WORKING CAPITAL FUND: LEVEL AND ADMINISTRATION SUMMARY

Transcription

1 ~ Ulls[l General Conference Twenty-eighth Session, Paris C 28 C/63 8 August 1995 Original: English Item 10.7 of the provisional agenda WORKING CAPITAL FUND: LEVEL AND ADMINISTRATION SUMMARY 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 Suggestions are made regarding the use of the Working Capital Fund during and a proposal is made regarding the level of the Fund required for that financial period. This document is also being submitted to the Executive Board at its 147th session. 1 Any observations or recommendations the Board may wish to make thereon will be transmitted to the General Conference by way of an addendum hereto. Decision required: paragraph Under cover of document 147 EX/36.

2 28 C/63 PART I INTRODUCTION 1. This document is divided into six 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: Financing of the proposed increase Section E: Currency or currencies of the Fund Section F: 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 twenty-seventh 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 self-liquidating 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 Director-General 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 28 C/63. 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 twenty-seventh session, the General Conference authorized the Director-General to advance from the Working Capital Fund l such sums as might be necessary to finance budgetary appropriations, pending the receipt of contributions from Member States. The General Conference also authorized 1 27 C/Resolution 27.1.

3 28 C/63 - page 2 the advance of sums not exceeding $500,000 to finance self-liquidating 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. 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 1994 to June 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 continue to pay their contributions promptly, the overall arrears situation has deteriorated causing serious cash flow problems that require almost constant advances from the Working Capital Fund to finance the regular programme. 6. The level of the Working Capital Fund was increased from $17.2 million to $22.2 million at the twenty-seventh session of the General Conference. The effective cash available in the Fund which depends on the payment of advances paid by Member States is shown in the attached annex. By reference to this annex it may be seen that only at the end of one month during the current biennium to end June has the Fund been able to fulfil its primary function of financing regular programme expenditure pending receipt of contributions due. 7. The cash deficits of the combined resources of the regular budget and the Working Capital Fund at the end of each month during 1994 and 1995 up to end June are shown on the last column of the annex. It maybe seen that at the end of certain months those cash deficits were particularly severe, despite efforts made by the Director-General to monitor cash outflow through the issue of allotments on a quarterly basis. After full use of the cash available in the Working Capital Fund, the cash deficits required borrowing as follows:

4 28 C/63 - page 3 End of Year month Borrowing required in thousands of dollars Current account Internal borrowing External Total (unpresented cheques) $ $ $ $ 1994 January 12,621 12,621 February 21,609 21,609 March 9,782 9,782 April 2,868 2,868 May 24,410 24,410 June 28,048 8,831 36,879 July 19,857 19,857 August 25,099 2,602 27,701 September October 16,330 16,330 November 30,926 1, ,906 December 31,236 5,743 12,793 49, January 28,226 6,756 12,776 47,758 February 31,179 6, ,889 March 8,395 8,395 April 26,561 26,561 May 23,914 23,914 June 25,185 25, With regard to the authority to make self-liquidating advances, these advances have been made from time to time during the current biennium for various trust funds 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 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 Director-General proposes a draft resolution on this subject which foresees that the purposes for which the Fund

5 28 C/63 - page 4 could be used in would be identical to those approved by the Conference for Proposed level of the Fund 10. In 1946, at its first session, the Working Capital Fund was established by the General Conference with the principal objective of funding the necessary resources to finance approved budget expenditure pending the receipt of assessed contributions. When fist 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. In the General Conference decided to reduce the level of the Fund to $15 million following the withdrawal of three Member States and the consequential budget adjustments. 11. For and the level of the Fund was maintained at $15 million. At the twenty-sixth session in 1991 the level of the Fund was raised to $17.2 million and at the twentyseventh session in 1993 it was further increased to $22.2 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 Level of Working Capital Fund Percentage of budget appropriation represented by Working Capital Fund $ $ United Nations WHO FAO ILO UNESCO 2,175,251, ,101, ,114, ,510, ,490, ,000,000 31,000,000 58,800,000* 23,490,000 22,200, I* Including $33.6 million in the Special Reserve Account available to finance budget appropriations pending receipt of contributions. A comparison of percentages of budget appropriations represented by Working Capital Funds is insufficient, however, to judge the comparative resources available for financing regular- programme cash deficits from one organization to another. Parallel working capital can be 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, resulting in additional working capital at the commencement of the current biennium of $l18.3 million. The United Nations also had fund balances totalling $188.7 million at that date financed by voluntary contributions and sales of United Nations bonds. Moreover its internal borrowing capacity includes the resources in Peace Keeping Accounts. At

