UNESCO. Executive Board; 200th; New audits by the...

200 EX/20.INF PARIS, 23 August 2016 English & French only

Executive Board Two hundredth session

Item 20 of the provisional agenda

NEW AUDITS BY THE EXTERNAL AUDITOR

AUDIT REPORT ON COST RECOVERY FROM VOLUNTARY CONTRIBUTIONS

SUMMARY

Pursuant to Article 12.4 of the Financial Regulations, the External Auditor submits his audit report on cost recovery from voluntary contributions.

The short form of this report and the comments by the Director-General are contained in document 200 EX/20 Part I.

200 EX/20.INF

AUDIT REPORT ON

COST RECOVERY

FROM VOLUNTARY CONTRIBUTIONS

External Auditor reference: UNESCO-2016-12

EXTERNAL AUDIT

OF THE UNITED NATIONS EDUCATIONAL, SCIENTIFIC AND

CULTURAL ORGANIZATION

200 EX/20.INF

TABLE OF CONTENTS Page

I. OBJECTIVES AND SCOPE OF THE AUDIT ................................................................ 1

II. LIST OF RECOMMENDATIONS ................................................................................... 1

III. THE RECOMMENDATIONS FROM THE 2011 REPORT ON COST RECOVERY HAVE BEEN IMPLEMENTED OR ARE IN THE PROCESS OF BEING IMPLEMENTED ........ 2

A. Review of the principles of the cost-recovery policy .............................................. 2

B. Analysis of the implementation of the recommendations from the 2011 External Auditor’s report .......................................................................... 4

1. Recommendation No. 5 on restoring the financial balance of FITOCA .................................................................................................... 4

2. Recommendation No. 6 on the streamlining and reliability of cost-recovery arrangements .................................................................... 10

IV. THE COST-RECOVERY RULES MUST BE REFORMED ............................................. 11

A. Reminder of the written cost-recovery rules ........................................................... 11

B. Weaknesses in the rules ........................................................................................ 12

1. Lack of recovery of fixed indirect costs ......................................................... 12

2. The risks of vague rules for cost recovery .................................................... 13

C. Possible reform of regulations ............................................................................... 14

V. THE DISTRIBUTION OF FITOCA FUNDS SHOULD BE REVIEWED ........................... 17

A. Practices for the distribution of funds and posts financed by FITOCA .................... 17

B. The necessary updating of practises used to distribute funds and posts ................ 18

1. The distribution of funds between Headquarters and field offices should be updated .............................................................. 18

2. The distribution of posts among Headquarters offices should be updated ........................................................................................ 18

3. The use of FITOCA funds by field offices must comply with the principles of the cost-recovery policy ............................................... 19

4. More flexibility regarding the practice of not carrying over FITOCA funds ..... 20

5. Non-allocation of FITOCA funds to field offices managing projects with support cost waiver rates should become moot as part of the upcoming reform ............................................................ 20

6. Each year, field offices should be informed of the method for calculating the allocation of FITOCA funds .............................................. 20

VI. INFORMATION FOR MEMBER STATES SHOULD BE IMPROVED ............................. 21

VII. CONCLUSION ............................................................................................................... 21

VIII. ACKNOWLEDGMENTS ................................................................................................. 21

ANNEX 1 .............................................................................................................................. 23

ANNEX 2 .............................................................................................................................. 27

200 EX/20.INF

I. OBJECTIVES AND SCOPE OF THE AUDIT

1. In accordance with the notification letter of 14 January 2016, two external auditors carried out an audit at UNESCO from April to June 2016. The purpose of the audit was to examine the modalities of the recovery for the regular budget of the costs of managing voluntary contributions , so as to update the findings of the External Auditor’s 2011 “Audit report on the general conditions of implementation of the Complementary Additional Programmes (2008-2011)” in that connection and to ensure follow-up to the corresponding recommendations.

2. The audit was conducted within UNESCO’s Bureau of Financial Management (BFM). The auditors also interviewed the Bureau of Strategic Planning (BSP) and 15 field offices.

3. The audit was conducted in accordance with the International Standards of Supreme Audit Institutions,1 established by the International Organization of Supreme Audit Institutions2 and in accordance with applicable texts, in particular Article 12 of the UNESCO Financial Regulations and the Annex on the Additional Terms of Reference Governing the Audit.

4. The preliminary observations were discussed at an exit meeting with UNESCO’s Bureau of Financial Management (BFM). Its observations were taken into account as warranted.

II. LIST OF RECOMMENDATIONS

Recommendation No. 1. The External Auditor recommends adapting the Organization’s financial management software (SISTER and FABS) so as to facilitate and automate cost-recovery operations for extrabudgetary projects under way.

Recommendation No. 2. The External Auditor recommends that training sessions continue to be held for those responsible for preparing and implementing the budgets for extrabudgetary projects. Recommendation No. 3. The External Auditor recommends that the Guidelines on the Cost Recovery Policy be rewritten, formalizing practices in force, integrating forthcoming reforms and providing more examples of how to apply the rules properly.

Recommendation No. 4. The External Auditor recommends: (i) updating the amount of extrabudgetary project management costs to be recovered, according to the project size and complexity; (ii) based on the results of the update, proposing a reform of the cost-recovery method to improve UNESCO’s position in relation to organizations competing with it for voluntary contributions, thanks to a reduced support cost rate, while avoiding the risk of overcharging projects by making a clear distinction between indirect variable costs recovered by the support cost rate and FITOCA, on the one hand, and direct costs recovered by charging to project budgets or through the special account for cost recovery on the other; (iii) quickly implementing the reform to avoid accumulating unproductive FITOCA reserves.

Recommendation No. 5. The External Auditor recommends a two-year trial to base the calculation of costs recovered by charging project budgets or through the special account for cost recovery on simplified set rates.

Recommendation No. 6. The External Auditor recommends: (i) updating the distribution of FITOCA funds between Headquarters and field offices based on the results of a study into the work time that various offices actually spend on managing voluntary contributions and extrabudgetary funds, and (ii) updating the distribution of FITOCA-funded posts at Headquarters among the various offices at Headquarters based on the results of a study similar to the one in the first part of the recommendation.

Recommendation No. 7. The External Auditor recommends reserving the use of FITOCA by field offices, save exceptions authorized by Headquarters, for the reimbursement of expenditure paid

1 ISSAI. 2 INTOSAI.

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from the regular budget for extrabudgetary projects, in accordance with the purpose of the cost-recovery policy.

Recommendation No. 8. The External Auditor recommends authorizing FITOCA funds to be carried over from one year to the next by field offices for extrabudgetary projects with annual expenditure rates of almost 100%.

Recommendation No. 9. The External Auditor recommends providing field offices, each year, with a detailed written explanation of the calculation of the annual allocation of the FITOCA funds they receive.

Recommendation No. 10. The External Auditor recommends that, each year, Member States should be provided with information on the distribution of FITOCA funds between Headquarters and the various field offices, the distribution of FITOCA-funded posts among Headquarters offices and the income collected by the special account for cost recovery.

III. THE RECOMMENDATIONS FROM THE 2011 REPORT ON COST RECOVERY HAVE BEEN IMPLEMENTED OR ARE IN THE PROCESS OF BEING IMPLEMENTED

A. Review of the principles of the cost-recovery policy

5. UNESCO extrabudgetary projects are those not funded from the regular budget (which is financed by compulsory contributions of all Member States), but rather from voluntary contributions paid by some Member States, multilateral organizations (such as the World Bank), other United Nations agencies, the European Union or private agencies (foundations, associations or companies).

6. The aim of the policy of the regular budget recovering the management costs of extrabudgetary projects is to avoid favouring extraordinary projects to the detriment of the work programme funded by the ordinary budget.

