FC 104/5

Finance Committee

Table of Contents

I. Introduction

II. Implementation of the Support Cost Reimbursement Regime

III. Proposal for Amendment to the Support Cost Policy

a) Review of the range for Emergency project Direct Operating Costs rates
b) The Indian Ocean Tuna Commission request for an exemption of project support costs

IV. Conclusions

I. Introduction

1. This annual report informs the Committee on the implementation of the FAO support cost reimbursement policy. In the light of experience in its application, the Committee is requested to consider proposals for amendments to the policy and the request for one waiver.

II. Implementation of the Support Cost Reimbursement Regime

2. The FAO policy for setting Project Servicing Costs (PSC) rates was endorsed by the Council in November 2000¹ and minor modifications made in September 2001² and September 2002³. The policy is 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.

3. Project Servicing Costs on Trust Funds may deviate from the 13% ceiling when the variable indirect support costs on the project are expected to be lower. The function of appraising deviations from standard rates is entrusted to the Office of Programme, Budget and Evaluation. 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.

4. The policy and guidance in its implementation has been made known throughout FAO, to project formulators and decision makers. The policy has been posted on the FAO intranet and described in the Field Programme Information Management System (FPMIS), where answers to a number of frequently asked questions on support cost matters are also included. Presentations on the policy and its application have been given to concerned staff.

5. The statistics in the table below cover the period 1 June 2002 through 31 May 2003, during which time FAO opened 306 Trust Fund projects. The table provides by PSC Category the distribution of the PSC rates applied to these projects in terms of both project numbers and lifetime budgets. It is noted that all projects have been charged at rates which fall within the currently approved policy.

Table 1. Distribution of the categories of PSC rates applied

III. Proposal for Amendment to the Support Cost Policy

6. There are two cases that require the Finance Committee review and decision:

1. Review of the range for Emergency project Direct Operating Costs rates; and
2. The Indian Ocean Tuna Commission request for an exemption of project support costs.

a) Review of the range for Emergency project Direct Operating Costs rates

7. The current policy states that rates for emergency assistance are to be determined on a case-by-case basis to recover the full variable indirect support cost of the project, with rates currently ranging from a low of 3% to a high of 6%. The Finance Committee was informed at its September 2002 Session that, in light of the results of recent cost studies, in-house consultations were being undertaken to examine whether there was a need for a higher ceiling for emergency projects, which would also be consistent with the rates charged by other agencies. These consultations confirmed that several factors contributed to an increase in FAO costs for emergency operations. In particular the changes in the structure and nature of emergency operations meant an increase in volumes and complexity of content (e.g. increased rehabilitation activities and activities aimed at ensuring a better link between relief, rehabilitation and development) including demands from donors for impact assessments, reporting and monitoring which are all more costly to implement. There is also a need for a realignment of costs over time, particularly as the volumes now being delivered are such that costs which might previously have been considered fixed, now need to be considered at least partially variable. The Committee is therefore invited to endorse an increase in the upper ceiling of the direct operating costs rate for emergency activities to 6.5%, which is consistent with the results of recent case studies and rates charged by other agencies.

b) The Indian Ocean Tuna Commission request for an exemption of project support costs

8. The Indian Ocean Tuna Commission at its Sixth Session requested its Secretariat to write to the Director-General of FAO on behalf of the Chairperson requesting a reduction in support cost charges to zero. This request has been reviewed and it has been considered necessary to seek the guidance of the Committee before communicating a decision to the Indian Ocean Tuna Commission.

9. The current policy states that “long-term trust fund accounts (e.g. Commissions established under the auspices of FAO) will be subject to a case by case estimate of the actual level of variable indirect support costs and charged accordingly”. In this regard, the rate of support cost charges for the Indian Ocean Tuna Commission is presently set at 4.5%, based on a cost study that determined this level of indirect variable costs associated with the Commission’s work. Since the policy has been applied in setting the current rate and does not foresee any provision for setting a rate below the actual level of variable indirect support costs, the Organization is not in a position to respond favourably to the request of the Indian Ocean Tuna Commission.

10. There are, however, some Commissions that were established before the current policy was adopted, which presently do not pay support cost. It was therefore considered desirable to enquire whether the Committee wished to modify the current policy to allow for consideration of waivers upon the request of the Commissions. To provide for such waivers to be requested would require amending the wording of the current policy to read “long-term trust fund accounts (e.g. Commissions established under the auspices of FAO) will be subject to a case by case estimate of the actual level of variable indirect support costs and charged accordingly, unless a waiver is granted to the Commission by the Finance Committee”. It should be noted that the current policy successfully moved away from the concept of “waivers” by adopting, as its foundation, the principle of reimbursing to the Organization the indirect variable costs incurred in servicing the activities funded by extra-budgetary resources. This approach was highly appreciated in the recent JIU Report on Support Costs presented to the Committee at its 102nd Session for information⁴.

11. The Committee should be aware that if the policy is changed and the request of the Indian Ocean Tuna Commission accepted, it will open the possibility for other Commissions to request similar treatment. The financial impact on the Organization of accepting the Indian Ocean Tuna Commission’s request would be relatively small, since the net effect of setting the PSC rate to zero on this project would be a loss of support cost income of about $40 000 per year (based on net average delivery of US $900 000 per year for the last three years).

12. The Finance Committee is therefore requested to either endorse retention of the policy in its present form, thereby excluding requests from the Commissions for waivers, or to amend the policy allowing submission to be made to the Finance Committee for such waivers.

IV. Conclusions

13. The Committee is invited to note the experience in the implementation of the new policy on support cost reimbursement rates and take decisions on the following two items:

• Change the upper limit of Direct Operating Cost rates for emergency assistance as determined on a case-by-case basis to recover the full variable indirect support cost of the project from 6% to 6.5%, while retaining the lower limit at the current 3% level.
• Either (i) retain the current wording of the policy related to Commissions, thereby excluding requests from the Commissions for a waiver of support cost, or (ii) change the wording of the policy to read “long-term trust fund accounts (e.g. Commissions established under the auspices of FAO) will be subject to a case by case estimate of the actual level of variable indirect support costs and charged accordingly, unless a waiver is granted to the Commission by the Finance Committee”. Should the Committee decided in favour of the latter wording, it is requested to decide whether a waiver should be granted to the Indian Ocean Tuna Commission.

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¹ CL 119/13 Annex II, Review of Support Costs – Summary of Proposals, refers.

² CL 121/4, Report of the Ninety-seventh Session of the Finance Committee paragraphs 21-23 refer.

³ FC 100/5 refers.

⁴ (CL 124/INF/10 – Sup.1 (JIU/REP/2002/3)