CL 123/14 |
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CL 123/14 |
Hundred-and-twenty-third Session |
Rome, 28 October – 2 November 2002 |
Report of the Ninety-ninth Session of the Finance Committee Rome, 6 – 10 May 2002 |
MATTERS REQUIRING ATTENTION BY THE COUNCIL
COLLECTION OF CURRENT ASSESSMENTS AND ARREARS
FINANCIAL OUTTURN OF THE 2000-2001 BIENNIUM
PROGRESS REPORT ON THE IMPLEMENTATION OF THE EXTERNAL AUDITOR’S RECOMMENDATIONS
EXTERNAL AUDIT REPORTS ON THE EMERGENCY FARM RECONSTRUCTION PROJECT IN KOSOVO (EFRP)
PROGRESS REPORT ON THE ORACLE PROJECT
COLLECTION OF CURRENT ASSESSMENTS AND ARREARS - THREE SCENARIOS
1. The Committee submitted to the Council the following report of its Ninety-ninth Session.
2. The following representatives were present:
| Chairperson: | Mr Humberto Oscar Molina Reyes (Chile) |
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| Vice-Chairperson: | Mr Anthony Beattie (United Kingdom)
Mr Masato Ito (Japan) Ms Fatimah Hasan J. Hayat (Kuwait) Mr Adnan Bashir Khan (Pakistan) Mr Abdoukarim Diouf (Senegal) Mr Rolf Gerber (Switzerland) Ms Perpetua M.S. Hingi (Tanzania) Ms Carolee Heileman (United States of America) |
3. Noting that he would soon complete his assignment with the Organization, the Committee wished to express its appreciation to Mr Michael Ruddy, Interim Director of Finance, for his support to the Committee during the last five years.
4. In accordance with Financial Regulation 4.6, the Committee reviewed the Director-General’s Thirty-fifth Annual Report of Budgetary Performance and Programme and Budgetary Transfers (Annex I), based on the unaudited accounts for the biennium.
5. The report summarized the actual financial performance of the Regular Programme against budgetary appropriations for 2000-01, showing overall net expenditure of US$11.8 million less than the appropriation of US$650 million.
6. The Committee noted that the overall performance was largely a consequence of two factors which contributed to under-spending, partially offset by two items of over-spending versus the appropriation:
7. The secretariat clarified that the Director-General had, in the absence of the hoped-for payment of arrears and in the light of the fortuitous savings arising out of the staff costs variance, prudently chosen to restrain expenditures against the appropriation to cover the US$8.4 million in redeployment and separation costs. This had been achieved without adverse consequences for the delivery of the approved Programme of Work. The Committee noted that these redeployment and separation costs had been incurred against the US$9 million authority, which was authorized under Conference Resolution 3/99 as additional expenditures over and above the appropriation pending receipt of arrears. As envisaged in the Resolution, these costs had been funded through an advance from the Working Capital Fund, which would be repaid once arrears from the major contributor had been received.
8. The Committee sought further clarification on the reversal of US$2.4 million in accrued expenditure on consultants after year-end which, in the External Auditor’s opinion, was not an acceptable charge against the 2000-01 appropriation and which would, as a consequence, be processed as expenditure in the 2002-03 biennium.
9. The Committee recognized that the favourable staff cost variance of US$21.3 million, or nearly 5 percent of staff costs, had a significant impact on the overall surplus. It noted that the positive staff cost variance was not a consequence of staff vacancies, but reflected the aggregate difference between budgeted unit staff costs versus the actual unit staff costs incurred during 2000-01. Accordingly, it appreciated that the favourable staff cost variance represented a fortuitous gain for the Organization, which if committed for expenditure would have effectively permitted the Organization to spend on a larger volume of Regular Programme-funded goods and services than had been originally planned within the US$650 million budget.
10. The Committee noted that a substantial positive staff cost variance had been anticipated by the secretariat at its previous session in September 2001 and that this experience had been reflected in the standard staff costs for 2002-03. It advised that the positive variance was primarily due to the strengthening of the US dollar against currencies in duty stations outside headquarters, where the substantial depreciation in local currencies against the US dollar since mid-1999 was not counterbalanced by local inflation adjustments. The Committee was also informed that the 12.2 percent increase in headquarters professional salaries promulgated by the International Civil Service Commission (ICSC) in June 2001, versus the budgeted 5 percent increase, was offset by lower than budgeted increases in headquarters general service and professional salaries in 1999 and 2000.
11. In response to the Committee’s request to outline the main lessons learned from the 2000-01 budgetary performance, the secretariat informed that:
12. The External Auditor noted two additional areas of concern for the Organization, clarifying that her comments were in the context of the 2000-01 audit exercise which was currently underway, but not yet completed:
13. The secretariat confirmed that a comprehensive proposal would be presented in September 2002 on the Organization’s functional currency and means of protecting the Programme of Work from exchange rate fluctuations, based on external expert advice. The Committee stressed that this issue must be resolved, particularly in view of the near depletion of the Special Reserve Account and the Working Capital Fund.
14. The Committee noted that no budgetary transfers between chapters were required in 2000-01 and concluded that the Director-General prudently managed the appropriations. It endorsed the Thirty-fifth Annual Report of Budgetary Performance and Programme and Budgetary Transfers for transmission to the Council.
15. The Committee reviewed the Financial Highlights document for the 2000-2001 biennium showing income and expenditure flows for Regular Programme separately from TCP and extra-budgetary funds.
16. The Committee expressed its satisfaction with the format of the Financial Highlights document and encouraged further efforts in improving consistency of data with other financial documents. It appreciated the usefulness of the information it provided.
17. The Committee expressed concern at the worsening financial position of the Organization and noted that lag time between budgetary appropriation and related disbursement of TCP funds was providing the Organization with liquidity. It noted that the balance of unspent TCP funds stood at US$77.7 million and that, if TCP expenditure were to accelerate, the Organization would need to meet part of its funding requirements through borrowing. The Committee stressed that TCP funds should be used for the purpose for which they had been voted and received confirmation from the secretariat that forecasts for TCP delivery showed that TCP expenditure would be accelerated during the current biennium.
