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Financial Framework

Proposal for an FAO Security Expenditure Facility and Related Draft Conference Resolution

138.     Security threats have increased notably worldwide since 11 September 2001 and a safe working environment cannot be taken for granted. The United Nations system, including FAO staff, faced attacks against its premises in Baghdad in August 2003. The conclusions of the report of the Independent Panel on the Safety and Security of United Nations Personnel in Iraq pointed to severe failures in the UN security management, system and practices. The response of the United Nations system and the present external environment, have resulted in mounting and unpredictable security expenditures in FAO.

139.     The primary responsibility for the security and protection of FAO personnel and property rests with the host government. However, within the framework of the United Nations Security Management System, the Director-General is ultimately responsible for the safety and security of FAO personnel and property. Providing a safe environment also requires adequate funding and Members have a collective responsibility in this regard.

140.     The budgets and expenditures for safeguarding staff and assets are currently spread among several chapters and organizational units. This weakens financial management and control of this important area of expenditure, hindering the formulation of a linked hierarchy of programmes and activities with clearly articulated objectives, and the alignment of resources to the programmes.

141.     The financial management of security resources is fraught with a number of uncertainties including the fluctuating security situation at global, regional or country level. A case in point is the unforeseen security-related relocation of some FAO country offices. In some cases, the Security Management Team mandated the relocation of the FAO Representation from existing government-provided offices to premises that could be rendered secure by effecting structural improvements and installing security equipment. The cost of these office moves/security upgrades is substantial: US$ 100 000 – 166 000 per office, plus the annual rental cost of the new premises if not government-provided.

142.     Financial management is also complicated by unanticipated costs and fluctuating cost estimates where they relate to FAO’s participation in United Nations system-wide arrangements, such as the Organization’s share in the costs of the UN Department of Safety and Security (UNDSS). The requirement to reduce the substantive programme of work due to unplanned security expenditures, or the inability to carry forward under-expenditure on security from one biennium to the next, on account of delays that are entirely outside the control of the Organization, are serious impediments to the delivery of FAO’s core programmes.

143.     The Organization has identified a possible solution to achieve a strengthened financial planning, monitoring and accountability framework for security and safety of staff and assets. To address the present shortcomings, following the advice of the Finance Committee, the Council at its 128th Session in June 2005 supported the Director-General’s proposal for a Security Expenditure Facility (SEF) to provide comprehensive coverage of staff and non-staff security costs under a new Chapter 9 of the budget. The SEF would group in Chapter 9 all costs that are directly related to headquarters and field security at FAO. The account could also be supplemented by voluntary contributions. Unspent funds in this Chapter at the end of the biennium would be credited to an FAO Security Account and could be carried forward to future biennia.

144.     The SEF would improve financial management within a results-based context and give needed visibility to the efforts of Members and the Organization to ensure a safe and secure working environment. A Draft Resolution to establish the Security Expenditure Facility is presented below for adoption by the Conference.

145.     FAO has taken decisive action during the past two years to strengthen security including through the promulgation of a new FAO Field Security Policy issued in July 2003 and the establishment of a unit dedicated to safeguarding the security of FAO field personnel and field locations. Security at field locations has been enhanced through four sets of action:

  • FAO’s participation in the newly established UNDSS, which includes benefiting from the UN unified security management system in non-headquarters duty stations worldwide and a field-based team of international Field Security Coordination Officers;
  • provision of Minimum Operating Security Standards (MOSS) equipment and facilities in accordance with policy established by UNDSS for FAO duty stations in each of the five security phases and for duty stations subject to terrorist threat – depending on the phase and terrorist threat level;
  • provision of Minimum Operating Residential Security Standards (MORS) equipment and measures to strengthen security at the residences of FAO personnel and their families; and
  • training of staff in security awareness, preparedness and use of security-related equipment.
146.     At FAO headquarters in Rome, security has been improved through the installation of shatter-proof film on all external windows of the headquarters building, construction of anti-ram barriers at the vehicular entrances, and the deployment of additional guards on the premises.

147.     In anticipation of many of the above actions, the budgetary provision for security of US$ 8.8 million in the PWB 2002-03 was increased in the Director-General’s PWB 2004-05 proposals by US$ 7.8 million to US$ 16.6 million. However, the Director-General’s budget proposals were significantly curtailed by the Conference in 2003. The actual cost incurred in 2004-05 is expected to rise to US$ 19.4 million. In 2006-07 it is estimated that the requirements will be of a similar magnitude, although with higher recurrent costs, as detailed in the following table and described in detail in Annex I, in the programme narrative for Chapter 9: Security Expenditure.

