Maritime Administration
Weaknesses Identified in Management of the Title XI Loan Guarantee Program Gao ID: GAO-03-657 June 30, 2003Title XI of the Merchant Marine Act of 1936, as amended, is intended to help promote growth and modernization of the U.S. merchant marine and U.S. shipyards by enabling owners of eligible vessels and shipyards to obtain financing at attractive terms. The program has committed to guarantee more than $5.6 billion in ship construction and shipyard modernization costs since 1993, but it has experienced several large-scale defaults over the past few years. Because of concerns about the scale of recent defaults, GAO was asked to (1) determine whether MARAD complied with key program requirements, (2) describe how MARAD's practices for managing financial risk compare to those of selected private-sector maritime lenders, and (3) assess MARAD's implementation of credit reform.
The Maritime Administration (MARAD) has not fully complied with some key Title XI program requirements. While MARAD generally complied with requirements to assess an applicant's economic soundness before issuing loan guarantees, MARAD did not ensure that shipowners and shipyard owners provided required financial statements, and it disbursed funds without sufficient documentation of project progress. Overall, MARAD did not employ procedures that would help it adequately manage the financial risk of the program. MARAD could benefit from following the practices of selected private sector maritime lenders. These lenders separate key lending functions, offer less flexibility on key lending standards, use a more systematic approach to loan monitoring, and rely on experts to estimate the value of defaulted assets. With regard to credit reform implementation, MARAD uses a simplistic cash flow model to calculate cost estimates, which have not reflected recent experience. If this pattern of recent experience were to continue, MARAD would have significantly underestimated the cost of the program. MARAD does not operate the program in a businesslike fashion. Consequently, MARAD cannot maximize the use of its limited resources to achieve its mission, and the program is vulnerable to fraud, waste, abuse, and mismanagement. Also, because MARAD's subsidy estimates are questionable, Congress cannot know the true costs of the program.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-657, Maritime Administration: Weaknesses Identified in Management of the Title XI Loan Guarantee Program
This is the accessible text file for GAO report number GAO-03-657
entitled 'Maritime Administration: Weaknesses Identified in Management
of the Title XI Loan Guarantee Program' which was released on June 30,
2003.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Committee on Commerce, Science, and
Transportation, U.S. Senate:
United States General Accounting Office:
GAO:
June 2003:
Maritime Administration:
Weaknesses Identified in Management of the Title XI Loan Guarantee
Program:
GAO-03-657:
GAO Highlights:
Highlights of GAO-03-657, a report to the Chairman, Senate Committee
on Commerce, Science, and Transportation
Why GAO Did This Study:
Title XI of the Merchant Marine Act of 1936, as amended, is intended
to help promote growth and modernization of the U.S. merchant marine
and U.S. shipyards by enabling owners of eligible vessels and
shipyards to obtain financing at attractive terms. The program has
committed to guarantee more than $5.6 billion in ship construction and
shipyard modernization costs since 1993, but it has experienced
several large-scale defaults over the past few years. Because of
concerns about the scale of recent defaults, GAO was asked to (1)
determine whether MARAD complied with key program requirements, (2)
describe how MARAD‘s practices for managing financial risk compare to
those of selected private-sector maritime lenders, and (3) assess
MARAD‘s implementation of credit reform.
What GAO Found:
The Maritime Administration (MARAD) has not fully complied with some
key Title XI program requirements. While MARAD generally complied with
requirements to assess an applicant‘s economic soundness before
issuing loan guarantees, MARAD did not ensure that shipowners and
shipyard owners provided required financial statements, and it
disbursed funds without sufficient documentation of project progress.
Overall, MARAD did not employ procedures that would help it adequately
manage the financial risk of the program.
MARAD could benefit from following the practices of selected private
sector maritime lenders. These lenders separate key lending functions,
offer less flexibility on key lending standards, use a more systematic
approach to loan monitoring, and rely on experts to estimate the value
of defaulted assets.
With regard to credit reform implementation, MARAD uses a simplistic
cash flow model to calculate cost estimates, which have not reflected
recent experience. If this pattern of recent experience were to
continue, MARAD would have significantly underestimated the cost of
the program.
MARAD does not operate the program in a businesslike fashion.
Consequently, MARAD cannot maximize the use of its limited resources
to achieve its mission, and the program is vulnerable to fraud, waste,
abuse, and mismanagement. Also, because MARAD‘s subsidy estimates are
questionable, Congress cannot know the true costs of the program.
What GAO Recommends:
GAO recommends that Congress consider providing no new funds for new
loan guarantees under the Title XI program until certain controls have
been instituted and MARAD has updated its default and recovery
assumptions to more accurately reflect costs. GAO also recommends that
MARAD undertake several reforms to help improve program management.
In written comments, the Department of Transportation disagreed with
some report findings, however, recognized that program improvements
were needed.
www.gao.gov/cgi-bin/getrpt?GAO-03-657.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Tom McCool at (202)
512-8678 or mccoolt@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
MARAD Has Not Fully Complied with Some Key Title XI Program
Requirements:
MARAD Techniques to Manage Financial Risk Contrast to Techniques of
Selected Private-sector Maritime Lenders:
MARAD's Credit Subsidy Estimates and Reestimates Are Questionable:
Conclusions:
Matters for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Transportation:
Appendix III: Comments from the Office of Management and Budget:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Projects Included in Our Review:
Table 2: Comparison of Private-sector and MARAD Maritime Lending
Practices:
Table 3: Projects Selected for Our Review:
Figures:
Figure 1: MARAD's Defaulted Projects (1993-2002):
Figure 2: Estimated and Actual Defaults of Title XI Loan Guarantees
(1996-2002):
Figure 3: Estimated and Actual Recoveries on Title XI Loan Defaults
(1996-2002):
Abbreviations:
AMCV: American Classic Voyages, Co.
DCAA: Defense Contract Audit Agency
DOT: Department of Transportation
FCRA: Federal Credit Reform Act
IG: Department of Transportation Inspector General
MARAD: Maritime Administration
MHI: Massachusetts Heavy Industries, Inc.
OMB: Office of Management and Budget
SEC: Securities and Exchange Commission:
United States General Accounting Office:
Washington, DC 20548:
June 30, 2003:
The Honorable John McCain
Chairman
Committee on Commerce, Science, and Transportation
United States Senate:
Dear Mr. Chairman:
Under the Title XI Loan Guarantee Program, the Maritime Administration
(MARAD) committed to guarantee more than $5.6 billion in shipyard
modernization and ship construction projects over the last 10 years.
During this period, MARAD experienced nine defaults associated with
these loan guarantee commitments totaling over $1.3 billion. The
defaulted amounts associated with these nine loan guarantee commitments
totaled $489 million.[Footnote 1] Five of these defaults were by
subsidiaries of American Classic Voyages Company (AMCV), a shipowner.
AMCV defaults represented 67 percent of all defaulted amounts
experienced by MARAD during this period, with this borrower having
defaulted on guaranteed loan projects in amounts totaling $330 million.
The largest loan guarantee ever approved by MARAD, for over $1.1
billion, was for Project America, Inc., a subsidiary of AMCV. Project
America, Inc., had entered into a contract in March 1999 with Northrup
Grumman Corporation (formerly Litton Ingalls Shipbuilding) in
Pascagoula, Mississippi, for the construction of two cruise ships. In
October 2001, AMCV filed for bankruptcy, defaulting on $187 million in
loan guarantees associated with Project America.
As of December 31, 2002, MARAD's portfolio included approximately $3.4
billion in executed loan guarantees, representing 103 projects for 818
vessels and four shipyard modernizations.[Footnote 2] At the end of
fiscal year 2002, MARAD had approximately $20 million in unexpended,
unobligated budget authority that had been appropriated in prior years.
In its 2004 budget, the administration requested no new funds for the
Title XI program.
Because of concerns about the scale of recent defaults experienced by
MARAD, particularly those associated with AMCV, you asked us to conduct
a study of the Title XI loan guarantee program. Specifically, you asked
us to (1) determine whether MARAD complied with key Title XI program
requirements in approving initial and subsequent agreements, monitoring
and controlling funds, and handling defaults; (2) describe how MARAD's
practices for managing financial risk compare to those of selected
private-sector maritime lenders; and (3) assess MARAD's implementation
of credit reform as it relates to the Title XI program.
To determine whether MARAD complied with key Title XI program
requirements, we identified key program requirements and reviewed how
these were applied to the management of five loan guarantee projects.
To determine how MARAD's practices for managing financial risk compare
to those of selected private-sector maritime lenders, we interviewed
three maritime lenders to learn about lending practices, and compared
these practices to MARAD's. To assess MARAD's implementation of credit
reform, we analyzed MARAD's subsidy cost estimation and reestimation
processes and examined how the assumptions MARAD uses to calculate
subsidy cost estimates compare to MARAD's actual program experience. We
conducted our work in Washington, D.C., and New York, N.Y., between
September 2002 and April 2003 in accordance with generally accepted
government auditing standards. Appendix I contains a full description
of our scope and methodology.
Results in Brief:
MARAD has not fully complied with some key Title XI program
requirements. In approving loan guarantees, MARAD generally complied
with requirements to assess an applicant's economic soundness. MARAD
used waivers or modifications, which, although permitted by Title XI
regulations, allowed MARAD to approve applications where borrowers did
not meet all financial requirements. In monitoring projects it
financed, MARAD did not ensure that shipowners and shipyard owners
provided required financial statements. Overall, we could not always
track financial reporting because of missing or incomplete
documentation. Without a systematic analysis of changes in the
financial condition of its borrowers, MARAD cannot take the appropriate
steps to minimize losses. Further, MARAD disbursed loan funds without
sufficient documentation of project progress. MARAD also permitted a
shipowner to minimize its investment in a project before receiving
guaranteed loan funds. With respect to the disposition of assets, MARAD
has guidelines, but no requirements, in place to ensure that it
maximizes recoveries.
Selected private-sector maritime lenders told us that they manage
financial risk by (1) establishing a clear separation of duties for key
lending functions; (2) permitting few, if any, exceptions to key
underwriting standards; (3) using a more systematic approach to
monitoring the progress of projects; and (4) employing independent
parties to survey and appraise defaulted assets. Private-sector
representatives we interviewed stated that they were very selective
when originating loans for the shipping industry. While MARAD cites its
mission as an explanation as to why it does not employ these practices,
these controls would actually help it to accomplish its mission while
managing financial risk.
MARAD's credit subsidy estimates and reestimates are questionable.
MARAD uses a relatively simplistic cash flow model that is based on
outdated assumptions, which lack supporting documentation, to prepare
its estimates of defaults and recoveries. While the nature and
characteristics of the Title XI program make it difficult to estimate
subsidy costs and may affect MARAD's ability to produce reliable cost
estimates, MARAD has not performed the basic analyses necessary to
assess and improve its estimates, which differ significantly from
recent actual experience. Specifically, we found that in comparison
with recent actual experience, MARAD's default estimates significantly
understate defaults, and its recovery estimates significantly overstate
recoveries. If this pattern of recent experiences were to continue,
MARAD would have significantly underestimated the costs of the program.
Agencies should use sufficient reliable historical data to estimate
credit subsidies and update--reestimate--these estimates annually
based on an analysis of actual program experience. However, MARAD has
never evaluated the performance of its loan guarantee projects to
determine if its subsidy cost reestimates were comparable to actual
costs. Finally, while the Office of Management and Budget (OMB)
approved each MARAD estimate and reestimate, its review was not
sufficient since it did not identify that MARAD's assumptions were
outdated and lacked adequate support.
This report makes several recommendations to help MARAD improve its
management of the Title XI loan guarantee program, including its
processes for approving loan guarantees, monitoring and controlling
funds, and managing and disposing of defaulted assets, and better
implementing its responsibilities under the Federal Credit Reform Act
(FCRA). We also recommend that Congress consider legislation to clarify
borrower equity contribution requirements and incorporate
concentration risk in the approval of loan guarantees. Because of the
fundamental flaws we have identified, we question whether MARAD should
approve new loan guarantees without first addressing these program
weaknesses.
We provided a draft of this report to the Department of Transportation
for its review and comment. MARAD noted that it has already begun to
take steps to improve the operations of the Title XI program,
consistent with several of our recommendations. MARAD disagreed with
the manner in which we characterized some report findings, and provided
additional information and data that we have incorporated into our
analyses and report as appropriate. We also provided a copy of the
draft report to OMB for its review and comment. OMB agreed that recent
recovery expectations should be incorporated into future reestimates,
but disagreed that it had provided little or no oversight over the
program's subsidy cost estimates. However, we believe that had OMB
provided greater review and oversight of MARAD's estimates and
reestimates, it would have realized that MARAD did not have adequate
support for its default and recovery assumptions.
