oversight

Nuclear Nonproliferation: Implementation of the U.S./North Korean Agreed Framework on Nuclear Issues

Published by the Government Accountability Office on 1997-06-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting Office

GAO                     Report to the Chairman, Committee on
                        Energy and Natural Resources,
                        U.S. Senate


June 1997
                        NUCLEAR
                        NONPROLIFERATION
                        Implementation of the
                        U.S./North Korean
                        Agreed Framework on
                        Nuclear Issues




GAO/RCED/NSIAD-97-165
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-276968

                   June 2, 1997

                   The Honorable Frank H. Murkowski
                   Chairman, Committee on
                     Energy and Natural Resources
                   United States Senate

                   Dear Mr. Chairman:

                   On October 21, 1994, the United States and North Korea concluded an
                   agreement known as the Agreed Framework to address the threat posed
                   by North Korea’s nuclear program and to diffuse tensions on the Korean
                   Peninsula.1 Under the Agreed Framework, the United States is helping
                   North Korea acquire two light-water nuclear power reactors and interim
                   supplies of heavy fuel oil in exchange for a freeze on North Korea’s
                   existing nuclear facilities and North Korea’s promise to eventually
                   dismantle the facilities and comply with its obligations under the Nuclear
                   Nonproliferation Treaty. Over time, the Agreed Framework specifies that
                   the United States and North Korea will work towards full normalization of
                   their political and economic relations and peace and security on the
                   Korean Peninsula.

                   This is our second report in response to your request that we review issues
                   related to the implementation of the Agreed Framework.2 This report
                   discusses (1) U.S. costs to implement the Agreed Framework; (2) options
                   for disposing of North Korea’s existing spent (used) fuel; (3) the
                   contracting for the light-water reactors and other goods and services;
                   (4) the status of actions to normalize economic and political relations
                   between the United States and North Korea; and (5) the status of actions
                   to promote peace and security on the Korean Peninsula. Appendix VI of
                   this report also discusses U.S. humanitarian assistance to North Korea.


                   As of April 1, 1997, the United States had approved about $82 million in
Results in Brief   funding to implement the Agreed Framework. The total cost to the United

                   1
                   “Agreed Framework Between the United States of America and the Democratic People’s Republic of
                   Korea.” The Democratic People’s Republic of Korea is commonly known as North Korea.
                   2
                    Our first report, Nuclear Nonproliferation: Implications of the U.S./North Korean Agreement on
                   Nuclear Issues (GAO/RCED/NSIAD-97-8, Oct. 1, 1996), addressed whether (1) the Agreed Framework
                   is a nonbinding political agreement, (2) the United States could be held financially liable for a nuclear
                   accident at the North Korean reactor site, (3) North Korea has obligated itself to pay the cost of
                   upgrading its existing electricity power distribution system, and (4) the agreement is being
                   implemented consistent with the applicable laws governing the transfer of U.S. nuclear components,
                   materials, and technology.



                   Page 1                                    GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                     B-276968




                     States is unknown but is expected to reach tens of millions of dollars.
                     South Korea and Japan are expected to provide the majority of the
                     estimated $4 billion needed to construct the two light-water reactors.

                     The removal of North Korea’s 50,000 kilograms of spent nuclear reactor
                     fuel is expected to begin in about 4 to 7 years. North Korea’s spent fuel
                     could either be reprocessed and stored or stored without reprocessing
                     until a deep underground repository is available for the fuel’s permanent
                     disposal.

                     The international organization created to implement portions of the
                     Agreed Framework has developed draft guidelines for contracting for
                     services needed to carry out the agreement. Details about how the
                     organization’s prime contractor will procure goods and services for the
                     reactors’ construction will not be known until the contract is finalized.

                     As specified in the Agreed Framework, the United States has taken steps
                     to normalize its economic and political relations with North Korea.
                     Further progress will depend on addressing issues of concern to the
                     United States, such as the return of the remains of U.S. soldiers missing in
                     action from the Korean War. Progress on issues of concern has been
                     limited.

                     The United States expects that improved relations between the two Koreas
                     will contribute to peace and security on the Korean Peninsula. In
                     April 1996, the United States and South Korea invited North Korea to
                     participate in peace talks. While North Korea accepted the talks “in
                     principle,” there has been no agreement about the timing of the talks or
                     the steps needed to initiate them.


                     Shortly after the signing of the Agreed Framework, the U.S. State
Costs to Implement   Department estimated that U.S. contributions to the Korean Peninsula
the Agreed           Energy Development Organization (KEDO)3—the international organization
Framework            created to implement portions of the agreement—would likely be between
                     $20 million and $30 million annually. State further estimated that the total
                     cost to implement the agreement would be tens of millions of dollars. As
                     of April 1, 1997, the United States had approved about $82 million in
                     funding to implement the Agreed Framework, including $51 million in
                     contributions to KEDO. The United States had also provided about

                     3
                      KEDO was formed by the United States, South Korea, and Japan. At the conclusion of our review,
                     seven other countries—Argentina, Australia, Canada, Chile, Finland, Indonesia, and New
                     Zealand—had joined KEDO. Efforts continue to recruit additional members.



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                        $31 million in other funding, including about $26 million to the Department
                        of Energy to assist North Korea in safely storing spent fuel from North
                        Korea’s 5-megawatt electric reactor, pending the removal of the fuel from
                        North Korea. South Korea and Japan are expected to pay the majority of
                        the estimated $4 billion for the reactors. As of April 1, 1997, these
                        countries had contributed about $38 million, including $9 million for site
                        survey and other preconstruction work and about $10 million for KEDO’s
                        administrative expenses. The remaining $19 million represents collateral
                        for securing loans for the heavy fuel oil purchases.

                        The total amount of future U.S. expenditures is not known, in part,
                        because of uncertainties about the amounts that other countries will
                        contribute to KEDO. Also, reliable estimates of some major costs, such as
                        the costs of disposing of North Korea’s spent fuel and of dismantling North
                        Korea’s existing nuclear facilities, are not yet available. While the existing
                        estimates are highly speculative, the two activities are expected to cost
                        hundreds of millions of dollars. None of the agreements concluded to date
                        obligates the United States, KEDO, or North Korea to pay the costs of
                        disposal or dismantlement. (App. I provides information on cost estimates
                        to fully implement the Agreed Framework, including the portion of these
                        costs expected to be paid by the United States.)


                        North Korea has about 50,000 kilograms of spent fuel from a small reactor
Options for Disposing   that had been operating before the freeze on North Korea’s nuclear
of North Korea’s        program. The spent fuel contains about 25 kilograms of plutonium that
Spent Nuclear           could be used to produce nuclear weapons. To address this threat, the
                        United States and North Korea agreed to safely dispose of the fuel in a
Reactor Fuel            manner that does not involve reprocessing in North Korea. The removal of
                        the fuel is expected to begin in about 4 to 7 years—when key nuclear
                        components for the first light-water reactor are delivered—and conclude
                        when the reactor is completed.

                        There are two options for dealing with North Korea’s spent fuel. One
                        option is to reprocess the fuel in a country other than North Korea and to
                        store the resulting high-level waste until it can be disposed of properly.
                        The other option is to package and store the fuel for an interim period
                        before its final disposal. Governments around the world support the use of
                        deep underground repositories as the best method for the final disposal of
                        highly radioactive waste, but no country has yet built such a facility. (App.
                        II provides information about the options for interim and final disposal,




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                          B-276968




                          including information about who will be involved in making the decision
                          about disposal and when the decision is expected to be made.)


                          According to KEDO, its draft procurement guidelines are based on the
Contracting               contracting policies and practices of U.S. government and commercial
Arrangements and          concerns. As of April 1, 1997, KEDO had contracted for a wide range of
Actions Arising From      services, including legal, banking, and architectural and engineering
                          services to carry out the Agreed Framework. KEDO had also contracted for
the Agreed                the supply of heavy fuel oil and for the purchase, delivery, installation, and
Framework                 maintenance of meters and recorders to monitor the flow of the heavy fuel
                          oil at six North Korean power plants where the oil is consumed.

                          According to KEDO, its contract with the Korea Electric Power Corporation
                          for the construction of the reactors—the prime contractor—is the largest
                          contract KEDO will award, both in terms of complexity and price. While
                          negotiations are ongoing, KEDO does not expect the contract will be
                          executed until 1998. Details about the prime contractor’s subcontracting
                          will not be known until the prime contract is finalized. (App. III provides
                          information about KEDO’s contracting, including the model KEDO and the
                          prime contractor are using to develop their contract.)


                          In January 1995, the United States announced several steps to ease
Status of Actions to      economic sanctions against North Korea, including the lifting of a ban on
Normalize Economic        telephone and telecommunications services between the countries. The
and Political Relations   United States does not intend to relax its trade restrictions further until
                          progress is made on issues of concern to the United States. Regarding
Between the United        political relations, in December 1994, the United States and North Korea
States and North          negotiated a draft agreement to exchange liaison offices—the lowest level
                          of diplomatic representation. The Department of State declined to provide
Korea                     us with information about the status of the negotiations or the expected
                          time frame for opening the offices.

                          The Agreed Framework also contemplates that diplomatic relations will be
                          upgraded as progress is made on numerous bilateral issues, including the
                          return of the remains of U.S. soldiers missing in action from the Korean
                          War. Thus far, limited progress has been made in addressing these
                          concerns. For example, as a result of the first joint U.S./North Korean
                          recovery mission, one American soldier was recovered, returned to the
                          United States, and positively identified. The United States paid the cost of
                          the recovery mission, including about $96,000 in compensation to North



                          Page 4                        GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                       B-276968




                       Korea. In May 1997, North Korea agreed “in principle” to allow the United
                       States to examine North Korea’s war archives and to conduct three joint
                       recovery missions in 1997. (App. IV provides information about actions to
                       normalize political and economic relations between the United States and
                       North Korea, issues of concern to the parties, and, where applicable,
                       actions taken to resolve the U.S. concerns.)


                       A key element of the Agreed Framework, which was included at the
Status of Actions to   United States’ insistence, is the expectation that relations between the two
Promote Peace and      Koreas will improve and contribute to peace and security on the Korean
Security on a          Peninsula. On April 16, 1996, the United States and South Korea proposed
                       a “Four Party Meeting” of representatives from South Korea, North Korea,
Nuclear-Free Korean    the United States, and the People’s Republic of China. The purpose of the
Peninsula              meeting is to replace the 1953 military armistice agreement—which ended
                       the hostilities of the Korean War—with a permanent peace accord.

                       In March 1997, a delegation of U.S. and South Korean officials met in New
                       York City to brief North Korean officials about the proposed peace talks.
                       Two working-level meetings were held in the following weeks, and in April
                       the North Korean delegation accepted in principle the four-way talks. At
                       the conclusion of our review, agreement had not been reached about the
                       timing of the talks or the steps needed to initiate them. (App. V provides
                       information about efforts to improve the peace and security of the Korean
                       Peninsula, including U.S. assurances to North Korea on the threat or use of
                       nuclear weapons and North Korean steps to implement its 1992
                       declaration with South Korea on the denuclearization of the Korean
                       Peninsula.)


                       The total amount of future U.S. expenditures to fully implement the
Observations           Agreed Framework is unknown because reliable estimates of the
                       agreement’s total cost are not available. In our opinion, this, together with
                       uncertainties regarding the amounts that other governments intend to
                       contribute to KEDO, raises questions about the extent to which the United
                       States—as both a party to the Agreed Framework and a founder of
                       KEDO—could be called upon to finance activities arising from the Agreed
                       Framework. This issue is particularly important with respect to the
                       required heavy fuel oil purchases for North Korea, since at the conclusion
                       of our review KEDO had purchased less than 20 percent of the oil required
                       to be delivered to North Korea by October 20, 1997, and did not have
                       sufficient funds to pay for the remainder.



                       Page 5                        GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
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                     Uncertainties also exist about who will pay for costly future activities,
                     including (1) the removal and disposal of North Korea’s spent nuclear
                     reactor fuel and (2) the dismantlement of North Korea’s existing nuclear
                     facilities. While existing estimates are speculative, these activities could
                     cost hundreds of millions of dollars. The United States, KEDO, and North
                     Korea are not obligated to pay these costs and, thus far, none of the parties
                     has committed to do so. Nevertheless, as the Department of Energy’s
                     $25.8 million effort to safely store North Korea’s spent fuel demonstrates,
                     the United States may need to contribute substantial funds to carry out the
                     Agreed Framework or face the agreement’s collapse, if the international
                     community does not contribute adequate funding.

                     The model being used to develop the prime contract between KEDO and the
                     Korea Electric Power Corporation for the construction of the two
                     light-water reactors provides recommended text and suggested
                     modifications for developing the prime contract. The model addresses
                     major contracting issues and, if properly tailored to the parties’
                     circumstances, should protect KEDO’s interests. However, the adequacy of
                     the prime contract will depend on the extent to which the parties adhere
                     to the model’s recommended language or otherwise adopt additional
                     protections for KEDO.


                     We provided a draft of this report to KEDO and the Department of State for
Agency Comments      their review and comment. KEDO provided comments on relevant topics in
and Our Evaluation   the report but explained that it could not comment fully in the time
                     available. We incorporated KEDO’s comments, as appropriate.

                     The State Department, whose comments are reproduced in appendix VII,
                     disagreed with three aspects of our report. First, State said that we implied
                     that the United States will end up “bankrolling” activities arising from the
                     Agreed Framework in the event of a funding shortfall. Also, State pointed
                     out that it has gone to great lengths to arrange financing from the
                     international community and that a “substantial portion” of the community
                     had joined, or would soon join, in financing activities arising from the
                     Agreed Framework. State indicated that any future funding shortfall will
                     have to be addressed by all interested parties, not by the United States
                     alone.

                     In our view, we have not implied that the United States will end up
                     bankrolling activities arising from the Agreed Framework. In fact, our
                     report clearly indicates that South Korea and Japan are expected to bear



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B-276968




the majority of these costs. Moreover, in discussing our draft report, State
officials agreed that uncertainties exist about (1) the total cost to
implement the Agreed Framework, (2) the amount of future contributions
to KEDO, and (3) who will pay for activities resulting from the agreement in
the event of a funding shortfall. Furthermore, while we credit State for its
efforts to secure international funding for KEDO, significant funding
shortfalls exist and are likely to continue, raising serious questions about
how KEDO will finance future oil deliveries without the intervention of an
interested party. While we focus on the potential cost implications to the
U.S. government, absent adequate funding the same points could be made
for any of the other nine existing KEDO members. As a result, the possibility
remains that, absent adequate funding, the United States—as both a party
to the Agreed Framework and a founder of KEDO—could be called upon to
finance a significant portion of future oil purchases.

Second, State said that the report implied that U.S. financing of the initial
safe storage of North Korea’s spent fuel means that the United States will
also pay for the eventual removal of the fuel from North Korea. State noted
that no decision had been reached about the disposal of the fuel and that
there is strong international interest in participating in the eventual
removal and disposal of the fuel. Finally, according to State, U.S. financing
of the safe storage of North Korea’s spent fuel was an initial obligation
agreed to by the U.S. government at the time that the Agreed Framework
was signed.

We have not implied that U.S. financing of the initial storage of North
Korea’s spent fuel is in any way associated with the future funding for the
removal and disposal of North Korea’s spent fuel. Our report clearly
acknowledges that no decision has been made in this area and that such a
decision is years away. We also are aware that several countries are
interested in studying North Korea’s spent fuel—a first step in the fuel’s
eventual removal. Instead, our report notes that no party has committed to
pay either the cost of disposal or the cost of dismantling North Korea’s
existing nuclear facilities, a circumstance that we believe raises questions
about the United States’ future role in paying for these activities.
Furthermore, while the United States apparently agreed to finance the safe
storage of North Korea’s spent fuel at the time that the Agreed Framework
was signed, neither the Agreed Framework nor any other document that
we reviewed legally obligates the United States to pay these costs.

Finally, State indicated that we had taken a “fundamentally flawed
approach” to the issue of North Korea’s responsibility for upgrading its



Page 7                        GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
              B-276968




              power grid—a topic discussed in appendix I of this report. According to
              State, there are no grounds for speculating that KEDO or its member states
              will undertake to pay these costs because the supply agreement between
              KEDO and North Korea and associated documents firmly establish North
              Korea’s responsibility for the grid’s upgrade. State further commented that
              North Korea does not owe KEDO a duty to upgrade the grid any more than
              it owes KEDO a commitment to pave the streets of Pyongyang.

              Our report discusses State’s view that North Korea is responsible for
              upgrading its power grid for use in operating the light-water reactors.
              Furthermore, we point out that KEDO did not seek North Korea’s legal
              commitment to upgrade the power grid during negotiations on the supply
              agreement because, according to State, it would have been illogical for
              North Korea to owe KEDO a legal duty to upgrade its own electricity power
              grid. Nevertheless, absent firm assurances that North Korea intends to pay
              for the upgrade, we continue to believe that there is nothing to preclude
              North Korea from reasserting a future demand that others pay for the
              upgrade. We believe that this possibility is even more likely given the need
              for humanitarian assistance to North Korea and its overall economic
              situation.

