Maritime Administration: Ship Disposal Program Needs Improved Communications and Updated Strategic Plan
Published: 2014-02-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Timely and proper disposal of obsolete ships in the National Defense Reserve Fleet-older ships designated for use in national emergencies-is critical to protecting the environment. Because these ships often contain hazardous materials, members of Congress and others have raised issues about the environmental concerns. As part of the Department of Transportation, MARAD's Ship Disposal Program serves as the federal government's agent for competing and awarding contracts for recycling the ships' materials. Congress has required MARAD's ship disposal program to award ship recycling contracts to qualified ship recycling facilities on the basis of best value. The Coast Guard and Maritime Transportation Act of 2012 mandated that GAO review MARAD's source selection procedures and practices used to award ship recycling contracts.
In this report, GAO assessed MARAD's (1) source selection process; (2) communication strategy with ship recycling contractors; and (3) long-term ship disposal strategy. To complete this work, GAO reviewed and analyzed documentation on MARAD's qualification process, source selection procedures, and strategies; and interviewed MARAD and all of its qualified ship recycling contractors.
section_title: What GAO Found
paragraphs: The Maritime Administration (MARAD) uses a two-step source selection process, first by qualifying contractors and then awarding contracts for ship recycling services based on best value, consistent with the Federal Acquisition Regulation (FAR). In the first step, MARAD qualifies contractors' ship recycling facilities. The qualification process involves evaluating ship recycling facilities' proposals based on multiple criteria, including how a facility plans to dismantle ships and the extent to which the contractor-including its ability to meet local, state, and federal regulations-supports that effort. For the second step, MARAD awards ship recycling contracts for specific ships using a best value source selection process. The best value source selection process allows the government to accept an offer other than the best-priced offer, considering both price and non-price factors, that provides the greatest overall benefit to the government. MARAD considers three evaluation criteria-price, schedule and capacity, and past performance.
MARAD has made some efforts over the last year to clarify certain elements of its source selection process; however, MARAD could strengthen its communication strategy with its contractors. All of the qualified contractors GAO spoke with were confused about MARAD's source selection process-including how MARAD uses past performance to evaluate contractors' offers. MARAD has made an effort to clarify its past performance criterion by further explaining what is considered in its most recent solicitation. However other concerns remain. For example, some contractors expressed concern as to whether changes to their facility were approved by MARAD. GAO's standards for internal controls state that management should ensure adequate means of communicating with external stakeholders that may have a significant impact on the agency achieving its goals. Improving its communication strategy with its contractors could help MARAD maximize the transparency of its source selection process.
In 2006, MARAD issued a comprehensive management plan, or strategic plan, that outlined short- and long-term strategies for the disposal of MARAD's obsolete ships; however several key elements are now outdated or no longer applicable. According to program officials, MARAD was required to provide regular reports to Congress for several years, the last of which was in March 2011, on the progress made to address the backlog of obsolete ships. However, these reports did not provide the strategic short- and long-term direction for the program. Further, they indicated that the principles of the plan remain relevant; but the 2006 strategy does not take into account current market conditions, goals, and external risks. For example, concerns about maintaining the supplier base are not addressed in the plan. MARAD wants to maintain a supplier base to ensure competition for future ship recycling contracts, but has not fully considered risks and options to address this pending issue. Competition is a cornerstone in federal contracting and a critical tool for achieving the best return on the government's investment. An updated strategic plan that reflects the current external environment and risks could better position MARAD to identify future challenges and opportunities to help ensure the long-term participation and competition of the industrial base for ship disposal.
section_title: What GAO Recommends
paragraphs: GAO is recommending that the Department of Transportation improve its communication strategy and update its strategic plan. The Department agreed with the facts but did not take a position on our recommendations.

section_title: Letter
paragraphs: As part of the Department of Transportation, the Maritime Administration’s  (MARAD) Ship Disposal Program serves as the federal government’s  agent for competing and awarding contracts for disposal of obsolete ships  in the National Defense Reserve Fleet (NDRF) and some of those from  other federal agencies weighing 1,500 gross tons or more. Many of  these ships contain hazardous materials such as asbestos, lead,  polychlorinated biphenyls, and residual oils and fuels. MARAD must  comply with certain federal statutes that affect ship disposal including  those related to the handling of pollutants and hazardous waste.  However, members of Congress and environmental groups have raised  issues about the potential environmental hazards—such as costly oil  spills or other environmental threats—posed by these ships and the need  for the timely and proper disposal of them to protect the environment.  MARAD’s disposal prioritization is based on ship material condition and a  “worst first” disposal policy for obsolete ships in the NDRF. From fiscal  year 2001 through fiscal year 2013, 197 ships have been removed from  MARAD’s fleets for disposal. As of October 2013, 27 obsolete ships  remain in the fleet, while about three to five additional ships are declared  obsolete each year.
