CL 125/12

Council

Table of Contents

I. Introduction

II. Background

III. Proposed solution: split assessment

Projection of expenditure by currency
Impact on Members’ Assessed Contributions
Budget Presentation and Euro/US dollar Rate of Exchange

IV. Proposed Changes in Basic Texts and Appropriation Resolution

V. Conclusion

DRAFT CONFERENCE RESOLUTION
Amendment to Regulation V of the Financial Regulations
(Split Assessments)

I. Introduction

1. The Council has been following the debate surrounding the protection of the programme of work from exchange rate fluctuations and the split assessments proposal which has been on-going in the Finance Committee since September 2000. Its guidance to the Finance Committee was reiterated by the Council at its Hundred and Twenty-fourth Session in June 2003:

• the Programme of Work and Budget should be protected to the maximum extent possible from the effects of fluctuating exchange rates; and,
• the US dollar remains the functional currency of the Organization¹.

2. At its session in September 2003, the Finance Committee considered the most recent report on Split Assessment contained in document FC 104/13². The Committee welcomed the updated information and additional clarifications following the previous documents reviewed on this topic at the May 2003 session³.

3. The proposed alternative approach on the presentation of split assessment in the budget document was considered to be a substantial improvement, which addressed the Committee’s desire to ensure transparency in the way the impact of exchange rates fluctuations would be reflected in the budget of the Organization. Furthermore, the Secretariat confirmed that the use of split assessment does not preclude discretion on the part of the Membership in determining whatever budget level it thinks fit. Rather, split assessment establishes the appropriate starting point for the discussion on any programme change to be incorporated in the subsequent budget.

4. Taking the above points into account, the Committee recommended the adoption of the split assessment methodology beginning with the 2004-05 biennium for endorsement by the Council. The Committee also endorsed the proposed revisions to the Financial Regulations and the prototype of the Appropriations Resolution for transmission to the Committee on Constitutional and Legal Matters (CCLM) for endorsement and submission to the Council. The CCLM, at its Seventy-fifth Session (6-7 October 2003), reviewed the proposed amendments to Financial Regulation VI as well as to the prototype of the Appropriations Resolution. The proposed amendments, as revised by the CCLM, are reflected in the present document.

5. Further background and detail on the proposed split assessment methodology and required revisions to the Financial Regulations and the Appropriations Resolution are provided below.

II. Background

6. In reports presented to the Finance Committee at its 95th Session in September 2000 [FC 95/9] and at its 100th Session in September 2002 [FC 100/4], the Secretariat brought to the attention of the Committee concerns related to the need to protect the Organization’s Programme of Work and Budget (PWB) against the impact of exchange rate fluctuation. The reports highlighted the major problems affecting the PWB caused by exchange rate fluctuation as follows:

1. Problems within a biennium are caused by the development of the budget and the assessment of Members in US dollars. The resulting income is used to cover expenditures, 40% or more of which are incurred in euros, primarily as fixed costs of permanent staff salaries and expenses necessary to maintain operations at HQ. When the actual rate of exchange for the US dollar vs. the euro is significantly lower than the rate used in establishing the budget, the income received in US dollars buys significantly less euros, which adversely impacts upon the Organization’s ability to carry out the approved programme of work.
2. Problems between biennia are caused by the establishment by the Conference of an absolute budget level (e.g. zero nominal growth [ZNG]) in US dollars that ignores problems created when 40% or more of budgeted expenditures are in a different currency. When the € = $ exchange rate varies significantly between biennia, the funds available to carry out the programme of work also vary. When there is a significant decline in the US dollar value when compared to the euro as at present, the approved programme of work has to absorb the decline in purchasing power.

7. The problems within the biennium have been addressed through the forward purchase of the euro requirement for the biennium at or close to the budgeted €=$ exchange rate, although there is a cost involved with such contracts. However, the forward purchase solution does not address the between biennia problems resulting from the fixed US dollar level of, for example, a ZNG budget. A less expensive longer-term alternative was required to ensure that the Organization had the resources to carry out the approved programme of work.

