NATO Enlargement: Cost Implications for the United States Remain Unclear
(Testimony, 10/23/97, GAO/T-NSIAD-98-50).

Pursuant to a congressional request, GAO provided information on issues
related to the cost and financial obligations of expanding the North
Atlantic Treaty Organization (NATO), focusing on: (1) current U.S. costs
to support NATO's common budgets and other funding that supports
relations with central and east European nations and promotes NATO
enlargement; (2) NATO's defense planning process, which will form the
basis for more definitive cost estimates for an enlarged alliance; and
(3) GAO's evaluation of the recent Department of Defense (DOD) study of
NATO expansion and a comparison of DOD's study with studies of the
Congressional Budget Office (CBO) and the Rand Corporation.

GAO noted that: (1) the ultimate cost of NATO enlargement will be
contingent on several factors that have not yet been determined; (2)
NATO has yet to formally define its future: (a) strategy for defending
the expanded alliance; (b) force and facility requirements of the newly
invited states; and (c) how costs of expanding the alliance will be
financed; (3) also unknown is the long-term security threat environment
in Europe; (4) NATO's process for determining the cost of enlargement is
under way and expected to be completed by June 1998; (5) in fiscal year
1997, the United States contributed about $470 million directly to NATO
to support its three commonly funded budgets, the NATO Security
Investment Program (NSIP), the military budget, and the civil budget;
(6) this is about 25 percent of the total funding for these budgets; (7)
it is through proposed increased to these budgets, primarily the NSIP
and to a lesser extent the civil budget, that most of the direct cost of
NATO enlargement will be reflected and therefore where the United States
is likely to incur additional costs; (8) over $120 million was
programmed in fiscal year 1997 for Warsaw Initiative activities in the
three countries that are candidates for NATO membership and other
Partnership for Peace (PFP) countries; (9) this money was provided to
help pay for Foreign Military Financing grants and loans, exercises, and
other PFP-related activities; (10) funding for these activities will
continue, but the allocation between the candidates for NATO membership
and all other PFP participants may change over time; (11) this funding
is strictly bilateral assistance that may assist the candidate countries
and other countries participating in PFP to meet certain NATO standards,
but it is not directly related to NATO decisions concerning military
requirements or enlargement; (12) GAO's analysis of DOD's cost estimate
to enlarge NATO indicates that its key assumptions were generally
reasonable and were largely consistent with the views of U.S., and NATO,
and foreign government officials; (13) the assumption that large-scale
conventional security threats will remain low significantly influenced
the estimate; (14) DOD's lack of supporting cost documentation and its
decision to include cost elements that were not directly related to
enlargement call into question its overall estimate; (15) because of the
uncertainties associated with enlargement and DOD's estimating
procedures, the actual cost of NATO enlargement could be substantially
different from DOD's estimated cost of about $27 billion to $35 billion;
and (16) Rand and CBO cost estimates are no more reliable than DOD's.

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

 REPORTNUM:  T-NSIAD-98-50
     TITLE:  NATO Enlargement: Cost Implications for the United States 
             Remain Unclear
      DATE:  10/23/97
   SUBJECT:  Cost analysis
             Foreign military assistance
             Foreign governments
             International organizations
             International cooperation
             Comparative analysis
             NATO military forces
             Future budget projections
             Defense economic analysis
IDENTIFIER:  NATO
             NATO Security Investment Program
             Hungary
             Poland
             Czech Federal Republic
             
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Cover
================================================================ COVER


Before the Committee on Appropriations, U.S.  Senate

For Release on Delivery
Expected at
10:00 a.m., EST,
Thursday,
October 23, 1997

NATO ENLARGEMENT - COST
IMPLICATIONS FOR THE UNITED STATES
REMAIN UNCLEAR

Statement of Henry L.  Hinton, Jr., Assistant Comptroller General,
National Security and International Affairs Division

