ANNEX I

ANNUAL REPORT ON BUDGETARY PERFORMANCE AND PROGRAMME AND BUDGETARY TRANSFERS

INTRODUCTION

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-sixth Annual Report of Budgetary Performance summarizes, for information and discussion, the budgetary aspects of the Regular Programme performance for 2002.

2. Financial Regulation 4.5 (a) calls for the Finance Committee to be notified of certain transfers between divisions and Financial Regulation 4.5 (b) requires transfers from one chapter to another to be approved by the Finance Committee. This report also provides some advance notice of the likely magnitude of budgetary transfers arising from the implementation of the programme of work. A formal request for transfers between chapters will be submitted at the next session in September 2003.

OVERALL BIENNIAL REGULAR PROGRAMME FINANCIAL PROJECTIONS

3. Conference Resolution 5/2001 on the Budgetary Appropriations for 2002-03 approved a budget of US$ 651.8 million, which comprises the approved Programme of Work less Other Income¹. Financial Regulation 4.1(a) authorizes the Director-General to incur obligations up to the amounts voted.

4. 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 include financial provision for under-budgeted activities, where appropriate, and are adjusted by PBE during the implementation cycle to take account of emerging programme requirements. The institutional allotments by programme heading constitute spending limits for allottees.

5. Table 1 summarizes the overall budgetary performance versus the Appropriation approved by the Conference. The 2002 performance is based on the actual expenditure in the interim unaudited accounts of the Organization, and the 2003 figures present the latest Regular Programme financial projections.

Table 1. Overview of 2002-03 Regular Programme Performance (US$ '000)

6. The following points are made regarding the performance indicated in the preceding table.

1. The Organization projects to fully spend the 2002-03 Appropriation of US$ 651.8 million (assuming the usual carry over of the balance of the TCP appropriation for the current biennium as per Financial Regulation 4.3).
2. In 2002, there has been an excess in expenditure of US$ 3.2 million compared with the "calendarised" net budget², which implies an overall delivery of 101% of this budget.
3. The over-expenditure is partly due to the impact of the AOS income shortfall, as the rate of income earning is generally lower in the first year of the biennium than in the second year.
4. In addition, the Investment Centre Division has responded to an increased demand from the World Bank in the first year of the biennium, thus spending a higher proportion of its appropriation in 2002, to largely be offset in 2003.

7. Appendix A provides an overview and more detailed comments on the 2002 Budgetary Performance by Major Programme/Chapter.

OTHER INCOME

8. 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$ 651.8 million. The outturn for 2002 is summarized in Table 2, and shows an overall shortfall of US$ 1.8 million, or 95.1% of the total budget. As this outcome was foreseen, corresponding reductions in expenditure could be managed in a planned fashion.

Table 2. 2002 Budgetary Performance of Other Income (US$ '000)

9. Support cost reimbursements are essentially earned in proportion to the actual expenditure on non-emergency Trust Fund projects³ and United Nations Development Programme (UNDP) projects implemented or executed by FAO. The shortfall versus budgeted support cost income totals US$ 3.6 million in 2002, notwithstanding the decrease in the support cost income budget from US$ 36.9 million in the PWB 2000-01 to US$ 34.6 million in the PWB 2002-03. The continued shortfall is a result of a further decline in 2002 in UNDP project delivery, which fell by 18.5% , while non-emergency Trust Fund delivery has declined by US$ 5.7 million compared with 2001.

10. 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; earnings from sale of surplus property; and other sundry income. In 2002, the aggregate recovery for these income types exceeded the amounts foreseen in the budget by US$ 1.8 million.

2002-03 BUDGETARY PROJECTIONS AND FORECAST OF BUDGETARY TRANSFERS BETWEEN CHAPTERS

11. Table 3 below provides an overview of the forecasted 2002-03 performance by Chapter. The year 2002 actual expenditure and the estimated requirements for the second year tentatively indicate that a number of budgetary transfers would be required for the 2002-03 biennium.

Table 3. 2002-03 Forecasted Budgetary Performance by Chapter (US$ '000)

12. Based on these early estimates of biennial performance, resources may need to be transferred from Chapter 2 (US$ 7.0 million), Chapter 4 (US$ 2.0 million) and Chapter 6 (US$ 0.4 million) in favour of Chapter 1 (US$ 0.7 million), Chapter 3 (US$ 7.9 million), and Chapter 5 (US$ 0.7 million).