7. Indeed, according to the Guidelines on the Cost Recovery Policy and Budgetary Aspects of Extrabudgetary Projects, if the regular budget subsidized extrabudgetary projects “This can give the erroneous impression that the management of extrabudgetary projects is more efficient than the regular programme; which in turn can make extrabudgetary projects more attractive to donors and in the long run can endanger the Organization’s regular programme funding”. These 2008 Guidelines are still in force, but have been supplemented by a decision from the 195th session of the Executive Board (see paragraph 38 below) and by the annual guidelines of the Bureau of Financial Management (BFM) that consider any changes in cost recovery policy direction from the working group on support costs for extrabudgetary activities (which was set up in 2003 by the United Nations High-Level Committee on Management (HLCM)).

8. The Guidelines thus recommend charging direct costs and indirect variable costs from extrabudgetary projects to the budget of each project using the following methods (summarized in table 1 below):

• Direct costs, which are “costs incurred by the Organization which can be traced in full to a specific project”,3 must be directly charged to the budget of each extrabudgetary project. They include the remuneration paid to staff recruited exclusively for the project, rent and charges for premises used exclusively for the project and the proportion of the general costs (information technology, premises maintenance, travel and so forth) of a service at Headquarters or a field office associated with the project;

• In the specific case of direct expenses for personnel costs (salaries and expenses) of UNESCO staff members paid by the Organization’s regular budget but spending some of

3 This and the following definitions are taken from Item 5.9 of the Administrative Manual.


their work time on extrabudgetary projects,4 the costs are charged to the budget of each extrabudgetary project;5 the corresponding revenue is credited to the Special Account for the Recovery of Staff and Other Costs from Extrabudgetary Projects and then refunded to the Headquarters service or field office that pays the staff concerned;

• Indirect variable costs, which are also known as support costs or general administration expenses, are “costs incurred by the Organization in support of projects, but which cannot be easily traced directly to a specific project”. They are charged to each project’s budget using a Programme Support Cost (PSC) rate (a percentage of the project’s total expenditure - usually 13%).6 The corresponding revenue is paid into the Funds-in-Trust Overhead Cost Account (FITOCA), with funds distributed to corporate services and field offices the following year according to non-formalized customary rules: field offices receive 40% of the FITOCA funds they generated by applying the previous year the standard support cost percentage of 13% to project budgets they manage, with Headquarters receiving the rest; in principle, no FITOCA credit is allocated 7 for extrabudgetary projects that have benefited from a support cost percentage of less than 13%, with Headquarters alone receiving funds generated the previous year through the application of the lower percentage.

• Indirect fixed costs are “costs incurred by the Organization regardless of the scope, level or funding source of activities, and which typically include the top management of an organization, its corporate costs and statutory bodies not related to service provision”. These costs relating to senior management and statutory bodies implicitly also cover any rent and service charges for UNESCO buildings not exclusively allocated to extrabudgetary projects8 that are paid from the regular budget and Special Accounts relating to the management of Headquarters offices9 and field offices. They are not paid by extrabudgetary projects, in accordance with a 2007 recommendation (that has been subsequently updated) from the working group on support costs for extrabudgetary activities set up by the United Nations High-Level Committee on Management (HLCM).

4 These costs were considered as indirect variable costs in the External Auditor’s report of 2011. The classification

that has now been adopted by the Secretariat in accordance with the latest United Nations guidelines is the one used herein.

5 A Certificate of Time Spent and a Request for Journal Voucher Creation must be produced by the Headquarters service or field office managing the extrabudgetary project, according to Annex 1, section 11.1, of the Guidelines on the Cost Recovery Policy and Budgetary Aspects of Extrabudgetary Projects. Those documents show the budget code for the relevant Headquarters service or field office so as to ensure that the personnel costs charged to the Special Account are actually refunded to them.

6 There are other percentages and potential waivers from them (see below). 7 Only the Office in Brazil receives FITOCA credits in such cases (see below). 8 The rent for buildings used by field offices for extrabudgetary projects are considered to be direct costs charged

to the project budgets. 9 The relevant Special Account for Headquarters is mainly funded by rents paid by delegations for their offices in

the rue Miollis.


Table 1. Cost recovery rules

Costs Definition Example Recovery method Use of funds Direct costs Costs that can

be traced in full to an extrabudgetary project10.

Salaries of staff and rents of premises that are exclusively used for the extrabudgetary project. The proportion of a field office’s capital expenditure allocated for an extrabudgetary project.

Costs charged to project budget. Costs paid by the funds of

each extrabudgetary project (from the voluntary contributions funding the

project).

Specific case of direct costs of staff paid from

the regular budget and

assigned part time to an

extrabudgetary project

The share of staff costs paid by the regular budget for the time worked by those staff members on the extrabudgetary project.

A few hours worked by a Headquarters expert on extrabudgetary projects or a field office’s IT technician on an extrabudgetary project.

Hours are estimated, recorded in the budget and charged to the project; they are then credited to the Special Account for cost recovery.

Hours credited to the special account for

cost recovery are then paid to the relevant Headquarters service or field

office.

Indirect variable costs

Expenses incurred by the regular budget for the extrabudgetary project that are difficult to quantify with any accuracy.

Any expenditure not included in direct costs

Set percentage of 13% of the budget for the extrabudgetary project (standard rate) or a waiver rate (such as 7% or 10%) is applied to the project’s expenses in favour of FITOCA.

FITOCA funds are distributed among the Headquarters and field offices on the basis of customary rules.

Indirect fixed costs

Costs independent of the value of each project.

Senior management costs or property expenses for UNESCO Headquarters

Not recovered.

Sources: External Auditor, based on the Guidelines on the Cost Recovery Policy and Budgetary Aspects of Extrabudgetary Projects.

9. The cost recovery policy was reviewed in the 2011 External Auditor’s report on the planning of voluntary contributions (“Audit Report on the General Conditions of Implementation of the Complementary Additional Programmes (2008-2011)”), in which recommendations 5 and 6 related to cost recovery.

10. The present report first examines the implementation of these recommendations, provides a full analysis of the cost-recovery system and then formulates new recommendations.

B. Analysis of the implementation of the recommendations from the 2011 External Auditor’s report

1. Recommendation No. 5 on restoring the financial balance of FITOCA

11. Recommendation No. 5: “restore the financial balance of the Funds-in-Trust Overhead Costs Account (FITOCA) in such a way as to ensure that its balance amounts to at least the equivalent of 18 months of the salaries that it pays:

10 EXB.


(i) by amending its regulations in order to reduce the number of cost-recovery rates below the single standard rate of 13%;

(ii) failing that, by reducing the number of waivers granted from the statutory cost recovery rates;

(iii) by using FITOCA to fund only Headquarters or field posts that provide administrative support for extrabudgetary projects; and

(iv) by continuing its efforts to rationalize the account in Brazil”.

12. The aim of the recommendation – to restore financial balance to FITOCA – has been achieved, and efforts have been made in the four areas suggested.

(a) Recovery of FITOCA accounts

13. The FITOCA accounts, which posted a $5.7 million deficit in 2008 and a $2.3 million deficit in 2009, recovered strongly between 2010 and 2015 thanks to a 10.62% increase in revenues and a 35.30 % reduction in expenditure from the fund (which recorded a $5.634 million surplus at the end of 2015). This progress is even more significant if the negative results from Brazil resulting from the fall in the value of the real against the dollar since 2010 are excluded.

Table 2. Evolution of all FITOCA accounts, 2010 to 2015 (Thousands of United States dollars)

FITOCA (overall)

2010 2011 2012 2013 2014 2015

Revenues 22 017 24 575 20 590 19 365 20 913 19 677

Expenditure 21 705 20 929 18 077 18 299 16 239 14 043

Balance 312 3 646 2 513 1 066 4 674 5 634 Sources: External Auditor, based on data communicated by the Secretariat.

