FC 108/26c)

Finance Committee

Hundred and eighth Session

Rome, 27 September – 1 October 2004

Payment of the European Community to cover Administrative and Other Expenses arising out of its Membership in the Organization

Table of Contents

I. Introduction

1. The European Commission (EC) has asked that the Finance Committee be advised of its intention to seek the agreement of other Members to certain changes in the methodology used in the calculation of its contribution to FAO covering administrative and other expenses arising out of its membership of the Organization.

2. This information document summarises the historical evolution of the EC’s financial contribution since 1991 and outlines the basis for its proposal. This is intended to be the first step in a process leading up to a proposal for eventual consideration of the Conference in November 2005. The next step would involve the submission of the EC’s proposals as well as the comments fo the Director-General to the Finance Committee for its consideration at its May session in 2005.

II. Summary of the History of EC’s Financial Contribution to FAO

Chronology of Events

3. The 26th Conference, upon the admission of the EC, decided to make a differentiation between administrative and other expenses associated with their membership, with the former to be paid into the General Fund and the latter to be paid into a Trust Fund (TF) established under F.R. 6.7. However, by the 27th Conference in 1993, it was clear that differentiation was not feasible and the decision was taken by the Conference to pay all sums received into the TF. This practice has continued to the present.

4. A number of options for the calculation of the sum to be paid by the EC were considered by the 77th Finance Committee in September 1993 but all were rejected on principle by the 104th Council in November later that year, on the grounds that the formulae were not compatible with Article XVIII.6 of the Constitution. Although this was not the view expressed by the 62nd CCLM in April 1994, the subsequent 78th Finance Committee felt there were advantages to the lump-sum approach and recommended that no formula be used in the calculation of the EC contribution, but that the lump-sum (of US$ 500 000) fixed by the 26th Conference in 1991 and used again by the 27th Conference in 1993 be the basis for future contributions. This was endorsed by the 107th Council and approved by the 28th Conference in 1995. At these sessions, these bodies also approved that the lump-sum be adjusted biennially for cost increases and movements in the lira/dollar exchange rate. This methodology has been applied consistently since 1995, the only change being that the 32nd Conference in 2003 fixed the sum to be paid in euro rather than in dollars.

Legal Basis

5. Article XVIII.6 of the Constitution referred to above, provides that:

“A Member Organization shall not be required to contribute to the budget specified in paragraph 2 of this Article, but shall pay to the Organization a sum to be determined by the Conference to cover administrative and other expenses arising out of its membership in the Organization (...).”

Current situation

6. The lump-sum amount is determined by the Conference, based on the payment for the previous biennium, adjusted by the forthcoming biennial budget cost increase coefficient and for movements in the euro/dollar exchange rate from one budget to the next.

7. The payment of this amount is seen as satisfying the entire obligation of the EC to cover such incremental expenses and hence it is not responsible for any additional actual expenditures that may be incurred, nor is it entitled to receive any refund should actual expenditure in any one period be less than the lump-sum. Consistent with this approach, the EC does not wish to receive reports on the use of the funds, leaving that to the discretion of the Organization.

8. In practice, the contribution is used to meet incremental expenses of the EC resulting from their membership (e.g. incremental expense of the Office of the Legal Council, some of the expenses of the Liaison Office in Brussels, relevant donor liaison costs, etc.).

9. The EC contribution is set up as an extra-budgetary arrangement in the form of a Trust Fund account. This has the advantage of allowing the balance to be carried forward into the subsequent biennium to either meet expenditures in advance of the EC payment, thereby avoiding a risk of a deficit, or to meet any unforeseen peaks in expenditure.

III. Summary of the EC’s proposal

10. Although the EC believes that its contribution should continue to be paid to a trust or special fund established under Financial Regulation 6.7, it believes that neither the lump-sum that it pays nor the formula used for its biennial adjustment any more reflect the actual “administrative and other expenses” arising out of its membership.

11. This principle was underlined by the CCLM at its 62nd Session in April 1994, stating that any methodology used for the calculation of this amount should ensure that the payment continues to reflect the real costs involved, noting that this should always be consistent with the provisions of the Constitution, and in particular Article XVIII.6 whereby the EC shall not contribute to FAO’s budget.

12. However, the EC does not wish to negotiate a new methodology as it is generally agreed that the current lump-sum methodology has proven merit in its relative simplicity. Rather, they would propose a modification of the lump-sum itself as well as of the formula used for its biennial adjustment in the light of their calculations of the costs incurred in relation to EC membership of FAO. These calculations are based on FAO’s progressive reduction in its administrative expenses whilst, over the same period, the total number of Member Nations has increased from 160 to 187.

13. Furthermore, as much of the Organization’s administrative costs are incurred in euro, the EC believe that a new adjustment formula should be found taking this into account. They feel that it is no longer appropriate that the lump-sum be adjusted every two years through a formula related to “budget net cost increases” and “exchange rate adjustments” (US dollar versus euro). The EC proposes that these two factors, which are linked to the US dollar, be substituted by an official rate calculated in euro that reflects the cost of living increases in the euro area or in the host country, thereby bringing the adjustment formula more in line with the system of split assessment.

14. Finally, the EC contend that neither the accession of the new Member States, nor the entering into force of the new Constitutional Treaty, will add further or unforeseen administrative costs impacting the payment due by the EC for its membership of the Ogranization. They feel that the administrative burden for FAO remains unchanged irrespective of the number of EU Member States. The new Constitutional Treaty will also mainly consolidate and clarify the existing “acquis” which has been built in stages and will thus not extend the Union’s competences considerably.

IV. Conclusion

15. Before presenting a proposal to the next Conference in November 2005, the EC hopes that the proposed new methodology, which will be presented in detail in May 2005, will benefit from the support of the Finance Committee. The September 2004 session has therefore been used as the first opportunity to alert the Committee to this issue.