MS Kim
Bucheon City

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
Title: Cost Analysis System by Accrual Information in City Project Bucheon city adopted the accrual accounting for the first time among Korean local governments in 2002. Over the last decade, the city has accumulated useful data and personnel experiences of how to handle the new system. Using these infrastructures since 2011, Bucheon has applied cost information to feasibility studies for such facilities as a mechanical biological treatment (MBT), a sports center, and parks. The Cost analysis system based on accrual accounting stemmed from efforts to resolve vital issues such as whether an ongoing project needed to proceed as planned, delayed decision-making due to lack of objective cost information, and concerns about how to operate public facilities. The following problems were prevalent before the introduction of the system. ① Incurring Additional Costs due to Delayed Projects and Inefficient Management In the case of the MBT facility, during the project delay, the city contracted out to other local governments for treating the amount of waste beyond its capacity which led to the city incurring additional costs and financial burden. In the case of the sports center and a park, costs of managing the facilities were not analyzed, including the estimation of costs associated with contracting out the facilities. This led to not finding cost saving elements as well as financial waste. ② Delayed Decision Making due to Lack of Objective Cost Information 75 tons of waste per day was produced in Bucheon. If completed as planned, the MBT facility was capable of handling that amount of waste. But delayed completion of the facility because of its lack of treatment capacity, unlike what it originally planned, led to an incapacity to treat over 51 tons of waste per day. In the case of a sports center and parks, lack of objective cost information led to a delay of decision-making related to whether to contract out facilities or how to improve management of facilities. Subsequently, through objective accounting information, the city was able to minimize unnecessary costs of having to follow political decisions not based on an accurate assessment of project feasibility and costs. ③ Occurrence of Resident Conflicts and Complaints Indetermination of whether or not to complete the MBT facility caused resident complaints by operating an existing treatment facility that was supposed to be closed and by not being able to serve as a residential convenient facility (parks) as initially planned. Due to inadequate public services, including the accumulation of untreated waste for months, the occurrence of stench became a source of conflict between Bucheon City and its residents, not to mention an increase in the number of residential complaints. In these circumstances, Bucheon City based on the accrual information, the mayor and executives were able to ameliorate and resolve the conflicts with residents. ④ Added Inconveniences of Facility Users Including Low-Income Groups, Senior Residents, and Children Lack of obtaining sufficient money for efficient management and of improving existing facilities or creating new facilities led to the aging of existing facilities, causing inconveniences to low-income groups, children, minors, and senior residents.

B. Strategic Approach

 2. What was the solution?
①Proposer of Solutions After the introduction of the accrual accounting system, accounting information was provided to external stakeholder, but it was not fully used internally. Facing the problem, a task force team consisting of public employees in the Accounting Division of Bucheon City, who also participated in introducing the system. Therefore a task force team proposed a new initiative, cost analysis system for project evaluation. Objective accounting analysis and information was, then, presented to the mayor to facilitate rational decision-making. ② Methods to Resolve Problems The cost analysis system based on accrual information when reviewing projects was applied to project analysis in order to determine completion of public facilities and their outsourcing as well as to improve their management ○ Whether to Complete the MBT Facility - Project Goal: offering waste treatment public service to residents - Project Beneficiaries: Bucheon citizens - Solutions to Problems Costs and benefits due to the completion of the project were analyzed from both demand and supply aspects respectively and, then, they were compared in terms of cost accounting perspective. To counter these problems, unlike existing economic analyses, the city focused on analyzing the amount of money to be spent and possible benefits/costs by accounting for costs invested before and after whether the project need to be supplemented before its completion or contract cancellation, loss due to the delay of decision-making and depreciation costs related to public facilities. The demand aspects considered the investment amount from project initiation to completion, loss of costs due to project delay, and loss of costs due to the stoppage of the waste treatment service; the supply aspects accounted for compensation for the loss resulting from the stoppage of the project, penalties for the project delay, and abandonment of contract deposits. These were calculated from a cost accounting perspective. ○ Conducting Cost Analysis of Managing Public Facilities Including Parks - Project Goal: reducing budget waste through reduction of unnecessary costs and elimination of waste factors in terms of management - Project Beneficiaries: minors, senior residents, and family users - Solutions to Problems Operating costs of public facilities including parks were calculated and analyzed using cost information. Once problems were identified, alternatives to them were prepared along with ways to reduce costs. Public facilities of similar types were analyzed and compared by cost category (such as personnel, maintenance, and depreciation cost) so as to identify management problems and alternatives. ○ Analysis of Whether to Operate the Sports Center Directly or Contract It Out - Project Goal: improving competitiveness compared to the private sector and applying the User Pay Principle - Project Beneficiaries: users, mainly women and senior residents - Solutions to Problems An analysis was made as to whether to operate the sports center directly or contract it out for efficient management, considering that the center can be operated based on the user pay principle since it is a selective public service. Real costs of managing public facilities were obtained, and compare with outsourcing costs. This led to determining the facility being contracted out. As a result, the quality of public services was able to be maintained while management costs were reduced.

