Maritime Security Fleet
Many Factors Determine Impact of Potential Limits on Food Aid Shipments Gao ID: GAO-04-1065 September 13, 2004Food aid cargo must generally be carried on U.S.-flag ships under requirements set by the cargo preference program. Two groups of carriers compete for this cargo: (1) those that participate in the Maritime Security Program and receive an annual government subsidy--generally liners operating on scheduled routes and (2) those that do not--generally carriers operating on a charter basis. Congress directed GAO to study (1) how the cargo preference and Maritime Security programs are designed and who participates;(2) the nature and extent of MSF and non-MSF carrier participation and competition in the food aid program; and (3) how a tonnage limitation on bagged preference cargo for MSF vessels could affect MSF, other U.S.-flag ships, the cargo preference food aid program, and the ports servicing these ships.
The cargo preference program and the Maritime Security Program provide incentives to retain privately owned U.S.-flag ships and their U.S. citizen mariners for commercial and national defense purposes. The cargo preference program is open to all U.S.-flagged vessels, while the Maritime Security Fleet (MSF) subsidy is only available to certain militarily useful vessels. Of the 47 ships currently in the MSF, 37 have participated in cargo preference food aid shipments. MSF and non-MSF carriers compete for food aid shipped as bagged cargo, which averaged 33 percent of food aid shipments by tonnage from fiscal years 1999 to 2003. There is no competition for bulk food aid shipments because MSF carriers do not carry bulk cargo. Changes in food aid spending have contributed to a shift from bulk to bagged cargo and increased reliance on bagged cargo by some non-MSF carriers. From 1999 to 2003, MSF carriers shipped about 45 percent and non-MSF carriers 55 percent of bagged food aid cargo. Competition between MSF and non-MSF carriers for bagged food aid is affected by certain cargo preference requirements. Establishing a tonnage limitation on MSF vessels would likely reduce their share of food aid shipments, but the extent would depend on factors such as the level of the limit and the options MSF carriers have in responding to it. We examined three proposed limits and found that the percentage of food aid voyages carrying more than the proposed limit rises from 3 percent with a limit of 7,500 tons to 19 percent above 2,500 tons, according to fiscal year 2001 to 2003 data. The actual impact on MSF carriers will be smaller if they are able to (1) carry some food aid up to the limit, (2) replace some food aid above the limit with other cargo, and/or (3) elect to carry food aid even without the subsidy. Food aid agencies are concerned about the impacts of a tonnage limit, including increased delays in providing food aid, administrative burdens, and higher shipping costs. Major ports would generally experience a limited overall impact of a tonnage limitation, but specific food aid terminals could be affected.
GAO-04-1065, Maritime Security Fleet: Many Factors Determine Impact of Potential Limits on Food Aid Shipments
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Report to Congressional Committees:
September 2004:
MARITIME SECURITY FLEET:
Many Factors Determine Impact of Potential Limits on Food Aid
Shipments:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-1065]:
GAO Highlights:
Highlights of GAO-04-1065, a report to congressional committees
Why GAO Did This Study:
Food aid cargo must generally be carried on U.S.-flag ships under
requirements set by the cargo preference program. Two groups of
carriers compete for this cargo: (1) those that participate in the
Maritime Security Program and receive an annual government subsidy”
generally liners operating on scheduled routes and (2) those that do
not”generally carriers operating on a charter basis. Congress directed
GAO to study (1) how the cargo preference and Maritime Security
programs are designed and who participates;(2) the nature and extent
of MSF and non-MSF carrier participation and competition in the food
aid program; and (3) how a tonnage limitation on bagged preference
cargo for MSF vessels could affect MSF, other U.S.-flag ships, the
cargo preference food aid program, and the ports servicing these
ships.
While GAO makes no recommendations in this report, we observe that a
decline in bulk food aid shipments since 2000 suggests greater
competition for bagged food aid, but clear trends in how industry
segments are responding cannot yet be determined. Our analysis suggests
that under certain conditions a tonnage limit would not lead to large
shifts in food aid to non-MSF carriers, and could result in lower
levels of subsidy payments and increased agency burdens. We note
significant limits of efforts to predict the future course of events
where key factors are so volatile.
What GAO Found:
The cargo preference program and the Maritime Security Program provide
incentives to retain privately owned U.S.-flag ships and their U.S.
citizen mariners for commercial and national defense purposes. The
cargo preference program is open to all U.S.-flagged vessels, while
the Maritime Security Fleet (MSF) subsidy is only available to certain
militarily useful vessels. Of the 47 ships currently in the MSF, 37
have participated in cargo preference food aid shipments.
MSF and non-MSF carriers compete for food aid shipped as bagged cargo,
which averaged 33 percent of food aid shipments by tonnage from fiscal
years 1999 to 2003. There is no competition for bulk food aid shipments
because MSF carriers do not carry bulk cargo. Changes in food aid
spending have contributed to a shift from bulk to bagged cargo and
increased reliance on bagged cargo by some non-MSF carriers. From 1999
to 2003, MSF carriers shipped about 45 percent and non-MSF carriers 55
percent of bagged food aid cargo. Competition between MSF and non-MSF
carriers for bagged food aid is affected by certain cargo preference
requirements.
Establishing a tonnage limitation on MSF vessels would likely reduce
their share of food aid shipments, but the extent would depend on
factors such as the level of the limit and the options MSF carriers
have in responding to it. We examined three proposed limits and found
that the percentage of food aid voyages carrying more than the proposed
limit rises from 3 percent with a limit of 7,500 tons to 19 percent
above 2,500 tons, according to fiscal year 2001 to 2003 data. The
actual impact on MSF carriers will be smaller if they are able to (1)
carry some food aid up to the limit, (2) replace some food aid above
the limit with other cargo, and/or (3) elect to carry food aid even
without the subsidy. Food aid agencies are concerned about the impacts
of a tonnage limit, including increased delays in providing food aid,
administrative burdens, and higher shipping costs. Major ports would
generally experience a limited overall impact of a tonnage limitation,
but specific food aid terminals could be affected.
Non-MSF and MSF Bagged Food Aid Shipments, Fiscal Years 1999-2003:
[See PDF for image]
[A] 2003 data are estimated.
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-04-1065.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Celia Thomas at (202)
512-8987 or thomasc@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Cargo Preference and Maritime Security Programs Provide Incentives to
Retain U.S.-Flag Ships and Mariners:
MSF and Non-MSF Carriers Compete for Bagged Food Aid Shipments:
Multiple Factors Determine How Tonnage Limit Changes Would Impact Food
Aid Carriers:
Observations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Simulating Potential Impacts of a Bagged Tonnage
Limitation:
Appendix III: Profile of Maritime Security Fleet:
Appendix IV: Comments from the U.S. Agency for International
Development:
Appendix V: Comments from the Department of Agriculture:
Appendix VI: Comments from the Department of Defense:
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Characteristics of U.S.-Flag Vessels Participating in Cargo
Preference Food Aid, Fiscal Years 1999-2003:
Table 2: Tonnage of Bagged Food Aid Cargo Loaded by MSF and Non-MSF
Vessels at Major Food Aid Ports, Fiscal Years 1999-2003:
Table 3: GAO Simulation of MSF Voyages with Food Aid above a 2,500
Tonnage Limit, 3-Year Annual Average for Fiscal Years 2001-2003:
Table 4: Assumptions in the Simulation Model and the Probability
Distributions Reflecting Those Assumptions:
Table 5: GAO Simulation of MSF Voyages with Food Aid above a 5,000 Ton
Limit, 3-Year Annual Average for Fiscal Years 2001-2003:
Table 6: Maritime Security Fleet, as of December 2, 2003:
Figures:
Figure 1: A Bulk Vessel:
Figure 2: A Containership:
Figure 3: USDA Purchases of Bulk and Bagged Agricultural Commodities
for the Food Aid Program, Fiscal Years 1996-2003:
Figure 4: Non-MSF Total Food Aid Shipments, Fiscal Years 1999-2003:
Figure 5: Non-MSF and MSF Bagged Food Aid Shipments, Fiscal Years 1999-
2003:
Figure 6: Criteria for MARAD's Prioritization of U.S.-Flag Vessel
Service for the Cargo Preference Program:
Figure 7: Estimated Share of Title II Food Aid Shipments by U.S.-Flag
Liner Carriers at Each Priority Level, Fiscal Years 1999-2003:
Figure 8: Number of MSF Food Aid Voyages at Different Tonnage Levels,
Fiscal Years 2001-2003:
Figure 9: Percentage of MSF Food Aid Revenues from Voyages with Tonnage
above a Potential Limitation, Fiscal Years 2001-2003:
Abbreviations:
DOD: Department of Defense:
LASH: Lighter Aboard Ships:
MARAD: Maritime Administration:
MSF: Maritime Security Fleet:
TEU: Twenty-foot Equivalent Unit:
USAID: U.S. Agency for International Development:
USDA: U.S. Department of Agriculture:
Letter September 13, 2004:
Congressional Committees:
Food aid shipments must generally be transported on U.S.-flag ships
under the requirements set by the cargo preference program.[Footnote 1]
Two broad groups of U.S.-flag carriers compete for these food aid
shipments:
1. those that participate in the Maritime Security Fleet (MSF)[Footnote
2] (generally liners that carry containers on scheduled routes) and
receive a $2.1 million annual subsidy from the federal government and:
2. those that do not (generally carriers of bulk and bagged cargo that
operate on a charter basis).
During the debate on renewing the Maritime Security Program and MSF,
the non-MSF carriers complained that the MSF subsidy put them at a
competitive disadvantage, particularly for bagged food aid cargo. They
supported a provision to limit the amount of bagged cargo that MSF
ships could carry so that, on days when the limit was exceeded, MSF
ships would have to forfeit their subsidy. Since no analysis had been
conducted on the effects of such a change, the Maritime Security
Program was authorized without this provision, and we were directed to
study the impact of placing a limitation on MSF transportation of
bagged food aid preference cargo.[Footnote 3]
As discussed with representatives of the House and Senate Committees on
Armed Services and the Senate Committee on Commerce, Science, and
Transportation, we have focused on answering the following questions:
1. How are the cargo preference and Maritime Security Programs designed
to meet their objectives and who participates in them?
2. What are the nature and extent of MSF and non-MSF carrier
participation and competition in the food aid program?
3. How would establishing a bagged cargo preference tonnage limitation
on MSF vessels be expected to affect MSF, other U.S.-flag ships, the
cargo preference food aid program, and the ports servicing these ships?
To answer these questions, we gathered and analyzed food aid shipment
data for fiscal years 1999 to 2003 from the U.S. Agency for
International Development (USAID), the Department of Agriculture
(USDA), and the Maritime Administration (MARAD), as well as MSF and
cargo preference vessel data from MARAD and military contingency
participation data from MARAD and the Department of Defense
(DOD).[Footnote 4] Through electronic data testing, verification of
data against other sources, and interviews with agency officials
managing the data, we found the data to be sufficiently reliable and
appropriate for our purposes. We conducted interviews and obtained
financial data for fiscal years 2001 to 2003 from representatives of 15
carriers that transported the majority of cargo preference food aid,
including 5 MSF and 10 non-MSF carriers.[Footnote 5] We also conducted
interviews with representatives of eight ports through which a major
share of food aid shipments were shipped. Consistent with the terms of
our mandate, we analyzed the potential impact of daily tonnage limits
on MSF vessels of 2,500, 5,000, and 7,500 tons.[Footnote 6] While our
analysis provides a range of impact estimates based on data in recent
years and several additional assumptions, if future market conditions
differ from those reflected in this recent data, impacts may differ
from those illustrated by our analysis. We conducted our work in
accordance with generally accepted government auditing standards. (See
app. I for details about our scope and methodology.)
Results in Brief:
The cargo preference and Maritime Security Programs both provide
incentives to retain privately owned U.S.-flag ships and their U.S.-
citizen mariners for commercial and national defense purposes. By
allocating a percentage of federal cargoes to U.S.-flag vessels, the
cargo preference program creates a protected market that provides an
economic incentive for vessel owners to pay the higher costs associated
with U.S.-flag registry and employ U.S.-citizen crews. We found that a
total of 190 privately owned U.S.-flag vessels carried cargo preference
food aid shipments at some point during the fiscal year 1999 to 2003
period. In addition, the Maritime Security Program provides a subsidy
for MSF carriers with particular types of militarily useful vessels.
MSF currently has 47 participating ships, of which 37 have also
participated in cargo preference food aid shipments. DOD strongly
supports both programs and said it has benefited from both during the
recent wars in Afghanistan and Iraq.
MSF carriers compete with non-MSF carriers for the 33 percent of the
food aid tonnage that is currently shipped as bagged cargo. However,
MSF carriers do not compete with non-MSF carriers for the 67 percent of
food aid tonnage that is shipped as bulk cargo because MSF vessels do
not carry bulk cargo. Changes in the amount of bulk and bagged
commodities purchased for food aid programs have contributed to a
decline in bulk shipments and a relative increase in bagged shipments
from fiscal years 1999 to 2003. The reduction in bulk food aid
shipments has caused some non-MSF bulk carriers to rely more on bagged
food aid shipments in recent years. From fiscal years 1999 to 2003, MSF
carriers shipped about 45 percent and non-MSF carriers 55 percent of
bagged food aid cargo. Competition between MSF and non-MSF carriers for
bagged food aid is affected by certain cargo preference requirements.
For example, MARAD's priority system for U.S.-flag service guarantees
preference for carriers that use only U.S.-flag vessels to transport
food aid cargo. This system has tended to favor non-MSF carriers
because they provide charter service from the port of origin to the
port of destination solely on a U.S.-flag vessel, whereas MSF liners
may use a foreign-flag vessel on one leg of their scheduled service
route. However, a provision of the Maritime Security Act of 1996
allocates a certain amount of bagged food aid cargo to Great Lakes
ports, which has favored MSF carriers and other carriers that offer
intermodal services. MSF and non-MSF carriers ship most of the bagged
food aid cargo from U.S. ports in the Gulf of Mexico.
Establishing a bagged cargo tonnage limitation on MSF vessels would
likely reduce their market share in food aid, but the extent will
depend on factors such as the level of the limit and the options MSF
carriers have in responding to it. Recent data show that only 3 percent
of MSF food aid voyages would be affected by a 7,500-ton limit; 19
percent of MSF food aid voyages would be affected by a 2,500-ton limit.
Almost all MSF voyages during fiscal years 2001 to 2003 with more than
7,500 tons were on a small number of noncontainership, specialized
vessels that are being phased out of MSF. If MSF vessels were to lose
all food aid shipments on containership voyages with more than 2,500
tons, the MSF would carry on average 160,000 tons less food aid per
year--out of their average total of 324,000 tons of food aid per year.
However, setting a limit at this level may not mean a reduction of
160,000 tons of food aid cargo for MSF vessels, to the degree they are
able to respond in the following ways: (1) carrying some food aid up to
the limit, (2) replacing some food aid above the limit with other
cargo, and (3) continuing to carry food aid above the limit when they
determine that is the most profitable decision. Under a scenario in
which these options are considered, for a limit of 2,500 tons for
example, we estimate that under certain assumptions the total annual
decline in food aid carried by the MSF would range from 17,000 tons to
63,000 tons. We estimate that the total annual decrease in MSF net
revenues over all carriers would then range from around $2 million to
$5 million.[Footnote 7] While this analysis reflects some range of
probabilities in the flexibility MSF carriers have in responding to a
tonnage limit, it may not fully reflect certain logistical challenges
that MSF carriers have identified, such as agreements between carriers
to share vessel space. Food aid agencies and MARAD are also concerned
that tonnage limits would create increased delivery delays,
administrative burdens, and higher shipping costs. Food aid agencies
emphasized concerns that these potential impacts could impede their
ability to meet critical humanitarian needs. The major food aid ports
would generally experience a limited impact on their overall port
activity if a bagged food aid tonnage limit were established, although
some terminals within the ports that service MSF vessels could
potentially be affected, depending on the degree to which MSF
participation in food aid were decreased.
