FC 99/2

Finance Committee

Table of Contents

Introduction

Overall Biennial Regular Programme Financial Projections

Staff Cost Variance

US$ 9 Million Authority

Other Income

2000-01 Budgetary Transfers and Performance by Chapter

2000-01 Budgetary Performance by Expenditure Category

Transfers Between Divisions within the Same Chapter

Conclusion and Action for the Committee

Annex I
2000-01 Budgetary Performance by Major Programme

Annex II
EXPENDITURE BY ACCOUNT

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-fifth Annual Report on Budgetary Performance summarises, for information and discussion, the budgetary aspects of the Regular Programme performance for 2000-01 and provides the details of the final budgetary transfers between Chapters.

Overall Biennial Regular Programme Financial Projections

2. Conference Resolution 2/99 on the Budgetary Appropriations for 2000-01 approved a budget of US$ 650 million, which comprises the approved Programme of Work less Other Income². Financial Regulation 4.1(a) authorises the Director-General to incur obligations up to the amounts voted.

3. 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 are adjusted by PBE during the implementation cycle to take account of emerging programme requirements and under-budgeted activities, sometimes offset by cost savings that were not planned in the PWB 2000-01. The institutional allotments by programme heading constitute spending limits for allottees, but the day-to-day financial management of the resources is the responsibility of the budget holders.

4. Table 1 summarises the overall budgetary performance versus the Appropriation approved by Conference. The 2000-01 performance is based on the actual expenditure in the unaudited accounts of the Organization.

Table 1. Overview of 2000-01 Regular Programme Performance (US$ 000)

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

6. A surplus balance of US$ 11.8 million is recorded against the 2000-01 Appropriation of US$ 650 million. This surplus is largely due to a higher positive staff cost variance than was conservatively forecast⁵ earlier in the biennium.

7. In addition, however, as it became increasingly clear that the expected arrears would not be paid, and given the favourable staff cost variance referred to above, the Director-General chose to restrain expenditures, which allowed the under-spending against the 2000-01 Appropriation to cover the redeployment and separation costs incurred against the US$ 9 million authority. This authority had been created under Conference Resolution 3/99, which authorised an advance from the Working Capital Fund pending the eventual receipt of assessed contributions in arrears from the major contributor⁶.

8. Most divisions fully utilised the allotted funds in 2000 and 2001, although some underspending against the 2001 divisional allotments did occur, mainly in the Regional Offices. Some under-spending against the allotments also occurred as a result of the last minute reversal of accrued expenditures on consultants which the External Auditor judged not to be an acceptable charge against the Appropriation for 2000-01.

9. The TCP net appropriation for project expenditures (Major Programme 4.1) amounted to US$ 89.1 million. This falls under the provisions of Financial Regulation 4.3, which makes the balance of the 2000-01 Chapter 4 appropriation available for obligations during 2002-03. In past biennia, the TCP appropriation was fully spent, and this assumption had been made for 2000-01, thus excluding the TCP project appropriation from the budgetary performance table above. In 2000-01, US$ 78.9 million had been earmarked for approved projects, and US$ 76.0 million was spent, of which US$ 11.4 million relates to the 2000-01 Appropriation, and US$ 64.6 million relates to the 1998-99 Appropriation.

Staff Cost Variance

10. The staff cost variance is the difference between budgeted and actual staff costs in a biennium. For the 2000-01 biennium, a positive staff cost variance of US$ 21.3 million was incurred, which is higher than such variances incurred in recent years.

11. For the PWB 2000-01, the standard rates established in July 1999 introduced, for the first time, "differentiated" standard rates for all positions, by grade and location. These distinct rates sought to take account of the unique costs and cost trends in the various major locations where FAO staff are located, including country-specific adjustments for possible cost increases during 2000-01 and changes in staffing structure. At the same time, the Organization's migration to the Oracle Financial System and concomitant review of accounting policies resulted in some adjustment to the Organization's methodology for computing and analysing the staff cost variance.

12. Most of the underlying causes of difference between the actual and standard unit costs of staff are beyond the control of the allottees - for example, exchange rates at non-Headquarters locations, decisions of the International Civil Service Commission, etc. The monitoring of the variance is therefore done centrally by PBE and any surplus or deficit, i.e. the staff cost variance, is charged at the end of the biennium to the financial accounts across all programmes in proportion to the staff costs incurred at standard rates.

