U.S.-ROK SMA (AD REF) AGREEMENT

C O N F I D E N T I A L SEOUL 002307 SIPDIS C O R R E C T E D COPY TEXT EDITS E.O. 12958: DECL: 12/02/2018 TAGS: PGOV PINS MARR MCAP KS SUBJECT: U.S.-ROK SMA (AD REF) AGREEMENT Classified By: POL M/C JOSEPH YUN. REASONS 1.4 (b),(d). -------------- SUMMARY -------------- ¶1. (C) On November 19-20, U.S. and Republic of Korea delegations, led respectively by Ambassador Jackson McDonald and Ambassador Cho Byung-jae, met in Honolulu for the sixth and likely final round of this year's Special Measures Agreement (SMA) defense cost-sharing negotiation. The talks started off poorly but ended well, with both sides agreeing (ad ref) to the following elements of a new SMA: --- A 5 year agreement (2009-2013). --- Totaling approximately 4 trillion won in ROK contributions to USFK's non-personnel stationing costs (NPSC) in the categories of labor, construction and logistics. --- Increases each of the five years, beginning with the amount of the 2008 SMA contribution plus the ROK consumer price index (CPI) capped at 4 percent annually. This would raise the overall percentage of the ROK share of the NPSC from its current contribution of 43 percent to approximately 47 percent by the end of the agreement. --- In each of the years, the ROKG agreed to provide 12 percent of its construction contribution in cash for design and oversight functions (a USFK requirement). --- The remaining 88 percent of the construction contribution would shift from payment in cash to a 30 percent in-kind contribution in 2009, a 60 percent in-kind contribution in 2010, and an 88 percent in 2011. Excluding the cash provided for design and oversight, this would allow the ROKG to state it had moved to 100 percent in-kind construction in three years time (a key ROK requirement). --- Both sides agreed in principle on the wording of 9 USFK principles that would guide implementation of the in-kind construction program. --- The new agreement would contain no restrictions on the use of SMA funds for implementation of the Land Partnership Plan (LPP) (a key DoD requirement) and no date would be specified in the agreement for completion of the LPP. The agreement would simply state instead that both the U.S. and ROK would make best efforts to accelerate completion of the Yongsan Relocation Plan (YRP) and the LPP. ¶2. (C) At the conclusion of the negotiation it was agreed the U.S. side would produce a first draft text of the SMA and its Implementing Agreement for approval by both governments. �00A;The two delegations agreed to meet again December 9-10 in Washington, but only if necessary. If both governments approve this ad ref agreement, a signing ceremony will take place in Seoul before the end of the year, with U.S. Ambassador to Korea Kathleen Stephens signing for the United States and the ROK Foreign Minister Yu Myung-hwan signing for the ROK. END SUMMARY -------------- ROCKY START AT SMALL GROUP BREAKFAST -------------- ¶3. (C) On November 19, at a ROK-hosted breakfast prior to the start of formal negotiations for SMA Round VI, Cho Byung-jae, MOFAT Ambassador for Special Measures Agreement, rejected the U.S. proposal for incorporating an "off-ramp" into the experimental in-kind construction program requested by the ROK. During the course of the breakfast, however, Major General Frank Panter, Assistant Chief of Staff, J5, USFK, picked up on a misunderstanding by Ambassador Cho that the U.S. meant to revert back entirely to a cash-based construction program if there were problems with in-kind projects. General Panter and Ambassador Jackson McDonald, Senior Advisor for Security Negotiations, clarified that if one or more in-kind projects were not working out, but others were proceeding smoothly, USFK would only ask to revert to cash payment for the troubled projects. -------------- OPENING PROPOSALS (Day 1 Plenary) -------------- ¶4. (C) An hour later, Ambassador McDonald opened the formal negotiations at the Asia Pacific Center for Security Studies by listing three topics to be discussed: 1) the overall amount of the new SMA agreement; 2) modalities for shifting to an in-kind construction program, and; 3) the year for completion of the Land Partnership Plan (LPP). Cho agreed to the agenda and began by restating a prior ROK proposal for a 3-year agreement with a freeze on the ROK contribution in the first year, and increases tied to the GDP deflator for years two and three. During the 3-year agreement, Cho pushed for a 100 percent transition from cash to in-kind construction. He also stressed the need for the U.S. to agree to completion of the LPP by no later than 2014. ¶5. (C) Ambassador McDonald rejected Cho's call for a freeze, stating that it was a non-starter because it amounted to a real reduction. McDonald proposed using the ROK Consumer Price Index (CPI),rather than the GDP deflator, to determine the annual rate of increase in the SMA contribution. He noted that the two sides remained far apart on the overall amount and offered to lower the U.S. proposed amount from Korean Won 851 billion to Korean Won 835 billion, tied to the CPI. He recalled ROK President Lee Myung-bak's stated desire to strengthen the U.S.