USAID, USDA, and DOD provided written comments on a draft of this
report, which are reproduced in appendixes IV, V, and VI. These
agencies generally stated that our report appropriately identified
issues and concerns regarding food aid shipments and potential tonnage
limits. They expressed concerns that tonnage limits could negatively
impact their program or mission. DOT provided oral comments, which we
summarize in the agency comments section below. DOT said that the draft
report provided a thoughtful analysis of the potential impact of
tonnage limitations. However, it identified issues with some factors in
our simulation model and emphasized its view that MSF carriers would
face constraints in responding to a tonnage limitation. We agree that
MSF carriers would face such constraints and explicitly included these
considerations in our analysis. We modified our report language in
several places to clarify our discussion of these constraints and the
uncertainties regarding potential tonnage limitation impacts. In
addition, USAID and DOT provided technical comments, which we
incorporated in the report as appropriate.
Background:
U.S.-flag fleet participants in cargo preference food aid shipments
comprise two general categories of carriers: charter service and liner
service. The cargo preference and Maritime Security Programs are
intended to support both as part of the U.S.-flag fleet. These programs
are administered by MARAD, while the food aid programs are administered
by USAID and USDA.
U.S.-Flag Fleet Generally Comprises Charter and Liner Service Carriers:
Vessels in the privately owned U.S.-flag fleet engaged in international
commerce can be placed into two general categories: charter service and
liner service. While most non-MSF carriers provide charter service,
most MSF carriers provide liner service, as shown in table 1 below.
Table 1: Characteristics of U.S.-Flag Vessels Participating in Cargo
Preference Food Aid, Fiscal Years 1999-2003:
Major type of service[A];
MSF vessels: Liner vessels with regularly scheduled sailings on a
fixed route;
Non-MSF vessels: Charter vessels hired to carry cargo to specific
ports at a specific time.
Major types of vessels[A];
MSF vessels: Containerships and LASH vessels[B];
Non-MSF vessels: Bulk vessels, break-bulk vessels, and tug- barge
vessels.
Types of food aid that are carried;
MSF vessels: Bagged;
Non-MSF vessels: Bulk and bagged.
Number of vessels;
MSF vessels: 47 vessels[C];
Non-MSF vessels: 143 vessels.
Number of companies;
MSF vessels: 5 companies;
Non-MSF vessels: 38 companies.
Source: GAO analysis of data from USDA and MARAD.
[A] This table is a simplification that places vessels into two broad
categories. There are exceptions such as some non-MSF vessels that
offer liner service and some containerships and LASH vessels, operated
by MSF carriers, that are not enrolled in MSF.
[B] LASH, or Lighter Aboard Ships, are barge-carrying vessels that use
barges like containers.
[C] This number reflects 42 containerships and 5 LASH vessels that
participated in MSF over a 5-year period and carried food aid.
Currently, MSF comprises 36 containerships and 1 LASH vessel that
carried food aid.
[End of table]
Most charter service vessels are operated by non-MSF carriers. Charter
service means that vessels are hired to carry a cargo to specific ports
at a specific time; these vessels do not provide regularly scheduled
service on a fixed route but typically carry a shipload of cargo for
only one or a few customers at a time. Charter service is primarily
provided by bulk, break-bulk, and tug-barge vessels that can carry
either bulk or bagged cargo. Bulk vessels are designed to carry dry
bulk commodities, such as rice or wheat, in large interior holds. The
benefit of bulk shipments is the economies of scale that can be gained
from shipping large amounts of a single commodity. Figure 1 shows a
photograph of a bulk vessel. Break-bulk vessels are general cargo ships
that are designed to carry nonuniform items packaged as single parcels
or assembled together on pallet boards. Bagged commodities are stacked
and secured within interior holds of the ship. Tug-barge vessels have a
tugboat or towboat that propels a separate barge by pushing or towing
it. Barges generally carry bulk or break-bulk cargo, although some also
carry containerized cargo.
Figure 1: A Bulk Vessel:
[See PDF for image]
[End of figure]
Most MSF vessels are liner service vessels. Liner service means that
vessels have regularly scheduled sailings on fixed routes. These
vessels typically carry small amounts of cargo for many customers at
one time and will sail, even if not completely full. Liner service is
primarily provided by containerships that carry bagged cargo; they do
not carry bulk cargo. Containerships are designed to carry cargo in
standard-size, preloaded containers that are stacked next to and on top
of each other on the ship. The benefit of containers is that they
permit rapid loading and unloading and efficient transportation of
cargo to and from the port area. Containers facilitate intermodal
transportation because they can be loaded by the supplier and sealed,
taken by truck or railcar to the port, then loaded onto the
containership without the cargo being handled. In the case of food aid,
generally the suppliers do not load the containers but instead ship
bagged commodities by rail or truck to the port of loading, where they
are loaded into the containers. Figure 2 shows a photograph of a
containership. Liner service is also provided by Lighter Aboard Ships
(LASH), which are barge-carrying vessels that use barges like
containers. They are also intermodal because the barges can use rivers
and canals to pick up and drop off cargo at interior loading docks.
Figure 2: A Containership:
[See PDF for image]
[End of figure]
Cargo Preference and Maritime Security Programs Intended to Support
U.S.-Flag Fleet:
The cargo preference and Maritime Security Programs are both intended
to bolster the U.S.-flag market share in international commerce, as
well as to ensure the availability of an adequate number of U.S.-flag
ships and U.S.-citizen mariners in the event of a national defense
need. The cargo preference laws are part of the overall statutory
program to support the privately owned and operated U.S.-flag
commercial fleet, or merchant marine.[Footnote 8] DOD and MARAD
consider the merchant marine vital to U.S. national security, providing
essential sealift capability in wartime. The ships that carry these
cargoes also provide jobs for American seafarers who are available in
time of national emergency to crew the sizable fleet of reserve
government vessels. As an agency of the Department of Transportation,
MARAD's responsibilities include promoting the development and
maintenance of the U.S. merchant marine. It administers both the cargo
preference and Maritime Security Programs.[Footnote 9]
The Maritime Security Program is more targeted than the cargo
preference program in terms of the vessels that can participate. It is
intended to guarantee that certain kinds of militarily useful ships and
their crews will be available to DOD in a military contingency. Under
the renewed program starting in 2005, DOD must approve the proposed
vessels as militarily useful. The program's main focus has been to
enable globally competitive carriers that operate militarily useful
vessels to enter or keep U.S.-flag status. Most MSF vessels are
containerships, operated by some of the largest containership carriers
in the world. For instance, MSF carriers Maersk Sealand, P&O Nedlloyd,
and APL were ranked among the top four containership carriers by volume
as of May 2001, according to the Bureau of Transportation Statistics.
These containership carriers have intermodal systems that also come as
part of the package, allowing DOD to benefit from private sector global
transportation and communication networks. According to MARAD, these
networks include not only vessels, but also logistics management
services, infrastructure, terminals and equipment, communications and
cargo-tracking networks, and thousands of trained, professional U.S.-
citizen mariners and shoreside employees located throughout the world.
The Maritime Security Program also results in the reflagging of new and
more efficient vessels to U.S. registry for participation in MSF. The
program requires that vessels be less than 15 years old to participate
(except that LASH vessels can be 25 years old). From its implementation
in 1996 through 2002, a total of 18 modern commercial liner vessels,
with an average age of less than 9 years, were reflagged to U.S.
registry for participation in MSF, according to MARAD.
Food Aid Programs Administered by USAID and USDA:
USAID and USDA's Foreign Agricultural Service are responsible for
administering the food aid programs that provide humanitarian food
assistance to countries in need. The food aid programs had an annual
average budget of $1.97 billion during fiscal years 1999 to 2003,
according to USDA. The primary mechanism through which the U.S.
government implements its international food assistance initiatives is
P.L. 480.[Footnote 10] Food assistance provided under P.L. 480 is
delivered to foreign countries through three separate programs: Titles
I, II, and III. USDA administers Title I, which provides for
government-to-government sales of agricultural commodities to
developing countries on credit terms or for local currencies. USAID
administers Titles II and III. Title II provides for donation of U.S.
agricultural commodities to meet emergency and nonemergency food needs
in other countries, and it is by far the largest of the food aid
programs. Title III provides for government-to-government grants to
support long-term growth in the least developed countries but has been
inactive in recent years. In addition to P.L. 480, food aid is provided
through three smaller programs administered by USDA's Foreign
Agricultural Service: Food for Progress, section 416(b), and the
McGovern-Dole International Food for Education and Child Nutrition
Program.[Footnote 11]
Cargo Preference and Maritime Security Programs Provide Incentives to
Retain U.S.-Flag Ships and Mariners:
The cargo preference and Maritime Security Programs both provide
incentives to retain privately owned U.S.-flag ships and their U.S.-
citizen mariners for commercial and national defense purposes. Cargo
preference makes available a protected market that provides the
economic incentive for vessel owners to pay the higher costs associated
with the U.S. flag and employ U.S.-citizen crews. We found that a total
of 190 privately owned U.S.-flag vessels carried cargo preference food
aid shipments at some point during the fiscal year 1999 to 2003 period.
In addition, the Maritime Security Program provides a subsidy for MSF
carriers with particular militarily useful vessels. MSF currently has
47 ships, of which 37 have participated in cargo preference food aid
shipments. DOD strongly supports both programs and said it has
benefited from both during the recent wars in Afghanistan and Iraq.
Cargo Preference Program Provides Protected Market as Incentive for
U.S.-Flag Registry:
Preference cargoes are intended to provide the economic incentive for
vessel owners to pay the higher costs associated with U.S.-flag
registry and employ U.S.-citizen crews. According to MARAD, due to high
U.S. labor costs; safety, health, and environmental regulations; and
taxes, it is more expensive for vessels to be U.S.-flagged. For
instance, U.S.-flag vessels generally incur higher labor costs due to
higher manning level requirements, as well as higher wages and benefits
for U.S.-citizen mariners.
The cargo preference laws, by guaranteeing the availability of cargo to
U.S.-flag ships, contribute to the financial viability of U.S.-flag
vessel operating companies, thereby helping to ensure that the vessels,
trained crews, and vessel service industries continue to exist,
according to MARAD.[Footnote 12] The cargo preference program provides
this incentive by reserving a portion of the U.S. market for U.S.-flag
vessels, despite the higher prices they typically charge. In the food
aid transportation market, a minimum of 75 percent of food aid
shipments must be shipped on U.S.-flag vessels.[Footnote 13]
The U.S.-flag vessels (both MSF and non-MSF) participating in cargo
preference food aid shipments during fiscal years 1999 to 2003
comprised a variety of vessel types. According to our analysis of USDA
data, a total of 190 individual vessels participated in food aid
shipments at some point between 1999 and 2003.[Footnote 14] This
included 111 bulk, break-bulk, tug-barge, and tanker vessels that
provided charter service and 79 containership, LASH, and other vessels
that provided liner service. These vessels were operated by 38 carrier
companies.
We found that the level of dependence on food aid varied significantly
among carriers. We interviewed representatives of 15 of the top
carriers that participated in U.S.-flag cargo preference food aid
shipments during 1999 to 2003, comprising 77 percent of food aid
revenues. Of the 10 non-MSF carriers we interviewed that generally
provided charter service, 4 said that 60 percent or more of their
annual revenues came from food aid shipments, 3 said between 20 and 50
percent, and 3 said less than 10 percent came from these shipments.
Most of the five MSF carriers we interviewed that provided liner
service said that food aid revenues comprised a small percentage of
their total revenues.
Maritime Security Program Provides Subsidy for MSF:
The Maritime Security Program was authorized for fiscal years 1996 to
2005[Footnote 15] and provides about $100 million in annual funding for
up to 47 vessels to participate. Each participating vessel receives an
annual subsidy payment of $2.1 million,[Footnote 16] intended to
partially offset the higher operating cost of keeping these vessels
under U.S.-flag registry. In November 2003, Congress passed another 10-
year authorization for the Maritime Security Program,[Footnote 17]
starting in fiscal year 2006, that would expand the program from 47 to
60 vessels. Annual subsidy payments were increased from a flat $2.1
million payment to an escalating payment of $2.6 million for fiscal
years 2006 to 2008, $2.9 million for fiscal years 2009 to 2011, and
$3.1 million for fiscal years 2012 to 2015, always subject to the
availability of congressional appropriations.
According to MARAD officials and MSF carrier representatives we
interviewed, the combination of MSF subsidy and access to cargo
preference shipments, including food aid shipments, enables these
containership carriers to stay in MSF and creates incentives to reflag
newer vessels. While most MSF carriers primarily carry commercial
cargo, MSF carrier representatives said that they need both MSF subsidy
and cargo preference food aid shipments to offset the higher costs of
operating as a U.S.-flag vessel. MARAD stated in its 2002 annual report
that the current $2.1 million subsidy represents about 13 percent of
the cost of operating a U.S.-flag vessel. According to a MARAD
official, the subsidy only partially offsets the higher cost of
employing U.S.-citizen mariners. However, during the interviews, MSF
carrier representatives said that the subsidy was important to them
because it was a guaranteed monthly payment that provided a level of
financial stability.
MSF currently comprises 47 vessels operated by 12 companies, based on
data as of December 2003.[Footnote 18] These vessels include 38
containerships, 1 LASH, and 8 roll-on/roll-off vessels.[Footnote 19] Of
the vessels currently participating in MSF, 36 containerships and 1
LASH vessel participated in cargo preference food aid shipments during
fiscal years 1999 to 2003. Approximately 2,162 mariners are employed on
these ships, according to MARAD.[Footnote 20] (See app. III for a
profile of the current MSF participants.)
DOD Supports Both Cargo Preference and Maritime Security Programs:
DOD strongly supports both the cargo preference and Maritime Security
Programs. DOD officials said that DOD's priority is to maintain or
increase the current level of U.S.-flag ships and mariners and,
therefore, it strongly supports both programs. Through the cargo
preference and Maritime Security programs, an additional manpower pool
is maintained that DOD can draw on to crew the reserve fleet.[Footnote
21] DOD officials said that the Maritime Security Program, in addition
to guaranteeing militarily useful U.S.-flag ships and trained U.S.-
citizen mariners, provides access to MSF liner carriers' intermodal
systems, which is important to DOD.
In testimony before the House Armed Services Committee on October 8,
2002, General John W. Handy, Commander of the U.S. Transportation
Command, strongly supported reauthorization of the Maritime Security
Program. He stated that DOD limited its sealift fleet[Footnote 22] to
those assets that the commercial sector could not provide, so that only
33 percent of the vessels DOD may require resided in its own fleet. The
remainder of the sealift capacity, needed to transport military
equipment and supplies, came from the commercial sector.
