Fiscal Reforms & PIM Policies in Korea

October 30, 2014

Yuncheol Koo

Director General for Fiscal Performance Management

Ministry of Strategy and Finance

2

Economic Development & Public Finance I

Contents

Reforms on Public Financial Management II

III PIM Policies in Korea III

I. Economic Development & Public Finance

-4

-* Average growth rate during 1960~2010 : 7.5%

-22,708

1. Economic Development & Challenges

Asian Economic

Crisis

1980 1960 1970 1995

5,000

10,000

1953

GNI per Capita (US$)

1990 1945

OECD Membership

1998 2007

15,000

20,000 Global

Economic Crisis

2009

5-year Economic Development Plan

67 79

11,505

7,607

100(1963) 1,043(1977)

21,632

17,041

2013

26,205

2. Organization of Public Finance

EPB

MOFE

MOF

MPB

MOFE

MOSF ‘94 ‘08 ‘99

5yrs Economic Development Plan 5yrs National Fiscal

Management Plan (NFMP)

1962 1997 2005

Evolvement of the Korean Budget and Planning Ministry

Downsizing Coordination Conflict resolution

6

3. Fiscal Condition

Economic growth rate slow down, fiscal deficit increase,

and national debt expansion

→ Need for greater fiscal consolidation

17.5 17.7 17.6

20.4

23.3

27.0

29.3 28.7 28.0

31.2 31.0 31.6 32.2

34.3

-0.9 -1.2

0.7 0.1 -0.4 -0.7 -0.9

0.7

-1.1

-3.8

-1.0 -1.0 -1.3 -1.5

8.8

4.0

7.2

2.8

4.6 4.0

5.2 5.1

2.3

0.3

6.3

3.7

2.0 2.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-12.0

-7.0

-2.0

3.0

8.0

13.0

18.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Debt/GDP(%, Right) Balance/GDP(%, Left) Growth Rate(%, Left)

※General Government Debt

-7

Int’l comparison of general gov’t debt levels showed Korea has a sound fiscal condition compared with other countries

Source: OECD Economic Outlook 95 database(May, 2014)

※Public Sector Debt

-8

Sustainable level. However, the size and portion of the debt held by public corporations are relatively greater than other countries.

235

124 110 91 56 37 31

31

11 15 2

9 28 6

266

136 125 93

64 65 37

0

50

100

150

200

250

300

Japan Portugal Canada UnitedKingdom

Australia Korea Mexico

Public Nonfinancial Corporations General Government

Source: http://stats.oecd.org

9

GDP & tax revenue growth slowed as the economy matures

4. Why is the Fiscal Reform?(1)

1971-1980

1981-1990

1991-2000

2001-2010

2013

GDP growth 9.1 9.8 6.6 4.2 2.8

Tax growth 31.7 16.7 13.5 6.8 3.6

(Unit,%)

Aging population and more social security services drove up social welfare spending

(Unit : Percentage of consolidated budget total)

(OECD)

-10

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Debt(Korea trillion won, Left) rate of increase(%, Right) a rate of economic Growth(Nominal, %, Right)

4. Why is the Fiscal Reform?(2)

< Trend of Debt increase rate >

II. Reforms on Public Financial Management

12

1. Four Major Fiscal Reforms in the 2000s

- MTBF (NFMP) Expansion of time horizon of fiscal management 1

2 - Top-Down Budgeting Strengthen management of fiscal aggregates

Enhance efficiency of resource allocation

- Performance Budgeting Shift from input control to output control 3

- dBrain (IFMIS) Integrated financial information, Real-time monitoring

4

13

2. Relationship among Four Major Fiscal Reforms

MTEF

Settlement

&

Evaluation

NFMP

(5yrs planning)

Performance

Evaluation

Budgeting

(Top-down)

Execution -Preliminary

PI Board

Integrated Financial Management Information System (dBrain)

3-1. Change of Top-down Budgeting Process

Two-stage budget formulation process

Past

Present

Line Ministries

Budget Requests

MPB

Budget Formulation

MOSF

NFMP

Expenditure

Ceilings

Cabinet

Meeting

Policy Priorities

Sectoral

Allocations

Budget

Formulation

Within Ceilings

Consultation

and Review

Line Ministries MOSF

Enhancing allocative efficiency

Budget ministry has to be alert to avoid inefficient budgets

• Suppose: optimal budget size for Project 1& 2 each is $50 million

-15

3-2. Effects of Top-Down Budgeting

Project 1 Project 2

45 ($5M less) 55 ($5M more)

