The Harmonization of the Extra-Budgetary Projects’ Documents

Financial resources of UN system organziations can be categorized in two broad classes:

the budgetary resources (also called core or ordinary resources), approved by the UN General Assemblies and the extra-budgetary resources, which donors voluntarily concede to organizations for specific projects consistent with their mandate:

− Between biennium 1996-1997 and biennium 2004-2005 the extra-budgetary resources incremented on average by 21%, while the budgetary resources only by 9%;

− In relative terms, the percentage of “core” resources lowered from 48% resources in 1996 to 32% in 2003, while the “other” resources, including the extra-budgetary ones and the peacekeeping operations increased correspondingly from 52% to 68%

(figure 2.1).

Figure 2.1 Shift in the Relative Percentage of “Core” and “Other” Economic Resources within the UN System. Source: UN Chief Executive Board for Coordination Website

This dynamic undoubtely represents a shift from the multilateral system of cooperation and development, where the community of states decides upon strategies and allocation of

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 %

1996 1997 1998 1999 2000 2001 2002 2003

Core Others

resources, to a bilateral model which directly involves the single donors and the implementing agencies.

In this context, in the past years donors and member states have often denounced the lack of transparency and consistency in these practices and policies, encouraged donors to look for what appeared to be the “best conditions in the market” to implement projects they want to fund. In this direction, often organizations played to lower che charges for indirect support costs, to make the organizations looking more efficient to donors. In the perspective of some organizations, this situation created an unfair competition on voluntary resources, not based on distinctive competencies of the organizations but on the ability and flexibility to maneuvre their accounts, leading to a growing financial unsustainability. In fact, the rationale behind the recovery of a percentage of support and administrative costs through a percentage of the extrabudgetary project revenues lies on the fact that the central and regional services an organization often work to support the realization of extra-budgetary projects; the shift towards voluntary resources and the competition to lower the “project support cost recovery charges” (PSC rates) creates a pressure on the administrative and support costs financed by ordinary resources threatening the capacity of the organizations to realize the ordinary/core programmes.

Consequently, growing attention has been given by the coordination bodies to the homogenization of the budget proposals structure for voluntarily funded activities (the so-called “extra-budgetary activities”) and to the harmonization of UN system organizations’

policies on cost recovery for these activities.

In 2002, the Joint Inspection Unit report on “Support Costs related to Extra Budgetary Activities in Organizations of the United Nations System” reviewed policies and practices in this area. The report raised a number of issues, among which the multiplicity of budget structures and PSC rates among the UN organizations and the lack of harmonization of the principles upon which these rates are based-.

In response to the pressure placed on UN system organizations, various HLCM and UN Development Group (UNDG) working groups were activated between 2003 and 2007. A first result of this work has been the agreement on a broad level cost categorization and a set of cost recovery principles: direct costs, indirect variable costs and indirect fixed costs¹¹. Organizations agreed on the principle that direct costs are recoverable and should

11 Three main cost categories were identified (CEB/2004/HLCM/8:

be charged directly to the projects; fixed indirect costs should be financed by regular/core resources (except for the organizations that do not have core resources); variable indirect costs should be totally recovered from extra-budgetary projects in one way or another, as a percentage rate or even as a cost component of the project direct costs (CEB/2005/HLCM/R.22).

In 2005, the UNDG management group agreed on a common support cost recovery rate (PSC) of 13%, with the possibility for certain projects to lower that at 7%, obtaining the consensus of the Excom agencies on Multi-Donors Trust Funds initiative but failing so far to align the organizations to that rate as a general behaviour.

There are two main lackages in the state of the art of this reform at 2007: on one side the agreed PSC rate policy has been originally decided and shared just among the organizations belonging to the UNDG, on the other side, they were based on a broad cost categorization without a common understanding on what type of costs belonged to what category. This made impossible both a common and shared identification of the costs behind the PSC rates and an homogeneous structure of the budget proposals for extra-budgetary activities.

A new working group has been created in 2007 with the mandate to further explore the cost classification practices of the UN organizations, to discuss the main differences and homogenization issues and to produce ad hoc guidelines. In particular:

− Guidelines on cost classification and cost accounting methodologies related to PSC calculation - drawing from the analysis of the state of the art and the existing differences between organizations the working group could try to find a convergence on practices related to classification of costs as direct costs or indirect

- Direct Costs are incurred for and can be traced in full to an organization’s activities, projects and programmes in fulfilment of its mandate. Included are costs of project personnel, equipment, project premises, travel and any other input necessary to achieve the results and objectives set out in programmes and projects.

- Fixed Indirect Costs are incurred by the organization, regardless of the scope and level of its activities, which cannot be traced unequivocally to specific activities, projects or programmes. These costs typically include the top management of an organization, its corporate costs and statutory bodies not related to service provision.

- Variable Indirect Costs, usually referred to as Programme Support Costs, are incurred by the organization as a function and in support of its activities, projects and programmes, and cannot be traced unequivocally to specific activities, project or programmes. These costs typically include service and administrative units, as well as their related system and operating costs.

variable costs and should try to identify a common approach to calculate the PSC rates starting from the quantification of IVC and DC;

− Guidelines on extra-budgetary activities budget structure, to ensure an overall consistency between the organizations on the categories of costs considered as direct costs of the XB activity and the categories considered as “lumped in” the PSC rate – of course this is a sensible issue and we could aspire to have a list of costs by nature classified as “direct” and a list of them classified as “indirect” and a list of conditions to consider as “direct” or “Indirect” the most controversial ones (cfr.

Results of table 2a).