Background:
Title XI of the Merchant Marine Act of 1936, as amended, authorizes the
Secretary of Transportation to guarantee debt issued for the purpose of
financing or refinancing the construction, reconstruction, or
reconditioning of U.S.-flag vessels or eligible export vessels built in
U.S. shipyards and the construction of advanced and modern shipbuilding
technology of general shipyard facilities located in the United
States.[Footnote 3] Title XI guarantees are backed by the full faith
and credit of the United States. Title XI was created to help promote
growth and modernization of the U.S. merchant marine and U.S. shipyards
by enabling owners of eligible vessels and shipyards to obtain long-
term financing on terms and conditions that might not otherwise be
available. Under the program, MARAD guarantees the payment of principal
and interest to purchasers of bonds issued by vessel and shipyard
owners. These owners may obtain guaranteed financing for up to 87.5
percent of the total cost of constructing a vessel or modernizing a
shipyard. Borrowers obtain funding for guaranteed debt obligations in
the private sector, primarily from banks, pension funds, life insurance
companies, and the general public. MARAD loan guarantees represent
about 10 percent of the U.S.-flagged maritime financing market,
according to MARAD officials. However, MARAD plays a greater role in
certain segments of the maritime finance market. For example, according
to a private-sector maritime lender, MARAD guarantees financing on
about 15 percent of the country's inland barge market.
Over the last 10 years, MARAD experienced defaults in amounts that
totaled $489 million. One borrower, AMCV, defaulted on five loan
guarantee projects in amounts totaling $330 million, 67 percent of the
total defaulted amounts. Figure 1 shows the nine defaults experienced
by MARAD over the past 10 years, five of which were associated with
AMCV and which are shown in gray.
Figure 1: MARAD's Defaulted Projects (1993-2002):
[See PDF for image]
[End of figure]
Once an applicant submits a Title XI application to MARAD, and prior to
execution of a guarantee, MARAD must determine the economic soundness
of the project, as well as the applicant's capability to construct or
operate the ship or shipyard. For example, the shipowner or shipyard
must have sufficient operating experience and the ability to operate
the vessels or employ the technology on an economically sound basis.
The shipowner or shipyard must also meet certain financial requirements
with respect to working capital and net worth.
The amount of the obligations that MARAD may guarantee for a project is
based on the ship or shipyard costs. Title XI permits guarantees not
exceeding 87.5 percent of the actual cost of the ship or shipyard, with
certain projects limited to 75 percent financing. The interest rate of
the guaranteed obligations is determined by the private
sector.[Footnote 4] MARAD also levies certain fees associated with the
Title XI program. For example, applicants must pay a nonrefundable
filing fee of $5,000. In addition, prior to issuance of the commitment
letter, the applicant must pay an investigation fee against which the
filing fee is then credited. Participants must also pay a guarantee
fee, which is calculated by determining the amount of obligations
expected to be outstanding and disbursed to the shipowner or shipyard
during each year of financing.
The Title XI program is also subject to the Federal Credit Reform Act
(FCRA) of 1990, which was enacted to require that agency budgets
reflect a more accurate measurement of the government's subsidy costs
for direct loans and loan guarantees. FCRA is intended to provide
better cost comparisons both among credit programs and between credit
and noncredit programs. The credit subsidy cost is the government's
estimated net cost, in present value terms, of direct or guaranteed
loans over the entire period the loans are outstanding. Credit reform
was intended to ensure that the full cost of credit programs would be
reflected in the budget so that the executive branch and Congress might
consider these costs when making budget decisions. Each year, as part
of the President's Budget, agencies prepare estimates of the expected
subsidy costs of new lending activity for the upcoming year. Unless OMB
approves an alternative proposal, agencies are also required to
reestimate this cost annually. OMB has oversight responsibility for
federal loan program compliance with FCRA requirements and has
responsibility for approving subsidy estimates and reestimates.
All credit programs automatically receive any additional budget
authority that may be needed to fund reestimates.[Footnote 5] For
discretionary programs this means there is a difference in the budget
treatment of the original subsidy cost estimates and of subsidy cost
reestimates. The original estimated subsidy cost must be appropriated
as part of the annual appropriation process and is counted under any
existing discretionary funding caps. However, any additional
appropriation for upward reestimates of subsidy cost is not constrained
by any budget caps. This design could result in a tendency to
underestimate the initial subsidy costs of a discretionary program.
Portraying a loan program as less costly than it really is when
competing for funds means more or larger loans or loan guarantees could
be made with a given appropriation because the program then could rely
on a permanent appropriation for subsequent reestimates to cover any
shortfalls. This built-in incentive is one reason to monitor subsidy
reestimates. Monitoring reestimates is a key control over tendencies to
underestimate costs as well as a barometer of the quality of agencies'
estimation processes.
When credit reform was enacted, it generally was recognized that
agencies did not have the capacity to implement fully the needed
changes in their accounting systems in the short-term and that the
transition to budgeting and accounting on a present-value basis would
be difficult. However, policy makers expected that once agencies
established a systematic approach to subsidy estimation based on
auditable assumptions, present value-based budgeting for credit would
provide them with significantly better information.
MARAD Has Not Fully Complied with Some Key Title XI Program
Requirements:
MARAD has not fully complied with some key Title XI program
requirements. We found that MARAD generally complied with requirements
to assess an applicant's economic soundness before issuing loan
guarantees. MARAD used waivers or modifications, which, although
permitted by MARAD regulations, allowed MARAD to approve some
applications even though borrowers had not met all financial
requirements. MARAD did not fully comply with regulations and
established practices pertaining to project monitoring and fund
disbursement. Finally, while MARAD has guidance governing the
disposition of defaulted assets, adherence to this guidance is not
mandatory, and MARAD did not always follow it in the defaulted cases we
reviewed. We looked at five MARAD-financed projects (see table 1).
Table 1: Projects Included in Our Review:
Dollars in millions.
(AMCV) Project America, Inc.; Year loan committed: 1999;
Original amount: $1,079.5; Risk category: 2A; Status: Default.
Searex; Year loan committed: 1996; Original amount: $77.3;
Risk category: 2B; Status: Default.
Massachusetts Heavy Industries (MHI); Year loan committed: 1997;
Original amount: $55.0; Risk category: 3; Status:
Default.
Hvide Van Ommeran Tankers (HVIDE); Year loan committed: 1996;
Original amount: $43.2; Risk category: 2C; Status: Active.
Global Industries; Year loan committed: 1996; Original amount:
$20.3; Risk category: 1C; Status: Active.
Source: MARAD.
Note: MARAD places projects into one of seven risk categories that,
from lowest to highest, are 1A, 1B, 1C, 2A, 2B, 2C, and 3.
[End of table]
MARAD Used Waivers and Modifications to Approve Loans That Would
Otherwise Not Be Approved:
MARAD regulations do not permit MARAD to guarantee a loan unless the
project is determined to be economically sound.[Footnote 6] MARAD
generally complied with requirements to assess an applicant's economic
soundness before approving loan guarantees, and we were able to find
documentation addressing economic soundness criteria for the projects
included in our review. Specifically, we were able to find
documentation addressing supply and demand projections and other
economic soundness criteria for the projects included in our
review.[Footnote 7] In 2002, MARAD's Office of Statistical and Economic
Analysis found a lack of a standardized approach for conducting market
analyses. Because of this concern, in November 2002, it issued guidance
for conducting market research on marine transportation services.
However, adherence to these guidelines is not required. According to
the Department of Transportation (DOT) Assistant Secretary for
Administration, the market research guidelines developed by the Office
of Statistical and Economic Analysis were neither requested nor
approved by Title XI program management. Finally, while MARAD may not
waive economic soundness criteria, officials from the Office of
Statistics and Economic Analysis which is responsible for providing
independent assessment of the market impact on economic soundness
expressed concern that their findings regarding economic soundness
might not always be fully considered when MARAD approved loan
guarantees.[Footnote 8] They cited a recent instance where they
questioned the economic soundness of a project that was later approved
without their concerns being addressed. According to the Associate
Administrator for Shipbuilding, all concerns, including economic
soundness concerns, are considered by the MARAD Administrator.
Shipowners and shipyard owners are also required to meet certain
financial requirements during the loan approval process. However, MARAD
used waivers or modifications, which, although permitted by Title XI
regulations, allowed MARAD to approve some applications even though
borrowers had not met all financial requirements that pertained to
working capital, long-term debt, net worth, and owner-invested
equity.[Footnote 9] For example, AMCV's Project America, Inc., did not
meet the qualifying requirements for working capital, among other
things. Although MARAD typically requires companies to have positive
working capital, an excess of current assets over current liabilities,
the accounting requirements for unterminated passenger payments
significantly affect this calculation because this deferred revenue is
treated as a liability until earned.[Footnote 10] Because a cruise
operator would maintain large balances of current liabilities, MARAD
believed it would be virtually impossible for AMCV to meet a positive
working capital requirement if sound cash management practices were
followed.[Footnote 11] Subsequently, MARAD used cash flow tests for
Project America, Inc., in lieu of working capital requirements for
purposes of liquidity testing. According to the Assistant Secretary for
Administration, one of the major cruise lines uses cash flow tests as a
measure of its liquidity.
According to MARAD officials, waivers or modifications help them meet
the congressional intent of the Title XI program, which is to promote
the growth and modernization of the U. S. merchant marine industry.
Further, they told us that the uniqueness of the Title XI projects and
marine financing lends itself to the use of waivers and modifications.
However, by waiving or modifying financial requirements, MARAD
officials may be taking on greater risk in the loans they are
guaranteeing. Consequently, the use of waivers or modifications could
contribute to the number or severity of loan guarantee defaults and
subsequent federal payouts. In a recent review, the Department of
Transportation Inspector General (IG) noted that the use of
modifications increases the risk of the loan guarantee to the
government and expressed concern about MARAD undertaking such
modifications without taking steps to mitigate those risks.[Footnote
12] The IG recommended that MARAD require a rigorous analysis of the
risks from modifying any loan approval criteria and impose compensating
requirements on borrowers to mitigate these risks.
MARAD Did Not Follow Requirements for Monitoring the Financial
Condition of Projects and for Controlling the Disbursement of Loan
Funds:
MARAD did not fully comply with requirements and its own established
practices pertaining to project monitoring and fund disbursement.
Program requirements specify periodic financial reporting, controls
over the disbursement of loan funds, and documentation of amendments to
loan agreements. MARAD could not always demonstrate that it had
complied with financial reporting requirements. In addition, MARAD
could not always demonstrate that it had determined that projects had
made progress prior to disbursing loan funds. Also, MARAD broke with
its own established practices for determining the amount of equity a
shipowner must invest prior to MARAD making disbursements from the
escrow fund.[Footnote 13] MARAD did so without documenting this change
in the loan agreement. Ultimately, weaknesses in MARAD's monitoring
practices could increase the risk of loss to the federal government.
MARAD regulations specify that the financial statements of a company in
receipt of a loan guarantee shall be audited at least annually by an
independent certified public accountant. In addition, MARAD regulations
require companies to provide semiannual financial statements. However,
MARAD could not demonstrate that it had received required annual and
semiannual statements. For example, MARAD could not locate several
annual or semiannual financial statements for the Massachusetts Heavy
Industries (MHI) project. Also, MARAD could not find the 1999 and 2000
semiannual financial reports for AMCV. The AMCV financial statements
were later restated, as a result of a Securities and Exchange
Commission (SEC) finding that AMCV had not complied with generally
accepted accounting principles in preparing its financial
statements.[Footnote 14] In addition, several financial statements were
missing from MARAD records for Hvide Van Ommeran Tankers (HVIDE) and
Global Industries Ltd. When MARAD could provide records of financial
statements, it was unclear how the information was used. Further, the
Department of Transportation Inspector General (IG) in its review of
the Title XI program found that MARAD had no established procedures or
policies incorporating periodic reviews of a company's financial well-
being once a loan guarantee was approved.
An analysis of financial statements may have alerted MARAD to financial
problems with companies and possibly given it a better chance to
minimize losses from defaults. For example, between 1993 and 2000, AMCV
had net income in only 3 years and lost a total of $33.3 million. Our
analysis showed a significant decline in financial performance since
1997. Specifically, AMCV showed a net income of $2.4 million in 1997,
with losses for the next 3 years, and losses reaching $10.1 million in
2000. Although AMCV's revenue increased steadily during this period by
a total of 25 percent, or nearly $44 million, expenses far outpaced
revenue during this period. For example, the cost of operations
increased 29 percent, or $32.3 million, while sales and general and
administrative costs increased over 82 percent or $33.7 million. During
this same period, AMCV's debt also increased over 300 percent. This
scenario combined with the decline in tourism after September 11, 2001,
caused AMCV to file for bankruptcy. On May 22, 2001 Litton Ingalls
Shipbuilding notified AMCV that it was in default of its contract due
to nonpayment. Between May 22 and August 23, 2001, MARAD received at
least four letters from Ingalls, the shipbuilder, citing its concern
about the shipowner's ability to pay construction costs. However, it
was not until August 23 that MARAD prepared a financial analysis to
help determine the likelihood of AMCV or its subsidiaries facing
bankruptcy or another catastrophic event.
