INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

Bangladesh

Designing a New Budget and Accounting Classification

January 2014

Sandeep Saxena, David Gentry, Kris Kauffmann, and Than Lwin

For Official Use Only

FOR OFFICIAL USE ONLY

INTERNATIONAL MONETARY FUND

Fiscal Affairs Department

BANGLADESH

DESIGNING A NEW BUDGET AND ACCOUNTING CLASSIFICATION

Sandeep Saxena, David Gentry, Kris Kauffmann, and Than Lwin January 2014

The contents of this report constitute technical advice provided by the staff of the International Monetary Fund (IMF) to the authorities of Bangladesh (the "TA recipient") in response to their request for technical assistance. This report (in whole or in part) or summaries thereof may be disclosed by the IMF to IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the TA recipient, and upon their request, to World Bank staff and other technical assistance providers and donors with legitimate interest, unless the TA recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information http://www.imf.org/external/np/pp/eng/2009/040609.pdf). Disclosure of this report (in whole or in part) or summaries thereof to parties outside the IMF other than agencies or instrumentalities of the TA recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the TA recipient and the IMFs Fiscal Affairs Department.

3 Contents Page

Acronyms ...................................................................................................................................5 Preface........................................................................................................................................6 Executive Summary ...................................................................................................................7 I. Introduction ..........................................................................................................................12 II. Designing a New Classification Structure ..........................................................................16 A. Conceptual Framework ...........................................................................................16 B. Suggested Classification Structure ..........................................................................19 III. Developing Classification Segments .................................................................................20 A. Administrative Classification..................................................................................20 B. Project Classification...............................................................................................25 C. Fund Classification..................................................................................................28 D. Economic Classification .........................................................................................34 E. Authorization Classification ....................................................................................38 F. Functional Classification .........................................................................................42 G. Location and other Derived Segments ....................................................................45 H. Program Classification ............................................................................................46 IV. Implementing the New Classification ...............................................................................47 A. Project Timeline and Sequencing ...........................................................................47 B. Change Management ...............................................................................................49 C. Institutional Support ................................................................................................51 V. FAD Technical Assistance ..................................................................................................53 Tables 1. Summary of Key Recommendations ...................................................................................10 2. Suggested Classification Structure for Bangladesh .............................................................20 3. Proposed Administrative Classification Structure ...............................................................21 4. Examples of Integrated Accounting.....................................................................................24 5. Proposed Project Classification Structure ............................................................................25 6. Proposed Fund Classification Structure ...............................................................................29 7. Fund Classification in South Africa.....................................................................................30 8. Albania's Classification of Capital Expenditure by Funding Source ...................................31 9. Proposed Economic Classification Structure .......................................................................34 10. Suggested Elements in the Economic Classification .........................................................35 11. Proposed Authorization Classification Structure ...............................................................39 12. Mauritius' Appropriations by Ministries and Programs .....................................................40 13. Illustrative Example of Mapping between Authorization and other Classifications .........41 14. Suggested Control Levels by Classification ......................................................................42

4 15. Suggested Functional Classification Structure ..................................................................43 16. Bangladesh: Proposed Functions .......................................................................................44 Figure 1. SPEMP's Proposal................................................................................................................14 Boxes 1. Conceptual Framework for a Sound Budget Classification System ....................................16 2. Classification System in Brazil ............................................................................................18 3. Transition to a New Budget Classification System .............................................................49 4. IFMIS Change Management ................................................................................................50

5 ACRONYMS
ADB ADP BACS BB BW C&AG CAO CGA CIDA CoA COFOG DANIDA DAO DFID DMFAS DPA ERD EU FAD FD GFS GFSM 2001 GIFMIS GL GoB iBAS IMR IPSAS IRD MoF MoH MTBF NBR OECD PFM PMBMA PWD SBL SOE SPEMP TA TDMW Tk TSA UAO VAT WB Asian Development Bank Annual Development Plan Budget and Accounting Classification System Bangladesh Bank Budget Wing (of Finance Division, Bangladesh) Comptroller and Auditor General (of Bangladesh) Chief Accounts Officer Controller General of Accounts (of Bangladesh) Canadian International Development Agency Chart of Accounts Classification of Functions of Government Danish International Development Agency District Accounts Officer Department for International Development (of the UK) Debt Management and Financial Analysis System Direct Project Aid Economic Relations Division European Union Fiscal Affairs Department (IMF) Finance Division (of Bangladesh Ministry of Finance) Government Finance Statistics Government Finance Statistics Manual 2001 Government-wide Integrated Financial Management Information System General Ledger Government of Bangladesh Integrated Budget Accounting System Inter-Ministerial Receipts International Public Sector Accounting Standards Internal Resources Division (of Bangladesh) Ministry of Finance (of Bangladesh) Ministry of Health (of Bangladesh) Medium-Term Budget Framework National Board of Revenue (of Bangladesh) Organization of Economic Cooperation and Development Public Financial Management Public Money and Budget Management Act Public Works Department (of Bangladesh) Sonali Bank Limited State-Owned Enterprise Strengthening Public Expenditure Management Program Technical Assistance Treasury and Debt Management Wing (of Finance Division, Bangladesh) Taka Treasury Single Account Upazila Accounts Officer Value Added Tax World Bank

6 PREFACE
In response to a request by the Government of Bangladesh (GoB), a Fiscal Affairs Department (FAD) public financial management (PFM) mission visited Dhaka from October 20 to 31, 2013 to advise the Finance Division (FD) on developing a new budget and accounting classification system and to provide guidance to meet its implementation challenges. The mission was led by Sandeep Saxena (FAD) and comprised Messrs. David Gentry (FAD), Kris Kauffmann, and Than Lwin (both external experts). The mission also reviewed the progress in implementing the recommendations of the March 2013 FAD mission on cash management and discussed further FAD support. The mission met with the Finance Secretary, Mr. Fazle Kabir, and apprised him of the main findings and recommendations. The mission was guided by Additional Secretary, Mr. Ranjit Chakraborty, and Deputy Comptroller and Auditor General, Mr. Dilip Kumar Poddar. The main counterpart of the mission was the Strengthening Public Expenditure Management Program (SPEMP) Component II. The mission interacted intensely with Component Director (Additional Secretary), Mr. Mohammad Muslim Chowdhury, and his team of consultants: Messrs. Sabbir Ahmed Khan, Mohammad Saiful Islam, Mustaque Ahmed, Aminul Mohaimen, and Robert Flanagan. In the FD, the mission also benefited from meetings with Additional Secretary, Mr. Nazmus Sakib, Deputy Secretary, Mr. Habibur Rahman, and his team of officers in the Budget Wing (BW), and Deputy Secretary, Mr. Sarwar Alam, and his team in the Treasury and Debt Management Wing (TDMW). The mission gained very useful insights from meetings: (i) in the Planning Commission with the Programming Division Chief, Mr. Khandaker Nuruzzaman, Joint Chief, Mr. Syeedul Haque, and other officers, including international consultant, Mr. Andrew Kettlewell; (ii) in the Controller General of Accounts (CGA) office with Additional CGA, Mr. Jiban Krishna Chowdhury, and Deputy CGA, Mr. Mohammad Jasim Uddin; (iii) in the National Board of Revenue (NBR) with Member VAT Policy, Mr. Farid Uddin; (iv) in the Economic Relations Division (ERD) with Ms. Farida Nasreen and her team; (v) in the Ministry of Agriculture with Additional Secretary, Mr. Swapan Kumar Saha, Deputy Secretary, Mr. Mahbubul Islam and other officers; (vi) in the Bangladesh Bank (BB) with General Manager, Mr. Bishnu Pada Saha, and Deputy General Manager, Mr. Osman Goni; and (vii) in the World Bank Dhaka office with Messrs. Jonas Fellov and Jorg Nadoll, and Ms. Sadia Priyanka. The mission expresses its gratitude for the courtesy with which it was received and for the cooperation throughout the course of its visit. It is particularly grateful to the staff of the SPEMP Component II and BW for their candor and the provision of all materials necessary for the missions work. The mission is highly appreciative of the support provided by the IMF resident representative, Ms. Eteri Kvintradze, and the staff of the IMF office in Dhaka. The mission would also like to acknowledge the contribution of the government of Japan for financing this activity through an account established for the purposes of financing IMF technical assistance (TA).

7 EXECUTIVE SUMMARY As part of the comprehensive Bangladesh PFM reform program, the authorities, with the help of SPEMP consultants, are developing a new budget and accounting classification system. The new classification is planned to be rolled out together with a new improved version of the in-house financial information software system (iBAS++), which is being developed in parallel. This report reviews the classification design developed by the SPEMP team and makes suggestions for its improvement and smooth implementation. In making its recommendations the mission was guided by the considerations of: (i) meeting GoBs divergent internal financial management needs while keeping the classification structure simple and implementable; (ii) building a sound control framework; (iii) providing scope for expanding the coverage of the government financial information system; (iv) addressing the external reporting requirements in accordance with international standards; and (v) enabling a future transition to accrual-based accounting. The mission recommends retaining a four-segment structure comprising: (i) administrative; (ii) project; (iii) fund; and (iv) economic classifications. Cross-walk tables could be used for deriving other classification, including functions, planning commissions sectoral classification, and geographic location. The mission suggests expanding the administrative classifications coverage to government entities outside the central budgetary sector. This would enable future iBAS++ extension to these entities and improving the reporting coverage progressively to the entire central government, general government, and eventually to the whole of government. This should be possible in a phased manner without diluting the functional autonomy of these entities. The recognition of these entities in the classification system is also necessary for a consolidated reporting. The fund segment, among other things, further complements the administrative segment by allowing a clear identification of own resources of the entities outside the budgetary central government. It uses the concept that money is fungible, and appropriately designed accounting systems can obviate the need for maintaining separate bank accounts to distinguish between different funding sources. The fund classification is a technique for showing all projects and activities in the budget process, while preserving the ability to track expenditures financed from specific sources. It serves two purposes: limiting the use of tied funds to the intended purpose and, in cases of external funding sources, restricting expenditure commitments until the funds are actually available. Identification of donors and specific loan/grant agreements in the fund segment should facilitate linking iBAS++ with ERDs debt database maintained in Debt Management and Financial Analysis System (DMFAS).

8 The suggested economic segment together with a well developed administrative classification allows specification of different levels of controls over budget execution. It allows clear distinction between the parliamentary grants and appropriations, the FDs budget controls and line-ministries micro-level controls over their sub-ordinate units. In collaboration with the SPEMP team, the mission developed the top four levels of the economic classification and illustrative formats for the financial statements that the economic classification would support. The segmentation within the economic classification would enable transition to accrual accounting without needing a change in the chart of accounts (CoA) structure. Although, the suggested structure provides for six levels in the economic segment, the mission would recommend a careful reconsideration of the detailed information needs, including how far these needs should be met through the national budgeting and accounting system. During the course of the missions analysis a number of larger policy issues were raised. These included: (i) the waning relevance of distinguishing between development and nondevelopment expenditures and the existing duality in budget formulation; (ii) the harmonization of the planning commissions sectoral classification with the functional classification used in the budget; (iii) the adequacy of the existing functional classification for macro-level resource allocation; (iv) the need for greater visibility and parliamentary scrutiny of certain large expenditures, such as interest payments and pensions; and (v) building transparent procedures for utilization of block (lump sum) appropriations and appropriations for contingencies, and subjecting these to legal budget reallocation process. While a substantive analysis of these issues was beyond the purview of the mission, the report touches upon some of these in the context of the missions focus on the classification system. Given the vast and dispersed financial administration in Bangladesh, the implementation of the new classification codes will be a challenge. FD should prepare itself to take over the ownership of the systems from SPEMP; and BW and CGA, as the main stakeholders, should work together to overcome the implementation challenges. The mission supports the taskforces informal decision to delay the implementation of the new classification system by a year. However, the additional available time should be utilized for testing the new system under near live conditions. Completion of the new classification and iBAS++ by March 2014 would allow FD an opportunity to pilot test the system during the 201415 budget process, which will be immensely beneficial before going live in 2015. Awareness and capacity building efforts should be initiated simultaneously. The technical capacity of the IT service arm of the FD (FSMU) needs augmentation. A renewed focus on project management methodology and a formalized approach to change management is required to ensure success. Follow-up TA would be useful to reinforce the concepts behind the missions recommendations and to develop business processes to use these concepts optimally. The expert could assist the taskforce and work with SPEMP team, FD and line ministry staff to

9 work out examples and define procedures. Considering the expertise already available within the SPEMP, a peripatetic mode of TA delivery would be more effective compared to a resident advisor. The mission suggests that TA be provided over at least a 12 month period more intensively in the first few months when the design is finalized and tested.

