Programme Change by Organizational Unit

126. The programme budgeting principles applied by FAO focus on relating resources to programme entities, and their objectives and outputs. However, it is also useful to see where the responsibility for resources lies by organizational unit. Annex V of the supplementary information on the Programme of Work and Budget 2002-03 available on the FAO's website (http://www.fao.org/pwb) provides information of resources under real growth (RG) and zero real growth (ZRG) by organizational unit and account.

127. The following matrix relates the two dimensions of the budget, i.e. "programme" and "organizational" responsibility. The narrative below the table points briefly to the major reasons for shifts in resources between the 2000-01 Programme of Work and the 2002-03 RG proposal.

Summary of Programme Changes by Organizational Unit

128. For the Office of Director-General (ODG) units, the increases arise from several factors. The Internal Auditor posts which are physically located in the Regional Offices are now shown under the Office of the Inspector-General at Headquarters, with the regional internal auditors treated as "outposted" staff, to better reflect the accountability for these positions. Furthermore, funds for the rebuilding of the Organization's programme planning and budgeting system (PLANSYS) have been provided to the Office of Programme, Budget and Evaluation (PBE). The budget for the Office of the Director-General has been increased to cover the regularisation of some temporary staff. The increase under Major Programme 2.1 is for the central support to Priority Areas for Inter-disciplinary Action (PAIAs). The changes under Chapters 3 and 4 are a result of the realignment of internal cross-charges for TCP direct operating expenses.

129. The increase under the FAO Representations covers partial provisions for the establishment of 11 new country offices as well as the strengthening of information technology, communications and training of staff in existing offices. Part of the increase in funding (US$ 1.6 million) is a result of the decentralization of project operational responsibility to country offices, which, under the net budget, is offset by an equivalent increase in support cost income.

130. The Agriculture Department (AG) has strengthened its professional capacity with 2 new senior-level posts for the implementation of the Rotterdam Convention and the Emergency Prevention System for Transboundary Animal and Plant Pests and Diseases (EMPRES), and entry-level positions in the Agricultural Support Systems Division (AGS). AG has also strengthened resources in other selected, high-priority technical areas, and for improved language coverage in publications and meetings.

131. In the Economic and Social Department (ES), the Commodities and Trade Division (ESC), in particular, has been strengthened, with resources identified for high priority areas such as the International Action on Commodity and Trade Issues (224P4). The Food and Nutrition Division (ESN) has gained three new entry-level Nutrition Officer posts, focusing on nutrition in emergencies, food microbiology, and biotechnology.

132. Particular attention has been paid to directing resources to the Fisheries and Forestry Departments. Fisheries has realigned and strengthened its professional capacity, establishing a number of junior-level professional posts focusing on areas such as fisheries resources, aquaculture, and fishery information and statistics. Furthermore, Fisheries is directing resources toward the International Plans of Action (IPOAs) under entity 234P3, Economic and Social Analysis of Fishery and Aquaculture Policy and Management.

133. The Forestry Department is also strengthening its professional capacity by establishing junior-level posts in sustainable mountain development, national forest programmes, forest fire management, impact assessment, and economic analysis. It is also assigning additional resources to the National Forest Programme Implementation Facility. Finally, both Fisheries and Forestry are focusing on improved language coverage.

134. The Sustainable Development Department (SD) proposes additional resources to strengthen information and communication technologies, and support to environmental agreements in its Research, Extension and Training Division (SDR). Furthermore, a new post has been created for an HIV/AIDS and Food Security Officer. Due to the decline in income from UNFPA, resources were decreased under Programme 2.5.2 in the Gender and Population Division (SDW).

135. The majority of the increase in the Programme of Work of the Technical Cooperation Department (TC) reflects a realignment of field operations, including in particular, an increase in the staffing of the Special Relief Operations Service (TCOR) which is funded by direct operating cost reimbursements from emergency project operations, in view of the substantially increased demand for emergency work. In addition, resources have been directed towards the Field Operations Division (TCO) for a more advanced Field Programme Management Information System (FPMIS) and for the Special Programme on Food Security (SPFS).

