NATO Enlargement: Requirements and Costs for Commonly Funded Projects
(Letter Report, 03/06/98, GAO/NSIAD-98-113).

Pursuant to a congressional request, GAO reviewed the basis for the
North Atlantic Trade Organization's (NATO) cost estimate for enlarging
its membership.

GAO noted that: (1) the approach used by NATO in determining its
estimated direct enlargement cost of $1.5 billion for commonly funded
requirements is reasonable; (2) GAO found that NATO's assessment was
based on site visits, historic data, and extensive dialogue with invitee
officials; (3) a key assumption of the NATO cost estimate is that the
current low threat environment will continue for the foreseeable future;
(4) any changes in the threat environment could affect
enlargement-related military requirements and costs; (5) based on GAO's
work at NATO and its prior analysis of enlargement estimates, GAO
concludes that the Department of Defense's (DOD) assessment of the NATO
cost report was reasonable; (6) according to DOD, the U.S. Joint Staff
validated the requirements on which these costs were based as militarily
sound; and (7) morever, DOD emphasized that the NATO study was a more
accurate reflection of commonly funded costs than DOD's 1997 study.

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

 REPORTNUM:  NSIAD-98-113
     TITLE:  NATO Enlargement: Requirements and Costs for Commonly 
             Funded Projects
      DATE:  03/06/98
   SUBJECT:  Future budget projections
             NATO military forces
             Foreign military assistance
             Cost analysis
             International organizations
             Defense economic analysis
IDENTIFIER:  NATO
             
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Cover
================================================================ COVER


Report to Congressional Requesters

March 1998

NATO ENLARGEMENT - REQUIREMENTS
AND COSTS FOR COMMONLY FUNDED
BUDGETS

GAO/NSIAD-98-113

NATO Enlargement

(711315)


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

  DOD - Department of Defense
  NAC - North Atlantic Council
  NATO - North Atlantic Treaty Organization
  NSIP - NATO security investment program
  SHAPE - Supreme Headquarters Allied Powers Europe

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


B-279394

March 6, 1998

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

On October 23, 1997, we testified before your Committee on a cost
study that had been developed independently by the Department of
Defense (DOD) regarding the enlargement of the North Atlantic Treaty
Organization (NATO).\1 We also provided you with NATO's schedule for
preparing its own studies regarding the requirements and costs
associated with the alliance's enlargement.  This report responds to
your request that we evaluate the basis for NATO's cost estimate for
enlarging its membership.  You also asked for our views on DOD's
assessment of NATO's estimate. 


--------------------
\1 In our testimony, NATO Enlargement:  Cost Implications for the
United States Remain Unclear (GAO/T-NSIAD-98-50, Oct.  23, 1997), we
reported that we had assessed the DOD study and found its key
assumptions were generally reasonable, but DOD's cost estimate was
speculative and lacked supporting documentation. 


   BACKGROUND
------------------------------------------------------------ Letter :1

At the Madrid Summit in July 1997, NATO invited three countries,
Poland, Hungary, and the Czech Republic, to enter into negotiations
to become NATO members.  At the summit, the NATO heads of state and
government also directed NATO's managing body, the North Atlantic
Council (NAC), to prepare an analysis of the commonly funded costs of
enlargement. 

NATO member states provide resources to support the alliance in two
ways.  First, countries, at their own expense, maintain forces and
assets which they pledge to NATO through the defense planning
process.  Second, countries make contributions to NATO's three
commonly funded budgets.  The three budgets are the military budget,
which primarily funds operations and maintenance for NATO's military
headquarters and activities (about $720 million planned for 1999);
the NATO security investment program (NSIP), which primarily funds
infrastructure improvements (about $734 million planned for 1999);
and NATO's civil budget, which primarily funds the civilian
headquarters and personnel in Brussels, Belgium, for NATO's political
structure (about $164 million planned for 1999). 

At the direction of the NAC, the major NATO commanders prepared a
study of the military requirements.  NATO's Senior Resource Board
then developed cost estimates for those requirements eligible for
common funding.\2 In addition, the Civil Budget Committee prepared a
study on the effects of enlargement for NATO's civilian personnel and
facilities.  These reports were agreed to by all NATO members at the
December 1997 ministerial meetings.\3

NATO estimated that $1.5 billion would be needed to meet commonly
funded military requirements.  Figure 1 shows a breakdown of the four
major cost categories:  (1) command and control, which reflects an
extension of NATO's communications links to the new members; (2) air
defense, which reflects the integration of new members into NATO's
air defense systems; (3) reinforcement reception facilities, which
reflect upgrades to infrastructure, particularly airfields to receive
NATO forces; and (4) training and exercises. 

   Figure 1:  Cost Breakout of
   NATO Enlargement Estimate

   (See figure in printed
   edition.)

Source:  DOD. 

On February 23, 1998, DOD submitted to the Congress a report on the
requirements and costs of NATO enlargement.\4 This report included an
analysis of the NATO studies and presented DOD's explanation for the
differences between NATO's results and DOD's February 1997 cost
estimate.  For example, NATO's study concluded that the
infrastructure in the invitee countries was in considerably better
condition than assumed by DOD.  DOD concurred with the conclusions of
the NATO studies. 


