below:
Figure 9: Comparisons of cumulative cost/ cumulative investment
FIR S T
P r i v a t e e qui t y
FD C F
N st a r : C o i n v e st m e n t f u n d
BLCF
Fund A
Fund B
N st a r : P r o o f o f c o n c e p t
N EL : N EI F 3
S i ngl e R e ge ne r a t i on B udge t
0% 10 % 20% 30% 40% 50% 60% 70% 80% 90%
If one ignores FIRST (which has particularly high management costs in part
because of its small average grant size and large number of projects) and SRB
(which has particularly low managements costs), the spread is around 8-24 per
cent. FDCF is at the top end but, in our view, is not unduly high in comparison
with other funds. The part of their bar shown in dark red represents the
additional costs of evaluation. We believe that there are some savings to be
made but it is unlikely that these will save more than a couple of percentage
points.
7. Lessons
Both DFID and the fund manager have identified a number of lessons over the
five years that FDCF has been running; the lessons reported here incorporate
many of those lessons and build on them. We suggest a number of lessons which
apply to challenge funds in general – and a number of lessons which might
apply specifically to an African Enterprise Challenge Fund. Whilst we have not
been explicit, most of these lessons imply recommendations for the designers of
future challenge funds.
7.1 For DFID & donors about challenge funds
7.1.1 Being clear about objectives
It is important to be clear about the objectives and what can be realistically

achieved:
Challenge funds can complement other DFID activities and, in particular, can
provide a useful mechanism to which to refer private sector enquirers looking
for support;
FDCF has not been ‘transformational’ but that is perhaps an unfair
expectation of a relatively small challenge fund – to put it in context, its
expenditure in India is around £1m over three or four years compared to an

annual DFID budget of £280m; clearer project eligibility criteria which
identify market impact and better dissemination of lessons might help;
Despite the relatively small number of approved proposals, the experience of
FDCF shows that the private sector can be a driving force for development
and can respond to suitable opportunities; financial support will provide
some encouragement to move forward with projects that will have a
development impact but where the financial return is less certain;
The log frame needs to be designed so that there are clearer links between
the outputs and objectives; the OVIs need to focus on outcomes – and
particularly to focus on the behaviour that the fund is intended to encourage –
though it is also important that the data is easily available to demonstrate that
the OVIs have been achieved; ideally, the OVIs that have to be measured by
the participating companies should be designed in such a way that additional
work on their behalf is minimised;
7.1.2 Eligibility criteria
Eligibility criteria should be regarded as providing guidance rather than rules
which are followed slavishly; the fund manager should be able to introduce
enough flexibility, at least in relation to the eligibility of bidders, to respond to
market conditions; a focus on achieving outcomes of commercially
sustainable financial services which target the poor would allow any
organisation (including not for profits) to bid and manage a project; in
particular there is a need:
To allow flexibility and evolution, not least because this will encourage
experimentation;
Not to limit support to regulated Financial Institutions, even if the focus is
on financial services since this may force inappropriate partnerships and,
in any event, financial institutions may not be the organisations most likely
to generate innovative proposals;
Including ‘Innovation’ as a screening criterion is only helpful if it is applied in
general terms – recognising that innovation can be as simple as introducing
to a new market a service which exists elsewhere;
The projects that had a technology dimension appeared more likely to have
problems, so avoid funding the development of new technology (as opposed
to its deployment) – because controlling the costs of new technology
development is difficult; it is impossible to foresee all the potential problems;
and it avoids getting into debates about who ultimately owns the IPR
7.1.3 Enabling environment
There is nothing inherently wrong with using a challenge fund approach for
enabling environment projects – but mixing them with other projects, when
the criteria are not the same and when the panels’ experience and expertise
is in areas other than enabling environment, is not sensible. In any event,
enabling environment projects will now be covered by the Investment Climate
Facility, so this is unlikely to be an issue going forward.

