Resources

153. The following table summarises, in a simplified manner, the projected income and utilization of resources under all sources of funds in 2004-05 under the real growth (RG) and zero real growth (ZRG) scenarios together with comparative information for 2002-03.

Budgeted Income and Utilization of Resources (Amounts in US$ 000 at € 1 = US$ 0.880)

154. The Programme of Work in the preceding table comprises those activities that are proposed to be performed on the basis of expected contributions from Member Nations, Miscellaneous Income and Other Income. The sub-category of Other Income comprises voluntary contributions available to execute the Programme of Work because they are at the disposal of the Organization and/or are managed closely with the Regular Budget Appropriation.

155. Trust Fund expenditure estimates are the Secretariat's forecast of the trust fund resources expected from donors to execute the extra-budgetary programme.

Overview of Total Resource Availability

156. The following table highlights the movements in budgetary resources.

Overview of Total Resource Availability (Before Cost Increases)

157. Overall, Miscellaneous Income is projected to increase to just over US$ 9.5 million based on the latest experience of amounts arising from the lapsing of accrued liabilities. It is noted that no surplus is expected to be earned on the Information Products Revolving Fund, and the 2004-05 budget for this fund is provided in Annex II.

158. The table also shows a very small increase in Other Income but this consists of a number of movements, the more significant ones being summarised as follows:

1. an anticipated US$ 3.7 million increase in reimbursements of direct operating costs from trust fund emergency activities, carried out by the Emergency and Rehabilitation Division (TCE);
2. a decline of US$ 2.7 million in budgeted project servicing costs and administrative and operational support services (AOS) reimbursements from non-emergency trust funds and United Nations Development Programme (UNDP) projects; and
3. a switch in income from that earned from Financial Institutions other than the World Bank to the World Bank itself where demand is particularly strong and where more favourable cost sharing arrangements are in place.

Risk Assessment

159. In the past Members have expressed interest in being informed of the risks to the achievement of the proposed Programme of Work which may underlie the Director-General's proposals. This is a brief list of the major risks that are recognized by the Secretariat:

160. Level of funding (at € 1 = US$ 0.880) – the extent to which Members are prepared to agree to the level of resources sought. On this occasion, cost increases and the amortization of After Service Medical Care will exacerbate the need to increase assessed contributions. Zero Nominal Growth, even if the Conference decides not to fund the amortization of After Service Medical Care, would amount to a drastic US$ 33 million budget cut in FAO's budget – the equivalent of 230 posts.

161. Split Assessment – the possibility that the Membership will reject the proposal to apply split assessment to the Organization's assessed contributions. This would require the Membership to consider a substantial increase in the budget when stated in US Dollars (the amount would depend upon the exchange rate €/US$ towards the end of November). A separate document is being prepared to evaluate the impact of this amount and how it might be addressed.

162. Field Programme Approvals and Delivery – the likelihood that delivery assumptions can be achieved and therefore that the assumed levels of support cost income will be earned. Here the risk is that over-optimism in delivery forecasts may put us in a position of under budgeting in this area. This phenomenon has been common in recent biennia but is further exacerbated by the volatile nature of large emergency programmes. It is hoped that the realistic estimates of forecast delivery envisaged in this budget combined with contingency plans for a major decline in emergency delivery will be sufficient to allow income to match the related expenditures.

163. Field Staff Security and Safety – The Director-General is committed to the full implementation of the UN Security Management System endorsed by the Chief Executive Board as applicable to the personnel of FAO. This implies responsibility for their safety and security and a number of explicit actions have been funded in these proposals. The risk is that there may be extensive further actions to be taken with cost implications which are not yet known although the provisions in this full PWB (i.e. US$ 4 million for the Office of the United Nations Security Coordinator [UNSECOORD]) are higher than those in the earlier Summary PWB and include all known costs to date.

164. Cost Management – the degree to which costs that are outside the control of the Secretariat can put unplanned strain on the Organization's capacity to deliver its Programme of Work (e.g. ICSC decisions). The Special Reserve Account now has a more substantial balance (i.e. US$ 15.4 million at 30 June 2003) which would allow us to respond to such an eventuality if necessary.

165. Cost Management – long-term unfunded liabilities and their potential for absorbing an ever larger share of total resources unless a conscious decision is made to fund them. This budget includes a specific proposal to fund the most significant of these long term liabilities.

166. Systems Development Management – an area of risk for all large organizations and one that FAO has had to face in the past. In particular, the major new area of work will be the development of Oracle Phase II which includes the Human Resource Management Systems and the Payroll Module. It is expected that the lessons learned from previous experiences will lower this risk.