              State Department officials also provided comments on the presentation
              and content of the report, which we included, as appropriate. In addition,
              we provided applicable sections of this report to the Departments of
              Commerce, Defense, Energy, and Treasury, and as well as representatives
              of numerous U.S. and international nuclear industry businesses contacted
              during our work. We incorporated their comments, as appropriate.


              To obtain information for this report, we reviewed and analyzed the
Scope and     Agreed Framework and subsequent agreements, applicable U.S. laws and
Methodology   regulations, and documentation related to the implementation of the
              Agreed Framework. We also interviewed cognizant officials from the
              Departments of Commerce, Defense, Energy, State, and Treasury and
              officials from the Central Intelligence Agency, the International Atomic
              Energy Agency, the Nuclear Regulatory Commission; and domestic and
              international representatives of the nuclear industry. We attempted to
              contact the governments of Japan, North Korea, and South Korea through
              the State Department to obtain their views about the implementation of
              the Agreed Framework. However, we were unable to do so. We conducted
              our work from December 1996 through May 1997 in accordance with
              generally accepted government auditing standards.



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B-276968




As agreed with your office, we plan no further distribution of this report
until 15 days after the date of this report. At that time, we will send copies
to the appropriate congressional committees, the Secretary of State, the
Executive Director of KEDO, and other interested parties. We will also
make copies available to others upon request.

If you have any questions, please call me at (202) 512-3841. Major
contributors to this report are listed in appendix VIII.

Sincerely yours,




Victor S. Rezendes
Director, Energy, Resources,
  and Science Issues




Page 9                         GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Contents



Letter                                                                                                1


Appendix I                                                                                           12
                          Cost Estimates for KEDO Activities                                         12
Costs to Implement        Cost Estimates for IAEA Activities                                         15
the Agreed                U.S. Costs to Implement the Agreed Framework as of April 1,                16
                            1997
Framework Are             Future U.S. Costs to Implement the Agreed Framework Are Not                22
Uncertain                   Known

Appendix II                                                                                          27
                          Spent Nuclear Fuel Disposal Options                                        27
Options for Disposing     Decisions About North Korea’s Spent Fuel Are Not Expected for              30
of North Korea’s            Several Years
Existing Spent
Nuclear Reactor Fuel
Appendix III                                                                                         32
                          KEDO Has Contracted for a Wide Variety of Services                         32
Contracting               Details on KEPCO’s Contracting Are Not Yet Available                       35
Arrangements and          Use of Limited-Scope Contracts to Perform Site Work                        36
Actions Arising From
the Agreed
Framework
Appendix IV                                                                                          38
                          Modest Improvements in Economic Relations Between the                      38
Status of Actions to        United States and North Korea
Normalize Economic        The United States Is Prepared to Open a Liaison Office in North            44
                            Korea Once Issues Between the Parties Are Resolved
and Political Relations   Limited Progress in Resolving Bilateral Issues of Concern                  45
Between the United
States and North
Korea




                          Page 10                      GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                        Contents




Appendix V                                                                                          57
                        Assurances by the United States Regarding Nuclear                           57
Status of Actions to      Nonaggression Against North Korea
Promote Peace and       Actions to Implement the North-South Joint Declaration on                   57
                          Denuclearization
Security on a           Limited Progress Towards North/South Dialogue                               58
Nuclear-Free Korean
Peninsula
Appendix VI                                                                                         62

U.S. Humanitarian
Assistance to North
Korea
Appendix VII                                                                                        64

Comments From the
Department of State
Appendix VIII                                                                                       66

Major Contributors to
This Report
Figure                  Figure I.1: Total U.S. Funding of $82.3 Million in Support of the           21
                          Agreed Framework as of April 1, 1997



                        Abbreviations

                        BNFL       British Nuclear Fuels, plc.
                        DOE        Department of Energy
                        EBWR       Experimental Boiling-Water Reactor
                        GAO        General Accounting Office
                        IAEA       International Atomic Energy Agency
                        KEDO       Korean Peninsula Energy Development Organization
                        KEPCO      Korea Electric Power Corporation
                        MW(e)      megawatt electric
                        NPT        Nuclear Non-Proliferation Treaty
                        OFAC       Office of Foreign Assets Control
                        SPRU       Separations Process Research Unit


                        Page 11                       GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix I

Costs to Implement the Agreed Framework
Are Uncertain

                        The Agreed Framework outlines numerous actions which, if fully
                        implemented, would result in costs for a wide range of activities over an
                        extended period. Some of these activities are ongoing while others are not
                        expected to begin for many years. The principal ongoing activities—the
                        supply of the reactors and heavy fuel oil—are being carried out by the
                        Korean Peninsula Energy Development Organization (KEDO). The United
                        States and the International Atomic Energy Agency (IAEA) are also
                        performing activities—such as monitoring North Korea’s nuclear facilities
                        and storing its spent nuclear fuel—specified in the Agreed Framework.
                        Shortly after the signing of the Agreed Framework, the U.S. State
                        Department estimated that U.S. contributions to KEDO would likely be
                        between $20 million and $30 million annually. As of April 1, 1997, the
                        United States had approved about $82 million in funding to implement the
                        Agreed Framework, including $51 million in contributions to KEDO and
                        over $31 million in other funding. The total amount of future U.S.
                        expenditures is not known, in part, because of uncertainties about the
                        amount that other countries will contribute. Also, reliable estimates of the
                        Agreed Framework’s total cost are still not available.


                        KEDO is currently incurring costs to implement the Agreed Framework in
Cost Estimates for      three areas—the reactor project, the heavy fuel oil purchases, and
KEDO Activities         administrative expenses. KEDO could incur additional costs if its activities
                        expand to other areas in the future.


Nuclear Reactor Costs   In December 1994, the Department of State estimated that supplying the
                        two 1,000-MW(e) reactors to North Korea would cost about $4 billion, most
                        of which was expected to be borne by South Korea and Japan. KEDO could
                        not provide an updated estimate of the reactors’ cost because, according
                        to KEDO, the reactors’ cost and schedule are part of ongoing negotiations
                        with the Korea Electric Power Corporation—the prime contractor for the
                        project.1 South Korea and Japan have informed KEDO that they intend to
                        play “central” and “significant” roles, respectively, in financing the
                        reactors; however, according to KEDO, specific commitments have not yet
                        been received. Through mid-May 1997, South Korea and Japan had
                        contributed $9 million for site survey and other preconstruction work.




                        1
                         Appendix III provides additional information about these negotiations.



                        Page 12                                 GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                       Appendix I
                       Costs to Implement the Agreed Framework
                       Are Uncertain




Heavy Fuel Oil Costs   KEDO is also supplying heavy fuel oil to North Korea to offset the energy
                       foregone due to the freeze on its nuclear power program.2 From
                       January 1995 through mid-May 1997, the United States and, primarily, KEDO
                       purchased and delivered about 735,000 metric tons of heavy fuel oil valued
                       at about $91.4 million. Assuming 1996 costs—an average of about $130 per
                       metric ton; including freight, insurance, and interest costs—and
                       completion of the first reactor between 2001 and 2002,3 the total cost of
                       the heavy fuel oil would range from $407 million to about $470 million.4
                       While historical costs are known, future costs for the heavy fuel oil
                       purchases cannot be estimated with any degree of confidence because the
                       price for oil commodities on the world market can differ significantly from
                       their historical levels. In addition, the world price of heavy fuel oil is
                       heavily influenced by winter weather conditions in the consuming
                       region—a factor that is difficult, if not impossible, to forecast. Because of
                       this, KEDO noted that it cannot anticipate the total cost of the oil.
                       Furthermore, according to KEDO, agreement has not been reached on a
                       specific schedule for completing the first reactor. As a result, the duration
                       of the oil purchases and deliveries is not yet known.

                       The Agreed Framework specifies that, the United States—representing an
                       international consortium—will make arrangements to offset the energy
                       foregone due to the freeze on North Korea’s nuclear program, pending
                       completion of the first reactor. Through mid-May 1997, KEDO had received
                       a total of about $68.2 million for possible use in paying for the fuel oil.5
                       These contributions were from the European Union and 17 countries,
                       including $43 million from the United States. KEDO also received three




                       2
                        The United States and North Korea agreed that 150,000 metric tons of oil would be provided in the
                       year ending October 20, 1995 (1 year after the signing of the Agreed Framework) and that deliveries
                       totaling 500,000 metric tons would be made for each 12-month period thereafter until the first reactor
                       is delivered.
                       3
                        The supply agreement between KEDO and North Korea obligates KEDO to develop a delivery
                       schedule aimed at achieving the reactors’ completion by 2003. According to State Department officials,
                       the first reactor is expected to be completed 1 to 2 years before the second reactor.
                       4
                        Actual costs for fuel oil in 1995 were $15.8 million (for 150,000 metric tons). Actual costs for fuel oil in
                       1996 were $65.2 million (for 500,000 metric tons).
                       5
                        The contributions were made to KEDO’s heavy fuel account or its account for unrestricted or other
                       purposes. In 1996, KEDO also received $19 million from Japan as collateral for the oil purchases.
                       Because these funds are collateral, we have not included them in the total amount available for
                       funding the oil purchases.



                       Page 13                                    GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                            Appendix I
                            Costs to Implement the Agreed Framework
                            Are Uncertain




                            contributions of oil valued at about $6.1 million, including a $5.5 million
                            contribution from the United States.6

                            Through mid-May 1997, KEDO had supplied about 85,000 metric tons of the
                            500,000 metric tons due before October 20, 1997. While KEDO could provide
                            a broad base of financial support for implementing aspects of the Agreed
                            Framework, according to KEDO, as of May 1, 1997, it owed about
                            $46 million and, consequently, had insufficient funds available to meet
                            future oil commitments.7 KEDO’s oil funding shortfall decreased to about
                            $25 million in mid-May when KEDO received the U.S. contribution for fiscal
                            year 1997.8 According to KEDO, it expects to receive about $28.5 million
                            from the European Union later this year following formal approval of an
                            agreement on the European Atomic Energy Community’s membership in
                            KEDO and the Community’s representation on KEDO’s Executive Board.
                            Absent other contributions, the $28.5 million contribution would result in
                            an estimated $3.5 million funding surplus. However, this surplus is likely
                            to be short-lived because, at the conclusion of our review, KEDO had
                            purchased less than 20 percent of the oil required to be delivered to North
                            Korea by October 20, 1997.


Costs for Fuel Meters and   To help ensure that North Korea uses the heavy fuel oil for intended
Recorders                   purposes,9 KEDO has installed meters and sealed recorders to measure and
                            record the flow of oil at six facilities where the fuel is used.10 Costs to
                            install and maintain the equipment as of April 1, 1997, were about $875,000
                            and were paid with funds available for KEDO’s fuel oil purchases. According

                            6
                             Contributions from 17 countries were used to purchase the oil. The contributions were from
                            Argentina, Australia, Brunei, Canada, Finland, Germany, Greece, Malaysia, Netherlands, New Zealand,
                            Norway, Oman, Philippines, Singapore, Switzerland, Thailand, and the United States. Also, Indonesia
                            contributed oil on two occasions.
                            7
                             As of May 1, 1997, KEDO owed about $27 million to oil suppliers. The remaining $19 million
                            represents the collateral supplied to KEDO by Japan and used for earlier oil purchases.
                            8
                             The United States contributed $25 million for fiscal year 1997. According to KEDO, $21 million of the
                            total amount is available for heavy fuel oil purchases, the remaining amount will be used for KEDO’s
                            administrative expenses.
                            9
                             The Agreed Framework specifies that the fuel is for heating and electricity production. In 1995, the
                            State Department disclosed that North Korea may have “diverted” a “small portion” of the first oil
                            delivery for other uses.
                            10
                              The six facilities are Chongjin, East Pyongyang, Pukchang, Pyongyang, Sonbong, and Suncheon.
                            According to KEDO, the facilities are thermal power plants with no purpose other than the production
                            of electricity and heating. North Korea provides KEDO with daily flow (consumption) meter readings
                            from the plants. Specifically, according to KEDO, North Korean personnel retrieve the electronically
                            stored measurements from sealed recorders and fax the readings to KEDO. The readings are received
                            on a bi-weekly basis and monitored by KEDO staff. According to KEDO, North Korea cooperates fully
                            in the fuel monitoring effort.



                            Page 14                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                       Appendix I
                       Costs to Implement the Agreed Framework
                       Are Uncertain




                       to KEDO, KEDO has no plans to install equipment at other North Korean
                       facilities; however, it may upgrade existing equipment at four of the six
                       facilities that have not yet received the latest equipment. KEDO estimated
                       that each of the upgrades would cost about $5,000 or, about $25,000 in
                       total, including about $5,000 in travel-related expenses to install the
                       equipment. According to KEDO, future costs for monitoring North Korea’s
                       use of the heavy fuel oil are expected to be small compared with the
                       overall cost of the heavy fuel oil purchases.


Administrative Costs   In 1996—the first full year of its operation—KEDO’s administrative costs
                       were about $9.9 million. As the reactor project progresses, KEDO expects
                       its administration costs will increase given the need for additional staff to
                       support the project. However, according to KEDO, it “cannot anticipate the
                       size or speed” of the increase. According to KEDO, the three founding
                       members—Japan, South Korea, and the United States—have agreed to
                       share equally in KEDO’s administrative costs.


Future Costs           While KEDO’s current costs are confined to three areas—the reactor
                       project, the heavy fuel oil purchases, and its administrative expenses—its
                       activities could expand in the future. Specifically, the agreement creating
                       KEDO allows it to implement “other measures” deemed necessary to
                       accomplish the objectives of the Agreed Framework. KEDO told us that any
                       such measures would be at the instruction of KEDO’s Executive Board.11
                       According to KEDO, it has not speculated on what additional costs it might
                       eventually incur in fulfilling its purposes. While there are no current plans
                       to expand KEDO’s activities, according to the State Department, there have
                       been discussions about KEDO becoming involved in studies on the
                       disposition of spent nuclear fuel from North Korea’s 5-MW(e) reactor using
                       contributions received for that purpose.


                       As provided in the Agreed Framework, IAEA is monitoring activities at five
Cost Estimates for     North Korean facilities, including the 5-MW(e) reactor, the reprocessing
IAEA Activities        plant, and the fuel fabrication facility to ensure that the facilities do not




                       11
                         At the conclusion of our review, the Executive Board was composed of representatives from each of
                       the three founding members. However, KEDO plans to include the European Atomic Energy
                       Community on its Executive Board.



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                        Appendix I
                        Costs to Implement the Agreed Framework
                        Are Uncertain




                        operate (i.e., that the nuclear freeze remains in place).12 If the Agreed
                        Framework is fully implemented, IAEA would also have a significant future
                        role in carrying out the agreement. For example, North Korea must resolve
                        IAEA’s questions about North Korea’s past production and separation of
                        plutonium before it can receive key nuclear components for the
                        light-water reactors.

                        According to an IAEA official, IAEA’s activities in North Korea cost about
                        $5 million in 1995. In 1996, costs increased to about $6.7 million because of
                        a greater inspection presence during the storage of North Korea’s spent
                        fuel. The official estimated that costs for 1997 would be similar to the 1996
                        costs. Future costs are likely to decline because IAEA expects to reduce its
                        inspection presence in North Korea from four to two inspectors when the
                        Department of Energy (DOE) completes storing North Korea’s existing
                        spent fuel later this year.13 According to the IAEA official, IAEA has not
                        previously carried out a continuous monitoring effort and, therefore, it has
                        no comparable information on which to base future estimates.


                        In January 1995, the Secretary of State estimated that the U.S. contribution
U.S. Costs to           to KEDO would likely be between $20 million and $30 million annually and
Implement the Agreed    called it a “modest contribution” compared with the “billions of dollars”
Framework as of April   that the United States expects South Korea and Japan will eventually
                        contribute. According to State, total U.S. costs to implement the Agreed
1, 1997                 Framework would be tens of millions of dollars. As of April 1, 1997, the
                        United States had approved about $82 million to implement the Agreed
                        Framework.14 More than half of this amount—$51 million—was in the
                        form of direct funding to KEDO. Specifically, the United States contributed
                        $4 million to KEDO in fiscal year 1995, $22 million in fiscal year 1996, and
                        $25 million in fiscal year 1997.15 The $4 million initial contribution was
                        used to help establish KEDO and the remaining funds were for KEDO’s
                        administrative expenses and, primarily, its heavy fuel oil purchases.
                        Furthermore, to meet the 90-day deadline set by the Agreed Framework

                        12
                         IAEA is an autonomous intergovernmental organization within the United Nations. IAEA’s objectives
                        are to promote the peaceful use of nuclear energy and to verify that nuclear material under its
                        supervision or control is not used to further any military purpose. The United States contributes about
                        25 percent of IAEA’s regular budget funding.
                        13
                         According to IAEA, for credibility purposes, it must maintain at least two inspectors in North Korea
                        at all times.
                        14
                          During the same period, South Korea contributed $10.5 million and Japan contributed $27.9 million.
                        As discussed earlier, the Japanese contribution includes $19 million for use as collateral in securing
                        loans for the heavy fuel oil purchases.
                        15
                          The State Department is requesting $30 million for KEDO in fiscal year 1998.