13. The transfer into Chapter 1 is mainly required for the additional cost of FAO's share of UNSECOORD as well as the funding of temporary administrative posts in the Office of the Director-General and the Administrative Support Unit, several of which are proposed to be regularised in the Programme of Work and Budget 2004-05.

14. The transfer into Chapter 3 is mainly required to offset the substantial effect of the shortfall in project support cost earnings on this Chapter, estimated at approximately
US$ 5.2 million for the biennium exacerbated by difficulties in reducing staff costs for operational support services particularly in the Regional Operating Branches. In addition, a modification in accounting policies for the recording of TCP and SPFS support cost reimbursements is expected to have a one-time, biennial impact of approximately US$ 2.7 million on this Chapter. It should be noted that a continuing high level of activity by the Investment Centre Division and lower than budgeted savings in the Regional Office Operations units could further increase the deficit in this Chapter.

15. The potential transfer from Chapter 4, while reflecting its share of the reductions which had to be taken in all Chapters, is particularly apt because of the one-time shortfall in Direct Operating Cost income arising from the change in timing of the recording of such internal income.

16. The transfer into Chapter 5 is mainly required for the support cost income shortfall.

17. A formal request for transfers between chapters will be submitted at the next session in September 2003.

TRANSFERS BETWEEN DIVISIONS WITHIN THE SAME CHAPTER

18. Financial Regulation 4.5(a) requires transfers between divisions within the same Chapter to be reported.

19. Minor changes occurred in 2002, involving post transfers from the Office of Assistant Director-General (TCD) to the Policy Assistance Division (TCA) and a transformation of the Special Relief Operations Service (TCOR) into a new Division - Emergency Operations (TCE). The changes arise from the final stages of the restructuring of the TC Department, which was largely undertaken in the PWB 2002-03.

CONCLUSION AND ACTION FOR THE COMMITTEE

20. This report is submitted for information purposes. The Committee is requested to:

1. take note of the overall Regular Programme budgetary outturn for 2002;
2. take note of the tentative forecast of the projected transfers between chapters; and
3. endorse the report for transmission to the Council.

APPENDIX A

2002 BUDGETARY PERFORMANCE BY MAJOR PROGRAMME

21. The table below summarizes the Regular Programme budgetary performance by major programme and chapter, comparing the 2002 Appropriation with the corresponding net expenditure.

Table 4. 2002 Budgetary Performance by Major Programme/Chapter
(US$ '000)

22. Although a number of specific issues contribute to the individual Chapter performances, some factors, as outlined below, have impacted expenditure across all chapters.

1. Funds across the programme structure were held back in 2002 at the allotment setting stages and were redirected mainly to cover:
1. the anticipated shortfall in support cost income against amounts budgeted;
2. a delay in the realization of savings which had been foreseen in the PWB 2002-03 as resulting from the restructuring of field operations; and
3. other items, such as conferences and inter-agency contributions (e.g. UNSECOORD) not fully budgeted in the PWB.
2. Support cost income earnings of US$ 13.7 million were distributed across the programme structure. Technical programmes in Headquarters and in the Regions (Chapter 2) benefited directly from their share of income earnings (US$ 2.4 million) as a result of the implementation of the new AOS reimbursement model, and the remainder was distributed across the programme structure in accordance with the allocation of support cost in the PWB 2002-03.
3. The shortfall in support cost income earnings of US$ 3.6 million against the 2002 budget affected mainly Chapter 3, which attracted 85.3% of the deficit, as well as Chapters 5 and 6.

23. A brief summary by Chapter follows.

Chapter 1: General Policy and Direction

24. General Policy and Direction utilized 99.6% of its 2002 appropriation, with under-expenditure occurring in Major Programme 1.2, Policy, Direction and Planning, largely as a result of professional staff vacancies in the Office of Programme, Budget and Evaluation (PBE) and the Office of the Inspector General (AUD).

25. The shortfall under MP 1.1, Governing Bodies, is mainly due to additional costs associated with the WFS:fyl being incurred in 2002, requiring a shift in the expenditure of the appropriation from 2003 to 2002.

