A series of laws and policy directives dating back to 1904 require DOD to rely in large part on U.S.-flag commercial vessels over government- owned or foreign-flag vessels for its sealift needs. Most recently, a 1989 National Security Directive reaffirmed the policy of relying on U.S.-flag commercial vessels to provide sealift in times of peace, crisis, and war. These requirements and policies align with the following principles from the Merchant Marine Act of 1936, as amended: A fleet of commercial vessels with military utility that are owned and operated by U.S. citizens and are able to provide reliable support during difficult wartime missions is necessary for national defense. According to testimony by the Commander of Transportation Command, during Operation Desert Shield, 7 percent of foreign-flag vessels refused to go into war zones, whereas U.S.-flag vessels continued to deliver cargo as promised. A pool of trained U.S. mariners is needed to crew the U.S.-flag fleet. According to DOD and MARAD, mariners are necessary to crew not only the U.S.-flag commercial vessels but also the U.S. government- owned reserve cargo vessels. These vessels are held in reduced operating status with minimal crew in peacetime. When put into full operating status—such as for a surge related to a wartime effort—the government needs to add additional trained and qualified mariners to operate them. U.S.-flag commercial vessels, which are required to be staffed by U.S.-citizen mariners, provide a pool of mariners who can be used for this task. Because mariners work on vessels for months at a time, commercial vessels typically have at least two full sets of mariners to crew a single vessel—one set of which is on the vessel while the other is on leave. In times of crisis, one set of mariners could continue to work on the commercial vessel, while some of those on leave could be called upon to voluntarily crew vessels in the government-owned reserve fleet. A U.S. presence in international trade is needed to carry goods overseas. According to MARAD, a U.S. presence in international trade helps ensure that both commercial shippers and the military can access vessels to carry their goods overseas at all times, both in times of peace and in times of war. In line with this policy, as of March 2018, DOD’s sealift capacity consisted of 61 government-owned reserve vessels held in reduced operating status and 113 commercial vessels operating under the U.S. flag in regular trade (see fig. 1). MARAD, in consultation with DOD, administers a program designed to ensure that needed U.S.-flag commercial vessel capacity will be available during a wartime activation. The program consists of an agreement between the U.S. government and operators of U.S.-flag commercial vessels, called the Voluntary Intermodal Sealift Agreement (VISA). MSP vessel operators are required to enroll in VISA or a similar agreement for tankers as part of their participation in the MSP, while other operators with U.S.-flag vessels may but are not required to enroll in VISA. Operators enrolled in VISA: commit to providing their intermodal resources and a certain percentage of their U.S.-flag vessel capacity to meet national defense needs during times of war or national emergency, if activated by DOD; will receive compensation during a VISA activation at rates that are set according to certain parameters established in contingency contracts between DOD and the operator; and receive priority for peacetime DOD cargo contracts, under which they carry DOD cargo at established or negotiated rates. According to Transportation Command and MARAD officials, DOD has never formally activated VISA, as vessel operators with these agreements have voluntarily met DOD’s ocean cargo carrying needs under regular operations and compensation rates established under contract with DOD. For example, these officials said that U.S.-flag vessels carried significant amounts of cargo during recent military conflicts such as those in Iraq and Afghanistan, and DOD did not have to activate VISA to obtain additional capacity. International shipping is dominated by foreign-flag vessels. According to MARAD, only about 1.5 percent of U.S. international oceangoing trade by weight is carried on U.S.-flag vessels. U.S.-flag vessels face difficulties competing in international markets due to the higher costs of operating under the U.S. flag. For example, to operate under the U.S. flag, vessel operators must comply with various U.S. laws, including requirements of the United States Coast Guard (Coast Guard), and must use U.S.-citizen and permanent resident crews, which according to a MARAD 2011 report, results in higher labor costs than are typically incurred by foreign-flag vessels for foreign crews. Since U.S.-based vessel operators engaged in international trade can choose to operate vessels under a foreign flag, according to the 2011 MARAD report, the majority of large, oceangoing, self-propelled merchant-type U.S.-owned vessels are not registered under the U.S. flag. In 2011, MARAD reported that the Marshall Islands, Singapore, and Liberia registries accounted for 52 percent of U.S.-owned vessels. According to MARAD, these registries have different requirements than the U.S. registry that result in lower associated operating costs. Further, according to MARAD data, the fleet of large U.S.-flag vessels engaged in international trade has declined from approximately 199 vessels at the end of 1990 to 82 vessels at the end of 2017 (see fig. 2). In February 2018, the number of U.S.-flag vessels dropped again, to 81 vessels. To ensure the existence of an international maritime presence of U.S.- registered and U.S.-citizen-crewed vessels, the U.S. government has, at least since 1936, had laws designed to provide financial support to offset the higher costs of operating an internationally trading vessel under the U.S.-flag. This support has provided an incentive for U.S. commercial vessel operators to register vessels under the U.S. flag in spite of the higher operating costs. Currently, this support is provided through the (1) MSP stipend for certain vessels and (2) cargo preference requirements: MSP stipend—Since fiscal year 1996, the MSP has provided an annual stipend set by statute to support a specific number of vessels. In return for receiving the stipend, the MSP vessel operator agrees to keep the vessel or an equivalent vessel under the U.S. flag for the life of a 10-year operating agreement (subject to annual appropriation), and enrolled in VISA. For fiscal year 2018, the MSP provided an annual stipend of $5 million per vessel, for a total cost of $300 million for the 60 vessels in the MSP. According to MARAD officials, the MSP was designed as a less costly replacement for the Operating Differential Subsidy that, since 1936, had subsidized the higher operating costs of the U.S.-flag fleet. According to DOT officials, the MSP currently covers approximately 80 percent of the average annual operating cost differential between U.S. and foreign-flag vessels, although this varies across vessels in the MSP. Cargo preference requirements—In general, cargo preference requirements specify that certain percentages of all U.S. government cargo, military and otherwise, must be carried on U.S.-flag vessels, to the extent the vessels are available at reasonable rates. Current law requires that 100 percent of military cargo be transported on U.S.