167. Inter-disciplinary Management Challenges – An area needing further attention is addressing the management issues related to Priority Areas for Inter-disciplinary Action (PAIAs) and the Strategies to Address Cross-organizational Issues (SACOIs). The risk is that the horizontal management processes and incentives for the inter-disciplinary activities may not be strong enough to overcome the traditional vertical programme management structures. More attention is being given to this matter in the coming months.

168. Change in Demand and Flexibility to Meet it – The Organization seems to face, more than perhaps ever before, increasing and fast changing demand for additional services or new areas of focus. These are often legitimately generated by other inter-governmental Organizations (e.g. CITES, WSSD, NEPAD, CBD, etc.). Increasingly we find ourselves being unable to adequately respond simply because we must operate within a fixed or declining resource envelope. Other forms of demand reflect the increasingly inter-dependent international environment and the growth in demand for global public goods that must be balanced against the need for capacity building. This is clearly evidenced in FAO through the call for increased support for standard setting (e.g. Codex, IPPC, PGFRA, etc.). Apart from the provision of additional resources, current efforts to sharpen priority setting methods may assist in addressing this issue.

Developments Under Extra-budgetary Resources

169. Project delivery by funding source is shown below and indicates that the total extra-budgetary field programme declined somewhat in 2002 after a steady increase from the low level of US$ 199 million in 1996. However, this increase reflected a growth in emergency assistance which expanded from US$ 15.8 million in 1996 to over US$ 160 million in 2000 before slipping back to US$ 140 million in 2002.

Extra-Budgetary Field Programme (All Amounts in US$ million, net of Project Servicing Costs)

170. UNDP project delivery has declined steadily from US$ 42.8 million in 1996 to US$ 14.9 million in 2002. The decrease since 2000 has mainly been in the area of support for policy and programme development with FAO execution of UNDP projects holding steady at about US$ 6 million per year. It is anticipated that UNDP delivery will stabilize at about US$ 12 million during 2004-05.

171. Non-emergency assistance has rebounded from a low of US$ 115.9 million in 2000 to US$ 135.0 million in 2002. Total UNDP and non-emergency Trust Fund project delivery, which had declined steadily from US$ 183.2 million in 1996 to US$ 129.1 million in 2000, recovered to US$ 159.8 million in 2001, but declined to US$ 149.9 million in 2002. The increase in 2001 can partly be attributed to the recovery of delivery following transfer of operating responsibilities from the Field Operations Division (TCO) and Regional Operations Branches to the FAO country offices and the inevitable difficulties that arose during the initial period of transition. Available unspent balances on current projects and newly approved projects continue to be higher than in the recent past, and there is an expectation that non-emergency Trust Fund delivery will stabilize during 2004-05 at about US$ 294 million.

172. Trust Fund emergency activities, mainly carried out by the new Emergency Operations and Rehabilitation Division (TCE) in the Technical Cooperation Department, vary with need. The large increase in emergency programmes since 1997 is mainly related to the Iraq Oil for Food programme. During 2002 delivery on this programme declined to US$ 88.6 million from a high of US$ 127.6 million in 2000. The Iraq Oil for Food programme is scheduled for completion in November 2003, although other forms of emergency assistance to Iraq are expected to continue in 2004-05. Delivery of other emergency operations increased from US$ 37.2 million in 2000 to US$ 51.3 million in 2002, keeping overall delivery of emergency assistance at or above US$ 140 million for the fifth straight year. It is assumed that emergency assistance in 2004-05 will be about US$ 220 million, somewhat above the level of current activity.

173. In planning extra-budgetary resources for 2004-05 an extensive data collection process has been undertaken using a joint interface between the Field Programme Information System (FPMIS) and the Programme Planning, Implementation Reporting and Evaluation Support System (PIRES) and involving technical and operations staff both at Headquarters and in the Regional Offices. This approach of basing the projected extra-budgetary resources on the data collected from those directly involved in the development and execution of the extra-budgetary projects is expected to significantly improve the quality and accuracy of the information provided in the document.

174. The following table therefore provides the Secretariat’s best forecast of what is likely to evolve as the extra-budgetary funded programme for 2004-05. This inevitably reflects not only the demand from Members for technical assistance but also the policies of donors which often reflect geographical and sectoral preferences.

175. The table shows the distribution of the forecast by programme and region. Major Programme 2.1 Agricultural Production and Support Systems makes up over 60% of the total forecast. However, these include delivery in Iraq which is estimated at US$ 120 million or 23% of total delivery. The programmes for Fisheries at US$ 47.4 million and the Special Programme for Food Security (SPFS) at US$ 49.1 million have risen by 63% and 100% respectively. On the other hand, the remaining programmes have declined by varying amounts.

