oversight

NATO Enlargement: Cost Estimates Developed to Date Are Notional

Published by the Government Accountability Office on 1997-08-18.

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

                   United States General Accounting Office

GAO                Report to Congressional Requesters




August 1997
                   NATO
                   ENLARGEMENT
                   Cost Estimates
                   Developed to Date Are
                   Notional




GAO/NSIAD-97-209
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-277471

             August 18, 1997

             The Honorable Benjamin Gilman
             Chairman
             The Honorable Lee H. Hamilton
             Ranking Minority Member
             Committee on International Relations
             House of Representatives

             On July 8, 1997, the North Atlantic Treaty Organization (NATO) invited
             Poland, Hungary, and the Czech Republic to become NATO members.1 If
             approved by the current membership, the alliance’s expansion will entail
             costs to NATO, its current members, and the newly invited states. Several
             efforts have been made to estimate these costs. At the request of Congress,
             the executive branch prepared a study on NATO enlargement issues,
             including cost, which was released in February 1997. Other estimates have
             been developed by the Congressional Budget Office (CBO) and the RAND
             Corporation.

             In response to your request, we have evaluated the executive branch’s
             estimate. Our specific objectives were to (1) assess the reasonableness of
             the study’s key assumptions, (2) verify the pricing of individual cost
             elements and identify the basis for the pricing, (3) determine whether the
             estimate’s major cost categories and elements should be ascribed to NATO
             enlargement, (4) identify factors that were not included in the study’s cost
             estimate that could affect enlargement costs, and (5) compare the
             executive branch’s estimate with the CBO and RAND estimates. As agreed
             with your offices, we did not independently estimate the cost of enlarging
             NATO.



             NATO was established in 1949 to help provide for its members’ common
Background   defense. The key provision of the treaty in this regard is article V, which
             states that an attack on one member shall be considered an attack on all
             members. To meet its military objectives, NATO (1) developed standards to
             help ensure that its members’ forces can operate with one another,
             (2) established force requirements for its members, and (3) agreed to
             commonly fund the procurement of equipment and facilities needed to
             accomplish common goals. In 1994, NATO announced that it would invite

             1
              Twelve nations initially signed the NATO treaty in 1949. NATO has since expanded three times to its
             current 16-nation membership of Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Italy,
             Luxembourg, the Netherlands, Norway, Portugal, Spain, Turkey, the United Kingdom, and the United
             States.



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other European states to join the alliance. Twelve Central and Eastern
European nations indicated interest in doing so, and since 1994, NATO and
its members have been providing assistance to help these countries
prepare for eventual membership.2 Figure 1 shows those nations
interested in becoming NATO members. In July 1997, NATO invited three of
these countries—Poland, Hungary, and the Czech Republic—to enter into
negotiations to become NATO members. It is NATO’s goal to have the 16
member states ratify the new members’ admission into NATO by April 1999.




2
See our report entitled NATO Enlargement: U.S. and International Efforts to Assist Potential New
Member States (GAO/NSIAD-97-164, June 27, 1997).



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Figure 1: States Invited to Join and
Interested in Joining NATO
                                                                               Gulf
                                                                                of                       Estonia
                                                                              Bothnia
                                                 Sweden


                                                                                                                                   Russia
                                                                                                         Latvia


                                                                  Baltic Sea
                                                                                                 Lithuania

                                                                                      Russia


                                                                                                                   Belarus


                                                                             Poland
                                         Germany




                                                     Czech
                                                    Republic                                                             Ukraine

                                                                            Slovakia

                                                                                                                     Moldova
                                                  Austria
                                                                            Hungary

                                                  Slovenia
                                                                                                     Romania
                                                               Croatia
                                                                Bosnia
                                                 Adriatic          &       Serbiaa
                                                  Sea          Herzegovina
                                                                                                                                   Black Sea
                                         Italy
                                                                                                       Bulgaria
                                                            Montenegroa
                                                                                                 b
                                                                                      F.Y.R.O.M.
                                                                               Albania
                                                                                                                               Turkey
                                                                                       Greece

                                                  States that have formally indicated interest in joining NATO.

                                                  States invited to join.
                                       a
                                        Serbia and Montenegro have asserted the formation of a joint independent state, but this entity
                                       has not been formally recognized as a state by the United States.