13. The main reasons for the positive variance were presented to the Finance Committee in September 2001⁷. As indicated at that time, the favourable result for this biennium, is the outcome of the combination of these distinctive factors:

• higher than expected favourable exchange rates between US dollar and the currencies in the FAO duty stations outside Headquarters, with the depreciation in local currencies against the US dollar not counterbalanced by local inflation adjustments;
• lower than budgeted salary increases in FAO duty stations, including Headquarters general service salaries, which were dependent on decisions by the International Civil Service Commission (ICSC);
• a change in the accounting policy for terminal payment costs, which was adopted after the PWB 2000-01 was finalised;
• a lower biennial liability for After Service Medical Coverage for the Organization than was budgeted in the PWB 2000-01.

14. The staff cost variance was closely monitored during the 2000-01 biennium and some additional divisional allotments for high-priority activities were provided in a planned fashion, mainly to the technical departments, when the estimated surplus warranted such action. However, as the staff cost variance is sensitive to matters outside the Organization's direct control, prudence was required in committing additional funds against a forecasted positive variance.

US$ 9 Million Authority

15. At its November 1999 session, the Conference authorised the advance of funds from the Working Capital Fund up to an amount of US$ 9 million to cover one-time redeployment and separation costs to complete restructuring pending the eventual receipt of arrears in assessed contributions from the major contributor⁸, and established Chapter 9 of the Programme of Work and Budget to manage the various "One-time Expenditures funded from Arrears".

16. Major restructuring actions in 2000-01 included the abolition of the Management Support Units at Headquarters and the creation of a centralised Management Support Service (MSS); the implementation of new arrangements for the field programme (affecting both Headquarters and decentralized offices); and the restructuring of AFF.

17. In 2000-01, US$ 8.4 million in redeployment and separation costs were incurred to resolve the cases arising from the above restructuring actions. Of the 239 staff members potentially eligible for the US$ 9 million authority, 130 cases were settled at no cost to the authority, essentially through placements to budgeted posts at the beginning of 2000. The remaining 109 cases (consisting of 21 Professional staff and 88 General Service staff) were settled at total cost of US$ 8.4 million. Of this amount, US$ 5.1 million covered salary costs for the staff members awaiting resolution of their cases and US$ 3.3 million covered agreed termination costs.

18. A total of 58 agreed terminations were granted (9 to Professional staff and 49 to General Service staff), either directly to the redeployee whose post was abolished or to a staff member on a budgeted post which could accommodate a redeployee.

19. As indicated above, the US$ 8.4 million in costs charged as an advance from the Working Capital Fund under Conference Resolution 3/99 are effectively covered by the overall surplus against the net appropriation.

Other Income

20. In accordance with FR 4.1(a), shortfalls in Other Income versus the budgeted levels require corresponding reductions in planned expenditure during the biennium to remain within the approved budgetary Appropriation of US$ 650 million. The outturn for 2000-01 is summarised in Table 2, and shows an overall shortfall of US$ 7.9 million, or 89.5% of the total budgeted income as having been earned. As this outcome was foreseen, corresponding reductions in expenditure could be managed in a planned fashion.

Table 2.  2000-01 Budgetary Performance of Other Income⁹ (US$ 000)

21. Support cost reimbursements are essentially earned in proportion to the actual expenditure on non-emergency Trust Fund projects¹⁰ and United Nations Development Programme (UNDP) projects implemented or executed by FAO. The biennial shortfall versus budgeted support cost income totals US$ 7.8 million. This is a result of a further decline in 2000-01 in UNDP project delivery, which fell by 45% compared with the previous biennium, to US$ 27 million, while non-emergency Trust Fund delivery has remained largely stable compared with the previous biennium.

22. 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; reimbursements for administrative services to the World Food Programme (WFP); Government Counterpart Cash Contributions to FAOR offices; and other sundry income. In 2000-01, the aggregate recovery for these income types corresponded largely to the amounts foreseen in the budget.

2000-01 Budgetary Transfers and Performance by Chapter

23. Table 3 below provides an overview of the 2000-01 performance by Chapter. It may be noted from Table 3 that no budgetary transfers were required for the 2000-01 biennium.

Table 3. 2000-01 Budgetary Performance by Chapter (US$ 000)

24. Annex I to this report summarises the budgetary performance by Major Programme and Chapter and describes significant factors that affected the overall performance.

2000-01 Budgetary Performance by Expenditure Category

25. There is no constitutional constraint as regards spending by expenditure category; the Organization is free to choose the most effective inputs to fulfil the approved Programme of Work. However, a review of spending by account can provide useful indications of cost fluctuations and trends. A review of the Regular Programme expenditure in 2000-01 (excluding TCP projects) by account and a brief description of trends emerging in the 2000-01 biennium, is covered in Annex II.