DOD officials said that it had benefited from both programs during the
Afghanistan and Iraq wars. For example, during Operation Iraqi Freedom,
DOD did not need to pull MSF vessels out of their normal commercial
service. Instead, it chartered two MSF roll-on/roll-off vessels for DOD
use and used the other MSF vessels in their normal commercial routes,
where appropriate, to meet its needs, according to a DOD official. This
official said that DOD preferred to leave MSF vessels in their normal
commercial service because then DOD would also be able to benefit from
use of their global intermodal systems. MSF carriers may have had to
displace some commercial cargo but otherwise continued business as
usual. During the period January 1 to October 14, 2003, MSF vessels
made 135 vessel voyages of cargo to sustain the Iraqi deployment. This
effort included 35 MSF containerships. These vessels transported a
total of 8,668 twenty-foot equivalent units (TEU),[Footnote 23]
according to DOD data. According to MARAD, more than 7,500 merchant
mariners served in Operation Iraqi Freedom. Of these, about 1,470
mariners served on MSF vessels, based on a DOD estimate.
MSF and Non-MSF Carriers Compete for Bagged Food Aid Shipments:
MSF and non-MSF carriers compete only for bagged food aid shipments
because MSF vessels do not carry bulk food aid. Although the majority
of food aid continues to be shipped as bulk cargo, bulk food aid
shipments decreased from fiscal years 1999 to 2003, partly because of
changes in food aid spending. The recent decline in bulk cargo has
caused some non-MSF bulk carriers to rely more on bagged cargo. Non-MSF
carriers transported about 55 percent and MSF carriers 45 percent of
bagged food aid shipments from fiscal years 1999 to 2003. Cargo
preference requirements affect whether agencies award bagged food aid
shipments to MSF or non-MSF carriers. Most of the bagged food aid cargo
carried by MSF and non-MSF vessels is loaded for export at U.S. ports
in the Gulf of Mexico.
Increasing Share of Food Aid Is Shipped as Bagged Cargo:
Although on average approximately 67 percent of food aid was shipped as
bulk cargo and 33 percent as bagged cargo[Footnote 24] from fiscal
years 1999 to 2003, the share of food aid shipped as bagged cargo
generally increased during these years. This change was due mostly to a
decline in USDA's purchases of bulk agricultural commodities for the
food aid program. Although USDA purchases of bulk commodities remained
relatively stable from 1996 to 1998, they increased dramatically in
1999 and then declined steadily from 1999 to 2003.[Footnote 25] As the
procurement data in figure 3 show, purchases of bulk commodities
decreased from 5.76 million tons in 1999 to 2.39 million tons in 2003.
However, purchases of bagged commodities equaled about 2 million tons
each year during this period. Thus, the percentage of commodities
procured that were bagged increased from 26 percent in 1999 to 46
percent in 2003.
Figure 3: USDA Purchases of Bulk and Bagged Agricultural Commodities
for the Food Aid Program, Fiscal Years 1996-2003:
[See PDF for image]
Note: Figure is based on procurement data. USDA shipment data are
available from fiscal years 1999 to 2003. They show the same pattern as
the procurement data for those available years. However, the shipment
amounts are generally smaller than the procurement amounts primarily
because food aid cargo is often damaged while it is being handled in
preparation for export shipment, according to USDA officials.
[End of figure]
Changes in food aid spending from fiscal years 1999 to 2003 have
contributed to this shift from bulk to bagged cargo. The largest food
aid program is administered under P.L. 480 Title II, which experienced
an increase in funding from 2000 to 2003. The P.L. 480 statute requires
that at least 75 percent of agricultural commodities donated for
development, or nonemergency, purposes be value-added. Value-added
commodities are shipped as bagged cargo, as opposed to bulk.[Footnote
26] Aside from Title II development assistance, many of the commodities
donated by the Food for Education and section 416(b) food aid programs
also have been shipped as bagged cargo in recent years, according to
USDA officials. However, spending for the P.L. 480 Title I food aid
program generally declined from 1999 to 2003.[Footnote 27] Most
commodities sold under the P.L. 480 Title I program are shipped as bulk
cargo, such as wheat, corn, and soybeans.
Reduction in Bulk Food Aid Cargo Leads to Increased Reliance on Bagged
Food Aid Cargo:
Many non-MSF carriers depend on cargo preference food aid shipments for
a large share of their business; therefore, the decline in bulk cargo
has meant increased reliance on bagged cargo shipments. According to
the interviews we conducted with non-MSF carriers, some non-MSF
carriers that traditionally ship bulk food aid reacted to the decline
in bulk food aid shipments by increasing their participation in bagged
food aid shipments. Figure 4 shows that while total shipments of food
aid by non-MSF vessels decreased over the fiscal year 1999 to 2003
period, the decline in bulk food aid shipments was partially offset by
an increase in bagged food aid shipments. Among non-MSF carriers that
have shipped bulk food aid, 43 percent have also shipped bagged food
aid.
Figure 4: Non-MSF Total Food Aid Shipments, Fiscal Years 1999-2003:
[See PDF for image]
[A] 2003 data are estimated.
[End of figure]
MSF and non-MSF vessels combined carried a total of 6.73 million metric
tons of bagged food aid cargo and earned an average of $430 million
each year from bagged food aid shipments from 1999 to 2003.[Footnote
28] MSF vessels carried about 45 percent of this cargo and non-MSF
vessels carried 55 percent. However, non-MSF carriers' share of the
bagged food aid market was clearly greater in 2002 and 2003 than in the
previous 3 years, as shown in figure 5.
Figure 5: Non-MSF and MSF Bagged Food Aid Shipments, Fiscal Years 1999-
2003:
[See PDF for image]
[A] 2003 data are estimated.
[End of figure]
The MSF cargo was shipped by five companies: four operating 42
containerships and one operating 5 LASH vessels. Each MSF containership
carried an average shipment of 950 tons per voyage, and each MSF LASH
vessel carried an average shipment of 22,440 tons per voyage. The non-
MSF cargo was shipped by 38 companies that operated 143 vessels. Each
non-MSF vessel carried an average shipment of 1,750 tons of bagged
cargo per voyage, almost twice the average shipment of each MSF
containership.
Cargo Preference Requirements Affect Whether Food Aid Shipments Are
Awarded to MSF or Non-MSF Carriers:
Cargo preference requirements affect the results of competition between
MSF and non-MSF carriers for food aid shipments. One requirement that
has tended to favor non-MSF carriers is MARAD's interpretation of U.S.-
flag service for the cargo preference program. Figure 6 outlines the
criteria agencies are required to follow when awarding shipments
subject to cargo preference laws. As the figure indicates, an ocean
carrier that offers to carry preference cargo on a U.S.-flag vessel can
be counted as either Priority 1 or Priority 2 service. For example, a
U.S.-flag vessel qualifies for Priority 1 service if it offers to
transport preference cargo on a U.S.-flag vessel or transship the cargo
to U.S.-flag vessels for the entire portion of the waterborne voyage.
However, a U.S.-flag vessel would qualify for Priority 2 service if it
transshipped the cargo to a foreign-flag vessel for any leg of the
voyage. In the absence of Priority 1 service availability, agencies may
also count Priority 2 as Priority 1 service by default.
Figure 6: Criteria for MARAD's Prioritization of U.S.-Flag Vessel
Service for the Cargo Preference Program:
[See PDF for image]
[End of figure]
Most non-MSF vessels qualify for Priority 1 service because they offer
the food aid program charter service entirely on a U.S.-flag vessel.
However, vessels that operate in liner service, such as MSF
containerships, often qualify for Priority 2 service because they
transfer shipment of (transship) food aid cargo to a foreign-flag
vessel for a leg of the voyage. In some locations, however, some MSF
carriers have started to transship food aid cargo to prepositioned
U.S.-flag vessels instead of foreign-flag vessels so that they can
qualify as Priority 1 service. In fact, as figure 7 shows, liner
vessels that carried Title II food aid cargo from fiscal years 1999 to
2003 qualified for Priority 1 service about 48 percent of the
time.[Footnote 29] Liner vessels counted as Priority 1 service by
default about 23 percent of the time and Priority 2 or 3 service about
29 percent of the time. Under the cargo preference program, agencies
are required to award food aid shipments to carriers that offer
Priority 1 service over carriers that offer Priority 2 or 3 service,
even if the freight rate charged by the carrier offering Priority 1
service is higher, unless the rate exceeds MARAD's fair and reasonable
rate calculation.
Figure 7: Estimated Share of Title II Food Aid Shipments by U.S.-Flag
Liner Carriers at Each Priority Level, Fiscal Years 1999-2003:
[See PDF for image]
[End of figure]
Other cargo preference requirements tend to favor MSF carriers. An
example of a requirement that has benefited MSF carriers is section 17
of the Maritime Security Act of 1996.[Footnote 30] This provision
allocates up to 25 percent of the total tonnage of Title II bagged food
aid cargo each month to Great Lakes ports. Moreover, shipments of this
cargo are awarded to carriers without regard to the flag of the vessel
offering service and therefore are not subject to MARAD's priority
rules.[Footnote 31] From fiscal years 1999 to 2003, MSF vessels and
foreign-flag vessels carried an estimated total of 221,000 tons and
379,000 tons of this cargo, respectively.[Footnote 32] MSF carriers
have shipped much of this cargo because they have incorporated certain
Great Lakes ports facilities into their intermodal networks. They have
created a system for transporting this cargo intermodally in containers
by rail to U.S. ports on the East and West Coast, where the cargo is
ultimately exported.[Footnote 33] MSF carriers have been successful in
winning much of this cargo because these intermodal shipments allow
them to offer competitive freight rates, according to USAID and USDA
officials. However, non-MSF carriers ship this cargo less often than
MSF carriers because they generally lack access to the intermodal
infrastructure that enables MSF carriers to move this cargo
efficiently.[Footnote 34]
MSF and Non-MSF Carriers Load Most Bagged Food Aid Cargo from U.S. Gulf
Ports:
U.S. Gulf ports handled about 70 percent of the average annual tonnage
of bagged food aid cargo carried by MSF and non-MSF vessels from fiscal
years 1999 to 2003. Table 2 shows the tonnages of bagged food aid cargo
loaded by MSF and non-MSF vessels at major food aid ports. As the table
indicates, the ports of Lake Charles and Jacintoport handled 1.72
million tons and 1.43 million tons of bagged food aid cargo from 1999
to 2003, respectively. These two ports handle bagged food aid mostly as
break-bulk, or noncontainerized, cargo. Lake Charles is an agricultural
port that is also the only U.S. port approved by USDA to store
prepositioned commodities for the food aid program. Jacintoport has an
automated cargo handling system capable of loading large tonnages of
bagged food aid into break-bulk vessels and bulk vessels at a high rate
of speed. Lake Charles will soon have a similar machine with like
capabilities. MSF carriers do not load food aid directly into their
vessels from these two ports. Instead, they hire stevedores to stuff
the food aid cargo into containers and then move the containers
intermodally by barge or rail to nearby ports that have container
terminals where they have regularly scheduled service, such as the
ports of New Orleans and Houston. MSF carriers run a similar operation
from the Port of Chicago, where most of the Title II bagged food aid
cargo subject to section 17 of the Maritime Security Act of 1996 is
loaded. The Port of Chicago handled on average an estimated 35,000 tons
of bagged food aid cargo for MSF carriers each year from 1999 to 2003.
Much of this cargo was transported intermodally by rail to major U.S.
container ports, such as Charleston, South Carolina; Norfolk, Virginia;
and Seattle, Washington.
Table 2: Tonnage of Bagged Food Aid Cargo Loaded by MSF and Non-MSF
Vessels at Major Food Aid Ports, Fiscal Years 1999-2003:
Port: Lake Charles, Louisiana;
Tonnage: 1,716,035;
Percent of total: 27.
Port: Jacintoport, Texas;
Tonnage: 1,432,957;
Percent of total: 23.
Port: New Orleans, Louisiana;
Tonnage: 799,382;
Percent of total: 13.
Port: Houston, Texas;
Tonnage: 346,228;
Percent of total: 6.
Port: Charleston, South Carolina;
Tonnage: 341,118;
Percent of total: 5.
Port: Litco Memphis,[A] Tennessee;
Tonnage: 276,057;
Percent of total: 4.
Port: Norfolk, Virginia;
Tonnage: 270,411;
Percent of total: 4.
Port: Chicago, Illinois;
Tonnage: 264,121;
Percent of total: 4.
Port: All other ports;
Tonnage: 819,402;
Percent of total: 13.
Port: Total;
Tonnage: 6,265,711;
Percent of total: 100.
Source: GAO analysis of USDA data.
Note: Table does not include estimated data for 2003. Percentages do
not add up to 100 due to rounding.
[A] Litco Memphis is a facility owned by the company that operated the
five LASH vessels in MSF that carried food aid from 1999 to 2003.
[End of table]
Multiple Factors Determine How Tonnage Limit Changes Would Impact Food
Aid Carriers:
Our analysis of data from program agencies and carriers suggests that
establishing a bagged tonnage limitation could reduce MSF vessels'
market share in food aid, but the extent will depend on the limitation
level and the options MSF carriers have in responding to it.[Footnote
35] Using recent data, we examined daily limits of 7,500, 5,000, and
2,500 tons and found that the percentage of MSF food aid voyages
affected rises from 3 percent at a limit of 7,500 tons to 19 percent at
a limit of 2,500 tons. Almost all voyages above 7,500 tons were on the
specialized LASH vessels, of which only one remains in MSF. Total
annual food aid for MSF containerships on voyages above a 2,500-ton
limit was around 160,000 tons. However, setting a limit at this level
may not mean a reduction of 160,000 tons that MSF vessels carry, to the
extent they are able to continue to carry some food aid on affected
voyages, replace some food aid with other cargo, and forfeit their
subsidy for food aid shipments that are sufficiently profitable. A
simulation analysis we performed for MSF containerships suggests that,
at a limit of 2,500 tons for example, the total annual decrease in food
aid carried by these vessels could, under certain assumptions
incorporating those options, range from about 17,000 to about 63,000
tons. Structured interviews with the carriers suggest that
considerations such as vessel sharing arrangements could also affect
the outcome and impacts on non-MSF carriers may depend on their market
niche. Further, if the terms of MSF and non-MSF carriers' participation
in cargo preference change, program agencies are concerned that they
could face increased delivery delays, administrative burdens, and
shipping costs. The major food aid ports would generally experience a
limited impact on their overall port activity from a bagged tonnage
limit, although specific food aid terminals could potentially be
affected, depending on the extent of any limitation and the MSF
carriers' responses to it.
Share of MSF Food Aid Voyages Affected Would Increase Substantially as
Limitation Level Decreases:
While more than 80 percent of MSF food aid voyages fall below a 2,500-
ton limit, establishing a limit at 2,500 tons would be substantially
more constraining for the majority of the fleet than limits at 5,000 or
7,500 tons. According to USDA data from fiscal years 2001 to 2003, only
3 percent of MSF food aid voyages carried more than 7,500 tons, almost
all of which occurred on the five LASH vessels that have participated
in the MSF.[Footnote 36] However, another 16 percent of MSF food aid
voyages carried food aid tonnage between 2,500 and 7,500 tons. All of
these voyages occurred on containerships, which comprise the majority
of current MSF vessels. Figure 8 shows the number of MSF food aid
voyages at different tonnage levels. The average annual tonnage carried
by both MSF LASH vessels and containerships on voyages in excess of
2,500 tons was around 322,000 tons, of which around 160,000 tons were
carried on the containerships.[Footnote 37]
Figure 8: Number of MSF Food Aid Voyages at Different Tonnage Levels,
Fiscal Years 2001-2003:
[See PDF for image]
[End of figure]
Similar to the percentage of MSF food aid voyages, the share of MSF
food aid revenues affected by a tonnage limit rises substantially as
the level is decreased. As shown in figure 9, 37 percent of MSF total
food aid revenues were earned on voyages carrying more than 7,500 tons
of food aid while 68 percent of MSF total food aid revenues were earned
on voyages with more than 2,500 tons of food aid. In comparison to the
percentage of voyages affected, these revenue shares reflect that MSF
voyages above a potential tonnage limit are earning proportionally more
food aid revenues than those with smaller cargo volumes. MSF food aid
revenues earned on the primarily LASH vessels that carried more than
7,500 tons were around $26 million annually, or $8.5 million per
vessel. Not including LASH vessels, MSF food aid revenues earned on
containerships that carried more than 2,500 tons were around $22
million annually, or $1.3 million per vessel. Nonetheless, while these
data indicate how often an MSF vessel could be restricted by a tonnage
limitation, they indicate the potential loss in revenue from food aid
only under the assumption that MSF carriers were to no longer carry any
food aid on these voyages.
