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04ROME4106 2004-10-25 09:37:00 UNCLASSIFIED Embassy Rome
Cable title:  

FAO FINANCE COMMITTEE SEPTEMBER 2004 SESSION

Tags:   AORC EAID EAGR KUNR FAO WFP 
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					  UNCLAS  ROME 004106 

SIPDIS


C O R R E C T E D C O P Y (TEXT PARAS 3, 7, 12, 16)

FROM THE U.S. MISSION TO THE UN AGENCIES IN ROME

STATE FOR IO/EDA BEHREND AND KOTOK, IO/S ABRAHAMS
USDA FOR FAS REICH AND HUGHES
AID FOR FFP LANDIS AND THOMPSON

E.O. 12958: N/A
TAGS: AORC EAID EAGR KUNR FAO WFP
SUBJECT: FAO FINANCE COMMITTEE SEPTEMBER 2004 SESSION

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Summary
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1.During the 108th session of FAO's Finance Committee:

-- The Secretariat outlined a critical deterioration of the
organization's finances and said it was making preparations
to borrow externally $50 million during the month of
October, with additional borrowing in November, to meet
immediate cash flow needs.

-- A number of countries were shown to be in a serious
arrears position, particularly Iraq, Yugoslavia, Argentina,
and Brazil.


-- We found that the organization's emergency operations
had not effectively utilized the Special Fund for Emergency
and Rehabilitation Activities (SFERA), in spite of critical
needs, as noted by the Director General (DG), to meet
crises such as the locust infestation in northwest Africa.

-- A recent actuarial estimate to amortize After Service
Medical Liabilities was discussed at double the level
presented to the 2003 Conference.

-- A Medium-Term Plan, based on ambitious (and probably
unrealistic) 2.2 percent real budget growth assumptions for
2006-2011, was presented.

-- An Independent Evaluation of FAO's Decentralization was
tabled, one which roundly criticized the organization's
field operations in most parts of the world.

-- The initiative for an independent external evaluation of
the organization's role, impact and management was
discussed widely on the margins, but not within the
committee meetings themselves. However, the tone of the
meeting emphasized that the organization's status quo is
not sustainable over the long term. Most members present
picked up on the logic of doing an independent evaluation.

End Summary.

2.The Fall session (Hundred and Eighth) of FAO's Finance
Committee convened between September 27 and October 1,


2004. DCM Michael Cleverley occupied the North American
seat on the Committee.



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Liquidity Crisis: Need for External Borrowing in late 2004


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--------------------------



3.In the Committee's first session, the Secretariat pointed
to the organization's seriously deteriorating financial
position. The general fund deficit had increased from $90
million at the end of the 2002/3 biennium to $134 million
at 30 June 2004. There were three reasons: (1) the delay
in receiving annual assessments, principally from the US
and Japan; (2) growing levels of arrears; and (3) higher
than projected spending for the amortization of after
service medical care (now running over double the $14.1
million per biennium set aside by the 2003 Conference).

4.The organization's liquidity was also critically
depleted, much due to the above factors as well an
accelerated rate of disbursement for the Technical
Cooperation Program (TCP) and disbursements to cover the
$41 million allocation of arrears for one-time expenditure.
The Secretariat said it expected to need $50 million in
external borrowing in October and early November if
contributions from the US and Japan were further delayed.
Such a borrowing would entail $62,000 of interest costs for
October. Following this discussion, the Japanese delegate,
after consulting with Tokyo, informed the Committee that
Japan would make full payment of its assessment in mid-
October. USDEL noted (privately to the Secretariat) that,
with the US's fiscal year just beginning, it was difficult
to give details, but we hoped to make a partial payment in
late October, with another partial payment in November. It
was not clear whether these payments alone would be
sufficient to cover late-October salaries. This borrowing,
if it takes place, will be the first time the organization
has resorted to external borrowing since 1994.



--------------------------



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Arrears: A Growing Problem


--------------------------



--------------------------



5.In a study on arrears, the Secretariat found that the
amount of arrears was increasing and that some countries in
arrears tended to make payments to other UN organizations
before FAO. The discussion on this latter point suggested
the broader issue of FAO's sagging credibility among many
members. Responding to the Committee's request, the
Secretariat provided information that showed a number of

SIPDIS
countries in arrears made significant extra-budgetary
contributions. Brazil, for example, while owing over $21
million in arrears, gave $13 million in extra-budgetary
contributions in 2002/3. Other countries with major
arrears: Argentina ($17.6 million), Iraq ($5.5 million) and
Yugoslavia ($8.4 million). On its books, the organization
is carrying the United States with $1.75 million in
arrears.

