Annex I

ANNUAL REPORT ON BUDGETARY PERFORMANCE AND PROGRAMME AND BUDGETARY TRANSFERS

Introduction

1. Financial Regulation (FR) 4.6 requires the Director-General to manage the appropriations so as to ensure that adequate funds are available to meet expenditures during the biennium, and calls for the Finance Committee to review annually the Director-General’s implementation of this regulation. In accordance with this requirement, this Thirty-seventh Annual Report on Budgetary Performance summarizes, for information and discussion, the budgetary aspects of the Regular Programme performance for 2002-03 and provides the details of the final budgetary transfers between Chapters.

Overall Biennial Regular Programme Financial Projections

2. Conference Resolution 5/2001 on the Budgetary Appropriations for 2002-03 approved a budget of US$651.8 million, which comprises the approved Programme of Work less Other Income². Financial Regulation 4.1(a) authorizes the Director-General to incur obligations up to the amounts voted.

3. The Director-General manages the appropriations via annual institutional allotments for the Regular Programme of Work issued by the Office of Programme, Budget and Evaluation (PBE) to allottees. The allotments are adjusted by PBE during the implementation cycle to take account of emerging programme requirements, under-budgeted activities and cost savings that were not planned in the PWB 2002-03. The institutional allotments by programme heading constitute spending limits for allottees.

4. Table 1 summarizes the overall budgetary performance versus the appropriation approved by Conference. The 2002-03 performance is based on the actual expenditure in the unaudited accounts of the Organization.

Table 1. Overview of 2002-03 Regular Programme Performance (US$ 000)

5. The following points are made regarding the performance indicated in the preceding table.

6. A surplus balance of US$0.6 million is recorded against the 2002-03 appropriation of US$651.8 million, with 99.9% of the appropriation utilized.

7. It is recalled that the Committee agreed in principle to the use of arrears for the one-time expenditure on equipment arising from field staff security requirements (totalling US$0.9 million)³. As agreed, every effort was made to absorb these costs within the Regular Programme, and they were indeed successfully included within the performance reported above.

Staff Cost Variance

8. The staff cost variance is the difference between budgeted and actual staff costs in a biennium. For the 2002-03 biennium, a US$5.4 million favourable staff cost variance, net of currency variance, materialized.

9. Most of the underlying causes of any difference between the actual and standard unit costs of staff, like exchange rate fluctuations in decentralized offices, decisions of the International Civil Service Commission, etc., are beyond the control of the allottees. The monitoring of the variance is, therefore, done centrally and any surplus or deficit, i.e. the staff cost variance, is charged at the end of the biennium to the financial accounts across all programmes in proportion to the staff costs incurred at standard rates.

10. It is recalled that the general service language factor increase for Headquarters staff was included in the standard rates for 2002-03, pending the outcome of the appeal launched on behalf of the general service staff to have the language factor reinstated. The appeal by general service staff was dismissed by the ILO Administrative Tribunal in February 2004, before the final closure of the 2002-03 accounts. The estimated biennial cost of the language factor was US$3.7 million net of currency variance, and contributed to an increase of the favourable staff cost variance from US$1.7 million to the current level of US$5.4 million.

11. The main other factor contributing to the favourable variance relates to the provision for the strengthening of local currencies against the US dollar in decentralized offices which was included when the initial cost increase assumptions were made during the finalization of the PWB 2002-03. This risk materialized at a much lower level and later stage than anticipated and contributed significantly to the generation of a favourable staff cost variance.

12. A few under- or un-budgeted items decreased the variance that would have resulted solely from the factors described above. One item in particular was the increase in professional salaries by 5.7% effective January 2003, as decided by the International Civil Service Commission, which was unforeseen during the preparation of the PWB 2002-03.

Other Income

13. In accordance with FR 4.1(a), shortfalls in Other Income versus the budgeted levels require corresponding reductions in planned expenditure during the biennium to remain within the approved budgetary appropriation of US$651.8 million. The outturn for 2002-03 is summarised in Table 2, and shows an overall shortfall of US$1.5 million, or 98% of the total budgeted income as having been earned. As this outcome was foreseen, the offsetting reductions in expenditure were managed in a planned fashion.