Figure 9: Percentage of MSF Food Aid Revenues from Voyages with Tonnage
above a Potential Limitation, Fiscal Years 2001-2003:
[See PDF for image]
[End of figure]
Various Factors Will Affect Actual Impact on MSF:
The actual food aid tonnage and net revenue impact for MSF vessels
under a tonnage limitation will depend on options available to the
carriers and how they respond to them. Numerous considerations relating
to market conditions, food aid logistics, and carrier characteristics
would ultimately shape the impact of any tonnage limitation. We
identified three factors to explicitly consider in an analysis of a
tonnage limitation. Each of these factors, under certain assumptions,
has the potential to make the impact of a tonnage limit on MSF vessels
smaller than suggested by the share of MSF voyages affected.
First, affected MSF vessels might be able to carry some food aid,
potentially up to the level of the limit, and may not have to give up
the entire tonnage for that voyage to keep their subsidy. This
situation can occur if a carrier can bid on a portion of an offered
shipment or if the food aid tonnage on a voyage comprises multiple
shipments, such that the carrier could bid on those shipments providing
tonnage under the limit.[Footnote 38] For example, a carrier that would
normally have a voyage with 3,700 tons of food aid may be able to carry
two food aid contracts for 1,000 tons each and, under a tonnage limit
of 2,500 tons, face a potential loss of food aid cargo of only 1,700
tons.
Second, depending on market conditions, affected MSF carriers may be
able to replace a portion of the food aid above the limit with
commercial or nonfood preference cargo, diminishing their loss in total
revenues. For example, if an MSF vessel were to carry 1,700 tons less
food aid due to a tonnage limit, the carrier may be able to replace a
portion of that tonnage with nonfood aid cargo.
Third, there may be occasions when carrying food aid cargoes above a
tonnage limit is more profitable than reducing food aid to receive the
subsidy for a voyage, thus providing an incentive to carry food aid
above the limit. This may occur for food aid shipments that are
particularly large or earn a particularly high freight rate such that
an affected MSF carrier might choose to carry the food aid, even if it
entailed forfeiting the subsidy otherwise earned during the days of
that voyage, as well as forgoing any net revenues from available
replacement cargo.[Footnote 39] For example, if an MSF vessel were to
normally carry 7,000 tons of food aid on a voyage that lasted 15 days,
the carrier would have to give up a subsidy payment of around $107,000
to carry that entire tonnage. The carrier might choose to forfeit the
subsidy payment if the net revenues from the food aid effectively above
the 2,500-ton limit exceeded the $107,000 plus potential net revenues
from replacement cargo.
To illustrate the impact of a tonnage limitation when accounting for
these three factors, we created a simulation model that suggests ranges
of possible tonnage and net revenue changes for MSF vessels at
different tonnage limits. The model uses estimates of average freight
rates, average cargo volumes, and average vessel costs for voyages from
fiscal years 2001 to 2003, and includes probability distributions that
reflect certain assumptions about carrier options and
behavior.[Footnote 40] Table 3 provides the annual average simulation
estimates for MSF containership voyages that carried more than 2,500
tons of food aid.[Footnote 41]
Table 3: GAO Simulation of MSF Voyages with Food Aid above a 2,500
Tonnage Limit, 3-Year Annual Average for Fiscal Years 2001-2003:
Total food aid tonnage on voyages affected by the limit[B];
Estimated range of values[A]: Average value: 160,000.
Factor 1: MSF vessels may carry some food aid up to the limit,
depending on number and terms of food aid shipments: Food aid tonnage
effectively above the limit[C];
Estimated range of values[A]: Low value: 61,000;
Estimated range of values[A]: Average value: 92,000;
Estimated range of values[A]: High value: 138,000.
Factor 1: MSF vessels may carry some food aid up to the limit,
depending on number and terms of food aid shipments: Food aid net
revenues associated with this tonnage;
Estimated range of values[A]: Low value: $6.7;
Estimated range of values[A]: Average value: $10.4;
Estimated range of values[A]: High value: $15.6.
Factor 2: MSF vessels may replace some food aid above the limit with
other cargo: Estimated tonnage of additional other cargo;
Estimated range of values[A]: Low value: 3,000;
Estimated range of values[A]: Average value: 24,000;
Estimated range of values[A]: High value: 49,000.
Factor 2: MSF vessels may replace some food aid above the limit with
other cargo: Net revenues earned from additional other cargo;
Estimated range of values[A]: Low value: $0.2;
Estimated range of values[A]: Average value: $1.8;
Estimated range of values[A]: High value: $4.0.
Factor 3: MSF vessels may continue to carry some food aid above the
limit and forfeit the subsidy if sufficiently profitable: Food aid
tonnage above the limit that is carried;
Estimated range of values[A]: Low value: 24,000;
Estimated range of values[A]: Average value: 53,000;
Estimated range of values[A]: High value: 102,000.
Factor 3: MSF vessels may continue to carry some food aid above the
limit and forfeit the subsidy if sufficiently profitable: Net Revenues
earned from food aid above the limit minus forfeited subsidy payments;
Estimated range of values[A]: Low value: $2.6;
Estimated range of values[A]: Average value: $5.1;
Estimated range of values[A]: High value: $9.4.
Simulation estimates with factors 1-3 combined: Decline in MSF food
aid tonnage[D];
Estimated range of values[A]: Low value: 17,000;
Estimated range of values[A]: Average value: 39,000;
Estimated range of values[A]: High value: 63,000.
Simulation estimates with factors 1-3 combined: Decline in MSF net
revenues[E];
Estimated range of values[A]: Low value: $2.2;
Estimated range of values[A]: Average value: $3.5;
Estimated range of values[A]: High value: $4.8.
Source: GAO analysis using USDA data and MSF vessel data.
[A] Ranges provided are based on probability distributions and the
range of probable results given the assumptions at a 90 percent
confidence interval. See appendix II for a more detailed discussion.
[B] This tonnage does not include LASH vessels.
[C] We assume carriers are not able to carry food aid tonnage exactly
up to the limit in every case, so that the food aid tonnage effectively
above the limit is greater than the difference between the tonnage and
the limit.
[D] This tonnage is calculated by subtracting the food aid tonnage
above the limit that is carried from the total food aid tonnage
effectively above the limit.
[E] This decline includes the revenue loss from carrying less food aid,
the revenue gain from carrying additional other cargo, the forfeited
subsidy payments, and cost savings from altering the cargo tonnages
carried of food aid and other goods.
[End of table]
The estimates illustrate that, under the assumption that carriers could
respond to a tonnage limit in the ways we have discussed, impacts on
MSF vessels could be reduced. While the total food aid tonnage on
voyages affected by the limit is around 160,000 tons, to the degree
that carriers can keep some food aid on voyages where the total food
aid tonnage has been above the limit, the amount of food aid that they
could lose due to the limit would, under certain assumptions, range
from around 61,000 to 138,000 tons. This food aid tonnage that is
effectively above the limit would correspond to estimated net revenues
of around $7 million to $16 million. Based on our assumptions about how
much other cargo MSF carriers are able to secure to replace the food
aid, MSF net revenues from additional cargo might range from an
estimated $200 thousand to an estimated $4 million. Based on our
assumptions about net revenues for food aid and other cargo, the food
aid tonnage above the limit that MSF vessels continue to carry might
range from an estimated 24,000 to an estimated 102,000 tons. The net
revenues from this food aid tonnage minus the forfeited subsidy
payments would then range from around $3 million to $9 million. Taking
all three factors into account, the total decline in MSF net revenues
under a limitation of 2,500 tons of food aid might range from around $2
million to $5 million a year. On a per vessel basis, this amounts to
roughly $120,000 to $270,000. By estimating the food aid tonnage
effectively above the limit and subtracting the tonnage that MSF
vessels might continue to carry while forfeiting their subsidy
payments, the annual food aid tonnage available to non-MSF carriers
might range from around 17,000 to 63,000 tons.
Impacts on carriers could fall toward the ends of the simulation ranges
reported in table 3 or, in some cases, outside those ranges if carrier
options and responses differ from those simulated. An important
consideration is that certain key assumptions in the simulation are
based on information from fiscal years 2001 to 2003. To the extent that
future market conditions differ from those reflected in recent years,
or carriers respond in different ways than we have considered, the
impacts of a tonnage limitation could be affected. For example, if
future food aid program levels decline, then the overall tonnage and
revenue changes from a shift in MSF's food aid market share would also
likely decline. If, however, future nonfood preference cargo levels
decline, then MSF may be able to replace a smaller share of the food
aid tonnage above a limit with other cargo, and the revenue impacts
from a tonnage limit would be greater. If MSF carriers decide never to
carry food aid above a limit--even when it is profitable to do so, net
of a forfeited subsidy payment--then the total decline in food aid
tonnage they carry and the revenue loss to MSF vessels would increase.
Carriers Reported that Structural Challenges Would Impede Their Ability
to Adapt to Tonnage Limits:
MSF carriers told us they face certain logistical constraints that
challenge them in being able to effectively respond to a tonnage limit
at any level.
* One challenge is the difficulty in planning vessel tonnages around a
limit. The MSF carriers cited their lack of control over when they
receive food aid cargoes from suppliers, which makes it difficult to
distribute the food aid tonnage onto vessel sailings to stay under the
limit and meet delivery deadlines. They stated they could face
additional expenses for cargo storage at ports as well as loading
penalties and charges for delayed delivery. MSF carriers also cited the
fact that they may bid on multiple food aid shipments concurrently as a
complication in planning vessel tonnages around a limit.
* A second challenge cited by two MSF carriers was that they have
agreements with other carriers to share space on their vessels that
could be at risk if a carrier is concerned with shipping food aid above
a certain tonnage. USDA and MARAD corroborated this view and expressed
concern that eliminating vessel-sharing agreements would increase
inefficiency in the market.
* A third challenge noted by some MSF carriers was that the costs they
incur to maintain an infrastructure to support food aid cargo might
become too high if their food aid tonnage should be reduced. Such
infrastructure might include a U.S.-flag vessel stationed abroad to
transfer food aid from major ports to more remote destinations or the
container loading operations some MSF carriers have set up in the Great
Lakes region.
The ability of the non-MSF carriers to benefit from a tonnage
limitation would depend on their market niche, according to our
interviews with 10 non-MSF carriers. The simulation we discussed above
suggests that, under certain assumptions, the additional bagged food
aid available to all non-MSF carriers might range from less than 1
percent to 8 percent of this segment's current bagged tonnage for
tonnage limits at 5,000 and 2,500 tons, respectively.[Footnote 42]
However, each non-MSF carrier's ability to bid for and win that cargo
would be differentially affected by (1) whether it carries bagged food
aid; (2) whether it services food aid destinations where cargo has
become available; and (3) the tonnage of cargo available, compared with
its vessel capacity. For example, while seven of the non-MSF carriers
we interviewed said they would benefit from a tonnage limitation, two
non-MSF carriers said they would be unaffected because they do not
carry bagged food aid. Three non-MSF carriers supported a lower tonnage
limitation limit, but two of them mentioned being constrained by the
geographic routes they service in their ability to pick up new
business. Moreover, two other non-MSF carriers responded that a lower
tonnage limitation would actually hurt them because it would encourage
MSF carriers to more intensely compete in their market niche that
services smaller shipments. Three other non-MSF carriers with larger
vessels were satisfied with a higher tonnage limitation because it
would reduce MSF competition in the market niche for large shipments.
Effect on Program Agencies Will Depend on MSF and Non-MSF Carrier
Responses:
The impact of a bagged tonnage limitation on program agencies is hard
to predict and will ultimately depend on the degree to which both MSF
and non-MSF carriers alter the terms in which they participate in the
Maritime Security Program and cargo preference. According to DOD, a
tonnage limit could cause some MSF carriers to withdraw from the
Maritime Security Program, though DOD officials indicated that they
expect to receive more applications for the next program than available
slots. USDA, USAID, and MARAD also reported several concerns about a
tonnage limit at any level. These concerns include:
* Decreased food aid timeliness: USDA and USAID noted concern that food
aid shipments could be delayed if the non-MSF vessels do not have
sufficient capacity to quickly carry the additional food aid shipments
above a limit or if MSF carriers responded to the limitation by
spreading food aid tonnage over several sailings to stay under the
limit.[Footnote 43]
* Increased administrative burdens: USDA and USAID noted concern about
additional administrative burdens if MSF carriers responded to the
limit by submitting partial bids or dividing up shipments and if non-
MSF carriers increasingly submitted bids for bagged cargo that were
contingent on getting numerous contracts in order to fill larger
vessels. MARAD noted concern that a tonnage limit would negatively
affect their initiative to implement service contracts.[Footnote 44]
Additionally, both food aid agencies and MARAD will face the
administrative burden of having to track volumes on a voyage basis--
something they do not currently do.
* Increased shipping costs: USDA, USAID, and MARAD noted concern over
the possibility of increased freight rates if (1) non-MSF carriers
raised prices in response to decreased competition, (2) freight rates
bid by non-MSF vessels for contracts that would have otherwise been
carried by MSF vessels are higher because of charter service rather
than liner service or because the non-MSF carrier may not regularly
sail to that location, (3) MSF carriers raised prices in response to
losses associated with carrying less food aid, receiving fewer subsidy
payments, or incurring costs for delayed delivery charges, and/or (4)
freight rates bid by MSF carriers for food aid shipments below a
tonnage limitation are higher than their bid otherwise would have been
for a larger shipment due to the loss of economies of scale.[Footnote
45]
Tonnage Limitation Generally Would Have Limited Overall Impact on
Ports, with Greater Potential Effects on Certain Terminals:
A bagged food aid tonnage limitation on MSF carriers generally would
have limited impact on the overall activity of the major food aid
ports, based on our analysis of the food aid shipment data and the
interviews we conducted with port representatives. Some ports may
experience some shift in the type of food aid handled, which could
affect participating terminals within these ports. For example, if
bagged cargo shipments by MSF containerships were seriously affected,
this would likely have a greater impact on terminals that predominantly
stuff bagged food aid cargo into containers. However, any impact would
depend on the extent of the limitation imposed and the MSF carriers'
responses to it.
The major Gulf ports, from which most food aid cargo is shipped, would
likely experience little impact if a bagged food aid limitation were
imposed on MSF carriers because they service both MSF and non-MSF
vessels that carry bagged cargo. The result would be a shift among
their customers, according to port officials. The ports of Lake Charles
and Jacintoport are specialized agricultural commodity ports that
handle only bagged food aid cargo, and they anticipate that any loss of
bagged cargo by MSF carriers would likely be picked up by the non-MSF
carriers who are their biggest customers. The ports of New Orleans and
Houston service both MSF and non-MSF customers at different terminals.
