Bosnia: Cost Estimating Has Improved but Operational Changes Will Affect
Current Estimates (Letter Report, 07/28/97, GAO/NSIAD-97-183).

GAO reviewed the: (1) Department of Defense's (DOD) process for
estimating the costs of contingency operations in Bosnia and Herzegovina
to determine whether the process has been improved since GAO's prior
reviews; and (2) basis for the fiscal years 1997-1998 cost estimates and
the impact operational changes could have on these estimates.

GAO noted that: (1) DOD has improved its process for estimating costs of
contingency operations by requiring that cost estimates be a part of the
decision-making process in undertaking any new operation or changing an
ongoing one; (2) it also created a high-level committee to review cost
estimates; (3) quarterly reviews of estimates for ongoing operations
allow DOD to react to changes in costs; (4) DOD based its cost estimates
for Bosnia operations for fiscal years 1997 and 1998 on its fiscal year
(FY) 1996 experience and operational decisions known at the time; (5)
DOD appears to have used a logical process to develop these estimates;
(6) however, operational changes have had and continue to have
significant impacts on the costs; (7) the North Atlantic Treaty
Organization's decision to extend the operation beyond December 1996
increased the FY 1997 cost estimate by over $1.8 billion; (8) recent
operational decisions will increase the cost estimate for FY 1998; and
(9) other decisions, such as changes in the size and composition of the
force and the timing of withdrawal, could further increase the cost
estimate for FY 1998.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-183
     TITLE:  Bosnia: Cost Estimating Has Improved but Operational 
             Changes Will Affect Current Estimates
      DATE:  07/28/97
   SUBJECT:  Cost analysis
             Defense cost control
             Defense operations
             NATO military forces
             Defense contingency planning
             Armed forces abroad
             Federal aid to foreign countries
             Foreign governments
             Military intervention
             Military withdrawal
IDENTIFIER:  Bosnia
             Herzegovina
             General Framework Agreement for Peace in Bosnia and 
             Herzegovina (Dayton Agreement)
             Yugoslavia
             Croatia
             Hungary
             Italy
             DOD Overseas Contingency Operations Transfer Fund
             
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Cover
================================================================ COVER


Report to Congressional Committees

July 1997

BOSNIA - COST ESTIMATING HAS
IMPROVED, BUT OPERATIONAL CHANGES
WILL AFFECT CURRENT ESTIMATES

GAO/NSIAD-97-183

Bosnia

(701108)


Abbreviations
=============================================================== ABBREV

  DOD -
  NATO -

Letter
=============================================================== LETTER


B-277271

July 28, 1997

Congressional Committees

The Department of Defense (DOD) has about 10,500 troops deployed to
Bosnia and Herzegovina (hereafter referred to as Bosnia) and
surrounding countries as of July 1997 to assist in implementing the
Dayton Peace Agreement.  U.S.  forces are part of a multilateral
coalition under North Atlantic Treaty Organization (NATO) command
called the Stabilization Force, a follow-on mission to the original
NATO Implementation Force.  DOD estimates that the incremental costs
of its participation in these NATO coalition forces will be about
$6.5 billion for fiscal years 1996-98.\1 We previously reported on
DOD's estimated costs for U.S.  participation in the Implementation
Force and the reasons why costs were higher than originally
estimated.\2 Because of Congress' continued interest in this matter,
we (1) reviewed DOD's process for estimating the costs of contingency
operations to determine whether the process has been improved since
our prior reviews and (2) determined the basis for the fiscal years
1997-98 cost estimates and the impact operational changes could have
on these estimates.  Because of your expressed interest in and
responsibilities to oversee the costs of these operations, we are
addressing the report to you. 


--------------------
\1 In this report, "incremental costs" means those costs that would
not have been incurred if not for the operation.  This same
definition is contained in 10 U.S.C.  127a, as amended by the
National Defense Authorization Act for Fiscal Year 1996. 

