PROGRAMME CHANGE BY ORGANIZATIONAL UNIT

110. The programme budgeting principles applied by FAO focus on relating resources to programme entities, and their objectives and outputs. However, it is also useful to see where the responsibility for resources lies by organizational unit. Annex II of the supplementary information package of the Programme of Work and Budget 2000-01 provides information on the FAO Website by detailing resources under ZRG and ZNG by organizational unit and budget component.

111. The following matrix relates the two dimensions of the budget (i.e. "programme" and "organizational responsibility"). The narrative below the table points briefly to the major reasons for shifts in resources between the 1998-99 programme of work and the ZRG scenario of 2000-01.

112. The reduction in the overall programme of work of US$ 12.4 million matches the decline in Other Income, as alluded to previously.

113. The largest increase in resources by organizational unit is in the AF Department (US$ 10.6 million). This is attributable to several factors:

• the creation of a centralized management support structure to replace the Headquarters MSUs, which has added a net amount of US$ 6.2 million to the AF budget;
• the inclusion of additional development and operational costs of Oracle and transfer of corporate internet access charges under the management of AFI, which has added a further US$ 3.4 million to the AFI budget; and
• the transfer of the US$ 1 million external audit contract from AUD to AFD.

114. Within AF, there have been other offsetting resource changes, including in particular an increase in the provision for local audits for FAO outposted offices and field activities in AFF Division, whereas there is also in the same division a decrease in the cost of, and reimbursement for, services rendered to the World Food Programme (WFP).

115. The largest decline in resources, US$ 12.9 million, occurs in TC department. The department has suffered most directly from the decline in Other Income, including World Bank contributions to its programmes (which have affected TCI), Terminal Reports income, and Project Servicing Costs and Other Administrative Support Services (all of which have largely affected TCO). This has in turn necessitated measures to improve the efficiency of operations, such as the abolition of TCOF, described above, and other means to achieve corresponding reductions in the programme of work. In addition, US$ 3.1 million of central funds held in the 1998-99 budget of TCO to support the decentralization of operations has been removed in 2000-01, and the abolition of the MSU in the TC department has reduced the department's resources by US$ 3.8 million.

116. The decline in resources in the other Headquarters departments is largely due to the MSU restructuring. The abolition of the MSU of AF (US$ 2.6 million) is more than offset by the creation of the new management centralized support structure within the same department (US$ 8.8 million). In contrast, AG's resources are to decrease by US$ 2.7 million in this regard, ES by US$ 2.0 million, SD by US$ 1.4 million, and GI by US$ 1.7 million. The replacement of the combined Fisheries and Forestry MSU, located organizationally in FI, would reduce FI by US$ 2.6 million (US$ 1.5 million and US$ 1.1 million under Major Programmes 2.3 and 2.4 respectively). Finally, the creation of the new Programme, Planning and Coordination Unit and a Registry in FO are estimated to increase the departmental budget under Major Programme 2.4 by US$ 0.6 million.

117. The Headquarters technical departments have also been affected by the transformation of the editorial services pool. The attendant costs of this pool, amounting to approximately US$ 2.3 million, were hitherto distributed over the user departments and offices, largely under Chapter 2. In the Programme of Work and Budget 2000-01, they are proposed to be transferred into a centrally-managed provision for core multilingual editorial services to technical departments placed in the GII Division under Programme 5.1.1.

118. Further changes within GI department include the additional funds for Cerestronic under Major Programme 5.1, especially to improve coverage in the Arabic and French languages; the transfer from Major Programme 5.1 to Major Programme 2.2 of provisions for publications in Chinese and non-FAO languages totaling US$ 0.9 million; an additional provision of US$ 1.6 million under Major Programme 2.2 to provide funds that will allow important gaps in language coverage to be attended to without delay and provide support to the institutionalization of improved language coverage; and further reallocation of resources, particularly in GIC and GIL, including the transfer of resources from GIL to some Regional Offices to support the decentralization of information management.

119. The overall change in resources in the Regional Offices reflects the impact of some further decentralization, particularly from SD and GI departments as well as additional funds to correct under-budgeting of general operating funds for these offices. However, RAF, RAP and RNE show substantial declines under Chapter 3 due to the abolition of posts in their respective operations branches.

