IAEA PROGRAM SUPPORT COSTS - FORCING THE ISSUE

UNCLAS UNVIE VIENNA 000027

SENSITIVE
SIPDIS

FOR IO, ISN/MNSA; DOE FOR NA-24, NA-25, NA-21

E.O. 12958: N/A
TAGS: IAEA AORC KNNP TRGY UN PREL CN UK
SUBJECT: IAEA PROGRAM SUPPORT COSTS - FORCING THE ISSUE

REF: 08 UNVIE 587


1. (SBU) Summary: The issue of Program Support Costs (PSCs)
at the IAEA has become increasingly irksome. The IAEA's
unpublished policy of charging 7 percent PSCs has grown to
include even the cost-free experts on loan to the IAEA from
Member States, while continuing to exempt donations to the
Technical Cooperation Fund (a favorite of the G-77). The
U.S. has refused to pay PSCs until the policy is clarified
and 3.8 million USD in DOE donations are currently in limbo
as a result. Mission is working to build Geneva Group
consensus around three conditions for an acceptable PSC
policy: 1) Publish a fair, transparent and universal PSC
policy that covers all extra budgetary contributions
(including the Technical Cooperation Fund); 2) make an
explicit, line-item reference to the PSC rate in all extra
budgetary, "transfer of funds" documents; and 3) establish a
flat fee for cost-free experts. Implementation of these
demands would likely arouse G-77 resistance, but may be worth
tackling in the interest of budgetary transparency and good
governance. Geneva Group members are interested in pressing
the issue, and cognizant of the opportunities and
complexities presented by the next meeting of the Board of
Governors, March 2 - 6. If progress is not made on the
issue, Mission recommends a reassessment of the overall USG
policy on cost-free experts, possibly reducing their number
with a greater focus on high-priority, technical
appointments. We also need to consider more closely the
possibility of eventually moving programs like nuclear
security and technical cooperation into the regular budget.
End Summary.

A Stealth Policy Expands
--------------


2. (SBU) On May 20, 2008 the IAEA Secretariat gave a
presentation to Member States on the PSC policy, including
details of the 7 percent rate, the exception for
contributions to the Technical Cooperation Fund (TCF),and
the establishment of a PSC "sub-fund" to collect the
anticipated annual income of two million Euros. Member
States failed to agree on the policy during the June Board of
Governors, and the policy was never formally implemented. In
reality, however, the IAEA Secretariat has moved forward with
the May policy.


3. (SBU) On December 24, Deputy Director General David Waller
responded to a November 12 letter from the Geneva Group
questioning the policy (reftel). Waller's letter reiterates
points from the May presentation, and notes that the income
generated from PSCs in 2008 amounts to 386,000 Euros. The
letter offers another briefing for Member States early in
2009, and assures donors that PSCs will only be charged "as
agreed with the contributors of such funds" (a reference to
Financial Rule 108.02).

PSC Headaches Continue
--------------


4. (SBU) As it turns out, the situation has progressed far
beyond the May presentation and Waller letter. For example,
PSCs are now being applied not only to projects that include
the donation of a cost-free expert (CFE) or consultant, but
also to the individual CFE agreements themselves.
Individuals on their own contract cost the USG anywhere from
50,000 to over 300,000 USD annually and now carry potential
PSC charges of 3500 to over 20,000 USD each. (The USG
currently provides 25 - 30 CFEs to the IAEA in both technical
and non-technical capacities.)


5. (SBU) Even more troublesome are rumors that donors no
longer need be explicitly informed that PSCs are being
charged. Contrary to the Waller letter, one IAEA staff
member told us that the IAEA legal office had "scammed" a
donor into paying PSCs by employing ambiguous language. If
it is true that the IAEA is charging PSCs without permission,
the Agency may be in violation of Financial Rule 108.02.


6. (SBU) Meanwhile, the PSC policy continues to foster
resentment within the IAEA as agile, progressive offices that
are highly dependent on voluntary funds (like Nuclear
Security and the Program of Action for Cancer Therapy) work
hard to attract voluntary funds, only to see 7 percent of
their revenue skimmed off the top to subsidize their
"parasitic" counterparts in the regular budget. The harshest
words from IAEA staff are reserved for the Management
Department, which is not only funded out of the regular
budget, but also manages the proceeds from PSCs.


