REPORT OF FAO 102ND FINANCE COMMITTEE

UNCLAS ROME 002485

SIPDIS


FROM FODAG

STATE FOR IO/S LISA JACOBSON AND IO/EDA WINNICK AND KOTOK
USDA/FAS FOR REICH AND HUGHES
ATHENS FOR CLEVERLY
PARIS FOR UNESCO

E.O. 12958: N/A
TAGS: AORC KUNR ABUD FAO
SUBJECT: REPORT OF FAO 102ND FINANCE COMMITTEE

1. Summary. The 102nd session of the UN Food and
Agriculture Organization (FAO) Finance Committee met May
5-9, 2003. Committee members were divided on the
question of the 2004-2005 budget level, with the U.S. and

Japan supporting zero nominal growth, G-77 members
supporting real growth, Switzerland supporting zero real
growth and the UK silent. The budget will be examined
again at the September Finance Committee Session.
Although recognizing the seriousness of FAO's after-
service medical care liabilities, the Finance Committee
was not ready to take a decision on funding and will
consider the matter further in September. As a result of
U.S. objections, the Committee sent back the
Secretariat's Split Currency Assessment and Capital

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Budgeting proposals for more work. These will be before
the September Finance Committee session for decision as
well. Throughout the session, USDel stressed
accountability and the need to ensure that proper
financial management controls were in place, as
recommended in last year's Report of the External Auditor
and this year's Joint Inspection Unit (JIU) report. As
noted in the JIU report, poor personnel practices and
weak management at FAO country offices seriously hamper
FAO's work and must be kept at the top of the agenda.
End Summary.


2. The 102nd session of the FAO Finance Committee (FC)
met May 5-9, chaired by Humberto Molina Reyes (Chile) and
Anthony Beattie (UK) as Vice-Chair. The nine member
committee is composed of Tanzania, Pakistan, the UK,
Kuwait, Japan, Chile, Switzerland, Senegal and the U.S.
The entire report of the Finance Committee will be sent
to the FAO 124th Council session (June 23-28, 2003).
Those items on which the Council must take action are
noted below.


I. Financial and Budget Reports
-------------- _


3. Agenda Item 3, Annual Report on Budgetary Performance
and Program and Budgetary Transfers:

-- As in previous years, the main variance from the
budget concerns the shortfall in support cost income
resulting from the decline in development projects being
implemented by the FAO. The Committee once again called
on FAO to adequately plan for the risk and the impact of
reduced income earnings.

-- Director of Program and Budget, Tony Wade, told the
Committee that FAO recognized the need to adapt to
declining income. Wade noted that the FAO Director
General (DG) did not want to increase support cost
charges; rather, FAO "would be able to manage the
reduction through re-deployment of staff."

-- At the request of USDel, the FC Report notes "concern"
over the deficit incurred as a result of increased
activities of the Investment Center in 2002. The deficit
will need to be covered from the Technical Cooperation
Department's budget in 2003.

4. Comment and follow-up: The Annual Report on
Budgetary Performance and Program and Budgetary
Performance is transmitted to Council for information.
The actual transfers will be approved at the September
2003 FC session.


5. Agenda Item 4, FAO Interim Accounts. The FC took
note of the information provided.


6. Agenda Item 5, Report on Investments: The Committee
took note of the report and discussed, in particular:

-- Declining income earnings from investments;

-- The resulting underfunding of staff-related
liabilities for which long-term portfolio income was
intended to provide;

-- After a third year of under-performance, the decision
to terminate the investment manager (Fiduciary Trust) and

seek new managers;

-- The need to increase in-house expertise and monitoring
capability of FAO's investments. Should FAO move to a
split-currency assessment, it does not have the in-house
expertise to handle the monthly spot currency
transactions that would be required.


7. Comment and follow-up: See additional discussion of
after-service medical care liabilities under the Program
of Work and Budget. FAO members will need to address the
fact that liabilities far eclipse the possibility of
assets addressing them; that assets have been under
performing badly; and that management of these assets
poses problems for the organization in terms of the
number and skills of staff members.


8. Agenda Item 6, Financial Highlights and status of
assessed contributions: The Committee took note of the
report and discussed, in particular:

-- FAO's liquidity has significantly improved following
receipt of U.S. arrears. (Finance Director Nick Nelson
noted that the organization was almost forced to resort
to external borrowing last year as a result of cash-flow
problems);

-- The shortfall in contributions was higher than last
year at this time, chiefly because Japan had not yet paid
its annual contribution.

