US embassy cable - 03ROME4348

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 
 
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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 
 
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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 
 
 
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	2003ROME04348 - Classification: UNCLASSIFIED