Jean-Marc Lepain

Public Finance Management Specialist

jlepain@yahoo.fr

www.slideshare.net/JeanMarcLepain/

© Jean-Marc Lepain (Lepain PFM Consulting)

Designing a Budget Entity Regulatory

Framework

Content

Part 1: Budget entity definition, types, hierarchy and

nomenclature

Part 2: Budget Entities, fiscal decentralisation and

programme budgeting

Part 3: Regulatory framework

Part 4. Implementation

Part 1 Budget Entities:

Definition, types hierarchy and

nomenclature

What is a Budget Entity Regulatory

Framework

A methodology for identifying BE by types and for organizing

them in a hierarchical structure;

A set of policies and procedures that will apply to BE for budget

formulation, budget execution, accounting and reporting;

An instrument for organizing the transition of a budget system

toward programme budgeting and result-based budgeting.

Objectives of a Budget Entity Regulatory

Framework?

Clear identification of budget entities and of rules associated with them is fundamental for:

Reorganizing the budget system in line with the structure of a new FMIS database and assisting in defining the system requirements;

Designing a good budget classification system;

Having a good system of delegation of authority and responsibilities (knowing who is doing what) and clear line of accountability (reporting);

Designing a good system of fund transfers for a smooth flowing of budget funds, efficient budget execution and good cash management;

Providing a sound foundation for programme budgeting and result-based budgeting.

BEFR as Foundation for Programme

Based Budgeting

Programmes are indentified as Budget Entities;

Role of Administrative Units involved in programme

administration is clearly defined;

A necessary segregation of duties and responsibilities is

introduced between Finance Departments, Planning Department

and Programmes in the management of funds.

BERF as Foundation for Result-based

Budgeting

BE must be linked to an identified sector policy framework (Two

or more policy frameworks, means confusion)

To each BE is assigned a number of objectives and a set of

indicators;

Business rules associated to the BE must be a direct consequence

of the objectives and indicators.

Clear segregation of duties is necessary for accountability

(Business rules);

The Five Dimensions of a Budget Entity

Regulatory Framework

Budget Entity

Nomenclature

&

Hierarchy

Budget execution Rules

Regulation & Business Rules

Fund Transfer Rules

Budget Formulation Rules

Prerequisites

Budget classification linking to the chart of accounts

Robust and efficient Treasury Single Account

Financial Management Information System

Clear policy of decentralization and deconcentration

Budget Entity Types

Primary budget users or direct budget users

Secondary budget users or indirect budget users

Public entities recipient of budget subsidies having their own

independent budget (ex: Road Fund) not consolidated into the

general budget but depositing funds on the Treasury Single

Account.

Others to be defined if necessary.

How to identify budget entities

One of the function of the BE regulatory framework is to establish a list of objective criteria for identifying BE.

BE must use budget resources;

BE must have human resources;

BE must provide public services or perform administrative functions including policy making;

BE must play a role in the achievement of the Administration’s objectives as set by the Government;

BE must have a certain level of managerial autonomy;

BE must have a line of accountability

Budget Entities and Administrative Units A Budget Entity is different from an Administrative Unit because

administrative units have no responsibility in providing services

to the public.

Typically Business Units are involved in budget preparation and

budget execution;

Different Budget Units can be used for the channeling of funds

from the central level to the end-user level.

Identifying Administrative Units involved in the process, and

rationalizing their role, is part of the design of the Budget Entity

Framework.

Administrative Units

Budget Entities should be identified in the Budget Classification and should have accounting rules;

Administrative Units have only accounting rules;

Accounts of Administrative Units are only transit accounts (Ex: account of the provincial directorate of the Ministry of Education in charge of transferring funds to schools;

Functions such as ‘allocating funds’, ‘administering funds’, ‘transferring funds’ must be clearly defined.

In a few cases, the same entities could appear both as a budget entities and an administrative units for different functions. Such cases must be eliminated as much as possible as they are signs of possible conflict of responsibilities.

Part 2

Budget Entities, fiscal

decentralization and programme

budgeting

Fiscal Decentralization and Budget

Entities (1)

BE Regulatory Framework requires a clear choice of model

(devolution, decentralization or deconcentration). Mix models

always create problems;

Revenue assignment and expenditure assignment must be in line

with the fiscal and administrative decentralization model chosen;

The managerial structure of budget programs should be

compatible with the model of administrative decentralisation

model;

Fiscal Decentralization and Budget

Entities (2)

Budget Entity Hierarchy must be modeled on the

decentralization system;

Business rules associated to BE must be fully in line with

decentralization regulation and policy;

The system of intergovernmental transfers must be adjusted to

the Business Entity Framework if necessary as long as it does not

violate any principle of fiscal decentralization;

Identifying Concordance between

Administrative Structure and

Programme Structure

Programs are themselves a set of budget entities;

The budget entity hierarchy must integrate program organization;

Program organization must be in line with decentralization/deconcentration principles;

Program management structure must use as much as possible existing administrative structure;

Administrative structures not part of the program management structure can be used for the channeling of funds.

