Action Plan for Output Budgeting in Mongolia

8/14/2019 Action Plan for Output Budgeting in Mongolia

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Output Budgeting Session-1 by Tarun Das 1

Output Costing and OutputBudgeting

Part-1: Current Status and ActionPlan

Prof.Tarun Das


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Contents of thispresentation

A. Strategic Planning, Output Budgeting andPerformance Management Cycles1. Current Status of Budgeting System and

Budget Planning in Mongolia2. Current Situation of Output Costing and

Output Budgeting in Mongolia3. Requirements for Moving to Output

Budgeting4. Recommendations and Desired Action Plan


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1. The Public Sector Managementand Finance Act (PSMFA)(27 June

2002) As a part of wider governance reforms and to

modernize planning and budgeting systems,govt of Mongolia enacted the PSMFA 2002.

Complete implementation of the PSMFA asregards Strategic Business Plans (SBPs) andPerformance-based budgeting requires the

following activities on the part of thegovernment:1. To prepare comprehensive SBPs for each line

Ministry and all Agencies under it;2. To prepare Output Costing and Output

Budgeting for each portfolio ministry;


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2. The Public Sector Managementand Finance Act (PSMFA)(27 June

2002)

3. To move towards accrual accounting inaddition to usual cash accounting;

4. To introduce and implement Performance-Based Budgeting in all Agencies;

5. To formulate Methodology and system forAssessment of Performance Agreement

6. To prepare Medium Term Fiscal frameworkand Budget Forecast

7. To prepare Consolidated Financial

Statement for the general government inconformity with the IMF GFSM 2001.


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3. Progress until now

Government initiated measures to implementthe PSMFA almost immediately since its

inception in June 2002. Good progress has been made as regards:a) Introduction of Strategic Business Plans in major

line ministries;b) Formulation of Medium Term Fiscal and

Budgetary Framework,c) Preparation of consolidated financial statement

for general government,d) Time bound execution of budget ande) Improved fiscal reporting on cash basis with

some steps towards accrual accounting.


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4. Progress until now

MOF is implementing two major capacitybuilding projects being financed by grantsand loans from the World Bank and the AsianDevelopment Project.

Significant progress has been made asregards:

a) Development of basic concepts,b) Preparation of methodological papers,guidelines and manuals

c) Strengthening the information technology(IT) system and

d) Creating general awareness about usefulnessand necessity of modern techniques foroutput budgeting and accrual accounting.


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5. Unfinished Agendaand Tasks Ahead

Despite good progress, significant worksneed to be done in the followingspheres:

Output costing and outputbudgeting, Accrual accounting and accrual

budgeting;

Performance based budgeting.


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6. Strategic Planning, Output Budgetingand Performance Management Cycles

Strategic Planning-Specify Goals,Outcomes, Outputs,Activities,Resources

Output Budgeting andPerformance Planning-(a) Costing and budgeting ofOutput on accrual basis(b) Specify performanceParameters- timeliness, relevance,Value, clients response etc.

Execution and PerformanceEvaluation- Track the cost,Outputs and performanceparameters

Assessment and Improvement- Compare actual results withTargets and benchmarks- Suggest measures for improvement- Specify performance parametersfor next years budget


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1.Current Status ofBudgeting Systems

and Budget Planning

in Mongolia


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1.1 Current Budget Planning

Articles 26.1 and 26.2 of the Public Sector

Management and Finance Act (PSMFA, 27 June2002) of Mongolia mandate that StrategicBusiness Plan of a budgetary body shall formthe basis for preparation and approval of itsbudget.

The SBP shall contain strategic objectives ofthe budgetary body for the forthcoming threeyears and the outputs to be delivered duringthe next financial year and specified bycategory, quantity, quality and costs.

The PSMFA also mandates that costs shouldbe based on accrual accounting.


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1. Annual budgets are based on multi-year

Strategic Business Plans (SBPs) for the HQ andthe agencies under the line ministries.2. For 2008, three pilot ministries viz. MOECS,

MOFA, MOSWL have introduced ProgramBudgets linked to outputs and outcomes.

