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### Viewing cable 08UNVIEVIENNA587, IAEA PROGRAM SUPPORT COSTS - A BUDGET ISSUE THAT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08UNVIEVIENNA587 | 2008-11-06 15:03 | 2011-04-28 00:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | UNVIE

`

    Usha E Pitts  11/26/2008 11:26:08 AM  From  DB/Inbox:  Usha

    Cable
    Text:
    UNCLAS        UNVIE VIENNA 00587
    CXUNVIE:
        ACTION: IAEA_UN
        INFO:   AMB_UN DCM_UN CTBT_UN

    DISSEMINATION: IAEAUN
    CHARGE: UNVI

    APPROVED: AMB:GSCHULTE
    DRAFTED: IAEA:UPITTS
    CLEARED: GPYATT, LHILLIARD, HASTWOOD, BHOFFHEINS, MSCHELAND

    VZCZCUNV643
    OO RUEHC RUEHXX RUEHII RUEHRO RHEBAAA RHEGGTN
    RUEHFR RUCNDT
    DE RUEHUNV #0587/01 3111523
    ZNR UUUUU ZZH
    O 061523Z NOV 08
    FM USMISSION UNVIE VIENNA
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 8639
    INFO RUEHXX/GENEVA IO MISSIONS COLLECTIVE PRIORITY
    RUEHII/VIENNA IAEA POSTS COLLECTIVE PRIORITY
    RUEHRO/AMEMBASSY ROME PRIORITY 0363
    RHEBAAA/DOE WASHDC PRIORITY
    RHEGGTN/DEPT OF ENERGY GERMANTOWN MD PRIORITY
    RUEHFR/USMISSION UNESCO PARIS PRIORITY
    RUCNDT/USMISSION USUN NEW YORK PRIORITY 1385

` `

    UNCLAS SECTION 01 OF 03 UNVIE VIENNA 000587

    SENSITIVE

    FOR ISN/MNSA, IO/T; DOE FOR NA-24, NA-25, NA-21

    E.O. 12958: N/A
    TAGS: IAEA OTRA KNNP TRGY AORC UN PREL AS CA
    SUBJECT: IAEA PROGRAM SUPPORT COSTS - A BUDGET ISSUE THAT
    FESTERS

    ¶1. (SBU) Summary:  The IAEA has no clear policy on the
    application of Program Support Costs (PSCs) to extrabudgetary
    contributions.  In recent months, however, the Secretariat
    has dabbled with implementing a universal fee of 7 percent.
    The U.S. and Australia have so far refused to pay the 7
    percent, and one Australian contribution is in limbo as a
    result.  Australia has proposed a paper, repeated below,
    which Geneva Group states are considering for presentation to
    the IAEA to advance the dialogue on this issue.  The letter
    conforms to U.S. policy, supports the goals of the UN
    Transparency and Accountability Initiative (UNTAI), and has
    broad support from the Geneva Group.  There is a risk,
    however, that forcing the issue into the public realm will
    lead to a messy repeat of past battles with the G-77.  There
    are also concerns among some USG agencies and IAEA technical
    staff that PSCs are a thinly-veiled &money grab8 by IAEA
    administrators that will divert money away from valuable
    technical programs.  Despite these concerns, Post supports
    the broader goal of budgetary transparency and requests
    authority to convey the paper, together with the UK as Geneva
    Group co-chair, to Deputy Director General Waller by the
    Geneva Group,s November 11 target (para 7).  Text attached.
    End Summary.

    ¶2. (SBU) Program Support Costs (PSCs) are loosely defined as
    charges to cover the direct and indirect costs of
    implementing extrabudgetary programs.  A growing consensus
    has emerged that PSCs should be harmonized across the UN
    system, and the topic has become a focus of the UN High-Level
    Committee on Management.  In general, the UN and its
    technical agencies charge PSCs of 13 percent, while the UN
    humanitarian agencies charge 7 percent.  The IAEA, on the
    other hand, has no clearly-defined policy on the application
    of PSCs, but began levying such expenses on a
    &case-by-case8 basis beginning approximately one year ago
    (the charge ranges between 0, 3, 7 and 12 percent, depending
    on the donor and program).  The U.S. has thus far declined to
    pay PSCs to the IAEA, partly in recognition of our
    significant extrabudgetary contributions, many of which
    include a cost-free expert (CFE).  The U.S. also objects to
    the lack of any clearly-defined policy outlining how PSC
    rates are determined and levied.

