## cr1882 ## Source details **Canonical URL:** [cr1882](https://www.imf.org/-/media/files/publications/cr/2018/cr1882.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1882.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1882.pdf.json) --- ### Mission background and participants - FAD technical assistance mission in Warsaw: October 26 – November 8, 2017. - MoF senior officials who met with the mission included Leszek Skiba; Katarzyna Szarkowska; Joanna Stachura; Agnieszka Stachniak; Piotr Dragańczuk; Justyna Adamczyk; Elżbieta Milewska; Barbara Brodowska-Mączka; Agata Harbaty; Anna Grzegrzółka; Iwona Fudała-Poradzińska; Anna Demusiak; Marzena Malinowska; Katarzyna Mocarska; Bartosz Staszewski. - External participants included representatives from National Bank of Poland, Central Statistics Office, Capital City of Warsaw, Social Security Institution. - Riccardo Ercoli, Project Manager for Poland Structural Reform Support Service, European Commission, joined Oct 30–31, 2017. - Technical workshops held with Ministry of Internal Affairs and Administration; Ministry of Family, Labour and Social Policy; Mazovian Voivodship Office; Social Security Institution; Ministry of Infrastructure and Construction; relevant MoF budget departments. ### Purpose and scope - Objective: support implementation of Poland’s budget system reform program (approved by the Council of Ministers in 2016) with emphasis on: - Introduction of a medium-term budget to help achieve the medium-term objective of reducing the structural deficit to one percent of GDP by 2021. - Reform of the chart of accounts (CoA) and budget classification to improve consistency and international reporting. - Built on February 2017 FAD mission guidance and prior World Bank support for CoA reform. ### Key activities and methodological support - MoF prepared first round of forward estimates in March 2017 as initial step toward a medium-term budget. - Mission ran three-day workshops with three ministries representing: - Ministry of Internal Affairs: largely current expenditures of agencies (police and firefighters). - Ministry of Family, Labor and Social Policy: demand-driven entitlement programs delivered through budget or Special Purpose Funds (e.g., Social Insurance Fund). - Ministry of Infrastructure and Construction: most capital expenditure, discretionary, uses EU and extra-budgetary funds. - Mission provided methodology and template, inputted detailed budget data, and applied key price and volume parameters. ### Observations on current systems and issues identified - Forward estimates: - Bottom-up, no-policy change forecasts for each agency over the coming three years; not budget bids or final allocations. - Intended to provide early warning of expenditure dynamics and enhance budget negotiations and assessment of fiscal space. - Chart of accounts (CoA) and budget classification issues: - No clearly defined administrative segment; organizational structures spread across segments, complicating aggregation and consolidation. - Fragmented system with four CoAs separated from the budget classification; financial statements not fully consistent with international requirements. - Sections and chapters mix organizations, programs and funds; paragraphs mix source of funds and cash flows with economic classification. - Need for a Standard Chart of Accounts (SCoA): - Proposed to "fix the plumbing" of government financial information, link government reports, and improve accounting and budget classifications. - Builds on seven-segment SCoA architecture proposed by the World Bank while prioritizing user needs. - Requires balance between standardization at higher levels and flexibility at lower levels; careful consultation and ongoing interaction with users required. ### Cross-cutting issues identified in workshops - Wages: - Recommend no wage increases in budgetary holders’ wage bills, aligned with MoF approach. - Include provisions for future increases within a central contingency reserve based on macroeconomic forecasts. - Entitlement programs: - Use existing detailed projection models within agencies/funds; ensure indices and volume parameters align with central macroeconomic assumptions. - Capital projects: - Differentiate between major and minor capital projects. - Incorporate major projects in the estimates only once Council of Ministers (CoM) approval is given. - Continuously update spending profiles and incorporate a construction market price parameter. ### Key recommendations and timing Forward Estimates - 1.1 Develop methodological guidelines to ensure consistency of forward estimates (Feb 2018). - 1.2 Leave nominal wage rates fixed, include provision for future wage decisions within contingency reserve (Feb 2018). - 1.3 Assign responsibility for March 2018 Forward Estimates to Budget Departments, coordinated by State Budget Department (Dec 2017). - 1.4 Provide detailed guidance on treatment of capital spending, differentiating minor and major capital projects (Feb 2018). - 1.5 Establish central validation process for forward estimates within MoF, including review of methodologies and analysis of major variations (Mar/Apr 2018). Standardized Chart of Accounts - 2.1 Define conceptual structure and process for the new SCoA, attention to user needs and international standards (Nov 2018). - 2.2 Communicate pre-conditions, assumptions and implications of SCoA project, including accounting standards and staff allocation (Apr 2018). - 2.3 Staff a SCoA working group to assess user needs and design SCoA structure (Mar 2018). - 2.4 Develop an implementation strategy for SCoA, addressing IT requirements and change management (Jan 2020). --- ### Definition and scope of no-policy-change and forward estimates - Definition proposed: "The level of spending that will continue to occur over the next three years in the absence of any new or amended laws, decisions by the CoM, or by the MoF." - Default presumption: continuation of the current level of services where policy position unclear. - If legislation defines a service level but budget does not meet it, use current budget funding level as indicator of current government policy. - EC guidance for Convergence Program: estimates “should include all interventions by the government to change past policy orientations that is specified in sufficient detail, as well as adopted or at least credibly announced, and has a direct incremental budgetary impact compared to the baseline.” - Coverage guidance: - Forward estimates should be as comprehensive as possible and include all entities with direct or indirect impact on expenditure subject to the key fiscal target. - For Poland, coverage applies to all entities and funds that fall within the Stabilizing Expenditure Rule (SER). - Coverage should be extended to entities outside the SER whose spending has budgetary implications. ### Forecasting transfers to entities outside the State Budget - For entities receiving top-up transfers contingent on funding needs, forecast entity’s overall financial position may be necessary (example: Social Insurance Fund (FUS)). - For fixed or formula-driven transfers, it is not necessary to forecast the external entity’s overall financial position (example: subsidies to Polish State Railways (PKP) for youth passes). ### Comparison with other forecasts and integration - Multiple medium-term fiscal forecasts exist (top-down and bottom-up) and have not been aligned with later budget estimates. - Incorporating forward estimates within top-down fiscal forecasts will align the Convergence Program with the annual budget. - Macroeconomic Policy Department (MPD) provides top-down forecasts included in Convergence Program; these meet requirements for budget year but ignore much line ministry information that bottom-up forward estimates capture. ### Box 2 — Sectoral coverage in Poland (key figures and definitions) - General Government sector: - Defined in accordance with ESA methodology. - General government spending represented 41.2 percent of GDP in 2016. - SER covers around 90 percent of general government expenditures. - Public Finance sector: - Includes about 90 percent of the general government sector. - Special Purpose Funds represent more than half of the spending of the Public Finance Sector. - Social Insurance Fund (largest Special Purpose Fund) accounts for spending of PLN 217bn in 2017, of which PLN 47bn was sourced from State Budget transfers. - State Budget: - Includes expenditure of state budget units and other expenditure not assigned to any state budget unit. --- ### Pilot applications: three ministries — approaches and findings Ministry of Internal Affairs - 2017 Ministry budget: PLN 21.5bn (1.1 percent of GDP). - Major components: - Part 42 — Internal Affairs current expenditure: PLN 10.9bn, of which 80 percent is wages and salaries. - Pensions to former public security service members: PLN 8.9bn. - Minor capital purchases: 2 percent of the Ministry’s budget. - Proposed forward estimates approach: - No volume adjustment for law-and-order services in no-policy-change baseline, except where externally driven. - Separate wage and non-wage components for price adjustments: wages held flat in nominal terms; non-wage indexed by broad inflation measure such as CPI unless sector-specific index justified. - Adjust for past CoM decisions not reflected in base (example modernization funding: PLN 0.47bn in 2018 and PLN 0.97bn in 2019). - Model mandatory pension payments using eligibility, retirements, mortality, income, and statutory indexation (indexation: inflation adjustment plus an increase representing 20 percent of the growth in real wages in the economy in the previous year). - Findings: Ministry broadly accepted no-policy-change methodology; forward estimates prepared broadly applying appropriate model. Ministry of Family, Labor and Social Policy (social spending) - Spending within portfolio budgeted at PLN 265bn (14 percent of GDP) in 2017. - Dominated by mandatory entitlements: - Payments from FUS: PLN 217bn; FUS receives PLN 47bn from State Budget; remainder covered by social security contributions. - Active programs figures: - Labor Fund programs for the unemployed: PLN 6.6bn. - State Fund for the Rehabilitation of Disabled Persons: PLN 4.9bn. - Proposed approach: - Use detailed models prepared by Ministry or ZUS forecasting beneficiaries with demographic and macroeconomic assumptions. - Link