oversight

Cargo Preference Requirements: Their Impact on U.S. Food Aid Programs and the U.S. Merchant Marine

Published by the Government Accountability Office on 1990-06-19.

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

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                                                    United S&es                General Accounting                     Office

    GAO                                             Repmt to the Chairman, Committee on
                                                    Agriculture, House of Representatives


: June 1990
                                                    CARGOPREFERENCE
r                                                   REQUIREMENTS
                                                    Their Impact on U.S.
                                                    Food Aid Programs
                                                    and the U.S. Merchant
                                                    Marine




 GAO/MSLlll)-90-174
GAO
             United States
             General Accounting  Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-23940 1

             June 19,199O

             The Honorable E (Kika) de la Garza
             Chairman, Committee on Agriculture
             House of Representatives

             Dear Mr. Chairman:

             In response to your September 14, 1989, request, we have reviewed how
             cargo preference laws, which require that significant portions of 1J.S.
             food aid be shipped on ITS-flag vessels, have affected (1) the cost and
             timeliness of U.S. food aid shipments and (2) the amount of government
             cargo transported on U.S.-flag vessels. We also provide information on
             changes in the number of 1T.S.merchant marine vessels and support per-
             sonnel over the past 10 years.


             The United States has cargo preference laws that require significant
Background   portions of government cargo to be shipped on U.S.-flag vessels.’ One of
             the main purposes of the laws is to ensure that an adequate and viable
             merchant marine fleet is maintained in the interest of national security.

             Cargo preference provisions contained in the Food Security Act of 1985
             require that at least 75 percent of government food aid provided to for-
             eign countries under Titles I, II, or III of the Agricultural Trade Develop-
             ment and Assistance Act of 1954 (P.L. 480) or under section 416 of the
             Agricultural Act of 1949, be shipped on U.S.-flag vessels. In prior years,
             only 50 percent of government food aid was required to be shipped on
             U.S.-flag vessels.

             The cost to the government of shipping P.L. 480 or section 416 food aid
             on U.S.-flag vessels. rather than on generally less expensive foreign flag
             vessels, has amounted to about $150 million in each of the past 3 cargo
             preference years. (A cargo preference year spans from April 1 of one
             year to March 31 of the next year.) The U.S. Department of Agriculture
             (USDA) pays the differential cost on the first 50 percent of tonnage
             shipped on LX-flag vessels, and the Maritime Administration (arxttiu)
             pays the differential cost on the next 25 percent. The remaining 25 per-
             cent may be shipped on foreign flag vessels, in which case there is no
             differential cost.


             ‘The legal definitwn of I’ S.-Rag rt~,~ls is set forth in app. I.



             Page 1                                           GAO/NSIAlMO-174    Cargo Preference   Requirements
                   Is239401




                   Titles I and III of P.L. 480 are concessional sales programs involving
                   sales of mostly bulk commodities, e.g., wheat or corn. Title II of P.L. 480
                   is a grant program involving donations of processed commodities, e.g.,
                   milled rice or cornmeal. Section 416 is also a grant program, involving
                   donations of surplus government bulk commodities. USDA, the Agency
                   for International Development (AID), and MARAD share responsibility for
                   ensuring that food aid shipments comply with the cargo preference pro-
                   visions contained in the Food Security Act of 1985, but USDA has lead
                   responsibility. LJSDA monitors the ocean transportation contracting activ-
                   ities of importing countries and private voluntary organizations (PVO)
                   and determines when U.S.-flag vessels should be used. AID helps USDA
                   monitor cargo preference requirements for the Title II and section 416
                   programs.

                   MAR~D   is responsible for ensuring that oceangoing shipments under all
                   government programs, food aid or otherwise, are conducted in compli-
                   ance with cargo preference laws. It provides government agencies with
                   ocean transportation guideline rates to be used in contracting services of
                   U.S.-flag vessels and monitors agencies’ shipping activities.


                   Although it still generally costs more to ship food aid to foreign coun-
Results in Brief   tries on U.S.-flag vessels, rather than on foreign flag vessels, the average
                   cost differential has decreased over the past several years. Since 1981,
                   the average cost differential has decreased by more than 50 percent due
                   to (1) liberalizing the method by which cargo preference compliance is
                   computed and (2) efficiencies in shipping. The cost differential now
                   accounts for less than 10 percent of food aid program expenditures.
                   U.S.-flag vessels, however, do not always provide timely service. For
                   example, during cargo preference year 1988-89, 22 to 44 percent of
                   Title II tonnage was loaded on U.S.-flag vessels late, depending on
                   whether the LTSDA or PVO standard is used for measuring lateness.