 3. How did the initiative solve the problem and improve people’s lives?
① Calculation of Total Accrual Costs Reflecting depreciation costs of public assets owned by the local government Accurate calculation of full costs including direct and indirect costs so as to aid decision-making ② Integration of Cost Analysis System into Project Evaluation Linking cost analysis system through accrual accounting to project evaluation The cost analysis method was applied to the project review and whether or not to outsource a project by comparing accurate costs and benefits. ③ Determination of Contracting Out through Objective Information Previously, contracting out and service fees were determined without input of cost information, causing inefficient decision-making and budget waste. Project contracts were made based on rough estimates of expected costs that ignored accurate accrual costs, leading to serious inefficient management of public facilities. Efforts were made to come up with life cycle costs that include both construction and management costs, helping to make decisions of projects based on cost analysis in a true sense.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
① Implementing Organization Bucheon created a task force team (TFT) to implement the cost accounting analysis system. The team consisted of public employees having experience with operating accrual accounting. During the planning phase, an Advisory Group was created and included public finance experts and certified accountants. After the execution phase, the Advisory Group was changed to the Project Review Committee that modified potential problems in the execution phase and supported analytical results. ② Implementation Phase The implementation phase consisted of a preliminary phase, planning phase, and execution phase. In the preliminary phase, the city made preparations for a project: composing implementation personnel, obtaining budget, and creating an Advisory Group for strategic approach of a project. During the planning phase, the city conducted interviews of related divisions such as the Project Review Division, surveyed assets for cost estimation, prepared for standards of setting indirect costs, wrote a cost accounting manual, conducted comparative analysis of cost allocation between local governments and the private sector, and produced assessment and assistance by an Advisory Group. During the execution phase, the city chose a project and public facility to be analyzed, calculated costs, verified by the Audit Division and Project Review Committee, held reporting meetings and seminars, reassessed the cost accounting manual for practical application, and conducted customized education for public employees and City Council members. ③ Major Activities - Obtaining Budget: obtained USD 100,000 from the central government thanks to positive assessment of innovativeness of the cost analysis system and its applicability - Internal and External Assessment: assessment of a project by the Audit Division and Project Review Committee including external experts - Examination Linked to Project Evaluation System: the link between existing project evaluation tools and the analysis system of costs - Cost Accounting Manual: producing a manual for applying the cost accounting analysis system - Education: customized education for staff-level public employees ④ History of the System The development and introduction of the system went through the following steps. - July 2010: creation of a task force team - August 2010: selection of policy directions and agenda items - September 2011: development of a cost analysis system based on local government accrual information - October 2011: announcement of application results of the system such as costs using accrual accounting and analysis of loss; hosting open forums and collecting opinions from citizens, civil organizations, public employees, and scholars - October 2011: presentation of the model in the Korean Association for Governmental Accounting and proposal of the system to the Ministry of Public Administration and Security - December 2011: the system published in the Journal of Government Accounting Studies (Korean Association for Governmental Accounting) - December 2011: the model certified by KRILA (Korea Research Institute for Local Administration) and Sungsan Accounting Corporation - January 2012: preparing action plan for 2012 - January 2012: applied the cost analysis system for the first time - June 2012: selected 13 projects to be reviewed in the first half of 2012 and conducted cost analysis - August 2012: verified cost analysis reports and results - September 2013: the system adopted in an international scholarly seminar (CIGAR: Comparative International Governmental Accounting Research)

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