Security Resource Requirements (US$ 000)
Security Item 2002-03 RP Security Budget Estimated 2004-05 Security Expenditure Estimated 2006-07 Security Expenditure
FAO share of UN-DSS (ex-UNSECOORD) 942 2,760 4,000
Malicious Acts Insurance Policy 200 300 300
MOSS equipment, GOE and related non-staff costs for FAORs 285 6,000 6,000
FAO Field Security Focal Point, Field Security Programme Officer and two Security Clerks 0 480 800
Residential security provisions 919 718 700
Miscellaneous, including MOSS equipment and GOE for Regional/Sub-regional Offices 0 800 425
Subtotal security items - field 2,346 11,058 12,225
HQ Security Guards 6,500 7,000 7,000
HQ security services including installation of anti-ram barriers, blast-proof film on HQ windows, other miscellaneous 0 1,300 200
Subtotal security items - HQ 6,500 8,300 7,200
TOTAL 8,846 19,358 19,425


148.     To fund the US$ 19.4 million required for security in 2006-07, the Director-General proposes that under the new Chapter 9, US$ 8.8 million be drawn from the provision for security budgeted in the PWB 2002-03 and the remaining US$ 10.6 million be funded as an exceptional cost escalation that has been forced upon the Organization. This approach recognises the responsibility of Members to collectively provide adequate resources for a safe working environment, and also responds to the request of many Members to protect the substantive work of the Organization in the face of mounting security costs. It is noted in this context that separate incremental funding for security costs has become a customary practice in some other UN organizations, such as the UN and IAEA22.

Draft Resolution for Adoption by the Conference

Amendment to Financial Regulation VI (Security Expenditure Facility)
 
THE CONFERENCE,
 
Recalling the Director-General's proposal to establish a Security Expenditure Facility grouping in a new Chapter of the Programme of Work and Budget expenditures directly related to headquarters and field security in FAO, as a means of strengthening the existing financial framework for planning, monitoring and accountability for improved security of staff and assets of the Organization;
 
Noting in particular, that the Finance Committee, at its Hundred-and-ninth Session (Rome, 9-13 May 2005), recognised the need for consolidated and comprehensive coverage for security costs within a single budgetary provision and for financial flexibility through a funding mechanism which could be supplemented by voluntary contributions, and supported the Director-General's proposal to establish a Security Expenditure Facility as a means of grouping all staff and non-staff costs directly related to headquarters and field security in a new Chapter 9 of the Programme of Work and Budget;
 
Noting further the deliberations of the Joint Meeting of the Programme and Finance Committees of 11 May 2005 concerning the proposal for the creation of an additional Chapter 9 to the Programme of Work and Budget and the establishment of a Security Expenditure Facility;
 
Recalling that the Council, at its Hundred and Twenty-eighth Session (Rome, 20-25 June 2005), concurred with the creation of an additional Chapter 9 to the Programme of Work and Budget and the establishment of a Security Expenditure Facility;
 
Considering that the Finance Committee, at its Hundred and Tenth Session (Rome, 19-23 September 2005) and Committee on Constitutional and Legal Matters, at its Seventy-ninth Session (Rome, 11-12 October 2005), reviewed the proposed amendments to Financial Regulation VI;
 
Noting that the Council, at its Hundred and Thirtieth Session (Rome, 16-18 November 2005), agreed to transmit to the Conference, for approval, the proposed amendments to Financial Regulation VI;
 
Decides:
a. to establish a Security Expenditure Facility consisting of a separate budgetary Chapter and a Security Account;
b. to designate Chapter 9 of the Programme of Work and Budget for the purposes of defining and authorising security expenditures, including staff and non-staff security provisions and expenditures at headquarters and in the field to ensure the Organization's compliance with United Nations security policies;
c. to establish a Security Account through the following addition of Financial Regulation 6.12 to the Financial Regulations of the Organization:
6.12. There shall be established:
a. a Security Account, which shall be used for the purpose of managing activities which involve security expenditure defined as being:
  i. expenditures on headquarters security provisions;
  ii. expenditures on field security provisions to ensure in particular the Organization's participation in the UN security management system and compliance with its provisions for field security;
b. the sources of funds shall be:
  i. Regular Programme Appropriations approved by the Conference;
  ii. voluntary contributions;
c. expenditures of a capital nature, defined as expenditures with a useful life in excess of FAO's financial period of two years that also meet the definition of security expenditures as per sub-paragraph (a) above, shall be funded from the Security Account;
d. the balance of funds in Chapter 9 of the budget at the end of each financial period shall be transferred to the Security Account for use in a subsequent financial period.
 


Capital Budgeting

149.     Conference Resolution 10/2003 established a Capital Expenditure Facility as a systematic approach to managing and financing essential capital expenditures, by:

  • designating Chapter 8 of the Programme of Work and Budget for the purposes of defining and authorising capital expenditures; and
  • establishing a Capital Expenditure Account through the addition of Financial Regulation 6.11.
150.     The capital expenditure proposals contained in this PWB are consistent with those included in the Medium Term Plan 2006-1123 except for the addition of US$ 2.5 million for the implementation of the Human Resource Management System during the next biennium. This responds to the Finance Committee’s advice at its May 2005 session that administrative information systems are a fundamental part of an effective Organization which should be accorded importance regardless of the budget level. The details of the planned capital expenditure on telephony services, shared data services, information technology support for meetings and administrative support systems can be found in the Programme Narratives for Chapter 8 in Annex I. The Finance Committee24 has already endorsed the cautious approach adopted by the Secretariat, in terms of the scope of eligible plans and level of funding, and the Council at its 127th session in November 2004 concurred with the endorsement of the capital expenditure proposals25.

