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

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

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

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

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

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

7. 7 Example Administrative Classification System SOFAdministrative ClassificationEconomic ClassificationFunctional ClassificationProgram LegalTitleChapterDivisionSectionArticleParagraphMain Function FunctionSecondary Function ProgramActivity MinistryManaging Unit Accountabl e Unit Main Classifier Sub ClassifierSupplement al Information DivisionGroupClassImprove Breeding Train Farmers Ministry of Agriculture & Forestry General Director of Agriculture Livestock Unit ExpensesCompensatio n of Employees Wages in Salaries in Cash Economic Affairs Agriculture Forestry Fishing Hunting AgriculturePoultry 122411231133 Other : Geographic, Beneficiary, Gender, Source of funds

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

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

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

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

12. 12 Budget Evolution and Classification Requirements  Known Classification Provisions 1.Administrative Classifications (Ministry/Division/Managing unit) 2.Economic Classification (Cash Based or Modified Accrual) – GFS 2001 3.Functional Classification (GFS/UN = COFOG) 4.Program Budgeting (Near Future Requirement) 5.Geographic? 6.Source of Funds. 7.Constitutional/Legal? i.e. Charged Expenditure 8.Gender?

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

14. 14 Classification & Reporting  Classification Segment = Data Reporting Ability Known Reporting Requirements 1.Public at Large = Consolidated Level (Budget and Financial -CGA) 2.Parliament = Approval = Consolidated Level (Budget) 3.Parliament = Informational = Consolidated Level Financial – CGA) 4.Parliament = Monitoring = Detailed Level (Budget and Financial -CGA) 5.Ministerial = Monitoring = Detailed Level (Budget and Financial -CGA) 6.Ministerial Preparation and M&E = Individual Appropriation Level 6.Donor = Individual Appropriation 7.Donor = Specialized Levels 8.IMF = Statistical Consolidated Level (GFS)

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

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

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