Table 3. Evolution of FITOCA accounts (excluding Brazil) (Thousands of United States dollars)

FITOCA (without Brazil)

2010 2011 2012 2013 2014 2015

Revenues 14 607 15 998 15 841 15 167 15 559 15 785

Expenditure 14 019 14 116 12 041 12 641 12 135 10 414

Balance 588 1 882 3 800 2 526 3 424 5 371 Sources: External Auditor, based on data communicated by the Secretariat.

Table 4. Evolution of FITOCA accounts (Brazil only) (Thousands of United States dollars)

FITOCA (Brazil)

2010 2011 2012 2013 2014 2015

Revenues 7 410 8 577 4 749 4 198 5 354 3 892

Expenditure 7 686 6 813 6 036 5 658 4 104 3 629

Balance -276 1 764 -1 287 -1 460 1 250 263 Sources: External Auditor, based on data communicated by the Secretariat.


14. The account recovery swelled the FITOCA reserves by 64.45% between 2010 and 2015. This easily pushed FITOCA beyond 18 months’ of the staff costs it pays (see table 5) from 2012. In 2014, reserves were 69.54% higher than 18 months’ of staff costs; in 2015, the reserves were 96.82% higher than 18 months’ worth and would cover 36 months of staff costs. This significant level of reserves, which may appear surprising, is due to the Secretariat’s wish to create a buffer in case the reform of the cost-recovery system (which is being studied by a working group – see below) results in reduced FITOCA revenues.

Table 5. Evolution of FITOCA reserves (Thousands of United States dollars)

2010 2011 2012 2013 2014 2015


11 876 13 758 17 558 20 084 23 508 28 879

FITOCA (Brazil) 8 035 9 799 8 512 7 052 8 302 3 865

FITOCA (overall) 19 911 23 557 26 070 27 136 31 810 32 744

Sources: External Auditor, based on data communicated by the Secretariat.

Table 6. Evolution of staff expenditure funded by FITOCA and share of that expenditure in total annual FITOCA expenditure

(Thousands of United States dollars)

2010 2011 2012 2013 2014 2015


11 803 84 %

12 021 85 %

9 380 78 %

9 836 78 %

9 745 80 %

8 460 81 %

FITOCA (Brazil)

4 331 56 %

4 635 68 %

4 033 67 %

4 242 75 %

2 763 67 %

2 631 72 %

FITOCA (overall)

16 134 74 %

16 656 80 %

13 413 74 %

14 078 77 %

12 508 78 %

11 091 79 %


(b) Increased revenues in the special account for cost recovery

15. The recovery in the FITOCA accounts has been accompanied by a rise in revenues in the special account for cost recovery,11 through which transit the payments for the direct costs of staff paid from the regular budget but spending some of their work time on extrabudgetary projects. Indeed, the revenues of this special account soared between 2010 and 2015, whereas the sum received by the Organization in voluntary contributions rose by only 3.52% during the same period.

16. This development can be attributed to the following three factors:

• the special account was significantly underused previously, and the extrabudgetary project managers did not charge major project staff costs to the project budgets;

• the Secretariat has made considerable efforts to train staff involved in managing such projects and to check that the relevant budgets are drawn up;

11 To be precise, there are two such accounts: the Special Account for the Recovery of Staff and Other Costs from

Extrabudgetary Projects and the Special Account for the Recovery of Security Costs from Extrabudgetary Projects.


• lastly, Member States intervened by requesting at the 195th session of the Executive Board, held in November 2014, that recovery of staff expenditure relating to extrabudgetary project management amount to 2% of the total cost of such expenditure (rather than the 1% it had been previously).

17. Having said that, the sum of revenues collected by the special account in 2015 was still only 1.2% of the total staff costs linked to extrabudgetary projects and not the 2% requested by the Executive Board.

Table 7. Evolution of revenues paid into by the special account for cost recovery (United States dollars)

2010 2011 2012 2013 2014 2015

184 317 631 996 779 930 1 415 289 1 910 814 2 047 086


Table 8. Evolution of voluntary contributions received by UNESCO (Thousands of United States dollars)

2010 2011 2012 2013 2014 2015

Voluntary contributions received by

UNESCO (not including Brazil)

161 926 158 333 191 255 199 034 167 011 160 082

Voluntary contributions

received by the Office in Brazil

42 167 47 262 55 382 57 804 47 201 29 855

Voluntary contributions received by

UNESCO institutes

72 323 80 999 72 733 98 936 100 141 96 236

Total voluntary contributions

276 417 286 595 319 372 355 776 314 355 286 174


(c) The FITOCA financial regulations have not been changed but a working group has been set up to review them

18. Contrary to subparagraph (i) of Recommendation No. 5 of the 2011 External Auditor’s report, the FITOCA financial regulations have not been amended to reduce the number of cases where the percentage taken from each extrabudgetary project’s budget is less than the standard 13%, with rates (programme support costs12) remaining as follows:

• standard rate: 13%;

• special accounts funded by donors: 10%;

• activities where the main activity is equipment procurement: 8%; 12 PSC.


• United Nations joint programmes, multi-donor funds-in-trust, European Union, World Bank, UNAIDS: 7%;

• minimum contribution to FITOCA of $6,500 for small extrabudgetary projects equal to or less than $50,000.

19. However, an internal working group in the Secretariat was set up in November 2012 to review the entire cost-recovery system, and the support cost percentages in particular. This group is not working with a view to reducing the number of percentages applied that are lower than the 13%, but rather is studying the possibility of applying a single lower rate and removing waivers by aligning if possible on the rates of 7% or 8% used in several United Nations agencies. This would prevent UNESCO from being disadvantaged in seeking voluntary contributions in competition with other United Nations agencies (see the section below on reform of current regulations).

(d) Maintaining exemptions to standard support cost percentages

20. Given the unchanged FITOCA financial regulations, authorised waivers to the standard programme support cost rate (provided they are approved by the Director-General on the basis of specific justifications)13 have continued to be granted. Furthermore, the European Union has set a support cost percentage of 7% for projects it funds, while the governing bodies of certain international conventions hosted by UNESCO have also set support cost rates under 13%.

21. There were nine new projects with rates below 13% in 2010, 11 in 2011, four in 2012, three in 2013, three in 2014 and two in 2015. Despite the downward trend, the number of older multi-year projects with rates below the standard means that 49.61% of extrabudgetary projects managed in 2015 ($58.4 million out of $117.7 million) have support cost rates below 13%.

(e) The proportion of FITOCA used to fund support posts at Headquarters or field offices has increased considerably

22. The total number of posts funded by FITOCA fell from 107 to 63 between 2010 and 2015 as part of the aforementioned account recovery policy. In accordance with the External Auditor’s recommendation, the share of administrative support posts increased (from 58.87% to 80.95%) in proportion with a reduction in operational posts: support posts went from 63 to 51 and operational posts reduced from 44 to 12.

23. The policy of account recovery and increased reserves is in accordance with the auditors’ recommendations and in keeping with the Secretariat’s precautionary concern about possible income reductions related to forthcoming reform to the cost-recovery system.

13 According to the Guidelines on the Cost Recovery Policy and Budgetary Aspects of Extrabudgetary Projects,

requests must “provide evidence of the need for the derogation, when possible; provide evidence to BB that the support costs which would have normally been covered via the PSC rates are budgeted as direct costs to the project; have a balanced FITOCA account before requesting a waiver (i.e. the requesting unit should have generated sufficient FITOCA revenue to cover its FITOCA posts, if any)”.


