The Significance of the 2014 ROK-U.S. Defense Cost-sharing Agreement. and Relevant Issues

Transcription

1 ISSUE 95 March 12, 2014 The Significance of the 2014 ROK-U.S. Defense Cost-sharing Agreement and Relevant Issues By Paek, Jae-ok (Ph.D.) Center for Defense Management Korea Institute for Defense Analyses (KIDA) Until 1991, the Republic of Korea (ROK) and the United States (U.S.) took responsibility for their respective share of the cost of stationing the USFK as indicated by Article 5 of the Status of Forces Agreement (SOFA signed in 1966). 1. However, since 1991, the cost of stationing the USFK has been shared based on the Special Measures Agreement (SMA), and the defense cost-sharing arrangement between the two countries is decided after in-depth negotiations that take into account the views of both countries. This year (2014), the Eighth SMA (2009~2013) is to be replaced by the Ninth SMA (2014~2018), over which the two countries have engaged in arduous negotiations for the past few months. The bill that was drafted after the two sides reached an agreement was submitted to the ROK National Assembly for ratification in February this year. Under the Ninth SMA, the ROK government takes responsibility for the costs involved in labor, military construction, and logistics support. Regarding labor expenses, the number of Koreans employed by the USFK came to about 8,600 in 2013, and the ROK is responsible for 1. SOFA, Article 5 (Facilities and Areas Cost and Maintenance) 1..the United States will bear without cost to the ROK all expenditures incident to the maintenance of the US armed forces in the ROK. 2. the ROK will furnish without cost to the US all facilities and areas and rights of way. 1

2 about 71% of all labor expenses associated with these employees. Military construction refers to the support of construction of non-combat facilities for the USFK, such as barracks and environmental facilities. The Combined Defense Improvement Project (CDIP), under the military construction category, refers to the provision of combat facilities and combat service support facilities, including runways and ammunition storage facilities. The CDIP was implemented in 1974 and most of its requirements have been met. Originally, it was a separate project, but its distinction from the category of military facilities was not clear. Hence, it was integrated into the military construction category in Starting with the Eighth SMA (2009~2013), the nature of military construction was changed from cash support to in-kind support. Through this change, the U.S. (Far East District of the US Army Corps of Engineers) came to be in charge of design and supervision, while the ROK assumed the responsibility for placing project orders, making contracts, and carrying out contract work. Under the Eighth SMA, in-kind support of military construction comes to 88% of the total support, and the remaining 12%, concerning design and supervision, is paid in cash by the ROK to the U.S. The logistics support includes U.S.-related ammunition management support and USFK-related logistics support. The main parts of the U.S.-related ammunition management support include the Single Ammunition Logistics System-Korea (SALS-K) and the Munitions Activities Gained by Negotiation of US-ROKAF Memorandum of Understanding (MAGNUM). The USFK-related logistics support includes maintenance of equipment (such as airplanes, combat equipment, and general-purpose equipment), transportation support (road and rail transportation of personnel, equipment, and supplies), purchase of equipment/supplies (such as generalpurpose/special-purpose vehicles, vehicle parts, and general-purpose consumables), war reserve stock for allies (WRSA) management (management of reserved equipment and supplies kept in both ROK-U.S. joint bases and U.S. bases), and oil stockpile and supply support. As for the ROK s provision of support in this category, the ROK pays any expenses incurred by the USFK s performance of its duties through ex post facto settlement. Under the Eighth SMA (2009~2013), the ROK s share of the defense cost supporting the USFK in 2009 stood at 760 billion Korean won. The two countries agreed that the amount for the following years would be limited to an increase of 4% a year, taking into account the consumer price index (CPI). Actually, in the period between 2011 and 2013, the budget was drawn up with a reduction of billion Korean won from the original budget due to funds carried forward each year in the process of implementing defense cost-sharing. However, the ROK must pay the said amount upon request from the U.S. Despite this reduction, the amount of defense cost-sharing funds remaining unspent came to 710 billion Korean won as of the end of 2

3 August This amount has accumulated due to delays in the implementation of military construction projects, the cost of which was paid in cash prior to the Eighth SMA. <Table 1> Status of amount of defense cost-sharing under the Eighth SMA (2009~2013) (Unit: hundreds of millions of Korean won) Total Labor expenses Military construction Logistics support Reduced amount Percentage of ROK s defense expenditure (%) ,600 3,221 2,922 1, ,904 3,320 3,158 1, ,125(7,325) 3,386 3,333(3,033) 1,406(906) ,361(7,461) 3,357 3,702(2,502) 1,302(1,602) ,695(7,360) 3,340 3,850(2,615) 1,505(1,405) -1, Figures in ( ) refer to the reduced budget allocation from the defense budget for the relevant year, not negotiated amounts of defense cost-sharing. The average annual rate of increase in the ROK s share of the defense cost has been quite high. The rate of increase from the First through to the Fifth SMA is particularly high, due to the method used to determine the ROK s portion of the cost. During the First and Second SMA, the ROK bore a third of the won-based costs (WBC), but from the Third to the Fifth SMA, an index-based method of determining the share of the defense cost was adopted. As a result, the ROK s share of the defense cost increased at a rate in the double-digits. The won-based costs (WBC) and index-based methods had been used upto the fifth SMA, but none of those had been determined by specific requirements of the USFK s stationing cost. Since the sixth SMA, the gross settlement method has been applied on the defense cost sharing negotiation. The gross settlement method is a method of negotiating defense costsharing. It assumes that a gross settlement made in previous SMA as a rational settlement and sets it as a starting point of a negotiation. However, the gross settlement method does not verify actual costs by each supporting category. 3