GAO/T-NSIAD-98-50

GAO/NSIAD-98-50T


(711305)


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

  CBO - x
  DOD - x
  GDP - x
  NATO - x
  NSIP - x
  PFP - x

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today to help the Committee sort through
some of the issues related to the cost and financial obligations of
expanding the North Atlantic Treaty Organization (NATO).  Our
testimony today will address three issues:  (1) current U.S.  costs
to support NATO's common budgets and other funding that supports
relations with Central and East European nations and promotes NATO
enlargement; (2) NATO's defense planning process, which will form the
basis for more definitive cost estimates for an enlarged alliance;
and (3) our evaluation of the recent Department of Defense (DOD)
study of NATO expansion and a comparison of DOD's study with studies
of the Congressional Budget Office (CBO) and the Rand Corporation. 


   SUMMARY OF OBSERVATIONS
---------------------------------------------------------- Chapter 0:1

The ultimate cost of NATO enlargement will be contingent on several
factors that have not yet been determined.  Specifically, NATO has
yet to formally define (1) its strategy for defending the expanded
alliance, (2) force and facility requirements of the newly invited
states, and (3) how costs of expanding the alliance will be financed. 
Also unknown is the long-term security threat environment in Europe. 
NATO's process for determining the cost of enlargement is underway
and expected to be completed by June 1998. 

In fiscal year 1997, the United States contributed about $470 million
directly to NATO to support its three commonly funded budgets, the
NATO Security Investment Program (NSIP), the military budget, and the
civil budget.  This is about 25 percent of the total funding for
these budgets.  It is through proposed increases to these budgets,
primarily the NSIP and to a lesser extent the civil budget, that most
of the direct cost of NATO enlargement will be reflected and
therefore where the United States is likely to incur additional
costs. 

Additionally, over $120 million was programmed in fiscal year 1997
for Warsaw Initiative activities in the three countries that are
candidates for NATO membership and other Partnership for Peace (PFP)
countries.\1 This money was provided to help pay for Foreign Military
Financing grants and loans, exercises, and other PFP-related
activities.  Funding for these activities will continue, but the
allocation between the candidates for NATO membership and all other
PFP participants may change over time.  This funding is strictly
bilateral assistance that may assist the candidate countries and
other countries participating in PFP to meet certain NATO standards,
but it is not directly related to NATO decisions concerning military
requirements or enlargement. 

NATO defense planners are now developing military requirements
through their defense planning process and are close to completing
their analyses.  These requirements will ultimately be translated
into costs eligible for common funding.  NATO officials plan to
present their cost estimates for these items for approval at the NATO
defense ministerial meeting in early December 1997.  However, it will
not be until June 1998 that NATO will make decisions about whether or
how much to increase the common budgets, which would then be shared
among current and new members.  Until this has been done, the
implications for the U.S.  contributions to NATO's common budgets
will be unclear. 

As you know, DOD, CBO, and Rand developed cost estimates for
enlarging NATO before invitations were extended to Poland, Hungary,
and the Czech Republic and therefore before NATO had assessed its
current military needs or developed military requirements that could
be used to make more accurate cost estimates.  Thus, the ranges of
these estimates--from $10 billion to $125 billion--are substantially
different, depending on the assumptions used.  In some instances, the
cost range estimates overlap; however, this may be coincidental,
since the assumptions and force postures used to develop the
estimates were different.  Thus, it is not surprising that the debate
on this issue has been surrounded by some confusion. 

Our analysis of DOD's cost estimate to enlarge NATO indicates that
its key assumptions were generally reasonable and were largely
consistent with the views of U.S., NATO, and foreign government
officials.\2 In particular, the assumption that large-scale
conventional security threats will remain low significantly
influenced the estimate.  However, DOD's lack of supporting cost
documentation and its decision to include cost elements that were not
directly related to enlargement call into question its overall
estimate.  Because of the uncertainties associated with enlargement
and DOD's estimating procedures, the actual cost of NATO enlargement
could be substantially different from DOD's estimated cost of about
$27 billion to $35 billion. 