3. These budget formulations are in the rightdirection. Program budget, as in many othercountries, is the first step towards outputbudgeting and accrual accounting.

4. These ministries need to be congratulated andcomplemented for their pioneering andexcellent works.


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1.3 Program Budget for MOECS

A. Institutions

1) Pre-school Eucation Program2) General Education Program3) Vocational and Higher Education

Program

4) Culture and Art Program5) Science and Technology ProgramB. Broad Outcomes

1. Educational services for users,

2. Policy renovation activities, and3. Administration and planning


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1.4 Number of Programs forMOECS

Institutions Outcome-1 Outcome-2 Outcome-3

Pre-school 3 2 3

Gen. edu.school

6 6 4

VETI 3 2 3

Higher edu.Institution

3 2 3

Art & cult.organizatio

n

5 4 3

Scienceorganizatio

n

4 3 3


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1.5 Program Budget for MOECS(Mln MNT)

Institutions 2006

A/C

2007 BE 2008 BE

Pre-Kindergarten 519 694 64,345

Kindergarten 29,178 39,778

General edu.

school

96,448 119,793 185,397

VETI 8,792 15,110 27,761

Higher edu. Inst. 24,634 0 39,492

Other edul orgns 21,293 36,072 33,392

Art & cult. orgns 11,289 15,646 23,483

Science orgns 6,680 7,706 12,817

Total 198,832 234,798 386,686


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1.6 Budget Allocation byInstitutions (in percentage to

total)

I n s t i t u

-


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1.7 Increase over the PreviousYear (in percentage)

Instit

- 1 8 O t 1 1 Ki d t


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1.8 Outcome 1.1.Kindergartenservices Regular classroom day

budget1. Expenditure for wage and other activities

=No.of children * Ave. rate of var. costs asper govt resolution # 184, 2007.

2. Fixed costs

3. Child food costs as per govt reso. #167,2006.

4. One time allowance or reward : (a) Exp.for reward included in the variable costs;(b) 6 month allowance in accordance withthe Law on Education 43.1.7; and (c)

Allowance for retiring teachers/staff as perthe Law on Education 43.1.5.


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1.9 Budget for kindergartenservices

ompos on o u ge


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. ompos on o u ge2008 (In percent to total budget for the

program)

P r o g r a m m eW a g e sS o c i a l I n s .G o oS e r v

T r a n s f e r sC a p . E x p .N e t l e n dT o

E d u c a t i o n 5 3 1 1 2 9 4 1 2 1 0

P r e . S c h o o l5 7 1 2 3 1 1 0 0 1 0G e n . e d u c a t i o n5 9 1 3 2 7 1 0 0 1 0

V o c . e d u c a t i o n3 9 8 2 7 2 6 0 0 1 0

T e r t i a r y e d u .3 3 5 3 8 8 5 1 0 1 0C u l t u r e 5 0 1 1 3 8 1 0 0 1 0

T o t a l 5 2 1 1 3 0 4 1 2 1 0


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1. Similar budgets need to be prepared other lineministries and all budgetary entities including theagencies.

2. However, there is scope for improvement:(a) There are too many outputs and programs and

sometimes duplication of activities.(b) This makes monitoring difficult. We need to

prioritize programs and outputs.(c) Allocations are driven by cash demands.(d) There is need for accrual accounting.(e) Need for setting benchmarks for unit costs for both

direct, indirect and capital costs.


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1.12 Actions for Improvement

3. Need to develop performance parameters forevaluating the timeliness of preparation andexecution of programs and reporting of results;

4. Performance parameters for timeliness, relevance,value, clients response etc. to delivery of publicgoods and services

5. Need for specifying service delivery performance inthe budget process.

6. Developing systems for monitoring the cost,outputs and performance parameters.

7. Compare actual results with Targets andbenchmarks and suggest measures forimprovement for the next years budget


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1.13 Actions required

Necessary to establish more output and

outcome oriented approach to budgeting.To specify a time schedule for delivery ofoutcomes and outputs for the managers,who would implement the programs.

It will help to identify and monitor outputs

without bothering too much details ofinputs. Outcomes and outputs framework also

allows field managers to know their jobsbetter.

