Management’s discussion and analysis

November 02, 2010
IDRC Communications

Summary of results

  • Revenue increased 5.2% to $214.5 million, from $203.8 million in 2008−2009 as a result of increased donor partnership revenue as well as additional funding provided by the Parliament of Canada.
  • Expenses increased 2.7% to $210.9 million from $205.4 million in 2008−2009 mostly due to increased donor partnership spending, while spending on administrative activities decreased as a result of management’s effort to curtail spending.
  • Implementation of the Development Innovation Fund (DIF) was delayed pending Parliamentary approval of the funding requested by the Centre. As a result, $5.2 million was left over at the end of the year.
  • Equity at year-end increased 25.0% to reach $16.8 million compared to $13.5 million in 2008−2009. The increase is essentially attributable to the DIF-related amount referred to above ($5.2 million) and the savings in operational activities ($4.8 million). In total, the equity was $10.1 million higher than budgeted.
  • Outstanding commitments funded by Parliamentary appropriations decreased slightly while outstanding commitments funded by donor partnerships increased significantly during the year. Details are on page 54.  
Revenues
 
The Centre’s funding is derived from five sources: Parliamentary appropriations, donor partnerships, recovery of administrative costs, investment income, and other income. Parliamentary appropriations are included with revenues in this discussion, although they are not classified as revenues on the Statement of Operations.
 

Parliamentary appropriation revenue

The Centre receives different types of Parliamentary appropriations including the Centre’s share of Canada’s Official Development Assistance (ODA) envelope as well as modest federal government funding from sources other than ODA. Parliamentary appropriations were 3.1% higher than 2008−2009 and $1.4 million higher than budgeted. As discussed later, the variance from budget relates to accounting adjustments and not to additional votes in Parliament. 

The federal budget tabled in February 2008 mentioned the creation of a Development Innovation Fund (DIF) to be “implemented by strategic partners in the research community working with the International Development Research Centre (IDRC).” The government has selected health as the DIF’s opening theme, which is being implemented by a consortium led by the Centre. 

The Centre received authority to spend in December 2009: therefore, the Parliamentary appropriation revenue for 2009−2010 includes $7.0 million to be directed to the DIF.

From time to time, the Centre receives additional onetime Parliamentary appropriations for specific projects or programs (see Note 10 of the Notes to the Financial Statements, page 76). These funds are recorded as deferred revenue and recognized when the related expenses are incurred. The revenues recognized in that manner during 2009−2010 relate to the Institute for Connectivity in the Americas. During the course of the year, it was decided to extend the duration of the program. This extension had an impact on the timing of the expenses, which resulted in revenues being $1.1 million lower than budgeted to which is associated lower administrative cost recovery. During the year, the Centre also recognized an additional $2.7 million in revenue, which contributed to the higher appropriation income. These funds will allow the Centre to collaborate with the Canadian International Development Agency in programming that encourages the equitable use of information and communication technology to improve democratic governance and to promote social and economic development in the Americas region.

Also included in the Parliamentary appropriations are transfers from other federal agencies. These amounts are not part of the long-term recurring funding base. The non-recurring transfers are a result of the Program and Partnership Branch’s efforts to establish collaborations with federal agencies.

 
 
Donor partnership revenue
 
Revenues from donor partnerships relate to contributions to entire development research programs or to funding for specific research projects within existing development research programs conducted or managed by the Centre on behalf of other organizations. The funds received in advance are recognized as revenue when the related expenses are incurred. Therefore, they have no direct impact on the Centre’s net results nor on the Centre’s equity. Donor partnership revenues increased by 18.3% to $35.1 million compared to $29.7 million in 2008−2009 and are $1.1 million higher than budgeted. The difference is primarily due to slightly higher initial spending on the Think Tank Initiative, a timing difference between two fiscal years, not an overrun of the Initiative.
 
 
The sources of donor funding continuously change. In 2009–2010, the proportion of funding from Canadian government organizations decreased to 18.5% of total donor funding compared to 24.8% in 2008−2009 (see Figure 2). Donor partnership funding from CIDA decreased to $7.2 million from $7.9 million in 2008–2009. However, the Centre also received $2.0 million in appropriation transfers from CIDA (see Table 2). This represents broader collaboration than what is evident solely from the donor partnerships profile.
 