MARAD could not always demonstrate that it had linked disbursement of
funds to progress in ship construction, as MARAD requires. We were not
always able to determine from available documents the extent of
progress made on the projects included in our review. For example, a
number of Project America, Inc., disbursement requests did not include
documentation that identified the extent of progress made on the
project. Also, while MARAD requires periodic on-site visits to verify
the progress on ship construction or shipyard refurbishment, we did not
find evidence of systematic site visits and inspections. For Project
America, Inc., MARAD did not have a construction representative
committed on-site at Ingalls Shipyard, Inc. until May 2001, 2 months
after the MARAD's Office of Ship Design and Engineering Services
recommended a MARAD representative be located on-site. For the Searex
Title XI loan guarantee, site visits were infrequent until MARAD became
aware that Ingalls had cut the vessels into pieces to make room for
other projects. For two projects rated low-risk, Hvide Van Ommeran
Tankers and Global Industries, Ltd., we found MARAD conducted site
visits semiannually and annually, respectively. We reviewed MHI's
shipyard modernization project, which was assigned the highest risk
rating, and found evidence that construction representatives conducted
monthly site visits. However, in most instances, we found that a
project's risk was not routinely linked to the extent of project
monitoring. Further, without a systematic approach to on-site visits,
MARAD relied principally on the shipowner's certification and
documentation of money spent in making decisions to approve
disbursements from the escrow fund.
We also found that, in a break with its own established practice, MARAD
permitted a shipowner to define total costs in a way that permitted
earlier disbursement of loan funds from the escrow fund. MARAD
regulations require that shipowners expend from their own funds at
least 12.5 percent or 25 percent, depending on the type of vessel or
technology, of the actual cost of a vessel or shipyard project prior to
receiving MARAD-guaranteed loan funds. In practice, MARAD has used the
estimated total cost of the project to determine how much equity the
shipowner should provide. In the case of Project America, Inc., the
single largest loan guarantee in the history of the program, we found
that MARAD permitted the shipowner to exclude certain costs in
determining the estimated total costs of the ship at various points in
time, thereby deferring owner-provided funding while receiving MARAD-
guaranteed loan funds. This was the first time MARAD used this method
of determining equity payments, and MARAD did not document this
agreement with the shipowner as required by its policy. In September
2001, MARAD amended the loan commitment for this project, permitting
the owner to further delay the payment of equity. By then, MARAD had
disbursed $179 million in loan funds. Had MARAD followed its
established practice for determining equity payments, the shipowner
would have been required to provide an additional $18 million. Because
MARAD had not documented its agreements with AMCV, the amount of equity
the owner should have provided was not apparent during this period.
Further, MARAD systems do not flag when the shipowner has provided the
required equity payment for any of the projects it finances.
MARAD officials cited several reasons for its limited monitoring of
Title XI projects, including insufficient staff resources, travel
budget restrictions and limited enforcement tools. For example,
officials of MARAD's Office of Ship Construction, which is responsible
for inspection of vessels and shipyards, told us that they had only two
persons available to conduct inspections, and that the office's travel
budget was limited. The MARAD official with overall responsibility for
the Title XI program told us that, at a minimum, the Title XI program
needs three additional staff. The Office of Ship Financing needs two
additional persons to enable a more thorough review of company
financial statements and more comprehensive preparation of credit
reform materials. Also, the official said that the Office of the Chief
Counsel needs to fill a long-standing vacancy to enable more timely
legal review. With regard to documenting the analysis of financial
statements, MARAD officials said that, while they do require shipowners
and shipyard owners to provide financial statements, they do not
require MARAD staff to prepare a written analysis of the financial
condition of the Title XI borrower. MARAD Assistant Secretary for
Administration noted that if financial documents were not submitted
after a request for missing documents was made, MARAD's only legal
recourse was to call the loan in default, pay off the Title XI debt and
then seek recovery against the borrower.
He said that MARAD tries to avoid takings these steps. We found no
evidence that MARAD routinely requested missing financial statements or
did any analysis. Also, the IG report on the Title XI program released
in March 2003 noted that MARAD does not closely monitor the financial
health of its borrowers over the term of their loans. We recognize that
MARAD has limited enforcement resources, however, for such publicly
traded companies as AMCV, financial statements filed with the
Securities and Exchange Commission could be used. However, we found no
evidence that MARAD attempted to use SEC filings.
Inconsistent monitoring of a borrower's financial condition limits
MARAD's ability to protect the federal government's financial
interests. For example, MARAD would not know if a borrower's financial
condition had changed so that it could take needed action to possibly
avoid defaults or minimize losses. Further, MARAD's practices for
assessing project progress limit its ability to link disbursement of
funds to progress made by shipowners or shipyard owners. This could
result in MARAD disbursing funds without a vessel or shipyard owner
making sufficient progress in completing projects. Likewise, permitting
project owners to minimize their investment in MARAD-financed projects
increases the risk of loss to the federal government.
MARAD Does Not Have Requirements in Place to Govern the Handling of
Defaulted Assets:
MARAD has guidance governing the disposition of defaulted assets.
However, MARAD is not required to follow this guidance, and we found
that MARAD does not always adhere to it. MARAD guidelines state that an
independent, competent marine surveyor or MARAD surveyor shall survey
all vessels, except barges, as soon as practicable after the assets are
taken into custody. In the case of filed or expected bankruptcy, an
independent marine surveyor should be used. In the case of Searex,
MARAD conducted on-site inspections after the default. However, these
inspections were not conducted in time to properly assess the condition
of the assets. With funds no longer coming in from the project, Ingalls
cut the vessels into pieces to make it easier to move the vessels from
active work-in-process areas to other storage areas within the
property. The Searex lift boat and hulls were cut before MARAD
inspections were made. According to a MARAD official, the cutting of
one Searex vessel and parts of the other two Searex vessels under
construction reduced the value of the defaulted assets. The IG report
on the Title XI program released in March 2003 noted that site visits
were conducted on guaranteed vessels or property only in response to
problems or notices of potential problems from third parties or from
borrowers.
The guidelines also state that sales and custodial activities shall be
conducted in such a fashion as to maximize MARAD's overall recovery
with respect to the asset and debtor. Market appraisals (valuations) of
the assets shall be performed by an independent appraiser, as deemed
appropriate, to assist in the marketing of the asset. MARAD did not
have a market appraisal for the defaulted Project America assets. Also,
MARAD relied on an interested party to determine the cost of making
Project America I seaworthy. An appraisal of Project America assets
immediately after default would have assisted MARAD in preparing a
strategy for offering the hull of Project America I and the parts of
Project America II for sale. According to MARAD officials, as of March
2003, MARAD had received $2 million from the sale of the Project
America I and II vessels.[Footnote 15] Without a market appraisal, it
is unclear whether this was the maximum recovery MARAD could have
received.
MARAD hired the Defense Contract Audit Agency (DCAA) to verify the
costs incurred by Northrop Grumman Ship Systems, Inc., since January 1,
2002, for preparing and delivering Project America I in a weather-tight
condition suitable for ocean towing in international waters. A MARAD
official said that the DCAA audit would allow MARAD to identify any
unsupported costs and recover these amounts from the shipyard. The DCAA
review was used to verify costs incurred, but not to make a judgment as
to the reasonableness of the costs. DCAA verified costs of
approximately $17 million.
MARAD officials cite the uniqueness of the vessels and projects as the
reason for using guidelines instead of requirements for handling
defaulted assets. However, certain practices for handling defaulted
assets can be helpful regardless of the uniqueness of a project. Among
these are steps to immediately assess the value of the defaulted asset.
Without a definitive strategy and clear requirements, defaulted assets
may not always be secured, assessed, and disposed of in a manner that
maximizes MARAD's recoveries--resulting in unnecessary costs and
financial losses to the federal government.
MARAD Techniques to Manage Financial Risk Contrast to Techniques of
Selected Private-sector Maritime Lenders:
Private-sector maritime lenders we interviewed told us that it is
imperative for lenders to manage the financial risk of maritime lending
portfolios. In contrast to MARAD, they indicated that to manage
financial risk, among other things, they (1) establish a clear
separation of duties for carrying out different lending functions; (2)
adhere to key lending standards with few, if any, exceptions; (3) use a
more systematic approach to monitoring the progress of projects; and
(4) primarily employ independent parties to survey and appraise
defaulted projects. The lenders try to be very selective when
originating loans for the shipping industry. While realizing that MARAD
does not operate for profit, it could benefit from the internal control
practices employed by the private sector to more effectively utilize
its limited resources and to enhance its ability to accomplish its
mission. Table 2 describes the key differences in private-sector and
MARAD maritime lending practices used during the application,
monitoring, and default and disposition phases.
Table 2: Comparison of Private-sector and MARAD Maritime Lending
Practices:
[See PDF for image]
Sources: GAO analysis of MARAD and private-sector data.
[End of table]
Private-sector Lenders Separate Key Lending Functions:
Private-sector lenders manage financial risk by establishing a
separation of duties to provide a system of checks and balances for
important maritime lending functions. Two private-sector lenders
indicated that there is a separation of duties for approving loans,
monitoring projects financed, and disposing of assets in the event of
default. For example, marketing executives from two private-sector
maritime lending institutions stated that they do not have lending
authority. Also, separate individuals are responsible for accepting
applications and processing transactions for loan underwriting.
In contrast, we found that the same office that promotes and markets
the MARAD Title XI program also has influence and authority over the
office that approves and monitors Title XI loans. In February 1998,
MARAD created the Office of Statistical and Economic Analysis in an
attempt to obtain independent market analyses and initial
recommendations on the impact of market factors on the economic
soundness of projects. Today, this office reports to the Associate
Administrator for Policy and International Trade rather than the
Associate Administrator for Shipbuilding. However, the Associate
Administrator for Shipbuilding is primarily responsible for overseeing
the underwriting and approving of loan guarantees. Title XI program
management is primarily handled by offices that report to the Associate
Administrator for Shipbuilding. In addition, the same Associate
Administrator controls, in collaboration with the Chief of the Division
of Ship Financing Contracts within the Office of the Chief Counsel, the
disposition of assets after a loan has defaulted. Most recently, MARAD
has taken steps to consolidate responsibilities related to loan
disbursements. In August 2002, the Maritime Administrator gave the
Associate Administrator for Shipbuilding sole responsibility for
reviewing and approving the disbursement of escrow funds. According to
a senior official, prior to August 2002 this responsibility was shared
with the Office of Financial and Rate Approvals under the supervision
of the Associate Administrator for Financial Approvals and Cargo
Preference. As a result of the consolidation, the same Associate
Administrator who is responsible for underwriting and approving loan
guarantees and disposing of defaulted assets is also responsible for
approval of loan disbursements and monitoring financial condition.
MARAD undertook this consolidation in an effort to improve performance
of analyses related to the calculation of shipowner's equity
contributions and monitoring of changes in financial condition.
However, as mentioned earlier, MARAD does not have controls for clearly
identifying the shipowner's required equity contribution. The
consolidation of responsibilities for approval of loan disbursements
does not address these weaknesses and precludes any potential benefit
from separation of duties.
Private-sector Practices Employ Less Flexible Lending Standards:
The private-sector lenders we interviewed said they apply rigorous
financial tests for underwriting maritime loans. They analyze financial
statements such as balance sheets, income statements, and cash flow
statements, and use certain financial ratios such as liquidity and
leverage ratios that indicate the borrower's ability to repay. Private-
sector maritime lenders told us they rarely grant waivers, or
exceptions, to underwriting requirements or approve applications when
borrowers do not meet key minimum requirements. Each lender we
interviewed said any approved applicants were expected to demonstrate
stability in terms of cash on hand, financial strength, and collateral.
One lender told us that on the rare occasions when exceptions to the
underwriting standards were granted, an audit committee had to approve
any exception or waiver to the standards after reviewing the
applicant's circumstances. However, according to one MARAD official the
waivers are often made without a deliberative process. Nonetheless,
MARAD points to its concurrence system as a deliberative process for
key agency officials to concur on loan guarantees and major waivers and
modifications. However, as mentioned earlier, the official responsible
for performing a macro analysis of the market is not always included in
the concurrence process. We found in the cases we reviewed that MARAD
often permits waivers or modifications of key financial requirements.