growth projections to macroeconomic forecasts (e.g., unemployment benefits to unemployment rate). - Findings and issues: - Forward estimates broadly consistent with proposed approach. - Need for detailed reporting on methodology and assumptions using central MoF templates. Ministry of Infrastructure and Construction (capital spending) - General government capital spending forecast for 2017: PLN 81bn (4.2 percent of GDP). - Central government: 60 percent of capital spending. - Local government: 40 percent of capital spending. - Capital spending under Ministry responsibility: PLN 21bn (1 percent of GDP). - Direct state budget capital spending: around PLN 3bn for road and railway infrastructure. - State Budget largest capital components: defense (around PLN 10bn) and road and railway infrastructure (around PLN 3bn). - Proposed approach: - Include future operational and maintenance costs of approved projects. - Use CoM-approved National Roads Construction Programme and National Railway Programme as firm policy for road and rail. - Use construction price index (producer price index or GDP deflator for construction) rather than CPI where appropriate. - Findings and issues: - Forward estimates accuracy depends on updated costs and timing for major projects; National Road and Railway Programs prepared in 2015 require regular updating. - Additional maintenance costs from new infrastructure should be included using Regulatory Impact Assessment estimates. --- ### Cross-cutting technical issues and guidance Wages and salaries - March 2017 approach: keep nominal wages flat in forward estimates; after aggregation estimate fiscal impact of overall public sector wage increase of 1 percentage point, but flat wages remained working assumption. - Risks: flat wages may be unrealistic given tightening labor market and low unemployment; keeping flat understates expenditure and overstates fiscal position. - Proposed alternative: include provision for future wage increases in a contingency reserve calculated using a projected wage price index; migrate amounts to line ministries when decisions made. Price indexation - General rule: use broad measure of inflation (e.g., CPI) unless sector-specific input price divergence justifies alternative index. - Recommend providing sector-specific price indices centrally to ensure consistent treatment across ministries. Capital investment - Use threshold to delineate major vs. minor projects; major projects constitute new policy. - Forward estimates for major projects should be based on up-to-date costs and time profiles of agreed projects. - Include additional maintenance costs required by new infrastructure in forward estimates based on Regulatory Impact Assessment. - For minor projects, use current levels or historical averages (e.g., prescribed five years) adjusted for inflation. Disaggregation and classification - Level of disaggregation should balance complexity and tractability; aim to break expenditure to reflect different price and volume drivers. - Current budget classification does not lend itself to prioritization; budget departments sometimes developed alternative groupings cutting across parts, sections and chapters as a workaround. - Development of a new budget classification is needed to provide a consistent framework. --- ### Assuring consistency and institutional arrangements for forward estimates - Central validation: - Central review by MoF recommended to ensure consistency and to compare forward estimates with MPD top-down forecasts. - Require access to documentation on methodology, assumptions and macroeconomic forecasts; documentation should use a standard proforma. - Engagement with line ministries: - Early-stage joint preparation by MoF and line ministry; progressive move to parallel preparation and reconciliation. - Timeframes and tasks (key milestones) - Before March 2018: engage remaining ministries; document methodologies; analyze for consistency. - March 2018: Budget departments to prepare forward estimates with line ministries for budget discussion. - After March 2018: compare forward estimates to MPD top-down forecasts; reconcile differences; possibly use forward estimates to inform Convergence Program. - March 2019: Budget departments and line ministries both prepare forward estimates; formally reconcile differences between 2018 and 2019 vintages. - For 2020 budget: first estimates for budget year should be based on rollover of March 2019 forward estimates. - Broader MTBF reforms: - Costing of new policy proposals: March 2018–June 2019 — medium-term cost estimates for all new policy proposals and changes to existing policies. - Spending reviews: ongoing — give clear savings targets, fully integrate with budget process, staff with MoF, line ministries, and possibly external experts. - MTBF design aspects to resolve: basis of medium-term expenditure commitment; multi-year prioritization; control mechanisms to enforce commitments; accountability mechanisms to establish credibility. --- ### Standardized Chart of Accounts (SCoA) — rationale, architecture, and implementation Rationale and background - A CoA underlies classification, recording and reporting of financial plans, activities, flows and stocks; should comply with international financial and statistical reporting standards. - Standardizing CoA across general government improves consistency, aggregation and consolidation; requires centralized control over development and changes. - SCoA reform is part of CoM six-point plan for budgetary reforms (July 2016); World Bank engaged on revised SCoA since Oct 2016. - Proposed SCoA reform phases: - Phase 1: development of an integrated SCoA (scope of report). - Phase 2: IT reforms to support implementation. Proposed architecture — seven segments - World Bank seven-segment proposal forms basis: - Administrative/Organization - Sector/Function - Source of Funds - Economic - Results/Program - Project - Geographic - Expected benefits: - Standardize across agencies; eliminate multiple use of same segment for different features. - Integrate current CoAs and budgetary classification; consistently identify segments for each transaction and include counterpart indicators. - Facilitate aggregation and consolidation of general government sector. Refinements and design considerations - Observations: - Distinction between grant and loan in Source of Funds may be redundant with economic segment. - Program and project could be sub-levels of Administrative/Organizational. - Location segment should allow for headquarter-based spending. - Levels in economic classification need full analysis of user needs. - Distinction between transactions and other economic flows (revaluations, volume changes) not yet provided; could be added as indicator. - Distinction between current and capital spending could be built into economic classification, including capitalization of own-account capital formation. - Identification of counterparts should be built into classification to facilitate consolidation. SCoA as building block and examples - SCoA enables integration and reconciliation of budgetary, financial and statistical reports. - Example: subsidies currently used broadly would be split correctly in economic subcategories (grants to extra-budgetary units; equity injections; subsidies; social benefits), enabling consistent aggregates across reports. Change management and stakeholder engagement - Users may resist change if unique needs are not preserved; many unique requirements are common across departments. - Important to determine user needs carefully and plan change management to alleviate resistance. - Roles and responsibilities must be clearly identified with timelines; involve MoF departments, representative line ministries, oversight bodies, external users (NBP, Central Statistics Office, Eurostat, IMF, OECD, World Bank). Preconditions, accounting standards, and resources - SCoA development is interdependent with other PFM reforms and IT reforms. - High-level formal agreement and political support required; formal agreement between Undersecretaries in MoF recommended. - Accounting policies are not standardized in Poland; legal acts and varied recording bases (cash vs. accrual) produce significant differences complicating consolidation. - EPSAS work at Eurostat may affect choices; IPSAS is practical reference although short-term adoption unlikely. - Resource implications: - Two-year development timeline ambitious; requires significant staff, time and IT resources. - Ministry staff expected to dedicate 50-80 percent of time; other members 20-40 percent. Workplan and timelines (indicative) - Agree and sign Memorandum of Understanding between MoF Deputy Ministers — Nov 2017 – Jan 2018. - Comply with pre-requisites (establish organization; decide roles; agree accounting standard) — Nov 2017 – Mar 2018. - Determine user needs — Apr 2018 – Oct 2018. - Determine segments of SCoA and coding structure — Nov 2018. - Seek CoM approval on conceptual design — Nov 2018. - Develop detailed classifications — Dec 2018 – Jun 2019. - Test and revise — Jun 2019 – Dec 2019. - Plan and agree roll-out strategy — Jan 2020 – Mar 2020. - Final approval of SCoA — Apr 2020. Testing, IT, and change management - Testing approaches: - Pilot implementation in selected entities while running old classifications in parallel. - Desk reclassification of existing data to test outputs. - IT implications: - Trezor system collates budget, plans and cash results; SCoA will require changes to Trezor and entity systems. - 2016 IT survey: about 700 diverse IT systems in 372 public sector entities. - 93 percent have feasibility to expand with new requirements. - 85 percent require changes by system providers. - 8 percent will be expanded by inhouse teams. - Almost 20 percent plan to modify or replace their systems—most planned these changes for 2017. - Full scoping mission recommended to determine IT reform needs. - Change management elements: - Assess readiness, communication strategy, training, feedback mechanisms, and support services (helpdesk, manuals). - Treat SCoA development as start of ongoing reforms; future changes should preserve core principles. ### SCoA recommendations (numbered) - 2.1 Investigate and decide conceptual structure and process for development of new SCoA: - Review and decide SCoA segments based on user needs. - Communicate full implications to stakeholders. - Decide and assign roles and responsibilities. - Formally agree reporting needs throughout fiscal cycle to be considered in SCoA design. - 2.2 Carefully consider and communicate pre-conditions, assumptions and implications: - Communicate practical implications to high-level decision makers. - Decide accounting standards, principles and policies guiding reforms. - Allocate sufficient resources (staff and IT) across relevant agencies for the envisaged two-year development. - 2.3 Set up and staff a SCoA working group to: - Assess user needs comprehensively and inclusively. - Develop SCoA framework and details based on user needs. - Test and revise draft SCoA as needed. - 2.4 Consider and plan for future work related to SCoA implementation: - Plan and agree implementation strategy and timelines. - Plan for IT reforms to support SCoA. - Plan and execute change management activities to support implementation, maintenance, and use of SCoA. --- *IMF Fiscal Affairs Department technical assistance mission report, Poland, October 26 – November 8, 2017.