10 Table 1. Summary of Key Recommendations1

Recommendations Classification Structure Adopt a four-segment classification structure comprising: (i) Administrative; (ii) Project; (iii) Fund; and (iv) Economic classification. Derive by using mapping tables the functional/sectoral views of expenditure, geographic location, and other reporting schemes. Administrative Classification Adopt a five-tier administrative classification. Include a single-digit identifier at the top of the administrative classification to distinguish between different types of public entities. Include in the administrative classification public entities that are outside the budgetary central government. To achieve an integrated financial management information system, in a phased manner and without diluting their functional autonomy, implement iBAS++ in the central autonomous bodies and consider integrating them in the treasury single account (TSA). Examine the feasibility of extending iBAS++ to local governments. Use a payee table in iBAS++ to identify the recipient of government transfers. Project Classification Adopt a three-tier project classification that distinguishes between development and non-development projects and identifies projects and subprojects. For reporting purposes, use a side table to group projects into umbrella projects. For transparency and greater parliamentary financial control, avoid the use of block allocations in the development budget. Consider eliminating the distinction between development and nondevelopment projects. Fund Classification Adopt a four-tier fund classification to identify funds, sub-funds, donors, and donor agreements. Include a side table to map donor funds to specific development partners. Use fund classification to: (i) identify the expenditures that are tied to certain resources; and (ii) identify appropriations that will be available only when some conditions are fulfilled. Expand the coverage of the budget using the fund classification, in particular by using an inter-ministerial receipts (IMR) fund source. To facilitate expansion of iBAS++ to entities outside the budgetary central government, create a sub-fund Own-source revenues to identify the own resources of these entities. Economic Classification H S H S Priority Timeframe

M M

M M

M M

M M

M M

M M

Priority: L Low; M Medium; H High. Timeframe: S Short (a year or less); M Medium (2-3 years).

11
Recommendations Adopt a six-tier economic classification structure. Carefully examine the pros and cons of keeping micro-level details in the CoA. Use a bridge table to produce GFS reports. Maintain double entry accounting principles in designing economic classification and keep the classification integrity intact. Identify and discard redundant accounts before migrating the existing accounts to the new structure. Authorization Classification Adopt an authorization classification to recognize the parliamentary votes. Consider increasing the visibility of selected large expenditure items, such as interest payments, pensions, by separately appropriating them. Functional Classification Establish a functional classification as a derived segment. Use a mapping table to map project and administrative segments to the functional classification. Use economic segment to identify expenditures to be included in the functional views. To report by other sectoral/functional classification schemes presently in use in the government, establish mapping tables between the functional classification and these schemes. Harmonize the various sectoral/functional classifications presently in use in the government. Location and other Classifications For reporting by locations, follow the standard geographic classification and map locations of projects and administrative units. Clarify that the information produced in this manner from a budgeting and accounting system is unlikely to be perfect. Build separate mapping tables and tags to derive other specific indicators, such as climate change, gender, etc. Program Classification Keep iBAS++ design flexible to accommodate additional classification segments, such as a program classification, as and when it is introduced. Project Implementation Update the implementation plan; target completion by March 2014. This would involve finalizing the classification design, development of individual segments, and establishing mapping tables. Conduct parallel run in two ministries during the process of finalizing the 2014-15 budget. Adopt a formalized change management approach, including a structured communication strategy; share implementation responsibility between FD and SPEMP. Undertake a more proactive program for stakeholder engagement. Disseminate information and conduct sensitization workshops for the key stakeholders in the line ministries, planning commission, auditor generals office, etc. Develop a comprehensive training plan. Adopt a structured project management methodology. Develop institutional support and capacity for reforms. H S H M S M Priority H Timeframe S

H H

S S

H H H

S S S

H H H

S S S

12 I. INTRODUCTION 1. GoB is undertaking comprehensive measures to reform its PFM. The reforms are supported by SPEMP, which aims to deepen and institutionalize the medium-term budget framework (MTBF) and build a more strategic and performance oriented budget management process, while strengthening financial accountability across the expenditure management cycle.2 Reforms are directed at modernizing the budget management systems and practices in the central agencies and the line ministries. Enhanced budgeting and financial accountability will improve strategic resource allocation and operational efficiency in public expenditure management, which in turn should result in better public service delivery in keeping with the governments overall social and economic policy objectives. 2. Among a set of complementary objectives, the SPEMP seeks to improve the quality of financial and fiscal reporting to support informed fiscal decision-making. Revising and modernizing the existing budget and accounting classification system (BACS) that was implemented in 1998 is an integral element of this reform strategy. Once developed, the BACS will be embedded in the enhanced Integrated Budget and Accounting System (iBAS++), the governments in-house financial management information system which is being developed in parallel. The authorities are targeting the implementation of the new system from 201415 budget year starting July 1, 2014. Effectively, the system has to be up and running by March 2014 to facilitate data aggregation in the budget preparation phase. The mission understands that in view of the delays in finalizing the BACS the GoB is giving consideration to extending the implementation deadline by a year. 3. The CGA in the FD is the body responsible for disbursements and accounting in the government. The CGA functions through his Chief Accounts Officers (CAOs) for each of the spending ministries, District Accounts Officers (DAOs) and Upazila Accounts Officers (UAOs).3 These officers have the primary responsibility of disbursing government money and accounting for government receipts and payments. With a few exceptions, central government disbursements are made from its main account with the BB. Government receipts are credited to the same account. The functional control of the CGA, however, does not extend to the self-accounting entities of Railways, Posts, Defence, Forests and Public
SPEMP is a USD115 million multi-donor PFM reform program, one of the largest donor-supported PFM reform programs in the world, financed and supported by DFID, EU, CIDA and DANIDA, and administered by the World Bank. SPEMP officially commenced at the end of 2009 and is scheduled to finish on 30 June, 2014. The DAOs and UAOs work as government treasuries in their respective geographic jurisdiction; government offices located outside Dhaka deal with the local DAO/UAO for drawing funds. The position in Dhaka is different. In the year 1985 the government introduced a departmentalized system of accounting, whereby 20 CAOs were created and accredited to each of the line ministries. The CAOs/DAOs/UAOs function under the overall supervision of the CGA, providing payment and accounting services to government departments. Presently, there are 20 CAOs, 58 DAOs, and 420 UAOs.
3 2

13 Works. These ministries have traditionally remained outside the normal treasury fold. Although operating on the same BB main account, these ministries have check-drawing rights and their own accounting formations. They render compiled monthly and annual accounts to the CGA, which are then aggregated with the CGAs accounts. 4. The revenue collection is mainly through the network of BB and the state-owned Sonali Bank Limited (SBL) branches.4 Taxpayers have three choices to pay their taxes: BB offices; designated SBL branches; and tax commissioners offices using a bank issued pay order. The NBR has recently introduced an online revenue collection system, which uses the BB/SBL network. Non-tax revenues are also collected in a similar way. The accounting of the revenue collections in the CGA organization is based on the daily inputs provided by the banks. 5. The autonomous bodies, nearly 200 in number, are outside the government payment and accounting system. These units are separate legal entities created generally as implementing arm of the central government. The autonomous bodies maintain their own bank accounts with commercial banks. They may raise their own revenues, which are available to them for spending. The government budgetary support is released to them in the form of grants that is transferred at periodic intervals (usually quarterly) to their respective bank accounts in commercial banks. Extrabudgetary funds are other prominent exclusions. So are the state owned enterprises (SOEs) and the local government bodies, which have their own independent administrative, accounting and banking structures. 6. iBAS provides the computerized platform for budget execution and accounting for the civil departments of the budgetary central government. 5 The system comprises two sub-systems for budgeting and accounting that are not integrated. iBAS is designed for ex-post recording of financial transactions without budgetary control. Ascertaining the availability of budgetary funds is performed manually before approval is granted for payment in the system. A hand-written check is issued for each approved payment and the details are entered in the system to update the payment records. 7. The coverage of iBAS is partial. It is available only to the accounting offices - all the CAOs and DAOs, and 35 UAOs. The CGA plans to extend IBAS to 100 UAOs by the year end. The UAOs not on iBAS (about 400 in number) are required to travel to an iBAS site to feed manually compiled data. This is undertaken on a monthly basis at the end of the month. The self-accounting entities remain outside the purview of iBAS. Some, like Railways, have developed their own information systems; others, such as Defence, operate
4

In some cases, commercial banks other than SBL are contracted for specific services.

Civil Departments mean ministries and divisions of the budgetary central government with the exclusion of Railways, Defense and self-accounting entities.

14 on manual basis. The self-accounting entities send their compiled accounts to CGA at the end of the month for incorporation in iBAS. Nevertheless, the system is fairly well entrenched in the CGA organization and there is a good base of accountants who are trained in using it. 8. The existing classification system is incapable of supporting the on-going PFM reforms. The existing BACS comprises four segments of classification namely: legal code (1 digit); institution (4 digits); function (4 digits); economic (4 digits). Except the legal code, each of the other segments provides two levels of disaggregation, but the overall structure is not capable of capturing fully the financial information required to support the decisionmaking process. The key weaknesses of the existing classification system include: (i) inadequate availability of analytical information; (ii) improper grouping and alignment of accounts; (iii) existence of numerous redundant accounts; and (iv) limited room for expansion. Further, it is not consistent with the modern reporting standards such as International Public Sector Accounting Standards (IPSAS), Government Finance Statistics (GFS), etc., and therefore extensive manual data manipulation is involved in producing fiscal reports. This potentially limits the accuracy, detail and timeliness of these reports. 9. The SPEMP technical team has developed a new multi-segment budget classification structure and a harmonized CoA. The new design has gone through several iterations and is now fairly mature. The design presently under consideration comprises five segments with 35 digits of classification codes. Figure 1. SPEMP's Proposal

10. The design has been seen and endorsed by a multi-agency taskforce, chaired by the Additional Secretary in the FD. However, concerns remain about the proposed designs ability to address the internal information needs and the external reporting requirements, particularly compliance with international financial and statistical reporting standards.

