PARIS, 11 August 2009 Original: English

Executive Board Hundred and eighty-second session 182 EX/42 PARIS, 11 August 2009 Original: English Item 42 of the provisional agenda REPORT BY THE DIRECTOR-GENERAL ON THE MANAGEMENT OF EXTRABUDGETARY RESOURCES AND ACTIVITIES INCLUDING COST- RECOVERY POLICY AND THE RESULTS OF THE COST-MEASUREMENT STUDY SUMMARY This document provides a progress report by the Director-General on the management of extrabudgetary resources and activities, and contains two sections. Part I of the document includes an update on the Programming of Extrabudgetary activities under the first Complementary Additional Programme for targeted/projected extrabudgetary activities referred to as the 34 C/5 CAP, and preparations for the 35 C/5 CAP, on resource mobilization and on the implementation and monitoring of extrabudgetary activities. Part II of this document provides a progress report on: UNESCO s 2008-2009 Cost Measurement Study; efforts made to refine and improve the cost-recovery policy processes; and efforts to harmonize cost-recovery policies of organizations within the United Nations system. Action expected of the Executive Board: Proposed decision in paragraph 30.

182 EX/42 PART I MANAGEMENT OF EXTRABUDGETARY RESOURCES AND ACTIVITIES 1. PROGRAMMING The first Complementary Additional Programme hereinafter referred to as the 34 C/5 CAP was designed to complement and reinforce document 34 C/5. Under the 34 C/5 CAP, 908 outlines were programmed, of which 164 have attracted donor interest. The current CAP will be closed at the end of December 2009. Outlines which remain relevant to the next C/5 may be adjusted, and resubmitted under the next Complementary Additional Programme referred to as the 35 C/5 CAP. From January 2010 until the end of the biennium, the 35 C/5 CAP will be the tool for programming of extrabudgetary activities, the main vehicle for dialogue with donors and reference for tracking resources mobilized. To further strengthen the coherence between extrabudgetary and regular programme activities, the timeline for the elaboration of the 35 C/5 CAP is being synchronized with the preparation of the regular programme (35 C/5) work plans. Over three months have been set aside for the preparation of outlines and the associated consultations with partners and stakeholders, compared to only one month under the previous programming exercise. The additional time available for incountry consultations is designed to ensure that the needs and priorities (aligned with UNESCO s strategic programme objectives) of beneficiary countries are fully taken into account. The draft 35 C/5 CAP will be adjusted and finalized by sector ADGs after the adoption by the General Conference of document 35 C/5. The final version of the 35 C/5 CAP will be published in January 2010. Taking into account the feedback from Member States, and lessons learned from the first experience with the CAP, efforts have been made to enhance the programmatic concentration and focus of the CAP, especially through the wider application of the programme approach. To make the CAP more attractive and accessible to potential donors, the presentation of the 35 C/5 CAP by main line of action will be combined where appropriate with a thematic approach. The need to give more visibility and profile to interregional, regional and country-level programmes, to South-South cooperation, and to post-conflict/post-disaster operations, has also been addressed. 2. RESOURCE MOBILIZATION UNESCO s overall resource mobilization strategy is set out in document 180 EX/INF.5. It is the subject of continuous reflection and revision. Extrabudgetary contributions received by UNESCO in 2008 amounted to US $307.7 million. Since the issue of the first House-wide strategy in September 2008, the following areas are the subject of specific analysis: ways of increasing UNESCO s participation in joint programming are being considered by the Task Force on Decentralization and by the Working Group on the Harmonization of Business Practices. This effort will be supported by targeted training and by giving greater visibility to joint United Nations programmes, especially at country level, in UNESCO s overall resource mobilization efforts; stocktaking of UNESCO s cooperation with the private sector, and analysis of best practice, to provide UNESCO with the main lines of a strategy for proactive House-wide engagement;

182 EX/42 page 2 building a stronger communication dimension to UNESCO s resource mobilization efforts by enhancing synergies between the Organization s communication and resource mobilization plans and strategies. As a first step, UNESCO will consult a cross-section of its partners and donors to obtain a better understanding of their needs and expectations from a communication perspective; further exploiting the potential of the self-benefiting modality for addressing development challenges, especially within middle-income countries, as a premise to extending its use on a basis that is sustainable for the Organization, and encouraging the upfront programming of projects financed under the self-benefiting modality within country programmes and framework; encouraging UNESCO s regional and cluster offices to develop and implement regional and subregional resource mobilization strategies, where appropriate with regional partners; exploring the value of a more extensive use of fully fledged thematic extrabudgetary programmes and of future-oriented resource management modalities, including multidonor trust funds. The above elements will be further elaborated and integrated into UNESCO s revised resource mobilization strategy. The revised strategy will be the subject of House-wide consultation, and will be issued thereafter as an information document at the 185th session of the Board. 