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    b
        Former Yugoslav Republic of Macedonia.


    In 1996, Congress asked the executive branch to report on the cost of
    enlargement and on a range of related issues.3 The executive branch
    issued its report in February 1997.

    The Department of Defense (DOD) was primarily responsible for preparing
    the report’s cost estimate. However, at the time DOD developed its
    estimate, many key cost determinants had not been established.
    Consequently, as the executive branch report stated, its analysis of
    enlargement costs should “be seen as purely illustrative and designed to
    provide an approximation of the costs of enlargement.” As the basis for its
    analysis, DOD made the following key assumptions:

•   Specific nations would be invited to join NATO in the first round of
    enlargement.4
•   NATO would continue to rely on its existing post-Cold War strategy to carry
    out its collective defense obligations (i.e., each member state would have a
    basic self-defense capability and the ability to rapidly receive NATO
    reinforcements).5
•   NATO would not be confronted by a significant conventional military threat
    for the foreseeable future and such a threat would take many years to
    develop.
•   NATO would continue to use existing criteria for determining which items
    would be funded in common and for allocating costs among members.6

    Using these assumptions, DOD estimated that the cost of enlarging NATO
    would range from about $27 billion to $35 billion from 1997 through 2009.7
    The estimate was broken down as follows:



    3
     The executive branch’s report was required by the Fiscal Year 1997 Defense Authorization Act
    (P.L. 104-201, section 1048).
    4
    The number of countries DOD assumed would be invited to join NATO and the actual countries that
    were the basis for the estimate are classified information.
    5
     NATO adopted a new post-Cold War strategic concept at its Rome summit meeting in 1991. The
    concept provides for substantial reductions in the size and readiness of NATO’s forces but increased
    force mobility, flexibility, and ability to adapt to the changed threat environment.
    6
     NATO funds only those facilities or portions of facilities that are over and above the needs of an
    individual country’s own national security requirements. For example, NATO would fund only the
    portion of infrastructure at an air base that is beyond the host nation’s own needs, such as hangars for
    reinforcing aircraft, but not hangars for the host country’s aircraft.
    7
     DOD assumed that NATO would reach a “mature capability” to operate with new members by 2009.



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                   •   about $8 billion to $10 billion for improvements in current NATO members’
                       regional reinforcement capabilities (e.g., addressing shortfalls in
                       deployable support capabilities),
                   •   about $10 billion to $13 billion for restructuring and modernizing new
                       members’ militaries (e.g., selectively upgrading self-defense capabilities),
                       and
                   •   about $9 billion to $12 billion for costs directly attributable to NATO
                       enlargement (e.g., ensuring that current and new members’ forces are
                       interoperable and capable of combined NATO operations and upgrading or
                       constructing facilities for receiving NATO reinforcements). (See app. I.)

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

                       CBO and RAND estimated the cost of incorporating the Czech Republic,
                       Hungary, Poland, and Slovakia into NATO. They based their estimates on a
                       range of NATO defense postures from enhanced self-defense with minimal
                       NATO interoperability to the forward stationing of NATO troops in new
                       member states. However, they also noted that the current lack of a major
                       threat in Europe could allow NATO to spend as little as it chooses in
                       enlarging the alliance. CBO’s estimate ranged from $61 billion to
                       $125 billion—including a $109-billion estimate that was predicated on a
                       resurgent Russian threat, although it was based on a self-defense and
                       reinforcement strategy similar to that used by DOD.8 Of this $109 billion,
                       CBO estimated that the United States would pay $13 billion. Similarly,
                       RAND’s estimate ranged from $10 billion to $110 billion and included a
                       $42-billion estimate that was also based on a self-defense and
                       reinforcement strategy. RAND estimated that the United States would pay
                       $5 billion to $6 billion of this $42 billion in total costs.


                       Our analysis of DOD’s cost estimate to enlarge NATO indicates that its key
Results in Brief       assumptions were generally reasonable and were largely consistent with
                       the views of U.S., NATO, and foreign government officials. In particular, the

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



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assumption that large scale conventional security threats will remain low
significantly influenced the estimate. However, DOD’s lack of supporting
cost documentation and its decision to include cost elements that were
not directly related to enlargement call into question its overall estimate.
Because of the uncertainties associated with enlargement and DOD’s
estimating procedures, the actual cost of NATO enlargement could be
substantially higher or lower than DOD’s estimated cost of about $27 billion
to $35 billion. Our comparison of DOD’s estimate with the RAND and CBO
estimates does not indicate that the RAND and CBO costs estimates are
more reliable than DOD’s.

