III. BUDGETARY FRAMEWORK

Overview of Total Resources

Total Estimated Resource Availability (At 2000-01 cost levels)

74. Voluntary contributions falling under the category of Other Income comprise resources available to execute the Programme of Work because they are at the disposal of the Organization and/or are managed closely with the Regular Budget Appropriation.

75. To improve the relationship between the budget figures in planning documents and actual results in the financial accounts of the Organization, Other Income has been further sub-divided between voluntary contributions that are treated as credits to the General Fund in the financial accounts and those which are accounted as Trust Funds.

76. The preceding table shows a small overall increase in Other Income. This consists of a number of movements, the more significant ones being summarised as follows:

1. an anticipated US$ 3.1 million increase in reimbursements of direct operating costs from Trust Fund emergency activities, mainly carried out by the Special Relief Operations Service (TCOR);
2. the United Nations Population Fund (UNFPA) is expected to reduce its support to the population aspects of the Gender and Population programme implying a reduction in income of US$ 0.8 million; its contribution will now be sufficient to support only one P-5 post, half a G-4 post and limited non-staff resources;
3. a decline of US$ 0.7 million in budgeted project servicing costs and administrative and operational support services (AOS) reimbursements as well as US$ 0.4 million in reimbursements for technical support services (TSS) from non-emergency Trust Fund and United Nations Development Programme (UNDP) projects. Estimates are subject to uncertainty and risk, as the achievement of the planned figure necessitates a significant turnaround in non-emergency project delivery from current levels, and they will be revised in the full Programme of Work and Budget (PWB) 2002-03 following an analysis of recent trends, a review of strategic relationships with major donors and projects in the pipeline, and an assessment of the new operating structures' capacities to execute ongoing projects efficiently. An eventual revision to the estimates would need to be accompanied, to the extent possible, by corresponding reductions in the resources budgeted in the administrative and operating structures supporting the execution of field projects; and
4. a decline of US$ 0.5 million in estimated reimbursements for administrative services to the World Food Programme (WFP), as the latter will shortly complete the implementation of its own payroll system, no longer requiring the services of the Finance Division (AFF).

Developments Under Extra-budgetary Resources

77. Historical project delivery by funding source is shown below and indicates that the total extra-budgetary field programme has increased from the low level of 1996. However, this increase reflects a growth in emergency assistance which has expanded from US$ 15.8 million in 1996 to US$ 168.5 million in 2000, while non-emergency assistance has continued to show a steady decline from a level of US$ 263.2 million in 1993 to US$ 129.1 million in 2000.

Extra-Budgetary Field Programme (All amounts in US$ million)

78. UNDP project delivery has declined steadily from US$ 108.1 million in 1993 to US$ 13.2 million in 2000. With the exception of 1997, when UNDP project delivery was close to the level of 1996, there has been a consistent decline averaging 25% each year. However, UNDP delivery is expected to stabilise at about US$ 25 million per year.

79. Non-emergency Trust Fund project delivery has oscillated at around US$ 116 million to US$ 130 million per year since 1997. Current activity has been temporarily depressed by the transfer of operating responsibilities from the Field Operations Division (TCO) and Regional Operations Branches to FAO country offices and the inevitable difficulties that such significant changes create during the period of transition. However, available unspent budgets on current projects and newly confirmed projects are higher than in the past, and there is an expectation of non-emergency Trust Fund delivery recovering during 2002-03.

80. Trust Fund emergency activities, mainly carried out by TCOR, vary with need. The large increase in emergency programmes since 1997 is related to the Iraq Oil for Food programme which is assumed to continue through 2002-03 at close to current levels of activity.

Efficiency Savings

81. Some of the input-oriented efficiency measures implemented in prior biennia are being further pursued. These include the ongoing efforts at reducing the average grade of professional posts, expanding partnership programmes, and implementing cheaper and better forms of communication between locations.