Table 2. 2002-03 Budgetary Performance of Other Income⁴ (US$ 000)

14. Support cost reimbursements are essentially earned in proportion to the actual expenditure on non-emergency Trust Fund projects⁵ and United Nations Development Programme (UNDP) projects implemented or executed by FAO. The total amount of Support Cost Income earned in 2002-03 reached US$28 million. The biennial shortfall versus the budgeted support cost income totals US$6.5 million.

15. Reimbursements for jointly funded investment activities relate to the work of the Investment Centre Division (TCI) in support of lending activities for the agricultural/rural sector under cost sharing arrangements from the World Bank and other multilateral financial institutions. Other external income includes: fees for technical support services; income from terminal project reports; reimbursements for administrative services to the World Food Programme (WFP); Government Counterpart Cash Contributions to FAOR offices; earnings from sale of surplus property; and other sundry income. The aggregate recovery for the above income types exceeded the amounts foreseen in the budget by US$5 million, which is mainly due to a marked increase in reimbursements from Jointly Funded Activities and higher than estimated earnings from sale of surplus property in the FAORs.

2002-03 Budgetary Transfers and Performance by Chapter

16. The final 2002-03 expenditure resulted in an overall surplus of US$0.6 million against the appropriation; budgetary chapter transfers sought fall within the levels previously requested and are tabulated below.

Table 3. 2002-03 Budgetary Performance by Chapter (US$ million)

17. Chapter transfers are required from Chapter 2 (US$5.8 million) and Chapter 4 (US$0.3 million), to Chapters 1 and 3 (US$0.1 million and US$6.0 million, respectively). The final required chapter transfers are lower than anticipated in the September 2003 Finance Committee document (FC 104/2). It is noted in particular that, although a transfer of US$2.7 million was approved from Chapter 4 due to the one-time impact of the change in accounting methodology on Direct Operating Expense (DOE) reimbursements, a large portion of this impact was absorbed within the Regular Programme performance, resulting in a much lower required transfer from Chapter 4.

18. Appendix I to this report summarises the budgetary performance by Major Programme and Chapter and describes main factors that affected the overall performance.

Transfers between Divisions within the Same Chapter

19. Financial Regulation 4.5(a) requires transfers between divisions within the same chapter to be reported.

20. FC 102/3 notes that some changes occurred in 2002 arising from the final stages of the restructuring of the TC Department. No noteworthy transfers were recorded in the second year of the biennium.

Conclusion and Action for the Committee

21. The Committee is requested to:

1. take note of the overall Regular Programme budgetary outturn in 2003 and final 2002-03 budgetary performance;
2. take note of the transfers between chapters and of the fact that they fall within the levels already approved by the Committee.

Appendix I

22. The table below summarises the Regular Programme budgetary performance by Major Programme and Chapter, comparing the 2002-03 appropriation with the corresponding net expenditure.

2002-03 Budgetary Performance by Major Programme/Chapter (US$ 000)

23. A few specific factors have impacted expenditure across all chapters and are therefore not mentioned separately under each chapter heading, as follows:

• reductions against divisional allotments were imposed in order to fund high-priority under-budgeted items, implemented on the basis of vacant posts and the reduction to certain non-staff components.
• the positive staff cost variance of US$5.4 million is distributed at biennium-end across all programmes in proportion to the staff costs incurred at standard rates.

24. Description of main changes by Major Programme and Chapter follows:

Chapter 1: General Policy and Direction

25. At biennium end, only a small deficit was incurred in Chapter 1, with 100.1% of the appropriation spent. Additional expenditure in this chapter as anticipated in previous reports⁶, related to FAO’s share of UNSECOORD as well as the funding of temporary administrative posts in the Office of the Director-General and the Administrative Support Unit, which were offset by gains in the staff cost variance.

Chapter 2: Technical and Economic Programmes

26. Technical and Economic Programmes ended the biennium with a surplus of US$5.8 million, utilising 98% of the appropriation.

27. Savings in Chapter 2 Technical and Economic Programmes were generated mainly from vacant posts and from the significant share of positive staff cost variance that is distributed to this chapter. The savings were intentionally set aside to provide for the increased costs in Chapter 3.

28. The over-spending in Major Programme 2.5 is largely attributed to the higher-than anticipated delivery during 2002-03 of Special Programme for Food Security (SPFS) projects funded by the Regular Programme. The success of the RP-funded South-South Cooperation Programme, coupled with synergies produced by increased delivery of UTF and GCP-funded SPFS projects, resulted in a far more rapid implementation of RP-funded SPFS projects in
2002-03 than in past years (US$2.4 million over the budget appropriation). The Organization is presently putting into place additional monitoring measures to ensure that in future years expenditures on RP-funded SPFS projects can be more realistically planned and managed.

