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ADB Project Terminal Report - Part-2 by Tarun Das

Terminal Report: Part-2


Chapters 2-5 on Strategic Planning, Output Budgeting,
Accrual Accounting, Benchmarks and Best Practices
ADB Capacity Building Project on Governance Reforms

Professor Tarun Das1

Ministry of Finance
Government of Mongolia
Ulaanbaatar, Mongolia
31 March 2008

1
Glocom Inc. (USA) Expert on Strategic Planning, ADB Capacity Building Project for Governance
Reforms, Ministry of Finance, Government of Mongolia. Formerly, Economic Adviser, Ministry of
Finance and Planning Commission, Government of India and Professor (Public Policy), Institute for
Integrated Learning in Management (IILM), New Delhi, India.

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Table of Contents

Table of Contents Pages

PART-1 1-70

Contents 2
Acknowledgements 3
Project Team 4
Administrative Units of Mongolia 4
Major macro-economic variables 5
Document history 6-9
List of Abbreviations 10-11

Chapter-1: Major Conclusions and Recommendations 12-51


Annex-1: TOR and Compliance Report 52-58

Annex-2: Policy Matrix – Compliance Report 59-62

Annex-3: Design of a Training Program for capacity building 63-67

Annex-4: List of Experts consulted 68-70

PART-2 71-158

Chapter-2: Strategic Business Planning 73-100


1.
Chapter-3: Output Costing and Output Budgeting 101-115

Chapter-4: Accrual Accounting and Accrual Budgeting 116-132

Chapter-5: Benchmarks and Best Practices 133-157

PART-3 158-214

Chapter-6: Financial Planning 160-191

Chapter-7: Core and Non-core functions 192-205

Chapter-8: Seven Year Action Plan (2008-2014) 206-214

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Chapter-2
Strategic Business Plans (SBP)

1. Basic Features of Strategic Business Plans (SBP)

1.1 What is a Strategic Business Plan?

Strategic Business Plan is a comprehensive plan which indicates strategic objectives and
describes plans and activities to achieve them, given the organization’s internal strength,
weaknesses and resources, and opportunities and threats posed by the changing economic
and other environment. It also indicates the organization’s priorities in the short and
medium term and articulates how to reach the real beneficiaries and clients. Strategic plan
is a revolving plan with continual process of monitoring, review, evaluation, modification
and periodic updating.

1.2 Brief History of Strategic Planning

Strategic Planning and Management (SPM) was originally developed in military circles
during the post World War II period by such organizations as the Rand Corporation to
have appropriate strategy and plan for tackling fast changing situations almost on daily
basis. Subsequently, the private sector corporations started adopting the technique in
1970s, particularly the Royal Dutch Shell (the technique is often known as Shell method)
to tackle the oil crisis. The diffusion of the technique was amplified and accelerated by
the management consulting companies in 1980s such as Mckinsey who assisted in
capacity building for SPM.

1.3 Basic Features of Strategic Planning

Under SBP, resources are focused to achieve a Mission, embedded in a clear and realistic
Vision. Mission is based on issues identified in collaboration with major stakeholders,
rather than pre-determined by whims of bureaucracy. Time frames are specified with
realistic projects and programs. Emphasis is placed on concrete actions and
implementation, rather than making an impressive and too ambitious plan with wish lists
and unrealistic targets. In fact, plans are useless unless these are implemented. Targets are
valueless unless these are achieved.

Emphasis is placed on maximizing the benefits or minimizing the use of resources. Thus,
strategic processes are cost-effective and benefits maximizing. SPM recognizes the
importance of champions or leadership and the quality of institutions. In the short run,
strategies need to be tailored to take advantage of institutional strengths and to avoid
weak institutions. But in the medium and long terms, emphasis should be placed on
capacity building and strengthening weak institutions. If necessary, some weak
institutions need to be replaced or eliminated.

SPM recognizes that we live in a global environment which is complex and fast
changing. So it stresses the importance of anticipation and foresight through analysis of

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leading factors, driving forces and realistic scenario building. SPM distinguishes between
internal and external environment. It recognizes that the external environment is very
important, but we cannot change it. Besides, the global public policy is an area of
conflicts and adversity, and the general consensus and cooperation will not be easily
forthcoming. So we need to understand its dynamics and anticipate change to some
degree, and we should be fully prepared with a strategy to tackle any contingent liabilities
and unforeseen events.

SPM recognizes that no government policies and programs will be successful unless the
government is able to make the people march along with them. Thus collaboration in
SPM is a deal making which rewards all parties involved, and creates win-win situations
for all stakeholders.

2. Strategic Plans and Reforms


2.1 Second Generation Reforms in Mongolia

It is well known that the government of Mongolia started economic reforms in 1991 to
adopt an open door policy for investment, production and trade of goods. Its domestic
economy and external sectors are much more liberalised today than they were before
1990s. During last five years Mongolia has also progressed significantly in the spheres of
privatization, public sector reforms and governance reforms.

Mongolia is now passing through a phase of second generation reforms to improve


efficiency and productivity in both private and public sectors and to impart dynamism to
the overall growth process. The Strategic Business Plans (SBPs) for the line ministries
have to be integrated fully with these structural and governance reforms and capacity
building. But, the SBPs need to adopt a gradual, step by step, evolutionary and
cumulative approach towards reforms, and should avoid the temptation of adopting the
so-called big bang, shock therapy, radical, fundamental or revolutionary approach
adopted by some developed nations in Latin America and Europe. As Mongolia is a low-
income country with significant incidence of poverty, the reforms and SBPs need to have
adequate safety nets for the vulnerable and weaker sections of the society so that they are
not adversely affected by structural changes and the waves of the so-called LPG
(liberalization, privatisation and globalization).

In a multi-party democracy as in Mongolia, there is a need for general political consensus


for acceptability of reforms, and the government must own the reforms. There is also a
need for emphasis on “human face” or pro-poor development policies. If every
Mongolian is skilled and healthy and lives longer, they can participate fully, contribute
more and benefit more from the development process.

2.2 Need for Reorientation of Public Policies

There is already a re-orientation of public policies. SBPs should put emphasis on creating
an enabling environment for public-private partnership (PPP), linking fiscal incentives to
productivity and efficiency, streamlining public investment programs, repairing market

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failures, and developing and strengthening structures and institutions. SBPs should focus
on consultations with stakeholders, flexibility, decentralization, prioritization and
selectivity, outputs and outcome, implementation, benchmarking and best practices,
performance evaluation, monitoring, and co-ordination of policies and programs.

There is need for strengthening the Public-Private Partnership (PPP) and involvement of
sub-national governments (Aimags, Soums, City Councils), NGOs and other civil
societies for delivery of public goods and services, so that the associated risks, costs and
benefits are shared by both private and public economic agents and by all stakeholders in
the development process. There is also a need for decentralization of both financial and
administrative powers for execution of programs, as the local governments would be
more efficient in implementing projects at the grass-root and micro and meso levels.

2.3 Redefining the role of government

Under economic reforms, there is a distinct change of the role of the government from a
controller to an enabler, from a supplier to a facilitator, from an operator to a policy
maker, and from a regulator to a trustee of social equity and environmental sustainability.

Both well governed state and well functioning markets are essential for high growth and
poverty reduction. Government and free markets should supplement and complement
each other. Government should withdraw from sectors where private participation and
management, including foreign investment, are more productive and more efficient. But,
the scope of government will remain large in the development of social sectors viz.
health, education and physical infrastructure.

We do not advocate a small, shrunken, weak state, but want the state to do more things in
a different way and more effectively. There is a need for a strong state to guide the
transition process for completing structural reforms, to strengthen the existing public
institutions, to create new institutions, to finance public investment and to help poor to
participate in the development process. A national poverty reduction strategy will require
a firm and consistent leadership by the state, sustained over a long period of time.

3.1 Economic Background


3.1.1 Macro-economic performance during 2003-2007

In recent years Mongolian economy has performed very well. In fact, Mongolian
economy is presently in a rebound and resilient mood after successfully tackling the
adverse impact of the severe and successive dzuds during 2000-2002. Economy
performed very well since 2003 and achieved an average growth rate of 8.4 per cent
during 5 years 2003-2007 with peak at 10.7 per cent recorded in 2004 (Table-1). The
mining, construction, wholesale and retail trade, financial services, transport and tele-
communications served as the main drivers of growth supported by favorable weather
conditions. Mongolian economy usually does well when the weather conditions are
favorable and commodity markets are buoyant. Consumer prices inflation moderated

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from 11 per cent in 2004 to 7 percent in 2006, but increased to 8.6 percent due to rise of
wages by 30 percent at home and hardening of petroleum prices abroad. Interest rate on
central bank bills declined from 15 percent in 2003 to 5.8 percent in 2006, but was raised
to 6.4 per cent in September 2007 by the Bank of Mongolia as a part of policies for
inflation targeting. The current account balance on both the government budget and the
external sector improved significantly and were in surplus in 2006 and 2007.

Table-1 Mongolia: Trends of Selected Economic Indicators in 2003-2007

Economic Indicators 2003 2004 2005 2006 2007P


1. Real GDP growth (percent) 5.6 10.7 7.0 8.7 9.9
(a) Agriculture 4.9 17.7 9.6 7.5 10.0
(b) Industry 4.8 15.0 1.2 7.0 7.9
(c) Services 6.1 6.3 8.7 10.0 11.1
2. Consumer prices inflation rate (percent) 4.7 11.0 9.5 7.0 8.6
3. Growth rate of broad money supply (%) 49.7 20.3 37.3 34.9 43.8
4. Interest rate on central bank bills (percent) 15.0 15.8 3.7 5.8 6.4
5. Revenue and grants (as % of GDP) 37.9 37.3 37.0 36.6 39.5
6. Mineral revenue (as % of GDP) 2.8 4.1 4.5 13.5 NA
7. Non-mineral revenue (as % of GDP) 34.2 32.5 29.0 27.0 NA
8. Expenditure and net lending (% of GDP) 42.1 39.4 33.7 33.3 40.5
9. Overall budget balance as % of GDP -4.2 -2.1 3.2 3.3 -1.0
10. Current account balance as % of GDP -7.7 1.6 1.4 5.2 NA
11.Year-End foreign exch. reserves (US$ ml) 178 208 333 626 1290
12. Foreign exch. reserves (months of imports) 1.5 1.6 2.1 3.4 8.0
13.Total public debt (as % of GDP) 113 93 68 54 NA
14. External debt (as % of GDP) 98 85 64 51 NA
15. NPV of external debt (as % of GDP) 64 52 40 32 NA
16. Domestic debt (as % of GDP) 15 8 4 3 NA
17. End-period Exchange rate (MNT/US$) 1170 1209 1221 1164 1186
Source: ADB, IMF, Govt of Mongolia 2008 Budget and the Bank of Mongolia.
Note: P stands for preliminary and the latest available information.

Foreign exchange reserves were rebuilt from their end-2003 low level after the settlement
of the pre-1991 Russian debt, and reached US$626 million (equivalent to 3.4 months of
imports) at the end-2006 and further to US$1290 million (equivalent to 8 months of
imports) at the end-2007.
3.1.2 External Debt

Mongolia’s public debt is predominantly external debt which constitutes 94 percent of


total public debt and 77 percent of GNI. However, financing of external debt does not
create any problems. External debt service ratio (as percent of exports of goods and
services) declined from 29.4 percent in 2003 to 2.6 percent in 2006. External debt is
predominantly concessional (95%) and multi-lateral (59%). Short term debt constitutes
less than 2 percent of total external debt. As per World Bank classification, Mongolia is
now regarded as a low income and less indebted country.

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Table-2 External Debt of Mongolia (US$ Million)

1995 2000 2001 2002 2003 2004 2005


Total Debt stock (EDT) 531 896 885 1036 1472 1518 1327
Long term debt 472 833 824 949 1137 1307 1267
Public & guaranteed 472 833 824 949 1137 1307 1267
Private non-guaranteed 0 0 0 0 0 0 0
Use of IMF credit 47 50 47 43 50 44 35
Short-term debt 12 13 14 44 285 167 25
Total debt service (TDS) 52 39 45 52 288 41 45
Principal repayments 42 29 35 40 274 20 25
Interest payments (INT) 10 10 10 12 14 21 20
Interest on long term debt 9 9 10 12 12 14 15
Interest on short term debt 0 1 0 0 2 7 5
IMF charges 1 0 0 0 0 0 0
Gross national income (GNI) 1201 940 1014 1113 1263 1601 1830
Exp.of goods and services (XGS) 511 639 677 778 978 1422 1722
Workers remittances 0 12 25 56 129 202 202
Imp.of goods & services (MGS) 550 791 846 965 1109 1432 1693
Net resource flows 153 189 165 196 45 280 315
Net long term debt flows 68 53 54 50 -154 115 72
Foreign Direct Investment 11 54 44 78 132 93 182
Portfolio equity flows 0 0 0 0 0 0 0
Grants (exc. Tech-coop grants) 74 82 67 68 67 72 61
International reserves (RES) 158 202 257 398 243 250 430
Current account balance 39 -70 -62 -105 -99 63 26
Sustainability Debt indicators (in per cent)
Total Debt stock (EDT)/ XGS 104 140 131 133 151 107 77
Short-term debt/ XGS 2 2 2 6 29 12 1
Total Debt stock (EDT)/ GNI 44 95 87 93 117 95 73
Long term debt/ GNI 39 89 81 85 90 82 69
Public & guaranteed/ GNI 39 89 81 85 90 82 69
Private non-guaranteed/ GNI 0 0 0 0 0 0 0
Use of IMF credit/ GNI 4 5 5 4 4 3 2
Short-term debt/ GNI 1 1 1 4 23 10 1
TDS/ XGS 10.2 6.1 6.6 6.7 29.4 2.9 2.6
INT/ XGS 2.0 1.6 1.5 1.5 1.4 1.5 1.2
INT/ GNI 0.8 1.1 1.0 1.1 1.1 1.3 1.1
RES/ EDT 30 23 29 38 17 16 32
RES/ MGS (months) 3.4 3.1 3.6 4.9 2.6 2.1 3.0
Short-term/ Total debt 2.3 1.5 1.6 4.2 19.4 11.0 1.9
Concessional/ EDT 68 91 92 90 76 85 95
Multilateral/ Total debt 32 52 55 55 47 53 59
Source: (1) World Bank, Global Development Finance 2007

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4 Economic and Development Prospects


4.1 Strengths, Weakness, Opportunities and Threats

A SWOT analysis of the Mongolian economy is presented in Table-3. It may be


observed from the table that Mongolia has many strengths and opportunities to achieve
higher growth provided it is able to tackle the risks due to variations of international
prices of its major exports such as minerals and cashmere and major imports such as
petroleum oil, food products, automobiles, plant and machinery.

Table-3 SWOT Analysis of the Mongolian Macro-economy


And the Ministry of Finance

1. Sustained high GDP growth averaging around 8% since 2004.


2. Strong performance by minerals, construction and services sectors.
Strengths 3. Manageable fiscal deficit, with surpluses in overall fiscal balance in
2005-2006.
4. Declining and moderate inflation since 2005
5. Declining interest rates in recent years
6. Declining ratios of public debt to GDP
Internal environment

7. Declining ratios of both external and domestic debt to GDP


8. Enabling environment for public-private partnership
1. High dependence on mineral revenues
2. Declining trend of the non-mineral revenues
Weaknesses 3. Very high growth rate of money supply
4. Low levels of domestic savings
5. Large proportion (nearly 80%) of current exp. and low levels of
public investment
6. High poverty ratio (32.6 percent in 2006)
7. GR remains vulnerable to unfavourable weather shocks
8. Constraints on growth of agriculture and allied sectors
9. Degradation of environment due to over use of forestry
10. Rise of govt exp. due to elections in 2008
Opportunities 1. Located between two large growth centres and fast growing
neighbors (China and Russia) with positive pulls and pushes on the
Mongolian economy
2. Surplus in the external current account during 2004-2006
External environment

3. Comfortable foreign exchange reserves (equivalent to 3.4 months


of imports at the end of 2006)
4. Declining ratios of external debt to GDP
5. Very low external debt service ratios indicating sustainability of
external debt over time (and possibility of no debt trap)
Threats  Overall economic growth and government revenue remain
vulnerable to terms of trade shocks trigged by possible sharp
declines in international prices of copper, coal, gold and cashmere
in future
 Balance of payments remains vulnerable to future risk of further
hardening of global oil prices

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4.2 Macroeconomic Prospects during 2009-2011

Mongolian economic prospects in the short and medium term are considered to be bright.
Assuming that there would be no major internal or external shocks having destabilizing
effects on the Mongolian economy and no monsoon failures, Mongolia would be able to
sustain real GDP growth rates around 10 percent in 2008-2011 supported by a growth
rate of 5 to 6 percent in agricultural value added, 10 to 11 percent in industry and 11
percent in services (Table-4). Industrial and services production are expected to sustain
growth momentum largely driven by cyclical factors and induced by a rise in agricultural
income and increased public spending on physical and social infrastructure.

Table-4: Projections of real GDP growth by main sectors (in percentage)

Sectors 2007P 2008 2009 2010 2011


Agriculture 9.9 5.0 5.8 6.0 6.0
Industry 10.0 11.5 10.6 10.0 10.0
Services 7.9 11.5 11.1 11.0 11.0
Total 11.1 10.1 9.9 9.8 9.8
Source: Government of Mongolia Budget 2008 for the years 2007 to 2010, and the author’s
estimate for 2011.

4.3 Development Challenges and Issues

Mongolian transition from a command economy to a market-oriented economy along


with democratic society has paid rich dividends in terms of higher economic growth,
higher per capita income, lower inflation and favourable external accounts. But, the
transition has also led to various development challenges such as how to sustain high
growth with fiscal prudence, how to promote equitable growth and to raise the levels of
living of all citizens, how to eradicate poverty, hunger and disease at a faster speed, and
how to create enabling environment for public-private partnership and international
cooperation in the process of development.

Along with other nations of the world, Mongolia has committed to achieve the UN
Millennium Development Goals (MDGs) by 2015 in the areas of reduction of poverty
and hunger, achievement of universal education, ensuring equality for women,
improvement in health, environmental sustainability and global partnership in
development. Mongolian government produced an evaluation report entitled
“Millennium Development Goals: National Report on the Status of implementation in
Mongolia” in 2004. According to this report, Mongolia is far behind in achieving many
targets, particularly for reduction of poverty, hunger and disease. Poverty incidence was
estimated at 32.6 percent in 2006 compared with MDG target at 18 per cent for 2015
(Table-5). This implies that trickle down effects of the sustained high growth rates
averaging around 8.6 per cent during 2004-2006 might have been delayed, slow and
uneven.

