General Conference Twenty-ninth Session, Paris 1997 WORKING CAPITAL FUND: LEVEL AND ADMINISTRATION OUTLINE

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1 General Conference Twentyninth Session, Paris C 29 C/36 13 August 1997 Original: English Item 9.7 of the provisional agenda WORKING CAPITAL FUND: LEVEL AND ADMINISTRATION Source: Financial Regulation 6.2. OUTLINE Background: Under Article 6.2 of the Financial Regulations, the General Conference determines the level of the Working Capital Fund and the purposes for which it shall be used. This document describes the establishment and the objectives of the Working Capital Fund and reports on the uses made of the Fund during the financial period Purpose: To submit to the General Conference a proposal regarding the level of the Fund required for and the purposes for which it may be used. Decision required: paragraph 20.

2 29 C/36 INTRODUCTION 1. This document is divided into five sections as follows: Section A: Establishment and objectives of the Fund; Section B: Use of the Fund s resources during the financial period ; Section C: Proposed use of the Fund s resources during the financial period and proposed level of the Fund; Section D: Currency or currencies of the Fund; Section E: Proposed resolution. SECTION A: ESTABLISHMENT AND OBJECTIVES OF THE FUND 2. The Working Capital Fund has been established in conformity with the provisions of Financial Regulations 6.2 to 6.5. The principal objectives of the Working Capital Fund as approved by the General Conference at its twentyeighth session for the current financial period are: (i) (ii) to provide finance for budgetary appropriations pending the receipt of contributions; to provide finance within limits determined by the General Conference for selfliquidating expenditures, including those arising in connection with Trust Funds and Special Accounts. Amounts drawn from the Working Capital Fund must be reimbursed as soon as income is available for that purpose. 3. Amounts paid by Member States to the Fund are considered as advances, thus remaining the property of the individual Member States. The DirectorGeneral submits a report to each ordinary session of the General Conference on the collection of contributions and advances to the Working Capital Fund in conformity with Financial Regulation 5.8. At the present session of the General Conference this report is contained in document 29 C/35. SECTION B: USE OF THE FUND S RESOURCES DURING THE FINANCIAL PERIOD In accordance with established practice, the purposes for which the Working Capital Fund may be used are specified by the General Conference at each ordinary session. At its twentyeighth session, the General Conference authorized the DirectorGeneral to advance from the Working Capital Fund 1 such sums as might be necessary to finance budgetary appropriations, pending the receipt of contributions from Member States. The General Conference also authorized the advance of sums not exceeding 500,000 at any one time to finance selfliquidating expenditures, including those arising in connection with Trust Funds and Special Accounts, on condition that sums so advanced should be reimbursed as rapidly as possible C/Resolution 25.

3 29 C/36 page 2 5. An annex to the present document shows the cash deficit of the regular budget of the Organization, the cash available in the Working Capital Fund and the combined net cash surplus of the regular budget and the Working Capital Fund taken together or cash borrowed at the end of each month for the period January 1996 to May From this annex it may be noted that delays in the payment of Member States contributions have been a recurring problem over the biennium Although many Member States continued to pay their contributions promptly, the overall arrears situation has caused serious cash flow problems that required almost constant advances from the Working Capital Fund to finance the activities of the regular programme. 6. The level of the Working Capital Fund was increased from 22.2 million to 25.0 million at the twentyeighth session of the General Conference. The effective cash available in the Fund which depends on advances paid by Member States is shown in the attached annex. By reference to this annex it may be seen that at the end of no month during the current biennium to end May 1997 has the Fund been able to fulfil its primary function of fully financing regular programme expenditure pending receipt of contributions due. At the end of all other months the resources of the Fund were insufficient to finance the regular programme cash deficits during that period. 7. The cash deficits of the combined regular budget and Working Capital Fund at the end of each month during 1996 and 1997 up to end June are shown on the last column of the annex to this document. It may be seen that at the end of certain months those cash deficits were particularly severe, despite efforts made by the DirectorGeneral to monitor cash outflow through the issue of allotments on a quarterly basis and efforts made by the Secretariat to schedule as legally late as possible settlement to suppliers and contractors. After full use of the cash available in the Working Capital Fund, the remaining cash deficits necessitated borrowing as follows:

4 29 C/36 page 3 Borrowing required in thousands of dollars year End of month Internal Current account borrowing (unpresented cheques) External Total 1996 January February March April May June July August September October November December 13,553 33,748 9,850 19,770 25,690 34,146 20,925 32,175 33,988 34,733 34,825 33,851 6,611 7,479 10,417 7,865 6,316 5,872 15,500 8,000 2,271 15,850 29,668 6,708 21,233 29,053 41,748 9,850 19,770 25,690 40,757 20,925 41,925 60,255 72,266 47,849 60, January February March April May 21,487 20,803 24,467 18,100 23,725 9,571 3,451 21,487 20,803 27,918 18,100 33, With regard to the authority to make selfliquidating advances, these advances have been made from time to time during the current biennium to various Trust Funds and Special Accounts, in order to avoid costly disruption of related operational activities when donors have been late in meeting cash payment commitments. SECTION C: PROPOSED USE OF THE FUND S RESOURCES DURING THE FINANCIAL PERIOD AND PROPOSED LEVEL OF THE FUND Proposed use of the Fund 9. In accordance with Financial Regulation 6.2, the General Conference determines the purposes for which the Working Capital Fund may be used. To this end the DirectorGeneral proposes a draft resolution on this subject which foresees that the purposes for which the Fund could be used in would be identical to those approved by the Conference for Level of the Fund in other organizations 10. In 1946, at its first session, the Working Capital Fund was established by the General Conference with the principal objective of providing the necessary resources to finance approved

5 29 C/36 page 4 budget expenditure pending the receipt of assessed contributions. When first established, the authorized level of the Working Capital Fund was fixed at 3 million. The level of the Fund has since been increased five times up to the financial period when it was raised to 20 million. For the General Conference decided to reduce the level of the Fund to 15 million, following the withdrawal of three Member States and the related budget reductions. 11. For and the level of the Fund was maintained at 15 million. At the twentysixth session in 1991 the level of the Fund was raised to 17.2 million, at the twentyseventh session in 1993 it was increased to 22.2 million and at the twentyeighth session in 1995 it was further increased to 25 million. The level of UNESCO s Working Capital Fund in relation to its approved regular budget for the financial period can be compared with the levels for other major organizations of the United Nations system as follows: Organization Budget appropriation for (thousands of US dollars) Level of Working Capital Fund (thousands of US dollars) Percentage of budget appropriation represented by Working Capital Fund 2,224, , , , , ,000 31,000 25,225 30,172 25,000 % United Nations WHO FAO ILO UNESCO A comparison of percentages of budget appropriations represented by Working Capital Funds is inadequate, however, to assess the comparative resources available for financing regular programme contribution arrears from one organization to another. Parallel working capital has been generated by a number of techniques. For instance the Working Capital Fund in the United Nations has been supplemented by suspension of surrender of budget surpluses and miscellaneous income to Member States over several recent biennia. The United Nations also had large parallel working capital from voluntary contributions and sales of United Nations bonds. Moreover its internal borrowing capacity includes the resources in Peace Keeping Accounts. For the biennium WHO has various accounts that totalled 154 million, from which internal borrowing is possible, in addition to its Working Capital Fund. FAO has a special reserve account amounting to 29.3 million at 31 December 1996 which is available for internal borrowing in addition to its Working Capital Fund. If adjusted to take account of such reserves, UNESCO s Working Capital Fund ranks as the lowest of the abovementioned organizations in percentage terms. Cash flow prospects 12. The cash deficits experienced during the biennium up to 30 June 1997 appear on the annex attached. Action taken to deal with the problem is described in document 29 C/35 (Collection of Member States contributions). At the end of 1996 a regular programme cash deficit of 85.9 million arose as against a Working Capital Fund availability of 25 million, leaving an external borrowing requirement of 21.2 million, after internal borrowing resources had been fully utilized. At the time of writing this report, although the visibility on cash flow prospects into the next biennium is not clear, there are reasons to expect some improvement. The extent of that

