FINANCE PRESENTATIONS TO UNRWA Advisory Commission

21/22 JUNE 2011

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• No major changes from starting position.

• 1-Jan-11 - Income Statement Deficit -$63.0m- Cash deficit -$51.0m

• 31-May-11 - Income Statement Deficit -$63.0m- Cash deficit -$55.0m

• Adverse increase in CAF (depreciation of NIS) -$3.0m offset by F/C in PSC Income +$3.0m.

• Donor Income F/C $458.4m (exclude favourable FX $8.5m) = $449.9m. Budget of $453.0m

• Favourable FX on Income +$8.5m – Offset by FX on Derivatives -$8.6m

• Timing of future cash receipts critical to effect post July salary payments.

• Difficult to meet November payroll, currently inadequate cash for December Payroll.

May 2011 FINANCE (UPDATE)

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4 Key Areas:

1) Inadequate Working Capital

2) Relative Inadequate Annual Income

3) Adverse Internal and External Factors &

4) Financial Effect of Migration to IPSAS

UNRWA Financial Situation

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• Usual Working Capital (WC) for most entities is in excess of 3 month’s expenditure

• UNRWA spends @ $50m per month,

• UNRWA’s WC has declined over last 10 years from @ $80m to be $42m at 1 Jan. 2011

• UNRWA’s $42m – comprises only $8m cash

Inadequate Working Capital – General Fund

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• Due to relative inadequacy of income – UNRWA typically starts each year with a deficit

• Rate of growth in expenses has outstripped growth in income

• 2010 starting deficit - $53m• 2011 starting deficit - $63m• 2012 (draft) starting deficit - $73m• 2013 (draft) starting deficit - $88m

• Structural deficit @ -$100m

Relative Inadequacy of donor Income

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• Structurally costs increase at least $20m p.a. (Wages + $12m, Severance +$4m, Others +$4m)

• Excl. e-Health, Education Reform, ERP, etc

• Impact on wages through Middle East changes

• OECD countries economic challenges

• 2012/13 shaping up as a very challenging period

Internal & External Factors

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• UNRWA is legally required to pay severance to local staff – liability

• At 1 Jan. 2011 severance liability -$330m, expect 2012 to -$370m

• Due to IPSAS, severance liability first time on Balance Sheet

• Expect in 2013 UNRWA’s net equity will be negative – Audit implications.

Severance Provision & IPSAS (Int. Public Sector Accounting Standards)

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• UNRWA is serious about reforms and Finance with many Depts have been active in seeking to effect appreciable reform.

• Financial Reforms covering:

i) Reportingii) Financial Reportingiii) Project Reportingiv) Inventory Managementv) Treasury Managementvi) IPSAS, (Int. Public Sector Accounting Standards)vii) ABC (Activity Based Costing) &viii) Streamlining of Costs

UNRWA Financial Reforms

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• From April 2010 UNRWA has effected a hard close of Monthly Accounts. Initially on working day (WD) 7, after 5 months WD5, April 2011 on WD 4

• As per UNBOA – UNRWA one of very few UN entities effects monthly hard close of GL. GF fully accrued.

• Full Monthly Report from Dec 2010 – forwarded to donors.

Reporting

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• New Fixed Assets and Accounts Receivable sub ledgers – go live July/August 2011

• Re programme ERP to effect a clear delineation of all cash transactions per Fund Group (GF, Projects, EA & PF)

• Enhanced, standard system generated project reports, by donor, Field. For YTD, LTD and E EOY – go live August 2011

• Freezing and aging of all hard commitments – new active

• Standard system generated report for all UN costs – replace manual processes – active July 2011

Reporting

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• Standard system generated donor reports – replaces tedious manual process – active July/August 2011

• New standard system generated head count by occupation – per Field/Dept – active July/August 2011

• New standard system generated expenditure reports for UNRWA’s largest project – Nahr El Bared – active July/August 2011

Financial Reporting

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• UNRWA commenced 1 Jan 2011 with 832 “active” projects.

• Just over 300 projects closed

• Work on closing over 250 projects by August 2011

• Post August & pre December 2011, effect full accrual accounting for the top 80% of projects by value (@ $100m)

• Project reporting, in all material respects fully accrued pre end of 2011

Project Reporting

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• Pre 2011, annual stock take for the 5 Field warehouses

• Commencing 2011, each quarter (March, June etc), quarterly stock take each warehouse

• Commencing June 2011 manual count of medical stores, One Field.

