ADB Project On Governance Reforms in Mongolia-Terminal Report Part-1 by Tarun Das

ADB Project Terminal Report- Part-1- Tarun Das and E.
Sandagdorj
Terminal Report: Part-1

Major Conclusions and Recommendations
ADB Capacity Building Project on Governance Reforms
Professor Tarun Das1

And
Mr. E. Sandagdorj2
Ministry of Finance
Government of Mongolia
Ulaanbaatar, Mongolia
31 March 2008
1
Glocom Inc. (USA) Expert on Strategic Planning, ADB Capacity Building Project for Governance
Reforms, Ministry of Finance, Government of Mongolia. Formerly, Economic Adviser, Ministry of
Finance and Planning Commission, Government of India and Professor (Public Policy), Institute for
Integrated Learning in Management (IILM), New Delhi, India.
2
National Consultant, ADB Capacity Building Project for Governance Reforms, Ministry of Finance,
Government of Mongolia.
MOF, Govt. of Mongolia 1 Glocoms Inc. (USA)

ADB Project Terminal Report- Part-1- Tarun Das and E. Sandagdorj
Table of Contents
Table of Contents Pages
PART-1 1-70
Contents 2
Acknowledgements 3
Project Team 4
Administrative Units of Mongolia 4
Major macro-economic variables 5
Document history 6-9
List of Abbreviations 10-11
Chapter-1: Major Conclusions and Recommendations 12-51

Annex-1: TOR and Compliance Report 52-58
Annex-2: Policy Matrix – Compliance Report 59-62
Annex-3: Design of a Training Program for capacity building 63-67
Annex-4: List of Experts consulted 68-70
PART-2 71-158
Chapter-2: Strategic Business Planning 73-100

1.
Chapter-3: Output Costing and Output Budgeting 101-115
Chapter-4: Accrual Accounting and Accrual Budgeting 116-132
Chapter-5: Benchmarks and Best Practices 133-157
PART-3 158-214
Chapter-6: Financial Planning 160-191
Chapter-7: Core and Non-core functions 192-205
Chapter-8: Seven Year Action Plan (2008-2014) 206-214

Acknowledgements
This Terminal Report summarizes the outputs and recommendations of the last phase of
the ADB Capacity Building Project implemented between June 2007 and March 2008.
This final report and the previous background reports have been produced with the help
of many people. We would like to thank everyone who has given time in meetings and
discussions and in the provision of basic data and information.
First of all, we are grateful to Mr. Batjargal Bazarsuren, Director General, Fiscal Policy
and Co-ordination Department, Ministry of Finance for his continual support, strategic
guidance and overall supervision.
We would like to thank our colleague Ms. Enkhtuul Khurel, Coordinator of the ADB
Capacity Building Project on Governance Reforms, for providing all possible help and
encouragements at every stage of our works.
The Report would not have been possible without the active participation and help by a
wide range of stakeholders in the Line Ministries. We would like to express our sincere
thanks to numerous officers, national and international consultants in the line ministries,
particularly the Ministry of Finance (MOF), Ministry of Education, Culture and Science
(MOECS), Ministry of Health (MOH), Ministry of Justice and Internal Affairs (MOJIA),
Ministry of Road, Transport and Tourism (MORTT) and the Ministry of the Social
Welfare and Labour (MOSWL) for their enthusiastic cooperation, keen interest, useful
discussions and for providing all relevant information and documents.
We are also grateful to the international and national consultants engaged in the World
Bank counterpart projects viz. Economic Capacity Building Technical Assistance Credit
(ECTAC) Project and Governance Assistance Project (GAP) for their valuable comments
and suggestions on our background papers.
We would like to thank all the participants of the half-day Workshop on Strategic
Planning conducted at the Ministry of Finance on the 28th August 2007, and the
participants of the two-day Workshop on output costing and output budgeting, accrual
accounting, benchmarks and performance parameters held at the Corporate Hotel on 29-
30 November 2007 for very fruitful discussions, valuable suggestions and comments.
It is needless to mention that the authors are solely responsible for the views expressed in
the paper and for any errors and omissions.
Ulaanbaatar, Mongolia Tarun Das3

31st March 2008. E. Sandagdorj4
3
International Strategic Planning Expert
4
National Strategic Planning Expert

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

on Strategic Planning
National IT Consultant Ms. D. Bolormaa
International IT Consultant Mr. David Lowey, Ph. D.
International Consultant Mr. Tarun Das, Ph.D.,

on Strategic Planning Glocom Inc. (USA).
Administrative units of Mongolia
Aimag – province – Mongolia is divided into 21 Aimags and the Ulaanbaatar capital city
Soum or District – county – Aimags are divided into 3-27 Soums (Total 331 Soums)
District – The capital city (Ulaanbaatar) is divided into 9 districts
Bags – the smallest administrative units (19-121) of Aimags (Total 1543 bags)
Khoroos – the smallest administrative unit in the capital city (Total 121 Khoroos)
Administrative System- comprises Local Representative Meeting in the capital city/ Aimags, and
Soums/ Districts; and Citizen’s meeting in the Bags/ Khoroos.

Fiscal year: 1st January to 31st December
Major macro-economic variables:
Items Units 2005 Rank in the World

from top in 2005
Area Million sq.kms. 1.56 19
GDP PPP Billion US$ 5.85 151
Population Million 2.55 137
GDP PPP per capita US$ 1983 176
GDP per capita US$ 736 148
Poverty ratio Percent 36 …
Items Units 2005 2006 2007
Real GDP growth rate Percent 7.0 8.7 9.9
CPI Inflation rate Percent 9.5 7.0 8.6
Interest rate on central bank bills Percent 3.7 5.8 6.4
GR of money supply Percent 37.3 34.9 43.8
Overall budget balance As % of GDP -1.0

3.2 3.3
BOP Current A/C balance As % of GDP 1.4 5.2 NA
Total public debt As % of GDP 68 54 NA
Total external debt As % of GDP 64 51 NA
Year end foreign exch. reserves Million US$ 333 626 1290

Document History
This report is based on the following background reports prepared earlier.
A. Strategic Business Planning
1. Ministry of Finance (MOF) Strategic Business Plan 2005-2006- Comments and

Suggestions for Improvement, pp.1-37, June 2007.
2. Ministry of Education, Culture and Science (MOECS) Strategic Business Plan 2006-2008-
Comments and Suggestions for Improvement, pp.1-20, June 2007.
.
3. Ministry of Health (MOH) Strategic Business Plan 2005-2008- Comments and Suggestions
for Improvement, pp.1-20, June 2007.
4. Ministry of Social Welfare and Labour (MOSWL) Strategic Business Plan 2005-2008-
Comments and Suggestions for Improvement, pp.1-20, June 2007.
5. Summary Report of comments on Strategic Business Plans for MOF, MOECS, MOH and
MOSWL, pp.1-5, June 2007.
6. Power Point Presentation 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.
7. Power Point Presentation 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.
8. Accompanying Text on “Preparation of Strategic Business Plans and General Guidelines”,

pp.1-25, for Workshop held on the 28th August 2007 at the MOF.
9. “Preparation of Strategic Business Plans- General Guidelines and Summary of

Recommendations”, Interim Report, pp.1-41, 31 August 2007.
10. “Preparation of Strategic Business Plans- General Guidelines, Suggestions for

Improvement, and Summary of Recommendations”, Final Report, pp.1-74, 30 Sept 2007.
11. Report at 1 is translated into Mongolian by E. Sandagdorj, National Consultant.

13. PPP at 6 is translated into Mongolian by E. Sandagdorj, National Consultant.
14. PPP at 7 is translated into Mongolian by E. Sandagdorj, National Consultant.

B. Output Costing and Output Budgeting
17. Output Costing and Output Budgeting- Basic Concepts and Methodology, pp.1-51, October
2007.
18. PPP on Output Costing and Output Budgeting: Part-1: Current Status and Action Plan,
pp.1-39, for the Workshop held at the Corporate Hotel on 29-30 Nov 2007.
19. PPP on Output Costing and Output Budgeting: Part-2: Upgrading Infrastructure, pp.1-24,
presented at the Workshop held at the Corporate Hotel on 29-30 Nov 2007.
20. PPP on Output Costing and Output Budgeting: Part-3: Output Costing Framework, pp.1-
42, presented at the Workshop held at the Corporate Hotel on 29-30 Nov 2007.
21. PPP on Output Costing and Output Budgeting: Part-4A: Output Costing Methodology,
pp.1-32, presented at the Workshop held at the Corporate Hotel on 29-30 November, 2007.
22. PPP on Output Costing and Output Budgeting: Part-4B: Case Studies, pp.1-24, presented
at the Workshop held at the Corporate Hotel on 29-30 November 2007.
23. PPP on Output Costing and Output Budgeting: Part-4C: Accrual Accounting, pp.1-26,
presented at the Workshop held at the Corporate Hotel on 29-30 Nov 2007.
24. Output Costing Methodology for Software Selection- Basic Concepts and Some Advices
for Selection, pp.1-9, December 2007.
25. Comparative Evaluation of the Australian ABC-FOCUS Software and the local Mongolian
ALOCOUS Software for Output Costing, pp.1-17, January 2008.
26. Report at 17 is translated in Mongolia by E. Sandagdorj, National Consultant.

27. PPP at 18 is translated in Mongolia by E. Sandagdorj, National Consultant.
C. Accrual Accounting and Accrual Budgeting
33. Accrual Accounting and Accrual Budgeting- Basic Concepts and Methodology, pp.1-43,
November 2007.
34. Transition from Cash to Accrual Accounting pp.1-26, November 2007.
35. Accrual Accounting Rules for the Govt Finance Statistics, pp.1-36, February 2008.
36. Glossary for Accrual Accounting and GFS, and Glossary for Financial Statistics, pp.1-38,
February 2008.


D. Benchmarks Setting and Best Practices
39. Benchmarks Setting and Best Practices for Output Costing and Output Budgeting- Part-1:
Basic Concepts, pp.1-31, Dec 2007.
40. Benchmarks Setting and Best Practices for Output Costing and Output Budgeting- Part-2:
Practical Applications for Mongolia, pp.1-36, Dec 2007.

E. Financial Planning Methodology and Policies
43. Financial Planning - Part-1: Methodology, pp.1-34, Jan 2008.
44. Financial Planning Methodology and Policies- Part-2: Policies, pp.1-32, Jan 2008.

F. Core and Non-Core Functions
47. “Core and non-core functions of the government of Mongolia- a critical assessment” – pp.1-
36, Feb 2008.
48. Report is translated into Mongolian by E. Sandagdorj, National Consultant.
G. Miscellaneous Reports
49. A Balance Sheet for the Mongolia Development Fund for the years 2007-2008 (pp.1-5),
June 2007.
50. A Report on the National Workshop on Bond Market, organised jointly by UN-ESCAP,
ADB and Bank of Mongolia (BOM) at the Corporate Hotel, Ulaanbaatar during 21-22 June
2007, pp.1-5.
51. Comments on the IT Group Report on the Budget Preparation Information Systems (BPIS)
- Budget Business Process Report, pp.1-6, 15 July 2007.
52. Comments on the IT Group Report on BPIS- Information Systems Architecture, pp.1-3,
August 2007.
53. Comments on the IT Group Report on BPIS Functional Requirements (Aug 2007).
54. Comments on two Reports on Policy and Expenditure Planning Statements (PEPS) for Pre-
school Education and Science and Technology of the MOECS by the World Bank
Consultants. August 2007.
55. Comments on the report of the IMF Mission on Budget Modernization on Mongolian
Government, pp.1-7, August 2007.

56. Comments on the report of the IMF Mission on Government Finance Statistics (GFS) and
Migration to GFSM 2001, pp.1-5, August 2007.
57. ADB Project and World Bank ECTAC Project Coordination Plan, pp.1-3, August 2007.
58. Official Economic statistics- Part-1 on Government Finance Statistics (GFS), Balance of
Payments (BOP) Statistics and Rest of the World Account, pp.1-70, lectures delivered at
the United Nations Statistical Institute for Asia and Pacific, at Chiba, Japan, during 20-25
August 2007.
59. Official Economic Statistics- Part-2 on Monetary and Financial statistics (MFS) and
Multi–Factor Productivity Measures (MFP), and Workout Sessions, pp.1-62, lectures
delivered at the United Nations Statistical Institute for Asia and Pacific, at Chiba, Japan,
during 20-25 August 2007.
60. Mainstreaming MDGs through National Development Strategies, Vol-1, Main Report,
pp.1-84, presented at the Regional MDG Workshop jointly organised by ADB, UNDP and
UN-ESCAP at Bangkok, 15-16 October 2007.
61. Mainstreaming MDGs through National Development Strategies, Vol-2, Annexes on

policies, programs and challenges for poverty reduction in 14 countries, pp.1-79, presented
at the Regional MDG Workshop jointly organised by ADB, UNDP and UN-ESCAP at
Bangkok, 15-16 October 2007.
62. Comments on the Mongolia Second National Report- Millennium Development Goals
Implemention in 2005-2006, pp.1-4, October 2007.
63. A Seven Year (2007-2013) Action Plan to implement the provisions of the PSMFA (2002)
as regards preparation of Strategic Business Plans on the basis of Accrual Output
Budgeting (AOB) and Performance Based Budgeting (PBB), pp.1-21, November 2007.
64. Report translated in Mongolian by E. Sandagdorj, National Consultant.
65. An abridged version in Mongolian prepared by E. Sandagdorj has been included in the
Mongolian Draft Budget for 2008.
66. Roll Out Plan for the ADB Project on Capacity Building on Governance Reforms, pp.1-3,
December 2007.
67. ADB Capacity Building Project on Governance Reforms- Policy Matrix Compliance
Report for 2007, pp.1-5, January 2008.
68. Mongolia Seven-Year Capacity Building Action Plan for 2008-2014, pp.1-6, Jan 2008.
69. A comparative analysis of budget planning, preparation, approval and execution systems in
Mongolia and Thailand, pp.1-11, March 2008.

