Budget Classification Design and Implementation: Tajikistan’s Administrative Segment

by John Zohrab, Robert Brudzynski and George Gridilian

Introduction

Purpose of Article

The purpose of this article, which is based on information available as ofSeptember 2010, is to document the design and implementation of the administrative segment of Tajikistan’s new budget classification during 2007-10, with the following ultimate objectives:

  • To expand the publicly-available literature on the design and implementation of new budget classifications. This literature is very limited, notwithstanding the importance of the budget classification in each public financial management (PFM) system and the importance of PFM reform in economic and public sector management reform;
  • To explain the actual and potential significance of the administrative segment in budget management. Some countries do not have a well developed administrative segment and its significance in practice may be unclear. Moreover, the publicly-available literature on budget classifications does not discuss the criteria for an effective administrative segment; and
  • To support Tajikistan’s PFM reform by preserving one part of institutional memory of the reform process. Tajikistan has embarked on a majorreform, the success of which will depend in part on careful attention being paid to each of its elements. Preserving its institutional memory should assist this.

Disclaimer

The authors worked on the design and implementation of Tajikistan’s administrative segment during the relevant period, respectively on behalf of the International Monetary Fund (IMF) via the JSA technical assistance program funded by the Government of Japan and the European Commission Budget Support Programme (ECBSP). The Ministry of Finance of the Republic of Tajikistan (MOF) has permitted the use for this article of certain official documents not publicly available, including technical assistance reports, for which the authors are grateful. However, the views in this article are the sole responsibility of the authors and do not necessarily reflect the views of the MOF, the IMF, the EC or the Government of Japan.

Previous Classification

The previous budget classification of the Republic of Tajikistan was approved in December 2004 and came into force on January 1, 2005[1]. It was based on the IMF’s Government Finance Statistics (GFS) 1986 framework[2] and comprised 7 segments:

  • Table A: Government Revenue and Grants;
  • Table B: Functional Classification of Expenditures;
  • Table C: Economic Classification of Expenditures and Lending Minus Repayments;
  • Table D: Financing by Type of Debt Holder;
  • Table E: Financing by Type of Debt Instrument;
  • Table F: Outstanding Debt by Type of Debt Holder; and
  • Table G: Outstanding Debt by Type of Debt Instrument.

It did not include an administrative or fund segment.

The functional expenditure segment, Table B, comprised three levels: (i) major groups; (ii) groups; and (iii) sub-groups. It comprised 14 major groups (e.g. Social Insurance and Protection), 48 groups (e.g. Social Protection) and 173 sub-groups (e.g. Institutions for the Elderly).

The economic expenditure segment, Table C, comprised four levels: (i) major groups; (ii) groups; (iii) sub-groups; and (iv) sub-sub-groups. There were three major groups: current expenditures; capital expenditures; lending minus repayments. There were 9 groups (e.g. Payments for Goods and Services), 26 sub-groups (e.g. Payments for Public Utilities) and 86 sub-sub-groups (e.g. Electricity).

A program segment that was not part of the approved budget classification was also used. It comprised one level and was used as if it were the fourth level of the functional segment. There were typically more than 500 programs, with the number changing from year to year. Most were not programs in the accepted sense, but were projects.[3] According to accepted definitions, a program is a set of activities that meets the same set of specific objectives, an activity is a subdivision of a program into homogenous categories and a project is a single, non-divisible activity with a fixed time schedule and a dedicated budget or activities.[4]

Programs were intended to be managed byKey Budget Organizations(KBOs). There were typically around 100 KBOs, with the number changing from year to year. Some of these were not government administrative units, but instead programs, projects, civil society organizations, state-owned joint stock companies, state unitary enterprises[5]and groupings of transfers.

In the absence of a formal administrative segment, the MOF used administrative groupings in several different arrangements:

  • Some programs were defined as administrative units;
  • Budget estimates were defined in terms of correspondents, which were budget organizations, groups of budget organizations or specific expenditures of budget organizations. In 2008, there were more than 1,500 correspondents for the republican budget;
  • Most KBOs were administrative units such as ministries, agencies, departments and budget organizations; and
  • Most ministries were designated as leading line ministries. Their task was to preparesectoral strategies and expenditure programs for the medium-term budget framework (MTBF) and annual budget, and to monitor their execution.In doing so, they exercised sectoral policy control over KBOs and other budget organizations. In 2007, 8 of the 14 central government ministries were leading line ministries.

These arrangements illustrated the lack of: (i) well-defined program and administrative segments that were independent from each other; (ii) an administrative segment requiring each budget estimate to be expressed in terms of a uniformly-defined administrative unit; and (iii) an administrative segment arranged as a logical hierarchy.

Because of these fragmented and heterogeneous administrative arrangements, the budget preparation process was in practice concentrated in the MOF, and the role of line ministries was limited. Budget expenditures were appropriated by the categories of the functional expenditure segment, which were broken down by the correspondents, and which were in turn broken down by the categories of the economic expenditure segment. Control in budget execution via the treasury was exercised in terms of the individual budget estimates and correspondents.