-flag vessels. DOD charters a small number of internationally trading U.S.-flag vessels, while contracting with other internationally trading U.S.-flag vessels to carry cargo as part of the vessel’s regular operations. A minimum of 50 percent of the gross tonnage of all other government civilian cargo, such as food aid or freight sent to overseas embassies and consulates, is to be transported on privately owned commercial U.S.-flag vessels. In addition, cargoes financed by U.S. agencies, such as through loans from EXIM Bank, have been congressionally directed to be transported on U.S.-flag vessels. DOD and MARAD each play a role in managing the nation’s sealift capacity. DOD’s Transportation Command determines the vessel capacity necessary to meet national security requirements, whereas MARAD is responsible for determining whether there are enough commercial vessels and mariners available to support the activation of the government-owned reserve fleet while maintaining trade. In addition, MARAD supports the U.S.-flag fleet by administering VISA and the MSP and monitoring federal agencies’ compliance with cargo preference requirements, among other responsibilities. DOD and MARAD each maintain their own set of government-owned vessels that are part of the surge sealift fleet. U.S. government support for the internationally trading U.S.-flag fleet has helped meet national defense needs. Specifically, financial support to U.S.-flag vessels through both the MSP stipend and the cargo preference requirements has helped ensure a sufficient number of internationally trading U.S.-flag vessels are available to meet DOD’s most recently stated cargo capacity needs from such vessels. In contrast, while cargo preference requirements are a means of providing government support to U.S.-flag vessels, these requirements have had a negative impact on some non-defense programs. For example, the requirement that food aid agencies send a certain percentage of food aid on U.S.-flag vessels has resulted in higher shipping costs for these agencies, and USAID and USDA officials stated that this has reduced the amount of funds the agencies can spend on their mission to reduce hunger. DOD’s Transportation Command conducts periodic mobility studies that, among other things, determine the overall vessel capacity needed under differing wartime scenarios, including resource-heavy scenarios involving a range of concurrent military operations for a sustained period of time. A mobility requirements study completed in 2000 found that in addition to the cargo capacity that could be provided by government-owned or long- term chartered vessels and by vessels belonging to allies, the United States would need the capacity of approximately 55 commercial vessels designed to carry dry cargo to meet mobility requirements. The study also found a potential need for additional tankers, which are designed to carry liquid cargo. At the time, the MSP stipend was provided to 47 vessels; subsequently, through the Maritime Security Act of 2003, a new MSP was established that raised funding levels to support an increase in the program fleet to 60 vessels beginning in fiscal year 2006, to include both vessels designed to carry dry cargo and tankers. According to Transportation Command officials, mobility study updates in 2010 and 2013 confirmed that this capacity remained sufficient to meet defense needs. As a result, the 60 vessels currently participating in the MSP have the ability to meet DOD’s stated cargo capacity needs. They include a mix of vessel types designed to carry dry cargo as well as two tankers for liquid cargo (see table 1). DOD is required by statute to complete a new study by September 30, 2018. According to Transportation Command officials, this study will evaluate the sufficiency of the sealift fleet in light of the current defense strategy, plans, threats, and DOD's mobility capabilities. MSP regulations establish that DOD and MARAD select vessels for the MSP based in part on their military utility. Due to different configurations and cargo capacity, some vessel types are more useful to the military than others. For example, Transportation Command officials stated that currently the most useful type of cargo vessel for DOD’s military needs is the roll on/roll off (Ro-Ro) vessel, in part because it is configured so that vehicles, including tanks, can be easily driven on and off the vessel. DOD’s priority for the selection of MSP vessels is Ro-Ro vessels, multi- purpose/heavy-lift vessels (also referred to as general cargo vessels), geared containerships, and all others (including tankers), in that order. According to Transportation Command officials, due to the need to balance military utility with commercial viability, a mix of vessel types with military utility is currently in the MSP, with over half of the vessels in the MSP being containerships. In addition to selecting vessels based on military utility, MARAD, in consultation with Transportation Command, also bases their MSP vessel selections on the commercial viability of operations. The assessment of commercial viability includes, among other things, four key areas: 1) the intermodal networks accessible to the applicant; 2) the trading routes operated by the applicant, and the ability to maintain service during military operations; 3) the applicant’s record of owning and operating vessels; and 4) the applicant’s financial condition. MARAD and Transportation Command officials cited numerous benefits to the current configuration of the MSP. First, MARAD and Transportation Command officials stated that the annual cost of the stipend is small compared to the outlay required to acquire, crew, and maintain a government-owned fleet of vessels that are not needed on a day-to-day basis. (See app. I for more information on the potential effects of discontinuing the MSP stipend and instead relying on a government- owned fleet.) Second, MSP vessels must be less than 25 years of age. According to MARAD officials, this requirement helps ensure the recapitalization of the U.S.-flag fleet participating in the program. According to our analysis of MARAD data, since the beginning of fiscal year 2006, MSP vessel operators have replaced more than 70 MSP vessels. In most cases, we found that the replacement vessels have been newer and provide greater capacity to meet DOD requirements. Finally, under the MSP’s operating agreements, participating vessel operators are required to make their commercial transportation resources, including infrastructure, available upon request by the Secretary of Defense during times of war or national emergency. In this way, according to MARAD and Transportation Command officials as well as MSP vessel operators, the MSP provides DOD with assured access to a global intermodal transportation network, including logistical management services, infrastructure, and terminal facilities. According to MARAD and Transportation Command officials, without assured access to this network and infrastructure, the government would have to undertake a multi-billion dollar effort to create such a network on its own or would have to contract for such a network separately, a process that could come with additional risks and costs in a war-time scenario. A 2006 study for the National Defense Transportation Association estimated that it would cost approximately $13 billion to replicate the Ro-Ro and containership capacity of MSP vessels and $52 billion to replicate the intermodal networks provided by MSP vessel operators. A 2012 report by the National Defense Transportation Association provided some examples of how intermodal networks made available by MSP vessel operators have helped meet DOD needs. This report states that during military action in Afghanistan, U.S. forces depended on supplies transported overland through Pakistan. However, the limited road capacity in Pakistan resulted in delayed cargo and left drivers vulnerable to attacks. In addition, U.S.