Explaining Leakage of Public Funds

Using panel data from a unique survey of
public primary schools in Uganda, The authors assess the
degree of leakage of public funds in education. The survey
data reveal that on average during 1991-95 schools received
only 13 percent of the central government's allocation
for the schools' nonwage expenditures. Most of the
allocated funds were used by public officials for purposes
unrelated to education or captured for private gain
(leakage). The survey data also reveal large variations in
leakage across schools. A small set of school-specific
variables can explain a significant part of this variation.
Specifically, the authors find that larger schools receive a
larger share of the intended funds per student. Schools with
children of wealthier parents also experience a lower degree
of leakage, while schools with a higher share of unqualified
teachers receive less. After addressing potential selection
and measurement issues, the authors show that these school
characteristics have a quantitatively large impact on the
degree of leakage. The findings are consistent with the view
that resource flows-and leakage-are endogenous to
schools' sociopolitical endowment. Rather than being
passive recipients of flows from government, schools use
their bargaining power relative to other parts of government
to secure greater shares of funding. Public resources are
therefore not allocated according to the rules underlying
the government's budget decisions, with obvious equity
and efficiency implications. The survey findings had a
direct impact on policy in Uganda. As evidence on the degree
of leakage became public knowledge, the central government
enacted a number of changes: it began publishing monthly
transfers of public funds to the districts in newspapers,
broadcasting them on radio, and requiring schools to post
information on inflow of funds. An initial assessment of
these reforms shows that the flow of funds improved
dramatically, from 13 percent on average reaching schools in
1991-95 to around 90 percent in 1999. These improvements
emphasize the role of information in mobilizing
"voice" for better public expenditure outcomes.