Strategic Business Plan-final Report- Tarun Das

For Distribution

Preparation of Strategic Business PlansGeneral Guidelines, Some Suggestions for Improvement, And Summary of Recommendations

Final Report

Ministry of Finance Government of Mongolia ADB Capacity Building Project On Governance Reforms

30 September 2007

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Preparation of Strategic Business PlansGeneral Guidelines, Some Suggestions for Improvement, and Summary of Recommendations

Professor Tarun Das1,2 And Mr. E. Sandagdorj3,4

Ministry of Finance Government of Mongolia 30 September 2007

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Glocom Inc. (USA) Expert on Strategic Planning, Ministry of Finance. First Author is grateful to Co-author Mr. E. Sandagdorj, National Consultant and Ms. Enkhtuul Khurel, Coordinator of ADB project for providing all possible help and encouragements. 2

Authors would like to thank Mr. Batjargal Bazarsuren, DG, Fiscal Policy and Coordination Department, MOF for overall supervision and guidance, and the officers of the MOF, MOECS, MOH and MOSWL and their national and international consultants, for very useful discussions and for providing all relevant information and documents. It is needless to mention that the authors are solely responsible for the views expressed in the paper and for any errors and omissions. National Consultant, ADB Project on Capacity Building for Governance Reform, Ministry of Finance. 3

Authors would like to thank all the participants of the half-day Workshop on the subject conducted at the Ministry of Finance on the 28th August 2007 for very fruitful discussions and valuable suggestions and comments. 4

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ADB Governance Reforms Capacity Building Project Project Team Project Supervisor

Mr. Batjargal Bazarsuren, DG, Fiscal Policy and Coordination Dept., Ministry of Finance

Project Coordinator

Ms. Enkhtuul Khurel

National Consultant

Mr. E. Sandagdorj

International Consultant

Mr. Tarun Das, Ph.D., Strategic Planning Expert, Glocom Inc. (USA).

Document History This report is based on the following background reports prepared earlier. 1. Summary Report of all comments on Strategic Business Plans for MOF, MOECS, MOH and MOSWL, pp.1-3, June 2007 (sent with Monthly Activity Report for June 2007). 2. Ministry of Finance (MOF) Strategic Business Plan 2005-2006- Comments and Suggestions for Improvement, pp.1-37, June 2007, (sent with Monthly Activity Report for June 2007). 3. Ministry of Education, Culture and Science (MOECS) Strategic Business Plan 2006-2008- Comments and Suggestions for Improvement, pp.1-20, June 2007, (sent with Monthly Activity Report for June 2007). . 4. Ministry of Health (MOH) Strategic Business Plan 2005-2008- Comments and Suggestions for Improvement, pp.1-20, June 2007, (sent with Monthly Activity Report for June 2007). 5.

Ministry of Social Welfare and Labour (MOSWL) Strategic Business Plan 20052008- Comments and Suggestions for Improvement, pp.1-20, June 2007, (sent with Monthly Activity Report for June 2007)

6. The Summary Report (at 1) and the Report for the Ministry of Finance (at 2) were translated in Mongolian language by Mr. E. Sandagdorj, national consultant, and circulated among the concerned ministries in July 2007.

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7. Power Point Presentation on “Preparation of Strategic Business Plans- General Guidelines and Suggestions”, pp.1-70, July 2007 (sent with monthly Activity Report for July 2007). 8. Accompanying Text processed on MS-WORD on “Preparation of Strategic Business Plans- General Guidelines and Suggestions”, pp.1-25, (sent with monthly Activity Report for July 2007). 9.

Updated PPP on “Preparation of Strategic Business Plans- General Guidelines and Some Suggestions for Improvement”, Part-1, pp.1-29, August 2007, presented at the Workshop on the 28th August 2007 at the MOF.

10. Updated PPP on “Preparation of Strategic Business Plans- General Guidelines and Some Suggestions for Improvement”, Part-2, pp.1-54, August 2007, presented at the Workshop on the 28th August 2007 at the MOF. 11. “Preparation of Strategic Business Plans- General Guidelines, Some Suggestions for Improvement, and Summary of Recommendations”, pp.1-41, August 2007, prepared jointly with E. Sandagdorj. 12. Reports at sl. no. 9 and 10 were translated in Mongolian by National Consultant E. Sandagdorj and were circulated among the participants at the Workshop on the 28th August 2007. Commonly used concepts in Strategic Business Plan Concepts Definition Inputs Resources (Personnel, financial, goods and services) are the basic ↓ requirements for any output and strategic planning. Activities Tasks undertaken by the staff to transform inputs into outputs. ↓ Output Deliverables (products and services produced) from inputs. ↓ Outputs are the immediate or end results of activities. Outcomes Medium term impact of public programs and policies on the economy and ↓ user groups. Goals Long term wide-spread results of public programs and policies, like the ↓ achievement of the Millennium Development Goals by 2015 Administrative units of Mongolia Aimag – province – Mongolia is divided into 21 Aimags Soum – county – Aimags are divided into 3-28 Soums Bag – the smallest administrative unit District – The capital city (Ulaanbaatar) is divided into 9 districts Khoroos – the smallest administrative unit in the capital city

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LIST OF MAIN ABBREVIATIONS ADB

Asian Development Bank

GDP

Gross Domestic Product

GFSM

Government Finance Statistics Manual

GM

General Manager

HQ

Headquarters

IMF

International Monetary Fund

JICA

Japan International Cooperation Agency

MDG

Millennium Development Goals

MNT

Mongolian Togrogs

MOECS

Ministry of Education, Culture, and Science

MOF

Ministry of Finance

MOH

Ministry of Health

MOSWL

Ministry of Social Welfare and Labour

MOUs

Memorandum of Understandings

NDP

National Development Plan

NGO

Non Government Organisation

NPV

Net Present Value

PPP

Public Private Partnership

PSMFA

Public Sector Management and Finance Act

SBP

Strategic Business Plan

SMP

Strategic Master Plan

SPM

Strategic Planning and Management

SWOT

Strength Weakness Opportunities Threats

UN

United Nations

UNDP

United Nations Development Project

US

United States

WB

World Bank

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Contents

Summary of Recommendations 1. 2. 3. 4. 5. 6. 7. 8. 9.

Basic features of Strategic Business Plans SBP and structural reforms Economic Background Strengths, Weaknesses, Opportunities, Threats (SWOT) Analysis Appraisal of present SBPs Stylized Design of SBPs Output costing and output budgeting Benchmarks and accrual accounting Concluding observations

Selected References Annex-1: Millennium Development Goals for Mongolia- Achievements, Constraints, Strategy and Challenges Annex-2: Accrual Accounting- Basic implementation in OECD countries

Concepts

and

status

of

Annex-3: List of experts consulted Annex-4: List of participants at the Workshop on 28 August 2007

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Summary of Recommendations A. General Recommendations 1. Public Sector Management and Finance Act (27 June 2002) of Mongolia mandates that “Strategic Business Plan of a budgetary body shall form the basis for preparation and approval of its budget. The SBP shall contain strategic objectives of the budgetary body for the forthcoming three years and the outputs to be delivered during the next financial year and specified by category, quantity, quality and costs. The SBP must prepare projected financial statements on the basis of the same indicators as the budgetary body’s annual report.””5 2. All Strategic Business Plan (SBP) must satisfy at least the above requirements under PSMFA. In addition, SBPs must focus to achieve a clear Mission, embedded in a realistic Vision, based on issues, objectives and strategies identified in collaboration with major stakeholders. 3. SBP need not be too ambitious with an impressive plan but unrealistic targets. It should emphasize concrete plan of actions and strict implementation schedule. In fact, plans are useless unless these are implemented, and targets are valueless unless these are achieved.

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4.

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.

5.

SBP needs to recognize that the global business environment is complex and changing everyday, and the global public policy is an area of conflicts and adversity, and the general consensus and cooperation will not be easily forthcoming. We need to understand the dynamics of both internal and external environment and be prepared with appropriate strategy to tackle any contingent liabilities.

6.

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

Article 26.1 and Article 26.2 of the Public Sector Management and Finance Act (27 June 2002).

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B. Institutional Set-up and Capacity Building 7. Successful implementation of the PSMFA (2002) as regards formulation and execution of the strategic business plans and performance-based budgeting will require the following actions on a priority basis by the government of Mongolia: (1) To consolidate the progress made until now by proper documentation in both English and Mongolian; (2) To build up necessary institutions for modernizing budgets; (3) To build up capacity and skill of the personnel engaged in planning, budgeting, accounting and auditing; (4) Strengthen and upgrade the information technology system to support the budget modernization process and systems. (5) All these works need to be done in a systems framework and in a phased manner. (a) Invest in capacity building 8. It is necessary to strengthen human resource development to develop capacities and skill. Targeted development and training need to be used to close skill gaps. Flexibilities for recruitment, promotions and salary structures for technical people are required to attract and retain a diverse talent pool in the government. Management should also recognize and reward employees for their contributions toward achieving the Agency’s priorities and outcomes. (b) Invest in technology 9. It is also necessary to upgrade information technology infrastructure. Without adequate support of IT, it is difficult to develop activity based costing (ABC), output budgeting and accrual accounting. (c)Performance and Accountability Report 10. It is necessary to review progress regularly toward achieving outcomes, and continuously improve by planning, executing, evaluating, and adjusting actions to achieve desired results using an integrated management evaluation system. It is necessary to focus on a set of critical performance measures and indicators and calculate the cost of achieving outcomes and target levels of performance. It is also necessary to improve systems for evaluation of performance.

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(d) Executing the Strategic Plan 11. To accomplish its strategic objectives effectively, an Agency must link outcomes, strategy, budget, and performance into an integrated management system. This management system, based on a model of continuous improvement, is shown below:

Source: John Mercer, regarded as the father of the USA “Government Performance and Results Act (GPRA, 1993)”. 12. The process begins with an understanding of important national priorities and outcomes, which are then translated into broadly defined and intended results for the Agency. These become the Agency’s strategic goals and objectives. Outcomes related to these strategic goals and objectives are then articulated. Strategies are developed to achieve the outcomes, and then measures and indicators are identified to provide the means to assess progress.

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(e) The Strategic-Operational Relationship 13. The following chart shows the relationship between the Department’s strategic goals and its annual program performance goals.