6.The committee explored a number of incentives and
penalties for dealing with arrears, but referred the issue
back to the Secretariat to develop an options paper for the
May 2005 Committee and June 2005 Council.



--------------------------



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Emergency Fund: Weak Management


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--------------------------



7.During a problematic discussion on the Special Fund for
Emergency and Rehabilitation Activities (SFERA),
established in June 2003 and operational in March 2004, the
Secretariat was initially unable to answer basic questions,

SIPDIS
such as the current balance of the rotating fund. Under
close Committee questioning led by USDel, the Secretariat
reluctantly admitted that it had allocated $430,000 from
the SFERA monies intended for emergency coordination units
for needs assessment work related to the Northwest Africa
locust infestation, but nothing from the $1 million SFERA
portion earmarked for advance funding for approved
emergency projects where pledged funds had not been
received. (Comment. FAO DG Diouf has repeatedly criticized
donors for their slowness in funding pledges for this
crisis. It appears that FAO did not utilize the fund
expressly created for bridging pledges and disbursements.
End Comment.) Instead, funds had been used in Darfur and in
Colombia to assist transitioning farmers. The Colombia
project came under Committee criticism for failing to be
the type of emergency for which SFERA was initially set up.
The Committee concluded the discussion by accepting the
USDel's call for (1) a lessons-learned assessment of FAO's
emergency locust control operations, and (2) a subsequent
update report on SFERA operations to be prepared for the
Finance Committee meeting in September 2005.



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After Service Medical Cost Liability: Overhang


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8.The Secretariat pointed to the erroneous actuarial
assumptions behind last year's estimate that was funded by
the December 2003 Conference at US$ 14.1 per biennium to
cover outstanding After Service Medical Cost (ASMC)
liabilities. Revised actuarial projections showed this
figure would need to increase to $30 million to be fully
amortized in subsequent biennia. USDel made the point that
the US still needed convincing that this additional cost
should be automatically transferred to member states, and
asked that the Secretariat prepare an options paper for the
May 2005 Finance Committee.



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Medium-Term Plan: Unrealistic


--------------------------



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9.The Medium-Term Plan (MTP) presented to the Committee and
discussed jointly with the Programme Committee projected
programming for the 2006-2011 period based on an assumption
of 2.2 percent real growth per annum. (A zero real growth
(ZRG) scenario also was inherent in the document, but
difficult to find in a presentation that obviously hoped to
draw attention away from ZRG assumptions.) The US led
Japan and the UK in an attack of the 2.2 percent real
growth assumption as unrealistic, given FAO's budget
history of the past decade and particularly the political
outcome of the 2003 Conference budget discussions. USDel
pointed out that, although the MTP was only indicative and
theoretically had few implications relative to eventual

budget resolutions, the Secretariat had lost an opportunity
to project an MTP that could be relevant to the likely
budget environment. Japan called for an alternative
scenario (USDel joined in support), and the UK complained
that the Secretariat's failure to provide a zero nominal
growth (ZNG) scenario for last year's budget discussions
had resulted in much additional last-minute work and
excessive expenditures before a budget was eventually
resolved. G77 countries, on the other hand, wanted a
larger than 2.2 percent growth factor keyed in.

10.The debate resumed the following day in the joint
meeting of the Programme and Finance Committees. The
Secretariat consistently countered that the MTP was the

SIPDIS
Director General's proposal, was only indicative, and was
not likely to be changed. As a result, the focus of the
debate shifted toward the assumptions rather than
concentrating on the program priorities inherent in the
plan. Upon continued questioning, it was eventually
possible to decipher the difficult document to reach the
following projection for 2005-6:

ZNG (based on 2004-5 budget): $749.1 million
ZRG (based on an assumed 3.5% price rise): $775 million
MTP (based on 2.2% real growth): $799 million

(This does not include the amortization for ASMC, which
could add another $30 million).



