6.1. Finance and Administration
6.2. The State of ICRAF's Finances
6.3. Finance and Administration Division
6.4. Human Resources
The numerous challenges facing ICRAF have two principal implications for financial management: (i) whether current or planned policies and procedures are capable of satisfying the needs of the ICRAF of the future; and (ii) whether donors can be assured that the root causes of past financial problems have been addressed and safeguards implemented in the form of new policies, procedures and reporting systems.
Some significant changes have taken place since the installation of ICRAF's new leadership. As a first step, previous recommendations of external reviewers on financial management have been acted upon (Annex I). The Director General has also firmly established sound financial management as a criterion for performance evaluation of senior staff. This, coupled with timely management information, greater controls, and revitalized oversight by the Board, provides a foundation for sound financial management in the future. The new Director of Finance and Administration (DFA), who arrived in September 1992, quickly established short-term priorities to: (i) improve the financial condition of ICRAF; (ii) provide a monthly financial report to management; and (iii) streamline the accounting function. Since then several advances have been recorded. The chart of accounts has been revamped, and monthly financial reporting has been implemented. Most significantly, ICRAF's financial condition improved in the latter part of 1992.
In 1992 ICRAF expects to record total income of $12.7 million against expenses of $12.1 million. Its initial expectation was income of $15.6 million. Close to 94% of total income, $11.9 million, will come from grants, with the remainder principally from foreign exchange gains due to a favourable exchange rate ($0.5 million, 4%). Restricted grants are expected to account for 56% total grant income. Overhead fees were 14% of restricted grants, below ICRAF's stated overhead rate of 20%.
ICRAF has had a history of financial problems that appear to have been overcome by the new leadership. In 1988 it registered on operating deficit of $553,000, over 20% of its revenues from unrestricted grants that year. The deficit stemmed mainly from an over expenditure $430,000 on its headquarters building. Lack of management oversight coupled with an inadequate management information system were the causes. Between 1989 and 1991 ICRAF registered modest operating surpluses each year until this accumulated deficit was wiped out. In 1992 the institute expects to record an operating surplus of about $600,000 that will be utilized to build an operating fund in accordance with CGIAR guidelines.
An inadequate cash flow has also been a particularly serious problem for ICRAF. This was due to slowness in collecting amounts due on grants and due from staff and other debtors. Between 1988 and 1991 20-30% of total revenues for the year were outstanding in accounts receivable at year end. In 1992 the new DFA made a special effort to collect grants outstanding, and in the last quarter of the year (i.e. immediately following his arrival) collected $6 million, about half of ICRAF's total income for the year.
In the past three years ICRAF has had a remarkable growth, averaging over 15% per year. In part this has been due to ICRAF's ability to work with a large group of donors and to obtain new restricted funds. While the funding base is large relative to other CGIAR Centres, the distribution of donor funding shows a relatively greater reliance on a large group of small donors (though less so in 1992) (Table 6.1). Though broadening the financial base reduces dependence on one large donor, coordinating a large group of smaller donors also makes financial planning difficult.
Table 6.1. Trends in Core Funding
|
TOTAL |
1989 |
1990 |
1991 |
1992 |
1991 CGIAR System Midpoint |
1991 CGIAR System Range |
|
No. of donors |
22 |
25 |
27 |
25 |
21 |
10-28 |
|
Top 3 donors % |
37 % |
40 % |
41 % |
52 % |
47 % |
32-65 % |
|
Top 5 donors % |
50 % |
50 % |
50 % |
62 % |
63 % |
46-86 % |
|
Top 10 donors % |
59 % |
67 % |
66 % |
77 % |
85 % |
73-100 % |
Of greater consequence for ICRAF is restricted funding. In 1992, 56% of total funding was restricted, similar to that of previous years and that projected for 1993 (Table 6.2). Restricted funding provides some advantages. Multi-year grants, for example, can provide a secure funding base. At the same time, however, they can have the potential to lead to a donor driven agenda for the institution. Also, in a time of resource constraints, when financial plans are in a constant flux, a high proportion of restricted funding greatly limits management flexibility in reallocating resources across the institution. And an inability to charge and collect overhead fees has a similar effect. A disproportionate amount of unrestricted funds must be devoted to paying overheads and thereby takes away from funds for research. Renegotiating restricted projects also carries a "hidden" management cost to the institution, which, with "bunching" of grant renewals as appears in 1993 and 1994, can be significant.