--------------------
\2 The Senior Resource Board is composed of senior national
representatives and is tasked with military resource allocation and
identification of priorities. 

\3 NATO operates on a consensus basis.  NATO cannot take action as an
alliance without the concurrence of all members. 

\4 This report was required by the fiscal year 1998 DOD Authorization
and Appropriations Acts and the fiscal year 1998 Military
Construction Appropriations Act. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The approach used by NATO in determining its estimated direct
enlargement cost of $1.5 billion for commonly funded requirements is
reasonable.\5 We found that NATO's assessment was based on site
visits, historic data, and extensive dialogue with invitee officials. 
A key assumption of the NATO cost estimate is that the current low
threat environment will continue for the foreseeable future.  Any
changes in the threat environment could affect enlargement-related
military requirements and costs. 

Based on our work at NATO and our prior analysis of enlargement
estimates, we conclude that DOD's assessment of the NATO cost report
was reasonable.  According to DOD, the U.S.  Joint Staff validated
the requirements on which these costs were based as militarily sound. 
Moreover, DOD emphasized that the NATO study was a more accurate
reflection of commonly funded costs than DOD's 1997 study.\6


--------------------
\5 Commonly funded means the payment will come from NATO's budgets,
which are funded by contributions assessed each member on a
predetermined percentage basis.  For example, the United States pays
about 25 percent of NATO's common budget costs. 

\6 For our assessment of DOD's study, see our report NATO
Enlargement:  Cost Estimates Developed to Date Are Notional
(GAO/NSIAD-97-209, Aug.  18, 1997). 


   NATO'S REQUIREMENT AND COST
   STUDIES
------------------------------------------------------------ Letter :3

As a result of direction received at the July 1997 Madrid Summit,
NATO military and civil officials prepared several requirement and
cost studies to address NATO enlargement issues.  Reports on these
studies were addressed by the members' defense ministers at their
December 1997 meeting in Brussels.  The studies produced included (1)
an assessment of military requirements, (2) an estimate of the costs
of meeting those commonly funded requirements, and (3) a study of
what additional forces existing members would need to pledge to NATO. 
NATO's military commanders addressed the military requirements issues
surrounding enlargement; the international military and civilian
staff developed cost estimates for the commonly funded military
requirements and other associated enlargement costs; and the Defense
Review Committee, the senior defense planning body in NATO, reported
on whether additional forces need to be pledged by existing members. 

The fundamental principle on which all military requirements were
based--both commonly funded and nationally funded--was NATO's ability
to fulfill Article V of the treaty in the new member countries as of
the accession date.\7 NATO's military commanders' requirements study
determined what alliance capabilities were needed upon accession of
the invitees and also determined what military upgrades were needed. 
Using a model that scores force capabilities, NATO determined that
the capability of reinforcing NATO forces, combined with invitee
forces was adequate to meet current and projected future threats.\8
The threat to the invitees was assessed to be low and is expected to
remain low.  NATO determined the number of squadrons needed to
provide combat air patrol over the territory of new invitees to
determine the number of collocated operating bases needed.  NATO also
identified the necessary communications links and minimal air defense
requirements.  The study also concluded that current NATO exercise
schedules could accommodate invitees at some small incremental
expense.  NATO's military commanders conducted site visits of the
invitees in developing their assessments. 

At the direction of the Senior Resource Board, NATO's international
staff then developed the cost estimates for the commonly funded
requirements that NATO's military commanders had developed and
determined eligibility for common funding by applying standard NATO
practices and procedures, including NATO's "over-and-above"
principle.\9

NATO's engineers conducted site visits of the invitees' facilities
that NATO expects to use and used cost data from NATO projects to
develop cost estimates for projects that would need to be done in the
invitees' countries.  According to officials at NATO, some of the
costs of enlargement may be absorbed in existing budgets, for
example, through the reprioritization of existing projects.  NATO is
expected to complete a study detailing the budget implications of the
enlargement's cost, including an analysis of how much of the cost
will be absorbed within existing budgets, in the spring of 1998. 

Because NATO officials used a conservative interpretation of the
over-and-above principle, NATO's cost estimate for the commonly
funded military requirements may be lower than the cost actually
incurred.  For example, the NATO study did not include the cost of
repaving runways, although NATO staff acknowledged that the runways,
while up to national standards, were not up to NATO standards.  The
staff said that they assumed that the invitees would eventually
purchase western aircraft and therefore would have to bear the
repaving costs themselves to meet necessary standards for the
aircraft.  However, historically, NATO has sometimes granted
exemptions to its policies and procedures for items such as this that
would otherwise be a national responsibility, particularly for less
wealthy members.  Such exemptions would add to the commonly funded
costs but would require approval by all NATO members.  Based on our
analysis, we believe that NATO's approach to estimating the $1.5
billion cost for commonly funded budgets is reasonable.\10

NATO's study of nationally funded force commitments concluded that
given the threat to and capabilities of the invitees, existing
members need not undertake any increase to their existing force
goals, that is, their agreed-upon contributions of military
capability.\11

NATO is developing target force goals for the invitees and these
should be finalized in the spring of 1998.  NATO did not and will not
estimate the cost of the nationally funded military commitments for
existing members or the invitees. 


