United Nations DP/2006/11

Executive Board of the Distr.: General

United Nations Development 9 January 2005
Programme and of the Original: English
United Nations Population Fund

First regular session 2006

20 to 27 January 2006, New York
Item 8 of the provisional agenda
United Nations Office for Project Services

Progress report of the Executive Director, a.i.,

on the activities of UNOPS*

Summary
The present report is submitted pursuant to Executive Board decision 2005/36 of 9 September
2005. The progress report provides an update on progress achieved in the implementation of
action to restore the viability of the United Nations Office for Project Services and an update on
the projected 2005 year-ending financial results.
Elements of a decision
The Executive Board may wish to take note of the progress report.
DP/2006/11

Contents
Chapter Page

Introduction...............................................................................................................................
3
I.Status of implementation of Executive Board decision 2005/36..............................................
3
II. Risk assessment and contingency planning during 2006-2007...............................................
4
III. 2005 Estimated year-to-date results and year-end Financial Projections................................
5
Annexes
1. Revised 2006-2007 biennium projections...............................................................................
6
2. Projected 2005 year-end financial results.............................................................................. 7

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Introduction
1. In its second regular session of 2005, the Executive Board requested the
Executive Director of the United Nations Office for Project Services (UNOPS),
through decision 2005/36, to carry out expeditiously a set of reform measures aimed
at restoring the financial viability of the organization. The present report is submitted
to the Executive Board through the Management Coordination Committee (MCC) of
the United Nations Office for Project Services.

I. Status of implementation of Executive Board decision

2005/36
2. In response to Executive Board decision 2005/36, UNOPS submits a revised
biennium budget projection (annex 1.). The projection responds to the challenges the
organization faces to restore its financial viability. The biennium projections respond
to four pressing challenges: (a) to streamline client portfolios in line with Executive
Board decision 2005/36; (b) to reduce administrative expenditures; (c) to realign the
organization to respond more efficiently to client demand; and (d) to replenish the
operational reserve. An update on the status of the implementation of Executive
Board decision 2005/36 is also provided.
3. The measures proposed in the UNOPS action plan (DP/2005/39) and
recognized in Executive Board decision 2005/36 included the relocation of UNOPS
headquarters and rationalization of its support services structure into a global service
centre. Relocation offers were received from five member states interested in hosting
a restructured UNOPS. UNOPS communicated to interested member states a
schedule of requirements and conducted site visits. Site visits were not mandatory
and did not affect the final evaluation of offers received. The deadline for the
submission of offers was set at 12 December 2005.
4. The offers were evaluated against the following criteria: (a) rapid availability
of rent-free office space; (b) fringe benefits to support timely implementation of the
action plan; (c) abatement of annual running costs; (d) logistical factors and local
labour market conditions; and (e) cost of living.
5. The evaluation concluded that, from a business case perspective, UNOPS
would relocate its current headquarters functions and Europe-based operations to
Denmark (Copenhagen) in the first half of 2006. The relocation grant provided for
by the Government of Denmark will cover all expenditures associated with the
relocation and the transition programme.
6. The relocation and associated transition measures will permit UNOPS, during
2006, to regain efficient use of its human and administrative resources. The proposed
course of action provides for a sharp rise, in 2007, of return on administrative
resources resulting from the three-pronged strategic direction that UNOPS will take:
(a) fixed-cost reduction; (b) enhanced operating efficiency; and (c) restoration of the
overall business prowess of the organization. (Since 1998, with the exception of
2003, fixed costs have exceeded revenue each year despite considerable growth in
business volume.)
7. The strategic direction of the biennium budget will provide for savings in the
UNOPS fixed-cost structure of $10 million in 2006 and a further $10 million in
2007. This requires: (a) relocation by mid-year of corporate service and headquarters
units, whereby all corporate service units will be consolidated into one global service
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centre; (b) rationalization of the European office network into the new UNOPS
headquarters location and consolidation of the UNOPS presence in Africa;
(c) consolidation of the emergency response and disaster preparedness capability;
and (d) implementation, over 2006-2007, of a business process improvement
programme. These measures will lead to a 25 per cent reduction in managerial posts
and an estimated 15 per cent reduction of programme management staff on
completion of the client portfolio rationalization.
8. The costs associated with the relocation, transfer of staff and non-renewal of
contracts component of the overall transition programme are estimated at $6.33
million in 2006 and $1 million in 2007. The transition programme costs will be
absorbed by the grant provided for by the Government of Denmark.
Reducing the fixed-cost base, adjusting portfolio delivery and restoring the
operational reserve
9. During the first quarter of 2006, UNOPS will proceed with a comprehensive
review of its business portfolio aimed at streamlining the delivery of its services;
wherever feasible, service delivery will take place at the country level. This activity
will precede the subsequent rationalization of the high fixed-cost regional client
division structure.
10. The level of delivery under the project portfolio of services is projected to
reach $781 million in 2006 and to level off at $612 million in 2007. The project
portfolio delivery volume is adjusted to reflect the gradual phase-out of current
lower value-added service lines producing marginal to negative returns, in
accordance with the provisions contained in the Executive Board decision 2005/36.
While the impact of the portfolio rationalization is expected to remain modest during
2006, it will accelerate the following year. Hence, projections account for an
estimated 20 per cent downward adjustment for portfolio delivery in 2007.
11. The overall financial performance is expected to improve. All costs for the
transition programme and the relocation are covered under the relocation grant. The
organization will thus generate income of $6.5 million in 2006, and targets a similar
level of income generation in 2007. It is noteworthy that the projected 2007 income
level would be achieved while overall delivery levels are reduced by 20 per cent. The
operational reserve will be replenished accordingly.
Adjusting service pricing and streamlining business processes
12. Activity-based costing pilots will be introduced during 2006 to price service
delivery more accurately, and a new UNOPS pricing policy will be instituted by mid-
2006. Similarly, UNOPS will engage in a revision and adjustment of its most basic
business processes to enhance process efficiency and thus reduce costs.

