US embassy cable - 03ROME2485

UNCLAS  ROME 002485 
 
SIPDIS 
 
 
FROM FODAG 
 
STATE FOR IO/S LISA JACOBSON AND IO/EDA WINNICK AND KOTOK 
USDA/FAS FOR REICH AND HUGHES 
ATHENS FOR CLEVERLY 
PARIS FOR UNESCO 
 
E.O. 12958:  N/A 
TAGS: AORC, KUNR, ABUD, FAO 
SUBJECT:  REPORT OF FAO 102ND FINANCE COMMITTEE 
1.  Summary.  The 102nd session of the UN Food and 
Agriculture Organization (FAO) Finance Committee met May 
5-9, 2003.  Committee members were divided on the 
question of the 2004-2005 budget level, with the U.S. and 
 
Japan supporting zero nominal growth, G-77 members 
supporting real growth, Switzerland supporting zero real 
growth and the UK silent.  The budget will be examined 
again at the September Finance Committee Session. 
Although recognizing the seriousness of FAO's after- 
service medical care liabilities, the Finance Committee 
was not ready to take a decision on funding and will 
consider the matter further in September.  As a result of 
U.S. objections, the Committee sent back the 
Secretariat's Split Currency Assessment and Capital 
 
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Budgeting proposals for more work.  These will be before 
the September Finance Committee session for decision as 
well.  Throughout the session, USDel stressed 
accountability and the need to ensure that proper 
financial management controls were in place, as 
recommended in last year's Report of the External Auditor 
and this year's Joint Inspection Unit (JIU) report.  As 
noted in the JIU report, poor personnel practices and 
weak management at FAO country offices seriously hamper 
FAO's work and must be kept at the top of the agenda. 
End Summary. 
 
2.  The 102nd session of the FAO Finance Committee (FC) 
met May 5-9, chaired by Humberto Molina Reyes (Chile) and 
Anthony Beattie (UK) as Vice-Chair.  The nine member 
committee is composed of Tanzania, Pakistan, the UK, 
Kuwait, Japan, Chile, Switzerland, Senegal and the U.S. 
The entire report of the Finance Committee will be sent 
to the FAO 124th Council session (June 23-28, 2003). 
Those items on which the Council must take action are 
noted below. 
 
I. Financial and Budget Reports 
------------------------------------_ 
 
3.  Agenda Item 3, Annual Report on Budgetary Performance 
and Program and Budgetary Transfers: 
 
-- As in previous years, the main variance from the 
budget concerns the shortfall in support cost income 
resulting from the decline in development projects being 
implemented by the FAO.  The Committee once again called 
on FAO to adequately plan for the risk and the impact of 
reduced income earnings. 
 
-- Director of Program and Budget, Tony Wade, told the 
Committee that FAO recognized the need to adapt to 
declining income.  Wade noted that the FAO Director 
General (DG) did not want to increase support cost 
charges; rather, FAO "would be able to manage the 
reduction through re-deployment of staff." 
 
-- At the request of USDel, the FC Report notes "concern" 
over the deficit incurred as a result of increased 
activities of the Investment Center in 2002.  The deficit 
will need to be covered from the Technical Cooperation 
Department's budget in 2003. 
4.  Comment and follow-up:  The Annual Report on 
Budgetary Performance and Program and Budgetary 
Performance is transmitted to Council for information. 
The actual transfers will be approved at the September 
2003 FC session. 
 
5.  Agenda Item 4, FAO Interim Accounts.  The FC took 
note of the information provided. 
 
6.  Agenda Item 5, Report on Investments: The Committee 
took note of the report and discussed, in particular: 
 
-- Declining income earnings from investments; 
 
-- The resulting underfunding of staff-related 
liabilities for which long-term portfolio income was 
intended to provide; 
 
-- After a third year of under-performance, the decision 
to terminate the investment manager (Fiduciary Trust) and 
 
seek new managers; 
 
-- The need to increase in-house expertise and monitoring 
capability of FAO's investments.  Should FAO move to a 
split-currency assessment, it does not have the in-house 
expertise to handle the monthly spot currency 
transactions that would be required. 
 