① Internal Divisions In addition to a task force team consisting of accounting personnel which led the development of the cost analysis system, the Project Division was also involved in implementing the system throughout the planning and execution phases. In particular, analysis techniques and experiences of assessing projects and calculating expected costs significantly helped produce the cost analysis system. Implementing the cost analysis system centered on Cost Analysis Team and in close cooperation with the Project Review Committee, Audit Division, Budgeting Division, and Project Division. ② Audit Division The official in charge of auditing analyzed appropriateness of development directions of a given project. Through verification of cost information, the division helped secure internal trust of a given project. The Audit Division of the city examined a project while the Advisory Group and Project Review Committee, consisting of public finance experts and certified accountants, also conducted external evaluations of the project. The results of the evaluations were reported to City Council. ③ Expert Group In the planning phase of the cost analysis system, the Advisory Group, consisting of public finance scholars and certified accountants, was created and offered expert advice on the application field of the cost analysis system and examination of completeness of analysis items. In the execution phase, the Advisory Group was expanded to the Project Review Committee which, in turn, helped select a project requiring the application of the cost analysis system and offered advice on cost analysis results. ④ Citizens and Non-Governmental Organizations Member of civil and non-government organizations were involved in the development of the cost analysis system even before the execution phase and participated strongly in seminars and public hearings held by the city. In particular, they were also involved in issues such as residential resistance to the reuse of the former waste treatment facility and reallocation of existing personnel due to private contracting out, creating mutual bonds through continual discussions with the city.
 6. How was the strategy implemented and what resources were mobilized?
① Finance Over USD 58,500 was invested into efforts that helped develop and apply the cost analysis system such as domestic and international seminars, public hearings, advisory meetings, producing a manual, and education and training. Talent donation from public finance experts and certified accountants helped develop the system with the least amount of cost possible. ② Expertise ○ Domestic and International Scholarly Seminars The local government cost analysis system combined public finance, accounting, and staff-level experience. Through three seminars, public employees in accounting, public finance experts, certified accountants, and public employees in related divisions exchanged ideas and opinions that were professional and practical. ○ Advisory Committees Public finance experts and certified accountants offered expert advice on the system 19 times from the planning phase to the execution phase. Their advice was particularly useful in such areas as selection of a project requiring cost analysis, coming up with categories of the cost analysis, and allocation of indirect costs. ○ Education and Workshops As users of cost information, staff-level public employees and City Council members participated in four education and workshop events to learn about the characteristics of the system, advantages and core contents of the system, its applicability. ○ Production of the Manual A user manual was created to apply the cost analysis system and has served as educational material. It was also distributed to related divisions and utilized for project evaluation. ③ Human Resources In the planning and development phase of the system, a task force team was created in 2010. It included seven public employees from the Accounting Division and other divisions that demonstrated passion, understanding, and expertise of accrual accounting and budget accounting. Members of the task force team took the lead in choosing agenda items, discussing implementation, and conducting on-site interviews. They were promised to receive personnel and financial incentives upon successful development of the system when they were recruited for the team. Consequently, after successful introduction of the system, they received such personnel and performance incentives. ④ Budget Obtainment and Contributors The city secured the support of USD 100,000 from the central government thanks to the selection of the system along with internal budget practice as an excellent policy example. They money was invested into advancing the cost analysis system after the execution phase.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