6 28 C/63 - page 5 the end of 1994 WHO had various accounts from which internal borrowing was possible that totalled $146.6 million in addition to its Working Capital Fund. 12. The present level of UNESCO s Working Capital Fund at $22.2 million is equivalent to 4.87 per cent of the approved budget for the biennium If this percentage were applied to the budget proposed for of $518,445,000 (Draft 28 C/5), on a strictly comparable basis the level of the Working Capital Fund should be increased to $25.2 million. This would not, however, compensate sufficiently for the overall increase of contributions in arrears, which for example at the end of June 1995 exceeded by $22.1 million the comparative figure at the same date two years previously. Cash flow prospects 13. The cash deficits experienced during the biennium up to 30 June 1995 appear on the annex attached. Action taken to deal with the problem is described in document (Collection of Member States contributions). At the time of writing this report the visibility on cash flow prospects into the next biennium is not clear. Unless arrears of contributions are substantially reduced, however, there is a danger that the cash deficits encountered during the current biennium will again be experienced during For instance, at the end of 1994 a regular programme cash deficit of $71.8 million arose as against a Working Capital Fund availability of $22.0 million leaving a borrowing requirement of $49.8 million. Borrowing authority 14. For the biennium borrowing authority was approved by the General Conference in 27 C/Resolution by which it authorizes the Director-General to negotiate and contract short-term loans and to report thereon to the Executive Board at its earliest subsequent session. A request for renewal of borrowing authority under the same conditions as approved for is included in document 28 C/62 in connection with the report of the Director-General to the General Conference on collection of contributions of Member States. 15. The extent of internal and external borrowing required at the end of each month during the period January 1994 to June 1995 is reported in paragraph 7 above. Internal borrowing in dollars was possible from certain self-financing and reserve accounts, the net equity of which belongs to the Organization. The accounts of these self-financing 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 , however, cannot be reliably foreseen. On the basis of past experience the monthly availability maybe in the region of $25 million. The currency available for borrowing from these funds is the US dollar. In view of rational management of the split-level assessment system recourse to borrowing in French francs may also be necessary and such borrowing would therefore be from external sources. In order to limit the costs of borrowing and to limit reliance on borrowing arrangements with external sources in the future, a substantial increase in the Working Capital Fund would now be desirable. Changes/suspensions in Financial Regulations 16. Unlike the United Nations and certain Specialized Agencies (see paragraph 11 above), UNESCO does not have any reserve accounts to supplement the Working Capital Fund when cash flow problems arise and has limited resources for internal borrowing. It is for this reason that the