Revenue from the recovery of administrative costs represents all actual costs to administer the projects and to support project staff. Recovered costs do not include core operating costs covered by the Parliamentary appropriations. The methodology to calculate the rate of cost recovery is based on generally accepted management accounting principles and is reviewed at least annually. The 2009–2010 revenue was slightly over budget ($0.3 million). Since the recovery of administrative costs from donor partnership agreements is proportionate to donor partnership revenues recognized, the total variance is proportional to the variance in the revenues recognized from donor partnerships.

The recovery of administrative costs on donor funding contracts increased to 10.9% of direct project costs (recognized as donor partnership revenues) in 2009−2010 from 10.0% in 2008−2009 with the increase in the target standard administrative cost recovery rate to 12.0% at the beginning of the 2009−2010 fiscal year. This rate applies to all partnerships except those with CIDA, with which the Centre has a long-standing relationship: the administrative cost recovery for agreements with CIDA is set at 10.0%. The Centre has conservatively budgeted an average cost recovery rate of 10.0% for 2010–2011. This rate takes into consideration the rate set for CIDA agreements, the signing of a very large project at 8.0%, and some newer agreements with costs of less than 12.0%.

 
Investment income
 
The Centre invests its available cash in high-quality money-market instruments. In 2009–2010, the investment income amounted to $0.3 million. The yield on investments is lower than in recent years, but the Centre continues to outperform its Treasury Bill benchmark. The actual return on investment was 1.06% compared to an average Treasury Bill yield of 0.22% throughout the year. For more information, see the Balance Sheet Discussion on page 56.
 
Other income
 
Other income includes revenues associated with conference and catering facilities and other miscellaneous items such as the sale of publications and office space subleasing. Income from these sources amounted to $1.2 million in 2009−2010, the same amount as in 2008−2009.
 
Revenue outlook
 
The 2010−2011 budget will reach an all-time high for the Centre of $253.6 million (see Table 1, page 45) in revenues and a similar amount in planned expenditures. About 60% of the budget growth is driven by increasing donor partnerships and the rest (40%) by the advent of the DIF, and, to a lesser extent, by an assumed modest growth in the Parliamentary appropriation.
 
Centre activities not funded by donor partnerships or the DIF appropriation are constrained to a little more than inflationary growth. The budget therefore takes into consideration an important strategy aimed at preserving the Centre’s operational integrity while managing the uncertainty around additional appropriations and the impact of slow “core” funding growth on the Centre’s operations. As the Government of Canada has announced that it will grow the International Assistance Envelope for fiscal year 2010−2011, Centre management has conservatively budgeted a $7.6 million increase in Parliamentary appropriations. However, it has frozen or reduced development research support and administrative services expenses in 2009−2010 and frozen most expense budgets for 2010−2011. This would result in total savings of $6.7 million by the end of 2010−2011. Should the government not increase appropriations as anticipated, these costs cuts would go a long way to preserving the Centre’s operational integrity as management rebalances costs across the existing three cost categories (development research programs, development research support, and administrative services). If the anticipated appropriation increase materializes, management intends to reinvest savings into development research programs in 2010−2011 and future years.
 
Figure 4 shows the value of signed donor partnership agreements ($285 million), the amount remaining to be allocated to projects from these agreements ($115 million), and the amount yet to be disbursed as at 31 March 2010 ($191 million). Of the $285 million in active agreements, $94 million has been expensed at 31 March 2010, leaving a very healthy balance of $191 million in expenditures in the remaining life of the donor-funded projects. In 2010−2011, $57 million is planned to be expensed, which represents only 30% of the total unspent funds as at 31 March 2010.
 
Management anticipates a 62.1% increase in donor partnership funding in 2010−2011 compared to 2009–2010 actuals. The projected increase arises primarily from the expansion of the Think Tank Initiative into South Asia and Latin America, as well as the ramping up of the Canadian International Food Security Research Fund. At the same time, implementation of several large financial agreements arranged with donors over the past few years to fund entire programs will continue in 2010–2011. Close to 82% of the $57 million donor partnership funding for development research programs will be recognized against existing donor agreements with the remaining 18% recognized against new agreements expected to be signed during the year.
 