-ROK alliance and pointed out there was no better way for the ROK to demonstrate that than by increasing its SMA contribution. He noted the ROK desire to see the LPP completed by 2014 was unrealistic, particularly if the ROKG sought to decrease its SMA contribution, as that was sure to further slow construction of the new 2nd Infantry Division facilities at Pyeongtaek. Ambassador Cho asked him not to put it that way, as it was unfair to say ROK funding was responsible for slowing the completion of LPP. ¶6. (C) Cho and his deputy delegation head, Major General-designate Choi Ik-bong, claimed the ROK side had already offered the U.S. side many gifts. Cho in particular argued that the U.S. needed to help more with the problem he would have selling an SMA agreement to the National Assembly if it contained the elements we were seeking. McDonald replied that the U.S. agreement to shift from cash to an in-kind contribution for construction was intended to help the ROK make its case to the National Assembly, but cautioned that Washington would never agree to a freeze. -------------- -------------- STRUCTURE OF IN-KIND PROGRAM (USFK'S 9 PRINCIPLES) -------------- -------------- ¶7. (C) By mutual consent, the two delegation heads then shifted to a discussion of the structuring of the in-kind construction program. Ambassador McDonald reiterated the U.S. position that we were willing to agree to a shift from cash to in-kind contributions provided the ROK agreed to utilize the 9 principles previously outlined by USFK for implementation of that program. The U.S. delegation further explained that the phase-in to in-kind construction would have to start off more gradually than the ROKG wanted, because the contracting process had to begin a year or two in advance of actual construction. Colonel Dan Russell, the USFK Engineer, further explained that the in-kind percentage in subsequent years could never be more than 88 percent because USFK needed 12 percent of the contribution in cash for the hiring of project designers and the execution of project surveillance (oversight). The U.S. delegation pointed out, however, that if design were not considered part of construction, the ROKG could say it was shifting to 100 percent in-kind construction during the life of the agreement. ¶8. (C) Ambassador Cho agreed with the USFK cash requirement, stating that the ROKG just wanted to say that in three years it was moving completely to an in-kind system. Ambassador McDonald then suggested a 5-year agreement that would shift from 30 percent in-kind construction in the first year to 45 percent in year two, 60 percent in year three, 75 percent in year four, and 88 percent in the final year. Cho responded that a 5-year agreement was still open for discussion, but that a 3-year shift to an in-kind system was the ROK bottom line. ¶9. (C) Both sides then went line-by-line through USFK's 9 principles for the in-kind program. Cho stated that he respected the U.S. requirement to set "priorities, standards and timelines" as voiced by USFK Commander, General Walter Sharp. McDonald noted that since the last round of negotiations, MG Panter and MG Choi had reached agreement on 6 of the 9 principles, but that further discussion of the remaining 3 was required. On principle 7 - bid savings used for future projects - General Choi explained that ROK law allowed for bid savings to be applied to other projects, but only within the same fiscal year. General Panter countered that he believed exceptions to that rule existed in ROK law, and pointed out why principle 7 was related to principle 8 - the rollover of unexecuted funds to future years. The ROK delegation replied while the ROKG must make every effort to avoid unexecuted funds, they could in fact be rolled over to future years, but that Korean law did not allow for bid savings to be rolled over as well. After further discussion the two sides reached agreement that bid savings would be applied to other projects within the same fiscal year, but that if the other project could not be executed that year, the funds would be rolled over into the next year. The MND representatives explained that the National Assembly would need to be notified in advance, but that such extensions were routinely approved. The ROK side stressed that the key to preventing funds from going away was to get the projects under signed contracts within the year for which they were budgeted. ¶10. (C) The discussion of principle 9 - the off ramp - took place following lunch. At the ROK's request, Ambassador clarified to the plenary that USFK would require some type of review of the in-kind program, and that if there were significant problems with executing one or more of the construction projects USFK would require payment for the troubled project in cash so it could hire a construction company to complete it. That off ramp, however, would apply only to those projects plagued by serious problems to the point where their completion was in jeopardy. He explained that the U.S. was taking a risk in agreeing to shift to in-kind, but that at the end of the day what mattered to USFK was getting the facilities it needed built on-time and to U.S. standards. He rejected Cho's call for the formation of a working group to decide on appropriate language for principle 9, noting that similar working-level efforts had previously failed to close the significant gap that existed between the two sides. Cho asked Ambassador McDonald to read the U.S. proposed language once again. When he had