A focus on outputs simplifies theprojection of output costs.

It avoids the need to focus heavily oninput requirements, which can be derivedfrom output targets.


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1.14 Benefits of OutputBudgeting

Output budgets are based on reliable estimatesof output costs.

This requires a new chart of accounts.

An attribution matrix to link resources toactivities, activities to outputs and outcomes.

As usual there are negotiations between the

MOF and line ministries for budget allocation. But under output budgeting, negotiations are

transparent and based on expected outputsrather than on arbitrary cuts and favors.

Departmental budgets are also based on agreed

strategic plans and objectives, and not on wishlist of programs and projects.

fi f


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1.15 Benefits of OutputBudgeting

The outputs and outcomes framework

provides a robust basis for block funding& consistent basis for multi-year funding. Block budget allocations can be

designed around output groups toprovide greater flexibility to the agencies

and greater certainty and transparencyfor MOF.

For example, there could be block grantsto the MOECS for constructing new

hostels for students, and a separateblock grant for scholarship payments.


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2. Current Situation ofOutput Costing and

Output Budgetingin Mongolia


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2.1 Current Status of OutputBudgeting

Presently the HQ of a Ministry (except the three

pilot ministries viz. MOECS, MOSWL andMOFA) adopts a methodology which can bedescribed as Output-based or more accuratelyactivity-based inputs costing and inputsbudgeting.

The methodology consists of costing of inputs (interms of personnel, goods and services, andoverheads) required to sustain the activities forproducing the desired outputs.

Although outputs are indicated in the SBP,budgeting is done on the basis for inputs.

2 2 P f O t t


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2.2 Purpose of OutputBudgeting

On the contrary, under output budgeting the

cost and budget estimates are providedseparately for each output.

Basic purpose of output budgeting, as requiredunder the PSMFA (2002), is that given the

budgeted cost, one is interested in theachievement of output and outcome (and notin 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 wouldnot know what happened to the output levels.

2 3 A ti f O t t


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2.3 Actions for OutputBudgeting

To develop an effective and comprehensive

costing system for output based budgeting. To gather detailed information and constant

recording of actual expenses against activities. To establish computer based system for

output costing linked to the chart of accounts.

It requires a substantial investment to buyhigh-speed computers and software packages. It also requires recruitment of committed and

qualified accounting and auditing staff toensure regular updating and accuracy of

records on a concurrent basis.


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2.5 Output budgeting needs

identification of the following items:

Outcomes, outputs and activities, Direct and indirect costs, Main cost drivers, Attribution matrix for attributing

resource costs to activity costs, activitycosts to output costs and contributionto outcomes

A new chart of accounts that linksexpenses to activities, outputs andoutcomes,

Agreement on the costing framework.


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3.Requirements forMoving to OutputBudgeting

s a s an n egra e p ann ng


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. s a s an n egra e p ann ng,costing, budgeting, reporting

framework Preparation of Strategic Business Plans with

specification of outputs and outcomes;

Specification of performance indicators formeasurement of quality, quantity and cost ofoutputs and outcomes;

Specification of appropriate indicators formonitoring the contribution of outputs to theirdesired outcomes;

Performance indicators should be clear,relevant, economic, adequate & monitorable.

Preparation of Performance Assessment RatingTool (PART).

Evaluation of the performance parameters ofthe previous SBP.

3 2 Establish a comprehensive costing


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3.2 Establish a comprehensive costingframework linking resources to

activities, and activities to outputsand outcomes.

1. Design and implement a new chart of accounts, withcodes for activities, outputs and outcomes, and anattribution matrix for recording all direct and indirectcosts to the appropriate items or to the GeneralLedger.

2. This could be achieved in a phased manner.3. Initially there may be reporting of direct costs plus

broad allocation of indirect costs.4. Latter, a more precise costing framework may be

established through a new chart of accounts andaccurate measurement of actual costs for all activities

leading to outputs.


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4: Recommendations and

Desired Action Plan


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4.1 Budget Planning MOF should develop a new budget framework

based on outcomes, outputs, activities, inputs andperformance parameters to measure quantity,quality and timeliness of outputs and outcomes.