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                           Appendix I
                           Costs to Implement the Agreed Framework
                           Are Uncertain




                           for the delivery of the first heavy fuel oil shipment, the Department of
                           Defense purchased and delivered about 50,000 metric tons of heavy fuel
                           oil at a cost of $5.5 million in January 1995. The delivery occurred about 2
                           months before KEDO was established and was paid for with appropriated
                           Defense Department funds designated for emergency and extraordinary
                           expenses.

                           As discussed earlier, as of May 1, 1997, KEDO owed about $46 million and,
                           consequently, had insufficient funds to pay for future heavy fuel oil
                           purchases. While KEDO’s funding situation has since improved, according
                           to a letter from State’s Acting Assistant Secretary for East Asian and
                           Pacific Affairs, KEDO will continue to face financial difficulties and will be
                           forced, as in the past, to incur debt to finance some of its activities if it
                           does not receive sufficient contributions. However, the official noted that
                           the United States, South Korea, and Japan will continue to urge members
                           of the international community to support the organization financially.
                           According to the official, KEDO’s funding prospects for 1997 and beyond are
                           expected to improve. Specifically, KEDO is expected to pay off its existing
                           debt with funds received from the United States, the European Union, and
                           other members in 1997.16 Finally, another State Department official said
                           that no decision has been made to obtain additional fiscal year 1997 funds
                           for KEDO beyond the $25 million already appropriated by the Congress.


U.S. Costs for Storing     The Agreed Framework specifies that the United States and North Korea
North Korea’s Spent Fuel   will cooperate in finding a method to store safely the spent fuel from the
                           5-MW(e) experimental reactor during the construction of the light-water
                           reactors. As of April 1, 1997, DOE had received about $25.8 million to
                           cooperate with North Korea in this area.17 Specifically, DOE (1) has treated
                           and stabilized the water in the basin containing the spent fuel discharged
                           from North Korea’s 5-MW(e) reactor; (2) has vacuumed corroded fuel
                           “sludge” and other debris from about one-half of the basin’s bottom;
                           (3) has installed new fuel storage racks and repackaging equipment and, in
                           April 1996; (4) began repackaging the spent fuel.18



                           16
                            The European Union is expected to contribute $18.5 million annually for 5 years based on current
                           exchange rates.
                           17
                            This includes $11.5 million in appropriated funds, $14.1 million in reprogrammed funds, and an initial
                           outlay of $200,000 from funds originally appropriated for regional arms control and nonproliferation
                           activities. According to DOE, the initial $200,000 was used to (1) purchase equipment to measure
                           water properties and to provide underwater viewing and (2) design the water treatment system.
                           18
                             DOE refers to its repackaging activities as “canning.”



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Costs to Implement the Agreed Framework
Are Uncertain




North Korea’s spent fuel—called “magnox”—is clad with a
magnesium-zirconium alloy. Unlike spent fuel from light-water reactors,
the magnox cladding corrodes rapidly and, as a result, is not suitable for
long-term storage in water.19 Repackaging the fuel provides a number of
benefits. For example, by isolating the fuel from the water, repackaging
minimizes the risk of radiological hazards and helps minimize corrosion.20
Repackaging also facilitates efforts to safeguard the fuel. Finally,
repackaging is a necessary first step in the fuel’s subsequent removal from
North Korea.

DOE originally estimated that it could (1) treat and stabilize the water basin
and (2) repackage the fuel for $10.2 million using contracts funded in fiscal
year 1995. Thereafter, DOE estimated that it would need about $1 million
annually for 4 to 7 years to conduct maintenance and monitoring
activities.21 DOE indicated that these estimates were the best available at
that time. However, DOE identified numerous uncertainties that could
impact the reliability of the estimates, such as the condition of North
Korea’s water basin and spent fuel and North Korea’s working conditions
in general.

According to DOE officials, actual funding has exceeded DOE’s original
estimates because of numerous technical, logistical, and political
difficulties experienced in implementing the project. For example,
according to DOE, the water treatment and sludge vacuuming operations
were more difficult than expected. During preliminary meetings in 1994
and early 1995, DOE learned that North Korea’s water treatment system had
failed on its first day of operation and that the fuel had been sitting in the
untreated water for more than 6 months. As a result, the water was murky
and, according to DOE, covered with a considerable amount of suspended
material such as algae. The North Koreans requested DOE to upgrade their
water treatment system, but DOE decided that constructing a new system

19
  Reactor operators store spent fuel in a basin of water to cool the fuel and reduce radiation levels. The
water in the basin must be chemically controlled to stabilize the fuel during storage. The duration of
time in the basin depends on a number of factors, including the fuel’s characteristics and the use for
which the fuel is intended. Due to water’s corrosive effect on the cladding of magnox fuel, the fuel is
generally stored in water for relatively short periods before it is reprocessed. The Agreed Framework,
however, prohibits reprocessing of the fuel in North Korea.
20
 The repackaged fuel is returned to the water basin for storage. However, the container is filled with a
gas mixture, and the fuel is isolated from the water, thereby diminishing the risk of radiation exposure
and corrosion.
21
  According to the supply agreement, the “transfer” will (1) begin simultaneous with the delivery of key
nuclear components for the first light-water reactor and (2) conclude when the first light-water reactor
is completed. DOE expects that the fuel will remain in North Korea for 4 to 7 years, depending on the
project’s progress.



Page 18                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix I
Costs to Implement the Agreed Framework
Are Uncertain




would be more efficient. Limited sampling revealed the presence of about
one-inch of sludge (corrosive product) on the bottom of the spent fuel
basin. DOE estimated that clarifying North Korea’s water basin would take
3 weeks and cost about $1.4 million. Thereafter, DOE determined that it
would need to vacuum sludge from the bottom of the basin to allow the
new storage racks and repackaging equipment to be safely placed in the
basin. DOE anticipated that the additional sludge vacuuming would cost
another $700,000 and take a little over 1 week to complete. According to
DOE, however, delays in obtaining funding approvals and in gaining
permission to enter North Korea resulted in additional corrosion, so that
by the time the DOE team arrived in September 1995—8 months later—the
sludge depth had increased to as much as 6 inches. As a result of these and
other problems, water clarification and sludge vacuuming took about 5
months and $2.44 million to complete.

Difficulties associated with establishing and supporting a nearly constant
and protracted U.S. presence at the site also caused cost increases.
According to DOE officials, the current level of North Korean technology is
such that essentially no materials required for the project are available
locally. As a result, through April 16, 1997, DOE had procured and delivered
over 200 tons of equipment, spare parts, and other supplies to support the
spent fuel project at a cost of $6.78 million. According to DOE, each
delivery took between 2 to 3 weeks because of the necessity of using
Beijing, China, as the transhipment point and because of inadequate
equipment and infrastructures for handling and transporting the materials
once the materials arrived in Pyongyang, North Korea. Finally, the project
experienced cost increases arising from a myriad of political difficulties,
including difficulties in obtaining visas for U.S. personnel and a 2-month
work stoppage indirectly related to North Korea’s submarine incursion
into South Korean water last fall.

As of April 16, 1997, DOE had repackaged 75 percent of North Korea’s
estimated 8,000 fuel rods. Barring unforeseen difficulties, DOE hopes to
complete repackaging in August 1997. However, according to DOE,
numerous uncertainties remain, including the possibility of major damage
to equipment and further diplomatic problems, that could affect the
project’s cost and schedule. Once repackaging is complete, DOE estimates
that it will need about $5 million annually during the estimated 4 to 7 year
period before the fuel can be removed from North Korea. The increase
over the original $1 million estimate is based on DOE’s experience working
in North Korea, including the occurrence of frequent power outages,
logistic and transportation complications, regular equipment failures, and



Page 19                          GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix I
Costs to Implement the Agreed Framework
Are Uncertain




high maintenance costs. According to DOE, the estimate also includes costs
for equipment maintenance, spent fuel/canister maintenance, and
personnel costs, as well as costs to resolve unusual problems involving the
physical integrity of the spent fuel, and on-site technical support for IAEA’s
safeguard activities. Figure I.1 illustrates total U.S. funding in support of
the Agreed Framework as of April 1, 1997.




Page 20                          GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                                          Appendix I
                                          Costs to Implement the Agreed Framework
                                          Are Uncertain




Figure I.1: Total U.S. Funding of $82.3
Million in Support of the Agreed
Framework as of April 1, 1997               Dollars in millions
                                            35.0
                                                                              32.9

                                            30.0                  29.7



                                            25.0


                                            20.0     19.7



                                            15.0


                                            10.0


                                              5.0


                                               0

                                                      1995         1996       1997
                                                      Fiscal year

                                                                  Costs for DOE's spent fuel project
                                                                  Heavy fuel oil costs
                                                                  Contributions to KEDO




                                          Notes: 1. Funding for fiscal year 1995 includes $4 million in start-up costs for KEDO, $5.5 million
                                          for the first heavy fuel oil shipment, and $10.2 million for DOE’s treatment and storage of North
                                          Korea’s nuclear power reactor spent fuel project.

                                          2. Funding for fiscal year 1996 includes a $22 million contribution to KEDO and $7.7 million for
                                          DOE’s spent fuel project.

                                          3. Funding for fiscal year 1997 includes a $25 million contribution to KEDO and $7.9 million for
                                          DOE’s spent fuel project.

                                          4. The United States incurs salary, travel, and other costs associated with carrying out the Agreed
                                          Framework, including the cost of resolving bilateral issues of concern, such as the identification
                                          and return of U.S. soldiers missing in action from the Korean War. We did not quantify these
                                          costs.

                                          5. As of April 1, 1997, the United States had provided $33.4 million in emergency assistance for
                                          North Korea. These costs are not included because, according to State, the assistance was
                                          provided solely for humanitarian reasons and has no bearing on the Agreed Framework’s costs.




                                          Page 21                                        GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                         Appendix I
                         Costs to Implement the Agreed Framework
                         Are Uncertain




                         For fiscal year 1998, the State Department is requesting $30 million for
Future U.S. Costs to     KEDO, and DOE is requesting $5 million to, among other things, monitor
Implement the Agreed     North Korea’s spent fuel. State did not estimate the amount of future
Framework Are Not        funding that it expects to request for KEDO. Instead, in a written response
                         to our inquiries, the Acting Assistant Secretary for East Asian and Pacific
Known                    Affairs, referenced State’s earlier estimate of between $20 million to
                         $30 million annually and said that the amount may vary throughout the life
                         of the Agreed Framework. Furthermore, according to this official, future
                         expenditures will be carried out in accordance with appropriate
                         congressional committees and with their approval. Regarding the duration
                         of U.S. contributions to KEDO, the official said that State will continue to
                         seek funding for KEDO as long as KEDO continues to carry out activities
                         related to the implementation of the Agreed Framework.

                         The Acting Assistant Secretary for East Asian and Pacific Affairs did not
                         respond to our inquiry about the amount of other future funding that may
                         be needed to implement the Agreed Framework. However, according to
                         other State officials, the Department will need about $1.5 million annually
                         to operate a liaison office in North Korea once the parties agree to open
                         the offices.22

                         Assuming full implementation of the Agreed Framework, as time
                         progresses, costs will also be incurred for a wide range of other activities,
                         including the disposal of North Korea’s spent fuel and the dismantlement
                         of North Korea’s existing nuclear facilities. However, little is known about
                         the cost of these activities, and the estimates that do exist are highly
                         speculative. None of the agreements concluded to date obligate the United
                         States, KEDO, or North Korea to pay these costs. While KEDO’s role could
                         expand to include these areas, neither KEDO nor any other party has agreed
                         to pay for these activities.


Estimate of Spent Fuel   Department of State and DOE officials could not provide us with an
Disposal Costs           estimate for the costs of disposing of North Korea’s spent fuel. According
                         to these officials, it is premature to estimate the costs because a decision
                         about what to do with the spent fuel, including its final destination, will
                         not be made for several years. One possible disposal option is to reprocess
                         the fuel and store it until an underground repository is available.
                         According to representatives of British Nuclear Fuels, plc. (BNFL)—a
                         company that provides commercial reprocessing services—it would cost

                         22
                          The Agreed Framework specifies that the United States and North Korea will exchange liaison offices
                         as a step toward normalizing their political relations.



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                          Appendix I
                          Costs to Implement the Agreed Framework
                          Are Uncertain




                          between $50 million to $100 million to transport, reprocess, treat the
                          waste, and, assuming that other arrangements are not made, store the
                          resulting products of North Korea’s spent fuel for up to 5 years. In addition
                          to the cost of reprocessing, costs would also be incurred to permanently
                          dispose of the plutonium and the one canister of radioactive waste in an
                          underground repository. We could not determine the costs of disposing of
                          these materials because, among other factors, the disposal location and
                          the cost of preparing the materials for disposal are not known. It is also
                          too early to determine the cost to permanently dispose of North Korea’s
                          unreprocessed spent fuel in an underground repository, because the
                          development of underground repositories is in the early stages. In the
                          United States, however, the projected cost to dispose of 50,000 kilograms
                          of spent fuel—the quantity in North Korea’s possession—would be about
                          $15.8 million. (App. II provides additional information on fuel disposal
                          options and their associated costs.)


Estimate of Costs to      The Agreed Framework provides that North Korea will stop operating its
Dismantle North Korea’s   5-MW(e) reactor and related nuclear facilities and stop construction on two
Nuclear Facilities        larger reactors, and that it will eventually dismantle the facilities.
                          According to the supply agreement between KEDO and North Korea,
                          dismantlement will begin when the first reactor is finished and will be
                          completed when the second reactor is finished.

                          Three of North Korea’s facilities—the 5-MW(e) reactor, the plutonium
                          reprocessing plant, and the fuel fabrication facility—have been in
                          operation and, therefore, would be costly to dismantle due to radioactive
                          contamination. State Department and DOE officials could not estimate the
                          cost of dismantling these facilities and, according to State, it will be years
                          before a decision is reached about who will bear these costs. However, in
                          April 1995, State reported that the two partially constructed reactors—the
                          50-MW(e) and the 200-MW(e)—could be dismantled using conventional
                          methods. State noted that dismantling the 5-MW(e) reactor would be more
                          expensive because of radiological contamination and the need to use
                          specialized tools and processes.

                          The Congressional Research Service has reported that dismantling the two
                          partially constructed reactors could cost about $500 million and that
                          dismantling the radioactive facilities could cost much more.23 We could
                          not verify the reliability of the $500 million estimate because, according to
                          the report’s author, the estimate is based on South Korean press accounts.

                          23
                            North Korea’s Nuclear Weapons Program (Feb. 24, 1997).



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                          Appendix I
                          Costs to Implement the Agreed Framework
                          Are Uncertain




                          However, we contacted TLG Services, Inc.—a U.S. company offering
                          decommissioning cost studies and other decommissioning services—to
                          obtain information about these costs.24

                          According to TLG Services, Inc., it is not possible to estimate the cost of
                          dismantling the two partially constructed reactors, using conventional
                          methods, without knowing what needs to be demolished and the technical
                          problems surrounding the job. According to the company, recent costs for
                          decommissioning two small U.S. reactors were about $19.6 million and
                          $13.8 million.25 Furthermore, DOE has estimated that decontaminating and
                          decommissioning the Separations Process Research Unit (SPRU)
                          reprocessing facility at the Knolls Atomic Power Laboratory in
                          Schenectady, New York, would cost about $144.8 million.

                          While the two U.S. reactors and the SPRU reprocessing facility appear
                          comparable in size to North Korea’s nuclear facilities,26 the cost to
                          decommission these facilities may not be useful in estimating the cost to
                          dismantle North Korea’s 5-MW(e) reactor for a number of reasons. In the
                          United States, decommissioning includes the removal and disposal of all
                          radioactive components and materials and the clean-up of any
                          radioactivity that may remain so that the facility can be used for
                          unrestricted purposes. Neither the Agreed Framework nor the supply
                          agreement specifies that the facilities will be restored to their
                          nonradioactive states. Instead, according to documentation obtained from
                          the State Department, dismantlement—as used in the Agreed
                          Framework—is limited to the disassembly and destruction of the facilities’
                          components and equipment to the point that they are no longer useful. In
                          addition, we could not determine the costs of North Korean labor,
                          transportation, and storage of the low-level waste—key components in
                          developing a reliable estimate.


Cost Estimates for        Other costs are indirectly related to the Agreed Framework and
Upgrading North Korea’s   subsequent agreements. For example, North Korea’s existing electricity
Power Grid                transmission and distribution system is inadequate to handle the
                          electricity that would be generated by two new 1,000 MW(e) light-water


                          24
                           According to the company, it has provided decommissioning cost studies for 85 percent of the
                          commercial nuclear power units in the United States.
                          25
                            The two recently decommissioned reactors were the Experimental Boiling-Water Reactor (EBWR) at
                          the Argonne National Laboratory and the Pathfinder reactor in South Dakota. The reactors are
                          comparable in size to North Korea’s 5-MW(e) reactor.
                          26
                            We could not identify a comparable sized fuel fabrication facility for comparison purposes.



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Costs to Implement the Agreed Framework
Are Uncertain




reactors. As a result, much of North Korea’s existing equipment will need
to be replaced or modernized before the reactors can be used. According
to the State Department, the upgrade could include the replacement or
modernization of substations and transformers, transmission towers, and
high-voltage cables. In April 1995, the State Department estimated that the
cost to modernize 740 kilometers of existing transmission lines, including
installation costs, could reach $750 million.27 The United States and KEDO
maintain that North Korea is responsible for paying for the upgrades;
however, North Korea has not yet obligated itself to pay.28

In a letter dated April 25, 1997, the State Department’s Acting Assistant
Secretary for East Asian and Pacific Affairs informed us that the
$750 million estimate was developed by DOE personnel. According to the
letter, the estimate is not a precise estimate derived from a thorough study
of North Korea’s existing power grid. Instead, DOE used a 1987 study by the
National Regulatory Research Institute to determine the average cost per
mile/kilometer for installing new transmission lines in the United States.29
The resulting estimate was in 1994 dollars and was adjusted to arrive at a
rough estimate—about $430 million—of what the project would cost if
undertaken in South Korea. DOE increased the initial estimate to reflect a
variety of unknowns in North Korea—the terrain, the quality and cost of
North Korean labor, and the availability and quality of equipment and
materials needed for the installation—and market variables such as the
price of copper. According to the Acting Assistant Secretary for East Asian
and Pacific Affairs, the estimate is very conservative, and actual costs are
unlikely to exceed the estimate.

We consulted Stone and Webster—a major U.S. architect and engineering
company—for an independent estimate of these costs. According to a
company official familiar with the terrain on the Korean Peninsula, each of
the two transmission lines would cost roughly $500,000 per mile. The
estimate assumes 500,000 volt transmission lines and includes material
and labor. The actual cost would depend, among other factors, on the
(1) distance between the reactors and the location where the power will

27
 While there is no commitment in the Agreed Framework to finance the modernization of North
Korea’s electricity power grid, during deliberations on the supply agreement for the reactors, North
Korea demanded that KEDO pay for the modernization. KEDO rejected North Korea’s demand.
However, North Korea could reassert this demand in the future. For further discussion of this issue see
Nuclear Nonproliferation: Implications of the U.S./North Korean Agreement on Nuclear Issues
(GAO/RCED/NSIAD-97-8, Oct. 1, 1996).
28
  According to State, KEDO did not formally seek North Korea’s legal commitment to upgrade the
power grid because it would have been illogical for North Korea to owe KEDO a legal duty to upgrade
its own electricity power grid.
29
  The 1987 study is entitled “Some Economic Principles for Pricing Wheeled Power.”


Page 25                                 GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix I
Costs to Implement the Agreed Framework
Are Uncertain




be used and (2) terrain between the locations. We do not know where
North Korea will choose to use power generated from the 1,000 MW(e)
reactors or, consequently, the distance or terrain between these points.
However, the majority of North Korea, including Pyongyang—North
Korea’s capital—appears to be within 150 miles of the reactors’ proposed
site. Thus, doubling the distance to 300 miles to factor in the likelihood of
rolling terrain would result in costs of about $300 million for the two
transmission lines. According to the Stone and Webster official,
engineering services would cost another $15 million—about 5 percent of
the overall cost—or, a total of about $315 million. Furthermore, any costs
for permits, if applicable in North Korea, would need to be added to the
estimate. Finally, additional costs would be incurred for upgrading the
local distribution centers, including the cost of constructing substations.




Page 26                          GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix II

Options for Disposing of North Korea’s
Existing Spent Nuclear Reactor Fuel

                      North Korea has about 50,000 kilograms of spent fuel from its 5-megawatt
                      electric (MW(e)) reactor that had been operating before the freeze on North
                      Korea’s nuclear program.1 The spent fuel from the reactor contains, among
                      other materials, about 25 kilograms of plutonium that the United States
                      feared would be used to produce nuclear bombs. To address this threat,
                      the Agreed Framework specifies that the United States and North Korea
                      will cooperate in finding a method to dispose of the fuel in a safe manner
                      that does not involve reprocessing of the fuel in North Korea. According to
                      annex 3 of the supply agreement that implements portions of the Agreed
                      Framework, removal of the fuel will begin when key nuclear components
                      for the first light-water reactor are delivered and conclude when the first
                      light-water reactor is completed.2 Thus far, no decisions have been made
                      about what to do with the spent fuel or who will be responsible for
                      disposing of the fuel once it is removed from North Korea. These and
                      other decisions are not expected to be made for several years since
                      construction has not yet begun on the first reactor.


                      There are two options for dealing with North Korea’s spent fuel. One
Spent Nuclear Fuel    option is to reprocess the fuel in a country other than North Korea and to
Disposal Options      store the resulting high-level waste until it can be disposed of properly.
                      The other option is to package and store the fuel for an interim period
                      before its final disposal. Governments around the world support the use of
                      deep underground repositories as the best method for the final disposal of
                      highly radioactive waste, but no country has yet built such a facility.


Reprocessing and      Reprocessing is the chemical separation of the spent fuel into its three
Subsequent Disposal   parts—plutonium, uranium, and highly radioactive reactor waste. Several
                      countries have the capability to reprocess North Korea’s spent fuel, but
                      only two—the United Kingdom and France—have companies that offer
                      commercial reprocessing services.3 These companies also have direct
                      experience in reprocessing magnox fuel—the type of fuel used in North
                      Korea’s 5-MW(e) reactor.4


                      1
                       The 50,000 kilograms of spent fuel are contained in about 8,000 fuel rods.
                      2
                       As discussed earlier, the spent fuel will not begin to be removed from North Korea for 4 to 7 years,
                      depending on the project’s progress.
                      3
                       The other countries with reprocessing capabilities include China, India, Russia, Japan, and the United
                      States.
                      4
                      The fuel rods used in North Korea’s 5-MW(e) reactor have an outer coating, called cladding, that is
                      made of an alloy of magnesium and zirconium. Fuel with this type of cladding is called magnox.



                      Page 27                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix II
Options for Disposing of North Korea’s
Existing Spent Nuclear Reactor Fuel




Two companies provide commercial reprocessing services—British
Nuclear Fuels plc. (BNFL) of the United Kingdom and Cogema of
France—and both have expressed interest in reprocessing North Korea’s
spent fuel.5 If either of these companies is selected to do the reprocessing,
under normal circumstances, the repackaged spent fuel would be picked
up, transported to the company’s reprocessing facility, and placed in
interim storage until it is reprocessed. Neither company would normally
take title to the spent fuel or the products of reprocessing so, unless other
arrangements are made, the separated materials would be stored for up to
5 years and, eventually, returned to the country of origin. The specific
terms of the commercial arrangement would be defined in a contract
between the parties. According to BNFL, other matters—such as ownership
and liability for the fuel after its removal—would be defined in letters
between the governments.

According to BNFL, reprocessing North Korea’s spent fuel would result in
approximately 25 kilograms of plutonium, 50,000 kilograms of uranium,
and 160 liters (one canister) of high-level waste. If the spent fuel is
reprocessed, the separated plutonium and uranium would be purified and
converted into stable compounds that can be safely stored until final
disposal.6 The separated uranium and plutonium could be used as fuel for
a nuclear power reactor. If not used as fuel, the plutonium would be
disposed of in an underground radioactive waste repository, and the
uranium would be stored for its economic value and potential use. The
radioactive waste would be mixed with melted glass and poured into a
steel canister to harden—a process called vitrification—and eventually
disposed of in an underground repository.7

BNFL representatives estimated that it would cost between $50 million to
$100 million to transport and reprocess North Korea’s spent fuel, treat the




5
France is expected to close its magnox reprocessing facilities later this year but, according to a
Cogema official, France has other facilities that could reprocess North Korea’s magnox fuel. The
magnox reprocessing facilities in the United Kingdom are expected to operate until at least 2006.
6
 According to DOE, the plutonium from the high-level waste need not be separated during
reprocessing. However, leaving the plutonium with the high-level waste might require modification of
the reprocessing facility to avoid a nuclear reaction.
7
 According to BNFL, the United Kingdom expects to store its vitrified waste for a minimum of 50 years
before final disposal in an underground repository.



Page 28                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                       Appendix II
                       Options for Disposing of North Korea’s
                       Existing Spent Nuclear Reactor Fuel




                       waste, and store the resulting products for up to 5 years.8 In addition to the
                       cost of reprocessing, costs would also be incurred for the final disposal of
                       the plutonium and the one canister of radioactive waste in an underground
                       repository. We could not determine the costs of disposing of these
                       materials because, among other factors, the disposal location and the cost
                       of preparing the materials for disposal are not known.9


Underground Disposal   Permanent disposal of long-lived and highly radioactive nuclear waste,
                       such as spent fuel and its byproducts, presents an extremely difficult
                       challenge. Governments around the world support the use of deep
                       underground repositories as the best method for safely disposing of highly
                       radioactive waste, but no country has yet built such a facility. Many
                       countries studying underground repositories, including the United States,
                       have encountered difficulties and most do not plan to have a repository
                       available until 2020 or later. The United States expects its repository will
                       begin accepting waste after 2010.

                       The nuclear material that will be disposed of in an underground repository
                       could be in several forms—spent reactor fuel, highly radioactive waste
                       that has been stabilized by vitrification or a similar process, or materials
                       like plutonium that will be radioactive for an extremely long time.
                       Whatever the form, the waste must be packaged to prevent the radioactive
                       material from leaking out. In the United States, the package design must
                       be reviewed and approved by the Nuclear Regulatory Commission. Other
                       countries have similar requirements, but none have approved a package
                       design for underground disposal.

                       Underground disposal of North Korea’s spent fuel—without
                       reprocessing—is also an option, although it may not be acceptable to
                       national licensing authorities. According to experts in the United Kingdom,
                       magnox corrodes easily and rapidly and is difficult to package safely for
                       long-term disposal. According to these experts, in 1986, the United
                       Kingdom’s House of Commons Environment Committee on Radioactive

                       8
                        According to BNFL representatives, BNFL could provide the necessary export facilities in North
                       Korea and convert all the products to a stable form for storage. However, the estimate does not
                       include the costs of returning the residual waste material resulting from reprocessing. The
                       representatives noted that the actual costs will be affected, to some extent, by the condition of the
                       spent fuel at the end of the storage period in North Korea. BNFL’s estimate assumes that a “safety case
                       can be made for the transport of the fuel and that this does not significantly affect the transport
                       conditions.” Furthermore, BNFL assumes that the fuel’s condition will be compatible with safe
                       handling requirements and processing conditions. The estimate, which is in 1997 dollars, also includes
                       the cost of safeguarding the separated materials.
                       9
                        Based on DOE’s projected cost of developing the U.S. underground repository, the cost to dispose of a
                       canister of high-level waste will be about $357,000. The actual cost in the United States or elsewhere is
                       not available because a repository has not been completely studied, developed, or put into service.


                       Page 29                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                       Appendix II
                       Options for Disposing of North Korea’s
                       Existing Spent Nuclear Reactor Fuel




                       Waste concluded that direct disposal was not an acceptable option for
                       magnox fuel because of its high intrinsic chemical reactivity.
                       Demonstrating to regulatory authorities that North Korea’s spent fuel can
                       be safely disposed of may be even more difficult because the fuel has
                       deteriorated badly—the magnox is completely or partially gone from many
                       of the fuel rods and cracked on others.

                       It is too early to determine the cost to dispose of North Korea’s spent fuel
                       since countries are still in the early stages of developing their underground
                       repositories. In the United States, for example, DOE’s projected cost to
                       package and dispose of commercial spent fuel in the Yucca Mountain
                       repository is about $317 per kilogram. On the basis of DOE’s projected cost,
                       we estimated that the cost to dispose of 50,000 kilograms of North Korea’s
                       spent fuel would be about $15.8 million. According to a DOE representative,
                       additional costs might also be incurred to pretreat North Korea’s spent
                       fuel before final packaging.

                       The United States has about 2.1 million kilograms of spent fuel from its
                       weapons plutonium production reactors that it has decided to store for up
                       to 40 years before disposal. The United States considered both
                       reprocessing and underground disposal. The current plan for the spent
                       fuel is to store the fuel in canisters until a decision is made about what to
                       do with it. Although the U.S. spent fuel is not magnox fuel, both the U.S.
                       and North Korean spent fuel have many similar characteristics. For
                       example, some of both are badly deteriorated and would require a multiple
                       barrier package before disposal in an underground repository. Because the
                       disposal problems are similar, from a technical standpoint, the 50,000
                       kilograms of North Korean spent fuel could be disposed of by the United
                       States along with its spent fuel. State Department officials stressed that
                       the U.S. government has never considered disposing of North Korea’s
                       spent fuel in this manner.


                       According to the State Department, decisions have not been made about
Decisions About        (1) who will be responsible for North Korea’s spent fuel once it is removed
North Korea’s Spent    from the country, (2) the method of disposal, (3) the party responsible for
Fuel Are Not           implementing the disposal method, or (4) the fuel’s final destination.
                       According to State, it will be several years before these decisions are made
Expected for Several   since construction has not yet begun on the first reactor.10
Years
                       10
                         As discussed earlier, transfer of the fuel will begin when key nuclear components for the first
                       light-water reactor are delivered and conclude when the first light-water reactor is completed.



                       Page 30                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix II
Options for Disposing of North Korea’s
Existing Spent Nuclear Reactor Fuel




While the United States generally discourages reprocessing and the
subsequent use of plutonium in civil power reactors, according to the
State Department, the United States has not excluded reprocessing from
consideration. Specifically, State said that all factors and methods that are
safe and in accordance with international procedures will be considered
as long as the disposal option is implemented outside of North Korea.
However, according to State, if reprocessed, the United States would not
agree to allow the separated plutonium to return to North Korea for any
purpose, including for use as fuel in the light-water nuclear power
reactors.11

According to State, numerous parties will be involved in the disposal
decision, including the relevant U.S. agencies. Also, State said that it
would consult closely with South Korea and Japan—as well as the
International Atomic Energy Agency and KEDO, if appropriate.
Furthermore, as provided in the Agreed Framework, the final decision will
be made in cooperation with North Korea.




11
  State did not address the possible use of North Korean plutonium in reactor fuel for another country.



Page 31                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix III

Contracting Arrangements and Actions
Arising From the Agreed Framework

                        The Agreed Framework between the United States and North Korea
                        specifies that the United States will organize under its leadership an
                        international consortium to finance and supply the nuclear power reactor
                        project. By agreement dated March 9, 1995, the United States, Japan, and
                        the Republic of Korea (South Korea) created KEDO to implement portions
                        of the Agreed Framework.1 The agreement authorizes KEDO to enter into
                        agreements, contracts, or other arrangements, including loan
                        arrangements,2 with states, international organizations, or other
                        appropriate entities to finance and supply North Korea with two
                        light-water nuclear power reactors and heavy fuel oil until the first reactor
                        is completed. The agreement also allows KEDO to implement “other
                        measures” deemed necessary to supply the reactors and heavy fuel oil or
                        to otherwise implement the Agreed Framework.


                        KEDO has developed draft procurement guidelines for carrying out its
KEDO Has Contracted     purposes and functions.3 The guidelines require KEDO to utilize fair and
for a Wide Variety of   open competition, to the maximum extent practical and, according to
Services                KEDO, are based on the contracting policies and practices of the U.S.
                        government and commercial concerns. According to KEDO, the guidelines
                        were developed by outside legal counsel with input from KEDO’s
                        (1) General Counsel, (2) senior contract specialist, and (3) Executive
                        Board.4 The draft guidelines are expected to be finalized later this year.

                        As of April 1, 1997, KEDO had contracted for a wide range of services,
                        including legal, banking, and architect and engineering services.5 In
                        January 1996, KEDO initiated a competitive procurement to obtain legal
                        services. According to KEDO, 13 law firms from Europe, Japan, South
                        Korea, and the United States responded. KEDO selected Freshfields—an
                        international firm with offices worldwide—as its lead counsel for the
                        reactor project, including nuclear liability issues. KEDO also retained
                        Covington and Burling of Washington, D.C., to provide legal advice on,

                        1
                         “Agreement on the Establishment of the Korean Peninsula Energy Development Organization.”
                        2
                         KEDO does not make a distinction between the terms “agreement,” “contracts,” and “other
                        arrangements, including loan arrangements.” Instead, according to KEDO, the terms are intended to
                        cover all possible contractual arrangements.
                        3
                         The draft guidelines are entitled “Procurement Rules And Regulations for Contracts entered into by
                        the [KEDO] Organization.”
                        4
                         At the conclusion of our review, the Executive Board was composed of representatives from each of
                        the three founding members—Japan, South Korea, and the United States. KEDO plans to add the
                        European Atomic Energy Community to its Executive Board.
                        5
                         As agreed with the requester’s staff, we did not review KEDO’s contracting actions in detail.