7 28 C/63 - page 6 Director-General proposed to the Executive Board at its 145th and 146th sessions that the miscellaneous income surplus of the biennium and any budget surplus that may become available for apportionment to Member States by the end of the current biennium should not be returned to Member States, but should be retained in a suspense account of the General Fund to reinforce the cash position of the regular programme. The total of funds that would be retained if the General Conference were to approve this approach is currently estimated to be at least $4.1 million. At its 146th session, however, the Executive Board decided to recommend that these resources should be utilized to finance any increase in the Working Capital Fund that may eventually be approved and/or the modified positive incentive scheme proposed for prompt payment of contributions (28 C/62). Other relevant considerations on the level of the Fund 17. The General Conference may wish to take note of the provisions of Article 6.4 of the Financial Regulations which provides that the Working Capital Fund may be required to make advances to finance unforeseen and extraordinary expenses. Such advances when not recoverable from sources outside of the regular budget would logically require the submission of supplementary estimates. Supplementary estimates may be provisionally approved by the Executive Board under Financial Regulation 3.9, but the assessment thereof requires General Conference approval, A lacuna exists, however, since the Working Capital Fund as it now stands contains no specific margin to finance supplementary estimates required to meet unforeseen and extraordinary expenses that the Board may provisionally approve. To avoid extraordinary sessions of the General Conference, an added margin in the level of the Working Capital Fund would be desirable for this eventuality. Recommendations made by the Executive Board at its 146th session 18. At the 146th session, the Executive Board took the following decision with regard to the Working Capital Fund: The Executive Board, Noting paragraph 59 of draft document 28 C/5, submitted to it by the Director-General, 2. Taking the view that consideration might be given to the possibility of increasing the amount of the Working Capital Fund to $25 million for , 3. Invites the Director-General to study the possibility of financing this increase by drawing on the following sources: (a) surplus of other income over the amount estimated under that heading for plus the balance under Part VIII - Currency Fluctuation - for that biennium, of which a total amount of $3,990,627 remains available; (b) miscellaneous income estimated for the next biennium from UNDP contributions under the heading of support costs, totalling $2 million;

8 28 C/63 - page 7 (c) any unobligated sums remaining from the appropriations voted under Part VII of the budget for ; (d) any other possible sources; 4. Requests the Director-General to include all relevant. information in the document intended for the General Conference and to submit it to the Executive Board at its 147th session so as to enable it to formulate recommendations to the Conference on this matter. 19. As the Director-General indicated in paragraph 59 of the Introduction to the Draft Programme and Budget for (28 C/5), in the light of the cash flow problems encountered during because of the increase in arrears of contributions, the level of the Working Capital Fund should be considerably increased. In the report of the Independent Advisory Group on United Nations financing co-chaired by Mr Shijuro Ogata and Mr Paul Volcker which was issued in February 1993 it was proposed that the level of the Working Capital Fund in the United Nations should be increased to a level of some 20 per cent of the regular budget on an annual basis. If this percentage were applied to UNESCO, the Working Capital Fund would be increased to a level of some $51.8 million for In the light of arrears experienced during , such a level would be essential in the absence of external borrowing authority to tide the Organization over peak short-term adverse cash fluctuations. In the light of the positive recommendation made by the Executive Board at its 146th session for the renewal of external borrowing authority for , the Director-General considers that an increase of the Fund to a level of $25 million for the forthcoming biennium, as envisaged by the Executive Board at its 146th session, would be a viable alternative to his original intention to propose $26.2 million. 20. A level of $25 million would more or less maintain the ratio of the level of the Fund to the budget that exists in the current biennium corresponding to some five weeks average expenditure. Above all the increase would serve to mitigate interest charges on borrowing that might otherwise become necessary. This level is therefore proposed on the understanding that the split-level assessment system will continue in to provide protection from exposure to adverse currency fluctuation and that the General Conference will authorize external borrowing as an instrument to supplement the resources of the Working Capital Fund in case of need. SECTION D: FINANCING OF THE PROPOSED INCREASE 21. Having studied the various possibilities of financing the proposed increase in the level of the Working Capital Fund identified by the Executive Board at its 146th session, the Director-General wishes to comment thereon in the light of the three following criteria: (i) the source of financing of the Working Capital Fund as defined in Financial Regulation 6.2 shall be advances from Member States, and these advances made in accordance with the scale of assessments as determined by the General Conference... shall be carried to the credit of the Member States which have made such advances ;