MARAD can dispose of obsolete ships through sales recycling  contracts—in which the government sells the ship to the contractor and  the contractor dismantles the ship and sells the scrap for profit. Prior to  2000, MARAD sold ships to the contractor with the highest price for the  ship. By the late 1990s, the market price for scrap metal decreased,  which contributed to a decline in contractors’ interest in purchasing ships.  As a result, MARAD experienced a backlog of obsolete ships for disposal.  Beginning in fiscal year 2001, Congress expanded MARAD’s ship  disposal authority to include the option to pay for recycling services  through contracts for services—through which the government pays the  contractor to dismantle and dispose of the ship’s material. Congress has  also required MARAD, for both sales contracts and contracts for services,  to select awardees on the basis of best value, consistent with the Federal  Acquisition Regulation (FAR), considering, among other things, least cost  to the government, timeliness, worker safety, and environmental  concerns. When awarding these contracts on the basis of best value,  MARAD selects a contractor’s offer that, in the government’s estimation,  provides the greatest overall benefit in response to the requirement,  considering both price and non-price factors. At times, this may result in  an award that is not the best price. MARAD started using best value  source selection procedures for ship recycling contracts beginning in  2002.
The Coast Guard and Maritime Transportation Act of 2012 mandated that  GAO conduct an assessment of the source selection procedures and  practices used to award MARAD’s NDRF ship recycling contracts,  including MARAD’s processes, procedures, and practices for the  qualification of ship recycling facilities, determining whether MARAD’s  contract source selection procedures and practices are consistent with  the law and best practices associated with making source selection  decisions, as well as any other aspect we deem appropriate to review. This report assesses MARAD’s (1) source selection process; (2)  communication strategy with ship recycling contractors; and (3) long-term  ship disposal strategy.
To determine MARAD’s source selection process for ship recycling,  including facility qualification and best value process for contract awards,  and the extent to which MARAD communicates that process with  contractors, we identified and reviewed federal laws and regulations  associated with MARAD’s source selection processes, including FAR  regulations on simplified acquisition procedures and best value  determinations, and compared these to MARAD’s processes. We  reviewed and analyzed the cognizant facility qualification documents,  including the proposals submitted to MARAD. Further, to identify how  MARAD made best value determinations, we identified and reviewed a  random, non-representative sample of source selection documents from  fiscal year 2010 through fiscal year 2013 to identify the steps and analysis  conducted by MARAD to select a contractor for award. We selected  contracts awarded from fiscal year 2010 to 2013 to include both sales  contracts and contracts for services in our sample. We interviewed  MARAD Ship Disposal Program officials responsible for source selection  and all six qualified contractors and one contractor going through  qualification to determine the facility qualification process and how  MARAD communicates with contractors. We also compared MARAD’s  communication strategy to criteria in Standards for Internal Control in the  Federal Government related to effective communications.
To assess MARAD’s long-term disposal strategy, we reviewed MARAD’s  documentation related to its ship disposal strategies. We reviewed  Standards for Internal Control in the Federal Government related to  strategic planning, and assessed MARAD’s actions against these  standards. We also interviewed MARAD officials to identify MARAD’s  program goals and long term strategies related to ship disposal.
We conducted this performance audit from May 2013 to February 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: MARAD’s Office of Ship Operations maintains the NDRF as a reserve of  ships for defense and national emergencies. When ships are no longer  considered useful for defense or aid missions, the Office of Ship Disposal,  which reports to the Associate Administrator for National Security,  arranges for their responsible disposal. NDRF ships are located at three  sites: the James River Reserve Fleet at Fort Eustis, Virginia; the  Beaumont Reserve Fleet in Beaumont, Texas; and the Suisun Bay  Reserve Fleet at Benicia, California. In addition, as established in a  Memorandum of Agreement with the Navy in 2011, MARAD disposes of  certain non-combatant ships from the Naval Inactive Ship Maintenance  Facilities in Pearl Harbor, Hawaii and in Philadelphia, Pennsylvania.  Naval Inactive Ship Maintenance Facilities are used to hold  decommissioned U.S. Navy and auxiliary ships pending determination of  their disposal.
