[Senate Hearing 106-1113]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 106-1113

          REAUTHORIZATION OF THE U.S. MARITIME ADMINISTRATION

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation



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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 16, 2000.....................................     1
Prepared statement of Senator Cleland............................     8
Statement of Senator Gorton......................................    49
Prepared statement of Senator Hollings...........................     6
Prepared statement of Senator Inouye.............................     7
Statement of Senator Kerry.......................................    47
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3
Prepared Statement of Senator Snowe..............................     5
Statement of Senator Stevens.....................................     4

                               Witnesses

DeCarli, Raymond J., Deputy Inspector General, U.S. Department of 
  Transportation.................................................    16
    Prepared statement...........................................    19
Hart, Jr., Hon. Clyde J., Maritime Administrator, U.S. Department 
  of Transportation..............................................     8
    Prepared statement...........................................    11
Holder, VADM Gordon S., USN, Commander, Military Sealift Command, 
  Washington Navy Yard...........................................    37
    Prepared statement...........................................    39

                                Appendix

Responses to written questions submitted by Hon. John McCain to:
    Raymond J. DeCarli...........................................    61
    Clyde J. Hart, Jr............................................    63
Response to written questions submitted by Hon. Max Cleland to:
    Clyde J. Hart, Jr............................................    86
Response to written questions submitted by Hon. Ernest F. 
  Hollings to:
    Clyde J. Hart, Jr............................................    75

 
          REAUTHORIZATION OF THE U.S. MARITIME ADMINISTRATION

                              ----------                              


                         TUESDAY, MAY 16, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 

SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.
    Staff members assigned to this hearing: Rob Freeman, 
Republican Professional Staff Member; and Carl Bentzel, 
Democratic Senior Counsel.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. This hearing will come to order. Today the 
Committee meets in order to fulfill its oversight role of the 
U.S. Maritime Administration, MARAD. As MARAD celebrates its 
50th year, I want to thank all MARAD employees, past and 
present, for their dedication to our nation's Merchant Marines. 
Today, we will hear testimony from three witnesses on MARAD's 
past performance, as well as issues facing its future. Our 
nation's maritime operations face many challenges in the world 
economy. While much of U.S. business and industry has had to 
make adjustments to adapt to new global markets, such is not 
the case with the maritime industry. Maritime transportation 
has always, by its nature, operated in a world market.
    That is not to say the U.S. maritime industry is not facing 
changes. On the contrary, one has just to look at the number of 
mergers and sales of U.S. carriers over the last 3 years to 
know the industry is undergoing great change, which raises many 
important questions.
    Why have these companies been sold or merged? Does the sale 
of the companies in many cases to foreign ownership impact our 
national security or our national commerce and, most 
importantly, is our overall national policy on maritime issues 
and the many associated problems effective in ensuring that our 
nation has a healthy and innovative merchant fleet that is able 
and available to meet our national security and commerce needs?
    I am increasingly concerned that U.S. maritime interests 
rely too much on Government programs that create an environment 
of dependance and do not foster investment and risk-taking, and 
on Government regulations that protect them from economic 
competition. I am aware that MARAD has revised its methodology 
in reporting maritime ship statistics, thereby increasing the 
U.S. fleet from 280 in 1998 to over 37,000 in 1999, but I am 
not convinced that these larger numbers, which represent a 
wider range of commercial vessels in both the domestic and 
international trade actually present a clear picture of our 
merchant fleet's viability to meet the needs of national 
defense and our commercial base.
    Additionally, with the expiration of the military security 
program, MSP, a few years away, it is time to begin to examine 
the merits of the program and look for ways to improve it. I 
believe that as part of this review we should take a serious 
look at overall reform of our maritime policy, with the goal of 
formulating a policy that will allow our merchant marine 
industry to grow and prosper in today's market.
    I look forward to hearing from all of our witnesses on the 
status of the U.S. fleet, and especially from Admiral Holder on 
his concerns regarding fleet size and the manning of vessels in 
the ready reserve fleet.
    Additionally, I am very interested in hearing from Mr. Hart 
on two issues raised in the Administration's proposal for 
reauthorization. The Administration proposal requests a 
temporary elimination of the 3-year period bulk or breakbulk 
vessels newly registered under the U.S. flag must wait in order 
to carry Government-impelled cargo.
    This request is almost identical to a measure passed by the 
Committee as part of last year's reauthorization. While in 
general I do not support cargo preferences because of the high 
cost associated with such programs, I hope that agreement could 
be reached on needed reform in this area.
    Current cargo preference law requires that 75 percent of 
U.S. government food aid to foreign countries be shipped under 
U.S. flag vessels. Because of this requirement, and a lack of 
dry bulk vessels under the U.S. flag, Government agencies have 
been forced to use less efficient and more costly vessels to 
ship food aid. According to a recent analysis performed by the 
Food Aid Administration, if just six new bulk ships had been 
available last year, U.S. taxpayers could have saved 
approximately $41 million in transportation of government food 
aid. I hope that Mr. Hart will be able to provide further 
explanation of why this is important not only to taxpayers' 
wallets but also to the health of our fleet.
    The Administration has also requested an extension in the 
statutory deadline for disposal of obsolete vessels in the 
National Defense Reserve fleet. As noted by the DOT Inspector 
General, in a report issued last month, MARAD has scrapped only 
five vessels since 1995 and currently has 115 vessels awaiting 
action.
    Of those 115 vessels, the IG reports that 41 are both an 
environmental hazard and navigational hazard to the waters in 
which they are now moored. Further extensions that allow these 
vessels to remain a threat to these waters must be justified.
    MARAD's inaction in addressing this problem in a timely 
manner is inexcusable. I hope that Mr. Hart and Mr. DeCarli 
both will be able to provide some new insight into the 
difficulties MARAD has faced, and offer recommendations on how 
they be addressed. I am also looking forward to hearing from 
our witnesses on MARAD's oversight of the Title XI loan 
guarantee for the revitalization of Four River Shipyard in 
Quincy, MA.
    As I pointed out in a hearing 2 weeks ago on the Big Dig, I 
am very concerned that the Department of Transportation is 
providing poor oversight of how Federal funds are being spent 
on this project. I understand that the Department of Justice 
continues to investigate certain aspects of the project for 
possible criminal activity, and that the U.S. Attorney in 
Boston has convened a grand jury to hear testimony on criminal 
activity. Until these investigations are completed, I believe 
it may not be possible to get a complete picture of what went 
wrong on the project and how to prevent further loss of 
taxpayer funds, so it may be necessary to hold additional 
hearings. However, I would hope our witnesses will shed light 
on this matter.
    As it stands today, U.S. taxpayers have paid out over $50 
million for this project, yet despite that fact, MARAD does not 
have complete control of the yard due to the bankruptcy filing 
of the project operator, Massachusetts Heavy Industry, and 
MARAD does not have cooperation of State and local agencies in 
their efforts to have the filing set aside so they can proceed 
with foreclosure of the project. This Committee needs an 
explanation for what has occurred at the Quincy shipyard.
    Again, I look forward to hearing from all of today's 
witnesses, and am eager to hear their views on how MARAD is 
operating and what we can do to ensure they continue to support 
our nation's maritime industry.
    Senator Stevens.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona

    Today the Committee meets in order to fulfill its oversight role of 
the U.S. Maritime Administration (MARAD). As MARAD celebrates its 50th 
year, I want thank all MARAD employees, past and present for the 
dedication to our nation's merchant marines. Today we will hear 
testimony from three witnesses on MARAD's past performance as well as 
issues facing its future.
    Our nation's maritime operations face many challenges in the world 
economy. While much of U.S. business and industry has had to make 
adjustments to adapt to new global markets, such is not the case with 
the maritime industry. Maritime transportation has always, by its 
nature, operated in a world market. That is not to say that the U.S. 
maritime industry is not facing changes.
    On the contrary, one just has to look at the number of mergers and 
sales of U.S. carriers over the last 3 years to know the industry is 
undergoing great change, which raises many important questions. Why 
have these companies been sold or merged? Does the sale of the 
companies, in many cases to foreign ownership, impact our national 
security or our national commerce? And most importantly, is our overall 
national policy on maritime issues and the many associated programs 
effective in insuring that our nation has a healthy and innovative 
merchant fleet that is able and available to meet our national security 
and commerce needs.
    I am increasingly concerned that U.S. maritime interests rely too 
much on government programs that create an environment of dependence 
and do not foster investment and risk taking, and on government 
regulations that protect them from real economic competition.
    I am aware that MARAD has revised its methodology in reporting 
maritime ship statistics, thereby increasing the U.S. fleet from 280 in 
1998 to over 37,000 in 1999. But I am not convinced that these larger 
numbers, which represent a wider range of commercial vessels in both 
the domestic and international trade, actually present a clear picture 
of our merchant fleet's viability to meet the needs of national defense 
and commercial base.
     Additionally, with the expiration of the Military Security Program 
(MSP) a few years away, it is time to begin to examine the merits of 
the program and look for ways to improve it. I believe that as part of 
this review, we should take a serious look at overall reform of our 
maritime policy with the goal of formulating a policy that will allow 
our merchant marine industry to grow and prosper in today's market.
    I look forward to hearing from all our witnesses on the status of 
the U.S. fleet and specifically from Admiral Holder on his concerns 
regarding fleet size and the manning of vessels in the Ready Reserve 
Fleet (RRF).
    Additionally, I am very interested in hearing from Mr. Hart on two 
issues raised in the Administration proposal for reauthorization. The 
Administration proposal requests a temporary elimination of the 3-year 
period bulk or breakbulk vessels newly registered under the U.S.-flag 
must wait in order to carry government-impelled cargo.
    This request is almost identical to a measure passed by the 
Committee as part of last year's reauthorization. While in general I do 
not support cargo preferences because of the high costs associated with 
such programs, I hope that agreement could be reached on needed reform 
in this area.
    Current Cargo Preference laws require that 75 percent of U.S. 
Government food aid to foreign countries be shipped on U.S.-flag 
vessels. Because of this requirement and a lack of drybulk vessels 
under the U.S.-flag, government agencies have been forced to use less 
efficient and more costly vessels to ship food aid. According to a 
recent analysis performed by the Maritime Administration, if just six 
new bulk ships had been available last year, U.S. taxpayers could have 
saved approximately $41 million in transportation of government food 
aid. I hope that Mr. Hart will be able to provide further explanation 
of why this is important not only to taxpayers wallets, but also to the 
health of our fleet.
    The Administration has also requested an extension in the statutory 
deadline for disposal of obsolete vessels in the National Defense 
Reserve Fleet (NDRF). As noted by the DOT Inspector General in a report 
issued last month, MARAD has scrapped only five vessels since 1995 and 
currently has 115 vessels awaiting action. Of those 115 vessels, the IG 
reports that 41 are both an environmental hazard and navigational 
hazard to the waters in which they are now moored. Further extensions 
that allow these vessels to remain a threat to our waters must be 
justified.
    MARAD's inaction in addressing this problem in a timely manner is 
inexcusable. I hope that Mr. Hart and Mr. DeCarli both will be able to 
provide some insight into the difficulties MARAD has faced and offer 
recommendations on how they be addressed.
    I am also looking forward to hearing from our witnesses on MARAD's 
oversight of the Title XI loan guarantee for the revitalization of Four 
River Shipyard in Quincy, Massachusetts. As I pointed out in a hearing 
two weeks ago on the Big Dig, I am very concerned that the Department 
of Transportation is providing poor oversight of how federal funds are 
being spent on this project.
    I understand that the Department of Justice continues to 
investigate certain aspects of the project for possible criminal 
activity and that the U.S. Attorney in Boston has convened a grand jury 
to hear testimony on criminal activity. Until these investigations are 
completed, I believe that it may not be possible to get a complete 
picture of what went wrong on the project and how to prevent further 
loss of taxpayer funds so it may be necessary to hold additional 
hearings. However, I would hope our witnesses will shed light on this 
matter.
    As it stands today, U.S. taxpayers have paid out over $50 million 
for this project. Yet despite that fact, MARAD does not have complete 
control of the yard due to the bankruptcy filing of the project 
operator, Massachusetts Heavy Industry, and MARAD does not have the 
cooperation of state and local agencies in their efforts to have the 
filing set aside so they can proceed with foreclosure of the project. 
This Committee needs an explanation for what has occurred at the Quincy 
shipyard.
    Again, I look forward to hearing from all of today's witnesses and 
am eager to hear their views on how MARAD is operating and what we can 
do to insure they continue to support our nation's maritime industry.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Thank you very much, Mr. Chairman. I am 
concerned about the backlog in these applications for loan 
guarantees. It is my information that as of May 9, MARAD had 20 
applications pending for loan guarantees for a variety of 
ships, cargo carriers, barges, et cetera, and I think that may 
well be a bottleneck as far as modernizing this fleet, and I am 
here to hear that testimony.
    Thank you very much.
    The Chairman. Thank you, Senator Stevens.
    I welcome the witnesses, the Honorable Clyde J. Hart, the 
Maritime Administrator, the U.S. Department of Transportation, 
Mr. Raymond J. DeCarli, the Deputy Inspector General of the 
U.S. Department of Transportation, and Vice Admiral Gordon 
Holder, U.S. Navy Commander of Military Sealift Command.
    We would like to begin with you, Mr. Hart. Thank you for 
appearing before the Committee today.
    [The prepared statements of Senators Snowe, Hollings, 
Inouye, and Cleland follow:]

             Prepared Statement of Hon. Olympia J. Snowe, 
                        U.S. Senator from Maine

    Mr. Chairman, I thank you for scheduling this hearing, and I would 
like to speak briefly on the Maritime Administration reauthorization 
and key maritime issues.
    MarAd oversees the operations of U.S. Government-supported maritime 
promotion programs, such as the Maritime Security Program, the State 
maritime academies and the U.S. Merchant Marine Academy. My home State 
of Maine, of course, is a maritime state, and we have a maritime 
academy, the Maine Maritime Academy in Castine, which is very important 
to the state.
    I also have an important shipyard in my state, Bath Iron Works, 
which is the largest employer in the state, so I am very interested in 
the Title XI shipbuilding loan guarantee program. The program makes it 
easier for shipowners and builders to obtain private financing for ship 
construction and fleet improvements in U.S. shipyards.
    Each Title XI dollar generates an estimated $20 in private capital 
for shipbuilding projects. However, only $6 million was appropriated 
for these guarantees in FY 2000 and FY 1999. Many in the maritime 
industry believe that this level is inadequate. Since it was revived in 
1994, the $40 to $50 million-a-year authorization-level program has 
generated over $2.1 billion in new U.S. commercial shipbuilding orders, 
and some 260 vessels have been built.
    In order to remain viable, the shipyards upon which the U.S. Navy 
depends must capture commercial shipbuilding orders if they are to 
survive to meet the expected future demands for Navy shipbuilding. As 
U.S. shipbuilders restructure to capture commercial orders, their first 
market focus is construction of ships for the Jones Act trade. 
Construction of ships for this trade may enable U.S. yards to establish 
a series production so that they can in turn be competitive in building 
ships on the international market.
    My hope is that as the legislative process continues, we can find a 
way to increase the appropriations for the Title XI program.
    I also have serious reservations about a provision in this bill 
that would waive the current cargo preference 3-year waiting period for 
vessels newly re-flagged in the U.S. Current cargo preference law 
reserves most food aid to U.S.-owned, -built, and -crewed vessels. It 
allows the use of foreign built ships for government-impelled cargo, 
such as food aid, but only after a 3-year waiting period.
    I am aware that there has been a significant increase in the amount 
of U.S. food aid--the Administration announced a large allocation of 
food aid for Russia and Indonesia, for example. However, foreign aid 
must not come at the expense of U.S. shipyards and their workers.
    The waiver in this bill would permit U.S. companies to buy foreign 
built ships at rock bottom prices, as a result of the Asian financial 
crisis. Asian shipyards are no doubt more than willing to dump their 
ships on the U.S. market. A similar ``one year'' waiver in 1981 was 
later extended to 5 years and resulted in orders for additional foreign 
built ships, so I would urge caution on this matter.
    In closing, I am hopeful that the Administration and our witness 
panels here today will also comment on what policies or initiatives we 
can consider that will grow and incentivize commercial shipbuilding at 
our nation's major shipyards, including efforts to incentivize the 
development of a domestic cruise industry with cruise vessels built in 
the U.S. by American workers. I am very interested in what Congress can 
do legislatively to encourage the growth of this industry in such a way 
that the benefits, economic and otherwise, accrue to U.S. ports, 
shipyards, and workers.
    Our nation has always been dependent upon the sea and has enjoyed a 
rich maritime tradition. Our merchant marine remains an integral part 
of our culture and our economy. Today, one out of every six jobs in the 
United States is marine related. America's ports support more than 95 
percent of all our overseas foreign trade, and within the U.S., more 
than one billion tons of commercial cargo is transported by ship each 
year. We must do all that we can to preserve our maritime legacy for 
future generations, and programs and issues under MARAD's purview are 
key to this.
    Again, I thank the Chair, and look forward to hearing from our 
witnesses. Thank you, Mr. Chairman.

                               __________

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Mr. Chairman, thank you for holding this hearing today to look into 
the various maritime programs of the Maritime Administration. As you 
know, I am a resident of Charleston, South Carolina, and I have always 
been aware of the importance of our coastal resources, and of our 
maritime trade. Over 95% of our international trade is carried on 
vessels, many of them using ports like Charleston, South Carolina, but 
most Americans are not aware of maritime trade. Most of us do not think 
about the movement of cargo, and I think that it is a testament to the 
efficiency with which the industry moves cargo, and the relative lack 
of disruption caused by their business operations.
    I would like to take this opportunity to formally welcome Clyde J. 
Hart back to this Committee to testify in his capacity as Maritime 
Administrator. As many of you know, Clyde worked here on the Committee 
as our transportation counsel, and while we may have lost out, the 
Maritime Administration has gained a valuable asset to help implement 
maritime policy. Mr. Administrator, you have many difficult chores in 
front of you, but I for one know that you are up to the task.
    Maritime policy is an arcane and difficult area to understand and 
master, but it is very important that the world's sole remaining 
superpower remain competent and self-reliant on our own maritime 
vessels. Even Adam Smith, the great proponent of free trade, identified 
one area that should not be considered under the principles of free 
trade. Here is what Mr. Smith said in his Inquiry into Nature and 
Causes of the Wealth of Nations:

          There seems, however, to be two cases in which it will 
        generally be advantageous to lay some burden upon foreign 
        government for the encouragement of domestic industry. The 
        first is, when some particular sort of industry is necessary 
        for the defence of the country. The defence of Great Britain, 
        for example, depends very much upon the number of its sailors 
        and shipping. The Act of Navigation, therefore, very properly 
        endeavors to give the sailors and shipping of Great Britain the 
        monopoly of the trade of their own country in some cases by 
        absolute prohibitions and in others by heavy burdens upon the 
        shipping of foreign countries.

