FC 99/20(a)


Finance Committee

Ninety-ninth Session

Rome, 6 - 10 May 2002

Memorandum of Understanding between FAO and the Global Environment Facility (GEF)
Request to the External Auditor for Specific Audit Reports on the Proposed FAO/GEF Fund

Table of Contents

I. Background

1. The Global Environment Facility (GEF) provides grant resources to meet the agreed incremental costs associated with measures to achieve global environmental benefits. GEF is the financing mechanism for the Conventions on Biodiversity (CBD), Climate Change (UNFCCC), and the Stockholm Convention on Persistent Organic Pollutants (POPs). While not yet a financing mechanism for the United Nations Convention to Combat Desertification (UNCCD), GEF supports a number of activities related to this Convention. Funding is guided by activities defined by 13 Operational Programmes (OPs) grouped under four GEF Focal Areas (FAs): biological diversity, climate change, international waters and ozone layer depletion. Land degradation, primarily desertification and deforestation as they relate to these four FAs, is also currently addressed. It is expected that Land Degradation and POPs will be designated as new focal areas by the end of 2002.

2. The GEF has long recognised that co-operation with other international bodies is essential if the Facility is to catalyse international action to protect the global environment. As such, in anticipation of becoming the interim financing mechanism for the POPs Convention, the GEF Council, in May 2000, approved an initiative to expand opportunities for FAO and UNIDO as Executing Agencies (EAs), given their specific expertise in newly emerging areas for GEF activities. This opens up the opportunity for FAO to request resources, initially for GEF Project Development and Preparation Funds (PDF-B) and expedited enabling activities for POPs, directly from the GEF Secretariat (GEFSEC), rather than passing first through one of the three GEF Implementing Agencies (World Bank, UNDP, UNEP). Moreover, while fully prepared project proposals still have to be channelled through an Implementing Agency (IA), these arrangements can now be negotiated on a project-specific basis, and the role of the IA may only be nominal in nature to comply with the Instrument's requirements, giving increased responsibility to the new EAs.

II. FAO-GEF Strategic Match

3. Following the GEF Council decision, in a series of very open and positive meetings between the GEFSEC and FAO, it was clear that the strategic match between FAO and GEF would form a sound basis for the development of a productive partnership. The partnership would be consistent with the three interrelated global goals of FAO as set out in para. 20 of the Strategic Framework (2000-2015), particularly the twin objectives of sustainable production and natural resource conservation, as well as with the corporate strategies and multi-disciplinary approaches to achieve these goals. FAO has clear comparative advantage in several areas of GEF's programme priorities, and this new collaborative relationship is furthermore consistent with spirit of the Organization's cross-organizational strategy for broadening partnerships and alliances (paras. 167 and 172 of the Strategic Framework). In addition, FAO-GEF collaboration would contribute to several of the Priority Areas for Inter-disciplinary Action (PAIAs) that have been set up, including, inter alia, integrated management of biological diversity for food and agriculture, biosecurity for agriculture and food production, integrated production systems, and climate change issues in agriculture. Enhanced collaboration with GEF would build on the considerable experience already gained by the Organization in assisting members in the preparation and implementation of GEF projects through its collaboration with the UNDP, UNEP and the World Bank. Finally, GEF is an attractive source of financing to developing countries, as it is one of the few large-scale sources of grant financing for sustainable development.

4. FAO and the GEF Secretariat agreed upon developing an initial work programme in six priority areas: persistent organic pollutants (POPs), agricultural biodiversity, biosafety, use of renewable energies in productive sectors (agriculture), integrated ecosystem management, and sustainable development in the productive landscape. In the short term, priority would be given to developing a portfolio of POPs-related projects.

5. The GEF Secretariat is presently in the process of negotiating its next replenishment for the period 2002-2006, which is estimated to be in the range of US$2.2 - 3.2 billion in new resources. Using a potential replenishment of US$3 billion as a basis, the GEF Secretariat has been discussing "notional allocations" for its respective collaborative partners. For FAO, GEFSEC had tentatively indicated that the Organization's portfolio could grow to approximately US$40 million per year. This would place FAO in an intermediate position between the Implementing Agencies (particularly the World Bank and UNDP) and the other Executing Agencies (the Regional Development Banks, IFAD and UNIDO). It should be furthermore noted that, apart from committing large amounts of its own resources, GEF has been highly successful in leveraging large amounts of co-financing - estimated at US$3 for every US$1 of GEF resources. An increase in the FAO/Government Trust Fund programme could therefore also be expected as a result of the GEF co-financing principle.