151.     The capital expenditure plans are limited to the most indispensable projects for 2006-07, and the extent to which the plans can be implemented is entirely dependent upon the funding available under the Facility, expected to be US$ 9.4 million under the ZRG and ZNG26 proposals for the forthcoming biennium, but higher under RG27.

152.     The sources of funds for the Capital Expenditure Account are the Regular Programme Appropriation approved by Conference, voluntary contributions, recoveries from charges to users for the delivery of capital investment services and, exceptionally, the unexpended balance of arrears earmarked for non-recurring, one-time costs. An explanation of each of the sources of funds available in 2006-07 under ZRG is outlined below.

153.     2006-07 Funds earmarked for Chapter 8 – US$ 4.5 million. An amount of US$ 4.5 million is proposed to be directed to Chapter 8 to ensure an immediate flow of resources from the 2006-07 Appropriation to the Capital Expenditure Account.

154.     Carry-forward from Arrears at 31/12/2005 – US$ 3.9 million. The Finance Committee at its 108th Session agreed to the proposal to carry-forward to the Capital Expenditure Account the 31 December 2005 unspent balance on Resolution 6/2001 Use of Arrears. The Committee recognised that many items detailed in Resolution 6/2001 fall under the definition of Capital Expenditure and that certain projects originally authorised under the Use of Arrears would run beyond 2005. Examples include the development of the Human Resources Management System (HRMS) and the Field Accounting System (FAS). The Council at its 127th session in November 2004 concurred with the Finance Committee’s recommendation.

155.     Transfer of 2004-05 budget to Chapter 8 – none foreseen. In accordance with Financial Regulation 4.5, the Finance Committee can authorise transfers between budgetary chapters, including into Chapter 8. Earlier Capital Budgeting estimates in the MTP 2006-11 and the SPWB 2006-07 foresaw that a transfer of US$ 1 million into Chapter 8 would be requested in 2004-05 for operation of the Facility in 2006-07. Given the expectation of full utilisation of the 2004-05 Appropriation, a transfer into Chapter 8 is no longer foreseen.

156.     Transfers from other chapters during 2006-07 implementation – US$ 1 million. Although the precise sources of funding can only be determined during implementation, the possibilities could include direct charges to beneficiary divisions for capital services and voluntary contributions.

157.     The following table summarises the inflows and the outflows for the Capital Expenditure Account to arrive at a tentatively projected balance in Chapter 8 of US$ 0.3 million at the end of 2006-07 at ZRG. In accordance with Financial Regulation 6.11, this balance will be transferred to the Capital Expenditure Account for use in the subsequent financial period.

Planned Movements in the Capital Expenditure Account (US$ 000)
  Carry forward at 31/12/05 2006-07 Biennium
Planned Inflows    
Carry-forward from Arrears at 31/12/2005 3,900  
Transfer of 2004-05 Budget to Chapter 8 0  
Total Available Funds at 31.12.05 Carried Over to 2006-07 3,900 3,900
2006-07 Appropriation earmarked for Chapter 8   4,500
Transfers from other chapters during implementation   1,000
Total Additions in 2006-07 to Capital Expenditure Account   5,500
Total Funds Available in 2006-07   9,400
 
Planned Capital Expenditure  
Programme 811 Telephony Services   150
Programme 812 Shared Data Services   1,545
Programme 813 IT Support to Meetings   1,000
Programme 814 Administrative Information Systems Projects   6,400
Total Planned Expenditure in 2006-07   9,095
 
Closing Balance transferred to the Capital Expenditure Account   305


Overview of Cost Increases

Methodology

158.     The methodology for the calculation of cost increases in 2006-07 follows the approach of previous biennia, which was approved by the Finance Committee, Council and Conference. As noted under the section on Risk Assessment, staff cost increases in particular remain difficult to predict despite the sophisticated information systems used to analyse current cost patterns and quantify trends.

159.     As in previous biennia, the cost increase estimates in the PWB are developed based on actual cost adjustments that have occurred in the first year and a half of the current biennium and cost projections over the planning horizon. The resulting financial adjustments are sub-divided into biennialization and inflation.

160.     Biennialization incorporates the full biennial effect of cost increases that have occurred or will materialise during the current biennium, but which will be incurred for the full 24 months in 2006-07. As such, biennialization objectively reflects the financial impact of events that will have already taken place before the implementation of the 2006-07 budget. The financial implications are essentially a matter of fact and arithmetic, not conjecture or long-range planning.

161.     Inflation represents the cost impact in 2006-07 of those adjustments that are expected to take effect at various points in the next biennium. The planning assumptions are summarised below. To assure prudent fiscal management and independent verification, external forecasts from the Economist Intelligence Unit and published data of authoritative bodies such as the International Civil Service Commission (ICSC) are used.

