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Nuclear Nonproliferation: Implementation of the U.S./North Korean Agreed Framework on Nuclear Issues (Letter Report, 06/02/97, GAO/RCED/NSIAD-97-165).

Pursuant to a congressional request, GAO reviewed issues related to the
implementation of the Agreed Framework between the United States and
North Korea, focusing on: (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 light-water reactors and other
goods and services being provided to North Korea under the agreement;
(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.

GAO noted that: (1) as of April 1, 1997, the United States had approved
about $82 million in funding to implement the Agreed Framework; (2) the
total cost to the United States is unknown but is expected to reach tens
of millions of dollars; (3) South Korea and Japan are expected to
provide the majority of the estimated $4 billion needed to construct the
two light-water reactors; (4) the removal of North Korea's 50,000
kilograms of spent nuclear reactor fuel is expected to begin in about 4
to 7 years; (5) 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; (6) 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; (7) 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; (8) as specified in the Agreed Framework, the United States
has taken steps to normalize its economic and political relations with
North Korea; (9) 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; (10) progress on issues
of concern has been limited; (11) the United States expects that
improved relations between the two Koreas will contribute to peace and
security on the Korean Peninsula; (12) in April 1996, the United States
and South Korea invited North Korea to participate in peace talks; and
(13) 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.

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

 REPORTNUM:  RCED/NSIAD-97-165
     TITLE:  Nuclear Nonproliferation: Implementation of the U.S./North 
             Korean Agreed Framework on Nuclear Issues
      DATE:  06/02/97
   SUBJECT:  Nuclear proliferation
             Arms control agreements
             International cooperation
             Nuclear reactors
             Atomic energy defense activities
             Nuclear waste disposal
             Nuclear powerplant construction
             International relations
             Technology transfer
IDENTIFIER:  North Korea
             South Korea
             Japan
             China
             
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Cover
================================================================ COVER


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

June 1997

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

GAO/RCED/NSIAD-97-165

U.S./North Korean Agreement

(141008)


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

  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

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


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. 


--------------------
\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. 


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

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


   COSTS TO IMPLEMENT THE AGREED
   FRAMEWORK
------------------------------------------------------------ Letter :2

Shortly after the signing of the Agreed Framework, the U.S.  State
Department estimated that U.S.  contributions to the Korean Peninsula
Energy Development Organization (KEDO)\3 --the international
organization 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 $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.)


--------------------
\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. 


   OPTIONS FOR DISPOSING OF NORTH
   KOREA'S SPENT NUCLEAR REACTOR
   FUEL
------------------------------------------------------------ Letter :3

North Korea has about 50,000 kilograms of spent fuel from a small
reactor that had been operating before the freeze on North Korea's
nuclear program.  The spent fuel contains about 25 kilograms of
plutonium that 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 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,
including information about who will be involved in making the
decision about disposal and when the decision is expected to be
made.)


   CONTRACTING ARRANGEMENTS AND
   ACTIONS ARISING FROM THE AGREED
   FRAMEWORK
------------------------------------------------------------ Letter :4

According to KEDO, its draft procurement guidelines are based on the
contracting policies and practices of U.S.  government and commercial
concerns.  As of April 1, 1997, KEDO had contracted for a wide range
of services, including legal, banking, and architectural and
engineering services to carry out the Agreed Framework.  KEDO had
also contracted for the supply of heavy fuel oil and for the
purchase, delivery, installation, and 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.)


   STATUS OF ACTIONS TO NORMALIZE
   ECONOMIC AND POLITICAL
   RELATIONS BETWEEN THE UNITED
   STATES AND NORTH KOREA
------------------------------------------------------------ Letter :5

In January 1995, the United States announced several steps to ease
economic sanctions against North Korea, including the lifting of a
ban on telephone and telecommunications services between the
countries.  The United States does not intend to relax its trade
restrictions further until progress is made on issues of concern to
the United States.  Regarding political relations, in December 1994,
the United States and North Korea negotiated a draft agreement to
exchange liaison offices--the lowest level of diplomatic
representation.  The Department of State declined to provide 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 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.)


   STATUS OF ACTIONS TO PROMOTE
   PEACE AND SECURITY ON A
   NUCLEAR-FREE KOREAN PENINSULA
------------------------------------------------------------ Letter :6

A key element of the Agreed Framework, which was included at the
United States' insistence, is the expectation that relations between
the two Koreas will improve and contribute to peace and security on
the Korean Peninsula.  On April 16, 1996, the United States and South
Korea proposed a "Four Party Meeting" of representatives from South
Korea, North Korea, the United States, and the People's Republic of
China.  The purpose of the 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.)