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Table-5 Achievements of MDG in Mongolia

MDG 1: Reduce poverty and hunger


1990 2000 2005 2006 2015
Poverty ratio (Head Count Ratio) 36.3 35.6 36.1 32.2 18.0
(1995) (1998) (2002)
Share of undernorished chidlren 12.0 12.7 6.3 - 0
(1992)
MDG 2: Achieve universal primary education
1990 2000 2005 2006 2015
Net enrollment ratio in primary educaion 97.5
95.0 95.6 91.4 100.0
(1995)
Proportion of pupils starting in grade 1 who reach grade 5 92.4 84.5 101.2 86.8 100.0
Literacy rate of youth age 15-24 99.0 97.7 ... ... 100.0
MDG 3: Promote gender equality and empower women
1990 2000 2005 2006 2015
Primary education male/female ratio 1.03 1.01 0.98 0.98 1.0
Secondary education male/female ratio 1.33 1.2 1.11 1.03 1.0
Tertiary education male/female ratio 1.72 1.72 1.53 1.53 1.0
Share of women having paid work in non-agricultural sector 51.1 50.4 53.1 53.9 50.0
Share of women elected in the National Parliament 24.9 6.6
11.8 6.6 30.0
(2004)
Share of women candidate in the National Parliament 7.7 13.7 35.0
10.9 -
(1992) (2004) (2012)
MDG 4: Child mortality reduction
1990 2000 2005 2006 2015
Under 5 child mortality rate (per 1000 live birth) 88.8 а 44.5 а 23.2 a
26.1 b 29.2
87.5 b 42.4 b 24.0 b
Infant mortality rate (per 1000 live birth) 64.4 а 19.1 a
32.8 b 20.8 b 22.0
63.4 b 19.8 b
Percentage of children vaccinated against Measles 82.3 а
92.4 97.5 b 98.9 96.0
82.5 b
МDG 5: Improve maternal health
1990 2000 2005 2006 2015
Maternal mortality rate 200.0 c 158.0 c 67.2 а
93.0 c 50.0
(per 100,000 live birth) 121.6 а 166.3 а 69.7 c
Share of births attended by skilled health personnel 99.9 99.6 99.6 c 99.7 а 99.8
MDG 6: Combat STIs/HIV/AIDS and Tuberculosis and other diseases
1990 2000 2005 2006 2015
Death rate associated with newly detected TB (per 100,000 79.0а 124.8 177.4 185.3 100.0
population)
Spread of TB (per 100,000 population) 435.5 60.0 91.0 84.8 -
Death rate associated with TB (per 100,000 population) 4.8 3.2 3.4 2.9 0
Share of TB cases detected and cured at international 31.4 80.9 79.0 82.1 100.0
standard level (1994)
Source: a) NSO, Official statistical data, 2006; b) Parliament resolution No. 25, Mongolia- MDG approval, 2005, c)
MoH, HDNC, health indicators, 2006

An important development challenge is to use government revenues from mineral


resources to attain higher growth and at the same time to tackle the problems of poverty,
inequity and environmental sustainability. Although some progress has been done due to

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direct welfare measures (such as cash transfers to families with newly born children, to
newly married couples, and to families for each child below the age, and food to school
children) introduced by the government in the budget after the imposition of the Windfall
Tax on minerals income in 2006, much more efforts need to be done to achieve the MDG
targets by 2015.

Although the concerned ministries, particularly the Ministry of Education, Culture and
Science (MOECS), Ministry of Social Welfare and Employment (MOSWE) and the
Ministry of Health (MOH), have the major responsibilities for achieving MDG targets,
the Ministry of Finance, being the coordinating Ministry, has special responsibilities to
provide advice and directions to other ministries. In fact, as in other countries, Mongolian
Ministry of finance has the responsibility to play the role of a coordinator of government
policies and reforms, to control overall fiscal balances, to oversee and report the
implementation of public programs and to assess overall outcomes of all strategic plans.

The core challenge for the government budget is how to adopt long-term MDG targets
within the short-term and medium-term national budget constraints and priorities. MDG
strategies are both ‘needs based’ and ‘resource constrained’. The national budget must
take care of poverty reduction strategies as a guide to MDG action, and set out clear
priorities for pro-poor public expenditure and investment plans based on a realistic
assessment of the available resources and the needs of other sectors.

The interlinkages between MDG targets and budget should include explicit analysis of
expected linkages between costs-outputs-outcomes. Outputs are continuous and the end
results of a project, whereas outcomes are the long-term impacts of the project on the
economy over time. Cost estimates should also address institutional constraints and be
prepared in a form that can be mapped to budgets and support resource bids. Priorities
should be identified to permit adjustments in the light of resource availability.

4.4 Development Prospects

Mongolia’s medium term prospects for sustained growth and poverty reduction are
considered to be bright, but vulnerable to both internal and external risks. With its rich
mineral resources and geographical location between two large and fast growing
economies China and Russia, Mongolia has the natural advantage to achieve growth rates
exceeding 7 per cent in the medium term. But, the main challenge will be to ensure fiscal
sustainability and stability in prices and real exchange rates by adopting strict fiscal and
monetary discipline and sound management of mineral resources.

Among other challenges, public investment plan needs to address the environmental
degradation due to overuse and illegal trade in forest products and wild life, which have
inflicted heavy environmental damage and put constraints on the sustainability of
economic growth. These issues also put constraints for achievement of primary education
and the achievement of environmental targets in the Millennium Development Goals.

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There is also risk to the sustainability of the natural resources. Overexploitation of natural
resources, lax control on smaller mines and faster urbanization may lead to
environmental problems in terms of loss of agricultural production, shortage of water
supply, sanitation problems, traffic hazards and pollution.

In addition to these policy risks, medium term output is vulnerable to unfavourable


weather shocks in the domestic sector and risk of sharp downward trends of global prices
of minerals and metals. Mineral exports are the major sources of government revenues
and the total export earnings and affect the exchange rates, which in turn have an impact
on domestic inflation. Sharp fall of global prices of minerals may lead to fall in
government revenues and constraints on social welfare and investment programs financed
by the windfall profits tax on minerals.

Significant falls in prices of copper, coal, gold and cashmere and substantial rise of oil
may affect adversely the current account of the balance of payments and may also lead to
the problem of external debt servicing.

5. Appraisal of SBPs of MOF, MOH, MOECS and MOSWL


5.1 Appraisal of Present SBPs

We have gone through the latest SBPs of the HQs of the MOF, MOECS, MOH and
MOSWL. The reason for selecting these Ministries is that they account for major share
(more than 75%) of the govt budget (Chart-1) and also very important by functional
classification of budget (Chart-2). We have held discussions on SBP and Master Plans
with officials of these Ministries, as well as with their national and international
consultants. All the Ministries must be complemented for producing excellent and
comprehensive Reports. We appreciate very much their hard work and high quality of
reports. However, there is always some scope for improvements.

5.2 Desired Uniform Structure

It is recommended that the SBPs for the years 2008-2010 may have a uniform structure
consisting of the following:
(A) Foreword by the Minister
(B) GM’s Statement
(C) Vision, Mission, Values, Priorities and Clients
(D) Strength-Weakness-Opportunities-Threats (SWOT) analysis
(E) Strategic Purpose and Objectives
(F) Specifications of Activities, Outputs, Outcomes and Goals
(G) Institutional Structure and Organization
(H) Budget for the Strategic Planning Period 2008-2010
(I) Monitoring and Assessment System
(J) Annex: Implementation and Evaluation Report of the previous SBP

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It may be noted that we have prescribed an Annex indicating a brief evaluation and
implementation report of the previous strategic business plan for 2005-2007. This report
should indicate the performance of the government in implementing the promised outputs
and the constraints faced in its implementation so that lessons could be learnt for future.
In fact, before preparation of the strategic business plan for the period 2008-2010 the first
task of every Ministry/ Department should be to prepare such a report as the base line
scenario on the basis of which the next SBP will be built.

5.3 Integrate with MDGs, Master Plan and National Development Plan (NDP)

It is desirable that the SBP should be fully integrated with the Millennium Development
Goals (MDGs) and the existing Master Plans of the concerned ministries. We understand
that presently a draft National Development Comprehensive Policy (NDCP) for
Mongolia is under active consideration of the Parliament. Once the NDCP is approved by
the Parliament, it should also form the basis for formulation of the next SBPs.

MDG Needs assessment and estimations were carried out in 2006 by various task forces set up
under the Prime Minister Decree (no.28 dated the 14th March 2006) and a report entitled “Report
on Needs Assessment for Millennium Development Goals Achievement in Mongolia-
Summary” has been prepared by the Government of Mongolia (2007a) with the
assistance of UNDP. This report has specified sector-wise policies and programs for the
achievement of MDGs. Financial needs required to achieve the MDGs have been estimated as
total of 14 billion USD and 500 million USD will need annually as ODA sources.

In designing outcomes and outputs, MDGs appear to be a good starting point for any
ministry. MDGs span income and non-income dimensions of development, such as
reduction of poverty and hunger, provision of universal basic education; ensuring gender
quality; improving child and maternal health; control of communicable diseases; ensuring
environmental sustainability and fostering partnership for development. All these goals
are inter-related. Higher income and less poverty mean better better health and education,
which in turn contribute to increased productivity and higher incomes.

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Chart-1 Shares of Ministries in Central Government Budget (%) 2006

Others
10%
Justice
5% Finance
26%
Health
9%
Transport
10%
Soial
Eduation
Welfare
18%
22%

Chart -2 Govt Expenditure by Functions (%) Average of 2004 and 2005

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There are important linkages among the human development goals. For example, the
strongest determinant of child mortality is the mother’s education. Health and nutritional
status affect the probability that a child will enroll and succeed in school. Child mortality
is closely linked to safe drinking water and basic sanitation. Roads and other transport
facilitate access to education and health facilities; electrification improves the quality and
effectiveness of these services and refrigeration networks help in preserving vaccines and
life saving drugs.

The multidimensionality of the MDGs, inter-linkages among them and their multi-
sectoral determinants imply that the policy agenda for the achievement of these goals is
very broad. Indeed, it spans the gamut of development. The central objective of
development is improving economic growth and raising the levels of living of all citizens.
Higher growth directly reduces poverty through trickle down effects. But the impact of
trickle down may be delayed, slow and uneven. So we need to adopt pro-poor growth
strategy and policies specifically targeted to enhance the capabilities of poor people to
participate in the growth process, through improved access to education, health and other
key services.

It is recommended that the First three chapters viz. Foreword, GM’s statement, Vision
and Mission can be improved by referring to the concerned targets under the Millennium
Development Goals (MDGs), the Master Plan (2006-2015) and the National
Development Plan.

Since their adoption in 2000, the MDGs have become the overarching objective of all UN
agencies and funding organisations. They have reached to the top policy agenda and are
being mainstreamed into the national development plans of many developing countries.
Their reference at the very outset in the Minister’s and GM’s statements will
demonstrate, to the citizens and to the international community at large, that Mongolian
govt is fully committed and having best efforts to achieve MDGs in the spheres of
education, health, social security and poverty reduction by 2015.

This will enhance credibility of the country in the international arena and Mongolia will
continue to be darling of international financial institutions and development donors. This
will also encourage inflows of direct foreign investment for the development of physical
infrastructure and formation of human capital.

5.5 Outputs and Outcomes

As regards outputs and outcomes, there is a genuine difficulty in the identification of


outputs and outcomes by the Head Quarter (HQ) of any Ministry. Most of the outputs as
described presently by the HQ are not really outputs but activities (or the normal
functions) of the Ministry. At present in any SBP for the HQ there is a very elaborate
description of these activities. This list may be kept as an internal document for guidance
of activities or as a work-chart. But, a short version of major activities may be reported in
the SBP as broad output groups for public use, as in done in the Australian Budget.

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Although in a strict economic sense, policy advice cannot be taken as an output, a major
part of the time of the officers at the HQ is spent on policy advice and planning. Besides,
output budgeting in Australia, which is pioneer in output budgeting, recognizes policy
advice as an output. Mongolian Public Sector Management and Finance Act 2002 also
recognizes policy advice as an output (Articles 23.2 & 23.3). Considering these facts we
recommend that policy advice may also be taken as an output of the HQ. However, only
the broad groups2 of policy planning and policy advice, as in the case of Australian
Output Budgeting, should be taken as an output, but not the numerous activities
mentioned in the present SBPs of all Ministries.

6. Stylized Design of a Strategic Business Plan


6.1 Top Down Approach

As per international best practices, a typical or a stylized Strategic Business Plan adopts
a top down approach and has the following design of events:

Table-6 Typical Structure of SBP – Top Down Approach

Goals Long term – wide spread results of public programs and policies, like the
↓ achievement of the Millennium Development Goals by 2015
Outcomes Medium term – impact of public programs and policies on the economy and
↓ user groups.
Output Deliverables- products and services produced during budget period.
↓ Outputs are the immediate or end results of activities.
Activities Tasks- undertaken by the staff to transform inputs into outputs.

Inputs Resources- (Personnel, financial, goods and services) are the basic
↓ requirements for any output and strategic planning.

6.2 Basic characteristics of indicators

It is required that the inputs, activities, outputs, outcomes and goals need to be measured
by suitable quantity and quality indicators for effective monitoring and evaluation. The
basic criterion is that these indicators, as far as feasible, should be “CREAM”.

• Clear Precise, unambiguous, tangible and quantifiable


• Relevant Appropriate for the strategic objectives
• Economic Available at reasonable cost and time
• Adequate Provides sufficient basis to access performance
• Monitorable Amenable to independent/ objective evaluation

It is very important that appropriate indicators should be specified to measure the


quantity and quality of inputs, outputs and outcomes, otherwise it will be very difficult to
judge success or failures (Box-1).
2
See Section 6.2 for details.

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Box-1: The Power of Measuring Results


• If you do not measure results, you cannot see either success or failure.
• If you cannot see success, you cannot reward it.
• If you cannot reward success, you are probably rewarding failure.
• If you cannot see success, you cannot learn from it.
• If you cannot recognize failure, you cannot correct it.
• If you can demonstrate results, you can win public support.
Source: Adopted from Reinventing Government by David Osborne and Ted Gaebler, Addison-
Wesley Publication Co., 1992, 427 pages.

Some economists talk of hierarchy of indicators, as mentioned below, to stress the


relationship among indicators.

Policy Goals
Planned Actual Evaluation
Planned outcomes → ← Actual outcomes Effectiveness
Planned outputs → ← Actual outputs Efficiency
Planned inputs → ← Actual inputs Compliance

7. Australian Treasury Budget for the year 2005-06

As an example of an ideal output budgeting, let us discuss the Australian Treasury


Budget for the year 2005-06. Australian Treasury performs almost the similar functions
as by the Ministry of Finance, Mongolia. The basic job of Treasury is to promote a sound
macroeconomic environment; effective government spending and taxation arrangements;
and well functioning markets by providing sound and timely advice to the Australian
government and Assisting Treasury Ministers in the administration of their
responsibilities and implementation of government decisions.

The Treasury produces outputs under four output groups viz. Macroeconomic, Fiscal,
Revenue and Markets (Table-7). Macroeconomic group outputs include: domestic
economic policy advice and forecasting; and international economic policy advice and
assessment. Fiscal groups output include budget policy advice and coordination,
Commonwealth State financial policy advice, and industry, environment and social
policy advice. Revenue group output includes taxation and income support policy advice.
Market group outputs include foreign investment policy advice and administration;
financial system and corporate governance policy advice; competition and consumer
policy advice; and actuarial prices. In addition, the Royal Australian Mint is responsible
for producing Australia’s circulating coins and like products.

Australian Treasury has 10 Agencies under it. These include the following:

1. The Australian Bureau of Statistics

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2. The Australian Competition and Consumer Commission


3. Australian Office of Financial Management
4. Australian Prudential Regulation Authority
5. Australian Securities and Investments Commission
6. Australian Taxation Office
7. Corporations and Markets Advisory Committee
8. Inspector General of Taxation
9. National Competition Council
10. Productivity Commission

Table -7 Output Groups in Australian Treasury Portfolio Budget 2005-06

Outcome Output Groups (Price of Output in A$ Million)


1: Sound macroeconomic 1.1: Macroeconomic group (35.8)
environment 1.1.1 Domestic economic Policy advice and forecasting (8.9)
1.1.2 International eco. policy advice and assessment (26.9)

2: Effective government 2.1: Fiscal group (14.4)


spending and taxation 2.1.1 Budget policy advice and coordination (4.3)
arrangements 2.1.2 Commonwealth state financial policy advice (2.8)
2.1.3 Industry environment and social policy advice (7.3)
2.2: Revenue group (44.0)
2.2.1 Taxation and income support policy advice (44.0)

Outcome-3: Well Output group 3.1: Markets group (90.3)


functioning markets 3.1.1 Foreign investment policy advice and administration (4.1)
3.1.2 Financial system and corporate governance policy advice
(22.9)
3.1.3 Competition and consumer policy advice (19.7)
3.1.4 Actuarial services (1.5)
3.1.5 Circulating coins and like products (42.1)

A single document entitled “Portfolio Budget Statements 2005-06: Treasury Portfolio” is


prepared indicating Agency overview, budget initiatives, explanations of Departmental
and Administered appropriations and other resources, and analysis of outcomes and
outputs, price of outputs, total available resources of the Treasury Head Quarter and the
other 10 Agencies under it. Budget estimates for all outputs for the current year are
provided along with estimated actual resources and costs in the previous year. Budgeted
Financial Statements for revenues and expenses are provided for the current year along
with estimated actual in the previous year and forward estimates for the next three years.

8 Components of Strategic Business Planning Document


8.1 Goals, Outcomes and Outputs of MOF, MOH, MOECS, MOSWL

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As regards outcomes of the MOF, these are major macro-economic and fiscal variables
(such as real GDP growth rate, inflation rate, ratios of public debt, external debt, current
& overall balance to GDP etc.). These ratios can be determined on the basis of medium
term expenditure and fiscal projections for the years 2008-2010. At a later stage, our
group will also produce medium term forecasts of major macro-economic variables.

For other Ministries, the minimum outcomes could be MDGs and other indicators
mentioned in their Master Plans. Health Sector Strategic Master Plan (2006-2015)
prepared by the MOH, and the Social Security Sector Strategy Paper prepared by the
MOSWL provide various output and outcome measures for the medium term. These
indicators can be taken as the basis for preparation of the Strategic Business Plans for the
years 2008-2010. Tables 8.1 to 8.4 provide some illustrative examples of goals,
outcomes, outputs and input indicators for MOF, MOSL, MOH and MOECS.