18. In response to questions from members, the secretariat clarified that the main factors contributing to the weak financial position of the Organization were (a) arrears on assessed contributions, (b) accounting losses on foreign exchange incurred on the forward contract, (c) losses incurred on long term investments during 2001 as a result of difficult market conditions, (d) the charging of certain costs over and above those foreseen in the Programme of Work and Budget directly to reserves and (e) the charges of US$35 million for the after service medical coverage for which no funding had been provided.
The Committee asked for additional information on the following matters:
19. In relation to the concerns of the Committee on the evolution of the above situation and its impact on the weak financial position of the Organization, the secretariat provided further information on the following salient points:
20. At the request of the Committee, the secretariat explained the cash flow statement attached to the Financial Highlights paper and noted that should the assumptions underlying the cash flow statement not prevail during the year 2002, the liquidity problems facing the Organization would deteriorate further.
21. The Committee concluded that the current weak financial position of the Organization would continue until the question of arrears on assessed contributions had been resolved and agreed to discuss this matter in detail under the agenda item on Collection of Current Assessments and Arrears. The Committee also agreed to discuss in more detail the losses incurred on investments under the agenda item which covered the Report on Investments 2001. The Committee also confirmed that TCP funds should be spent as planned.
22. The secretariat introduced the paper on Collection of Current Assessments and Arrears and highlighted the following salient points:
23. The Committee noted with concern the worsening liquidity situation resulting from arrears and slow collection of contributions. In this connection the Committee was informed that the major contributor’s goal was to resolve its arrears situation this year and was working actively with the FAO secretariat to achieve that end.
24. The Committee recognized that the Organization had for many years suffered the effects of arrears in assessed contributions despite the incentive scheme and appeals from the Finance Committee and Council to member nations to meet their obligations to the Organization. The Committee therefore agreed that there was a need to study afresh the problem and propose solutions. It was recalled that three options had been considered in the past, namely, offering incentives to pay, sanctions for non-payment and exhorting members to pay.
25. In the case of incentives, the Committee had at its September 2001 session discussed the effectiveness of the financial incentive scheme and had concluded such incentives had little positive effect. The Council, however, had rejected the recommendation of the Committee and acted to retain the financial incentive scheme to encourage prompt payment of contributions. Regarding sanctions, the Basic Texts provided for loss of voting rights at Conference for any member with arrears “equal to or exceeding the amount of the contributions due from it for the two preceding calendar years.” Such provisions had not in the past been rigorously applied. In addition, appeals by the Finance Committee and Council to member nations to pay had not resulted in significant reduction of arrears.
26. The Committee noted that, in view of the particularly weak financial position of the Organization, should TCP expenditure accelerate as requested by member states during the current year and arrears not be received, the Organization would be required to resort to external borrowing. The Committee requested the secretariat to provide a cash flow projection for the current year including various scenarios reflecting different assumptions regarding the rate of TCP expenditure in order to illustrate properly the seriousness of the situation. The tables produced by the secretariat (which the Committee did not have an opportunity to examine) are attached in Annex II.
27. Having considered the serious implications for the Organization of the arrears, the Committee:
28. The secretariat introduced the Financial Outturn paper covering the 2000-2001 biennium and explained that the accounts therein were the unaudited accounts of the Organization as presented to the External Auditor. It was also noted that the audited accounts, together with the opinion and long form report of the External Auditor would be presented to the Committee at the hundredth session in September 2002.
29. The secretariat explained that, while the Financial Outturn paper covered the same financial period as the Financial Highlights paper, there were certain presentational differences between the papers. In response to members’ requests, the secretariat confirmed that a reconciliation between the papers would be provided to the Committee.
30. Having noted that the subject matter of the Financial Outturn paper overlapped to a great extent with that of the Financial Highlights paper and that the audited accounts, together with the opinion and long form report of the External Auditor would be discussed at the September session, the Committee agreed to defer discussion of the 2000-2001 biennium accounts to September.
31. The Committee also agreed to consider at the September session whether in future years it would be necessary to receive a Financial Outturn report in addition to the Financial Highlights report at the May session.
32. In response to a question from the Committee regarding voluntary contributions and arrangements for oversight of such funds and procedures in place for ensuring that activities so funded were consistent with the mandate of the Organization, the secretariat confirmed that a written reply would be provided to the Committee.
33. The secretariat introduced the report and provided further detailed information on investment activity for 2001, noting that the period under review had been a particularly difficult one in all the main financial markets. FAO’s long-term investment portfolio, managed by Fiduciary Trust International2, ended the year at -16.8% compared with the benchmark of -10.5%. The negative performance of the investment manager in 2001 needed to be seen in the context of previous positive performances (e.g. for the calendar years from 1990 to 2001 the compounded total return of 158.2% was well above the benchmark compounded return for the same period of 127.6%). It was further noted that the portfolios of other major international organisations experienced similar, but lesser, declines under the market conditions that prevailed in 2001. Because the funds included an accumulation of investment surpluses earned over time and were aimed at meeting future liabilities that were dependent on actuarial requirements, the secretariat further explained that the losses incurred on the investments portfolios would not require FAO to provide replacement funds.
34. In view of the performance in 2001, the Organization’s investment manager (Fiduciary Trust International) had been invited to this session to explain to the Committee how the account had been managed during the year ended 31 December 2001. In this context, the President of Fiduciary Trust International made a presentation to the Committee during which he illustrated the reasons for the weak performance in the long-term investment portfolio. Given the objectives of the portfolio, the President pointed out that growth relied on the equities component out-performing bonds over the long-term. The Committee was informed that Fiduciary Trust International’s investment style had always had a distinct growth bias and often exceeded the benchmarks. The President of Fiduciary Trust International further explained that in the year under review three main factors had contributed to the under-performance of the equity portfolio against the benchmark. These factors concerned the overweighting in the technology sector, poor stock selections and the currency impact of the non-US dollar investments that were sold. The performance for the first quarter of the current year was still negatively influenced by market aversion to equities and the uncertainties in the markets.
35. The Committee also noted that short-term investments consisted largely of Trust Fund deposits held pending disbursement on project implementation and that the FAO annual return (net of fees) on this portfolio for the year 2001 was 4.0% versus a benchmark of 4.1%.
