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NATO Enlargement: Cost Estimates Developed to Date Are Notional (Letter Report, 08/18/97, GAO/NSIAD-97-209).

Pursuant to a congressional request, GAO reviewed the executive branch's
estimate of the cost of expanding the North Atlantic Treaty Organization
(NATO), focusing on: (1) the reasonableness of the study's key
assumptions; (2) verifying the pricing of individual cost elements and
identifying the basis for the pricing; (3) whether the estimate's major
cost categories and elements should be ascribed to NATO enlargement; (4)
factors that were not included in the study's cost estimate that could
affect enlargement costs; and (5) comparing the executive branch's cost
estimate with the Congressional Budget Office (CBO) and Rand Corporation
estimates. GAO did not independently estimate the cost of enlarging
NATO.

GAO noted that: (1) its analysis of the Department of Defense's (DOD)
cost estimate to enlarge NATO indicates that its key assumptions were
generally reasonable and were largely consistent with the views of U.S.,
NATO, and foreign government officials; (2) however, DOD's lack of
supporting cost documentation and its decision to include cost elements
that were not directly related to enlargement call into question its
overall estimate; (3) because of the uncertainties associated with
enlargement and DOD's estimating procedures, the actual cost of NATO
enlargement could be substantially higher or lower than DOD's estimated
cost of about $27 billion to $35 billion; (4) GAO's comparison of DOD's
estimate with the RAND and CBO estimates does not indicate that the RAND
and CBO costs estimates are more reliable than DOD's; (5) GAO could not
verify DOD's pricing of many individual cost elements because DOD
officials did not develop sufficient supporting documentation; (6) DOD
included two major cost categories that cannot be directly attributed to
NATO's enlargement; (7) GAO found no direct link between the cost of
remedying current shortfalls in NATO's reinforcement capabilities and
enlargement of the alliance; (8) GAO questions whether all of DOD's new
member modernization and restructuring costs are attributable to NATO
enlargement; (9) DOD's third cost category, direct enlargement, contains
elements appropriately attributed to NATO enlargement, based on GAO's
analysis; (10) NATO enlargement could entail additional costs beyond
those included in the DOD estimate; (11) these costs could include
assistance, such as enhanced Partnership for Peace or other bilateral
assistance provided as a consolation to countries not invited to join
NATO in July 1997; (12) there will also be additional costs associated
with subsequent decisions to invite additional countries to join NATO;
(13) in addition, the United States may provide assistance to help new
members restructure and modernize their forces, which DOD acknowledged
but did not include in its estimate of the U.S. cost share; (14) CBO and
RAND developed a range of cost estimates for NATO enlargement, including
estimates that employ a defense strategy similar to DOD's; and (15)
several factors account for the differences between DOD's estimate and
the CBO and RAND estimates, including those estimates that employed
defense strategies similar to DOD's.

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

 REPORTNUM:  NSIAD-97-209
     TITLE:  NATO Enlargement: Cost Estimates Developed to Date Are 
             Notional
      DATE:  08/18/97
   SUBJECT:  Comparative analysis
             NATO military forces
             International organizations
             Cost analysis
             International cooperation
             NATO standardization
             Cost sharing (finance)
             Foreign military assistance
             Foreign governments
             Military interoperability agreements
IDENTIFIER:  Poland
             Hungary
             Czech Federal Republic
             Slovak Federal Republic
             NATO
             NATO Partnership for Peace Program
             NATO Security Investment Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

August 1997

NATO ENLARGEMENT - COST ESTIMATES
DEVELOPED TO DATE ARE NOTIONAL

GAO/NSIAD-97-209

NATO Enlargement

(711276)


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

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

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


B-277471

August 18, 1997

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

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

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


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


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

NATO was established in 1949 to help provide for its members' common
defense.  The key provision of the treaty in this regard is article
V, which states that an attack on one member shall be considered an
attack on all members.  To meet its military objectives, NATO (1)
developed standards to help ensure that its members' forces can
operate with one another, (2) established force requirements for its
members, and (3) agreed to commonly fund the procurement of equipment
and facilities needed to accomplish common goals.  In 1994, NATO
announced that it would invite other European states to join the
alliance.  Twelve Central and Eastern European nations indicated
interest in doing so, and since 1994, NATO and its members have been
providing assistance to help these countries prepare for eventual
membership.\2 Figure 1 shows those nations interested in becoming
NATO members.  In July 1997, NATO invited three of these
countries--Poland, Hungary, and the Czech Republic--to enter into
negotiations to become NATO members.  It is NATO's goal to have the
16 member states ratify the new members' admission into NATO by April
1999. 

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

   (See figure in printed
   edition.)

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

\b Former Yugoslav Republic of Macedonia. 