15 11. In August 2013, at the request of the authorities, a joint FAD/STA team of experts reviewed the design of the new classification system, primarily to examine its ability to support GFS reporting. The mission suggested changes to the proposed classification structure and prepared a plan for implementing the revised classification by March 2014 that would enable preparation of the 201415 budget according to the new structure. The missions recommendations included (i) extending the coverage of the classification system to the general government sector, including autonomous bodies, other government controlled entities, and local governments; (ii) a revision of the economic and functional classifications in line with GFS and COFOG standards, respectively; and (iii) improvements in the other associated segments of the classification structure. The mission suggested compiling a schedule of extrabudgetary entities and autonomous bodies and categorizing them according to their affiliation to subsectors of the public sector. Based on the recommendations, the classification design was further revised. Considering the tight implementation deadline, the authorities requested further TA to finalize the revisions to the BACS and support the implementation process. 12. This report reviews the proposed architecture of the new BACS and makes suggestions for further improving the design before it is finalized and coded in iBAS++. The missions recommendations are driven by the objective of making BACS a tool that harnesses the technological capabilities of the new software system to meet comprehensively the internal and external reporting needs, and the need for the design to leave scope for potential future enhancements. The recommendations are guided both by internal financial management needs and international standards. The report identifies implementation challenges, offers advice for overcoming these challenges and assesses further TA needs, including the nature and scope of further FAD support. 13. The mission adopted a strong practical approach. A series of hands-on sessions with the SPEMP technical team were held for developing individual segments of the new classification system. Possible options concerning every single classification segment were presented and discussed extensively, and the changes agreed upon. Consultations were held with the key stakeholders, such as BW, CGA, C&AG, NBR, and the Planning Commission to identify and address their financial information needs. Consultations also focused on building awareness among the key stakeholders. To ensure greater engagement and buy-in of the major stakeholders, the mission conducted a half-day seminar where the new classification design was discussed in detail in the presence of the members of the taskforce. 14. The rest of this report is organized in four sections. Section II outlines the conceptual framework for a budget and accounting classification system and a suggested design of the new classification system. Section III discusses in detail each of the individual segments of the suggested design. It provides rationale for the segments and the benefits of keeping them. Section IV carries a discussion of the implementation challenges. Finally, Section V outlines the possible FAD TA support for furthering this work.

16 II. DESIGNING A NEW CLASSIFICATION STRUCTURE A. Conceptual Framework 15. The task of any classification system is to identify basic similarities in government operations and organize individual transactions into relatively homogeneous categories. These categories can provide some meaningful information on the nature, composition and impact of these transactions. This categorization thus facilitates analysis of government operations. 16. A budget and accounting classification system should aim to satisfy divergent user information needs. Users of government financial data have diverse information needs. Most notably, formulating policy and making decisions on sectoral allocation of funds, monitoring the performance of various government programs and activities, establishing accountability for budgetary compliance and the use of resources, and analyzing overall economic impact of government policies. More generally, these needs are concerned with basic questions, such as, where the resources came from, how they were used, to what purpose they were applied, who was responsible for resource mobilization and utilization, and what was achieved. Classification of budget and accounts should address these questions and allow a meaningful analysis of the governments use of public resources. Box 1. Basic Principles of Classification
A sound budget classification system follows three fundamental principles of classification: Homogeneity: Each of the classification schemes should have a unique set of defining characteristics to which every transaction must comply; Independence: Each classification has defining characteristics that are different from and independent of the others; and Comprehensiveness: The definitions of each of the classification dimension are complete and comprehensive.

It is possible, on the basis of these principles, to attribute transactions to multiple classification segments clearly and unambiguously without duplication, overlap or repetition. Source: IMF TNM No.6 Budget Classification prepared by Davina Jacobs, Jean-Luc Helis, and Dominique Bouley, December 2009.

17. Data on fiscal operations can be classified in a variety of ways to satisfy different information needs. Typically, governments classify fiscal data on more than one attribute. The commonly followed classification systems include: An administrative classification that groups fiscal data according to the administrative unit or body responsible for collecting revenues and/or utilizing funds, (e.g., the ministry of education, health, etc., and at a lower level, schools and hospitals etc.). A typical administrative classification is organized into multiple levels of

17 hierarchy, such as ministries, departments, divisions, and cost centers. It is usually the main basis for establishing accountability in budget management. Many governments obtain parliamentary votes or appropriations by major administrative units. An economic classification identifies the economic nature of resources (e.g., salaries, goods and services, transfers, subsidies, etc.) and is the basis for macroeconomic analysis, monitoring of fiscal aggregates, and micro-level control over the use of resources. Economic classification is fundamental to input-based budgeting structures. In these systems, along with administrative classification it determines the way resources are budgeted, distributed and controlled. Economic classification also forms the base for structuring financial statements. A classification by functions categorizes transactions on the basis of their broad purpose or objectives (e.g., education, health, energy, environment, etc.). It is useful for policy formulation and analysis, resource allocation decisions at the macro-level, historical analysis of public spending and cross-country comparisons. Functional classifications are important for historical analysis as they largely remain unaffected by organizational changes that may take place time to time in a government. A program classification is linked to a governments policy objectives. It groups outlays according to the activities that are carried out to meet these specific policy objectives. Programs typically identify the goals and policies that the government spending is expected to serve (e.g., preventive healthcare for all) and are usually subdivided into homogenous activities (e.g., vaccination) required to meet the goals. A program classification transparently establishes a governments policy priorities, as reflected in the budgetary allocations, and forms the basis for monitoring and evaluating performance by allowing the specification of measurable program targets in terms of outputs and outcomes. Countries adopting program budgeting often seek parliamentary appropriations by programs. In addition, some governments use geographic classification to capture information on the spatial distribution of revenues and expenditures (e.g., regional distribution of tax collections, location of the beneficiaries of government subsidies and transfers, etc.). A geographic classification is useful in inter-regional analysis, particularly in studying the regional impact of government policies.

Governments also use source of financing classification to associate expenses with the funds that financed them and classification of beneficiaries of government transfers and subsidies. Many countries track expenditure to serve specific policy objectives, such as poverty reduction, gender equality, etc. 18. Use of standardized classification systems facilitates comparison across entities and across jurisdictions. The Government Finance Statistics Manual (GFSM) 2001

18 provides a standard economic classification of financial transactions of a government. The GFSM classification is on an accrual basis and covers revenues, expenses, flows and stocks of assets and liabilities, and classification of transactions in financial assets and liabilities by sector. COFOG provides a standard functional classification that classifies government expenses and net acquisition of non-financial assets into 10 functions. COFOG follows a three-tier hierarchical structure comprising Divisions, Groups, and Classes. IPSAS leaves it to the governments to decide the classification, but requires presentation of financial statements in standardized formats. Box 2. Classification System in Brazil
The Brazilian budget classification system is detailed and well aligned with international standards. The Budget Framework Law sets out the basic classification framework for government income (cash) and expense (cash and accrual basis). The Federal Government provides detailed guidance in the form of separate manuals for the classification of revenues, expenses (including assets and liabilities) that are used for the formulation, execution and reporting of budgets by the Federal Government, all 26 Brazilian states and the Federal District. The revenues are classified by economic categorywith subcategories for current, capital, current extrabudget, and capital extra-budgetorigin, type and by line. The administrative classification is designed around the organizational structure of the Federal Government. It comprises the main organizational units and budget units. Appropriations are set to the budget units, which are responsible for carrying out actions, and do not always correspond to a Federal administrative unit, for example in the case of transfers to other levels of government or debt service. Expenditures are also classified by economic category. The functional and sub-functional classification system meets the COFOG standards. It is composed of 28 primary functions and 109 sub-functions. Brazil has also developed a detailed program classification. Every action of government is structured into programs, which aim to achieve objectives that are outlined in the multi-year (4-year) Strategic Plan at the start of the administration. Furthermore, all expenditure is classified by location and source of funding. While all the above classification structures have been amended to suit the specific nature of fiscal management in Brazil, for example covering transfers to sub-national entities, they are generally in line with the international standards outlined in the GFSM 2001. Source: Brazil Federal PEFA assessment, 2009 available at http://www.pefa.org/en/content/pefapublically-available-assessments.

19.

A well developed classification system has three main characteristics: It captures multiple attributes required for meeting the divergent internal as well as external reporting requirements; It allows appropriate granularity of data required for analytical and control purposes; and It is possible to apply the classification codes consistently across the government and over time.

20. A governments ability to implement a multi-segment classification system is linked with the level of automation achieved in transaction processing and accounting.

19 Computerized transaction processing opens up the scope for recording multiple attributes of a transaction, which is cumbersome in a manual accounting system. Automated systems also support greater granularity in data. Classification system reforms are, therefore, best carried out along with automation initiatives. Consistency in the application of codes requires adequate user training and can be enhanced by clear definition of classification codes backed up with a user manual aimed at promoting and disseminating knowledge of codes. 21. A unified classification system enables consolidated reporting. A uniform application of a classification system by all government entitiesbudgetary and extrabudgetaryfacilitates data sharing and aggregation within the system. The classification must be commonly applied at all stages in the annual resource management cycle. Different classifications followed at planning, budgeting, and accounting stages impede policy analysis and monitoring. A unified classification is a pre-requisite for implementing a government-wide financial management information system (GFMIS). B. Suggested Classification Structure 22. The mission suggests an eight segment hierarchical classification structure for the GoB (Table 2). For the purpose of defining how the coding is determined, the classification structure is split between: Core segments that are explicitly coded for each transaction and are maintained in the general ledger (GL) of the iBAS++ system; and Derived segments that are produced using mapping tables or other coding mechanisms within the iBAS++ system, and used mainly for reporting purposes.

The core segments of the classification system comprise the administrative, project, fund and economic classifications, while the derived segments include the authorization, function, sector and location classifications.

20 Table 2. Suggested Classification Structure for Bangladesh

Core Segments Administrative (8) Type of Public Entity (X) Ministry/Division / Entity (XX) Department (X) Operating Unit Group (X) Operating Unit (XXX) Project (7) Type (X) Projects (XXXX) Subprojects (XX) Fund (8) Funds (X) SubFunds (XX) Donors (XX) Donor agreement (XXX) Economic (7) Type (X) Category (X) SubCategory (X) Item (X) Sub-item (X) Detail (XX) Authorization (5) Level1 (XX) Level2 (XX) Type (X) Level 1 2 3 4 5 6 Derived Segments Function (5) Major Function (XX) Minor Function (X) Detail (X) Subdetail (X) Sector (4) Sector (XX) Subsector (XX) Location (6) Divisions (XX) Districts (XX) Upazila/ Thana (XX)

23. The proposed structure is not very different from the one prepared by the SPEMP team. It retains the same scope, but allows greater flexibility for future expansion and application to public entities outside the budgetary central government. The individual segments and their respective coding structures have been rationalized to suit the present GoB control and reporting requirements, at the same time maintaining room for accommodating extra demands from the potential PFM reforms. The following section describes each of the classification segments in detail. III. DEVELOPING CLASSIFICATION SEGMENTS A. Administrative Classification 24. A five-tier administrative classification largely consistent with the SPEMPs latest proposal is suggested (Table 3). The structure retains the proposal by the SPEMP team but adds a layer at the top to facilitate expansion of the administrative classification to government entities outside the budgetary central government.

21 Table 3. Proposed Administrative Classification Structure

Level 1 Attribute Type of Public Entity Digits X Explanation Identifies the type of public entity - Budgetary central government, Social security funds, Central extrabudgetary units, Local governments, Public non-financial corporations, etc. Identifies the top most organizational level within an entity type. The budgetary central government will be classified into ministries and divisions. The autonomous bodies, local governments, public corporations, etc. will be listed at this level and appropriately grouped. Identifies the second level organizational grouping. For the budgetary central government this level will record the government departments. Identifies the major operating unit. Identifies the operating unit.

Ministry/Division/ Entity

XX

Department

4 5

Operating Unit Group Operating Unit

X XXX

25. The inability to adequately record and report on the activities of entities outside the budgetary central government is a limitation of the SPEMP proposed structure. The administrative classification previously proposed to the taskforce serves the purpose of defining the budget and budget execution controls of the budgetary central government only. In this structure, the first two-digit Ministry/Division segment defines the administrative level at which appropriations are approved by parliament. The next two digits define the department - the level at which budget allocations (or distributions) are made. The next two digits define the subordinate office and the last three digits define the unit or local office. It, however, does not recognize government entities outside the central budgetary sector. 26. The key benefit of identifying the type of public entity is that it will enable recording of the budgets and accounts in iBAS++ of a broader set of government entities beyond the budgetary central government. This will support separate controls being applied to different types of entities within iBAS++ (for example appropriation control need not be applied to the social security funds and autonomous bodies) and support expanded coverage as required for accounting and statistical reporting according to IPSAS and GFS. 27. A new element at the start of the administrative segment can identify the type of public entity. A single digit would enable separate identification of (1) budgetary central government, (2) extrabudgetary central government (3) social security funds, (4) local government, (5) public non-financial corporations, and (6) Public Financial Corporations. In the first instance, it is expected that only the data of the budgetary central government will be included within iBAS++. Nonetheless, it is important that the classification structure enables broader coverage of the accounting systems and associated reporting and statistical data collection.

