Maritime Security: DOT Needs to Expeditiously Finalize the Required National Maritime Strategy for Sustaining U.S.-Flag Fleet

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.

The Department of Defense (DOD) ships more than a million metric tons  of cargo overseas annually to sustain its military presence around the  world. In a time of war or crisis, it may need access to additional vessel  capacity to transport supplies to support both the surge—the initial  movement of troops, equipment, and supplies to a war’s location—and to  sustain these troops during a potentially long-lasting conflict, while  continuing operations elsewhere. The process of transporting government  equipment and supplies by sea for military purposes is often referred to  as “sealift”. Due to certain statutory requirements and long-time  government policy, DOD largely relies on internationally trading U.S.-flag  vessels to transport its cargo in peacetime and to supplement the  government-owned reserve fleet in times of war or crisis. However, it has  long been recognized that the operating costs of U.S.-flag vessels are  higher than the operating costs of foreign-flag vessels, and that  government support is therefore necessary to maintain a fleet of  internationally trading U.S.-flag vessels.

Currently, the U.S. government financially supports internationally trading  U.S.-flag vessels in two key ways: (1) by providing an annual stipend for  60 specific vessels through the Department of Transportation’s (DOT)  Maritime Security Program (MSP) and (2) by requiring, under laws that  are distinct from the MSP, that the federal government transport certain  types and percentages of government cargo on U.S.-flag vessels, also  known as cargo preference requirements. Federal agencies can meet  cargo preference requirements by transporting cargo on vessels in the  MSP or on other U.S.-flag vessels. The shipping fees federal agencies  pay to U.S.-flag vessels to transport government cargo under cargo  preference requirements also help to financially support U.S.-flag vessels.  In recent years, Congress has increased appropriations to support  vessels in the MSP; however, the amount of government cargo available  to be shipped under cargo preference requirements has decreased. This  decrease has prompted questions regarding the future of the U.S.-flag  fleet and the costs to the government to support it. In 2014, Congress  statutorily mandated that DOT develop two national strategies related to  the U.S.-flag fleet, one a national sealift strategy focused on ensuring the  long-term viability of the U.S. Merchant Marine (U.S.-flag vessels and  U.S.-citizen mariners) and the other a national maritime strategy  focused, among other things, on increasing the competitiveness of  internationally trading U.S.-flag vessels.

You asked us to review the costs to the government of supporting U.S.- flag vessels for military needs. This report responds to the following  objectives:

What effect has the U.S. government’s support for the internationally  trading U.S.-flag fleet had on defense needs and other government  programs?

According to stakeholders, what, if any, sustainability challenges does  the internationally trading U.S.-flag fleet face in meeting national  defense needs?

What is the status of the mandated national sealift and maritime  strategies, and what options has DOT considered to address any  challenges related to sustaining the internationally trading U.S.-flag  fleet to meet defense needs?

In addition, you requested that we identify and discuss alternatives to the  MSP with DOD, the Department of Transportation’s Maritime  Administration (MARAD), and other stakeholders, and this information is  included in appendix I.

To identify the effect the U.S. government’s support for the internationally- trading U.S.-flag fleet has had on national defense needs and other  government programs, we reviewed relevant laws, regulations, and  directives, including the Maritime Security Act of 1996, the Maritime  Security Act of 2003, National Security Directive 28, and laws and  regulations related to cargo preference requirements, among others. We  also reviewed unclassified summaries of DOD studies and interviewed  officials from DOD’s U.S. Transportation Command (Transportation  Command) to learn how these studies are used to determine defense  needs for U.S.-flag vessels. We reviewed DOT guidance on the MSP and  interviewed MARAD officials to learn how the program operates, including  how participants are selected for the program and how the stipend is  determined. We also conducted a literature search on the MSP and  maritime economics and reviewed prior GAO reports as well as reports  from the Congressional Research Service, MARAD, Econometrica, and  academics on the MSP and cargo preference requirements.

In addition, to understand the extent to which the U.S. government is  supporting U.S.-flag vessels through shipments of government cargo  under cargo preference requirements and the effect of this support on defense and other government programs, we obtained and analyzed data  from DOD on the amount of DOD cargo shipped from fiscal years 2012  through 2017 and data from MARAD on the amount of government cargo  that was shipped by non-defense government agencies during the same  time period to determine the volume of government cargo shipped on  U.S.-flag vessels (including MSP and non-MSP vessels) and the types of  vessels used, and the volume of government cargo shipped on foreign- flag vessels. We chose this time period to provide the most recent  information with the most complete data available, as data prior to fiscal  year 2012 are less complete. To determine whether these data were  sufficiently reliable for our analysis, we reviewed the program  documentation associated with the files and discussed various data  elements and collection processes with MARAD and Transportation  Command staff responsible for the data. We also conducted our own  electronic testing to check the consistency of the data and to reconcile the  accuracy of certain data elements. We did not attempt to evaluate or test  all aspects of the data files but focused on data on government cargo  transported on U.S.-flag vessels. As a result of our review and  discussions, we determined that these data were sufficiently reliable for  the purposes of our review. We also interviewed officials representing  federal agencies affected by cargo preference requirements, including the  U.S. Department of Agriculture (USDA), U.S. Agency for International  Development (USAID), U.S. Export-Import Bank (EXIM Bank),  Department of Energy, and the State Department; all 14 MSP vessel  operators; six labor unions; an international ship-registry service; a  maritime association; two stakeholders in nongovernmental organizations  involved with food aid; and six academics with a background in defense  transportation, food assistance or maritime economics.

