Budget Execution System

1

• Budget Execution System
• and Expenditure Control in Korea
• May 24, 2005
• Tae Sung Lee
• Director, Investment Management Division
• Ministry of Planning and Budget
• Republic of Korea

2
Contents

• Political and Administrative Structures in Korea
• Koreas Budget Formulation Process
• The Significance of Budget Execution
• Koreas Budget Execution Process and Main
  Characteristics
• Improving the Public Expenditure Management System

3

• Political and Administrative
• Structures in Korea

4
Administrative and Legislative Bodies

• Koreas political system Presidential system
• Principle of checks and balances

5
Budget-related Bodies
6

• Koreas Budget
• Formulation Process

7
Budget Formulation Process
8
Approval by the National Assembly
Preliminary review by standing committees (Oct.
Nov.)

• The National Assembly may make reductions to the
  budget proposal, but approval of the government
  is required to make increments

9
Budget Allocation and Execution
10
Settlement of the Budget Account
11

• The Significance of
• Budget Execution

12
The Significance of Budget Execution

• Budget execution is realizing policy measures
  contained in the budget
• Inappropriate execution leads to failure in
  achieving budget formulation objectives
• Strict expenditure control is important, but
  adapting to changes in circumstances is also
  essential
• More people are related with budget execution
  than with budget formulation
• Budget is not only a administrative control
  mechanism but also a measure for democratic
  policy making and implementation

13
The Significance ofBudget Execution

• Hence, efficient budget execution calls for
• Strict execution in accordance with legal
  procedures
• Flexibility to counteract changes in circumstance
• Wise settlement of problems which may occur
  during the execution process
• Managing the purchase and use of resources
  efficiently

14

• Koreas Budget Execution
• Process and
• Main Characteristics

15
Basic Process of Budget Execution

• Budget allocation (MPB)

Allocation of financial resources (MOFE)
Acts causing expenditure (Line ministries)

• When the budget is settled, MPB formulates
  quarterly budget allocation plan (Dec. of the
  previous year)
• Line ministries execute the budget according to
  the plan (Jan. Dec.)
• MPB sends budget execution guidelines to line
  ministries (Jan.)

16
Basic Process of Budget Execution

• Budget allocation (MPB)
• Allocating budget resources by 3-month terms
• Budget allocation is necessary for acts causing
  expenditure
• Allocation of financial resources (MOFE)
• Monthly expenditure ceilings are set, taking into
  consideration the tax revenue circumstances
• Financial resources must be allocated for budget
  execution
• Commitment (Line ministries)
• Commitment, contract which incurs a future
  obligation to pay, within Budget allocation
• Payment (Line ministries)
• Payments within expenditure ceilings

17
Transparency and Accountability in Budget
Execution

• Institutional mechanisms to ensure transparency,
  control and accountability
• Budget and account settlement reports are
  publicly announced
• Spending of a fiscal year is financed by the
  years revenues
• Restriction of spending which do not follow the
  budgets purposes or exceed predefined amounts
• Restriction of the issuance of government bonds
  or signing of contracts which cause
  extra-budgetary burden

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Flexibility in Budget Execution

• Institutional mechanisms to enhance flexibility
  in budget execution
• Reallocation between budget items transfers
  between items are possible with the pre-approval
  of the National Assembly
• Diversion between administrative budget items
  transfers between administrative items are
  possible with the approval of MPB
• Reserve funds funds which have been pre-approved
  by the National Assembly in lump sum, can be used
• Multi-year expenses multi-year spending is
  possible with the pre-approval of the National
  Assembly

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Strengthening fiscal policy functions

• Front loading of budget expenditure to provide
  economic stimulus
• In case of subdued economic growth during the
  first half and rapid growth during the second
  half, budget expenditures are front-loaded during
  the first half to support economic growth
• Key programs which have greater effect are front
  loaded
• 58(100 trillion won) of key program spending(170
  trillion won) are being front loaded in 2005
• Fiscal Management Inspection Meetings (chaired by
  the Vice Minister of Planning and Budget and
  attended by Planning and Management Officers of
  line ministries) are held every month to check
  the budget execution situation

20
Supplementary Budget

• Formulation of supplementary budgets
• In the case of significant changes in
  circumstances, supplementary budgets are
  formulated and approved by the National Assembly
• In the case of natural disasters, economic
  downturns, and other serious domestic and
  external changes

