GENERAL SECRETARIAT OF THE ORGANIZATION OF AMERICAN STATES

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

12/01/2006 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 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. ” - New OAS Indirect Cost Recovery (ICR) Policy p. 2 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 3 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 4 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 5 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 6 -

12/01/2006 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 - New OAS Indirect Cost Recovery (ICR) Policy p. 7 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 8 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 9 -

12/01/2006 Background Evolution of Funds 1994 - 2005 (in millions of US$) 678 employees 605 employees - New OAS Indirect Cost Recovery (ICR) Policy p. 10 -

12/01/2006 Background (cont. ) - New OAS Indirect Cost Recovery (ICR) Policy p. 11 -

12/01/2006 Current ICR policy - New OAS Indirect Cost Recovery (ICR) Policy p. 12 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 13 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 14 -

12/01/2006 Calculation of Direct and Indirect Costs - New OAS Indirect Cost Recovery (ICR) Policy p. 15 -

12/01/2006 Secretariat’s financial transactions in 2005: $181 million Excluded costs: Eligible • 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: 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 16 -

12/01/2006 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). - New OAS Indirect Cost Recovery (ICR) Policy p. 17 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 18 -

12/01/2006 Considerations in establishing an OAS ICR policy - New OAS Indirect Cost Recovery (ICR) Policy p. 19 -

12/01/2006 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%. - New OAS Indirect Cost Recovery (ICR) Policy p. 20 -

12/01/2006 What similar organizations do … ICR rates in similar organizations range from 4. 5 to 21%: § § § UN System PAHO PADF EU UNDP IICA 13% 6 – 21% 16% 7 – 20% 5 – 7% 4. 5% and over However, these organizations have done a better job of classifying direct and indirect costs more precisely. - New OAS Indirect Cost Recovery (ICR) Policy p. 21 -

12/01/2006 There 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). - New OAS Indirect Cost Recovery (ICR) Policy p. 22 -

12/01/2006 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) non-contributing donors programs approved before current ICR policy contributions under $100, 000 conferences and meetings co-financed by RF contributions for feasibility studies - New OAS Indirect Cost Recovery (ICR) Policy p. 23 - $ 10. 5 M 8. 8 4. 7 4. 5 1. 3 1. 1

12/01/2006 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). - New OAS Indirect Cost Recovery (ICR) Policy p. 24 -

12/01/2006 New ICR Rate Policy - New OAS Indirect Cost Recovery (ICR) Policy p. 25 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 26 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 27 -

12/01/2006 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. - New OAS Indirect Cost Recovery (ICR) Policy p. 28 -

12/01/2006 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% - New OAS Indirect Cost Recovery (ICR) Policy p. 29 -

12/01/2006 Expected 2007 financial outcome with new policy § Estimated eligible Specific Fund contributions $58. 4 million § Less: likely exclusions from ICR policy $10. 4 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 § Projected ICR base - New OAS Indirect Cost Recovery (ICR) Policy p. 30 - $48. 0 million

12/01/2006 Expected 2007 financial outcome (cont. ) 2007 New ICR rate projected contributions Projected ICR collection § Partnerships 12% $47. 5 $5. 7 § Executing Agency 15% 0. 5 0. 1 § Flow-through 20% 0. 0 $48. 0 $5. 8 TOTAL Interest income and certain in-kind contributions may be applied to partially defray ICR. - New OAS Indirect Cost Recovery (ICR) Policy p. 31 -

12/01/2006 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 p. 32 -