FAQs Cost-Recovery Policy

Transcription

1 27/04/2017 FAQs Cost-Recovery Policy Important note: The Executive Board at its 200th session (200 EX/Decision 5.III (F)) requested the Director-General to present at its 201 st session a revised cost-recovery policy (CRP), a comparative document on proportionality policy in other United Nations Organizations, and the management rate based on the cost-recovery policy conceptual framework. The revised policy will be debated at the forthcoming session of the Executive Board (201 EX/5 Part III (C) and 201 EX/5.INF.3). These FAQs further explain how the principles endorsed by the Executive Board at its 200 th session will be applied. For background, the key principles were to classify costs according to their functions into 3 main categories namely, Programme 1, Special Purpose and Management; and that the Management cost be applied proportionally to Regular programme (RP) and Extrabudgetary (XB) resources, including revenue generating funds (OPF). 1. Why do we need to revise the Cost-recovery policy? The External auditor s recommendation on the cost recovery policy suggested that an immediate reform of the policy should be undertaken. Specifically, recommendation 4 stated The cost-recovery regulations may be criticized in terms of the lack of consideration for fixed indirect costs and especially the complexity and risks of the current cost-recovery system (1) Lack of recovery of fixed indirect costs (2) The risks of vague rules for cost recovery (a) The risk of improper implementation of the system due to its own complexity (b) The risk of making UNESCO s extrabudgetary projects less attractive than those of other international organizations. The External auditor suggested 5 options in the report. With regard to 5 th option, the report stated The fifth option, which is the direction currently preferred by the working group, would be to align the support cost rate for FITOCA on the rate envisaged by the abovementioned group of international organizations (8 %), prohibit waivers from the rate and recover the maximum level of direct costs (as today). To avoid the risk of overcharging, this arrangement studied by the working group would have to be accompanied by the aforementioned reform (to identify cost categories covered by the support cost rate for FITOCA and to reserve direct cost recovery for other cost categories). The External auditors report also noted that the current approach of the working group corresponds to the 5 th and preferred reform option. The need for review of the policy is therefore well articulated in External Auditor s recommendations accepted by the Secretariat. Further, the principles of the cost recovery conceptual framework were already approved by the Executive Board at its 200 th session. The Executive Board paper (201 EX/5 Part III (C)) simply elaborates these principles, including the cost classifications, and its implications on 39 C/5. 1 Programme cost category is further divided in two sub groups namely, Programme and Programme Coordination and support as stated in the table.

2 2. What functions would be classified under each of the 3 main categories? The table below summarizes the classification of functions under each of the categories. Programmes Education Natural Sciences (Incl. IOC) Social & Human Sciences Culture Communication and Information UNESCO Institute for Statistics Management of Field Offices Special Purpose Governing Bodies Participation in JUNM ASHI Liability Part IV - Loan repayment MBF (currently under HRM) P R O G R A M M E S Program Coordination and Support Coordination & monitoring of Action to benefit Africa Gender Equality Post Conflict & Post Disaster situations Knowledge Management Ext relations & public Information Management of Support Services Participation Programme & Fellowships Management Cost Direction Human Resources Management Bureau of Financial Management Bureau of Strategic Planning Mgmt of Information Services & comms 3. Why are functions such as Management of Support Services and Security not classified as Management? The functions that are classified as Management must meet the following criteria: Nature of support is overall wellbeing/ institutional. These functions provide support for a well-managed, accountable Organization through key activities such as planning, organizing, motivating and controlling. Supports Programme as well as other functions both at Headquarters and Field. Can t be allocated using appropriate and traceable cost drivers can t easily be charged back as services. Functions stated above do not meet the last two criteria as they are either restricted to HQ or field and / or can recharge costs to other functions or to projects using cost drivers. Changes to the functions classified as management has an impact on the average management rate which is calculated at 8% based on the classification above. For example the average rate would be 9% if Security is classified as Management, and 11% if Management of Support Services is classified as management. 4. Why are derogations adjusted for while calculating the Management costs to be covered from RP? The calculation of the average Management Rate is based on the principle that all funding sources bear a share of the Management cost. Currently a number of extrabudgetary projects have a rate lower than average rate calculated, including some Conventions and Special Accounts with 0% PSC. Derogations represent a decision to not recover Management costs against extrabudgetary funds and in effect, in order for Management costs to be fully covered, the reduction in management income due to derogations are 2

