FINANCIAL ISSUES AT WORLD FOOD PROGRAM EXECUTIVE

UNCLAS SECTION 01 OF 02 ROME 003805

SIPDIS

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

STATE USAID/FFP FOR J. DWORKEN AND D. SKORIC

E.O. 12958: N/A
TAGS: EAID AORC PREF EAGR WFP
SUBJECT: FINANCIAL ISSUES AT WORLD FOOD PROGRAM EXECUTIVE
BOARD MEETING


1. Summary. At the Second Session of the World Food
Program (WFP) Executive Board (EB) meeting on November 7-
11, 2005, the U.S. set into motion a series of steps to
address concerns about WFP's financial management and
reporting. WFP has now committed to develop for
consideration reports on (1) potential benefits and
consequences of applying a fixed Indirect Support Cost
(ISC) rate based on estimated expenditures verses an
audited ISC rate based on actual expenditures; (2) the
amounts, sources, and uses of WFP's cash balances, with an
explanation of what WFP considers appropriate levels; and
(3) actual 2004 and 2005 expenditures compared to estimated
costs. The EB approved the two-year ISC rate of seven
percent, and decided that the rate would be reviewed at the
Annual EB Meeting in June 2006, at which time EB members
would have data on actual expenditures. The WFP
Secretariat withdrew its proposal to allow unlimited carry-

SIPDIS
over of Program Support and Administrative (PSA) funds, and
instead the EB approved a one-time authority to spend in
2006 up to of USD seven million in unspent 2005 budget
items using the PSA Equalization Account. End Summary.

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Background
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2. WFP charges an Indirect Support Cost (ISC) overhead rate
of seven percent on all operations. The seven percent goes
to fund the Program Support Account (PSA) budget. Under
procedures approved by the EB in the past, the unspent
balances from the PSA budget roll over into the PSA
Equalization Account at the end of the fiscal year (also
the calendar year) to be used in future years in case of a
shortfall in the PSA account. At the November 2005 EB
meeting, Board members were asked to approve WFP's Biennial
Management Plan (2006 - 2007). As part of the Management
Plan, WFP proposed an ISC rate of seven percent that, as in
the past, was based on estimated expenditures (as opposed
to an audited rate based on actual expenditures). The U.S.
position is that WFP should provide information on actual
expenditures and move toward establishing an audited ISC
rate and performing annual reconciliation of donors'
contributions and ISC payments against actual expenditures.


3. WFP also proposed to amend Financial Regulation 9.9 to
allow carry-over of unspent PSA funds as a standard
practice. The U.S. opposed the amendment, in part based on
the recommendation of the UN's Advisory Committee on
Administrative and Budgetary Questions. Both the ISC and
carry-over issues raised concerns about WFP's financial
management, and WFP's substantial cash balances, which in
the past UN committees and donors have said should be
reduced and kept to a minimum. Given the complexities of
the cash balance issue, the U.S. requested information on
the cash balance of each account in order to set in motion
a process to reduce balances that may be inappropriate.

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Consultations
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4. The week prior to the EB meeting, U.S. Mission shared
concerns on Management Plan issues and previewed the draft
U.S. statement with WFP officials and EB member
representatives in Rome. Sensing concerns among donors
about the amendment of Financial Regulation 9.9, WFP
proposed a one-time carryover of USD$ 7 million expenses in
CY 2006 that were in the CY 2005 budget but were not going
to be spent in CY 2005. WFP argued that this carryover
would avoid the usual practice of operating units rushing
to spend funds at the end of the fiscal year, and lead to
improved smoothing out of expenditures over the year. The
U.S. position is that while this solution is not ideal, the
USD seven million represents just two per cent of the PSA
budget for 2006/7, and the consensus of the Board was to
approve it this time and seek alternative ways to address
this issue through the budget process in the future.


