Maritime Administration: Improved Program Management Needed to Address Timely Disposal of Obsolete Ships
Published: 2005-03-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Maritime Administration (MARAD) has more than 100 obsolete and deteriorating ships awaiting disposal that pose potentially costly environmental threats to the waterways near where they are stored. Congress, in 2000, mandated that MARAD dispose of them by September 30, 2006. While MARAD has various disposal options available, each option is complicated by legal, financial, and regulatory factors. In this report, GAO assesses (1) whether MARAD will meet the September 2006 disposal deadline for these ships and, if not, why not; (2) the extent that MARAD has used alternative disposal methods other than scrapping, and barriers to using other methods; (3) the appropriateness of MARAD's methods for procuring ship disposal services; and (4) the impact of foreign competition and other factors on reducing disposal costs.
section_title: What GAO Found
paragraphs: MARAD is unlikely to meet its statutory deadline of September 30, 2006. As of September 2004, MARAD had disposed of 18 ships from its inventory, with over 100 ships left to dispose of by the deadline. MARAD's current approach is not sufficient for disposing of these remaining ships within the next 2 years. MARAD's slow progress is due primarily to program leaders not developing a comprehensive management approach that could address the myriad of environmental, legal, and regulatory challenges that the program faces. MARAD's approach lacks an integrated strategy with goals, milestones, performance measures, and a mitigation plan for overcoming anticipated impediments. In the absence of this comprehensive approach, MARAD's ship disposal program lacks the vision needed to sustain a long-term effort. Consequently, MARAD has not been able to assure Congress that it can dispose of these ships in a timely manner to reduce the threat of a costly environmental event, nor has it clearly articulated what additional congressional assistance, such as funding, may be needed. While MARAD has considered alternative disposal methods to scrapping, it has made limited use of these methods because of a number of environmental, financial, and legislative barriers. Since fiscal year 2001, MARAD has disposed of 17 ships through scrapping, but only 1 through artificial reefing. MARAD has not disposed of ships using deep-water sinking and donations to historic organizations. MARAD has taken positive steps to reduce barriers limiting its use of these methods but still may be years away from increasing the number of disposals using these alternative methods because it has not developed an overall plan for expanding their use. Consequently, MARAD may be losing opportunities that could expedite the disposal of the obsolete ships in its inventory. Since fiscal year 2002, MARAD has relied almost entirely on an inappropriate procurement method--Program Research and Development Announcements (PRDA)--to acquire ship scrapping services. The Federal Acquisition Regulation and the Competition in Contracting Act of 1984 generally require that MARAD use other methods for acquiring these types of services. PRDAs may only be used to contract for research or development. According to MARAD, PRDAs provide greater flexibility and allow firms to propose innovative solutions to ship disposal. GAO found, however, that MARAD was not contracting for research or development but instead was acquiring ship scrapping services. MARAD's use of PRDAs has also resulted in a lack of transparency in the contract award process and has raised concerns among firms as to the fairness of MARAD's processes. While GAO was unable to isolate the specific impact of foreign competition and other factors on reducing ship disposal costs, MARAD attributes the decrease in ship disposal prices almost exclusively to foreign competition. However, other factors, such as larger annual program funding and increases in the scrap value of steel, may have also played a role.

section_title: Letter
paragraphs: More than 100 deteriorating and obsolete ships that are part of the National  Defense Reserve Fleet are anchored along the East, West, and Gulf coasts,  awaiting disposal because they are no longer needed for national defense.  Many of them contain hazardous materials such as asbestos, lead,  polychlorinated biphenyls (PCB), and residual oils and fuels that are  typically found on older ships. Some of these ships have been associated  with oil spills, with the largest in 1998 costing about $1.4 million to clean  up. Members of Congress, the states, and environmental groups have  expressed concerns about the environmental hazards posed by these ships.  The Maritime Administration (MARAD), which is part of the Department of  Transportation (DOT), is responsible for the disposal of these obsolete  ships.
Ship disposal is complicated by a number of factors. MARAD must comply  with numerous federal statutes that affect ship scrapping, including those  related to the treatment of hazardous materials. To dispose of these ships,  MARAD must also coordinate its efforts with various federal agencies,  individual states, and foreign governments. For example, MARAD has to  work with the states and the Environmental Protection Agency (EPA) to  ensure that hazardous materials are removed from ships in compliance  with federal and state environmental and worker safety laws. MARAD has a  number of methods that it can choose from to dispose of these ships,  including selling them to, or contracting with, domestic or foreign  scrapping companies to dismantle them; sinking them to create artificial  reefs; donating them to private or public entities for various authorized  uses; or transferring them to the Navy for use in its deep-sinking training  exercises. However, each of these disposal methods has associated  challenges. For example, the number of domestic firms that have been  interested in scrapping has been limited. In addition, environmental,  regulatory, and legal barriers have limited opportunities to export ships for  scrapping, and have led to lower demand for donations and reefing.
MARAD’s ship disposal program has long been recognized as a concern.  In the late 1990s, DOT’s Inspector General and GAO both reported that  MARAD was making little progress in selling its obsolete ships to be  scrapped—at that time its predominate method for disposal. The reports  cited several constraints, including a 1994 government limitation on  overseas ship sales, a 1998 ban on overseas scrapping for environmental  reasons, and a decline in the domestic industry’s interest in buying ships.  In 2000, DOT’s Inspector General added MARAD’s ship disposal program to  the department’s list of high-priority management challenges and made  several recommendations to improve the ship disposal program, including  the need for MARAD to develop a disposal plan. In response to the  difficulties that MARAD was facing in selling its ships, Congress  specifically authorized MARAD in October 2000 to begin paying for  scrapping services but also directed MARAD to consider other disposal  methods in developing its disposal program. At that time, Congress  extended MARAD’s deadline to complete the disposal of its obsolete ship  inventory from September 30, 2001, to September 30, 2006. To accomplish  this, Congress has appropriated almost $80 million to MARAD’s ship  disposal program from fiscal years 2001 to 2005. In addition, within  6 months after the enactment of the Defense Authorization Act of 2001,  Congress directed MARAD to report on its ship disposal program and  provide progress reports every 6 months thereafter. As of December 2004,  MARAD had submitted to Congress its initial report and two of the  progress reports.
Leading organizations embrace key principles to effectively implement and  manage programs. The Government Performance and Results Act of 1993,  for example, embodies key principles that provide an effective  management framework to improve the likelihood of successfully  implementing programs and assessing results. The framework consists of a  number of critical elements considered essential in developing an effective  strategy, guiding resource allocations, and monitoring results. Combined  with effective leadership, these elements provide decision makers with a  framework to guide program efforts and the means to determine if these  efforts are achieving the desired results.
We were asked to review MARAD’s ship disposal program and related  contracting and procurement processes. Specifically, our objectives were  to (1) determine whether MARAD will meet the statutory deadline of  September 2006 to dispose of its obsolete ships and, if not, what factors  may prevent it from doing so; and (2) assess the extent to which MARAD  has used alternative methods, other than ship scrapping, to dispose of its  obsolete ships and the barriers to using such alternatives. In addition, we  were asked to examine the appropriateness of MARAD’s primary  procurement method (Program Research and Development  Announcements) for obtaining ship disposal services and the impact of  foreign competition and other factors on reducing ship disposal costs.
To determine whether MARAD will meet its September 2006 deadline and  identify factors affecting this goal and to assess whether MARAD has  considered alternative approaches to scrapping, we reviewed the agency’s  performance plans and program status reports and applicable laws and  regulations. We also interviewed MARAD, Navy, and industry  representatives to discuss barriers to program success. To assess the  appropriateness of MARAD’s acquisition methods for procuring ship  disposal services, we interviewed MARAD program, administrative, and  legal officials to identify what acquisition methods they used and what their  rationale was for their use. We also reviewed contract documents, the  Federal Acquisition Regulation, and case law. To assess the impact of  foreign competition and other factors on disposal prices, we reviewed  industry proposals and contracts to identify price trends and interviewed  industry representatives to get their perspectives on factors affecting these  trends. We determined that the data used in the report were sufficiently  reliable for meeting our purposes. We conducted our review between  December 2003 and November 2004 in accordance with generally accepted  government auditing standards. A detailed description of our scope and  methodology is provided in appendix I.
subsections: section_title: Background
paragraphs: As part of DOT, MARAD serves as the federal government’s disposal agent  for government-owned merchant vessels weighing 1,500 gross tons or  more. MARAD’s ship disposal program, in the Office of Ship Operations,  is responsible for disposing of these vessels. Historically, MARAD has  disposed of its obsolete ships primarily by selling them to overseas  scrapping companies. From 1983 to 1994, MARAD scrapped over  200 vessels through overseas sales, which represented close to 100 percent  of all of MARAD’s scrapping activity. Ships were sold “as is/where is” to the  highest bidder. The sale of vessels for overseas scrapping was curtailed in  1994 because of concerns raised by EPA about the presence of PCBs in  various shipboard components. The Toxic Substances Control Act and  EPA’s implementing regulations govern the use of PCBs. According to  MARAD, the act and EPA regulations limit MARAD’s ability to export  vessels for disposal without first removing regulated PCBs. Ship scrapping  is also subject to other federal, state, and local government laws that are  meant to protect the environment and ensure worker safety. In addition,  overseas disposal can be more complicated and time consuming because it  requires the involvement of foreign governmental agencies and is subject to  additional laws related to exporting hazardous materials. Similarly,  disposing of ships through artificial reefing also requires coordination with  several federal agencies.
After overseas sales were curtailed in 1994 and halted in 1998, MARAD  had little success in selling its obsolete ships domestically, leading to a  backlog of ships awaiting disposal. At the same time, the fleet had several  well-publicized leaks, which raised concerns about the risk of continued  storage. . . . in the manner that provides the best value to the Government, except in any case in  which obtaining the best value would require towing a vessel and such towing poses a  serious threat to the environment; and  . . .through qualified scrapping facilities, using the most expeditious scrapping methodology  and location practicable. Scrapping facilities shall be selected…on a best value basis  consistent with the Federal Acquisition Regulation, as in effect on the date of the enactment  of this Act, without any predisposition toward foreign or domestic facilities taking into  consideration, among other things, the ability of facilities to scrap vessels— (1) at least cost to the Government; (2) in a timely manner; (3) giving consideration to worker safety and the environment; and (4) in a manner that minimizes the geographic distance that a vessel must be towed when  towing a vessel poses a serious threat to the environment.
The 2001 Authorization Act also required MARAD, within 6 months of its  enactment, to provide Congress with a report on its program for disposing  of ships and subsequent progress reports every 6 months thereafter. As of  September 2004, MARAD had submitted two reports to Congress.
In its first report to Congress, issued in April 2001, MARAD stated that its  primary goal for the ship scrapping program was to meet the statutory  deadline. The report also provided a plan to dispose of all ships that  MARAD expected would be in its inventory through the deadline.  Highlights from the report included that MARAD would use fiscal years  2001 and 2002 to refine cost estimates specific to merchant type ships, and  from fiscal years 2003 through 2006, would dispose of 35 ships per year  mostly through domestic scrapping. MARAD, at that time, estimated that it  would be able to scrap 140 ships at an average cost of $2.5 million per ship  and donate or reef 15 ships by the 2006 deadline. Also, in accordance with  the statute, MARAD developed milestone dates for disposal of each ship  and developed an approach that focused disposal efforts on its highest  priority ships (ships in the worst condition) considering the condition of  the vessel hulls; the amount, type, and location of potential pollutants on  board; and the vessel spill history. MARAD stated it recognized that the  immediate threat that these high-priority ships posed at the sites, in all  likelihood, would result in using the domestic scrapping industry in the  near term, and stated it would continue to seek innovative solutions to the  challenging issue of ship disposal. MARAD also stated that, while there was  much scrapping capacity overseas, exporting ships was banned by the  Toxic Substances Control Act because PCBs can be found in shipboard  systems.
The second report to Congress, issued in June 2002, indicated that  MARAD no longer expected that it could meet the statutory deadline of  September 30, 2006, if it used domestic scrapping as the predominate  disposal method because no funds had been appropriated for the program  in fiscal year 2002 and that the prospects for future funding were  considered uncertain. The report also discussed an additional planned  procurement method to contracting by negotiation, which was the use  of PRDAs.
At the time the 2006 deadline was set, the reserve fleet consisted of  115 vessels designated as obsolete and available for disposal. Of these,  40 were considered high priority for disposal because of their deteriorated  condition. MARAD projected that another 40 ships would enter the fleet,  for a total of 155 ships that it expected would need disposal. These ships  are located at MARAD’s three anchorages: with the James River Reserve  Fleet (near Fort Eustis, Virginia) having the most ships and most of the  highest priority ships; the Beaumont Reserve Fleet (Beaumont, Texas); and  the Suisun Bay Reserve Fleet (near Benicia, California).
In disposing of its nonretention vessels, MARAD has usually had its excess  ships dismantled, or scrapped—a labor intensive approach that poses  certain environmental and worker safety risks. Ships are normally  dismantled from the top down and from one end to the other, using torches  and/or shears to cut away large parts of the vessel. Cranes are often used to  move larger metal pieces to the ground where they can be cut into the  shapes and sizes required by the foundry or smelter where the scrap will be  sent. The scrapping process produces some products, such as steel and  other metals, that can be sold to recyclers. Remediation of hazardous  materials, such as asbestos, PCBs, lead, mercury, and cadmium, takes place  before, as well as during, the dismantling process. If it is not done properly,  ship scrapping can pollute the ground and water around the scrapping site  and jeopardize the health and safety of the workers involved in the  scrapping process. The following figures illustrate various stages of the  scrapping process.
section_title: MARAD Is Unlikely to Meet 2006 Deadline
paragraphs: MARAD is unlikely to meet the statutory deadline of September 30, 2006,  to dispose of its inventory of obsolete ships. Since October 2000, when  Congress established the deadline, MARAD has disposed of only 18 ships,  or about 12 percent of its inventory. There still remain more than 100 ships  still needing disposal. MARAD’s current approach, which has resulted in an  average of about 5 ships disposed of per year, has not been sufficient to  meet the deadline. The ship disposal program’s slow progress stems  primarily from program leaders not establishing a comprehensive  management approach that better focuses the program’s efforts on meeting  the myriad of challenges that the program faces in eliminating its inventory  in a timely and efficient manner. Key elements necessary for effective  program management that are missing or inadequate include (1) no  integrated strategy or milestones for meeting the 2006 deadline; (2) no  identification of funding resources needed to meet the 2006 deadline;  (3) inadequate performance measures; (4) inadequate identification of the  legal, regulatory, and environmental external impediments that could  impact progress; (5) inadequate formal decision-making framework; and  (6) no formal program evaluations. In the absence of a comprehensive  management approach that includes all of these key elements, MARAD’s  ship disposal program lacks the vision needed to sustain a long-term effort.  MARAD has also not provided Congress with all of the required reports on  the program’s progress. As a result, MARAD has not been able to ensure  Congress that it can dispose of its obsolete ships in a timely way.
subsections: section_title: MARAD Has Made Slow Progress toward 2006 Deadline
paragraphs: Since October 2000, when Congress specifically authorized MARAD to pay  for ship disposal services and set a September 30, 2006, deadline to dispose  of all vessels, the agency has made slow progress toward achieving this  goal. In 2000, MARAD reported that it had 115 ships in its inventory.  Between October 2000 and September 2004, MARAD received 42 additional  ships through transfers, bringing the total number of ships that needed to  be disposed of to 157 (the beginning inventory of 115 plus 42 transfers). Of  these 157 ships, 18 ships, or about 12 percent of the inventory (as of  September 2004), had been disposed of, leaving 139 still in the inventory  (see table 1).
Of the remaining 139 ships, as of September 2004, MARAD had awarded  contracts for the disposal of another 29, leaving 110 ships that were still  awaiting disposal actions. The status of the 29 ships under contract is as  follows:  Twenty ships are waiting to be moved to a scrapping company. Of these,  9 are awaiting a court ruling on whether MARAD will be able to export  them to the United Kingdom.
Four ships have been towed but have not begun scrapping. These ships  were towed in October 2003 to the United Kingdom where they are  waiting for a U.K. company to obtain the proper permits to scrap them.
Five ships are either at scrapping facilities in the process of being  dismantled or are en route to scrapping facilities.
Of the ships that have been part of MARAD’s inventory since October 2000,  more than 40 ships have been designated as high priority for disposal  because of their severely deteriorating conditions. Ships in this category  have had known holes in their underwater hulls that may or may not have  been patched, and the potential for additional holes is considered to be  moderate or high. Consequently, these ships are considered to pose the  most immediate threat to the environment. Figure 4 shows (center) one of  the high-priority ships in the James River Fleet awaiting disposal; MARAD  awarded a contract to dispose of this ship in September 2004, but the ship  had not yet been removed from the fleet.
Based on the average rate of ship disposal of about 5 per year, it is unlikely  that MARAD will be able to get rid of the 110 obsolete ships that were in its  September 2004 inventory by the 2006 deadline (assuming that all of the  ships already under contract are disposed of by then). MARAD requested  and received $21.6 million to dispose of 15 ships in the fiscal year 2005  budget cycle and a yet-unspecified amount in its fiscal year 2006 budget. At  the same time, MARAD expects to receive up to 30 more obsolete ships  through transfers during the next 2 years. As table 2 shows, we estimate  that MARAD will likely have more than 100 obsolete ships in its inventory  in September 2006.
section_title: MARAD’s Slow Progress Is due to Lack of Comprehensive Management Approach
paragraphs: Sound management principles, such as those embodied in the Government  Performance and Results Act and used by leading organizations, include  the need for developing approaches to meet program goals, measuring  performance, identifying resource requirements, and reporting on the  degree to which goals have been met. Combined with effective leadership,  these elements provide decision makers with a framework to guide  program efforts and the means to determine if these efforts are achieving  the desired results. While MARAD has adhered to some of these principles,  for example, by including the ship disposal program in its strategic and  performance planning process, program leaders have not developed a  comprehensive approach to better focus its efforts on overcoming the  challenges related to eliminating its obsolete ship inventory in a timely  manner. Key elements necessary for effective program management that  are missing or inadequate include (1) an integrated strategy and milestones  for meeting the 2006 deadline; (2) an identification of total resources  needed to achieve the program’s goals; (3) measures of progress toward  achieving the goals; (4) identification of external factors, particularly those  related to legal, regulatory, and environmental issues, which could impact  the program’s progress, and strategies to mitigate these factors; (5) a decision-making framework; and (6) an evaluation and corrective  action plan. Although the 2001 Defense Authorization Act required  MARAD to submit a progress report on the program to Congress within  1 year of its enactment and every 6 months thereafter, the agency had  submitted only three reports through December 2004. The following  discussion focuses on the key elements that are missing or inadequate in  MARAD’s management approach.
Integrated strategy to meet stated goals and milestones for  completing ship disposal. Leading organizations have an integrated  strategy that identifies program goals and specifies an approach and a  timetable for completing the goals. While the program has a requirement  to dispose of its entire inventory by September 2006 and MARAD has  stated this requirement as one of its program goals, the program does  not have a current strategy to achieve this requirement using the  available disposal methods (e.g., domestic and overseas scrapping,  sales, artificial reefing, deep-water sinking, or donations). In its 2001  report to Congress, MARAD proposed a general strategy for meeting the  deadline by identifying 140 ships that could be scrapped through service  contracts and 15 ships that could be disposed of by donations or  artificial reefing. However, MARAD abandoned this approach in fiscal  year 2002 when the program did not receive any funding, and since that  time, it has not developed a new integrated strategy for disposing of all  ships. Instead, MARAD officials told us that their current strategy  consists of a market-based approach that is responsive to the current  proposals made by interested parties. Based on these proposals, specific  ships are matched to the various available disposal methods. These  officials also stated that, in the rare instances where competing  proposals exist for the same ship, MARAD makes a decision based on  best value/best interest to the government. However, because this  situation occurs infrequently and because the factors that need to be  considered, such as cost and timing, vary greatly, MARAD does not  document this decision-making process.
Moreover, while MARAD has identified the expeditious disposal of  high-priority ships (because of their poor condition) as another  program goal, it has not always matched its planned disposal methods  to this goal. For example, while past MARAD reports and briefings  identified domestic disposal as the most expeditious method and  indicated that this method would likely be used for some of its high- priority ships to minimize towing distance, MARAD awarded a ship  disposal contract in 2003 to an overseas firm that included many high- priority ships, even though export was considered more complicated  and time consuming. To determine the feasibility and advisability of  exporting ships overseas for scrapping, in 2002, Congress directed  MARAD to conduct at least one overseas pilot program for up to four  ships. As part of this effort, MARAD worked with EPA to determine  the circumstances under which the export of certain ships would be  allowed. Subsequently, in 2003, MARAD awarded a scrapping services  contract covering 13 ships, which was 9 more than authorized by the  pilot program, and included 10 that were considered to be high priority  for disposal, to a company in the United Kingdom. Prior to selecting the  ships to be included in the overseas contract, MARAD did not  determine the high-priority ships’ suitability for being towed across the  ocean. According to program documents, one of the high-priority ships  initially proposed for contract inclusion sprung a leak just before the  contract was signed and was replaced by another ship. Subsequently, a  citizen’s group lawsuit led to a U.S. court limiting the number of ships  that MARAD could initially export to 4 (consistent with the number that  would comprise the pilot program). MARAD selected 4 ships for export  that were among the ships in the best condition included in the  contract, in part, because they could be prepared for towing the  quickest, according to a program official. As a result, 7 of the highest  priority ships included in the overseas contract remained at the fleet. In  the following year, from June through September 2004, MARAD  included these 7 high-priority ships (originally part of the contract to  the overseas firm) in contract awards to domestic companies, to hasten  their departure from the fleet since the court had not yet determined if  these ships could be exported overseas.
In addition, MARAD does not have specific milestones to dispose of its  entire inventory of obsolete ships. MARAD’s 2001 progress report to  Congress outlined an approach to meet the 2006 deadline, however, in  its 2002 report to Congress, MARAD expressed concerns that it could  not meet the deadline but did not provide a timetable for what it could  achieve. In a 2004 progress report to Congress, MARAD proposed an  alternative plan to meeting the statutory 2006 deadline. Instead of  eliminating the entire obsolete ship inventory, MARAD suggested that  it would dispose of the remaining ships in its inventory at a rate that  would exceed the number of new vessels entering the fleet. MARAD  would work toward an “end-state” with a target goal of eliminating the  backlog of vessels that accumulated in the 1990s by September 30,  2006. MARAD’s proposal would include removing all “high” and  “moderate” priority ships (about 65) at a rate of 20 to 24 ships per year  and keeping only “low” priority ships at the fleet sites. However, for  fiscal year 2005, MARAD is planning to dispose of only 15 ships with the  $21.6 million that was appropriated.
Identification of resources needed to achieve goals. Good  management principles call for the identification of resources, including  funding, which are needed to accomplish the expected level of  performance. In its 2001 report to Congress, MARAD provided a general  estimate of costs to dispose of its inventory of 155 ships by the 2006  deadline, and it stated that it planned to further refine cost estimates as  additional data relating to merchant-type vessels were collected during  fiscal years 2001 and 2002. However, these costs were not converted  into a long-term funding plan linked to disposing of all obsolete ships by  2006. In addition, MARAD did not revise its cost estimates based on  actual contracting experiences. For example, the 2001 report estimated  that it would cost about $350 million to scrap 140 of the 155 vessels—an  average of about $2.5 million per ship—using ship scrapping services  contracts. However, MARAD’s budget requests for ship disposal for  fiscal years 2002 through 2005 have totaled only $54.1 million, about  one-sixth of the $350 million estimate. Congress has appropriated a total  of $78.8 million over the same period. Table 3 shows MARAD’s annual  budget requests, associated appropriations, and the difference between  the two.
MARAD officials said they did not incorporate the estimated costs to  achieve the 2006 deadline into a funding plan because MARAD did not  believe that Congress would fund the levels identified in its 2001 report  and because they believed that environmentally sound, qualified  foreign facilities that could scrap ships for less than the $350 million  estimate existed. Instead, MARAD officials said that their budget  requests reflected a consistent funding level that they believed  Congress would support; recognized the limited capacity of the most  expeditious method (scrapping at domestic facilities); allowed MARAD  to eliminate high-priority ships prior to the 2006 deadline; and provided  a sufficient disposal rate while MARAD investigated and pursued  potentially more cost-effective overseas alternatives.
Appropriate performance measures. Although DOT’s and MARAD’s  performance plans have tracked the ship disposal program’s progress  since 2001, the department-level performance measures that are being  used are not linked to the program’s goal of disposing of all obsolete  ships by September 30, 2006. For example, MARAD’s 2004 performance  plan links the ship disposal program to DOT’s facility cleanup  performance goal, which aims to ensure that DOT operations “leave no  significant environmental damage behind.” To measure progress toward  the facility cleanup goal, MARAD’s performance measure uses the  number of vessels that have been physically removed from the fleet for  subsequent disposal rather than the number of ships that have been  completely disposed of as called for by statute. MARAD officials stated  that the reason the chosen performance measure is not more directly  linked to the statutory requirement is because of MARAD’s recognition,  in 2002, that the deadline was unachievable due to the program’s  inconsistent funding and disposal impediments. A MARAD official  stated that tracking the number of removed ships as a performance  measure is appropriate because removing ships contributes to the  facility cleanup goal. However, using removal rather than disposal as a  performance measure may obscure MARAD’s actual progress toward  achieving the disposal deadline cited in the statute. For example,  MARAD counted toward meeting its fiscal year 2004 removal target the  four ships that were towed to the United Kingdom in October 2003, but,  as of November 2004, these ships were still fully intact and awaiting  permit approvals before scrapping could begin. In another example,  MARAD program officials reported to senior managers in March 2004  that the program had exceeded its fiscal year 2004 ship performance  target for removals by 10 ships. However, 6 months later, only 3 of these  ships had been completely disposed of. MARAD officials stated that they  also use other measures not tracked in its performance plan. For  example, the number of contracts awarded and ships disposed of are  recorded continuously and frequently communicated to program  officials. While we found that MARAD does collect the data, this  information is not reported against established targets in its  performance reports, reports to Congress, or budget requests making  assessing program progress difficult.
Finally, MARAD’s performance targets are set too low to complete the  disposal of the 155 obsolete ships in MARAD’s 2001 inventory by the  2006 deadline. As table 4 shows, MARAD’s projected performance  targets for the ship disposal program were to remove a total of  29 ships—less than 20 percent of the inventory—from the fleet for  subsequent disposal from fiscal year 2001 to 2005.
MARAD officials acknowledged that while the targets were too low to  meet the statutory deadline, they were more realistic and achievable  given the program’s constraints such as unpredictable funding. These  officials stated that a more meaningful goal related to the statutory  requirement would be to dispose of as many ships that represented the  greatest risk to the environment, as possible, given the available  resources. MARAD stated that it has reported this goal to focus on  high-priority ships in its budget request and reports to Congress. While  MARAD has stated this general goal, it has not developed specific  performance measures with targets to track its progress toward  achieving this goal.
External factors and mitigation plans. Good management practices  include identifying external factors that may be impediments to  program success and actions needed to mitigate these impediments.  MARAD has cited a number of external factors that provide challenges  to the ship disposal program in briefings and in some of its strategic  planning documents. These challenges include domestic disposal  capacity limitations; environmental, legal, and regulatory restrictions on  export; and similar restrictions on other disposal options. Specifically,  MARAD has stated that the existing domestic ship recycling capacity is  very limited and must serve both MARAD’s and the Navy’s needs.  Additionally, foreign disposal remains a challenge because of the Toxic  Substances Control Act prohibition on the export of PCBs, the extensive  regulatory requirements to obtain an exemption from the act, and legal  challenges. As a result, MARAD has concluded that export is not  commercially viable for ships containing PCBs. MARAD has stated that  other options, such as artificial reefing, donations, and deep sinking of  vessels, are also limited, in part, by the cost of preparing ships to meet  environmental requirements. However, MARAD’s plans do not clearly  describe the linkage between these factors and the program goals they  impede or specify how their impact can be reduced. For example, while  MARAD’s strategic plan cites the lack of domestic disposal  opportunities as an impediment to the program, the plan is not clear on  how this impediment would keep MARAD from meeting its stated goal  of completing the disposal of all of its high-priority ships or its target of  removing 4 to 15 ships per year. Also, the plan does not specify the  actions that MARAD might take that could increase domestic capacity  or foster existing capacity. In addition, MARAD has taken a number of  actions to address impediments related to overseas scrapping, artificial  reefing, donations, and deep-water sinking, which may lead to some  progress in the future. However, these actions do not appear to have  been done in a systematic manner nor linked to specific program goals.  Such an effort would allow MARAD to systematically identify and assess  the factors that pose risk to the program, and would allow MARAD to  prioritize its actions in order to increase the likelihood that its actions  could successfully influence the factors that impede the program from  meeting its goals. Until MARAD develops a process that focuses its  actions on long-term program goals and appropriate performance  measures, it will be difficult for MARAD to assess how external factors  may impede program goals and the actions needed to reduce them.
Formal decision-making framework. Successful organizations  establish a decision-making framework that encourages the appropriate  level of management review and approval, supported by the proper  technical and risk analyses. A well-thought-out review and approval  framework can mean program decisions are made more efficiently and  are supported by better information. Some leading organizations have  review processes in place that determine the level of analysis and  review that will be conducted based on the size, complexity, and cost of  the project. Projects that are crucial to the program’s strategy usually  require more analysis, support, and review than projects that have less  organizationwide impact.
We found that MARAD’s decision-making framework lacks many of  these elements. For example, MARAD does not have a formal  decision-making process that specifies how program oversight is to be  provided and what decisions need to be reviewed by senior leadership,  and it has no formal program documents that describe how the various  offices will interact. MARAD has some policies that generally describe  roles and responsibilities for key offices involved with ship disposal.  According to these policies, the MARAD Administrator is to provide  general direction and supervision to the Associate Administrator for  National Security, whose responsibilities include the executive  direction of the Office of Ship Operations. Within this office is the Ship  Disposal Program Office that, in coordination with other offices,  develops and administers the ship disposal program. MARAD officials  stated that while the process is not well documented, they believed that  program participants understood their roles and responsibilities and  that senior management is aware of issues affecting the program.  MARAD does not follow a formal process that uses written guidance  and does not have an approved program plan that addresses all  elements of the program. In addition, MARAD program officials could  not provide us with analytical results to support key program decisions.  For example, MARAD did not have an analysis to support its position  that domestic ship scrapping capacity is limited, which led it to  consider foreign scrapping capacity to be of greater importance to the  program. MARAD officials stated that the capacity and capabilities of  the domestic industry were obvious through the data associated with  the industry responses to disposal solicitations. These officials stated  that ship disposal is not a growth industry in the United States and a  formal capacity analysis would not have benefited the program because  the results would have been largely theoretical. Instead, these officials  told us that the domestic industry’s cost-effective capacity is evident  through the proposals received during disposal solicitations. We  disagree that there would be no benefit to conducting a capacity  analysis. Such an analysis could provide the basis to determine  throughput levels for planning purposes in developing funding plans for  the program. While MARAD stated that ship disposal is not a growth  industry, in 2004, MARAD awarded contracts to two firms that had not  participated in past solicitations.
Program evaluation and corrective action plans. Program  evaluations are defined as objective and formal assessments of the  results, impact, or effects of a program or policy. Such information can  be used to assess the extent to which performance goals are met and  identify appropriate corrective actions for achieving unmet goals. While  MARAD had not performed an evaluation since it received its new  authority in fiscal year 2001, officials stated that the agency initiated the  program’s first evaluation in June 2004 and expects to complete it as  early as January 2005. This evaluation could identify any corrective  actions that may be needed for the program to improve its performance.
Periodic progress reports to Congress. The 2001 Defense  Authorization Act required MARAD, within 6 months of its enactment,  to provide Congress with an initial report on the disposal program and  to submit progress reports every 6 months thereafter. Since 2000,  MARAD had submitted only three out of a possible eight reports that  were required to communicate the program’s status through December  2004. In April 2001, MARAD provided its initial report to Congress  addressing aspects of its plan. In June 2002, it submitted a second report  updating the program’s status since the 2001 report. A third report,  which had been in draft format for over a year, was submitted to  Congress in October 2004. Failure to provide these reports has left  Congress without information that could be useful in its decision- making process.
As a result of weaknesses in MARAD’s management approach, the program  lacks a clear vision to guide program decision making concerning the ship  disposal program. Missing management elements such as the lack of an  integrated strategy, resource identification, and inadequate performance  measures reflect this lack of a vision and undermine MARAD’s efforts to  sustain a long-term effort. In addition, MARAD has not been able to provide  Congress and other stakeholders with a reasonable timetable and the  associated annual funding requirements needed to meet the 2006 deadline,  nor has it clearly articulated the areas that congressional assistance may be  needed to expedite the disposal of these deteriorating ships that continue  to pose potentially costly environmental threats to the waterways near the  sites where these ships are stored.
section_title: MARAD Has Made Limited Use of Alternative Disposal Methods because of Several Barriers
paragraphs: Although Congress directed MARAD in fiscal year 2001 to consider  alternative methods in designing its ship scrapping program, the program  has made only limited use of these methods—artificial reefing, deep-sea  sinking, and donations—because of a number of environmental, financial,  and legislative barriers. With the support of Congress, MARAD has recently  taken a number of actions to address these impediments. Despite these  positive steps, MARAD may still be years away from increasing the number  of disposals using these alternative methods. MARAD has not developed an  overall plan that could increase the use of alternative disposal methods.
In fiscal year 2001, Congress directed MARAD to consider alternative  methods in designing its ship scrapping program. However, MARAD has  used an alternative method for ship disposal—artificial reefing—only once  since that time, and work on this disposal action started prior to 2001 (see  table 5). At the same time, MARAD has not yet disposed of any ships  through deep-water sinking or ship donations. Instead, MARAD has  focused on ship scrapping—either by awarding contracts or selling the  ships to scrapping firms to dismantle them—to dispose of 17 of the 18 ships  for which it has completed disposal actions. MARAD officials told us they  are currently reviewing applications to dispose of 5 ships through artificial  reefing and are holding 4 ships for donations, although few of these actions  are likely to be completed by the statutory deadline.
subsections: section_title: MARAD Has Taken Recent Steps to Address Barriers to Use of Artificial Reefing, Deep-Water Sinking, and Donations
paragraphs: Recently, in response to congressional direction, MARAD has taken a  number of steps to address several barriers that have limited its use of  alternative disposal methods. These barriers have included environmental  factors related to the removal of hazardous materials (remediation) from  obsolete ships, the financial costs to remediate these ships, and the  legislative barriers to donating ships to historical organizations. MARAD’s  actions to facilitate the use of alternative methods are discussed below.
subsections: section_title: Artificial Reefing Program
paragraphs: MARAD officials have identified artificial reefing as having the greatest  potential for use among the alternative methods and are currently  evaluating reefing applications from four states that cover five ships.  MARAD officials are optimistic that one of the five ships being evaluated  for reefing may be sunk as early as 2005. Under the artificial reef program,  MARAD transfers obsolete ships to states or other jurisdictions to be  submerged as part of a state-managed program to build artificial reefs that  benefit marine life, commercial and sport fishing, and recreational diving.  From 1973 to 1992, MARAD transferred 46 ships to coastal states to be used  as artificial reefs but, since 2001, it has disposed of only one ship through  reefing, partly because of unresolved environmental issues.
MARAD has identified several obstacles that have hindered its ability to use  reefing, and the agency has recently taken some actions toward facilitating  the use of this method. Four of the obstacles and MARAD’s actions include:  Lack of national environmental standards to prepare ships for  artificial reefing. According to MARAD officials, concerns about  environmental contamination, especially PCBs, have stifled the artificial  reefing program in recent years, and plans for preparing vessels for  reefing have been complicated by the lack of consistent standards for  environmental remediation. Congress, in 2002, directed MARAD and  EPA to jointly develop best management practices (national guidelines)  for preparing ships for the artificial reef program. In June 2004, EPA  published draft national guidelines. The guidelines require, among  other things, the removal of PCBs greater than 50 parts per million  throughout a ship and asbestos in areas of a vessel that could be  disturbed by explosives used to sink the vessel. Once adopted, the  guidelines should provide MARAD and the states participating in the  artificial reef program with clear criteria for removing hazardous  materials from ships.
Cost of preparing/remediating vessels. According to MARAD  officials, the states have been reluctant to take on the responsibility of  towing, preparing, and sinking ships for artificial reefing because of the  potentially high costs they could incur. To address this issue, MARAD  requested and in 2002 Congress provided it with authority to provide  financial assistance to states to tow, prepare, and sink reef candidates.
Since 2002, MARAD has received applications from four states to sink a  total of five ships, one possibly as early as 2005. Other applications have  been delayed, partly because of the lack of funding to prepare ships for  reefing.
Need to streamline application process. To sink obsolete ships to  form an artificial reef, MARAD and the states have to coordinate their  efforts with a number of government agencies, including the U.S. Army  Corps of Engineers, the U.S. Coast Guard, and EPA. According to  MARAD, states typically require about 9 months to complete this  coordination. MARAD and other agencies have been working to  streamline the process. For example, the Navy and MARAD have  established a joint reef application process for soliciting, receiving, and  evaluating applications from interested states. The joint process will  allow MARAD and the Navy to share resources to achieve common  reefing goals.
Limitation of program to the United States. Prior to fiscal year  2004, reefing candidates were restricted to state governments within the  United States. MARAD requested and received congressional  authorization in fiscal year 2004 to accept applications from  U.S. territories and foreign governments for reefing. MARAD has  received several inquiries since it received this new authority. For  example, MARAD has had significant interest from the Cayman Islands  for a reefing project.
section_title: Deep-Water Sinking Program
paragraphs: MARAD has taken actions that could result in it disposing of a few of its  ships through the Navy’s Sinking Exercise (SINKEX) program, which  involves sinking ships in deep water for weapons development testing and  evaluation and for fleet training exercises. In September 2003, MARAD and  the Navy developed a memorandum of agreement to include ships in  MARAD’s inventory in the Navy’s SINKEX program. According to MARAD,  as with the other disposal methods, deep-water sinking requires the  removal of environmentally hazardous materials from ships before they are  sunk. According to MARAD and discussions with the Navy, most of  MARAD’s high-priority ships do not meet the Navy’s needs because of their  advanced deterioration. As a result, MARAD considers deep-water sinking  a low-volume option even though the estimated costs are lower than  scrapping. MARAD has set a goal of disposing of one or two ships a year  through this method. However, the one ship that was scheduled, and had  been prepared by the Navy for deep-water sinking, had to be withdrawn  when it was determined that the ship had historical significance and thus  was not suitable for the Navy’s program.
section_title: Vessel Donation
paragraphs: As a result of recent congressional action, MARAD’s use of a third  alternative disposal method—the ship donation program—may increase in  the future. Until 2003, MARAD could donate ships to qualified groups only  through special congressional legislation that designated a specific ship,  the recipient, and the conditions under which the donation would take  place. According to MARAD officials, the agency has set aside four ships  under this process, making them ineligible for disposal through other  methods unless their condition deteriorates. This process has been lengthy,  primarily because recipient groups needed time to raise money to acquire,  restore, and operate a ship for its intended use. In some cases, ships that  are on hold for a donation may be removed because the recipient group has  not been able to make significant progress to complete the donation  requirements. As table 6 shows, two ships (Hoist and Sphinx) are currently  in this status.
At MARAD’s request, Congress, in 2003, gave the agency authorization to  establish a donation program that would allow it to donate ships directly to  groups interested in acquiring and preserving ships that have historic  significance. This change would eliminate the time-consuming procedure  of interested groups needing special legislation for each donation.  MARAD established its donation program in July 2004 and indicated that  accepted applications would be valid for 1 year with two 6-month  extensions possible based on an applicant’s progress in meeting the  milestones presented in its business plan. However, the program does not  have the authority to provide potential recipients with direct financial  assistance—a barrier to progress in the past. MARAD officials have said  that the high costs associated with the indefinite preservation of ships for  historical purposes make it unlikely that the agency could provide  significant assistance, even if the authority was provided.
section_title: MARAD Has Not Developed an Overall Plan to Increase Usage of Alternative Disposal Methods
paragraphs: Despite the steps it has taken recently, MARAD faces some additional  challenges to using alternative disposal methods. Since its first report to  Congress in 2001, MARAD has not conducted a systematic assessment of  its ship inventory to determine the most cost-effective and efficient method  for getting rid of individual ships. In addition, it has not developed policies  that would enhance the use of alternative disposal methods. For example,  while MARAD now has authority to share artificial reefing costs and can  provide funds to remediate ships in its inventory, it does not have specific  policies to guide it in determining how much funding it should set aside for  cost sharing or for remediating ships to make them more readily  transferable as part of the artificial reefing or donation program. MARAD  officials told us that their approach is to make all ships available for all  disposal methods with few exceptions. According to these officials, this  approach allows states and historical preservation groups to select ships  according to their preferences without any restrictions. In the past, this  approach has led to some cases in which recipient groups selected ships  that were in the worst condition. For example, two of the four ships that  have been placed on hold for donation have had poor hulls, and MARAD  officials plan to remove these from hold status. Because of the lack of an  overall approach, MARAD may be losing opportunities to dispose of more  of its obsolete ships in the most cost-effective and expeditious manner.
section_title: MARAD’s Use of PRDAs to Scrap Ships Is Inappropriate
paragraphs: Since fiscal year 2002, MARAD has inappropriately used a procurement  method—PRDA—to acquire most of its ship disposal services rather than  other procurement methods that are appropriate for acquiring such  services. According to MARAD, PRDAs are a variant of broad agency  announcements, an authorized procurement process under the FAR and  the Competition in Contracting Act of 1984 (CICA). PRDAs are designed to  enable federal agencies to acquire basic and applied research and that part  of development not related to the development of a specific system or  hardware procurement. MARAD officials cited several reasons for using  PRDAs, including seeking innovative solutions to ship disposal, attracting  more industry proposals, and reducing costs. Our analysis of MARAD’s  PRDAs and contracts awarded under PRDAs through February 2004  showed that MARAD was not using PRDAs to acquire research or  development but to procure conventional ship scrapping services. In  addition to being inconsistent with CICA and the FAR, MARAD’s use of  PRDAs to acquire ship scrapping services has led to a lack of transparency  and raised questions about the fairness of MARAD’s contract award  process.
subsections: section_title: MARAD’s Rationale for Using PRDAs
paragraphs: According to MARAD, PRDAs are a variant of broad agency  announcements and meet the requirements of the FAR for the use of these  announcements. MARAD officials explained that the agency chose to use  PRDAs for a number of reasons. MARAD officials said that they have used  PRDAs to seek innovative, private-sector solutions for controlling ship  disposal costs and, at the same time, to gain insights into domestic and  international dismantling and recycling market costs. MARAD officials  pointed out that market cost data were particularly important when the  program did not receive appropriated funds in fiscal year 2002. According  to MARAD, the use of PRDAs provides greater flexibility as it allows  interested parties to propose methodologies that are broader than those  received in response to other solicitations. In addition, MARAD officials  said that they used PRDAs to attract a larger number of proposals from  qualified firms than they had received under other methods. MARAD  officials also told us that their use of PRDAs had contributed to the  significant lowering of disposal prices through greater industry  participation and increased competition.
Since fiscal year 2002, MARAD has used PRDAs as its primary procurement  method. According to MARAD, the agency has used PRDAs to solicit  proposals for the disposal of over 130 different obsolete ships and has  awarded contracts for 34 of those ships. In addition to PRDAs, MARAD has  used other procurement methods—contracting by negotiation, under  which an agency issues a request for proposals, and sealed bidding, under  which an agency issues an invitation for bids—to award contracts to  scrap 6 ships in 2001 and 4 ships in 2003.
section_title: Our Assessment of MARAD’s Use of PRDAs
paragraphs: Under the FAR, broad agency announcements are used to acquire basic  and applied research and that part of development not related to the  development of a specific system or hardware procurement. Agencies  can use this method to fulfill their requirements for scientific study and  experimentation directed toward advancing the state of the art or  increasing knowledge or understanding. According to the FAR, agencies  should use this method only when meaningful proposals with varying  technical approaches can be expected. Although the FAR considers broad  agency announcements a competitive procurement method, proposals do  not have to be evaluated against one another since they are not submitted  against a common work statement. Regardless of MARAD’s stated  purposes for using PRDAs, their use must be consistent with CICA and  the FAR. ompetitive selection of basic and applied research and that part of development not  related to the development of a specific system or hardware procurement is a competitive  procedure if award results from—(i) A broad agency announcement that is general in nature  identifying areas of research interest, including criteria for selection of proposals, and  soliciting the participation of all offerors capable of satisfying the Government’s needs; and  (ii) A peer or scientific review.
The FAR, in this respect, implements the requirements of CICA by allowing  agencies to use the broad agency announcement as a means to obtain  research or development. It follows, and we conclude, that an agency may  only use broad agency announcements, or any variant of that process, to  acquire research or development in order to comply with CICA and the  FAR. Our analysis indicates that MARAD is not using broad agency  announcements, or PRDAs, to acquire research or development; rather it is  inappropriately using them to acquire ship scrapping services.
An appropriate use of PRDAs would have allowed MARAD to solicit  proposals and award contracts for research or development that sought to  advance the state of the art or increase knowledge. In other words, MARAD  could have sought innovation in the ship scrapping industry through  research or development contracts. PRDAs we reviewed, however, did not  seek proposals to perform research or development. Rather, along with  innovative approaches for ship disposal, the PRDAs indicated that  proposals should address environmental and worker safety considerations,  production throughput/capacity, experience with ship disposal, and  funding requirements. With respect to funding, the PRDAs did not ask firms  to explain their costs to research or develop new methods or approaches  for ship disposal; instead, the PRDAs specified that funding “must be  proposed in sufficient detail to show all anticipated costs associated with  the complete dismantlement of the vessel(s), including cost categories  such as towing, remediation of hazardous materials, labor costs, etc., as  appropriate.” Thus, rather than soliciting proposals to perform research or  to develop new methods or technologies to scrap ships, MARAD’s PRDAs  essentially contemplate the award of production contracts to firms with  ship disposal experience.
In addition, the results of MARAD’s evaluation approach appeared to give  greater weight to the disposal of ships rather than obtaining innovation,  research, or development. In our review of MARAD’s evaluations for more  than 70 proposals submitted under PRDAs from November 2001 through  March 2003, we found that MARAD had not accepted proposals that were  identified in program evaluations as having innovative approaches or  research or development. For example, one evaluation summary stated  that the proposal was rejected because it would not result in the disposal of  ships but only in the testing of a hazardous material remediation  technology and that PRDAs were not intended to solicit proposals of  untested technologies. Another evaluation summary stated that only one  ship would be disposed with no cost advantage to MARAD and with no  guarantee of discovering methods or efficiencies that could be applied to  the ship dismantlement industry to MARAD’s benefit. On the other hand,  proposals that MARAD provisionally accepted for further consideration  were described in the evaluations as providing conventional ship  dismantling or recycling services and in many instances acknowledged that  the proposals did not contain innovations.
We also found that MARAD did not award contracts that required  innovation or research or development. Our analysis of six contracts  awarded under PRDAs through February 2004 also showed that none of the  contracts specifically required innovative approaches in disposing of ships.  Instead, the contracts provided for conventional ship scrapping services,  with requirements, time lines, schedules, costs, and objectives clearly spelled out, contrary to most research and development contracts. For  example, a contract between MARAD and Post-SVC Remediation Partners,  which was effective July 25, 2003, specifies that the contractor is to tow  13 vessels from their current location (at the James River Reserve Fleet  and Portsmouth Naval Base) to the United Kingdom and completely  “dispose of, dismantle and remediate. . . vessels by 31 December  2005.” MARAD officials stated that their dismantling contracts contained  performance schedules and outcomes as part of the government’s  responsibility to monitor contractor performance; however, these officials  stated that MARAD did not mandate the methodology by which the  contractor was to dispose of the vessels. MARAD officials stated that  because their contracts are performance based, the contractors are  responsible for determining how they will comply with the terms of the  contract, thereby giving them flexibility during the dismantling operations.  While we agree that the use of a research or development contract would  not alleviate the government’s responsibility for oversight, we do not  believe that MARAD acquired the innovative service it indicated PRDAs  were designed to obtain. In our view, the contracts were for ship scrapping.
In addition, MARAD may not need to specifically acquire innovation to  expeditiously scrap ships. Industry representatives told us the process of  scrapping a ship does not require innovative approaches. Industry officials  said that ship scrapping is a fairly straightforward activity, and most  companies are using similar techniques to dispose of ships. They pointed  out that the basic technology for scrapping a ship involves removing  environmentally hazardous materials and then dismantling the ship with a  cutting torch. They said that while companies might use different  processes, the core technology did not change. The representatives said  that they had not developed any innovative approaches in response to  MARAD’s PRDA process, and officials at one firm said that they had not  responded to MARAD’s first PRDA solicitation because they did not believe  their company was eligible to participate since it had no new technologies  or innovations to offer. However, once they learned that a competitor was  obtaining ship scrapping contracts through the PRDA process, they too  submitted proposals under PRDAs and were subsequently awarded  contracts for ship disposal. MARAD officials told us that the agency has  seen several innovations from domestic and foreign contractors as a result  of the PRDA process. Specifically, they pointed to the application of  technological advances such as hydraulic, articulated shears and high  pressure, water-cutting technology that have distinct advantages over the  traditional use of cutting torches, as well as the use of the dry basin for  dismantling of vessels, and improved business processes in the contract  performance. However, we did not see any evidence that the use of these  technologies was required by the terms of the contracts. More importantly,  the use of these technologies does not make the contracts research or  development contracts.
While MARAD officials claimed that more firms had responded to PRDA  solicitations than to other solicitation methods, we found that MARAD did  not consider several other factors that could have affected participation.  MARAD officials said that between 2001 and 2004, the agency received  proposals from 71 firms (57 from October 2001 to March 2003 and 14 from  January 2004) through PRDA solicitations, compared with 13 firms (8 in  2001 and 5 in 2003) through invitations for bid and requests for proposals  (see table 7). However, the higher responses may have been due to the  number of ships offered and their condition. For example, while the PRDA  solicitations included around 100 ships and were open to domestic and  foreign firms, solicitations by other methods were limited to a few high- priority ships and were open only to domestic firms because of concerns  about long tows to the scrapping sites. Other factors, such as the ship  disposal program’s larger appropriations in 2003 and 2004 and a rise in the  price of scrap metal (making scrapping more profitable for the industry),  could also have affected participation. In addition, there is no evidence to  suggest the response that other procurement methods might have received  would have been any different, since most ships were only offered under  PRDAs. Moreover, several firms we contacted said that PRDAs had not  positively influenced their decision to make offers to scrap ships over other  procurement methods.
In addition to being inconsistent with CICA and the FAR, MARAD’s use of  PRDAs has provided less transparency than other available solicitation  methods. For example, under an invitation for bids, bids are publicly  opened and typically are available for examination by competing vendors.  Under a request for proposals, competing vendors are given written notice  of the reason they are excluded from the competition and are given an  opportunity for a debriefing explaining the agency’s award decision. By  contrast, proposals submitted under PRDAs are often difficult to compare  with other proposals because they do not generally cover a specified  statement of work or a set number of ships. Consequently, firms are often  unable to determine why their proposal was not selected over another  proposal. Moreover, MARAD officials were not able to tell us what criteria  they used to award the six contracts we reviewed. For example, when they  conditionally accepted proposals from two different firms, they could not  explain what criteria they used to ultimately award a contract to one firm  rather than the other. The domestic ship scrapping contractors with whom  we spoke agreed that there was no way to determine why a particular  company got a contract.
This lack of transparency confuses and can alienate ship scrapping  contractors. In discussing their experience with MARAD’s PRDA process,  several ship scrapping contractors told us that although they had received  contracts, they perceived inconsistencies in MARAD’s use of PRDAs. For  example, they said that often a long time passes between the acceptance of  a proposal by MARAD and the award of a contract. Industry officials said  that although MARAD had informed them that their firm’s proposal was  acceptable, MARAD took no further action on their proposal for more than  a year. During this time, MARAD conducted negotiations with other firms  over disposal issues, including the number of ships, the specific ships, and  the cost. Some firms questioned MARAD’s ability to assess the best  proposal if it is negotiating only with selected firms. Delays in awarding  contracts affect the ship scrapping contractors because of the volatile  nature of the scrap metal market.
section_title: Other Procurement Methods Could Provide Similar Benefits
paragraphs: At the beginning of the ship scrapping program in fiscal year 2001, MARAD  had planned to use another procurement method—contracting by  negotiation—in which an agency issues a request for proposals. MARAD  expected to use requests for proposals to dispose of vessels that were in  the worst condition and designated as high priority. It planned to use this  method to award multiple contracts to various ship scrapping companies in  different locations, using long-term, indefinite delivery, indefinite quantity  (IDIQ) contracts. These contracts were to specify a minimum initial  quantity of high-priority ships to be scrapped but could subsequently be  used to award additional ships to the same firms within a certain time  period. MARAD expected to award contracts to a minimum of three  companies to scrap at least one ship, and these companies would have the  opportunity to scrap additional ships. However, MARAD officials said that  when the agency did not receive any fiscal year 2002 appropriations for the  ship disposal program, it shelved these plans. Instead, it turned to PRDAs  for almost all of its contracts.
While MARAD stated that other acquisition methods, such as requests for  proposals and invitations for bids, do not allow offerors to submit solutions  outside of the defined government requirements as could be done with  PRDAs, MARAD did not provide a convincing case as to why these  solutions were necessary to dispose of the ships that were in the worst  condition as quickly as possible. In fact, MARAD stated in its briefing  documents, PRDA solicitations, and reports to Congress, that it anticipated  that it would use methods other than PRDAs to address the worst ships.  While MARAD has also said that requests for proposals and invitations for  bids do not accommodate numerous proposals of varied solutions based on  each offeror’s business model, we found that they can provide some  flexibility for both the government and the offeror. For example, in a 2003  invitation for bids for four ships, MARAD stated that it could award each  ship separately or make multiple awards for any combination of ships. As  noted earlier, MARAD could also use a request for proposals to select from  a pool of qualified firms to propose on an indefinite quantity of ships as  funding became available. Moreover, other federal agencies have used IDIQ  contracts as a flexible procurement tool when funding is uncertain. For  example, Navy officials told us that they used this method to gain flexibility  in awarding contracts for the Navy’s ship disposal program when  unanticipated end-of-year money became available. Since fiscal year 1999,  the Navy has used requests for proposals to award IDIQ contracts to scrap  36 ships.
section_title: Overseas Competition Just One Factor Contributing to Lower Prices
paragraphs: While we could not isolate the specific impact of foreign competition and  other factors on reducing the cost of ship disposal, MARAD attributes the  overall decrease in ship disposal costs almost exclusively to overseas  competition. However, other factors, such as larger annual program  funding allowing for more ships per contract and increases in the scrap  value of steel, may have also played a role. As table 8 indicates, the price of  contracts that MARAD has awarded since 2001 has generally decreased.  These decreases included an instance where solicitations were  geographically restricted to domestic firms only—because of the  deteriorated condition of some ships.   In 2001, MARAD paid contractors an  average of about $250 per ton to scrap ships. This average price fell to  about $109 per ton in 2004—a decrease of about 56 percent.
In its 2004 report to Congress, MARAD attributed the drop in contract  prices to increased competition due to the inclusion of foreign firms since  it had received more proposals when international firms have been  included. However, while the overall price dropped from 2001 for two  solicitations that included both domestic and international companies, it  also decreased for one of the domestic solicitations that excluded foreign  competition. According to industry officials, however, other factors, such  as the condition of the ship, the amount of remediation that is required, and  the potential recovery from recyclable material, can affect bid prices; thus,  average prices based on tonnage alone may not be very meaningful if the  amount of hazardous materials present on the ships varies.
An increase in appropriations for the ship disposal program since 2003 may  also have contributed to lower contract prices by allowing larger contracts  that can benefit from a greater economy of scale. As table 3 shows, the  program received $10 million in fund transfers from the Navy in fiscal year  2001 and no appropriated funding in fiscal year 2002. However, since fiscal  year 2003, MARAD has received an annual average of about $23 million.  This level of funding has likely attracted new interest among firms.  According to MARAD officials, they have received proposals from  companies that had not participated previously and have awarded  contracts to some firms for the first time in 2004. Several industry  representatives told us that MARAD’s higher funding levels allowed them to  offer proposals that represented greater economies of scale, thus lowering  costs. For example, one firm we visited was awarded a contract in 2003 to  dispose of five ships, and three other firms received contracts to dispose of  three ships each in 2004. By contrast, only one firm received a contract to  dispose of two ships in 2001.
A rise in scrap metal prices since 2003 has also contributed to lower bid  prices. Representatives from firms we contacted said that higher scrap  metal prices contributed to a large degree to their ability to offer lower  prices for scrapping ships in recent proposals because they could expect to  recover more of their costs from recycling the metal. Figure 5 shows the  increase in average yearly international scrap steel prices since about 2002.
While several firms’ representatives said that the participation of foreign  companies did not have an affect on their offers, in at least one case  domestic prices seem to have been influenced by foreign competition.  According to MARAD officials, one domestic firm reduced its previous  proposal by about 50 percent when it learned that MARAD was in the latter  stages of contract negotiations to export several ships to a foreign firm.  The domestic company made its new offer about 6 months after its original  offer, and it included many of the ships that were under negotiations with  the foreign firm. MARAD officials told us that subsequent offers from this  and other domestic firms have been lower since MARAD awarded the  contract for foreign export.
section_title: Conclusions
paragraphs: Although MARAD’s ship disposal program has made some strides in  reducing its inventory of obsolete and deteriorating merchant ships in the  National Defense Reserve Fleet, it has managed to dispose of only  12 percent of its original 2001 inventory, and it is unlikely to meet the  already extended deadline of September 30, 2006, to get rid of the entire  inventory. The strides that MARAD has made have been facilitated by  congressional appropriations of almost $80 million—almost $25 million  higher than requested—to procure ship scrapping services during fiscal  years 2001 through 2004 and by congressional support that helped  streamline the ship donation program and encouraged the development of  environmental standards for the artificial reefing program.
However, these steps have not been enough to better ensure long-term  program success. MARAD’s program currently does not have an overall,  comprehensive management approach that focuses specifically on the ship  disposal program and on meeting the statutory deadline of 2006. In the  absence of a comprehensive management approach, MARAD’s ship  disposal program lacks the vision needed to sustain a long-term effort. In  addition, the program has not been able—and will likely continue to be  unable—to obtain, on a consistent and predictable basis, the funding  resources that it needs to efficiently and expeditiously reduce its obsolete  ship inventory. Moreover, MARAD has not undertaken an overall  assessment of its obsolete ship inventory, which is needed to determine  what disposal methods (e.g., domestic or foreign scrapping, artificial  reefing, deep-water sinking, or donations to organizations) are the most  appropriate one for each vessel. It has also failed to set reasonable  milestones for completing disposal and has not established relevant  performance measures to periodically measure progress toward meeting  the deadline. Similarly, MARAD has not established a formal decision- making framework that would clearly delineate roles and responsibilities  and formalize program guidance and procedures. Further, MARAD has not  established a process to systematically identify and assess the risk that  external factors pose to the program, nor has it laid out plans that would  prioritize its actions to mitigate these risks. In addition, MARAD has not  submitted to Congress on a timely basis the semiannual progress reports  that the 2001 statute requires. Finally, MARAD has predominately used a  procurement method that is not appropriate for acquiring ship scrapping  services and that has led to concerns about the lack of transparency in the  way that ship scrapping contracts have been awarded. As a result of these  many weaknesses, MARAD has not been able to ensure Congress that it  can dispose of the obsolete ships in a timely and cost-effective manner.
Without an improved management approach, MARAD’s ship disposal  program will be limited in its ability to dispose of—in a timely manner—the  more than 100 obsolete ships currently in its inventory, as well as the  additional ships that the program expects to receive each year. As a result  of its slow progress, MARAD will continue to have a backlog of obsolete  and deteriorating ships that pose a threat to the coastal waterways where  they are anchored because of the toxic materials that they contain. If this  hazardous material should spill out, as it has already in a number of cases,  the ships could cause a costly environmental disaster in some of the  nation’s sensitive waterways.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Transportation direct the MARAD  Administrator to take the following three actions.
Develop a comprehensive approach to manage MARAD’s ship disposal   identify a strategy and an implementation plan to dispose of all  existing obsolete ships and future transfers in a timely manner,  maximizing the use of all available disposal methods;  determine the needed resources, the associated funding plan, and  specific milestones for this disposal;  establish a framework for decision making that would delineate roles  and responsibilities and establish guidance and procedures;  identify external factors that could impede program success and  develop plans to mitigate them; and  annually evaluate results and implement corrective actions.
Regularly communicate MARAD’s plan, required resources, and any  impediments that require congressional assistance in the mandated  reports to Congress.
We also recommend that MARAD change its contracting approach for  acquiring ship scrapping services from the use of PRDAs to an appropriate  method.
section_title: Agency Comments and Our Evaluation
paragraphs: In commenting on a draft of this report, DOT did not directly state  whether it agreed with our recommendations but noted that MARAD is  taking some actions that may address them. DOT’s comments stated that  MARAD will provide an updated comprehensive, integrated approach to  program management in subsequent reports to Congress and MARAD  has terminated its usage of PRDAs. DOT’s comments are included in  appendix II of this report.
DOT stated that despite the complex challenges that MARAD’s ship  disposal program faces, through its efforts and actions, much has been  achieved including the disposal of 26 vessels. DOT also commented that  MARAD built a comprehensive disposal plan when the program was  authorized and provided that plan to Congress in 2001, and also  acknowledged that MARAD agrees that the time is right to ensure that its  planning efforts are up to date and are appropriately comprehensive.  However, MARAD does not believe that effective planning will change the  fundamental external legal, environmental, and regulatory challenges that  limit the number of ships that can be processed and the speed at which the  program can proceed.
We recognize that the ship disposal program faces a number of complex  challenges and that MARAD has taken a number of actions to address  them. However, we do not believe that these actions have been taken in an  integrated manner. That is why we continue to believe that a  comprehensive management approach could better focus program efforts  and lead to better program results. Specifically, we believe that the  program could benefit from clearly stated goals, planned approaches  consistent with these goals and with timetables, resource identification  that could support these approaches in identifying, appropriate  performance measures, and a process to systemically identify and assess  the program’s external factors and determine the related mitigation actions  that could improve MARAD’s chances of meeting its program goals. While  MARAD developed a plan that contained some of these elements in 2001,  the plan was not followed or revised. We believe that MARAD’s  acknowledgment that it needs to ensure that its planning efforts are up to  date and comprehensive is a good first step. However, MARAD’s comments  do not provide enough detail for us to determine if these actions are  sufficient.
DOT commented that MARAD has revised its contracting approach, which  resulted in the termination of its use of PRDAs. It stated that MARAD had  consistently provided fair treatment to contractors and that contract  awards were made on the basis of best value to the government. We were  not provided the details of MARAD’s revised contracting approach and thus  cannot comment on it.
DOT also provided technical comments, which were incorporated as  appropriate.
We are sending copies of this report to Senators George Allen and John  Warner; Representative Jo Ann Davis; the Secretary of Transportation; the  Director, Office of Management and Budget; and other interested parties.  We will also make copies available to others upon request. In addition, the  report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have questions regarding this report, please contact me  at (202) 512-8365 or Solisw@gao.gov or Dave Schmitt, Assistant Director, at  (757) 552-8124 or Schmittd@gao.gov. Other major contributors to this  report were Rodell Anderson, Harry Jobes, Vijay Barnabas, Kenneth  Patton, and Nancy Benco.
section_title: Scope and Methodology
paragraphs: To assess whether the Maritime Administration (MARAD) is likely to meet  the statutory deadline of September 2006 and, if not, what factors may  prevent it from doing so, we reviewed MARAD’s 2001 report to Congress, in  which it presented its plan to meet the deadline, and its subsequent 2002  and 2004 status reports to Congress. We also reviewed the Department of  Transportation’s (DOT) and MARAD’s strategic and performance plans and  applicable laws and regulations pertaining to the ship disposal program. To  assess the adequacy of these plans and reports for managing the ship  disposal program, we compared the elements used in MARAD’s ship  disposal management approach with those developed from sound  management principles as embodied in the Government Performance and  Results Act (GPRA) of 1993 and further refined in GPRA user guides, our  guide for leading practices in capital decision-making, and our prior  reports. To measure progress that MARAD was making toward the 2006  deadline, we determined the number of awarded contracts, ships removed  from the storage sites, and the number of ships disposed of by reviewing  program documents. We also obtained data to reflect impediments that  were impacting the program. During our review, MARAD officials in  Washington provided us with briefings on the program’s funding, fair  market value of obsolete ships, domestic and foreign ship scrapping  capacity, and ship scrapping performance bond cost determination. We  reviewed and analyzed National Defense Reserve Fleet inventory reports  for fiscal years 2000 to 2004 to determine the number of ships entering and  leaving the inventory. We also reviewed reports that categorized the  condition of ships in the inventory and assessed whether ships in the worse  condition were given the highest priority for disposal. We also reviewed  and analyzed funding data for the MARAD ship disposal program for fiscal  years 2001 through 2004 to identify funding trends and examined a number  of publications that had focused on ship disposal issues.
In addition to talking with MARAD officials in Washington, D.C., we  met with MARAD representatives and conducted on site visits at the  James River Reserve Fleet near Fort Eustis, Virginia, and the  Suisun Bay Reserve Fleet, Benicia, California. During these visits, we  talked with officials about their methodology for determining ship  condition, discussed past instances of oil spills, and observed the condition  of the ships by touring selected obsolete ships. We selected these two sites  because they had the largest number of ships and included the ones  considered to be of highest priority for disposal.
To gain the perspective of domestic scrapping companies, we conducted  on-site visits at four domestic firms that had submitted proposals for  scrapping ships and had been awarded scrapping contracts. These  companies were Bay Bridge Enterprises LLC, Chesapeake, Virginia; and  International Shipbreaking Limited, LLC, Marine Metals, Inc., and ESCO  Marine, Inc., all of Brownsville, Texas. At each location, we met with  company managers to obtain their views on MARAD’s ship disposal  program and also toured their facilities. We also interviewed officials at a  fifth firm—All Star Metals, Brownsville—that we had identified as having  the potential capacity to scrap MARAD ships.
To determine to what extent MARAD has used alternative disposal  approaches, other than ship scrapping, to dispose of its inventory of  obsolete ships, we interviewed officials in MARAD’s Office of Ship  Operations and Ship Disposal Program Office and obtained and reviewed  MARAD’s 2001 plan for ship disposal and MARAD’s 2002 and 2004 reports  to Congress on plan implementation. We reviewed a list of alternative  approaches considered by MARAD and documented the priority that  MARAD placed on each alternative and the trade-offs associated with each  alternative in terms of costs, time, and barriers to implementation. In  addition, we interviewed officials in the U.S. Naval Sea Systems Command  program office responsible for managing the Navy’s ship disposal program  in Washington, D.C., to discuss their program.
To assess the appropriateness of MARAD’s procurement methods for  contracting for the disposal of surplus ships, we interviewed responsible  MARAD headquarters officials in their ship disposal program office and  their acquisition office, listened to briefings, and reviewed documents  related to the acquisition process. We also compared MARAD’s acquisition  methods for ship disposal services with those used by the Navy. We  submitted a series of written questions to MARAD to obtain the agency’s  legal position on the appropriateness of using Program Research and  Development Announcements (PRDA) as an acquisition method for ship  disposal. We reviewed MARAD’s responses and reviewed the criteria in the  Competition in Contracting Act of 1984 and the Federal Acquisition  Regulation. We also examined MARAD’s contract files containing recent  ship disposal industry proposals received in response to PRDAs and  reviewed the criteria and process that MARAD used to evaluate industry  proposals. We also reviewed the first six contracts that MARAD awarded  under PRDA to determine if they were consistent with the Federal  Acquisition Regulation. These contracts were awarded from August 2002 to  February 2004.
To assess the impact of foreign competition on reducing the cost of ship  disposal, we compared bid prices for solicitations that were restricted to  domestic firms only versus those that included domestic and foreign firms.  We also interviewed officials at MARAD and industry representatives at the  five domestic ship scrapping firms mentioned previously to obtain their  perspectives on factors contributing to lower ship scrapping costs. In  addition, we visited the Institute of Scrap Recycling Industries,  Washington, D.C., and obtained historical data on world prices for recycled  steel.
We determined that the data used in this report were sufficiently reliable  for the purposes of this report. We performed our audit from November  2003 through November 2004 in accordance with generally accepted  government auditing standards.
section_title: Comments from the Department of Transportation
subsections: section_title: GAO’s Comments
paragraphs: The following are GAO’s comments on the Department of Transportation’s  letter dated February 15, 2005. 1. We do not agree that MARAD has made substantial progress since 2001,  considering less than 12 percent of the ships that have been in its  inventory had been disposed of through September 2004—4 years later.  While MARAD has made more progress in disposing of ships in the past  2 years, much of this progress can be attributed to Congress providing  about $25 million more than was sought in the fiscal years 2003 and  2004 budget requests and the rising scrap metal market that has kept  contract prices low. We also do not agree that the number of ships  awarded is a good measurement of program progress since contract  award has not always led to ships being removed and disposed of. 2. MARAD has no way of determining how successful exporting ships  could be in reducing the number of its ships because it has not  systematically identified and assessed potential impediments to export  and determined actions to mitigate them.  3. As our report points out, while DOT states that domestic capacity is  limited, our report notes that MARAD has not done an analysis to  determine the potential domestic capacity nor thought such an analysis  was necessary. The recent increase in the number of domestic firms  being awarded contracts would indicate that MARAD underestimated  domestic capacity in the past. 4. We believe that MARAD lacks an integrated strategy for disposing of all  of its ships using its available disposal methods. Lacking such a strategy  contributed to MARAD’s decision to award an export contract that  included 10 of its worst-conditioned ships before the advisability and  feasibility of exporting was demonstrated. As a result, almost half of  the $31 million that Congress appropriated in fiscal year 2003 has been  tied up, pending the resolution of issues related to the exporting of  these ships, and the disposal of these 10 deteriorated ships has been  delayed. 5. We agree that plans must be flexible. However, successful programs  must have a road map to guide its efforts. While DOT states that its  strategy emphasizes disposing of ships in the worst condition first,  neither its reports to Congress nor its strategic planning documents  have identified the amount of funding needed to accomplish this  strategy based on its available disposable methods nor given a  timetable for accomplishing these disposal actions.
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