## 1polea2020001 ## Source details **Canonical URL:** [1polea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1polea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1polea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1polea2020001.pdf.json) --- ### Preface and mission context - FAD capacity development (CD) mission in Warsaw from December 5–18, 2019. - Mission meetings with senior MoF officials including Director of the State Budget Department Ms. Anna Napiórkowska and Director of the Accounting and Auditing Department Ms. Justyna Adamczyk. - European Commission Structural Reform Support Services Policy Analysts Messrs. Riccardo Ercoli and Iakovos Dimitriou joined for a day. - Mission appreciation expressed to Ms. Katarzyna Szarkowska, Mr. Bartosz Staszewski, the IMF resident representative in Warsaw and staff, and interpreters Mses. Joanna Rheindorf-Zaorska and Bozena Glowacka. ### Executive summary — substantive findings and analysis - Government making good progress implementing Budget System Reforms (BSR) approved by the Council of Ministers in 2016. - High level of commitment and significant progress implementing earlier FAD recommendations with resident advisor support. - Governance structure (Steering Committee, Working Groups, Project Management) appropriate and effective; fosters collaboration and coordination. - Caution: harmonizing reporting may require bolder decisions (example: revising definitions of revenue and expense to exclude proceeds from the sale of assets and payments incurred for the acquisition of non-financial assets to enable harmonized reporting throughout the fiscal cycle). - Significant milestones: - Stabilizing Expenditure Rule (SER) introduced in 2013 and implemented in 2015. - Several amendments to the Public Finance Act (PFA) and supporting regulations since 2010 to facilitate reforms. - Assumptions to Budget System Reforms (CoM, July 2016) guided first phase (BSR 1) and included first proposals on the Standard Chart of Accounts (SCoA). - Working groups proposed SCoA structure and segment details; further modifications required before BSR 1 Steering Committee approval for coding, testing, and implementation. - Need for new thinking about classifications rather than accommodating existing classifications. - Economic segment most challenging; two options considered and a compromise solution likely required based on consistent definitions across the PFM cycle. - Administrative and fund segment overlap identified; recommendations to identify reporting entities by accountability before establishing consolidation boundaries and to enforce mutual exclusivity between administrative and fund classifications. - Program and project segments needed to support MTBF and performance-based budget indicators to link policy initiatives, MTBF and performance. - MTBF actions: - First year of plans should correspond to the annual budget (achieved in 2019). - Outer years should progressively provide useful predictions for medium-term planning incorporating inflation, growth, and investment project cost analysis. - Accounting systems readiness: most central government entities ready to accommodate SCoA; urgent IT gap analysis needed to identify collection and consolidation capabilities for testing and implementation. ### Key recommendations (overview) - Integration of fiscal reporting: - Adopt a balanced view of SCoA purposes (statistical, budgetary, financial). - Ensure all relevant user needs are represented in SCoA development. - Focus on connections between the budget and GPFSs and reconciling budgetary reporting and financial statements. - Address links between enhancing MTBF and financial reporting in PFM reform design and implementation. - Developing the SCoA: - Administrative segment: identify accountability levels, refine Public Finance Sector taxonomy (PFA, Article 9), classify sub-types in consultation with Level 1 Budget Holders, define subsidiary reference tables. - Economic segment: ground development in accepted concepts of revenue, expense, assets, liabilities; develop compromise solution incorporating elements of the two options considered; be prepared to revise budget definitions (e.g., revenue); design for future budget, financial, statistical and managerial reports; apply relevance, materiality, cost-benefit to granularity decisions. - Fund segment: review proposed SoF classification and eliminate overlaps with administrative classification. - MTBF and program budgeting: - Align government policy priorities in a National Strategic Plan costed within MTBF constraints. - Ensure consistency between program segment SCoA reforms and MTBF by enhancing CoM technical support. - MoF to reengage with line ministries to assist MTBF submissions and refine forward estimates. - IT environment: - Review ability of existing collection and consolidation financial software to support SCoA and accounting reforms. - Requisition IT consultant within next three months to assess current financial software environment, determine gaps, and provide strategy, costing and timelines. ### Introduction — objectives and context - Main CD objective: support MoF in developing a new SCoA to facilitate fiscal reporting and accounting and to develop aspects of the MTBF. - MoF approved six-point Assumptions to Budget System Reform (July 2016) components: - implementation of a MTBF; - integration of annual and multi-annual planning processes, and modifications to the budget calendar; - redefinition of CoM, line ministries and MoF roles in the budget process; - unification of traditional budget classification and performance-based classification; - improvement in accounting and financial reporting systems; and - institutionalization of spending reviews. - Introducing SCoA requires organizational, standards/policy and systems improvements; MTBF requires calendar and administrative reforms including program identification and spending reviews. ### Progress summary (selected items from Table 1) - Cross-cutting: - Implement permanent fiscal rules — Achieved. - Introduce a Fiscal Responsibility Law — Partly achieved. - Initiate a budget reform process — Achieved. - Establish a Fiscal Council — Not achieved. - Comprehensive review of the PFA — Partly achieved. - Budget strategy paper presented to CoM — Partly achieved. - MoF change management strategy — Not achieved. - SCoA: - Governance arrangements set up — Achieved. - User needs assessment — Ongoing. - Conceptual SCoA structure — Partly achieved. - Standardize economic and functional segments based on GFS/ESA — Partly achieved. - Standardize administrative segment — Partly achieved. - MTBF: - Expenditure forward estimates model — Partly achieved. - Synchronize MTBF and annual budget — Initiated. - Define MTBF scope to cover all budgetary-impacting entities — Not achieved. - Strengthen engagement with line ministries — Partly achieved (stalled recently). - Implement performance-based budget system — Partly achieved. - Establish spending review committee — Achieved. ### Standard Chart of Accounts — core issues and guidance - Working groups made good progress proposing SCoA structure and segment details; refinement needed for approval, coding, testing and implementation. - Key guidance: - Economic segment: adopt generally accepted concepts and consistent definitions of revenue, expense, assets, liabilities across the PFM cycle; compromise solution likely needed. - Administrative vs Fund segments: avoid overlaps; enforce mutual exclusivity — entities cannot be both administrative units and in the fund segment. - Program and project segments: develop to support MTBF and performance budgeting linkages. - Urgent IT gap analysis required for collection and consolidation capabilities. ### Administrative segment — structure, coding rules, and findings - Purpose: identify accountability and consolidate financial reporting; used for budget control, reporting, fiscal responsibility, and cash/resource management. - Proposed hierarchical coding (examples from working proposals): - Administrative Level 1 (First Level Budget Holder): 3 digits - Level 2 (Second Level Budget Holder): 2 digits - Level 2(1): 2 digits - Level 3 (Entity): 5 digits - Entity Type: 2 digits - Rule of thumb for digits: - Level 1 coded with three digits because there are 156 entities at level 1. - Level 2 coded with 2 digits as there are presently no more than 16 level 2 entities below a level 1 entity. - Level 3 entities coded using a unique 5-digit code; currently no more than 99,999 such entities. - Coding rules and hierarchy: - First three sub-segments coded hierarchically. - Two-digit Level 2 codes may repeat under different Level 1 holders; unique identification achieved by concatenating Level 1 and Level 2 codes (7-digit code). - Level 3 five-digit code uniquely identifies each spending unit. - Rules to guide code allotment for administrative changes and additions. - Entity type sub-segment to reflect Public Finance Sector taxonomy (PFA, Article 9); refinement of taxonomy a separate exercise before grouping and coding. - Reporting entities and IPSAS alignment: - Identify reporting entities consistent with IPSASB Conceptual Framework and GFSM 2014 institutional unit notions. - Control relationships (IPSAS 35) should be used to determine consolidation boundaries; assess control, significant influence, and appropriate accounting treatment/disclosures. - Anomalies and principles: - Resolve anomalies (e.g., funds without legal personality) before coding. - Principle: an administrative entity should control funds; funds as separate institutional units should be identified in the administrative classification. - Main finding: proposed administrative classification provides flexibility for grouping level 3 entities; criteria for assigning entities to groups should be defined and dictionaries/tables prescribed. ### Administrative segment — key statistics (as reported) - State budget administrators: - First level holders (holders of budgetary parts) 156 - Second level holders 89 - Third level holders 2864 - Public finance sector entities: - State budgetary units 2468 - Executive agencies 10 - Institutions of budgetary economy 10 - State special-purpose funds 35 - State owned legal entities 67 - Municipalities, including cities with Powiat rights 2477 - Cities with Powiat rights 66 - Powiats 314 - Voivodships 16 - Local government public finance sector entities, including budgetary units ~55000 - Source notes: MoF and Statistics Poland; number of state budget administrators as of February 2020; number of state budgetary units as of December 2018. ### Economic segment — challenges and recommendations - Economic segment identified as one of the most challenging areas. - Both options considered have pros and cons; compromise needed grounded in generally accepted concepts and consistent application across the PFM cycle. - Recommendations (MoF, Working Group; short term): - 1. Ground further development of the economic category in the generally accepted concepts of revenue, expense, assets and liabilities. - 2. Develop a compromise solution for the economic classification that incorporates elements from the two options considered. - 3. Use existing classifications in budget accounts and other reports only as a starting point and be prepared to make bold decisions such as revising the definition of revenue in the Budget to align definitions. - 4. Consider future structure of budget, financial statements, statistical and managerial reports while finalizing the economic segment. - 5. Articulate the economic segment so data can be pulled easily at various classification levels consistent with different reports. - 6. Apply relevance, materiality and cost benefit to decide on granularity. ### Fund segment — purpose, current SoF classification and recommendations - Purpose: ensure accountability of resources