Project 1 Project 2

50 50

Bottom-up Top-down

Bottom-up budgeting is $10M more inefficient than top-down budgeting

• Increase rates of budget request from line ministries have been on the decrease

-From 16.8% to 3.7% (average) 16.8%

Before top-down (’02-’04)

3.7% (average)

After top-down (’05-’13)

4-1. Structure of Performance Budgeting (PB) in Korea

16

Reflect Feedback

1/3

Projects

Assessment

Reflect

Annual

Performance Plan

(Oct. of the Year t-1)

• Annual

Performance Report

(May of the Year t+1)

Annual Review

for 1/3 of Projects

• 5-Level Evaluation

• Mar. –May

of the Year t+1

Selection of about

10 Cross-cutting

projects

• Recommendations

• Participation of

Experts

FY (t+2) Budget

From Jul. to Sep.

Additional

Work

PGMS In-depth

Evaluation BPA

4-2. Evaluation results from BPA

(Number of Projects, %)

Year

(Evaluation) Total Effective Adequate Ineffective

2008 384 (100) 55 (14.4) 226 (58.9) 103 (26.8)

2009 440 (100) 36 (8.2) 311 (70.7) 93 (21.2)

2010 552 (100) 26 (4.7) 393 (71.2) 133 (24.1)

2011 482 (100) 33 (6.8) 317 (65.8) 132 (27.4)

2012 474 (100) 32 (6.8) 330 (69.6) 112 (23.6)

2013 597(100) 29 (4.9) 424 (71.0) 144 (24.1)

The ratio of ineffective projects to the number of the total evaluated

projects is about 25%

17

4-3. In-Depth Evaluation

Focus is given to crosscutting issues as well as individual programs

- MOSF chooses those issues through the BPA

Primary purpose : Funding and Program reorganization

Evaluation is mainly executed by researchers and staffs of MOSF

- Program for multicultural family (2012)

- Support program for university restructuring (2010)

- Vocational training program for the unemployed (2007)

18

• Evaluate about 10 projects per year, since 2005

• Cut 3 trillion won in budget (2009-13)

Performance

III. PIM Policies in Korea

-20

1-1. Concept of Total Project Cost Management System

Concept of Total Project cost Management system(TPCMS) For projects that take more than 2 years and cost more than 50

billion won the head of each central government agency shall

determine the size of the project, total project costs, and the

project period, and negotiate with the MOSF. Any ex-post

alterations are strictly controlled (Legal Basis: National Finance

Act, Article 50)

-21

1-2. Management Process and Principles(TPCMS)

Management Process and its Principles

Large-Scale investment projects are implemented in order of project

planning, preliminary feasibility review, feasibility study, basic and working

designs, contracting and construction, etc.

When each stage is finished, changes in the details of projects and total

project costs shall be reviewed to avoid increases in the volume of

construction or in project size that were not specified in the original plan.

Projects whose demand decreases by more than 30% or total project

costs increase by more than 20% as a result of re-survey for demand

estimation in the process of the establishment of master plans, feasibility

study, basic designs, and working designs are subject to feasibility

retests. In this case, project implementation is reviewed altogether.

In additon, penalties, such as budget cuts, are imposed for the violation

of the guidelines

-22

1-3. Performance of TPCMS

Performance

Until now, the total project cost management has been enhanced by

broadening the scope of projects subject to the total project cost

management and correcting imperfections of the system.

The average growth rate of total project costs has been over 10% in the

1990s when the total project cost management was introduced, but after

the implementation of the preliminary feasibility review in 1999, the

average increase rate in total project costs has been kept around 1%.

This indicates that the total project cost management is considered to

have been playing a key role in keeping the total project costs steady.

2-1. Concept of Preliminary Feasibility Review(PFR)

23

Preliminary Feasibility Review As pre-procedure for budget creation, the MOSF verifies the

feasibility of new large-scale projects in an objective and neutral

position (Legal Basis: National Finance Act, Article 38)

Structure

Project Design

(Line Ministry)

Project Screen(PFR)

(MOSF/KDI)

Budget Creation

(MOSF)

Scale : A new project that costs 50 billion won or more in total

24

(1) Reduced Information Asymmetry between Fiscal authority and Line Ministry

Accurately identify project contents and effects, and build a consensus through

the review meeting with line ministries and private experts

(2) Established Public Investigation & Enhanced transparency of Decision-making

Investigation results based on common principles and standards are released to

enhance objectivity and fairness, and reliability is ensured through participation

of professional investigation organizations and private experts

(3) Improved Fiscal Soundness and Investment Efficiency

Efficiency is improved by investing in projects with high feasibility, and

expenditures on not urgent and unnecessary projects are suppressed

(4) Minimized inefficient Fiscal Investment by the Political Logic Based on the outcome of Preliminary Feasibility Study, acceptance of budget requests

by local Assembly members in the process of budget deliberation by the National

Assembly is determined, and projects with insufficient feasibility are controlled