176. The regional distribution has also changed quite significantly since the forecast in the PWB 2002-03. Because of Iraq, the Near East is still the region with the highest forecast. However, Africa which was the second largest beneficiary region has now slipped to third place behind Asia and the Pacific. Global and Inter-regional have risen whereas Europe and Latina America and the Caribbean have remained at similar levels.

Extra-budgetary Expenditure by Region and Programme

Efficiency Savings and Organizational Changes

177. Since the Director-General assumed office in January 1994, substantial efforts have been made to improve the Organization's efficiency through the implementation of savings defined by the FAO Council as "reductions in the costs of inputs without material negative impact on the outputs". The savings implemented have included:

1. changes designed to take advantage of favourable cost differentials to reduce the costs of inputs;
2. changes in policies, procedures and work methods aimed at streamlining operations and administrative functions; and
3. increased recovery of the costs of technical support services provided by the Organization to projects.

178. These savings have enabled the Organization to limit the negative impact on its mandated services of the series of "zero nominal growth" budgets approved by the Conference.

Fully Implemented and Operational Efficiency Saving Measures

179. Following is a summary of the main actions taken over the past five biennia. These actions have been reported previously in the 2002-2003 Programme of Work and Budget and in a report to the 119^th session of the FAO Council (CL 119/INF/12).

180. The successful implementation of these efficiency measures has enabled the Organization to continue to provide its mandated services without severely diminishing their quality, notwithstanding the requirement to operate within the US$ 650 million zero nominal growth budget until the 2002-03 biennium which implied a reduction in real terms of US$ 95 million in the biennial budget. It also allowed the Membership to introduce new programmes such as SPFS and EMPRES during a period of declining resources.

181. However, it should be recognized that the rate of savings has certainly declined from that achieved in the period up to the end of the 'nineties. In fact, some of the savings originally planned have not eventuated or have had to be reversed. For example, recent increases in the staffing of AFF and AFI, as recommended by an international accounting firm, may be seen as the reversal of previous reductions, although they have not been counted as such in the above calculations.

On-going Efficiency Measures

182. In addition to the above measures which have been fully implemented, the Organization is continuing the process of streamlining administrative, operations and financial procedures to eliminate unnecessary processes and reduce requirements for staff. The process is being developed based upon the Oracle package along with new enhancements and complementary systems which will increase the overall capacity available to the Organization.

Restructuring of Field Programme Operations

183. Beginning in 1994-1995 the Organization began to implement a process designed to reduce project-servicing costs and at the same time improve the delivery and efficiency of operational services. The process first involved the centralization of departmental operational units into a single Field Operations Division within the Technical Cooperation Department. This was followed in the period 1996-1998 by the decentralization of regional and in-country project operational support to operations units within the Regional Offices. The final stage in 2000-2001 involved the further decentralization of management responsibility for in-country projects to the FAOR country offices where practical. Annual savings of US$ 5.0 million had been achieved through the first two phases of restructuring. An additional US$ 4.0 million annual savings was projected for the final phase of decentralization to country offices.

184. Achievement of the additional savings has been complicated by difficulties in realigning procedures to the new operating conditions and because of problems with the decentralization of the IT systems for travel, personnel servicing and project finance to country offices. With 78 country offices, many located in countries without advanced communications capacity, systems implementation has been complex. This has necessitated the restoration of most of the anticipated savings in the PWB 2004-05.

185. An inter-departmental task force has been established to review the operations of Regional Office management support units and regional units responsible for field project operations. The task force will make recommendations on the extension of existing or new IT and communications systems to simplify procedures and eliminate duplicated effort in the processing of field project transactions by Regional Offices, FAOR country offices and Headquarters. It is anticipated that full implementation of the recommendations can be achieved over time, providing an opportunity for eventual realization of some, if not all, of the planned savings.

New Efficiency Savings Measures

186. As can be seen from the above analysis, the Organization has made massive cuts to its costs and has very much improved its efficiency. Clearly, however, there are limits to the extent to which such savings can be made and certainly it appears, at times, that the Organization may have gone too far and is now having to reverse some of the budgetary reductions which were originally made.

187. That is not to say that the search for further efficiency savings should cease, but rather that a more systematic approach needs to be developed and institutionalized through enhancement of the underlying planning processes. The need to take affirmative action in this regard coincides with the implementation of the new programme model to non-technical programmes. This results-based approach to planning has now been implemented for all of FAO's technical work but needs to be adapted to the rather different needs of service oriented non-technical programmes.

188. This requires some conceptual adaptation of the basic model to take into account the rather different nature of the work as well as the necessary linkages to the Strategies to Address Cross-organizational Issues (SACOIs). Part of the conceptual design will be to build in a periodic analysis of "strengths, weaknesses, opportunities and threats" (SWOT) for each non-technical programme entity aimed specifically at service effectiveness and efficiency.

