Finance Committee

1. In connection with the role of the Finance Committee in the management of arrears, the report of the Ninety-fifth Session of the Committee (September 2000) noted the following:

"34. The Committee recalled that at its 94^th Session it had requested the Secretariat to prepare a document listing the various options open to the Committee concerning the management of arrears and giving the experience of other UN organizations in this field. It further noted that the document provided at the current session did not provide sufficient information to enable full consideration of the subject.

35. While discussing the item, one option suggested was that the Secretariat prepare an analysis of those cases in which member nations faced voting rights problems with its recommendations for the Finance Committee's review and endorsement and onforwarding to the Council. Another possible option would involve following the decisions adopted by the UN Committee on Contributions with regard to these member nations. Following the discussion, the Committee reiterated its request that the Secretariat prepare a document for consideration at its Session in May 2001, describing a full range of options to enable a more pro-active role in the management of arrears and comparing the experience of other UN agencies.

36. Following the deliberation of the matter next May, the Committee would make an appropriate recommendation to the subsequent Session of the Council in June 2001, of how the problems relating to the loss of voting rights could better be handled. Depending on the views of the Council, the Committee would be in a position to review the matter in depth and make appropriate recommendations, prior to the Conference in November 2001."

This document is presented in accordance with the above request.

2. The Committee will recall that the sanctions envisaged by the Basic Texts for the non-payment of contributions are threefold:

• Loss of voting rights in the Conference under Article III-4 of the Constitution
• Ineligibility for election to the Council under Rule XXII-5 of the General Rules of the Organization.
• Loss of seat in the Council under Rule XXII-7 of the General Rules of the Organization.

3. In implementing these provisions, it has been the practice of the Organization not to take into account the amounts due for the current financial year, since these are not formally defined as "arrears" in accordance with Financial Regulation 5.5. Furthermore, only contributions to the budget of the Organization, duly apportioned by the Conference, are taken into account when calculating the amount of arrears (i.e. the amounts due to the Working Capital Fund and the Special Reserve Account are excluded)¹

4. The loss of voting rights is automatic and can only be restored by a positive action of the Conference, or the payment of the arrears due. The provisions for ineligibility for election to the Council or loss of a Council seat have been consistently applied by the Organization with no exceptions either foreseen or made.

5. At the beginning of the Conference session, the General Committee considers the situation of those countries at risk of losing their voting rights. It is, however, customary to allow all Member Nations to vote on the requests for admission to the Organization of new Member Nations. Following this preliminary vote, the voting situation of countries with arrears is reviewed and requests for "special consideration" are examined by the General Committee. Should a Member Nation so request, an instalment plan for the repayment of arrears over a period of several years is also considered and, where appropriate, the General Committee recommends to the Conference approval for the retention of voting rights by appropriate resolution.

6. The matter under review has been the subject of various studies in the past both as ways of improving the rate of receipt of contributions (both current and in arrears) and in connection with voting rights and associated practices. In this latter connection, the Conference at its 27th Session in November 1993 already noted:

"...mindful of concerns regarding the procedures and practices presently followed by the Organization for restoring the voting rights of Member Nations in arrears of assessed contributions, requested the Finance Committee and the Council to address the issue and report their findings to the 28^th Session of the Conference. Particular concern was expressed over the unsatisfactory results of the practice of allowing Member Nations which had lost their voting rights as a consequence of their arrears position, to have them restored by paying contributions under special installment plans. However, application of the provisions of Article III.4 should also be reviewed, in general and with a view to defining the criteria to be applied in assessing and determining the condition deemed "beyond the control of a Member Nation". To facilitate the work of the Finance Committee and the Council, the Conference requested the Director-General to review the procedures and practices of the UN and the other Specialized Agencies in the search for alternative procedures and practices, and to provide the Finance Committee with an assessment of the alternatives relative to those presently followed by the Organization"

7. Various alternatives that have been considered in the past by the Committee have included the following:

• A proposal to consider amounts due to the Working Capital Fund and Special Reserve Account as "contributions" in accordance with Article III.4 and GRO XXII-5 and XXII-7.
• A proposal to amend the sanctions under Article III.4 and GRO XXII-5 and XXII-7 so that only one year of arrears would have resulted in the loss of voting rights, ineligibility for election to the Council and loss of seat in the Council.
• Extension of the restriction under GRO XXII-5 & XXII-7 to include membership of the Finance and Programme Committees.