Analysis of Problem

For reasons of generality, it is probably best to analyze the problem of a non-existent or inadequate administrative segment of the budget classification from the perspective of fiscal transparency, and in particular the concept of fiscal clarity.

Fiscal Clarity

The concept of fiscal clarity is fundamental to the IMF’s fiscal transparency code and in fact several elaborations of fiscal clarity in the code, which are reproduced in Box 1, relate directly to the problem of the administrative segment[6]:

Box 1. Fiscal Clarityand the Administrative Segmentin the Fiscal Transparency Code

1.1 The government sector should be distinguished from the rest of the public sector and from the rest of the economy, and policy and management roles within the public sector should be clear and publicly disclosed.
1.1.1 The structure and functions of government should be clear.
1.1.3 The responsibilities of different levels of government, and the relationships between them, should be clearly specified.
1.2 There should be a clear and open legal, regulatory, and administrative framework for fiscal management.

As Box 1 shows, the concepts of openness and public disclosure in the code are distinct from the concept of clarity. Openness means general availability short of public disclosure, whereas clarity means intelligibility. Because the openness and public disclosure of unintelligible material are counterproductive, clarity should precede openness and public disclosure. On the other hand, openness and public disclosure tend to enhance clarity, because they tend to require that the material be expressed in terms that maximize intelligibility.

The code itself does not define fiscal clarity. However, the IMF’s fiscal transparency manual that is a companion to the code does define fiscal clarity in a number of different contexts. If the most well-defined parts of each such definition are combined with one another, it is possible to derive an all-encompassing definition of fiscal clarity. According to this, fiscal clarity exists where any particular fiscal material is defined by an internationally-accepted, standardized and uniformly-codified classification that is based on a set of stable a priori concepts that are objective, reliable, relevant, simple and able to be expressed numerically. All the separate definitions of fiscal clarity in terms of intelligibility in the different sections of the manual can be derived from this all-encompassing definition. It follows from this that there is comprehensive clarity in the fiscal system in terms of intelligibility if there is a comprehensive set of classifications that have these characteristics.[7]

Implications of Code and Manual

It follows from the IMF’s fiscal transparency code and manual that the administrative segment of a budget classification is required to the extent necessary to define, in terms of an internationally-accepted, standardized and uniformly-codified classification that is based on a set of stable a priori concepts that are objective, reliable, relevant, simple and able to be expressed numerically:

  • The policy and management roles within the public sector;
  • The structure and functions of government;
  • The responsibilities of different levels of government and the relationships between them; and
  • The administrative framework for fiscal management.

Reform Context

Donor Perspectives

In 2005, an IMF technical assistance mission reviewed Tajikistan’s PFM system in terms of the then recently-introduced Public Expenditure and Financial Accountability (PEFA) PFM Performance Measurement Framework. In its unpublished report,[8] it made four points relevant to the administrative segment:

  • A list of primary budget recipients is used in budget presentation, appropriation, execution and reporting; and a list of budget organizations is used in the MOF’s apportionment of the appropriated budget and in budget execution and reporting;
  • These lists are not approved as part of the budget classification and they are not structured as classifications;
  • The absence of a proper independent administrative segment prevents analysis and monitoring of expenditure by administrative responsibility; and
  • The absence of a proper independent administrative segment was exemplified by the inability of the authorities to identify readily the numbers of primary budget recipients and budget organizations.

In 2006, an IMF fiscal transparency mission reviewed Tajikistan’s compliance with the IMF’s fiscal transparency code. In its published report,[9] it reiterated the above points and in addition:

  • Noted that the budget classification does not include an administrative segment to allow a clear tracing of responsibility to parliament for the collection and use of public funds;
  • Noted that parliament approves the budget by broad functional categories but actual allocations are made to individual spending units during the year administratively by the MOF;
  • Noted that most countries have relatively sound administrative segments, often to sub-departmental levels, to allow detailed specification of administrative responsibilities. Although a list of KBOs is used by the MOF in Tajikistan for apportionment of the appropriated budget and in budget execution and reporting, there is a difference between this list and a hierarchical administrative segment based on a logic to reflect the administrative hierarchy and structure (e.g., a line ministry being at the top or first level and the lowest level administrative unit executing the budget being at the bottom of the hierarchy); and
  • Recommended that the authorities develop a hierarchical administrative segment based on a logic reflecting the administrative hierarchy and structure for the purpose of: (i) parliamentary authorization of budgetary appropriations by administrative units and (ii) providing a clear framework for allocating budgets and monitoring their execution at various levels of budget organizations.