Chapter 2: Technical and Economic Programmes

26. Technical and Economic Programmes were under-spent by US$ 4.6 million or 96.8% of the 2002 appropriation.

27. Approximately US$ 2.7 million of the surplus is explained by the planned reduction to the allotments, implemented on the basis of vacant professional posts, and the reduction to certain non-staff components. As explained above, such adjustments were required to cover the expected shortfalls in AOS earnings and to compensate for under-budgeted high-priority programmes.

28. The remaining under-spending is mainly in Major Programmes 2.1 and 2.3. The surplus under MP 2.1, Agricultural Production and Support Systems, is chiefly due to professional vacancies in decentralized offices, whereas the surplus in MP 2.3, Fisheries, is largely due to professional vacancies at headquarters.

Chapter 3: Cooperation and Partnerships

29. Cooperation and Partnerships has incurred over-spending of US$ 9.2 million, utilising 115.2% of its 2002 appropriation.

30. As already noted, a significant percentage of the support cost income shortfall against the budgeted amount is allocated to this Chapter (US$ 3 million). Some over-spending has had to be anticipated because of the difficulty in adjusting relatively fixed expenditures to sudden shifts in support cost income.

31. Furthermore, a modification in accounting policies applied to the recovery of TCP and SPFS support cost reimbursements resulted in a change in the timing for the recording of this income, causing a one-time under-recovery of approximately US$ 2.7 million against the budgeted amount in 2002. The change in accounting methodology is not expected to have any further impact in 2003, however, internal income earnings in Chapter 3 will continue to be closely monitored.

32. Expenditure in MP 3.2, Support to Investment, is approximately 35% over the Appropriation for 2002 which is the equivalent of 19.1% on the Programme of Work, and which represents TCI's response to increased demand from the World Bank exacerbated by a decline in the level of reimbursement of technical support services provided to the World Food Programme (WFP). This acceleration of implementation is expected to largely be offset by savings in the second year of the biennium.

Chapter 4: Technical Cooperation Programme

33. The TCP net appropriation for project expenditures (Major Programme 4.1 Technical Cooperation Programme) amounts to US$ 92.5 million for the biennium (US$ 46.2 million in 2002). This falls under the provisions of Financial Regulation 4.3, which makes the balance of the 2002-03 Chapter 4 appropriation available for obligations during 2004-05. The assumption is therefore made that the allotments will be fully spent. Delays in expenditures which had been experienced in recent years seem to have been overcome in 2002 when total TCP expenditure reached US$ 42.1 million, a record for the first year of a biennium. However, most of this was against the carry-over from the appropriation for 2000-01 and hence these high rates of delivery will need to be maintained in order to ensure full utilization of the available resources. In 2002, US$ 62.8 million has been earmarked for approved projects and US$ 2.3 million has been spent against the 2002-03 appropriation.

34. A surplus of US$ 0.9 million under Major Programme 4.1 results from the planned reduction to the allotments. TCP resources were made available to contribute to a share of the required reductions as a means of moderating the burden on Chapter 2, Technical and Economic Programmes, and to assist in covering the shortfall in Chapter 3, Cooperation and Partnerships, which arose in part from the one-time impact of the change in timing of the recording of Direct Operating Cost Income to TCP projects.

Chapter 5: Support Services

35. The 2002 annual expenditure is practically equal to the appropriation (99.4%). The surplus, although partially offset by the shortfall in income, is due to the re-programming of Oracle funds at the allotment level within the Information Systems and Technology Division (AFI) from development costs, which impact Chapter 5, to operational costs, which impact all Chapters.

Chapter 6: Common Services

36. Expenditure of 98.7% of the 2002 appropriation in Chapter 6 arises mainly from professional vacancies in the Administrative Services Division (AFS) and the Regional Offices.

Chapter 7: Contingencies

37. Approximately 80% of the biennial approved budget for Chapter 7, which provides US$ 0.6 million for Contingencies, was utilized in 2002 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."

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¹ Other Income is further described in paragraphs 8 through 10.

² The breakdown of the approved budget between 2002 and 2003 takes account of the timing of the Regional Conferences and the FAO Conference in the first and second year of the biennium respectively, and assumes that all other programmes incur expenditure evenly throughout the biennium.

³ Emergency projects, including the Oil for Food programme in Iraq, constitute a substantial share of delivery. 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.