-- The balance in the Special Reserve Account also
reflected the positive effects of net favorable currency
variations in the current biennium (in fact, foreign
exchange gains amounted to USD 12.6 million and could
reach USD 20 million by the end of the biennium);

-- The General Fund continued in deficit, and ongoing
amortization of the unfunded after-service medical care
liabilities would increase the deficit;
-- The Technical Cooperation Program (TCP) balance of USD
81.8 million showed that the rate of TCP expenditure was
still low;

-- Since FAO's management and administrative costs
related to the Oil for Food (OFF) Program were funded
entirely through the OFF program, the eventual suspension
of the OFF program would not affect the Regular Program
Budget in 2003.


9. Comment and follow-up: The Financial Highlights are
transmitted to the FAO Council for information.

II. Oversight Matters
--------------


10. Agenda Items 7 and 8, 2002 Annual Activity Report of
the Office of the Inspector General and Progress Report
on Implementation of the External Auditor's
Recommendations: Inspector General Pete Wilson briefed
the FC on items 7 and 8. The FC took note of the Reports
with the following comments:

-- Welcoming the creation of the Audit Committee and the
information that staffing in the Finance Division was
"now satisfactory."

-- Noting the need for more precise timetables for
implementation of the External Auditor's recommendations;

-- Stressing the importance of achieving full and timely
implementation of the recommendations relating to
internal controls;

-- Requesting that the review of progress be a standing
item for the FC.


11. Comment and follow-up: The lack of an Audit
Committee and the need for increased staffing in the
Finance Division were two of the most important issues
raised in last year's Report of the External Auditor.

The FC should continue to monitor closely the FAO's
follow-up to the 2002 Report of the External Auditor and
stress full and timely implementation.


12. Agenda Item 9, Program of Work of the External
Auditor: The External Auditor explained that the
Technical Cooperation Program (TCP) had been picked for a
"value for money" audit. The rationale included the fact
that TCP is the third largest program funded by the
regular budget, and delivery is low; only two percent of
the current year appropriation had been spent so far and
decentralization, according to the External Auditor,
"creates new risks." The report will be presented in

2004.


13. Agenda Item 10, Appointment of the Inspector
General: The FC is "consulted" on the appointment of the
Inspector General (IG). The FC was informed of the
selection process and the DG's intention to name Ms.
Amelia Lo Fasso (U.S.) as the new IG on the retirement of
incumbent Pete Wilson (Canada) in August 2003.


14. Agenda Item 11, UN Joint Inspection Unit (JIU)
Reports: The Finance Committee transmitted the JIU
reports on Water Management and Involvement of Civil
Society NGO's to the Program Committee for action.

-- The FC discussed JIU report 2002/3 on Support Costs
Related to Extrabudgetary Activities in Organization of
the UN system. The Committee welcomed FAO's assurance
that "extrabudgetary resources should only be accepted
consistent with the policies, aims and activities of the
organization."


15. Agenda Item 11, continued, Report on Management and
Administration in the FAO (JIU/Rep/2002/08):

-- It was noted that FAO management stated that "the
majority" of the JIU recommendations were being
implemented. However, some would need to be submitted to
the Governing Bodies and others would be considered by
the Program or Finance Committees. Members requested
that FAO provide a follow-up on the implementation of
recommendations.

-- The Finance Committee is charged with follow-up on
personnel policies relating to FAO Country and Regional
Representatives and a proposal that the term of the
External Auditor be limited. The September Finance
Committee will have proposals by FAO management on both
of these issues.

-- USDel took issue with the FAO Director General's
rejection of the JIU recommendation that selection of
country and regional representatives should follow
standard personnel selection procedures. USDel also
noted the importance of following up on the JIU
recommendations on improving management in country and
regional offices, particularly given the increasing
decentralization of FAO activities.


16. Comment and follow-up: In discussion with FAO senior
staff, USDel was (informally and unofficially) encouraged
to continue with this message. It seems that FAO staff
themselves are all too conscious of the weakness of FAO
country representatives under the current selection
process whereby the DG appoints them as his "personal
representatives." The JIU reports will be transmitted to
the FAO Council for information.

III. Financial Policy Matters
--------------


17. Agenda Item 12, Capital Budgeting:

-- As a result of USDel objections to the proposal on
capital budgeting, the FC did not endorse the proposal
and requested the Secretariat to revise the proposal
without a reserve fund (using only Chapter 8 of the
Program of Work and Budget); allowing for prior review of
proposals by the Finance Committee and allowing for
approval of such proposals by a separate Conference

resolution.

-- Budget Director Tony Wade argued that the FAO proposal
"offered more accountability than anything in the UN
system," called attention to WFP's recent adoption of a
capital budgeting mechanism, and argued that FAO - like
any other large organization or company -- needed a means
of tracking capital assets.


