oversight

Use of Vessels Under Time Charters for Military Cargo

Published by the Government Accountability Office on 1971-03-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                            UNITED STATES GENERAL ACCOUNTING ,OFFICE
                                                                   WASHINGTON, D.C.  20548

                                                                                                               FOR RELEASE ON DELIVERY
                                                                                                               Expected at       a.m. EST
                                                                                                               March 9, 1971

                                                             STATEMENT OF
                                 ROBERT F. KELLER, ASSISTANT COMPTROLLERGENERAL OF THE UNITED STATES
                                                              BEFORE THE
                                              COMMITTEE ON MERCHANT MARINE AND FISHERIES
                                                UNITED STATES HOUSE OE REPRESENTATIVES

                          Mr.    Chairman
                                        and Members of the Committee:
                                                          wW%
                                At your request,   ';ire bppear before you today to present the information                                                                that
                              L                  1
                          the General Accounting      Office has developed concerning   the use- of vessels                                                           under

                          time      charters        for     the ocean movement of military                          cargo by the Department                         of
-.
                                                                  k.Jv.SJcb-bD
                          Defense.                               directed    primaril                                  ning      whether             the Military
               ?          Sealift       Command was complying                    with   the provisions               of the Wilson-Weeks                      Agreement

                          in its       decisions          to charter         ships.      We also         inquired        into     the         impact         the    Command's

                          chartering           practiceshad on the U.S. Merchant Marine.                                      Our findings              were reported
                                                                     "b
                    ‘\I   to this       Committeeh“ i&i? letter   dm    January 22, 1971.

                          THE WILSON-WEEKS AGREEMENT
          $i
                                    The Wilson-Weeks              Agreement          of 1954 is an agreement                    between         the Department
                    ..
                          of Commerce and the Department                           of Defense       (DOD) to provide                   for     the permanent                   or
                   ,'
                          temporary        transfer,           allocation,          and utilization                of merchant-type                  ships     by DOD.

                          The agreement,             which      remains         in effect,       sets     fc@h         (1) the size             and composition

                          of the nucleus             fleet,       that    is,      the ships       owned and operated                   by Military                Sealift

                          Command, (2) the procedures                        for     augmenting       the nucleus             fleet          under     conditions               of
                                    -
                          full      mobilization,             and (3) a priority               formula       for     the acquisition                  of merchant
                                                                        I----
                          shipping        capability           required     by DOD.            The priority           formula          provides          that,        "con-

                          sistent       with     military         requirements          and prudent           management,"              DOD requirements

                          will      be met by the use of the                       (1) nucleus      fleet,          (2) U.S.          flag     berth         space,

                          (3) time        and voyage           charters         of privately        owned U.S.           flag     merchant             ships,            (4)


      .
     -.
    *
        ships      from the Nataal@fense                                 Reserve        Fleet,            and@)         f@ign         flag       ships,         in
.
        that      order      of priority.

                  In essence,           the agreement                 provides          that         the Government-owned                     shipping

        capability,           except          under        conditions            of full            mobilization,           will      be kept          rela-

        tively       small     and that           the remainder                  of DOD's shipping                     needs will           be satisfied

        thrcugh       the use of the services                            of the U.S. Merchant                       Marine.          Preference            is to

        be given          to U.S.       flag      berth           service        unless        it      is inconsistent               with      military

        requirements           and prudent                 management.               For example,               the Military               Sealift        Command

        considers          shipments           of ammunition                 as a military                  requirement           not requiring                con-

        sideration           of available                 berth      service.           The Command believes                        also      that     -prudent

        management           dictates          that        available            space on ships                already       under          charter        be used
          ---  ._.*-I
        prior      to using          berth      service.

        Compliance           with     the Wilson-Weeks                      Agreement          in Chartering               Ships

                  Our review          indicated             that      the Military                  Sealift      Command's procedures   for   ~~~     :
                                                                                                                                            :?
                                                                                                                          &  L%4kdI     &&w fy@ fi    :
        procuring          ocean transportation                       provide          reasonable             assurance/that   the terms of   @P   Y:
                                                                                        ---cc-
                                                                                                                                              NH      :
        the Wilson-Weeks                Agreement             will       be complied                with.

