This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS  ROME 004106 
 
SIPDIS 
 
 
C O R R E C T E D C O P Y (TEXT PARAS 3, 7, 12, 16) 
 
FROM THE U.S. MISSION TO THE UN AGENCIES IN ROME 
 
STATE FOR IO/EDA BEHREND AND KOTOK, IO/S ABRAHAMS 
USDA FOR FAS REICH AND HUGHES 
AID FOR FFP LANDIS AND THOMPSON 
 
E.O. 12958: N/A 
TAGS: AORC EAID EAGR KUNR FAO WFP
SUBJECT: FAO FINANCE COMMITTEE SEPTEMBER 2004 SESSION 
 
--------------------------------------------- -------------- 
Summary 
--------------------------------------------- -------------- 
 
1.During the 108th session of FAO's Finance Committee: 
 
-- The Secretariat outlined a critical deterioration of the 
organization's finances and said it was making preparations 
to borrow externally $50 million during the month of 
October, with additional borrowing in November, to meet 
immediate cash flow needs. 
 
-- A number of countries were shown to be in a serious 
arrears position, particularly Iraq, Yugoslavia, Argentina, 
and Brazil. 
 
 
-- We found that the organization's emergency operations 
had not effectively utilized the Special Fund for Emergency 
and Rehabilitation Activities (SFERA), in spite of critical 
needs, as noted by the Director General (DG), to meet 
crises such as the locust infestation in northwest Africa. 
 
-- A recent actuarial estimate to amortize After Service 
Medical Liabilities was discussed at double the level 
presented to the 2003 Conference. 
 
-- A Medium-Term Plan, based on ambitious (and probably 
unrealistic) 2.2 percent real budget growth assumptions for 
2006-2011, was presented. 
 
-- An Independent Evaluation of FAO's Decentralization was 
tabled, one which roundly criticized the organization's 
field operations in most parts of the world. 
 
-- The initiative for an independent external evaluation of 
the organization's role, impact and management was 
discussed widely on the margins, but not within the 
committee meetings themselves.  However, the tone of the 
meeting emphasized that the organization's status quo is 
not sustainable over the long term.  Most members present 
picked up on the logic of doing an independent evaluation. 
 
End Summary. 
 
2.The Fall session (Hundred and Eighth) of FAO's Finance 
Committee convened between September 27 and October 1, 
¶2004.  DCM Michael Cleverley occupied the North American 
seat on the Committee. 
 
--------------------------------------------- -------------- 
Liquidity Crisis: Need for External Borrowing in late 2004 
--------------------------------------------- -------------- 
 
3.In the Committee's first session, the Secretariat pointed 
to the organization's seriously deteriorating financial 
position.  The general fund deficit had increased from $90 
million at the end of the 2002/3 biennium to $134 million 
at 30 June 2004.  There were three reasons: (1) the delay 
in receiving annual assessments, principally from the US 
and Japan; (2) growing levels of arrears; and (3) higher 
than projected spending for the amortization of after 
service medical care (now running over double the $14.1 
million per biennium set aside by the 2003 Conference). 
 
4.The organization's liquidity was also critically 
depleted, much due to the above factors as well an 
accelerated rate of disbursement for the Technical 
Cooperation Program (TCP) and disbursements to cover the 
$41 million allocation of arrears for one-time expenditure. 
The Secretariat said it expected to need $50 million in 
external borrowing in October and early November if 
contributions from the US and Japan were further delayed. 
Such a borrowing would entail $62,000 of interest costs for 
October.  Following this discussion, the Japanese delegate, 
after consulting with Tokyo, informed the Committee that 
Japan would make full payment of its assessment in mid- 
October. USDEL noted (privately to the Secretariat) that, 
with the US's fiscal year just beginning, it was difficult 
to give details, but we hoped to make a partial payment in 
late October, with another partial payment in November.  It 
was not clear whether these payments alone would be 
sufficient to cover late-October salaries.  This borrowing, 
if it takes place, will be the first time the organization 
has resorted to external borrowing since 1994. 
 
--------------------------------------------- -------------- 
 
Arrears: A Growing Problem 
--------------------------------------------- -------------- 
 
5.In a study on arrears, the Secretariat found that the 
amount of arrears was increasing and that some countries in 
arrears tended to make payments to other UN organizations 
before FAO.  The discussion on this latter point suggested 
the broader issue of FAO's sagging credibility among many 
members.  Responding to the Committee's request, the 
Secretariat provided information that showed a number of 
 
SIPDIS 
countries in arrears made significant extra-budgetary 
contributions.  Brazil, for example, while owing over $21 
million in arrears, gave $13 million in extra-budgetary 
contributions in 2002/3.  Other countries with major 
arrears: Argentina ($17.6 million), Iraq ($5.5 million) and 
Yugoslavia ($8.4 million).  On its books, the organization 
is carrying the United States with $1.75 million in 
arrears. 
 