Table-8.1 Goals, outcomes, outputs and input indicators for MOF


Ministry of Finance
Goal • Achieve macro-economic stability
Outcome • To sustain growth rates around 7 per cent
• Maintain moderate rate of inflation (less than 9 per cent)
• Keep a regime of low interest rates (less than 6 per cent)
• Maintain stability in real exchange rate
Output • Try to maintain a surplus in the current account of the budget
by hard budget constraint and total fiscal discipline,
• Keep overall fiscal deficit less than 3 per cent of GDP
• Try to maintain surplus in external sector balance by
encouraging exports and non-debt creating financial flows
• Keep public debt below 50 per cent of GDP,
• Keep external debt below 50 per cent of public debt,
• Raise revenue/GDP ratio by enhancing tax buoyancy,
• Consolidate expenditure sector reforms through targeting
social insurance and enhancing user charges recovery in
economic services
Activities • Preparation of medium term macro-economic projections
• Preparation of fiscal framework statement
• Preparation of medium term fiscal policy paper
• Preparation of short term and medium term budget planning
• Preparation of short and medium term financial planning
Inputs • Staff
• Goods and services
• Institutional arrangements
• Financial resources

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Table-8.2: Ministry of Social Welfare and Labour

Goal • Millennium Development Goal for poverty reduction-


Reduce the poverty ratio by 50 per cent in 10 years during
2005-2015 (from 36 per cent in 2005 to 18 per cent in 2015)

Outcome • Have a target for the poverty head count ratio and the
poverty gap ratio by 2010 and 2015
• Have a target for the number of poor families crossing the
poverty line in the medium and long term
• Have a target for rise of per capita income, say doubling per
capita in 10 years
• Have a target for the inequality ratio (Gini-Lorenz ratio for
household expenditure)
• Have a target for the income/ consumer expenditure share of
the bottom quintile of the population
Output • Prepare an approved list of beneficiaries of social welfare
programs
• Estimate assets delivery and asset creation by the poor in the
medium term
• Estimate extra jobs created in the medium term
• Evaluate job markets, financial support, suitable training for
the poor, self employed. and small scale enterprises
• Establish linkages with commercial banks and other financial
institutions
• Strengthen public works program
Activities • Prepare list of poor families
• Identify poverty groups and poverty areas
• Prepare Soum-level and Bags-level socio-economic mapping
and resource inventory
• Analyze the social, economic and demographic profiles of
the poor
• Prepare list of agreed and feasible social welfare programs
• Create training, marketing and financial support for the self
employed and small enterprises
• Develop micro credit systems
• Create public works program for the poor
• Provide final support for higher education for the poor
• Strengthen vocational training and education system
Inputs • Staff
• Goods and services
• Institutional arrangements
• Financial resources

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Table-8.3: Ministry of Education, Culture and Social Welfare

Goal • MDG for education- Goal-2 Achieve universal primary


education by 2015;
• Goal-3 Promote gender equality and Empower Women-
Eliminate gender disparity in primary and secondary
education by 2005 and to all levels of education no later than
by 2015.
Outcome Have medium term targets for:
• Net enrolment ratio in primary education
• Proportion of pupils starting grade-1 who complete grade-5
• Literacy of youth aged 15-24 year
• Gross primary enrolment- female/male ratio (percent)
• Gross secondary enrolment- female/male ratio (percent)
• Literacy rate of ages 15-25 years- female/male ratio (percent)
• Females/male ratio in higher educational institutes (percent)
• Share of women in non-agricultural employment (percent)
• Proportion of women members in national Parliament
(percent)
Output • Number of schools, colleges, universities
• Number of new educational institutes
• Desired teacher/ student ratio for schools, colleges and
higher educational institutes
• Number of students by gender getting enrolled and passing at
different grades
• Drop out ratios by gender at different grades
• Training imparted
• Schools/ colleges infrastructure facilities
Activities • Construction of new buildings for schools and colleges
• Creation of other related infrastructure
• Identify training needs of the teaches
• Prepare curriculum and course outlines
• Number of students by gender at different grades
• Number of teaches at different grades
• Number of non-teaching staff
Inputs • Staff
• Goods and services
• Institutional arrangements
Financial resources

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Table-8.4: Ministry of Health

Goal • Goal-4 Reduce Child mortality


• Target-6 Reduce by two-thirds, between 1990 and 2015, the
under-five mortality rate.
• Goal-5 Improve maternal health
• Target-7 Access for all individuals of appropriate age to
required reproductive health services and reduce by three-
quarters, between 1990-2015, the maternal maternity ratio.
Outcome • Have targets on the following for the medium term:
• U-5 mortality rate (per 1000 live births)
• Infant mortality (per 1000 live births)
• Percentage of children below age-1 vaccinated against
measles
• Maternal mortality rate (per 100,000 live births)
• Proportion of births attended by skilled health personnel,
• Maternal mortality rate (per 100,000 live births)
• Proportion of births attended by skilled health personnel
Output • Number of primary health care centres and hospitals,
• Necessary medical equipment, laboratories, machines
• Number of adequate medical and para-medical staff,
• Number of medical colleges
• Number of doctors produced
• Training for health care providers
• Strengthening prevention of disease systems
• Improve medical insurance systems
• Strengthen public-private partnership for primary health care
• Involve NGOs and civil societies for primary health care
Activities • Procurement of machines
• Training activities launched
• New hospitals and health care centres build
• Strengthening inoculation and vaccination for children
• Provision of subsidized nutritional food and medicines to
children and women
• To have sufficient doctors and nurses

Inputs • Staff
• Goods and services
• Institutional arrangements
• Financial resources

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8.2 Output Groups and Indicators for Quantity and Quality

As in the case of Australian Budget for Treasury Portfolio, discussed earlier, the number
of outcome and output groups for each ministry should be as minimum as possible. It has
to be remembered that the basic purpose of output budgeting is to cost, budget, monitor
and evaluate each specified output separately. In other words, each output will become a
separate cost centre and a separate budget centre under output budgeting. Therefore, if
there be too many outputs as in the present case for each ministry, output budgeting will
demand huge resources on auditing and accounting and may become impossible.

Ideally from legal angle, output specifications for each ministry should be compatible
with the department-wise specifications of output groups indicated in the Government
decree 233 dated the 5th February 2006 on “Output specification for each budget portfolio
ministries and other authorities”. Specified outputs of the Ministries of Finance, Health,
Education and Social Welfare are indicated in Table-9.

After specifying output groups we need to specify ‘category, quantity, quality and cost’
for each output4. Here also we can learn from the Australian Budget, which is very brief
and to the point and there is no beating around the bush. For example, for performance
information relating to output on Domestic Economic Policy Advice and Forecasting,
Australian Budget simply requires that “(1) advice on economic policy and the economic
outlook meets Treasury portfolio Ministers’ needs in administering their responsibilities
and implementing government decisions that contribute to a sound domestic economy.
(2) Effective presentation of budget documents and other publications to adequately
inform public debate”.

We can adopt the similar approach for Mongolia. In addition, we could list the important
policy documents, briefs on economic trends, other reports prepared by the Ministry,
surveys conducted, amendments of existing acts or preparation of a new act etc. which
are quantifiable, tangible and monitorable over time.

8.3 Output Costing and Budgeting

It is re-iterated that, under output costing and output budgeting, an identified output
becomes a cost centre as well as a budget centre, so that the cost of that output can be
estimated, budgeted, monitored and evaluated. If single output cannot be budgeted, then
related outputs can form an output group and the cost and budget centre. The
Departments who are responsible for the output should also be identified and specified in
the Budget. For operational purpose, it is necessary to realign outputs with departments/
divisions or to make a one-to-one correspondence between outputs and departments/
divisions. In other words, at the first phase, each department/ division can become a cost
and budget centre. At a later stage, when the system is developed properly, the specific
outputs can also become cost centres.
3
Government Decree 23 dated the 6th February 2006 has specified general output groups for
budget portfolio ministries and other authorities.
4
As required under Article 26.2.2 of the PSMFA, 27 June 2002.

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Table-9: Specified Outputs in the Government Decree #28, 2006

Portfolio Ministry and Output Portfolio Ministry and Output

Ministry of Finance and Economy Social Welfare Activities


4.1.1 Policy advice to ensure macro- 10.1.1 Improve social insurance activities
economic stability, 10.1.2 Activties to promote employment and
4.1.2 Formulation pf the state budget and reduce unemployment
MTEF draft, 10.1.3 Activities of social insrance sector
4.1.3 Collection of state revenue, 10.1.4 Citizens’ health insurance activities
4.1.4 Sectoral development policy and 10.1.5 Social welfare and care activities
planning activities, 10.1.6 Children’s protection and
4.1.5 Policy advice on accounting development activities,
andauditing, 10.1.7 Support and service activities for
elders,
4.1.6 Treasury cash mangement and
financing activities, 10.1.8 State ordered services to be executed
by the public organisations
4.1.7 Government debt management
10.1.9 Other activities
activities,
4.1.8 Economic foreign cooperation, loans
and aids activities, and
4.1.9 Others.

Health activities Educational activities

7.01.01 Preventive and public health aids and 9.01.01 Activities on pre-school education
services 9.01.02 Activities on secondary education
7.01.02 Hospital aids and services 9.01.03 State education fund services
7.01.03 Aids and services on rehabilitation 9.01.04 Dormitory services for secondary schools
7.01.04 Long term care services 9.01.05 Educational and culture centers: activities
7.01.05 Additional health services 9.01.06 Build and improve the training and service
7.01.06 Services on medicines and purchase, environment
repair and regulation of the medical tools 9.01.07 Activities on studies and researches of the
7.01.07 Health management and health scientific organizations
insurance activities 9.01.08 Activities on Tertiary education
7.01.08 Other health activities

Source: Annex to Government Decree #28 dated February, 2006 “On output specification for each budget
portfolio ministry and other authorities”

8.4 MOF Output Budgeting

Let us take the example of the Strategic Business Plan for 2005 for the Ministry of
Finance. MOF has committed to deliver 8 output groups with 19 specific outputs as
indicated in Table-11. For output budgeting, we need to specify separate budgets for
each of 19 outputs and keep separate accounts for 19 output/ cost centres. This may not
be feasible at this stage of accounting and auditing in Mongolia.

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But, we can have separate departmental budget and separate division budget dealing with
broad output groups in order to implement output budgeting. This is indicated in Table-
11 where broad output groups have been realigned with 8 departments which can act as
separate budget centres and are manageable for separate book keeping and accounting.

It may be observed from Table-12 that except for Fiscal Policy and Coordination
Department and Treasury Department, all other six Departments are in charge of one
output group each. Fiscal Policy and Coordination Department comprises four separate
divisions and tackle four output groups. Similarly Treasury Department comprises three
divisions and can handle three separate output groups. Thus we have eight Departments
dealing with 13 output groups. Other Ministries can also identify similar output groups
which can be realigned with their existing Departments and Divisions.

As in the case of Australian Budget, we should also provide budget estimates for the
current year 2008, actual expenditure for the previous year 2007, and three future
estimates for the years 2009, 2010 and 2011 for each output group.

8.5 Headquarter Budget

In this respect, it is worth noting that the share of HQ budget in the total budget of a
Ministry is very small (Table-10). As there are fixed costs for administration, the share is
higher for smaller Ministries and lower for larger ministries.

In large sectoral ministries such as MOF, MOH, MOSWL and MOECS with staff
directly involved in actual service delivery down to the Aimags, Soums and grassroots
level, in addition to their planning, distributive, regulatory and coordination functions; a
very small HQ budget may put constraints on their efficiency and productivity. Besides,
if they are required to prepare SBP every year and to shift towards output budgeting and
accrual accounting, there is not only need for increasing the size of the Departments at
the HQ but also upgrading the capacity at various levels. Thus, there is a need to enhance
both the staff and budget for the HQ of these ministries.

Table-10 Budget Allocation in 2006

Ministry Total As % HQ HQ as %
Budget of Total Budget of Total
MOF 312238 27 1227 0.39
MOECS 208715 18 287 0.14
MOSWL 263172 22 925 0.35
MOH 103168 9 436 0.42
MOJ 61212 5 489 0.80
MOT 72052 6 534 0.74
MOE 36331 3 609 1.67
OTHERS 119772 10 37203 31.06
TOTAL 1176659 100 41710 3.54

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Table-11 MOF Output Budget for 2005 (Cost in Million MNT)

Output classes and sub-classes Person-days Million Tog %


1. Economic Policy Advice 3958 67.5 12.7
1.1 State socio-econ SP 2880 44.3 8.3
1.2 Regional socio-econ SP 1078 23.2 4.3
2. Sector & inv. management 3214 55.6 10.4
2.1 Sector & fincl. management 1743 29.9 5.6
2.2 State budget investment plan 1471 25.8 4.8
3.Budget Management 4343 79.9 15.0
3.1 Revenue policy, planning 1068 20.2 3.8
3.2 Expenditure policy, planning 1706 31.2 5.8
3.3 Unified budget planning 1569 28.5 5.3
4. Govt cash assets management 8043 107.7 20.2
4.1 Budget financing registration 2489 33.5 6.3
4.2 State fund services 3058 36.3 6.8
.3 Govt debt management 2496 37.9 7.1
5. Govt procurement management 1860 34.4 6.4
5.1 Procurement policy, methods 1080 20.7 3.9
5.2 Procurement coordination 780 13.7 2.6
6. Foreign credit management 2450 49.8 9.3
6.1 Foreign loan & assistance policy 1500 32.0 6.0
6.2 Loan and assistance control 950 17.8 3.3
7. Accounting and auditing 2104 35.4 6.6
7.1 Accounting & audit policy 1468 25.3 4.7
7.2 State sector financial report 636 10.1 1.9
8. Govt admmn management 6314 102.9 19.3
8.1 Admn, legality& HRM 3845 62.8 11.8
8.2 IT and advertisement 1287 20.4 3.8
8.3 Monitoring and assessment 1182 19.7 3.7
Total output budget 32286 533.3 100.0

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Table-12 MOF Departmental Output Budgeting

Department Output Group Total Budget %


1. Economic Policy 1. Economic Policy Advice 67.5 8.5
2. Fiscal Policy & Coord. 2. Revenue, expenditure & 105.7 13.3
investment policy & planning
2.1 Revenue Division 2.1 Revenue policy 20.2 2.5
2.2 Expenditure Division 2.2 Expenditure policy 31.2 3.9
2.3 Fiscal Consolidation Div 2.3 Unified budget planning 28.5 3.6
2.4 Investment division 2.4 Investment planning 25.8 3.2
3. Treasury 3. Govt cash assets management 107.7 13.5
3.1 Debt Management div 3.1 Govt debt management 37.9 4.8
3.2 treasury exp accounting 3.2 consolidated finan report 33.5 4.2
& reporting
3.3 Banking settlement div 3.3 Banking settlements 36.3 4.6
4. Procurement Policy & 4. Procurement policy & coord 34.4 4.3
Coordination
5. Loan & Aid Policy & 5. Foreign credit management 49.8 6.2
Coord.
6. Accounting policy & 6. Accounting and auditing 35.4 4.4
Supervision
7. Financial sector policy 7. Financial sector policy & 29.9 3.8
regulation
8. State Public Admn 8. Govt admmn management 366.9 46.0
including State Secretary,
Minister, Vice Minister
Total Ministry of Finance HQ 797.3 100

9 Suggestions for Structural Changes

It is observed from above sections that the HQ budget of the four major ministries
viz. MOF, MOECS, MOH and MOSWL accounts for less than 0.5 per cent of the
Ministry’s total budget and for that the HQ produces an elaborate and very
comprehensive SBP with many outputs, whereas the Agencies under it, which
account for more than 99.5 per cent of the Ministry’s budget, donot have an elaborate
SBP. This is an anomaly which needs to be rectified.

Besides, there is no comprehensive document for the Ministry as a whole including


all the Agencies under it. In the case of Australian Budget, a single document is
produced having different chapters dealing with strategic business plans and output
budgets for the HQ and the various Agencies under a Portfolio Minister. It has an
advantage because all the activities of a Ministry are interrelated and the general
public can see the total picture relating to a portfolio minister.

We recommend that Mongolia can follow the practice of Australian budgeting and
prepare only one document for the Ministry as a whole for effective budgeting and
co-ordination i.e. to put SBPs and output budgets of the HQ and all Agencies as

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different chapters under a single report. If this suggestion is accepted, then naturally
the responsibility of coordination and preparation of a single document will fall on
the shoulders of the State Secretary. This will require positioning extra staff at the HQ
in the Administration and Coordination Unit. However, as usual, the General
Manager of other Agencies shall conclude Performance Agreement every year
(Article 18.3.2 of the PSMFA)5.

Such an arrangement is feasible under the Public Sector Management and Finance
Law 2002 provided that the concerned Portfolio Minister considers it efficient and the
GM of the concerned Agency also agrees (Article 19.46 and Article 19.57).

10. Concluding Remarks

• As the first generation reforms take root and second generation reforms unfold,
Mongolia is emerging as a land of immense opportunities for all citizens.
• Given its rich mineral base and favourable geographical location between two
economic giants with pulls and pushes on its economy, Mongolia has potentials
and prospects of higher growth.
• Mongolia should continue with structural and governance reforms and maintain
its open door policy in goods and services production, investment, and trade.
• Carried to their logical ends, Strategic Business Plans for 2008-2010 combined
with governance reforms would make Mongolia as one of the dynamic
economies of Asia by 2010.
• All the Ministries and Agencies have to play their distinct roles in that exciting
process of development. International donors are also requested to continue their
development assistance to Mongolia for capacity building and good governance.

5
Article 18.3.2: In case of state budgetary body which directly report to the General Manager of another
state budgetary body by the decision of the Portfolio Minister, the General Manager shall conclude
Performance Agreement directly with the General Manager of the budgetary body.
6
Article 19.4: “Where a Portfolio Minister considers it efficient, and with the agreement of the General
Manager of the Agency concerned, Portfolio Minister can determine that the General Manager o the agency
shall be responsible to the General Manager of a Ministry or another agency.”
7
Article 19.5: As it is specified in Paragraph 18.3 of this law, the General Manager of a Ministry or
another agency, whom the General Manager of an agency is responsible for, shall undertake the following
functions:
19.5.1 Each year conclude Performance Agreement in conformity with Paragraph 18.3 of this Law;
19.5.2 Implement the Strategic Business Plan of the agency, and spend budget allocations;
19.5.3 Ensure consistency of the output to be delivered by the agency with the outcomes and strategic
objectives of the Portfolio;
19.5.4 Monitor the financial performance and other ownership performance of the agency;
19.5.5 Review the annual performance of the agency and the personal performance of its General Manager.

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References
Asian Development Bank (2007) Country chapter on Mongolia, in the Asian Development
Outlook 2007, ADB, Manila.

Das, Tarun and E. Sandagdorj (2007) Preparation of Strategic Business Plans- General
Guidelines, Some Suggestions for Improvement, and Summary of Recommendations- Final
Report, pp.1-74, ADB Capacity Building Project on Governance Reforms, Ministry of Finance,
Government of Mongolia, Ulaanbaatar, September 2007.
Dees, Martin and Paul Neelissen (2004) Five Countries Pioneering Accrual Budgeting and
Accounting in Central Government, International Journal of Auditing, January 2004

Government of India (2003) Fiscal Responsibility and Budget Management Act, New Delhi,
India.

_______ (2007) Expenditure Budget, Vol-2 of the Central Government Budget for 2007-2008,
New Delhi.

Government of Mongolia (2004) Millennium Development Goals: National Report on the


Status on Implementation in Mongolia, pp.1-61, Ulaanbaatar, 2004.

_______ (2007a) Report on Needs Assessment for Millennium Development Goals Achievement
in Mongolia- Summary, pp.1-40, Ulaanbaatar, 2007.

_______ (2007b) Second National Report- Millennium Development Goal (MDG)


Implementation in 2005-2006- Summary, pp.1-65, Ulaanbaatar, 2007.

International Monetary Fund (2005) Poverty Reduction Strategy Paper Progress Report Joint
Staff Advisory Note, pp.1-12, International Development Association and the International
Monetary Fund, September 19, 2005

_______ (2006) Poverty Reduction Strategy Paper Annual Progress Report- Joint Staff Advisory
Note, pp.1-7, International Monetary Fund and International Development Association,
Washington D.C., November 30, 2006.

_______ (2007) IMF Executive Board Concludes 2006 Article IV Consultation with Mongolia,
Public Information Notice (PIN) No. 07/11, January 29, 2007, Washington D.C.

Lakshman Athukorala, S. and Barry Reid (2003) Accrual Budgeting and Accounting in
Government and its Relevance for Developing Member Countries, Asian Development
Bank, Manila.

