NEW ROK SMA FORMULA HIGHLY PROBLEMATIC

C O N F I D E N T I A L SEOUL 001908

SIPDIS

SIPDIS

E.O. 12958: DECL: 06/25/2017
TAGS: MARR MCAP PARM PREL KS
SUBJECT: NEW ROK SMA FORMULA HIGHLY PROBLEMATIC

REF: 05 SEOUL 1300

Classified By: A/Pol Brian D. McFeeters. Reasons 1.4 (b,d).


1. (C) Summary. On June 5, 2007, Ambassador Robert Loftis,
Senior Advisor for Security Negotiations and Agreements, held
a two-hour discussion and working lunch with Ministry of
Foreign Affairs and Trade (MOFAT) Director General for North
American Affairs Cho Byung-jae to discuss the ROK's "Proposal
for a New SMA (Special Measures Agreement) Formula" (text of
proposal at final para.). The proposal was disappointing
because it was nearly identical to a proposal rejected by the
USG two years ago. The "new" ROK SMA formula would shift ROK
cash contributions for construction to in-kind support. What
is new is the ROKG position that, after the end of the
current SMA, SMA funds would not be available for use by U.S.
Forces Korea (USFK) to build the new facilities needed to
complete the Land Partnership Plan (LPP) agreement. Contrary
to the stated aim of the ROK government to "depoliticize" the
SMA process, the ROKG's proposed prohibition against using
SMA funds for LPP -- which resulted from a supplementary
opinion the National Assembly attached to passage of the
current SMA -- would further complicate the follow-on
U.S.-ROK burdensharing negotiations. End Summary.

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BACKGROUND
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2. (C) On May 31, 2007, two days before Ambassador Loftis was
due to arrive in Seoul, DG Cho provided POL M/C Yun with the
ROK's "Proposal for a New SMA Formula." This so-called "new"
proposal for determining the ROK's share of its alliance
burdensharing contribution had been anticipated since Foreign
Minister Song Min-soon had told the Ambassador six months
earlier that he wished to propose a new SMA formula that
would make U.S.-ROK burdensharing negotiations more an
administrative matter than a political fight. The May 31
ROKG proposal was disappointing because most of it is not at
all "new," but is in fact nearly identical to a proposal the
ROKG had put forward, and the USG had rejected, two years
earlier.


3. (C) The earlier ROKG formula proposed shifting the two SMA
construction accounts (ROK Korea Funded Construction (ROKFC)
and Combined Defense Improvement Projects (CDIP)) from the
SMA into a single account handled under the SOFA, similar to
the Joint Defense Improvement Projects (JDIP) program in
Japan. Although it would have allowed these funds to be used
for the LPP, it would have been entirely voluntary and at the
discretion of the ROKG, and was rejected by the USG. The new
ROKG proposal would prohibit USFK from using SMA funds to
build the new facilities needed to complete the movement of
the 2nd Infantry Division (2ID) under the 2004 U.S.-ROK LPP.
Contrary to the stated aims of FM Song, that constraint --
resulting from a supplementary opinion the ROK National
Assembly attached to passage of the current 2007-2008 SMA --
would likely make U.S.-ROK burdensharing negotiations more,
rather than less, contentious and lead to greater problems
for the Alliance given the implications for USFK realignment
and the fulfillment of the LPP.

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MAIN ELEMENTS OF THE ROK SMA PROPOSAL
--------------


4. (C) On June 5, 2007, a USG delegation led by Ambassador
Loftis met a MOFAT team headed by DG Cho for two hours to
discuss the ROK proposal. During what both agreed was a
"consultation," rather than a "negotiation," DG Cho explained
the content of the ROK proposal in detail. Cho stressed that:

-- The ROK recognized that its burdensharing contribution was
an important part of its commitment to the ROK-U.S. Alliance
and that it helped to provide a stable stationing environment
for USFK, thereby enhancing the combined defense capabilities
of the U.S.-ROK Alliance. The ROKG wished to continue to
provide that contribution and therefore did not seek to
reduce its overall SMA contribution.

-- However, the ROKG faced a significant problem with the
current SMA procedure because the burdensharing issue had
become "too politicized" in Korea over the last several
years, with many questioning the transparency of the
burdensharing calculation and usage of SMA funds. Following
lengthy discussions within the ROKG, a consensus was reached
that in order to depoliticize the SMA it would be necessary
to create a new burdensharing mechanism that could handle the
issue in an administrative, rather than political, manner.

