1. Introduction of Program Budgeting in Korea June 7, 2005 Sang Dae Choi Budget and Accounting Reinvention Office(BARO) Ministry of Planning and Budget

2. - Contents- - Contents- Ⅰ. The BARO and its Mission Ⅰ. The BARO and its Mission Ⅱ. Why Program Budget in Korea at this point Ⅱ. Why Program Budget in Korea at this point Ⅲ. Key Factors in Designing Program Budget Structure Ⅲ. Key Factors in Designing Program Budget Structure Ⅳ. Efficient Operation of the Program Budget Ⅳ. Efficient Operation of the Program Budget Ⅴ. Schedule to Introduce the Program Budget Ⅴ. Schedule to Introduce the Program Budget Ⅵ. Lessons and Recommendations Ⅵ. Lessons and Recommendations

3. 1 Ⅰ. The BARO and its Mission ■ ■ National Policy Task Meeting, chaired by the President (March 4. 2004) - Reform of budget structure and system - Reform of the government accounting system - Integrated fiscal information system ■ ■ Budget and Accounting Reinvention Office (BARO) - A government-wide task force (like JFMIP of the U.S.A.) Ministry of Planning and Budget (MPB) Ministry of Finance and Economy (MOFE) Ministry of Government Administration and Home Affairs (MOGAHA) Board of Audit and Inspection (BAI) - CPA and IT experts - Advisory committee, composed of experts from academia and the private sector

4. 2 Ⅰ. The BARO and its Mission (Continued) ■ ■ Mission : Establishment of Digital Budget and Accounting System -"Providing budget and accounting infrastructure for better strategic resource allocation and performance management" - One of the recent 4 fiscal reform agendas in Korea with National Fiscal Management Plan (as a MTEF) Top-down approach in budgeting Performance Management System ■ ■ Core Tasks - Redefining the scope of public finance - Revising the budget structure : Program Budget - Introduction of accrual accounting and double-entry bookkeeping - Establishing an integrated fiscal information system (IFIS)

5. 3 Ⅱ. Why Program Budget in Korea at this point 1. Input and Control Oriented Budget System so far ■ ■ There has been a positive effect on restraining wasteful expenditures in budget. ■ ■ However, a budget system incompatible with the aims of better strategic resource allocation and performance management CategoryName(#) ▪ ▪ Too many detailed activities to be managed (over 6,000 sesehangs) FunctionSection Jang(20) Subsection Kwan(66) Item Hang(550) Organization (office or bureau) Subitem sehang(1,400) ▪ ▪ Operating based on line-items not programs (49 moks / 102 semoks) Activity/ProjectSub-subitem Sesehang(6,000) ObjectDivision mok(49) Subdivision Semok(102)

6. 4 2. Barrier to Success of Fiscal Reform Agendas ■ ■ Regarding the 5-Year National Fiscal Management Plan, - Different functional classification with annual budget ※ The plan : 14 section/56 subsection, Annual budget : 20Jang/66Kwan - No program level between 550 items and 6,000 sub-subitems ■ ■ Also, in the process of top-down budgeting, - Absence of program level, which is critical in deciding sectoral and ministerial ceilings ■ ■ In regard with the Performance Management System, - No budget level appropriate for performance management - Not reflect a program’s full cost - No change in line-item centered method in budget execution management and account settlement

7. 6 Ⅲ. Key Factors in Designing Program Budget Structure 1. Setting up Programs to Link Budget with policy ■ ■ Excessively detailed current activities will be consolidated and then grouped as program level, which represents policy objectives. sectionSubsection 1 program1Activity1 Activity2 Activity3, 4… Program 2 Program3,4… Subsection 2 Subsection 3, 4…

8. 7 1. Setting up Programs to Link Budget with Policy (continued) ■ ■ Firstly, rearranging functional classification of expenditure budget (16 sections & 66 subsections). - Accordance of the MTEF and annual budget 16 Sections 1. General Public Services 2. Defense 3. Unification and Foreign Affairs 4. Public Order and Safety 5. Agricultural, Forestry, and Fishery 6. Industry and Small-Medium Enterprises 7. SOC (Transportation) 8. Communication 9. Science and Technology 10. Environmental Protection 11. Housing and Community Amenities 12. Culture and Tourism 13. Education 14. Social Welfare 15. Health 16. Expenditures not classified by major section

9. 8 ■ ■ Secondly, simplifying excessively detailed activities to a consolidated activity that links to programs Current systemProgram system Sub-subitem activityConsolidated activityProgram Preparation of statistics of marine products Supporting self- management marine products Assistant to Korea Fishing Port Association, etc. 1. Construction of fishery production foundation Development of fishery villages and fishing ports Construction of a fishes museum Construction of fishery tourism complex Fishery folk museum, etc. → 2. Development of tourism in fishery villages Construction of a national fishing ports Construction of digitalized fishery villages Construction of local fishing ports, etc. 3. Investment and management of fishery villages and fishing ports 1. Setting up Programs to Link Budget with Policy (continued)

10. 9 2. Allocation of Indirect Costs to Reflect a Program's Full Cost ■ ■ Personnel cost and operation cost will be allocated by programs. Current system (Personnel/ operation/ activity costs) Personnel cost Operation cost Activity 1 Activity 2 Activity 3 Activity 4 Activity 5 Activity 6.. Program system (Personnel+ operation+ program costs) Program1Program2Program3 … ■ ■ This will be implemented by stages. - In a short term, only personnel cost and operation cost of Offices and Bureaus will be allocated by relevant Offices and Bureaus’ programs. - In a long term, costs of supporting organizations within a ministry such as Planning and Management Office and Coordination Division will be allocated by relevant Offices and Bureaus' programs.