* ### PREFACE _________________________________________________________________________________________ 5 ### PREFACE ### Mission background and participants - A Fiscal Affairs Department (FAD) technical assistance (TA) mission took place in Warsaw from October 26 – November 8, 2017 in response to a request from the Ministry of Finance (MoF). - MoF senior officials met with the mission, including: Leszek Skiba, Undersecretary of State; Katarzyna Szarkowska, Director - Expenditure Policy Department; Joanna Stachura, Deputy Director - Expenditure Policy Department; Agnieszka Stachniak, Deputy Director - Accounting and Auditing Department; Piotr Dragańczuk, Deputy Director - State Budget Department; Justyna Adamczyk, Deputy Director - State Budget Department; Elżbieta Milewska, Deputy Director - Economy Financing Department; Barbara Brodowska-Mączka, Minister’s Counsellor - Economy Financing Department; Agata Harbaty, Minister’s Councillor - Expenditure Policy Department; Anna Grzegrzółka, Minister’s Councillor - Accounting And Auditing Department; Iwona Fudała-Poradzińska, Head of Unit - Macroeconomic Policy Department; Anna Demusiak, Head of Unit - Paying Authority Department; Marzena Malinowska, Head of Unit - Finance and Accounting Department; Katarzyna Mocarska, Head of Unit - Finances and Accounting Department; Bartosz Staszewski, Head of Unit - Expenditure Policy Department. - External participants and counterparts included: Tomasz Jędrzejowicz, Head of Unit - National Bank of Poland; Maria Jeznach, Director – National Accounts Department, Central Statistics Office; Mirosław Błażej, Director - Macroeconomic Studies and Finances Department, Central Statistics Office; Mirosław Czekaj, Treasurer - Capital City of Warsaw; Radosław Socha, Deputy Director - Social Security Institution; Marek Szymala, Deputy Director - Social Security Institution. - Riccardo Ercoli, Project Manager for Poland Structural Reform Support Service, European Commission, joined the mission during October 30–31, 2017. - The mission held technical workshops on forward estimates with staff from the Ministry of Internal Affairs and Administration, the Ministry of Family, Labour and Social Policy; the Mazovian Voivodship Office, the Social Security Institution, and the Ministry of Infrastructure and Construction, and the staff from the relevant budget departments of the MoF. - The mission acknowledges coordination and logistical support from Bartosz Staszewski and the IMF resident representative in Warsaw, Bas Bakker, and his staff. ### Purpose and scope of the engagement - Objective: Support implementation of Poland’s budget system reform program (approved by the Council of Ministers in 2016) with emphasis on: - Introduction of a medium-term budget to help achieve the medium-term objective of reducing the structural deficit to one percent of GDP by 2021. - Reform of the chart of accounts (CoA) and budget classification to improve consistency and international reporting. - This mission built on the February 2017 FAD mission guidance on delivering a medium-term budget framework and on prior World Bank support for CoA reform. ### Key activities and methodological support - The MoF prepared the first round of forward estimates in March 2017 as the initial step toward a medium-term budget. - The mission reviewed and refined forward estimates through three-day workshops with three ministries selected to cover representative portfolio issues: - Ministry of Internal Affairs: largely current expenditures of agencies (police and firefighters). - Ministry of Family, Labor and Social Policy: large, demand-driven entitlement programs delivered through budget or Special Purpose Funds (e.g., Social Insurance Fund). - Ministry of Infrastructure and Construction: most capital expenditure, discretionary, uses EU and extra-budgetary funds. - Provided methodology and template, inputted detailed budget data, and applied key price and volume parameters. ### Observations on current systems and issues identified - Forward estimates: - Are bottom-up, no-policy change forecasts for each agency over the coming three years and intended to provide early warning of future expenditure dynamics. - Are not budget bids or final spending allocations; they represent the cost of continuing existing policies and will be updated as new decisions and parameter revisions occur. - Enhance budget negotiations, assessment of fiscal space, and early identification of pressures. - Chart of accounts (CoA) and budget classification issues: - No clearly defined administrative segment; organizational structures are spread across a range of segments, complicating aggregation and consolidation. - Fragmented system with four CoAs separated from the budget classification; financial statements compiled based on these classifications are not fully consistent with international requirements. - Mixed classifications: sections and chapters mix organizations, programs and funds; paragraphs mix source of funds and cash flows with the economic classification. - Need for an SCoA: - A Standard Chart of Accounts (SCoA) is proposed to "fix the plumbing" of government financial information, link government reports, and improve accounting and budget classifications. - Builds upon the seven-segment SCoA architecture proposed by the previous World Bank report while prioritizing user needs. - Requires balance between standardization at higher levels and flexibility at lower levels; careful consultation and ongoing interaction with a broad range of users will be required. ### Cross-cutting issues and recommended treatments identified in workshops - Wages: - Provide for no wage increases in budgetary holders’ wage bills, aligned with MoF approach. - Include provisions for some future increases within a central contingency reserve based on macroeconomic forecasts to avoid prejudicing negotiations. - Entitlement programs: - Apply consistent treatment for demand-driven entitlement programs by using existing detailed projection models within agencies and funds, ensuring indices and volume parameters align with central macroeconomic assumptions. - Capital projects: - Differentiate between major and minor capital projects. - Incorporate major projects in the estimates only once Council of Ministers (CoM) approval is given. - Continuously update spending profiles and incorporate a construction market price parameter. ### Key recommendations (with timing as presented) Forward Estimates - 1.1 Develop a set of methodological guidelines to ensure the consistency of the forward estimates, particularly around price and volume parameters, separation of wage and non-wages and documentation of methodologies (Feb 2018). - 1.2 Continue to leave nominal wage rates fixed, in line with the approach adopted by MoF, but include a provision for future wage decisions within a contingency reserve (Feb 2018). - 1.3 Assign responsibility for the preparation of the March 2018 Forward Estimates to the Budget Departments, working with line ministries under the central coordination of the State Budget Department (Dec 2017). - 1.4 Provide detailed guidance on the treatment of capital spending, differentiating between minor and major capital projects (Feb 2018). - 1.5 Establish a process for the central validation of forward estimates within the MoF, which includes reviewing methodologies for consistency and analyzing major variations between vintages of forward estimates (Mar/Apr 2018). Standardized Chart of Accounts - 2.1 Define the conceptual structure and process for development of the new SCoA, paying specific attention to meeting user needs and international accounting and statistical standards (Nov 2018). - 2.2 Carefully consider and communicate the pre-conditions, assumptions and implications of the SCoA project, with particular direction on accounting standards and allocation of staff resources (Apr 2018). - 2.3 Staff a SCoA working group to assess user needs and design the SCoA structure (Mar 2018). - 2.4 Develop a strategy for the implementation of the SCoA, paying attention to IT requirements and change management across the government (Jan 2020). *IMF Fiscal Affairs Department technical assistance mission report, Poland, October 26 – November 8, 2017.