MARAD’s Ship Disposal Program’s mission is to dispose of obsolete  NDRF ships through the most expedient, best value, and environmentally  safe disposal methods. The program’s approach is to remove all ships  that present the highest risk to the environment as soon as possible, and  to have disposal alternatives and the necessary funding in place to  ensure that obsolete ships can be disposed of at a faster rate than ships  in the NDRF are designated as obsolete. MARAD’s Ship Disposal  Program is authorized to consider alternative ship disposal methods in  addition to recycling obsolete NDRF ships, including, for example,  artificial reefing and donation. MARAD has made limited use of these  methods because of a number of environmental, financial, and legal  barriers. According to MARAD, recycling is the most expedient,  environmentally sound, and cost-effective method of disposal available.
After MARAD determines that a ship is ready for recycling, it first offers  the ship for sale to qualified contractors through sales contracts. If it  receives no offers to purchase the ship, MARAD will then procure  services to dispose of the ship through a contract for services—in which  the government pays the contractor to recycle the ship’s material. When  acquiring services through a contract, MARAD uses simplified acquisition  procedures, as defined in the FAR, which allow for simplified processes to   MARAD is generally not  award contracts under a certain dollar threshold.required to follow the procedures delineated in the FAR when awarding  sales contracts because the government is not acquiring supplies or  services with appropriated funds. However, MARAD officials explained  that because they are required to adhere to the FAR when awarding  contracts for services, to be consistent, they adopted similar procedures  for sales contracts.
In the past two years, MARAD has disposed of the ships exclusively  through domestic recycling using sales contracts. See appendix II for  more information on the ship disposal options used since 2001. In its  most recent announcement in November 2013, however, three ships  were announced as ready for recycling and MARAD received no sales  offers. As a result, MARAD plans to procure the services to recycle the  ships through contracts for services. MARAD officials explained that,  while they cannot know all the factors the contractors considered when  deciding whether or not to submit a sales offer on a ship, the specific  ships in this announcement may not have looked profitable to the  contractors for a variety of reasons. One ship was tested and proven to  have polychlorinated biphenyls, which must be removed through a very  costly process before the steel can be sold to recyclers. The other two  ships were small, and MARAD officials noted that contractors may have  estimated that the costs of towing the ship to the facility plus the labor  were not likely to be recovered in the sale of the steel.
section_title: MARAD’s Two-Step Source Selection Process Uses A Best Value Process Consistent with the Federal Acquisition Regulation
paragraphs: Since 2005, MARAD has been using a two-step source selection process  for ship recycling. The first step is to qualify the facilities of ship recycling  contractors that respond to MARAD’s solicitation for ship disposal,  thereby creating a pool of qualified facilities for contracts for either sales  or services. In this step, MARAD determines if a ship recycling facility is  qualified by evaluating the facility against multiple criteria as outlined in  the solicitation. The second step is to award ship recycling contracts for  specific ships to qualified contractors. Qualified contractors submit offers  in response to MARAD’s announcements—which inform the contractors  about the location, names, and work to be completed on multiple ships  available for recycling. MARAD then evaluates the offers and determines  which offer is the best value for the government, consistent with the FAR,  using price and non-price factors such as schedule, capacity, and past  performance.
subsections: section_title: MARAD’s Qualification Process Is Based on Multiple Criteria and Varies in the Time It Takes to Complete
paragraphs: The first step for a contractor interested in having their facility qualified is  to submit a proposal in response to MARAD’s solicitation. MARAD’s  process for determining if a ship recycling facility is qualified consists of  evaluating the facility’s proposal against multiple criteria as outlined in  MARAD’s solicitation for ship disposal. These criteria include considering  how a contractor plans to dismantle ships and the extent that the site is  capable to support that effort. Beginning in 2005, MARAD began using an  open solicitation process—in which interested vendors can respond at  any time as opposed to by a specific date. Periodically, MARAD will  update and reissue the solicitation, as it did in fiscal year 2009 and again  in fiscal year 2014. When the solicitation was updated in fiscal year 2014,  previously-qualified facilities needed to re-qualify based on any new  criteria incorporated into the updated solicitation.
Once the interested recycling contractor submits a proposal, MARAD  follows the steps indicated in figure 1 to determine if the ship recycling  facility is qualified.
MARAD reviews the proposal—including a technical compliance plan that  addresses performance capability and ability to comply with all applicable  local, state, and federal environmental, safety, and health laws and  regulations—for completeness in its initial evaluation. Once MARAD  determines that the proposal is complete, it begins evaluating the  proposal against multiple criteria including:  feasibility and likelihood of success of the engineering, technical, and  management approach for disposal of obsolete ships and associated  risks; productivity of the proposed approach including schedule and cost  assessments;  type and sufficiency of proposed methods, processes, and  procedures; and depth, relevance, and currency of requisite experience of the facility.