11. 10 3. Ensuring Accountability by Linking Programs with Organization ■ ■ In principle, a cross-cutting program among organizational units (ministries or offices/bureaus) will be avoided. ■ Linkage of performance and budget management by according the level of performance objective and policy program performance objective and policy program MinistriesMissionSection Strategic objectiveSubsection ↕↕ Offices and BureausPerformance objectivePolicy program Programs ↕↕ Divisions, subsectionsFiscal programUnit program Activities/Projects

12. 11 4. Enhancement of Autonomy in Line Ministries ■ ■ The activities and/or projects under programs, in principle, will be managed autonomously by line ministries. - The sectoral and ministerial expenditure ceilings will be decided on the basis of programs. ■ ■ Furthermore, the line-items will be greatly reduced. (49 divisions → less than 10 divisions) - The tentative divisions Personnel costs Acquisition of capital assets Operation costs Capital transfers Current transfers Other payments - The compartments between divisions will be minimized while compartments will carry out the role of the cost element in resource allocation, rather than input control.

13. 12 5. Improvement of Budget and Accounting Documents ■ ■ Formats and contents of budget and accounting documents show philosophy of a country on its fiscal management. - Line-item & control centered → Program & performance centered ■ ■ Uplifting range and quality of budget information - A program budget document to consolidate resources such as budget and public funds. - From figure-oriented to programs information-oriented ■ ■ Regarding account documents, - The results of cash-based budget execution, as program and activity standard from the current line-item centered - Additionally, accrual-based consolidated financial reports such as a report on fiscal status and a fiscal operation report by programs, will be provided separately.

14. 13 Ⅳ. Efficient Operation of the Program Budget 1. Role Changes of Line Ministries and Fiscal Authorities CurrentForward Line Ministries ▪ A lack of efforts to guarantee program performance performance ▪ Not taking initiative in deciding detailed budget activities activities ▪ ▪ Guarantee of accountability in program performance ▪ ▪ Higher discretion of detailed budget activities and operational autonomy Ministry of Planning and Budget ▪ ▪ Micro analysis of activities ▪ ▪ Input and control-centered resource allocation → → controlling each ministry’s budget in advance ▪ ▪ Macro analysis of policies and programs ▪ ▪ Program performance centered resource allocation → → coordination and adjustment of each ministry’s policies Ministry of Finance and Economy ▪ Management of government-wide bud ▪ Management of government-wide budget account settlement report as line-item centered ▪ ▪ Supplying budget account settlement information as program centered ▪ ▪ A partner of the macro resource allocation policy with the MPB Board of Audit and Inspection ▪ Account as regulation oriented ▪ Account inspection as regulation oriented ▪ Performance auditing of detailed activities ▪ ▪ Program performance-centered auditing ▪ ▪ Coordination of performance evaluation system management

15. 14 2. Budget Process Changes focused on Programs NFMP formulation & expenditure ceilings Budget request & compilation Performance evaluation & execution management Account settlement (T-1) year Jan. to Apr. (T-1) year May. to Sept. During T year (T+1) year Feb. to May ▪ Consult &adjust by programs (MPB & line ministries) ▪ Decide expenditure ceilings by sector and ministry on the basis of program consulting results Consult ▪ Consult new and large activities/projects under a program ※ Submission of program budget documents to the National Assembly(Oct.) ▪ Evaluate previous year’s performance ▪ Monitor execution results of programs and main activities by quarter ▪ Account settlement by programs and activities (cash-based) ▪ Separately, produce consolidated financial reports (accrual-based)

16. 15 Ⅴ. Schedule to Introduce the Program Budget The 1st stage (2004-2005) - Preparation of introducing the program budget ▪ Program budget structuring for all ministries ▪ ▪ Application of program structure for the MTEF(’05-’09) ▪ Test of program structure for FY 2006 budget The 2nd stage (2006) - Application of program budget for FY 2007 budget (Backed up by the current Fimsys) ※ Allocation of indirect costs by programs deferred The 3rd stage (2007) - Full-fledged operation of the program budget in FY 2008 budget (Backed up by the IFIS) ▪ ▪ Allocation of indirect costs by programs reflected ※ The Integrated Fiscal Information System will be established in October, 2006

17. 16 Ⅵ. Lessons and Recommendations √ Grand picture and sequence among fiscal reform agendas √ Feasible guidelines on the program budget structure and operation, which can be practically implemented within line ministries √ Active participation of line ministries from the beginning stage of designing the program budget structure √ A steering government-wide task force √ Strong back-up from the political and government-wide leadership √ Consensus building with the National Assembly and the NGOs √ Education and training for budget people of line ministries