With the democratic revolution of 1990, Mongolia overthrew the Soviet satellite regime that had ruled the country since 1924. However, by 1996 it was evident to the newly-elected Mongolian government that much of the civil service was still modelled on the old communist system.
The Mongolian parliament, the State Great Hural, passed a law to allow the recruitment of public servants to be based on competitive examinations rather than allegiance to a political party. However, the government was still unable to stop local government units from overspending on their budgets and being at least three months in arrears in paying their staff's salaries. In 1996 alone, “local governments disbursed nearly 40 percent of the central government’s total spending”. This led to an environment in which the central government had almost no oversight of their local government units. Mongolia was about to reform its civil service radically in order to complement its transformation to a private market economy.
The government that was elected in 1996 wanted to complete Mongolia's transition to a full market economy. Having carried out further privatisations, it then initiated civil service reform. The reform was largely based on New Zealand's New Public Management (NPM) progamme, which created a government structure based on a private enterprise model. In order to achieve this ambitious goal, the Mongolian government worked together with the Asian Development Bank (ADB) to draft a range of different reform packages, which were contained in the two phases that were later adopted in the State Great Hural.
The First Phase of the Mongolian Government Reform Programme (GRP1) aimed to establish a "sound public sector financial management and accountability system" and "transparent data and information dissemination". To achieve this, the following five objectives were outlined:
- "Improving aggregate fiscal discipline
- "Strengthening the public sector’s budget formulation and execution
- "Enhancing the public sector’s operational efficiency
- "Addressing social impact and financing needs of the reforms under the GRP1
- "Preparing the groundwork for continuing the reforms."
The Second Phase of the Mongolian Government Reform Programme (GRP2) aimed to “increase accountability and efficiency in the public sector, as measured by fiscal sustainability and tangible improvements in the delivery of key public services”. In greater detail, this meant:
- Enhancing institutional capacity to implement budget, planning, and financial management reforms
- Improving fiscal sustainability through pension reforms and administrative consolidation
- Mainstreaming governance reforms and enhancing confidence in public institutions. 
The first of the two reform phases was completed in 2002 when the State Great Hural adopted the Public Sector Management and Finance Law (PSMFL). This legislation built on GRP1 to establish a legal basis for budgeting and performance contracting in the public sector and set up GRP2.
The public impact
The public impact of Mongolia's shift from a centrally planned communist regime towards a privatised market economy is difficult to assess in its entirety. However, the World Bank Open Data database, for example, shows that overall GDP growth rates accelerated from -3.2 percent in 1990 to +3.9 percent in 1997 after wholesale privatisation.
It is more difficult to assess the impact of public management reform. A major result of the reform process was the centralisation of the budget authority and the introduction of the Treasury Single Account system, which led all the accounts of public entities to be overseen by the Mongolian Ministry of Finance. This was intended to remove any incentive to overspend on budgets, but ministries still had a political incentive to overstate economic forecasts and expand budgets. With regard to budgetary discipline, the World Bank concluded in 2015 that planned and actual state expenditure still diverged significantly (by 20 percent) in 2014 and 2015.
However, the budget process was formalised and given a formal execution and planning process for the first time, and the Ministry of Finance now had oversight of all electronically updated accounts from the Treasury. This meant that it knew exactly how much cash the Mongolian state had each day, and from 2003 onwards civil service salaries were paid on time (see The Challenge above). There was much greater central government control over the public finances: "in 1996, local governments disbursed nearly 40 percent of the government’s expenditures; in 2004, they disbursed 8 percent."
In its 2015 Financial Performance Review, the World Bank specifically praised Mongolia for its public finance management:
- “The budget is realistic and is implemented as intended...
- “The budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public...
- “The budget is prepared with due regard to government policy...
- “The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds...
- “Adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes...
- “External scrutiny and audit: Arrangements for scrutiny of public finances and follow up by the executive are operating.”
Public Confidence Good
In the 1996 general election, the Democratic Union Coalition won 50 out of the 76 seats in the State Great Hural on a 90.2 percent voter turnout. The ruling Mongolian People’s Revolutionary Party was defeated, and communist rule came to an end. However, one view is that the strong vote for the Democratic Union Coalition was not primarily a vote for their political programme, but rather a protest vote against communism in favour of democracy.