Rand and CBO cost estimates are no more reliable than DOD's, based on
our comparison of the three studies.  CBO and Rand developed a range
of cost estimates for NATO enlargement, including estimates that
employ a defense strategy similar to DOD's.  Several factors account
for the differences between DOD's estimate and the CBO and Rand
estimates, including those estimates that employed defense strategies
similar to DOD's.  For example, CBO assumed a much larger
reinforcement force and much more extensive modernization,
infrastructure, and training costs than DOD did.  Rand assumed a
somewhat larger reinforcement force and higher training and air
defense modernization costs than DOD did. 


--------------------
\1 In 1994, NATO launched a wide-ranging cooperative effort--known as
PFP--with nonmember countries to promote democracy, expand
cooperation, and strengthen relationships between NATO and nonmember
countries.  Participation of countries in PFP plays a role in NATO's
decisions regarding expansion.  For further information see NATO
Enlargement:  U.S.  and International Efforts to Assist Potential New
Member States (GAO/NSIAD-97-164, June 27, 1997). 

\2 See our report NATO Enlargement:  Cost Estimates Developed to Date
Are Notional (GAO/NSIAD-97-209, Aug.  18, 1997). 


   U.S.  CONTRIBUTIONS TO COMMON
   BUDGETS AND OTHER FUNDING
   SOURCES
---------------------------------------------------------- Chapter 0:2

As it does now, the United States will fund its share of NATO
enlargement primarily through contributions to the three common
budgets.  NSIP pays for infrastructure items that are over and above
the needs of the member nations, including communications links to
NATO headquarters or reinforcement reception facilities, such as
increased apron space at existing airfields.  The military budget
pays for NATO Airborne Early Warning Force program and military
headquarters costs, and the civil budget pays primarily for NATO's
international staff and operation and maintenance costs of its
civilian facility in Brussels.  For fiscal year 1997, the U.S. 
contribution for the three common budgets was about $470 million: 
$172 million for the NSIP, $252 million for NATO's military budget,
and $44.5 million for NATO's civil budget.  Any increases to the U.S. 
budget accounts would be reflected primarily through increased
funding requests for the DOD military construction budget from which
the NSIP is funded, the Army operations and maintenance budget from
which the military budget is funded (both part of the National
Defense 050 budget function), and the State Department's
contributions to international organizations from which the civil
budget is funded (part of the International Affairs 150 budget
function). 

While NATO will not have finalized its common infrastructure
requirements for new members until December 1997 or decided whether
or how much to increase the common budgets until June 1998, DOD and
State Department officials told us that the civil and NSIP budgets
are likely to increase by only 5 to 10 percent and the military
budget will probably not increase at all.  This would mean an
increase of about $20 million annually for the U.S.  contribution to
NATO.  However, as we indicated, NATO has yet to make decisions on
these matters.  In addition, the United States could choose to help
new members in their efforts to meet their NATO membership
obligations through continued Foreign Military Financing grants
and/or loans, International Military Education and Training grants,
and assistance for training activities.  The three candidate
countries and other PFP countries have been receiving assistance
through these accounts since the inception of the PFP program, and
this has enabled some of these countries to be more prepared for NATO
membership.  In fiscal year 1997, over $120 million was programmed
for these activities, and about $60 million of this amount went to
the three candidates for NATO membership.  Any increased funding for
such assistance would be funded through the International Affairs and
Defense budget functions. 


   NATO'S DEFENSE PLANNING PROCESS
---------------------------------------------------------- Chapter 0:3

It is through NATO's defense planning process that decisions are made
on how the defense burden will be shared, what military requirements
will be satisfied, and what shortfalls will exist. 