Analysis of Cost Increases

162.     This section provides an overview of the cost increases needed to maintain purchasing power, which are estimated at US$ 47.7 million for the 2006-07 biennium at ZRG net of income28. This corresponds to a biennial cost increase rate of 5.7% of the Programme of Work (equivalent to a 3.7% annual increase), or 6.3% of the total net budget29.

163.     The cost increase projections have increased by US$ 2.0 million from SPWB estimates.

  • This is partly on account of updated information available, particularly with respect to the latest actuarial valuations for after service benefits (including medical benefits) in response to a request of the Finance Committee30 for more up-to-date information. This has led FAO to ask the actuaries to provide, in May 2005, updated service costs due to the weakening of the US dollar since the last valuation.
  • Further adjustments arise from the application of cost increases to the proposed staff and non-staff input mix in the 2006-07 biennium. While the SPWB assumed the same input mix as the PWB 2004-05, changes between the current budget and the PWB 2006-07 in the proportion of staff and the distribution of posts across locations, alter the cost increase calculations.
164.     The significant level of cost increases required to maintain purchasing power in 2006-07 is due primarily to cost escalation that has already occurred during the biennium, which is reflected under biennialization in the table below. To mitigate the financial effect of cost increases, the Organization has used the lowest figures possible in the range of assumptions for future inflation. This entails a moderate amount of risk that the overall estimates for cost increases are understated, particularly with respect to professional staff salaries, pensionable remuneration, overall medical costs, especially current service costs for After-service Medical Coverage (ASMC), and some future costs of certain goods and services.

Summary of Cost Increases at ZRG (US$ millions)
  PWB 2004-05 Programme Base Biennalization Inflation Lapse Factor Total Cost Increases for 2006-07 2006-07 ZRG Budget after Cost Increases
Personnel Services:            
Salaries, Pension Fund Contributions and Allowances 550.8  22.8  15.8  (1.5) 37.1  588.0 
After Service Medical 10.3  2.3  0.7  0.0  3.0  13.2 
Other After Service Benefits 16.8  2.0  1.0  0.0  3.0  19.8 
Total Personnel Services 577.9  27.1  17.6  (1.6) 43.1  621.0 
Total Goods and Services 284.7  0.0  6.5    6.4  291.2 
Programme of Work 862.7  27.1  24.0  (1.6) 49.5  912.2 
Less income (103.0) (0.3) (1.5)   (1.8) (104.8)
Net budget and additional requirements 759.7  26.9  22.5  (1.6) 47.7  807.5 


165.     Explanations are provided below for the most significant cost increases and the underlying assumptions by main cost heading.

Personnel Services
166.     Personnel Services comprises all staff costs, including salaries, pension fund contributions, dependency allowances, social security and other staff related entitlements and after service benefits for both the professional and general service staff categories31. The increases in personnel services costs are exclusively those deriving from the UN common system, as reviewed by the ICSC and approved by the UN General Assembly.

167.     Personnel Services are estimated to increase by 7.5% compared to the previous biennium (or 4.8% per year) and account for US$ 43.1 million (87%) out of the overall US$ 49.5 million cost increases for the 2006-07 Programme of Work. They are, in turn, primarily the effect of staff cost adjustments that are occurring in the current biennium, which are reflected under biennialization.

168.     Biennialization accounts for US$ 26.9 million of the total cost increase in the net budget, due mainly to underbudgeting of unit staff cost rates in the current biennium32 arising from:

  • the increase in Staff-Related Liabilities of some US$ 5.2 million due to a change in methodology in the actuarial valuation as at 31 December 2003 (US$ 4.2 million of this amount was unforeseen and unbudgeted);
  • the rise in the Organization’s share of the premiums for the Basic Medical Insurance Plan was budgeted at 12% per year, while the actual increase in premiums in both 2004 and 2005 was 15%; this resulted in an effective 20% increase in the Organization’s share in 2004 on account of the cap on premiums payable by staff;
  • increases in education grant, entitlement travel; and
  • the impact of a lower US dollar against local currencies in decentralized offices.
169.     With regards to inflation, a total cost increase of US$ 16.1 million net of income is foreseen for personnel services based on estimates for the various cost components, including:

  • for headquarters general service staff remuneration, an increase at 2% for both 2006 and 2007, somewhat lower than the Economist Intelligence Unit (EIU) Average Nominal Wages Index forecast for Italy for 2006 (2.4%) and 2007 (2.3%);
  • for headquarters professional salaries, 1.6% for both 2006 and 2007, somewhat lower than Consumer Price Inflation Index (CPI) in Italy for 2006 (1.9%) and 2007 (1.8%); and
  • an average of factors such as inflation indexes, exchange rate forecasts and recent past patterns of increases as applied to staff costs in other locations.
170.     For pensionable remuneration, a somewhat lower rate than the EIU forecast for Average Nominal Wages Index for the United States for 2006 and 2007 is applied, at 2% for each year respectively. A 4.42% across-the-board increase in September 2004 in the scale of pensionable remuneration for the professional and higher categories has also been taken into account.