18. Comment and follow-up: We expect that the
Secretariat will be urging the FC to take a final

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decision on capital budgeting at the next session.
Proposed changes to the Financial Regulations will be
submitted as well in September.


19. Agenda Item 13, Review of Project Proposals to
Confirm Compliance with FAO's Mandate: The FC took note
of the document without discussion.


20. Agenda Item 14, Proposal to Establish a Special Fund
for Emergency and Rehabilitation Activities:

-- Anne Bauer, Director of FAO's emergency programs,
informed the Committee that the fund was designed to
speed up FAO's response in emergencies; it would not be
used for procurement of inputs, but for assessment
missions. The fund would remain totally outside of the
regular Program of Work and Budget (PWB) and presented
"no risk" to the PWB, according to Bauer. Bauer also
reported that donors had already expressed interest in
supporting the Special Fund.

-- The FC supported the proposal, noting that the FAO
Director General has the authority to establish such a
fund on his own authority.


21. Innovative Models for Leveraging Resources in Support
of the Field Program:

-- The FC endorsed the proposed amendment to Financial
Regulation 6.7, after discussion of the modalities for
moving responsibility for project execution to national
authorities. It was noted that the FAO proposal closely
tracked that of other UN agencies and programs.


22. Comment and follow-up: The proposed amendment will
be submitted to FAO's Committee on Constitutional and
Legal Matters and submitted to the 125th Council for
transmission to Conference.


23. Agenda Item 16, Information Note on the Cost of the
World Food Summit Five Years Later: The FC took note of
the document without discussion.

IV. Budgetary Matters
--------------


24. Agenda Item 17, Summary Program of Work and Budget
(SPWB) 2004-05:

-- The U.S. and Japan reiterated requests for a zero
nominal growth scenario; the G-77 members supported a
real growth scenario, and Switzerland supported a zero
real growth scenario. The U.K. was silent.

-- Without prejudice to the overall budget size, the
Committee considered the cost increase calculations to be
consistent with the agreed methodology. The Committee
also emphasized the importance of resolving amortization
of the liability for after-service medical care, as
investment income can no longer cover these costs.

-- Some members expressed the view that the best option
for amortizing the liability would be to approve the
Secretariat's proposal to include an earmarked USD 14.1

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million in the PWB starting from 2004-2005 and continuing
for the subsequent eleven biennia (depending on
investment performance and subject to actuarial
recalculation).


25. Comment and Follow-up: Among the items on which the
FC agreed to take a decision in the September Finance

Committee is how to handle amortization of unfunded
liabilities associated with after-service medical costs.
The Secretariat will prepare a paper on the subject.
Concerning the final budget level, we do not expect the
September Finance Committee to come to any conclusion
(nor in fact for a decision to be reached until the
November/December Conference.) The Summary Program of
Work and Budget will also be transmitted to the FAO
Council session.


26. Agenda item 18, Split Assessments:

-- As a result of USDel objections, the Committee did not
endorse the Secretariat's proposed methodology for a
split currency assessment (SCA). USDel argued that split
assessment was burdensome for members and that the FAO
should be responsible for managing its resources in the
economic environment in which it operated. USDel also
argued that the proposed methodology lacked transparency,
as adjustments would be made automatically between
biennia for exchange rate fluctuations.

-- The Secretariat was requested to prepare an additional
methodology that protected the PWB against exchange rate
fluctuations within the biennium, but not between biennia
"and to compare this with the Secretariat's methodology."

-- UKDel stated that the U.S. position raised an
important question which needed to be examined by the UK
authorities; that being said, UKDel confirmed that he in
fact agreed to the need to protect the budget from
exchange rate fluctuations within and between biennia.
The UK also stated that there was no significant
additional burden in paying in two currencies.

-- The Delegate of Pakistan stated that he supported the
principle that the budget should be protected both
between as well as within biennia. He agreed that the
Finance Committee could look at the question again, but
cautioned that the Committee "should not become
deadlocked."

-- A number of countries pursued the question of whether
Euro-zone countries should provide the Euro portion of
any split currency assessment, arguing that the exchange
rate "risk" should be transferred to those countries best
positioned to handle the risk. The Secretariat responded
that those countries only provided 38.48 percent of the
budget (whereas the FAO's Euro needs represent some 44
percent of the budget).

-- The Delegate of Tanzania stated that payment in two
currencies could add to the burden of developing
countries.

-- Budget Director Tony Wade noted that the proposed
methodology closely resembled that of the IAEA and
UNESCO, except that the exchange rate was more realistic
(both of those organizations use an old exchange rate
which, according to Wade, "distorts" the calculations.)