NATO's New Strategic Concept, adopted in Rome in 1991, places greater
emphasis on crisis management and conflict prevention and outlines
the characteristics of the force structure.  Key features include (1)
smaller, more mobile and flexible forces that can counter
multifaceted risks, possibly outside the NATO area; (2) fewer troops
stationed away from their home countries; (3) reduced readiness
levels for many active units; (4) emphasis on building up forces in a
crisis; (5) reduced reliance on nuclear weapons; and (6) immediate
and rapid reaction forces, main defense forces (including
multinational corps), and augmentation forces.  Although NATO has not
defined exactly the type and amount of equipment and training needed,
it has encouraged nations to invest in transport, air refueling, and
reconnaissance aircraft and improved command and control equipment,
among other items. 

NATO's force-planning and goal-setting process involves two
interrelated phases that run concurrently:  setting force goals and
responding to a defense planning questionnaire.  The force goals,
which are developed every 2 years, define NATO's requirements.  The
major NATO commanders propose force goals for each nation based on
command requirements.  Each nation typically has over 100 force
goals.  NATO and national officials frequently consult one another
while developing force goals and national defense plans.  NATO
commanders are unlikely to demand that member nations establish units
or acquire equipment they do not have. 

In its annual response to NATO's defense planning questionnaire, each
member verifies its commitment for the previous year, defines its
commitment for the next year, and lays out plans for the following 5
years.  Alliance members review each nation's questionnaire and, in
meetings, can question national plans and urge member nations to
alter their plans.  After finishing their reviews, generally in
October or November, NATO staff write a report summarizing each
nation's plans and assessing national commitments to NATO.  Once NATO
members approve this report, it becomes the alliance's consensus view
on each country's strengths and weaknesses and plan to support the
force structure.  It is through this process that NATO determines
what shortfalls exist, for example, in combat support and combat
service support capabilities. 

According to U.S.  officials, NATO is preparing several reports to be
presented for approval at the defense ministerial meetings in
December 1997.  One report will discuss the additional military
capability requirements existing alliance members will face as a
result of the alliance's enlargement.  According to officials at the
U.S.  mission and Supreme Headquarters Allied Powers Europe, it is
unlikely that any additional military capability requirements will be
placed on NATO members over and above the force goals they have
already agreed to provide.  In other words, if current force goals
are attained, NATO will have sufficient resources to respond to
likely contingencies in current and new member countries.  Therefore,
it can be concluded that although enlargement of the alliance is
another reason for current allies to attain their force goals, it
will not add any new, unknown costs to existing members' force plans. 

Other reports resulting from this process will discuss the
requirements for commonly funded items in the new nations and their
estimated costs.  These items include infrastructure that will enable
the new allies to receive NATO reinforcements in times of crisis,
communication systems between NATO and their national headquarters,
and a tie-in to NATO's air defense system.  How these projects will
be financed by NATO, for example, whether they will be financed
within existing budgets or by increasing the size of NATO's common
budgets, will not be determined until June 1998.  Therefore, the
impact of these costs on the U.S.  contributions to NATO's common
budgets and the U.S.  budget will be unknown until next spring. 

Another report will present an assessment of the capabilities and
shortfalls in the military forces of Poland, Hungary, and the Czech
Republic.  NATO does not and will not estimate the costs of the
shortfalls of either the current or the new member states, but once
these shortfalls are identified, cost estimates can be made by
others.  However, even though new members' capabilities and
shortfalls will be identified in December, these countries' force
goals will not be set until the spring.  These force goals will, in
effect, be a roadmap for the new members on how to address their
shortfalls.  (See app.  I for a timeline illustrating these events.)


   KEY ASSUMPTIONS AND COST
   ESTIMATES FOR NATO ENLARGEMENT
   STUDIES
---------------------------------------------------------- Chapter 0:4

When the DOD, CBO, and Rand studies were completed, many key cost
determinants had not been established.  Consequently, each study made
a series of key assumptions that had important implications for each
studies' results. 

