UNDP ASSOCIATE ADMINISTRATOR AD MELKERT PROVIDES

UNCLAS USUN NEW YORK 000050

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EAID KFPC KN KNNP KUNR PINR PREL UNDP
SUBJECT: UNDP ASSOCIATE ADMINISTRATOR AD MELKERT PROVIDES
RESPONSE TO USUN AMBASSADOR MARK WALLACE

REF: A. USUN 00011

B. USUN 00023

C. USUN 00034

D. USUN 00035

E. USUN 00038


1. In a letter dated January 21, 2007, UNDP Associate
Administrator Ad Melkert responded to Ambassador Mark
Wallace's letter of January 16, 2007. In this letter, the
latest in a string of formal communication between USUN and
UNDP, Associate Administrator Melkert attempts to explain
away USG concerns regarding the UNDP DPRK country program
while acknowledging violations of UNDP rules.


2. Text of Associate Administrator Ad Melkert letter follows:

Begin Text: Dear Mr. Ambassador,

Thank you for your letter of 16 January 2007 - I also
appreciated our breakfast conversation. As with your
previous letters we have looked carefully into the questions
raised in your letter of 16 January 2007.

Before responding in detail, allow me to share some general
observations.

As you know UNDP is implementing the DPRK programme in
accordance with the decisions of the entire Executive Board.
There are a number of formal safeguards in place to ensure
that implementation is in compliance with existing rules and
regulations, including the opportunity for the UN Member
States to raise audit issues on country programme
implementation on the basis of the annual report by the UN
Board of Auditors. These procedures Qrve both as an
oversight mechanism and as a safeguard for UN country staff,
particularly staff that are performing duties in the most
difficult of circumstances.

As we both know circumstances in countries vary tremendously.
Yet there is, and should continue to be, a single set of
procedures that our operations adhere to. I want to
reiterate the position of the Administrator and myself that
in our country programme implementation we do not tolerate
exceptions to the standard norms. Since the country
programme is owned by the programme country this requires
full compliance from the latter's side in order to enable
agencies, funds and programmes to do their work. In the
particular circumstances that define the options for
implementation of the DPRK country programme by UNDP, the
fundamental question is whether there is a role at all for
UNDP, or for that matter other UN agencies. Whilst this is a
decision for the Executive Board, I would like to emphasize
that UNDP staff are in North Korea because, to date, the
entire Executive Board has expressed the wish for us to be
there.

It is important to clarify this matter as the pertinent
questions you have raised have spilled into the public domain
which is no problem as long as there is respect for the facts.

We are deeply disheartened by your assertion - which we
cannot accept - over UNDP's alleged "complicity" with the
DPRK programme that "has been systematically perverted for
the benefit of the Kim Jong II regime - rather than the
people of North Korea (...) in blatant violation of UN rules
(...)". Equally we firmly take exception with your statement
that "UNDP apparently has failed to bring the widespread
violation of UNDP rules in the DPRK country program to the
attention of the UNDP Executive Board". We would be grateful
if you would reconsider both the assertion and conclusion,
taking into account the responses provided below.

With reference to the questions and assertions that you have
derived from the in-person review of the 1999, 2001 and 2004
internal audit reports I note that you have not referred to
the noticeable improvement in the implementation of audit
recommendations between 1999 and 2004. The internal
auditor's count shows that meaningful follow-up was given to
the many audit recommendations, with a remarkable decrease in
the apparent need for recommendations in 2004 as opposed to
the high numbers in 1999 and 2001 (see specifications in
Annex 1a). While this does not indicate that everything is
perfect, it underscores the serious effort made to ensure
effective oversight, despite a less than conducive
environment. Moreover the recommendations have identified
fundamental issues that needed to be addressed beyond the
existing framework of cooperation with DPRK, i.e. direct
payments in hard currency to government, national partners,
local staff and local vendors and sub-contracting of national
staff via government recruitment. As you know we have
decided to discontinue both practices.



I would like to respond to your seven "points and
conclusions":


1. U.S. Conclusion: "UNDP local staff is dominated by DPRK
government employees"

With reference to the above conclusion this should be no
surprise to anyone familiar with the local situation in DPRK.
Indeed diplomatic missions, international organizations and
NGOs in DPRK are subject to service agreements with the
government on national staff provision. The pertinent point
is whether we would want to continue this situation. As you
know for the Administrator and I the answer is clear: we do
not want this practice to continue and we have informed the
DPRK government of this decision.


2. U.S. Conclusion: "UNDP DPRK government employees have
performed financial and program managerial core functions in
violation of UNDP rules."