• Recent cases of supplementary budgets

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Total Project Cost Management

• Purpose
• Strict control of increasing in large-scale
  project costs to enhance the productivity of
  budget expenditure and quality of projects
• Projects under total project cost management
• Projects with total costs exceeding 50 billion
  won and whose construction period exceeds 2 years
• As of March 2005
• 718 projects (totaling 220 trillion won) are
  subject to TPCM system

22
Total Project Cost Management Guidelines

• Requires preliminary consultations with the MPB
  when making changes to the project size, costs,
  and implementation timeframe
• Excluding inevitable cases such as improved
  safety and legal changes, increases in project
  size are disallowed
• In cases of exceedingly large increases (more
  than 20) in project size, project feasibility is
  reviewed by external experts
• In 2003, 15 reviews were conducted, reducing the
  size of projects by 650 billion won

23
Countermeasures against imprudent spending

• Budget misuse prevention system, participated by
  MPB and line ministries, is under operation
• Formation of the Fiscal Management Inspection
  Group, and establishment of a Budget Waste
  Reporting Center (43 institutions)
• Strengthening budget misuse prevention training
  for line ministries
• Budget performance award money is given to those
  who have contributed to budget saving

24

• Improving the Public
• Expenditure Management
• System

25
Changes in the Fiscal Management Environment

• Socioeconomic changes
• Population ageing and low fertility rate
• of the population over 65 7.2 (2000) ?
  14.4(2019)
• Total fertility rate 6.0(1961) ? 2.1(1982) ?
  1.17(2002)
• Rising demand for a better quality of life
• Focus on social welfare, education, culture,
  environment
• Possible slowdown in economic growth engines
• Input driven ? productivity-driven economy
• Increased demand for participation and fiscal
  transparency

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Changes in the Fiscal Management Environment

• Public expenditure management will face future
  challenges
• Increase rate of tax revenues will drop
• Spending requirements are continuously increasing
• Support for the aged / disabled / low-income
  bracket, childcare, medical services,
  unemployment countermeasures
• Promoting regional economies, balanced national
  development, new growth driving factors
• Fiscal risk factors such as public pension scheme
  and unification-related costs

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Changes in the Fiscal Management Environment

• Increased attention of the general public and
  NGOs in fiscal management
• Demand for improved national competitiveness, and
  transparent fiscal management
• Need for the establishment of a system to allow
  the transparent understanding of the current
  fiscal situation
• Need for improved public announcement of fiscal
  information

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Performance Management System

• Objective evaluation of performance to enhance
  accountability and transparency
• Line ministries set performance indicators and
  goals
• Yearly evaluation of performance
• Program effectiveness and implementation problems
  will be evaluated and the results will be
  reflected in budget formulation

2004 (Y-1)
2006 (Y1)
2005 (Y)
Budget Execution
Performance Reports
Performance Plans
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Performance Management System (example)

• Ministry of Environment
• Goal blue sky, clean air
• Objective air quality improvement
• Programs
• 
  04 05 06 07 08
• LNG vehicles (billion won) 63.5 57.7
  117.8 130.9 90.0
• Measures to improve air
• quality in Seoul Metropolitan
• Area (billion won)
  - 15.9 25.0 40.8 81.6
• Expanding automobile
• certification testing
• equipment(billion won) 2.6
  9.4 6.8 7.2 7.4
• Key indicators
• NO2 emission(?g/m3) 34 33
  31 30 29
• PM10 emission (?g/m3) 70 68
  65 60 55

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Digital Budget and Accounting System

• Establishment of the Budget and Accounting
  Reinvention Office (May 2004)
• MPB, MOFE, MOGAHA, BAI
• Setting implementation tasks and directions
• 
  (Jul. 2004)
• Reform of the budget structure and system
• Reform of the accounting system
• Integrated fiscal information system
• Reform measures will be introduced according to
• yearly plans with the objective operating
  the system
• by 2007
• The system will be established by 2006

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Digital Budget and Accounting System(Implementat
ion Tasks)

• Redefining the scope of public finance
• Gradually expanding the scope until 2005
• Preparation of new fiscal indicators
• Program-oriented and simplified budget structure
• Systematic linkage between policy, organization
  and program
• Simplification of budget structure
• Introduction of accrual accounting
• Early-warning system of fiscal risks
• Supporting performance management
• Integrated fiscal information system
• Real time analysis and projection capacity
• Supporting policy formulation and decision making