Also, a recent IG report found that MARAD routinely modified financial
requirements in order to qualify applicants for loan guarantees.
Further, the IG noted that MARAD reviewed applications for loan
guarantees primarily with in-house staff and recommended that MARAD
formally establish an external review process as a check on MARAD's
internal loan application review.[Footnote 16] A MARAD official told us
that MARAD is currently developing the procedures for an external
review process of waivers and modifications.
These private-sector lenders also indicated that preparing an economic
analysis or an independent feasibility study assists in determining
whether or not to approve funding based on review and discussion of the
marketplace, competition, and project costs. Each private-sector lender
we interviewed agreed that performance in the shipping industry was
cyclical and timing of projects was important. In addition, reviewing
historical data provided information on future prospects for a project.
For example, one lender uses these economic analyses to evaluate how
important the project will be to the overall growth of the shipping
industry. Another lender uses the economic analyses and historical data
to facilitate the sale of a financed vessel. In the area of economic
soundness analysis, MARAD requirements appear closer to those of the
private-sector lenders, in that external market studies are also used
to help determine the overall economic soundness of a project. However,
assessments of economic soundness prepared by the Office of Statistical
and Economic Analysis may not be fully considered when MARAD approves
loan guarantees.
Private-sector Lenders Use a More Systematic Approach to Loan
Monitoring:
Private-sector lenders minimized financial risk by establishing loan
monitoring and control mechanisms such as analyzing financial
statements and assigning risk ratings. Each private-sector lender we
interviewed said that conducting periodic reviews of a borrower's
financial statements helped to identify adverse changes in the
financial condition of the borrower. For example, two lenders stated
that they annually analyzed financial statements such as income
statements and balance sheets. The third lender evaluated financial
statements quarterly. Based on the results of these financial statement
reviews, private-sector lenders then reviewed and evaluated the risk
ratings that had been assigned at the time of approval. Two lenders
commented that higher risk ratings indicated a need for closer
supervision, and they then might require the borrower to submit monthly
or quarterly financial statements. In addition, a borrower might be
required to increase cash reserves or collateral to mitigate the risk
of a loan. Further, the lender might accelerate the maturity date of
the loan. MARAD notes that in certain cases, such as a loan guarantee
to a subsidiary of Enron, it already uses such requirements. The DOT IG
noted that MARAD should place covenants in its loan guarantees
concerning the required financial performance and condition of its
borrowers, as well as measures to which MARAD is entitled should these
provisions be violated. However, the IG expressed concern that MARAD's
minimum monitoring approach would not provide financial information in
a timely and sufficient manner. Private-sector lenders use risk ratings
in monitoring overall risk, which in turn helped to maintain a balanced
maritime portfolio.
At MARAD, we found no evidence that staff routinely analyzed or
evaluated financial statements or changed risk categories after a loan
was approved. For example, we found in our review that for at least two
financial statement reporting periods, MARAD was unable to provide
financial statements for the borrower, and, in one case, one financial
statement was submitted after the commitment to guarantee funds. Our
review of the selected Title XI projects indicated that risk categories
were primarily assigned for purposes of estimating credit subsidy costs
at the time of application, not for use in monitoring the project.
Further, we found no evidence that MARAD changed a borrower's risk
category when its financial condition changed. In addition, neither the
support office that was initially responsible for reviewing and
analyzing financial statements nor the office currently responsible
maintained a centralized record of the financial statements they had
received. Further, while one MARAD official stated that financial
analyses were performed by staff and communicated verbally to top-level
agency officials, MARAD did not prepare and maintain a record of these
analyses.
Private-sector lenders also manage financial risk by linking the
disbursement of loan funds to the progress of the project. All the
lenders we interviewed varied project monitoring based on financial and
technical risk, familiarity with the shipyard, and uniqueness of the
project. Two lenders thought that on-site monitoring was very important
in determining the status of projects. Specifically, one lender hires
an independent marine surveyor to visit the shipyard to monitor
construction progress. This lender also requires signatures on loan
disbursement requests from the shipowner, shipbuilder, and loan officer
before disbursing any loan funds. This lender also relies on technical
managers and classification society representatives who frequently
visit the shipyard to monitor progress.[Footnote 17] Shipping
executives of this lender make weekly, and many times daily, calls to
shipowners to further monitor the project based on project size and
complexity. This lender also requires shipowners to provide monthly
progress reports so the progress of the project could be monitored.
MARAD also relied on site visits to verify construction progress.
However, the linkage between the progress of the project and the
disbursement of loan funds was not always clear. MARAD tried to adjust
the number of site visits based on the amount of the loan guarantee,
the uniqueness of project (for example, whether the ship is the first
of its kind for the shipowner), the degree of technical and engineering
risk, and familiarity with the shipyard. However, the frequency of site
visits was often dependent upon the availability of travel funds,
according to a MARAD official.
Private-sector Lenders Use Industry Expertise to Value Defaulted
Assets:
Private-sector maritime lenders said they regularly use independent
marine surveyors and technical managers to appraise and conduct
technical inspections of defaulted assets. For example, two lenders
hire independent marine surveyors who are knowledgeable about the
shipbuilding industry and have commercial lending expertise to inspect
the visible details of all accessible areas of the vessel, as well as
its marine and electrical systems. In contrast, we found that MARAD did
not always use independent surveyors. For example, we found that for
Project America, the shipbuilder was allowed to survey and oversee the
disposition of the defaulted asset. As mentioned earlier, MARAD hired
DCAA to verify the costs incurred by the shipbuilder to make the
defaulted asset ready for sale; however, MARAD did not verify whether
the costs incurred were reasonable or necessary. For Searex,
construction representatives and officials from the Offices of the
Associate Administrator of Shipbuilding and the Chief of the Division
of Ship Financing Contracts were actively involved in the disposition
of the assets.
MARAD Cites Mission as the Difference in Management of Financial Risk
Compared to Private-sector Lenders:
According to top-level MARAD officials, the chief reason for the
difference between private-sector and MARAD techniques for approving
loans, monitoring project progress, and disposing of assets is the
public purpose of the Title XI program, which is to promote growth and
modernization of the U.S. merchant marine and U.S. shipyards. That is,
MARAD's program purposefully provides for greater flexibility in
underwriting in order to meet the financing needs of shipowners and
shipyards that otherwise might not be able to obtain financing. MARAD
is also more likely to work with borrowers that are experiencing
financial difficulties once a project is under way. MARAD officials
also cited limited resources in explaining the limited nature of
project monitoring.
While program flexibility in financial and economic soundness standards
may be necessary to help MARAD meet its mission objectives, the strict
use of internal controls and management processes is also important.
Otherwise, resources that could have been used to further the program
might be wasted. To aid agencies in improving internal controls, we
have recommended that agencies identify the risks that could impede
their ability to efficiently and effectively meet agency goals and
objectives.[Footnote 18] Private-sector lenders employ internal
controls such as a systematic review of waivers during the application
phase and risk ratings of projects during the monitoring phase.
However, MARAD does neither. Without a more systematic review of
underwriting waivers, MARAD might not be giving sufficient
consideration to the additional risk such decisions represent.
Likewise, without a systematic process for assessing changes in payment
risk, MARAD cannot use its limited monitoring resources most
efficiently. Further, by relying on interested parties to estimate the
value of defaulted loan assets, MARAD might not maximize the recovery
on those assets. Overall, by not employing the limited internal
controls it does possess, and not taking advantage of basic internal
controls such as those private-sector lenders employ, MARAD cannot
ensure it is effectively utilizing its limited administrative resources
or the government's limited financial resources.
MARAD's Credit Subsidy Estimates and Reestimates Are Questionable:
MARAD uses a relatively simplistic cash flow model that is based on
outdated assumptions, which lack supporting documentation, to prepare
its estimates of defaults and recoveries. These estimates differ
significantly from recent actual experience. Specifically, we found
that in comparison with recent actual experience, MARAD's default
estimates have significantly understated defaults, and its recovery
estimates have significantly overstated recoveries. If the pattern of
recent experience were to continue, MARAD would have significantly
underestimated the costs of the program. Agencies should use sufficient
reliable historical data to estimate credit subsidies and update--
reestimate--these estimates annually based on an analysis of actual
program experience. While the nature and characteristics of the Title
XI program make it difficult to estimate subsidy costs, MARAD has never
performed the basic analyses necessary to determine if its default and
recovery assumptions are reasonable. Finally, OMB has provided little
oversight of MARAD's subsidy cost estimate and reestimate calculations.
MARAD's Credit Subsidy Estimates Are Questionable:
FCRA was enacted, in part, to require that the federal budget reflect a
more accurate measurement of the government's subsidy costs for loan
guarantees.[Footnote 19] To determine the expected cost of a credit
program, agencies are required to predict or estimate the future
performance of the program. For loan guarantees, this cost, known as
the subsidy cost, is the present value of estimated cash flows from the
government, primarily to pay for loan defaults, minus estimated loan
guarantee fees paid and recoveries to the government. Agency management
is responsible for accumulating relevant, sufficient, and reliable data
on which to base the estimate and for establishing and using reliable
records of historical credit performance. In addition, agencies are
supposed to use a systematic methodology to project expected cash flows
into the future. To accomplish this task, agencies are instructed to
develop a cash flow model, using historical information and various
assumptions including defaults, prepayments, recoveries, and the timing
of these events, to estimate future loan performance.
MARAD uses a relatively simplistic cash flow model, which contains five
assumptions--default amount, timing of defaults, recovery amount,
timing of recoveries, and fees--to estimate the cost of the Title XI
loan guarantee program. We found that relatively minor changes in these
assumptions can significantly affect the estimated cost of the program
and that, thus far, three of the five assumptions, default and recovery
amounts and the timing of defaults, differed significantly from recent
actual historical experience.[Footnote 20] According to MARAD
officials, these assumptions were developed in 1995 based on actual
loan guarantee experience of the previous 10 years and have not been
evaluated or updated. MARAD could not provide us with supporting
documentation to validate its estimates, and we found no evidence of
any basis to support the assumptions used to calculate these estimates.
MARAD also uses separate default and recovery assumptions for each of
seven risk categories to differentiate between levels of risk and costs
for different loan guarantee projects.
We attempted to analyze the reliability of the data supporting MARAD's
key assumptions, but we were unable to do so because MARAD could not
provide us with any supporting documentation for how the default and
recovery assumptions were developed. Therefore, we believe MARAD's
subsidy cost estimates to be questionable. Because MARAD has not
evaluated its default and recovery rate assumptions since they were
developed in 1995, the agency does not know whether its cash flow model
is reasonably predicting borrower behavior and whether its estimates of
loan program costs are reasonable.
The nature and characteristics of the Title XI program make it
difficult to estimate subsidy costs. Specifically, MARAD approves a
small number of guarantees each year, leaving it with relatively little
experience on which to base estimates for the future. In addition, each
guarantee is for a large dollar amount, and projects have unique
characteristics and cover several sectors of the market. Further, when
defaults occur, they are usually for large dollar amounts and may not
take place during easily predicted time frames. Recoveries may be
equally difficult to predict and may be affected by the condition of
the underlying collateral. This leaves MARAD with relatively limited
information upon which to base its credit subsidy estimates. Also,
MARAD may not have the resources to properly implement credit reform.
MARAD officials expressed frustration that they do not have and,
therefore, cannot devote, the necessary time and resources to
adequately carry out their credit reform responsibilities.
Notwithstanding these challenges, MARAD has not performed the basic
analyses necessary to assess and improve its estimates. According to
MARAD officials, they have not analyzed the default and recovery rates
because most of their loan guarantees are in about year 7 out of the
25-year term of the guarantee, and it is too early to assess the
reasonableness of the estimates. We disagree with this assessment and
believe that an analysis of the past 5 years of actual default and
recovery experience is meaningful and could provide management with
valuable insight into how well its cash flow models are predicting
borrower behavior and how well its estimates are predicting the loan
guarantee program's costs. We further believe that, while difficult, an
analysis of its risk category system is meaningful for MARAD to ensure
that it appropriately classified loan guarantee projects into risk
category subdivisions that are relatively homogenous in cost.