COST INCREASES

Methodology

120. The programme budget is developed using the cost rates and the rate of exchange approved for the previous budget thus allowing, in the Programme Budget section of this document, a valid comparison between the approved budget for the current biennium with the proposed budget for the next biennium. The methodology and the results of the calculation of cost increases to be provided within the Programme of Work and Budget 2000-01 are described in this section. The methodology used is the same as used for the 1998-99 biennium and approved by the Finance Committee, Council and Conference.

121. The changes in costs estimated in this document are the sum of detailed calculations for each item of expenditure developed using a known methodology and under stated assumptions. Where possible, use has been made of independent verifiable forecast data such as the Economist Intelligence Unit and published data of authoritative bodies such as the ICSC and CCAQ. The cost increase calculations included in this document are based on actual data to May 1999.

Impact of Exchange Rate

122. The budget is prepared in US dollars and therefore the relationship of the US dollar to the other currencies in which expenditures are incurred can have an important impact upon the costs incurred. This is particularly important for Lira-based expenditures.

123. The Council at its Hundred and sixteenth session in June 1999 endorsed the recommendation of the Joint Meeting of Programme and Finance Committees that the Secretariat develop the budget taking account of recent developments affecting cost increases, including the impact of current Italian Lira/US$ exchange rates. In this connection, a rate of Lira 1,800 to US$ 1 had been conservatively put forward in the document "Additional Information on the Summary Programme of Work and Budget 2000-01" considered by the Council².

124. Since the beginning of 1999, the Lira/US$ rate has consistently remained above Lira 1,800. Indeed, since the Hundred and sixteenth session of the Council in June, it even exceeded Lira 1,900 at one stage. At the time this document was being prepared, the spot rate stood at Lira 1,826. The rate used in the calculation of cost increases has therefore been retained at Lira 1,800.

125. This rate will, as per established practice affect the budgeted cost for personnel services as follows:

• firstly, through its effect upon professional staff post adjustment multipliers; and
• secondly, by changing the US dollar cost of general service salary costs incurred in Lira.

126. The impact of the exchange rate on other categories of cost is less apparent. In practice, shifts in exchange rate relationships tend to be gradually absorbed by their relative impact upon international prices and the Organization's continuing efforts to find the best price for goods and services. In other words, the international tendering process deals, to some extent, with the impact of such changes.

127. However, one area where the currency impact on non-staff cost cannot be ignored is for those categories of expenditure where the organization has no practical alternative to procuring the required goods and services in a single country, particularly in the host county. The most significant area is under Chapter 6, Common Services, which includes all of the non-staff costs associated with the maintenance of the Headquarters buildings, much of which relates to goods and services which must be sourced locally (e.g. utilities, maintenance of premises, etc.). In this case, the impact of differences between the current budget exchange rate of Lira 1,690 and the assumed exchange rate for 2000-01 of Lira 1,800 is estimated at US$ 1 million and has been taken into account as a reduction to cost increases.

128. To ensure transparency, the impact of exchange rate is clearly identified in the cost increase tables that follow. Since the budget rate to be set by the Conference may vary from the rate at which the budget has been built (i.e. Lira 1,800), it may be noted that the impact of a departure from the assumed US$/Lira exchange rate of Lira 1,800 is an estimated increase/decrease of US$ 3.3 million for every movement of Lira 25 in the US$/Lira exchange rate.

Biennialization and Inflation

129. 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

130. The lapse factor is a technique used by a number of organizations in the United Nations system, which affects the budgetary estimates of staff costs. It 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 Hundred and seventh Session for application since the 1996-97 budget has again been applied to the Programme of Work and Budget 2000-01.

131. 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.

132. Given the difficulty in forecasting staff separations, a five-year moving average has been applied (i.e. 1994 through 1998 inclusive ). This results in an average turnover rate of 9.41 percent for professional staff and 5.61 percent for general service staff.

133. The current standard recruitment lead times, which take account of changes recently introduced by the organization in the recruitment process for professionals, are as follows: professional - 42 weeks or 0.81 years; and general service - 25 weeks or 0.48 years.

134. The extent of separations which can be foreseen is derived from a review of the reasons for separation, the results of which are summarized below:

135. These factors have been applied to produce an across the board budgetary reduction of 4.41 percent for professional and 1.64 percent for general service costs respectively in arriving at the financial estimates for 2000-01. Weighting these on the basis of respective costs for the revised programme base produces an average lapse factor of 3.46 percent.

