FinancialDeepeningChallengeFund Section3 3 3 by 59hl91hv


Eligibility and ranking criteria
3.3.1 The key documents used to guide the project selection and approval process
have been reviewed, with a view to strengthening them and enhancing their utility in
achieving the project purpose. In general our recommendations centre on giving more
weight to enhanced competition in the microfinance market, broadening the notion of
‘innovation’ and relatively less emphasis on notions of projected replicability and
financial sustainability. These recommendations are found in Annex D.

Marketing strategy
3.3.2 The marketing of the FDCF by the fund managers has evolved in a steep
learning curve. The initial strategy, especially in East Africa, involved newspaper ads
and launch events based on targeted but extensive lists of invitees. These ‘hot lists’, as
they were referred to, were based on lists provided by Enterplan, DFID, and reviewed
and refined by Deloitte & Touche. These lists identified the organisations and
companies the fund wanted to engage and encourage participation. The first round
yielded around 500 concept notes of which the bulk did not meet the requirements. For
subsequent rounds both the marketing and eligibility requirements were narrowed
substantially. Key changes included: (1) requiring three years of audited accounts to
exclude start-ups, and (2) allowing NGOs to apply only when partnered with a private
sector entity. The information distribution process was then streamlined with the
circulation of information leaflets and the concept note form. Finally as of the third round
there was no more public advertising.
3.3.3 Some concentration of marketing was warranted. However, the narrow focus of
present marketing efforts may exclude highly innovative financial service providers
outside the mainstream formal financial sector. In the cases of India and Pakistan, not
enough attention has been placed on the use of industry associations, relevant
government agencies and other key informants to both publicise the programme and
encourage applications from suitable bidders. In all geographic areas the domain
knowledge of the fund managers has been queried, especially their ability to ‘drill-down’
and encourage applicants from the less obvious formal financial sector partners.

Contribution of Assessment panels
3.3.4 The two-tiered assessment panel structure in theory was supposed to offer the
following benefits:
       the regional panel, would contribute greater local context knowledge as well as
        direct familiarity with bidders;
       the international panel, whose members possess a range of high-level financial
        sector experience, would lend greater substantive experience, provide
        networking possibilities, and act as a fiscal watchdog.
Not all of these assumed benefits have been borne out in practice. The division
between the two levels of the assessment panels has contributed substantially to longer
decision-making times, and played a key role in the low approval rate (54 per cent) of
encouraged applications being ultimately funded.
3.3.5 The multiple assessment panel arrangement and the length of the management
chain have not created an efficient or transparent image for FDCF. Bidders feel the
decision-making process takes too long and they are often unaware why encouraged
applications are not successful i.e. there appears to be a lack of constructive feedback.
In addition, some regional panel members complained that they could not understand
why certain applications were rejected at international level. An analysis of projects
recommended by the regional panel but rejected by the international panel highlight that
these applications were recommended with substantial caveats by the regional panel.
The international panel may have been justified in rejecting them – or the regional panel
might have been remiss in not advising the applicants as to reservations, and how
modifications to the proposals could increase likelihood of success at international panel
level. In summary, there was a serious communications gap, in that the regional panel
was not adequately informed as to the reasons for international panel rejections,
engendering a sense of bitterness and a questioning the value of their input to the
overall decision-making process. This was especially evident among members of the
East Africa regional panel. Even when informed, members of the regional panel have
called into question the international panel’s knowledge of and sensitivity to the local
environment and context in assessing applications.
3.3.6 Underlying all of these problems is obviously the multi-tiered decision-making
structure. The regional panels, knowing that they are not the final arbiter, can approve
with reservations, while the international panel is too far removed to provide remedial
work for deficient applications. FDCF would be better served by eliminating one layer of
review. With modified terms of reference to permit a more activist and participating
contractor manager, either panel could be dropped. Eliminating the regional panels may
entail the greatest cost savings, however potential clients seem more comfortable with a
model in which the international panel is eliminated.

Options for improving the assessment process
3.3.7 There are three options that could be adopted – none of which are complete
maintenance of the status quo – as the FDCF moves forward:

       Option 1 (Modified two-tier system) – under this model regional panels, as
        described earlier, have the option to award a small grant to proposals and high
        potential concepts which can’t meet all criteria for full award. This option has the
           advantage of delivering funding to more applicants in a shorter time, however its
           main disadvantage is that it does not reduce the time for receiving a large
           award, which averaging as it does over six months, is faster than a normal DFID
           procurement process, is clearly perceived as too long by private sector
           applicants not experienced in working with donors.

          Option 2 (Eliminating the international panel). Although this would address
           the transaction time problem, it would deprive FDCF of a mechanism to
           objectively allocate resources between different regions. It will also make it
           difficult, unless there is also some international expertise participating in all
           regional assessments, to ensure uniformity in applying selection criteria. There
           could arise situations in which more capable (or risk tolerant) regional panels
           process more applications and consume the lion’s share of resources before
           other regions figure out how to work the mechanism. The reviewers feel these
           risks of geographic skewing of awards are small, but there is no obvious way to
           mitigate these risks without an international arbiter (of course, the FDCF
           manager could serve as this arbiter).

          Option 3 (Eliminating the regional panels) – under this model applications
           would be sent straight to the international panel. This also would address the
           transaction time problem but it would deprive the assessment of local and
           regional knowledge. It could also isolate FDCF from local opportunities and
The reviewers recommend that, at a minimum, FDCF adopt Option 1, but Option 2 (with
some form of international “quality control” and arbitration) is best for the long run.