\2 Bosnia:  Costs Are Exceeding DOD's Estimate (GAO/NSIAD-96-204BR,
July 25, 1996) and Bosnia:  Costs Are Uncertain but Seem Likely to
Exceed DOD's Estimate (GAO/NSIAD-96-120BR, Mar.  14, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOD has improved its process for estimating costs of contingency
operations by requiring that cost estimates be a part of the
decision-making process in undertaking any new operation or changing
an ongoing one.  It also created a high-level committee to review
cost estimates.  Quarterly reviews of estimates for ongoing
operations allow DOD to react to changes in costs. 

DOD based its cost estimates for Bosnia operations for fiscal years
1997 and 1998 on its fiscal year 1996 experience and operational
decisions known at the time.  DOD appears to have used a logical
process to develop these estimates.  However, operational changes
have had and continue to have significant impacts on the costs. 
NATO's decision to extend the operation beyond December 1996
increased the fiscal year 1997 cost estimate by over $1.8 billion. 
Recent operational decisions will increase the cost estimate for
fiscal year 1998.  Other decisions, such as changes in the size and
composition of the force and the timing of withdrawal, could further
increase the cost estimate for fiscal year 1998. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Dayton Peace Agreement, signed on December 14, 1995, was designed
to end 4 years of conflict in the former Yugoslavia.  In part, the
agreement involved the deployment of a NATO-led coalition force to
Bosnia to implement the peace plan.  The Implementation Force was to
enforce the cessation of hostilities and provide a secure environment
so that other parts of the peace plan could take place. 

Although the Implementation Force's mission ended in December 1996,
NATO authorized a new force and mission for an 18-month period to end
in June 1998.  The Stabilization Force recognizes the need for a
continued international military force to deter renewed hostilities
and stabilize and consolidate peace in Bosnia.  As with the
Implementation Force, the United States is the major force provider,
and Americans occupy the key military positions that control the
operation.  As of July 6, 1997, approximately 10,500 U.S.  active and
reserve personnel were deployed to
4 countries in support of the Stabilization Force.  Of this total
number,
7,900 military personnel were deployed to Bosnia, 500 to Croatia, and
2,100 to Hungary and Italy.  We recently issued a report on the
progress in achieving the goals of the Dayton Peace Agreement and
testified before the Senate Subcommittee on European Affairs,
Committee on Foreign Relations on this.\3

DOD's incremental costs for fiscal year 1996 for operations in and
around Bosnia totaled about $2.5 billion for both operation and
maintenance and military personnel costs.  To pay for fiscal year
1996 costs, Congress approved DOD's transfer of about $2.3 billion
from other previously appropriated sources.  The services absorbed
the difference within their operation and maintenance accounts. 

In anticipation that operations would end in December 1996, DOD
requested $542 million in operation and maintenance and military
personnel funding for Bosnia operations as part of its fiscal year
1997 budget.  Of the $1.3 billion Congress appropriated for
contingency operations for fiscal year 1997, DOD budgeted $677
million for operations in Bosnia.  Subsequently, NATO extended
operations, and DOD submitted a funding request for over $2 billion
for contingency operations, which included over $1.8 billion more for
fiscal year 1997 Bosnia operations.  Congress has since appropriated
about $1.8 billion for contingency operations, of which DOD plans to
use about $1.2 billion for Bosnia.  DOD's fiscal year 1998 budget
request includes almost $1.5 billion for Bosnia operations. 

DOD has recognized deficiencies in its process for developing cost
estimates for large-scale peacekeeping and other major contingency
operations.  While DOD believes the current process worked fairly
well for operations in Somalia and Haiti, it believes that the
process failed to provide reasonable estimates for Bosnia.  In our
past reports, we have reported that operational changes and
unexpected events can have a significant impact on the cost estimates
for contingency operations. 


--------------------
\3 Bosnia Peace Operation:  Progress Toward Achieving the Dayton
Agreement's Goals (GAO/NSIAD-97-132, May 5, 1997) and Bosnia Peace
Operation:  Progress Toward the Dayton Agreement's Goals--An Update
(GAO/T-NSIAD-97-216, July 17, 1997). 