82. Process-oriented change, focusing on changing policies, procedures and ways of working, with the aim of streamlining operational and administrative functions, is also being pursued. In the PWB 2000-01, various restructuring exercises were initiated, including the replacement of Headquarters Management Support Units (MSUs) with a centralised Management Support Service (MSS). Furthermore, potential for economies were identified in Regional Office Operations Branches, and a review of the responsibilities and modalities for providing administrative and technical support to field programme operations in the regions was initiated.

83. Specific areas of process change which are reflected in the 2002-03 proposals include completion of the upgrade of Oracle Financials and restructuring of the Finance Division. Also included is the restructuring of the Field Operations Division and Regional Operations Branches, to reflect the transfer of project operational responsibility to FAO country offices and technical officers wherever possible, as well as the reorganisation of the Office of Assistant Director-General (TCD).

84. Improvement in efficiency and related process change is an essential part of a dynamic organization and remains an ongoing management activity. However, fundamental changes have entailed modifications to systems and procedures, including basic changes in financial management approaches and adjustments in the delegation of authority conferred on officials of the Organization, whilst ensuring that acceptable levels of internal control and stewardship of resources are retained. These changes have had major implications for training, as new skills needed to be acquired by existing staff, while in other cases restructuring creates a mismatch between the skills of existing staff and the future needs of the Organization. Finally, in FAO, restructuring has had to be implemented within a fixed budgetary appropriation, which has been declining in real terms, for several biennia, without recourse to additional financial or human resources.

85. There are, therefore, limitations in the pace and extent of further reform in 2002-03, as a period of respite is needed to complete, absorb, and take advantage of changes that have already been initiated.

86. For example, the abolition of the Regional Operations Branches and transfer of project operational responsibility to country offices has, inter alia, required the upgrading of their Field Accounting System and information technology infrastructures; the training of Country Representatives who are assigned new responsibilities for operating and managing projects; transfer, redeployment and separation of operations officers and their assistants; and rewriting of relevant procedures.

87. Internal financial and budgetary management practices are being reviewed in connection with the above restructuring. The redistribution of project operational responsibility to technical units and FAO Representatives (FAORs) has underlined the need for a more transparent and equitable income distribution system which better relates allocations of support cost reimbursements to the units and programmes earning these resources, as it will exacerbate inequities if it is not accompanied by a responsive means of reallocating resources to compensate for changes in operational workload. The current proposals in the Summary Programme of Work and Budget (SPWB) 2002-03 are resulting in shifts in the costs of supporting the field programme. Regional Offices, for example, are undergoing significant cost savings which are partly offset by additional costs in FAO Representations. Hence, a critical examination of the basis of distribution of support cost income is currently being undertaken. At present, the direct assignment of AOS income to specific programme entities and organizational units has not proved feasible and many administrative and operational functions represent a collective responsibility involving many units. The results of the review of the basis of distribution of support cost income will be reflected in the full PWB 2002-03 and may directly affect the distribution of the budgetary appropriation by chapter.

88. A further review of the structure of the Technical Cooperation Department (TC), in particular of the Policy Assistance Division (TCA) and the Investment Centre Division (TCI), is likely to be undertaken before the full PWB 2002-03, and may be reflected in the latter document if sufficient progress has been made by the time it goes to print.

Posts

Evolution of Posts

89. The PWB 2000-01 included the net abolition of 87 general service posts and four professional posts, bringing the total establishment down to 3,508 posts. In the PWB 2002-03, further implementation of restructuring and other actions, results in the net creation of 79 professional and National Professional Officer (NPO) positions and the net abolition of 56 general service posts, as tabulated under the column entitled Overall Change, bringing the total establishment to 3,531 posts. The changes result in an overall improvement in the general service to professional ratio from 1.48 to 1.36, as the Organization continues to strengthen its professional capacity, ensuring that this is done without undue hardship to staff members.

90. The Restructuring Changes resulted in the net addition of 16 posts at Headquarters and the abolition of 31 posts in the decentralized locations, as detailed in the table below.