LIST OF MAIN ABBREVIATIONS
ADB Asian Development Bank

AISI Agency in Charge of Specialized Inspection
BPIS Budget Preparation Information Systems
DBMS Database Management System

DMFAS Debt Management Financial and Analysis System
ECTAC Economic Capacity Building Technical Assistance Credit
EGSPRS Economic Growth Support and Poverty Reduction Strategy

EVMIS Evaluation Management Information System
FISCAL The main budget preparation tool in use at the Ministry of Finance
GAP Governance Assistance Program
GCC General Council of Courts
GDP Gross Domestic Product

GFMIS Government Financial Management Information System
GFSM Government Finance Statistics Manual
GM General Manager
HQ Headquarters
ICT Information and Communications Technology
IMF International Monetary Fund
IT Information Technology
JICA Japan International Cooperation Agency
MCUD Ministry of Construction and Urban Development
MDG Millennium Development Goals

MIES Ministry in Charge of Emergency Services
MIS Management Information System
MNT Mongolian Togrogs

MOD Ministry of Defense
MOECS Ministry of Education, Culture, and Science

MOF Ministry of Finance
MOFDA Ministry of Food and Agriculture
MOFE Ministry of Fuel and Energy
MOFRA Ministry of Foreign Affairs
MOH Ministry of Health

MOIT Ministry of Industry and Trade
MOJIA Ministry of Justice and Internal Affairs
MONE Ministry of Nature and Environment
MORTT Ministry of Road, Transport and Tourism
MOSWL Ministry of Social Welfare and Labour

MOUs Memorandum of Understandings
NDP National Development Plan
NGO Non Government Organisation
OCS Office of Cabinet Secretary
ODPM Office of Deputy Prime Minister
OOP Office of Parliament
OPG Office of Prosecutor General
OPM Office of Prime Minister
NPV Net Present Value

PART Program Assessment Rating Tool
PLASTIC A software application used to consolidate financial reports by
MOF, UB city, 21 Aimags and 9 districts.
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
UK United Kingdom
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UN-ESCAP United Nations Economic Commission for Asia and Pacific
UNITAR United Nations Institute for Training and Research
UN-SIAP United Nations Statistical Institute for Asia and Pacific
UNDP United Nations Development Project
USA United States of America
WB World Bank

Chapter-1
Major Conclusions and Recommendations
1. Scope, Objectives and Structure of the Report
1.1 This Terminal Report summarizes the outputs and recommendations of the last
phase of the ADB Capacity Building Project on Governance Reforms implemented
between June 2007 and March 2008. It is understood that the project started in 2003
and was extended twice since then. The basic purpose of the project was to build
necessary capacity and skill in the government of Mongolia to implement fully the
Public Sector and Finance Management Act (PSFMA) enacted by the Mongolian
Parliament on the 27th February 2002.
1.2 The present international consultant5 from the Glocom Inc. (USA) joined the
project on the 1st June 2007 and was given only 10 months to accomplish an extensive
list of diverse tasks6 on identification and management of core and non-core functions,
preparation of guidelines and manuals and provide training on strategic business
planning, output costing and output budgeting, accrual accounting, benchmarks setting
and financial planning etc.
1.3 It may be observed from the TOR (Annex-1) that each component of the TOR is
itself a major study requiring collection and analysis of data, critical review of the past
reports and further research on a number of economic parameters and diverse subjects.
The TOR presumed that previous studies on these issues have been prepared and are
easily available, and the consultant’s main job is to make a critical review of these
studies and suggest further improvements in the methodology, if any.
1.4 But, the real situation was completely different from this perception. Except for
four Strategic Business Plans for the MOF, MOECS, MOH and MOSWL, no other
relevant documents were available. Even for the Strategic Planning, there were no
formal and approved guidelines on the concepts and desired structure of SBP.
Guidelines on output specification and output costing were incomplete. There was no
approved methodology on output costing and accrual accounting. These were no
documents on benchmarks and performance parameters.
1.5 So the international consultant has to start from the scratch and to produce
background reports and manuals on basic concepts, methodology and detailed
guidelines on strategic planning, output costing and output budgeting, accrual
5
Professor Tarun Das, Glocom Inc. (USA) Expert on Strategic Planning, formerly Economic Adviser,
Ministry of Finance and Planning Commission, Government of India and Professor (Public Policy),
Institute for Integrated Learning in Management (IILM), New Delhi, India. Consultant was required to
have extensive experience in strategic planning, output specification and costing, and implementation of
similar projects in other countries with similar legal and fiscal arrangements to Mongolia.
6
Detailed Terms of Reference (TOR) and the Compliance Report are presented in Annex-1.

accounting and accrual budgeting, benchmarks setting and financial planning. The
international consultant was supported by only one national consultant7 for all these
works.
1.6 Both the international consultant and the national consultants are happy to report
that all the terms of reference have been fully accomplished8. In addition to this
Terminal Report, consultants have produced 68 reports consisting of 43 reports in
English and 25 reports translated in Mongolian. All these reports were circulated
among the line ministries and their comments and suggestions have been incorporated
in the final reports.
1.7 These reports have been made available to the IMF Missions on Governance
Reforms and Consultations on Article-IV and the ADB Missions on Governance
Reforms and Policy Evaluation. It is a matter of satisfaction for the consultants to
report that their hard works and the detailed guidelines and manuals on various aspects
have been appreciated by both the IMF Mission and the ADB Mission.
1.8 Consultants organised and conducted two Workshops on strategic planning,

output budgeting, accrual accounting and benchmarks setting, attended by the officials
of line ministries, Aimags and local governments
1.9 This final report summarizes the major conclusions and recommendations of the
previous background papers. This report consists of seven chapters including this
chapter on major conclusions and recommendations. Chapter 2 deals with Strategic
Business Planning, Chapter 3 with Output Costing and Output Budgeting, Chapter 4
with Accrual Accounting and Accrual Budgeting; Chapter 5 with Benchmarks and Best
Practices; Chapter 6 with Financial Planning; and Chapter 7 on Core and Non-core
functions of the government.
2. Strategic Business Plan (SBP)

A. Scope and Objectives of the SBP
2.1 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.””9
2.2 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
7
Mr. E. Sandagdorj, National Consultant, ADB Capacity Building Project for Governance Reforms.
8
The progress report on each item of TOR is indicated in details in Annex-1.
9
Articles 26.1 and 26.2 of the Public Sector Management and Finance Act (27 June 2002).

realistic Vision, based on issues, objectives and strategies identified in collaboration

with major stakeholders.
2.3 SBP need not be too ambitious with an impressive plan but unrealistic targets. It
should emphasize concrete plan of actions and strict implementation schedule.
2.4 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 strengthening, replacing or even eliminating weak institutions.
2.5 SBP needs to recognize that the global business environment is complex and fast
changing and global public policy is an area of conflicts and adversity. We need to
understand the dynamics of both internal and external environment and be prepared
with appropriate strategy to tackle any contingent liabilities.
2.6 SBP needs to recognize that government policies and programs cannot be
successful unless the government is able to take the people along with them. Thus
collaboration in SBP is a deal which rewards all parties involved, and creates win-win
situations for all stakeholders.
B. SBPs and Reforms
2.7 SBPs have to be integrated fully with structural and governance reforms and
capacity building. 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, radical, fundamental or revolutionary approach.
2.8 In a multi-party democracy as in Mongolia, there is a need for general political

consensus for acceptability of reforms, and government should own the reforms.
2.9 There is also a need for emphasis on “human face” or pro-poor policies. If every
Mongolian is skilled and healthy and live longer, they can participate fully, contribute
more and benefit more from the development process.
2.10 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 services, so that the associated risks,
costs and benefits are shared by all economic agents.
2.11 There is already a re-orientation of the role of the government in Mongolia, which
has withdrawn from the sectors where private participation including foreign
investment is more productive and more efficient. But the scope of the government
should remain large in the development of physical infrastructure and social sectors
viz. health and education.

2.12 We do not advocate for a small, shrunken and weak state, but want the state to be
strong to guide the transition process, to bring governance reforms to their logical ends,
to strengthen the existing public institutions, to finance public investment programs on
social and physical infrastructure and to help the poor to participate fully in the
development process. A national poverty reduction strategy will require a firm and
consistent leadership by the state, sustained over a long period of time.
C. Uniform Structure of SBPs for 2008-2010
2.13 It is recommended that for uniformity, the SBPs of all budgetary entities 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 Client
(D) Economic Environment Analysis in terms of Strength-Weakness-Opportunities-
Threats (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) Institutional Structures and Organizations
(H) Output Budgets for the Strategic Planning Period 2008-2010 along with past
performance for the years 2006 and 2007
(I) Monitoring and Assessment System
(J) Annex: Implementation and Evaluation Report of the previous SBP
2.14 2.14 It may be noted that we have prescribed the preparation of an Annex on a
brief evaluation and implementation report of the previous strategic business plan for
the years 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
business plan for the period 2008-2010 the first task of every budgetary entity 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.
2.15 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.

D. Linkages between SBP, MDG, NDP and Master Plan
2.16 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.
2.17 In fact, at the instance of the Parliament, the government of Mongolia (2007b) has
recently prepared the “Second National Report on Millennium Development Goals
(MDGs) Implementation for 2005-2006”. The report has concluded that “MDGs
implementation in Mongolia is slow, coordination of MDGs related policies is weak
and results are insufficient”. It clearly indicates that there is need to have more focus
on the achievement of MDGs while preparing the Strategic Business Plans.
2.18 In designing outcomes and outputs, MDGs appear to be a good starting point for
any ministry. The multidimensionality of the MDGs and inter-linkages among them
imply that the policy agenda for the achievement of MDGs is very broad. 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 the poor through
improved access to education, health and other basic public services.
E. Output Specifications
2.19 There must be distinctions between outputs and outcomes. Outputs are the
deliverables or the products and services produced, and the immediate or end results of
activities, whereas outcomes are the medium term impact of public programs and
policies on the economy and user groups.
2.20 As per international best practices, a typical or a stylized Strategic Business Plan
adopts a top down approach and has the following design of events:
Table-2.1 Typical Structure of SBP – Top Down Approach
Goals Long term – wide spread results of public programs and policies, like the
↓ achievement of the Millennium Development Goals by 2015
Outcomes Medium term – impact of public programs and policies on the economy and
↓ user groups.
Output Deliverables- products and services produced during budget period.
↓ Outputs are the immediate or end results of activities.
Activities Tasks- undertaken by the staff to transform inputs into outputs.
↓
Inputs Resources- (Personnel, financial, goods and services) are the basic
↓ requirements for any output and strategic planning.

2.21 According to the Articles 23.2 and 23.310, outputs include policy advice including
regulatory advice and other services required by the Great Hural or the Portfolio
Minister, as the case may be.
2.22 There has been debate in the economic literature whether policy advice can be
regarded as an output, because it is difficult to estimate its quantity, and its quality is
not uniform over time, space and individuals. However, 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 advice11 as an
output. As mentioned above, Mongolian Public Sector Management and Finance Act
2002 also recognize policy advice as an output. 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 the line Ministries.
2.23 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. 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 of the government programs and policies.
2.24 There is 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, and to determine next year’s budget.
Table-2.2: Evaluation of Policy Goals
Planned/ Budgeted Actual Evaluation
Planned outcomes → ← Actual outcomes Effectiveness
Planned outputs → ← Actual outputs Efficiency
Planned inputs → ← Actual inputs Compliance
10
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.
11
As per definition of the Australian Output Budgeting, if any policy advice is required by the portfolio
minister or the Parliament, it should be regarded as an output. But, if any advice is required internally by a
Division/ Departmental head from the subordinate officers, it should not be regarded as an output, because
it is a routine consultation, and not required for public use by the elected Members of Parliament.

F. Goals and Outcomes
2.25 As regards outcomes of the MOF, these will be the major macro-economic and
fiscal variables (such as real GDP growth rate, inflation rate, ratios of public debt,
external debt, current and overall balance of payments to GDP etc.). These ratios can be
determined on the basis of medium term expenditure and fiscal projections for the years
2008-2010.
2.26 For other Ministries, the minimum outcomes could be MDGs and other
indicators mentioned in their Master Plans. Health Sector Strategic Master Plan (2006-
2015) prepared by the MOH in collaboration with JICA, 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 examples of inputs, outputs and
outcomes in a variety of programs have been highlighted in chapter-2 on Strategic
Business Planning.
G. Output Groups and Indicators for Quantity and Quality
2.27 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 costing, auditing and accounting and may become unmanageable.
2.28 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 2312 dated the 5th February 2006 on “Output specification for each
budget portfolio ministries and other authorities”.
2.29 After specifying output groups we need to specify ‘category, quantity, quality
and cost’ for each output13. Here also we can learn from the Australian Budget14 which
is very brief and to the point and there is no beating around the bush.
12
Government Decree 23 dated the 6th February 2006 has specified general output groups for budget
portfolio ministries and other authorities.
13
As required under Article 26.2.2 of the PSMFA, 27 June 2002.
14
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”.

2.30 We can adopt the similar approach for Mongolia. In addition, we could list the
important policy documents, briefs on economic trends and other reports prepared by
the Ministry, surveys conducted, anticipated amendments of existing acts or preparation
of a new act, which are quantifiable, tangible and monitorable over time.
H. Output Costing and Output Budgeting
2.31 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 we need to cost and provide budget
estimates for each output.
2.32 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.
2.33 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.
2.34 For example, the output groups for the Ministry of Finance can be realigned with
the Departments as indicated in Table-2.3.
2.35 Other Ministries can also identify similar output groups which can be realigned
with their existing Departments and Divisions.
2.36 As in the case of Australian Budget, we should also provide budget estimates for
the current year 2007, estimates of actual expenditure for the previous year 2006, and
three future estimates for the years 2008, 2009 and 2010 for each output group

Table-2.3: Re-alignment of Output Groups and Departments for MOF
Departments/ Divisions Output Groups
1. Economic Policy Department 1. Economic Policy Advice

2. Fiscal Policy and Co-ordination Department 2. Revenue, expenditure and investment policy
and planning
2.1 Revenue Division 2.1 Revenue policy
2.2 Expenditure Division 2.2 Expenditure policy
2.3 Fiscal Consolidation Division 2.3 Unified budget planning
2.4 Investment Division 2.4 Investment planning
3. Treasury Department 3. Government cash assets management
3.1 Debt Management Division 3.1 Government debt management
3.2 Treasury expenditure accounting and 3.2 Accounting and Preparing Consolidated
reporting division Financial Report
3.3 Banking settlement division 3.3 Banking settlements
4. Procurement Policy and Coordination Dept 4. Procurement policy and coordination
5. Loan and Aid Policy and Coordination Dept 5. External debt management
6. Accounting policy and Supervision Dept 6. Accounting and auditing
7. Financial sector policy Department 7. Financial sector policy and regulation
8. State Public Admn including State Secretary, 8. Govt administration and management
Minister, Vice Minister
Total Ministry of Finance HQ
I. Institutional Set-up and Capacity Building
2.37 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
2.38 It is necessary to strengthen human resource development for upgrading skill and
imparting training 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
2.39 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, accrual accounting, benchmarks setting and performance evaluation.
(c) Performance and Accountability Report
2.40 It is necessary to review progress regularly and prepare regular performance and
accountability reports and to try to improve performance by planning, executing,
evaluating and adjusting actions. It is necessary to focus on a set of critical performance
parameters and calculate the cost of achieving outcomes and targeted performance.
(d) Executing the Strategic Plan
2.41 To accomplish its strategic objectives effectively, an Agency must link outcomes,
strategy, budget and performance into an integrated management system. The process
begins with an understanding of important national priorities and outcomes and the
Millennium Development Goals (MDGs), which are then translated into intended
results for the Agency. These results become the Agency’s strategic goals and
objectives. Outcomes related to these goals and objectives are then articulated and
strategies are developed to achieve these outcomes. Then appropriate measures and
indicators are identified to provide the means to assess progress.
(e) Execution of Performance-based Budget

2.42 The latest development in budgeting is the performance (based) budgeting. Most
of the OECD countries (e.g. Australia, Canada, New Zealand, Netherlands, Sweden,
Finland, UK and USA) have rewritten their financial legislation or legal frameworks to
allow for performance (based) financial information systems, including budgets.
2.43 It is important to understand that performance-based budgeting is not simply the

use of program performance information in budgeting. 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 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 for
planning and execution 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)”.
2.44 A true Performance Budget tells much more than an output budget 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 activities and how these
activities are expected to generate certain outputs and outcomes.
2.45 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 expenditures will accomplish: such as establishing a primary
school, setting up a city hospital, constructing roads, building houses etc. However,
every output can also be associated with input costs.
J. Structural Change within a Line Ministry
2.46 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 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.
2.47 The MOF, MOH, MOSWL and MOECS are large sectoral ministries accounting
for 75 per cent of the total central government budget and the staffs are directly
involved in actual service delivery down to the Aimags and Soums, in addition to their
planning, distributive, regulatory and coordination functions. 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, they need not only larger manpower but also upgraded capacity and skill at
various levels. In fact, there is need for having a larger budget for capacity building. All
these additional activities will require allocating at least 3 per cent of the Ministry’s
budget to the HQ budget. Ministries dealing with poverty alleviation and employment
generation programs and implementation of the MDG targets will need higher
allocation of budgetary resources to the HQ for better planning, execution,
implementation, monitoring, review, evaluation and updating of plans and projects.
K. Comprehensive SBP for a Line Ministry
2.48 There is no comprehensive document for any Ministry as a whole including all
the SBPs of all 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.
2.49 We recommend that the government of 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 justify our recommendation for enhancing the HQ budget.
2.50 However, as usual, the General Manager of other Agencies shall conclude
Performance Agreement every year (Article 18.3.2 of the PSMFA). 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).
L. Dedicated Unit for Preparation of SBP
2.51 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 or by international and national consultants. Such a system is not efficient as the

experiences of the present members of the working groups or consultants might not be
available in future due to formation of new groups.
2.52 Preparation of the Strategic Business Plan (SBP) on the basis of output costing
and output budgeting by any agency is a very complex and 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 unit in the Department of
Fiscal Policy and Coordination Department in the Ministry of Finance. This unit will
have the following tasks:
(a) To prepare and update regularly guidelines on the structure and scope of SBPs
and identification of activities, outputs and outcomes;
(b) To prepare and update regularly manual on methodologies for activity-based
costing (ABC), output costing and output budgeting, accrual accounting and
accrual budgeting, benchmarks for output costing and performance evaluation.
(c) To coordinate and oversee the preparation of SBPs and output budgeting by all
line ministries and agencies,
(d) 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.
(e) To build up capacities in line ministries by organizing training and workshops.
2.53 It is also necessary to set up additional unit at each line ministry, including the
Ministry of Finance, and local governments comprising experienced economists, IT
specialists, works and cost accountants and chartered accountants specialized in public
sector accounting and budgeting. 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 help to
build up necessary capacities and experience in each Agency and to establish proper
succession plans for management in the event of exit of the coordinator or any other
member of the specialized unit dealing with preparation of comprehensive SBPs.
3. Output Costing and Output Budgeting
3.1 Major steps involved in the output costing and budgeting include the following:
Step-1: Specification of outputs/ cost objects/ cost or budget centres