7.1.4 Marketing
Marketing was seen as important from the outset, but more effort than had been
anticipated was required to generate interest:
It is important, early on, to identify all the stakeholders; to understand who
needs to be influenced and at what stage (be it prospective applicants, policy
makers, DFID country offices, other companies, etc); and to be clear about
the messages that need to be communicated to each group of stakeholders;
Challenge fund marketing works best when it is accurately targeted, first at
firms who may be interested and secondly at specific individuals within those
firms;
One cannot ignore the public advertisement since the principle of inviting
all who are eligible to apply is critical to the challenge concept;
Conference marketing works well: where pools of right people gather e.g.
participating in WSSD led to several subsequent proposals;
Fund managers can do more to promote the ‘brand value’ of DFID
endorsement to aspiring top companies who want to receive non-financial
benefit as well;
Whilst firms who have previously received donor support should not be
excluded, the marketing effort should focus on supporting firms who have
not previously had such support.
7.1.5 Multi-country funds
There are advantages in having a multi-country fund – monies can be
allocated to the countries where demand is greatest rather than having
money lying idle in some countries; fixed overhead costs can be spread over
more projects and so require a smaller percentage; and there is scope to
promote cross border projects.
7.1.6 Managing the process
The challenge-type mechanism can be decentralised to a country-level
alongside a global standard competition; and can lever in other donors on a
round by round basis as the WB Development Marketplace has done;
Echoing one of the recommendations of the City Challenge evaluation, we
would encourage the creation of a comprehensive web-based database at
the outset to provide monitoring and financial information, used by all
parties, to ensure that data is only entered once and can be reported in
whatever way is necessary;
For some bidders, signing an agreement that potentially gave DFID rights to
their IPR was a problem: so try to avoid supporting the development of IPR
but recognise that in this sector, it is hard to define IPR, and focus on
supporting deployment;
Whilst we believe that the management costs are not unreasonable, FDCF is
still quite an expensive project – maybe this is inevitable if there is to be
proper assessment of projects prior to offering support and effective
evaluation to assess impact. However, challenge type mechanisms which give
sizable grants cannot be light touch in process and therefore not light in costs
either;

Encouraging the use of standard headings for budgets would enable easier
comparison between projects and also make it easier to consider whether
proposed expenditure is appropriate for FDCF support;
The private sector expects to move quickly and becomes frustrated when
others are unable to move at the same speed.
7.1.7 Appraisal and approval
More consideration needs to be given to the roles of adviser and appraiser,
whether they need to be clearly separated and, if so, how;
The fund manager can promote partnership and can, on occasion, introduce
prospective partners to one another.
7.1.8 Local panels
Panels: it is useful to have a regional/ local presence – they provide added
value – as did the more remote but sometimes more rigorous international
level checklist. There is an issue, however, about how to get the workflow
right by splitting work.
Keep panels updated by giving them a monitoring function beyond the
award phase only, even if this means less frequent meeting. Their insights
on major restructurings of proposals which have happened in several
cases could be valuable.
There is a good argument for giving local panels more responsibility for
decision making;
7.1.9 Reporting & monitoring
The area of reporting and monitoring was the one that generated most response
from successful bidders. The objective should be to keep the reporting
requirements as simple as possible and not to over-burden bidders with too
many additional requirements:
Limit reporting to clear targets agreed upfront and which are as close as
possible to bidders’ existing reporting arrangements both in terms of content
and reporting periods;
Extra M&E should be done at the cost of the donor with minimal additional
cost to the recipient;
The enquiry, appraisal, monitoring and financial management could have
been so much more efficient if a (web enabled) database system had been
set up at the beginning in order to reduce paperwork and transaction costs
for fund managers and applicants;
The identification, consolidation and dissemination of knowledge is a core
aspect of the programme, and should be given adequate resource and
attention, without being conflated with the monitoring and evaluation role of
the fund managers.
7.1.10 Finance instrument
Limiting financial support solely to grant aid does not allow the flexibility of
response that might be desirable:
We recognise the reasons for using grants, but would encourage the
designers of future challenge funds to explore the use of other instruments in

addition. In particular, a loan may give more leverage over subsequent
outcomes since it may be repayable under defined circumstances and written
off in others; corporates (without the benefit of prior exposure to donors) may
find a loan easier to account for than a grant; Providing a loan, assuming
that it is repaid, may help avoid concerns about IPR ownership; on the other
hand, challenge funds taking direct equity positions in applicants does not
appear appropriate since issues of valuation, governance and exit are much
more complicated and this would rule out large applicants in any event9;
Programmes need an incentive mechanism to ensure organisations retain a
pro-poor focus ex post or else there is a danger that they could drift
upmarket; one way of achieving that incentive may be to agree in advance
that a proportion of a loan will be turned into a grant if certain targets are
met.
7.1.11 Exchange risk
Funding should be contracted in local currency with the challenge fund
carrying the exchange rate risk; in most cases, working in developing
countries, this is likely to be a small risk; the fund could create a small reserve
to cover this risk – and can then take a view as the fund approaches closure
as to whether it can also commit the funds available in its reserve.
7.1.12 Dissemination
If challenge funds are to “punch above their weight”, dissemination is important

