Adaptation Fund and assessed contributions

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer- client relationship. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 15/12/2009

1. If the Adaptation Fund is funded (whether partly or wholly) through “assessed contributions”, how can this finance commitment be made as strong as possible? What would be the best draft text to achieve this?  How do other international agreements provide for assessed contributions? In particular, is there an example where an international agreement is strongly effective in securing payments of assessed contributions, and an example where an international agreement is weak in doing so? 

2. Could the agreement provide for penalties for not paying up on assessed contributions? For example, could a Party’s rights under the agreement (e.g. carbon trading rights) be suspended if it is in arrears? Is there precedent for this in other international agreements?   

Provision for assessed contributions is a feature of many international organisations, including the United Nations bodies. The issue of arrears and non-payment is the subject of many UN reports. Provision is typically made in the constitution of UN bodies for incentives and penalties in respect of contributions. A common type of incentive appears to be the distribution to Member States of a share of interest earnings generated by cash surpluses. The most common type of penalty appears to be the temporary suspension of voting rights or membership until arrears are settled. There is evidence to suggest that such incentives and penalties are thought to be ineffective. It is clear that arrears is a problem for a number of UN bodies.

Draft language for strengthening “assessed contributions’ under the Adaptation Fund

The UNFCCC and the Kyoto Protocol did not provide directly for penalties. The Marrakesh Accords created an enforcement regime for non-compliance with emissions limits under  the Kyoto Protocol (Dec 24/CP.7, Annex XV) which includes suspension of eligibility to participate in emissions trading and the factoring of excess emissions into the assigned amounts for subsequent commitment periods as a penalty.

If there is sufficient political will to do so, the Parties are free to provide in any new LCA text and/or amend the Marrakesh Accords so that failure to make ‘assessed contributions’ is linked to certain penalties. Appropriate penalties might be (i) suspension of eligibility to participate in emissions trading and/or (ii) suspension of voting rights in the COP/CMP. In relation to (ii) however, note that this would raise procedural issues: Article 22(1) of the UNFCCC and Article 18 of the Kyoto Protocol provide that each party shall have one vote, so these treaties would themselves need to be amended (following the procedures set out in Articles 15 and 20 respectively) to allow for the suspension of voting rights. In general terms, the Parties would need to take account of practicalities and past experience, but have considerable discretion as to the penalties that are appropriate.

There are too many variables for us to provide definitive text. For example, the Adaptation Fund is currently a Kyoto Protocol body and lobbying is going on to make it the financial mechanism under the whole UNFCCC process. Answer 51 dealt with drafting and other issues relating to expanding the Adaptation Fund’s remit. We examine a number of scenarios below.

 Adaptation Fund as financial mechanism under UNFCCC pursuant to LCA protocol or COP decisions

(i) Voting rights

In the above scenario, the new text would have to deal with the issues in Answer 51 and would also need to include something like the following to deal with voting powers;

“Any Party which is in arrears in the payment of its financial contributions to the Adaptation Fund shall have no vote in the [COP] if the amount of its arrears equals or exceeds the amount of contributions due from it for the preceding [two] full years and upon fulfilment of these criteria such suspension of voting shall have immediate effect without the need for any further vote or action by the COP”.

(ii) Emissions trading

Suspension of participation of emissions trading in this scenario assumes that this concept will be applied in the LCA and not just KP.  If so, there are judgments to be made about whether the Enforcement Branch, which deals with non-compliance under the KP, is also the suitable body in the LCA context.  The Enforcement Branch is a Kyoto Protocol body and expanding its remit to the LCA track would raise similar complexities to those detailed in the Answer to question 51 regarding the Adaptation Fund.

For present purposes, we assume that the constitutional arrangements of both the Adaptation Fund Board and the Enforcement Branch have been altered to allow them to co-operate on this compliance issue and we suggest the language linking failure to pay ‘assessed contributions’ to participation in emissions trading could be;

In the event that any Party is in arrears in the payment of its financial contributions to the Adaptation Fund and the amount of such arrears equals or exceeds the amount of contributions due from it for the preceding [two] full years, the Adaptation Fund Board shall have the full and immediate authority to instruct the Enforcement Branch to suspend the relevant Party’s eligibility to make transfers as part of emissions trading under [Article 17 of the Kyoto Protocol] and [equivalent LCA provision]until such time as the Adaptation ..Fund Board instructs the Enforcement Branch that arrears have been paid and that participation in emissions trading can resume.”

Adaptation Fund remains under KP 

If emissions trading is not relevant under the LCA track, the references to the latter would simply be removed in the language in 1.1(ii) above.  Regarding 1.1(ii) the constitutional arrangements of the Adaptation Fund Board and the Enforcement Branch would need to be altered to allow co-operation on the issue, but the complex issues relating to expanding their remits to include the LCA would not arise.

Examples of ‘assessed contributions’ under international agreements

UN Charter – weak effectiveness 

Article 17 of the UN Charter provides for consideration and approval of the budget of the UN by the General Assembly.

Article 19 provides that “a Member of the UN which is in arrears in the payment of its financial contributions to the Organisation shall have no vote in the General Assembly if the amount of its arrears equals or exceeds the amount of contributions due from it for the preceding two full years.

Article 19 also gives the General Assembly the discretion to waive the suspension of voting rights if it is satisfied that the failure to pay is due to conditions beyond the control of the Member.

Regulation [3.1] of the Financial Regulations and Rules of the UN (the “Financial Rules”) provides for ‘assessed contributions’ and states that;

Appropriations … shall be financed by contributions from Member States, according to the scale of assessments determined by the General Assembly.”