Table 9. Evolution of posts funded by FITOCA

Year Operational posts Administrative posts Total

2010

Headquarters 27 63 90

Field offices 17 0 17

Total 44 63 107

2011


Field offices 19 0 19

Total 47 66 113

2012


Field offices 0 3 3

Total 14 54 68

2013


Field offices 3 3 6

Total 25 45 70

2014


Field offices 0 2 2

Total 14 50 64

2015


Field offices 0 2 2

Total 12 51 63 Sources: External Auditor, based on data communicated by the Secretariat.

24. Other FITOCA expenditure ranged from 24% of the annual total in 2010 to 21% in 2015 (see the share of staff costs in the total in table 5). The annual FITOCA accounts and the questionnaire replies from field offices indicate that some of the costs correspond to external services (which include other kinds of staff costs such as consultant recruitment or contracting for a few months of services) (see section on allocation of FITOCA funds below).

(f) Recovery efforts for the Brazil account

25. The UNESCO Office in Brazil implements a significant portfolio of activities covering all areas in which UNESCO is active and amounting to over 100 million reais of expenditure in 2015. The activities are almost entirely funded by voluntary contributions from local partners (70% by the Brazilian Government, federal States and cities, non-governmental organizations and the private sector - particularly the Globo television channel that renewed its partnership agreement for six years in 2012). FITOCA accounts for Brazil, which are always presented separately in the FITOCA annual accounts owing to the scale of voluntary contributions funding them, have been rebalanced in recent years from a deficit of $276,000 in 2010 to a surplus of $1.25 million in 2014 and $263,000 in 2015.

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26. The scale of the recovery in dollars is masked by the depreciation of the real. In Brazilian currency, the Brazil FITOCA reserves stood at 14.87 million reais14 (BRL15) at the end of 2015 (representing 20 months of staff costs).

27. The situation in Brazil with regard to the cost-recovery policy is unique. Indeed, a Brazilian Government decree prohibits the charging of direct staff costs to the budget of projects funded by the Government’s contribution. The Office in Brazil is therefore unable to apply the standard support cost FITOCA rate of 13% (instead applying a 5% rate established by the aforementioned decree), as well as being unable to apply the special account mechanism for cost recovery to charge to State-funded projects (which are 70% of the total) the costs of working hours spent by the five staff members funded from the UNESCO regular budget for the projects concerned.

28. The Office does, however, effectively apply the cost-recovery policy to other extrabudgetary projects funded by non-governmental sources (particularly the private sector). This enables it to use extrabudgetary resources to fund about one third of the costs of posts at the Office.

29. Given the significance of the extrabudgetary projects it manages, the Office in Brazil is the only field office to benefit from Headquarters allocating it FITOCA funds even for projects having a support cost rate of below 13% : FITOCA provides it with 80% of the sums taken for the account from projects funded by the Brazilian Government.

2. Recommendation No. 6 on the streamlining and reliability of cost-recovery arrangements

30. Recommendation No. 6: “streamline procedures for the recovery of time spent by regular-programme staff on extrabudgetary projects; and (ii) build the Organization’s accounting and budgeting information system’s capacities for reliable calculation of indirect variable costs and, thus, for equally reliable statutory recovery rules and rates”.

31. In accordance with information provided by the Secretariat during the 2011 audit on the planning of voluntary contributions, the Budget for UNESCO (B4U) online tool was launched in 2013-2014 to prepare the budgets for extrabudgetary projects. It is compulsory to use this tool to gain Headquarters approval on new extrabudgetary project proposals and their budgets.

32. Five field offices (out of the 15 to have received the External Auditor’s questionnaire) would also like a computer tool to facilitate budget application in terms of cost recovery. Although B4U can be used to draw up a budget, charging direct costs from an extrabudgetary project under way (using the special account for cost recovery) involves laborious manual operations that would ideally be automated. This suggestion seems particularly relevant at a time when the Organization is reforming its information systems. It would be desirable to supplement the Organization’s financial management software (SISTER and FABS)16 so as to facilitate and automate the cost recovery operations for extrabudgetary projects under way.

Recommendation No. 1. The External Auditor recommends adapting the Organization’s financial management software (SISTER and FABS) so as to facilitate and automate cost-recovery operations for extrabudgetary projects under way.

(a) Organization of training sessions

33. To develop the skills of staff members responsible for extrabudgetary project preparation and budgets, training sessions were held by BFM and BSP in March 2015 in Beirut for the seven field offices in Arab countries; by BFM in June 2015 in Dakar for the eight field offices in French-

14 $3.865 million. 15 Brazilian real. 16 SISTER (System of Information on Strategies, Tasks and Evaluation of Results) and FABS (Finance and Budget

System).

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speaking Africa; by BFM and BSP in September 2015 in Addis Ababa for the 10 offices and an institute in English-speaking countries; and by BFM, BSP and HRM in April 2016 in Montevideo for the 11 offices in Latin America and the Caribbean.17

34. The courses attended by these participants clearly explain the rules to apply and are supplemented by practical exercises on preparing budgets for extrabudgetary projects using B4U and the implementation of such budgets in terms of cost recovery.

35. Given the fact that field offices are unfamiliar with certain cost recovery rules, as reflected in some of the replies to the External Auditor’s questionnaire - see para. 69 below), training sessions should continue to be organized.

Recommendation No. 2. The External Auditor recommends that training sessions continue to be held for those responsible for preparing and implementing the budgets for extrabudgetary projects.

(b) Controls on the preparation of budgets for extrabudgetary projects

36. Proposals for extrabudgetary projects and the corresponding project budgets drawn up by a Headquarters service or a field office must be validated by BFM (except for projects for an amount less than $250,000).

37. Reading the messages exchanged between project managers and BFM shows that the Bureau is very proactive in encouraging budget amendments that emphasize the recovery of all costs to be charged to projects (either directly or through the special account for cost recovery) in application of the rules of B4U and the choice of the appropriate support costs rate.

38. It is thanks to B4U, the training sessions and BFM’s controls that the revenues paid into the special account for cost recovery have increased so considerably.

IV. THE COST-RECOVERY RULES MUST BE REFORMED

A. Reminder of the written cost-recovery rules

39. The UNESCO cost-recovery system is governed by a few written rules on the recovery methods themselves and the support cost rates, as well as by old customary practices based on the distribution and use of FITOCA funds.

40. The cost-recovery policy is briefly mentioned in the UNESCO Administrative Manual, in which Item 2.218 refers to the Practical Guide to UNESCO's Extrabudgetary Activities19 and Item 5.920 defines direct costs, indirect variable costs and indirect fixed costs and sets out the cost-recovery principles, as follows:

41. In line with the United Nations General Assembly Triennial Comprehensive Policy Review (TCPR) principle of full cost recovery, the HLCM-endorsed cost-recovery principles specify that all costs (i.e. direct and indirect variable) incurred in the management and implementation of extrabudgetary projects should be charged to the projects themselves. These costs may be: (a) charged directly to the project, or (b) recovered by applying a programme support cost (PSC) rate.

17 Bureau of Financial Management (BFM), Bureau of Strategic Planning (BSP) and Bureau of Human Resource

Management (HRM). 18 Item 2.2 “Programme and Budget”, section 3.3 “Main programming principles and approaches”, (d) “Alignment of

extrabudgetary activities with the regular programme”. 19 Article 5, paragraph 6 of the Financial Regulations defines special accounts (which include FITOCA and the

special account for cost recovery). 20 Item 5.9 “UNESCO’s Cost Recovery Policy”.

