Rein in Cost of Headquarters Renovation, Budget Committee Urges as Project Director Stresses Extra Funds Vital for Timely Completion
Rein in Cost of Headquarters Renovation, Budget Committee Urges as Project Director Stresses Extra Funds Vital for Timely Completion
|Department of Public Information • News and Media Division • New York|
Sixty-eighth General Assembly
13th Meeting (AM)
Rein in Cost of Headquarters Renovation, Budget Committee Urges as Project
Director Stresses Extra Funds Vital for timely completion
Seven years after they gave the go-ahead for the massive, multi-billion-dollar renovation of the United Nations historic Headquarters building, delegates at the Fifth Committee (Budgetary and Administrative) today urged the Secretariat and managers of the Capital Master Plan to rein in cost overruns and add-ons that tallied nearly $400 million.
While generally supportive of the comprehensive renovation project slated to end with the opening of the venerated General Assembly Hall in September 2014, some delegates were unhappy with the project’s final estimated cost of $2.114 billion. That figure, Malaysia’s delegate noted, was nearly 12 per cent over the approved budget authorized in 2006 through Assembly resolution 61/251. Malaysia was concerned about the cost overruns tallying $224.4 million and additional so-called associated costs of $141.4 million and the $15 million earmarked for a secondary data centre.
At the same time, Michael Adlerstein, Assistant Secretary-General and the Plan’s Executive Director, told the Committee today that the project would run out of cash next spring and stall unless the Assembly decided to fund these additional costs in a timely manner. He said he was convinced the Committee would find a way to ensure the Plan would be successfully completed for the 2014 general debate, “but this will required a decisive step to resolve the project cost shortfall, the associated costs and the cost of the secondary data centre”. Mr. Alderstein introduced the Secretary-General’s eleventh annual progress reports on the Plan.
Australia’s delegate, also speaking on behalf of Canada and New Zealand, voiced their worries with the cost overruns yet acknowledged most could not have been predicted when the initial budget was approved. He noted that the Secretariat had recommended financing the $224.4 million shortfall by suspending the renovation of the Library and South Annex buildings and through various fiscal techniques, including by using accumulated interest income and the working capital reserve, and applying projected future interest income. He understood why the Assembly had been asked to remove the renovation of these buildings from the project scope, given security concerns. He agreed that replacing both buildings on their existing site, for a cost of $350 million to $450 million, was a poor use of scarce financial resources.
Fiji’s delegate, on behalf of the “Group of 77” and China, insisted the project be complete on time within the approved budget and without changing the project’s original scope or compromising its quality. The Group was very concerned that the Secretary-General had not presented viable alternatives to complete the Plan in its entirety. He urged the Secretariat to quickly find an agreeable solution with the host Government for renovating the South Annex and Library buildings.
Hugh O’Farrell, Chairman, Audit Operations Committee, Board of Auditors, introduced the Board’s report on the Plan. To meet the 2015 completion date, the project team would need to make great efforts, he said. An agreement was needed on financing the current cost overruns and adjusting the project’s scope. The major risk to delivery was the compressed schedule for the Assembly’s refurbishment, which had been reduced from 16.5 months to 13.5 months.
Chandrumouli Ramanathan, Deputy Controller of the Department of Management’s Office of Programme Planning, Budget and Accounts, introduced reports on the Plan and managing after-service health insurance liabilities. Carlos Ruiz Massieu, Chair of the Advisory Committee on Administrative and Budgetary Questions (ACABQ), introduced the Advisory Committee’s reports on the Plan and the second agenda item, managing after-service life insurance liabilities.
Also speaking today were delegates from the European Union and Japan.
The Committee will reconvene at 10 a.m., Friday, 1 November to take up its agenda item on appointments to fill vacancies in subsidiary organs and other appointments.
The Committee met today to discuss the Capital Master Plan, an agenda item found under the Proposed Programme budget: biennium 2014-2015, and after-service Health Insurance, part of the Programme budget: biennium 2012-2013 agenda item. Regarding the Capital Master Plan, it considered two reports of the Secretary-General: Eleventh annual progress report on the implementation of the capital master plan (document A/68/352), and Final expenditure for associated costs for the period from 2008 to 2013 (document A/68/352/Add.1). It also had before it the Report of the Board of Auditors for the year December 2012, Volume V Capital Master Plan (document A/68/5 (Vol.V)); a Secretary-General report titled Implementation of the recommendations of the Board of Auditors contained in its report on the capital master plan for the year ended 31 December 2012 (document A/68/336)); and the Advisory Committee on Administrative and Budgetary Questions’ (ACABQ) report on the Capital Master Plan (document A/68/551).