                   The amount of government cargo transported on U.S.-flag vessels has
                   increased by about 67 percent since 1980, and the food aid portion has
                   doubled from almost 3 million metric tons to almost 6 million metric
                   tons, now accounting for about one-third of all government cargo.
                   Despite these increases, over the past 10 years, the number of U.S.-flag
                   vessels has decreased by 24 percent, and the number of support per-
                   sonnel has decreased by about 31 percent. However, active shipping
                   capacity has only decreased by 6.5 percent because the newer ships are
                   larger and can hold more cargo. The newer ships also require fewer per-
                   sonnel to load, operate, and maintain them.


                   Page 2                             GAO/NSIAD90-174   Cargo Preference   Requirements
                                           B-239401




                                           shipping rates, referred to as the ocean freight differential, for shipping
Differential Has                           food aid under Titles I and III of P.L. 480 has decreased by more than
Decreased by More                          50 percent. This decrease is due largely to (1) administrative changes
                                           that now allow USDA to compute cargo preference compliance on an
Than 50 Percent                            annual basis rather than on the basis of each commodity purchase
                                           authorization, and (2) greater efficiencies in shipping. For the past
                                           3 cargo preference years, ocean freight differentials for P.L. 480 ship-
                                           ments have totaled less than 10 percent of program expenditures.

                                           According to MARADrecords, the average ocean freight differential per
                                           metric ton for Titles I and III food aid decreased from $56.72 in calendar
                                           year 1981 to $24.65 in cargo preference year 1988-89. This change in
                                           cost differential subsidy translates into a 56.5 percent decrease over
                                           nearly 8 years (see fig. 1). When inflation is taken into consideration,
                                           the decline in the real cost of the subsidy is even greater.


Figure 1: Titles I and III Ocean Freight
Differentials (1981-1989)                  75   Avomga   Of0   par Ml (vahm In dohn)




                                           15
                                           10
                                            5
                                            0

                                           CY 1951       CY 1952        CY1953         CYl954          CYls%       cPY1smt57        CPY 1957188    CPY 1955i59

                                            Note The penod between calendar year 1985 and cargo preference year 1986-87 (Jan 1986 to Mar 31
                                            1986) IS not reflected In this figure
                                            Source MarltIme AdmInIstratIon


                                            There are two primary explanations for the decrease in ocean freight
                                            differential. First, cargo preference compliance used to be computed on
                                            each commodity purchase authorization. Computing compliance in this


                                            Page 3                                              GAO/NSIAD-90-174    Cargo      Preference   Requirements
                         B-239401




                         manner limited the USDA'S ability to be flexible when scheduling the use
                         of U.S.-flag vessels to carry food aid. Computing cargo preference com-
                         pliance annually, as is now done, allows USDA additional flexibility to
                         schedule more cargoes on U.S.-flag vessels when U.S. rates are low and
                         more cargoes on foreign flag vessels when U.S. rates are high. The
                         second reason for the decrease in ocean freight differentials is that U.S.-
                         flag vessels today are generally larger, more fuel efficient, and less
                         labor intensive.

                         For the past 3 cargo preference years, total expenditures for ocean
                         freight differentials have ranged from 8.9 percent to 9.7 percent of the
                         total expenditures for P.L. 480. USDA'S portion of the total ocean freight
                         differential bill has been between 6.0 percent and 7.5 percent. For
                         example, in fiscal year 1988, the government spent $1,341.7 million on
                         the P.L. 480 program. The total cost differential was approximately
                         $117.8 million, or 8.8 percent. USDA paid approximately $80.6 million of
                         that amount, or 6.0 percent of the total P.L. 480 program. (See app. II.)


                         PVO   officials, who help administer Title II food aid programs, believe
Effects of Increase in   that the increase in cargo preference requirements from 50 to 7.5 percent
Requirements May         has resulted in less timely lifting of Title II commodities. Officials from
Have Resulted in Less    USDA   and the PVOS have different standards for measuring timely lifting,
                         but using either standard, the PVO officials believe that the percentage of
Timely Lifting of        late lifting has increased.
Cargo
                         PVO officials voiced concern about lateness more often than the I'SDA
                         officials responsible for monitoring vessel transportation of Titles I and
                         III commodities. One explanation may be that Title II shipments are gen-
                         erally made on liner vessels. Liners provide regularly scheduled service
                         to several ports and will typically carry cargoes for four or five dif-
                         ferent shippers to four or five different locations. A delay at any one
                         location could adversely affect remaining deliveries. Conversely, Titles I
                         and III commodities are generally shipped in bulkers or tankers. Bulkers
                         and tankers are generally chartered by one shipper to transport a com-
                         modity from point A to point B, so possibilities for delay are fewer.