7.  Comment and follow-up: See additional discussion of 
after-service medical care liabilities under the Program 
of Work and Budget.  FAO members will need to address the 
fact that liabilities far eclipse the possibility of 
assets addressing them; that assets have been under 
performing badly; and that management of these assets 
poses problems for the organization in terms of the 
number and skills of staff members. 
 
8.  Agenda Item 6, Financial Highlights and status of 
assessed contributions: The Committee took note of the 
report and discussed, in particular: 
 
-- FAO's liquidity has significantly improved following 
receipt of U.S. arrears.  (Finance Director Nick Nelson 
noted that the organization was almost forced to resort 
to external borrowing last year as a result of cash-flow 
problems); 
 
-- The shortfall in contributions was higher than last 
year at this time, chiefly because Japan had not yet paid 
its annual contribution. 
 
-- The balance in the Special Reserve Account also 
reflected the positive effects of net favorable currency 
variations in the current biennium (in fact, foreign 
exchange gains amounted to USD 12.6 million and could 
reach USD 20 million by the end of the biennium); 
 
-- The General Fund continued in deficit, and ongoing 
amortization of the unfunded after-service medical care 
liabilities would increase the deficit; 
-- The Technical Cooperation Program (TCP) balance of USD 
81.8 million showed that the rate of TCP expenditure was 
still low; 
 
-- Since FAO's management and administrative costs 
related to the Oil for Food (OFF) Program were funded 
entirely through the OFF program, the eventual suspension 
of the OFF program would not affect the Regular Program 
Budget in 2003. 
 
9.  Comment and follow-up:  The Financial Highlights are 
transmitted to the FAO Council for information. 
 
II. Oversight Matters 
---------------------- 
 
10.  Agenda Items 7 and 8, 2002 Annual Activity Report of 
the Office of the Inspector General and Progress Report 
on Implementation of the External Auditor's 
Recommendations: Inspector General Pete Wilson briefed 
the FC on items 7 and 8.  The FC took note of the Reports 
with the following comments: 
 
-- Welcoming the creation of the Audit Committee and the 
information that staffing in the Finance Division was 
"now satisfactory." 
 
-- Noting the need for more precise timetables for 
implementation of the External Auditor's recommendations; 
 
-- Stressing the importance of achieving full and timely 
implementation of the recommendations relating to 
internal controls; 
 
-- Requesting that the review of progress be a standing 
item for the FC. 
 
11.  Comment and follow-up:  The lack of an Audit 
Committee and the need for increased staffing in the 
Finance Division were two of the most important issues 
raised in last year's Report of the External Auditor. 
 
The FC should continue to monitor closely the FAO's 
follow-up to the 2002 Report of the External Auditor and 
stress full and timely implementation. 
 
12.  Agenda Item 9, Program of Work of the External 
Auditor: The External Auditor explained that the 
Technical Cooperation Program (TCP) had been picked for a 
"value for money" audit.  The rationale included the fact 
that TCP is the third largest program funded by the 
regular budget, and delivery is low; only two percent of 
the current year appropriation had been spent so far and 
decentralization, according to the External Auditor, 
"creates new risks."  The report will be presented in 
2004. 
 
13.  Agenda Item 10, Appointment of the Inspector 
General:  The FC is "consulted" on the appointment of the 
Inspector General (IG).  The FC was informed of the 
selection process and the DG's intention to name Ms. 
Amelia Lo Fasso (U.S.) as the new IG on the retirement of 
incumbent Pete Wilson (Canada) in August 2003. 
 
14.  Agenda Item 11, UN Joint Inspection Unit (JIU) 
Reports: The Finance Committee transmitted the JIU 
reports on Water Management and Involvement of Civil 
Society NGO's to the Program Committee for action. 
 
-- The FC discussed JIU report 2002/3 on Support Costs 
Related to Extrabudgetary Activities in Organization of 
the UN system.  The Committee welcomed FAO's assurance 
that "extrabudgetary resources should only be accepted 
consistent with the policies, aims and activities of the 
organization." 
 