Concerning the second topic, the Committee consider the Secretary-General’s report titled Managing after-service health insurance (document A/68/353) and the Advisory Committee’s accompanying report, also titled Managing after-service health insurance liabilities (document A/68/550).
Capital Master Plan
MICHAEL ADLERSTEIN, Assistant Secretary-General and Executive Director, Capital Master Plan, introduced the Secretary-General’s eleventh annual progress report on the Plan (document A/68/352) and its addendum (A/68/352/Add.1) on behalf of Under-Secretary-General Yukio Takasu. Mr. Adlerstein said the project was proceeding well and on schedule. The Secretariat and Conference buildings were completed and in full use and the General Assembly Building renovation was underway. He was confident the Assembly Hall would be renovated by summer 2014 and the project would be completed on time.
However, the Assembly needed to resolve critical financing questions to ensure it would be backed by the necessary resources to continue its work, he said. There was greater certainty that, if the Assembly approved the Secretary-General’s proposals, the project would be completed without the need for an additional assessment. Yet, as explained in the eleventh annual progress report, the associated costs and the cost of the secondary data centre, which had not been part of the project’s original scope, could not be absorbed within the Plan’s approved funds. They needed a different treatment.
The project was on schedule, moving ahead at an accelerated pace, and the end was in sight, he said. The occupancy of the Conference Building was delayed by more than three months, primarily because of Hurricane Sandy in October 2012. Yet the Secretariat expected the Assembly Hall to be completed in time for the general debate in September 2014. The estimated cost to complete the project was $2.114 billion. Compared to last year, the total cost for completion had been reduced by $13 million, while the overall shortfall had been reduced by $16 million. This was due to cost reductions approved by the Assembly and an increase in funding through donations by $3 million.
The progress report provided a way to address the project’s financial shortfall, which stood at $224.4 million in June 2013, he said. This compared to the originally approved budget, plus donations, which totalled $1.89 billion. The proposed arrangements included the continued suspension of work on the Library and South Annex Building due to prevailing security conditions ($65 million), and the use of the balance of the interest income and working capital reserve (accumulated to $159.4 million). If the Assembly endorsed these recommendations, the project would be completed without additional assessed contributions by Member States. If not, the Plan would run out of cash before the resumed session.
As previously reported, the Library and South Annex building could not be renovated to secure them against threats from the external roadways next to Headquarters, he said. If work on these buildings continued to be suspended, all formal and informal functions would be relocated. To remove the existing Library and South Annex Buildings and build blast-free replacement structures would require $350 million to $400 million. Other medium-term options to relocate the buildings’ functions to other locations on the campus would also require significant capital expenditures. These options were not recommended with the current financial environment faced by Member States. The Secretary-General believed that the library and cafeteria functions should be maintained in the current buildings while a long-term accommodation option was decided.
Turning to associated costs, Mr. Adlerstein said the cumulative and projected associated costs totalled $141.4 million through 31 December 2013 while the secondary data centre price tag was $15 million. These costs were not included in the original scope of the Plan. The Assembly had authorized the Secretary-General to make commitments for the associated costs as well as for the Plan and all expenditures were approved by the Assembly. Now, at the last stage of project implementation, Plan funds would no longer support these costs and a solution was needed.
The project would run out of cash by the end of April 2014 and it would not be possible to move ahead unless the Assembly decided to fund the associated costs in a timely manner. Mr. Adlerstein said he was convinced the Committee would find a way to ensure the Plan would be successfully completed by next year for the general debate, “but this will require a decisive step to resole the project cost shortfall, the associated costs and the cost of the secondary data centre”.
HUGH O’FARRELL, Chairman, Audit Operations Committee, Board of Auditors, outlined the key findings of the Board’s report on the Plan, pointing to considerable physical progress, and a reduction in the level of risk to the delivery. To meet the 2015 date for completion, the project team would need to exert great effort, while agreement was needed on financing the current cost overrun – or funding gap – and on a change in scope due to enhanced security upgrade and the use of the $65 million originally intended for renovation of the Library and South Annex. The major risk to delivery was the compressed schedule for the Assembly’s refurbishment, which had been reduced from 16.5 months to 13.5 months. That renovation needed to be completed before the general debate in September 2014 and similar issues to those faced during commissioning of the Conference Building’s broadcast system remained possible.