* ### 7. While for the majority of spending this may be clear, there will be difficult areas ### cr1882 - 7. While for the majority of spending this may be clear, there will be difficult areas ### Definition of no-policy change - Proposed clear definition: "The level of spending that will continue to occur over the next three years in the absence of any new or amended laws, decisions by the CoM, or by the MoF." - Where policy position is not clear, default presumption: continuation of the current level of services. - If legislation defines a level of service but the budget does not meet it, use the current budget funding level as the best indicator of current government policy. - EC guidance for Convergence Program high-level forecasts: estimates “should include all interventions by the government to change past policy orientations that is specified in sufficient detail, as well as adopted or at least credibly announced, and has a direct incremental budgetary impact compared to the baseline.” ### Scope of the forward estimates - Forward estimates should be as comprehensive as possible for budget decision-making. - Coverage should include all entities with direct or indirect impact on expenditure subject to the key fiscal target (see Box 2 in the source). - For Poland, coverage applies to all entities and funds that fall within the Stabilizing Expenditure Rule (SER). - Coverage should be extended to entities outside the SER whose spending has budgetary implications. ### Forecasting transfers to entities outside the State Budget - For entities receiving top-up transfers contingent on funding needs (expenditure minus revenue), it may be necessary to forecast the entity’s overall financial position. - Example: Social Insurance Fund (FUS) relies on State Budget transfers to cover the shortfall between mandatory spending and revenue from social security contributions; both contributions and payments must be forecast. - For fixed or formula-driven transfers, it is not necessary to forecast the external entity’s overall financial position; transfers can be forecast independently. - Example: subsidies to Polish State Railways (PKP) for youth passes depend on number of users, not company financial position. ### Comparison with other spending forecasts - Multiple medium-term fiscal forecasts exist at top-down and bottom-up levels; these have not been aligned with later budget estimates. - Incorporating forward estimates within top-down fiscal forecasts will align the Convergence Program with the annual budget. - The Macroeconomic Policy Department (MPD) provides top-down spending forecasts for the general government sector included in the Convergence Program; these: - Include detailed projections of major units of GG sector and top-down projections for the rest based on broad macroeconomic parameters. - Have been relatively accurate for the budget year and meet Convergence Program requirements. - Ignore a large amount of information from line ministries that bottom-up forward estimates can capture. ### Box 2 — Sectoral coverage in Poland (key figures and definitions) - General Government sector: - Defined in accordance with ESA methodology. - General government spending represented 41.2 percent of GDP in 2016. - SER covers around 90 percent of general government expenditures. - Public Finance sector: - Includes about 90 percent of the general government sector. - Special Purpose Funds represent more than half of the spending of the Public Finance Sector. - The Social Insurance Fund (largest Special Purpose Fund) accounts for spending of PLN 217bn in 2017, of which PLN 47bn was sourced from State Budget transfers. - State Budget: - Includes expenditure of state budget units and other expenditure not assigned to any state budget unit. ### Issues with line ministry forecasts prior to reforms - Until 2018, line ministries’ multi-year forecasts were not used in the budget process and were produced without central guidance or verification. - Result: forecasts evolved into highly optimistic bids rather than realistic forecasts of future spending. ### Progress of Forward Estimates (implementation milestones) - First attempt at preparing forward estimates presented available fiscal space to the Minister of Finance and discussed within the CoM. - Forward estimates for 2018–20 were prepared by the Budget Departments of the MoF and presented to the CoM in April 2017, prior to adoption of the Multiannual State Financial Plan. - A definition of no-policy-change was prepared by the Expenditure Policy Department. - Forward estimates were prepared using the same groupings used for setting budget limits. - Forward estimates were compared to the current budget base; no large deviations were identified. - Forward estimates enable critical comparisons with: - Stabilizing Expenditure Rule — to identify medium-term fiscal space; - MPD’s top-down expenditure forecasts — to validate forecasts; - Line ministries’ multi-year spending forecasts — to identify implied new policy bids. - Next step: integrate forward estimates into MPD aggregate medium-term spending forecasts to serve as the starting point for budget preparation. ### Applying forward estimates to select line ministries — approach and examples - Selected ministries for piloting cover key issues: Ministry of Internal Affairs (large operational current expenditure and wages), Ministry of Family, Labor and Social Policy (demand-driven entitlements), Ministry of Infrastructure and Construction (investment spending). - Methodology: day-long sessions with each line ministry and MoF Budget Departments to discuss conceptual approach, March 2017 methodology, and spending drivers. ### Ministry of Internal Affairs — key statistics (2017) - 2017 Ministry budget: PLN 21.5bn (1.1 percent of GDP). - Major components: - Part 42 — Internal Affairs current expenditure: PLN 10.9bn, of which 80 percent is wages and salaries. - Pensions to former public security service members: PLN 8.9bn. - Other items: transfers to outside bodies, minor capital spending (investment spending on minor capital purchases accounts for 2 percent of the Ministry’s budget). - Special Purpose Funds (in chart context): 0.6 (PLN billion) shown in figure legend in source. ### Ministry of Internal Affairs — proposed approach for forward estimates - For current expenditure, assume no volume adjustment in the no-policy-change baseline for law-and-order services; volume changes are typically policy decisions. - Exception: consider volume changes when services are externally driven (e.g., number of border guards if migrant arrivals materially change). - Separate wage and non-wage components for price adjustments: - Wages: hold flat in nominal terms over the forward estimates (current approach). - Non-wage: index by a broad measure of forecast inflation such as CPI, unless a sector-specific price index is justified. - Adjust current expenditure to include effects of past policy decisions not reflected in the base: - Example: additional funds for police modernization require additional spending of PLN 0.47bn in 2018 and PLN 0.97bn in 2019; these decisions were taken by the CoM but not fully reflected in the 2017 base and must be adjusted separately. - Model mandatory pension payments to former officers using eligibility based on expected retirements, mortality, income levels, and indexation set in legislation: - Indexation comprises an inflation adjustment and an increase representing 20 percent of the growth in real wages in the economy in the previous year. - Ensure modelling parameters are consistent with macroeconomic forecasts to maintain consistency across ministries. - Treatment of transfers requires case-by-case approach based on cost and volume drivers under no-policy-change: - Example: training transfers may require volume adjustment based on recruits needed to maintain force levels and a specific higher-education price index. ### Findings from the March 2017 exercise (Ministry of Internal Affairs) - Forward estimates were prepared by the Budget Department broadly applying the appropriate model and following key steps. - Ministry broadly accepted the proposed no-policy-change methodology, understanding it differed from their budget-bid approach. ### Main issues identified (system-wide and ministry-specific) - Two system-wide issues: treatment of wages and minor capital expenditure. - Proposed treatment of wages: keep them flat in the forward estimates, in line with MoF approach. - Capital expenditure: for this Ministry, minor capital purchases should be treated as rolling continuation of current capital expenditure levels in real terms. - Need to consider disaggregation where budget parts mix activities with different cost drivers: - Example: police and border guards are in the same section but likely have different volume drivers and need separate estimation. - Policy impacts (e.g., police modernization vs. EU border management commitments via Frontex) should be factored separately. - Balance required between disaggregation and complexity. - Current grouping of paragraphs does not separate wage and non-wage spending, hindering indexation adjustments: - Address as part of reforms of CoA and Budget Classifications (see Chapter II). - Interim: make efforts to identify wage and non-wage components within current expenditure paragraph groupings. *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1882.pdf* ### 36. Spending within the portfolio of the Ministry is budgeted at PLN 265bn (14 percent ### Spending within the portfolio of the Ministry is budgeted at PLN 265bn (14 percent of GDP) in 2017 ### Composition of 2017 spending - Total budgeted spending within the Ministry’s portfolio: PLN 265bn (14 percent of GDP) in 2017. - Payments of mandatory legislated entitlements dominate: - Payments from FUS: PLN 217bn (old age, disability and survivor pensions, sickness and maternal allowances). - FUS receives transfers from the State Budget: PLN 47bn. - Remaining FUS payments covered by social security contributions. - Other main mandatory components: - Family and social benefits (including the 500+ Family Program delivered through the voivods). - Unemployment and pre-retirement benefits paid from the Labor Fund. - Active labor market and social support programs: - Labor Fund programs for the unemployed: PLN 6.6bn. - State Fund for the Rehabilitation of Disabled Persons (training and rehabilitation): PLN 4.9bn. - Budget parts include multiannual operational programs funded by the EU and spending by voivods. ### Proposed approach for demand-driven entitlement and active programs - Use existing detailed models prepared by the Ministry or ZUS for forward estimates: - Models forecast beneficiary numbers using demographic and macroeconomic assumptions, including incomes and labor markets. - Price adjustments follow the type of indexation set out in legislation. - ZUS uses macroeconomic forecasts prepared by MPD; MPD uses social security spending forecasts for the Convergence Program. - Identify and model additional future costs and behavioral impacts of frequent policy changes (e.g., retirement age changes, 500+ Family Program). - Active programs (unemployed, disabled) should be estimated by: - Treating current spending per unemployed/disabled person as the no-policy-change assumption. - Volume forecasts based on projected number of relevant beneficiaries. - Price forecasts dependent on program nature (e.g., fixed wage subsidies for disabled persons; other programs adjusted