Janet Tay Consultants Private Ltd (2003) Initial Phase of Public Administration Reforms-
Draft Report, December 2003.

Ministry of Education, Culture and Science (2002) Strategic Business Plan 2003-2005,
Ulaanbaatar.

________ (2005) Medium-term strategic plan 2005-2007, Ulaanbaatar.

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________ (2006) Medium-term strategic plan 2006-2008, Ulaanbaatar.

Ministry of Finance (2005) Strategic Business Plan 2005-2007, 25 March 2005, Ulaanbaatar.

Ministry of Health (2005a) Medium Term Strategic Plan 2005-2008, Ulaanbaatar.

______ (2005b) Health Sector Strategic Master Plan 2006-2015, Vol.-1, Ulaanbaatar.

______ (2005c) Medium Term Expenditure Framework, Volume-2, Ulaanbaatar.

______ (2005d) Monitoring and Evaluation Framework, Volume-3, Ulaanbaatar.

______ (2005e) Planning and Budgeting Framework, Volume-4, Ulaanbaatar.

Ministry of Social Welfare and Labor (2003) Social Security Sector Strategy Paper,
Ulaanbaatar, November 2003.

_______ (2005) Strategic Business Plan 2005-2007, Ulaanbaatar.

National Statistical Office (2005) Mongolian Statistical Yearbook 2005, Ulaanbaatar.

OECD (2002) Accrual Accounting and Budgeting- Key Issues and Recent Developments,
prepared for the Twenty-third Annual Meeting of OECD Senior Budget Officials at Washington
D.C., 3-4 June 2002, by the by the OECD Public Management Committee, Public Management
Service.

Osborne, David and Ted Gaebler (1992) Reinventing Government by, pp.1-427, Addison-
Wesley Publication Co., New York, 1992.

UNDP (2001) A Strategy for Poverty Reduction in Mongolia, A report of a UNDP mission led by
Keith Griffin on the Integration of Equity and Poverty Reduction Concerns into Development
Strategy, pp.1-210, Ulaanbaatar, July 2001.

United States of America, Government Audit Office (2000) Accrual Budgeting – Experiences
of Other Nations and Applications for the United States, Report to the Honorable Benjamin L.
Cardin, House of Representatives.

World Bank (2002) Mongolia Public Expenditure and Financial Management Review- Bridging
the Public Expenditure Management Gap, Poverty Reduction and Economic Management Sector
Unit, East Asia and Pacific Region, June 2002.

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Chapter-3
Output Costing and Output Budgeting

1. Costing Framework

Major steps involved in the activity based costing (ABC) and output budgeting include
the following:

Step-1: Specification of outputs/ cost objects/ cost or budget centres


Step-2: Identification of all costs- direct, indirect, overheads, accrued
Step-3: Specifying appropriate costing structure i.e. layers of costs
Step 4: Collection and verification of cost data on General Ledger (GL)
Step 5: Classification of GL costs into direct, indirect, capital related, taxes
Step 6: Methodology for assignment of costs to output
Step 7: Assignment of direct costs
Step-8: Allocation of indirect costs
Step-9: Determination of total cost
Step-10: Output budgeting on the basis of output costs

1.1 Specification of output

Under output budgeting the cost and budget estimates are provided for each output and
there are output heads for both accounting and auditing. An identified output becomes a
cost centre as well as a budget centre, so that the cost of that output can be estimated,
budgeted, monitored, and evaluated. If single output cannot be budgeted, then related
outputs can form an output group and the associated cost and budget centre. A “program”
can also be taken as an output. Policy planning should also be treated as an output.

For operational purpose, it is more convenient to realign outputs with departments/


divisions or to make a one-to-one correspondence between outputs and departments/
divisions. In other words, at the first phase, each department/ division can become a cost
and budget centre. At a later stage, when the system is developed properly, the specific
outputs can also become cost centres.

1.2 Estimate cost for producing an output

Output Costing is completed through two broad phases:

1. Cost collection – gathering of costs in an organised way in the General Ledger using
an accounting system.

2. Cost assignment – the assignment of a cost or group of costs from the


General Ledger to one or more outputs.

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Whilst there are many different costing methods, all are designed to describe the two
primary functions of cost collection and cost assignment. In its simplest form, the
diagram below illustrates the basic process, or generic method, of costing.

A key component of the


output costing is that agency
outputs will be costed on an
accrual basis. Major
requirements of output
costing include the
following:

1. Output costs must be


calculated on the basis of the
accrued costs of all resources
(direct and indirect). All resources consumed directly by an output must be assigned to
that output. All resources consumed that cannot be traced directly to an output should be
assigned to the output using an allocation technique.

2. The total cost must include all the relevant costs including an appropriate share of the
agency’s total overhead costs i.e. executive management and corporate services.

1.3 Cost accumulation and General Ledger (GL) Costing

Prior to the output costing, agencies collect their costs under cost centre codes within the
general ledger. In the Government sector, this is commonly termed as ‘general ledger
(GL) costing’. All costs incurred during a period are recoded and accumulated against
relevant GL accounts defined by the chart of accounts. Depending on the nature of the
item, certain costs may not be able to be posted to a single account, and may be
distributed across a number of general ledger accounts. Chart of the accounts should be
consistent with cost classifications and should include departmental heads.

Cost objects

Cost objects are the elements which need to be costed by the agencies for the purpose of
output budgeting. Cost objects could be outputs, group of outputs or activities. For
external reporting, agencies report cost information at the output level. For internal
purposes of monitoring and evaluation, agencies may like to report costs at sub-output
and activity levels, basic cost centres and major geographic regions.

1.4 Cost classification

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For the purpose of output budgeting, costs are classified into direct and indirect costs
depending on the manner in which costs are consumed by outputs, activities or cost
centres. Identifying as many as resources as direct costs helps in improving the accuracy
and relevance of output costing and output budgeting:

Direct costs

Direct costs are those costs which can be directly attributed to an output. They are mostly
variable costs and vary in direct proportion to changes in the volume of output or the
level of activity. In the public sector, where labor is the dominant factor, direct costs are
divided into direct staffing cost and other direct costs (e.g. direct material costs). Direct
staffing costs include not only wages and salaries but also other compensation to labor
such as superannuation, workers’ compensation insurance, leave travel, uniforms, and
payment of payroll tax, if any.

As regards staffing cost, the following items should be included if applicable:


(a) Base wage or salary
(b) Overtime
(c) Shift loading
(d) Leave loading
(e) Superannuation
(f) Severance benefits
(g) Other allowances
(h) Travel expenses
(i) Uniforms and protective clothing
(j) Training
(k) Workers’ compensation insurance premium
(l) Housing for residence
(m) Office accommodation
(n) Power consumption at office
(o) Equipment (including computer)
(p) Stationary
(q) Other office consumables
(r) Payroll tax and fringe benefits tax (if actually paid)

Some of these factors require additional explanation as given in Table-1:


Indirect costs

For some costs, it may not be possible to establish direct relationships with the cost
objects, because they are common to more than one output. These are called indirect
costs, and sometimes referred as overheads. For example, indirect costs can include the
salary of the Head of the Agency, corporate office and general administration costs, the
cost of personnel and finance services and the cost of office accommodation. These costs
are assigned to different outputs on the basis of their contributions to the output cost.

Other expenses or non-output costs

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An agency may incur costs that are unrelated to outputs. For example, there could be
costs due to abnormal restructuring or abnormal write-off of assets. These costs are
regarded as non-output costs and excluded from the output costing exercise.

Table-1: Different Components of Staff Expenditure

Overtime Include only the employee’s overtime associated with the


activity being costed
Shift Loading Ensure that the shift penalties reflect the staffing roster
which is being proposed for the activity.
Leave Loading Include accrued as well as cash costs.

Superannuation Government employees may be members of the


Retirement Benefits Fund Scheme or they may contribute
to some other superannuation funds such as Provident
Funds, Pension Funds and Insurance Funds. But this will
not include any payments to the pensioners (who have
already retired) as these do not constitute part of the cost
of services of the current staff.
Travel Expenses Include all relevant expenses on travel

Training Includes cost for conducting training. However, the costs


should not include wages and salaries paid to the staff
while they are attending training courses.
Residential housing If government housing is provided, then the cost should be
the net cost to government for providing the housing (i.e.
net of rent paid by the staff but inclusive of the annualized
cost to government, based on the full market rent of the
Government house).
Source: Costing Fees and Charges: Guidelines for Use by Agencies, Australian Treasury,
December 2006

Capital Costs
There are two aspects relating to the use of assets which must be considered in any
analysis of cost:
• The determination of an appropriate depreciation charge; and
• Recognition that the funds invested in the assets have alternative uses and therefore
some allowance should be made for a rate of return on those assets (known as the
opportunity cost of capital).

Asset Depreciation
There are two common methods of determining the depreciation charge:

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1. The prime cost or straight line method which allocates the cost of the asset over
the number of years of useful life; and
2. The diminishing value method which allocates a higher proportion of the cost of
the asset to the earlier years of its life.
The valuation of the assets employed is an important matter for determining the
depreciation charge. Asset valuation policies need to be formulated before estimating
depreciation or capital charges.

Opportunity Cost of Capital


Estimation of capital charge is very difficult and complex. As a thumb rule, the
Australian Treasury8 recommends that the Tascorp long term borrowing rate (around 2
per cent) be used as the central estimate for the cost of capital for funds invested in
agency assets.
Recommendation for Mongolia
As the line ministries and Aimags mostly depend on central government resources for
making capital expenditure, it is not recommended to use capital charge as cost of capital,
because it would simply increase the burden on the central government. As regards
depreciation, we have already recommended that depreciation cost need not be
considered until assets have been listed fully and valued properly. When it is possible to
include depreciation as a part of output cost, depreciation may be estimated on the basis
of the basis of book value of assets and by using the straight line formula.
1.5 Total Costs

The full cost of an Output is the aggregation of direct, indirect and capital costs. Most of
these costs are attributable to agencies. The estimation of the output cost is only the first
step in the cost analysis. At the end of an accounting period, actual results should be
compared with the estimated cost as part of a process of continually improving costing
procedures. The Table-2 below provides a summary of various costs.

Table-2 Summary of Types of Costs


8
Costing Fees and Charges: Guidelines for Use by Agencies, Australian Treasury, December 2006.

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(a) Direct Cost


Staffing Costs
Base wage or salary Overtime
Allowances Shift loading
Residential housing Subsidies
Office accommodation Uniforms
Superannuation benefits Travel expenses
Training cost Protective clothing
Workers’ compensation Air conditioning
Insurance premiums Water

(b) Other Direct Costs


Consumable supplies
Contractors/consultants
Office equipment expensed on purchase
Purchase of services such as maintenance
The cost of inventory consumed in the course of producing a service

(c) Indirect costs


Includes corporate services costs

(d) Capital related costs


Depreciation
Capital charge (i.e. Opportunity cost of capital)

(e) Taxes, Duties and Fees (Only if Actually Paid)


Local government taxes, duties, fees, royalties etc., if actually paid.

Total Cost = (a) + (b) + (c) + (d) + (e)

2. Cost drivers

Cost drivers are those activities, events or factors that trigger or have a strong correlation
to the total cost being allocated. Identification of cost drivers makes the allocation of
costs to outputs easier and more accurate. A simple example is the allocation of rental
and clearing costs to a range of outputs. A cost driver for this will be the ratio of floor
space occupied by each work group to the total floor area. Table-3 illustrates the relation
between cost items, cost groupings and cost drivers.

Table-3: Relation between cost items, cost groups and cost drivers

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General Ledger (GL) Cost Grouping Allocation Method


Cost Items and Cost Driver
Office accommodation rentals Employees/ staff Resource usage analysis
(Floor area used)
Salaries and wages Employees/ staff Activity analysis (Person
hours)
Medical expenses Employees/ staff Activity analysis (Time
consumption)
Travel Employees/ staff Activity analysis (Time
consumption)
Telephones, and Communications Resource usage analysis
communications lines (Transfer pricing system)
Stationary Consumables Resource usage analysis

Equipment maintenance Equipment Resource usage analysis

Software licenses Softwares Resource usage analysis

Depreciation Depreciation Resource usage analysis

Motor vehicles expenses Overhead Allocation to overhead

Equipment rental Equipment Resource usage analysis

When apportioning overhead costs between outputs, an agency may choose alternative
techniques depending on availability of data. These can be classified into two categories:
1. Logical cause-and-effect or cost-driver
2. Arbitrary pro-rata.

(a) Logical Cause-and-Effect

With the cause-and-effect technique, costs that cannot be traced directly to specific
outputs are attributed to cost pools/centres. The total cost in a cost pool/centre is then
attributed to outputs based on the cost-driver that causes the activity to be undertaken.
The technique is based on the assumption that there exists a cause-and-effect relationship
between the output and the cost pools. Some commonly used cost-drivers are:
(i) Floor space
(ii) Number of staff
(iii) Number of hours worked
(iv)Number of transactions processed
(v) Number of documents received

Table-4: Methods to assign direct costs to outputs

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Method Description Advantages Disadvantages


(When used)
1. Cost centre Direct costs are allocated to the cost • Flexibility and • Costly in the
attribution i.e. centres as they are incurred. Estimates sensitivity to short run.
Activity Review are compiled of a cost center’s or change. • Required
(When business individual time required for completion disciplined
units are of specific activities and costs assigned implementation.
responsible for on the basis of these estimates.
delivery of one
output only)
2. Time recording Employees record the time they spend • Flexibility and • Costly in the
systems (Useful for the delivery of each output. The time sensitivity to short run.
for assigning direct may be recorded on hourly, daily, change. • Required
labor and staff weekly, monthly or annual basis. Time disciplined
cost. recording systems are generally used for implementation.
charging and other staff related costs.
3.Resource Measure each output’s use of resources • Flexibility and • Costly to
consumption such as photocopies, computers, sensitivity to implement.
accounting telephones and printers. The costs are change • Requires
(when the use of directly charged to the outputs for the • Tailored for resource for
these resources is use of these resources on a transaction organised ongoing
significant easily basis. For example, the cost of use of charging. maintenance
recorded,) photocopies might be allocated on the • Results in and control.
basis of the cost per page and number of equitable
pages copied. charging.
• Provides
information for
value-added
business
decisions.
4. Output Direct costs are allocated to specific • Flexibility and • Required
Accounting output codes in the budgeting body’s sensitivity to disciplined
(Suitable only accounting records (i.e. general ledger) change implementation
when there is a as they are incurred. The output code can
relationship then be used to produce a report showing
between outputs the total output cost. This method
and cost centres. requires all costs to be coded to outputs.
Judgments need to
be applied if a
budgetary body
has many outputs.)
5. Experienced Management and staff often use their • Quick and easy • May be
judgments (Not a own experience to estimate each output’s to implement. inaccurate.
generally accepted use of resources and attribute costs on • Low cost. • May be
method). the basis of these estimates. arbitrary.
• No formal
documentation.

(b) Arbitrary Pro-Rata

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This technique attributes costs without determining a clear cause-and-effect relationship.


Usually all overhead costs are firstly aggregated and then attributed to outputs using
some arbitrary pro-rata basis such as using the number of direct labour hours consumed
in producing the output. As for example, the total cost of computer maintenance can be
firstly attributed on a pro-rata basis of Full Time Equivalents (FTEs).

Appropriate costing methodology: It is recommended that Fully Distributed Cost (FDC)


should be used for cost estimation. FDC should take account of:
(i) all direct costs such as labour, materials and premises;
(ii) indirect costs (overheads) such as personnel services, IT support,
administration;
(iii) capital cost i.e. depreciation of physical assets utilised.

The following financial management system should be in place:


(i) accrual accounting;
(ii) output costing; and
(iii) asset valuation.

Total costs will include both direct and indirect costs. PSMFA (27 June 2002) mandates
that “Cost of outputs shall be determined on the basis of full accrual cost of production,
including management overheads and capital charges”9. Accordingly the total costs
should include the following items:

(i) Cost of labour directly associated with production of goods and services;
(ii) Cost of materials and services directly consumed in the production process;
(iii) An appropriate share of indirect labour costs;
(iv)Office accommodation costs;
(v) A share of indirect materials and services;
(vi)However, capital costs including depreciation of fixed assets and capital charges
may not be included as a part of cost until all assets are listed and valued.
·

3. Output Costing for the Ministry of Finance


9
Article 26.3 of the PSMFA (2002).

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As an example, Table-5 provides broad categories of outputs for the MOF, which are
aligned with its Departments. This is the simplest model where Departments/ Divisions
are taken as Output Centres or Cost Centres or Budget Centres or Activity Centres.

Table-5: Allocation of G/L Cost Items to Outputs

G/L Items Cost centers in MOF/ Outputs in MOF


Departments and Divisions
• Salaries & wages • Economic Policy • Policy advice
• Insurance and pension • Fiscal Policy • Budget preparation
benefits • Treasury • Revenue collection
• Travel and tours • Loan and Aid • Expenditure
• Purchase of Goods • Procurement management
• Transport • Financial sector • Investment planning
• Telecom • Administration • Treasury functions
• Fuel • Accounting • Public debt management
• Power • State Secretary • Banking settlement
• Water • Finance Minister • Government sale and
• Stationary procurement
• Software • External assistance
• Rental management
• Maintenance • Advice on audit and
• Depreciation accounting
• Equipment • Financial sector policy
• Others & regulation

4. Activity Based Costing (ABC)

Under ABC, general ledger costs are first allocated to different activities on the basis of
cost drivers; then activity costs are allocated among different outputs on the basis of
another set of cost drivers. Feasibility of applying ABC to Mongolia was examined and it
was observed that at present the line ministries do not have the requisite data to use
Activity Based Costing. Building up necessary data will take very long period, and for
some ministries it may not be feasible at all. So a simpler cost allocation model, as
explained below and described in the flow diagram, is recommended.

1. First Level Allocation, find appropriate cost drivers to allocate G/L items to cost
centres (which can be output centres or departments or divisions)

2. Second Level Allocation; find appropriate cost drivers to allocate cost centre
items to outputs (which can be broad output groups, sub-outputs or programs). In
this case, for simplicity, cost/output centres are treated as activity centres.

3. Third Level Allocation, only when the data base is established and the system
develops over the years, have third level allocation i.e. allocate cost centre items

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to activities, and then activities to outputs. This is the final stage of ABC for
output budgeting.

Output-1
Cost
Drivers

Output-2

Cost
Centre-
1 Output-3

Cost
Drivers

Output-4

Cost
Centre- Output-5
G/L 2
Item
s
Output-6

Cost
Centre-3
Output-7

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5. Choice of Software for Activity Based Costing

Das and Sandagdorj (2007, 2008) developed the business model for Activity Based
output costing and output budgeting on the basis of accrual accounting, benchmarks and
performance parameters. International IT Expert Mr. David Loewy and local IT
consultant Ms. Bolormaa were assigned the task of selecting or developing suitable
software for output costing, which can be used by the line ministries and the budget
entities of Mongolia and which should have a demo version for evaluation. After various
rounds of web searching and initial studies, they suggested that the following two
software packages appear to be promising subject to usual IT and other tests.

(a) ABC FOCUS Software developed by an Australian vender; and


(b) ALOCOUS Software developed by the local Mongolian vendor Citicom.