Source: John Mercer, regarded as the father of the USA “Government Performance and Results Act (GPRA, 1993)”. 3.2 Execution of Performance-based Budget 14. The latest stage of development as regards budgeting is the performance (based) budgeting. Most of the OECD countries (e.g. Australia, Canada, New Zealand, The Netherlands, Sweden, Finland, UK, and USA) have rewritten their financial legislation or legal frameworks to allow for performance (based) financial information systems, including budgets. 15.It is important to understand that performance-based budgeting is not simply the use of program performance information in developing a budget. It does more than just informing the resource allocations of a traditional type of budget. In other words, it is not just "budgeting based on performance." Instead, it is the process and integrated systems framework by which a particular type of budget (such as output budget or program budget) is developed. To design an effective

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system of performance-based budgeting, it is vital to understand first what the end product should be, what it should contain, and how efficiently it can be achieved. The pyramidic structure of performance budgeting is illustrated in figure-1.

Source: John Mercer, an internationally acknowledged guru on Performance Budget and also regarded as the father of the USA “Government Performance and Results Act (GPRA, 1993)”. 16.A true Performance Budget is not simply an output budget with some program goals attached. It tells much more than this and gives an indication of how the budgeted resources are expected to turn into results, certainly not with scientific precision, but at least in an approximate sense, by outlining a general chain of cause and effect. The most effective Performance Budget does this by showing, for each program area, how budgeted fund finances day-to-day tasks and activities, how these activities are expected to generate certain outputs, and what outcomes should then be the result. 17.A Performance-based output Budget differs from an input-based budget in a fundamental way. An input-based budget shows how budgeted fund is spent on salaries, social benefits, goods, office supplies, travel, utilities, equipment, etc. The Performance Budget shows what expenditure will accomplish: establishment of a primary school, city hospital, building roads, houses etc. and review a compliance activity. However, every output can also be associated with input costs.

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C. SBPs and Reforms 18. SBPs have to be integrated fully with 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 a Big Bang, Shock Therapy or Revolutionary Approach. 19. In a multi-party democracy as in Mongolia, there is a need for general political consensus for acceptability of reforms. 20. There is also a need for emphasis on “human face” or pro-poor policies. If every Mongolian is skilled and healthy, then they can participate fully, contribute more and benefit more from the development process. 21. There is need for emphasis on Public-Private Partnership (PPP) and involvement of sub-national governments (Aimags, Soums, City Councils) and NGOs and other civil societies for delivery of public goods and service, so that the associated risks, costs and benefits are shared by all economic agents. D. Uniform Structure of SBPs for 2008-2010 22. It is recommended that for uniformity, the SBPs for the years 2008-2010 may have the following structure. (A) Foreword by the Minister (B) GM’s Statement (C) Vision, Mission, Values, Priorities and Clients (D) Economic Environment Analysis in terms of Strength-Weakness-OpportunitiesThreats (SWOT) (E) Strategic Purpose and Objectives (F) Top-Down Approach- Specifications of Goals, Outcomes, Outputs, Activities and Inputs (with clear, relevant, economic, appropriate and monitorable indicators) (G) Structure and Organization (H) Output Budgets for the Strategic Planning Period 2008-2010 along with estimates for 2006 and 2007 (I) Monitoring and Assessment System (J) Annex: Implementation and Evaluation Report of the previous SBP 23. 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

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business plan for the period 2008-2010 the first task of every Ministry/ Department should be to prepare such an implementation and evaluation report as the base line scenario on the basis of which the next SBP will be built. 24. Mongolian economy is presently in a rebound and resilient mood. It has moved on a higher growth path with lower inflation, lower rate of interest and surplus in the current account of both fiscal and external sectors. Prospects of Mongolian economy in the short and medium term are considered to be bright. A SWOT (Strengths, Weakness, Opportunities and Threats) analysis for the Mongolian economy should be done in the SBP of the MOF for the years 2008-2010. E. Size of the HQ Budget 25. It is observed that the share of the HQ budget in the total budget of the MOF, MOH, MOSWL and MOECS is very small (less than 0.5 per cent of the total budget for the Ministry). These are large sectoral ministries accounting for 75 per cent of the total central government budget and the staff are directly involved in actual service delivery down to the Aimags and Soums, in addition to their planning, distributive, regulatory and coordination functions. 26. Such a very small HQ budget may put constraints on their efficiency and productivity. Particularly, 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. There is need for having a separate budget for capacity building. All these additional activities will require allocating at least 1.5 per cent of the Ministry’s budget to the HQ budget. F. Linkages between SBP, MDG, NDP and Master Plan 27. 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 further 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 of the Ministries. 28. In fact, at the instance of the Parliament of Mongolia, the government of Mongolia (2007b) has recently prepared the “Second National Report on Millennium Development Goals (MDGs) Implementation for 2005-2006” that summarizes and assesses the current status of MDGs achievement in Mongolia. The objectives of the National Report are to monitor and assess the MDGs progress, to publicize official information and statistical data on MDGs implementation, direct attentions of related stakeholders to focus on challenging issues of MDGs achievement and reflect them in policies and interventions. A summary of the main observations and conclusions of the report are presented in Annex-1.

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29. The report has concluded that “The National Report is the document that summarizes and assesses current outlook of the MDGs implementation in Mongolia. MDGs implementation in Mongolia is going slow, coordination of MDGs related policies and arrangements is weak, and results are not sufficient. Understanding and knowledge of MDGs vary in local areas, implementation process differs and inter aimag differences are significant. Absence of a (particular) unit or (specific) organization to perform the coordination function of the monitoring and assessment system and sector goals, not yet established complete data base of indicators, weak human resources skills and capacity- all these (factors) lead to weak monitoring of MDGs implementation. Though the MDGs Needs Assessment has been undertaken, its linkage and reflection in the budget are not sufficient and left on its own. Coordination of activities to attract cooperation of international partners and financing organizations is perfomed not sufficiently.” 30. Above paragraph clearly indicates that there is need to have more focus on the achievement of MDGs while preparing the Strategic Business Plans, specifying the programs and outputs, and finalizing the annual budgets. It may also be mentioned here that the President of Mongolia has issued Decree in 2006 to initiate development of “MDG based National Development Comprehensive Policy” (NDCP) and the first draft of NDCP is currently being discussed at Cabinet Session.

31. 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). This report has specified sector-wise policies and programs for the achievement of MDGs. 32. In designing outcomes and outputs, MDGs appear a good starting point for any ministry. MDGs span income and important non-income dimensions of development. 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. G. Some Suggestions for Structural and Institutional Change 33. It is observed that although 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, the HQ produces an elaborate and very comprehensive SBP with

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many outputs, whereas the Agencies under it, which account for more than 99.5 per cent of the Ministry’s budget, do not have an elaborate and comprehensive SBP. This is an anomaly which needs to be rectified. 34.

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. Such a system is not only desirable but also more efficient, because all the activities of a Ministry are interrelated and we need to see the total picture relating to a portfolio ministry.

35. We recommend that Mongolia can follow the practice of Australian budgeting system and prepare only one document for the Ministry as a whole with different chapters dealing with SBPs and output budgets of the HQ and all Agencies under it. 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’s Administration and Coordination Unit and will also justify our recommendation for enhancing the HQ budget (see recommendation no.14 above). 36. However, as usual, the General Manager of other Agencies shall conclude Performance Agreement every year (Article 18.3.2 of the PSMFA)6. 37. 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 19.4 and Article 19.5 of the PSMFA)7.

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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. 7

Article 19.4 of the Public Sector Management and Finance Act (27 June 2002) “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.” 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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38. It has been observed that there is no permanent unit in any line Ministry to prepare the Strategic Business Plans. In general, works are carried out by working groups. Such a system is not efficient as the experiences of the present members of the working groups might not be utilized due to formation of new groups. 39. Preparation of the Strategic Business Plan (SBP) on the basis of output costing and output budgeting by any agency is a very technical job. In order to ensure uniformity and consistency in the structure and methodology for SBPs of various agencies, it is necessary to set up a specialized dedicated organization (may be called the Office of Performance Budgeting and Strategic Planning as in the USA8). This organization will have the following tasks: (a) To prepare guidelines on the structure and scope of SBPs and identification of activities, outputs and outcomes; (b) To prepare manual on methodologies for activity-based costing (ABC), output costing and output budgeting, and on benchmarks for costing; (c) To provide guidance to line ministries and agencies on preparation of comprehensive SBPs, ABC and output-budgeting, (d) To prepare guidelines for accrual accounting, (e) To coordinate and oversee the preparation of SBPs by all agencies, (f) To establish inter-linkages among SBPs and other core documents on national strategic development such as MDGs-2015, Sector’s Master Plans 2007-2017, and National Development Strategy up to 2027. 8

In the United States, the Office of Performance Budgeting and Strategic Planning is the focal point of Treasury's budget and performance integration efforts. The Office oversees the USA President's Management Agenda and provides guidance to the Bureaus (i.e. Agencies) on policy issues. There is also a separate Department on Strategic Plan in the Treasury which prepares and implements medium term Strategic Plan for the Fiscal Years 2007 – 2012. It indicates goals, objectives and strategies for the diverse activities under the strategic plan, enables the Department to effectively steward the nation’s finances, promote economic opportunity, strengthen national security and achieve organizational excellence. There is also an Office of Management and Budget (OMB) in the USA Congress to evaluate and rate performances and results of different agencies. OMB's predominant mission is to assist

the President of the USA in overseeing the preparation of the federal budget and to supervise its administration in Executive Branch agencies. In helping to formulate the President's spending plans, OMB evaluates the effectiveness of agency programs, policies, and procedures, assesses competing funding demands among agencies, and sets funding priorities. OMB ensures that agency reports, rules, testimony, and proposed legislation are consistent with the President's Budget and with Administration policies. In addition, OMB oversees and coordinates the Administration's procurement, financial management, information, and regulatory policies. In each of these areas, OMB's role is to help improve administrative management, to develop better performance measures and coordinating mechanisms, and to reduce any unnecessary burdens on the public.

