Rome, 5 – 9 May 2003
Innovative Models for Leveraging Resources in Support of the Field Programme
A. National Execution of Technical Assistance Projects – Proposed Amendments to the Financial Regulation
B. Request for Approval of new Arrangements for Audit Assurance of the Financial Reports of Projects Funded by the World Bank
C. CONCLUSION AND ACTION REQUESTED OF THE FINANCE COMMITTEE
1. The purpose of this document is to inform the Finance Committee of recent developments and proposals with respect to FAO’s support for the national execution of technical assistance projects; and to seek the Committee’s concurrence in the amendment of the Financial Regulations governing such support.
2. As developing countries develop their own technical and managerial capabilities, they are increasingly looking to national execution as the preferred modality for development projects. National execution has long been the preferred modality for the delivery of UNDP development projects.1 For FAO, donors, including the World Bank, have also expressed continuing convictions that development projects should be nationally executed wherever possible: national execution is especially appropriate for projects linked with national food security, where governments are particularly interested in increased national participation.
3. In such situations, the traditional role and responsibility of FAO are significantly affected. FAO no longer has direct responsibility for the management of the project or for the technical choices to be made in its implementation: its role is rather one of assisting the national executing and implementing entities in making the right choices, i.e. one of influencing and advising rather than deciding. While the role of the Organization and thus its direct legal liability are therefore limited, a situation that must be reflected in the project agreement, the Organization still retains a degree of moral responsibility for the success of the project, by the mere fact of its association with it. It is in fact in a form of partnership with the government. For this reason, it is suggested that these new types of project be called partnership in development projects.
4. Three business models have been developed to reflect the range of possible partnership arrangements. The business models are:
Model A - FAO provides technical support only, with the project being executed by the government or other national entity. Under this model, funds would be held and managed by the government or other national entity and FAO’s responsibility would be limited to the provision of technical and possibly operational support services.
Model B – the Organization provides technical support services together with financial and operational support services specified in the Agreement. Funds would be placed in the custody of FAO and released for national implementation subject to the controls and monitoring mechanisms specified in the Agreement.
Model C - similar to Model B, except that the funds would be provided to FAO by an external donor, to whom FAO would report on their use.
5. The Organization has developed new standard agreements for projects with substantial national execution components, in line with the specific characteristics of the three business models. These agreements establish clear accountability between the executing agent, the external donor, where present, and FAO and set the limits of the Organization’s legal liability. Given the absence of direct control over projects under national execution, they provide for the indirect controls required to safeguard the position of FAO, including in the areas of:
6. In this connection, the following clauses would be incorporated in the Agreement for Business Model A, under which FAO provides technical support only, with the project being executed by the government or other national entity. Funds would be held and managed by the government or other national entity and FAO’s role would be limited to the provision of technical and possibly operational support services, including participation in the Project Oversight Committee.
Article VI – Management of project funds
2. “The Government or other responsible national entity shall keep accurate accounts and financial records of all transactions carried out in executing and implementing the project. All financial accounts and statements relating to funds administered by the Government or other responsible national entity under this project shall be certified by the Government or other responsible national entity and made available to the Project Oversight Committee for information and appropriate action.”
Article XI – Audit of the Project
1. The Government and FAO shall agree on the appointment of an independent auditor to audit the Government implemented activities and related financial statements of the Project each year or at other intervals as shall be agreed.
2. The independent auditor shall submit the report and opinion on the financial statements to the Project Oversight Committee established under Article IV for information and appropriate action.
3. FAO-implemented activities and services shall be subject to FAO’s internal and external auditing procedures.
4. The costs of the audit shall be borne by the Project.
7. The agreements for Business Models B and C will reflect the fact that the funds for those projects are to be held in trust by FAO and will be subject to the normal internal and external auditing procedures of the Organization. Provision will also be made for the audit of the provision of government-implemented services under the Project by an independent auditor appointed with the agreement of both the government and FAO and reporting to the Project Oversight Committee for the project concerned, with a copy directly to FAO. Models B and C are identical except for the inclusion in the latter of provisions for the financial reporting and other requirements of the external donor. They both provide for operational and financial arrangements to take account of varying modes of project implementation by the Government or other national entity. In particular, since FAO will not have direct control over project activities implemented by the government or other national entity, which will be implemented in accordance with national rules and regulations, FAO will need to rely on certification by the national authorities that related funds have been properly expended. The Organization will also need to satisfy itself, before entering into the project agreement, that the national rules and regulations are consistent with FAO’s Financial Regulations and that they provide adequate controls. These principles are reflected in the proposed amendments to the Financial Regulations of the Organization. Equivalent provisions are to be found in the Financial Regulations of UNDP, the UN body with most experience of national execution arrangements2.