and requires an explicit focus, especially as projects move to maturity:
There are many people in DFID and the broader donor world who are likely
to be interested in the results of challenge fund projects; the newsletter, which
could focus more on insights, lessons and collaborative approaches on
projects, should be circulated widely within DFID and the donor world;
Targets for dissemination should include other donors, governments, central
banks, etc as they are potentially in a position to encourage the private sector
to take up some of the ideas that have been piloted through FDCF.
7.2 Lessons for Africa Enterprise Challenge Fund (AECF)
All the generic lessons for challenge funds outlined above apply to the Africa
Enterprise Challenge Fund, but the proposed AECF adds additional components:
AECF is proposed to have a multi-sectoral approach, of which the financial
sector may be one sector (i.e. thereby taking forward the work currently
supported by FDCF);
AECF is for Africa only but, as a result, covers potentially more countries than
FDCF (22 versus 12).
9
This review is not the place for specific recommendations on this issue, since FDCF’s award phase is long
past, but we would propose the use of non-recourse, participating debt as an effective mechanism –
essentially this is debt that behaves like equity, with no repayments until the point where the project is
successful, a share in the profit instead of interest, and no requirement to repay if the project fails; and the
advantage that there is no need to defend the giving of money to the private sector because, if the project is
successful, then it will come back and can be used again.

We are conscious that it would be very easy to start designing AECF so have tried
hard, in drawing these lessons, only to identify those which are supported by
evidence from the FDCF.
7.2.1 Demand
The slow take up of support from FDCF in the initial two years may lead to
questions about the real level of demand for such funding. However, the
increasing number and improving quality of bids towards the end of FDCF, and
indeed its sister challenge fund BLCF, suggest that there is demand but this issue
should be considered further.
7.2.2 Caution over multi-sectoral focus
One sector focus: even within one sector, it has been quite challenging for FDCF
fund managers to manage diverse areas – from health insurance to smart cards,
for example. If AECF is to fund more than one sector, it will need dedicated
capacity to assess proposals and provide, in so far as it is needed, technical
oversight over each. There is no reason, however, to create more than one fund
or have more than one organisation providing all the back office services, in
order to minimise the transaction costs. A further advantage of a multi-country
approach is that it may seek to promote the spread of identified innovations
across geographies.
7.2.3 Financial sector “prevailing winds” in Africa
Even in the financial sector in Africa, the environment is changing fast and gaps
for donors must be carefully considered on the basis of trends observed on the
ground:
DFID and other donors have set up dedicated financial deepening
programmes in a number of key countries such as Kenya, Uganda, Tanzania
and South Africa. Others are likely to be starting in Nigeria and Zambia.
Some of these have their own challenge windows or, at least, their mandates
allow them to do the same thing: is the role of AECF in the financial sector to
be limited to countries without such funding programmes of their own; or is it
in these countries in order to gear country funding and enable cross-country
linkages? There is probably room for both.
Evolving sectoral issues such as financial switches for low value financial
transactions may fall between the mandates of ICF and AECF because they
are operating utilities, which are not purely environmental and may be non
for profit, unless addressed explicitly
Another prevailing wind is the trend to seek cross regional impact – AECF role
may be in working with regional players e.g. Vodafone, Stanbic etc.
7.2.4 Linkages to others
In course of this work, we identified the potential for linkages to achieve greater
leverage:
With other capital providers at project level: the fund could potentially co-
invest in projects with complementary programmes or with commercial
finance, which might become more affordable if the project does not have to