171.     Following the sharp cost escalation in the current biennium, a slowing down of Basic Medical Insurance Plan cost increases is assumed in the next biennium with an 11% inflation for each year. The contract for the medical plan will come to an end in 2006 and, through the tendering process, cost containment measures are expected to materialise. It is, however, noted that medical inflation is on the rise and affecting most UN agencies in Europe, with an uncertain prospect for improvement.

172.     Funding for after service staff benefits, including ASMC, is budgeted to increase in cost by US$ 1.7 million compared to the level set by the actuarial valuation of 31 December 2003, following an update from the Actuary in June 2005 to reflect movements in the euro - US dollar exchange rates. This additional cost is now included in the above estimates and explains in large part the rise in cost increases for staff since the SPWB.

173.     Finally, no provision is included in the budget for the adjustment of local currencies against the US dollar in decentralized offices, which essentially implies that the exchange rate experienced in 2004 and 2005 is considered to be a reasonable assumption for the next biennium.

Goods and Services
174.     This cost heading includes Other Human Resources, Travel, General Operating Expenses, Furniture, Equipment and Vehicles and is estimated to increase by 2.1% overall for the biennium due to inflation (equivalent to 1.4% per year).

175.     Other Human Resources, which consists of non-staff human resources in the form of temporary assistance, consultants and contracts, is estimated to increase by 2.4% overall for the biennium due to inflation (1.6% per year). The calculation is based on the weighted average of the estimated nominal wage increase for Italy applied to headquarters-based expenditures and the consumer price index for goods and services. For decentralized expenditure the estimated increases are even lower.

176.     Travel costs are projected to increase by 0.9% for the biennium in view of the low level of increases in air tariffs and DSA33, assuming that cost containment measures mentioned under Efficiencies and Productivity Improvements are implemented. The 1% inflationary increase in General Operating Expenses is based on the CPI for Italy applied to headquarters-based expenditures and lower inflation rates for the remaining part of expenditure, with a higher cost increase factor to take account of the particularly high cost escalation of certain utilities in Italy, e.g. electricity. 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.

177.     At its September 2005 session the Finance Committee will review several options for funding the amortization of the ASMC. Such funding is not part of the Organization’s current or proposed Programme of Work for 2006-2007.

Lapse Factor

178.     The lapse factor 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 107th 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 2006-07.

179.     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.

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

  • staff turnover rates, as measured through separations;
  • standard recruitment times; and
  • the extent to which separations are foreseen, so that recruitment action can be anticipated and the effective lead time thus reduced.
181.     In accordance with the established methodology, a five-year moving average (i.e. 2000 through 2004 inclusive) has been applied to calculate staff turnover rates. This results in an average turnover rate of 7.28% for professional staff and 6.24% for general service staff. Comparing to the five-year moving average used in the PWB 2004-05, the turnover rate has decreased by 0.43% for professionals (which declined below previous levels in 2003 and 2004) and increased only slightly, by 0.07%, for general service.

182.     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.

183.     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
  Professional General Service
Category of Separations % of Population No. of weeks foreseen % of Population No. of weeks foreseen
Foreseen separations (e.g. mandatory retirements) 36%  42 weeks or more 24%  25 weeks
Foreseen separations for a limited period (e.g. resignations with notice) 54%  12 weeks 56%  8 weeks
Unforeseen separations 10%  0 weeks 20%  0 weeks


184.     These results have been applied to calculate the 2006-07 lapse factor of 2.83% for professional and 1.75% for general service costs respectively, which translate into a corresponding budgetary reduction in staff costs.

185.     It is noted that a technique to statistically reduce the cost of the staffing establishment has some merit in large organizational units within FAO, which can cope with a vacancy pending filling of the post. However, experience in the application of the lapse factor technique has demonstrated over the years that smaller units cannot “absorb” budgetary savings that are imposed by the lapse factor, and that the technique is tantamount to structural underbudgeting in these cases. The Secretariat will propose a refinement in the methodology at a future session of the Finance Committee.

Financial Analysis of the General and Related Funds and Related Draft Conference Resolution on Miscellaneous Income

186.     The General and related funds comprise three distinct elements which together characterise the overall financial health of the Organization:

  • the most significant caption is the General Fund, which reflects the accumulated historical result of all receipts from assessments on Members, miscellaneous and other income, offset by cumulative expenditures to execute the Programme of Work;
  • the Working Capital Fund (WCF), which is authorised at a level of US$ 25 million, its primary purpose being to advance monies to the General Fund to finance expenditures pending receipt of assessed contributions to the budget. The WCF can also be used to finance emergency activities not contemplated in the budget;
  • the Special Reserve Account (SRA), which is authorised at a level of 5% of the effective working budget (currently US$ 37.5 million). Its primary purpose is to protect the Programme of Work against the effects of unbudgeted extra costs arising from adverse currency fluctuations and unbudgeted inflationary trends. The SRA can also advance monies on a reimbursement basis to the WCF.