3 covered from the regular programme. From a full cost budgeting standpoint, the derogations are a decision to co-finance from the Regular programme i.e. the Extrabudgetary funds and the co-financed amount together contribute to the achievement of programmatic results under an integrated budgeting framework. 5. Will the policy allow for differentiated PSC rates to be charged? The average management rate is calculated at 8% for the 39 C/5. Some funds such as the European Commission and UN Joint Programmes have fixed PSC rates, which are lower than the average management rate calculated for UNESCO. UN organizations also use differential rates as a resource mobilization tool. Currently UNESCO uses lower PSC rates for Special Accounts in order to incentivize multi donor funds. Establishing differential rates will take into consideration resource mobilization requirements as well and give due considerations to lower rates required (EC, UN Joint Programming). 6. Does it mean the new rate would be 8%? There are two ways in which we can look at PSC rate. Either we can have one rate (8%) and anything below that is a derogation funded from RP as co-financing or we establish a set of rates, which come to an average of 8%. The latter may result in higher than 8% rate to compensate the lower rates in other cases. This will be addressed from a resource mobilization perspective and finalized at the 202 nd session of the Executive Board. 7. How does the policy result in releasing additional funds in Regular programme? Based on the principle of proportionality, the proportion of Management cost that would be needed to be covered from extrabudgetary resources would increase by $3.2M in 39 C/5, which corresponds to the amount released for reprogramming under RP. 8. Is the release of additional RP funds a one-time effect? The release to RP depends on the proportion of Management costs covered from both RP and XB, amount of derogations and the Management costs. If the proportion of RP and XB remains constant (RP budget has not changed since 2011 and XB disbursement since 2011 have averaged around $205M), these additional funds would continue in future C5s, assuming Management costs are also stable. However, if the XB proportion increases without corresponding increase in Management cost, the release will be higher, and viceversa if the XB proportion is lower. 9. What if the proportionality results in more cost charged to RP? If the total RP budget remains stable, the proportion charged to RP will increase if the extrabudgetary funds decrease substantially in a given biennium. In theory, as is the case today for FITOCA, a significant decrease in extrabudgetary funding would require a review of the management functions and / or a resource mobilization strategy to increase extrabudgetary funding in the following biennium. To avoid these short-term adjustments, the regulations for the Special Account for Management Costs (previously FITOCA) provide a reserve to cushion short-term fluctuations. 10. Will the proportion be calculated at each C5? Considering the principle of proportionality, the distribution percentages to be applied for RP and XB would be calculated at each C5. 3

4 11. If the total Management Costs were to be proportionality covered from RP and EXB, why do we need reserves? Some of the main risks of implementing the policy, where reserves would be needed to cushion the impact of such variations are as follows: Since the amount of Management Cost required to be funded from voluntary contributions will be based on past data, any reduction in the size of voluntary disbursement will result in lower than anticipated recovery of Management Costs. Any significant structural change in the Organization will affect the cost that is classified as Management. Sudden shift in reduced PSC rates on voluntary contributions, special account in particular, will have short-term reduction in anticipated recovery of Management Costs. If differential rates are established, significant change in the composition of funding (for example, more EC funding that allows only 7%) would affect the amount of anticipated recovery of Management Costs. Short term changes in proportion of RP and XB resources could result in higher management rate. To ensure the rate is sustained in the short term without frequent changes (at least 2 biennium). In summary, the reserves are needed to cover the short-term fluctuations in management rate, Management Costs, drop in expected income due to temporary reduction in EXB funding etc. The reserves would also help smooth out the short-term fluctuations to avoid making short-term changes to staffing. 12. How would this rate be applied to Additional Appropriations? As presented at the 200 th session, since additional appropriations are supplemental to Regular Programme, while calculating the proportion of Management Cost using past funding data, additional appropriations will be included in Regular Programme. In other words, the new rate will not be applied to individual additional appropriations but handled at a global level. 13. Why are revenue generating special accounts (OPF) brought under the umbrella of the new rate? Some OPF accounts such as HQF do budget staff costs as direct costs. The support provided by functions to be classified under Management to revenue generating (OPF) accounts are not different than the support provided to PFF (other extrabudgetary funds) and GEF (Regular Programme) and all funds are brought under the cost recovery policy. Headquarters Fund, for example, involves significant oversight and administrative support, and currently has cost of management functions as direct costs. Therefore, the new management rate will be applied to HQF but the costs of management functions (Staff cost) will not be charged to avoid double charging. If the support provided to OPF funds is not covered, this will have to be subsidized by the Regular Programme. The staff cost of functions classified under Management will no longer be charged as direct costs to these OPF accounts. 14. Applying new rate to OPF account would result in over charging? Once the new policy is approved, cost of staff under the Management function will not be charged as direct cost to these accounts. Secondly, a mechanism will be put in place to ensure that there is no double counting in specific cases related to revenue generating 4

