Weaknesses in Negotiating Rates and Services for Commercial Containerized Sealift

Containerized service, or containerization, is a relatively recent innovation in shipping which allows the loading of cargo into intermodal containers for shipment from source to user over several modes of transportation without intermediate rehandling. Containerization is the principal means by which the Department of Defense (DOD) supplies its forces overseas. GAO reviewed the Military Sealift Command's (MSC) management of commercial containerized sealift service and the process of negotiating rates for such service to determine: (1) how well MSC was obtaining rates and services for meeting DOD shippers' container requirements; (2) whether the present system of procurement was effective in getting the lowest and most advantageous rates; and (3) if MSC adequately considered the needs of DOD shippers and the ability of the ocean carriers to offer such rates.

Currently MSC bases its competition on largely unknown requirements and refuses to allow carriers to bid for specific traffic. It also fixes the bids for arbitrary timeframes. Thus, rates are not based on anticipated demand for service, but on the carriers' guess. MSC buys containerload transportation from ocean carriers from a specific point to another point over a given route. Carriers are asked to submit rates for routes over which they have no idea of the intended volume or how much a particular traffic pattern might yield in terms of revenue. This results in a series of unilateral rate offers which may yield carriers substantial revenues or none at all. Every 6 months, MSC asks for or allows carriers to rebid rates for service they plan to offer to give carriers a chance to change any one or a combination of factors which affect the rates. While MSC is supposed to negotiate for relief when it feels the rates are too high, the present system merely forces the carriers to hold their rates for 6 months and then allows them to rebid. GAO found no indication that the constant renegotiation by MSC has lead to stabilized rates or to lower rates. The rates have been steadily increasing over the last 5 years, and nothing in the present MSC system of negotiations suggests that MSC will alter that trend through its negotiation system.

Recommendations

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