Congressional Documents
23 October 1997
Cost of NATO Enlargement
Henry Hinton
General Accounting Office (GAO)
Assistant Comptroller General
Senate Appropriations Committee
October 23, 1997
Mr. Chairman and Members of the Committee:
I am pleased to be here today to help the Committee sort through some
of the issues related to the cost and financial obligations of
expanding the North Atlantic Treaty Organization (NATO). My testimony
today will address three issues: (1) current U.S. costs to support
NATO's common budgets and other funding that supports relations with
Central and East European nations and promotes NATO enlargement; (2)
NATO's defense planning process, which will form the basis for more
definitive cost estimates for an enlarged alliance; and (3) our
evaluation of the recent Department of Defense (DOD) study of NATO
expansion and a comparison of DOD's study with studies of the
Congressional Budget Office (CBO) and the Rand Corporation.
SUMMARY OF OBSERVATIONS
The ultimate cost of NATO enlargement will be contingent on several
factors that have not yet been determined. Specifically, NATO has yet
to formally define its future (1) strategy for defending the expanded
alliance, (2) force and facility requirements of the newly invited
states, and (3) how costs of expanding the alliance will be financed.
Also unknown is the long-term security threat environment in Europe.
NATO's process for determining the cost of enlargement is underway and
expected to be completed by June 1998.
In fiscal year 1997, the United States contributed about $470 million
directly to NATO to support its three commonly funded budgets, the
NATO Security Investment Program (NSIP), the military budget, and the
civil budget. This is about 25 percent of the total funding for these
budgets. It is through proposed increases to these budgets, primarily
the NSIP and to a lesser extent the civil budget, that most of the
direct cost of NATO enlargement will be reflected and therefore where
the United States is likely to incur additional costs.
Additionally, over $120 million was programmed in fiscal year 1997 for
Warsaw Initiative activities in the three countries that are
candidates for NATO membership and other Partnership for Peace (PFP)
countries. This money was provided to help pay for Foreign Military
Financing grants and loans, exercises, and other PFP-related
activities. Funding for these activities will continue, but the
allocation between the candidates for NATO membership and all other
PFP participants may change over time. This funding is strictly
bilateral assistance that may assist the candidate countries and other
countries participating in PFP to meet certain NATO standards, but it
is not directly related to NATO decisions concerning military
requirements or enlargement.
NATO defense planners are now developing military requirements through
their defense planning process and are close to completing their
analyses. These requirements will ultimately be translated into costs
eligible for common funding. NATO officials plan to present their cost
estimates for these items for approval at the NATO defense ministerial
meeting in early December 1997. However it will not be until June 1998
that NATO will make decisions about whether or how much to increase
the common budgets, which would then be shared among current and new
members. Until this has been done, the implications for the U.S.
contributions to NATO's common budgets will be unclear.
As you know, DOD, CBO, and Rand developed cost estimates for enlarging
NATO before invitations were extended to Poland, Hungary, and the
Czech Republic and therefore before NATO had assessed its current
military needs or developed military requirements that could be used
to make more accurate cost estimates. Thus, the ranges of these
estimates -- from $10,000 million to $125,000 million -- are
substantially different, depending on the assumptions used. In some
instances, the cost range estimates overlap; however, this may be
coincidental, since the assumptions and force postures used to develop
the estimates were different. Thus, it is not surprising that the
debate on this issue has been surrounded by some confusion.
Our analysis of DOD's cost estimate to enlarge NATO indicates that its
key assumptions were generally reasonable and were largely consistent
with the views of U.S., NATO, and foreign government officials. In
particular, the assumption that large-scale conventional security
threats will remain low significantly influenced the estimate.
However, DOD's lack of supporting cost documentation and its decision
to include cost elements that were not directly related to enlargement
call into question its overall estimate. Because of the uncertainties
associated with enlargement and DOD's estimating procedures, the
actual cost of NATO enlargement could be substantially different from
DOD's estimated cost of about $27,000 million to $35,000 million.
Rand and CBO cost estimates are no more reliable than DOD's, based on
our comparison of the three studies. CBO and Rand developed a range of
cost estimates for NATO enlargement, including estimates that employ a
defense strategy similar to DOD's. Several factors account for the
differences between DOD's estimate and the CBO and Rand estimates,
including those estimates that employed defense strategies similar to
DOD's. For example, CBO assumed a much larger reinforcement force and
much more extensive modernization, infrastructure, and training costs
than DOD did. Rand assumed a somewhat larger reinforcement force and
higher training and air defense modernization costs than DOD did.