5 accounts where the income into these accounts is coming by way of a charge to RP or XB codes that already attract a PSC rate will be excluded. 15. Field Offices currently get 40% of the FITOCA generated for projects with 13% PSC. What happens to these funds with the new policy? Field costs would not be identified as Management as they don t meet the criteria - the offices exist to support programmes and would no longer be covered by the management charge (PSC) rate on projects. 16. Would this mean that Field Offices will no longer be funded through extrabudgetary income? With the new cost classifications, these costs will have to be budgeted as direct costs. 17. What transitional arrangements will be put in place to address this change in field offices? Measures proposed are (i) allowing distribution of PSC income for projects that currently attract standard PSC rate while these projects phase out (ii) the provision of funds earmarked for resource mobilization efforts, based on a strategy for their allocation. 18. What happens when projects are approved with derogation for a rate that may be below the new rate? Ideally, all projects funded from all sources will use the new rates agreed. Any reduction in rates, if granted, will reduce the management income to cover the costs and will mean that the difference will have to be covered from RP. 19. Shouldn t the new rate be applied to all existing FIT projects? Currently, there are around FIT projects, all of them governed under individual donor agreements, the majority of which will end within Applying new rate would require significant administrative burden to amend the agreements and adjust the accounting and reporting frameworks. It is therefore recommended that the new policy is applied to FIT project agreements concluded after the new policy becomes effective. 20. Why do we need to look at interest retention? The retention of interest was envisaged as part of the overall cost recovery policy and would help in achieving the recovery closer to the average rate. In the current regime of very low interest rates, the reduction in management rate is much higher than the interest rates. 21. Will the new Management rate charged to Special Purpose activities such as Renovation of buildings? The new rate will not be charged to some special accounts such as Renovation of building thatare one off in nature.. UNESCO currently does not have a capital expenditure budget and hence the related depreciation expenses are not budgeted and included in the Management Costs. Therefore, contributions received for these activities would not be charged as the management rate. 5

6 22. What other OPF account would be excluded from applying the new management rate? A limited number of Special Accounts are created to accommodate the internal operational mechanism in order to facilitate the working of the Organization. These accounts are technical in nature and include, for example, Field office Income, ASHI Liability, Cost recovery special account, and Management of ICT infrastructure and related services. A significant part of the income to these funds is either received from regular programme and/or from internal charge backs. Charging new management rate to these accounts may result in double counting. 23. How do we release $11M when at the last Board there was no clarity of the amount to become available? At the 200th session, the Secretariat in response to the debate on a proposal based on an assumption of $653 million in assessed contributions, mentioned that the level of the FITOCA reserve was unpredictable because it depended on the cost recovery policy.. The residual balance calculation as per the financial regulations of Special Account on Management Cost depended on the classification of Management Cost which is now proposed in 201 EX/5 Part III (C) as per the principles approved at the 200 th session. The Executive Board requested the Director-General to report to it at its 201 st session on the reserves and the residual balance of the Special Account for Management Costs, as referred to in Article 3 of the Financial Regulations of the Special Account for Management Costs. The FITOCA reserve as at December 2016 was stated in various documents such as 200 EX/4 Part II and 200 EX/ Why are we replacing the name FITOCA with Management Cost? Traditionally, FITOCA stood for Funds-in-Trust Overhead Cost Account as the income and expenditure to this special account related only to Voluntary contributions. The new cost recovery policy relates to the management costs in its entirety. The new terminology, therefore, reflects the true nature of this Special Account. 25. What happens to long term Framework agreements that specifies standard PSC, considering that the new rate will only be applied to new agreements? As stated in the response to question 19, it is recommended to apply the new rate to new agreements concluded after the new policy becomes effective. In our experience, framework agreements generally include a clause where the PSC/management rate applied is defined by the Organizations policies and procedures, requiring no amendment. However, if there are Framework agreements that specify a rate these would need to be amended. Such amendments will also apply to transfers from General funds for new projects. 26. Does the new Cost recovery policy require changes to financial regulations? No. The cost recovery policy, if approved, would not require any changes to financial regulations. 27. How does the new average management rate relate to the Cost recovery target of 2%?. The 2%relates to the cost of programme staff funded from regular budget but working on extrabudgetary resources. Their portion of cost (efforts attributed to extrabudgetary in terms of time) is budgeted as direct cost. The Executive Board decision was to increase this 6

7 recovery to 2%. The management rate is calculated based on direct extra budgetary cost is intended to cover the cost of management functions. 28. As per the forecast, the residual balance is $12.1M. If $11M is decided to be used for 39C/5, what happens to the balance $1.1M? The forecast balance of $1.1M will remain in the Special Account for Management Cost, as residual reserve. The actual reserve at the end of 2017 would be reported in the management chart. As per the financial regulations, the residual balance is applied based on the guidance provided by the Executive Board and approved by the General Conference. 7