7. (SBU) The ever-glaring exception in this scenario is the
Technical Cooperation Fund (TCF),which draws some 100
million dollars a year in extra budgetary funds, but pays no
PSCs. (In one recent case, Spain was able to avoid paying
PSCs on a project by relabeling it "TCF.") The Canadians are
quick to point out another exception, the nuclear fuel bank,
which met its goal of 150 million USD (primarily with funds
from the non-governmental Nuclear Threat Initiative and the
USG) but pays nothing to the IAEA for the hundreds of staff
hours that Canada alleges go toward its support.

Three "Conditions" for an Acceptable Policy
--------------


8. (SBU) During a January 13 meeting, Geneva Group Members
worked to develop three basic conditions toward the
establishment of an acceptable policy on PSCs. While the
Group has not determined how to put forward these conditions,
some Members may determine to raise them in advance of - or
during - the March Board of Governors:

- PUBLISH AN OFFICIAL PSC POLICY THAT IS FAIR, TRANSPARENT
AND UNIVERSAL. The policy should include a "rates scale"
that charges lower rates for large sums of money, cash
transfers, rote procurement (including appropriate Government
Cost-Sharing projects) and gifts. The policy includes TCF,
though many procurement projects will be covered by the lower
rate. (A similar sliding scale is in place at the WHO,
allowing the organization to differentiate between real extra
budgetary projects and money that is just passing through.)


- REFER TO PSCs AS A SEPARATE LINE ITEM IN ALL EXTRA
BUDGETARY, "TRANSFER OF FUNDS" DOCUMENTS. This would allow
Member States to view what is being charged, the
justification, and the rate. If there is any deviation from
the regular, 7 percent rate, a reference to the "rates scale"
must be included. This would also bring the IAEA into
compliance with Financial Rule 108.02.

- CHARGE A FLAT RATE FOR COST-FREE EXPERTS. The IAEA should
produce an estimate of the institutional support required to
support donated staff, whether consultants, CFEs, or JPOs.

Potential Pitfalls
--------------


9. (SBU) Despite the wide adoption of PSCs across UN
agencies, diplomatic missions in Vienna tend not to
appreciate this standard of good governance. Even worse,
progressive members of the G-77 who might otherwise support
good governance initiatives turn atavistic under any
perceived threat to technical cooperation. (A similar
scenario plays out at UNESCO in Paris.) In the end, any
attempt to reopen the PSC discussion would raise the ire of
the G-77, possibly unleash a cantankerous exchange at the
March Board, and even stall future TCF negotiations.


10. (SBU) Another factor to consider is that the principle of
transparency is not necessarily worth championing if it
breeds G-77 resentment. Other donors recognize this point,
and, like the Japanese, have already admitted privately that
they will eventually pay PSCs whether or not the policy is
clear and fair. The IAEA Secretariat is similarly aware of
this reality, and may simply lay low until donor states drop
the debate and continue contributing as before. Canada, for
example, is holding up a four million dollar donation, but
will have to relinquish any hold on the donation by March 15
or risk losing the funds altogether.


11. (SBU) Finally, IAEA Management regularly argues that if
Member States do not like PSCs, they should fund priority
programs out of the regular budget and stop draining the
institution of its resources. This is a difficult argument
to counter, and it is one of the reasons - despite the
prospect of increased assessments - to move programs like
Nuclear Security and TCF into the regular budget.
Potential Gains in Good Governance
--------------


12. (SBU) Despite the specter of a (possibly) losing battle,
a real effort to clarify the PSC policy would make a long
term contribution to good governance at the IAEA. Publishing
a fair policy would also fulfill a universally-recognized and
important pillar of budgetary transparency, as recognized by
Goal 8 of the Department's UN Transparency and Accountability
Initiative (UNTAI). The UK, Canada and Japan (after the
conclusion of the Director General's election) are likely to
be strong partners in pushing for the fulfillment of the
three conditions.


13. (SBU) Comment: Past PSC battles have led to practices
that are neither transparent nor fair, and vulnerable to
Secretariat manipulation. Mission recommends continued
Geneva Group cooperation to gain consensus on the three
conditions above, as well as bilateral approaches to remind
the IAEA that U.S. resources are vast but not unconditional,
and that transparency is one way to ensure goodwill and the
uninterrupted flow of resources.
SCHULTE