The length of the qualification process—which has been as short as a few  months or as long as five years—varies for several reasons. One reason  for the variation, according to MARAD officials, is that the initial proposals  are rarely complete. This part of the process is iterative and MARAD  officials stated that they work closely with individual contractors to obtain  the necessary information to enable the completion of the evaluation  process. In its fiscal year 2014 solicitation, MARAD’s stated goal is to  complete the initial evaluation of proposals within eight weeks from the  date the proposals are submitted. This timeline, according to officials, is  based on the availability of MARAD’s resources. However, MARAD  officials noted that the contractor’s responsiveness to requests for  additional explanation or information is out of their control and can impact  their ability to move forward with the qualification process. In some cases,  a contractor may opt to not continue with the qualification process.
Another reason for the different timetables for qualification, according to  MARAD officials, is that each facility is unique and faces individual  challenges. MARAD officials explained that it is incumbent upon the  contractor to identify all of the local, state, and federal laws and  regulations that apply to ship recycling for the location where the facility is  located, and to comply with those laws. For example, a facility in  California took over five years to qualify because, according to MARAD  officials, it had to address strict state and local environmental laws and  regulations and experienced significant delays in obtaining necessary  permits from state environmental regulators. Further, the proposed  location had not been used for many years, and MARAD needed  additional assurances to ensure qualification criteria were met. When a  new process is introduced by a ship recycling facility, qualification may  take more time. For instance, a contractor recently proposed a new  method for ship recycling that involves dismantling the ship while afloat.  MARAD considers the procedures for maintaining the stability of the ship;  environmental abatement of hazardous materials, such as asbestos and  paint disposal; worker safety; and health considerations under this new  approach before making a qualification decision.
As shown in figure 2, MARAD currently has six qualified recycling  facilities, represented by four contractors, in two states: Louisiana and  Texas. As of October 2013, there were 27 MARAD and two Navy-owned  ships awaiting disposal.
After a facility is deemed qualified, MARAD conducts regular oversight, to  include bi-weekly teleconferences and quarterly visits to the facilities.  During its visits, MARAD checks the facility’s compliance processes and  issues deficiency notices if corrective action is needed. In addition,  MARAD conducts oversight of the environmental protection and worker  safety procedures for the facility. If there is a deficiency found, MARAD  refers the issue to the appropriate federal agency, such as the  Environmental Protection Agency or Occupational Safety and Health  Administration. Further, through its announcement process, MARAD  requires existing qualified contractors to report changes made to their  ship recycling facilities. These changes could range from a minor change  to one part of its recycling process, such as a change in paint removal  process, or a significant change such as when a facility is changing  ownership.
section_title: MARAD’s Best Value Process for Source Selection of Its Ship Recycling Contracts is Consistent with the Federal Acquisition Regulation
paragraphs: After becoming qualified, a contractor’s facility is eligible to compete for  ship recycling contracts, and does so by providing offers in response to  MARAD’s announcements on specific ships. Approximately three to four  announcements are issued per year, with three to six ships offered per  announcement. MARAD’s announcement includes the location and  names of the ships that MARAD would like recycled, and the work to be  accomplished for each ship. According to MARAD officials, including  multiple ships in each announcement optimizes competition and  minimizes costs.
To decide which facility should receive contracts for the ships in the  announcement, MARAD uses a source selection process to determine  which offer provides the best value to the government. This process  allows the government to accept an offer other than the best priced offer,  considering both price and non-price factors. MARAD uses the following  three evaluation criteria to determine which offers provide the best value  for the government: price, past performance.  schedule and capacity, and  Because it is using simplified acquisition procedures, MARAD is not  required to disclose the relative importance assigned to each evaluation  factor. For example, MARAD is not required to state in the  announcement whether price is more, less, or equal in importance to past  performance.