Disbursement and related issues
3.3.8 A widespread complaint of successful bidders is the slow disbursement process.
In the early days of FDCF implementation, the fund managers seemed highly reluctant
to allow advances to projects, maintaining that advances caused difficulties with DFID
accounts departments. However, discussions with DFID account officials in both East
Kilbride and within the Enterprise Development section in London contested this view.
Their position was that up until very recently the fund managers did not possess
suitable accounting and financial controls systems for grant funds provided by DFID and
further they were not reporting disbursements made against projections.
3.3.9 The advance issue appears now to be resolved. The fund managers today report
on a quarterly ‘accountable grant’ basis1 (1) amounts received from DFID, (2) grant
funds expended and (3) expenditures against projections. They are also now providing
DFID with information on anticipated disbursements per quarter, including the levels of

    There is a one quarter lag in the reports i.e. the report due 31 December 2002 covers the quarter to 30 June 2002
disbursements in advance to projects. As can be seen management and DFID appear
to have learned useful lessons in this case and disbursement delays should be avoided
in future.

Information sharing
3.3.10 Both actual and potential partners asked for more information on approved
projects and the implementation lessons learned. Wider information sharing and richer
content (including a frank exposé of problems encountered and their resolution) could
contribute to lesson-sharing among project partners as well as encouraging the
application of suitable new entrants. The emerging ‘success stories’ being facilitated by
the FDCF should be more widely shared with the formal financial sector and regulatory
circles, to provide proof of the viability of pro-poor financial services. Lessons emerging
from the use of the challenge fund process by the FDCF should also be more widely
shared among DFID colleagues, to enhance replication of the challenge fund
mechanism by other sectors seeking an effective means to engage and leverage private
sector resources.

Intellectual property rights
3.3.11 Intellectual property rights (IPR) protect applications of ideas and information that
are of commercial value. The FDCF policy has been to request the grantee to share IPR
with DFID. This is a principle commonly applied by Governments (and thus
Government-related donors2) that any government/donor-supported project should not
be the exclusive property of the fund-recipient. In this instance, Clause 22 of the
standard FDCF agreement requires the grantee to give DFID a licence to use the
project material, which would include the right to publish, copy and distribute all material
include written material and software produced under a FDCF grant.
3.3.12 The FDCF policy on intellectual property right has been a contested issue,
especially when the (proposed) project would use grant funding for developing software.
It is crucial for a commercial institution that it should be able to keep control of the
distribution of any proprietary software; otherwise it may loose a crucial competitive
advantage. Several grantees in Southern and Eastern Africa raised the issue of IPR.
For instance, Teba Bank legal department objected to signing a clause allowing co-
ownership. DFID thereafter explained its position which is to require IPR co-ownership
only on software developments made under grant funding. That means that if the initial
software was acquired before the grant, the institution will retain exclusive IPR.
Modifications and adaptations to the software made under grant funding will remain
under IPR co-ownership status. This situation although more balanced is still a threat if

   DFID Office Instructions Volume IV: B1/Page 971 as referred to in memo on IPR issues from Crown Agents Legal
Advisory Services dated 17 September, 2002.
the original software is available on the open market or the software is developed from
3.3.13 To avoid any more delay in signing contracts, the FDCF managers are now
asking applicants to acknowledge that they have accepted the terms of the agreement,
including the IPR clause. This might raise the awareness of the issue earlier in the
process but does not bring relief on the main concern. Aware of the objections raised by
FDCF grantees, an interesting alternative has been adopted by another DFID fund
(FinMark Trust) which has adopted the following policies on IPR:
      “Where FinMark Trust provides 50 per cent or less of the cost of a project: the partner may retain
      full ownership of the intellectual capital created by the project, provided (i) that the partner makes
      use of the intellectual capital within a defined time frame and (ii) that a mutually agreed
      announcement takes place around the success of a project in general terms at its conclusion to
      encourage a demonstration effect.
      “Where FinMark Trust provides more than 50 per cent of the funding, it may require that the
      intellectual capital be placed in the public domain.”
The advantages of this solution is it takes into account the proportion of funding coming
from the grantee as well as leaving some room for flexibility to the fund manager,
however FinMark’s right to disseminate information on successful project in preserved.
The FDCF may wish to consider adopting a similar policy.

Lessons from other donor experience using similar mechanisms
3.3.14 A number of other donors are using various forms of matching grants or
challenge funds to promote microfinance or other aspects of financial sector deepening.
Annex V reviews some of this experience. Many of these programmes share
frustrations that better quality applications are not coming in, and that partner’s lack
technical capacity to move forward. Some donors (like the Inter-American Development
Bank and IFC) are responding by being more pro-active in introducing partners to
capable technical assistance providers. Some programmes (like USAID’s Innovation
Grants Fund, IFC’s microfinance bank investments, and the IDB/MIF Line of
Assistance) focus on larger initiatives and give out relatively few grants. Others (like
CGAP and MicroSave Africa) are attempting to broadcast smaller grants to more
institutions. Only IDB has carried out a formal review of its programme, but all donors
are generally pleased with the “challenge fund” instrument as a way of attracting new,
private sector partners. All other donors manage their programmes in-house, though
USAID is considering possible out-sourcing management of its programmes. The only
donor really trying to assess management costs against disbursements is the IFC,
however it is running specialised equity investment funds, which as noted earlier have
substantially different management responsibilities.
3.3.15 At their heart, the “lessons” of this other experience are subjective and need to
be treated with some caution by DFID and FDCF management. However, there is some

    FinMark Trust pamphlet, Making financial markets work for the poor.
consensus as which qualities a new financing initiative should have in order to succeed
in bringing new private sector partners to work with DFID or any other international
donor agency. These qualities include transparency, low transaction costs, flexibility and
shared risk/trust. Virtually all those interviewed see shortcomings in their existing funds
in these respects, and are working on improvements. It is relatively new ground for
development assistance. All regard this as promising, but difficult territory and all are
continuing (if not expanding) their efforts.

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