United States General Accounting Office

GAO Report to Congressional Requesters

May 1998 NATO

History of Common

Budget Cost Shares

GAO/NSIAD-98-172

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-279904 

May 22, 1998

The Honorable Ted Stevens

Chairman

The Honorable Daniel K. Inouye

Ranking Minority Member

Subcommittee on Defense

Committee on Appropriations

United States Senate

The debate regarding the enlargement of the North Atlantic Treaty

Organization (NATO) raised questions about how NATO apportions costs

among its members for expenditures the organization has agreed to

commonly fund. This report responds to your request that we provide

information on how the apportionment of those shares has changed over

the years and identify how NATO determines what the members’ cost

shares will be for its three common budgets.

Background NATO member states provide resources to support the alliance in two ways.

First, countries, at their own expense, maintain forces and assets that they

pledge to NATO through a defense planning process. Second, countries

make contributions to NATO’s three commonly funded budgets. These three

budgets are the civil budget, which primarily funds the civilian

headquarters and personnel in Brussels, Belgium, for NATO’s political

structure (about $164 million planned for 1999); NATO’s military budget,

which primarily funds operations and maintenance for its military

headquarters and activities (about $720 million planned for 1999); and the

NATO Security Investment Program (NSIP) budget,1 which primarily funds

infrastructure improvements (about $734 million planned for 1999). Each

member contributes an established percentage of each budget. Changes to

the cost share require alliance consensus, as do all decisions in NATO.

Appendix I identifies the apportionment of current cost shares to NATO

members for each of the common budgets.

Results in Brief NATO does not routinely evaluate members’ cost shares for any of its three

commonly funded budgets. Rather, NATO has adjusted the shares based on

comprehensive reviews occurring at no specific interval and/or in

response to discrete events, such as entry of a new member. Cost shares

1

Prior to December 1994, the NSIP budget was known as the Common Infrastructure Program. For

ease of publication, this report will refer to the NSIP and its predecessor programs as the NSIP or

infrastructure budget.

Page 1 GAO/NSIAD-98-172 NATO
B-279904 

for the NSIP budget, most recently reviewed in 1990, have been subject to

comprehensive reviews more frequently than the civil budget—last

reviewed in 1955, or the military budget—last reviewed in 1966. NATO has

adjusted cost shares due to discrete events infrequently—in 1966, when

France withdrew from NATO’s military structure; in 1982, when Spain

joined NATO; and in 1994, when Canada sought to decrease its NSIP share.

NATO has used various methods to adjust cost shares. For example, in 1955,

NATO used expenditures to comprehensively review and adjust shares for

its civil and military budgets. In contrast, changes to NSIP cost shares in

1990 were based on negotiations among members that considered factors

such as each nation’s capacity to pay and the expected benefits from

NSIP-funded projects. NATO has also relied on negotiations to adjust cost

shares in response to discrete events. For example, when Spain joined

NATO in 1982, its share was determined through high-level negotiations and

the other members’ shares were adjusted on a prorated basis. In 1997, the

United States’ actual cost-share across all the common budgets was

28.45 percent.2

Comprehensive

Reviews of Cost

Shares

NATO’s review of cost shares related to the civil and military budgets have

similar histories from 1950 to 1965.3

 In 1951, NATO used a grouping method

whereby countries of similar economic strength or potential were assigned

identical cost shares derived from country contributions to the United

Nations and the predecessor to the Organization for Economic

Cooperation and Development. When the budget shares were reexamined

in 1952, the three largest countries (the United States, the United Kingdom,

and France) remained grouped and were assigned identical cost shares of

22.5 percent. However, the other countries’ cost shares were based on

their capacity to pay, that is, the relative size of their gross national

products (GNP). When NATO adjusted civil and military budget cost shares

in 1955, it used an expenditure-based method and agreed not to continue

reviewing cost shares annually. Under the expenditure method, NATO

determined each country’s actual expenditures for civil and military

budget expenses from 1950 to 1955 and then assigned each country a cost

share equal to its percentage of NATO’s total expenditures. Since 1955, the

civil budget has not been comprehensively reviewed and has remained

essentially unchanged; the military budget cost shares have been modified

once since then.

2

Effective U.S. cost shares for each commonly funded budget are shown in detail in appendix I.

3

Originally the civil budget had operating and capital elements with differing cost shares. The 1955

review resulted in assigning a single cost share per country for all elements of this budget.

