Recommendations on Containerized Shipping Service to Puerto Rico, Hawaii, and Guam

Published by the Government Accountability Office on 1977-05-03.

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

                         DOCUM3RT RESURE
02327 - [A1332326]
(Recommendations on Containerized Shipping Service to Puerto
Rico, Hawaii, and Guam]. LCD-77-226; B-145455. Ray 3, 1977. 8
Report to Secretary, Department of Defense; by Fred J. Shafer,
Di rector, Logistics and Communications Div.

Issue Area: Facilities and Haterial Managementt  Federal
    Transportation of Things (704); Military Preparedness Plans:
    Transportation in Emergency Situations (t104).
Contact: Logistics and Communications Div.
Budget Function: Fational Defense: Department of Defense -
    Procurement & Contracts (058); Comuerce and Transportation:
    Water Transportation (406).
Organization Concerned: Federal Maritime Commission.
Congressional Relevance: House Committee on Merchant marine and
Authority: B-154967 (1964).

         The Department of Defense (DOD) did not concur with the
following two GAO recomnendat.ons concernir.g containerized
shipping service to Puerto Rico, Hawaii; and Guam: (1) the
Military Sealift Command (MSC) should be directed to develop a
staff knowledgeable in commercial ocean tariffs; and (2) MSC
should review its negotiation efforts to date in the Puerto Rico
trade. DOD replied to GLO that they disagreed that USC has a
void in the ability to use commercial ocern tariffs, and that
the problem was not one of a lack of staff competence but a lack
of basic commodity information necessary to properly rate the
shipments. Findings/Conclusions=: GAO requested that DOD
reconsider GAO's recommendations in these two areas. GAO's
conclusion that MSC needed to develop a oa ff knowleugeable in
this area was based primarily on statements NSC made in its
cases before the Federal Maritime Commission. The record shows
that neither MSC, nor anyone in DOD, possessed the tariff
expertise to use commodity information prudently. The study DOD
cited ac shoving a 6% cost advantage in favor of the Government
negotiated rates over the commercial tariffs lacked the basic
foundation for a comparative cost study. Also, there is a
continuing need to obtain better commodity description
infcrmation to enable MSC to evaluate the reasonableness of its
negotiated rates. The original recommendations are still
appropriate. (SC)
                                      UNITED STATES GENERAL ACCOUNTING OFFICE
rig        1e~                                WASHINGTON. D.C.     Z054

                                                             MAY          3 177


                 The Honorable
                 lte Secretary of Defense

                 Dear Mr. Secretary:

                      Your letter of November 29, 1976, signed by the Honorable Dale R.
                 Babione, Acting Principal Deputy Assistant Secretary of Defense (I&L),
                 was in final reply to our report on containerized shipping service
                 to Puerto Rico, Hawaii, and Guam (B-145455, OSD Case #4432). You gener-
                 ally concurred -ith our conclusions and recom-endations except where
                 we recommended that:

                        -The Miliftary Sealift Command should be directed to develop
                          a staff knowledgeable in commercial ocean tarif s, and

                        -MSC should review its negotiation efforts to date in the
                          Puerto Rico trade.

                      We have reviewed the information cited in your letter and find that
                 it does not alter our conclusions. We ask that you reconsider our
                 recommendations. Our basis for this request is as follows:


                      In your letter you state that you do not agree the MSC has a void
                 in the ability to use commercial ocean tariffs. You further state that
                 the problem was not one of a lack of staff competE:nce, but a lack of
                 basic commodity information necessary to properl} rate the shipments.
                 Our conclusion that MSC needed to develop a staff knowledgeable in the
                 use of ocean tariffs was based primarily on statements MSC made in its
                 two cases before the Federal Maritime Commission (FMC).

                      In its opening brief before the FMC on 1 August 1975, relating to
                 the Puerto Rico Maritime Shipping Authority-Government Cargo (Docket
                 No. 75-20), MSC stated;.