36. The secretariat explained that the Organization’s investment strategy had been agreed in May 1998 with the FAO Advisory Committee on Investments (ACI), which body comprised among its members a number of prominent banking professionals from prestigious international financial institutions3. The key elements of this investment strategy included the following:
37. The secretariat further explained that work had started in implementing this investment management strategy in 1999 after specific proposals on the implementation methodology had been reviewed once again with the FAO Advisory Committee on Investments. However, due to the limited staffing resources in FAO’s Treasury Branch and complications in contracting the firms selected in December 1999, it was not possible to sign the contracts for managing the short-term funds until February 20024.
38. In addition, the FAO Advisory Committee on Investments at its meeting held in May 2001 strongly advised the Organization not to go ahead with the partitioning in the long-term portfolio between a growth and a value manager until Treasury had adequate staffing and an appropriate monitoring facility had been put in place to deal with several investment mangers. The completion of the first component of this strategy and the appointment of a Senior Treasury Officer, with effect from 1 July 2002, meant that work would now start on implementing the remaining changes in the management strategy for the long-term portfolio. The secretariat noted that in view of the significant skills and time which were required to effectively manage and monitor portfolio operations, an alternative strategy might be to have investment portfolio management functions carried out collectively by the UN system on behalf of the UN agencies. With regard to the portfolio manager’s authority, the current contractual situation was that, while the secretariat set the overall investment strategy, it was the responsibility of the investment manager to decide on the individual purchases and sales of the components of the portfolio within the set guidelines. The secretariat confirmed that details on asset disposals during the year would be included in future reports to be provided to the Committee.
39. Upon the request of the Committee, the representative of the External Auditor drew the attention of the Committee to: (a) the arrangements with Fiduciary Trust Company, since the contract was automatically renewed in 2002; (b) the need to review the benchmark 65/35 split between equities and bonds and (c) the desirability of the FAO Advisory Committee on Investment meeting before the May Session of the Finance Committee in order to have the benefit of the experts’ advice. The secretariat recalled that the Report of the External Auditor for the 1998-1999 biennium recognized that the lack of staff in Treasury had made the process of overhauling the investment strategy extremely difficult. It was also noted that proposals on the 65/35 split would be submitted to the ACI meeting in May 2002.
40. The Committee recognized that, based on their past performance, Fiduciary Trust International had historically produced significant gains and that the poor performance in 2001 with respect to not reaching the benchmark returns was to be attributed to the growth strategy of the managers, the prevailing market conditions and the loss of personnel in the events of 11 September 2001. The Committee also recognized that measures, including the recruitment of a Treasury Officer and the signature of the contract for the placement of the short-term funds, had now been taken to implement the investment strategy and requested that a progress report on the long-term investment portfolio be provided at the next session of the Finance Committee due to be held in September 2002.
41. The Committee reviewed the progress made, since the Ninety-seventh Session held in Rome from 17 to 22 September 2001, in implementing the recommendations of the External Auditor.
42. The secretariat recalled that this progress report summarized the unresolved issues and was in two parts; the first part included the outstanding recommendations from the long form audit report for the biennium 1998-99 and the second part (Appendix 1) contained a few remaining items from the previous audit period. The secretariat explained that most of the recommendations had now been implemented or were in course of implementation. However, there was one recommendation that specifically related to the reporting of Telefood projects, which the Organization had initially agreed to implement, and which it was now difficult to realize due to certain technical complications. As commented upon by the External Auditor in the progress report, this item would be reviewed during the course of the audit of the FAO’s 2001-02 financial statements.
43. The Committee noted that a number of items had already been dealt with or were about to be discussed as separate items during the course of this session, specifically the ones relating to Oracle systems implementation, investment strategy and cases of fraud and it was therefore agreed to defer any discussions to the respective agenda items. The Committee also noted that the External Auditor, pursuant to paragraph 6(c)(i) of the Additional Terms of Reference Governing External Audit (Basic Texts), would be including comments on fraud or presumptive fraud in the long-form audit report on the FAO’s 2001-02 financial statements to be presented at the next session of the Finance Committee to be held in September 2002.
44. The secretariat introduced the representative of the Comptroller and Auditor General of India who had been appointed external auditor of FAO for the 2002-2003 and the 2004-2005 bienna.
45. The Committee welcomed the representative of the Comptroller and Auditor General of India, who at the Committee’s request commented on plans for commencement of the audit of the Organization for the 2002-2003 biennium.
46. The Committee underlined the importance of the transition period and was assured that there would be sufficient overlap between the outgoing and incoming External Auditors to ensure a smooth transition. The Committee requested that the incoming External Auditor present his proposed work programme to the Committee for review at the September session.
47. The secretariat explained that in the past, like other UN agencies, the Organization had not signed a formal contract with the External Auditor. Rather, from a formal viewpoint, relations between the Organization and the External Auditor had been based on the formal communication of appointment by the Council and the detailed terms of reference set out in the Basic Texts of the Organization. The Committee expressed its satisfaction that the secretariat was currently working on the preparation of a draft engagement letter with the External Auditor for consideration and review by the Committee prior to signature.
48. The secretariat introduced the External Audit Report prepared for the EFRP for the period that ended on 31 December 2000. This specific audit was requested by the Finance Committee in May 2000 (94th session) on the basis of Financial Regulation 12.6 of the FAO and in compliance with the agreement reached between FAO, the United Nations Interim Administration in Kosovo (UNMIK) and the World Bank (WB). The secretariat confirmed immediate implementation of all recommendations made by the External Auditor on the preparatory and implementation phases of the project.
49. The Committee re-iterated its concern on the principle of a donor requesting a specific external audit of FAO projects and proposed that this issue be addressed under the agenda item on the request to the External Auditor for specific reports concerning the FAO/Global Environmental Facility (GEF) Fund.
50. The Committee recognized that the secretariat had satisfactorily replied to the Committee questions and noted that all external auditor’s recommendations have been implemented. It appreciated that the report’s recommendations table followed the format suggested by the 97th Session of the Finance Committee in September 2001.
51. The Committee cleared the External Audit report and expressed satisfaction with the implementation of the report’s recommendations.
52. The Committee welcomed the Progress Report on Human Resources Management Issues (doc. FC 99/10).
53. The Committee recognized the following items as main concerns in the area of human resources management:
54. While these items were considered to be of major importance, it was recognized that other areas cited in the report would require attention by the secretariat as well.