200 EX/20.INF – page 12

42. The Practical Guide to UNESCO's Extrabudgetary Activities was published in 2012, in accordance with Recommendation No. 3 of the 2011 External Auditor’s report to "Compile a single specific document, grouping together all instructions on the preparation and execution of complementary additional programmes". The Guide simply refers back to the 2008 Guidelines on the Cost Recovery Policy and Budgetary Aspects of Extrabudgetary Projects for matters concerning calculation methods for the various costs to recover.

43. The 2008 Guidelines were written for practitioners. The document defines the general principles of the cost-recovery policy and reviews the definitions from the Administrative Manual, while emphasizing the specific list of actions to carry out to prepare a budget (Annex 1) without formalizing the customary practices in the form of clear legal rules.

44. The special account for cost recovery and its operations are therefore only mentioned in three annexes to the Guidelines (Annexes 1, 7 and 8) on Explanation of Cost Elements; Financial Regulations of the Special Account for the Recovery of Staff and Other Costs from Extrabudgetary Projects; and Financial Regulations of the Special Account for the Recovery of Security Costs from Extrabudgetary Projects, respectively.

45. Annex 1 makes a brief reference to the special account under 11.20 “Internal experts”, which states that the sums to recover for those experts must be recorded as credit for the special account (with no previous explanation of the role of the account). The other two annexes on the regulations of the special accounts offer no further clarifications on this role.

46. These drafting shortcomings have negative impacts on field offices’ understanding of recovery rules: seven replies to the External Auditor’s questionnaire to 15 offices showed a wish for clarification of the explanations provided. The questions asked by certain offices also show that some significant rules have been misunderstood: several offices wonder whether they should take into account the working hours spent on extrabudgetary projects by their staff members paid under the regular budget. One office asked whether costs other than staff costs should be recovered.

47. It would be desirable to rewrite the Guidelines on the Cost Recovery Policy by formalizing the customary practices in the form of clear legal rules and updating the document to take account of recent innovations (such as the Executive Board’s setting of a 2% recovery target for staff costs linked to extrabudgetary projects) and to incorporate rules resulting from the impending reforms. It would also be useful, for educational purposes, to provide more examples of how to apply to cost-recovery rules.

Recommendation No. 3. The External Auditor recommends that the Guidelines on the Cost Recovery Policy be rewritten, formalizing practices in force, integrating forthcoming reforms and providing more examples of how to apply the rules properly.

B. Weaknesses in the rules

48. The cost-recovery regulations may be criticized in terms of the lack of consideration for fixed indirect costs and especially the complexity and risks of the current cost-recovery system.

(1) Lack of recovery of fixed indirect costs

49. In accordance with the conclusions of the working group on support costs for extrabudgetary activities (which was set up by the United Nations High-Level Committee on Management21), the Guidelines on the Cost Recovery Policy do not provide for charging indirect fixed costs to the budget of extrabudgetary projects. The costs of senior management, statutory bodies and the buildings of Headquarters and field offices are therefore completely covered by the regular budget of UNESCO, while the property charges are covered by specific special accounts and the 21 HLCM.

200 EX/20.INF – page 13

Organization’s regular budget - with no contribution from extrabudgetary project budgets, except where a field office charges to its own budget the direct cost of rent and charges for a building rented exclusively for the needs of an extrabudgetary project). Implicitly, the policy considers that costs that cannot be traced to specific project are only marginally influenced by extrabudgetary projects.

50. This is hardly questionable when the sum of voluntary contributions is but a small proportion of the total resources of an organization. However, it becomes untenable when voluntary contributions represent almost half of an international organization’s revenue (as is the case for UNESCO).22

51. Some organizations use income from cost recovery to fund new buildings rented for additional staff recruited to manage programmes funded by voluntary contributions.23

52. It would be to UNESCO’s advantage to envisage funding some of the costs of its premises used for both regular budget requirements and extrabudgetary projects using the cost recovery system (rather than just using the regular budget and specific special accounts as per current procedures).

(2) The risks of vague rules for cost recovery

(a) The risk of improper implementation of the system due to its own complexity

53. The current system provides for two ways of withdrawing funds from the budgets of projects funded by voluntary contributions: charging direct costs to the budgets, or charging support costs that is paid into FITOCA, but there is no mention as to how the two arrangements combine or what the ceiling is for such levies.

54. In fact, the system provides for each project to recover direct costs (by charging them to its budget and using the special account for cost recovery) and to apply the programme support cost rate with no limit on the cumulative effect of the two methods. There is no exhaustive list of expenditure covered by the support cost rate (which would prevent levies for direct costs already on such a list) and there is also no rule on a ceiling for cumulative levies from direct costs and the support cost rate (which would limit cost recovery as a percentage of each project budget) to avoid donors being disadvantaged to the favour of the regular budget.

55. The regulations do, however, make a subtle reference to the accumulation issue in the particular case of support cost rates below the standard rate of 13%: the Guidelines on the Cost Recovery Policy state that the Headquarters service or field office requesting a waiver must “provide evidence to BB that the support costs which would have normally been covered via the PSC rates are budgeted as direct costs to the project”. This rule demonstrates that considerable recourse to direct costs may cover indirect variable costs that are normally covered by programme support costs.

56. In practice, what has been more typical in the management of extrabudgetary projects has been the under-recovery of direct costs, rather than an overcharging of these costs to projects (as demonstrated by the aforementioned surge of withdrawals transiting through the special account since 2010). The very complexity of the cost-recovery rules (rather than just the aforementioned shortcomings in the Guidelines) probably leads to a poor understanding of the system on the part of some field offices and only a partial application thereof. This in turn leads to a shortfallfor the Organization’s regular budget.

57. The Secretariat gives instructions to project managers on a case-by-case basis requesting them not to apply both means of levy at the same time, and controls the application of the 22 According to Note 25 on revenue in the 2015 financial statements, voluntary contributions represented 47.35% of

total OECD income in 2014 (331 554 k€ out of 742 458 k€). 23 As is the case of OECD.

200 EX/20.INF – page 14

instructions. The External Auditors has not noted any cases of overcharging.

58. However, there is still a risk of overcharging, even if no case has been noted. This fear held by Member States was demonstrated by an unverifiable case that several delegations reported to the External Auditor.24

59. As the Secretariat’s actions improve the application of recovery rules for direct costs, it is important to specify the scope of each levy method so as to avoid the risk of overcharging these costs to extrabudgetary projects. This is even more of a concern given that UNESCO is in competition with other international organizations in the quest for voluntary contributions to fund extrabudgetary projects.

(b) The risk of making UNESCO’s extrabudgetary projects less attractive than those of other international organizations

60. The reflections of the working group on support costs for extrabudgetary activities, set up in 2003 by the United Nations High-Level Committee on Management (HLCM), were intended to harmonize the programme support cost rates of all United Nations agencies. The 13% rate adopted by UNESCO was in accordance with the proposals of the group (which was chaired by the Director of UNESCO’s Bureau of the Budget).

61. In practice, however, the rates applied by many international organizations are around 7% or 8%:25 the 7% rate is given in the Guidelines on the Cost Recovery Policy for United Nations joint programmes, multi-donor funds-in-trust, the European Union (which funds several of UNESCO’s extrabudgetary programmes), World Bank and UNAIDS. One of the field offices questioned by the External Auditor complained about competition from UNOPS, IOM and OEI. Certain United Nations agencies (UNFPA, UNDP, UNICEF and UN Women),26 which also applied a 7% rate, agreed to increase it to 8% in 2013.

62. Four of the field offices contacted by the External Auditors would like to see the adoption of rates similar to those of the above-mentioned international organizations, or even ad hoc percentages negotiated with donors, so that UNESCO is not disadvantaged by competition with other organizations in its quest for voluntary contributions.

63. This is why the working group set up in late 2012 to review the entire cost-recovery system is studying the possibility of aligning the support cost rate on the 8% rate applied by some other international organizations. This approach is in part legitimized by the risk of overcharging indirect variable costs.