carry the total costs of the capital; this may also help to allay fears that
programmes like this are ‘simply giving money to the private sector’;
With enabling environment work: changes in the regulatory environment
which may follow inter alia from the work of ICF may create opportunities for
private providers to innovate: for example, changes in legislation and
regulation in both India (insurance) and South Africa (Financial Sector
Charter) during the life of FDCF spawned greater pressure on private
institutions to innovate for low end markets; AECF could help to support
concrete projects which use new enabling legislation or regulation;
With TA providers: programmes such as UNDP’s GSB functions as “on the
ground” brokerage service in an increasing number of African countries, and
could connect and refer private sector to AECF for funding.
These partnerships will expand the potential deal flow and impact of AECF.
7.2.5 Challenge funds in weak and difficult markets
The limited experience of FDCF in weak and thin markets suggests that the
challenge fund mechanism can still be appropriate and useful there. However, it
is likely that prospective bidders will need more assistance to develop sensible
projects and that successful bidders will need more support to implement
projects.
8. Conclusions
Our assessment of FDCF has been from two angles:
Against the requirements spelt out in the revised log frame established by
DFID; and
On a weighted review of the bulk of portfolio of projects funded to assess the
overall impact measured against the stated purpose
From both angles, our conclusion is that the outcomes to date suggest that FDCF
is likely to make progress towards largely achieving its purpose in the remainder
of its life. It has done so at a cost level which, while high relative to some of its
peers, is not excessive for the management of relatively small venture or
challenge-type funds.
However, we would draw attention again to our conclusion that, in order for real
market impact to be achieved through the FDCF portfolio, careful attention must
now be focussed on developing and gearing up the dissemination process for
the learning gained from the projects in the next two-three years (and maybe
beyond).
As one of the larger, older challenge-type mechanisms around, FDCF also yields
lessons and insights into how such mechanisms can work best. Our conclusion is
that challenge-type mechanisms can be effective in catalysing and accelerating
pro-poor investment and innovation by the private sector. However, careful
attention must be paid to lessons on structure, process in design; and new
generation funds can benefit from the trail blazed by FDCF in order to be more
effective.

9. Recommendations
Since the application phase ended in 2004, FDCF’s remaining life focuses on
successfully managing out the portfolio of projects so that they achieve maximum
impact. There is a limit to what can realistically changed in a cost effective
manner at this late stage of FDCF although we believe that there are many useful
lessons for the design and structure of any future challenge funds. Our
recommendations in this section are limited to specific proposals arising from the
review which can be usefully implemented in the remaining life of the FDCF (to
2008).
9.1 Dissemination strategy: this should be reviewed and upgraded to give
sufficient priority and attention to this vital area during the remainder of the
project; specifically, more attention has to be paid to inventorying and
actively disseminating relevant learning from projects within local markets
and across markets.
The FDCF Website (www.financialdeepening.org) could be upgraded
further, not least to support more effective dissemination and greater
interaction with the international knowledge community
For knowledge creation: there should be more rigorous production of
independent business school-type case studies – not to be confused or
conflated with evaluations or M&E activities, which the fund manager
undertakes. A small budget should be allocated towards travel stipends or
grants to MBA or other graduate students who could undertake these
under supervision from professors who are familiar with the programme.
Consideration should be given to securing the services of skilled public
relations advisors to develop a renewed strategy, and if necessary, assist
the fund managers in implementing it. This does have a cost implication;
and would require careful management by the fund managers in order to
be aligned with the ongoing management of FDCF projects.
9.2 Reconvene all panels once to report back on FDCF in general, including this
review, as well as the record of projects approved by them.
9.3 Review how technology related IPR funded by FDCF can be actively deployed
elsewhere, especially on failed projects, using DFID worldwide licence in the
agreement.

Appendix 1 People & organisations consulted
UK
Commonwealth Business Council Steve Godfrey
DFID Sukhwinder Arora, Justin Highstead, Richard Boulter, Gavin
McGillivray, Andrew Kidd, Doug Pearce
Enterplan Jeremy Swainson, Bob Fitch, Jon Ridley, Wendy Wilkin
International Panel Chair Ian McIsaac
Shell Foundation Chris West
Vodafone Nick Hughes, Susan Lonie
South Africa
ABSA Bank Le Roux Redelinghuys
Deloitte: former regional fund Garry Whitby
manager
DFID-SA Hugh Scott
First Rand Bank Selina Beagle
Futuregrowth Asset Managers Ashraf Mohamed
MTN Mobile Money Jenny Hoffman (former TEBA CEO)
Regional Panel Chair Jeff van Rooyen
TEBA Bank Archie Hurst, Gerrie vd Merwe, Dirk Bruyne, Chantal Storbeck, Elmine
vs Merwe
Tanzania
CRDB Bank Joseph Witts; Itangula
DFID David Stanton
Kibaigwa SACCO Secretary, Mr. Msanjila
Kenya
Coop Bank Hassan Morowa
DFID FSDP David Ferrand
Equity Bank Allan Mwangi; Nicasio Karani
K Rep Development Agency Aleke Dondo, George Muruka
KDA Former project manager Shenaz Ahmed
Microsave Graham Wright
Regional Panel Chair Sam Muumbi
Safaricom Les Baillie
UNDP Growingl Sustainable Business Anna Chilzuk
India
Country manager Ramesh Arunachalam
Deloitte: Former Country manager Chandrika Shah
DFID Delhi Mahesh Mishra
Mega Top Insurance Ltd L V L N Murty
Regional panel chairman Mr M. R. Umarji
Tata AIG Madhusudhan Laigsetty, Katta Shyam Benny
USA
Accion International, Roy Jacobowitz
Centre for Financial Services Jennifer Tescher
Innovation
CGAP Syed Hashemi, Rani Deshpande
Deutsche Bank, Community Asad Mahmood
Development Finance Group,