for forecast inflation). - State Budget funding components approach: - EU supported activities: reflect agreed funding profile. - Spending by voivodships for services: base on current level of activity, adjusted for inflation and any one-offs. - Current expenditure: base on current level of activity, adjusted for inflation and any one-offs. ### Findings and main issues for social spending - Findings: - Forward estimates prepared by Budget Zone Financing Department broadly consistent with the proposed approach. - Demand-driven program estimates rely on detailed line ministry estimates projecting recipient numbers and economic parameters. - Ministry is experienced in producing projections for planning purposes. - Main issues: - Require detailed reporting on methodology and assumptions behind forward estimates, using central MoF templates and underlying data where necessary. - Growth projections should be linked to macroeconomic forecasts: - Unemployment benefits should be directly linked to the unemployment rate (changes in recipients and unemployment are highly correlated). - Other working-age payments (e.g., disability pension) indirectly related to labor market and should be linked to macro forecasts to ensure consistency. ### Ministry of Infrastructure and Construction — 2017 capital spending overview - General government capital spending forecast for 2017: PLN 81bn (4.2 percent of GDP). - Central government: 60 percent of capital spending. - Local government: 40 percent of capital spending. - Within central government capital spending: - State Budget (including subsidies to other units, mainly local government units): PLN 20bn. - National Road Fund (NRF): PLN 14bn. - Remainder dominated by PKP PLK S.A. (railway infrastructure company), R&D institutions and universities. - Largest state budget capital components: defense (around PLN 10bn) and road and railway infrastructure (around PLN 3bn). - Capital spending under Ministry responsibility: PLN 21bn (1 percent of GDP), covering around a quarter of general government capital spending. - Direct capital spending by the Ministry through the state budget: around PLN 3bn for road and railway infrastructure. - Ministry responsible for Road and Rail Funds that sit outside the state budget. ### Proposed approach for capital investment forward estimates - Recognize capital investment challenges: multi-year projects, timing/profile changes, defining existing policy baseline. - Include future operational and maintenance costs of approved projects in forward estimates to inform CoM decisions and fiscal targets. - Identify clear decision point for project approval to include in forward estimates (avoid including too early or too late). - Forward estimates should provide for approved projects but prevent reallocation to other (new policy) projects once used for budget allocations. - Specific proposals: - Road and rail infrastructure: use estimates in the National Roads Construction Programme and National Railway Programme as firm CoM-approved policy; adjust original 2015 program cost estimates for known price movements and timing changes. - Subsidies for young rail users: forecast using projections for CPI and targeted population groups from Central Statistical Office (price and volume indicators). - Transfers to housing sector: forecast using GDP growth, interest rates, and indicators of household and bank financial conditions. - Forward estimates for administrative current expenditures: base on previous year allocations adjusted for estimated price parameters; identify wage share to determine appropriate price parameter. - Maintenance costs: adjust for price (e.g., producer price index or GDP deflator for construction) and volume changes reflecting new infrastructure additions. ### Findings and main issues for capital investment - Findings: - Budget department acknowledges capital spending prediction for this Ministry requires a different approach. - Future road and rail outlays given by CoM-approved programs (including aggregate allocation to minor projects) and can be treated as no-policy-change estimates. - Main issues: - Accuracy of forward estimates depends on updated cost and timing estimates for major projects; National Road and Railway Programs prepared in 2015 for period 2015–23 require regular updating for delays and cost changes. - Construction project prices vary more than CPI; consider using a construction price index (producer price index or GDP deflator for construction). - Additional maintenance costs from new infrastructure are often not factored in; a multi-year perspective requires inclusion of lifecycle maintenance costs in forward estimates. ### Cross-cutting issues — Wages and salaries - March 2017 approach: keep nominal wages flat in forward estimates; after aggregation, estimate fiscal impact of an overall public sector wage increase of 1 percentage point, but flat wages remained the working assumption. - Risks of flat wages assumption: - May be unrealistic over the longer term given tightening labor market and historic low unemployment. - Budgetary sector wages have shown positive real growth and closely tracked economy-wide average wages (Figure 3). - Keeping wages flat can understate expenditure and overstate fiscal position. - Proposed alternative: - Include a provision for future wage increases in a contingency reserve, calculated using a projected wage price index from macroeconomic parameters. - Once wage increase decisions are made, migrate required amounts to individual line ministry forward estimates and reduce contingency reserve accordingly. - Country examples for treatment of wages in forward estimates (illustrative practices): - Australia: agency salary component adjusted by index based on minimum wage increase; increases beyond index require offsetting staff reductions. - Austria: medium-term budgeting ties expected wage increase generally to inflation but is not made transparent to avoid prejudging union negotiations; line ministries must make savings if wage increases exceed included adjustments. - South Africa: budgets wages according to inflation and states commitment to cost-saving measures, including reducing staff, if wage rises exceed inflation. ### Cross-cutting issues — Price indexation - General rule: use broad measure of inflation (e.g., CPI) unless a budget holder has major inputs with price changes materially different from CPI. - Exceptions when alternative indices justified: sectors where input prices diverge significantly from CPI (e.g., health care, pharmaceuticals, imported goods requiring exchange rate adjustment). - Challenges for transfers, subsidies, and service provision spending: - Appropriate index depends on cost structure of recipient agencies (e.g., transfers to higher education, voivod services). - Case-by-case approaches risk inconsistency. - Recommendation: provide sector-specific price indices centrally to ensure consistent treatment across ministries (e.g., higher education transfers, voivod service cost structures). ### Cross-cutting issues — Capital investment (summary) - Forward estimates for major projects should be based on estimated costs over time of currently approved projects, accounting for expected inflation over project life. - Establish a clear decision point (CoM approval) for including projects in forward estimates and require sound cash-flow specifications. - Regularly update forward estimates for cost changes and new policy decisions; reconcile vintages of forward estimates with sources of variation. - For minor projects/capital purchases: - Include estimated expenditure level based on current levels or historical averages. - If variable over time, use an average period (e.g., prescribed five years) for consistency and adjust historical averages for inflation. - Aggregated forward estimate amounts may be allocated across ministries later in budgeting. *Source: IMF staff report text provided.* ### 64. A threshold should be used to determine the size of capital investments that would ### 64. A threshold should be used to determine the size of capital investments that would be considered major projects and constitute new policy ### Threshold for capital investments - A threshold should be used to determine the size of capital investments that would be considered major projects and constitute new policy. - The size of the threshold should take into account the large number, and relatively small size of projects usually undertaken across the state budget. - Setting a threshold balances the need to scrutinize major projects as new policies, without impeding the undertaking of minor capital investments that form part of the ongoing activity of ministries. ### Further Development of the Forward Estimates — Assuring the consistency of the forward estimates - Early attempts at the preparation of forward estimates are often not particularly accurate but checking for consistency is crucial for longer term success. - Facilitation measures: - Provide ongoing guidance material and templates seeking adoption of a uniform approach in the early stages. - Review of the forward estimates by a central unit within the MoF is crucial to achieve consistency. - Central review could include a top-down comparison with the forward estimates to see how they compare to the earlier forecasts prepared by the MPD. - Documentation and review: - Central review requires access to documentation on methodology, assumptions and macroeconomic forecasts used. - Documentation should be based on a standard proforma, setting out the methodology and assumptions, and supplemented where necessary with more detailed calculations. - There should be continual review of the validity of assumptions to identify errors in estimates forecasts. - Particular attention: large demand-driven programs with complex methodologies require detailed documentation. ### Engagement with line ministries on the forward estimates - Improving quality over time requires increased engagement with line ministries on preparation methods. - Early-stage approach: - First attempts should be undertaken jointly by the MoF and the line ministry to allow guidance and checking. - Progressive approach: - MoF consulting line ministries when preparing forward estimates. - Eventually, parallel preparation by Budget Departments and line ministries to enable comparison and discussion. - Rationale: Line ministries