Post Changes due to Restructuring Initiatives

91. The restructuring of AFF, already considered by the Joint Meeting of the Programme and Finance Committees¹ in September 2000, is reflected in the SPWB, together with further refinements to the Management Support Service which was established following the implementation of Oracle.

92. The full impact of the ongoing decentralization of project operations to country offices and technical departments is expected to result in the abolition of 23 professional and 22 general service posts in Regional Offices, and the establishment of seven NPO and seven general service posts in FAO Representations.

93. The restructuring of the TC Department was intimated to the Conference in 1999 and focuses on the need to strengthen TC's capacity to develop, coordinate and monitor the field programme so as to reverse the current declining trend in non-emergency field activities funded from external sources.

TC Restructuring - Net Post Changes

94. The main elements of the restructuring are described below:

1. in TCO, a new Field Programme Monitoring and Coordination Service is created and the service for the Special Programme on Food Security is strengthened;
2. the fellowships programme in TCO is downsized to match the decline in workload and its residual functions are transferred to TCD;
3. the Technical Cooperation Programme (TCP) is transferred from TCD to TCO so as to combine similar functions in the TCO division; and
4. the Special Relief Operations Service (TCOR) is increased by five professional and nine general service posts, funded by direct operating cost reimbursements from emergency project operations, in view of the substantially increased demand for emergency work as described above.

95. Due to the complexity of the work involved in the restructuring of the TC Department, a phased approach is being undertaken which may result in further post change proposals in the full PWB 2002-03 and thereafter.

96. Within the Net Programme Changes shown in the table on Evolution of Posts, there was a net increase of 81 professional and a net reduction of 43 general service posts. The changes include:

1. replacing 29 general service posts in the FAO Representations with 27 NPO posts;
2. the establishment of additional entry-level professional posts to provide for an increased intake of junior professionals, bearing in mind the future levels of retirement of professional staff;
3. using opportunities arising from natural staff turnover and post vacancies in both the general service and professional categories to realign and strengthen technical expertise; and
4. using additional resources proposed for high-priority programmes (19 professional posts).

97. The following table lists all new and abolished posts to the Regular Programme labelled as Net Programme Changes in the table on Evolution of Posts, excluding National Professional Officer posts and general service posts in the FAORs.

Regular Programme-funded New Posts and Abolitions (including divisional transfers, and excluding NPO and FAOR GS posts and changes pertaining to AFF restructuring, MSS realignment, TC restructuring and RO Operations Branches)

98. Particular emphasis has been placed on creating entry level positions, aimed at providing opportunities for attracting young professionals, given the significant staff turnover foreseen in upcoming years due to retirements. As can be seen in the table above, the majority of the abolished professional posts are higher-graded posts, while the majority of the new professional posts are entry-level positions. Indeed, 43 new positions at the P-1 to P-3 level are foreseen in the PWB 2002-03. The above actions, and further efforts to downgrade professional posts where feasible, have resulted in a reduction in the average grade mix of professional staff, with the overall grade point average (GPA) declining from 4.3 to 4.2.

99. As for the general service category, which has borne much of the burden of reductions in recent biennia due to the changing nature of the workplace and the impact of automation on many tasks, remaining staff have sometimes taken on additional and more demanding tasks. In this regard, a limited number of well-justified general service grade increases are included in the budgetary proposals. Furthermore, a review of all general service post descriptions and job classifications is underway and is expected to result in some further upward adjustments of the general service GPA. This is considered appropriate both in terms of the comparison across the United Nations system, where FAO's GPA is below average, and also as the means to creating a structure which has satisfactory career opportunities despite the reduced overall general service population at Headquarters.

Cost Increases

Methodology

100. The methodology for the calculation of cost increases to be provided within the PWB 2002-03 is the same as used for previous biennia and approved by the Finance Committee, Council and Conference. The cost increase calculations included in this document are based on actual data through to the end of 2000 and use, as the base, the Programme of Work for 2000-01. Calculations will be further refined and updated for the full PWB.

