Finance Committee

Introduction

1. The Finance Committee at its 93^rd Session received and reviewed a paper¹ on the issue of Support Costs. It welcomed the broadly based review initiated in the paper and acknowledged the conceptual framework as a helpful basis for further development of proposals.

2. The Committee at its present session has received a series of papers in response to its request that the Secretariat provide information on various related areas. These papers are as follows:

• FC 94/4 a) Review of Support Costs - Current Profile of FAO's Field Programmes and Other Programmes Funded from Voluntary Contributions
• FC 94/4 b) Review of Support Costs - Current Reimbursement Rates for Support Costs on Field Programmes and Other Voluntary Contributions
• FC 94/4 c) Review of Support Costs - Methodology Used to Calculate the Cost of Supporting Field Programmes and Other Programmes Funded from Voluntary Contributions

3. This paper builds on the conceptual framework which was developed for the last meeting of the Committee and the analysis of the existing support cost reimbursement regime to propose some principles for consideration by the Committee. Once the principles have been agreed, the Secretariat will develop the consequent internal policy and procedures which are to be applied to support cost reimbursements.

Scope

4. The following diagram portrays the full range of activities which may attract support costs and shows their potential relationship to the Regular Programme.

Table 1: Matrix of Activities by Funding Source and Type²

5. The shaded boxes above reflect all of the activities where some type of support cost potentially exists. The document examines each of the categories with a view to establishing principles for support cost recovery.

The Objectives of Change

6. The current practices outlined in FC 94/4 (b) suffer from having been developed over a period of many years. While an attempt was made in 1993 to introduce a new support cost regime, it failed to garner sufficient support from Member Nations with the result that existing practices remained in force, gradually evolving to address current needs. However, it is recognised that current policies are complex, sometimes inconsistent and not always equitable.

7. The longer-term strategy of the Organization in this area is reflected in the Strategic Framework as approved by the Conference at its 30^th Session:

continuing efficiency savings with a view to reducing the cost of supporting field programmes and placing FAO in a better position to compete for resources³

8. This implies the reduction of support costs so that firstly, the reimbursements cover costs and secondly these costs further decline so that the reimbursement rates can be reduced to improve FAO's competitiveness in leveraging resources for its Members.

9. The immediate objectives of a new support cost reimbursement scheme are therefore to:

• define and apply a consistent and defensible approach to support cost recovery;
• simplify the approach in the interests of transparency and administrative efficiency; and
• ensure that charges made are a reasonable reflection of actual costs and, while recognizing the need to apply averages in rates, to ensure that inequitable over-charges are not levied on any partner.

Proposed Principles

PRINCIPLE 1: A CONSISTENT AND DEFENSIBLE APPROACH TO SUPPORT COST RECOVERY

Discussion

10. This issue was already discussed by the Committee when it considered it in relation to document FC 93/4 Support Costs at its last session. It was generally recognised by the Committee that full cost recovery including fixed overheads was not to be recommended as:

• it would result in problems in the financial structure of the Organization by eventually requiring that substantial portions of fixed costs be funded from variable income;
• it was inconsistent from the budgetary viewpoint in that the fixed costs in question are already correctly budgeted under the Regular Programme; and
• it is unacceptable to donors who have consistently mentioned that they are not prepared to cover FAO's fixed or core costs.

Recommendation

11. The Committee is recommended to confirm its earlier conclusion to the effect that support cost reimbursement should aim to fully recover indirect project support costs as defined in FC 93/4; that is, full costs less the following fixed costs:

1. all costs related to the ADG Offices [i.e. AFD, AGD, ESD, FID, FOD, GID, SDD, TCD] excluding the Management Support Units (MSUs) which are allocated to indirect project support costs using the work measurement questionnaire;
   
   
2. all fixed overhead costs related to the operation and maintenance of the information technology infrastructure by AFI;
   
   
3. all costs of the operation of the financial system except the AFF units directly responsible for UNDP and Trust Fund accounting which are treated as indirect project support costs;
   
   
4. all costs of administering the central personnel function by AFP;
   
   
5. costs of space, security, communications (except those charged directly to projects), messenger service, central records and procurement for Regular Programme activities administered by AFS - although AFSP costs related to project procurement are treated as indirect project support costs;
   
   
6. costs of regular budget preparation, control and evaluation by PBE, although costs of project budgetary control and evaluation are treated as indirect project support costs or, in the case of evaluation missions, as direct project costs;
   
   
7. costs of legal services provided by LEG, excluding technical services to projects which are treated as direct project costs (see TSS below); and
   
   
8. costs of Internal Audit and External Audit excluding direct services provided to projects.

PRINCIPLE 2: SIMPLICITY OF APPROACH

Discussion

12. The Committee at its last meeting expressed the general view that simplified support cost recovery rates were highly desirable so long as such rates were based upon a clear understanding and sound and consistent definition of indirect support costs to be recovered. This view is consistent with that of the Director-General and of the External Auditor. To determine how to achieve simplification, there is a need to examine the factors which have acted as a constraint to simplification despite the fact that it is an objective that all endorse.