In past years, the Centre’s Parliamentary appropriations have represented approximately 83% of total revenues. In 2010−2011, this will decrease to about 75% due to the anticipated increase in donor partnerships revenue. (see Figure 5). 

Expenses

 
The Centre tracks its expenses based on a three-tier cost structure: development research programs, development research support, and administrative costs.
 
 
Development research program expenses
 
Development research program expenses reflect the direct costs, mainly in the form of grants, of scientific and technical research projects administered by the Centre as part of its ongoing programs. In 2009–2010, the share of research program expenses funded by Parliamentary appropriations increased by 0.5% to $110.0 million from $109.4 million in 2008−2009 and 3.0% or $3.2 million more than budget. The variance arises from a combination of overspending on the recurring funding activities ($4.3 million) and underspending on specific projects and programs funding ($1.1 million). The specific projects and programs relate to the Institute for Connectivity in the Americas (see the Revenues discussion for more information). The overrun of $4.3 million on the recurring funding activities includes expenses for the DIF ($1.6 million) that were not included in the revised expenses budget because of the uncertain implementation date. The balance of the overrun ($2.7 million) is due to changes in new project spending patterns. Overall, the 2.7% variance in 2009–2010 is only slightly higher than the 2.2% variance in 2008−2009.
 
The share of development research program expenses funded by donor partnerships totalled $35.1 million, or $1.1 million higher than budgeted. The Revenues discussion above provides an explanation for this small variance.
 
Development research program expenses for all Centre development research programs increased by 4.3% to $145.1 million, from $139.1 million in 2008−2009. The majority of the increase ($5.4 million) pertains to expenses funded by donor partnerships.
 
 
As shown in Figure 6, the proportion of the Centre’s development research program expenses used as counterpart (co-funding) to donor partnership funding remained the same as in the past year (17.0%). As the level of donor partnership activity increases, the level of development research program expenses related to projects funded solely by IDRC has declined to 58.8% in 2009–2010 compared to 61.7% in 2008−2009.
 
 
Development research support expenses
 
Development research support represents the costs of building research capacity in the developing regions of the world including technical support, program complements, and program management. Development research support expenses increased 1.7% to $42.1 million in 2009–2010 from $41.3 million in 2008−2009 and are only 92.9% of budget. The $3.2 million budget savings are primarily due to underspending on travel ($1.7 million) which is a result of both expenditure restraint as well as savings from staff vacancies in positions where significant travel is required. The remainder of the savings are due to efforts to curtail professional services as well as savings in salaries and benefits attributable to management’s caution and prudence in restaffing vacancies as the Centre prepares to renew its programming for the new strategic period (2010−2015).
 
Administrative services expenses
 
Administrative services provide a variety of policy, executive, administrative, and service functions that support the Centre’s overall operations and corporate responsibilities. These expenses declined by 4.9% to $23.8 million from $25.0 million in 2008−2009 and are $1.6 million under budget. The variance is mainly due to the capitalization of salaries of staff involved in information technology projects causing expenses to be reduced without a corresponding budget decrease; reduced spending on professional services; and reduced salaries and benefits attributable to staff vacancies.
 
As shown in Figure 7, administrative costs have grown at a much lower rate than total expenses since 2005–2006. In fact, the share of administrative costs relative to total expenses declined from over 16% in 2005–2006 to a projected 10.2% in 2010–2011. The Centre continues to strive to balance program expenditures and administrative costs.
 
 
Expenses outlook
 
Expenses will reach an all-time high of $253.3 million during 2010−2011.
 
Administrative services budgets will increase by 2.2% to $25.9 million compared to the budgeted $25.4 million in 2009−2010. Management has capped all expenses, except for salaries and rent, at their 2009−2010 budget level.
 
Development research program and development research support expenses will increase by 21.5% to $227.3 million in 2010–2011 compared to actual expenses of $187.1 million in 2009−2010. The increase reflects planned expenses on the DIF as well as large donor-funded programs such as the Think Tank Initiative expansion into Latin America and South Asia, and the ramping up of the Canadian International Food Security Research Fund.  