--------------------
\7 Article V of the treaty is the collective defense provision, which
states that an attack on one member is an attack on all. 

\8 This model assigns values to specific weapons systems and units to
estimate combat capability, permitting comparisons to be made of
various forces. 

\9 Under this principle NATO will only pay for projects over and
above the country's own defense needs.  For example, it is a
country's responsibility to maintain the runway up to the standard
needed for its own aircraft; however, NATO will pay for modifications
to the runway to accommodate reinforcing NATO aircraft. 

\10 In commenting on our report, DOD noted that as details of
implementation plans are finalized and more detailed engineering
surveys are developed, final costs could increase or decrease. 

\11 However, as we noted in our report NATO Enlargement
(GAO/NSIAD-97-209, Aug.  18, 1997), NATO has long-standing shortfalls
in meeting its force goals. 


   DOD'S ASSESSMENT OF NATO'S
   STUDIES
------------------------------------------------------------ Letter :4

DOD's February 1998 report did not develop a new cost estimate for
NATO enlargement; rather it assessed NATO's cost and requirements
studies and provided some comparisons between NATO's estimate and
DOD's February 1997 estimate.  DOD concluded that NATO's cost
estimates were sound and reliable and emphasized that because NATO's
study had the benefit of site visits, historic NATO cost data, and
knowledge of NATO common funding eligibility, it was a more accurate
reflection of commonly funded enlargement costs than DOD's prior
estimate. 

DOD could not completely reconcile the differences between its 1997
estimate of $27 billion to $35 billion for enlargement and NATO's
estimate of $1.5 billion.  Several factors explain most of the
difference.  The most prominent of these factors are that DOD's 1997
report

  -- included two categories, new member modernization costs and
     existing member reinforcement costs, that account for $18
     billion to $23 billion of the difference and are not commonly
     funded and are thus not included in the NATO study;\12

  -- assumed that more items in the direct enlargement category would
     be eligible for common funding;

  -- included four countries, whereas NATO included only the three
     invitees;

  -- assumed that the new members' infrastructure was in worse
     condition than NATO surveys showed them to be; and

  -- differed in some requirements, as well as pricing. 

We could not validate all the specific cost differences detailed in
the 1998 DOD report because the DOD data provided was insufficiently
detailed.  However, we believe that DOD's assessment of the NATO cost
report was reasonable. 


--------------------
\12 DOD's February 1997 report indicated that the United States would
not be responsible for bearing any of these costs. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :5

To address our objective, we interviewed officials and gathered and
analyzed information from the Department of State; the Office of the
Secretary of Defense; the U.S.  Mission to NATO in Brussels, Belgium;
and Supreme Headquarters Allied Powers Europe (SHAPE) in Mons,
Belgium.  We interviewed officials in Brussels during the Defense
Ministerial meetings in December 1997.  We also reviewed Department
of State and U.S.  Mission to NATO reporting cables, program and
briefing documents, and correspondence.  In addition, this work built
upon our prior assessments of NATO enlargement cost studies. 

To understand the basis for the NATO-developed military requirements,
we held discussions with the Policy and Requirements Division staff
of SHAPE and reviewed data on threat scenarios used and the
analytical elements of developing a force to meet the scenarios.  We
examined the criteria for deciding on the number of airfields and
reinforcement reception facilities required in each new members'
country to receive reinforcing aircraft and troops. 

To understand the methodology for and to develop judgments on the
soundness of the NATO cost estimate, we held discussions with the
NATO engineers who had assessed the new members' capabilities and
needs.  We also examined the engineers' cost analyses and engineering
assessments, and their historical cost data on comparable projects. 
The engineers also presented their assessment methodology for each
base and command, control, communication, and air defense needs. 
NATO officials presented, and we reviewed, the criteria used for
determining what projects would qualify for common NATO funding. 

In order to review the procedures NATO followed in developing its
reports and to help us understand what the U.S.  involvement in this
process was, we interviewed U.S.  and NATO officials and obtained
documentation regarding the process involved in the development of
NATO's reports.  Finally, we discussed with, and obtained
documentation from, DOD officials to understand how they assessed the
NATO studies. 

We did not independently validate the condition of infrastructure in
the invitee states, NATO's historic cost data, or the force
calculation model used by SHAPE. 

We conducted our review between October 1997 and February 1998 in
accordance with generally accepted government auditing standards. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

The Departments of State and Defense provided oral comments on a
draft of this report and generally concurred with our findings and
conclusions. 


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

We are providing copies of this report to the Secretaries of State
and Defense and other congressional committees.  Copies will be made
available to other interested parties upon request. 

Please contact me on (202) 512-4128 if you or your staff have any
questions concerning this report.  The major contributors to this
report were Jim Shafer, Muriel Forster, and Hynek Kalkus. 

Harold J.  Johnson, Associate Director
International Relations and Trade Issues


*** End of document. ***