189. Such efforts, if carried out in depth, require a considerable investment in resources including staff time. In addition, there are also likely to be diminishing returns unless a reasonable period is allowed to elapse between repetition of SWOT exercises. For this reason it is expected that, while the adapted new programme model will be applied to all non-technical programmes during 2004-05, albeit outside the PWB document, at least one third of all non-technical programme entities will be subjected to a SWOT analysis. This will then be repeated on a cyclical basis such that all entities are covered during a period not exceeding three biennia and hopefully somewhat less, at least for the first complete cycle.

190. This strategy is expected to identify further opportunities for efficiency savings as well as improvements in service delivery. However, given the over-optimistic assumption of certain efficiency savings in the 2002-03 PWB and the consequent under-budgeting, no attempt is made to quantify the extent or timing of the savings which may be captured by this process.

Posts

Evolution of Posts

191. The Evolution of Posts table shown above, highlights post movements from the PWB 2002-03 to the two scenarios (RG and ZRG) of the PWB 2004-05, by grade category and location.

192. The following RG programme changes are noted:

1. The trend to reduce general service posts and increase professional posts continues, although to a lesser extent than in the PWB 2002-03. The real growth proposal shows a net increase of 80 professional and 24 NPO posts and a net reduction of 17 general service posts.
2. The FAO Representations show a net reduction of 8 general service posts and the creation of 24 NPO and 2 professional posts, primarily linked to the further decentralization of project operations to the country offices and improved information resource management for knowledge and technology transfer in support of decentralized offices.
3. The majority of the post changes shown under Pools and Other Funds is due to transfers to the Regular Programme associated with the Information Systems and Technology Division (AFI) pool restructuring (47 Professional and 42 GS posts).

193. Moving from the RG proposal, the PWB 2004-05 ZRG scenario proposes a net reduction of 26 professional posts, 8 NPO posts, and 18 general service posts. The reductions in the professional category regrettably include 19 posts which would have benefited high-priority technical programmes.

194. The following table shows changes to the PWB 2004-05 posts by post grade.

Evolution of Posts by Grade

195. Particular emphasis has been placed in the PWB 2004-05 on creating entry level positions, aimed at providing opportunities for attracting young professionals, given the significant staff turnover foreseen in upcoming years due to retirements. As can be seen in the table above, the majority of post changes are introduced in the P-1 to P-3 grade categories (a net increase of 51 posts), resulting in a reduction in the average grade mix of professional staff. Consequently, the Real Growth grade point average (GPA) for the group of posts funded from the Regular Programme declined from 4.09 to 3.98 (i.e. where 4 is equivalent to a P-4).

196. The General Service category has borne the larger part of post reductions in recent biennia as a result of the declining workload through increased productivity achieved with the help of new technological advances in the Organization. Remaining staff have taken on additional and more demanding tasks and hence a limited number of well-justified general service grade increases are included in the budgetary proposals. This is considered appropriate also in terms of the comparison across the United Nations system, where, for general service posts funded from the Regular Programme, FAO's GPA of 4.07 is below average. It is noted that some further grade increases may be required for this category as the on-going review of General Service classifications proceeds.

197. Changes in organizational structure are proposed in the Forestry Department where units attached to the office of the ADG have been moved to the technical divisions and some realignment of units between divisions has been undertaken to better balance resources and management responsibility. In the Administration and Finance Department it is proposed to move the travel unit from AFF to the Management Support Service (MSS). Intra-divisional changes have also been proposed in AGS, ESS and GII. In the Technical Cooperation (TC) Department, the final stages of the restructuring, which was largely undertaken in the PWB 2002-03, have been implemented. As part of the restructuring, the Emergency Operations and Rehabilitation Division (TCE) was created to enable the Organization to better respond to humanitarian and natural emergencies; the PWB 2004-05 proposes the creation of core posts for the division using extra-budgetary resources. Where appropriate these changes are discussed in more detail in the Programme Budget section of the document.

198. Annex I lists all new and abolished posts to the Regular programme, excluding NPO and GS posts in FAO Representations. In total, 141 new posts have been created and 72 posts have been abolished. Technical departments have used opportunities arising from staff turnover and post vacancies in both the general service and professional categories to realign and strengthen technical expertise. The Field Operations Division (TCO) has created posts to strengthen the division's capacity to formulate and implement SPFS projects, given the rapid expansion of the programme, as well as to strengthen the staffing of the TCP Unit in order to accelerate the review and approval of TCP Projects. In line with the increased emphasis on Information Security throughout the UN system, AFI has added posts in this area to allow risk assessment and enhance protection from information security threats. The division has also added posts to strengthen its capacity to support the electronic communications needs of the decentralized offices through the Wide Area Network.