Step-2: Identification of all costs- direct, indirect, overheads, accrued
Step-3: Specifying appropriate costing structure i.e. layers of costs
Step 4: Collection and verification of cost data on General Ledger (GL)
Step 5: Classification of GL costs into direct, indirect, capital related, taxes
Step 6: Methodology for assignment of costs to output
Step 7: Assignment of direct costs
Step-8: Allocation of indirect costs
Step-9: Determination of total cost
Step-10: Output budgeting on the basis of output costs

3.2 Prior to the output costing, agencies put their costs under cost centre codes within
the general ledger (GL). This is called general ledger costing. The existing Chart of the
accounts (FISCAL and PLASTICS) used by the budgetary entities need to be modified
to include cost classifications and output heads.
3.3 Cost objects are the elements which need to be costed by the agencies for the
purpose of output budgeting. Cost objects could be outputs, group of outputs or
activities depending on the circumstances.
3.4 For the purpose of output budgeting, costs are classified into direct and indirect
costs. Direct costs are those costs which can be directly attributed to an output. They
are mostly variable costs such as direct labor cost and direct material costs. Direct labor
costs include not only wages and salaries but also other compensation to labor such as
superannuation, workers’ compensation insurance, leave travel, uniforms, and payment
of payroll tax, if any.
3.5 For some costs, it may not be possible to establish direct relationships with the
cost objects, because they are common to more than one output. These are called
indirect costs, and sometimes referred as overheads. For example, indirect costs can
include the salary of the Head of the Agency, corporate office and costs relating to
general administration, personnel and finance services. These costs are assigned to
different outputs on the basis of their contributions to the output cost.
3.6 Capital Costs include depreciation cost and capital charges (also known as the
opportunity cost of capital). As the line ministries and Aimags mostly depend on central
government resources for making capital expenditure, it is not recommended to use
capital charge as cost of capital, because it would simply increase the burden on the
central government.
3.7 As regards depreciation, we recommend that depreciation cost need not be

considered until assets have been listed fully and valued properly. When it is possible to
include depreciation as a part of output cost, depreciation may be estimated on the basis
of the basis of book value of assets and by using the straight line formula.
3.8 The full cost of an Output is the aggregation of direct, indirect and capital costs.
Most of these costs are attributable to agencies. PSMFA (27 June 2002) mandates that
“Cost of outputs shall be determined on the basis of full accrual cost of production,
including management overheads and capital charges”15. Accordingly the total costs
should include the following items:
(i) Cost of labour directly associated with production of goods and services;
(ii) Cost of materials and services directly consumed in the production process;
(iii) An appropriate share of indirect labour costs;
(iv)Office accommodation costs;
(v) A share of indirect materials and services;
15
Article 26.3 of the PSMFA (2002).

(vi)However, capital costs including depreciation of fixed assets and capital charges
may not be included as a part of cost until all assets are listed and valued.
3.9 Cost drivers are those activities, events or factors that trigger or have a strong
correlation to the total cost being allocated. Identification of cost drivers makes the
allocation of costs to outputs easier and more accurate. When apportioning overhead
costs between outputs, an agency may choose alternative techniques depending on
availability of data. These can be classified into two categories:
1. Logical cause-and-effect or cost-driver
2. Arbitrary pro-rata.
3.10 With the cause-and-effect technique, costs that cannot be traced directly to
specific outputs are attributed to cost pools/centres. The total cost in a cost pool/centre
is then attributed to outputs based on the cost-driver that causes the activity to be
undertaken. Some commonly used cost-drivers are:
(i) Floor space
(ii) Number of staff
(iii) Number of hours worked
(iv)Number of transactions processed
(v) Number of documents received.
3.11 Arbitrary Pro-Rata technique attributes costs without determining a clear cause-
and-effect relationship. Usually all overhead costs are firstly aggregated and then
attributed to outputs using some arbitrary pro-rata basis such as using the number of
direct labour hours consumed in producing the output.
3.12 As an example of output costing and output budgeting, Table-3.1 provides broad
categories of outputs for the MOF, which are aligned with its Departments. This is the
simplest model where Departments/ Divisions are taken as Output Centres or Cost
Centres or Budget Centres or Activity Centres.
Activity Based Costing (ABC)
3.13 Under ABC, general ledger costs are first allocated to different activities on the
basis of cost drivers; then activity costs are allocated among different outputs on the
basis of another set of cost drivers. Feasibility of applying ABC to Mongolia was
examined and it was observed that at present the line ministries do not have the
requisite data to use Activity Based Costing. Building up necessary data will take very
long period, and for some ministries it may not be feasible at all. So a simpler cost
allocation model, as explained below, is recommended.
a) First Level Allocation, find appropriate cost drivers to allocate G/L items to cost
centres (which can be output centres or departments or divisions)

b) Second Level Allocation, find appropriate cost drivers to allocate cost centre
items to outputs (which can be broad output groups, sub-outputs or programs). In
this case, for simplicity, cost/output centres are treated as activity centres.
c) Third Level Allocation, only when the data base is established and the system
develops over the years, have third level allocation i.e. allocate cost centre items
to activities, and then activities to outputs. This is the final stage of ABC for
output budgeting.
Table-3.1: Allocation of G/L Cost Items to Outputs
G/L Items Cost centers in MOF/ Outputs in MOF

Departments and Divisions
• Salaries & wages • Economic Policy • Policy advice
• Insurance and pension • Fiscal Policy • Budget preparation
benefits • Treasury • Revenue collection
• Travel and tours • Loan and Aid • Expenditure
• Purchase of Goods • Procurement management
• Transport • Financial sector • Investment planning
• Telecom • Administration • Treasury functions
• Fuel • Accounting • Public debt management
• Power • State Secretary • Banking settlement
• Water • Finance Minister • Government sale and
• Stationary procurement
• Software • External assistance
• Rental management
• Maintenance • Advice on audit and
• Depreciation accounting
• Equipment • Financial sector policy
• Others & regulation
Choice of Software for Activity Based Costing
3.14 Das and Sandagdorj (2007, 2008) developed the business model for Activity
Based output costing and output budgeting on the basis of accrual accounting,
benchmarks and performance parameters. International IT Expert Mr. David Loewy and
local IT consultant Ms. Bolormaa were assigned the task of selecting or developing
suitable software for output costing, which can be used by the line ministries and the
budget entities of Mongolia and which should have a demo version for evaluation.
After various rounds of web searching and initial studies, they suggested that the
following two software packages appear to be promising subject to usual IT and other
tests.
(a) ABC FOCUS Software developed by an Australian vender; and

(b) ALOCOUS Software developed by the local Mongolian vendor Citicom.
3.15 These two software packages were tested and run on the basis of actual data, and
their relative merits and demerits were evaluated by the line ministries. The usual IT
tests conducted by David Lowey (2008). Both the results indicate that although
ALOCOUS is not yet fully developed and tested, it is simpler and more suitable for the
Mongolian budget entities. It can be developed fully with little efforts and with much
less cost than attempts for localizing and customizing the ABC FOCUS.
4. Accrual Accounting and Accrual Budgeting

4.1 Cash and Accrual Accounting
4.1 There are two basic accounting methods- cash and accrual. Under a cash method,
income and expenses are recorded at that point in time when money is actually received
or paid. In contrast, under an accrual method, incomes and expenditures are recorded at
the time when the economic value is created, transformed, exchanged, transferred or
extinguished irrespective of the time of cash transactions. Thus, the accrual method
provides a more accurate picture of the fiscal balance than the cash method.
4.2 Hybrid method/ Cash plus Accrual method means use of accrual accounting to
the extent possible and use of cash accounting for other incomes and expenses. After
examining international best practices on accrual accounting and present capability of
Mongolia, we recommend the following for the government of Mongolia:
a) It may start with cash-cum-accrual accounting, and move towards full accrual
accounting by a gradual and phased program over the next five years.
b) Although it may use accrual accounting, approval of budget by the Parliament may
be done on full cash basis.
c) Fixed assets may be valued on the basis of historical value.
d) Inclusion of depreciation of fixed assets as a part of accrual cost can be avoided
by the budget entities for the next three years until listing of all assets and their
valuation are completed. When depreciation is recognized as a part of accrual cost, it
may be estimated by the straight line method.
e) It is not recommended to use capital charge (known as opportunity cost of
capital).
f) Provisions (for liabilities, charges, loss contingencies etc.) may be made in
budget.
Transition from Cash to Accrual Accounting
4.4 IMF GFSM 2001 recognizes that in a developing country like Mongolia with
constraints on data base, finance, technical manpower and information technology,
transition to a full fledged accrual accounting and budgeting and GFSM 2001 reporting
systems have to be evolved by stages over a number of years. These stages span from a
cash basis accounting to cash-plus-accrual accounting (alternatively known as modified
accrual accounting or partial accrual accounting) to full accrual accounting.

4.5 The first stage involves the reclassification of existing cash information, which
can be done relatively quickly. The second step relates to developing key institutional
set up and a modern public expenditure management (PEM) framework, which is fully
GFSM 2001 compliant. Four institutional features of the PEM framework can support
a successful changeover to GFSM 2001. These include the following:
(a) A chart of accounts, which is a hierarchical coding framework for classifying and
recording fiscal data that is fully mapped into GFSM 2001.
(b) A general ledger which provides a central accounting record of all government
financial transactions.
(c) A treasury single account into which all government receipts are deposited and
from which all payments are made on the basis of budget authorization.
(d) A Government Financial Management Information System (GFMIS), which is an
integrated accounting system.
4.6 Experiences of IMF technical assistance for PEM reforms in many countries suggest
that a well-functioning chart of accounts, general ledger, single treasury account and
GFMIS constitute a sound institutional basis for meeting a wide range of PEM
objectives.
Current Status in Mongolia
4.7 Government of Mongolia already adopts some amount of accrual data, particularly
for government commitments towards terminal benefits to the government staff. It has
introduced single treasury account and is improving budget process information system.
It is also making an attempt to list and value physical assets. So, it will be opportune to
adopt a “cash plus accruals” accounting system. The transition path to the IMF GFSM
2001 can follow the path outlined in Flow Chart-1.
(a) Stage one: Restructure existing cash data
4.8 Without additional data, cash data may be reorganized to prepare new statements for
IMF GFSM 2001. This will require preparing operating statements and balance sheets16.
In brief, taxes and other current revenues, wages and salaries, purchases of goods and
services, interests and other current payments are included in a cash operating account.
Purchases of non-financial assets are classified to an investment account and changes in
financial assets and liabilities are shown in a separate financing account.
4.9 An essential requirement of modified accrual accounting is to introduce payables,

receivables and the following items of accrual accounting in the government accounts.
(b) Provisions for employee entitlements such as contributions to pension, provident,

insurance and terminal benefits funds for the government staff.
(i) Prepayments received by government: These receipts include deposits on the assets
sale and installment payments on the provisions of government goods and services.
16
For details, see “Accrual Accounting Rules for GFS” prepared by Tarun Das.

(ii) Interests payable: Interests on debt can be significant drain on budget resources
and simply recording interests when paid may not provide adequate information on
government liabilities for interest payments in future.

Flow Chart-1: Steps for Migration to IMF GFSM 2001

(Taken from Jack Diamond, IMF WP/02/240, Washington D.C., Dec 2002.)
Capital charge

4.10 The issues on depreciation and capital charges had earlier been examined by
international consultants Jim Yardley and Andrew Hilton in November 2005. They
concluded that capital charges and current value accounting are complicated, expensive,
and may not provide much benefits in return. Depreciation estimated on the basis of the
book value of capital investment may provide reliable and inexpensive approximations
of capital charge for five or ten years. We agree with their conclusions.
(2) Stage two: Extend partial accrual to financial and non-financial assets
4.11 Accommodate some elements of statement of economic flows- Most flows under this
category involve revaluation of fixed and financial assets and liabilities at market prices.
4.12 Progressive recognition of existing financial and nonfinancial assets: A possible

transition path is as follows: first priority is financial assets including on-lending, and
then easily quantifiable non-financial assets such as buildings and lands. The most
difficult assets like public infrastructure assets (e.g. roads, rails, air ports, sea ports etc.)
can be avoided for an indefinite period, and can be assumed to be sunk capital stock. It is
advised that for a developing country like Mongolia, it is not necessary to include
mineral resources and other hard-to-define assets like forest wealth, national parks, and
heritage assets. It may be mentioned here that even the developed countries have not yet
developed methodologies for valuation of heritage assets.
4.13 Begin to replace cash transactions in the operating account by the corresponding
accrual transactions: All liabilities, including contingent liabilities be recognized as
soon as they arise by opening account heads to capture accounts receivable in revenues
and accounts payable in expenses.
4.14 Stage three: A progressive move to full accrual data- here all costs including
capital costs are used for accounting.
5. Benchmarks Setting and Best Practices

5.1 Benchmarks
5.1 Benchmark is an indicator for performance measurement. In the case of output

costing, benchmarks imply some standard norms for unit output costs or input-output
ratios in order to minimize costs. Benchmarks can also be specified for cost escalation
factors for some cost items in order to take care of the impact of inflation on output cost
in future.
Benchmarks must satisfy the following criteria:
a) Credible – to ensure that benchmarks satisfy basic costing principles,
b) Transparent – to ensure that assumptions on the basis of which benchmarks are
specified are explicit and well-vetted, and
c) Practical – to ensure that undue transaction costs and time are not incurred to
collect basic data.
5.2 Benchmarks can be grouped into two broad categories.

a) Standardized or Uniform- For a particular output (or group of outputs),

benchmarks hold goods for all line ministries, agencies and all regions
b) Unstandardized or Non-Uniform- For a particular output (or group of outputs),

benchmarks vary among line ministries, agencies and regions
5.3 As with program-specific baselines, there is no single or objective procedure for

establishing a benchmark. Benchmarks can differ based on the availability and source
of data. They can rely on historical data on past performance of existing outputs and
costs within a sector. Or, they can rely on Projections of emerging changes in demand,
resource prices, turnover, availability of capital, sector restructuring and public policies.
5.4 Benchmarks can differ depending on the sample population on which they are
based. They can be based on information of all programs in a given ministry.
5.5 Benchmarks can differ based on their stringency of setting. They can be set to
reflect the average (or median) value of the use of programs under the same ministry.
They can also be set at the better-than average value relative to the sample population
to ensure some improvements in efficiency.
5.6 There are different types benchmarks as indicated in Table-5.1. Ideally benchmarks
should be stringent (having better than value) and dynamic (updated over time), but
unique for an output (or group of output) based on historical and aggregate values.
Table-5.1 Types of Benchmarks Options
Items Alternative-1 Alternative-2
Source of Data Historical (on the basis of Projection by fitting trends

past values) and extrapolating for future
Type of data Time series ( data for the Cross section ( data for the
same output group over same output for different
time) agencies in a given year)
Population / Sample All projects (old and new) Only new projects
Aggregation Sector-wide average value Disaggregated (different