3. IMPLEMENTATION AND MONITORING 3.1 Sector alert system With respect to monitoring and implementation, the newly established sector alert systems have been refined, particularly to enhance the interface between the quantitative monitoring undertaken by the Bureau of the Budget (quarterly reports on project execution) and the quarterly reviews undertaken by programme sectors. The various review mechanisms set up by the programme sectors are tailored to the size, structure, programme and level of decentralization of each sector. The sector alert system provides that senior management also assumes responsibility for the monitoring of the extrabudgetary portfolio. A priority for the future is the development of a sector alert system at the level of each field office for the monitoring of extrabudgetary projects. 3.2 Capacity-building Enhancing capacity of UNESCO staff is a central element of UNESCO s efforts to improve the management of extrabudgetary projects. In the current biennium training on extrabudgetary activities has been given collectively to the heads of field offices in Asia and the Pacific, and the heads of field offices of the Latin America and Caribbean region. Regional training has been conducted for programme specialists in the Africa, Central Asia and LAC regions, and training has been given to the following individual field offices: Maputo, Bangkok, Jakarta, Dhaka, Moscow, Beijing, Harare, Montevideo, Bamako and Addis Ababa. For the future, it will be important to supplement existing training material on extrabudgetary activities with guidelines for staff at Headquarters and in the field, to help them engage more effectively in communication related to resource mobilization.

182 EX/42 page 3 PART II INTRODUCTION 4. At the 181st session of the Executive Board, the Secretariat gave a short presentation on two major studies that were under way: UNESCO s internal cost-measurement study and the HLCM- UNDG cost-recovery study. The Secretariat also highlighted the progress made in implementing the Organization s internal cost-recovery policy, such as the dissemination of training and review of processes and procedures. This document provides a brief update on the status of these developments. UNESCO S COST-MEASUREMENT STUDY 5. In November 2008, UNESCO launched a cost-measurement study with the objectives of: (a) (b) Obtaining updated information of UNESCO s cost structures; Determining whether the existing cost-recovery policy was adequate to recover the net level of regular programme resources used to for extrabudgetary activities, in an effort to implement the United Nations General Assembly 2007 Triennial Comprehensive Policy Review (TCPR) resolution of no subsidization; and of (c) Obtaining information on the amount of staff time spent working for category 2 institutes, 1 in response to a request from certain Members of the Executive Board. 6. This section of the document summarizes the findings of the 2008-2009 Cost-Measurement Study with regard to the aforementioned objectives. Methodology 7. According to the United Nations High-Level Committee on Management (HLCM) Harmonized Cost Categories, an organization would have three main types of costs: Fixed Indirect Costs, Direct Costs, and Variable Indirect Costs. However, only the last two categories (direct costs and variable indirect costs) can be charged to extrabudgetary projects, while fixed indirect costs should only be financed from the regular budget. One of the main objectives of the Cost-Measurement Study was to group UNESCO s costs within these three cost categories. For certain types of costs a distinction could clearly be made based on the nature of the costs or the organizational unit (e.g. certain fixed indirect costs such as the governing bodies are clearly identifiable in this manner). However, in order to categorize the majority of the costs, a survey by questionnaire was conducted. Also, statistics were used to analyse the costs of certain services, for which the questionnaire results would not have been the most appropriate means of obtaining the needed information. 8. The Cost-Measurement Study questionnaire was distributed to personnel with grades G-5 to D-2, and was designed to determine the distribution of each staff member s workload between regular programme and extrabudgetary activities, and between programmatic work and administrative support services. Although the response rate to the questionnaire was considered sufficient for statistical purposes, as approximately 50% of regular programme personnel within the aforementioned grades responded, continuous efforts will be made in future studies to improve the response rate and the questionnaire s content in general. 1 For information purposes, as at March 2009 there were 42 category 2 institutes and centres under the auspices of UNESCO.