55. The Committee noted the need to clarify timelines, to define baselines and to refine benchmarks in order to assess progress in human resources management in a more effective manner.
56. In particular, the Committee discussed the need to:
57. The Committee noted the secretariat’s initiative to review its spousal employment policy in 2003 and requested that this matter be placed on the Committee’s agenda for that year.
58. The Committee requested an update of the progress report on human resource management issues for the next meeting in September 2002, including data on the progress made. A comparative analysis based on experiences of other UN organizations on relevant issues was also requested. Finally, the Committee, recognizing that the staff was the most important asset of the Organization, suggested that the matter should be reviewed on a regular basis.
59. The Committee took note of the information provided in document FC 99/11 which summarized the decisions of the United Nations General Assembly (UNGA) at its 56th session (2001) on the annual report of the International Civil Service Commission (ICSC) for 2001, and of the additional information provided by the secretariat. The Committee noted that the UN Joint Staff Pension Board did not meet in 2001.
60. The Committee noted that the margin between the net remuneration of the United Nations staff in grades P-1 to D-2 in New York and that of officials in comparable positions in the United States federal civil service for 2001 was 111.0. It also noted that the United Nations/United States net remuneration ratios ranged from 117.1 at the P-2 level to 104.4 at the D-2 level. The Committee was informed that the ICSC would address this imbalance in the context of the overall margin considerations established by the General Assembly.
61. The Committee noted that with effect from 1 March 2002 the UNGA had approved a 3.87 per cent increase in the salaries for staff in the professional and higher categories. On the whole this did not result in an increase in remuneration as it was offset by a corresponding decrease in the post adjustment classification of each duty station world-wide. In those countries, however, where the post adjustment multiplier would have fallen below zero, it was maintained at zero level. Accordingly, the staff in such duty stations received a real increase in salary.
62. With effect from the same date, the amounts of the mobility and hardship allowance and the scale of separation payments were also revised by the same percentage. The financial implication of these changes for FAO was estimated to be US$538 500 for the remaining part of the year 2002. The Committee was informed that provision for these increases had been made in the projections of cost increases included in the Programme of Work and Budget 2002-2003.
63. The Committee took note of the information provided in document FC 99/12, which described the changes in the post adjustment classification for Rome during the period February 2001 – February 2002 and the interim adjustment of salaries of staff in the general service category.
64. Given the similarity to the information presented in document FC 99/11, the Committee requested that in future these documents be combined into a single item.
65. The secretariat introduced the report by providing an overview of the Oracle Project background in terms of nature, scope and timing and progress made so far in Phase I financial systems. The secretariat illustrated the major areas for future development, namely the upgrade to the next release of the Oracle software (Oracle 11i) and the implementation of Phase II, covering human resources and payroll and planning and budgeting systems. The secretariat also provided detailed status information on Phase I of the project, illustrating the good progress made in correcting problems experienced during the early stages of implementation.
66. The report was structured in two parts, one for the past and current aspects of Oracle and one for the future developments.
67. The Committee welcomed the transparency and clarity of the introduction. The Committee requested and obtained confirmation that problems experienced with the introduction of Oracle had been resolved. It also requested and obtained detailed information on the upgrade project and assurances that the project was adequately funded and on schedule.
68. The secretariat indicated that the upgrade was necessary in order for FAO to remain with a version of the software supported by Oracle Corporation.
69. The secretariat illustrated in detail the major areas for future development: Oracle 11i and Phase II implementation of Oracle Human Resources and Payroll and Programme Planning, Implementation Monitoring, Evaluation Support (PIRES).
70. The Committee questioned the availability of adequate funding for the Phase II project noting that only US$2.3 million had been allocated in the 2002-2003 Programme of Work and Budget and a provision of US$24.7 million was subject to the payment of arrears. The Committee also asked detailed questions about the Phase II project approach, plan and costs.
71. The secretariat confirmed that indeed the Phase II project would have to be put on hold after December 2002 if the arrears did not become available to fund it adequately; it further provided details about the project plan for Phase II Human Resources and Payroll, which at this point foresaw the preparation of a Project Charter and the issuance of a tender for external consultancy services. Upon release of the full scope document, the project cost estimate, including contingency funds, would be confirmed.
72. The secretariat noted that:
73. The Committee concluded the following main points:
74. The Committee requested that an Oracle progress report be presented at each future session.
75. In introducing his Annual Activity Report, the Inspector-General reminded the Committee that it was upon his recommendation that the Director-General had decided to make the report simultaneously available to the Finance Committee and the Director-General. The Inspector-General reviewed the various sections of the report with brief explanations.
76. The Committee discussed the report and obtained clarifications from the Inspector-General where needed. The issues which were discussed were:
77. The Committee analysed the report of the Inspector-General and took note of the contents and the various issues discussed.
78. The UN Joint Inspection Unit (JIU) report 2000/9 “Strengthening the Investigations Function in United Nations System Organizations” was introduced to the Committee by Mr Armando Duque, the Vice-Chairperson of the JIU. Mr Duque noted that the investigation function was of increasing importance in internal oversight, and that it was a relatively new function in the UN system. He summarized the six recommendations of the report:
79. Mr Duque noted that the investigators of the UN system had met in March 2002 and had adopted uniform standards and procedural guidelines for investigations.
80. The Committee discussed risk profiles, uniform standards in diverse organizations and the cost of investigations. It was clarified that implementation of the JIU recommendations would be the responsibility of the various organizations. The Inspector-General outlined the audit planning process, risk assessment and the investigation capabilities within the current structure of the Office of the Inspector-General in FAO. The Committee was informed that in the view of the Inspector-General, a separate investigations unit was not required at present in FAO. The Inspector-General added that FAO was adopting the common standards as feasible.
81. The Committee expressed its interest in the subject and endorsed adopting common standards. It thanked the JIU for the report, which was found to be useful and which could be included in the briefing package for new Committee members. The report and the Director-General’s comments thereon were endorsed for transmission to the Concil.
82. The Committee underlined that the scope of this report fell more particularly under the purview of the Programme Committee. The Committee expressed its satisfaction with the comments of the Director-General. It further noted that subsequent follow-up stages of this project had addressed the concerns raised in the JIU Report regarding target beneficiaries.
83. The Assistant Executive Director for Administration introduced this document and explained that this report was provided in compliance with the General Rules of WFP.
