III. BUDGETARY FRAMEWORK

OVERVIEW OF TOTAL RESOURCES

Total Estimated Resource Availability (at 1998-99 cost levels)

41. Voluntary contributions falling under the category of Other Income comprise resources largely at the disposal of the Organization, and/or resources that are managed closely with the Regular Budget Appropriation. The Organization will continue to review the classification of voluntary contributions under Financial Regulation 6.7 to improve the presentation of an integrated programme of work, taking due account of financial reporting requirements implemented in the new administrative systems.

42. The preceding table highlights a decline of US$ 11.3 million in Other Income, which has required a corresponding adjustment in the programme of work, or planned expenditure. The key factors underlying this reduction are:

• the substantial reductions in estimated income from Terminal Project Reports and Project Servicing Costs are due to a large projected decline in non-emergency extra-budgetary project delivery for 2000-01 compared with the levels foreseen in the current budget; and
• a decline is also foreseen with respect to estimated cost reimbursements from the World Bank (WB). The 1998-99 budget foresaw additional expenditure and related cost reimbursements from the WB, which have not materialized. The WB income for 2000-01 is consequently adjusted downwards to bring the projections in line with the provisions of the governing Memorandum of Understanding for the FAO/WB Cooperative Programme, where the WB covers 75 percent of the costs of the Programme.

DEVELOPMENTS UNDER EXTRA-BUDGETARY RESOURCES

43. Historical project delivery by funding source is shown below and indicates that the total Extra-budgetary Field Programme has increased somewhat from the low level of 1996. However this increase reflects an increase in emergency assistance, which grew from US$ 15.8 million in 1996 to US$ 78.2 million in 1998. The non-emergency assistance has continued to show a steady decline from a level of US$ 263.2 million in 1993 to US$ 157.1 million in 1998.

Extra-Budgetary Field Programme (All amounts in US$ million)

44. The United Nations Development Programme (UNDP) project delivery has declined steadily from US$ 108.1 million in 1993 to US$ 28.6 million in 1998. With the exception of 1997, when UNDP project delivery was close to the level of 1996, the decline has amounted to 25 percent or more each year. However, the year-to-year decline in UNDP delivery is now considered to be at an end and delivery in 2000-01 is expected to stabilize at about US$ 30.0 million per year.

45. Non-emergency Trust Fund project delivery declined in both 1997 and 1998 to levels below US$ 130 million per year, after showing small increases in 1995 and 1996. As with the UNDP Programme it is hoped that the Non-emergency Trust Fund delivery will recover during the 2000-01 biennium to levels reached during 1994 to 1996.

46. Trust Fund Emergency activities, mainly carried out by FAO's Special Relief Operations Service (TCOR), vary with need. Between 1993 and 1995 work of the Emergency Centre for Locust Operations (ECLO) and the Screwworm Emergency Centre for North Africa (SECNA) resulted in expenditures of more than US$ 25 million each year. As the work of these programmes declined, or was completed, emergency assistance delivery reached a low of US$ 15.8 million in 1996. The large increase in emergency programmes in both 1997 and 1998 is related to the Iraq Food for Oil programme which accounted for US$ 25.2 million of the US$ 35.2 million delivery in 1997 and US$ 66.9 million of the US$ 78.2 million delivery in 1998.

EFFICIENCY SAVINGS

47. Significant efficiency savings of the past three biennia have made it possible for the Organization to reprogramme substantial resources to new thrusts and priorities. This has been achieved despite reductions in the Organization's net budget level in both real and nominal terms since 1992-93 and notwithstanding large reductions in Other Income, particularly Support Cost funds.

48. Some of the efficiency measures implemented in prior biennia are being further pursued. These include the ongoing efforts at reducing the number of director-level posts in 2000-01 (mainly in FAORs), expansion of the partnership programmes, the implementation of cheaper and better forms of communication between locations and cost reductions through more rigorous means of tendering.