182 EX/42 page 4 FINDINGS: UNESCO s costs and cost structure: 9. One of the main objectives of the study was to determine UNESCO s overall cost structure using updated information for 2008-2009. This information is summarized in Table 1 and the pie charts below. Table 1 UNESCO s Overall Cost Structure 2008-2009 (in millions of US$) Funded by: RP XB Total Fixed Indirect Costs (FICs): 169.1-169.1 Direct Costs (DCs): 372.6 397.2 769.8 Variable Indirect Costs (VICs): 139.6 20.4 160.0 Total 681.3 417.5 1,098.9 RP* Funds (2008-2009) XB* Funds (2008-2009) VIC 139.6 20% FIC 169.1 25% VIC 20.4 5% FIC - 0% DC 372.6 55% DC 397.2 95% FIC DC VIC FIC DC VIC Overall structure of the regular programme budget and extrabudgetary projects 10. The main distinction between the structures of the regular programme budget and extrabudgetary resources is the fact that the fixed indirect costs of the Organization are only financed by the regular programme. These costs were estimated at $169.1 million and constituted approximately 25% of regular programme funds. 11. With regard to direct costs, the level of resources financed by the regular programme and extrabudgetary projects for programme implementation was similar in absolute dollar values (i.e. $372.6 million and $397.2 million respectively). However, in relative terms, a far larger proportion of extrabudgetary funds was used to finance the project implementation directly (i.e. RP: Regular programme budget for 2008-2009 ($631M) plus FITOCA allocations for 2008 and estimates for 2009 ($50.3M). XB: Extrabudgetary expenditures for 2008 multiplied by 2, excluding FITOCA expenditure. FITOCA funds correspond to recurrent resources which belong to the regular programme for which the financing is assured from the reimbursement of all or a part of the variable indirect costs financed by the regular programme but used for extrabudgetary projects in the course of their implementation. Therefore, FITOCA funds are combined with the regular programme budget.

182 EX/42 page 5 95%) than in the regular programme (i.e. 55%). This is partially due to the fact that fixed indirect costs take up a considerable portion of the regular programme budget. 12. Another significant distinction between the cost structures of the regular programme budget and extrabudgetary resources pertains to the weight of the variable indirect costs (which are often considered as support costs). At a first glance, the regular programme could appear very administration-heavy, as approximately 20% of its total resources are used to finance variable indirect costs; compared to 5% for extrabudgetary projects. In fact this picture, which is based on today s actual funding structure, could give the impression that the regular programme is costly to operate in relation to extrabudgetary projects. 13. However, what is often not visible in the global figures is the level of cross-subsidization which occurs between regular programme resources and extrabudgetary resources, whereby costs financed by the regular programme are actually used for extrabudgetary activities and vice versa. Therefore, efforts were made in this study to obtain more detailed information, not only on the Organization s overall cost structure, but also about how the funds are actually used. This information is summarized in Tables 2 and 2B below. Table 2 UNESCO s organizational structure Showing the funding source and use of funds (in millions of US $) RP XB Total Fixed Indirect Costs 169.1 0.0 169.1 Direct Costs: Used for RP programmes 325.6 14.2 339.9 Used for XB projects 47.0 382.9 429.9 Total Direct Costs 372.6 397.2 769.8 Variable Indirect Costs: Used for RP programmes 81.9 6.2 88.2 Used for XB projects 57.7 14.1 71.8 Total Variable Indirect Costs 139.6 20.4 160.0 Total 681.3 417.5 1098.9 Table 2B Cost structures based on funding sources and actual use of funds and the level of cross-subsidization RP Funded by RP Used for RP Difference (in millions of US $) XB Funded by XB: Used for XB: Difference Fixed Indirect Costs 169.1 25% 169.1 28% 0.0 0.0 0% 0.0 0% 0.0 Direct Costs 372.6 55% 339.9 57% 32.7 397.2 95% 429.9 86% (32.7) Variable Indirect Costs 139.6 20% 88.2 15% 51.5 20.4 5% 71.8 14% (51.5) Total 681.3 100% 597.1 100% 84.2 417.5 100% 501.7 100% (84.2) 14. From these tables we can now see that regular programme funds which are actually used to support regular programme activities (i.e. variable indirect costs used for regular programme activities) accounted for only 15% of the total rather than 20% shown in the pie charts under Table 1. Similarly, support costs actually used for extrabudgetary activities corresponded to 14% of the total extrabudgetary costs, instead of the 5% initially shown. Therefore, we can see that the overall cost