15.  Agenda Item 11, continued, Report on Management and 
Administration in the FAO (JIU/Rep/2002/08): 
 
-- It was noted that FAO management stated that "the 
majority" of the JIU recommendations were being 
implemented.  However, some would need to be submitted to 
the Governing Bodies and others would be considered by 
the Program or Finance Committees.   Members requested 
that FAO provide a follow-up on the implementation of 
recommendations. 
 
-- The Finance Committee is charged with follow-up on 
personnel policies relating to FAO Country and Regional 
Representatives and a proposal that the term of the 
External Auditor be limited.  The September Finance 
Committee will have proposals by FAO management on both 
of these issues. 
 
-- USDel took issue with the FAO Director General's 
rejection of the JIU recommendation that selection of 
country and regional representatives should follow 
standard personnel selection procedures.  USDel also 
noted the importance of following up on the JIU 
recommendations on improving management in country and 
regional offices, particularly given the increasing 
decentralization of FAO activities. 
 
16. Comment and follow-up:  In discussion with FAO senior 
staff, USDel was (informally and unofficially) encouraged 
to continue with this message.  It seems that FAO staff 
themselves are all too conscious of the weakness of FAO 
country representatives under the current selection 
process whereby the DG appoints them as his "personal 
representatives." The JIU reports will be transmitted to 
the FAO Council for information. 
 
III. Financial Policy Matters 
----------------------------- 
 
17.  Agenda Item 12, Capital Budgeting: 
 
-- As a result of USDel objections to the proposal on 
capital budgeting, the FC did not endorse the proposal 
and requested the Secretariat to revise the proposal 
without a reserve fund (using only Chapter 8 of the 
Program of Work and Budget); allowing for prior review of 
proposals by the Finance Committee and allowing for 
approval of such proposals by a separate Conference 
 
resolution. 
 
-- Budget Director Tony Wade argued that the FAO proposal 
"offered more accountability than anything in the UN 
system," called attention to WFP's recent adoption of a 
capital budgeting mechanism, and argued that FAO - like 
any other large organization or company -- needed a means 
of tracking capital assets. 
 
18.  Comment and follow-up:  We expect that the 
Secretariat will be urging the FC to take a final 
 
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decision on capital budgeting at the next session. 
Proposed changes to the Financial Regulations will be 
submitted as well in September. 
 
19.  Agenda Item 13, Review of Project Proposals to 
Confirm Compliance with FAO's Mandate:  The FC took note 
of the document without discussion. 
 
20.  Agenda Item 14, Proposal to Establish a Special Fund 
for Emergency and Rehabilitation Activities: 
 
-- Anne Bauer, Director of FAO's emergency programs, 
informed the Committee that the fund was designed to 
speed up FAO's response in emergencies; it would not be 
used for procurement of inputs, but for assessment 
missions.  The fund would remain totally outside of the 
regular Program of Work and Budget (PWB) and presented 
"no risk" to the PWB, according to Bauer.  Bauer also 
reported that donors had already expressed interest in 
supporting the Special Fund. 
 
-- The FC supported the proposal, noting that the FAO 
Director General has the authority to establish such a 
fund on his own authority. 
 
21. Innovative Models for Leveraging Resources in Support 
of the Field Program: 
 
-- The FC endorsed the proposed amendment to Financial 
Regulation 6.7, after discussion of the modalities for 
moving responsibility for project execution to national 
authorities.  It was noted that the FAO proposal closely 
tracked that of other UN agencies and programs. 
 
22.  Comment and follow-up: The proposed amendment will 
be submitted to FAO's Committee on Constitutional and 
Legal Matters and submitted to the 125th Council for 
transmission to Conference. 
 
23.  Agenda Item 16, Information Note on the Cost of the 
World Food Summit Five Years Later: The FC took note of 
the document without discussion. 
 
IV. Budgetary Matters 
---------------------- 
 
24.  Agenda Item 17, Summary Program of Work and Budget 
(SPWB) 2004-05: 
 
-- The U.S. and Japan reiterated requests for a zero 
nominal growth scenario; the G-77 members supported a 
real growth scenario, and Switzerland supported a zero 
real growth scenario.  The U.K. was silent. 
 