Inventory Management

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• Effected inaugural FX hedges for 2011 donor income – stability of income & E EOY forecast

• Detailed 2 monthly & rolling 12 month cash flow forecast

• Having short listed preferred Bank, commence internet banking in August 2011 & roll out to all Fields within 6 months, bias – move away from cash & cheque transactions – quicker, safer, less time consuming

Treasury Management

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• UNRWA to be an early adopter of IPSAS – as from 1 January 2012

• IPSAS not reliant on purchasing new ERP

• Projects – accrual accounting – August – December 2011

• 20 UNRWA Policies IPSAS compliant – effected

• 45 UNRWA Financial Technical Instructions IPSAS compliant – August 2011

• New Sub-ledgers (Assets and Accounts Receivable) and Reports

IPSAS

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• Select preferred vendor end of June, 2011

• Project commence in July and estimated to conclude December 2011

• Project deliverables:

1. Identification, definition and costing of all salient activities per Dept & Field2. Identification and weighting of the cost drivers per activity3. Full absorption costing of all key activities for all Fields – front line activities4. Clearer understanding of the cost differentials in provision of services per

Field5. What can be done to stream line costs of comparable activities per Field6. ABC model, aligned with ERP system, each month generate system

generated reports, costing key activities per Field Dept, actuals tie to each month’s actual costs

7. Each key Field activity appraised with reference to performance metrics

Activity Based Costing (ABC) – General Fund

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• UNRWA Management have agreed to a series of initiatives that are planned to generate over $20m of savings per year

• I.e. – agreement of 2% head count reduction per year

• Finance – effect plan to centralize the current 6 Accounts Payable teams – to 1 central location, pre end of 2011 – savings $400K p.a.

Streamlining of Costs

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Past Biennia Expenditure and draft 2012/13 Budget

• Past Biennia Expenditure and draft 2012/13 Budget covering:

1. General Fund2. Projects3. Emergency Appeals in Gaza and WB

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GF Projects EA - Gaza&WBDefinition: Support “core” activities that require recurrent resources.

Typical Intervention: Provision of health, education, and relief and social services, as well as support services that enable UNRWA to operate.

Source of Funding:93% voluntary contributions, 6% UNNY – Int. Staff, 1% Others

Definition: For specific and time bound activities, with a view to improve services without increasing recurrent costs.

Typical Intervention: Building of facilities, and reform related items that are supposed to be integrated in the medium term. Source of Funding:Earmarked contributions.

Definition: Responding to emergency conditions; i.e. that are created by external factors and that are expected to be provided as long as these external conditions prevail.

Typical Intervention: JCP, emergency education, additional relief related to the external factorsSource of Funding:Earmarked and un-earmarked contributions

Definitions 22

General Fund – Expenditure and Draft Budget2006-07 2008-09 2010-11 2012-13

Expenditure($m)

Expenditure($m)

Expenditure/ Forecast

($m)Draft Budget

($m)General Fund:

Labour Costs 602.8 751.7 869.0 924.1 Non Labour Costs 117.8 153.8 196.5 219.6

720.6 905.5 1,065.5 1,143.7

Programmes:Education 472.5 590.2 651.0 674.2Health 148.9 172.2 199.6 212.8Relief & Social Services 44.1 43.5 50.0 57.8Infrastructure and Camp Development 6.1 10.5 18.7 21.0Support Departments 49.0 89.1 146.2 177.9

720.6 905.5 1,065.5 1,143.7

Head Count 26,566 27,789 28,535 Notes:1. Labour costs excludes international staff posts funded by UN2. 2010/2011 includes 2010 Expenditure and 2011 EOY forecast

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General Fund:

Labour Costs 602.8 751.7 869.0 924.1 Non Labour Costs 117.8 153.8 196.5 219.6 Programmes:

Education 472.5 590.2 651.0 674.2Health 148.9 172.2 199.6 212.8Relief & Social Services 44.1 43.5 50.0 57.8Infrastructure and Camp Development 6.1 10.5 18.7 21.0Support Departments 49.0 89.1 146.2 177.9

2006/2007 2008/2009 2010/2011 2012-2013General Fund Expenditure & Draft Budget

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Support Departments

Infrastructure and CampDevelopment

Relief & Social Services

Health

Education

Non Labour Costs

Labour Costs

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Emergency Appeal 2006-2007 2008-2009 2010-2011 2012-2013

Prior Years EA incl. 2006-07 289.0 67.8 12.8  

EA 2008-09   346.5 157.2  

EA 2010-11     247.3  

EA 2012-13 (Draft Budget)       528.3

Total 289.0 414.3 417.4 528.3

Note: The US$528.3m for 2012-13 represents Gaza and WB requirements as per the draft FIPs