received from identifiable sources and link expense to sources of financing (Source of Funds, SoF). - Benefits: facilitate fund accounting for donor-specified or legally earmarked resources; separate immediate operational resources from donor-specified resources; provide audit trail for intended spending. - Clarification: presence of “fund” in name does not imply separate management; if fund is a separate institutional unit it is identified in the administrative classification. - Current SoF (single-digit MoF regulation categories): - Code 1: Financing of programs from non-returnable funds originating from the European Union - Code 2: Co-financing programs carried out from non-returnable funds originating from the European Union - Code 3: Financing from foreign credits and loans or grants allocated to Poland by individual countries or institutions - Code 4: Co-financing of foreign credits and loans and donations and grants awarded to Poland by individual countries or institutions - Code 5: Financing from other non-returnable funds - Code 6: Co-financing of other non-returnable funds - Code 7: Payments related to the budget of European funds - Code 8: Financing of programs and projects from funds referred to in PFA, Art. 5 para. 3, with exclusions - Code 9: Co-financing of programs and projects carried out from funds referred to in PFA, Art. 5 para. 3, with exclusions - Code 0: Used when the above-mentioned categories do not apply - Proposed SoF structure (digits and descriptors): - Digits: 2 Source of Fund - 1 Type of Fund - 2 Fund Code - 1 Detail - Notes: Source of funds examples (State, vovoidship, powiat, gmina, union of gminas, union of powiats-gminas, union of powiats, Metropolitan Unions, other domestic sources, multilateral organizations, bilateral development partners, other international organizations); Type of Fund examples (General budget, earmarked funds, extrabudgetary funds); Fund Code examples (e.g. 01 2 01 Civil Society Development Fund; 10 1 01 EU structural funds); Detail to identify co-financing by sources. - Overlaps and mutual exclusiveness issue: - Proposed SoF mixes administrative units and sources of funding (e.g., including vovoidship, powiat, gmina in SoF), contradicting mutual exclusiveness principle. - SoF “Extra-Budgetary Funds” repeatedly classified for different local government levels instead of using multidimensional structure combining unique fund code with administrative classification. - Recommendation (MoF, short term): - 1. Review the proposed SoF classification structure and eliminate overlaps with other segments (most notably administrative classification) of the SCoA. ### Medium-Term Budget Framework (MTBF) — progress, program budgeting and linkages - Background and progress: - Authorities committed to MTBF since 2016 with measures in 2019 MoF Budget Regulation requiring medium-term perspective in budget submission forms. - Initial ceilings for outer years provided for 2021 and 2022 in preparing the 2020 budget. - Main focus remained annual budget; concern that initial ceilings may be treated as floors; refinement to bottom-up estimates will take years. - Typical evolution: outer year expenditure initially incremental (inflation and growth), later refined with bottom-up estimates including investment O&M. - Strategy and costing: - Strategy for Responsible Development 2017-2020 extends to 2030 but lacks detailed costing constrained by MTFF; future strategy updates should include costing and MTFF comparison. - Sectoral and local strategic plans should align with national plan and inform annual action plans. - Policy clarity and program design: - Policy often emblematic and not thoroughly defined; effective PFM requires clear policy and improved policy design. - Programs should be costed based on outcomes, outputs and activities; linking to administrative units useful but not optimal for performance assessment. - Program identification and design require extensive review and may be piloted in selected ministries (e.g., Health, Education, Interior, Social Welfare, Transport, Infrastructure). - Program examples (indicative from 2019): - Protection of animal and public health — Well-defined - Construction of a coastal Lagoon (Vistula to Bay of Gdansk) — Stand-alone project - University of Warsaw 2016-2025 — Project for new construction or a transfer - Program of supporting Investments of significant importance to the Polish economy 2011-23 — Multi projects - Asbestos Cleansing Program 2009-32 — Sub-program - Coastal Protection Program — Well-defined - Maintenance of Sea Waterways in Oder Estuary 2019-28 — Project - Reconstruction of University Children’s Hospital Krakow — Project - Operational Program Technical Assistance 2014-2020 — Technical Assistance - Regional Operational Program Pomeranian Voivodeship 2014-2020 — Regional Assistance - Program Policy Statement (Box 1) four parts: - Policy description; Policy goals; Policy objectives; Policy standards. - Policy Goal: desired, measurable long-term result. - Policy Objectives: specific, measurable short-to-medium-term results with time, number and cost. - Policy Standards: quantity and quality parameters. - Recommendations (numbered as in source): - 1. Head towards aligning government policy priorities in a National Strategic Plan costed within the constraints of the MTBF; (MoF, medium term) - CoM to decide appropriate Ministry for task; CoM to ensure sectoral and regional plans harmonize with National Strategic Plan. - 2. Ensure consistency in program segment SCoA and MTBF reforms by enhancing technical support in CoM; (MoF and CoM, medium term) - Possibly expand Centre for Strategic Analysis/Centre for Assessment of Administration in CoM; develop small dedicated advisory team; formalize communication structures. - 3. MoF to reengage with line ministries to assist MTBF submissions and refine forward estimates based on desired policy outcomes; (MoF and relevant line ministries, medium term). ### Performance indicators, piloting and rollout - Performance indicators: - Outcomes and outputs development is time-consuming and requires training across program management teams. - Outputs example: education of 5,000 extra schoolchildren to grade 9 in 2020; 10 percent extra mothers breastfeeding for at least 6 months in 2021. - Indicators should be Specific, Measurable, Achievable, Relevant and Time bound (SMART). - Phased rollout: - Identify some Key Performance Indicators (KPIs) initially. - Pilot programs in key service delivery ministries and larger municipalities; include all local governments over time. - Full rollout may be inappropriate for some ministries (e.g., Defense, Finance, Foreign Affairs). - Spending reviews: - Examples conducted by MoF: payments to farmers using qualified seed material; teachers motivation and remuneration; indexation mechanisms for social and health expenditures; housing support policy; road programs financed from National Road Fund; tasks executed by Voluntary Work Corps; institutions with budget autonomy. - Too early to assess impact of reviews on budgetary decisions. ### IT environment — systems, survey results and urgent actions - Systems in use: - Financial Management system essentially cash based. - Trezor system used by Budget Departments and three levels of budget holders for formulation, allocation, control, cash planning/control and reporting; supports daily transfers and suite of statutory reports [Rb-23, 23A, 23B, 24, 27, 28, 28NW, 28, 28UE, 28NW, 28CAP, 28UECAP, 33, 35, 40, 50]. - TREZOR periodically incorporates external data for accrual-based reports and imports some local government data from BeSTi@. - BeSTi@ installed in 2,807 local government units, 16 regional accounting chambers and the MoF; enables preparation and electronic submission of budget/financial reports and MYFFs. - IT survey (covered 2,694 central and local government entities): - 70 percent of participating entities use 12 IT programs to support general-purpose accounting; remaining 30 percent use further 128 IT programs. - 65,5 percent of state budgetary entities use 7 IT programs to support their general-purpose accounting; remaining 34,5 percent use a variety of 89 other IT programs. - 16,7 percent of participating entities share their IT program with their subordinates. - Fragmentation and findings: - IT support fragmented across many systems; standalone third level systems interfaced with TREZOR for non-cash information. - Since 2016 only 8,9 percent of entities replaced IT systems; a further 11,9 percent have plans to do so. - 2016 MoF survey indicated 93 percent of public sector entity systems have feasibility to expand; of these 85 percent require system provider changes, 8 percent can be expanded inhouse. - Almost 20 percent planned to modify or replace systems (most planned for 2017). - Recommended IT focus: - Define SCoA requirements first; focus on data relationships, data warehouses, interfaces, interoperability and interconnectivity rather than a single integrated system. - Promote shared service centers for smallest entities; consider MoF-provided accounting application offered free of charge. - Urgent IT strategy actions and timeline: - Upgrade/replacement could take from two to four years. - SCoA implementation conditional on tested software and requisite hardware being operational for pilot roll out. - BSR 1 project should, within the next three months, requisition IT consultant services to: - Determine gaps in functionalities versus SCoA requirements. - Provide strategy for financial software development and deployment, including feasibility of web-based shared service centers. - Provide costing and timelines for implementation. ### IT strategy, SCoA implementation and project management - Comprehensive IT strategy required to support timely implementation of SCoA reforms. - Urgent actions: - Assess accounting systems’ ability to collect and consolidate financial information using new SCoA. - Select best future option as a priority. - SRSS follow-up: - SRSS considered a follow-up project for SCoA implementation; SRSS representatives joined mission to discuss objectives and modalities and draft project plan to be developed. ### Fiscal reporting across the PFM cycle, principles and benefits of SCoA - PFM cycle: - Initiated by national strategic plans reflected in the MTBF; MTBF determines yearly budgeting, revenue/expenditure/debt management, accounting, GPFS and specialized reporting, followed by audits and spending reviews. - Financial reporting integration: - Cash-focused reporting controls financing but neglects non-cash assets/liabilities; accrual accounting captures assets/liabilities and net worth. - GPFS core to GPFRs; GPFS supplemented by notes and linked to budgetary information per IPSAS 1 and IPSAS 24. - For cash-basis budgets, execution should be comparable in GPFS (Statement of Comparison of Budget and Actual Amounts or harmonized cash-flow statement). - IPSASB RPGs recommend three additional reports: Long-Term Sustainability of Entity’s Finances; Service Performance Information; Financial Statements Discussion and Analysis to integrate budgets, MTBF, performance and statistical reporting. - Benefits of SCoA adoption: - Improves quality and integration of statistical, budgetary and financial reporting. - Classifies financial data into multi-dimensional granular data for control, accountability and reporting. - Enhances consistency and facilitates reconciliation across reporting purposes. - Appendix II — Core principles for building a SCoA (at least seven): 1. Comprehensiveness 2. Adequate Granularity 3. Mutual Exclusiveness 4. Avoiding Redundancy 5. Internal Consistency 6. Unified Framework 7. Scalability - Observed deviations from principles: - Fragmentation with at least 5 classifiers for specific reporting purposes violating unified framework. - Lack of granularity for transactional accounts. - Segment overlaps (Chapters mixing organizations, programs, projects, activities and funds) violating mutual exclusiveness. - Paragraph segment code overlaps with account, fund and administrative codes violating avoidance of redundancy. - Proposed remedy: integrate separate classifiers into one multi-dimensional SCoA structure, parse overlaps into appropriate segments, and enhance administrative and economic granularity. ### Appendix III–IV highlights - Conceptual differences mapped among GFSM 2014, IPSAS and CF, noting coverage differences for assets, liabilities, and ownership contributions. - Mapping examples (Paragraphs to CF/IPSAS): - Paragraph 001 Receipts from natural persons’ income tax — CF, IPSAS1 Revenue — IPSAS 23 Income Taxes. - Paragraph 078 Receipts from disposal of property rights — CF, IPSAS1 Assets (disposal of). - Paragraph 808 Receipts related to Treasury securities, credits and loans and other financial instruments on the domestic market — CF, IPSAS1 Liabilities (incurrence of). - Paragraph 255 Entity-specific grant from the budget for a State culture institution — CF, IPSAS1 Expense Grants. - Paragraph 606 Expenditure for investment purchases of budgetary units (606004 Artillery equipment) — CF, IPSAS1 Assets (acquisition of). - Paragraph 976 Redemption of Treasury bonds sold abroad — CF, IPSAS1 Liabilities (settlement of). *Source: IMF Fiscal Affairs Department mission report (December 5–18, 2019) contained in the document 1polea2020001.