FC 104/14 |
|
FC 104/14 |
Hundred-and-fourth Session |
Rome, 15-19 September 2003 |
Capital Budgeting |
1. The Finance Committee at its May 2003 session reviewed the document on Capital Budgeting (FC 102/12) in which its approval in principle had been sought for the establishment of a facility aimed at allowing the Organization to better manage activities which involve capital expenditure, defined as expenditures on tangible or intangible assets with a useful life in excess of FAO’s financial period of two years and which generally require a level of resources which could not be funded within the appropriation for a single biennium.
2. The proposal was for a Capital Expenditures Facility (hereinafter referred to as the Facility) which would consist of two separate but inter-related elements:
3. The Committee noted that the proposed facility and procedures surrounding it provided for:
4. The Committee was not ready to endorse the precise modalities of the facility as proposed, but requested the secretariat to prepare revised proposals, taking into account:
5. The secretariat was also requested to prepare a draft resolution and the changes needed in the Financial Regulations for eventual consideration by the Finance Committee, the Committee on Constitutional and Legal Matters, the Council and the Conference.
6. Introducing capital budgeting in FAO, a step which has been recommended by at least two independent sources1, would be an appropriate and beneficial move fitting soundly within FAO’s planning framework. Integration into the planning framework, as opposed to ad hoc requests to the Governing Bodies for the use of fortuitous surplus funds, is the key underlying factor which distinguishes FAO’s proposal from existing schemes in many other UN agencies.
7. FAO capital budgets should and would have their strategic origins in the Strategic Framework and each proposal should in some way relate to one of more of the six Strategies to Address Cross-Organizational Issues (SACOIS), endorsed by the Membership in the Strategic Framework 2000-15:
8. In the current Medium Term Plan 2004-09 (MTP), for example, proposals of a capital nature have been made in several areas:
9. A well prepared capital expenditure MTP would also cover the planned replacement of capital equipment over the forthcoming six year period (e.g. replacement of servers, desk-top computers, vehicles, heating and cooling equipment, etc.).
10. It should be recognized that there are often quantifiable benefits arising from the implementation of sound capital budgeting. The process itself will bring discipline to such expenditure proposals as it will require the application of the relevant financial tools to determine internal rates of return and/or payback periods.
11. In certain cases, immediate benefits will flow in the form of reduced costs. For example, one of the major reasons for the KPMG recommendation on capital budgeting was the existing need for the Information Technology Division (AFI) to maintain and support several desk top environments at one time – the reason being that the replacement of the relevant equipment is a function of the availability of resources within each division. With a centralized fully integrated capital budget plan, the orderly replacement and elimination of obsolete environments can be managed and thus the number of staff supporting such environments, reduced.
12. The integration of capital budgeting would flow through from the MTP to the more detailed level in the Programme of Work and Budget (PWB) with the result that FAO could deliver its programmes in a cost-effective and efficient manner without disruptions due to peaks in financial requirements.
13. The key to capital budgeting is to have access to a multi-biennia funding mechanism. The establishment of a Capital Expenditures Facility would be the appropriate funding mechanism to support the introduction of the concept of capital budgeting in FAO. The features and modalities of the proposed Facility are expanded upon below, taking into consideration the concerns expressed by the Finance Committee.
14. As noted above, capital expenditures are defined as expenditures on assets with a useful life in excess of FAO’s financial period of two years and which generally require a level of resources which could not be funded within the appropriation for a single biennium. For this reason, the Facility by definition would need to have the capacity to carry over balances from one biennium to the next.
15. However, taking into consideration the request of the Committee to avoid the use of a reserve fund, the Secretariat is no longer proposing that the Conference establish such a fund under the provisions of Financial Regulation (F.R.) 6.8. Rather, the Secretariat proposes that a Capital Expenditure Account be established under the provisions of a new financial regulation. It would be stipulated therein that the balance of the account could be carried over from one financial period to the next.
16. A Draft Resolution including a draft of the proposed Financial Regulation (F.R. 6.10) establishing the capital expenditure account is attached in the Annex, which is submitted for consideration by the Finance Committee and the Committee on Constitutional and Legal Matters, and eventually the Council and the Conference.
17. Once the establishment of the Capital Expenditures Facility has been authorized (which is currently proposed to consist of Chapter 8 of the Budget and the Capital Expenditure Account), the review of proposals would become part of the regular programme planning cycle. The Medium Term Plan (MTP) would include a Capital Expenditure Plan outlining capital expenditure projects envisaged over the medium term (i.e. the next six year period). The Programme of Work and Budget (PWB) would include further detail in the form of a Capital Expenditure Budget for the next two years under Chapter 8.