DOD made the following key assumptions: 

  -- Specific nations would be invited to join NATO in the first
     round of enlargement.\3

  -- NATO would continue to rely on its existing post-Cold War
     strategy to carry out its collective defense obligations (that
     is, each member state would have a basic self-defense capability
     and the ability to rapidly receive NATO reinforcements).\4

  -- NATO would not be confronted by a significant conventional
     military threat for the foreseeable future, and such a threat
     would take many years to develop. 

  -- NATO would continue to use existing criteria for determining
     which items would be funded in common and which costs would be
     allocated among members.\5

Using these assumptions, DOD estimated the cost of enlarging NATO
would range from about $27 billion to $35 billion from 1997 to 2009. 
The estimate was broken down as follows: 

  -- about $8 billion to $10 billion for improvements in current NATO
     members' regional reinforcement capabilities, such as developing
     mobile logistics and other combat support capabilities;

  -- about $10 billion to $13 billion for restructuring and
     modernizing new members' militaries (for example, selectively
     upgrading self-defense capabilities); and

  -- about $9 billion to $12 billion for costs directly attributable
     to NATO enlargement (for example, costs of ensuring that current
     and new members' forces are interoperable and capable of
     combined NATO operations and of upgrading or constructing
     facilities to receive NATO reinforcements). 

DOD estimated the U.S.  share of these costs would range from about
$1.5 billion to $2 billion--averaging $150 million to $200 million
annually from 2000 to 2009.  The estimated U.S.  share chiefly
consisted of a portion of direct enlargement costs commonly funded
through NATO's Security Investment Program.  DOD assumed that the
other costs would be borne by the new members and other current
member states and concluded that they could afford these costs,
although this would be challenging for new members.  (See app.  II.)


--------------------
\3 DOD assumed that four countries would be invited to join NATO, but
the actual countries that were the basis for the estimate are
classified information. 

\4 NATO adopted a new post-Cold War strategic concept at its Rome
summit meeting in 1991.  The concept provides for substantial
reductions in the size and readiness of NATO's forces but increased
force mobility, flexibility, and ability to adapt to the changed
threat environment. 

\5 NATO funds only those facilities or portions of facilities that
are over and above the needs of an individual country's national
security requirements.  For example, NATO would fund only the portion
of infrastructure at an air base that is beyond the host nation's own
needs, such as hangars for reinforcing aircraft, but not hangars for
the host country's aircraft. 


      DOD'S KEY ASSUMPTIONS WERE
      REASONABLE, BUT COST
      ESTIMATES ARE SPECULATIVE
-------------------------------------------------------- Chapter 0:4.1

In our review of DOD's study of NATO enlargement, we (1) assessed the
reasonableness of DOD's key assumptions, (2) attempted to verify
pricing information used as the basis for estimating enlargement
costs, (3) looked into whether certain cost categories were actually
linked to enlargement, and (4) identified factors excluded from the
study that could affect enlargement costs. 

We concluded that DOD's assumptions were reasonable.  The assumption
regarding the threat was probably the most significant variable in
estimating the cost of enlargement.  Based on information available
to us, we concluded that it was reasonable to assume the threat would
be low and there would be a fairly long warning time if a serious
threat developed.  This assumption, and the assumption that the
post-Cold War strategic concept would be employed, provided the basis
for DOD's judgments concerning required regional reinforcement
capabilities, new members' force modernization, and to a large extent
those items categorized as direct enlargement costs. 

DOD also assumed that during 1997-2009, new members would increase
their real defense spending at an average annual rate of 1 to 2
percent.  Both private and government analysts project gross domestic
product (GDP) growth rates averaging 4 to 5 percent annually for the
Czech Republic, Hungary, and Poland during 1997-2001.  Thus,
projected increases in defense budgets appear affordable.  Analysts
also point out that potential new member countries face real fiscal
constraints, especially in the short term.  An increase in defense
budgets at the expense of pressing social concerns becomes a matter
of setting national priorities, which are difficult to predict.  If
these countries' growth rates do not meet expectations, their ability
to increase real defense spending becomes more problematic. 