6.The committee explored a number of incentives and 
penalties for dealing with arrears, but referred the issue 
back to the Secretariat to develop an options paper for the 
May 2005 Committee and June 2005 Council. 
 
--------------------------------------------- -------------- 
Emergency Fund: Weak Management 
--------------------------------------------- -------------- 
 
7.During a problematic discussion on the Special Fund for 
Emergency and Rehabilitation Activities (SFERA), 
established in June 2003 and operational in March 2004, the 
Secretariat was initially unable to answer basic questions, 
 
SIPDIS 
such as the current balance of the rotating fund.  Under 
close Committee questioning led by USDel, the Secretariat 
reluctantly admitted that it had allocated $430,000 from 
the SFERA monies intended for emergency coordination units 
for needs assessment work related to the Northwest Africa 
locust infestation, but nothing from the $1 million SFERA 
portion earmarked for advance funding for approved 
emergency projects where pledged funds had not been 
received.  (Comment. FAO DG Diouf has repeatedly criticized 
donors for their slowness in funding pledges for this 
crisis. It appears that FAO did not utilize the fund 
expressly created for bridging pledges and disbursements. 
End Comment.) Instead, funds had been used in Darfur and in 
Colombia to assist transitioning farmers.  The Colombia 
project came under Committee criticism for failing to be 
the type of emergency for which SFERA was initially set up. 
The Committee concluded the discussion by accepting the 
USDel's call for (1) a lessons-learned assessment of FAO's 
emergency locust control operations, and (2) a subsequent 
update report on SFERA operations to be prepared for the 
Finance Committee meeting in September 2005. 
 
--------------------------------------------- -------------- 
After Service Medical Cost Liability: Overhang 
--------------------------------------------- -------------- 
 
8.The Secretariat pointed to the erroneous actuarial 
assumptions behind last year's estimate that was funded by 
the December 2003 Conference at US$ 14.1 per biennium to 
cover outstanding After Service Medical Cost (ASMC) 
liabilities.  Revised actuarial projections showed this 
figure would need to increase to $30 million to be fully 
amortized in subsequent biennia.  USDel made the point that 
the US still needed convincing that this additional cost 
should be automatically transferred to member states, and 
asked that the Secretariat prepare an options paper for the 
May 2005 Finance Committee. 
 
--------------------------------------------- -------------- 
Medium-Term Plan: Unrealistic 
--------------------------------------------- -------------- 
 
9.The Medium-Term Plan (MTP) presented to the Committee and 
discussed jointly with the Programme Committee projected 
programming for the 2006-2011 period based on an assumption 
of 2.2 percent real growth per annum.  (A zero real growth 
(ZRG) scenario also was inherent in the document, but 
difficult to find in a presentation that obviously hoped to 
draw attention away from ZRG assumptions.)  The US led 
Japan and the UK in an attack of the 2.2 percent real 
growth assumption as unrealistic, given FAO's budget 
history of the past decade and particularly the political 
outcome of the 2003 Conference budget discussions. USDel 
pointed out that, although the MTP was only indicative and 
theoretically had few implications relative to eventual 
 
budget resolutions, the Secretariat had lost an opportunity 
to project an MTP that could be relevant to the likely 
budget environment.  Japan called for an alternative 
scenario (USDel joined in support), and the UK complained 
that the Secretariat's failure to provide a zero nominal 
growth (ZNG) scenario for last year's budget discussions 
had resulted in much additional last-minute work and 
excessive expenditures before a budget was eventually 
resolved.  G77 countries, on the other hand, wanted a 
larger than 2.2 percent growth factor keyed in. 
 
10.The debate resumed the following day in the joint 
meeting of the Programme and Finance Committees.  The 
Secretariat consistently countered that the MTP was the 
 
SIPDIS 
Director General's proposal, was only indicative, and was 
not likely to be changed. As a result, the focus of the 
debate shifted toward the assumptions rather than 
concentrating on the program priorities inherent in the 
plan.  Upon continued questioning, it was eventually 
possible to decipher the difficult document to reach the 
following projection for 2005-6: 
 
ZNG (based on 2004-5 budget): $749.1 million 
ZRG (based on an assumed 3.5% price rise): $775 million 
MTP (based on 2.2% real growth): $799 million 
 
(This does not include the amortization for ASMC, which 
could add another $30 million). 
 
--------------------------------------------- -------------- 
Decentralization: Critical Evaluation 
--------------------------------------------- -------------- 
 
11.Up for discussion was an important and thoroughly 
researched Independent Evaluation of FAO's 
Decentralization, released during the summer of 2004, that 
roundly criticized the quality, training, and capacity of 
FAO's field offices and operations.  It documented 
widespread member state dissatisfaction with the field 
offices in all but a few regions.  In its "preliminary 
response," the Secretariat said it welcomed the report's 
findings, but claimed that it had not yet had an 
opportunity to thoroughly reflect on the several 
recommendations.  Rather than spend time with each 
individual recommendation, the Committee agreed to revisit 
the report in its next session and called on the 
Secretariat to provide for that discussion a response that 
 
SIPDIS 
detailed in which areas management disagreed with findings 
and recommendations, and that provided a time-bound 
implementation plan. 
 