C. Possible reform of regulations

64. To streamline the system, eliminate the risk of overcharging and improve UNESCO’s position in relation to other agencies competing for voluntary contributions, there seem to be several possible reform options.

65. One option, which it appears necessary to implement in any event, would be to specify the categories of costs recovered by current support cost rates (13%, 10%, 8%, 7% and 5% for Brazil) and only use the charging of direct costs for other cost categories. In other words, certain cost categories would be recovered by FITOCA while other cost 24 In 2005, the UNESCO Secretariat is said to have suggested charging services provided to the Convention on the

Protection and Promotion of the Diversity of Cultural Expressions under the principle of direct cost recovery, even though those services were already provided by the Convention’s secretariat. Following negotiations, the overcharging seems to have been avoided.

25 See the list of organizations in Annex 2. 26 United Nations Office for Project Services (UNOPS), International Organization for Migration (IOM), Organization

of Ibero-American States (OEI), United Nations Population Fund (UNFPA), United Nations Development Programme (UNDP), United Nations Children’s Fund (UNICEF) and the United Nations Entity for Gender Equality and the Empowerment of Women (UN Women).

200 EX/20.INF – page 15

categories would be directly charged to the project budget.

66. Prior to such reform and in the interests of all other possible reforms, it would be useful to identify all cost categories, update the calculation of the amounts they represent for various types of extrabudgetary project of differing size and complexity (as project management is less costly if there is a single donor and economies of scale are possible when managing high-value projects) and grouping together these categories of expenditure by support cost rate (with a support cost rate of 13% covering more categories than a 5% rate).

67. A second option would be to use only a standard programme support cost rate for cost recovery (through FITOCA) and do away with the direct cost recovery system. This would be simple and low cost, as it would avoid the current complex calculation of direct costs by extrabudgetary project managers, the cost of BFM checking such calculations and the costs of training in cost recovery.

68. However, this method would probably involve applying a support cost rate of over 13%, which would place UNESCO at a disadvantage compared to its rivals.

69. A third option would be to recover the maximum level of costs as direct costs and to adopt an extremely low programme support cost (such as 3%) so that UNESCO is at much less of a disadvantage in relation to its competitors. However, the Secretariat does not consider such reform to be feasible as the working group on support costs for extrabudgetary activities, set up by the United Nations High-Level Committee on Management (HLCM), is strongly in favour of harmonizing the rates of the various agencies.

70. A fourth option put forward by two field offices in their replies to the External Auditor’s questionnaire would be to enable extrabudgetary project managers to negotiate an ad hoc support cost rate with the donor(s): the rate would be based on their estimate of direct costs that could not be charged to each project’s budget for whatever reason. All cost categories not included in this support cost rate would be charged to the project as direct costs.

71. While this solution appears very sensible, it requires a very high level of training of those in charge of project budgets, as well as intensified BFM controls on the preparation and implementation of extrabudgetary project budgets. The Secretariat is not in favour of this option, as it would run the risk of creating competition among field offices for donors and would make UNESCO’s cooperation policy fragmented and incoherent.

72. The fifth option, which is the direction currently preferred by the working group, would be to align the support cost rate for FITOCA on the rate envisaged by the abovementioned group of international organizations (8 %), prohibit waivers from the rate and recover the maximum level of direct costs (as today). To avoid the risk of overcharging, this arrangement studied by the working group would have to be accompanied by the aforementioned reform (to identify cost categories covered by the support cost rate for FITOCA and to reserve direct cost recovery for other cost categories).

73. The Secretariat is concerned that the reform being considered by the working group will result in a shortfall for the Organization of between $1.4 million and $3.3 million in relation to the budgets of extrabudgetary projects under way. 27 This risk explains the Secretariat’s aforementioned wish to maintain a high level of FITOCA reserves.

74. The risk must not be exaggerated for two reasons:

• Training sessions held to date have increased the skills of staff members and have rapidly increased the sums recovered by the special account (which have risen tenfold since

27 See document 197 EX/5, Follow-up to decisions and resolutions adopted by the Executive Board and General

Conference at their previous sessions. Part IV.B of 26 August 2015 on management issues (para. 49).

200 EX/20.INF – page 16

2010).

• The system favoured by the working group (adoption of an 8% support cost rate) is closer to the status quo that it may appear, as almost half of extrabudgetary projects already have a rate of less than 13% applied to them.

75. In any event, the External Auditor considers that the first step is to recalculate the amount of costs of all categories in different types of extrabudgetary project (of varying size and complexity) and to recalculate the relevant level of support cost rates: what rate should be adopted to cover all indirect variable costs for different types of extrabudgetary project of varying size and complexity? Which categories of indirect variable costs might be included in a support cost rate of 8%?

76. The risk of overcharging should not be overestimated either (although there is always some risk). On only one occasion did the risk materialize, (as far back as 2005, and it was noticed as part of the audit.

77. Once the work has been done, the Organization will have the data it needs to adopt one of the suggested options for reforms (with the latter two seeming the most realistic).

78. Reform must be decided upon and implemented quickly so as to put a stop to the lasting accumulation of unproductive reserves that amount to much more than 18 months of staff costs: once the reform is implemented, at least one year of execution will be required to establish whether there is a loss of income (as currently feared) and to reflect that in the rate of FITOCA expenditure to adopt in the future.

Recommendation No. 4. The External Auditor recommends: (i) updating the amount of extrabudgetary project management costs to be recovered, according to the project size and complexity; (ii) based on the results of the update, proposing a reform of the cost-recovery method to improve UNESCO’s position in relation to organizations competing with it for voluntary contributions, thanks to a reduced support cost rate, while avoiding the risk of overcharging projects by making a clear distinction between indirect variable costs recovered by the support cost rate and FITOCA, on the one hand, and direct costs recovered by charging to project budgets or through the special account for cost recovery on the other; (iii) quickly implementing the reform to avoid accumulating unproductive FITOCA reserves.

79. The procedures for calculating costs are complex. This means that they may waste time and therefore management costs. Using simplified set rates28 is an option worth studying to streamline management.

Recommendation No. 5. The External Auditor recommends a two-year trial to base the calculation of costs recovered by charging project budgets or through the special account for cost recovery on simplified set rates.

28 For instance, there could be three rates for a legal consultation depending on whether it was considered, simple,

intermediate or complex.

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V. THE DISTRIBUTION OF FITOCA FUNDS SHOULD BE REVIEWED

A. Practices for the distribution of funds and posts financed by FITOCA

80. The Guidelines on the Cost Recovery Policy only deal with the distribution of amounts collected under the policy in terms of the special account for cost recovery, stating that recovered sums are allocated to the Headquarters services or field offices that committed expenditure for each extrabudgetary project using regular budget funds. Those services and offices are duly mentioned on the Certificates of Time Spent and Requests for Journal Voucher Creation: the system is designed so that each service or field office is reimbursed for expenditure incurred, with no risk of allocation or challenge error. The External Auditor did not hear any criticism in this regard.

81. In contrast, there is no written rule on the distribution of FITOCA funds, and the Secretariat follows the old customary practices: each year Headquarters consolidates the funds collected from the various extrabudgetary projects and the interest from the resulting short-term investment of those funds, and distributes this sum29 the following year (at a rate of 40%30 of funds generated by field offices the previous year based on the programme support cost rate returned to them, and the rest going to Headquarters – which also receives all funds generated by field offices for projects with a support cost rate below 13%).

