GA/AB/3606
17 March 2004
United States Proposal for $1.2 Billion Loan to Finance Capital Master Plan Discussed in Budget Committee
Also Takes Up Recommendations Made Following Audit of Pension Fund’s Investment Management Service
NEW YORK, 16 March (UN Headquarters) -- Following a United States’ proposal for a $1.2 billion loan to the Organization for implementation of the capital master plan to refurbish United Nations Headquarters, members of the Fifth Committee (Administrative and Budgetary) this morning discussed the means of financing that project.
The plan was approved by the Assembly in December 2002, when, by the terms of its resolution 57/292, it expressed concern over the hazards and deficiencies of the current United Nations complex and endorsed construction and lease purchase of a new United Nations building south of 42nd Street. The United States proposal is contained in a Secretary-General’s progress report on the status of possible funding for the plan.
Formally presenting his country’s provisional loan proposal, which is subject to approval of Congress, the United States representative said his Government would pay its 22 per cent regular assessed share of the loan’s principal and interest. That included a waiver of the United States past practice not to pay interest on United Nations loans. The United States Treasury would float a loan to raise the principal. The interest to be paid by Member States would not be paid to the United States Government, but to the investors who put up the principal. The United States Government would make no money on the loan to the United Nations and, in fact, was paying approximately $6 million to guarantee the loan and insure it against default.
Responding to the United States’ proposal, Ireland’s representative, on behalf of the European Union, expressed strong concern that the cost of the project would more than double as a result. During its negotiations prior to the adoption of 57/292, there was an understanding in the Fifth Committee that the United States’ offer would not be in the form of an interest-bearing loan. Accordingly, the Union continued to believe that the United States should provide a substantial portion of the funding for the capital master plan.
A similar concern was expressed by the representative of India who said that a loan with an interest rate of 5.54 per cent would entail a repayment obligation for the Organization of $2.5 billion on a $1.2 billion loan, assuming a 30-year repayment period.
China’s representative said the same kind of interest-free loans as had been used to build the United Nations complex should be used for the reconstruction of the Headquarters. He hoped the Secretary-General would engage in consultations with the host Government on the loan terms to arrive at an acceptable funding arrangement. Several speakers also encouraged the Secretary-General to continue to explore other financing options for the funding of the capital master plan, including private contributions.
Also this morning, as the Committee considered the implementation of the recommendations of the Office of Internal Oversight Services (OIOS), which were made following its audit of the United Nations Joint Staff Pension Fund Investment Management Service, speakers welcomed such measures as the appointment of a new Management Service Director and the adoption of a code of professional conduct for investment officers. Saying that the implementation of the recommendations was “on the right track”, speakers stressed the importance of the agenda item under discussion, in view of the large size of the Pension Fund, which amounted to over $26 billion.
The Under-Secretary-General for Management, Catherine Bertini, who introduced the report on the matter, said broad issues, such as a plan on governance, investment strategy and the overall investment process, including operations of the Investment Management Service, would need to be re-examined as part of a comprehensive review. While not registering a complete collapse of controls in the Service, the review of the Fund had identified procedural gaps and lapses in adherence to the prescribed manuals. The consulting firm of Deloitte and Touche had been engaged to assess the implementation of the OIOS audit recommendations and provide guidance on the way forward. However, in view of the unique nature of the Fund and the Investment Management Service, adoption of practices of some other entities could present practical challenges.
Listing the initiatives taken since October, she said that an assessment of governance and strategy had been deferred, as OIOS had undertaken a further audit on the governance of the Fund at the end of last year. The assessment of the investment processes and operations had been set in motion. A detailed request for a proposal for consultancy had been issued in February to various companies that were competent in that sphere.
The Committee is expected to take up administrative and budgetary aspects of peacekeeping financing at 10 a.m. Wednesday, 17 March.
Background
As the Fifth Committee (Administrative and Budgetary) met this morning, it was expected to consider the audit of the Investment Management Service of the United Nations Joint Staff Pension Board, as well as the status of possible funding arrangements for the capital master plan.