I have been informed about the following practical
arrangements that in recent years do not confirm your point.
UNDP DPRK assigns job functions to its national staff in DPRK
similar to its national staff in any other UNDP country
office - and this includes operational and programme
functions. All national staff members are closely supervised
by international personnel (four staff),and no national
staff has the authority to make resource allocations
decisions or commitments on behalf of UNDP. Please find as
annex 1b) a more detailed breakdown of different functions
and assignments of responsibilities.


3. U.S. Conclusion: "The DPRK government insists upon and
UNDP pays cash to local DPRK government suppliers in
violation of UNDP rules."

You may wish to review this conclusion as UNDP in DPRK does
not pay government suppliers in cash but by cheque or bank
transfer. Also your later reference to the DPRK government
accepting only cash is not supported by the fact that all
UNDP payments to the government are by cheque or bank
transfer.


4. U.S. Conclusion: "UNDP funds DPRK controlled projects
without the oversight required by UNDP rules."

The facts provide a different picture of the reality on the
ground. Out of eleven ongoing projects that are nationally
executed, nine are, de facto, directly executed by UNDP in
the form of country office support to NEX. Accordingly, UNDP
financial, procurement and personnel policies have been
applied to their implementation, including a review by the
Local Contracts, Assets and Procurement Committee as
necessary. For two NEX projects, advances have been given on
a quarterly basis, and reporting has been received from
project authorities on the amounts spent as per UNDP
programme procedures. No advances have been made for any
other amounts spent as per UNDP programme procedures. No
advances have been made for any other ongoing NEX project.
All advances to the government have been discontinued as of
January 2007. Importantly the total of transfer payments for
2005/06 is, to be precise, US$337,701.28.

5. U.S. Conclusion: "There is no audit review of DPRK
controlled programs in violation of UNDP rules."

This statement stands to be corrected in view of the fact
that in accordance with standing procedures on NEX audits for
every year since 2001 the Country Office in DPRK has the
required "Evaluation of Audit of NEX Projects" annual letters
on record. Since the first letter in 2001, which had an
overall rating of "deficient", the letters in 2002, 2003,
2004 and 2005 had a rating of "satisfactory" from the Office
of Audit Performance and Review. Indeed the overall OAPR
Audit ratings improved from "marginally deficient" in 1999
and 2001 to "partially satisfactory" in 2004, which is reason
for further corrective action along the upward trend that has
become visible in more recent years. These facts do not
sustain your conclusion on "violation" of UNDP Rules.
However I do appreciate your concern whether the general
rules, following from the General Assembly's call to support
national capacity building in development programme
implementation, provide sufficient conditions for effective
oversight in the specific context of DPRK. I see this as a
common objective for the Executive Board and UNDP management
to address such concern in the appropriate manner.


6. and 7. U.S. Conclusion: "The DPRK refuses to allow outside
audits of any DPRK projects and instead either limits UNDP
audits or utilizes "sham" DPRK audits in violation of UNDP
rules" and that "UNDP officials are not permitted to perform


site visits to many UNDP DPRK projects in violation of UNDP
rules."

On the facts I have established that in 1999 the Country
Office contended that project visits were made without being
duly recorded. Furthermore, I have been informed that since
2000 requests to visit projects have been allowed, including
by Headquarters' staff and project review teams.

In addition, as stated before, there have been supportive
OAPR assessments of NEX audits according to the standing
procedures. In Annex 1c) please see the account by our staff
on a number of initiatives that have been taken in recent
years to meet demands for adequate monitoring. However, as
stated before, it is not the only observation of formal
requirements that we must look at as what counts most is
whether procedures help us to ensure effective oversight over
the substantive part of the programme. We will follow this
up accordingly.

U.S. reference to the 1999 Audit concerning UNDP "routinely
making direct payments to the DPRK"

I would like to draw your attention to the fact that the
Audit recommended that the "Office should consider
discontinuing the practice of making direct payments for
routine matters", because it was for purely practical
consideration seen as an unnecessary burden to the Country
Office daily management.

U.S. reference to the 1999 Audit on the absence of annual
"DPRK government contributions (in-kind or otherwise) towards
local in-country UNDP office costs ("GLOC")"

I can inform you that since 1999 this is no longer the case,
although the country,s record is still insufficient. DPRK
has paid about 45% of its GLOC target in the period
2000-2006. (See Annex 1d) for breakdown of annual
contributions.)

