Overhead costs of international NGO partners

EC/48/SC/CRP.18

OVERHEAD COSTS OF INTERNATIONAL NGO PARTNERS

I. Review of the Standing Committee's Deliberations and Decisions

1. In a decision of the 1995 Executive Committee, the High Commissioner was requested to initiate a process of informal technical consultations on the question of overhead costs for non-governmental implementing partners, particularly costs for the headquarters of such partners (A/AC.96/860, para. 21(I)).

2. Four consultative meetings were held in late 1995 and early 1996 with the participation of, inter alia, Permanent Missions to the United Nations Office at Geneva and non-governmental organizations. Discussion focused on the following questions:

(i) What is the nature and level of the contribution from an NGO that allows the relationship to be characterized as one of partnership (as opposed to a contract subject to the normal procedures for the procurement of services)?

(ii) What support costs are a legitimate charge on UNHCR voluntary funds channelled through NGOs?

(iii) If international NGO headquarters support costs are such a legitimate charge, what arrangements to meet them would be appropriate?

3. Three options were proposed, as follows:

(i) Headquarters support costs could be calculated on a case-by-case and itemized basis.(The disadvantage of this approach was seen to be that the costs would have to be renegotiated for each agreement and that the results would be neither transparent nor consistent.)

(ii) These costs could be calculated using a percentage specific to that NGO, reflecting actual headquarters support costs as incurred across all its operational activities.(A number of NGOs use this method for their own budgeting, with the level of the percentage reviewed quarterly by their auditors. While simpler and more transparent than option 3 (i), it was noted that this option could be seen to favour those NGOs with relatively higher headquarters costs, but, other elements being equal, could be expected to lead UNHCR to seek to work with those NGOs with the lower percentages.)

(iii) These costs could be calculated using the same standard percentage for all NGOs and projects, except that if an NGO's actual audited headquarters support costs represented a lower percentage, that would be used.(This option was seen as the simplest, most transparent and consistent of the three.)

4. A report on the consultations, including the above options, was presented to the second meeting of the Standing Committee in April 1996 (EC/46/SC/CRP.21). Some delegations expressed satisfaction with the proposed option (paragraph 3 (iii) above), including an initial ceiling of 8 per cent (which several delegations recognized as a compromise, but nonetheless reasonable, figure), but stressed that this was an initial figure, subject to review. Other delegations felt, however, that further consultations were required on both the level of the initial standard percentage and the financial impact of the proposal. It was felt that the way the figure was arrived at should be more transparent. Another delegation expressed doubts as to whether the conditions under which the standard percentage would be applied were readily implementable. It was decided that the consultations as to the actual level of the initial standard percentage would continue, so as to enable a decision to be taken on the matter at the third meeting of the Standing Committee in

June 1996. The proposed decision (with the exception of a percentage level) before the Standing Committee, with the relevant amendments, was adopted and is summarized in paragraph 10 below.

5. At its third meeting (25 to 27 June 1996), the Standing Committee decided that the initial standard percentage would be five per cent, noted that certain transition arrangements may be required, and decided to review the issue, including the level of standard percentage, in the first half of 1998.

6. In November 1996, UNHCR issued an instruction to all field offices outlining the new policy (effective 1 July 1996) and providing guidance on its application.

II. Summary of UNHCR's Current Policy on Support Costs

7. In general terms, and in accordance with the principle of partnership and the decisions of the Standing Committee in April and June 1996 on the subject, UNHCR looks to implementing partners to contribute resources that they themselves raise for UNHCR's refugee programmes. UNHCR believes that implementing partners should also develop the capacity to meet the support costs associated with their implementation of refugee programmes and, in particular, their headquarters support costs. UNHCR's approach to support costs has thus been formulated not only in view of the already heavy burden on UNHCR voluntary funds, but also in the belief that NGOs should avoid financial dependence on UNHCR as much as possible. UNHCR recognizes, however, that certain types of support costs, including those for international NGO headquarters support costs, could be a legitimate charge on UNHCR voluntary funds.

8. UNHCR defines support costs as those necessarily incurred in supporting and managing an activity. As such they are different from operational costs which are those of the activity itself. Support costs are often incurred at several locations, ranging from the activity site, through in-country and regional offices, to an international NGO's headquarters. The types of support costs range from those that are clearly and directly attributable to supporting the activity (for example, administrative personnel, travel and communications costs wholly dedicated to the activity) to those less clearly or directly attributable to the activity, and which for that reason are often determined pro rata (for example, shared office and utilities, common accounting and financial services). Some costs, or even a pro rata share of them, are clearly not support costs in this context, for instance those related to an NGO's advocacy activities, fund raising and external relations. It should be noted that personnel may be either an operational or a support cost. Generally, the closer the personnel are to the activity site(s), the more likely they are to be an operational cost.

9. UNHCR's flexibility in covering support costs depends largely on the level of a partner's contribution to a project and the nature of the partner. More flexibility may be appropriate for local NGOs than for those based outside the country. The more an NGO contributes to the particular partnership, the greater will be UNHCR's flexibility in covering such costs. The lower an NGO contribution (defined as an input which would otherwise be an appropriate charge on UNHCR funds, such as an input agreed by UNHCR as being necessary for project implementation, but not covered by UNHCR funding), the more likely it is that UNHCR would seek other partners or consider the implementation relationship on a contractual rather than a partnership basis.