22 28. Using this additional coding element for the type of organization, coverage of accounts will have the potential to expand to enable implementation of IPSAS and reporting GFS for the general government. Achieving an ability to report GFS for the general government requires extending coverage beyond the budgetary central government to include extrabudgetary funds and social security funds as well as local governments. In addition, achieving the authorities objective of IPSAS compliance requires that all controlled entities be included within the reporting entity for accounting and reporting purposes. In the case of Bangladesh, the controlled entities would include autonomous bodies, stated owned enterprises (SOEs) as well as the controlled pension and provident funds. 29. A key difference between coverage of GFS and IPSAS relates to local government and SOEs. SOEs are typically included within the reporting entity for IPSAS but not within the general government for GFS reporting. Local governments would typically be included within the general government for GFS reporting but, subject to verification of a control relationship, may or may not be included within the reporting entity for IPSAS. 30. GoB is currently facing issues with the narrow coverage of the current iBAS system in relation to autonomous bodies. Specifically, the mission was informed that the inability to track the flow of grants to autonomous bodies was problematic from both a budget transparency and control perspective. These bodies are each established by a separate statute and intended to operate with a degree of independence. In practice, while they hold their own bank accounts and many collect revenue from their own sources, they require grants from ministries to sustain their operations and their administration and management are closely tied to their overseeing ministry. 31. A stepwise approach could be adopted for bringing the autonomous bodies under the coverage of the iBAS++. The first stage will involve extending iBAS++ to autonomous bodies. This will bring these entities on the same financial reporting platform as the central government. They will share the iBAS++ software system, which will ensure that the MoF has a single repository of financial data for the entire central government. A uniform CoA will be a pre-requisite for achieving this integration. The next stage in progression will be to bring these entities under the national budget execution procedure without changing their existing banking arrangements. Stage III will involve complete integration with the revenues of these entities coming to the treasury single account (TSA) and their expenditures being met from the TSA.6 Achieving full use of iBAS++ and access to the TSA does not imply any dilution (or concentration) of the level of functional independence enjoyed by
The pros and cons of extending TSA arrangements to the autonomous bodies are beyond the scope of this report and will have to be separately examined. May 2013 IMF TA Report Bangladesh: Strengthening Government Cash Management by S. Saxena, P. Jnsson and E Wilders provides a detailed analysis of some of these issues.
6

23 these entities, as such independence relates to factors other than the nature of accounting and banking arrangements. 32. Transparency of the recipients of government financial support was an issue for which a CoA solution was being sought by the authorities. The representatives of the GoB expressed concern that, if the CoA does not identify the recipient of government grants and subsidies, transparency and control over such payments will be lost. The treatment of grants paid to autonomous bodies was raised as a specific case. At present, the autonomous bodies are classified within the administrative structures of their controlling ministries and the grants planned in the budget to flow to these entities is contained in the detailed demands for grant of the ministry. However, from a CoA perspective, including these entities within the coding structure for the ministry is improper as these entities are most appropriately classified as extrabudgetary units. 33. The key question is whether the grants/loans to such entities are to be explicitly budgeted in the detailed demands for grant and, therefore, subject to normal budget controls. If they are not, the purpose of transparency can be achieved by appropriating funds under a single line item, for example grants to autonomous bodies, and presenting its distribution among the various autonomous bodies in a separate table annexed to the detailed demand for grant. This can be achieved without having to classify autonomous bodies as administrative units of their controlling ministry. This treatment supports the rationale that the appropriations are provided to the ministry/divisions in the form of grants to be transferred to entities outside the central government budget. Identification and classification of such entities in the administrative segment as a separate stream (refer to paragraph 27) should facilitate this presentation of detailed demands for grant. 34. An iBAS++ functionality that recognizes such bodies in a payee table can then be used to identify flows for such entities during budget execution and report accordingly. A payee table is proposed to be used (outside the GL) to facilitate expenditure transactions. This payee table would include details of the payee, including a unique code, as well as incorporating the taxpayer identification number, contact information and bank account details for the payee. The payee code could be used to track the payments to recipients of government grants and subsidies. It is proposed that payee codes should be used for all transactions except mass payments to individuals (such as payroll, pensions etc). The advantage of this solution is that it is simple. 35. Implementation of iBAS++ in the autonomous bodies would further simplify this issue. By doing so, the budget and all of the flows to, from and within each autonomous agency will be visible in iBAS++. This is by far the most desirable option as it is simple to achieve once the required connectivity and capacity building is completed. It ensures a single source of accounting data, avoids the need for further coding elements in the CoA for recipient and is more consistent with IPSAS and GFS standards for dealing with controlled entities.

24 36. The transparency of the transactions involved using the new CoA when autonomous bodies use iBAS++ for their accounting is best demonstrated with a worked example. The following table shows an example of the coding of a hypothetical payment of a grant from a budgetary central government entity (Ministry of Agriculture) to an autonomous body (Cotton Development Board) and the subsequent payment of some of this grant to an external supplier. Under this scenario, both entities use the same CoA and record transactions in iBAS++. The separate organization and fund coding as well as the separately identified banking arrangement in the economic code, provides considerable transparency regarding the expenditure and use of grant funds. In addition, the coding will enable consolidation for whole-of-government reporting, where the internal grant transaction is eliminated (on both payment and receipt side) and what remains is the payment to the nongovernment supplier. Table 4. Examples of Integrated Accounting
Administrative Economic Project Fund Debit Credit Transaction 1: Department of Agriculture Extension (DAE) pays a grant to the Cotton Development Board (CDB) [assumed here to be an autonomous body]. Grant expense XXX 10,000 DAE Consolidated fund general fund TSA bank account XXX 10,000 DAE Consolidated fund general fund Transaction 2: Cotton Development Board receives the grant in its bank account. CDB CDBs bank account XXX 10,000 Own revenue CDB Grant revenue XXX 10,000 Own revenue Transaction 3: Cotton Development Board makes payment to external supplier of cotton seeds. CDB Goods and services XXX 5,000 Own revenue CDB CDBs bank account XXX Own revenue

5,000

37. A less desirable alternative would be to include a recipient segment in the CoA. This segment would facilitate presentation of transfers to external entities by their names in the detailed demands for grant and tracking the flows to these entities during budget execution. This would achieve the required result by showing the recipients at budget approval and execution stages, it offers broad scope for identification of recipients for various transactions and could be implemented quite quickly. However, the recipient code would be cumbersome in that it would be a required field for all general ledger entries but is a redundant segment of the CoA for the majority of these transactions - and will become further redundant once the autonomous bodies, SOEs and local government start accessing iBAS++. Recommendations Short term Make provision for expanding the coverage of the administrative classification to include public entities that are outside the budgetary central government. Add a single-digit identifier at the top of the administrative classification to distinguish

25 between different types of public entities. These entities can be classified at the next level. Use a payee table to identify the recipient of government transfers.

Medium term Populate the administrative classification for entities outside the budgetary central government. In a phased manner, and without diluting their functional autonomy, implement iBAS++ in the central autonomous bodies and consider integrating them in the TSA. Examine the feasibility of extending iBAS++ to local governments. B. Project Classification 38. A three-tier project classification is proposed. In addition, projects can be grouped into higher level umbrella projects using a side table for reporting purposes. Table 5. Proposed Project Classification Structure
Level 1 2 3 Attribute Type Projects Sub-projects Digits X XXXX XX Explanation Identifier to distinguish between development and non-development projects. Identifies projects for which expenditures are controlled by the FD. Identifies sub-projects for which expenditures are controlled by implementing agencies.

39. The purpose of a project classification is to associate expenditures that have a limited common purpose, usually with a clear beginning and end in time. This definition includes grouping expenditures related to building physical structures and conducting discrete operating activities, such as international sports events. Like all other classifications, the project classification should supplement and not replace or detract from other classifications. 40. The existing classification identifies projects at the third level of the administrative classification. This level contains four digits and combines lower level administrative units with projects, which enables separation of project from non-project expenditures through the assumption that any expenditure coded by lower-level organization is not a project. A major disadvantage of this design is that it is not possible to associate a project with a lower-level organization. 41. A project classification should achieve two primary objectives: (i) relate projects planned to work in a complementary fashion; and (ii) separate legal control from sub-

26 dividing a project for management purposes. Both purposes suggest a hierarchical grouping similar to that in other classifications, but projects are more fluid than other elements. For example, an agricultural development project may have water source and crop storage components. Appropriation controls may be established at the agricultural project level, in which the water and crop storage sub-projects are segregated for management purposes. Alternatively, the appropriation might be made at the level of the water and crop storage components, in which case there are no sub-projects and there is no appropriation for the agricultural project as a whole. In short, there are three levels in a project hierarchy, from highest to lowest: (i) an umbrella project which is an aggregation of complementary projects and for which costs do not roll up for control or management purposes; (ii) projects that are the primary units for appropriation control; and (iii) project sub-components identified primarily for management purposes. Umbrella projects are simple groupings of projects that need not be explicitly recognized in the classification structure. At present, only a few projects have umbrella projects. These grouping, therefore, can be achieved using a side table for mapping projects to relevant umbrella projects. The concept of umbrella projects is somewhat akin to programmatic classification and has the potential to be developed in future along those lines. However, this is an area that will require much further work (see Section H for discussion on program classification) and any attempt to preempt the uncertain future requirements can lead to unnecessary complications for the software designers and the users. 42. Block allocations that do not identify the purpose of the project should be avoided.7 The existing development budget includes block allocations that are not attributed to any project. Often, such allocations are kept in anticipation without clear specification of the purpose of the expenditure. This practice brings opacity to the budget, and should be best avoided. The allocations should be specific with details of the purpose and nature of the expenditure. With regard to the development budget, expenditure provisions should uniformly provide detailed information at the level of sub-projects to bring greater transparency and accountability in budget execution. 43. Continuity of project numbering, grouping and sorting between the planning and budget processes is a challenge. Planning and budgeting organizations have different analytical and management needs, and thus different information needs. In such cases, it is always difficult to reach agreement on a single coding structure, which entails compromises by one or both organizations. When the planning and budgeting offices are located in different organizations, compromise to reach agreement on a single coding structure is rare. Ideally, project codes should be harmonized across the board. Should that were not to happen, there should be a way of establishing correspondence between the planning and the
The parliamentary votes and appropriations are obtained by ministry/division. The Detailed Demands for Grant that are used for budget control by the FD provide departments/project wise distribution of appropriations. It is not uncommon to find block allocations.
7

27 budgeting/accounting system. This can be achieved by assigning a unique code to each project, which has no meaning with regard to grouping and sorting that will be used to identify the project throughout its life (including the 5-year Plan and the ADP). Each project will have a second code that is unique to the Planning Commission for its purposes (for grouping and sorting within its information system), and which will be replaced by a code that is unique to FD (for grouping and sorting within iBAS++). Through the use of a unique identification code separate from codes used for sorting and grouping data, a single project can be identified and tracked across the separate planning and budgeting information systems without compromising the information requirements of any organization. 44. Projects can be physical in nature, or large and important activities. For example, the Election Commission has a number of ongoing responsibilities, such as maintaining voter rolls and storing and maintaining voting equipment. However, it also has responsibilities for conducting elections, which are discontinuous in time and involve a number of additional types of expenses. The project classification could be used to separate these two types of expenses and enable a clear assessment and accounting of the cost of an election. Whether a project is an activity or physical is identified through the economic classification distinction between recurrent and capital costs. 45. Projects may be funded by development partners or from domestic financial resources. As noted in subsequent discussion, the fund classification is an instrument to independently identify fund sources, thus eliminating the assumption that projects are donor funded. As Bangladesh develops economically, and the proportion of donor funding to total budget expenditures decreases, it can be expected that domestic financing will be a growing source of project financing. 46. The benefit of distinguishing between development and non-development expenditures is eroding. Broadly speaking, the budget should not include any spending that does not yield significant social, economic, or environmental benefits. The development budget has historically included both recurrent and capital expenditures. It is increasingly funded from domestic resources. At the same time, the GoB has several projects in the nondevelopment part of the budget that target developmental activities. Therefore, the development / non-development budget distinction no longer conveys meaning with regard to the nature or purpose of spending, or the source of funding. 47. The mission does not recommend discarding the development budget concept, but the usefulness of the concept can be called into question. Increasingly, there is convergence in the view that all public expenditures have developmental objectives, and a unified view of all expenditures better supports policy planning and delivery. Removing the distinction between development and non-development budgets will have considerable benefits for Bangladesh. Among these benefits will be a more efficient budget process that focuses on the full set of alternatives to address policy challenges, better management of assets by dealing with both recurrent and capital through the same process (for example,

28 maintenance of existing buildings is addressed in the same process as a decision to build a new asset), and an enhanced focus on outputs and outcomes through the budget process rather than inputs. This is not to suggest that development planning is not important, it has an important place in formulating the MTEF and defining the policy goals for a single unified budget process. Recommendations Short term Include a three-tier project classification segment within the classification structure. Distinguish between development and non-development projects and classify projects and sub-projects. For reporting purposes, use a side table to group projects into umbrella projects. Avoid the use of block allocations in the development budget, as these weaken parliamentary financial control and transparency. Specify projects/sub-projects for all development expenditures.