① Classification of Asset by Cost Object The system reclassified registered asset information such as assigning asset names to each facility among tangible assets, additional expenses by each facility, and survey of affiliated facilities, preparing for a comprehensive asset classification structure for costing. For ease of costing, asset was systematically classified by individual facility and cost object. ② Building specified costing guidelines The system came up with cost categories and their components necessary for analyzing projects. The system defined basic components for costing: selection of cost categories befitting characteristics of public agencies, classification of direct costs from indirect costs, allocation standards of indirect costs, and separation of project division from support division. ③ Cost statement The system produced full costs for constructing and managing public facilities that include depreciation costs, direct costs, and indirect costs. Previously, project analyses of public facilities were exclusively economic ones, but the system included analyses of objective full costs. The cost statement contained cost objects, cost elements, specifications of costing, costing bases, and ratio of cost categories etc. ④ Project Analysis System Using Cost Information The system prepared for an analysis model for producing cost information, considering decision of project completion or contract cancellation, calculation of optimal management costs of public facilities, and comparative analysis of direct operation or contracting out. The costing model made it easier for analysis by applying costs and benefits into a framework. Determination of whether to pursue a project was based on a project analysis using the accounting analysis tool that considered costs invested before and after project completion as well as operation costs, maintenance costs, loss due to choosing an alternative, and benefits including admission fees. This was clearly differentiated from general cost benefit analyses of public facilities. ⑤ Cost Management Manual To utilize the cost analysis system for project analysis, a cost management manual was created, including an classification of asset by cost object, costing guidelines for components of costs, full costs, a project analysis, and cost management methods.

 8. What were the most successful outputs and why was the initiative effective?
The major contents of the implementation of the system as well as major activities of monitoring are as follows. ① Selection of a Project Requiring Cost Analysis The Project Review Committee chose projects that require cost analysis. These facilities included public facilities causing conflicts around their completion or expected to cause conflicts, those needing a decision of private contracting out, or core residential amenities demanding an annual assessment of its management efficiency. ② Costing and Analysis of Projects The Accounting Division (Cost Analysis Team) collected basic materials from related divisions for analyzing a project and estimated its costs following the cost analysis manual. When assessing the MBT facility, the completeness of cost elements based on cost-benefit analysis and appropriateness of details of costing and of calculation method of indirect cost allocation were assessed. In terms of analysis of public facility management, the scope of operating costs, appropriateness of comparative public facilities, and division of direct and indirect costs were assessed. In the case of the decision to manage the sports center directly or to contract it out, the application of user pay principle, elements of contracting out costs, and benefit-cost analysis were assessed. ③ Verification of Project Analysis Results The Audit Division assessed the appropriateness of analysis directions of costing calculated by the Cost Analysis Team. It pointed to matters that required improvement and ensured they were implemented. The Project Review Committee had assessed analysis results and notified the Accounting Division (Cost Analysis Team) of matters requiring improvement before they were reported to the City Council and Audit Division. ④ Decision to Pursue a Project Decision-makers decided on pursuing a project based on assessment results. In this process, the results were explained to stakeholder such as citizens and non-government organizations. In turn, stakeholder gave their opinions on the project. Opinions of stakeholder were reflected into a final decision on pursuing a project. If additional expenses were needed, an effort to obtain additional money was made. ⑤ Reporting Results to City Council Policy decision-makers reported analysis and assessment results of pursuing a project to City Council. In case additional budget was necessary, it required an budget deliberation by City Council. ⑥ Assessment of Major Policies The Performance Evaluation Division conducted the assessment of major city policies including analysis results of public facilities. Assessment results were then reported to the mayor, and matters requiring improvement were subsequently implemented.

