AusAID Indonesia's ‘Supporting Indonesia’s Tertiary Education’ project builds on the lessons learned from a two-year programme of demand-driven analysis and policy engagement with the Directorate General of Higher Education, as well as independent and multi-donor analysis. In order to achieve the project objectives, AusAID will establish a competitive funding scheme aimed at channelling grants to selected institutions. Once funding has been approved, AusAID will attempt to identify common, grant-related problems and solicit solutions through a challenge fund mechanism, which will invite the private sector to submit alternative proposals to address these issues.

The research paper will answer the following questions:

• How are challenge funds structured and how do they work?
• What are the costs associated with the creation and administration of funds?
• What are the risks related to challenge funds and how can they be overcome?
• What evidence exists for the effectiveness of challenge funds and similar funding mechanisms?
• What conditions are required for a successful challenge fund?
• What lessons and best practice can be applied when establishing challenge funds?

Claudia Pompa