Of loans originated in the past 10 years, nine have defaulted, totaling
$489.5 million in defaulted amounts. Eight of these nine defaults,
totaling $487.7 million, occurred since MARAD implemented its risk
category system in 1996. Because these eight defaults represent the
vast majority (99.6 percent) of MARAD's default experience, we compared
the performance of all loans guaranteed between 1996-2002 with MARAD's
estimates of loan performance for this period.[Footnote 21] We found
that actual loan performance has differed significantly from agency
estimates. For example, when defaults occurred, they took place much
sooner than estimated. On average, defaults occurred 4 years after loan
origination, while MARAD had estimated that, depending on the risk
category, peak defaults would occur between years 10-18. Also, actual
default costs thus far have been much greater than estimated. We
estimated, based on MARAD data, that MARAD would experience $45.5
million in defaults to date on loans originated since 1996. However, as
illustrated by figure 2, MARAD has consistently underestimated the
amount of defaults the Title XI program would experience. In total,
$487.7 million has actually defaulted during this period--more than 10
times greater than estimated. Even when we excluded AMCV, which
represents about 68 percent of the defaulted amounts, from our
analysis, we found that the amount of defaults MARAD experienced
greatly exceeded what MARAD estimated it would experience by $114.6
million (or over 260 percent).
Figure 2: Estimated and Actual Defaults of Title XI Loan Guarantees
(1996-2002):
[See PDF for image]
[A] We excluded estimates for risk categories 1A, 1B, and 1C, because
estimated defaults for these categories totaled only $1.5 million or
3.4 percent of total estimated defaults.
[End of figure]
In addition, MARAD's estimated recovery rate of 50 percent of defaulted
amounts within 2 years of default is greater than the actual recovery
rate experienced since 1996, as can be seen in figure 3. Although
actual recoveries on defaulted amounts since 1996 have taken place
within 1-3 years of default, most of these recoveries were
substantially less than estimated, and two defaulted loans have had no
recoveries to date. For the actual defaults that have taken place since
1996, MARAD would have estimated, using the 50 percent recovery rate
assumption, that it would recover approximately $185.3 million dollars.
However, MARAD has only recovered $94.9 million or about 51 percent of
its estimated recovery amount. When we excluded AMCV, which represents
about 68 percent of the defaulted amounts, from our analysis, we found
that MARAD has more accurately estimated the amount it would recover on
defaulted loans, and in fact, has underestimated the actual amount by
about $10 million (or about 15 percent). If the overall pattern of
recent default and recovery experiences were to continue, MARAD would
have significantly underestimated the costs of the program.
Figure 3: Estimated and Actual Recoveries on Title XI Loan Defaults
(1996-2002):
[See PDF for image]
[A] Estimated recoveries are based on applying MARAD's 50 percent
recovery rate within 2 years to the actual default amounts. Our
analysis of recovery estimates includes estimated recovery amounts for
two of the five defaulted AMCV loans, even though 2 years have not
elapsed, because, according to MARAD officials, no additional
recoveries are expected on these two loans. Thus, our recovery
calculation was based on $370.6 of the $487.7 million in defaulted
loans, which includes defaults for which 2 years have elapsed, as well
as the two AMCV defaults for which no additional recoveries are
expected. With its 50 percent recovery assumption, MARAD would have
estimated that, at this point, it should have recovered $185.3 million
of these defaulted loans.
[B] We calculated the actual recovery rate by comparing the total
actual recoveries to the $370.6 million in relevant actual defaulted
amounts. At the time of our review, MARAD had recovered $94.9 out of
this $370.6 million.
[End of figure]
We also attempted to analyze the process MARAD uses to designate risk
categories for projects, but were unable to do so because the agency
could not provide us with any documentation about how the risk
categories and MARAD's related numerical weighting system originally
were developed.[Footnote 22] According to OMB guidance, risk categories
are subdivisions of a group of loans that are relatively homogeneous in
cost, given the facts known at the time of designation. Risk categories
combine all loan guarantees within these groups that share
characteristics that are statistically predictive of defaults and other
costs. OMB guidance states that agencies should develop statistical
evidence based on historical analysis concerning the likely costs of
expected defaults for loans in a given risk category. MARAD has not
done any analysis of the risk category system since it was implemented
in 1996 to determine whether loans in a given risk category share
characteristics that are predictive of defaults and other costs and
thereby comply with guidance. In addition, according to a MARAD
official, MARAD's risk category system is partially based on outdated
MARAD regulations and has not been updated to reflect changes to these
regulations.
Further, MARAD's risk category system is flawed because it does not
consider concentrations of credit risk. To assess the impact of
concentration risk on MARAD's loss experience, we analyzed the defaults
for loans originated since 1996 and found that five of the eight
defaults, totaling $330 million, or 68 percent of total defaults,
involved loan guarantees that had been made to one particular borrower,
AMCV. Assessing concentration of credit risk is a standard practice in
private-sector lending. According to the Federal Reserve Board's
Commercial Bank Examination Manual, limitations imposed by various
state and federal legal lending limits are intended to prevent an
individual or a relatively small group from borrowing an undue amount
of a bank's resources and to safeguard the bank's depositors by
spreading loans among a relatively large number of people engaged in
different businesses. Had MARAD factored concentration of credit into
its risk category system, it would likely have produced higher
estimated losses for these loans.
MARAD's Credit Subsidy Reestimates Are Also Questionable:
After the end of each fiscal year, OMB generally requires agencies to
update or "reestimate" loan program costs for differences among
estimated loan performance and related cost, the actual program costs
recorded in accounting records, and expected changes in future economic
performance. The reestimates are to include all aspects of the original
cost estimate such as prepayments, defaults, delinquencies, recoveries,
and interest. Reestimates allow agency management to compare original
budget estimates with actual costs to identify variances from the
original estimates, assess the reasonableness of the original
estimates, and adjust future program estimates, as appropriate. When
significant differences between estimated and actual costs are
identified, the agency should investigate to determine the reasons
behind the differences, and adjust its assumptions, as necessary, for
future estimates and reestimates.
We attempted to analyze MARAD's reestimate process, but we were unable
to do so because the agency could not provide us with adequate
supporting data on how it determined whether a loan should have an
upward or downward reestimate. According to agency management, each
loan guarantee is reestimated separately based on several factors
including the borrower's financial condition, a market analysis, and
the remaining balance of the outstanding loans. However, without
conducting our own independent analysis of these and other factors, we
were unable to determine whether any of MARAD's reestimates were
reasonable. Further, MARAD has reestimated the loans that were
disbursed in fiscal years 1993, 1994, and 1995 downward so that they
now have negative subsidy costs, indicating that MARAD expects these
loans to be profitable. However, according to the default assumptions
MARAD uses to calculate its subsidy cost estimates, these loans have
not been through the period of peak default, which would occur in years
10-18 depending on the risk category. MARAD officials told us that
several of these loans were paid off early, and the risk of loss in the
remaining loans is less than the estimated fees paid by the borrowers.
However, MARAD officials were unable to provide us with adequate
supporting information for its assessment of the borrowers' financial
condition and how it determined the estimated default and recovery
amounts to assess the reasonableness of these reestimates. Our analysis
of MARAD's defaults and recoveries demonstrates that, when defaults
occur, they occur sooner and are for far greater amounts than
estimated, and that recoveries are smaller than estimated. As a result,
we question the reasonableness of the negative subsidies for the loans
that were disbursed in fiscal years 1993, 1994, and 1995.
MARAD's ability to calculate reasonable reestimates is seriously
impacted by the same outdated assumptions it uses to calculate cost
estimates as well as by the fact that it has not compared these
estimates with the actual default and recovery experience. As discussed
earlier, our analysis shows that, since 1996, MARAD has significantly
underestimated defaults and overestimated recoveries to date. Without
performing this basic analysis, MARAD cannot determine whether its
reestimates are reasonable, and it is unable to improve these
reestimate calculations over time and provide Congress with reliable
cost information to make key funding decisions. In addition, and,
again, as discussed earlier, MARAD's inability to devote sufficient
resources to properly implement credit reform appears to limit its
ability to adequately carry out these credit reform responsibilities.
OMB Has Provided Little Oversight of MARAD's Estimates and Reestimates:
Based on our analysis, we believe that OMB provided little review and
oversight of MARAD's estimates and reestimates. OMB has final authority
for approving estimates in consultation with agencies; OMB approved
each MARAD estimate and reestimate, explaining to us that it delegates
authority to agencies to calculate estimates and reestimates. However,
MARAD has little expertise in the credit reform area and has not
devoted sufficient resources to developing this expertise. FCRA assigns
responsibility to OMB for coordinating credit subsidy estimates,
developing estimation guidelines and regulations, and improving cost
estimates, including coordinating the development of more accurate
historical data and annually reviewing the performance of loan programs
to improve cost estimates. Had OMB provided greater review and
oversight of MARAD's estimates and reestimates, it would have realized
that MARAD did not have adequate support for the default and recovery
assumptions it uses to calculate subsidy cost estimates.
Conclusions:
MARAD does not operate the Title XI loan guarantee program in a
businesslike fashion to minimize the federal government's fiscal
exposure. MARAD does not (1) fully comply with its own requirements and
guidelines, (2) have a clear separation of duties for handling loan
approval and fund disbursement functions, (3) exercise diligence in
considering and approving modifications and waivers, (4) adequately
secure and assess the value of defaulted assets, and (5) know what its
program costs. Because of these shortcomings, MARAD lacks assurance
that it is effectively promoting growth and modernization of the U.S.
merchant marine and U.S. shipyards or minimizing the risk of financial
loss to the federal government. Consequently, the Title XI program
could be vulnerable to waste, fraud, abuse, and mismanagement. Finally,
MARAD's questionable subsidy cost estimates do not provide Congress a
basis for knowing the true costs of the Title XI program, and Congress
cannot make well-informed policy decisions when providing budget
authority. If the pattern of recent experiences were to continue, MARAD
would have significantly underestimated the costs of the program.
Matters for Congressional Consideration:
We recommend that Congress consider discontinuing future appropriations
for new loan guarantees under the Title XI program until adequate
internal controls have been instituted to manage risks associated with
the program and MARAD has updated its default and recovery assumptions
to more accurately reflect the actual costs associated with the program
and that Congress consider rescinding the unobligated balances in
MARAD's program account. We also recommend that Congress consider
clarifying borrower equity contribution requirements. Specifically, we
recommend that Congress consider legislation requiring the entire
equity down payment, based on the total cost of the project including
total guarantee fees currently expected to be paid over the life of the
project, be paid by the borrower before the proceeds of the guaranteed
obligation are made available. Further, we recommend that Congress
consider legislation that requires MARAD to consider, in its risk
category system, the risk associated with approving projects from a
single borrower that would represent a large percentage of MARAD's
portfolio.
Recommendations for Executive Action:
We recommend that the Secretary of Transportation direct the
Administrator of the Maritime Administration to take immediate action
to improve the management of the Title XI loan guarantee program.
Specifically, to better comply with Title XI loan guarantee program
requirements and manage financial risk, MARAD should:
* establish a clear separation of duties among the loan application,
project monitoring, and default management functions;
* establish a systematic process that ensures independent judgments of
the technical, economic, and financial soundness of projects during
loan guarantee approval;
* establish a systematic process that ensures the findings of each
contributing office are considered and resolved prior to approval of
loan guarantee applications involving waivers and exceptions made to
program requirements;
* systematically monitor and document the financial condition of
borrowers and link the level of monitoring to the level of project
risk;
* base the borrower's equity down payment requirement on a reasonable
estimate of the total cost of the project, including total guarantee
fees expected to be incurred over the life of the project;
* make apparent the amount of equity funds a shipowner or shipyard
owner should provide;
* establish a system of controls, including automated controls, to
ensure that disbursements of loan funds are not made prior to a
shipowner or shipyard owner meeting the equity fund requirement;
* create a transparent, independent, and risk-based process for
verifying and documenting the progress of projects under construction
prior to disbursing guaranteed loan funds;
* review risk ratings of loan guarantee projects at least annually;
and:
* establish minimum requirements for the management and disposition of
defaulted assets, including a requirement for an independent evaluation
of asset value.
To better implement federal credit reform, MARAD should:
* establish and implement a process to annually compare estimated to
actual defaults and recoveries by risk category, investigate any
material differences that are identified, and incorporate the results
of these analyses in its estimates and reestimates;
* establish and implement a process to document the basis for each key
cash flow assumption--such as defaults, recoveries, and fees--and
retain this documentation in accordance with applicable records
retention requirements;
* establish and implement a process to document the basis for each
reestimate, including an analysis of a borrower's financial condition
and a market analysis;
* review its risk category system to ensure that it appropriately
classifies projects into subdivisions that are relatively homogenous in
cost, given the facts known at the time of designation, and that risks
and changes to risks are reflected in annual reestimates; and:
* consider, in its risk category system, the risk associated with
approving projects from a single borrower that would represent a large
percentage of MARAD's portfolio.
