[ga] More on ICANN Telephone Costs, Argo Pacific currency adjustments, FX hedging project

[George Kirikos <gkirikos@xxxxxxxxx>]

Hi again,

--- On Wed, 2/4/09, Roberto Gaetano <roberto@xxxxxxxxx> wrote:
> As far as I know the telephone costs include the costs of all teleconferences 
> for
> all ICANN bodies (Board, Board committees, working groups, SOs, ALAC, RALOs, 
> etc.)
> Before we start arguing about skype and other means available in the
> developed countries, let's remind that these calls have to be joined by
> folks who are all over the world.


Just as an additional followup, note that on page 3 of the IRS Form 990 
statement:

http://www.icann.org/en/financials/tax/us/fy-2007-form-990.pdf

line 34 breaks down the $986,733 spent on telephone costs into $511,236 for 
"Program Services" and $475,497 into "Management and General". 

If one assumes the teleconferences are concentrated into "Program Services" for 
the working bodies of ICANN, it still begs the question why management and 
general has expenditures of nearly half a million dollars on phone costs, 
especially given that the year ending June 2007 had a lot fewer employees than 
at present. Indeed, if you look up on that page, and compare the ratios of 
phone costs to compensation (lines 25 through 26) for program services vs. 
management, the ratios are very different.

When telephone costs are almost as high as legal fees (line 32) and exceed 
conferences, conventions and meetings (line 40), or occupancy costs (rent, line 
36), something seems out of whack, and is worth exploring in order to ensure 
that the most cost effective providers are chosen, and that ICANN hasn't been 
suckered.

By the way, Page 51 of the Form 990 statement notes adjustments to Paul 
Twomey's total compensation to reflect the declining value of the US dollar 
over that period. Argo Pacific could have certainly hedged its own exposure to 
the fluctuations in currency values on its own, without ICANN providing this 
payment ex-post. You didn't see VeriSign, Neustar or Afilias come to ICANN for 
adjustments to their contracts to reflect a declining US dollar. When a 
supplier is perfectly capable of hedging their own risk, and doesn't, the loss 
should fall upon the supplier, and not ICANN (and by extension, domain 
registrants).

That being said, note that the US dollar has gained considerably against the 
Australian dollar (and other major currencies) of late (note the 5 year or 10 
year chart):

http://finance.google.com/finance?q=usdaud

If ICANN was compensating Argo Pacific for US dollar declines, then it is only 
logical that Argo Pacific now compensate ICANN for US dollar gains. I will be 
looking for this in future Form 990 filings, so be on notice that you make sure 
to get this right. Argo Pacific can't have a "heads I win, tails you lose" 
compensation scheme that is a one-way bet, getting compensated when the US 
dollar declines, but not providing reimbursements when the US dollar increases 
in value.

If Argo Pacific truly wants to get paid in Australian dollars, that can be 
easily accomplished within the contract. We shall see, though, whether that was 
truly the case, if/when Argo Pacific reimburses ICANN due to the massive 
*appreciation* of the US dollar against the Australian currency.

This situation illustrates why the Board Finance Committee is going in the 
wrong direction with another potential boondoggle, namely the International 
Currency Exchange (FX) hedging project, discussed at:

http://www.icann.org/en/minutes/minutes-finance-18nov08.htm

ICANN has the ability for the most part to do the vast majority of its business 
in US dollars, even with foreign suppliers. I'm a Canadian company, for 
example, and am happy to take US dollars from customers, and could easily hedge 
currency risk if I make that choice (my company has both US and Canadian dollar 
bank accounts). The same happens for worldwide hotels and other foreign 
expenditures that ICANN makes. In other words, ICANN doesn't need a major FX 
hedging project when they can certainly shift any FX exposures to their 
suppliers, and not bear major risks themselves.

Does this mean one can conduct all one's business in US dollars? No, but any 
remaining exposure can easily be hedged by simply holding small balances of 
foreign currencies (Euros for European employees, perhaps), and refreshing 
those balanced for anticipated spending on an annual basis (thereby locking in 
that FX rate for an entire year). Instead, ICANN appears to be on the verge of 
another expensive program outside their area of expertise where they'll build 
an elaborate program of forwards or futures in the name of "hedging", when a 
much simpler 2-pronged approach would be far more effective (i.e. a) shift the 
risk to suppliers, and b) carry small balances of local currencies for the 
anticipated.)

Often the simplest approach is best, and it certainly appears to be the case 
here. ICANN's Finance Committee looks to be going in the wrong direction if 
they build up an elaborate system that will cause more problems than it solves, 
and be costly in terms of continuing oversight and excessive external 
consulting costs.

Sincerely,

George Kirikos
http://www.leap.com/