done so, General Choi said, "O.K. MND approves." -------------- INCLUSION OF THE PRINCIPLES IN THE SMA -------------- ¶11. (C) In discussion that followed, Ambassador Cho asked whether the U.S. side intended that the 9 principles would be included in the language of the SMA, and expressed great surprise when he was told that was the case. Ambassador McDonald stated that the U.S. side required that our agreement on the principles be legally binding, which meant they needed to either be included in the SMA itself or attached as an appendix. Cho claimed it was the first time he had heard that, but McDonald countered that Cho had known from the beginning that the U.S. had to have a government-to-government agreement on the principles in order to entertain the ROK request to shift from to in-kind construction. He asked if Cho intended that in-kind would be mentioned in the SMA. When Cho said yes, he stated that it was fundamentally fair that the principles for implementation of the program be mentioned alongside the in-kind language. Cho argued that the SMA IA (which is signed by MND and USFK, while the SMA itself is signed by the U.S. Ambassador to Korea and the Foreign Minister) was a legally binding document. Pointing out that was not at the same level as the SMA itself, McDonald said that if the principles governing the in-kind program could not be mentioned in the same agreement as the in-kind program itself, the U.S. side would drop the offer of a move to in-kind construction and ask that the SMA revert back to a cash-based system. ¶12. (C) After considering the U.S. position, General Choi suggested that if the principles were to be attached to the agreement it would be best to word them as simply as possible. General Panter pointed out that the original USFK proposal had done precisely that by rendering each as a simple declarative sentence. Subsequent ROK counterproposals had added significantly to the language. Ambassador Cho raised concerns about National Assembly scrutiny. Embassy POL-MIL Chief David Wolff asked if the SMA IA would be reported to the National Assembly. When Cho acknowledged it would be, he asked why language MOFAT would share with the National Assembly in the IA could not therefore be included in, or at least referenced by, the SMA itself. Ambassador McDonald added that it was appropriate to reserve technical details for inclusion in the IA, but that the shift to in-kind and the principles that would guide it, were more than mere technical details. Rather they represented a fundamental shift in the way construction would be carried out under the SMA. -------------- COMPLETION DATE FOR LPP -------------- ¶13. (C) Shifting to new ground, the ROK side pressed the U.S. to agree to stating in the SMA that the Land Partnership Plan (LPP) would be completed by 2014, citing intense ROK domestic political pressure. Ambassador McDonald declined, pointing out he could not agree to putting a deadline in the SMA that we knew we could not meet. He instead suggested a statement that both countries would make best efforts to complete LPP without further delay, but stated that was as far as he could go since USFK had made it clear that, even if all goes well, LPP construction would not be completed until 2016 at earliest. MG Panter noted that by pressing to state a completion date of 2014 in the SMA, the ROK side was disregarding what the Project Management Consortium (PMC) report would say. He noted that political considerations, rather than engineering ones, appeared to be driving the ROK position. -------------- IMPASSE AT U.S.-HOSTED DINNER -------------- ¶14. (C) At the end of the first day of negotiations, OSD hosted a small group dinner for the ROK delegation. It ended with Ambassador Cho once again pleading for more U.S. assistance with which to resolve various ROK domestic political concerns. He sought further considerable concessions from the U.S. side while offering no further movement on the ROK proposal from the previous round in October. By the end of the evening it appeared the two sides had reached an impasse, prompting MOFAT U.S.-ROK Security Cooperation Director Kim Young-hyon to question whether there would be a second day of negotiations the next morning. The impasse prompted several last ditch phone calls after dinner from ROK officials to key members of the U.S. delegation, seeking further side bar discussions during which they probed and sought clarification on several elements of the U.S. position. ¶15. (C) General Choi later revealed to the Embassy POL-MIL Chief that during the night the ROK delegation reported by telephone to the Blue House on the status of the negotiations and had received clear instructions to make every effort to conclude the negotiations the next day. Ambassador Cho had also been empowered by the Blue House with increased flexibility with which to do so. -------------- BREAKTHROUGH (Day 2 Plenary) -------------- ¶16. (C) The next morning (November 20),in a one-on-one meeting with Ambassador McDonald, Ambassador Cho floated a new ROK offer. At McDonald's urging he then repeated the offer in the plenary session that began at 09:00 a.m. Ambassador Cho called for a 5-year agreement. He dropped his demand for a freeze on the contribution in 2009 (something he had earlier said he needed owing to ROK economic difficulties) and