MPB Spearheads Epochal Innovation in Public Sector
- MPB Minister Kim enumerates four major fiscal reforms

Grandiose policies on reforming all sectors of society had been declared when all past governments were inaugurated, but the reform drives had end up as hollow, short-lived slogans. Reflecting a rapid pace of changes in a knowledge-based era, the participatory government is initiating a sweeping, far-reaching array of changes and reforms. One of the government sectors undergoing tremendous changes fundamentally, unlike the previous superficial or political rhetoric, is a sector of implementing national fiscal policies, including national budget compilation and fund management plans and fiscal reform.
The fiscal policy reform scheme, launched in earnest this year, is projected to have a tremendous overhaul of the public sector. Spearheading what is viewed as the most innovative change in the 50-year history of national budget planning is Minister of Planning and Budget Kim Byung-il, who has been all around in the field of national policy and budget for more than 30 years.
The four key fiscal policy reforms the ministry has pushed with a strong will and determination is the adoption of the National Fiscal Management Plan, Top-down Budgeting, Performance Management System, and digital Budget and Accounting System. "In the past, interested parties from government agencies and districts tended to scramble for more budgets beyond the nation's means, and budget compilation has been virtually a process in which government agencies focused on securing more money rather execution and performance of their own projects, and understaffed, less specialized MPB officials had to cut budget proposals, partly inessential yet sometimes partly vital", Minister Kim said in an interview with NewsWorld.
From this year, the ministry has introduced the Top-down Budgeting approach under which each government agency is given autonomy in to allocating their fiscal resources within the total amounts, preset by the MPB according to the budgetary constraints, the minister said. The rationale of the new system is that each government agency is given rights to determine factors like the priority of state-financed products, investment volumes, and unlike the past, all government officials are participating in the process of discussing how to allocate their own fiscal resources. "Starting this year, the working-level function of selecting projects has been transferred to each government agency under the fiscal reform plans, paving the way for an efficient dispensing of taxpayer's money and enhanced productivity. The fiscal reform plan means a fundamental shift of a paradigm in order to ensure performance-oriented fiscal management, expanded autonomy, participation and a sound fiscal stance, departing from the past practices of budget management", he said.
MPB Minister Kim stressed that the fiscal reforms are necessary at a time when the nation has witnessed slower economic growth but soaring public demands for welfare like developed countries like the United States. Minster Kim said he personally asked each minister for cooperation in setting each ministry's budget for next year under the new paradigm and visited provincial areas to explain the new fiscal reforms to heads of each provincial autonomous body. Thirty-six of the 47 government ministries and other agencies proactively cooperated in the new resource allocation system.
MPB will focus on performing the Performance Management System in which execution and performance of state-funded projects are reviewed in the public sector and the outcome of the assessments are reflected, as the private sector does.
All budgetary processes ranging from compilation, execution, and performance assessment, which were previously done manually, will be digitalized under the new paradigm giving more weight on execution and performance rather than money input, he said. With regard to a demand for the government's aggressive fiscal policy aimed at turning around the sagging economy, Minister Kim said, the government has tried to strengthen fiscal policies aimed to boosting the economy in finalizing the budgetary size and fiscal balance for next year despite economic hardships, while holding the consolidated fiscal deficit within 1 percent of gross domestic product (GDP), the lower limit of the sound fiscal stance. In particular, the minister stresses the need for the availability of pension and other funds for investments into public service and facility projects.
Minister Kim said the government is seeking to implement a Korean version of the New Deal project by cashing in on pension and other funds, estimated at 190 trillion won, saying that the use of the rich funds would not only relieve fiscal constraints but also bring about a virtuous circle of the economy - boosting investments, consumption, economic growth and creation of jobs. For instance, from a bitter lesson Korea has experienced, the minister cited the construction of subways in Seoul, saying that the Seoul Metropolitan Government had to suspend the construction of subway Nos. 9 through 13 due to snowballing debt woes five years ago. The following are the excerpts of the interview with MPB Minister Kim.