Biennialization and Inflation

101. As in previous biennia, cost increases are analysed under the headings of Biennialization and Inflation.

1. Biennialization incorporates the full biennial effect of cost increases that have occurred at some stage during the current biennium (therefore only for part of the 24-month period), but which will be incurred for the full 24 months in 2002-03. Since it reflects the financial impact in 2002-03 of changes that will have occurred before the end of 2001, it is not based on long-term forecasts which are more prone to forecasting error.
2. Inflation, on the other hand, represents the cost impact in 2002-03 of those increases that are expected to take effect at various points in the next biennium (i.e. on or after 1 January 2002 and before 31 December 2003).

Lapse Factor

102. With regard to staff costs, the methodology approved by the Council at its Hundred and Seventh Session for application since the 1996-97 budget has been followed. An across the board budgetary reduction of 4.53% and 1.78% continues to be applied to professional and general service costs respectively in arriving at the programme budget estimates for 2002-03. The percentages will be revised in the full PWB 2002-03 to take account of standard recruitment lead times and staff turnover rates up to 31 December 2000.

Analysis of Cost Increases

103. The table which follows shows the cost increases summarised by major component, showing separately the amounts attributable to biennialization of cost increases arising in 2000-01 from cost increases due to inflation in 2002-03. Explanation of the most significant increases and the main assumptions made in forecasting the amounts are described below.

Summary of Cost Increases for 2002-03 (All amounts in US$ 000)

Personnel Services

104. Under Basic Professional Salaries and Post Adjustment, the cost of living adjustments foreseen in the first half of the biennium did not materialise to the extent foreseen in the PWB 2000-01. Biennialization arises from a likely 5% increase in professional salaries at Headquarters from July 2001 following a place-to-place survey conducted by the International Civil Service Commission (ICSC) in October 2000. Under inflation, further cost of living adjustments of 2% are foreseen in July 2002 and July 2003.

105. The biennialization of General Service Salaries reflects the impact of lower than expected increase in general service salaries effective November 1999, which has been offset by a possible 3% increase, retroactive to November 2000, following a recently completed place-to-place survey at Headquarters, and a further cost of living adjustment of 3% in November 2001. Under inflation, an estimated 2% increase in general service salaries is foreseen effective November 2002 and November 2003.

106. Biennialization of Pension Fund Contributions is attributable to an increase of 3.63% in pensionable remuneration for professional staff, promulgated by the ICSC in October 2000 (compared with a foreseen increment of 3% in the PWB 2000-01), and the impact on pension contributions of the 2000-01 increase in general service salaries at Headquarters. Under inflation, the estimated increases are consistent with the estimated increase in professional and general service salaries in 2002-03.

107. Under Social Security, which comprises the Organization's payment to staff medical schemes, biennialization reflects a correction to bring the provision to the actual rate of expenditure in the 2000 accounts. This will be subject to further examination and adjustment, if necessary, in the full PWB 2002-03.

108. The decrease in After Service Medical costs under biennialization reflects the results of the latest actuarial valuation as of 31 December 1999, which has determined a reduced provision for current service costs. This provision has varied considerably since the first actuarial valuation in 1996, and it is considered prudent to include an inflationary increase for 2002-03, bringing the overall provision to the amount required in the 1997 actuarial valuation.

109. Under Dependency Allowances, biennialization largely reflects the impact on children's and secondary dependant's allowance of an 11.89% increase. Similar increases are foreseen under inflation in 2002 and 2003. Increases for the general service category are assumed to correspond to their estimated salary increases in 2002-03.