These two software packages were tested and run on the basis of actual data, and their
relative merits and demerits were evaluated by the line ministries. The results are
summarized in Table-7. It can be observed from the table that although ALOCOUS is
not yet fully developed and fully tested, it is simpler and more suitable for the Mongolian
budget entities. It can be developed fully with little efforts and with much less cost than
attempts for localizing and customizing the ABC FOCUS.

The usual IT tests conducted by David Lowey (2008) also indicated that ALOCOUS is
better than ABC FOCUS (Table-6).

Table-6: Relative IT Test Scores for ABC FOCUS and ALOCOUS

Sl. No. Final Score ABC FOCUS ALOCOUS


7.00 Overall Software Requirements 171 277
7.10 Administration and Security 56 82
7.11 Reports 30 57
7.13 Vendor & vendor support 60 41
7.14 Additional data 0 0
7.15 Software & associated costs 80 156
7.16 Miscellaneous 0 0
7.17 Total Score 397 613

On the basis of above mentioned tests, it can be concluded that there does not exist any
output costing software which can meet the needs of the Mongolian budgetary entities. It
is better to develop the required software locally as it will help in customization and
localization and it will be least expensive.

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Table-7: Comparative Evaluation of ABC-FOCUS and ALOCOUS Software

ABC Score Alocous Score


Evaluation Criteria
Focus
1. Fully developed and tested Yes 1 No 0
2. Can be developed and tested with little efforts Yes 1 Yes 1
3. Can be customized easily No 0 Yes 1
4. Mongolian version is available No 0 Yes 1
5. Mongolian version can be made with minor cost No 0 Yes 1
6. Easy to use/learn No 0 Yes 1
7. Nice looking user interface Yes 1 Yes 1
8. Ability to do recursive costing Yes 1 Yes 1
9. More than three levels of cost objects Yes 1 No 0
10. Ability to perform process costing in the software Yes 1 Yes 1
11. Robust, multi-format import features No 0 Yes 1
12. Robust, multi-format export features No 0 Yes 1
13. Ability to input data from other programs No 0 Yes 1
14. Capacity utilization features and calculations Yes 1 Yes 1
15. Full multi-user access at the same time Yes 1 Yes 1
16. Ability to deal with multi scenario Yes 1 Yes 1
17. Budget vs. actual cost comparisons Yes 1 Yes 1
18. Value for money analysis Yes 1 Yes 1
19. Built-in report writer, report generator Yes 1 Yes 1
20. Generation of pre-defined reports Yes 1 Yes 1
21. User-defined fields and attributes Yes 1 Yes 1
22. Link to executive information systems 1 0
Yes No
23. Support to audit Yes 1 Yes 1
24. Responsible technical support Yes 1 Yes 1
25. Immediate technical help, if needed No 0 Yes 1
26. Vender’s past experience with Mongolian govt No 0 Yes 1
High 0 Low 1
27. Initial Price
$ 5600 $800
28. Costs for maintenance and support High 0 Low 1
29. Total Score 17 25

Selected References

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Bartlett, W. and L. Harrison (1993), ‘Quasi-Markets and the National Health Service Reforms’,
in J le Grand and W. Bartlett (ed.), Quasi-Markets and Social Policy (Macmillan, London).

Bureau of the Budget (BOB) Budget Modernization Program (1999) Report of Graham Scot
and Lewis Hakwe, Sector Experts, Office of the Civil Service Commission Pilot Project,
Thailand, Bangkok.

Cash Focus (2008) ABC Cash Focus Manual for demonstration and trial run, pp.1-17,
Cash Focus Pty Limited, Australia.

Citicom (2008) Alocous Software Manual for demonstration and trial run, pp.1-24,
Citicom, Ulaanbaatar, Mongolia.

Commonwealth Competitive Neutrality Complains Office (CCNCO) (1998) Cost Allocation


and Pricing, CCNCO Research Paper, Commonwealth of Australia, Canberra, October 1998.

Das, Tarun and E. Sandagdorj (2007a) Output Costing and Output Budgeting- Basic Concepts
and Methodology, pp.1-50, ADB Capacity Building Project on Governance Reforms, Ministry of
Finance, Government of Mongolia, Ulaanbaatar, October 2007.

_______ (2007b) Output Costing Methodology for Software Selection- Basic Concepts
and Some Advices for Selection, pp.1-9, ADB Capacity Building Project on Governance
Reforms, Ministry of Finance, Govt of Mongolia, Ulaanbaatar, December 2007.

Department of Treasury and Finance (2006) Costing Fees and Charges: Guidelines for Use by
Agencies, Government of Australia, December 2006.

Department of Treasury and Finance (2007) Costing and Pricing of Government Services-
Guidelines for Use by Agencies in the Western Australian Public Sector, Fifth Edition,
Government of Western Australia, April 2007.

Diamond, Jack (2002) Performance budgeting, is accrual accounting required?, IMF Working
Paper no.WP/02/240, International Monetary Fund, Washington D.C.

DOFA (Department of Finance and Administration) (1998) Specifying Outcomes and Output:
Implementing the Commonwealth’s Accrual-Based Outcomes and Outputs Framework, DOFA
(Canberra).

DOFA (Department of Finance and Administration) (1999a) Accrual Resourcing Framework,


DOFA (Canberra).

DOFA (Department of Finance and Administration) (1999b) Commonwealth Accrual


Budgeting Guidelines, DOFA (Canberra).

DOFA (Department of Finance and Administration) (1999c) Accrual Appropriation


Framework, DOFA (Canberra).

Gurowka, Jim (2005a) Activity-based costing software- The market explodes, pp.1-12,
Focused Management Information Inc., of Oakville, Ontario.

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_______ (2005b) It Ain't the Software- an Article on ABC Software, pp.1-3, Focused
Management Information Inc., of Oakville, Ontario.

Loewy, David W. (2008) Output Costing Software Selection- Technical Comparison Matrix for
ABC FOCUS and ALOCOUS, pp.1-13, ADB Capacity Building Project on Governance
Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar, March 2008.

Mercer, John (2003) Cascade Performance Budgeting- A Guide to an Effective System for
Integrating Budget and Performance Information and for Linking Long Term Goals to Day-to-
Day Activities, May 2003.

Mercer, John: See Website on GPRA and Performance Management:


www.governmentperformance.info

NZT (New Zealand Treasury) (1996) Putting It Together: An Explanatory Guide to the New
Zealand Financial Management System, The Treasury (Wellington).

Queensland Treasury (1998) Output Costing Methods Module: A Costing Framework,


Government of Australia, November 1998.

Robinson, Marc (2000) ‘Contract Budgeting’, Public Administration, Vol. 78, No. 1, pp.75-90.

Robinson, Marc (2002) ‘Accrual Accounting and Australian Fiscal Policy’, Fiscal Studies.

Robinson, Marc (2007) edited. Performance Budgeting- Linking Funding and Results, Palgrave
McMillan.

South Australian Department of Treasury and Finance (2000) A Guide to Implementation of


Cost Reflective Pricing- A Part of Neutrality Competitive Policy, October 2000.

USA (1993) Government Performance and Results Act (GPRA) of 1993, Office of Management
and Budget (OMB).

United States of America, Office of Management and Budget (OMB) Homepage:


http://www.whitehouse.gov/omb/gils/gil-home.html

VDTF (Department of Treasury and Finance, Victoria) (1998a) Accrual Accounting Manual,
Melbourne: The Department.

VDTF (Department of Treasury and Finance, Victoria) (1998b) The Capital Assets Charge in
1998-99, The Department (Melbourne).

WAT (Treasury, Western Australia) (1998) Output Based Management Output Measures -
Guidelines To Assist Agencies, The Treasury (Perth).

Chapter-4
Accrual Accounting and Accrual Budgeting

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1. Cash and Accrual Accounting

An accounting system performs two important functions. First, it provides an account of


the financial position of the government for the fiscal year as required by the legal system
to ensure accountability for public funds. Second, day-to-day recording of government
financial transactions provides useful information for formulation of desired public
policies and to aid management decision making.

There are two basic accounting methods- cash and accrual (sometimes called cash basis
and accrual basis). The major difference between cash and accrual is that under a cash
method, income and expenses are recorded at that point in time when money is actually
received or paid. In contrast, under an accrual method, incomes and expenditures are
recorded at the time when the economic value is created, transformed, exchanged,
transferred, or extinguished irrespective of the time of cash receipts or cash payments.
Thus, the accrual method provides a more accurate picture of the fiscal balance than the
cash method, because incomes are recorded on the books when they are truly earned, and
expenses are recorded when they are incurred. Basic differences between Cash and
Accrual Accounting are indicated in the following table:

Table-1: Differences between Cash and Accrual Systems

1. Cash accounting records receipts when 1. Accrual accounting recognizes events


cash is banked and payments when and transactions when they occur,
cash is paid. regardless of when cash changes
hands.
2. Only a cash flow statement is prepared 2. Under accrual accounting10—in
under cash accounting. addition to the cash flow statement—
two key financial statements are
presented:
2.1 Operating Statement: Shows the
financial results of an organization
during a period.
2.2 Balance Sheet: Shows all assets
and liabilities at a certain point in

10
International accounting standards require the preparation of four primary key statements: (i)
Statement of Financial Position (balance sheet); (ii) Statement of Financial Performance
(operating statement, income statement or profit and loss account); (iii) Statement of Changes in
Net Assets/ Equity; and (iv) Cash Flow Statement.

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time, providing insights on the


organization’s long-term financial
sustainability.

Hybrid method or Cash plus Accrual method

Hybrid method means use of accrual accounting to the extent possible and use of cash
accounting for the remainder of incomes and expenses.

2. A Simple example of Accrual Accounting

It is generally recognized that an accrual accounting is better than cash accounting as an


accrual system identifies, measures and reveals all government liabilities and revenues,
both balance-sheet and off-balance-sheet items, which may be concealed in cash
accounting. As accrual accounting allows generation of cash accounts, these systems
should not be regarded as mere substitutes.

Using a simple example11 for a small government, Table-2 illustrates differences between
cash and accrual accounting for a period of one week. Particularly, the way in which
pension obligations are treated is very informative12. Cash accounting ignores the $30
million pension obligation (in present value terms) until the pension payments are
actually made usually after many years. But, the accrual accounting immediately
recognizes the obligation as an expense.

The effects of the following five transactions are shown in the financial statements:

(1) Corporate taxpayers are required to make tax payments of $100 million, but govt
received only $90 million. At the end of the week, $10 million is outstanding.

(2) The government sells fixed assets (valued at $100 million) for $100 million.

(3) Government paid salary during the week. In addition to paying employees $60
million, the government is obligated to provide for their pensions when they
retire. Employees earned $30 million in future pension rights during the week.

(4) The government settles an old legal dispute. It agrees to pay $30 million to the
plaintiff in 2 months’ time.

11
Example is taken from Lakshman Athukorala, S. and Barry Reid (2003) Accrual
Budgeting and Accounting in Government and its Relevance for Developing Member
Countries, ADB, Manila.

12
In keeping with most government pension scheme arrangements, the example assumes that
pension obligations are unfunded.

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(5) All the government’s borrowings (amounting to US$500 million) are held in
foreign exchange. The exchange rate depreciated by 2% during the week.

Table-2 Accrual Accounting

Cash flow statement Operating statement Balance Sheet


Opening Changes Closing
Receipts: Revenues Assets
Taxation a 90 Taxation a 100 Banks 50 130 180
Asset sales b 100 Receivables 20 a 10 30
Fixed assets 700 b -100 600
Total 770 40 810
Payments Expenses Liabilities
Salaries c -60 Personal costs c 90 Litigation 0 d 30 30
Foreign exchange Pensions 0 c 30 30
Loss e 10 Borrowing 500 e 10 510
Litigation Exp d 30
Total 130 Total 500 70 570
Cash surplus 130 Accrual deficit -30 Net assets 230 -30 240
Bank balance Equity and reserves 270 30 240
Opening 50
Closing 180

It may be observed from the table that the Cash accounting shows a surplus of $130
million, while the accrual operating statement shows a deficit of $30 million. The $160
million difference arises from the fact that cash accounting ignores the pension liability
($30 million), the asset already had a value equal to its sale price ($100 million) and
therefore no gain in revenues on accrual accounting, the exchange rate change ($10
million), the judgment liability ($30 million), and the taxes to be received ($10 million).

3 Status of Accrual Accounting in Five Pioneer Countries


viz. New Zealand, Australia, the United Kingdom, the United States, and Sweden
Five countries viz. New Zealand, Australia, the United Kingdom, the United States, and
Sweden have been pioneers in accrual accounting and accrual budgeting. They provide
good examples for other countries who desire to introduce accrual accounting and
budgeting, although their systems, techniques and methodology differ significantly.

Among these five countries, only Australia and New Zealand have adopted the technique
of output costing and output budgeting, while the other countries are adopting the
technique of input costing and input budgeting (Martin Dees and Paul Neelissen 2004).
Table-3.1 provides designs of accrual accounting and Table-3.2 indicates main
accounting principles applied in these countries. As regards accounting principles, the
following observations may be noted:

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• There are considerable differences in valuation policies for fixed assets. While
Sweden and United States use primarily historical cost, New Zealand and United
Kingdom use modified historical cost, and Australia uses current value.

• The main statement of financial position classification agrees with the generally
accepted classification of fixed and current assets, liabilities and equity as a
balancing item.

• Provisions (for liabilities, charges, loss contingencies etc.) are permitted in all five
countries.

• All five countries calculate an operating result as the balance between income and
expenses.

• As regards depreciation, USA uses systematic and rational method, while all
others use the traditional straight-line method with residual value. However, for
USA, UK and Sweden, the inclusion of depreciation as a part of accrual cost is
optional.

• Three of the five countries apply a capital charge. New Zealand and UK use 6%
of equity as capital charge, Australia uses 12% of equity as capital charge, while
USA and Sweden do not use any capital charge.

Anther important study on “Accrual Accounting and Budgeting- Key Issues and Recent
Developments” made by the OECD Public Management Committee, (June 2002)
indicates that although accrual accounting has been adopted by most of the OECD
members, Full Cash Basis is the accounting basis applied for budget approval by the
legislature for most of the OECD counties (Table-4).

3. Recommendations for Mongolia

After examining international best practices on accrual accounting and accrual budgeting
(discussed) and present accounting systems and capability of Mongolia, we recommend
the following for the government of Mongolia:

1. It may start with cash-cum-accrual accounting, and move towards full accrual
accounting by a gradual and phased program over the next five years.
2. Although it may use accrual accounting, approval of budget by the Parliament may
be done on full cash basis.
3. Fixed assets may be valued on the basis of historical value.
4. Inclusion of depreciation of fixed assets as a part of accrual cost can be avoided
by the budget entities for the next three years until listing of all assets and their
valuation are completed. When depreciation is recognized as a part of accrual cost, it
may be estimated by the straight line method.
5. It is not recommended to use capital charge.

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6. Provisions (for liabilities, charges, loss contingencies etc.) may be made in


budget.

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Table-3.1 Design of Accrual Systems in Australia, New Zealand,


Sweden, United Kingdom and United States of America

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Table-3.2 Accrual Accounting Principles in Australia, New Zealand,


Sweden, United Kingdom and United States of America

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Table-4

Accounting Basis Applied for Budget Approved by Legislature

Country Accrual Basis, except no Cash Basis, except


Full Accrual Full Cash
Capitalization or certain transactions on
Basis Basis
Depreciation of Assets Accrual Basis
Australia X
Austria X
Belgium X
Canada X
Czech Rep X
Denmark X(1)
Finland X(2)
France X
Germany X
Greece X
Hungary X
Iceland X
Ireland X
Japan X
Korea X
Luxembourg X
Mexico X
Netherlands X
Norway X
New Zealand X
Poland X
Portugal X
Spain X
Sweden X
Switzerland X
Turkey X
United Kingdom X(3)
United States X(4)
Source: OECD Budgeting Database

Notes:
1. Denmark – Interest Expenses and Employee Pensions Treated on Accrual Basis.
2. Finland – Transfer Payments Not on Accrual Basis.
3. United Kingdom – Budget on Full Accrual Basis Effective Fiscal Year 2001-02.
4. United States – Interest Expenses, Certain Employee Pension Plans, and Loan and Guarantee
Programmes Treated on Accrual Basis.
5. Canada, Korea, Netherlands and Sweden plan to move to budgeting on the basis of full accrual
accounting.

Transition from Cash to Accrual Accounting

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Transition to accrual accounting and budgeting is an integral part of overall fiscal reforms
and wider public sector governance reforms. However, as OECD (2002) concluded

“Although accruals have been used in the private sector for a very long time, it is not
possible to simply adopt private sector accruals to the public sector in bulk. There are a
number of unique issues that arise when governments move to accruals. The government
has certain types of assets and liabilities that do not exist in the private sector, including
heritage assets, military assets, infrastructure assets and the treatment of social insurance
programs. What valuation methods are used is very important, especially from an
economic analysis point of view. What institutional structures are in place for setting
accounting standards are very important, especially the need to maintain their
independence while respecting the constitutional responsibilities of the finance minister.
Finally, a great number of implementation issues arise when accruals is being adopted in
the public sector.”

“Finally, it must be emphasised that accruals is not a “magic bullet” for improving the
performance of the public sector. It is simply a tool for getting better information about
the true cost of government. It needs to be used effectively and in tandem with a number
of other management reforms in order to achieve the desired improvement in decision-
making in government.”
The purpose of this rather long quotation is to convey the message that even developed
countries with highly trained and skilled manpower and sufficient financial resources and
technology have not been able to implement fully accrual budgeting system, and they are
still in the process of experimentation and development.

General lessons from these experiences indicate that a shift to a full fledged accrual
system of accounting and budgeting will take longer period and cannot be done at one
stroke. However, a beginning needs to be done “for getting better information about the
true cost of government”. Initially, we need a mixture of cash and accrual budgeting i.e.
cash plus accrual accounting and budgeting.

IMF GFSM 2001 recognizes that in a developing country like Mongolia with constraints
not only in required data base but also in resources, technical manpower and information
technology, transition to a full fledged accrual accounting and budgeting and GFSM 2001
reporting systems cannot be created overnight and have to be evolved through various
stages over a number of years. These stages span from a cash basis accounting to cash-
plus-accrual accounting (alternatively known as modified accrual accounting or partial
accrual accounting) to full accrual accounting. However, the transitional path and the
journey time can be shortened and better planned by learning lessons from international
experiences and best practices.

Migration to IMF GFSM 2001 Reporting System

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Financial Statements

The basic relationships under the GFSM 2001 analytical framework are summarized in
three accrual-based statements relating to transactions, other economic flows, and the
balance sheet, and one cash-based statement.

(a) The Statement of Government Operations distinguishes between revenue and


expense transactions, transactions in nonfinancial assets, and transactions in
financial assets and liabilities. Revenue covers all transactions that increase net
worth and expense covers all transactions that decrease net worth. Transactions
in nonfinancial assets, financial assets and liabilities are not included. The
difference between revenue and expense is the net operating balance.
Subtracting the net acquisition of nonfinancial assets from the net operating
balance yields net lending/borrowing, which in turn is equal to the net
acquisition of financial assets less the net incurrence of liabilities.

(b) The Statement of Other Economic Flows presents information on changes in


net worth that arise from flows other than transactions.

