(Adds Boeing comment)
By Andrea Shalal
WASHINGTON, Aug 22 (Reuters) - A dispute over budgeting processes could delay NATO's efforts to finalize a $1 billion contract to extend the life of 14 aging Boeing E-3A surveillance aircraft, often called NATO's "eyes in the sky," sources familiar with the program said.
NATO officials have invited the 16 member nations in the Airborne Warning & Control System, or AWACS, program to an extraordinary meeting on Sept. 12 to mark the program's 40th anniversary and resolve the budget dispute, the sources said.
Unless the issue is resolved soon, the contract will not be awarded to Boeing in time to be announced as planned at the Dec. 3-4 NATO summit in London, the sources said.
"It's disappointing that a one-sided interpretation of the rules is putting this much-needed upgrade program at risk," said one of the sources.
The upgrades would keep the 1979/1980-era airplanes, with their distinctive radar domes on the fuselage, flying until 2035. NATO needs the planes to carry out missions such as air policing, evacuations and counter-terrorism operations.
A second source said the dispute was not expected to kill the upgrade program outright, but could well push a contract award to Boeing off until next year, marking a setback for the U.S. contractor at a time when it still is struggling to get its 737 MAX commercial airplane back in the air.
NAPMA, the NATO agency that manages the AWACS fleet, said in June it expected to finalize by December a $750 million contract with Boeing to extend the life of the aircraft through 2035, with $250 million more earmarked for design, spare parts and testing.
But unanimous consent of member states is needed to proceed, and Norway has raised concerns about an uneven flow of funds to the program until its completion by 2027, the sources said.
They said Oslo wants the biggest program states - the United States, Germany, Italy and the Netherlands - to transfer the bulk of their payments at the start, but that is not possible due to budgetary rules in those countries.
In the United States, for instance, funding for weapons programs is generally authorized and distributed on an annual basis, subject to approval by the U.S. Congress.
Ann-Kristin Salbuvik, spokeswoman for the Norwegian defense ministry, said Norway remained committed to the AWACS Final Life Extension Program and was prepared to finance its share of the program in coming years.
But she said a decision to launch the program was contingent on approval by all member states, and the Boeing offer had to be "compliant, affordable and feasible."
Boeing spokeswoman Melissa Stewart on Thursday had no comment on the dispute, saying Boeing continued to work with NATO "to assess needs and present the best options and upgrades that will keep their AWACS fleet operational for years to come."
Once NAPMA presented its recommendations later this fall, member nations still have to agree on technical, financial and managerial aspects of the program, she said.
A NATO official downplayed the risk to the upgrade program but acknowledged that it still required securing final signatures on multilateral agreements, confirmation of budget arrangements and negotiation of other "last-minute details."
"Despite the complexity of a $1 billion multinational program being conducted by 16 Allies, these preparations are on track. The plan remains to award the contract in December," the official said. (Reporting by Andrea Shalal; Editing by Dan Grebler)