REPORT OF FAO 104TH FINANCE COMMITTEE

UNCLAS ROME 004348 SIPDIS FROM THE U.S. MISSION TO THE UN AGENCIES STATE FOR IO/S ABRAHAMS AND JACOBSON AND IO/EDA BEHREND AND KOTOK USDA/FAS FOR REICH AND HUGHES PARIS FOR UNESCO E.O. 12958: N/A TAGS: AORC KUNR ABUD FAO SUBJECT: REPORT OF FAO 104TH FINANCE COMMITTEE ¶1. Summary. The 104th Session of FAO's Finance Committee met September 15-19 to discuss a number of issues particularly relevant to the Council/Conference meetings later this year. Top of the list was budget and finance for the upcoming biennium. Whereas the Organization outwardly continued to display an assumption that the next budget would allow at least zero real growth, the Secretariat and member states understood well that neither the US nor Japan, who together cover forty percent of regular contributions, continued to support, at best, the zero nominal growth policy of the recent past. The US' willingness in the end to not block consensus on split assessments broke us out of total isolation and left us much better positioned to mobilize support for a tight budget policy. Other member states across the board considered this a major concession on our part. Further on the budget, the Secretariat noted that with 2003 payments by Japan and the US still delayed, the organization would within the next several weeks begin preparations to borrow to meet current obligations. The secretariat noted that FAO has been receiving annually approximately $3-4 million revenue from Oil for Food projects in Iraq. Its Iraq programs in 2003 will generate about $9 million. ¶2. The Committee agreed to support our call for a Secretariat action plan to rectify the existing under SIPDIS representation of some states, especially the US, on the organization's staff. A decision was reached to recommend that the Council begin to fund the large outstanding after service medical cost liabilities by agreeing to a 2004-2005 budget resolution that includes $14.1 million to match the amount of the liability to be amortized during the biennium. At the same time it asked for an assessment of the current medical scheme afforded FAO staff. End summary. ¶I. Budget and Split Assessments -------------- ¶3. The big issue in the September 15-19 104th FAO Finance Committee meeting was the budget for the next millennium and specifically how the organization would cope with the large revenue short-fall generated by the recent decline in the dollar-euro rate. Although the Secretariat and many member states preferred to talk in SIPDIS terms of zero real growth (ZRG),or positive real growth, the organization could see the writing on the wall as both the Japanese, who were talking about possibly supporting a negative nominal growth budget, and ourselves, who spoke of zero nominal growth (ZNG),laid down an uncompromising position against real growth. Canada and Australia also supported ZNG while the EU's common position was still ambiguous due to fragmented member views. The UK, who represented the EU, told us that the UK supported ZNG. ¶4. The discussion heated markedly, however, when we argued strenuously against a split assessment. US del mapped a strong argument against multiple currency assessments and shot back when both the Secretariat and other member states accused us of trying to avoid the costs ("like all the other members face") of exchange rate fluctuations, responding that the rate cuts both ways, depending on its direction of movement, and the US paid much more to the organization than a real ZRG formula would have dictated when the dollar appreciated just a few years ago. We argued for transparency and discretion in order for member states to make a deliberate decision on how much exchange rate loss or gain they wanted to assume. ¶5. Our position, nevertheless, met a solid wall of opposition. Whereas many states admitted they understood our position in principle, they said they did not think it feasible to talk of a ZNG budget under current exchange rate circumstances where FAO faced a rigid short- run fall in revenues. The US was totally isolated, with Canada, the EU, and Japan all supportive of adopting split assessments in FAO. Canada, in fact, used its position as chair of the program committee to launch a sharp vitriolic specific attack on the US during a joint finance-program committee session, accusing us of pursuing self-interest at the expense of other member states as well as the organization. Canada's outspoken rep misrepresented our position on a number of points, and it was possible to successfully hollow out his aggressive intervention. ¶6. At the end of the Tuesday session, we remained alone in our opposition to split assessments and as the discussion was on the verge of collapse, US del, as per instructions, said that while we remained strongly opposed to split assessments we had not necessarily an intention to break a consensus on this issue. The Committee chairman quickly took advantage of this opening to postpone further discussion, and asked us to meet with the secretariat to see if the most recent proposal could cover our concerns over transparency and discretion. In a subsequent discussion with budget director Tony Wade, Wade readily agreed to our request to have exchange rate effect explicit in the budget resolution. He also suggested a statement expressing the Committee's intent to distinguish the split assessment, as a technical mechanism, from the political process of establishing budget levels. His statement ["The use of a split assessment does not preclude discretion on the part of the membership in determining whatever budget level it thinks fit."] was included in the Finance Committee report. ¶7. The Committee report also noted, "One member was opposed in principle to the split currency assessment concept, but did not wish to block a consensus view. This member stressed the need to ensure 1) transparency in the way the impact of exchange