New OAS Indirect Cost Recovery (ICR) Policy GENERAL SECRETARIAT OF THE ORGANIZATION OF AMERICAN STATES 12/01/2006.

New OAS Indirect Cost Recovery (ICR) Policy

GENERAL SECRETARIAT OF THE ORGANIZATION OF AMERICAN STATES

12/01/2006

- New OAS Indirect Cost Recovery (ICR) Policy p. 2 -

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Mandate: 2007 Budget Resolution

“III. GENERAL PROVISIONS

7. Recovery of Indirect costsTo instruct the Secretary General to analyze the cost recovery policy for technical supervision and administrative support of all funds administered by the General Secretariat, taking into account the Inspector’s General’s audit on overhead charges, and present a report to the PC prior to September 30, 2006, for consideration, that proposes amendments to the General Standards as required, so as to reflect a new cost recovery policy that is coherent, consistent and reasonable.”


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The Function of the OAS Secretariat

The OAS Secretariat translates the mandates of the governing bodies into services, initiatives, programs and projects.

These activities are funded by either Regular or Specific funds.

Well executed programs and the trust of our Member States and the international community are essential elements to sustain and increase support for the mission of the OAS, as well as to meet the Organization’s financing needs.


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Why does the OAS need Specific Funds?

Regular funds have decreased in real terms.

Mandates from Member States have increased.

Specific Funds have been identified by the Budget Resolution as necessary to complement the Regular Fund budget.

The cost of overseeing Specific Funds generate costs that are not contemplated fully in the Regular Fund Budget, and which must somehow be covered.


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Why does the OAS need a new Indirect Cost Recovery (ICR) Policy?

The OAS is financed with multiple funding sources, requiring efficiency, effective record-keeping and a transparent environment that will earn the confidence of our donors and staff.

A sound indirect cost-recovery policy ensures transparency and reduces “cross-subsidization” among projects and Funds.

A principal criteria in establishing an indirect cost recovery policy is the proportional sharing of all indirect costs among all projects and funds.


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DIRECT COSTS: Costs that can be attributed to a particular activity with a high degree of accuracy.

INDIRECT COSTS: Costs that are incurred for a common purpose which cannot be easily attributed to a particular activity.

What is an Indirect Cost?


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Examples of indirect costs include: Staffing of administrative functions of the Secretariat Procurement of goods and services Setup and management of accounts Recording and processing of transactions Financial reporting Internal and external audit coordination Legal and financial review of agreements Planning, monitoring, review and evaluation Resource mobilization Facilities and utilities General use office equipment and supplies

What is an Indirect Cost? (cont.)


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Most donors recognize the need to provide indirect cost recovery to recipients.

In fact, when acting as a donor, OAS recognizes that need and provides, in some cases, up to 30% for indirect costs.

What is an Indirect Cost? (cont.)


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Immediate Context The Secretariat has a mandate from the General Assembly.

The 2007 Budget Resolution requires an additional indirect cost contribution to the Regular Fund Budget, from $0.7 million in 2006 to $2.5 million in 2007.

To increase its limited capacity to administer Specific Funds, the Secretariat is: revising its current ICR policy; requesting CAAP to approve relevant modifications to General

Standards supporting the revised ICR policy; and, simultaneously, improving its administrative procedures.

This presentation addresses the implementation of a revised ICR policy.


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Background

Evolution of Funds 1994 - 2005(in millions of US$)

$72.9

$84.0 $84.3 $88.0$80.0 $78.0 $76.0 $76.0 $76.6 $76.6

$28.5

$15.9 $18.0$25.4

$33.3$42.6

$47.6 $47.7

$74.7$68.0

$76.0$78.0

$111.8

$47.3

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Regular Fund Approved Budget Specific Fund Contributions

678 employees 605

employees


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Background (cont.)

TOTAL % representing Specific Funds

▪ Purchase orders 14,880 8,390 23,270

▪Administrative and financial requests (tickets)

7,200 830 8,030

▪ Contracts 2,850 400 3,250

▪ Financial reports 500 40 540

▪Legal and financial review of agreements

170 160 330

(estimated 2005 volume)

Examples of Workload Distribution Among Specific and all other Funds:

SPECIFIC FUNDS

ALL OTHER FUNDS

90%

64%

88%

93%

52%

100%


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Current ICR policy


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Current ICR policy

General Standards require Specific fund contributions to include a provision for ICR, with the exception of emergency, humanitarian and contributions under US$100,000.