                         In cargo preference year 1988-89, U.S.-flag liners lifted 22.5 percent of
                         the Title II tonnage late under LSDA'S standard for lateness. For that
                         same period, U.S.-flag liners lifted 44 percent of Title II tonnage late
                         under the PVOS' standard for lateness. Neither USDA nor PVO officials pro-
                         vided similar data for periods when cargo preference requirements were



                         Page 4                              GAO/NSLAD-90-174   Cargo Preference   Requirements
                                         B-239401




                                         at 50 percent, but PVO officials believe the timeliness of lifting Title II
                                         cargo has worsened.

                                         ~ISDA considers   cargo to be lifted late if it is lifted 30 days after the
                                         lifting date promised. According to USDA officials, the 30-day standard is
                                         appropriate because Title II shipments are often shipped on less-fre-
                                         quently-traveled trade routes. However, PVOS consider Title II cargo to
                                         be lifted late if it is lifted more than 14 days after the lifting date prom-
                                         ised. PVOS believe 14 days is a more appropriate standard because car-
                                         riers are familiar with foreign port and trade route limitations and
                                         should build these limitations into their estimated lifting dates. (See
                                         fig. 2.)


Figure 2: Title II Vessel Performance:
U.S.-Flag Liners (CPY 1988-89)                                                                     Lied at 30 or more days


                                                                                                    Lifted early




                                                                                                    Liied within 14 days




                                                      ‘                                             Lied within 15-29 days
                                          Note These figures reflect the percentage   of tonnage llfted
                                          Source U S Department of Agnculture



                         The increase in the U.S.-flag requirement to 75 percent meant that there
Greater Capacity         would be greater capacity utilization of US-flag vessels. The increased
utilization of U.S.-Flag demand for U.S.-flag vessels would also help account for the reported
Vessels                  poorer service and has made it difficult for USDA to take actions against
                         U.S.-flag shippers who provide poor service.




                                          Page 5                                           GAO/NSIAIMM-174         Cargo Preference   Requirements
                       B-239401




                       The increase in the U.S.-flag requirement meant that there would be
                       greater demand for, and thus greater capacity utilization of, U.S.-flag
                       vessels because there would be a larger amount of cargo to be lifted
                       without any increase in the number of U.S.-flag vessels.

                       Both USDA and PVO officials stated that the additional demand for U.S.-
                       flag vessels discourages USDA from taking actions against U.S.-flag car-
                       riers when the carriers’ performance is unsatisfactory, e.g., when a car-
                       rier consistently lifts cargo late. They told us that at peak demand times,
                       the suspension of even one carrier could have a negative impact on the
                       availability of U.S.-flag vessels. However, poorer U.S.-flag service and
                       USDA’S reluctance in taking action against U.S.-flag carriers should have
                       been anticipated.

                       Some food aid administrators believe that a return to a 50-percent cargo
                       preference requirement would permit more flexibility for taking puni-
                       tive actions against poor performers and improve the timeliness in
                       lifting cargo.


                       There are several laws that affect cargo preference (see app. III). These
Government Cargo       laws generally require that 100 percent of Department of Defense (DOD)
Transported on U.S.-   cargo, at least 75 percent of food aid cargo, and at least 50 percent of
Flag Vessels Has       other government cargo tonnage be shipped on U.S.-flag vessels,
                       depending upon the prices that are charged for the use of such vessels.
Increased Since 1980   From calendar years 1980 to 1987,? the amount of all government cargo
                       transported on U.S.-flag vessels increased by about 67 percent. The
                       amount of cargo that was government food aid doubled between 1980
                       and 1987. Government food aid now constitutes about one-third of all
                       government cargoes, and most of the food aid is transported on U.S.-flag
                       vessels.

                       In 1980, total government cargo tonnage shipped on U.S.-flag vessels
                       amounted to 12616,688 metric tons (MT). In 1987, total government
                       cargo shipped on U.S.-flag vessels amounted to 20,985,483 MTS, an
                       increase of about 67 percent. Of the total government cargo shipped on
                       U.S.-flag vessels, the amount of food aid transported about doubled,
                       from 2,993,136 MTS in 1980 to 5,978,488 MTS in 1987. The doubling in
                       food aid shipments represents an increase from 23.7 percent of all gov-
                       ernment cargo on U.S.-flag vessels in 1980 to 28.5 percent in 1987.


                       ‘Calendar year 198’i IS the last year for which MARAD has final published statistics.



                       Page 6                                        GAO/NSLAD-90-174      Cargo Preference    Requirements
                                        R-239401




                                        In 1987, total government cargo, whether shipped on U.S.-flag vessels or
                                        foreign flag vessels, amounted to 26,813,737 MTS. Government food aid
                                        accounted for 8,447,559 MTS of that total, or 31.5 percent. (See fig. 3.)
                                        Almost 71 percent of the food aid cargo was shipped on U.S.-flag vessels
                                        in 1987.


