Introduction of Program Budgeting in Korea

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Introduction of Program Budgeting in Korea
June 7, 2005 Sang Dae Choi Budget and
Accounting Reinvention Office(BARO) Ministry of
Planning and Budget
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- Contents-
?. The BARO and its Mission ?.
Why Program Budget in Korea at this point
?. Key Factors in Designing Program Budget
Structure ?. Efficient Operation of the
Program Budget ?. Schedule to Introduce
the Program Budget ?. Lessons and
Recommendations
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?. The BARO and its Mission

• National Policy Task Meeting, chaired by the
  President
• (March 4. 2004)
• - Reform of budget structure and system
• - Reform of the government accounting system
• - Integrated fiscal information system
• Budget and Accounting Reinvention Office (BARO)
• - A government-wide task force (like JFMIP of
  the U.S.A.)
• Ministry of Planning and Budget (MPB)
• Ministry of Finance and Economy (MOFE)
• Ministry of Government Administration and
  Home Affairs (MOGAHA)
• Board of Audit and Inspection (BAI)
• - CPA and IT experts

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?. The BARO and its Mission (Continued)

• Mission Establishment of Digital Budget and
  Accounting System
• -"Providing budget and accounting
  infrastructure for better
• strategic resource allocation and
  performance management"
• - One of the recent 4 fiscal reform agendas in
  Korea with
• National Fiscal Management Plan (as a MTEF)
• Top-down approach in budgeting
• Performance Management System
• Core Tasks
• - Redefining the scope of public finance
• - Revising the budget structure Program
  Budget
• - Introduction of accrual accounting and
  double-entry bookkeeping
• - Establishing an integrated fiscal information
  system (IFIS)

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?. Why Program Budget in Korea at this point

• 1. Input and Control Oriented Budget System so
  far
• There has been a positive effect on
  restraining wasteful
• expenditures in budget.
• However, a budget system incompatible with
  the aims of better
• strategic resource allocation and
  performance management

ltKorean Budget Classificationgt ltKorean Budget Classificationgt ltMain Problemsgt
Category Name() ? Too many detailed activities to be managed (over 6,000 sesehangs)
Function Section Jang(20) Subsection Kwan(66) Item Hang(550) ? Too many detailed activities to be managed (over 6,000 sesehangs)
Organization (office or bureau) Subitem sehang(1,400) ? Operating based on line-items not programs (49 moks / 102 semoks)
Activity/Project Sub-subitem Sesehang(6,000) ? Operating based on line-items not programs (49 moks / 102 semoks)
Object Division mok(49) Subdivision Semok(102) ? Operating based on line-items not programs (49 moks / 102 semoks)
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2. Barrier to Success of Fiscal Reform Agendas

• Regarding the 5-Year National Fiscal Management
  Plan,
• - Different functional classification with
  annual budget
• ? The plan 14 section/56 subsection,
  Annual budget 20Jang/66Kwan
• - No program level between 550 items and 6,000
  sub-subitems
• Also, in the process of top-down budgeting,
• - Absence of program level, which is critical
  in deciding sectoral and
• ministerial ceilings
• In regard with the Performance Management
  System,
• - No budget level appropriate for performance
  management
• - Not reflect a programs full cost
• - No change in line-item centered method in
  budget execution
• management and account settlement

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?. Key Factors in Designing Program Budget
Structure

• 1. Setting up Programs to Link Budget with policy
• Excessively detailed current activities will
  be consolidated and then
• grouped as program level, which represents
  policy objectives.

section Subsection 1 program1 Activity1
Activity2
Activity3, 4
Program 2
Program3,4
Subsection 2
Subsection 3, 4
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1. Setting up Programs to Link Budget with Policy
(continued)

• Firstly, rearranging functional classification
  of expenditure budget
• (16 sections 66 subsections).
• - Accordance of the MTEF and annual budget

lt Renewed Functional Classification gt lt Renewed Functional Classification gt
16 Sections 16 Sections
1. General Public Services 2. Defense 3. Unification and Foreign Affairs 4. Public Order and Safety 5. Agricultural, Forestry, and Fishery 6. Industry and Small-Medium     Enterprises 7. SOC (Transportation) 8. Communication 9. Science and Technology 10. Environmental Protection 11. Housing and Community Amenities 12. Culture and Tourism 13. Education 14. Social Welfare 15. Health 16. Expenditures not classified      by major section
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1. Setting up Programs to Link Budget with Policy
(continued)

• Secondly, simplifying excessively detailed
  activities to a consolidated activity
• that links to programs

 lt Example of Ministry of Maritime Affairs and Fisheries gt  lt Example of Ministry of Maritime Affairs and Fisheries gt  lt Example of Ministry of Maritime Affairs and Fisheries gt  lt Example of Ministry of Maritime Affairs and Fisheries gt
Current system Program system Program system
Sub-subitem activity Consolidated activity Program
Preparation of statistics of marine products Supporting self- management marine   products Assistant to Korea Fishing Port Association, etc. 1. Construction of fishery production foundation Development of fishery villages and fishing ports
Construction of a fishes  museum Construction of fishery  tourism complex Fishery folk museum, etc. ? 2. Development of tourism in fishery villages Development of fishery villages and fishing ports
Construction of a   national fishing ports Construction of   digitalized fishery villages Construction of local   fishing ports, etc. 3. Investment and management of fishery villages and fishing ports Development of fishery villages and fishing ports
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2. Allocation of Indirect Costs to Reflect a
Program's Full Cost

• Personnel cost and operation cost will be
  allocated by programs.