                        Page 32                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix III
Contracting Arrangements and Actions
Arising From the Agreed Framework




among other matters, general liability issues and issues arising from the
organization’s status as an international organization. Following KEDO’s
request for proposals from 13 Japanese, South Korean, and U.S. banks
with offices in New York City, KEDO contracted with three banks—the
Bank of Tokyo-Mitsubishi; the Korean Exchange Bank; and, a U.S. bank,
Citibank—to, among other things, accept deposits of contributions from
member and nonmember governments in support of the organization’s
activities. Finally, KEDO evaluated five proposals for architect and
engineering services and selected Duke Engineering and Services—a U.S.
subsidiary of the Duke Power Company6—to provide technical support for
the reactor project. Duke Engineering and Services is responsible for,
among other things, assisting KEDO in contract matters such as the
development and negotiation of the prime contract for supplying the
reactors.

KEDO also relies on contractors to supply heavy fuel oil to North Korea. As
of April 1, 1997, KEDO had contracted with eight such vendors and was
planning to initiate a contract to secure a broker for the 1998 oil deliveries.7
According to KEDO, it purchases heavy fuel oil using open worldwide
invitations for bids.8 KEDO evaluates the bids to determine the best overall
price and, according to KEDO, has awarded all of the contracts to the low
bidder when transportation and the commodity costs are considered.
According to KEDO, the process follows the standard offer and acceptance
process used by commercial and U.S. government entities. Also, according
to KEDO, all awards have been made on a fixed-price basis at prices
comparable to the worldwide market price for the grade of oil purchased.

As of April 1, 1997, KEDO had also awarded numerous contracts for the
purchase, delivery, installation, and maintenance of meters to monitor the
flow of heavy fuel oil at six North Korean thermal power plants where the
oil is consumed. Other KEDO contracts were for printing, accounting, and
interpreter services.

According to KEDO, the prime contract with the Korea Electric Power
Corporation (KEPCO) is the largest contract KEDO will award, both in terms
of complexity and price. The agreement between KEDO and North Korea

6
 The Duke Power Company is a major U.S. utility with international experience in managing the
design, construction, and operation of nuclear power plants.
7
The eight heavy fuel oil vendors are: Global Petroleum Corp., Itochu Hong Kong Ltd., Honam Oil
Refinery Co., Vital Asia Ltd., BP Oil., Sun Kyung Corp., Han Wha Corp., and Mitsubishi Corp.
8
 According to KEDO, it also follows the standards set forth in the U.S. Federal Acquisition Regulation
to ensure that all contractors in the free world are given a fair and equal opportunity to compete for
the oil deliveries.



Page 33                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix III
Contracting Arrangements and Actions
Arising From the Agreed Framework




for supplying the reactors (supply agreement)9 specifies that the reactors
will be an advanced version of a U.S. designed reactor currently under
production. The supply agreement further requires KEDO to select a prime
contractor to provide the reactors—on a turnkey basis—and to conclude a
commercial supply contract with the prime contractor.10 KEDO selected the
Korean standard nuclear power plant, a pressurized water reactor
modified by KEPCO, and in March 1996, KEDO formally designated KEPCO as
the prime contractor for the project.11

KEDO’s first annual report, dated July 31, 1996, stated that active
negotiations between KEDO and KEPCO on the prime contract would begin
in August 1996, followed by a fully executed contract in the first quarter of
1997. While negotiations are ongoing, KEDO does not expect the contract
will be executed until 1998. According to KEDO, various factors contributed
to the contract’s delay, including the uniqueness and complexity of the
project and general delays associated with KEDO’s inability to access the
reactor site following North Korea’s September 1996 submarine incursion
into South Korean waters. As discussed later, KEDO plans to execute a
preliminary works contract so that the initial infrastructure work at the
reactor site can begin while negotiations continue on the prime contract.

The contents of the prime contract will not be known until the contract is
finalized. However, according to KEDO, the contract will be modeled on the
“Orange Book,” which KEDO describes as the leading international model
for turnkey contracts.12 This model is intended to simplify contract
preparation and includes recommended text on 160 contract clauses
considered generally applicable to turnkey contracts.13 The Orange Book
also provides guidance on other contract clauses that may need to be

9
 “Agreement on Supply of a Light-Water Reactor Project to the Democratic People’s Republic of Korea
[North Korea] Between the Korean Peninsula Energy Development Organization and the Government
of the Democratic People’s Republic of Korea.”
10
  A “turnkey” contract obligates the contractor to provide a fully equipped facility that is ready for
operation (at the turn of a key). Turnkey contracts typically include design, construction, fixtures,
fittings, and equipment and may include a requirement for the contractor to operate the facility—the
reactors in this case—for a specified period of time. The other type of contract is a “Design-Build”
contract. According to KEDO, most international infrastructure projects now use the turnkey contract
model.
11
 KEPCO is a partially state-owned South Korean utility with experience in the construction, operation,
and maintenance of Ulchin 3 and Ulchin 4—the nuclear reactor model selected for North Korea.
12
  The full name of the Orange Book is “Conditions of Contract for Design-Build and Turnkey.” The
book was published in 1995 by the Federation Internationale Des Ingenieurs-Conseils—an
international federation of consulting engineers. According to the Federation, it includes members
from more than 60 countries, including members from most of the independent consulting engineers in
the world.
13
 The generally applicable clauses cover topics such as design; staff and labor; plant, materials, and
workmanship; contract price and payment; claims; and disputes and arbitration.
Page 34                                  GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                      Appendix III
                      Contracting Arrangements and Actions
                      Arising From the Agreed Framework




                      modified to reflect the particular circumstances of the contracting parties.
                      Taken together, the contract clauses are intended to govern the rights and
                      obligations of the contracting parties.

                      According to KEDO, its outside legal counsel—experts in contracting for
                      international infrastructure and construction projects—advised KEDO to
                      select the Orange Book model for its prime contract with KEPCO for several
                      reasons. First, the model’s terms are viewed as being the most favorable to
                      the interests of the owner of a major international construction
                      project—KEDO’s position in the prime contract. Second, the model has
                      been used to draft many construction contracts for international
                      infrastructure projects. Third, the model is well regarded by major
                      multilateral lending institutions, in particular, the World Bank, the
                      European Bank for Reconstruction and Development, and the Asian
                      Development Bank. Finally, according to KEDO, the Federation has a strong
                      record and considerable prior experience in developing standard form
                      contracts in other areas, for example, civil works projects.

                      We reviewed the contract clauses in the Orange Book as well as the
                      model’s suggested modifications for tailoring contracts to specific
                      situations. The clauses address major contracting issues which, if properly
                      tailored, should protect KEDO’s interests.


                      The details of KEDO’s prime contract with KEPCO will not be known until the
Details on KEPCO’s    contract is finalized. Among the issues still being negotiated are details on
Contracting Are Not   how KEPCO’s procurement (subcontracting) will be handled. In general,
Yet Available         according to KEDO, because the prime contract is a turnkey contract, KEPCO
                      must manage its procurement using its internal contracting rules and
                      procedures and within the total price agreed upon between the parties.14
                      However, KEDO plans to negotiate a set of general procurement principles
                      applicable to KEPCO’s subcontracting on the “appropriate portion” of the
                      reactors’ “balance of plant” equipment.15 The general principles for KEPCO’s
                      subcontracting are as follows:



                      14
                       We attempted to obtain information on KEPCO’s contracting policies and procedures from KEDO.
                      However, according to KEDO, it does not have such information.
                      15
                        According to the State Department, balance of plant equipment for the North Korean reactors refers
                      to all equipment and materials purchased by KEPCO to complete the reactors with the exception of
                      the reactors’ turbine generators and nuclear steam supply systems. The nuclear steam supply is the
                      combination of all systems needed to produce the steam that drives a reactor’s turbine-generator for
                      the production of electricity. Combustion Engineering, Inc.—a U.S. company—supplies a large portion
                      of the system’s equipment for KEPCO.



                      Page 35                                GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
                           Appendix III
                           Contracting Arrangements and Actions
                           Arising From the Agreed Framework




                       •   Companies based in KEDO member countries will be able to participate in a
                           fair and open procurement process in the form of competitive bidding on
                           the appropriate portion of the reactors’ balance of plant equipment.
                       •   All companies prequalified by KEPCO will be provided timely and adequate
                           notification regarding the bidding process for all appropriate subcontracts
                           and an equal opportunity to bid on the subcontracts.
                       •   KEPCO, in consultation with KEDO, will establish the bidder prequalification
                           criteria in consideration of each bidder’s technical capabilities,
                           performance history, relevant experience, financial condition, and quality
                           assurance capability.
                       •   Objective criteria will be established as determined by KEPCO, in
                           consultation with KEDO, for evaluating bids tendered for appropriate
                           subcontracts, including (1) the bidder’s proposed price and conformance
                           of the technical proposal to the purchase specifications; (2) the proposed
                           quality, delivery schedule, and work plan; and (3) the magnitude of the
                           contribution to KEDO of a member country in which the bidder is based and
                           the magnitude of the subcontracts already awarded to companies from
                           that member country.
                       •   Before the expiration of a bid, KEPCO will award the relevant subcontract
                           to the bidder whose bid has been evaluated to be the lowest priced among
                           the most qualified bidders, based on the objective criteria.
                       •   The procurement process will be agreed upon between KEDO and KEPCO
                           and conducted by KEPCO.

                           According to KEDO, the Orange Book envisions that the contractor will be
                           responsible for subcontracting and for the performance of its
                           subcontractors. KEDO intends to follow the model’s subcontracting clause.
                           However, KEDO indicated that it will need to modify the clause to
                           accommodate its general procurement principles. According to KEDO, its
                           Executive Board will have the opportunity to approve relevant KEPCO
                           subcontracting principles as part of its approval of the prime contract.


                           According to KEDO, the draft prime contract provides KEDO and KEPCO
Use of Limited-Scope       flexibility to enter into interim and limited-scope contracts for preliminary
Contracts to Perform       site preparation work and for reactor components that must be ordered
Site Work                  early. Thus far, KEDO and KEPCO have executed one contract of this nature
                           and another is being negotiated.16



                           16
                            We attempted to obtain information on KEPCO’s subcontracting actions, including the number, type,
                           purpose, dollar amount, selection criteria, and the vendors’ country of origin. However, according to
                           KEDO, KEDO does not have such information.



                           Page 36                                 GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix III
Contracting Arrangements and Actions
Arising From the Agreed Framework




In January 1996, the parties executed a contract for preproject services
which enabled KEPCO to begin topographical survey work at Sinpo—the
proposed site for the reactors. The contract’s statement of work required
KEPCO to, among other things, (1) prepare a topographical survey and
maps; (2) conduct a preliminary geological investigation; (3) prepare a
preliminary site plan; (4) prepare a top-level schedule, including key
milestones; and (5) prepare a “rough-order of magnitude” cost estimate for
the entire project as of December 31, 1995. KEDO and KEPCO had anticipated
that work under this contract would be accomplished on or before July 15,
1996. However, as of April 1, 1997, this contract was still being used to
perform work at the site.

Negotiations are underway on a second contract between KEDO and
KEPCO—the preliminary works contract. According to KEDO, the
preliminary works contract is intended to ensure that physical work on the
project can get underway at an early date—before the prime contract is
executed.17 According to KEDO, negotiations on the contract began in
September 1996 because of delays in negotiating the prime contract and
the desire to show progress at the site. However, as of April 1, 1997, the
contract had not been finalized. According to KEDO, with the exception of
establishing an office, KEPCO cannot begin any physical work in North
Korea until this contract is approved.

According to State Department officials, work under the preliminary
works contract is expected to begin in mid-1997. KEDO and KEPCO anticipate
that the work will cost up to $45 million and take up to 12 months to
complete. As currently negotiated, KEPCO would provide the initial
infrastructure and site development services, including (1) temporary
support facilities such as water and community facilities, housing, and
other facilities such as a store, a restaurant, and a first-aid facility;
(2) diesel storage tanks, a gas station, a temporary construction office
(including warehouse), communication facilities, a repair shop for heavy
equipment, a temporary power supply and lighting facilities for the site
and housing area; and (3) contingency planning for the communication
facilities, including establishment of a project site communication services
office; and (4) mobilization of the personnel, material, and equipment
needed for the reactors’ subsequent construction period. The actual scope
of work as well as the cost and duration of the site infrastructure work are
subject to ongoing negotiations between the parties.



17
  According to KEDO, this work would normally be included in the prime contract.



Page 37                                GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix IV

Status of Actions to Normalize Economic
and Political Relations Between the United
States and North Korea
                        The Agreed Framework between the United States and North Korea
                        provides that the two countries will take steps to normalize their
                        economic and political relations. Specifically, the countries agreed to
                        (1) reduce barriers to trade and investment; (2) exchange liaison
                        offices—the lowest level of diplomatic representation; and (3) upgrade
                        their relations to the Ambassadorial level, as progress is made in resolving
                        issues of concern to each side.1


                        For well over four decades, North Korea has been the target of a
Modest Improvements     comprehensive array of sanctions imposed by the United States under the
in Economic             Trading With the Enemy Act (50 U.S.C. App. §§ 1-44) that prohibits U.S.
Relations Between the   businesses and other entities subject to U.S. jurisdiction from engaging in
                        commercial trade with North Korea. In 1950, following North Korea’s
United States and       attack on South Korea, the United States imposed an embargo on trade
North Korea             and financial relations with North Korea. The embargo consisted of a
                        general ban on U.S. commercial and financial transactions with North
                        Korea. Under the embargo, transactions with North Korea are allowable
                        only if they are authorized by regulations implementing the act, or are
                        specifically licensed by the U.S. Department of the Treasury or the U.S.
                        Department of Commerce.2 The embargo also blocked North Korean
                        assets held in financial institutions subject to U.S. banking regulations. In
                        addition to the general trade embargo, the United States has statutorily
                        imposed other types of restrictions and prohibitions on specific aspects of
                        trade, export credits, and private investments with North Korea.3

                        Under the Agreed Framework, the United States and North Korea agreed,
                        that within 3 months of its signing, they would reduce barriers to trade and
                        investment, including restrictions on telecommunications services and
                        financial transactions. In January 1995, the United States announced that it
                        had taken incremental steps to ease economic sanctions against North



                        1
                         Issues of concern to the United States include (1) obtaining North Korea’s cooperation in finding and
                        returning the remains of U.S. soldiers “missing in action” from the Korean War, (2) halting North
                        Korea’s ballistic missile development and exports to countries of concern, (3) reducing the threat of
                        North Korea’s conventional military force buildup near South Korea, (4) seeking a credible
                        condemnation of terrorist activity by North Korea, and (5) seeking improvements in North Korea’s
                        human rights record.
                        2
                         Treasury, together with Commerce, implements the embargo against North Korea.
                        3
                         Examples of such restrictions include a prohibition of credits through the U.S. Export/Import Bank,
                        denial of preferential (Most Favored Nation) tariff rates, and specific penalties imposed on U.S.
                        persons or entities engaging in business with countries, such as North Korea, which have been
                        determined to be supporters of international terrorism.



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    Status of Actions to Normalize Economic
    and Political Relations Between the United
    States and North Korea




    Korea in these areas.4 The following month, the Treasury Department’s
    Office of Foreign Assets Control (OFAC)—its office that administers the
    embargo against North Korea—amended its regulations to specifically
    authorize:5

•   transactions related to telephone and telecommunications connections
    between the United States and North Korea;
•   credit card use by Americans for personal travel to North Korea, other U.S.
    travel-related transactions, and travel-related transactions for North
    Korean nationals in the United States;
•   financial transactions associated with opening of U.S. news offices in
    North Korea, and North Korean news offices in the United States, subject
    to OFAC’s approval of a specific license;
•   financial and other related transactions incident to the import or export of
    certain informational materials—compact disks, CD ROMs, artworks, and
    news wire feeds;6
•   North Korea’s use of the U.S. banking system to clear financial
    transactions involving U.S. dollars, provided that persons subject to U.S.
    jurisdiction cannot be originators or ultimate beneficiaries of funds
    transfers;
•   the case-by-case release of certain funds held in U.S. financial institutions,
    subject to OFAC licensing, provided that no funds are released to North
    Korea or its nationals;
•   U.S. imports, subject to a specific OFAC license, of North Korean-origin
    magnesite or magnesia—minerals used in domestic steel production;
•   financial transactions related to the establishment and operation of a U.S.
    liaison office in North Korea, and a North Korean liaison office in the
    United States; and
•   other financial transactions, subject to OFAC licensing, for U.S. firms
    participating in energy sector projects connected with North Korea’s
    transition to light-water reactor power plants, including the supply of
    alternative energy (heavy fuel oil) and the disposition of the spent nuclear
    fuel removed from North Korea’s 5-megawatt electric (MW(e)) nuclear
    power reactor.