DOD further assumed that current NATO members would on average
maintain constant real defense spending levels during 1997-2009.\6
Analysts have expressed somewhat greater concern about this
assumption and generally consider it to be an optimistic, but
reasonable projection.  Some analysts indicated that defense spending
in some current member states may decline further over the next
several years.  Such declines would partly be due to economic
requirements associated with entry into the European Monetary
Union.\7

Despite our conclusion that DOD's underlying assumptions were sound,
for several reasons we concluded that its estimates are quite
speculative.  First, DOD's pricing of many individual cost elements
were "best guesses" and lacked supporting documentation.  This was
the case for all three categories of costs:  direct enlargement
costs, current members' reinforcement enhancements, and new members'
modernization requirements.  Most of the infrastructure upgrade and
refurbishment cost estimates were based on judgments.  For example,
DOD's estimate of $140 million to $240 million for upgrading a new
member's existing air base into a NATO collocated operating base was
not based on surveys of actual facilities but on expert judgment.  We
were told that the actual cost could easily be double--or half--the
estimate. 

DOD's estimated costs for training and modernization were notional,
and actual costs may vary substantially.  DOD analysts did not
project training tempos and specific exercise costs.  Instead, they
extrapolated U.S.  and NATO training and exercise costs and evaluated
the results from the point of view of affordability.  DOD's estimate
for modernization and restructuring of new members' ground forces was
also notional and was based on improving 25 percent of the new
members' forces.  However, it did not specify what upgrades would be
done and how much they would cost. 

Second, we could find no linkage between DOD's estimated cost of $8
billion to $10 billion for remedying current shortfalls in NATO's
reinforcement capabilities and enlargement of the alliance.  Neither
DOD nor NATO could point to any specific reinforcement shortfalls
that would result from enlargement that do not already exist. 
However, existing shortfalls could impair the implementation of
NATO's new strategic concept.  DOD officials told us that while
reinforcement needs would not be greater in an enlarged NATO,
enlargement makes eliminating the shortfalls essential.  This issue
is important in the context of burdensharing because DOD's estimate
shows that these costs would be covered by our current NATO allies
but not shared by the United States. 

Finally, NATO has yet to determine what military capabilities,
modernization, and restructuring will be sought from new members. 
Consequently, DOD had little solid basis for its $10 billion to $13
billion estimate for this cost category.  Moreover, DOD and new
member governments have noted that new members are likely to incur
costs to restructure and modernize their forces whether or not they
join NATO.  Indeed, some countries have indicated that they may need
to spend more for these purposes if they do not become NATO members. 
DOD showed these costs as being covered entirely by the new members. 


--------------------
\6 In 1996, defense spending as a percent of GDP was 2 percent for
Italy, 1.7 percent for Germany, 2.9 percent for the United Kingdom,
and 3 percent for France.  If GDP increases in real terms, these
percentages will decline under DOD's assumption of constant real
defense spending. 

\7 Under the European Monetary Union, scheduled to go into effect
January 1, 1999, the European Union would have a common central bank
and monetary policy and a single currency called the euro.  According
to the Maastricht Treaty, the primary goal of the common central bank
is price stability.  The treaty requires that the economies of the
participating countries converge toward certain performance goals in
terms of inflation, long-term interest rates, exchange rate
stability, and budget deficits (no greater than 3 percent of GDP) and
debt (no greater than 60 percent of GDP). 