Page 2 GAO/NSIAD-98-172 NATO
B-279904 

At the request of the United Kingdom, in 1965, NATO reviewed the cost

shares for the military budget. The United Kingdom believed that

economic changes in member countries in the previous decade,

particularly the uneven growth of GNP, would for reasons of equity warrant

a review of cost shares. Further, the United Kingdom asked that NATO take

into account member countries’ per capita GNP trends and global defense

efforts that could be regarded as serving the general interest of the

alliance. This review and the resulting negotiations were concluded in

January 1966, but very few changes in cost shares were made; for

example, the United Kingdom’s share was reduced by 1.28 percentage

points, from 19.5 percent to 18.22 percent. To allow for this change,

smaller adjustments were made in other countries’ shares. ( See app. II for

historic cost-share tables for the civil and military budgets.)

While the members’ cost shares for NATO’s civil and military budgets were

infrequently reexamined, the shares for its infrastructure budget were

looked at more often. The actual changes in cost shares resulting from

these reviews are documented, but the reasoning behind them is not.

In the early 1950s, sharing the costs of NATO’s infrastructure requirements

was the subject of annual negotiations; however, to avoid overly frequent

discussions of cost shares, NATO opted to review cost shares every few

years. According to officials at NATO, the last review of the infrastructure

cost shares occurred about 1990.

From NATO’s inception, the basic principle applied to infrastructure cost

sharing was to achieve as equitable a distribution as possible of the entire

NATO defense burden—including commonly funded infrastructure—among

members of the alliance. The main factors that underlie the negotiations

for an infrastructure cost-sharing arrangement are: (1) the capacity of the

member countries to contribute, (2) the advantage each country would

gain as a user of the facilities to be financed, (3) the net economic benefits

that would accrue to a host country from the construction of the facilities

on its soil, (4) the services each country renders to the common defense

interests of the alliance in ways other than infrastructure, and (5) various

political and economic factors. Since these guidelines for cost sharing are

broad and subject to wide interpretation, the setting of cost shares is

essentially accomplished through negotiations. Attempts have been made

from time to time to determine a cost-sharing formula on the basis of an

objective factor such as GNP or a combination of several such factors.

However, NATO has been unable to develop consensus on this issue. (See

Page 3 GAO/NSIAD-98-172 NATO
B-279904 

app. III for historic information on the NSIP and app. IV for current gross

domestic products (GDP) of alliance members.)

Event-Driven

Cost-Share Changes

Members’ cost shares for all of NATO’s common budgets have been affected

by specific events. For example, in 1966, France withdrew from the

alliance’s military structure; in 1982, Spain joined NATO;

4

 in 1994, Canada

unilaterally decided to reduce its participation in the NSIP by 50 percent;

and in 1999, the Czech Republic, Poland, and Hungary are expected to join

NATO.

Cost shares for the NATO budgets were adjusted in different ways in

response to these events. For example, when the French withdrew from

the military structure, France’s shares in the military and infrastructure

budgets were prorated among the remaining 14 nations.5

 When Spain

joined the alliance in 1982, other members wanted to base Spain’s

contribution on GDP and capacity to pay, which would have made its cost

share about 5 percent, more than the shares of Belgium or the

Netherlands. Spain believed, however, that since its GDP per capita was

lower than that of Belgium or the Netherlands, it should pay less than

5 percent. Through negotiations, it was determined that Spain’s share of

the civil and military budgets would be 3.5 percent.

In 1994, Canada unilaterally decided to reduce its contribution to the NSIP

budget by 50 percent. Canada did not formally request a renegotiation of

its cost share but, instead, negotiated separately with other members6

 to

assume a portion of its share and presented the results to the alliance.

NATO officials noted, however, that had Canada not been successful in

convincing other countries to assume that portion of Canada’s cost share,

Canada would have had to either maintain its contribution level or

withdraw from the alliance. No agreement has yet been reached on how

cost shares for existing members will change with the anticipated

accession of the Czech Republic, Hungary, and Poland to NATO in 1999.

These countries have agreed to cost shares of 0.9 percent, 0.65 percent,

and 2.48 percent, respectively.

4

Spain’s participation in the common budgets has evolved since joining the alliance in 1982. It has

always participated fully in the civil budget, and partially in the military budget. It had no participation

in the infrastructure program until 1994, and has indicated it will fully participate in the NSIP in 1999.

5

France did not withdraw from the alliance, and it continues to share in NATO’s civil budget. It also

continues to participate in some infrastructure projects and part of the military structure funded by the

military budget.

6

The United States, the United Kingdom, and Germany were not among these countries.