182 EX/42 page 6 structure of the regular programme and extrabudgetary projects is more balanced than it initially appeared. 15. The information contained in Table 2B also underlines the importance of the cost-recovery policy (CRP) as it shows the net level of cross-subsidization which would occur if such a policy did not exist. The study showed that if no recovery mechanism were in place, the net level of crosssubsidization of regular programme resources used for extrabudgetary activities would be approximately $84.2 million (i.e. $32.7 million of direct costs, and $51.5 million of variable indirect costs as shown in Table 2B). UNESCO s CRP attempts to reduce the level of cross-subsidization to a minimum, by establishing mechanisms to reimburse the regular programme for the resources used for extrabudgetary activities. 16. For variable indirect costs, UNESCO recovers these costs by applying a programme support cost rate (PSC rate) of 13% for standard extrabudgetary projects (10% for Special Accounts, 8% for equipment and, more recently, 7% for Multi-Donor Trust Funds (MDTFs), United Nations Joint Programmes and the Delivering as One initiatives on the condition that more costs are charged directly to these projects). Funds recovered from charging the PSC rate are held on a special account called FITOCA. UNESCO s cost-recovery policy stipulates that the PSC rate would only recover the support costs of Headquarters central services and field office administrative units and that all other costs should be charged directly to the projects. The study results indicated that at a global level this new recovery strategy was more or less sufficient to recover the variable indirect costs incurred by the Organization for extrabudgetary projects (partially due to the recent decision to apply a PSC rate of 10% for donor-funded special accounts). However, if the Organization were to continue to lower the PSC rate, additional variable indirect cost items which are currently recovered through the PSC rate would have to be charged as direct costs to the projects. To do this, these costs would have to be traced from the source to ensure that they are actually recovered, which can only be done if sufficient resources and system investment are dedicated for this purpose. 17. With regard to the direct costs subsidization by regular programme resources to extrabudgetary projects, the cost-recovery policy will also play an important role in correcting such subsidization. For example, for regular programme direct costs used for extrabudgetary projects, such as the cost of regular programme staff time and contributions for the United Nations Department of Safety and Security (UNDSS) and Malicious Acts Insurance Policy (MAIP) costs, the policy proposes that these costs would be reimbursed to the sector/division which initially bore the costs through a special account. All other regular programme resources used directly for project implementation (e.g. communication, utilities, etc.) should be charged directly to the project. We should note, however, that since this element of the cost-recovery policy was only recently introduced, continuous efforts still have to be made (e.g. through training, reviews of project budgets, IT developments, etc.) before an adequate level of recovery of regular programme direct costs could be achieved. Brazilian-funded projects 18. Given the magnitude of Brazilian-funded projects, efforts were made to identify the level of support costs incurred specifically for these projects. The study results showed that, for now, a PSC rate of 5% can be maintained for Brazilian self-benefiting funds-in-trust, which obviously benefit from economies of scale. In addition, in collaboration with the Bureau of the Budget, the Brasilia Office is launching a study aimed at identifying all direct costs of implementing their projects to enable the office to negotiate and charge them directly to the projects, in line with the full cost-recovery principle. 19. Efforts will also be made in future studies to determine the appropriate project size for which economies of scale could be achieved and the appropriate PSC rate which could be applied to large projects in general.