Rockefeller Foundation: Provenex Jacqui Khor
Fund
UNDP Growing Sustainable Business Sanjay Gandhi, Anna Chilzuk
University of Michigan Business Ted London
School, William Davidson Institute
World Bank Dan Crisafulli
WWB Nancy Barry, Mariama Ashcroft, Fern Mele

Appendix 2 Documents consulted
Ahmed, S et al (2005) “Health is Wealth: How Low Income People Finance Health Care”,
Journal of International Development 17: 383-396
Coetzee, G et al (2003) “Equity Building Society’s Market led approach to Microfinance”,
MicroSave Africa
Commission for Africa (2005) Ch.7: “Going for Growth and Poverty Reduction”
DFID, “Challenge Funds for Business Partnerships: Financial Deepening Challenge Fund”,
(PEC (99) 12 project submission), 1999
Enterplan, “Annual Report 2004 and Fifteenth Progress Report”, April 2005
Enterplan, “Monitoring & evaluation report – recommendations for impact assessment & the
case study programme”, internal document
Financial Times Business & Development (2005) Special Report: Focus on efforts by private
enterprise to engage in poverty alleviation 14 September 2005
London, T & S. Hart (2004) “Reinventing strategies for emerging markets: beyond the
transnational model”, Journal of International Business Studies 35: 350-370
Nelson & Prescott (2003) Business and the MDGs, UNDP
ODPM, “City Challenge - Final National Evaluation” summary at
www.odpm.gov.uk/stellent/groups/odpm_urbanpolicy/documents/page/odpm_urbpol_608
136.hcsp
Prahalad, C.K, “The fortune at the bottom of the pyramid”, Wharton School Publishing,
2005
Rhodes,J et al, “Lessons and evaluation evidence from ten Single Regeneration Budget case
studies”, DTLR, 2002
UNDP (2004) Private Sector Partnerships: Landscape Review: Discussion Document
UNDP (2004) Unleashing Entrepreneurship: Making Business work for the Poor”, Report of
Commission on Private Sector and Development (see www.undp.org/cpsd/)
Wood, R & Gary Hamel (2002) “The World Bank’s Innovation Market”, Harard Business
Review November pp 104-112
World Business Council for Sustainable Development (2004) Doing business with the Poor:
a field guide; available via website
World Business Council for Sustainable Development (2004) Finding Capital for sustainable
livelihoods businesses; available via website
In addition, Enterplan gave us unrestricted access to all of their project documentation.

Appendix 3 The process
Figure 10: Flow chart of the application process
The process through which an application progresses is straightforward, though generally should be
seen as guidelines rather than absolute rules:

The Fund Manager markets the fund and offers face to face opportunities for prospects to
discuss ideas (as the rounds progressed the FM moved far more to targeting potential applicants
and encouraging them to submit proposals);
Prospects are encouraged to submit an outline proposal and feedback is offered which can
ensure that the concept note is better thought through though this is not essential;
The prospect submits a concept note;
The concept note is reviewed against the criteria, based entirely on the written application –
applicants might be passed to the next stage, or might be asked to clarify part of the application,
or might be encouraged to rethink or bring in additional partners to strengthen the proposal, or
might simply be rejected;
Applications are passed to DFID locally for a “no objection” review: DFID could note proposals
as veto, concern or positive measured against strategic fit with country level programme
(including conformance with basic principles of best practice), innovation, integrity, prior misuse
or previously rejected (unless rejection was solely because of lack of funds)
The application is appraised in a “Fund Manager review” and a report is prepared for
submission to the regional panel;
For applications under £100,000 the regional panel can approve, ask for further clarification,
suggest ways in which the proposal can be strengthened, or rejected – their decision is passed to
the international panel for noting;
For applications over £100,000 the regional panel makes a recommendation – and passes to
the international panel for a decision;
The international panel can approve, ask for further clarification, suggest ways in which the
proposal can strengthened, or rejected;
Applicants whose concept notes have been approved are then invited to submit full applications
– the fund manager would contact the bidder, provide feedback and explain the application
process; in practice the fund manager would expect to check on progress half way through the
period and also to review drafts and provide feedback prior to the application being submitted
formally;
Applications are reviewed for completeness – and additional information or clarification sought
as necessary;
A detailed appraisal is undertaken by the FM and a report and recommendation prepared for
the panels;
For applications under £100,000 the decision is taken by the regional panel and passed to the
international panel for noting;
For applications over £100,000 the regional panel considers and provides a recommendation
to the international panel who take the decision – which might be to approve, to approve with
conditions, or to reject;
The FM then writes an offer letter and enters into “contract negotiation”, including discussing the
conditions, finalising the budget, finalising the indicators, etc.
In most cases, applicants did not prepare a detailed implementation plan until the funding had been
approved, so there was a delay – whilst they identified the staff who would manage the project,
moved them from existing duties, etc – before they could start. This typically required 6-12 months.
Funds are disbursed quarterly (either in advance or arrears) in accordance with the agreed budget
and subject to receipt of progress and finance reports and evidence of the private sector
contribution.
Projects are required to be audited annually (by the company’s existing auditor).

Figure 11: Monitoring & evaluation
Once the offer letter has been sent, there is usually a protracted period of contract negotiation in
which the bidder prepares a detailed implementation plan and budget and secures the agreement
of the fund manager. This period has typically lasted 3-12 months, though in one case it was
considerably longer. They can then start. Bidders are required to prepare quarterly progress reports
and quarterly finance reports; in addition, they are subject to quarterly reporting by the country
manager. They also have to prepare annual progress reports and annual financial reports as well as
a project completion report and an externally prepared post-completion report. In addition, the fund
manager commissions detailed evaluation reports which include preparing a baseline study and a
subsequent evaluation of performance. Some projects have also been the subject of independently
prepared case studies.

Appendix 4 Other challenge funds
Table 8: Comparison of selected challenge funds
Fund ProPoor FDCF Challenge BLCF Civil Society Challenge
Innovation (DFID) Fund A10 (DFID) Challenge Fund B11
Challenge Fund
(CGAP) (DFID)
Years operation 2000-present 2001-2006 2004-present 2001-2006 2000-present 1998-present
Size of fund £15m £15m £14 million
(extra £4m in
2005/6 after
review of
criteria)
Rounds to date 7 rounds; 44 7 rounds 2 rounds 8 rounds 6 rounds 38 rounds; 12
awards DMs run in
2005 up from 1
in 2000
Countries of Global Southern & East US Any emerging Any as long as Global; and
operation Africa, India, but focus on the intended country-specific
Pakistan DFID countries beneficiaries are level
poor
communities
Min/ Max / $50 000 £50k/1m/500k $50k/$150k Min - £50,000 100% funding Global:
Average Size of 15m Av: $90k (only 2 Max - up to £500,000 Max $150k
grant rounds to date: £1,000,000 for a maximum
(36 projects) Av $120k
$500k; $750k of 5 years. No
Average - Local:
where only the minimum size
£280,000
half for NFP has Av $14k
been awarded
to date
Eligibility for Micro finance Private sector Not for profit Any, but UK-based, non- Can be private
funding Institutions mainly and for objective to profit sector; but 57%
operating profit in round encourage organisations to date to
‘below the 2; not pre- commercial NGOs; 15% to
donor radar revenue but can business business; 12% to
screen’ be before linkages academia
breakeven
Instrument used Grant Grant Grant for NFP; Grant Grant Grant
loan/equity
possible
Match required Not required >=1:1 Not required >=1:1 Used to require Not required
50:50 but now
willing to fund
up to 100%
Conversion rate 300 applications 40 applications 7 funded project For Global: 3000
per round to 4-5 successful to 10 passed per round, 10 to 2003/04:120 appsÆ75
d/d; 4 awarded; full application, proposals; 20 finalists of which
2nd round: 100- 25 quality funded; 31 chosen
>8 -> 4 concept notes, 2004/05: 388
more than 100 Concept Notes;
submitted per 170 Proposals;
round (all above 54 funded;
x8 for total 2005/06: 301
numbers- these Concept Notes;
are by round) 158 Proposals
being
processed;
looking to
support 35-45
projects
Turnaround 3 months 6 months 6 months Can submit Global: 7
time: Opening concept notes months
of round to once every 4
10
Asked to remain anonymous
11
Asked to remain anonymous