The Committee had before it a report of the Secretary-General on the implementation of the recommendations of the Office of Internal Oversight Services (OIOS) on the Investment Management Service of the United Nations Joint Staff Pension Fund (document A/58/725). The report is submitted pursuant to General Assembly resolution 279 of December 2003, in which the Assembly took note of the OIOS report on the audit of the Investment Service Management.
The report notes that the OIOS conducted its audit of the Fund’s Investment Management Service between September 2001 and March 2002 of the Service’s operations in 2000-2001. A final internal report, presented to the administration in October 2002, contained a total of 29 recommendations, identifying weaknesses in areas relating to governance and strategies, investment management practices and procurement and contract administration. After the internal report was issued, the Investment Management Service had implemented a number of recommendations. The present report provides an update on the recommendations contained in the OIOS report, as well as an overall update on the multi-pronged action being taken to implement the recommendations.
Also before the Committee was the report of the Secretary-General on the status of possible funding arrangements for the capital master plan (document A/58/729). In February 2004, the host country Government informed the Secretariat that the United States had offered to lend the Organization some $1.2 billion to finance the capital master plan. The offer is provisional in nature, subject to approval by the United States Congress. By the terms of the offer, the host country would provide financing in segments during the construction phase of the capital master plan. Interest would be paid annually on the advances received, at a rate of 5.54 per cent.
According to the report, the Assembly, in its resolution 57/292, appropriated some $25.5 million for the first phase of the design work for the plan, which is likely to be completed by the end of 2004 or February 2005. In the same resolution, the Assembly gave the Secretary-General authority to enter into commitments of up to $26 million for the second phase of the design work, which is anticipated to be commenced in 2005, and to be completed by early 2006.
In the report, the Secretary-General recommends that the Assembly note with appreciation the intention of the host country Government to offer a loan to the Organization, to be offered as repayable with interest, which would increase the overall cost. The Secretary-General also recommends that the Assembly request him to consult further with host country authorities on the exact terms and conditions of the loan and to report on the outcome of such consultations at the fifty-ninth session. The Assembly would also request the Secretary-General to explore other funding opportunities, including contributions from public and private sources.
Introduction of Report
CATHERINE BERTINI, Under-Secretary-General for Management, introduced the Secretary-General’s report on the implementation of the recommendations of the Office of Internal Oversight Services on the audit of the Investment Management Services of the Joint Staff Pension Fund (document A/58/725). She recalled that last October, she had informed the Committee that she had engaged the consulting firm of Deloitte and Touche to assess the implementation of the OIOS audit recommendations and provide guidance on the way forward. At that time, she had also shared with the Committee the most significant observations of the consultants.
The analysis had revealed that the Fund and the Investment Management Service were unique among pension funds and that adoption of practices of some other entities could present practical challenges, she continued. Broad issues, such as a plan on governance, investment strategy and the overall investment process, including operations of the Investment Management Service, would need to be re-examined as part of a comprehensive review. Also, while the OIOS recommendations did not denote a complete collapse of controls in the Service, they did identify procedural gaps and lapses in adherence to the prescribed manuals. Another finding of the consultants was that information technology was underutilized in automating controls.
Listing the initiatives taken since October, she said that an assessment of governance and strategy (Track I of the approach taken in response to the recommendations) had been deferred, as the Oversight Office had undertaken a further audit on the governance of the Fund at the end of last year. The second track -- investment processes and operations -- had been set in motion. A detailed request for a proposal for consultancy had been issued in February to various companies that were competent in that sphere. Among other measures that had been initiated in the past four months, she mentioned the adoption of a code of professional conduct for investment officers. Investment officers were now required to submit financial disclosures on an annual basis, starting this year. In the long term, she envisaged development of a code of conduct, specific to the United Nations system, for investment officers.
Yet another positive change had been the strict use of competitive procedures in the procurement of services for the Service, she said, which had already resulted in obtaining better value for the Organization in terms of fees for investment advisory services. Last, but not least, was the appointment of a new Director for the Investment Management Service, who was expected to be on board by mid-May.