--------------------------------------------- -------------- 
WFP Consideration  Anachronism 
--------------------------------------------- -------------- 
 
12.During the May 2004 Finance Committee meeting, the 
Committee requested that World Food Programme (WFP) agenda 
items be labeled "for information," and be discussed only 
if Committee members had questions or comments on the 
submitted documents.  For this session, the Secretariat 
failed to follow this request and included two WFP items 
"for discussion."  When USDel asked about this during the 
discussion on the agenda, the Secretariat countered with a 
litany over FAO oversight of WFP's finances.  USDel noted 
that WFP financial issues are discussed in detail at the 
ABACQ in New York and at WFP Executive Board meetings, and 
argued that the Finance Committee could meet any statutory 
responsibilities by including the items on the Committee's 
agenda, to be discussed if needed.  The Secretariat refused 
to budge, clearly trying to maintain the organization's 
fig-leaf of control over WFP. 
 
13.Comment: Finance Committee review of WFP finance- 
policy items is in our view redundant, anachronistic, and 
expensive.  Over the past year there have been several FAO 
Finance Committee sessions devoted to WFP items. 
Interpretation costs, alone, run about $10,000 a day.  No 
substantive points arose from the FAO review process that 
were not later discussed in much greater detail in WFP's 
Executive Board meetings.  We strongly recommend that the 
US maintain pressure on FAO to remove this inefficient use 
of funds for what appears to be simply a case of 
superficial turf preservation.  End Comment. 
 
--------------------------------------------- -------------- 
External Auditor  Private Sector Participation? 
? 
 
--------------------------------------------- -------------- 
 
14.The Secretariat returned to a question, raised by the 
USDel in the May 2004 Finance Committee session, about 
whether a private sector entity could compete for 
appointment as external auditor.  The Secretariat's paper 
indicated that throughout the UN system the auditor must be 
chosen from among auditors general of member states. 
Several G77 members were troubled by this discussion, 
apparently for political reasons, but the committee 
requested the Director-General refer the issue to the UN 
System Chief Executives Board for Coordination for 
additional information about UN practices. 
 
15.This is a broader issue that might merit Department 
attention.  There could well be economies to be achieved 
from opening the audit function to private sector 
competition. 
 
--------------------------------------------- -------------- 
Comment 
--------------------------------------------- -------------- 
 
16.Many of the issues considered in Committee will return 
for discussion in the November FAO Council, and we will 
provide via septel further background and thinking prior to 
the Council.  However, there were several points that 
deserve continued US attention: 
 
Arrears  The top four countries in arrears owe nearly $53 
million. There are financial issues surrounding Argentina 
and Brazil, and political considerations for Iraq and 
Yugoslavia.  We may wish to consider whether the US 
can/should use any possible leverage for dealing with the 
arrears problem from these countries. 
 
Medium-Term Plan (general)  It appears that the 
organization has cut spending close to the bone, and 
further cuts will be exceptionally painful.  However, this 
has been done thus far within existing organizational 
parameters  inside the box.  Whereas in one sense the MTP 
projects a needed increase in real revenue levels, in 
another sense the lack of imagination and creativity 
inherent in the current formulation essentially guts its 
usefulness by failing to take into consideration relevant 
scenarios.  For example, the question,  "How would you 
spend your money if next time you had less than (or the 
same as) now?" is a reasonable point of departure for a 
serious program planning discussion.  At issue is not 
necessarily whether the organization will have more or less 
funding in the future, but how can it re-structure itself 
to better react to today's world, i.e., to get outside the 
box. 
 
Independent External Evaluation  The proposed external 
evaluation of FAO was discussed on the margins, but not 
within the Committee meetings themselves.  However, just 
about everything discussed, such as the MTP, the budget 
crisis, and the decentralization report, underlined the 
need for a basic re-look at the organization and how it 
does business.  Most countries present picked up on this 
logic  that the status quo is not sustainable over the 
long term. 
 
 
WFP  We need to be working to get WFP off the FAO Finance 
Committee agenda.  The current arrangement is a waste of 
funds and time. 
 
After Service Medical Charges  We made it clear in the 
discussions that we are in no mood to rubber stamp the 
increase necessary to cover ASMC, from $14.1 to $30 million 
per biennium.  While the Secretariat is now tasked to 
provide an options paper for the June 2005 Council, the 
logic for covering this liability is still as valid as it 
was in December 2003.  It will need to be covered within 
the structure of any sound financial approach to the 
organization. 
 
HALL 
 
 
NNNN 
2004ROME04106 - Classification: UNCLASSIFIED