                  In March 1965, prior                      to the start               of the Vietnam                  buildup,       the      Command had

        five      ships      under      time      charter            with       a total        per voyage              cargo       capacity          of about

        57,000      measurement               tons.         During          fiscal      year         1965, the Command moved approxi-
        mately       13.2 million              measurement               tons        of cargo.

                  In planning           for     fiscal            year      1966, the Military                  Sealift   Command based its
                                                                                                           6
        13.5 million           measurement                 ton required               shipping            capability    on military  cargo pro-

        jections          prepared       by the military                     shipper        services.               However,         as a result               of the

        Vietnam       buildup,          the actual                cargo      the Command was required                          to move totaled                  20.9    *

        million       measurement              tons.          This        increase         in cargo           exceeded         the capability                  of the

        Command's fleet,                and the            Command petitioned                       the     industry       to provide            additional

        shipping          capability.




                                                                                                                                                -2-


                                                      ,
.
                                         .a                                                               00
                       There was insufficient                     berth          service          available       on ships          operating

            on routes           from the United               States           to Vietnam           to meet the increased                     cargo

            requirements.                Also,       some berth               service       operators          were reluctant             to carry

            military           cargo      to Vietnam          because           of the potential                risks,       the extreme

            delays        in unloading              cargo     in that            area,      and the resultant                disruption                 of

            their       commercial           berth     service.                Much of the additional                     cargo       was ammuni-

            tion     which        was more suitable                     for    shipment           on time      charter       ships      than            on

            berth       service         ships       because         of safety            factors,         loading        and unloading

            priorities,               and incompatibility                     with      certain       commercial          cargo       which

            created           stowage      and scheduling                  problems         for     berth      service       operators.

                       In response           to this         emergency,              the    shipping          industry       offered          a

            substantial               number of ships               for       charter       to the Military               Sealift       Command

            for     initial           periods       of 3 to 6 months.                      Many of the ships                offered      were

            available           because          of a strike              on the east             coast     of the United             States

            which       prevented          these      ships         from being             used for         shipment        of commercial



                              November 1965,           the Command asked the industry                                   to extend       the

            charters           on the       ships     initially               offered       and to make more ships                     available
        /
    /       to meet the escalating                     cargo            requirements.                The industry     responded in
                                                                                                      6
            various           ways,     some ship           operators           agreeing           to charter     extensions,   others

            offering           additional           ships     for         charter,         and others          recommending            that,the

            Command petition                 the Maritime                Administration               to activate           ships      from the

            Reserve           Fleet     citing       the unavailability                     of additional               ships.        The latter

            operators           stated       that     their         ships       were needed.to                satisfy       commercial

            commitments.


                                                                                                                                                  ‘3’



                                                                    I
                                          00                                                              I)*
    .


                       Cargo requirements                continued          to escalate             until       a peak of 30.6 million

                measurement        tons     was reached            in fiscal         year         1969.       The Military              Sealift

                Command met these              requirements          by increased                 use of all-types               of shipping

                capability--nucleus,              berth,      charter,             and Reserve              Fleet     ships.        On

                January       1, 1969, the Command was operating                              144 Reserve             Fleet       ships      and

            had 130 break-bulk                  cargo      ships     under         charter,         the latter              group repre-

                senting       an estimated        1.7 million             measurement              tons      of cargo          space,

                          .

                       In fiscal        year     1970, military              cargo        requirements               decreased          to 26.9

            miG.Znmeasurement                    tons,      and projections                 for     fiscal          year     1971 indicate
                      /
            a further   decrease                to 19.5 million              measurement             tons.           As a result,            the

                Command has removed              all     Reserve         Fleet      ships         from operation,               and as of
            /
        /
                December 1, 1970, it              reduced          the number of break-bulk                          cargo      ships      under

                time   charter      to 76 representing                   a total         of about           1.1 million          measurement

                tons   of cargo        capacity .--_c"-1114d1--m .               By December 31, 1970, the number of
                           -v-.
                                                                                                                % &&J&&&&                   d
                time   charter      ships       had been further                 reduced          to 63.

                       Tables      showing       the levels          of cargo            carried       during         fiscal       years        1965
                to 1971, and the number and type                          of ships          under         charter          to the Command

                are included        in the attachment                to this          statemept.