    4
     In January 1995, North Korea’s Korean Central News Agency announced that the North Korean
    government had lifted trade restrictions on imports of U.S. products and calls by U.S. vessels into
    North Korean ports. We were unable to verify these actions.
    5
     Foreign Assets Control Regulations (31 C.F.R. part 500), as amended.
    6
     Some information-related items—such as publications and films—were exempted from the embargo
    prior to the Agreed Framework. Treasury’s amended regulations expanded the list of exempted items
    to include the above informational materials.


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                         Status of Actions to Normalize Economic
                         and Political Relations Between the United
                         States and North Korea




                         Effective on April 7, 1997, Treasury also amended its regulations to
                         authorize payments to North Korea for services rendered by the North
                         Korean government in connection with U.S.-registered aircraft, or aircraft
                         controlled or owned by persons subject to the jurisdiction of the United
                         States, that fly over North Korean airspace or make emergency landings in
                         North Korea. While authorized, according to the State Department, U.S.
                         overflights and landings in North Korea have not yet taken place.

                         According to State Department officials, North Korea asserts that the
                         United States has not gone far enough in fulfilling its economic
                         commitments to North Korea under the Agreed Framework.7 According to
                         State officials, the United States does not intend to relax its trade
                         restrictions with North Korea further until additional progress is made by
                         North Korea in addressing issues of concern under the Agreed
                         Framework. (The issues of concern are discussed later in this app.)

                         The following sections provide information on the impact of Treasury’s
                         amended trade regulations with North Korea, and to the extent available,
                         information about any resulting trade associated with the regulatory
                         changes.



Telecommunications and   Following Treasury’s actions to ease trade restrictions, in February 1995,
Information-Related      the AT&T Corporation applied for and received approval from the Federal
Transactions             Communications Commission to offer international, long-distance
                         telephone service between the United States and North Korea. On April 10,
                         1995, AT&T launched its long-distance service, including direct-dial
                         service between U.S. cities and Pyongyang, and operator-assisted service
                         to calls placed outside of Pyongyang. The services are subject to some
                         limitations; for example, collect calls cannot be made to or from North
                         Korea, and North Korean directory assistance is not available.

                         In addition, Treasury’s amended regulations authorize, without limitation,
                         the export to North Korea of U.S. information and informational materials,
                         such as books, magazines, films, compact disks, CD ROMs, artworks, news
                         wire feeds, and recordings. The regulations also permit U.S. travelers
                         returning from North Korea to bring back $100 worth of North Korean
                         merchandise for personal use and an unlimited quantity of North
                         Korean-origin informational material.


                         7
                          We were unable to obtain details about North Korea’s position on this matter.



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                           Status of Actions to Normalize Economic
                           and Political Relations Between the United
                           States and North Korea




                           Treasury officials told us that they do not maintain records on
                           telecommunications and informational transactions with North Korea.8
                           Accordingly, we were unable to obtain the estimated value of these
                           transactions since the signing of the Agreed Framework.


Travel-Related             Treasury’s amended regulations allow U.S. citizens traveling to and from
Transactions               North Korea to engage in financial transactions that are incident to their
                           travel in North Korea. Furthermore, U.S. travel service providers are
                           authorized to organize group travel to North Korea, including transactions
                           with North Korean carriers. However, individuals may only spend money
                           in North Korea to purchase traveled-related items such as hotel
                           accommodations, meals, and goods for personal consumption. Also,
                           Treasury’s amended regulations remove a $200-per-day limitation on travel
                           expenses for U.S. citizens traveling in North Korea and authorize U.S.
                           citizens to use their credit cards for their travel-related transactions there.

                           Neither State nor Treasury could provide us with information on the
                           amount of U.S. travel-related expenses incurred in North Korea, since the
                           relaxation of the regulations. However, according to a State Department
                           official, North Korea has not yet begun to accept credit cards drawn on
                           U.S. banks because it fears that the transactions might be blocked. Also,
                           according to Treasury officials, currently, major U.S. credit card firms do
                           not accept transactions that originate in North Korea.


Other Types of Financial   Prior to Treasury amending its regulations, it had blocked, or frozen,
Transactions               $20.6 million in North Korean-related financial transactions. According to
                           Treasury officials, most of these transactions occurred in the late 1980s
                           and early 1990s, when Treasury developed a means of detecting and
                           monitoring suspicious foreign payments involving U.S. dollars. Treasury’s
                           amended regulations allow blocked funds to be released under specific
                           conditions. Nevertheless, the funds cannot be released to North Korea, its
                           entities, or any person located in North Korea. According to Treasury
                           Department officials, as of mid-May 1997, 52 transactions totaling
                           $6.1 million were released—no funds were released to North Korea or its




                           8
                            Commerce officials from the Bureau of Export Administration told us that it has authorized two
                           licenses to North Korea for exports related to telecommunications. We could not obtain further details
                           about these transactions.



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                            Status of Actions to Normalize Economic
                            and Political Relations Between the United
                            States and North Korea




                            nationals. Treasury has no immediate plans to release the remaining
                            $14.5 million in blocked North Korean funds.9


News Organization Offices   Treasury’s amended regulations authorize the issuance of specific licenses
                            for transactions related to the establishment and operation of U.S. news
                            bureaus in North Korea. Transactions that may be authorized, include
                            (1) leasing office space and securing goods and services in North Korea,
                            (2) hiring North Korean nationals to serve as support staff, (3) purchasing
                            North Korean goods for the office, and (4) paying fees for the operations
                            of the office. Similarly, if licensed by Treasury, North Korean organizations
                            can establish and operate news agencies in the United States. Since late
                            1994, Treasury officials told us that they have neither licensed any U.S.
                            news organizations to set up operations in North Korea, nor authorized
                            North Korean news bureaus to set up operations in the United States.10


Magnesite/Magnesia Trade    As of mid-April 1997, the Treasury Department had licensed four U.S.
                            companies to import quantities of magnesite or magnesia—materials used
                            in domestic steel production—from North Korea.11 Treasury issued the
                            first license on March 8, 1995. The license authorized a U.S. company to
                            import up to 100,000 metric tons of magnesite from North Korea. In
                            June 1995, North Korea and the U.S. firm contracted for the import of
                            85,000 metric tons of magnesite at an estimated cost of between $5 million
                            to $10 million. The license, extended twice, is valid through
                            December 1997, and authorizes the U.S. firm to import up to 200,000
                            metric tons of magnesite or magnesia.

                            Also, since 1995, three other firms were awarded licenses by Treasury.
                            Two of these licenses are still in effect. One license, approved in
                            November 1996, authorizes the import of up to 200,000 metric tons of
                            magnesia over an indefinite period of time. A second license, approved in
                            April 1995, authorized the import of up to 80,000 metric tons of magnesia
                            until December 1995. This license was subsequently extended through
                            December 1997. The third license, which has expired, was approved in
                            August 1995. The license authorized 50,000 metric tons of


                            9
                             Treasury officials told us that they normally consult with the State Department prior to any decision
                            to release funds that remain blocked.
                            10
                             Commerce officials said that its Bureau of Export Administration has licensed one U.S. firm to
                            export goods to North Korea related to news bureaus.
                            11
                                China and North Korea are the primary natural sources of these materials on the world market.



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                              Status of Actions to Normalize Economic
                              and Political Relations Between the United
                              States and North Korea




                              magnesite/magnesia through August 1996. We could not obtain details on
                              these transactions.


The Light-Water Nuclear       Because of the embargo against North Korea, U.S. products, technology,
Reactor Project               or services generally cannot be exported to North Korea, either directly or
                              indirectly.12 Treasury’s amended regulations, however, permit OFAC to
                              grant licenses to U.S. persons or entities to participate in transactions that
                              further activities related to the Agreed Framework, including the design of
                              reactors; site preparation and excavation; delivery of essential nonnuclear
                              components, including turbines and generators; building construction; the
                              disposition of the spent nuclear fuel from North Korea’s 5-MW(e) reactor;
                              and the provision of heavy fuel oil for heating and electricity in North
                              Korea.

                              To date, Treasury has approved a broad license for KEDO—the
                              international consortium established to carry out the Agreed Framework’s
                              provisions—and nine licenses authorizing firms under contract with KEDO
                              to do business in North Korea. The nine licenses authorize:

                          •   two U.S. companies and a U.S. individual to provide support services to
                              KEDO,
                          •   a U.S. financial institution to provide banking services to KEDO,
                          •   a U.S. firm to assist in the site survey and preparation at the reactors’ site,
                          •   three U.S. firms to engage in transactions related to the delivery of heavy
                              fuel oil to North Korea, and
                          •   one U.S. firm to monitor North Korea’s usage of heavy fuel oil provided
                              under the Agreed Framework.

                              Furthermore, any export of U.S. materials or technology necessary to
                              implement the Agreed Framework must be licensed by the Commerce
                              Department’s Bureau of Export Administration. Since October 1994,
                              Commerce has not approved any licenses for the export of goods and
                              services to North Korea related to the light-water nuclear project with
                              respect to KEDO. However, Commerce has approved 10 licenses, including
                              8 associated with the cleanup of the North Korean spent fuel and 2
                              associated with the alternative heavy fuel oil.




                              12
                               This general prohibition also affects individuals dealing in or assisting in the sale of goods or
                              commodities to North Korea.



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                       Status of Actions to Normalize Economic
                       and Political Relations Between the United
                       States and North Korea




                       North Korea was established as a separate country in 1948, but the United
The United States Is   States has never established a formal political relationship with North
Prepared to Open a     Korea. With the signing of the Agreed Framework, a step was taken
Liaison Office in      towards eventually establishing formal diplomatic relations between the
                       United States and North Korea—a pledge by the two countries to open
North Korea Once       liaison offices in each others’ capital.13 According to State Department
Issues Between the     officials, establishing liaison offices would provide practical benefits for
                       both countries. For example, liaison offices afford countries the ability to
Parties Are Resolved   protect and support its citizens while in each others’ country.
                       Furthermore, from the U.S. point of view, an office in Pyongyang would
                       provide the United States with first-hand knowledge of the situation in
                       North Korea and provide improved access to North Korean officials.

                       In December 1994, the United States and North Korea met to discuss the
                       establishment of liaison offices. The meeting resulted in a draft agreement
                       on consular matters which, among other things, would allow the staff of
                       each liaison office access to local authorities for citizens arrested or
                       detained while traveling in that country. In January 1995, North Korea
                       informed the United States that it wished to modify certain provisions of
                       the agreement. According to publicly available information, North Korea
                       wanted to change the method for passing diplomatic pouches in and out of
                       North Korea. The United States objected, insisting that any modification of
                       the agreement, would require further negotiations between the parties.

                       According to State Department officials, subsequent negotiations to
                       resolve the impasse were delayed by numerous incidents, including (1) the
                       February 1995 arrest and detention of a U.S. military crewman after his
                       helicopter crashed in North Korea, (2) the August 1996 apprehension and
                       detention of a U.S. citizen of Korean descent who crossed into North
                       Korea from China, and (3) the September 1996 incursion of a North
                       Korean submarine into South Korea.

                       State Department officials told us that outstanding issues regarding the
                       liaison offices were briefly discussed in a series of meetings between the
                       United States and North Korea earlier this year.14 A key issue remaining to
                       be resolved is the transit and passage of diplomatic pouches between the
                       countries. However, according to State officials, most of the other

                       13
                         In general, liaison offices are the lowest level of diplomatic representation between countries. The
                       United States has maintained such low-level offices in countries with which it has no diplomatic
                       relations. For example, the United States maintained a liaison office in the People’s Republic of China
                       from 1973 until 1979, when it upgraded diplomatic relations with China.
                       14
                        The State officials declined to provide us with information about the status of the negotiations or the
                       expected time frame for opening the liaison offices.



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                          Status of Actions to Normalize Economic
                          and Political Relations Between the United
                          States and North Korea




                          essential details related to the establishment of the offices have been
                          resolved. For example, the United States has arranged for the supply and
                          support of an office in Pyongyang, and in March 1997, North Korean
                          officials visited Washington, D.C., to identify, among other things, possible
                          sites for its office.

                          According to State Department officials, the Department has developed a
                          staffing plan and, in the fall of 1995, had set aside funds for the operation
                          of a prospective liaison office in Pyongyang.15 State officials plan to
                          request six full-time positions, at a cost of $1.5 million annually to staff and
                          operate the office. Given the uncertainty about planning for the office’s
                          opening, the officials said that State will probably need to request
                          congressional approval to reprogram funds for the office’s start-up. Once
                          outstanding issues are resolved between the parties, a State official
                          estimated that the U.S. liaison office could begin operating within about 3
                          to 6 months, assuming congressional approval.


                          The Agreed Framework states that the United States and North Korea will
Limited Progress in       upgrade their relations to the Ambassadorial level once progress on
Resolving Bilateral       resolving issues of concern to both parties is made. The Agreed
Issues of Concern         Framework does not identify what the issues are between the United
                          States and North Korea. According to State Department officials, however,
                          there are five specific areas related to the Agreed Framework that the
                          United States has sought to discuss with North Korea:

                      •   Progress in recovering and returning to America the remains of missing
                          U.S. soldiers who died while serving in the Korean War.
                      •   A halt to North Korea’s indigenous development, deployment, and export
                          of offensive ballistic missiles.
                      •   A reduction in the threat posed to South Korea by North Korea’s
                          conventional military forces.
                      •   The cessation by North Korea of engagement in, and sponsorship of, acts
                          of international terrorism.
                      •   Reforms by the North Korean government in dealing with domestic human
                          rights issues.

                          According to the State Department, efforts to normalize U.S. relations with
                          North Korea will be done carefully and sequentially as progress is made on
                          the issues that, according to the United States, have troubled the Korean

                          15
                           The United States has chosen a site for a liaison office in Pyongyang, North Korea. Present U.S. plans
                          are to share facilities with the German delegation.



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                             States and North Korea




                             Peninsula for years. In January 1995 testimony before the Congress, the
                             former Secretary of Defense said that the United States did not expect any
                             of the issues separating the United States and North Korea to be resolved
                             quickly.16 Instead, the Secretary said that the Agreed Framework serves as
                             a vehicle to start a dialogue with North Korea on issues of concern that,
                             over time, would increase the likelihood that these points of contention
                             between the two countries would be resolved.

                             A discussion of each issue and, where applicable, progress towards
                             resolving each issue follows.


Progress in Accounting for   According to the Department of Defense, over 8,100 American service
the Remains of U.S.          personnel were unaccounted for from the Korean War.17 In 1954, following
Soldiers Missing in Action   the end of the war, the North Korean government returned the remains of
                             1,868 American soldiers to the United States. Until this decade, further
From the Korean War          efforts to recover and identify the remains of American soldiers were
                             largely unsuccessful. In 1990 and 1991, North Korea recovered and
                             returned a total of 16 remains to two Members of Congress visiting the
                             North. In 1992, North Korea turned 30 more remains over to the United
                             Nations Command—one of the signatories to the 1953 Armistice
                             agreement. From July 1993 through September 1994, North Korea returned
                             to the Command an additional 162 sets of remains, for a total of 208.

                             During the 1990s, several noteworthy events affected the pace and
                             progress of U.S. efforts to account for U.S. soldiers missing in action from
                             the Korean War. In an August 1993 written agreement, the United Nations
                             Command and North Korea’s “Korean People’s Army” recognized the
                             importance, for humanitarian reasons, of cooperating on the recovery,
                             return, and identification of missing soldiers in the North. That same
                             month, the United States—through the Command—paid North Korea
                             $897,000 for recovery activities associated with the first 46 sets of remains
                             returned between 1990 and 1992. The following year, the late Kim Il

                             16
                               According to State Department officials, North Korean issues of concern include (1) lifting the
                             complete regime of U.S. economic sanctions against North Korea, (2) withdrawing U.S. military troops
                             from South Korea, and (3) providing North Korea with additional food assistance. However, according
                             to the officials, North Korea has not identified these or other issues as impediments to upgrading
                             diplomatic relations between the countries. We were unable to obtain North Korea’s views on this
                             matter.
                             17
                               According to a Defense Department official, because of discrepancies in U.S. war casualty records,
                             an official count of U.S. soldiers missing in action from the Korean War is not currently available. The
                             official said that the number 8,177 has been widely used as the total for U.S. military personnel missing
                             from the war, but this figure is not reliable. The official also said that the U.S. Army is reconciling
                             records of missing Korean War soldiers from three databases and that it hopes to have a more accurate
                             count on missing U.S. soldiers in the near future.



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Sung—then President of North Korea—informed former President Carter
that North Korea would permit joint U. S./North Korean recovery teams.
According to a Defense Department official, the North Korean
commitment led to cautious optimism about the possibility that increased
progress could be made in the accounting for missing U.S. soldiers.
Progress towards this goal, however, was delayed by a disagreement
between the United States and North Korea over the amount of
compensation that would be paid to North Korea for its recovery of the
162 sets of remains returned in 1993 and 1994.