6. FAO, in its new relationship with the GEF Secretariat as an Executing Agency would develop new modalities for collaboration with the beneficiary countries and the GEF Secretariat and would be responsible for the whole project cycle (development, preparation, appraisal, supervision and evaluation). As already advised to the Finance Committee at its 97th Session, the cost of the Organization's services would be covered by an Implementation Services Fee. This is likely to be a flat fee, which would cover the full cost of the management and administration of all project-cycle tasks and activities during all phases of a project from concept to closure. Once the GEF Council would approve a project, the project resources and the Implementation Services Fee would be transferred to FAO by one of the IAs.

III. FAO-GEF Agreements: financial and audit provisions

7. Two agreements have been under consideration since March 2001: a Memorandum of Understanding (MOU) between the GEF Secretariat and FAO and a Financial Procedures Agreement (FPA) between FAO and the GEF Trustee - the World Bank. Under the provisions of the MOU and FPA, FAO would establish a Fund, the FAO-GEF Fund, to receive, hold and administer GEF Grants that are transferred by the Trustee as directed by the GEF Secretariat. Such grants would be made on the basis of the GEF Secretariat's approval of project proposals prepared by FAO.

8. The GEF standard provisions for financial reporting on such a Fund are set out in Article V of the MOU and Article VI of the FPA. They include the requirement for an annual audit opinion on the status of the Fund, to be given by the External Auditor of the body concerned. These provisions are determined by the World Bank as Trustee of the GEF Trust Fund.

9. In the course of meetings and discussions with the GEF Secretariat during 2001, the reasons for FAO's difficulty in accepting these audit provisions were explained and solutions were proposed. The compromise (see Annex 1) finally achieved represents a significant modification of the audit requirement in FAO's favour, compared with the other bodies signing up for the new arrangements (the four Regional Development Banks, IFAD and a UN Specialised Agency, UNIDO). Specifically, FAO would be asked to provide a separate audit opinion on the FAO-GEF Fund on a biennial basis, as for the Organization's accounts, rather than every year; in the intermediate years the Organization would simply provide a statement of the FAO-GEF Fund certified by management.

IV. Scope of Audit

10. The operations that FAO would carry out with the grants received into the Fund could be of two kinds viz.:

    1. For a project that FAO would carry out itself: in this case, expenditure would be processed through FAO's own financial systems and procedures. Assurance of project expenditure is thus substantially provided by the use of those financial systems and procedures and their review and audit in the normal course of business. The additional audit work required to provide a separate audit opinion of the FAO-GEF Fund is correspondingly reduced.
    2. For a project that a national entity or other third party would carry out under FAO supervision: in this case, FAO would transfer grant funds received from the GEF Trustee to the local entity. Project expenditure would be controlled and processed locally, substantially or exclusively through non-FAO systems and procedures. To obtain requisite assurance for audit purposes of such expenditure goes beyond current practice and requires a change in approach, as now explained.

11. As administrator of the grant received for a project under (2), FAO would be responsible for certifying that the funds transferred were expended for approved project purposes and not merely that funds received had been duly transferred to the right entity. In this regard, the Agreements provide that audited financial statements received for such a project would be used to provide assurance of expenditure under such arrangements. In practical terms, FAO and its External Auditor would be reliant on these audited statements and related audit findings for the requisite assurance of that locally managed expenditure. Accordingly, the agreement for such a project would make contractual provision for appropriate external audit of expenditure and for ensuring the prompt availability of the audited financial statements and audit findings to FAO. Similar arrangements are already known to the Organization e.g. the agreement signed in 1995 between FAO and the Government of Brazil, under which a number of projects are being operated in that country. Moreover, such arrangements are consistent with the principles of national execution generally adopted in the UN System.

12. It is noted that for the foreseeable future (the next 12 - 18 months) FAO-GEF projects would all appear to fall under (1). FAO would therefore have gained experience of the proposed new GEF arrangements before any prospective involvement in managing GEF projects falling under (2).

V. Suggested Action by the Finance Committee

13. The Finance Committee last considered and approved a request for a special audit at its session in May 2000 (document FC94/9 refers). That request related to a large emergency ($25m) project, the Kosovo Emergency Farm Reconstruction Project, funded by the World Bank. The matter had been referred to the Finance Committee because the Organization could not, under its Financial Regulations, directly ask the External Auditor to carry out a special audit of the proposed project. Under Financial Regulation 12.6 only the Finance Committee may request the External Auditor "to perform specific examinations and issue separate reports on the results". The Finance Committee may also, under Financial Regulation 12.3, give any special directions to the External Auditor regarding a particular audit. The request was approved and the record of the Finance Committee decision is at Annex 2.