It is noteworthy that expenses for outstanding commitments (“old” projects in Figure 8) funded by Parliamentary appropriations in 2010–2011 will reach an all-time high of about $96.5 million (see Figure 8). This amount represents nearly 80% of the funding available for development research programs in 2010– 2011. The expenditure growth from previous years is still reflected in ongoing projects, but the levelling of the regular Parliamentary appropriation (excluding the DIF) leaves proportionately fewer resources to fund new projects. The funding available for new projects will drop from about $28 million in 2009–2010 to just under $26 million in 2010–2011 (see Figure 8). Management expects funding available for new projects to increase to about $28 million after 2010−2011, which will allow new project allocations to be maintained or slightly increased. This will be made possible by the continuing decrease in expenditures on old projects (see Figure 8).

 
The DIF will reach maturity and “programming speed” by the end of next year. We expect DIF-related expenditures to grow very rapidly over the next 24 months. That trend will have a favourable impact on the relative share of administrative services costs (Figure 7).
 
 
 

Other key financial indicators

 
As at 31 March 2010, the Centre is committed to payments of up to $444.4 million on research projects and activities over the next five years. This commitment is subject first to funds being provided by Parliament ($373.7 million) and by donor partners ($70.7 million) and, second, with few exceptions, to recipients’ compliance with the terms and conditions of their grant agreements. The significant increase in outstanding commitments funded by Parliamentary appropriations is due to the approval of the DIF in 2009−2010. The DIF-related outstanding commitment is valued at $218.0 million.
 
Excluding this amount, the outstanding commitments funded by Parliamentary appropriations remains relatively stable compared with the 2008−2009 level with a 2.4% decrease to $155.7 million, while outstanding commitments funded by donor partnerships increased by 32.5% to $70.7 million.
 
Of the total $373.7 million in outstanding commitments funded by Parliamentary appropriations, $38.0 million is linked to projects co-financed by donor partnership agreements, which are included in the $155.7 million in Table 5.
 
 
Program allocations funded by Parliamentary appropriations
 
Program allocations represent the funds approved for new research projects that will last up to five years. Disbursement is progressive over project duration. The program allocations funded by Parliamentary appropriations increased to $308.3 million in 2009–2010 ($305.9 million + $2.4 million), of which $29.4 million was linked to projects and programs co-financed with donors. The significant increase in 2009−2010 is due to the one-time DIF allocation of $220.5 million. Excluding the DIF, regular program allocations declined by 32.3% to $85.4 million, $4.6 million lower than budgeted, which was a deliberate management decision aimed at preserving programming flexibility in 2010−2011 given the uncertainty of the level of the Parliamentary appropriation.
 
Program allocations funded by donor partnerships
 
The 2009−2010 budget for program allocations funded by donor partnerships was comparable to the actual allocations in 2008−2009. These allocations declined 19.1% to $49.0 million in 2009−2010 compared to $60.6 million in 2008−2009 and $11.1 million below budget. The lower allocations are mainly explained by a delayed rollout of Think Tank Initiative activities in Latin America and South Asia.
 
Most of the $357.3 million program allocations made in 2009–2010 (96.6%) were committed during the 2009– 2010 fiscal year. Expenses started for projects committed in 2009–2010 and will continue over their individual lifespan. Taking into account the uncertainty in the Centre’s Parliamentary appropriation, management has determined that the 2010–2011 program allocations funded by Parliamentary appropriations will be $90.5 million. Excluding the one-time DIF allocation, this amount is about $2.7 million higher than regular allocations in 2009–2010 (see Figure 9). When co-funding pledges to projects are considered, the amount of funds remaining for programming not linked to donor partnerships stands at $70.5 million or 40% of total program allocations of $176.3 million (see Figure 10).