General Standards grant authority to the Secretariat to negotiate the ICR rate.

Interest income accrued on Specific Fund contributions is credited towards defraying indirect costs, unless otherwise specified in the agreement.


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Current ICR policy (cont.)

ICR rate for central administrative support is 2%, while any ICR above the 2% is retained by the areas for technical support and supervision.

Some donors do not include a provision to cover indirect costs, while others provide up to 30%.

Some donors have required that ICR be directed exclusively to technical areas managing the projects and do not take into consideration the impact of these projects on the other areas of the Secretariat.


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Calculation of Direct and Indirect Costs


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$150 million83%

$31 million17%

Secretariat’s financial transactions in 2005: $181 million

Excluded costs:

• Trust Funds (Medical, Rowe)• Tax Equalization Fund• Building renovations (related to

Res. 831)• Grants to affiliated institutions

(PADF, IADB, Court IACHR)• Parking Fund• Others

Excluded

Eligible

Excluded: Activities of a unique nature which do not form part of the pool of activities analyzed to determine Secretariat’s indirect costs.

Eligible: Normal functions of the Secretariat which generate indirect costs.


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Eligible costs for 2005: analysis of direct and indirect costs:

AREA BY CHAPTER DIRECT INDIRECT TOTALSecretary General 2.9 6.1 9.0 Mulltidimensional Security 12.6 2.1 14.7 Autonomous and/or Decentralized Entities 14.9 2.0 16.9 Political Affairs 27.9 3.6 31.5 Integral Development 25.7 7.1 32.8 Assistant Secretary General 11.0 10.2 21.2 International Legal Affairs 2.0 0.8 2.8 Administration and Finance - 10.8 10.8 Basic Infrastructure and Common Costs - 10.3 10.3 Grand Total 97.0 53.0 150.0

64.7% 35.3% 100%

US$ millions

In 2005, The Secretariat required an additional $0.53 in support costs for every $0.97 managed. Therefore, the indirect cost rate was 54.6% ($0.53 / $0.97).


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Fundamentals of indirect costs

It is not uncommon to have a large indirect cost rate (universities managing grants usually have rates of over 50%).

Full recovery of indirect costs cannot be expected, but a reasonable recovery should be attained.

A number of costs at the Secretariat are currently charged as indirect, when they should be included in the budgets as direct.

As costs are better classified, the ICR rate should decrease accordingly.


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Considerations in establishing an OAS

ICR policy


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Donors’ caps on ICR

Donors have varied caps on ICR:

U.S. Federal grants limit recovery for indirect costs to 26%, though in few cases USAID has allowed 33%. Some U.S. funding sources allow ICR through interest income on U.S. fund deposits.

CIDA’s (Canada) policy provides a fixed overhead rate of 12%, though in most cases the Secretariat has recovered 2%.

AECI (Spain) has allowed ICR through interest income (which is variable), though its policy allows for 7% ICR.

SIDA (Sweden) has placed an ICR cap on the Secretariat of 3.5%.


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What similar organizations do …

ICR rates in similar organizations range from 4.5 to 21%:

UN System 13% PAHO 6 – 21% PADF 16% EU 7 – 20% UNDP 5 – 7% IICA 4.5% and over

However, these organizations have done a better job of classifying direct and indirect costs more precisely.


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There are at least three different types of OAS/donor activities:

A. Partnership: mutual cooperation agreements requiring significant Secretariat’s technical involvement. Secretariat is responsible for outcome. (e.g. MAPP, Demining, CIM-women/children Trafficking).

B. Executing Agency: mutual cooperation agreements requiring minimal Secretariat’s technical involvement. Secretariat is responsible for outcome. (e.g. Guarani Acquifer System, Panama – SENACYT).

C. Flow-through: funds channeled through the Secretariat for which the Secretariat’s responsibility is limited to its administration and financial management. Secretariat is not responsible for the outcome. (e.g. Mexico conference).