Figure 3: Government Preference
Cargoes by Percent of Tonnage Shipped              1                                          Other (a)
CCY1987)




                                        p                       .___...,
                                                                 “‘x-1Fmd
                                                                       aid
                                                                         program
                                                                           tb)

                                                          L                                    DOD (c)

                                        ‘Excludes Exlmbank, Includes all other agencies, In addltlon to non-P L. 480 and non-sectlon 416 USDA
                                        and AID cargoes

                                        “Food aId programs Include P L 480 and sectlon 416 tonnages only

                                        -DOD figures reflect P L 664 and the Cargo Preference Act of 1904 requirements
                                        Source, MantIme Admlnlstration


                                        In 1986, U.S.-flag vessels carried about 4 percent of all oceanborne cargo
                                        coming into or going out of the United States, or approximately 37.8 mil-
                                        lion MTS. More than 40 percent of that amount, or 16.4 million MTS, was
                                        government cargo.


                                        Officials representing agricultural interests claim that the dollar
Differing Views on                      amounts of food aid provided by Congress are misleading because those
How to Fund Shipping                    amounts must cover shipping costs as well as commodity costs. They,
costs                                   therefore, believe that the additional costs of shipping food aid on U.S.
                                        rather than on foreign flag ships results in less funding being available



                                         Page 7                                        GAO/NSLAD-90-174     Cargo Preference    Requirements
                      B-239401




                      for food aid. Officials representing maritime interests, on the other
                      hand, believe that exempting food aid from cargo preference require-
                      ments would not necessarily mean that savings in shipping costs would
                      be used for acquiring additional food, but that food aid appropriations
                      would be reduced accordingly.

                      One official suggested, as an alternative way of funding transportation,
                      replacing cargo preference requirements with a direct subsidy to the
                      maritime industry. Another alternative would be to provide for the
                      additional costs of cargo preference requirements by establishing a sep-
                      arate budget line item.


                      The U.S. merchant marine fleet consists of several types of vessels,
Numbers of Merchant   many of which participate in the food aid preference trade. Since 1979,
Marine Vessels and    the number of these vessels and of the support personnel has decreased
Personnel Have        significantly while the tonnage capacity of ships in operation has also
                      decreased. However, if both active and inactive ships are considered,
Significantly         capacity has slightly increased during that time. The Department of
Decreased Over the    Transportation (nor) stated that it is clear that federal programs,
                      including cargo preference, have not succeeded in meeting maritime
Past 10 Years         objectives.

                      According to MARAD, as of October 1, 1989, the U.S. oceangoing merchant
                      marine fleet consisted of 661 active and inactive vessels (see app. IV).
                      Of these, 383 are active ships;: 109 of which participated in the food aid
                      preference trade in cargo preference year 1987-88. The 109 ships consist
                      of 70 liners that carry processed goods; 22 tankers and 16 bulk carriers,
                      both of which carry bulk commodities; and 1 integrated tug/barge. (In
                      addition, 44 oceangoing tug/barges also participated in food aid
                      shipments.)

                      Since September 30, 1979, the total U.S. oceangoing merchant marine
                      fleet has decreased by 210 ships, or 24.1 percent. Of that decrease. 151
                      ships were active and privately owned. According to MARAD officials, the
                      decrease is due largely to the replacement of smaller, World War II vin-
                      tage ships with larger, increased cargo capacity ships during the past 10
                      years. (See fig. 4.)




                       ‘There are 8 government cj\vned and 375 privately owned vessels.



                      Page 8                                       GAO/NSLAD-W-174        Cargo Preference   Requirements
                                       R-239401




Figure 4: U.S. Oceangoing Merchant
Marine Fleet: Number of Ships (1979,   Ship
1989)                                  900

                                       600

                                       700

                                       600

                                       500

                                       400

                                       300

                                       200

                                       100

                                         0




                                                      Inactive Reet
                                                      Active fleet

                                       Note The fleet Includes pnvately owned and government owned ships

                                       ‘Tugs and barges are not included
                                       Source MarltIme AdmInIstratIon


                                       Also since 1979, average monthly employment in the merchant marine
                                       work force has decreased by 30.6 percent. (See app. V.) The work force
                                       positions that decreased include seafaring shipboard,‘shipyard, and
                                       longshore positions. According to MARAD officials, the decrease is due
                                       largely to the placement in service of newer ships during the last 10
                                       years. Officials said the newer ships require fewer personnel to load,
                                       operate, and maintain.

                                       Despite the significant decreases in ships and personnel, active shipping
                                       capacity has decreased by only 6.5 percent, and if active and inactive
                                       ships are considered, capacity has actually increased by 6.3 percent.
                                       According to MARAD officials, the newer ships are larger and can hold
                                       more cargo than the older ships that were replaced. (See fig. 5.)