182 EX/42 page 7 Category 2 institutes 20. Finally, in response to a request made by certain Member States to have additional information on the costs incurred by the Organization for category 2 institutes, the Cost- Measurement Study attempted to determine the amount of regular programme staff time spent working for category 2 institutes. The study results estimated these costs at approximately $8.2 million for the 34 C/5 biennium. Contribution to category 2 institutes (US $ millions) - Coordination of institutes activities (e.g. communication, networking with institutes and serving as focal points etc.) 2.3 - Conducting feasibility studies 1.0 - Participation in institutes boards of directors 0.4 - Mapping and reporting exercises (e.g. linking institute activities with UNESCO s strategic objectives) 1.5 - Participating in Review Committees 0.5 - Evaluation exercises 1.0 - Other regular programme services for category 2 institutes (e.g. other travel, etc.) 1.5 Total 8.2 EFFORTS MADE TO REFINE AND IMPROVE THE COST-RECOVERY POLICY PROCESSES 21. As part of the Secretariat s continuous effort to cultivate a better understanding of the budgeting process as well as the cost-recovery policy, and enhance costs and results awareness, several training sessions have been held with Programme Specialists and Administrative Officers both at Headquarters and in the field. Training had been provided to the Sciences and Culture Sectors and the World Heritage Centre Programme Specialists, as well as to UNESCO offices in Moscow, Dakar, Santiago, Montevideo, Brasilia, Addis Ababa and Bangkok at the time of the drafting of this report. More sessions are planned for the World Heritage Centre Programme Specialists as well as the New Delhi Office in the coming months. 22. Furthermore, in an attempt to facilitate the budgeting and thereby the cost-recovery processes, the Secretariat is also actively working on the development of an automated budget simulation tool and cost-recovery reimbursement mechanism to be used by Programme Specialists at Headquarters and in the field. Internal processes, as well as technical and methodological tools, are being reviewed and enhanced to make the policy more accessible, transparent and efficient to implement. 23. To facilitate the above activities and provide assistance and advice to sectors and field offices regarding the application of the cost-recovery policy and the preparation of extrabudgetary project work plans, a separate section was established within the Bureau of the Budget. HARMONIZING THE COST-RECOVERY POLICIES WITHIN THE UNITED NATIONS SYSTEM 24. Following the re-establishment by the High-Level Committee on Management (HLCM) of a Working Group chaired by UNESCO, a UNDG-HLCM study co-chaired by the United Nations Development Operations Coordination Office (DOCO) and UNESCO, financed by 10 participating agencies and for which two consultants were commissioned, was launched in a step towards further harmonization of cost-recovery policies and practices in the United Nations system and

182 EX/42 page 8 aimed at full cost recovery in accordance with the Triennial comprehensive policy review of operational activities for development of the United Nations system (TCPR). 25. The study is built on the work conducted earlier by the HLCM Working Group on Costrecovery Policy and its Task Force on Cost Categorization resulting in a harmonized Programme Support Cost (PSC) rate of 7% on the condition that more costs are charged directly to the projects for Multi-Donor Trust Funds (MDTFs), United Nations Joint Programmes and the Delivering as One initiatives. The primary objective of this study was to help the United Nations agencies charge their costs directly to MDTF-financed projects and programmes, particularly at the country level, and addressed the following: Common guidelines for charging direct costs at the country level Common definitions, standards and criteria for direct costs Price lists per country, including common standard staff rates The threshold for a small contribution Set-up fee to meet establishment costs Methodology for the calculation of fixed indirect costs Assessment of actual costs in the pass-through modality 26. The main objective of the study was to find a mechanism to accelerate the harmonization of cost-recovery policies by identifying constraints at country level. However, the terms of reference were interpreted in such a way that the scope of the study was limited to costs incurred at the country level overlooking regional and Headquarters costs and to MDTF and Delivering as One initiatives. Given that agencies have different structures and thereby different ways of operating, a country-focused approach would not lend itself to the harmonization of cost-recovery policies. 