DMSDR1S- 5314747-V1-Bangladesh FAD TA Report

8/12/2019 DMSDR1S- 5314747-V1-Bangladesh FAD TA Report

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INTERNATIONAL

MONETARY

FUND

Fiscal Affairs

DepartmentBangladesh

Designing a New Budget and

Accounting Classification

January 2014

Sandeep Saxena, David Gentry, Kris Kauffmann,

and Than Lwin

For Official Use Only


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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


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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, toWorld 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.


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Contents Page

Acronyms ...................................................................................................................................5

Preface........................................................................................................................................6

Executive Summary ...................................................................................................................7

I. Introduction ..........................................................................................................................12

II. Designing a New Classification Structure ..........................................................................16

A. Conceptual Framework ...........................................................................................16B. Suggested Classification Structure ..........................................................................19

III. Developing Classification Segments .................................................................................20

A. Administrative Classification ..................................................................................20

B. Project Classification...............................................................................................25

C. Fund Classification ..................................................................................................28D. Economic Classification .........................................................................................34

E. Authorization Classification ....................................................................................38

F. Functional Classification .........................................................................................42G. Location and other Derived Segments ....................................................................45

H. Program Classification ............................................................................................46

IV. Implementing the New Classification ...............................................................................47

A. Project Timeline and Sequencing ...........................................................................47B. 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


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15. Suggested Functional Classification Structure ..................................................................43

16. Bangladesh: Proposed Functions .......................................................................................44

Figure

1. SPEMP's Proposal ................................................................................................................14Boxes

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


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ACRONYMS

ADB Asian Development Bank

ADP Annual Development Plan

BACS Budget and Accounting Classification System

BB Bangladesh Bank

BW Budget Wing (of Finance Division, Bangladesh)

C&AG Comptroller and Auditor General (of Bangladesh)

CAO Chief Accounts Officer

CGA Controller General of Accounts (of Bangladesh)

CIDA Canadian International Development AgencyCoA Chart of Accounts

COFOG Classification of Functions of Government

DANIDA Danish International Development Agency

DAO District Accounts Officer

DFID Department for International Development (of the UK)DMFAS Debt Management and Financial Analysis System

DPA Direct Project AidERD Economic Relations Division

EU European Union

FAD Fiscal Affairs Department (IMF)

FD Finance Division (of Bangladesh Ministry of Finance)

GFS Government Finance StatisticsGFSM 2001 Government Finance Statistics Manual 2001GIFMIS Government-wide Integrated Financial Management Information System

GL General Ledger

GoB Government of Bangladesh

iBAS Integrated Budget Accounting System

IMR Inter-Ministerial Receipts

IPSAS International Public Sector Accounting StandardsIRD Internal Resources Division (of Bangladesh)

MoF Ministry of Finance (of Bangladesh)

MoH Ministry of Health (of Bangladesh)

MTBF Medium-Term Budget Framework

NBR National Board of Revenue (of Bangladesh)

OECD Organization of Economic Cooperation and Development

PFM Public Financial Management

PMBMA Public Money and Budget Management Act

PWD Public Works Department (of Bangladesh)

SBL Sonali Bank Limited

SOE State-Owned Enterprise

SPEMP Strengthening Public Expenditure Management ProgramTA Technical Assistance

TDMW Treasury and Debt Management Wing (of Finance Division, Bangladesh)

Tk Taka

TSA Treasury Single Account

UAO Upazila Accounts Officer

VAT Value Added Tax

WB World Bank


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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 bySandeep 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, andDeputy 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).


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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 inparallel. 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, restrictingexpenditure 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).


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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 economicclassification 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 non-

development expenditures and the existing duality in budget formulation; (ii) theharmonization 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


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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.


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Table 1. Summary of Key Recommendations1

Recommendations Priority Timeframe

Classification Structure

Adopt a four-segment classification structure comprising: (i) Administrative;

(ii) Project; (iii) Fund; and (iv) Economic classification. Derive by usingmapping tables the functional/sectoral views of expenditure, geographic

location, and other reporting schemes.

H S

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.

H S

Include in the administrative classification public entities that are outside the

budgetary central government.

M M

To achieve an integrated financial management information system, in aphased 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 extendingiBAS++ to local governments.