-- This could best be achieved by enhancing the
"transparency, accountability, and predictability" of the SMA
process. Increasing understanding of the process by the
Korean people would help to increase ROK public support for
burdensharing.

-- The ROK believed that transparency and accountability
could best be enhanced by increasing its in-kind support to
USFK, while decreasing the amount of cash given to USFK.

-- Funds from past and the present SMA could be used by USFK
to finance LPP, and that should cover the bulk of the U.S.
share of LPP construction. The "small shortfall" could be
made up with U.S. appropriated Mil-Con or the savings
realized from the ROKG increase in its share of labor and
logistics costs. (Note: USFK initial estimates, however,
show that past and current SMA funds would only amount to 55%
of the U.S. funding for LPP.)

-- Under the SMA, the ROK would contribute most (Cho said 95
percent) of USFK's ROK labor and logistical costs; the former
in cash, the latter in-kind.

-- The construction categories of the SMA would be replaced
by a new system under which the ROK would provide the
facilities required by USFK. The ROKG would select those
construction projects in consultation with the USG and in
accordance with SOFA procedures.

-- In accordance with the 2007 supplementary opinion of the
National Assembly, after the current 2007-2008 SMA expires,
the ROK labor and logistics contributions provided through
the SMA and the construction provided through the SOFA
procedures would NOT be used to support the LPP.

-- In accordance with a second 2007 supplementary opinion of
the National Assembly, the ROK would endeavor to complete the
SMA negotiations process by the end of May 2008, so that the
ROK contribution could be included in the regular ROKG budget
cycle. The ROKG therefore wished to reach agreement with the
USG on a new formula by the end of 2007, and to utilize that
new formula during the follow-on SMA negotiations in the
first half of 2008.

-- If the USG agreed to the ROK proposal, the ROKG would
agree in principle to concluding longer-term agreements (of
more than 2 years).

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NO SMA CONTRIBUTIONS FOR LPP
--------------


5. (C) In explaining the new ROK proposal, DG Cho stated that
the SMA issue had become politicized within the Republic of
Korea because the National Assembly generally opposed using
SMA funds to fund LPP. Cho explained that the National
Assembly had questioned why the USG was not paying for its
obligations under LPP with its own money, but instead planned
to use SMA funds for that purpose. When it did not receive
what it considered to be an adequate answer, the National
Assembly had attached a supplementary opinion to the current
SMA prohibiting the future use of SMA funds for LPP. Cho
added that MOFAT had been trying to "muddle through" on the
completion of the LPP by allowing USFK to utilize SMA funds
for LPP construction projects with no objection, but that
recent negative publicity of the fact had brought the issue
to the attention of the National Assembly.

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MOFAT: WE NEED U.S. COOPERATION TO GET US OUT OF TROUBLE
-------------- --------------

6. (C) Cho went on to explain that because MOFAT had gotten
into trouble with the National Assembly over the issue, it
was asking the USG to accept its proposed solution. The
solution, Cho said, was for the ROKG to increase its SMA
contributions in the labor and logistics categories to 95
percent. USFK would then use the money saved (because the
ROK would be paying most of the cost in those categories) to
carry out the needed LPP construction, Cho suggested. This
plan would not result in a change in the overall ROK
contribution, because while it would raise the amount it
spends on labor and logistics, it would zero out the amount
it provides under the ROK Korea Funded Construction (ROKFC)
and Combined Defense Improvement Projects (CDIP) categories.
Because the increases and decreases in ROK contributions
across these categories would largely offset one another, Cho
stated that the changes proposed by the ROK "would not impact
the total Korean burdensharing commitment, which may even
increase." Cho repeatedly asked for U.S. "flexibility" and
assurances that SMA funds would not be used for LPP.