Table 6.2. Trends in Sources of Core Funds (%)
|
|
1990 |
1991 |
1992 |
1991 |
|
|
CG System Midpoint |
CG System Range |
||||
|
Unrestricted |
46 % |
44 % |
44 % |
82 % |
74-98 % |
|
Restricted |
54 % |
56 % |
56 % |
18 % |
2-26 % |
ICRAF has been unable to develop an operating fund, its attention in the past few years having been focused on eradicating the accumulated deficit. At the end of 1992, after the application of the year's surplus, the operating fund will be about 20 days of operating needs, well below the 90 day minimum set in the CGIAR guidelines. It needs to build up its operating fund as an essential part of prudent financial management.
ICRAF also has an ambitious capital development plan amounting to $9.6 million over the next four years. While funding for the first phase ($2.8 million) has been secured, the new buildings and equipment will incur annual operational expenses for maintenance and upkeep. ICRAF should ensure that these funds will be available as part of the initial financing package or are included in the MTP. Also, because the financing package will cover only the minimum plant and equipment needs for the expanded research agenda, ICRAF has requested an allocation for capital items amounting to $864,000 per year in the MTP. In part this allocation is necessary because ICRAF's capital development fund is minimal ($32,000). Since ICRAF's capital requirements will undoubtedly be large in the next five years, the Panel believes that a strengthened capital development fund can cushion the impact of potential shortfalls in grants.
Recommendation: The Panel recommends that the Board request Management to submit a financial strategy for the next five years that covers alternative scenarios, identifies potential sources of funds (CGIAR and non-CGIAR) and describes the specific steps to further improve the Centre's financial condition.
Given the uncertain funding environment, the difficulty of planning in such an environment, the potential rigidities introduced by restricted grants, and ICRAF's own financial condition, the Panel believes such an approach to be prudent.
6.3.1. Accounting
6.3.2. Assessment
6.3.3. Financial Control
6.3.4. Assessment
6.3.5. Treasury
6.3.6. Assessment
6.3.7. Auditing
6.3.8. Assessment
6.3.9. The Expansion of the Headquarters Facility
6.3.10. Assessment
The Division appears to have made great strides in recent months due to the efforts of the new Director of Finance and Administration and his staff. The DFA, who is also a member of the institution's Management Committee, has overall responsibility (Annex VIII). He is assisted by a Budget Officer who has responsibility for tracking budgets against expenses and for administrative control of projects on restricted funding. The Head of Finance manages the accounting function. The position of Management Accountant, dealing mainly with project accounting, is vacant. The Administrative Officers in the Research and Training divisions also have a key role in financial management. A summary of current practices and associated issues is shown in Table 6.3.
Table 6.3. Evaluation of ICRAF Financial Management
|
Function |
Current Status |
Issues |
|
Accounting
|
- Recently revamped chart of accounts and coding system; new software |
- Structure and skills may not be adequate for an expanded ICRAF |
|
- Accounting practices in line with CGIAR |
- Outreach accounting: oversight |
|
|
- Have prepared an accounting manual and will use it as basis for "in service" training of staff in 1993 |
- Fill Management Accountant position |
|
|
Control
|
- Matrix management for budget control |
- Greater emphasis on ex-post control |
|
- Main emphasis on ex-ante control |
- Introduce quarterly financial report |
|
|
- Adequate control on balance sheet items |
- Matching financial and programme responsibility in matrix management |
|
|
Treasury
|
- Successful introduction of cash planning |
- Review treasury function |
|
- Favourable K.Sh. rate |
- Board guidelines on investments |
|
|
- Investments in "sweep account" in the USA |
|
|
|
Auditing
|
- Audit Committee review is acceptable |
- Internal Audit Programme |
|
- Have made progress in meeting CGIAR standards |
- "Off-site audits" |
|
|
- Intend to hire Internal Auditor in 1994 |
- CGIAR audit guidelines |
The Finance Unit is organized along traditional lines, i.e. individual accountants have specific responsibility for classes of transactions in the general ledger (Annex IX). Transactions, except cash and bank, an area not yet computerized, are inputted directly into an automated system from the source documents by the respective accountants. Input of transactions in a batch mode is currently restricted to cash and bank, and inventory areas. New software was purchased in 1991. Since 1991 efforts have been made by the Head of Finance to upgrade accounting practices and bring them in line with CGIAR guidelines (and with generally accepted accounting principles for non-profit organizations). An accounting manual has been prepared and will serve as the basis for on the job training of staff in 1993.
The DFA has identified the practice of batch processing as a source of inefficiency. Additional training of staff and possibly a restructured department will be needed to introduce on-line processing. As the institution grows larger, greater specialization may be needed within the structure of the accounting department to deal with more transactions, more suppliers, a larger payroll and more offsite activities. Consequently the Panel suggests that management fill the post of Management Accountant, take steps to identify potential new skill needs, and review reporting procedures and management oversight, particularly with respect to non-headquarters activities.