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(g) To oversee the preparation of SBPs and output budgeting in line ministries and Agencies. (h) To build capacities in line ministries by organizing training and workshops. 40. If it is not possible to set up such a separate structure to provide support for performance based budgeting, then the Fiscal Policy and Coordination Division in MOF needs to be enlarged and strengthened for planning and coordination of SBPs at the national level and in line ministries. 41. It is also necessary to set up additional unit at each line ministry including MOF and local governments comprising experienced economists, IT specialists, works and cost accountants, and chartered accountants specialized in public sector accounting. This unit would be responsible for output specification, output costing, output budgeting, estimation of output quantity and evaluation of output quality as required by clause 26.2.1 of the PSMFA. It will also help to build up necessary capacities, skill and experience in each Agency and to establish a proper succession plans for management in the event of an exit of the coordinator or the unit supervisor or any other member of the specialized unit dealing with preparation of comprehensive SBPs. G. Output Specifications 42. Although in a strict economic sense, policy advice cannot be taken as an output, as its quality is not uniform over time, space and individuals. But, 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 recognize policy advice as an output (Articles 23.2 & 23.3)9. 43. Considering all these facts we recommend that policy advice may be taken as an output of the HQ. However, only the broad groups 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. 44. As per the Article 26.2.2 of the Public Sector Management and Finance Act 2002, outputs should be specified by category, quantity, quality and costs. 45. It is well known that as per international best practices, a typical or a stylized Strategic Business Plan has the following design or sequence of events: 9

Article 23.2 Parliamentary bodies shall provide the Portfolio Minister with the following outputs: 23.2.1 Policy advice, including regulatory advice; 23.3.2 Other services required by the State Great Hural within appropriation authority. Article 23.3 State Administrative Bodies shall provide the Portfolio Minister with the following outputs: 23.3.1 Policy advice including regulatory advice.

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Table-1 Typical Structure of SBP Inputs ↓ Activities

Resources- (Personnel, financial, goods and services) are the basic requirements for any output and strategic planning. Tasks- undertaken by the staff to transform inputs into outputs.

↓ Output Outcomes Goals

↓

Deliverables- products and services produced. Outputs are the immediate or end results of activities.

↓

Medium term – impact of public programs and policies on the economy and user groups.

↓

Long term – wide spread results of public programs and policies, like the achievement of the Millennium Development Goals by 2015

46. Top-Down Approach 47. While preparing Strategic Business Plan, we need to adopt a Top-Down Approach and to specify indicators to measure the quantity and quality of output and outcome. Table-2 Top-Down Approach Outcome ↓

While preparing Strategic Business Plan, we need to adopt a Top-Down Approach and to specify indicators to measure the quantity and quality of output and outcome.

Output

↓

Activities ↓ Inputs

48. 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 6.1).

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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 cannot correct failure, you cannot win public support. You can win public support, only when you can demonstrate results,

Source: Adopted from Reinventing Government by David Osborne and Ted Gaebler, pp.1-427, Addison-Wesley Publication Co., 1992. 49. We also need to evaluate the actual inputs, outputs and outcomes in relation to planned/ budgeted inputs, outputs and outcomes to judge the compliance, efficiency and effectiveness of plans. Table-3: Evaluation of Policy Goals Planned

Actual

Evaluation

Planned outcomes →

← Actual outcomes

Effectiveness

Planned outputs →

← Actual outputs

Efficiency

Planned inputs →

← Actual inputs

Compliance

H. Goals and Outcomes 50. As regards outcomes of the MOF, these will be trends of 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. 51. For other Ministries, the minimum outcomes could be MDGs and other indicators mentioned in their Master Plans or the National Development Plan. Health Sector Strategic Master Plan (2006-2015) prepared by the MOH in collaboration with JICA, and the Social Security Sector Strategy Paper prepared

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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. 52. Some examples of inputs, outputs and outcomes in a variety of programs are highlighted in the following table: Examples of goals, outcomes, outputs and input indicators: Table-4: Ministry of Finance Goal

• Achieve macro-economic stability

Outcome

• • • • •

Activities

• • • •

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 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 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

Inputs

• • • •

Staff Goods and services Institutional arrangements Financial resources

Output

• • • • • •

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Table-5: Ministry of Social Welfare and Labour Goal

• Millennium Development Goal for poverty reductionReduce the poverty ratio by 50 per cent in 10 years during 2005-2015

Outcome

• Have a target for the head count ratio for the poor 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 in the medium term • Estimate extra jobs created in the medium term • Evaluate 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 • Prepare list of poor families • Identify poverty groups and poverty areas • Prepare Soum-level and Bags-level economic mapping and resource inventory • Analyze the social, economic and demographic characteristics 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 • Create public works program for the poor • Provide final support for higher education for the poor • Strengthen vocational training and education system • Staff • Goods and services • Institutional arrangements • Financial resources

Activities

Inputs

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Table-6: Ministry of Education, Culture and Social Welfare Goal

Outcome

Output

Activities

Inputs

• MDG for education- Goal-2 Achieve universal primary education by 2015; • Goal-3 Promote gender equality and Empower WomenEliminate gender disparity in primary and secondary education by 2005 and to all levels of education no later than by 2015. Have medium term target 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) • 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 • 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 • Staff • Goods and services • Institutional arrangements • Financial resources

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Table-7: Ministry of Health Goal

Outcome

Output

Activities

Inputs

• 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 threequarters, between 1990-2015, the maternal maternity ratio. • 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 • 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 • 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 • • • •

Staff Goods and services Institutional arrangements Financial resources

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I. Output Groups and Indicators for Quantity and Quality 53. As in the case of the Australian Budget, the number of outcomes 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 for auditing and accounting and may become impossible. 54. 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 2310 dated the 5th February 2006 on “Output specification for each budget portfolio ministries and other authorities”. 55. After specifying output groups we need to specify ‘category, quantity, quality and cost’ for each output11. Here also Australian Budget 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, they simply indicate 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”. 56. 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. J. Output-Based Input Budgeting 57. Presently the HQ of a Ministry adopts a methodology which can be described as “Output-based” or more accurately “activity-based inputs costing and inputs budgeting”. The methodology consists of costing of inputs (in terms of personnel, goods and services, and overheads) required to sustain the activities for producing the desired outputs. Although outputs are indicated in the SBP, budgeting is done on the basis for inputs. On the other hand, under output budgeting the cost and budget estimates are provided for each output (and the input costs used for estimation of outputs are not shown in the budget).

10

Government Decree 23 dated the 6th February 2006 portfolio ministries and other authorities. 11

has specified general output groups for budget

As required under Article 26.2.2 of the PSMFA, 27 June 2002.

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58. The basic purpose of output budgeting is that given the budgeted cost, one should be interested in the achievement of output and outcome (and not in costs for labor, goods and other services). Once we monitor output costs, the input costs are automatically monitored. But if we simply monitor input costs, we would not know what happened to the output levels. 59. Thus, under output budgeting, there will be output heads for accounting and auditing. We also need input costs in order to satisfy the requirements for the IMF Government Finance Statistics to provide estimates of budget by economic and functional classifications. K. Output Costing and Output Budgeting 60. It is reiterated 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 and Agencies who are responsible for the output should also be identified and specified in the Budget. 61. 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. 62. For example, the output groups for the Ministry of Finance can be realigned with the Departments as indicated in Table below. 63. Other Ministries can also identify similar output groups which can be realigned with their existing Departments and Divisions. 64. As in the case of Australian Budget, we should also provide budget estimates for the current year 2007, estimates of actual for the previous year 2006, and three future estimates for the years 2008, 2009 and 2010 for each output group

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Table-8: Re-alignment of Output Groups and Departments for MOF Department 1. Economic Policy 2. Fiscal Policy and Co-ordination 2.1 Revenue Division 2.2 Expenditure Division 2.3 Fiscal Consolidation Division 2.4 Investment Division 3. Treasury 3.1 Debt Management Division 3.2 Treasury expenditure accounting and reporting 3.3 Banking settlement div 4. Procurement Policy and Coordination 5. Loan and Aid Policy and Coordination 6. Accounting policy and Supervision 7. Financial sector policy 8. State Public Admn including State Secretary, Minister, Vice Minister Total

Output Groups 1. Economic Policy Advice 2. Revenue, expenditure and investment policy and planning 2.1 Revenue policy 2.2 Expenditure policy 2.3 Unified budget planning 2.4 Investment planning 3. Government cash assets management 3.1 Government debt management 3.2 Accounting and Preparing Consolidated Financial Report 3.3 Banking settlements 4. Procurement policy and coordination 5. External debt management 6. Accounting and auditing 7. Financial sector policy and regulation 8. Govt administration management

Ministry of Finance HQ

L. Benchmarking 65. As regards Benchmarks on costing, due to variations in the fiscal structure and scope of activities of government in different countries, it is difficult to provide some international benchmarks for different components of cost. 66. However, benchmarks can be developed by suggesting some improvements in one’s own performance after comparing its performance in the past, performance in the public and private sectors, trends of other financial variables (such as inflation, interest rates etc). 67. For example, given projected rate of inflation at 7 per cent and assuming that there is to need to improve efficiency by at least one per cent, the benchmark increase for any item of cost may be recommended at 6 per cent (which equals 7 per cent rate of inflation less one per cent efficiency increase)12.

M. Accrual Accounting 12

A detailed methodological note for benchmarks is under preparation by the Consultants.

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There is a need to move towards accrual accounting system13 so that there are no hidden costs and the full financial impact of government activities are captured in the Budget. However, it may be mentioned here that only Australia and New Zealand have been able to adopt full accrual accounting, and all other countries are adopting partial accrual accounting which is known as “cash plus accrual accounting” or “a hybrid accrual accounting” implying use of accrual accounting to the extent possible and use of cash accounting for the remainder of incomes and expenses. The IMF Government Finance Statistics Manual (GFSM) 2001 also recognizes that the implementation of the accrual accounting can take numerous forms and will depend on each country’s circumstances. It recommends that: (1) For countries that have data only on a cash basis, a first step could be to reclassify these data in the GFSM 2001 framework. (2) Introduction of accrual reporting can take the form of either (i) the implementation of ad hoc adjustments to the cash data (for example, the recognition of in-kind transactions and the accrual of interest) or (ii) the implementation of accrual accounting for the source data.

13

Consultants will produce a methodological paper on an operational system on “cash plus accrual accounting” for Mongolia.

