How Uganda fixed leakages with transparency, and why it matters to India

India’s subsidy system needs reform, but the lack of information from the ground undermines the state’s ability to design right policies. Aadhaar promises that information and transparency

N S Ramnath

[By USAID Africa Bureau [Public domain], via Wikimedia Commons]

In the 1990s, Uganda was the focus of attention for development economists across the world thanks to an innovative experiment.

It started with two researchers: Ritva Reinikka from the World Bank, and Jakob Svensson from Stockholm University. They were trying to find out if the grants that the country’s central government gave to primary schools actually reached their destination. Just as the Indian government gives funds to schools to provide midday meals based on the number of students a school has, the Ugandan government allocates a capitation grant per enrolled student to schools to buy textbooks and instructional material, to maintain the buildings and so on. The money is transferred to the district administration and from there to the schools. Or that’s how it was supposed to work.

However, when Reinikka and Svensson surveyed 250 schools about the inflow of money and checked it against the outflow from government coffers, the results were stunning. Between 1991 and 1995 only 13% of the funds that were meant for the schools reached them in reality. The rest was diverted for other purposes, or it simply disappeared.

The results of the survey spurred the Ugandan central government into action. It could have come up with a complex solution to fix the problem, involving probes and investigative officers. Instead, it opted for a simple, even counterintuitive, way. It started publishing monthly transfers of public funds in newspapers and splashed them on radio. And it asked the schools to post notices on the inflows of funds. The results were dramatic. “Instead of about 20% in 1995 over 90% of the intended capitation grants reached the schools in 1999,” the researchers wrote in a 2001 paper titled Explaining Leakage of Public Funds.

What exactly was going on?

The problem with much of public spending, especially in countries that don’t have strong institutions, is that the government is often in the dark about where the money goes. The scale of operations is large. At the time of the survey, the government was giving grants to about 8,500 primary schools. They were funnelled through the district administration, which posed what’s called the “agency problem”—the officials didn’t work with the best interests of the schools in mind. It led to leakages. While everyone knew there were leakages, until this survey was done, it wasn’t even quantified. The government didn’t know, and neither did the schools. There was no transparency.

While the grants were supposed to be based on the number of students a school had, in reality it didn’t work that way. The schools that had more involved parents—ones who actively participated in the Parents Teachers Association (and they were typically rich) received most of the grants they were meant to get. Similarly, the schools that were showing better grades received their grants, because the top officials tend to visit better performing schools. But mostly, it depended on the relationship individual school principals had with the district administration officials. The better the relationship, the lesser the leakages. The other schools were neglected. The money they were supposed to get, went elsewhere.

When the government started publishing the outflow of funds in newspapers and asked schools to publish inflows, suddenly there was a new level of transparency. The bargaining power of almost all school principals went up, because they had data with them. In their book Poor Economics, economists Abhijit Banerjee and Esther Duflo described what happened thus: “About half of the headmasters of schools that had received less than they were supposed to had initiated a formal complaint, and eventually most of them received their money. There were no reports of reprisals against them, or against the newspapers that had run the story. It seems that the district officials had been happy to embezzle the money when no one was watching but stopped when that became more difficult,”

Cut to India. One of the basic premises of Aadhaar is that it will make such embezzlement of money more difficult.

In India today, no one doubts that the country’s subsidy system needs reform. A number of surveys have confirmed Rajiv Gandhi’s famous statement that only a small part of the funds from government actually reach intended beneficiaries. In public distribution for example, a study found that illegal diversion of rice as a percentage of supply was 72% in the poorest of poor category, and in case of wheat it was 78%. But for such surveys, the government and the citizens are mostly in the dark about how the funds are spent. This lack of information from the ground also undermines the ability of the state to design right policies.

The biometric identity project got the backing of many top politicians mainly because it offered a way to plug these leakages. The early evidence—from its application in cooking gas subsidies and rural employment guarantee scheme—show that Aadhaar does its job pretty well (while underlining the need to ensure that no one gets left out during the change). But there is little doubt that change itself is much needed, as it promises to bring the benefits of digital economy, presently enjoyed by a few hundred million people at the top of the economic pyramid, to a majority of the population.

However, unlike the Ugandan exercise, in which the scope was restricted to elementary schools and action was limited to publishing expenditure data in the media, Aadhaar was designed to have far reaching and dramatic changes. As a result it has attracted opposition from a range of people. In the recent past, the pitch has gone up, but opposition in some form or the other was there almost from the beginning.

Last year, Sanjay Jain, an engineer who was involved with Aadhaar almost from the beginning, told me that he could place those who have opposed Aadhaar in three buckets. “1) Those who don’t understand, they have constant fear that the government projects are not well thought through. They change their minds once we explain. 2) Those who oppose on the grounds of privacy, they are afraid that it could get too powerful. You have to respect that view, and make the system more secure. 3) Those who have their own agenda. There’s nothing you can do about it. You can’t reason with them. You just have to live with them.”  

It’s as true today as it was a year ago, or five years ago, even though there are more interesting categories, such as this one by columnist Manu Joseph in Mint newspaper.

Whether it is schools in Uganda or cooking gas subsidies or rural employment guarantee scheme in India, there are a few takeaways. The systems have inbuilt inertia, and things will continue to be the way they are till there is a strong stimulus. People tend to resist change that promises efficiency and transparency—not only those who are gaining from the lack of it, but also those who suffer because of it. A known devil is better than an unknown angel. However, the opposition fades when people see the benefits. 

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About the author

N S Ramnath
N S Ramnath

Senior Writer

Founding Fuel

NS Ramnath is a senior writer and part of the core team at Founding Fuel, and co-author of the book, The Aadhaar Effect. His main interests lie in technology, business, society, and how they interact and influence each other. He writes a regular column on disruptive technologies, and takes regular stock of key news and perspectives from across the world. 

Ram, as everybody calls him, experiments with newer story-telling formats, tailored for the smartphone and social media as well, the outcomes of which he shares with everybody on the team. It then becomes part of a knowledge repository at Founding Fuel and is continuously used to implement and experiment with content formats across all platforms. 

He is also involved with data analysis and visualisation at a startup, How India Lives.

Prior to Founding Fuel, Ramnath was with Forbes India and Economic Times as a business journalist. He has also written for The Hindu, Quartz and Scroll. He has degrees in economics and financial management from Sri Sathya Sai Institute of Higher Learning.

He tweets at @rmnth and spends his spare time reading on philosophy.

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