-Pakistan relations became strained, and the need for an alternative delivery method arose. The report says that MSP vessel operators devised alternative distribution systems, including an overland distribution network from Baltic seaports to Afghanistan as well as a multimodal (both sea and air transport) route from other seaports in the region. Some MSP vessel operators also told us that they were willing to participate in the MSP because, as U.S.- based companies, they felt a responsibility to contribute to national security. The MSP stipend provides a fixed financial incentive for vessel operators to maintain vessels under the U.S. flag, but on its own is not sufficient to support the higher costs of operating U.S.-flag vessels, according to MARAD officials and 12 of the 14 MSP vessel operators we spoke to. According to MARAD officials, the MSP currently covers about 80 percent of the operating cost differential between U.S. and foreign-flag vessels. However, a majority of MSP vessel operators we spoke with said that in order for a U.S.-flag vessel to be financially viable, the entire operating cost differential must be somehow made up. The other key way that MSP vessel operators can make up the difference in operating costs between U.S.-flag and foreign-flag vessels is through the transport of government cargo under cargo preference requirements. According to a 2015 MARAD report, the higher freight rates that DOD and other federal agencies pay to transport government cargo on U.S.-flag vessels are critical to these vessels’ financial viability. According to this report, carriers of U.S.-flag vessels stated that in the absence of government cargo at freight rates that cover the higher commercial cost of operating under a U.S. flag, the financial support provided by MSP would be insufficient to continue operating under the U.S. flag. A 2011 MARAD report similarly stated that the portion of U.S.-flag vessels’ higher operating costs not covered by the MSP stipend is defrayed by the ability of those vessels to carry government cargo at rates that are significantly higher than commercial rates. Under cargo preference requirements, the use of U.S.-flag commercial vessels is required to the extent that such vessels are available at rates that are fair and reasonable, as determined by MARAD and the Transportation Command. According to Transportation Command guidance, even though lower prices may be available from foreign-flag carriers, a lower price for use of a foreign-flag vessel is not a sufficient basis, on its own, to determine the ocean freight rate proposed by a U.S.- flag vessel operator is excessive or otherwise unreasonable. Similarly, by regulation, MARAD’s determination of U.S.-flag vessels’ fair and reasonable rates takes into account the vessels’ operating costs, among other things, which as described previously are higher than foreign-flag vessels’ operating costs. Our analysis of DOD and MARAD data show that in total, more than 1.4- million metric tons of government cargo were shipped on MSP vessels in fiscal year 2016. Fifty-nine of the 60 MSP vessels carried government cargo in fiscal year 2016. One MSP vessel (a general cargo vessel) entered the MSP at the end of the fiscal year but did not carry any government cargo until the next fiscal year. As shown in figure 3, the MSP Ro-Ro and containership vessels carried more cargo for DOD than for civilian agencies. MSP general cargo vessels predominantly carried food aid, and during this time, tankers were used only by civilian agencies for foreign military assistance. Our analysis also found that the extent to which government cargo shipped on U.S.-flag vessels was transported on MSP vessels varied. For example, 69 percent of the cargo DOD shipped on U.S.-flag vessels was transported on an MSP vessel; 99 percent of non-food aid cargo that civilian agencies shipped via U.S.-flag vessels was transported on an MSP vessel; and 24 percent of food aid shipped on U.S.-flag vessels was transported on MSP vessels. The rest of the government cargo shipped on U.S.-flag vessels was shipped on vessels that are not in the MSP. Most of the MSP vessel operators we spoke to said that in addition to government cargo, their MSP vessels also carry commercial cargo. These vessel operators told us that because they have to compete for commercial cargo with foreign-flag vessels that have lower operating costs, commercial cargo alone typically does not have high-enough rates to maintain the financial viability of U.S.-flag vessels. However, when added to the MSP stipend and government cargo rates, the rates they receive for commercial cargo are part of the overall financial picture that allows them to operate MSP vessels under the U.S. flag (see fig. 4). Officials at USAID and the EXIM Bank have raised concerns that the higher shipping costs that result from cargo preference requirements have had a negative effect on their missions. For example: According to officials at USAID’s Office of Food for Peace, the additional costs the agency incurs by using U.S.-flag vessels instead of foreign-flag vessels for its cargo directly reduces its budget to fulfill its mission of reducing hunger and malnutrition. For example, USAID officials stated that for each $40-million increase in shipping costs, its food aid reaches one-million fewer recipients each year. Concerns about the role of cargo preference requirements for food aid in supporting the U.S.-flag fleet are longstanding, and we reported on them in 1994, 2011, and 2015. Others have also reported on these concerns over the last few decades. According to USAID officials, due to cargo preference requirements and the limited availability of U.S.-flag bulk carriers, the agency has at times had to send bulk food, such as grain, on other types of U.S.-flag vessels that are not meant to carry this type of cargo. According to these officials, this process has resulted in additional costs and delays because the equipment used to load and unload bulk grains onto and off of a bulk cargo vessel cannot be used with other types of vessels, as wells as concerns about the appearance and health of bulk food being transported, for example, on vessels that typically carry oil or other fuels. Officials from the EXIM Bank said that U.S. shipping provisions may have put EXIM bank at a competitive disadvantage compared with other countries’ export credit agencies, thus having a negative impact on the Bank’s mission—which is to support American jobs by facilitating the export of U.S. goods and services. Cargoes financed through loans from EXIM Bank have been congressionally directed to be transported on U.S.