M M

Use a payee table in iBAS++ to identify the recipient of government

transfers.

H S

Project Classification

Adopt a three-tier project classification that distinguishes between

development and non-development projects and identifies projects and sub-projects. For reporting purposes, use a side table to group projects into

umbrella projects.

H S

For transparency and greater parliamentary financial control, avoid the use of

block allocations in the development budget.

M M

Consider eliminating the distinction between development and non-development projects.

M M

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.

H S

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.

H S

Expand the coverage of the budget using the fund classification, in particular

by using an inter-ministerial receipts (IMR) fund source.

M M

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.

M M

Economic Classification

1Priority: L Low; M Medium; H High. Timeframe: S Short (a year or less); M Medium (2-3 years).


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Recommendations Priority Timeframe

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 toproduce GFS reports.

H S

Maintain double entry accounting principles in designing economic

classification and keep the classification integrity intact.

H S

Identify and discard redundant accounts before migrating the existingaccounts to the new structure.

H S

Authorization Classification

Adopt an authorization classification to recognize the parliamentary votes. H S

Consider increasing the visibility of selected large expenditure items, such as

interest payments, pensions, by separately appropriating them.

M M

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.

H S

To report by other sectoral/functional classification schemes presently in usein the government, establish mapping tables between the functionalclassification and these schemes.

H S

Harmonize the various sectoral/functional classifications presently in use in

the government.

H M

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 systemis unlikely to be perfect.

M M

Build separate mapping tables and tags to derive other specific indicators,

such as climate change, gender, etc.

M M

Program Classification

Keep iBAS++ design flexible to accommodate additional classificationsegments, such as a program classification, as and when it is introduced.

H S

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.

H S

Conduct parallel run in two ministries during the process of finalizing the

2014-15 budget.

H S

Adopt a formalized change management approach, including a structured

communication strategy; share implementation responsibility between FD andSPEMP.

H S

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.

H S

Develop a comprehensive training plan. H S

Adopt a structured project management methodology. H S

Develop institutional support and capacity for reforms. H S


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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 expendituremanagement cycle.

2Reforms 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).3These 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

2SPEMP 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.

3The 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.


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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-ownedSonali Bank Limited (SBL) branches.

4Taxpayers 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 ownbank 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.5The 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

4In some cases, commercial banks other than SBL are contracted for specific services.

5 Civil Departments mean ministries and divisions of the budgetary central government with the exclusion of

Railways, Defense and self-accounting entities.


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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 (1digit); 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 decision-

making 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.


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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 theclassification 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.


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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 relativelyhomogeneous 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.

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 classificationthat 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

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 definingcharacteristics to which every transaction must comply;

Independence:Each classification has defining characteristics that are different from andindependent of the others; and

Comprehensiveness:The definitions of each of the classification dimension are complete andcomprehensive.

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.


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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 classificationidentifies the economic nature of resources (e.g., salaries,

goods and services, transfers, subsidies, etc.) and is the basis for macroeconomicanalysis, 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 functionscategorizes 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. Functionalclassifications 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 classificationis 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 sub-

divided 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 classificationto 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 financingclassification to associate expenses with the fundsthat financed them and classification of beneficiariesof 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


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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 itto 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 extra-

budget, 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/pefa-

publically-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.


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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 segmentsthat are explicitly coded for each transaction and are maintained in

the general ledger (GL) of the iBAS++ system; and

Derived segmentsthat 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.


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Table 2. Suggested Classification Structure for Bangladesh

Core Segments Derived SegmentsLevel

Administrative Project Fund Economic Authorization Function Sector Location

(8) (7) (8) (7) (5) (5) (4) (6)

1 Type of Public

Entity(X)

Type

(X)

Funds

(X)

Type

(X)

Level1

(XX)

Major

Function(XX)

Sector

(XX)

Divisions

(XX)

2 Ministry/Division/ Entity(XX)

Projects(XXXX)

Sub-Funds(XX)

Category(X)

Level2(XX)

MinorFunction

(X)

Sub-sector(XX)

Districts(XX)

3 Department(X)

Sub-projects

(XX)

Donors(XX)

Sub-Category

(X)

Type(X)

Detail (X) Upazila/Thana(XX)

4 Operating UnitGroup

(X)

Donoragreement

(XXX)

Item(X)

Sub-detail(X)

5 Operating Unit(XXX)

Sub-item(X)

6 Detail(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.


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Table 3. Proposed Administrative Classification Structure

Level Attribute Digits Explanation

1 Type of Public

Entity

X Identifies the type of public entity - Budgetary central

government, Social security funds, Central extrabudgetary

units, Local governments, Public non-financial corporations,

etc.

