strategy

Ensuring viable financial basis for the United Nations

Synonyms:
Reducing shortage of funds of United Nations
Increasing amount of financial resources within the United Nations system
Context:
The precarious financial situation of the United Nations stems from two factors. The United Nations has an extremely limited capital base effectively at hand, and hence very inadequate cash reserves from which to cover fluctuations in the timing and amount of cash inflows from member states. It also lacks a financial mechanism to maintain liquidity, [ie], to ensure that cash inflows from member states match cash outflows which the Organization must make to respond to member states' mandates.

Before considering possible approaches to these matters, it may be useful to recall the principal sources of financing of the Organization. In the main, the United Nations has three sources of funding. One is the regular budget, which the General Assembly approves biennially and may revise during the biennium. The initial regular budget level for the 1994-1995 biennium is US$2,580 million. The second funding source is the individual peace-keeping budgets, which are also approved by the General Assembly for each peace-keeping mission separately as missions are approved or extended and budgets therefore are prepared and reviewed. As at 31 August 1994, there were 15 peace-keeping missions, with cumulative aggregate budgets of over $8,000 million, the most significant of which were for mandated periods not exceeding six months and hence requiring periodic, sometimes frequent, extensions. The third financing component comprises the so-called extrabudgetary resources, provided by governments and other organizations for specific activities, such as technical cooperation projects, or humanitarian activities, distinct from those carried out under the regular budget and peace-keeping fundings.

While the extrabudgetary contributions are voluntary (governments and organizations provide them at their discretion), the other two, namely, the regular budget and peace-keeping, represent mandatory payments by member states: they are assessed upon the member states under the Charter, and are payable within 30 days of such assessment.

It is noteworthy that extrabudgetary resources present little or no cash-flow problems, as they are paid by the donors largely in advance of the activities or protects they intend to finance. However, this is not the case with the regular budget and the peace-keeping fundings.

In a word, as to these latter two fundings, cash inflows to the Organization lag outflows to meet mandates because of "lateness": (a) lateness in payment by member states of assessments, both for regular budget and peace-keeping assessments; (b) lateness resulting from the process of approving budgets and appropriations for peace-keeping operations; (c) imbalance in the resulting cash position caused by the lack of a financial mechanism to compensate or correct for the "lateness" situation.

On 31 August 1994, the United Nations owed a total of approximately $172,500 million: it owed $400 million to various vendors and suppliers; it owed about $1,000 million to some 70 member states for troops, equipment and other services; it owed all member states an aggregate of $325 million for budgetary surpluses in prior years -- amounts which should normally have been returned to member states. In addition, ongoing regular budget and peace-keeping costs amounted to some $400 million per month.

Against this formidable array of financial demands, the United Nations had on 31 August cash balances aggregating $375 million; there was virtually no cash in its Peace-keeping Reserve Fund; there is no external borrowing capability. The only other significant asset, the realization of which could enhance cash flow, was some $32,500 million due from member states for assessments levied; some 30 per cent of this amount was due for prior years.

Recent dates have seen some amelioration of the degree of financial precariousness. It is expected that cash inflow aggregating $1,200 million will be received from one member state with a significant arrearage -- some $900 million before 31 October, the balance before the end of the year. A portion has already been received. Other member states have also made substantial payments recently.

This cash inflow will enable the Organization to reduce its obligations, most notably, amounts owed to the member states who have provided the troops and contingent equipment which are the backbone of United Nations peace-keeping missions. But the operative word is "ameliorate". The situation of financial precariousness will merely be mitigated, not resolved. Cash inflow from member states will rapidly be followed by cash outflow to other member states.

From a financial viewpoint the position of the United Nations will still be precarious. This is not a new situation but one made more difficult due to recent escalation in outstanding contributions from member states and in amounts owed to troop and equipment-contributing countries. Financial liquidity is impaired -- current obligations and demands greatly exceed available cash. Financial flexibility is non-existent. Cash resources cannot be marshalled in amounts sufficient to respond to needs -- present or possible. The situation imperils the capability of the United Nations to perform the very functions for which it was created.

The long wait for payment is discouraging to member states - particularly those member states who otherwise may not be in a position to answer the call for troop and equipment contributions. And it creates an inequity as between member states, with those who wait for payment from the United Nations financing the late payments by others to the United Nations.

In summary, only if all assessments now due were paid would the Organization add some $400 million to the cash levels available to it for other than short-term needs. Prompt payment, in full, continues to be made by many member states and is much appreciated. But, to put it quite simply, many member states are chronically late in their assessment payments, both for regular budget and peace-keeping purposes. Many have large outstanding contributions as well.