-flag vessels. According to a 2014 survey of exporters and lenders conducted by EXIM Bank, arranging U.S. transport typically results in higher costs and can result in shipment delays. These exporters and lenders reported that the requirement to ship on U.S.-flag vessels placed them at a competitive disadvantage relative to other countries’ exporters—and may have resulted in potential clients choosing to import goods from other countries without the same requirements. According to our prior work and EXIM’s 2016 Competitiveness Report, export credit agencies in many other countries do not have such a requirement. Furthermore, food aid advocates have questioned the economic efficiency of using food aid shipments to financially support the U.S.-flag fleet for defense purposes, particularly in light of the increased costs to food aid agencies. These advocates have argued that it is inefficient to spend U.S. government funds to support U.S.-flag vessels generally considered to have little military utility—such as bulk carriers—primarily for the U.S.-citizen mariners they provide. According to our analysis of MARAD data, during fiscal year 2016, food aid agencies shipped 592,000 metric tons of cargo on U.S.-flag dry bulk carriers, providing substantial government support to a vessel type that Transportation Command officials have stated is not a priority for the military’s cargo needs and that Transportation Command and MARAD officials acknowledge has only limited military utility. Based on our analysis of data provided by DOD, during fiscal year 2016, DOD did not ship any cargo on dry bulk vessels. In contrast, based on our review of data provided by MARAD, in fiscal year 2016, 57 percent of food aid transported on U.S.-flag vessels was transported on vessels flagged by MARAD as having limited military utility. In contrast to the food aid advocates’ perspective, Transportation Command and MARAD officials stated that ensuring sufficient mariners for defense purposes is one key purpose of supporting the U.S.-flag fleet, regardless of the military utility of the vessel. The total additional cost the government incurred due to cargo preference requirements is not known, as neither Transportation Command nor MARAD track the additional costs to ship on U.S.-flag vessels. Transportation Command and MARAD officials both stated that their current processes are not designed to track the difference between what federal agencies are paying to ship government cargo on U.S.-flag vessels and what they would pay to ship the same cargo on foreign-flag vessels, and that it would require considerable time and expense for them to create processes to do this. Moreover, Transportation Command officials stated that there would be little value in tracking this information, since their focus is on complying with the requirement to transport DOD cargo on U.S.-flag vessels whenever possible. Our past work on this issue has shown that cargo preference laws have increased transportation costs to federal agencies. For example, in 1994 we reported that these costs increased by $578 million per year between fiscal years 1989 and 1993, with DOD estimating that it spent about $350 million of that amount in increased costs. More recently, in 2015, we found that cargo preference requirements for food aid increased the cost of shipping food aid by 23 percent, or $107 million, for the period from April 2011 through fiscal year 2014. MARAD and Transportation Command officials acknowledged that some agencies have raised concerns that cargo preference requirements may have adverse impacts on their programs. According to MARAD officials, while there is not overall agreement on the net benefit to the nation of cargo preference requirements, such requirements provide offsetting benefits to the U.S. maritime sector that are difficult to quantify in dollar terms. A Transportation Command official stated that cargo preference for food aid has been less beneficial in supporting U.S.-flag vessels than it once was because of recent decreases in food aid volumes. However, this official emphasized that cargo preference for food aid continues to provide value as a tool to help support the U.S.-flag vessels that provide mariners to meet DOD’s needs. Stakeholders we spoke with identified two primary challenges to ensuring that the U.S.-flag fleet would continue to meet DOD’s national defense needs. First, stakeholders described maintaining the financial viability of U.S.-flag vessels participating in MSP as a challenge. Second, stakeholders identified a potential shortage of U.S. citizen mariners available to crew the government-owned reserve fleet during a military activation as a challenge, in part due to the declining numbers of U.S.-flag vessels. According to MARAD officials, the relative cost of operating a U.S.-flag vessel compared to a foreign-flag vessel has increased in recent years, making it increasingly challenging for vessel operators to remain economically viable under the U.S. flag. While an increasing cost differential between U.S.-flag and foreign-flag vessels affects all U.S. flag vessels, MARAD officials raised particular concerns related to defense needs about maintaining the financial viability of vessels in the MSP. MARAD estimates this operating cost differential is currently between $6.2 million and $6.5 million per vessel per year, up from an estimated $4.9 million in 2009 and 2010—an increase of more than 25 percent. MARAD and MSP vessel operators we spoke with stated that the increase is due to a range of factors, primarily the rising relative costs of employing U.S. mariners as crew versus foreign crew members. For example, one MSP vessel operator indicated that labor costs for its U.S.- flag vessels are projected to increase approximately 4 percent per year compared to smaller increases in its foreign-flag crew costs. Representatives from maritime unions that we interviewed acknowledged that labor costs have risen and also noted that one factor contributing to higher labor costs in the United States is that operators are required to cover retirement benefits for employees. These representatives stated that such benefits are paid by the government in some other countries. In addition to labor costs, MSP vessel operators also mentioned that increasing insurance and maintenance and repair costs are also factors. At the same time, total government cargo volumes have fallen, compounding the challenge for vessel operators to remain viable under the U.S. flag. Figure 5 below shows the decline in total government cargo volumes between 2004 and 2014 for DOD, food aid, and other civilian agencies. According to a 2015 MARAD report on the effect of declining cargo preference volumes, vessel operators that reflagged vessels from the U.S. flag to a foreign flag, or retired vessels in recent years said that the primary reason for doing so was the loss of government cargo. However, it is not known exactly how many vessels have been reflagged, and the 2015 MARAD report stated it could not quantify the number of vessels that left the U.S. flag specifically for this reason. One vessel operator we spoke with stated that it removed five vessels from the U.S.- flag registry due to a decline in food aid shipments and an increase in the cost of operating under the U.S flag. According to MARAD officials, if government cargo volumes continue to decline in future years, the resulting decline in revenue to U.S.