Current system (Personnel/ operation/    activity costs) Personnel cost Operation  cost Activity 1 Activity 2 Activity 3 Activity 4 Activity 4 Activity 5 Activity 6..


Program system (Personnel operation program costs) Program1 Program1 Program1 Program2 Program2 Program2 Program3 Program3 Program3
This will be implemented by stages.   - In a
short term, only personnel cost and operation
cost of Offices and Bureaus will be
allocated by relevant Offices and Bureaus
programs. - In a long term, costs of
supporting organizations within a ministry such
as Planning and Management Office and
Coordination Division will be allocated by
relevant Offices and Bureaus' programs.
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3. Ensuring Accountability by Linking Programs
with Organization

• In principle, a cross-cutting program among
  organizational units
• (ministries or offices/bureaus) will be
  avoided.
• Linkage of performance and budget management by
  according the level of
• performance objective and policy program

ltPerformance managementgt ltPerformance managementgt ltPerformance managementgt ltBudget managementgt ltBudget managementgt ltBudget managementgt
Ministries Mission Section Section
Ministries Strategic objective Subsection Subsection
? ? ?
Offices and Bureaus Performance objective Policy program Policy program
Offices and Bureaus Programs  Programs  Programs  Programs 
? ?
Divisions, subsections Fiscal program Unit program
Divisions, subsections Activities/Projects Activities/Projects Activities/Projects Activities/Projects
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4. Enhancement of Autonomy in Line Ministries

• The activities and/or projects under programs,
  in principle, will be
• managed autonomously by line ministries.
• - The sectoral and ministerial expenditure
  ceilings will be decided
• on the basis of programs.
• Furthermore, the line-items will be greatly
  reduced.
• (49 divisions ? less than 10 divisions)
• - The tentative divisions
• Personnel costs                     
  Acquisition of capital assets
• Operation costs                     
  Capital transfers
• Current transfers                    
  Other payments
• - The compartments between divisions will be
  minimized while

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5. Improvement of Budget and Accounting Documents

• Formats and contents of budget and accounting
  documents show
• philosophy of a country on its fiscal
  management.
• - Line-item control centered ? Program
  performance centered
• Uplifting range and quality of budget
  information
• - A program budget document to consolidate
  resources such as
• budget and public funds.
• - From figure-oriented to programs
  information-oriented
• Regarding account documents,
• - The results of cash-based budget execution,
  as program and
• activity standard from the current line-item
  centered
• - Additionally, accrual-based consolidated
  financial reports such as

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?. Efficient Operation of the Program Budget

• 1. Role Changes of Line Ministries and Fiscal
  Authorities

Current Forward

Line Ministries ? A lack of efforts to guarantee program performance ? Not taking initiative in deciding detailed budget activities ? Guarantee of accountability in program performance ? Higher discretion of detailed budget activities and operational autonomy

Ministry of Planning and Budget ? Micro analysis of activities ? Input and control-centered resource allocation ? controlling each ministrys budget in advance ? Macro analysis of policies and programs ? Program performance centered resource allocation ? coordination and adjustment of each ministrys policies

Ministry of Finance and Economy ? Management of government-wide budget account settlement report as line-item centered ? Supplying budget account settlement information as program centered ? A partner of the macro resource allocation policy with the MPB

Board of Audit and Inspection ? Account inspection as regulation oriented ? Performance auditing of detailed activities ? Program performance-centered auditing ? Coordination of performance evaluation system management
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2. Budget Process Changes focused on Programs
NFMP formulation expenditure ceilings Budget request compilation Performance evaluation execution management Account settlement
(T-1) year Jan. to Apr. (T-1) year May. to Sept. During T year (T1) year Feb. to May

? Consult adjust by programs (MPB line ministries) ? Decide expenditure ceilings by sector and ministry on the basis of program consulting results ? Consult new and large activities/projects under a program ? Submission of program budget documents to the National Assembly(Oct.) ? Evaluate previous years performance ? Monitor execution results of programs and main activities by quarter ? Account settlement by programs and activities (cash-based) ? Separately, produce consolidated financial reports (accrual-based)
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?. Schedule to Introduce the Program Budget
The 1st stage (2004-2005) - Preparation of introducing the program budget ? Program budget structuring for all ministries ? Application of program structure for the MTEF(05-09) ? Test of program structure for FY 2006 budget

The 2nd stage (2006) - Application of program budget for FY 2007 budget (Backed up by the current Fimsys) ? Allocation of indirect costs by programs deferred

The 3rd stage (2007) - Full-fledged operation of the program budget in FY 2008 budget (Backed up by the IFIS) ? Allocation of indirect costs by programs reflected ? The Integrated Fiscal Information System will be established in October, 2006
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?. Lessons and Recommendations

• lt Program Budget Design gt
• v Grand picture and sequence among fiscal
  reform agendas
• v Feasible guidelines on the program budget
  structure and operation,
• which can be practically implemented within
  line ministries
• v Active participation of line ministries from
  the beginning stage of
• designing the program budget structure
• lt Implementation Strategies gt
• v A steering government-wide task force
• v Strong back-up from the political and
  government-wide leadership
• v Consensus building with the National Assembly
  and the NGOs
• v Education and training for budget people of
  line ministries