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SERIOUS SHORTCOMINGS OF THE ROK PROPOSAL
--------------


7. (C) After listening carefully to DG Cho's presentation,
Ambassador Loftis responded that the ROK's "new" SMA proposal
was, in fact, almost identical to a proposal the USG had
found unacceptable two years earlier. On the issue of using
SMA funds for LPP, Ambassador Loftis and the rest of the U.S.
delegation, which included representatives from OSD and USFK,
made it clear that the ROKG's "political problem" was of its
own making, because it had failed to be forthright with the
National Assembly about the understanding it has had with
USFK that SMA funds can, will, and must be used to implement
the LPP agreement. What the ROKG was asking the USG to do
was impossible, Loftis added, because USFK could not divert
funds appropriated for one purpose (labor and logistics) to
another purpose (construction) without violating U.S. law.
Consequently, the burden remained on MOFAT and the ROKG to
find a solution to this dilemma that did not involve either
violations of U.S. law or the USG seeking additional funding
from the U.S. Congress, as the ROK had also frequently
proposed.


8. (C) Ambassador Loftis acknowledged that the USG shared the
ROKG's goal of making SMA more predictable and less
political, but strongly rejected the ROK contention that the
SMA process lacked transparency and accountability, noting
that the ROKG knows exactly where and for what purposes its
SMA contributions are utilized by USFK. He pointed out that
when the U.S. and South Korea began negotiations over LPP,
the agreement was reached that SMA money would be used for
LPP "in the interest of using the funds wisely," and the U.S.
had since proceeded on that basis. Consequently, Cho's
suggestion to separate SMA from LPP "may violate that
agreement," a point DG Cho disagreed with, saying that "USFK
may have planned to use SMA money for LPP implementation, but
the ROK had not committed itself to it." (Note: During the
LPP negotiations and discussions, the U.S. side explained
that USFK would fund the 2ID relocation and that the USFK
budget had two funding streams -- U.S. Congressionally
appropriated funds and the SMA. The ROKG understood USFK's
plans to use SMA funds for LPP construction (reftel).)


9. (C) Ambassador Loftis went on to explain that the problem
was of MOFAT's own making, because MOFAT failed to properly
keep the National Assembly informed of the SMA-LPP
connection, choosing instead to "muddle through," a point
that Cho did not dispute. Additionally, Ambassador Loftis
stated that Cho's suggestion to request additional funds from
the U.S. Congress simply would not be possible in the current
climate because the Congress "will not appropriate funds for
construction in Korea," both because Congress typically does
not fund such new construction overseas, and because current
ROKG financial support for USFK is "well below the mandated
levels." If the SMA-LPP issue was not solved by MOFAT,
Ambassador Loftis said, the two countries would find
themselves with a significant problem in a couple of years,
as the money to build the needed facilities would simply be
unavailable.

10. (C) Ambassador Loftis proposed that because the problem
was the direct result of MOFAT's repeated failings to clearly
inform the National Assembly of this issue, MOFAT should use
the next year to convince the National Assembly of the merits
of using SMA funds to complete implementation of the LPP,
rather than trying to shift the onus onto the United States.
By Cho's own admission, the discussions with the National
Assembly had consisted of one three-hour session with seven
legislators: that was not adequate. Loftis concluded that it
was unacceptable that the ROKG had created a problem with its
own National Assembly and was now asking the USG to accept a
solution that would create a problem with the U.S. Congress
that did not currently exist.

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NEXT STEPS
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11. (C) Per conversations between Ambassador Loftis, the
Embassy, USFK, and OSD, Ambassador Loftis will send a letter
to DG Cho reminding the ROKG of the longstanding connection
between the use of SMA construction funds and the completion
of LPP, and the ROKG's explicit acceptance of that linkage.

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TEXT OF THE ROK PROPOSAL
--------------


12. (C) Begin Text:

Proposal on a New SMA Formula


A. The Government of the Republic of Korea recognizes that
the ROK's burden-sharing, as a token of a strong commitment
to the ROK-U.S. alliance, is contributing to a stable
stationing environment for the United States Forces in Korea
(USFK) and enhanced combined defense capabilities.


B. However, whilst the ROK's burden-sharing is important,
with the current formula the negotiations are taking an
excessively long time and the issue of transparency has
constantly been raised in its calculation and implementation.


C. Against this backdrop and based on the understanding
reached in the previous rounds of the negotiations on the
Special Measures Agreement (SMA),the Government of the
Republic of Korea would like to make the following proposal
to the Government of the United States with a view to
improving the current SMA formula.