-flag vessels for shipping these goods may lead to further reductions in the number of U.S.-flag vessels and may also affect the financial viability of those vessels in the MSP. According to the 2015 MARAD report, the decrease in total government cargo volumes has been driven by two trends. First, the international military presence of the United States has decreased overseas. DOD, which generates 75 percent of preference cargo, has gone through a worldwide drawdown following the end of the cold war in the 1990s, notwithstanding brief upticks in volume during military escalations since that time. Second, due to reduced funding, fluctuating commodity prices, and other factors, food aid agencies, such as USDA and USAID, have shipped reduced volumes of food aid overseas. Further affecting the amount of food aid cargo on U.S.-flag vessels were changes to the cargo preference requirement and the elimination of reimbursements designed to help cover the extra cost of meeting the preference requirement. The Cargo Preference Act of 1954, as amended, requires that at least 50 percent of all U.S. government cargo be shipped on U.S.-flag commercial vessels. For food aid programs, an additional 25 percent of the tonnage of certain agricultural commodities was required beginning in 1988. This increase was repealed in 2012, and the cargo preference requirement for food aid effectively returned to 50 percent. In prior work, we found that although the reduction in the food aid cargo preference requirement reduced overall shipping costs for food aid, food aid agencies still paid a higher price to ship on U.S.-flag vessels than on foreign-flag vessels to meet cargo preference requirements. Further, in 2012 and 2013, government reimbursements to USAID and USDA to help cover the extra costs to meet cargo preference requirements were discontinued. As we reported in 2015, this change in reimbursement policy reduced the amount of food aid these agencies were able to provide. In 2015, to ensure the continued financial viability of vessels in the MSP, maritime unions advocated for and eventually received an MSP stipend increase. According to MARAD data, at the time, several companies with vessels in the MSP were in financial trouble, and all but three of the companies participating in the MSP would have been operating at a loss without the MSP stipend. Congress authorized the appropriation of a 42 percent increase in the MSP appropriation from fiscal year 2016 to fiscal year 2017—from $210 million to $299 million. The corresponding authorized stipend rose from $3.5 million to $4.99 million per vessel annually. The appropriation for fiscal year 2018 further increased this amount to $5 million, and an additional increase to about $5.23 million is authorized for fiscal year 2021. Figure 6 shows the authorized annual stipend for MSP vessels from fiscal year 1996 through fiscal year 2021. According to MARAD officials, the recent increase in the MSP stipend to the current level of $5 million in fiscal year 2018 has temporarily stabilized the financial situation of MSP vessel operators. However, concerns remain about the future of the U.S.-flag fleet. According to MARAD officials and commercial vessel operators we spoke with, if the cost differential between operating U.S.-flag and foreign-flag vessels continues to increase, the levels of government support would accordingly need to rise to ensure that vessel operators would be willing and able to keep the existing U.S.-flag vessels under the U.S. flag, including those in the MSP. In 2015, MARAD issued a statutorily-mandated report that concluded that without a comprehensive change to maritime policy, the size of the U.S.- flag fleet would continue to decline. However, in this report, MARAD did not propose specific changes or options to address this concern. According to MARAD and DOD officials, another challenge related to the ability of the U.S.-flag fleet to meet national defense needs is a potential shortage of U.S.-citizen mariners qualified to crew government-owned reserve vessels. While in terms of cargo capacity, the current number of U.S.-flag commercial vessels in international trade is sufficient to meet DOD’s stated needs, MARAD and DOD have raised concerns that the declining number of such U.S.-flag vessels has led to a corresponding decline in the number of U.S.-citizen mariners qualified to crew these types of vessels and who are also able to crew government-owned reserve vessels that are usually held in reduced operating status. On January 23, 2018, MARAD’s Maritime Workforce Working Group issued a statutorily-mandated report that found that the current number of U.S.-citizen mariners is insufficient to support sustained activation of the government-owned reserve fleet for military operations. Specifically, the report estimated approximately 11,768 qualified and available U.S.-citizen mariners as of June 2017—1,839 less than the 13,607 mariners the working group estimates would be needed for sustained operation of the reserve and commercial fleet. The working group based its identification of 11,768 existing qualified U.S.-citizen mariners on the number of U.S.-citizen mariners actively sailing on U.S.-flag commercial and government-owned ocean-going vessels. For the vessels in full operating status, the working group accounted for 2 mariners employed for each crew position. The double crew, which according to MARAD officials is typical for a commercial U.S.-flag vessel operating in international trade, allows each mariner, over the course of a year, to work for 6 months on the vessel and take 6 months of earned leave. According to MARAD officials, this typical double crew configuration is based on the fact that while on duty, mariners work long hours with little to no opportunity to leave the vessel. The working group assumed that during a military activation, commercial operations would continue at the same level as during peacetime—but that some U.S-citizen mariners currently working on commercial vessels would be willing to reduce the amount of earned leave they took in order to work on government-owned reserve vessels. The working group analyzed this scenario by changing the ratio of crew positions to crew from 2 (in which case half of the employed mariners are working on the vessel and half are on earned leave at any one time) to 1.75. As illustrated in figure 7, under this scenario, with an average of 26 crew positions per vessel, between 6 and 7 mariners per existing commercial oceangoing U.S.-flag vessel are made available to crew the reserve fleet. According to the working group’s methodology, given the size of the current U.S. flag oceangoing fleet and the number of currently employed mariners on this fleet, there are enough U.S.-citizen mariners to crew the reserve fleet during an initial surge, but not for a sustained activation, during which the working group estimated that the reserve vessels themselves would need a double crew to allow for crew rotations. This need for crew rotations on the reserve vessels led the working group to the estimate a shortage of 1,839 U.S.