136. The additional resources under the Administration and Finance Department (AF) shown across the programme structure are for the ongoing costs of the Wide Area Network (WAN) in the Computer Pool Account. The WAN is presently being installed and will greatly enhance the communications infrastructure of the Organization and the communications capabilities of FAO Representations. The further increase under Chapter 5 is for the strengthening of the Finance Division (AFF), already implemented in 2000, and for the Information Systems and Technology Division (AFI) for the development phases of the human resources and payroll systems under Phase II of Oracle.

137. The increase under Major Programme 2.2 of the General Affairs and Information Department (GI) is related to the strengthening of the Library and Documentation Systems Division (GIL), where a number of new entry-level professional posts have been created, focusing mainly on the facilitation of the World Agricultural Information Centre (WAICENT) outreach and on information management systems. The incremental funding under Chapter 3 is for World Food Day Special Events/TeleFood supportive structures.

138. The decrease in funding for Regional Offices is primarily related to the decentralization of field programme operations, and affects mainly Chapter 3. Changes under the technical programmes are due to the strengthening and realignment of technical expertise in the field; indeed, a net increase of 14 technical officers at Regional and Sub-regional Offices is proposed.

139. The increase in TCP resources under Chapter 4 is aimed at maintaining the proportion of this programme as a percentage of the budget at 14.9 percent, as foreseen in the Medium Term Plan 2002-07.

Cost Increases

Methodology

140. 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 2002-03 are described in this section. The methodology used is the same as used for the 2000-01 biennium and approved by the Finance Committee, Council and Conference.

141. 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 United Nations Administrative Committee on Coordination (ACC). The cost increase calculations included in this document are based on actual data to June 2001.

Impact of Exchange Rate

142. 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. This is particularly important for expenditures based in Euro-zone countries, especially in Italy, where the majority of staff is located.

143. As stressed in the Director-General's Introduction, and for reasons more fully described below, to develop the estimates for cost increases in 2002-03, a rate of 1 = US$ 0.880 (Lira 2,200 to US$ 1) has been used.

144. This rate will, as per established practice, affect the budgeted cost for personnel services as follows:

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

145. The impact of the exchange rate on other categories of cost is less apparent. In practice, shifts in exchange rate relationships tend to be gradually absorbed by their relative impact upon international prices and FAO's continuing efforts to find the best price for goods and services. However, one area where the currency impact on non-staff costs cannot be ignored 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, and in Austria, where FAO supports the joint programme with the International Atomic Energy Agency (IAEA).

146. Under the current practice, the budget rate is set by the Conference. It is based on the spot rate on the day of the Conference Resolution on the budget. Thereafter, the budget thus voted is protected from further movements in the Lira/US Dollar rate of exchange via a forward purchase contract which allows the Organization to meet future needs for Euro at, or close to, the rate at which the budget is approved. This involves entering into 24 monthly forward purchases of Lira/Euro for US Dollars, at a fixed US Dollar/Lira rate, with the amount covered by the forward contract being the estimated monthly value of Lira/Euro disbursements during the biennium.

147. At its 96^th session in May 2001, the Finance Committee took note of the present mechanisms to protect the Programme of Work and Budget against exchange rate fluctuations, notably the Euro/US Dollar rate. The Committee was informed that under current market conditions, the present methodology as applied to budget rates and forward purchase would entail minor costs. It was also informed that the Secretariat planned to seek expert advice on this and related matters from the external experts, including the Advisory Committee on Investments. The latter Committee, which met in May 2001, noted that the present methodology of forward purchase had the advantage of simplicity and advised that, because of its limited staff capabilities, FAO should continue using the simplest hedging techniques.

148. Given the volatility of the Euro/US Dollar exchange rate and the generally held perception that the US Dollar is over-valued vis à vis the Euro, the Director-General decided to eliminate the risk of a major downturn in the US Dollar and, therefore, in the purchasing power of the Appropriation in US Dollars, by anticipating the timing of the forward purchase contract. A contract covering current expenditure levels was entered into in late July at a rate of 1 = US$ 0.880 (Lira 2,200 to US$ 1). Noting that this rate of exchange is effectively guaranteed for the biennium, it is also the Director-General's proposal that it be approved by the Conference as the budget rate for 2002-03.

