17 instance, public schools in Uganda received only 13 percent of the central government’s allocation for non-wage expenditures, with the leakage depending on the size of the school and the wealth of the families in the particular district. When the scool transfers were published in local newspapers and schools were required to publish the inflow of funds, the leakage reduced substantially to 10 percent (Reinnika and Svensson, 2001). In nutrition, programs targeted to ensure children’s intake of minimum nutritional elements are also subject to leaks. In Peru, the _Vaso de Leche (Glass of Milk)_ program oriented to ensure children’s intake of calcium and protein was considered a success until a World Bank Public Expenditure Tracking Survey (World Bank, 2002) found that the beneficiaries (children under six) received 30 cents for every dollar spent by the central government. Private gains and high operational costs of the public sector explained the leakage of funds.

The health sector also registers weak links between public spending and health outcomes that have been explored comprehensively across numerous counties (Filmer, et.al., 2000). The pioneering study in this area showed that inadequate institutional capacity and allocation of budgets to the activities in which market failures are not that big limit the potential impact of public spending on improving health outcomes. The authors showed that, when conditions were not serious or quality was not important, patients would choose public facilities. But for serious conditions, individuals were willing to pay for private higher-quality care, bypassing the public service provider.

Improving service delivery for human capital formation is more difficult than in physical capital because outcomes are observable only with long lags and it is difficult to monitor the work effort by service providers. This limits the option of linking pay to performance and suggests that, in many circumstances, to improve service delivery policymakers will have to rely more on individual choice in a setting involving a proper mix of public and private provision of services. Generalization to a uniform standard of private sector participation is impossible, as there are a constellation of possible arrangements depending on whether the service is homogeneous or not, on the communities preferences, and on the monitoring feasibility. In general, the more heterogeneous is the service, and the higher the difficulty in monitoring outcomes and work effort, the more involved will local governments have to be. If the service is more homogeneous, the central government may be involved. In both cases, the extent of private provision will depend on monitoring capabilities (World Bank, 2003)

# **3. Is all capital equally productive?**

# 1. Human capital

The output response to additions of human or physical capital will vary with its quality and productivity. This heterogeneity helps explain why the macroeconomic literature based on aggregate figures finds ambiguous results on the impact of public investment or capital on growth. This section examines the sources of heterogeneity in human and physical capital, and discusses its implications for policy.