Question: What are the main features of the government bill on the budget plan for next year, submitted to the National Assembly and what priority does the MPB place?
A: The 2005 budget plan calls for adopting fiscal policies aimed at boosting the sagging economy. General account expenditures will grow 9.5 percent during 2005, compared to 1.7 percent growth in 2004. The volume of government bonds issued will be increased from 2.5 trillion won in 2004 to 6.8 trillion won in 2005, the 2005 fiscal deficit will widen slightly with the consolidated budget balance growing by 8.2 trillion won or 1.0 percent of GDP, the lower limit of the sound fiscal stance in 2005, compared to 7.2 trillion won or 0.9 percent of GDP in 2004.
The 2005 budget plan has been drawn up under the top-down budgeting and autonomous allocation system and the five-year National Fiscal Management Plan, the most innovative change in 50-year history of national budget planning. The highlight of the 2005 budget plan is to attach priority in resource allocation of projects which are aimed at expanding the potential economic growth by 14.3 percent. The government's priority projects include improvement quality of life, decentralization and balanced national development, and strengthening national defense stance and inter-Korean relations on top of technology and human resources development as well as welfare projects like creation of jobs.

Q: What is your assessment of the Top-down Budgeting approach that was put into action and what about its long-term prospects?
A: The Top-down Budget approach has contributed to redressing a vicious cycle of budget compilation in which excessive budget requests by each government agency are cut down during the process of deliberating. State-funded projects have undergone restructuring with the amounts of the budget cut or affected under the restructuring process surging to 2.7 trillion won in 2005 from 1.6 trillion won in 2004.
Each government agency has been give more autonomy in the process of their own budget allocation and responsibility therein.
To our regret, the fiscal reform scheme has been pressed for time or suffered from insufficient experience and a lack of understanding in the inaugural year, as each government agency was given two months and one month to draw up the ceiling on its own expenditures and determine its own expenditures, respectively. The scheme has set the stage for distributing fiscal resources in the strategic perspective and making the most of each government agency's expertise.
The Top-town Budgeting approach will be complemented and its development plans will be worked out. Negotiations on annual linkages in the National Fiscal Management Plan and setting of expenditure ceilings will start next January.

Q: What are the main points of the long-term national fiscal management plan that was established this year for the first time?
A: The National Fiscal Management Plan specifying fiscal management between 2004 and 2008, was approved by the cabinet on Sept. 14 and submitted to the National Assembly on Oct. 12. The fiscal management plan projects the real growth rate of the national economy at the 5 percent level during the period and the average annual growth rate of total revenues at 7.4 percent. Total expenditures are projected to record the annual growth rate of 6.3 percent with a top priority being placed on expanding the potential economic growth, while the per capita tax burden is predicted to stand at about 20 percent, similar to the current level, and at between 25 percent and 26 percent given social security net contributions.

Q: Would you explain the Digital Budget and Accounting System, one of the four fiscal policy reforms?
A: The Digital Budget and Accounting System refers to the public on-line access to information about the compilation and execution of the national budget in a transparent and excise manner like listed companies. The design is to build a basic infrastructure for implementing the four fiscal policy reforms. Specifically, the sphere of public finance, now limited to accounting of the central government and funds, will be expanded to include local governments, their affiliated institutions and public companies in accordance with international standards, including IMF's in a bid to ensure credibility.
The budget accounting structure will change from the current cash input categories into the one programmed with policies and project results in an effort to raise fiscal efficiency, accountability, and productivity.
Double-entry bookkeeping and accrual accounting system, now put into practice in the private sector, will be introduced in the public sector to ensure transparency in accounting, settlements, and accuracy. An integrated national fiscal information system is being established to analyze and provide information on all budgetary processes ranging from budget compilation, execution to accounting.

Q: What are the main features of the bill on the proposed National Fiscal Act aimed at overhauling the National Fiscal Management Plan, that was submitted to the National Assembly?
A: The Budget Accounts Act, enacted in 1961, needs to be streamlined to correspond to the changes currently. A new fiscal management framework will be legislated by combining the Budget Accounts Act and the Framework Act on Public Funds Management. The proposed National Fiscal Act stipulates such fiscal policy reforms as the mandatory adoption of the National Fiscal Management Plan, Top-down Budgeting and Performance Management System. It also would allow additional issuance of government bonds to the level equivalent to 1 percent of GDP of the previous year and pave the way for executing expenditures of ongoing projects in advance so as to adopt fiscal policies of boosting the economy and brace for a shortage of tax revenues.
The government would be required to establish an annual national debt management plan and submit it to the National Assembly. The move is one of the steps the government wants to introduce in order to handle government debts and fiscal balance in a more aggressive manner. Under the measure, it would be mandatory for the government to attach priority in redeeming government debts with extra revenues. As a means of raising fiscal transparency, the government would be required to announce such fiscal information as the consolidated budget balance for one time or more annually. It would give rights to demand for rectifying illegal fiscal expenditures.
The proposed National Fiscal Act, submitted to the plenary session of the National Assembly last month, is expected to be approved by the parliament within the year. It is necessary to accelerate legislation of the bill so that fiscal management will be overhauled focused on decentralization of authorities, autonomies and Performance Management System.