149. To ensure clarity of budgetary impact, the effect of this Euro/US Dollar exchange rate is clearly identified in the Cost Increase tables that follow.

150. The worldwide presence of the Organization implies that the relationship of the US Dollar to the local currencies in which FAO has decentralized offices (i.e. Regional, Sub-regional, Liaison Offices and FAO Representations) can also have a significant impact upon costs. The estimates for cost increases have been adjusted to reflect the prevailing US Dollar rates of exchange and the actual local costs experience up to mid-2001. The US Dollar exchange rate has fluctuated substantially against these currencies in the past two years, which has often been offset by significant local rates of inflation. For example, in Ghana, where FAO has its largest regional office, the local currency (Cedi) has depreciated by 66 percent against the US Dollar in the past two years. The Organization has no financial instruments in place to protect the budget against possible adverse movements in the US Dollar rate of exchange against non-Euro currencies. However, the Programme of Work can be protected as unbudgeted extra costs due to movements of currency exchange rates may be covered by the Special Reserve Account⁹.

Biennialization and Inflation

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

152. 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 2002-03. 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 2002-03 of changes that will have occurred before the end of 2001. It is not based on long-term forecasts, which are understandably more prone to forecasting error.

153. Inflation, on the other hand, represents the cost impact in 2002-03 of those increases that are expected to take effect at various points in the next biennium (i.e. on or after 1 January 2002 and before 31 December 2003).

Lapse Factor

154. 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 some time as a result of staff movements. The lapse factor methodology approved by the Council at its 107^th session for application since the 1996-97 budget, has again been applied to the Programme of Work and Budget 2002-03.

155. In accordance with this methodology, several new posts have been costed in the programme budget for only part of the next biennium, where the expected incumbency period is less than the full biennium.

156. 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.

157. In accordance with the established methodology, a five-year moving average has been applied (i.e. 1996 through 2000 inclusive). This results is an average turnover rate of 8.56 percent for professional staff and 5.15 percent for general service staff. Comparing to the five-year moving average used in the PWB 2000-01, the turnover rate has now decreased by 0.85 for professionals and 0.46 for general service. The decrease is largely attributed to the fact that 1995 turnover rates (the highest since 1990 in both professional and general service categories) have now been excluded from the lapse factor calculations.

158. 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.

159. 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

160. These results have been applied to calculate the 2002-03 lapse factor of 2.77 percent for professional and 1.38 percent for general service costs respectively in arriving at the financial estimates for 2002-03. Weighting these on the basis of respective costs for the revised programme base produces an average lapse factor of 2.31 percent. This compares with lapse factor figures of 4.41 percent for professional and 1.64 percent for general service in 2000-01.

161. The decrease in lapse factor is explained by two factors: first, a lower five-year moving average for staff separations, as explained above, and second, a higher share of separations in 1999 and 2000 than could be foreseen in the past.

Analysis of Cost Increases

162. The table which follows shows the cost increases summarised by major component, indicating separately the amounts attributable to biennialization of cost increases incurred in 2000-01 from cost increases due to inflation in 2002-03. Explanation of the most significant increases and the main assumptions made in forecasting the amounts are described below.

Summary of Cost Increases for 2002-03 (All Amounts in US$ 000)

Personnel Services

163. Differentiated standard rates for professional positions by location, which take account of distinct cost levels in FAO's major duty stations, were implemented in the PWB 2000-01. The absolute level of professional and general service salaries and benefits varies between locations, for example with respect to payments for hardship, mobility and rental allowances for professional staff, and best prevailing local salary conditions for general service staff. The estimated cost increases at each location are also dependent on economic factors which differ from country to country, and the cost increase assumptions below take due account of distinct cost trends and economic projections in each of FAO's major duty stations.

