NATO Common Funds Burdensharing: Background and Current Issues
Released: 2012-02-15T00:00:00

Introduction

Members of the North Atlantic Treaty Organization (NATO) contribute to the alliance in various ways. The most significant means by far is through funding, in their individual national defense budgets, the deployment of their respective armed forces in support of NATO missions. As the alliance has undertaken enlargement in the post-Cold War period, current member countries have been providing bilateral assistance to prospective future members to assist them in modernizing their forces and making them interoperable with other NATO militaries. Defense analysts point out that the NATO allies also contribute to mutual security in many other ways.

Several NATO activities, however, are coordinated and conducted by the alliance's headquarters in Brussels. These operations are directly funded by three common accounts: the NATO Military Budget, the NATO Civil Budget, and the NATO Security Investment Program (NSIP). The funds are maintained by direct contributions from NATO's member states. Individual shares of the civil and military budgets remained unchanged for decades, while NSIP shares were adjusted every few years based upon relative gross domestic product (GDP), per capita GDP, and several other factors. In 2005, members negotiated new burdensharing arrangements for all three funds—for all countries except the United States.

Twice a year, ministers of NATO member countries provide guidance on general use of NATO resources. But the actual management of the accounts is conducted by various separate committees. As their names imply, the three funds are responsible for separate, but often complementary, activities.

NATO Civil Budget

The NATO civil budget supports the alliance's Brussels headquarters and its international civilian staff, which is responsible for policy planning of operations and capabilities, liaison with non-alliance partner countries, and public diplomacy aimed at building international support for the alliance. NATO's international staff is headed by the Secretary General's office, and consists of civilian employees of member countries, often provided to NATO on three- to four-year details. Among other activities, this staff supports the work of the North Atlantic Council (the governing body of the alliance) and its more than two dozen committees.

The civil budget covers standard administrative tasks, such as personnel, travel, communications, utilities, supplies and furniture, security, and the NATO headquarters project, for which construction began in 2010. In addition, this budget is used for several program activities, including public information, civil emergency planning, and the work of the science committee.

The civil budget also has funded the non-military aspects of structures related to enlargement, including the Partnership for Peace (PfP) program and the Euro-Atlantic Partnership Council (EAPC). The civilian side of these bodies sponsors activities intended to strengthen European security through creating stronger political and economic systems in former communist countries. In addition, the civil budget funds activities related to the Mediterranean Dialogue, the NATO-Russia Founding Act, the NATO-Ukraine Charter, as well as relations with the European Union.

NATO's civil budget is financed by all member states, usually through their ministries of foreign affairs. The U.S. contribution is provided through the State Department's budget (Contributions to International Organizations). The U.S. current assessment is 21.7394%. In FY2010 through FY2012, the U.S. contributed $81.9 million, and $79.7 million, and $82.4 million, respectively. The Obama Administration requested a total of $68.8 million in its FY2013 budget.

NATO Military Budget

NATO's military budget is, in most years, the largest of the three accounts. More than half of this fund is used to pay for operational and maintenance costs of the international military staff, its headquarters in Mons, Belgium, and subordinate commands in different NATO geographical areas, including the Allied Command Operations (ACO) in Casteau, Belgium, and the Norfolk, VA-based Allied Command Transformation (ACT). This budget also covers the cost of administering the alliance's military-related activities and organizations, including the international military headquarters; the Airborne Early Warning and Control System (AWACS) fleet operations, which accounts for a significant portion of the U.S. share; the NATO pipeline (referred to as the Central European Operating Agency); and the Maintenance and Supply Agency.

The level of the NATO military budget is reviewed and approved annually by the North Atlantic Council. Individual member state contributions to the budget are based on a cost-sharing formula. According to DOD, "The U.S. Ambassador to NATO and the Office of the Secretary of Defense are responsible for negotiating the cost share with NATO." The U.S. contribution to NATO's military budget is provided through the Department of the Army's Operations and Maintenance account (Support for Other Nations). The U.S. share is approximately 25%. In FY2010 through FY2012, the U.S. contributed $425.3 million, $462.5 million, and $449.9 million, respectively. The Obama Administration requested $443.0 million in its FY2013 budget.

NATO Security Investment Program

Formerly known as the NATO Infrastructure Fund, this program in the past was responsible chiefly for funding military installations and construction projects. In May 1993, the functions of the program were changed significantly to reflect the alliance's post-Cold War security policy. Known since December 1994 as the NATO Security Investment Program (NSIP), the fund's activities have been steered away from a static defense posture, appropriate to countering a possible Warsaw Pact invasion, toward crisis control, anti-terrorism, and other tasks that require more rapid force mobility and flexibility.