have superior knowledge of their activities and associated cost drivers. ### Level on which to calculate forward estimates - Disaggregation balance: - The level of disaggregation should strike a balance between complexity and tractability. - Aim to break up expenditure to reflect different price and volume drivers while avoiding undue complexity. - More important to get estimation methods right for the largest components of the budget. - Classification problems: - The current classification of the budget does not lend itself to budget prioritization and decision-making. - Example: Section 754 in budget part 42 combines the major spending areas of police and border security. - Workaround: - Budget Departments in some cases developed different groupings of government tasks and prepared forward estimates following these groupings, cutting across parts, sections, and chapters. - Need for reform: - Development of a new system of budget classification should provide a consistent framework usable at each step of the budget process, removing the need for different approaches to forward estimates and appropriations. ### Future work on Forward Estimates and the Medium-Term Budget Framework — Timeframes and tasks - To proceed with the medium-term budget reform, the MoF should follow the proposed time frames. Forward estimates — milestones and tasks - Before March 2018: - Engagement with remaining ministries on the methodology for the forward estimates. - Documentation of methodology of the forward estimates prepared by each budget department with clear assumptions, followed by an analysis of these methodologies to ensure consistency. - March 2018: - Budget departments to prepare forward estimates in consultation with line ministries and use forward estimates as a basis for budget discussion. - After March 2018: - Compare the forward estimates to the top down fiscal forecasts prepare by MPD identify and reconcile major differences, and depending on confidence in the forward estimates, potentially use the forward estimates to inform the Convergence Program Fiscal forecasts. - Comparison of 2018 forward estimates to those prepared in 2017 and identification of drivers of major changes. - March 2019: - Budget departments and line ministries to both prepare forward estimates on the basis of agreed methodologies. Formally reconcile the reasons for variations between the 2018 and 2019 vintages of forward estimates. - In preparing the budget for 2020, the first estimates for the budget year should be based on a rollover of the forward estimates from March 2019. Broader Medium-Term Budget Framework reforms — sequencing - Costing of new policy proposals (March 2018–June 2019): - Medium-term cost estimates should be prepared for all new policy proposals, and changes to existing policies, including alterations to eligibility criteria or assistance rates of existing transfers or social security programs. - Spending reviews (ongoing): - Poland has a framework of spending reviews, but impact has been limited. - To increase effectiveness: give clear targets for savings, fully integrate with the budget process, and staff reviews with representatives from the MoF’s budget departments, line ministries, and possibly external experts. - MTBF design aspects to resolve: - (i) the framework and basis of medium-term expenditure commitment; - (ii) the multi-year prioritization process; - (iii) the control mechanisms to enforce multi-annual spending commitments; - (iv) the accountability mechanisms to establish credibility. - The March 2017 FAD report makes recommendations that fit the Polish context and provides a time frame for implementation. ### Recommendations (numbered) 1.1 Develop a set of methodologies to ensure the consistency of the forward estimates: - Develop a set of price indices for the treatment of transfers; - Provide for the separate identification of wage and non-wage estimates within commonly used reporting; and - Require detailed reporting on the methodology, assumptions and macroeconomic forecasts used in the preparation of the forward estimates for major programs, with estimation methodologies linked to macroeconomic forecasts wherever possible; 1.2 Establish a process for the central validation of forward estimates within the MoF, which includes reviewing methodologies for consistency and analyzing major variations between vintages of forward estimates. 1.3 Assign responsibility for the preparation of the March 2018 Forward Estimates to the Budget Departments, working with line ministries under the central coordination of the State Budget Department. 1.4 Continue to leave nominal wage rates fixed, as per the CoM decision, but include a provision for future wage decisions within a contingency reserve. 1.5 Provide detailed guidance on the treatment of capital spending, differentiating between minor and major capital projects: - Provide a threshold to delineate between major and minor capital projects with major projects to constitute new policy; - Require that forward estimates for major projects be based on up-to-date costs and time profiles of agreed projects; and - Include the additional maintenance costs required by new infrastructure in forward estimates based on the estimates provided in the Regulatory Impact Assessment. ### II. DEVELOPING A STANDARDIZED CHART OF ACCOUNTS — Overview and rationale - A Chart of Accounts (CoA) underlies the appropriate classification, recording and reporting of the financial plans, activities, flows and stocks of government. - A CoA presents a systematic and organized coded list of the individual accounts used to record flows of economic value and report on stock positions at a reporting date. - A CoA should meet legal and administrative requirements for budget management and ensure necessary details to comply with international financial and statistical reporting standards and guidelines. - Standardizing the CoA for all government units of the general government sector: - Improves consistency of reporting and facilitates aggregation and consolidation of accounts. - Requires centralized control over development and changes to structure, classifications and interpretations of the code list. - Might allow flexibility at lower levels while centralizing higher-level classification decisions. - A SCoA can be integrated with budget classifications to ensure consistency between budgetary accounts and financial accounts and enable precise reconciliation where presentation objectives differ. ### Background to SCoA reform in Poland - Introducing a SCoA is part of comprehensive Public Financial Management (PFM) reforms in Poland. - In July 2016, the CoM approved a six-point plan for budgetary reforms, based on proposals submitted by the MoF. - Objective: eliminate the existing dual budget classification system, introduce a new budget structure and improve data collection for budget and financial reporting based on standardized public sector accounting rules supported by IT upgrades. - Since October 2016, the World Bank engaged with MoF officials on a revised SCoA and Budget Classifications; work supported by the Enhancement of Public Sector Accounting and Financial Reporting Program (ended 2017). - The proposed SCoA reform has two phases: - Phase 1: development of an integrated SCoA (scope of this report). - Phase 2: IT reforms to support implementation of the SCoA. ### Box 5 — Key Recommendations of the World Bank on CoA Reforms (summarized) - Development of a new integrated CoA including a range of segments; suggestion of a seven segment structure (Source of Funds, Administrative Organization, Sector/Function, Results/Program, Project, Geographic, Economic). - Development of a new economic segment benchmarked against ESA2010 or GFS2014. - Presenting the budget on the basis of a fiscal balance to link budget policies to the balance sheet and net assets (even on a cash basis). - Reporting entities should include a cash flow statement in annual financial statements. - PFM reforms and supporting ICT systems should be developed with a broad view across the entire PFM system. - MoF should have the legal authority to issue clear policies, instructions and guidelines to provide assurance regarding the integrity of the PFM system. - Fragmentation of ICT systems should not be an impediment; focus first on financial information needs, then ICT solutions. ### Key issues with the current Chart of Accounts (summary) - Organizational: - No clearly defined administrative segment corresponding to accountability. - Budget is divided into 84 parts per the Public Finance Act 2009; alignment between responsibilities for administration and budgetary accountability is incomplete. - Integration: - Four standardized CoAs and a budget classification exist but are not integrated at the state level. - Polish financial statements differ in some aspects from international standards. - Budget information and financial statements are generated from the same basic accounting records but use of financial statements is limited and not consolidated at the state level. - Coverage: - Various government entities are not included in the Trezor system and use idiosyncratic CoA (e.g., state legal entities, various special funds). - Classifications: - Current budgetary classification groups transactions in sections, chapters, and paragraphs; chapters mix organizations, programs, projects, activities and funds; paragraphs mix elements of funding and cash flows. - Classifications are not fully consistent with international structures (e.g., GFSM 2014), requiring difficult or impossible mappings. - Current coding structure has limited digits, preventing building a hierarchy in the budgetary classification. - Standardization: - Various CoAs are standardized for particular entity types but not for all general government units. - Concepts are not well defined and leave discretion for interpretation, hampering aggregation and consolidation. *Source: cr1882 - 64. A threshold should be used to determine the size of capital investments that would* ### 83. In addition, the current hierarchy of administrative units is unclear, with no clear ### Proposed Architecture of the Standardized Chart of Accounts ### Unclear hierarchy and institutional coverage (paragraphs 83–84) - Finding: "the current hierarchy of administrative units is unclear, with no clear link between low level reporting units and the