    The principles espoused by Mr. Smith in this paragraph still hold 
true today. The United States cannot be put in a position of depending 
on foreign nations itself for some important foreign policy objective. 
We cannot say to U.S. troops that supplies and weapons will be on the 
way, in the event that we can charter foreign tonnage.
    I look forward to hearing this morning's testimony, but wanted to 
bring up a couple areas of concern. The first I would like to mention 
is the Title XI loan guarantee program. I support this program, and 
would like it noted that over the history and course of the entire 
program the government has made money while generating public sector 
economic returns.
    Since 1985, after having recovered from over-expansion in oil and 
gas and agriculture, MARAD has guaranteed over $7 billion in ship 
construction and shipyard modernization, of that amount MARAD has only 
had two defaults totaling $56.7 million. During that same time frame, 
MARAD collected $110 million in fees which were deposited in the 
Treasury, and Congress set aside $260.5 million in appropriated funds 
to cover the risk of default. This program helps leverage private 
sector funding, and generates huge returns in the shipbuilding and 
marine supply industry. This is the sort of heavy industry know how 
that we need to maintain a strong industrial base and, as I said, this 
program efficiently utilizes federal resources to stimulate the private 
sector.
    I am also heartened to see Admiral Holder of the Military Sealift 
Command here today. He runs the naval transportation system in supply 
of our armed forces. 
Admiral Holder is the largest user of U.S.-flag vessels, and he is the 
largest employer of civilian mariners. He is going to tell us here 
today that he is getting to the point where he is short of men and 
women capable of working. We need to listen to what he has to say, and 
work to ensure that his concerns do not become a reality.
    I would also like to touch on the area of research for maritime 
transportation. We all talk around here about intermodalism, and about 
the need to eliminate bottlenecks in order to have seamless service, 
and the need to promote policies that foster intermodalism. The 
Secretary of Transportation recognized the need to address this when he 
established the Maritime Transportation System Committee, and chartered 
it to evaluate what needs to be done federally to accommodate the 
projected doubling of trade within the next 20 years. One of the 
primary recommendations from that Committee was to increase research. 
However, according to a recent publication evaluating the Department of 
Transportation's research budget, in FY 2000 we invested $226 million 
in aviation research; $257 in surface transportation; and $22 million 
in rail, but none in maritime. We need to address this disparity, and 
spend some time properly thinking and researching the maritime and 
intermodal problems facing us today, before they affect us tomorrow.
    Thank you, Mr. Chairman.

                               __________

 Prepared Statement of Hon. Daniel K. Inouye, U.S. Senator from Hawaii

    Mr. Chairman, it is with pleasure that we meet here today to 
discuss the Maritime Administration budget for Fiscal Year 2001. This 
Maritime Administration is critical to the continuation of a modern 
commercial fleet owned and operated by U.S. citizens and crewed by 
American seafarers. It also ensures America's economic competitiveness 
and national security. I am especially happy to have Clyde Hart here 
today testifying. As many of you may know, Clyde, in his previous life, 
worked to keep me well staffed, and while I miss him here, I am 
heartened to see him at the helm of the Maritime Administration.
    The Maritime Administration (MARAD) reauthorization continues very 
important programs, and we need to finalize legislation rapidly to 
ensure its inclusion in the Department of Defense Reauthorization 
conference. I would say that I have some concerns about the level of 
funding provided for Title XI loan guarantees. Title XI is a truly 
national and international program. Title XI shipbuilders, their 
operation and their supplier base, cover almost every State in this 
country. Title XI has been vital in assisting our shipyards in 
competing internationally. There are a number of worthwhile projects 
that should not be precluded from being considered by MARAD for lack of 
funds. Not everyone may be aware, but over the entire course of its 
history, Title XI has earned the government money.
    The reauthorization of MARAD will also include the funds for the 
operation of the U.S. Merchant Marine Academy at Kings Point, New York 
and continuing assistance to six State maritime academies. It is my 
understanding that U.S. Merchant Marine Academy is in a state of 
disrepair. We need to make sure the students have the proper facility 
for instruction. The U.S. Merchant Marine Academy may very well be one 
of the best maritime training academies in the world, but we need to 
provide it with the necessary support it needs to flourish. These 
students are the future of our country and our merchant marine.
    This reauthorization should also recognize the importance of the 
merchant marine to our national security by its support for the 
recently enacted Maritime Security Program (MSP), a modern commercial 
fleet available to provide critical support to the Department of 
Defense during war or national emergency.
    This year's reauthorization will also contain provisions which aim 
to strengthen our U.S.-flag fleet through a much needed infusion of new 
tonnage by eliminating the 3-year wait that a newly registered bulk or 
breakbulk vessel must currently wait to carry preference cargo. This 
opportunity, which would end in one year, would not just improve the 
vessel profile of this fleet, but also add U.S. jobs. Vessels allowed 
to enter the preference trade would be required to perform shipyard 
repairs and other work necessary to bring them up to U.S.-flag 
standards in our own U.S. shipyards.
    Mr. Chairman, MARAD's budget should recognize the importance of 
sealift readiness and a strong U.S.-flag fleet. It should acknowledge 
the need for a healthy shipbuilding industry and also provide 
assistance for the education of our youth. I look forward to working 
with you to ensure that it does.
                                 ______
                                 
   Prepared Statement of Hon. Max Cleland, U.S. Senator from Georgia

    Good morning, and thank you for being here today. Administrator 
Hart, I would especially like to welcome you back to the Committee. As 
former Democratic Staff Counsel to the Committee, it is a pleasure to 
have the opportunity to hear your views on matters relating to this 
hearing.
    Let me turn now to a subject of great interest to me. As a member 
of the Armed Services Committee, and as Ranking Member of the Personnel 
Subcommittee, I have spoken at considerable length about the urgent 
need to address our recruitment shortfalls in the military. One of the 
ways I believe we can correct the current situation is by improving 
quality of life. I understand that when the term ``quality of life'' is 
invoked, all too often it is simply idle rhetoric. But, rest assured, I 
am serious about improving the present situation in which our soldiers, 
sailors, airmen, and marines find themselves. If we are to encourage 
our young men and women to consider a career in the armed services, 
they must be assured that their domestic environment is one which will 
suit them well.
    Having said that, I'll get right to the point. I have heard a good 
deal about the current situation of the physical structures, 
particularly the barracks, at the U.S. Merchant Marine Academy at Kings 
Point. I have received letters from concerned parents of Midshipmen who 
are rightly worried about the living conditions for their young sons 
and daughters. I have met with various groups of Kings Point Midshipmen 
who tell me that much of the potable water does not even meet minimum 
EPA safety standards. I have heard from my military academy advisory 
board and members of my staff who have personally visited the Academy. 
They tell me that these problems, in addition to such things as leaking 
roofs, dilapidated furniture, and general infrastructure concerns are 
all too common.
    As you know, Kings Point, in addition to training officers to crew 
our merchant vessels, graduates leaders who enter all branches of our 
armed forces--Navy, Coast Guard, Air Force, Marines, even the Corps of 
Engineers. Many of these billets are filled by young officers who have 
a reputable comprehension of logistics and the know-how to ``get there 
firstest with the mostest.'' As an old Army Air Cavalry officer, I can 
certainly can appreciate this doctrine. And, I believe Admiral Holder 
will share my beliefs not only on the importance of logistics, but also 
regarding the significant role of morale in recruiting and retaining 
our soldiers, sailors, airmen, marines, and support personnel. Your 
views on these issues, Admiral, would be most welcome.
    Administrator Hart, I would be pleased to hear your opinions on the 
current State of the living conditions at the Academy, and I am most 
anxious to hear how the Administration proposes to remedy these 
shortfalls. Again, thank you for appearing before us today, and let me 
say that I truly appreciate your outstanding work. Each of you should 
be commended for a job well done.

 STATEMENT OF HON. CLYDE J. HART, MARITIME ADMINISTRATOR, U.S. 
                  DEPARTMENT OF TRANSPORTATION

    Mr. Hart. Thank you, Mr. Chairman, Senator Stevens. I 
welcome the opportunity to be here today to discuss the 
Maritime Administration's fiscal year 2001 authorization 
request. Full funding of MARAD's budget request will allow the 
agency to address high priority needs such as the renovation of 
the Nation's Merchant Marine Academy, as well as fund our 
ongoing efforts in the Maritime Security Program, shipbuilding, 
the Marine Transportation System Initiative, the National 
Defense Reserve Fleet and Ready Reserve Force, and maritime 
education and training.
    Secretary Slater has made passage of MARAD's authorization 
act for fiscal year 2001 a priority. In fiscal year 2001, we 
request $98.7 million for the Maritime Security Program. The 
request represents payments of approximately $2.1 million each 
to 47 vessels with proven national security capabilities. As of 
January 1, 2000, all of the 47 ships enrolled in MSP were 
participating in the program according to their operating 
agreements with MARAD.
    Authorization for the MSP ends in fiscal year 2005. This 
year, we will conduct an evaluation of the impact of the MSP 
and the Voluntary Intermodal Sealift Agreement on the readiness 
and capability of the commercial transportation system to meet 
national defense needs.
    Revitalization of the nation's shipbuilding continues to be 
an Administration priority. The Title XI guarantee program is 
the centerpiece of our shipbuilding revitalization initiative, 
and has been very successful in stimulating shipbuilding 
activity.
    An authorization request of $2 million would enable MARAD 
to provide loan guarantees of up to $40 million based on a 5-
percent loan subsidy rate. $4.179 million for administrative 
expenses will enable MARAD to manage both existing and new loan 
guarantees.
    I must mention that for the first time in nearly half a 
century, two large ocean-going cruise ships will be built in a 
U.S. shipyard. Title XI loan guarantees of more than $1 billion 
have helped make this project a reality, and we hope will 
launch a new segment of the industry.
    I am aware of your interest in the status of the Quincy 
Shipyard Project. As you know, Massachusetts Heavy Industry 
failed to make two consecutive payments on its guaranteed 
obligations. On February 25 of this year, at the demand of the 
lender, MARAD made a payment for $59.1 million on MHI's 
defaulted loan. MHI subsequently filed for Chapter 11 
bankruptcy, and MARAD is moving to foreclose on the shipyard.
    Let me reassure you that MARAD has worked closely with the 
Department's Office of the Inspector General throughout this 
project. The agency has also kept Members of Congress apprised 
of the status of the Quincy Shipyard reactivation and 
modernization project at all times. It is our goal to see that 
productive use of the shipyard can someday be achieved. 
However, there remain both environmental and financial concerns 
which must be resolved.
    The disposal of obsolete National Defense Reserve Fleet 
vessels remains a priority at MARAD. Currently, 112 vessels in 
the NDRF are slated for scrapping. It is estimated that this 
number will grow to 134 at the beginning of the year 2001 if 
additional vessels are not disposed of. MARAD has sought to 
scrap the vessels in the domestic market, where environmental 
and safety standards are high. Capacity of this market is 
limited. MARAD will be unable to dispose of all of the obsolete 
vessels in the NDRF by its September 30, 2001 deadline. 
Therefore, this year's authorization bill proposes to extend 
the disposal date by 5 years. This will provide MARAD with 
additional time to develop an action plan and begin to dispose 
of this growing number of vessels.
    This year's authorization proposal will also provide a 
limited opportunity for modern, foreign-built bulk and 
breakbulk vessels to register under the U.S. flag and be 
immediately eligible to carry preference cargo in international 
trade. In return, the vessels would perform any shipyard work 
necessary to become a U.S. flag vessel in the United States.
    This amendment could improve the vessel profile of the U.S. 
flag dry bulk and breakbulk fleets, add jobs for U.S. merchant 
mariners capable of crewing sealift ships in a mobilization, 
and increase the percentage of U.S. foreign commerce carried in 
U.S. flag vessels.
    This year's funding request of about $37.2 million for the 
Merchant Marine Academy includes a $3.3 million increase over 
funds appropriated in fiscal year 2000, including mandatory 
Federal salary and related cost increases. The increase will 
fund both operational and capital improvements at the academy, 
as well as enable the academy to improve existing academic and 
administrative programs. An overall facilities master plan is 
under development at the academy and is expected to be 
completed in July.
    In addition to the funding for the Merchant Marine Academy, 
approximately $9.5 million is required for financial assistance 
to the six State maritime academies.
    Congress recognized the importance of the marine 
transportation system, or MTS, when, as part of the Coast Guard 
Authorization Act of 1998, it tasked the Secretary, through 
MARAD and the Coast Guard, to establish a task force to assess 
the adequacy of the nation's MTS to operate in a safe, 
effective, secure, and environmentally sound manner.
    Last September, Secretary Slater released a report to 
Congress entitled, ``An Assessment of the U.S. Marine 
Transportation System.'' Representing an intense joint effort 
by industry, other maritime partners, and Government, the 
report will serve as a blueprint for the future of our MTS.
    The first MTS council, comprised of representatives from 31 
non-Federal organizations, will take place next week on May 24. 
Secretary Slater, Admiral Loy and I welcome the opportunity to 
provide leadership in this initiative, and we take this 
responsibility very seriously. America's marine transportation 
system has always delivered the goods, and we intend to help 
make sure that this tradition continues.
    Among the ongoing efforts at MARAD is the assessment of the 
supply of mariners to meet commercial and mobilization crewing 
requirements, now and in the future. MARAD is hearing of 
recruitment and retention problems in the seagoing work force, 
just as every industry is facing labor shortages in this 
vibrant economy.
    Based on our analysis of maritime data, there are enough 
qualified active seafarers to crew the DOD organic fleet for a 
short 
duration, but however, an extended mobilization of the entire 
Government-owned surge fleet would create pressure to rotate 
Government and commercial ship crews, by augmenting the pool 
with inactive mariners.
    There is likely to be a mismatch between available mariners 
and the specific skills needed to fully activate the DOD 
organic fleet. We are also concerned that shoreside commitments 
of some of the inactive mariners, such as work and family, may 
also keep them from volunteering to serve, even with 
reemployment rights. These uncertainties concern us.
    Mr. Chairman, I would like to report that one of your 
initiatives is now up and running at MARAD. The administrative 
waiver process of the U.S.-build requirements contained in the 
Passenger Vessel Services Act for small vessels, which was part 
of the Coast Guard Authorization Act of 1998, has been 
implemented.
    Final regulations were published in the Federal Register on 
February 11, 2000. We have received 15 applications to date, 
and three applications have been approved, with many others 
close to completion.
    That concludes my prepared statement. I would be happy to 
address any questions you may have.
    [The prepared statement of Mr. Hart follows:]

   Prepared Statement of Clyde J. Hart, Jr., Maritime Administrator, 
                   U.S. Department of Transportation

    Mr. Chairman and Members of the Committee:
    I welcome the opportunity to be here today to discuss the Maritime 
Administration's (MARAD's) Fiscal Year 2001 authorization request. I 
know that I do not need to tell you that MARAD is committed to U.S. 
merchant mariners and our maritime industry. The U.S.-flag merchant 
marine and the domestic maritime industry perform yeoman service for 
America at an affordable price. They deliver a cornucopia of goods to 
and from foreign markets. In war or crisis, they have a proven track 
record of responding professionally, often in dangerous environments, 
to the critical needs of our U.S. armed forces. America's preeminence 
in economic and military affairs has been bolstered in no small part by 
this industry. May 25th marks the 50th anniversary of MARAD as an 
executive agency. All who have had the privilege to serve here over the 
years are determined that this year be one that will long be 
remembered.
    Full funding of MARAD's budget request will allow the agency to 
address high priority needs--such as the renovation of the Nation's 
Merchant Marine Academy, as well as fund our ongoing efforts in the 
Maritime Security Program (MSP), shipbuilding, the Marine 
Transportation System Initiative, the National Defense Reserve Fleet 
and Ready Reserve Force, cargo preference, and maritime education and 
training. The proposal would also provide MARAD with necessary time to 
develop a plan to dispose of obsolete government vessels. As a former 
staff counsel on this committee, I recognize the inevitable competing 
demands for scarce resources. However, we at MARAD strongly believe 
that every dollar requested is needed. This budget request in the first 
year of the new century will be viewed as an indication of what the 
future holds for this industry. Secretary Slater and I have made 
passage of the MARAD Authorization Act for fiscal year 2001 a priority.
    I will now summarize our fiscal year 2001 budget request and note 
for the committee the contributions and progress of MARAD programs 
during the past year.

Maritime Security Program

    The Maritime Security Act of 1996 established a Maritime Security 
Program (MSP) with the goal to ensure the continued presence of a fleet 
of U.S.-flag vessels engaged in international trade, that is also able 
to meet national security sealift requirements in times of war or 
national emergency. In fiscal year 2001, we request a total of $98.7 
million for MSP payments. The request represents payments of 
approximately $2.1 million each to 47 vessels with proven national 
security capabilities.
    As of January 1, 2000, all of the 47 ships enrolled in MSP were 
participating in the program according to their operating agreements 
with MARAD. The MSP continues to be a truly innovative program--at 
about half the cost per vessel of the Operating-Differential Subsidy 
program it replaced. MSP operators, through participation in the 
Voluntary Intermodal Sealift Agreement (VISA) program, make not only 
each participating vessel, but their state-of-the-art intermodal 
transportation system, available to the Department of Defense (DOD) for 
sealift support. This program provides essential support to DOD as the 
military increasingly relies on the commercial transportation industry 
for logistics capability. The MSP is a shining example of successful 
partnering between the Government and the private sector.
    Mr. Chairman, as you know, authorization for the MSP ends in fiscal 
year 2005. During fiscal year 2000, we will conduct an evaluation of 
the impact of the MSP and VISA programs on MARAD and DOT national 
security goals of increasing the readiness and the capability of the 
commercial transportation system to meet national defense needs. This 
evaluation is being undertaken as part of our commitment to the 
Government Performance and Results Act.

Shipbuilding

    Revitalization of the nation's shipbuilding continues to be an 
Administration priority. The Maritime Guaranteed Loan, or Title XI, 
Program is the centerpiece of our shipbuilding revitalization 
initiative, and has been very successful in stimulating shipbuilding 
activity. Title XI loan guarantees enable ship owners and U.S. 
shipyards to borrow private sector funds on more favorable terms than 
might otherwise be available. Government funds are obligated to offset 
the credit risk of loan guarantees and for administrative costs. Since 
1993, shipyard construction and shipyard modernization projects costing 
approximately $6 billion have been approved by MARAD. An authorization 
request of $2 million for the cost of loan guarantee commitments would 
enable MARAD to provide loan guarantees of up to $40 million based on a 
5 percent loan subsidy rate. A carryover of amounts previously 
authorized for loan guarantees into fiscal year 2001 will allow for an 
appropriate level of loan guarantees. The $4.179 million request for 
administrative expenses will enable MARAD to manage both the existing 
portfolio of loan guarantees and new guarantees.
    Thanks to Title XI funding, 11 new state-of-the-art double hull 
tankers have been delivered from U.S. shipyards since enactment of the 
shipbuilding revitalization initiative in 1993. These deliveries marked 
the first time that an ocean-going petroleum tanker had been built in 
the United States in over a decade, and the first ever deliveries of 
commercial double hull tankers in this country. Title XI financing has 
also been instrumental in the construction of numerous double-hull tank 
barges being utilized on the inland and coastal waterways.
    This past year, more advances in modern American shipbuilding have 
been achieved by the Title XI program. In April 1999, Secretary Slater 
announced that two large ocean-going cruise ships will be built in the 
United States for the American Classic Voyages Company--the first time 
in nearly a half century that large, ocean-going cruise ships will be 
built in an American shipyard. The vessels are designed to embrace the 
amenities of modern cruise ship luxury, safeguard the environment and 
will carry up to 1,900 passengers each. This design was a direct result 
of a MARAD administered project under the now terminated MARITECH 
program. Construction is scheduled to begin sometime this year. Title 
XI loan guarantees of more than $1 billion have helped make this 
project a reality and, we hope, will help to launch a new segment of 
the industry. MARAD's Capital Construction Fund (CCF) Program has also 
made significant contributions to U.S. shipyard activity, such as 
facilitating the construction of three double-hull tankers for ARCO 
Marine in Louisiana, and two roll on/roll off (RO/RO) vessels for 
Saltchuk Resources at NASSCO.
    Mr. Chairman, I am aware of your interest in the status of the 
Quincy Shipyard Project. As you know, in 1995, Massachusetts Heavy 
Industry, Inc. (MHI) approached MARAD regarding a Title XI loan 
guarantee to reactivate and modernize the Quincy Shipyard. MARAD 
determined that MHI would be unable to demonstrate the economic 
soundness necessary to secure a Title XI loan guarantee. Public Law 
104-324, the Coast Guard Authorization Act of 1996, directed the 
Secretary to waive the Title XI requirements for economic soundness. 
Pursuant to that authority, on November 1, 1996, MHI received approval 
for a loan guarantee in the amount of $55 million to reactivate and 
modernize the shipyard. As required by the legislation, MARAD protected 
its security position to the maximum extent possible by obtaining a 
first mortgage, instituting strict escrow fund disbursal procedures, 
and entering into a favorable intercreditor agreement.
    MHI missed a regularly scheduled $1.55 million debt service payment 
on June 1, 1999. Upon its request and the concurrence of the lending 
institution, Fleet Bank, MARAD deferred the payment until December 1, 
1999. However, on December 1, 1999, MHI missed its second consecutive 
regularly scheduled payment of $2.1 million on the guaranteed 
obligations, as well as the payment owed from June 1st.
    MARAD and MHI had continuing discussions in an attempt to provide a 
funding mechanism for the December 1, 1999 payment, at the urging of 
Fleet Bank. MARAD extended until late February 2000 the date on which 
this payment could be made to give MHI the fullest opportunity possible 
to make those payments. However, MHI was unable to obtain the necessary 
financing--in a form acceptable to MARAD--to make this payment or to 
complete the shipyard without substantially impairing MARAD's security 
and increasing MARAD's liability under the loan guarantee. Thus, a 
demand for payment under the Title XI guarantee was made to MARAD by 
the lending institution. On February 25, 2000, the agency honored this 
demand by making a payment for $59.1 million on the defaulted loan, 
which was the principal amount plus accrued interest. MHI subsequently 
filed for Chapter 11 bankruptcy protection and MARAD is moving to 
foreclose on the shipyard.
    Mr. Chairman, let me reassure you once again, MARAD has worked 
closely with the Department's Office of the Inspector General (DOT IG) 
throughout this project. On September 15, 1999, the DOT IG recommended 
that, until it was clear whether the surety would act under its 
performance bond, MARAD freeze funds contained in the escrow fund 
established to pay for the reactivation. MARAD subsequently froze the 
escrow funds and work at the shipyard, which had been halted in August, 
was never resumed as a result of MHI's contract dispute with its 
general contractor. These funds, approximately $12 million, were used 
to offset MARAD's February 25, 000 payment on the loan guarantee, 
thereby reducing our initial losses. At all times, MARAD kept Members 
of Congress with an interest apprised of the status of the Quincy 
Shipyard reactivation and modernization project.
    Mr. Chairman and Members of the Committee, it is our goal to see 
that productive use of the shipyard can someday be achieved. However, 
there remain both environmental and financial concerns which must be 
resolved through court proceedings.

