FC 108/4-Rev.1 (English only)

Finance Committee

Introduction

4. This paper is presented in accordance with the request made by the Committee at its 107^th Session in May 2004 when discussing a general decline in the rate of receipt of contributions in recent years.

Receipt Patterns 1995-2003

Total contributions received

5. The above Table 1 shows that receipt of Regular Programme current assessments has been in constant decline since 1999. (In 1996 and in 2002, the largest contributor paid practically all of its accumulated arrears.)

Arrears

6. The annual collection of arrears is fairly stable. This relative stability is shown in monetary terms in Table 2 (2004 receipts are January to June). The two major exceptions in 1996 and 2002 reflect arrears payments from the largest contributor.

7. On the other hand, the year-end balance of total Regular Programme arrears (Table 3) has shown a persistent increase in the last few years (2004 data at 30 June).

8. Table 4 shows the receipts of arrears of contributions expressed as a percentage of the total amount of arrears due at 1 January of each year (2004 receipts are January to June). With the exception of 1996 and 2002 when arrears payments were received from the largest contributor, the percentage collected has ranged between 5.22 percent and 25.19 percent of the arrears due.

9. Table 5 shows year-end arrears positions in excess of US$250,000 of countries in regions or individual countries, at each year end since 1995 (2004 data at 30 June). The major unpaid balances can be categorised as follows:

• Arrears due from the largest contributor
• Arrears due from the former Yugoslavia (the issue of how these arrears should be considered and resolved, on a UN-wide basis, has for several years been the subject of a review on the part of the UN Committee on Contributions (UNCC) in New York. The amount of these arrears is stable.)
• Arrears due from Iraq
• Arrears due from former constituent republics of the USSR (the countries concerned have claimed that unduly high assessment rates initially attributed by the UN to these Member Nations in the early and mid 1990s has caused the accumulated arrears. The matter is being addressed by the UNCC at the request of several of the Member Nations concerned. Pending a decision, five out of nine of these Member Nations have requested and been granted instalment plans by the FAO Conference for the repayment of their arrears over a period of up to 15 years.)
• Arrears due from Member Nations in the Latin America region

Current Assessments

10. Table 6 shows that some Member Nations are irregular with their payments during the year, in contrast to others who are more consistent and pay during the same period over the years. The high irregularity of receipts each year (see also Table 7) makes it difficult for the Organization to accurately forecast its cash flow. Amongst the top 10 contributors, Brazil has not paid its current assessment since 1998.

11. In 2002 and 2003 the unpaid amounts due from the USA were equivalent to approximately 4.47% of current assessments in 2003 and 2.24% in 2002 (the 2002 balance was paid in the subsequent year, and 50% of the 2003 balance has been received in 2004). Taking into account these percentages when examining Table 7, the percentage of total current assessments received for the full year would have been equal to 93.45% in 2002 and 94.21% in 2003, and would have been more substantially in line with previous years.

Table 7: Percentage Receipts of Current Assessments from all Member Nations 1995-2004 (January to June)

(July to December)

Actions currently being taken to encourage timely payment of contributions

12. A Circular State Letter is sent to all Member Nations each December in accordance with Financial Regulation 5.4 informing of their obligation to the Budget for the following calendar year and of arrears of contributions outstanding. It is customary to remind Member Nations of the terms of the Incentive Scheme and of the discount that could be earned by effecting full payment promptly (before 31 March).

13. In accordance with procedures established during the 2002-03 biennium, statements of contributions outstanding are sent by AFF to Member Nations on a quarterly basis. The response to these statements has been encouraging.

14. Specific action is taken to notify those Council Members who are considered to have resigned their seat due to non-payment of contributions in accordance with General Rule XXII.7 of the General Rules of the Organization (G.R.O.), to encourage them to regularise their positions well before the Council session.

15. Similarly, specific action is taken to ensure that those Member Nations with potential voting rights problems are notified well in advance of the Conference session and have ample time to regularise their contributions position or clarify the reasons for the non-payment of assessed contributions.

16. Since September 2003 AFF has sent to all FAO Regional Offices and Sub-Regional Offices a detailed report every three months describing the contributions position of all Member Nations in their region, with the request that FAO officials follow-up with local authorities to ensure payment is made.

Incentives currently in place to encourage payment

17. The mechanism currently in place to encourage the timely payment of contributions is the Incentive Scheme to Encourage Prompt Payment of Contributions. The rules governing the Scheme together with the history of the Scheme’s performance and cost to the Organization over the past decade are covered in detail in document FC 108/5 “Incentive Scheme to Encourage Prompt Payment of Contributions – Determination of Discount Rate”.

Sanctions envisaged in the case of non payment of contributions

18. The Committee will recall that the sanctions envisaged by the Basic Texts for the non-payment of contributions are threefold:

• Loss of voting rights in the Conference under Article III-4 of the Constitution.
• Ineligibility for election to the Council under Rule XXII-5 of the General Rules of the Organization.
• Loss of seat in the Council under Rule XXII-7 of the General Rules of the Organization.

19. In implementing these provisions, it has been the practice of the Organization not to take into account the amounts due for the current financial year, since these are not formally defined as “arrears” in accordance with Financial Regulation 5.5. Furthermore, only contributions to the budget of the Organization, duly apportioned by the Conference, are taken into account when calculating the amount of arrears (i.e. contributions to WCF and SRA are not considered).