84. The Committee requested information on the specific commodities purchased from developed countries as presented in Annex I of the document5. The secretariat agreed to provide the detailed information requested by the Committee. The Committee welcomed WFP’s efforts to procure commodities in developing countries.
85. While welcoming the contributions from non-traditional donors, clarification was requested on the waiver of Indirect Support Costs (ISC) presented in Annex II of the document5 The secretariat explained that when contributions were made by non-traditional donors, other donors were requested to fund the other associated costs. In some cases, all costs, including ISC, were covered. However, in these three cases the Indirect Support Costs were not covered by other donors and were waived by the Executive Director.
86. The Assistant Executive Director for Administration introduced the document and presented the background of the preparation of this paper6. She presented the historical trends related to ISC income used to fund the programme and administrative support (PSA) budget, a comparison of PSA income and expenditure, and the outcome of the application of a single ISC rate to fund PSA for the biennium 2000-2001. She also highlighted several issues relating to this review, such as the analysis of the fixed and variable nature of these costs, the accounting policies of income and expenditures, and the appropriate level of PSA. She indicated to the Committee that this was a preliminary report, and that the work remaining to be done was outlined in the section on ‘next steps’ in the document.
87. The Committee noted that a working group should look at the longer-term issues related to support costs. The Committee considered the proposal of retaining the current ISC rate and recommended that the rate of 7.8% be retained for 2002, until a final decision was made by the Executive Board in October of this year.
88. The Committee invited the External Auditor to comment on the paper. The External Auditor noted that this was a useful document and that it provided extensive historical background, described problems related to resources and analyzed other sources of PSA income, such as host governments’ contributions to local costs. She further explained that their report on the 2000-2001 biennium would include a comprehensive review of support costs and how they are managed. The External Auditor expressed concern that the current accounting principles lead to a distortion between recording of income and expenditure and that accounting principles should be consistent for both income and expenditure. She also noted that this review required more work, especially on the detailed analysis of the fixed and variable components of expenditure, and remarked that this analysis should be facilitated by the new information system. Furthermore, in the longer-term, the External Auditor expressed the view that the secretariat should conduct a broader review of all the support costs, and ascertain what should be financed from ISC or other sources. Finally, it was the External Auditor’s opinion that the ISC rate should be fixed for the entire biennium, in line with WFP’s financial period.
89. The Committee noted with satisfaction the work completed to date on this issue, but recognized that this was an interim paper and that further work needed to be done. The Committee noted the need to focus on the next steps, which it considered comprehensive7. The secretariat confirmed to the Committee that it would make every effort to submit the next paper within the time required by the Committee.
90. The Committee concluded by endorsing the recommendations of the Executive Director that the Executive Board:
91. The Committee examined the Memorandum of Understanding between FAO and the Global Environment Facility and the request for a separate audit opinion to be given by the External Auditor on the biennial statement of the proposed FAO-GEF Fund. The Committee welcomed strengthening the partnership between the two institutions and noted the complementary strategic priorities.
92. The Committee supported the proposal and requested the External Auditor, in accordance with the provisions of Financial Regulation 12.6 and the Organization’s rules and procedures for external audit, to perform a special biennial audit of the FAO/GEF Fund, the cost of which would be covered by project funds.
93. The Committee, furthermore, proposed that the Committee consider how it examines such periodic reports in the future.
94. The Committee was informed that the Hundredth Session was tentatively scheduled to be held in Rome from 9 to 13 September 2002. The final dates of the session would be decided in consultation with the Chairperson.
1. Financial Regulation (FR) 4.6 requires the Director-General to manage the appropriations so as to ensure that adequate funds are available to meet expenditures during the biennium, and calls for the Finance Committee to review annually the Director-General’s implementation of this regulation. In accordance with this requirement, this Thirty-fifth Annual Report on Budgetary Performance summarises, for information and discussion, the budgetary aspects of the Regular Programme performance for 2000-2001 and provides the details of the final budgetary transfers between Chapters.
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In addition, a sum of up to US$ 9 million was authorised under Conference Resolution 3/99 for redeployment and separation costs. The total expenditure of US$ 8.4 million was utilised as planned, effectively offsetting the larger part of the surplus balance against the Appropriation. In line with previous reports to the Committee8, Major Programme shifts are largely due to the following factors:
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2. Conference Resolution 2/99 on the Budgetary Appropriations for 2000-01 approved a budget of US$ 650 million, which comprises the approved Programme of Work less Other Income9. Financial Regulation 4.1(a) authorises the Director-General to incur obligations up to the amounts voted.
3. The Director-General manages the Appropriations via annual institutional allotments for the Regular Programme of Work issued by the Office of Programme, Budget and Evaluation (PBE) to allottees. The allotments are adjusted by PBE during the implementation cycle to take account of emerging programme requirements and under-budgeted activities, sometimes offset by cost savings that were not planned in the PWB 2000-01. The institutional allotments by programme heading constitute spending limits for allottees, but the day-to-day financial management of the resources is the responsibility of the budget holders.
4. Table 1 summarises the overall budgetary performance versus the Appropriation approved by Conference. The 2000-01 performance is based on the actual expenditure in the unaudited accounts of the Organization.
Table 1. Overview of 2000-01 Regular Programme Performance
(US$ 000)
| 2000 | 2001 | Total | ||||
| Budgetary Appropriation | ||||||
| Programme of Work | 368,098 | 366,354 | 734,452 | |||
| Other Income | (42,226) | (42,226) | (84,452) | |||
| Appropriation adopted by Conference Resolution 2/99 | 325,872 | 324,128 | 650,000 | |||
| Less TCP Projects (Major Programme 4.1) | 44,559 | 44,559 | 89,118 | |||
| Net Appropriation (excluding TCP projects budget) | 281,313 | 279,569 | 560,882 | |||
| Net Expenditure (excluding TCP projects budget)10 | 258,519 | 290,603 | 549,122 | |||
| Expenditure vs. Net Appropriation | 22,794 | (11,034) | 11,760 | |||
| Redeployment and separation costs incurred against US$ 9 million authority (Resolution 3/99)11 |
8,360 | |||||
| Net balance | 3,400 | |||||
5. The following points are made regarding the performance indicated in the preceding table.
6. A surplus balance of US$ 11.8 million is recorded against the 2000-01 Appropriation of US$ 650 million. This surplus is largely due to a higher positive staff cost variance than was conservatively forecast12 earlier in the biennium.
