Explaining Leakage of Public Funds

Abstract

Unique survey data are used to explain variation in leakage across schools. Using panel data from a unique survey of public primary schools in Uganda, Reinikka and Svensson 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.

This paper - a product of Public Services for Human Development, Development Research Group - is part of a larger effort in the group to study the role of governance in the provision of public services.