(mean or median) adopted benchmarks for the same
for the output for all output in different agencies)
agencies
Stringency Average value (mean or Better-than-average value
median)
Dynamics Fixed over time Updated over time

Mathematical Models on Benchmarks
5.7 Best example of the use of a mathematical model to determine benchmarks is to fit
hedonic regression equations. The method is used where the products are heterogeneous
and have wider variations in qualities. This is true for buildings and houses whose prices
depend on size, structure, location and many other characteristics. Housing mortgage
companies in Canada, UK and USA use hedonic model to determine housing prices
while providing mortgage finance to their clients. The model is described below.
Practical examples of benchmarks setting
We have provided some practical examples of Benchmarks for the Mongolian budget
such as benchmarks for composition of output cost, benchmarks for salaries and
wages, benchmarks for administrative and headquarter expenditure, and
escalation factors for different components of output cost.
5.8 Budget entities can compare their own performance against the benchmarks and use
this information to diagnose and detect areas of concern in terms of the composition of
cost, efficiency and quality and highlight measures for improvement. Thus, there are
three broad categories of benchmarks:
(a) Cost Dimension Benchmarks

(b) Efficiency Dimension Benchmark
(c) Quality Dimension Benchmarks
Cost Dimension Benchmarks
5.10 Benchmark for Cost escalation factor for a component of cost can be set to equal
the rate of increase of the appropriate price or cost of living index minus an accepted
efficiency factor. For example, if the general cost of living index rises by 6 percent, and
an agency decides that the labor productivity must increase by at least 0.5 per cent, then
the wage rate may be allowed to increase by 5.5 percent (=6 percent minus 0.5 percent).
When the wage rates are fixed by government, an agency has to accept those wage
increases, otherwise it will lead to unnecessary legal disputes between management and
trade unions. However, for other inputs, goods and services, an agency can apply the
above mentioned benchmarks for cost escalations over time.
Quality Dimension Benchmarks
5.11 Average wage cost need to be adjusted for qualifications and experiences of
staff. The first quality benchmark of the staff is the average length of service of the staff
in a ministry which is an indicator of stability and skill retention. The second overall
benchmark which can provide a broad indication of quality of the staff is to measure the
educational levels of the employees. However, it should be noted that education levels
and years of service are only two factors shaping the overall skill set. Other factors such

as employee training and related work experience in other organisations are also relevant
when evaluating the overall skill set of the work force.
Better Practice Benchmarks
5.12 A general benchmark used as an indicator of the adoption of better work practices in
an organization is the utilization of shared services within it. Shared services mean the
consolidation, standardization and reengineering of support process (such as finance,
audit, personnel, administration etc.) into one department to serve the entire ministry.
5.13 Other better practices include the following measures:
(a) Budgets should be linked to strategic business plans, millennium development

goals, master plans and national development plans.
(b) Large ministries and agencies can use budget modeling systems, linking cost
management approaches and other data sources with budgeting.
(c) Budget preparation performance can be improved by standardization of budget
preparation guidelines; preparation of manuals on different concepts, benchmarks
and sources of data; preparing uniform time schedules; and reducing the number of
budget centres and levels of decentralized authority.
Benchmarks for composition of cost
5.14 After examining the trends of composition of current expenditure (which can be
treated as output cost) for 19 major ministries/ budget entities 17 in three budget years
2006-2008, we recommend the benchmarks for cost composition as given in Table-5.2.
Table-5.2: Benchmarks for composition of output cost

(In percentage of total output cost)
Benchmarks
Items = Average Min Max
1. Compensation to labor in total output cost 59 13 86
2. Goods and service cost 41 14 87
2.1 Office expenses (stationery, printing, telecom, books) 3 0 13
2.2 Utilities (Electricity, fuel, heating, POL, water) 8 0 21
2.3 Missions (Domestic and Foreign) 3 0 12
2.4 Payments for works on behalf of the government 10 0 83
2.5 Rent 1 0 9
2.7 Other goods & services 17 0 40
3. Output total cost (1+2) 100 100 100
Source: Estimated by the author on the basis methodology indicated in the text and the data
taken from the Budget 2008.
17
These budget entities include AISI, GCC, MIES, MCUD, MOD, MOF, MOFDA, MOFE, MOFRA,
MOH, MOIT, MOJIA, MONE, MORTT, OCS, ODPM, OOP, OPG, and OPM.

5.15 Setting a benchmark does not mean than an entity cannot have share of
compensation to labor or any other components exceeding the benchmark. Benchmark is
only a norm and a norm may not hold good for many reasons such as different output
mix, input mix, heterogeneity in inputs and outputs and variations over time and regions.
So if an agency had, say labor share in total output cost, exceeding the benchmark (59
per cent), it needs to provide detailed analysis and convincing and valid reasons in their
budget for such high share of compensation to labor.
Comparison of expenditure in Mongolia with that in selected countries
5.16 As the structure of fiscal federalism and the fiscal powers of the central and sub-
national governments and the level of development differ from country to country, it is
neither desirable nor feasible to set unique international benchmarks for any component
of total expense as percentage of GDP. However, a comparison of the shares of the
components of central government expenditure in Mongolia with those in Australia and
selected countries18 in Asia indicates that the total central government expense and the
compensation of labor and social benefit as percentages of GDP are much higher in
Mongolia than those in selected developing countries, but are lower than those in
Australia. The higher share of current expenditure in GDP in Mongolia is due to the fact
that its population is dispersed over vast geographical area and it has low economic size
in terms of GDP.
5.17 As regards composition as percentage of total current expenditure, the share of

wages has increased from 27 percent in 2002 to 29 percent in 2008, while payments for
the purchase of goods declined significantly from 40 to 23 percent during the period.
However, it is a matter of concern that the share of subsidies in current expenditure has
jumped from 1.3 percent in 2006 to 23.3 percent in 2007.
Benchmarks on Compensation to Employees
5.18 A comparison of wage cost with that in India, which has almost the same per capita
GDP as in Mongolia, it is observed that the personnel costs in Mongolian government,
even after the recent hike of wages, appear to be very reasonable and modest, and may
even justify some increase to compensate for more responsibilities assigned in the
Strategic Business Planning, and need for skill upgradation to deal with budget
modernization program, high inflation, recent economic boom and rise of private sector
salaries.
Administrative Expenditure at the National Level

18
Countries include Australia, Bangladesh, Macao, India, Indonesia, Korean republic and Thailand.

5.19 In a broad sense, administrative costs include costs for general public services,
defense and pubic order and safety. An examination of the ratio of administrative cost in
total cost for Australia and selected Asian countries19 indicates that the share of
administrative expenditure in the total central government outlay in Mongolia is lower
than that in Bangladesh, India, Indonesia and Myanmar; although it is higher than that in
Australia, Macao and Thailand.
5.20 Similarly, the share of administrative expenditure in the total general government
outlay in Mongolia is lower than that in Singapore; while it is higher than that in
Australia and Japan; and more or less comparable to that in Bhutan, Macao, Hong Kong
and Maldives.
5.21These observations lead to the conclusion that the administrative expenditures for the
Mongolian government either at national or sub-national levels can be considered to be
reasonable. However, there are various factors which lead to higher administrative costs
in Mongolia. Mongolia has a small (2.8 million) and dispersed population and its major
growth centre and the capital city of Ulaanbaatar is remote from the Aimags. It is also
remote from the economic activities of the neighboring countries- China and Russia.
Headquarter Expenditure in the Line Ministries
5.22 In a broad sense, all current expenditures of the head quarter (HQ) can be taken as
the administrative expenditure related to a line ministry. We have observed earlier that
the share of HQ budget in the total sector budget of the Line Ministries is very small and
may put constraints on their efficiency and productivity. Besides, if they are required to
prepare SBP every year and to modernize budgeting, accounting and auditing
procedures, there is need to enhance their administrative expenditure. After examining
details of HQ budget, we recommend the following benchmarks for HG expenditure for
four pilot ministries (Table-5.3).
Table-5.3 Benchmarks for Share of HQ current expenditure budget

(In percent of the ministry’s current expenditure)
Line Ministry Benchmark
1. Ministry of Education, Culture and 3 percent

Science (MOECS)
2. Ministry of Finance 3 percent
2. Ministry of Health 5 percent
3. Ministry of Social Welfare and Labor 11 percent
6. Financial Planning Methodology and Policies

19
Selected countries include Australia, Bangladesh, Bhutan, Hong Kong, India, Indonesia, Japan, Macao,
Maldives, Mongolia, Myanmar, Singapore and Thailand.

6.1 Ex-ante and ex-post financial planning
6.1 In the broad sense, ex-ante financial planning implies assessment of feasible
financial resources and planning revenues and expenditures before the budgetary
commitments are made, while ex-post financial planning means management of
budgeted resources and expenditure. However, both ex ante and ex post financial
planning are integrally related.
6.2 Basic objective of government financial planning is to assess the mobilisation,
allocation and management of financial resources keeping in view the Government’s
strategic objectives and sustainability of pubic expenditure over time. This includes
developing, promulgating and implementing financial policies, rules and regulations,
and establishing and strengthening institutions for the better management of investment
plans and development of efficient and vibrant financial, monetary and capital markets.
6.3 An effective financial planning serves to provide:
(a) Optimal allocation of resources among competing needs and sectors;
(b) Sustainability of fiscal deficit over time;
(c) Stability and predictability of government financial resources; and
(d) Coherence to diverse fiscal objectives for both short and long term interests.
6.4 There is of course no universal model, methodology or structure for an

effective and efficient financial planning. Like physical planning,
government financial planning must satisfy the criterion of transparency,
accountability, responsiveness, future orientation and rule of law and
integrity.
6.2 Status of Fiscal Planning in Mongolia
6.1 The Public Sector Management and Finance Act (27 June 2002) requires
preparation of multi-year output budgeting on the basis of accrual accounting,
benchmarks and performance parameters, accountability by General Managers of
Budget Entities, fiscal transparency, efficient internal financial control, which are major
components of modern financial planning and management. Annual Budget prepared by
the MOF is the basic financial document of the government.
6.2 Financial controls include both Internal Control and External Control, and there
could be both ex-ante control (before disbursement of funds) and ex-post control (after
disbursement of funds). In many countries, like India, Bangladesh, Nepal and Pakistan,
there are Financial Advisers/ Financial Control Officers attached to the Expenditure
Department of the Ministry of Finance but in charge of ex-ante financial control of
various budget entities. Such Ex ante control mechanism is based on the principle that
compliance audit is performed before the payment is made at various stages of the
spending process. It is understood that the government of Mongolia does not have such a
system of Financial Adviser/ Financial Controller/ Internal Auditor. It may be advisable
for the Mongolian government to adopt such a system for ex ante financial control and

internal auditor. To start with, MOF may appoint Financial Advisers/ Internal Auditors
for the major ministries like MOF, MOECS, MOSWL and MOH.
6.3 Financial Planning and Budget Planning
6.1 Financial planning is an integral part of a sound and transparent

budgeting exercise. However, that there is no unique methodology which can be
applied at all times. Financial Planning depends on the macroeconomic prospects and
on the budgetary and fiscal framework already approved by the Parliament. We have
attempted to make medium term fiscal projections for Mongolia on the basic of macro-
economic prospects for the years 2008-2011 as described in the section on strategic
planning.
6.2 Parliament of Mongolia has earlier approved major macroeconomic and fiscal
parameters as medium-term objectives under the Medium Term Budgetary Framework
(Table-6.1). For financial planning during 2009-2011, we consider major macro-
economic and fiscal parameters such that these parameters comply with the basic
targets under MTBF.
Table-6.1 Compliance with the 2008 MTBF targets

(As percentage of GDP unless otherwise specified)
Major macro-economic and fiscal MTBF Budget for Financial
parameters 2008 Plan for
2009-2011
1. Floor on GDP growth rate (%) 8.7 10.1 10.0
2. Ceiling on inflation rate (%) 5.0 5.5 5.5
3.Ceiling on total budget revenue 40.2 44.0 43.7
4. Ceiling on total budget expenditure 43.2 47.0 46.2
5. Floor on current balance 7.9 7.7 7.7
6. Ceiling on budget deficit -3.0 -3.0 -2.5
7. Floor on capital expenditure 8.0 8.8 9.0
Source: Government of Mongolia Budget 2008 for MTBF and 2008 Budget, and the author’s
estimate for the Financial Plan for 2009-2011.
6.1 Financial planning means forecasting different components of government’s

revenues and expenditures for the financial planning horizon. In this exercise, the current
budget year 2008 has been taken as the base year and the three forwarding years viz.
2009-2011 have been taken as the planning horizon. Trends of different revenue and
expenditure items are examined during 2006-2008 and then one of the following
methods, depending on the pattern of past trends and underlying relationships, are used
for projecting these items for the planning horizon:

(oooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo
oooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo
ooooooooooooooo) Growth method- Average growth rate of an item during
2005-2008 or growth rate during 2008 or average growth rate in the past
excluding extreme values;
(pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp
pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp
ppppppppppppppp) Stability approach- Stable value for an item over the
planning horizon implying attainment of satiety or saturation level;
(qqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqq
qqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqqq
qqqqqqqqqqqqqqq) Ratio or intensity approach- Average ratio of an item to
GDP at current market prices.
(rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr) Elasticity approach- Elasticity of an item
with respect to GDP at current market prices.
Table-6.2 Financial Planning for the Govt of Mongolia for 2009-2011

Share of GDP (in percentage)
2005 2006 2007 2008 As % As % As %
Outturn Outturn Outturn MOF Of GDP of GDP of GDP
Final

.1. . 2. . 3. . 4. . 5. .6. .7. .8.

1. TOTAL REVENUE AND GRANTS 37.0 36.6 39.5 44.0 43.7 43.6 43.7
2. CURRENT REVENUE 36.7 36.4 39.3 43.7 43.4 43.4 43.5
2.1 Tax revenue 30.5 30.4 31.3 36.5 37.0 37.6 38.4
2.2 Nontax revenue 6.2 6.1 8.0 7.2 6.4 5.7 5.1
3. CAPITAL REVENUE 0.0 0.0 0.0 0.0 0.0 0.0 0.0
4. FOREIGN GRANTS 0.2 0.1 0.1 0.3 0.2 0.2 0.2
5. TOTAL EXP & NET LENDING 33.7 33.3 40.5 47.0 46.3 46.0 46.2
6. CURRENT EXPENDITURE 26.5 26.4 31.2 36.0 35.6 35.6 35.9
6.1 Goods and Services 17.1 18.6 14.7 18.7 17.1 15.7 14.4
6.2 Interest payment 0.9 0.5 0.4 0.4 0.3 0.3 0.2
6.3 Subsidies and transfers 8.5 7.3 16.1 17.0 18.2 19.6 21.3
7. CAPITAL EXPENDITURE 4.0 4.7 6.9 8.8 8.9 9.0 9.0
8. NET LENDING 3.3 2.1 2.3 2.2 1.8 1.5 1.3
8.1 Domestic (net) -0.6 -0.3 0.4 -0.8 -0.7 -0.6 -0.5
8.2 Foreign (net) 3.9 2.4 1.9 3.0 2.5 2.1 1.7
9. Overall Balance 3.2 3.3 -1.0 -3.0 -2.6 -2.4 -2.5
10 Current Balance 10.2 10.0 8.1 7.7 7.8 7.8 7.6
11. Mineral balance -2.2 -5.1 0.0 0.0 - - -
12. FINANCING: -3.2 -3.3 1.0 3.0 2.6 2.4 2.5
12.1 Foreign (net) 4.0 2.0 1.4 3.1 3.1 3.0 3.2
12.2 Domestic (net) -7.2 -5.3 -0.4 -0.1 -0.5 -0.6 -0.7
6.2 Results are summarized in Table-6.2 It may be observed from the table that the
overall fiscal balance as per the fiscal planning is projected to decline to 2.5 percent of
GDP during 2009-2011 compared with MTBF ceiling on fiscal deficit at 3 percent of
GDP. This implies that the financial planning for the period is consistent with fiscal
sustainability over time. Underlying parameters for the real GDP growth rates and the
inflation rates for consumer prices are realistic as judged by past trends. Resource
mobilizations from individual taxes and duties and expenditures by economic
classifications appear to be reasonable and realistic. Government’s financing planning
also appears to be feasible. Needs for foreign project loans will continue, but the
government will be able to repay domestic and foreign loans and make attendant interest
payments in time without undue pressure on budgets. Overall, the fiscal planning as
indicated in Table 6.2 appears to be realistic and feasible.
6.4 Policies for Financial Planning and Risk Management

6.4.1 Management for Natural Disaster
6.3 One of the major objectives of the ex-ante Financial Planning is to deal with
contingent liabilities of the government and risk management for unforeseen events such
as droughts, floods, earthquakes, land slides and other natural disaster. Risk management
and emergency response need to be clearly distinguished. Risk management calls for ex-
ante planning and investments to reduce vulnerability. Emergency response involves ex-
post expenditures for reconstruction, rehabilitation and restoration of public
infrastructure affected by natural disaster, which can be greatly reduced through ex-ante
planning and investments in prevention and mitigation.