13. These include the following:

1. the policies established by our UN system partners through their own Governing Body structures - examples include UNDP and most of the UN agency or programme funding arrangements which vary with each other and with FAO standard policy;
   
   
2. the policies applied by major donors (e.g. ceiling rates placed on support cost reimbursement by the European Commission (EC) by project size);
   
   
3. the preference expressed by some donors for a move away from percentage rates and for the conversion of indirect to direct costs specifically addressed in the project budget (e.g. UK, India, EC);
   
   
4. the wide variation between projects of actual indirect project support costs when expressed as a percentage of the project budget (e.g. the difference between delivering US$ 20 million worth of pesticides where costs run at say 3% to the recruitment and servicing of US$  200 000 of TCDC assistance where costs may run at 20+% of delivery);
   
   
5. the need to recognize that even projects of a similar size and input mix may exhibit significant variations in actual indirect project support costs (e.g. the difference between delivering and servicing three experts at FAO HQs in support of normative RP work versus the cost of delivering and servicing the same three experts to a remote field location);
   
   
6. the need to be flexible in developing partnerships with other international organizations where such partnerships are in the interests of leveraging support for FAO policies in Member Nations; and
   
   
7. the need to respect existing agreements.

Recommendation

14. It is recommended that a simplified approach to support cost recovery rates be recognized as a priority in the establishment of such rate structures, subject to due recognition of the need to respect the legitimate needs of our partners and to charge amounts which are a reasonable reflection of the indirect variable support costs actually incurred.

PRINCIPLE 3: REASONABLE ALIGNMENT OF CHARGES TO ACTUAL COSTS

Discussion

15. The need for simplification of approach requires us to avoid complex cost accounting structures which would, for example, allow us to accurately allocate costs to individual projects. Such a system would be both onerous and expensive to manage and is likely to result in divisive discussion with partners over costs. What is necessary is a rate-setting system which has sufficient flexibility to apply appropriate rates to appropriate circumstances - so as to align the average rates applied as close to actual as is practicable. Such a system must be transparent in that the decision making rules as to which rate should be applied need to be known and understood by our partners and by our Members.

Recommendation

16. It is recommended that a set of realistic rates be established for a limited number of circumstances and that the criteria for determining and applying such rates be clearly defined.

Proposed Support Cost Reimbursement Regime

17. In proposing a new regime, attention must be given to the principles recommended above (adjusted to the extent that these principles are revised by the Committee) and to existing agreements. With regard to the latter point, it is recommended that the existing agreements be fully respected but that FAO encourage its partners, particularly those in the UN system, to work towards a consistent inter-agency approach.

18. The following notes apply these principles to each of the categories of programme defined in Table 1 at the beginning of this document.

EXTRA-BUDGETARY PROGRAMMES

Technical Assistance - National Funding

19. These are defined as technical assistance projects in the field which are funded by the Government of the recipient country including those which are funded through loans from international financing institutions.

20. In principle, such projects should reimburse the variable indirect support costs associated with the project. Standard rates are not to exceed a ceiling rate (currently 13%) but can be adjusted where appropriate for special circumstances:

• high proportions of contracts, supplies and equipment requiring minimal AOS costs (current MS 250 provisions to continue to apply);
• national execution in whole or in part;
• inclusion of project support costs in the project budget as direct project costs;
• other cost sharing or complementary support arrangements; and
• exceptionally large projects when economies of scale apply.

Technical Assistance - Donor Contributions

21. These are defined as technical assistance projects in the field which are funded by a third party other than FAO or the recipient Government.

22. In principle, such projects should reimburse the variable indirect support costs associated with the project. Standard rates are not to exceed a ceiling rate (currently 13%) but may be adjusted where appropriate for special circumstances:

• rates established by inter-governmental bodies of the UN system organizations (including the international financial institutions);
• high proportions of contracts, supplies and equipment requiring minimal AOS costs (current MS 250 provisions to continue to apply);
• Associate Professional Officers (APOs) which are charged a fixed rate of 12%;
• inclusion of project support costs in the project budget as direct project costs; and
• exceptionally large projects when economies of scale apply.

Emergency Assistance

23. Emergency assistance is defined as a situation where there is an urgent response to the impact on the agriculture sector of a particular disaster, natural or man-made. Such disaster should therefore be addressed with immediate action which justifies specific operational procedures. If the project is characterized as an emergency, the request follows the "fast track" and is operationally treated as such. Generally, "prevention" and "preparedness" are not within the meaning of "emergency" for project operational purposes.

24. 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 as incurred by the Special Relief Operations Service. Such rates currently range from a low of 3% to a high of 6%.

25. Further identifiable incremental costs incurred in the Special Relief Operations Service (TCOR) and other units (e.g. special purchasing missions or additional temporary staffing) should be covered by these support cost rates unless they are chargeable as direct costs to the project (often the case).