14. It may be noted that the operational activities concerned in the last request were quite different from those of the request now being made. The present request relates to a major, prospectively long-term collaborative programme with an important funding institution in search of partners, whose mandate is complementary to the entire range of FAO's operations of technical assistance. It is accordingly expected that the FAO-GEF Fund would make a significant contribution to the environmental and sustainable livelihood aspects of Organization's programmes of technical assistance to member nations for many years to come.

15. The Finance Committee is accordingly requested to consider the background document and request for a separate audit opinion to be given by the External Auditor on the biennial financial statement of the proposed FAO-GEF Fund. If the proposal is acceptable, the Committee is asked, under the provisions of Financial Regulation 12.6, to request the External Auditor to perform a special audit of the biennial FAO/GEF Fund in accordance with the terms of reference agreed.

16. As regards the associated costs:

 

ANNEX I

MEMORANDUM OF UNDERSTANDING BETWEEN FAO AND THE GEF SECRETARIAT
(EXTRACT OF ARTICLE V)
FINANCIAL PROCEDURES AGREEMENT BETWEEN FAO AND THE IBRD AS THE TRUSTEE OF THE GEF TRUST FUND

(extract of Article VI - identical provisions to those of extract of Article V of MOU)
Records and Reporting

Section 5.01. FAO shall provide the Secretariat with the following reports on the FAO/GEF Fund prepared in accordance with FAO's accounting and reporting procedures:

    1. quarterly unaudited financial reports for the GEF Grants;
    2. quarterly and annual reports (substantially in the form of Attachment 1 hereto) indicating, for each GEF Grant transferred, the expenses incurred and disbursements made during the relevant period;
    3. semi-annual progress reports;
    4. as soon as practicable after the end of FAO's fiscal year, an annual financial report for the FAO/GEF Fund certified by FAO's Director of Finance and Assistant Director-General Administration and Finance and attaching any audited financial reports with respect to the use of GEF resources which FAO has received from entities to whom FAO has transferred some or all of the proceeds of any GEF Grant;
    5. as soon as practicable after the end of FAO's biennial financial period, a copy of the FAO Regular Programme Statement of Trust Funds, which shall include a statement detailing the amount of funds received into the FAO/GEF Fund, the purposes for which such funds have been used and the amount of funds remaining in the FAO/GEF Fund and the opinion of FAO's external auditor on such statement;
    6. within six months after the date of completion or termination of the activities for which each GEF Grant has been granted, a final report on such GEF Grant;
    7. as soon as practicable after the termination of the Letter Agreement and this MOU, a final financial report for the FAO/GEF Fund certified by FAO's Director of Finance and Assistant Director-General Administration and Finance;
    8. as soon as practicable after the end of FAO's biennial financial period following the termination of the Letter Agreement and this MOU, a copy of the FAO Regular Programme Statement of Trust Funds which shall include a final statement for the FAO/GEF Fund detailing the purposes for which such funds have been used and the amount of funds remaining in the FAO/GEF Fund at the time of termination and the opinion of FAO's external auditor on such statement; and;
    9. such other reports as may reasonably be requested by the Secretariat from time to time.

Such reports and accounts will be identical in form and content to the reports and accounts to be furnished to the Trustee pursuant to the Financial Procedures Agreement, and FAO shall provide copies to the Secretariat as soon as they are available. The costs of any external audits to be performed pursuant to this MOU shall be provided for in accordance with Article II, section 2.3 of the Financial Procedures Agreement.

For purposes of the financial reports required under paragraphs (d), (e) (g) and (h) hereof, investment income earned by the FAO/GEF Fund may be reported as cumulative investment income and need not be allocated across individual GEF Grants.

 

ANNEX II

EXTRACT FROM THE REPORT OF THE NINETY-FOURTH SESSION OF THE FINANCE COMMITTEE, 8-12 MAY 2000,
(document CL 119/12)

32. The Finance Committee considered document FC 94/9 regarding the request to the External Auditor of a specific examination of the Emergency Farm Reconstruction Project, for an approximate amount of US$25 Million financed through the World Bank, to be executed by FAO on behalf of the United Nations Interim Administration Mission in Kosovo (UNMIK).

33. The Finance Committee requested the External Auditor, in accordance with the provisions of Financial Regulation 12.6, to perform a special audit of the Project in accordance with the terms of reference as required by the World Bank. In this connection, the Committee noted that all costs arising from the special audit would be covered by the Project. The Finance Committee drew attention to the risks of a possible multiplication of similar requests and emphasized that special audits by the External Auditor should remain of an exceptional nature.