      "In this regard, it was suggested by Counsel far
       Matson that most large commercial shippers hlave a
       traffic department with people trained in using
       commercial tariffs (Yr. p. 478). Of course, it
       can be added that it is absolutely essential for
       such commercial shippers to train these tariff
       experts to protect the shipper's interest. The
       point to be made here is that the DOD is also a
       large shipper, probably the largest shipper in both
       volume and number of different commodities shipped
       on any trade route, but at this time it does not
       have a traffic department or the tariff experts needed
       to protect its interests. Mr. Boy testified that
       MIMC personnel trained in tariffs are trained only
       in inland tarifts, not ocean tariffs, and even then
       'do not become :.ighly qualified freight tariff
       people, they are overall transportation specialists
        er traffic management specialists rather than tariff
       specialists' (Tr. pp. 317, 465).

      "MSC is of the view that to force the military to
       utilize conmmercial tariffs at this point in time
       and in light of the well-known lack of familiarity
       with ocean tariffs on the part of defense aRency
       employees and uitary    personnel would be extremely
       unfair and costly to the military services."

        In the heariigs before the FMC in October 1975, relating to the
 complaints of MSC against Matson Navigation Company (Docket Nos. 75-4 and
 735-5), two witnesses for MSC spoke about the weaknesses of DOD in ursing
 commercial tariffs. Captain 7. K. Feagin, As3istant Chief of Staff
 (Operatiuns and Plans), Military Sealift Command, Pacific was questioned
 as follows:

           Mr. Eugene L. Stewart, Esq., for the Government of Guam:
      Nov, in the - in your very concise statement, you have said at
      page 13, in the last paragraph at the bottom of the page, that you
      have had to establish a separate system, and have not been able to
      attract supervisory personnel experienced in commercial tariffs.

           Would you please wxplain the nature of the separate system
      in your Command that you have reference to, and a part of that
      expertise in commercial tariffs would play under your intended
      operation of that system?

           Captain Feagin: We have established our cargo passenger
      division, is divided - was divided into a break-bulk, passenger
      section, a container reefer section, and a documentation and statis-
      tics section. We found that tha procedures for booking cargo under
      the tariffs was so different in the - to that used with contracts


      ,n the container reefer trade, that we segregated those
     responsibilities out, and established :a domestic traffic
     branch and we had no - no one in the organization that was
     at all' familiar with commercial tariffs.

          So we contracted for a consultant who was mota familiar
     with steamship commercial practices than a tariff man, but did
     have certainly much more understanding of the tariffs than we

          Then we took two people from other sections, other duties, and
     put them to 'iork in this group.

            Mr. Stewart: Is it your testimony that those people that you
     hav*ye so assigned are not qualified in commercial common carrier
      .triff matters?

           Captain Feagin:   They are not qualified.

          Mr. Stewart: Hava you requested the Military Traffic Manage-
     ment Command to make available to you on a loan, or other basis.
     from their qualified staff, experts in the interpretation of common
     carrier ocean freight tariffs?

          Captain Feagin: We have discussed the availability of such
     experts, and have been advised informally that such personnel are
     not available.

     Mr. James Hoy of the MTMC's Directorate of Iternational Traffic
was also questioned about the ability to use commercial ocean tariffs

          Mr. David P. Anderson, Esq., for Matson Navigation Company:
     Do I understand correctly, Mr. Roy, that since February 20th,
     when these contracts expired, neither MTHIC nor MSC has acquired
     anyone vith knowledge of ocean tariffs in connection with these
     traffic management functions?

           Mr. Roy:   I can't speak for MSC, but .4TMC has not, no.

          Mr. Anderson: Well, you actually do not provide any traffic
     management advice as far as having -- as far as it might be based
     on tariffs, ocean tariffs, is that correct?

           Mr. Roy:   Ou ocean tariffs, yes.
     While we agree that a lack of basic commodity information necessary
to rate the shipments was a problem, that was not the only problem. In
addition to getting good information, MSC needs the tariff expertise to
use commodity information prudently. The record shows that neither MSC,
nor anyone in DOD, possessed such expertise.



     In your letter you also state:

     "A detailed analysis -,   Puerto Rico Maritime Shipping
      Authority's tariff 7etes prepared by MSr 'indicates
      that costs under the. government negotiated rates
      amount to approximately 6 percent 3Iss than the cost
      would be under commercial tariff."