We could not verify DOD’s pricing of many individual cost elements
because DOD officials did not develop sufficient supporting documentation.
According to DOD officials, DOD priced many cost elements on the basis of
expert guesses, due to the lack of hard data. Moreover, in one case we
examined, the U.S. Air Force provided us information on the cost of
refurbished Western aircraft that was significantly higher than the cost
used in DOD’s estimate.

DOD included two major cost categories that cannot be directly attributed
to NATO’s enlargement. First, we found no direct link between the cost of
remedying current shortfalls in NATO’s reinforcement capabilities and
enlargement of the alliance. Neither NATO nor DOD had identified any
specific reinforcement shortfalls that would result from enlargement.
Instead, DOD estimated the cost of satisfying perceived shortfalls in
capabilities the allies have currently in meeting existing requirements.
Second, we question whether all of DOD’s new member modernization and
restructuring costs are attributable to NATO enlargement. NATO has yet to
determine what types of modernization and restructuring will be sought
from new members and some upgrades, such as Western aircraft, may not
be required. Moreover, as DOD notes, new members are likely to incur
costs to restructure and modernize their forces whether or not they join
NATO.


DOD’s third cost category, direct enlargement, contains elements
appropriately attributed to NATO enlargement, based on our analysis. These
are costs that will directly result from enlargement, such as developing
interoperability between new members and NATO and creating
reinforcement reception facilities.

NATO enlargement could entail additional costs beyond those included in
the DOD estimate. These costs could include assistance, such as enhanced



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                       Partnership for Peace or other bilateral assistance provided as a
                       consolation to countries not invited to join NATO in July 1997. There will
                       also be additional costs associated with subsequent decisions to invite
                       additional countries to join NATO. In addition, the United States may
                       provide assistance to help new members restructure and modernize their
                       forces, which DOD acknowledged but did not include in its estimate of the
                       U.S. cost share. For example, Polish officials said they may need up to
                       $2 billion in credits to buy multipurpose aircraft. While not an added cost
                       of enlargement, such assistance would represent a shift in the cost burden
                       from the new member countries to the countries providing assistance.

                       As noted, CBO and RAND developed a range of cost estimates for NATO
                       enlargement, including estimates that employ a defense strategy similar to
                       DOD’s. Several factors account for the differences between DOD’s estimate
                       and the CBO and RAND estimates, including those estimates that employed
                       defense strategies similar to DOD’s. For example, CBO assumed a much
                       larger reinforcement force and much more extensive modernization,
                       infrastructure, and training costs than DOD did. RAND assumed a
                       somewhat larger reinforcement force and higher training and air defense
                       modernization costs than DOD did.


                       The ultimate cost of NATO enlargement will be contingent on many factors
Uncertainties Exist,   that had not been determined when DOD prepared its estimate, many of
but DOD’s Key          which will likely remain undetermined, at least in the near term. For
Assumptions Appear     example, NATO had not yet determined which countries would be invited to
                       join NATO. While it subsequently invited Poland, Hungary, and the Czech
Reasonable             Republic to join, NATO has yet to formally define its future (1) strategy for
                       defending the expanded alliance, (2) force and facility requirements of the
                       newly invited states, and (3) formula for allocating costs in the expanded
                       alliance. Also unknown is the long-term security threat environment in
                       Europe.

                       Nonetheless, DOD’s key assumptions constitute a reasonable attempt to
                       address these uncertainties. First, the number and mix of new member
                       states DOD assumed in its cost estimate were generally consistent with the
                       expectations that were current at the time and with the results of the
                       July 1997 NATO Madrid summit. Second, DOD’s assumption of a NATO
                       strategy to use reinforcement forces rather than station substantial
                       permanent forces in the countries of the new members is consistent with
                       U.S. and NATO policy and with the current low-threat security environment
                       in Europe. In 1991, NATO adopted a new post-Cold War strategy that



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involves replacing larger and relatively static forces with smaller, more
mobile forces to reinforce members’ self-defense efforts. Officials at the
U.S. mission to NATO told us that NATO is likely to maintain this strategy for
an expanded alliance.

