FC 97/5

Finance Committee

Ninety-seventh Session

Rome, 17 - 22 September 2001

Report on Support Costs

Table of Contents


1. Following an extensive review of support costs and the principles of support cost reimbursement rates at the 94th and 95th fifth sessions of the Finance Committee in May 2000 and September 2000 respectively, the Council endorsed the new policy on support cost reimbursement rates at its November 2000 session1. Reporting arrangements had also been agreed with the Finance Committee as follows:

2. This paper provides the annual report referred to in the first bullet above and informs the Committee on the implementation of the new policy and, in the light of experience in its application, submits proposals for minor amendments.

Implementation of the Support Cost Reimbursement Regime

3. The newly approved policy for setting Project Servicing Costs (PSC) rates is firmly established on the principle that there should be a reasonable alignment of charges to actual costs, taking due regard of existing arrangements and the need for a simple and transparent approach.

4. Accordingly, PSC on Trust Funds may deviate from the 13% ceiling where the variable indirect support costs on the project are expected to be lower. The categories of projects to which PSC rates apply are defined as follows: Technical Assistance; Normative (including jointly funded activities and Commissions); and Emergency Assistance. Within each category, circumstances that merit a departure of PSC rates from the applicable ceiling rates are clearly spelled out.

5. The function of appraising deviations from standard rates is entrusted to the Office of Programme, Budget and Evaluation. A consultative system with the Technical Cooperation Department has been set up to ensure consistency of approach when the variable indirect support cost, and consequently the PSC rate, is dependent upon the designation by TCD of the unit that will operate the project.

6. It is noted that all projects have been charged at rates which fall within the newly approved policy - with the possible exception of three Global Environment Facility (GEF) projects and one Common Fund for Commodities project on which further comments are made below.

7. The statistics in the table below cover the period 1 June 2000 through 31 May 2001, during which time FAO opened 245 Trust Fund projects. The table provides a categorised distribution of the PSC rates applied to these projects in terms of both project numbers and lifetime budgets.

Table 1: Distribution of the categories of PSC rates applied

PSC Category


Lifetime Budget (US$ 000)

% of Total Budget

Projects approved at their ceiling rates (usually 13%)




Projects approved under the rates for "Emergency Assistance"




High proportion of contracts, supplies and equipment (Manual Section 250, Appendix A applies)




Normative and implemented at Headquarters or Regional Office (6% applied)




"Mixed" Trust Funds with Normative and Operational elements (6% to 13% applied)




Administrative Support from TCP (0% on the project)




Global Environment Facility (6% applied)




Partnership with UN system organizations (UNEP at 0% and UNFIP at 5% based on pre-existing arrangements)




Technical Support Services for the Common Fund for Commodities (charged at 0%)








Proposals for Revision of the Rates and Project Categories
Covered by the Policy

8. Three situations which may merit adjustment to the PSC ceiling are not explicitly covered by the new support costs reimbursement regime:

Voluntary contributions to improve FAO's infrastructure

9. Before the implementation of Oracle, contributions to FAO for the refurbishment and improvement of premises were treated as temporary accounts and attracted no PSC. They were reported annually to the Finance Committee in the report on PSC exemptions. In line with past practice, it is proposed that voluntary contributions for FAO building refurbishment works at Headquarters and in the decentralized offices should be formally recognised as being exempted from PSC.

Voluntary contributions to reimburse FAO staff time for the provision of Technical Support Services

10. Donor contributions aimed at paying for technical support services (project formulation, appraisal, technical monitoring/supervision and evaluation) require the setting up of a trust fund project to account for the reimbursement for such services (e.g. as provided to the Common Fund for Commodities). The project components would chiefly comprise reimbursement of FAO staff time, and some general operating expenses.

11. The most significant precedent for the provision of such services has been the Technical Support Service (TSS-2)2 arrangements established by UNDP wherein reimbursements covered the direct staff costs of the agencies, but did not cover overheads. UNDP and other funding sources reimbursing the cost of staff time argue that there are little or no incremental overheads involved and that there should, therefore, be no PSC charge in such cases. Consequently, it is proposed that Trust Fund projects which consist largely of support for technical services provided through FAO staff time should be exempted from PSC.

Global Environment Facility Projects

12. The origins of GEF date back to the work of UNEP in 1973 to define global environment issues and the 1987 World Commission on Environment and Development Report that recommended the setting up of a special international banking program or facility to finance investments in conservation projects and national strategies. In May 2000, the Council of the GEF approved an initiative to expand opportunities for the United Nations Industrial Development Organization and FAO as executing agencies of GEF projects. FAO's expertise in newly emerging areas of interest to GEF, such as the Persistent Organic Pollutants and agricultural biodiversity, should provide greater extra-budgetary funding. The first phase in developing full-scale projects is through Project Development and Preparation Facility (PDF) Block B projects, which range from US$ 350,000 to US$ 700,000. These cover project formulation including pre-feasibility, basic costing, technical and scientific design, in-country preparation of the project proposal, national and /or sectoral preparatory work.

13. An FAO-GEF Agreement is under negotiation and will probably involve a flat fee system which is already in place between GEF and the pre-existing executing agencies. In the meantime, GEF-funded PDF Block B projects that have become operational have been granted Project Support Servicing of 6%, which should be sufficient to fully recover variable indirect support costs.


14. The Committee is invited to note the experience in the application of the new policy on support cost reimbursement rates, and endorse the following policy amendments:

15. Pending finalisation of an FAO-GEF Agreement, PDF - Block B projects will be handled on a flexible basis and usually be charged about 6% PSC.

1 CL119/13 Annex II, Review of Support Costs - Summary of Proposals, refers

2 Subsequently renamed Support for Technical Services