higher level groups (such as ministerial portfolios)." - Recommendation: "Identifying reporting units (called institutional units in statistics) and how these are related to each other should be resolved and made consistent throughout the fiscal cycle." - Analytical point: "Usually the structure of control between individual entities and the nature of their activities (whether they are market or nonmarket producers) determine how they are consolidated into groups (group reporting entities) and determine the sector classification in the statistical reporting." - Risk: National definitions differ from internationally agreed statistical definitions of budgetary central government unit/subsector and the public sector, creating potential confusion and making reconciliation of data "cumbersome and difficult." - Implication for SCoA: "The identification of individual reporting units should be decided and aligned with assigned responsibility and accountability. For consolidation purposes, the design of the chart of accounts needs to identify items subject to consolidation." - Goal: "Attaining full consistency between the coverage of national reports and statistical reporting to Eurostat, OECD, and the IMF will increase confidence in the reliability of fiscal data." ### Proposed SCoA architecture and seven segments (paragraphs 85–86) - Proposal basis: "The World Bank proposal of a new seven segment integrated CoA forms a sound basis for the new architecture." - The seven segments are: - Administrative/Organization - Sector/Function - Source of Funds - Economic - Results/Program - Project - Geographic - Expected benefits: - "The proposed segment structure will be standardized across agencies and will eliminate the current multiple use of the same segment for identifying various features of transactions." - "The proposed SCoA structure will integrate the current CoAs and budgetary classification and consistently identify all the proposed segments for each transaction and will include counterpart indicators." - "These proposed reforms will facilitate aggregation and consolidation of the general government sector." ### Refinements and potential adjustments to segment design (paragraph 87) - Observations and suggested refinements: - "The proposed Source of Fund segment includes a level used to make a distinction between whether the source is a grant or a loan. This distinction is usually made in the economic segment and is therefore redundant here." - "The program and project are presented as separate segments of the classification and could potentially be captured as sub-levels of the Administrative/Organizational segment." - "The location segment does not provide for general headquarter based spending." - "The levels of distinction in the economic classification (currently proposed to be five levels), could only be finalized after full analysis of user needs." - "For statistical reporting needs, the distinction between transactions and other economic flows such as revaluations and volume changes in assets and liabilities is currently not provided for in the structure of reporting. This distinction could be built in as an indicator in the coding structure." - "A distinction between current and capital spending could be built into the economic classification, as a sub-level not only of transfers but also for items such as compensation of employees and goods and services, which will allow the total of that aggregate to be derived from the system, but also the portion of it that needs to be capitalized in the cost of own-account capital formation." - "To facilitate consolidation, the identification of counterparts to transactions should be built into the classification structure." ### SCoA as building block: consistency, integration, and examples (paragraphs 88–93; Box 6) - Role: "A well-designed and well-structured SCoA provides the building blocks according to which all the potential and actual financial flows and positions of government are captured." - Integration: "Using the SCoA building blocks consistently in classifications for the budget, financial accounts, and statistical reports enables integration and reconciliation of budgetary, financial information, and statistical data." - Example (subsidies): - Current problem: Poland uses the term "subsidies" broadly to describe transfers including financial support to extra-budgetary units, capital injections into state-owned enterprises, transfers to support operations of loss-making entities, and transfers to support households exposed to some social risks. - Consequence for reports: - Financial statements: small entities may subsume subsidies into "other operational expense"; entities with large amounts will have to disclose specific types. - Statistical reports: each type must be reclassified into appropriate economic categories (e.g., grants to extra-budgetary units, equity injections, subsidies, social benefits). - SCoA solution: "In a SCoA, each of these types of transfers will be provided for in the correct subcategories of the economic classification structure and be defined appropriately." - Presentation principle: "Using the SCoA Budgetary classifications may be done at the aggregate level, i.e., subsidies, which will then be consistent with the total subsidies that will be reported in statistical reports. For financial statement purposes, the interest may be on making the split between subsidies to public corporations and they may report them separately, but the total subsidies will remain the same." - Flexibility vs. standardization: "Creating an integrated SCoA is a balancing act between standardization and flexibility." - Design trade-offs: determine "the level of detail that should be included, the level of standardization that should be enforced, and the flexibility that should be allowed." - User needs: "The SCoA should be sufficiently detailed to serve the needs of as many users as possible, inform policy decisions appropriately, allow clear and direct linkages with sub-systems, and eliminate most of the needs to employ secondary collections/estimations of required data." ### Change management and stakeholder engagement (paragraphs 90–94) - User resistance: "Various users of the CoA seem to want the change, only if their unique needs are served in the same way as in the past, and if the changes are not too extensive and costly." - Observation: Many claimed "unique" requirements are common across departments (e.g., reporting on specific EU-funded projects, specific management needs). - Recommendation: "It will be important to carefully determine user needs and plan change management activities to alleviate resistance to change during the project." - Consistency benefits: "A well-built SCoA will serve to attain consistency and integration throughout the fiscal cycle." - Example: Compensation of employees can be aggregated or disaggregated by SCoA to meet needs of medium-term fiscal framework, budget presentation, and departmental management. - Organizational roles: "Clearly identifying roles and responsibilities, formally agreeing on the contributions each will make, and agreeing on timelines for deliverables would be a critical success factor in the development of the revised SCoA." - Key players to involve: - Various departments in Ministry of Finance, among others, Accounting and Auditing, Expenditure Policy, Macroeconomic Policy, State Budget, Local Government, Financial Information, Tax and Legal; - Representative line ministries and other government agencies under the reform scope; - Oversight bodies such as Parliament and the Supreme/Regional Audit Institution; - External users such as the National Bank of Poland (NBP), Central Statistics Office of Poland, and regional/international organizations. ### Preconditions, assumptions, and implications (paragraphs 95–101; Box 7) - Interdependence: "The development of the SCoA is part of a comprehensive program of PFM reforms approved by the CoM, and will be informed and influenced by other reforms." - Dependency: "Decisions on accounting standards, principles and policies will influence the SCoA reforms, and IT reforms will be needed to support the SCoA reforms. At the same time, the reforms in the SCoA will have significant influence on other areas of PFM such as budget classification, presentation, and in-year reporting." - Need for high-level agreement: "The development of an integrated SCoA requires high-level formal agreement to the SCoA reform process and sufficient broad political support." - "A formal agreement between various Undersecretaries in MoF should underpin the reforms, and other senior role players and the CoM should regularly be informed on the progress with the developments." - Accounting standards issues: - Current state: "Accounting policies are not yet standardized in Poland." Multiple legal acts and varied recording bases (cash vs. accrual) allow variances that "result in significant differences in the financial outcomes produced by various entities that complicates consolidation." - European context: Decisions pending on Eurostat work to create "European Public Sector Accounting Standards (EPSAS) harmonized with International Public Sector Accounting Standards (IPSASs) for all EU members." - Interim approach: "In lieu of the availability and adoption of EPSAS, a compromise decision on the adoption of uniform national accounting standards, regulations and policies will be required." - Practical reference: "IPSAS presents the most consistent solution, and while its adoption in the short term is unlikely, it does provide a primary reference point upon which the uniform national accounting standards and the SCoA can be developed." - Action: "The existing accounting acts, principles and policies will need to be investigated and all discrepancies, contradictions and redundancies should be removed. Where existing standards allow a choice between various options, these would need to be removed, and any possibilities for misinterpretation should be eliminated by providing additional accounting guidelines." - Resource implications: - Timeline risk: "Developing a SCoA over a timeframe of two years is very ambitious and will require the allocation of sufficient resources to the project." - Resource needs: "Significant investment in terms of staff, time, and IT will be required. Resources with various levels of skills and knowledge, and various levels of decision-making powers should be committed and dedicated to the project." *Source: IMF Country Report cr1882 (selected excerpts).