-citizen mariners. Moreover, the working group’s report found that the shortage of mariners may be understated if some of the estimated available mariners are unable or unwilling to continue sailing during times of national emergency, as available mariners are not required to crew the reserve fleet. Although the working group concluded that there is a shortage of mariners for sustained operations, its report also details data limitations that cause some uncertainty regarding the actual number of existing qualified mariners and, thus, the extent of this shortage. The working group’s approach—driven, in part, by limitations of the U.S. Coast Guard’s database that tracks mariner credentials—did not count any qualified mariners who are no longer employed on U.S.-flag oceangoing vessels or who are employed on other types of vessels but may have the required credentials. In fact, according to the working group’s analysis, over 15,000 mariners listed in the U.S. Coast Guard’s database have unlimited credentials but are unaccounted for, as they are neither currently employed on large, oceangoing vessels nor serving as civil- service mariners committed to government-owned vessels. The working group stated that the availability and continuing proficiency of these mariners remains unknown. These data limitations, which the working group was unable to resolve, are long standing. For example, in August 2015, we reported that the number of U.S. civilian mariners who would be qualified and available to serve during a prolonged defense activation was uncertain. We found that MARAD’s analysis of the sufficiency of the mariner pool could have included more qualified mariners using different assumptions, and we recommended that MARAD study this issue. MARAD was later mandated by statute to convene a working group to study the sufficiency of the U.S.-citizen mariner pool. MARAD officials emphasized to us, however, that mariners who have not worked on the right types of vessels for more than 18 months are likely to need additional training before they would be qualified to crew the reserve fleet during a military activation. The working group’s report contains several recommendations related to improving information on the number of available and willing mariners. These recommendations include that the Coast Guard database should be replaced with one that would enable a more accurate account of available mariners, and that a periodic survey of the U.S.-citizen mariner pool should be established to allow MARAD to determine, with reasonable certainty, how many qualified mariners would be available and willing to sail in U.S. government reserve vessels if called upon to do so. The report concluded that until these agencies improve the tracking of licensed mariners who may be available to crew the government-owned reserve vessels when activated into full operating status, the extent to which there is a shortage of mariners for defense needs will remain unclear. The lack of information on the extent to which there is a shortage of mariners limits the U.S. government’s ability to effectively plan for such needs. In January 2018, MARAD’s administrator testified that MARAD is working with the Coast Guard and the maritime industry to better track licensed mariners who may no longer be sailing but could serve in a time of crisis, and in March 2018, MARAD officials told us they are taking steps to initiate a new survey of mariners, as recommended in the Mariner Workforce Working Group’s report. Congress issued two separate mandates to DOT to develop strategies related to challenges facing the U.S.-flag fleet, specifically: The Secretary of Transportation was directed in 2014 to develop a national maritime strategy with recommendations, among other things, to increase U.S.-flag vessel competitiveness. The Secretary of Transportation and MARAD were directed in 2014 to develop, in collaboration with DOD, a national sealift strategy to ensure the long-term viability of the U.S. Merchant Marine (which encompasses U.S.-flag vessels and U.S.-citizen mariners). According to MARAD and DOD officials, MARAD has been working on a single draft maritime strategy to meet both mandates, since from their perspective, the national maritime strategy would need to encompass the national sealift strategy, as well. While there was no statutory deadline for the completion of the national sealift strategy, there was a statutory deadline of February 2015 for the national maritime strategy to be submitted to Congress. However, DOT had not finalized the national maritime strategy as of May 2018. According to MARAD officials, MARAD completed a draft strategy in 2016, which was approved by DOT and reviewed by the Office of Management and Budget (OMB) and 28 additional agencies identified as being stakeholders, including DOD. MARAD officials told us that while MARAD had reached initial concurrence with these other agencies, the strategy is now subject to the new administration’s review. MARAD and DOT officials told us that they now view the existing draft strategy as pre- decisional and emphasized that no decisions have yet been made about the extent to which it must be revised before being sent out for a new round of review by the stakeholder agencies. DOT officials provided no timeline to us as to when they expect the strategy to move forward, stating that it was not yet clear how long DOT would be reconsidering and potentially revising the strategy before moving it forward again. Similarly, no time frames have been provided to Congress. The delay in submitting this strategy to Congress means that decision-makers do not have information and recommendations from the agency to inform policy- making in this area. Moreover, it further delays a response to a specific statutory requirement that DOT make recommendations related to U.S.- flag vessel competitiveness and develop a strategy to ensure the long- term viability of U.S.-flag vessels and U.S.-citizen mariners. While DOT has been delayed in issuing the national strategy, MARAD has in other agency reports or through discussions with stakeholders identified some options to address the competitiveness of U.S.-flag vessels and the long-term viability of the U.S. Merchant Marine—issues that are very similar to the key challenges identified by stakeholders with whom we spoke. However, DOT and MARAD officials stated that they are not yet ready to address the feasibility of these options. For example, MARAD has identified the following options as having potential to reduce the costs of operating a U.S.-flag vessel—which would in turn increase U.S.-flag vessels’ competitiveness: MARAD is part of a U.S. Registry Working Group that was established in response to a 2016 report and is looking at actions to decrease the time and cost of bringing vessels under the U.S. flag, including the cost of meeting Coast Guard requirements. This working group is considering actions, such as applying internationally recognized vessel standards to U.S.-flag vessels to meet Coast Guard requirements, among others. In the current strategic plan for 2017 through 2021, MARAD identified two areas of reform—mariner income-tax relief and liability insurance reform—that could reduce the crew costs of operating under a U.S. flag. MARAD officials stated that stakeholders have recommended that MARAD consider whether a tax on U.S.-flag vessels receiving maintenance overseas should be eliminated in order to reduce maintenance costs for U.S.-flag vessels. In general, maintenance and repairs on U.S.