110. With regard to Education Grant, Travel and Other Allowances, current expenditure patterns indicate that cost increases having taken effect during the current biennium can be absorbed, although appointment travel and related installation allowance cost trends require further review before the full PWB 2002-03. Education Grant provisions, amounting to approximately US$ 14.6 million in the current biennium, are reviewed every two years by the ICSC, and an increase in the education grant ceiling of up to 13% in key countries became effective 1 January 2001, for which an appropriate provision has been made. Following the adoption of a new accounting methodology in the 1998-99 financial accounts, separation costs (comprising repatriation grant, termination indemnities, repatriation travel and removal, death grant and accrued leave) are now covered by accrual accounting principles and are subject to actuarial valuations. The results of the latest actuarial valuation as at 31 December 1999 have been included in the estimates.

111. The provision for General Service Separation Payments Scheme is in line with the latest actuarial valuation as at 31 December 1999.

112. The Organization is now in the second year of implementation of differentiated standard rates for professional positions that take account of distinct cost rates and cost trends in the various locations where FAO staff are posted. A more detailed analysis of cost trends by major location will be completed before the full PWB. While such review is unlikely to have an impact on the overall level of cost increase, it might cause some redistribution of costs between organizational units, and consequently, between programmes.

Goods and Services

113. Other Human Resources consists of non-staff human resources in the form of temporary assistance, consultants and contracts. Under inflation, a cost increase of 2% per annum effective January 2002 and January 2003 is considered appropriate and is consistent with overall trends in earnings growth.

114. Travel costs, which were not subject to any cost increase in the PWB 2000-01 in the interest of responding to requests to absorb cost increases to the maximum extent possible, have been increased by 3% per annum in 2002 and 2003.

115. The inflation under General Operating Expenses has been based on estimated rates of inflation for Italy which, according to the Economist Intelligence Unit are forecast at 2.4% in 2002 and 2.2% in 2003.

116. Under Furniture, Equipment and Vehicles, it has been assumed that most of the expenditure will be incurred under international tendering provisions for which US rates of inflation are considered more appropriate, less some allowance to take account of the competitive advantages of international tendering. Accordingly, an estimated rate of inflation of 2% for 2002 and 2.4% for 2003 has been applied.

Biennial Cost Increase Rates

117. The biennial rate of cost increases is the net effect of applying two annual increases to each year of the biennium. For example, assuming a 2% increase in 2000 and a 3% increase in 2001 on a biennial budget of US$ 100, the calculation of the biennial rate is as follows:

Example data:

118. The biennial rate in this example is therefore 3.53%. Conversely, this process can be reversed so that a biennial rate can be converted to an annual rate of inflation. In this example, the biennial rate of 3.53% is equivalent to an annual average rate of 2.35%.

119. The biennial rate of cost increases for 2002-03 works out at 3.53% of the proposed Programme of Work. As noted above, substantial cost increases arise from the need to take account of increases that will take effect before the commencement of the next biennium, which are estimated under biennialization. The proposed cost increases for 2002-03 are equivalent to an average annual rate of 2.33%.

Budget Level and Funding

120. The budget is prepared in US Dollars on the basis of the exchange rate adopted by the 1999 Conference for the 2000-01 budget of Lira 1 875 to US$ 1.

121. Under the current methodology for the determination of the effective working budget in the Resolution put before the Conference for its adoption, adjustments are made to the provisions for cost increases to reflect the rate of exchange for that day. As a consequence, the final Appropriation, and therefore the assessed contributions for 2002-03, can only be determined in November 2001. At the current market rate of Lira 2 150, the financial impact of biennialization and inflation would be completely offset by the favourable currency effect. Depending on the prevailing rate in November 2001, the budget as proposed would be financed as follows:

Funding of Programme of Work and Budget (All amounts in US$ 000)

122. Budgetary proposals result in an increase in assessments of 9.7% over the biennium at the budget rate of exchange approved by the Conference in November 1999. At the rate of Lira 2 150, which is the market rate of exchange at the time of this document going to print, the proposed level of assessed contributions would fall to approximately US$ 677.3 million, an increase in assessments of 5.3% over the biennium or 3.5% per annum.

¹ Document JM 2000/3, FAO's New Financial Systems and Procedures, refers.