* ### 1. Four Parts of the Program Policy Statement ___________________________________________________ 37 ### 1. Four Parts of the Program Policy Statement ### Preface - A Fiscal Affairs Department (FAD) capacity development (CD) mission took place in Warsaw from December 5–18, 2019. - Mission participants met with senior officials of the Ministry of Finance (MoF), including: the Director of the State Budget Department, Ms. Anna Napiórkowska; the Director of the Accounting and Auditing Department, Ms. Justyna Adamczyk; and representatives of Budget Zone Financing Department, Economic Policies Support Department, Economy Financing Department, Local Governments’ Finances Department, Macroeconomic Policy Department, Public Debt Department, and Paying Authority Department. - Messrs. Riccardo Ercoli and Iakovos Dimitriou, Policy Analysts of the European Commission’s Structural Reform Support Services, joined for a day. - Mission appreciation expressed to Ms. Katarzyna Szarkowska, Mr. Bartosz Staszewski, the IMF resident representative in Warsaw and staff, and interpreters Mses. Joanna Rheindorf-Zaorska and Bozena Glowacka. ### Executive Summary — substantive findings and analysis - The Polish government is making good progress with implementing the ambitious Budget System Reforms (BSR) program, first approved by the Council of Ministers (CoM) in 2016. - Government demonstrates a high level of commitment and is making significant progress implementing recommendations of earlier FAD missions with support of the resident advisor. - Governance structure for reforms is appropriate and effective, supported by various working groups; management and working arrangements foster good collaboration and coordination. - Caution: harmonizing reporting may require bolder decisions (example: revising definitions of revenue and expense to exclude proceeds from the sale of assets and payments incurred for the acquisition of non-financial assets to enable harmonized reporting throughout the fiscal cycle). - Significant milestones reached since project start in 2016; Stabilizing Expenditure Rule (SER) introduced in 2013 and implemented in 2015. - Several amendments made to the Public Finance Act (PFA) and supporting regulations to facilitate ongoing reforms. - Assumptions to Budget System Reforms approved by the CoM guided the first phase (BSR 1 project) and include first proposals on the new Standard Chart of Accounts (SCoA). - Working groups have proposed SCoA structure and details for various segments; further modifications required before BSR 1 Steering Committee approval for coding, testing, and implementation. - Need for new thinking about classifications rather than accommodating existing classifications in a new structure; harmonization across the PFM cycle discussed. - Economic segment of classification is the most challenging area; two options considered and a compromise solution may be necessary; solution must be based on consistent application of definitions of main elements throughout the PFM cycle. - Administrative and fund segment proposals show overlap between fund and administrative segments; recommendations: - Identify individual reporting entities per accountability and responsibility before establishing controlled entities for consolidation boundary determination. - Adhere to mutual exclusivity: entities cannot be classified as both an administrative unit and in the fund segment. - Once identified as an administrative unit, sources of funds for such an entity can be either a fund (fund segment) or another entity (administrative segment), only. - Functional segment proposals developed but need supplementation by program and project segments. - Developing program segment of SCoA will form basis for data collection for MTBF and performance-based budget indicators. - Implementation will facilitate linkages between policy initiatives, MTBF, and performance. - MTBF development actions needed to synchronize multi-year state financial plans and annual budgets: - First year of plans should correspond to the annual budget (achieved in 2019). - Outer years should, in time, provide useful prediction of future year budgets to allow medium-term planning; outer year estimates should incorporate inflation and growth estimates and detailed analysis of investment project costs over time. - Guidelines provided to enhance performance-based indicators by improving program structures, aligning SCoA, MTBF and program structures, and improving communication and coordination between MoF, CoM and the legislature. - Accounting systems readiness survey indicates most central government entities are ready to accommodate SCoA; gap analysis on IT-systems urgently needed to identify collection and consolidation capabilities required for testing and implementing SCoA. ### Recommendations — Integration of Fiscal Reporting (III) - 1. Adopt a balanced view of different purposes and uses (internal and external) of the SCoA including statistical reporting, budgetary, and financial; - 2. Ensure that all the relevant user needs are equally represented and taken into consideration in the development of the SCoA; - 3. Focus development work on the connections between the budget and GPFSs, and the needs for reconciling budgetary reporting and financial statements; and - 4. Address in the design and implementation of PFM reforms, the connections between enhancing MTBF and financial reporting. ### Recommendations — Developing the Standard Chart of Accounts (IV) - Administrative segment: - 1. Identify accountability levels at which individual and consolidated financial reports should be compiled in the administrative classification; - 2. Review and refine the taxonomy of the Public Finance Sector as defined in the 2009 PFA, Article 9; - 3. Classify appropriate sub-types of entities in consultation with the respective Level 1 Budget Holders; - 4. Define subsidiary reference tables for reporting by other combinations of public entities as required for statistical or legislative reporting. - Economic segment: - 1. Ground further development of the economic category in the generally accepted concepts of revenue, expense, assets and liabilities; - 2. Develop a compromise solution for the economic classification that incorporates elements from the two options considered; - 3. Use existing classifications in budget accounts and other reports only as a starting point for the development of the economic segment and be prepared to make bold decisions such as the revision of the definition of revenue in the Budget to align definitions; - 4. Have in mind the future structure of the budget, financial statements, statistical, and managerial reports while finalizing the structure of the economic segment; - 5. Articulate the economic segment so that data can be pulled out easily at various levels of classification in a consistent manner with the structure of the different reports; - 6. Apply the notions of relevance, materiality, and cost benefit to decide on the granularity of information classified in the economic segment. - Fund Segment: - 1. Review the proposed SoF classification structure and eliminate overlaps with other segments (most notably administrative classification) of the SCoA. ### Recommendations — Developing the Medium-Term Budget and Performance Budgeting (V) - 1. Head towards aligning government policy priorities in a National Strategic Plan costed within the constraints of the MTBF; - 2. Ensure consistency in the reforms of the program segment of the SCoA and the MTBF reforms by enhancing the necessary technical support in CoM as the centrepiece of the Integrated Planning System; - 3. MoF to reengage with line ministries in order to assist with MTBF submissions including the further refining of forward estimates based on policy outcomes desired. ### Recommendations — IT Environment (VI) - 1. Review the ability of the existing collection and consolidation financial software to facilitate the implementation of the proposed SCoA and accounting reforms. - Note: "The anticipated dates for these deliverables are being finalized in consultation with the working groups. The dates are being synchronized with the work plan of the resident advisor." ### Introduction — objectives and context - Main objective of CD: support MoF in developing a new standard chart of accounts (SCoA) to facilitate fiscal reporting and accounting and to develop aspects of the MTBF as needed. - Polish government approved a six-point plan (Assumptions to Budget System Reform (BSR)) in July 2016. The plan’s components are: - implementation of a MTBF; - integration of annual and multi-annual planning processes, and modifications to the budget calendar; - redefinition of the role of the CoM, line ministries, and the Ministry of Finance (MoF) in the budget process; - unification of the traditional budget classification and the performance-based classification; - improvement in accounting and financial reporting systems; and - institutionalization of spending reviews. - Introducing SCoA will require improvements in organizational arrangements, accounting and financial reporting standards, principles and policies, and accounting systems. - MTBF will require adjustments to budget calendars, administrative reforms including identification of programs and introduction of spending reviews. - IMF FAD assistance requested, benefiting from previous World Bank capacity development work. - Past FAD advice in 2008, 2010, 2017, and 2019 referenced; government has made significant progress but further work remains outstanding. ### Table 1 — Summary of Progress Made in Implementing Fiscal and Budgetary Reforms (selected items) - Cross-cutting Issues: - Implement permanent fiscal rules — Achieved. Stabilizing Expenditure Rule introduced in 2013 and implemented in 2015 - Introduce a Fiscal Responsibility Law — Partly achieved. Several Amendments to Public Finance Act introduced since 2010 - Initiate a budget reform process — Achieved. CoM approved MoF proposals in the Assumptions to Budget System Reform paper, July 2016 - Establish a Fiscal Council — Not achieved - Comprehensively review the Public Finance Act to incorporate reforms in the budget process — Partly achieved through amendments to Public Finance Act since 2010 - Budget strategy paper presented to the CoM at beginning of the budget process — Partly achieved with the