136. The corresponding lapse factor figures for 1998-99 were 4.53 percent for professional and 1.78 percent for general service. The financial impact of the slight decrease in the lapse factor since 1998-99 is US$ 0.6 million. It is taken into account as cost increases, under biennialization, and is shown separately in the tables on cost increases that follow.

Introduction of Differentiated Professional Staff Rates by Location

137. The Programme of Work and Budget 2000-01 introduces 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 major locations where the staff are posted. These differentiated rates replace the uniform standard rates, which hitherto reflected, for every grade, an average cost across all locations where FAO operates. Accordingly, from 2000-01, separate standard rates are applied for professionals in Headquarters and each of the non-Rome based Regional Offices, Sub-regional Offices and Liaison Offices. For all the other locations, such as the FAORs, where there is a very limited professional staffing in each location, an average standard rate across all those locations is applied.

138. The proposed change in methodology for costing professional positions has been implemented under cost increases. It is emphasized that the introduction of differentiated rates for professional positions by location does not have any impact on the overall level of cost increases. However, variations in professional salaries and benefits between locations are significant, since they are dependent on local economic factors which differ for each country.

139. Specifically, professional staff in most of the decentralized locations have higher salary costs than those at Headquarters. This reflects, for example, the generally higher levels of post adjustment multiplier points for professional salaries in the decentralized locations at the current rate of exchange, and higher payments for hardship, mobility, rental and other allowances to field staff, as determined by the United Nations common system of salaries.

140. The introduction of differentiated rates therefore causes some redistribution of the budget between programmes and organizational units, with programmes and locations that have higher than average professional staff costs, such as the Major Programme 3.4, FAO Representatives, receiving a larger share of cost increases in 2000-01.

Analysis of Cost Increases

141. 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

142. 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 Programme of Work and Budget 1998-99, have not and will probably not materialize. Under inflation, an increase of four post adjustment multiplier points, or approximately 3.3 percent, is projected in May 2000, to coincide with the results of a place-to-place survey in Rome and two multiplier points, or approximately 1.7 percent, in May 2001 to take account of cost of living increases. It is noted that the current methodology for place-to-place surveys is currently under review. In arriving at these estimates, it is assumed that the post adjustment methodology will be revised, particularly as regards the rent and housing components of the post adjustment index, which is foreseen to have the effect of augmenting the cost of living adjustment.

143.The biennialization of general service salaries and Separation Payments Scheme includes the upward impact of two factors affecting Headquarters salaries. First, an International Labour Office (ILO) Administrative Tribunal judgement of January 1998 reinstated the Language Factor as an element of general service remuneration retroactively from November 1995 and accounts for an increase of approximately US$ 5.5 million. Second, a likely 3 percent increase in Headquarters salaries effective November 1999, which is based on information on outside labour contracts pending negotiation and renewal (including the contract for "metalmeccanici"), accounts for a further biennialization of US$ 4.6 million. These biennialization increases are partly offset by favourable cost trends in general service salaries in the non-Headquarters duty stations. 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 2 percent increase is projected in November 2001.

144. 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 Programme of Work and Budget 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. Inflation reflects the impact on the organization's pension fund contributions of increases in pensionable remuneration, which are estimated at 3 percent per annum for professional staff and for general service staff are expected to match the estimated annual increase in salary noted above.

145. Under Social Security, biennialization reflects the impact of the transfer to the General Fund of excess assets of the Staff Compensation Plan. Based on the Actuarial Valuation Report as at 31 December 1997, the Regular Programme liability may be expected to rise from the current annual expense of US$ 0.2 million to US$ 0.8 million per annum, as a result of the greatly reduced amortization of surplus.

146. 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.

147. A current service cost methodology was first adopted in the Programme of Work and Budget 1998-99 to recognize the cost of medical benefits, including after service medical coverage, for current staff. The additional provision in the Programme of Work and Budget 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 at 1997 rates compared to a budgeted amount of US$ 8.5 million. A shortfall of US$ 3.5 million for 1998-99 is therefore 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.