Transfers Between Divisions within the Same Chapter

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

27. In this connection, it is noted that in the 2000-01 biennium several posts were transferred between Headquarters and Regional Offices in order to better align technical expertise among these locations, and two posts were transferred making up the Programme Policy Review Committee (PPRC) Secretariat from the Agriculture Department (AG) to the Field Operations Division (TCO). Further transfers between divisions took place in the context of the restructuring of the Technical Cooperation Department (TC), to strengthen TC's capacity to develop, coordinate and monitor the field programme and reverse the current declining trend in non-emergency field activities funded from external sources. The impact of the restructuring in 2000-01 primarily affected the Field Operations Division (TCO) and the Office of the Assistant Director-General (TCD). The proposals were reflected in the Programme of Work and Budget 2002-03.

Conclusion and Action for the Committee

28. The Committee is invited to note that no budgetary transfers were required in 2000-01 and to endorse the report of budgetary performance for 2000-01 for transmission to the Council.

Annex I

2000-01 BUDGETARY PERFORMANCE BY MAJOR PROGRAMME

29. The table below summarises the Regular Programme budgetary performance by major programme and chapter, comparing the 2000-01 Appropriation as revised¹³ with the corresponding net expenditure.

2000-01 Budgetary Performance by Major Programme/Chapter (US$ 000)

30. Although a number of specific issues contribute to the individual Chapter performances, five main factors, outlined below, have impacted expenditure across all chapters:

• During the annual allotment setting phase in 2000 and 2001, reductions against divisional allotments were imposed in order to fund high-priority, under-budgeted items. The reductions affected all Chapters and were implemented on the basis of vacant Professional posts and the reduction to certain non-staff components.
• During the biennium, the funds which were held back at the allotment setting stages were redirected mainly to cover the support cost income shortfall (US$ 7.8 million), the under-budgeted costs of Oracle and the restructuring of the Finance Division (approximately US$ 4.0 million).
• In the latter part of the biennium, additional funds became available for spending as a result of the forecasted positive staff cost variance. The majority of these funds were re-allocated to the technical programmes in Chapter 2.
• At the end of the biennium, the positive staff cost variance of US$ 21.3 million was distributed across the programme structure in relation to the amounts incurred at standard rates. This distribution had the effect of reducing expenditure by Chapter as follows: Chapter 1 (US$ 2.0 million); Chapter 2 (US$ 8.1 million); Chapter 3 (US$ 6.0 million); Chapter 4 (US$ 0.1 million); Chapter 5 (US$ 3.0 million); and Chapter 6 (US$ 2.1 million).
• The support cost income shortfall of US$ 7.8 million was distributed across the programme structure in accordance with the allocation of support cost in the PWB 2000-01. The biggest effect was in Chapter 3, where 67.6% of the overall shortfall was allocated (US$ 5.2 million).

31. A brief summary by Chapter is as follows:

Chapter 1: General Policy and Direction

32. General Policy and Direction utilised 96.3% of its 2000-01 Appropriation, with the surplus occurring mainly as a result of the distribution of US$ 2 million of the staff cost variance to this Chapter.

Chapter 2: Technical and Economic Programmes

33. Technical and Economic Programmes ended the biennium with a surplus of US$ 6.2 million, utilising 97.8% of the Appropriation.

34. The surplus would have been substantially higher, given the distribution of US$ 8.1 million of the staff cost variance to this Chapter, as well some under-spending against divisional allotments. However, once the magnitude of the positive staff cost variance became known in the latter part of the biennium, and in view of the wishes of the Committee to give priority to the Technical and Economic Programmes, a substantial portion of the available funds was redirected to the technical programmes in Chapter 2. This had the result of reducing the surplus balance, with, in some cases, final expenditure exceeding the appropriation (Major Programmes 2.4, Forestry and 2.5, Contributions to Sustainable Development and Special Programme Thrusts).

Chapter 3: Cooperation and Partnerships

35. Cooperation and Partnerships utilised 99.1% of the biennial Appropriation, incurring a surplus of US$ 1.1 million.

36. As noted above, a significant percentage of the support cost income shortfall is allocated to this Chapter, which is why over-spending in this Chapter had been anticipated. The effect of the support cost income shortfall is mitigated by the distribution of the positive staff cost variance.