 9. What were the main obstacles encountered and how were they overcome?
Unlike private companies, there were major barriers to implementing the system in Bucheon: fear of failure in an environment where accrual accounting infrastructures lacked, pressure to produce good performance of implementing the system, obtaining necessary budget and personnel, and internal organizational resistance. In addition, there were preliminary efforts to be made for developing the system and applying the concept of costs such as investigation and reclassification of assets and introduction of a cost center. ① Difficulty of Obtaining Expert and Implementation Personnel One of the major barriers was lack of expertise to develop a manual and apply it by incorporating accrual cost information into project assessment. To overcome the barrier, the Cost Analysis Team was created, consisting of public employees with experience of running accrual accounting. The team worked together with experts to solve problems. ② Internal Organizational Resistance The strong will of the mayor helped reduce internal resistance to change due to the introduction of a new system. In particular, education based on real examples was given to public employees and City Council members, helping to change the perception of public employees toward the system. ③ Lack of Basic Materials for Generating Cost Information To apply the concept of costs, existing asset information was expanded and reclassified by supplementing asset information that reflect detailed information about individual assets. In addition, an officer in the Accounting Division was designated for asset management so that asset information is managed continuously and systematically from the budget execution phase. There was difficulty in calculating costs due to confusion of direct and indirect costs common in the public sector. To clear the hurdle, costing rules were established.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
① Impact of New Costing System ○ Resolving Conflicts among Stakeholder Previously, decision-making on a project was delayed because objective information was not utilized when a problem or conflict arose around completion of public facilities. The cost analysis model helped made it possible for decision of project completion, thanks to the utilization of accrual information. This helped resolve potential problems resulting from public facilities (often acute conflicts among stakeholder including citizens) and complete and operate quality public facilities in a timely manner. ○ Timely and Accurate Decision-Making Previously, lack of comparative data made it difficult for decision-making. This, in turn, led to a delay of project completion or the completion of a project in a non-timely manner. Providing public services, thus, was delayed, causing additional financial burden to the city. As a solution, the existence of objective accounting data was provided to decision-makers, paving the way for timely and accurate decision-making. ② Differentiation of Public Service Delivery In the case of the MBT facility, a waste disposal facility, accounting analysis was conducted on such areas as whether the project need to be completed due to not meeting planned design requirements such as facility capacity, whether the project needs to be cancelled, and whether the project needs to be supplemented before its completion. The analysis was conducted before the completion of the project and helped determine feasibility of the project. Bucheon, as a cultural city, houses many recreational parks. It spent approximately USD 7,700,000 in 2012. The cost analysis system enabled the city to reduce management costs by identifying appropriateness of the costs and reallocating parks administration personnel. The reduced costs, in turn, led to reinvest into facilities for children, minors, senior residents, and families, leading to improved public service delivery. Comparative analysis of management costs across the same type of parks was conducted; quality of public services was maintained while the city was able to choose an alternative that improves management style and reduces financial burden of parks operation. In addition, sports centers were previously operated by user fees and additional city grants. But inefficient management continually produced operating deficits and caused a financial burden to the city. The cost analysis system enabled the city to identify the appropriateness of user fees, whether the fees need to increase, and whether it needs private contracting out. Consequently, the sports center was contracted out to a private company while maintaining its quality and reducing its operation costs. ③ Positive Impact on Citizens Previously, user fees for public facilities were determined without the input of cost information, leading to complaints from citizens that they were expensive. The opening of information compared user fee with real cost of sports center operation by the cost analysis system led to resolving the complaints. ④ Measurement of the Impact The impact on implementing new costing system was measured by Satisfaction surveys. Satisfaction surveys (called Satisfaction Survey on Sports Center Users) were conducted on before and after the improvement of the sports center. The measurement of the surveys along with received complaints from citizens was reflected in policy improvement.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