      We have reviewed that study and conclude that the 6 percent
difference is not adequately supported. Our detailed evaluation
of the study, which was presented to officials of MSC, indicated

     (1) MSC did not know and did not make any attempt to
         determine the precise tariff descriptions for the
         shipments in the study and therefore could not make a
         valid comparison between the commercial tariff rates
         and the Government's simplified class rates.

     (2) MSC did not audit the charges tle carrier actually billed
         to insure the carri. i billed the correct charges accord-
         ing to its tariff.

     (3) MSC could rct support the basis for the charges it stated
         it would have paid had the rates it wanted to use betn in

      (4) The sample of GBLs used for the study did not reflect the
          universe of the shipments made to Puerto Rico during the
          study period.

      The MSC study was initiated to compare DOD's cost under the
Puerto Rico Maritime Shipping Authority's full tariff rates with the
class rates (general cargo, vehicles, refrigerated cargo) Fez would
have paid had the class rates not been temporarily suspended by the
F1IC. MSC reviewed 21 of the 144 Government bill of lading (GBL)
sailings made during the period 8 June 1975 through 1 December 1975.
The 21 GBLs covered sailings between 24 June 1975 and 13 August 1975.

     The documents MSC used for the study were GBLs prepared by Army
port representatives. These officials used commodity description
information furnished by the shipper services under MILSTAEP. It
had been acknowledged that KELSTAMP information was inadequate for
describing shipments in terms of commercial tariffs.


Although MSC was aware of this, it did not attempt to go behind the GBL
records to determine whether what was described on the GBLs was in fact
what was shipped. It accepted the GBL descriptions as its basis for the
comparative cost analysis. Moreover, MSC did not audit or have GSA verify
that the rates the carries. billed were the correct rates for what was
described on the GBLs.

     We believe the costs MSC would have had to pay on the 21 GBLs used
in its study would have been considerably reduced had MSC used more
precise commodity descriptions and then audited the clrrier's charges.
From the information we reviewed, we believe MSC was overbilled about
$2600 on the dry cargo containers and $4300 on the refrigerated containers.
Several containers described as "freight-all-kinds" should have been
described as "beverages" based on a comparative analysis of the pieces,
weight, and cube listed for the containers on the same GBLs. Other
containers were billed as "refrigerated cargo, NOS" which had they been
described in more precise terms, would have qualified as "meats, NOS"' or
other D.ower rated items.

     MSC also Incorrectly determined the charges it would have paid had
the class rated under FMC suspension been in effect. MSC failed =o
consider that it would have had to pay not only for the freight loaded
in each container but also for the deficit tonnage necessary to meet the
rate item's minimum tonnage charge for each container.

     Finally, MSC chose to select shipments from only three of the ports-
New York, Charleston, and Jacksonville-from which MSC shipped cargo to
Puerto Rico. It ignored shipments made from Baltimore and New Orleans.
Since Baltimore was the primary port from which "straight," or single
coumodity, containerloads were shipped, the study sample of GBLs was
weighted in favor of "mixed shipment" containerloads and against
"straight" containerloads.

     As we pointed out in our report, "mixed shipments" offered NSC
the most potential for reduced rate negotiation of "freight-all-kinds"
rates. However, "straight" shipments offered MSC the opportunity to use
the reduced rates in existing tariffs. But, by its sample of GBLs, MSC
chose to ignore those shipments-from Baltimore, particularly--where
the existing tariff rates were lower than the rates WSC was trying to use.
The result was that the study showed that the tariff rates were higher
than the other rates.

     In the GBLs used in MSC's study, 51 of 123 dry cargo container-
loads consisted of a single commodity. Eighty-four out of 84 of the
containerloads from Baltimore, which MSC dia not use in its study,
conslwted of a single commodity. We do not know why MSC would want to
use "freight-all-kinds" rates for single commodity shipments wherein it
was almost always required to pay higher charges than at the tariff
specific conmmodity rates. The difference in favor of the tariff rates for
those 84 containers was over $14,000 or 17 percent.