7. In addition, however, as it became increasingly clear that the expected arrears would not be paid, and given the favourable staff cost variance referred to above, the Director-General chose to restrain expenditures, which allowed the under-spending against the 2000-01 Appropriation to cover the redeployment and separation costs incurred against the US$ 9 million authority. This authority had been created under Conference Resolution 3/99, which authorised an advance from the Working Capital Fund pending the eventual receipt of assessed contributions in arrears from the major contributor13.
8. Most divisions fully utilised the allotted funds in 2000 and 2001, although some underspending against the 2001 divisional allotments did occur, mainly in the Regional Offices. Some under-spending against the allotments also occurred as a result of the last minute reversal of accrued expenditures on consultants which the External Auditor judged not to be an acceptable charge against the Appropriation for 2000-01.
9. The TCP net appropriation for project expenditures (Major Programme 4.1) amounted to US$ 89.1 million. This falls under the provisions of Financial Regulation 4.3, which makes the balance of the 2000-01 Chapter 4 appropriation available for obligations during 2002-03. In past biennia, the TCP appropriation was fully spent, and this assumption had been made for 2000-01, thus excluding the TCP project appropriation from the budgetary performance table above. In 2000-01, US$ 78.9 million had been earmarked for approved projects, and US$ 76.0 million was spent, of which US$ 11.4 million relates to the 2000-01 Appropriation, and US$ 64.6 million relates to the 1998-99 Appropriation.
10. The staff cost variance is the difference between budgeted and actual staff costs in a biennium. For the 2000-01 biennium, a positive staff cost variance of US$ 21.3 million was incurred, which is higher than such variances incurred in recent years.
11. For the PWB 2000-01, the standard rates established in July 1999 introduced, for the first time, “differentiated” standard rates for all positions, by grade and location. These distinct rates sought to take account of the unique costs and cost trends in the various major locations where FAO staff are located, including country-specific adjustments for possible cost increases during 2000-01 and changes in staffing structure. At the same time, the Organization’s migration to the Oracle Financial System and concomitant review of accounting policies resulted in some adjustment to the Organization’s methodology for computing and analysing the staff cost variance.
12. Most of the underlying causes of difference between the actual and standard unit costs of staff are beyond the control of the allottees – for example, exchange rates at non-Headquarters locations, decisions of the International Civil Service Commission, etc. The monitoring of the variance is therefore done centrally by PBE and any surplus or deficit, i.e. the staff cost variance, is charged at the end of the biennium to the financial accounts across all programmes in proportion to the staff costs incurred at standard rates.
13. The main reasons for the positive variance were presented to the Finance Committee in September 200114. As indicated at that time, the favourable result for this biennium, is the outcome of the combination of these distinctive factors:
14. The staff cost variance was closely monitored during the 2000-01 biennium and some additional divisional allotments for high-priority activities were provided in a planned fashion, mainly to the technical departments, when the estimated surplus warranted such action. However, as the staff cost variance is sensitive to matters outside the Organization’s direct control, prudence was required in committing additional funds against a forecasted positive variance.
15. At its November 1999 session, the Conference authorised the advance of funds from the Working Capital Fund up to an amount of US$ 9 million to cover one-time redeployment and separation costs to complete restructuring pending the eventual receipt of arrears in assessed contributions from the major contributor15, and established Chapter 9 of the Programme of Work and Budget to manage the various “One-time Expenditures funded from Arrears”.
16. Major restructuring actions in 2000-01 included the abolition of the Management Support Units at Headquarters and the creation of a centralised Management Support Service (MSS); the implementation of new arrangements for the field programme (affecting both Headquarters and decentralized offices); and the restructuring of AFF.
17. In 2000-01, US$ 8.4 million in redeployment and separation costs were incurred to resolve the cases arising from the above restructuring actions. Of the 239 staff members potentially eligible for the US$ 9 million authority, 130 cases were settled at no cost to the authority, essentially through placements to budgeted posts at the beginning of 2000. The remaining 109 cases (consisting of 21 Professional staff and 88 General Service staff) were settled at total cost of US$ 8.4 million. Of this amount, US$ 5.1 million covered salary costs for the staff members awaiting resolution of their cases and US$ 3.3 million covered agreed termination costs.
18. A total of 58 agreed terminations were granted (9 to Professional staff and 49 to General Service staff), either directly to the redeployee whose post was abolished or to a staff member on a budgeted post which could accommodate a redeployee.
19. As indicated above, the US$ 8.4 million in costs charged as an advance from the Working Capital Fund under Conference Resolution 3/99 are effectively covered by the overall surplus against the net appropriation.
20. In accordance with FR 4.1(a), shortfalls in Other Income versus the budgeted levels require corresponding reductions in planned expenditure during the biennium to remain within the approved budgetary Appropriation of US$ 650 million. The outturn for 2000-01 is summarised in Table 2, and shows an overall shortfall of US$ 7.9 million, or 89.5% of the total budgeted income as having been earned. As this outcome was foreseen, corresponding reductions in expenditure could be managed in a planned fashion.
Table 2. 2000-01 Budgetary Performance of Other Income16 (US$ 000)
| Description | Budget | Actual | Variance | Actual as % of Budget |
| Trust Funds and UNDP Support Cost Income | (36,850) | (29,095) | (7,755) | 79.0% |
| Jointly funded investment activities, technical support services and other reimbursements | (38,283) | (38,167) | (116) | 99.7% |
| Total Income | (75,133) | (67,262) | (7,871) | 89.5% |
21. Support cost reimbursements are essentially earned in proportion to the actual expenditure on non-emergency Trust Fund projects17 and United Nations Development Programme (UNDP) projects implemented or executed by FAO. The biennial shortfall versus budgeted support cost income totals US$ 7.8 million. This is a result of a further decline in 2000-01 in UNDP project delivery, which fell by 45% compared with the previous biennium, to US$ 27 million, while non-emergency Trust Fund delivery has remained largely stable compared with the previous biennium.