Q: The fiscal deficit is widening following the 1997-98 Asian financial crisis. What is your assessment on soundness of the fiscal stance and future prospects?
A: Our nation's fiscal stance and national debts are relatively sound in the fiscal respect. The government has maintained the consolidated fiscal balance within plus or minus 1 percent of GDP since 2002.
National debts stood at 165.7 trillion won as of the end of 2003, but debts exacerbating the deficit accounted only for 36 percent of the total debts. Our nation's ratio of government debts remains at 23.0 percent, lower compared to the average of 76.0 percent among the member countries of the Organization for Economic Cooperation and Development as of the end of 2003, according to statistics released by the World Economic Outlook. The fiscal management plan calls for curbing the growth rate for expenditures 1 percentage point lower than that for revenues, with the goal of achieving a sound fiscal stance in 2009 with projected 7.4 percent growth rate in total revenues and 6.3 percent growth rate in total expenditures.

Q: Some people demand the government adopt an aggressive fiscal policy aimed at turning point of the sagging economy. What is your comment on the issue as minister of planning and budget?
A: I share the view that an active fiscal spending policy is needed in consideration of the current economic situation. The government has strengthened fiscal policies aimed at boosting the economy in finalizing the budgetary size and fiscal balance despite economic hardships. The 2005 budget plan calls for raising the general account budget to 131.5 trillion won, up 9.5 percent from 120.1 trillion won in 2004. The issuance of government bonds in the general account deficit will be increased to 6.8 trillion won in 2005 from 2.5 trillion won in 2004, while focus management fiscal balance will rise to 8.2 trillion won, 1 percent of GDP in 2005, from 7.2 trillion won, and 0.9 percent of GDP this year.
Besides, pension funds, private and public funds are made available to implement additional public investment projects.

Q: Would you elaborate on the necessity of allowing pension and other funds to be used for stock and other investments by revising the Framework Act on Public Funds Management?
A: The bill on amending the Framework Act on Public Funds Management, submitted to the National Assembly on June 6, stipulates the deletion of Article 3, Clause 3 of the Act, banning funds from being invested in the stock market and real estate purposes. The rationale of the proposed amendment is that pension and other funds find it difficult to secure proper profits only through investments into the bond market and it is inevitable for pension and other funds to diversify their investment portfolios to such investment assets as stock holdings.
Pension and other long-term investment funds acquiring stock holdings are expected to contribute to ensuring stability and development of the stock markets. The bill deliberation subcommittee of the National Assembly Steering Committee is discussing a changed version of the government bill and an amendment bill, proposed by the opposition Grand National Party (GNP). The government submitted a revision of the government bill calling for raising independence, transparency, and expertise of fund management to the subcommittee on August 25, while the GNP proposed their own amendment bill on Sept. 16.

Q: The government is seeking to carry out a Korean version of the New Deal project by capitalizing on pension and other funds investments in a bid to boost the economy. Do you think such a plan would be as effective as expected?
A: The so-called Korean New Deal project would advance such public services and facilities that have been put on hold due to budgetary constraints. By doing so, it would bring about public convenience, private investments, supplemented by expanded outlays by the public sector with the aim of boosting the economy, and help pension and other funds find their safe investment areas for a long-term perspective.
The government plans to widen the scope of investments into public services and facilities by the private sector by 10 to 45 facilities, including education, welfare, and culture amenities. The projects will be carried in the form of the build-transfer-lease (BTL) method in which private businesses are responsible for cash input and construction and the relevant government agencies take over operation.
I expect the project will be effective when the government attaches priority on raising economic efficiency in selecting the scope of undertakings and pension and other funds are considered massive funds that are made available for a long-term perspective.