6 29 C/36 page 5 improvement is not expected to be such, however, as to preclude full use of a Working Capital Fund of 25 million to finance arrears of contributions during most of the next biennium and recourse to internal and external borrowing during difficult shortterm cash flow periods. Borrowing authority 13. For the biennium borrowing authority was approved by the General Conference in 28 C/Resolution by which it authorized the DirectorGeneral to negotiate and contract shortterm external loans when necessary. A request for renewal of borrowing authority under the same conditions as approved for is included in document 29 C/35 in connection with the report of the DirectorGeneral to the General Conference on collection of contributions of Member States. 14. The extent of internal and external borrowing required at the end of each month during the period January 1996 to June 1997 is reported in paragraph 7 above. Internal borrowing in dollars was possible from certain selffinancing and reserve accounts, the net equity of which belongs to the Organization. The accounts of these selffinancing funds are clearly identified and always recorded separately from funds held in a trusteeship capacity. The amounts expected to be available for internal borrowing purposes from these sources during cannot be reliably foreseen. On the basis of past experience the monthly availability may be in the region of 25 million. The currency available for borrowing from these funds is the US dollar and repayment must be made in that same currency. In view of rational management of the splitlevel assessment system, however, recourse to borrowing in French francs may also be necessary. French franc borrowing must be arranged with external sources, in the absence of internal borrowing facilities in that currency to avoid exposure to adverse currency fluctuations on repayment of such French franc loans. Proposed level of the Fund for The present level of UNESCO s Working Capital Fund at 25.0 million is equivalent to 4.82 per cent of the approved budget for the biennium representing only five weeks of average regular programme expenditure. As the DirectorGeneral indicated in paragraph 58 of the Introduction to the Draft Programme and Budget for (29 C/5), the level of the Working Capital Fund has proved inadequate to provide finance for the temporary financing of the approved programme throughout the current biennium, due to the persistent high level of contributions in arrears. External borrowing became necessary for shortterm periods on several occasions in order to supplement the resources of the Fund and internal borrowing facilities. It is anticipated that this situation will repeat itself during although with reduced amounts of borrowing because of an expected improvement in the arrears of the contributions situation. 16. In view of the great economic problems and budgetary constraints facing many Member States, at the time of writing the Introduction to document 29 C/5 the DirectorGeneral did not wish to propose an increase in the level of the Working Capital Fund during This approach was adopted on the understanding that shortterm borrowing authority would be renewed during , to tide the Organization over peak shortterm adverse cash flow problems that could arise. Such borrowing would be restricted in time and in amount to the strict minimum, in accordance with the recommendation made to the General Conference by the Executive Board at its 151st session. In the absence of borrowing authority, however, other measures would have to be envisaged among which a substantial increase in the level of the Working Capital Fund would have to be considered.

7 29 C/36 page The United Kingdom rejoined the Organization on 1 July The General Conference will recall that following the withdrawal of the United States of America, the United Kingdom and Singapore at the end of 1984 and 1985, the level of the Working Capital Fund was reduced from 20 million to 15 million for the biennium (23 C/Resolution 35.1). Leaving aside the question of the relationship of the level of the Fund to borrowing facilities and authority, the DirectorGeneral proposes that the level should be increased by the advance that the United Kingdom will be required to make to the Fund for the biennium, without increasing the existing total advanced by other Member States. Based on the theoretical assessment rate of 5.23 of the United Kingdom in the UNESCO scale for 1997, the advance of the United Kingdom to a Fund of 25 million is estimated at around 1.8 million. The exact amount of the advance of the United Kingdom to the Fund, will depend on its rate in the scale of assessments to be decided at the twentyninth session of the General Conference, following consideration of document 29 C/34, which deals with the scale of assessments for all Member States. Once that scale of assessments is decided, the existing Working Capital Fund level of 25 million could be apportioned to Member States excluding the United Kingdom, in accordance with the scale excluding the United Kingdom. The advance of the United Kingdom could then be calculated and added to the level of the Fund, in such a manner that the United Kingdom would be assessed for its due proportional share of the increased level of the Fund, in accordance with the total scale of assessments for , without any further adjustment to the advances of other Member States in that scale. SECTION D: CURRENCY OR CURRENCIES OF THE FUND 18. Financial Regulation 5.6 provides that advances to the Working Capital Fund shall be assessed in dollars of the United States of America and paid in a currency or currencies to be determined by the General Conference. At its twentyeighth session the General Conference decided by resolution 25 that advances shall be assessed and paid in United States dollars; the Fund shall normally be held in United States dollars, but the DirectorGeneral shall have the right, with the agreement of the Executive Board, to alter the currency or currencies in which the Fund is held in such a manner as he deems necessary to ensure the stability of the Fund and the smooth functioning of the splitlevel assessment system; if such an alteration should be agreed, an appropriate exchange equalization account should be established within the Fund to record translation gains and losses on exchange of the French franc visàvis the United States dollar. 19. In view of the high level of arrears of contributions of Member States that have to be financed in US dollars and the need to provide a significant level of advances in dollars to field offices for their expenditure requirements, the DirectorGeneral proposes that the resources of the Working Capital Fund for should again be assessed, paid and held in US dollars. With a Working Capital Fund in US dollars, however, any advances made from the Fund for regular programme French franc expenditure requirements would result in exposure to exchange losses on repayment of these advances. In accordance with the current financial procedures such losses would become a charge to miscellaneous income. At some future time, therefore, when the effective cash balance of the Working Capital Fund has reached a higher level and arrears of contributions decline, it will become appropriate to introduce changes to such arrangements, in order to allow advances to be made both in dollars and French francs (or euros at the appropriate future time) from the Fund to facilitate the smooth functioning of the splitlevel assessment system. Meanwhile the resolution proposed to the General Conference is identical to that approved in this respect at the twentyeighth session. It again allows for possible change in the currencies in which the Fund will be held, subject to the approval of the Executive Board.