He pointed to an anticipated final cost of $2.379 billion, $314 million higher than the revised budget of $2.065 billion but $115 million less than the excess cited in the last report. No new cost pressures or significant risks had since emerged and the report detailed the Administration’s proposal to finance the funding gap. Interest from the Working Capital Fund would be used, along with the $65 million budget of the cancelled renovation of the Library and South Annex, with significant cost efficiencies also realised. The report also contained a commentary on the Administration’s plan for financing the difference between the currently approved budget of the Plan and the funds available. No further assessment from Member States was sought, except relating to associated costs, and existing resources would fund the remaining elements of the Plan. That would not reduce the reported budget overrun but would help reduce the funding gap.
The position on the Library and South Annex had not changed, he said. No budgeted solution to re-house its functions had been presented and the audit had made clear that the Department of Management was responsible for doing that. He could not provide firm assurances over the robustness of the process to determine the anticipated final cost, and was concerned about the analytical basis of cost forecasting. Some risks identified were not linked explicitly to the forecast for the final cost, he noted, adding that no structure trend analysis was undertaken to determine any potential liability for future change orders, claims or the costs of unexpected acceleration needed to finish the project.
The Administration’s cost-benefit analysis of the flexible use of office space could realise significant cost efficiencies and reduce reliance on rented office accommodation but occupancy data would be vital to that. Such data was currently unavailable but it was vital to developing a practical understanding of the United Nations’ current and future estate requirements. There remained no long-term asset management strategy for the newly renovated campus or for the global United Nations estate and the Organization would need to heed lessons learned from delivering the Plan.
CHANDRAMOULI RAMANATHAN, Deputy Controller, Office of Programme Planning, Budget and Accounts, Department of Management, introduced the Secretary-General’s report on implementation of the recommendations of the Board of Auditors relating to the Plan, noting with appreciation the decrease in the number of Board recommendations from 12 to nine compared to the previous year. Of the nine recommendations, two were already implemented, with two others due to be implemented by year’s end. Three others were due for implementation by the end of 2014 and the remaining two due for implementation by the end of 2015. From the 12 recommendations made in 2012, nine were already implemented, with two still in progress and the other not accepted. He stressed his commitment to full, timely implementation of the accepted Board of Auditor’s recommendations and to their full incorporation into management processes. He also noted the Board’s contribution to improving the efficiency and effectiveness of the United Nations.
CARLOS RUIZ MASSIEU, Chair of the Advisory Committee on Administrative and Budgetary Questions (ACABQ), introduced the Advisory Committee’s report on the implementation of the capital master plan and the financing of the project and the associated costs (document A/68/551). The Advisory Committee regretted that the Secretariat had not sufficiently changed its approach on forecasting final costs to gain the Board of Auditors’ acceptance and said the management of the contingency provisions under the Plan still lacked transparency. The Advisory Committee also regretted that the Secretariat did not give the Board the information it needed to properly verify the occupancy of the renovated Headquarters campus.
Regarding the South Annex Building and Dag Hammarskjold Library Building, the Advisory Committee noted the uncertainties that could impact Assembly decisions and believed the Secretariat should be asked to submit feasible alternative options for the two buildings’ functions, he said. These alternative options would be independent of the long-term Headquarters accommodation requirements. These two buildings should be within the scope of the Plan until the Assembly decided on the options. The Advisory Committee believed the financing of the associated costs and secondary data centre should be considered at the Committee’s first resumed session in 2014.
PETER THOMSON (Fiji), speaking on behalf of the “Group of 77” developing countries and China, said the Group had consistently insisted the Plan be completed on time and within its approved budget, without impacting the project’s original scope or compromising its quality. Management’s handling of the Plan’s budget and unresolved issues on associated costs were some of delegates’ major concerns. The Group regretted the Secretariat had not sufficiently changed its approach on forecasting final project costs to gain the Board of Auditors’ acceptance. The sustained lack of transparency surrounding reporting to the Assembly on the management of contingency provisions was also a source of concern. The Group strongly backed the transparent and timely reporting on all aspects of the Plan’s implementation so the Assembly could make appropriate decisions. “Failure to do so could be equated to a management fault,” he added.
He questioned whether the Secretariat had the capacity to complete the Assembly Building in time for the 2014 general debate and said its report did not lay out a clear assessment of the risks or contingency measures if the schedule became unrealistic. The Group also was very concerned that the Secretary-General had not presented viable alternatives for completion of the Plan in its entirety. He urged the Secretariat to quickly find an agreeable solution to the renovation of the South Annex and Library buildings with the Host Government. “It is unacceptable that a proposal sent by the United Nations to the Host Government in December 2011 is left unanswered for almost two years,” he said. The Group would not consider the project’s work completed until an agreeable solution was reached. The Group also firmly rejected any proposal to defer demolishing the Temporary North Lawn Building. Assembly resolution 65/269 included a mandate for the timely demolition and removal of that building when the Headquarters renovation work was completed.
