|
GB.271/PFA/7/8
| ||
|
| ||
|
Programme, Financial and Administrative Committee |
PFA |
|
| |
SEVENTH ITEM ON THE AGENDA
Other financial and general questions
Cooperation between the ILO and the
European Commission (EC)
1. The Committee has been kept informed of developments in respect of the Office's efforts to establish an agreement with the European Commission (EC) which would cover the financial and administrative aspects of projects funded by the EC. The last document presented to the Committee(1) at the 265th Session (March 1996) of the Governing Body provided information on an agreement that the EC had signed with UNESCO on 27 February 1996, which met the main concerns of the ILO and could serve as a model for a possible agreement between the ILO and the EC. At the time it was the general understanding that the text of the UNESCO agreement would serve as the model for standard agreements with the United Nations and the specialized agencies.
2. Accordingly, the Director-General wrote to the President of the EC on 25 April 1996 proposing a similar agreement with the ILO. No formal response has yet been received from the EC. Pending a formal agreement, technical cooperation activity has continued with the EC, but the terms and conditions of each project have had to be negotiated separately and vary considerably from one project to another.
3. Recent project discussions with the EC have confirmed that the financial and administrative conditions that the EC requires continue to present difficulties for the ILO which can only be resolved if some changes are authorized in its Financial Regulations and budgetary practices. Unlike some other organizations of the United Nations system, the ILO has made concessions which are not of a financial nature such as in matters of procurement, recruitment and the visibility of EC funding.
4. The main financial and administrative problems that need to be resolved may be summarized as follows.
Funding
5. The payment procedures of the EC are such that considerable delays occur before the ILO is reimbursed in respect of expenditure that it has incurred on behalf of EC projects. This poses difficulties because the Office has no authority to use either regular budget funds or those of other multibilateral donors to cover such temporary cash deficits.
Interest charges
6. While interest earned on surplus EC funds is credited to its account, the EC does not allow reimbursement for any loss of interest suffered by the funds managed by the ILO which might temporarily be used to finance EC deficits. Moreover, in the case of certain projects, the EC demands additional interest over the market rate to be paid to it should there be delays in the execution of the projects in question.
Audit
7. The Committee was informed in the earlier documents on this subject that a satisfactory solution had been found for the audit requirements and that the arrangements agreed with the EC were being applied. However, in recent project negotiations, the EC has insisted on regular audits by an independent auditor. This raises the question as to how to cover the cost of such audits, as the EC does not allow such costs to be included in the project budget. Quite independently of the cost implications, the United Nations Panel of External Auditors has expressed reservations on the appropriateness of such "third party audits".
Exchange rates
8. While the EC agrees to accounting in US dollars for some projects, for others it insists that the ILO account for expenditure in ECUs, thus transferring the entire exchange risk to the ILO. Should there be savings at the end of a project in terms of ECUs because of favourable exchange rate movements, the savings are returned to the EC. On the other hand, if there is an overspending in ECUs because of adverse exchange rate fluctuations, the additional cost must be borne by the ILO unless it is able to negotiate additional contributions from the EC. The effect of these requirements is not only that special monitoring has to be set up for the projects in question in order to minimize losses, but also that funds have to be found by the ILO to meet any cost of negative exchange rate variations.
Supporting documents
9. In addition to the audit requirements, for certain projects the EC insists on receiving all supporting documentation (invoices, receiving notes, purchase orders, copies of entry visas for experts, boarding passes, etc.) when periodic financial statements are presented. The administrative effort involved in collecting documentation from the official records at ILO headquarters, regional offices, area offices, UNDP offices and project offices is both time-consuming and expensive, but the EC will not allow any provision for these additional costs in the project budget. It is therefore necessary to identify non-EC funds to meet these costs.
Miscellaneous
10. The EC imposes several other requirements which do not follow the normal administrative and accounting procedures that the ILO has established for the management of projects financed by multibilateral donors. For example, separate bank accounts have to be maintained for certain EC projects rather than integrating the funds into the ILO's cash management system; financial reports vary from one project to another and do not follow any standard format that could be prepared in an automated manner by the ILO's accounting system. These exceptional arrangements for the EC projects result in additional administrative costs.
Possible solutions
11. The problems outlined above are common to various organizations in the United Nations system, and it is hoped that a solution satisfactory to all parties concerned will eventually be found. In the meantime, in order to resolve the problem of funding cash deficits caused by the delayed payments by the EC, the Director-General believes that the most practical solution would be to authorize the use of the Working Capital Fund to cover such temporary deficits for a period of two years, after which the situation would be reviewed. This would require a decision by the Conference to derogate from article 19.1 of the Financial Regulations, which sets out the purposes for which use can be made of the Working Capital Fund. It is, of course, understood that the regular budget would be compensated for any loss of interest that might occur. Under such an arrangement, reimbursement to the Working Capital Fund of such temporary borrowings would be made from the payments subsequently received by the EC and would not be a charge to member States through the regular budget.
12. The other difficulties mentioned above could be resolved if there was a regular budget appropriation to which supplementary expenditure such as interest charges, exchange rate costs, audit costs and the cost of additional administrative work may be charged. In order to foster cooperation between the ILO and the EC, the Director-General believes that a realistic approach would be to make a provision in future programmes and budgets under Major programme 290 (Other budgetary provisions) to meet the additional expenditure resulting from the implementation of EC-financed projects. The amount of this provision would be estimated on the basis of experience in the administration of EC-funded projects and on the trend in the volume of such projects. Should the Governing Body agree to this proposal, analogous measures would be taken for the current biennium. Based on the present level of EC-funded activities, it is estimated that an amount of $180,000 would be required to cover the costs during the current biennium. This could be financed in the first instance from savings in Part I of the budget. Should this prove impossible, the Director-General would propose alternative methods of financing at a later stage in the biennium.
13. In the longer-term perspective, for larger ILO programmes such as IPEC, which are funded from voluntary sources, the Director-General intends to explore ways of finding more practical and flexible administrative arrangements. This might be achieved through less rigid rules for these programmes, and by giving such programmes a more autonomous status which would be independent of the ILO's funds and its Financial Regulations.
14. The Committee may wish to recommend to the Governing Body that --
(a) the Director-General continue to work closely with the European Commission to develop a practical and cost-effective partnership for technical cooperation activities;
(b) it propose to the 86th (June 1998) Session of the International Labour Conference that it adopt a resolution in the following terms:
The General Conference of the International Labour Organization,
Recognizing the importance of technical cooperation activities funded from voluntary sources;
Decides, in derogation from articles 18 and 19.1 of the Financial Regulations, to authorize the Director-General:
(i) to draw upon the Working Capital Fund, during a period of two years ending on 30 June 2000, in order to cover temporary cash deficits on technical cooperation activities funded from voluntary sources, provided that such advances shall be repaid together with a sum determined by the Director-General to be equivalent to the amount of interest that would have been earned had the advance not been made; and
(ii) to finance the additional costs in 1998-99 resulting from meeting the financial and administrative requirements of the European Commission, estimated at $180,000, in so far as possible, from savings in Part I of the budget.
(c) the Director-General include under Major programme 290 (Other budgetary provisions) in his Programme and Budget proposals for 2000-2001 provision for the additional costs of undertaking technical cooperation activities with the European Commission; and
(d) the Director-General report to the Governing Body at its first session in the year 2000 on the situation, with respect to technical cooperation activities funded from voluntary sources, covered by the present paper.
Geneva, 11 March 1998.
Point for decision: Paragraph 14.
1. GB.265/PFA/6/3.