Purpose


D. The new formula will enhance transparency and
accountability in the calculation and implementation,
establishing a more rational and predictable system of
burden-sharing, thereby laying a basis for greater
understanding of the system amongst Korean people and thus
building public support for burden-sharing.


E. It will also provide for a fair level of the ROK's
burden-sharing, thereby contributing to the strengthening and
development of a future-oriented ROK-U.S. alliance.

Basic Direction for Improvements


F. By determining the total amount of the contribution on a
basis of actual needs, the two governments will enhance the
predictability and accountability of the ROK contribution.


G. The two governments will further enhance transparency in
the implementation of the ROK contribution by maximizing
in-kind support to the USFK.

Details


H. The Government of the Republic of Korea will bear a part
of the stationing costs of the USFK through a two-tier
burden-sharing system consisting of the 'Special Measures
Agreement (SMA)' and the 'SOFA Procedures'.

a. Under the SMA, the Government of the Republic of Korea
will contribute part of the labor costs for Korean national
employees in the USFK and part of logistics costs.

i) The Government of the Republic of Korea will provide a
certain agreed proportion of the labor costs for Korean
national employees in cash within the ceiling stated in the
Agreement.

ii) The Government of the Republic of Korea will provide a
certain agreed proportion of logistics costs in in-kind form,
within the ceiling stated in the Agreement, in accordance
with the current method for paying invoices submitted by the
USFK.

iii) In principle, the two governments will conclude a
long-term agreement.

b. The Government of the Republic of Korea will provide the
facilities required by the USFK under the 'SOFA Procedures'.


I. The Government of the Republic of Korea will consolidate
the present Republic of Korea Funded Construction (ROKFC) and
Combined Defense Improvement Projects (CDIP) into the
Facilities Construction. The Government of the Republic of
Korea will select projects in accordance with mutually agreed
standards under the 'SOFA Procedures', through close
consultations with the Government of the United States.


J. The two governments agree that, in and after the year of
2009, the ROK contribution provided through 'the SMA' and
'the SOFA Procedures' will not be used in the Land
Partnership Plan (LPP projects.

a. However, this will not affect the total amount of the ROK
contribution to the USFK provided through 'the SMA' and 'the
SOFA Procedures'.


K. The two governments will take into full account the
National Assembly's budget deliberations schedule.

a. The two governments will endeavor to complete the SMA
negotiations process by the end of May of the year prior to
the effectuation of the Agreement.

b. The two governments will strive to agree upon the amount
of the ROK contribution for the Facilities Construction under
the 'SOFA Procedures' annually by the end of May of the
previous year.

Timetable for Further Negotiations


L. The two governments will endeavor to agree on a new
formula by the end of 2007 and start implementation as of
January 1, 2009.

End Text

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PARTICIPANTS
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13. (U) Participants List

United States
--------------
Ambassador Robert Loftis, Senior Advisor for Security
Negotiations and Agreements
Mr. David Wolff, Pol-Mil Chief, AMEMB Seoul
Colonel Christopher P. DiNenna, Chief, Strategy and Policy
Division, J5-J, USFK
Mr. Andrew Hyde, ROK Unit Chief, Office of Korea Affairs, DoS
Ms. Mary Beth Morgan, Korea Country Director, ISA/IA OSD
LCDR Kevin Aanestad, Korea Desk Officer, NEA Div J5, JCS
Mr. Jordan Heiber, AMEMB/Office of Korean Affairs, DoS
Mr. Charles Shin, International Relations Officer, Strategy
and Policy Division, J5-J, USFK

Republic of Korea
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Ambassador Cho Byoung-jae, Director General, North America
Affairs Bureau, MOFAT
General Kim Byoung-gi, Deputy Director General, International
Policy Bureau, MND
Mr. Lee Jeong-kyu, Director, North America Divison III, MOFAT
Colonel Song Seong-jong, Director, U.S. Policy Division, MND
Mr. Oh Kee-young, Director, Construction Management Division,
MND
Colonel Lee Chang-hee, Assistant Secretary to the President
for National Security Policy
Mr. Jeong Yeon-doo, First Secretary, Korean Embassy to the
U.S.
Mr. Moon In-seok, Second Secretary, North America Division
III, MOFAT


14. (U) Ambassador Loftis has cleared this message.
VERSHBOW