U.S. CONTRIBUTIONS TO COMMON BUDGETS AND OTHER FUNDING SOURCES
As it does now, the United States will fund its share of NATO
enlargement primarily through contributions to the three common
budgets. NSIP pays for infrastructure items that are over and above
the needs of the member nations, including communications links to
NATO headquarters or reinforcement reception facilities, such as
increased apron space at existing airfields. The military budget pays
for NATO's AWACS (airborne early warning aircraft) program and
military headquarters costs, and the civil budget pays primarily for
NATO's international staff and operation and maintenance costs of its
civilian facility in Brussels. For fiscal year 1997 the U.S.
contribution for the three common budgets was about $470 million: $172
million for the NSIP, $252 million for NATO's military budget, and
$44.5 million for NATO's civil budget. Any increases to the U.S.
budget accounts would be reflected primarily through increased funding
requests for the DOD military construction budget from which the NSIP
is funded, the Army operations and maintenance budget from which the
military budget is funded (both part of the National Defense 050
budget function), and the State Department's contributions to
international organizations from which the civil budget is funded
(part of the International Affairs 150 budget function).
While NATO will not have finalized its common infrastructure
requirements for new members until December 1997 or decided whether or
how much to increase the common budgets until June 1998, DOD and State
Department officials told us that the civil and NSIP budgets are
likely to increase by only 5 to 10 percent and the military budget
will probably not increase at all. This would mean an increase of
about $20 million annually for the U.S. contribution to NATO. However,
as I indicated, NATO has yet to make decisions on these matters. In
addition, the United States could choose to help new members in their
efforts to meet their NATO membership obligations through continued
Foreign Military Financing grants and/or loans or through
International Military Education and Training grants. The three
candidate countries and other PFP countries have been receiving
assistance through these accounts since the inception of the PFP
program, and this has enabled some of these countries to be more
prepared for NATO membership. In fiscal year 1997, over $120 million
was programmed for these activities, and about $60 million of this
amount went to the three candidates for NATO membership. Any increased
funding for such assistance would be funded through the International
Affairs budget function.
NATO'S DEFENSE PLANNING PROCESS
It is through NATO's defense planning process that decisions are made
on how the defense burden will be shared, what military requirements
will be satisfied, and what shortfalls will exist.
NATO's New Strategic Concept, adopted in Rome in 1991, places greater
emphasis on crisis management and conflict prevention and outlines the
characteristics of the force structure. Key features include (1)
smaller, more mobile and flexible forces that can counter multifaceted
risks, possibly outside the NATO area; (2) fewer troops stationed away
from their home countries; (3) reduced readiness levels for many
active units; (4) emphasis on building up forces in a crisis; (5)
reduced reliance on nuclear weapons; and (6) immediate and rapid
reaction forces, main defense forces (including multinational corps),
and augmentation forces. Although NATO has not defined exactly the
type and amount of equipment and training needed, it has encouraged
nations to invest in transport, air refueling, and reconnaissance
aircraft and improved command and control equipment, among other
items.
NATO's force-planning and goal-setting process involves two
inter-related phases that run concurrently: setting force goals and
responding to a defense planning questionnaire. The force goals, which
are developed every two years, define NATO's requirements. The major
NATO commanders propose force goals for each nation based on command
requirements. Each nation typically has over 100 force goals. NATO and
national officials frequently consult one another while developing
force goals and national defense plans. NATO commanders are unlikely
to demand that member nations establish units or acquire equipment
they do not have.
In its annual response to NATO's defense planning questionnaire, each
member verifies its commitment for the previous year, defines its
commitment for the next year, and lays out plans for the following
five years. Alliance members review each nation's questionnaire and,
in meetings, can question national plans and urge member nations to
alter their plans. After finishing their reviews, generally in October
or November, NATO staff write a report summarizing each nation's plans
and assessing national commitments to NATO. Once NATO members approve
this report, it becomes the alliance's consensus view on each
country's strengths and weaknesses and plan to support the force
structure. It is through this process that NATO determines what
shortfalls exist, for example, in combat support and combat service
support capabilities.
According to U.S. officials, NATO is preparing several reports to be
presented for approval at the defense ministerial meetings in December
1997. One report will discuss the additional military capability
requirements existing alliance members will face as a result of the
alliance's enlargement. According to officials at the U.S. mission and
Supreme Headquarters Allied Powers Europe, it is unlikely that any
additional military capability requirements will be placed on NATO
members over and above the force goals they have already agreed to
provide. In other words, if current force goals are attained, NATO
will have sufficient resources to respond to likely contingencies in
current and new member countries. Therefore, it can be concluded that
although enlargement of the alliance is another reason for current
allies to attain their force goals, it will not add any new, unknown
costs to existing members' force plans. Other reports resulting from
this process will discuss the requirements for commonly funded items
in the new nations and their estimated costs. These items include
infrastructure that will enable the new allies to receive NATO
reinforcements in times of crisis, communication systems between NATO
and their national headquarters, and a tie-in to NATO's air-defense
system. How these projects will be financed by NATO, for example,
whether they will be financed within existing budgets or by increasing
the size of NATO's common budgets, will not be determined until June
1998. Therefore, the impact of these costs on the U.S. contributions
to NATO's common budgets and the U.S. budget will be unknown until
next spring.