Part 3 Budget Entities Regulatory

Framework

What is the methodology for BERF?

1. Identify budget entities;

2. Group budget entities hierarchically;

3. Identify for each entities “attributes” for the five dimensions

already identified;

4. After analyzing all attributes across all budget entities, then

group them in logical clusters consistent with the country

legislation and regulation.

5. Organize the segregation of functions, duties and

responsibilities between the different BE and the different

Administrative Units

Issues to be considered

Managerial structure and delegation of authority (part of the

expenditure assignment)

Level of financial autonomy

Budget formulation rules

Fund transfer rules

Budget control and budget execution rules

Accounting rules

Reporting rules

Audit

What is an attribute?

An attribute is a business rule that is closely associated with a budget

entities.

Not all attribute are legitimate. Illegitimate attribute should

be eliminate in the BERF and in business practices;

Some attribute should be questioned because they might be

cause of inefficiency;

Some attributes might conflict with other attributes or with

other budget entities’ responsibilities.

Possible list of clustered attributes

Relationship with other budget entities

Revenue assignment

Expenditure assignment

Financial Management regulation

Budget execution rules

Audit regulation

Regulation and Business Rules Regulation and Business Rules must consider:

BE attributes

Revenue assignment;

Expenditure Assignment;

Program management structure;

Fiscal and administrative decentralization/ decentraltion

rules;

Specific rules

Revenue Assignment

Who is responsible for setting the rate for own source revenue ?

Who is responsible for collecting the revenue?

Who is responsible for transferring the funds?

Who is responsible for administering the funds?

Is the revenue assignment generating some kind of imbalance and what are the consequences?

Is there any form of revenue sharing?

Expenditure Assignment Who is responsible for delivering service and what is the

system of delegation of authority?

Who is responsible for administering the service (resource

allocation and managerial decision)?

Who is responsible for financing the services?

Who is responsible for setting standard, regulations or

policies guiding the provision of service?

Fund Transfer Rules

Fund transfer rules must be specified in accordance with the model of fiscal decentralisation and the managerial structure of budget programmes;

Fund transfers can be direct or indirect;

Funds must take the shortest possible road from the source to the end users;

Fund transfers rules must follow the Treasury Single Account regulation. In case of conflict, regulations must be harmonized.

Programmes can be funded at the central level, or provincial, district or municipal levels or by a mix of funds;

Budget norms can be associated to certain types of BE;

Block grants can be used.

Part 4 Implementation of the Budget

Entities Regulatory Framework

BEFR Development

Preparation of a BERF is generally slow because several types of analysis and

framework development have to run in parallel, including:

FMIS database design or customization;

Revision of Budget Classification and Chart of Accounts;

Fiscal decentralization framework and revision of the

expenditure assignment;

Intergovernmental Fund Transfer Policy Framework

Revision of budget control procedures.

BE and Financial Management

Information System

The Budget Entity Nomenclature must be embedded in the

budget classification linking with the chart of accounts for

reporting;

Business procedure used by FMIS must be revised to become

compatible with the BE Regulatory Framework;

The BE Regulatory Framework must be compatible with FMIS

technical requirements and avoid unnecessary customization.

BERF and Database Design

There is a similarity between the design of a Budget Entity

Regulatory Framework and the preparation of an Entity

Relationship Model necessary for database design.

In case that an FMIS implementation is considered the two types

of analysis must go in parallel to generate maximum synergies.

Entities and Attributes A Budget Entity and an Administrative Entity are both

Database entities. They differs only in the nature of their

attributes.

Attributes of Budget Entities are business rules that are

captured in the Database Functional Model, not in the Entity

Relationship Model.

Attributes of Database Entities are set of data hold in

database tables.

Budget Classification & Chart of Accounts

Budget entities must be identified in the Budget Classification for the purpose of budget accounting;

Reform of the accounting system must go hand in hand with the design of the BEFR prior to FMIS implementation;

Accounting rules must be prepared in relation with the BEFR and with BE entities;

Budget Entities that require a subsidiary ledger must be identified;

Budget Entities that require a transit account must be identified.

Budget Control Procedures and Audit

Budget control procedures must be fully revised as part of the BERF

design.

Budget control procedures are especially affected by management

autonomy of programs

A rigid separation between managers and accountants becomes more

difficult to maintain (French system: Ordonateur/Comptable);

Transfers of funds must leave an audit trail;

Training of auditors must be part of the BEFR implementation plan.

THANKS