22. Reimbursements for Jointly Funded Investment Activities relate to the work of the Investment Centre Division (TCI) in support of lending activities for the agricultural/rural sector under cost sharing arrangements from the World Bank and other multilateral financial institutions. Other external income includes: fees for technical support services; income from terminal project reports; reimbursements for administrative services to the World Food Programme (WFP); Government Counterpart Cash Contributions to FAOR offices; and other sundry income. In 2000-01, the aggregate recovery for these income types corresponded largely to the amounts foreseen in the budget.
23. Table 3 below provides an overview of the 2000-01 performance by Chapter. It may be noted from Table 3 that no budgetary transfers were required for the 2000-01 biennium.
Table 3. 2000-01 Budgetary Performance by Chapter (US$ 000)
| Chapter/Title | 2000-01 Appropriation as Revised18 |
2000-01 Expenditure/ Commitments |
Balance vs. Final Appropriation | ||||
| 1. | General Policy and Direction | 50,891 | 49,013 |
1,878 |
|||
| 2. | Technical and Economic Programmes | 289,177 | 282,945 |
6,232 |
|||
| 3. | Development Services to Member Nations | 120,636 | 119,536 |
1,100 |
|||
| 4. | Technical Cooperation Programme19 | 91,455 | 91,455 |
0 |
|||
| 5. | Support Services | 57,319 | 57,026 |
293 |
|||
| 6. | Common Services | 39,922 | 37,808 |
2,114 |
|||
| 7. | Contingencies | 600 | 457 |
143 |
|||
| Grand Total Regular Programme | 650,000 | 638,240 | 11,760 | ||||
24. Annex I to this report summarises the budgetary performance by Major Programme and Chapter and describes significant factors that affected the overall performance.
25. There is no constitutional constraint as regards spending by expenditure category; the Organization is free to choose the most effective inputs to fulfil the approved Programme of Work. However, a review of spending by account can provide useful indications of cost fluctuations and trends. A review of the Regular Programme expenditure in 2000-01 (excluding TCP projects) by account and a brief description of trends emerging in the 2000-01 biennium, is covered in Annex II.
26. Financial Regulation 4.5(a) requires transfers between divisions within the same Chapter to be reported.
27. In this connection, it is noted that in the 2000-01 biennium several posts were transferred between Headquarters and Regional Offices in order to better align technical expertise among these locations, and two posts were transferred making up the Programme Policy Review Committee (PPRC) Secretariat from the Agriculture Department (AG) to the Field Operations Division (TCO). Further transfers between divisions took place in the context of the restructuring of the Technical Cooperation Department (TC), to strengthen TC’s capacity to develop, coordinate and monitor the field programme and reverse the current declining trend in non-emergency field activities funded from external sources. The impact of the restructuring in 2000-01 primarily affected the Field Operations Division (TCO) and the Office of the Assistant Director-General (TCD). The proposals were reflected in the Programme of Work and Budget 2002-03.
28. The Committee is invited to note that no budgetary transfers were required in 2000-01 and to endorse the report of budgetary performance for 2000-01 for transmission to the Council.
Annex I
29. The table below summarises the Regular Programme budgetary performance by major programme and chapter, comparing the 2000-01 Appropriation as revised20 with the corresponding net expenditure.
2000-01 Budgetary Performance by Major Programme/Chapter (US$ 000)
| Chapter/Major Programme | 2000-01 Appropriation as Revised | 2000-01 Expenditure/ Commitments | Balance vs. Appropriation | % Appropriation Spent | |
| 1. | General Policy and Direction | 50,891 | 49,013 | 1,878 | 96.3% |
| 2. | Technical and Economic Programmes | ||||
| 2.1 | Agricultural Production and Support Systems | 88,099 | 85,151 | 2,948 | 96.7% |
| 2.2 | Food and Agriculture Policy and Development | 85,562 | 82,684 | 2,878 | 96.6% |
| 2.3 | Fisheries | 38,546 | 37,624 | 922 | 97.6% |
| 2.4 | Forestry | 29,708 | 29,859 | (151) | 100.5% |
| 2.5 | Contributions to Sustainable Development and Special Programme Thrusts | 47,262 | 47,627 | (365) | 100.8% |
| Total Chapter 2 | 289,177 | 282,945 | 6,232 | 97.8% | |
| 3. | Cooperation and Partnerships | 120,636 | 119,536 | 1,100 | 99.1% |
| 4. | Technical Cooperation Programme | 91,455 | 91,455 | 0 | 100.0% |
| 5. | Support Services | 57,319 | 57,026 | 293 | 99.5% |
| 6. | Common Services | 39,922 | 37,808 | 2,114 | 94.7% |
| 7. | Contingencies | 600 | 457 | 143 | 76.2% |
| Grand Total Regular Programme | 650,000 | 638,240 | 11,760 | 98.2% | |
30. Although a number of specific issues contribute to the individual Chapter performances, five main factors, outlined below, have impacted expenditure across all chapters:
31. A brief summary by Chapter is as follows:
32. General Policy and Direction utilised 96.3% of its 2000-01 Appropriation, with the surplus occurring mainly as a result of the distribution of US$ 2 million of the staff cost variance to this Chapter.
33. Technical and Economic Programmes ended the biennium with a surplus of US$ 6.2 million, utilising 97.8% of the Appropriation.
34. The surplus would have been substantially higher, given the distribution of US$ 8.1 million of the staff cost variance to this Chapter, as well some under-spending against divisional allotments. However, once the magnitude of the positive staff cost variance became known in the latter part of the biennium, and in view of the wishes of the Committee to give priority to the Technical and Economic Programmes, a substantial portion of the available funds was redirected to the technical programmes in Chapter 2. This had the result of reducing the surplus balance, with, in some cases, final expenditure exceeding the appropriation (Major Programmes 2.4, Forestry and 2.5, Contributions to Sustainable Development and Special Programme Thrusts).
35. Cooperation and Partnerships utilised 99.1% of the biennial Appropriation, incurring a surplus of US$ 1.1 million.
36. As noted above, a significant percentage of the support cost income shortfall is allocated to this Chapter, which is why over-spending in this Chapter had been anticipated. The effect of the support cost income shortfall is mitigated by the distribution of the positive staff cost variance.
37. Although substantial expenditure beyond the total appropriation for Chapter 5 was foreseen for the Oracle development project21, the final biennial expenditure was practically equal to the Appropriation (99.5%). The over-expenditure did not materialise, partly due to the impact of the positive staff cost variance distribution and also due to the re-programming of Oracle funds within the Information Systems and Technology Division (AFI) from development costs, which impact Chapter 5, to operational costs, which impact all chapters.