To ensure that the reformed Title XI program is carried out effectively
and in conformity with program and statutory requirements, MARAD should
conduct a comprehensive assessment of its human capital and other
resource needs. Such analysis should also consider the human capital
needs to improve and strengthen credit reform data collection and
analyses.
To assist and ensure that MARAD better implements credit reform, and
given the questionableness of MARAD's estimates and reestimates, we
also recommend that the Director of OMB provide greater review and
oversight of MARAD's subsidy cost estimates and reestimates.
Agency Comments:
We provided a draft of this report to DOT for its review and comment.
We received comments from the department's Assistant Secretary for
Administration, who noted that MARAD has already begun to take steps to
improve the operations of the Title XI program consistent with several
of our recommendations. The department disagreed with the manner in
which we characterized some report findings and provided additional
information and data that we have incorporated into our analyses and
report as appropriate. We also provided a copy of the draft report to
OMB for its review and comment. We received comments from OMB's Program
Associate Director for General Government Programs, and its Assistant
Director for Budget, who agreed that recent recovery expectations
should be incorporated into future reestimates, but disagreed that OMB
had provided little or no oversight over the program's subsidy cost
estimates.
The department noted that its Office of Inspector General recently
identified a number of issues raised in our report and that MARAD is
already addressing these issues. MARAD recognized that aspects of the
program's operation need improvement and said it is working to fine
tune program operations and create additional safeguards. Specifically,
MARAD has agreed to improve procedures for financial review, seek
authorization for outside assistance in cases of unusual complexity,
and expand, within resource constraints, its processes for monitoring
company financial condition and the condition of assets.
The department pointed out that MARAD is permitted, under Title XI
regulations, to modify or waive financial criteria for loan guarantees.
Before issuing waivers in the future, DOT reported that MARAD will
identify any needed compensatory measures to mitigate associated risks.
MARAD also agreed to consider using outside financial advisors to
review uniquely complicated cases. In addition, DOT reported that MARAD
is working to improve its financial monitoring processes by developing
procedures to better document its regular assessments of each company's
financial health. The department stated that MARAD plans to highlight
the results of these assessments to top agency management for any Title
XI companies experiencing financial difficulties.
The department also reported that MARAD is developing a system that
leverages limited staff resources for providing more extensive
monitoring of Title XI vessel condition. In this regard, DOT said MARAD
is establishing a documentation process for each vessel that would
include improved record keeping of annual certificates from the U.S.
Coast Guard, vessel classification societies, and insurance
underwriters. MARAD hopes to use this system, together with company
financial condition assessments, to determine whether additional
inspections are necessary.
In addition, DOT indicated that MARAD has begun an analysis of the
program's results covering the full 10-year period since FCRA was
implemented to improve the accuracy of subsidy cost estimates. We agree
that MARAD should conduct this analysis as part of its annual
reestimate process to determine if estimated loan performance is
reasonably close to actual performance and are encouraged that MARAD
has been able to obtain the historical data to conduct such an
analysis. We had attempted to perform a similar analysis to assess the
basis MARAD used for its default and recovery assumptions, but MARAD
was unable to provide us with this data.
The department believes that our analysis may provide results that do
not accurately reflect the management of the program as a whole, and
that the results we report are affected by our sample selection. It
points out that the report is based on an analysis of only 5 projects,
representing a minute segment of the Title XI program's universe, 3 of
which are defaulted projects, even though the program experienced only
9 defaults out of 104 projects financed over the last 10 years. We do
not contend that this sample is representative of all of the projects
MARAD finances. However, we do believe that these case studies uncover
policies that permeate the program and do not provide for adequate
controls or for the most effective methods for protecting the
government's interest. In addition, our conclusions also draw on the
work of a recent IG review, which looked at 42 Title XI projects, as
well as a comparison with practices of selected private sector lenders
and our own experience in analyzing loan guarantee programs throughout
the federal government.
The department also believes that as a result of our emphasis on
projects involving construction financing, a significant portion of the
report is directed at issues associated solely with that type of
financing, which only accounts for about 30 percent of Title XI
projects since 1993. The department believes it is important for us to
recognize that most projects (70 percent) have been for mortgage period
financing because there are no disbursements made from an escrow fund
for these types of projects, and there is virtually no need for agency
monitoring of the construction process for these types of projects
because the ship owner does not receive any Title XI funds until the
vessel has been delivered and certified by the regulatory authorities
as seaworthy. We believe that projects involving construction financing
are at greater risk of fraud, waste, abuse, and mismanagement, and
therefore require a greater level of oversight compared to projects
involving only mortgage period financing. Again, as mentioned above,
our overall conclusions are based on more than the cases we reviewed.
DOT asserts that the report's portrayal of events and the rationale
behind our description of the assessment of defaulted Searex assets and
the verification of the cost for completing Project America I are
inaccurate. In the case of Searex, the department believes that we
implied that had the program officials rigorously adhered to program
guidelines, the vessels would not have been dismantled. We believe that
while the use of rigorous program guidelines may not have prevented
Ingalls from dismantling the vessels, adherence to existing program
guidelines would have provided evidence of the value and condition of
the assets at the time of default. This documentary evidence would be
advantageous if legal action occurred. In the case of Project America,
DOT believes that the report incorrectly asserts that MARAD relied on
an interested party, Ingalls Shipbuilding, Inc., to determine the value
of the Project America I assets. The department believes that MARAD
relied on the shipbuilder only to provide an estimate of the cost of
making Project America seaworthy. We revised the report to reflect that
MARAD did not obtain a market appraisal of the assets, and that it
relied on Ingalls to estimate the cost of making the vessel seaworthy.
We believe that in order to market the Project America assets, MARAD
needs to know the costs of the available options including the cost of
making the hull seaworthy.
The department also believes that the report does not convey a clear
understanding of DCCA's role in the handling of Project America assets
after default. We disagree with this assertion, and believe that the
report appropriately reflects DCCA's role as outlined in its report
entitled the Application of Agreed-Upon Procedures Incurred on Project
America.
DOT believes that the report uses a number of examples to show that
granting waivers or "other occurrences" related to program guidelines
somehow contributed to the three defaults among the cases studied and
expresses concern that the report concludes that weak program oversight
contributed to the defaults examined in the draft. First, the report
correctly notes that MARAD is permitted to approve waivers under
certain circumstances. Nonetheless, waiving financial requirements
increases the risk borne by the federal government. MARAD is now
recognizing this by agreeing to implement the IG recommendations
calling for compensating provisions to mitigate risk when approving
waivers. Second, the program's vulnerability to fraud, waste, abuse and
mismanagement is not only due to MARAD not complying with program
requirements, but also because MARAD lacks requirements for the
management of defaulted assets, does not utilize basic internal control
practices, such as separation of duties, and cannot reasonably estimate
the program's cost.
With regard to the private sector comparison, DOT does not agree that
MARAD lacks a deliberative process for loan approvals. The department
believes that, in each written loan guarantee analysis, MARAD discusses
the basis for granting major modifications or waivers. Also, DOT
believes MARAD has a deliberative process through its written
concurrence system whereby key agency offices have to concur on actions
authorizing waivers or modifications. We revised the report to reflect
the differing opinions of MARAD officials regarding the process for
approving loan guarantees and waivers or modifications. We believe that
it is not clear that MARAD uses a deliberative process and our review
of the project files showed that key agency offices were not always
included in the concurrence process.
DOT believes that the report should acknowledge that MARAD maintains
separation of duties for disbursement. The report correctly notes that
the ultimate decision to disburse funds is made by the same office that
approves and monitors the Title XI loans. We added the name of the
office that it then instructs to disburse funds.
DOT noted that certain lenders consolidate rather than separate
approval and monitoring functions in order to improve efficiencies. The
lenders we spoke to, who are major marine lenders, do not combine these
functions. They also separate approval and monitoring functions from
marketing and disposition functions. Further, we do not believe that
efficiencies achieved through consolidating these functions outweigh
the greater vulnerability to fraud, waste, abuse, and mismanagement
associated with consolidation.
The department believes that MARAD's determination of subsidy costs is
in accordance with OMB guidance. While we did not assess MARAD's
compliance with OMB guidance, MARAD did not comply with other
applicable, more specific guidance, which states that estimated cash
flows should be compared to actuals, and estimates should be based on
the best available data. The guidance is in the Accounting and Auditing
Policy Committee's Technical Release 3, Preparing and Auditing Direct
Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act.
This guidance was developed by an interagency group including members
from OMB, Treasury, GAO, and various credit agencies to provide
detailed implementation guidance on how to prepare reasonable credit
subsidies. Regardless of whether MARAD complied with all applicable
guidance, because MARAD did not conduct this fundamental analysis to
assess whether its cash flow model was reasonably predicting borrower
behavior, it did not know that for the past 5 years, defaults were
occurring at a much higher rate and costing significantly more than
estimated, and recoveries were significantly less than expected. In
addition, MARAD did not appropriately incorporate these higher default
rates and lower recovery rates into its cash flow models.
The department also stated that the report should recognize that, as a
result of its full compliance with FCRA, MARAD set aside adequate funds
for all defaults to date. While MARAD may have complied with some of
the broad requirements of FCRA in preparing estimates and reestimates,
these estimates were based on outdated assumptions and MARAD could not
demonstrate that the estimates were based on historical data or other
meaningful analyses. Further, DOT's response does not recognize that
the appropriated funds are to cover expected losses over the life of
the loan guarantee program. Because actual losses for the last 5 years
have been significantly more and recoveries significantly less than
expected, in the future actual losses will need to be significantly
less and recoveries significantly more than estimated for MARAD not to
require additional funding.
In addition, DOT believes that our analysis of MARAD's subsidy
estimates was inaccurate and based on incomplete or incorrect data, and
that we underreported actual recoveries from one of the defaulted
projects (MHI). We disagree and believe our analysis was accurate,
based on the information MARAD had provided. In its comments, the
department provided new information on recoveries for the MHI project.
We have now incorporated this new data, as appropriate, into our
analysis. We did not include data provided on guarantee fees because
these are paid upfront and should not be included in estimates of
recoveries.
The department also provided technical comments, which we have
incorporated as appropriate. The department's comments appear in
appendix II.
OMB agreed that recent recovery expectations on certain defaulted
guarantees cited in our report should be incorporated into future
reestimates, and plans to ensure that these expectations are reflected
in next year's budget. Further, OMB plans to work with MARAD to review
recovery expectations for other similar loan guarantees. In addition,
OMB has been working with DOT and MARAD staff to implement
recommendations contained in the IG report, and expects that resulting
changes will also address many of the concerns raised in our report.
OMB disagreed with our finding that it provided little review and
oversight of MARAD's subsidy cost estimates and reestimates and points
to the substantial amount of staff time it devotes to working with
agencies on subsidy cost estimates. OMB claims that the data used in
our report does not seem to support our assertion of a lack of OMB
oversight and disagrees with our implication that the overall subsidy
rates would be higher if it had provided oversight. We clarified our
report to convey the message that if OMB had provided greater
oversight, it would have realized that MARAD did not have adequate
support for the default and recovery assumptions it uses to calculate
subsidy cost estimates. While OMB asserts that the number of default
claims made between 1992 and 1999 is substantially in line with the
assumptions underlying the estimated subsidy costs, we could not verify
the magnitude and timing of defaults prior to the period included in
our review (1996-2002) because MARAD could not provide data on
historical default experience. Because MARAD could not provide adequate
support for its default and recovery assumptions, we question the basis
for the estimates and whether OMB had provided sufficient oversight. We
continue to believe that MARAD's recent actual experience was
significantly different than what MARAD had estimated and OMB had
approved. Even when we exclude all of the AMCV projects, as well as the
MHI project, from our analysis, we found that the amount of defaults
MARAD experienced exceeded what MARAD estimated it would experience by
$63.3 million (or about 177 percent). Should the program receive new
funding in the future, the subsidy rate estimates should be calculated
using updated default and recovery assumptions to incorporate recent
actual experience.
OMB also took issue with our use of data on the eight defaults,
particularly those involving AMCV and MHI, in questioning MARAD's most
recent reestimates of the costs of loans guaranteed between 1992 and
1995. However, we continue to question the reasonableness of the
negative subsidies for the loans that were disbursed in fiscal years
1993, 1994, and 1995. First, the loans in these cohorts have not been
through what MARAD considers the period of peak default--years 10-18
depending on the risk category. Second, MARAD was unable to provide us
with adequate supporting information for how it determined the
estimated default and recovery amounts. OMB agrees that recent
experience should be used to calculate reestimates and states in its
comments that it generally requires agencies to use all historical data
as a benchmark for future cost estimates and agreed that recent
recovery experience should be incorporated into future reestimates.
OMB's comments appear in appendix III.