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EA 2012-13 (DraftBudget)

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Emergency Appeal – Gaza and West Bank Expenditure and Draft Budget in US$M

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Fund Type 2006-07 2008-09 2010-11 2012-13

General Fund 720.6 905.5 1,065.5 1,143.7

Projects 116.8 173.9 213.0 295.5

Emergency Appeals 289.0 414.3 417.4 528.3

Grand Total 1,126.4 1,493.7 1,695.9 1,967.5

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Past Biennia Expenditure & Draft Budget US$M GF-Projects-EA

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Detailed Breakdown of Support Department Costs ($000 – Actual + Draft Budget)

Notes Expenditure Expenditure Expenditure Expenditure Expenditure EOY F/C Draft Budget Draft Budget2006 2007 2008 2009 2010 2011 2012 2013

Com-Gen Office 1 1,029 1,273 1,300 1,507 1,948 771 767 767 Human Resources - - - - - - - -

Office of Director of Human Resources 127 110 152 199 111 - - - Personnel Services 2,3 2,003 1,942 4,229 2,017 11,238 - - - Compensation & Management Services 175 200 274 250 314 - - - Staff Training and Development 220 407 514 459 540 - - -

Human Resources Total 2,524 2,660 5,170 2,924 12,203 8,305 8,606 8,831 - - - - - - - -

Admin Services - - - - - - - - Admin Support 4 11,071 14,019 13,550 13,902 16,335 - - - Procurement 5 13,329 (11,596) 16,850 19,247 19,625 - - - Information Sysems 6,7 1,874 2,172 3,175 3,142 4,207 - - - ERP 219 270 202 197 384 787 951 951

Admin Services Total 26,493 4,865 33,777 36,488 40,552 55,280 57,281 58,781 - - - - - - - -

Financal Services 8,9 2,609 4,291 1,375 2,508 4,335 9,869 10,226 10,494 Legal 330 400 409 586 580 669 693 711 IOS 10 506 378 308 400 664 1,086 1,079 1,079 ERD 11 729 876 1,119 1,168 1,250 2,582 2,021 2,021 Holding Codes 12,13 1,186 (1,186) - - - 5,384 6,176 6,464

- - - - - - - -

35,407 13,556 43,457 45,581 61,532 84,733 87,800 90,100

Total Biennium 48,963 89,038 146,265 177,900

Department/Year

Grand Total

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Note 1 Adhoc increase in 2010 $300k due to construction and maintenance of HQ Jerusalem office

Note 2 Increase in 2008 is due to Accrual of Area staff annual leave encashment of +$2.4m.

Note 3 Increase in 2010 due to +$4m leave encashment and +$3m towards the costs of strike in West Bank

Note 4 Increase of +$2m in 2007 is due to Construction & Remodeling of new building in HQA, and new building for Field Office Jordan.

Note 5 Inventory credit of +$25m in 2007 is due to consumption from the previous years inventory.

Note 6&7 Increase in costs +$1m due to expansion of SWAN network for users and disaster recovery plan costs

Note 8 Increase of +$2m in 2007 due to accounting for depreciation / capitalization

Note 9 Increase in 2011 is due to expected CAF expenditure increase + $3m, expected +$2m unbudgeted annual leave and +$2m other accruals.

Note 10 Increase of +$400K in 2010 is due to increased staff and consultancy services.

Note 11 Increase in 2011 EOY Forecast in ERD is due to transfer of PIO and Cairo office costs from Com Gen to ERD.

Note 12&13 Represents the Head Quarters Reserves EOY(F/c) as on May 2011+$5.4m, $12.6m for 2012-13 and will be reallocated to other Programmes.

Explanation Note to Support Department Costs

MTS costing – Assumptions and Main Results 30

• MTS costing is based on the individual sections per field in the MTS

• The majority of recurrent costs are staff cost and cost for relief services

• One time cost mostly refer to additional installations mainly schools

• Reform costs are only partially included

• GFO has not yet calculated the recurrent costs for the additional schools nor the UNESCO teacher norm

• SFO needs to confirm the recurrent or one time nature of the needs • Headquarters‘ initiatives are not included

MTS costing – What would it cost to implement the full MTS in 2011 in USD millions

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USD m

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Emergency Funding

Project Funding

General Fund

MTS costing – Breakdown of the additional cost 32

USD m

Annual - Recurrent

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Gaza Jordan Lebanon Syria West Bank

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700Goal 1 - Long and healthy life

Goal 2 - Acquired knowledge and skills

Goal 3 - A decent standard of living

Goal 4 - Human rights enjoyed to the fullest extend possible

Other