II. Risk assessment and contingency planning

during 2006-2007
13. The following contingency measures will be put in place to monitor and meet
the business and financial projections:
(a) The new global service centre will be built gradually by functionality. A
contingency overlap per functionality is foreseen to permit fallback onto
existing headquarters functionality should the new service centre incur delays.

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(b) If the long-term lease of the current New York premises cannot be
terminated on acceptable terms, UNOPS will make every effort to sublease
available office space for the remaining lease period thus limiting its financial
exposure.
(c) If business managers with delegated authority overspend on administrative
expenditures or do not meet their revenue targets in the first quarter of 2006,
budget authority will be centralized.
(d) Conservative business acquisition ratios underpin the projections to
mitigate, inter alia, possible market volatility or shrinkage.

III. 2005 estimated year-to-date results and year-end

financial projections
Business acquisition
14. Business acquisition as of 29 December 2005 stood at $1.01 billion. This is a
record level in the history of UNOPS and a continuation of the upward trend
recorded since 2004.
Project delivery and income (annex 2)
15. As of 4 December 2005, revenue from project implementation services and
revenue from the provision of services were recorded at $65.55 million. Project
delivery reached a record level of $822.52 million. Revenue already exceeded the
Board-approved $53.77 million level. The year-end delivery projection is expected to
reach $835 million. This would bring total UNOPS revenue to $55.70 million from
project implementation services and $9.46 million from services-only revenue,
together with revenue from interest and rental of $2.20 million.
Administrative expenditures
16. Estimated administrative expenditures for the period 1 January to 4 December
2005 amount to $53.83 million. The year-end projection is for expenditures to reach
$63.94 million.
17. The higher-than-anticipated expenditure level is primarily attributable to
additional expenditure incurred by the UNOPS Afghanistan Implementation Facility
(APIF), which grew rapidly during the course of the biennium and now contributes
approximately 45 per cent of revenue earned under the project portfolio of services.
Level of the operational reserve
18. The Board-approved 2005 budget foresaw a net replenishment of the UNOPS
reserve at $2.91 million. As at 4 December 2005, the year-end forecast of net income
from ongoing operations was estimated at $3.42 million.