10. As concerns contributions to the headquarters support costs of international NGOs, UNHCR's policy, as endorsed by the Standing Committee, currently comprises the following elements:

(a) UNHCR will, on request from an NGO, participate in bearing such costs on the basis of a standard percentage (currently 5 per cent, as noted above) of all funds provided by UNHCR, with the exception of funds provided for activities that do not entail significant headquarters support costs, as in large-scale local procurement;

(b) The UNHCR contribution to headquarters support costs must not exceed the actual support costs incurred in respect of implementation with UNHCR funds, as in cases where an NGO has a negotiated or audited overhead rate, and if this rate is less than the standard UNHCR percentage (currently 5 per cent), then the lower rate shall be applied;

(c) An NGO must, in order to qualify for such support, contribute to the programme or project concerned (see sub-paragraph (e) below) an amount at least sufficient to offset UNHCR's total contribution to all support costs;

(d) The timeframe over which an NGO contribution will be taken into account is the current and the previous calendar year; and

(e) The geographical scope within which an NGO contribution will qualify for consideration is That of a UNHCR regional programme, where such exists or, otherwise, of an entire country programme.

III. Implementation

11. UNHCR has recently reviewed the implementation of the policy and has ascertained the following:

(a) Amounts budgeted under both General and Special Programmes for international NGO headquarters overhead costs were just over $ 1.8 million in 1997 and just over $ 2.6 million in 1998. The actual 1997 expenditure will only be available when all implementing partners submit final financial reports and all projects are closed;

(b) In 1997, 37 international NGOs received the 5 per cent contribution; in 1998, the number is 46;

(c) The majority of international NGOs who qualified for the overhead applied for, and received, it;

(d) A number of UNHCR field offices and NGOs had difficulties in interpreting the guidelines and, in several instances, resorted to their respective headquarters for clarification and/or arbitration. Indeed, some UNHCR field offices found the matter to be of such perceived complexity that they suggested that the issue be dealt with entirely at a headquarters level. Other field offices, in implementing the Standing Committee decision, have, nevertheless, raised questions about its appropriateness, given that the additional costs were being introduced into existing programmes which were already facing funding shortfalls;

(e) In particular, and as foreshadowed during the consultative process, assessing the level of an NGO contribution has proven to be the most difficult aspect of the policy; what should be counted as a contribution may be unclear, as may be the indicative value that could be placed on it. In some cases, this problem has been compounded by the reluctance of certain partners to provide detailed information as to the level of their own contribution to a programme. Also, the source of the NGO contribution to be taken into account has raised some difficulties in instances where the "source" is simultaneously a major donor to UNHCR;

(f) The most problematic and controversial aspect of the policy is generally the interpretation of the component "with the exception of funds provided for activities that do not entail significant headquarters support costs, e.g. large-scale local procurement" (paragraph 10 (a) above). For example, in the context of income-generation projects, the question of whether or not funds provided for the payment of loans to refugees should be included in the calculation, on the argument that the NGO's headquarters was also involved in the administration of such funds, was raised. Agreement between UNHCR local offices and NGO partners on the extent to which procurement of services, as opposed to commodities, should be included in the calculation also caused difficulties;

(g) Differences of opinion as regards the reporting requirements for expenditures incurred against the headquarters overhead budget line led to some difficulties;

(h) Instances in which an overall project budget was reduced during the course of the year sometimes led to differences of opinion as to whether or not to maintain the originally agreed overhead amount.

IV. Conclusions and Recommendations

12. There is a clear need for UNHCR to have a transparent and consistent policy, inter alia, to improve its efforts at enhancing the effectiveness and management of its arrangements for implementation through NGOs, whilst preserving the nature of this partnership. While the policy adopted in 1996 was a compromise among differing options, it is submitted that this was still the best option, especially in terms of equity and transparency. However, as noted above, certain difficulties were encountered in the implementation of the policy, both on the side of UNHCR field offices, as well as on the part of some NGOs. As these are mainly related to differing interpretations of the basis for the calculation of such costs, rather than the substance of the policy itself, UNHCR will need to provide further guidance and/or clarification to its field offices, as well as continue to maintain a dialogue with NGOs with a view to enhancing the common understanding and implementation of the policy and resolving any residual problems.

13. In view of the above, it is also submitted that the 5 per cent level be maintained. In this regard, it is likely that, as differing interpretations of the policy are resolved on either a comprehensive or case-by-case basis, the amount budgeted and subsequently paid to international NGOs may increase slightly. UNHCR, of course, remains ready to adapt the policy in light of any Standing Committee recommendations.

Draft Decision

Overhead Costs of International NGO Partners

The Standing Committee,

Recalling its decision taken at the second meeting of the Standing Committee (10-11 April 1996) on the subject of overhead costs of NGO implementing partners (EC/46/SC/CRP.27) in which it was decided that UNHCR should, subject to certain conditions, participate in bearing headquarters support costs of international NGOs;

Recalling further the decision taken by the Standing Committee at its third meeting

(25-27 June 1996) that the basis for such participation would be 5 per cent of project costs funded by UNHCR (EC/46/SC/CRP.42 para. 61);

OP1 Decides that UNHCR shall continue to participate in bearing headquarters support costs of international NGOs;

OP2 Decides that the current, standard percentage of 5 per cent shall be maintained for the next two years and reviewed again during the first half of 2000