Medium term Consider eliminating the distinction between development and non-development projects. C. Fund Classification 48. A four-tier fund classification is proposed. The number of levels in the classification is determined by the need to budget and control expenditures by donor agreements.

29 Table 6. Proposed Fund Classification Structure

Level 1 Attribute Funds Digits X Explanation This level identifies all funds operated by GoB. Three main funds are Consolidated Fund, Public Account, and OwnSource Revenue. The last item represents a grouping of expenditures that draw from money belonging to organizations outside the central budgetary sector, such as autonomous bodies or SOEs. This would enable the future inclusion of the budgets of these entities in a comprehensive general government or public sector budget. This level identifies sub-funds within the three funds identified at level 1. The Consolidated Fund may be further classified into: (i) a general fund representing unrestricted expenditures, (ii) a donor fund representing expenditures tied to a specific donor source; and (iii) inter-ministerial receipts. The general fund principally includes governments own revenues, proceeds from issuing debt, and untied donor grants received as budgetary support. Public Account may be classified into specific items, such as National Savings Scheme, State Provident Funds, etc. Donor organizations would be identified at this level. Multidonor funds would be identified as a single consolidated donor, the membership of which would be explained in the linked Development Partners side table. Specific donor agreements for which spending must be controlled should be identified here.

Sub-Funds

XX

Donors

XX

Donor agreements

XXX

49. The purpose of the fund segment is to identify from where money will be drawn at the time of expenditure. Each revenue item in the economic classification, including individual tax, non-tax, borrowing, or grant items, should be linked to a fund classification item to identify where money received from each revenue stream will be deposited, or where money will be available, as is often the case of a donor grant. Thus, the fund classification, while linked to the revenue portion of the economic classification, is an integral part of the expenditure portion of the budget. Stated another way, the revenue portion of the economic classification identifies the source of financing for the budget as a whole; the fund classification identifies the source of financing for each appropriation. Internationally, it is considered good practice to have a fund or financing source classification. 50. Although the Constitution and the Public Money and Budget Management Act (PMBMA) use the concept of a fund, the existing 13-digit classification does not include a fund classification. The Constitution provides for the Consolidated Fund and the Public Account. The PMBMA provides additional guidance on the scope and nature of the Consolidated Fund. All taxes, loans, loan repayments and grants are deposited into the Consolidated Fund. All spending authorized in the budget comes from the Consolidated Fund, including development and non-development, and voted and charged, expenditures. The Public Account includes all other money deposited by or on behalf of the government,

30 and which do not require an annual act of parliament in order to disburse. This includes national savings schemes (such as national savings certificates, postal savings, postal life insurance, etc.), provident fund, and deposit accounts (such as suppliers deposits, election deposits, etc.). 51. A fund classification is particularly useful when: (i) the use of certain resources is tied to specific purposes; and (ii) the appropriations are available for incurring expenditures subject to certain conditions being fulfilled. Donor grants and loans, other than budget support, often come with strings attached and can be spent only for purposes stated in the grant or loan agreement. A fund classification permits associating individual expenditures with an agreement, which enables verification that money was spent for the intended purpose. In case of conditional appropriations, a fund classification facilitates identifying such appropriations and acts as a prompt to ensure that the conditionality is met before releasing the appropriation for expenditure. Again, donor projects provide clear examples. The budget may include anticipated donor projects and related funding, but money cannot be spent until the agreement is signed or conditions of the agreement met, even if an appropriation exists. Table 7. Fund Classification in South Africa8

52. The Consolidated Fund may contain money from sources that place restrictions on the purpose of spending. Good cash management practice is that, unless prohibited by law, cash from all sources are commingled, and budget, accounting and management systems
Source: Government of South Africa, Project Summary Report, October 2008, available at http://scoa.treasury.gov.za/Pages/DVDTrainingOct2008.aspx
8

31 are used to meet a variety of control and reporting requirements. Many donors require special bank accounts because they do not have confidence that systems are in place to ensure that money deposited in a single government bank account will be used for its intended purpose. As treasury and cash management systems in Bangladesh improve, it will be increasingly likely that donors will agree that special bank accounts are not required. Therefore, a distinction between unrestricted and restricted purpose funds under the Consolidated Fund is useful. 53. Fund classification facilitates recognizing multiple financing sources of a single activity. A single project or activity may be financed by more than one fund source, such as donor funding plus required matching funds from domestic sources. In such cases, the amounts under each fund item should sum to the total cost of the project or activity. It is important to avoid the practice of entering different projects as a way to indicate that there are different fund sources, which makes it difficult to understand the nature of the project. Table 8. Albania's Classification of Capital Expenditure by Funding Source9
Budget Institution / Program Ministry of Health Planning, Management and Administration Primary Health Care Services Secondary Health Care Services Public Health Services Current Expenditure 24,907,000 246,100 7,759,800 14,226,000 2,675,100 Capital Expenditure From the Budget 2,607,565 40,000 499,000 1,963,565 105,000 From own Revenues 26,000 0 1,000 20,000 5,000 Foreign Financing 2,077,000 0 654,379 1,422,621 0 Total 4,710,565 40,000 1,154,379 3,406,186 110,000 Overall Total 29,617,565 286,100 8,914,179 17,632,186 2,785,100

54. At this time there are no own-source funds in the budget. However, the suggested structure allows for entities, such as autonomous bodies or SOEs, to be brought into the budget process in the future if the government decided to do so (see paragraph 27). The added coverage may be with or without a vote from parliament and with or without appropriation controls. 55. A fund classification supports improved budget planning. A principle of good budgeting is that it should be comprehensive, meaning that it reflects all government projects and activities regardless of financing source. Having said this, budget discussions focus primarily on allocating money over which the executive and legislature have discretion, often to the exclusion of projects for which they do not have discretion in the annual budget
9

Source: Albania Budget 2011, available at http://www.minfin.gov.al/

32 process. The fund classification is a technique for showing all projects and activities in the budget process, while preserving the ability to keep track of what is financed from money over which there is full discretion separately from money with strings attached. 56. A fund classification assists in budget execution, but does not replace functions of the economic classification. For an unrestricted fund source, authorization to spend can be established effective immediately in the treasury system consistent with monthly or quarterly allotment procedures. However, for restricted fund sources, the process may be considerably more complex. For example, the treasury must have procedures to ensure that money is available and conditions are met before establishing authorization to spend in the treasury system. 57. Fund classification can also be used for identifying and budgeting for the interministerial transactions. A new fund source is proposed that will enable one ministry to pay another ministry for specialized services, such as works executed by the Public Works Department (PWD). This might be called Inter-Ministerial Receipts (IMR). If such spending can be anticipated in the budget process, it would be budgeted in the requesting ministry as general funds or donor funds, and budgeted in the receiving ministry using the IMR fund source. Any such placements must be consistent with the intent of the appropriation for the requesting agency. iBAS++ would prohibit spending from an appropriation with IMR fund source until a proper agreement is reached between the requesting and receiving entities. The IMR appropriation in the budget would be indicative; the amount in the agreement might be less or greater than the planned amount. In financial reports, IMR amounts would not be considered an appropriation or potential draw on the Consolidated Fund and would simply be ignored; it would not cancel a matching general fund appropriation. 58. For example, the Ministry of Health (MoH) might budget for clinic construction for Tk1 million. The fund source would be the general fund. Meanwhile, the PWD might anticipate performing works for several ministries in the amount of Tk5 million, and has 100 employees whose salaries depend on this revenue. PWD would budget Tk5 million in IMR and show that it plans to employ 100 persons. After PWD signs an agreement to perform works on behalf of the MoH, the FD would reduce MoHs authorization to spend for the amount of the agreement and increase PWDs by a like amount so that there is no net change in total appropriations. Inter-agency placements are common practice internationally. 59. A side table listing development partners should be linked to donor organizations at Level 3. The development partner classification proposed by the FD is reasonable and should meet additional analysis and reporting needs. The link would be made once at the time of entering a donor organization into iBAS++. Reporting by grant and loan would be based on the economic classification. A budget support grant or loan would need to be reported on the basis of disbursements made, but the money would be placed in the Consolidated Fund without the need for special tracking of expenditures. In this way, budget

33 support funds are indistinguishable from general funds when setting appropriation controls and when processing an individual expenditure transaction. 60. In summary, there are important benefits to be gained by establishing a fund classification: Increase budget comprehensiveness because it is possible to include in the budget projects, activities, and personnel financed from all sources while respecting restrictions placed on the use of those funds. Improve cash management by reducing the use of special accounts. Expedite and improve the accuracy of initial budget execution setup by identifying budget items contingent on meeting certain conditions before spending can occur. Enable presentation of domestic financing of development projects, and donor funding of non-development activities.

Recommendations Short term Establish a four-tier fund classification to identify funds, sub-funds, donors, and donor agreements. Include three main funds Consolidated Fund; Public Account; and Own-Source Revenues. Include a side table to map donor funds to specific development partners. Use fund classification to: (i) identify the expenditures that are tied to certain resources; and (ii) identify appropriations that will be available only when some conditions are fulfilled.

Medium term Expand the coverage of the budget using the fund classification, in particular by using the IMR fund source. Reduce the number of donor special accounts by giving donors confidence that there are sufficient controls in place to ensure that donor funds are spent as intended. With the future possible expansion of iBAS++ to entities outside the budgetary central government, use own-source revenues as a means to identify the own resources of these entities.

34 D. Economic Classification 61. A six-level economic classification structure is suggested to meet the budgeting and accounting needs of the GoB. Based on the information gathered from the available documents and reports and discussions held with the ministerial staff, the mission considers a six-level economic classification structure to be appropriate for the current needs while providing room for expansion to meet future accounting needs. Table 9. Proposed Economic Classification Structure
Level 1 Name Type Digits X Explanation This level identifies each of the major elements, such as revenues, recurrent expenditures, capital expenditures, financial assets, etc. This level provides a high-level aggregation of each major element, such as Tax revenues, Non-tax revenues (under revenue), Compensation of employees, Goods and services (under recurrent expenditure), etc. This level represents the aggregation of subelements of each major element described in level 2 above. For example, tax revenues will be further classified into Taxes on property & wealth, Taxes on goods and services, etc. and Compensation of employees into Employee pay and allowances, Employers social contribution, etc. This level provides the breakdown of each subelement described in level 3 above. For example, VAT, Sales tax under Taxes on Goods and services; Employees pay, Employees allowances under Employee pay and allowances. This level provides lower level information for the finance managers in ministries/institutions to analyze, plan and monitor the revenue/expenditure, e.g., disaggregation of Sales tax, disaggregation of Employees pay. This level shall provide finer details for the finance managers in ministries/institutions to analyze, plan and monitor the revenue/expenditure, e.g., disaggregation of salary and allowances.