On this last point the Committee considered that:

"....the restricted committees should not be brought within the ambit of these disqualifications, as members of these committees were also selected for their personal qualifications and not merely as representatives of Member States or geographic groups..."

8. In an attempt to facilitate the payment of contributions by those Member Nations with limited availability of convertible currency, the Committee at its 77th Session had considered a proposal to recommend a derogation from Financial Regulation 5.6 which would have allowed, under certain conditions, the Organisation to accept contributions in non-convertible local currencies. The conditions originally proposed were:

• The Organization would have activities in that country which would have allowed the utilisation of the funds.
• The amounts could not have exceeded those useable by FAO activities within 2-3 months.
• The contribution would not have been acceptable if there was a currency exchange risk for the Organization.

        The proposal was considered by the Council at its 104^th Session and subsequently by the 27^th Conference in 1993 which requested further in-depth analysis of the subject before taking a decision. The proposal was subsequently withdrawn since it was considered a complex issue requiring further study.

9. The Council at its 107th Session in November 1994 considered the in depth review that had been requested by the Conference as mentioned in paragraph 6. above. The recommendations made to the Conference^b remain the most precise reference points to this day and are reported below for the information of the Committee:

"...It considered that such action should take the form of a more restrictive approach to the restoration of voting rights envisaged in Article III.4 of the Constitution.

In this connection, the Council, having reviewed the conclusions reached by the Finance Committee, made the following recommendations to the Conference:

a) voting rights should continue to be restored where default in the payment of arrears was due to "conditions beyond the control of the Member Nation concerned"

b) the criteria for what constitutes "conditions beyond the control of the Member Nation concerned" were very difficult to define formally and fixed definitions could present complications. Accordingly, while keeping in mind the broad parameters of what might constitute such conditions, voting rights should only be restored in exceptional cases, and only on the basis of a formal request by the Member Nation concerned, specifying the circumstances that in its view constituted "conditions beyond its control"

c) The practice of requiring agreed installment plans for the payment of arrears should be continued, agreed installment plans should be required as part of the application for restoration of voting rights, and voting rights should be lost again if the Member Nation defaulted on two installments.

d) The scope of the methodology for the calculation of arrears should not be expanded to include payments to the Working Capital Fund, Special Reserve Account or Tax Equalization Fund, nor should any changes be made to the period over which the arrears should be calculated;

and

e) the Director-General should continue to search for sustainable schemes that would respond to the particular problems of developing countries without endangering the financial viability of the Organization and taking into account the experience of other UN organizations in this field"

10. Article III.4 of the Constitution authorises the Conference to restore the right to vote if it is satisfied that the failure to pay is due to conditions beyond the control of the Member Nation which, in recent years, has been the option of preference for those countries asking for restoration of voting rights. While this authority appears to be reasonable and proper, the formal criteria to guide the Conference in these determinations have not been established until now. It is most difficult to establish, as noted in paragraph 9 b) above, the appropriate criteria. However, the Committee may still wish to consider establishing appropriate categories which could include internal strife, natural disasters, extreme economic difficulties, international sanctions etc.

11. The practice of granting installment plans for the liquidation of arrears is not explicitly authorised by Article III.4 of the Constitution. The granting of installment plans is an accepted practice in FAO going back many years. Following the recommendations of the Council as in 9 c) above, thirteen installment plans were granted at the 28th Session of the Conference in 1995 as a part of the restoration of voting rights. Of these thirteen plans, only three are still in existence today, the other ten having been voided due to the non-payment of installments.

        Although there is a generalised move in the UN toward using these plans, the experience of the Organization in this field, which goes back over twenty years, indicates that installment plans have no useful effect in either improving the collection of arrears or modifying a Member Nation's attitude vis-�-vis voting rights. In the light of this experience, the Committee may wish to consider making a proposal to abandon this practice.

