Making business inclusive:are enterprise challenge funds useful tools?

Robin Davies, Associate DirectorKerri Elgar, Visiting FellowDevelopment Policy CentreCrawford School of Public Policy

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What is an enterprise challenge fund?

• In developing countries, targeted subsidies are sometimes needed to overcome barriers for businesses on the threshold of making investment decisions that are likely to benefit poor people as employees, suppliers or consumers.

• Enterprise challenge funds (ECFs) are main instrument used by bilateral aid agencies for providing such targetted subsidies to inclusive business ventures.

• Pros and cons…but increasing in popularity.

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ECF working groupEstablished July 2013 ‘to examine the rationale for the use of ECFs, reflect on experience to date and develop principles-based recommendations to development agencies on their use in the future’

Four ‘big-picture’ questions:• rationale for the use of ECFs• their place in a broader array of approaches• their partnership structure• their impact

And four more practical but still broad questions bearing on the design of ECFs:• geographical and sectoral scope• the manner in which financing is made available• the role of complementary services• fund administration

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Fault lines

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Ten characteristics of an ECF1. Offers firm-specific incentives: it offers incentives to particular firms to invest in business creation, reconfiguration

or expansion2. Issues a challenge: the incentives are used for a specific purpose of the proponent’s own devising, sometimes

within broad parameters defined by the fund3. Employs competitive allocation: firms are selected through open competition4. Requires additionality: an investment must be one that would not otherwise have made5. Requires risk-sharing: incentives are set at a level, determined by a matching ratio, that only partially compensates

for market or government failures6. Seeks benefits for the poor: investments confer benefits on poor people associated with beneficiary firms as

suppliers, employees or customers7. Seeks sustainability: it is intended that such benefits be provided on an ongoing basis, beyond the consumption of

the incentive8. Values competitive neutrality: incentives compensate for government or market failures without seeking to give

beneficiary firms a long-term competitive advantage9. Values demonstration effects: it is intended that similar benefits are subsequently experienced by other groups of

poor people through the replication or scaling-up of investments, whether by the beneficiary firm or copycats10. Values systemic impact: it is intended that such replication or scaling-up occur with less or no need for the

provision of further incentives 6/10

Poverty reduction through private sector development: objectives

1. Strengthening enabling environments: helping to develop legal and regulatory frameworks, infrastructure, workforce skills and consumer knowledge in order to promote the growth of the private sector for the general benefit of a region or country

2. Fostering enterprise development: helping to establish or expand particular enterprises in order to deliver general economic benefits for a region or section of the population, often with an eye to those enterprises’ direct impact on poor people as suppliers, employees or consumers

3. Stimulating inclusive investment: helping to reconfigure particular enterprises or extend them into new markets in order to promote the beneficial engagement of poor people with those enterprises as suppliers, employees or consumers

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Assistance types

• Confidence: temporary subsidies to reduce business expenditure or increase revenue, or support for research on the characteristics, skills and preferences of the target population of poor people, or the ‘good offices’ of the sponsoring agency

• Context: physical infrastructure with public-goods characteristics, or general workforce skills development, or consumer education

>==============================<• Capital: grants, equity, loans or guarantees (including within blended financing

packages negotiated with banks or multilateral development financing institutions)

• Capacity: business planning and management capacity, business-specific workforce skills development, or equipment

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Poverty reduction through private sector

development ASSESS:

Weak general enabling environment?

STOP

Adequate general enabling environment?

ASSESS:

Weak firm? PROVIDE:

Strong firm? PROVIDE:

Strong project enabling environment?

ASSESS:

Weak project enabling environment?

ASSESS:

Capacity (technical assistance)

Capital (direct or by guarantee)

Context (public goods) Confidence (temporary subsidies, intelligence,

association)

Strong firm? STOP

Weak firm? STOP

Firm strength

Intervention type

Project environment

General environment

Objective

Decision tree

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Two fund types• Enterprise development (ED): supports the establishment or

expansion of small-to-medium-scale enterprises to achieve positive general or sector-specific development impacts, by providing investment financing or increasing firm capacity

• Inclusive business (IB): supports the expansion or reconfiguration of large-scale, often multinational, enterprises to increase their beneficial engagement with poor people as suppliers, employees or consumers, by providing risk reduction financing, information and good offices

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Eight observations on…1. Giving money to strong firms: sometimes risk reduction, sometimes to support a project champion—

but the beneficiaries are the suppliers, employees, customers2. Geographic and sectoral scope: open for IB funds and more restricted for ED funds—but the latter

should be organised in hub-and-spoke fashion if possible3. Which firms get assistance: open for ED funds but IB funds could reasonably target a donor country’s

own firms, with care4. Fund scope: housing ED and IB funds under one roof does not make much sense (different clients,

offerings and stances)5. Lightness of touch: ED funds operate in the market and work with fragile firms, so need strong TA and

market intelligence capacity; IB funds have no need of this but must be capable of high-level business engagement and persuasion

6. Financing terms: for IB funds, use grants; for ED funds use grants or guarantees within blended finance packages or else equity, quasi-equity or debt

7. Measuring results: where payments are for risk reduction, make them proportional to specific results automatically measured by the firm (inputs purchased, units sold, wages paid)

8. Semantic niceties: while any fund that places the onus on some entity other than the donor to come up with pro-poor business ideas can reasonably be called an ‘enterprise challenge fund’, better to talk about IB funds and ED funds

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Making business inclusive:are enterprise challenge funds useful tools?

Robin Davies, Associate DirectorKerri Elgar, Visiting FellowDevelopment Policy CentreCrawford School of Public Policy