6.4 While the occurrence of natural events can not be predicted precisely and prevented
fully, there is a possibility to reduce the degree of vulnerability of populations through
risk management. This can be achieved in two ways: (i) planning with the purpose of the
identification and reduction of risk by integrating prevention and mitigation measures
into national development and financial plans and programs and (ii) financial protection
provided by transferring risk partly to the private sector or spreading it over time. The
latter can be achieved by strengthening both life and non-life insurance institutions.
6.5 Table 6.3 summarizes various sources of ex ante and ex post disaster financing.
Among these the government of Mongolia has already established a Contingent Liability
Fund to take care of adverse effects of unforeseen natural disaster.
Table 6.3 Ex ante and Ex post Sources of Disaster Financing
6.4.2 Management of Contingent Liabilities
6.1 Contingent liabilities are defined by the System of National Accounts 1993 as
contractual financial arrangements that give rise to conditional requirements to make
payments or to provide objects of value. An emerging country like Mongolia can adopt
several public policy measures to contain the risk of contingent liabilities. These include
the following:
a) As an initial step towards risk management, it is necessary to promote disclosure and

accountability with regard to explicit contingent liabilities. A centralised unit may be
set up in the Department of Fiscal Policy and Coordination in the MOF to identify
and measure the magnitude and associated risk of all contingent liabilities.

b) Once the concepts, definitions, methodology and data problems have been resolved
and key organisational challenges addressed, a computerized recording system for
management of debt and contingent liability could be introduced. Ministry of
Finance, Mongolia is using the UNCTAD Debt Management and Financial Analysis
System (DMFAS) for recording and monitoring external debt. The same system can
be easily extended for management of internal debt and contingent liabilities.
c) A guarantee fee must be charged for all guarantees. Guarantee fees collected should
not be taken as general revenues; rather be kept in a separate contingency fund or
contingent liability redemption fund. The Government of Mongolia has already
established such a Contingency Fund.
d) Sound risk sharing arrangements would include providing termination dates or sunset
clause for the contingent claims, pricing the contingent liability on a risk adjusted
basis and charging the beneficiaries accordingly.
e) Risks associated with contingent liabilities can be reduced by promoting sound

governance rules for all budgetary entities, by improving the supervision and
regulation of the banking and insurance system and capital markets, and by adopting
sound macro-economic policies, complemented by appropriate legal, regulatory and
institutional set-up for effective prudential regulation, monitoring, surveillance and
supervision of the financial system and improved corporate governance. However,
these entail structural reforms with an unavoidably long-time scale.
6.4.3 Management of Public Debt
6.2 Mongolia’s public debt at around 55 percent of GDP is not high as judged by
international standards, and it does not pose any problem for financing debt services as
the Government of Mongolia has maintained a surplus on current fiscal account for the
last few years. However, government revenues are highly dependent on mineral taxes
and are subject to risk in volatility of international prices of minerals, particularly copper
and gold. Although there is surplus on minerals account, there is a significant deficit on
non-minerals balance.
6.3 One of the major challenges for the government to maintain fiscal sustainability is to
reduce non-minerals deficit over time. This can be done by taking a number of measures
such as the following:
(a) To widen tax base to include services which now account for about 55 percent
of Mongolian GDP but remains relatively under-taxed.
(b) It is also necessary to strengthen tax administration for personal and corporate
income taxes and value added tax.
(c) At present the personal income tax is ten percent at all levels of income which
does not satisfy the basic principle of equity for a tax system. It may be
necessary to make it progressive while strengthening the tax administration to
deal with tax evasion.

(d) On the expenditure side, there may be a need to set limits on rise of salaries,
subsidies and social securities.
6.17 International best practices indicate that there is generally an independent and
integrated public debt office dealing with both internal and external debt, and in most of
the countries such an office is situated in the Ministry of Finance. Although the MOF in
Mongolia deals with management of domestic and external debt, there is no such well
structured and integrated office. It may be useful to examine the feasibility of setting up
an independent and integrated Public Debt Office under the Ministry of Finance with the
following functions:
(i) To deal with both domestic and external debt

(ii) To set bench marks on interest rate, maturity mix, currency mix, composition of
debt in terms of domestic debt and external debt.
(iii) Identification and measurement of contingent liabilities
(iv) Policy formulation for debt management
(v) Monitoring risk exposures
(vi) Building Models in Assets Liability Management (ALM) framework
6.18 An integrated Public Debt Office consists of the following independent debt
offices with associated functions viz. independent Front Offices, Back office,
(i) Middle office, and the
(ii) Head Office. Some experts may argue that having a comprehensive debt
management system as described here will be expensive, but not having one may be
more expensive.
6.19 Limits on Public Debt: As regards legal framework, many countries have
enacted Fiscal Responsibility and Budget Management Acts and have set limits on
annual borrowing and total outstanding public debt as a percentage of GDP. Parliament
is the appropriate authority to set new limits of public debt. It will be beneficial for
Mongolia to legislate similar acts with limits on fiscal deficit, annual borrowing, total
outstanding public debt and also separate limits on non-mineral balance.
6.4.4 Management of External Debt
6.20 External debt of Mongolia constitutes about 95 percent of public debt and is subject
to various risks such as liquidity risk, exchange rate risk, market risk, convertibility risk,
interest rate risk and yield risk. At present, external debt service ratio at 2 percent of
exports does not pose any problem for the Mongolian economy, but in future debt
sustainability may be at risk if there is sudden fall of international prices of Mongolia’s
major exports or unexpected rise of prices of major imports. Significant falls in the
global prices of copper, coal, gold and cashmere and substantial rise of prices of
petroleum products may affect adversely the current account of the balance of payments
and may lead to the problem of external debt servicing for Mongolia.

6.21 In the chapter 6 we have indicated various external debt sustainability measures,
stress tests, determinants of debt distress and policies to tackle various kinds of risk.
Some of these techniques and policies may be used by the MOF for monitoring external
debt in Mongolia.
6.22 As regards legal and institutional set up, international experiences suggest that
centralized debt offices in most of the countries are located under the Ministry of
Finance (MOF). The main argument for entrusting the public debt management
responsibility with the Ministry of Finance or Treasury is the proximity of location,
which enables the senior management within the Ministry of Finance to review, assess
and monitor public debt more easily. Another factor, which prompted many
governments to locate the debt office within the Ministry of Finance, is that the public
debt has budgetary implications in terms of payments of debt services, and co-
ordination between the budget office and the debt office facilitates effective
management of debt and fiscal deficit.
6.23 As regards governance of external debt, most of the countries donot allow Sub
national or provincial governments to borrow directly from the external sources. Only
the Central government borrows from multilateral and bilateral sources and then on-
lends money to the states and local governments.
6.24 Government of Mongolia has the system of locating the debt management offices
within the MOF. It is necessary to continue with the system but to strengthen its
structure, debt management policies and to adopt modern techniques for risk
management.
6.25 As regards policy framework, international best practices for the management of
external debt leads to the following broad conclusions:
(a) Management of external debt is closely related to the management of domestic debt,
which in turn depends on the management of overall fiscal deficit.
(b) Debt management strategy is an integral part of the wider macro economic policies
that act as the first line of defense against any external financial shocks.
(c) Nearly all of the autonomous debt management offices have adopted an
organizational structure similar to that in leading corporate treasury and investment
banks. Usual practice is to establish separate front offices, middle office, back office and
head office, as explained earlier.
(d) For an emerging economy like Mongolia, it is better to adopt a policy of cautious and
gradual movement towards capital account convertibility.
(e)

(xix) There is need to have a cautious

approach on external short-term credits and big bullet loans which are bad for small economies like
Mongolia, as these can create refinancing risk in future.
(f)
(xx) It is necessary to adopt suitable
policies for enhancing exports and other current account receipts that provide natural
hedge and the means for financing imports and debt services.
(g)
(xxi) Detailed data recording and
dissemination are pre-requisites for an effective management and monitoring of
external debt and formulation of appropriate debt management policies.
(xxii)
(h)
(xxiii) It is important to strengthen
public and corporate governance and enhance transparency and accountability, to
strengthen the legal, regulatory and institutional set up for management of both internal
and external debt, and to establish a sound financial system with well developed debt,
money and capital markets.
7. Core and Non Core Functions of the Govt of Mongolia
7.1 One of the basic functions of the government is to repair market failures. Market
failure occurs when the free market fails to allocate resources in an optimal and efficient
manner. There are four main sources of market failures viz. (a) existence of
externalities, (b) no provision of public goods, (c) existence of imperfect competition
and (d) existence of inequity. According to theories in welfare economics, allocative
efficiency, social justice and social equity cannot be achieved in these situations without
appropriate government interventions.
Government Interventions
7.2 Government interventions basically include the following:
(a) Direct provision of public goods/ merit goods at low prices or free of charge;
(b) Enacting laws and regulations, imposing environment tax, and organizing
education campaigns/ advertisements in the case of negative externalities;
(c) Providing subsidies to producers or consumers for positive externalities;
(d) To tackle imperfect market conditions, government interventions include
iimposition of tax or price controls on a monopolist, enacting antitrust laws, and

ensuring competition through deregulation, delicensing and decontrol of

investment, production and trade;
(e) To reduce inequalities, government interventions include imposition of wealth
tax and inheritance tax; to make the tax system progressive; to provide cash or in-
kind benefits to the poor; unemployment benefits, State pensions, child benefits,
and universal basic healthcare and basic education.
(f) Nationalization of private enterprises engaged in unfair production and trade
practices (for example natural monopolies supplying public utilities).
Government failures and government imperfections
7.3 Another important function of the government is to deal with its own
imperfections and to ensure good governance. As there are market failures and market
imperfections, there could also be government failures and government imperfections.
Government failures arise due to many factors such as the problems of incentives,
information, distribution, bureaucratic inefficiency, long time lags, frequent shifts in
government policy and vicious circle of government intervention. Government failures
may also arise when there are breaks between the government expenditures and the
intended outputs and outcomes leading to Okun’s leaky bucket.
Core Functions of the Government
7.4 A government in an emerging economy like Mongolia will have the following
core functions:
(a) Allocative role: This role requires the government to intervene in the allocative
functions of the market to ensure that the market trades and private transactions take
place according to established rules and regulations and are fair and just. This role
requires the government to specify and enforce private property rights (i.e. sale, purchase,
transfer, ownership, lease etc. of property) and laws on business contracts.
(b) Regulatory role: As part of allocative role, government enacts and enforces laws on
property rights and contracts for business. But, government should also protect basic
human rights and ensure fundamental rights of individuals guaranteed by the constitution.
This requires that government should also enact more general system of laws and justice.
(c) Supportive role: The government’s allocative and regulatory roles require the creation
and maintenance of administrative and political functions, including systems and laws for
revenue raising and expenditure allocation among various sectors.
(d) Stabilization role: Another major function of the government is to adopt appropriate
stabilization measures (such as monetary, fiscal, budgetary, exchange rate, wage-income,
labour policies and laws etc.) to tackle adverse impact of high inflation, high interest
rates, high unemployment, wide fluctuations in the exchange rate and imbalances in
external markets, and thereby to improve social welfare.

(e) Re-Distributive role: The government should also address the issues relating to
income and wealth inequalities and social injustice by specifying and implementing
appropriate taxation and transfer policies.
7.5 Mongolia and India have almost the same level of PPP adjusted per capita
income, although they differ significantly in the size of population and overall GDP.
While India has a vast size of population and GDP, Mongolia is a small economy in
terms of population and economic size. However, they have strikingly similar industrial
composition of GDP and also the similar role of the private and public sectors in overall
GDP. Like India, Mongolia has allowed private participation and private investment in
all the sectors. Private sector has predominant share in GDP in agriculture, mining and
quarrying, manufacturing, construction, wholesale and retail trade, hotels and
restaurants, transport, storage and communications, financial services, real estate and
business services, and social and personal services. The role of public sector is limited
to defense, public administration, public utilities (comprising electricity, gas and water
supply), education, health and social welfare.
7.6 An examination of the existing programs of the MOECS and MOSWL in

Mongolia leads to the conclusion that these programs are justified to be operated by the
public sector because of their either allocative or distributive, regulative and market
stabililizing roles, although there is scope for further enhancing the role of public-
private partnership and involvement of stakeholders in policy planning and execution of
projects. Mongolia is already involving NGOs and other civil society groups in pre-
school education, vocational education, higher education, science and culture, various
poverty alleviation programs, employment generation programs, health and nutritional
programs. These efforts should continue and may be strengthened in future.
8. Seven year (2008-2014) Action Plan for

Full Implementation of PSFMA (2002)
8.1 Public Sector Management and Finance Act (PSMFA)
8.1 The Government of Mongolia enacted the Public Sector Management and Finance
Act (PSMFA) on the 27 June 2002 in order to modernize budget planning and
budgeting systems as per international best practices. The complete implementation of
the provisions of the Act requires the following activities on the part of the government:
(1) Preparation of Medium Term Strategic Business Plan20 for each budgetary body;
(2) Outputs should be specified by category, quantity, quality and costs21.
(3) Output costs shall be determined on the basis of accrual cost of production including
management overheads and capital charges.22
20
Article 26.1 of the Public Sector Management and Finance Act (PSMFA) (27 June 2002).
21
Article 26.2 of the PSMFA.
22
Article 26.3 of the PSMFA.

(4) Signing of output purchases agreement between the “Portfolio Minister” and the
budgetary bodies for purchase of goods and services. Output purchase agreement
shall specify terms of delivery of outputs and prices to be paid from the budget23.
(5) Setting accounting policies for budgetary bodies in conformity with International
Accounting Standards and implement these policies24:
(6) To prepare Financial Statements containing operating statement, balance sheet,

and statements of cash flows, net assets and contingent liabilities25, which are also
the requirements of the IMF Government Finance Statistics Manual (GFSM 2001).
(7) To prepare Fiscal Framework Statement including the Government’s medium

term objectives, public investment plans, forecast balance sheet and cash flow for
the budget year and two forward years26.
(8) To conclude Performance Agreement between the Portfolio Minister and the
General Managers (GM) of a budgetary body within one month from the date of the
approval of the State Budget by the State Great Hural27.
(9) The Act also specifies systems for the Assessment of Performance Agreement28 .
8.1 Progress of implementation during last five years
The government of Mongolia initiated measures to implement the PSMFA almost

immediately since its inception in June 2002. Good progress has been made with the
preparation of Strategic Business Plans in major line ministries; formulation of Medium
Term Fiscal and Budgetary Framework, preparation of consolidated financial statement
for the general government, time bound execution of budget and improved fiscal
reporting on cash basis with some steps towards accrual accounting.
MOF is implementing two major capacity building projects being financed by grants and
loans from the World Bank and the Asian Development Project. Significant progress has
been made in the development of basic concepts, preparation of methodological papers,
guidelines, manuals on strategic planning, output costing and output budgeting, accrual
accounting, setting benchmarks and performance parameters for the budgetary bodies,
improving technical capabilities of the staff engaged in budget formulation, strengthening
Information technology (IT) system and creating general awareness of the stakeholders
about the usefulness and necessity of modern techniques for output budgeting on the
basis of accrual accounting and benchmarks.
23
Article 23 of the PSMFA.
24
25
26
Article 25 of the PSFMA.
27
28
Article 47 of the PSFMA.