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ICR base for 2006

An estimated $27.1 million in contributions will be subject to ICR in 2006, even though $58 million in Specific Fund contributions are expected.

$30.9 million are estimated to be excluded from the ICR policy:

unprogrammed contributions (includes FEMCIDI) $ 10.5 M

non-contributing donors 8.8 programs approved before current ICR policy 4.7 contributions under $100,000 4.5 conferences and meetings co-financed by RF 1.3 contributions for feasibility studies 1.1


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What will happen in 2007 if the current ICR policy remains in place?

Estimate based on projected eligible Specific Fund contributions of $27.1 million (similar to 2006).

PROJECTED ICR COLLECTIONS (in millions)

Administrative support (ICR rate of 2%) $ 0.5

Interest Income 1.3

Technical support for areas (ICR rate above 2%) 1.7

Total $ 3.5

ICR REQUIREMENTS

Budget Resolution requirement to partially finance the Regular Fund $ 2.5

Technical support currently financed by Specific Funds 1.7

Central administration support currently financed by Specific Funds 1.3

Total $ 5.5

2007 projected shortfall $ (2.0)


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New ICR Rate Policy


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New ICR rate policy

Considering that:

the Regular Fund has a limited capacity to administer the large portfolio of Specific Funds’ resources;

the Secretariat has the responsibility to meet immediate needs of $5.5 million for 2007;

interest income may be used to partially defray indirect costs;

ICR should be applied to all eligible Specific Fund activities; and,

donors have caps on ICR.


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The Secretariat …

will enforce the policy that all budgets for eligible Specific Fund projects include an ICR.

will exclude the following contributions from ICR: disaster relief, conferences and meetings co-financed by Regular Fund and contributions for feasibility studies.

may apply interest income generated by Specific Funds and some types of in-kind contributions to partially defray ICR.

New ICR rate policy (cont.)


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Existing ICR agreements will not be amended, although renegotiation of long-term and framework agreements will be considered, as appropriate.

The Secretary General may approve exceptions to ICR upon recommendation of the Project Evaluation Committee, in coordination with the Resource Mobilization Committee. Any exception results in an implicit increased subsidy from the Regular Fund.

The Secretary General shall determine the distribution of indirect cost recoveries among eligible areas based on transparent criteria.



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ICR RATES FOR DIFFERENT TYPES OF AGREEMENTS


Within OAS mandates

OAS technical

participation

OAS responsible for outcome

New ICR rate

Partnership YES HIGH YES 12%

Executing Agency

YES LOW YES 15%

Flow-through NO NONE NO 20%


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Estimated eligible Specific Fund contributions $58.4 million

Less: likely exclusions from ICR policy $10.4 million

Projected ICR base $48.0 million

unprogrammed contributions (FEMCIDI) $4.5 M conferences and meetings co-financed by RF $1.3 M existing agreements $3.5 M contributions for feasibility studies $1.1 M

Expected 2007 financial outcome with new policy


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Expected 2007 financial outcome (cont.)

Interest income and certain in-kind contributions may be applied to partially defray ICR.

New ICR rate

2007 projected

contributions

Projected ICR collection

Partnerships 12% $47.5 $5.7

Executing Agency

15% 0.5 0.1

Flow-through 20% 0.0 0.0

TOTAL $48.0 $5.8


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Next steps

To modify General Standards and issue a corresponding Executive Order by January 15, 2007.

To have a focal point for negotiations between donors and the Secretariat on ICR issues.

To develop by January 15, 2007 an internal policy to equitably and transparently distribute indirect cost recoveries throughout the Secretariat (excluding the $2.5 million which must be transferred to the Regular Fund, per the 2007 Budget Resolution).

To retain the new policy through the end of 2007, when its results will be assessed.

New OAS Indirect Cost Recovery (ICR) Policy GENERAL SECRETARIAT OF THE ORGANIZATION OF AMERICAN STATES 12/01/2006.

Documents

indirect cost recovery

new cost recovery policy

recovery of indirect

revised icr policy

current icr policy slide

oas secretariat

icr rate

examples of indirect