   DOD HAS IMPROVED THE PROCESS
   FOR ESTIMATING COSTS OF
   CONTINGENCY OPERATIONS
------------------------------------------------------------ Letter :3

Cost growth in the ongoing Bosnia operation focused the attention of
senior DOD leadership on the need to improve management of
contingency operation costs.  Therefore, the Comptroller has taken
steps to improve the process for developing and reviewing cost
estimates.  Also, the newly created Overseas Contingency Operations
Transfer Fund, which provides funding to DOD rather than directly to
the individual military services, allows DOD to manage the funding of
contingency operations among the military services more effectively
and with some flexibility. 

In January 1997, the Principal Deputy Comptroller established a
contingency operations cost estimating team for joint operations. 
The team, which consists of a logistics and a financial management
expert from each of the services and the Joint Staff, is expected to
meet when senior management requires a preliminary cost estimate for
a major contingency operation.  In addition, the Chairman of the
Joint Chiefs of Staff directed that the joint staff develop a cost
estimate to accompany every deployment order for new operations or
changes to ongoing operations so that the official approving the
order would be aware of the costs. 

In January 1997, the Comptroller also established a steering
committee to review contingency operation cost estimates.  This
committee is chaired by the Principal Deputy Comptroller and includes
senior representatives from the Office of the Under Secretary of
Defense (Policy), the Joint Staff, and the military services.  The
committee's purpose is to (1) oversee the implementation of changes
in the way DOD develops, assesses, communicates, and reacts to cost
requirements associated with large-scale peacekeeping and other major
contingency operations and (2) provide ongoing reviews and
assessments of all contingency operation cost estimates to support
DOD decision processes and aid senior leaders in tracking and
controlling costs more effectively. 

In January 1997, the Comptroller directed that the military services,
the Special Operations Command, and the defense agencies report
quarterly on the most current estimate of their contingency costs. 
The Comptroller is to provide this quarterly update to the Senior
Readiness Oversight Council, which makes recommendations to the
Secretary of Defense on readiness matters.  The Council can then
track and control contingency costs more effectively to avoid
situations such as that which occurred in the fall of 1994, when the
readiness of several units fell due to cash flow problems resulting
from the need to finance contingency operations. 

In the DOD Appropriations Act of 1997 (P.L.  104-208), Congress
established the Overseas Contingency Operations Transfer Fund to pay
for ongoing contingency operations.  Congress appropriates money to
the Fund.  As an operation unfolds during the year, DOD can transfer
money directly from the Fund to the military services' operation and
maintenance accounts.  DOD is required to show the amounts
transferred and the requirements funded in a quarterly report to the
defense subcommittees of the House and Senate Appropriations
Committees.  According to an official from the Office of the Under
Secretary of Defense (Comptroller), the Fund allows DOD to exercise
flexibility in paying for operations in a timely and direct way. 


   A LOGICAL PROCESS WAS USED TO
   DEVELOP COST ESTIMATES FOR
   FISCAL YEARS 1997 AND 1998
------------------------------------------------------------ Letter :4

DOD applied the actual cost data from the first year of the Bosnia
operation to anticipated operational conditions to develop revised
cost estimates for fiscal year 1997 and estimates for fiscal year
1998.  DOD revised the original fiscal year 1997 estimate based on
operational changes made after the beginning of the fiscal year.  The
cost estimate that supported the funding request included in the
President's fiscal year 1998 budget was based on a specific U.S. 
force size and drawdown plan.  NATO has not yet agreed to this
plan.\4

The original fiscal year 1997 cost estimate for the operation was
about $600 million.  The estimate included funding for continued
operations through December 1996, redeployment of U.S.  troops and
reserve component deactivation, and reconstitution of equipment used
in the operation.  At the time the fiscal year 1997 budget was
submitted in March 1996, DOD had preliminary cost data to use in
developing the fiscal year 1997 estimate; however, the data were not
extensive, given that the operation had begun in December 1995. 