Category

Sub- Category

Item

Sub-item

Detail

XX

62. The mission considers the top four levels in the suggested structure to be essential for managing the budget and preparing the financial reports for different purposes including the reports for the legislature, IPSAS reports, GFS reports etc. The mission worked together with the SPEMP team and constructed a sample CoA with the codes populated at the top four levels of the economic classification structure and provided explanations where appropriate. The inclusion of analytical information at levels five and six in the CoA should be carefully considered. The consequences from capturing excessive

35 details in the system should be assessed. While merits from the availability of analytical information in the PFM system are apparent, the potential for micro-managing budget execution, recording inconsistent classifications, and increasing data storage requirements should not be discounted. 63. The proposed economic classification structure groups the various economic classes into eight elements (Table 10). The suggested groupings are determined keeping in view GoBs present accounting system, which is primarily cash based, but has some accrual elements, such as recognition of financial assets and liabilities. The segmentation serves the present accounting policies, and is also capable of supporting a transition to more accrual based elements (See paragraph 71). Table 10. Suggested Elements in the Economic Classification
No. 1 2 Name Revenue Recurrent Expenditures Explanation For recording various categories of budgeted revenues, e.g., Tax revenues, Non-tax revenues, etc. For recording various categories of recurrent expenditures, e.g., Personnel expenses, Goods and services, Grants, Subsidies, etc. For recording receipts from disposal of non-financial assets. For recording expenditures for acquisition of assets, e.g., expenses for building a school, road, etc. For recording the value and volume changes to the stock of assets and liabilities as a result of other economic flows, e.g., increase/decrease in debt due to changes in exchange rate, loss of assets due to natural disaster, etc. For recording the flows and stock of financial assets, such as cash and cash equivalents, loans and advances, equity investments, etc. For recording the flows and stock of liabilities, such as public debt and state provident fund. For recording the residual measure of the financial position, i.e., Assets minus Liabilities.

3 4 5

Capital Receipts Capital Expenditures Changes in Assets and Liabilities resulting from other economic flows

Financial Assets

7 8

Liabilities Net Asset/Equity

64. The proposed segmentation treats non-financial assets differently from other stock items. This is necessitated by the present accounting base followed in the GoB. The present practice is to record transactions in non-financial assets as capital receipts and expenditures. No stock of these items is maintained in the accounts, neither are these items depreciated. The entire cost of acquisition is charged to the year of acquisition. Receipts on disposal of non-financial assets are taken in as capital receipts for the year. Till the time GoB starts recognizing non-financial assets on accrual basis, this distinction will have to be maintained in the classification structure. Once full accrual base is adopted, flows and stocks

36 of non-financial assets could be recorded together as in the case of financial assets and liabilities. 65. Changes in assets and liabilities resulting from other economic flows will not be recognized under the present accounting base. Items under this element represent value and volume changes in the stock of assets and liabilities that do are result from a transaction undertaken by the government. These are typically results of external events that change the valuation or volume of stocks held by the government. For example, holding gains or losses on assets and liabilities may arise due to changes in prices of those assets and liabilities. Valuation of assets and liabilities may also change due to exchange rate movements. Volume changes can occur due to catastrophic events that may result in destruction of assets or technological innovations that may lead to recognition of additional assets. The accrual system of accounting requires recognizing the impact of such changes on the net asset/equity of the government. This element is futuristic that will be operationalized at the time of adopting accrual accounting. SPEMP team included other economic flows as part of equity. The mission is of the view that this element merits separate recognition. This would also facilitate reporting, including the GFS reporting. 66. The classification developed by the SPEMP team separates flows and stocks in assets and liabilities and recognizes them under different codes. For example, incurrence and discharge of a financial liability are recognized under two separate codes, and the stock of that liability is assigned a third code. Similarly, inflows and outflows under financial assets are assigned different codes. This has been suggested on the ground that outflows on assets and liabilities require appropriation control and, therefore, need to be separately recognized in the software system. The mission is of the view that the software system design issues should not dilute the integrity of the classification system. It is an entirely different issue if the software design requires keeping inflows, outflows, and stocks in three separate interlinked tables. It need not require segmentation in the classification system. For the classification system, each unique economic item is the unit. Such segregation of flows and stocks can cause unnecessary maintenance burden for the classification system. If the software system design warrants such distinction, it should be handled in the software system while translating the classification system into the software system. 67. The current economic classification codes need to be cleaned up prior to migration to the new coding structure. The current economic classification codes contain numerous redundant accounts that were created many years ago for specific purpose(s) but are no longer active. To manage the budget and actual spending at different levels, the redundant accounts should be discarded before migrating the existing economic classification codes to the new structure. 68. A multi-level economic classification structure facilitates multiple levels of budget and spending controls. For instance, appropriation controls could be exercised at the top most level, the detailed demand for grants could be maintained at the third level, and the

37 fourth level could be used by the ministries/divisions to internally allocate the budget to their subordinate and attached offices for execution. A decision should be made on how to use the multiple level economic classification structure in coordination with the other segments in the classification structure to effectively manage the budget. This aspect is further discussed in paragraph 81. 69. The proposed structure will enable financial reporting in internationally accepted formats. The mission demonstrated to the ministry staff the compatibility of the proposed economic classification with the IPSAS reporting requirements with the aid of the sample IPSAS compliant financial statements listed below: Cash flow statement classified according to operating, investing and financing activities conforming to the format specified in IPSAS 2 Cash Flow Statement. Statement of financial operations showing the results of the operating performance of the government and the resulting surplus or deficit. Statement of financial position showing financial assets and liabilities under the present accounting basis, evolving to a complete disclosure of all assets in future. Statement of changes in net assets/equity showing value and volume changes to assets and liabilities that are not related to a transaction entered into by the government.

The mission is of the view that the top three levels of the proposed structure should be sufficient for the purpose of preparing these financial statements. Further details of each of the elements could be disclosed as schedules to the financial statements. The financial statements can be formulated directly from the proposed economic segment using the relevant account codes without the need for data manipulation. 70. The differentiation of third-party payments from other payments in iBAS++ can be accomplished by including a Mode of payment field on each expenditure transaction record. GoB aims to adopt cash based IPSAS in future as a stepping stone to full IPSAS adoption. Cash based IPSAS stipulates disclosure of third-party payments in separate columns on the cash flow statement. In Bangladesh, such payments typically arise on account of direct project aid (DPA) disbursements by the donors. A Mode of payment field could be used in iBAS++ to attach a variety of information to each transaction. For example, this field may be used for recording whether the transaction was: a payment in cash or in kind; processed by bank transfer; a journal posting for a payment processed outside the iBAS++; or a journal posting for a payment processed offshore by a donor to an overseas vendor (a third-party payment); etc. This functionality should easily identify third-party payments that can be marked separately from other payment records. In collaboration with the CGA, the SPEMP team should carefully identify and list all possible types of transactions.

38 71. The suggested classification facilitates transition to accrual based accounting without needing any structural changes to the classification codes. With the exception of capital receipts and capital expenditures, the suggested segmentation follows the standard accrual-based accounting structure. As discussed earlier, the capital receipts and expenditure segments have to be given special treatment due to the current accounting policies of the GoB, which is in parts accrual but largely cash. A switch to accrual accounting would require closing the capital receipt segment and converting the capital expenditure segment into a segment that would record both flows and stocks of non-financial assets. This, however, should not require changing the account codes in this segment. Specific ranges have been reserved in the expense segment to accommodate depreciation and provisions. Similarly, provisions are provided for accounts payable and receivables. 72. The proposed structure is capable of producing GFS complaint statistical reports. This can be achieved by mapping the account in the economic segment with a corresponding account in GFS. The mapping table should be built in iBAS++. The system should be able to produce GFS reports from the iBAS++ accounting records with assistance of the mapping table. The SPEMP team will need to complete the mapping table. If necessary, further guidance may be obtained from the IMF. Recommendations Short term Adopt a multi-tier economic classification structure. Carefully examine the pros and cons of keeping micro-level details in the CoA. Maintain double entry accounting principles in classification design and keep the classification integrity intact. Complete the assignment of codes of the new economic classification structure. Identify and discard redundant accounts before migrating the existing accounts to the new structure. Map the new economic classification codes with GFS counterparts and build a bridge table to enable the production of GFS compliant reports from iBAS++. E. Authorization Classification 73. An authorization classification is proposed to report and control the budget in accordance with the Appropriation Act and statements in the Annual Financial Statement. The first two levels in the classification represent a separate parliamentary authorization. The third level identifies the type of authorization-voted or charged. It would be mainly used for reporting purposes for generating from the iBAS++ the Demands for Grant, the Annual Financial Statement and the Appropriation Accounts. Authorization

39 classification would also be useful for control purposes by verifying that the sum of lower level spending controls in iBAS++ do not exceed legally authorized spending totals. Table 11. Proposed Authorization Classification Structure
Level 1 Attribute Level 1 Digits XX Explanation Currently, the ministry / division level in the administrative classification. But this could be used to authorize spending by the highest level of the function classification, or to include items from the economic classification that would control sums spent for that economic classification item for the entire budget. Should this approach be adopted in the future, selected charged expenses in the economic classification, or major units under ministries / divisions might be presented at this level for high level control purposes. Explicitly identify if an authorization is voted or charged.

Level 2

XX

Legal type

74. The purpose of the authorization classification is to define how parliament approved spending. Authorization classification items are the basis for the Appropriation Act, based on Demands for Grant summarized by Vote (Statement 10 in the Annual Financial Statement), and serve as legal controls on subsequent spending. The number of sub-segments, and the nature of each element in a sub-segment, for voted items are determined by political and management concerns that parliament may have with regard to the executives freedom of action during budget execution. In addition, the authorization classification can be used to present the combined demands for grant and appropriations (Statement 11 in the Annual Financial Statement). They are also the basis for preparing the Appropriation Accounts. 75. The current CoA does not include an authorization classification. The Appropriation Act is prepared at this time outside of iBAS in accordance with an implicit authorization classification, showing Grants (voted expenditures) and Appropriations (charged expenditures) at the ministry / division level of the administrative classification. Grant numbers are assigned to voted items; no identification number is assigned to charged items. A different grant/appropriation code is used to assign a unique identifier to all appropriations and grants. 76. The proposed authorization classification gives flexibility to establish Vote control levels in a variety of ways between and within other classifications. It facilitates two levels of controls, i.e., controlling certain expenditure items within other controlled totals, if desired. For example, interest payments can be controlled as a Vote at the second level under the FD Vote or it can be an independent Vote. In the later case it would be

40 captured at Level 1. The Votes need not be tied to any particular classification. The FD is considering identifying in the Appropriation Act selected large individual items normally associated with the economic classification, such as interest and public employee pension payments. The proposed structure would support such as a move. It also opens up several possibilities. For example, Demands for Grant can be presented by administrative units (ministries/divisions) but there may be separate Grants/Appropriations for large economic items (e.g., subsidies, interest payment, pensions, debt repayment, etc.). Another possibility is presentation of the Demands for Grant by a combination of administrative and economic classifications. In that case, the Votes would be obtained for each ministry/division under major economic categories (Employees benefits, Good and services, etc.) A third possibility could be grants by major functions of government broken down by ministries/divisions for each function, or vice versa. What is important is that each parliamentary authorization-voted or charged- should be assigned a unique Vote number. Table 12. Mauritius' Appropriations by Ministries and Programs10

77. The authorization classification should be the place for identifying the legal type of an authorization to spend. It is appropriate that designating authorization to spend as voted or charged expenditures, as required in the Constitution and PMBMA, should be made in the classification used to prepare the Appropriation Act and the Annual Financial Statement. No core segment is structured to do this if the Appropriation Act includes votes from more than one segment. 78. The authorization classification can be applied using a mapping table outside the GL. Table 13 provides an illustrative example of a hypothetical application of the proposed

10

Source: Mauritius Appropriation Act, 2012 available at mauritiusassembly.gov.mu/English/acts/Documents/2012/act2512.pdf

41 authorization classification using a mapping table with the administrative and economic classification. Table 13. Illustrative Example of Mapping between Authorization and Other Classifications
Authorization Code Level1 01 02 03 03 03 03 Level2 00 00 01 02 03 04 Type* C V V V C V Administrative Classification Economic Classification

Office of the President Ministry of Agriculture Finance Division Finance Division Finance Division Finance Division

00000000 00000000 Subsidies Pensions Interest Payments Others

*C=Charged; V=Voted.