Accordingly, the NSIP budget now involves the collective financing of a wide variety of NATO support functions, including, for example command, control, communications, and information hardware and software; surveillance and intelligence capabilities; logistics activities; harbors and airfields; training installations; transportation; and storage facilities for equipment, fuel, and munitions. Its work is managed by the NATO Infrastructure Committee, and individual projects are implemented by host countries or NATO agencies or commands. In light of fiscal constraints being experienced by all nations in the wake of the global financial crisis, "NATO has had to postpone many long-term defense investment requirements, focusing instead on requirements for Active operations and Missions (notably Afghanistan)." The Alliance Global Hawk unmanned reconnaissance aircraft being used in Afghanistan is one such priority project.

Because NSIP projects may be located in any of the member countries, this program has tended to be somewhat more politically sensitive than the other two. Infrastructure and other NSIP projects are decided upon through a priority planning process. Specific projects are generally awarded on the basis of competitive bidding, and, once completed, undergo NATO-controlled inspection and auditing.

According to the U.S. Department of Defense (DOD), the focus on new NATO missions and the resultant redirection of NSIP activities have been relatively advantageous for the United States. Among other benefits, a change made in May 1993 to the "program's funding criteria for facilities construction and restoration all but eliminates NATO facility funding for the European allies but continues full support for U.S. requirements at European bases." NSIP also helps fund U.S. storage facilities in Europe, as well as U.S.-based facilities for American reinforcement forces assigned to NATO. DOD has noted that the United States has benefitted from NATO infrastructure support for several military operations, including the 1986 air strike on Libya, Desert Storm, Provide Comfort, Deny Flight, peacekeeping activities in the Balkans, as well as military operations in Afghanistan and training in Iraq. Finally, the Pentagon notes that U.S. companies have been successful in bidding on NSIP contracts.

In the 1990s, NSIP funding shortfalls were an issue. According to DOD, Congress had "substantially reduced the Department's budget request ... [and] a large number of U.S.-unique projects could not be considered for NATO funding." Pentagon officials state that in the post-9/11 defense budget environment, this has ceased to be a problem.

NSIP is used in support of out-of-area NATO military missions. The U.S. Department of Defense notes that "the highest Alliance priority [for the program] is to support on-going military operations in Afghanistan, the Balkans, and Iraq." Defense officials note further that NSIP pays for projects that would otherwise be paid for by the United States alone, or be cancelled for lack of funds. They emphasize that "U.S. credibility, as well as the ability for NATO to make payments to U.S. contractors for NATO-awarded projects and urgently needed U.S. operational support facilities, is directly related to the [U.S. Defense] Department's ability to secure appropriations that will satisfy its prorated share of NATO contributions."

With the addition of two new members (Albania and Croatia), and the reappearance of France in the alliance's integrated military command structure in 2009, the current U.S. share of the NSIP projects is 22.2%, which represents a slight decrease from earlier years. The United States provides funds to NSIP annually through the military construction appropriations. According to the U.S. Department of Defense Budget Justification for FY2013,

Based on the existing cost sharing agreement and budgeted exchange rates, the U.S. cost share of the NSIP for FY2013 is $264.4 million. Approximately $10.2 million of the total FY2013 program is expected to be available from recoupments of prior year work funded by the U.S. Applying this amount toward the requirement of $264.4 million decreases the need for appropriation in FY2013 by a corresponding amount since this is an alternate source of funds. The FY2013 request for new appropriation is $254.2 million.

Common Funds Burdensharing Issues

The majority of NATO-related expenses incurred by member states arises from the deployment of their own armed forces. For this reason, the burdensharing debate in the United States has tended to focus not so much on NATO's common funds, but rather on the extent to which established allies have been restructuring their forces and acquiring new military capabilities that enable them to respond to both NATO's traditional Article V, as well as its new, non-Article V missions—particularly Afghanistan—and on the ability and willingness of the newer members to modernize their militaries, make them interoperable with alliance standards, and develop niche capabilities.

As noted above, the three NATO common accounts are funded by contributions from the member states. How have these national shares been determined in the past? The 2001 NATO Handbook noted that

[b]y convention, the agreed cost-sharing formulae which determine each member country's contributions are deemed to represent each country's "ability to pay". However the basis for the formulae applied is as much political as it is economic.

