FC 109/3

Finance Committee

Table of Contents

Overall Biennial Regular Programme Financial Projections

Other Income

2004-05 Budgetary Projections and Forecast of Budgetary Transfers between Chapters

Use of Arrears

Conclusion and Action for the Committee

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-eighth Annual Report on Budgetary Performance summarises, for information and discussion, the budgetary aspects of the Regular Programme performance for 2004.

2. Financial Regulation 4.5 (a) calls for the Finance Committee to be notified of certain transfers between divisions and Financial Regulation 4.5 (b) requires transfers from one chapter to another to be approved by the Finance Committee. This report provides some advance notice of the likely magnitude of budgetary transfers arising from the implementation of the programme of work. A formal request for transfers between chapters will be submitted at the next session in September 2005.

Overall Biennial Regular Programme Financial Projections

3. Conference Resolution 7/2003 on the Budgetary Appropriations for 2004-05 approved a budget of US$ 749.1 million, which comprises the approved Programme of Work less Other Income¹. Financial Regulation 4.1(a) authorises the Director-General to incur obligations up to the amounts voted.

4. 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 include financial provision for under-budgeted activities, where appropriate, and are adjusted by PBE during the implementation cycle to take account of emerging programme requirements. The institutional allotments by programme heading constitute spending limits for allottees.

5. Table 1 summarises the overall budgetary performance versus the Appropriation approved by the Conference. The 2004 performance is based on the actual expenditure in the interim unaudited accounts of the Organization, and the 2005 figures present the latest Regular Programme financial projections.

Table 1. Overview of 2004-05 Regular Programme Performance (US$ 000)

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

7. The Organization projects to fully spend the 2004-05 Appropriation of US$ 749.1 million (with the possible exception of the contingency funds of US$ 0.6 million). Any unspent balance of the TCP appropriation for the current biennium would be charged against the 2004-05 budget and made available in 2006-07 as per Financial Regulation 4.3.

8. In 2004, expenditure is US$ 14.8 million lower than the "calendarised" net budget², which implies an overall delivery of 96.1% of this budget.

9. The under-expenditure is partly due to shifts in the implementation of programmes and/or the accounting of expenditures to early 2005. The under-expenditure against the appropriation is also impacted by the required hold back at the 2004 allotment setting stage, mainly to cover additional security costs and the forecasted unfavourable staff cost variance (explained further below) which is only reflected in the accounts of the Organization at biennium-end.

Staff Cost Variance

10. During the biennium, all charges for staff costs against divisional budgets are made at standard rates that take account of the grade and duty station of the staff member. The standard rates are established for the PWB 2004-05 in July 2003.

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

12. Based on actual staff cost trends until end 2004, an unfavourable staff cost variance of approximately US$ 16 million is estimated for the biennium. This is equivalent to approximately 2.7% percent of total biennial standard staff costs. This type of unbudgeted cost can have a significant negative impact on programme implementation. Mechanisms for dealing with this risk are currently under review, including the possible expanded use of the SRA.

13. At the time of setting the standard rates in July 2003, a number of cost increase assumptions and provisions were made on the basis of the information available. The following deviations have mainly contributed to the estimated unfavourable variance:

• Although a provision was included in the budget for the strengthening of local currencies against the US dollar in decentralized offices, the impact in 2004 was much greater than anticipated due to the severe devaluation of the US dollar against those currencies since the 2004-05 budget was prepared in 2003. The likelihood of such rates continuing throughout 2005, or the possibility of even further devaluation is contributing significantly to the generation of the unfavourable staff cost variance, although it remains difficult to predict what the fluctuations might be for the remainder of the biennium.
• The actuarial valuation of staff related liabilities undertaken in December 2003, after the 2004-05 budget was established, will result in US$ 5.2 million of unbudgeted costs due to a change in methodology. The results of the 31 December 2003 valuation differ from the results of the previous valuation mainly because the past service liability for the After Service Medical Plan was allocated among participating organizations in proportion to active and retiree headcounts while in previous valuations the liability was allocated based on pensionable remuneration.
• An increase in premiums of staff medical schemes was budgeted at 12% for each year of the biennium; actual increases materialised at 20% in 2004 and are expected to increase at nearly the same rate also in 2005.
• Finally, more timely processing of Education Grant claims in response to an external audit observation has resulted in a higher level of expenditure this biennium than budgeted.