-flag vessels not conducted at U.S. shipyards are subject to a statutory 50 percent ad valorem tax on the cost of maintenance performed overseas. According to 12 of the 14 MSP vessel operators we spoke with, U.S. shipyards are typically more expensive than foreign shipyards or may not be close to the vessel’s location or route, so they typically choose to pay the tax and have the maintenance performed overseas. Four MSP vessel operators stated that they send U.S.-flag vessels to U.S. shipyards for maintenance when it makes sense from a logistical and financial perspective. MARAD officials stated they are considering the effect of eliminating the tax, a step that would reduce costs for vessel operators but would potentially negatively affect the financial viability of U.S. shipyards, which the law was designed to assist. However, MARAD officials stated that they have not yet evaluated these trade-offs. MARAD and Transportation Command officials have also identified—but not officially proposed—several options to increase the volume of government cargo carried on U.S.-flag vessels, which was identified by stakeholders we spoke with as a cause of the challenge of sustaining the financial viability of MSP vessels. For example, Transportation Command officials told us that they consider access to cargo to be a critical means of sustaining U.S.-flag vessels. Transportation Command and MARAD officials stated that one way to increase the amount of commercial cargo on U.S.-flag vessels would be to require that certain energy export commodities, such as oil or liquefied natural gas, be carried on U.S.-flag vessels. While this option has been considered in the past, it would require new legislation and would have potential trade-offs. For example, in 2015, we analyzed the potential effects of a requirement that U.S. liquefied natural gas exports be carried on U.S.-built and flagged vessels. We found that such a requirement could potentially increase the number of U.S.-flag vessels by 100, but, due to their higher operating costs, could also increase the cost of transporting liquefied natural gas from the United States, decrease the competitiveness of U.S. liquefied natural gas in the world market, and in turn, reduce demand for U.S. liquefied natural gas. MARAD officials stated that another option would be increasing the percentage of cargo, such as food aid, that civilian agencies are required to transport on U.S.-flag vessels. This would also require an amendment to existing legislation and would also have trade-offs since as described previously, cargo preference requirements can negatively affect the missions of civilian agencies. Another option stated by MARAD officials to address declining government cargo volumes would be to increase the MSP stipend to replace some of the government support previously provided through cargo preference programs. This option was previously used to address the recent reduction in government cargo, as described previously in this report. MARAD, through its 2017 Mariner Workforce Working Group report, also identified options to address the challenge of ensuring a sufficient number of U.S.-citizen mariners for defense needs. This challenge was identified by stakeholders we spoke with and by the sealift strategy mandate’s call for DOT to ensure the long-term viability of the U.S. Merchant Marine, which includes U.S.-citizen mariners. The Mariner Workforce Working Group report identified two actions that could help increase the number of U.S.-citizen mariners. However, the working group’s report did not discuss specific costs or trade-offs related to either action or elaborate any further on them. The identified actions were as follows: MARAD should develop a broad-based reserve program that would identify and support qualified mariners willing to sail in commercial and government-owned vessels during an emergency. MARAD would provide limited financial assistance in training mariners and maintaining credentials, in turn for which mariners who participate would be obligated to sail in the event of a defense need. MARAD and other U.S. government agencies should support a healthy merchant marine (which encompasses U.S.-flag vessels and U.S.-citizen mariners). The government should fully support programs including MSP, cargo preference requirements, the Jones Act, and government chartering of privately owned vessels. When DOD determines that national needs require more mariners and vessels than can be provided through current programs, those programs should be expanded to meet such needs. MARAD and DOT officials stated that they are not yet ready to propose actions to address any of these issues. According to these officials, they have not yet developed cost estimates or analyzed the trade-offs of various alternatives to increasing U.S.-flag vessels’ competitiveness or otherwise supporting the financial viability of the U.S.-flag fleet or ensuring sufficient U.S. citizen mariners for defense purposes. The officials stated that they are therefore not ready to recommend which of the identified options, if any, should be pursued, either as recommendations in the national maritime strategy or elsewhere. To date, U.S. government support for commercial sealift has helped meet national defense needs, but recent increases in the cost differential of U.S.-flag vessels versus foreign-flag vessels and decreases in the volumes of government cargo have made it more challenging to ensure the financial viability of U.S.-flag vessels. Moreover, with a smaller number of U.S. flag vessels in international trade than in previous years, DOD and MARAD have raised concerns about the sufficiency of the pool of U.S. citizen mariners the United States can count on to crew government-owned reserve vessels activated for national defense needs. Congress mandated in 2014 that DOT issue strategies to address these challenges. MARAD has been working on a national maritime strategy to address both mandates. However, over 3 years after a congressionally mandated issuance date of February 2015, DOT has not published this strategy or made any recommendations to increase U.S.-flag vessels’ competitiveness or to ensure the long-term viability of the U.S.-flag fleet and U.S. citizen mariners. DOT has also not developed a timeline for when it will complete and provide this strategy to Congress. The continued lack of such a strategy limits decision-makers’ ability to make policy choices related to these challenges in a comprehensive way that considers the complex issues related to the long-time government support for the U.S.