In November 1996, NATO decided that the original mission would end as
scheduled and that a follow-on force would stay until June 1998.  At
that point, DOD and the military services had several months of
actual cost data with which to develop an estimate for the rest of
fiscal year 1997.  The cost of the logistics contract for sustaining
the troops was stable at about $20 million a month.  An 8,500-troop
strength and force structure were planned through the end of the
fiscal year, and actual data on operating tempos, such as average
tank miles used, could be used to calculate the estimate.  DOD also
included in its estimate the costs of rotating the troops at some
point during the fiscal year. 

Given the information available, DOD increased the cost estimate by
over $1.8 billion for a total estimate of about $2.5 billion for the
fiscal year.  In March 1997, DOD requested the $1.8-billion increase
as part of a supplemental funding request to Congress.  However, as
new information became available, DOD reduced the request for Bosnia
operations by about $160 million.  This reduced request reflects a
decrease in estimates of $20 million for military personnel costs. 
According to an Army official, it also reflects a savings of $140
million from the extension of the logistics support contractor in
Bosnia, reevaluation of support requirements, and implementation of
better management controls over the logistics contract.  Based on
actual cost data available through the end of April 1997, it appears
that the total actual costs for fiscal year 1997 might be less than
the estimate. 

The almost $1.5-billion estimate for fiscal year 1998 was based on a
planned strength of about 5,000 troops in Bosnia on October 1, 1997,
and withdrawal of them by June 1998.  The force structure and
operating tempo were planned through the end of June 1998.  The
estimate also included the costs for a deliberate, land-based
withdrawal; deactivation of reserve component troops; and
reconstitution of equipment.  As with the fiscal year 1997 estimate,
DOD had several months of actual cost data to use in developing the
estimate. 


--------------------
\4 NATO has agreed to review the mission at the 6- and 12-month
marks.  NATO intends to reduce force levels, at an unspecified date,
to a deterrence-sized force, commensurate with the security
situation, to facilitate NATO's departure from Bosnia in June 1998. 
The first review was held on June 26-27, 1997. 


   OPERATIONAL CHANGES CONTINUE TO
   HAVE SIGNIFICANT IMPACTS ON
   COSTS
------------------------------------------------------------ Letter :5

The decision to extend the operation from December 1996 to June 1998
required DOD to increase the fiscal year 1997 cost estimate and
create a fiscal year 1998 cost estimate.  Recent operational
decisions and the pending decision on a new time frame for the
drawdown to 5,000 troops will increase the cost estimate for fiscal
year 1998 by a maximum of about $161 million.  Other future decisions
could further increase the cost estimate for fiscal year 1998. 

NATO recently announced that it has authorized an increase to the
force level that will be required to enforce the peace agreement
during the municipal elections.  NATO anticipated these elections
would be held in the spring of 1997, but they have now been
rescheduled for mid-September 1997.  To accomplish this increase,
U.S.  European Command officials have approved a plan that would
retain the troops now in the area and accelerate deployment of troops
planned to replace the current force so that both forces would
overlap before, during, and after the election to handle any problems
that may arise. 

The fiscal year 1997 cost estimate was developed with the assumption
that the troop rotation would occur at the end of fiscal year 1997. 
If the change is approved, rotational costs would instead be incurred
in fiscal year 1998; however, higher sustainment costs incurred for
the higher troop strength during fiscal year 1997 would offset the
savings from the delayed rotation.  The estimate also assumed that a
5,000-troop level would be in place by October 1, 1997, which DOD is
still anticipating.  However, the date for the drawdown has not yet
been set.  Overall, DOD estimates that fiscal year 1998 costs could
increase by a maximum of about $161 million from the buildup
surrounding the elections and a worst-case scenario of maintaining an
8,500-troop strength through June 1998. 