-- Without prejudice to the overall budget size, the 
Committee considered the cost increase calculations to be 
consistent with the agreed methodology.  The Committee 
also emphasized the importance of resolving amortization 
of the liability for after-service medical care, as 
investment income can no longer cover these costs. 
 
-- Some members expressed the view that the best option 
for amortizing the liability would be to approve the 
Secretariat's proposal to include an earmarked USD 14.1 
 
SIPDIS 
million in the PWB starting from 2004-2005 and continuing 
for the subsequent eleven biennia (depending on 
investment performance and subject to actuarial 
recalculation). 
 
25.  Comment and Follow-up:  Among the items on which the 
FC agreed to take a decision in the September Finance 
 
Committee is how to handle amortization of unfunded 
liabilities associated with after-service medical costs. 
The Secretariat will prepare a paper on the subject. 
Concerning the final budget level, we do not expect the 
September Finance Committee to come to any conclusion 
(nor in fact for a decision to be reached until the 
November/December Conference.) The Summary Program of 
Work and Budget will also be transmitted to the FAO 
Council session. 
 
26.  Agenda item 18, Split Assessments: 
 
-- As a result of USDel objections, the Committee did not 
endorse the Secretariat's proposed methodology for a 
split currency assessment (SCA). USDel argued that split 
assessment was burdensome for members and that the FAO 
should be responsible for managing its resources in the 
economic environment in which it operated.  USDel also 
argued that the proposed methodology lacked transparency, 
as adjustments would be made automatically between 
biennia for exchange rate fluctuations. 
 
-- The Secretariat was requested to prepare an additional 
methodology that protected the PWB against exchange rate 
fluctuations within the biennium, but not between biennia 
"and to compare this with the Secretariat's methodology." 
 
-- UKDel stated that the U.S. position raised an 
important question which needed to be examined by the UK 
authorities; that being said, UKDel confirmed that he in 
fact agreed to the need to protect the budget from 
exchange rate fluctuations within and between biennia. 
The UK also stated that there was no significant 
additional burden in paying in two currencies. 
 
-- The Delegate of Pakistan stated that he supported the 
principle that the budget should be protected both 
between as well as within biennia.  He agreed that the 
Finance Committee could look at the question again, but 
cautioned that the Committee "should not become 
deadlocked." 
 
-- A number of countries pursued the question of whether 
Euro-zone countries should provide the Euro portion of 
any split currency assessment, arguing that the exchange 
rate "risk" should be transferred to those countries best 
positioned to handle the risk.  The Secretariat responded 
that those countries only provided 38.48 percent of the 
budget (whereas the FAO's Euro needs represent some 44 
percent of the budget). 
 
-- The Delegate of Tanzania stated that payment in two 
currencies could add to the burden of developing 
countries. 
 
-- Budget Director Tony Wade noted that the proposed 
methodology closely resembled that of the IAEA and 
UNESCO, except that the exchange rate was more realistic 
(both of those organizations use an old exchange rate 
which, according to Wade, "distorts" the calculations.) 
 
-- Wade also argued that failure to approve a split 
currency assessment left the organization in danger of 
having to absorb exchange rate losses in the next 
biennium - which would require cutting some 500 
positions.  He noted that he could wait "until September 
or October" to get a final ok on the SCA, but that if the 
organization were not to have one, he would have 
considered "buying forward today." 
 
27. Comment and follow-up:  USDel was also requested to 
prepare a non-paper to circulate to FC members on the 
subject.  The Committee also agreed that the issue needed 
to be resolved no later than the September Finance 
Committee session in view of the preparations that the 
Secretariat would need to make to prepare the budget and 
 
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the Secretariat for the next biennium.  Of the nine FC 
members present, probably one other member (UK) 
thoroughly understood the issue.  We expect the 
Secretariat to push very hard for member approval of 
 
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their original proposal.  The Finance Committee's 
conclusions (or lack thereof) on the split currency 
 
assessment will be transmitted to the Council. 
 
28.  Agenda Item 19, Scale of Contributions 2004-05: 
 
-- As expected, Chile, on behalf of Argentina, requested 
that Argentina's assessment be reduced. 
 
