New OAS Indirect Cost Recovery (ICR) Policy

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New OAS Indirect Cost Recovery (ICR) Policy
GENERAL SECRETARIAT OF THE ORGANIZATION OF
AMERICAN STATES
12/01/2006
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Mandate 2007 Budget Resolution

• III. GENERAL PROVISIONS
• 7. Recovery of Indirect costs
• To 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 Inspectors Generals 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.

3
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 Organizations financing needs.

4
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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What is an Indirect Cost?

• 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.

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What is an Indirect Cost? (cont.)

• 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

8
What is an Indirect Cost? (cont.)

• 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.

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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)
678 employees
605 employees
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Background (cont.)
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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 US100,000.
• 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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Secretariats financial transactions in 2005
181 million
Excluded
Eligible

• Excluded Activities of a unique nature which do
  not form part of the pool of activities analyzed
  to determine Secretariats 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
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.
• CIDAs (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 Secretariats technical
  involvement. Secretariat is responsible for
  outcome. (e.g. MAPP, Demining, CIM-women/children
  Trafficking).
• B. Executing Agency mutual cooperation
  agreements requiring minimal Secretariats
  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 Secretariats
  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).

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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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New ICR rate policy (cont.)

• 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.

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New ICR rate policy (cont.)

• 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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New ICR rate policy (cont.)
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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Expected 2007 financial outcome with new policy

• 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
• 
  

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Expected 2007 financial outcome (cont.)
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

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

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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.