Chapter 3: Cooperation and Partnerships

29. Cooperation and Partnerships utilised 104.9% of the biennial appropriation, incurring a deficit of US$6.0 million.

30. The deficit in Chapter 3 is partially a result of the shortfall in support cost earnings exacerbated by difficulties in reducing staff costs for operational support services in the Regional Operating Branches. Furthermore, the increase in field staff security costs and changes in the accounting methodology for the TCP DOE reimbursements imposed an additional burden on this chapter. These main influencing factors were carefully monitored throughout the biennium and anticipated over-spending in this chapter was offset in Chapters 2 and 4.

31. The final performance in Major Programme 3.2 Support to Investment was within the appropriation levels despite the deficit reported in 2002⁷. The increased level of spending in 2002 due to the high level of activity by the Investment Centre Division (TCI) was largely offset in 2003 through curtailment of expenditure and a change in accounting policy. In order to better manage its allotment in future, TCI conducted a thorough review of its business processes, which has culminated in the re-organization of the Division's organizational units.

Chapter 4: Technical Cooperation Programme

32. The TCP net appropriation for project expenditures (Major Programme 4.1 Technical Cooperation Programme) amounts to US$92.5 million for the biennium. This falls under the provisions of Financial Regulation 4.3, which makes the balance of the 2002-03 appropriation available for obligations during 2004-05. In the tables in this document, the assumption is therefore made that the Major Programme 4.1 appropriation, minus any budgetary chapter transfers, will be fully spent.

33. Total Chapter 4 expenditure against the appropriation of US$95.2 million amounts to US$94.9 million (with US$0.3 million in chapter transfers), which consists of:

• US$2.9 million for the TCP unit under Major Programme 4.2;
• US$30.0 million in project expenditures against the 2002-03 appropriation under Major Programme 4.1; and
• US$62.0 million in deferred income for project expenditure.

34. In addition to the US$30.0 million in project expenditures noted above, the deferred income balance from the 2000-01 appropriation of US$77.7 million was fully spent on TCP projects in 2002-03. This total project expenditure of US$107.7 million shows that actual expenditures against TCP projects continued at a good pace in 2002-03.

Chapter 5: Support Services

35. Although expenditure beyond the total appropriation for Chapter 5 was anticipated as a result of the support cost income shortfalls, final chapter performance was within the appropriation (99.7% spent) due to the gains in staff cost variance.

Chapter 6: Common Services

36. Chapter 6 recorded a small surplus of US$0.3 million (99.3% of appropriation spent); although shortfalls in support cost earnings and the continued weakness of the US dollar against the euro impacted this chapter, gains in the staff cost variance offset these items.

Chapter 7: Contingencies

37. Approximately 78.7% of the approved budget for Chapter 7, which provides US$600 000 for Contingencies, was utilized to provide for incidental costs incurred for the emergency structural works on the top floor of building B. As stated in Financial Regulation 4.5(c) (i), “the expenditure of any sum (or part thereof) which may have been voted in the budget to cover unforeseen contingencies may be effected by the Director-General.”

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¹ FC 102/3, Annual Report on Budgetary Performance and Budgetary Transfers (May 2003); and FC 104/2, Programme and Budgetary Transfers in the 2002-03 Biennium (September 2003).

² Other Income is further described in paragraphs 13 through 15.

³ Report of the 104^th Session of the Finance Committee (CL 125/4) refers.

⁴ In arriving at the 2002-03 appropriation for Other Income, adjustments have been made for those elements that are accounted as Trust Funds in the accounts of the Organization. This is necessary to provide a comparable basis of relating the appropriation with the expenditure reported in the audited accounts of the Organization.

⁵ Emergency projects have continued the high delivery pattern observed in 2000-01. FAO earns Direct Operating Costs from emergency projects, which are excluded from the tabulated support cost reimbursement figures as these reimbursements are accounted under a Trust Fund and currency policy for reimbursement covers only the operating unit’s direct costs.

⁶ FC 102/3 and FC 104/2 refer.

⁷ Document FC 102/3 refers.