US embassy cable - 05ROME3805

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