5. In a series of side meetings with the U.S. Delegation
before the formal session on the Management Plan, senior
WFP officials acknowledged that WFP financial reporting on
cash balances could be done in a manner that is easier to
understand; suggested that growing cash balances reflected
increasing overall WFP funding; committed to complete
transparency on cash balances; agreed to U.S Delegation
request that the January U.S-WFP bilateral consultations
focus on financial issues; committed to provide the U.S.
with audited 2004 expenditures and preliminary 2005
expenditures at the January bilateral consultations; and
asked if discussions on movement to using actual
expenditures as the basis for the ISC rate could be
undertaken within the context of the 2006 review of all WFP
financial arrangements.

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Formal Session
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6. In the opening presentation for the formal EB session on
the Management Plan, WFP provided a general overview,
requesting approval of the biennial PSA budget of USD 367.5
million. The PSA budget proposal may require the use of up
to USD 66 million from the PSA Equalization Account to
offset any potential shortfall should the level of
anticipated funding for emergencies be less than expected.
WFP also presented the request for a two year extension of
the seven percent ISC rate, and proposed three options
related to amending Financial Regulation 9.9: (1) approve
the original proposed amendment in the Management Plan of
unrestricted carryover; (2) authorize the expenditure in CY
2006 of planned expenditures from unspent CY 2005 funds up
to USD seven million; and (3) no change to the regulation
and no authorization to carryover expenses.


7. The issues raised by the U.S. Delegation on the ISC
rate, cash balances and carryover were highlighted
throughout the discussion. Speaking for the U.S.
Delegation, USAID Assistant Administrator Mike Hess
congratulated WFP on the preparation of a thorough
Management Plan to guide discussions and decisions; thanked
WFP for providing a series of informal consultations that
allowed the U.S. to seek clarification on issues of
concern; noted that the WINGS accounting system was now
fully operational, giving WFP the ability to identify,
track and report actual costs; and said that WFP should
therefore have the capability to provide information on
actual costs and move toward establishing an audited ISC
rate and performing annual reconciliation of donors'
contributions and ISC payments against actual expenditures.
Hess proposed that the EB approve the seven percent ISC
rate, provided that it is reviewed at the Annual Meeting in
June 2006 based on a report on actual versus estimated
expenditures for CY 2005 and 2006.


8. On the amendment to Financial Regulation 9.9, Hess
agreed with the recommendation of the UN's Advisory
Committee on Administrative and Budgetary Questions (ACABQ)
October 2005 report not to approve giving WFP unlimited
carryover authority. On cash balances, Hess proposed
additional language to the decision that would require the
WFP Secretariat to prepare for the Annual Board Meeting in
June 2006, for the review and approval of the Board: (1) a
report indicating the amount, sources and uses of cash
balances in all accounts; and (2) an explanation of what
WFP considers an appropriate cash level for all accounts.

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Final Decisions
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9. Due to the willingness of senior WFP leadership to
address issues raised, all U.S. concerns were reflected in
the EB final decisions: (1) the WFP Secretariat will
develop for consideration at the first session of the EB in
February 2006 a report on the potential benefits and
consequences of applying a fixed ISC rate based on
estimated expenditures verses an audited ISC rate based on
actual expenditures; (2) the WFP Secretariat will prepare a
review of the amounts, sources, and uses of WFP's cash
balances, with an explanation of what WFP considers
appropriate levels, for the Annual Meeting of the EB in
June 2006; (3) with this understanding and for budgeting
purposes, the EB approved the two-year ISC rate of seven
percent, and decided that the rate would be reviewed at the
Annual EB Meeting in June 2006 based on a report of actual
2004 and 2005 expenditures and a comparative analysis with
estimated costs; and (4) the WFP Secretariat withdrew its
proposal to allow unlimited carry-over of PSA funds and
instead the EB approved a one-time authority to spend in
2006 up to of USD seven million using the PSA Equalization
Account in unspent 2005 budget items. Once WFP provides
the analysis above, the U.S. will be in a better position
to work with WFP and other EB members to institute any
appropriate changes to WFP's financial management system.


10. USAID Assistant Administrator Hess reviewed this cable
before it was sent. Hall