These large ports handle all kinds of cargo in addition to food aid
shipments, and port officials anticipate that there would be no net
loss in overall business for the port. While officials said there could
be some impact on individual terminals, they estimated that the
terminals could likely replace any lost food aid container cargo with
other container cargo.
The large coastal container ports like Norfolk, Charleston, and Seattle
would also likely experience little impact since the volumes of food
aid cargo involved comprise a very small percentage of their total
business. For instance, Norfolk handled 12 million tons of cargo in
2003, of which 70,000 tons were food aid that they stuffed into
containers at the port, according to a port official. Norfolk did not
track how much food aid it handled that was already in containers. The
port official in Charleston estimated that food aid was about 1 percent
of its cargo, while the official in Seattle estimated about 3 to 4
percent. These ports would experience little impact from a bagged
tonnage limitation on MSF carriers, according to these officials.
However, they said that the terminals at the ports that stuff the
bagged food aid into the containers might be affected.
A port of Chicago representative expressed the greatest concern about
the potential impact from a tonnage limitation, although food aid cargo
is a small portion of Chicago's total cargo. MSF carriers transport
most of the section 17 cargo reserved for Great Lakes ports, and the
majority of it goes through the port of Chicago. The port official said
that the port valued food aid cargo because it was relatively more
labor intensive and generated more jobs than other types of cargo. The
preponderance of food aid cargo going through the port of Chicago is
handled at a single terminal, whose business could be damaged,
depending on the nature and extent of the impact. If MSF carrier
participation in food aid shipments is severely curtailed and other
carriers do not step in to carry section 17 cargo, the terminal could
be seriously affected. In addition, the port official said that one
benefit of the section 17 provision was that it helped make Midwestern
commodity suppliers more competitive when their cargo could be loaded
in nearby Great Lakes ports instead of being transported to Gulf ports.
The official said that the regional effort to encourage more food aid
commodity sourcing from Midwestern suppliers could also be affected if
section 17 bagged cargo was curtailed.
Observations:
While we make no recommendations in this report, we believe that our
analysis provides important insights into the nature of competition
between MSF and non-MSF carriers for food aid shipments. A sharp drop
in bulk food aid shipments in fiscal years 2000 and 2001 suggests that
competition for bagged food aid has become more intense. In those
years, MSF carriers captured a large share of the business, but market
share of bagged shipments shifted toward the non-MSF carriers in fiscal
years 2002 and 2003. The two segments of the industry appear to be
finding ways to respond to the changes in food aid, but this time frame
is too short to determine any clear trends.
We also believe that our analysis of a potential limit on the MSF
carriers' food aid shipments provides some findings that are not
obvious without a close examination of the system. One finding is that,
if MSF carriers have certain options in responding to a tonnage limit
that would mitigate the impacts of that limit, the potential decline in
food aid shipments by this group would be less than the total volume of
food aid carried on voyages over the limit. This result would occur if
MSF vessels carry some food aid up to the limit on affected voyages,
and in some cases choose to forfeit subsidy payments in favor of
carrying profitable shipments above the limit. To the extent that MSF
carriers do choose to carry food aid over the limit and forfeit the
subsidies, a tonnage limit may not lead to a large shift in food aid
shipments and financial benefits to non-MSF vessels. Where any
financial effects of food tonnage limitations would accrue remains
uncertain. For example, MARAD subsidy payments could be lower if MSF
carriers continue to carry food aid. However, food aid agencies could
face higher costs if the limits resulted in fewer and more expensive
options for some shipments, and these agencies have emphasized their
concerns that additional constraints on food aid shipments could impede
their ability to provide food aid to meet critical humanitarian needs.
Finally, it is important to recognize the limits of any effort to
predict the future course of events in an area in which key factors are
so volatile. For example, the volume of food aid shipments has varied
greatly over recent years, and the relationship between food aid and
export subsidies is also under discussion in the WTO negotiations. The
outcome of MARAD's efforts to support the two key maritime sectors is
clearly influenced by the level and composition of food aid, so long-
term trends and even fluctuations in food aid shipments will affect the
program. Second, the importance and profitability of food aid, compared
with other commercial or preference cargo, has a large influence on the
health of the various firms and components of the industry, and the
volume and prices for these alternative cargoes can also change
significantly. In these cases, firms may decide to move vessels into or
out of the program, which will have an effect on the existing
operators.
Agency Comments and Our Evaluation:
USAID, USDA, and DOD provided written comments on a draft of this
report, which are reproduced in appendixes IV, V, and VI. USAID stated
that we used sound and logical methodologies to analyze the data and
accurately identified trends pertaining to MSF and non-MSF carriers
that carried food aid over a 5-year period. USAID agreed that
predicting the impact of a tonnage limitation is difficult and said it
takes a cautious approach to changes, citing concerns regarding impacts
on administrative systems and the ability to meet foreign assistance
objectives. USDA said that the report adequately summarized USDA's
major concerns over the impact on food aid programs that could result
from a bagged cargo tonnage limitation placed on MSF carriers,
including decreased food aid timeliness, increased administrative
burdens, and increased shipping costs. DOD generally concurred with our
findings. It stated that it would oppose any change in cargo preference
that would adversely impact the U.S. merchant marine because it
believed there would be negative impacts on DOD mobilization
capabilities. DOT provided oral comments. DOT said that the draft
report provided a thoughtful analysis of the potential impact of
tonnage limits on food aid shipments and how they might affect the
U.S.-flag shipping industry. However, DOT identified issues with some
factors, and the way they are considered, in the simulation model we
used to estimate the range of impacts from different tonnage limits. In
addition, USAID and DOT provided technical comments, which we
incorporated in the report as appropriate.
DOT officials, including the Director of MARAD's Cargo Preference
Program, said that they identified issues with some factors and the way
they are considered in the simulation model used in our analysis of
potential impacts of a tonnage limitation. In particular, these
officials suggested that the draft report and its simulation model
could have more thoroughly explored the effects of three factors: (1)
MSF carriers' ability to replace food aid cargo with commercial cargo,
(2) the industry's reluctance to carry cargo over the limit and forfeit
the subsidy, and (3) the logistical constraints on carriers' ability to
operate under a low tonnage limit. Specifically, with respect to
replacing food aid cargo, DOT officials questioned whether sufficient
commercial cargo is actually available in the marketplace to replace
food aid cargo for MSF vessels. With respect to carrying cargo above
the limit and forfeiting the subsidy, DOT emphasized that all five MSF
carriers stated they would not give up their subsidy to carry food aid.
DOT officials stated their view that logistical limitations, which
would further constrain MSF carriers' ability to carry food aid
shipments under low tonnage limits, may be underestimated in the model.
While the DOT officials recognized these factors are acknowledged in
the draft report as limitations on the model's predictive value, they
emphasized their view that the cumulative effect of more thoroughly
exploring them in the model might have led us to conclude that the
imposition of tonnage limits could be more detrimental to MSF than the
results otherwise indicated. As a result, the officials suggested the
model's limitations be more extensively and prominently recognized in
the body of the report. Finally, the DOT officials emphasized their
agreement with the aspect of our observations that the imposition of
any tonnage limit on MSF vessels could drive up costs for the food aid
program and decrease efficiency by limiting competition and increasing
freight charges.
We agree that MSF carriers may face constraints in terms of their
options in responding to a tonnage limitation. Specifically, we agree
that carriers may have restricted flexibility in managing contract
amounts to keep food aid shipments below limits and still carry food
aid, and in replacing lost food aid with other cargo. Our simulation
analysis specifically incorporates uncertainty in these factors, and we
have modified our report language in several places to clarify the
range of assumptions concerning those and other variables, and the
implications of the uncertainty regarding our results. Additional
detail about how these factors are treated in our analysis is presented
in the following paragraphs. With respect to whether carriers would in
some cases carry food aid above a tonnage limit and forgo the subsidy
for affected days, we agree that including that assumption is important
to our simulation model results. Our simulation model represents the
outcome when carriers choose the most profitable option available on
each voyage, and vessel data reported by MSF carriers suggest that
there are times when carriers would have the financial incentive to
carry food aid above the limit and forfeit their subsidy payment for
that voyage. The presentation of our simulation model results makes it
clear that option is an important one in carriers being able to
mitigate the impact of a tonnage limitation. If carriers never forgo
the subsidy, the impacts of a limitation on MSF carriers would be
greater. Neither carriers nor MARAD provided us a reason why they would
not ever forgo a subsidy.
The simulation model incorporates the likelihood that MSF carriers
would face logistical constraints in managing food aid contracts to
continue carrying food aid amounts near but under the limit. It
reflects possibilities ranging from carriers being able to carry food
aid exactly up to the limit amount--for example 2,500 tons--to not
being able to carry any food aid on the share of voyages above the
limit. We tested the sensitivity of our simulation results to the
particular probability distribution assumed for this variable; and we
found that if carriers are assumed to have less flexibility in managing
food aid tonnage below a limit, the average values for the impacts
would differ somewhat from the averages we reported. For example, for
one alternative distribution assuming less flexibility, the average
value of food aid tonnage that carriers would have to give up or lose
the subsidy for the voyage increased from about 92,000 tons to about
109,000 tons.[Footnote 46]
Similarly, our simulation model allows for the possibility that MSF
carriers would be unable to replace any food aid above a limit with
commercial or nonfood preference cargo. However, most MSF carriers
reported that they are currently sailing near full capacity, with a
range of capacity utilization rates that together average 90 percent.
The simulation model relies on these reported capacity utilization
rates to determine the most likely value for the share of food aid
effectively above the limit that carriers might be able to replace with
other cargo. However, the simulation model reflects a range of
probabilities with respect to carriers being able to replace lost food
aid cargo and achieve their current (based on the fiscal year 2001 to
2003 data we analyzed) average capacity utilization, and includes at
one extreme the possibility that no lost food aid tonnage will be
replaced.
To the extent that these constraints strongly affect MSF carriers'
ability to respond to tonnage limits, then the high end of the range of
possible results suggested by the simulation model should be
considered. For example, if MSF carriers face significant logistical
constraints to carrying food aid up to the limit, then, under a tonnage
limit of 2,500 tons, they are more likely to have an annual 138,000
tons of food aid effectively above the limit, compared with the annual
61,000 tons of food aid effectively above the limit as estimated by the
simulation's low value results.[Footnote 47]
In addition to the potential impacts of a tonnage limit that are
suggested by the simulation model under certain assumptions, there are
potential structural constraints we were not able to reliably quantify
and include in the model. One example is the potential impact on MSF
carriers' total tonnage and revenues if a tonnage limit were to
jeopardize their vessel sharing agreements. As we stated in the report,
these types of structural constraints could challenge MSF carriers in
being able to effectively respond to a tonnage limit at any level.
We are sending copies of this report to appropriate congressional
committees, the Secretaries of USDA, DOD, and DOT, and the
Administrator of USAID. We will also make copies available to others
upon request. In addition, this report will be available at no charge
on the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-4128. Additional contacts and staff
acknowledgments are listed in appendix VII.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
Report to Congressional Committees:
The Honorable John McCain:
Chairman:
The Honorable Ernest F. Hollings:
Ranking Minority Member:
Committee on Commerce, Science, and Transportation:
United States Senate:
The Honorable John W. Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Duncan Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
In a legislative mandate in section 3535 of the National Defense
Authorization Act for Fiscal Year 2004 (P.L. 108-136), Congress
directed us to review the impact of placing a tonnage limitation on
transportation by the Maritime Security Fleet (MSF) of cargo preference
food aid and to report to the Chairman and Ranking Minority Member of
the House and Senate Committees on Armed Services and the Senate
Committee on Commerce, Science, and Transportation. As discussed with
Committee representatives, we have focused on answering the following
questions: (1) how the cargo preference and Maritime Security Programs
are designed to meet their objectives and who participates in them; (2)
what the nature and extent are of MSF and non-MSF carrier participation
in the food aid program; (3) how establishing a bagged cargo preference
tonnage limitation on MSF vessels would be expected to affect the MSF,
other U.S.-flag ships, the cargo preference food aid program, and the
ports servicing these ships.
To examine how the cargo preference and Maritime Security Programs are
designed to meet their objectives and who participates in them, we
reviewed documents, relevant legislation, regulations, and data
pertaining to the cargo preference and Maritime Security Programs from
the Maritime Administration (MARAD) and Department of Defense (DOD), as
well as our prior studies and those done by the Congressional Research
Service. We also obtained and analyzed MSF and cargo preference vessel
data and food aid shipment participation data from MARAD and the
Department of Agriculture (USDA) for fiscal years 1999 to 2003. We
examined the data for their reliability and appropriateness for our
purposes through electronic testing of the data, verification of the
data against other sources, and interviews with agency officials that
manage the data. We found the data to be sufficiently reliable to
represent participation by MSF and non-MSF vessels and carriers in
transporting food aid shipments. In addition, we interviewed agency
officials at MARAD, DOD, USDA, and the Agency for International
Development (USAID), as well as representatives of three maritime trade
associations. We also conducted structured interviews with
representatives of 15 carriers that transported the majority of cargo
preference food aid, including 5 MSF and 10 non-MSF carriers.
To determine the nature and extent of MSF and non-MSF carrier
participation and competition in the food aid program, we gathered and
analyzed food aid shipment data from USDA and USAID for fiscal years
1999 to 2003. We examined the data for their reliability and
appropriateness for our purposes and found them sufficiently reliable
to represent MSF and non-MSF carrier participation and competition in
the food aid program. We also interviewed USDA, USAID, MARAD, DOD, and
maritime trade association officials, including company
representatives from 5 MSF and 10 non-MSF carriers. To determine
whether bagged cargo has accounted for an increasing share of food aid
shipments, we obtained and analyzed USDA food aid procurement data from
fiscal years 1996 to 2003. We examined the data for their reliability
and appropriateness for our purposes through electronic testing of the
data, verification of the data against other sources, and interviews
with agency officials that manage the data. We found them sufficiently
reliable to confirm that an increasing share of food aid was shipped as
bagged cargo from 1999 to 2003. In addition, we reviewed agency reports
that discussed food aid program activities and trends, and conducted
interviews with USDA and USAID officials. To examine the process by
which agencies award food aid shipments to MSF and non-MSF carriers, we
obtained and reviewed USDA, USAID, and MARAD directives and regulations
governing the ocean transportation of food aid cargo and also reviewed
applicable legislation. We also conducted interviews with USDA and
USAID officials responsible for awarding food aid shipments in
accordance with cargo preference requirements. To identify the U.S.
ports that handled the largest tonnages of food aid cargo shipped by
MSF and non-MSF carriers, we analyzed USDA food aid shipment data. To
gain additional perspectives on how MSF and non-MSF carriers handled
and transported this cargo in preparation for export shipment, we
interviewed port officials from 8 major food aid ports,[Footnote 48] as
well as 15 MSF and non-MSF carrier representatives.