4 <Table 2> Changes in defense cost-sharing for the USFK 1st/ 2nd Period 1991~1995 3rd 1996~1998 4th 1999~2001 5th 2002~ th 2005~ th 2007~ th 2009~2013 Description The ROK paid up to 300 million US dollars by 1995, which was subject to incremental increases The ROK paid a third of won-based costs (WBC) Amount determined by annual negotiations 10% increase every year based on US dollars A package fixing the amount of defense cost-sharing for three years, the first decision of its kind Real economic growth rate + price increase rate Start of payment in Korean won (after 1998) 8.8% + GDP deflator increase percentage Expansion of the portion to be paid in Korean won Gross settlement method; payment of total amount in Korean won MOFAT(Ministry of Foreign Affairs and Trade; former MOFA) played a key role in negotiations Gross settlement method (with price increase rate taken into account) Gross settlement method (with price increase rate taken into account, limited to up to 4% a year) Phased in-kind payment for military construction (88% in 2011) Acceptance of SMA-LPP transfer Average rate of increase (%) (Frozen) The negotiations over the defense cost-sharing for this year were concluded on January 11, 2014, with the two countries consenting to a draft agreement that stipulates the amount to be paid by the ROK (920 billion Korean won in total) and is effective for five years ( ). The draft says that the total amount to be paid by the ROK will be set based on the amount of the previous year plus the CPI of the year before that and will be paid each year during the period from 2015 to 2018, but not exceeding an increase of 4% a year. Defense costsharing has always been a focal point of the bilateral negotiations, and the amount for 2014 was set at 920 billion Korean won, representing a 5.8% year-on-year increase. This amount was reached through strategic concessions made by both sides; the U.S. got the portion of the defense cost that it aimed for, and the ROK secured the transparency that it sought. 4

5 The two countries also agreed to several controversial improvements in the defense costsharing system. The five main improvements include stronger pre-coordination in the cost allocation stage; establishment of a pre-consultation system for military construction; alleviation of difficulties experienced by Korean SMEs involved in logistics support; efforts made to promote the welfare of Korean employees hired by the USFK as well as to increase transparency in labor expenses; and strengthening transparency through reports made to the ROK National Assembly in the process of drawing up the budget for defense cost-sharing and settlement. In fact, the largest issue concerning the Ninth SMA was the need for improvement in the way defense costs are managed rather than the amount of cost-sharing funds itself. In past negotiations over defense cost-sharing, the two countries concentrated on the amounts involved, but many problems regarding the management of defense cost-sharing funds were pointed out in 1991 and following years. The need for improvement in this regard emerged as a more urgent and important issue than merely the amount of defense cost-sharing funds. The Eighth SMA (2009~2013) stipulated the shift from cash payment to in-kind payment for military construction in consideration of the issues that had previously been pointed out. This served as the starting point for improvement in the management of defense cost-sharing funds. In fact, neither side would benefit from maintaining the existing management method. Even a penny of defense costsharing funds should not be free money, as the U.S. Senate Committee on Armed Services pointed out last year. Related to the management of defense cost-sharing funds, the strengthening of transparency and accountability is an urgent matter. Two steps should be taken to address this pressing issue: the U.S. should take voluntary measures to deal with this issue, and the ROK should be allowed to play a leading role in issues related to the management of defense costsharing funds. The agreement made by the two countries this time around is focused on the former of these two recommended steps. Concerning the recent agreement, MOFA said that it is satisfied with this first step and that now the time has come to put those ideas into practice. The two countries, particularly the United States, should make sincere efforts to realistically and effectively implement the measures. For example, the Eighth Memorandum on In-kind Support, signed in March 2009, stipulates that the United States shall consult with the ROK concerning the order of priority of military construction projects, but the stipulation was not fully complied with. From now on, the two countries should make continuous efforts to reach a settlement regarding the system for inkind support for military construction. The need for the ROK to play more of a leading role in the management of defense costsharing funds is an issue that should be addressed through continuous efforts. In the defense 5

6 cost-sharing agreement between the U.S. and Japan, it is Japan that plays a leading role in military construction, which includes needs assessment, design, and contract work. In contrast, in the agreement between the U.S. and the ROK, the ROK plays a relatively limited role, with the U.S. selecting projects and taking responsibility for design, while the ROK assumes responsibility for making contracts and carrying out contract work. Therefore, the ROK should take a leading role in the future concerning military facilities. One of the ways in which the ROK could take on more of a leading role is for it to secure the right to sign contracts concerning logistics support. Although the ROK pays defense cost-sharing funds to the U.S., most of it goes back into the country s economy. In relation to this, noticeable achievements that the two sides made are setting the qualification requirements for Korean contractors participating in logistics support and adopting a system to monitor payments to contractors. Another noteworthy accomplishment is the agreement on the prioritization of budget allocation for labor expenses provided to Korean workers hired by the USFK. Despite the satisfactory agreement that was reached this time, the gross settlement method concerning defense cost-sharing still requires improvement. Under this method, negotiations between the two countries over defense costs are inevitably to be repeated and conducted based on their economic conditions and changes in the security environment rather than on itemized requirements, so it is necessary to consider adopting a method that addresses the total amounts for each category in an itemized list of requirements. A support system for the cost of stationing the USFK in the country based on transparency and accountability, which the Korean people can recognize and understand, should be established. It is hoped that this most recent defense cost-sharing agreement will maintain the stability of the USFK and lead to further developments in the bilateral alliance. Paek, Jae-ok (Ph.D. in Economics, Korea University) is a research fellow at Korea Institute for Defense A`nalyses. His major research area includes defense budgetary policy, economic effects of defense R&D, defense economy in Northeast Asia, and the ROK-U.S. alliance defense burden-sharing. 6