Page 4 GAO/NSIAD-98-172 NATO
B-279904 

Scope and

Methodology

To obtain information about how NATO member costs shares have changed

over the years, we interviewed officials from the Department of State; the

Office of the Secretary of Defense; and the U.S. Mission to NATO in

Brussels, Belgium. We also interviewed NATO international staff and

reviewed NATO documents. We collected and analyzed historical U.S. and

NATO documents and tables related to cost shares for each of the three

commonly funded budgets from 1951 to the present. We examined the

effects of various events, such as new accessions, on members’ cost

shares to explain these changes where possible. We reviewed Department

of State and U.S. Mission to NATO reporting cables, program and briefing

documents, and correspondence.

To identify how NATO determines what the members’ cost shares will be

for its three commonly funded budgets, we interviewed officials from the

Department of State, the Office of the Secretary of Defense, and the U.S.

Mission to NATO. We reviewed the various methods used to determine cost

shares from the inception of the alliance to the present and were briefed

by NATO international staff on the history and logic of those methods. We

collected and analyzed data on member countries economic indicators,

such as GDP and per capita GDP as expressed by purchasing power parity,

to understand the basis for some cost-share methods. We reviewed State

Department and U.S. Mission to NATO reporting cables that detailed the

negotiations for the invitation and accession of the Czech Republic,

Hungary, and Poland. In addition, this work built upon our prior work on

NATO enlargement issues.

We conducted our review between March and April 1998 in accordance

with generally accepted government auditing standards.

Agency Comments The Departments of State and Defense provided oral comments on a draft

of this report and concurred with our findings and conclusions.

Department officials indicated that the report provides a documented

record of the changes that occurred in how NATO costs have been shared

over the years, a history that had not been previously compiled.

We plan no further distribution of this report until 30 days after its issue

date. At that time, we will send copies of this report to the Secretaries of

State and Defense and appropriate congressional committees. Copies will

be made available to other interested parties upon request.

Page 5 GAO/NSIAD-98-172 NATO
B-279904 

Please contact me on (202) 512-4128 if you or your staff have any

questions concerning this report. The major contributors to this report

were Jim Shafer, Muriel Forster, and Hynek Kalkus.

Harold J. Johnson, Associate Director

International Relations and Trade Issues

Page 6 GAO/NSIAD-98-172 NATO
Page 7 GAO/NSIAD-98-172 NATO
Contents

Letter 1

Appendix I 

Current North Atlantic

Treaty Organization

Common Budget Cost

Shares

10

Appendix II 

Historic Information

About NATO’s Civil

and Military Budgets

12

Appendix III 

Historic Information

About NATO’s

Infrastructure Budget

14

Appendix IV 

Current Gross

Domestic Product for

NATO Members

15

Tables Table I.1: Current Cost Shares for NATO’s Common Budgets 11

Table II.1: Historic Cost-Share Changes to the NATO Civil Budget 12

Table II.2: Historic Cost-Share Changes to the NATO Military

Budget

13

Table IV.1: NATO Nations’ Estimated GDPs, Adjusted by PPP 15

Abbreviations

NATO North Atlantic Treaty Organization

PPP purchasing power parity

AWACS Airborne Warning and Control System

NSIP NATO Security Investment Program

GDP gross domestic product

GNP gross national product

Page 8 GAO/NSIAD-98-172 NATO
Page 9 GAO/NSIAD-98-172 NATO
Appendix I 

Current North Atlantic Treaty Organization

Common Budget Cost Shares

Not all North Atlantic Treaty Organization (NATO) members participate in

all aspects of the commonly funded budgets.1

 Although all 16 members

participate fully in the civil budget, Spain and France do not participate in

all aspects of the military budget or the NATO Security Investment Program

(NSIP). Further, the NATO Airborne Warning and Control System (AWACS)

program, funded through the military budget but with its own negotiated

cost shares, does not include France, Spain, and Iceland, and the United

Kingdom only partially participates in it. Finally, although Iceland is

counted as a participant in the NSIP, its cost share is zero. Table I.1 shows

the current cost shares for each member at each level of participation. In

1997, the actual cost shares for the United States were 23.35 percent for

the civil budget, since all 16 nations participate fully in this budget;

28.08 percent for the military budget, exclusive of the AWACS program;

41.48 percent for the AWACS program; and 26.46 percent of the NSIP budget.

The total U.S. cost share is 28.45 percent across all the budgets.

1

When a nation does not participate in some aspect of a budget, its cost share is apportioned among

those participating.

