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

Letter

Background

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.

MARAD Is Unlikely to Meet 2006 Deadline

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.

MARAD Has Made Slow Progress toward 2006 Deadline

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.

MARAD’s Slow Progress Is due to Lack of Comprehensive Management Approach

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.

MARAD Has Made Limited Use of Alternative Disposal Methods because of Several Barriers

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.

MARAD Has Taken Recent Steps to Address Barriers to Use of Artificial Reefing, Deep-Water Sinking, and Donations

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.

Artificial Reefing Program

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.

Deep-Water Sinking Program

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.

Vessel Donation

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.

MARAD Has Not Developed an Overall Plan to Increase Usage of Alternative Disposal Methods

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.

MARAD’s Use of PRDAs to Scrap Ships Is Inappropriate

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.

MARAD’s Rationale for Using PRDAs

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.

Our Assessment of MARAD’s Use of PRDAs

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.

Other Procurement Methods Could Provide Similar Benefits

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.

Overseas Competition Just One Factor Contributing to Lower Prices

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Scope and Methodology

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.

Comments from the Department of Transportation

GAO’s Comments

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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