Chapter 5: Support Services

37. Although substantial expenditure beyond the total appropriation for Chapter 5 was foreseen for the Oracle development project¹⁴, the final biennial expenditure was practically equal to the Appropriation (99.5%). The over-expenditure did not materialise, partly due to the impact of the positive staff cost variance distribution and also due to the re-programming of Oracle funds within the Information Systems and Technology Division (AFI) from development costs, which impact Chapter 5, to operational costs, which impact all chapters.

Chapter 6: Common Services

38. Expenditure of 94.7% of the Appropriation in Chapter 6 (leaving a surplus balance of US$ 2.1 million) arises mainly from the effect of the staff cost variance distribution.

Chapter 7: Contingencies

39. Approximately 76% of the approved budget for Chapter 7, which provides US$ 600 000 for Contingencies, was utilised to provide for incidental costs incurred for the emergency structural works on the top floor of building B. As stated in Financial Regulation 4.5(c) (i), "the expenditure of any sum (or part thereof) which may have been voted in the budget to cover unforeseen contingencies may be effected by the Director-General."

ANNEX II

EXPENDITURE BY ACCOUNT

2000-01 Regular Programme Expenditure Summary (excluding MP 4.1) (US$ 000)

Staff Costs

40. The total staff appropriation, which includes professional and general service staff costs, was underspent by approximately 9.3% (US$ 42.4 million). Half of the surplus (US$ 21.3 million) is a result of the positive variance between the standard rates set at the beginning of the biennium and the actual biennial staff costs. The remaining under-spending largely reflects professional staff vacancies. Some of these staff savings permitted the application of resources to underbudgeted programmes and activities that required non-staff expenditure.

Non-staff Components

41. Approximately 113% of the non-staff appropriation was spent in 2000-01, continuing the trend of the past biennium where non-staff expenditure exceeded the appropriation. The Other Human Resources category was over-spent by US$ 20.3 million, reflecting the decisions by managers to use alternative inputs for programme implementation, and largely compensating for vacant Professional posts. Additional expenditures under General Operating Expenses result from a number of high priority items, including Oracle, one-time costs associated with the implementation of the Wide Area Network (WAN), additional maintenance works, and miscellaneous improvements and upgrades of computer equipment.

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1 FC 96/4, Annual Report of Budgetary Performance and Budgetary Transfers (May 2001); and FC 97/3, Programme and Budgetary Transfers in the 2000-01 Biennium (September 2001).

2 Other Income is further described in paragraphs 20 through 22.

3 Total expenditure of US$ 549,122 reconciles with actual expenditure in Statement IV of US$ 560,519 after subtracting the TCP expenditure in the 2000-01 biennium of US$ 11,397 million (para 9 of FC 99/3, Financial Highlights paper refers). US$ 560,519 - US$ 11,397 = US$ 549,122.

4 Operative paragraph 6 of Conference Resolution 3/99 establishes Chapter 9 of the PWB to manage "One-time Expenditures funded from Arrears", including one-time redeployment and separation costs.

5 The staff cost variance is further described in paragraphs 10 through 14.

6 The US$ 9 million authority is further described in paragraphs 15 through 19.

7 FC 97/3, Programme and Budgetary Transfers in the 2000-01 Biennium, refers.

8 Conference Resolution 3/99 refers.

9 In arriving at the 2000-01 Appropriation for Other Income, adjustments have been made for those elements that are accounted as Trust Funds in the accounts of the Organization. This is necessary to provide a comparable basis of relating the Appropriation with the expenditure reported in the audited accounts of the Organization.

10 Emergency projects have shwn a substantial rise in delivery due to the Oil-for-Food programme in Iraq. 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 only the operating unit's direct costs.

11 The 2000-01 Appropriation as Revised is the Appropriation arising out of the Conference approval of the budget at Lira 1,875 (May 2000 Finance Committee paper FC 94/5 refers).

12 The Technical Cooperation Programme (TCP) appropriation falls under the provisions of Financial Regulation 4.3, which makes the balance of the 1998-99 Chapter 4 appropriation available for obligations during 2000-01. Thus, in line with the presentation in Statement IV of the accounts, the unspent balance of TCP appropriation for the reporting biennium is excluded from the budgetary performance

13 The Appropriation as revised constitutes the approved budget by chapter following re-programming of resources to reflect the adoption of the budget at an exchange rate of Lira 1,875 to the US dollar (document FC 94/5 refers).

14 Document JM 2000/3, FAO's New Financial System and Procedures, refers.