awards weeks
Proposals
submitted by 31
July; decision
made by
Jan/Feb
Allocation Competitive International Committee of International External Tech
mechanism rounds and 3 regional externals + panel Consultants assessment: 1/3
adjudicated by panels CEO (tripleline); external; Final
CGAP staff DFID overseas jury: 50%
panel offices, British external
High
Commissions
and
CSCF
committee,
chaired by the
Head of ICSD
Disbursement One tranche In quarterly Tranched In quarterly Quarterly Global: in 4-5
tranches tranches tranches
Reporting Semesterly Quarterly Quarterly Annual Linked to
requirement tranches
IPR NA DFID has NA DFID has No Claim No claim; only
irrevocable irrevocable access to info to
licence to use IP licence to use IP disseminate
lessons
Outcome Survey: General Logframe Targets set in Logframe Nothing formal External review
measured by indicators on evaluation application evaluation
growth of
recipients
Outcome Survey in 2003 Under Too early to Recent Review Never been
achieved of 25 indicated evaluation assess; mainly conclusion? evaluated.
good growth via secondary Underwent
proxy measures consultation
review process
in 2004
Leverage NA Greater than NA Greater than NA
1:1 1:1
Other Issues Flexible light Lot of emphasis Now gearing in
touch instrument on research, external funders
to identify new knowledge for global
ways for MFIs creation and rounds on bank
sustainably to sharing; grants themes; so
reach clients create basis for program is
most often engagement growing.
excluded from Flexible tool to
access to MF get money to
public

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Financial Deepening Challenge Fund

Strategic Project Review

MAIN REPORT .................................................................... 10

Review of the programme

Strategic Project Review 5

Review of programme management

6 Financial Deepening Challenge Fund

Strategic Project Review 7

8 Financial Deepening Challenge Fund

Strategic Project Review 9

Reaching into rural communities

10 Financial Deepening Challenge Fund

Table 1: Highlights FDCF 2000/5

Strategic Project Review 11

Table 2: Challenge Funds in perspective

12 Financial Deepening Challenge Fund

Strategic Project Review 13

Minimum level of return

14 Financial Deepening Challenge Fund

We sought to anchor the review of FDCF in the prevailing thinking of pro-poor

Strategic Project Review 15

16 Financial Deepening Challenge Fund

Strategic Project Review 17

18 Financial Deepening Challenge Fund

4. Review of the programme

FDCF is, in essence, a portfolio of investments in pro-poor innovation: 29 have

Strategic Project Review 19

20 Financial Deepening Challenge Fund

As suggested earlier, the spread of outcomes matters in a VC-type environment.

Strategic Project Review 21

22 Financial Deepening Challenge Fund

Strategic Project Review 23

24 Financial Deepening Challenge Fund

Leverage is the measure of private sector investment unlocked by FDCF

IT i/ s t ruc t ure & h/ wa re

0 500 1,000 1,500 2,000 2,500 3,000

Figure 6: Private sector contribution budget analysis

IT i/ s t ruc t ure & h/ wa re

Wo rk ing c a pit a l re q' t

0 500 1,000 1,500 2,000 2,500 3,000

Strategic Project Review 25

26 Financial Deepening Challenge Fund

Strategic Project Review 27

FDCF and technology

4.4 Progress measured against log frame indicators

28 Financial Deepening Challenge Fund

Strategic Project Review 29

In our interviews with approved projects, we encountered generally positive

30 Financial Deepening Challenge Fund

Strategic Project Review 31

To provide a local presence, the fund manager appointed “country” managers,

32 Financial Deepening Challenge Fund

The country managers were expected to undertake an independent appraisal of

Strategic Project Review 33

34 Financial Deepening Challenge Fund

In addition to the bidders’ reports, the country managers prepare reports,

Strategic Project Review 35

There is a difference between marketing, intended to stimulate applications, and

In order to have systemic impact beyond merely funding a handful of firms on