III. Proposed solution: split assessment

8. After examining various solutions and obtaining expert advice⁴, the most effective solution was determined to be a split currency system of assessment, whereby Members would be assessed and make their contributions partially in US dollars and partially in euros based upon an estimate of the dollar/euro balance of expenditures established by the Conference. By matching income from assessed contributions as closely as possible to the currencies in which the largest portion of FAO’s expenditures are incurred, gains and losses that arise when one currency must be converted to another are minimized. With split assessment, changes in purchasing power as a result of exchange rate fluctuations will be minimized so long as the expenditure forecast by currency is accurate.

9. Delays in the receipt of contributions may also, in certain periods, result in a shortfall in one or other currency and oblige the Organization to buy a given currency and then subsequently sell it at a different rate of exchange thus generating a difference. A simulation of this effect based on 2001-02 cashflow data suggests a potential risk of about US$ 1 million, although this figure would vary with the circumstances. The Organization plans to utilize a mechanism known as currency swaps as a means of avoiding this risk.

Projection of expenditure by currency

10. The key to effective operation of a split assessment strategy is accurate analysis and forecasting of expenditure by the currencies in which it is made. Success will depend on the ability to predict expenditures in each currency for the entire biennium.

11. The Secretariat has undertaken a historical analysis of expenditures incurred by currency for the completed 2000-2001 biennium and for 2002. The emphasis in this analysis is on the currency in which the amount of the transaction is fixed. The same analytical techniques have been applied to the PWB 2004-05 so as to arrive at forecasts for the forthcoming biennium.

12. Other currencies which presently track the euro more closely than the US dollar are also considered in the projection of the euro portion of expenditures. Expenditure in these currencies amounted to 2% of total expenditures in the 2000-2001 biennium.

13. On this basis, the current expenditure estimate for the split by currency of the assessed contributions for 2004-05 would result in the absolute figures and percentage data shown in the following table:

Analysis of Assessment by Currency and Scenario

^{See C 2003/3 paras 250/251 for RG and ZRG scenarios and CL 125/10 for the ZNG scenario.}

14. It is noted that the exchange rate of € 1=US$ 1.15 requires a greater number of dollars to fund the same level of euro expenditure. Hence, in comparing real growth at the two different rates of exchange, we see no change in the amounts to be assessed in US dollars and euros whereas we do see a significant change in the percentage of dollars required.

Impact on Members’ Assessed Contributions

15. Starting in the 2004-05 biennium, Members’ contributions would be assessed in two currencies, the euro and the US dollar. Calls for funds will include both the US dollar and the euro assessment. Any partial payments received in the assessment year will be apportioned between the two currencies according to the proportion of the amounts assessed in the two currencies in that biennium.

16. Any balances in euro which remain unpaid at year end would be converted into US dollars at a rate most beneficial to the Organization – budget rate, average UN official rate of the assessment year or UN official rate in effect on 31 December of the assessment year. According to Financial Regulation 5.5, as of 1 January of the following calendar year, the unpaid balance of assessed contributions shall be considered to be one year in arrears. Obligations in arrears of Members and Associate Members will remain henceforth payable in US dollars only.

17. For the purpose of applying the sanctions envisaged by the Basic Texts for the non-payment of contributions (Loss of voting rights in the Conference under Article III-4 of the Constitution; Ineligibility for election to the Council under Rule XXII-5 of the General Rules of the Organization; Loss of seat in the Council under Rule XXII-7 of the General Rules of the Organization) contributions due for the two preceding calendar years will be calculated based on conversion of euro amounts at the rate which was applicable at each year end to the conversion of the Member’s arrears to US dollars (see revised Financial Regulation 5.7 in Annex 2).

18. Some Finance Committee members requested if it would be possible to allow Members to choose their currency of payment (euro or US dollar). The Secretariat did not recommend this approach and outlined three problems. First, the Director-General feels strongly that Members should receive equitable treatment, which would not be the case under this approach as presumably euro-zone countries and the United States would be exposed to no exchange risk (choosing, respectively, full payment in euros and US dollars) while most other Members would be exposed to an exchange risk when converting national currencies. A second problem arises from the fact that euro income would not match euro needs. Again, assuming all European Union countries pay in euros, the receipt in euros would be 38%, while expenditures are estimated at more than 50% at current exchange rates. Therefore, a significant portion of the US dollar receipts would need to be converted at the Organization’s expense to euros, thus exposing it to an exchange risk. Thirdly, a proportional flow of euro income and US dollar income is lacking under this approach.