Statements
AKIRA YAMAMOTO (Japan) acknowledged the important role of the Fund, saying that its performance had a significant impact on the morale of the Organization’s staff members. As mentioned in the report, in the management of the pension fund there were two important aspects: governance and strategy; and the investment process and operation. For better and healthier management, it was essential that those two aspects be improved and coordinated. Therefore, his delegation welcomed the two-track approach in which both aspects were pursued at the same time. He also welcomed the appointment of a new Director for the Investment Management Service with very extensive experience in investment. He hoped that the Under-Secretary-General would keep in close communication with the new Director.
AHMED FARID (Saudi Arabia) stressed the importance of the agenda item under discussion, in view of the large size of the Pension Fund. He welcomed the two-track approach mentioned in the report and the temporary assignment of a legal officer to review all contracts of the Investment Service and strengthen its documentation. Also welcome was the assignment of the new Director. While a code of ethics had already been adopted, he also looked forward to the development of the code of conduct. The Organization was on the right track in that area.
THOMAS REPASCH (United States) said that last fall, when the original OIOS report was introduced, his delegation had expressed great concern about the report’s findings, which indicated, among other things, poor management. He was pleased to see that the Secretariat had taken those concerns seriously.
He said he had three questions, including what the Oversight Office thought about the actions that had been taken so far. As OIOS auditors had carried out the initial review, their views on the implementation part of the reporting process was needed. On the consulting services engaged, he noted that another firm would be engaged to conduct a more in-depth evaluation. He wanted to know the total cost of those services. While welcoming the fact that a new director had been hired, he had to wonder why it had taken so long to bring somebody on board. The last director had retired last fall. As the United Nations had mandatory retirement, it should have been planned well in advance. Why the nine-month gap had been allowed when the Management Service was found to have irregular management was a question that begged to be asked.
Ms. BERTINI, Under-Secretary-General for Management, responding first to the last question, said she had no good answer to that question. When she had been told of the coming vacancy last April, she had instructed that proper steps be taken to post the job, which had been held by the same person for so long that a new job description needed to be rewritten. By the time it had been posted, in late July-August, there was no way a selection could have been made. The Department of Management had been fairly preoccupied by other matters at that time. She regretted the gap, and did not like to manage the process that way, but it was the best that could be done.
The Fund’s overall level of contributions, which was over some $26 billion, had returned to March 2000 levels, she noted. On the cost of the contracts, Deloitte and Touche had been paid some $27,500 for the review. She had felt that it had been essential to bring in a reputable firm, as there were differences of opinion on some of the issues. As a result of their proposal, Deloitte and Touche had offered a framework on how to proceed. Deloitte and Touche had helped to organize the way through a second track of important issues identified by the Oversight Office. She did not know the cost for the services that would be engaged for the in-depth review, as it was still in competition. She did not believe that $27,500 was too much to pay for clarity from real professionals on what was needed. She also noted that the OIOS had welcomed the adoption of the code of conduct.
Introduction
Introducing the report of the Secretary-General on the capital master plan, Ms. BERTINI said the host country Government had on 20 February 2004 extended a provisional offer for a $1.2 billion loan to the United Nations to finance the plan. The offer was subject to approval of the draft Presidential Budget by the United States Congress. The funding for construction needed to be available to the United Nations by late 2006.
The Vice-Chairman of the Advisory Committee on Administrative and Budgetary Questions (ACABQ), RAJAT SAHA, said that the issue of possible funding arrangements was a matter for policy consideration by the General Assembly. The ACABQ would revert to the issue in the context of further reporting by the Secretary-General, and its further consideration of the capital master plan would take into account the policy guidelines that the Assembly might wish to provide in that regard.
Statements
MARGARET STANLEY (Ireland), speaking on behalf of the European Union and associated States, said that the capital master plan was of major strategic importance for the United Nations. The safety and security of all those who worked at the Headquarters was of primary concern. There was universal agreement that the Secretariat was in urgent need of major repair, which was based on well-established concerns relating to building and safety codes, security, hazardous materials, as well as the need for universal accessibility and energy efficiency.