The National Defense Reserve Fleet and the Ready Reserve Force

    The National Defense Reserve Fleet (NDRF) was established in 1946 
in order to meet reserve sealift requirements for national defense 
purposes. NDRF vessels are located at three major sites: James River, 
Virginia; Beaumont, Texas; and Suisun Bay, California. There are 
currently 257 ships in the NDRF, 90 of which comprise the Ready Reserve 
Force (RRF). RRF ships are maintained in various states of readiness, 
and can sail in either 4, 5, 10, 20 or 30 days. The majority of RRF 
ships are outported to various locations throughout the country in 
proximity with likely loadout ports established by the Department of 
Defense.
    When activated, RRF ships are fully crewed by civilian merchant 
mariners working to support DOD missions. From the time of the 
Revolutionary War to the present, the American merchant marine has 
always played a critical role in the protection of U.S. interests. The 
tradition continues today. MARAD's RRF ships played a critical role 
during the Gulf War, and have been used to provide assistance during 
crises in Somalia, Haiti, Bosnia, and hurricane- ravaged Central 
America. Four RRF ships are currently deployed as part of DOD's 
prepositioned forces to respond quickly to regional conflicts 
throughout the world.

Ship Scrapping

    Some NDRF vessels remain idle at Reserve Fleet sites because they 
are beyond their useful lives. Currently, 112 vessels in the NDRF have 
been determined to be obsolete and are slated for scrapping. It is 
estimated that the inventory of obsolete vessels will increase to 134 
at the beginning of the year 2001 if additional vessels are not 
disposed of.
    MARAD's primary means of disposing of obsolete vessels has been to 
sell them for scrapping. Under the National Maritime Heritage Act of 
1994, the agency is required to dispose of obsolete vessels in the NDRF 
by September 30, 2001, in a manner that maximizes financial return to 
the United States. However, since 1995, MARAD has refrained from 
scrapping obsolete NDRF vessels overseas due to concerns about the 
environment and worker health and safety at the foreign scrap sites. 
Although MARAD has sought to scrap the vessels in the domestic market, 
where environmental and safety standards are high, the capacity of this 
market is limited. Moreover, the Department of the Navy, which is 
responsible for the disposal of obsolete combatant vessels, has 
initiated a pilot program to pay for the costs of disposing of its 
obsolete vessels. MARAD has been reviewing bids and performing 
increased contract monitoring and oversight. Between 1987 and 1994, 130 
vessels were sold to foreign scrappers for $108/ton, but only 10 
vessels were awarded to be scrapped domestically in 1997-98 at an 
average of $4.60/ton. Last year, 12 vessels were awarded for only 27 
cents per ton and three vessels were sold for $10 each, to be scrapped 
domestically. Many of the vessels that were sold domestically have not 
been picked up by the buyers. One sales agreement for five vessels was 
terminated last year because the purchaser did not take possession of 
the vessels.
    MARAD will be unable to dispose of all of the obsolete vessels in 
the NDRF by the September 30, 2001 deadline. Therefore, this year's 
authorization bill proposes to extend the disposal date by 5 years to 
September 30, 2006. This extension will provide MARAD with additional 
time to develop an action plan and begin implementation of the plan to 
dispose of this growing number of vessels, given current scrapping 
conditions. The objective we all work to accomplish is to scrap vessels 
in an environmentally sound and economically reasonable manner.
    I am sure that you are aware that about 40 NDRF vessels--containing 
PCBs (polychlorinated biphenyls), asbestos, fuel oil and other 
hazardous substances--are in extremely poor condition. These ships are 
monitored closely by MARAD to prevent sinking or a hazardous discharge. 
Nevertheless, they continue to deteriorate. To date, the Department of 
Defense has provided the necessary resources to ensure that no 
environmental damage occurs.

Cargo Preference

    U.S. cargo preference laws are an important part of the overall 
statutory program to support the privately owned and operated U.S.-flag 
merchant marine. These laws require that a certain percentage of 
Government- impelled cargo be carried on U.S.-flag vessels. By 
guaranteeing the availability of cargo to U.S.-flag ships, these laws 
are important to the financial viability of U.S.-flag vessel operating 
companies. The laws ensure that the vessels, trained crews, and vessel 
service industries continue to be available to support our nation's 
economic and national security. The laws also help protect our ocean 
commerce from domination by foreign companies, many of which enjoy 
significant tax breaks and direct subsidies. Monitoring compliance with 
the U.S. cargo preference laws is essential in encouraging other 
Federal agencies to maximize the use of U.S.- flag vessels. MARAD 
provides an annual report to Congress on the level of compliance among 
other Federal agencies, and is currently updating its cargo preference 
regulations.
    This year's authorization proposal contains a provision that was 
also contained in our Fiscal Year 2000 proposal, to establish a 1-year 
waiver of the ``three year rule'' which mandates that foreign-built 
vessels brought under the U.S. flag must wait 3 years before carrying 
food aid preference cargoes. The proposed amendment provides a limited 
opportunity for modern, foreign-built bulk and break bulk vessels to 
register under the U.S.-flag and be immediately eligible to carry 
preference cargo in international trade. In return, the vessels must 
have any additional shipyard work necessary to become U.S.-flagged 
performed in the United States. The vessels would not be granted pre-
approval to leave U.S. registry under section 9(e) of the Shipping Act, 
1916, or be entitled to any benefit of the Capital Construction Fund, 
under section 607 of the 1936 Act.
    We expect food aid programs for Russia, North Korea, and the 
Administration's recently announced Section 416(b) program, to generate 
about 5.2 million metric tons of bulk grain shipments this year, 
including the normal flow of aid cargoes to other countries. The 
existing U.S.-flag drybulk capacity may not be able to meet the 
anticipated need. The waiver would help to ensure that there are enough 
U.S.-flag vessels to carry 75 percent of the food aid to these 
countries, as required by law.
    Most importantly, this amendment could improve the vessel profile 
of the U.S.-flag drybulk and breakbulk fleets, add jobs for U.S. 
merchant mariners capable of crewing sealift ships in a mobilization, 
and increase the percentage of U.S. foreign commerce carried in U.S.-
flag vessels. Additional modern vessels in the U.S.-flag fleet also 
would increase the competition for carriage of government-impelled 
cargoes. This could result in substantial cost savings to the U.S. 
Government. Because these vessels would only be eligible for foreign 
trade, this proposal has no impact on the Administration's firm 
commitment to the U. S.-build requirement of the Jones Act. Foreign-
built vessels have always been eligible to carry preference cargo after 
being registered for 3 years as a U.S.-flag vessel.
    We also propose changing the cargo preference year for determining 
compliance so that it coincides with the Federal Government fiscal 
year. This would simplify record keeping and management of the program 
without impact on any involved agencies or shippers. Parties affected 
by the change have expressed support for the change.

Maritime Education and Training

    A significant portion of MARAD's budget request is intended for 
ongoing maritime education and training activities. Our request for 
operations and training funds includes approximately $37.2 million to 
operate the U.S. Merchant Marine Academy at Kings Point, NY. The 
Merchant Marine Academy offers a 4-year undergraduate program that 
leads to a Bachelor of Science Degree, and a merchant marine license as 
a Third Mate or Third Assistant Engineer, or a dual license. In 
addition, the students are enrolled as midshipmen and are commissioned 
upon graduation as Ensigns in the U.S. Naval Reserve. The Academy's 
significance as a world-renowned institution of maritime education 
cannot be overestimated. Not only does the Academy produce highly 
qualified officers for the merchant marine, but it is also the largest 
single source of inactive duty Naval Reserve Officers. In peacetime, 
Academy graduates create and operate efficient, cost-effective marine 
transportation systems. In times of conflict, Academy graduates crew 
the ships that support our troops.
    This year's funding request of about $37.2 million for the Academy 
includes a $3.3 million increase over funds appropriated in fiscal year 
2000, including mandatory Federal salary and related cost increases. 
The increase will fund both operational and capital improvements at the 
Academy. The increase for operational improvements, approximately $1 
million, will enable the Academy to improve existing academic and 
administrative programs, the costs of which have escalated due to 
contractual manpower and equipment/supplies cost increases. The 
remainder of the program increase requested is designated for capital 
improvements to address a serious maintenance backlog at the Academy's 
facilities. Because the condition of the utility systems in Academy 
buildings affects the health and safety of the students, faculty and 
staff, these repairs are a priority. An overall facilities master plan 
is under development at the Academy, and is expected to be completed in 
July.
    In addition to the funding for the Merchant Marine Academy, 
approximately $9.5 million is requested for financial assistance to the 
six State maritime academies. The State academies, like the Merchant 
Marine Academy, offer training for qualified individuals to become 
officers in the U.S. merchant marine. A portion of the requested 
funding will support the Student Incentive Payment (SIP) Program at the 
State academies, which results in a service obligation to the maritime 
industry and the Armed Forces reserves for the recipients. The request 
will also fund the costs of maintenance and repair for MARAD ships on 
loan to the State academies as training ships. Approximately $2.5 
million is needed to renovate the New York Maritime Academy's aging 
training ship, the Empire State.

Marine Transportation System Initiative

    Today, over two billion tons of goods produced or consumed in the 
United States move through our nation's ports and waterways. This 
volume is expected to more than double over the next 20 years. The 
number of recreational users is also expected to grow by over 65 
percent to more than 130 million annually in the next 20 years, and 
high-speed ferry transportation is experiencing rapid growth in 
response to land-transport congestion. Cruise ships anticipate 
attracting 6.5 million passengers by the year 2002. Military reliance 
on the Marine Transportation System (MTS) for force projection and 
sustainment is also expected to grow in the new millenium.
    Congress recognized the importance of the Marine Transportation 
System (MTS) when, as part of the Coast Guard Authorization Act of 
1998, it tasked the Secretary--through MARAD and the Coast Guard--to 
establish a task force to assess the adequacy of the nation's MTS to 
operate in a safe, effective, secure and environmentally sound manner. 
The MTS initiative was launched by Secretary Slater nearly 2 years ago. 
Last September, the Secretary released a report to Congress entitled An 
Assessment of the U.S. Marine Transportation System, representing an 
intense joint effort by industry and Government. Secretary Slater has 
made it clear that the report will serve as the ``blueprint'' for the 
future of our MTS. On January 13, 2000, MARAD announced the 
establishment of the Marine Transportation System National Advisory 
Council (MTSNAC). The charter for the Council became effective January 
28, 2000. The MTSNAC will advise the Secretary of Transportation, 
through MARAD, on current and future matters relating to the MTS--
waterways, ports, and their intermodal connections. The MTSNAC will 
address: strategies to ensure a safe, environmentally sound, and secure 
MTS that improves the global competitiveness and national security of 
the United States; issues and concerns raised by the marine 
transportation industry; and other matters at the Secretary's request.
    The Council will be composed of representatives from approximately 
31 non-Federal organizations, representing a cross section of the 
diverse components that comprise the MTS, including private sector 
organizations and State and local public entities. The individual non-
Federal participants have been nominated by their organizations. The 
first Council meeting will take place next week on May 24th.
    MARAD welcomes its continued leadership in this initiative, and we 
take our responsibility very seriously. We look forward to continuing 
our partnership with the U.S. Coast Guard and others involved in this 
important effort. America's marine transportation system has always 
delivered the goods and we intend to help make sure that this tradition 
continues.

Manpower Needs

    Among the ongoing efforts at MARAD is the assessment of the supply 
of mariners to meet commercial and mobilization crewing requirements, 
now and in the future. Right now, MARAD is seeing and hearing of 
recruitment and retention problems in the seagoing workforce, just as 
every industry is facing labor shortages in this vibrant economy. Based 
on our analysis of mariner data, there are enough qualified active 
seafarers to crew the DOD organic fleet for a short duration, but this 
could dry up much of the pool. An extended mobilization of the entire 
government-owned surge fleet would create pressure to rotate government 
and commercial ship crews, by augmenting the pool with inactive 
mariners. There is likely to be a mismatch between available mariners 
and the specific skills needed to fully activate the DOD organic fleet. 
We are also concerned that shoreside commitments of some of the 
inactive mariners--such as work and family--may keep them from 
volunteering to serve, even with re-employment rights. These 
uncertainties concern us.
American Fisheries Act

    The American Fisheries Act of 1998 (PL 105-277) assigned MARAD the 
responsibility to ensure that proper citizenship standards are adhered 
to for ownership of fishing vessels 100 feet or greater. New 
regulations will require us to rigorously scrutinize transfers of 
ownership or control, with particular attention to leases, charters, 
mortgages, and financing arrangements for fishing vessels.
    The final rule to implement the new citizenship requirements of the 
American Fisheries Act is currently in clearance within the Department 
of Transportation and will be forwarded to the Office of Management and 
Budget shortly. Because of the complexity of the issues involved, 
additional time was required to complete the final rule, which we 
expect to publish in the Federal Register in early June.

Administrative Waivers of the Coastwise Laws for Small Passenger 
Vessels

    Mr. Chairman, I would like to report that one of your own 
initiatives is now up and running at MARAD--the administrative process 
for waiver of the U.S.-build requirement contained in the Passenger 
Vessel Services Act for small vessels, which was part of the Coast 
Guard Authorization Act of 1998. Under this provision, MARAD is charged 
with establishing and administering a waiver process that allows 
vessels carrying less than 12 passengers to engage in coastwise 
transportation. Waivers are available to qualified vessels so long as 
the intended employment of the vessel would not harm the domestic boat 
building industry or the existing business of any domestically built 
vessel.
    Final regulations were published in the Federal Register on 
February 11, 2000. We have received 15 applications to date, and three 
applications have been approved with many others close to completion. 
We expect to receive about fifty applications each year. We are pleased 
to have been selected to administer this program. It offers a fair 
alternative to small vessel owners who might otherwise be prohibited 
from employing their vessels in coastwise transportation.

Conclusion

    Mr. Chairman, the successes that MARAD can claim to date did not 
come without help. Committee Members and staff have determined not only 
the amounts of our authorizations, but also how we conduct business. I 
noted earlier that the year 2000 represents a special one for us, a 
year in which we not only wish to celebrate accomplishments but to 
reach out as never before to industry and Congress. If we are to create 
the domestic maritime industry that will embody the MTS vision 
statement in our report to Congress last September, we need your 
continued support. We at MARAD welcome the responsibilities and 
challenges that have been given to us and pledge our determination to 
meet those duties fully as stewards of the public's trust.
    This concludes my prepared statement. I would be happy to address 
any questions you may have at this time.

    The Chairman. Thank you very much, Mr. Hart. 
Mr. DeCarli, welcome back.