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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 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 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. Wish lists of too ambitious plans and unrealistic targets are avoided. Emphasis is placed on concrete actions and implementation, rather than making an impressive plan. 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. 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 fast changing. So it stresses the importance of anticipation and foresight through analysis of leading factors, driving forces and realistic scenario building. SPM distinguishes between internal and external environment. It recognizes that the external environment is very important and we cannot change it. So we need to understand its dynamics and anticipate change to

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some degree, if a strategy is to be successful. We should be fully prepared to tackle any contingent liabilities and unforeseen events. SPM recognizes that the global business environment is complex, the global public policy is an area of conflicts and adversity, and the general consensus and cooperation will not be easily forthcoming. It 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 Strategic Plans and Reforms Mongolia started economic reforms in 1991 and its domestic economy as well as external sectors are much more liberalised today than they were before 1990s. During last three years Mongolia has also progressed significantly in the spheres of privatization and public sector 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) 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 a Big Bang, Shock Therapy or Revolutionary Approach adopted by some developed nations in Latin America and Europe. Because Mongolia is a poor country, the reforms and SBPs need to have adequate safety nets for the vulnerable and weaker sections of the society so that they are adversely affected by structural changes. In a multi-party democracy as in Mongolia, there is a need for general political consensus for acceptability of reforms. But, the present government must own the reforms. There is also a need for emphasis on “human face” or pro-poor policies. If every Mongolian is skilled and healthy, then they can participate fully, contribute more and benefit more from the development process. There is need for emphasis on Public-Private Partnership (PPP) and involvement of subnational governments (Aimags, Soums, City Councils) and NGOs and other civil societies for delivery of public goods and service, so that the associated risks, costs and benefits of reforms are shared by both private and public economic agents. 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.

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2.2 Need for Reorientation 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 failures, strengthening structures and institutions. SBPs should focus on consultations, flexibility, decentralization, selectivity, outcome, implementation, evaluation, monitoring, co-ordination of policies and programs 2.3 Redefining the role of Bureaucracy 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.

3. Economic Background 3.1 Economic Background 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 per cent during 2003-2006 with peak at 10.8 per cent recorded in 2004 (see Table-3.1). The mining, construction, wholesale and retail trade, financial services, transport and telecommunications 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 to 7 percent in 2006 from 11 per cent in 2004. Interest rate on central bank bills declined from 15 percent in 2003 to 5.8 percent in 2006. The fiscal balance on the domestic account and the current accounts balance in the external sector improved significantly and were in surplus in 2006. Net present value of public external debt halved from 64 percent of GDP in 2003 to 32 percent in 2006. External debt service ratio (as percent of exports of goods and services) declined significantly from 34 percent in 2003 to 3.4 percent in 2006. 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 compared to US$178 million (equivalent to 1.5 months of imports) at the end-2003.

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Table-3.1 Mongolia: Trends of Selected Economic Indicators in 2003-2006 Economic Indicators 1. Real GDP growth (percent) (a) Agriculture (b) Industry (c) Services 2. Consumer prices inflation rate (percent) 3. Growth rate of broad money supply (%) 4. Interest rate on central bank bills (pecent0 5. Revenue and grants (as % of GDP) 6. Mineral revenue (as % of GDP) 7. Non-mineral revenue (as % of GDP) 8. Expenditure and net lending (as % of GDP) 9. Overall budget balance as % of GDP 10. Current account balance as % of GDP 11. End-period international reserves (US$ ml) 12. End-period internl. reserves (months of imports) 13.Total public debt (as percentage of GDP) 14. External debt (as percentage of GDP) 15. NPV of external debt (as percentage of GDP) 16. Domestic debt (as percentage of GDP) 17. External debt service (as % of exports) 18. End-period Exchange rate (MNT per US$) Source: IMF and ADB.

2003 6.5 4.9 4.8 6.1 4.7 49.7 15.0 37.9 2.8 34.2 42.1 -4.2 -7.7 178 1.5 113 98 64 15 34 1170

2004 10.8 17.7 15.0 6.3 11.0 20.3 15.8 37.3 4.1 32.5 39.4 -2.1 1.6 208 1.6 93 85 52 8 7.5 1209

2005 6.6 7.7 -0.9 9.1 9.5 37.3 3.7 37.0 4.5 29.0 33.7 3.2 1.4 333 2.1 68 64 40 4 2.9 1221

2006 8.4 9.9 8.7 7.3 7.0 34.9 5.8 42.9 13.5 27.0 39.0 3.9 5.2 626 3.4 54 51 32 3 2.1 1164

It may be mentioned here that the indicators given in Table-1 are the outcomes of budgets and development plans. The Strategic Business Plan of the Ministry of Finance should provide the medium term projections of these indicators for the strategic planning horizon 2008-2010.

4 Strengths, Weakness, Opportunities and Threats 4.1 Strength, Weakness, Opportunities and Threats A SWOT analysis of the Mongolian economy is presented in Table-2. 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.

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Table-4.1 SWOT Analysis of the Mongolian Macro-economy And the Ministry of Finance

Internal environment

Strengths

Weaknesses

External environment

Opportunities

Threats

1. Sustained high GDP growth averaging around 8% since 2004. 2. Strong performance by minerals, construction and services sectors. 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 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 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 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 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)  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 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 also 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. 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. 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 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

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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. 4.3 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. 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.

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Appraisal of Present SBPs of MOF, MOH, MOECS and MOSWL

5.

5.1 Appraisal of Present SBPs We have gone through the latest SBPs of the HQs of the MOF, MOECS, MOH and MOSWL. However, we did not have any opportunity to examine any SBP for an Agency under these Ministries. The reason for selecting these Ministries is that they account for major share (more than 75%) of the govt budget (Chart 5.1) and also very important by functional classification of budget (Chart 5.2). 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 Structure of Present SBPs Presently the SBPs have the following uniform structure (only the MOF does not have a SWOT analysis) 1. Introduction- scope of laws and regulations and GM’s Statement 2. Ministry’s Strategic Objectives 2.1 Vision of future 2.2 Mission statement 2.3 SWOT analysis 3. Strategic objectives and outcome 4. Deliverable outputs with their classifications and descriptions- detailed description of each output, man-days required and costs. 5. Budget planning and output cost 6. Resource utilization and improvement

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Chart 5.1 Shares of Ministries in Central Government Budget (%) 2006 Others 10% Justice 5%

Finance 26%

Health 9% Transport 10%

Soial Welfare 22%

Eduation 18%

Chart 5.2 Govt Expenditure by Functions (%) Average of 2004 and 2005

Expenditure by Function (% ) 2004-2005

Others, 3 Health, 10 Econ services, 11

Education, 19 Housing & comnty, 1

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Gen services Gen services, 29

Defence Social security Housing & comnty

Defence, 5 Social security, 22

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5.3 Desired Uniform Structure It is recommended that for uniformity, the SBPs for the years 2008-2010 may have the following structure. It may be noted that we have prescribed an Annex indicating a brief evaluation and implementation report of the previous strategic business plan for 20052007. 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. (A) Foreword by the Minister (B) GM’s Statement (C) Vision, Mission, Values, Priorities and Clients (D) Environment Analysis in terms of Strength-Weakness-Opportunities-Threats (SWOT) (E) Strategic Purpose and Objectives (F) Specifications of Activities, Outputs, Outcomes and Goals (G) Structure and Organization (H) Budget for the Strategic Planning Period (I) Monitoring and Assessment System (J) Annex: Implementation and Evaluation Report of the previous SBP 5.4 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 further 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 of the Ministries. In fact, at the instance of the Parliament of Mongolia, the government of Mongolia (2007b) has recently prepared the “Second National Report on Millennium Development Goals (MDGs) Implementation for 2005-2006” that summarizes and assesses the current status of MDGs achievement in Mongolia. The objectives of the National Report are to monitor and assess the MDGs progress, to publicize official information and statistical data on MDGs implementation, direct attentions of related stakeholders to focus on challenging issues of MDGs achievement and reflect them in policies and interventions. A summary of the main observations and conclusions of the report are presented in Annex-1.

The report has concluded that “The National Report is the document that summarizes and assesses current outlook of the MDGs implementation in Mongolia. MDGs implementation in Mongolia is going slow, coordination of MDGs related policies and arrangements is weak, and results are not sufficient. Understanding and knowledge of MDGs vary in local areas, implementation process differs and inter aimag differences are

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significant. Absence of a (particular) unit or (specific) organization to perform the coordination function of the monitoring and assessment system and sector goals, not yet established complete data base of indicators, weak human resources skills and capacityall these (factors) lead to weak monitoring of MDGs implementation. Though the MDGs Needs Assessment has been undertaken, its linkage and reflection in the budget are not sufficient and left on its own. Coordination of activities to attract cooperation of international partners and financing organizations is perfomed not sufficiently.” Above paragraph clearly indicates that there is need to have more focus on the achievement of MDGs while preparing the Strategic Business Plans, specifying the programs and outputs, and finalizing the annual budgets. It may also be mentioned here that the President of Mongolia has issued Decree in 2006 to initiate development of “MDG based National Development Comprehensive Policy” (NDCP) and the first draft of NDCP is currently being discussed at Cabinet Session. 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 MongoliaSummary” has been prepared by the Government of Mongolia (2007a). 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 a good starting point for any ministry. MDGs span income and important non-income dimensions of development, such as reduction of poverty and hunger, provision of universal primary 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 human development outcomes. Better health and education contribute to increased productivity and higher incomes. 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 of these services 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 multisectoral 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.

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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. It is well known that along with other nations of the world, Mongolia has committed to achieve the UN-MDGs by 2015 in the areas of reduction of poverty and hunger, achievement of universal education, ensuring equality for women and empowering women, improvement in child and maternal health, eradication of communicable diseases, environmental sustainability and global partnership in development. 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. Most of these activities relate to routine works for the policy advice and policy planning at the HQ and for Agencies under it. In the strict sense of the term, policy advice cannot be regarded as an output as it is not quantifiable and its quality is not uniform over time and over individuals. In fact, policy advice and associated functions should be regarded as “Activities or Processes” which help to transform “inputs and resources” (in terms of man, materials, machines, money etc.) into “Outputs” and finally “Outcomes”. At present in any SBP for the HQ there is a very elaborate description of these activities or the so-called outputs. 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. We will discuss this issue at length in a later section.

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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 all these facts we recommend that policy advice may be taken as an output of the HQ. However, only the broad groups14 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. 5.6 Headquarter Budget In this respect, it is worth noting that the share of HQ budget in the total budget of the Ministry is very small (see Table 5.1 and Table 5.2). As there are fixed costs for administration, the share is higher for smaller Ministries and lower for larger ministries. Nevertheless, 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 5.1 HQ Budget as % of Ministry’s Total Budget in 2003

14

See Section 6.2 for details.