                       The Military          Sealift        Command responded                     to the de'cline              in military

                cargoes       by deactivating            the Reserve             Fleet      ships      and by steadilyreducing

                the number of ships              under      time     charters.              The pace of this                   reduction          was

                based on the        Command's periodic                   comparison           of shipper-service                   requirements

            with       sealift      capability.

                                                                     \
                                                                                                                                                -4-
.
                           Each year           in February                the shipper            services        submit           their       annual

                 estimates          of military                 cargo      in measurement               tons     per month by commodity,

                 origin,          and destination.                       On the basis            of these        submissions,                the

                 Command develops                  its     Cargo Operating                   Force      Plan which           identifies               its

                 estimated          capability             to handle               these     projected          cargo       requirements                   by

                 -We,           such as nucleus                 fleet,       berth         service,        and time         charters.

                           The plan         is developed                  by first          identifying          that       cargo          which      (1) will
 “!. \
i.’              move between              points         for      which       no berth          service        is offered,                and (2) is not

                 suitable          for     berth         service          because          of its      nature     and military                 require-
                                                                                                                                                                                      #Lop
                 ments,          such as ammunition,                      aircraft,          and outsized            cargo.           This         cargo          is        ,J         '
                                                                                                                                                                            w
                 then      allocated           to the nucleus                  fleet.                                                                                   $        ,"

                 est.ab$ishes             the minimwn.time                   charter         capab,&litg, +.*. required.
                                                                                                                    ..--_
                      ~?Al         other       cargo       is then           allocated           to berth        service;            except,          if
                                 P
                 there          is a surplus             time      charter          capability          already           under      contract,              it

                 is     first      utilized.              The allocation                   to berth        service         is then          compared
             /
         '       with      the     Command's estimate                      of berth          space available.

                           This     gives       the Command an annual                           planning        estimate           of the capability

                 necessary          to meet shipper                      requirements            and alerts          it     to any major                   changes
   1
                 that      may be necessary.                       However,           actual        decisi.ns        on increasing                   or

                 decreasing              the number of ships                       under     charter        are made throughout                       the

                 year      on the basis             of revised               estimates           of the        shipper       services              and the

                 actual          cargo being             presented           for      shipment.           For example,               at intervals                  of

                 105,      75, 45, and 15 days preceding                                   each month the            shipper              services          submit

                 revised          cargo     estimates              for     the month and the                   Command makes decisions                             as

                 to terminating                or extending                charter          contracts        based         on these          up-to-date

                 revisions          and current                 operational             data.

                                                                                                                                                                 -5-
                                                                  \
              As previously
                                  00 stated,                   we believe
                                                                                                 00
                                                                                  the Command's procedures                        as

     described           above provide                  reasonable         assurance          that      it     generally          will

     comply with              the terms             of the Wilson-Weeks                Agreement              in allocating              cargo.

     We have found,               however,              one chartering             practice          of the Command that                      does

     not fit          into     the above decision-making                           process       and would             appear      to mili-

     tate     against          compliance               with     the Wilson-Weeks              Agreement.               This      is the

     practice          of entering               into      charter        agreements          beyond          one year.

              For example,                  in April           1970 the Command chartered                       three      seatrain

     ships      for     a period             of 3 to 5 years.                    Subsequently,               in June 1970,             14 new

     C-4 type          ships      were chartered                  for     a short      term period,              but with          an

     option      for         an additional               period         of a minimum of three                   and a maximum of

     five     years.

              As stated              earlier,           the normal         process      for      determining              capability

     required          is based on an annual                          forecast      revised          month by month through-

     out the year.                   If     the Command continues                   to enter          into      long      term      charter

     agreements              which         have not been justified                    in this         normal          process,         we

     believe          compliance             with       the *provisions            of the Wilson-Weeks                    Agreement            may

     be frustrated               since          one aspect            of this      process       is to allocate                  cargo

     first      to time          charter            capability           already      under      contract             before      consider-

9
 /   ing berth           service.

     Comparative              cost         of berth        service        and time       &tarters.

              At the          specific           request         of the Committee's                  staff,      we made a limited

     comparison              of the cost             of time          charter      service       as opposed to that                      of

     berth      service.                  We analyzed           the voyages         made by eight               selected          dry cargo

     C-4 type          ships         under       charter         to the Military              Sealift          Command during                 the
     period      October             1966 through               December 1969.            We found             that     the 79 voyages
                                                                                                                                   -6-
      .                                                                                                       eo
              made by these              ships         during         this      period            cost     the Government               approximately
.
  I
/              $38 million,             including             per diem,             escalation,             fuel,         and port           charges.         We

               estimated         that      if    the         cargo      carried            on these         voyages          had moved in berth

               service      at the lowest                    applicable             shipping             agreement          rates,      including

              necessary          demurrage             charges,          the cost             would have been about                          $33 million.