In conclusion we have shown ongoing commitment to improve the
day-to-day management of operations in DPRK. However the
fundamental issue concerns the way and the extent to which UN
agencies, funds and programmes are able to contribute or not
the implementation of Executive Board approved country
programmes in DPRK.

As you know Secretary-General Ban Ki-moon has decided to have
an overall review, worldwide of the activities of Funds and
Programmes. Within that framework and with close guidance
from the Executive Board we would welcome a more specific
audit of the operations of funds and programmes in the DPRK.
We hope all these efforts will allow us to continue to work
within a professional relationship of trust and mutual
support.

Yours sincerely,
/s/
Ad Melkert

ANNEX I

a) Implementation of audit recommendations

Status Implementation of Recommendations for
Summary Audit Report RCM0018*

(issued Aug (issued Jul (issued Sept
1999) as at 2001) as at 2004) as at
30 June 2000 Dec 2006 Dec 2006

Implemented 17 27 8
In progress 11 7 4
Not Implemented 3 3 1
Unclear N/A 0 0
Not applicable N/A 1 1
Total No.
Recommendations 31 38 14

* the audits conducted in 1999 and 2001 were carried out by
the audit firm KPMG (based in Malaysia)

b) Segregation of duties for functional areas in the DPRK
Country Office, consistent with the internal control
framework of UNDP

- Bank Signatory and certifying officer functions - The
national staff (Finance Officer) acted, and continues to act,
as alternate bank signatory and certifying officer due to the
limited number of international staff at the DPRK country
office. This, of course, is communicated as per normal


procedures to headquarters.
- Personnel actions - National staff do not perform personnel
actions. They assist the Operations Manager in personnel
administration, but all personnel actions and decisions are
taken by internationals.
- Prepare Contracts and Travel Authorizations - Preparation
of contracts and their approval is carried out by
international staff. Travel authorizations are prepared by
national staff, but approved and signed only by international
staff.
- Manages Petty Cash and maintains financial records - The
national Finance Officer has acted, and continues to be, the
petty cash custodian as delegated.
- Acts as staff officer to dispose of equipment and supplies
- No national staff has acted as an officer disposing of
equipment and supplies. Requests for disposal of equipment
are reviewed and recommended by the LCAP, and submitted for
approval to the Resident Representative.

The 1999 internal audit concern on handling of petty cash has
been addressed satisfactorily in the following way with the
office strictly implementation the Petty Cash guidelines
issued by UNDP Headquarters. This includes maintaining the
imprest level within the US$500 limit, designating a petty
cash custodian, keeping all single petty cash payments within
$50 and approving all petty cash expenditures. Cheque books
are adequately controlled and kept in the office safe. A
cheque register is also maintained in the safe.

Since the past several years the office raises Purchasing
Orders for all travel and for all procurement of stationery,
office supplies and equipment above $2,500. for agency
executed projects, the office raises PO,s based on
requisitions from the agencies. Purchase are made by checks
or bank transfers, not cash. The only payments in cash are
petty cash payments.

c) Initiatives to strengthen program monitoring

UNDP country office management in DPRK places great
importance on the need to continually monitor the relevance,
performance and effectiveness of its programmes and projects,
and to assure funding agencies and donors that resources
provided through UNDP re used for their intended purpose. To
this end, the country office is taking proactive steps to
ensure that its support is provided in an effective,
accountable and transparent manner. These include:
development and implementation of an M&E Strategy for the
DPRK programme in 2006; more rigorous and systematic project
level M&E activities (tripartite reviews for all projects
once a year, project monitoring visits); strengthened
controls on the acquisition and use of project equipment
including physical verification of equipment on delivery at
the project site, maintenance of project inventories, and
periodic physical verification of project assets against
inventories, and the recruitment of an ARR (Programme) with
specific experience and enhanced responsibilities for M&E
plan implementation. It should be stressed that UNDP adheres
to the UN principle of "no access-no assistance" in the
implementation of its programme in DPRK. In addition, the
predominant use of Direct Execution by the Country Office or
DEX or agency implementation (such) as by UNOPS) in DPRK and
not National Execution (NEX),though not ideal for fostering
national ownership, provides UNDP with greater leverage and
control over the use of funds.

d) Gloc performance over the years is as follows (in USD):

Year Received

2000 37,559
2001 37,209
2002 29,765
2003 61,547
2004 43,532
2005 78,144
2006 11,348

Total 299,104

UNDP has been using GLOC balances since early 2006 to pay for
rent and utilities for the office. In addition, DPRK has
also made available, free of rent, a two floor building near
the UNDP office in which several project offices and staff
are accommodated. End Text.

WOLFF