(c) The Balance Sheet shows the government’s net worth at the end of a fiscal
year, which is equal to the stock of nonfinancial assets plus net financial worth
(i.e., the difference between financial assets and liabilities). The change in net
worth in a year is the sum of changes due to revenue and expense transactions
and to other economic flows. The links between the components of the balance
sheet and the other accrual-based statements are shown in Table-A.1.

(d) Statement of Sources and Uses of Cash shows cash flows associated with
revenue and expense transactions and transactions in nonfinancial assets, and
their net impact in terms of the cash surplus/deficit. Adding the cash flow from
transactions in financial assets and liabilities to the cash surplus/deficit gives the
net change in the stock of cash.

All flows and stocks are valued at market prices. This is the cash value of in-kind
transactions or the amount for which goods, services, assets, labor or capital are
exchanged. Flows are valued at the current prices on the dates when they are recorded.
Stocks are valued at the market prices current on the balance sheet date.

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Table-A.1 GFSM 2001 Analytical Framework

Opening Statement of Statement of Other Closing Balance


Balance Sheet Government Economic Flows Sheet
Operations
Revenue

Minus

Expense

Net operating
balance
=

Net worth + Change in net worth + Change in net worth = Net worth
due to revenue and due to other
expense transactions economic flows
= = = =

Nonfinancial + Net acquisition of + Change in = Nonfinancial


assets nonfinancial assets nonfinancial assets Assets
due to other
economic flows
+ Plus + +
Net financial + Net + Change in net = Net financial
worth lending/borrowing financial worth due Worth
to other economic
flows
= = = =
Financial assets + Net acquisition of + Change in financial = Financial assets
financial assets assets due to other
economic flows
– Minus – –
Liabilities + Net incurrence of + Change in liabilities = Liabilities
liabilities due to other
economic flows

Consumption of fixed capital means depreciation. It is the decline in the current value
of the stock of fixed assets in the accounting period due to physical deterioration, normal
obsolescence, and accidental damage. Consumption of fixed capital is treated as an
expense under accrual accounting.

Although the balance sheet is to be valued at market prices, provision is made in GFSM
2001 for reporting the nominal value of the debt as a memorandum item.

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Net lending/borrowing, the net operating balance, and the cash surplus/deficit are
the main GFSM 2001 fiscal indicators.

• Net lending/borrowing is the most important indicator, as it reflects the


government’s financing operations.
• Net operating balance measures the impact of fiscal policy on net worth.
• The cash surplus/deficit measures the change in the government’s liquidity
position due to revenue, expense and transactions in nonfinancial assets.

Implementation by Countries

Successful implementation of GFSM 2001 in the first instance involves the


reclassification of existing fiscal information, which can be done relatively quickly. The
second step relates to developing key institutional set up for a modern public expenditure
management (PEM) framework, which provides assurance that government accounting
and classification systems are capable of supporting statistical reporting that is fully
GFSM 2001 compliant. Four institutional features of the PEM framework can support a
successful changeover to GFSM 2001. These include the following:

(a) A chart of accounts, which is a hierarchical coding framework for classifying and
recording fiscal data that is fully mapped into GFSM 2001.
(b) A general ledger which provides a central accounting record of all government
financial transactions.
(c) A treasury single account into which all government receipts are deposited and
from which all payments are made on the basis of budget authorization.
(d) A Government Financial Management Information System (GFMIS), which is an
integrated accounting system that can generate detailed information to support
budget preparation and execution, commitment control, arrears management,
liquidity management and other tasks involved in managing government finances.

Experiences of IMF technical assistance for PEM reforms in many countries suggest that
a well-functioning chart of accounts, general ledger, single treasury account and GFMIS
constitute a sound institutional basis for meeting a wide range of PEM objectives.

Current Status in Mongolia

Government of Mongolia already adopts some amount of accrual data, particularly for
government commitments towards terminal benefits to the government staff. It is also
making an attempt to list and value physical assets. Usually, the accounting of assets may
not include common assets such as infrastructure assets (e.g. roads, rails, sea ports, air
ports, brides and water supply which can be regarded as sunk costs). So, it will be
opportune to adopt a “cash plus accruals” accounting based on the availability of accrual-
based data. The conversion path to the IMF GFSM 2001 reporting system can follow
transition the path outlined in Flow Chart-1.

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Stage one: Restructure existing cash data

Without additional data, cash data may be reorganized to prepare new statements for IMF
GFSM 2001. This will require preparing operating statements and balance sheets 13. In
brief, taxes and other current revenues, wages and salaries, purchases of goods and
services, interests and other current payments are included in a cash operating account.
Purchases of non-financial assets are classified to an investment account and changes in
financial assets and liabilities are shown in a separate financing account. It is necessary to
prepare consolidated general statement of financial position and cash flow statement.
Attempts may also be made to prepare consolidated public sector accounts.

An essential requirement of modified accrual accounting is to introduce payables and


receivables in the government accounts.

(a) Accounts payable: This allows for the recording of liabilities that have not
resulted in the payment of cash in the current accounting period. It includes
goods delivered but not paid for and agreements to pay subsidies and grants to
the private sector.

(b) Accounts receivable: This allows for the recording of revenue earned by the
government that has not resulted in the receipt of cash although it is sufficiently
close to cash receipts. It includes taxes and non-tax revenues that are due but not
paid and also credit sales of goods and services.

The following additional items of accrual accounting could also be considered:

(a) Provisions for employee entitlements such as contributions to pension,


provident, insurance and terminal benefits funds for the government staff.

(b) Prepayments received by government: These receipts can range from deposits
on the sale of assets to installment payments on the provisions of government
goods and services.

(c) Interests payable: Interests on debt can be significant drain on budget resources
and simply recording interests when paid may not provide adequate information
on government liabilities for interest payments in future. This is particularly the
case with the zero coupon bonds (see Box-1).

13
For details, see “Accrual Accounting Rules for GFS” prepared by Tarun Das.

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Box-1: Cash and Accrual Treatment of Zero Coupon Bond

Consider a 5-year $1,000, 000 zero coupon treasury bond that is sold for $7,000,000. the following
example illustrates the differences in treatment between cash accounting and accrual account ting
(the interest expense is estimated on the basis of yield-to-maturity of 7.394 percent.

Items Year Total


0 1 2 3 4 5
Cash Basis: Cash flows 700 0 0 0 0 0 -300
Accrual Basis
(a) Operating statement: interest expense 0 52 55 60 64 68 300
(b) Balance sheet, Outstanding liability 700 752 808 868 932 0*
* Obligation is fully paid in year-5, thereby eliminating the outstanding liability.

Adopt simplifying recognition rules

For revenue recognition, adopt a rule that is very close to cash realisation while
recognizing tax revenues on accrual basis. For expenses, do not adopt category no.22
“use of goods and services” (see Flow Chart-1), and distinguish between current
expenditure and longer lasting materials assets acquisitions. In respect of these assets,
adopt a 100 percent first year depreciation rule (as used in Canada). Also do not adopt
category no.23 “consumption of fixed capital”, a periodic depreciation of fixed assets.

Capital charge

Article 26.3 of the Public Sector Management and Finance Act (PSMFA, 27 June 2002)
of Mongolia mandates that “Cost of outputs shall be determined on the basis of full
accrual cost of production, including management overheads and capital charges”. In
our opinion, inclusion of capital charge may not be necessary for Mongolia as most of the
budgetary bodies do not have their own resources and depend on the central government
funding. The issues on depreciation and capital charges have earlier been examined by
international consultants Jim Yardley and Andrew Hilton in November 2005. They
concluded that capital charges and current value accounting are complicated, expensive,
and may not provide much benefit in return. Depreciation estimated on the basis of the
book value of capital investment may provide reliable and inexpensive approximations of
capital charge for five or ten years. We agree with their conclusions.

(2) Stage two: Widen partial accrual to financial and non-financial assets

(a) Accommodate some elements of statement of economic flows

Most flows under this category involve revaluation of fixed and financial assets and
liabilities at market prices. At the early period, only some flows may be recognized such
as write-off of assets, revaluation of financial assets/ liabilities due to exchange rate
fluctuations, windfall gains/ losses due to natural disasters, unforeseen accretion to

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wealth due to discovery of new mineral assets; privatisation of corporations with


unremunerative assets (by reclassification) etc.

(b) Progressive recognition of existing financial and nonfinancial assets.

A possible transition path is as follows: first priority is financial assets including on-
lending, and then easily quantifiable non-financial assets such as government buildings
and lands. The most difficult assets like public infrastructure assets (e.g. roads, rails, air
ports, sea ports etc.) can be avoided for an indefinite period, and can be assumed to be
sunk capital stock. It is also advised that a developing country like Mongolia, it is not
necessary to include mineral resources and other hard-to-define assets like forest wealth,
national parks, and heritage assets. It may be mentioned here that even the developed
countries have not yet developed methodologies for valuation of heritage assets.

(c) Begin to replace cash transactions in the operating account by the corresponding
accrual transactions.

All liabilities, including contingent liabilities (like placed orders for supply), be
recognized as soon as they arise by opening account heads to capture accounts receivable
in revenues and accounts payable in expenses. The depreciation cost could also be
included as an expense for these assets. For this stage, it is necessary to prepare GFSM
2001 compatible chart of accounts and to generate new fiscal reports consistent with
partial accrual accounting.

3. Stage three: A progressive move to full accrual data.

GFSM 2001 recognizes that since GFS is a reporting system, it can differ in many
respects from the budgeting accounting systems of a country. It is possible for a country
(e.g. Australia) operating an accrual accounting system with national accounting
standards and coding structures, which are different from those of GFSM 2001.
Alternatively, it is possible to adopt GFSM 2001 accrual based system but with
significant dilutions of accrual concepts e.g. depreciating new buildings 100 percent in
the first year so as to reflect the entire capital cost as an expenditure in the same fiscal
year (as Canada); eliminating difference between expense and expenditure by assuming
immediate consumption of stocks, or valuing heritage assets by a token value etc.

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Flow Chart-1: Steps for Migration to IMF GFSM 2001


(Taken from Jack Diamond, IMF WP/02/240, Washington D.C., Dec 2002.)

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Selected References

American Institute of Certified Public Accountants (AICPA) (2003) AICPA Professional


standards International Volume on International Accounting and International Auditing, AICPA,
New York, USA, June 2003.

Das, Tarun (2007a) Accrual Accounting and Accrual Budgeting- Basic Concepts and
Methodology, pp.1-43, Ministry of Finance, Government of Mongolia, Ulaanbaatar, October
2007.

_______ (2007b) Accrual Accounting Rules for Government Finance Statistics, Ministry of
Finance, Government of Mongolia, Ulaanbaatar, December 2007, under preparation.

_______ (2007c) Accrual Accounting and Government Finance Statistics Glossary, Ministry of
Finance, Government of Mongolia, Ulaanbaatar, December 2007, under preparation.

Dees, Martin and Paul Neelissen (2004) Five Countries Pioneering Accrual Budgeting and
Accounting in Central Government, International Journal of Auditing, January 2004

Diamond, Jack (2002) Performance Budgeting: Is Accrual Accounting Required?, Working


Paper WP/02/240. Washington, DC: IMF.

International Federation of Accountants (IFAC) (1996) Perspectives on Accrual Accounting.


Occasional Paper 3, Public Sector Committee, New York.

______ (1998) Guidelines for Government Financial Reporting, Public Sector Committee, New
York.

______ (2002) Transition to the Accrual Basis of Accounting: Guidelines for Governments and
Government Entities, Study 14, New York.

International Monetary Fund (IMF) (1986) Government Finance Statistics (GFS) Manual
1986, IMF, Washington D.C., USA.

_______ 2001) Government Finance Statistics Manual (GFSM) 2001, Washington D.C., USA.

_______ (2002) Government Finance Statistics 2001 Companion Material. Washington, DC.

_______ (2003a) The Implications of the Government Finance Statistics Manual 2001 for
Country Work in the Fund, GFS Policy Development Taskforce, IMF, Washington, Aug 2003.

_______ (2005) Balance of Payments Manual, Washington, DC.

_______ (2006a) Government Finance Statistics (GFS) Yearbook 2006, Washington D.C., USA.

_______ (2006b) Government Finance Statistics (GFS) Yearbook 2006 Accompanying


Document, Washington D.C., USA.

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_______ (2007a) Monetary and Financial Statistics Manual (MFSM), IMF, Washington, DC.

_______ (2007b) Monetary and Financial Statistics (MFS): Compilation Guide, IMF,
Washington, DC.

Lakshman Athukorala, S. and Barry Reid (2003) Accrual Budgeting and Accounting in
Government and its Relevance for Developing Member Countries, ADB, Manila.

OECD Public Management Committee (2002) Accrual Accounting and Budgeting: Key Issues
and Recent Developments, the Twenty-third Annual Meeting of OECD Senior Budget Officials at
Washington D.C., 3-4 June 2002, published by the PUMA/SBO (2002)10, Paris.

World Bank (1998) Public Expenditure Management Handbook, Washington, D.C.

Yardley, Jim and Andrew Hilton (2005) Capital Charges for the Government of Mongolia,
pp.1-5, Consultancy Report prepared for the Ministry of Finance, Government of Mongolia,
Ulaanbaatar, 25 November 2005.

United States of America, Government Audit Office (2000) Accrual Budgeting – Experiences
of Other Nations and Applications for the United States, Report to the Honourable Benjamin L.
Cardin, House of representatives.

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Chapter-5

Benchmarks Setting and Best Practices

1. Benchmarks and Best Practices

Benchmark is an indicator for performance measurement. In the case of output costing,


benchmarks imply some standard norms for unit output costs or input-output ratios in
order to minimize costs. Benchmarks can also be specified for cost escalation factors for
some cost items in order to take care of the impact of inflation on output cost in future.
In order to specify benchmarks, it is necessary to gain a clear understanding of the scope
of the similar projects implemented by the competitors, the methodology and critical
success factors they used, the challenges and opportunities they faced in implementation,
and the important lessons they learned. This is known as the best practices review.

‘Gap Analysis’ and ‘Activity Modeling’


When examining the best practices of others and drawing lessons, an organization often
performs what is called a "gap analysis." This is a way to identify the performance and
operational differences between an agency and that of the benchmarking partners, and to
understand why the differences exist. One way to identify these gaps is through a
technique called "activity modeling". It is a useful method for understanding how a
business process really works by first describing how things are ("as-is" modeling), and
then by specifying how they ought to be ("to-be" modeling).

2. Benchmarks Setting
2.1 Ideal Characteristics of Benchmarks

Benchmarks set the standard against which a measure could be assessed. Often this
standard for an output is the unit cost by comparable agencies or the best result achieved
over a period of time. Benchmarks must satisfy the following criteria:
1. Credible – to ensure that benchmarks satisfy basic costing principles,
2. Transparent – to ensure that assumptions on the basis of which benchmarks are
specified are explicit and well-vetted, and
3. Practical – to ensure that undue transaction costs and time are not incurred to
collect basic data.

2.2 Broad Types of Benchmarks

Benchmarks can be grouped into two broad categories.

1. Standardized or Uniform- For a particular output (or group of outputs),


benchmarks hold goods for all line ministries, agencies and all regions

2. Unstandardized or Non-Uniform- For a particular output (or group of outputs),


benchmarks vary among line ministries, agencies and regions

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Table-1 indicates the strengths and weaknesses of these approaches with respect to the
three criteria viz. credibility, transparency, and practicality.

Table-1: Relative Merits of Standardized and Unstandardized Benchmarks

Standardized Benchmarks Unstandardized Benchmarks

Uniform and rigid benchmark for all line Different and flexible benchmarks for line
ministries ministries
Based on output-category-wide information Based on ministry-specific information

Credible for family of projects Credible for individual projects

Transparent; simplified review process Not transparent; cumbersome review


process
Lower transaction costs and less time for High transaction costs and more time for
benchmarks setting benchmarks setting
Rewards any program that has lower costs Rewards any program that has lower costs
compared to benchmarks compared to the average of benchmarks

2.3 Benchmark Setting- Issues and Options

As with program-specific baselines, there is no single or objective procedure for


establishing a benchmark. Instead, there is a series of alternative methodological options
that can be considered for setting benchmarks:

1. Benchmarks can differ based on the availability and source of data. They can
rely on historical data on past performance of existing outputs and costs within a
sector. Or, they can rely on Projections of emerging changes in demand, resource
prices, turnover, availability of capital, sector restructuring and public policies.

2. Benchmarks can differ depending on the sample population on which they are
based. They can be based on information of all programs in a given ministry.

3. Benchmarks can differ based on their stringency of setting. They can be set to
reflect the average (or median) value of the use of programs under the same
ministry. They can also be set at the better-than average value relative to the
sample population to ensure some improvements in efficiency.

4. H
 ybrid approaches that adopt average value for some outputs and better-than
average value for other outputs, because a uniform approach for benchmark
setting may not be appropriate for all output groups due to variations in
technology and input-mix.

5. Benchmarks can also be set on the basis of expert judgment and stakeholder
processes, which are less empirically based.

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6. Time-varying behavior- Use of the same benchmarks over long time even for
the same output group may not be appropriate because it presumes that there is no
scope for improvement in productivity. There may also be variations in input
costs due to unforeseen events such as energy price shocks, new resource
discoveries, technological innovations, changes in public policy and regulations
etc. Therefore, benchmark updating at regular interval may be needed to respond
to ongoing evolution in both domestic and external markets.

Once benchmarks are set, an agency can develop a system of rewarding the activities that
significantly improve upon their peers. At first sight, average benchmarks might appear
to be more “empirical” and “objective,” while better-than-average benchmarks might
appear to be subjective because they rely on choosing an “arbitrary” threshold. However,
the average (or median, etc.) value is also equally arbitrary threshold for setting a
benchmark, because an average value conceals more than it reveals.

Thus we have different types benchmarks as indicated in Table-2. Ideally benchmarks


should be stringent (having better than value) and dynamic (updated over time), but
unique for an output (or group of output) based on historical and aggregate values.

Table-2 Types of Benchmarks Options

Items Alternative-1 Alternative-2

Source of Data Historical (on the basis of Projection by fitting trends


past values) and extrapolating for future
Type of data Time series ( data for the Cross section ( data for the
same output group over same output for different
time) agencies in a given year)
Population / Sample All projects (old and new) Only new projects

Aggregation Sector-wide average value Disaggregated (different


(mean or median) adopted benchmarks for the same
for the output for all output in different agencies)
agencies
Stringency Average value (mean or Better-than-average value
median)
Dynamics Fixed over time Updated over time

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3 Mathematical Models on Benchmarks

Best example of the use of a mathematical model to determine benchmarks is to fit


hedonic regression equations. The method is used where the products are heterogeneous
and have wider variations in qualities. This is true for buildings and houses whose prices
depend on size, structure, location and many other characteristics. Housing mortgage
companies in Canada, UK and USA use hedonic model to determine housing prices while
providing mortgage finance to their clients. The model is described below.

A. Hedonic Model

Suppose, our objective is to estimate the construction cost of school buildings. Instead of
using engineering approach with detailed costs of manpower, raw materials etc. which
require huge data base, a hedonic model can be used to estimate the approximate cost of a
new school building. As the time, location, size, types etc of building projects are
different, they must be adjusted for while making the cost estimate. Under the hedonic
approach, a multi-variable hedonic regression equation is estimated by regressing
building prices on various characteristics of buildings:

Ln (BPit) = β 0 + ∑ β i ln (Xit) + uit

This equation is a simple lognormal hedonic function. Ln stands for natural logarithms.
BPit = Building prices for unit-i in time t, and
Xit = Different building characteristics as indicated below.