                        These are gross                 figures          for        all     voyages.              Cost differences                for

              individual          voyages         varied             depending             on the tonnage                 carried       and the

              route      used.          Of the 79 voyages,                      we found             22 voyages             in which          charter

              costs      were lower             than         costs     based on lowest                     berth         rates,      and 57 voyages

              on which       the costs            would have been lower                              based on berth                 rates.        We did

              not examine           into        the reasons              for        tonnage          variations             on the chartered

              vessels       or the economy and efficiency                                     of the Command's routing                          of its

              chartered          vessels.

                        We did find             indications,                 however,             that     there         was generally            insuf-

              ficient       berth        service             available          to meet the Command's cargo                                  requirements

          43. during       the period            covered             by our study.                   We have no evidence                      to the effect

              that      the carriers             offering             the      lowest         berth        service         rates      had equipment

              available          or offered             it     to the Command at the times                                 and places           necessary

              to meet the military                      requirements.                      Also,         we did not attempt                   to determine

              whether       the carriers                quoting          the low rates                    would      or could         have maintained

              their      rates      at the quoted                    levels         if     they      hadheen             required       to furnish            the

              vessels       necessary            to handle             the cargo              moved during                the period.             Officials

              of the Military               Sealift            Command have stated                         they     were using           all      berth

              service       available            to them during                     the     shipping         period          covered          by our re-

              view,      and our study              tends            to support             ,this.
                        We, therefore,              emphasize                that         our finding             that     charter       costs          in most

              cases were higher                  than         costs      based on quoted                    berth         rates      should       not be
              construed          as a criticism                  of the Command's action                             in chartering              these
              particular          ships.
                                                                                                                                                   -7-
                 .   .




         4   .




                         Impact             of     the charter practices  on the continued
                         existence                 of a sound U. S. Merchant Marine

                                      During             the Vietnam        buildup       the entire           merchant          marine       was being

                         fully             utilized,         and the Command's chartering                             of vessels,           in itself,

                         was not opposed by the industry.                                     Since       July        1969,     military        tonnage               has

                         decreased.                    At the same time              there      has been an increased                      use of con-

                         tainerized                 berth      service       thereby         resulting           in less        cargo      being       avail-

                         able         to berth             break-bulk        carriers.             Accordingly,               some segments            of the

                         industry                 have expressed            concern       over       the Command's chartering                         practices,

                         The nature                 of this       impact        is not readily               determinable              and opinions

                         differ             depending          on which         segment       of 'the industry                 is queried.

                                      For example,              berth       line      operators          generally            believe       the Command

                         could             and should          utilize       fewer       tfme       charters          and offer         more cargo               for

                         berth             service.          Representatives              of the         subsidized            operators           stated         that

                         a strong                 U. S. Merchant            Marine       is dependent             on U. S. operators                   offering

                         sufficiently                     competitive        service         on enough trade                  routes       to secure             as

                         much of the worldss                        trade       as possible,              They point            out that           additional

                         military                 cargo     offered      to berth         service         could        be a determining                 factor

                         in whether                  or not      an operator            can continue             to offer         service          on a

                         particular                 trade      route.                                             d
’ .‘-Y
   .,!
  *,                                  Although,             representatives              of the non-subsidized                     berth       line       operators

                         believed                 that     'more cargo        offered        for     berth       service        would       be desirable,

                         they         expressed             concern      that      unless          the additional              military        cargo            offered

                         exceeds                 the capability          of the         subsidized           operators           they      could      not


                                                                                                                                                          -8-
                          -A
                            -.;       -r


                                  /
             receive       such additional                   cargo.            They said             that     because             of the oper-

             ational       subsidy,        the subsidized                      operators             are able             to underbid             them

             for    military        cargo.           As a result                    they     contend         that         they     are unable             to

             compete with           the      subsidized              operators               and their             continued             operation

             is threatened.