18. It is proposed that the Finance Committee be given the mandate and responsibility to review the Capital Budgeting section of the MTP and to endorse Chapter 8 of the PWB.
19. Furthermore, during implementation, it is proposed that all major projects be subject to progress reports to the Finance Committee.
20. Because Chapter 8 would be an integral part of the Regular Programme budget, the adoption of the Conference Resolution on the Budgetary Appropriations (F.R 4.1) would include the capital expenditure proposals reflected in Chapter 8.
21. The desire for a separate Conference Resolution reflecting, for example, the WHO practice, could not function with an integrated capital expenditure budget which is part of the structure of budget itself. Within any one biennium, the amount appropriated could consist of funds from within the Regular Programme appropriation as well as income in the form of part or all of the resources already held in the Capital Expenditure Account.
22. In addition, Legal Counsel has noted that there is a well-founded traditional principle that the budget should be a single consolidated one and consequently that there should be a single resolution.
23. As suggested by the Finance Committee, the Secretariat has reviewed WFP’s proposals for a Capital Asset Fund as outlined in WFP’s Comprehensive Financial Report2. The procedures outlined for the Fund were approved in principle by the Executive Board in October 2002. In addition, FAO has undertaken consultations with WFP senior management on this topic.
24. The Secretariat draws attention to the fact that the FAO Facility closely parallels the Capital Asset Fund (CAF) recently established by WFP, as detailed below.
25. Purpose: The CAF was established to provide a funding mechanism for expenditures of a capital nature, while FAO’s facility is aimed at allowing FAO to better manage activities which involve capital expenditure and, in doing so, to establish the necessary funding mechanisms.
26. Criteria for eligible expenditures: For purposes of CAF funding, capital expenditures should meet the criteria that the cost will have benefits beyond the current biennium and that the cost could not be met by the budget of the current biennium. FAO’s criteria are that the assets have a useful life in excess of FAO’s financial period of two years and generally require a level of resources which could not be funded within the appropriation for a single biennium.
27. Approval mechanism: WFP will present a biennial management plan and budget to the Board for approval which will include details of the sources and utilization of the CAF. FAO will include capital expenditure proposals as an integral part of the MTP and PWB planning process and hence will present such proposals to the Finance Committee, the Council and the Conference.
28. Implementation: A committee appointed by the Executive Director will manage implementation of projects undertaken from the CAF. At FAO, managers will be made responsible for projects and all major projects will be subject to progress reports to the Finance Committee.
29. Funding Sources: WFP proposes three funding sources: 1) reprogramming from other funds; 2) specific donor contributions; 3) recoveries from programme activities and other users of capital assets through a process of internal charging. FAO, in its document to the May 2003 Finance Committee session, proposed the following three funding sources: 1) Regular Programme budgetary provisions; 2) income from net interest earnings; and 3) voluntary contributions.
30. As can be seen above, WFP has proposed a funding source that FAO had not initially considered: recoveries from users of capital assets through a process of internal charging. The Secretariat believes it would be appropriate to have a similar funding source for the Facility. A user charge for the delivery of capital investment services to projects and Regular Programme activities could be implemented, for example for space, telephone infrastructure or computer use. While seeking approval in principle as granted in the WFP case, the Secretariat proposes that a study be undertaken to determine the precise modalities to be applied while ensuring that the proposed chargeback procedure does not duplicate charges already levied and that the best practices of governments and United Nations organizations are followed.
31. In addition, the previously proposed use of interest income in the FAO Facility has been removed, partly because of comments made at the Finance Committee but also because of concurrent proposals to use part of this income to support investment related expenses.
32. The Finance Committee is requested to review and endorse for consideration by the Council the establishment of a Capital Expenditures Facility which would consist of two separate but inter-related elements:
33. The Committee is also requested to review and endorse the draft text of the proposed Draft Resolution, including the draft Financial Regulation 6.10, for submission to the Council.
Resolution _ _/03
Capital Budgeting
34. Noting the recommendations of external experts and of the JIU that the Organization should introducing capital budgeting;
35. Recognizing the desirability of integrating capital expending planning into the existing planning framework:
36. Decides:
Draft Financial Regulation on the Establishment of a Capital Expenditure Account
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1 The international accounting firm KPMG (following its review of the staffing structure of the Information Systems and Technology Division (AFI)) and the JIU in its “Review of Management and Administration in FAO”.
2 Section F of WFP/EB.A/2003/6-B/1 refers.