Although not required to state the relative importance of the evaluation  criteria, MARAD’s source selection process generally addresses the  criteria in a specific order. Initially, MARAD ranks contractors’ sales offers  on individual ships by highest to lowest price, then by shortest to longest  schedule. MARAD then determines a competitive range—in other words,  a subset of all the offers that represents the most highly rated offers.  Once the competitive range is determined, MARAD requests multi-ship  recycling schedules from contractors with competitive offers on more than  one ship to gain insight into what the schedule would be if the facility wins  more than one ship in the announcement. For example, if a contractor  made offers on two ships that were determined to be in the competitive  range, MARAD would ask the contractor to provide a revised schedule  showing how many days it would take the contractor’s facility to recycle  both ships. MARAD then reviews capacity at each facility in the  competitive range. Capacity, according to MARAD, refers to the facility’s  ability to take possession of and actively work on the ship(s) at its facility,  which reflects current and future ship recycling work from all sources at  the recycling facility. Finally, MARAD considers past performance, which  can include timeliness on past contracts, a change in management, or the  amount of time since the facility last recycled a MARAD ship. Figure 3  describes in more detail the steps MARAD uses in its best value source  selection for ship recycling contracts.
As indicated in figure 4, most contracts were awarded to the contractor  with the best price offer.
For fiscal year 2009 through fiscal year 2013, about 78 percent of  MARAD’s contract awards for ship recycling, including both sales  contracts and contracts for services, were awarded to the contractor that  offered the best price. Half of all contracts were awarded to the contractor  that offered both the best price and shortest schedule. Another 19 percent  of the awardees were selected based on factors other than the best price,  and 3 percent were awarded non-competitively, which means these  awards were not subject to MARAD’s typical source selection process.  For example, one contract was awarded non-competitively because it  was in the best interest of the government to support an increased  industrial base of ship recycling facilities on the west coast.
section_title: MARAD Has Taken Steps to Clarify Its Source Selection Process, but Could Strengthen Its Communication Strategy
paragraphs: MARAD has made some efforts over the last year to clarify certain parts  of its source selection process; however, during our review, contractors  told us that they do not fully understand how it works. Almost all of the  contractors were unsure as to how MARAD determines best value under  sales contracts. Most of the contractors told us that they did not always  understand why they lost a ship recycling contract. Three contractors  noted it was particularly confusing when they offered the best price with  what they believed to be a reasonable schedule compared to other  contractors, yet still lost the contract. A couple admitted that there were  instances where they did not understand why they won a contract.
One consistent source of confusion was that they did not know how  MARAD values past performance when awarding contracts for ship  recycling—both in how past performance affected the chance to be  awarded a future contract and in what factors were considered. For  example, they did not know if environmental infractions or late  performance on previous contracts played a role in the ability to win future  MARAD ship recycling contracts. MARAD, for its part, explained to us that  past performance has rarely affected a contractor’s ability to win a  contract for one ship in an announcement, but has had a greater affect  when MARAD considers the award of more than one ship to the  contractor. In addition, in our review of contract documentation, we found  several instances where MARAD considered past performance in  combination with capacity. For example, a contractor may have had  schedule delays on prior ships which were then exacerbated when the  contractor was managing the recycling schedule for multiple ships. How  MARAD considers the multiple factors when making a best value award  varies depending on the specific circumstances of the procurement. As a  result, the basis for each award may be unique, which may contribute to  the contractor’s confusion on how MARAD is making these decisions. To  clarify past performance, in the fiscal year 2014 solicitation, MARAD has  elaborated on what will be evaluated within the past performance  criterion—stating that it includes the contractor’s history of reasonable  and cooperative behavior, record of integrity, and business relationships  with the customer. Although a positive step, lack of communication with  contractors regarding effects of their past performance, if any, on their  future offers remains a source of confusion.
Further, MARAD recently improved its contractor debriefing process by  adding two more narrative sections to its pre-debriefing form, one on  capacity and one on best value. Under the simplified acquisition process,  if a contractor requests information on an award that was based on  factors other than price alone, MARAD is to provide a brief explanation of  the basis for the contract award decision. Although not required to do so,  about two years ago, MARAD decided to offer more formal debriefings to  convey this information. The debriefings are intended to help contractors  understand how their offer compared to the winning offer and to help  improve offers for the next time. Once a facility contractor requests a  debriefing, MARAD creates a pre-debriefing report that compares the  contractor’s offer—price and schedule—to the successful contractor’s  price and schedule. The pre-debriefing report is then sent to the  requesting contractor with an invitation to participate in a debriefing  meeting. MARAD told us that all contractors have been informed of the  availability, upon request, of debriefing after a contract award. However,  according to MARAD, after the last four ship recycling announcements,  only three of the six contractors that bid on the ships asked for a  debriefing.