187.     The breakdown of the General and related funds as at 31 December 2003 (i.e. from the latest available audited accounts), is summarised as follows:

General and Related Funds Equity Position as at 31 December 2003
  US$ Millions
General Fund Balance/(Accumulated Deficit) (90.1)
Working Capital Fund 25.2 
Special Reserve Account 23.0 
Total Reserves and Fund Balances/(Deficit) at 31 December 2003 (41.9)


188.     The significant accumulated deficit under the General Fund at 31 December 2003 can be largely explained by:

  • the treatment of arrears in assessed contributions from Members; and
  • the recognition of After-service Medical Coverage costs in the accounts of the Organization.


189.     Outstanding payments of assessed contributions are not recognised in the accounts. However, the accumulated deficit of US$ 90.1 million as at 31 December 200334 is covered by outstanding arrears in assessed contributions from Members, amounting to US$ 97.7 million at the same date.

190.     The Organization’s accounting policy with respect to ASMC is similar to that of the international accounting standards and the policy of some other UN organizations. At the same time, it is more prudent than the policy presently adopted by the United Nations itself and several other agencies, as recognised by Council35. For example, the United Nations recognises ASMC liabilities only to the extent of the payments actually incurred every biennium on retiring or separated staff. However, this is currently under review with the assistance of a recognised firm of actuaries, to see how the matter can be brought in line with best practice.

191.     In the case of FAO, since 1998 the governing bodies have approved the following approach:

  • the current service costs, as determined in the actuarial valuation, are planned in the Regular Budget and charged in the accounts; and
  • the unrecorded liabilities for past service determined by the actuarial valuation are being amortized over 30 years for ASMC.


192.     The accumulated deficit at 31 December 2003 includes charges for ASMC amortization amounting to US$ 49.5 million which are not funded and have augmented the accumulated deficit by a corresponding amount. However, at 31 December 2003 ASMC liabilities not yet recorded amount to US$ 202.9 million. While the above clarifications provide a justification for the accumulated deficit balance on the General Fund at 31 December 2003, the difficulty is real. The accumulated deficit will grow in 2004-05 and will continue to rise unless further action is taken.

193.     The Conference approved additional funding in 2004-05 of US$ 14.1 million for ASMC in 2003 and the Finance Committee and Council were subsequently informed in 2004 and 2005, that according to the latest actuarial report, the current funding would need to increase significantly to cover the ASMC liabilities. The result of the latest valuation as at 31 December 2004 that was delivered by the Actuary in early August 2005 shows that the amortization of the ASMC for the 2006-07 biennium, using the original 30-year amortization period which began in 1998, amounts to US$ 40.8 million. Options for dealing with the funding of the ASMC liabilities are submitted to the governing bodies in a separate document36.

194.     The governing bodies have also been informed37, and Council has expressed concern38, that delays in the receipt of assessed contributions continue to exacerbate the cash position of the General Fund, requiring monies to be advanced to the General Fund from the WCF and SRA on a more frequent and continuing basis. There will be a requirement for external borrowing during 2005 unless significant contributions from Members are received earlier than was the case in 2004.

195.     The Organization must, therefore, seek solutions to reverse the trend of an increasing accumulated deficit under the General Fund, or at least to stabilise it, and to improve the cash flow situation. A partial solution concerns the treatment of Miscellaneous Income in arriving at the assessment of the contributions to the biennial budget.

196.     In accordance with Financial Regulation 7.4, Miscellaneous Income shall be estimated for each financial period. The estimates are provided in every Programme of Work and Budget, and the amounts put forward during the past three biennia are tabulated below:

Miscellaneous Income
Description 2000-01 2002-03 2004-05
Rental of Conference and Office facilities 196 100 100
Investment Earnings 4,000 4,500 4,500
Less discounts payable (1,200) (600) (600)
Lapse of accrued liabilities 3,700 2,500 5,000
Contributions from New/Associate Members 100 100 100
Sundry 100 95 95
TOTAL ESTIMATED MISCELLANEOUS INCOME 6,896 6,695 9,195


197.     In accordance with Financial Regulation 5.2(a), in the assessment of contributions of Members and Associate Members for each financial period, adjustments shall be made in respect of estimated Miscellaneous Income of the financial period in respect of which the assessment of contributions is being made. Thus, in arriving at the assessments on Members, the resolution on the budgetary Appropriation makes a deduction for the estimated Miscellaneous Income in the Programme of Work and Budget.

198.     It is befitting to recall the rationale for this treatment of Miscellaneous Income. Under Financial Regulation 7.4, if the actual Miscellaneous Income ... exceeds or is less than the estimate, such excesses or such shortfall shall form part of the surplus or deficit of that financial period. Moreover, under Financial Regulation 6.1(b), any cash surplus in the General Fund at the close of any financial period shall be allocated among Member Nations. Therefore, the practice of estimating Miscellaneous Income is aimed at projecting the likely surplus in the General Fund at the end of a biennium. Assuming full implementation of the Programme of Work, the deduction of Miscellaneous Income from assessments serves to obviate the need to raise assessments for the portion that would anyway have to be distributed to Members after the implementation cycle.