Basic Professional Salaries and Post Adjustment

164. The salaries of staff in the professional and higher categories are made up of two main elements: a base/floor salary and a post adjustment, both expressed in US Dollars. The base/floor salary scale is applied worldwide and is established by the UN General Assembly on the recommendation of the ICSC. The ICSC is also responsible for determining the post adjustment level (multiplier) to ensure that professional salaries have the same purchasing power at all duty stations. FAO accepted the statute of the ICSC in March 1975.

165. The level of the post adjustment is determined by periodic place-to-place cost-of-living surveys conducted by the ICSC secretariat every four to five years. The purpose of these surveys is to establish the cost-of-living relationship between the surveyed duty station and New York, the base of the post adjustment system. The results of the survey are then updated monthly to reflect changes due to inflation and exchange rate fluctuations.

166. Such a survey was carried out by the ICSC secretariat in Rome in October 2000, as part of the ICSC's round of surveys of all UN-Headquarters duty stations. The Rome survey for professional staff covered price data collection and index calculations for a basket of goods and services. In addition to the price collection, all international officials in grades P-1 to D-1 were requested to report on their housing and domestic service costs.

167. The purpose of the housing survey was to collect data for the establishment of duty station specific weights for rents and housing costs and the calculation of rental subsidy thresholds. This information was derived from a questionnaire that was distributed to 1,233 staff members. A total of 444 questionnaires or about 36 percent were received. The questionnaires also provided the costs and weights for domestic services.

168. Furthermore, a sample of international officials in grades P-1 through D-1 was requested to report on their household expenditures. A second questionnaire was distributed for this purpose to a random sample of 722 staff members located in Rome. A total of 217 questionnaires or about 30 percent were received. The expenditure data was used in the calculation of common weights for the seven UN Headquarters duty stations.

169. The report on this survey was reviewed by the Advisory Committee on Post Adjustment Questions (ACPAQ) in March 2001 and approved by the ICSC in June 2001. The result of the place-to-place survey were implemented from July 2001, and included a further adjustment for inflation in Italy in the period from October 2000, when the survey was conducted to the effective date of implementation of the results.

170. Thus, under Basic Professional Salaries and Post Adjustments, a cost increase of US$ 24 million is attributable under biennialization to a technical review by the ACPAQ which resulted in an increase in the Headquarters post adjustment of 12.2 percent as of the base date of the survey (October 2000) and at the exchange rate prevailing at the time (Lira 2,186 to the US Dollar). In fact, the effective increase at the rate of Lira 2,186 was limited to 12.2 percent because the salaries in Rome were below the worldwide floor of UN salary scales. The impact at the budget rate of exchange of Lira 1,875 amounted to a larger increase, of 15.3 percent, and the adjustment for inflation in the intervening period amounts to a further 2.5 percent approximately.

171. With regard to other duty stations, biennialization also includes the impact of a cost-of-living adjustment of 9.7 percent in Washington, effective July 2001; and the effect in Bangkok of the consolidation of 5.1 multiplier points into base salaries in March 2001, ostensibly on a no-gain-no-loss basis, but which was not cost neutral as salaries in Bangkok were already at the base salary level, which represents the floor for worldwide UN professional salaries. Offsetting some of the increases under biennialization are cost decreases in FAOR locations and in the Regional Office for Africa (RAF), in particular, on account of the need to adjust the planned salary rates of these decentralized offices for the effect of more favourable exchange rates against the US Dollar.

172. Under inflation, the expected professional salary levels for staff will also be influenced by the annual cost of living change to the post adjustment. This would normally be implemented in the month of July for Rome-based staff and is projected at 2 percent in July 2002 and July 2003. The US Dollar denominated inflation adjustments projected for non-Headquarters staff range from 2 percent per annum for most locations to a maximum of 7.7 percent for Harare (SAFR).