   OBSERVATIONS
------------------------------------------------------------ Letter :7

The total amount of future U.S.  expenditures to fully implement the
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. 

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. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

We provided a draft of this report to KEDO and the Department of
State for their review and comment.  KEDO provided comments on
relevant topics in 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 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 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. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To obtain information for this report, we reviewed and analyzed the
Agreed Framework and subsequent agreements, applicable U.S.  laws and
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. 


---------------------------------------------------------- Letter :9.1

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


COSTS TO IMPLEMENT THE AGREED
FRAMEWORK ARE UNCERTAIN
=========================================================== Appendix I

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. 


   COST ESTIMATES FOR KEDO
   ACTIVITIES
--------------------------------------------------------- Appendix I:1

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


      NUCLEAR REACTOR COSTS
------------------------------------------------------- Appendix I:1.1

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. 


      HEAVY FUEL OIL COSTS
------------------------------------------------------- Appendix I:1.2

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 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. 


--------------------
\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. 

\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. 


      COSTS FOR FUEL METERS AND
      RECORDERS
------------------------------------------------------- Appendix I:1.3

To help ensure that North Korea uses the heavy fuel oil for intended
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 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. 


--------------------
\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. 


      ADMINISTRATIVE COSTS
------------------------------------------------------- Appendix I:1.4

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
------------------------------------------------------- Appendix I:1.5

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. 


--------------------
\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. 


   COST ESTIMATES FOR IAEA
   ACTIVITIES
--------------------------------------------------------- Appendix I:2

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


--------------------
\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. 


   U.S.  COSTS TO IMPLEMENT THE
   AGREED FRAMEWORK AS OF APRIL 1,
   1997
--------------------------------------------------------- Appendix I:3

In January 1995, the Secretary of State estimated that the U.S. 
contribution to KEDO would likely be between $20 million and $30
million annually and called it a "modest contribution" compared with
the "billions of dollars" that the United States expects South Korea
and Japan will eventually contribute.  According to State, total U.S. 
costs to implement the Agreed 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
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. 


--------------------
\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. 

\16 The European Union is expected to contribute $18.5 million
annually for 5 years based on current exchange rates. 


      U.S.  COSTS FOR STORING
      NORTH KOREA'S SPENT FUEL
------------------------------------------------------- Appendix I:3.1

The Agreed Framework specifies that the United States and North Korea
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

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
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 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. 

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

   (See figure in printed
   edition.)

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. 


--------------------
\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."

\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. 


   FUTURE U.S.  COSTS TO IMPLEMENT
   THE AGREED FRAMEWORK ARE NOT
   KNOWN
--------------------------------------------------------- Appendix I:4

For fiscal year 1998, the State Department is requesting $30 million
for KEDO, and DOE is requesting $5 million to, among other things,
monitor North Korea's spent fuel.  State did not estimate the amount
of future 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 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. 


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


      ESTIMATE OF SPENT FUEL
      DISPOSAL COSTS
------------------------------------------------------- Appendix I:4.1

Department of State and DOE officials could not provide us with an
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 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
      DISMANTLE NORTH KOREA'S
      NUCLEAR FACILITIES
------------------------------------------------------- Appendix I:4.2

The Agreed Framework provides that North Korea will stop operating
its 5-MW(e) reactor and related nuclear facilities and stop
construction on two 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.  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. 


--------------------
\23 North Korea's Nuclear Weapons Program (Feb.  24, 1997). 

\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. 


      COST ESTIMATES FOR UPGRADING
      NORTH KOREA'S POWER GRID
------------------------------------------------------- Appendix I:4.3

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


--------------------
\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."


OPTIONS FOR DISPOSING OF NORTH
KOREA'S EXISTING SPENT NUCLEAR
REACTOR FUEL
========================================================== Appendix II

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. 


--------------------
\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. 


   SPENT NUCLEAR FUEL DISPOSAL
   OPTIONS
-------------------------------------------------------- Appendix II:1

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. 


      REPROCESSING AND SUBSEQUENT
      DISPOSAL
------------------------------------------------------ Appendix II:1.1

Reprocessing is the chemical separation of the spent fuel into its
three 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

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 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


--------------------
\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. 

\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. 

\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. 


      UNDERGROUND DISPOSAL
------------------------------------------------------ Appendix II:1.2

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 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. 


   DECISIONS ABOUT NORTH KOREA'S
   SPENT FUEL ARE NOT EXPECTED FOR
   SEVERAL YEARS
-------------------------------------------------------- Appendix II:2

According to the State Department, decisions have not been made about
(1) who will be responsible for North Korea's spent fuel once it is
removed from the country, (2) the method of disposal, (3) the party
responsible for implementing the disposal method, or (4) the fuel's
final destination.  According to State, it will be several years
before these decisions are made since construction has not yet begun
on the first reactor.\10

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. 