Third, DOD’s most important assumption in terms of its cost projection is
that there is currently no major conventional threat to NATO’s security and
any such threat would take years to develop. The presumed extent of such
a threat affects assumptions concerning NATO strategy, reinforcement
forces, the urgency with which new members’ defense capabilities would
be improved, and the willingness of members to allocate resources to
NATO-related defense needs. U.S. and foreign government officials and
experts that we consulted supported the expectation of a continuing
low-threat environment.9 Fourth, officials from the U.S. mission to NATO
told us that NATO would continue to use its current eligibility criteria for
commonly funded projects—as assumed by DOD. Moreover, they informed
us that it was reasonable for DOD to use NATO’s current cost allocation
formula in its estimate because NATO had not yet determined the countries
that would be invited to join.10

DOD also assumed that during the 1997-2009 period, new members would
increase their real defense spending at an average annual rate of 1 to
2 percent. Both private and government analysts project strong economic
growth, especially over the long term, for potential member countries.
Projected increases in defense budgets appear affordable, given the
predicted economic growth rates. For example, private analysts project
economic growth rates averaging between 4 and 5 percent annually for the
Czech Republic, Hungary, and Poland for 1997 to 2001. However, these
analysts also point out that potential new member countries face real
fiscal constraints, especially in the short run. Increasing defense budgets
at the expense of pressing social concerns becomes a matter of setting
national priorities and is difficult to predict.

DODfurther assumed that current NATO members would on average
maintain constant real defense spending levels for 1997 through 2009.11

9
 The executive branch’s estimate states that costs would increase substantially if the threat increased
substantially—but adds that it is impossible to estimate the additional costs of meeting an increased
direct territorial threat to NATO from outside conventional military forces.
10
    NATO’s formula for allocating costs is based on the relative size of its members’ economies.
11
  In 1996, defense spending as a percent of gross domestic product was 2.0 percent for Italy,
1.7 percent for Germany, 2.9 percent for the United Kingdom, and 3.0 percent for France. If gross
domestic product grows in real terms, then these percentages will decline under DOD’s assumption of
constant real defense spending.



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                        Analysts have expressed somewhat greater concern about this DOD
                        assumption, generally considering it to be an optimistic, but reasonable,
                        projection. Some analysts indicated that defense spending in some current
                        member states may decline further over the next several years. Such
                        declines would be due, in part, to economic requirements associated with
                        entry into the European Monetary Union.12


                        Many of DOD’s estimates for specific cost elements could not be verified.
DOD’s Pricing of Cost   DOD officials did not consistently document their analyses. As a result, we
Elements Could Not      were unable to audit or validate estimates for most specific cost elements.
Be Verified             Moreover, until NATO officials determine which facilities in the new
                        member states are needed and are able to see the condition of these
                        facilities, the scope of required improvements can only be guessed at. In
                        discussing a draft of this report with DOD officials, they suggested that such
                        information will not likely be available for several months and that
                        estimates of a quality higher than “notional” could not be prepared until
                        early 1998.

                        In many cases, DOD’s estimates were based on expert judgment. For
                        example, DOD based its $140 million to $240 million estimate for the cost of
                        upgrading a new member’s existing air base into a NATO collocated
                        operating base on expert judgment, not on surveys of actual facilities. The
                        DOD source for that figure told us that the actual cost could easily be
                        double—or half—the estimated cost. Similarly, according to DOD, most of
                        the other infrastructure upgrade and refurbishment cost estimates are also
                        based on expert judgments.

                        DOD developed other cost element estimates on a highly aggregated basis.
                        For example, DOD’s $8 billion to $10 billion estimated cost for upgrading
                        allied reinforcement capabilities was developed without specific data
                        regarding actual shortfalls in these capabilities. This estimate contained
                        only two elements—upgrades to air force units (wings) and ground units
                        (divisions). DOD analysts stated they did not compute costs of individual
                        items in these units. Instead, they computed a general cost estimate
                        encompassing a broad range of deployable logistic support capabilities
                        (e.g., engineer and medical unit equipment and specialized containers)
                        based on NATO assessments that shortfalls exist in commitments made to




                        12
                          European Monetary Union membership requires a nation to keep its budget deficit at or below
                        3 percent of its gross domestic product.