14. To remain within the biennial appropriation for 2004-05, the impact of the estimated unfavourable staff cost variance has been taken into consideration in the allotment setting for each year, so that offsetting reductions in programme expenditure could be managed in a planned fashion. The actual variance will be distributed in the accounts at biennium-end.

Other Income

15. The outturn for Other Income versus budgeted levels for 2004 is summarised in Table 2, and shows an overall excess in Income earning versus the budgeted level of US$ 2.0 million, or 105.5% of the total budget.

Table 2. 2004 Budgetary Performance of Other Income (US$ 000)

16. Support cost reimbursements are essentially earned in proportion to the actual expenditure on non-emergency Trust Fund projects³ and United Nations Development Programme (UNDP) projects implemented or executed by FAO. After several biennia of shortfalls versus budgeted support cost income, which required corresponding reductions in expenditure, 2004 earnings are in line with budgeted amounts. The current alignment has arisen after the progressive reduction of budgeted support cost income over the last several biennia, from US$ 36.9 million in the PWB 2000-01 to US$ 31.9 million in the PWB 2004-05, aided by a recent improvement in technical cooperation delivery.

17. 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; Government Counterpart Cash Contributions to FAOR offices; earnings from sale of surplus property; and other sundry income. In 2004, the aggregate recovery for these income types exceeded the amounts foreseen in the budget by US$ 1.7 million. The over-recovery of income in this category is partly due to ad-hoc extra-budgetary contributions in direct support of Regular Programme funded normative activities.

2004-05 Budgetary Projections and Forecast of Budgetary Transfers between Chapters

18. The 2004-05 budget level approved by the last Conference resulted in the need to identify resource cuts totalling US$ 51.2 million (i.e. a 6.4% average reduction) from the ZRG scenario presented to the Conference.

19. The second operative paragraph of Resolution 7/2003 requested the Director-General “to make proposals to adjust the approved Programme of Work, bearing in mind the expression of priorities by Council and Conference as well as the criteria for priority setting .... to the next meetings of the Programme and Finance Committees and to their Joint Meeting for their approval.”

20. The Adjustments to the Programme of Work and Budget 2004-05⁴ were presented to the Programme and Finance Committees at their May 2004 session. The Committees gave their broad endorsement to the proposed adjustments, thus allowing the Secretariat to proceed with the implementation of the Programme of Work, as adjusted⁵.

21. It is recalled that, following the decision of the Joint Meeting of the Programme and Finance Committees in May 2004, the approved transfers between budgetary chapters, and the current distribution of the budget by chapter is as follows⁶:

Table 3. Approved Budget Level (US$ 000)

22. The year 2004 actual expenditure and the estimated requirements for 2005 tentatively indicate that a number of further budgetary Chapter transfers would be required for the 2004-05 biennium from those already approved, as shown in Table 4 below.

Table 4. 2004-05 Forecasted Budgetary Performance by Chapter (US$ 000)

23. Although a number of specific issues contribute to the individual Chapter performances, funds across the programme structure were held back at the allotment setting stage to cover mainly:

• the negative staff cost variance, currently estimated at approximately US$ 16 million for the biennium; and
• the anticipated shortfall in budgeted security provisions, estimated at approximately US$ 2 million.

24. Based on these early estimates of biennial performance, resources may need to be transferred from Chapters 1 (US$ 0.7 million), 2 (US$ 4.5 million) and 5 (US$ 0.9 million), in favour of Chapters 3 (US$ 5.5 million) and 6 (US$ 0.65 million).

25. The distribution of the estimated unfavourable variance is anticipated in the forecasted biennial budgetary performance figures above; it is noted that some further variation is possible as, for example, the exact impact and amount by staff category is difficult to predict.

26. The transfers into Chapter 3 and 6 are mainly required to offset the substantial unbudgeted security costs which are foreseen for the biennium. In Chapter 3, unbudgeted costs are being incurred for vulnerability equipment and general operating expenses for the country offices in security phase duty stations (estimated at US$ 3.5 million for the biennium). Additional Chapter 6 security expenditures include funds for a security risk assessment study and protective film for windows. Furthermore, adding to the Chapter 3 over-expenditure, is the significant impact of the forecasted unfavourable staff cost variance on this chapter. The TCP net appropriation for project expenditures falls under the provisions of Financial Regulation 4.3, which makes the balance of the 2004-05 appropriation available for obligations during 2006-07. It is therefore anticipated that the Chapter 4 appropriation will be fully spent⁷.