9 28 C/63 - page 8 (ii) the advances of Member States to the Working Capital Fund are assessed at the commencement of each biennium and moneys received from a Member State are credited in priority to the advance due in application of Financial Regulation 5.7; (iii) any financing arrangements introduced should reach the practical objectives of providing a certain level of real cash resources at the commencement of each biennium to finance the approved programme in the event of delay in payment of contributions. 22. The Director-General considers that the option described in paragraph 3(a) of the Executive Board decision (see paragraph 18 above) is a viable mechanism in terms of the foregoing criteria, since there is an amount of $3,990,627 available in cash under the heading other income and Part VIII surplus of the financial period. The Director-General could apportion to eligible Member States either the whole of this sum, or whatever amount thereof the General Conference considers appropriate, on the basis of the scale of assessments applicable for and credit the resulting amounts against the advance due by individual Member States to the Working Capital Fund for On the other hand it would not be in accordance with the Financial Regulations to apportion to the credit of advances of Member States to the Working Capital Fund, an amount of estimated UNDP support costs [paragraph 3(b) of the Executive Board decision]. The amount of UNDP support costs for will only be received in monthly instalments during that biennium and the monthly amounts of such installments will depend on the number of projects entrusted to UNESCO for execution and the actual implementation levels. Consequently the estimated amount of $2 million may not be received in full. The Director-General would have to proceed in a highly complicated number of apportionments in monthly steps, to credit the advance account of each of the 183 Member States, resulting in a profusion of correspondence which would be difficult to administer. Meanwhile cash contributions received would have to be credited in the first place against advances due to the Working Capital Fund in application of Financial Regulation 5.7. The result would be constant confusion for Member States regarding advances paid and due to the Working Capital Fund and amounts paid and due on contribution accounts, especially as the support costs expected to be received are considerably less than the increase of $2.8 million. proposed in the level of the Fund. Above all many delegates to the Finance and Administrative Commission at the 146th session of the Board warned against the possible repercussions in the UNDP Governing Council should the Administrator of UNDP report that support costs destined for the administration and backstopping of projects were being redeployed to finance an increase in the Working Capital Fund of UNESCO. 24. With regard to the use of any unobligated balance remaining in Part VII of the budget of the current biennium [paragraph 3(c) of the Executive Board decision], this approach has two drawbacks: (i) any balance that may be available will not be a cash surplus; it will be a book balance that will only be realized in cash when arrears of contributions for will be fully paid which is not expected to occur before the end of ; not only is this approach contrary to the provisions of Financial Regulation 4.3 that requires retention of surpluses until Member States have paid their contributions in full for the financial period concerned, but there is no assurance that the amount available as budget surplus for will eventually match the requirements to finance the increase recommended;

10 28 C/63 - page 9 (ii) the increase requested in the Working Capital Fund is required early in 1996 to reinforce the cash position from the outset of the biennium, which would not be the case with this option for financing the increase. SECTION E: CURRENCY OR CURRENCIES OF THE FUND 25. 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 twenty-seventh session the General Conference decided by resolution 27.1 that advances shall be assessed and paid in United States dollars; the Fund shall normally be held in United States dollars, but the Director-General 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 split-level 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 vis-à-vis the United States dollar. 26. In view of the persistently high level of arrears of assessed contributions of Member States for previous financial periods and the need to provide a significant level of advances in dollars to field offices for their expenditure requirements, the Director-General considers that on balance the resources of the Fund for should be assessed, paid and held in US dollars. With a Working Capital Fund in dollars only, however, any advances made for French franc expenditure requirements would result in exchange gains or losses on repayment of these advances. In accordance with the current financial procedures such gains or losses would be brought to account under 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 from prior biennia 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 from the Fund to facilitate the smooth functioning of the split-level assessment system. Meanwhile the resolution proposed to the General Conference is identical to that approved in this respect at the twenty-seventh session and again allows for possible change in the currencies in which the Fund will be held, subject to the approval of the Executive Board. SECTION F: PROPOSED RESOLUTION 27. Taking into account the considerations outlined in this document and in particular Section D regarding the financing of the proposed increase to $25 million in the level of the Fund, the General Conference may wish to approve the text of a resolution concerning the level and administration of the Working Capital Fund for that follows closely the model approved by the General Conference at its twenty-seventh session as follows:

11 28 C/63 - page 10 The General Conference resolves: (a) (b) (c) (d) (e) (f) (g) that the authorized level of the Working Capital Fund for shall be fixed at $25 million, 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 for , taken in proportion to the total of such rates; that a new Member State shall be required to make an advance to the Working Capital Fund calculated as a percentage or proportion of the authorized level of the Fund, in accordance with the percentage or rate assigned to it under the scale of assessments applicable at the time it becomes a member; that advances shall be assessed and paid in United States dollars; [text to be added if the General Conference approves any special financing measures recommended by the Executive Board: notwithstanding the relevant provisions of Financial Regulations a total of $ shall be transferred to the credit of individual Member States from ]; that the resources of the Fund shall normally be held in United States dollars, but the Director-General 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 split-level 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 vis-à-vis the United States dollar; that income derived from the investments of the Working Capital Fund shall be credited to miscellaneous income [text to be deleted if the proposal to use such interest for the positive incentive scheme as proposed by the Executive Board (document 28 C/62) is approved]; that the Director-General 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 contribution.s are available for that purpose; that the Director-General is authorized to advance during sums not exceeding in total $500,000 at any one time, to finance self-liquidating expenditures, including those arising in connection with trust funds and special accounts; these sums are advanced pending availability of sufficient receipts from the trust funds and special accounts, international bodies and other extra-budgetary sources; sums so advanced shall be reimbursed as rapidly as possible.

12 28 C/63 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 surplus (borrowed) $ $ $ 1994 January February March April May June July August September October November December (34,473) (43,465) (31,723) (24,762) (46,313) (58,832) (41,830) (49,679) (21,127) (38,324) (54,900) (71,807) 21,852 21,856 21,941 21,894 21,903 21,953 21,973 21,978 21,978 21,994 21,994 22,035 (12,621) (21,609) (9,782) (2,868) (24,410) (36,879) (19,857) (27,701) 851 (16,330) (32,906) (49,772) 1995 January February March April May June (68,844) (60,154) (30,232) (48,500) (45,954) (47,232) 21,086 21,265 21,837 21,939 22,040 22,047 (47,758) (38,889) (8,395) (26,561) (23,914) (25,185)

13 ~ ml General Conference Twenty-eighth Session, Paris C 28 C/63 Add. 28 October 1995 Original: English Item 10.7 of the agenda WORKING CAPITAL FUND: LEVEL AND ADMINISTRATION ADDENDUM At its 147th session the Executive Board considered document 28 C/63 under cover of document 147 EX/36 concerning the level and administration of the Working Capital Fund for and adopted the following decision thereon: The Executive Board, 1. Having examined document 147 EX/36 concerning the level and administration of the Working Capital Fund for proposed by the Director-General to the General Conference, 2. Recommends that the General Conference adopt the following draft resolution: The General Conference resolves: (a) that the authorized level of the Working Capital Fund for shall be freed at $25 million, 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 for , taken in proportion to the total of such rates; (b) that a new Member State shall be required to make an advance to the Working Capital Fund calculated as a percentage or proportion of the authorized level of the Fund, in accordance with the percentage or rate assigned to it under the scale of assessments applicable at the time it becomes a member;

14 28 C/63 Add. - page 2 (c) (d) (e) (f) (g) that advances shall be assessed and paid in United States dollars; for this purpose an amount of $2,800,000 shall be t&en from the surplus of other income plus the balance on Part VIII - Currency Fluctuation for the biennium and apportioned to the credit of Member States in proportion to their assessed contributions for that financial period notwithstanding the provisions of Financial Regulations 5.2,6.2 and 7.1; that the resources of the Fund shall normally be held in United States dollars, but the Director-General 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 split-level 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 vis-à-vis the United States dollar; that income derived from the investments of the Working Capital Fund shall be credited to miscellaneous income [text to be deleted if the proposal to use such interest for the positive incentive scheme as proposed by the Executive Board (28 C/62) is approved]; that the Director-General 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; that the Director-General is authorized to advance during sums not exceeding in total $500,000 at any one time, to finance self-liquidating expenditures, including those arising in connection with trust funds and special accounts; these sums are advanced pending availability of sufficient receipts from the trust funds and special accounts, international bodies and other extra-budgetary sources; sums so advanced shall be reimbursed as rapidly as possible.