In addition to the mobilization of the national capacities, valuable assistance and

consultancy from experts of the international financial institutions such as ADB, IMF and
the World Bank have been extensively used in the implementation of fiscal reforms and
enforcing related legislation. Assessment and evaluations made by the international
experts facilitated the fiscal reforms process, particularly for strengthening the capacity
building for governance reforms.
Despite these efforts and good results during the last five years, progress towards full
implementation of the PSMFA remains slow due to some structural problems.
Assessments made by the IMF and ADB experts and the present consultants have
indicated the following constraints:
(a) There is absence of specialized units in line ministries, which have adequate
expertise in strategic planning, output costing and accrual budgeting;
(b) The issues and activities involved in budget modernization are complex, but the
real background was not studied carefully and in a timely manner.
(c) Assessment of national capabilities in terms of manpower, skill and ICT for full
implementation of the law was neglected.
(d) A hustled approach was adopted to complete the full implementation of the
framework within 2-3 years without adequate capacity building.
(e) In a way, the Act was passed in a hurry and the Act is over-ambitious for a
developing country like Mongolia.
8.2 Seven-Year Action Plan for 2008-2014

For Complete Implementation of the PSMFA (2002)
Above observations lead to the conclusion that the successful implementation of the
PSMFA (2002) as regards strategic business plans and output budgeting on the basis of
accrual accounting and benchmarks will require the following actions on a priority basis
by the present 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) To strengthen and upgrade the information technology system to support

the budget modernization process and systems.
(5) To conduct all these works in a time-bound systems framework but step
by step and in a phased manner.

8.3 An Action Program for 2008-2014
On the basis of the above observations, a seven year Action Program for the period of
2008-2014 has been prepared by the government. This is described in the Flow-Chart-1
indicating desired actions by all budgetary bodies in a phased manner during 2008-2014.
While framing this action plan the following issues have been considered:
1. For successful transition into strategic business planning and output

budgeting, there is need to strengthen all governments organizations for integrated
strategic planning consistent with national development plan, millennium
development goals, sectoral master plan and regional and sectoral investment
programs;
2. In framing the current structures of sectoral ministries, there is need to

identify output costs centers that will have own budgets managed independently.
Internal restructuring is also required for accountability of budget expenditure, to
maintain records of outputs and outcomes, to develop appropriate rules for
monitoring and auditing; and to report results in a timely manner to the MOF.
3. For the investment projects being funded by the budgetary resources, there
is need to carry out independent assessments on technical feasibility, financial
viability, economic and environmental sustainability as per international best
standards and completion of projects without any time and cost overruns.
All the budgetary bodies including agencies and Aimags are directed to study the flow
chart carefully and to take note of the following tasks:
1. In the first phase of implementation of this Action Program i.e. during

2008-2010, MOF will prepare detailed guidelines, manuals with precise
elaboration of concepts, methodologies and examples on strategic planning,
output costing and output budgeting, modified accrual accounting29, benchmarks
and performance parameters. MOF will advise line ministries and provide training
for preparation of strategic business plans, output budgeting and accrual
accounting.
2. During the first phase the line ministries and other budgetary bodies will
prepare strategic business plans consistent with national plan, sectoral master
plan, millennium development goals as per advice and directives by the MOF.
They will prepare output budgets on the basis modified accrual accounting and
29
Modified Accrual Accounting also called cash-plus-accrual accounting means preparing
budgets basically on cash accounting but using accrual accounting wherever possible such as for
government’s contributions to employees’ insurance, social security, reserve fund, natural
calamity and contingent liability funds. Depreciation costs for assets may not be considered until
all assets (both financial and non-financial) have been fully listed and assessed at market prices.

provide advice and guidance to the agencies under their jurisdiction for
preparation of strategic business plans and output budgets.

MOF/ Fiscal
Policy and
Coordination Track and report
results and
performance
Department
parameters to the
respective Line
Ministries
………………
FLOW CHART-1: SEVEN YEAR (2008-2014) ACTION PROGRAM
………………
3. During the second phase (2011-2012) all ministries and agencies will move
towards full accrual accounting i.e. depreciation costs will be considered as a part
of output cost. MOF will conduct pilot studies on performance based budgeting30
for selected line ministries and agencies.
4. During the last phase (2013-2014) there will be complete implementation of the
provisions of the PSMFA. All ministries/ Agencies including Aimag will move
towards strategic planning and output budgeting on the basis of full accrual
accounting, benchmarks and performance parameters.
5. In order to support this transition for all budgetary bodies, there is need to develop
and strengthen the accounting and auditing norms and standards as per
international best practices. Works are already in progress for strengthening both
software and hardware for accounting and auditing. These works will continue
and be brought to their logical ends.
6. Government of Mongolia gratefully acknowledges the valuable financial and

technical assistance received from international development organizations, other
donors and bilateral countries during the last few years. It is expected that in
future similar technical assistance will be provided by these donors for capacity
building and upgrading the technical manpower of line ministries/ Agencies/
Aimags and other budgetary bodies.
30
Under performance based budgeting, outputs, outcomes, costs, planning and execution of projects,
physical and financial performances of the line ministries/ agencies of the previous year are tracked and
evaluated by the MOF as per prescribed performance parameters, and budget for the next year is
determined on the basis of this performance. MOF also provides suggestions for improvement of
performance parameters.

Annex-1:
TOR Compliance Report at the end of March 2008
Prof. Tarun Das, Strategic Planning Expert

Mr. E. Sandagdorj, National Expert
Items of Responsibilities as per TOR Status as on 31 March 2008
A. Review core and non-core functions Accomplished:

(i) Based on any earlier assessments of the
core versus non-core functions of Report prepared:
ministries and budgetary agencies,
critically review the functions of the key 1. “Core and non-core functions of the
line portfolio ministries to segregate the government of Mongolia- a critical
core from non-core functions. The assessment” – pp.1-36, Feb 2008.
functional review will include all 2. Report is translated into Mongolian by
agencies that come under the structure of E. Sandagdorj, National Consultant.
the ministries included.
(ii) Formulate recommendations on
alternative arrangements for the non-
core functions.
(iii) Formulate recommendations based on Accomplished: Reports prepared:
the above review, to streamline the core Benchmarks Setting and Best Practices for
functions of the ministries concerned. Output Costing and Output Budgeting-
Assess the administrative expenditures Part-1: Basic Concepts, pp.1-31, Dec
of Ministry of Finance (MOF), Ministry 2007.
of Health (MOH), Ministry of Benchmarks Setting and Best Practices for
Education, Culture, and Science Output Costing and Output Budgeting-
(MOECS), and Ministry of Social Part-2: Practical Applications for
Welfare and Labor (MSWL) and if Mongolia, pp.1-36, Dec 2007.
necessary redefine and set ceilings on 3. Report-3 is translated into Mongolian
such expenditures. by E. Sandagdorj, National Consultant.
4. Report-4 is translated into Mongolian
by E. Sandagdorj, National Consultant.
(iv) Prepare a report deriving lessons for the Accomplished: Included as a part of the
Government from these assessments. Terminal Report prepared in March 2008.
B. Strengthen Strategic Planning, Output Specification, Benchmark Setting

and Costing in Selected Ministries
(v) (a) Based on previous assessments of the Accomplished: Reports produced:
strategic business plans (SBPs) of 5. Summary Report of comments on
MOECS, MOH, MSWL and MOF SBPs for all pilot ministries, pp.1-3,
review the revised SBPs and certify that June 2007.
they are in line with comparable SBPs of 6. MOF SBP 2005-2006- Comments and
public sector agencies in other countries. Suggestions, pp.1-37, June 2007.
7. MOECS SBP 2006-2008 – Comments
and Suggestions, pp.1-20, June 2007.
8. MOH SBP 2005-2008- Comments and

Suggestions, pp.1-20, June 2007.

9. MOSWL SBP 2005-2008- Comments
and Suggestions, pp.1-20, June 2007.
10. Reports at 7 translated in Mongolia by
E. Sandagdorj, National Consultant.
11. Report at 8 translated in Mongolia by
12. Final report produced after
incorporating comments by line
ministries.
(v) (b) In particular, review the current Accomplished: Linkages are discussed in the
linkages between SBPs and medium- Report on the Strategic Business Plan, Seven
term sector specific budget planning and Year Action Plan 2008-2014 and the Terminal
advice on improvement of the linkage. Report of the Project.
(v) (c) Assess past sector performance Accomplished: Reports produced:

against benchmarks and recommend 13. Benchmarks Setting and Best Practices
ways to integrate lessons from for Output Costing and Output
assessments. Budgeting- Part-1: Basic Concepts,
pp.1-31, Dec 2007.
14. Benchmarks Setting and Best Practices
for Output Costing and Output
Budgeting- Part-2: Practical
Applications for Mongolia, pp.1-32,
December 2007.
(vi) Based on the above recommendations, Accomplished: Reports produced:
assist in preparation of the SBP for 17. Preparation of Strategic Business
MOH, MOECS, MSWL and MOF and Plans- General Guidelines and
advise MOF on consolidating/ analyzing Suggestions for Improvement - Final
SBPs received from the line ministries, Report, pp.1-74, September 2007.
develop regulations/ guidelines on 18. Report at 19 translated in Mongolia by
consolidation/ analysis and recommend E. Sandagdorj, National Consultant.

ways to strengthen them. 19. Recommendations are summarized in

the Terminal Report of the Project in
March 2008.
(vii) Assess medium term expenditure Accomplished: Reports produced:
planning on accrual accounting basis 20. Accrual Accounting and Accrual
(International Public Sector Accounting Budgeting- Basic Concepts and
Standards). Formulate recommendations Methodology, pp.1-43, Nov 2007.
and design the methodology for medium 21. Transition from Cash to Accrual
term expenditure planning on accrual Accounting pp.1-26, Nov 2007.
basis for the ministries. 22. Report at 22 translated in Mongolia by
(viii) Provide assistance in establishment of Accomplished: Reports produced:

the linkage among the Government, 23. Output Costing and Output Budgeting-
MOF and portfolio ministries in regard Basic Concepts and Methodology,
of output based accrual budget planning. pp.1-51, October 2007.
24. Accrual Accounting Rules for the
Government Finance Statistics, pp.1-
36, February 2008.
25. Glossary for Accrual Accounting and
GFS, and Glossary for Financial and
Monetary Statistics, pp.1-42, Feb 2008.
26. Report at 25 translated in Mongolian
by E. Sandagdorj, National Consultant
(ix) Improve guidelines on portfolio Accomplished:
appropriation estimates in line with Discussed in the Report on Strategic Business
PSMFL provisions and issue the Plan.
guideline and manual for formulation of
medium term appropriation estimates.
Formulate recommendations on
improvement of the structure and
relationships between the headquarters
of ministries and aimag administrations
in regard of budget planning,
contracting, financing, and reporting.
(x) Assess the level of preparedness for Accomplished: Reports produced:
output specification, benchmark setting, 27. A Seven Year (2007-2013) Action Plan

and costing at the central and local to implement the provisions of the
levels, at the headquarters of ministries PSMFA (2002) on preparation of
and aimag administrations and provide Strategic Business Plans on the basis of
recommendations. Accrual Output Budgeting (AOB) and
Performance, pp.1-21, Nov 2007.
28. Report translated in Mongolian by E.
Sandagdorj, National Consultant.
29. An abridged version has been included
in the Mongolian Draft Budget for
2008.
(xi) Improve the (sample) format and manual Accomplished:
for preparation of output provision
report for budget entities, and design and Discussed in the Terminal Report of the ADB
issue the manual for preparation of Project.
output provision report for the portfolio
ministers where required. Provide
assistance to MOF in review and
evaluation of portfolio ministers’ and
budget entities’ reports on output
provision and performance contract.
(xii) Provide overall advisory support in Accomplished: There is continual interaction
output specification, benchmark setting, between the ADB Project consultants and the
and costing to MOF and other line officials of the line ministries engaged in
ministries. preparation of SBPs and budgets.
(xiii) Identify 3 other portfolio ministries, in

consultation with MOF and at least 3 Accomplished:
provinces, and provide in-depth advisory
support to strengthen their output Two Aimags have been visited by National
specification, benchmark setting, and Consultant E. Sandagdorj in October 2007.
costing. Within these portfolios, select
facilities to get a good representation of
the chosen sectors, and undertake a full
costing exercise. Finalize the
methodology for output specification,
benchmark setting and costing, and the
formats for reporting the outputs and

costs in the education, health, and social

sectors, and sound standards for
monitoring the utilization of budgetary
allocations against the specified outputs.
(xiv) Design and conduct training programs Accomplished: Two Workshops held.
for central and local government • First, a half-day Workshop on
officials (including public sector “Preparation on SBPs- General
agencies) on planning, output Guidelines” was held at the MOF on the
specification, benchmark setting, and 28 August 2007. 35 officers from the
costing. MOF, MOECS, MOJ, MOR& Transport,
MOH, WB ECTAC Project and ADB
GRCB Project attended the workshop and
actively participated in wide ranging
discussions on strategic business plans,
millennium development goals, national
development plan, output costing and
budgeting, benchmarks, accrual and cash
accounting. Power Point Presentations in
two parts in both English and Mongolian
were distributed among the participants.
• Second, a two-day Workshop on Output

Budgeting and Accrual Accounting was
held on 29-30 Nov 2007 at the Corporate
Hotel, Ulaanbaatar. The Workshop as
attended by 86 officials from 6 line
ministries (viz. MOF, MOECS, MOH,
MOSWL, MOJIA and MORTT), all local
government budget entities, World Bank
ECTAC Project and the ADB Project on
Governance Reforms.
• Six PPPs were prepared in both English
and Mongolian, and presented in the
Workshop jointly by Tarun Das and E.
Sandagdorj.
30. PPP on “Strategic Business Plans-

General Guidelines”. Part-1, pp.1-30.

31. SBP Part-2, pp.1-54.
32. Output Costing and Output Budgeting:
Part-1: Status and Action Plan, pp.1-
39.
33. Part-2: Upgrading Infrastructure, pp1-
24.
34. Part-3: Output Costing Framework, 1-
42.
35. Part-4A: Output Costing
Methodology, pp.1-32.
36. Part-4B: Case Studies, pp.1-24.
37. Part-4C: Accrual Accounting, pp.1-26.
38. Report at 34 translated in Mongolian.
• A design of the Training Program with
scope and need for resource persons is
included in the Terminal Report prepared
in March 2008.
(xv) Coordinate and provide advisory It is understood that the said National Council
support to the work of the National on Anti-Corruption (NCAC) subgroup has
Council on Anti-Corruption (NCAC) since been discontinued and an alternative
subgroup established as part of the agency has been established. The new Agency
Second Phase of the GRP to evaluate the is still in the preparatory mode.
performance of customs and tax
agencies, and public service delivery
functions in education and health
portfolios.
(xvi) Prepare a comprehensive report Accomplished:
outlining the overall current status of
strategic planning, output specification, A Comprehensive Terminal Report has been
benchmark setting and costing activities produced and submitted.
in the public sector. Recommend
forward looking reforms in these areas to
ensure full compliance with Public
Sector Management and Finance Law
(xvii)Develop the methodology for the Accomplished: Reports Produced:
preparation of ex ante financial planning. 44. Financial Planning: Part-1
Methodology, pp.1-34, January 2008.
45. Financial Planning: Part-2 Policies,
pp.1-32, January 2008.
46. Report at 41 translated by E.
Sandagdorj.
47. Report at 42 translated by E.
Sandagdorj.