-- It was noted that this would require other members to 
meet the difference.  A few members suggested that 
postponing payments was the normal option. 
 
-- The FC agreed to the proposed scale of assessments for 
forwarding to the Council and took note (but no action) 
on the Argentine request. 
 
29. Comment and follow-up: We expect that Argentina may 
request another Latin American country to raise this 
issue again at Council (Argentina has lost its seat on 
the Council as a result of arrears).  The Council must 
adopt the proposed scale of assessments. 
 
30.  Agenda Items 20, 21, 22, Budget for the European 
Commission for Control of Food and Mouth Disease; for the 
Regional Animal Production and Health Commission for Asia 
and the Pacific; and for the Desert Locust Commission: 
The FC took note of the reports with minimal discussion. 
 
V.  Human Resources Management 
------------------------------- 
 
31.  Agenda Item 23, Progress Report on Human Resources 
Management:  The FC took note of the progress report 
without discussion. 
 
32.  Agenda Item 24, Statistics of Personnel Services: 
The FC took note of the document without discussion. 
 
33.  Agenda Item 25, Annual Reports of the ICSC and UN 
Joint Staff Pension Board to the General Assembly and 
Summary of the Decisions Taken:  The FC took note of the 
document without discussion. 
 
VI. Organizational Matters 
--------------------------- 
 
34.  Agenda Item 26, Methodology for Determination of 
Equitable Geographic Distribution: 
 
-- USDel pointed out that the Secretariat paper had 
incorrectly described the methodology in use by the 
United Nations in New York for determining geographical 
distribution in preparing the two "alternatives" for FC 
consideration.  USDel also noted that any methodology was 
only as effective as management chose to make it. 
 
--Other FC members stated that they needed to know how 
the alternatives proposed would affect their countries. 
 
--Pakistan noted that the Secretariat's proposal did not 
address regional distribution, and noted in this regard 
what he called the "severe" underrepresentation of the 
region. 
 
-- USDel stated that there were no agreed criteria for 
regional distribution and that the U.S. would not support 
creating a methodology for geographic distribution which 
took into account regional distribution. 
 
-- Japan argued that consistency with other UN agencies 
was desirable.  Other members supported, in principle, a 
methodology similar to that in use in New York, which 
takes into account population and contributions. 
 
-- The Delegate of Pakistan stated that "the current 
system of linking representation to contributions is in 
general not acceptable." 
 
-- The Secretariat will revise the paper to correct the 
mistake; the item will be taken up again at the September 
FC. 
35.  Follow-up and comment:  FC members requested that 
 
the item not be discussed in the meantime at the Council 
(where it appears on the agenda). The proposal to review 
the methodology for determining geographic distribution 
was first proposed by the Latin American and Caribbean 
region; while the membership as a whole has never agreed 
to change the methodology, discussion is kept alive by 
the fact that everyone has something to dislike about the 
current system.  Any change to the system should require 
the Secretariat to make better efforts to increase 
representation of underrepresented countries (for 
instance, by not accepting applications from candidates 
from overrepresented countries). 
 
36.  Agenda Item 27, Progress Report on the Oracle 
Project:  The FC took note of the paper without 
discussion. 
 
Comment 
------- 
 
37.  The agenda for the upcoming FC session in September 
contains a number of complicated but important financial 
issues, all of which must, in one form or another, be 
acted upon by the Committee.  We expect the Secretariat 
to push strongly for a Split Currency Assessment 
methodology which automatically protects the FAO budget 
between biennia; we expect the Secretariat to similarly 
push for agreement on a capital budgeting mechanism.  And 
we expect that the Secretariat will push hard for a real 
growth budget (although this is likely to be postponed 
for final action to the November/December Conference, as 
was the case in 2001).  Concerning follow-up to the 
recommendations of the JIU report and that of the 
External Auditor, the FC must be persevering in insisting 
on full reporting on follow-up and not lose sight of 
these important management issues, despite the heavy 
workload of the Committee sessions.   Tamlyn 
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 2003ROME02485 - Classification: UNCLASSIFIED