Noting the provisional offer of the host country as outlined in document A/58/729, she said that in making the proposal the United States had also acknowledged the importance of the project. However, the Union would like to express its strong concern that the United States proposal would result in more than doubling of the cost of the project. That greatly increased cost would have to be borne by all Member States. As host country, the United States bore important, unique responsibilities towards the United Nations and, therefore, also for the successful implementation of the capital master plan. In that connection, she recalled the understanding of the Fifth Committee, during its negotiations, which resulted in resolution 57/292, that the United States offer would not be in the form of an interest-bearing loan.
Accordingly, the Union continued to believe that the United States should provide a substantial portion of the funding for the capital master plan, she said. She also encouraged the Secretary-General to continue to explore all financing options for the funding of the plan, including the seeking of private contributions and setting up of a financial advisory board.
PATRICK F. KENNEDY (United States),formally presenting his Government’s funding proposal for the capital master plan, said he would have wished to present the offer before it had been attacked. The Secretary-General’s report outlined an illustrative example of the proposed loan of up to $1.2 billion at an interest rate of 5.54 per cent for a period of up to 30 years. He asked that the Committee note the word “proposal”, as the United States Congress had to approve the President’s budget plan. Congress took up the capital master plan funding proposal as part of the total fiscal year 2005 budget, discussions that were expected to be finalized by 30 September 2004 for the fiscal year beginning 1 October 2004.
Clarifying certain points of the provisional loan proposal, he said his Government would pay its 22 per cent regular assessed share of the loan’s principal and interest. That included a waiver of the United States past practice not to pay interest on United Nations loans. The United States Treasury would float a loan to raise the principal. The interest to be paid by Member States would not be paid to the United States Government, but to the investors who put up the principal. The United States Government would make no money on the loan to the United Nations and, in fact, was paying approximately $6 million to guarantee the loan and insure against default.
It was also important to understand that in order to present some scope to the proposal, an illustrative example had had to be picked, he added. A 30-year term was used, based on the 30-year term of the original loan that funded the construction of the United Nations. The 30-year term was actually a five-year grace period where only interest was paid, followed by 25 years payment of interest and principal. The term could actually be any lesser amount, if Member States so decided. The $1.2 billion loan amount was the maximum potential amount, as the figure included all capital master plan scope options added to the baseline proposal. It was up to Member States, however, to decide if they wished to borrow the full sum or a lesser amount.
He said that his Government’s proposal assumed three equal disbursements of $400 million in the first three years of construction. The actual amounts drawn, however, and the specific times they were drawn depended on the United Nations actual needs. Depending on several variables available to Member States, their decision might result in lower overall loan costs. Variables were in four distinct but related factors, namely, the loan term, the interest rate, the loan amount and the disbursement plan.
Thirty years was the maximum term his Government was provisionally offering, he continued. Changing the loan term to 15 years, for example, including the grace period, would reduce the interest rate to 4.76 per cent. Total loan costs -- principal and interest -- would be $1.615 billion, or almost $896 million less than a 30-year loan. While the interest rate would not exceed 5.54 per cent for a 30-year, $1.2 billion loan, the interest rate would be less if the term was less than 30 years.
Regarding the loan amount, not choosing any scope options reduced the amount to $1.049 billion, he said. The full $1.2 billion loan amount was the maximum amount being offered. Any lesser figure reduced the overall costs to Member States. The final variable, the loan disbursement plan, was based notionally on three equal $400 million payments, three years in a row. The capital master plan Programme Office advised that only about $120 million would be needed in the first year, so a longer disbursement trend would reduce loan costs.
He asked the Committee to adopt a resolution that would welcome the Secretary-General’s report and the United States provisional loan offer and defer any further discussion until the fifty-ninth session, as the provisional offer remained provisional until the United States Congress acted on the President’s budget. Any loan offer approved by the United States Congress would be valid until 30 September 2005 and the actual loan agreement would have to be signed by that date.
As the upper limits of the loan were known, it might be appropriate for the Secretary-General to explore other funding opportunities, including contributions from public and private sources. The economic cost of redoing the current United Nations compound in a piecemeal, reactive fashion would be significant. When considering the United States effort as the host nation, one must also consider the separate but related efforts of the city and State of New York to design and build a secure building on Robert Moses Park. Consolidating United Nations offices into a new United Nations annex, with below commercial market rental rates, would provide significant savings to the United Nations and the Member States and an improved security profile for all those who worked in the annex. At the end of the bond term used by the City and State to construct the building, the United Nations would own the building and have free use of the land on which it stood.