(1) Land area (square feet or square meter)


(2) Tenure of land: freehold, leasehold, public (represented by dummy variable)
(3) Type of building: Single storey, multistoried (represented by dummy variable)
(4) Number of storey
(5) Floor size (square feet)
(6) Number of rooms: class rooms, common rooms, canteens, stores, auditoriums,
laboratories, libraries, sports rooms, bathrooms/ toilets
(7) Number of garages and garage spaces/ No garage or parking spaces
(8) Age of the property.
(9) Central heating: none, full, partial (represented by dummy variable).
(10) Garden, playground (represented by dummy variable)
(11) Location (region) (represented by dummy variables)
(12) Location in relation to bus-stops, railway stations, hospitals, public parks, eating
places, shopping centres etc. (represented by dummy variables).

In the above equation, β i is the elasticity of the building cost (or price) with respect to
the respective characteristics i.e.
β i = δln (BPit) / δln (Xit) for all i = 1, 2, 3, …………….k

These β i's can be taken as benchmarks for adjusting buildings costs for variations in
characteristic of houses and apartments.

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B. Straight forward mathematical models

Some common and straight forward mathematical approaches to estimate buildings costs
are described below.

1) Adjustment for Location

Equation (1) is to be used to adjust the previous projects cost data for the City Cost
Index.

CA = CN (IA / IN) (1)

Where CA = cost in dollars for city A;


CN = national average cost in dollars;
IA = Price index for city A;
IN = Price index based on the major city.

2) Adjustment for Time (to consider the impact of inflation)

We can use equation (2), which uses the change in value of an index between two years,
to calculate an equivalent interest rate.

Icurrent / Ireference = (1 + r )ª (2)

Where a = number of years between current year and reference year;


Icurrent = Index for current year;
Ireference = index for reference year;
r = interest rate

3) Adjustment for Size

The use of cost information from a previous project to forecast the cost of future projects
has to be adjusted for the difference in size between two projects. Simplest method is to
use a linear formula.

4) Adjustment for Height, Exterior Wall and Structure Type

Optional parameters can be estimated to account for these variations in engineering and
structural characteristics.

3. Policies and Measures for Cost Reduction

It is not enough to set benchmarks. Various policies and measures may also be taken for
cost reduction. Some of these policies are indicated in Table-3.

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Table-3 Cost reduction policies and measures

Policies Measures
1. Ensure that work practices are aligned with 1.1 Continue inclusion of values in the
the vision, mission and objectives specified performance parameters.
in the Strategic Business Plan and Master 1.2 Enhance existing learning and
Plan of the Ministry. development programs.
1.3 Align recruitment and selection policies
and practices.

2. Improve transparency and consistency of 2.1 Develop management structure to


decision making. enhance transparency in decision making.
2.2 Develop procedures to ensure
enforcement actions are consistent and
appropriate.
2.3 Review implementation of the
management framework with overall
objectives of the agency.

3. Improve enforcement regime. 3.1 Review enforcement rules and


procedures and suggest changes for
improvement.
3.2 Establish effective analytical methods for
assessing enforcement strategies.

4. Develop and strengthen risk management 4.1 Expand and improve risk management
strategy as an integral part of operational framework for identification, mitigation
and business strategies. and control of risks and contingent
liabilities
5. Engage cooperatively with all stakeholders. 5.1 Enhance consultation activities with
stakeholders
6. Increase overall efficiency by optimal use of 6.1 Enhance cost consciousness of all staff.
all resources – man, materials, machines and 6.2 Have an action plan for cost efficiency
services. for the short and medium term .

7. Continuous improvement in the agencies 7.1 Improve quality and delivery of


services, processes, techniques, systems, public goods and services.
knowledge and information management. 7.2 Establish world-class works culture
for clients’ satisfaction.
7.3 Upgrade technology to achieve
efficiencies.

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8. Formulate policies and set up institutes for 9.1 Integrated Planning - Asset
purchase, sale and maintenance of both management decisions are integrated with
financial and non-financial assets. strategic planning.

9.2 Acquisition Planning - Asset planning


decisions are based on an evaluation of
alternatives to ownership and demand
management. The evaluations should include
a comparison of life-cycle costs, benefits and
risks.

9.3 Accountability - An effective


framework is established to identify
accountability for asset conditions, use and
performance.

9.4 Disposal Planning - A framework for


the disposal process may be designed
indicating methods to achieve the best net
return.

9.5 Control Framework - An effective


internal asset control mechanism is
established for formulation of asset policies
and procedures and use of appropriate
information systems.
9. Maintain a high level awareness and 9.1 Maintain sound and cordial working
compliance of government policy directions. relationships with the Minister, and all
Ministries, Aimags and other Agencies.
9.2 Support the timely implementation of all
government directives.
9.3 Support the Medium Term Expenditure
Policy and Framework of the Ministry of
Finance.
10. Create a work environment that attracts 10.1 Develop a more flexible employment
and develops motivated, capable and framework.
high-performing officials. 10.2 Develop and embed a high performance
culture.
10.3 Develop workforce plans and systems
which reward the best performers and
punish the poor performers.
11. Deliver enhanced level of organisational 11.1 Continuously improve the quality of
integrity, ethics, probity, governance and monitoring, reviewing and reporting.
accountability. 11.2 Establish and implement appropriate
fraud, ethics and privacy awareness
policies, rules and procedures.
11.3 Establish and ensure effective and

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efficient operation of the Audit and Risk


Committee.
4 Practical examples of benchmarks setting

In this section we provide some practical examples of Benchmarks for the Mongolian
budget such as benchmarks for composition of output cost, benchmarks for salaries and
wages, benchmarks for administrative and headquarter expenditure, and escalation
factors for different components of output cost.

We also discuss various types of benchmarks such as cost dimensions benchmarks,


quality dimensions benchmarks, better practice benchmarks, efficiency dimension
benchmarks and fixed assets activity benchmark.

4.1 Benchmarks for Program Budget of MOECS

Three pilot ministries viz. MOECS, MFA and MOSWL have introduced program
budgets for the year 2008 and have used benchmarks for estimation of output budgets for
different programs. These program budgets are in the right directions and consistent with
output budgeting, because a program is a combination of multiple outputs and activities.
These ministries should be complemented and congratulated for their pioneering works in
program budgeting. In fact, for many developed countries, including Australia and New
Zealand, program budgets were the first steps towards moving to accrual output costing
and output budgeting on the basis of performance management.

4.2 Cost, Efficiency and Quality Benchmarks

Budget entities can compare their own performance against the benchmarks and use this
information to diagnose and detect areas of concern in terms of the composition of cost,
efficiency and quality and highlight measures for improvement. Thus, there are three
broad categories of benchmarks:

(a) Cost Dimension Benchmarks


(b) Efficiency Dimension Benchmark
(c) Quality Dimension Benchmarks

4.2.1 Cost Dimension Benchmarks

Aggregated benchmarking measures can be estimated for different components of cost.


Major cost items include the following:

1. Overall cost; 7. Postage and telecommunications;


2. Compensation for labor; 8. Administrative expenses;
3. Goods and raw materials; 9. Inventories and maintenance;
4. Transport, 10. Miscellaneous overheads;
5. Utilities- water, electricity, fuel; 11. Depreciation and capital charges; and
6. Travel and tour; 12. Contingencies.

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As the scope of functions and the input-mix vary among line ministries and agencies, it is
difficult to fix a set of universal benchmarks for different components of unit costs,
which would hold good for all agencies and at all times. It is also not possible to compare
benchmarks with other countries because they have different levels of living and different
socio-economic environment. It will be more practicable to compare one’s performance
at present with one’s own performance in the past. There should be continual endeavor
for any agency to improve its own productivity and efficiency over time. Therefore, a
rule of thumb benchmark for cost escalation for a component of cost could be as follows:

(a) Benchmark for Cost escalation factor for a component of cost = Rate of increase of
the appropriate price or cost of living index minus an accepted efficiency factor.

For example, if the general cost of living index rises by 6 percent, and an agency decides
that the labor productivity must increase by at least 0.5 per cent, then the wage rate may
be allowed to increase by 5.5 percent. When the wage rates are fixed by government, an
agency has to accept those benchmarks, otherwise it will lead to unnecessary labor
relations conflicts and legal disputes between management and trade unions. However,
for other inputs, goods and services, an agency can apply the above mentioned
benchmarks for cost escalations over time.

4.2.2 Quality Dimension Benchmarks

Average wage cost need to be adjusted for qualifications and experiences of staff.
The first quality benchmark of the staff is the average length of service of the staff in a
ministry which is an indicator of stability and skill retention. The second overall
benchmark which can provide a broad indication of quality of the staff is to measure the
educational levels of the employees. However, it should be noted that education levels
and years of service are only two factors shaping the overall skill set. Other factors such
as employee training and related work experience in other organisations are also relevant
when evaluating the overall skill set of the work force. In recent years, the number of
professionally qualified staff has increased and there has been a focus by the government
to recruit and promote professionally qualified staff.

4.2.3 Better Practice Benchmarks

A general benchmark used as an indicator of the adoption of better work practices in an


organization is the utilization of shared services within it. Shared services mean the
consolidation, standardization and reengineering of support process (such as finance,
audit, personnel, administration etc.) into one department that serves the entire
organization. Better work practices for shared services include strategy to:
(a) standardize and simplify rules and procedures;
(b) employ and consolidate common systems;
(c) take advantage of economies of scale; and

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(d) eliminate duplication of efforts.

Other better practices include the following measures:

(a) Budgets should be linked to strategic business plans, millennium development


goals, master plans and national development plans.
(b) Large ministries and agencies can use budget modeling systems, linking cost
management approaches and other data sources with budgeting.
(c) Budget preparation performance can be improved by standardization of budget
preparation guidelines; preparation of manuals on different concepts, benchmarks
and sources of data; preparing uniform time schedules; and reducing the number of
budget centres and levels of decentralized authority.

4.2.4 Efficiency Dimension Benchmark

The cycle time to collect the regular data and information, and to prepare standard reports
and budgets etc. for the parliament indicates the staff efficiency for formulation of
budget. Total Budget Cycle Time for an agency or budgetary entity can be taken as the
Budgeting and Analysis activity efficiency benchmark.

4.2.5 Fixed Assets Activity Benchmarks

Fixed assets are physical resources used for production of goods and services. They are
long-term in nature and subject to depreciation. Such assets include equipment
(machinery, computers, furniture, and tools), building structures (offices, factories,
warehouses) and land.

Accurate and timely acquisition, tracking, maintenance and disposal of fixed assets are
objectives of asset management. This entails recording, updating, depreciating and
disposing of fixed assets in the accounting books in a timely and accurate manner. The
following benchmarks can be used to judge asset efficiency:

(a) Overall Asset Cost Benchmark = Total fixed assets activity cost / Total
organisational expenditure
(b) Asset Cost per Activity = Total fixed assets activity cost / Annual number of
fixed assets transactions during the year.

4.3 Benchmarks for composition of cost

In this section we examine the trends of composition of current expenditure (which can
be treated as total output cost) for 19 major line ministries/ budget entities 14 in three

14
These budget entities include AISI, GCC, MIES, MCUD, MOD, MOF, MOFDA, MOFE,
MOFRA, MOH, MOIT, MOJIA, MONE, MORTT, OCS, ODPM, OOP, OPG, and OPM.

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budget years 2006-2008. Current expenditure has been grouped into the following broad
heads:

1. Compensation to labor (which includes wages, salaries, bonus, social insurance


contributions by the government, and one-time benefits and allowances to staff)
2. Goods and services cost
2.1 Office expenses (stationery, printing, posting, books)
2.2 Utilities (electricity, fuel, heating, POL, water)
2.3 Missions (both domestic and foreign)
2.4 Payment to works executed on behalf of the government
2.5 Rent
2.7 Others

4.3.1 Benchmarks for composition of output cost


(On the basis of cross-section data)

Because of significant increase in wages in the Budget for 2008, it is not meaningful to
compare composition of total cost in 2008 with that in 2006 and 2007. However, we can
examine the composition of total cost in different budget entities for the year 2008, an
analysis of which indicates that the share of each component in total expenditure varies
widely among these line ministries. This is due to the fact that the Line ministries have
different outputs and activity mix as mandated by the government and have different skill
of the workforce. However, for any component, the average share for 19 entities in
2008 can be taken as a benchmark. These benchmarks are indicated in Table-4.

Table-4: Benchmarks for composition of output cost


(In percentage of total output cost)
Benchmarks
Items = Average Min Max
1. Compensation to labor in total output cost 59 13 86
2. Goods and service cost 41 14 87
2.1 Office expenses (stationery, printing, telecom, books) 3 0 13
2.2 Utilities (Electricity, fuel, heating, POL, water) 8 0 21
2.3 Missions (Domestic and Foreign) 3 0 12
2.4 Payments for works on behalf of the government 10 0 83
2.5 Rent 1 0 9
2.7 Other goods & services 17 0 40
3. Output total cost (1+2) 100 100 100
Source: Estimated by the author on the basis methodology indicated in the text and the data
taken from the Budget 2008.

The share of compensation to labor in total current expenditure has an average of 59


percent with minimum of 13 percent in the Ministry of Road, Transport and Tourism
(MORT&T) and maximum of 86 percent in the General Council of Courts (GCC). This
average share of labour can be taken as the benchmark for labour cost. Eight budget
entities (viz. MOFRA, MOH, MOFDA, MOIT, MOFE, MORTT, PARLMT, MCUD)
have labor share less than the Benchmark, while eleven budget entities (viz. MOJIA,

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MOF, MOD, MONE, AISS, OPM, ODPM, OCS, GCC, OPG, MIES) have share
exceeding the Benchmark.

Setting a benchmark does not mean than an entity cannot have share of compensation to
labor or any other components exceeding the benchmark. Benchmark is only a norm and
a norm may not hold good for many reasons such as different output mix, input mix,
heterogeneity in inputs and outputs and variations over time and regions. So if an agency
had, say labor share in total output cost, exceeding the benchmark (59 per cent), it needs
to provide detailed analysis and convincing and valid reasons in their budget for such
high share of compensation to labor.

4.3.2 Comparison of expenditure in Mongolia with that in selected countries

It may be interesting to examine the components of central government expenditure in


Mongolia as compared with those in Australia and selected countries in Asia (Table-5).
As the structure of fiscal federalism and the fiscal powers of the central and sub-national
governments (i.e. provinces and local governments) and also the level of development
differ from country to country, it is neither desirable nor feasible to set unique
international benchmarks for any component of total expense as percentage of GDP.
However, it is worth noting that the total central government expense and the
compensation of labor and social benefit as percentages of GDP are much higher in
Mongolia than those in selected developing countries, but are lower than those in
Australia. The higher share of current expenditure in GDP in Mongolia is due to the fact
that its population is dispersed over vast geographical area and it has low economic size
in terms of GDP.

Table-5 Central government expenses by economic classification


(In percentage of GDP)
Items Mongolia Australia Bangladesh Macao India Indonesia Korea Thailand

2003 2005 2004 2005 2003 2004 2005 2005


1.Compensation 8.6 9.3 2.2 6.0 1.6 2.2 2.4 5.7
of labor
2.Use of goods 10.4 6.5 1.5 2.7 1.9 1.3 2.1 3.6
and services
3.Consumption 0.0 1.4 0.0 0.0 0.0 0.0 0.0 0.4
of fixed capital
4.Interest 1.1 1.6 1.7 0.0 4.4 2.8 1.3 1.3

5.Subsidies 0.6 1.4 0.3 0.6 0.0 4.0 0.1 1.3

6.Grants 0.8 0.3 1.5 0.0 0.0 5.7 8.1 2.4

7.Social 7.5 10.7 0.9 0.8 0.0 1.0 2.9 1.3


benefits
8.Other 0.0 3.0 0.8 2.2 0.0 0.0 4.5 0.4
expenses
Total 29.0 34.2 8.9 12.3 7.9 17.0 21.4 16.4
expenditure
Source: Government Finance Statistics Yearbook 2006, IMF, Washington D.C.

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4.3.2 Time series data on composition of current expenditure

Table-6 presents the trends of current expenditure of the Mongolian central government
during 2002-2008 as given in the Mongolian Budget for 2008. It may be observed from
the table that current expenditure as percentage of GDP declined continuously from 29.8
percent in 2003 to 26.4 percent in 2006 but it jumped by 5 percentage points to 31.1
percent in 2007 and again by another 5 percentage points to 36 percent in 2008 due to
substantial upward revision in government salaries. Among other components, purchase
of goods and interest payments as percentage of GDP had declining trends, while both
subsidies and transfers have witnessed substantial increases, much above the medium
term budget forecasts, during the period under study. It is understood that a major part of
subsidies is being financed by the Mongolia Development Fund (MDF) generated by the
Windfall Tax on minerals- copper and gold. Presently, there had been higher realizations
under the Windfall Tax than the projections made under the Medium Term Budget
Forecast (MTBF) due to high international prices of copper and gold. However, due to
normal business cycles in future, such windfall gains for Mongolia and realizations for
the Mongolia Development Fund may be reduced. For fiscal sustainability, it is,
therefore, necessary for the government to keep a check on the rise of subsidies in future.

Table-6 Trends of composition of current expenditure of the Central Government of


Mongolia during 2002-2008
Items 2003 2004 2005 2006 2007 2008 2008 2008
Final Final Final Final Final MTBF line MOF
min BE
Composition of Current Expenditure (as percentage of GDP)

1.Current Expenditure 29.8 28.2 26.5 26.4 31.2 32.2 35.4 36.0
A. Goods & Services 20.0 18.6 17.1 18.6 14.7 18.7 17.8 18.7
- Wages & salaries 8.0 6.7 6.3 5.3 6.8 9.5 7.6 10.4
- Purchase of goods 12.0 11.9 10.8 13.3 7.9 9.3 10.2 8.3
B. Interest payments 1.2 1.2 0.9 0.5 0.4 0.6 0.4 0.4
C. Subsidies & transfers 8.6 8.4 8.5 7.3 16.1 12.9 17.2 17.0
- Subsidies 0.6 0.6 0.4 0.3 7.3 0.3 7.0 6.9
- Transfers 7.9 7.8 8.2 7.0 8.8 12.5 10.2 10.0
Composition of Current Expenditure (as percentage of total)

1.Current Expenditure 100 100 100 100 100 100 100 100
A. Goods & Services 67.1 66.1 64.4 70.5 47.2 58.2 50.2 51.8
- Wages & salaries 26.9 23.9 23.8 20.0 21.7 29.4 21.5 28.8
- Purchase of goods 40.2 42.2 40.6 50.5 25.4 28.9 28.7 23.0
B. Interest payments 4.1 4.1 3.4 1.8 1.4 1.8 1.1 1.1
C. Subsidies & transfers 28.8 29.8 32.1 27.7 51.4 40.0 48.7 47.1
- Subsidies 2.2 2.1 1.4 1.3 23.3 1.1 19.9 19.3
- Transfers 26.7 27.7 30.8 26.4 28.1 38.9 28.8 27.8
Source: Draft 2008 Budget, Ministry of Finance, Government of Mongolia, Dec 2007.