To examine how establishing a bagged cargo preference tonnage
limitation on MSF vessels would potentially affect MSF and other U.S.-
flag ships, we obtained and analyzed USDA food aid shipment data for
fiscal years 1999 to 2003. We analyzed the tonnage carried and revenues
earned for each MSF vessel voyage that carried food aid above potential
limits of 2,500, 5,000, and 7,500 tons. To illustrate how carriers
might respond to a tonnage limit, we obtained operating and revenue
information from the five MSF carriers on each of their vessels from
fiscal years 2001 to 2003. To account for variation in the values of
our estimates, we performed a Monte Carlo simulation[Footnote 49] that
varied the impact model approximately 20,000 times from probability
distributions characterizing possible values for variables, such as the
percent of food aid above the limit that carriers replace with other
cargo, the freight rate for other cargo, and the cost differential
between food aid and other cargo. This simulation resulted in a range
of estimates, under certain assumptions, for the likely total decline
in MSF food aid tonnage and net revenues on an annual basis. A
technical discussion of the simulation model and the results at a
5,000-ton limitation is provided in appendix II.[Footnote 50] We
examined USDA's food aid shipment data and carrier's vessel estimates
for their reliability and appropriateness for our purposes. For USDA's
data, we performed electronic testing of the data, verification of the
data against other sources, and interviews with agency officials that
manage the data. Although we were able to do only limited verification
of the self-reported data from carriers, we found both sources to be
sufficiently reliable to inform our simulation model. In addition, we
supplemented our simulation results with information that both MSF and
non-MSF carriers provided in interviews pertaining to any structural
constraints they may face in responding to a tonnage limitation.
To examine how establishing a bagged cargo preference tonnage
limitation on MSF vessels would potentially affect the program
agencies, we reviewed the current extent of data collection and
procedures for tracking food aid shipments to see if additional
administrative burdens would be entailed. We also interviewed agency
officials at USDA, USAID, MARAD, and DOD.
To examine how establishing a bagged cargo preference tonnage
limitation on MSF vessels would potentially affect the ports that
service food aid shipments by MSF and non-MSF carriers, we analyzed
food aid shipment data from USDA that identified the ports used for
each shipment for fiscal years 1999 to 2003. We also conducted
telephone interviews with representatives of eight major food aid ports
(Charleston, South Carolina; Chicago, Illinois; Houston and
Jacintoport, Texas; Lake Charles and New Orleans, Louisiana; Norfolk,
Virginia; and Seattle, Washington) to obtain additional information,
including their assessment of the potential impact of a limitation on
their port.
We performed our work from February through August 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Simulating Potential Impacts of a Bagged Tonnage
Limitation:
This appendix describes the data and methodology that we used to
analyze the impact of a bagged tonnage limitation on MSF and presents
some additional estimates not contained in the letter portion of this
report. This simulation analysis is based on certain assumptions
regarding carrier options and responses and makes use of food aid data
from agencies, reported vessel revenue and cost estimates for recent
years, and information from interviews about the food aid industry. The
three potential carrier responses incorporated into our model include
an MSF vessel's potential ability to continue carrying some food aid on
affected voyages, replace some food aid with other cargo, and forfeit
its subsidy for food aid contracts that are sufficiently profitable.
Our methodology illustrates that, depending on the degree to which
these options exist for MSF, carriers may reduce the overall tonnage
and net revenue[Footnote 51] impacts of a limit. These estimates
reflect some probability that carriers will face constraints in how
they respond to limits, however, there is uncertainty associated with
some of the assumptions of the model. Carriers may face additional
logistical or structural constraints relating to program requirements
or company characteristics that would limit their responses to a
greater degree than our simulation reflects. Moreover, future market
conditions may differ from those reflected in recent data, such that
our analysis could not be used as a forecast. Thus, while our
simulation can help decision-makers understand important factors that
should be taken into account when considering tonnage limits--and
develops a range of impact estimates based on recent years that reflect
those factors--actual impacts could be near the outer limits of or fall
outside our estimated ranges.
Data and Methodology:
To analyze the impacts of a tonnage limit on MSF vessels, we collected
data on key tonnage and revenue variables from a variety of sources for
fiscal years 2001 to 2003. To create a list of MSF vessel voyages that
carried food aid tonnage above a potential limit, we examined USDA's
food aid shipment data and identified 123 vessel voyages. We paired
this voyage list with estimates we collected from the MSF carriers on
each vessel's annual costs and annual tonnage and freight rates for
commercial cargo, food aid cargo, and nonfood aid preference
cargo.[Footnote 52] We also calculated the subsidy per voyage each MSF
vessel earns, based on the number of days per voyage in that vessel's
regularly scheduled outbound service.[Footnote 53]
To estimate a range of impacts for a tonnage limitation under certain
assumptions, we explicitly consider three options that MSF carriers may
potentially have in responding to such a limit. For affected voyages,
an MSF carrier may be able to (1) continue carrying some food aid up to
the limit, (2) replace some food aid above a limit with other cargo,
and (3) continue carrying food aid above a limit if it were more
profitable than the subsidy payment for that voyage plus any net
revenue from replacing the food aid with other cargo. As discussed
below, we rely on assumptions about the degree to which carriers may be
able to respond in these three ways to assign probabilities to a
probability distribution. Table 4 shows that we use the following five
probability distributions to calculate a range of impacts for MSF
carriers under a tonnage limitation. Each of these distributions is
discussed further in the text following table 4.
Table 4: Assumptions in the Simulation Model and the Probability
Distributions Reflecting Those Assumptions:
Variable: Food aid tonnage effectively above the;
limit[B];
Type of distribution[A]: Triangular;
Basis: USDA and USAID report food aid voyage tonnage is comprised of
multiple, divisible contracts;
Probability at 90 percent confidence interval:
Mean: Varies by voyage;
Probability at 90 percent confidence interval:
Minimum: Same as likeliest;
Probability at 90 percent confidence interval:
Likeliest: Total food aid tonnage per voyage minus limit tonnage (e.g.
2,500 or 5,000 tons);
Probability at 90 percent confidence interval:
Maximum: Total food aid tonnage per voyage.
Variable: Percent of food aid tonnage effectively above the limit that
is replaced with other cargo;
Type of distribution[A]: Triangular;
Basis: Capacity utilization rates as reported by each carrier;
Probability at 90 percent confidence interval:
Mean: Likeliest value times 67 percent;
Probability at 90 percent confidence interval:
Minimum: 0 percent;
Probability at 90 percent confidence interval:
Likeliest: Reported capacity usage for each vessel (ranges from 75 to
95 percent);
Probability at 90 percent confidence interval:
Maximum: Same as likeliest.
Variable: Freight rate per ton for other cargo;
Type of distribution[A]: Triangular;
Basis: Standard deviation of freight rates on other cargo reported by
all MSF carriers;
Probability at 90 percent confidence interval:
Mean: Calculated mean freight rate times 1.0, with certain
constraints[C];
Probability at 90 percent confidence interval:
Minimum: Calculated mean freight rate times 0.6, with certain
constraints[C];
Probability at 90 percent confidence interval:
Likeliest: Calculated mean freight rate times 1.0, with certain
constraints[C];
Probability at 90 percent confidence interval:
Maximum: Calculated mean freight rate times 1.4, with certain
constraints[C].
Variable: Per-ton cost difference for food aid over other cargo;
Type of distribution[A]: Triangular;
Basis: Estimates reported from carriers and industry experts;
Probability at 90 percent confidence interval:
Mean: $21.67;
Probability at 90 percent confidence interval:
Minimum: $0;
Probability at 90 percent confidence interval:
Likeliest: $30;
Probability at 90 percent confidence interval:
Maximum: $35.
Variable: Percent of total vessel costs that vary with the tonnage
level;
Type of distribution[A]: Uniform;
Basis: Estimate from MARAD on fixed vessel costs;
Probability at 90 percent confidence interval:
Mean: 35 percent;
Probability at 90 percent confidence interval:
Minimum: 0 percent;
Probability at 90 percent confidence interval:
Likeliest: Not applicable due to uniform distribution;
Probability at 90 percent confidence interval:
Maximum: 70 percent.
Source: GAO analysis.
[A] Given the information available pertaining to each of our impact
variables, we selected probability distributions that are widely used
by researchers.
[B] This term is used to indicate the food aid tonnage that may not be
carried when an MSF vessel voyage is affected by the limit.
[C] We considered the freight rates that all five MSF carriers reported
for all of their vessel voyages--both those above and below a tonnage
limit--to calculate a standard deviation ($58.18). We then used this
standard deviation to create a distribution for each voyage ranging
from 1.65 standard deviations below the reported freight rate to 1.65
standard deviations above the reported freight rate. This range was
constrained to fall between the lowest ($39.45) and highest ($300.94)
freight rates reported by the group of carriers, and was further
constrained to not exceed the food aid rate for the voyage. From that
distribution (without the food aid rate constraint), we determined the
mean freight rate for each voyage. When the constraints created by the
highest and lowest reported rates are not binding, the mean equals the
reported rate. But when the lower (higher) constraint is binding, the
mean will be greater (lesser) than the reported rate.
[End of table]
1. USDA and USAID reported that the food aid tonnage on a voyage often
comprises multiple food aid contracts such that carriers may be able to
continue to bid only on those shipments providing tonnage under the
limit. However, since food aid contract terms vary, the degree to which
MSF carriers can maximize carrying food aid up to the limit will also
vary. As a result, we include in our simulation an assumption that
carriers will most likely be able to carry tonnage up to the level of
the limit (based on profit maximization principles), but we use a
probability distribution that includes a range of values for the amount
of food aid that the vessel could potentially lose--otherwise stated as
the amount of food aid effectively above the limit. For example, at a
limit of 5,000 tons, for an MSF voyage with 6,000 tons of food aid,
only 1,000 tons of food aid could be effectively above the limit.
However, if MSF carriers had less flexibility in managing food aid
tonnage, up to the entire 6,000 tons could be effectively above the
tonnage limit.
2. We asked carriers to provide information about their current
capacity utilization as an indication of the most likely value for the
share of food aid they may be able to replace. Reported capacity
utilization rates were high for all carriers with a range of values
averaging 90 percent. However, we note the uncertainty regarding how
close to the reported capacity utilization rates carriers would be able
to come through replacing lost food aid tonnage with other cargo. We
use a probability distribution to incorporate this uncertainty that
allows for the possibility that carriers would not be able to replace
any lost food aid with other cargo.
3. We asked carriers to provide their average freight rates for
commercial cargo and nonfood aid preference cargo as an indication of
the most likely freight rate they may receive on replacement cargo.
Using annually weighted information from the five MSF carriers on all
of their vessel voyages, we calculated a standard deviation and used
this variation to apply a range of values for each voyage to reflect
likely freight rates for other cargo, subject to certain constraints.
4. If MSF carriers replace food aid above a limit with other cargo,
they are also likely to experience a change in costs. We found that it
is generally more costly for the MSF to carry a ton of food aid than it
is to carry a ton of commercial cargo.[Footnote 54] Based on interviews
with carriers and industry experts, we incorporate, across the model, a
range of values for this additional food aid cost differential around a
most likely estimate of $30 per ton.
If carriers alter the total tonnage on a vessel voyage, their costs
will also vary. We do not have data pertaining to the percentage of MSF
total vessel costs that vary with tonnage levels. Based on broad
estimates from MARAD that around 40 percent of vessel costs are for
overhead or fixed items, we consider a wide range of values around the
remaining 60 percent of total costs.
To incorporate these five assumptions into our impact estimates, we
performed a Monte Carlo simulation.[Footnote 55] In this simulation,
values were randomly drawn 20,000 times from probability distributions
characterizing possible values for impact variables discussed above and
listed in table 4. Under assumptions described by probability
distributions selected for these impact variables, the simulation
yields estimates for the total decline in both MSF food aid tonnage and
net revenues on an annual basis.
Summary of Results:
Using our simulation model, we analyzed the tonnage and net revenue
impacts on MSF of a food aid limit at 5,000 and 2,500 tons.[Footnote
56] Results for a 2,500-ton limit are presented in the letter portion
of this report while table 5 provides the results for a 5,000-ton
limit. As shown in table 5, the estimated decline in MSF food aid
tonnage under this limitation ranges from around 3,000 to 13,000 tons,
a decline significantly less than the total tonnage on voyages affected
by the limit--46,000 tons. In this analysis, carriers are estimated to
replace food aid above the limit with 1,000 to 11,000 tons of other
cargo and continue to carry 5,000 tons to 31,000 tons of food aid above
the tonnage limit. The total decline in net revenues for this group
would range from roughly $500,000 to $1 million.
Table 5: GAO Simulation of MSF Voyages with Food Aid above a 5,000 Ton
Limit, 3-Year Annual Average for Fiscal Years 2001-2003:
Dollars in millions;
Total food aid tonnage on voyages affected by the limit[B];
Estimated range of values[A]: Average value: 46,000 tons.
Factor 1: MSF vessels may carry some food aid up to the limit,
depending on number and terms of food aid shipments: Food aid tonnage
effectively above the limit[C];
Estimated range of values[A]: Low value: 11,000;
Estimated range of values[A]: Average value: 22,000;
Estimated range of values[A]: High value: 38,000.
Factor 1: MSF vessels may carry some food aid up to the limit,
depending on number and terms of food aid shipments: Food aid net
revenues associated with this tonnage;
Estimated range of values[A]: Low value: $1.3;
Estimated range of values[A]: Average value: $2.6;
Estimated range of values[A]: High value: $4.5.
Factor 2: MSF vessels may replace some food aid above the limit with
other cargo: Estimated tonnage of additional other cargo;
Estimated range of values[A]: Low value: 1,000;
Estimated range of values[A]: Average value: 5,000;
Estimated range of values[A]: High value: 11,000.
Factor 2: MSF vessels may replace some food aid above the limit with
other cargo: Net revenues earned from additional other cargo;
Estimated range of values[A]: Low value: $0.0;
Estimated range of values[A]: Average value: $0.4;
Estimated range of values[A]: High value: $0.9.
Factor 3: MSF vessels may continue to carry some food aid above the
limit and forfeit the subsidy if sufficiently profitable: Food aid
tonnage above the limit that is carried;
Estimated range of values[A]: Low value: 5,000;
Estimated range of values[A]: Average value: 15,000;
Estimated range of values[A]: High value: 31,000.
Factor 3: MSF vessels may continue to carry some food aid above the
limit and forfeit the subsidy if sufficiently profitable: Net revenues
earned from food aid above the limit minus forfeited subsidy payments;
Estimated range of values[A]: Low value: $0.5;
Estimated range of values[A]: Average value: $1.5;
Estimated range of values[A]: High value: $3.3.
Simulation estimates with factors 1-3 combined: Decline in MSF food
aid tonnage[D];
Estimated range of values[A]: Low value: 3,000;
Estimated range of values[A]: Average value: 7,000;
Estimated range of values[A]: High value: 13,000.
Simulation estimates with factors 1-3 combined: Decline in MSF net
revenues[E];
Estimated range of values[A]: Low value: $0.5;
Estimated range of values[A]: Average value: $0.7;
Estimated range of values[A]: High value: $1.0.
Source: GAO analysis using USDA data and MSF vessel data.
[A] Ranges provided are at a 90 percent confidence interval.
[B] This tonnage does not include LASH vessels.
[C] We assume carriers are not able to carry food aid tonnage exactly
up to the limit in every case, so that the food aid tonnage effectively
above the limit is greater than the difference between the tonnage and
the limit.
[D] This tonnage is calculated by subtracting the food aid tonnage
above the limit that is carried from the total food aid tonnage
effectively above the limit.
[E] This decline includes the revenue loss from carrying less food aid,
the revenue gain from carrying additional other cargo, the forfeited
subsidy payments, and cost savings from altering the cargo tonnages
carried in food aid and other goods.
[End of table]
According to this analysis, the impact estimates for a limit at both
2,500 and 5,000 tons are influenced most by variations in assumptions
pertaining to the amount of food aid effectively above the limit for
each voyage, and the share of food aid above the limit that carriers
may be able to replace with other cargo. A higher value for the amount
of food aid effectively above the limit tends to increase the estimate
for the total decline in MSF net revenues because MSF carriers are less
able to maximize carrying food aid up to the limit. A higher value for
the share of food aid above the limit that carriers might replace with
other cargo tends to lower the estimate for the total decline in MSF
net revenues because carriers are earning more money from replacement
cargo. However, this assumption tends to raise the estimate for the
total decline in MSF food aid tonnage carried because it makes the
option of forfeiting the subsidy payment to carry food aid above the
limit less profitable.