    ¶3. (SBU) Emerging best practice, including UNTAI, stipulates
    that international organizations apply PSCs in a fair and
    transparent manner in order to accurately reflect the real
    costs of running programs.  Attempts by Member States to
    implement such a policy at the IAEA have failed in the face
    of G-77 resistance (G-77 countries usually pay only 3 percent
    and do not wish to see any changes to the arrangement).  A
    policy battle at the time of the June 2008 Board of Governors
    meeting ended with the Secretariat,s agreement to conform to
    the status quo and continue applying PSC on a
    &case-by-case8 basis.

    Turbid Policy
    -------------

    ¶4. (SBU) Following the June dust up, the IAEA Secretariat
    took steps to circumvent the deadlock among Member States by
    apparently &universalizing8 PSCs at 7 percent.  The 7
    percent is charged retroactively to all projects submitted
    since July 1, 2008.  In partial confirmation of these rumors,
    a high-ranking IAEA official told DCM that two middle income
    countries (Pakistan and one of the Baltic States) had been
    initially charged only 3 percent in PSCs, but that DG
    ElBaradei had turned down the projects &until they agreed to
    the full 7 percent.8  The official (who spoke in confidence)
    did not indicate whether the policy would apply to the U.S.,
    nor did he mention the U.S. refusal to pay PSCs on a recent,
    USD 1.5 million DOE donation to the Nuclear Security Fund.
    (Note: The Australians have also refused to pay PSCs.  As a
    result, funds for an Australian project have been in limbo )
    sitting in an IAEA bank account ) since early this summer.
    The Japanese, on the other hand, are resigned to paying PSCs,
    and the European Union recently accepted that 7 percent of
    its planned 5 million Euro contribution to the Nuclear
    Security Fund would go to PSCs.  End Note.)

    ¶5. (SBU) Contrary to what we have heard from the Secretariat,
    other rumors indicate that a tiered structure remains in
    place whereby G-77 Members pay 3 percent for government
    cost-sharing projects, OECD countries pay 7 percent, and
    contributions for junior professional officers (JPOs) are
    charged 12 percent.  For example, a Mexican diplomat (and new
    participant in Geneva Group meetings) questioned the high
    rate charged on a Mexican JPO, given it amounted to &free
    labor8 for the IAEA.  Canada and the U.S. are in a similar
    position.

    ¶6. (SBU) In addition to the confusion over PSC rates, rumors
    allude to internal dissension at the IAEA, with some
    high-level officials pushing for universal PSCs, and others
    adhering to tiered structures.  Even the DG,s supposed
    support for universal PSCs has not been put to the test
    publicly.  A number of Member States, notably Japan and
    Australia, are irritated by the obfuscation and have
    encouraged other Members to support them in pressuring for a
    policy that is fair, universal and transparent.

    Request for Guidance
    --------------------

    ¶7. (SBU) Australia has recently drafted a paper requesting
    clarity on the PSC policy (sections of the document are
    lifted from a previous U.S. statement on the issue).  In an
    UNVIE-hosted meeting of Geneva Group members November 5,
    there was near-consensus that the paper should go from the
    Geneva Group as a whole to Director General David Waller.
    Post requests authority to convey the paper, together with
    the UK as Geneva Group co-chair, to DDG Waller by the Geneva
    Group,s November 11 target.