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Decentralization: Critical Evaluation


--------------------------



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11.Up for discussion was an important and thoroughly
researched Independent Evaluation of FAO's
Decentralization, released during the summer of 2004, that
roundly criticized the quality, training, and capacity of
FAO's field offices and operations. It documented
widespread member state dissatisfaction with the field
offices in all but a few regions. In its "preliminary
response," the Secretariat said it welcomed the report's
findings, but claimed that it had not yet had an
opportunity to thoroughly reflect on the several
recommendations. Rather than spend time with each
individual recommendation, the Committee agreed to revisit
the report in its next session and called on the
Secretariat to provide for that discussion a response that

SIPDIS
detailed in which areas management disagreed with findings
and recommendations, and that provided a time-bound
implementation plan.



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WFP Consideration Anachronism


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--------------------------



12.During the May 2004 Finance Committee meeting, the
Committee requested that World Food Programme (WFP) agenda
items be labeled "for information," and be discussed only
if Committee members had questions or comments on the
submitted documents. For this session, the Secretariat
failed to follow this request and included two WFP items
"for discussion." When USDel asked about this during the
discussion on the agenda, the Secretariat countered with a
litany over FAO oversight of WFP's finances. USDel noted
that WFP financial issues are discussed in detail at the
ABACQ in New York and at WFP Executive Board meetings, and
argued that the Finance Committee could meet any statutory
responsibilities by including the items on the Committee's
agenda, to be discussed if needed. The Secretariat refused
to budge, clearly trying to maintain the organization's
fig-leaf of control over WFP.

13.Comment: Finance Committee review of WFP finance-
policy items is in our view redundant, anachronistic, and
expensive. Over the past year there have been several FAO
Finance Committee sessions devoted to WFP items.
Interpretation costs, alone, run about $10,000 a day. No
substantive points arose from the FAO review process that
were not later discussed in much greater detail in WFP's
Executive Board meetings. We strongly recommend that the
US maintain pressure on FAO to remove this inefficient use
of funds for what appears to be simply a case of
superficial turf preservation. End Comment.



--------------------------



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External Auditor Private Sector Participation?
?



--------------------------



--------------------------



14.The Secretariat returned to a question, raised by the
USDel in the May 2004 Finance Committee session, about
whether a private sector entity could compete for
appointment as external auditor. The Secretariat's paper
indicated that throughout the UN system the auditor must be
chosen from among auditors general of member states.
Several G77 members were troubled by this discussion,
apparently for political reasons, but the committee
requested the Director-General refer the issue to the UN
System Chief Executives Board for Coordination for
additional information about UN practices.

15.This is a broader issue that might merit Department
attention. There could well be economies to be achieved
from opening the audit function to private sector
competition.



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Comment


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16.Many of the issues considered in Committee will return
for discussion in the November FAO Council, and we will
provide via septel further background and thinking prior to
the Council. However, there were several points that
deserve continued US attention:

Arrears The top four countries in arrears owe nearly $53
million. There are financial issues surrounding Argentina
and Brazil, and political considerations for Iraq and
Yugoslavia. We may wish to consider whether the US
can/should use any possible leverage for dealing with the
arrears problem from these countries.

Medium-Term Plan (general) It appears that the
organization has cut spending close to the bone, and
further cuts will be exceptionally painful. However, this
has been done thus far within existing organizational
parameters inside the box. Whereas in one sense the MTP
projects a needed increase in real revenue levels, in
another sense the lack of imagination and creativity
inherent in the current formulation essentially guts its
usefulness by failing to take into consideration relevant
scenarios. For example, the question, "How would you
spend your money if next time you had less than (or the
same as) now?" is a reasonable point of departure for a
serious program planning discussion. At issue is not
necessarily whether the organization will have more or less
funding in the future, but how can it re-structure itself
to better react to today's world, i.e., to get outside the
box.

Independent External Evaluation The proposed external
evaluation of FAO was discussed on the margins, but not
within the Committee meetings themselves. However, just
about everything discussed, such as the MTP, the budget
crisis, and the decentralization report, underlined the
need for a basic re-look at the organization and how it
does business. Most countries present picked up on this
logic that the status quo is not sustainable over the
long term.


WFP We need to be working to get WFP off the FAO Finance
Committee agenda. The current arrangement is a waste of
funds and time.

After Service Medical Charges We made it clear in the
discussions that we are in no mood to rubber stamp the
increase necessary to cover ASMC, from $14.1 to $30 million
per biennium. While the Secretariat is now tasked to
provide an options paper for the June 2005 Council, the
logic for covering this liability is still as valid as it
was in December 2003. It will need to be covered within
the structure of any sound financial approach to the
organization.

HALL


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2004ROME04106 - Classification: UNCLASSIFIED