Budget Presentation and Euro/US dollar Rate of Exchange

19. The currently proposed approach on the presentation of split assessment in the budget document, endorsed by the Finance Committee in September 2003, was developed in response to the Finance Committee’s request to ensure transparency in the way the impact of exchange rate fluctuations would be reflected in the budget of the Organization. This newly proposed approach is further described below, along with a comparison to the current methodology.

20. The fundamental difference in the current and proposed methodologies would be the elimination of the effect on assessed contributions of the budgeted exchange rate since total assessments would be approved as absolute amounts and percentages of US dollars and euros. A comparison of the current and proposed methodologies at each stage of the budgetary planning process is shown in Annex 1.

21. Under the proposed split assessment methodology, the budget rate would be determined in advance of the Programme of Work and Budget document preparation which would allow for separate identification of the impact of the new budget rate, either positive or negative, on the proposed budget. This exchange rate effect would be shown in a summary table, by Chapter or Major Programme, in the Resources (ex. Budgetary Framework) section of the document. A sample of the proposed table is shown below (figures are for illustrative purposes only), in which the impact of the programme change, the cost increases, and the exchange rate are all shown separately.

22. This approach will result in a new consolidated figure in US dollars for the Appropriation which will include the impact of the exchange rate. The budget would be approved by Chapter at the new budget rate.

23. However, the essence of the split assessment concept is made clear by the bottom two lines of the above table; that is, the two amounts (US dollars and euros) required under split assessment are identical regardless of whether the exchange rate is € 1=US$ 0.880 or € 1=US$ 1.15; that is, US$ 369.3 million and € 400.4 million in both cases.

24. This makes it clear that the change in the total assessment is a nominal change that arises from stating the amount in a currency other than the currency of the transactions undertaken by the Organization. The same would be true if the budget was stated in cruzeiros or Australian dollars – the figure might go up or down but in any case it would be a limited representation of the nominal value of the budget in that currency.

25. The detailed programme budget would continue to be shown at the current budget rate but each table produced at the lowest level of detail would now include the exchange rate effect on the programme in the same way as cost increases are shown today. The sample table below demonstrates the approach.

26. As noted above, under this methodology the budget rate would need to be established in advance of the document preparation, which means by early July of the Conference year. The Finance Committee recommends establishing the budget rate based upon the forward rate for two years as of 1 July.

27. This approach has the advantage that the full PWB document will portray a budget at the exchange rate which is intended to be used in its adoption. This is unlike the current method where selection of the budget rate is left until the day of the Conference, thus immediately making obsolete the numeric content of the PWB document. The proposed approach avoids this weakness and would be possible because the exchange rate would no longer have any effect on the amounts of the assessed contributions expressed in US dollars and euro.

28. For the 2004-05 biennium, the budget rate of exchange would be established on the day of the vote in Conference, as per past practice.

IV. Proposed Changes in Basic Texts and Appropriation Resolution

29. The Financial Regulations of the Organization currently provide for the assessment of Members in a single currency, the US dollar. Annex 2 contains proposed changes to the Financial Regulations, as follows:

• Amendments to Regulation 5.6 providing for the assessment of Members partially in US dollars and partially in euros in a proportion to be determined by the Conference.
• Amendments to Financial Regulation 5.6 to remove obsolete references to the lire and to streamline and clarify the treatment of contributions which are paid in currencies other than US dollars or euro.
• An amendment to Regulation 5.7 for treatment of arrears, providing that arrears in euros of Members and Associate Members shall be converted to US dollars and shall be payable in US dollars, and specifying the rates of conversion to be applied both to the arrears and in determining the equivalent of contributions due for the two preceding calendar years as required in applying the sanctions envisaged in the Basic Texts for the non-payment of contributions.

