Part 1Budget Entities:Definition, types hierarchy andnomenclature
What is a Budget Entity RegulatoryFramework A methodology for identifying BE by types and for organizingthem in a hierarchical structure; A set of policies and procedures that will apply to BE for budgetformulation, budget execution, accounting and reporting; An instrument for organizing the transition of a budget systemtoward programme budgeting and result-based budgeting.
Objectives of a Budget Entity RegulatoryFramework?Clear identification of budget entities and of rules associated with them isfundamental for: Reorganizing the budget system in line with the structure of a new FMIS databaseand assisting in defining the system requirements; Designing a good budget classification system; Having a good system of delegation of authority and responsibilities (knowing whois 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 ProgrammeBased Budgeting Programmes are indentified as Budget Entities; Role ofAdministrative Units involved in programmeadministration is clearly defined; A necessary segregation of duties and responsibilities isintroduced between Finance Departments, Planning Departmentand Programmes in the management of funds.
BERF as Foundation for Result-basedBudgeting BE must be linked to an identified sector policy framework (Twoor more policy frameworks, means confusion) To each BE is assigned a number of objectives and a set ofindicators; Business rules associated to the BE must be a direct consequenceof the objectives and indicators. Clear segregation of duties is necessary for accountability(Business rules);
The Five Dimensions of a Budget EntityRegulatory FrameworkBudget EntityNomenclature&HierarchyBudget execution RulesRegulation & Business RulesFundTransfer RulesBudget Formulation Rules
Prerequisites Budget classification linking to the chart of accounts Robust and efficientTreasury 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 ownindependent budget (ex: Road Fund) not consolidated into thegeneral budget but depositing funds on theTreasury SingleAccount. Others to be defined if necessary.
How to identify budget entities One of the function of the BE regulatory framework is toestablish 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 administrativefunctions including policy making; BE must play a role in the achievement of the Administration’sobjectives 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 anAdministrative Unit becauseadministrative units have no responsibility in providing servicesto the public. Typically Business Units are involved in budget preparation andbudget execution; Different Budget Units can be used for the channeling of fundsfrom the central level to the end-user level. IdentifyingAdministrative Units involved in the process, andrationalizing their role, is part of the design of the Budget EntityFramework.
Administrative Units Budget Entities should be identified in the Budget Classification andshould have accounting rules; Administrative Units have only accounting rules; Accounts ofAdministrative Units are only transit accounts (Ex:account of the provincial directorate of the Ministry of Education incharge 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 budgetentities and an administrative units for different functions. Such casesmust be eliminated as much as possible as they are signs of possibleconflict of responsibilities.
Part 2Budget Entities, fiscaldecentralization and programmebudgeting
Fiscal Decentralization and BudgetEntities (1) BE Regulatory Framework requires a clear choice of model(devolution, decentralization or deconcentration). Mix modelsalways create problems; Revenue assignment and expenditure assignment must be in linewith the fiscal and administrative decentralization model chosen; The managerial structure of budget programs should becompatible with the model of administrative decentralisationmodel;
Fiscal Decentralization and BudgetEntities (2) Budget Entity Hierarchy must be modeled on thedecentralization system; Business rules associated to BE must be fully in line withdecentralization regulation and policy; The system of intergovernmental transfers must be adjusted tothe Business Entity Framework if necessary as long as it does notviolate any principle of fiscal decentralization;
Identifying Concordance betweenAdministrative Structure andProgramme Structure Programs are themselves a set of budget entities; The budget entity hierarchy must integrate program organization; Program organization must be in line withdecentralization/deconcentration principles; Program management structure must use as much as possible existingadministrative structure; Administrative structures not part of the program managementstructure can be used for the channeling of funds.
What is the methodology for BERF?1. Identify budget entities;2. Group budget entities hierarchically;3. Identify for each entities “attributes” for the five dimensionsalready identified;4. After analyzing all attributes across all budget entities, thengroup them in logical clusters consistent with the countrylegislation and regulation.5. Organize the segregation of functions, duties andresponsibilities between the different BE and the differentAdministrative Units
Issues to be considered Managerial structure and delegation of authority (part of theexpenditure 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 budgetentities. Not all attribute are legitimate. Illegitimate attribute shouldbe eliminate in the BERF and in business practices; Some attribute should be questioned because they might because of inefficiency; Some attributes might conflict with other attributes or withother 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 RulesRegulation and Business Rules must consider: BE attributes Revenue assignment; ExpenditureAssignment; Program management structure; Fiscal and administrative decentralization/ decentraltionrules; 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 whatare the consequences? Is there any form of revenue sharing?
Expenditure Assignment Who is responsible for delivering service and what is thesystem of delegation of authority? Who is responsible for administering the service (resourceallocation and managerial decision)? Who is responsible for financing the services? Who is responsible for setting standard, regulations orpolicies guiding the provision of service?
Fund Transfer Rules Fund transfer rules must be specified in accordance with the model offiscal decentralisation and the managerial structure of budgetprogrammes; Fund transfers can be direct or indirect; Funds must take the shortest possible road from the source to the endusers; Fund transfers rules must follow theTreasury SingleAccountregulation. In case of conflict, regulations must be harmonized. Programmes can be funded at the central level, or provincial, districtor municipal levels or by a mix of funds; Budget norms can be associated to certain types of BE; Block grants can be used.
Part 4Implementation of the BudgetEntities Regulatory Framework
BEFR DevelopmentPreparation of a BERF is generally slow because several types of analysis andframework development have to run in parallel,including: FMIS database design or customization; Revision of Budget Classification and Chart ofAccounts; Fiscal decentralization framework and revision of theexpenditure assignment; Intergovernmental FundTransfer Policy Framework Revision of budget control procedures.
BE and Financial ManagementInformation System The Budget Entity Nomenclature must be embedded in thebudget classification linking with the chart of accounts forreporting; Business procedure used by FMIS must be revised to becomecompatible with the BE Regulatory Framework; The BE Regulatory Framework must be compatible with FMIStechnical requirements and avoid unnecessary customization.
BERF and Database Design There is a similarity between the design of a Budget EntityRegulatory Framework and the preparation of an EntityRelationship Model necessary for database design. In case that an FMIS implementation is considered the two typesof analysis must go in parallel to generate maximum synergies.
Entities and Attributes A Budget Entity and anAdministrative Entity are bothDatabase entities.They differs only in the nature of theirattributes. Attributes of Budget Entities are business rules that arecaptured in the Database Functional Model, not in the EntityRelationship Model. Attributes of Database Entities are set of data hold indatabase tables.
Budget Classification & Chart of Accounts Budget entities must be identified in the Budget Classification forthe purpose of budget accounting; Reform of the accounting system must go hand in hand with thedesign of the BEFR prior to FMIS implementation; Accounting rules must be prepared in relation with the BEFRand with BE entities; Budget Entities that require a subsidiary ledger must beidentified; 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 BERFdesign. Budget control procedures are especially affected by managementautonomy of programs A rigid separation between managers and accountants becomes moredifficult 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.