                       Tramp operators,                as a group,                   favor      the Command's use of time

             charters          because       it     provides          an important                   market         for     their         ships.          Be-

             cause they           do not offer               regular           scheduled             service,             tramp      operators            are

             ineligible           to compete           for     military               berth      space cargo.                     They also          have

             difficulty           competing          with      foreign               flag     operators             for     commercial             cargo.

             Without       the Command's time                      charter            market         the tramp             operators          may

             possibly          obtain     an increased                 share          of the commercial                     bulk         cargo--such

             as rice       and wheat--but,                   according               to informed             sources             in the industry,

             they      would      probably          sell      many of their                   ships         for     scrap         and sell         or

             transfer          others     to foreign               flag        registry.

                       The Command's extensive                        use of time                charters            during          the Vietnam

             buildup       kept     a large          number of old and obsolete                                    U. S. flag             ships      in

             service,           The Command had to use all                                  available             shipping          capability            and

             as a result           a large          number of the World War II                                    ships     were chartered.

  'Y The non-subsidized                            berth      line        and the tramp                 fleets            are composed primarily
 '-\,
     ‘bf these obsolete                           World War II                vintage         ships,         while         the newer and more

             modern       ships     are almost               exclusively                   in the subsidized                     berth     line      fleet.

             With      the recent         decreases             in Vietnam                  cargo,      the Command can be more

             selective          in the types               of ships            it     is chartering.                      This has resulted                     in

             .the Command releasing  from charter many of the obsolete  ships                                                                 while        it
                 '.
              see&s t,6 retain the newer and more modern ships being offered                                                                  by the

             industry.
                                                                                                                                                     -9          -
         /
A-----
                                                               i          .
             "
  \,             . .
                                                                                                                           00

                                    Many of the obsolete                            U.S.     flag     ships      are disappearing                   from the U.S.

                       Merchant            fleet       because               of the decrease                 in military            cargoes         and the

                       chartering             of more modern                        ships     in lieu         of the        obsolete           ships.       This

                       loss         of U.S.         flag        ships          is offset            to an undetermined                    extent     by the

                       addition            of modest             numbers             of larger,         faster,        and more modern                  ships       in

                           recent     years         and by the contemplated                            fiture      construction                of 300 new

                       ships         over     a IO-year                    period     as authorized              by the Merchant                   Marine   Act      of

                       1970.

                                    This    change in the makeup of the merchant                                           fleet          has also      given       the

                       Command cause for                        concern.              The Command maintains                        that     newer ships          being
        ’    )
       .,’             added to the fleet                         are not designed,                    for      the most part,                to carry      break-
* -\
                       bulk         type    cargo.              It,         therefore,          evisions         a time       when the merchant                   fleet

                       will         no longer          have sufficient                       break-bulk          capability               to meet military

                       contingency                 requirements,                    and it      is concerned           as to how this                  capability

                           can be maintained.

                             -LYti
                                Chairman, this completes my prepared   statement.                                                                  I will   be
                             i
                       happy to provide  additional information as desired.




                                                                                                                                                                 -10      -


                               .




                       ”




                                                           ..         ,i
           'Cs        7.
                      LUw novr;d
                           1 - by char&e&
                                       b           Includes       'weak-bulk,     bulk,     and reefer   cargo.
                                                                                                                                  ‘.




J&p+Lp*y
            J
                 ?
                 -3     1?69--Peak-Vietnam                  130                 1,678,591;
3ecember              1, 1970                                                   1,058,168
Decem'ser 31, l.970                                   I i\iOt aVailable
     X-o% : in addition     to the reduction         L-
                                                in c,1m2 charters J Iiescrve Fiee', stlps
             vere reduced from i&L in January 1969, to 0 in Xovm'3er Z..F?O.
             Does not.include     Seatrain   sp?ecial cargo s.hips whic'n are sho:rfi below.



                                        Narch     31, 1965                  Jancaq        1, 1969            Deceix'oe: 1, 1570
                                                  --                                 15                                23
                                                  I-
                                                                                      9                                 9
                                                  --                                  28                                2
                                                  --                                  2
                                                  mm                                  1:
                                                  --                                 12
                                                  --                                 111
                                                        1                            47
                                                        4                          16
                                                   --                                7
                                                   --                              1.2
                                              0 ---F                              E,
                                        ..I     =



                                                                                                         i
                                                                                                                  - 11   -