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Table 5.2 Budget Allocation in 2006 Ministry

Total Budget 312238 208715 263172 103168 61212 72052 36331 119772 1176659

MOF MOECS MOSWL MOH MOJ MOT MOE OTHERS TOTAL

5.7

As % of Total 27 18 22 9 5 6 3 10 100

HQ Budget 1227 287 925 436 489 534 609 37203 41710

HQ as % of Total 0.39 0.14 0.35 0.42 0.80 0.74 1.67 31.06 3.54

Some 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 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, separate Memorandum of Understanding (MOUs) will need to be signed with the Agency Heads with performance parameters. 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 19.4).

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6 Stylized Design of a Strategic Business Plan It is well known that as per international best practices, a typical or a stylized Strategic Business Plan has the following design or sequence of events: Table 6.1 Typical Structure of SBP Inputs Resources- (Personnel, financial, goods and services) are the basic ↓ requirements for any output and strategic planning. Activities Tasks- undertaken by the staff to transform inputs into outputs. ↓ Output Deliverables- products and services produced. ↓ Outputs are the immediate or end results of activities. Outcomes Medium term – impact of public programs and policies on the ↓ economy and user groups. Goals Long term – wide spread results of public programs and policies, like ↓ the achievement of the Millennium Development Goals by 2015 6.2 Basic characteristics of indicators It is required that the inputs, activities, outputs, outcomes and goals need to be measured by suitable indicators for quantity and quality for effective monitoring and evaluation. The basic criterion is that the output and outcome indicators, as far as feasible, should be “CREAM”. • • • • •

Clear Relevant Economic Adequate Monitorable

Precise, unambiguous, tangible and quantifiable Appropriate for the strategic objectives Available at reasonable cost and time Provides sufficient basis to access performance 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 6.1). Box 6.1: 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.

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Some economists talk of hierarchy of indicators, as mentioned below, to stress the relationship among indicators. Planned Planned outcomes → Planned outputs → Planned inputs →

Policy Goals Actual ← Actual outcomes ← Actual outputs ← Actual inputs

Evaluation Effectiveness Efficiency Compliance

6.3 Top-Down Approach

While preparing Strategic Business Plan, we need to adopt a Top-Down Approach.

Outcome ↓ Output ↓ Activities ↓ Inputs

Australian Treasury Budget for the year 2005-06 For example, 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 (see Table-6.2). 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.

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Table 6.2 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 functioning markets

Output group 3.1: Markets group (90.3) 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)

Australian Treasury has 10 Agencies under it. These include the following: 1. The Australian Bureau of Statistics 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 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.

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6.4 Goals and Outcomes of MOF As regards outcomes of the MOF, these will be trends of 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 or the National Development Plan. 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. Some suggestions on these aspects have been provided by us for each Ministry in our earlier reports. So these are not repeated here. 6.5 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 2315 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 6.3 After specifying output groups we need to specify ‘category, quantity, quality and cost’ for each output16. Here also Australian Budget 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, they simply indicate that “(1) advice on economic policy and the economic outlook meets Treasury portfolio Ministers’ needs in administering their responsibilities and implementing government decisions that 15

Government Decree 23 dated the 6th February 2006 has specified general output groups for

budget portfolio ministries and other authorities. 16

As required under Article 26.2.2 of the PSMFA, 27 June 2002.

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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. Table 6.3 Specified Outputs in the Government Decree #28, 2006 Portfolio Ministry and Output

Portfolio Ministry and Output

Ministry of Finance and Economy

4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.1.7 4.1.8 4.1.9

Social Welfare Activities

Policy advice to ensure macroeconomic stability, Formulation pf the state budget and MTEF draft, Collection of state revenue, Sectoral development policy and planning activities, Policy advice on accounting andauditing, Treasury cash mangement and financing activities, Government debt management activities, Economic foreign cooperation, loans and aids activities, and Others.

Health activities

10.1.1 10.1.2 10.1.3 10.1.4 10.1.5

10.1.6 10.1.7

10.1.8 10.1.9

Improve social insurance activities Activties to promote employment and reduce unemployment Activities of social insrance sector Citizens’ health insurance activities Social welfare and care activities Children’s protection and development activities, Support and service activities for elders, State ordered services to be executed by the public organisations Other activities

Educational activities

7.01.01 Preventive and public health aids and services 7.01.02 Hospital aids and services 7.01.03 Aids and services on rehabilitation 7.01.04 Long term care services 7.01.05 Additional health services 7.01.06 Services on medicines and purchase, repair and regulation of the medical tools 7.01.07 Health management and health insurance activities 7.01.08 Other health activities

9.01.01 Activities on pre-school education 9.01.02 Activities on secondary education 9.01.03 State education fund services 9.01.04 Dormitory services for secondary schools 9.01.05 Educational and culture centers: activities 9.01.06 Build and improve the training and service environment 9.01.07 Activities on studies and researches of the scientific organizations 9.01.08 Activities on Tertiary education

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

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6.5 Output-Based Input Budgeting Presently the HQ of a Ministry adopts a methodology which can be described as “Outputbased” or more accurately “activity-based inputs costing and inputs budgeting”. The methodology consists of costing of inputs (in terms of personnel, goods and services, and overheads) required to sustain the activities for producing the desired outputs. Although outputs are indicated in the SBP, budgeting is done on the basis for inputs. On the other hand, under output budgeting the cost and budget estimates are provided for each output (and the input costs used for estimation of outputs are not shown in the budget). The basic purpose of output budgeting is that given the budgeted cost, one should be interested in the output and outcome and not in costs for labor, goods and other services. Once we monitor output costs, the input costs are automatically monitored. But if we simply monitor input costs, we would not know what happened to the output levels. Thus, under output budgeting, there will be separate output heads for accounting and auditing. We also need to indicate the input costs in order to satisfy the requirements for the IMF Government Finance Statistics to provide estimates of budget by economic and functional classifications. 6. OUTPUT BUDGETING

The Above Symbols stand for MDG Goals: 1. Reduce Poverty and Hunger 2. Achieve universal primary education 3. Promote gender equality & empower women 4.Reduce child mortality 5. Improve maternal health 6. Combat HIV/AIDS, Malaria, TB, other disease 7. Ensure environmental sustainability 8. Develop global partnership for development

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7.1 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 and Agencies 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. 7.2 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 7.1. For proper 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. 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 7.2 where broad output groups have been realigned with 8 divisions which can act as separate budget centres and are manageable for separate book keeping and accounting. It may be observed from Table 7.2 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 consists of four separate divisions and tackle four output groups. Similarly Treasury Department consists of 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 2007, estimates of actual for the previous year 2006, and three future estimates for the years 2008, 2009 and 2010 for each output group.

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Table 7.1 MOF Output Budget for 2005 (Cost in Million MNT) Output classes and sub-classes 1. Economic Policy Advice 1.1 State socio-econ SP 1.2 Regional socio-econ SP 2. Sector & inv. management 2.1 Sector & fincl. management 2.2 State budget investment plan 3.Budget Management 3.1 Revenue policy, planning 3.2 Expenditure policy, planning 3.3 Unified budget planning 4. Govt cash assets management 4.1 Budget financing registration 4.2 State fund services .3 Govt debt management 5. Govt procurement management 5.1 Procurement policy, methods 5.2 Procurement coordination 6. Foreign credit management 6.1 Foreign loan & assistance policy 6.2 Loan and assistance control 7. Accounting and auditing 7.1 Accounting & audit policy 7.2 State sector financial report 8. Govt admmn management 8.1 Admn, legality& HRM 8.2 IT and advertisement 8.3 Monitoring and assessment Total output budget

Person-days 3958 2880 1078 3214 1743 1471 4343 1068 1706 1569 8043 2489 3058 2496 1860 1080 780 2450 1500 950 2104 1468 636 6314 3845 1287 1182 32286

Million Tog 67.5 44.3 23.2 55.6 29.9 25.8 79.9 20.2 31.2 28.5 107.7 33.5 36.3 37.9 34.4 20.7 13.7 49.8 32.0 17.8 35.4 25.3 10.1 102.9 62.8 20.4 19.7 533.3

% 12.7 8.3 4.3 10.4 5.6 4.8 15.0 3.8 5.8 5.3 20.2 6.3 6.8 7.1 6.4 3.9 2.6 9.3 6.0 3.3 6.6 4.7 1.9 19.3 11.8 3.8 3.7 100.0

7

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Table 7.2 MOF Departmental Output Budgeting Department 1. Economic Policy 2. Fiscal Policy & Coord. 2.1 Revenue Division 2.2 Expenditure Division 2.3 Fiscal Consolidation Div 2.4 Investment division 3. Treasury 3.1 Debt Management div 3.2 treasury exp accounting & reporting 3.3 Banking settlement div 4. Procurement Policy & Coordination 5. Loan & Aid Policy & Coord. 6. Accounting policy & Supervision 7. Financial sector policy 8. State Public Admn including State Secretary, Minister, Vice Minister Total

Output Group 1. Economic Policy Advice 2. Revenue, expenditure & investment policy & planning 2.1 Revenue policy 2.2 Expenditure policy 2.3 Unified budget planning

Total Budget 67.5 105.7

% 8.5 13.3

20.2 31.2 28.5

2.5 3.9 3.6

2.4 Investment planning 3. Govt cash assets management 3.1 Govt debt management

25.8 107.7 37.9

3.2 13.5 4.8

3.2 consolidated finan report

33.5

4.2

3.3 Banking settlements

36.3

4.6

4. Procurement policy & coord

34.4

4.3

5. Foreign credit management

49.8

6.2

6. Accounting and auditing

35.4

4.4

7. Financial sector policy & regulation

29.9

3.8

8. Govt admmn management

366.9

46.0

Ministry of Finance HQ

797.3

100

8. Benchmarks and Accrual Accounting 8.1 Cash Accounting and Benchmarks Costing Methodology adopted by the Ministries is based on the cash accounting system. This is the traditional method adopted by many developing countries. The methodology is alright so long as the implicit norms or benchmarks for costing different heads are made explicit and are subject to approval by the financial advisers. Although it is not categorically mentioned in the SBPs of different Ministries, there appears to be some symmetry, uniformity and convergence of norms for costing used for various goods and services. Table-8.1 indicates that the composition of total output cost is more or less the same in the MOH and MOECS. In these ministries, employees account for 60 per cent of total output cost, office expenses around 13 per cent, utilities 9 per cent, domestic and foreign missions 8 per cent and others 10 per cent. In the MOF, employees account for 44 per cent, but central events 15 per cent, and domestic and foreign tours 12 per cent.