STATEMENT OF RAYMOND J. DeCARLI, DEPUTY INSPECTOR GENERAL, U.S. 
                  DEPARTMENT OF TRANSPORTATION

    Mr. DeCarli. Good morning, Mr. Chairman, Senator Stevens, 
Senator Kerry. We appreciate the opportunity to be here today 
to discuss the reauthorization of the Maritime Administration. 
Our statement today will focus on three issues.
    First of all, we will discuss the approval and subsequent 
default of the Title XI loan guarantee to Massachusetts Heavy 
Industries to rebuild the Quincy Shipyard, then we will talk 
about MARAD's growing inventory of obsolete vessels and actions 
needed to scrap them, then finally we will talk about the need 
for improved controls related to the administration of 
contracts for maintaining the Ready Reserve Force fleet.
    Let me begin with the Quincy Shipyard, but before we begin 
the discussion I think it is important to point out that the 
loan guarantee to MHI is not a good example of MARAD's Title XI 
program. Of the approximately $7 billion in Title XI loan 
guarantees that MARAD has made since 1985, there has been only 
two defaults, a vessel for $1.7 million, and the MHI loan.
    The goal of the Quincy Shipyard project was to bring the 
once-prominent shipbuilding industry back to Massachusetts. 
Obviously, this was a noble objective to help rebuild the 
nation's shipbuilding capacity and bring jobs back to the 
Quincy area.
    In 1995, MHI first applied for a $55 million loan 
guarantee. Under existing regulations, MARAD was required to 
ensure the economic soundness of the MHI project prior to its 
approval. In other words, Mr. Chairman, MARAD had to see that 
the MHI could produce income necessary to repay that loan. The 
loan guarantee request could not pass that test, and MARAD 
rejected it at that time.
    The following year, Congress passed a temporary amendment 
waiving the Title XI economic soundness requirement for closed 
shipyards. As a result, MARAD could not apply the repayment 
test and MHI's loan guarantee request was approved at that 
time. From the time that the guarantee was approved until the 
default, MARAD took appropriate actions to protect the 
Government's interests, and that was one of the requirements in 
the legislation.
    Prior to closing on the loan, MARAD identified 28 
significant requirements MHI had to complete, and there were 
several important requirements in there. First of all, MHI had 
to give a first priority lien of all assets to the Secretary of 
Transportation, and then MARAD had to exercise control over all 
loan disbursements in an escrow account. When it became 
apparent that MHI did not have the resources to make its future 
payments, once again MARAD acted. MARAD froze the balance in 
the escrow account, protecting the remaining $12 million, and 
then conducted an inventory of all assets at the shipyard.
    In January of this year, after MHI missed its December 
payment, the bank made a payment demand on the loan guarantee. 
MARAD paid $59 million to settle the guarantee. The ultimate 
loss to the Government as it stands right now would be about 
$40 million less whatever amount is recovered through the 
liquidation process. The pay-off amount of $59 million is 
offset by the $12 million that was left in the escrow account, 
the $6.6 million subsidy that was provided by the State of 
Massachusetts, and the $2.6 million loan guarantee fee paid by 
MHI. Future decisions on where this ends up will be dictated by 
decisions made in the bankruptcy court.
    Let me turn now to the ship-scrapping area. MARAD currently 
has 114 obsolete vessels awaiting disposal, and by the end of 
2001 expects to have about 155 vessels. The chart in front of 
you illustrates the growth trend that exists. MARAD is under a 
legislative mandate to dispose of its obsolete vessels by 
September 30, 2001. It is required also to do this in a manner 
that yields financial benefits, and some of that money goes to 
the academy and maritime schools.
    MARAD will not meet either of these requirements. 
Environmental dangers associated with MARAD vessels which are 
harbored in Virginia, Texas, and California are serious. The 
ships contain hazardous materials such as PCBs, asbestos, lead 
paint, and fuel oil. Some vessels have deteriorated to the 
point where a hammer can penetrate the hulls.
    The picture we are about to put up shows one of those 
ships. This is the 56-year-old Mission Ynez that is at Suisun 
Bay, CA. This ship has been awaiting disposal for 25 years. It 
has holes in the topside deck. The transformers contain PCBs. 
It is covered with lead-based paint.
    From 1991 to 1994, 80 ships were scrapped overseas. The 
ships were sold at an average price of about $435,000. MARAD 
stopped selling ships overseas for scrapping in 1994 due to EPA 
restrictions. Since then, MARAD had been relying on the 
domestic scrapping market, and quite frankly that has not 
worked.
    As you can see from the chart, that we are displaying now, 
few ships have been scrapped since 1994. Proceeds from sales 
have dropped dramatically, and in the United States, ships are 
sold for about $100, and what is even more important besides 
the low prices, there are few companies that are interested in 
buying these ships.
    The current approach for selling vessels for domestic 
scrapping does not work. Today the Navy is paying contractors 
to scrap fleet warships, while MARAD is asking contractors to 
pay to scrap its vessels. Furthermore, domestic scrapping 
capacity is very limited.
    We recently recommended that the Maritime Administrator 
seek legislative approval to obtain an extension on the 
disposal mandate and eliminate the requirement for financial 
returns on vessel sales. We also recommended that MARAD develop 
a proposal seeking authority and funding to pay contractors to 
scrap vessels and target the ``worst condition'' vessels for 
priority disposal.
    In its authorization request for 2001, MARAD proposed a 5-
year extension to develop and implement a plan to dispose of 
these vessels. In our opinion, Mr. Chairman, the MARAD proposal 
to begin disposal within 5 years is unacceptable. Considering 
the condition of the vessels, the environmental risks, and the 
cost to maintain them, the legislation should require more. It 
should not only require MARAD to develop a disposal plan, but 
require complete or substantial disposal of all the vessels 
within the 5-year period.
    Let me turn last to internal controls over the maintenance 
contracts for Ready Reserve vessels. For the past several 
years, we have been participating with the FBI in a law 
enforcement effort. That investigation has focused on bribery, 
fraud, and kickbacks relating to the maintenance of both 
military sealift command ships and Ready Reserve fleet vessels.
    In August 1999, the Department of Justice announced 23 
indictments and information as a result of those 
investigations. Two MARAD employees pleaded guilty to accepting 
unlawful gratuities from contractors, and MARAD took action to 
debar or suspend 16 companies and individuals. The MARAD 
actions were quite bold.
    We subsequently performed an audit to evaluate the adequacy 
of MARAD's internal control system for awarding and managing 
its contracts. We found that MARAD had effective policies and 
procedures related to the award of the new ship's contracts. 
However, the administration of those contracts with ship 
managers and general agents needed improvement. MARAD has 
agreed to strengthen its controls for administering the 
contract and now must follow through on the necessary 
corrective action.
    Mr. Chairman, that completes our statement. I would be 
pleased to answer any questions.
    [The prepared statement of Mr. DeCarli follows:]

  Prepared Statement of Raymond J. DeCarli, Deputy Inspector General, 
                   U.S. Department of Transportation

    Mr. Chairman and Members of the Committee:
    We appreciate the opportunity to be here today to discuss the 
reauthorization of the Maritime Administration (MARAD). Our statement 
focuses on three issues:
    (1) The approval and subsequent default on the Title XI loan 
guarantee for the Quincy Shipyard in Massachusetts,
    (2) MARAD's growing inventory of obsolete vessels and actions 
needed to scrap them, and
    (3) The need for improved controls related to the administration of 
contracts for maintaining Ready Reserve Force (RRF) vessels.

Title XI Loan Guarantee to Massachusetts Heavy Industries (MHI)/Quincy 
Shipyard Fails

    Title XI of the Merchant Marine Act of 1936, as amended, 
established the Federal Ship Financing Guarantee Program. Under Title 
XI, businesses secure loans in the private sector, and the U.S. 
Government guarantees repayment in the event of default.
    As of April 2000, Title XI guarantees totaled approximately $4 
billion and covered approximately 81 individual shipowners operating 
600 vessels and 8 shipyard modernization projects. Of the approximate 
$7 billion in Title XI guarantees issued since 1985, MARAD has 
experienced only two defaults--a vessel for $1.7 million, and MHI. The 
goal of the MHI/Quincy Shipyard project was to bring the once prominent 
shipbuilding industry back to Massachusetts.
    On December 19, 1995, MHI submitted an application for a $55 
million loan guarantee to MARAD to reactivate and modernize the former 
Fore River Shipyard in Quincy, Massachusetts. MARAD was required to 
ensure the economic soundness of the loan guarantee application prior 
to its approval. In other words, MARAD had to see that MHI could 
produce the income necessary to repay the loan. Because the application 
did not include any firm shipbuilding contracts, MARAD questioned the 
economic soundness of MHI's proposal and rejected the application.
    As a result of Congressional interest in the MHI/Quincy project, 
the Coast Guard Authorization Act of 1996 contained a provision waiving 
the Title XI economic soundness requirement for reactivation and 
modernization of closed shipyards in the United States. This provision 
was enacted only for one year and expired in 1997. Under this 
provision, MARAD concluded that the MHI application qualified for a 
Title XI loan guarantee. On November 1, 1996, MARAD approved the loan 
guarantee and issued a $55 million letter commitment to MHI.
    Prior to closing on the loan guarantee, MARAD appropriately took a 
number of actions to protect the Government's interest. MARAD 
identified 28 significant requirements for MHI to complete, including 
granting a first priority lien on all assets to the Secretary of 
Transportation and establishing a MARAD-controlled escrow account for 
disbursing the loan.
    In June 1999, MHI missed its scheduled loan payment and asked to 
defer that payment until December 1999. With the lender's concurrence, 
MARAD approved the deferral.
    MHI made progress on the shipyard modernization until August 1999, 
when a dispute arose with the general contractor. MHI had torn down and 
refurbished buildings, purchased and began installing equipment, and 
made repairs to reactivate cranes. Approximately $47 million was spent 
out of the escrow fund to cover these and other expenses. However, the 
shipyard is not operational and considerable work remains to be done. 
The drydocks have not been repaired, equipment is still in crates, and 
machinery has been exposed to the elements. The Environmental 
Protection Agency (EPA) has advised MARAD that there are environmental 
problems in the shipyard that require remediation. MARAD estimates that 
cleanup costs could approach $1 million.
    When it became apparent that MHI did not have the resources to make 
its future loan payments, MARAD again acted to protect the Government's 
interest. In September 1999, MARAD froze the balance in the escrow 
account and conducted an inventory of all assets at the shipyard.
    In January 2000, after MHI missed its December 1999 payment, the 
bank made a payment demand on the loan guarantee. MARAD paid $59.1 
million to settle the guarantee on February 25, 2000. However, the 
ultimate loss to the Government, and, ultimately the taxpayer, will be 
offset by the balance in the loan escrow account ($12 million), the 
original subsidy provided by the State of Massachusetts ($6.6 million 
plus accrued interest), the loan guarantee fees ($2.6 million), and 
whatever amount is recovered through liquidation.
    Although MARAD has a first priority lien, the amount that can be 
recovered through liquidation cannot be determined at this time. First, 
the value of the shipyard and equipment is uncertain so MARAD has 
initiated an independent appraisal. Also, the resolution of MHI's plea 
to reorganize because of bankruptcy could impact MARAD's ability to 
recover additional funds.
    Even before the loan guarantee was approved, this Committee asked 
us to review MARAD's actions to ensure taxpayer interests were 
protected. Since 1997, we have issued four reports related to the loan 
guarantee. Our primary concern throughout has been the absence of any 
firm contracts to build ships once the shipyard is completed. There was 
always a 6-ship foreign deal requiring another MARAD loan guarantee 
dangling as a possibility--but it never materialized and always 
appeared doubtful as a source of future revenue for the shipyard. MARAD 
was responsive to the majority of our recommendations, but stated the 
Congressional directive to waive the economic soundness criteria 
prevented it from acting on our recommendations to require evidence of 
contracts or sources of income.

MARAD's Inventory of Obsolete Vessels Is Growing, A Realistic Disposal 
Plan Is Needed

    MARAD currently has 114 obsolete vessels awaiting disposal that 
require continued maintenance at taxpayer expense. MARAD is under a 
legislative mandate to dispose of its obsolete vessels by 2001 in a 
manner that will yield financial benefits. MARAD will not meet these 
requirements.
    Environmental dangers associated with these old, deteriorating 
ships increase daily. The so-called ``worst condition'' vessels are 
about 50 years old and have been awaiting disposal 22 years on average. 
These vessels contain hazardous materials such as PCBs, asbestos, and 
fuel oil. Some vessels have deteriorated to the point where a hammer 
can penetrate their hulls. In addition, the inventory of obsolete 
vessels awaiting disposal is increasing, and MARAD expects to have 155 
by the end of fiscal year (FY) 2001.
         Vessels Awaiting Disposal at Suisun Bay Reserve Fleet 



      
    MARAD stopped selling vessels overseas for scrapping in 1994 due to 
EPA restrictions. In 1998, the Administration placed a moratorium on 
all sales of vessels for scrapping overseas. Although the moratorium 
expired in October 1999, MARAD has refrained from exporting obsolete 
vessels.
    Since 1995, few vessels have been scrapped because there is limited 
domestic scrapping capacity. Although MARAD sold 22 vessels to domestic 
scrappers, only 7 have been scrapped. Last month two additional vessels 
were towed to scrapping sites. The remaining 13 vessels are still in 
MARAD's Fleet, and recent contractor defaults raise a question as to 
whether these vessels will be removed. This represents a significant 
change from 1991 through 1994 when 80 ships were sold overseas at an 
average price of $433,000 per vessel. Recent sales yielded between $10 
and $105 per vessel.

                         MARAD Vessels Scrapped



    The current approach of selling obsolete vessels for domestic 
scrapping will not work in today's marketplace. MARAD cannot compete 
with a Navy pilot program that is paying contractors to scrap obsolete 
warships while it is asking contractors to pay to scrap its vessels. A 
program similar to the Navy's would require about $500 million to scrap 
the 155 vessels MARAD expects to have for disposal in 2001.
    While MARAD has been pursuing ways to improve scrapping sales, its 
ability to explore creative solutions for disposing of vessels is 
constrained by the requirement to maximize financial returns. Also, the 
programs and alternatives MARAD is pursuing have capacity limitations 
and, therefore, do not have the potential to significantly reduce the 
backlog of vessels in a timely manner. These alternatives include: 
coordinating with the Navy and a west coast company on a proposal for a 
potential scrapping site; participating in interagency work groups to 
look for innovative ways to improve the ship scrapping process; and 
requesting approval from EPA to sell vessels to overseas markets.
    We recently recommended that the Maritime Administrator seek 
legislative approval to obtain an extension on the disposal mandate and 
eliminate the requirement to gain financial returns on vessel sales. We 
also recommended that MARAD develop a proposal seeking authority and 
funding to pay contractors to scrap vessels, and target the ``worst 
condition'' vessels for priority disposal.
    In its authorization request for FY 2001, MARAD proposed a 5-year 
extension ``to develop and begin implementing a plan to dispose of 
these vessels.'' We do not believe it is acceptable to begin disposal 
within five years considering the condition of some of the vessels, the 
environmental risks, and the costs to maintain them. In our opinion, 
the legislation should require MARAD to develop a disposal plan and 
substantially dispose of these vessels within 5 years.

Internal Controls Over Maintenance Contracts for RRF Vessels Need to Be 
Strengthened

    Since 1996, we have participated in a joint law enforcement task 
force led by the FBI. The task force investigated bribery, fraud, and 
kickbacks involving contracts for vessels in the Military Sealift 
Command and MARAD's Ready Reserve Fleet.
    In August 1999, the Department of Justice announced 23 indictments 
and informations, as a result of the investigation. Two MARAD employees 
pleaded guilty to accepting unlawful gratuities from contractors, and 
MARAD and the Navy took action to debar or suspend 22 companies and 
individuals.
    In light of the problems identified in the investigation, we 
reviewed MARAD's internal controls for the ship manager program. We 
found that MARAD implemented effective policies and procedures relating 
to the award of the ship managers' contracts. However, the 
administration of these contracts and those covering general agents 
needed improvement.
    Specifically MARAD:
     Advanced $63 million to general agents without supporting 
documentation that costs were incurred,
     Allowed ship manager contractors to issue numerous 
noncompetitive subcontracts without required documentation, and
     Did not consistently ensure payments were for actual costs 
incurred and were related to the work performed.
    MARAD agreed to strengthen its controls for administering ship 
managers' contracts. MARAD officials must now follow through on the 
actions they agreed to take.

Title XI Loan Guarantee to Massachusetts Heavy Industries (MHI)/Quincy 
Shipyard Fails

    Title XI of the Merchant Marine Act of 1936 (as amended) authorizes 
the Secretary of Transportation to make loan guarantees to finance the 
construction, reconstruction, or reconditioning of eligible export 
vessels and the modernization and improvement of shipyards. Under this 
Title XI program, which is administered by MARAD, businesses secure 
loans in the private sector, and repayment is guaranteed by the U.S. 
Government. One of the criteria for eligibility for most loan 
guarantees is that the applicant's proposed project be economically 
sound.
Original Modernization Proposal Did Not Meet Title XI Criteria
    On December 19, 1995, MHI submitted to MARAD an application for a 
loan guarantee of $55 million to reactivate and modernize the closed 
Fore River Shipyard located in Quincy, Massachusetts. The shipyard 
historically built military vessels, and MHI was seeking to reactivate 
it as an internationally competitive commercial shipyard. Because MHI's 
proposal did not include firm shipbuilding contracts, there were 
questions as to whether the shipyard would generate sufficient revenue 
to repay the guaranteed loan. MARAD concluded that the criterion that 
projects be economically sound was not met and rejected this 
application.
Congress Waived Economic Soundness Criteria
    As a result of Congressional interest, the Coast Guard 
Authorization Act of 1996 contained a provision temporarily amending a 
key requirement of the Title XI loan guarantee program. Specifically, 
the amendment waived the economic soundness requirement for 
reactivation and modernization of closed shipyards in the United 
States. MARAD concluded that MHI's application for the closed Fore 
River Shipyard qualified for consideration under the amendment.
    Although the amendment waived the economic soundness requirement, 
it required the Secretary of Transportation to ``impose such conditions 
* * * as are necessary to protect the interests of the United States 
from the risk of default.'' On November 1, 1996, MARAD approved the 
loan guarantee and issued a $55 million letter commitment to MHI for 
reactivating the closed shipyard.

MARAD Acted to Protect the Government Interest Prior to Loan Guarantee 
        Approval

    The letter commitment contained 28 significant provisions to 
protect the interests of the U.S. Government including requirements 
that:
    1. The State of Massachusetts deposit $6.6 million in cash, bonds, 
or a letter of credit to be held in a financing account (this amount 
equates to the required subsidy rate of 12 percent);
    2. MHI have at least $3 million in capital available to ensure its 
ability to operate as a going concern to support normal operating 
expenses and routine start-up costs associated with the proposed 
project;
    3. MHI have $2.6 million of its own funds available for use on the 
project to ensure that MHI stockholders have a personal stake in the 
project;
    4. MHI grant the Secretary of Transportation a first priority lien 
on all assets, land, and other real and personal property owned or 
acquired by MHI to ensure, in case of default on the loan guarantee by 
MHI, that the U.S. Government has the right to assume ownership and 
sell the property to recover its funds; and
    5. MHI deposit proceeds from the loan into an escrow account 
controlled by the Secretary of Transportation.
MARAD Recognized the Loan Guarantee to MHI Was High Risk
    In order to limit the Government's potential losses, Title XI loan 
guarantee applicants (or in this case the State of Massachusetts) are 
required to submit to MARAD, at the beginning of the loan, resources to 
cover a percentage of the loan. This percentage, known as the subsidy 
rate, depends on MARAD's assessment of the applicant's risk of default. 
The higher the risk, the larger the subsidy rate.
    MARAD assesses the risk of an applicant's default by assigning 
points to 10 different factors, weighted by importance. Also, subsidy 
rates can change over the term of the loan guarantee if the risk 
changes. To keep the subsidy rate in line with the risk, the Office of 
Management and Budget requires reassessments if actual events differ 
from the assumptions of the original assessment.
    On November 7, 1997, prior to closing on the loan guarantee, we 
reported that MARAD had held MHI to the requirements of the letter 
commitment and followed applicable Title XI loan guarantee regulations. 
Our report recommended MARAD: (1) reassess the risk factor rating for 
MHI's application, and when reassessed, take appropriate actions; (2) 
require evidence of shipbuilding contracts or alternative sources from 
which revenues could be generated to repay the guaranteed loan; and (3) 
ensure MHI fulfills the remaining requirements contained in the letter 
commitment. While MARAD generally agreed with the recommendations, it 
was unable to implement the first two recommendations.
    Based on a legal opinion by the Office of the Secretary of 
Transportation's Deputy General Counsel, dated November 12, 1997, MARAD 
concluded it had no legal authority to reassess the risk factor rating 
prior to closing. MARAD also said that the Coast Guard Authorization 
Act precluded it from requiring MHI's project to meet the economic 
soundness provision and was precluded from requiring evidence of viable 
shipbuilding contracts or alternative sources from which revenues could 
be generated to repay the guaranteed loans because these requirements 
were not stipulated in MARAD's letter commitment.
    On December 17, 1997, we reported (Report Number MA-1998-048) our 
concern that MARAD was not planning to reassess the risk factor on the 
loan guarantee prior to closing. MARAD agreed to reassess the risk but 
suggested delaying any reassessment of risk until the last quarter of 
1998, thereby giving MHI the opportunity to demonstrate that 
modernization is underway and that MHI is ``aggressively marketing its 
products.''
    In a July 31, 1998 memorandum from the acting MARAD Administrator, 
we were informed that MARAD had ``. . . completed a reestimation of the 
risk rating of MHI . . . . and can find no basis to change our original 
estimate. . . .'' The assessment attached to the memorandum showed that 
the loan guarantee was rated as high risk.
    MARAD's July 31, 1998 memorandum also stated that ``The only change 
in the circumstances underlying our assessment is that MHI has entered 
into a technology transfer agreement with South Korea's Halla 
Engineering and Heavy Industries, one of the most advanced yards in 
Asia.'' This change would enable MARAD to assign MHI more points for 
``Historical Experience,'' but the additional points would not be 
sufficient to change the overall risk assessment. The memorandum also 
stated that MHI was actively pursuing a shipbuilding project with 
Intermare, a ship owner.
    An application for a Title XI loan guarantee, for the project with 
Intermare, was received by MARAD in February 1996. Although there were 
major outstanding issues regarding this shipbuilding project, MARAD 
stated there was a reasonable basis to conclude that the Intermare 
proposal was still viable.