                                        Page 9                                     GAO/NSIAD-90-174 Cargo Preference Requirrawnts
                                        E&239401




Figure 5: U.S. Oceangoing Merchant
Marine Fleet: Deadweight Ton Capacity   30   Lkadweighttons   in millions   (a)
(1979, 1989)                            26
                                        26
                                        24
                                        22
                                        20
                                        18
                                        16
                                        14
                                        12
                                        10
                                         0
                                         6
                                         4
                                         2
                                         0

                                             1979                   1969

                                                     Inactive fleet
                                                     Active fleet

                                        Note The fleet Includes privately owned and government owned shops

                                        “Tugs and barges are not Included
                                        Source. Mantime Admlnlstratlon


                                        The DOTFebruary 1990 policy report, Moving America, New Directions,
                                        New Opportunities, asserts that federal programs, including cargo pref-
                                        erence rules, have not kept the U.S. merchant marine fleet viable and
                                        competitive in world trade. Further, uor says that the U.S. merchant
                                        marine has declined to the point where the nation’s ability to meet mili-
                                        tary sealift needs has been impaired. nor advocates reform of U.S. mari-
                                        time programs to assist the U.S. merchant marine in meeting its world
                                        trade and military sealift demands.

                                         One of the maritime industry’s major concerns is its dependence on the
                                         food aid cargo preference trade. As discussed previously, food aid now
                                         represents almost one-third of all government cargo. Furthermore, if
                                         U.S. assistance to Eastern Europe increases over the coming years and
                                         additional food aid is made available, food aid will likely grow as a per-
                                         centage of all government cargo.

                                         We provide information on recent food aid shipments to Poland in
                                         appendix VI and on special legal provisions related to shipments from


                                         Page 10                                    GAO/NSLAD9@174       Cargo Preference   Requirements
El-23940 1




Great Lakes ports in appendix VII. Our objectives, scope, and method-
ology are in appendix VIII. As agreed with you, we did not obtain offi-
cial agency comments on this report. However, we discussed the
contents with cognizant government agency officials. Comments
received during the discussions were incorporated in the report as
appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 7 days from
the date of this letter. At that time, we will send copies to the Secre-
taries of Agriculture and Transportation; the Administrator of the
Agency for International Development; appropriate congressional com-
mittees; the Director of the Office of Management and Budget; and other
interested parties. We will make copies available to others upon request.
If you have any questions regarding this report, please call me at (202)
275-4812. Major contributors to this report are listed in appendix IX.

Sincerely,




Allan I. Mendelowitz, Director
Trade, Energy, and Finance Issues




 Page 11                          GAO/NSIAD-SO-174   Cargo Preference   Requirements
Contents


Letter
Appendix I
Definition of U.S.-Flag
Vessels
Appendix II
Ocean Freight
Differential as a
Percentage of Total
P.L.480 Expenditures
Appendix III                                                                       17
Cargo Preference
Laws
Appendix IV                                                                        19
U.S. Oceangoing
Merchant Marine Fleet
Components
Appendix V
Average Monthly
Maritime
Employment-1979 and
1989
Appendix VI
Recent Food Aid
Shipments to Poland




                          Page 12   GAO/NSIAlMO-174   Cargo Preference   Requirements
                         Contents




Appendix VII
The Great Lakes Set-
Aside
Appendix VIII                                                                                             24
Objectives, Scope, and
Methodology
Appendix IX                                                                                               25
Major Contributors to    Xational Security and International Affairs Division,                            25
                              Washington, D.C.
This Report
Figures                   Figure 1: Titles I and III Ocean Freight Differentials                               3
                          Figure 2: Title II Vessel Performance: U.S.-Flag Liners                              5
                          Figure 3: Government Preference Cargoes by Percent of                                7
                               Tonnage Shipped
                          Figure 4: U.S. Oceangoing Merchant Marine Fleet: Number                              9
                               of Ships
                          Figure 5: U.S. Oceangoing Merchant Marine Fleet:                                10
                               Deadweight Ton Capacity




                          Abbreviations

                          AID        Agency for International Development
                          CY         Calendar Year
                          CPY        Cargo Preference Year
                          DOD        Department of Defense
                          Da-        Department of Transportation
                          MARAD      Maritime Administration
                          MT         Metric Ton
                          OFD        Ocean Freight Differential
                          PVO        Private Voluntary Organization
                          USDA       U.S. Department of Agriculture


                           Page 13                         GAO/NSIAD-W-174   Cargo Preference   Requirements
Appendix I

Definition of U.S.-FlagVessels


                According to section 3 of Title 1, United States Code, the word “vessel”
                includes every description of watercraft or other artificial contrivance
                used, or capable of being used, as a means of transportation on water.
                To become a U.S.-flag vessel, the vessel must be measured, documented,
                and registered in the United States.