Project Related Non-TOR Works Completed
In addition, the following TOR related reports were prepared by the International Consultant.
48. A Balance Sheet for the Mongolia Development Fund for 2007-2008 (pp.1-5).
49. A Report on the National Workshop on Bond Market, organised jointly by UN-ESCAP,
ADB and Bank of Mongolia (BOM) at the Corporate Hotel, Ulaanbaatar during 21-22
June 2007 (pp.1-4).
50. Comments on the IT Group Report on the Budget Preparation Information Systems
(BPIS) - Budget Business Process Report (15 July 2007).
51. Comments on IT Group Report on BPIS-Information Systems Architecture (Aug 2007).
52. Comments on the IT Group Report on BPIS Functional Requirements (Aug 2007).
53. Comments on Reports on Policy and Expenditure Planning Statements (PEPS) for Pre-
school Education and S&T of the MOECS by the World Bank Consultants, Aug 2007.
54. Comments on the report of the IMF Team on Budget Modernization, pp.1-7, Aug 2007.
55. Comments on the report of the IMF Mission on GFS, pp.1-5, August 2007.
56. ADB Project and the World Bank ECTAC Project Coordination Plan, pp.1-3, Aug. 2007.
57. Lecture Notes31 on Official Economic statistics- Part-1 on Government Finance Statistics
(GFS), Balance of Payments (BOP) Statistics and Rest of the World (ROW) Account,
pp.1-70, Aug 2007.
58. Lecture Notes32 on Official Economic Statistics- Part-2 on Monetary and Financial
statistics (MFS), Multi–Factor Productivity Measures (MFP), and Workout Sessions,
pp.1-62, Aug 2007.
59. Comments on the Mongolia Second National Report- Millennium Development Goals
Implemention in 2005-2006, pp.1-4, October 2007.
60. Mainstreaming MDGs through National Development Strategies33, Prepared for the
Economic Commission for Asia and the Pacific (UN-ESCAP), Vol-1, Main Report, pp.1-
84, Oct. 2007.
61. Mainstreaming MDGs through National Development Strategies, Prepared for the
Economic Commission for Asia and the Pacific (UN-ESCAP), Vol-2, Annexes on
policies, programs and challenges for poverty reduction in individual countries, pp.1-79,
Oct. 2007.
62. ADB Capacity Building Project on Governance Reforms- Policy Matrix Compliance
Report for 2007, pp.1-4, January 2008.
63. Mongolia Seven-Year Capacity Building Action Plan for 2008-2014, pp.1-6, Jan 2008.
31
Lectures delivered by the International Consultant Tarun Das at the UN Statistical Institute for Asia and
Pacific (UN-SIAP) at Chiba, Japan on 19-25 August 2007, on an invitation from Ms. Davaasuren
Chultemjamts, Director, UN-SIAP (formerly Chairperson, the National Statistical Office, Mongolia). The
international training program was attended by 25 statisticians/ economists from the Ministry of Finance/
Central Statistical Organisation/ Central Banks of 18 selected countries viz. Argentina, Armenia, Bhutan,
Bolivia, Cambodia, Honduras, Indonesia. Malaysia, Micronesia, Mongolia, Nepal, Pakistan, Paraguay,
Philippines, Tajikistan, Tanzania, Turkey and Vietnam.
32
Lectures delivered by the International Consultant Tarun Das at the UN Statistical Institute for Asia and
Pacific (UN-SIAP) at Chiba, Japan on 19-25 August 2007.
33
Presented by Consultant Tarun Das at a Regional Workshop on MDGs organised jointly by the Asian
Development Bank (ADB), UN-ESCAP and UNDP at Bangkok, Thailand on 15-16 Oct 2007.

64. Provided help to the IT Group for model description and methodology, test, calibration,
evaluation and selection of appropriate software for output costing (Dec 2007-Jan 2008).
Following report was prepared as a business guideline for choice of software.
65. Output Costing Methodology for Software Selection- Basic Concepts and Some Advices
for Selection, pp.1-9, December 2007.
66. Comparative Evaluation of the Australian ABC-FOCUS Software and the local
Mongolian ALOCOUS Software for Output Costing, pp.1-17, January 2008.
67. A comparative analysis of budget planning, preparation, approval and execution systems
in Mongolia and Thailand, pp.1-11, March 2008.

Annex-2
POLICY MATRIX: Status as on 31 March 2008
Loan No.2010-MON (SF): Second Phase of the Governance Reform Program

Compliance Report on Monitoring Conditions 5, 6 and 8
Enhance Institutional Capacity to Implement Budget, Output,
And Financial Management Reforms
Sub-Objective Policy Matrix Status of Compliance

Conditions
B. Improve 5. MOF and the Complied with. Last year, the Domestic Strategic Planning
mid term three line Expert, who started working from the 7th September 2006,
planning ministries listed examined the trends of ratios of administrative expenditures
processes to above will in total current expenditures of the selected four ministries,
strengthen jointly assess and in consultation with the Budget Expenditure Division of
public their respective the MOF, recommended that the Headquarters and Sector’s
expenditure public sector administrative expenditures of these ministries should not
management administrative increase by more than the rate of increase of the general
expenditures commodity price index. This benchmark was taken in the
and agree on State Budget Estimate for the year 2007.
ceilings on such
expenditures, to Subsequently, International Strategic Planning Expert, who
take effect from started working since the 1st June 2007, prepared detailed
1 January 2005. methodological papers and suggested operational
benchmarks for various components of output cost, including
Headquarters and the sector’s administrative expenses. These
papers include the following:
1. “Benchmarks Setting and Best Practices for Output

Costing and Output Budgeting- Part-1: Basic Concepts,
pp.1-31, Dec. 2007”.
Costing and Output Budgeting- Part-2: Applications for
Mongolia, pp.1-36, Dec 2007”.
These papers were translated in Mongolian and were

circulated to the MOF and the other selected line ministries.
The main recommendations on the benchmarks are being
discussed and the decisions will be taken by the MOF.
6. MOF and the Complied with, but it is an ongoing work which needs
three line continual updating and improvement, which can be fully
ministries listed completed only in stages.
above will
assess the output (i) It was reported last year that guidelines on costing of
costs of their hospital service were prepared by MOH. For MSWL, this
respective work was being done under the ECTAC Project.
portfolios and
agree on

quantitative (ii) Significant progress has been made during 2007. Under
norms against the guidance of the ECTAC Project, program budgets have
which their been prepared on the basis of benchmarks for the MOECS,
outcomes MOSWL and Ministry of Food and Agriculture for the year
can be 2008.
benchmarked.
In addition, the International Strategic Planning Expert,
who started working since the 1st June 2007, has further
examined the norms for ratios for different components
of cost in total output cost on the basis of budgetary data
for 19 selected budgetary agencies for the budget year
2008. Detailed analysis and data are presented in the
following papers.
Costing & Output Budgeting- Part-1: Basic Concepts, pp.1-
31, Dec 2007”.
Costing and Output Budgeting- Part-2: Practical
Applications for Mongolia, pp.1-36, December 2007”.
These papers were translated in Mongolian and were

circulated to the MOF and the other selected line ministries.
The main recommendations on the benchmarks are being
discussed and the decisions will be taken by the MOF.
Both international and domestic consultants reviewed and

suggested measures for improvements for strategic business
planning, specification of outputs and activities, and
medium term expenditure framework for six line ministries
viz. MOF, MOECS, MOH, MOJIA, MOSW&L and MOFA
for the 2008 portfolio budget and 2008-2010 MTFF.
Consultants also deliberated on the output costing and

output classifications principles and methods, identification
of cost drivers and cost centres which were reflected in the
budget appropriations for 2008 and medium term
expenditure frameworks for these six line ministries.
At present, majority of the portfolio ministries including

these six budgetary entities executed output costing and
output budgeting exercises using simple excel worksheets
and suitable software packages on output costing.
C. Mainstream 8. MOSTEC, Mostly complied with, but it is an ongoing process and
output-based MOH, MSWL needs to be completed at stages. As per the evaluation made
budgeting by will finalize, to by the International Strategic Planning Expert, although
setting sound ADB’s good progress has been made for specification of outputs by
examples in key satisfaction, (i) the pilot ministries, complete works on preparation of
sectors the budgets on the basis accrual output costing need to be done
methodology for at phases and will take a number of years. Progress until
output now is indicated below:
specification

and costing, and (i) It was reported last year that the methodology for output
the formats for specification and costing was approved by the Finance
reporting the Minister's order No.388 of 2006, and the formats for
outputs and reporting outputs and costs for the Portfolio ministers and
costs, in the budget entities under them were approved by the Finance
education, Minister orders No. 32 and 388 of 2006, respectively.
health, and Methodology for output budgeting was developed by the
social sectors; MOECS and MOSWL.
and (ii) sound
standards for (ii) Significant progress has been made during 2007. The
monitoring the World Bank ECTAC Project guided the MOECS, MOSWL
utilization of and MFAA to develop program budgets for the year 2008.
budgetary A program is a combination of outputs and the first stage of
allocations output budgeting.
against the
specified
outputs. (iii) International consultant on Strategic Planning and the
local consultant had produced detailed guidelines on
strategic planning, output costing and accrual accounting.
These include the following:
1. Preparation of Strategic Business Plans- General
Guidelines, Suggestions for Improvement and Summary of
Recommendations- Final Report, pp.1-74, September 2007.
2. Output Costing and Output Budgeting- Basic Concepts
and Methodology, pp.1-51, October 2007.
3. Accrual Accounting and Accrual Budgeting- Basic
Concepts and Methodology, pp.1-43, October 2007.
4. Transition from Cash to Accrual Accounting pp.1-26.
All these documents were translated in Mongolian and

submitted to the MOF and forwarded to other pilot
ministries.
(iv) Consultants organised two workshops-

(a) First, a half-day Workshop on “Preparation on
SBPs- General Guidelines” was held at the MOF on
the 28 August 2007. 35 officers from the MOF,
MOECS, MOJ, MOR& Transport, MOH, WB ECTAC
Project and ADB GRCB Project attended the workshop.
(b) Second, a two-day Workshop on Output

Budgeting and Accrual Accounting was held on 29-30
November 2007 at the Corporate Hotel, Ulaanbaatar.
The Workshop as attended by 86 officials from 6 line
ministries (viz. MOF, MOECS, MOH, MOSWL,
MOJIA and MORTT), all local government budget
entities, World Bank ECTAC Project and the ADB
Project on Governance Reforms.

(v) Both international and national consultants on

strategic planning also prepared technical paper on
model description and methodology, test, calibration,
evaluation and selection of appropriate software for
output costing. Following report was prepared as a
business guideline for choice of software.
70. Output Costing Methodology for Software
Selection- Basic Concepts and Some Advices for
Selection, pp.1-9, December 2007.
(vi) At present, above mentioned six line ministries are

conducting test runs on two software packages (ABC Focus
developed by an Australian firm, and Acolous developed by
a local Mongolian firm) under the guidance of IT experts
and the local and international consultants on strategic
planning. A suitable software package will be selected after
appropriate evaluation made by the experts and the users.

Annex-3
Design of a 5-Day Training Program for Capacity Building
The consultants conducted two training programs spanning over three days on strategic planning,
output costing and output budgeting, accrual accounting and accrual budgeting, benchmarks
setting and performance evaluation. The same training program could be repeated for the officials
engaged in preparation of strategic business plans and budgets for the line ministries.
Here we present a detailed course outline and scope for a five-day training program.
3.1 Basic Objectives and Scope of the Course
The basic objective of the course is to improve the following areas of professional competence of
the government officials in the line ministries of the central government, Aimags and Agencies:
(a) At the cognitive level, the course aims to impart, to the participants, the current state-of-
the-knowledge on strategic planning and output budgeting, so that it enhances their
understanding and ability to prepare strategic business plans and output budgeting based
on accrual accounting, benchmarks and performance parameters.
(b) At the attitudinal level, the course aims to increase sensitivity to the impact of
Millennium Development Goals, economic reforms, and poverty reduction strategy may
have on strategic planning and output budgeting.
(c) At the skill level, the course aims to strengthen the participants’ leadership and
capability for problem solving, team works and communication skills and to make them
aware of the principles and values of modern planning, budgeting and systems
management.
(d) Accordingly, the course encourages pro-active behavior and a hands-on approach to
both teaching and learning.
3.2 Learning Outcome
(a) Develop a comprehensive understanding of the basic concepts, scope, analytical

framework, applications and constraints for preparation of strategic business plans,
output budgeting and applications of accrual accounting and performance evaluation.
(b) Develop skills and capabilities for analytical presentation, networking and teamwork
through group discussions, case studies and workout sessions.
(c) More emphasis will be laid on understanding basic concepts, practical issues,
operational problems and prospects of strategic planning and budgeting rather than
abstract theoretical discussions and complicated mathematical models.
3.3 Pedagogy
(a) Teaching techniques will consist of formal lectures, case studies, workout sessions and
preparation and presentation of group project reports.

(b) Selected case studies would be given so as to facilitate participants to relate to theoretical
concepts with real life situations in strategic planning and budgeting. The participants
would present and discuss these case studies in the class.
3.4 Sessions Plan: Global Public Policy and Global Business Environment
Six Sessions a Day:
(1) First Session 0930=1030 (2) Second Session 1030=1130
Tea Break 1130=1145
(3) Third Session 1145=1245
Lunch 1245=1400
(4) Fourth Session 1400=1500 (5) Fifth Session 1500=1600
Tea break 1600=1615
(6) Sixth Session 1615=1715.
Sessions MODULES/ TOPICS
1-3 Module 1: Scope and objectives
1.1 What do we mean by Strategic Planning and Output Budgeting? Basic

concepts and analytical framework.
1.2 Course outline, objectives and pedagogy
1.3 A Diagnostic Test (DT) for the participants to determine the level at which
the course should be taught to derive maximum gains
Formation of Groups for projects works
4-9 Module 2: Strategic Business Planning

2.1 Basic Features of Strategic Planning
2.2 Vision, Mission, Values, Priorities and Clients
2.3 Strategic Purpose and Objectives
2.4 Strategic Plans and Reforms
2.5 Macro Economic Background
2.6 Development Challenges and Issues
2.7 Economic and Development Prospects
2.8 Strengths, Weakness, Opportunities and Threats for Mongolia
2.9 Integrate MDGs, Master Plan and National Development Plan (NDP)
2.10 Stylized Design of a Strategic Business Plan
2.11 Top Down Approach
2.12 Goals ⇒ Outcomes ⇒ Outputs ⇒ Activities ⇒ Resources
2.13 Specifications of Activities, Outputs, Outcomes and Goals
2.14 Quantity and Quality of Outcomes and Outputs- Basic Indicators and
their characteristics
2.15 Examples from Australian Budget
2.16 Goals, Outcomes and Outputs for the Ministries of MOF, MOH,
MOECS, MOS in Mongolia (can be given as a Project Work for the
different Groups after brief discussion on the subject)
2.17 Institutional Structure and Organization
2.18 Monitoring and Assessment System
2.19 A case study on the Australian Treasury Budget for the year 2005-06

2.20 Output Groups in Australian Treasury Portfolio Budget 2005-06

2.21 Components of Strategic Business Planning Document
2.22 Output Groups and Indicators for Quantity and Quality
2.23 Conclusions

10-15 Module 3: Output Costing and Output Budgeting

3.1 Costing Framework- Basic Concepts and Principles
What is output budgeting?
What is output costing?
Objectives, purpose and benefits of output budgeting
Cost accumulation and General Ledger (GL) Costing
Cost objects
Cost classification
Total costs
Cost drivers
Costing Methods
Activity Based Costing (ABC)
3.2 Output Costing Methodology

