FC 104/2

Finance Committee

Table of Contents

Introduction

Overall Biennial Forecast

Field Staff Security Requirements
Staff Cost Variance

Budgetary Transfers between Chapters

Decision Sought

Introduction

1. Conference Resolution 5/2001 on the Budgetary Appropriations for 2002-03 approved a budget of US$ 651.8 million, and Financial Regulation (FR) 4.1(a) authorises the Director-General to incur obligations up to the amount voted. Financial Regulation 4.5(b) requires transfers from one chapter to another to be approved by the Finance Committee. This document provides updated estimates of the chapter transfers foreseen in 2002-03, for approval by the Finance Committee.

Overall Biennial Forecast

2. At its 102nd session in May 2003, the Finance Committee reviewed the Thirty-sixth Annual Report on Budgetary Performance and Programme and Budgetary Transfers¹, which was subsequently endorsed by the Council at its 124th session in June 2003. The document tentatively indicated that transfers would be required principally in favour of Chapter 1 (US$ 0.7 million), Chapter 3 (US$ 7.9 million) and Chapter 5 (US$ 0.7 million). Resources would need to be transferred from Chapter 2 (US$ 7.0 million) and Chapter 4 (US$ 2.0 million).

3. The Committee took note of the tentative forecast of the projected transfers between Chapters and noted that the official request for transfers would be presented in the September 2003 session.

4. The Committee recognized that a number of items were contributing to the variance from budget, the main ones of which are highlighted below:

• the forecast shortfall in support cost income, which was largely attributed to the continuing change in the volume and mix of the Organization’s extra-budgetary programmes, exacerbated by difficulties in reducing staff costs for operational support services particularly in the Regional Operations Branches;
• the requirement of a budgetary transfer from Chapter 4 to Chapter 3, which occurred as a result of a modification in the accounting methodology applied to the recovery of TCP Direct Operating Cost (DOE) reimbursements;
• the high level of activity by the Investment Centre Division, which occurred as a response to increased demand from the World Bank.

Field Staff Security Requirements

5. Since the report to the May Finance Committee, incremental requirements for field staff security have arisen, which will increase expenditure under Chapter 3 by an additional US$ 1.6 million. These funds are required as a result of the Minimum Security Telecommunications Standards (MISTS), which were adopted by the Chief Executives Board (CEB) in the autumn of 2001. Consequently, FAO is called upon to comply with MISTS in each FAO Representation in which a Security Phase is in effect (FAORs falling into this classification totalled 56 as of January 2003, and had increased to 65 by April 2003). The Organization is also expected to contribute to the cost of running shared Radio Rooms in 67 of the countries in which FAO has a Representation.

6. Of the total field staff security requirements outlined above, US$ 0.9 million is required for one-time equipment costs, which could be eligible for coverage by arrears as authorized by Conference Resolution 6/2001. In order to avoid excessive burden on the Regular Programme activities, the Finance Committee is requested to give its agreement in principle to the use of arrears for these one-time equipment expenditures. Every effort would be made to absorb within the Regular Programme appropriation the full amount of the unbudgeted security costs; arrears would only be utilized if full absorption of the costs were to risk impairing the implementation of the approved programmes.

Staff Cost Variance

7. During the biennium, all charges for staff costs against divisional budgets are made at standard rates that take account of the grade and duty station of the staff member. This ensures that allottees and programme managers are not held accountable for cost variations that are outside their control, such as exchange rate variations and changes in salaries and allowances determined by the International Civil Service Commission (ICSC). Differences between the overall standard costs established for the PWB 2002-03 in July 2001 and actual Regular Programme costs incurred during the biennium represent the staff cost variance. The staff cost variance is charged in the financial accounts across all programmes in relation to the amounts incurred at standard rates.

8. Actual staff cost trends until mid-2003 reveal that a favourable staff cost variance of US$ 6 million may be estimated to arise for the biennium. This is equivalent to approximately 1.3 percent of total biennial standard staff costs.