                Vessels that have been measured in the United States, are of at least 5
                net tons, and are not registered under the laws of a foreign country are
                eligible for documentation if the vessel is owned by

                1. An individual who is a citizen of the United States,

                2. An association, trust, joint venture, or other entity,

                  a. all of whose members are citizens of the United States, and

                  b. that is capable of holding title to a vessel under the laws of the
                  United States or of a state,

                3. A partnership whose general partners are citizens of the United
                States and the controlling interest in the partnership is owned by citi-
                zens of the United States,

                4. A corporation established under the laws of the United States or of a
                state, whose president or other chief executive officer and chairman of
                its board of directors are citizens of the United States and no more of its
                directors are noncitizens than a minority of the number necessary to
                constitute a quorum,

                5. The U.S. government, or

                6. The government of a state.

                Vessels eligible for documentation may be issued a certificate of docu-
                mentation by the Secretary of Transportation. The certificate of docu-
                mentation identifies and describes the vessel; identifies the owner of the
                vessel; and contains any additional information prescribed by the Secre-
                tary of Transportation.

                Once documented, vessels can be registered with the Secretary of Trans-
                portation as U.S.-flag vessels and may engage in foreign trade or trade
                with Guam, American Samoa, Wake Island, Midway Island, or Kingman
                Reef.


                Page 14                             GAO/NSIAD-SO-174   Cargo Preference   Requirement5
Appendix     I
Definition       of U.S.-Flag Vessels




According to section 901(k) of the Merchant Marine Act of 1936, as
amended, the definition of a U.S.-flag vessel eligible to carry preference
cargoes is as follows:

. ..a vessel, as defined in section 3 of title 1, United States Code, that is necessary for
national security purposes and, if more than 25 years old, is within five years of
having been substantially rebuilt and certified by the Secretary of Transportation
as having a useful life of at least five years after that rebuilding.

If the vessel is privately owned and was either (1) built or rebuilt
outside the United States, or (2) documented under any foreign registry,
then it must be documented under the laws of the United States for a
period of 3 years before it is eligible to carry preference cargo.’




  ’ Exceptionsto the 3-year documentation period for foreign built or rebuilt vessels have been allowed
  in the past by legislation.



  Page 15                                       GAO/NSLAlMO-174       Cargo Preference   Requirements
Appendix II

OceanFreight Differential as a Percentageof
Total P.L.480 Expenditures


Dollars   in mdhons
                                                        Percent of total                      Percent of total                  Percent of total
                                         1986-87”         expenditures           1987-8ab       expenditures      1988-89c        expenditures
Total P.L. 480 expenddures     (by FY)   $1 534.4                   1000         $1,349 5   -~--~        100.0    $1,341 7                   100.0
Total P.L 480 OFD costs (by CPY)            136.0                      89           130.5                   97       117.8                     88
USDA portton    of total OFD                115.0                      75            95.4                   7.1        80.6                    60

                                              Legend
                                              CPY = Cargo preference    year

                                              FY = Fiscal year

                                              OFD = Ocean freight dlfferentlal

                                              USDA = U S Department of Agnculture


                                              ‘Represents   CPY 1986-87 and FY 1986

                                              “Represents   CPY 1987-88 and FY 1987

                                              ‘TJepresents CPY 1988-89 and FY 1988.

                                              Sources    USDA and MarltIme Admlntstratlon




                                               Page 16                                         GAO/NSIAD-90-174   Cargo Preference   Requirements
Appendix III

Cargo Preference Laws


                            There are several cargo preference laws in the United States. The pri-
                            mary laws are the Cargo Preference Act of 1904, the Merchant Marine
                            Act of 1936, and the Cargo Preference Act of 1954. In addition, the Food
                            Security Act of 1985 contains significant cargo preference requirements.


The Cargo Preference Act    The Cargo Preference Act of 1904 (P.L. 58-198) states that only vessels
                            of the United States may be used in the transportation by sea of supplies
of 1904                     bought for the Army, Navy, Air Force, or Marine Corps. However, if the
                            President finds that the freight charged by those vessels is excessive or
                            otherwise unreasonable, contracts for transportation may be made as
                            otherwise provided by law. In effect, the law generally requires that
                            100 percent of DOD cargo be shipped on U.S.-flag vessels.


The Merchant Marine Act     The Merchant Marine Act of 1936 (P.L. 74-858) was implemented
                            largely to further the development and maintenance of an adequate and
of 1936                     well-balanced American merchant marine to aid in the national defense.
                            The act requires that government employees traveling on official busi-
                            ness overseas use ships registered under U.S. laws. It was amended by
                            the Cargo Preference Act of 1954 and the Food Security Act of 1985 to
                            specify the percentages of cargo tonnage that should be transported on
                            U.S.-flag vessels.


Cargo Preference Act of     The Cargo Preference Act of 1954 (P.L. 83-664) amended the Merchant
1954                        Marine Act of 1936 and requires that at least 50 percent of all govern-
                            ment cargo tonnage transported on ocean vessels shall be transported on
                            privately owned, U.S.-flag commercial vessels, to the extent such vessels
                            are available at fair and reasonable prices.