introduction of multi-year forecast requirements in 2019 MoF Budget Regulation - MOF to introduce a change management strategy — Not achieved. - SCoA: - Set up appropriate governance arrangements for the SCoA project — Achieved. Steering Committee, Working Groups and Project Management was established and functions effectively. - Consider and assess user needs in light of international standards and guidelines — Ongoing. User survey conducted, results analyzed, and all forms of financial reporting are being considered in the development of the structure - Define and agree a conceptual structure for the SCoA — Partly achieved. Working groups developed proposals, that will be further developed and decided on based on advice of this mission. - Standardize the economic and functional segment based on GFS/ESA — Partly achieved. Proposals for these segments partly reflect the international classifications - Standardize the Administrative segment across various reports and ensure consistency with regional and international requirements to report on general government and public sector — Partly achieved. Proposals for these segments partly reflect the international classifications - MTBF: - Build and implement expenditure forward estimates model — Partly achieved. No systematic framework yet in place for bottom-up forward estimations – however some pilots were conducted. - Synchronize preparation of the MTBF and annual budget — Initiated. First step in building a top-down decision-making process initiated in 2019 MoF Budget Regulation. - Define the scope of the MTBF to cover all the entities, funds and accounts that have budgetary impact — Not achieved - Strengthening engagement with line ministries in preparing forward-estimates — Partly achieved during 2017, but now stalled as the focus shifted to SCoA development completion as a priority. - Implement a performance-based budget system — Partly achieved. Performance data are compiled and presented but are not integrated with decision making on the annual budget, nor with budget execution. - Establish a spending review committee in the MoF, and initiate first reviews — Achieved – A Committee was set up and some reviews conducted. ### Standard Chart of Accounts — summary of key issues - Progress: - Working groups have made good progress proposing SCoA structure and segment details; further refinement needed for approval, coding, testing, implementation. - Key challenges and guidance: - Economic segment is most challenging; two options considered and a compromise likely needed. - Need to adopt generally accepted concepts and consistent definitions of revenue, expense, assets, liabilities across the PFM cycle. - Avoid overlaps between fund and administrative segments; apply mutual exclusivity in classification. - Develop program and project segments to support MTBF, performance-based budgeting, and linkages between policy, MTBF and performance. - Urgent need for IT gap analysis to ensure collection and consolidation systems can support SCoA testing and implementation. *Source: IMF Fiscal Affairs Department mission report (December 5–18, 2019) contained in the document 1polea2020001.* ### 6. The WB supported this reform, as part of their broader Enhancement of Public ### 1polea2020001 - 6. The WB supported this reform, as part of their broader Enhancement of Public ### Development and governance of the Standard Chart of Accounts (SCoA) - The WB supported this reform as part of their broader Enhancement of Public Sector Accounting and Financial Reporting Program, which came to an end in 2016. - WB provided guidance on integration of the SCoA and budget classification that provides the broad conceptual design architecture of the reform. - Conceptual design elements were adapted to Polish circumstances, initially focusing primarily on four core segments: the administrative, economic, fund, and functional classifications. - Some attention was also given to the development of the program classifications to accommodate classification in use in the current performance budgeting system; this requires further fleshing out during the remainder of the development phase of the SCoA. - Governance of the development phase is conducted within dedicated projects with Steering Committees and working groups covering various aspects of the reform. - Early work focused on resolving the scope and coverage of the public sector and the economic segment of the SCoA; preliminary structure proposals for the four core segments were developed and will be refined with subsequent CD missions and support of the resident advisor. ### Medium-Term Budget Framework (MTBF) progress - The February 2017 FAD Capacity Development (CD) mission found that many of the prerequisites are in place for implementing a successful MTBF. This mission provided high-level guidance on MTBF design and tools. - Recommendations included enhancing the role of the CoM in the resource allocation process and designing a standard approach for line ministries to prepare forward estimates. - October 2017 follow-up mission found a first attempt at preparing forward estimates had been made; measures and methods to improve these estimates were discussed and working examples with three ministries were used to illustrate the methodology. - Additional guidance on refining the methodology for preparing forward estimates was provided in May 2019. - Authorities introduced changes to the budget calendar and issued broad guidelines for preparing forward estimates, enabling the CoM to intervene and make decisions earlier in the budget process. - A MoF Budget Regulation issued in 2019 required all holders of budgetary parts to prepare a medium-term budget with initial estimates for 2020, and starting estimates for 2021–22. - Further refinements of estimation processes at budget holder level depend on other reforms in the classification system and estimation procedures; outstanding needs include providing comprehensive guidance on bottom-up forward estimation procedures and fully incorporating performance-based indicators. ### Integration of fiscal reporting across the PFM cycle - Fiscal reporting occurs at various phases of the PFM Cycle; need for a SCoA is well agreed in Poland but doubts exist on how to use it to harmonize reporting through the fiscal cycle. - Fostering an integrated view of the different reporting elements of the fiscal cycle is less well understood; amalgamating views is needed to overcome obstacles in areas such as the economic segment of the SCoA and integration between the MTBF and financial reporting. - The conceptual basis of the various phases of the PFM cycle and their fiscal reporting needs were discussed extensively (see Appendix I in source). - Particular focus on the role of general purpose financial statements (GPFS) and their integration with other fiscal reporting needs. ### An integrated approach to financial reporting — key concepts - Financial information must integrate multiple dimensions of financial operations; no single notion captures every dimension. - Cash-focused reporting prioritizes control over financing expenditure but neglects non-cash resources and management of all assets and liabilities; accrual accounting captures assets and liabilities and addresses net worth as an indicator of financial sustainability. - The basic building blocks of financial reporting derive from the entity’s budgetary and financial accounting systems: adequate information about assets and liabilities, revenue and expense, cash inflows and outflows, and budgeted amounts compared to actuals. - Accounting information should be supplemented by service performance indicators and statistical reporting to assess long-term sustainability, intergenerational equity, efficiency and effectiveness, and stewardship responsibilities. - GPFS form the core of general purpose financial reports (GPFRs) and provide information about financial position and financial performance; GPFS present information primarily from the entity’s financial accounting system supplemented by notes. - In Poland, requirements exist for compilation of individual financial statements which are consolidated by entities servicing holders of budgetary parts or by local governments, but consolidation coverage is incomplete: - Consolidated financial statements are not prepared at all levels of government. - At individual local government level, only consolidated balance sheets are provided for the economic entity encompassing entities controlled by that local government. - Public entities with legal personality are not consolidated at holder of budgetary part level. - There are no consolidated financial statements available for the whole of the State administration. - Harmonization of accounting and financial reporting regulations facilitates understandability, comparability and consolidation; International Public Sector Accounting Standards (IPSAS) provide international standards for high-quality financial reporting. - Budgetary information should be a component of GPFSs and be linked or reconcilable with financial accounting information; IPSAS 1 and IPSAS 24 provide for budgets and actuals to be reported in GPFS by entities required or electing to make approved budgets public. - For cash-basis budgets (as in Poland), execution information should be prepared on a comparable basis, either in a Statement of Comparison of Budget and Actual Amounts within the GPFS or by harmonizing the format of the Cash-flow statement required by IPSAS 2; IPSAS 24 sets requirements for reconciliation of actual amounts reported in the budgetary statement with other financial statements at the level of net cash-flows from operating, investing, and financing activities. - The scope of financial reporting is broader than financial statements and implies an integrated set of GPFRs, plus statistical and budgetary reports to match users’ needs. - IPSASB Recommended Practice Guidelines (RPGs) propose three additional reports: Long-Term Sustainability of Entity’s Finances; Service Performance Information; Financial Statements Discussion and Analysis — integrating budgetary and financial accounting information with entity strategic plans, MTBF, performance and statistical reporting. ### Main findings - An integrated view of objectives and components of financial reporting should be further enhanced in Poland. - Implementation of the new SCoA can facilitate: - Amalgamation of views among departments involved in the Project. - Better understanding of the role of, and requirements for, the SCoA under development. - Leveraging connections between functions and systems along the PFM cycle, particularly between MTBF and financial reporting. - Improving transparency and accountability at different stages of the PFM cycle. - Designing and implementing PFM reforms in line with best international practice. ### Recommendations - 1. Adopt a balanced view of different purposes and uses (internal and external) of the SCoA including statistical reporting, budgetary, and financial; (MoF Working groups, short term) - 2. Ensure that all the relevant user needs are equally represented and taken into consideration in the development of the SCoA; (BSR Steering Group, continuously) - 3. Focus development work on the connections between the budget and GPFSs, and the needs for reconciling budgetary reporting and financial statements; (MoF, short term) - 4. Address in the design and implementation of PFM reforms, the connections between enhancing MTBF and financial reporting. (MoF, medium term) ### Developing the SCoA — Administrative segment - Progress with developing the SCoA was reviewed and guidance provided to inform pending decisions on the SCoA structure; general principles for building a SCoA were discussed to resolve outstanding issues (see Appendix II in source). - Administrative segment is essential for