32
National Fiscal Act

• The current Budget and Accounts Act has
  maintained the basic framework since its
  enactment in 1961
• There are limits in effectively supporting the
  fiscal reform initiatives of the Korean
  government
• The National Fiscal Act will serve as a legal
  framework for public expenditure management,
  supporting fiscal reform initiatives
• In October, 2004, the National Fiscal Bill was
  finalized at the cabinet meeting, and submitted
  to the National Assembly

33
National Fiscal Act(Contents and expected
effects)
34

• Thank You

35
Total Project Cost Management System
ltANNEXgt

• May 24, 2005

• Lee, Tae-sung
• Director, Investment Management Div.
• Budget Management Bureau
• Ministry of Planning and Budget
• leeftc_at_korea.com

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
1. Overview of TPCM

• The TPCM aims to enhance fiscal productivity and
  to ensure high quality of public construction
  work by properly adjusting and managing total
  project costs (TPC) throughout the implementation
  stages of a project.
• The Ministry of Planning and Budget (MPB)
  established the cost monitoring system in 1994,
  and has revised the Guidelines for Total Project
  Cost Management on an annual basis.
• It was after the establishment of MPB in 1999 as
  a leading agency of government reform in the wake
  of financial crisis of 1997 and 1998 that the
  TPCM has been effectively implemented as a
  government expenditure measure.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• The following construction projects are subject
  to TPCM system
• ? Projects implemented by the central
  government itself or its agents,
• or by local governments or private
  institutions supported by government
• funding,
• ? Projects whose construction period
  exceeds two years, and
• ? Civil engineering projects whose TPC
  exceeds fifty billion Korean
• won (fifty million USD), or
  architectural projects whose TPC
• exceeds twenty billion Korean won
  (twenty million USD).
• The TPC includes all the cost items accrued
  throughout the life cycle of the project,
  including design, land acquisition, and
  construction costs regardless of whether the
  source of funding is from the central government,
  local governments or private institutions.

38
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
2. General Principles of TPCM

• Project costs should be managed by the
  construction phase and by construction unit in
  reference to total construction cost. The
  construction costs are not arbitrarily
  inter-changeable between project phases or
  between construction units.
• When increases in construction size or
  construction costs are inevitable, the minister
  in charge of the project is to consult with the
  Minister of Planning and Budget concerning TPC
  adjustment. At the same time, he/she also must
  consult matters relating to adjusting project
  duration that will be accompanied by the cost
  change.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
3. Implementation of the TPCM by project phase

• Project Conception phase
• The minister in charge of the project should make
  an appropriate estimate of the total cost and
  duration of the project and request the Minister
  of Planning and Budget for a PFS if the estimated
  total cost in the project conception phase is
  fifty billion won or more.
• In the case of local government projects, the
  minister in charge should request the Minister of
  Planning and Budget for a PFS if the projects
  funding relies on the central government subsidy
  by thirty billion won or more.
• Phases of PFS and (Detailed) Feasibility Study
• The Minister in charge should report project
  size, TPC and project duration to the Minister of
  Planning and Budget for all the projects that
  have been evaluated as feasible by PFS and drawn
  up the budget by the end of January.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• Detailed feasibility studies should cover the
  life cycle cost of the projects resulting from
  all technological, environmental, social, and
  financial aspects as well as land acquisition.
• Draft Design phase
• It is recommended to spend sufficient amount of
  money and time in the draft design phase to
  prevent significant and frequent design
  modifications in the following construction
  phases. The design team should collect various
  opinions from target citizens, interests groups
  and related government authorities to minimize
  public discontent expected in the construction
  phase.
• The minister in charge should consult
  value-engineering (VE) experts at least once
  before the end of this phase to prevent
  overestimation of costs and excessive
  construction.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• Blueprint Design phase
• The construction size should not be modified
  significantly in this phase. When design
  modification or change in construction size is
  inevitable, the minister in charge should discuss
  the matter with the Minister of Planning and
  Budget.
• The minister in charge should also consult
  value-engineering (VE) experts at least once
  before the end of this phase to prevent
  overestimation of costs and excessive
  construction.
• Contracting phase
• The Minister of Planning and Budget informs the
  Administer of the Office of Supply Administration
  of the total construction cost that is discussed
  with the minister in charge.
• When the contract cost exceeds the informed cost,
  the Administer of the Office of Supply
  Administration should discuss the matter with the
  Minister of Planning and Budget.