199.     In fact, the governing bodies have already recognised the risk in this approach should the level of forecast Miscellaneous Income not eventuate, with the consequent adverse effect on the delivery of the Programme of Work. For this reason “the Council asked the Director-General to prepare conservative estimates of Miscellaneous Income for the purpose of determining the level of payment of contributions from Member Nations39.

200.     For 2006-07, Miscellaneous Income is estimated at US$ 6 million (US$ 3.2 million lapse of accrued liabilities, US$ 2.5 million investment earnings, and US$ 0.3 million other), which is less than 1% of the proposed Appropriation. This estimate is based in part on actual and projected Miscellaneous Income in 2004-05 in the amount of US$ 7 million, which is US$ 2 million less than the deduction from Members’ assessments.

201.     The reality now is that the Organization has a large and growing accumulated deficit in the General Fund. Therefore, the basis for reducing the assessed contributions to a figure that is lower than the net Appropriation, on the assumption that the Organization will have a cash surplus, is no longer valid. In the light of such circumstances, it would be prudent fiscal management to fully fund the net Appropriation.

202.     The Secretariat is proposing that the governing bodies fully fund the net Appropriation from 2006-07 by temporarily suspending the application of Financial Regulation 5.2(a), which requires adjustments to be made to the assessments in respect of estimated Miscellaneous Income, until such time as a cash surplus is available in the General Fund for allocation among Member Nations in accordance with Financial Regulation 6.1(b). As noted by Council, this would not create a precedent in the UN system, as in the case of ILO and UNESCO40, Member Nations fully fund the budget.

203.     A draft resolution in this regard is presented for consideration by Conference.

Draft Resolution for Adoption by Conference

Miscellaneous Income
 
THE CONFERENCE,
 
Noting that, at its Hundred and ninth Session (Rome, 9-13 May 2005), the Finance Committee reiterated its concern with the deteriorating accumulated deficit in the General Fund and the difficult cash flow situation of the Organization;
 
Noting, in particular, that, at the same Session, the Finance Committee reviewed the Director-General's proposal that, as a means of helping to address cash flow difficulties in the General Fund, in the assessment of the contributions of Member Nations no deductions should be made in respect of estimated Miscellaneous Income of the financial period for which the assessment of contributions is being made, until such time as the Organization returns to a stronger financial and cash flow position, and agreed to transmit such proposal to the Council;
 
Noting further the deliberations of the Joint Meeting of the Programme and Finance Committees on 11 May 2005, which was apprised of the justification for the Director-General's proposal that Member Nations be required to pay their assessed contributions, without deduction of Miscellaneous Income;
 
Recalling that the Council, at its Hundred and Twenty-eighth Session (Rome, 20-25 June 2005), in directly addressing the financial risks related to FAO's cash flow difficulties, considered the proposal to require Member Nations to pay their Assessed Contributions without deduction of Miscellaneous Income as transmitted by the Finance Committee and agreed to receive more specific proposals in the full PWB;
 
Recalling further that the Council, at its Hundred and Twenty-ninth Session (Rome, 16-18 November 2005),...;
 
Decides, notwithstanding Financial Regulation 5.2(a), that no deductions shall henceforth be made in the assessment of contributions for estimated Miscellaneous Income, until such time as a cash surplus in the General Fund materialises.


Funding of the Budget

204.     The table below provides an overview of the funding of the 2006-07 budget under the four resource scenarios requested by Council, including HRG41 covered in the Supplement.

205.     Whilst unrelated to the 2006-07 Programme of Work, the Thirty-second session of the Conference, in 2003, addressed the funding for the amortization of the After-service Medical Coverage as part of the Appropriation resolution. It approved an additional assessment of US$ 14.1 million for 2004-05.

206.     Under the split assessments methodology adopted by Conference Resolution 11/200342, the assessments on the budget are due in US dollars and euro, as shown in the shaded sections of the table below, with 46% due in US dollars and 54% due in euro at the budget rate for the 2006-07 biennium. The Secretariat has recommended to the Finance Committee that the ASMC amortization funding decided by Members should be made in both US dollars and euro in the proportions recommended in the Asset and Liability Study, i.e. 40% in US dollars and 60% in euro, at the budget rate for the 2006-07 biennium.

207.     It is recalled that the assessed split contributions in euros and US dollars do not vary under different exchange rate assumptions. Nonetheless, for information purposes, the assessments shown in the table below are also expressed in US dollars, which is the Organization’s functional currency for accounting purposes. For 2006-07, a budget rate of € 1 = US$ 1.19 is proposed, which was the spot rate at the beginning of July 2005, when the PWB was being finalised. The budget rate adopted for 2004-05 was also € 1 = US$ 1.19.