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As regards composition as percentage of total current expenditure, the share of wages has
increased from 27 percent in 2002 to 29 percent in 2008, while payments for the purchase
of goods declined significantly from 40 to 23 percent during the period. However, it is a
matter of concern that the share of subsidies in current expenditure has jumped from 1.3
percent in 2006 to 23.3 percent in 2007.

4.4 Benchmarks on Compensation to Employees

Prior to the wage revision for the public sector employees in Mongolia for 2007 and
2008, Tarun Das and E. Sandagdorj (July 2007) examined the trends of average
personnel cost in MOF, MOECS and MOH of Mongolia during 2004-2007 compared
with that in the corresponding Ministries and the Central Govt of India. It was compared
with India because India had almost the same per capita income (although in recent years
Mongolia has higher per capita income than India). Comparative analysis indicated that:

(a) The average expenditure per government employee in any Ministry in India is
much higher than that in Mongolia.
(b) Even if we account for 30% rise of salaries for government employees in
Mongolia in 2006, the present average salary per person in Mongolia is less than
half of that in India.
(c) The differences will be much larger if one considers the following factors:
(i) The personnel costs for India include only wages and salaries and do not
include contributions made by the government towards provident funds,
pensions, life insurance and health care.
(ii) The Indian government officials also receive many other in-kind benefits
such as government accommodation and its maintenance at concessional
rate, use of staff car or transport allowance, free leave travel, free medical
treatment, free telephones, newspapers, computers at residence etc.

Although Indian example cannot be considered as one of the international best practices,
the fact is that such in-kind allowances and benefits do exist in many developing
countries and their sudden withdrawal may result in a demand by employees for
substantial increase in cash emoluments, otherwise it may affect adversely efficiency of
government officials.

Judged by these cases, Das and Sandagdorj concluded that the personnel costs in
Mongolian government appear to be very reasonable and modest, and may even justify
some increase to compensate for more responsibilities assigned in the Strategic Business
Planning, and need for skill upgradation to deal with budget modernization program, high
inflation, recent economic boom and rise of private sector salaries.

In fact, as mentioned earlier, the minimum wage was increased by 30 per cent and set at
Tog 69,000 in 2007. The 2008 Budget, on the basis of an increase of civil servants’ wage
and living cost of population, further assumes that the minimum wage would increase to

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Tog 90,000 from October 2007 and Tog 100,000 in 2008. As a result, the current
average salary of civil servants in Mongolia would be more or less comparable to that in
similar developing countries like India, although the average salary of civil servants in
Mongolia has increased 170 times since 1991.

5.5 Administrative Expenditure

Terms of reference (TOR) for Strategic Planning Expert include the following task
relating to administrative expenditure:

“Assess the administrative expenditures of Ministry of Finance (MOF), Ministry of


Health (MOH), Ministry of Education, Culture, and Science (MOECS), and Ministry of
Social Welfare and Labor (MSWL) and if necessary redefine and set ceilings on such
expenditures”.

5.5.1 Administrative Expenditure at the National Level

Administrative expenditure has various connotations and can be measured in many ways.
The functional classification, known as the Classification of Functions of Government
(COFG), was developed by the Organisation of Economic Cooperation and Development
(OECD) and published by the United Nations Statistical Division. The Government
Finance Statistics Manual (GFSM 2001) published by the International Monetary Fund
(IMF) adopts the same functional classification with minor modifications for government
expenditure. The COFG adopted by the IMF GFSM 2001 is reproduced in Table-16.
Expenditures under the COFG code 701 for General Public Services (comprising sub-
codes 7011 and 7018) and code 703 for Public Order and Safety (comprising sub-codes
7031 to 7036) can be taken as the Civil Administrative Expenditure at the national level.
In a broad sense, the defense expenditure may also be included to estimate the total
administrative expenditure of a government. Tables 17-A and 17-B present functional
classification of expenditures for the Central and General Government of Mongolia
respectively.

We have mentioned earlier that there are significant variations in the structure of fiscal
federalism, fiscal powers and scope of economic activities of the central and sub-national
governments (i.e. provinces and local governments) and level of development in selected
countries in Tables-17-A and 17-B. It is, therefore, neither desirable nor feasible to set
unique international benchmarks for administrative cost as percentage of total outlay.
However, it may be noted from Table-17-A that the share of administrative expenditure
in the total central government outlay in Mongolia is lower than that in Bangladesh,
India, Indonesia and Myanmar; although it is higher than that in Australia, Macao and
Thailand.

Table-17-B indicates that the share of administrative expenditure in the total general
government outlay in Mongolia is lower than that in Singapore; while it is higher than

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that in Australia and Japan; and more or less comparable to that in Bhutan, Macao, Hong
Kong and Maldives.

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Table-16: Classification of Expense by Function of Government

7 Total outlays 706 Housing and community amenities


701 General public services 7061 Housing development
7011 Executive and legislative organs, financial 7062 Community development
and fiscal affairs, external affairs 7063 Water supply
7012 Foreign economic aid 7064 Street lighting
7013 General services 7065 R&D Housing and community amenities
7014 Basic research 7066 Housing and community amenities n.e.c.
7015 R&D1 General public services 707 Health
7016 General public services n.e.c.2 7071 Medical products, appliances, and equipment
7017 Public debt transactions 7072 Outpatient services
7018 Transfers of a general character between 7073 Hospital services
different levels of government 7074 Public health services
702 Defense 7075 R&D Health
7021 Military defense 7076 Health n.e.c.
7022 Civil defense 708 Recreation, culture, and religion
7023 Foreign military aid 7081 Recreational and sporting services
7024 R&D Defense 7082 Cultural services
7025 Defense n.e.c. 7083 Broadcasting and publishing services
703 Public order and safety 7084 Religious and other community services
7031 Police services 7085 R&D Recreation, culture, and religion
7032 Fire protection services 7086 Recreation, culture, and religion n.e.c.
7033 Law courts 709 Education
7034 Prisons 7091 Pre-primary and primary education
7035 R&D Public order and safety 7092 Secondary education
7036 Public order and safety n.e.c. 7093 Post-secondary non-tertiary education
704 Economic affairs 7094 Tertiary education
7041 General economic, commercial, and labor 7095 Education not definable by level
affairs 7096 Subsidiary services to education
7042 Agriculture, forestry, fishing, and hunting 7097 R&D Education
7043 Fuel and energy 7098 Education n.e.c.
7044 Mining, manufacturing, and construction 710 Social protection
7045 Transport 7101 Sickness and disability
7046 Communication 7102 Old age
7047 Other industries 7103 Survivors
7048 R&D Economic affairs 7104 Family and children
7049 Economic affairs n.e.c. 7105 Unemployment
705 Environmental protection 7106 Housing
7051 Waste management 7107 Social exclusión n.e.c.
7052 Waste water management 7108 R&D Social protection
7053 Pollution abatement 7109 Social protection n.e.c.
7054 Protection of biodiversity and landscape
7055 R&D Environmental protection
7056 Environmental protection n.e.c.

Note: (1) R&D = Research and development. (2) n.e.c. = not elsewhere classified.

Source: Government Finance Statistics Manual (GFSM 2001), International Monetary Fund (IMF),
Washington D.C.

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Table-17-A Composition of Central Government Outlay (in percent of total outlay)


Mongo Austra Bangla Macao India Indone Myan Thai
lia lia desh sia mar land
Items 2005 2005 2004 2005 2003 2004 2002 2005
1.General public services 32.2 25.4 36.7 16.5 60.6 74.1 23.5 17.6
2. Military services 5.9 6.1 9.9 0 13.4 6.6 21.5 6.3
3.Public order and safety 4.0 1 6 15.4 0 0.7 0 5.5
4.Economc services 21.2 6.6 8.4 17.6 16.8 6.2 31.4 30.3
5.Environmental 0.4 0.3 0.1 3.2 0 0 0 0.5
protection
6.Housing & comm. 0.3 0.6 9.3 0.8 5.3 0.9 1 2.1
services
7.Health services 4.7 14.9 7 10.8 1.5 1.4 5.3 8.4
8.Recreation, culture & 2.2 0.9 1.6 12.8 0 0.6 0.7 0.6
sports
9.Education services 6.3 9.6 17.1 14.2 2.4 4 14.6 20
10.Social protection 22.8 34.6 3.9 8.7 0 5.5 2 8.7
Total expenditure 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Memo Items:
Area (sq. kms) 1564 7687 144 0.028 3288 1919 678 514
Population (million) 2.6 20 142 0.5 1095 221 51 64
Population density/ sq. 1.7 2.6 986 17857 333 115 75 125
km.
Per capita GDP (US $) 736 36032 423 14754 736 1302 … 2750
Admn. expense-1 (1+3) 36.2 26.4 42.7 31.9 60.6 74.8 23.5 23.1
Admn. expense-2 42.1 32.5 52.6 31.9 74.0 81.4 45.0 29.4
(1+2+3)

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Table-17-B Composition of General Government Outlay (in percent of total outlay)


Mongo Austra Japan Bhutan Hong Macao Mal Singa
lia lia kong dives Pore
Items 2005 2005 2004 2000 2004 2005 2005 2004
1.General public services 19.8 12.2 13.6 22.4 19.9 16.5 21.9 9
2. Military services 4.7 4.5 2.6 0 0 0 10.1 28.8
3.Public order and safety 6.5 4.7 3.8 5.4 10.5 15.4 2.3 6.2
4.Economc services 11.1 11.6 10.7 46.4 9.7 17.6 13.5 12.1
5.Environmental 0.0 1.3 3.6 0 3.2 3.2 0 0
protection
6.Housing & comm. 1.0 2.5 2 2.3 7.4 0.9 20.4 13.2
services
7.Health services 10.5 17.8 19 9.2 12.8 10.8 8.7 5.8
8.Recreation, culture & 2.7 2.5 1.4 0.9 3.3 12.8 0 0.1
sports
9.Education services 19.3 14.9 10.7 13.4 19.9 14.1 14.3 21.6
10.Social protection 24.3 28 32.6 0 13.3 8.7 8.8 3.2
Total expenditure 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Memo Item:
Area (sq. kms) 1564 7687 378 47 1 0.028 0.3 0.7
Population (million) 2.6 20 128 0.6 7 0.5 0.321 4.3
Population density/ sq. 1.7 2.6 339 13 7000 17857 1070 6143
km.
Per capita GDP (US $) 736 36032 35484 1325 25592 14754 2326 26893
Admn. expense-1 (1+3) 26.3 16.9 17.4 27.8 30.4 31.9 24.2 15.2
Admn. expense-2 31.0 21.4 20.0 27.8 30.4 31.9 34.3 44.0
(1+2+3)
Source: Government Finance Statistics Manual (GFSM 2001), International Monetary Fund (IMF),
Washington D.C.

These observations lead to the conclusion that the administrative expenditures for the
Mongolian government either at national or sub-national levels can be considered to be
reasonable. However, there are various factors which lead to higher administrative costs
in Mongolia. Mongolia has a small (2.8 million) and dispersed population and its major
growth centre and the capital city of Ulaanbaatar is remote from the Aimags. It is also
remote from the economic activities of the neighboring countries- China and Russia.

Mongolia has a geographic area of 1,564,116 sq. Kms, 19th largest in the world. It
accounts for 1.3 percent of the world land area, but is a home for only 2.6 million people
accounting for 0.04 percent of the world population. Accordingly, the population density
of 1.7 per sq. km is very low in Mongolia compared with world average of 52.5 per
sq.km. A small size of population, low density and long distances between the capital and
aimag economic centres with associated high costs for transport and communications
lead to higher current and administrative expenditures in Mongolia.

Recently Mongolia has also adopted an open door policy for trade and investment. While
increased global integration generates opportunities for trade and development, it also
raises the need to manage new risks related to international economic and financial

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shocks, international crime, smuggling, immoral human traffic, money laundering,


terrorism and spread of contagious disease. All these also lead to higher public
administrative and infrastructure expenditure.

These observations reinforce our earlier conclusion that the administrative expenditures
for the Mongolian government either at national or sub-national levels are not high as
judged by the global benchmarks.

5.5.2 Administrative Expenditure in the Line Ministries

In a broad sense, all current expenditures of the headquarter (HQ) can be taken as the
administrative expenditure related to a line ministry because the HQ is in charge of
formulation of policies, planning, execution, implementation and evaluation of all
programs, and supervising and providing advice to Aimags and non-governmental
organisations working under it.

Das and Sandagdorj (2007a) had examined the headquarter budget in relation to total
sector budget. It was noted that the share of HQ budget in the total sector budget of the
Line Ministries was very small (see Tables 18.1 and Table 18.2). As there are fixed
costs for administration, the share is higher for smaller Ministries and lower for larger
ministries.

Table 18.1 HQ Budget as % of Ministry’s Total Budget in 2003


Ministry Sector budget As % of total Ministry’s HQ Budget as
(Bln tug) budget for 10 HQ budget % sector
ministries (mln tug) budget
Education 126.9 23.3 179.2 0.14
Finance 123.6 22.7 609.2 0.49
MOSWL 115 21.1 133.3 0.12
Health 62.3 11.4 224.1 0.36
Infrastructure 50.2 9.2 257.3 0.51
MOHIA 40.9 7.5 212.6 0.52
Food & Agrl 11.3 2.1 264.6 2.34
Foreign Affairs 8 1.5 310.4 3.88
Environment 4.3 0.8 145.1 3.37
Industry & Trade 2.3 0.4 275.9 12.00
Total 544.8 100 2611.7 0.48
Source: Mongolia Budget for 2003

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Table 18.2 Budget Allocation in 2006

Ministry Sector budget As % of total Ministry’s HQ HQ Budget as


(Bln tug) budget for 10 budget % sector
ministries (mln tug) budget
MOF 312.2 27 1227 0.39
MOECS 208.7 18 287 0.14
MOSWL 263.2 22 925 0.35
MOH 103.2 9 436 0.42
MOJ 61.2 5 489 0.80
MOT 72.2 6 534 0.74
MOE 36.1 3 609 1.67
OTHERS 119.8 10 37203 31.06
TOTAL 1176.7 100 41710 3.54
Source: Mongolia Budget for 2006

Nevertheless, in large sectoral ministries such as MOF, MOH, MOSWL and MOECS, the
officials are directly involved in actual service delivery down to the Aimags, Soums and
grassroots level, in addition to their normal functions relating to planning, distribution,
regulation and coordination. Therefore, a very small HQ budget may put constraints on
their efficiency and productivity. Besides, if they are required to prepare SBP every year
and to shift from the system of cash accounting and input budgeting to accrual accounting
and output budgeting, there is not only need for increasing the size of the Departments at
the HQ but also upgrading the capacity at various levels.

In fact, it has been observed that in any line ministry there is no sufficient and dedicated
staff to prepare strategic business plans and to prepare accrual output budgeting (AOB).
Thus, there is a need to enhance both the number of staff and the HQ budget for these
ministries.

More up-to-date information on administrative expenditures in three line ministries viz.


MOH, MOECS and MOSWL, obtained from the respective ministries, are presented in
Tables- 19.1, 19.2 and 19.3 respectively.

Table-19.1 HQ Expenditure for Ministry of Health (Million tug)

Year Sector Overhead HQ exp Number of HQ exp HQ exp


current current Staff as % of as % of
expend. expend. sector exp current exp
2004 na 73995 2313 60 na 3.13
2005 na 80266 2894 73 na 3.61
2006 na 97369 4158 73 na 4.27
2007 na 124659 5101 75 na 4.09
2008 na 169881 8471 75 na 4.99

Table-19.2 HQ Expenditure for Ministry of Education (Million tug)

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Year Sector Overhead HQ exp Number of HQ exp HQ exp


current current Staff as % of as % of
expend. expend. sector exp current exp
2004 137846 9162 208 62 0.15 2.27
2005 146927 10801 228 63 0.16 2.11
2006 191755 11657 287 70 0.15 2.46
2007 228520 14076 421 70 0.18 2.99
2008 326684 20433 634 70 0.19 3.10

Table-19.3 HQ Expenditure for Ministry of Social Welfare & Labor (Million


tug)
Year Sector Overhead HQ exp Number of HQ exp HQ exp
current current Staff as % of as % of
expend. expend. sector exp current exp
2004 153117 1204 167 41 0.11 13.87
2005 186384 1549 179 41 0.10 11.56
2006 260904 6180 271 51 0.10 4.39
2007 445546 7573 362 53 0.08 4.78
2008 453279 4008 461 57 0.10 11.50

Tables 19.1 to 19.3 lead to the following main observations:

i. HQ expenditure of a ministry as percentage of the sector total expenditure is


very small amounting to less than 0.2 per cent.

ii. HQ expenditure of a ministry as percentage of the ministry’s current


expenditure is also reasonable. For budget 2008, it is around 5 percent for
the Ministry of Health, around 3 per cent for the Ministry of Education,
Culture and Science and 11.5 percent for the Ministry of Social Welfare and
Labor.

iii. In recent years (particularly during the last three years) there has been an
increasing trend of the share of HQ expenditure in the ministry’s current
expenditure. This is mainly due to upward revision of the wages and salaries
for the public sector employees.

iv. For the Ministry of Social Welfare and Labor, there has been significant jump
of the ratio of HQ expenditure in the Ministry’s current expenditure from 4.8
percent in 2007 to 11.5 percent in 2008. This is due to combined results of
the upward pay revisions and changes in the rates of pensions and benefits of
social insurance.

It has been observed earlier that these ministries (MOECS, MOH and MOSWL) are large
ministries accounting for 60 percent of the total allocation in the central government
budget and are engaged in the delivery of vital social sector services. In addition to
maintaining internal and external security and building basic physical infrastructure for

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transport and communications, delivery of health, education and social security services
are the basic functions of the government. On considering these aspects and also noting
the administrative expenses at the national level observed in section 4.5.1 we consider
that the budget allocations made in 2008 are reasonable and can be considered as
benchmarks for budget allocations in future.

Table-20 Benchmarks for Share of HQ current expenditure budget


(in percent of the ministry’s current expenditure)

Line Ministry Benchmark

1. Ministry of Education, Culture and 3 percent


Science (MOECS)
2. Ministry of Health 5 percent

3. Ministry of Social Welfare and Labor 11 percent

It may be mentioned here that the “Health Sector Strategic Master Plan 2007-2008 and
the Medium Term Expenditure Framework” prepared jointly by the MOH, its related
agencies, and international partners like JICA, WHO, World Bank and other stakeholders
had estimated desirable share of the HQ budget in total health sector budget. According
to this report, the public sector health management expenditures (comprising
administration expenses of HQ, agencies, city and aimag health departments) amounted
to USD 2.26 million in 2004, which was 4.8% of the total state budget. The Expert Group
projected that this percentage should increase to 6.3% and 8.4% respectively for the
period 2005-2006 and 2007-2008.

The Report concluded that “In order to enable health sector to achieve its objective and to
implement successfully policies and strategies, the ministry and its agencies’ structure
and administration must be efficient and have human resources with high capability. In
addition, the sector’s management expenditure should be commensurate with the entire
sector’s expenditure budget. The intention of forecasting an increase in the public sector
health management expenditures is to enable the MOH to have capable professional staff
and an effective organisational structure and to perform and implement the Strategic
Master Plan in an effective and sustainable manner”. Benchmarks mentioned in Table-20
are consistent with these observations.

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Ren, Guoqiang and Qianying Zhang (2006) Benchmarking the Life Cycle Cost Management of
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