Food Security Act of 1985   The Food Security Act of 1985 (P.L. 99-198) also amended the Merchant
                            Marine Act of 1936 and requires that, by calendar year 1988, and for
                            every year thereafter, an additional 25 percent of commodity tonnage
                            exported under P.L. 480, section 416 of the Agricultural Act of 1949 and
                            the Food Security Wheat Reserve Act of 1980, be transported on pri-
                            vately owned, U.S.-flag commercial vessels. The Department of Trans-
                            portation, through the Maritime Administration, is required to fund the
                            OFDS for the additional 25-percent tonnage. In addition, the act requires
                            that P.L. 480 Title II waterborne cargoes exported from Great Lakes
                            ports be preserved at the calendar year 1984 levels for calendar years



                            Page 17                           GAO/NSLAD-SO-174   Cargo Preference   Requirements
Appendix III
Cargo Preference   Laws




1986 through 1989. This provision of the act is known as the “Great
Lakes Set-Aside.”




Page 18                          GAO/NSIALh90-174   Cargo Preference   Requirements
Appendix IV

U.S. OceangoingMerchant Marine Fleet
Components

               iDwt”    In Thousands)
                                                                                                  Percent
                                                        1979                    1989             change in
                                                Ships           DWT     Ships           DWT     Ships    DWT
               Active     Fleet
                  Passenqer                         9              75       7              55      -22.2        -26.7
                  General         cargo           130           1,756      38             575      -708         -673
                  Intermodal                      133           2.685     126           3.730      --53           389
                  Bulk carriers                    22             701      22             972         0.0         38 7
                  Tankers                         258          13,731     190          12,388      -26.4         -98
               Subtotal                           552          18,948     383     -    17,720      -306          -6.5
               Inactive     Fleet
                  Passenger                        64             413      13             107      -79.7        -741
                  General         cargo           198           2,142     171           2,034      -13.6         -50
                                  ___--~
                  Intermodal                       11             153      41             955      2727         524.2
                  Bulk carriers                     4              88       4             298             0.0   2386
                  Tankers                          42           1,254      49           3,343        16.7        1666
               Subtotal                           319           4,050     278           6,737      -129           66.3
               Total                              871          22,998     661          24,457      -24.1           6.3

               ‘DeadweIght tons
               Source MarltIme Admlnlstratlon




                Page 19                                   GAO/NSLAD9@174        Cargo Preference      Requirements
Appendix V

Average Monthly Maritime Employment-1979
and 1989

                                                                                            Percent
              Maritime employment                           1979             1989           change
              SeafarIng shipboard   lobs                  26,979            14,268             -47.1
              Shipyard jobs                              115,174            go, 179 --~~ ----qqj

              Longshore   jobs                            49,103            28,339             -42.3
              Total                                      191,256          132,786             -30.6
              Source MantIme Admlnistratlon




              Page 20                         GAO/NSlAD-90-174     Cargo Preference   Requirements
Appendix VI

Recent Food Aid Shipments to Poland


               In recent months there has been much discussion among officials repre-
               senting U.S. food aid and maritime interests about shipping food aid to
               Eastern Europe and to Poland in particular. Also, there has been consid-
               erable debate in Congress on the subject. Food aid advocates fear that
               significantly higher U.S.-flag rates will seriously affect the amount of
               food aid available to Poland. MARAD officials point to the fact that in two
               out of three recent bids, U.S.-flag carriers underbid their foreign compet-
               itors. However, some food aid officials believe that the U.S. competitive
               pricing was an aberration in the market and will not continue.

               Congress authorized $125 million in food aid to Poland for fiscal year
               1990. Three tenders for freight services have already been made, and all
               three tenders were awarded to U.S.-flag carriers. The first was for a
               shipment of 11,500 MTS of sorghum. The accepted U.S.-flag rate was
               $84.%/MT,   even though the foreign flag rates were between $49.%jMT
               and $63.00/~~. To comply with cargo preference laws, however, the
               shipment was awarded to a U.S.-flag carrier. The additional cost to use a
               U.S.-flag carrier was approximately $402,500.’ MARAD believes that if
               the shipment had been larger, and if there had been more time fot
               advance planning, the cost differential would not have been so great.

               The second tender was for 50,000 MTS of corn. In this case, the accepted
               U.S.-flag rate was 836.%/~T. Foreign flag carriers required two ships to
               carry the cargo, at an average rate of $k%.%/MT. The shipment was
               awarded to the U.S.-flag carrier who was offering the lowest landed
               cost. The lowest landed cost is the combination of the commodity price
               and the ocean freight rate that results in the lowest total cost to delivet
               the commodity to the importing country.