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                       NATO.13 DODofficials were unable to respond to our requests for data
                       concerning the amount of equipment needed or cost by equipment type.

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

                       In one of the cases where DOD officials provided us with an information
                       source—a U.S. Air Force officer—we could not confirm DOD’s estimate.
                       Our analysis of data regarding the purchase of refurbished aircraft showed
                       that the cost of purchasing refurbished F-16 aircraft would be at least
                       11 percent higher than the high end of DOD’s estimate. When we asked
                       about this difference, DOD analysts said that it may have been due to
                       changes in equipment packages and pricing terms between the time they
                       developed their estimate and the time we contacted the Air Force to verify
                       the estimate.


                       Substantial portions of DOD’s total estimate consist of costs that are not
Estimates Include      directly related to enlargement, in contrast to those costs included in the
Some Costs That Are    direct enlargement category. While they may represent valid costs that
Not Directly Related   could be incurred by current and new NATO members, they cannot at this
                       time be ascribed directly to the enlargement of NATO. Nevertheless,
to Enlargement         according to DOD officials, the enhancements that these costs underwrite
                       would be critical to the military effectiveness and credibility of an
                       enlarged alliance.

                       DOD’s decision to include $8 billion to $10 billion as the estimated cost to
                       enhance current members’ reinforcement capabilities is questionable.
                       According to U.S. and NATO officials, NATO currently has long-standing
                       shortfalls in combat support and combat service support capabilities
                       needed to carry out its post-Cold War strategy. Current members have
                       chosen not to fulfill these requirements, but it is not known whether they

                       13
                         NATO and U.S. officials in Europe acknowledged that there are persistent shortfalls among the allies
                       in combat support and combat service support units; however, the specific shortfalls have not been
                       defined nor is there a direct link between the perceived shortfalls and DOD’s cost estimate or between
                       the shortfalls and NATO’s enlargement.



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                       lack the capabilities to fill the requirements or whether they simply have
                       not assigned forces to NATO due to other national priorities. Moreover,
                       neither DOD nor officials at the U.S. mission to NATO had identified any
                       specific shortfalls that could be attributed only to bringing new countries
                       into NATO. DOD officials told us that while reinforcement needs would not
                       be greater in an enlarged NATO, enlargement makes fulfilling these
                       requirements essential. DOD officials stated that these costs were included
                       because an enlargement report to Congress on military implications and
                       costs that ignored current shortfalls, which would seriously impair an
                       enlarged NATO’s military effectiveness, would be seen as incomplete.14

                       We also question whether all of the $10 billion to $13 billion DOD included
                       for new members’ military modernization and restructuring are
                       enlargement costs. Modernization costs incurred in response to NATO
                       requirements could logically be considered NATO enlargement costs.
                       However, because NATO has yet to formulate requirements for new
                       members, identifying such costs is speculative. Given current NATO
                       requirements, some costs, such as certain training and air defense costs,15
                       are more likely to result from enlargement than others, such as the
                       purchase of Western fighter aircraft.

                       According to DOD, potential new members will incur modernization and
                       restructuring costs whether or not they join NATO.16 Therefore, not all
                       modernization and restructuring costs incurred by the new members will
                       necessarily represent net additions to their defense budgets.


                       Various additional costs may be incurred by the United States in
Additional Costs May   connection with NATO enlargement that were not specifically quantified in
Be Associated With     DOD’s cost study. For example, during fiscal years 1995-97, the United

NATO Enlargement       States allocated $59.6 million in security assistance grants and
                       $242.5 million in security assistance loans to the newly invited states. DOD
                       acknowledged that the United States may choose to continue or expand

                       14
                         While we understand DOD’s logic for including costs associated with current NATO member
                       reinforcement shortfalls that would seriously impair an enlarged NATO’s military effectiveness, by
                       making this argument, DOD would seem to be acknowledging that NATO’s current reinforcement
                       shortfalls also seriously impair the military effectiveness of an unenlarged NATO.
                       15
                         For example, NATO has established flying hour requirements for member states’ pilots. To meet
                       these requirements, new member states would probably have to increase pilot training budgets.
                       Regarding air defense, CBO and RAND experts informed us that new member states would have to
                       upgrade their air defense missile forces to achieve minimal self-defense capabilities.
                       16
                        Similarly, during our review of Partnership for Peace programs, officials in Poland, Hungary, and the
                       Czech Republic told us that their nations would modernize their aging forces, regardless of whether or
                       not they join NATO.