Risk of Default by MHI Materially Increased
    In June 1999, MHI defaulted on its $1.55 million ``interest only'' 
payment owed to Fleet National Bank. A May 27, 1999 letter to MARAD, 
from attorneys representing MHI, cited unavoidable delays in 
reactivating the shipyard. According to the letter, the delays 
increased costs, and funds for the June 1999 payment were used instead 
for shipyard construction. MHI's attorneys requested approval from 
MARAD to delay the June 1, 1999 payment for 6 months (until December 1, 
1999). In a written reply to MHI, dated July 7, 1999, MARAD requested 
MHI provide specific additional information demonstrating that the 
shipyard will be a going concern after completion of the reactivation. 
According to MARAD, this information was needed to assess the 
reasonableness of MHI's extension request. MARAD received this 
information in late July and early August 1999.
    MHI's failure to make the June 1, 1999 payment, the request for a 
6-month extension to make the payment, and lack of a shipbuilding 
project indicated a major change in MHI's risk of default. On July 20, 
1999 (Report Number MA-1999-115), we recommended that MARAD:
    1. Reassess the risk factor rating for MHI's loan guarantee as 
prescribed by OMB Circular Number A-11, and make the required 
adjustment to the subsidy rate.
    2. Ensure it has all of the information required by the Title XI 
program to protect the interests of the United States from default 
prior to making a decision on MHI's request to defer its June 1, 1999 
payment.
    3. Ensure that MHI provides complete and current information as 
required by the Title XI program prior to making a decision on the loan 
guarantee application by Intermare.
    In its August 6, 1999 response to our report, MARAD advised us that 
it would reassess the risk factor rating by December 1, 1999. According 
to MARAD, this would ``allow sufficient time for the shipyard 
modernization to be completed and for MARAD to determine whether MHI 
will be able to finalize the Intermare shipbuilding contract on a 
viable basis.''
    On July 12, 1999, the mortgage holder informed MARAD that it 
intended to make a demand for payment under the guarantee on or about 
August 1, 1999, unless MHI's request to defer the missed payment was 
approved. On August 6, 1999, MARAD approved the deferral of MHI's 
missed June 1, 1999 ``interest only'' loan payment to December 1, 1999.

Work on Shipyard Modernization
    On August 17, 1999, MHI's general contractor (and its 
subcontractors) for the shipyard modernization project walked off the 
job because of payment disputes of $3 million. The general contractor 
claimed it had not been paid since April 1999, when only a partial 
payment was made. On August 30, 1999, MARAD: (1) declared contractor 
default and formally terminated MHI's general contractor for the 
shipyard modernization project, and (2) called on the surety company to 
perform under the terms and conditions of the performance bond.
    In a September 15, 1999 report (Report Number MA-127), we 
recommended that MARAD take action to immediately freeze the 
uncommitted balance in MHI's escrow account, conduct a physical 
inventory of all assets and property owned by MHI, and ensure the 
assets and property are safeguarded from loss or unauthorized 
disposition. MARAD agreed with our recommendations and took the 
necessary actions.

MHI Failed to Make Loan Payments and Bank Called Loan Due
    On December 1, 1999, MHI missed its deferred ``interest only'' 
payment, as well as its regularly scheduled principal and interest loan 
payment to Fleet Bank. During the 30-day grace period, MARAD approved 
an extension to January 29, 2000 to make the payment. During this 
period, MHI continued to request additional extensions. On January 28, 
2000, Fleet National Bank made a demand for payment under the MARAD 
guarantee.
    On February 25, 2000, MARAD paid off the Fleet Bank loan of $59.1 
million and ordered MHI personnel to vacate the shipyard. MARAD 
immediately recovered $12 million from MHI's escrow account and applied 
$6.6 million plus accrued interest that was deposited by the State of 
Massachusetts and the $2.6 million in loan guarantee fees to the 
payoff, thereby lowering MARAD's exposure to $36.6 million. This 
exposure will be further reduced because MARAD has first priority lien 
in liquidation proceedings. The value of the shipyard, and equipment in 
it, is unknown at this time. On May 8, 2000, MARAD contracted to have 
the shipyard real estate and equipment appraised. After paying off 
Fleet Bank, MARAD presented a claim to MHI for $47 million, plus 
accrued interest, on the principal amount.
    On March 13, 2000, MHI sought bankruptcy protection under Chapter 
11 of the U.S. Bankruptcy Code. MHI has until July 11, 2000, to propose 
a reorganization plan in U.S. Bankruptcy Court. However, MARAD is 
scheduled to ask the Court to permit it to foreclose on MHI.
    Last week, the EPA advised MARAD that there are environmental 
problems in the shipyard that require remediation. MARAD estimates that 
cleanup costs could approach $1 million.

MARAD is Making Little Progress Scrapping its Obsolete Vessels

    The Merchant Ship Sales Act of 1946 created the National Defense 
Reserve Fleet (NDRF), a Government-owned and administered Fleet of 
inactive, but potentially useful, merchant and non- military vessels to 
meet shipping requirements during National emergencies. MARAD 
administers the Fleet, and the Department of Defense provides the 
funding to maintain the Fleet. The Federal Property and Administrative 
Services Act gave MARAD responsibility for disposing of all Federal 
Government merchant-type vessels of 1,500 gross tons or more. The 
National Maritime Heritage Act of 1994 required MARAD to dispose of 
obsolete vessels in the Fleet by September 30, 1999, in a manner that 
maximizes financial return to the United States, but the Act was 
amended to extend the original disposal date by 2 years, from 1999 to 
2001.

Current Inventory and Age of Vessels
    As of April 30, 2000, 114 obsolete vessels were designated for 
disposal because the majority of them are no longer operational. 
Ninety-one of the 114 vessels are slated for scrapping. The remaining 
23 vessels will be disposed of through the fish reef program, used by a 
state or Federal agency, or held for useful parts and equipment.
    MARAD maintains the inactive vessels in the water at the following 
locations:
     James River Reserve Fleet (JRRF) at Ft. Eustis, Virginia 
(61 vessels);
     Beaumont Reserve Fleet (BRF) in Beaumont, Texas (9 
vessels); and
     Suisun Bay Reserve Fleet (SBRF) in Benecia, California (42 
vessels).
    The Coast Guard holds two vessels in Mobile, Alabama.
    As shown in the following chart, the average age of the 114 
obsolete vessels is 48 years. These vessels have been in the Fleet for 
an average of 15 years.
                          Average Vessel Age 



Obsolete Vessels Pose Environmental Risk
    The 114 obsolete vessels currently awaiting disposal pose 
environmental risks because they are deteriorating, contain hazardous 
materials, and contain oil that could leak into the water. These 
vessels are literally rotting and disintegrating as they await 
disposal. Some vessels have deteriorated to a point where a hammer can 
penetrate their hulls. They contain hazardous substances such as 
asbestos and solid and liquid polychlorinated biphenyls (PCBs). If the 
oil from these vessels were to enter the water, immediate and 
potentially very expensive Federal and state action would be required.
    In 1999, MARAD identified the 40 ``worst condition'' vessels. These 
vessels were classified as ``worst condition'' due to their severe 
deterioration and threat to the environment. As of April 30, 2000, 3 of 
the 40 had been moved out of the Fleet to domestic scrappers.

                      Worst Condition Vessel Ages 



      
    The remaining 37 ``worst condition'' vessels have been in MARAD's 
Fleet for an average of 22 years, are in particularly bad condition, 
and may require additional or special maintenance. Our inspection of 11 
of the original 40 ``worst condition'' vessels revealed corrosion, 
thinning, and rusting of the hull; asbestos hanging from pipes below 
deck; lead-based paint easily peeled from the ship; solid PCBs (in 
cabling); and in some instances, remnants of liquid PCBs in electrical 
equipment.

           Deteriorating Vessel at James River Reserve Fleet 





      
    Costs to maintain these vessels will likely increase due to their 
deteriorating condition, leaks, and the need for additional time-
sensitive maintenance. For example, MARAD spent $1.3 million to 
maintain 1 of the 40 ``worst condition'' vessels over the past 2 years. 
This vessel is over 35 years old, contains hazardous substances 
including asbestos, and it deteriorated to the point where oil leaked 
into the water requiring costly environmental clean-up. MARAD has 
applied over 20 patches to leaks, removed hazardous materials, deployed 
containment booms, and pumped oil out of the vessel. The vessel is 
disintegrating to a point where it will not be seaworthy much longer. 
Monitoring efforts for this vessel are ongoing.

Loss of Overseas Market and Limited Domestic Capacity Reduced 
Scrapping Progress

    Although MARAD has sold 22 vessels since 1995, only 7 have been 
scrapped. Two other vessels have been towed to scrapping sites. The 
remaining 13 vessels sold are still moored in MARAD's Fleet, requiring 
continued maintenance at U.S. Government expense.
    As shown in the following chart, this rate of progress is a 
significant change from previous years when vessels were sold to 
overseas scrappers.

                        MARAD Vessels Scrapped 



    Between 1991 and 1994, MARAD sold 80 vessels overseas for scrapping 
at an average price of $433,000 per vessel. During the past year, 
vessel sales yielded between $10 and $105 per vessel. On October 25, 
1999, MARAD sold three vessels for $10 per vessel. The most recent sale 
was for two vessels at $105 per vessel on December 21, 1999.
    MARAD suspended the sale of vessels to overseas scrappers in 1994 
because the EPA prohibited the export of Government-owned ships 
containing PCBs.
    In September 1998, an Administration moratorium halted all sales of 
Government-owned vessels for scrapping overseas. As a result, MARAD has 
been relying on the domestic market, but capacity in the domestic 
market is limited. In the 1970s, there were 30 U.S. contractors in the 
ship scrapping industry. Over the past 19 months, however, only four 
companies have bid on MARAD's scrapping contracts and passed MARAD's 
technical compliance review to scrap vessels. Additional companies are 
not attracted to this industry because of the low profits currently 
available. Scrap steel prices in the United States are low and 
contractors must comply with environmental regulations. According to 
scrapping company officials, the number of vessels that a contractor 
can scrap at one time is approximately 1 to 5 vessels.

The Number of Vessels Awaiting Disposal Is Increasing

    The number of obsolete vessels has almost doubled over the last 2 
years. MARAD expects its inventory of obsolete vessels awaiting 
disposal will increase to 155 vessels by the end of FY 2001, as shown 
in the following chart.

                       Vessels Awaiting Disposal 



    This projected increase is due to additional vessel transfers from 
the Navy, downgrades of other NDRF vessels to obsolete status, and the 
inability to sell ships for scrap. Of the 155 vessels, 132 will be 
targeted for scrapping. Although the remaining 23 vessels are slated 
for other forms of disposal, some of these may be transferred into the 
scrapping category in future years if they cannot be disposed of 
through other means.

The Navy's Pilot Project May Be a Model for MARAD

    The Department of the Navy experienced a similar inability to sell 
its combatant vessels for domestic scrapping. In 1998, Congress 
authorized and appropriated funding for a Navy pilot project for the 
disposal of obsolete warships. Under the pilot project, the Navy is not 
subject to a legal requirement to maximize financial returns on its 
obsolete vessels. On September 29, 1999, the Navy awarded four 
contracts amounting to $13.3 million for the scrapping of four 
warships.
    The purpose of the Navy project is to quantify the costs associated 
with ship scrapping, which could lead to the disposal of 66 warships. 
If MARAD were authorized to implement such a project, it could cost as 
much as $515 million to dispose of the obsolete vessels that MARAD 
expects to have by the end of FY 2001.

Alternatives Offer Potential but Will Not Solve the Problem

    While MARAD has been pursuing ways to improve scrapping sales, its 
ability to explore creative solutions for disposing of vessels is 
constrained by the requirement to maximize financial returns. Also, the 
programs and alternatives MARAD is pursuing do not have the potential 
to significantly reduce the backlog of vessels awaiting disposal in a 
timely manner. We have identified some additional alternatives that 
MARAD has not pursued that may have the potential to contribute to the 
goal of disposing of obsolete vessels.
    Programs to improve scrapping sales and alternatives MARAD is 
pursuing include: coordination with the Navy and a West Coast Company 
on a proposal for a potential scrapping site; participation in 
interagency work groups to look for innovative ways to improve the ship 
scrapping process and establish consistent procedures; donation of 
vessels designated for disposal for uses such as museums and the fish 
reef program, given legislative or executive approval; and coordination 
with the Navy on its program to sink vessels in deep water after 
hazardous materials are removed.
    MARAD may be able to explore alternatives that have the potential 
to assist in disposing of some of its vessels such as: selling vessels 
to other countries for non-military uses, given legislative approval 
and approval from the EPA to sell vessels to overseas markets that are 
capable of scrapping them in an environmentally compliant manner. 
According to MARAD, selling vessels overseas for non-military uses 
would require a change in the law that only allows MARAD to sell 
vessels for disposal or non-transportation use. However, legislation 
was passed in 1996 for four vessels to be sold on a competitive basis 
for operational use. One vessel was sold in 1999 and bids on two 
vessels are currently under review. The fourth vessel requires an EPA 
approval, which MARAD requested April 1999.
    During the moratorium on overseas sales from 1998 to January 1, 
1999, MARAD could not request any exceptions for exporting vessels. 
However, since January 1, 1999, it could have requested exceptions to 
this prohibition through the Chair of the Council on Environmental 
Quality. To obtain an exception, MARAD would have to ensure that 
vessels sold overseas would be scrapped in an environmentally sound and 
economically feasible manner. MARAD, however, has not requested any 
exceptions to sell vessels overseas.

Recommendations Based on Recent Audit

    In our March 10, 2000 audit report, MA-2000-067, we recommended 
that the Maritime Administrator:
    1. Seek legislative approval to extend the 2001 mandate to dispose 
of obsolete vessels and to eliminate the requirement that MARAD 
maximize financial returns on the sale of its obsolete vessels.
    2. Continue to pursue programs to improve scrapping sales and 
identify alternative disposal methods that can contribute to the goal 
of reducing the number of obsolete vessels awaiting disposal, to 
include working with the Navy on the results of its studies on the 
environmental impact of sunken vessels.
    3. Develop a proposal for submission to Congress seeking approval 
and funding for a project to pay contractors for vessel scrapping. The 
proposal should include a plan to target the ``worst condition'' 
vessels first, identify funding and staffing requirements, and provide 
milestone dates to dispose of all obsolete vessels.
    MARAD concurred with our recommendations. In its FY 2001 
authorization request, MARAD proposed a ``five year extension [in the 
deadline that] will provide MARAD with additional time to develop and 
begin implementing a plan to dispose of these vessels.'' Considering 
the condition of some of the vessels, the environmental risks, and the 
costs to maintain them, we find the MARAD proposal unacceptable. MARAD 
must develop and implement a disposal plan for its obsolete vessels 
once legislative approval is obtained for an extension.
    MARAD also needs to obtain legislative approval allowing it to 
eliminate the requirement to maximize financial returns on vessel 
sales. This would then allow MARAD to seek funding for a pilot program, 
similar to the Navy's, whereby it would pay for vessel scrapping. MARAD 
should focus first on disposing of its ``worst condition'' vessels and 
so state that in its plan.
    MARAD should also continue to coordinate with the Navy on its 
disposal programs and seek legislative approval to sell vessels in the 
Fleet that are still operational, but will eventually become obsolete, 
to overseas companies for continued use. MARAD should also request 
exceptions from EPA to sell vessels to overseas scrappers that meet the 
environmental standards. A requirement for MARAD to report on its 
progress should be included in all legislative mandates.

Recent Legislative Actions Propose Different Solutions But MARAD Has 
Yet to Develop a Plan for Either

    On April 5, 2000, a Bill was introduced in the House of 
Representatives to authorize funding for a ship scrapping pilot project 
for MARAD that would allow MARAD to pay qualifying U.S. shipyards to 
scrap its obsolete vessels. Such a program would help MARAD dispose of 
some of its vessels by generating interest among existing U.S. 
companies. Furthermore, this program would provide jobs for qualified 
workers in the areas selected. The Navy's current project would provide 
a model for MARAD. However, the average time to scrap a MARAD vessel is 
4 to 6 months, and additional time would be required to implement such 
a program, while these vessels continue to be maintained at Government 
expense. MARAD's rate of progress indicates that this would serve as a 
long-term solution.
    On May 1, 2000, a Bill was introduced in the Senate on MARAD's FY 
2001 Authorization, to include a 3-year extension on disposing of its 
obsolete vessels and to allow for the disposal of MARAD's 39 ``worst 
condition'' vessels in foreign countries. The 3-year extension will 
provide additional time for MARAD to develop a plan to dispose of its 
vessels, which is a requirement in this proposed bill. As noted 
earlier, MARAD did not develop an implementation plan during its 
original extension from 1999 to 2001. In a February hearing, 
Congressmen noted that MARAD did not prepare a plan to dispose of its 
vessels during the original extension, and questioned whether MARAD 
would develop such a plan during this second extension.
    The allowance for MARAD to again sell vessels overseas for 
scrapping would assist in disposing of its ``worst condition'' vessels 
that require high maintenance. However, MARAD would still be required 
to request approval from EPA to sell these vessels to overseas markets 
that are capable of scrapping them in an environmentally compliant 
manner. Additionally, the environmental and worker safety and health 
concerns in some countries remain and could continue to prohibit this 
practice. According to MARAD officials, it has coordinated with a 
scrapping company in Mexico that reportedly meets the environmental 
requirements and standards for its workers, although MARAD has not 
pursued this as a viable option due to the continual environmental and 
worker safety and health concerns.

Internal Controls Over Maintenance Contracts for Ready Reserve Force 
(RRF) Vessels can be Improved

    In 1976, a Memorandum of Agreement between MARAD and the Department 
of Defense established the RRF as a component of the National Defense 
Reserve Fleet. MARAD is responsible for maintaining the RRF vessels in 
a heightened state of readiness so that they can be activated in 4 to 
30 days to meet shipping requirements during National emergencies. As 
of March 2000, the RRF was composed of 91 militarily useful vessels 
with an estimated value of $1.58 billion.
    MARAD administers RRF vessel acquisition, upgrade, activation, 
maintenance, operations, and subsequent deactivation through ship 
manager contracts and general agency agreements. Ship manager contracts 
are awarded to ship management companies, through competitive bids, to 
maintain vessels in the RRF. General agency agreements are issued to 
ship management companies and are usually used when a new vessel is 
acquired or a ship manager contract is terminated.
    Three MARAD regional offices (Norfolk, Virginia; New Orleans, 
Louisiana; and San Francisco, California) administer the ship managers' 
contracts and general agency agreements. During the period of our 
audit, 57 vessels were maintained under ship manager contracts, and 32 
vessels were maintained under general agency agreements. Two vessels, 
assigned for training purposes, were not maintained by either a ship 
manager or a general agent.

Fraud Identified in Department of Defense and MARAD Ship Managers' 
        Contracts
    The Federal Bureau of Investigation (FBI), Defense Criminal 
Investigative Service and the Naval Criminal Investigative Service 
initiated an investigation in 1994 to look into potential kickbacks 
between ship managers managing Military Sealift Command vessels and 
their subcontractors. The FBI named their investigation ``Operation 
Octanova.'' MARAD was not the initial focus of the investigation, but 
we joined the investigation in 1996 because MARAD and the Military 
Sealift Command use the same contractors.
    The investigation identified fraud and kickbacks involving 
contracts to maintain RRF vessels. In August 1999, the Department of 
Justice announced Federal indictments and informations of 2 companies 
and 21 individuals, including 2 MARAD employees. One MARAD employee in 
Beaumont, Texas subsequently pleaded guilty to accepting a large screen 
television and a videocassette recorder from a contractor. The 
contractor inflated invoices by the costs of the items given to the 
employee. A second MARAD employee in Norfolk, Virginia, also pleaded 
guilty to soliciting and accepting over $10,000 from an undercover 
agent who he believed was a potential ship repair contractor. The 
employee agreed to assist the contractor in being awarded a future 
contract. Also, in October 1999, we announced that a former MARAD 
employee had been charged for receiving $60,000 in unreported income to 
``put in a good word'' for a ship repair company, which was 
subsequently awarded Navy contracts. This former MARAD employee also 
pleaded guilty.
    As a result of the investigation, MARAD and Department of the Navy 
took aggressive debarment and suspension actions against 6 companies 
and 16 individuals. Also, a ship manager voluntarily withdrew from the 
program and numerous ship manager employees were convicted for 
accepting kickbacks to influence the award of subcontracts. In many of 
the kickback schemes, contractors recouped the money by submitting 
fraudulently inflated invoices.