We are sending copies of this report to the Secretary of
Transportation. We also will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO web site at http://www.gao.gov.
If you or your staff have any questions about this report or need
additional information, please contact me, or Mathew Scirč at 202-512-
6794. Major contributors to this report are listed in appendix IV.
Sincerely yours,
Thomas J. McCool
Managing Director, Financial Markets and Community Investment:
Signed by Thomas J. McCool:
[End of section]
Appendix I: Scope and Methodology:
To determine whether MARAD complied with key Title XI program
requirements, we identified key program requirements and reviewed how
these were applied to the management of five loan guarantee projects.
We judgmentally selected 5 projects from a universe of 83 projects
approved between 1996 and 2002. The selected projects represent active
and defaulted loans and five of the six risk categories assigned during
the 1996-2002 period. The projects selected include barges, lift boats,
cruise ships, and tankers. (See table 3.) Two of the selected
shipowners had multiple Title XI loan guarantees during 1996-2002
(HVIDE, five guarantees; and AMCV, the parent company of Project
America, Inc., five).
Table 3: Projects Selected for Our Review:
Project: (AMCV) Project America, Inc.; Year loan committed: 1999;
Type of project: Cruise ships.
Project: Searex; Year loan committed: 1996; Type of project:
Lift boats.
Project: Massachusetts Heavy Industries (MHI); Year loan committed:
1997; Type of project: Shipyard modernization.
Project: Hvide Van Ommeran Tankers (HVIDE); Year loan committed: 1996;
Type of project: Tanker.
Project: Global Industries; Year loan committed: 1996; Type of
project: Barge.
Source: GAO.
[End of table]
We interviewed agency officials and reviewed provisions of existing
federal regulations set forth in Title 46, Part 298 of the Code of
Federal Regulations to identify the key program requirements that
influence the approval or denial of a Title XI loan guarantee. We
reviewed internal correspondence and other documentation related to the
compliance with program requirements for the approval of the loan
guarantee, ongoing monitoring of the project, and disposition of assets
for loans resulting in default. We interviewed agency officials and
staff members from the Title XI support offices that contribute to the
approval and monitoring of loans and disposal of a loan resulting in
default. Also, we interviewed a retired MARAD employee involved in one
of the projects.
In addition, we interviewed officials that represented AMCV/Project
America, Inc., including the former Vice President and General Counsel
and former outside counsel.
To determine how MARAD's practices of managing financial risk compare
to those of selected private-sector maritime lenders, we interviewed
two leading worldwide maritime lenders, and one leading maritime lender
in the Gulf Coast region. We interviewed these lenders to become
familiar with private-sector lending policies, procedures, and
practices in the shipping industry. Among the individuals we
interviewed were those responsible for portfolio management and asset
disposition. We did not verify that the lenders followed the practices
described to us.
To assess MARAD's implementation of credit reform, we analyzed MARAD's
subsidy cost estimation and reestimation processes and examined how the
assumptions MARAD uses to calculate subsidy cost estimates compare to
MARAD's actual program experience. We first identified the key cash
flow assumptions MARAD uses to calculate its subsidy cost estimates.
Once we identified these assumptions, we determined whether MARAD had a
reliable basis--whether MARAD had gathered sufficient, relevant, and
reliable supporting data--for the estimates of program cost and for
their estimates of loan performance. We compared estimated program
performance to actual program performance to determine whether
variances between the estimates and actual performance existed.
Further, we interviewed those MARAD officials who are responsible for
implementing credit reform and compared the practices MARAD uses to
implement credit reform to the practices identified in OMB and other
applicable credit reform implementation guidance.
We performed our work in Washington, D.C., and New York, N.Y., between
September 2002 and April 2003 in accordance with generally accepted
government auditing standards.
[End of section]
Appendix II: Comments from the Department of Transportation:
U.S.Department of Transportation
Assistant Secretary for Administration
400 Seventh St., S.W.
Washington, D.C. 20590:
JUN 12 2003:
Mr. Thomas J. McCool:
Managing Director, Financial Markets and Community Investment Issues:
U.S. General Accounting Office 441 G Street, N.W. Washington, D.C.
20548:
Dear Mr. McCool:
Thank you for the opportunity to review and comment on the GAO draft
report, "Maritime Administration: Weaknesses Identified in Management
of the Title XI Loan Guarantee Program." We offer the following
comments for your consideration as the report is finalized. The
comments are organized to provide an overall perspective on the draft
report, followed by a section with specific and detailed comments. If
you have any questions concerning our reply, please contact Martin
Gertel on 366-5145.
Sincerely,
Vincent T. Taylor:
Signed for Vincent T. Taylor:
U.S. Department of Transportation Comments on U.S. General Accounting
Office Draft Report, "Maritime Administration: Weaknesses Identified in
the Management of the Title XI Loan Guarantee Program" GAO-03-657:
Title XI Program Management Improvements Underway:
A number of issues raised in the draft report were previously
identified by the Department's Office of Inspector General (OIG) in its
recently issued report on the Title XI program, and MARAD is already
addressing those issues. MARAD recognized that aspects of the Title XI
program's operation need improvement, and it is working closely with
OIG to fine tune program operation and create additional safeguards.
Specifically, MARAD has agreed to improve procedures for financial
review, seek authorization for outside assistance in cases of unusual
complexity, and expand, within resource constraints, its processes for
monitoring company financial condition and the condition of assets.
MARAD is permitted under the Title XI regulations to modify or waive
financial criteria for a loan guarantee. Before issuing a waiver in the
future, MARAD will identify any needed compensatory measures to
mitigate associated risks. These compensatory measures could include
requirements for liens on unencumbered collateral or greater amounts of
project equity. MARAD also agreed to consider using outside financial
advisors to review uniquely complicated cases. Its fiscal year 2004
authorization seeks authority to engage such financial advisors, at the
expense of the prospective borrower.
MARAD is working to improve its financial monitoring processes by
developing procedures to better document its regular assessments of
each Title XI company's financial health. The results of these
assessments will be highlighted to top agency management for any Title
XI companies experiencing financial difficulties.
Finally, MARAD is developing a system that leverages its limited staff
resources for providing more extensive monitoring of Title XI vessel
condition. In this regard, MARAD is establishing a documentation
process for each Title XI vessel which will include improved
recordkeeping of annual certificates from the U.S. Coast Guard, vessel
classification societies, and insurance underwriters. MARAD will use
this system together with company financial condition assessments to
determine whether additional inspections by MARAD are necessary.
Draft Report Results Affected By Sample Selection:
The GAO draft report is based on analysis of only five projects,
representing a minute segment of the Title XI program's universe. These
five projects included three defaults even though MARAD has financed
104 Title XI projects over the last 10 years and experienced only nine
defaults in total. Thus, while 60 percent of the projects in GAO's
sample were defaults, the program has experienced less than a 9 percent
default rate
over the last 10 years. It should also be noted that one of the
projects analyzed by GAO, the shipyard reactivation project for MHI
Shipbuilding, was approved only as the result of special legislation
that has no applicability to any other Title XI project. This project
has already been the subject of three separate OIG audits. The draft
report's analytical focus on defaults, including a unique case with no
parallels in the program, may provide results that do not accurately
reflect the management of the program as a whole.
Another aspect of sample selection also affected the draft report's
analysis. Two distinct types of financing are offered through the Title
XI program, "Mortgage Period" and "Construction Period." Since 1993,
mortgage period financing accounts for about 70 percent of the
projects. This type of financing provides funds only after vessel
construction has been satisfactorily completed as compared to
construction period financing, which provides funding during the
construction period as well. Despite the program's preponderance of
mortgage period loans, only one of five cases considered by GAO was of
this type. Recognizing most Title XI financings are mortgage period
loans is significant for two key reasons. First, there are no
disbursements from an escrow fund for mortgage period financing.
Second, there is virtually no need for agency monitoring of the
construction process because the ship owner does not receive any Title
XI funds until the vessel has been delivered and certified by the
regulatory authorities as seaworthy. As a result of the draft report's
emphasis on projects involving construction financing, a significant
portion of the report is directed at issues associated solely with that
type of financing that accounts for only about 30 percent of Title XI
projects. For example, all of the discussion in the draft report's
section "Controlling the Disbursements of Loan Funds" addresses issues
that are pertinent only to construction period financing.
Finally, it would have been useful to include a drill rig project in
the sample, since these projects represent the largest market segment
in the Title XI portfolio. MARAD has approved drill rig projects
totaling $1.6 billion in outstanding loan guarantees and commitments
out of a total portfolio of $4.6 billion. All of these projects to date
have been successful.
Clear Understanding of Events Necessary to Avoid Erroneous Conclusions:
In some cases, the draft report's portrayal of events and the rationale
behind them is inaccurate. For example, the draft report cites certain
issues that arose during Title XI funded projects to assert that
reliance on flexible guidelines for handling defaulted assets is
insufficient and that specific and rigorous requirements could save
funds. As stated earlier, while we agree that the program will benefit
from certain procedural modifications, some of the examples cited are
misconstrued.
Assessing Assets in Custody:
The draft report implies that had program officials rigorously adhered
to program guidelines, the SEAREX vessels would not have been
dismantled. MARAD's guidelines
for the disposition of defaulted assets state that a marine surveyor
"shall survey all vessels as soon as practicable after the assets are
taken into custody." The draft report states that MARAD did not timely
conduct such a survey before Ingalls dismantled the SEAREX vessels,
implying that had this action occurred, the vessels would not have been
dismantled. There are several flaws in this logic. First, MARAD did not
have custody of the vessels, Ingalls did. As a result, the guideline
provisions, even if they had been inflexible requirements, would not
have applied. Secondly, MARAD conducted oversight visits to Ingalls
prior to the vessels being dismantled. However, it is unclear how a
marine surveyor's assessment, or oversight visits by MARAD, could have
prevented Ingalls from dismantling the vessels.
MARAD and SEAREX were both entitled to rely on the duty of Ingalls, as
a secured party in possession of the vessels, to take reasonable care
of the vessels and preserve them. Instead, Ingalls cut up the vessels
because they were in its way and, in so doing, failed to carry out its
legal obligations imposed by the State of Mississippi, and also Federal
Bankruptcy law, which forbids such actions without a Bankruptcy Court
order. SEAREX has commenced a civil action against Ingalls for the
damage and MARAD will claim against any proceeds. MARAD does not have
an independent right to bring a civil action against Ingalls for damage
to its collateral.
Verifying Cost for Completion versus Estimates of Assessed Value:
The draft report incorrectly asserts that, in the case of Project
America, MARAD relied on an interested party, Ingalls Shipbuilding, to
determine the value of the Project America I assets. In fact, MARAD
relied on the shipbuilder only to provide an estimate of the cost of
making the Project America I vessel seaworthy. In places, the draft
report incorrectly interprets this as a request for Ingalls to perform
an appraisal for the purpose of marketing the asset. MARAD did not ask
Ingalls to appraise the hull's market value; rather, MARAD wanted to
know how much it would cost to make the vessel towable. The draft
report should note the fact that the incomplete vessel, more than 800
feet long and 200 feet high, could only be removed from the shipyard by
partially completing it or allowing Ingalls to cut the vessel up. It
was MARAD's independent conclusion, based on its shipbuilding
expertise, that it would cost more and return less money to dismantle
the vessel than it would to partially complete it. MARAD opted to
partially complete the vessel for no more than $12 million - not the
$16 million the cited in the draft report. Subsequently, of the $14
million attributable to the sale of Hull 1, after deducting the $12
million used to partially complete the vessel, MARAD recovered $2
million. Had MARAD adopted the alternative course of action described
in the draft report, it would have fared worse.
The draft report also does not convey a clear understanding of DCAA's
role in this project. On page 18, the draft report states that "rather
than obtaining a market appraisal to assist in marketing the asset,
MARAD hired the Defense Contract Audit Agency (DCAA) to verify the
costs incurred by [Ingalls]." MARAD hired the DCAA to protect its
rights under its contract with Ingalls. Had Ingalls spent less than $12
million in preserving and completing the vessel, MARAD would have been
entitled to each dollar:
under the $12 million cap. MARAD's hiring of DCAA was unrelated to
assessing the asset's market value, and represents standard and
appropriate practice for ensuring charges related to a contract were in
fact incurred. Further, the draft report states that DCAA did not
review the reasonableness of the costs charged by Ingalls. DCAA does
not provide that service. Instead, MARAD is performing a reasonableness
review. Prior to entering into its agreement to pay $12 million of the
sales proceeds to Ingalls for partially completing the hull, MARAD
performed a preliminary review of the reasonableness of such costs and
concluded that they were likely to be reasonable. Now that DCAA has
submitted its report, MARAD is completing its review of the
reasonableness of Ingalls' charges.