27. It is recalled that, with the introduction of Split Assessments, changes in purchasing power as a result of US dollar/euro exchange rate fluctuations are minimized, as expenditures in euro are translated at the biennial rate of exchange established by the Conference for the budget. Thus, budgetary reporting at the end of the biennium will be based on the US dollar/euro exchange rate established in the PWB 2004-05 of 1.19 (the budget rate).  Any difference arising from the translation of euro expenditures at the budget rate versus the UN rate of exchange (i.e. the actual rate used for accounting purposes) is monitored throughout the biennium and will be reflected as an adjustment figure in Statement IV of the final 2004-05 accounts of the Organization. The forecasted biennial performance figures in the table above are reflected at the budget rate of exchange⁸; some variations may occur if the final percentage of expenditures in euro differs significantly from the assumptions used in the budget.

28. A formal request for transfers between chapters will be submitted at the next session in September 2005, based on updated information.

Transfers between Divisions within the Same Chapter

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

30. The Secretariat of the Consultative Group on International Agricultural Research (CGIAR) Science Council was transferred within Major Programme 2.5 from the Research, Extension and Training Division (SDR) to the Office of the Assistant Director-General of the Sustainable Development Department (SDD), which included a transfer of budgeted non-staff expenditures of US$ 1.6 million for the biennium. The related posts are accounted outside the Regular Programme accounts of the Organization.

Use of Arrears

31. It is recalled that in approving the Budget Resolution 7/2003, the Conference invited the Director-General to make proposals to the Finance Committee for the reallocation of arrears to cover one-time redeployment and separation costs associated with the implementation of the adjusted budget. At its May 2004 session, the Finance Committee approved the setting aside of an amount of US$ 4.1 million being 10% of the unexpended balance of arrears at the end of 2003, for possible use in covering one-time costs related to redeployment and separation of staff and security infrastructure, on the understanding that the Organization would make every effort to absorb these costs within the Regular Programme⁹.

32. The Secretariat is pleased to inform the Committee that security infrastructure costs are expected to be fully absorbed within the Regular Programme, while total costs for redeployment and separation are currently estimated at US$ 4.0 million, implying that close to the full contingency will be required for these costs. Almost all of the 89 eligible redeployment cases (including FAOR posts) have been resolved at this time.

33. At its May 2004 session, the Committee noted that some arrears resources under Resolution 6/2001, particularly those related to the Human Resources Management Systems project, would most likely not be fully spent by the end of 2005 given the current timeframe for that project. At its September 2004 session, the Committee approved in principle the proposal to carry forward any unused balance of arrears as at 31 December 2005 to the Capital Expenditure Facility.

Conclusion and Action for the Committee

34. This report is submitted for information purposes. The Committee is requested to:

• take note of the overall Regular Programme budgetary outturn for 2004;
• take note of the tentative forecast of the projected transfers between chapters; and
• endorse the report for transmission to the Council.

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¹ Other Income is further described in paragraphs 15 through 17.

² The breakdown of the approved budget between 2004 and 2005 takes account of the timing of the Regional Conferences and the FAO Conference in the first and second year of the biennium respectively. In addition, in the 2004-05 budget a number of posts were funded for the first part of the biennium and then abolished upon retirement of the incumbent.

³ Emergency projects constitute a substantial share of delivery. 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 current policy for reimbursement covers the full variable indirect cost of the project as incurred by the Emergency Operations and Rehabilitation Division (TCE) and, where possible, identifiable incremental costs incurred by other units.

⁴ PC 91/3 – FC 107/14 – JM 04.1/2

⁵ CL 127/8 Report of the Joint Meeting of the Ninety-first Session of the Programme Committee and the Hundred-and-seventh Session of the Finance Committee, paragraph 6.

⁶ CL 127/14 Report of the 107^th Session of the Finance Committee, paragraph 76.

⁷ TCP expenditure against the 2004-05 appropriation of US$ 98.6 million amounted to US$ 21.9 million in 2004. Spending towards projects of the 2002-03 appropriation amounted to US$ 49.2 million against the deferred income balance of US$ 62.0 million.

⁸ The adjustment of expenditure to the budget rate is done at the end of the biennium, and is therefore not yet reflected in the 2004 figures.

⁹ CL 127/14, para 79.