Page 10 GAO/NSIAD-98-172 NATO
Appendix I 

Current North Atlantic Treaty Organization

Common Budget Cost Shares

Table I.1: Current Cost Shares for NATO’s Common Budgets

AWACS

Civil

budget Military budget

NATO Security Investment

Program

Numbers in percent

Country

At

16a

At

16a

At 15b

France

At 15c

Spain

At

14d

At

13e

At

12f

At

16a

At 15b

France

At 15c

Spain

At

14d

United States 23.35 24.12 25.00 28.89 30.16 32.62 41.53 23.27 24.06 26.77 27.82

Belgium 2.76 2.85 2.95 3.41 3.56 2.66 3.39 4.13 4.26 4.76 4.96

Canada 5.60 5.60 5.80 6.71 6.99 7.40 9.43 2.75 2.80 3.00 3.20

Denmark 1.59 1.68 1.74 2.01 2.10 1.57 2.00 3.33 3.42 3.79 3.94

France 16.50 16.50 17.10 g g g g 12.90 13.34 g g

Germany 15.54 15.54 16.10 18.61 19.42 22.10 28.14 22.40 23.16 25.74 26.76

Greece 0.38 0.38 0.39 0.46 0.47 0.49 0.62 1.00 1.01 1.05 1.07

Iceland 0.05 0.04 0.05 0.05 0.06 g g 0 0 0 0

Italy 5.75 5.91 6.12 7.08 7.38 5.71 7.26 7.75 8.09 9.10 9.40

Luxembourg 0.08 0.08 0.09 0.10 0.11 0.08 0.11 0.20 0.21 0.23 0.24

Netherlands 2.75 2.84 2.94 3.40 3.55 2.94 3.75 4.58 4.72 5.27 5.48

Norway 1.11 1.16 1.20 1.39 1.45 1.15 1.46 2.83 2.94 3.27 3.38

Portugal 0.63 0.63 0.65 0.75 0.78 0.55 0.70 0.35 0.37 0.39 0.41

Spain 3.50 3.50 g 4.19 g g g 3.29 g 3.78 g

Turkey 1.59 1.59 1.65 1.90 1.99 1.28 1.63 1.04 1.08 1.13 1.17

United Kingdom 18.82 17.58 18.22 21.05 21.98 21.45 g 10.19 10.54 11.72 12.18

Total 100 100 100 100 100 100 100 100 100 100 100

Legend

AWACS = Airborne Warning and Control System

Note: Totals may not add due to rounding.

aCost share when all 16 members of the alliance participate.

bCost share when France participates and Spain does not.

cCost share when Spain participates and France does not.

dCost share when both Spain and France do not participate.

eCost share for AWACS when Spain, France, and Iceland do not participate but the United

Kingdom does participate.

f

Cost share for AWACS when the United Kingdom, Spain, France, and Iceland do not participate.

gCountry does not participate.

Source: NATO.

Page 11 GAO/NSIAD-98-172 NATO
Appendix II 

Historic Information About NATO’s Civil and

Military Budgets

Table II.1 provides information on the methods used and the cost shares

agreed to for the civil budget. Initially, NATO attempted to revise these

shares annually; however, from 1952 through 1954, the alliance was unable

to agree on any changes. The 1955 cost-sharing formula was permanently

adopted, barring the intervention of new factors.

Table II.1: Historic Cost-Share Changes to the NATO Civil Budget

Grouping Grouping and capacity to pay

1951 1952 1955 1982

Numbers in percent

Country Current Capital Current Capital

Expenditure and

addition

of Germany

Spain negotiated

and others

prorated

United States 22.50 40.00 22.50 45.00 24.20 23.35

United Kingdom 22.50 22.50 22.50 22.50 19.50 18.82

France 22.50 17.00 22.50 10.73 17.10 16.50

Germany 16.10 15.54

Canada 8.00 5.10 10.00 6.70 5.80 5.60

Italy 8.00 5.10 7.65 5.36 5.96 5.75

Spain 3.50

Belgium 5.00 3.10 4.00 2.68 2.86 2.76

Netherlands 5.00 3.10 3.50 2.18 2.85 2.75

Denmark 2.00 1.30 2.25 1.51 1.65 1.59

Turkey 2.12 1.42 1.65 1.59

Norway 2.00 1.30 1.30 0.84 1.15 1.11

Portugal 2.00 1.30 1.00 0.64 0.65 0.63

Greece 0.50 0.33 0.39 0.38

Luxembourg 0.25 0.10 0.13 0.08 0.09 0.08

Iceland 0.25 0.10 0.05 0.03 0.05 0.05

Total 100 100 100 100 100 100

Source: NATO.