Other pending decisions could increase the cost estimate for fiscal
year 1998.  For example, the parties to the Dayton Peace Agreement
were unable to agree on which of Bosnia's ethnic groups would control
the strategically important area in and around the city of Brcko. 
This area is vitally important to two of Bosnia's three major ethnic
groups.  The agreement called for an arbitration tribunal to decide
this issue by December 14, 1996.  After a 2-month extension, the
tribunal decided that a designated supervisor would establish an
interim administration for the Brcko area.  This administration
started on April 11, 1997, and is to operate for at least 1 year. 
However, if requested, the tribunal may make a further decision on
the status of the area by March 15, 1998.  According to observers,
awarding control of the area to either of the two ethnic groups could
lead to civil unrest and possible renewal of the conflict.  According
to U.S.  Army Europe and U.S.  European Command officials, if this
conflict restarted, it could prevent the planned reduction from 8,500
to
5,000 troops and lead to higher sustainment costs. 

In another example, redeployment plans currently call for a
deliberate, land-based withdrawal of troops and equipment to the
staging base in Hungary.  To accomplish this withdrawal, decisions
need to be made early enough to schedule bridge crossings and rail
transportation, instead of the more expensive airlift that was used
extensively during the original deployment.  If decisions leading to
the redeployment are delayed, and the June 1998 time frame for
withdrawal from Bosnia is firmly enforced, the withdrawal would
require a greater reliance on airlift, which would increase the cost
for redeployment. 

The redeployment plans also call for the use of U.S.  troops, instead
of the logistics contractor, to tear down the base camps and clean up
and dispose of excess material.  If the contractor is used for these
tasks, however, the fiscal year 1998 costs might increase, since
there is no amount currently included in the estimate for the
contractor to perform these tasks.  According to an Army official,
the Army is currently studying this issue to see whether it is more
cost-effective to use the contractor to perform these tasks. 

Although there are no indications that these circumstances will
occur, the current security situation could change, requiring further
changes to the operational plans.  For example, as we reported in May
1997, some State and Defense Department officials believed, based on
current conditions, some type of international military force will
likely be required after the Stabilization Force's mission ends.  If
there is a follow-on force and the U.S.  participates, plans will
change and cost estimates will increase.  However, according to an
official from the Office of the Under Secretary of Defense
(Comptroller), it would also be reasonable to expect that other
operational changes during the year could lead to savings. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To determine whether DOD's process for estimating costs of
contingency operations has improved, we reviewed documents and
discussed changes in policy and procedures with officials at the
Office of the Under Secretary of Defense (Comptroller) and the
military services. 

To determine how DOD and the military services developed their fiscal
years 1997 and 1998 budget estimates and what impact operational
changes could have on these estimates, we discussed the assumptions
used with Comptroller and service officials.  We reviewed DOD's
appropriations for fiscal year 1997, the President's fiscal year 1998
budget, and DOD's fiscal year 1997 request for supplemental funding
for military operations.  We also held discussions and reviewed data
at the Air Mobility Command; the U.S.  European Command; U.S.  Army
Europe; 21st Theater Army Area Command; U.S.  Air Forces, Europe; the
Air Force's Air Combat Command; and the Navy's Commander in Chief,
Atlantic Fleet. 

We performed our review from February to June 1997 in accordance with
generally accepted government auditing standards.  We reviewed the
information in this report with DOD officials and made changes where
appropriate.  DOD officials generally concurred with our findings. 


---------------------------------------------------------- Letter :6.1

We are providing copies of this report to appropriate Senate and
House Committees; the Secretaries of Defense, the Air Force, the
Army, and the Navy; and the Director, Office of Management and
Budget.  Copies will also be made available to others on request. 

If you have any questions about this report, please contact me at
(202) 512-3504.  Major contributors to this report are Robert
Pelletier,
Ann Borseth, and John Wiethop. 

Richard Davis
Director, National Security
 Analysis

List of Congressional Committees

The Honorable Strom Thurmond
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Ted Stevens
Chairman
The Honorable Daniel K.  Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ronald Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Honorable C.  W.  Bill Young
Chairman
The Honorable John P.  Murtha
Ranking Minority Member
Subcommittee on National Security
Committee on Appropriations
House of Representatives


*** End of document. ***