Ms. SAKATA (Japan) said the capital master plan was important since the project related to the United Nations security. Based on that notion, Japan supported resolution 57/292 of December 2002 and believed that Member States should not waste time, but deal with the issue earnestly. Regarding the proposal by the host country, while it indicated its commitment to support the capital master plan, it fell short of what her delegation had expected of the host country. She was not certain that the Secretariat had received sufficient information on the details of the proposal. To lead the discussion properly, Member States must be well briefed in informal consultations.
JAIDEEP MAZUMDAR (India) said that in October 2002 his delegation had expressed its concern that delay in the implementation of the project would result in cost escalation of 3.5 per cent per annum, and emphasized that it was essential to arrive at a speedy conclusion of the financing arrangements for the project. A year and a half later, however, the Organization was essentially in the same position as it had been then.
Turning to the intention of the host Government to offer a loan to the Organization, he noted its provisional nature and remarked that the terms of the potential loan, with an interest rate of 5.54 per cent would entail a repayment obligation for the Organization of $2.5 billion on a $1.2 billion loan, assuming a 30-year repayment period. He also noted that in paragraph 29 of its resolution 57/292, the Assembly had requested the Secretary-General to report to the fifty-eighth session on the status of funding arrangements, including, but not limited to, a financial package to be provided by the host country. The Secretary-General had also been requested to report on other contributions and his efforts to secure them from public and private sources. In the absence of any mention of such efforts in the report before the Committee, he could only assume that no efforts had been made to that effect.
While he appreciated the intention of the host country to offer a loan to the Organization, he hoped that the Secretary-General would be able to consult with the host country authorities so that the terms and conditions of the potential loan would be acceptable to all Member States, he said. Pending such consultations on the potential offer, he agreed with the Secretary-General’s recommendation that the Assembly again authorize him to explore other funding opportunities, including from public and private sources, and to report to the Assembly at its fifty-ninth session.
VLADIMIR A. IOSIFOV (Russian Federation) said that now that the capital master plan had been approved following lengthy negotiations, the main issue before the Committee was the source of financing for the project. He noted the role of the host country in seeking the funding. The latest proposals could contribute to finding a solution. He noted the reasoning of the host country in determining the parameters of the proposal, as well as the preliminary nature of the offer.
The United Nations presence in New York had become not only an integral element of the landscape, but also an economic component of the city, he continued. He appreciated the active participation in the project of the city and State authorities of New York and believed that it was necessary to continue to work with the host country in the search for the best financing option. At this juncture, it was possible to agree with the Secretary-General’s recommendations, contained in paragraph 7 of the report.
XINXIA WANG (China) said that during the fifty-seventh session of the General Assembly, his delegation had made a formal statement on the capital master plan, in which it was stated that a well planned renovation was better than temporary repairs. Once successfully implemented, the plan was sure to bring about changes to the infrastructure of the United Nations Headquarters, which was important for security and benefits of Secretariat personnel. Financing held the key to the plan’s implementation. More than a year ago, the Chinese delegation had said that the same kind of interest-free loans used to build the United Nations complex should also be used for financing today’s plan. That position remained unchanged. He was aware of the intention of the host Government to provide loans. He hoped the Secretary-General would engage, in consultations with the host Government, on the loan terms to arrive at an acceptable funding arrangement. His delegation was also open to other possible options.
GILDA MOTTA SANTOS-NEVES (Brazil) said the project must proceed, given its implications for security, a healthy working environment and the financial consequences of addressing the building’s maintenance in a piecemeal approach. She was not sure how to address the offer, which awaited congressional approval, as it seemed not to be an offer from the United States Government as a whole. Her delegation was disappointed with the Secretary-General’s present report on the matter, as well as his last report, as they had not addressed the provisions contained in resolution 57/292. Efforts to secure financial resources from public and private sectors had not been addressed in the reports. It seemed that no alternative funding arrangements had been sought. She hoped the next report would contain more detailed initiatives in that direction.
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