Failure to Implement Controls Over Ship Managers' Contracts Create 
        Vulnerabilities
    During the joint investigation, we initiated an audit on RRF Ship 
Managers' Contracts, and in a report issued on May 12, 2000, we found 
that MARAD implemented effective policies and procedures relating to 
the award of ship manager's contracts. However, this was in sharp 
contrast to its failure to implement controls for the administration of 
these contracts. We found that MARAD has not adhered to established 
procedures and practices for administering the ship managers' contracts 
and general agency agreements.
    Specifically, we found MARAD was not following existing procedures 
to ensure that payments to general agents and ship managers were for 
actual costs incurred, related to cited work orders, and did not 
duplicate previously paid invoices. For example, MARAD's Central and 
Western Regions paid $63.7 million during fiscal years 1998 and 1999 to 
general agents without supporting documentation that costs were 
incurred. Work orders did not adequately describe the work authorized, 
making it difficult for MARAD personnel to validate payments during the 
invoice review process. Work orders were not closed timely, allowing 
the opportunity for ship managers to use funds from open work orders 
for unrelated work.
    Finally, we reported that MARAD was not ensuring that ship managers 
justified the award of non-competitive subcontracts. We found a high 
percentage of subcontractor awards that did not comply with the Federal 
Acquisition Regulation. Ship managers often awarded subcontracts non-
competitively, without required documentation justifying awards. 
Unjustified non-competitive awards create the potential for improper 
business dealings between ship managers and subcontractors and increase 
the potential for kickbacks. Therefore, MARAD has limited assurance 
that Federal funds are expended in a manner that is most advantageous 
to the Government.
    When MARAD personnel do not follow existing procedures, they 
compromise their ability to ensure that Federal funds are expended for 
items received or for work authorized and performed. The control 
weaknesses we identified contribute to an environment where there is an 
increased risk of fraud occurring.

MARAD Agreed to Strengthen Controls Over Ship Managers' Contracts
    In light of the recent joint investigation and audit on MARAD's 
controls over ship managers' contracts, MARAD has agreed to strengthen 
its procedures and practices for administering ship managers' contracts 
and general agency agreements. Specifically, MARAD agreed to:
    1. Instruct regional employees on existing procedures for 
processing invoices and provide sufficient oversight to ensure that 
these procedures are followed.
    2. Provide detailed, self-explanatory work statements, 
specifications or descriptions on all work orders.
    3. Periodically review open and inactive work orders to identify 
those that should be closed, and reprogram any remaining funds.
    4. Reinstate periodic reviews of ship manager procurement actions, 
including documentation justifying sole-source subcontractor awards and 
indications of split purchases.
    MARAD must now follow through on the actions they agreed to take.
    Mr. Chairman, this concludes our statement. I would be pleased to 
answer any questions.
                                 ______
                                 
Attachment

Department of Transportation Office of Inspector General

Summaries of Related Audit Reports

Status Update Massachusetts Heavy Industries, Inc. Title XI Loan 
        Guarantee

(Report Number MA-1999-127, September 15, 1999)

    This report presents our observations on the status of the Maritime 
Administration's (MARAD) Title XI loan guarantee for Massachusetts 
Heavy Industries, Inc. (MHI).
    On August 6, 1999, MARAD concurred with our conclusion that the 
risk of default by MHI had increased materially. MARAD suggested 
deferring the risk reassessment until December 1999.
    Additional significant events recently occurred. Specifically:
     On August 1, 1999, MHI missed a payment of $258,880 to the 
city of Quincy, Massachusetts. MHI is in arrears on a loan balance of 
$7.8 million to the city of Quincy obtained through the Housing and 
Urban Development program.
     On August 6, 1999, MARAD approved the deferral of MHI's 
missed June 1, 1999 ``interest only'' payment of $1.55 million to 
December 1, 1999. As a result, MHI will be liable to pay Fleet National 
Bank approximately $5.1 million on December 1, 1999.
     On August 17, 1999, MHI's general contractor (and its 
subcontractors) for the shipyard modernization project walked off the 
job because of payment disputes of $3 million.
     Based on discussions with representatives of MHI and its 
general contractor, MARAD concluded that MHI was unable to resolve its 
differences with its contractor. MARAD noted that each of the parties 
to the contract had declared the other in default of its obligations 
under the contract. Based on information provided by MHI and its 
general contractor, MARAD concluded that the general contractor might 
be in breach of material contract promises.
     On August 30, 1999, MARAD: (1) declared a ``Contractor 
Default'' and formally terminated MHI's general contractor for the 
shipyard modernization project and (2) called on the surety company to 
perform under the terms and conditions of the performance bond. As a 
result, work on the shipyard stopped and the estimated completion date 
has slipped for an indeterminate amount of time.
     As of September 14, 1999, MHI had not provided MARAD any 
new or updated applications for shipbuilding projects. The potential 
shipbuilding project with Intermare is in question.
    These events have reinforced and made more serious our previously 
reported concerns. Taken together, these events will delay completion 
of the shipyard for an indeterminate period of time and further 
increase the risk of default by MHI on the guaranteed loan.
    As of September 14, 1999, approximately $12 million remained in the 
escrow account. Of this amount, approximately $5 million is committed 
to pay for equipment ordered but not yet received at the shipyard. 
According to MARAD, this amount is not in dispute. In the event of 
default by MHI, MARAD could use the funds remaining in the escrow 
account to reduce the Government's loss on the loan guarantee.
    In order to protect the interests of the United States, we 
recommended that MARAD immediately:
    1. Freeze the uncommitted balance in MHI's escrow account until 
negotiations relating to the performance bond are concluded.
    2. Conduct a physical inventory of all assets and property owned or 
acquired by MHI for the shipyard.
    3. Ensure that the assets and property identified in the inventory 
are safeguarded from loss or unauthorized disposition. This is 
important because, in the event of default on the guaranteed loan, the 
United States Government has a first priority lien on all assets and 
property owned or acquired by MHI.

Massachusetts Heavy Industries, Inc., Title XI Loan Guarantee

(Report Number MA-1999-115, July 20, 1999)

    We prepared this report because MHI: (1) did not make the June 1999 
``interest only'' payment on the guaranteed loan, (2) requested 
approval of a 6-month extension to make this payment, and (3) has not 
secured a shipbuilding project.
    Construction and reactivation at the shipyard is proceeding. 
However, MHI's estimated completion date for the shipyard has slipped 
from November 1998 to October 1999. Initial work completed by MARAD's 
Office of Ship Construction estimates the completion date may be later 
than October 1999. The only potential shipbuilding project identified 
by MHI requires MARAD approval of a Title XI loan guarantee 
application.
    The risk of default by MHI has materially increased warranting 
action by MARAD. The missed June 1, 1999 payment and the request to 
defer this payment until December 1, 1999, reflect a major change in 
the assumptions underlying MHI's loan guarantee.
    MARAD has not made a decision on MHI's request for deferral of its 
June 1, 1999 payment, nor has MARAD made a decision on the Title XI 
loan guarantee application submitted by Intermare for a proposed 
shipbuilding project at MHI, because there are unresolved issues 
regarding how MHI will implement the shipbuilding project. MARAD is 
reviewing additional information provided by MHI needed to determine 
the reasonableness of the deferral request and how MHI intends to 
satisfy requirements of the Title XI loan guarantee program.
    MHI's failure to make the June 1, 1999, payment, the request for a 
six-month extension to make the payment, and lack of a shipbuilding 
project indicates a major change in MHI's risk of default. We 
recommended that MARAD:
    1. Reassess the risk factor rating for MHI's loan guarantee as 
prescribed by OMB Circular Number A-11, and make the required 
adjustment to the subsidy rate. Ensure it has all of the information 
required by the Title XI program to protect the interests of the United 
States from default prior to making a decision on MHI's request to 
defer its June 1, 1999, payment.
    2. Ensure that MHI provides complete and current information as 
required by the Title XI program prior to making a decision on the loan 
guarantee application by Intermare.

Management Advisory on Massachusetts Heavy Industries, Inc., Title XI 
        Loan Guarantee

(Report Number MA-1998-048, December 17, 1997)

    MARAD provided a status report for three recommendations made in a 
Management Advisory Report, Number MA-1998-007, dated November 7, 1997.
    1. MARAD did not plan to reassess the risk factor (Recommendation 
1) based on a legal opinion made by the Office of the Secretary of 
Transportation's Deputy General Counsel, which concluded MARAD has no 
legal authority to reassess the risk factor rating for MHI's 
application prior to closing. Further, MARAD, not the Commonwealth of 
Massachusetts, is liable for additional funds if subsequent 
reassessments identify increased risk.
    2. MARAD is precluded from requiring evidence of viable 
shipbuilding contracts or alternative sources from which revenues can 
be generated (Recommendation 2) because these requirements were not 
stipulated in MARAD's letter commitment.
    3. As of December 11, 1997, MARAD officials indicated that MHI had 
substantially fulfilled all of these requirements. The remaining 
requirements (13) contained in the letter commitment that were not 
complete at the time of the report (Recommendation 3).
    Office of Management and Budget Circular Number A-11, Preparation 
and Submission of Budget Estimates, paragraph 33.11(e)(1)(3), 
recognizes the need to reassess risks ``when a major change in actual 
versus projected activity is detected.'' Since the risk would appear to 
be greater now than when the original calculations were made, we 
believe MARAD must reassess the risk factor immediately after closing 
and obtain, from its permanent indefinite appropriation, additional 
funds necessary to cover additional risk identified by the 
reassessment.
    As of December 11, 1997, MARAD officials indicated that MHI had 
substantially fulfilled all of these requirements. Other than obtaining 
legal opinions on MHI's performance bonds, MARAD needs to finalize 
documentation and work out minor issues before closing.
    MARAD officials stated they were ``* * * sympathetic to MHI's claim 
that it is difficult to obtain customers without the modernization 
going forward and being underway. . . .'' MARAD agreed to reassess the 
risk but suggested delaying any reassessment of risk until the last 
quarter of 1998, thereby giving MHI the opportunity to demonstrate that 
modernization is underway and that MHI is ``aggressively marketing its 
products.'' We understand MHI's difficulty in obtaining customers 
before it has the capacity to build ships. However, in our opinion, the 
change in risk, prudence, applicable regulations and circulars requires 
a formal reassessment of risk immediately after closing.

Management Advisory Report on Massachusetts Heavy Industries, Inc., 
        Title XI Loan Guarantee

(Report Number MA-1998-007, November 7, 1997)

    We reviewed the loan guarantee process to determine if (1) MARAD 
held MHI to the requirements in the letter commitment and followed 
applicable Title XI loan guarantee regulations and (2) the related 
tanker construction project qualifies for a Title XI loan guarantee.
    On November 1, 1997, MARAD issued a $55 million letter commitment 
to MHI to reactivate the closed shipyard in Quincy, Massachusetts. 
Twenty-eight of the requirements contained in the letter to protect the 
interest of the U.S. Government were categorized as significant. At the 
time of the report, 15 of these requirements were completed and 13 were 
not complete.
    The following requirements were designated as the five most 
important. As of November 5, 1997, MHI had not completed these five 
requirements.
    1. Provide working capital of $3 million--MHI had not demonstrated, 
through applicable financial documents, that it had the required 
working capital.
    2. Demonstrate availability of capital contribution of $2.6 
million--MHI proposed using $2.6 million of incurred costs that 
included attorney and accountant fees. MARAD contended that the funds 
should have a direct impact on the project and should not include costs 
such as attorney and accountant fees. We agree with MARAD on this 
position.
    3. Assign first priority lien on collateral to MARAD--MHI proposed 
dividing the shipyard property and providing MARAD with a first 
priority lien on area 1. In our opinion, MARAD should require first 
priority lien on all of the property.
    4. Enter into a reserve fund and financial agreement--MARAD and MHI 
have not reached an agreement on the provisions of the financial 
agreement. In our opinion, MARAD should not deviate from the standard 
financial requirements.
    5. Place funds in escrow with specific withdrawal procedures--MHI 
proposed making withdrawals for items that have not been fully paid 
for, have not been delivered and are still subject to prior claims. 
MARAD had not taken a final position on fund withdrawals. In our 
opinion, MARAD should not deviate from the standard escrow fund 
withdrawal procedures.
    MARAD's first estimate of risk factored in a construction contract. 
This contract has not materialized and MHI has shown no proof of future 
contracts, increasing the cost of default: appraisal values provided to 
MARAD by MHI may not represent the amount that could be recovered in 
the event of default. Additionally, MARAD agreed in the letter to 
assume responsibility for any additional funds needed as a result of an 
increase in the risk of default.
    We recommendations that MARAD.
    1. Reassess the risk factor rating for MHI's application excluding 
the related tanker construction project. Based on the results of the 
reassessment, take appropriate action within the limits of MARAD's 
legal authority.
    2. Prior to closing, require evidence of shipbuilding contracts or 
alternative sources from which revenues could be generated to repay the 
guaranteed loan.
    3. Ensure MHI fulfills the remaining requirements contained in the 
letter commitment.

Report on the Program for Scrapping Obsolete Vessels Maritime 
        Administration

(Report Number MA-2000-067, March 10, 2000)

    The audit objectives were to evaluate MARAD's progress in meeting 
its legislative mandate to dispose of obsolete vessels in the National 
Defense Reserve Fleet by September 30, 2001; identify what action MARAD 
has taken toward meeting the mandate; and identify potential 
alternatives to assist MARAD in achieving its goals. We determined that 
MARAD will not meet its legislative mandate to dispose of its obsolete 
vessels by 2001 and maximize financial return to the United States. 
This is due to the prohibitions on selling vessels overseas for 
scrapping, a limited domestic ship scrapping market, and competition 
from the Navy's pilot project, which pays contractors to scrap ships.
    We found that the obsolete vessels awaiting disposal pose 
environmental risks because they are deteriorating, contain hazardous 
materials, and contain oil that could leak into the water. We also 
reported that the number of vessels awaiting disposal is increasing, 
from 110 vessels to 152 vessels projected to be awaiting disposal by 
the end of FY 2001 (numbers have increased to 114 and 155, respectively 
since this report was published). Although we noted that MARAD had been 
pursuing ways to improve scrapping sales, the alternatives do not have 
the potential to significantly reduce the backlog of vessels awaiting 
disposal in a timely manner. We identified some additional alternatives 
that MARAD had not explored that may help to dispose of its obsolete 
vessels including: (1) selling vessels to other countries for non-
military uses, given legislative approval; and (2) requesting approval 
from the EPA to sell vessels to overseas markets that are capable of 
scrapping them in an environmentally compliant manner.
    We recommended that MARAD:
    1. Seek legislative approval to extend the 2001 mandate to dispose 
of obsolete vessels and to eliminate the requirement that MARAD 
maximize financial returns on the sale of its obsolete vessels.
    2. Continue to pursue programs to improve scrapping sales and 
identify alternative disposal methods that can contribute to the goal 
of reducing the number of obsolete vessels awaiting disposal, to 
include working with the Navy on the results of its studies on the 
environmental impact of sunken vessels.
    3. Develop a proposal for submission to Congress seeking approval 
and funding for a project to pay contractors for vessel scrapping. The 
proposal should include a plan to target the 40 ``worst condition'' 
vessels first, identify funding and staffing requirements, and provide 
milestone dates to dispose of all obsolete vessels.
    A draft of this report was provided to the Maritime Administrator 
on February 8, 2000. MARAD concurred with the recommendations and 
indicated the actions planned or underway to implement them.

Report on the Ready Reserve Force Ship Managers' Contracts Maritime 
        Administration

(Report Number MA-2000-096, May 12, 2000)

    The audit objective was to evaluate MARAD's procedures and controls 
relating to the requirements, specifications, award, and administration 
of the ship managers' contracts. This audit was initiated during a 
joint investigation by the Department of Transportation, Office of 
Inspector General for Investigations; the Federal Bureau of 
Investigations; and the Department of Defense. The investigation 
identified fraud and kickbacks involving contracts to maintain Ready 
Reserve Force vessels.
    We determined that MARAD has implemented effective policies and 
procedures relating to the requirements, specifications and award of 
the ship managers' contracts. However, we found a sharp contrast 
between MARAD's implementation of procedures and controls for awarding 
ship managers' contracts and their procedures and controls for 
administrating ship managers' contracts and general agency agreements. 
We determined that MARAD has not fully adhered to their established 
procedures and practices for administering the ship managers' contracts 
and general agency agreements. Specifically, we noted that MARAD's 
failure to follow internal controls created vulnerabilities for fraud 
and that MARAD's lack of effective procedures to ensure ship management 
companies justify sole source awards created the potential for 
kickbacks.
    To address our concerns, MARAD needs to strengthen its controls by 
implementing effective procedures and practices for administering ship 
managers' contracts and general agency agreements. We recommended 
MARAD:
    1. Instruct regional employees on existing procedures for 
processing invoices and provide sufficient oversight to ensure that 
these procedures are followed.
    2. Provide detailed, self-explanatory work statements, 
specifications or descriptions on all work orders.
    3. Periodically review open and inactive work orders to identify 
those that should be closed and reprogram any remaining funds.
    4. Re-instate periodic reviews of ship manager procurement actions 
including documentation justifying sole-source subcontractor awards and 
indications of split purchases.

Report on the Audit of Ship Manager Contracts Maritime Administration

(Report Number AV-3-013, August 25, 1993)

    The audit objective was to evaluate MARAD's administration of the 
ship managers' contracts in the regions using selected items in the 
Quality Assurance (QA) Plan. The items selected for review were (1) 
initial deliverables, (2) specifications, and (3) invitations for bid. 
We found MARAD followed procedures in the Federal Acquisition 
Regulations and the request for proposal in awarding the ship manager 
contracts. However, there were noted inconsistencies in the 
administration of contracts and monitoring of ship managers' 
performance in the regions reviewed.
    We recommended that MARAD Headquarters:
    (1) Require the regions to implement the QA Plan for monitoring 
ship managers' performance,
    (2) Provide sufficient guidance and oversight of regional contract 
administration with emphasis on the use of the QA Plan for monitoring 
contractor performance, and
    (3) Establish general specifications and invitations for bid to 
facilitate the monitoring of ship managers' performance under the QA 
Plan. MARAD agreed with the finding and recommendations.

Report on the Audit of Activation of the Ready Reserve Force Maritime 
        Administration
(Report Number AV-1-034, September 5, 1991)

    The audit objectives were to evaluate the availability of (1) crew 
members to man the vessels, (2) shipyards to complete the activation 
work, (3) tugs to move the vessels, (4) supplies to fill ship stores, 
and (5) fuel to power the vessels. Additionally, we evaluated (1) the 
ability of the fleet to obtain the necessary certifications from the 
American Bureau of Shipping, the United States Coast Guard, and the 
Federal Communications Commission; (2) the ability to move vessels to 
shipyards in specific timeframes; and (3) the feasibility of performing 
dock trials on the vessels during periods of industrial assistance.
    As a result of the activation of the Ready Reserve Force in support 
of Operation Desert Shield/Storm, we focused on actual activation work 
rather than testing the potential activation of the RRF as originally 
planned. We found Government and industry personnel associated with the 
activation of the RRF vessels achieved the activation requirements 
mandated by U.S. Navy's Military Sealift Command. Nonetheless, 78 
percent of the vessels were not activated within the prescribed 
readiness periods to be available to load cargo in support of Operation 
Desert Shield/Storm.
    We recommended that MARAD:
    1. Amend contractual agreements to require ship managers and 
general agents to provide retention crews on selected RRF vessels to 
assist in maintenance, activation, and operation;
    2. Finalize the reserve concept study and establish competent and 
dedicated personnel necessary to operate RRF vessels,
    3. Develop a comprehensive plan to systematically activate the RRF 
vessels and request appropriate funding for activation,
    4. Require newly acquired RRF vessels to be adequately tested in 
order to identify and correct mechanical problems prior to placing the 
vessels in the fleet.
    MARAD officials fully concurred with the finding and 
recommendations.
    Additional information, including selected audit reports summarized 
above, can be found on the DOT-Office of Inspector General website 
(http://www.oig.dot.gov).