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                       the current assistance being provided to potential new members’
                       restructuring and modernization efforts, but it did not attempt to estimate
                       these costs. Both CBO and RAND assumed that NATO members—including
                       the United States—would need to provide substantial levels of security
                       assistance to help the new members. A Polish official told us that Poland
                       would likely need $2 billion in credits to support its acquisition of
                       multipurpose aircraft, although aircraft modernization may not be directly
                       related to enlargement.

                       Another indirect cost of NATO enlargement may involve increased
                       assistance to countries that applied for NATO membership but were not
                       invited to join in July 1997. According to U.S. and NATO officials, the United
                       States, NATO, and other NATO members may increase their Partnership for
                       Peace and related assistance as a consolation to those countries. The
                       amount of any such increase is unknown and would have been speculative
                       had it been included in DOD’s cost estimate.

                       U.S. and NATO officials have stated that additional Central and Eastern
                       European nations may be invited to join NATO in the future, most likely in
                       1999. However, DOD’s cost estimate addressed only a first round of
                       invitations and did not take into account a second or third round of
                       invitations to join NATO. If additional countries are invited, additional
                       enlargement costs would be incurred.


                       Several factors account for the differences between DOD’s estimate and the
Differences in         CBO and RAND estimates, even those that employed defense strategies
Estimates Are Due to   similar to DOD’s. Table 1 illustrates the major results and key assumptions
Various Factors        of the three estimates.




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Table 1: Comparison of DOD, CBO, and RAND Estimates
Assumptions                   DOD                                    CBO                                  RAND
Total cost                       $27-$35 billion in constant 1997 $61-$125 billion in constant            $10-$110 billion in constant
                                 dollars                          1997 dollars ($109 billion for a        1996 dollars ($42 billion for a
                                                                  defense strategy similar to             defense strategy similar to
                                                                  DOD’s)                                  DOD’s)
U.S. cost share                  $1.5-$2.0 billion                   $13.1 billiona                       $5 to $6 billiona
Notional new NATO members        A Small Group (details              Poland                               Poland
                                 classified)                         Hungary                              Hungary
                                                                     Czech Republic                       Czech Republic
                                                                     Slovakia                             Slovakia
Time period                      1997-2009                           1996-2010                            Approximately 1995-2010
                                                                                          a
Threat assessment                Low threat                          A resurgent Russia                   Low threata
                                                                                                 a
Comparable force posture options 4 divisions/6 wings                 11.7 divisions/11.5 wings            5 divisions/10 wingsa
                                              a
                                              These assumptions correspond to the estimate based on a defense strategy similar to DOD’s.



                                              CBO’s cost estimate is significantly higher than DOD’s, even for a similar
                                              defense strategy, for several reasons. First, where DOD assumed a
                                              reinforcing force of 4 divisions and 6 wings, CBO assumed a force of 11 2/3
                                              divisions and 11 1/2 wings and a much larger infrastructure in the new
                                              member states to facilitate the reinforcements. Second, CBO’s new member
                                              modernization costs are much higher than DOD’s and include the purchase
                                              of 350 new aircraft and 1,150 new tanks. DOD assumed that about
                                              25 percent of the new member states’ ground forces would be modernized
                                              through upgrades and that each nation would procure a single squadron of
                                              refurbished Western combat aircraft. Third, CBO assumed much higher
                                              training costs, $23 billion, which included annual large-scale combined
                                              exercises. DOD included $2 billion to $4 billion for increased training due to
                                              enlargement. Fourth, CBO’s estimate included the purchase of Patriot air
                                              defense missiles at a cost of $8.7 billion, which is considerably higher than
                                              DOD’s assumed purchase of refurbished I-HAWK type missiles at
                                              $1.9 billion to $2.6 billion. Finally, CBO’s infrastructure costs were much
                                              higher than DOD’s and included new construction, such as extending the
                                              NATO fuel pipeline. Moreover, CBO assumed the construction would be built
                                              to meet U.S. standards. In contrast, DOD’s estimate included refurbishment
                                              of existing facilities to minimal wartime standards.