38. Expenditure of 94.7% of the Appropriation in Chapter 6 (leaving a surplus balance of US$ 2.1 million) arises mainly from the effect of the staff cost variance distribution.
39. Approximately 76% of the approved budget for Chapter 7, which provides US$ 600 000 for Contingencies, was utilised to provide for incidental costs incurred for the emergency structural works on the top floor of building B. As stated in Financial Regulation 4.5(c) (i), “the expenditure of any sum (or part thereof) which may have been voted in the budget to cover unforeseen contingencies may be effected by the Director-General.”
ANNEX II
2000-01 Regular Programme Expenditure Summary (excluding MP 4.1) (US$ 000)
| Description | 2000-01 Oracle Appropriation | 2000-01 Financial Performance | 2000-01 Balance vs. Appropriation | % Appropriation Spent | ||||
| Staff Costs (including Staff Cost Variance) | 455,287 | 412,914 | 42,373 | 90.7% | ||||
| Other Human Resources | 72,474 | 92,741 | (20,267) | 128.0% | ||||
| General Operating Expenses* | 47,941 | 62,144 | (14,203) | 129.6% | ||||
| Other (Incl. Internal Transfers) | 60,313 | 48,585 | 11,728 | 80.6% | ||||
| Total Non-staff | 180,728 | 203,470 | (22,742) | 112.6% | ||||
| Total Staff and Non-staff | 636,015 | 616,384 | 19,631 | 96.9% | ||||
| Less External Income | (75,133) | (67,262) | (7,871) | 89.5% | ||||
| Net Total | 560,882 | 549,122 | 11,760 | 97.9% | ||||
| * General Operating Expenses include General Overhead Expenses, and Expendable and Non-Expendable Procurement. | ||||||||
40. The total staff appropriation, which includes professional and general service staff costs, was underspent by approximately 9.3% (US$ 42.4 million). Half of the surplus (US$ 21.3 million) is a result of the positive variance between the standard rates set at the beginning of the biennium and the actual biennial staff costs. The remaining under-spending largely reflects professional staff vacancies. Some of these staff savings permitted the application of resources to underbudgeted programmes and activities that required non-staff expenditure.
41. Approximately 113% of the non-staff appropriation was spent in 2000-01, continuing the trend of the past biennium where non-staff expenditure exceeded the appropriation. The Other Human Resources category was over-spent by US$ 20.3 million, reflecting the decisions by managers to use alternative inputs for programme implementation, and largely compensating for vacant Professional posts. Additional expenditures under General Operating Expenses result from a number of high priority items, including Oracle, one-time costs associated with the implementation of the Wide Area Network (WAN), additional maintenance works, and miscellaneous improvements and upgrades of computer equipment.
1. The Committee asked for the attached three scenarios to the cash management plan prepared by the secretariat for 2002:
(Scenario I, Scenario II, Scenario III, in Excel format)
________________________________
May 36.61* 40.85 49.24 51.71 45.12
* as at 3 May 2002, all other figures at month end.
2 Fiduciary Trust International had been FAO’s portfolio manager for the last 25 years and for the UN pension Fund for a comparable period.
3 Including the Bank for International Settlements, the European Bank for Reconstruction and Development and the International Monetary Fund, as well as the former Director of the Investment Department at the World Bank.
4 It was noted that, while these contract arrangements were being undertaken, FAO commenced negotiations with IFAD to acquire investments monitoring and control support with respect to the Organization’s portfolios.
5 doc. FC 99/16 (WFP/EB.A/2002/6-C/1)
6 doc. FC 99/17 (WFP/EB.A/2002/6-A/1)
7 ref. doc. FC 99/17, para 78, see also para 90c) below
8 FC 96/4, Annual Report of Budgetary Performance and Budgetary Transfers (May 2001); and FC 97/3, Programme and Budgetary Transfers in the 2000-01 Biennium (September 2001)
9 Other Income is further described in paragraphs 20 through 22.
10 Total expenditure of US$ 549,122 reconciles with actual expenditure in Statement IV of US$ 560,519 after subtracting the TCP expenditure in the 2000-01 biennium of US$ 11,397 million (para 9 of FC 99/3, Financial Highlights paper refers). US$ 560,519 – US$ 11,397 = US$ 549,122.
11 Operative paragraph 6 of Conference Resolution 3/99 establishes Chapter 9 of the PWB to manage “One-time Expenditures funded from Arrears”, including one-time redeployment and separation costs.
12 The staff cost variance is further described in paragraphs 10 through 14.
13 The US$ 9 million authority is further described in paragraphs 15 through 19.
14 FC 97/3, Programme and Budgetary Transfers in the 2000-01 Biennium, refers.
15 Conference Resolution 3/99 refers.
16 In arriving at the 2000-01 Appropriation for Other Income, adjustments have been made for those elements that are accounted as Trust Funds in the accounts of the Organization. This is necessary to provide a comparable basis of relating the Appropriation with the expenditure reported in the audited accounts of the Organization.
17 Emergency projects have shown a substantial rise in delivery due to the Oil-for-Food programme in Iraq. FAO earns Direct Operating Costs from emergency projects, which are excluded from the tabulated support cost reimbursement figures as these reimbursements are accounted under a Trust Fund and current policy for reimbursement covers only the operating unit's direct costs.
18 The 2000-01 Appropriation as Revised is the Appropriation arising out of the Conference approval of the budget at Lira 1,875 (May 2000 Finance Committee paper FC 94/5 refers).
19 The Technical Cooperation Programme (TCP) appropriation falls under the provisions of Financial Regulation 4.3, which makes the balance of the 1998-99 Chapter 4 appropriation available for obligations during 2000-01. Thus, in line with the presentation in Statement IV of the accounts, the unspent balance of TCP appropriation for the reporting biennium is excluded from the budgetary performance
20 The Appropriation as revised constitutes the approved budget by chapter following re-programming of resources to reflect the adoption of the budget at an exchange rate of Lira 1,875 to the US dollar (document FC 94/5 refers).
21 Document JM 2000/3, FAO’s New Financial System and Procedures, refers.
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