    The Chairman. Thank you very much.
    Admiral Holder.

          STATEMENT OF VICE ADMIRAL GORDON S. HOLDER, 
              COMMANDER, MILITARY SEALIFT COMMAND

    Admiral Holder. Good morning, Mr. Chairman, Members of the 
Committee. It is a pleasure to have the opportunity today to 
address the issues related to the U.S. Merchant Marine manpower 
needs. With your consent, I would like to submit my written 
statement for the record and provide a summation. I would first 
provide a brief overview of Military Sealift Command and how 
its mission fits into our national maritime strategy.
    Sealift Command has four vital global missions. First, we 
provide combat-ready logistics ships for the underway 
replenishment of fuel, ammunition, and supplies to our Navy 
fleets around the world. We also provide ships for related 
support services such as hospital ships and ocean-going tugs.
    Second, we provide special mission ships to support the DOD 
and various civilian agencies in the national security arena, 
including oceanographic research, ocean surveillance, missile 
tracking, and submarine rescue.
    Third, in support of the military services we provide 
prepositioned ships which are stationed in three strategic 
areas and are combat-loaded for rapid response in any 
contingency, and fourth, using specialized ships we provide 
ocean transportation strategic sealift of heavy military 
equipment to sustain U.S. forces worldwide during peacetime and 
in war for as long as operational requirements dictate.
    On an average day, approximately 112 ships are deployed and 
actively involved with fulfilling MSC's for missions. All MSC 
ships, unlike other U.S. Navy ships, are crewed by merchant 
mariners. As a result, MSC is the single largest employer of 
U.S. merchant mariners. MSC directly employs 3,200 Civil 
Service seagoing mariners to primarily operate the combat and 
logistics force ships. Our charters and ship-operating 
contracts are responsible for the employment of an additional 
1,900 private sector merchant mariners.
    Numerous international crises in the 1990s have underscored 
our vital role as a major contributor in the execution of our 
national strategy. During the Persian Gulf War, MSC 
distinguished itself as the largest source of defense 
transportation of any nation involved. Using more than 230 
ships, both U.S. Government-owned and chartered, MSC delivered 
more than 12 million tons of wheeled-track vehicles, 
helicopters, ammunition, fuel and other supplies and equipment. 
Virtually all of these ships were crewed by commercially 
employed merchant mariners.
    In more recent events, MSC combat logistics ships crewed by 
Civil Service mariners supported Navy operations in the Persian 
Gulf. Our surge sealift assets provided resupply cargo to 
Bosnia and Herzegovina. Two large, medium-speed roll-on, roll-
off ships, LMSR's, carried combat equipment and supplies to 
U.S. peacekeeping forces in Kosovo.
    The motor vessel Captain Steven Bennett delivered 
prepositioned U.S. Air Force ammunition to support air 
operations over Kosovo.
    Our sealift assets also proved invaluable in recent natural 
disasters in humanitarian relief efforts. MSC-controlled ships 
transported construction equipment, disaster relief supplies to 
the Caribbean after Hurricane Georges.
    Four maritime Ready Reserve Force ships transported 
construction equipment and supplies needed to rebuild roads and 
bridges in Central American regions that were destroyed by the 
torrential rains following the aftermath of Hurricane Mitch.
    Our success with these humanitarian relief operations 
reflects the increased usefulness of the RRF. MSC relies 
exclusively on our commercial partners to support our worldwide 
transportation requirements in peace and war. In peacetime we 
ship more than 1.6 million measurement tons of DOD cargo using 
privately-owned U.S. flagships crewed by private sector U.S. 
merchant mariners. In wartime, we depend on the private sector 
merchant marine work force to crew MSC surge sealift and 
prepositioning fleet, as well as the MARAD RRF.
    Currently, in addition to our own assets, four RRF ships 
are being used as MSC prepositioned assets. The Ready Reserve 
Force contains an additional 86 ships maintained in a 4-, 5-, 
10- or 20-day readiness status to fulfill part of our surge 
sealift requirements. Because of their configurations, these 
ships are uniquely capable of handling bulky, oversized 
military equipment. Whenever activated, the ships are crewed by 
U.S. merchant mariners.
    Shipboard automation, increased productivity in modern 
container ships, and a decrease in the number of U.S. flag 
ocean-going ships have resulted in shrinking numbers of 
seafarers in the commercial seagoing industry. The overall 
result has been a smaller pool of mariners than existed in the 
past.
    Given our mission, the issue of merchant mariner 
availability has been a concern to me since I took command of 
MSC over a year ago. MSC's efforts to improve both recruitment 
and retention of mariners led to an expansion of a program for 
entry-level Civil Service mariners which provides training to 
ordinary seamen so that they can advance to the able seaman 
rating. Our effort has resulted in better trained personnel and 
higher employee satisfaction, thus aiding in retention of MSC 
seagoing work force. This example is just one possible solution 
of many solution sets that would help this system.
    Because MSC relies so heavily on the commercial Merchant 
Marines to meet our mission, I am concerned that MSC's 
difficultly in recruiting and retaining a professional cadre of 
Civil Service merchant mariners also extends to the commercial 
merchant fleet. As we have observed in other areas of our 
national workforce, including the military services, the United 
States' robust economic environment, and the availability of 
employment opportunities in less arduous careers, makes 
attracting and maintaining an adequate merchant mariner work 
force a significant challenge.
    As the executive agent for the National Defense 
Transportation Association's Military Sealift Committee, I 
worked with the committee to form a working group charged with 
assessing our nation's ability to meet the crewing demand 
required to support our sealift mobilization. The group, 
comprised of ship operators, maritime and labor experts, has 
recently completed its study. It identifies the potential of 
mariner shortage that are now being analyzed. While the working 
group has developed numerous ideas for increasing the 
availability of both licensed and unlicensed mariners, work 
continues. We are not yet at the point where we can present 
coordinated, concrete recommendations.
    I am pleased to report that throughout this past year I 
have experienced a wonderful and excellent relationship amongst 
the Transportation Command, MARAD, the Coast Guard, the 
maritime transportation industry, and labor partners as well as 
MSC employees. We mutually have a great and correct concern and 
commitment to identify the solutions to the Merchant Marine 
manning challenge.
    Thank you for the opportunity to appear, and I am ready to 
answer any questions you might have.
    [The prepared statement of Vice Admiral Holder follows:]

    Prepared Statement of Vice Admiral Gordon S. Holder, Commander, 
                        Military Sealift Command

    Good morning, Mr. Chairman and Members of the Commerce, Science, 
and Transportation Committee. I am VADM Gordon Holder, Commander of the 
Military Sealift Command (MSC). It is a pleasure to have the 
opportunity to appear before you today. Before addressing issues 
related to the U.S. Merchant Marine Fleet and manpower needs, I would 
like to provide a brief overview of MSC and how its mission fits into 
our National Military Strategy.
    The Military Sealift Command has four vital global missions:
    1st: we provide combat ready logistics ships for the underway 
replenishment of fuel, ammunition and supplies to our Navy fleets 
around the world--a critical enabler of our Navy's ability to maintain 
a combat-credible forward presence in regions of national interest 
throughout the world. We also provide ships for related support 
services such as the hospital ships and ocean going tugs;
    2nd: we provide special mission ships to support DoD and various 
civilian agencies in the national security arena, including 
oceanographic research, ocean surveillance, missile tracking and 
submarine rescue;
    3rd: in support of the military services we provide prepositioned 
ships which are stationed in three strategic areas and are combat 
loaded for deterrence and rapid response in any contingency; and
    4th: using specialized ships we provide ocean transportation--
strategic sealift--of heavy military equipment to sustain U.S. forces 
worldwide during peacetime and in war for as long as operational 
requirements dictate.
    On an average day approximately 112 ships are deployed and actively 
involved with fulfilling MSC's four missions--providing what we at MSC 
like to refer to as ``Logistics . . . From the Sea''.
    All MSC ships, unlike other U.S. Navy ships, are crewed by merchant 
mariners. As a result, MSC is the single largest employer of U.S. 
merchant mariners. MSC directly employs 3,200 civil service seagoing 
mariners who primarily operate the combat logistics force ships. In 
addition, MSC's ship charters and ship operating contracts are 
responsible for the employment of 1,900 additional private sector 
merchant mariners.
    Numerous international crises in the 1990s have underscored the 
vital role of the Military Sealift Command as a major contributor in 
the execution of our national strategy. During the Persian Gulf War, 
MSC distinguished itself as the largest source of defense 
transportation of any nation involved. Command resources were tasked to 
deliver more than 12 million tons of wheeled and tracked vehicles, 
helicopters, ammunition, dry cargo, fuel and other supplies and 
equipment. More than 230 ships, both U.S. government-owned and 
chartered commercial vessels, virtually all crewed by commercially 
employed merchant mariners, delivered and returned more than 95 percent 
of the international arsenal required to meet military requirements in 
the Gulf.
    In more recent events, MSC's combat logistics ships, crewed by 
MSC's workforce of civil service mariners, supported Navy operations in 
the Persian Gulf, and our surge sealift assets provided resupply cargo 
to U.S. forces in Bosnia and Herzegovina. In 1999, two of MSC's large, 
medium-speed roll-on/roll-off ships, USNS Soderman and USNS Bob Hope, 
carried combat equipment and supplies for U.S. peacekeeping forces in 
Kosovo. Also in 1999, a privately owned ship chartered to MSC, MV Capt. 
Steven L. Bennett, delivered prepositioned U.S. Air Force ammunition to 
support air operations over Kosovo. All three ships, Soderman, Bob Hope 
and Bennett, were operated by commercial mariners.
    These operations have highlighted the critical contribution made by 
MSC's ships and mariners to our Navy's efforts to operate from the 
littoral seas to directly and decisively influence events ashore. These 
responses by MSC and Navy units, throughout a spectrum from peacetime 
through a crisis and into war, have made a direct contribution to 
promoting a framework of regional security and stability that supports 
our national interests.
    In addition to meeting military contingency and peacekeeping 
requirements, our sealift assets proved invaluable in natural disasters 
and humanitarian relief efforts by transporting vast quantities of 
construction supplies and equipment for victims in stricken countries. 
When Hurricane George hit the Caribbean, MSC joined in to help Puerto 
Rico and other nearby islands return to normal. We used one of MSC's 
Fast Sealift Ships, USNS Algol, and chartered space aboard the U.S.-
flag ship MV Seacor Clipper, to transport construction equipment and 
disaster relief supplies. Again, both Algol and Seacor Clipper were 
crewed by private sector commercial mariners.
    Four Maritime Administration (MARAD) Ready Reserve Force (RRF) 
Ships, under MSC operational control, transported equipment and 
supplies needed to help rebuild roads and bridges that were destroyed 
by the torrential rains following the aftermath of Hurricane Mitch. The 
RRF ship MV Cape Vincent was the first to arrive in Corinto, Nicaragua 
carrying heavy construction equipment, trucks and tractors. The RRF 
ships MV Cape Ducato, MV Cape Edmont and MV Cape Victory carried 
additional construction material to the Central America region. Our 
success with these humanitarian relief operations reflects the 
increased usefulness of the RRF. All of the RRF ships are crewed by 
private sector commercial merchant mariners.
    We rely extensively on our commercial partners to support our 
worldwide transportation requirements in peace and war. In peacetime, 
we ship more than 1.6 million measurement tons of DOD cargo using 
privately owned U.S. flag ships crewed by private sector U.S. merchant 
mariners. In wartime we also depend on the private sector merchant 
marine workforce to crew MSC's surge sealift and prepositioning fleet, 
as well as MARAD's RRF.
    Currently, four RRF ships are being used as MSC prepositioned 
assets. They include: SS Gopher State, an auxiliary crane ship with 
four 30-ton cranes stationed in Guam; SS Cape Jacob, a breakbulk ship 
prepositioned with Navy munitions; and two offshore petroleum discharge 
system tankers, SS Potomac and SS Petersburg, which are capable of 
delivering fuel from four miles offshore over undeveloped beaches. The 
RRF contains an additional 86 ships maintained in a 4-, 5-, 10- or 20-
day readiness status to fulfill part of our surge sealift requirements. 
The RRF includes roll-on/roll-off cargo ships, breakbulk ships, barge 
carriers, auxiliary crane ships, tankers and two troop ships for surge 
sealift requirements. Because of their configurations, RRF ships are 
uniquely capable of handling bulky, oversized military equipment. In 
both prepositioning status and when activated, these ships are crewed 
by U.S. merchant mariners employed by commercial ship operating 
companies. The use of ships in these examples, plus the no- notice 
activation exercises conducted over the past ten years, has proven the 
reliability and readiness of the RRF.
    Shipboard automation and increased productivity of modern 
containerships have resulted in shrinking numbers of seafarers in the 
commercial seagoing industry. Not only has the size of the ships' crew 
decreased, but the number of U.S. flag ocean-going ships has also 
decreased. The overall result has been a smaller pool of mariners than 
existed in the past. Given our mission and operations, the issue of 
merchant mariner availability has been a concern to me since I took 
Command of MSC over one year ago. MSC continuously looks for ways to 
improve both recruitment and retention of mariners. For example, in 
September 1999, after evaluating MSC's experience with seagoing 
manpower requirements and retention rates, we expanded a program for 
entry-level civil service mariners that provides training to ordinary 
seaman so they can advance to the able-bodied seaman rating. Our effort 
in grooming our entry level seamen for advancement has resulted in 
better trained personnel and higher employee satisfaction, thus aiding 
in retention of MSC's sea-going workforce.
    Because MSC relies so heavily on the commercial merchant marine to 
meet our mission, I am concerned that MSC's difficulty in recruiting 
and retaining a professional cadre of civil service merchant mariners 
also extends to the U.S. commercial merchant fleet. As we have observed 
in other areas of our national workforce, including the military 
services, the United States' robust economic environment and the 
availability of employment opportunities in less arduous careers makes 
attracting and maintaining an adequate merchant mariner workforce a 
significant challenge.
    As the executive agent for the National Defense Transportation 
Association's (NDTA) Military Sealift Committee, I worked with the 
committee's Chairman, Mr. Jim Henry, to form a working group charged 
with assessing our nation's ability to meet the crewing demand required 
to support a national sealift mobilization. The group, comprised of 
ship operators and maritime and labor experts, quickly started 
evaluating the issue and conducted in-depth discussions with the 
Maritime Administration and the U.S. Coast Guard.
    The study has recently been completed. It identifies potential 
mariner shortages that are now being analyzed. Additionally, the 
Working Group is reviewing the impact the requirements of the Standards 
of Training, Certification and Watchkeeping (STCW) will have on the 
training of our mariners to ensure we meet international maritime 
standards. This is necessary to improve our professional standards and 
enhance our mariner forces. While the Working Group has developed 
numerous ideas for increasing the availability of both licensed and 
unlicensed mariners, the work continues and we are not yet at the point 
when we can present coordinated concrete recommendations.
    I am pleased to report to you that we have an excellent 
relationship among the U.S. Transportation Command, MSC, MARAD, the 
U.S. Coast Guard and our maritime transportation industry and labor 
partners. We mutually have the correct concern and commitment to 
identify solutions to this merchant marine manning challenge.
    Thank you again for this opportunity to appear before the 
committee. I am ready to answer any questions you may have.