① Sustainability While advice from experts for reassessment of projects and operation of a cost analysis team require some financial input, additional, significant financial commitment is not necessary after the development of the system is completed and when the system is operated. The cost analysis system itself is not a profitable project, but it helps improve public services and resolve conflicts with stakeholder including citizens. The system is socially sustainable by maintaining a cooperative governance based on participation from expert groups, citizens, and NGOs. The system is linked with the project evaluation system according to the Local Finance Act. As such, cost analysis of approximately ten projects among major city projects based on cost analysis guidelines will continue to be needed, making it a sustainable institution for local governments. ② Transferability and Impact - National: The accrual accounting system was widely adopted among local governments in 2007, and project evaluation systems are already being operated. These enable the cost analysis system to be easily adopted by and spread across other local governments. - International: One of the major advantages of the system is that it can help solve common dilemmas among local governments around the world: how to solve conflicts between local governments and citizens, how to determine outsourcing of public projects to the private sector, and how to identify accurate operating costs of public facilities. To ensure the effectiveness of the cost analysis system, it is important that the system be linked with a project evaluation system. If the latter is non-existent or is not operated efficiently, it needs to be institutionally reformed. ③ How is it Transferred? In the beginning stage of adopting the cost analysis system, the system can be applied to major investment projects that require urgent cost analysis. Later, the system can be applied to other investment projects and public facilities in general. The central government must prepare for laws and regulations for the operation of the system and offer budgetary assistance to local governments if needed; local governments, in turn, must take institutional steps to implement the system, such as education of personnel for ensuring expertise, composing an experts group, and creating an implementation organization such as the Cost Analysis Team as in Bucheon The central government and Bucheon first planned to transfer the system to local governments with similar conditions as Bucheon and, then, to other local governments across the country.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
① Overall Experience In the process of reassessing the decision to complete public facilities (such as the MBT facility and sports center) using accrual cost information, previous asset classification data turned out to be incomparable to the cost analysis system, leading to asset reclassification efforts and, consequently, requiring additional personnel and time. Since cost structure used in the private sector cannot be applied immediately to the public sector, overall cost accounting standards were prepared by considering the differences between private accounting and local government accounting; they also reflected local government characteristics such as differences between budget items (such as personnel costs) and cost items as well as difficulty in calculating cost items by cost object due to sheer number and types of public facilities. Unlike what Bucheon expected initially, the development and operation of the cost analysis system demanded deep expertise, needing continual participation from public finance scholars and certified accountants. In particular, a cost analysis team was created within the Accounting Division to develop and operate the system effectively. The team played a central role in developing and operating the system. ② Lessons Learned Decision-making using objective cost analysis information enabled the city to persuade stakeholder including citizens and the City Council, resolve conflicts among stakeholder, reduce citizen complaints, and produce fast decision-making. The use of accrual information in decision making can be enlarged through linking cost analysis system with project evaluation system. The creation and operation of a task force team enabled the city to identify accurate development directions of the system and produce performance from the beginning. Involvement of diverse stakeholder including citizens, public employees, and related experts offered an opportunity for the city to share necessity and efforts to introduce the system and make it work. The possibility of the successful operation of the cost analysis system can be increased through systemic monitoring efforts and a verification system. Promotion of the necessity to develop a new costing system, open forums, promotion outlets and public hearing proved to be an important factor that helped persuade stakeholder. Continual implementation of step-by-step customized education (City Council members and public employees by each grade) along with gradual introduction of the system minimized potential mistakes that might have hampered the development and application of the system. ③ Recommendations for the Future In the case of adopting the system in the future, it is important to create a task force team consisting of public employees with experience in accrual accounting and strong commitment. It is also important to raise awareness of developing the system for the mayor and to create an atmosphere and an atmosphere in which members of the team can work with passion. In addition, policy directions and objectives of the system need to be identified clearly obviously through a sufficient number of discussions. Involvement of diverse stakeholder including citizens, public employees, and related experts helps secure the soundness of the system and its stability. Preliminary customized education for public employees and City Council members help them understand the system and form a shared consensus about the use of the new system and its necessity.

Contact Information

Institution Name:   Bucheon City
Institution Type:   Government Agency  
Contact Person:   Man soo Kim
Title:   Mayor  
Telephone/ Fax:   82-32-625-2630/2649
Institution's / Project's Website:  
Address:   210 Gilju-ro(1156 jung-dong), Wonmi-gu
Postal Code:   420-736
City:   Bucheon
State/Province:   Gyeonggi-do

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