26. This implies that the time of Regular Programme staff (e.g. FAOR services, Technical Support Services, Administrative staff in HQ and the Regional Offices) will not generally be charged to emergency projects except where they can be treated as direct costs.

27. When TCOR operates technical assistance projects because of special situations, the reimbursement rates for technical assistance shall normally apply.

Regular Programme Normative Activities

28. These are defined as voluntary contributions which directly support the implementation of Regular Programme activities. Such activities will generally be normative in nature and be implemented at HQ or at a Regional Office rather than directly in the field.

29. A standard rate (currently 6%) will apply to those projects which fully meet the definition (i.e. HQ implemented and normative in nature) being average actual variable indirect support costs incurred by such projects.

30. Such rates can be adjusted to reflect the impact of certain special circumstances:

• mixed projects which may have a high normative content may also have a significant field content in which case the rate will be increased to reflect the approximate average cost up to the standard ceiling for technical assistance projects (currently 13%);
• contributions to cover the travel cost of participants from developing countries to conferences and consultations on matters within FAO's mandate will be exempted from indirect support cost charges;
• sponsorship funds in support of awareness raising and/or promotional events will be used to cover the identifiable direct costs of these activities and as such, are not subject to project servicing costs;
• Associate Professional Officers (APOs) which are charged a fixed rate of 12%; and
• 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.

Jointly Funded Activities

31. These arrangements cover activities which are part of the Regular Programme and are usually normative in nature. They are defined as partnership arrangements between FAO and other inter-governmental organizations including, in particular, UN system organizations.

32. The special nature of these partnership arrangements will be recognized and translates into an agreement to share direct costs in a manner appropriate to the joint activity's contribution to the strategic objectives of the Organization. Variable indirect costs are generally to be funded by the host organization although recognition of this fact should generally be given in the Memorandum of Understanding and related cost sharing formulae.

REGULAR PROGRAMME

TCP and SPFS

33. Regular Programme funded technical assistance (including emergencies) should, in principle, reimburse the variable indirect support costs incurred by "operating units" or their equivalent associated with the project (i.e. for operational services). This should be based on an average rate (currently 7%).

Technical Support Services (TSS)

34. These do not fall under the definition of indirect support costs as they are handled as direct charges to the project. However, given the inclusion of this type of expenditure under the general heading of support costs by the External Auditor, it is included here for the sake of completeness.

35. TSS is defined as inputs by technical staff of the Organization in their technical capacity to the processes of project formulation, appraisal, technical backstopping and evaluation. It is recognised that the provision of such technical assistance is part of the function of the Organization and that total recovery is not the target. On the other hand, it is also accepted that services which are paid for place a stronger obligation on the service provider to deliver satisfactorily.

36. Therefore, in principle, the Organization will encourage the specific inclusion in project budgets of resources to cover TSS to the maximum degree possible. The Organization will endeavour to forecast and budget for uncovered TSS in the form of a specific provision in the Programme of Work and Budget as approved by the Organization.

37. Charges to project budgets will be made on the basis of the number of days' service provided times the daily standard cost for the grade of post concerned. It is recognised that this may need to take account of cost sharing arrangements either through the application of a ceiling on the number of days or the rate to be charged as reflected in the project budget.

SUMMARY OF PROPOSALS

Table 2: Matrix of Activities by Funding Source and Type

OTHER RELATED MATTERS

Cost Measurement

38. The policy approach proposed requires the Organization to have a reasonable knowledge of its costs in supporting the field programme. Therefore, even though such work measurement surveys (or time keeping) and cost measurement systems are not widespread throughout the UN system, it is recommend that such a system be maintained by FAO.

Rate Setting and Adjustment

39. Rates will tend to fluctuate with two factors: the cost of support and the volume of delivery. This implies a periodical review and revision of rates. To avoid an excessive numbers of changes to rates, it is recommended that these be looked at over a significant time frames - for example, as a moving average over three biennia.

Reporting

40. The following reporting pattern is recommended:

• report on waivers and exceptions to the policy guidelines detailed above annually to the Finance Committee;
• report of rate changes approved by the Director-General in the context of the policy guidelines when applicable to the Finance Committee; and
• report on actual costs of supporting the field programme versus the reimbursements received - biennially in the Programme Implementation Report.

Conclusions

41. The Committee is requested to consider the proposals in this document in the context of the information contained in the three supporting documents (FC 94/4 a, b and c).

42. In particular, the Committee is requested to endorse:

1. the principles as contained in paragraphs 11, 14 and 16;
   
   
2. the proposed policy for reimbursement rates as summarized in the table following paragraph 37 and detailed in paragraphs 19 through 33;
   
   
3. the maintenance of a cost measurement system as per pawragraph 38 and the rate revision procedure in paragraph 39; and
   
   
4. the reporting pattern proposed in paragraph 40.

1 FC 93/4

2 A list of acronyms is given as an Annex to the first of this series of documents, FC 94/4 a).

3 The Strategic Framework for FAO 2000-15, Rome 1999, paragraph 130 d)