| FC 95/6
|
| FC 95/6
|
Ninety-fifth Session |
Rome, 25-29 September 2000 |
Review of Support Costs - Supplementary Information |
1. The Committee at its 94th Session in May 2000 examined a series of papers covering its Review of Support Costs. The Committee concluded by requesting the Secretariat to prepare a short document that addresses the outstanding issues raised by it.
2. Ever since there has been an effort to measure the cost of field programme support, there has been a gap between the cost of support and the reimbursements made to cover such costs. The gap arises fundamentally from an under-recovery of cost; that is, the reimbursement rates have never been set to cover the costs incurred.
3. Such under-recovery has been much influenced by UNDP which is the largest single UN funding source for such assistance. The basic premise has been that technical assistance activities carried out by the specialized agencies are a form of partnership between the donor (UNDP) and the executing agency (e.g. FAO) in the interests of the recipient country who will also be a Member of the Specialized Agency concerned.
4. This premise was subsequently applied to Trust Fund activities funded by other donors owing to the fact that UNDP was generally accepted as being the standard setting organization when it came to support cost rates. Thus, the same flat rate established by the UNDP Governing Council (14% in the seventies and 13% since 1981) was applied by FAO's Governing Bodies1 to all sources of funds subject to the standard rate.
5. In 1990-91, UNDP reviewed the existing support cost arrangements in the light of the changing environment and in particular the increasing use of national execution and the adoption of the programme approach. The outcome was the introduction of support cost successor arrangements, effective 1 January 1992, which consisted of the following major elements:
6. The outcome was considered to be too complex by many Trust Fund Donors and the Membership in general and hence, for the first time, the agencies did not apply a new UNDP regime to their Trust Fund projects.
7. The FAO Conference decided in 1991 that a study of arrangements for reimbursement of Support Costs under FAO's Trust Fund programme be undertaken. The outcome, following extensive consultation, was a report to the Conference in November 19932 which proposed direct charging of TSS to projects and specific rates for different types of AOS service (e.g. recruitment fees, etc.). However, the Conference could not agree to the proposals and therefore asked the Director-General to pursue consultations with all interested parties with a view to arriving at a broad consensus conclusion. At the informal consultation with interested Member Nations, the Director-General indicated that his position was not to submit new proposals for new rates but rather to suspend further consideration until administrative costs had been reduced. This was subsequently endorsed by the Programme and Finance Committees and then noted by the Council.3
8. While support cost expenditure levels have declined significantly and therefore have contributed to a reduction in the gap between costs and their reimbursement, several external factors (i.e. other than internal efficiency) can cause changes in the cost to occur. These are summarized as follows:
9. Exchange Rates: These affect the support cost as a percentage of delivery since the project inputs can be incurred in one currency and the support costs in another. This factor tended to have a greater impact before the Organizations's decentralization was initiated in 1994.
10. Overall delivery: While the definition of support costs limits such costs to indirect variable costs, the capacity to reduce costs becomes increasingly strained at lower volumes of delivery as minimum staffing levels come into play. Thus, very low volumes imply higher costs when they are expressed as a percentage of delivery.
11. Sudden changes in delivery: Staff providing support services represent a relatively inflexible cost over the short-term. They often hold longer-term employment contracts, making it difficult to adapt to short-term declines in delivery. Of course, this works in the opposite direction for short-term increases in delivery when recruitment lead times oblige existing staff to temporarily carry the additional load.
12. Project Size: Large projects benefit from economies of scale and thus tend to reduce the percentage cost. For example, the Iraq Oil for Food programme only earns 3%, but this is generally considered to be adequate in terms of covering cost.
13. Project input mix: This expression refers specifically to the nature of the inputs required. The simplest comparison is between the cost of recruiting one expert for three years and three experts for one year. Clearly the second case, which will result in three separate recruitment exercises, will cost more. The percentage rate will be exacerbated if the experts are nationals receiving a much lower remuneration. Here, in addition to incurring a higher cost, the percentage will also rise because it is calculated against a lower base for delivery.
14. Location of Delivery: Projects located in difficult field locations are inevitably more costly to support than those located in capital cities or at HQ.
15. While some Members have expressed concern at the size of the support cost recovery gap over the years, FAO's Governing Bodies have been kept fully informed of the costs of supporting the field programme and have accepted that such costs are a legitimate part of the cost of delivering technical assistance to Member Nations as required under Article I 3(a) which states that "It shall also be the function of the Organization to furnish such technical assistance as governments request".