      POTENTIAL ADDITIONAL COSTS
      OF ENLARGEMENT
-------------------------------------------------------- Chapter 0:4.2

NATO enlargement could entail costs in addition to those included in
DOD's estimates, including costs for assistance to enhance the PFP or
other bilateral assistance for countries not invited to join NATO in
July 1997.  In addition, the United States may provide assistance to
help new members restructure and modernize their forces.  For
example, Polish officials said they may need up to $2 billion in
credits to buy multipurpose aircraft.  While not an added cost of
enlargement, such assistance would represent a shift in the cost
burden from the new member countries to the countries providing
assistance.  DOD did not include such costs in its estimate of the
U.S.  share, though it acknowledged that the cost was possible. 
Moreover, U.S.  and NATO officials have stated that additional
countries may be invited to join NATO in the future, most likely in
1999.  DOD's cost estimate did not take into account a second or
third round of invitations.  If additional countries are invited,
cost of enlargement would obviously increase. 


      COMPARISON OF THE DOD, CBO,
      AND RAND ESTIMATES
-------------------------------------------------------- Chapter 0:4.3

CBO and Rand estimated the cost of incorporating the Czech Republic,
Hungary, Poland, and Slovakia into NATO.  They based their estimates
on a range of NATO defense postures, from enhanced self-defense with
minimal NATO interoperability to the forward stationing of NATO
troops in new member states.  However, they also noted that the
current lack of a major threat in Europe could allow NATO to spend as
little as it chose in enlarging the alliance. 

Because of the uncertainties of future threats, and the many possible
ways to defend an enlarged NATO, CBO examined five illustrative
options to provide such a defense.  Each option built on the pervious
one in scope and cost.  CBO estimated that the cost of the five
options over the 15-year period would range from $61 billion to $125
billion.  Of that total, CBO estimated that the United States might
be expected to pay between $5 billion and $19 billion.  CBO included
in its range of options a $109-billion estimate that was predicated
on a resurgent Russian threat, although it was based on a
self-defense and reinforcement strategy similar to that used by
DOD.\8 Of this $109 billion, CBO estimated that the United States
would pay $13 billion. 

Similarly, Rand developed estimates for four options to defend an
enlarged NATO that build upon one another, from only self-defense
support at a cost of $10 billion to $20 billion to the forward
deployment of forces in new member states at a cost of $55 billion to
$110 billion.  These options include a middle option that would cost
about $42 billion that was also based on a self-defense and
reinforcement strategy.  Rand estimated that the United States would
pay $5 billion to $6 billion of this $42 billion in total costs. 

Several factors account for the differences between DOD's estimates
and the CBO and Rand estimates, even those that employed defense
strategies similar to DOD's.  (App.  III illustrates the major
results and key assumptions of the three estimates.)

CBO's cost estimate is significantly higher than DOD's for the
following reasons: 

  -- DOD assumed reinforcements of 4 divisions and 6 wings, whereas
     CBO assumed a force of 11-2/3 divisions and 11-1/2 wings and a
     much larger infrastructure for this force in the new member
     states. 

  -- CBO's modernization costs are much higher than DOD's and include
     the purchase of 350 new aircraft and 1,150 new tanks for the new
     member states.  DOD assumed that about 25 percent of the new
     member states' ground forces would be modernized through
     upgrades and that each nation would procure a single squadron of
     refurbished Western combat aircraft. 

  -- CBO assumed much higher training costs, $23 billion, which
     include annual, large-scale combined exercises.  DOD included $2
     billion to $4 billion for training. 

  -- CBO included the purchase of Patriot air defense missiles at a
     cost of $8.7 billion, which is considerably higher than DOD's
     assumed purchase of refurbished I-HAWK type missiles at $1.9
     billion to $2.6 billion. 

  -- CBO's infrastructure costs were much higher than DOD's and
     included new construction, such as extending the NATO fuel
     pipeline, which CBO assumed would meet U.S.  standards.  DOD
     assumed planned refurbishment of existing facilities that would
     meet minimal wartime standards. 