Budget Level and Funding (Assuming 1 Euro = 1.19 US$)
  2006-07 PWB ZNG 2006-07 PWB ZRG 2006-07 PWB RG 2006-07 PWB HRG
Budgetary Appropriation (all amounts in millions)
Appropriation approved for 2004-05 (US$) 749.1  749.1  749.1  749.1 
Programme Change (US$) (44.6) 0.0  30.9  69.9 
Appropriation at 2004-05 costs (US$) 704.5  749.1  780.0  819.0 
Security cost escalation (US$) 0.0  10.6  10.6  10.6 
Other Cost Increases (US$) 44.6  47.7  50.1  52.6 
Appropriation at 2006-07 costs (US$) 749.1  807.4  840.7  882.2 
Appropriation assessments due in US$ (46%) 344.6  371.4  386.7  405.8 
Appropriation assessments due in Euro (54%), calculated at 2006-07 budget rate of 1 euro = US$1.19 339.9  366.4  381.5  400.3 
 
After-service Medical Coverage (all amounts in millions)
Funding for amortization of ASMC for 2006-07 (US$)   14.1   
ASMC assessments due in US$ (40%)   5.6   
ASMC assessments due in Euro (60%), calculated at 2006-07 budget rate of 1 euro = US$1.19   7.1   
 
Note: At ZNG budget level, the Organization's security expenditures are funded at the 2002-03 budget level (i.e., US$ 8.8 million).


Draft Resolution for Adoption by the Conference

Budgetary Appropriations 2006-07
 
THE CONFERENCE,
 
Having considered the Director-General's Programme of Work and Budget:
 
1. Approves a total net Appropriation of US$ 840,725,000 for the financial period 2006-07 and approves the Programme of Work proposed by the Director-General for 2006-07 as follows:
 
  a. Appropriations are voted for the following purposes:
      US$  
    Chapter 1: General Policy and Direction 65,036,000   
    Chapter 2: Technical and Economic Programmes 368,235,000   
    Chapter 3: Cooperation and Partnerships 163,675,000   
    Chapter 4: Technical Cooperation Programme 109,486,000   
    Chapter 5: Support Services 60,945,000   
    Chapter 6: Common Services 43,469,000   
    Chapter 7: Contingencies 600,000   
    Chapter 8: Capital Expenditure 8,835,000   
    Chapter 9: Security Expenditure 20,444,000   
    Total Appropriation (Net) 840,725,000   
    Chapter 10: Transfer to Tax Equalization Fund 86,043,000   
    Total Appropriation (Gross) 926,768,000   
 
  b. The appropriations (gross) voted in paragraph (a) above, plus an amount of US$ 14,100,000 to fund the amortization of After Service Medical Coverage (ASMC), shall be financed by assessments on Member Nations, thus resulting in assessments against Member Nations of US$ 940,868,000.
 
  c. In establishing the actual amounts of contributions to be paid by individual Member Nations, the assessment of each Member Nation shall be reduced by any amount standing to its credit in the Tax Equalization Fund provided that the credit of a Member Nation that levies taxes on the salaries, emoluments and indemnities received from FAO by staff members shall be reduced by the estimated amounts of such taxes to be reimbursed to the staff member by FAO. An estimate of US$ 5,900,000 has been withheld for this purpose.
 
  d. The contributions due from Member Nations in 2006 and 2007 shall be paid in accordance with the scale adopted by the Conference at its Thirty-third Session, which contributions, after the deduction of amounts standing to the credit of Member Nations in the Tax Equalization Fund, result in net amounts payable totalling US$ 860,725,000.
 
  e. The contributions shall be established in US dollars and euro and shall consist of US$ 398,274,000 and euro 388,615,000, which represents a split of 46% US dollars and 54% euro for the budgetary appropriation and a split of 40% US dollars and 60% euro for the ASMC.
 
  f. The foregoing Appropriations are calculated at the rate of euro 1 = US$ 1.19.



22 International Atomic Energy Agency

23 CL 127/7, paras. 624-645

24 CL 127/15, para. 79

25 CL 127/REP, para. 54

26 Zero real growth (ZRG); zero nominal growth (ZNG)

27 Real growth (RG)

28 Biennialization and Inflation include adjustments to the unit rate of staff cost reimbursement, reflected under income, amounting to US$ 1.8 million.

29 The overall reduction in resources at ZNG is derived by applying the 6.30% biennial cost increase to the reduced Programme of Work base required to remain at a total net budget level of US$ 749.1 million.This produces a real reduction in resources of approximately US$ 44.6 million.

30 CL 128/13, para. 48

31 FC 108/11(b) contains a detailed description of the various benefits and allowances granted to internationally and locally recruited staff.

32 FC 110/2, paras. 4-5

33 Daily subsistence allowance

34 This includes the effect of the balance of one-time expenditures authorised by the Conference against the major contributor’s arrears payments (US$ 41.4 million).

35 CL 128/REP, para. 103

36 FC 110/16

37 FC 109/4, FC 110/3

38 CL 128/REP, para. 93

39 CL 91/REP, para. 278

40 International Labour Organization (ILO); United Nations Educational, Scientific and Cultural Organization (UNESCO)

41 Higher real growth (HRG)

42 The performance of the split assessment arrangement is further described in C 2005/16.

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