To identify stakeholders’ views on any challenges the government faces  in sustaining the internationally trading U.S.-flag fleet to meet defense  needs, we conducted a literature search on the MSP and maritime  economics and reviewed prior GAO reports as well as reports from the  Congressional Research Service, MARAD (including, among others,  MARAD’s 2015 report on cargo preference requirements, 2011 report on  the costs of operating U.S.- and foreign-flag vessels, and 2017 Maritime  Workforce Working Group Report), Econometrica, and academics on  the MSP and cargo preference programs. We reviewed data provided by  MARAD on MSP vessel operators’ finances and laws authorizing and  appropriating funds for the MSP. We also interviewed MARAD and  Transportation Command officials as well as the stakeholders identified  above.

To discuss the status of the mandated national sealift and maritime  strategies and options that DOT has considered to address any  challenges related to sustaining the internationally trading U.S.-flag fleet  to meet defense needs, we reviewed the laws requiring MARAD or DOT  to develop these strategies and interviewed MARAD and DOT officials on  the status of their efforts to develop the mandated strategies and the  process the officials used. We compared MARAD’s efforts to the pertinent  laws. We also reviewed laws requiring MARAD to convene a working  group in order to study the sufficiency of the mariner pool and the working  group’s 2017 Maritime Workforce Working Group Report. In addition, we  reviewed MARAD’s strategic plan and reports and documents related to  the U.S.-flag fleet and Coast Guard requirements, mariners, and cargo  preference, among other things; and interviewed MARAD and DOD  officials.

To identify alternatives and modifications to the MSP, we conducted a  literature search on the program and reviewed a 2009 study of the MSP,  and prior GAO work. We then interviewed stakeholders, including  MARAD and DOD officials; MSP participants; an international ship- registry service; a maritime association; academics with backgrounds in  food aid, defense transportation, food assistance; and maritime  economics; as well as maritime unions about these alternatives and  modifications and on other ways to potentially improve the MSP. (See  app. I.)

We conducted this performance audit from January 2017 to July 2018 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

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 U.S.- Flag Fleet Has Helped Meet National Defense Needs but Has Had a Negative Effect on Some Non- Defense Government Programs

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.

MSP and Cargo Preference Requirements Have Resulted in Sufficient U.S.-Flag Vessel Capacity to Date to Meet Defense Needs, At Acceptable Risk

Under the MSP, DOD and MARAD Select Vessels for Government Support That Meet the Military’s Needs and Have Commercial Viability

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.

Vessels in the MSP Rely on the Combination of MSP Stipend and Government Cargo Shipped Under Cargo Preference Requirements to Maintain Financial Viability

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).

Cargo Preference Requirements Have Had a Negative Effect on Some Non-Defense Agency Programs

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 Identified Two Primary Sustainability Challenges the Internationally Trading U.S.-Flag Fleet Faces in Meeting National Defense 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 Stakeholders, Maintaining the Financial Viability of Vessels Participating in the MSP Is a Challenge due to Increasing Costs and Decreasing Levels of Government Cargo

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.

MARAD and Stakeholders Identified a Potential Shortage of U.S.-Citizen Mariners as a Challenge to Meeting National Defense Needs

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.

DOT Has Not Finalized Mandated National Strategies but Has Identified Various Options to Address Challenges to Sustaining U.S.- Flag Fleet for Defense Needs

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.

Appendix I: Alternatives and Potential Modifications to the Maritime Security Program

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.

Appendix II: Comments from the Department of Transportation

Appendix III: Comments from the U.S. Agency for International Development

Appendix IV: GAO Contacts and Staff Acknowledgments

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.

In a crisis, the government relies on oceangoing U.S.-flag ships and U.S.-citizen crews to help the military. To ensure their availability, the government provides stipends and requires certain government cargoes to be shipped on U.S.-flag ships.

Despite these efforts, there are challenges:

In recent years, U.S.-flag ships have become more expensive to run and the government has shipped less cargo—making it harder for carriers to stay in business.

There may not be enough U.S.-citizen sailors to meet defense needs.

In 2014, Congress required the Department of Transportation to develop a U.S. maritime strategy, which we recommended completing.