Rand's cost estimate is somewhat higher than DOD's, although both
were based on similar threat assessments.  First, its reinforcement
package was larger--5 divisions and 10 wings--and therefore
infrastructure costs were higher.  Second, it assumed new members
would purchase the more expensive Patriot air defense system rather
than the refurbished I-HAWKs.  Finally, it assumed greater training
costs than did DOD.  The author of the Rand study stated that if he
had used DOD's assumptions, the cost range would have been almost
identical to DOD's. 


--------------------
\8 CBO's lowest estimate is based on a low-threat assessment; the
additional costs are predicated on a resurgent Russian threat. 


-------------------------------------------------------- Chapter 0:4.4

Mr.  Chairman, this concludes our prepared remarks.  We would be
happy to answer any questions you or the Committee members may have. 


NATO ENLARGEMENT TIMELINE
=========================================================== Appendix I

Date                       Activity
-------------------------  -----------------------------------------------------
September 1995             NATO issues study on enlargement.

July 1997                  NATO issues invitations to Poland, Hungary, and the
                           Czech Republic to begin accessions talks.

October/November 1997      NATO prepares several reports:
                            additional military capability requirements for
                           existing alliance members that
                           will result from the alliance's enlargement;
                            requirements for commonly funded items in the new
                           member nations, including
                            infrastructure that will enable the new allies to
                           receive NATO reinforcements in
                           times of crisis,
                            communication systems between NATO and their
                           national headquarters, and
                            a tie-in to NATO's air defense system;
                            cost estimates for items eligible for common
                           funding presented by NATO officials;
                           and
                            the capabilities and shortfalls in the military
                           forces of Poland, Hungary, and the
                           Czech Republic.

Early December 1997        NATO defense ministerial meeting to approve the above
                           reports.

Spring 1998                New members' force goals set.

June 1998                  NATO decides whether or how much to increase the
                           common budgets, which would then be shared among
                           current and new members.

April 1999                 Target date for new member accession into NATO.
--------------------------------------------------------------------------------

CATEGORIES AND SHARE OF COSTS
========================================================== Appendix II



                                    Table II.1
                     
                       Estimates From the Executive Branch
                      Report to the Congress, February 1997

                              (Dollars in billions)

                                                   Current
                                New members'       allies'       U.S.
Cost category                          share         share      share      Total
------------------------------  ------------  ------------  ---------  =========
New members' military             $10 to $13             0          0     $10 to
 restructuring and                                                           $13
 modernization
Current members' reinforcement             0     $8 to $10          0    8 to 10
 enhancements
Direct enlargement                  3 to 4.5    4.5 to 5.5    $1.5 to    9 to 12
                                                                   $2
================================================================================
Total                           $13 to $17.5      $12.5 to    $1.5 to     $27 to
                                                     $15.5         $2        $35
--------------------------------------------------------------------------------

COMPARISON OF DOD, CBO, AND RAND
ESTIMATES
========================================================= Appendix III

                         (Dollars in billions)

Assumption        DOD               CBO               Rand
----------------  ----------------  ----------------  ----------------
Total cost        $27-$35 in        $61-$125 in       $10-$110 in
                  constant 1997     constant 1997     constant 1996
                  dollars           dollars ($109     dollars ($42 for
                                    for a defense     a defense
                                    strategy similar  strategy similar
                                    to DOD's)         to DOD's)

U.S. cost share   $1.5-$2.0         $13.1\a           $5-$6\a

Notional new      A small group     Poland            Poland
NATO members      (details          Hungary           Hungary
                  classified)       Czech Republic    Czech Republic
                                    Slovakia          Slovakia

Time period       1997-2009         1996-2010         Approximately
                                                      1995-2010

Threat            Low threat        A resurgent       Low threat\a
assessment                          Russia\a

Comparable force  4 divisions/6     11.7 divisions/   5 divisions/10
posture options   wings             11.5 wings\a      wings\a
----------------------------------------------------------------------
\a These assumptions correspond to the estimate based on a defense
strategy similar to DOD's. 


*** End of document. ***