     We want to reiterate that we are not opposed to the negotiation of
"freight-all-kinds" rates, provided the overall cost to the Government
is no more than it would be otbhrwise. Comptroller Ceneral decision
B-154967, December 21, 1964--wich MSC introduced into the Puerto Rico
hearings before FMC-addressed the issue of the validity of Section 22
quotations which provided some instances of rates or charges on "freight-
all-kinds" higher than those named in tariffs, but which, overall,
provided rates and charges considerably below those in tariffs. The
Comptroller stated that he believed there was merit in use of 'freight-
all-kinds" rates related to the savings in transportation charges, man-
power, and paperwork and to facilitate the audit of payments. However,
the basis upon which authorization was given to use ".reight-all-
kinds" rates was that (1) the shipments were almosa. all "mixed shipments"
and (2, the shipper would be able to determine what he was shipping in
the precise cor=odi'cy descriptions of the underlying tariff and be able
to compare the charges under the tariffs with those of the simplified

     We found MSC was unable to determine what the precise tariff
commodity descriptions were for the cargo in tb
                                              h "mixed shipment"
containerloads. There was simply no way MSC could compare the tariff
rates with the simplified class rates.

     In our opinicn, the study you cited to us as showing a 6 percent
cost advantage in favor of the Government negotiated rates lacked the
basic foundation for a comparative cost study. The cost advantage in
favor of the negotiated rates, considering what we believe to be the more
precise commodity descriptions, was only one percent. However, that
difference would have been obviated by a better sample which included
some Baltimora shipments.


     In your letter you state:

     "The Military Traffic Management Command (MTMC),
      as the Military Standard Transportation and
      Movement Procedures (MILSTAM) Administrator
      in conjunction with MSC, has developed and
      promulgated procedures to provide the necessary
      commodity descriptive information to allow us
      the use of the lowest cost commercial rates in
      the domestic offshore trades."


     At present cargo shipped to daws.  and Guam musc be described
more specifically than the generalized descriptions MSC has bean
using in connection with ita container agreemats to ovez-seas locations.
Cargo shipped to Puerto Rico can still be describedb in general terms,
but the FMC has under consideration whether those procedutes are legal.

      From our discussions with MSC and KrMC, the information ilSC is
provided to describe its shipments to Hawaii and Guam is still inade-
quate. The breakdown is apparently at the shipper servlces' level.
MITMC has asked the shippers to provide more specifi.c descriptions for
cargo shipped to Hawaii and Guam, but MSC advises that the information
is -ot adequate for all shipments. The result has been that MSC must
describe many containerloads of cargo as "freight-all-kinds."

     Rating cargo as "freight-all-kinds" is permitted under the
commercial tariffs for shipments to Hawaii and Guam, but there are
conditions to the use of that rate that MSC ca.mot meet. MSC may
be subjecting DOD to future claims for failing to describe its
shipments prLperly. The tariffs require that "freight-all-kinds"
shipments consist of five or more different commodities--as defined
by separate rate items in the tariffs or separate item numbers in
the Uniform Freight Classification--no one of which may weigh more
than 50 percent of the total shipment weight. MSC must be able to
certify that it knows these conditions are met for each shipment so
described. The information MSC is receiving from the shipper services,
through MTMC, does not give MSC assurance that it can meet these
conditions, since the infcomation is often not stated in clear descrip-
tive terms MSC can use in conjunction with the commercial tariffs.

     We are aware that GAO was not the first to point out this particular
problem with commodity descriptions. MSC-Pacific was aware of the
problem in early 1975. The need for commodity description information
underlies the whole basis by which MSC car evaluate the reasonableness
of its negotiated rates.

     In summary, we believe that our original recommendations that MSC
be directed to develop a staff knowledgeable in commercial ocean tariffs
and that MSC should review its negotiation efforts in the Puerto Rico
trade were and still are appropriate. We also believe there is a need
for DOD to further emphasize to the shipper services the importance
and necessity for adequate commodity descriptions.


     We would be glad to discuss with you any of the matters presented
in this letter. Please contact us if you have any questions or additional
comments on our report.

                                     Sincerely yours,

                                  F. J. Shafer
cc:   Senate Committee on Govrunment Operations
      House Committee on Government Operations.
      Senate Committee on AppropriatioLs
      House Committee on Appropriations

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