42
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• Construction phase
• The minister in charge should try to minimize
  increase in costs except when new construction
  techniques or new equipment are to be introduced
  to enhance the quality of the product
  substantially.
• When the increase in costs, change in
  construction size and/or construction duration
  are inevitable, the minister in charge should
  submit a written explanation and consult with the
  Minister of Planning and Budget.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
4. Construction Contingencies

• Construction Contingencies
• The line ministry is allowed to set construction
  contingencies up to 8 of the contract price of a
  project to cope with inevitable design
  modification and amendment of the law and so on.
  The line ministry can change the TPC within the
  limit of contingencies with its own discretion.
• Contingencies apply only to construction phase of
  a project.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
5. Re-inspection of Feasibility (RIF)

• The RIF aims to check unnecessary cost increase
  by re-affirming the feasibility of projects under
  implementation and scrutinizing the adequacy of
  the cost increase.
• The MPB conducts the RIF on a project if
• ? the PFS has not been conducted although it
  falls under the PFS coverage, or if
• ? the TPC has increased by more than 20
  (excluding inflationary effects
• and increase in land acquisition
  cost) compared to the cost that the
• Minister of Planning and Budget
  confirmed at the previous phase of the
• project. (e.g. if the blueprint
  design cost estimate exceeds the draft design
• cost estimate by more than 20,
  the project is subject to RIF.)

45
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• The line ministries conduct the RIF on a project
  with miscellaneous changes in construction costs
  and report to the Minister of Planning and
  Budget.
• Guidelines and Contents of RIF
• The MPB established the RIF guidelines in March
  2005 to clarify the procedure and methodology of
  RIF.
• The RIF guidelines suggest that the RIF should
  include, but should not be limited to, the
  following components
• Outline of a project
• Analysis of background date and newly raised
  project issues
• Analysis on adequacy of the plan including size
  of the project
• Economic analysis including cost-benefit analysis
• Policy Analysis
• Overall Assessment including judgement whether or
  not to continue a project and if the TPC increase
  is adequate.

46
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
6. Principles of TPC Adjustment

• In general, an increase in construction size
  through design modification is not allowed,
  except for inevitable cases.
• The base cost for TPCM system is the contract
  cost determined by bidding, not the cost estimate
  at design phase.
• "The indicator adjustment formula" set by the
  Office of Supply Administration is applied to
  re-calculate project costs incorporating
  inflationary effects.

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Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
7. Other administrative guidelines

• When project under implementation violates the
  TPCM guidelines, the Minister of Planning and
  Budget can cut off or suspend budget allocation
  for the project.
• The minister in charge can impose sanctions
  prohibiting invitation to tendering of
  construction projects on design teams when their
  work have resulted in substantial cost increase
  due to unsatisfactory performance or when they
  intentionally or unintentionally failed to
  estimate the appropriate construction costs or
  sizes.
• The minister in charge can petition to the
  Minister of Planning and Budget requesting for
  changes in costs and project duration at any time
  through the Budget Information Management System,
  if necessary.

48
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)
ltTable 1gt Number of projects with substantial
change in TPC
(Unit the number of project, )
Year Total projects under TPCM (A) Increase in TCP by over 20 (B) Decrease in TCP by over 20 (C) B/A() C/A()
1994 218 - - - -
1995 207 19 2 9.2 1.0
1996 159 19 2 11.9 1.3
1997 189 20 2 10.6 1.1
1998 183 17 2 9.3 1.1
1999 459 15 2 3.3 0.4
2000 483 24 23 5.0 4.8
2001 602 26 13 4.3 2.2
2002 602 10 15 1.7 2.5
2003 667 15 27 2.2 4.0
2004 698 26 20 3.7 2.9
49
Budget Execution System and Expenditure Control
in Korea (Total Project Cost Management System)

• B/A () has decreased and C/A () has increased
  since 1999.
• It is result of establishment of the MPB and the
  MPBs efforts to reinforce the TPCM System.
• THANK YOU