Distinguished Members of the Executive Board,
Thank you for joining us at this session to discuss the UNCDF operational reserve.
The UNCDF operational reserve for regular resources was established in 1979 by the Governing Council, now the Executive Board. Its aim was to ensure an adequate core liquidity for the organization. The Governing Council decided to use no less than 20 per cent of the UNCDF programme and other core resources project commitments to calculate the reserve.
Between 1979 and today, UNCDF activities, income sources and business model have changed significantly but the formula and the methodology for the operational reserve calculation have not been updated.
UNCDF management and UNDP senior management recognized the need for an adjustment in the operational reserve methodology, and in 2014, the UN Board of Auditors requested UNCDF to substantiate the reserve amount and establish a method for calculating reserves to mitigate risks associated with non-core resources.
UNCDF initiated an independent operational reserve review in 2016. The paper before you presents those findings. It proposes an updated methodology for calculating UNCDF’s operational reserves for core, and proposes for the first time the inclusion of a reserve for non-core funds as well.
The operational reserve is meant to help UNCDF take the necessary administrative actions in the event of risks materializing, such as unexpected downturns in resources, fraud or other unanticipated shifts.
Back in 1979, UNCDF was largely funded by core resources and was focused primarily on stand-alone infrastructure projects. These projects were generally of long duration, and therefore dependent on predictable core contributions year in and year out so UNCDF could maintain its financial commitment to them. UNCDF was authorized back then to make commitments on a partial funding basis, meaning it could approve multi-year commitments against anticipated core income. The reserve was calculated at a level that could pick up the slack for a short time, if core income was not at the level required to meet those commitments, so that infrastructure projects were not interrupted mid-course.
Now, UNCDF has shorter project cycles than in the past, our funding mix has shifted, and as a result the majority of our resource commitments are made against confirmed income. Also, our core resources bear less of the programme costs because core resources are a smaller percentage of the total pie. In 2006, for example, non-core accounted for 36.7% of total resources. Fast forward to 2015, and non-core represented 78.5% of resources. And all non-core activities must be fully funded before commitments are made.
In light of these changes, the new methodology proposes the equivalent of 6 months of reserves based on the average of the previous three years expenditure against regular resources. That is robust, and gives adequate flexibility to take the required actions should any of the risks materialize.
On the non-core side, the proposed methodology recognizes that our programmes are fully funded but that some risks remain. These include:
- Unanticipated Decrease in revenues/inability of a partner to meet a commitment;
- Unexpected programme delays due to crisis or unrest; and
- Fraud risk.
As part of prudent financial management, UNCDF has already been maintaining an informal non-core operational reserve, funded out of our extra budgetary resources. We are now seeking your approval for the methodology of formally establishing a non-core reserve.
I would also just like to say that we have strengthened UNCDF’s risk management policy and practices through stronger systems and procedures, and better monitoring and reporting tools. We have worked closely with UNDP senior management and the Bureau for Management Services – notably with Darshak’s team – and are very grateful for the outstanding support we receive.
In short, the recommended methodology for the operational reserve is a necessary update, one that will reasonably provide for mitigation of risks associated with UNCDF’s business model.
I now hand over to Darshak to walk you through the proposal’s details. Thank you.