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Table-8.1 Composition of Total Output Cost Types and items of costs

1. Personnel cost 2. Goods and service cost 2.1 Office expenses (stationery, printing, posting) 2.2 Utilities (Electricity, fuel, heating, POL, water) 2.3 Missions (Domestic and Foreign) 2.4 Scientific works

2.5 Payment to works executed on behalf of govt 2.6 Centralized events 3. Output total cost (1+2)

MOH Average 2004-2007

MOF Average 2004-2007

MOECS SBP 2006

60 39 14 8 9 4 4 0 100

44 56 7 12 12 5 4 15 100

60 40 12 7 8 4 4 4 100

8.2 Compensation to Employees A World Bank study on Mongolia Public Expenditure and Financial Management Review (2002) has argued that among the transition economies the share of wages as a percentage in GDP in Mongolia is relatively higher than that in other transition economies. We donot agree with such observation because the analysis is subject to the following errors: (a) Concept of wages may be different (other countries may receive many in-kind allowances which may not exist for Mongolia), (b) Composition of GDP may also be different. Besides, Mongolian GDP was also low. (c) Due to these differences in the concept and scope of wages and salaries, it is difficult to make meaningful international comparisons. Table on next slide presents data on average personnel cost in MOF, MOECS and MOH of Mongolia compared with that in the corresponding Ministries and the Central Govt of India, which had almost the same per capita income (although in recent years the Mongolia has higher per capita income). It is observed from this table that (a) The average cost 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 towards provident funds, pensions, life insurance and health care. (ii) The Indian government officials also receive many other in-kind benefits such as govt 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.

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Table 8.2 Average Emoluments per Person in Mongolia and India (US dollar) Ministry/ Country Mongolia- MOF Mongolia- MOECS Mongolia- MOH India- MOF India- Min of Edu India- Min of Health India Central Govt Memorandum Items Mongolia per capita income (US$) India: per capita income (US$)

2004 1469 1461 1327

676 637

2005 1450 1503 1547 4145 4862 3827 2706

2006 1970 2162 2195 4134 5067 4371 2877

2007 1996

785 719

951 792

1088 868

4143 5936 4435 3397

Note: Emoluments in Mongolia includes social insurance contributions made by the govt, while emoluments for India donot include these contributions. Besides, Indian civil servants receive various in-kind benefits which are not included here.

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 substantial increase in cash emoluments for employees, otherwise it may affect adversely efficiency of govt officials. Judged by these cases, personnel costs in Mongolian govt appear to be reasonable, and may even justify some increase to compensate for more responsibilities assigned in the SBP, need for skill upgradation to deal with new methodology, high inflation, recent economic boom and rise of private sector salaries. 8.3 Benchmarks As regards Benchmarks on costing, due to variations in the fiscal structure and scope of activities of government in different countries, it is difficult to provide some international benchmarks for different components of cost. However, benchmarks can be developed by suggesting some improvements in one’s own performance after comparing its performance in the past, performance in the public and private sectors, trends of other financial variables (such as inflation, interest rates etc). For example, given projected rate of inflation at 7 per cent and assuming that there is to need to improve efficiency by at least one per cent, the benchmark increase for any item of cost may be recommended at 6 per cent (which equals 7 per cent rate of inflation less one per cent efficiency increase). The Consultants will produce a methodological paper on benchmarks.

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8.4 Accrual Accounting There is a need to move towards accrual accounting system so that there are no hidden costs and the full financial impact of government activities are captured in the Budget. However, it may be mentioned here that only Australia and New Zealand have been able to adopt full accrual accounting, and all other countries are adopting partial accrual accounting which is known as “cash plus accrual accounting” or “a hybrid accrual accounting” implying use of accrual accounting to the extent possible and use of cash accounting for the remainder of incomes and expenses. The IMF Government Finance Statistics Manual (GFSM) 2001 also recognizes that the implementation of the accrual accounting can take numerous forms and will depend on each country’s circumstances. It recommends that: (3) For countries that have data only on a cash basis, a first step could be to reclassify these data in the GFSM 2001 framework. (4) Introduction of accrual reporting can take the form of either (i) the implementation of ad hoc adjustments to the cash data (for example, the recognition of in-kind transactions and the accrual of interest) or (ii) the implementation of accrual accounting for the source data. Consultants will produce a methodological paper on an operational system on “cash plus accrual accounting” for Mongolia. 9. 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 prospects of high growth. • Mongolia should continue with structural 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.

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References Asian Development Bank (2007) Country chapter on Mongolia, in the Asian Development Outlook 2007, ADB, Manila. 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 20072008, 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.

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Ministry of Education, Culture and Science (2002) Strategic Business Plan 20032005, Ulaanbaatar. ________ (2005) Medium-term strategic plan 2005-2007, Ulaanbaatar. ________ (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 ReviewBridging the Public Expenditure Management Gap, Poverty Reduction and Economic Management Sector Unit, East Asia and Pacific Region, June 2002.

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Annex -1 Mongolia MDG Targets, Performances, Challenges and Strategy 1. Mongolia- MDG Second Evaluation Report 2007 Mongolian government has recently produced a “Second National Report- Millennium Development Goal Implementation in 2005-2006- Summary” (Government of Mongolia, 2007b). At UN High Level Summit 2000 government leaders of 189 countries gathered together, ratified historical document Millennium Declaration, and defined issues to be addressed and goals to be achieved by 2015. The President of Mongolia has expressed his thankful support to the Millennium Declaration. Similar to other countries, Mongolia has defined its own goals and targets based on identified challenging issues specific to the country and is implementing appropriate policies and programs to achieve eight MDGs. Parliament of Mongolia adopted in 2005 the MDGs to achieve by 2015 adding one more specific goal for Mongolia to strengthen human rights and governance. President of Mongolia issued Decree in 2006 to initiate development of “MDG based National Development Comprehensive Policy” (NDCP) and the first draft of NDCP is currently being discussed at Cabinet Session. Needs assessment and estimations for MDGs were carried out in 2006 under the Prime Minister Decree and currently is being submitted for Parliament consideration. MDGs Needs have been assessed with the help of a Generalized Macroeconomic Framework Model. It defines development policies, coordination activities and required financial needs to achieve the MDGs. Given importance of “human rights and democratic governance” along with 8 MDGs specified by the UN, Mongolia has developed its national MDGs with 9 goals and 22 targets. Currently, only two countries of the world viz. Mongolia and Albania, have identified democratic governance issue to be included in the national MDGs.

General Conclusion The Second National Report on Millennium Development Goals (MDGs) implementation for 2005-2006 summarizes and assesses the current status of MDGs achievement in Mongolia. The current status of MDG progress in Mongolia is assessed as slow in general, the results of policies and actions taken are not sufficient and the coordination is weak. There are also significant variations of results over the regions. There is no proper alignment of sectoral policies with the MDGs, and no proper linkages between MDGs implementation and the financing and budgeting needs. There is a need to establish a particular unit responsible for monitoring and assessment of MDGs. There is also need to strengthen data base for health, education, gender, environment related goals and targets. Financial needs required to achieve the MDGs have been estimated as total of 14 billion USD during 2008-2015 and 500 million USD will need annually as ODA sources.

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MDG 1: Reduce poverty and hunger 1990 36.3 (1995) 12.0 (1992)

Poverty coverage17 Share of undernorished chidlren

2000 35.6 (1998) 12.7

2005 36.1 (2002) 6.3

2006 32.2

2015 18.0

-

0

MDG 2: Achieve universal primary education 1990 Net enrollment ratio in primary educaion Proportion of pupils starting in grade 1 who reach grade 5 Literacy rate of youth age 15-24

97.5 (1995) 92.4 99.0

2000

2005

2006

2015

95.0

95.6

91.4

100.0

84.5

101.2

86.8

100.0

97.7

...

...

100.0

MDG 3: Promote gender equality and empower women Primary education male/female ratio Secondary education male/female ratio Tertiary education male/female ratio Share of women having paid work in non-agricultural sector Share of women elected in the National Parliament Share of women candidate in the National Parliament

1990 1.03 1.33 1.72 51.1 24.9 7.7 (1992)

2000 1.01 1.2 1.72 50.4 11.8 10.9

2005 0.98 1.11 1.53 53.1 6.6 (2004) 13.7 (2004)

2006 0.98 1.03 1.53 53.9

2015 1.0 1.0 1.0 50.0

6.6

30.0

-

35.0 (2012)

Source: NSO, 1990-2006

MDG 4: Child mortality reduction Under 5 child mortality rate (per 1000 live birth) Infant mortality rate (per 1000 live birth) Percentage of children vaccinated against Measles

1990

2000

2005

88.8 а 87.5 b 64.4 а 63.4 b 82.3 а 82.5 b

44.5 а 42.4 b

26.1 b

32.8 b

20.8 b

92.4

97.5 b

2006

2015

23.2 a 24.0 b 19.1 a 19.8 b 98.9

Source: a) NSO, Official statistical data, 2006 b) Parliament resolution No. 25, Mongolia- MDG approval, 2005 c) MoH, HDNC, health indicators, 2006

МDG 5: Improve maternal health 17

Poverty level

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29.2 22.0 96.0

Maternal mortality rate (per 100,000 live birth) Share of births attended by skilled health personnel

1990

2000

200.0 б 121.6 а 99.9

158.0 б 166.3 а 99.6

2005 93.0 в 99.6 в

2006

2015

67.2 а 69.7 в 99.7 а

50.0 99.8

Source: a.NSO, Official statistics data, 2006 б.Parliament Resolution # 25 to approve MDGs, 2005 в. MoH, Health indicators, 1996-2006

MDG 6: Combat STIs/HIV/AIDS and Tuberculosis and other diseases Death rate associated with newly detected TB (per 100,000 population) Spread of TB (per 100,000 population) Death rate associated with TB (per 100,000 population) Share of TB cases detected and cured at international standard level

1990 79.0а

2000 124.8

2005 177.4

2006 185.3

2015 100.0

435.5 4.8 31.4 (1994)

60.0 3.2 80.9

91.0 3.4 79.0

84.8 2.9 82.1

0 100.0

Source: NSO, Official statistics data, 2006

МDG 7: Ensure environmental sustainability 1990 7.8 а 9.0 b

2000 8.5 а 8.2 b

3.6 а 7.0 b 11.50 а 4.08 b

Share of forest area Share of protected land area Carbon dioxide emission per person (ton)

2005

2006

2015

7.8

7.7

9.0

13.1 а 13.3 b

1.3

13.3

6.6 а 4.19 b

5.8

...