16. The policy proposed in this paper differs between Technical Support Services (TSS) and Administrative and Operational Support (AOS).
17. TSS is specifically budgeted under the Regular Programme and is a service that Members expect to be provided by the Organization free of charge given that it is part of FAO's mandate to furnish technical assistance. During the 1996-97 budget crisis, the Organization made efforts to increase the proportion of such costs which are recovered as a means of being able to live within the reduced level of resources available. However, it is NOT the Organization's long-term policy that TSS be recovered in its entirety but, rather, that TSS should be fully and explicitly budgeted either as income or as a legitimate expense under the Regular Programme.
18. AOS costs are largely reimbursed, and it is the policy of the Organization to continue to reduce such costs so that they are eventually completely matched by income. However, this objective will be made more difficult to achieve if there are declines in delivery. While it may be tempting to consider increasing recovery rates should delivery decline, it would be counter-productive do so. Such an increase would presumably tend to reduce project approvals, as some donors already have difficulty with the current rates. A reduction of project approvals would be clearly undesirable, as it would mean a reduced level of technical assistance to members.
19. The Committee had asked how the Secretariat proposed to improve transparency of budgeting for support costs at the planning stage - specifically in the Programme of Work and Budget (PWB) which is presented to the Governing Bodies. The following paragraphs describe the Organization's proposed approach to programming such costs in the PWB.
20. Technical support services have always been identified in the PWB. Under the old programme structure (pre- 1996-97), sub-programmes with four digit codes ending in "8" were reserved for field programme support (e.g. 2128 provided field programme support for the Crops programme). As reported in the 1996-97 PWB4, resources allocated to individual technical programmes for support to the field programme were fully integrated into each programme element. However, the extent of such support was identifiable and reported in the PWB.
21. In the PWB 2000-01, the matter has been somewhat complicated by the introduction of the new programme model. While the new model allows for technical support to projects, in general, to be identified under "technical service agreements" (TS), it is also foreseen that such TSS which is required to achieve the objectives of a technical project (TP) is expected to be programmed under that project. This requires a rather more sophisticated methodology than is currently available.
22. The Director-General agrees that this is an area for greater budgetary transparency and will arrange for improved presentation of these costs in the draft PWB 2002-03.
23. In the case of AOS, specific identification of the costs is not practicable. These costs are spread over many administrative and operational posts, all of which are fully funded in the PWB and many of which do not provide full time support to the field programme. A separate budget provision for an amount equivalent to the gap between cost and reimbursement is not a practical proposition.
24. Instead, the Director-General would propose to provide historical data on costs and reimbursements and to indicate a best estimate of the gap for the next biennium based on certain clearly stated assumptions.
25. The Committee, at its last session, felt that its deliberations on this subject would benefit from further discussions within the Regional Groups and that it would aim to reach a conclusion on this issue at its September 2000 session. It also approved the three original objectives of the new support cost reimbursement scheme dealing with a consistent and defensible approach, simplification and charges which were a reasonable reflection of actual costs. It added a fourth objective which was to ensure the transparency of the approach.5
26. The Committee also agreed with the maintenance of a cost measurement system and the proposed rate revision procedure as well as the proposed reporting pattern.
27. Therefore, what remains for the Committee to decide is the proposed policy for reimbursement rates as summarized in the table below and detailed in paragraphs 19 through 33 of FC 94/4(d).
28. It is emphasized that the table has only been revised to clarify the proposals and not to change them from what was proposed in the detailed text referenced above. This revision has been made because the previous summary seemed to convey the wrong message and complicate the proposal for the reader.
| Funding Source | Technical Assistance (TA) | Emergency Assistance | Normative Programmes and Other RP Activities | ||
| National Funding | Donor Contributions | Donor Contributions | FAO RP Normative Activities inc. Commissions | Jointly Funded Activities | |
| Extra-budgetary | 13% ceiling (see text of FC 94/4(d)for exceptions) | 13% ceiling (see text of FC 94/4(d) for exceptions) | 6% ceiling (to recover actual indirect costs of TCOR | 6% (see text of FC 94/4(d) for exceptions) | As per MoU |
| Regular Programme | TCP and SPFS: ceiling of 7% TSS Days times standard cost per day |
TCP 7% ceiling | FAO Regular Programme | FAO Regular Programme | |
29. The Committee is invited to decide upon the new support cost reimbursement arrangements.
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