General Service Salaries

173. The biennialization of General Service Salaries includes a substantial overall decrease for Headquarters staff, following a review of current Headquarters salary budget rates versus actual cost trends to mid-2001. Downward adjustments for Headquarters salaries include the impact of the implementation of accrual principles for all After Service Benefits, particularly Terminal Payments, supported by actuarial valuations and their statistical allocation between the general service and professional categories (see below). Downward adjustment has also arisen on account of the lower than expected increase in general service salaries effective November 1999 (1.55 percent versus 3 percent estimated) and a revision for the impact of the International Labour Organization (ILO) Administrative Tribunal Judgement of January 1998 on the language factor, following a successful appeal by Headquarters staff. This has been partly offset by an ICSC-approved salary increase of 4.25 percent, retroactive to November 2000, following a recently completed place-to-place survey at Headquarters. The ICSC again decided not to take into account the language factor, which could have added a further 3.7 percent to the increase for Headquarters general service staff from November 2000. Although the ICSC claims to have defensible technical grounds to exclude the language factor, for the purposes of the budget, financial provision has been foreseen for an additional language factor adjustment in Headquarters salaries. A further cost of living adjustment of 3 percent is foreseen in November 2001 for Headquarters staff and is included under biennialization.

174. With regard to the decentralized offices, biennialization also reflects the impact of lower general service salary costs incurred than what was planned in the PWB 2000-01 for Accra (RAF), on account of more favourable exchange rates against the US Dollar.

175. Under inflation, an estimated 3 percent increase in Headquarters general service salaries is foreseen effective November 2002 and 2 percent in November 2003. The US Dollar denominated inflation adjustments projected for non-Headquarters general service staff range from 1 percent per annum in Cairo (RNE), Apia (SAPA) and Tunis (SNEA), to 5 percent per annum in Accra (RAF) and Harare (SAFR).

Other Salaries and Allowances

176. Biennialization of Pension Fund Contributions is attributable to an increase of 3.63 percent in pensionable remuneration for professional staff, promulgated by the ICSC in October 2000 (compared with a foreseen increment of 3 percent in the PWB 2000-01), and the impact on pension contributions of the 2000-01 increase in general service salaries at Headquarters. Under inflation, the estimated increases are consistent with the overall rates of inflation of professional and general service salaries in 2002-03.

177. Under Dependency Allowances, biennialization reflects the impact on children's and secondary dependents' allowance of an 11.89 percent increase for professional staff in 2001. Under inflation, an increase of 5 percent is foreseen in 2003. Increases for the general service category are assumed to correspond to their estimated salary increases in 2002-03.

178. Under Social Security, which comprises the Organization's payment to staff medical schemes, biennialization brings the provision to the actual rate of expenditure in the 2000 accounts. Under inflation, in view of recent medical claims history, a rise of 15 percent is forecast to take effect upon the commencement of the new medical coverage contract from January 2002.

179. With regard to Education Grant, Travel and Other Allowances, current expenditure patterns indicate that cost increases, which have taken effect during the current biennium, can be absorbed. Education grant provisions, amounting to approximately US$ 17 million in the current biennium, are reviewed every two years by the ICSC. An increase in the education grant ceiling of up to 13 percent in key countries became effective 1 January 2001, and an overall biennial increase of 5 percent has been included.

After Service Benefits

180. After Service Benefits are staff members' entitlements which become payable at the end of service. The evaluation of the Organization's liability and the periodic contributions for after service benefits is based on actuarial valuations that are normally conducted every biennium for retroactive application in that biennium. The Organization needs to make financial provision for the following liabilities as they are earned: Compensation Payments; After Service Medical Coverage (ASMC); Terminal Payments; and Separation Payments.

181. Compensation Payments are due to staff members and their dependents in case of death, injury or illness attributable to the performance of official duties. Compensation payments are subject to actuarial review to ascertain the liabilities and the recommended rates of contribution. The plan is fully-funded. The amounts provided for 2002-03 are consistent with the rate of contributions in the last valuation as at 31 December 1999 and include an inflationary increase for 2002-03 to take account of possible adverse changes in the actuarial assumptions in the next valuation.

182. The accounting and funding aspects of the ASMC liability have been the subject of many reports and explicit action since 1997. The unaccrued ASMC liability in respect of past service of staff members, which amounted to US$ 195.1 million on 31 December 1997 and US$ 109.6 million two years later, is being amortised over a period of 30 years outside the budgetary appropriations. The decrease in After Service Medical Coverage costs under biennialization reflects the results of the latest available actuarial valuation as of 31 December 1999, 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 an inflationary increase for 2002-03, bringing the overall provision closer to the amount required in the 1997 actuarial valuation.