30.0 Note: 15% taken under the local protection

4.0

Source: а.NSO, Official statistics data, 2006 б.Parliament Resolution # 25 to approve MDGs, 2005

1. Assessment Two types of analysis as indicated below were carried out to assess the feasibility of the achieving the MDGs within the stipulated time by 2015 and to assess the efficacy of programs and policies: 1.1 Trend Analysis and Assessment that provides assessment by approved indicators achieved and target levels (Attachment 1);

1.2 Matrix Assessment that provides assessment of policies and arrangements to ensure MDGs achievement (Attachment 2).

1.1 RESULTS OF TREND ANALYSIS AND ASSESSMENT

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(a) Indicators categorised as “Early achieved” the MDGs: 

  

Male/female ratio in secondary education; Coverage of children by Measles vaccination; Infant mortality rate; Under 5 children mortality rate;

(b) Indicators categorised as “Possible” to achieve the MDGs:    

Share of emaciated children; Maternal mortality rate; Share of national protected land area; Share of births attended by health skilled personnel;

(c) Indicators categorised as “Slow” to achieve the MDGs:     

 

Poverty level; Female/male ratio of tertiary education; Death rate caused by TB; Percentage of TB cases detected and cured at international standard level; Carbon dioxide emission per person; Percentage of population living in conditions meeting sanitation requirements; Percentage of population having access to safe drinking water.

(d) Indicators categorised as “Backward” in achieving the MDGs:  

      

Net enrollment rate of primary education; Portion of pupils enrolled in grade 1 and completed grade 5; Literacy rate of youth of 15-24 age; Female/male ratio of primary education; Portion of female having paid work in non-agriculture sector; Portion of female candidates in the National Parliament; Portion of female members of National Parliament; TB spread; Portion of forest area.

1.2 Matrix Assessment results -

Targets where a policy documents needed to be developed: it relates to MDGs Targets 1, 3, 4, 17, 18, 21. Targets where actions needed to be undertaken and intensified: it relates to MDGs Targets 11, 12, 13, 14, 15, 16, 20, and 22. Targets where the policies, actions needed to be well coordinated, changes placed, results improved: it relates to MDGs Targets 5, 6, 10. Targets where the policies, actions are implemented well: it relates to MDGs Targets 2, 7, 8, 9, 19.

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Attachment 1

Macro economic indicators of Mongolia, 2000, 2004-2006

Macro economic indicators Residential population, year end, thous. Economic active population, thous. Of which employees Registered unemployed, thous. GDP, current price, billion MNT GDP, constant price 2000, billion MNT Investment, current price, billion MNT External trade, million USD Export Import External trade balance, million USD State budget, current price, billion MNT Revenue Expenditure Total budget balance, billion MNT Total revenue in GDP, percent Total expenditure in GDP, percent Total budget balance in GDP, percent Annual change of CPI, percent Annual average exchange rate, 1USD= MNT

2000 2 407.5 847.6 809.0 38.6 1 020.1 1 020.1 284.7

2004 2 533.1 986.1 950.5 35.6 1 945.6 1 256.8 639.2

2005 2 562.4 1 001.2 968.3 32.9 2 524.3 1 346.1 797.1

2006 2 594.8 1 042.8 1 009.9 32.9 3 172.4 1 459.0 858.2

535.8 614.5 -78.7

869.7 1 021.1 -151.4

1 064.9 1 184.3 -119.4

1 542.8 1 485.6 57.2

351.1 429.7 -78.6 34.4 42.2 -7.7 8.1 1 097.0

713.1 752.5 -39.4 36.7 38.7 -2.0 11.0 1 185.2

837.9 764.6 73.3 33.2 30.3 2.9 9.5 1 205.3

1 360.4 1 237.0 123.4 42.9 39.0 3.9 6.0 1 179.6

2. Poverty Reduction Strategy Paper (2001) Another report entitled “A Strategy for Poverty Reduction in Mongolia” was prepared by a UNDP mission led by Keith Griffin (University of California, Riverside) and submitted in July 2001. The other team members consisted of Mark Brenner (Political Economy Research Institute of the University of Massachusetts, Amherst), Amy Ickowitz (University of California, Riverside), Takayoshi Kusago (Hokkaido University, Japan) and Terry McKinley (UNDP, New York). N. Oyuntungalag was responsible for organizing administrative services and translating documents when necessary. She was assisted by T. Amarbayasgalan, E. Dolguun and B. Undrakh in the final preparation of the report.

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A Repot has a number of themes, particularly the following: • The first is that the most important requirement for poverty reduction is to accelerate the growth of per capita income. Faster growth should be a sine qua non of a comprehensive strategy to reduce poverty. • The second is that growth is only a necessary but not sufficient condition for reduction of poverty and hunger. Policies to reduce inequality will be necessary in order to reduce poverty, even if the rate of growth accelerates. That is, the objective of economic policy should be pro-poor growth. • A third theme is that there need be no conflict between growth and equity. In fact a redistribution of productive assets in favour of poor could actually result in a faster rate of growth of output, as it would reduce economic insecurity and risk aversion, increase the access to credit and investment opportunities by many people. All of this should lead to higher levels of investment and faster growth of output and employment. • Employment is a fourth theme. One of the quickest ways to reduce poverty is to create productive employment in the livestock sector, non-farm rural activities, small and medium sized enterprises and public works projects. • The fifth theme is the investment in human capital (e.g., in the education of young boys and girls), in physical capital (including improved infrastructure) and in natural capital (particularly in improved pasture and water management). • A sixth theme is the importance of working through local government institutions, organizations of civil society and local communities so that they can identify priorities, search for solutions and contribute resources to help finance small scale local projects. In Mongolia, decentralization, participation, democracy and efficiency can go hand- in-hand. • A final theme is the need for a strong state to guide the transition process, to create new institutions, to introduce economic reforms, to finance public investment and to help poor to participate and gain from the process of development. The report does not advocate a small, shrunken, weak state, but wants the state to do more things, to do different things and to do them better than they have been done in the past. A national poverty reduction strategy will require firm, consistent leadership by the state, sustained over a long period of time.

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Annex-2 Accrual Budgeting- Basic Concepts and Status of Implementation in OECD countries

Use of accruals in accounting and budgeting leads to: • an increase in public sector efficiency, • an improvement in the allocation of limited public resources and • a grater transparency and increase in the information available to policy makers for choice of different policy alternatives. To fulfill these objectives, accrual principles should be applied not only for reporting and financial statements, but also for the central government budget formulations and appropriations. However, accrual accounting needs to precede accrual budgeting for successful application of accrual techniques. However, it should be noted here that the development of accrual methodology and its application to the national and sub-national governments takes a number of years and cannot be done overnight. Besides, the methodology differs across the countries depending on their fiscal structure, legal systems and availability of data. In fact, at present no two countries have introduced identical systems, and there is no trend towards international harmonization. Even within individual countries, the details differ significantly from one part of the public sector to another. In addition, many countries are reluctant to apply accrual systems to their budgets. Many members of parliament consider the present system of cash-based budgeting to be simpler, clear and more beneficial for quick decision making. They are afraid that accrual budgeting may lead to cash overruns, unnecessary technical complexity and the attendant potential for manipulating financial data. One such example is the case for the Netherlands, whose government has decided to postpone the introduction of the new system for several years. In a more technical sense, the accrual system must take into account the specific issues such as the valuation of all financial and non-financial assets such as government bonds and securities, buildings and the recognition of provisions. These issues include the appropriate accounting treatment of defense equipment, cultural heritage, obligations for social security, and provision of public transport and public utilities. 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.

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Among the countries which are moving from cash accounting and budgeting to accrual accounting and budgeting, only Australia and New Zealand have adopted the technique of output costing and output budgeting, and the other countries are adopting the technique of input costing and input budgeting (Martin Dees and Paul Neelissen 2004). Five Pioneering Countries Compared With respect to the general design of the accrual system, the following observations can be made about the five countries whose practices were compared by Martin Dees and Paul Neelissen (2004). •

Most introduced an accrual system that was both comprehensive (for all central government entities) and full (including complete statements of financial position and financial performance and a link between these two main documents).

•

Most adopted an accrual basis for both budgeting and accounting.

•

The budgets and, in particular, the accounts of most include the three main accrual-based financial statements (statement of financial position, statement of financial performance, and cash flow statement).

•

The financial statements of the various parts of central government are generally consolidated into central government financial statements; the public sector as a whole is generally not consolidated.

•

The legislature authorizes various items: costs, cash expenditures, obligations, or both; in most cases it principally authorizes costs.

•

Accounting standards in most pioneering countries are based on private sector standards, with certain departures to allow for the unique characteristics of their government.

•

National and government accounting are separate; national accounting standards played virtually no role in the development of government accounting standards in most pioneering countries.

The details of these observations are presented in Table-1 in the Box below. With respect to the main accounting principles applicable in each country, the following observations can be made: •

There are considerable differences in valuation policies from primarily historical cost (Sweden, United States) to primarily modified historical cost (New Zealand, United Kingdom) to primarily current value (Australia).

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•

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 and contingencies are permitted in all five countries.

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•

All five countries calculate equity (under a variety of names) in accordance with generally accepted principles as the balance of assets and liabilities.

•

In all five countries, tax revenue allocated by the central tax collecting agency is accounted for by the other parts of central government receiving the revenue.

•

All five countries calculate an operating result (in a variety of ways) as the balance between income and expenses.

•

Three of the five countries apply a capital charge.

Table 2 presents the main accounting principles applicable in each country.

Anther study on “Accrual Accounting and Budgeting- Key Issues and Recent Developments” prepared by the OECD Public Management Committee, Public Management Service for the Twenty-third Annual Meeting of OECD Senior Budget Officials at Washington D.C., 3-4 June 2002, concluded the following: “About half of all Member countries have adopted accruals to one degree or another. There are great variations, however, to what extent Member countries have adopted

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accruals, from doing so for agency and ministry-level financial reporting exclusively to whole-of-government financial reporting to budgeting (see Appendices I to IV). The migration to accruals has been remarkably quick if one considers that it is only about ten years since the first Member country adopted full accruals.” “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 decisionmaking 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 fully implemented 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. The issues are complex and need extensive studies, research and hard thinking. It is a multi-disciplinary subject involving accountants, legal experts and economists. A methodological paper for a practical and operational system on “cash plus accrual accounting” will be prepared by Tarun Das.