8 29 C/36 page 7 SECTION E: PROPOSED RESOLUTION 20. Taking into account the considerations outlined in this document, the General Conference may wish to approve the text of a resolution concerning the level and administration of the Working Capital Fund for , as shown below, that follows closely the model approved by the General Conference at its twentyeighth session. The text between square brackets for paragraph (a) could be adopted, if the scale of assessments for cannot be definitively calculated before the closure of the twentyninth session of the General Conference. The General Conference resolves: (a) [(a) that the authorized level of the Working Capital Fund for shall be fixed at (to be determined during the debate on this subject) and that the amounts to be advanced by Member States shall be calculated according to the rates assigned to them under the scale of assessments approved by the General Conference for ; that the authorized level of the Working Capital Fund for shall be increased from the level of 25 million approved by the General Conference at its twentyeighth session in the following manner: (i) (ii) the amounts to be advanced by Member States, excluding the United Kingdom, shall be calculated on the basis of a level of 25 million, in accordance with the scale of assessments approved by the General Conference for excluding the United Kingdom; the advance of the United Kingdom shall be determined and added to the level of 25 million, in such a manner, that the United Kingdom shall make an advance to the increased level of the Fund, in accordance with its rate in the total scale of assessments for , without any further adjustments to the advances of other Member States determined in accordance with subparagraph (a)(i) above;] (b) (c) (d) that a new Member State shall be required to make an advance to the Working Capital Fund, calculated as a percentage of the authorized level of the Fund, in accordance with the percentage assigned to it under the scale of assessments applicable at the time it becomes a member; that the resources of the Fund shall be assessed and paid in United States dollars; these resources shall normally be held in United States dollars, but the DirectorGeneral shall have the right, with the agreement of the Executive Board, to alter the currency or currencies in which the Fund is held in such a manner as he deems necessary to ensure the stability of the Fund and the smooth functioning of the splitlevel assessment system; if such an alteration should be agreed, an appropriate exchange equalization account should be established within the Fund to record translation gains and losses on exchange; that the DirectorGeneral is authorized to advance from the Working Capital Fund, in accordance with Article 5.1 of the Financial Regulations, such sums as may be necessary to finance budgetary appropriations pending the receipt of contributions; sums so advanced shall be reimbursed as soon as receipts from contributions are available for that purpose;

9 29 C/36 page 8 (e) that the DirectorGeneral is authorized to advance during sums not exceeding in total 500,000 at any one time, to finance selfliquidating expenditures, including those arising in connection with trust funds and special accounts; these sums are advanced pending availability of sufficient receipts from trust funds and special accounts, international bodies and other extrabudgetary sources; sums so advanced shall be reimbursed as rapidly as possible.

10 29 C/36 Annex ANNEX CASH SITUATION OF THE ORGANIZATION (expressed in thousands of US dollars) Year End of month Cash deficit of regular budget Cash balance available in Working Capital Fund Cash borrowed 1996 January February March April May June July August September October November December 53,147 65,844 34,559 44,527 50,503 65,572 45,918 66,918 85,249 97,260 72,843 85,950 24,094 24,096 24,709 24,757 24,813 24,815 24,993 24,993 24,994 24,994 24,994 24,994 29,053 41,748 9,850 19,770 25,690 40,757 20,925 41,925 60,255 72,266 47,849 60, January February March April May 46,443 45,768 52,890 43,081 58,278 24,956 24,965 24,972 24,981 24,982 21,487 20,803 27,918 18,100 33,296