79. The authorization classification has features of both core segments and derived classifications. It has the character of a core segment in the sense that it will be used for control purposes. Control is achieved during budget execution by confirming that amounts re-allocated to lower levels after the budget is approved do not exceed the amounts authorized by parliament-voted or charged. Day-to-day budgetary control would be exercised in iBAS++ at the level of individual administrative units, projects, and economic category (see Table 14 below). The authorization classification has the character of a derived classification in that it will be used to produce reports by aggregating expenditure data according to parliamentary authorization. 80. When preparing the budget, the amounts shown in the Demands for Grant can be entered into iBAS++ in two ways. First, it can be the sum of the detailed information in the system proposed by ministries and agreed by budget staff. Second, it can be entered as a single number in a separate table. This is an important iBAS design issue that should be decided by the iBAS++ working group. The advantages of the first approach are that the detail in the proposed budget always matches the total requested in the Demand for Grants. However, this means that all detailed data are known and in the system, which may not be the case in the event of last minute changes. The advantages of the second approach are that changes to the Demands for Grant can be made very quickly and easily as budget negotiations progress. In addition, it preserves the approved budget in a separate table that would not be altered by re-allocations and re-appropriations during budget execution. However, it is important that the details are fully reconciled and consistent with the totals. 81. iBAS++ should provide for at least three types of control, based on who has the authority to establish or amend amounts. First, appropriations that require parliamentary approval to modify; second, re-allocations and re-appropriations that must be approved by

42 the FD; and, third, re-appropriations that may be approved by ministries. The authorization classification would serve as the basis for the first type of controls. There are multiple technical ways for iBAS++ to assign responsibilities for the second and third types of control, and should be configurable. It is recommended that the system be configured so that FD approval is required to establish or amend amounts at the following levels: Table 14. Suggested Control Levels by Classification
Control Levels Appropriation [Grants] Budget [Detailed Demand for Grants] Internal Management within a ministry Administrative Segment Level 2 Ministry/Division Level 3 Major units Level 4 Units Project Segment Level 2 - Projects Level 3-Subprojects Economic Segment Level 2 Category Level 3 SubCategory Level 4 - Item

82. The principal advantages of having an authorization classification within iBAS++ are: Preserve the integrity of other CoA segments by not imposing on their structures the need to meet Demands for Grant presentation, or Appropriation Act control, purposes. Automate controls within iBAS++ to ensure that re-allocated and re-appropriated amounts stay within the limits established by the Appropriation Act.

Recommendations Short term Establish an authorization classification within iBAS++. Medium term Consider increasing the visibility of selected large expenditure items, such as interest payments, pensions, by separately appropriating them. F. Functional Classification 83. A four-tier five-digit functional classification is proposed. The first two digits define the major function and the subsequent three digits provide a cascading level of detail (Table 15).

43 Table 15. Suggested Functional Classification Structure

Level 1 2 Attribute Major function Minor function Digits XX X Explanation Identifies major functions of the government. For example, Education, Health, etc. Further classification of each of the major functions into minor functions. For Example, Primary and mass education, Preventive health care, etc. Further classification of each of the minor functions. For Example, Mass education, etc. For Example, Non-formal education, Community schools, etc.

Details of minor function Sub-details of minor function

84. The GoB currently employs a myriad of functional and sector classifications to serve a range of similar purposes. These include: A 13 function classification incorporated in the MTBF; A 14 function classification scheme proposed to be adopted in the new classification system; A 15 function classification currently being used for classification of the final budget documents; A 17 sector classification used in the annual development plan by the Planning Commission; and The 10-digit COFOG that is derived for GFS reporting.

These classification schemes are closely linked to each other. The authorities provided the mission with a table that shows the alignment of each of these classification schemes. It is understood that each of these schemes can be derived from the 14-function functional classification proposed by the authorities for inclusion in the CoA. 85. GoB should consider harmonizing the various sectoral and functional classifications. Divergent approaches to functional and sectoral classification are not conducive to sound policy making or analysis. It is apparent that the major impediment to undertaking this reform is administrative separation of the planning and the budgeting bodies, i.e., the Planning Commission and the Finance Division, and entrenched positions in these agencies regarding their unique roles and responsibilities in strategy setting and budget formulation. The current inability to reach consensus on a common approach to defining functional sectors for the new classification system is a symptom of the depth of this divide. 86. The SPEMP team presented to the classification taskforce an approach that involves a functional classification that incorporates 14 functional elements. The

44 differences between the proposed functional classification and GFS/COFOG are that, in the proposed functional classification, the economic affairs segment is split into five elements. In addition, Education class in COFOG is further elaborated to provide more detail around ICT. Table 16. Bangladesh: Proposed Functions
Functions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 General Public Services Defense Public Order and Safety Industrial and Economic Services Agriculture Power and Energy Transport and Communication Local Government and Rural Development Environmental Protection Housing and Community Amenities Health Recreation, Culture and Religion Education and Technology Social Protection Environmental Protection Housing and Community Amenities Health Recreation, Culture and Religion Education Social Protection Economic Affairs Defense Public Order and Safety COFOG General Public Services

87. Authorities have accepted the recommendation of the August 2013 IMF GFS mission to derive the functional classification, rather than explicitly coding it. It is not practical to have users entering the functional classification for each transaction and incorporating this segment of data in the GL. In the absence of adequate knowledge of functional classification at the data entry level, the potential for mistakes will be higher, and the results are likely to be inconsistent and sub-optimal. For most users the entries will be largely repetitive. Moreover, the functional coding elements would be redundant for all but expenditure transactions recorded in the GL. 88. iBAS++ could incorporate an algorithm for deriving and recording the appropriate functional classification for expenditures. This algorithm should default to capturing the functional classification assigned to a project (entered in the system when a project is established within iBAS++) and for non-project expenditures to capture the functional classification assigned to the organization in a pre-populated mapping table. As an example, for non-development (project) expenditures of the Ministry of Education, iBAS++ would look up a pre-populated internal table that shows mapping of the Ministry of Education to the education functional code and recorded such functional code against these

45 expenditures. The economic classification will provide the range of expenditure items that will be included in the functional views. 89. The five-digit 14-function classification scheme can be mapped to produce the other functional/sectoral coding schemes currently in use by the government. Prior to the GoB achieving (the highly desirable) harmonization of the functional coding structure, a detailed mapping table can be produced that would enable reporting according to these other classification schemes. While it is possible to build this mapping and reporting functionality in iBAS++, the mission is of the view that this should be viewed as a lower priority item in developing the architecture of iBAS++ and is a development best avoided by adopting a unified functional coding system. Recommendations Short term Establish a functional classification as a derived segment. Use a mapping table to map project and administrative segments to the functional classification. Use economic segment to identify expenditures to be included in the functional views. To report by other sectoral/functional classification schemes presently in use in the government, establish mapping tables between the functional classification and these schemes.

Medium term Harmonize the various sectoral/functional classifications presently in use in the government. G. Location and other Derived Segments 90. A location classification can be developed and implemented using an approach similar to the one outlined for the functional classification. This would involve assigning a location code to a project during the process of entering and elaborating this project during its development phase in iBAS++. In addition, a mapping table can be constructed that assigns a location code to each administrative unit. A coding algorithm can then be built in iBAS++ that derives the location code by taking the location code assigned to a project where a project exists, and taking the location code of the concerned administrative unit for the non-project items. For the purpose of coding locations, the standard geographic classification developed by the statistical office should be used. This will facilitate comparability and exchange of data with other information systems in the country. 91. Classifying the location of government expenditure is always challenging exercise. Many government expenditures cover the whole of a country, some cover multiple locations, and for other expenditures it is difficult to know where the ultimate beneficiary

46 may reside. Nonetheless, even though this information is imperfect, it can be useful for policy formulation and enhancing the transparency of the government operations. 92. The GoB also seeks to produce a range of other indicators that may be derived within iBAS++. As examples, the BW prepares a report on the expenditures incurred to mitigate climate change. It also publishes data on expenditures targeted at gender equality and poverty reduction. Each of these indicators could potentially be derived from within iBAS++ using mapping tables and tagging of certain types of expenditure during the budget planning or execution phases. While these are important initiatives, developing mechanisms to derive these elements with iBAS++ should be lower order priority than developing and implementing the core classification. Recommendations Short term For reporting by locations, follow the standard geographic classification and map locations of projects and administrative units. Clarify that the information produced in this manner from a budgeting and accounting system is unlikely to be perfect. Build separate mapping tables and tags to derive other specific indicators, such as climate change, gender, etc. H. Program Classification 93. A program classification is used in a program budget system, which is different in important ways from traditional budget systems. A first requirement is that the budget process should analyze, decide, report and evaluate budgets using financial as well as nonfinancial information in determining the allocation of limited financial resources. Another key requirement, and often a difficult one to achieve, is that line ministries should re-align their operations and management systems around the programmatic structure to gauge their progress toward non-financial goals. It calls for a change in the administrative culture to accept that control functions shift in part from financial to operational measures, and there is much greater disclosure of what agencies are doing and achieving. In the end, program budgets are as much operational plans as financial plans, and assess value for money by looking at what is achieved through government expenditures. 94. Successful adoption of program budgeting requires extensive adjustments to institutions, procedures, information systems, and human resources at all levels of government and parliament. This is a multi-year commitment, and is costly. A widespread consensus, especially at the political level, on the benefits of a program budget system, and agreement by all parties that they will participate in required changes, is highly desirable before seriously considering moving to a program budget system.

47 95. Considering that program budgets are unlikely to be implemented in the near future, any attempt to freeze a program classification structure at this stage will not be fruitful. Bangladesh is yet to decide on when and how to introduce program-based budgeting. The FD has shown interest in introducing program budgets, but much further work is required for clarity on their form and content. Because iBAS++ will allow for introduction of new classification segments in future, a program classification can be introduced when a consensus and plan for its introduction is reached. The Planning Commission, broadly speaking, attempts to achieve many elements of a program budget through the 5-Year Plan and proposals for inclusion in the ADP. Additional benefits in the short term can be gained by: Integrating project coding schemes used by the Planning Commission and the FD; Modifying the existing non-COFOG functional classification (if it is not subsumed within a joint Planning Commission / Finance Division classification scheme) to reflect unique activities and policy priorities; Adopting strategic policy priorities that apply to the 5-Year Plan, MTBF, ADP, and the non-development portion of the annual budget; and Designing iBAS++ to collect non-financial information that conforms to key performance indicators associated with organizations, functions, and, eventually, programs.