               The third tender was for 180,000 MTS of corn. The accepted U.S.-flag
               rates were $33.88,/~~ and $35.%/MT for four shipments from two dif-
               ferent carriers. Foreign flag offers ranged from $35.75/MT to $39.32: 511‘.
               Again, the tender was awarded to the lower-cost U.S.-flag carrier.

               Overall, MARAD was pleased with the performance of the US. carriers in
               competing for the Polish food aid shipments. Food aid program officials
               also were pleased to see the lower U.S.-flag rates for two of the ship-
               ments. However, they believe a number of factors in both the I!.S. and
               foreign markets played a role in the lower U.S.-flag rates for the Polish


               ‘This is an approximate ujst. because the P.L. 480 and section 416 agreements allowed for a ~mi~il
               tolerance in the amount of commodity loaded.



               Page 2 1                                      GAO/NSIAD-90-174     Cargo Preference   Reqrrirrnwnts
Appendix VI
Recent Food Aid Shipments   to Poland




shipments. These factors include the improved efficiencies in U.S. ship-
ping and the high level of competition among U.S.-flag ships due to the
limited number of preference cargoes made available at the time of the
Polish food aid tenders. Also, foreign flag carriers may have been
largely unavailable at the time of the Polish food aid tenders, due to
heavy demand for the limited number of foreign flag bulk carriers.




 Page 22                                GAO/NSLADQO-174   Cargo Preference   Requirementa
Appendix VII

The Great Lakes Set-Aside


               The Food Security Act of 1985 requires that exports of Title II water-
               borne cargoes from ports in the Great Lakes be preserved during cal-
               endar years 1986 through 1989 at the levels exported from those ports
               in calendar year 1984. The act also requires that this “Great Lakes Set-
               Aside” be implemented without detriment to any other port range.

               The Great Lakes set-aside provision, now expired, came about because
               few U.S.-flag vessels service the Great Lakes ports, and it was believed
               that increasing the cargo preference requirements from 50 percent to
               75 percent would adversely affect the food aid exports from those ports.

               Few U.S.-flag vessels service the upper Great Lakes ports, partly
               because many U.S.-flag vessels are too large to transit the Welland
               Canal, which connects Lake Erie and Lake Ontario. As a result, the
               upper Great Lakes are serviced largely by foreign flag vessels. When
               cargo preference requirements were set at 50 percent, the Great Lakes
               ports were able to compete for the other 50 percent of exports allowed
               to be shipped on foreign flag vessels. However, when the cargo prefer-
               ence requirements were increased to 75 percent, the Great Lakes ports
               were able to compete only for the other 25 percent. The cargo prefer-
               ence increase, in effect, cut the Great Lakes potential Title II export bus-
               iness in half. The 4-year set-aside was supposed to give the Great Lakes
               ports time to adjust to the decrease in shipping levels that were
               expected to occur due to the increase in cargo preference requirements.




               Page 23                            GAO/NSIAIBO-174   Cargo Preference   Requirements
Appendix VIII

Objectives, Scope,and Methodology


                The Chairman, House Committee on Agriculture, asked us to review (1)
                the cost and timeliness of delivering U.S. food aid to foreign countries
                under the cargo preference requirements, and (2) the extent to which
                U.S. food aid helps strengthen and sustain our merchant marine. We did
                not look at other agricultural export programs, nor did we look at mari-
                time assistance programs other than cargo preference. Also, we did not
                conduct a management review and did not include transportation man-
                agement issues in the scope of this study.

                We interviewed government officials involved in monitoring or adminis-
                tering cargo preference requirements at USDA, AID, and MARAD. In addi-
                tion, we met with officials representing PVOS, ocean transportation
                companies, and freight forwarders. We obtained and analyzed relevant
                data from 1979 to the present, where available.

                We did not verify these data. However, where possible, we compared
                figures available from different agencies. Our data analysis was compli-
                cated by the fact that the different agencies do not maintain records in
                the same format. Also, within each agency, we found that reporting for-
                mats vary from year to year. Comparisons were made even more diffi-
                cult because some agencies record data by calendar years (January 1
                through December 3 1), some by fiscal years (October 1 through Sep-
                tember 30), and some by cargo preference years (April 1 through March
                31). For clarity, throughout this report we have identified the type of
                year used when presenting data.

                Our review work was performed from October 1989 to March 1990. All
                of our work was conducted in accordance with generally accepted gov-
                ernment auditing standards.




                Page 24                           GAO/NSIAJHO-174   Cargo Preference   Requirements
Appendix IX

Major Contributors to This Report


c
National Security and       N. Scott Einhorn, Project Manager
International Affairs       Joanne L. Jurmu, Evaluator    -
Division,     Washington,   David E. Moser, Evaluator

D.C.




 (483535)                    Page 25                            GAO/NSLAD-W174   Cargo Preference   Requirements
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