82. Each year, the funds for Headquarters are allocated to pay a certain number of named staff members. The 2011 External Auditor’s report recommended allocating these funds to administrative support posts, in accordance with the mission of FITOCA.31

83. As stated in the 2011 External Auditor’s report, the proportion distributed to field offices is used by them to fund activities in support of their extrabudgetary projects under way or to manage new extrabudgetary projects. In cases where a field office has staff members financed by FITOCA funds, it must generate enough revenue through levies in the form of support costs to cover the cost of the staff members. If the total funds withdrawn are insufficient to cover these staff costs, the 40% share distributed to the office will be reduced or even cancelled as a result. Any remaining funds cannot be carried over from one financial year to the next. Unless the Director-General decides otherwise, no field office can receive in year N+1 over 40% of the funds it collected in year N.

84. Each year, the overall distribution of funds between Headquarters and field offices, the distribution of posts between Headquarters offices (and the promotion of some of the posts concerned) and the distribution of funds among various field offices are the subject of a proposal from the Chief Financial Officer, which the Deputy Director-General then submits to the Director-General for approval.

85. There are several comments to be made on this process: the overall distribution of funds between Headquarters and field offices and the distribution of posts among Headquarters offices are purely customary; the use of FITOCA funds by field offices is not always in keeping with the purposes of the cost-recovery policy; the ban on carrying over funds from one year to the next and the non-allocation of FITOCA funds to projects with waiver rates warrant review; field offices sometimes misunderstand the calculation of FITOCA sums allocated to them each year.

29 After payment of any miscellaneous expenses from FITOCA such as external audit costs, or Bureau of Human

Resource Management missions linked to the cost-recovery policy. 30 Headquarters does not really consider this percentage as a rule, but it is a rule of thumb used by the field offices

surveyed. 31 In fact, operational posts for extrabudgetary projects are usually covered by the project budgets under the

chargeback of direct costs. FITOCA funds should mainly be used to pay administrative support posts that are more difficult to trace to each extrabudgetary project (and covering them as direct costs is also more difficult).

200 EX/20.INF – page 18

B. The necessary updating of practices used to distribute funds and posts (1) The distribution of funds between Headquarters and field offices should be

updated

86. Six out of the 15 field offices surveyed by the External Auditor request that the current overall distribution of funds be changed in their favour. This matter is also on the agenda of the working group on reforming cost-recovery policy.

87. Without a prior technical study, it is impossible to say whether the distribution needs to be changed:32 the first step is to assess the time spent by Headquarters offices and field offices on managing voluntary contributions and extrabudgetary projects before establishing how the number of working hours is spread between Headquarters and field offices. The current distribution of FITOCA funds should only be amended if it does not reflect the spread of working hours.

(2) The distribution of posts among Headquarters offices should be updated

88. The same reasoning applies to the distribution of FITOCA-funded posts among Headquarters offices: the time that each one spends on managing voluntary contribution and extrabudgetary projects needs to be calculated before changing the distribution (if appropriate).

Table 10. Distribution of FITOCA-funded posts at Headquarters

Headquarters offices33 2010 2011 2012 2013 2014 2015

ODG34 4 8 6 5 3 3 IOS 2 2 2 2 2 2

Part I 6 10 8 7 5 5 ED 7 6 1 4 3 2 SC 4 4 2 2 2 2

SHS 4 4 1 1 1 1 CLT 21 23 10 6 5 4 CI 5 6 2 3 1 1

BFC 4 5 4 1 2 AFR 1 1 1 1 BSP 23 22 20 20 19 21 ERI 5 5 2 1 1 1 FEL 2 2 1 1 1 2

ODG Gender 0 0 1 1 Part II 76 78 44 40 36 35 HRM 3 3 3 2 2 2 BFM 13 13 12 13 13 13 MSS 9 9 8 8 8 8

Part III 25 25 23 23 23 23 Total number

of posts 107 113 75 70 64 63

Sources: External Auditor, based on data communicated by the Secretariat. 32 If the forthcoming reform continues to distribute FITOCA funds between Headquarters and field offices. If the

reform results in FITOCA funds being reserved at Headquarters after a reduction of the support cost rate to 8% (based on an option mentioned during the survey), field offices would have to receive the funds they need to cover their expenditure incurred on extrabudgetary projects using funds that they now receive through FITOCA thanks to increased use of the direct charging of expenditure to the budgets of extrabudgetary projects. For instance, they should charge to those budgets the costs of FITOCA-funded staff employed locally.

33 Office of the Director-General (ODG), Internal Oversight Service (IOS), Education Sector (ED), Natural Sciences Sector (SC), Social and Human Sciences Sector (SHS), Culture Sector (CLT), Communication and Information Sector (CI), Bureau of Strategic Planning (BSP), Sector for External Relations and Public Information (ERI), field offices (FEL), Bureau of Human Resources Management (HRM), Bureau of Financial Management (BFM), Africa Department (AFR), Bureau for the Management of Support Services (MSS).

34 Three staff members from ODG were paid from FITOCA in 2015. They are responsible for overseeing extrabudgetary projects in various ways (collection policy for voluntary contributions, coordination of follow-up policy for donors, coordination of agreements concluded with donors). One such post was abolished in 2016. Furthermore, the member of ODG who was assigned to coordination of gender equality policies was transferred to another post in 2016.

200 EX/20.INF – page 19

Recommendation No. 6. The External Auditor recommends: (i) updating the distribution of FITOCA funds between Headquarters and field offices based on the results of a study into the work time that various offices actually spend on managing voluntary contributions and extrabudgetary funds, and (ii) updating the distribution of FITOCA-funded posts at Headquarters among the various offices at Headquarters based on the results of a study similar to the one in the first part of the recommendation.

(3) The use of FITOCA funds by field offices must comply with the principles of the cost-recovery policy

89. Field offices currently allocate FITOCA funds to pay for local administrative support posts (like Brazil, mentioned above, which finances a third of staff members paid by the regular budget with FITOCA funds) or for other types of expenditure from extrabudgetary projects they fund. They freely allocate FITOCA funds to all their extrabudgetary projects, regardless of whether they are old or new or whether they have given rise to a levy of expenditure to the benefit of FITOCA.

90. The field offices’ replies to the External Auditor’s questionnaire show that the funds are mainly used to finance the costs of temporary operational staff assigned to extrabudgetary projects (in the form of temporary contracts or consultant contracts) and to a lesser extent to finance costs relating to missions, training, equipment (IT), building andvehicle maintenance, seeking donors and so forth. Audits of field offices show that FITOCA funds are sometimes used to cover temporary cash-flow deficits for extrabudgetary projects.

91. Some of these allocations do not comply with the general principles of the cost-recovery policy that aims to reimburse35 expenditure advanced by the regular budget for extrabudgetary projects. When FITOCA funds from extrabudgetary project budgets are used to fund temporary staff members working exclusively on those or other extrabudgetary projects managed by the field office, that purpose is neglected: one hand is withdrawing money from the budget of a project funded by a donor, while the other hand is returning the money or giving the money to a project financed by another donor.

92. It is therefore advisable for the Guidelines on the Cost Recovery Policy (which, moreover, the External Auditor considers should be rewritten)36 to specify that FITOCA funds should only be used to reimburse the expenditure of field offices funded by the regular budget for extrabudgetary projects, unless an exception is authorized by Headquarters: reimbursement of the costs of staff paid by Headquarters who sometimes work on extrabudgetary projects, and reimbursement of equipment expenses and maintenance of buildings andvehicles when they are used for both regular budget programmes and extrabudgetary projects in each office.

Recommendation No. 7. The External Auditor recommends reserving the use of FITOCA by field offices, save exceptions authorized by Headquarters, for the reimbursement of expenditure paid from the regular budget for extrabudgetary projects, in accordance with the purpose of the cost-recovery policy.