Step-1: Specification of outputs
Step-2: Identification and information on costs
Step-3: Assignment of direct costs
Step-4: Allocation of indirect costs
Step-5: Appropriate costing methodology
Step-6: Accrual output budgeting (AOB)
Cost allocation- an example from Australian budget
A case study for output costing from Mongolian Budget
A Case Study for Costing Govt Services from Australian Budget
Program Budgets for the Ministries of MOCS, MOFA
3.3 Output costing software
3.4 Workout Sessions
16-21 Module 4: Accrual Accounting and Accrual Budgeting
4.1 Cash and Accrual Accounting

4.2 A simple example of accrual accounting
4.3 Analytic Frameworks for IMF GFSM 2001
4.4 Different compilation approaches by member countries
4.5 Data for IMF GFS Yearbook
4.6 GFS Basic Concepts - Stocks and flows, Types of flows, economic flows
4.7 Accounting Rules - Type of accounting systems, Time of recording flows
4.8 Valuation methodology
4.9 Aggregates and Netting of Stocks and Flows
4.10 Consolidation
4.11 Contingent Liabilities
4.12 Data coverage and subsectors
4.13 Migration from cash to accrual
4.14 Preconditions for the move to accrual and IMF GFSM 2001 reporting
4.15 Steps for successful transition from cash to accrual accounting
4.16 Current Status of IMF GFSM 2001 in Mongolia
4.17 Requirements to complete migration to accrual budgeting
4.18 Workout sessions

22-26 Module-5: Benchmarks setting
What is a Benchmark?
Ideal characteristics of benchmarks
Broad types of benchmarks
Benchmarks setting- issues and options
Stringency for benchmarks: Free riders and rewarded options
How aggregates should benchmarks are?
Benchmarks basis and data survey
Trend lines versus recent averages
Boundaries for benchmarks
Mathematical Models on Benchmarks for heterogeneous goods
Cost, Efficiency and Quality Benchmarks
Cost dimensions benchmarks
Quality dimensions benchmarks
Better practice benchmarks
Efficiency dimension benchmarks
Fixed assets activity benchmark
Benchmarks for composition of cost
Benchmarks on the basis of cross section data
Time series data on the composition of current expenditure
Benchmarks on salaries and wages
Benchmarks for Administrative Expenditure
5.1 Benchmarks for cost escalation for other components of cost
5.2 Workout sessions
27-29 Module-6 Group Report Presentations
30 Module-7: Feedback Session
Recommended Readings
A. Strategic Business Planning
Tarun Das and E. Sandagdorj (2007) “Preparation of Strategic Business Plans- General
Guidelines, Suggestions for Improvement, and Summary of Recommendations”, Final Report,
pp.1-74, ADB Capacity Building Project on Governance Reforms, Ministry of Finance,
Government of Mongolia, Ulaanbaatar, 30 Sept 2007 (in both English and Mongolian).
B. Output Costing and Output Budgeting
Tarun Das and E. Sandagdorj (2007a) Output Costing and Output Budgeting- Basic Concepts
and Methodology, pp.1-51, ADB Capacity Building Project on Governance Reforms, Ministry of
Finance, Government of Mongolia, Ulaanbaatar, October 2007 (in both English and Mongolian).
Tarun Das and E. Sandagdorj (2007b) Output Costing Methodology for Software Selection-
Basic Concepts and Some Advices for Selection, pp.1-9, ADB Capacity Building Project on

Governance Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar, December

2007 (in both English and Mongolian).
Tarun Das, E. Sandagdorj and D. Bolormaa (2008) Comparative Evaluation of the Australian
ABC-FOCUS Software and the local Mongolian ALOCOUS Software for Output Costing, pp.1-
17, ADB Capacity Building Project on Governance Reforms, Ministry of Finance, Government
of Mongolia, Ulaanbaatar, January 2008 (in both English and Mongolian)
C. Accrual Accounting and Accrual Budgeting
Tarun Das and E. Sandagdorj (2007a) Accrual Accounting and Accrual Budgeting- Basic
Concepts and Methodology, pp.1-43, ADB Capacity Building Project on Governance Reforms,
Ministry of Finance, Government of Mongolia, Ulaanbaatar, November 2007 (in both English
and Mongolian).
Tarun Das and E. Sandagdorj (2007a) Transition from Cash to Accrual Accounting pp.1-26,
ADB Capacity Building Project on Governance Reforms, Ministry of Finance, Government of
Mongolia, Ulaanbaatar, November 2007 (in both English and Mongolian).
Tarun Das (2008a) Accrual Accounting Rules for the Govt Finance Statistics, pp.1-36, ADB
Capacity Building Project on Governance Reforms, Ministry of Finance, Government of
Mongolia, Ulaanbaatar, February 2008.
Tarun Das (2008b) Glossary for Accrual Accounting and GFS, and Glossary for Financial
Statistics, pp.1-38, ADB Capacity Building Project on Governance Reforms, Ministry of Finance,
Government of Mongolia, Ulaanbaatar, February 2008.
D. Benchmarks Setting and Best Practices
Tarun Das and E. Sandagdorj (2007a) Benchmarks Setting and Best Practices for Output
Costing and Output Budgeting- Part-1: Basic Concepts, pp.1-31, ADB Capacity Building
Project on Governance Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar,
Dec 2007 (in both English and Mongolian).
Tarun Das and E. Sandagdorj (2007b) Benchmarks Setting and Best Practices for Output
Costing and Output Budgeting- Part-2: Practical Applications for Mongolia, pp.1-36, ADB
Capacity Building Project on Governance Reforms, Ministry of Finance, Government of
Mongolia, Ulaanbaatar, Dec 2007 (in both English and Mongolian).

Annex-4
List of Experts Consulted
Asian Development Bank
1. Mr. Adrian H. Ruthenberg, Country Director, Mongolian Resident Mission.

2. Mr. Jan Hansen, Financial Sector Specialist, and the Program Officer for the Second
Phase of the Governance Reforms Program and the Capacity Building Reforms, ADB
HQ, Manila.
3. Mr. Peter M. Robertson, Evaluation Specialist (Governance and Capacity Development),
Operations Evaluations Department, ADB HQ, Manila.
4. Mr. Scott Bayley, Evaluation Specialist, Operations Evaluations Department, ADB HQ,
Manila.
International Monetary Fund
5. Mr. Holger M. Van Eden, Senior Economist, Public Finance Management Division, Fiscal
Affairs Department, International Monetary Fund, Washington D.C.
6. Mr. Gary Jones, Government Finance Division, Statistics Department, International
Monetary Fund, Washington D.C.
7. Ms. Khulan Buyankhishing, Economist, Office of the IMF Resident Representative Office
in Mongolia, Ulaanbaatar.
Ministry of Finance
8. Mr. Batjargal Bazarsuren, Director General, Fiscal Policy & Coordination Dept.
9. Ms. Enkhtuul Khurel, Project Coordinator, ADB Governance Reforms Project.
10. E. Sandagdorj, National Consultatnt on SBP.
11. D. Tsogtbaatar, Director of Public Administration Department of MOF
12. J. Jargalsaikhan, Director-general of Economic Policy Dept, MOF
13. J. S. Myagmardash, Director of Consolidated Budget Planning Division, MOF
14. D. Oyun, Director of Monitoring and evaluation Division, MOF
15. G. Batkxurel, Deputy Director of Macroeconomic Policy & Coordination Dept.
16. B. Daajamba, Deputy Director of Accounting Policy and Control Department
17. D. Nanzaddorj, Deputy Director of Treasury Department
18. B. Ganbold, Deputy Director of Financial Policy and Coordination Department
19. N. Ganerdene, Senior Specialist of Public Administration Department
20. D. Tsedenbal, Senior Specialist of Public Administration Department
21. E. Selenge, Specialist of Procurement Department
22. Ts. Zolzayaa, Specialist of Foreign loans and aid Policy and Coordination Dept.
23. I. Erdenesaikhan, Specialist of Legal Department
24. B. Uranbaigali, Specialist of Public Administration Department
25. Z. Bayanmonkh, Specialist of Public Administration Department
26. Mr. Ulziisaikhan Dash, Economist, Fiscal Policy Department
27. Ms. Munkhtseren Sharav, Officer in Charge of MDG monitoring and localization.
28. R. Batjargal, Senior economist of A&S department, MOF
29. Ts. Zorigtbat, Specialist of Economic Policy Dept, MOF
30. B. Myagmarsuren, Deputy director of Procurement Department, MOF
31. P. Ganchimeg, Specialist for Socila welfare sector budgeting, FPC Dept, MOF
32. J. Enkhzul, Specialist for Health Sector Budgeting, FPCD, MOF

33. A. Mandakhnaran , Specialist of FPC Dept, MOF

34. Munkhtuul, Specialist (Education, Culture & Science), FPC Dept, MOF
35. Tsedenbal, Senior specialist on SBP of Administration Dept, MOF
36. G. Batbayar, Specialist for Revenue division, FPC Dept, MOF
37. Ms. Bolormaa Gochoosuren, Officer, Economic Policy Division, MOF.
38. Ms. Erdenesan Endev Ochir, Senior Economist, National Statistical Institute.
39. Mr. Bat Bayar, Deputy Auditor General, Audit Office.
Ministry of Education, Culture and Science (MOECS)
40. Ts. Davaasuren, Director General, Department of Economics and Finance

41. Ms. Erdemchimeg Sumiya, National Consultant for Public Exp. Management
42. J. Otgonbat, Specialist of Monitoring, Supervision and Control Dept, MOECS
43. J. Ganbaatar, Senior economist of FE Dept, MOECS
44. T. Sarantuya, Specialist (Planning & Reporting), Public Admn Dept, MOECS
45. Kh. Gantsetseg, General accountant and specialist of FE Dept, MOECS
Ministry of Social Welfare and Labor (MOSWL)
46. Ms. Nyam Ayush, Director, Monitoring Department

47. Chief, Accounting Department
48. Expert on Strategic Planning
49. Expert of Accounting
50. Expert on Social insurance
51. Mr. Dunkhree Batmonkh, Senior Financial Management Specialist, World Bank
Governance Assistance Project, ECTAC and PHRD Projects
World Bank ECTAC Project- Civil Service Reforms
52. Darrell Freund, Functional Review Adviser

53. Clive Parry, International Public Administration Consultant
54. Ms. D. Khangal, Functional Review Consultant
World Bank ECTAC and PHRD Projects
55. Ms. Erdemchimeg Sumiya, National Consultant, Public Exp. Management;

56. Ms. Helen E. Tilley, International Consultant, World Bank ECTAC Project.
57. Mr. Dunkhree Batmonkh, Senior Financial Management Specialist, World Bank GAP.
58. Mr. Benjamin Diokno, ECTAC, MOSWL.
59. Mr. Mauro Napdonno, ECTAC, MOESC.
60. B. Tugoldor, Local Expert, Short and Medium-term Budget Planning, WB, ECTAC
Project.
61. S. Dorjhand, Project coordinator of the WB ECTAC Project
62. T. Batsukh, Project coordinator of the WB ECTAC Project
63. Enkhbat, Local expert on the WB ECTAC Project

Information Technology (IT) Group
64. Mr. Jim Ramsey, International Consultant (IT development for budget preparation)
65. Mr. David Lowey, International Consultant (IT development for auditing and output
costing)
66. Ms. Bolormaa, National Consultant
67. Mr. Oyunbaatar, National Consultant
68. Ms. Tsolmon, Functional Specialist, Citicom
69. Mr. Jugdernamjil, IT Expert, Citicom
70. Batdelger, Local consultant on software reviewing, MOF
UNDP Regional Office at Ulaanbaatar, Mongolia
71. Ms. Pratima Mehta, UNDP Regional Coordination at Ulaanbaatar.

72. Dr. Dilli Bhattarai, Chief Technical Adviser (MDG), UNDP.
73. Ms. Tsedev Erdenchimeg, National Project Manager, UNDP and MOF Poverty,
MDGs Monitoring and Assessment Systems Support, Ulaanbaatar.

ADB Project On Governance Reforms in Mongolia-Terminal Report Part-1 by Tarun Das

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ADB Project On Governance Reforms in Mongolia-Terminal Report Part-1 by Tarun Das

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ADB Project Terminal Report- Part-1- Tarun Das and E.

Terminal Report: Part-1

Professor Tarun Das1

MOF, Govt. of Mongolia 1 Glocoms Inc. (USA)

Table of Contents Pages

Chapter-1: Major Conclusions and Recommendations 12-51

Annex-2: Policy Matrix – Compliance Report 59-62

Annex-3: Design of a Training Program for capacity building 63-67

Annex-4: List of Experts consulted 68-70

Chapter-2: Strategic Business Planning 73-100

Chapter-4: Accrual Accounting and Accrual Budgeting 116-132

Chapter-5: Benchmarks and Best Practices 133-157

Chapter-6: Financial Planning 160-191

Chapter-7: Core and Non-core functions 192-205

Chapter-8: Seven Year Action Plan (2008-2014) 206-214

MOF, Govt. of Mongolia 2 Glocoms Inc. (USA)

Ulaanbaatar, Mongolia Tarun Das3

MOF, Govt. of Mongolia 3 Glocoms Inc. (USA)

ADB Capacity Building Project on Governance Reforms

Project Supervisor Mr. Batjargal Bazarsuren, DG,

National Consultant Mr. E. Sandagdorj

International IT Consultant Mr. David Lowey, Ph. D.

International Consultant Mr. Tarun Das, Ph.D.,

Administrative units of Mongolia

MOF, Govt. of Mongolia 4 Glocoms Inc. (USA)

Fiscal year: 1st January to 31st December

Major macro-economic variables:

Items Units 2005 Rank in the World

GDP PPP Billion US$ 5.85 151

Population Million 2.55 137

GDP PPP per capita US$ 1983 176

GDP per capita US$ 736 148

Poverty ratio Percent 36 …

Items Units 2005 2006 2007

Real GDP growth rate Percent 7.0 8.7 9.9

CPI Inflation rate Percent 9.5 7.0 8.6

Interest rate on central bank bills Percent 3.7 5.8 6.4

GR of money supply Percent 37.3 34.9 43.8

Overall budget balance As % of GDP -1.0

Total public debt As % of GDP 68 54 NA

Total external debt As % of GDP 64 51 NA

MOF, Govt. of Mongolia 5 Glocoms Inc. (USA)

This report is based on the following background reports prepared earlier.

A. Strategic Business Planning

1. Ministry of Finance (MOF) Strategic Business Plan 2005-2006- Comments and

6. Power Point Presentation on “Preparation of Strategic Business Plans- General Guidelines

7. Power Point Presentation on “Preparation of Strategic Business Plans- General Guidelines

8. Accompanying Text on “Preparation of Strategic Business Plans and General Guidelines”,

9. “Preparation of Strategic Business Plans- General Guidelines and Summary of

10. “Preparation of Strategic Business Plans- General Guidelines, Suggestions for

11. Report at 1 is translated into Mongolian by E. Sandagdorj, National Consultant.

MOF, Govt. of Mongolia 6 Glocoms Inc. (USA)

B. Output Costing and Output Budgeting

26. Report at 17 is translated in Mongolia by E. Sandagdorj, National Consultant.

C. Accrual Accounting and Accrual Budgeting

34. Transition from Cash to Accrual Accounting pp.1-26, November 2007.

37. Report at 33 is translated in Mongolia by E. Sandagdorj, National Consultant.

MOF, Govt. of Mongolia 7 Glocoms Inc. (USA)

D. Benchmarks Setting and Best Practices

41. Report at 39 is translated in Mongolia by E. Sandagdorj, National Consultant.

E. Financial Planning Methodology and Policies

43. Financial Planning - Part-1: Methodology, pp.1-34, Jan 2008.

45. Report at 43 is translated in Mongolia by E. Sandagdorj, National Consultant.