--------------------
\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. 

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


CONTRACTING ARRANGEMENTS AND
ACTIONS ARISING FROM THE AGREED
FRAMEWORK
========================================================= Appendix III

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. 


--------------------
\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. 


   KEDO HAS CONTRACTED FOR A WIDE
   VARIETY OF SERVICES
------------------------------------------------------- Appendix III:1

KEDO has developed draft procurement guidelines for carrying out its
purposes and functions.\3 The guidelines require KEDO to utilize fair
and open competition, to the maximum extent practical and, according
to 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, 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 Company\6 --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 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 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. 


--------------------
\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. 

\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. 

\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. 


   DETAILS ON KEPCO'S CONTRACTING
   ARE NOT YET AVAILABLE
------------------------------------------------------- Appendix III:2

The details of KEDO's prime contract with KEPCO will not be known
until the contract is finalized.  Among the issues still being
negotiated are details on how KEPCO's procurement (subcontracting)
will be handled.  In general, 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: 

  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. 


--------------------
\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. 


   USE OF LIMITED-SCOPE CONTRACTS
   TO PERFORM SITE WORK
------------------------------------------------------- Appendix III:3

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

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. 


--------------------
\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. 

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


STATUS OF ACTIONS TO NORMALIZE
ECONOMIC AND POLITICAL RELATIONS
BETWEEN THE UNITED STATES AND
NORTH KOREA
========================================================== Appendix IV

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


--------------------
\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. 


   MODEST IMPROVEMENTS IN ECONOMIC
   RELATIONS BETWEEN THE UNITED
   STATES AND NORTH KOREA
-------------------------------------------------------- Appendix IV:1

For well over four decades, North Korea has been the target of a
comprehensive array of sanctions imposed by the United States under
the Trading With the Enemy Act (50 U.S.C.  App.   1-44) that
prohibits U.S.  businesses and other entities subject to U.S. 
jurisdiction from engaging in commercial trade with North Korea.  In
1950, following North Korea's attack on South Korea, the United
States imposed an embargo on trade 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 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. 

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. 


--------------------
\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. 

\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. 

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


      TELECOMMUNICATIONS AND
      INFORMATION-RELATED
      TRANSACTIONS
------------------------------------------------------ Appendix IV:1.1

Following Treasury's actions to ease trade restrictions, in February
1995, the AT&T Corporation applied for and received approval from the
Federal 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. 

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. 


--------------------
\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. 


      TRAVEL-RELATED TRANSACTIONS
------------------------------------------------------ Appendix IV:1.2

Treasury's amended regulations allow U.S.  citizens traveling to and
from 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
      TRANSACTIONS
------------------------------------------------------ Appendix IV:1.3

Prior to Treasury amending its regulations, it had blocked, or
frozen, $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 nationals.  Treasury has no
immediate plans to release the remaining $14.5 million in blocked
North Korean funds.\9


--------------------
\9 Treasury officials told us that they normally consult with the
State Department prior to any decision to release funds that remain
blocked. 


      NEWS ORGANIZATION OFFICES
------------------------------------------------------ Appendix IV:1.4

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


--------------------
\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. 


      MAGNESITE/MAGNESIA TRADE
------------------------------------------------------ Appendix IV:1.5

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


--------------------
\11 China and North Korea are the primary natural sources of these
materials on the world market. 


      THE LIGHT-WATER NUCLEAR
      REACTOR PROJECT
------------------------------------------------------ Appendix IV:1.6

Because of the embargo against North Korea, U.S.  products,
technology, 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. 


   THE UNITED STATES IS PREPARED
   TO OPEN A LIAISON OFFICE IN
   NORTH KOREA ONCE ISSUES BETWEEN
   THE PARTIES ARE RESOLVED
-------------------------------------------------------- Appendix IV:2

North Korea was established as a separate country in 1948, but the
United States has never established a formal political relationship
with North Korea.  With the signing of the Agreed Framework, a step
was taken towards eventually establishing formal diplomatic relations
between the United States and North Korea--a pledge by the two
countries to open liaison offices in each others' capital.\13
According to State Department officials, establishing liaison offices
would provide practical benefits for both countries.  For example,
liaison offices afford countries the ability to 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 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. 


--------------------
\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. 

\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. 


   LIMITED PROGRESS IN RESOLVING
   BILATERAL ISSUES OF CONCERN
-------------------------------------------------------- Appendix IV:3

The Agreed Framework states that the United States and North Korea
will upgrade their relations to the Ambassadorial level once progress
on resolving issues of concern to both parties is made.  The Agreed
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 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. 


--------------------
\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. 