2 Ministry/Division/

Entity

XX 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.

3 Department X Identifies the second level organizational grouping. For the

budgetary central government this level will record the

government departments.

4 Operating Unit

Group

X Identifies the major operating unit.

5 Operating Unit XXX Identifies the operating unit.

25. The inability to adequately record and report on the activities of entities outsidethe 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. Inthe 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.


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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 allcontrolled 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.6Achieving full use of iBAS++ and access to the TSA does not

imply any dilution (or concentration) of the level of functional independence enjoyed by

6The 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.


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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 andsubsidies, 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 budgetcontrols.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 thisissue.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.


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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 andrecord 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 non-

government 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 DevelopmentBoard (CDB) [assumed here to be an autonomous body].

DAE Grant expense XXX Consolidated fund

general fund

10,000

DAE TSA bank account XXX Consolidated fund

general fund

10,000

Transaction 2: Cotton Development Board receives the grant in its bank account.

CDB CDBs bank account XXX Own revenue 10,000

CDB Grant revenue XXX Own revenue 10,000

Transaction 3: Cotton Development Board makes payment to external supplier of cotton seeds.

CDB Goods and services XXX Own revenue 5,000

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


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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 groupedinto higher level umbrella projects using a side table for reporting purposes.

Table 5. Proposed Project Classification Structure


1 Type X Identifier to distinguish between development and

non-development projects.

2 Projects XXXX Identifies projects for which expenditures are

controlled by the FD.

3 Sub-projects XX 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-


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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 cropstorage 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 futurealong 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.7The 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 shoulduniformly 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

7The 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.


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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 uniqueidentification 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 anelection. 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 non-

development 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 isconvergence 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,


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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 alldevelopment 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.


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Table 6. Proposed Fund Classification Structure


1 Funds X This level identifies all funds operated by GoB. Three main

funds are Consolidated Fund, Public Account, and Own-

Source Revenue. The last item represents a grouping of

expenditures that draw from money belonging to organizationsoutside 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.

2 Sub-Funds XX 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 intospecific items, such as National Savings Scheme, State

Provident Funds, etc.

3 Donors XX Donor organizations would be identified at this level. Multi-

donor funds would be identified as a single consolidated

donor, the membership of which would be explained in the

linked Development Partners side table.

4 Donor

agreements

XXX Specific donor agreements for which spending must be

controlled should be identified here.

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 includea 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,


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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 resourcesis 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 anappropriation exists.

Table 7. Fund Classification in South Africa8

52. The Consolidated Fund may contain money from sources that place restrictionson 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

8Source: Government of South Africa, Project Summary Report, October 2008, available at

http://scoa.treasury.gov.za/Pages/DVDTrainingOct2008.aspx


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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 isuseful.

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 Source

9

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 focusprimarily 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

9Source: Albania Budget 2011, available at http://www.minfin.gov.al/

Budget Institution /

Program

Current

Expenditure

Capital ExpenditureOverall

TotalFrom theBudget

From ownRevenues

ForeignFinancing

Total

Ministry of Health 24,907,000 2,607,565 26,000 2,077,000 4,710,565 29,617,565

Planning, Managementand Administration 246,100 40,000 0 0 40,000 286,100

Primary Health Care

Services 7,759,800 499,000 1,000 654,379 1,154,379 8,914,179

Secondary Health CareServices 14,226,000 1,963,565 20,000 1,422,621 3,406,186 17,632,186

Public Health Services 2,675,100 105,000 5,000 0 110,000 2,785,100


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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 canbe 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 inter-

ministerial 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 spendingcan 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 isreasonable 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


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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 bud

Documents

DMSDR1S- 5314747-V1-Bangladesh FAD TA Report