Budget control is exercised through the chart of accounts, which serves as the link between the accounting system and the budget. The chart of accounts gives an internal logic to the recording of transactions at two levels: first by broad types of transactions, e.g., asset, equity, revenue, and second by providing rules for coding additional information. Within the chart of accounts for example, expenses are broken down by type (personnel, services travel), source of funds (core, complementary, restricted, unrestricted) and type of activity (programme, projects) and location (headquarters, ecoregion). The result is a matrix that is a foundation for control of budgets and expenses. The rows of the matrix are the programmes of ICRAF (broken down by project) and the columns are the locations at which this work takes place. Within each cell expenses are grouped by object of expenditure (salary, etc.). The cells of the matrix are called accounting units and are the lowest level of control.
The project accounting system was established in 1990. There are currently 140 accounting units. Beginning in 1993 they will serve as the basis for a financial management information system.
ICRAF has an established system of ex-ante expenditure control that relies on pre-authorization of spending by various divisions. Some improvements in balance sheet control have taken place, as evidenced by the accelerated collection of grants in the last quarter of 1992. Greater attention to donor accounts will become a regular feature in 1993. Accounts statements are prepared and sent to staff members monthly and debts may be settled directly by the staff members or recovered through the payroll. Of the total non-donor debts of $594,000 at 31, December 1991, staff debt constituted only $7,000 (1%). The level is not expected to be significantly higher at the end of 1992. A complete fixed assets inventory is conducted once every three years (1985, 1988 and 1991). During the intervening years ad hoc spot checks are conducted for fixed assets at Headquarters while annual returns are made at year end for assets at outreach sites.
In the 1993 budget, the initial step in budget control has been taken by assigning accounting units a level of funding. Additional steps, however, need to be introduced. The Panel suggests that the operational responsibility, authority and accountability that has been assigned to the Programme Coordinators must be accompanied by financial responsibility, authority and accountability. Operational and financial considerations should not be divided. The monthly financial reports need to be provided to those responsible for each accounting unit. And, to ensure that the system provides meaningful information, all direct costs need to be incorporated into each accounting unit. One area in which this is likely to be difficult for ICRAF is staff costs, because some scientists are working across several accounting units. Time sheets may need to be introduced to accommodate the need for allocating expenses in this category. The current intention of having the Head of Finance interview informally the affected staff and allocate costs on this basis is likely to be unworkable.
The monthly financial report of planned versus actual expenses is a solid foundation for budget control. In addition, the Panel suggests that a comprehensive quarterly report be circulated to the Management Committee and the Board of Trustees by the DFA. It should contain an evaluation of planned versus actual and projected levels for the critical financial variables affecting the institution: (i) revenues (grants, interest, foreign exchange gains and sales of publications); (ii) expenses (programmes, capital); and (iii) balance sheet items (cash flow, accounts receivable from donors, staff and other debtors).
This comprises a number of sub-functions, including cash management, foreign exchange management, investments and banking. As noted above, the strengthening of ICRAF's financial position in recent months is largely due to the efforts made by the DFA in these areas. He has instituted regular cash forecasting, which has led to a year end cash balance of about $2.5 million compared to $0.8 million in 1991. The DFA also indicated that investment procedures would be reviewed in 1993. Currently investments are handled by ICRAF's principal commercial bank, which each day "sweeps" the account of any balance in excess of $50,000 and invests them in one-day instruments.
The treasury function is critical to ICRAF, given its key role in the cash cycle, i.e. forecasting cash flows and currency exposures, and giving maximum leverage to cash on hand. The introduction of cash forecasting has yielded immediate results. The Panel suggests that ICRAF undertake a thorough review of other treasury functions, particularly foreign exchange management, banking relationships, investment policies and the application of new products such as electronic funds transfer. The Panel also believes that while prudent investments can enhance cash management they should take place within an agreed framework,
Recommendation: The Panel recommends that the Board approve an investment policy for ICRAF.
ICRAF's accounts have been audited by Coopers and Lybrand since 1989. The auditors are appointed annually by the Board of Trustees' Audit Committee after discussions with the auditors on the scope and methodology of the audit and their proposed fees. The Committee also meets "in camera" with the auditors each year and requires management to respond in writing to each of the recommendations made by the external auditors in their "Management Letter" following their audit. There is currently no Internal Auditor, though there are plans to hire one in 1994.
The procedures for contracting the external auditors and reviewing their work are adequate. Though significant improvements have taken place, CGIAR audit guidelines are not followed in their entirety. The Panel suggests that ICRAF complete the adoption of these guidelines with respect to the presentation of supplemental financial information in the financial accounts. Also, with the planned expansion of ICRAF, the Panel suggests that management review periodically with the Audit Committee the need for external audits of offices outside of Nairobi. Many CGIAR Centres have successfully introduced an internal auditing function in the past five years. The Panel suggests that ICRAF survey these centres for "best practices", including the work programme (especially the balance between traditional tasks and expanded ones such as efficiency and effectiveness audits), reporting relationships, and the use of a national versus an international position.