identifying accountability and is used in consolidating financial reporting. - Poland PFA, Article 9 defines the scope of the Public Finance Sector by enumerating administrative entities, authorities, funds, and some non-defined unique organizations without legal personality. - Administrative segment classifies organizations (ministries, departments, agencies and other budget-funded entities) to identify responsibility and accountability centers for: - Budget control: identify entity responsible for managing resources, monitor and manage use of budget in accordance with annual and multi-year appropriations, hold entities accountable for delivering policy objectives. - Reporting: provide government financial information by statistical sector and by consolidated and individual reporting entity to policy makers, government managers, parliament/legislature, the broader public, supreme audit institution, credit rating agencies and international agencies; set organization segment as balancing segment for aggregated and/or consolidated financial reports; adhere to statutory and international reporting requirements and standards. - Fiscal responsibility, and cash and other resource management: optimize the use of government financial resources by entities. - Proposed administrative segment reflects current hierarchy of central government budget holders configured in the Trezor system; same configuration proposed for local government budget holders. - Hierarchical levels and coding digits (Table 2 and Table 3 in source): - Segment Sub Segment Digits - Administrative Level 1-First Level Budget Holder 1/ : 3 - Level 2-Second Level Budget Holder : 2 - Level 2(1)-Second Level Budget Holder : 2 - Level 3-Entity : 5 - Entity Type : 2 - Rule of thumb for digits: - Level 1 budget holder to be coded using three digits as there are be 156 entities at level 1. - Level 2 budget holder to be coded using 2 digits as the coding at level 2 will be hierarchical and there are presently no more than 16 level 2 entities below a level 1 entity. - Level 3 entities to be coded using a unique 5-digit code for each entity as there are currently no more than 99,999 such entities. ### Key statistics (as reported) - State budget administrators: - First level holders (holders of budgetary parts) 156 - Second level holders 89 - Third level holders 2864 - Public finance sector entities: - State budgetary units 2468 - Executive agencies 10 - Institutions of budgetary economy 10 - State special-purpose funds 35 - State owned legal entities 67 - Municipalities, including cities with Powiat rights 2477 - Cities with Powiat rights 66 - Powiats 314 - Voivodships 16 - Local government public finance sector entities, including budgetary units ~55000 - Source notes: - Source: MoF and Statistics Poland; number of state budget administrators as of February 2020; number of state budgetary units as of December 2018. *IMF staff.* ### 28. The final recommendations of the working group on administrative segment ### 28. The final recommendations of the working group on administrative segment ### Coding rules and hierarchical structure - The final recommendations should include coding rules. - The rules should provide for the first three sub-segments of the segment to be coded hierarchically. - Two-digit codes of second-degree budget holders are not unique as the same code could be repeated under different first-degree budget holders. - The 7-digit code comprising first, and second-degree budget holders will be unique. - The five-digit code allotted to entities which are at level 3 uniquely identify each spending unit. - The rules should also provide guidance on the allotment of codes when there are modifications or additions to the administrative structure. ### Entity type sub-segment and taxonomy of the public finance sector - The entity type sub-segment could be used to reflect the taxonomy of the public finance sector as envisaged in Article 9 of the PFA. - Table 4 (illustrative) reflects the current taxonomy of the public finance sector and shows how entity type codes could be used to map entities to groups for reporting budget appropriations and budget outcomes by these groups. - Note: The refinement of the taxonomy of the public finance sector is a separate exercise and should be addressed before the entity types are grouped and coded for inclusion in the new SCoA. - Illustrative groups from Table 4 (Poland: Taxonomy of Public Finance Sector) include: - 01 Government administration authorities - 02 Authorities of state control - 03 Authorities of legal protection - 04 Courts and tribunals - 05 Local governments and unions thereof - 06 Metropolitan unions - 07 Budgetary units - 08 Local government budgetary entities - 09 Executive agencies - 10 Institutions of budgetary economy - 11 State special-purpose funds - 12 Social Insurance Institution and Funds - 13 Agricultural Social Insurance Institution and Funds - 14 The National Health Fund - 15 Independent public healthcare facilities - 16 State higher education institutions - 17 The Polish Academy of Sciences and organizational units - 18 State and local government cultural institutions - 19 Other state or local government legal persons established under separate statutes ### Reporting entities, IPSAS alignment, and institutional units - The taxonomy of public sector units and the administrative segment may be improved by identifying reporting entities, consistent with fiscal reporting and as defined in IPSASs. - IPSASB’s Conceptual Framework does not specify which public sector units should be identified as a reporting entity; a reporting entity can be: - a government or other public sector organization, with or without a separate legal identity, - a program, or - an identifiable area of activity. - Signals that resource providers and service recipients may depend on the GPFRs of the entity include responsibility to raise or use public resources, acquire or manage public assets, incur liabilities, deliver service on a significant scale. - Such reporting entities should be clearly identified and be aligned within the reformed administrative segment. - The flexible notion of reporting entity according to IPSASs could also be aligned with the notion of institutional unit from GFSM 2014. ### Level 3 unique code: mapping, reassignment, and data dictionaries - The unique code of the level 3 entity provides flexibility to map the entity to different sectors, functions or higher-level budget holders. - When a level 3 entity is attached to another higher-level budget holder due to administrative restructuring, the unique code of the level 3 entity can be reassigned, and past budget execution data migrated to the new higher-level budget holder. - It is possible to use data dictionaries or internal database tables to group level 3 entities to different sectors or combinations of sectors. - Recommendations to the BSR 1 Steering Committee on the structure of the SCoA should include a list of all the dictionaries/tables needed to map level 3 entities to sectors or other administrative groups required to be consolidated or aggregated for various reporting needs. - The criteria for mapping to different groups should be clearly defined. ### Control relationships, consolidation and accounting treatment - The administrative segment should include and identify controlling entities as defined in IPSASs. - According to IPSAS 35, an economic entity includes a controlling entity and one or more controlled entities. - The controlling entity presents GPFSs which consolidate accounts of all the entities within the economic entity. - Units in the administrative segment which are not reporting entities based on the IPSASB’s Conceptual Framework should consolidate within a broader economic entity if requirements for consolidation are satisfied. - For an economic entity to be identified, a control relationship as defined in IPSASB must be assessed to exist between a controlling entity and one or more controlled entities. - Control relationships among units and boundaries of economic entities should be clearly identified when designing the administrative segment. - There may be interests in other entities other than control, which give rise to significant influence on an “associate entity”; identifying the nature of relationships among entities is relevant to apply appropriate accounting treatment and disclosure requirements according to different IPSASs. ### Anomalies, funds, and criteria for inclusion in the administrative segment - Existing anomalies in administrative structures should be resolved before coding the segment. - One anomaly: funds regarded as separate public sector entities despite not having legal personality. - General principle: an administrative entity should be the controlling entity for funds as defined in a fund segment. - Entities meeting criteria of being a reporting unit should be coded as such in the administrative segment. - Only when within such entities the source of funding should be identified separately, a fund segment should be distinguished. - The criteria for identifying units to be included in the administrative segment should be linked to their status as individual or consolidated reporting units and to their status as institutional units. ### Main findings and recommendations - Main finding: The proposed administrative classification provides flexibility for grouping level 3 entities by sub-types, sectors, controlling entities, reporting entities or other administrative sub-sets for reporting purposes. - The criteria for assigning entities to different groups should be clearly defined and appropriate dictionaries/tables prescribed in the SCoA proposal to be submitted to the BSR 1 Steering Committee. Recommendations: 1. Identify accountability levels at which individual and consolidated financial reports should be compiled in the administrative classification; (MoF, short term) 2. Review and refine the taxonomy of the Public Finance Sector as defined in PFA, Article 9; (MoF, short term) 3. Classify appropriate sub-types of entities in consultation with the respective Level 1 Budget Holders; (MoF, short term) 4. Define subsidiary reference tables for reporting by other combinations of public entities as required for statistical or legislative reporting. (MoF, short term) *Source: IMF staff. (Excerpt from "The final recommendations of the working group on administrative segment")* ### 52. The economic segment seems to have been one of the most challenging areas for ### 1polea2020001 - 52. The economic segment seems to have been one of the most challenging areas for ### Economic segment — summary and recommendations - The economic segment has been one of the most challenging areas for progressing in the development of the SCoA. - Both options for structuring the economic segment present advantages and disadvantages and require a compromise solution grounded in full understanding and consistent application of definitions based on generally accepted concepts and principles. Recommendations (MoF, Working Group; short term): - 1. Ground further development of the economic category in the generally accepted concepts of revenue, expense, assets and liabilities. - 2. Develop a compromise solution for the economic classification that incorporates elements from the two options considered. - 3. Use existing classifications in budget accounts and other reports only as a starting point for the development of the economic segment and be prepared to make bold decisions such as the revision of the definition of revenue in the Budget to align definitions. - 4. Have in mind the future structure of the budget, financial statements, statistical, and managerial reports while finalizing the structure of the economic segment. - 5. Articulate the economic segment so that data can be pulled out easily at various levels