199. Additional post changes may arise in the Regional Offices following the outcome of the review of the Operations Branches and Management Support Units (MSUs) in the Regional Offices. A pilot study has recently been undertaken in the Asia-Pacific region and the resulting report will be presented to the Field Programme Committee (FPC) at its September Session. The review, undertaken by an inter-departmental task force, analyses the organizational structures and staffing that would optimally be in place in the regions to ensure a high standard of operational performance for projects of different types and sizes, with a focus on the least-cost and most efficient approach to providing such services.

Cost Increases

Methodology

200. As per established practice, the programme budget is developed using cost rates and the rate of exchange approved for the previous budget thus allowing, in the Programme Budget section of this document, a valid comparison of the approved budget for the current biennium with the proposed budget for the next biennium. The methodology and results of the calculation of cost increases to be provided within the Programme of Work and Budget 2004-05 are described in this section. The methodology used is the same as used for the 2002-03 and previous biennia as approved by the Finance Committee, Council and Conference.

201. The changes in costs estimated in this document are developed from detailed calculations for each item of expenditure using an accepted methodology and under stated assumptions. Where possible, use has been made of independent verifiable forecast data such as the Economist Intelligence Unit and published data of authoritative bodies such as the International Civil Service Commission (ICSC) and the Chief Executives Board for Coordination - High Level Committee on Management (CEB-HLCM). The cost increase calculations included in this document are based on actual data to June 2003 and are supported by a sophisticated computer based model.

Impact of Exchange Rate – existing procedure

202. The budget is prepared in US Dollars and, therefore, the relationship of the US Dollar to other currencies in which expenditures are incurred can have a notable impact upon the costs incurred when the amounts are translated into US dollars. This is particularly important for expenditures based in Euro-zone countries, especially in Italy, where the majority of staff are located.

203. As indicated above, the approved budget rate for 2002-03, €1 = US$ 0.880, has been used to develop the estimates for cost increases in 2004-05.

204. A change from this rate will affect the budgeted cost for personnel services, when stated in US dollars, as follows:

1. firstly, through its effect upon professional staff costs as seen in the post adjustment multipliers and some benefits earned by staff in Euro-zone countries, notably Italy; and
2. secondly, through the US Dollar cost of general service salary costs incurred in Euro.

205. The exchange rate effect derives from the fact that assessments are made and paid in US dollars while the expenses for Rome based staff described in the preceding paragraph are obligations made in Euros. When the time for payment comes, the Organization must purchase Euros at the market rate at that point of time. To the extent that this rate is different from the rate assumed in the development and approval of the budget, an exchange gain or loss will be incurred.

206. Under the current practice, the budget rate is set by the Conference. Normally it is based on the spot rate on the day of the Conference Resolution on the budget although in the case of the PWB 2002-03, the budget rate equalled the forward rate obtained in the contract for the forward purchase of Euro requirements which was exceptionally entered into before the budget was approved. No such forward purchase contract is proposed to be entered into prior to the approval of the budget by the Conference in the first week of December 2003.

207. The following graph shows the effect of the exchange rate on cost increases which commences at zero million at the current budget rate of €1=US$0.880 and then rises according to the applicable rate of exchange. For example, the rate at the time the document was being produced was in the region of €1=US$1.15 which would increase cost increases by US$ 68 million for staff costs alone.

208. The standard formulae for adjusting the Appropriation does not, under current procedures include non-staff costs. However, there are two areas where the currency impact on non-staff costs cannot be ignored. The first is for those categories of expenditure where the Organization has no practical alternative to procuring the required goods and services in a single country, particularly in the host country (e.g. utilities, cost of premises, etc.). Similarly, in Austria, where FAO supports the joint programme with the International Atomic Energy Agency (IAEA), specifically by paying a share of the General Service staff in the laboratories, there is a significant Euro amount which needs to be maintained. At €1=US$ 0.880, no adjustment is necessary to these two areas but under a new exchange rate, an adjustment would have to be made to reflect the budget rate so that their purchasing power is not eroded dramatically. The amounts are not substantial when compared to the adjustment for staff cost (see graph above) but are very material to the units concerned. It is therefore proposed to include these two adjustments in the calculation for the adjustment to the Appropriation.

Impact of Exchange Rate – procedure under split assessment

209. The Finance Committee is currently considering the Director-General’s recommendation to the Council and Conference, that the Organization adopt split assessment as a means of protecting the Programme of Work both during and between biennia from the effect of €/US$ exchange rate fluctuations.