Page 12 GAO/NSIAD-98-172 NATO
Appendix II 

Historic Information About NATO’s Civil

and Military Budgets

Table II.2 details methods used and the cost shares agreed to for the

military budget, with all members participating. These shares were

identical to the civil budget until 1966, when new cost shares resulted from

a request by the United Kingdom to renegotiate military budget cost

shares. The United Kingdom based its argument on its weaker gross

national product (GNP) growth over the preceding decade compared to

most other member countries.

Table II.2: Historic Cost-Share Changes to the NATO Military Budget

1951

1952

1955

1966

1982

Numbers in percent

Country Grouping

Grouping and

capacity to pay

Expenditure

and addition

of Germany Renegotiation

Spain negotiated

and others

prorated

United States 22.50 22.50 24.20 25.00 24.12

United Kingdom 22.50 22.50 19.50 18.22 17.58

France 22.50 22.50 17.10 17.10 16.50

Germany 16.10 16.10 15.54

Canada 8.00 10.00 5.80 5.80 5.60

Italy 8.00 7.65 5.96 6.12 5.91

Spain 3.50

Belgium 5.00 4.00 2.86 2.95 2.85

Netherlands 5.00 3.50 2.85 2.94 2.84

Denmark 2.00 2.25 1.65 1.74 1.68

Turkey 2.12 1.65 1.65 1.59

Norway 2.00 1.30 1.15 1.20 1.16

Portugal 2.00 1.00 0.65 0.65 0.63

Greece 0.50 0.39 0.39 0.38

Luxembourg 0.25 0.13 0.09 0.09 0.08

Iceland 0.25 0.05 0.05 0.05 0.04

Total 100 100 100 100 100

Source: NATO.

Page 13 GAO/NSIAD-98-172 NATO
Appendix III 

Historic Information About NATO’s

Infrastructure Budget

In 1951, NATO inherited its infrastructure program from the Western Union

Defense Organization. Initially the program’s cost shares were negotiated

annually for groups of projects; however, to manage the financing of these

projects more efficiently, cost shares for multiyear programs were

adopted. According to officials at NATO, from the mid-1950s until 1990,

NATO reviewed infrastructure cost shares about every 5 years.

The effective U.S. cost share for infrastructure projects has been reduced

from over 43 percent in 1960 to under 27 percent in 1997. The U.S. share in

percentage terms has been affected by both permanent reductions in the

established U.S. cost share and by other means. Due to the nature of the

program, effective costs for a member can be changed without

permanently adjusting the cost share. For example, between 1971 and

1975, NATO implemented the European Defense Improvement Plan. This

plan funded infrastructure projects to improve physical protection

installations for aircraft on NATO airfields. It was financed by a one-time

special European contribution from member nations except Canada,

France, Portugal, and the United States. Between 1975 and 1979, NATO

implemented the United States Special Program, which was designed to

reduce to 20 percent the effective U.S. cost share by the allocation of a

small portion of infrastructure funds to special U.S. projects. These

projects were generally not eligible for infrastructure funding. This group

of projects was funded by all members except Turkey. The effective U.S.

cost share will also decrease due to the greater participation in the military

aspects of the alliance and infrastructure projects by Spain and possibly

France.

Page 14 GAO/NSIAD-98-172 NATO
Appendix IV 

Current Gross Domestic Product for NATO

Members

Table IV.1 presents all NATO nations’ gross domestic products (GDP)

converted into dollars through the use of purchasing power parity (PPP).

PPP is a technique using standardized international dollar price weights

applied to the quantities of goods and services produced in an economy,

rather than using exchange rates to compare economies. We are

presenting this information because GDP is an economic indicator that has

been considered when assessing a nation’s capacity to pay in alliance

cost-share negotiations. For example, GDP was used in negotiations on cost

shares with Spain in 1982.

Table IV.1: NATO Nations’ Estimated

GDPs, Adjusted by PPP (1996) Dollars in billions

Country PPP GDP

Percent of total

NATO PPP GDP

United States $7,610 48.99

Germany 1,700 10.94

France 1,220 7.85

United Kingdom 1,190 7.66

Italy 1,120 7.21

Canada 721 4.64

Spain 593 3.82

Turkey 379 2.44

Netherlands 318 2.05

Belgium 205 1.32

Portugal 122 0.79

Denmark 118 0.76

Norway 114 0.73

Greece 107 0.69

Luxembourga 10 0.06

Iceland 5 0.03

Total $15,532 100

Note: Totals may not add due to rounding.

aLuxembourg’s GDP is based on a 1995 estimate.

Source: The World Factbook 1997.

(711332) Page 15 GAO/NSIAD-98-172 NATO
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