of classification in a consistent manner with the structure of the different reports. - 6. Apply the notions of relevance, materiality, and cost benefit to decide on the granularity of information classified in the economic segment. ### Fund segment — purpose, benefits, and current issues - Purpose: - The fund segment of a SCoA ensures accountability of funds received by government entities from specific identifiable domestic and/or external sources and links expense to the source of financing (also referred to as Source of Funds (SoF) in Poland). - It identifies resources received from a specific fund and used by an entity to deliver a service and facilitates linkage of resources used with performance achieved. - Benefits of including the fund segment in the SCoA: - Facilitates fund accounting for resources whose use is defined by donors, granting authorities, governing agencies, other individuals or organisations, or by law. - Enables separation of financial resources between those immediately available for ongoing operations and those intended for donor-specified reasons. - Provides an audit trail that all moneys have been spent for their intended purpose. - Clarification: - The presence of the word “fund” in an entity’s name does not necessarily imply separate management in recipient accounts; if the fund is a separate institutional unit it is identified in the administrative classification and will not necessarily constitute a SoF for the recipient entity. ### Current SoF classification (Table 5) — Poland - The current classification of SoF in Poland is not comprehensive. The MoF regulation on budget classification prescribes a single digit for classifying the SoF and mainly relates to external multilateral and bilateral sources: - Code 1: Financing of programs from non-returnable funds originating from the European Union - Code 2: Co-financing programs carried out from non-returnable funds originating from the European Union - Code 3: Financing from foreign credits and loans or grants allocated to Poland by individual countries or institutions - Code 4: Co-financing of foreign credits and loans and donations and grants awarded to Poland by individual countries or institutions - Code 5: Financing from other non-returnable funds - Code 6: Co-financing of other non-returnable funds - Code 7: Payments related to the budget of European funds - Code 8: Financing of programs and projects from funds referred to in PFA, Art. 5 para. 3, with the exclusion of funds referred to in PFA, Art. 5 para. 3 subpara. 2, subpara. 5 let. c and d and subpara. 6, with the exclusion of the budget of European funds - Code 9: Co-financing of programs and projects carried out from funds referred to in PFA, Art. 5 para. 3, with the exclusion of funds referred to in PFA, Art. 5 para. 3 subpara. 2, subpara. 5 let. c and d and subpara. 6 - Code 0: Used when the above-mentioned categories do not apply - Source: MoF ### Proposed SoF structure (Table 6) — Poland - The proposed fund segment structure provides the granularity required to underpin on-going BSR and covers all types of sources including domestic earmarked and extrabudgetary funds and different external sources. - Proposed digits and descriptions: - Digits: 2 Source of Fund - 1 Type of Fund - 2 Fund Code - 1 Detail - Notes (as provided): - Source of funds: State, vovoidship, powiat, gmina, union of gminas, union of powiats-gminas, union of powiats, Metropolitan Unions, other domestic sources, multilateral organizations, bilateral development partners, and other international organizations; - Type of Fund: General budget, earmarked funds, extrabudgetary funds; - Fund Code: e.g. 01 2 01 Civil Society Development Fund, 01 2 06 Physical Culture Development Fund, 01 3 03 National Health Fund, 01 3 02 National Railway Fund, 10 1 01 EU structural funds, 10 1 02 Cohesion Fund; - Detail: To identify co-financing by sources of funding ### Overlaps and principle of mutual exclusiveness - There are overlaps between the proposed structure and other segments of the SCoA, contradicting general principles for building a SCoA. - The proposal includes elements that should be in the administrative segment (for example, the “Source of Fund” subsegment includes vovoidship, powiat, gmina, union of gminas). - SoF “Extra-Budgetary Funds” is classified repeatedly for different levels of local governments instead of using the multi-dimensional structure where a unique code for “Extra-Budgetary Funds” combined with the administrative classification identifies the local government entity. - Main finding: - The proposed source of fund classifications mix administrative units and sources of funding. Following mutual exclusiveness, administrative unit classification should be decided first and within such units the source of funds identified, rather than considering certain funds as both administrative units and funds. - Recommendation (MoF, short term): - 1. Review the proposed SoF classification structure and eliminate overlaps with other segments (most notably administrative classification) of the SCoA. ### Medium-Term Budget Framework (MTBF) — background and progress - Background: - Polish authorities committed to extend policy making into the medium term as a key instrument for achieving medium-term objectives set out in the Convergence program. Plans on moving towards a MTBF were first pronounced in 2016 and reiterated in early 2019. - Several FAD capacity development missions contributed to developing the MTBF. The first round of forward estimates for selected ministries was prepared as a technical exercise following the FAD TA mission in March 2017. Follow-up missions in November 2017 and April 2019 reviewed progress and offered guidance, recommending strengthened engagement with line ministries and defining the scope of the MTBF to cover all entities, funds and accounts with budgetary impact. - Project resources are currently directed towards developing a SCoA and when available forward estimates are envisaged to be further refined to embed the “bottom-up” estimates of MTBF. - Progress with MTBF: - Poland has made progress since 2016 in moving towards a multi-annual budget framework. - The 2019 MoF Budget Regulation incorporated the medium-term (three years) perspective in the standard budget submission forms. - Initial amounts of expenditure are supplemented with starting amounts of expenditure (initial ceilings) for two outer years. Starting amounts were issued for the first time for years 2021 and 2022 in preparing the budget for 2020. - Despite these reforms, the main focus in preparing the budget for 2020 remained on the annual budget. There is concern that budgetary parts may treat initial ceilings as floors; refining outer year limits will take some years. - Typical evolution: outer year expenditure is calculated incrementally at first (considering inflation and growth) and later refined with “bottom-up” estimates including investment expenditure and associated operations and maintenance. ### Strategy, program budgeting, and links to MTBF and SCoA - Strategy and costing: - The Strategy for Responsible Development 2017-2020 includes perspective up to 2030 and identifies objectives and basic sources of financing but does not comprise detailed costings constrained by the MTFF and is not easily used for prioritizing expenditure in annual planning. - Costing should be part of future strategy updates and compared with the MTFF to assess viability. - Sectoral and local strategic plans should align with the national plan and inform annual action plans for budget implementation. - Policy clarity and linking budgets to policy: - Ensuring linkage of budgets to strategy and policies is a key challenge; policy is often emblematic and not thoroughly defined, making it difficult to link budgets to policy objectives. - Effective PFM requires clear policy and improved policy design processes. - Once policy is clear, link expenditures through activities, outputs, outcomes and programs to declared policy objectives via program policy review and budget preparation. The CoM can ensure policy consistency by reviewing proposed budgets, which requires sufficient CoM capacity. - Linkages between MTBF, SCoA, and Performance Budgeting (PB): - The BSR agenda expects traditional classification and presentation of the budget to be linked with performance-based classifications, with implications for the MTBF. MTBF should include a program and performance-based classification to support policy decisions. - MoF intends to support baseline costing and setting of ceilings using programs based on well-defined outcomes, outputs and activities and has recognized the need for defining programs in a dedicated segment of the SCoA. - Currently ceilings focus on budgetary parts rather than well-defined programs; programs should be costed based on outcomes, outputs and activities. Linking these to administrative units is useful but not optimal for performance assessment. - Designing programs requires extensive review of administrative structure and expenditure program design to clarify mandates and key competencies of ministries. - Program design and piloting: - Poland’s current programs are a mixture of well-defined programs, sub-programs, projects, and project/transfer funding that could cover many programs, including those under EU financing. - Allocating EU-financed activities to well-defined programs does not require changes to EU financing modalities but requires identifying appropriate program allocations. - Examples of select programs in 2019 (indicative types as presented): - Protection of animal and public health — Well-defined (ostensibly) - Construction of a coastal Lagoon (Vistula to Bay of Gdansk) — Stand-alone project - University of Warsaw 2016-2025 — Project for new construction or a transfer - Program of supporting Investments of significant importance to the Polish economy 2011-23 — Multi projects that could be incorporated into many programs - Asbestos Cleansing Program 2009-32 — Sub-program (of building rehabilitation for example) - Coastal Protection Program — Well-defined - Maintenance of Sea Waterways in Oder Estuary 2019-28 — Project - Reconstruction of University Children’s Hospital Krakow — Project - Operational Program Technical Assistance 2014-2020 — Technical Assistance probably covering many program areas (EU funded) - Regional Operational Program Pomeranian Voivodeship 2014-2020 — Regional Assistance probably covering many program areas - Program identification in the SCoA should reflect all programs and comply with the four parts of a Program Policy Statement (see Box 1). Programs can be redefined over time and the SCoA updated accordingly; initial program and sub-program structures should be identified for piloting and testing. - The scope of programs can vary across countries; Poland may pilot program classifications in selected ministries (e.g., Health, Education, Interior, Social Welfare, Transport, Infrastructure) with large expenditure and measurable performance indicators before deciding on broader coverage. *Source: IMF staff.