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

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

  -- Specific nations would be invited to join NATO in the first
     round of enlargement.\4

  -- NATO would continue to rely on its existing post-Cold War
     strategy to carry out its collective defense obligations (i.e.,
     each member state would have a basic self-defense capability and
     the ability to rapidly receive NATO reinforcements).\5

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

  -- NATO would continue to use existing criteria for determining
     which items would be funded in common and for allocating costs
     among members.\6

Using these assumptions, DOD estimated that the cost of enlarging
NATO would range from about $27 billion to $35 billion from 1997
through 2009.\7 The estimate was broken down as follows: 

  -- about $8 billion to $10 billion for improvements in current NATO
     members' regional reinforcement capabilities (e.g., addressing
     shortfalls in deployable support capabilities),

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

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

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

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


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

\3 The executive branch's report was required by the Fiscal Year 1997
Defense Authorization Act
(P.L.  104-201, section 1048). 

\4 The number of countries DOD assumed would be invited to join NATO
and the actual countries that were the basis for the estimate are
classified information. 

\5 NATO adopted a new post-Cold War strategic concept at its Rome
summit meeting in 1991.  The concept provides for substantial
reductions in the size and readiness of NATO's forces but increased
force mobility, flexibility, and ability to adapt to the changed
threat environment. 

\6 NATO funds only those facilities or portions of facilities that
are over and above the needs of an individual country's own national
security requirements.  For example, NATO would fund only the portion
of infrastructure at an air base that is beyond the host nation's own
needs, such as hangars for reinforcing aircraft, but not hangars for
the host country's aircraft. 

\7 DOD assumed that NATO would reach a "mature capability" to operate
with new members by 2009. 

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


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

Our analysis of DOD's cost estimate to enlarge NATO indicates that
its key assumptions were generally reasonable and were largely
consistent with the views of U.S., NATO, and foreign government
officials.  In particular, the assumption that large scale
conventional security threats will remain low significantly
influenced the estimate.  However, DOD's lack of supporting cost
documentation and its decision to include cost elements that were not
directly related to enlargement call into question its overall
estimate.  Because of the uncertainties associated with enlargement
and DOD's estimating procedures, the actual cost of NATO enlargement
could be substantially higher or lower than DOD's estimated cost of
about $27 billion to $35 billion.  Our comparison of DOD's estimate
with the RAND and CBO estimates does not indicate that the RAND and
CBO costs estimates are more reliable than DOD's. 

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

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

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

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

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


   UNCERTAINTIES EXIST, BUT DOD'S
   KEY ASSUMPTIONS APPEAR
   REASONABLE
------------------------------------------------------------ Letter :3

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

Nonetheless, DOD's key assumptions constitute a reasonable attempt to
address these uncertainties.  First, the number and mix of new member
states DOD assumed in its cost estimate were generally consistent
with the expectations that were current at the time and with the
results of the July 1997 NATO Madrid summit.  Second, DOD's
assumption of a NATO strategy to use reinforcement forces rather than
station substantial permanent forces in the countries of the new
members is consistent with U.S.  and NATO policy and with the current
low-threat security environment in Europe.  In 1991, NATO adopted a
new post-Cold War strategy that involves replacing larger and
relatively static forces with smaller, more mobile forces to
reinforce members' self-defense efforts.  Officials at the U.S. 
mission to NATO told us that NATO is likely to maintain this strategy
for an expanded alliance. 

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

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

DOD further assumed that current NATO members would on average
maintain constant real defense spending levels for 1997 through
2009.\11 Analysts have expressed somewhat greater concern about this
DOD assumption, generally considering it to be an optimistic, but
reasonable, projection.  Some analysts indicated that defense
spending in some current member states may decline further over the
next several years.  Such declines would be due, in part, to economic
requirements associated with entry into the European Monetary
Union.\12


--------------------
\9 The executive branch's estimate states that costs would increase
substantially if the threat increased substantially--but adds that it
is impossible to estimate the additional costs of meeting an
increased direct territorial threat to NATO from outside conventional
military forces. 

\10 NATO's formula for allocating costs is based on the relative size
of its members' economies. 

\11 In 1996, defense spending as a percent of gross domestic product
was 2.0 percent for Italy, 1.7 percent for Germany, 2.9 percent for
the United Kingdom, and 3.0 percent for France.  If gross domestic
product grows in real terms, then these percentages will decline
under DOD's assumption of constant real defense spending. 

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


   DOD'S PRICING OF COST ELEMENTS
   COULD NOT BE VERIFIED
------------------------------------------------------------ Letter :4

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

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

DOD developed other cost element estimates on a highly aggregated
basis.  For example, DOD's $8 billion to $10 billion estimated cost
for upgrading allied reinforcement capabilities was developed without
specific data regarding actual shortfalls in these capabilities. 
This estimate contained only two elements--upgrades to air force
units (wings) and ground units (divisions).  DOD analysts stated they
did not compute costs of individual items in these units.  Instead,
they computed a general cost estimate encompassing a broad range of
deployable logistic support capabilities (e.g., engineer and medical
unit equipment and specialized containers) based on NATO assessments
that shortfalls exist in commitments made to NATO.\13 DOD officials
were unable to respond to our requests for data concerning the amount
of equipment needed or cost by equipment type. 