-- Wade also argued that failure to approve a split
currency assessment left the organization in danger of
having to absorb exchange rate losses in the next
biennium - which would require cutting some 500
positions. He noted that he could wait "until September
or October" to get a final ok on the SCA, but that if the
organization were not to have one, he would have
considered "buying forward today."


27. Comment and follow-up: USDel was also requested to
prepare a non-paper to circulate to FC members on the
subject. The Committee also agreed that the issue needed
to be resolved no later than the September Finance
Committee session in view of the preparations that the
Secretariat would need to make to prepare the budget and

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the Secretariat for the next biennium. Of the nine FC
members present, probably one other member (UK)
thoroughly understood the issue. We expect the
Secretariat to push very hard for member approval of

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their original proposal. The Finance Committee's
conclusions (or lack thereof) on the split currency

assessment will be transmitted to the Council.


28. Agenda Item 19, Scale of Contributions 2004-05:

-- As expected, Chile, on behalf of Argentina, requested
that Argentina's assessment be reduced.

-- It was noted that this would require other members to
meet the difference. A few members suggested that
postponing payments was the normal option.

-- The FC agreed to the proposed scale of assessments for
forwarding to the Council and took note (but no action)
on the Argentine request.


29. Comment and follow-up: We expect that Argentina may
request another Latin American country to raise this
issue again at Council (Argentina has lost its seat on
the Council as a result of arrears). The Council must
adopt the proposed scale of assessments.


30. Agenda Items 20, 21, 22, Budget for the European
Commission for Control of Food and Mouth Disease; for the
Regional Animal Production and Health Commission for Asia
and the Pacific; and for the Desert Locust Commission:
The FC took note of the reports with minimal discussion.


V. Human Resources Management
--------------


31. Agenda Item 23, Progress Report on Human Resources
Management: The FC took note of the progress report
without discussion.


32. Agenda Item 24, Statistics of Personnel Services:
The FC took note of the document without discussion.


33. Agenda Item 25, Annual Reports of the ICSC and UN
Joint Staff Pension Board to the General Assembly and
Summary of the Decisions Taken: The FC took note of the
document without discussion.

VI. Organizational Matters
--------------


34. Agenda Item 26, Methodology for Determination of
Equitable Geographic Distribution:

-- USDel pointed out that the Secretariat paper had
incorrectly described the methodology in use by the
United Nations in New York for determining geographical
distribution in preparing the two "alternatives" for FC
consideration. USDel also noted that any methodology was
only as effective as management chose to make it.

--Other FC members stated that they needed to know how
the alternatives proposed would affect their countries.

--Pakistan noted that the Secretariat's proposal did not
address regional distribution, and noted in this regard
what he called the "severe" underrepresentation of the
region.

-- USDel stated that there were no agreed criteria for
regional distribution and that the U.S. would not support
creating a methodology for geographic distribution which
took into account regional distribution.

-- Japan argued that consistency with other UN agencies
was desirable. Other members supported, in principle, a
methodology similar to that in use in New York, which
takes into account population and contributions.

-- The Delegate of Pakistan stated that "the current
system of linking representation to contributions is in
general not acceptable."

-- The Secretariat will revise the paper to correct the
mistake; the item will be taken up again at the September
FC.

35. Follow-up and comment: FC members requested that

the item not be discussed in the meantime at the Council
(where it appears on the agenda). The proposal to review
the methodology for determining geographic distribution
was first proposed by the Latin American and Caribbean
region; while the membership as a whole has never agreed
to change the methodology, discussion is kept alive by
the fact that everyone has something to dislike about the
current system. Any change to the system should require
the Secretariat to make better efforts to increase
representation of underrepresented countries (for
instance, by not accepting applications from candidates
from overrepresented countries).


36. Agenda Item 27, Progress Report on the Oracle
Project: The FC took note of the paper without
discussion.

Comment
--------------


37. The agenda for the upcoming FC session in September
contains a number of complicated but important financial
issues, all of which must, in one form or another, be
acted upon by the Committee. We expect the Secretariat
to push strongly for a Split Currency Assessment
methodology which automatically protects the FAO budget
between biennia; we expect the Secretariat to similarly
push for agreement on a capital budgeting mechanism. And
we expect that the Secretariat will push hard for a real
growth budget (although this is likely to be postponed
for final action to the November/December Conference, as
was the case in 2001). Concerning follow-up to the
recommendations of the JIU report and that of the
External Auditor, the FC must be persevering in insisting
on full reporting on follow-up and not lose sight of
these important management issues, despite the heavy
workload of the Committee sessions. Tamlyn
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2003ROME02485 - Classification: UNCLASSIFIED