9. At the time of the PWB 2002-2003 finalisation, a number of cost increase assumptions and provisions were made on the basis of the information available, the following of which have contributed to the current favourable variance:

• A provision was included in the budget for the strengthening of local currencies against the US dollar in decentralized offices, where FAO does not have currency hedging mechanisms in place. This risk, however, is materialising at a later stage than anticipated, hence contributing significantly to the generation of a favourable staff cost variance.
• A provision was included for an increase in the actuarial valuation for the After Service Medical Care current service charge that was higher than the subsequent 2001 valuation results.
• An increase in premiums was budgeted at 15% for the whole biennium, which subsequently materialised at 11% after the decision of the JAC/MC to use the Profit Sharing Account to reduce the impact of the increase in costs.

10. Finally, it is recalled that the GS language factor increase for headquarters staff was included in the standard rates for 2002-03, pending the outcome of the appeal launched on behalf of the General Service staff to have the language factor reinstated. If the appeal is won, which will only be known in the early part of next year, the biennial impact of reinstating a language factor at 4% would amount to US$ 4 million, an amount which is currently being held aside.

11. The distribution of the positive variance is anticipated in the forecasted budgetary performance figures presented below.

Budgetary Transfers between Chapters

12. Full utilisation of the 2002-03 appropriation is indicated, and the 2002-03 transfers sought are tabulated below. Although the pattern of the requested transfers is similar to that in FC 102/3, the transfer into Chapter 3 has increased as a result of the field staff security requirements described above². Offsetting this requirement, the transfers from Chapters 2 and 4 have increased.

Table 1. 2002-03 Forecasted Budgetary Performance by Chapter (US$ million)

13. The explanations of the required transfers by chapter were largely provided in the Annual Report on Budgetary Performance and Programme and Budgetary Transfers (FC 102/3), which the Finance Committee reviewed in May 2003. A summary of the main influencing factors is provided below.

14. Chapter 1 - General Policy and Direction: over-spending is mainly due to the additional cost of FAO's share of UNSECOORD as well as the funding of additional human resources in the Administrative Support Unit and Special Advisers to the Director General (SAD).

15. Chapter 2 - Technical and Economic Programmes: these savings are generated partially from vacant posts and partially because a significant portion of the positive staff cost variance is distributed to this Chapter (50% or US$ 3 million). These savings have intentionally been set aside to cover increased costs elsewhere in the budget.

16. Chapter 3 - Cooperation and Partnerships: the transfer into Chapter 3 is required for four main reasons:

• the substantial effect of the shortfall in project support cost earnings;
• the impact of the modification in the accounting methodology for the recording of TCP DOE reimbursements;
• the high level of activity by the Investment Centre Division; and
• the increase in field staff security costs.

17. Chapter 4 – Technical Cooperation Programme: the transfer from Chapter 4 is necessary because of the one-time impact of the change in the accounting methodology on DOE reimbursements.

18. Chapter 5 - Support Services: this transfer is mainly required to cover the support cost income shortfall.

19. Chapter 6 – Common Services: currently no transfer is being requested into this Chapter, as any US dollar/Euro exchange losses incurred on headquarters non-staff expenditures are expected to be absorbed. Continued weakness of the US dollar against the Euro, however, may result in some over-expenditure in this Chapter for which a transfer would be required.

Decision Sought

20. In accordance with FR 4.5, the Finance Committee is requested to approve the transfer of up to US$ 10.5 million from Chapter 2, Technical and Economic Programmes, and Chapter 4, Technical Cooperation Programme, to Chapter 1, General Policy and Direction (US$ 0.5 million), Chapter 3, Cooperation and Partnerships (US$ 9.7 million) and Chapter 5, Support Services (US$ 0.3 million).

21. In addition, the Committee is requested to give its agreement in principle to the use of arrears for the one-time expenditures on equipment arising from field staff security requirements, on the understanding that, in the first instance, every effort will be made to fully absorb these costs within the Regular Programme.

22. The forecast budgetary performance and the required transfers are partially influenced by factors that are largely outside the Organization's direct control, including the US Dollar rate of exchange against the currencies of FAO's Regular Programme operations, and the level of UNDP and non-emergency trust fund delivery (on which support cost reimbursements are based). The precise amounts transferred can only be determined after the finalisation of the 2002-03 Regular Programme accounts in early 2004.

23. As per past practice, the Director-General will report to the Finance Committee, at its first session in 2004, the exact amounts transferred.

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¹ FC 102/3 refers.

² The required transfer would decrease by US$ 0.9 million if the one-time costs were covered by arrears.