In 2007, an IMF technical assistance mission reviewed Tajikistan’s budget classification. In its unpublished report,[10] it elaborated on the points made in the previous missions relevant to the administrative segment, as follows:

  • Budget allocations to individual budget organizations are shown within the respective functional segment code. However, each budget organization cannot be identified in a distinctive manner because at the lowest level of the functional segment hierarchy, i.e., the sub-program or the sub-function for the republican and local budgets respectively, there could be multiple budget organizations. For example, under the subprogram “hospitals, centers and clinics” (functional classification code: 5.1.2.8.1), there are 12 hospitals/clinics each being attributed the same code; and
  • There are also instances when a lowest level budget organization performs multiple

functions, e.g., the central apparatus of the ministry of health, which is a budget

organization, administers three expenditure estimates having allocations under different functional categories (functional codes 5.4.1 and 5.4.4). Therefore, in the absence of an independent and hierarchical administrative segment, not only a clear tracing of responsibility before parliament (or a local legislature) for the collection and use of public funds is rendered difficult, but also any attempt to uniquely identify each unit administering a separate budget for the purpose of administrative accountability is essentially frustrated.

Other donors, notably the EC, the World Bank and the Swiss State Secretariat for Economy (SECO), advanced similar perspectives. In particular:

  • The EC was sponsoring the development of medium-term and program budgeting in Tajikistan’s government sector. It recognized that the programs, and hence the medium-term budgeted projections, needed to be anchored in a logically-structured administrative segment for accountability reasons. Hence, it saw this as essential for the long-term sustainability of medium-term and program budgeting once they had been introduced;
  • The World Bank was preparing a major PFM reform project including a computerized Integrated Financial Management Information System (IFMIS). It recognized that a logically-structured administrative segment was an essential feature of the coding structure of the IFMIS, and hence was essential for the full effectiveness of its project. Indeed, the 2007 IMF report suggested that upgrading the budget classification should be a precondition for the introduction of medium-term budgeting and a computerized IFMIS; and
  • The 2007 PEFA sponsored by the World Bank and SECO noted the absence of an administrative segment. It assigned the lowest rating D to the performance indicator Classification of the budget and stated that this rating would improve significantly if an administrative segment were implemented.[11]

Decision to Proceed and Context

The 2005 FAD TA mission appears to have been the first occasion on which a major donor had advised the authorities formally of the importance of establishing a logically-structured administrative segment. Moreover, the Fiscal ROSC mission in 2006 helped them to resolve their internal debate. In January 2007, before the publication of the Fiscal ROSC report, the Minister of Finance requested the 2007 FAD TA mission to assist the MOF to develop a hierarchical administrative segment defining both the budget appropriations approved by Parliament in terms of ministries and agencies and the budget allocations executed in terms of budget organizations.[12] The Minister’s letter amounted to a decision in principle to proceed with a new administrative segment, subject to further detailed work on its design.

Several other factors also played a role:

  • The PEFA, the World Bank’s planned PFM reform program and PFM Strategy. In 2006, preparations for the World Bank’s Public Financial Management Modernization Project (PFMMP) began to gather pace. After the IMF’s Fiscal ROSC and the PEFA, the introduction of a new administrative segment became an accepted part of World Bank thinking on preparations for the PFMMP.[13]In order to control all the PFM reform activities included in the PFMMP as well as those supported by other donors outside the PFMMP, the authorities were encouraged by donors to adopt a formal PFM Strategy in 2008.[14] This integration of the intention to introduce the new administrative segment into the PFM Strategy meant that it received sufficient focus and resources to enable it to be achieved within a reasonable timeframe;
  • The ECBSP’s work. In early 2007, the ECBSP began detailed work on a new administrative segment. However, this work did not gain traction. It appeared initially to the ECBSP that the authorities were not committed, but it subsequently emerged they were waiting for the FAD mission later in 2007 to elaborate the conceptual design of the new segment before undertaking detailed work. In conjunction with FAD, the ECBSP resumed detailed work on the new segment in late 2007. This turned out to be more intensive than expected, and so the ability of the ECBSP to deploy local resources turned out to be more important for preparing the final decisions to proceed than might have been expected originally.

The ECBSP were also instrumental in assisting the authorities to amend the Law on State Finances in 2008 by inserting a paragraph requiring the 2010 budget to be presented according to the new administrative segment. This played a key role in finalizing the decision to proceed; and

  • Information Technology (IT) developments: The MOF’s existing budget preparation system was Microsoft Access-based and the Treasury’s existing budget execution system was Foxpro-based. For practical reasons, the changes to these systems to accommodate the introduction of the new administrative segment had to be done at the same time as other changes that affected the coding structure of the system functionality. In addition, the timing of the changes and how they were effected was dictated by the availability of donor funding and its terms. The overall impact of the IT developments was to delay beginning the introduction the new administrative segment but to make it less easy to stop or reverse once the IT development process had got under way.

Principles of New Segment

2007 IMF Report Principles

The 2007 IMF report sets out the essential characteristics of a sound budget classification, four of which relate directly to the design of the administrative segment, as follows:

I.The classification should allow a clear tracking of responsibility for the collection and use of public funds. The administrative segment should identify the entity that spends the public funds—such as the ministry of education, health and defense or, at a lower level, schools, hospitals and individual defense establishments;

II.The different segments of the classification should be independent of each other. For example, the administrative segment should be independent of the functional and economic segments. This allows the classified data to be analyzed in a flexible way, according to the administrative unit concerned, as well as by function or economic characteristic.