210. This proposal recognizes that in total, FAO incurs a high proportion of its expenditures in Euro (i.e. 44% in 2002) and therefore requires that assessments for the Euro portion be issued and paid in Euros and not US Dollars. The beneficial consequence would be that there would be no need for FAO to buy Euros with US dollars and hence the exchange rate gains or losses would be largely eliminated.

211. Options for changing the exchange rate under the split assessment approach include not changing at all (a practice which is common amongst those utilizing split assessment in the UN System), changing to a one or two year moving average, establishing a nominal rate in advance of the PWB (e.g. a forward rate at a certain date) or continuing to rely on the spot rate on the day of approval.

212. This issue is further addressed in a separate document and will be subject to a recommendation of the Finance Committee at its next session. Attention is also drawn to the text on Budget Level and Funding at the end of the Resources section of the document, where the split assessment approach is applied in comparison to the existing single currency assessment.

Biennialization and Inflation

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

214. Biennialization reflects the full biennial effect of cost adjustments that have occurred at some stage during the current biennium (and, therefore, for only part of the 24-month period) but which will be incurred for the full 24 months in 2004-05. It includes US Dollar-denominated cost adjustments for the decentralized offices to reflect the prevailing US Dollar rates of exchange and the actual experience of local costs. Therefore, biennialization reflects the financial impact in 2004-05 of changes that will have occurred before the end of 2003.

215. Inflation, on the other hand, represents the cost impact in 2004-05 of those increases that are expected to take effect at various points in the next biennium (i.e. on or after 1 January 2004 and before 31 December 2005).

Lapse Factor

216. The lapse factor is a technique used by a number of organizations in the United Nations system, which affects the budgetary estimates of staff costs. It consists of a reduction of the budgetary provision for the estimated cost of established posts to account for the fact that some of them will be vacant for part of the biennium as a result of staff movements. The lapse factor methodology approved by the Council at its 107^th session for application in the 1996-97 budget, has been consistently applied to all budgets since then and is again used for the Programme of Work and Budget 2004-05.

217. In accordance with this methodology, new posts have been costed in the programme budget for only that part of the next biennium, during which they are expected to be encumbered.

218. The methodology for ongoing posts is based on three factors:

1. staff turnover rates, as measured through separations;
2. standard recruitment times; and
3. the extent to which separations are foreseen, so that recruitment action can be anticipated and the effective lead time thus reduced.

219. In accordance with the established methodology, a five-year moving average (i.e. 1998 through 2002 inclusive) has been applied to calculate staff turnover rates. This results in an average turnover rate of 7.71 percent for Professional staff and 6.17 percent for General Service staff. The annual professional turnover rates in Headquarters, high at the peak of the downsizing process in 1996-97, have declined from 1998 onwards. Hence, the five-year moving average for Professional posts has decreased by 0.85 compared to that used in the PWB 2002-03. In contrast, General Service separations on the rise in recent years reflect higher retirement rates, such that the five year moving average for general service has increased by 1.02.

220. The current standard recruitment lead times are as follows:

• Professional - 42 weeks or 0.81 years; and
• General Service - 25 weeks or 0.48 years.

221. The extent of separations which can be foreseen is derived from a review of the reasons for separation, the results of which are summarised below:

Extent to which Recruitment Action can be Foreseen

222. These results have been used to calculate the 2004-05 lapse factor of 2.52 percent for professional and 1.63 percent for general service costs respectively in arriving at the financial estimates for 2004-05. Weighting these on the basis of respective costs for the revised programme base produces an average lapse factor of 2.27 percent.

Analysis of Cost Increases

223. The table which follows shows the cost increases summarised by major component, showing separately the amounts attributable to biennialization of cost increases arising in 2002-03 and the cost increases due to inflation in 2004-05. Explanation of the most significant increases and the main assumptions made in forecasting the amounts are described below.

Summary of Cost Increases for 2004-05 (All amounts in US$ 000)

Personnel Services

224. Under Basic Professional Salaries and Post Adjustment, biennialization arises from the GA decision (78^th Plenary meeting of the 57th Session) that approved a new base/floor salary scale for staff in the professional and higher categories effective 1 January 2003. The new salary scale reflects net increases differentiated by grades and was unbudgeted. The provision under inflation includes one cost of living adjustment per year by location where warranted plus provision for expected cost of living surveys. In particular, the assumptions for HQ based staff is for increases of 2.0 percent in 2003 and 2004 with 3 percent forecast at the end of 2005 following the planned place to place survey.

225. The biennialization of General Service Salaries shows a slight decrease as the budgeted increases closely captured the effective increases. In addition, small favourable variances were experienced in the decentralized offices. Under inflation, an estimated 3% increase in general service salaries is assumed effective November 2004 and November 2005, at a somewhat lower level than the Economist Intelligence Unit (EIU) Forecast for Italian nominal wages index.