Q: What are the highlights of the management assessment system introduced in the wake of the implementation of the Framework Act on the Management of Governments-affiliated institutions that took effect last April?
A: The Framework Act on the Management of the Government-affiliated Institutions was enacted and promulgated on Dec. 31, 2003 about two years after the Presidential Commission on Government Innovation and Decentralization raised the necessity for legislation of the law.
The academic, economic, and civic circles have criticized the government-affiliated institutions for their inefficient management, exacerbating the burden to taxpayers and a lack of systematic management. The act stipulates a management accountability system in which each government-affiliated institution is given more autonomy and take responsibility on the performance of management by strengthening ex post assessment, transferring from the previous practice of prior control.
The government-affiliated institutions subject to government management scrutiny in accordance to the act are 88 institutions which has a great impact on public lives and whose fiscal dependence is relatively higher. Among them are such corporations as Korea District Heating Corp. in which the government has largest stakes and such corporations as Korea National Parks Authority and Road Traffic Safety Authority which the government has contributed an average of more than 5 billion won for the past three years.
Each head of the government-affiliated institutions sets its own goals on priority projects, while the relevant government ministry works out the guideline for management assessment taking into account the former's management goals. Each government ministry has a group of civic experts responsible for appraising management performance of each government institution.
The outcome of appraising the performance of each government-affiliated institution will be submitted to the National Assembly and revealed to the public to face public scrutiny. The results will be available in differentiating government-endowed institutions in government support and making personnel changes in a bid to raise management efficiency.
The management assessment system for government-affiliated institutions is significant because from now on, the institutions were expected to make efforts to provide the best service to citizens and ensure ethical management, although they have so far tried to win over the relevant ministry.
The CEO of each institution is motivated as the system guarantees autonomy and takes responsibility on management performances so that it can be managed the similar way private companies are assessed by market forces. The latest move caps the government's efforts to raise fiscal management as the scope of fiscal management, which has so far centered on the general account, the special account and public corporations, has been expanded to include pension and other funds in 2001 and the government has affiliated institutions in 2004. Such factors as personnel management and prior excessive restrictions the government has imposed will be streamlined to help make the government-affiliated institutions' adoption of the management assessment system, to be introduced next year, successful.

Q: What steps has the MPB taken to ensure management renovation and system overhaul of public corporations and the government-endowed institutions?
A: The participatory government has established a foundation for ensuring autonomy and accountability of the government-affiliated bodies in accordance with the April 2004 implementation of the Framework Act of the Management of Government-endowed Institutions by introducing management assessment system, public CEO recruiting system, and customer satisfaction survey.
Management results of public corporations have been examined, and the corporations are encouraged to participate in their own innovation by assimilating select renovation examples to other corporations. In 2003, 2,311 tasks were recommended as innovative examples. The government will redouble efforts to ensure autonomy and accountability, while expanding management weight in such vulnerable areas as labor expenses in a bid to contain moral hazards and reinforcing a public notice system. The process for recruiting and recommending public corporation chiefs will be strengthened to raise objectivity and transparency in personnel management. The government will seek to overhaul governance and inspection system of public corporations.

Q: The government plan to privatize public corporation has come to a standstill. What is the future course of privatizing Korea Electric Power Corp. (KEPCO), Korea Gas Corp. and Korea District Heating Corp. that has been put on hold?
A: In several countries, privatizing public corporations, the subject of public criticism over a dearth of "their own ownership" thinking, has become one of the policies aimed at improving efficiency and competitive edge. In this vein, such corporations as KG&T and POSCO in Korea have been privatized.
But the Ministry of Commerce, Industry and Energy taking the initiative, the government is reconsidering the planned privatization of such corporations as Korea Electric Power Corp. Korea Gas Corp. and Korea District Heating Corp. in the network industrial sector as the public sale of such corporations are feared to bring about such side-effects as charge hikes, supply instability and disregard of public interests, as showed in the blackout case that took place in the state of California. The government decided to halt the privatization process of the power distribution sector of KEPCO, citing inelastic electricity charges and stable power supply, and instead change it into a separate division.
The public sale of such power generation companies as Korea South-East Power Co. will be pushed, however, as planned, after comprehensively taking into account such factors as the stock market conditions as a means of stemming a controversy over the cheap sellout. Regarding the privatization of Korea Gas Corp., a consultative group comprising of the representatives from labor, management, and government is studying to determine whether the government will separate and sell the importation and wholesale sectors or allow new market entrants.
Negotiations take place through a consultative body of shareholders and relevant interest parties on the public sale of Korea District Heating Corp. since last July. Residents in Bundang have field a lawsuit demanding their rights on their contributions on the construction of facilities, fearing that the privatization of the corporation would bring about heat charge hikes. The legal action has delayed the listing of the corporation.
The government plans to decide prudently on whether it would go ahead with the planned privatization process or employ other ways of exploring efficiency of public corporations, depending on the outcome of the negotiations and studies. nw