These three contractors stated that MARAD’s debriefing process did not  help them understand why they lost the contract or how MARAD  considered price and non-price factors in its best value determinations.  MARAD revised the debriefing form to include the additional narrative  sections; however, it has not informed contractors of this change.  Contractors may not be aware that the additional information is available  unless they request a debriefing. MARAD officials told us that they plan to  inform contractors of the new debriefing form through an amendment to  the solicitation. If MARAD communicates the additions to the debriefing  form in an open and transparent way, facility contractors may seek to  obtain information in order to improve their offers for the next  announcement, which ultimately could lead to better results for the  government.
Contractors that we spoke with also expressed confusion about other  parts of MARAD’s source selection process, including its qualification  process. For example, four contractors said that they notified MARAD of a  change to an element of their recycling process at a facility, and that  MARAD acknowledged receipt of the notification but did not indicate  whether the change was approved or not approved. These contractors  were confused about whether certain changes made would affect their  eligibility to compete for a contract. In one instance, a contractor told us  they informed MARAD about newly-installed ship cutting pads and some  dredging they had completed at their facility, but they heard no response  from MARAD. According to the contractor, a MARAD official only  recognized the changes during a site visit to the facility.
In response to these concerns, MARAD officials explained that they are  always available to hear questions from contractors should any questions  arise, and contractors should feel comfortable contacting them with any  questions. Standards for Internal Control in the Federal Government state  that management should ensure there are adequate means of  communicating with external stakeholders that may have a significant  impact on the agency achieving its goals. Although MARAD has  improved some aspects of communication with facility contractors, it  could strengthen its communication strategy. For example, one method to  improve communication could involve an annual industry day or  conference where all contractors can ask questions and request  clarification on any part of MARAD’s source selection process or other  aspects of ship disposal resulting in all contractors hearing the same  responses at the same time. Regular individual meetings might also be  scheduled with contractors where their specific concerns are discussed.  Improving its communication strategy with its contractors could help  MARAD maximize the transparency of its source selection process.
section_title: MARAD’s Strategic Plan Does Not Reflect Current Conditions
paragraphs: In our 2005 report, we found MARAD had not developed a  comprehensive management approach that could address the myriad of  environmental, legal, and regulatory challenges that the program faces.  As a result, we recommended that it develop a comprehensive approach  to manage its ship disposal program.comprehensive management plan, or strategic plan, which outlined short  and long-term strategies for the disposal of the agency’s obsolete ships;  however, several key elements are outdated or no longer applicable. The  plan stated that MARAD will annually assess and report on its progress  and all factors affecting the program, and if necessary, revise the short-  and long-term strategy and implementation plan. Since then, however, it  has not updated its plan, because, according to program officials, the  principles of the plan remain relevant. MARAD was required, however, to  provide regular reports to Congress for several years, the last of which  was in March 2011. The reports provided information on the progress  made to address the backlog, and other activities accomplished since the   In 2006, MARAD issued a  last report, but did not provide the strategic short- and long-term direction  for the program.
The 2006 strategy does not take into account current market conditions,  goals, and external risks. For example, one of MARAD’s stated goals was  to eliminate the backlog of high priority ships that accumulated in the  1990s. MARAD officials we spoke with acknowledge that the backlog has  been addressed and they are now focused on maintaining a steady  stream of ships entering the NDRF to be removed from the fleet for  disposal. As shown in figure 5, from fiscal years 2005 through 2013, 168  ships were removed from the fleet in preparation for disposal. MARAD  has 27 NDRF and 2 Navy ships for disposal at the start of fiscal year  2014 and about three to five obsolete ships will be added to its inventory  during fiscal year 2014. Further, MARAD’s target is to remove 12 ships  for disposal in fiscal year 2014.
The 2006 plan also discusses options for ship disposal that are no longer  applicable.
The plan points to available domestic recycling facilities located along  the East and Gulf Coasts; however, as of October 2013, the East  Coast facility is no longer considered a qualified facility.
The plan notes that one of the critical factors that will impact  MARAD’s goals for ship disposal is making foreign recycling a viable  disposal option in 2006 and beyond. Foreign recycling is not an option  because the Duncan Hunter National Defense Authorization Act for  Fiscal Year 2009 generally prohibited sales to foreign facilities,  unless, among other things, no domestic capacity is available.
The plan describes sales contracts as an option that is of occasional  interest and not considered a trend that can be relied upon. MARAD  has experienced a trend of sales contracts starting in fiscal year 2011.  (See appendix II)
Further, MARAD officials expressed concern about maintaining the  supplier base to help ensure adequate competition among contractors as  the number of ships available for disposal decreases, a concern that is  not addressed in the 2006 plan. Competition is a cornerstone of federal  contracting and a critical tool for achieving the best return on the  government’s investment. Achieving effective competition, in which the  government receives more than one offer in response to a solicitation,  has been a focus of other agencies, such as the Office of Management  and Budget and Department of Defense, because of its noted benefits to  the government, including the ability to consider alternative solutions in a  reasoned and structured manner.
MARAD officials also expressed concerns about the potential effect on  the capacity of three of their qualified facilities that were recently awarded  Navy contracts to recycle three large aircraft carriers. According to them,  one aircraft carrier is approximately equivalent to eight MARAD ships,  and they are concerned that this will reduce the capacity of these facilities  which will in turn reduce their availability to compete on future MARAD  announcements. Standards for Internal Control in the Federal  Government call for identifying risks to the agency arising from external  and internal factors, and developing a thorough analysis of the possible  effect of the risks and an approach for risk management.updating the current goals and ship disposal options available, MARAD  can use the plan to assess future risks and strategies to address internal  and external factors, such as supplier base. For example, MARAD has a  fiscal year 2011 Memorandum of Agreement with the U.S. Navy to  dispose of certain non-combatant ships, a fiscal year 2013 Letter of  Agreement with the General Services Administration to disposed of  certain federally-owned excess ships, and a Memorandum of Agreement  with the U.S. Coast Guard to dispose of certain excess cutters, none of  which are included in the 2006 plan. An updated strategic plan that  reflects the current external environment and risks could better position  MARAD to identify challenges and opportunities confronting the future  management of the ship disposal program, including maintaining long- term participation in and competition within the industrial base for ship  disposal.
section_title: Conclusions
paragraphs: Over the last decade, MARAD’s ship disposal program has made ample  progress disposing of obsolete ships, effectively eliminating the past  backlog. MARAD’s current process for making source selection decisions  is consistent with the FAR’s procedures and processes for simplified  acquisitions and determining best value. However, MARAD could improve  its information sharing with its qualified contractors to be more  transparent. Ship recycling contractors have been concerned whether  changes in their facility and processes are being approved by MARAD.  Contractors were also uncertain about how best value determinations are  made. MARAD, on the other hand, believes it is always available to  discuss concerns and relies on the contractors to reach out and ask for  clarification. Until MARAD improves its communication strategy with  contractors, it is not maximizing transparency in its efforts. Moreover, an  updated strategic plan or new strategic plan reflecting the current external  environment and risks could help MARAD improve its ship disposal  program.
section_title: Recommendations for Executive Action
paragraphs: To enhance MARAD’s transparency in its source selection processes or  other aspects of ship disposal and strategic direction for its efforts, we  recommend that the Secretary of Transportation direct the MARAD  Administrator to take the following two actions:  Improve MARAD’s communication strategy, such as by holding an  annual industry day or annual meetings with qualified contractors, to  transparently communicate information to qualified contractors and to  respond to their questions; and
Update MARAD’s 2006 comprehensive management plan, i.e.  strategic plan, or create a new strategic plan to reflect its current  goals, external factors affecting the disposal program, and future risks  and strategies based on those goals and factors, and periodically  update this plan.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOT for review and comment. DOT  did not take a position on our recommendations, but generally agreed  with the facts presented. DOT provided technical comments, which we  incorporated as appropriate  We are sending copies of this report to the Secretary of Transportation  and appropriate committees. In addition, the report will also be available  at no charge on our website at http://www.gao.gov.
If you or your staff have questions about this report, please contact me at  (202)-512-4841 or makm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: The Coast Guard and Maritime Transportation Act of 2012 mandated that  GAO conduct an assessment of the source selection procedures and  practices used to award the Maritime Administration’s (MARAD) ship  recycling contracts, including the process, procedures and practices used  for qualification of ship disposal facilities, whether MARAD’s contract  source selection procedures and practices are consistent with the law,  and best practices associated with making source selection decisions, as  well as any other aspect we deem appropriate to review. This report  assesses MARAD’s (1) source selection process; (2) communication  strategy with ship disposal facility contractors; and (3) long-term ship  disposal strategy.
To assess MARAD’s source selection process—including facility  qualification and best value determination—and its communication  strategy, we reviewed federal laws and regulations, guidance, and other  documentation associated with the agency’s source selection procedures,  including simplified acquisition procedures and how best value  determinations are addressed in the Federal Acquisition Regulation  (FAR). We compared MARAD’s procedures to those in the FAR, as  applicable. We analyzed its solicitations for fiscal years 2005, 2009, and  2014 that describe the facility qualification process, which represent all  the solicitations issued since the agency stopped using Program  Research and Development Announcements in 2005. We also reviewed  examples of correspondence between MARAD and facilities, specific ship  announcements, and required reports and briefings for Congress and  other communications with contractor facilities, such as debriefing forms,  and recent bid protests related to facility qualification and source selection  procedures. We compared MARAD’s communication strategy to criteria in  Standards for Internal Control in the Federal Government related to  effective communications. In addition, we reviewed facility qualification  documents, e.g. the facilities’ submitted general technical plans,  MARAD’s letters of concern to contractors, and the notification of results  from the evaluation of technical plans to determine the length of time it  took to become qualified and how monitoring by MARAD was conducted.  To identify how MARAD determined best value during the source  selection process, we identified and reviewed a random non- representative sample of source selection documents for fiscal year 2010  through 2013, e.g., sales announcements for 18 obsolete ships, facility  proposals and MARAD notification memorandums, and contracts, to  determine the steps and analysis MARAD uses to select a contractor  through a best value process. We selected contracts awarded from fiscal  year 2010 to 2013 to include both sales contracts and contracts for  services in our sample.
We also interviewed MARAD Ship Disposal Program officials and six  contractors representing all seven qualified facilities at the time of our  review to determine the processes that are used to select and award  contracts. We also interviewed one contractor with one facility going  through the qualification process at the time of our review. Through  interviews with these officials, we determined (1) how the qualification  process was applied for facilities to become technically acceptable and  qualified; (2) how MARAD monitors a facility’s qualification status and any  changes to the facility; (3) the process for source selection, including how  best value determinations are made for specific ship announcements for  disposal; (4) how MARAD communicates its source selection process  with contractors; and (5) challenges identified by facilities or MARAD  relating to the award of ship disposal contracts.
MARAD’s pool of qualified ship disposal facilities at the time of GAO  review included:  1.  All Star Metals, LLC  2.  Mare Island Shipyard, LLC (formerly Allied Defense Recycling, LLC)  3.  Bay Bridge Texas, LLC (undergoing qualification)  4.  BB Metals Enterprises, Inc.  5.  Esco Marine, Inc.  6.  International Shipbreaking Ltd.  7.  Marine Metals, Inc.  8.  Southern Recycling, LLC  To assess MARAD’s long-term strategy for its ship disposal program, we  reviewed its current strategy—the fiscal year 2006 Comprehensive  Management Plan for the Disposal of MARAD Non-Retention Vessels. In  reviewing MARAD’s most recent strategy, we identified its decision  making framework and its schedule and milestones for ship disposal,  which included planning up through fiscal year 2007. We reviewed  Standards for Internal Control in the Federal Government related to  strategic planning, and assessed MARAD’s actions against these  standards. We also reviewed MARAD’s agreements with other agencies  to dispose of their obsolete ships, e.g., its memorandums of agreement  with the U.S. Navy, General Services Administration, and U.S. Coast  Guard to dispose of certain ships. We also obtained data from MARAD  about the number of obsolete ships on hand and removed for disposal  through MARAD’s Ship Disposal Program for fiscal years’ 2005 through  2013. We spoke with MARAD officials and facility contractors to identify  concerns related to MARAD’s strategy, including supplier base concerns  for the ship recycling industry, and how it communicates its future ship  disposal plans with qualified facilities.
We conducted this performance audit from May 2013 to February 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Maritime Administration’s Ship Disposal Options
paragraphs: The Maritime Administration’s (MARAD) available ship disposal options  include: domestic recycling, artificial reefing, deep-water sinking (called  SINKEX), donations, and sale for reuse.
Domestic recycling—MARAD sells the ships to qualified contractors  or purchases recycling services from these contractors.
Artificial reefing—MARAD accepts applications from coastal states,  U.S. territories and possessions, and foreign governments for use of  obsolete NDRF ships as offshore reefs for the conservation of marine  life.
SINKEX—Navy and MARAD jointly operate ship disposal projects  through the Navy’s sink at-sea live-fire training exercises (SINKEX  Program).
Ship donations—MARAD may convey obsolete NDRF ships to a  non-profit organization, state, commonwealth, or U.S. possession for  ship reutilization including historic restoration of ships as memorials  and museums, and the operational restoration of ships to support  non-profit humanitarian missions.
Sale for reuse—MARAD sells ships to another buyer for reuse.
section_title: Appendix III: Maritime Administration’s Process for Qualifying Ship Disposal Facilities
paragraphs: Table 1 presents the information in figure 1 in a non-interactive format.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above Tatiana Winger, Assistant  Director; Suzanne Sterling, and Alyssa Weir made contributions to this  report.