183. Terminal Payments relate to payments of accrued leave, repatriation grant, termination indemnity, the cost of repatriation travel and the removal of household goods for all eligible staff. In the PWB 2000-01, such costs were budgeted on the basis of planned cash expenditure. Since the 1998-99 accounts, however, terminal payments have been accounted on the basis of an actuarial valuation, whereas prior to this date, they were charged to expenditure on a cash paid basis. As at 31 December 1999, there was an unaccrued Regular Programme liability of US$ 20.8 million. The Director-General proposes to address the unfunded liability outside the budgetary appropriations by extending the funding mechanism under Conference Resolution 10/99 to cover this liability. In the meantime, however, the rate of the provision for 2002-03 is consistent with the last valuation as at 31 December 1999 and the amounts charged in the 1998-99 accounts.

184. Separation Payments are due to general service category staff at Headquarters who are entitled to receive a separation payment equivalent to ¹/_13.5 of yearly salary for each year of service completed after 1 January 1975. The provision for General Service Separation Payments Scheme is consistent with the recommended rates of contribution in the latest actuarial valuation as at 31 December 1999.

Lapse Factor

185. As noted above, in accordance with the methodology approved by the Council at its 107^th session for application since the 1996-97 budget, the average lapse factor has decreased from 3.46 percent in 2000-01 to 2.31 percent in 2002-03. The resulting financial impact of the decrease in the lapse factor is US$ 6 million and taken into account as cost increases. It is shown separately, under biennialization, in the tables on cost increases.

Breakdown of Personnel Services between Professional and General Service Categories

186. The following tables break down the professional and general service staff costs for 2002-03¹⁰ and show a net increase before currency adjustment of 11.8 percent and 0.2 percent respectively. After taking account of the impact of the US Dollar/Lira currency adjustment from the current budget rate of Lira 1,875 to the 2002-03 forward purchase rate of Lira 2,200 (1 = US$ 0.880), the adjusted cost increase amounts to 3.1 percent and minus 10.8 percent respectively over the biennium.

Professional Staff Cost Increases - Programme of Work and Budget 2002-03

General Service Staff Cost Increases - Programme of Work and Budget 2002-03

Goods and Services

187. Other Human Resources consists of non-staff human resources in the form of consultants and contracts, temporary assistance and overtime payments to general service staff. Under inflation, a cost increase of 3.0 percent effective January 2002 and January 2003 is included for consultants and contracts for human resources. The amount provided is well below the projected trends in US earnings growth by the Economist Intelligence Unit of 3.2 percent and 3.6 percent respectively as well as projected trends in Italian wage inflation of 3.3 percent in 2002 and 3.6 percent in 2003. Overtime payments have been subject to a 2 percent inflation increase per annum. Also included, however, is an exceptional increase of US$ 600,000 to partially cover the cost increase for FAO's share of the costs of the Office of the United Nations Security Coordinator (UNSECCORD) secretariat in New York as well as likely changes to the cost sharing formula between the participating agencies. Finally, the currency adjustment reflects the favourable impact of currency differences in the cost of contractual services for the Austrian-based joint programme on Agricultural Applications of Isotopes and Biotechnology with IAEA.

188. Travel costs normally follow the ACC recommendations which, in January 2001 recommended that they be increased by 1.9 percent per annum for 2002 and 2003.

189. The inflation under General Operating Expenses has been based on estimated rates of inflation for Italy which, according to the Economist Intelligence Unit are forecast at 2.2 percent in 2002 and 2.4 percent in 2003. Due account has also been taken of an exceptional increase in rent for the Liaison Office in New York, as well as increases in certain Headquarters utility costs. Under currency adjustment, the net impact of differences between the current budget exchange rate of Lira 1,875 and the forward contract exchange rate for 2002-03 of Lira 2,200 (1 = US$ 0.880) is estimated at US$ 1 million in costs associated with the maintenance of Headquarters buildings relating to goods and services that must be sourced locally (e.g. utilities, maintenance of premises, etc.).