12. In accordance with the Committee's request that the experience of other UN agencies be reviewed, it was found that there is substantial conformity throughout the UN system on the subject^c:

    Definition of Arrears

• 8 agencies (UN; ILO; ICAO; ITU; WMO; IMO; UNIDO; IAEA) have a definition of arrears consistent with that of FAO, i.e. contributions are considered to be in arrears as of 1 January of the following calendar year.
• 4 agencies (UNESCO; WHO; UPU; WIPO) apply a stricter definition with contributions considered to be in arrears within thirty days of receipt of the letter of assessment or from the beginning of the financial year for which the contribution is due.

    Types of Sanctions Imposed

• All agencies with the exception of UPU have loss of voting rights as the standard sanction imposed.
• Interest penalties are levied by UPU and ITU.

    Time Period before Sanctions/Limitations may be triggered

• 8 agencies (UN; ILO; WHO; ITU; WMO; WIPO; UNIDO; IAEA) trigger sanctions/limitations consistent with that of FAO, i.e. when the amount of the arrears equals or exceeds the amounts due for the preceding two calendar years.
• UNESCO trigger sanctions/limitations when the amount of the arrears equals or exceeds the amounts due for the current and prior year.
• ICAO trigger sanctions/limitations when the amount of the arrears equals or exceeds the amounts due for the preceding three calendar years.
• IMO trigger sanctions/limitations when the amount of the arrears equals or exceeds the amounts due for the preceding calendar year.
• UPU charges interest on amounts due from the beginning of the financial year for which the contribution is due.

    Application of Loss of Voting Rights Sanction

• 8 agencies (UN; ILO; UNESCO; ITU; WMO; WIPO; UNIDO; IAEA) automatically apply the sanction unless it has been suspended by a Governing Body.
• The other agencies apply the sanction on the basis of a specific decision of a Governing Body.

13. With the foregoing, the Secretariat hopes to have provided the Committee with an over-view of the subject of arrears/voting rights and the way in which the Governing Bodies of FAO have affronted the problem in the past. The Secretariat also notes that the practices adopted by FAO are largely consistent with those followed by other UN agencies.

14. As noted at Para 4, the loss of voting rights is automatic and can only be restored by a positive action of the Conference or payment of arrears due. As further noted in Para 10, the formal guide to the Conference in determining whether the failure to pay is due to conditions beyond the control of the Member Nation has not been established until now. One option for the Committee to consider is it reviews requests received for restoration of voting rights and makes appropriate recommendations thereon to Council. In this respect the Finance Committee should take note of the existing practices of the General Committee of the Conference as noted at Para 5.

• Those Member Nations which would be at risk of losing their right to vote at the Conference would be contacted in the course of the Conference year, updating them on their positions and the amounts to be paid in order that they retain voting right privileges.
• The responses of these Member Nations together with an analysis of their arrears position would be presented to the Committee for its review at the September session. Listings giving the breakdown of Member Nations with arrears, those with potential voting rights problems, details of ageing and ordered by amount as contained in Appendix B to Document FC 96/10(i) on the Collection of Current Assessment and Arrears would be provided. These would be updated with an appropriate Working Paper as at the time the Committee discusses this item.
• The Committee could, based on this review, make appropriate recommendations to Council, which in turn would make recommendations to the Conference.
• The Secretariat notes that if the Finance Committee were to discharge the functions outlined above, this would require a change to Rule XXIV.3 and to Rule XXVII7 of the General Rules of the Organisation (G.R.O.). This would require a decision of the Conference to be taken by a two-thirds majority of the votes cast.

15. An update will be presented to the Committee in the form of a working paper at the time of the May meeting, as appropriate. On the basis of the replies received and with the guidance of the Committee, the Secretariat will be in a position both to follow up the matter further with the Member Nations concerned and commence preparation of a report for the subsequent sessions of the Committee and the Council.

_______________________

1  The rationale for the practice of restricting the concept of arrears to contributions to the budget is that the words "arrears in payment of its financial contributions" are used rather than a broader expression such as "sums due to the Organisation" and that it is a general rule of interpretation that provisions that imply sanctions should be strictly interpreted, leaving any element of doubt in favour of the entity that is to be sanctioned.

b CL 107/REP para graphs 205-209 refer

c copies of the latest document of the Administrative Committee on Co-ordination on this subject, ACC/1997/FB/87/CRP.4, will be made available in the meeting room