49. A shift towards process-oriented change as opposed to input-oriented economies focuses on changing policies, procedures and ways of working, with the aim of streamlining operational and administrative functions. It will include further modifications to the delegation of authority conferred on officials of the Organization, whilst ensuring that acceptable levels of internal control and stewardship of resources are retained.

50. Process-oriented savings are clearly desirable in that they create an improvement in working arrangements and in the qualitative aspects of programme delivery by allowing staff time to be applied to more substantive activities. However, the implementation of such changes requires time and they are, in any case, difficult to translate into quantifiable efficiency savings. For example, the streamlining of consultant recruitment procedures, or the removal of approval layers for official travel, may generate marginal and fragmented savings in staff time across numerous organizational units in the Administration and Finance Department (AF), Management Support Units (MSUs) and in the time devoted by technical officers to arrange such administrative actions. However, they may not lead to the direct and immediate abolition of posts.

51. It is premature to quantify the resulting changes in the Summary Programme of Work and Budget (SPWB) 2000-01, before the implementation of the first phase of Oracle. Instead these will be drawn from substantive experience gained during the implementation of the new systems during 1999 and 2000.

POSTS

52. The incorporation of Support Costs and Other Income within the budget, and the implementation of a new framework for FAO publications and documents, led to the inclusion of a number of non-Regular Programme positions in the total establishment for 1998-99. The adoption of a Zero Nominal Growth (ZNG) budget in 1998-99 entailed the abolition of 83 posts beyond the ZRG budget, bringing the total 1998-99 establishment to 3 599 posts, of which 3 387 are funded by the Regular Programme.

53. At the time of the Programme of Work and Budget (PWB) 1998-99, the review of the organizational structure of AF had not been finalized. Following completion of the review, the organization chart for the department was provided to the Joint Meeting of the Programme and Finance Committees in July 1998 (JM 98/INF/3 refers). The Administration and Finance Department (AF) has now made further proposals in the SPWB 2000-01 involving consolidation of the communications functions within the Information Systems and Technology Division (AFI). Although the proposals are cost neutral for AF, five professional posts and 26 general service posts are proposed for transfer from the divisional budgets to the Information Technology (IT) Pool account as part of this restructuring thus integrating all posts dealing with telecommunications in all its forms.

54. In view of the Director-General's desire that 2000-01 be a period for consolidating the notable changes of the past three biennia, significant restructuring has been avoided. Nevertheless, the Organization's proposals continue to improve the balance between professional and support staff. Within the Regular Programme, a net reduction of 20 general service posts is proposed, counterbalanced by a net addition of 8 professional posts. Despite the proposed increase in the professional establishment, an overall reduction in the number of Director-level posts is proposed. The Regional and Sub-regional Offices continue to be strengthened, with 7 professional positions added to their establishment.

55. As noted above, once the new Oracle administrative systems are implemented, the Finance Division (AFF) and MSUs in particular will need to undergo further reorganization to align the organizational structure to new business processes.

56. The following table summarizes the evolution of established posts from the 1998-99 approved budget to the proposals for the SPWB 2000-01. The transfer of posts into Pools and Other Funds related to the AFI/Administrative Services Division (AFS) restructuring is shown, as well as the impact of net programme changes.

Evolution of Posts

57. Within the net programme changes referred to above, 60 new posts and 72 post abolitions are proposed under the Regular Programme.

58. The following table lists all new posts and abolitions to the Regular Budget. However, divisional transfers within Headquarters and changes pertaining to AFI/AFS restructuring are not included as they have no overall cost impact on the Organization's budget for 2000-01.

Regular Programme-funded New Posts and Abolitions (excluding divisional transfers within Headquarters and changes pertaining to AFI/AFS restructuring)

COST INCREASES

Methodology

59. The methodology for the calculation of cost increases to be provided within the PWB 2000-01 is the same as used for previous biennia and approved by the Finance Committee, Council and Conference. The cost increase calculations included in this document are based on actual data through to the end of 1998 and use as the base, the approved Programme of Work for 1998-99. The cost increase calculations will be further refined and updated for the full PWB.