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Annex 1. 2005 year-end financial projection

Projection Board-approved 2005

2005 actuals 5 2005 projected 6
(in millions of dollars) 2005 budget 1 projected
(1 Jan to 4 Dec) (4 Dec to 31 Dec) Year-end
SECTION 1. DELIVERY
Delivery amount 641.40 822.52 12.48 835.00

SECTION 2. REVENUES AND EXPENDITURES

Revenue
Total project revenue 43.52 54.87 0.83 55.70
Total ‘service only’ revenue 8.44 8.67 0.80 9.46
Other revenue (interest, rental)3 1.81 2.02 0.19 2.20
Total revenue 53.77 65.55 1.81 67.36

Administrative expenditures (KY001-KY004)

Salary and benefits 2 28.00 26.10 5.70 31.80
General and administrative 10.05 19.54 3.49 23.03
Subtotal 38.05 45.64 9.20 54.84

Reimbursement expenditures
PeopleSoft/Atlas payment to UNDP 3.50 1.94 0.18 2.12
Reimbursement costs 3.91 2.65 0.24 2.89
Subtotal 7.41 4.59 0.42 5.01

Allowance for doubtful accounts 0.70 3.02 0.27 3.29

Change management programmes 0.58 0.22 0.80
Audit observations-related initiatives 4.70

Total administrative expenditures 50.86 53.83 10.12 63.94

Income/(loss) from ongoing operations 2.91 11.73 (8.30) 3.42

SECTION 3. FUND BALANCE ROLL-FORWARD

Beginning fund balance 3 14.46 14.46

Income/(loss) from ongoing operations
(and separation) 2.91 3.42
Refund for Oil-for-Food Programme (11.50) (11.50)
Refund for World Food Programme (2.98) (2.98)
Ending fund balance 17.37 3.40

Reserve should be 4% of total delivery

plus administrative expenditure 27.69 35.96
Notes
1. January 2005 Executive Board approval.
2. Actual number from consolidated financial statement for 2004.
3. 2005 YTD shows actual revenues for fee-based projects and estimated revenues for fixed-fee projects and service projects.
4. 2005 delivery is assumed to be $835m net of 2004 and 2005 unliquidated obligations. Of this, APIF is estimated to make $400m, resulting in an
APIF income estimate of $26.56m and thus, per agreement with the Executive Director, a 2005 APIF administrative budget of $9.8m.
5. Projected 2005 salary and benefits include $2.32m for tax reimbursements and education grants and $2m for after-service health insurance.
6. 2005 salary and benefits includes a deduction of $0.301m for reclassification of administrative budget for Central Asia, Northern Africa and Europe.
7. Allowance for doubtful accounts includes $1.7 m for 2002-2003 Imprest reconciliation, $0.5m for project over-expenditures related to an Eastern
and Southern Africa regional office project in Mozambique, $0.3m of project over-expenditures related to Western and Central Africa regional office
projects, $0.2m for United Nations Office in Geneva (UNOG) prior year loss due to currency exchange and $0.593 for UNOG.

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Annex 2. Financial projections

Financial projections
(in millions of dollars) 2006 2007
SECTION 1. DELIVERY
Delivery amount 781.38 612.26

SECTION 2. REVENUES AND EXPENDITURES

Revenue from implementation of project portfolio
UNDP core and trust funds
UNDP management services agreement
Other United Nations organization
Total project revenue 51.48 40.34

Revenue from ‘service only’

International Fund for Agricultural Development
Reimbursable service agreements
Programme of Assistance to the Palestine People
Total ‘service only’ revenue 4.48 4.48

Other revenue (interest, rental) 3.42 4.59

Total revenue 59.37 49.40

Administrative expenditures
Salary and benefits 25.29 19.84
General and administrative 18.14 13.56
Subtotal 43.43 33.40

Reimbursement expenditures
PeopleSoft/Atlas payment to UNDP 3.10 3.10
Reimbursement costs 4.79 4.79
Subtotal 7.89 7.89

Allowance for doubtful accounts 1.50 0.86

Total administrative expenditures 52.82 42.15

Income/(loss) from ongoing operations 6.55 7.25

SECTION 3: Fund balance roll-forward

Beginning fund balance 3.42 9.97
Income/(loss) from ongoing operations 6.55 7.25
Ending fund balance 9.97 17.22

Note: Transition-related costs will be reimbursed by the Government of Denmark.

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