Public polling data at the time indicated that over 90 percent of the population approved of the radical reform programme, and this level of approval did not drop below 80 percent until 2000. In an opinion poll in the early 2000s, Mongolian citizens rated the civil service as a whole more positively than negatively. However, they still did not have a lot of confidence in the system overall, with only 14 percent of the population having “full confidence” in institutions such as the police and the judiciary. At the same time, private institutions such as NGOs and the news media had earned “full confidence” of 22 percent of the population.
Stakeholder Engagement Good
In the 1990s, the Mongolian government was the main stakeholder in introducing new reforms, NPM among others. Local civil society stakeholders were less engaged, because under communist rule they had been used to a centrally planned regime. Thus, the initiatives were driven by a mix of international donor organisations and the Mongolian government. However, in 1996 the incoming Mongolian prime minister, Mendsaikhany Enkhsaikhan, invited local and district governors to Ulaanbaatar for a conference in order to gain the goodwill of local leaders. This was the first time in modern Mongolian history that such a meeting had taken place.
The ADB, the UNDP and USAID all supported the Mongolian government in formulating its GRP1 and GRP2 strategies, with the ADB specifically helping to draft them. A UNDP adviser was called upon to advise the Mongolian cabinet secretary and assist with their legal implementation. Because the GRP reforms were modelled largely on New Zealand's NPM, the New Zealand government's official development assistance to Mongolia included sending the Treasury officials who had implemented its own reform programme as advisers to the Mongolian government.
Political Commitment Strong
In 1996, the incoming Mongolian government was enthusiastic about acting to tackle the country's economic problems. The chief economic advisor, Batbold Tserenpuntsag, described the time after the 1996 election as “an exceptional political window”. The government acted quickly in auctioning off large enterprises and privatising the economy, while the reform programme and the integration of the New Zealand NPM model were driven by the new prime minister himself.
Clear Objectives Strong
The PSMFL was an outcome of the GRP1 and is commonly seen as setting out Mongolia's vision for public management, establishing a formal legal framework for budgeting and performance contracting in government. Officially, its purpose was to “regulate relations connected with authorities and responsibilities of state organisations and officials with regard to preparation, approval, spending and reporting of budget, personnel policies and principles of operational management of budgetary bodies”. The GRP2 phase later strengthened the law by carrying out measures to reinforce the purpose of the PSMFL.
Overall, the policy framework proposed by the government had the following tenets:
- “The adoption of output-based budgeting, management and reporting by ministries, agencies and parliamentary bodies.
- “The adoption of accrual budgeting and accounting [principles] by ministries, agencies, parliamentary bodies and the government as a whole.
- “The delegation of input[-based] management decisions to state secretaries and chief executives.
- “The preparation of strategic business plans by ministries, agencies and parliamentary bodies for which state secretaries and chief executives will be held accountable at the end of the year.
- “The integration of current and capital budgeting through the appropriation process in the form of appropriations to ministries and agencies for investments... as well as expenses of producing outputs, transfer payments, etc...
- “The preparation of forecast accrual financial statements and annual accrual financial statements the government as a whole."
The Mongolian government decided to introduce a public sector management model that was largely based on existing NPM initiatives in New Zealand. Also, pilot projects were launched in five different government agencies via GRP1 prior to the enactment of PSMFL, and these pilots provided additional evidence in a specifically Mongolian context.
Although New Zealand's public management reforms were not being adopted in other developing countries, Mongolia was an exception, because New Zealand's programme was the choice of the Mongolian prime minister and the finance minister. The draft PSMFL legislation mirrored many of the characteristics of public management legislation in New Zealand, such as the State Sector Act and the Public Finance Act, which were passed in 1988 and 1989 respectively.
Mongolia's choice ran counter to some expert advice from the World Bank, which had warned that such reforms might be too much to take on for a developing country, as they “tend to have an informal economy with relatively weak specification of property rights and other formal processes to regulate economic activity". Nonetheless, Batbold Tserenpuntsag stated that the government liked the way that the New Zealand model "emulated market incentives". Mongolia had previously enacted an aggressive privatisation of its economy, and making the civil service run like a business was a progressive idea at the time.