2-2. Performance of Preliminary Feasibility Review(1)

Performance of Preliminary Feasibility Review

25

Performance of Preliminary Feasibility Review

- From 1999 to 2014, PFS was conducted on 695 projects

(315 trillion won)

- 250 projects(36.0%) were assessed to be projects with low

feasibility → Suppressed not urgent and unnecessary projects

Total (1999~2014.3/4)

Feasibility-verifies Need mid and long term revies

projects Amount projects (%)

Amount (%) Projects (%) Amount (%)

695 315 445 (64.0) 184.9 (58.7) 250 (36.0) 130.1 (41.3)

(number of projects, trillion won)

2-3. Performance of Preliminary Feasibility Review(2)

-26

PPP(Public-Private-Partnership): A long-term contract between a private party

and a government for providing a public asset or service in which the private

party bears significant risk and management responsibility(World Bank)

BTO: Build-Transfer-Operate, BTL: Build-Transfer-Lease

-

BTO BTL

Investment Return User fee Government payment

Facility Types Road, railway, seaport, freight

terminal, environmental facility

School, military housing, sewage

pipe, welfare facility

Project Risk Relatively high Relatively low

Return Relatively high Relatively low

3-1. What is PPP?

-27

3-2. Performance of Korea’s PPPs

In 1994, PPP was introduced to expand SOC investment.

In 2012, PPP investment volume amounts to 2.4 trillion KRW (2.4 billion

USD), about 10% of total Government investment.

PPP investment share increased steadily, reaching its peak in 2008 with the

onset of global financial crisis.

(in trillion KRW)

FY95-

FY00 FY02 FY04 FY06 FY08 FY10 FY11 FY12

Total SOC

Investment 72.4 17.2 19.1 21.3 24.3 27.2 26.6 25.5

Government

Investment (A) 69.7 16.0 17.4 18.4 20.5 24.5 24.4 23.1

PPP Investment

(B) 2.7 1.2 1.7 2.9 3.8 2.7 2.2 2.4

B / A (%) 3.9 7.5 9.8 15.8 18.5 11.0 9.0 10.3

-28

Total number of projects and investment volume

(in trillion KRW*)

Under

operation

Under

construction

Under

preparation

Types

BTO

No. of

Projects 207 (32.8%) 152 34 21

Project

volume 65.5 (72.1%) 40.1 14.7 10.7

BTL

No. of

Projects 423 (67.2%) 324 88 11

Project

volume 25.3 (27.9%) 16.3 8.0 1.0

Total

No. of

Projects 630 (100%) 476 122 32

Project

volume 90.8 (100%) 56.4 22.7 11.7

- As of December 2012

- * 1 trillion KRW = approximately 1 billion USD

3-3. Performance of Korea’s PPPs (2)

-29

4-1. Outline of Public Sector Debt Management(PSDM)

Pre-emptive management of fiscal risks

Enhancement of fiscal transparency

Advancement of fiscal statistics

Rationale

Progress

2009 - Adopted the accrual basis accounting

2012 - Compiled the general government fiscal statistics

2014 - Published the public sector debt

Outline

4-2. Scope of Public Sector Debt Management

Methodology

30

Looked into domestic conditions, studied overseas cases and referred to the international guidelines

Scope

Covered general government and non-financial public corporations

1) 432 entities designated as a public institution or a public corporation by law and 9 additional entities satisfying the criteria for “ being under government control”

2)Divided into general gov’t , public non-financial corporations, and public financial corporations

Public Sector General Gov’t Public Corporation

Non-financial Financial

Total (a+b) 441 252 173 16

a. Central 304 165 123 16

b. Local 137 87 50 -

4-3. Structure of Public Sector Debt Management

Scope of the Public sector

31

Gov’t control

General government and public corporations – every institutional unit under government control

National Economy

Public Sector

General Government

Central Government

Accounts & Funds

Non-profit Public institution

Local Government

Accounts & Funds

Non-profit Public institution

Public Corporation

Non-financial

Financial

Private Sector

Enterprises

Households

Marketability

-Government holds more than a majority of voting rights or/and an appointment power for key members of the management, etc.