This simulation model has certain limitations resulting from two broad
areas of uncertainty not incorporated into the estimates. First, MSF
carriers may face logistical or structural constraints as imposed by
program requirements or company characteristics that would alter their
response to a tonnage limit in ways our simulation does not reflect.
For example, if an MSF carrier decides never to carry food aid above a
limit---even if it is profitable to do so, net of a forfeited subsidy
payment--then the total food aid tonnage available to the non-MSF
carriers would also increase. In addition, vessel financial data are
based on estimates of annual averages and may not incorporate the
entire range of variation for every variable.[Footnote 57] One example
might include a higher food aid cost differential associated with an
emergency food aid shipment to a remote area with particularly
expensive contract terms.
Second, our model relies on data from fiscal years 2001 to 2003, which
may not be an accurate indicator of future food aid program levels,
future food aid program requirements, or the future number of U.S.-flag
vessels participating in cargo preference. For example, if future food
aid program levels decline, then the overall tonnage and revenue
changes from a shift in the MSF's food aid market share would also
likely decline. Therefore, to the extent that our model's assumptions
do not adequately reflect these two broad areas of uncertainty, the
impacts of a tonnage limit could lie outside our estimated ranges.
[End of section]
Appendix III: Profile of Maritime Security Fleet:
The Maritime Security Fleet currently comprises 47 vessels operated by
12 companies. Table 6 provides a profile of the vessels participating
in the Maritime Security Fleet, as of December 2, 2003.
Table 6: Maritime Security Fleet, as of December 2, 2003:
MSP contract number: MA/MSP-1;
Vessel name: APL Korea;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,900 TEUs.
MSP contract number: MA/MSP-2;
Vessel name: APL Philippines;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,900 TEUs.
MSP contract number: MA/MSP-3;
Vessel name: APL Singapore;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,900 TEUs.
MSP contract number: MA/MSP-4;
Vessel name: APL Thailand;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,900 TEUs.
MSP contract number: MA/MSP-5;
Vessel name: President Adams;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,600 TEUs.
MSP contract number: MA/MSP-6;
Vessel name: President Jackson;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,600 TEUs.
MSP contract number: MA/MSP-7;
Vessel name: APL China;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,900 TEUs.
MSP contract number: MA/MSP-8;
Vessel name: President Polk;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,600 TEUs.
MSP contract number: MA/MSP-9;
Vessel name: President Truman;
Company name: American Ship Management, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,600 TEUs.
MSP contract number: MA/MSP-10;
Vessel name: Green Cove;
Company name: Central Gulf Lines, Inc;
Vessel type: Roll-on/roll-off;
Volume carried (TEUs, square feet or metric tons): 131,998 sq. ft.
MSP contract number: MA/MSP-11;
Vessel name: Green Point;
Company name: Central Gulf Lines, Inc;
Vessel type: Roll-on/roll-off;
Volume carried (TEUs, square feet or metric tons): 128,328 sq. ft.
MSP contract number: MA/MSP-12;
Vessel name: Green Lake;
Company name: Central Gulf Lines, Inc;
Vessel type: Roll-on/roll-off;
Volume carried (TEUs, square feet or metric tons): 150,828 sq. ft.
MSP contract number: MA/MSP-13;
Vessel name: Liberty;
Company name: American International Car Carrier, Inc;
Vessel type: Roll-on/roll- off;
Volume carried (TEUs, square feet or metric tons): 135,324 sq. ft.
MSP contract number: MA/MSP-14;
Vessel name: Patriot;
Company name: American International Car Carrier, Inc;
Vessel type: Roll-on/roll- off;
Volume carried (TEUs, square feet or metric tons): 155,947 sq. ft.
MSP contract number: MA/MSP-15;
Vessel name: Freedom;
Company name: American International Car Carrier, Inc;
Vessel type: Roll-on/roll- off;
Volume carried (TEUs, square feet or metric tons): 215,709 sq. ft.
MSP contract number: MA/MSP-16;
Vessel name: Chesapeake Bay;
Company name: First American Bulk Carrier Corporation;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,409 TEUs.
MSP contract number: MA/MSP-17;
Vessel name: Delaware Bay;
Company name: First American Bulk Carrier Corporation;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,409 TEUs.
MSP contract number: MA/MSP-18;
Vessel name: Endeavor;
Company name: E- SHIPS, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 1,834 TEUs.
MSP contract number: MA/MSP-19;
Vessel name: Endurance;
Company name: E-SHIPS, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 1,834 TEUs.
MSP contract number: MA/MSP-20;
Vessel name: Enterprise;
Company name: E-SHIPS, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 1,834 TEUs.
MSP contract number: MA/MSP-21;
Vessel name: Lykes Navigator;
Company name: First Ocean Bulk Carrier-I, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,698 TEUs.
MSP contract number: MA/MSP-22;
Vessel name: Lykes Discoverer;
Company name: First Ocean Bulk Carrier-II, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,698 TEUs.
MSP contract number: MA/MSP-23;
Vessel name: Lykes Liberator;
Company name: First Ocean Bulk Carrier-III, LLC;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,698 TEUs.
MSP contract number: MA/MSP-24;
Vessel name: Maersk Missouri;
Company name: Maersk Line, Limited;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,084 TEUs.
MSP contract number: MA/MSP-25;
Vessel name: Maersk Virgina;
Company name: Maersk Line, Limited;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,084 TEUs.
MSP contract number: MA/MSP-26;
Vessel name: Maersk Georgia;
Company name: Maersk Line, Limited;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,084 TEUs.
MSP contract number: MA/MSP-27;
Vessel name: Maersk Carolina;
Company name: Maersk Line, Limited;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,084 TEUs.
MSP contract number: MA/MSP-28;
Vessel name: Overseas Joyce;
Company name: OSG Car Carriers, Inc;
Vessel type: Roll on/roll-off;
Volume carried (TEUs, square feet or metric tons): 100,965 sq. ft.
MSP contract number: MA/MSP-29;
Vessel name: Sealand Achiever;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-30;
Vessel name: Sealand Florida;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-31;
Vessel name: Sealand Pride;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,890 TEUs.
MSP contract number: MA/MSP-32;
Vessel name: Sealand Motivator;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,890 TEUs.
MSP contract number: MA/MSP-33;
Vessel name: Sealand Commitment;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-34;
Vessel name: Sealand Atlantic;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-35;
Vessel name: Sealand Defender;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-36;
Vessel name: Sealand Endurance;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-37;
Vessel name: Sealand Explorer;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-38;
Vessel name: Sealand Innovator;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-39;
Vessel name: Sealand Integrity;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-40;
Vessel name: Sealand Liberator;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-41;
Vessel name: Sealand Patriot;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,306 TEUs.
MSP contract number: MA/MSP-42;
Vessel name: Sealand Performance;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-43;
Vessel name: Sealand Quality;
Company name: U.S. Ship Management, Inc;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 3,606 TEUs.
MSP contract number: MA/MSP-44;
Vessel name: Lykes Motivator;
Company name: Waterman Steamship Corporation;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,500 TEUs.
MSP contract number: MA/MSP-45;
Vessel name: Atlantic Forest;
Company name: Waterman Steamship Corporation;
Vessel type: LASH[A];
Volume carried (TEUs, square feet or metric tons): 40,795 metric tons.
MSP contract number: MA/MSP-46;
Vessel name: Green Dale;
Company name: Waterman Steamship Corporation;
Vessel type: Roll on/roll off;
Volume carried (TEUs, square feet or metric tons): 131,998 sq. ft.
MSP contract number: MA/MSP-47;
Vessel name: Lykes Explorer;
Company name: Waterman Steamship Corporation;
Vessel type: Containership;
Volume carried (TEUs, square feet or metric tons): 2,698 TEUs.
Source: MARAD and DOD.
[A] LASH or Lighter Aboard Ships are barge carrying vessels that use
barges like containers.
[End of table]
[End of section]
Appendix IV: Comments from the U.S. Agency for International
Development:
U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT:
SEP 3 2004:
Mr. Loren Yager, Ph.D.:
Director, International Affairs And Trade:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Mr. Yager:
I am pleased to provide you with the U.S. Agency for International
Development's (USAID's) formal response to the draft GAO report
entitled Maritime Security Fleet: Many Factors Determine Impact of
Potential Limits on Food Aid Shipments (September 2004).
As the report contains no specific recommendations, USAID will focus
our comments to the background portions which may impact future
discussions concerning the U.S. cargo preference program generally.
Thank you for the opportunity to respond to the GAO draft report and
for the courtesies extended by your staff in the conduct of this
review.
Sincerely,
Signed by:
John Marshall:
Assistant Administrator Bureau for Management:
Enclosure: a/s:
USAID Comments on the GAO report Maritime Security Fleet:
Many Factors Determine Impact of Potential Limits On Food Aid Shipments
(September 2004):
I. General Observations.
USAID agrees with the GAO that the overall impact of limiting food aid
tonnage for Maritime Security Fleet (MSF) vessels is difficult to
predict. The GAO used sound and logical methodologies to analyze the
extensive statistical data provided, and were able to accurately
identify trends pertaining to Maritime Security Fleet (MSF) carriers
and non-MSF carriers that carried P.L. 480 Title II food aid over a
five-year period. GAO should be commended in accomplishing their
assignment in the short timeframe provided. USA-ED finds that this is a
useful report and intends to use it for future reference.
II. Discussion of Cargo Preference and the Maritime Security Programs.
USAID would like to highlight the following points in relation to these
background portions of the report:
1. USAID needs both MSF and non-MSF carriers in order to deliver P.L.
480 Title II food aid. Typically, MSF carriers deliver packaged,
processed and tinned commodities, while non-MSF vessels deliver bulk
grains and oils. Both carriers serve a vital role in the efficient
delivery of more than 2,000 individual Title II shipments each year to
various destinations worldwide to be utilized in feeding programs,
monetization programs, school feeding, food work programs and emergency
programs such as disaster relief, famine and other such dire
circumstances.
Most MSF carriers that participate in the Title II food aid program are
containerships which operate regularly scheduled liner service on their
U.S.-flag, line-haul vessels from ports in the United States to trans-
shipment hubs in Europe and Southeast Asia. Cargoes are then trans-
shipped to foreign-flag feeder vessels for the final leg of the
delivery. This type of service is efficient and economical.
There are two types of non-MSF vessels which provide service for both
packaged commodities and bulk grains. The first type of vessel is the
bulker which carries bulk commodities such as wheat and corn. These
vessels deliver bulk commodities anywhere in the world at reasonable
rates with acceptable service provided the tonnage offered to them fits
their vessel size. They are also able to offer reasonable rates for
packaged commodities, provided there is sufficient tonnage to fill out
the vessel.
The second non-MSF vessel type is the break-bulk vessel which provides
charter or tramp service with no regular schedule. This vessel is able
to carry both packaged and bulk commodities, but typically carries
packaged commodities under the Title II program. This type of vessel is
generally smaller and more expensive than most of the vessels in the
U.S.-flag bulk fleet, thus its niche is found in the packaged commodity
market. These vessels are costly to operate and pass those costs on to
the Title II program in the form of higher rates than the other U.S.
containerships or larger bulk vessels.
2. Cargo preference is an indirect subsidy to our U.S.-flag fleet.
Throughout the draft report it is noted that DOD supports the cargo
preference program. It is unclear, however, to what extent cargo
preference achieves this objective and at what cost.
Page 12 of the draft GAO report states: "Of the 10 non-MSF carriers we
interviewed that generally provided charter service, 4 said that 60
percent or more of their annual revenues came from food aid shipments,
3 said between 20 and 50 percent, and 3 said less than 10 percent came
from these shipments. Most of the 5 MSF carriers interviewed that
provided liner service, said that food aid revenues comprised a small
percentage of their total revenues. [emphasis added]"
This indicates that MSF vessels are not necessarily relying on cargo
preference, as related to Title II food assistance, to stay afloat.
With their direct maritime security subsidy, they are able to compete
in the worldwide market and carry other types of cargoes. On the other
hand, non-MSF vessels with little or no military usefulness, which do
not receive this direct subsidy, do rely on cargo preference to
maintain their business.
Ultimately, USAID and other U.S. government agencies, in the course of
providing humanitarian food aid relief, are paying to maintain a
trained U.S. mariner base on non-MSF vessels upon which DOD can draw.
This continues to be an unfortunate dilemma for the food aid programs
that must pay the higher freight rates in maintaining compliance with
our cargo preference tonnage requirement. The Title II program, shown
recently through ongoing responses to sudden emergencies such as
Afghanistan and Sudan, is itself vital to United States national
security interests. Moreover, as the Title II food aid budget is
capped, every dollar spent to transport food is one less dollar
available to purchase food. Typically, the net cargo preference costs
to the Title II food aid program is approximately $90 million per year
in additional transportation costs.
III. Establishment of a bagged cargo preference tonnage limitation on
MSF vessels.
As stated earlier, USAID agrees that it is difficult to predict the
actual impact of a tonnage limitation. USAID offers, however, that
imposing a limit would further complicate an already complex process.
In complying with current cargo preference requirements and sub-
requirements impacting how tonnage is allocated to U.S. and foreign-
flag carriers, USAID must negotiate a priority system within and among
U.S.-vessels while taking into account a Maritime Security Act set
aside program. Adding another potentially arbitrary limitation on the
amount of tonnage assigned to various vessels would likely make the
process more difficult and less efficient; thereby impeding USAID's
ability to meet critical foreign policy and humanitarian assistance
objectives. The changing nature of food aid, with the increased
frequency of responses to sudden emergencies, can ill afford additional
financial or bureaucratic impediments. Moreover, in this era of
streamlining programs, the addition of further complexities may well be
seen as counter-productive.
IV. Conclusion:
USAID meets its obligations under the Cargo Preference Act and related
statutes. However, a delicate balance must always be struck in
balancing USAID's cargo preference obligations with the foreign
assistance objectives sought through the Title II food aid program. The
processes in place to strike this balance are very complex and
burdensome. Consequently, USAID takes a very cautious approach to any
new variables that could further complicate these complex
administrative systems, and more importantly negatively impact the
Title II program's ability to achieve foreign assistance objectives.
[End of section]
Appendix V: Comments from the Department of Agriculture:
USDA:
United States Department of Agriculture:
Farm and Foreign Agricultural Services:
Foreign Agricultural Service:
1400 Independence Ave, SW Stop 1035:
Washington. DC 20250-1035:
Mr. Loren Yager:
Director, International Affairs and Trade:
U.S. Government Accountability Office:
441 G Street. N.W.
Washington, D.C. 20548:
Dear Mr. Yager:
The U.S. Department of Agriculture (USDA) would like to thank the
Government Accountability Office (GAO) for the opportunity to comment
on draft report #GAO-04-1065 entitled "Maritime Security Fleet: Many
Factors Determine Impact of Potential Limits on Food Aid Shipments."
USDA is pleased to provide the following comments for your
consideration.
The report adequately summarizes USDA's major concerns over the impact
on food aid programs that could result from a bagged cargo tonnage
limitation placed on the Maritime Security Fleet (MSF). These concerns
are decreased food aid timeliness, increased administrative burdens and
increased shipping costs.