Biennialization and Inflation

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

• Biennialization reflects the full biennial effect of cost increases that have occurred at some stage during the current biennium (and therefore only for part of the 24-month period) but which will be incurred for the full 24 months in 2000-01. It reflects the financial impact in 2000-01 of changes that will have occurred before the end of 1999. It is not based on long-term forecasts which are understandably more prone to forecasting error.
• Inflation, on the other hand, represents the cost impact in 2000-01 of those increases that are expected to take effect at various points in the next biennium (i.e. on or after 1 January 2000 and before 31 December 2001).

Lapse Factor

61. With regard to staff costs, the methodology approved by the Council at its Hundred and seventh Session for application since the 1996-97 budget has again been applied to the SPWB 2000-01. Consequently, an across the board budgetary reduction of 4.53 percent and 1.78 percent continues to be applied to professional and general service costs respectively in arriving at the programme budget estimates for 2000-01. The percentages will be revised in the full PWB 2000-01 to take account of standard recruitment lead times and staff turnover rates up to 31 December 1998.

Impact of Exchange Rate

62. The budget is prepared in US Dollars on the basis of the budget rate adopted by the Conference for the 1998-99 budget of Lit. 1 690 to US$ 1.00.

63. The importance of the rate of exchange on the provision for cost increases is significant. Under the current methodology for the determination of the effective working budget in the Resolution put before the Conference for its adoption, adjustments are made to the provisions for cost increases to reflect the rate of exchange for that day. As a consequence, the final appropriation, and therefore the assessed contributions for 2000-01, can only be determined in November 1999. However, the impact is an estimated increase/decrease of US$ 3.7 million for every movement of Lit. 25 in the US Dollar/Lit. exchange rate.

Analysis of Cost Increases

64. The table which follows shows the cost increases summarized by major component, showing separately the amounts attributable to biennialization of cost increases incurred in 1998-99 from cost increases due to inflation in 2000-01. Explanation of the most significant increases and the main assumptions made in forecasting the amounts are described below.

Personnel Services

65. Under basic professional salaries and post adjustment, a cost reduction arises under biennialization. This is because the cost of living adjustments of 2.2 percent, foreseen in May 1998 and May 1999 in the PWB 1998-99, have not and will probably not materialize. Under inflation, an increase of four post adjustment multiplier points is projected in May 2000 and two multiplier points in May 2001, to take account of cost of living increases.

66. The biennialization of general service salaries and Separation Payments Scheme includes the impact of an International Labour Office (ILO) Administrative Tribunal judgement of January 1998. This reinstated the Language Factor as an element of general service remuneration retroactively from November 1995, accounting for approximately US$ 5.5 million of the total US$ 9.6 million under this caption. The remaining biennialization reflects a likely 3 percent increase in salaries effective November 1999. Under inflation, an estimated 3 percent increase in general service salaries is foreseen effective November 2000, following a comprehensive salary survey which is scheduled to commence in October 2000, and a further 3 percent increase is projected in November 2001.

67. Biennialization for pension fund contributions is attributable to two factors. It reflects an across the board increase of 1.8 percent in pensionable remuneration for professional staff, promulgated by the International Civil Service Commission (ICSC) in November 1997. This was not reflected in the current budget since it was approved after the 1998-99 PWB was completed. Biennialization also includes the impact on pension contributions of the reinstatement of the Language Factor and consequent 4 percent increase in general service salaries at Headquarters.

68. Under Social Security, biennialization reflects the impact of the transfer to the General Fund of excess assets of the Staff Compensation Plan. According to the Actuarial Valuation Report as at 31 December 1997, this has resulted in an increase in the annual expense from approximately US$ 350 000 to US$ 1.8 million as a result of the greatly reduced amortization of surplus.

69. The inflation estimates for Social Security provide for a 7 percent increase in January 2000 and a similar increase in January 2001. This is consistent with the assumptions used for future trends of per capita costs of medical claims in the Actuarial Valuation of After Service Medical Costs.