                                              RAND’s cost estimate is somewhat higher than DOD’s, although both were
                                              based on similar threat assessments. First, it had a larger reinforcement
                                              package of 5 divisions and 10 wings and therefore higher infrastructure
                                              costs. Second, it also assumed new members would purchase the more




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                  expensive Patriot air defense system rather than a refurbished I-HAWK
                  type system. Finally, it also assumed greater training costs than did DOD.
                  The author of the RAND study stated that if he had used DOD’s
                  assumptions, his cost range would then be almost identical to DOD’s.


                  DOD  and the Department of State agreed with our principal conclusion that
Agency Comments   the uncertainties associated with the military implications of NATO
                  enlargement and DOD’s estimating procedures resulted in cost estimates
                  that were notional and that could differ substantially from actual
                  enlargement costs. DOD stated that because an initial attempt to identify
                  military requirements through the NATO defense planning process will not
                  occur until 1998, it will remain difficult to develop more solid estimates
                  prior to that time frame. DOD also agreed that most of the costs associated
                  with the allies’ reinforcement capabilities and modernizing the military
                  forces of new members are not directly linked to enlargement but said that
                  (1) current members must upgrade their reinforcement capabilities to be
                  able to more effectively implement NATO’s 1991 Strategic Concept and
                  (2) new members must modernize to enhance their self-defense
                  capabilities.

                  We agree that until military requirements for new members are identified
                  through NATO’s defense planning process, it will be difficult to develop
                  more reliable estimates of the cost of enlargement. We also agree that
                  shortfalls in the NATO allies’ reinforcement capabilities and new members’
                  modernization of military forces should be considered in deliberating the
                  Alliance’s enlargement. However, in deliberating these matters, it should
                  be understood that upgrading current members’ reinforcement capabilities
                  and modernizing new members’ forces need to occur whether or not the
                  Alliance enlarges.

                  The Department of State said that NATO enlargement may also result in
                  some increase in NATO’s civil budget. This budget pays for NATO’s own
                  administrative, security, and communication costs for the civilian
                  international staff. State could not estimate the amount of such an
                  increase but said it would likely be manageable.

                  DOD’s written comments are reprinted in appendix III. DOD also provided
                  technical corrections that have been incorporated in the report where
                  appropriate. The Department of State provided oral comments.




                  Page 14                                     GAO/NSIAD-97-209 NATO Enlargement
              B-277471




              To address our objectives, we interviewed officials and gathered and
Scope and     analyzed information from the Department of State; the Office of the
Methodology   Secretary of Defense; the Joint Chiefs of Staff; the Defense Intelligence
              Agency; the Defense Security Assistance Agency; the U.S. Mission and
              Military Delegation to NATO in Brussels, Belgium; the U.S. European
              Command in Germany; U.S. country delegations in Poland, the Czech
              Republic, Hungary, and Germany; and governments in the Czech Republic,
              Poland, Hungary, and Germany. We also interviewed officials and analysts
              and gathered information at CBO, the RAND Corporation, the British
              American Security Information Council, PlanEcon, Inc., the WEFA Group,
              and several academic institutions.

              In evaluating the executive branch’s cost estimate for the enlargement of
              NATO,  we interviewed the analysts responsible for the study, reviewed the
              documentation they provided us, and contacted sources they referred us
              to. In addition, we obtained expert opinions and analyses concerning NATO
              enlargement and its costs from other government and private sector
              organizations. To assess DOD’s assumptions regarding defense budgets for
              potential and current NATO members, we interviewed government, private
              sector, and academic economic analysts and reviewed documents they
              provided. To obtain information on the modernization plans of potential
              new member countries, we met with U.S. country delegations and national
              government officials in the Czech Republic, Poland, and Hungary. To
              obtain information on reinforcement requirements, we met with officials
              at the Joint Chiefs of Staff; the U.S. Mission and Military Delegation to
              NATO in Brussels; and the U.S. European Command in Germany.


              To determine if there were any additional costs that could affect
              enlargement costs but were not included in the DOD estimate, we reviewed
              other analyses of NATO enlargement, including the CBO and RAND cost
              studies, and interviewed relevant officials and analysts. In comparing the
              executive branch’s estimate with those of CBO and RAND, we interviewed
              the analysts at CBO and RAND who conducted the studies and reviewed
              source information they provided or suggested.