Another report will present an assessment of the capabilities and
shortfalls in the military forces of Poland, Hungary, and the Czech
Republic. NATO does not and will not estimate the costs of the
shortfalls of either the current or the new member states, but once
these shortfalls are identified, cost estimates can be made by others.
However, even though new members' capabilities and shortfalls will be
identified in December, these countries' force goals will not be set
until the spring. These force goals will, in effect, be a roadmap for
the new members on how to address their shortfalls. (See attachment I
for a timeline illustrating these events.)
KEY ASSUMPTIONS AND COST ESTIMATES FOR NATO ENLARGEMENT STUDIES
When the DOD, CBO, and Rand studies were completed, many key cost
determinants had not been established. Consequently, each study made a
series of key assumptions that had important implications for each
studies' results.
DOD made the following key assumptions:
-- Specific nations would be invited to join NATO in the first round
of enlargement.
-- NATO would continue to rely on its existing post-Cold War strategy
to carry out its collective defense obligations (that is, each member
state would have a basic self-defense capability and the ability to
rapidly receive NATO reinforcements).
-- NATO would not be confronted by a significant conventional military
threat for the foreseeable future, and such a threat would take many
years to develop.
-- NATO would continue to use existing criteria for determining which
items would be funded in common and which costs would be allocated
among members.
Using these assumptions, DOD estimated the cost of enlarging NATO
would range from about $27 ,000 million to $35,000 million from 1997
through 2009. The estimate was broken down as follows:
-- about $8,000 million to $10,000 million for improvements in current
NATO members' regional reinforcement capabilities, such as developing
mobile logistics and other combat support capabilities;
-- about $10,000 million to $13,000 million for restructuring and
modernizing new members' militaries (for example, selectively
upgrading self-defense capabilities); and
-- about $9,000 million to $12,000 million for costs directly
attributable to NATO enlargement (for example, costs of ensuring that
current and new members' forces are interoperable and capable of
combined NATO operations and of upgrading or constructing facilities
to receive NATO reinforcements).
DOD estimated the U.S. share of these costs would range from about
$1,500 million to $2,000 million -- averaging $150 million to $200
million annually from 2000 to 2009. The estimated U.S. share chiefly
consisted of a portion of direct enlargement costs commonly funded
through NATO's Security Investment Program. DOD assumed that the other
costs would be borne by the new members and other current member
states and concluded that they could afford these costs, although this
would be challenging for new members. (See Attachment II.)
DOD's Key Assumptions Were Reasonable, But Cost Estimates Are
Speculative
In our review of DOD's study of NATO enlargement, we (1) assessed the
reasonableness of DOD's key assumptions, (2) attempted to verify
pricing information used as the basis for estimating enlargement
costs, (3) looked into whether certain cost categories were actually
linked to enlargement, and (4) identified factors excluded from the
study that could affect enlargement costs.
We concluded that DOD's assumptions were reasonable. The assumption
regarding the threat was probably the most significant variable in
estimating the cost of enlargement. Based on information available to
us, we concluded that it was reasonable to assume the threat would be
low and there would be a fairly long warning time if a serious threat
developed. This assumption, and the assumption that the post-Cold War
Strategic Concept would be employed, provided the basis for DOD's
judgments concerning required regional reinforcement capabilities, new
members' force modernization, and to a large extent those items
categorized as direct enlargement costs.
DOD also assumed that during 1997 to 2009, new members would increase
their real defense spending at an average annual rate of one to two
percent. Both private and government analysts project gross domestic
product (GDP) growth rates averaging four to five percent annually for
the Czech Republic, Hungary, and Poland during 1997 to 2001. Thus,
projected increases in defense budgets appear affordable. Analysts
also point out that potential new member countries face real fiscal
constraints, especially in the short term. An increase in defense
budgets at the expense of pressing social concerns becomes a matter of
setting national priorities, which are difficult to predict. If these
countries' growth rates do not meet expectations, their ability to
increase real defense spending becomes more problematic.
DOD further assumed that current NATO members would on average
maintain constant real defense spending levels during 1997 to 2009.