Over the next 2 years, the impasse over the compensation issue continued.
The United States and North Korea met in January 1996 at the U.S. Army’s
Central Identification Laboratory in Hawaii to discuss past and present
issues related to the recovery of U.S. soldiers missing in action. The
January 1996 talks failed to produce an agreement on the appropriate
amount of compensation to North Korea for the 162 remains. However,
according to Defense Department officials, the meeting was valuable
because it demonstrated to the North Koreans the advantages of
conducting joint search and recovery operations with the two sides’
militaries and convinced the North about the desirability of future talks.
Finally, a breakthrough on the compensation issue occurred at a May 1996
meeting in New York City between the United States and North Korea.
Specifically, North Korea agreed to accept $2 million for the 162 remains.
Also, in the meeting, the United States and North Korea agreed to meet the
following month to discuss the specific timing, sites, personnel, and other
issues related to the first joint recovery mission.

In June 1996, the parties held follow-on discussions in Pyongyang, and
they agreed that U.S. and North Korean military officials would conduct
two joint recovery missions—one in July 1996 and one in
September 1996—with each to last 20 days. The parties also agreed that
the two missions would take place at two North Korean sites where U.S.
planes were believed to have crashed. In addition, the United States
agreed that it would reimburse North Korea for its costs of each mission,
consistent with existing U.S. military procedures. According to State
Department and Defense officials present at these negotiations, the
meeting produced other positive benefits. For example, for the first time
since the Korean War, U.S. and North Korean military officials agreed to
negotiate directly with each other over the terms and conditions of future
recovery operations. Also, the officials said that the meetings set the stage
for proceeding with future joint recovery missions based strictly on




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Status of Actions to Normalize Economic
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humanitarian considerations, rather than as an adjunct to progress on
other bilateral issues of concern.

According to the Departments of Defense and State, the first joint recovery
operation proceeded as planned, lasting from July 9, 1996, through July 29,
1996. As a result of this mission, one American soldier’s body was
recovered and returned to the U.S. Army’s laboratory in Hawaii, where a
positive identification was made. The U.S. Army paid the costs of the first
joint recovery mission, including about $96,000 in compensation to the
North Koreans.18 With the additional set of remains returned, this
increased the count of remains returned since 1990 by North Korea to the
United States to 209.19

Plans for the second joint recovery operation in September 1996 did not
materialize due to the controversy surrounding the North Korean
submarine incursion into South Korea that month. According to State and
Defense Department officials, further negotiations on the return of U.S.
remains were put on hold until after December 29, 1996, when North
Korea expressed its deep regret over the incident.

Talks about future joint recovery missions between the United States and
North Korea have resumed, and on February 25, 1997, the Defense
Department wrote to the Korean People’s Army requesting its cooperation
in continuing the missions. The United States also requested North Korea’s
cooperation in obtaining access to North Korean War archives and
museums to learn more about the fate of U.S. soldiers last known to be
alive in prisoner-of-war camps. According to the Defense Department, this
type of information will help facilitate subsequent recovery operations.
The Department of Defense’s Deputy Assistant Secretary of Defense for
Asian and Pacific Affairs, testified before the House of Representatives, on
February 26, 1997,20 that the United States hopes to complete the archival
research with North Korea before undertaking additional joint recovery
missions.

18
  The $96,000 includes the cost of food for North Korean personnel and fuel for U.S. vehicles used in
the mission. In addition, the U.S. Army incurred costs of $236,000 for travel and transportation, as well
as $475,000 in annual costs to lease and store the vehicles and equipment used for the joint recovery
mission.
19
  According to U.S. Army officials at its Central Identification Laboratory in Hawaii, to date only 11 of
the 209 remains have been positively identified as U.S. soldiers. However, efforts are continuing to
investigate the North Korean-returned remains through new and existing anthropologic and forensic
technologies, such as DNA matching.
20
 Statement by Dr. Kurt M. Campbell, Deputy Assistant Secretary of Defense (Asian and Pacific
Affairs) before the Subcommittee on Asia and the Pacific, House Committee on International
Relations.



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Related to this, the United States is continuing to seek answers from North
Korea and other sources on reports of Americans allegedly detained and
still alive in North Korea. To date, efforts to substantiate reports of
Americans still alive in North Korea have been unsuccessful, according to
Department of Defense officials. These officials maintain that over the
years, the United States has received reports alleging that Americans are
living in North Korea. However, the officials described these reports as
mostly hearsay.

According to the Department of Defense officials, uncertainties remain
about the number of Americans in North Korea, and whether they are
prisoners of war or defectors. According to a January 1997 internal
Defense memorandum, the Department believes that at least some of the
reports of suspected Americans in North Korea may be linked to four
former U.S. servicemen who defected to North Korea after the Korean
War. The individuals are believed to be still alive. Other reports contain
conflicting evidence; for example, some of the reports indicate that as
many as 10 to 15 Americans were reportedly held in North Korea, while
other reports, including those received by South Korean military
intelligence, suggest that North Korea may harbor a group of 20 Americans
other than the 4 known defectors. The memorandum also cites the
account of an American who spent 5 years working at a North Korean
university. The individual alleges that he heard second-hand reports about
American prisoners of war still in the country. According to the
memorandum, the North Korean government has consistently denied
holding any American prisoners of war.21

At the end of our review, progress in accounting for U.S. soldiers missing
from the Korean War was continuing. Specifically, according to a Defense
Department official, in early April 1997, the North Korean government
responded favorably to U.S. requests (1) for access to the North Korean
War archives, (2) to resume joint recovery operations, and (3) to further
discuss allegations of Americans living in North Korea. Talks on these
subjects began on May 4, 1997. On May 15, 1997, the Defense Department
announced that North Korea had agreed in principle to allow the United
States to examine North Korean War archives and to conduct three joint
recovery missions in 1997. There was no agreement reached on
interviewing American defectors in North Korea, but both sides said that
discussions would continue on this issue. The Department of Defense

21
 In addition to the alleged sightings of living U.S. prisoners in North Korea, Defense Department
officials have received other reports over the years alleging that some U.S. prisoners of war from
Korea may have been moved to China or the former Soviet Union. To date, according to the
Department, none of these reports have been substantiated.



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                           States and North Korea




                           hopes to conduct four joint recovery missions in fiscal year 1997 and
                           included $860,000 in its current budget for that purpose.


Some Movement Towards      Since the early 1980s, according to the Defense Intelligence Agency, North
Addressing U.S. Concerns   Korea has spent millions of dollars annually to engineer and produce
About North Korea’s        offensive ballistic missiles for its own use and for export to countries of
                           concern in the Middle East.
Ballistic Missiles
                           In the early stages of its missile program, North Korea acquired
                           single-stage SCUD B missiles from the former Soviet Union. North Korea
                           later produced its own variant of the missile—called the SCUD C.
                           According to an unclassified 1995 Defense Intelligence Agency report, the
                           SCUD C can deliver a 700-kilogram warhead with a range of 500
                           kilometers compared with SCUD B’s range of 300 kilometers. In addition,
                           the SCUD C has an improved internal guidance system for greater
                           accuracy. North Korea is believed to have installations of both types of
                           missiles about 50 kilometers north of the demilitarized zone (DMZ),22 and,
                           according to a Defense Department report, several hundred of these
                           missiles are believed to be available for North Korea’s use.23 The missiles
                           are capable of reaching targets throughout South Korea. And, according to
                           a Defense Department official, the missiles may be capable of delivering
                           chemical and biological warheads. In addition to fixed launching
                           installations, the North is reported to have mobile launching capabilities
                           for its missiles.

                           The Defense Intelligence Agency reports that North Korea also has been
                           working on other, longer-range missiles that are believed to be capable of
                           delivering larger warheads than its existing SCUDs. One such missile,
                           called the “No Dong,” is reported to have a range of 1,000 kilometers or
                           more and can deliver about a 40-percent heavier warhead than the SCUD
                           C. According to a Defense Department official, the No Dong missile, which
                           was believed to have been last flight-tested in 1993, can reach targets as far
                           away as Japan. In November 1996, press accounts from the Far East
                           reported that North Korea was about to resume No Dong testing, but the
                           tests apparently were cancelled. However, recent Japanese and South
                           Korean press accounts indicate that the North Koreans may be intending


                           22
                            The DMZ is the strip of land about 2.4 miles wide, running the entire length of the Korean Peninsula,
                           established by the 1953 Korean Armistice Agreement as a buffer along the Military Demarcation Line
                           between North and South Korea.
                           23
                            Department of Defense Report on Weapons Proliferation in Northeast Asia, Office of the Secretary of
                           Defense (Apr. 12, 1996).



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to further test these missiles soon. According to these reports in April and
May 1997, North Korea has three missiles ready for immediate test-firing
along its northeastern coast and plans to install seven more such missiles.

In addition to the No Dong missiles, the Defense Intelligence Agency
reports that North Korea is working on other, longer-range designs, with
two rocket stages. These missiles—called the Taepo Dong I and Taepo
Dong II—are reported to be in the design stage of development. The Taepo
Dong I is reported to have a range of more than 1,500 kilometers and the
Taepo Dong II, a range of 4,000 kilometers or more. Testimony by a
Central Intelligence Agency official last December before a Senate Select
Committee indicated that the Taepo Dong II missile design may be capable
of reaching Alaska or the westernmost parts of the Hawaiian Islands.24
However, according to a Defense official, there are questions about the
state of development and effectiveness of North Korea’s missile program.
Also, according to a 1997 report by the National Defense University’s
Institute for Strategic Studies,25 U.S. intelligence had initially estimated
that North Korea’s longer-range missiles might become operational by the
turn of the century, but the estimate has been since revised to reflect
reports of slower progress in North Korea’s development of these missiles.

Also, according to the National Defense University’s report, North Korea is
a key supplier of missiles and technology assistance to other nations of
concern that have not yet perfected their own ballistic missile production
capabilities. Specifically, North Korea is believed to have sold SCUD
missiles to Iran and Libya and to have assisted Iraq and Syria with
developing their missile programs, and North Korea may be helping Libya
with its program.

Progress between the United States and North Korea on resolving the
issue of missile proliferation has been limited. According to State
Department officials, the United States and North Korea met in Berlin
during April 1996 to discuss a freeze on North Korea’s exports and
production of missiles, and to encourage North Korea to become a
member of the Missile Technology Control Regime—a multilateral




24
 Testimony of John Mclaughlin, the Vice Chairman for Estimates of the National Intelligence Council,
before the Senate Select Committee on Intelligence, (Dec. 4, 1996).
25
   Strategic Assessment 1997: Flashpoints and Force Structure, National Defense University/Institute
for National Strategic Studies, Fort Lesley J. McNair, Washington, D.C.; 1997.



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                          agreement established to restrict such exports.26 According to State
                          Department officials, the talks were useful; however, no agreement was
                          reached. The countries agreed to meet at a later time, and on April 14,
                          1997, the State Department announced that the United States and North
                          Korea would hold a second round of missile talks on May 12 and 13, 1997.
                          However, the North Koreans subsequently postponed the talks for
                          “technical” reasons.


Threat Posed by North     According to the State Department, the United States and North Korea
Korea’s Conventional      have not yet discussed issues related to North Korea’s conventional
Military Forces Has Not   military presence on the Korean Peninsula. North Korea, with a population
                          of only about 24 million people, fields the world’s fifth-largest military,
Significantly Changed     with a combined active force of over 1.1 million, and another 4.7 million
                          reservists. The large, heavily armed and forward positioned, military
                          forces of North Korea’s Korean People’s Army continues to pose a serious
                          threat to South Korea and the approximately 37,000 U.S. forces stationed
                          there.27 Furthermore, according to the Department of Defense, North
                          Korea remains a source of unpredictability and potential danger to the
                          entire East Asian/Pacific region.

                          Two-thirds of North Korea’s conventional military personnel are
                          positioned within 60 miles of the DMZ. According to a Defense
                          Department official, North Korea has continued to maintain a “forward
                          leaning” military posture during this decade. Since the signing of the
                          Agreed Framework, the official said, there has been no appreciable change
                          in the troop placements by North Korea. This combined with North
                          Korea’s deployment of over 10,000 pieces of artillery and placement of
                          large concentrations of artillery and multiple rocket launchers in locations
                          close to the DMZ poses a formidable risk to South Korea’s security. Some
                          of these weapons are capable of striking Seoul, about 26 miles from the
                          DMZ, with little advance warning, and could potentially inflict great
                          damage and casualties on South Korea in the event of an attack.

                          In addition, the North Korean People’s Army possesses (1) a large cadre of
                          well-trained special operations forces capable of being inserted behind


                          26
                            The United States and seven other countries formed the Regime in April 1987 to coordinate their
                          national exports of certain goods and technologies so as to limit the proliferation of missiles and
                          related technology. Since then, an additional 21 nations have joined the Regime, and 7 other countries
                          adhere to the Regime’s guidelines.
                          27
                            In contrast, South Korea maintains a total active military force of about 650,000 and reserves of over
                          2 million, while the United States presently has a combined force of about 37,000 stationed in South
                          Korea and about 100,000 in the entire East Asian/Pacific region.



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South Korean lines, (2) a growing arsenal of missiles, and (3) the
capability of using missiles and other means to deliver chemical and
biological weapons. Finally, according to the National Defense
University’s Institute for Strategic Studies, North Korea’s military doctrine,
patterns of deployment, the structure of its military forces, and equipment
all are designed for a rapid offensive thrust into South Korea.

According to Department of Defense and State Department officials, North
Korea has done little to reduce its conventional force military threat
against South Korea since the start of the decade. Despite signs of a badly
deteriorating economy, years of poor harvests, and recent reports of
widespread hunger, North Korea has continued to give priority to its
military. The Central Intelligence Agency has estimated that between
one-fourth to one-third of North Korea’s gross domestic product is spent
on its military. A Defense Department official said that up to the present,
the North Korean military has been largely shielded from the worst effects
of food shortages afflicting the country. But according to the National
Defense University’s study and the Department of Defense official, other
factors such as shortages of fuel, North Korea’s lack of hard currency, its
poor international credit rating, and loss of backing by the former Soviet
Union, all indicate a potential reduction in readiness by the North Korean
forces.

While there is reason for military analysts to believe that overall North
Korean military readiness may be on the decline, a Department of Defense
official said that this does not affect North Korea’s ability to inflict serious
damage upon South Korea. The official said that it appears that North
Korea continues to use its offensive military force posture as leverage in
negotiations with the United States and South Korea and apparently does
not want to give up this advantage.

According to recent statements by the Department of State and the
Defense Department, the United States has no plans to decrease the 37,000
troops stationed in South Korea, which cost about $2.5 billion annually to
maintain, or to reduce the total 100,000-troop commitment for the East
Asian/Pacific region. According to the Secretary of Defense, present-day
U.S. troop reductions could have a destabilizing effect on the region,
possibly upsetting the East Asian/Pacific regional military balance and
triggering a dangerous arms race in the region.




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No Progress on Issues      North Korea is believed to have been engaged in and sponsored
Related to North Korea’s   international acts of terrorism, and North Korea was added to the State
Suspected Involvement in   Department’s annual list of states supporting international terrorism in
                           January 1988.28 According to State and Defense Department officials, the
Terrorist Activities       action to add North Korea to its terrorism list followed North Korea’s
                           mid-flight bombing of a Korean Air Line passenger aircraft in 1987, killing
                           all 115 people aboard. North Korea has since made several statements
                           condemning terrorism and denies any involvement with international
                           terrorist acts. For example, in November 1995, a North Korean spokesman
                           said that North Korea opposed “all kinds of terrorism and any assistance
                           to it.” A similar statement was made in May 1994 when a North Korean
                           Foreign Ministry spokesman indicated North Korea’s opposition to “any
                           act encouraging and supporting terrorism.” According to the State
                           Department, North Korea and South Korea pledged in 1991 to “refrain
                           from all acts destroying and overthrowing the other side” and “not use
                           arms against one another.”

                           Despite North Korea’s statements renouncing terrorism, North Korea is
                           believed to be providing sanctuary for terrorists, such as members of the
                           Japanese Communist League-Red Army Faction, who participated in the
                           1970 hijacking of a Japan Air Lines flight into North Korea. And, talks
                           between North Korean and Japan on normalizing their diplomatic relations
                           have been complicated by North Korea’s refusal to respond to questions
                           concerning the status of a Korean resident of Japan allegedly kidnapped
                           by North Koreans in the 1980s. The individual is believed to have been
                           kidnapped to teach Japanese to North Korean agents. Most recently,
                           according to the State Department’s 1996 report on global terrorism,29 a
                           senior member of the Japanese Red Army was arrested in March 1996 on
                           counterfeiting charges. The individual was captured in Cambodia carrying
                           a North Korean diplomatic passport and was in the company of several
                           North Korean diplomats. State Department officials told us that at this
                           time, they have no plans to remove North Korea from the list of terrorist
                           nations.