In order to test the validity and applicability of these reforms, five pilot projects were sponsored by the ADB in the following Mongolian government agencies:
- The General Department of National Taxation
- The Customs General Administration
- The State Audit and Inspection Committee
- The State Administration Services Council
- The National Statistical Office.
The reasoning behind these choices was as follows: “The tax and customs agencies were chosen because they generated revenue. The civil service council and audit office were chosen because they would oversee the new performance contracts and accounting system, respectively. The statistics office volunteered for the pilot project.”
Before the introduction of the PSMFL, the Mongolian government had received funding from USAID and the ADB to conduct study tours to New Zealand to show lawmakers the reforms at first hand. A highly-qualified NPM technical team was funded by the ADB to implement the pilots. The team members had all graduated from Western universities and the ADB underwrote the costs of their recruitment and their salaries. “The team trained agency counterparts to identify outputs, provide estimated costs for those outputs, develop strategic business plans, and complete performance agreements.”
After the PSMFL was enacted, the Mongolian Ministry of Finance, supported by the GRP2 project, engaged in substantial capacity-building efforts across government in order to familiarise staff with the new regulations on budgeting and public management. They developed audit manuals for financial performance, provided training for the accountant general and the chief accountants of line ministries, and trained staff in basic budget management principles. The ADB and the IMF were involved in helping build this capacity. However, despite these efforts, the World Bank reported that “limited staff numbers, a shortage of relevant skills, and high turnover of professional staff often hindered agencies from implementing key GRP2 reform measures”.
While the PSMFL introduced a new management style based on performance, the Mongolian civil service remained politicised, according to the World Bank. The core feature of the reform was the new performance contracts for staff that were meant to hold civil servants accountable for the outputs they produced rather than their political allegiance.
The performance contracts meant that “at every level of the system, managers received budgetary autonomy in exchange for accountability”. This meant that, in theory, managers could spend their budget freely, as long as they delivered the results specified in their performance contracts. What remained difficult, however, was to measure actual performance and to distinguish between costs arising from outputs and costs arising from inputs. “For example, when Mongolia’s Academy of Management conducted research for other government agencies, the work was evaluated based on the number of projects rather than their quality. Throughout the civil service, quantity received undue weight in performance evaluations simply because it was measurable.” These unclear criteria set unclear performance standards across different government units, and also led to subjective evaluations and "unfair" performance bonuses for government employees.
Although the World Bank published evaluation reports that monitored the key performance indicators of GRP1 and GRP2, the Mongolian government itself did not track targets over time in any formal way.
Of the external stakeholders, the ADB was the one principally responsible for monitoring the implementation of GRP1 and GRP2. In 2002, it recommended that Mongolia strengthen its monitoring efforts, while in 2011 the World Bank concluded that “on average, only one or two review missions a year were carried out during the 2004-2008 implementation period, despite significant implementation delays and the comprehensiveness and complexity of the reforms”.
The Mongolian government understood that before substantial civil service reforms could be successful, it had to reduce the number of employees on its payroll: prior to privatisation, it employed nearly a third of the entire Mongolian population. The government privatised large state companies such as the mining company Erdenet and the cashmere producer Gobi Cashmere, and only afterwards focused on public management reform. By mid-1996 the government’s ownership of companies was reduced to 20.4 percent.
Before enacting the PSMFL, the government had introduced other laws and reforms that were intended to promote sound public management principles in the civil service. In 1996, the Mongolian State Policy on Reforming Government Processes and the General System of Structure was introduced to implement “managerial” ideas and values, such as “strong, entrepreneurial, innovative and creative management”.
In 2000, the State Great Hural approved the Good Government for Human Security Programme. “The idea of this programme was to promote the societal ownership of policy formulation and implementation that can lead to extensive collaboration between the sectors, between central and local public administrative authorities, and between government and citizen. Special consideration was given to work towards coherent organisation of activities involving NGOs, the private sector, the mass media, academics and citizens.”