Although your report does not make recommendations, it does observe
potential actions that could be taken by the MSF if tonnage limitations
were to go into effect. The MSF carriers may choose to: 1 ) continue to
carry food aid up to the tonnage limit, 2) replace some food aid above
the tonnage limit with other cargo, and/or 3) carry food aid even
without the MSF Subsidy.
Given your observations, we reiterate our concern that each potential
action by the MSF carriers to bagged cargo tonnage limitations has a
potential negative effect on food aid programs. If individual carriers
were to opt out of or limit their carriage of food aid to the tonnage
limitation, we anticipate a decrease in the competition that now exists
between carriers. This loss in competition would likely result in
increased freight rates, thus increased program costs. You also observe
that carriers may elect to carry food aid tonnage in excess of the
tonnage limitation because they are able to offset the subsidy loss
with higher freight rates on the food aid tonnage. This carrier
response would directly impact food aid program costs.
The potential actions by the carriers add an additional degree of
complexity ill the already complex task of managing cargo preference.
This could lead to uncertainty in the process, which could negatively
impact not only the timeliness of deliveries but also the amount of
cargo we can provide.
In closing, I again want to thank you for allowing us to comment on
this draft report.
Sincerely,
Signed by:
A. Ellen Terpstra:
Administrator:
[End of section]
Appendix VI: Comments from the Department of Defense:
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS:
3500 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3500:
SEP 7 2004:
Mr. Loren Yager:
Director, International Affairs and Trade:
U.S. Government Accountability Office:
441 "G" Street, N.W.
Washington, D.C. 20548:
Dear Mr. Yager:
This is the Department of Defense (DoD) response to the Government
Accountability Office Draft report, "MARITIME SECURITY FLEET: Many
Factors Determine Impact of Potential Limits on Food Aid Shipments,"
dated August 25, 2004 (GAO Code 320245/GAO-04-1065):
The DoD acknowledges receipt of the draft report and in general concurs
with the findings. The Department of Defense supports a strong and
viable United States Merchant Marine which provides DoD with needed
U.S.-flag vessels and mariners during war. The Cargo Preference and
Maritime Security Programs are vital to the U.S. Merchant Marine and
DoD. Any change in cargo preference that would adversely impact the
U.S. Merchant Marine will have a similar negative impact to DoD's
mobilization capabilities. The Department appreciates the opportunity
to comment on the draft report.
Sincerely,
Signed for:
Bradley Berkson:
Principal Assistant:
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Celia Thomas (202) 512-8987 Leyla Kazaz (202) 512-9638:
Acknowledgments:
In addition to those named above, Jay Cherlow, Martin De Alteriis,
Jamie McDonald, Eric Petersen, Kendall Schaefer, Richard Seldin, and
Daniel Williams made key contributions to this report.
(320245):
FOOTNOTES
[1] Cargo preference is the reservation, by law, for transportation on
U.S.-flag vessels, of all or a portion of all ocean borne cargo that
moves in international trade, either as a direct result of the federal
government's involvement or indirectly because of the financial
sponsorship of a federal program or guarantee provided by the federal
government. These preference cargoes include agricultural, military,
and Export-Import Bank cargoes. This report focuses only on cargo
preference food aid shipments; cargo preference shipments of military
or other cargo were outside the scope of our review. Agricultural
preference cargoes accounted for about a quarter of all preference
cargoes, by tonnage, according to Maritime Administration data for
2002.
[2] MSF comprises vessels that participate in the Maritime Security
Program, a program established by the Maritime Security Act of 1996
that provides funding to U.S. vessels participating in international
trade, to support the Department of Defense (DOD).
[3] Section 3535 of the National Defense Authorization Act for fiscal
year 2004, P.L. 108-136, 117 Stat. 1818-19.
[4] We did not conduct an evaluation of programs related to this study,
including the cargo preference program and the Maritime Security
Program.
[5] Self-reported financial data is subject to limited verification.
Heightened uncertainties in our analysis relating to financial data are
discussed in appendixes I and II.
[6] Our analysis and findings are expressed in terms of metric tons.
[7] We use the term net revenues to reflect revenues minus costs.
[8] A 1954 amendment to the Merchant Marine Act of 1936 (P.L. 83-664),
requires that at least 50 percent of the gross tonnage of all
government-generated cargo be transported on privately owned, U.S.-flag
commercial vessels to the extent such vessels are available at fair and
reasonable rates. In 1985, the Merchant Marine Act of 1936 was amended
to require that the percentage of certain agricultural cargoes to be
carried on U.S.-flag vessels be increased from 50 to 75 percent. The
Cargo Preference Act of 1904 requires 100 percent of supplies bought
for U.S. military departments to be carried on U.S.-flag vessels
available at rates that are not excessive or otherwise unreasonable.
Finally, Public Resolution 17 of the 73RD Congress calls for all
cargoes, resulting from loans from federal government agencies, such as
the Export-Import Bank of the United States, to be shipped exclusively
on U.S.-flag vessels, unless MARAD grants a waiver.
In addition, Section 901(b) of the Merchant Marine Act of 1936, as
amended, prohibits vessels built or rebuilt outside the United States
or under foreign registry from carrying preference cargo subject to the
Act for 3 years, unless the vessel is in MSF.
[9] For cargo preference, MARAD establishes the regulations governing
how the cargo preference laws are to be implemented by federal
agencies. MARAD also exercises oversight over how these regulations are
carried out in practice by federal agencies, such as when USAID and
USDA determine ocean transportation for food aid shipments. It also
reimburses USAID and USDA for a portion of the higher costs related to
using U.S.-flag vessels. For the Maritime Security Program, MARAD
screens applicants to MSF, establishes operating agreements with the
carriers that are selected, and provides their monthly subsidy payment.
[10] The Agricultural Trade Development and Assistance Act of 1954,
P.L. 83-480, 68 Stat. 454.
[11] Food for Progress provides for the donation or credit sale of U.S.
commodities to developing countries and emerging democracies to support
democracy and an expansion of private enterprise. Section 416(b)
provides for overseas donations of surplus USDA commodities. The
McGovern-Dole International Food for Education and Child Nutrition
Program provides for donations of U.S. agricultural products, as well
as financial and technical assistance, for school feeding and maternal
and child nutrition projects in low-income, food-deficit countries that
are committed to universal education.
[12] One reason for MARAD support of the U.S.-flag fleet is concern
about its continuing decline. From 1983 to 2003, the number of active
privately owned ships in the U.S.-flag fleet declined by about half and
their carrying capacity fell by about 25 percent, according to MARAD
data. Another concern is related to the declining size of the U.S.-
citizen mariner pool.
[13] However, cargo preference has also meant that U.S. government-
sponsored cargoes, including food aid, have been required to be shipped
on higher-cost vessels, resulting in historically higher government
transportation costs. See GAO, Cargo Preference Requirements:
Objectives Not Significantly Advanced When Used in U.S. Food Aid
Programs, GAO/GGD-94-215 (Washington, D.C.: Sept. 29, 1994) and GAO,
Maritime Industry: Cargo Preference Laws--Estimated Costs and Effects,
GAO/RCED-95-34 (Washington, D.C.: Nov. 30, 1994).
[14] There was an annual average of 108 U.S.-flag vessels that carried
food aid during these years.
[15] Maritime Security Act of 1996, P.L. 104-239, 110 Stat. 3118.
[16] The exception was that the subsidy payment was $2.3 million for
the first year of the program, 1996. However, according to MARAD, the
Act was not signed until the end of the first year, so the $2.3 million
was never paid.
[17] P.L. 108-136, 117 Stat. 1803.
[18] These 12 operating companies were owned by 8 carriers. Of these 8
carriers, 5 had participated in cargo preference food aid shipments.
[19] Roll-on/roll-off ships are vehicle carriers that allow vehicles
such as cars, trucks, or tanks to drive on and off the ship. They do
not participate in food aid shipments.
[20] According to MARAD, MSF ships have approximately 940 mariner
billets. MARAD calculates that each billet supports 2.3 mariners based
on current industry ratios, so that the number of employed mariners
would total 2,162. However, DOD calculates that each billet supports 2
mariners in its contingency planning, which would result in a total of
1,880 mariners.
[21] The reserve fleet comprises (1) the Ready Reserve Force, 59
standby reserve ships maintained by MARAD and (2) DOD's Surge Force, 8
fast sealift ships and 11 large, medium-speed roll-on/roll-off ships.
Reserve fleet vessels are kept ready with a skeleton crew but need
additional mariners to make a full complement when activated for
service.
[22] DOD prepositioned sealift ships are kept fully loaded with
military material and fully crewed at all times to be ready to embark
immediately to a war zone in the initial surge of a deployment.
[23] A TEU is the unit of measure for containerized cargo. One 20-foot
container would be one TEU, while one 40-foot container would be two
TEUs.
[24] Bagged cargo includes agricultural commodities that are packaged
or processed. Processed commodities are packaged in bags, tins, or
other containers.
[25] In 1999, bulk commodity purchases were augmented to provide food
aid to Russia. This donation to Russia was one of the largest single
food aid transfers in U.S. history.
[26] Value-added commodities are processed, fortified, or bagged, and
include such food products as wheat flour, cornmeal, corn-soy blend,
and vegetable oil.
[27] Title I spending also declined from 1992 to 1998, before the spike
in 1999 when food aid was provided to Russia.
[28] If foreign-flag vessels are included, the total is $499 million.
[29] This estimate is for food aid shipments by tonnage from both
containership and LASH carriers with U.S.-flag liner service and
consequently includes shipments from some non-MSF carriers. Title II
food aid data only records the carrier rather than the vessel name.
[30] P. L. 104-239, 110 Stat. 3138.
[31] Agencies are required to count all vessels that carry this cargo
as Priority 3 service, or foreign-flag vessel service, according to
USDA and USAID officials.
[32] These data reflect an estimate because USDA's food aid shipment
database does not designate this cargo differently from other food aid
cargo that is shipped from Great Lakes ports.
[33] Few U.S.-or foreign-flag carriers offer to transport food aid
cargo by sailing on the Great Lakes.
[34] According to USAID, non-MSF carriers also indirectly benefit from
this cargo because it is treated as foreign flag, even though it is
mostly carried by U.S.-flag vessels, thereby leaving a higher
proportion of U.S.-flag cargo available for the non-MSF carriers.
[35] Increasing or decreasing a bulk tonnage limitation on current MSF
vessels will have no effect because these vessels currently do not
carry bulk cargo. However, according to MARAD, the new Maritime
Security Program allots space for five tanker vessels that would be
impacted by a bulk tonnage limitation, and would therefore have a
disincentive to join MSF.
[36] Almost all LASH voyages carried in excess of 7,500 tons of food
aid such that establishing a tonnage limitation at any of the proposed
levels would affect these vessels. However, only one LASH vessel
remains in MSF.
[37] This figure represents a 3-year annual average for data from
fiscal years 2001 through 2003.
[38] According to USDA and USAID, the food aid tonnage on both MSF and
non-MSF vessel voyages is often comprised of multiple food aid
contracted shipments, often from different agencies and programs, such
that a carrier could decrease the food aid tonnage carried on a voyage.
With regard to carriers' ability to bid on a portion of a contract,
program agencies, carriers, and industry representatives had different
opinions. MARAD officials stated that contracts are typically
structured to require carriage of the total tonnage with specific
arrival dates, which prevents the splitting of cargoes. USAID and USDA
noted that carriers' flexibility is limited because contract terms are
primarily determined by the private voluntary organizations that seek
the food aid grants, however, they acknowledged that bidding on a
portion of a contract was possible.
[39] The five MSF carriers reported that they would not give up their
subsidy to carry food aid on any voyage -a view that was corroborated
by MARAD. However, USDA acknowledged that this practice could be
financially beneficial for large voyages.
[40] See appendix II for a more detailed discussion of the model's
probability distributions, assumptions that are used to assign the
probabilities, and the limitations in financial data that heighten the
model's uncertainties.
[41] Simulation results for a tonnage limit at 5,000 tons are included
in appendix II. We did not perform the simulation on a tonnage limit at
7,500 tons, given that so few containership voyages carried cargo at
that level and that only one LASH vessel remains in the MSF.
[42] This percentage only reflects tonnage impacts forecasted for MSF
containerships. If the one remaining LASH vessel in the MSF were to
also carry less food aid, then these percentages would rise.
[43] When we asked the non-MSF carriers about excess capacity, only 3
of 10 reported they could do more sailings with their existing vessels
while the others would either have to charter or buy new vessels.
Additionally, most MSF and non-MSF carriers reported that food aid
agencies tend to bunch up contracts in the last 3 months of the fiscal
year, such that vessel availability could become a problem under a
tonnage limitation.
[44] According to MARAD, a service contract is a long-term contract
arranged for a regular volume of cargo to be delivered over a period of
time for a negotiated freight rate. If a tonnage limit were imposed,
MARAD is concerned that MSF carriers would not be able to participate
in service contracts because they would fear exceeding a tonnage
limitation.
[45] We did not analyze freight rate differences between MSF and non-
MSF carriers. Both groups of carriers emphasized that competitive
pressures in the market limit their ability to raise prices.
[46] As in the simulation model results in our report, this simulation
assumed that the food aid effectively above the limit (or given up to
keep the subsidy on a voyage) equaled the amount above the limit plus
an additional amount that ranged from 0 to 2,500 tons. The most likely
value in this range of incremental amounts was changed from 0 to 1,250.
Other distributions in the simulation model were unchanged. Other
impacts of this changed distribution include a similar percentage
increase in net revenue lost from carrying food aid and a greater
likelihood that carriers would forgo the subsidy to carry larger food
aid shipments on some voyages. The average overall decline in MSF food
aid tonnage due to the limit under this scenario was about 42,000 tons,
compared with 39,000 tons in the simulation we report.
[47] We provided the individual simulation results for each of the
three carrier options discussed in the report in table 3, for a limit
of 2,500 tons, and in table 5, for a limit of 5,000 tons. While
eliminating any one of the three carrier options would affect the
results for the remainder of the model, the results are provided
individually in order to illustrate the types of impacts associated
with each option.
[48] Port selection criteria included the tonnage of bagged cargo
handled by the port as well as factors relating to geographic location
and whether the port services MSA-17 cargo.
[49] A Monte Carlo simulation is a widely used computational method for
generating probability distributions of variables that depend on other
variables or parameters represented as probability distributions.
[50] We did not perform the simulation on a tonnage limit at 7,500
tons, given that so few containership voyages carried cargo at that
level and that only one LASH vessel remains in MSF.
[51] We use the term net revenue to reflect revenue minus costs.
[52] Our cost data reflect total costs incurred by the MSF carrier for
each vessel's annual operations. They include vessel expenses such as
wages and insurance, as well as cargo handling expenses. They do not
include administrative and general expenses incurred by the carrier
company.
[53] We used the days of outbound service because a vessel carrying
food aid cargo above a tonnage limit would have to forfeit its subsidy
only for the days the food aid is on the vessel, which occur on the
outbound portion of its voyage.
[54] The primary reasons for this cost difference include container
stuffing and stripping costs, as well as fumigation costs that are
required for food aid and not for commercial cargo. This estimate does
not include cost differences pertaining to particular voyage contract
terms.
[55] Monte Carlo simulation is a widely used computational method for
generating probability distributions of variables that depend on other
variables or parameters represented as probability distributions. Monte
Carlo methods are to be contrasted with the deterministic methods used
to generate specific single number or point estimates.
[56] We did not analyze a food aid limit at 7,500 tons in our model due
to the fact that recent data show that most of these voyages occurred
on LASH vessels that are being phased out of MSF.
[57] Vessel financial data are also self-reported, and we were only
able to do limited verification of these data.
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