* ### 102. Staff resources for the development of the SCoA should be organized by ### Staff resources for the development of the SCoA should be organized by ### Organization of staff resources - Staff resources should be organized at a minimum into three levels: - Senior level (the SCoA Committee): senior staff from budget, accounting, expenditure, tax, audit, and legal offices to take major strategic decisions. - Working level (the SCoA working group / secretariat): representatives from budget, accounting and statistical compilers dedicated to perform development tasks, execute development work, and prepare information for the SCoA Committee and users group. - User level (the SCoA users group): consultative group comprising representatives from units that will compile accounts/data or use outputs produced from the SCoA. - Staffing time expectations (from Ministry and other members): - Ministry staff: on average available to dedicate 50-80 percent of their time to the project. - Other members: probably need to dedicate between 20-40 percent of their time to the project. ### Resources - IT - Conceptual design decisions generally drive IT reform decisions; in Poland, existing IT solutions could influence SCoA design, and a revised SCoA will require updates to existing IT systems. - The MoF conducted an IT infrastructure survey and believes a revised SCoA will not impose significant additional demands on resources associated with existing IT systems. - Implications for IT systems that collate and consolidate results will be scoped in phase 1 and considered in more detail in phase 2 of the EU project. ### Workplan for Developing a Standardized Chart of Accounts (SCoA) - The workplan phases and key decision points (indicative timelines and responsibilities) include: - Agree and sign Memorandum of Understanding between MoF Deputy Ministers — Nov 2017 – Jan 2018. - Comply with pre-requisites (establish organizational structure; decide roles and responsibilities; agree accounting standard and principles; allocate resources) — SCoA Committee — Nov 2017 – Mar 2018. - Determine user needs (identify users; compare existing CoAs; survey analytical data needs; determine additional user needs) — SCoA Working group in collaboration with SCoA users group — Apr 2018 – Oct 2018. - Determine segments of SCoA and coding structure (agree segments and coding structure) — SCoA working group to propose and SCoA Committee to decide — Nov 2018. - Seek approval of CoM on conceptual design and implications of SCoA design — Nov 2018. - Develop detailed classifications of SCoA (determine line items; develop standardized definitions; determine cutoff for standardized levels; engage users) — SCoA working group in collaboration with SCoA users group — Dec 2018 – Jun 2019. - Test and revise (choose agencies for testing; devise modalities; develop and test report templates) — SCoA working group in collaboration with relevant users — Jun 2019 – Dec 2019. - Plan and agree a roll-out strategy (consider IT reforms; enabling instruments; manuals; support systems; timing and sequencing) — SCoA working group to propose and SCoA Committee to decide — Jan 2020 – Mar 2020. - Final approval of SCoA (approve and publish SCoA project outcome) — SCoA Committee — Apr 2020. ### Determining user needs - User needs must consider both direct users (those who record economic events) and indirect users (those who need compiled information). - Stakeholders to consider include: - Internal government users: Ministry of Finance (budgetary planning, oversight and accountability; accounting for financial statements; fiscal and macroeconomic data), Parliament, supreme/regional audit institutions, other government units, line ministries, legal entities, government managers. - External users: other domestic users (Central Bank of Poland; Central Statistics Office of Poland; Citizens, creditors and donors); international and regional users (Eurostat for EDP and ESA 2010 transmission program; IMF, OECD, World Bank). - Key points: - Examine current reporting needs and reporting obligations carefully to avoid loss of existing data availability. - Standardization can maintain data availability while possibly reorganizing nomenclature and presentation. - Maintain flexibility at lower levels to add unique sub-items; meeting common needs at higher levels reduces need for additional directories and secondary methods. ### Determine segments of SCoA and coding structure - User needs determine segments and broad categories; three primary classifications should be employed as separate segments: administrative, functional, and economic classification. - Additional classifications (program and project, fund, counterparts to transactions) supplement primary segments for varied reports. - Develop a coding system and structure based on agreed segments; this links to IT systems and provides the framework for detailed classifications, nomenclature, and definitions. ### Develop detailed classifications of the SCoA - Combine agreement on segments, coding, and major groups with user needs analysis to determine detailed line items. - Three core principles guiding detailed line items: - Use current reporting lines as a basis; find commonalities; match with international guidelines; decide common terminology and clear definitions. - Identify and eliminate duplications and redundancies; determine remaining data gaps. - Propose additional classifications to be introduced as needed. - Not all line items will be used by all entities; unused items may be blocked for certain entities to prevent misuse. - Decide who controls availability of various items (central control versus individual entity control trade-offs). - Final review of proposed SCoA by users group to identify omissions and clarify nomenclature and definitions. ### Test and revise - Two testing approaches: - Pilot implementation in selected entities while maintaining old classifications in parallel (comprehensive but potentially costly). - Desk reclassification of existing data into the new format to test whether required reporting outputs can be produced (less comprehensive and less costly; limited by old classification constraints). - Testing should identify tweaks and reach sufficient user satisfaction before abolishing old system. ### Future work - Tasks outside first phase include planning roll-out, IT system reforms/updates, and change management during development and implementation. - Plan and agree roll-out plan: - Consider reforms to enabling instruments (laws, standards, regulations, policies). - Develop comprehensive accounting, recording and reporting instructions and manuals. - Establish SCoA support systems: training and help desk functions. - Decide timing and sequencing of implementation supported by resource allocation. - IT implementation: - Implementing SCoA will affect IT across MoF and all compiler user groups; currently entities may choose decentralized accounting/reporting IT systems. - At MoF level, the Trezor system contains budget, financial plans, and cash results of budget execution; data uploaded from individual accounting systems in State Budget units, except for EU Funds. - SCoA will require changes to Trezor and entity systems; decisions on Trezor’s ability to facilitate accrual-based financial statements and consolidation are pending further IT assessment. - MoF 2016 IT survey covered financial and accounting systems in 372 public sector entities and indicated approximately 700 diverse IT systems in operation. - Per the survey: - 93 percent of these systems have the feasibility to expand with new requirements. - 85 percent require changes by system providers. - 8 percent will be expanded by inhouse teams. - Almost 20 percent of respondents plan to modify or replace their systems—most planned these changes for 2017. - A full investigation of SCoA implications on IT systems should be conducted; the envisaged project provides for a scoping mission to determine IT reform needs. - Change management and support: - MoF should develop a change management strategy; key elements to consider: - Prepare for change — assess readiness of various users. - Determine an appropriate communication strategy to introduce changes and their potential impact. - Determine information/training needs and strategies for categories of users including politicians, managers, technicians, and civil society. - Obtain feedback — enforce success and introduce corrective actions during implementation. - Establish appropriate support services and procedures to update SCoA for new needs: supporting material, query procedures, online and live helpdesk functions, and IT support. - Treat developing a new SCoA as the start of ongoing reforms; future changes should preserve core principles while responding timely to emerging needs. ### Recommendations - 2.1 Investigate and decide the conceptual structure and process for development of the new SCoA: - Review and decide SCoA segments based on user needs. - Consider and communicate full implications of SCoA reforms to stakeholders. - Decide and assign roles and responsibilities of agencies in SCoA development. - Formally agree which reporting needs throughout the fiscal cycle will be considered in SCoA design. - 2.2 Carefully consider and communicate pre-conditions, assumptions and implications of the SCoA project: - Communicate practical implications of SCoA reforms to high level decision makers. - Decide the accounting standards, principles and policies guiding reforms. - Allocate sufficient resources (staff and IT) in all relevant agencies to develop the SCoA during the envisaged two-year period. - 2.3 Set up and staff a SCoA working group to: - Assess user needs comprehensively and inclusively. - Develop the framework and details of the SCoA based on user needs. - Test and revise the draft SCoA as needed. - 2.4 Consider and plan for future work related to SCoA implementation: - Plan and agree on an implementation strategy and timelines. - Plan for IT reforms to support SCoA use. - Plan and execute change management activities to support implementation, maintenance, and use of the SCoA. *Fiscal Affairs Department, International Monetary Fund* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1882.pdf_