8. An amendment to the Financial Regulations is proposed as follows.
Financial Regulation 6.7Bis
The Director-General may enter into agreements with governments and donors providing for technical assistance in the context of development projects to be executed/ implemented by the beneficiary Government or other national entity. Where the funds are to be held and managed by the government or other national entity under national execution or implementation arrangements, FAO’s participation shall be separately reported to the Finance Committee as Funds under Partnership in Development Agreements, and such funds shall not be included in the Financial Statements of the Organization. Where the funds are to be held in trust by FAO and transferred to the government or other national entity for the implementation of agreed activities, the funds shall be reported to the Finance Committee in the Financial Statements of the Organization’s as Funds held in Trust on behalf of Beneficiary Governments under Partnership in Development Agreements and shall be subject to the internal and external auditing procedures of the Organization. Funds held in trust by FAO that are subject to national implementation shall be expended in accordance with the national regulations and rules of the implementing government and shall be subject to certification by the responsible national authorities, provided that the Director-General shall satisfy himself before entering into the agreement with the government that such regulations and rules are consistent with the Financial Regulations of the Organization and provide adequate controls over the expenditure of the funds. All projects under Partnership in Development Agreements shall be subject to audit at least once a year by an independent auditor appointed with the agreement of both the government concerned and the Organization in accordance with the respective agreements.
9. The Finance Committee is invited to take note of the proposals made for accommodating recent developments concerning support by FAO to nationally executed projects and to make any comments it might deem appropriate.
10. Furthermore, as per Rule XXVII, Paragraph 7 (p) of the General Rules of the Organization, the Finance Committee is invited to consider the proposal to amend the Financial Regulations, through the addition of the proposed new Financial Regulation 6.7 (bis) and to submit it to the Council for transmission to the Conference for approval. The Finance Committee may also wish to recommend that the proposed amendment be reviewed by the Committee on Constitutional and Legal Matters.
11. Until recently, the World Bank has required, as part of the standard terms and conditions of its grants, the independent audit of the related financial statements. The Finance Committee approved the request for the special audit of one project so funded, the Emergency Farm Reconstruction Project (EFRP) in Kosovo, at its 94th Session in May 2000. More recently, in November 2002, the Chairperson and Members of the Committee gave their consent to another request from the World Bank for special audit, of the Mata Atlantica (Rain Forest) Project. That action was to have been presented at the current Session for formal approval but this has been overtaken by a change in the World Bank’s requirements, as explained below.
12. Faced with an overwhelming volume of audit reports, in 2002, the management of the World Bank decided that their audit regime needed to be reviewed. The review undertaken included consultation with a number of supreme audit institutions (among them that of India, the External Auditor of the Organization). As a result of the review, the management of the World Bank presented a proposal for change in grant audit arrangements to the meeting of the Directors of the Bank held on 20 February 2003. The proposal was approved and the effect of the new audit regime on audit requirements for FAO projects funded by the World, including the Mata Atlantica project, is as follows.
13. Instead of a separate audit report on the financial statements of a project funded from a World Bank grant, the requirement is now for the inclusion of a note of the financial status of the project in the audited financial statements of a recipient organization. That note would be covered by the opinion of the external auditor of the organization but there would be no need for a separate audit opinion and report, such as was the case of the project in Kosovo (EFRP) mentioned above.
14. The Bank has still to specify the degree of disclosure required in the note of the project’s financial status. It seems likely that there might be a need to ask the External Auditor to carry out additional work in relation to such a note, though this would be less than the work executed to satisfy an approved request for special audit, as in the past. Accordingly it appears that the Committee would need to consider the possibility that, especially if there are any of such projects, the External Auditor should be asked to carry out special audit of notes of the financial status of projects funded by the World Bank. The cost of this additional audit work would be met from the World Bank grant(s).
15. The Committee is asked to take note of the matter presented, to express any comments that members might wish to make and to ask the External Auditor to agree to undertake the additional audit work that might arise from the inclusion in the Financial Statements of notes of the financial status of projects financed by the World Bank.
1 UNDP Financial Regulation 17.02 provides that “National execution shall be the norm for UNDP programme activities, taking into account the capacities of programme countries and the nature of UNDP programme activities.” National execution has been defined by the Consultative Committee on Programmes and Operational Questions as a method of carrying out programmes and projects “where national entities retain the main responsibilities for planning, formulating and managing the programme or project funded by the UN system.”
2 UNDP Financial Regulation 16.05 provides that “The administration by executing entities of resources obtained from or through UNDP shall be carried out under their respective financial regulations, rules, practices and procedures only to the extent that they do not contravene the principles of the Financial Regulations and Rules of UNDP.”