Analysts have expressed somewhat greater concern about this assumption
and generally consider it to be an optimistic, but reasonable
projection. Some analysts indicated that defense spending in some
current member states may decline further over the next several years.
Such declines would partly be due to economic requirements associated
with entry into the European Monetary Union.'
Despite our conclusion that DOD's underlying assumptions were sound,
for several reasons we concluded that its estimates are quite
speculative. First, DOD's pricing of many individual cost elements
were "best guesses" and lacked supporting documentation. This was the
case for all three categories of costs: direct enlargement costs,
current members' reinforcement enhancements, and new members'
modernization requirements. Most of the infrastructure upgrade and
refurbishment cost estimates were based on judgments. For example,
DOD's estimate of $140 million to $240 million for upgrading a new
member's existing airbase into a NATO co-llocated operating base was
not based on surveys of actual facilities but on expert judgment. We
were told that the actual cost could easily be double -- or half --
the estimate.
DOD's estimated costs for training and modernization were notional,
and actual costs may vary substantially. DOD analysts did not project
training tempos and specific exercise costs. Instead, they
extrapolated U.S. and NATO training and exercise costs and evaluated
the results from the point of view of affordability. DOD's estimate
for modernization and restructuring of new members' ground forces was
also notional and was based on improving 25 percent of the new
members' forces. However, it did not specify what upgrades would be
done and how much they would cost.
Second, we could find no linkage between DOD's estimated cost of
$8,000 million to $10,000 million for remedying current shortfalls in
NATO's reinforcement capabilities and enlargement of the alliance.
Neither DOD nor NATO could point to any specific reinforcement
shortfalls that would result from enlargement that do not already
exist. However, existing shortfalls could impair the implementation of
NATO's new Strategic Concept. DOD officials told us that while
reinforcement needs would not be greater in an enlarged NATO,
enlargement makes eliminating the shortfalls essential. This issue is
important in the context of burdensharing because DOD's estimate shows
that these costs would be covered by our current NATO allies but not
shared by the United States.
Finally, NATO has yet to determine what military capabilities,
modernization, and restructuring will be sought from new members.
Consequently, DOD had little solid basis for its $10,000 million to
$13,000 million estimate for this cost category. Moreover, DOD and new
member governments have noted that new members are likely to incur
costs to restructure and modernize their forces whether or not they
join NATO. Indeed, some countries have indicated that they may need to
spend more for these purposes if they do not become NATO members. DOD
showed these costs as being covered entirely by the new members.
Potential Additional Costs of Enlargement
NATO enlargement could entail costs in addition to those included in
DOD's estimates, including costs for assistance to enhance the
Partnership for Peace or other bilateral assistance for countries not
invited to join NATO in July 1997. In addition, the United States may
provide assistance to help new members restructure and modernize their
forces. For example, Polish officials said they may need up to $2,000
million in credits to buy multipurpose aircraft. While not an added
cost of enlargement, such assistance would represent a shift in the
cost burden from the new member countries to the countries providing
assistance. DOD did not include such costs in its estimate of the U.S.
share, though it acknowledged that the cost was possible. Moreover,
U.S. and NATO officials have stated that additional countries may be
invited to join NATO in the future, most likely in 1999. DOD's cost
estimate did not take into account a second or third round of
invitations. If additional countries are invited, cost of enlargement
would obviously increase.
Comparison of the DOD, CBO, and Rand Estimates
CBO and Rand estimated the cost of incorporating the Czech Republic,
Hungary, Poland, and Slovakia into NATO. They based their estimates on
a range of NATO defense postures, from enhanced self-defense with
minimal NATO interoperability to the forward stationing of NATO troops
in new member states. However, they also noted that the current lack
of a major threat in Europe could allow NATO to spend as little as it
chose in enlarging the alliance.
Because of the uncertainties of future threats, and the many possible
ways to defend an enlarged NATO, CBO examined five illustrative
options to provide such a defense. Each option built on the previous
one in scope and cost. CBO estimated that the cost of the five options
over the 15-year period would range from $61,000 million to $125,000
million. Of that total, CBO estimated that the United States might be
expected to pay between $5,000 million and $19,000 million. CBO
included in its range of options a $109,000 million 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.
Of this $109,000 million, CBO estimated that the United States would
pay $13,000 million.
Similarly, Rand developed estimates for four options to defend an
enlarged NATO that build upon one another, from only self-defense
support at a cost of $10,000 million to $20,000 million to the forward
deployment of forces in new member states at a cost of $55,000 million
to $110,000 million. These options include a middle option that would
cost about $42,000 million that was also based on a self-defense and
reinforcement strategy. Rand estimated that the United States would
pay $5,000 million to $6,000 million of this $42,000 million in total
costs.