Recommendations Short term Keep iBAS++ design flexible to accommodate additional classification segments, such as a program classification, as and when it is introduced. IV. IMPLEMENTING THE NEW CLASSIFICATION A. Project Timeline and Sequencing 96. SPEMP stakeholders consider that target dates for the new classification and iBASS++ implementation are very tight. It has become apparent to the SPEMP team, FD and the representatives of multiple donors funding the project that key elements of the project, including the development and approval of the new classification system, are unlikely to be met within the timeframes previously agreed. The 2013 independent annual review of the SPEMP project11 found that it is highly unlikely that the system, as it is defined, will go live on July 1, 2014. Part of the reason given for the project delay is that the
11

2013 Independent Annual Review of the Bangladesh SPEMP, May2013.

48 classification work, which remains ongoing, is a necessary precursor to other project activities. Based on this report, the findings of a subsequent World Bank led mission, and the mission discussions with the SPEMP team, it is apparent that the key issues causing delay are: Underestimation of the scope of the institutional and business process changes required; Underestimation of the scope of required human capacity development associated with the project; and An inability to attract and retain the required skill sets to complete both the technical work and deliver the associated business process reforms.

97. Given the current status of the project, agreement to a delayed implementation is now under discussion. If it is determined that iBAS++ and associated classification implementation cannot be achieved in time for preparing the 2014-15 budget, the logical approach is to target the implementation for the preparation of the 2015-16 budget. How this might be achieved will require a conversation between the various donors and GoB stakeholders and is outside the scope of this mission. However, any extension of the project does not obviate the need for careful management of the classification redesign, approval, and incorporation in the iBAS++ and associated training. Irrespective of the target date for implementation, classification changes will need to be sequenced with both system implementation and business processes reengineering in mind. 98. SPEMP, under the oversight of the classification taskforce and in close cooperation with the FD and CGA, should proceed to finalize the new classification and obtain the necessary formal approvals as the earliest. The critical path for approving the new classification involves: a. b. c. d. e. Task force approval of the classification design Final articulation of classification segments at detailed level Endorsement by FD Submission to C&AG for concurrence Approval by the President of the Republic

99. Proceeding to develop the iBAS++ modules should not await formal approval of the new classification. Once the taskforce has approved the classification structure, this should be sufficient for commencing the coding of the iBAS++ and development of associated new and revised business processes. SPEMP team and the CGA must collaborate on a strategy to transition from the previous to the new classification using mapping functions built into the iBAS++ and to deal with accounting issues that will inevitably arise during this transition. To the extent that there is subsequent (hopefully minor) amendment to

49 the CoA during the approval process, these can be accommodated later in the iBAS++ development and testing process. Box 3. Transition to a New Budget Classification System
A transitional period of sufficient length should be allowed before the new classification system is fully operational, so that (1) the new system can be reviewed by key stakeholders, such as line ministries, the external audit authority, and the legislature; (2) operational guidelines can be developed and training performed for staff in line ministries, local budget institutions, and other entities involved in the reform; and (3) the legal framework can be amended, if necessary. Transfer of knowledge and ownership are key elements if the new classification is to be used as a foundation for preparing and executing the budget. Source: IMF TNM No.6 Budget Classification Prepared by Davina Jacobs, Jean-Luc Hlis, and Dominique Bouley, December 2009.

100. A key weakness with the plan to implement the project for the 2014-15 budget is lack of adequate time to undertake user testing prior to full implementation. Any rescoping of the project to target implementation for the 2015-16 budget should ensure sufficient time for extensive testing of the new CoA, iBAS++ and associated changes in business processes well before the implementation date. It is suggested that two ministries be selected to undertake pilot testing of the new system in preparing and executing their 201415 budget in parallel to their use of existing systems. In addition to the planned acceptance testing, running the systems in parallel is the best way to identify bugs in the system and make required modifications to business processes prior to full roll-out of the system in time for preparation of the 2015-16 budget. B. Change Management 101. A carefully managed and well-resourced approach to change management is required to ensure success of the new CoA. The most recent annual review of the SPEMP found that the Component 2 as a whole must be approached as an institutional reform initiative which requires that users, management, suppliers, IT support, contractors and developers be educated and sensitized to its impact far in advance of the systems roll-out. The mission found considerable support for this finding among the various stakeholders, including the SPEMP team, and the mission strongly agrees with this conclusion. 102. A more proactive program of stakeholder engagement needs to be launched to address potential impediments to reform before they arise. Although the existence of a currently functioning iBAS system and high levels of computer literacy form a sound foundation, the change management challenges should not be underestimated. As the new system will extend beyond the finance domain to all budget-holders and in some ways attempt to standardize their financial operations, some resistance to these reforms can be expected. Achieving the level of buy-in requires that a formalized approach to change

50 management be employed as a shared responsibility between the SPEMP team and the Finance Division. Box 4. IFMIS Change Management
Change management is one of the most critical, but also one of the most neglected, aspects of IFMIS reforms. Despite the obvious advantages of a new IFMIS system, opposition is to be expected. Resistance will come from all angles. There will be vested interests who have benefited from the way things have traditionally been done. There will be civil servants who see new systems as a threat to their jobs. There will be those who resist simply for fear of the unknown. While opposition is not always easy to overcome, any systems implementation that ignores change management flaunts with failure. So what can be done? As soon as an IFMIS project is conceived, a change management strategy needs to be laid out, taking into consideration the change implications for diverse stakeholders, from politicians and senior managers to department heads, civil servants and the IT personnel who will support the new systems. A core team needs to be designated to manage the change, composed of people who can and are empowered to lead. This requires a strategy, a plan, with alternatives, with an aim to bring about the change. Overcoming resistance will happen through clear communication, education, training, and quick wins that demonstrate the benefits of change. Source: USAID, IFMIS Practical Guide, 2008.

103. The desirable features of project management that will encourage stronger change management include: Complete assessment of the changes in business processes required as a result of the change in CoA and iBAS++ implementation. Revisions to the legal framework to support these changes, as well as system functionality and training, need to be carefully sequenced and supported with appropriate resources. A formal process for identifying stakeholders, assessing their interests and requirements, and managing interactions with these stakeholders to engender their support for the project. At present this appears to be an informal aspect of the role conducted by the project leadership but needs to be formalized and specific resources assigned to this task. A comprehensive training strategy. A tremendous volume of training will be required to transition to iBAS++ and new CoA. The mission team was informed that up to 60,000 people will need to be trained on the new system. The SPEMP Implementation Strategy and Plan outlines an approach to training that involves training of trainers, electronic training packages and tailoring of training to specific job types. A formal communication strategy is required and specific expertise included within the project to support its implementation. Given the diverse stakeholders a broad set of communication channels is needed to deliver key messages to stakeholders.

51 Identification and engagement of thought leaders and project champions to assist in building consensus and overcoming impediments that arise. Identifying the mechanisms to ensure that the CoA, iBAS++ and associated reforms will be supported after the end of the project. The project and supporting institutions must ensure that resources, technical requirements and institutional structures, including people with required skills, will be in place within FD once the SPEMP ends.

104. A renewed focus on project management methodology is required to ensure success. Application of a standard project management methodology (such as PMI PMBOK or Prince 2) will embed the change management elements within project management. In addition, formal project management methodology will ensure that the project scope is carefully defined. It would map out project timelines including the critical path, identify specific work packages to be delivered both by project staff and counterparts, identify where resources are required to support delivery of the work packages, formalize user acceptance of project outputs, define quality assurance arrangements and identify project risks and appropriate risk mitigation strategies. C. Institutional Support 105. Institutional support in FD is a key success factor. Perhaps the most critical element to successful change management in the implementation of the new classification system is to ensure that FD continues to be seen as leading the reform process and has the resources and structures to support implementation of the iBAS++ once the SPEMP is completed. The mission is under no doubt as to the extraordinary level of commitment of the FD leadership to the success of the new CoA and iBAS++. However, the mission also supports the proposition, put forward in the most recent annual review of the SPEMP, that the project scope failed to adequately considerthe GoBs readiness to assume full responsibility for the systems support, maintenance, and its future expansion following the inevitable handover.12 106. The mission is of the view that the readiness of FD to assume full responsibility over the CoA and iBAS++ would be supported by some changes in the institutional arrangement in the FD. Specifically, the mission team suggests:

12

2013 Independent Annual Review of the Bangladesh SPEMP, May 2013.

52 Establishment of a PFM reform team in FD whose primary day-to-day role will be to provide thought leadership, promotion and technical support to the PFM reform effort on a continuous basis. Classification reform should not be seen as a mere technical exercise; it is at the very core of a well-functioning PFM system and an enabler to achieving other more visible and important PFM reforms. The potential of the new CoA will be fully unlocked only when these associated reforms are undertaken. Identifying a group within the CGA that will take immediate ownership of development and maintenance of the new CoA and provide support in managing the accounting issues that arise in transitioning to it. With assistance of SPEMP, developing and implementing a plan for strengthening the FSMU to be the technical owner of the iBAS++. FSMUs technical capacity will be critical to support a government-wide implementation of the new system and its subsequent sustenance. In addition to technical ownership of the iBAS++ - that will reside with the FSMU - a functional owner needs to be found for the system that will provide leadership of the ongoing development of the systems and its functionality to meet future PFM reform efforts. This is not an IT function. This function could reside within the PFM reform team before eventually migrating to the CGA once the PFM reform has been implemented. Irrespective of where it resides, this team must pay particular regards to the functional needs of the accounting, reporting, control and budget preparation functional areas of FD and GoB generally.

Recommendations Short term Update the implementation plan; target completion by March 2014. This would involve finalizing the classification design, development of individual segments, and establishing mapping tables. Conduct parallel run in two ministries during the process of finalizing the 2014-15 budget. Adopt a formalized change management approach, including a structured communication strategy; share implementation responsibility between FD and SPEMP. Undertake a more proactive program for stakeholder engagement. Disseminate information and conduct sensitization workshops for the key stakeholders in the line ministries, planning commission, auditor generals office, etc. Develop a comprehensive training plan.

53 Adopt a structured project management methodology. Develop institutional support and capacity for reforms as outlined in paragraph 106. V. FAD TECHNICAL ASSISTANCE 107. Follow-up expert TA is required to ensure implementation of the missions recommendations. Concepts behind some of the missions recommendations are new, and business processes to employ these concepts to best advantage are not clear. TA would be useful to reinforce the concepts and work with SPEMP project, task force, and ministry staff to work out examples and define procedures. This applies particularly to the economic and the fund segment recommendations. 108. The mission suggests that TA should be provided by peripatetic experts over at least a 12 month period. The mode of TA delivery is determined in large part by the high quality of Project staff. These counterparts are fully capable of working out many details. The TA expert should focus on clarifying concepts and adjusting business processes. Between visits by the peripatetic expert, project staff can independently research options and test ideas. The duration of the TA is determined by the design and development phase of the iBAS++ system. Given that full implementation of the new system will likely be pushed back a year from July 2014 to July 2015, a number of implementation issues will be addressed over the next 12 to 18 months. 109. The Advisors main tasks will be to assist the FD in implementing the recommendations contained in this report. More specifically, the advisor will assist the FD and the SPEMP team in: Finalizing the overall classification structure. The advisor will further clarify the purpose and hierarchy of each segment and facilitate an early decision on the classification design. Review the economic classification of revenues and expenditure, as well as the administrative and project classifications. This would include providing assistance to the SPEMP team to complete the economic, administrative and project classifications in accordance with the new structure and translate the existing codes into the new structure. Facilitate development of fund and authorization classification. This will include appropriate classification of the consolidated fund and public account. The advisor will, in particular, facilitate decisions on the possible applications of the fund classification as discussed in this report. Review the functional classification for its sufficiency for a comprehensive functional analysis of expenditures. This will include constructing the bridge-tables to produce the COFOG classification and the other sectoral/functional classifications followed in the

54 government. The advisor could also facilitate harmonization of the various functional/sectoral classifications by identifying the possibilities and presenting the available options. Advise on the strategy for furthering this work and provide implementation support, including support for designing associated business process changes, the suggested pilot testing and resolving issues thrown up during the testing and implementation phase. Assist FD and SPEMP team in planning and delivering training programs.

Assist SPEMP team in developing the classification manual and any other guidance documents/communications.