No Progress by North       According to the State Department’s annual report on international human
Korea in Addressing        rights practices for 1996, North Korea continues to deny its citizens
Human Rights Issues        fundamental human rights. As cited in the report, North Korea’s state

                           28
                             Nations determined by the Secretary of State to have repeatedly supported acts of international
                           terrorism are subject to certain U.S. trade or other restrictions.
                           29
                            Patterns of Global Terrorism, 1996: Overview of State-Sponsored Terrorism, U.S. Department of
                           State.



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    leadership perceives most international norms of human rights, especially
    individual rights, as illegitimate and alien social artifacts subversive to the
    goals of the state and party. Also, North Korea’s leadership appears
    determined to maintain tight ideological and political control of its people
    despite a sharp decline in its economy—brought about because of the
    collapse of the former Soviet bloc and food and material shortages.

    The Department of State’s human rights report calls attention to many
    areas in which North Korea’s practices on human rights appear to
    substantially deviate from established international human rights
    conventions. For example, according to State’s report:

•   Citizens do not have the right to peacefully change their government.
•   North Korea’s Penal Code stipulates capital punishment and confiscation
    of all assets for a wide variety of “crimes against the revolution,” including
    defection, attempted defection, slander of the policies of the party or
    State, writing “reactionary” letters, and possessing “reactionary” printed
    matter.
•   North Korean constitutional provisions, which reportedly allow for an
    independent judiciary and fair trials, are not implemented in practice, and
    there are no restrictions on the ability of the North Korean government to
    detain and imprison persons against their will.
•   Many North Korean citizens are held as political prisoners under harsh
    conditions, and prisoners reportedly are dying from torture, disease,
    starvation, or exposure.
•   The North Korean government subjects its citizens to rigid controls, such
    as a prohibition of freedom of the press and association, and governmental
    intervention over all forms of cultural and media activities, such as radio
    and television.
•   The North Korean government directs all significant economic activity,
    with only government-supervised labor unions permitted to exist, and
    workers do not have the right to strike.
•   The North Korean government is believed to restrict freedom of religion,
    even though the country’s 1992 Constitution provides for the freedom of
    religious belief, including the right to build buildings for religious use.
•   North Korea restricts citizens’ movements and internal and external travel,
    and its government tightly controls access to civilian aircraft, trains, buses,
    food, and fuel.

    The State Department notes that because the United States does not have
    diplomatic relations with North Korea, and North Korea does not allow
    representatives of foreign governments, journalists, or other invited



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visitors freedom of movement, it is not possible to fully evaluate human
rights conditions in the country. State acknowledges that the details of its
human rights report on North Korea may be limited. However, according
to State, it has updated the report’s information wherever possible, and
believes that its contents are indicative of the current human rights
situation in North Korea.

North Korea continues to deny allegations that it has subverted the
fundamental rights of its citizens. However, according to State officials,
given their concern about North Korea’s past record on human rights,
North Korea will have to implement major reforms before it can
substantially improve its standing with the United States on this issue.




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Appendix V

Status of Actions to Promote Peace and
Security on a Nuclear-Free Korean
Peninsula
                            The Agreed Framework provides that the United States and North Korea
                            will work together for peace and security on a nuclear-free Korean
                            Peninsula. Specifically:

                        •   The United States will provide formal assurances to North Korea, against
                            the threat or use of nuclear weapons by the United States.
                        •   North Korea will consistently take steps to implement the 1992
                            North-South Joint Declaration on the Denuclearization of the Korean
                            Peninsula.
                        •   North Korea will engage in a dialogue with South Korea.


                            The Agreed Framework specifies that the United States will provide
Assurances by the           formal assurances to North Korea, against the threat or use of nuclear
United States               weapons by the United States. According to State Department officials, the
Regarding Nuclear           United States does not intend to provide these assurances until North
                            Korea comes into full compliance with the Treaty on the Non-Proliferation
Nonaggression               of Nuclear Weapons (NPT)—to which it has been a party since 1985.
Against North Korea         Specifically, before U.S. assurance will be provided, North Korea must
                            implement the NPT-mandated nuclear safeguards pursuant to its safeguards
                            agreement with the International Atomic Energy Agency (IAEA), including
                            verification by IAEA of the completeness and accuracy of North Korea’s
                            initial report on the quantity of nuclear material in its possession.1


                            On January 20, 1992, South Korea and North Korea signed the “Joint
Actions to Implement        Declaration on the Denuclearization of the Korean Peninsula.” The
the North-South Joint       declaration indicated both parties’ desire to eliminate the danger of
Declaration on              nuclear war and to create an environment favorable for peace and security
                            in Asia and the world. For example, the declaration prohibited both sides
Denuclearization            from testing, manufacturing, producing, receiving, possessing, storing,
                            deploying, or using nuclear weapons and forbade the countries from
                            possessing nuclear reprocessing and uranium enrichment facilities.
                            Furthermore, a procedure for inter-Korean inspections was to be
                            developed and implemented, and a South-North Joint Nuclear Control
                            Commission was to establish procedures and methods for the inspections.

                            According to the State Department, North Korea and South Korea held a
                            series of meetings in early 1992 to discuss issues related to the
                            implementation of the declaration. However, these meetings were

                            1
                             We will address the status of North Korea’s compliance with the NPT and its safeguards agreement
                            with IAEA, as related to its performance under part IV of the Agreed Framework in a report expected
                            to be issued later this year.



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                      Peninsula




                      unsuccessful in establishing a bilateral inspection regime. The meetings
                      were subsequently discontinued as relations between the two Koreas
                      worsened in March 1993, when North Korea threatened to withdraw from
                      the NPT and refused to cooperate with IAEA’s inspections of its nuclear
                      facilities. Discussions have not yet resumed and, as a result, the 1992
                      declaration has not been implemented.

                      According to State, the Agreed Framework has several elements in
                      common with the Joint Declaration. As a result, while North Korea had not
                      taken specific actions to implement the declaration, in State’s view, North
                      Korea’s actions under the Agreed Framework represent consistent steps to
                      implement key provisions of the declaration. According to State, North
                      Korea’s willingness to freeze and eventually dismantle its
                      graphite-moderated nuclear reactors and related facilities, halted activities
                      that would have threatened the Korean Peninsula and Northeast Asia.
                      Also, according to State, North Korea’s agreement to forego reprocessing
                      of its spent nuclear fuel and to replace its nuclear reactors with light-water
                      reactors represents a major step towards ensuring that North Korea will
                      not test, manufacture, produce, receive, store, deploy, or possess nuclear
                      weapons—another key provision of the North-South declaration.2
                      Furthermore, according to State, North Korea’s agreement to allow a
                      continuous IAEA inspector presence at its nuclear facilities and to
                      eventually come into full compliance with its nuclear safeguards
                      agreement with IAEA, fulfills inspection objectives in the North/South 1992
                      declaration on denuclearization of the Korean Peninsula.


                      North Korea and South Korea have had a difficult and acrimonious
Limited Progress      relationship in the four decades since the Korean War.3 During the postwar
Towards North/South   period, both Korean governments have repeatedly affirmed their desire to
Dialogue              reunify the Korean peninsula, but have not yet met to discuss a permanent
                      and peaceful end to the Korean War. During former President Carter’s
                      1994 visit, the late North Korean leader Kim Il Sung agreed to a first-ever
                      North-South summit. The meeting was planned for July 1994, but was
                      cancelled due to Kim’s death that month.


                      2
                      North Korea’s reactors and related nuclear facilities are particularly well suited to produce nuclear
                      materials for bombs.
                      3
                       On July 27, 1953, at Panmunjom, the military commanders of the North Korean People’s Army, the
                      Chinese People’s Volunteers, and the United Nations Command signed an armistice agreement to
                      cease the hostilities of the Korean War. Neither the United States nor South Korea is a signatory to the
                      armistice, although both adhere to it through the Command. More than four decades later, a
                      comprehensive peace agreement has not replaced the 1953 armistice.



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According to the State Department, a key element of the Agreed
Framework, which was included at U.S. insistence, is the expectation of
improvements in relations between the North and South. The Agreed
Framework includes a pledge by North Korea to engage South Korea in
dialogue, as a step towards eventual peace and security on the Korean
Peninsula. Since the signing of the Agreement, the State Department
reports that the United States has taken steps to support South Korean
initiatives towards the North and to encourage North Korea to fulfill its
commitment to engage in dialogue as soon as possible. Furthermore, the
State Department maintains that in its subsequent diplomatic contacts
with North Korea, U.S. officials have stressed consistently and frequently
the necessity of such contacts. In fact, according to State, improvement in
North-South relations is a requirement if U.S./North Korean bilateral
relations are to move forward. State refers to fostering improved
North-South relations as the most important and the most difficult goal of
the Agreed Framework.

The United States supports the peaceful reunification of Korea—divided
following World War II—on terms acceptable to the Korean people and
recognizes that the future of the Korean Peninsula is primarily a matter for
the Korean people to decide. The U.S. position is that a constructive and
serious dialogue between the authorities of North Korea and South Korea
is necessary to resolve the most important issues on the peninsula, and
that concrete steps to promote greater understanding and reduce tension
are needed to pave the way for reunification. According to State, the
United States is prepared to participate in negotiations between North
Korea and South Korea if they desire, provided that both are full and equal
participants in any negotiations.

On the basis of these principles, on April 16, 1996, President Clinton and
South Korean President Kim Young Sam proposed a “Four Party Meeting”
of representatives of South Korea, North Korea, the United States, and the
People’s Republic of China as soon as possible and without preconditions.
The 4-way talks are intended to result in a permanent peace accord to
replace the 1953 military armistice agreement. According to State, the
main difference between this proposal and North Korea’s previous
position is that North Korea wished to negotiate only with the United
States. According to U.S. officials, this is not feasible, as the establishment
of a permanent peace is primarily the responsibility of the Korean people.
In this respect, both the United States and South Korean Presidents agreed
that North Korea and South Korea should take the lead in a renewed
search for peace.



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More than 1 year after the U.S./South Korean 4-way peace proposal, there
are signs of possible movement by North Korea towards engaging South
Korea in peace talks. On March 5, 1997, a delegation of U.S. and South
Korean officials met in New York City to brief North Korean officials and
encourage North Korea’s participation in the 4-way peace talks. The State
Department reported that the meeting was serious and sincere although no
agreements were reached. Two working-level meetings between the
United States, South Korea, and North Korea were held in the weeks
following the joint briefing. On April 16, the North Korean delegation
returned to New York to respond to the U.S. and South Korean proposal
for peace talks. At that meeting, North Korea accepted in principle the
4-way talks, but agreement was not reached on the steps needed to initiate
the talks.

Although an agreement has not been reached, according to the State
Department spokesperson on April 21, 1997, recent events appear to
indicate that North Korea is receptive to further talks. However, it is
unclear whether North Korea will ultimately agree to participate in the
4-way peace talks. State’s spokesperson said that the North Koreans raised
the issue of additional U.S. food assistance as a condition of North Korea’s
participation in the 4-way talks, but that the United States refused to allow
food aid to be linked, in any way, to the talks. On April 22, 1997, North
Korea proposed that the United States, South Korea, and itself continue to
meet before the 4-way talks with China. According to a press account
quoting the North Korean Vice Foreign Minister, continued trilateral talks
are needed until U.S. negotiators build “confidence” with North Korea.

In addition to preliminary talks on the peace front, the State Department
has reported that implementation of the Agreed Framework has created a
number of opportunities for other North/South contacts. For example,
South Korean officials participated in extensive negotiations between KEDO
and North Korea on the agreement for supplying the reactors and related
protocols. Also, South Korean personnel have made up most of the site
survey teams sent to North Korea to investigate the proposed site for the
reactors.

The State Department cited other examples of dialogue between the
Koreas, such as a series of North Korean and South Korean meetings in
Beijing, whereby South Korea in June 1995 agreed to provide 150,000 tons
of rice to North Korea as a grant. Also, in December 1995, North Korea
released the crew of a South Korean fishing vessel that had strayed into
North Korean waters earlier that year, in response to pleas for the ship’s



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return by South Korea. Like the United States, South Korea also has
responded repeatedly to worldwide pleas for food assistance to North
Korea through the U.N. World Food Program. For example, as of April 28,
1997, South Korea had committed to provide $6 million in food aid this
year to help address North Korea’s acute food shortage.

Finally, State reported that the two Koreas have begun to increase their
economic ties. Trade between the countries increased from about
$18.8 million in 1989 to about $195 million in 1994. According to trade
figures by the Department of Commerce, South Korea is North Korea’s
third largest trading partner.4 South Korea had prohibited substantial
direct investment in North Korea. However, after the signing of the Agreed
Framework, the South Korean President announced that he would again
allow discussions regarding investments. State officials told us that two
large South Korean firms—Hyundai and Daiwoo Industries—have already
pursued business opportunities with North Korea.




4
 China is North Korea’s largest trading partner, and Japan is its second largest trading partner.



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Appendix VI

U.S. Humanitarian Assistance to North
Korea

               This appendix describes recent U.S. efforts to address food and other
               chronic shortages in North Korea. According to State Department officials,
               the U.S. assistance is being provided for humanitarian reasons and is in no
               way linked to the implementation of the Agreed Framework.

               In 1995 and 1996, a series of severe floods destroyed a considerable
               amount of farmland in North Korea. This exacerbated North Korea’s
               chronic food production shortfalls, resulting in widespread food shortages
               and malnutrition. The United Nations World Food Program—a major
               international relief organization—estimates this year’s shortage at
               1.8 million to 2.3 million metric tons—nearly half of North Korea’s food
               needs. Recent reports by numerous sources, including the State
               Department, indicate that North Korea’s food situation is likely to reach a
               critical stage this spring, with certain groups, especially children,
               vulnerable to the risk of starvation.

               The United States responded to this need by easing restrictions on
               providing humanitarian assistance to North Korea. In February 1996, the
               Department of the Treasury modified its Foreign Assets Control
               Regulations to facilitate private and nongovernmental humanitarian
               assistance to North Korea under a general license. The amended
               regulations allow donations of goods and funds for humanitarian
               assistance to the United Nations, United Nations programs and specialized
               agencies, and to the American Red Cross and the International Committee
               of the Red Cross. Furthermore, the amended regulations permit some
               other donations of goods to meet basic human needs in North Korea, by
               persons subject to U.S. jurisdiction. In addition to Treasury, the
               Department of Commerce’s Bureau of Export Administration also allows
               exports of goods to North Korea to meet basic human needs.

               Before the general licensing provision became effective, Treasury
               approved eight licenses for humanitarian assistance to North Korea. The
               terms of the licenses varied, some dealt with money and others dealt with
               donations of different types of commodities. As a result, we were unable
               to determine a total value for these transactions.

               In December 1996, Treasury issued a license to a U.S. grain
               conglomerate—Cargill Corporation—to negotiate with North Korea for the
               sale and delivery of up to 500,000 metric tons of wheat or rice and to
               subsequently sell an unspecified quantity of bartered North Korean-origin
               goods in return for the grain shipment. On April 8, 1997, the State
               Department confirmed that Cargill had concluded a deal after protracted



               Page 62                      GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix VI
U.S. Humanitarian Assistance to North
Korea




negotiations with North Korea. We could not obtain details about this
transaction.

According to the Department of Commerce’s Bureau of Export
Administration, since 1994 Commerce has approved 61 licenses related to
North Korea, for either donations or sales of products that meet basic
human needs. Commerce has also approved three licenses for United
Nations programs supporting humanitarian relief in North Korea. The vast
majority of these licenses were for foodstuffs to assist flood victims.

In addition, the United States government has provided $33.4 million in
emergency humanitarian assistance—basically, food and medical
supplies—to the World Food Program, which manages and distributes
assistance to North Korea. On April 15, 1997, the United States approved
50,000 metric tons of corn. The assistance is valued at about $15 million
and is targeted toward the roughly 2.4 million North Korean children
under the age of six who are believed to be at risk. On February 19, 1997,
the State Department approved $10 million in corn, rice, and corn soy
blend to North Korea for children under age five and for flood victims.
Finally, the United States provided $8.2 million in assistance in February
and June 1996, and in August and October 1995, a total of $225,000 for
medical supplies. According to the State Department, the United States is
the single largest donor to the World Food Program over the past 2 years.




Page 63                            GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix VII

Comments From the Department of State




               Page 64   GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix VII
Comments From the Department of State




Page 65                         GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
Appendix VIII

Major Contributors to This Report


                        Gene Aloise, Assistant Director
Resources,              Kathleen Turner, Evaluator-in-Charge
Community, and          Victor J. Sgobba, Senior Evaluator
Economic                Mario Zavala, Senior Evaluator
                        Duane G. Fitzgerald, Ph.D., Nuclear Engineer
Development
Division, Washington,
D.C.
                        Jackie A. Goff, Senior Attorney
Office of the General   Richard Seldin, Senior Attorney
Counsel




(141008)                Page 66                     GAO/RCED/NSIAD-97-165 U.S./North Korean Agreement
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