* ### Box 1. Four Parts of the Program Policy Statement ### 1polea2020001 - Box 1. Four Parts of the Program Policy Statement ### Program Policy Statement: definitions and structure - The Program Policy Statement is a written presentation of: - The policy description - The policy goals - The policy objectives - The policy standards - Policy is defined as: The translation of government’s political priorities and principles into courses of action to deliver desired changes. - Policy Goal is defined as: The desired, measurable result to be achieved from government actions that should be achieved in the long term. - Policy Objectives are defined as: Specific results, precisely measured in terms of time, number and cost, that can be accomplished in the short-to -medium term and that are intermediate steps in achieving a policy goal. - Policy Standards are defined as: The quantity and quality parameters that give the policy meaning. - Source attribution in the Box: SPEM Project, Albania. ### Institutional arrangements to drive program segment reform - Dedicated units in CoM and MoF would be required to drive the program segment reform process. - The BSR project team provides a basis for such an institution within the MoF. - A similar function should be performed in the office of CoM; the Centre for Strategic Analysis and/or the Centre for Assessment of Administration in the office of CoM could provide technical advisory services. - Such institutional set–up has been advanced as part of an Integrated Planning System in some countries, e.g., Lithuania and Albania. - Benefits: - Provides political space to advance program and performance indicator reforms. - Allows CoM to review ceilings and budget submissions as early in the process as possible. - Unit in CoM should interface regularly with other stakeholders, such as the Ministry responsible for strategy development. ### Integrating program classifications into the SCoA and MTBF - Integration requirement: - Integration of program/functional classifications into the SCoA is a prerequisite for a fully integrated program segment and performance indicators. - Classification change: - In addition to administrative, economic, fund, and functional segments, expenditure should also be classified by program and sub-program level. - Expected capabilities: - Enable production of accounting, statistical, economic, and performance reports. - Link all expenditure to activities, outputs and outcomes. - Allow compilation of a matrix of spending by economic classification and programs. ### Performance indicators, outputs and outcomes - Development characteristics: - Development of performance indicators (ordinarily outcomes and outputs) is time-consuming and requires training across government program management teams. - Definitions and examples: - Outcomes: broad policy goals (e.g., increase in literacy; increase in maternal and child health). - Outputs: detailed, measurable items (e.g., education of 5,000 extra schoolchildren to grade 9 in 2020; 10 percent extra mothers breastfeeding for at least 6 months in 2021). - Characteristics required: - Ability to measure outputs is central. - Outputs should be specific, achievable, realistic and time bound. - Each output achieved through combination of activities (which have associated costs). - Monitoring: - Spending on activities captured through the SCoA. - Monitoring of outputs requires supplementary information, increased coverage and frequency. - Skilled service providers may prefer service delivery over bureaucratic reporting to Program Management Teams. ### Box 2 — Characteristics of Effective SMART Indicators (Source: World Bank Group) - Specific: Indicators should reflect simple information that is communicable and easily understood. - Measurable: Are changes objectively verifiable? - Examples: Students’ learning achievement; Value of land (number of hectares, multiplied by price per hectare); Percentage of customers who are satisfied with the availability of potable water or electricity - Achievable: Indicators and their measurement units must be achievable and sensitive to change during the life of the project. - Relevant: Indicators should reflect information that is important and likely to be used for management or immediate analytical purposes. - Time bound: Progress can be tracked at a desired frequency for a set period of time. ### Spending reviews and performance-linked expenditure analysis - Well defined performance indicators enable meaningful monitoring, evaluation and expenditure reviews. - Unit costs of outputs can be calculated and compared across regions and countries, driving efficiency savings. - Examples of spending reviews MoF has conducted in Poland: - Payments to farmers utilizing qualified seeds material; - Teachers motivation and remuneration mechanisms; - Indexation mechanisms regarding social and health expenditures; - Housing support policy; - Road programs financed from National Road Fund (excluding PPPs); - Tasks executed by Voluntary Work Corps, especially with regard to beneficiaries not in employment, education or training; - Institutions with budget autonomy, e.g., Chancellery of lower and upper chamber of parliament, Supreme Audit Institution, etc. - MoF approach to efficiency gains: balanced fear of units losing funding with assurance that any such gains can be retained within the budget holder’s institution. - It is too early to ascertain whether these reviews have impacted budgetary decisions within line ministries. ### Phased rollout, KPIs and coverage considerations - Phased approach: - Identification of some Key Performance Indicators (KPIs) initially. - Piloting of programs in key service delivery ministries with policies, outcomes, outputs and activities linked to expenditures. - Pilots enable assessment before full or maximum rollout. - Coverage: - Rollout should include all LGs, given their importance to service delivery in Poland. - Limitations: - Full rollout may be inappropriate for some ministries whose functions do not lend themselves easily to performance analysis (e.g., Defense, Finance, Foreign Affairs). ### Management flexibility and MTBF process enhancements - Management flexibility needed: - Ability to transfer funding between activities to secure delivery of goods and services more efficiently. - Requires increased management skills and shift from incremental year-on-year budgeting. - Benefits of bottom-up estimation: - Promotes accountability of budgeting at program level. - Multi-year horizons promote flexibility of carryovers in deserving programs year-to-year. ### Accommodating decentralized units and LG involvement - Some LGs already introduced performance budgeting frameworks based on service delivery projects. - Piloting program classifications in larger municipalities may be worthwhile. - PFM sophistication: - Warsaw and other larger LG units accommodate large budgets with significant EU funds. - LGs already budget using Multi-Year Financial Forecasts (MYFF). - Rationale for LG inclusion: - To fully cover program impacts, rollout to local governments is important. - Example: central-level program for social welfare may only capture administration and monitoring while actual payments are made by LG units; Voivodeship could represent a sub-program enabling cost comparisons per unit of welfare payments. ### Main findings on MTBF and program integration - There is room for government to strengthen development of the MTBF. - Requires strengthening and implementation of longer-term policies at a high level. - Development of appropriate program structures and preparation for MTBF software development are needed. - CoM engagement with the budgetary process has increased but could be deepened with technical support and guidance on translating government policy into strategic plans. - Current programs are not well integrated with performance indicators; program definitions should be revisited. - Engagement with line ministries has decreased since 2017 and re-engagement is required to refine budget submissions in line with medium-term ceilings issued according to the 2019 MoF Budget Regulation. ### Recommendations (numbered as in source) 1. Head towards aligning government policy priorities in a National Strategic Plan costed within the constraints of the MTBF; (MoF, medium term) - CoM to decide the appropriate Ministry for this task; and - Once complete, CoM to ensure that sectoral and regional plans are developed in harmony with National Strategic Plan. 2. Ensure consistency in the reforms of the program segment of the SCoA and the MTBF reforms by enhancing the necessary technical support in CoM as the centrepiece of the Integrated Planning System; (MoF and CoM, medium term) - Possibly expanding the capacity of the current Centre for Strategic Analysis and/or Centre for Assessment of Administration in the CoM; - Developing a small dedicated team to advise on PFM reform within the CoM to foster support and understanding for these reforms; and - Formalizing communication structures that facilitate consistent reform progress between all relevant technical teams and other role players. 3. MoF to reengage with line ministries in order to assist with MTBF submissions including the further refining of forward estimates based on policy outcomes desired; (MoF and relevant line ministries, medium term). ### IT environment — systems in use - Financial Management system is essentially cash based. - Trezor system used by Budget Departments in MoF and three levels of budget holders for budget formulation, allocation, control, cash planning, cash control, and reporting. - Trezor functionalities include: - Preparation of budget bids and cash forecasts by third level budget holders, aggregation by higher levels, submission to MoF; - Distribution and recording of approved budget and cash limits from MoF through different levels of budget holders; budget breakdown by Sections, Chapters and Paragraphs; - Communication of monthly, weekly, and daily cash limits broken down to the third level of budget holders; - Daily transfer of funds from the government’s account at the National Bank of Poland (NBP) to bank accounts of third level budget holders in the NBP or the National Economy Bank (NEB) on the basis of payment instructions issued by the MoF; - Return of funds remaining unused at the end of the day to the MoF account by the NBP and recording in the Trezor system on the basis of the NBP bank statement; - Suite of financial reports including reports on Cash Balance, Profit and Loss Account and Statement of Changes in the Budget Entities’ Fund; - Suite of statutory budget reports including [Rb-23, 23A, 23B, 24, 27, 28, 28NW, 28, 28UE, 28NW, 28CAP, 28UECAP, 33, 35, 40, 50]. - TREZOR reports periodically incorporate data from external sources for accrual-based financial reports and budget execution reports on commitments and arrears. - TREZOR imports some local government finance data (reports RB-50 and Rb-27ZZ) from the BeSTi@ system. - BeSTi@ system: - Electronic data collection and dissemination system for local governments. - Installed in 2,807 local government units, 16 regional accounting chambers and the MoF. - Enables preparation and electronic submission of budget and financial reports, financial plans and MYFFs of local governments to MoF through regional accounting chambers. - System consists of three subsystems used by local governments, regional accounting chambers and the MoF, communicating via a communication server. - Functionality includes preparation, verification and dispatch of reports; analysis of financial situation using reporting module; calculating amount of general subsidy for local governments at MoF level; preparation of draft budget resolutions and MYFFs by local governments and sending them to regional accounting chambers for verification. - IT survey results on financial accounting software (survey covered 2,694 central and local government entities): - 70 percent of participating entities use 12 IT programs to support their general-purpose accounting; remaining 30 percent use further 128 IT programs. - 65,5 percent of state budgetary entities use 7 IT programs to support their general-purpose accounting; remaining 34,5 percent use a variety of 89 other IT programs. - 16,7 percent of participating entities share their IT program with their subordinates. ### Need for IT environment changes to accommodate SCoA and reforms - Fragmentation: - IT support is fragmented across a number of financial accounting and reporting systems. - EU PHARE project (2002–2006) envisaged integration of Trezor and BeSTi@; currently they are