226. The substantial biennialization of Pension Fund Contributions is largely attributable to the under-provision of biennialization in 2002-03 with the consequence that the base budget was too low. In addition, there was an increase of 3.76% in pensionable remuneration for professional staff, promulgated by the ICSC in October 2002 (compared with a foreseen increment of 3.6% in the PWB 2002-03) compounded by the adverse effect of the new base salary increases described above. In addition, there is the impact on pension contributions of the 2002-03 increase in general service salaries at Headquarters and in the field. Under inflation, the estimated increases are consistent with the estimated increase in professional and general service salaries in 2004-05.

227. Under Dependency Allowances, the decrease arising from biennialization more than offsets the forecast increase due to inflation resulting in a net slight decrease.

228. Under Social Security, which comprises the Organization’s payment to staff medical schemes, biennialization reflects a slight decrease due to the adjustment in premiums at 11 percent in 2002 and 10 percent in 2003 being lower than the 15 percent biennial assumption in the budget. The Organization needs to take into consideration the adverse impact of medical inflation which continues to outpace general levels of inflation and has led to a forecast overall increase in premiums of 12% for 2004 and 12% for 2005, reflected under inflation.

229. With regard to Education Grant, Travel and Other Allowances, Education Grant provisions, are reviewed every two years by the ICSC, and an increase in the education grant ceiling by an average of 2.1% became effective 1 January 2003. The expected increase in 2005 is budgeted under inflation at 5%. The latest expenditure patterns for appointment travel and related installation allowance cost trends indicate that they have increased in 2003.

230. The decrease in After Service Medical costs under biennialization reflects the results of the latest actuarial valuation as of 31 December 2001, which has determined a reduced provision for current service costs. This provision has varied considerably since the first actuarial valuation in 1996, and it is considered prudent to include only a modest inflationary increase for 2004-05 to cover for medical inflation.

231. Terminal Payments (comprising repatriation grant, termination indemnities, repatriation travel and removal, death grant and accrued leave) are now covered by accrual accounting principles and are subject to actuarial valuations. The results of the latest actuarial valuation as at 31 December 2001 have been included in the estimates, with a provision to cover for the actual increase in service costs as occurred between the 1999 and the 2001 valuations.

232. The provision for General Service Separation Payments Scheme is in line with the latest actuarial valuation as at 31 December 2001 and reflects the continuing decrease in the base of staff in the general service category.

233. The above cost increase calculations can be presented separately for the Professional and Higher Categories and for General Service as follows:

Professional Staff Cost Increases for 2004-05

234. This amounts to an average biennial increase of 5.6% for the Professional and Higher categories. This is equivalent to an annual rate of 3.7%.

General Service Staff Cost Increases for 2004-05

235. This amounts to an average biennial increase of 2.5% for the General Service category and is equivalent to 1.7% per annum.

236. The Organization continues to maintain differentiated standard rates by grade for all posts that take account of distinct cost rates and cost trends in the various locations where FAO staff are posted.

Goods and Services

237. Other Human Resources consists of non-staff human resources in the form of temporary assistance, consultants and contracts. Under inflation, a cost increase of 1.5% per annum effective January 2004 and January 2005 is considered appropriate. It is less than the overall trend in earnings growth and is likely to be well below the outcome of the revision in consultants rates that is under review in Rome, to bring them up to the levels applied by other UN system organizations.

238. Included under this heading (Other Human Resources) is the increase in FAO’s share of the costs of the jointly-funded activities of UNSECOORD as well as increases in other costs related to field staff security. In comparison to PWB 2002-03, this amounts to an additional US$ 4 million for the provision of the same outcome; that is, a secure environment for field staff. All other additional costs, such as new field security posts in OCD, have been treated as a programme change in ZRG.

239. Cost increases related to field staff security have risen from US$ 2.1 million in the SPWB 2004-05 to US$ 4 million in the PWB 2004-05. The cost increases are largely comprised of:

• a significant increase in the jointly-funded UNSECOORD field-related costs, for which FAO pays a proportional share together with the UN and other UN agencies, including the funding of Field Security Officers and the funding of the Malicious Acts Insurance Policy that covers UN personnel in 88 duty stations The increase is partially counterbalanced by the significantly lower than anticipated prospects of the USA inflation rates since SPWB for 2004 and 2005;
• the FAO contribution to the rising costs of operating UN-system shared radio rooms in each duty station in which a Security Phase is in effect; and
• increases in cost arising from the need to maintain Minimum Security Telecommunications Standards (MISTs) in decentralized offices in order to comply with the prescribed Minimum Operating Security Standards (MOSS) for Security Phase duty stations, including the costs of operating satellite phones where applicable.