70. A current service cost methodology was first adopted in the PWB 1998-99 to recognize the cost of medical benefits, including after service medical coverage, for current staff. The additional provision in the PWB 1998-99 was based on the actuary's report as at 31 December 1996. The updated report as at 31 December 1997 includes a substantial upward revision by the actuary of the current service requirements. It provides a revised current service charge for 1998-99 of US$ 12.0 million compared to a budgeted amount of US$ 8.7 million. The resulting shortfall of US$ 3.3 million for 1998-99 is shown under biennialization. In accordance with the same report, future annual cost increases of 7 percent p.a. have also been applied and are reflected under inflation.

71. Under Dependency Allowances, biennialization largely reflects the impact on children's and secondary dependant's allowance of a 14.6 percent increase in the value of tax abatements and social legislation payments at seven Headquarters duty stations, that occurred between January 1996 and January 1998.

72. Under Education Grant, Travel and Other Allowances, Recruitment and Separation Costs, current expenditure patterns indicate that cost increases that have taken effect during the current biennium can be absorbed. Education Grant provisions, amounting to approximately US$ 14.6 million in the current biennium, are reviewed every two years by the ICSC, and a possible increase could become effective 1 January 2001. However, no provision is made for this contingency. The majority of the inflation forecast relates to recruitment and separation costs, which amount to US$ 27.9 million in the current budget base and are largely on account of professional staff. These tend to move in line with basic professional salary costs, with the result that this component of the cost has been subject to a 2.84 percent increase.

73. It may be noted that the Organization is considering the implementation of differentiated standard rates for professional positions (as is already the case for general service posts) that take account of distinct cost rates and cost trends in the various locations where the staff are posted. If implemented, such a change will not have any impact on the overall level of cost increase but would cause some redistribution of the budget between programmes and organizational units.

Goods and Services

74. Other Human Resources consists of non-staff human resources in the form of temporary assistance, consultants and contracts. Under inflation, a cost increase of 1.63 percent as provided on the general service salaries has been applied to temporary clerical/secretarial assistance and an increase of 2.84 percent as calculated on professional staff has been applied to consultants and contracts.

75. Travel costs have been increased by 2 percent p.a. for 2000 and 2001.

76. The inflation under General Operating Expenses has been based on estimated rates of inflation for Italy, which are provided at 2 percent p.a.

77. 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, less some allowance to take account of the competitive advantages of international tendering. Accordingly, an estimated rate of inflation of 1.8 percent has been applied for the biennium.

Biennial Cost Increase Rates

78. 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 2000 and a 3 percent increase in 2001 on a biennial budget of US$ 100, the calculation of the biennial rate is as follows:

2000 cost of US$ 50 x 2% = 51.00

2001 cost of US$ 51 x 3% = 52.53

Total 103.53

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 2.35 percent.

79. The biennial rate of cost increases for 2000-01 works out at 4.65 percent. As noted above, substantial cost increases arise from the need to take account of the retroactive 4 percent increase on general service salaries at Headquarters and a significant increase in the current service cost of after service medical coverage and the Staff Compensation Plan. These cost increases have already taken effect and are estimated under biennialization. The proposed cost increases for 2000-01 are equivalent to an average annual rate of 3.07 percent.

BUDGET LEVEL AND FUNDING

80. The budget as proposed would be financed as follows:

Funding of Programme of Work and Budget (All amounts in US$ 000)

81. The ZRG proposed implies an increase in assessments of 6.17 percent over the biennium or 4.05 percent p.a. at the budget rate of exchange prevailing during 1998-99. At the current market rate of Lit. 1 770, the proposed level of assessed contributions would fall to approximately US$ 665.8 million, an increase in assessments of 4.32 percent over the biennium or 2.85 percent p.a. This increase merely maintains the 1998-99 reduced level in terms of constant Dollars.

82. The "growth" scenario implies an increase in assessments of 9.71 percent at the budget rate of exchange.