works.<sup>2 4</sup> Local governments also receive grants (FAG funds) from state governments to conduct maintenance works.25 These transfers represent instruments that have been criticized because of their "good merit" or "golden bridle" character where the granting government can attach strings to such funds such that the receiving government is no longer free to use them according to its own preferences. We will look at the implications for the road sector in the next section.

# _Vertical Analysis_

The graphical analysis at the vertical level aims at discussing the road performance of state- versus local governments. For construction, figure 9 shows that resource costs decline systematically with increased decentralization at the state government level. At the local government level, resource costs increase initially and then decrease at higher levels of decentralization. Looking at the two curves simultaneously, recognizing that an increase in decentralization at the state level means more responsibility for the local governments, we may be witnessing a "passing-on-ofthe-costs" of road provision to lower levels of governments in the early stages of decentralization. The increased autonomy at the local level may then lead to increased efficiency at higher levels of decentralization; hence explaining the difference in the shape of the gains between local and state governments. State governments seem to have economies of scale in production of roads--better technology and equipment to conduct the works--which local governments do not inherit when decentralization takes place. Considering the financing side, we had observed in section 5 that Germany has very high unit costs of construction, even after normalizing by per capita GNP. The local government financing structure for construction activities can help explain this effect. Local governments receive ear-marked transfers from the federal government (GVFG transfers) to construct road works. These transfers are only allocated for very large construction projects and cover on average between 50-80 percent of the costs.26 Tied grants of this sort provide less incentives for governments to operate efficiently.

As for maintenance activities, at lower levels of decentralization, local governments are better performers than state governments (see figure 10). But unit cost of maintenance at the local government level increase in a linear fashion as decentralization advances, whereas, at the state government level, resource costs decrease 24 Two related arguments are put forward for provision of federal government grants: a) the overall importance of roads in economic development of the German territory; and b) the positive externalities resulting from such transfers. The GVFG transfer covers on average 50-80 % of the construction costs and can only be requested for construction projects larger than 200,000 DM.

**25** The allocation formula varies from state to state: in Baden-Wuerttemberg, for example the FAG transfer is 13,800 DM for 1. km/'000 population; 17,300 DM for 2 km/'000 pop. and 20,700 DM for 3 km/'000 pop. . In Bavaria, it is lower at 3000 DM/'000 pop for 1. km and 6,700 for 2. km/'000 pop. and 9,200 DM for 3. km/'000 pop. In Schleswig-Holstein, it a fixed amount of 5500 DM per km. In all other states, FAG transfers are allocated as share of total amount of transfers to local governments.

Information from Jung, Dieter, Direktor beim Landekreisverband Bayern, Muenchen.

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