MARAD Compliance with Program Management Requirements:
The draft report uses a number of examples to show that granting
waivers or other occurrences related to program guidelines somehow
contributed to the three defaults among the cases studied. While MARAD
agrees, as stated earlier, that some increased program controls may be
useful in managing future projects, the draft report does not make a
convincing case that cited instances materially contributed to these
defaults. For example, MARAD recognizes that certain ship owner
financial statements could not be located; however, in each case MARAD
was aware of the ongoing financial difficulties, and was working with
those tools available to address the situation.
The draft report comments extensively on waivers and modifications of
financial requirements, but acknowledges that these are permitted under
the Title XI regulations. While MARAD acknowledges that in the future,
compensatory measures will be used to provide additional risk
mitigation, it should be noted that MARAD has frequently required such
compensatory measures in the past. It should also be noted that MARAD
could not have approved many of its successful and desirable projects
without having waived or modified financial requirements. Examples
include the double hull tankers that MARAD financed for American Heavy
Lift and Hvide Van Ommeren. These tankers were necessary to meet the
requirements of the Oil Pollution Act and could not have been built
without MARAD financing, which included the judicious use of waivers.
MARAD also disagrees with the draft report's conclusion, based on the
small number of examples studied, that its Title XI oversight is weak,
or somehow contributed to the defaults examined by the draft. While
MARAD recognizes there are opportunities to improve oversight, some of
the assertions in the report lack firm basis. For example, the draft
report asserts that MARAD could not always demonstrate linkage between
fund disbursement and construction progress. MARAD has supporting
documentation of construction progress for Project America which is the
example cited in the draft report, and has made it available to GAO.
MARAD Practice Compared to Private Lenders:
While comparisons between Title XI practices and those of the private
sector offer some useful insights, MARAD does not agree with all of the
characterizations of its processes:
in the draft report. For example, while MARAD agrees that some of the
financial analysis documentation practices of the private sector offer
useful insights for improving the program's practices, MARAD does not
agree that it lacks a deliberative process for loan approvals. In each
written loan guarantee analysis, MARAD discusses the basis for granting
major modifications or waivers. MARAD has a deliberative process
through its written concurrence system whereby key agency offices have
to concur on actions authorizing waivers or modifications. Also,
certain lenders consolidate rather than separate approval and
monitoring functions to achieve greater efficiencies, as MARAD has
recently done. The draft report recognizes that MARAD consolidated
certain functions in order to correct the very issues GAO and the OIG
have identified, yet the draft asserts MARAD's organizational structure
offers too little separation of duties for the Title XI program. The
GAO report should note that MARAD does maintain separation of duties
for disbursement.
Credit Subsidy:
MARAD's determination of subsidy costs is in accordance with guidance
from the Office of Management and Budget. The draft report should
recognize that as a result of its full compliance with the Federal
Credit Reform Act (FCRA), MARAD set aside adequate funds for all
defaults to date. The draft report is critical of MARAD's subsidy
estimates on the basis that, even if the AMCV recoveries were excluded,
MARAD's estimates of its other recoveries were inaccurate.
Unfortunately, the draft report's analysis was based on incomplete or
incorrect data (see the Specific and Technical comments section), since
it underestimated MARAD's recovery from MHI. If the draft report's
analysis had been accurate in this case, it would have recognized that
MARAD recovered more funds than anticipated, and it would have reached
a different overall conclusion.
Finally, we agree with the draft report's suggestion to conduct long-
term, retrospective analyses of program results to improve the accuracy
of FCRA estimates. However, the draft report's recommendation of
conducting analyses covering the last 5 year period could provide an
insufficient time-span to achieve worthwhile results. For example, if
such an analysis had been done after the first five years after
implementation of FCRA, it would have demonstrated that MARAD
overestimated program costs, since no defaults occurred during this
period. A longer term perspective offers greater assurance that we
capture a complete and accurate record of the program's results.
Therefore, MARAD has begun an analysis of the program's results
covering the full 10-year period since FCRA was implemented.
[End of section]
Appendix III: Comments from the Office of Management and Budget:
EXECUTIVE OFFICE OF THE PRESIDENT OFFICE OF MANAGEMENT AND BUDGET:
WASHINGTON, D. C. 20503:
June 23, 2003:
Thomas J. McCool Managing Director Financial Markets and Community
Investment General Accounting Office:
Washington, DC 20548:
Dear Mr. McCool:
We have been asked to respond on the Acting Director's behalf to your
request for comment from the Office of Management and Budget on your
draft report "Maritime Administration: Weaknesses Identified in
Management of the Title XI Loan Guarantee Program.":
We agree with GAO that recent recovery expectations on certain
defaulted guarantees cited in the report should be incorporated into
future reestimates; since these data were received after publication of
the 2004 President's Budget, we will ensure that they are reflected in
next year's Budget, and will work with the Maritime Administration
(MARAD) to review recovery expectations for other similar loan
guarantees.
In addition, we commend GAO on recognizing many of the same program
management issues raised in the Department of Transportation's Office
of the Inspector General (OIG) report on the Title XI program, issued
in March 2003. We have been working with the Department and MARAD staff
to implement recommendations contained in the OIG report, and expect
that resulting changes will also address many of the concerns raised in
the GAO report.
However, we disagree with GAO's assertion that OMB provided little or
no oversight over the MARAD Title XI subsidy cost estimates. To support
this assertion, GAO cites several defaults on loans originated between
1996-2002, and implies that the overall subsidy rates would be higher
if OMB had provided oversight.
First, OMB devotes a substantial amount of staff time to working with
all agencies, including DoT staff, on subsidy cost estimates: we work
with agencies on revisions and refinements to their models throughout
the year, review cash flows for all agency subsidy cost estimates and
reestimates in preparation for the President's Budget, provide a
variety of tools to aid agencies in making calculations in support of
these estimates, and provide comprehensive annual training in credit
budgeting guidance and procedures for all interested Federal government
staff, as well as respond to ad hoc requests for guidance and training.
Second, the data used in the report does not seem to support GAO's
assertion of a lack of OMB oversight. In general, OMB requires that
agencies use their program's historical experience as a benchmark for
future cost estimates. As GAO outlined, the:
large majority of MARAD's default experience is attributable to six
loan guarantees: Massachusetts Heavy Industries (MHI), and the five
made for American Classic Voyages (AMCV). At the time of making the
AMCV loan guarantees in 1999, MARAD had experienced, at most, only four
default claims since 1992. GAO acknowledges that MHI was an atypical
project because P.L. 104-324 waived MARAD's economic soundness
criterion. Therefore, on the more than 70 standard loan guarantees
issued between 1992-1999, MARAD had experienced only three default
claims. This figure is substantially in line with the assumptions
underlying the estimated subsidy costs for guarantees made under
conditions permitted by law and regulations, such as those to AMCV. As
a result, OMB would not have questioned the estimates since they were
in line with historical experience.
Finally, GAO also uses the data on the eight defaults to call into
question NIARAD's most recent estimates of the cost of loans guaranteed
between 1992-1995, primarily because the MHI and AMCV defaults occurred
earlier, and in larger amounts, than originally estimated. As GAO
wrote, MARAD estimates that most defaults will occur during years 10-18
of the loans. Since the loans from those earlier years now have between
eight and eleven years of experience behind them, with only one
default, it is not clear how the MHI and AMCV experience would change
the default estimates on the earlier loan guarantees.
Sincerely,
Stephen McMillin
Program Associate Director,
General Government Programs:
Richard P. Emery
Assistant Director for Budget
Signed by Stephen McMillin and Richard P. Emery:
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Thomas J. McCool (202) 512-8678 Mathew J. Scirč (202) 512-6794:
Staff Acknowledgments:
In addition to those individuals named above, Kord Basnight, Daniel
Blair, Rachel DeMarcus, Eric Diamant, Donald Fulwider, Grace Haskins,
Rachelle Hunt, Carolyn Litsinger, Marc Molino, and Barbara Roesmann
made key contributions to this report.
FOOTNOTES
[1] Defaulted amounts may include disbursed loan guarantee funds,
interest accrued, and other costs.
[2] Loan guarantees are legal obligations to pay off debt if an
applicant defaults on a loan.
[3] Vessels eligible for Title XI assistance generally include
commercial vessels such as passenger, bulk, container, cargo and
oceanographic research; also eligible tankers, tugs, towboats, barges,
dredges, floating power barges, offshore oil rigs and support vessels,
and floating dry docks. Eligible technology generally includes proven
technology, techniques, and processes to enhance the productivity and
quality of shipyards; novel techniques and processes designed to
improve shipbuilding; and related industrial production that advances
U.S. shipbuilding.
[4] MARAD must determine that the interest rate is reasonable.
[5] Congress recognized that data were limited or unreliable in the
early years of credit reform and that this could impede the ability of
agencies to make reliable estimates. Thus, Congress provided for
permanent, indefinite budget authority for upward reestimates of
subsidy costs. Agencies with discretionary credit programs then could
reestimate subsidy costs as required without being limited by the
constraints of budgetary spending limits.
[6] All projects must be determined to be economically sound, and
borrowers must have sufficient operating experience and the ability to
operate the vessels or employ the technology on an economically sound
basis. Particularly, MARAD regulations contain language stating that
(1) long-term demand must exceed supply; (2) documentation must be
provided on the projections of supply and demand; (3) outside cash flow
should be shown, if in the short-term the borrower is unable to service
indebtedness; and (4) operating cash flow ratio must be greater than
one (sufficient cash flow to service the debt).
[7] Economic soundness analyses are prepared by the Office of Insurance
and Shipping Analysis which is responsible for recommending approval or
disapproval of loans from an economic soundness perspective, and the
Office of Statistical and Economic Analysis. It should be noted that we
did not assess the substance of these economic analyses.
[8] In another case, Congress statutorily waived economic soundness
criteria. Specifically, the Coast Guard Authorization Act of 1996
contained a provision waiving the economic soundness requirement for
reactivation and modernization of certain closed shipyards in the
United States. Previously, MARAD had questioned the economic soundness
of the MHI proposal and rejected the application.
[9] MARAD may waive or modify financial terms or requirements upon
determining that there is adequate security for the guarantees.
[10] Unterminated passengers are individuals who pay for a cruise, but
do not actually take the cruise, and the payment is not refunded.
However, the passenger may take the trip at a later date.
[11] Cash management is a financial management technique used to
accelerate the collection of debt, control payments to creditors, and
efficiently manage cash.
[12] U.S. Department of Transportation, Office of Inspector General,
Maritime Administration Title XI Loan Guarantee Program (Washington,
D.C.: March 27, 2003).
[13] An escrow fund is an account in which the proceeds from sales of
MARAD-guaranteed obligations are held until requested by the borrower
to pay for activities related to the construction of a vessel or
shipyard project or to pay interest on obligations.
[14] On June 25, 2001, AMCV restated losses from $6.1 million to $9.1
million for the first quarter of 1999.
[15] MARAD has no financial interest in the equipment purchased for
Project America II , and therefore has no right to sale proceeds for
this vessel.
[16] The IG also recommended that MARAD impose compensating factors for
loan guarantees to mitigate risks.
[17] Classification society representatives are individuals who inspect
the structural and mechanical fitness of ships and other marine vessels
for their intended purpose.
[18] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999) and Internal Control Management and Evaluation Tool, GAO 01-1008G
(Washington, D.C.: August 2001).
[19] The Federal Accounting Standards Advisory Board developed the
accounting standard for credit programs in Statement of Federal
Financial Accounting Standards No. 2, "Accounting for Direct Loans and
Loan Guarantees," which generally mirrors FCRA and which established
guidance for estimating the cost of guaranteed loan programs.
[20] MARAD's recovery assumption assumes a 50 percent recovery rate
within 2 years of default. However, 2 years have not yet elapsed for
several of the defaults and so we could not yet determine how the
estimated timing of recoveries compares to the actual timing of
recoveries.
[21] Our analysis focused on loans beginning in 1996 because (1) this
was the first year in which MARAD implemented its risk category system,
and (2) MARAD could not provide us with any supporting data for its
default and recovery assumptions for loans originating before 1996.
Further, only one default occurred between 1993-1996, representing less
than 1 percent of MARAD's total defaults between 1993-2002.
[22] MARAD's risk category system incorporates ten factors that are set
out in Title XI, which specifies that MARAD is to establish a system of
risk categories based on these factors. How MARAD weighs and interprets
these factors is described in program guidance.
GAO's Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office
441 G Street NW,
Room LM Washington,
D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800 U.S.
General Accounting Office, 441 G Street NW, Room 7149 Washington, D.C.
20548:
