food aid reforms will not significantly affect shipping...

Centers on the Public Service School of Policy, Government, and International Affairs George Mason University

Food Aid Reforms Will Not Significantly

Affect Shipping Industry or Surge Fleet

June 2015 Phillip J. Thomas Wayne H. Ferris

Centers on the Public Service 2 School of Policy, Government, and International Affairs

Page left intentionally blank.

Food Aid Reforms Will Not Significantly Affect Shipping Industry or Surge Fleet 3

Acknowledgments Food Aid Reforms Will Not Significantly Affect Shipping Industry or Surge Fleet has benefited greatly from the contributions of many individuals who are committed to expanding the knowledge and understanding of global food aid security. The emergence of renewed and heightened interest in global hunger over the past several years presents an excellent opportunity to undertake meaningful research on food security. Significant U.S. government involvement and increased non-governmental, private sector, and foundation engagement has created a dynamic environment for major advancements in addressing key food security issues, including key policy and operational challenges. This research was conducted by Mr. Phillip J. Thomas and Dr. Wayne H. Ferris, Research Fellows at the Centers on the Public Service with George Mason University’s School of Policy, Government, and International Affairs. It was led under the direction of Principal Investigator, Dr. Paul L. Posner, who, along with Mr. Thomas and Dr. Ferris, take sole responsibility for all errors and oversights in this study. Other key researchers included Drs. Roger R. Stough and Kenneth J. Button. Funding for this research was provided by both the William and Flora Hewlett Foundation and the New Venture Fund. The authors would like to thank the following contributors to this report: Ms. Monica Hyun Ju Kim and Mr. Asif Shahan for their continued research assistance as well as Dr. Bonnie Stabile, Ms. Carrie Drummond, and Dr. Tonya T. Neaves, Mr. Aaron Kestner, and Ms. Anne Fenley for editorial assistance. For more information, all findings, conclusions, and recommendations on the results of this study will be made available at http://psc.gmu.edu.


Research Highlights

Food Aid Reforms Will Not Significantly Affect U.S. Shipping or Surge Fleet Issue Current proposals for reforming major US international food aid programs call for reducing the amount of US produced and shipped commodities, shifting to a more flexible approach that includes purchasing some of the food closer to where it is needed and the use of cash and vouchers. Current cargo preference law requires at least 50 percent of the food be shipped on more costly US-flag vessels. Critics are concerned that reforms will adversely affect the shipping industry, including the number of US-flag merchant ships and US mariners engaged in international trade. They worry this could negatively affect the availability of US mariners needed to crew a government-owned Surge Fleet, maintained by the Maritime Administration (MARAD) and available to the Navy in the event of a contingency requiring swift sea delivery of military equipment and supplies. They also worry the reforms may negatively affect participation of US-flag merchant vessels in the Maritime Security Program (MSP). In return for a subsidy, MSP participating operators are required to make their ships and commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency. Overall Findings

• Proposed reforms for reducing the amount of US-produced and shipped food aid will not significantly affect 1) the US shipping industry; 2) activity in US ports that handle US food aid shipped overseas; 3) US agricultural exports; 4) the value of US farms’ output; and 5) the economy more generally.

• Complete detailed data on active mariners is not available. MARAD and Defense Department assessments on whether enough mariners are available to crew US-flag ships if the Surge Fleet needs to be employed are not readily available, interfering with independent review by outside observers.

• The proposed food aid reforms will not significantly affect the total number of US-flag

oceangoing merchant vessels or the total number of available mariners to crew those vessels. Moreover, developments in the Jones Act trade could more than offset any reduction in vessels or mariners that might accompany the food aid reforms. Based on the information we were able to obtain and analyze, we conclude the reforms will not significantly affect activation of the Surge Fleet.

• Privately owned Jones Act oceangoing ships can be an important source of ships and

U.S. mariners – to assist the Navy’s mobilization efforts in the event of a military contingency and to contribute to the pool of mariners relied on to man the Surge Fleet.

• Critics warn that the MSP may lose US-flag vessels that participate in the program if the

amount of cargo preference trade they receive, in combination with their direct subsidy, is considered insufficient for offsetting the higher costs of operating US-flag vessels. However, this currently is not a problem according to an April 21, 2015 MARAD report to


the Congress. If it were to become a problem, the government could increase the subsidy.

• Cargo preference laws primarily serve US Department of Defense (DOD) interests. US

food aid accounts for a small proportion of cargo preference tonnage and revenue. The Department of Defense should pay for programs that serve its mission. This increases the likelihood that DOD will design and establish cost effective and efficient programs.

• Cargo preference requirements for food aid and requiring all U.S. food aid to be grown in

the United States have negatively affected U.S. food aid programs by (1) substantially increasing the cost of ocean transport, (2) significantly increasing the time to get food aid to recipient countries; (3) reducing the amount of food aid that can be provided to people suffering from hunger and food insecurity, and (4) increasing costs to U.S. taxpayers.

Recommendations The Defense Department, Congress, and the public need to know that sufficient mariners will be available to man the Surge Fleet when the need arises. Acquiring additional U.S.-flag vessels to increase the number of available mariners would involve substantial costs and seems premature unless more evidence of the need is provided to Congress and the public. Alternative options deserve consideration. Cargo preference food aid is not cost effective and adversely affects other U.S. objectives, including national security. Therefore, we make the following recommendations:

1. The Maritime Administration, in coordination with the Department of Defense, should provide a comprehensive report to Congress on the adequacy of data on the number of available mariners to man the Navy’s surge fleet, whether there are currently a sufficient number, and, if not, options for correcting the situation.

2. If the Maritime Administration recommends the government purchase or finance additional U.S.-flag vessels to ensure more mariners will be available to man the surge fleet and/or to increase the proportion of U.S. trade carried on U.S.-flag vessels, Congress should require the agency to provide a cost-benefit analysis to accompany its recommendation.

3. Congress should eliminate food aid cargo preference and the requirement that all the food aid be produced in the United States. Until food aid cargo preference is repealed, the Defense Department should fully reimburse USAID and USDA for the added cost of complying with the requirement.


Table of Contents Acknowledgements ................................................................................................................... 3 Research Highlights .................................................................................................................. 4 Table of Contents ...................................................................................................................... 7 Abbreviations ............................................................................................................................ 8 List of Tables ............................................................................................................................ 9 List of Figures ......................................................................................................................... 11 Executive Report ..................................................................................................................... 12 Section 1 ................................................................................................................................. 19 Research Objectives, Scope, and Methodology Section 2 ................................................................................................................................. 21 US Merchant Marine’s Role in Commerce and Defense Section 3 ................................................................................................................................. 37

Impact of Ocean Freight Transportation and Cargo Preference on Food Aid Programs Section 4 ................................................................................................................................. 52

MARAD and DOD Concerns about the Declining Number of US-Flag Ships and Availability of Mariners to Man the Surge Fleet

Section 5 ................................................................................................................................. 71

Reform of US Food Aid Programs Will Not Significantly Affect the Number of US-Flag Ships or Availability of Mariners

Section 6 ................................................................................................................................. 88

Food Aid Reforms Impact on US Ports, Agricultural Exports, Farm Output, and the Economy More Generally

Bibliography……………………………………………………………………………………………..98


Abbreviations BEHT Bill Emerson Humanitarian Trust CARE Cooperative for American Relief Everywhere CBO Congressional Budget Office CDS Construction-Differential Subsidy CRS Catholic Relief Services DOD United States Department of Defense DOT United States Department of Transportation DWT Deadweight Ton FAS Foreign Agricultural Service FMC Federal Maritime Commission GAO United States Government Accountability Office ITSH Inland Transportation, Shipping, and Handling LRP Local and Regional Procurement MARAD Maritime Administration MSC Military Sealift Command MSP Maritime Security Program Mt Metric Ton NGO Nongovernmental Organization OFD Ocean Freight Differential PL-480 Title II Food for Peace Program RO/RO Roll On/Roll Off RRF Ready Reserve Force TRANSCOM United States Transportation Command US United States USAID United States Agency for International Development USDA United States Department of Agriculture USTRANSCOM United States Transportation Command VISA Voluntary Intermodal Sealift Agreement VTA Voluntary Tanker Agreement WFP World Food Program


List of Tables Table 2.1 US Foreign Trade by Transportation Mode, 2006-11 ……………………… ….24 Table 2.2 US Trade as a Percent of Gross Domestic Product: 1980-84 and 2010-12 …24 Table 3.1 Percentage of Food Aid Tonnage Shipped on US and Foreign Flag

Vessels, FY 2005-13 …………………………………………………….…… ……39 Table 3.2 Comparison of US-Flag Class A and Class B Ships on Food Aid Tonnage

Carried ……………………………………………………………………………..….41 Table 3.3 Ocean Freight Differential per Ton for Class A and B Vessels ………….…..…..42 Table 3.4 Impact of Class B Vessels on Ocean Freight Differential Costs …………………42 Table 3.5 Minimum US Cost of Using US-Flag Ships to Transport US Aid, FY 2005-12 …43 Table 3.6 Relationship between US-Flag Ocean Freight Differential Costs and US Flag

Ocean Freight Shipping Costs, FY 2005-12 and FY 2009-14 ……………… ….44 Table 3.7 US-Flag Average Cost per Metric Ton of US Food Aid Moved, FY 2009–14 ….48 Table 3.8 Comparison of US-Flag and Foreign-Flag Average Costs per Metric Ton of

Food Aid Transported, FY 2009-13 ………………………………………….……..48 Table 3.9 MARAD Reimbursements for Ocean Freight Differential, FY 2006-11 …………50 Table 4.1 Summary Results of May-June 2013 DOD Assessment of Mariner Availability

and Surge Fleet Manning Requirements ……………………………...……………56 Table 4.2 Trying To Account for the Estimated 13,301 Mariners Included in the

“Commercial Fleet” in June 2013 (See Table 4.1) …………………...……………58 Table 4.3 Seafarers International Union Estimate of Available Seafarers Compared to

MARAD/DOD Estimate of June 2013 ………………………………………………60 Table 4.4 MARAD Table on Mariner Supply (Oceans) as of June 20, 2013 ……….………62

Table 4.5 Comparison of MARAD Revised August 2013 Estimate of Qualified Mariners to

DOD/MARAD Estimate of June 25, 2013 …………………………………………..62 Table 4.6 Comparison of MARAD Revised August 2013 Estimate of Actively Sailing

Mariners to DOD/MARAD Estimate of June 25, 2013 …………………………….62 Table 4.7 Bureau of Labor Statistics Data on Mariners’ Employment in Deep Sea, Coastal,

and Great Lakes Water Transportation, 1988-2014 ……………………………....64


Table 5.1 US Food Aid Totals and US-Flag Tonnage and the Number of Vessels, FY 2011-13 (Tons in Millions) ………………………………………………………73

Table 5.2 US-Flag Oceangoing Merchant Vessels Carrying US Food Aid, FY 2011-13 …74 Table 5.3 Number of Shipload Equivalents of Food Aid Carried by Vessels Per Annum,

FY 2011-13 …………………………………………………………………………….75 Table 5.4 Total Expected Days to Make Food Aid Deliveries, FY 2014 ………………...….76 Table 5.5 US Food Aid Shipped by US-Flag Carriers, FY 2013 …………………………….77 Table 5.6 US-Flag Oceangoing Merchant Vessels Transporting Food for Peace Title II

Food Aid Commodities, FY 2014 ……………………………………………………78 Table 5.7 US Flag Privately-Owned Oceangoing Merchant Fleet, Including Non-Eligible

Jones Act Vessels as of March 9, 2015 …………………………………………….83 Table 5.8 Military Usefulness of US-Flag Privately-Owned Merchant Fleet - Oceangoing

Non-Jones Act and Jones Act Vessels as of March 9, 2015 …………………….84 Table 5.9 Participation of US-Flag Privately-Owned Merchant Oceangoing Vessels,

Non-Jones Act and Jones Act Vessels, in VISA and VTA Programs, as of March 9, 2015 ……………………………………...………………………………….84

Table 5.10 Number of US-Flag Vessels Transporting US Food Aid and Number of Tons

Transported by Participants in the Maritime Security Program, FY 2011-13 …..85 Table 5.11 Tons of Food Aid Transported by Vessel Operators and Amount of Tonnage

Lifted by Vessels Participating in the Maritime Security Program, FY 2011-13 ..86 Table 5.12 Number of Shiploads of Food Aid Transported by Maritime Security Program

Vessels, FY 2011-13 ………………………………………………………………….87


List of Figures Figure 2.1 US-Flag Privately-Owned Oceangoing Fleet, 1946-2014 ……………………….27 Figure 2.2 US-Flag Privately-Owned Fleet Share of Foreign Waterborne Trade,

1946-2003 ……………………………………………………………………………..28 Figure 2.3 US-Flag Privately-Owned Fleet Share of Foreign Waterborne Trade,

1961-2003 ………………………………………………………………………..……29 Figure 2.4 US Waterborne Foreign Trade, 1946-2012 ………………………………………..30 Figure 3.1 Cost Breakdown for USAID Food for Peace Title II Programs, FY 2004-13 ...…38 Figure 3.2 Comparison of US-Flag to Foreign-Flag Ship Daily Operating Costs, 2010 ……40 Figure 5.1 US Commercial Mariners Who Might Be Affected by Implementation of the

Administration’s FY 2014 Flood Aid Budget Proposal ……………… …………..79 Figure 5.2 US Food Aid, DOD, and Civilian Agencies Cargo Preference Tonnage and

Revenue, FY 2012 ……………………………… ………………………………….81 Figure 6.1 Dollar Value of US Food Aid Commodities Moving Through US Ports as a

Percent of the Value of Total Port Exports, 2013 ………………………………….89 Figure 6.2 Growth in US Waterborne Foreign Trade by Select Ports, 2003-12 ……….……90 Figure 6.3 Food Aid Commodity Cost Compared to Value of US Agricultural Exports,

1997 -2013 …………………………………………………………………………….91 Figure 6.4 Food Aid Commodity Costs as a Percent of the Value of US Farm Outputs,

2012 …………………………………………………………………………………….92


Executive Report Background Reforms of USAID and USDA food aid programs proposed by the Obama administration and some members of Congress include: (1) lifting the requirement that 100 percent of food aid be procured from commodities produced in the United States; (2) allowing U.S. commodities to be used in combination with those produced locally or regionally in countries and areas closer to where the aid is needed, as well as allowing vouchers and cash transfers, whichever is the most cost effective; and (3) giving U.S. food aid programs the flexibility to ship U.S.-produced food assistance on vessels that are readily available, thus permitting foreign flag vessels to be used when available at a lower cost. With this kind of flexibility, the amount of “cargo preference” food aid in any year might fall below the current required 50 percent minimum. Food aid has an important dimension. It can reduce hunger and enhance agricultural development, as well as promote economic development in affected countries. This can advance U.S. interests by helping fragile states prone to armed conflict and environments where terrorist organizations can establish themselves and thrive. Cargo preference refers generally to legal requirements for the carriage of government cargoes on vessels flagged within the registry of a government for the purpose of promoting a national merchant marine. The 1954 Cargo Preference Act required that at least 50 percent of U.S. food aid be shipped on U.S.-flag vessels. In 1985, the law was amended to require that at least 75 percent of U.S. food aid be shipped on U.S.-flag vessels. In July 2012, the law was amended to restore the 50 percent requirement. Department of Defense (DOD) cargoes and cargoes of other civilian agencies also have preference cargo requirements. The Administration’s Fiscal Year 2014 budget food aid proposal would have guaranteed that no less than 55 percent of the requested $1.4 billion for emergency food assistance would be used for procurement, transport, and related costs of U.S. commodities. See Section 2 for additional information and analysis. Methods This study conducted a comprehensive literature review of U.S. food aid programs, laws, regulations and shipping practices, including economic analyses, hearing records, reports, studies, and research completed by U.S. Government agencies, the U.S. shipping industry, the Center For Naval Analysis (CNA), universities, policy think tanks, consultants, the World Food Program (WFP) and other international organizations. A series of interviews and discussions was conducted with analytical and program management staff of these agencies, organizations, and institutions. Extensive statistical data on food aid shipping was gathered from USDA, USAID, and DOT/MARAD. Established economic analysis tools were employed to assess the magnitude of cuts to food aid shipping and the resilience of the existing markets in the shipping industry, agricultural economy, and general U.S. economy in response to such cuts. The use of economic multipliers in past analyses was also assessed.


For the purposes of this study the food aid programs examined were USAID’s Food for Peace (Title II), Section 416(b), Food for Progress, McGovern-Dole Food for Education, and the Bill Emerson Humanitarian Trust. Of these, USAID’s Title II program accounted for nearly 78 percent of total budgetary outlays in Fiscal Year (FY) 2014. See Section 1 for additional information on Methods. Findings Ninety-eight percent or more of U.S. foreign trade is transported on foreign-flag ships. (See Figure 2.2 on p. 28.) The U.S. shipping industry has essentially lost the ability to compete in international trade, including building of ships for such trade. According to one source, the last U.S. tanker built for international trade in U.S. shipyards was in 1981; the last bulk vessel was in 1982; and the last container ship and last roll-on roll-off ship were built in 1983. These types of ships continue to be built in U.S. shipyards but only because of the Jones Act, section 27 of the Merchant Marine Act of 1920, which contains a number of provisions designed to encourage a robust U.S. shipbuilding capacity and employment opportunities for U.S. mariners. It requires that all waterborne shipping between points within the United States be carried out by vessels built in the United States, owned by U.S. citizens, and manned with U.S. citizen crews. The law essentially bars foreign-built and -operated vessels from engaging in U.S. domestic commerce. (See Section 2.) Jones Act ships are a protected market. U.S.-flag ships for the international trade are nearly all built in other countries. (See Section 2.) The number of U.S.-flag privately owned oceangoing merchant vessels is now down to almost one tenth of its peak in 1950 of more than 1,200 vessels (see Figure 2.1 on p. 27). As of September 30, 2014, only 172 ships were left; by January 2015 the number had fallen to 167 ships. Of these, about half were Jones Act ships. Although the number of ships declined, the gross tonnage of the fleet rose between the late 1950s and the early 1980s-- as larger ships were built and incorporated into the fleet. Since then, however, the gross tonnage of the U.S. privately owned, oceangoing fleet has also declined. (See Section 2.) The amount of trade carried by U.S.-flag ships has declined, even as U.S. waterborne foreign trade overall has grown substantially since 1946, (see Figure 2.4 on p. 30). Through a variety of subsidy programs, over a period of decades, the U.S. government has slowed the decline of the U.S. shipping presence in international trade. However, it has not stopped it, much less reversed it. In mid-January 2015, the United States had only 81 U.S.-flag privately owned oceangoing foreign trade vessels (1,000 gross tons and above). Sixty of these were enrolled in the Maritime Security Program (MSP), which currently provides each vessel with an annual subsidy of $3.1 million. Some of these, and most, if not all, of the others have relied on cargo preference programs to help them compete against foreign-flag ships. The Defense Department accounts for the large majority of U.S. government cargo preference shipping. Because of this and because cargo preference programs have not, either alone or in combination with other U.S. government subsidy programs, enabled the United States to compete successfully in international trade shipping or enabled U.S.-flag oceangoing merchant vessels to maintain a substantial proportion of U.S. trade with the rest of the world, we conclude that cargo preference and the other subsidy programs primarily serve U.S. defense objectives. (See Section 2.) The U.S. Administration (MARAD) has been tasked by Congress and is in the process of developing a National Maritime Strategy that will provide recommendations aimed at supporting


the growth of the U.S. maritime industry and ensuring the availability of U.S.-flag vessels for the nation’s economic and national security. We understand that MARAD has considered whether to recommend support for as many as another 35 U.S.-flag vessels, which would provide jobs for nearly 1,400 mariners. The results of this analysis suggest that the budgetary resources required to successfully implement such a program would be considerable. (See Section 4.) Other options for helping to ensure a sufficient number of mariners are available could be explored, such as exploring incentives and other measures to encourage more mariners to join or remain in the merchant marine reserve. Reform of U.S. food aid programs will not significantly affect the U.S. shipping industry, the U.S. agricultural economy, or the economy more generally. For example, the Department of Defense estimated that the Administration’s FY 2014 budget food aid proposal might affect 8-11 vessels and roughly 360 to 495 mariners. Eight to 11 vessels would represent between 5 percent and 7 percent of the total number of U.S.-flag oceangoing merchant vessels in January 2015. Although the number of such vessels has declined considerably in recent years, developments in the Jones Act oceangoing trade and other related areas could offset any vessel reductions due to food aid reforms. The estimated 360 to 495 mariners that might be affected represent about 2.4 percent to 3.2 percent of the number of available commercial mariners estimated by DOD in 2013 (see Figure 5.1 on p. 79). Of 74 vessels that carried food aid between FY 2011–FY 2013, 7 ships carried more than half of the food and a total of 16 ships carried nearly 80 percent of the food. In FY 2014, 7 ships carried 85 percent of the Food for Peace Title II food aid. Most of the vessels carried such small amounts of food aid that it is questionable whether the food aid reforms alone would cause them to drop the U.S.-flag. Much more important to such a decision would be how the rest of their business is performing. (See Section 5.) In FY 2013 three vessel carriers accounted for 88 percent of shipped food aid. They were Liberty (49 percent), Sealift of Delaware (20 percent), and Maersk Line, Limited (18 percent). Liberty used 4 vessels, Sealift 4 vessels, and Maersk Line 14 ships. Nearly all of the food aid transported by Maersk was moved on 4 vessels. (See section 5.) Proposed food aid reforms will not significantly affect activity in U.S. ports that handle U.S. food aid commodities shipped overseas. The total Fiscal Year 2013 dollar value of U.S. food aid commodities that moved through five U.S ports was only between 0.1 and 0.5 percent of the value of total port exports in 2013 (see Figure 6.1 on p. 79). This is a small fragment of the considerable growth in U.S. waterborne trade handled by such ports between 2003 and 2012 (see Figure 6.2 on p. 90). Any reduction in the purchase of U.S. commodities for food aid will not have a perceptible impact on U.S agricultural exports or the value of U.S. farms’ output. Food aid commodity costs, at $790 million in 2012, for instance, constituted only a very small portion of the $167 billion value of U.S. farms’ output (see Figure 6.3 and Figure 6.4 on pp. 91-92). Some previous studies exaggerated the economic impacts of using U.S.-flag privately owned commercial oceangoing ships to transport U.S. foreign trade cargoes or preference cargoes. We reviewed two studies,1 prepared for organizations representing ships’

1 Impacts on the US Economy of Shipping International Food Aid, Promar International, Alexandria, Virginia; Nathan Associates, 1995, Economic Analysis of Federal Support for the Private Merchant Marine, American Maritime Congress, Washington, D.C.


carriers/operators and maritime unions that made inappropriate use of economic multipliers and input-output analysis to assess impacts. Moreover, they examined only gross economic and not net impacts. Thus, they did not consider alternative opportunities for the human and material resources used by an industry and all other affected industries. (See Section 6.) Any potential loss of U.S. flag vessels and mariner jobs due to food aid reforms would not have a perceptible impact on the U.S. economy. One way to put food aid’s impact on the U.S. economy into context is to consider that the total U.S. national income is about $18 trillion dollars, while in 2013 USAID and USDA spent $212 million on food aid ocean freight costs. A portion of this went to the seamen who manned the U.S.-flag ships that carried most but not all of the food aid. Only a portion went as profit (assuming profits were made) to the three U.S.-flag carriers that transported 88 percent of the food aid. As already indicated, if 8-11 vessels were affected by food aid reform that would represent about 360 to 495 mariners. In January 2015 about 120.7 million people were employed full time in the U.S. economy. It should be clear that if 11 vessels stopped operating under the U.S. flag and 360 to 495 mariners initially lost jobs, the effect on the U.S. economy would not be perceptible. Beyond that, the U.S. market economy is dynamic. Vessel owners can compete for other cargoes, if available, or switch to a foreign flag. Mariners can look elsewhere for employment opportunities, both in their industry and in other occupations. (See Section 6.) Data on the number of mariners who potentially would be available to man the surge fleet is not adequate. The U.S. Maritime Administration and the Department of Defense have expressed concerns that there are not or may not be enough U.S. mariners to help man the Navy’s surge fleet in the event of a major war, particularly one lasting more than six months. According to this view, actions that result in more vessels leaving the U.S.-flag fleet reduce the number of jobs for U.S. mariners and thus contribute to a decline in the number of U.S. mariners available to help crew the surge fleet. However, we found that data on the number of mariners who would be available to man the surge fleet is not adequate. Assessments with adequate supporting analysis and documentation (e.g., which ships counted, which mariners counted, key assumptions, quality of data) are not readily available. We reviewed four estimates of estimated ocean mariners for 2013 that ranged from approximately 11,000 to 17,000 mariners. (See Section 4.) Based on information that we were able to obtain, DOD, MARAD, and maritime unions conclude enough mariners are available to man the Surge Fleet if it were fully activated and to sustain this for at least a year. In the event of a conflict that required full activation of the Surge Fleet beyond a year, views appear to differ. Looking to the future, both the unions and MARAD have warned that sufficient mariners may not be available to fully man the Surge Fleet. (See Section 4.) If sufficient mariners or U.S.-flag vessels are not available, DOD can charter foreign-flag vessels to make up the difference. During the Persian Gulf War of 1990-1991, sufficient U.S.-owned sealift could not be mobilized to unilaterally meet the initial surge requirements. This occurred because U.S. commercial and Surge Fleet ships were not readily available -- especially during the initial phase of the operations. DOD contracted for 137 foreign flag ships, of which 105 delivered cargo. The foreign flag vessels delivered about 29 percent of the surge cargo. According to the DOD U.S. Transportation Commander, lacking U.S.-flag commercial capability, the most expeditious means to restore sealift capability is to charter foreign-flag vessels. (See Section 2.)


DOD and MARAD have also expressed concerns that vessels participating in the Maritime Security Program might drop out of the program because of a substantial decline in cargo preference volumes. According to this view, participants rely on a combination of preference cargoes and the MSP subsidy stipend to help offset the higher costs of operating under the U.S.-Flag. However, in an April 2015 report to Congress,2 MARAD cited only one vessel as having left the MSP because available preference cargo was not sufficient to justify continued commercial operations under the U.S.-flag. Moreover, MARAD said it anticipated that operators of other vessels would be willing to fill open MSP slots should they become available. (See Section 4.) If MSP vessels started dropping out of the program because of a lack of sufficient cargo preference volumes, the MSP subsidy could be increased. For example, this was a suggestion made in a comprehensive report comparing U.S. and foreign-flag vessel costs that was provided to MARAD in 2011. Of 74 vessels that carried food aid between fiscal years 2011-2013, 34 were participants in the Maritime Security Program. However, in aggregate the 34 ships carried only 18 percent of the total food aid, and most of the MSP ships carried only small amounts of the food aid relative to their carrying capacity. (See Section 5.) In its April 2015 report to the Congress, the Maritime Administration reported the results of a statistical analysis it conducted on the impact of reductions in cargo preference on the U.S.-Flag international trading fleet. It identified the decrease in available Government-impelled cargo as the most significant factor contributing to the loss of vessels between 1990 and 2013. Although it concluded overall cargo preference volumes are likely to decrease further over the next two to three years, returning to the levels of the later 1990s, its analysis indicated a net loss of three ships and approximately 120 mariners by 2023. The analysis did not make any assumptions about a further decline in food aid preference cargoes compared to the 2013 level. The study did not assess how future developments in the Jones Act oceangoing trade could affect the number of available vessels and mariners between now and 2023. (See Section 4.) Although food aid reforms might lead to a reduction in some of U.S.-flag oceangoing merchant vessels engaged in U.S. international trade, recent developments in the U.S. oil and gas sector and Jones Act oceangoing shipping could offset these losses. A 1 percent growth in the volume of the Jones Act coastal trade — which includes trade with Alaska, Hawaii, and Puerto Rico — would nearly equal the volume of U.S. food aid in FY 2014. (See Section 5.) Privately owned Jones Act oceangoing ships can be an important source of ships and U.S. mariners -- to assist the Navy’s mobilization efforts in the event of a military contingency and to contribute to the pool of mariners relied on to man the Surge Fleet. In March 2015, these Jones Act ships slightly outnumbered the number of U.S.-flag oceangoing vessels engaged in international trade and exceeded them in deadweight tonnage. Sixty-five of these Jones Act ships were judged militarily useful and 32 of them were participating in a program to help the Defense Department meet mobilization requirements. (See Section 5.) Cargo preference requirements for food aid have negatively affected U.S. food aid programs by (1) substantially increasing the cost of ocean transport, (2) significantly increasing

2 U.S. Department of Transportation, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the U.S. Merchant Marine (Washington, D.C.: April 21, 2015).


the time to get food aid to recipient countries, (3) reducing the amount of food that can be provided to people suffering from hunger and food insecurity, and (4) increasing costs to U.S. taxpayers. Over the past 20 years a number of Government Accountability Office (GAO) reports have identified inefficiencies associated with food aid cargo preference. A 2010 Cornell University study addressed a variety of similar concerns. (See Section 3.) Cargo preference substantially increases the cost of ocean transport because U.S.-flag ships cost much more than foreign-flag ships to operate. In 2012 ocean transport accounted for 17 percent of USAID’s Title II program costs. A 2011 study for the U.S. Maritime Administration found that the average cost of operating a U.S. registered ship was 2.7 times that of a foreign-flag equivalent vessel. The difference was largely accounted for by the requirement that U.S.-flag vessels hire U.S.-citizen crews, which resulted in higher personnel requirements, higher wages (owing to the higher standard of living in the United States), and higher benefits compared to foreign flag vessels. Other factors included higher maintenance, repair, and shipyard costs, and higher insurance and overhead costs. (See Section 3.) Between FY 2004 and FY 2013 USAID spent $3 billion on ocean freight shipping. Less than 40 cents of every USAID Food for Peace Title II dollar was spent on food. Between FY 2005 and FY 2010, about one-third of U.S. food aid tonnage was shipped on older, slower, and more costly U.S.-flag vessels. The average ocean freight differential cost for these ships was 157 percent higher than for the younger U.S.-flag vessels. (See Section 3.) The requirement that 50 percent (currently) to 75 percent (formerly) of U.S. food aid be shipped on more expensive U.S.-flag ships is inefficient and costly to U.S. taxpayers. We analyzed USAID and USDA data on the overseas freight differential (OFD) cost between U.S. and foreign flag vessels. According to the data we reviewed, U.S. taxpayers spent about $518 million on OFD costs between Fiscal Years 2005 and 2012. Based on USAID information, we estimated $518 million could have fed as many as 1.8 million more people in emergency situations each year or as many as 14.4 million over the 2005- 2012 period. (See Section 3.) The $518 million figure represents a lower bound estimate of the added cost of using U.S.-flag shipping during the FY 2005 – FY 2012 period -- to the extent that foreign-flag bids on U.S. food aid cargoes understated the prevailing foreign-flag rates in other comparable international trade. FY 2006 data indicate that 27 percent of all U.S.-flag shipments received no foreign-flag bids, representing 30 percent of total U.S.-flag coverage. (See Section 3.) When Congress amended the Cargo Preference Act in 1985, it required MARAD to reimburse the food agencies for the ocean freight differential cost incurred by complying with the additional 25 percent cargo preference requirement (i.e., from 50 percent to 75 percent) and to pay for “excess 20 percent OFD.” In any given year excess 20 percent OFD occurred when the ocean freight cost exceeded 20 percent of the value of the commodity costs plus ocean freight costs plus incremental OFD costs. Both the incremental OFD and 20 percent excess OFD were intended to reimburse the food assistance programs for a portion of the added costs of using U.S.-flag vessels. Between FY 2006 and FY 2011, MARAD reimbursed the food agencies $950 million. (See Section 3.) Although the food aid cargo preference requirement was reduced from 75 percent to 50 percent in July 2012, since December 2013 USAID and USDA are not being reimbursed for any of the added costs of using U.S.-Flag ships to carry at least 50 percent of their food aid. (See Section 3.)


Food aid cargo preference accounts for only a small percentage of total revenues for all U.S. government cargo preference shipping. In FY 2012 it accounted for only 8 percent of total revenue, while DOD accounted for 86 percent (see Figure 5.2 on p. 81). If food aid cargo preference were eliminated, U.S. food aid agencies would continue to procure substantial quantities of U.S.-produced food for their food. Many processed foods and large cereal procurements that are not available elsewhere in the world or are produced in insufficient amounts by developing countries near crises. In other cases, U.S. commodities might be the best option because of inflation or food price volatility. (See Section 5.) Recommendations The Defense Department, Congress, and the public need to know that sufficient mariners will be available to man the Surge Fleet when the need arises. Acquiring additional U.S.-flag vessels to increase the number of available mariners would involve substantial costs and seems premature unless more evidence of the need is provided to Congress and the public. Alternative options deserve consideration. Cargo preference food aid is not cost effective and adversely affects other U.S. objectives, including national security. Therefore, we make the following recommendations:

1. The Maritime Administration, in coordination with the Department of Defense, should provide a comprehensive report to Congress on the adequacy of data on the number of available mariners to man the Navy’s surge fleet, whether there are currently a sufficient number, and, if not, options for correcting the situation.

2. If the Maritime Administration recommends the government purchase or finance additional U.S.-flag vessels to ensure more mariners will be available to man the surge fleet and/or to increase the proportion of U.S. trade carried on U.S.-flag vessels, Congress should require the agency to provide a cost-benefit analysis to accompany its recommendation.

3. Congress should eliminate food aid cargo preference and the requirement that all the food aid be produced in the United States. Until food aid cargo preference is repealed, the Defense Department should fully reimburse USAID and USDA for the added cost of complying with the requirement.


Section 1

Research Objectives, Scope, and Methdology The objective of our research is to assess the impact of food aid reform, primarily on the US shipping industry, including mariners and ports, and to assess the economic impacts of food aid reforms on the agricultural economy and the overall US economy. We also analyzed the impact of the current ocean freight transportation system, including cargo preference, on US food aid programs. We conducted a comprehensive literature review of US food aid programs, laws, regulations and shipping practices, including economic analyses such as hearing records, reports, studies, and research completed by US Government agencies, the US shipping industry, the Center For Naval Analysis (CNA), universities, policy think tanks, consultants, the World Food Program (WFP) and other international organizations. The work of US Government agencies considered in our review includes that of the United States Agency for International Development (USAID), the United States Department of Agriculture (USDA), the United States Department of Transportation (USDOT), the Maritime Administration (MARAD), the Federal Maritime Commission (FMC), the United States Department of Defense (DOD) (including the Office of the Secretary of Defense and USTRANSCOM), the Government Accountability Office (GAO), the Congressional Budget Office (CBO), the Congressional Research Service (CRS), and Non-Governmental Organizations (NGO’s). We engaged numerous analytical and program management staff of the above agencies, organizations, and institutions in a series of interviews and discussions on a wide variety of food aid shipping related issues consistent with our review and reporting objectives. We gathered extensive statistical data on food aid shipping from USDA, USAID, and DOT/MARAD. Some of this data was provided on request. We solicited and received detailed food aid shipping related data through Freedom of Information Act requests from USDA and DOT/MARAD. We sorted and validated this data, performing a variety of targeted analyses. We examined the data for their reliability and appropriateness for our purposes through electronic testing of the data, verification of the data against other sources, and interviews with agency officials who manage the data. We checked, compared, and verified USAID, USDA, and MARAD food aid shipping data when appropriate and when possible. We obtained the majority of MARAD’s food aid shipping related data from its annual reports. Our data collection and analysis efforts were complicated by incomplete and redundant data that required extensive verification and clarification. We successfully managed these methodological challenges, and found the data sufficiently reliable and acceptable to complete our multiple analyses. To assess the impact of current ocean freight transportation and US cargo preference requirements on existing food aid programs, and to calculate the total cost to the US Government and taxpayer, we used USAID and USDA food aid shipping data comparing data for multiple years on total shipping costs, the ocean freight differential paid to US flag carriers, and the excess reimbursement cost. We also used this data and other market related data to assess the cost of cargo preference if increased to 75 percent. We used available but limited MARAD and DOD data on US vessels and mariners to assess the impact of food aid cargo preference cuts on the US shipping industry and mariners to augment


the US naval fleet in the event of a national emergency or conflict. Although data on available vessels is generally available and accurate, data on available mariners is not complete, accurate, reliable, and up to date. In an effort to assess the impact of food aid reform on food aid shipping, we configured data and assessed the impact in terms of decreasing food aid cargo preference requirements from 75 percent to 50 percent and increasing it from 50 percent to 75 percent. In this analysis, we also incorporated and assessed data on US and foreign-flag operating cost data from a 2011 MARAD contracted Price Water House Report comparing US and foreign flag operating costs. We also used this data and analysis to inform our assessment of more extensive cuts in cargo preference and its impact on the food aid shipping economy. We employed well-established economic analysis tools to make general conclusions on these issues. We assessed the use of economic multipliers used in past analyses to measure the economic benefits of US food aid cargo preference and found them to be seriously exaggerated and deficient. Our economic analysis essentially focused on assessing the magnitude of cuts to food aid shipping and the resilience of the existing markets in the shipping industry, agricultural economy, and general US economy to offset such cuts, which are relatively insignificant.


Section 2

US Merchant Marine’s Role in Commerce and Defense Summary It is the policy of the United States to have a strong merchant marine for both commercial and defense purposes. US policy stipulates that the merchant marine be sufficient to carry a substantial portion of our trade with the rest of the world, with vessels constructed in the United States, owned, operated and crewed by US citizens. The US Merchant Marine was a major world player before World War II and emerged dominant following the end of the war. However, its global role has been trending downward since the early 1950s. In general, the United States is no longer competitive in shipbuilding for the commercial oceangoing trade. Less than two percent of US foreign trade is transported on US flagships. That said, US waterborne foreign trade accounted for close to half (46 percent) of all US foreign trade between 2006 and 2011. And, all trade (sea, land, and air) plays an increasingly important role in the US economy – representing about 30 percent of gross domestic product in 2010-2012 compared to 17 – 20 percent for 1980-1984. Regarding the role of the merchant marine in defense, it is the policy of the United States to have a strong merchant marine capable of serving as a naval and military auxiliary in times of war or national emergency. The Department of Defense and the Department of Transportation’s Maritime Administration seek to accomplish this in three principal ways. First, they count on US civilian mariners to man a Surge Fleet of 60 government-owned, strategic sealift ships kept in standby status, ready to go on short notice. The Maritime Administration maintains this fleet. In the event of war or some other contingency event requiring swift sea delivery of military equipment and supplies, this fleet can assist the Navy’s fleet of surge vessels. Second, they rely on another fleet of 60 US-flag, privately-owned commercial ships to be made available if the need arises. These vessels, which are subsidized by the government, can be used to support a surge or sustainment sealift operation. Third, the Defense Department contracts directly with militarily useful US-flag, merchant vessels. As the world’s most capable military power, with forces well trained and designed for power projection and intervention on a global scale across the whole spectrum of operations3, the United States is better positioned than any other country to protect its trade with other nations as well as to promote safe sea lanes around the world. In the view of at least one senior global shipping executive, a flag state merchant fleet is no longer necessary to be classed as a maritime power.

“The US remains the world’s dominant maritime power despite having no US flag merchant marine of any significance… A maritime power must be a globally significant naval power supporting the ability to first consistently and reliably exploit an international trading system across the surface of the ocean in furtherance of national economic wellbeing, and second be a force in shaping the rule set and international institutions within which maritime trade is conducted. The US clearly meets that definition.”4

3 The International Institute for Strategic Studies, The Military Balance 2014 (London: 2014), p. 42. 4 Stephen Carmel, “With so few US-flagged ships and carriers, is America still a maritime power?” Information Dissemination, June 11, 2012. http://www.informationdissemination.net/2012/06/with-so-few-us-flagged-ships-and.html. Stephen Carmel is a Senior Vice


Current Laws, Policies, and Programs Promoting the Merchant Marine The Jones Act. The Jones Act (Merchant Marine Act of 1920) declares it necessary for the national defense and proper growth of its foreign and domestic commerce that the United States have a merchant marine of the best equipped and most suitable type of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency. These vessels should ultimately be owned and operated privately by citizens of the United States. US policy supports all efforts necessary to develop and encourage the maintenance of such a merchant marine.5 The Jones Act contains a number of provisions designed to encourage a robust US shipbuilding capacity and employment opportunities for US mariners. All waterborne shipping between points within the United States must be carried by vessels built in the United States, owned by US citizens, and manned with US citizen crews. The master, all of the officers, and at least three-quarters of the crew must be US citizens in order for a vessel to be flagged in the United States. The Jones Act essentially bars foreign built and operated vessels from engaging in US domestic commerce.6 The Merchant Marine Act of 1936 declares it is necessary for the national defense and the development of the domestic and foreign commerce of the United States to have a merchant marine: 7 Sufficient to carry its waterborne domestic commerce and a substantial portion of the

waterborne export and import foreign commerce of the United States;

Capable of serving as a naval and military auxiliary in time of war or national emergency; Owned and operated as vessels of the United States by citizens of the United States;

Composed of the best-equipped, safest, and most suitable types of vessels constructed

in the United States and managed with a trained and efficient citizen personnel; and Supplemented by efficient facilities for building and repairing vessels.

Domestic Shipbuilding Programs. The federal government seeks to support the viability of the domestic shipbuilding industry through a combination of laws and programs including:

1) Tariffs - Under the Smoot-Hawley Act of 1930, US vessel operators are liable for a 50 percent duty on maintenance and repairs performed on their vessels at overseas shipyards.

2) Title XI of the Merchant Marine Act of 1936 enables US vessel owners and operators to defer federal income taxes on their income by depositing the income in a Capital Construction Fund (CCF). Income deposited in a CCF may only be used to finance the construction, reconstruction, or acquisition of a vessel built or rebuilt in a US shipyard.

President of a US-based subsidiary of the Maersk Group, which owns Maersk Line, the world’s largest container shipping company, with a fleet of over 600 ships. 5 46 App. USC. 861 (2002). 6 Summary of Subject Matter, p 2. John F. Frittelli, The Jones Act: An Overview, Congressional Research Service Report RS21566 (Washington, D.C.: July 8, 2003), p. 2. 7 Title 46, Chapter 27, Subchapter I, Section 1101.


3) Title XI of the above Act also provides federal government loan guarantees to: a) vessel operators for the purpose of financing or refinancing the construction or reconstruction of vessels in US shipyards; or b) US shipyards for the purpose of financing advanced shipbuilding technology for a facility located in the United States. Loan guarantees cannot exceed 87.5 percent of the project’s actual cost.

4) Small Shipyard Grants - Under the National Defense Act for Fiscal Year 2009, US

owned and operated shipyards with fewer than 1,200 production employees are eligible to receive matching grants from MARAD to finance capital improvements and equipment purchases.8

Cargo Preference. Several laws establish cargo preference requirements:

1) The Military Cargo Preference Act of 1904 requires that 100 percent of cargoes “bought for the Army, Navy, Air Force, or Marine Corps” be carried on board US-flag vessels. Charges for such transportation are limited to “charges made for transporting like goods for private persons” and where the Government finds that such charges are “excessive or unreasonable” it may contract for such transportation as otherwise provided by law.9

2) Public Resolution 17, 48 Stat. 500 of 1936 requires that 100 percent of US Export-

Import Bank cargoes be carried on board US flagged vessels.10 3) The Cargo Preference Act of 1954 requires government agencies that generate shipping

of cargo to take such steps as may be necessary and practicable to ensure that at least 50 percent11 of the gross tonnage of cargoes (computed separately for dry bulk carriers, dry cargo liners, and tankers) is transported on privately-owned commercial vessels of the United States – to the extent those vessels are available at fair and reasonable rates.12

National Security Sealift Policy. On October 5, 1989, the President issued National Security Sealift Policy directive, which addresses sealift for defense of US interests: “We must be prepared to respond unilaterally to security threats in geographical areas not covered by alliance commitments. Sufficient US-owned sealift resources must be available to meet requirements for such unilateral response.” The policy requires the Department of Defense (DOD) to obtain US-owned sealift to support security threats in such operations as Desert Shield.13 Three US-owned sources exist for meeting DOD surge cargo requirements in times of war or national emergency: (1) Ships under the direct control of DOD; (2) the Ready Reserve Force fleet of ships, which is maintained by MARAD; and (3) commercial US-flag ships, which are chartered by MARAD after their need is identified. US-Flag Commercial Vessels. A US flag commercial vessel is a commercial vessel registered and operated under the laws of the US, owned and operated by US citizens, and used in the

8 Summary of Subject Matter, pp. 2-4. 9 Ibid. 10 Ibid., 4. 11 As discussed earlier, for agricultural cargoes (including food aid), the requirement was increased to 75 percent in 1985 and reduced to 50 percent in 2012. 12 Murray A. Bloom, “The Cargo Preference Act of 1954 and Related Legislation”, Journal of Maritime Law & Commerce, Vol. 39, No. 3, July 2008. 13 Department of Defense, Office of the Inspector General, DOD Sealift Operations, Audit Report Number 92-135 (Washington, D.C.: September 9, 1992), p. 5.


commercial trade of the US.14 US-flag vessels must use citizen crews. All licensed officers must be US citizens. Each unlicensed seaman must be a citizen of the United States or an alien admitted to the United States for permanent residence; and not more than 25 percent of the total number of unlicensed seaman may be aliens admitted to the United States for permanent residence.15 The US flag fleet includes the International or Foreign Trade Fleet and the Coastwise or Jones Act Fleet. Vessels in either fleet must fly the US flag, be US owned, and US crewed. Jones Act ships must be built in the United States, receive no subsidy, and can compete both in the domestic and international market. US foreign trade vessels can be built in the United States or overseas, can engage in foreign trading only, are eligible for participation in the Maritime Security Program, and are eligible for cargo preference cargoes.16 Waterborne Trade Plays an Important Role in the Nation’s Economic Well Being Foreign waterborne trade plays an important role in the US economy. As shown in Table 2.1, it averaged nearly 47 percent of total trade between 2006 and 2011. Table 2.2 shows the growing importance of total trade to the economy.

Table 2.1: US Foreign Trade by Transportation Mode, 2006-2011 in Billion $ Trade 2006 2007 2008 2009 2010 2011 Avg Total $2,880 $3,105 $3,391 $2,615 $3,191 $3,688 $3,145 Percent by Water 44.4% 45.0% 47.9% 44.4% 44.9% 46.9% 45.6% Overland 30.2% 29.8% 28.4% 28.7% 28.8% 28.2% 29.0% Air 25.4% 25.2% 23.8% 26.8% 26.2% 24.9% 25.4%

Source: US Census Bureau, Foreign Trade Division, https://usatrade.census.gov/ as reported in US Department of Transportation, 2011 US Water Transportation Statistical Snapshot.

Table 2.2: US Trade as a Percent of Gross Domestic Product: 1980-84 to 2010-2012

Years Annual Trade Range

as Percent of GDP 1980-84 17-20 1985-89 17-19 1990-94 20-21 1995-99 22-23 2000-04 22-25 2005-09 25-30 2010-12 28-31

Source: The World Bank, World Bank Open Data, Trade (% of GDP), 1980-84 to 2010-2014 (data.worldbank.org), November 19, 2014. 14 41 CFR 102-117.25. 15 46 CFR 8103. There are rare exceptions 16 ABSA, In Defense of the Jones Act, ASBA Annual Cargo Conference (Miami: September 26-28, 2012), pp. 4-5.


Loss of Competitiveness in Building Commercial Ships for the Oceangoing Trade The US Merchant Marine was a major world player before World War II and emerged dominant following the end of the war. However, in the space of a few decades the US flag merchant fleet was transformed from being the largest and most diverse in the world to a specialized fleet of modest size, aggressively engaged in the foreign liner trades and serving a variety of domestic bulk and line trades. Many of the US maritime business interests that were dominant in US flag merchant shipping in 1950 had become owners of large bulk fleets registered in Liberia and Panama. These fleets (known as “US controlled, foreign flag fleets”) were now carrying practically all of US petroleum imports and sizable proportions of US exports of coal, grain, and other key commodities.17 By the early 1980s, Japan and South Korea had become the largest commercial shipbuilding countries – having taken shipbuilding production systems that were introduced in the US during World War II, and combining these with modern assembly and manufacturing technologies and lower wages, thereby gaining a substantial productivity and competitive advantage in merchant marine ship construction. According to the Office of Technology Assessment, US maritime policies had not kept pace with changes in world trade or the maritime industry. If there were no policy changes, OTA said, most US maritime industry segments would probably continue to decline in size and significance.18 By the early-1990s, the situation had deteriorated further:

During the 1980s, under the Reagan administration, US shipbuilders carried out an extensive construction program to renew the US naval fleet. However, as this program flourished, US yards were becoming increasingly isolated from major developments in the world’s commercial industry. During that time, other shipbuilding nations, particularly South Korea, Germany, and Japan concentrated—often with the help of new forms of government assistance—on building ships in series, benefitting from economies of scale and learning efficiencies. Between 1974 and 1993, US shipbuilding for the commercial market declined precipitously. In the mid-1970s, a combined total of about 20 large oceangoing commercial ships were built every year in all private US yards; since 1984 that number has been 10 or fewer ships every year, and no vessels were on order at all between 1989 and 1991. Since 1985, Japan and Europe have supplied the dwindling number of commercial ships built for US owners. Finally, after 1990, with the end of the Cold War, US shipbuilders lost significant military work, as well as a large part of their work force.19

Both the Congress and the President wanted to find a way to support the reestablishment of a commercial shipbuilding industry, with the hope that the industry could serve both commercial and military markets to their mutual benefit. Through the National Defense Authorization Act of 1993, the Congress required the President to develop “a comprehensive plan to enable and ensure that domestic shipyards could compete effectively in the international shipbuilding market.” In October 1993, the Clinton administration issued a corresponding five-part plan. The nation’s goal was to assist the efforts of the country’s shipyards to make a successful transition

17 An Assessment of Maritime Technology and Trade (Washington, D.C.: US Congress, Office of Technology Assessment, OTA-O-220, October 1983), pp. 3-4. 18 Ibid. p. 4. 19 National Research Council, Shipbuilding Technology and Education (Washington, D.C.: National Academy of Sciences, 1996), p. 6.


from military to commercial shipbuilding—a competitive industry in a truly competitive marketplace.20 DOD commissioned the National Research Council’s Marine Board to assess how technology could help the United States to regain a place in world commercial shipbuilding markets. The Council found that US shipbuilders lagged behind in four major categories that it examined: 1) business process technologies; 2) engineering systems technologies; 3) shipyard production process technology; and 4) new materials and new product technologies.21 According to the Council, builders that had competed successfully in the construction of large, complex US navy vessels in the previous 15 years now found themselves shouldering excess personnel, needlessly complex procedures, and high overhead costs when compared to commercially competitive US and international shipbuilders. US wages were higher than most Asian shipbuilders, although they were lower than most European shipbuilders. Other factors, including the effect of environmental concerns on such activities as open-air-blasting and coating of structure and the additional safety requirements mandated from US workers posed by the OSHA, tend to increase the cost of ship construction in the United States compared with other nations that do not have such stringent requirements. Few of the US companies can compete successfully with overseas builders of commercial ships at this time, it concluded.22 The Council concluded that the US commercial shipbuilding industry was in crisis. It offered a set of recommendations aimed at providing valuable support in re-establishing the industry. However, the Council was pessimistic about the US ability to do so:

Judged by the difficulty that other industries have encountered, the magnitude of the task of regaining a significant share of international shipbuilding is enormous. No other substantial industry has achieved such a turn-around. Industries that have been severely damaged by international competition and recovered were still in their markets and took several years to learn new skills to become serious international players. This is true for the electronics, electrical equipment, automobile, and steel industries, for example. All of them had to invest and incurred large losses over several years to reestablish a position. This fact argues against the likelihood of success for US shipbuilders, at least from a banker’s perspective. For shipbuilders, it simply calibrates the difficulty of their task and helps to establish the level and quality of effort that will be needed for success.23

Nearly 20 years later the Council’s pessimism seems well founded. According to one source, the US industry for building commercial, oceangoing non-Jones Act ships has not recovered. The last tanker built for foreign trading in US shipyards was in 1981; the last bulk vessel was in 1982, and the last container ship and last roll on-roll off (Ro-Ro) ship built for foreign trading was in1983. Tankers, container ships, and Ro-Ro vessels continue to be built for the domestic trade, but only because the Jones Act requires domestic-trade ships be built in US shipyards.24 Jones Act ships are a protected market. Virtually all of the vessels in the government’s Maritime Security Program (this program is discussed later in this section) are built in foreign shipyards.25 Shrinking Role of US Flag Ships in International Trade 20 Ibid. p. 7. 21 Ibid. p. 2. 22 Ibid. p. 12. 23 Ibid., p. 97. 24 Tim Colton correspondence with authors and information on his website: shipbuildinghistory.com. 25 US Department of Transportation, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine (Washington, D.C.: April 21, 2015), p. 38.


Although the United States is no longer a player in the building of merchant ships for foreign trade, in principle a substantial portion of US oceangoing foreign trade could – as intended by US law – still be carried on US flag ships owned and crewed by US citizens. However, this is not the case. Figure 2.1 shows that the number of US flag, privately-owned, oceangoing ships peaked around 1950 and has been more or less steadily declining ever since. As of September 30, 2014, only 172 ships were left. Of these, about half were Jones Act ships. Although the number of ships declined, the gross tonnage of the fleet rose between the late 1950s and the early 1980s-- as larger ships were built and incorporated into the fleet. Since then, however, the gross tonnage of the US privately-owned, oceangoing fleet has also declined.

*Self-propelled, cargo carrying ships, over 1,000 GT Source: US Maritime Administration, National Maritime Strategy Symposium, Fleet Statistics and Trends (Slide Show), (Washington, D.C.: January 14-16). Adaptation of chart. Figure 2.2 shows that the US flag privately owned share of foreign waterborne trade declined dramatically between the end of the Second World War and the late 1950s – from more than 60

0

200

400

600

800

1000

1200

1400

0

2000

4000

6000

8000

10000

12000

14000

16000

Figure 2.1: US-Flag Privately-Owned Oceangoing Fleet,* 1946-2014

Gross Tonnage ('000) Number of Ships

GT (000) # of Ships


percent to 10 percent. After that, it continued to decline with some ups and downs. By 2003, the share was reduced to a mere 2 percent (see Figure 2.3.). More recently, the share has been estimated at 2 percent or less.26 Figure 2.4 contrasts the decline against the very large growth in US waterborne foreign trade since the early 1950s. US-flag shipping has primarily declined because US-flag ships cost much more to operate that foreign-flag vessels. See Section 3 for a discussion of this issue.

26 Stephen Carmel, “With so few US-flagged ships and carriers, is America still a maritime power?” Information Dissemination, June 11, 2012. http://www.informationdissemination.net/2012/06/with-so-few-us-flagged-ships-and.html. PWC, Study of the Impediments to US-Flag Registry (PricewaterhouseCoopers LLP: September 20, 2011), p. 15. Congressman Duncan Hunter, National Maritime Strategy Symposium Remarks -- Transcript (Washington, D.C.: January 14, 2014), p. 1.

Source: US Maritime Administration, National Maritime Strategy Symposium, Flag Fleet Statistics and Trends (Slide Show) (Washington, D.C.: January 14-16, 2014).

Figure 2.2: US-Flag Privately-Owned Fleet Share of Foreign Waterborne Trade, 1946-2003*

http://www.informationdissemination.net/2012/06/with-so-few-us-flagged-ships-and.html


Figure 2.3: US-Flag Privately-Owned Fleet Share of Foreign Waterborne Trade, 1961-2003*

Source: US Maritime Administration, National Maritime Strategy Symposium, Flag Fleet Statistics and Trends (Slide Show) (Washington, D.C.: January 14-16, 2014).


Defense Department Reliance on the US Merchant Marine to Serve as a Naval and Military Auxiliary in Times of War The US Navy’s Military Sealift Command (MSC) is the premier provider of ocean transportation and sealift to DOD. It operates approximately 110 non-combatant, civilian-crewed ships that replenish US Navy ships, conduct specialized missions, strategically preposition combat cargo at sea around the world, and move military cargo and supply ships used by deployed and allied partners. Afloat prepositioning strategically places military equipment and supplies aboard ships located in key ocean areas to ensure rapid availability during a major theater war, a humanitarian operation or other contingency. Prepositioning ships provide quick and efficient movement of military gear between operating areas and give US commanders the assurance that they will have what they need to quickly respond in a crisis – anywhere, anytime. More than 90 percent

Figure 2.4: US Waterborne Foreign Trade, 1946-2012 US Flag Share 1946-2003*

Source: US Maritime Administration, National Maritime Strategy Symposium, Flag Fleet Statistics and Trends (Slide Show) (Washington D.C.: January 14-16, 2014).


of US war fighters’ equipment and supplies travels by sea. During a contingency, troops are flown into a theater of operations to rapidly employ the cargo from these ships. Prepositioning ships include a combination of US government-owned ships, chartered US-flagged ships, and ships activated from the Maritime Administration’s Ready Reserve Force (RRF). All prepositioning ships are operated by US civilian mariners who work for ship operating companies under contract to the federal government. By DOD policy, MSC must first look to the US-flagged market to meet its sealift requirements. Government-owned ships are used only when suitable US-flagged commercial ships are unavailable. During wartime or other contingencies, the Navy charters dry cargo ships under contract to MSC to move cargo as needed. With a shrinking US merchant fleet, the importance of ready and available surge vessels increases each year. The Ready Reserve Force includes 46 ships owned and maintained by the Maritime Administration. It provides a resource to offset the shortage of militarily useful US-flagged ships. The RRF consists of fast sealift ships, roll-on/roll-off ships, lighter aboard ships, heavy lift ships, crane ships, and government-owned tankers. Maintained in four-, five-, 10-, or 20-day readiness status, these ships are activated when needed, fully crewed and placed under the operational control of MSC in support of US wartime, humanitarian and disaster-relief operations. RRF ships are also used for some military exercises. The RRF primarily supports transport of Army and Marine Corps unit equipment, combat support equipment, and initial resupply during the critical surge period before commercial ships can be marshaled. The RRF provides nearly one-half of the government-owned surge sealift MSC ships provide more than half of the government-owned surge sealift capability and MSC the rest. A memorandum of agreement between DOD and the Maritime Administration defines management of the program. As a result of significant problems that arose during mobilization for the Persian Gulf War of 1990-1991, the government created the Maritime Security Program (MSP) to be better prepared for future mobilization contingencies. MSP provides substantial subsidies to vessels that participate in the program. Two other agreements allow other vessels to participate but do not include direct subsidies. However, they get preference when bidding on DOD peacetime cargo preference shipments. According to MARAD, MSP vessels have been key contributors to our Nation’s efforts in Afghanistan and Iraq over the last decade. However, the Maritime Security Program has never been activated, not even during the Afghanistan War (2001-2014) or the Iraq War (2003-2012). Ready Reserve Force Fleet and Other Reduced Operating Status Ships Section 11 of the Merchant Ship Sales Act of 1946 established the National Defense Reserve Fleet (NDRF), a fleet of US government owned vessels available for national defense and national emergencies. The NDRF is managed by MARAD. As of early September 2014, NDRF had 103 ships. Twenty-one were judged no longer useful and set for disposal; 36 were being preserved for potential government use; and 46 were assigned to the Ready Reserve Force (RRF).27 The Ready Reserve Force (RRF) program was initiated in 1976 to support the rapid worldwide deployment of US military forces. 27 US Department of Transportation, Maritime Administration, The Maritime Administration’s Ready Reserve Force.


As a key element of Department of Defense (DOD) strategic sealift, the RRF primarily supports transport of Army and Marine Corps unit equipment, combat support equipment, and initial resupply during the critical surge period before commercial ships can be marshaled. The RRF vessels, normally in standby status, provide nearly one-half of the government-owned surge sealift capability. A Memorandum of Agreement (MOA) between DOD and the Department of Transportation (DOT) defines management of the RRF program.28 The Maritime Administration owns and maintains the vessels.29 As of October 2014, it was also operating another 16 vessels in standby status (14 Military Security Command surge vessels and 2 MARAD Special Mission vessels (Missile Defense Agency).30 The Ready Reserve Force is primarily used by the Navy’s Military Sealift Command (MSC) to support the transport of military equipment to the battlefield. RRF vessels are expected to be fully operational within 5 to 10 days and sail to designated loading berths. MARAD contracts with US owned vessel management companies to provide maintenance, repairs, logistics support, activation, manning, and operations for the vessels. In addition to regular activation by the MSC, RRF vessels were activated in support of relief operations in the wake of Hurricane Sandy in November 2012. The RRF Vessel M/V Cape Ray, which was activated in January 2014, served as an offshore facility to destroy Syrian chemical weapons.31 Commercial US ship managers provide systems maintenance, equipment repairs, logistics support, activation, manning, and operations management by contract. The RRF relies on skeleton crews of US merchant mariners to keep the ships in standby status. Ships in priority readiness have Reduced Operating Status (ROS) maintenance crews of about 10 commercial merchant mariners that are supplemented by additional mariners during activations to bring them to Full Operating Status. Readiness of the RRF is periodically tested by DOD directed activations of ships for military cargo operations and exercises.32 Programs to Secure US Flag Privately Owned Oceangoing Ships in DOD Sealift Sealift Readiness Program. During the Vietnam War the Secretary of Defense recognized a need for some type of sealift augmentation during less than a full national emergency. DOD established the Commercial Sealift Augmentation Program as a mechanism for providing commercially owned and operated emergency sealift resources to DOD when needed and according to prearranged procedures. Two years later the program was retitled as the Sealift Readiness Program. It operated through the Military Sealift Command’s annual procurement of ocean transportation for the supply of US peacetime military forces overseas. In order to bid on ocean transportation services a carrier had to commit 50 percent of its US flag fleet to the program – one half of its commitment within 30 days of notice and the remainder within 60 days. A call-up under the program would need to be jointly authorized by the Secretaries of Defense and Commerce, if Presidential requisitioning was not indicated.33

28 Ibid. 29 http://www.msc.navy.mil/pm3/ 30 US Department of Transportation, Maritime Administration, NDTA Military Sealift Committee Meeting (Slide Presentation) (Washington, D.C.: October 28, 2014), p. 3. 31 Statement of Paul N. Jaenichen before the House Committee on Transportation and Infrastructure Subcommittee on Coast Guard and Maritime Transportation, The Maritime Administration’s Fiscal Year 2015 Budget Request, March 26, 2014. 32 Ibid. 33 National Research Council, The Sealift Readiness Program (Washington, D.C.: June 1975), pp. 1, 5-6. Lawrence Schwartz, Alfred Beyer, Frederick McNamee, and Click Smith, Review of DoD’s Strategic Mobility Programs (Bethesda, Maryland: Logistics Management Institute, January 1992), pp. iii, 6.


Sealift Problems During the Persian Gulf War. The Ready Reserve Force and US-flag privately owned ships were relied on during the Persian Gulf War of 1990-199134, which resulted following Iraq’s invasion and annexation of Kuwait on August 2, 1990. During Operation Desert Shield (2 August 1990 – 17 January 1991), the United States and a coalition of other countries, conducted operations leading to the buildup of troops and defense of Saudi Arabia. During Operation Desert Storm (17 January 1991 – 28 February 1991), war was waged against Iraq.35 According to MARAD, the RRF made a major contribution to the success of Desert Shield/Desert Storm Operations from 1990 through 1992, when 79 vessels were activated to meet military sealift requirements by carrying 25 percent of the unit equipment and 45 percent of the ammunition needed.36 However, the DOD Inspector General (IG) determined significant problems arose with both the RRF and commercial US-flag ships -- especially during the initial phase of the operations. The IG found that sufficient US-owned sealift could not be mobilized to unilaterally meet the initial surge requirements. This occurred because US commercial and RRF ships were not readily available and because US-owned sealift did not include enough militarily suitable ships.37 More specifically, the IG said: When DOD determined its controlled sealift was not sufficient to meet the surge

requirements of Desert Shield, DOD quickly requested commercial US flag dry cargo ships and DOD’s RRF ships to augment DOD controlled sealift.38

The RRF proved to be in the poorest condition of the US-owned sources of sealift used. For example, 29 of the 46 ships requested during the first 32 days of Desert Shield could not be activated on time primarily because of the poor mechanical condition of the RRF ships. There were also some problems with obtaining and retaining crews with appropriate mechanical experience.39

Of 61 RFF ships requested, only 13 were delivered in prescribed time frames. The

remaining 48 ships were from 1 to 126 days late, with 14 days being the average. The primary causes of the RFF mobilization difficulties were inadequate funding for ship maintenance, repair, and test activations; the inaccurate readiness reporting of the RFF to DOD; and the limited use of US shipyards to break out the RFF.40

Eighty-seven US-flag dry cargo commercial ships were members of the Sealift

Readiness Program when the war occurred. However, the program was never activated.41 (According to the Center for Naval Analysis activation would have disrupted the commercial activities of US shipping companies, leading perhaps to permanent loss of business on some routes.42)

The location of US commercial ships at the start of Desert Shield was a problem. Due to

the nature of commercial business, these ships were scattered around the world at the

34 http://www.dot.gov/search/Ready+Reserve+Force/ 35 Wikipedia, Gulf War, p. 1. http://en.wikipedia.org/wiki/Gulf_War 36 http://www.marad.dot.gov/ships-and-shipping/strategic-sealift/maritime-security-program-msp/ 37 DOD Inspector General, Audit Report Number 92-135: DOD Sealift Operations, September 9, 1992, pp. 1, 5. 38 DOD Inspector General, p 7. 39 Ibid., pp. 5, 8. Funding shortfalls precluded the Department of Transportation from adequately maintaining RRF ships to meet activation time frames. Furthermore, DOT inaccurately reported the readiness status of the RRF to DOD because DOD and DOT had not developed clear criteria to justify the reported readiness status of RRF ships. 40 DOD Inspector General, p 8. 41 Ibid. p 48. 42 CNA, A First Look at Sealift Options for the 1990s in Light of the Experience in Operation Desert Shield, (Alexandria, Virginia: January 1991), p. 3.


beginning of Desert Shield. Therefore, all could not respond initially to surge cargo movement requirements.43

DOD was especially interested in acquiring Ro-Ro ships, which were the most militarily

suitable ships for surge cargo.44 However, DOD could not find a sufficient number of Ro-Ro ships in the US owned ships.

Of the 140 dry cargo ships in the US commercial flag inventory at that time, 17 (12

percent) were Ro-Ro ships and 27 (19 percent) were breakbulk ships. The remaining 96 ships, mostly container ships, were ill suited for the movement of surge cargoes.45

Of the 253 dry cargo ships acquired during Desert Shield, 94 (37 percent) were Ro-Ro

ships. Of the 94 Ro-Ro ships acquired, only 51 came from US-owned sources (25 from DOD, 17 from DOT, and 9 from commercial US flag. The remaining 43 Ro-Ro ships were foreign-flag ships.46

As a result of the above-cited problems, DOD contracted for 137 foreign flag ships, of

which 105 delivered cargo. Of 105 foreign flag ships used to support surge cargo requirements, 34 were Ro-Ro and 71 were breakbulk.47 (In general, before chartering foreign-flag ships, US flag ships should be allowed to provide sealift services. In the event commercial US flag is not available, foreign flag shipping may be obtained.48)

US shipyard capability was ineffectively used to activate RRF ships during Desert

Shield. As a result, DOD lost the ability to mobilize about 1.9 million square feet of RRF sealift capacity and relied on foreign ships to deliver about 6.8 million square feet of cargo at a cost of about $91 million.49 In total, the foreign flag vessels delivered about 29 percent of the surge cargo.50

Notwithstanding the above problems, the Inspector General said the sealift operations effectively met the needs of Desert Shield.51 However, the IG said the inability to mobilize sufficient US-owned sealift to meet initial surge requirements increased the risk that the US government would not be able to unilaterally respond to future contingencies as required by its National Security Sealift Policy.52 In January 1992 the Logistics Management Institute issued a report that evaluated DOD’s commercial sealift support and the Sealift Readiness Program. It concluded that DOD needed to revitalize its SRP to meet the lift requirements of future emergencies and that the method the Military Sealift Command used to procure commercial sealift services -- direct competitive

43 DOD Inspector General, p 8. 44 Ro-Ro ships can usually load more cargo, and with the use of ramps, can load cargo much more quickly than breakbulk ships. In addition, DOD-controlled Ro-Ro ships can usually deliver surge cargo faster than other ships because they maintain higher operating speeds. 45 DOD Inspector General, p 7. 46 DOD Inspector General, p 7. 47 DOD Inspector General, p 8. 48 DOD Inspector General, p 49. 49 DOD Inspector General, p. 5. 50 Analysis of data in DOD Inspector General Report. 51 DOD Inspector General, p. i. 52 DOD Inspector General, p 5.


bidding--precluded effective military/industry contingency planning, a key ingredient for a sound sealift augmentation program.53 Maritime Security Program The Maritime Security Act of 1996 established the Maritime Security Program (MSP), which replaced the Sealift Readiness Program. The Secretary of Transportation, in consultation with the Secretary of Defense, established a fleet of active, commercially viable, militarily useful, privately owned vessels that operate in the foreign commerce of the United States. Congress authorized the current MSP fleet on the basis that it provide a solution to current and projected sealift requirements for the US. MSP provides direct financial assistance to the operators of US owned, flagged, and crewed merchant vessels to make their vessels available to support military sealift during times of war or national emergency. Currently, 13 vessel operators operating 60 vessels receive $3.1 million per vessel per year.54 Participating operators are required to make their ships and commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency. The fleet is supposed to provide a total global intermodal transportation network, including not only vessels, but logistic management services, infrastructure, terminals, facilities and US citizen mariners to crew the government owned/controlled and commercial fleets.55 MSP is designed to help retain a labor base of skilled American mariners who are available to crew the US Government-owned strategic sealift, as well as the US commercial fleet, both in peace and war. MSP ship crews are considered a major source for the DOD surge fleet. According to MARAD, the MSP contributes approximately 2,700 mariner positions to the US deep water seafarer base.56 The program was originally comprised of 47 ships and designed to run for 10 years. It was reauthorized in 2003 to run through FY 2015 and expanded to 60 ships. 57 In 2011, it was re-authorized to extend to 2025.58 All MSP dry cargo ships are enrolled in the Voluntary Intermodal Sealift Agreement59; however, not all VISA members participate in the MSP.60 VISA seeks to create a partnership between the US government and the maritime industry. Carriers agree to provide commercial sealift and intermodal shipping services and systems necessary to meet mobilization requirements. Carriers are brought into the DOD planning process with DOD and the Maritime Administration. The agreement aims to enable carriers to better meet defense transportation needs while maintaining ongoing commercial arrangements during contingencies. VISA participants get priority preference when bidding on DOD peacetime cargo.61 The VISA program can be activated in three stages, with each stage representing a higher level of capacity commitment. In Stage III participants must commit at least 50 percent of their capacity. Dry cargo MSP participants must commit 100 percent during the third stage. The VISA program is open to US-flag vessel operators of oceangoing militarily useful vessels. Enrollment is conducted annually during an open season window.62 53 Lawrence Schwartz, Alfred Beyer, Frederick McNamee, and Click Smith, Review of DoD’s Strategic Mobility Programs (Bethesda, Maryland: Logistics Management Institute, January 1992), pp. iii-iv.. 54 Summary of Subject Matter, p. 5. 55 http://www.marad.dot.gov/ships-and-shipping/strategic-sealift/maritime-security-program-msp/ 56 Ibid. 57 Ibid. 58 Ibid. 59 Ibid. 60 Ibid. 61 Ibid. 62 Ibid.


All MSP tankers are enrolled in the Voluntary Tanker Agreement (VTA). The VTA is an agreement established by Maritime Administration (MARAD) to provide for US commercial tanker owners and operators to voluntarily make their vessels available to satisfy DOD needs. It is designed to meet contingency or war requirements for point-to-point petroleum, oil, and lubricants movements, and not to deal with capacity shortages in resupply operations.63 According to MARAD, MSP vessels were key contributors to America’s efforts in Afghanistan and Iraq over the last decade, moving over 50 percent of all military cargo – over 26 million tons – to the Middle East. Since 2009, MSP carriers have moved over 90 percent of the ocean-borne cargo needed to support US military operations and rebuilding programs in both countries.64 However, the Maritime Security Program and VISA have never been activated, not even during the Afghanistan War (2001-2014) or the Iraq War (2003-2012). Additional Analysis Section 4 analyzes MARAD and DOD concerns about the declining number of US flag oceangoing merchant ships and whether there are or will be sufficient US mariners to help man the Defense Department’s surge fleet in the event of war. Section 5 analyzes the impact of proposed food aid reforms on the number of US flag ships and available mariners.

63 MARAD, Voluntary Tanker Agreement brochure. 64 Of even greater significance, according to MARAD’s administrator, MSP carriers led development of multi-modal services into Afghanistan via the Northern Distribution Network and establishing air-sea intermodal bridging to provide critical alternative routes to resupply and support our US military forces. Statement of Paul N. Jaenichen before the House Committee on Transportation and Infrastructure Subcommittee on Coast Guard and Maritime Transportation, The Maritime Administration’s Fiscal Year 2015 Budget Request, March 26, 2014.


Section 3 Impact of Ocean Freight Transportation and Cargo Preference on Food Aid Programs

Summary Ocean freight transportation of food aid and food aid cargo preference requirements substantially increase program costs.65 Between FY 2004 and FY 2013 USAID spent $3 billion on ocean freight shipping. Less than forty cents of every USAID dollar spent on Food for Peace Title II food aid during that period went for food. Requiring cargo preference for food aid substantially reduces competition and thus increases the cost of ocean freight -- meaning fewer program resources are available to feed hungry people. US-flag vessels cost about three times as much as foreign-flag vessels to operate, contributing to the higher cost of US-flag vessels and ocean freight. The Cargo Preference Act of 1954 requires government agencies to contract with US-flag vessels as long as those vessels are “available at fair and reasonable rates for United States-flag commercial vessels.” But, US-flag vessels, including old US-flag ships, which cost more to operate, can bid substantially higher rates than those offered by more modern foreign-flags and still prevail as long as MARAD judges their higher operating costs as fair and reasonable. On average, the ocean freight differential (OFD) between the price bid by US-flag vessels and the foreign-flag vessels on food aid preference cargoes was about $32 per metric ton between FY 2005 and FY 2012. About one-third of US food aid tonnage shipped on US-flag vessels between FY 2005 and FY 2010 was on ships older than 25 years (Class B ships). The average OFD for the Class B vessels was 157 percent higher than younger vessels, and Class B vessels accounted for 43 percent of the total OFD for the period. Based on OFD data we estimate the minimum added cost to US taxpayers of the government’s using US-flag ships to transport food aid between FY 2005 and FY 2012 at $518 million. We estimated this amount could have provided food aid to an additional 14.4 million people in emergency situations. The $518 million understates the actual cost to taxpayers because of limitations inherent in the OFD data and its calculation. It also excludes the impact reflected in the 20 percent excess freight adjustments that MARAD reimbursed to the US food agencies between 1986 and 2013 that were intended to offset some of the additional excess costs associated with US food aid cargo preference shipments. Ocean Freight Transportation of Food Aid Increases Costs Substantial resources are required to transport food aid to those who need it in other countries. US “in-kind” food aid donations are particularly expensive. Figure 3.1 provides a breakdown of USAID Food for Peace costs for its Title II Programs for Fiscal Years 2004-2013. On average, only 39 cents of every dollar was spent on procuring food. Seventeen cents was spent on ocean freight (both US- and foreign-flag) to move the food from the United States to a destination port

65 In addition to the analysis provided in this section, a number of previous studies have reported on adverse impacts of ocean freight and cargo preference costs on food aid programs. For example, see the following. Management Systems International, USDA Local and Regional Food Aid Procurement Pilot Project (Washington, D.C.: December 2012). GAO, International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of US Commodities Is Inefficient and Can Cause Adverse Market Impacts, GAO-11-636 (Washington, D.C.: June 23, 2011. GAO, International Food Assistance: Local and Regional Procurement Can Enhance the Efficiency of US Food Aid, but Challenges May Constrain Its Implementation, GAO-09-570 (Washington, D.C.: May 29, 2011. Elizabeth R. Bageant, Christopher B. Barrett and Erin C. Lentz, “Food Aid and Agricultural Cargo Preference,” Applied Economic Perspectives and Policy, Vol. 2, No. 4, (2010), pp. 624-641. GAO, Cargo Preference Requirements Objectives Not Significantly Advanced When Used in Food Aid Programs, GAO/GGD-94-215 (Washington, D.C.: September 1994).


at or near the recipient country. For land-locked countries, 7 cents of every dollar was spent on transporting the food from the destination port to the border of the recipient country. Twenty-five cents was spent on transportation, storage, and handling costs within recipient countries. About 12 cents of every dollar was spent on administrative costs (Section 202e and other associated costs). USAID’s total expenditure under this program over the ten-year period was $18.3 billion. Of this, $3 billion was spent on ocean freight transportation. Figure 3.1: Cost Breakdown for USAID’s Food for Peace Title II Programs, FY 2004-2013

Note 1: ITSH = Internal storage, transportation, and handling costs. Note 2: Total percentages based on actual costs for FY 2003-2012. Source: USAID. Cargo Preference Food Aid Requirement Lowered to 50 Percent In July 2012 the Moving Ahead for Progress in the 21st Century (MAP-21) transportation legislation (Public Law 112-141) amended US food aid cargo preference law by reducing the requirement that 75 percent of all food aid tonnage be shipped on US-flag ships to the 50-percent requirement that prevailed from 1954 to 1985. Table 3.1 shows the share of US food aid that was carried by US- and foreign-flag ships between 2005 and 2013. In nearly every year the amount carried by US-flag ships exceeded the threshold requirement. It averaged 79 percent from 2005 through 2012. In FY 2013 – the first full year at the restored 50-percent requirement, US-flag ships carried 56 percent of the tonnage.

Other Associated Costs

4%

Commodities 39%

Ocean Freight

17% Inland Freight

7%

ITSH 25%

Section 202e 8%

Costs


Table 3.1: Percent of Food Aid Tonnage Shipped on US- and Foreign Flag Vessels, FY 2005-13

Year US-Flag Ships Foreign-Flag

Ships 2005 71% 29% 2006 77% 23% 2007 83% 17% 2008 79% 21% 2009 86% 14% 2010 81% 19% 2011 80% 20% 2012 78% 22% 2013 56% 44%

Notes:

1) Numbers rounded to the nearest whole number. 2) Percentages based on ocean freight cargoes. Cargoes destined for prepositioning in the

United States did not require ocean freight. Also, in some cases, the data included cargoes that had not yet been assigned for ocean freight delivery.

3) During 2011, 2012, and 2013 a small amount of tonnage was transported on both a US and a foreign-flag ship. These equaled 0.4%, 0.1%, and 0.3% respectively.

Source: Analysis of USDA shipping data for FFPA Title II, BEHT, Section 416, Food for Progress, and Food for Education programs. US-Flag Vessels Cost More Requiring US food aid to be shipped on US flag vessels adds extra costs to the aid programs, since US-flag vessels cost more than foreign-flag ships. The conditions of US-flag registry, with the attendant US-citizen crewing requirement, push up the costs of all categories of US registered ships that are used. A 2011 US Maritime Administration study, for example, found that the average daily cost of operating US-flag vessels in international trade in 2010 was roughly 2.7 times than that of foreign-flag vessels ($20,053 versus $7,454). Higher crew costs accounted for nearly 88 percent of the cost difference (see Figure 3.2). US-flag vessels are required to hire US-citizen crews, while carriers operating under a foreign-flag can hire cheaper crews with the necessary skills. Vessel operators surveyed for the study noted that the standard of living in the United States and the social benefits provided to mariners contributed to US-flag wages being significantly higher than foreign-flag wages. Some US-flag carriers reported that payroll taxes for US crews also contributed to their costs; others noted that in some countries, mariners do not have to pay income tax. Carriers also highlighted work rules and manning requirements – such as restrictions on the number of hours a mariner can work and the type of work he or she can perform.66 Part of the cost differential reflects the market power that the cargo preference act conveys – allowing maritime unions to bid up wages and vessel operators to pass along these and higher overhead and other costs in the freight rates charged to US government agencies that ship by ocean. 66US Department of Transportation, Maritime Administration, Comparison of US and Foreign-Flag Operating Costs, Washington, D.C., September 2011, pp. 3-5.


Figure 3.2: Comparison of US-Flag to Foreign-Flag Ship Daily Operating Costs, 2010

Source: Adaptation of data reported in: US Department of Transportation, Maritime Administration, Comparison of US and Foreign-Flag Operating Costs, Washington, D.C., September 2011, p. 13. Fair and Reasonable Rates Provision Allows Old US-Flag Ships to Win Bids An important factor that increases the cost of using US flag vessels to transport US food aid is related to the way that the “fair and reasonable rates” provision of the Cargo Preference Act of 1954 is calculated. This provision requires government agencies to contract with US-flag vessels as long as those vessels are “available at fair and reasonable rates for United States-flag commercial vessels.” MARAD uses a fair and reasonable calculation based on the carrier’s reporting of capital and operating costs with MARAD’s estimate of a reasonable addition for overhead. According to one source, the Maritime Administration’s regulations for determining fair and reasonable costs, are supposed to rein in high cost carriers by basing the cost structure for certain items of expense on an average, not an individual, cost basis.67 However, the data that are provided by carriers to calculate these costs are not independently audited. Moreover, MARAD does not report when it determines that freight rates are unfair or unreasonable. Such

67 Murray Bloom, “The Cargo Preference Act of 1954 and Related Legislation”, Journal of Maritime Law & Commerce, Vol. 39, No. 3, July 2008, p. 298.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Wages Stores & Lubes Maintain &Repair

Insurance Overhead

$

U.S.-Flag

Foreign Flag


determinations appear to be rare, suggesting that this approach does not constitute a significant constraint on the freight rates paid by US food aid agencies. Old US-Flag Ships Have Carried a Substantial Portion of US Food Aid, Further Increasing Costs Older US-flag ships bidding on food aid shipments can charge a higher rate than that offered by more modern and efficient foreign flag vessel bidders68 and still prevail as long as MARAD judges that their higher costs are considered fair and reasonable. Age matters because older vessels typically cost more to operate and maintain. Tables 3.2 through 3.4 provide information on the role of Class A and Class B ships in the transporting of US food aid. Class A ships are age 25 years or less. Class B vessels are ships over 25 years in age. Table 3.2 shows that between 2005 and 2010 Class B vessels transported on average 33 percent of the food aid tonnage. According to other USDA data that we analyzed, at least 42 percent of the US flag food aid tonnage was transported on Class B vessels during the FY 2011 through FY 2013 period.69

Table 3.2: Comparison of US Flag Class A and Class B Ships on Food Aid Tonnage Carried

Fiscal Year

Metric Tons (000) Class B as a Percent of

Total Class A Class B Total 2005 1,687 627 2,314 27% 2006 1,944 686 2,630 26% 2007 1,338 784 2,122 37% 2008 1,126 924 2,050 45% 2009 1,708 733 2,441 30% 2010 1,489 776 2,265 34% Total 9,292 4,530 13,822 33%

Source: Analysis of USDA bill of ladings data for FFPA Title II, BEHT, Section 416, Food for Progress, and Food for Education Program Table 3.3 provides figures on the average ocean freight differential (OFD) per metric ton of food aid shipped between FY 2005 and 2010. OFD is the difference between what it costs to ship cargoes on US flag vessels compared to what foreign flag vessels bid on the cargoes which is often higher than prevailing foreign-flag vessel rates in other international trade. In effect, the calculated OFD is probably a lower-bound estimate of the indirect subsidy paid by the US government to US-flag ship owners to sustain a US-flag presence in international ocean trade. For the 2005 – 2010 period, the average OFD per ton for Class B vessels was 157 percent higher than that for Class A vessels. To the extent that the foreign rates used in the OFD

68 The higher freight rates that are possible under the US-flag, allow older vessels to keep operating, particularly for civilian and food aid cargoes. See: US Department of Transportation, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine, A Report to Congress (Washington, D.C.: April 21, 2015), p. 38. 69 According to a recent MARAD report, the average age of US-Flag international trade vessels in 2014 was 14.3 years. See: US Department of Transportation, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine, p. 39.


calculation are higher than prevailing foreign-flag freight rates in unconstrained international trade, this calculation underestimates the indirect subsidy to US-flag owners.70

Table 3.3: Ocean Freight Differential Per Ton for Class A and Class B Vessels

Fiscal Year

OFD Per Metric Ton1 Class B as % of Class A

Class A Ships

Class B Ships

Combined

2005 $32.25 $49.26 $36.86 153 % 2006 $46.87 $71.26 $53.23 152 % 2007 $16.20 $42.03 $25.74 259% 2008 $11.33 $23.56 $16.85 208% 2009 $17.21 $29.78 $20.98 173% 2010 $ 8.18 $16.57 $11.05 203% Avg1 $23.85 $37.34 $28.27 157%

1Weighted. Source: Analysis of USDA bill of ladings data for FFPA Title II, BEHT, Section 416, Food for Progress, and Food for Education programs. Table 3.4 shows that between FY 2005 and FY 2010 the cumulative OFD for Class B vessels shipping US food aid ranged from 35 percent to 63 percent of total US flag OFD costs. The average share across the entire period was about 43 percent.

Table 3.4: Impact of Class B Vessels on Ocean Freight Differential Costs

Fiscal Year

OFD Cost Class B as % of OFD Total Class A Class B Total

2005 $54,421,715 $30,889,175 $85,310,890 36.2% 2006 $91,106,449 $48,868,458 $139,974,907 34.9% 2007 $21,677,960 $32,932,257 $54,610,217 60.3% 2008 $12,751,039 $21,783,959 $34,534,998 63.1% 2009 $29,385,940 $21,823,711 $51,209,651 42.6% 2010 $12,183,580 $12,852,232 $25,035,812 51.3% Total $221,526,682 $169,149,792 $390,676,474 NA

Avg1 43.3%

1Weighted. Source: Analysis of USDA bill of ladings data for FFPA Title II, BEHT, Section 416, Food for Progress, and Food for Education programs.

70 See, for example, GAO, Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of US Food Aid, GAO-07-560 (Washington, D.C.: April 13, 2007), pp. 29-31.


Conservatively, Food Aid Cargo Preference Cost US Taxpayers more than $518 Million from FY 2005 through FY 2012 Table 3.5 provides annual OFD costs for US food aid shipments from FY 2005 through FY 2012. As shown, 2006 was the high watermark at $140 million; and, 2010 was the lowest at $25 million. The average annual cost was about $65 million. For the entire eight years the cargo preference requirement cost US taxpayers a minimum of $518 million more than it would have cost if the food had been shipped on the lowest cost available vessels. This number understates the actual cost to taxpayers because OFD is based on actual foreign flag bids. Because carriers incur expenses to make bids and foreign-flag carriers can win fewer bids the higher the cargo preference requirement, foreign carriers often did not even bid on shipments. In addition, shipments without a foreign-flag bid were omitted from MARAD’s OFD calculations. FY 2006 data indicate that 27 percent of all US-flag shipments received no foreign-flag bids on the freight tenders, representing 30 percent of total US-flag coverage.71 Our total OFD number may also underestimate the actual cost because our analysis did not have sufficient data to allow us to control for shipping routes, the shipping time and term, and the type of commodities shipped.72

Table 3.5: The Minimum Added Cost of Using US-Flag Ships to Transport US Food Aid, Fiscal Years 2005-2012

Fiscal Year

Metric Tons Shipped

(thousands)

OFD Costs ($ million)

OFD Cost / Metric Ton

($)

2005 2.314 $85.3 $36.86 2006 2.630 $140.0 $53.23 2007 2.121 $54.6 $25.74 2008 2,050 $34.5 $16.85 2009 2.441 $51.2 $20.98 2010 2,265 $25.0 $11.05 2011 1,397 $54.8 $39.22 2012 1.266 $73.1 $57.72 Total 16.485 $518.6 NA Average 2.061 $64.8 $31.46

Source: Analysis of USAID and USDA data. Data for 2005 to 2010 based on analysis of USDA bill of ladings data for FFPA Title II, BEHT, Section 416, Food for Progress, and Food for Education programs. Data for 2011 and 2012 are from other USDA and USAID sources. Applying the frequently-cited Food for Peace Title II average cost of $37 per beneficiary, we calculated the $518.6 million minimum additional cost to US taxpayers for the USAID and USDA food aid programs) is equivalent to what it would have cost, on average, to provide food aid to an additional 14.4 million people. 71 See: Elizabeth R. Bageant, Christopher B. Barrett, and Erin C. Lentz, “Food Aid and Agricultural Cargo Preference,” Policy Brief (Cornell University: November 2010), pp. 11-12. 72 A 2011 GAO report on food aid monetization analyzed the freight differences between US- and foreign-flag carriers, using the ocean freight rates that US agencies paid prior to cargo freight differential reimbursement for Fiscal Years 2008 – 2010. GAO estimated the freight rate on foreign-flag carriers cost on average $25 per ton less than the freight rate on US-flag carriers, controlling for shipping routes, the shipping time and term, and the type of commodities shipped. As shown in Table 3.5, our analysis reports a lower average cost per metric ton difference for each of those years. See: GAO, International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of US Commodities Is Inefficient and Can Cause Adverse Market Impacts, GAO-11-636 (Washington, D.C.: June 23, 2011), pp. 23-27.


Total official ocean freight differential cost data are not available for 2013 or subsequent years. According to a USAID official, the agency stopped keeping figures on foreign flag bids when the cargo preference requirement was reduced to 50 percent, since USAID was no longer going to be reimbursed for OFD.73 OFD Accounts For 20 Percent of US-Flag Food Aid Ocean Freight Costs Table 3.6 shows that during the fiscal years 2005 -2012, cargo preference ocean freight differential costs (a minimum measure of the increased cost of ocean freight for food aid cargo preference cargoes) accounted on average for about 20 percent of US-flag ships’ total ocean freight costs.

Table 3.6: Relationship between US-Flag Ocean Freight Differential Costs and US-Flag Ocean Freight Shipping Costs, FY 2005 – FY 2012

Year

Metric Tons Shipped

(thousands)

Ocean Freight Costs

(millions)

OFD Costs (millions)

OFD Cost as % of Ocean

Freight Cost 2005 2,314 319.5 85.3 26.7% 2006 2,630 380.6 140.0 36.8% 2007 2,121 279.7 54.6 19.5% 2008 2,050 373.7 34.5 9.2% 2009 2,441 364.5 51.2 14.0% 2010 2,265 311.3 25.0 8.0% Sub-total 13,821 $2,029 $390.7 19.3% 2011 1,397 240.0 54.8 22.8% 2012 1,266 245.9 73.1 29.7% Total 2005-12 16,485 $2,515 $518.6 NA Avg 2005-12 2,060 $314.4 $64.8 20.6%

Source: Analysis of USAID and USDA data. Data for FYs 2005-2010 are from a USDA bill of ladings database. For FYs 2011 and 2012 data are from another USDA database and other USAID data. Added Cost If the 75 Percent Cargo Preference Requirement Were Restored In 2014 there was an effort by some members of Congress to restore the 75 percent food aid cargo preference level that was reduced to 50 percent in 2012, by inserting language in an otherwise unrelated piece of legislation reauthorizing the US Coast Guard. CBO and USAID have provided estimates of the savings to the government of reducing cargo preference from 75 percent to 50 percent and/or raising it back to 75 percent. However, the agencies were not fully transparent about how they made their estimates. CBO estimates made at two different times seem to provide contradictory results, described in greater detail below. Comparing US- and foreign-flag tonnage and average cost per metric ton data for a few years before and after the

73 However, USDA continued to collect this information. According to data USDA provided, we calculated USDA’s OFD for fiscal year 2013 at $15.4 million. The data for fiscal year 2014 were incomplete when we received it (covering from October 1, 2013 through July 23, 2014), and totaled $14.2 million.


July 2012 change in the cargo preference requirement are interesting but do not provide a definitive basis for estimating the added cost. The average OFD per metric ton for the FY 2005 – FY 2012 period can be used to provide a lower bound estimate of the added cost to the government of restoring the 75 percent level. This approach will understate costs to the extent that reported foreign-flag food aid bids understate prevailing foreign-flag rates at the time they were made. If Congress seriously considers raising the requirement back to 75 percent, US agencies that estimate the added cost to the government of doing so should be fully transparent as to how their estimates are made. Estimating the Added Cost of Increasing Food Aid Cargo Preference to the 75 Percent Level The additional cost of using US flag vessels to transport US food aid if the cargo preference requirement were restored to 75 percent would depend on two basic components -- the additional 25 percent of tonnage covered under the higher requirement and the higher freight rates that would apply as a result of a further reduction in competition. In any given year, costs may also change because of numerous other factors such as the type of vessel required (e.g., bulk carrier, container vessel, tanker), the routes to be served, size of individual consignments, when and how quickly the food needs to be transported, the ship’s age, and supply and demand for vessels in the US-flag and international markets, which are related to global macroeconomic conditions. Significant shipping capacity is available in the global maritime sector generally.74 For example, the United Nations Conference on Trade and Development Performance reported a persistent oversupply in the world fleet across various market segments in 2013. As discussed elsewhere in this report, the Maritime Administration has expressed concerns about the shrinking size of the US-flag fleet engaged in international trade, a decline it attributes largely to a decline in the volume of Department of Defense (DOD) cargoes.75 However, this does not mean that sufficient capacity cannot be found to meet demand for preference cargoes. Cargo preference laws do not require vessels carrying preference cargoes to be built in the United States. Registry under the US flag is the key requirement. Vessels carrying food aid must first be registered under the US flag for at least three years. This requirement has been seen by some as a deterrent to owners who would not have access to sufficient amounts of other preference cargoes. However, ships carrying DOD cargoes are not bound by the three-year waiting period, which applies only to ships carrying food aid under cargo preference provisions. Foreign-built vessels enrolled in the US Maritime Security Program (MSP) can be replaced quickly and with immediate eligibility to carry preference cargoes of all types. Moreover, there has been and continues to be a significant number of foreign-built liner-type vessels coming off MSP contracts or Military Sealift Command charters that would have already qualified under the three-year wait rule.76 USAID/USDA Estimates of the Added Cost of Increasing Food Aid Cargo Preference to 75 Percent In 2014 USAID estimated that increasing food aid cargo preference to 75 percent would result in an increase in USAID’s transportation costs of approximately $60 million per year. Depending on the size of the future Food for Peace program in future years in tonnage terms, it projected increased costs ranging between $40 million to $80 million per year. It said USDA had 74 UNCTAD, Review of Maritime Transport 2014, (UNCTAD/RMT/2014), p.4 75 See: US DOT, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine (Washington, D.C.: April 21, 2015), p. 3. 76 Ibid. pp. 10-11, 37-38.


estimated the proposed increase in cargo preference would cost its Food for Progress and McGovern-Dole Food for Education and Child Nutrition programs an additional $13.6 million annually. Thus, the combined impact was estimated at approximately $75 million per year.77 USAID said it had analyzed the reduction in cargo preference from 75 to 50 percent after the cargo preference requirement was lowered to 50 percent in July 2012 and conservatively estimated its Food for Peace program transportation costs were reduced by an average of nearly 30 percent. (USAID spent an average of about $300 million on ocean freight between FY 2009 and FY 2011. Thirty percent of that equals $90 million.) USAID said its savings resulted from more efficient operations on both US and foreign-flag voyages, as USAID was able to better match available cargoes with the appropriate vessels. Based upon anticipated annual ocean transportation expenditures, these savings, if reversed, would equate to an annual increase in USAID’s transportation expenses of about $60 million per year. While helpful, USAID did not more fully describe how it arrived at its estimate.78 According to USAID, based on its experience there is reduced competition at the 75 percent cargo preference level and substantially less competition when partitioned based on both country-by-country, geographic area and vessel type. The reduced competition means US flagged carriers have a much greater sense prior to bidding of which cargoes USAID must ship on US flagged vessels. In an environment with limited competition from foreign flag vessels, US carriers tend to raise prices when it is reasonably clear USAID cannot select a foreign flagged ship. Also, in these circumstances, few, if any, competitive foreign flag carriers will bid. Therefore, as cargo preference increases from 50 percent to 75 percent, prices tend to increase sharply due to the reduction of competition in the US flag market and the smaller pool of participating foreign flag carriers. Conversely, as the compliance level decreases from 75 percent to 50 percent, USAID says, it can seek to eliminate the least efficient US flagged voyages first. Therefore, USAID says, a US voyage contracted as a means of reaching the 50 percent threshold will be inherently a lower cost and may be more efficient than a voyage contracted to meet the 75 percent threshold. It would be useful if USAID provided some evidence to support its case. For example, it asserts there will be reduced competition in the US-flag fleet as the amount of preference cargo is increased and seems to assume there will be little or no economy of scale effects among US-flag ships as that happens. Regarding foreign carriers it seems to imply that international shipping companies with large amounts of space capacity will stop competing when the amount of cargo available to foreign carriers is diminished. Scale effects dominate things in the shipping industry, since bigger ships have lower unit costs. Congressional Budget Office Estimates In 2012 the Congressional Budget Office estimated $108 million in annual savings would result from repeal of the incremental ocean freight differential (i.e., the increased costs associated with the 75 percent US-flag food aid shipping requirement). (See the last section of this section for an explanation of incremental OFD and 20 percent plus OFD.) Its estimate was provided in a letter to the Chairman of the House Rules Committee that included other estimated savings that

77 In addition, USAID said, due to lack of US-flag capacity, it expected there would be secondary effects adding to the cost of commodity purchases and local logistics. See: USAID, Cargo Preference FAQS, p.1: http://www.usaid.gov/foodaidreform/cargo-preference/faqs. 78 Ibid.

http://www.usaid.gov/foodaidreform/cargo-preference/faqs



would result if H.R. 4348, MAP-21, were enacted. CBO’s estimate did not include information on how the estimate was made.79,80 In early 2014, CBO estimated the added cost to the government of a bill that would have increased the food aid cargo preference requirement from 50 to 75 percent for government-generated food aid cargo that must be transported on privately owned, US-flag commercial vessels.81 Historically, CBO said, shipping rates on US-flag vessels have been higher than that of their foreign counterparts by roughly 30 percent, according to the Department of Agriculture. CBO estimated Food for Peace program shipments in 2014 would cost $145 per metric ton on US ships and $111 per metric ton on foreign ships. Using that difference and projections of foreign food aid, CBO said, it estimated increasing the cargo preference mandate would cost $41 million over the 2016-2019 period or about $10.25 million per year (assuming appropriation of the necessary amounts).82 CBO said its estimated outlays were based on historical spending patterns. It did not provide additional details about how it arrived at its estimate. (Increased outlays of $10.25 million a year and a price difference per metric ton of $34 imply annual food aid exports of 1.2 million metric tons per year.) In the absence of additional information, it is not evident what accounts for the large difference between the two CBO estimates generated less than two years apart. Following the release of CBO’s 2014 estimate, USAID announced that it disagreed with the result. USAID noted that it had not been consulted by CBO when it was making the estimate. USAID said it had since consulted with CBO and suggested that CBO would have liked to revise its estimate. However, USAID said, CBO did not have that option, because the draft legislation had already passed the House.83 US-Flag and Foreign-Flag Costs per Metric Ton before and After Food Aid Cargo Preference Was Reduced to 50 Percent Table 3.7 provides figures on metric tons of food aid transported by US-flag and foreign-flag vessels between fiscal year 2009 and fiscal year 2014. Data are not available for FY 2011. As the table shows, the amount of metric tons shipped by US-flag vessels declined substantially between FY 2009 and FY 2012, and then again in FY 2013 when the sequestration was in effect and when the 50-percent cargo preference requirement was in place for the entire year. In contrast, foreign-flag tonnage transported increased considerably during FY 2013 and FY 2014. Thus, even though total US food aid tonnage declined dramatically during the period, the tonnage available to foreign flags increased considerably.

79 Congressional Budget Office letter to the Chairman, Committee on Rules, US House of Representatives, regarding the conference report for H.R. 4348, MAP-21 (Washington, D.C.: June 29, 2012), p.2 and Table 1. House of Representatives Senate, MAP-21 Conference Report to Accompany H.R. 4348 (Washington, D.C.: June 28, 2012), p. 667. 80 In 2011, the House Budget Committee Resolution for FY 2012 proposed ending the law that required the Department of Transportation to reimburse other federal agencies for the subsides they must pay to the US shipping industry to transport food aid. This language may have also targeted elimination of the 20% excess freight subsidy. See: House of Representatives, Concurrent Resolution on the Budget—Fiscal Year 2012, Report of the Committee on the Budget, Report 112-58 (Washington, D.C.: April 11, 2011), p. 87. 81 Congressional Budget Office Cost Estimate, H.R. 4005, Howard Coble Coast Guard and Maritime Transportation Act of 2014 (Washington, D.C.: March 6, 2014). 82 CBO did not detail how it used the difference of $34 nor what level of food aid exports it assumed for the 2016-2019 years. 83 See: http://www.usaid.gov/foodaidreform/cargo-preference/faqs.



Table 3.7: US-Flag Vessels Average Cost Per Metric Tons of US Food Aid Moved, FY 2009–FY 2014

Fiscal Year

Cargo Preference

Requirement

US-Flag Metric Tons Transported

Foreign-Flag Metric Tons Transported

Total

Tonnage1

2009 75% 2,402,335 403,017 2,805,352 2010 75% 1,886,961 446,842 2,333,803 2011 75% NA2 NA2 1,746,311 2012 75% / 50%3 1,266,431 349,130 1,615,561 2013 50% 753,121 582,731 1,335,860 2014 50% 752,671 522,551 1,275,222

1Excludes tonnage carried by both a US-flag and foreign-flag ship. 2Figures are not provided for FY 2011 because of what appears to be mistakes in coding which vessels were US-flag and which were foreign-flag. 3The requirement changed July 6, 2012. Source: Analysis of USDA data. Table 3.8 compares the average cost per metric ton for the US-flag and foreign-flag vessels. As shown, the foreign-flag average annual cost per metric ton dropped considerably in FY 2012 compared to FY 2009 and FY 2010, whereas the US-flag cost increased considerably. The foreign-flag cost continued to decline in FY 2013 and FY 2014. Its average annual cost for FY 2014 was about 23 percent lower than its average for FY 2009 and FY 2010. The US-flag rate declined in FY 2013 and again in FY 2014. However, the average US-flag cost per metric ton for FY 2014 was almost the same as its annual average annual cost for FY 2009 and FY 2010. Table 3.8 also reports the difference between the US-flag and foreign-flag average annual costs per metric ton during the period. For example, during FY 2009 and FY 2010, the difference ranged from about $9 to $20. However, during FYs 2013 and 2014, the difference was more than $50 per metric ton. This suggests a difference between the two sets of years of more than $30 a metric ton – from the time when the cargo preference requirement was 75 percent to when it was 50 percent. If one assumes annual food aid exports of 1.5 million metric tons, this implies a savings to the US government of $11.25 million per year.84 By reverse analysis, it implies an added cost of $11.25 million per year if the cargo preference requirement were raised from 50 to 75 percent. Of course, these figures are speculative, since other factors could have influenced the average cost per metric ton figures reported in Table 3.8. In the absence of additional information on such things as economy of scale effects and competitive reactions, one cannot confidently say to what extent the lowered cargo preference requirement affected US-flag and foreign-flag shipping prices and, in turn, costs. 84 Twenty-five percent of 1.5 million metric tons equals 375,000 metric tons. $30 per metric ton times 375,000 metric tons equals 11.25 million.


Table 3.8: Comparison of US-Flag and Foreign-Flag Average Costs per Metric Ton of Food Aid Transported, FY 2009 – FY 2013

Fiscal Year

Cargo Preference

Requirement

US-Flag Cost

Per Metric Ton

Foreign-Flag Cost Per Metric

Ton

Difference in Cost Per

Metric Ton 2009 75% $162.73 $154.12 $8.61 2010 75% $171.11 $150.85 $20.26 2011 75% NA1 NA NA 2012 75% / 50%1 $194.18 $136.43 $57.75 2013 50% $180.60 $129.30 $51.30 2014 50% $168.96 $116.68 $52.28

1Figures not reported for FY 2011 because USDA appears to have made mistakes in coding which vessels were US- and which foreign-flag. 2The requirement changed from 75% to 50% on July 6, 2012. Source: Analysis of USDA data. Using Historical Average OFD Costs per Metric Ton to Estimate the Added Cost of a 75 Percent Cargo Preference Requirement As shown earlier, in Table 3.5 of this section, we calculated the average OFD per metric ton for using US-flag ships to transport US food aid for fiscal years 2005 –2012 at $31.46 per ton. This figure is based on eight years of actual experience, all of which (excepting three months) occurred when the cargo preference requirement was at the 75 percent level. Assuming food aid exports averaging 1.5 million metric tons and an average OFD difference of $32 per metric ton, an increase in the cargo preference requirement from 50 percent to 75 percent would represent coverage for an extra 375,000 metric tons. Assuming a subsidy of $32 per metric ton, this results in an estimated added subsidy cost of $12 million.85 This estimate will represent a lower bound estimate of the added cost to the extent that foreign-flag bids on US food aid cargoes during the FY 2005 – FY 2012 period understated the prevailing foreign-flag rates in other comparable international trade. Shipments without a foreign-flag bid were omitted from USDA’s OFD calculations. If foreign-flag bids for these shipments were not made because carriers concluded their chances of winning were slim, the actual OFD bid data could be biased downwards significantly. FY 2006 data indicate that 27 percent of all US-flag shipments received no foreign-flag bids, representing 30 percent of total US-flag coverage. In addition, our analysis of USDA’s OFD data did not control for shipping routes, the shipping time and term, and the type of commodities shipped.86 Also, according to some observers, at higher mandated cargo preference compliance rates, foreign-flag bids tend to be made mainly by higher cost vessels. 85 Assuming food aid exports averaging about 5 million metric tons per year (circa 1999 – 2003), the added subsidy cost would be $40 million. 86 A 2011 GAO report on food aid monetization analyzed the freight differences between US- and foreign-flag carriers, using the ocean freight rates that US agencies paid prior to cargo freight differential reimbursement for Fiscal Years 2008 – 2010. GAO estimated the freight rate on foreign-flag carriers cost on average $25 per ton less than the freight rate on US-flag carriers, controlling for shipping routes, the shipping time and term, and the type of commodities shipped. As shown elsewhere in our report, our analysis reports a lower average cost per metric ton difference for each of those years. See: GAO, International Food Assistance: Funding Development Projects through the Purchase, Shipment, and Sale of US Commodities Is Inefficient and Can Cause Adverse Market Impacts, GAO-11-636 (Washington, D.C.: June 23, 2011), pp. 23-27.


Incremental OFD and Twenty Percent Excess OFD When Congress amended the Cargo Preference Act in 1985 to increase the preference share for agricultural commodities from 50 percent to 75 percent, it required MARAD to pay for the ocean freight differential cost incurred by complying with the additional 25 percent cargo preference requirement. This is referred to as “incremental OFD.” In addition, Congress required MARAD to pay for “excess 20 percent OFD.” In any given year excess 20 percent OFD occurred when the ocean freight cost exceeded 20 percent of the value of the commodity costs plus ocean freight costs plus incremental OFD costs.87 According to MARAD, both the incremental OFD and 20 percent excess OFD were intended to reimburse the food assistance programs for a portion of the added costs of using US-flag vessels.88 A Congressional Research Service report indicates the excess 20 percent OFD was aimed at offsetting excessive shipping costs incurred during periodic spikes in ocean transport costs.89 Table 3.9 provides figures on MARAD actual obligations for FYs 2006-2011 for the incremental OFD and the excess 20 percent OFD. Total obligations averaged $156.8 million per year for the six-year period. During that time, an average of 2.361 million metric tons of food per year were shipped. Thus, the average reimbursement per metric ton was $66. The figures in the table may not reflect well actual annual obligations. In an undated report for the assessment year 2006, the Office of Management and Budget said historically OFD invoicing and reimbursement were several years in arrears due to disputes about reimbursement calculation methodology. However, MARAD and USDA staff had worked as a team to clear up the backlog and establish current invoicing. With these initiatives complete, funds are now obligated in a timely manner.90

Table 3.9: MARAD Reimbursements for Ocean Freight Differential, FYs 2006-11 (Actual Outlays1)

Year

OFD-

Incremental

OFD – 20% Excess Freight

Total 2006 $53,817,000 $212,649,000 $269,083,000 2007 39,512,000 153,170,000 197,559,000 2008 22,167,000 87,863,000 110,835,000 2009 29,810,000 119,241,000 149,498,000 2010 25,502,000 101,861,000 127,509,000 2011 19,013,000 76,336,000 95,420,000 Total $189,821,000 $751,120,000 $949,904,000 Avg $31,637,000 $125,187,000 $158,317,000

1Excludes outlays for interest. Source: Analysis of data reported in: US Department of Transportation, Maritime Administration, Budget Estimates Fiscal Year 2012 (Washington, D.C.) and reports for Fiscal Years 2006-2011.

87 See P.L. 99-198; Section 1142. See also, Expect More, Detailed information on the Maritime Administration Ocean Freight Differential Assessment, 2006, p. 2. 88 Maritime Administration, Cargo Preference Billing and Payment Process, Report Number Fl-2004-057, May 5, 2004, p. 3. 89 Randy Schnept, US International Food Aid Programs: Background and Issues, Congressional Research Report R41072 (Washington, D.C.: April 1, 2015, p. 27. 90 US Office of Management and Budget, Detailed Information on the Maritime Administration Ocean Freight Differential Assessment (The White House), p. 11. Http://www.whitehouse.gov/default/files/omb/assets/expect more/detail/10004009.2006.html.


In July 2012 Congress eliminated the incremental OFD reimbursement requirement (MAP-21, P.L. 112-141), while reducing the food aid cargo preference requirement from 75 percent to 50 percent. In December 2013, Congress eliminated the 20 percent excess OFD requirement (P.L. 113-67).


Section 4

MARAD and DOD Concerns about the Declining Number of US-Flag Ships and Availability of Mariners to Man the Surge Fleet

Summary Both the Maritime Administration (MARAD) and DOD have expressed concerns about the decline in the number of US-flag ships and the effect this may have on the availability of mariners to help crew the surge fleet, especially the Ready Reserve Force. The RRF provides nearly one-half of the government-owned surge sealift capability. In addition, MARAD and DOD have expressed concerns about the possible impact of declining amounts of preference cargo on the Maritime Security Program and the Voluntary Intermodal Sealift Agreement (VISA) participants. For a variety of reasons, good data are not available on the number of available mariners to crew the surge fleet. Based on a joint MARAD/DOD exercise conducted in spring 2013, the Defense Department (DOD) estimated the number of available mariners at 15,280. Seafarers unions challenged this number. They prepared an estimate indicating 11,315 mariners – a difference of almost 4,000 mariners. By August 2013, MARAD had revised its estimate down to 11,506. In June 2014, MARAD and DOD conducted another joint exercise. We were not able to obtain the results, but understand that the two agencies do not agree on the number. If and when contingencies arise that require activation of the Surge Fleet, DOD needs to know that sufficient mariners will be available to man the fleet. Given the importance of this issue and based on the results of our analysis, we believe much more transparency is needed. Estimates and how they are made should be available to the Congress and the public more generally. More transparency may indicate a need for better data and analysis. More specifically, we believe MARAD should make available the 2014 MARAD/DOD study and a 2015 study if it has been completed. We also believe MARAD should make the study available, which it conducted with Maritime Labor that led to its adoption of a different method for estimating the number of available mariners. Detailed supporting information is needed on how estimates have been made to see if apparent differences can be reconciled and what weaknesses in the methods exist. MARAD and DOD Concerns about the Number of US-Flag Vessels and Available Mariners The Department of Defense (DOD) relies on its own ships, called the “organic” fleet, as the first responder for sealift in a contingency91, as well as the Ready Reserve Force -- augmented by the merchant marine via the Voluntary Intermodal Sealift Agreement (VISA) and the Maritime Security Program (MSP). Management of the Ready Reserve Force is outlined in a memorandum of the agreement between DOD and the Department of Transportation. The merchant marine also provides crew for the Ready Reserve Force. According to DOD, this combined capacity is determined to satisfy sealift requirements with acceptable risk. (See Section 2 for further discussion regarding the Ready Reserve Force, MSP, and VISA). Both the Maritime Administration (MARAD) and DOD have expressed concerns about the

91 The Navy’s Military Sealift Command (MSC) has a Strategic Sealift group of about 50 ships.


decline in the number of US-flag ships and the effect this may have on the availability of mariners to help crew the surge fleet, especially the Ready Reserve Force. The RRF provides nearly one-half of the government-owned surge sealift capability. In addition, MARAD and DOD have expressed concerns about the possible impact of declining amounts of preference cargo on the Maritime Security Program and VISA participants.92 For example, in July 2014 the Deputy Commander, United States Transportation Command, testifying before the House Committee on Armed Services, Subcommittee on Seapower and Projection Forces, said:

Currently, there is downward pressure on the number of qualified mariners because the flag fleet is shrinking. We remain concerned with the loss in the number of US-flagged vessels in the international trading sector, specifically ocean going vessels in excess of 1,000 tons. Since 1990, the size of this segment of the US-flag fleet has been reduced from 193 to 85 as US-flag companies struggle to remain competitive with companies operating under foreign flags at lower operating costs. Although operations in Iraq and Afghanistan temporarily slowed the decline, the Nation’s transition out of Afghanistan and current economic conditions may exacerbate the decline. Vessels continue to participate in the MSP because the combination of government impelled cargoes and the MSP stipend offset some of the operating cost differential. The loss of government-impelled cargoes, however, may cause participants to rethink their participation in MSP as the stipend alone may not provide enough incentive to remain under US flag.93

The MARAD Administrator, testifying before the same committee, said:

The overall volume of non-bulk dry and dry bulk preference cargo transported on US-flag vessels has substantially decreased since 2005, which was during the Afghanistan and Iraq wars. The reductions are most significant in non-militarily-useful bulk carriers along with reductions in other service types. Ships require cargo to be economically viable. So without ready access to either commercial or government-impelled (cargo preference) cargoes, the survival of some vessels in the US- flag fleet operating in international trade is in question. The causes of the falling volumes of non-bulk dry cargo and dry bulk preference cargo do not appear to be transient. Continued reductions in the number of US Armed Forces and overseas military bases, coupled with decline in the number of troops involved in global operations, suggest that military cargoes will continue to decrease through 2016, leveling off at less than one million metric tons per year. This is less than half of the volume transported as recently as 2011. The size of the US-flag international fleet of privately-owned, self-propelled vessels decreased from the five-year average between 2008 and 2013 of 101 to 84 vessels as of July 2-14, and is expected to decrease further in the years to come. Adverse impacts on the 58 liner-service-service type vessels in the Maritime Security Program Fleet are already occurring with one vessel leaving the program and reflagging foreign and two more expected before the end of the year. They state that their basis for leaving the program is a lack of cargo and it appears unlikely that commercial or preference cargo will recover significantly in the future.

92 All MSP vessels participate in VISA but a considerable number of VISA participants do not belong to the MSP. 93 Statement of William A. Brown, Logistics and Sealift Force Requirements and Force Structure Assessment, before the House Committee on Armed Services, Subcommittee on Seapower and Projection Forces (Washington, D.C.: July 30, 2014), pp. 4-5.


MARAD is responsible for determining whether adequate manpower is available to support the operation of sealift ships during a crisis, as set forth in the National Security Sealift Policy --- National Security Directive (NSD) No. 28, dated October 5, 1989. We have determined that the pool of civilian US Merchant Mariners available to crew government sealift ships when activated has declined over the last decade, and the current number of qualified and experienced mariners available may not be adequate in the very near future without requiring the US Coast Guard to waiver domestic and international requirements for mariners. This assessment of the status of the civilian Merchant Mariner pool included close coordination with the US Maritime Labor Unions and consultation with other maritime industry stakeholders. Given this assessment, I intend to work closely with the US Transportation Command, the US Navy, and the commercial maritime industry to address this issue. …The primary source of mariners to crew government reserve sealift ships is the pool of US contract mariners actively sailing in the US-flag shipping industry, including the Jones Act trades, which are reserved entirely for the US flag. The sufficiency (availability, commitment, and skills) of this mariner pool to support a large-scale activation of the government reserve sealift fleet (60 ships) directly depends upon the number of commercial US-flag merchant fleet vessels actively sailing. A fleet that is sufficiently sized provides an adequate pool of qualified merchant mariners to meet the crewing requirements of both the commercial and government sealift fleets during national emergencies and during normal peacetime operations.94

Uncertainty about Estimates of the Number of Available Mariners Based on our review, there is considerable uncertainty about the number of available mariners based on different numbers from different sources. Also, several of the estimates lack detailed information on how the estimates were made. DOD/MARAD June 2013 Estimate According to DOD, MARAD in coordination with DOD, conduct an annual review to determine if there are sufficient mariners to help man the Navy’s surge fleet. Table 4.1 presents summary results of a May/June 2013 exercise by United States Transportation Command 95, 96 (TRANSCOM) that was developed in coordination with MARAD. The exercise focused on assessing whether there were enough mariners available to manage 60 strategic sealift vessels -- 46 Ready Reserve Force ships and 14 MSC vessels – hereafter referred to as the Surge Fleet. These ships are kept in standby or reduced operating status (ROS) – ready if the need arises to provide a surge capability to get military equipment and supplies quickly to where they are needed and until it is possible to charter other US-flag vessels to help in the effort and, if necessary, sustain transportation over the longer run. (See Section 2.) The assessment was conducted with reference to at least two base case scenarios: (1) US 94 Statement of Paul N. Jaenichen, Logistics and Sealift Force Requirements and Force Structure Assessment, before the House Committee on Armed Services, Subcommittee on Seapower and Projection Forces (Washington, D.C.: July 30, 2014), p 4-5. 95 June 25, 2013 letter from the TRANSCOM Commander to the Assistant Secretary of Defense for Logistics and Material Readiness. In early May, the Assistant Secretary asked TRANSCOM to determine the minimum merchant mariner requirements. 96 United States Transportation Command (TRANSCOM) provides air, land, and sea transportation for the Department of Defense. It has three service component commands: the Navy’s Military Sealift Command, the Army’s Surface Deployment and Distribution Command, and the Air Force’s Air Mobility Command.


forces conduct two nearly simultaneous large-scale land campaigns and at the same time respond to three nearly simultaneous homeland defense events; (2) US forces conduct a large land campaign against the backdrop of an ongoing long-term irregular warfare campaign, and respond to three nearly simultaneous homeland defense events.97 As shown in Table 4.1 the exercise estimated the number of commercial mariners holding the necessary qualifications to man the Surge Fleet and available to sail,- and compared the result to the number of commercial mariners needed to crew both the Commercial Fleet and the Surge Fleet in three different stages of readiness. As the figure shows, the number of available mariners was estimated as 15,280. The number of merchant mariners needed to crew the Commercial Fleet over the course of a year was estimated at 13,301. During peacetime, when the Surge Fleet is in Reduced Operating Status, 628 merchant mariners are needed to maintain the 60 vessels in standby status ready to sail on short notice. As we understand it, a crew serves for 6 months, goes on leave, and is replaced by a second group of 628 mariners. If the Strategic Fleet is initially activated to Full Operating Status (FOS) to address a contingency, 1,853 mariners are needed. Counting the 628 ROS mariners, the net number of additional mariners needed is 1,225.98, 99 The 1,853 mariners provide an average crew size per ship of 30 mariners, permitting for some rotation of crew.100 The Surge Fleet could serve for six months or longer. If the Surge Fleet is needed for an extended period of time, at some point it would need to be rotated, requiring another 2,409101 mariners.

97 Ibid. GAO, Mobility Capabilities: DOD’s Mobility Study Limitations and Newly Issued Strategic Guidance Raise Questions about Air Mobility Requirements, GAO-12-510T (Washington, D.C.: March 7, 2012), pp. 1-3. 98 Statement of Paul N. Jaenichen, p 6. 99 1,853 – 628 = 1,225. 100 Active ships need a crew of about 20 licensed and unlicensed members, plus a crew of approximately 10 rotation members. When in Reduced Operating Status, vessels need a 10-member crew performing on-board maintenance. See Econometrica, p. 63. 101 4,262 – 1,853 = 2,409.


Table 4.1: Summary Results of May-June 2013 DOD Assessment of Mariner Availability and Surge Fleet Manning Requirements

(“Surge Fleet” Includes the 46 Vessel Ready Reserve Force and 14 Military Sealift Command

Vessels – All Managed by the Maritime Administration)

(Annual Manning Requirements Unless Otherwise Noted)

Qualifications Qualified Commercial Mariners

Commercial Mariners Sailed (Last 24 Months)

Licensed 15,026 5,415 Unlicensed 88,880 9,865 Total 103,906 15,280

Commercial Fleet and Surge Fleet Mariner Requirements

Available Mariners

(Sailed last 24 months)

Commer-cial Fleet Manning Require-

ment

Surge Fleet Manning Require-

ment

Total Manning Require-

ment

Surplus / Shortfall

Combined Fleets; Surge Fleet in Reduced Operating Status (ROS)

15,280 13,301 6282 13,929 1,351

Combined Fleets (Full Operating Status); Initial Activation of Surge Fleet

15,280

13,301

1,8532

15,154

126

Combined Fleets (FOS) Surge Fleet in Rotational Status***

15,280

13,301

4,2622

17,563

(2,283)

1The average number of crew billets on an oceangoing commercial vessel is 20. On average, two mariners are employed annually in each billet as mariners sail on average 6 months a year. Thus, for example, the annual commercial manning requirement of 13,301 is based on 5,783 billets. Of these, 1,967 were for licensed mariners (i.e., officers) and 3,816 for unlicensed (non-officer) credentialed mariners. 2See discussion for clarifying information. Source: Analysis of information in United States Transportation Command June 25, 2013 letter to the Assistant Secretary of Defense for Logistics and Material Readiness.


As Table 4.1 shows, a surplus of mariners was estimated for the combined fleets when the Surge Fleet was in ROS and during the Initial Activation phase at FOS. However, if a point were reached where the entire FOS Surge Fleet needed to be rotated, a shortage of about 2,400 mariners was indicated. According to TRANSCOM, in this case labor unions would need to find additional mariners beyond the estimated 15,280 available mariners. According to the TRANSCOM Commander, Maritime Labor said that there was no surplus of available mariners. However, the Commander said, in his assessment, TRANSCOM was able to meet the Department’s requirements.102 Basis for DOD/MARAD Estimate of Pool of Available Mariners. To estimate the actively sailing pool of qualified mariners, DOD used data from the US Coast Guard Merchant Mariner Licensing and Documentation (MMLD) system. The database tracks all credentialed mariners (licensed and unlicensed103), including information on when they last sailed. DOD/MARAD assumed that those who had sailed during the past 24 months would be available to sail. The Coast Guard system does not record information on how many actually would be willing and available to sail in the event of a contingency. The assumption is subject to error in both directions. On the one hand, by counting all who had sailed during the past 24 months as being available, the exercise probably picked some who would not be available to serve. On the other hand, excluding all those who had not sailed in more than 24 months could underestimate the number of available mariners. As Table 4.1 shows, there were 15,026 licensed mariners (i.e., officers) who were qualified to serve on the Surge Fleet, but the assessment only counted the 5,415 who had sailed during the past 24 months. Similarly, there were 88,880 unlicensed but credentialed seamen who were qualified but the assessment only counted the 15,280 of those who had sailed during the past 24 months. Basis for DOD Estimate of Commercial Fleet Needs. As Table 4.1 shows, DOD estimated the number of mariners needed to crew the “Commercial Fleet” at 13,301. The documentation we reviewed did not define the commercial fleet or specify which ships or how many ships were used to arrive at this number. As Table 4.2 shows, we tried but were not able to fully account for 13,301 mariners in the commercial fleet -- even when we included commercial mariners who work on government vessels.104 Our total – 11,680 mariners – is shy of 13,301 by 1,621 mariners.

102 The Commander said TRANSCOM was working closely with MARAD and the Maritime Industry to reach a consensus assessment of mariner availability. 103 Licenses are issued to senior positions aboard ships, including deck officers, engineers, staff officers, radio officers, and pilots. Mariners that do not have a license are referred to as unlicensed mariners or ratings. A wide variety of competencies exist for unlicensed mariners. 104 DOD’s Military Sealift Command (MSC), the principal provider of ocean transportation to the department, operates approximately 110 non-combatant, civilian crewed ships that replenish US Navy ships, conduct specialized missions, strategically pre-position combat cargo at sea around the world, and move military cargo and supplies used by deployed US forces and coalition partners.104 According to MSC, federal civil service employees are the largest segment of its global workforce. MSC recruits transitioning military, merchant marines, maritime academy graduates, and skilled entry-level candidates to fill its maritime job opportunities.


Table 4.2: Trying To Account for the Estimated 13,301 Mariners Included in the “Commercial Fleet” in June 2013 (See Table 4.1)

Vessels

# of Vessels

Average # of

Crew Billets

# of Mariners Per Billet

Total Mariners Required Annually

1. US-Flag Non-Jones Act Privately-Owned Oceangoing Vessels

90

2

20

3,600

2. Jones Act Eligible Privately-Owned Oceangoing Vessels

92

2

20

3,680

3. Maritime Security Program Fleet Included in # 1 above. Sub-total 182 NA1 NA 7,280 4. Military Sealift Command Vessels Crewed by US Civilian Mariners2

110

2

20

4,400 Total 292 NA NA 11,680

1NA = not applicable. 2The Surge Fleet has two billets of 628 mariners or 1,256 civilian mariners a year when in standby status. However, they are not included in this table, since they are separately accounted for in Table 4.1. Source: Analysis of maritime data. DOD referred us to MARAD for information on the Commercial Fleet, since MARAD has primary responsibility for keeping track of these numbers. When we asked MARAD for information on which type and number of ships were included in the estimate, it replied as follows:

The average number of crew billets on an ocean going commercial vessel is 20. On average, two mariners are employed annually in each billet as mariners sail an average 6 months a year. The 60-vessel MSP fleet employs an estimated 2,400 mariners annually. The US-flag privately owned oceangoing, non-Jones Act fleet are not the only vessels that utilize ocean-going, STCW105 qualified mariners.

Obviously, MARAD’s response was not responsive to our question but indicative of the reluctance on the part of some key players to candidly discuss the subject. Maritime Labor Challenges DOD Estimate at May 31, 2013 Hearing On May 21, 2013, a subcommittee of the House Transportation Committee held a hearing on the merchant marine. The TRANSCOM Commander testified that based on its requirements study, sufficient mariners were available to meet DOD surge fleet needs.

105 STCW is an acronym for the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers. It entered into force in 1984. Major revisions were made in 195 and 2010.


Based on the numbers I have, the merchant mariner pool right now is slightly in excess of 15,000 mariners, of which at any time there are approximately 7,000 or so that are at sea doing their job. The others are maintaining certification, getting ready to go, doing these type of things. So that, then, leaves a pool of which we need approximately 3,000 mariners to man our surge and Ready Reserve Fleet. So we would draw from that remaining pool of merchant mariners that are current, qualified, certified, and licensed to fulfill that requirement. …We would pull from that pool. We would turn to MARAD, who would then reach out to industry based on the capabilities that we would need to man the ships, depending upon the types of ships that we were getting underway. They would then pull this team, this crew together and then be ready to sail in minimum time.106

Also testifying at the hearing was the Executive Vice President of the Seafarers International Union, who disagreed with the 15,000 number, saying that it probably represented a number of deep sea licenses and documents issued in a particular time period: “The actual manpower pool that he can grab onto to support his ships is … far less than that.” In addition, he said, the mean age within the officers is somewhere around 55 years old, so a whole generation of officers will soon be retiring. He questioned whether there were adequate training platforms to replace them.107 The chairman of the subcommittee asked the Seafarer’s representative to provide a statement for the record regarding what the union believes is the accurate number of available mariners for defense sealift needs today. Seafarers International Union Estimate of the Number of Available Mariners – October 2013 When the May 21, 2013 hearing record was published in 2014, it included a 14-page paper, titled “Deep Sea Manpower Survey” dated October 2013, and covering the period from 2013 to 2018.108 According to the paper, the presidents of four unions representing the deep-sea mariners decided a manpower study was needed to quantify the actual number of actively sailing seafarers available. Their intent was to provide the most accurate determination of their collective ability to man the reserve and surge fleets during a crisis at that time and for five years into the future. According to the Seafarers their total includes their ability to man every vessel under contract including the private commercial deep sea and Great Lakes sectors, the Military Sealift Command Surge vessels, the Great Lakes Sector, and MARAD’s Ready Reserve Force vessels. They assumed a 2 to 1 seafarer to billet requirement. Table 4.3 summarizes their results and compares them to the DOD/MARAD June 25, 2013 Estimate. As shown, the Seafarers estimate is nearly 4,000 mariners less (-26 percent) than that of the DOD/MARAD estimate.

106 House of Representatives, Subcommittee on Coast Guard and Maritime Transportation, Committee on Transportation and Infrastructure Hearing, Marine Transportation: The Role of US Ships and Mariners (Washington, D.C.: May 21, 2013), p 24-25. 107 Ibid. pp. 25, 28-31. 108 House of Representatives, Subcommittee on Coast Guard and Maritime Transportation, Committee on Transportation and Infrastructure Hearing, Marine Transportation: The Role of US Ships and Mariners (Washington, D.C.: May 21, 2013), pp. 127-138.


Table 4.3: Seafarers International Union Estimate of Available Seafarers Compared to MARAD/DOD June 2013 Estimate of 15,280

Seafarers

Estimate August 291 & October 2013

DOD / MARAD Estimate June 25, 20132

Seafarers Minus DOD / MARAD Estimate

Deep Sea Union Officers AMO3 2,344 MEBA4 900 MM&P5 900 Sub-total Officers 4,144 5,415 (1,271) Deep-Sea Unlicensed Ratings Deck Department 2,851 Engine Department 1,571 Steward Department 868 Entry Ratings 1,881 Sub-total Ratings 7,171 9,865 (2,694) Total 11,315 15,280 (3,965)6

1We reviewed a copy of a paper with the same title dated August 29, 2013. 2 See Table 4.1. 3American Maritime Officers union. 4 Marine Engineer’ Beneficial Association union. 5 International Organization of Masters, Mates & Pilots union. 6In its papers, Seafarers reported a difference of -3,685, because it was referencing the 15,000 figure cited in the May 21 House hearing. Differences in the Two Estimates. As previously discussed, the DOD/MARAD estimate of the pool of available mariners was based on Coast Guard data and the assumption that the number who had sailed in the past 24 months would be available. Seafarers acknowledged their estimate did not include the number of mariners who are eligible to sail but for various reasons are not captured by the studies. Seafarers simply estimates the number of mariners needed to man every vessel under contract. One surprising thing is that DOD/MARAD estimate of the Commercial Fleet needs was 13,301 mariners compared to Seafarers’ 11,315. This is a difference of nearly 2,000 mariners. But it is an even larger estimate than that because Seafarers includes the mariners needed to man the Ready Reserve Force fleet and DOD/MARAD do not. Because neither identified the actual ships or total number of ships included in their estimates, we cannot say to what extent if any this accounts for the difference. We don’t know if the DOD/MARAD estimate includes the Great Lakes Sector. For each source, we don’t know if they include oceangoing Jones Act vessels. However, based on the numbers presented in Table 4.2, we suspect they do. Seafarers Conclusions for 2013. Seafarers reported a shortage of 443 mariners relative to a contract need of 7,614 unlicensed ratings mariners. Nonetheless, it said it could fully man full activation of all Ready Reserve Force and MSC Surge vessels in 2013. Shortages in individual unions, it said, could be made up through agreements that allow for sharing manpower to fill


vacancies regardless of union affiliation. In addition, Seafarers said it could support a one-year sustainment of a full break out at this time. Seafarers Conclusions for 2018. Seafarers projected a net loss of at least 10 US-flag vessels by 2018 but did not explain how it came up with this estimate. (It added that the projected loss is far greater when considering estimated cuts in the Food for Peace (PL-480) program, the Maritime Security Program, and organic fleets.) As discussed elsewhere in our study, the robust growth in the oceangoing Jones Act trade could lead to an increase in mariner positions. Assuming a net loss of 10 vessels and given the current number of RRF and MSC Surge vessels, Seafarers said: (1) the officers unions would not be able to man all vessels in a full activation scenario or a one-year sustainment operation in 2018; (2) the unlicensed unions would be able to man all vessels in a full activation scenario but not in a one-year sustainment operation in 2018. Seafarers said that during the 2008-2013 period, there had been a net loss of about 1,300 mariner positions. It said we cannot create qualified, skilled deck and engine ratings with a decline in seafaring jobs. Sea time is the gateway to skilled positions. It said the mean age of Masters and Chief Engineers in 2013 was 52. Based on current average retirement rates the unions can expect a shortage of Senior Officers beginning in 2014-2015 and becoming chronic in 2018. MARAD Revises Method for Estimating the Number of Available Mariners – August 2013 During the summer of 2013 MARAD revised the standard that it and DOD had been using to estimate the number of available mariners.109 In a recent report, MARAD said it uses data from the US Coast Guard Merchant Mariner Licensing and Documentation (MMLD) system. Historically, the methodology used to determine the actively sailing pool included data on mariners who had sailed within the past 24 months. This was based on analysis of crewing practices and MMLD data entry delays. Testimony from the House hearing on May 21, 2013 revealed updated information from the Coast Guard on the timeliness of MMLD data entry and new crewing practices from labor unions. Based on this new information, MARAD revalidated all assumptions regarding its methodology for estimating the actively sailing pool of mariners that resulted in revising to include data on mariners who had sailed within the past 18 months to determine the “actively sailing” pool. However, the maritime unions that collect these data are not required to provide or verify them for any Federal agency.110 We reviewed the House hearing record and could not find any discussion of information from the Coast Guard on the timeliness of MMLD data entry and new crewing practices of the labor unions. However, MARAD may be relying on union data on the number of their members who have sailed within the past 18 months to adjust Coast Guard numbers. We asked MARAD to provide us with a copy of the study it conducted with the mariners, but it did not do so. According to the Seafarers International Union, MARAD completed revising its method in August 2013, and using that method estimated the number of available mariners at 11,506. Table 4.4 is a table that Seafarers included in the October 2014 paper it submitted to the House Subcommittee on the Coast Guard and Maritime Transportation. The table shows the 11,506 mariners that had sailed in the past 18 months. It also shows another 5,660 “CIVMARS”

109 Seafarers International Union, Deep Sea Manpower Study, October 2013. 110 House of Representatives, p 47.


(presumably civilian mariners) who had sailed and then a total of 17,166 ocean mariners. However, in the comments and observations that Seafarers provides in its paper, Seafarers does not explain which civilian mariners are included in the 5,660 or why these mariners are not also counted as available mariners.

Table 4.4: MARAD Table on Mariner Supply (Oceans) as of June 20, 2013

Mariners by License

Qualified

Sailed last 18

CIVMARS

Total Sailed

Licensed 12,993 3,884 831 4,715 Unlicensed 75,017 7,622 4,829 12,451 Total 88,010 11,506 5,660 17,166

Source: Table 4.1; Seafarers International Union, Deep Sea Manpower Study, October 2013. Tables 4.5 and 4.6 compare MARAD’s revised estimate of available mariners (based on June 30, 2013 data) to the DOD/MARAD Estimate of June 25, 2013. The revised method reduces the estimated number of qualified mariners by about 15 percent and the number of available or actively sailing mariners by about 25 percent. Thus, the differences are substantial.

Table 4.5: Comparison of MARAD Revised August 2013 Estimate of Qualified Mariners to

DOD/MARAD Estimate of June 25, 2013 Qualifications

Qualified Commercial Mariners

Difference

Percent

Difference DOD/MARAD

June 25 MARAD August

Licensed 15,026 12,993 2,033 14% Unlicensed 88,880 75,017 13,863 16% Total 103,906 88,010 15,896 15%

1The MARAD estimate is based on data as of June 30, 2013. Source: Table 4.1; Seafarers International Union, Deep Sea Manpower Study, October 2013.

Table 4.6: Comparison of MARAD Revised August 20131 Estimate of Actively Sailing Mariners to DOD/MARAD Estimate of June 25, 2013

Qualifications

Available Commercial Mariners

Difference

Percent Difference

DOD/MARAD (Sailed Last 24 Months)

MARAD (Sailed Last 18

Months) Licensed 5,415 3,884 1,531 28% Unlicensed 9,865 7,622 2,243 23% Total 15,280 11,506 3,774 25%

1The MARAD estimate is based on data as of June 30, 2013. Source: Table 4.1; Seafarers International Union, Deep Sea Manpower Study, October 2013.


MARAD/DOD June 2014 Estimate of Available Mariners “Not Available” Between June 18 and June 27, 2014 MARAD, in coordination with DOD, conducted another annual breakout exercise to assess if there were sufficient mariners to man the surge fleet. According to DOD, the exercise indicated there were. We requested a copy of the results from DOD. However, it asked us to contact MARAD for a copy of the study. We did, but MARAD did not respond. July 2014 MARAD Estimate On July 30, 2014, the MARAD Administrator, in congressional testimony, said MARAD estimates that vessels average about 20 billets (or 40 mariners on an annualized basis), and that within current international trade there are approximately 4,100 licensed officers and 7,600 readily available mariners to sail on either commercial or government reserve sealift ships. This revised analysis of the contract mariner pool, including both union and non-union mariners has been shared with DOD, he said. The total of 11,700 mariners is close to the August 2013 estimate discussed above. The Administrator’s statement suggests that MARAD’s estimate may not include mariners engaged in the Jones Act oceangoing trade. MARAD and DOD seem to have a difference of view on the number of available mariners. According to a DOD official with whom we spoke, MARAD believes, based on input from maritime unions, that if mariners have not sailed within the past 18 months, they are not likely to be available, whereas DOD believes the 24-month standard is still a good one. Bureau of Labor Statistics Employment Data on the Number of Mariners The Bureau of Labor Statistics (BLS) collects and reports data on US mariners’ employment in deep sea, oceangoing coastal, and Great Lakes water transportation. The data includes breakouts for sailors and mariner oilers (combined); captains, mates, and pilots (combined); and ships engineers.111 Table 4.7 provides figures for 1988 through 2014. However, these data are of limited value for a few reasons. First, BLS cannot identify how many mariners are in the deep sea category, the coastal category, and the Great Lakes category. Second, for the coastal and Great Lakes category, BLS cannot identify which mariners have the qualifications to crew oceangoing vessels. Third, the data are for those who are employed. The survey does not collect data on mariners who are qualified to sail but are not working when the surveys are conducted. Sailors who are qualified to work but can’t find it or sailors who are qualified to work but are taking time off for various reasons are not included in the numbers. Notwithstanding these limitations, one point of interest is the considerable fluctuation in total employment across the 26-year period. This may reflect, to some degree, a rise and fall in demand for mariners related to the nation’s military needs. For example, total employment was 10,170 in 1988. Three years later, when the Persian Gulf War was well underway, the number had increased by 28 percent, to 13,710 mariners. By 1997 the number had fallen to 6,790 and remained around that level for 5 years. At the start of 2002, when the United States had begun deploying troops to Afghanistan, the number had risen back to 10,170, an increase of 42

111 BLS conducts a semi-annual survey to produce occupational employment estimates at the national, state, and sub-state level. BLS selects establishments to be surveyed from a list maintained by state workforce agencies for unemployment insurance purposes. According to two ocean transportation specialists that we interviewed, US mariners licensed or otherwise credentialed to sail on the Great Lakes would be qualified to sail on oceangoing vessels. In addition, they said when the lakes freeze over, many mariners would look for ocean-going work.


percent over what it had been in 2000. In 2003 the war with Iraq got underway. By 2006 the number had risen to 18,610 – an increase of 84 percent over where it was in 2002. Between 2006 and 2011, the number fluctuated. By 2011 the United States had completed its withdrawal from Iraq and begun its withdrawal from Afghanistan. Interestingly, the number of mariners in the table peaked in 2012, at 20,160112 and by the end of 2013 had fallen to 15,540.

Table 4.7: Bureau of Labor Statistics Data on Mariners’ Employment in Deep Sea, Coastal, and Great Lakes Water Transportation, 1988 – 2014

Year

Sailors & Marine Oilers

Captains, Mates & Pilots

Ship

Engineers

Total 1988 5,670 3,080 1,960 10,710 1989 NA NA NA NA 1990 NA NA NA NA 1991 6,850 3,760 3,100 13,710 1992 NA NA NA NA 1993 NA NA NA NA 1994 6,580 4,190 3,350 14,120 1995 NA NA NA NA 1996 NA NA NA NA 1997 3,070 2,110 1,610 6,790 1998 3,000 1,740 1,460 6,200 1999 3,060 1,900 1,210 6,170 2000 3,130 2,240 1,000 6,370 2001 3,420 2,470 1,260 7,150 2002 4,460 3,790 1,920 10,170 2003 4,500 3,770 1,840 10,110 2004 4,290 3,210 2,990 10,490 2005 6,460 4,780 5,110 16,350 2006 7,530 5,350 5,730 18,610 2007 7,830 5,640 5,320 18,790 2008 6,470 4,520 3,560 14,550 2009 6,920 5.050 4,250 16,220 2010 7.050 4,900 3,370 15,320 2011 7,980 5,500 3,920 17,400 2012 9,350 6,350 4,460 20,160 2013 6,940 5,120 3,480 15,540 2014 6,700 5,020 3,300 15,020

1Employment is collected from establishments in six semiannual panels for three consecutive years. Every six months a new panel of data is added, and the oldest panel is dropped, resulting in a moving average staffing pattern. The three years of employment data are benchmarked to represent the total employment for the reference period. Source: Bureau of Labor Statistics.

112 The Econometrica, Inc. report, previously cited, estimated approximately 20,500 mariners engaged in oceangoing merchant marine activities (including 6,400 officers and 14,100) but is not clear for what year. Also, the authors did not describe how they arrived at their figures.


Would a War Requiring Activation of the Surge Fleet Increase the Willingness of US Mariners To Make Themselves Available? According to a 2009 study prepared by Econometrica, Inc. for MARAD, interviews with industry representatives indicated a widespread belief that, when needed, the industry finds the mariners necessary to support commerce and national defense.113 According to a study done for the Joint Chiefs of Staff, during the Persian Gulf War (1990/1991), unions and carriers greatly bolstered their training programs and many mariners came out of retirement, some at a very advanced age.114 Reportedly, as many as 3,000 civilian mariners volunteered on short notice to crew 79 Ready Reserve Force ships that were activated.115 A 2001 Department of Transportation survey of mariners indicated that 77 percent of licensed US mariners and 67 percent of unlicensed mariners would volunteer for national defense service.116 According to Econometrica, Inc., the Maritime Administration had in the past projected a shortfall of almost 2,000 mariners regarding a contingency operation that required crewing the surge fleet for a period greater than 6 months. But interviews Econometrica, Inc. conducted with Maritime Administration staff and with contacts in the military/DOD community indicated that the then-current mariner labor pool was adequate to meet the needs.117 Results of Our Study Reinforce GAO 2014 Report Finding The discrepancies in estimates we found on the number of available mariners and difficulties in obtaining estimates that have been made and supporting details reinforce the findings of a GAO 2014 GAO report. According to GAO, complete detailed data on active mariners is not available. Maritime industry stakeholders and federal agencies collect different types of data on US mariners primarily related to their own segment of the industry or for different purposes. Some data, such as the number of mariners who work for maritime companies or the number of mariners who belong to unions, are considered business proprietary, and these organizations are reluctant to share these numbers with each other or the public. Other potential data—such as the number of mariners working in the domestic waterways, the number of non-union mariners, or the number of mariners who are not permanent employees of companies—are not currently widely collected. Similarly, government agencies closely related to the maritime industry currently do not track the entire maritime workforce, but focus on individual aspects of it. For example, according to Coast Guard officials, their data system tracks the number of credentials; however, mariners may hold more than one credential or they may not be active. MARAD relies on Coast Guard data to assess the number of mariners in the industry who would be qualified to work on oceangoing sealift vessels.118 Questions about the Nexus among MARAD, Shipping Companies and Maritime Unions MARAD told us it does not have any direct agreements with any of the labor unions. The RRF vessels under MARAD control are handled and crewed under commercial contracts with various 113 Econometrica, Inc., Maritime Security Program Impact Evaluation (Bethesda, MD, July 2009), p. 61. 114 Ibid. p. 61.Mathews, James k. and Holt, Cora J., So Many, So Much, So Far, So Fast: United States Transportation Command and Strategic Deployment for Operation Desert Shield/Desert Storm, Joint History Office, Office of the Chairman of the Joint Chiefs of Staff, and the Research Center, USTRANSCOM, US Government Printing Office: Washington, D.C., 1996, p. 128. 115 Federation of American Scientists, Military Analysis Network, Ready Reserve Force, June 12, 2015. http://fas.org/man/dod-101/sys/ship/rrf.htm. 116 US Department of Transportation, Bureau of Transportation Statistics, 2001 Mariner Survey, Principal Findings, August 2001, Washington, D.C., 2001 – as cited by Econometrica, Inc., p. 63. 117 Econmetrica, p. 63. 118 GAO, US Merchant Marine: Maritime Administration Should Assess Potential Mariner-Training Needs,” (Washington, D.C.: January 31, 2014), pp. 8, 26.


ship management organizations that make their own labor agreements. The companies who hold the contracts to operate the surge vessels have collective bargaining agreements with the maritime labor unions, and the unions provide the necessary mariners to crew the vessels when activated per the agreements, Similarly, MARAD said, the US-flag commercial fleet, which carries both commercial and government impelled cargo, has such labor agreements. We asked MARAD what actions the maritime unions take to assure that a sufficient number of qualified mariners will be available in a timely way to man the sealift fleet on short notice. MARAD said as far as it knows, the unions meet job requests on a first come, first served basis. We believe it would be useful for MARAD to make available information about the contracts that the commercial companies have with MARAD and with maritime labor to crew the Surge Fleet. For example, do the companies’ agreements with the unions include guarantees to provide a specified number of mariners to crew the surge fleet when activated and in a timely manner? Does the combination of numbers in the company agreements add up to the total number needed for the Surge Fleet? If guarantees exist, do they cover both an initial activation period for the surge fleet and a possible subsequent surge rotation? What period of time is covered by such agreements and how frequently are they re-negotiated? Is MARAD provided copies of the company/union agreements? How Will New Mariner Standards Affect the Number of Available Mariners? According to MARAD, when US merchant mariners are not actively sailing, they typically do not maintain their memberships in the US maritime unions, which have collective bargaining agreements to crew the reserve sealift fleet. The cost for unlimited ocean and tonnage credentialed merchant mariners to maintain both domestic and international training endorsements on their US Coast Guard Merchant Mariner Credential, which will increase in January 2017 as the US comes into compliance with new STCEW requirements may cause mariners who are not actively sailing to place their credentials in continuity or allow them to expire. They may then not be readily available to crew the reserve sealift fleet and may require additional training to reinstate their credentials depending, for example, on when their credentials were placed in continuity or expired.119 A work around solution may be found to address this potential problem. For example, it might be cost-efficient for MARAD to offer some support to encourage such mariners to keep their endorsements active. Similarly, perhaps unions can be persuaded to waive or reduce their dues when mariners are not actively sailing. Concluding Remarks about Estimates of Available Mariners If and when contingencies arise that require activation of the Surge Fleet, DOD needs to know that sufficient mariners will be available to man the fleet. Given the importance of this issue and based on the results of our analysis, we believe much more transparency is needed. Estimates and how they are made should be available to the Congress and the public more generally. More transparency may indicate a need for better data and analysis. More specifically, we believe MARAD should make available the 2014 MARAD/DOD study and a 2015 study if it has been completed. We also believe MARAD should make available the study it conducted with Maritime Labor that led to its adoption of different method for estimating the number of available

119 Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine, A Report to Congress (Washington, D.C., April 21, 2015), p 47.


mariners. Detailed supporting information is needed on how estimates have been made to see if apparent differences can be reconciled and what weaknesses in the methods exist. Additional Perspective on MARAD and DOD Concerns about the Shrinking Number of US-Flag Ships and Declining Preference Cargoes As discussed earlier, in July 2014 DOD said it was concerned about the loss in the number of US-flagged vessels in the international trading sector, specifically ocean going vessels in excess of 1,000 tons. Since 1990, it said, the size of this segment of the US-flag fleet has been reduced from 193 to 85 as US-flag companies struggle to remain competitive with companies operating under foreign flags at lower operating costs. However, in an April 2015 report to the Congress, MARAD said the overall decline in the number of vessels since 1990 corresponds roughly to an increase in the size of each vessel and a reduction in the number of mariners required to crew each vessel. And, the number of mariners required per vessel currently averages about 20 billets (or 40 mariners per year) compared to about 32 mariners per vessel in the 1990s. Since the late 1990s, the report said, the number of containerships and RO/RO has remained relatively constant and the average size of the vessels has continued to increase, so that the average deadweight tonnage overall is roughly 10-15 percent higher than in the late 1990s. The containership and RO/RO fleets have been particularly well suited to the movement of military cargoes it said. 120 Moreover, MARAD acknowledged that the decline in number of tanker and bulk vessels since 1990 is likely due to changes in the domestic markets and strict regulation of petroleum tankers under the Oil Pollution Act of 1990.121 In July 2014 DOD said that although operations in Iraq and Afghanistan had temporarily slowed the decline in the number of US-flagged vessels in the international trading sector, the nation’s transition out of Afghanistan and current economic conditions might exacerbate the decline. Vessels continue to participate in the Maritime Security Program because the combination of government impelled cargoes and the MSP stipend offset some of the operating cost differential. But, the loss of government-impelled cargoes may cause participants to rethink their participation in MSP as the stipend alone may not provide enough incentive to remain under US flag.122 Similarly, MARAD said the size of the US-flag international fleet of privately-owned, self-propelled vessels decreased from the five-year average between 2008 and 2013 of 101 to 84 vessels as of July 2-14, and is expected to decrease further in the years to come. Adverse impacts on the 58 liner-service-service type vessels in the Maritime Security Program Fleet are already occurring with one vessel leaving the program and reflagging foreign and two more expected before the end of the year. They state that their basis for leaving the program is a lack of cargo and it appears unlikely that commercial or preference cargo will recover significantly in the future. However, in its April 2015 report to Congress, MARAD cited only one vessel as having left the MSP because available preference cargo was not sufficient to justify continued commercial operations under the US-flag. Moreover, MARAD said, it anticipated that operators of other vessels would be willing to fill open MSP slots should they become available. Also, MARAD noted that if the slots eventually go unfulfilled, the current level of 58 liner-type vessels in MSP might be reduced (thus providing more preference cargo per remaining ship and possibly

120 Maritime Administration, Impacts of Reductions, pp. 4-5 31-32. 121 Ibid. 122 Statement of William A. Brown, pp 4-5


stabilizing the MSP fleet). 123 April 2015 MARAD Estimate of Future Cargo Preference Levels and Possible Impact on Mariner Jobs In an April 2015 report to Congress the Maritime Administration quantitatively projected how many vessels would be in the US-Flag International Trading Self-Propelled Oceangoing Fleet by 2023. The analysis used data from 1990 through 2013. Among factors evaluated were volumes of preference cargo moved on US-Flag vessels since 1990, number of vessels under ODS or Maritime Security Program contracts, number of vessels under Military Sealift Command long-term charters, and US-flag vessel sizes and ages. Based on the analysis, the study identified the decrease in available Government-impelled cargo as the most significant factor contributing to the loss of vessels. 124 In addition, it concluded overall cargo preference volumes will likely decrease further over the next two to three years, returning to the levels of the later 1990s as the war efforts in Iraq and Afghanistan wind down. Food aid preference cargoes, it said, will continue to fluctuate for a number of reasons, including the nature of food emergencies, the variability of food prices, and the costs of transportation and distribution. 125 MARAD’s analysis indicates that in 2023 there may be a total of 84 vessels compared to a predicted 87 at the end of 2013,126 which would be slightly lower than the levels before the wars in Iraq and Afghanistan.127 The number of mariner jobs with the loss of 3 ships was estimated at approximately 120 mariners. Based on the 95 percent confidence interval for the quantitative analysis, the range in 2023 was from 64 to 110 total private-owned self-propelled vessels, with associated changes in mariner jobs ranging from a loss (compared to the end 2014) of up to 680 jobs to a gain of 1,160 jobs.128 The quantitative analysis further shows that through 2023 the size of the US-flag international trading fleet will at best recover to a level similar to those observed in 1999, 2010, and 2011, and will likely remain at or below the current size of 81 given current forecasts of preference cargo. Accordingly, the number of mariner jobs is estimated to follow a similar trend, likely to remain either constant or decline from the period before 2010. (For additional analysis on cargo preference levels, see Section 5.) What is especially noteworthy about this analysis is what the study did not evaluate. Although MARAD acknowledged that global economic growth has produced a robust job market in maritime commerce governed by the Jones Act, it did not estimate how many, if any, new positions might be available for mariners in the Jones Act trade over the period to 2023129 or the number of vessels that might be affected.130 According to MARAD, it did not do so because the study was focused on the impact of reductions in government impelled cargo on the US merchant marine, and Jones Act-eligible vessels do not rely on preference cargoes or MSP

123 Maritime Administration, Impacts of Reductions, pp 44-45. 124 Maritime Administration, Impacts of Reductions. 125 The study did not consider a possible ramping up of US military forces in Iraq to counter the Islamic State (ISIS). Nor did it consider the possible impact of enactment of US food aid reforms on the number of US-Flag vessels and associated mariners. For an analysis of the latter, see Section 5. 126 The report noted that the actual number of such vessels at the end of 2014 was 81. 127 Ibid. 128 Maritime Administration, Impacts of Reductions, pp. 5-8. 129 Maritime Administration, Impacts of Reductions, p. 48. 130 As noted elsewhere in this section, the Maritime Administrator has said that the primary source of mariners to crew government reserve sealift ships is the pool of US contract mariners actively sailing in the US-flag shipping industry, including the Jones Act trades, which are reserved entirely for the US flag.


stipends for their revenues.131 See Section 5 of our study for a discussion of how growth in the Jones Act trade may increase the number of US-Flag oceangoing ships and associated mariners. MARAD’s National Maritime Strategy May Include a Proposal to Increase the Number of US-Flag Ships and Mariners The Maritime Administration is working on developing a National Maritime Strategy with stakeholders that aims at preserving and growing all aspects of the US merchant marine, including the US-Flag international trading fleet.132 In an October 2014 presentation, the MARAD Administrator suggested consideration be given to creating about 1,400 new mariner jobs for addressing the insufficient mariner pool for activation and prolonged operation of the 62 vessels in the Surge Fleet. This would require an additional 35 contract mariner US-Flag vessels.133 It would cost a considerable amount of resources to acquire 35 vessels, regardless of how they were financed. For example, the current annual subsidy for MSP vessels is $3.1 million per year. Thirty-five ships at $3.1 million would equal $109 million a year. Who would pay for this? Such a proposal would need to be considered within the context of the significant aging of the Ready Reserve Force (RRF) Fleet vessels. The value of buying more ships to increase assurance of having enough mariners to man the Surge Fleet in a rotational status for a prolonged contingency should be weighed against whether the RRF vessels are adequate to perform their role. According to MARAD’s Administrator, maintaining a standby fleet of former commercial vessels in the RRF has served the Nation well. However, although commercial ships are normally retired after 25 years of service, MARAD intends to maintain the RRF program service ships in service for 50 years. As of 2014, the RRF ships already had an average age of 40 years.134 As discussed in section 2, during the 1990-1991 Persian Gulf War, the RFF ships were not well prepared to perform their mission. One of the primary causes of difficulties was inadequate funding for ship maintenance and repair. According to the Administrator, the current RRF maintenance program has compensated for age by effectively managing through auxiliary equipment upgrades to provide more modern shipboard systems.135 That said, questions have been raised by some about whether (1) TRANSCOM is confident about the viability and dependability of the RRF ships and (2) an independent study should be conducted of the bottom 20 performing ships in the RRF.136 In July 2014 the Administrator said MARAD was preparing, in coordination with DOD, a RRF recapitalization study to assess the full range of options that would balance DOD’s requirements with funding realities. One option that could be considered, was acquiring new US-built vessels, which MARAD estimated would cost approximately $225 million. Among other options

131 Ibid p. 24. 132 Statement of Paul N. Jaenichen, p 7. 133 US Department of Transportation, Maritime Administration, NDTA Military Sealift Committee (slide presentation), October 28, 2014. The National Defense Transportation Association is a non-political, non-profit educational association of government, military, and industry professionals that seek to foster a strong and efficient global transportation and distribution system in support of national security. 134 Statement of Paul N. Jaenichen, p 4. 135 Ibid. 136 NDTA, Sealift/Intermodal Issues and Solutions Discussion (slide show), NDTA-USTRANSCOM Fall Meeting 2013 (St. Louis, MO: October 16, 2013).


mentioned were (1) acquiring commercial vehicles when they age out of economic usefulness, (2) supporting construction and operation of American Marine Highway vessels to be available for worldwide deployment on short notice, and (3) exploring the possibility of joint Navy-MARAD national security multi-mission vessels.137 Based on the information and analysis provided in this section, we believe more information is needed to justify acquiring 35 more vessels for the purpose of making 1,400 more mariners available to crew the Surge Fleet if it had to be rotated. If serious consideration is given to purchasing or subsidizing 35 additional vessels, we believe a cost benefit analysis should be conducted that examines alternative ways to assure more mariners can be available.

137 Statement of Paul N. Jaenichen, p 4.


Section 5

Reform of US Food Aid Programs Will Not Significantly Affect the Number of US-Flag Ships or Availability of Mariners

Summary The Administration’s food aid reform proposals could effectively reduce in-kind food aid purchases for Food for Peace (P.L. 480) Title II emergency food aid by about 25 to 45 percent. Senators Corker and Coons have a bill that provides USAID with flexibility as to how much of Title II would be used for in-kind US food and eliminates cargo preference food aid requirements. At issue are how many US-flag vessels and their associated mariners might be affected if such proposals were implemented. A 45 percent reduction might affect the US-flag status of as many as 8 to 11 vessels and 360 to 495 mariners. The number of mariners that might be affected represents only about 2 percent to 3 percent of the total number of available commercial mariners estimated by the Department of Defense (DOD) and Maritime Administration (MARAD) in June 2013. Moreover, recent developments in the US oil and gas sector, and Jones Act oceangoing shipping, could offset these losses. Mariners who work on Jones Act oceangoing vessels are qualified to help staff the Navy’s surge fleet and many Jones Act oceangoing ships are militarily useful. A considerable number of Maritime Security Program (MSP) vessels transported food aid during the FYs 2011-2013 period. However, the amounts carried by most of the ships were small relative to their shipping capacity. Food aid cargo preference accounts for a small proportion of total cargo preference dollar revenues and total tonnage transported. Food Aid Reform Proposals The Administration’s FY 2014 budget proposed to replace Food for Peace (P.L. 480) Title II funding estimated at $1.4 billion annually, with an equivalent amount divided among three USAID assistance accounts.138 According to USAID, the reform proposal guaranteed that in 2014 no less than 55 percent of a requested $1.4 billion in total funding for emergency food assistance in the International Disaster Assistance Account would be used for the purchase, transport, and related costs of US commodities.139 Effectively, then, the proposal would have amounted to a 45 percent cut in funding for in-kind food and cargo preference food aid. The proposal would have allowed $630 million to be available for interventions such as local and regional procurement (LRP), food vouchers or cash transfers. The proposal was not enacted. For FY 2015, the Administration proposed a considerably reduced reform that would have allowed up to 25 percent of its Title II funding ($350 million of $1.4 billion requested) be used for LRP, food vouchers, or cash transfers.140 This proposal was not enacted. A similar proposal has been made for FY 2016.141 In June 2014 and again in February 2015 Senators Corker and Coons from the Senate Foreign Relations Committee introduced bills that proposed eliminating cargo preference requirements and the US-only commodity purchase requirement for the Food for Peace Act Title II

138 Congressional Research Service, International Food Aid Program: Background and Issues, R-41072 (Washington, D.C.: May 28, 2014), p. 22. 139 USAID, The Future of Food Assistance: US Food Aid Reform, Fact Sheet on the President’s 2014 budget request, p 2. 140 USAID, The Future of Food Assistance: US Food Aid Reform, Fact Sheet on the President’s 2015 budget request, p 1. 141 Ibid. p. 1.


program.142 Under their proposals, Title II funds could be used to purchase agricultural commodities produced in the United States, purchased locally or regionally abroad, and for food vouchers or cash-based assistance -- whichever is deemed by USAID as the preferred option for the given situation. Similarly, USAID could ship any US sourced commodities on vessels most readily available and most cost-effective—irrespective of the vessel’s registry. If the latest Corker/Coons bill becomes law, in theory USAID could use all of the Title II funding for LRP and food or cash vouchers, eliminating all in-kind food aid and all cargo preference for the program. However, USAID said US commodities would continue to make up a significant portion of purchases, particularly for many processed foods and large cereal procurements that are not available elsewhere in the world or are produced in insufficient amounts by developing countries near crises. In other cases, USAID said, US commodities might be the best option because of inflation or food price volatility. In addition, changes to existing legislation might include restrictions affecting the amount of food that could be purchased abroad. For example, the Corker-Coons 2015 bill would require the USAID Administrator to take reasonable precautions to avoid displacing any sales of US agricultural commodities that the Administrator determines would otherwise occur. If the Corker/Coons bill was to become law and if USAID relied on 55 percent of its Title II funding for the purchase, transport, and related costs of US commodities, it is possible that US-flag vessels would not bid against foreign flag vessels for transportation of any of the Title II commodities because of their vessels’ higher operating costs. In this case, Title II cargo preference food aid might be reduced by as much as 100 percent. Whether, and if so, how many US-flag ships that have carried US food aid will continue to operate as US-flags if in-kind food aid or food aid cargo preference is reduced will depend in part on how much they rely on food aid cargoes for their business. It could also depend on whether they can compete in the domestic Jones Act trade.143 As discussed in section 4, MARAD and DOD have expressed concerns that there are not or may not be enough US mariners to help staff the Navy’s surge fleet in the event of a major war, especially a prolonged conflict lasting more than 6 months. They have also voiced concerns about whether there will be enough US-flag ships with military utility. It has even been suggested that a diminution of cargo preference for food aid vessels would negatively impact readiness. For our analysis, we examine two scenarios of possible impacts of proposed food aid reforms on the number of US flag ships and the number of US mariners: 1) a 45 percent reduction in US in-kind Title II food aid and Title II cargo preference; and (2) a 100 percent reduction in food aid cargo preference. In addition, we review the military usefulness of vessels that have been transporting cargo preference food aid. Finally, we examine the extent to which cargo preference food aid contributed to overall cargo preference dollar revenues and tonnage transported.