35 When an administrative support staff member is paid by FITOCA, the cost of his/her salary is not reimbursed to

the regular budget but rather is directly covered by FITOCA. The staff member works alongside colleagues paid from the regular budget. This operation differs from a reimbursement in legal and accounting terms but the purpose remains the same: to bolster the means allocated to the regular programme of UNESCO by a levy from the budgets of extrabudgetary projects.

36 See Recommendation No. 3 above.

200 EX/20.INF – page 20

(4) More flexibility regarding the practice of not carrying over FITOCA funds

93. Some field offices criticize the inability to carry over unused FITOCA funds from one year to the next. This request is paradoxical, as some field offices37 end the year with significant unused sums in extrabudgetary funds (from their extrabudgetary project budgets, regardless of whether they come from FITOCA credits).

94. The issue is, however, relevant for field offices that have used up all their extrabudgetary funds.

95. The suggestion is to make the customary practice of not carrying over FITOCA funds more flexible for field offices with an expenditure rate for extrabudgetary funds of almost 100%.

Recommendation No. 8. The External Auditor recommends authorizing FITOCA funds to be carried over from one year to the next by field offices for extrabudgetary projects with annual expenditure rates of almost 100%.

(5) Non-allocation of FITOCA funds to field offices managing projects with support cost waiver rates should become moot as part of the upcoming reform

96. Some field offices request FITOCA funds even for extrabudgetary projects with waiver rates. At present, only the Brazil Office, with its special and unique situation, currently receives such funds even for projects at lower rates.38

97. This request will become moot if UNESCO reforms the support cost rates by prohibiting waivers, in accordance with the current approach of the working group studying reform of the cost-recovery system. The priority appears to be to adopt the reform quickly.

(6) Each year, field offices should be informed of the method for calculating the allocation of FITOCA funds

98. Some field offices report not understanding how the allocated amount of FITOCA funds is calculated each year. The suggestion is for the Secretariat to provide all field offices with a detailed explanation, for instance when the balance of FITOCA funds is paid usually in April, following an advance granted in January).

Recommendation No. 9. The External Auditor recommends providing field offices, each year, with a detailed written explanation of the calculation of the annual allocation of the FITOCA funds they receive.

37 Four of the field offices surveyed by the External Auditor used up less than 60% of their extrabudgetary funds. 38 See paras 46 to 50 above.

200 EX/20.INF – page 21

VI. INFORMATION FOR MEMBER STATES SHOULD BE IMPROVED

99. Some delegations would like more information on the cost-recovery policy. The policy is the subject of regular reports, such as the previously mentioned document 197 EX/5 (Follow-up to decisions and resolutions adopted by the Executive Board and General Conference at their previous sessions) and there is a reference to FITOCA funds in the Organization’s annual budgets.

100. The suggestion is to supplement the information given to Member States by providing them each year with information on the distribution of FITOCA funds between Headquarters and the various field offices, the distribution of FITOCA-funded posts among Headquarters offices and the amounts collected by the special account for cost recovery.

Recommendation No. 10. The External Auditor recommends that, each year, Member States should be provided with information on the distribution of FITOCA funds between Headquarters and the various field offices, the distribution of FITOCA-funded posts among Headquarters offices and the income collected by the special account for cost recovery.

VII. CONCLUSION

101. As the External Auditor has noted in other international organizations, the current cost-recovery system is highly complex and involves many management and control operations. It might therefore be useful to streamline the system and reduce its costs. The ideal solution would be for all United Nations agencies to adopt a common, standardized cost-recovery system. In the absence of such a common system, it would be preferable to adopt quickly any reforms inspired by those recommended by the working group set up by the Secretariat to reform the UNESCO system. The External Auditor has noted that the current approach of the working group corresponds to the fifth and preferred reform option.

VIII. ACKNOWLEDGMENTS

102. The External Auditor extends sincerest thanks to the Director and staff members of the Bureau of Financial Management (BFM) for their cooperation and the accuracy of the information provided.

End of audit findings.

200 EX/20.INF – page 23

ANNEX 1 : Example of a spreadsheet from the ‘Budget for UNESCO’ (B4U) application

Budget proposal information

Budget proposal N°

Title

PSC Rate 13%

Officers Responsible: Deputy: Assistant:

A.O.

Note

Simulation N°1

Duration 1 year

Location

Currency USD - United States Dollar

Description

FABS code

Date of draft

Detail of calculated data

Sub Cost Description Year Act.

(-) 11 - Professional Staff (PA) 1 1

8,00 x (P-3)=150 000

(-) 11 - Internal UNESCO Staff time (P) 1 1

10,00 x (D-1)=9 690


10,00 x (P-4)=7 580


60,00 x (P-3)=37 380

(-) 13 - Internal UNESCO Staff time (G) 1 1

20,24 x (L-7)=3 846

(-) DSA 1 1

70,00 x Iraq (Iraq Elsewhere)=20 300

Category of expenses Year 1

Act

1

10 - Personnel costs, consultants and missions 395 111

International & National Staff 208 496

11 - Professional Staff (PA) 150 000

11 - Other International Professional -

11 - Internal UNESCO Staff time (P) 9 690

7 580

200 EX/20.INF – page 24

37 380

13 - General Services Staff (PA) -

13 - Other Admin and Technical support staff -

13 - Internal UNESCO Staff time (G) 3 846

Temporary Staff 142 661

11 - Temporary Assistance at Professional Level -

13 - Temporary Assistance at General Service Level -

13 - Service Contracts (SC) 142 661

Other Personnel Costs -

10' - Staff Mission Costs 30 954

Tickets (Air, train...) 10 654

DSA 20 300

Others (Terminal Fare, Visa fees...) -

11 - Consultants 13 000

Consultant fees - International -

Consultant fees - National 10 000

Consultant Travel 3 000

National Professionals -

Delegates & External Individuals Missions -

11 - Other Contracts -

20 - Contracted Services 1 175 959

Contracted Research -

Contracted Research -

Evaluation -

Contracted seminars and meetings -

Contracted document production -

Other contracted services 1 175 959

Subcontracts 768 000

Implementation Partners Agreements (IPAs) 385 000

Security costs 22 959

Audit -

200 EX/20.INF – page 25

30 - External Training and Grants 47 355

Grants and Fellowships -

External Training and Seminars 47 355

40 - Equipment and Maintenance 111 987

Equipment 104 187

Leases 2 000

Maintenance & Repairs 5 800

50 - Other Expenses 39 500

Financial Contributions 14 500

Publications -

UN Joint activities (security costs) 14 500

Conferences & Meetings -

Programme activities -

Communications 7 800

Utilities 4 600

Other supplies 11 800

Finance Costs 800

SubTotal - direct costs 1 769 912

80 - Support costs 230 089

TOTAL 2 000 000

UNESCO's Contribution -

Regular Programme staff resources -

Office running costs -

Other project costs -

200 EX/20.INF – page 27

ANNEX 2

List of international organizations with a support cost rate of 7% or 8%

International Organizations Support cost rate

United Nations Office for Project Services (UNOPS) Less than 7%

International Organization for Migration (IOM) Less than 7%

Organization of Ibero-American States for Education, Science and Culture (OEI) Less than 7%

United Nations Joint Programmes 7%

Multi-Donor Trust Funds 7%

European Union 7%

World Bank 7%

Joint United Nations Programme on HIV/AIDS (UNAIDS) 7%

Food and Agriculture Organization of the United Nations (FAO) 7%

International Fund for Agricultural Development (IFAD) 7%

United Nations Population Fund (UNFPA) 8%

United Nations Development Programme (UNDP) 8%

United Nations Children's Fund (UNICEF) 8%

UN-Women 8%

Organisation for Economic Co-operation and Development (OECD) Between 8% and 9%

Sources: External Auditor, based on documents provided by the Secretariat.

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