      PROGRESS IN ACCOUNTING FOR
      THE REMAINS OF U.S. 
      SOLDIERS MISSING IN ACTION
      FROM THE KOREAN WAR
------------------------------------------------------ Appendix IV:3.1

According to the Department of Defense, over 8,100 American service
personnel were unaccounted for from the Korean War.\17 In 1954,
following 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 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 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
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. 

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


--------------------
\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. 

\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. 

\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. 


      SOME MOVEMENT TOWARDS
      ADDRESSING U.S.  CONCERNS
      ABOUT NORTH KOREA'S
      BALLISTIC MISSILES
------------------------------------------------------ Appendix IV:3.2

Since the early 1980s, according to the Defense Intelligence Agency,
North Korea has spent millions of dollars annually to engineer and
produce offensive ballistic missiles for its own use and for export
to countries of concern in the Middle East. 

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 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
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. 


--------------------
\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). 

\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. 

\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. 


      THREAT POSED BY NORTH
      KOREA'S CONVENTIONAL
      MILITARY FORCES HAS NOT
      SIGNIFICANTLY CHANGED
------------------------------------------------------ Appendix IV:3.3

According to the State Department, the United States and North Korea
have not yet discussed issues related to North Korea's conventional
military presence on the Korean Peninsula.  North Korea, with a
population of only about 24 million people, fields the world's
fifth-largest military, 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 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. 


--------------------
\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. 


      NO PROGRESS ON ISSUES
      RELATED TO NORTH KOREA'S
      SUSPECTED INVOLVEMENT IN
      TERRORIST ACTIVITIES
------------------------------------------------------ Appendix IV:3.4

North Korea is believed to have been engaged in and sponsored
international acts of terrorism, and North Korea was added to the
State Department's annual list of states supporting international
terrorism in January 1988.\28 According to State and Defense
Department officials, the 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. 


--------------------
\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. 


      NO PROGRESS BY NORTH KOREA
      IN ADDRESSING HUMAN RIGHTS
      ISSUES
------------------------------------------------------ Appendix IV:3.5

According to the State Department's annual report on international
human rights practices for 1996, North Korea continues to deny its
citizens fundamental human rights.  As cited in the report, North
Korea's state 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 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. 


STATUS OF ACTIONS TO PROMOTE PEACE
AND SECURITY ON A NUCLEAR-FREE
KOREAN PENINSULA
=========================================================== Appendix V

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. 


   ASSURANCES BY THE UNITED STATES
   REGARDING NUCLEAR NONAGGRESSION
   AGAINST NORTH KOREA
--------------------------------------------------------- Appendix V:1

The Agreed Framework specifies that the United States will provide
formal assurances to North Korea, against the threat or use of
nuclear weapons by the United States.  According to State Department
officials, the United States does not intend to provide these
assurances until North Korea comes into full compliance with the
Treaty on the Non-Proliferation of Nuclear Weapons (NPT)--to which it
has been a party since 1985.  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


--------------------
\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. 


   ACTIONS TO IMPLEMENT THE
   NORTH-SOUTH JOINT DECLARATION
   ON DENUCLEARIZATION
--------------------------------------------------------- Appendix V:2

On January 20, 1992, South Korea and North Korea signed the "Joint
Declaration on the Denuclearization of the Korean Peninsula." The
declaration indicated both parties' desire to eliminate the danger of
nuclear war and to create an environment favorable for peace and
security in Asia and the world.  For example, the declaration
prohibited both sides 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
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. 


--------------------
\2 North Korea's reactors and related nuclear facilities are
particularly well suited to produce nuclear materials for bombs. 


   LIMITED PROGRESS TOWARDS
   NORTH/SOUTH DIALOGUE
--------------------------------------------------------- Appendix V:3

North Korea and South Korea have had a difficult and acrimonious
relationship in the four decades since the Korean War.\3 During the
postwar period, both Korean governments have repeatedly affirmed
their desire to 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. 

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. 

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 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. 


--------------------
\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. 

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


U.S.  HUMANITARIAN ASSISTANCE TO
NORTH KOREA
========================================================== Appendix VI

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 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. 




(See figure in printed edition.)Appendix VII
COMMENTS FROM THE DEPARTMENT OF
STATE
========================================================== Appendix VI



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Gene Aloise, Assistant Director
Kathleen Turner, Evaluator-in-Charge
Victor J.  Sgobba, Senior Evaluator
Mario Zavala, Senior Evaluator
Duane G.  Fitzgerald, Ph.D., Nuclear Engineer

OFFICE OF THE GENERAL COUNSEL

Jackie A.  Goff, Senior Attorney
Richard Seldin, Senior Attorney


*** End of document. ***