20. The loss of voting rights is automatic and can only be restored by a positive action of the Conference, or the payment of the arrears due. The provisions for ineligibility for election to the Council or loss of a Council seat are strictly applied by the Organization with no exceptions either foreseen or made.

Measures considered in the past to improve collection of contributions but not approved by Governing Bodies

21. Changes to sanctions envisaged in the Basic Texts.

• A proposal to consider amounts due to the Working Capital Fund and Special Reserve Account as “contributions” in accordance with Article III.4 and GRO XXII-5 and XXII-7 (considered in 1994).
• A proposal to amend the sanctions under Article III.4 and GRO XXII-5 and XXII-7 so that only one year of arrears would have resulted in the loss of voting rights (instead of two) (considered in 1991).
• Extension of the restriction under GRO XXII-5 & XXII-7 to include loss of seat in the Finance and Programme Committees (considered in 1991).

22. Acceptance of local currency in payment of assessed contributions. To facilitate the payment of contributions by those Member Nations with limited availability of convertible currency, the Finance Committee at its 77th Session in September 1993 considered a proposal to recommend a derogation from Financial Regulation 5.6 which would have allowed, under certain conditions, the Secretariat to accept contributions in non-convertible local currencies.

The conditions proposed at the time were:

• The Organization would have activities in that country which would have allowed the utilisation of the funds.
• The amounts could not have exceeded those useable by FAO activities within 2-3 months.
• The contribution would not have been acceptable if there was a currency exchange risk for the Organization.

23. The proposal was considered by the Council at its 104th Session in 1993 and subsequently by the 27th Conference in 1993 which requested further in-depth analysis of the subject before taking a decision. The proposal was subsequently withdrawn by the Secretariat since it was a complex issue and the proposal appeared to have little chance of adoption.

Recent experience of other UN Agencies in the area of receipts of contributions

24. Recent experience in contributions collection patterns by other UN organizations is better than that experienced by FAO. Information compiled by the UN Chief Executives Board (CEB) indicates that the FAO collection rate is amongst the lowest when measured at various points in 2002 and 2003. The data in the same years then shows a significant improvement in the FAO collection rate during the last quarter. The information suggests that some Member Nations assign higher priority of payments to other agencies and organizations of the UN system.

25. The deterioration of collection rates of current assessments by FAO has become increasingly evident in recent years. When considered together with the UN data, it is clear that measures to improve FAO’s collections should address not only the build-up of arrears across financial periods but also the increasingly deteriorating patterns within financial periods, evidenced in Table 7 above.

26. Measures implemented by individual UN organizations were recently identified by the CEB and summarized in their report entitled “Budgeting in Organizations of the United Nations System” dated 3 November 2003. Usually measures in force include incentives and penalties. The most frequent type of incentive entails the distribution of a share of interest earnings generated by cash surpluses to Member Nations, usually upon the condition that they pay in full their annual contributions and have no arrears. The most recurring penalty is the temporary suspension of voting rights until the arrears of contributions are settled through payment by the Member Nation.

27. With the exception of the IMO, where collection rates have reached 98% in recent years from a low level of 68% in 1990, all Organizations reported to the CEB that their incentives and/or penalties had not resulted in any perceptible improvement in rate of receipts from Member Nations.

28. The United Nations General Assembly in May 2004 examined a report of the Secretary-General entitled “Improving the financial situation of the United Nations”. It provides a review of the UN’s financial situation as at 31 December 2003 and some projections to 31 December 2004. The report’s conclusion regarding the UN’s financial picture is quite similar to FAO’s experience, which is that although the situation did not change dramatically in 2003, aspects of the current situation are a cause for high concern. While 2003 ended with a positive cash balance for the regular budget of the UN, its situation remains precarious, and there is a real prospect that cross-borrowing amongst assessment funds will be required. The UN reports that the only solution to current and prospective problems is for Member Nations to meet their financial obligations in a full and timely fashion.

Conclusions and Recommendations

29. The Organization collection rate has been deteriorating in recent years both in terms of arrears and current contributions within a financial period. Accordingly the Secretariat has intensified its efforts both at Headquarters and in Regional Offices by reminding Member Nations of their obligations and soliciting payments of current contributions and arrears. Despite these additional efforts improvement has been imperceptible while the Organization continues to face significant difficulties in managing its cash flow.

30. Formal proposals put forward in the past (see paragraph 21) were rejected or withdrawn (paragraph 22-23). New penalty schemes such as charging interest on arrears did not receive support in the past and were not submitted to Governing Bodies.

31. Delays in payment of current assessments and non-payment of arrears force the Organization to consume its statutory reserves for operating needs and, when these are depleted, to approach the banking sector to negotiate loans. This has occurred in 2002 and 2003, and in the absence of improvement by Member Nations in payments of their obligations to FAO, may occur again in 2004.

32. The Finance Committee is urged to draw the attention of the Council to the need for all Member Nations to make timely payment of assessed contributions. Timely payment ensures that FAO can meet the operating cash requirements for the Programme of Work without recourse to statutory reserves or to external borrowing.