The expansion of the headquarters facility, described in the Capital Development Programme of the MTP, has been designed in three overlapping phases (phase I 3/93 to 10/94; phase II 3/94 to 10/96; and phase III 3/95 to 10/96) and detailed plans have been drawn up on disposition of space and facilities over this period. ICRAF has now been successful in raising approximately US$ 2.8 million to finance Phase I. Although there are still some problems over site acquisition, there appears to be confidence that the first phase will go ahead successfully. The programme is being managed by a task force of senior ICRAF staff chaired by the DG and advised by a consultant architect. This task force had its first meeting on 22.9.1992 and has now met five times. Its functions are to execute the overall project under the guidance of the Board as follows: (i) link with the ICRAF strategy; (ii) monitor the progress of the programme; (iii) coordinate space and equipment plans; (iv) approve submissions the consultant architects, engineers and surveyors; (v) approve commencement of each stage of the project; and (vi) oversee international competitive bidding process and letting of contracts, subject to prior approval of the Chairman of the Board of Trustees.
The Panel was also informed that detailed space estimates have been produced as the basis for costing building construction and acquisition of related services and that the project financing includes laboratory equipment. There is still some dispute about the need for a 15% contingency allowance in the programme budget although the task force is currently operating on this basis.
The Panel suggests that efforts to obtain additional funding be linked to the progress on the overall ICRAF strategy and the MTP, and be included in the financing strategy described previously. In addition, since ICRAF may have extensive laboratory facilities, the Panel suggests the creation of a safety committee to take charge of safety matters relating to laboratory and other operations at ICRAF.
Human resources at ICRAF are managed through the Human Resources Unit (HRU), the head of which reports directly to the DFA. Its responsibilities include recruitment, job classifications, salary administration, personnel policy, performance evaluations, staff promotions, training and vacancy management. The HRU was established in 1989. Prior to this the personnel function was handled by the DFA for the internationally recruited staff and by the office manager for the nationally recruited staff.
As of 31 December 1992 ICRAF had a total staff composition of 284 of whom 54 were classified as internationally recruited senior staff, 24 as nationally recruited professional staff and 173 support staff. There were 13.5 established positions that remained vacant in 1992 either due to lack of funding or because incumbents will be joining the Centre in 1993. This figure decreases to 7.5 positions in 1993. Some of the 1993 vacant established positions will only be filled if funding becomes available and some are not due for recruitment until early 1994.
The gender composition of senior scientific staff is split 85:15 in favour of men, but the inclusion of all professional staff changes this ratio to 78:22. ICRAF is one of the two CGIAR Centres that has a female senior director. Further summary details on staff composition may be seen in Annex X.
ICRAF staff meet regularly to discuss conditions of service and related matters through two associations, the ICRAF Professional Staff Association (IPSA) for senior staff and the General Support Staff Association (GSSA) for support staff, which were each established of staff initiative. Both are representative bodies with elected officials and both liaise with the Management Committee through the DDG.
Although a relatively small operation (one senior plus three support staff), the HRU has made impressive achievements over the past three years and is now an efficient, well-run part of ICRAF's administration. On the whole, staff morale appears high across all categories of staff and at all levels of seniority. Nevertheless there are a small number of matters to which the Panel would like to draw attention.
On staff appraisal there is now a detailed paper-based performance evaluation procedure in place. While this procedure is still evolving, the Panel suggests that management address some aspects of the process. Few supervisory staff appear to have had much training in how to conduct personnel appraisal. As a result there is some evidence of variation across ICRAF in terms of how well appraisals are carried out. In addition there appears to be a lack of an adequate feedback mechanism on the results of evaluations, and in particular one which permits areas of disagreement to be expressed by staff. Finally, the practice of linking personnel evaluation with consequent training does not appear to have developed very far, especially with respect to support staff.
In its discussions with the staff associations the Panel identified concerns amongst staff of all categories about differential conditions of service and treatment. Having noted these points, however, it should be added that the HRU has recently commissioned a study to compare ICRAF's conditions of service for national staff with other Kenyan organizations.
As outlined above ICRAF does have a mechanism for handling issues concerning staff relations (i.e. through the DDG to MC), but the Panel suggests that management consider instituting a mechanism to consider employee grievances. While ICRAF is to be congratulated on the quality of its staff morale, nevertheless such an initiative might pay dividends in future years.