148. It is recalled that action still needs to be taken to fund the liability for past services, which has been estimated at US$ 195.1 million at 31 December 1997. This liability is currently unfunded. At its One-hundredth and fifteenth session, the Council decided to forward to the 1999 Conference for its approval a draft resolution that provides a plan of action to fund the liability for past services.

149. 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. The General Service dependency allowances also increased by 4 percent following the reinstatement of the language factor at Headquarters. This has been somewhat offset by the General Assembly decision to revise the floor formula from its current 3 percent to 2.5 percent of the local salary effective the next interim adjustment.

150. 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. The decrease under biennialization is due to the reduction by US$ 1 million of the overall US$ 2.9 million provision for termination indemnities included in the Programme of Work and Budget 1998-99. Education Grant provisions, amounting to approximately US$ 14.7 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$ 27.4 million in the current budget base and pertain largely to 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 2.6 percent increase.

Breakdown of Personnel Services between Professional and General Service Categories

151. The following tables break down the professional and general service staff costs for 2000-01 and show a net increase before currency adjustment of 3.28 percent and 9.32 percent respectively. After taking account of the impact of the US$/Lira currency adjustment from the current budget rate of Lira 1,690 to the assumed rate of Lira 1,800, the adjusted cost increase amounts to 0.54 percent and 5.29 percent respectively over the biennium.

Goods and Services

152. Other Human Resources consists of non-staff human resources in the form of temporary assistance, consultants and contracts. Under inflation, a cost increase of 2.1 percent as provided on the general service salaries has been applied to temporary clerical/secretarial assistance and an increase of 2.85 percent as calculated on professional staff has been applied to consultants and contracts.

153. The cost increases for travel normally follow the CCAQ recommendations which, in January 1999 recommended that travel costs be increased by 2 percent per annum for 2000 and 2001, or 3.02 percent for the biennium. However, in the interests of responding to requests to absorb cost increases to the maximum extent possible, no increase is provided for travel on official business.

154. The inflation under General Operating Expenses is based on inflation forecasts for Italy which, according to the Economist Intelligence Unit currently stand at 1.8 percent for 2000 and 1.9 percent for 2001.

155. 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. The Economist Intelligence Unit forecast for inflation in the United States is 2.5 percent for 2000 and 2.8 percent for 2001. However, some allowance has been made 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.

Income

156. Many of the significant categories of Other Income do not benefit from cost increase adjustments, as the current estimates are already based on the nominal levels of reimbursements for 2000-01. This is the case, for example, for AOS income and Government Counterpart Cash Contributions for the FAORs. However, arrangements with the World Bank and other financial institutions permit cost reimbursement as a percentage of actual costs incurred, and largely account for the estimated increase in income, under cost increases, of US$ 907 000.

Summary of Cost Increases by Budget Component

157. The following table summarizes the cost increases after currency adjustment by budget component. It is emphasized that these budget components include some "composite" items, such as documents, meetings and computer services. Such components include the provision of both personnel inputs as well as goods and services. It therefore follows that the components below are not individually comparable with the aforementioned descriptions of personnel services and goods and services. Thus, for example, the professional and general service budget components below exclude the staff inputs involved in the translation of documents, interpretation services for meetings and staff involved in the provision of computer services through the computer pool account.

158. 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:

159. 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.

160. The overall biennial rate of cost increases at the assumed rate of Lira 1,800 for 2000-01 works out at 2.3 percent. The proposed cost increases for 2000-01 is equivalent to an average annual rate of 1.5 percent.

161. As noted above, substantial cost increases arise from the recognition in the budget 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.

BUDGET LEVEL AND FUNDING

162. The ZRG, RG and ZNG budgets as proposed would be financed as follows:

163. The proposal for a ZRG budget would, at Lira 1,800 = US$ 1, result in an increase in assessments of 3.1 percent. The real growth and zero nominal growth scenarios requested to be formulated would imply an increase in assessments of 6.6 percent and 0.8 percent respectively using the same cost increase assumptions.

164. It is reiterated that the budget rate is to be set by the Conference in November 1999 and may vary from the rate at which the budget has been built (i.e. Lira 1,800). The impact of a departure from the assumed US$/Lira exchange rate of Lira 1,800 is an estimated increase/decrease of US$ 3.3 million for every movement of Lira 25 in the US$/Lira exchange rate.

2 Document CL 116/3 Sup.1