27. In effect, the findings of the study emphasize the harmonization constraints faced by agencies, which diverge from the original vision rather than leverage on commonalities in order to standardize policies. For example, since the differences in funding modalities (core/assessed and non-core/extrabudgetary contributions) and structural differences (different levels of decentralization, varying regional office/country office structures) result in different budgets among agencies for similar types of work, the report suggests that fundamental structural changes would be required to achieve complete harmonization of policies and comparability of budgets on the programme level. 28. The Working Group reviewed the study report, agreed that it provided a practical technical mechanism to charge certain cost elements as direct costs, but recognized that it did not respond to the agencies overall needs, namely the provision of straightforward guidelines to identify direct cost items for full cost recovery. As such, the recommendations proposed in the report did not bring any new element to allow the agencies to move forward. 29. In order to finalize the study and propose a final report by the end of July, the draft report was distributed to a small task force for comments. The Working Group will convene a meeting back to back with the HLCM conference on 30 September 2009 in New York, to review the report and decide on the way forward. Action expected of the Executive Board 30. In the light of the above, the Executive Board may wish to adopt a decision along the following lines: The Executive Board, 1. Recalling 166 EX/Decision 8.7, 33 C/Resolution 92 and 175 EX/Decision 36, 176 EX/Decision 43, 177 EX/Decision 51 and 34 C/Resolution 72; 180 EX/37; 181 EX/38 and 180 EX/INF.5,

182 EX/42 page 9 2. Having examined document 182 EX/42 and..., Part I 3. Welcomes the steps taken by the Director-General in the context of the preparation of the 35 C/5 CAP to further strengthen the coherence between extrabudgetary and regular programme activities, and to strengthen mechanisms to ensure that the needs of beneficiary countries are more extensively taken into account at the programming phase; 4. Invites the Director-General to consolidate progress to date in the programming, monitoring and implementation of UNESCO s extrabudgetary activities and further enhance its resource mobilization strategy; 5. Encourages the Director-General to continue UNESCO s active participation in and examination of these issues in all relevant United Nations fora; 6. Invites the Director-General to report to it at its 185th session on the management of extrabudgetary resources and activities, and to share the updated Extrabudgetary Resource Mobilization Strategic Plan in the form of an Information Document; Part II 7. Recalling the United Nations General Assembly resolution 62/208 on the 2007 triennial comprehensive policy review requesting that the executive boards ensure that core resources do not subsidize the projects undertaken through non-core/ supplementary/extrabudgetary funding, 8. Takes note of the lead role taken by UNESCO, in the framework of the High-Level Committee on Management (HLCM) Finance and Budget Network, to further harmonize cost-recovery policies among United Nations Organizations; 9. Welcomes the Director-General s decision to introduce and implement a cost-recovery policy that recognizes the principle of true cost recovery in accordance with the triennial comprehensive policy review; 10. Takes note of the findings of the 2008-2009 Cost-Measurement Study; 11. Takes note of the Director-General s ongoing efforts: (a) to foster a better understanding of the proposed cost-recovery policy by providing in-depth training; (b) to pursue the necessary administrative procedures to implement the costrecovery policy; and (c) to lower the administrative costs and increase the efficiency of implementing the cost-recovery policy, inter alia by proposing automated processes. Printed on recycled paper