-→ the public sector

sales/production cost≤ 50% or sales to

gov’t/gross sales ≥ 80%

→ general government

1

1

2

2

(note) Output for 2012

-32

Class. Size (trillion won) As a % of GDP

Public Sector Debt (A+B+C) 821.1 59.6

A. General Government Debt(a+b+c) 504.6 36.6

a. Central Government 466.7 33.9

b. Local Government 53.7 3.9

c. Inter-governmental Transaction -15.8 -1.1

B. Non-financial Public Corporation (a+b+c) 389.2 28.3

a. Public Corporation (Central) 343.5 24.9

b. Public Corporation (Local) 51.3 3.7

c. Internal Transaction -5.6 -0.4

C. Internal Transaction (btw. general gov’t and non-financial public corporations)

-72.8 -5.3

The consolidated public sector debt-to-GDP ratio

stood at 59.6%

4-4. Results of Public Sector Debt Management

Findings(Public sector Debt)

33

Sustainable level. However, the size and portion of the debt held by public corporations are relatively greater than other countries.

235

124 110 91 56 37 31

31

11 15 2

9 28 6

266

136 125 93

64 65 37

0

50

100

150

200

250

300

Japan Portugal Canada UnitedKingdom

Australia Korea Mexico

Public Nonfinancial Corporations General Government

-Source: http://stats.oecd.org

※ National Debt Management Framework

-34

Established a 5-year target to manage National Debt (D1)

Stricter fiscal discipline

Maintain Debt-to-GDP ratio at the range of mid 30%

34.3 35.1 35.7 36.4

36.7 36.3

30

34

38

2013 2014 2015 2016 2017 2018

10.5 7.6 8.2 8 7.1

4.9

0

4

8

12

2013 2014 2015 2016 2017 2018

Debt-to-GDP ratio (%)

Rate of debt increase (%)

Stabilize the rate of debt increase

Broader revenue base

Fiscal risk mgmt.

Fiscal reform

-35

※ National Debt Management Framework

Stricter fiscal

discipline

As of 2016, expenditure growth < revenue growth

Fiscal rules to be introduced (i.e. Pay-go)

Fiscal reform

Permanent reduction in tax expenditures by revised legal and institutional frameworks

Eliminate duplicate projects and consolidate similar projects

Robust performance management and greater feedback into budgeting

Developed a mid- to long-term debt management plan

-36

※ National Debt Management Framework

Broader revenue

base

Refinement of the non-taxation and exemption system through performance evaluation, etc.

Enhancement of transparency in revenue sources (i.e. regularization of the underground economy)

Phase-in of higher tax on financial income

Developed a mid- to long-term debt management plan

Fiscal risk

mgmt.

Development of measures to analyze debt sustainability

Establishment of fiscal risk monitoring system

Projection for the amount of public finances to be required by 2060

※ Public Institution Financial Management Strategy

-37

A 5-year financial management plan for public institutions with assets exceeding 2 trillion won

Debt-to-Equity Ratio (%)

Public Institution Liabilities (tril. won)

• Asset sales

• Re-arrangement

• Management efficiency

• Separate accounting

• Business assessment

• Debt limit

Debt-to-equity ratio 231%(’13) →172%(’18)

Self-help Institutional

502 511

524 526 517 513

450

470

490

510

530

2013 2014 2015 2016 2017 2018

231 220 214 200 183 172

100

150

200

250

300

2013 2014 2015 2016 2017 2018

-38

※Public Institution Financial Management Strategy

Greater self-help efforts by institution for debt reduction

Asset sales

Assets relatively less associated with public services

Shrinking of non-core businesses

Re-arrange-

ment

Downsizing of business and schedule adjustment

Business methods change and utilization of private investment

Manage-ment

efficiency

Greater profitability by seeking for new revenue sources

Cost reduction with less overhead and labor expenses

-39

※Public Institution Financial Management Strategy

Reinforced institutional frameworks to manage public institution liabilites

Separate account-

ing

Financial condition monitoring through the separate management of debt by event

(Currently, 7 institutions → additional 6 institutions)

Business assess-ment

Refined pre-feasibility test

Ex-post assessment of business efficiency

Debt limit

Reduce the ratio of public corporation bonds to the total debt by 1%p annually

Quarterly monitoring of public corporation bonds level

Compre-hensive

management of the public sector debt

Medium-term fiscal management

plan

Debt limit target

Monitoring system

Fiscal risk report

※Policy Outcomes and Future Direction

-40

Policy Outcomes Future Direction

Enhanced fiscal soundness and transparency

Fitch upgraded the credit ratings

of 12 public corporations