loosely interfaced with BeSTi@ transmitting some electronic reports to Trezor. - EU financed programs implemented by MoF’s Paying Authority Department through the NEB payment portal. - Standalone systems at third level budget holders interfaced with TREZOR for non-cash information (commitments, accruals, arrears). - Survey findings: - Since 2016 only 8,9 percent of entities replaced their IT systems with new ones; further 11,9 percent have plans to do so in the near future. - Earlier MoF 2016 survey indicated 93 percent of public sector entity systems have feasibility to expand; of these, 85 percent require changes by system providers, 8 percent can be expanded by inhouse teams. - Almost 20 percent of respondents planned to modify or replace their systems—most planned these changes for 2017. - Recommended IT focus: - Define current and future SCoA requirements unencumbered by perceived limitations of existing systems. - Focus on data relationships, data warehouses, interfaces, inter-operability and interconnectivity between systems rather than on a single integrated system. - Poland should first focus on SCoA data requirements and then seek vendor and public sector entity support to ensure systems can support these requirements. ### Urgent IT strategy actions and timeline - With the imminent start of the second phase of the BSR there is an urgent need for clarity on IT support needs for SCoA implementation. - The 2017 FAD Report envisaged scoping implications for IT systems in phase 1 and detailed consideration in phase 2 (funded by the EU). - Recommendations from recent IT survey include: - Promote use of shared service centers to outsource accounting function for the smallest entities. - Consider purchase or development by MoF of accounting application software for public sector entities to be offered free of charge. - Decision urgency and timeline: - Upgrade/replacement of system could take from two to four years. - SCoA implementation is conditional on a tested version of appropriate software and requisite hardware being operational in time for pilot roll out. - The BSR 1 project should, within the next three months, requisition the services of an IT consultant to assess the current financial software environment available to public entities. - IT consultant assessment scope: - Determine gaps in functionalities compared to requirements of the SCoA structure recommended by the SCoA working groups to the Steering Committee. - Provide a strategy for financial software development and deployment, including feasibility of establishing web-based shared service centers. - Provide costing and timelines of activities proposed for implementing the strategy. *Source: SPEM Project, Albania; World Bank Group; IMF staff.* ### 94. A comprehensive IT strategy is required to support the timely implementation of ### 1polea2020001 - 94. A comprehensive IT strategy is required to support the timely implementation of ### IT strategy and SCoA implementation - Paragraph 94: A comprehensive IT strategy is required to support the timely implementation of the SCoA reforms. - Current situation: - A variety of accounting systems are currently used for financial reporting needs in a very decentralized system. - Diversity and deficiencies in IT systems may cause delays in testing and roll-out of the reforms if they are found to be not suited to accommodate the changes. - Potential consequences include duplications in efforts and costs. - Urgent actions called for: - Assess these systems and the extent to which they will be able to collect and consolidate financial information of the entities using the new SCoA as a matter of urgency. - Select the best option to be used in future as a matter of priority. Recommendations: - 1. Review the ability of the existing collection and consolidation financial software to facilitate the implementation of the proposed SCoA and accounting reforms. (MoF, short term) ### Project management and SRSS follow-up - Paragraph 95: At the request of the authorities the SRSS considered a follow-up project to focus on the implementation of the SCoA reforms. - Mission actions: - Representatives of the SRSS joined the mission to discuss the objectives and modalities of the follow-up project. - In consultation with the authorities and the SRSS, the mission discussed a draft project plan that will be further developed. ### Fiscal reporting across the PFM cycle (Appendix I) - The PFM cycle description (Appendix I) highlights: - The cycle is initiated by national strategic or development plans reflected in the medium-term budget framework (MTBF). - MTBF is largely determined by costing of public expenditure and monitored through performance indicators. - MTBF provides the basis for yearly budgeting, which leads to revenue management, expenditure management, debt management, accounting, general purpose and specialized financial reporting, followed by quality control measures such as compliance and financial auditing, performance auditing and spending reviews. - Objective of PFM: - To assure that public resources are efficiently raised and utilized according to agreed strategic objectives and policy priorities, while preserving operational efficiency and fiscal sustainability. - Role of financial reporting and audit: - Various types of financial reports are prepared, among them the GPFS. - As a general good practice these GPFS should be subject to some independent external audit by either the Supreme Audit Chamber or private audit companies, as applicable. - The financial audit process ensures assessment of the quality of financial information; audit opinions should inform further improvements in the reporting system. - Information flow: - Information from reporting and audit is used to adjust entity’s objectives and programs and to develop subsequent PFM cycles. ### Accountability, transparency, and quality of financial information - Accountability and transparency: - Essential requirements across the whole PFM cycle. - PFM should be structured as “due processes,” in accordance with the law and other regulations and guidelines. - At each stage information must be accessible and checks and balance mechanisms established to ensure accountability. - Financial information quality: - Financial information must meet the qualitative characteristics of relevance, faithful representation, understandability, timeliness, comparability, verifiability. - Financial reports prepared in accordance with high-quality reporting standards, such as IPSASs, match those qualitative characteristics. - Accessibility: - The accessibility of financial information is a prerequisite for accountability and decision-making. - Information about results compared to targets is a basic mechanism for public sector accountability. ### Role and benefits of SCoA - The adoption of a SCoA: - Improves quality and facilitates the integration of the statistical, budgetary and financial reporting from the accounting systems. - Is the tool for classifying financial data into granular pieces of data across multiple dimensions. - Classifications are determined by their relevance to statistical, budgetary and financial accounting systems. - Recording data using a common classification system enhances consistency and facilitates reconciliation in financial information provided for statistical, budgetary and financial reporting purposes. - Compatibility with GFS/ESA: - Economic and functional classifications in the GFS/ESA are largely consistent with those at the basis of financial accrual accounting and reporting systems. - Recording transactions relevant to a cash-based budgetary accounting system is still possible using the same SCoA, given differences in scope and timing of recognition. ### Appendix II — Principles in Building a SCoA - At least seven core principles identified for effective development, implementation and maintenance of a CoA: 1. Comprehensiveness - The COA should be comprehensive enough to capture all the required/relevant information and serve the budget, accounting and statistical frameworks. - The SCoA should provide building blocks usable in any reporting system. 2. Adequate Granularity - Segments and sub-segments should facilitate many possible combinations of data elements for control, accountability and reporting. - Each segment should have sufficient detail to meet financial control, accountability, management, and reporting needs. 3. Mutual Exclusiveness - CoA segments and attributes should be defined to be mutually exclusive to avoid confusion in recording and reporting. 4. Avoiding Redundancy - No need for an independent segment if related information can be derived from another segment. - Establish relationships between classifications to minimize data capture volume and reduce input errors. 5. Internal Consistency - Hierarchical structure of CoA segments should be internally consistent, with a consistent numbering system and structure to reduce coding errors. - Use same categories of assets for purchases, sales, depreciation, maintenance, revaluations, and accumulated stocks. 6. Unified Framework - While subsidiary ledgers can capture unit-specific detail, aggregated information should use the same accounting classification to ensure consistency. 7. Scalability - CoA should allow flexibility for future additions and changes, provide room for growth and anticipate future reporting requirements, while avoiding excessive detail that overburdens the system. - Observed deviations from core principles in current CoA: - Fragmentation of the classification system with at least 5 classifiers for specific reporting purposes in violation of the unified framework principle. - Lack of granularity to compile transactional accounts. - Specific segments (e.g., Chapters) reflecting a mix of organizations, programs, projects, activities and funds in violation of mutual exclusiveness. - Paragraph Segment code overlaps with account codes, fund codes and administrative codes violating the principle of avoiding redundancy. - Proposed remedy: - The proposed new SCoA integrates the five separate classifiers into one multi-dimensional structure, parses overlaps in the Paragraph classification into appropriate segments, and enhances granularity of administrative and economic segments for transactional accounting. ### Appendix III and IV — Conceptual differences and mapping examples - Appendix III: Comparison of basic conceptual definitions across GFSM 2014, IPSAS, CF, with noted differences in coverage for assets, liabilities, and ownership contributions. - Appendix IV: Analysis of paragraphs in existing budgetary CoA showing mapping examples: - Revenues (cash receipts) examples: - Paragraph 001 Receipts from natural persons’ income tax — CF, IPSAS1 Revenue — IPSAS 23 Income Taxes. - Paragraph 078 Receipts from the disposal of property rights — CF, IPSAS1 Assets (disposal of) — Disposal of a non-financial asset classified according to nature of the asset. - Paragraph 808 Receipts related to Treasury securities, credits and loans and other financial instruments on the domestic market — CF, IPSAS1 Liabilities (incurrence of). - Expenditure (cash disbursements) examples: - Paragraph 255 Entity-specific grant from the budget for a State culture institution — CF, IPSAS1 Expense Grants. - Paragraph 606 Expenditure for investment purchases of budgetary units (606004 Artillery equipment) — CF, IPSAS 1 Assets (acquisition of) — IPSAS 1, IPSAS17 Property, plant and equipment; Military specialized equipment. - Paragraph 976 Redemption of Treasury bonds sold abroad — CF, IPSAS 1 Liabilities (settlement of) — Repayment of a liability. - Footnotes in Appendix IV highlight IPSAS disclosure and classification guidance relevant to mapping. *Source: IMF staff (excerpts from the referenced PDF chapter).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1polea2020001.pdf_