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APPENDIX I Accounting Basis Applied for Budget Approved by Legislature Country Australia Austria Belgium Canada Czech Rep Denmark Finland France Germany Greece Hungary Iceland Ireland Japan Korea Luxembourg Mexico Netherlands Norway New Zealand Poland Portugal Spain Sweden Switzerland Turkey United Kingdom United States

Full Accrual Basis

Accrual Basis, except no Capitalization or Depreciation of Assets

Cash Basis, except certain transactions on Accrual Basis

Full Cash Basis

X X X X X X(1) X(2) X X X X X X X X X X X X X X X X X X X X(3) X(4)

i. Denmark – Interest Expenses and Employee Pensions Treated on Accrual Basis. ii. Finland – Transfer Payments Not on Accrual Basis. iii. United Kingdom – Budget on Full Accrual Basis Effective Fiscal Year 2001-02. iv. United States – Interest Expenses, Certain Employee Pension Plans, and Loan and Guarantee Programmes Treated on Accrual Basis. Source: OECD Budgeting Database

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APPENDIX II Plans to Move Budget to Accrual Basis Country Canada Denmark Germany Korea Netherlands Portugal Sweden Switzerland

Full Accrual Basis Budgeting to be introduced X(1)

Additional Accrual Basis information to be presented X X

X(1) X X X(1) X(1)

i. under Active Consideration. Source: OECD Budgeting Database

APPENDIX III Additional Use of Accruals in Departmental / Agency Level Financial Statements Country

Belgium Germany Hungary Ireland Japan Netherlands Portugal Switzerland United Kingdom

i.

Departmental/ Agency Level Financial Statements on Full Accrual Basis

Financial Statements on Full Cash Basis but Supplementary Accrual Information is presented X X X X

X X X X X

This refers to departments/agencies that prepare separate financial statements for their own operations and where such financial statements contain more accrual information than the consolidated (whole-ofgovernment) financial statements. In cases where the consolidated (wholeof-government) financial statements are on full accrual basis (Appendix 3), departmental/agency level financial statements would also be on full accrual basis.

Source: OECD Budgeting Database

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APPENDIX IV Accounting Basis Applied for Consolidated (Whole-of-Government) Financial Statements

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Hungary Iceland Ireland Japan Korea Luxembourg Mexico Netherlands Norway New Zealand Poland Portugal Spain Sweden Switzerland Turkey United Kingdom United States

Full Accrual

Accrual Basis, except no Capitalization or

Basis X

Depreciation of Assets

Cash Basis, except certain Transactions on Accrual Basis

Full Cash Basis

X X X X X(1) X X(2) X X X X X X X X X X X X(3) X X X X X X(4) X

i. Denmark – Interest Expense and Employee Pensions Treated on Accrual Basis. ii. France – Interest Expense and Certain Other Transactions Treated on Accrual Basis. Full Accrual Basis to be introduced. iii. Poland – Employee Pensions Treated on Accrual Basis. iv. United Kingdom – Statements on Full Accrual Basis Effective Fiscal Year 2005-06. Source: OECD Budgeting Database.

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Annex-3 List of Experts Consulted ADB Resident Office at Mongolia, Ulaanbaatar 1. Mr. Adrian H. Ruthenberg, Country Director, Mongolian Resident Mission. International Monetary Fund 1. Mr. Holger M. Van Eden, Senior Economist, Public Finance Management Division, Fiscal Affairs Department, International Monetary Fund, Washington D.C. 2. Ms. Khulan Buyankhishing, Economist, Office of the IMF Resident Representative Office in Mongolia, Ulaanbaatar. Ministry of Finance 1. Mr. Batjargal Bazarsuren, Director General, Fiscal Policy and Coordination Department. 2. Ms. Enkhtuul Khurel, Project Coordinator, ADB Governance Reforms Capacity Building Project. 3. E. Sandagdorj- National Consultatnt on SBP. 4. D. Tsogtbaatar- Director of Public Administration Department of MOF 5. G. Batkxurel- Deputy Director of Macroeconomic Policy and Coordination Department 6. B. Daajamba – Deputy Director of Accounting Policy and Control Department 7. D. Nanzaddorj- Deputy Director of Treasury Department 8. B. Ganbold- Deputy Director of Financial Policy and Coordination Department 9. N. Ganerdene- Senior Specialist of Public Administration Department 10. D. Tsedenbal- Senior Specialist of Public Administration Department 11. E. Selenge- Specialist of Procurement Department 12. Ts. Zolzayaa- Specialist of Foreign loans and aid Policy and Coordination Department 13. I. Erdenesaikhan- Specialist of Legal Department 14. B. Uranbaigali- Specialist of Public Administration Department 15. Z. Bayanmonkh- Specialist of Public Administration Department 16. D. Oyun- Chief of Monitoring and Internal Control Division of the Public Administration Department 17. Mr. Ulziisaikhan Dash, Economist, Fiscal Policy Department

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Ministry of Education, Culture and Science (MOECS) 1. Ts. Davaasuren, Director General, Department of Economics and Finance 2. Ms. Erdemchimeg Sumiya, National Consultant for Public Expenditure Management Ministry of Social Welfare and Labor (MOSWL) 1. 2. 3. 4. 5. 6.

Ms. Nyam Ayush, Director, Monitoring Department Chief, Accounting Department Expert on Strategic Planning Expert of Accounting Expert on Social insurance Mr. Dunkhree Batmonkh, Senior Financial Management Specialist, World Bank Governance Assistance Project, ECTAC and PHRD Projects

World Bank ECTAC Project- Civil Service Reforms 1. Darrell Freund, Functional Review Adviser 2. Clive Parry, International Public Administration Consultant 3. Ms. D. Khangal, Functional Review Consultant World Bank ECTAC and PHRD Projects 1. Ms. Erdemchimeg Sumiya, National Consultant, Public Exp. Management; 2. Ms. Helen E. Tilley, Development Economist, Medium and Short Term Budget Planning, World Bank ECTAC Project. 3. Mr. Dunkhree Batmonkh, Senior Financial Management Specialist, World Bank Governance Assistance Project; and others) 4. Mr. Benjamin Diokno, ECTAC, MOSWL. 5. Mr. Mauro Napdonno, ECTAC, MOESC. Information Technology (IT) Group 1. Mr. Jim Ramsey, International Consultant (IT development for budget preparation) 2. Mr. Oyunbaatar, National Consultant 3. Mr. Jugdernamjil, IT Expert UNDP Regional Office at Ulaanbaatar, Mongolia 1. Ms. Pratima Mehta, UNDP Regional Coordination at Ulaanbaatar.

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Annex-4 List of participants in workshop on “Public Sector Strategic Business Planning in Mongolia” held on 28th of August, 2007 at MOF. Name of participants

Work place and their Position -Senior economist of FED, MOJ

Email address

2. Ts. Ariunjargal

-Specialist of Monitoring & Supervision Dep/t, MOJ

[email protected]

3. G. Zina

-Senior specialist of MOJ

[email protected]

4. D. Nanzaddorj

-Deputy general director, Treasury Dep/t, MOF

[email protected]

5. R. Batjargal

-Senior economist of A&S department, MOF

[email protected]

6. J. Jargalsaikhan

-Director-general of Economic Policy Dep/t, MOF

[email protected]

7. S. Myagmardash

-Director of Consolidated Budget Planning Division, MOF

[email protected]

8. D. Oyun

-Director of Monitoring and evaluation Division, MOF

[email protected]

9. Ch. Lkhagvasuren

-Senior specialist of Finance, Investment and Cooperation Dep/t, MOR&Transportation

10. Ts. Zorigtbat

-Specialist of Economic Policy Dep/t, MOF

11. B. Bayan-amgalan

-Specialist of Road construction Dep/t, MOR&Trans.

1. N. Tsevelmaa

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[email protected]

[email protected]

[email protected]

[email protected]

Tarun Das and E. Sandagdorj

12. J. Otgonbat

-Specialist of Monitoring, Supervision and Control Dep/t, MOECS

[email protected]

13. J. Ganbaatar

-Senior economist of FE Dep/t, MOECS

[email protected]

14. B. Myagmarsuren

-Deputy director of Procurement Department, MOF Specialist for Planning and Reporting of Public Administration Dep/t, MOECS

15. T. Sarantuya

[email protected]

16. Kh. Gantsetseg

-General accountant and specialist of F E Dep/t, MOECS

[email protected]

17. B. Munkhtsetseg

-Specialist of FE Dep/t, MOH

[email protected]

18. B. Tugoldor

-WB, ECTAC Project, local expert on Strengthening of Short and Medium-term Budget Planning

19. S. Dorjhand

-Project coordinator of the ECTAC Project

[email protected]

20. T. Batsukh

- Nat. Consultant of the ECTAC Project

[email protected]

21. P. Ganchimeg

-Specialist for Socila welfare sector budgeting, FPCDep/t, MOF

[email protected]

22. J. Enkhzul

-Specialist for Health Sector Budgeting, FPCD, MOF -Specialist of FPCDep/t, MOF -specialist of Transport Dep/t, MOR&Trans

[email protected]

23. A. Mandakhnaran 24.D. Khurelbaatar

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[email protected]

[email protected] [email protected]

Tarun Das and E. Sandagdorj

25. B. Myatavsuren

-Senior specialist of Finance, Investment and Cooperation Dep/t, MOR&Trans

[email protected]

26. Munkhtuul

_Specialist for Education, Culture and Science sector budgeting of FPCDep/t, MOF

[email protected]

27. Helen Tilley

_ Intern. Consultant on SS&MTBP, WB ECTAC Project in Mongolia

28. Enkhbat

-Local expert on the above Project

29. Kh. Enkhtuul

-CB for GR, ADB project coordinator

30. Tsedenbal \

- Senior specialist on SBPlanning of ADministr. Dep/t, MOF

31. D. Tsogtbaatar

Director general of Administration dep/t, MOF

32. S. Erdemchimeg

Local expert on SS&MTBP Sub-Project of the WB ECTAC Project in Mongolia

33.G. Batbayar

-Specialist for Revenue division, FPCDep/t, MOF

34. Batdelger

[email protected]

-Local consultant on software reviewing on SBP sub-project

Prepared by: E. Sandagdorj, National Consultant, ADB Capacity Building Project on Governance Reforms.

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Tarun Das and E. Sandagdorj