Regulation [3.4 ]of the Financial Rules provides that contributions are due in full within 30 days of the UN Secretary General  requesting Member States contributions and advances to the Working Capital Fund or on the first day of the calendar year to which they relate, whichever is later.  Regulation [3.4] further provides that “as of 1 January of the following calendar year, the unpaid balance of such contributions and advances shall be considered to be one year in arrears.

There has been debate over whether Article 19 requires an automatic suspension of voting rights or whether such a suspension must be a matter for decision by the General Assembly.

Opinion appears to favour the view that suspension is not automatic.  There appear to be significant problems with enforcement of assessed contribution obligations under the UN Charter language.

The IMF – strong but inflexible mechanism

The IMF’s resources come predominantly from the quotas that members are required to subscribe for. Article III, Section 1 contains the obligation to pay the quota to the IMF and these quotas are reviewed periodically by the Board of Governors pursuant to Article III, Section 2.

The IMF Articles of Agreement do not provide a specific set of penalties or incentives for inducing compliance with these payment obligations, however Article XXVI, Section 2 provides that if a member fails to fulfil any of its obligations under the Articles, the IMF may prevent them from using the general resources of the IMF and that persistent failure may be sanctioned by suspending the voting rights of the member provided that there is a 70% vote in favour of such action. Where a member that has had their voting rights suspended continues to fail to fulfil its obligations, they may be required to withdraw from membership by a majority decision of the Board of Governors having 85% of the voting rights.

Although these enforcement mechanisms are strong, they have never actually been relied upon in practice and the IMF has acknowledged that more could be done to improve compliance. It has been suggested that they are too inflexible to meet with the range of obligations that the Articles of Agreement cover, however they may be appropriate for pure funding obligations.

World Bank – inflexible

The “World Bank” typically refers to the International Bank for Reconstruction and Development (“IBRD”) and the International Development Association (“IDA”). Like the IMF, it has an inflexible enforcement system that is not relied on in practice.

Article II, Section 3 of the IBRD Articles of Agreement provides that each member shall subscribe for shares in the capital stock of the IBRD and Article II, Section 5 provides that this subscription amount shall be divided between an amount paid for up front and a callable amount.

Article II, Sections 7, 8 and 9 set out the details for the timing of such payments and the potential increase in commitments (e.g. in the event of the devaluation of a member country’s currency).

There are no specific provisions governing a failure to meet any of these payment obligations. Rather, they are governed by the provisions of Article VI, Section 2 which provides that:

“If a member fails to fulfill any of its obligations to the Bank, the Bank may suspend its membership by decision of a majority of the Governors, exercising a majority of the total voting power. The member so suspended shall automatically cease to be a member one year from the date of its suspension unless a decision is taken by the same majority to restore the member to good standing.

While under suspension, a member shall not be entitled to exercise any rights under this Agreement, except the right of withdrawal, but shall remain subject to all obligations.

The IDA includes its equivalent provisions at Article VII, Section 2.

Collectively, the IMF and World Bank financial commitments have been well observed compared to the UN. However, this appears to owe more to the policy objectives of their members and ‘peer pressure’ than to the enforcement mechanisms contained in their constituent instruments.

Global Environmental Facility facilitative compliance mechanism

The Instrument for the Establishment of the Restructured Global Environment Facility (March 2008) provides that the GEF shall operate a financial mechanism for the implementation of UNFCCC.

Any state member of the United Nations or of any of its specialised agencies may become a participant in GEF by depositing an instrument of participation.

A GEF Trust Fund was established and the World Bank acts as the Trustee of the Fund. Contributions to the GEF Trust Fund are made to the Trustee by contributing participants in accordance with the financial provisions in the Annex of the Instrument which sets out the mechanism and timing of payment.

However, there is no enforcement provision in the Instrument to enable contributions that are not paid to the Trustee to be enforced.

The Instrument merely provides for Trustee consultation with the relevant participant if, in the Trustee’s judgement, there is a substantial likelihood that the total amount of contributions may not be committed.

Multilateral Fund under the Montreal Protocol – facilitative compliance mechanism

Paragraphs 1 and 2 of Article 10 in the Montreal Protocol provide that the financial mechanism shall be established and the mechanism shall include a Multilateral Fund.

The Multilateral Fund is financed by contributions from industrialised countries, or non-Article 5 countries (Australia, Belgium, Germany, Japan, Romania, Sweden, and the US). Where contributions by parties are in arrears, there are no enforcement procedures against those parties in the Policies, Procedures, Guidelines, and Criteria (as at July 2009).

Regarding contributions in arrears, the Thirteenth Meeting of the Executive Committee requested that the Treasurer find ways and means to identify the causes of non-payment of contributions and to attempt to open avenues for speedy payment. It also agreed that the Treasurer should be requested to undertake a study on the various options to be adopted to encourage payment of the arrears and generally to make timely payments.

In summary both GEF and Multilateral Fund provide for a facilitative compliance mechanism only.

As an aside, and in the context of securing funding from donor countries, the International Finance Facility for Immunisation (“IFFim”) serves as an example of innovative financing of a multilateral development financing institution. If we make the assumption that the donor countries are willing to legally bound to make the agreed contributions, this serves as an example of how such commitments can be bound in on a very practical level (as such commitments serve as the collateral for borrowings by the institution in the international capital markets). As such, we assume that there is a strong incentive to adhere to the commitments made to ensure that the capital markets view the relevant donor’s credit accordingly.