142 In May 2013, the Chairman and Ranking Minority Member of the House Foreign Affairs Committee introduced a bill that would have eliminated the US-only commodity purchase requirement and exempted Title II food assistance from cargo preference requirements. The 113th Congress took no action on the bill. 143 Regarding the latter, of 74 US-flag vessels that transported US food aid during the period of fiscal years 2011-2013, we identified 15 that were built in the United States. Many, if not all, had been approved by the Coast Guard for unrestricted coastwise trade.


US Flag Vessels and Vessel Operators Involved in Transporting US Food Aid As Table 5.1 shows, the number of US-flag vessels carrying food aid has declined in recent years, along with the tonnage carried. The tonnage shift was especially large in FY 2013, the first full year after the 50 percent cargo preference requirement had been restored. Table 5.1: US Food Aid Totals and US-Flag Tonnage and Number of Vessels, FY 2011-13

(tons in millions)

FY 2011

FY 2012

FY 2013

Total Tons Transported1 1.752 1.615 1.340 Tons Transported by US-Flag Ships 1.396 1.389 0.753 # of US-flag Vessels Transporting Food 55 47 41

1 Includes a small number of vessels and amounts (0.4 percent or less of the tonnage) that involved both a US-flag and a foreign-flag vessel. Source: Analysis of USDA data. Table 5.2 shows that 16 of the 74 vessels accounted for nearly four-fifths of the food aid tons transported during FY 2011 – FY 2013.144 In fact, the first four vessels carried more than a third of the food aid, and the next 6 vessels accounted for nearly a third. We estimated the equivalent number of full shiploads of food aid each vessel carried on an annualized basis.145 Two of the 16 vessels carried about five shipload equivalents, four more than two shipload equivalents, and eight more than one shipload equivalent. Two of the 16 ships carried less than one-half of a shipload.

144 Ten of these ships carried food aid in each of the three fiscal years. The other six participated in two of the three years. 145 The amount of food aid carried by a vessel on a specific voyage could range from a small fraction of the ship’s carrying capacity to an entire shipload. See table 5.2.


Table 5.2: US-Flag Oceangoing Merchant Vessels Carrying US Food Aid, FY 2011-13

(Ranked in Descending Order Based on Tons Lifted)

Vessel Name

Vessel Operator

Tons Lifted

Vessel Tonnage

Lifted as % Total Lifted

Cumula-

tive Percent Lifted

Annual

Shipload Equiva-lents1, 2, 3

Liberty Glory Liberty 391,500 11.5% 11.5% 2.58 Liberty Grace Liberty 342,039 10.0% 21.5% 2.25 Liberty Eagle Liberty 259,480 7.6% 29.1% 1.67 Liberty Sun Liberty 234,000 6.8% 35.9% 1.82 Maersk Virginia Maersk, Inc. 218,941 6.4% 42.3% 1.18 Liberty Spirit Liberty 207,300 6.1% 48.4% 1.59 Sheila McDevitt United Maritime

Group 183,510 5.4% 53.7% 2.46

Advantage Sealift 158,160 4.6% 58.4% 1.90 Mary Ann Hudson United Maritime

Group 151,900 4.4% 62.8% 2.09

Noble Star Sealift 138,240 4.0% 66.9% 1.86 Black Eagle Sealift 99,877 2.9% 69.8% 1.02 Liberty Star Liberty 90,100 2.6% 72.4% 4.92 Maersk Ohio Maersk, Inc. 62,490 1.8% 74.2% 0.34 Major Bernard F Fisher

Sealift 56,740 1.7% 75.9% 1.16

Maersk Montana Maersk, Inc. 55,110 1.6% 77.5% 0.30 EOT Spar Schuyler 51,060 1.5% 79.0% 5.56 Sub-total 2,700,447 79.0% 58 Other Vessels 717,589 21.0% 100.0% Total 3,418,036 100.0% 1A shipload equivalent was estimated by dividing the number of food aid metric tons a vessel carried during the year by its deadweight tonnage (DWT). A ship’s DWT is the total weight (metric tons) a ship can carry when immersed to its load line. Since DWT includes (in addition to the cargo carried) fuel, fresh water, stores, and crew, the estimates in the table are underestimated to a degree. 2The amount of food aid carried by a vessel on a specific voyage could range from a small fraction of the ship’s carrying capacity to an entire shipload. 3Some vessels were used to carry food aid during all three fiscal years while others were used during only one or two of the fiscal years. The data were standardized by dividing the results from the calculation described in footnote one by the number of fiscal years a vessel carried food aid. Source: Analysis of USDA food aid data and of shipping data.


Table 5.3 shows that a substantial number of the 74 vessels were not heavily involved in transporting food aid. For example, 41 of the vessels carried less than one-half of a shipload on an annualized basis. Similarly, Table 5.4 shows that nearly one-third of the vessels that carried Food for Peace Title II food aid in FY 2014 were expected to deliver their food in 30 days out of the year and nearly two-thirds were expected to do so in 60 days. The number of days were aggregated for each vessel that made more than one voyage during the year carrying food aid. Table 5.3: Number of Shipload Equivalents of Food Aid Carried by Vessels per Annum1, 2

(FY2011-13)

Shipload Equivalents1

Number of Ships

Cumulative Number of

Ships Less than 1/10 20 20 1/10 to 2/10 11 31 2/10 to 5/10 10 41 5/10 to 1 shipload 8 49 1 to 1 ½ shiploads 9 58 1 ½ to 2 shiploads 7 65 2 to 3 shiploads 5 70 3 to 4 shiploads 1 71 4 to 5 shiploads 1 72 5 to 6 shiploads 1 733

1See Table 5.2 for clarifying notes. 2One ship was not included in the analysis due to missing data. Source: Analysis of USDA and MARAD data.


Table 5.4: Total Expected Days1 to Make Food for Peace Title II Food Aid Deliveries, FY 2014

Total Expected Days to Deliver Food

Number of Vessels

Percent of Vessels

Cumulative Percent

0 - 30 9 33% 33% 31 - 60 8 30% 63% 61 - 90 5 19% 82% 91 - 120 0 0% 82% 121 – 150 2 7% 89% 151 – 180 1 4% 93% 181 – 210 0 0% 93% 211 – 240 1 4% 96% 241 – 270 0 0% 96% 271 – 300 4 4% 100% Total 27 100% ---

1Days were aggregated for vessels that made more than one voyage carrying food aid. Source: Analysis of USDA data. Commercial Operators Engaged in US Food Aid Transportation Table 5.5 shows three commercial vessel operators accounted for nearly 90 percent of the US food aid shipped by US-flag vessels in FY 2013. Liberty accounted for 49 percent, Sealift of Delaware 20 percent, and Maersk, Inc. 18 percent. Liberty and Sealift of Delaware used 4 ships each while Maersk employed 14. However, most of Maersk’s food aid was moved by 4 ships. One handled 11.5 percent of the tonnage and the other three vessels together accounted for 5 percent of the tonnage.


Table 5.5: US Food Aid Shipped by US Flag Carriers, FY 2013 Carrier

Number of

Vessels Used

Metric Tons

Ocean Freight Costs

Carrier’s Tons

as % of Total

Tons All Carriers

Cumu-lative

Percent

Liberty 4 372,750 $49,378,974

49% 49%

Sealift of Delaware 4 150,070 28,317,575

20% 69%

Maersk Line, Limited 14 138,940 31,115,617

18% 88%

Moran Towing Corp. 2 18,000 3,799,200 2% 90% Industrial Maritime Carriers 4 17,230 7,041,914 2% 93% Foss International, Inc. 2 14,320 5.026,765 2% 94% Dome Chartering & Trading Corp.

1 14,210 6,130,084 2% 96%

Crimson Shipping Co. 2 10,280 1,810,027 1% 98% American President Lines 4 10,150 1,386,286 1% 99% USS Holding Inc. 1 6,500 1,561,745

0 1% 100%

Hapag-Lloyd USA LLC 3 670 445,627 0% 100% Sub-total 41 753,120 $136,013,

819 100%

111,9001 NA Total 865,020 $136,013,

819

4Some commodity purchases were pre-positioned in the United States for future delivery. Source: Analysis of USDA data. The Liberty Maritime Corporation is (1) a carrier of United States origin overseas food aid shipments for various US government agencies including the Departments of Agriculture, State, and Defense, (2) a carrier of cargo for many commercial grain houses, and (3) the largest US flag food carrier for the United Nation’s World Food Program. According to Liberty, in mid-May 2015, it had a US-flag fleet of ten vessels, including eight bulk carriers and two roll on/roll off vessels. Liberty provides transport for tracked and wheeled military equipment such as tanks, helicopters, Humvees, MRAPs and M-ATVs, as well as commercial vehicles, heavy equipment and project type equipment. According to Liberty, its entire US-flag fleet are VISA participants and three of it vessels meet US Maritime Security Program requirements.146

Sealift describes itself as one of the largest ocean transportation contractors for US government food aid cargoes. According to Sealift, in mid-May 2015 its fleet included seven vessels, one of which was for sale.147 146 www.libertymar.com 147 www.sealiftinc.com


The Maersk Line, Limited is a US-based subsidiary of A.P.Moller – Maersk Group. The Maersk Group, a worldwide conglomerate headquartered in Denmark, owns one of the world’s largest shipping companies, the Maersk Line. The Maersk Line is the world’s largest container shipping company and has a fleet of over 600 ships. The Maersk Line, Limited (MLL) operates a fleet of varying types of vessels (container ships, tankers, and roll-on/roll-off vessels), either in international commercial service or under contract with the US government. In mid-May 2015, it listed a fleet of 36 ships. According to MLL, it has the largest and most diverse US flag commercial fleet in international trade. In addition, MLL describes itself as a leading operator and manager of US government vessels, and as one of the largest employers of US merchant mariners. According to MLL, since 1983 it has managed government-owned vessels in reduced operating status and shifted them to full operating status, including during the first and second Gulf Wars, when military pre-positioned ships it maintained and operated delivered military supplies to troops on the ground.148 Possible Impacts of Proposed Food Aid Reforms on the Shipping Industry We examine two scenarios of possible impacts of proposed food aid reforms on the number of US-flag ships and the number of US mariners: 1) a 45 percent reduction in US in-kind Title II food aid and Title II cargo preference; and, 2) a 100 percent reduction in Title II food aid cargo preference. In June 2013, the Department of Defense estimated that the Administration’s FY 2014 budget food aid proposal might affect eight to 11 vessels and roughly 360 to 495 mariners.149 This was for an estimate that would have allowed up to 45 percent of previously funded Title II food aid to be purchased outside of the United States. Thus, if fully implemented, the amount of food aid subject to cargo preference requirements would be reduced by 45 percent. Figure 5.1 shows that the number of possibly affected mariners would equal about 2 to 3 percent of the number of available mariners estimated by DOD/MARAD in June 2013.150 As Table 5.6 shows, in FY 2014 27 US-flag vessels delivered 457,350 tons of Title II food aid, but 13 of them accounted for 94 percent of the tonnage.151 In fact, two of the 13 vessels – the Liberty Glory and the Liberty Grace – together accounted for half the tonnage delivered. Of the remaining 14 vessels, three carried a little more than one percent each, while the other nine carried amounts ranging from less than 0.1 percent to 0.8 percent of total tonnage. Depending on USAID’s needs in terms of where, when, and in what amounts the food would need to be delivered, it might be possible to achieve a 45 percent reduction with fewer than eight vessels affected. At issue overall is whether the affected vessels would decide to stop operating under the US-flag because of the reduced amount of cargo subject to cargo preference requirements. As shown in Table 5.6 and earlier in Tables 5.3 and 5.4, many of the vessels carry such small amounts of food aid that it is questionable whether the food aid reforms alone would cause them to drop the US-flag. Much more important to such a decision is how the rest of their business is performing. Also, the number of mariners that might be affected will depend on 148 www.mearsk.com; www.maersklinelimited.com 149 As discussed in section 4, the Seafarers International Union projected a loss of 10 vessels between 2013 and 2018. The union did not specify how it arrived at this estimate. 150 As discussed in section 4, we analyzed several different estimates of the number of available mariners. We rely on the MARAD/DOD joint exercise result for 2013. MARAD did not us with a copy of the 2014 joint exercise estimate. By the time our report is issued, a 2015 joint exercise may have been completed, 151 Liberty, Maersk, and Sealift together accounted for more than 93 percent of the deliveries.

http://www.mearsk.com/


the availability of other employment opportunities. See, for example, the section ahead on the Jones Act trade.

15,280 mariners

2.35% to 3.23%

Figure 5.1: US Commercial Mariners Who Might Be Affected by Implementation of the Administration's Fiscal Year 2014

Food Aid Reform Budget Proposal

Estimated # of availablemariners

# Mariners that might beaffected

360 to 495

Source: Analysis of Department of Defense data


Table 5.6: US-flag Oceangoing Merchant Vessels Transporting Food for Peace Title II Food Aid Commodities, FY 2014

Vessel Name

Commercial Operator

Tons Lifted

Tonnage Lifted

as % Total Tons Lifted

Cumula-tive

Percent 1. Liberty Glory Liberty 116,430 25.5% 25.5% 2. Liberty Grace Liberty 113,640 24.8% 50.3% 3. Capt. Steven Bennett Sealift Inc. of Delaware 60,390 13.2% 63.5% 4. Maersk Chicago Maersk Inc. 31,520 6.9% 70.4% 5. Maersk Detroit Maersk Inc. 30,650 6.7% 77.1% 6. Advantage Sealift Inc. of Delaware 23,850 5.2% 82.3% 7. Maersk Atlanta Maersk Inc. 14,220 3.1% 85.4% 8. Liberty Eagle Liberty 10,960 2.4% 87.8% 9. Ocean Freedom Industrial Maritime

Carriers 7,500 1.6% 89.5%

10. Maersk Hartford Maersk Inc. 6,130 1.3% 90.8% 11. Maersk Ohio Maersk Inc. 5,800 1.3% 92.1% 12. EOT Spar Schuyler Line Navigation

Co 5,300 1.2% 93.2%

13. Ocean Crescent Industrial Maritime Carriers

5,000 1.1% 94.3%

14. Maersk Denver Maersk Inc. 3,760 0.8% 95.1% 15. Maersk Wisconsin Maersk Inc. 3,640 0.8% 95.9% 16. APL China American President Lines 2,900 0.6% 96.6% 17. Ocean Titan Industrial Maritime

Carriers 2,790 0.6% 97.2%

18. Crimson Clover Crimson Shipping Lines 2,290 0.5% 97.7% 19. Ocean Charger Industrial Maritime

Carriers 2,220 0.5% 98.2%

20. Maersk Kentucky Maersk Inc. 2,210 0.5% 98.7% 21. Maersk Idaho Maersk Inc. 2,130 0.5% 99.1% 22. APL Cyprine American President Lines 1,860 0.4% 99.5% 23. Maersk Memphis Maersk Inc. 1,000 0.2% 99.7% 24. Maersk Utah Maersk Inc. 750 0.2% 99.9% 25. APL Coral American President Lines 200 0.0% 100.0% 26. Maersk Pittsburgh Maersk Inc. 110 0.0% 100.0% 27. Maersk Columbus Maersk Inc. 100 0.0% 100.0% Total 457,350 100.0% Source: Mason analysis of USDA data.


The second scenario is a 100 percent reduction in Title II cargo preference. Based on the FY 2014 Title II figures discussed above for US-flag deliveries, in principle an end to the cargo preference requirement could have affected all 27 vessels that delivered Title II food aid that year. However, once again, one should consider what proportion of a vessel’s overall business would be affected. Tables 5.3 to 5.6 demonstrate that many of the US-flag vessels engaged in the food aid cargo preference business in recent years have carried small amounts of cargo relative to their carrying capacity. And the number of days out of the year spent delivering the food aid has been small. As Figure 5.2 demonstrates, US food aid overall (not only Title II) accounts for a small amount of total cargo preference tonnage carried by US-Flag vessels and a small amount of cargo preference revenues. In FY 2012 it was ten percent and eight percent respectively.

616,476 4% 1,575,449

10%

15,304,198 86%

Figure 5.2: U.S. Food Aid, DOD, and Civilian Agencies Cargo Preference Tonnage and Revenue, FY2012

Civilian Agencies Food Aid Military

$163,338,000 4%

$299,910,000 8%

$3,254,802,000 88%

Tonnage Revenue

Note: Military cargoes, as reported by the US Maritime Administration, include measurement tons, metric tons dry cargo, and petroleum metric tons. Figures for civilian agencies and food aid

are reported in metric tons. Source: Analysis of data provided in the US Maritime Administration’s Annual Report 2013.


Jones Act Trade and Other Options Could More Than Offset Possible Loss of US-flag Ships and Mariners Due to Food Aid Reforms Although food aid reforms might lead to a reduction in some of US-flag oceangoing merchant vessels engaged in US international trade, recent developments in the US oil and gas sector and Jones Act oceangoing shipping could offset these losses. In addition, other options for ensuring a sufficient number of mariners could be explored. Privately owned Jones Act oceangoing ships can be an important source of ships and US mariners to help assure that the Navy’s surge fleet can perform adequately in the event of war. In FY 2012 the Jones Act coastal trade represented 146 million tons of cargo. The 1.46 million metric tons of US food aid in FY 2014 represents about 1 percent of that volume. Thus, a one percent growth in the volume of the Jones Act coastal trade — which includes trade with Alaska, Hawaii, and Puerto Rico — would nearly equal the volume of US food aid in FY 2014.152 In testimony before Congress, on May 21, 2013, the Deputy Secretary of Transportation, said:

There are many complex factors that influence current conditions and the long-term outlook in the domestic oceangoing trades of large self-propelled vessels, with some factors for Jones Act ships indicating that the industry is trending toward a growth phase in the oceangoing segment. Self-propelled oceangoing vessels of 1,000 gross tons or more each in the Jones Act trades experienced a net decrease of 15 vessels since the beginning of 2010, with 91 vessels currently operating, primarily because of the retirement of older tankers as a result of the Oil Pollution Act of 1990. At the same time, there has been an offsetting increase in large oceangoing tank barges, most in the articulated tug-barges (ATBs) that function in much the same way as self-propelled oceangoing vessels but with smaller crews and slower speeds. Importantly, the recent surge in domestic oil production has increased demand for new domestic self-propelled tanker vessels. One recent industry projection foresees roughly 10 to 14 new oceangoing tankers entering the fleet by 2018, and demand for even more vessels. Recent announcements of new containership orders to work in the Jones Act trade are also encouraging signals for industry growth.153

Subsequently, on September 10, 2014, the President of the Shipbuilders Council of America, in testimony before the same subcommittee, reported the following:

Much of the growth in the commercial shipyard sectors has been a response to the country’s shale oil and natural gas revolution. Vast domestic abundance, coupled with new extraction methods, has had major impacts on supporting transportation infrastructure. The result has been a boom for shipyards, who are currently building out 19 (options included) large petroleum product carriers representing billions of barrels of new capacity for coastwise transportation. These vessels are both self-propelled and articulated tug/barge units … At the same time, due in large part to coming emissions control regulations, US shipyards currently have seven (including options) containerships on order to serve the noncontiguous domestic trades. …

152 In FY 2012 the Jones Act coastal trade represented 146 million tons of cargo. The 1.46 million metric tons of US food aid in FY 2014 represents about 1% of that volume. 153 Statement of John D. Porcari before the House Committee on Transportation and Infrastructure, Subcommittee on Coast Guard and Maritime Transportation, Maritime Transportation: The Role of US Ships and Mariners, May 21, 2013, p. 1.


Both the construction affiliated with the domestic energy revolution and recapitalization of the non-contiguous fleet are recent new markets. However, the continued boom of shipbuilding and ship repair associated with the offshore oil and gas sector in the Gulf of Mexico is equally important. With roughly 4,000 offshore oil and gas platforms in Gulf of Mexico there has been steady shipbuilding and repair for all the supporting workboats. In 2013, shipyards entered into 111 contracts for offshore oil and gas support vessels. …154

As discussed in Section 4, in an April 2015 report to the Congress, MARAD acknowledged that global economic growth has produced a robust job market in maritime commerce governed by the Jones Act. However, it did not estimate how many, if any, new positions might be available for mariners in the Jones Act trade over the period to 2023 or the number of vessels that might be affected. 155, 156 Table 5.7 shows, as of March 9, 2015, Jones Act vessels slightly outnumbered the non-Jones Act ships and exceeded them in terms of deadweight tonnage.

Table 5.7: US-flag Privately-Owned, Oceangoing Merchant Fleet, Including Non-Eligible Jones Act Vessels and Jones Act Vessels: March 9, 2015

(Self-propelled, Cargo-Carrying Vessels of 1,000 Gross Tons and Above)

Non-Jones Act Jones Act Total # US-flag Vessels 81 86 167 Total Gross Tons 3,584,517 3,050,677 6,635,194 Total Deadweight Tons 3,423,859 4,264,047 7,687,906 # Vessel Types: Containership 44 22 66 Dry Bulk 3 3 6 General Cargo 10 7 17 Ro-Ro 19 9 28 Tanker 5 45 50

Jones Act vessels participate in the delivery of US food aid. A MARAD, April 3, 2015 list of 119 vessels eligible to participate in the agricultural cargo preference trade includes at least 23 Jones Act eligible ships. During FYs 2011-2013, the Sheila McDevitt, a Jones Act vessel, was the seventh largest carrier of US food aid on a metric ton basis. Table 5.8 shows that a considerable number of privately-owned Jones Act eligible merchant vessels are militarily useful. Table 5.9 shows that a considerable number of the Jones Act oceangoing vessels also participate in the VISA or VTA programs.

154 Testimony of Mathew Paxton before the Subcommittee on Coast Guard and Maritime Transportation, House Committee on Transportation and Infrastructure, Examining the State of the US Merchant Marine, pp. 2-3. 155 US Department of Transportation, Maritime Administration, Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine (Washington, D.C.: April 21, 2015), p. 48. 156 According to MARAD, it did not do so because the study was focused on the impact of reductions in government impelled cargo on the US merchant marine, and Jones Act-eligible vessels do not rely on preference cargoes or MSP stipends for their revenues.


Table 5.8: Military Usefulness of US-Flag Privately-Owned Merchant Fleet -- Oceangoing Non-Jones and Jones Act Vessels, March 9, 2015

Self-Propelled Cargo-Carrying Vessels of 1,000 Gross Tons & Above

Militarily Useful Not Militarily Useful Total

Non-Jones Act 81 0 81 Jones Act 65 21 86 Total 146 21 167

Source: Analysis of MARAD data.

Table 5.9: Participation of US-Flag Privately-Owned Merchant Oceangoing Vessels, Non-Jones Act and Jones Act, in the VISA and VTA Programs: March 9, 2015

Self-Propelled Cargo-Carrying Vessels of 1,000 Gross Tons & Above

VISA1 Ships

VTA2 Ships Non-VISA and

Non-VTA Ships

Total Non-Jones Act 67 4 10 81 Jones Act 32 0 54 86 Total 99 4 64 167

1VISA is the Voluntary Intermodal Sealift Agreement. The VISA program is a partnership between the US Government and the maritime industry to provide the Department of Defense (DOD) with “assured access” to commercial sealift and intermodal capacity to support the emergency deployment and sustainment of US military forces. Intermodal capacity includes dry cargo ships, equipment, terminal facilities, and intermodal management services. 2VTA is the Voluntary Tanker Agreement. The VTA is an agreement established by Maritime Administration (MARAD) to provide for US commercial tanker owners and operators to voluntarily make their vessels available to satisfy Department of Defense needs. It is designed to meet contingency or war requirements for point-to-point petroleum, oil, and lubricants movements, and not to deal with capacity shortages in resupply operations. Source: Analysis of MARAD data. Participation of Food Aid Vessels in the Maritime Security Program Some have expressed concerns that a further reduction in food aid preference cargoes will lead to a significant reduction in the number of available commercial mariners to help staff the Navy’s surge fleet and may affect the willingness of carriers to keep participating in the MSP. According to this view, MSP participants have relied on a combination of the MSP $3.1 million stipend and preference cargoes to keep operating under the US flag. However, we found that most MSP vessels participating in food aid cargo preference in recent years have not carried much food aid. Table 5.10 shows that 34 of the 74 vessels that carried food aid during Fiscal Years 2011 – 2013 participated in the MSP during part or all of those years. Table 5.11 shows that together, the 34 vessels transported 18 percent of the food aid. Five of 17 vessel operators used at least some vessels that participated in the Maritime Security Program. However, Maersk was the


dominant operator. It transported 17 percent of the food aid and 94 percent of its tonnage moved on MSP vessels. The other four operators together moved less than 4 percent of all the food aid.

Table 5.10: Number of US-flag Vessels Transporting Food Aid and Number of Tons Transported by Participants in the Maritime Security Program1,

FY 2011-13

Privately-Owned Non-Jones Act Oceangoing Merchant Vessels Self-Propelled Cargo-Carrying Vessels of 1,000 Gross Tons and Above

Non-MSP

Participant MSP Participant2 Total

Number of Vessels 40 34 74 Metric Tons of Food Aid Transported

2,794,405

623,631

3,418,036

1The Maritime Security Program (MSP) was established in 1996. The Secretary of Transportation, in consultation with the Secretary of Defense, established an MSP fleet of active, commercially viable, militarily useful, privately owned vessels that operate in the foreign commerce of the United States. Congress authorized the current MSP fleet on the basis that it provides a solution to current and projected sealift requirements for the US. The MSP provides financial assistance to compensate operators of US-flag vessels that meet certain qualifications. Participating operators are required to make their ships and commercial transportation resources available upon request by the Secretary of Defense during times of war or national emergency. The MSP is designed to help retain a labor base of skilled American mariners who are available to crew the US Government-owned strategic sealift, as well as the US commercial fleet, both in peace and war. All MSP dry cargo ships are enrolled in the Voluntary Intermodal Sealift Agreement (VISA) program. All MSP tankers are enrolled in the Voluntary Tanker Agreement (VTA). See Table 5.9 for additional information on VISA and VTA. 2We identified which food aid vessels were participants in the Maritime Security Program during FY 2011 – FY 2013 by reviewing MARAD data tables on MSP participants covering eight points in time during those fiscal years. MARAD told us that it does not keep a record of when vessels enter or leave the program. Some of the vessels carrying food aid did so during only one or two of the three fiscal years. Source: Analysis of MARAD and USDA data.


