Deepening Medium Term Budget Framework – “DMTBF”

1. Deepening Medium Term Budget Framework – “DMTBF” Principles of Classification and Reporting January 6, 2011

2. TODAY’S PRESENTATION • Public Expenditure Management Classification • Main Principles of a Sound Classification Systems • Budget Evolution and Classification Requirements • Defining Bangladesh’s Financial Classification System

3. What is Classification? • Classification is the Identification, Data Capture and Storage of Budget and Financial data so it can be easily retrieved for Analytic and Reporting Purposes. • In the case of Bangladesh, data may be captured and stored in electronic Database(s) .. E.g. IBAS.. Or other systems e.g. payroll (if developed) • Data Classification is Expensive (Costs of Identification, Data inputs (Electronic Capture), Storage, and Maintenance (IFMIS), Data Integrity (Ongoing Staff Training)) – Need to strike a balance of aggregate and detailed requirements). • Promotes standardized One time Data Entry – Data Transfer Between Systems.

4. What is Classification? • Current Era of Increasing Stakeholder Informational Needs. No Data Classification = No Reporting e.g. District Data, Programmatic Data, Financial Data (recent IMF mission) • Standard Defined Building Block to provide a Normative Framework for both Policy Decision Making and Accountability of Public Monies. • Enables: • Policy Formulation and Performance Analysis • Efficient resource allocation amongst Sectors • Ensures compliance of resources as approved by legislature • Day-to-Day administration of the Budget

5. Main Features of A Sound Classification System • The Primary Aim of a Modern Classification Scheme is to ensure that the Budget Complies with the Main Principals of Sound Budget Management • Principle of Comprehensiveness – The Budget Covers ALL government entities and Institutions undertaking Government operations – Presents a complete and consolidated view. • Principle of Unity – The Budget include ALL revenue and expenditure of all government Entities undertaking Government Operations. • Principle of Internal Consistency – that the current revenue expenditures resulting from the completion of past investment projects are fully reflected in the budget and there be a unified approach in preparing and executing the current Capital and Development Budget.

6. Main Features of A Sound Classification System • Major Budget and Revenue Classification Groupings • Source of Funds • Administrative • Functional • Economic • Program • Other - Constitutional and Fiscal Management Requirements

7. Example Administrative Classification System Other : Geographic, Beneficiary, Gender, Source of funds

8. Main Features of A Sound Classification System • Major Considerations: • Distinction Between Administrative and Economic Classifications • Independence of Economic and Administrative Categories • Mutual Exclusivity is the Classification Cornerstone • Revenues (by Tax, Social contributions, Grants and Other) • Expenditures (by administrative, economic and functional classifications) • Focus (or provision) on Linking Funds to results rather than inputs – i.e. Program Classification. Consideration of Program Budgeting.

9. Main Features of a Sound Classification System • Major New Classification Considerations: • Integration of the Budget and Accounting Classification Systems (e.g. GFS 2001) • Additional Informational Needs: • Classification by Geographical Location • Classification of Beneficiaries (e.g. Gender) • Classification of Sources of Financing (Debit, grants, donor funding) • Poverty Reduction • “Other” legal/constitutional requirements (Unitary State)

10. Budget Evolution and Classification Requirements • Bangladesh’s Legal Basis of Budget provides for detailed cash based appropriations with a 1 year time limit = Cash based compliance Budgeting • Current Budget Methodology is based upon Government Structure (Ministries, Divisions, Directorates). • Current International Budget Evolution - Moving to a Performance Program Budgeting. • 1950’s Budget by Full Cost of Program (USA - Hoover Commission) • 1950’s Budget by Program and Project Blocks (Philippines) • 1960’s Planning Program Budget System (USA) • 1970’s Zero Based Budgeting (Incremental Budgeting) • 1980’s Program Budgeting – qualitative program goals (cost unit) • 1990’s Block Budgeting - (lump sums to Ministry to allocate with contract for results (/Canada/Malaysia) agreement of results )

11. Budget Evolution and Classification Requirements • Current Methodologies focus on performance Program Budgeting. • Agency Model – budget by function (UK) • Output Budgeting (NZ) Principal Agent • The End Result is as Educational Standards and Communication Capabilities improve, the Public wants more Transparency and Accountability from Government . • Just Publicizing Who got the Money is No Longer Sufficient.. There is Increasing Need to explain what was done with it. • Enter the era of Program Budgeting

12. Budget Evolution and Classification Requirements • Known Classification Provisions • Administrative Classifications (Ministry/Division/Managing unit) • Economic Classification (Cash Based or Modified Accrual) – GFS 2001 • Functional Classification (GFS/UN = COFOG) • Program Budgeting (Near Future Requirement) • Geographic? • Source of Funds . • Constitutional/Legal? i.e. Charged Expenditure • Gender?

13. Classification Boundaries • Classification Definitions? Detailed VS consolidated? Debit Management IBAS Asset Management Cash Management Payroll & Pensions

14. Classification & Reporting • Classification Segment = Data Reporting Ability • Known Reporting Requirements • Public at Large = Consolidated Level (Budget and Financial -CGA) • Parliament = Approval = Consolidated Level (Budget) • Parliament = Informational = Consolidated Level Financial – CGA) • Parliament = Monitoring = Detailed Level (Budget and Financial -CGA) • Ministerial = Monitoring = Detailed Level (Budget and Financial -CGA) • Ministerial Preparation and M&E = Individual Appropriation Level • Donor = Individual Appropriation • Donor = Specialized Levels • IMF = Statistical Consolidated Level (GFS)

15. International - Standardized Classifications • IN PLACE In International Arena - (Only Need to Define aggregate or detail) • GFS 2001 – Functional • GFS Economic • IPSAS – Financial • TO DEVELOP • Administrative • Program • “Other”

16. International - Standardized Classifications • Classification Tricks • Project code is used to accumulate Costs.. Not to define a type of cost e.g. ADP). • Special Parameter codes can be used to capture statistical data.

17. International - Standardized Classifications • Management Issues - Guidance Needed • What Classification Codes? Standard Budget and Financial Codes? • IBAS Consolidated Only? • And what is IBAS? • Pace of reform.. • Programme Classifications? • District, Upazila, City Corporations, Autonomous Bodies? • Other – Geographic? Beneficiary? • Accounting Policy that will be adopted? • Ongoing Classification Maintenance & Training – Dedicated Resource