    ¶8. (SBU) Comment: Two issues affect the decision to co-sign:
    1) If donor countries force the Secretariat to &admit8
    publicly to a universal PSC policy, it could lead to G-77
    pushback and a potential showdown at the Board of Governors
    that merely repeats past struggles.  In other words, we could
    win the battle of transparency, but lose the war of
    establishing a fair PSC policy if the DG ultimately caves in
    to G-77 pressure for a lower rate for some projects.  2) U.S.
    support for universal PSCs could increase the proportion of
    resources going to IAEA administration (PSCs on top of CFEs)
    and decrease the remainder available for priority programs in
    the areas of safety and non-proliferation.  (Canada is in the
    same position and has stated off the record that universal
    PSCs would likely end their CFE program.)  Skeptical
    observers within the USG and even the IAEA go so far as to
    suggest that the move to levy PSCs amounts to little more
    than a &money grab8 by IAEA administrators that will siphon
    money away from the real work of the Agency.  Recognizing
    these risks, post recommends signing the letter as a means to
    advancing our long term goal of transparency in international
    organizations.  End Comment.

    ¶9. (U) Australian Draft Letter to DDG Waller

    The Geneva Group supports in principle the application of
    Programme Support Costs (PSCs) to extrabudgetary
    contributions.

    In June 2008, the Board debated a Secretariat document
    setting out a specific policy on the application of common
    PSCs to extrabudgetary contributions.

    Several Geneva Group countries (as well as the EU as a group)
    indicated they still had some concerns about the precise
    modalities of how the charge would be applied, and requested
    the Secretariat to delay broader implementation.

    Several members also emphasised that any such mechanism could
    only be applied in an equitable and non-discriminatory
    manner. In The Geneva Group's view, if a program support cost
    policy is to be implemented, it should be transparent and as
    consistent as possible.

    We are concerned at indications the Secretariat has been
    moving to make acceptance of extrabudgetary contributions
    received after 1 July 2008 contingent on the levying of a 7
    per cent PSC, despite its statement at the June Board that
    "it would continue to apply Programme Support Costs on
    extrabudgetary contributions on a case-by-case basis, as is
    currently the practice."

    We note that there are a number of issues to be clarified
    regarding how the Agency intends to implement the policy,
    including:

    -     effects on extrabudgetary activities for which funding
    for management and administration is already available;

    -     confirmation that the introduction of a common PSC
    policy will be cost-neutral, e.g. that it would not lead to
    an augmentation of MTBF (budget and finance) staff levels
    simply to administer the PSC mechanism itself;

    -     advice of the quantity of funds already raised through
    the levying of PSCs, the purpose to which these funds have
    been put (or will be put), and the point at which such funds
    may begin effectively subsidising - or creating savings in -
    the Regular Budget.

    We also note that some Member States continue to suggest a
    discriminatory approach whereby certain lines of
    extrabudgetary funding should be exempted from the common PSC
    policy.

    Our understanding of the Secretariat's reference at the June
    Board to "a case-by-case basis, as is currently the practice"
    was based on paragraph 3 of its "Policy on the Application of
    Programme Support Costs", according to which PSCs have been
    applied in the case of a few voluntary contributions in
    agreement with donors, or otherwise arranged through the
    provision of cost-free experts."

    Based on discussion at the June Board, it was our expectation
    that streams of extrabudgetary funding previously subject to
    PSCs would continue to have PSCs applied, and that PSCs could
    be charged on new streams of extrabudgetary funding subject
    to the agreement of the donor (n.b. Rule 108.02 of the
    Agency's Financial Rules provides that the Agency may charge
    PSCs only with the agreement of the contributor).

    We also understood that the Secretariat "could even find
    itself in the position of having to decline extrabudgetary
    funding" if administrative resources were not available in
    specific cases.

    However, until such time as Member States can see an
    official, transparent and equitable PSC policy applicable
    across the Agency, the Secretariat should not make its
    acceptance of new extrabudgetary contributions contingent on
    donor agreement to PSCs.

    In this context, we note that several donor agencies have
    already approved certain extrabudgetary contributions on the
    understanding that the entirety of the contribution would be
    used for direct project costs such that the retrospective
    application of PSCs would require administratively burdensome
    re-approval of the contribution.

    The Geneva Group is prepared to continue working with the
    Secretariat toward a fair, equitable and transparent common
    PSC policy.
    SCHULTE

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