240. Inflation for Travel costs, has been provided for at 1.0% per annum in 2004 and 2005.

241. The inflation under General Operating Expenses has been calculated at rates which are lower than the forecast rates of inflation for Italy which, according to the Economist Intelligence Unit should be at 2% in 2004 and 2.1% in 2005.

242. Under Furniture, Equipment and Vehicles, it has been assumed that most of the expenditure will be incurred under international tendering provisions for which US rates of inflation are considered more appropriate. Accordingly, an estimated rate of inflation of 1.3% for 2004 and 2.8% for 2005 has been applied.

Amortization of Accrued Liability for After Service Medical Care (ASMC)

243. It may be recalled that this is an area of cost which is not being fully funded². Initially, FAO operated on a "pay-as-you-go" approach to its medical scheme (i.e. enough to cover current claims). However, following actuarial valuations, two problems were recognised:

• FAO had an outstanding liability for ASMC (e.g. over US$ 200 million at 31 December 2001) which from an accounting viewpoint had to be disclosed in the accounts of the Organization; and
• a practical implication was that pay-as-you-go payments would grow exponentially in the coming years, as the ratio of the retiree population to active contributors will increase the Organization's share of premiums to proportions which would distort the budget by huge amounts.

244. The response, as endorsed by the Governing Bodies, has been to:

• budget for current service cost, as well as the pay-as-you-go cost (this prevents the outstanding liability from growing further); and
• allow surpluses on investments to be set aside in the General Fund to cover the ASMC accrued liability (this has resulted in US$ 78 million being successfully set aside for this purpose).

245. However, apart from the use of investment gains, which are unlikely to be repeated in the next few years at the rate experienced in the 90's, the Governing Bodies have not decided on any funding formula to cover the remaining outstanding liability. It is, therefore, proposed that a provision of US$ 14.1 million per biennium be included under cost increases, being the funding required for the remaining 24-year amortisation, which will be made in the biennial accounts. It is noted that this matter will be further considered at the September 2003 session of the Finance Committee which plans to make a specific recommendation to the Council on this proposal.

Biennial Cost Increase Rates

246. The biennial rate of cost increases is the net effect of applying annual increases to each year of the biennium. For example, assuming a 2% increase in 2004 and a 3% increase in 2005 on a biennial budget of US$ 100, the calculation of the biennial rate is as follows:

247. Example data:

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

249. The biennial rate of cost increases for 2004-05, excluding the funding of the amortization of After Service Medical Care, works out at 4.3% of the proposed Programme of Work. The proposed cost increases for 2004-05 are equivalent to an average annual rate of 2.84% on the Programme of Work.

Budget Level and Funding

250. The following two tables indicate the financing of the RG and ZRG budgets as proposed. The first table assumes the exchange rate adopted by the 2001 Conference for the 2002-03 budget of € 1 = US$ 0.880, which implies no exchange rate impact.

Budget Level and Funding (assuming 1 Euro = 0.880 US$)

251. The second table assumes an exchange rate of € 1 = US$ 1.15, which implies an exchange rate impact of US$ 107.4 million and US$ 100.6 million respectively for the RG and ZRG budget proposals. Cost increases are identical in both tables.

Budget Level and Funding (assuming 1 Euro = 1.15 US$)

252. Both tables show the levels of assessed contributions as they would occur either given a single currency assessment (i.e. US $) or as a split assessment between US Dollars and Euro.

253. The system of split assessments as a methodology is still under consideration by the Finance Committee and is a means of protecting the Programme of Work within and between biennia from the effects of fluctuating exchange rates. Under split assessments, the Organization’s Euro requirements are paid by members in Euros and hence the exchange rate effect does not come into play. As shown in the tables, the assessed split contributions in Euros and US Dollars do not vary under the different exchange rate assumptions. In effect, under a split assessment methodology, the overall US dollar figure for the assessed contributions becomes a nominal amount.

254. The following table shows the variation in the nominal value of the budget at a variety of different exchange rates, assuming the RG proposal after cost increases.

Effect of Fluctuating US Dollar/Euro Exchange Rates on the FAO Budget (Amounts in Millions of US$ or €)

255. It is noted that the methodology used to develop the above figures is much more comprehensive than the existing approach used to adjust the Appropriation to the spot rate on the day the budget is approved, the latter dealing only with the effect on Headquarters based staff salaries.

256. The actual cost to each Member in terms of their own currency will, as always, depend upon the rate of exchange between the Member’s currency and the currency of assessment. Under split assessment, the risk of fluctuations has been reduced as a fluctuation of the amount in US Dollars from one biennium to another will often be offset by a fluctuation in the opposite direction in Euro.

² Further background on this issue can be found in FC 104/12.