30. The same Annex 2 includes a prototype of the resolution for adoption by the Conference under a split assessment strategy, as reviewed by the CCLM. The features of this prototype resolution are:

• Chapter by Chapter approval in US dollars at the new budget rate (the forward rate for two years on 1 July of the Conference year);
• overall determination of the total to be assessed in consolidated US dollar terms taking account of the deduction of miscellaneous income and credits from the Tax Equalization Fund – always in US dollars; and
• split of assessments in both percentages and absolute amounts in each of the two currencies.

V. Conclusion

31. The Council is requested to:

1. endorse the recommendation of the Finance Committee to adopt the split assessment methodology outlined in this document beginning with the 2004-05 biennium; and
2. endorse the proposed changes in the Financial Regulations and in the prototype Appropriation Resolution.

Annex 1

Alternative Budget Presentation and Euro/US Dollar Rate of Exchange

Annex 2

DRAFT CONFERENCE RESOLUTION

Amendment to Regulation V of the Financial Regulations
(Split Assessments)

THE CONFERENCE

Recalling that the Finance Committee, at its Hundred and fourth Session held from 15 to 19 September 2003, “recommended the adoption of the split assessment methodology beginning with the 2004-2005 biennium for endorsement by the Council” and endorsed the revisions to Regulation V of the Financial Regulations and to the prototype of the Appropriations Resolution, for transmission to the CCLM for endorsement and submission to the Council;

Considering that the Committee on Constitutional and Legal Matters, at its Seventy-fifth Session held on 6 and 7 October 2003, reviewed the proposed amendments to Regulation V of the Financial Regulation as well as the prototype of the Appropriations Resolution;

Noting that the Council, at its Hundred and Twenty-fifth Session held from 26 to 28 November 2003, agreed to transmit to the Conference, for its approval, the proposed amendments to Regulation V of the Financial Regulations as well as the prototype of the Appropriations Resolution;

1. Decides to amend Regulation V of the Financial Regulations as follows⁵:

5.1 The appropriations for a financial period, subject to related adjustments effected in accordance with Regulation 5.2, shall be financed by annual contributions from Member Nations and Associate Members. Contributions from Member Nations shall be assessed in accordance with the scale of contributions determined by the Conference, which scale shall not include contributions from Associate Members. Contributions from Associate Members shall as far as feasible be calculated on the same basis as contributions from Member Nations, the amount thus obtained being reduced by four tenths to take account of the difference of status between Member Nations and Associate Members, and shall be credited to Miscellaneous Income. Pending receipt of contributions, appropriations may be financed from the Working Capital Fund.

5.2 In the assessment of the contributions of Member Nations and Associate Members for each financial period, adjustments shall be made in respect of:

1. estimated Miscellaneous Income of the financial period in respect of which the assessment of contributions is being made;
    
2. credits accruing to Member Nations as a result of the application of Financial Regulation 6.1 (b);
    
3. supplementary appropriations for which contributions have not previously been assessed on the Member Nations and Associate Members.

5.3 For determining the annual contribution of each Member Nation and Associate Member, the assessment of each such Member Nation and Associate Member for the financial period shall be divided into two equal instalments, one of which shall be payable in the first calendar year and the other in the second calendar year of the financial period.

5.4 At the beginning of each calendar year the Director-General shall:

1. inform Member Nations and Associate Members of their obligations in respect of annual contributions to the budget;
    
2. inform Member Nations of their obligations in respect of advances to the Working Capital Fund;
    
3. request Member Nations and Associate Members, as the case may be, to remit all contributions and advances due.

5.5 Contributions and advances shall be due and payable in full within 30 days of the receipt of the communication of the Director-General referred to in Regulation 5.4 above, or as of the first day of the calendar year to which they relate, whichever is the later. As of 1 January of the following calendar year, the unpaid balance of such contributions and advances shall be considered to be one year in arrears.