offered instead to increase the contribution for each of the five years using an average of the CPI and GDP deflator. That would have resulted in increases averaging only about 1.8 percent a year; a real term reduction given that inflation in Korea has averaged 2.82 percent over the past five years. Cho also called for a complete phase in of the in-kind construction program within the first three years. He accepted, however, that would include setting aside 12 percent in cash, as requested by USFK, for design and oversight. He stated that the ROK would accept the USFK principles and would agree to them in a legally binding manner. He asked that the U.S., in turn, agree to the inclusion of the date 2014 in the SMA as the date for completion of the LPP. ¶17. (C) Ambassador McDonald welcomed the improved ROK proposal, but rejected the unprecedented use of an average of the CPI and GDP deflator for determining the annual increase. He explained once again why the USG could not say LPP would be concluded in 2014, when we knew it would take longer than that. He suggested a 4-year phase-in of the in-kind program tied to the CPI. He said there were arguments for and against a 5 vs. 3-year agreement, pointing out that the content of the agreement was more important than its duration. He acknowledged, however, that a 5-year SMA was what the U.S. preferred, provided it was a good agreement. He went on to state that the U.S. understood the ROK's concerns about an anticipated spike in inflation next year, and said we were therefore willing to cap the CPI at 5 percent. He also offered to reduce the overall amount of the U.S. request to KRW 741.5 billion. Finally, he informed the ROK side that the handling of the principles would need to be finalized before the U.S. would agree to sign the SMA. ¶18. (C) Ambassador Cho said he understood the reasons why the transition to in-kind needed to start off at no more than 30 percent in 2009, but urged that the phase-in be completed in three, not four, years. He agreed that the CPI could be applied to the labor portion of the SMA, but argued for use of the GDP deflator for construction, stating that was more appropriate. He said 5 percent was too high a cap for the CPI and countered with an offer of 3 percent. General Choi voiced approval of the language the U.S. had proposed to include in the SMA stating that both governments would make best efforts to accelerate completion of LPP, and he added, YRP as well. McDonald replied that YRP was outside his portfolio, and primarily under ROK control, but that such a statement spoke well for the alliance because we are working together. ¶19. (C) Returning to the CPI cap, McDonald said the U.S. was concerned about having the resources needed to meet USFK's stationing requirements. He said that an inflationary cap of only 3 percent would create too large a funding gap. He suggested a compromise at 4 percent instead. He offered that the U.S. side would agree in principle to complete the in-kind shift in 3 years, but cautioned it might not be humanly possible given the workings of construction bids and contracting. He noted that one of the USFK principles allowed for an annual review process that would allow both sides to consult on how the transition to in-kind was progressing. ¶20. (C) Cho continued to hold out for the GDP deflator, stating that there was good precedent for it because it had been used in previous SMA agreements. Ambassador McDonald countered that while it had been used in the past, it had been added on top of sizable (3-8 percent) real increases in the amount of the ROK contribution. Frustrated, Cho complained he wasn't winning anything. Bob Mounts of the SOFA Secretariat noted that, to the contrary, we were on the verge of reaching a winning agreement for both sides. In response to Cho's point that inflation averaged only 2.82 percent over the past five years, Embassy POL-MIL Chief Wolff said we weren't concerned about the last five years, but rather the next five, and that all indications were that the inflation rate would rise before it went back down again. For economic reasons, he said a 4 percent cap on CPI was a reasonable compromise between the U.S. and ROK positions. McDonald agreed, sharply pointing out to Cho that the U.S. was not trying to make a profit, but simply wanted to meet its stationing requirements. ¶21. (C) At this point Ambassador Cho stated that he would drop his proposal to use the GDP deflator and would take back to his government for approval the compromise position of a four percent cap on the CPI. ¶22. (C) McDonald then reviewed the key elements of the proposed SMA one by one, obtaining Cho's explicit agreement to each element. ¶23. (C) The negotiations adjourned quickly after that, with both sides agreeing that preparations of the first draft of the SMA and IA would be prepared by David Rathgeber, USFK Special Advisor to the Judge Advocate and Commander Tom Herold, PM Legal Counsel. The text would be submitted for ROKG consideration as soon thereafter as possible. It was agreed that another round of negotiations was unlikely to be needed, but that if it were needed it would be held December 9-10, just prior to the 20th U.S.-ROK Security Policy Initiative Talks (SPI) in Washington. ¶24. (U) Ambassador McDonald has cleared this message. STEPHENS STEPHENS