A Strategic Business Plan should be preparedindicating priorities for the budget year and threeforward years

Once in three years, a Medium Term Budget maybe prepared indicating expenditure for theprevious year, and forward estimates for thebudget year and three forward years using thebudget outcomes and outputs framework.

4 2 B dget Planning


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4.2 Budget Planning

Budgets for agencies must indicateresponsibilities of each unit/ manager for

executing outputs and outcomes. A new budget preparation and approval cycle

should be established that allows explicitconsideration of reliable information on financialand non-financial performance during at least firstthree quarters.

A new chart of accounts should be establishedthat links revenues and expenses to activities,outputs and outcomes.

The role of Accounting and Audit Divisions inrecording, maintaining and reporting financial

accounts and the systems coordination should bestrengthened.

4 3 Budget Planning


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4.3 Budget PlanningThere will be greater responsibility and

accountability for operations managers

to ensure efficient and effective use ofresources. It can be achieved by specifying

performance parameters on outputsand outcomes at the operational level,and more accurate costing informationfor each activity and output.

MOF should provide estimates forbudgetary allocations for all portfolio

ministries for the budget year and threeforward estimates as early as possible, so that line ministries can prepare

comprehensive strategic plans in time.

4 4 Output Costing and


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4.4Output Costing andBudgeting

Need to move to an output and outcome budgetingand planning framework.

The new framework should include a system for

monitoring and reporting cost information on a timelyand accurate basis.

Ideally the system should be fully computer based toimprove speed and efficiency.

A new costing system should be developed within anoutcome and output framework, and an attribution

matrix for linking activities and resources. Costs will include both direct and indirect costs, but

at the first phase, major capital costs (i.e.depreciation and capital charges) may be excludedfrom calculations.

. u pu os ng an


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. u pu os ng anBudgeting

Specification of outputs should includedefinition of quantity and quality so that

unit costs can be measured.There should be specific staff responsiblefor maintaining and analyzing cost data aspart of their duties.

This should be a priority area to be

monitored by internal audit. Cost information should be a majorelement of reporting on outputs.

When accurate cost data is produced on auniform basis for a number of years or for

alternative providers, agencies shouldconsider providing benchmarks for costinggoods and services.

4 6 N A ti H d d


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4.6 New Accounting Heads andCodes

Develop a new chart of accounts to facilitateoutput budgeting and accrual accounting.

Purchase of a standard software package forFinancial Management Information System(FMIS) may help to automate processes forentry, checking, verification andauthorization of transactions.

Selection of a new FMIS also provides thechecklist of standards required foraccounting platforms.

Some changes to existing procedures andstandards may be required to be made if

there is a move to a new FMIS and accrualaccounting and reporting.

4 7 Fi i l d P f


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4.7 Financial and PerformanceReporting

Outputs and outcomes need to be defined andspecified clearly.

Performance indicators need to be developed formonitoring outputs and outcomes.

Senior management should support the move andparticipate in design and specification of theoutputs and outcomes.

Reporting to senior managers should bestreamlined to reduce the amount of details.

Emphasis should be placed on improving accuracyand timeliness of information.

Procedures continue to be applied for ensuringconsistency of reporting across agencies and lineministries.


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4.8 Asset Management Asset management as part of the

move to multi-year budgeting, accrualaccounting and reporting.

Asset register should be maintained,retained and expanded to record initialvalue, current value, depreciation andcost attribution of each asset.

The cost of assets (comprisingdepreciation and capital charges) foreach output should be identified andattributed accordingly.

Managers should be aware of the role

of cost of assets as part of their totalproduction costs.

4 9 Internal Audit


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4.9 Internal Audit

Internal audit and accounting systems need tobe aligned for output costing, output budgetingand accrual accounting.

There should be a system of continual capacitybuilding and proper succession plan.

Ministry of Finance may prepare regulations andprocedures on the role and functions of various

audit authorities.There should be close alignment between theaccounting and auditing staff to address issuesrelating to performance and systems integrity(IT auditing) in addition to standard financialand compliance audits.


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Action Plan for Output Budgeting in Mongolia

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