              We conducted our review between January and July 1997 in accordance
              with generally accepted government auditing standards.


              We are providing copies of this report to other congressional committees
              and to the Secretaries of State and Defense. Copies will be provided to
              others upon request.



              Page 15                                    GAO/NSIAD-97-209 NATO Enlargement
B-277471




Please contact me on (202) 512-4128 if you or your staff have any
questions concerning this report. Major contributors to this report are
listed in appendix IV.




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




Page 16                                    GAO/NSIAD-97-209 NATO Enlargement
Page 17   GAO/NSIAD-97-209 NATO Enlargement
Contents



Letter                                                                                            1


Appendix I                                                                                       20

Individual Cost
Elements by Category
Appendix II                                                                                      22

Cost Categories and
Shares
Appendix III                                                                                     23

Comments From the
Department of
Defense
Appendix IV                                                                                      25

Major Contributors to
This Report
Table                   Table 1: Comparison of DOD, CBO, and RAND Estimates                      13


Figure                  Figure 1: States Invited to Join and Interested in Joining NATO           3




                        Abbreviations

                        CBO        Congressional Budget Office
                        DOD        Department of Defense
                        NATO       North Atlantic Treaty Organization


                        Page 18                                    GAO/NSIAD-97-209 NATO Enlargement
Page 19   GAO/NSIAD-97-209 NATO Enlargement
Appendix I

Individual Cost Elements by Category


                     (1) Modernization of 25 percent of planned ground force structure, by
New Members’         division
Military
Modernization and    (2) Procurement of refurbished I-HAWK type, wide area surface-to-air
                     missiles
Restructuring
                     (3) Procurement of refurbished Western combat aircraft

                     (4) Modernized ammunition for ground forces

                     (5) Modernized ammunition for air forces

                     (6) Modernized ammunition storage for air forces

                     (7) Modernized ammunition storage for ground forces

                     (8) Increased proficiency in individual and unit training


                     Highly aggregated cost estimate for deployable logistics sustainment that
Current Members’     includes such things as engineering, transport, test and repair equipment,
Reinforcement        mobile logistics, special operations units gear, medical unit equipment,
Enhancements         liquid oxygen equipment generators, and specialized firefighting
                     equipment for

                     (1) three allied divisions

                     (2) five allied wings


                     (1) Refurbishment and renovation of headquarter facilities
Direct Enlargement
                     (2) Communications and intelligence links to forces

                     (3) Military education

                     (4) Air sovereignty operations centers

                     (5) Air command and control costs for initial capability, such as radar

                     (6) Air command and control costs for mature capability, such as weapons
                     engagement capabilities



                     Page 20                                     GAO/NSIAD-97-209 NATO Enlargement
Appendix I
Individual Cost Elements by Category




(7) Logistics equipment for initial capability, such as common fuel nozzles
and standards and radio frequencies

(8) Staff-level planning for host nation support

(9) Continued compliance with North Atlantic Treaty Organization (NATO)
standards and interoperability in logistics areas for mature capability

(10) Collocated operating bases to host reinforcing wings

(11) Compatible/interoperable fueling facilities

(12) Road and rail upgrades

(13) Staging areas for ground reinforcements

(14) Fuel storage and distribution infrastructure for reinforcing ground
and air units

(15) Port upgrades

(16) Transportation and operations and maintenance for incremental
exercises due to enlargement

(17) Upgrades to existing exercise facilities to approach NATO training
needs and standards




Page 21                                     GAO/NSIAD-97-209 NATO Enlargement
Appendix II

Cost Categories and Shares



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




                                            Page 22                                  GAO/NSIAD-97-209 NATO Enlargement
Appendix III

Comments From the Department of Defense




               Page 23       GAO/NSIAD-97-209 NATO Enlargement
Appendix III
Comments From the Department of Defense




Page 24                                   GAO/NSIAD-97-209 NATO Enlargement
Appendix IV

Major Contributors to This Report


                        David Martin
National Security and   James Shafer
International Affairs   Celia Thomas
Division, Washington    Patrick Hickey
                        Hynek Kalkus
D.C.                    Pierre Toureille




(711276)                Page 25            GAO/NSIAD-97-209 NATO Enlargement
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