Except for the one-time peak caused by the DIF in 2009−2010, allocations funded by Parliamentary appropriations remain below their 2005−2006 level. The reasons for this situation are many. The primary reasons are changed expenditure patterns and increasing expenditures. Starting in 2005, project expenditure patterns changed to reflect an increase in project duration, gains in the purchasing power of the Canadian dollar, growth in the number of new projects, and other factors that contributed to decreasing the relative value of expenditures on older projects, thus leaving more funding available for new projects. At the same time, the Centre’s Parliamentary appropriation increased, making even more money available which can only be disbursed through increased new project allocations. This is why project allocations were increased rapidly. Because project durations span up to five years, allocations also impact expenditures in future years — years two and three of the project typically represent the highest expenditure years. Thus, the project allocation wave created a lagging expenditure wave that takes an increasing proportion of what became a levelled-off project expense budget in 2009−2010. Thus with fewer dollars left for new projects, the project allocation budget must be reduced. Once the expenditure wave is passed, assuming the project expense budget remains constant, allocations can increase again until they reach the steady level of being equal to the constant expense budget.

Balance sheet discussion

The levels of cash as well as investments result from the Centre receiving funds in advance of actual spending. These funds are invested in short-term money market instruments. Due to the nature of its activities, the Centre always has cash and investments consisting of surplus liquidities invested for more than 90 days (see Note 2d in the Notes to the Financial Statements, page 70). At 31 March 2010, the total cash and investments were $69.2 million compared to $60.5 million at 31 March 2009.  

 
However, investments were higher reflecting the improvement of the Treasury investment market since 31 March 2009, while cash declined from the previous year. The Centre’s investment policy aims at maximizing returns on liquidities within the parameters set by the Board of Governors. Owing to the instability of financial markets, it was often more rewarding to keep money in the bank than in bonds or Treasury Bills. As a result, management achieved higher yields (see page 48) but failed to maintain the maturity profile of the investment portfolio, particularly the 0−30 day maturity threshold on a few occasions during the year. The high bank balance throughout the year (higher than the closing balance of $23.2 million), and its interest yield, more than justified this approach because it provided the necessary liquidity to cover the Centre’s obligations.
 
The cash on hand from donor partnerships is not subject to any restrictions, other than ultimately being used for the purposes intended. In practice, much of the cash and investments relate to accrued liabilities. Thus, these liquidities are spoken for and can not be used to enhance programming.
 
The increase of $4.7 million in donor partnership liquidities is attributable to more funds being received in advance of disbursements for donor-funded research projects and programs.
 
Accounts receivable and prepaid expenses totalled $11.3 million, including $0.2 million in Parliamentary appropriations receivable and $7.4 million in donor partnerships receivable. This year’s total represents a decrease of $4.8 million over the 31 March 2009 balance, mainly attributable to lower Parliamentary appropriation receivables at year-end.
 
Property and equipment are composed of assets with an initial cost of $5 000 or more. As at 31 March 2010, they totalled $12.4 million, down $0.4 million from last year. Those assets are made up of leasehold improvements, software, IT hardware, regional office vehicles, and miscellaneous equipment (see Note 6 of the Notes to the Financial Statements, page 74).
 
 
Accounts payable and accrued liabilities are part of the Centre’s regular operations and represent such things as payments to suppliers, grants payable to recipients, and salaries and annual leave benefits owed to employees. At the end of March 2010, the accounts payable and accrued liabilities totalled $14.2 million, down 10.8% or $1.7 million from 31 March 2009. The decrease is mostly in the value of the project grant payments, which were due but not yet paid at year-end.
 
Deferred revenue includes the unspent portion of funds received or receivable for donor partnership activities ($36.4 million, see Table 8), the portion of the Parliamentary appropriations used for the purchase of property and equipment, and the unspent portion of the Parliamentary appropriations received for specific projects and programs (see Note 7 in the Notes to the Financial Statements, page 74). The year-end closing balance was $55.6 million, up only $1.8 million from 31 March 2009.
 
Employee future benefits include a provision for employee severance (see Note 2f in the Notes to the Financial Statements, page 71). At $6.2 million, long-term employee future benefits remain very close to the 2008–2009 level (see Note 8 in the Notes to the Financial Statements).
 
 
The Centre’s equity is segregated between unrestricted, restricted, reserved, and accumulated other comprehensive income. Management had planned to release total retained earnings during 2009−2010, which actually increased to $16.9 million compared to $13.3 million at 31 March 2009. The $10.1 million difference with the revised budget is explained by:
  • the impact of the DIF, which had not been taken into account