Table 5.11: Tons of Food Aid Transported by Vessel Operators and Amount of Tonnage Lifted by Vessels Participating in the Maritime Security Program, FY 2011-13

Vessel Operator

Food Aid

Tons Transport-

ed

Operator Tons as %

of Total Tons for All Operators

Cumulative Percent

Tons Lifted on MSP Vessels

MSP Tons

as % of Operator’s Total Tons

Liberty 1,524,419 45% 45% 0 0 Sealift 588,806 17% 62% 0 0 Maersk 587,061 17% 79% 552,231 94% United Maritime Group

335,410 10% 89% 0 0

US United 70,410 2% 91% 0 0 APL 63,150 2% 93% 59,380 94% Schuyler 51,060 1% 94% 0 0 Moran Towing 47,630 1% 96% 0 0 Foss 38,240 1% 97% 0 0 Matson Navigation 30,000 1% 98% 0 0 Industrial Maritime Carriers

23,550 1% 98% 8,180 35%

Overseas 20,000 1% 99% 0 0 USS Holding 17,450 1% 99% 0 0 Crimson Shipping Co

13,520 0.4% 100% 0 0

Dome Chartering and Trading

3,490 0.1% 100% 0 0

AM Roro 2,500 0.07% 100% 2,500 100% Hapag-Lloyd USA 1,340 0.04% 100% 1,340 100% Total 3,418,036 623,631 18%

Source: Analysis of USDA and MARAD data. Table 5.12 shows that most of the 34 MSP vessels carried very small amounts of food aid relative to their carrying capacity. For example, one vessel carried the equivalent of 1.18 shiploads on an annualized basis during the three-year period. All but one of the others carried less than one-third of a shipload.


Table 5.12: Number of Shiploads of Food Aid Transported by MSP Vessels, FYs 2011-2013

(Annualized Basis)

# of Shiploads (Annualized)

# of MSP Vessels

0.0 to 0.20 26 0.21 to 0.40 6 0.41 to 0.60 0 0.61 to 0.80 1 0.81 to 1.00 0 1.01 to 1.20 1 Total 34

Source: Analysis of USDA and MARAD data.


Section 6

Food Aid Reforms Impacts on US Ports, Agricultural Exports, Farm Output, and the Economy More Generally

Food aid reform has little economic impact on the US maritime industry or agricultural economy, and has virtually no major effect on the overall US economy. The dollar value of US food commodities moving through US ports, as a percent of the value of total port exports is less than .5 percent, as illustrated in Figure 6.1. This is a small fragment of the considerable growth in US waterborne trade handled by such ports between 2003 and 2012 (see Figure 6.2). Any reduction in the purchase of US commodities for food aid will not have a perceptible impact on US agricultural exports or the value of US farms’ output. Food aid commodity costs, at $740 million in 2013, for instance, constituted only a very small portion of the $140 billion value of US farms’ output (see Figure 6.3 and Figure 6.4) Food aid represents less than one-half of one percent of US agricultural exports annually and is a very small part of US international maritime trade (as indicated in Section 5). Any potential loss of US flag vessels and mariner jobs due to food aid reform would not have a perceptible impact on the US economy. One way to put food aid’s impact on the US economy into context is to consider the following. The total US national income is about $18 trillion dollars. In 2013 USAID and USDA spent $212 million on food aid ocean freight costs. A portion of this went to seamen who manned the US-flag ships that carried most, but not all, of the food aid. Only a portion went as profit (assuming profits were made) to three US-flag carriers that transported 88 percent of the food aid. As discussed in Section 5, if 8-11 vessels were affected by food aid reform, that would represent a total of about 360 to 495 mariners. In January 2015, about 120.7 million were employed full time in the US economy. It should be clear that if 11 vessels stopped operating under the US-flag and 360 to 495 mariners initially lost jobs, the effect on the US economy would not be perceptible. Food aid reform doesn’t necessarily mean jobs will be lost, though some small number of jobs could well be affected. The US market economy is dynamic, and vessel owners can compete for other cargoes, if available, or switch to a foreign flag. Mariners can look elsewhere for employment opportunities, both in their industry and in other occupations.


$94,050,000,000

$52,420,000,000

$36,181,000,000 $29,566,000,000

$10,501,000,000

0.4%

0.1%

0.2% 0.3%

0.5%

Houston, Texas New York, New York New Orleans, LA Norfolk/HamptonRoads, VA

Corpus Christi, Texas

Figure 6.1: Dollar Value of US Food Aid Commodities Moving Through US Ports as a Percent of the Value of Total Port

Exports, 2013

Total Exports $ Value Food Aid Commodities $ Value

Source: Analysis of USDA and US Census Bureau data


-

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Figure 6.2: Growth in U.S. Waterborne Foreign Trade by Select Ports, 2003-12

Houston-Galveston, TX New Orleans,LA New York City, NY Norfolk, VA

Source: Analysis of the United States Census Bureau Foreign Trade Division data.


Source: Analysis of USDA and US Census Bureau data

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 6.3: Food Aid Commodity Costs Compared to Value of US Agricultural Exports, 1997 - 2013 (Nominal $)

Total Commodity Costs Total Agricultural Export


Some Studies Have Exaggerated the Economic Impacts of US Foreign Shipping Trade and Preference Cargoes Some studies prepared for organizations representing ships, carriers/operators and maritime unions that we reviewed have provided exaggerated estimates of the economic impacts of using US-flag privately owned commercial oceangoing ships to transport US foreign trade cargoes or preference cargoes. We found these studies made inappropriate use of economic multipliers and input-output analysis to assess impacts.157 Moreover, they examined only gross economic and not net impacts. Thus, they did not consider alternative opportunities for the human and material resources used by an industry and all other linked industries. Multiplier Inflation Essentially we are dealing with “multiplier inflation.” Fiscal multipliers can be traced back to the work of Richard Kahn in the early 1930s, and their adoption to John Maynard Keynes in the late 1930s. Multipliers are economic concepts designed to assess the consequences of major changes in fiscal policies of nations. Their use at more micro levels is inevitably problematic given their nature; they rely heavily on aggregate averages of consumption patterns, taxation, and international trade. Micro studies, even at the level of large regions or relating to major

157 Kenneth Button, “The Political Economy of Shipping US Food Aid Under the Cargo Preference Regime,” Maritime Economics & Logistics;(George Mason University, School of Policy, Government and International Affairs, Arlington, Virginia (June 18, 2015)

Source: Analysis of USDA data.

0.5%, $789.9 milion

$166.9 billion

Figure 6.4: Food Aid Commodity Costs as a Percent of the Value of U.S. Farms' Output, 2012

Food Aid Total Commodity Costs Value of U.S. Farms' Output


industries rely almost exclusively on macro parameters with inevitable issues of aggregation bias, and the assumption that local circumstances exactly mirror the national. The underlying idea of the multiplier is that if there are underused resources in an economy, the government can step-in and, by running a fiscal deficit, employ these resources. In turn, the expenditure of this income by the newly employed will circulate, creating more jobs and output, with part of the additional income being spent, leading to further spirals in employment and income. The fact that not all income will be spent in each round, some will be kept back as savings, some will go to buy imports, and some will be taken in taxes, increasingly mutes the impact of the injection over the cycles. The outcome is a constrained overall increase in jobs and income in excess of the initial multiplicand. A reduction in government expenditures will have the reverse effect; effectively a reverse multiplier. The concept, as originally developed, was not seen as an exact device with a specific amount of fiscal stimulus being calculated to generate a given level of national income and employment. Indeed, Keynes publicly stated that he did not believe exact quantification of multipliers is possible. Rather it was perceived as a general policy approach that provided a rationale for broad government intervention at times of economic recession. The subsequent development of national income accounting and mathematical modeling, together with the growth of computer power led in the 1960s to the misguided idea that government could “fine tune” an economy by manipulating public expenditures. The macro concept, let alone those applied to industries, has come under a variety of criticisms. In particular, government fiscal injections have to be financed in some way other than through raising general taxes that would simply offset the multiplicand. Equally, borrowing on financial markets faces the problem that it can “crowd-out” private investment and, as with taxation, set in motion a reverse multiplier. There are also issues about whether the magnitude of the “leakages” from the multiplier is so large that it effectively reduces the magnitude of the income spiral to zero. The size of the aggregate multiplier, which is also often used in industrial studies, has been the subject of considerable academic work that suggests it falls well below the estimates often mooted by politicians and lobbyists. A recent overview in the journal of the American Economics Association, provides a good summary, quoting from the Conclusions: “… at this point, it seems that the bulk of the estimates imply that the aggregate multiplier for a temporary rise in government purchases not accompanied by an increase in current distortionary taxes is probably between 0.8 and 1.5.’158 This is supported by a number of more recent studies; for example Owyanng et al159 regarding the US multiplier at various stages in the trade cycle, concludes it is “between 0.7 and 0.9” with it being higher during slack periods; the Canadian multiplier is found to be 0.5. At a more local, state level looking at fiscal injections from pension changes, Shoag160 finds that $1 increase in spending leads to a $1.43 increase in state income; hence a multiplier of 1.43.

158 V.A. Ramey, “Can government purchases stimulate the economy?”, Journal of Economic Literature, 49(3): 673-85. 159 M.T. Owyang, V.A. Ramey, and S. Zubairy, (2013) “Are government spending multipliers greater during periods of slack? Evidence from twentieth-century historical data,” American Economic Review, Papers and Proceedings, 103(3), 129-134. 160 D. Shoag, (2013) “Using state pension shocks to estimate fiscal multipliers since the Great Recession, American Economic Review, Papers and Proceedings, 103(3), 121-124.


Input-Output Analysis At a more intermediate level when policy involves fiscal injections in particular industries rather than broadly across the general economy, the multiplier has often been disaggregated following the advent of input-output analysis in the 1950s. There has, however, been considerable misuse of the approach. Input-output analysis, was designed by Leontief to provide guidance on overall inputs required to produce a given output, including secondary inputs needed to provide the primary inputs. It shows, “…what level of output should each of the n industries in an economy produce, in order that it will just be sufficient to satisfy the total demand for that product?”161 Thus the input-output model makes it possible, under an extreme set of assumptions, to determine the output of each industry that must be produced to obtain a given amount for final demand. It makes it possible to find production levels that will meet the demands of all sectors inside and outside of that economy. The usefulness was seen in highlighting bottlenecks in supply that might arise, and that would stymie the ability to produce the target level of output. If there are inadequate inputs then outputs elsewhere in the system need to be taken from other types of production, with their own complex interactions throughout the economy, or the output target for the sector of interest must be revised down. The misuse, or to be more generous, the “alternative use”, has come in reversing the logic of what input-output analysis was designed to do, and instead it is used to trace out across sectors the implications of fiscal injections into the system on levels of output. The original use relied upon numerous restrictive assumptions, not least of which is that there are no scale-economies in production and there is a fixed production technology (a “Leontief Production Function”) implying that doubling output requires a doubling of all inputs. It is also assumed that there is a perfectly elastic supply of factors of production. Despite this misunderstanding, the use of both multipliers and input-output at the meso-level has become widespread, and with this has been a tendency to have parameter inflation. Just as the aggregate national multiplier is often exaggerated in policy debates, the same frequently occurs when assessing meso-level projects; indeed the tendency may be greater. A major problem in many policy comparisons is that the dispersion of overall gains from an action is estimated but the dispersion of costs across sectors is ignored. The point is made clear regarding maritime studies by Haralambides;

[E]stimates of the economic impacts of an industry are, with rare exceptions, measures of gross, not net impacts [Italics in original]. A net impact would need to reflect all opportunities available elsewhere in the economy for the resources used directly by the industry and indirectly by all other industries. For example, if the demand for shipping were to decline and the services provided by the shipping industry were to decline, seafarers might remain employed in other maritime occupations or other industries. In this case, the provision of service by the merchant marine would not have resulted in a gain in national employment. Moreover, if the decline in service provided by the merchant marine did not affect the provision of port services and the production of other domestic goods and services because foreign-flag operators taking the place of national shipping operators would have used these goods and services, then the jobs associated with the provision of merchant marine

161 W. Leontief, The Structure of the American Economy, 1919-1929 (Harvard University Press, Cambrige, Mass., 1941).


service would not have been lost with the decline in service provided by the merchant marine. Hence, shipping would not have indirectly generated employment gains in other domestic industries In most cases, estimated impacts are gross impacts of economic activity and as such they fail to identify alternative employment opportunities for the human, material and financial resources used by the industry under examination and all other industries linked to it…To use the “creation of employment” argument again, “employment” per se, despite its positive impacts, is an economic cost rather than an economic benefit (otherwise societies would be willing to pay people for digging and filling ditches); it is only the goods and services that this employment produces (and society is willing to pay for) plus the value that society attributes to the preservation of a certain know-how that can be considered as an economic benefit.162

There are also longer-term, often dynamic effects ignored in multiplier style work. For the coefficients of any input-output analysis to hold, there must be slack, unemployed resources to use. And this must hold for each round of the multiplier spiral. Often an industrial policy designed to stimulate income or jobs in a particular sector because slack is thought to exist there, ignores the fact that these unemployed factors will need to be combined with factors taken from elsewhere where there is full employment.163 This sets in motion negative multipliers in industries where these factors are drawn from. The same is true in the opposite direction when public support for any industry is reduced. While there will be job losses in that industry, with associated multiplier implications, there will be off-sets as new businesses take up at least some of the resources that are released setting in train positive multipliers in those. This excludes any positive multiplier effects that come from the reduction in taxes or borrowing associated with the reduced public expenditure. Perhaps the greatest potential for overestimating multiplier effects, both at the macro- and input-output levels, stems from their underlying assumption of a fixed technology.164 In practice there are market reactions and technical changes to consider if markets are manipulated. Any increase in the demands for the outputs of a sector will, unless all the resources were previously unused, lead to the price of inputs rising and efforts to reduce their use in production, either by substituting cheaper inputs from other sectors or by improving the technical efficiency of their use. The former will involve reduced outputs and higher prices for consumers in the sectors that lose their productive capacity, thus setting in train reverse multipliers. The overriding problem with using any multiplier approach is well summed up in several Australian reports, viz: “Multipliers are used to suggest that an industry is more valuable to Western Australia than its current size would suggest. ...However, multipliers do not provide a measure of net economic benefit of expanding activity in a particular area...It is in assessing claims for government assistance that the potential misuse of multipliers is greatest.”165 And, “….multipliers are a poor predictive device in many applications. In the context of assessing assistance to industry, how changes translate into changes in demand ... is not clear. Also, they

162 H.E. Haralambides, The Economic Impact of Shipping on the National Economy, Erasmus University, Rotterdam, 1996. 163 C.C. Coughlin and T.B. Mandelbaum, (2011) “A consumer’s guide to regional economic multipliers,” Federal Reserve Bank of St. Louis Review, 73, 19-32. 164 K.J. Button, (2012) “What do we know about the multiplier effects of regional transportation infrastructure on regional economies? Some reflections,” Studies in Regional Science, 42, 61-75. 165 Western Australia Department of Finance and Treasury, (2002) The Use and Abuse of Input-output Multipliers, Economic Research Paper, Perth.


often overstate effects on account of the omission of important adjustment mechanisms and constraints.”166 Assessment of Studies As we have highlighted, the inherent danger of using multiplier and input-out measures in assessing the impact of any government expenditure is that it almost inevitably leads to gross over estimations because of the double counting involved and/or the lack of netting out of costs. We briefly comment on the problems that are inherent in some of the work that has been conducted regarding the maritime sector. The Nathan Report. Two decades ago, Nathan Associates (1995) produced a report167 for the American Maritime Congress providing a general assessment of the economic outcomes of US federal aid to the US merchant fleet. It concluded that overall, the impact was, at the time, about 107,000 jobs and $12.1 billion in output (direct, indirect and induced effects). As with all other studies discussed there are no indications of the statistical significance of the results, they are just presented with a reassuring degree of confidence. The dated and general nature of the work excuses detailed comment, but most of the underlying, potential traps laid out above are present. Nathan used multipliers ranging from 3.5 to 5.4. To turn over commentary to a disinterested third party, in assessing this study of the importance of the US Maritime sector to the economy, together with that of the Dutch maritime sector to the Netherland’s economy, Haralambides comments:

“Even more importantly however, the method’s usefulness is to be found in its ability to rank order the impacts of sectoral economic activity, such as shipping, vis-a-vis the corresponding impacts of other industrial sectors …In this context, unfortunately, neither of the two studies referred to above addressed the issue of whether the benefits of government support to shipping are greater than the benefits that could be attained by other government support programmes (current or contemplated) for other sectors of the economy.”168

The Promar Report. A 2010 study by Promar International169 further typifies this gross assessment input-output analysis approach. The study arrives at the extraordinary employment multiplier of 8.56 for the US maritime contribution to the movement of food aid.170 This is in a sector where a 49 percent foreign ownership of ships is allowed, with the remainder often being owned by a foreign subsidiary, meaning that any multiplicand is immediately reduced as parts of the profits are not retained in the US, and where up to 25 percent of the crew may be non-nationals or residents thus leaking income overseas, where also most of the ships used (if not all) are built, and where many inputs to the sector (elements of fuel, repair, victuals, etc.) may be foreign sourced. 166 Industries Assistance Commission (August 1989), Using Input-Output Analysis and Multipliers, Working Paper No. 12, Canberra. 167 Nathan Associates, 1995, Economic Analysis of Federal Support for the Private Merchant Marine, American Maritime Congress, Washington, D.C. 168 H.E. Haralambides. 169 Impacts on the US Economy of Shipping International Food Aid, Promar International, Alexandria, Virginia. 170 To glean some idea of what a multiplier of 8.6 for shipping means, given the assumptions that underlay the notion of input-output analysis, let us assume entire the US stimulus packages of about $831 billion to combat the Great Recession all went to shipping. Applying a fiscal multiplier of 8.6 to this means that if it were all spent on the US maritime sector, this would result in a $7,146.6 trillion increase in National Income. The US National Income is about $17,528 trillion! Quite clearly by reason of reductio ad absurdum, the 8.6 multiplier is untenable.


Another way of looking at this over estimation issue is to consider the demand side, and to distinguish between final and intermediate goods. While the Promar study argues that water transportation creates over eight times the number of jobs for one in water transportation, this can simply be stood on its head. Water transportation is an intermediate good; it is an input into the production process. It is the production of the final good that is driving the demand for water transportation. Thus in strict input-output terms it is the supply of wheat that is driving the demand for water transportation – or more bluntly, the provision of more water transportation will not lead to a greater demand for wheat, or other food products unless it reduces the costs of production that, with the assumed Leontief technology involving fixed costs, is not possible.


Bibliography June 18, 2015; “The Political Economy of Shipping U.S. Food and Aid Under the Cargo Preference Regime”; Maritime Economics and Logistics; Kenneth Button; School of Policy, Government, and International Affairs; George Mason University June 4, 2015; “Why the US Food Aid System Needs Reform”; Vincent H. Smith; Montana State University; American Enterprise Institute April 21, 2015; “A Report to Congress: Impacts of Reductions in Government Impelled Cargo on the US Merchant Marine”; US Department of Transportation, Maritime Administration April 1, 2015; “US International Food Aid Programs: Background and Issues”; Randy Schnepf; Congressional Research Service 2014; “Flags of Inconvenience: Freedom and Insecurity on the High Seas”; Tina Shaughnessy and Ellen Tobin; University of Pennsylvania, Law School 2014; “Review of Maritime Transport 2014”; United Nations Conference on Trade and Development 2014; “The Military Balance 2014”; International Institute for Strategic Studies 2014; “The Negligible Welfare Effects of the International Food Aid Provisions in the 2014 Farm Bill”; Erin C. Lentz and Christopher B. Barrett; Choices Magazine; 3rd Quarter May 22, 2014; “Congress Should Reject Proposed Food Aid Shipping Mandate”; Bryan Riley and Brett D. Schaefer; Heritage Foundation; Issue Brief, No. 4228 March 2014; “International Food Aid: Better Agency Collaboration Needed to Assess and Improve Emergency Food Aid Procurement System”; US Government Accountability Office; GAO-14-22 March 2014; “International Food Aid: Prepositioning Speeds Delivery of Emergency Aid, but Additional Monitoring of Time Frames and Costs Is Needed”; US Government Accountability Office; GAO-14-277 January 14-16, 2014: “Proceedings of the National Maritime Symposium #1: Growing the US Flag Fleet Engaged In International Trade”; US Department of Transportation, Maritime Administration January 2014; “US Merchant Marine: Maritime Administration Should Assess Potential Mariner-Training Needs”; US Government Accountability Office; GAO-14-212 June 2013; “Food Aid for the 21st Century: Saving More Money, Time, and Lives”; Kimberly Ann Elliot and William McKitterick; Center for Global Development Brief 2013; “US International Food Assistance Report: Fiscal Year 2013”; US Department of Agriculture and US Agency for International Development


2013; “Food Procurement Annual Report 2013”; United Nations World Food Program 2013; “The Timeliness and Cost-Effectiveness of the Local and Regional Procurement of Food Aid”; Erin Lentz, Simone Passarelli, and Christopher B. Barrett; World Development Journal; Volume 49, Issue C, pp 9-18 August 29, 2013; “Deep Sea Manpower Study: 2013-2018”; Seafarers International Union May 30, 2013; “The Economic Importance of the US Shipbuilding and Repairing Industry”; Department of Transportation, Maritime Administration April 2013; “Waves in Ship Prices and Investment”; Robin Greenwood and Samuel G. Hanson; Harvard University, Business School December 2012; “USDA Local and Regional Food Aid Procurement Pilot Project: Independent Evaluation Report”; Management Systems International 2012; “Seafarers and Seafaring”; Heather Leggate McLaughlin; The Blackwell Companion to Maritime Economics, First Edition, Edited by William K. Talley March 7, 2012; “Mobility Capabilities: DOD’s Mobility Study Limitations and Newly Issued Strategic Guidance Raise Questions about Air Mobility Requirements”: US Government Accountability Office, GAO-12-510T 2011; “America’s Maritime Industry: The Foundation of American Seapower”; The Navy League of the US June 2011; “International Food Assistance: Funding Development Projects through the purchase, shipment, and sale of US Commodities Is Inefficient and Can Cause Adverse Market Impacts”; US Government Accountability Office; GAO-11-636 September 2011; “Comparison of US and Foreign-Flag Operating Costs”; US Department of Transportation, Maritime Administration December 2010; “A Critical Analysis of Food Aid and Agricultural Cargo Preference: In Defense of the US Merchant Marine”; USA Maritime October 2010; “Food Aid and Agricultural Cargo Preference”; Elizabeth R. Bageant, Christopher B. Barrett, and Erin C. Lentz; Applied Economic Perspectives and Policy; Volume 32, Number 4, pp 624-641 June 2010; “Impacts on the US Economy of Shipping International Food Aid”; Promar International, prepared for USA Maritime January 26, 2010; “Local and Regional Procurement for US International Emergency Food Aid”; Charles Hanrahan, Congressional Research Service July 2009; “Maritime Security Program Impact Evaluation”; Econometrica, Inc., prepared for the US Department of Transportation, Maritime Administration

Centers on the Public Service 100 School of Policy, Government, and International

Affairs

May 2009; “International Food Assistance: Local and Regional Procurement Can Enhance the Efficiency of US Food Aid, but Challenges May Constrain Its Implementation”; US Government Accountability Office; GAO-09-570 2009; “Liberalization in Maritime Transport: International Transport Forum 2009”; Mary R. Brooks and William A. Black; Dalhouse University January 7, 2009; “An Evaluation of Maritime Policy in Meeting Commercial and Security Needs of the United States”; IHS Global Insight, Inc., prepared for US Department of Transportation, Maritime Administration August 2008; “Leading the Future: 2008—2013 Strategic Plan”; US Department of Transportation, Maritime Administration July 2008; “Maritime Law and Commerce”; Murray A. Bloom; Journal of Maritime Law and Commerce; Volume 39, Number 3, pp 289-314 April 2007: “Foreign Assistance: Various Challenges Impede the Efficiency and Effectiveness of US Food Aid”; US Government Accountability Office; GAO-07-560 2006; “Detailed Information on the Maritime Administration Ocean Freight Differential Assessment”; US Office of Management and Budget November 2006; “Foreign-Flag Crewing Practices: A review of Crewing Practices in US-Foreign Ocean Cargo Shipping”; US Department of Transportation; Maritime Administration; Office of Financial and Rate Approvals July 2005; “US Food Aid: Time to Get It Right”; Sophia Murphy and Kathy McAfee; Institute for Agriculture and Trade Policy September 2004; “Maritime Security Fleet: Many Factors Determine Impact on Food Aid Shipments”; US Government Accountability Office; GAO-04-1065 May 5, 2004; “MARAD’s Cargo-Preference Billing and Payment”; Office of Inspector General; US Department of Transportation; Project ID Fl-2004-057 July 8, 2003; “The Jones Act: An Overview”; Congressional Research Service March 30, 2001; “Report of Audit: Audit of USAID’s Cargo Preference Reimbursements Under Section 901d of the Merchant Marine Act of 1936; US Agency for International Development, Office of Inspector General; Audit Report No. 9-=000-01-003-P March 2000: “The Role of US Maritime Policy in Strategic Sealift”; Stephen J. Williams; Naval Postgraduate School; Thesis March 31, 1999; “Meeting The Strategic Sealift Needs of the US With A Limited Merchant Marine”; Keven S. Cook, US Coast Guard and US Army War College 1996; “Shipbuilding Technology and Education”; National Academy of Sciences


1996; “So Many, So Much, So Far, So Fast: United States Transportation Command and Strategic Deployment for Operation Desert Shield/Desert Storm”; US Office of the Joint Chiefs of Staff, Joint History Office and Research Center December 1995: “Farm Bill Options”; US Government Accountability Office; GAO/GGD-96-39R January 1995; “Economic Analysis of Federal Support for Private Merchant Marine”; Nathan Associates, prepared for the American Maritime Congress 1994; “Reform Maritime Policy: Building Blocks of an Integrated Program”; Allen R. Ferguson; Regulation Journal; Number 2, pp 28-36 November 1994; “Maritime Industry: Cargo Preference Laws-Estimated Costs and Effects”; US Government accountability Office; GAO/RCED-95-34 September 1994; “Cargo Preference Requirements: Objectives Not Significantly Advanced When Used in US Food Aid Programs”; US Government Accountability Office; GAO/GGD-94-215 September 9, 1992; “DOD Sealift Operations”; US Department of Defense, Office of Inspector General; Audit Report Number 92-135 December 1985; “Manning the Ready Reserve Force: A Study of the Availability of US Maritime Labor to Man the Ready Reserve Force”; Mary Theresa Winger, Naval Postgraduate School August 1985; “Alternative Approaches to Cargo Policy: A Supplement to Assessment of Maritime Trade and Technology”; John Andelin; US Congress, Office of Technology Assessment October 1983; “An Assessment of Maritime Technology and Trade”; US Congress, Office of Technology Assessment; OTA-0-220

Centers on the Public Service 102 School of Policy, Government, and International

Affairs

Page left intentionally blank.

food aid reforms will not significantly affect shipping...

Documents