GERARDUS VAN DEN AKKER, a representative of the European Union Delegation, expressed concerned about the final stages of the Plan and its associated final financial developments, including questions over the Administration’s approach to forecasting the project’s anticipated final costs. Outlining several areas of particular concern, he called for transparent accounting of all project costs, urging the Administration to pursue further savings and cost-reductions. The Secretariat’s latest information on project expenditures was neither complete nor satisfactory and additional and detailed justifications would be required. He concurred with ACABQ that a final decision on associated costs of the Plan would have to wait until the Secretariat could fully ascertain those costs and he requested the latest information on the Working Capital Fund and the Special Account.
He reiterated his call for the Secretariat to provide a clear plan on lessons learned regarding the Plan. Major capital expenditure projects had to be subject to great scrutiny before any decisions could be taken or major phases initiated, while robust governance and oversight structures were needed to ensure accountability. In addition, a standard and unified approach to delivery of major projects was needed. Occupancy levels, flexible working arrangements, swing-space related matters and the budgeting of associated costs were of particular note and he looked forward especially to receiving auditable occupancy numbers. Regarding sequencing of large-scale capital projects, he said the Plan could not be regarded in splendid isolation. It was linked to the Strategic Heritage Plan and the United Nations’ long-term accommodation needs. The future of the North Lawn Building, the Library and the South Annex would need to be decided and, in future, major capital projects should not be launched simultaneously.
EMIL STOJANOVSKI (Australia), also speaking on behalf of Canada and New Zealand, said he was pleased to see the “light at the end of the tunnel” and recognized the efforts made by the Plan’s management over the past year to place the project on a more sustainable footing. Yet he remained concerned about the ongoing cost overruns. He acknowledged that most cost overruns associated with the project could not have been fully foreseen when the initial budget was approved. He noted that the Secretary-General had proposed recommendations to finance the project shortfall of $224.4 million, including the continued suspension of the renovation of the Library and South Annex buildings, the application of accumulated interest income and working capital reserve, and the application of projected future interest income.
He said he understood why the Assembly had been asked to remove the renovation of these buildings from the project scope, given their security concerns. He agreed that replacing both buildings on their existing site, for a cost of $350 million to $450 million, was a poor use of scarce financial resources. He looked forward to discussing this important issue so a consensus decision could be reached. Regarding the associated costs, he was disappointed that the Secretariat had been able to remove only $1.7 million from these total projected associated costs, which still totalled $141.4 million. He expected the Secretariat to continue examine ways to further absorb these costs among various departments as the project’s final year begun.
HUSSEIN HANIFF ( Malaysia) noted that the Secretariat report estimated the cost of completing the Plan at $2.114 billion. This was 11.9 per cent more than the approved budget authorized by Assembly resolution 61/251 in 2006. While the estimated figure showed a major increase, Malaysia continued to support the project’s completion in a timely manner. Malaysia was very concerned with the cost overrun of $224.4 million and urged the Secretariat to use all means necessary to absorb those cost overruns. It also was concerned with the additional associated costs totalling $141.4 million and the $15 million for a secondary data centre. Since these items were not part of the project’s budget, Malaysia urged the Secretariat to identify ways to absorb these costs.
He also stressed the importance of renovating the Assembly Hall in a timely manner. Malaysia had seen the complications and inconveniences experienced by all Member States when using the make-shift Assembly Hall in the North Lawn Building during the sixty-eighth session. He said the renovation of the South Annex and Library building should be completed within the specified costs under the Plan budget. While believing the Plan should be completed in a timely manner and within its approved budget, Malaysia was pragmatic and understood the project was not impervious to inflation or cost overruns. Yet Malaysia would ask the Secretariat to identify all ways to mitigate the estimated shortfall and cost overruns.
SHO ONO ( Japan) welcomed progress since the previous year on the successful completion and occupancy of the Secretariat Building, the completion and occupancy of the Conference Building and the commencement of the renovation of the Assembly Building. He was encouraged about assurances over completion of the Assembly renovation in time for the 2014 general debate and welcomed efforts to present updated information, options and financial implications pertaining to the Library and South Annex building. He would thoroughly examine the options presented. He stressed the importance of the Secretary-General containing associated costs, and noted that the Committee would be best placed to consider their financing during its first resumed session in 2014.