rate fluctuations would be reflected in the budget of the organization; and 2) continued discretion among the members regarding the budget level (i.e., no automaticity)." It added our other point: "This member also proposed that those member countries that strongly support the proposal might provide voluntary contributions to offset FAO's costs (ranging between $150,000 to $250,000) to implement split assessments." ¶8. From the overwhelming comments of other member states, it appeared that our final position on the split assessment was accepted as both principled and pragmatic. It also appears now that we will be in a much stronger position for leading other like-minded member states in opposition to calls for a positive or zero real growth budget than if we had blocked the consensus on split assessments. ¶9. The Committee mandated the Secretariat to do a "how- to" guide on how split assessments will be administered, to be ready well in advance of discussion at the upcoming Council meeting. The Secretariat is also preparing a paper on the impact of a zero nominal growth budget, with a split assessment, on the organization. II. Geographic Distribution -------------- ¶10. On another issue of prime importance to us, US del refused to join consensus during the discussion on proposals calling for a new methodology for determining equitable geographic distribution among FAO employees. He argued that we need to see what the Secretariat is doing to rectify the current imbalances before addressing methodologies. (Most Committee members favored option 2 and a few, option 3. There was no support for option 1.) The Committee, without the US, had difficulty deciding which of the alternate methodologies it wished to propose, and finally called for the establishment of a working group to review how many posts would be included in the base figure, the weight of each of the factors used in the alternate proposals, and timeframe issues. On the final day during the report drafting session, the US del said that the US could support the creation of a working group if the secretariat would provide an action plan outlining further concrete measures it would take to redress under-representation of certain members' states when the results of the working group were tabled in the May 2004 session. The Committee agreed to this formulation and we joined in supporting a working group and the development of an action plan. III. Unfunded After-Service Medical Costs -------------- -------------- ¶11. Returning to the discussion of unfunded liabilities for after service medical costs, the secretariat's presentation showed that the current procedure of earmarking investment income to cover the liability was vastly insufficient. In its discussion of the problem, the Committee unanimously agreed that a solution had to be implemented. There was no support for a lump some assessment to cover the liabilities, but agreement with broad support was reached for funding them through its regular program budget. The Committee recommended that the 2004-2005 budget resolution include $14.1 million to match the amount of the liability to be amortized during the biennium. At the same time it asked for an assessment of the current medical scheme afforded FAO staff. An executive summary of a recent 400-page study on this subject will be prepared for Committee members. IV. Other Agenda Matters -------------- ¶12. Finance and Budget Reports - In its financial highlights presentation, the secretariat noted that the general fund continued to reflect a net deficit position. With 2003 payments by Japan and the US still delayed, the organization would, before long, need to borrow to meet current obligations. The secretariat noted that FAO has been receiving annually approximately $3-4 million revenue from Oil for Food projects in Iraq. Its Iraq programs in 2003 will generate about $9 million. The organization is prepared to move ahead with other Iraq programs if asked to do so, a secretariat rep noted. The Committee agreed to program and budgetary transfers as requested. It approved a proposal to add an additional investment officer to the treasury operations branch, to be funded from investment income. There was agreement that extra-budgetary activities should be covered by support costs and that the ceiling rate paid for emergency assistance projects be increased from 6.0 to 6.5 percent. It denied a request by the Indian Ocean Tuna Commission to waive support costs, and reaffirmed the view that there should be a uniform policy toward the support costs paid by all entities soliciting project activities. It asked for a Secretariat information paper on recent trends in support costs and on the calculation of a methodology applied in recovering them. ¶13. Finance and Budget Matters - An incentive scheme to encourage prompt payment of contributions was approved at the proposed discount rate. The Committee endorsed for Council consideration the establishment of a capital expenditures facility. ¶14. Oversight Matters - The Committee reviewed line-by- line a report on the progress of the external auditor's report. It appeared that there had been progress; however, the presentation was unspecific in regards to when specific recommendations would be met. The Committee requested that a progress report be part of each meeting and that specific time frames be established for completing action. The audited accounts (FAO Credit Union and Commissary) were approved. ¶V. Committee Meeting -------------- ¶15. The Finance Committee Meeting was capably chaired by Humberto Oscar Molina Eyes (Chile). Other participants were Anthony Beattie (UK),Ryuko Inoue (Japan),Lamya Al- Saqqaf (Kuwait),Muhammad Saleem Khan (Pakistan), Alassasne Wele (Senegal),Lothar Caviezel (Switzerland), Perpetual M.S. Hingi (Tanzania). FODAG DCM J. Michael Cleverley represented the US. CLEVERLEY NNNN 2003ROME04348 - Classification: UNCLASSIFIED