-flag fleet. The Secretary of the Department of Transportation should complete the national maritime strategy and establish and provide to Congress a timeline by which the strategy document will be issued. (Recommendation 1) We provided a draft of this report to DOT, DOD, USDA, USAID, EXIM Bank, the Department of Energy, and the State Department for review and comment. DOT provided written comments, which are reprinted in appendix II, and technical comments, which we incorporated as appropriate. DOT agreed with our recommendation that DOT should complete the national maritime strategy and provide a timeline to Congress by which the document will be issued. USAID provided written comments, which are reprinted in appendix III. DOD and EXIM Bank provided technical comments, which we incorporated as appropriate. USDA, the Department of Energy, and the State Department informed us that they had no comments. We are sending copies of this report to the Secretary of Transportation, the Secretary of Defense, the Secretary of State, the Secretary of Energy, the Secretary of Agriculture, the Administrator of USAID, and the Chairman of EXIM Bank, as well as appropriate congressional committees and other interested parties. In addition this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-2834 or vonaha@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. In addition to the potential modifications to the Maritime Security Program (MSP) that we described in the report, we examined two alternatives to the MSP that we identified by conducting a literature search on the program and reviewing a 2009 study of the MSP. We also interviewed stakeholders about these two alternatives. These two alternatives were for the government to purchase its own vessel fleet to meet defense requirements or for DOD to charter or contract for vessels in times of need. However, these options do not present clear cost savings or would reduce the government’s ability to meet national defense goals, according to stakeholders we interviewed and the 2009 study. We also identified additional options beyond those described in the report to modify the MSP while maintaining the annual stipend by reviewing prior GAO work and interviewing the same stakeholders on ways to improve the MSP. These modifications included implementing a competitive-bidding process to select participants and varying payments to MSP vessel operators based on the vessel’s type and military usefulness, among others. Cost savings to the government associated with these modifications are likely to be small to nonexistent, according to MARAD officials, and maritime stakeholders had differing views on whether these modifications would improve the program. Tables 2 and 3 below show the potential effects, as identified by stakeholders, that each of the alternatives and modifications to the MSP would have on costs, mission, and other areas. In addition to the individual named above, Alwynne Wilbur (Assistant Director), Stephanie Purcell (Analyst in Charge), Amy Abramowitz, David Ballard, Geoff Hamilton, Bonnie Ho, Christopher Jones, Josh Ormond, Amy Rosewarne, and Kelly Rubin made key contributions to this report.

Summary: The U.S. government relies on U.S.-flag vessels that trade internationally to transport cargo and to provide a pool of U.S. mariners who could be called upon in times of crisis for DOD's reserve fleet. Through financial support and cargo preferences, the United States has supported the viability of the U.S.-flag fleet. However, in recent years concern has grown about the sustainability of the U.S.-flag fleet, and in 2014, Congress statutorily mandated that DOT develop national strategies related to the sustainability of the U.S.-flag fleet including recommendations for the future. GAO was asked to review U.S. government support for these U.S.-flag vessels that trade internationally. This report discusses: (1) the effect the U.S. government's support for the U.S.-flag fleet has had on national defense needs and other government programs; (2) the challenges identified by stakeholders in sustaining the U.S.-flag fleet for defense needs; and (3) the status of the mandated national strategies related to the U.S.-flag fleet. GAO reviewed relevant laws and analyzed DOT and DOD documents and government cargo data for fiscal years 2012–2017. GAO also interviewed officials from DOT, DOD, and other federal agencies subject to cargo preference; MSP vessel operators; and other stakeholders. U.S. government support for the U.S.-registered (U.S.-flag) fleet has helped meet national defense needs, but it has had a negative effect on some non-defense government programs. Specifically, the U.S. government supports U.S.-flag vessels through: (1) an annual stipend provided through the Maritime Security Program (MSP) and (2) cargo preferences that require federal agencies to transport certain percentages of government cargo on U.S.-flag vessels. These supports have helped ensure that a sufficient number of U.S.-flag vessels are available to meet the Department of Defense's (DOD) cargo capacity needs. Although cargo preference requirements have helped support the financial viability of U.S.-flag vessels that participate in the MSP, they have had a negative impact on some non-defense programs. For example, the requirement pursuant to which food-aid agencies send a certain percentage of food aid on U.S.-flag vessels has resulted in higher shipping costs for these agencies and has negatively affected their missions, according to officials at these agencies. Stakeholders GAO spoke to identified two primary challenges in sustaining the internationally trading U.S.-flag fleet for national defense needs. First, even with the annual MSP stipend, maintaining the financial viability of U.S.-flag vessels is a challenge. This challenge largely results from the higher costs of operating a U.S.-flag vessel. According to U.S. Maritime Administration (MARAD) officials, the additional cost of operating a U.S. flag vessel compared to a foreign-flag vessel has increased—from about $4.8 million annually in 2009 and 2010 to about $6.2 to $6.5 million currently—making it harder for such vessels to remain financially viable. In addition, government cargo volumes have fallen in recent years. In response to this challenge, Congress increased the MSP stipend from $3.5 million per vessel for fiscal year 2016 to $4.99 million per vessel for fiscal year 2017. MARAD officials said this increase has temporarily stabilized the financial situation of MSP vessel operators. However, MARAD officials stated trends in operating costs and government cargo suggest this will remain an ongoing challenge. Second, a potential shortage of U.S.-citizen mariners available to crew the government-owned reserve fleet during a crisis is a challenge. DOD counts on mariners working on U.S.-flag vessels to crew this fleet when activated. A MARAD working group recently estimated a shortage of over 1,800 mariners in the case of a drawn-out military effort, although it also recommended data improvements to increase the accuracy of the count of available mariners. The Department of Transportation (DOT) has drafted but not issued the national maritime strategies mandated by Congress. The strategies are intended to address U.S.-flag vessels' competitiveness and ensure the long-term viability of U.S.-flag vessels and U.S.-citizen mariners. According to DOT officials, a combined draft strategy was developed under the previous administration but is now being reviewed by the current administration. DOT has not established a timeline for finalizing the strategy even though it was to be completed by 2015. Without establishing a timeline to complete this required strategy, DOT continues to delay providing decision-makers the information they need to determine how best to address the challenges facing the U.S.-flag fleet. GAO recommends that DOT complete the national maritime strategy and establish time frames for its issuance. DOT concurred with our recommendation and provided technical comments, which we incorporated as appropriate.