After-Service Health Insurance
CHANDRAMOULI RAMANATHAN, Deputy Controller, Office of Programme Planning, Budget and Accounts, introduced the Secretary-General’s report on managing the after-service health insurance liabilities (document A/68/353). He said the United Nations was not exempt from the pressure of the growing cost of providing post-retirement healthcare benefits to employees. A number of bodies in the United Nations system had taken steps to recognize and/or fund their liabilities, driven mainly by adoption of the International Public Sector Accounting Standards (IPSAS) that required the specific reflection of such liabilities. When measured in 2011, the total liability faced by the United Nations was $3.65 billion, with that figure projected to grow to $3.94 billion by the end of 2012. Seventy per cent of that figure related to the regular budget; 21 per cent to peacekeeping activities; and nine per cent to extrabudgetary funded activities.
In the face of such liabilities, the report addressed the need for a funding strategy to cover existing liabilities and to provide for the future, he said. Long-term, “pay-as-you-go” funding was unsustainable, with the resources needed under that option projected to grow by 247 per cent by the 2028-2029 biennium. The report therefore proposed implementation of an accrual on current staff expenditures in order to build a reserve. Initially, that would work in addition to “pay-as-you-go” funding but eventually reserve funds would replace the current mechanism.
The proposal was two-fold, he said. First, an accrual of 4.5 per cent against total staff costs would cover liabilities that increased with each year of service by staff. An additional accrual of 2 per cent against total staff costs would fund already accrued liabilities without the need for any special one-time funding. That rate would be applied for 20 years until full funding was achieved, resulting in the gradual replacement of “pay-as-you-go” funding by resources from the reserve funds. Periodic reviews of the accrual rates would be needed to make any necessary adjustments and ensure full funding of liabilities.
Legislation passed in the United States like the Patient Protection and Affordable Care Act could impact future valuations because many of the costs associated with after-service health insurance were associated with United States healthcare plans and that market was likely to be affected by the Act. Accruals would begin in 2016 and would be reflected in the budget estimates for the biennium 2016-2017. The proposed approach would benefit from a transparent method of costing of staff service; it differentiated between funding of liabilities already accrued and those to be accrued. It would also maintain transparency in the true cost of employing staff even once full funding of past liabilities was achieved. Investment of the reserve funds that would be generated from the accruals would initially be handled by the United Nations Treasury within existing resources given that it currently already managed a portfolio of more than $6 billion for more than 100 pooled funds.
The report also explained measures taken by the Secretariat since 2009 to contain costs of related healthcare plans that impacted the liabilities, he said, adding that Member States had asked the Secretary-General to look into the financial and legal implications of changes in the scope and coverage of the plans for retirees, as well as to the contribution levels. Some changes to the plan had been implemented to try and contain costs but more significant changes could potentially impact upon “acquired rights” of active and retired staff, which were protected by the Staff Regulations approved by the Assembly.
PETER THOMSON (Fiji), speaking on behalf the Group of 77 and China, stressed the importance of the welfare of staff members, stating his general satisfaction with the settlement of their end-of-service liabilities as many could not benefit from the social security schemes of Member States because of their service. He noted the long-term implications of after service health insurance liabilities, calling for careful consideration of the issue and noting the different approaches to funding liabilities that had already been adopted in the Organization. He agreed with ACABQ that a system-wide approach to the matter was needed and he noted the rapid increase in liabilities recorded over the preceding five years. While he accepted that the “pay-as-you-go” approach had led to almost $4 billion in unfunded liabilities related to after-service health insurance benefits, he sought more information on the approach’s correlation with growing liabilities. He also hoped for more information on the judicious use of reserves in excess of reasonable industry and United Nations standards in the context of analysing various funding options.
He expressed serious concern that the Secretariat did not currently have a funding plan for its increasing unfunded portion of end-of-service liability, noting that the growth in liabilities and expenditures on after-service health insurance for retirees would continue to accelerate. The United Nations’ current financial statements indicated that no specific assets existed to settle the unfunded liabilities. He would seek more information on how the Secretariat could handle the situation, which had the potential to hamper its ability to become fully IPSAS-compliant. Funding of after-service healthcare was an issue of system-wide concern, he stated, looking to the approach of the Joint Staff Pension Fund and hoping for more information on the feasibility of expanding the Fund’s mandate to cover management of the liabilities.
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