In the area of the regular budget, a growing "lateness" gap exists due to the pattern of payments of assessments. Assessments are rendered to member states prior to 1 January, and are due by 31 January, but, of late, more and more member states have tended to pay their assessments toward the end of the assessment period. For instance, by 31 August, only 56 member states had paid their 1994 contributions in full, while some 70 had not made any payment towards their 1994 contributions. In the peace-keeping area, payments are due within 30 days of the issuance of the assessment letters by the Secretariat, yet many member states fall chronically behind this date. In both cases, the lateness in current payments, when added to the situation of increasing arrears for prior periods, obviously only aggravates the Organization's financial situation. The problem is not merely that of member states tardiness in payment. A structural impediment has also contributed to the payment delays. In the peace-keeping area there exists a material "time gap" between the actual initiation date of peace-keeping missions and the date assessments are payable. The preparation of the budget for each peace-keeping mission, and its review and approval by legislative bodies, can involve a process of several months, which thus pass before any contributions can be assessed on member states, let alone received in cash.

In most cases, the start of the mission requires major commitments and actual costs, and hence commensurate cash receipts to finance them. Delays and shortfalls in payments thus become problematic. For instance, in one of the latest missions, the United Nations Assistance Mission in Rwanda (UNAMIR), by the end of the initial six months mandate of the mission (April 1994), total costs of $31 million had been incurred, but only $18 million received in contributions. In another case, the United Nations Operation in Somalia (UNOSOM II), at the end of six months of the initial mandate (October 1993), total costs of $498 million had been incurred and only $311 million received in payments -- a $187 million gap. By the end of 12 months of operations (April 1994), that gap grew to some $347 million; and to $376 million by 31 August.

Implementation:
A number of possible actions are planned or can be taken for the regular budget as well as for peace-keeping operations:< (a) Cash management by the Secretariat can maximize the availability to the Organization of existing cash levels. A cash management study has been concluded; cash funds presently distributed in 100 or so accounts will be concentrated and their utility value thus enhanced. Increased interest to be earned on the available concentrated cash balances is presently an issue under negotiation with banks.

(b) Accelerating the cash flow cycle: Budget data can be simplified and the preparation time-frame shortened from that now required. Changes in billing practices within the Secretariat can also shorten the time interval between the date when an budget is approved and the date the assessment notes are presented to member states. These matters are being worked on.

(c) Minimizing the need for cash: As suggested by some member states, it could be possible for the Secretariat to accept contributions of non-financial resources, such as Secondment of personnel and equipment and supplies, for set-off purposes against such members' contributions, when specifically requested by the Secretary-General and within a framework clearly defined by the General Assembly.

(d) Encouraging more positive cash flow: Recognizing that there is a time value to money, member states could consider and determine whether the United Nations should be given authority to charge interest on future arrears. Expert groups and other commentators relative to United Nations financing arrangements have repeatedly recommended such authority. Also, a number of member states have stated their broad support for this concept. But there are some reservations. In the same vein, a strict interpretation of Article 19 of the United Nations Charter and related regulations governing the definition of both "arrears" and outstanding contributions could be effective.

(e) Removing obstacles to improved cash flow: A key improved cash inflow objective must be to remove the cash payment "time gap" in peace-keeping missions described above. This does not mean giving the United Nations external borrowing capability. The assessment system remains fundamental and exclusive to the United Nations intergovernmental structure and its financing capacity. New adaptations are, however, possible to accelerate cash inflows basing them on the assessment mechanism.

Specifically in relation to the peace-keeping assessment process, consideration could be given to the concept of assessing member states for an appreciable portion, say, 33 per cent of estimated mandate requirements, substantially concurrent with the initiation of a new mission or the extension of an existing one. These preliminary assessments would be based on overall cost estimates set forth in the "financial implications statements" developed by the Secretariat and available to member states at the beginning of a mission or its renewal. Such statements could as part of the process be reviewed and approved by the General Assembly on a "reasonableness" basis for preliminary assessment purposes. A detailed budget, setting out the actual requirements of the operation more substantively, would subsequently be submitted to the General Assembly and approved by it as at present to supplant the preliminary assessments.

Alternatively, or in addition, the General Assembly could authorize a stated amount (say, $50 million or $100 million) of peace-keeping Redeemable Certificates for sale to member states concurrent with initiation or extension of a new mission. These Certificates would be sold to member states at a discount and be redeemable by member states against future peace-keeping assessments when such assessments are made. The interest factor inherent in such certificates would deal with the reality that there is a time value to money and that cash available to the Organization at the start of a mission is more valuable than cash later received. This financial mechanism would also deal with the issue of equity as between member states.

(f) Building a base for financial flexibility: The above actions, or others which may emerge from member states' discussions, would go an appreciable way toward meeting the Organization's liquidity needs. They may not be sufficient, however, to permit financial flexibility. Only a secure capital base with attendant cash reserves will assist in meeting that objective. A measure of financial flexibility can be obtained if the level of outstanding contributions is sufficiently reduced to replenish and maintain the reserves depleted in earlier years (approximately $400 million). Additional financial capability could ensue if member states were to forego receiving the benefit for budget surpluses in prior years (approximately $325 million) currently due them by the Organization. The replenishment of reserves and the conversion of debt to equity, together aggregating $725 million, would substantially assist in restoring financial flexibility.

Facilitated by:
Increasing global funds
Subjects:
Finance
Vulnerability
Scarcity
Systems
United nations
Type Classification:
D: Detailed strategies