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

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


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


   ESTIMATES INCLUDE SOME COSTS
   THAT ARE NOT DIRECTLY RELATED
   TO ENLARGEMENT
------------------------------------------------------------ Letter :5

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

DOD's decision to include $8 billion to $10 billion as the estimated
cost to enhance current members' reinforcement capabilities is
questionable.  According to U.S.  and NATO officials, NATO currently
has long-standing shortfalls in combat support and combat service
support capabilities needed to carry out its post-Cold War strategy. 
Current members have chosen not to fulfill these requirements, but it
is not known whether they lack the capabilities to fill the
requirements or whether they simply have not assigned forces to NATO
due to other national priorities.  Moreover, neither DOD nor
officials at the U.S.  mission to NATO had identified any specific
shortfalls that could be attributed only to bringing new countries
into NATO.  DOD officials told us that while reinforcement needs
would not be greater in an enlarged NATO, enlargement makes
fulfilling these requirements essential.  DOD officials stated that
these costs were included because an enlargement report to Congress
on military implications and costs that ignored current shortfalls,
which would seriously impair an enlarged NATO's military
effectiveness, would be seen as incomplete.\14

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

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


--------------------
\14 While we understand DOD's logic for including costs associated
with current NATO member reinforcement shortfalls that would
seriously impair an enlarged NATO's military effectiveness, by making
this argument, DOD would seem to be acknowledging that NATO's current
reinforcement shortfalls also seriously impair the military
effectiveness of an unenlarged NATO. 

\15 For example, NATO has established flying hour requirements for
member states' pilots.  To meet these requirements, new member states
would probably have to increase pilot training budgets.  Regarding
air defense, CBO and RAND experts informed us that new member states
would have to upgrade their air defense missile forces to achieve
minimal self-defense capabilities. 

\16 Similarly, during our review of Partnership for Peace programs,
officials in Poland, Hungary, and the Czech Republic told us that
their nations would modernize their aging forces, regardless of
whether or not they join NATO. 


   ADDITIONAL COSTS MAY BE
   ASSOCIATED WITH NATO
   ENLARGEMENT
------------------------------------------------------------ Letter :6

Various additional costs may be incurred by the United States in
connection with NATO enlargement that were not specifically
quantified in DOD's cost study.  For example, during fiscal years
1995-97, the United States allocated $59.6 million in security
assistance grants and $242.5 million in security assistance loans to
the newly invited states.  DOD acknowledged that the United States
may choose to continue or expand the current assistance being
provided to potential new members' restructuring and modernization
efforts, but it did not attempt to estimate these costs.  Both CBO
and RAND assumed that NATO members--including the United
States--would need to provide substantial levels of security
assistance to help the new members.  A Polish official told us that
Poland would likely need $2 billion in credits to support its
acquisition of multipurpose aircraft, although aircraft modernization
may not be directly related to enlargement. 

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

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


   DIFFERENCES IN ESTIMATES ARE
   DUE TO VARIOUS FACTORS
------------------------------------------------------------ Letter :7

Several factors account for the differences between DOD's estimate
and the CBO and RAND estimates, even those that employed defense
strategies similar to DOD's.  Table 1 illustrates the major results
and key assumptions of the three estimates. 



                                     Table 1
                     
                         Comparison of DOD, CBO, and RAND
                                    Estimates

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

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

Notional new NATO   A Small Group       Poland              Poland
members             (details            Hungary             Hungary
                    classified)         Czech Republic      Czech Republic
                                        Slovakia            Slovakia

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

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

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

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

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


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

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

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

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

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


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

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

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

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

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


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

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

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

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


INDIVIDUAL COST ELEMENTS BY
CATEGORY
=========================================================== Appendix I

NEW MEMBERS' MILITARY
MODERNIZATION AND RESTRUCTURING

(1) Modernization of 25 percent of planned ground force structure, by
division

(2) Procurement of refurbished I-HAWK type, wide area surface-to-air
missiles

(3) Procurement of refurbished Western combat aircraft

(4) Modernized ammunition for ground forces

(5) Modernized ammunition for air forces

(6) Modernized ammunition storage for air forces

(7) Modernized ammunition storage for ground forces

(8) Increased proficiency in individual and unit training

CURRENT MEMBERS' REINFORCEMENT
ENHANCEMENTS

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

(1) three allied divisions

(2) five allied wings

DIRECT ENLARGEMENT

(1) Refurbishment and renovation of headquarter facilities

(2) Communications and intelligence links to forces

(3) Military education

(4) Air sovereignty operations centers

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

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

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

(8) Staff-level planning for host nation support

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

(10) Collocated operating bases to host reinforcing wings

(11) Compatible/interoperable fueling facilities

(12) Road and rail upgrades

(13) Staging areas for ground reinforcements

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

(15) Port upgrades

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

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


COST CATEGORIES AND SHARES
========================================================== Appendix II

                              (Dollars in billions)

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



(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON D.C. 

David Martin
James Shafer
Celia Thomas
Patrick Hickey
Hynek Kalkus
Pierre Toureille


*** End of document. ***





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