5.6 Annual contributions to the budget shall be assessed partly in United States dollars and partly in euro. Each biennium, the Conference will determine the proportionate share of the budget payable by all Member Nations and Associate Members in United States dollars and in euro respectively. Unless the amounts assessed are received simultaneously and in full in the currencies in which they were assessed, credit for any partial payment shall be given against contributions due in proportion to the amounts assessed in both currencies. Annual contributions to the budget shall be assessed in United States dollars. To the extent that the Conference, after ascertaining in what currencies Member Nations and Associate Members propose to make their contributions in the ensuing financial period, finds that anticipated United States dollar income will be inadequate to meet estimated United States dollar expenditures of the Organization as determined by the Conference,Should a the Conference will determine the proportionate share of contribution that all Member Nations and Associate Members who do not pay their contributions in full in United States dollars shall pay in that currency. Each Member Nation orand Associate Member shall pay any the remainderpart of its current year contributions in a currency other than United States dollar or eurolire, or in its own currency which, for the purposes of its contributions to the Organization, it will be the responsibility of that Member Nation or Associate Member to ensure the free convertibility of that currency into United States dollars and/or Eeuro. must be freely convertible into lire, the convertibility being the responsibility of the contributing government. The exchange rates applicable to such contributionto partial payment or payment in other currencies as described in this paragraph rate shall be the marketofficial rates of the the Eeuro and the lire to theUnited States Ddollar to the currency of payment dollar on the first business day in January of the calendar year in which the contribution is due, or the rate in effect on the day the payment is made, whichever is more favourable to the Organizationthe higher.

5.7 Obligations of Member Nations and Associate Members Nations in Eeuro which are considered to be in arrears in accordance with F.R.Financial Regulation 5.5 shall be converted into USUnited States dollars at the rate most beneficial to the Organization applying either the budget rate of the assessment year, or the average UN operational rate for the assessment year or the UN operational rate in effect on 31 December of the assessment year. Such arrears shall thereafter be considered payable in USUnited States Ddollars. For the purpose of determining loss of voting rights in the Conference, ineligibility for election to or loss of seat in the Council as foreseen in the Basic Texts of the Organization, contributions due for the two preceding calendar years will be calculated on the same basis as above. Payments received against arrears in freely convertible currencies other than USUnited States Ddollars shall be converted using the market exchange rate of the currency to the USUnited States Ddollar in accordance with the provision of the last sentence of F.R.Financial Regulation 5.6.

5.8Obligations of Member Nations and Associate Members, including arrears of contribution, shall remain payable in the currency of contribution of the year in which they were due.

5.8 Any nation admitted to membership or any territory or group of territories admitted to associate membership shall pay a contribution to the budget for the financial period in which the membership or associate membership becomes effective. Such contributions shall be an amount determined by the Conference and shall begin with the quarter in which the application was approved. All new Member Nations shall be required to make advances to the Working Capital Fund in accordance with Regulation 6.2 (b) (ii).

5.9 Non-member nations of the Organization that are members of intergovernmental commodity groups; subcommittees, subsidiary working parties and study groups established by the Committee on Fisheries; or of bodies established by conventions or agreements concluded under Article XIV of the Constitution shall contribute towards the expenses incurred by the Organization with respect to the activities of those groups or bodies in an amount determined by the Director-General except as otherwise decided by the Conference or the Council.

5.10 The Council, at any of its sessions, may advise the Director-General as to any steps that ought to be taken in order to expedite the payment of contributions. The Council may submit to the Conference such recommendations in this regard as it may consider appropriate.

2. Decides to amend the prototype of the Appropriation Resolution as follows:

Prototype Resolution for Adoption by the Conference

__________________________

¹ idem, paragraph 94.

² Previous documents on this topic are: FC 95/9, FC 97/4, FC 100/4, FC 102/18 and FC 102/INF/18.

³ FC 102/18 and FC 102/INF/18 refer.

⁴ This approach was recommended by the External Auditor (Cour des Comptes), in a report related to the Annual Report of Budgetary Performance presented to the Finance Committee at its 99^th session in May 2002 and by KPMG, an external consulting firm engaged by the Organization.

⁵ Words struck out are deleted; words underlined are added.