Mar Ad's Management Control Over Title XI Vessels

Detailed Federal Policies And Procedures May Be Needed To Better Monitor The Program's Performance The Federal Ship Financing Program was established by Title XI of the Merchant Marine Act of 1936 (Ch. 858, 49 Stat. 1985). To promote the U.S. merchant fleet and encourage domestic shipbuilding, the act, as amended, provides federal guarantees of debt used to finance the purchase or construction of privately owned American-fl agged vessels built in U.S. shipyards. If a borrower defaults on a loan, MarAd pays the lender the outstanding balance and usually forecloses, takes title to the vessel or vessels put up as collateral, and attempts to recoup the government's losses by selling the vessel or vessels. MarAd usually stores the vessels in its custody at its National Defense Reserve Fleet facilities. Currently, the $2.57 billion in loans that the program has guaranteed covers approximately 3,000 vessels and 163 shipowners.

There are over 50 vessels in Mar Ad's custody as a result of defaults totalling approximately $143 million.

According to MarAd officials, these vessels have an estimated resale value of $42 million.

Payments to lenders and maintenance and storage costs for vessels in Mar Ad's custody are paid by the Federal Ship Financing Fund—a revolving fund financed by proceeds from the sale of vessels and from fees paid by borrowers whose loans are guaranteed. Although the fund is self-supporting at this time, in fiscal years 1987 and 1989 MarAd received supplemental appropriations of $1,375 billion and $515 million, respectively, to cover losses by the fund. As of September 30,1991, the fund had $700 million in cash and investments.

In addition to administering the title XI program, MarAd is responsible for maintaining the government- owned National Defense Reserve Fleet, which is a fleet of about 230 inactive merchant ships that can be activated to help meet shipping requirements during a national emergency. There are two components to this fleet: (1) a Ready Reserve Force (RRF) consisting of ships routinely maintained so that they could be activated in 5,10, or 20 days and (2) a less ready component (non- RRF) consisting of vessels receiving less maintenance, so activating them would require a longer time—between 30 and 120 days. In fiscal year 1991, MarAd budgeted about $232 million for this program, approximately one-half of the agency's total budget.

MarAd and all other executive agencies are required by the Federal Managers' Financial Integrity Act (P.L. 97-255) to develop and implement management controls (also known as internal controls) in compliance with the Comptroller General's guidelines in the General Accounting Office's Standards for Internal Controls in the Federal Government, commonly referred to as the "Green Book." In general, management controls are the combination of policies and procedures program managers use to provide reasonable assurance that program objectives are efficiently achieved with full accountability for the resources made available. The ultimate responsibility for ensuring that management controls are developed and implemented rests with an agency's senior management.

MarAd does not have detailed formal policies and procedures to provide guidance for decisions concerning the custody, maintenance, and sale of vessels acquired when borrowers default on loans. Without such guidance, MarAd cannot be sure that these decisions are achieving the program's objectives in managing and selling vessels. However, MarAd officials believe that their system of review, requiring that decisions be approved by a number of officials, adequately ensures the program's success.

The title XI program's primary objective in taking custody, maintaining, and then selling vessels is to recoup, to the extent possible, the government's losses on defaults.

When a borrower defaults, MarAd usually takes custody of and eventually title to the vessel. (MarAd takes custody of the vessel before it has title in order to protect the vessel's value in anticipation of the foreclosure sale. Legal proceedings can prevent the foreclosure sale from taking place for up to five years after the default.) Once MarAd takes custody, it must decide how long it expects to retain the vessel and how much it should spend on preservation and other custodial expenses, such as insurance. After MarAd takes title, it must decide when and for what price to sell the vessel.

These decisions involve thousands to millions of dollars. For example, in fiscal years 1983 through 1991, MarAd sold over 2,000 vessels for a total of more than $937 million and spent approximately $65 million on preservation andcustodial expenses.

The annual cost of storing and maintaining a vessel can range from $2,500 to $1 million, depending on the type of vessel.

Besides recovering losses on defaults, the title XI program has a second objective in managing and selling vessels, which stems from MarAd's overall mission to foster the development and encourage the maintenance of the U.S. maritime industry. In particular, in operating the title XI program, MarAd tries to avoid harming weak sectors of the shipping industry by not introducing additional capacity through the sale of vessels. For example, when MarAd obtained a large number of supply boats used to transport equipment to oil rigs, the agency decided to hold for later sale those vessels that were in better condition and to sell the other vessels with the restriction that they would be used for different purposes, such as fishing.

Thus, MarAd avoided doing economic harm to owners of supply boats remaining in use in the oil business.

Without detailed formal policies and procedures, appropriate documentation, and adequate performance indicators, title XI program managers cannot be sure that their activities in managing and selling vessels are as efficient and effective as possible. While MarAd officials believe that these activities are being conducted properly, no one can independently confirm this because of lack of these basic management controls.

To help ensure that the title XI program is administered efficiently and effectively, the General Accounting Office recommends that the Secretary of Transportation direct the Administrator of MarAd to take the following actions: • Develop detailed formal policies and procedures to guide decisionmaking regarding the custody, maintenance, and sale of title XI vessels.

• Identify and document significant information and program activities concerning decisions affecting the custody, maintenance, and sale of individual vessels.

• Develop indicators to allow MarAd officials and others to better monitor the program's performance.