In May 1998, the U.S. Government Accountability Office (GAO), responding to a congressional request, issued a report on the history and apportionment of NATO common funds shares. According to GAO, NATO cost shares had not been reviewed regularly, but had been changed in response to requests from individual member states, or to major events, such as changes in membership. Like all NATO decisions, burdensharing arrangements are based upon members' consensus.

NATO has revised relative member contributions based on "event-driven" changes. The GAO cited the following: (1) the 1966 French withdrawal from the military command, described below; (2) the admission of Spain in 1982 (to which could be added the more recent enlargements in 1999, 2004, and 2009), for which shares were renegotiated among all members; and (3) Canada's 1994 unilateral 50% reduction of its NSIP contribution, for which several European member countries agreed to defray the cost among themselves.

In addition to changes caused by specific events, the alliance has periodically subjected shares to comprehensive reviews. In the early years of NATO, the alliance agreed to split up members' shares by grouping countries according to their economic strength, and then assigned members within the different groups identical shares, referencing those countries' contributions to the United Nations. In 1952, the three largest member states (the United States, the United Kingdom [U.K.], and France) each paid 22.5% of the budget, while the other nine founding member countries (plus Greece and Turkey, which joined in February 1952) were assessed according to their ability to pay (i.e., their relative GDP). In 1955, NATO determined that each country's future contribution would be based on its average past expenditures for the civil and military budgets, and also agreed not to continue to review cost shares annually. Since then, relative shares of the civil account have remained unchanged.

The military account was revisited in 1965, when the U.K. requested a review of that budget to take into account changed relative economic conditions among member states. The following year, France withdrew from the NATO military structure, and reduced its contributions (since made on a unilateral, ad hoc basis); this change was accommodated by prorating shares among the other members. The net effect of both the British-requested review and the partial French pullout was a small redistribution of shares of the military budget.

Shares of the NSIP account have been examined somewhat more frequently. The changes have been made through negotiations, but the complete rationales behind the share revisions have not been made public. According to GAO, the alliance has sought to achieve an equitable distribution of NSIP cost shares by considering several factors: (1) members' capacity to pay; (2) benefits of use of NSIP projects that accrue to individual members; (3) economic benefits of construction of NSIP projects in member countries; (4) non-infrastructural security contributions made by individual countries; and (5) "various political and economic factors." In addition, the alliance reportedly takes into account the scope and sophistication of member nations' defense industries. These criteria are not, of course, fully quantifiable; NATO has sought to develop such hard-and-fast, objective guidelines, but has been unable to achieve consensus. Therefore, GAO concluded, "the setting of cost shares is essentially accomplished through negotiations." NSIP cost shares were last reviewed and revised in 1990. However, in early 2004 the alliance's European members agreed to standardize the percentages that each participating nation contributes to the military budget and NSIP.

When burdensharing contributions are negotiated, the alliance reportedly has taken into consideration the United States' worldwide security responsibilities. For example, the 2003 U.S. contribution to the NSIP budget was 23.8%—not too far above Germany's 19.8%. But that same year, U.S. GDP was $10.3 trillion, while the combined GDP of the other 18 NATO allies was $8.9 trillion. If NATO common funds assessments were based solely on GDP, the U.S. share that year would have been 53.6% and Germany's would have been 9.8%.

In addition, policy analysts long have argued that alliances save money. The 2001 NATO Handbook , for example, noted that "to arrive at a meaningful conclusion" on the cost of belonging to the alliance, "each member country would have to factor into the calculation the costs which it would have incurred, over time, in making provision for its national security independently or through alternative forms of international cooperation."

Nonetheless, the total size and individual shares of the common funds have been the subject of discussion in recent years. Prior to the 1999 enlargement, analysts estimated the cost of adding new members at between $10 billion and $125 billion, depending upon different threat scenarios and accounting techniques. Some Members of Congress expressed concern over these cost projections and were also worried that the United States might be left to shoulder a large share of the expenditures; they questioned whether existing burdensharing arrangements should continue and suggested that the European allies should be encouraged to assume a larger financial share for the security of the continent. However, a NATO study estimated that enlargement would require only $1.5 billion in common funds expenditures over 10 years, and a Pentagon study concurred. It was further forecast that the 2004 round of enlargement would cost a similar amount, "with greater benefits" to U.S. security. Furthermore, the addition of 10 new contributors to the NATO common funds actually reduced the percentage shares of the established members—including the United States.