190. 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 2.3 percent for 2002 and 2.6 percent for 2003, corresponding to the projected trends in US consumer price index growth by the Economist Intelligence Unit, has been applied.

Income

191. Most categories of Other Income are not affected by cost increases, as the current estimates are already based on the nominal levels of reimbursements for 2002-03. This is the case, for example, for AOS income and government counterpart cash contributions for the FAORs. However, arrangements with the World Bank and other financial institutions permit cost reimbursement as a percentage of actual costs incurred, and largely account for the estimated increase in income, under cost increases, of US$ 215,000.

Summary of Cost Increases by Budget Component

192. The following table summarises the cost increases after currency adjustment by budget component. It is emphasised that these budget components include some "composite" items, such as computer services and internal chargeback services, as well as the provision for personnel inputs and goods and services. It, therefore, follows that the components below are not individually comparable with the aforementioned descriptions of personnel services and goods and services. Thus, for example, the professional and general service budget components below exclude the staff inputs involved in the translation of documents, interpretation services for meetings and staff involved in the provision of computer services through the computer pool account.

193. The biennial rate of cost increases is the net effect of applying two annual increases to each year of the biennium. For example, assuming a 2 percent increase in 2002 and a 3 percent increase in 2003 on a biennial budget of US$ 100, the calculation of the biennial rate is as follows:

194. The biennial rate in this example is, therefore, 3.53 percent. 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 percent is equivalent to an annual average rate of 2.33 percent.

PWB 2002-03 Programme of Work after Cost Increases by Budget Component

195. Cost increases are applied to every programme entity in the Programme Budget in accordance with the planned distribution of resources by budget component. The introduction of country-specific cost increases for personnel services causes some redistribution of the budget between programmes, with some locations receiving a larger share of the overall cost increases in 2002-03. In particular, at the proposed Euro/US Dollar rate of exchange for 2002-03, the overall impact of cost increases is made up of a substantial decline in general service costs and a small increase in professional costs at Headquarters, offset by overall increases in professional and general service costs at decentralized locations. It, therefore, follows, for example, that programme entities which include a high proportion of Headquarters general service costs will experience a cost decrease in 2002-03. Conversely, programmes incurring a high proportion of decentralized staff and non-staff costs will receive the largest share of cost increases.

196. The overall biennial rate of cost increases at the forward contract rate of Lira 2,200 (1 = US$ 0.880) for 2002-03 works out at 0.5 percent. The proposed cost increases for 2002-03 is equivalent to an average annual rate of 0.3 percent.

Budget Level and Funding

197. The RG and ZRG budgets as proposed would be financed as follows:

Funding of the Programme of Work and Budget Under RG and ZRG

198. The proposal for a RG budget would result in an increase in US Dollar assessments of 6.0 percent. The zero real growth scenario would imply an increase in assessments of 0.3 percent using the same cost increase assumptions.

199. A system of split assessments has been the subject of preliminary consideration by the Finance Committee as a means of protecting the Programme of Work within and between biennia¹¹. Split assessments would entail the development of the appropriation and collection of assessed contributions partly in Euro and the remainder in US Dollars. The overall proportion to be collected in each currency would correspond to the Regular Programme obligations of the Organization denominated in Euro and non-Euro currencies, which are very tentatively estimated at 46 and 54 percent respectively.

200. An estimate of the Euro and US Dollar appropriation under such system is provided below, for information purposes, for the RG and ZRG scenarios.

Funding of the Programme of Work and Budget Under Split Assessments

6 The possibility for staff to opt for a cash payment equivalent to 80% of the full purchase price of the ticket
7 Conference Resolution 13/97 refers
8 Document JM 2000/3, FAO's New Financial Systems and Procedures, refers
9 Conference Resolution 13/81 refers
10 Actuarial valuations for After Service Benefits are not provided separately for professional and general service costs and are thus allocated on the basis of appropriate statistical keys
11 Document FC 95/9 entitled Protection of the Organization's Programme of Work Against Exchange Rate Fluctuations, refers