Several factors account for the differences between DOD's estimates
and the CBO and Rand estimates, even those that employed defense
strategies similar to DOD's.
(Attachment III illustrates the major results and key assumptions of
the three estimates.)
CBO's cost estimate is significantly higher than DOD's for the
following reasons:
-- DOD assumed reinforcements of 4 divisions and 6 wings, whereas CBO
assumed a force of 11 2/3 divisions and 11 1/2 wings and a much larger
infrastructure for this force in the new member states.
-- CBO's modernization costs are much higher than DOD's and include
the purchase of 350 new aircraft and 1,150 new tanks for the new
member states. DOD assumed that about 25 percent of the new member
states' ground forces would be modernized through upgrades and that
each nation would procure a single squadron of refurbished Western
combat aircraft.
-- CBO assumed much higher training costs, $23,000 million, which
include annual, large-scale combined exercises. DOD included $2,000
million to $4,000 million for training.
-- CBO included the purchase of Patriot air defense missiles at a cost
of $8,700 million, which is considerably higher than DOD's assumed
purchase of refurbished I-HAWK type missiles at $1,900 million to
$2,600 million.
-- CBO's infrastructure costs were much higher than DOD's and included
new construction, such as extending the NATO fuel pipeline, which CBO
assumed would meet U.S. standards. DOD assumed planned refurbishment
of existing facilities that would meet minimal wartime standards.
Rand's cost estimate is somewhat higher than DOD's, although both were
based on similar threat assessments. First, its reinforcement package
was larger -- 5 divisions and 10 wings -- and therefore infrastructure
costs were higher. Second, it assumed new members would purchase the
more expensive Patriot air-defense system rather than the refurbished
I-HAWKs. Finally, it assumed greater training costs than did DOD. The
author of the Rand study stated that if he had used DOD's assumptions,
the cost range would have been almost identical to DOD's.
Mr. Chairman, this concludes my prepared remarks. I would be happy to
respond to any questions you or other Committee members may have.
ATTACHMENT I
NATO ENLARGEMENT TIMELINE
Date Activity
September 1995 NATO issues study on enlargement.
July 1997 NATO issues invitations to Poland,
Hungary, and the Czech Republic
to begin accessions talks.
October/November 1997 NATO prepares several reports:
-- additional military capability
requirements for existing alliance
members that will result from the
alliance's enlargement;
-- requirements for commonly
funded items in the new member
nations, including
-- infrastructure that will enable
the new allies to receive NATO
reinforcements in times of crisis,
-- communication systems between
NATO and their national
headquarters, and
-- a tie-in to NATO's air-defense
system;
-- cost estimates for items
eligible for common funding
presented by NATO officials; and
-- the capabilities and shortfalls
in the military forces of Poland,
Hungary, and the Czech Republic.
Early December 1997 NATO defense ministerial meeting
to approve the above reports.
Spring 1998 New members' force goals set.
June 1998 NATO decides whether or how
much to increase the common
budgets, which would then be
shared among current and new
members.
April 1999 Target date for new member
accession into NATO.
ATTACHMENT II
CATEGORIES AND SHARE OF COSTS
Dollars in billions (thousands of millions)
New Current
members' allies' U.S.
Cost category share share share Total
New members' $10 to 0 0 $10 to
military $13 $13
restructuring
and modernization
Current members' 0 $8 to $10 0 $8 to
reinforcement $10
Direct 3 to 4.5 4.5 to 5.5 $1.5 $9
to $2 to $12
$13 to $12.5 to $1.5 to $27
Total $17.5 $15.5 $2 $35
ATTACHMENT II
DOD, CBO, AND RAND ESTIMATES
Dollars in billions (thousands of millions)
Assumption DOD CBO RAND
Total cost $27-$35 in $61-$125 in $10-$110 in
constant constant constant 1996
1997 dollars 1997 dollars dollars ($42
($109 for a for a defense
defense strategy
strategy similar to
similar to DOD's)
DOD's)
U.S. cost $1.5-$20 $13.1(a) $5-6(a)
share
Notional new A small Poland Poland
NATO members group Hungary Hungary
(details Czech Republic Czech Republic
classified) Slovakia Slovakia
Time period 1997-2009 1996-2010 Approximately
1995-2010
Threat Low threat A resurgent Low threat(a)
assessment Russia(a)
Comparable 4 divisions/ 11.7 divisions/ 5 divisions/
force 6 wings 11.5 wings(a) 10 wings(a)
(a) These assumptions correspond to the estimate based on a defense
strategy similar to DOD's.
(end text)