In preparation for the Bucharest summit in April 2008, NATO staff prepared estimates of the total cost and the cost-sharing implications of a new round of enlargement. NATO staff concluded, and allies informally agreed, that the methodologies and assumptions used to estimate costs and cost sharing arrangements in prior rounds of enlargement were still valid, and that the addition of new members in 2009 would not entail significant costs. The main expenses likely to be charged directly to the alliance's common military budget would be for air defense upgrades, improvement of in-country facilities (mainly airfields for deployment), and the procurement of secure communications between NATO headquarters in Brussels and Mons, and capitals of the new member countries. Any other common-funded projects in new members states would be assessed and funded in terms of their contributions to NATO capabilities or support to ongoing missions and are not directly attributable to enlargement.

In mid-2005, after reviewing existing burdensharing arrangements, NATO's Senior Resource Board recommended a new formula that seeks to be "fair, equitable, stable, and objectively based, ... [with] an automatic mechanism for regular updates." The new formula excludes from its calculations the United States, which negotiated a ceiling for its cost share percentages at the existing rate. The allies also agreed that if new members join the alliance, U.S. contributions would decline on a pro rata basis.

The new pro rata apportionment will apply to cost shares after the limited U.S. share has been subtracted. The military and NSIP budgets would be similarly adjusted to account for French participation. The formula is being based on gross national income (GNI) data, representing an average of figures using current prices and data measuring purchasing power parity, both taken from the World Bank's World Development Indicators . The formula will use a two-year rolling average of each country's GNI to smooth out annual fluctuations. The revised cost share plan was introduced in January 2006, and is being gradually phased in over a 10-year transition period.

After additional review, NATO staff recommended in mid-2006 that future burdensharing arrangements take into account several other factors besides GNI, including nationally provided staffing for critical NATO operational activities, NATO Airborne Early Warning, benefits from NSIP and other projects, and NATO staffing levels. It was recommended that NATO biennially review each nation's contributions to specified NATO operations over the previous four years and adjust the final share according to those contributions.

In addition, during their February 2010 meeting, NATO defense ministers approved measures aimed at balancing the alliance's budget, and also "committed to inject additional resources into the budget this year, as well as to modernise how NATO does its budgeting and looks for savings where it can."

During its November 2010 summit in Lisbon, NATO member states agreed to the acquisition of a new capability: ballistic missile defense. Secretary General Rasmussen stated that the territorial missile defense plan would cost an estimated 200 million euros (about $260 million) over 10 years. This amount was characterized as an additional expenditure for upgrading the alliance's existing ALTBMD (Active Layered Theatre Ballistic Missile Defense) program, which is expected to cost approximately 800 million euros (approximately $1 billion) over 14 years. The outlays for both programs are to be borne among all member states, and will be funded from the common NATO budget. In addition, individual countries will be responsible for supporting the deployment of their own ship- or land-based interceptors and sensors. However, in December 2010, a NATO-mandated industry advisory group reportedly concluded in an internal study that the cost could far exceed the early estimate. Inside the Army quoted the group's report as stating that "[w]hile NATO publicly envisages relatively benign cost for currently assumed territorial missile defence functionalities as add-on to the [existing theater-level missile defense] programme, it is obvious that a new, open [command-and-control] architecture approach will require a significant investment by NATO."

In recent years, questions concerning the level and shares of the three NATO common funds have received relatively little attention from U.S. policymakers and the media. The focus has instead been on (1) specialized capabilities that new and existing members can bring to the alliance, (2) member states' willingness to contribute military assets to alliance operations, particularly in Afghanistan, and (3) operational restrictions (known as caveats) that member states place on their national contingents. In a November 2010 article, The Economist stated that

the Americans (and those like the British, the Canadians, and the Danes who have taken disproportionately heavy casualties) have been frustrated by the reluctance of some countries to put their forces in harm's way and by the maddening caveats that dictate their rules of engagement. One NATO insider observes that such problems arise not always because those allies 'are chicken, but because they don't have the right equipment for war-fighting conditions'. That is no less damning a criticism, reflecting the toll on the alliance's fighting capability of inadequate or poorly conceived defence spending by too many of its members ... ."

The 112 th Congress may review the new common funds burdensharing arrangements—as well as U.S. contributions to the NATO budgets—in the context of the Defense Department and State Department appropriations.