    The Chairman. Thank you very much, Admiral.
    Mr. Hart, let us begin with the vessel scrapping issue. 
There is the chart there that displays the number of ships 
scrapped. I believe there have been two over the last 5 years, 
is that correct?
    Mr. Hart. I think that is close to correct, yes, sir.
    The Chairman. Is one of the major reasons for this because 
we are not allowing foreign corporations or companies to 
partake in the bidding process to scrap the ships?
    Mr. Hart. I would say that is correct, sir.
    The Chairman. That moratorium has been in place for how 
long, do you recall?
    Mr. Hart. I believe that moratorium was originally put in 
place around 1998. Prior to that, MARAD had entered into an 
export agreement with EPA to find a way to sell ships for 
overseas scrapping which was never implemented as a moratorium 
was put in place.
    The Chairman. We are hearing that--and the information is 
more than anecdotal that some of these ships, which are as old 
as, I believe, 50 years, are causing some hazard both to the 
environment and navigation. Is that the information you have as 
well?
    Mr. Hart. I do not have any information that they are 
posing such a hazard. I certainly agree that it is possible 
that they would be a hazard if one of them began to leak. That 
would be an environmental hazard. As of now, I am unaware of 
any leaks, but it is something we worry about and something we 
check for almost every day.
    The Chairman. Well, I had a look at this vessel right there 
at Suisun Bay Reserve Fleet. That is not comforting. Have you 
visited these areas?
    Mr. Hart. I have been to all three fleet sites, yes, sir.
    The Chairman. Aren't you concerned?
    Mr. Hart. Yes, sir.
    The Chairman. Just from what you can see visually?
    Mr. Hart. Yes, sir.
    The Chairman. Mr. DeCarli.
    Mr. DeCarli. Yes, sir. The latest problem was with the 
Export Challenger, which is down in the James River. That ship 
did spring a leak a year or so ago, cost about $1 million to 
plug that leak. Part of the concern here is that the ships are 
getting so bad that we may have to drydock some of them. If we 
do that it is going to cost probably between $800,000 and $1 
million to bring it to drydock and put some steel on them and 
put them back in the water. We really need to take action to 
get rid of them.
    The Chairman. Is it not also true that in some cases, Mr. 
Hart, we are paying as much as $1 million just to maintain one 
or more of these ships?
    Mr. Hart. Well, as Mr. DeCarli said, when the Export 
Challenger sprung a leak it cost us about $1.3 million to fix 
the leak and to remediate the damage that was caused, so that 
you could extrapolate from that that every time there is a leak 
it could cost us as much as $1.3 million. I have to say that 
the Export Challenger leak was not a major leak.
    The Chairman. Mr. Hart, I understand the reason the 
moratorium was declared and written into law was so that 
domestic corporations or companies would have an opportunity to 
get into the scrapping business. Wasn't that the reason for it?
    Mr. Hart. I do not know why the moratorium was initiated. 
That was prior to my assuming my present position. I am not 
sure why.
    The Chairman. Well, I quoted from a letter somewhere here 
in this documentation from Senators saying that that was the 
reason for it. Is that your understanding, Mr. DeCarli?
    Mr. DeCarli. I think it was twofold, Mr. Chairman. I think 
it related to not wanting to get PCBs exported out in the 
world, and the conditions of some of the foreign places where 
these ships were scrapped, as well as the desire to get some of 
our shipyards additional business to scrap ships. Yes, sir, 
that was clearly part of the reason.
    The Chairman. I guess that leads to the question, Mr. Hart, 
have you seen any indication the United States is domestically 
developing this capability?
    Mr. Hart. I know of one, as was brought up earlier, I think 
in Mr. DeCarli's testimony. There is a pilot project that the 
Navy has to scrap ships that is beginning. To that extent there 
is a startup there. There are a couple of other shipbreakers in 
Texas, but the industry is at this point very small.
    The Chairman. Admiral Holder, do you have any comment on 
this situation?
    Admiral Holder. I really am not in this field, sir. I need 
to use those ships, but those are not useful. I would tell you 
that I know of one, Baltimore Marine Industries, which is 
involved with the Navy in a ship-scrapping program that is just 
in its infancy. Beyond that, it is out of my field.
    Mr. DeCarli. Mr. Chairman, the Navy has a pilot program 
going where they are paying scrappers to take these ships. They 
have four contractors they are currently using, including the 
one in Baltimore. It is costing them approximately $3 million 
per ship to scrap them. The Maritime Administration is 
currently using four contractors, all in Brownsville, TX, for 
scrapping operations, and that is pretty much the extent of the 
U.S. capacity presently.
    The Chairman. Has the EPA been involved in any way in this 
issue, Mr. Hart?
    Mr. Hart. Yes, they have. Now that the moratorium is--the 
moratorium sunsetted itself October 1 last year. I wrote to the 
Administrator of the EPA last month to ask if we could get 
together and talk about ways to start scrapping ships in an 
environmentally sound manner. I also have had meetings with 
Admiral Amerault at the Pentagon, Deputy CNO for logistics 
about the same subject.
    The Chairman. How many places in America do these ships 
reside?
    Mr. Hart. Three. James River, Beaumont, TX, and Suisun Bay 
in California, west of San Francisco.
    The Chairman. Well, to state the obvious, if we do the 
math, and we have only done two ships in 5 years, with 114 
ships remaining, it obviously means that we are facing I think 
severe environmental challenges. It seems to me that we need 
to, with some urgency, get together--you need to get together 
with the EPA and start resolving this problem. I have not been, 
but I intend to go and see some of these ships. When you have 
ships in the condition which I have heard descriptions of, this 
is a very serious environmental challenge, and when you are 
talking about some of the areas where these ships are located, 
then that threat becomes even more significant.
    So, Mr. Hart, I am not belaboring you here. You did not 
pass the legislation that called for a moratorium, but I 
believe the intent of the legislation was as Mr. DeCarli 
stated. I do not think you disagree with those reasons. But now 
we have got, with some urgency, to try to move forward.
    I would worry about PCBs being released some place in the 
world. I would also be deeply concerned about PCBs being 
released in these places where these ships now reside. I am 
sure the good people in San Francisco are not too interested in 
seeing that kind of problem, as well as Texas and Virginia.
    So I would like, if you could, Mr. Hart, and I can write it 
into law if you like, but I do not see the point, I would like 
for you in about a month or two to give the Committee a full 
report as to where we are, what the threats are, and maybe we 
will ask for some similar assessment from the EPA so that 
perhaps we can get a handle on this and see what we can do to 
proceed.
    I do believe there is some urgency associated with this 
problem. Do you agree, Mr. Hart?
    Mr. Hart. Yes, I do.
    The Chairman. Mr. DeCarli.
    Mr. DeCarli. Yes, sir.
    The Chairman. I thank you. There will be another round of 
questions.
    Senator Stevens.
    Senator Stevens. Mr. Chairman, I agree with you. I remember 
sitting through at least two previous hearings in the past 30 
years on these ships, and it is high time we did it. Will you 
add one thing to that request, and that is an estimate prepared 
by the Navy of what it would cost to dispose of them in a 5-
year period?
    The Chairman. I would be glad to.
    Mr. DeCarli. Mr. Stevens, I think the estimate is probably 
in the neighborhood of $\1/2\ billion, based upon a $2 to $2\1/
2\ million per piece disposal cost.
    Senator Stevens. What is it costing to maintain them now?
    Mr. DeCarli. For 1999 it was only $5 million, but there 
were no real significant problems, other than the one with the 
James River, but the costs are going to go up. The problems are 
going to get more severe. These things are deteriorating 
constantly.
    Senator Stevens. Well, Mr. DeCarli, we are paying out about 
$1\1/2\ billion a year right now on restoring formerly used 
defense sites. This is no different than that, no different at 
all. It ought to be included in that program, as a matter of 
fact, and I think the costs ought to be associated with that. 
They were used for military purposes in the past, and we ought 
to face up to it.
    Let me start off, Mr. Hart, with thanking you for your 
administration under the American Fisheries Act. I think that 
is proceeding as we anticipated, and your agency has played a 
key role, and we thank you for that.
    Mr. Hart. Thank you very much, Senator.
    Senator Stevens. That is very essential to our area for 
that act to work. As I said, I am interested in this Title XI 
program, and I have got a series of questions. If you do not 
have the answers now, we can get them for the record. Do you 
know how much carry-over money you have on Title XI at the 
beginning of this fiscal year?
    Mr. Hart. I believe it was in the neighborhood of $71 
million carryover. It is now down to, I think, $45 million.
    Senator Stevens. It is down to about $45 million?
    Mr. Hart. I believe that is correct.
    Senator Stevens. My understanding last time we checked that 
about $77 million carried over from 1999 and we had about $42 
million left at the beginning of the fiscal year, this fiscal 
year 2000, and--will have, rather, at the beginning of the 
fiscal year. No, that began last year. I had better get in tune 
here.
    Mr. Hart. Senator, you are right, it is $45 million.
    Senator Stevens. You have committed about $35 million in 
the first half of this year, is that correct?
    Mr. Hart. Yes, sir.
    Senator Stevens. Now, can you tell us what kind of projects 
you are approving now under that program?
    Mr. Hart. I have a pending list that I could read from.
    Senator Stevens. Is it going across the board in terms of 
construction? Are there guarantees for all types of vessels, or 
is it just one area of the country?
    Mr. Hart. No, sir. Reading from the pending list, I have 
deck barges that are being done in Louisiana, shipyard 
modernization being done in Louisiana, I have an inland double-
skinned heated tank barge in Ashland City, TN and 
Jeffersonville, IN, a submersible drill rig in Mississippi, a 
power barge in Portland, OR, a seagoing barge in Sturgeon Bay, 
WI and passenger and automobile ferry in Panama City, FL, high-
speed container vessels in San Diego, CA, and a deep water 
semisubmersible in Brownsville, TX.
    There are other projects that are ongoing, but that just 
gives you an idea of the States.
    Senator Stevens. Can you tell us how much you put out in 
terms of loan guarantees in the past 2 or 3 years? Do you have 
a schedule for that?
    Mr. Hart. Loan approvals in fiscal year 1998 were $734.3 
million. In fiscal year 1999, $1.766.9 billion, and to date in 
this fiscal year, $398 million.
    Senator Stevens. It is my understanding there is about 20 
applications pending at this time.
    Mr. Hart. I had 19, but 19 or 20.
    Senator Stevens. How long have they been pending, do you 
know?
    Mr. Hart. Well, some of them have been pending for a while. 
What happens, Senator, is when someone files a Title XI 
application we meet with them, we tell them what is required, 
and in some cases they go off and try and meet the 
requirements. We just let that application stay there until 
they get back to us, and so there may be longer times than 
others, but part of that is just the loan applicant trying to 
get the paperwork and necessary documentation together.
    I cannot give you an average time, but I could certainly 
provide one for the record for you.
    Senator Stevens. Well, you know I come from a State that 
has half the coastline in the United States, and we own the 
ferries. We are in the ferry business. I have been doing 
ferries. People building ferries come from all over the world 
to visit us, and Title XI, you did decide Title XI for the 
first time covered an application for ferries at Allen Marina 
that has been built in Alaska for the first time, and many of 
the ferries being built in Louisiana and Mississippi and on the 
West Coast are Title XI-eligible, and I am worried about the 
fact that we have such a backlog that we will not be able to 
get our ferries done on time.
    I am told that you have been notified that there are a 
number of additional filings that will be made for Title XI 
guarantees. Do you have notice of other guarantees being filed 
in the near future?
    Mr. Hart. Well, we always hear of potential applications. 
We have a number of premeetings with people before they file 
their applications. They will come in and say they are 
interested in doing Title XI and ask us what is required. We do 
not note those until we get a completed application, but we are 
always aware of people who want to build under Title XI.
    Senator Stevens. Now, there is very little of this 
employment that takes place in my State, but the utilization of 
many of the vessels takes place in my State. I am told if MARAD 
receives just $2 million that is requested by the 
Administration for Title XI you would be very limited in terms 
of the number of these applications that you could approve, is 
that right? How many do you think you could approve with $2 
million?
    Mr. Hart. With $2 million, based on a 5-percent subsidy 
rate, that will give us the ability to approve loans in the 
neighborhood of $40 million. That, plus the amount that we have 
left, the $45 million we have left, we are talking in the 
neighborhood of $940 million worth of loans.
    Senator Stevens. How much of the total of those 
applications are before you now?
    Mr. Hart. Let us see, pending, it does not show. I could do 
the math and give you a rough estimate, or provide a more 
complete answer for the record.
    Senator Stevens. My people have told me that they estimate 
it to be somewhere in the vicinity of $4 billion would be 
required, $4 billion in loan guarantees, and that would require 
some $50 million for each $1 billion, so you would need $200 
million for loan guarantees to approve the applications before 
you now.
    Mr. Hart. I do not know if we need that much, but I would 
agree that, if all of the pending applications prove out, and 
all of the pending lists are economically sound, then it would 
be about a $4-billion price tag.
    Senator Stevens. Are you capable of giving us a breakdown 
of what that would mean in terms of employment in the shipyards 
of the United States?
    Mr. Hart. We could probably work on a rough estimate for 
that, depending on size of the vessel, how long it takes, and 
where exactly it is being built. We could probably work up some 
sort of projection.
    Senator Stevens. We could get our ferries and our cargo 
ships for Alaska built overseas but for the Jones Act. We are 
prohibited from going overseas to have them built, and the 
reason for that is to maintain shipyard capability in the 
United States, so currently we are paying about--well, we are 
paying about 50 percent more for our vessels because they are 
built in the United States, and we are being held up now 
because we do not have enough loan guarantees to build them in 
the United States.
    Mr. Hart. Well, Senator, I am not sure we do not have 
enough to build them. As soon as the application is complete we 
make a determination yes or no. There is no hesitation on our 
part, or any reason for us to hold up any loan guarantee 
application.
    Senator Stevens. If you are limited by the $2 million the 
Administration has requested, how can you approve them?
    Mr. Hart. I understand what you mean, Senator, but that has 
not happened yet. We are not there yet. We do have sufficient 
money to approve a lot of the applications we have.
    Senator Stevens. You just testified you could do about, 
what, about a total of $40 million?
    Mr. Hart. Yes, sir.
    Senator Stevens. With the $2 million you have got now, but 
if my information is right you have got over $1 billion, or $4 
billion in requests pending.
    Mr. Hart. That is right, but a couple of those are very 
large, very large projects, and----
    Senator Stevens. Well, give us a breakdown. What I am 
really looking for is what do you need in funds to keep a 
reasonable program going as far as this concept is concerned? 
You also put them in. Can you do that for the record, give us a 
breakdown?
    Mr. Hart. Yes, I will.
    [The information was not provided.]
    Senator Stevens. You also put these in some sort of a 
priority, do you not?
    Mr. Hart. If there is not going to be enough money to do 
all of the applications, we do domestic over foreign, we do 
militarily useful over not military useful, and the third 
category is, we do the newer ships first.
    Senator Stevens. Why isn't there a priority for those ships 
that cannot be built overseas, the Jones Act vessels? Why 
shouldn't they come first? If we are required to build in the 
United States and cannot build out of the United States, why 
shouldn't we have a priority for those that are required by the 
national law to be built in this country?
    Mr. Hart. Senator, honestly, that is a good idea.
    Senator Stevens. I hope you will look at it.
    Mr. Hart. I will.
    Senator Stevens. Thank you very much, Mr. Chairman.
    The Chairman. Senator Kerry.

               STATEMENT OF HON. JOHN F. KERRY, 
                U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. I just want a clarification. I am a little 
confused. Obviously the ships that are sitting there are an 
enormous hazard--or disaster waiting to happen. I understand 
some of the hulls are sufficiently weak that you can just hit 
them with a hammer and put a hole in them. Is that correct?
    Mr. Hart. That is correct.
    Senator Kerry. Some are filled with asbestos, PCBs and so 
forth.
    Mr. Hart. That is correct also.
    Senator Kerry. I am troubled. I understand that generally 
speaking we have looked at the foreign market in order to scrap 
these. Given that potential disaster for Texas or Virginia, why 
is there not some more focused intergovernmental effort to 
either have one of our military entities, or to create some 
kind of entity? It would seem to me in the value of the scrap, 
et cetera, there ought to at least be a cost neutrality there, 
is there not?
    Mr. Hart. It depends on the kind of ship. Generally, 
warships are more valuable to scrappers than commercial ships 
because of the steel used.
    Senator Kerry. But taken as a whole, this disastrous fleet 
that is sitting there waiting to cost us an awful lot more. If 
there is a spill the Federal Government is involved, correct?
    Mr. Hart. Correct.
    Senator Kerry. We will have to come in and clean it up. 
What is the cost of that? What is the cost of the PCBs that we 
are going to spend countless amounts of dollars in remediation 
on, correct?
    Mr. Hart. Correct.
    Senator Kerry. Has that been cost-valued into the 
comparative cost? That is a liability we are going to assume if 
we do not scrap these.
    Mr. Hart. Senator, we at MARAD have been working with the 
Pentagon and the DOD to try and come up with a joint response 
to the scrapping that we both face.
    Also, I might add that we are working with the IMO, the 
International Maritime Organization, because not surprisingly 
foreign shipowners are having the same problems scrapping 
ships, so we are on the same page of the hymnal, so to speak, 
trying to come up with a unified response to the scrapping 
problem.
    Senator Kerry. What is the difficulty?
    Mr. Hart. Well, the difficulty is just coordinating three 
or four different agencies and trying to get together and come 
up with a uniform program that works. The Navy pilot program 
which they just put into place does show some promise, but 
again it is fairly expensive, and it is fairly limited. Right 
now you can only scrap so many ships at a time, but we are 
trying to put that together.
    The Chairman. With all due respect, if I could interrupt, 
you are talking about 5 years now. You have been talking 5 
years now.
    Mr. Hart. Yes, 5 years since MARAD stopped scrapping 
overseas.
    The Chairman. You have had two ships in 5 years.
    Mr. Hart. We have had nine ships, sir. I just got an 
updated figure, but your point is correct. There has not been 
enough ships scrapped, and we need to scrap more, and we need 
to scrap them as quickly as possible, both warships and 
commercial.
    Senator Kerry. I am just perplexed. I mean, either this is 
one of those things that gives Government a horrendous name, or 
there is a turf struggle that I am not aware of, or there is a 
cost struggle as to who is assuming this, and nobody wants to 
make a cut on it, but it just sounds like bureaucracy, frankly, 
at its worst.
    We are sitting around with this disaster waiting to happen.
    Mr. DeCarli. Senator Kerry, if I can, we could sell these 
ships overseas as we did back in the early 1990s. The problem 
over there is the environmental problems.
    Senator Kerry. I know, we are being responsible. I 
understand.
    Mr. DeCarli. In doing so, MARAD is locked into legislation 
that basically requires them to sell the ships. They have got 
to get actual money back from selling the ships. Nobody in 
today's market is interested in buying these ships. That is why 
the Navy has this pilot program where they are actually paying 
contractors to take them.
    The Navy is paying about $3 million a ship currently to get 
the contractors to take these ships on a pilot basis. Then the 
Navy is sharing in the proceeds from the scrapped materials, 
from the steel, from the aluminum, from the brass, and so----
    Senator Kerry. Does this cost get amortized in our 
expensing when we put a ship price down?
    Mr. Hart. No.
    Senator Kerry. I think we ought to start measuring that.
    Mr. Hart. Frankly, some people agree with you in the 
industry that we should start taking into account how much it 
takes to take a ship apart when you are trying to put one 
together.
    Mr. DeCarli. If you are going to do this domestically you 
are going to have to pay. Probably there is enough ships out 
there that MARAD needs flexibility in their reauthorization to 
do both. They probably need flexibility to pay some contractors 
to take several of these ships off their hands and scrap them, 
and they also need the authority to get rid of some of these 
ships overseas when they are in such condition that they are 
going to be hazardous to the United States, and I think we need 
a combination.
    Senator Kerry. Well, that is our responsibility 
legislatively to adjust that, and I think we ought to try to do 
it in quick order. I think it is appropriate for us to be 
concerned about the environmental conditions under which this 
takes place.
    I think it is irresponsible for us to find some Third World 
country where they are willing to dispose of the ship, but it 
is in the worst ways that they do it, and we know that is 
happening, and obviously that is what we are trying to avoid. 
That is something we have an obligation to do.
    Mr. Chairman, you have asked for some analysis here. I 
would like to see if that analysis cannot give us a comparison 
of the value of the ship in scrap versus the cost of scrapping 
it and see what the differential is. Maybe we can find some 
more efficient way of getting that differential picked up so 
there is less of an Alphonse and Gaston routine here. I think 
that part of the reason it is taking so long, is--everybody is 
afraid of being the one that is holding the bag. It is musical 
ships, rather than musical chairs.
    Mr. Chairman, thank you.
    The Chairman. Thank you. Senator Gorton.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. Thank you, Mr. Chairman.
    Administrator Hart, one of the small shipyards in my State, 
and some of the operators of smaller vessels, have asked me to 
prepare legislation to make Title XI more sort of user-friendly 
for smaller shipyards, and vessel owners. I have not made a 
decision on that yet, but perhaps you could enlighten me on how 
much use these smaller yards get out of Title XI at the present 
time and whether there is a way, either by a new bill or 
internally, to make the changes more usable and more widely 
usable by small shipyards.
    Mr. Hart. Thank you, Senator. Let me start this way. We 
know at MARAD that there is reluctance on the part of some 
people to come in and take on a Title XI application, and the 
reason we hear over and over again is because we are not user 
friendly. It takes too long, too much paperwork. We want too 
much documentation.
    We constantly struggle with that. We are trying to 
streamline the process. We are trying to make it more user 
friendly, and that is an ongoing effort. I would love to sit 
down with your staff and kick around some ideas and maybe 
legislation to make it more user friendly. We see ourselves 
basically as a bank, and so we take seriously our 
responsibility to ensure that the projects have some hope of 
repaying the loan so that everybody goes home happy. It is 
something we struggle with constantly, how to make it more user 
friendly.
    Senator Gorton. Well, you are entirely right, and other 
matters before the Committee indicate that the bank made bad 
loans, or bad guarantees, and we certainly do not want you 
doing that, but I take that invitation seriously, and we will 
try to submit to you some of the questions and some of the 
proposed legislation, because there is a balance. You do have 
to be secure, but Title XI, if it is to do our shipyards any 
good, has got to be used by small ones as well as large ones.
    So thank you. Thank you for that commitment, and if we can 
help with legislation that is still responsible and protects 
your security, we definitely want to do it.
    Mr. Hart. Thank you.
    Senator Gorton. I am not sure whether you are the proper 
person for this question, or Mr. DeCarli is, but what is going 
to happen with the creditors of Massachusetts Heavy Industry, 
Inc. who have not been paid their bills?
    Mr. Hart. Well, now that MHI has gone into bankruptcy 
court, they have gone in under Chapter 11 for the authority to 
reorganize and take another shot at being a shipyard. The 
creditors will, like all creditors in most bankruptcies, line 
up and if there is something there after it is over, the 
bankruptcy court will apportion whatever it can among those 
creditors.
    Senator Gorton. You have paid all your loan guarantee? You 
do not have any more left?
    Mr. Hart. Well, we have paid out the loan guarantee we were 
required to pay out to Fleet Bank, yes, sir, so that commitment 
is done. Now our commitment is to try and recover as much as we 
can.
    Senator Gorton. Where do you stand in comparison with these 
other creditors?
    Mr. Hart. We are first.
    Senator Gorton. So you are going to get your money back 
before these creditors get their money back?
    Mr. Hart. I am going to get some of my money back before 
the creditors get any of their money back, yes.
    Senator Gorton. Thank you. That is a very clear answer.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Mr. Hart, I would be glad to get you a letter along with 
one to the EPA to try to get a handle on this scrapping issue.
    Mr. Hart. Thank you.
    The Chairman. Obviously, it is going to require 
coordination. I think it is clear the moratorium was wrong. I 
think there are other ways of addressing concerns about what 
would happen in foreign shipyards, besides prohibiting any 
foreign entity from being able to at least attempt to qualify 
to engage in this activity. I intend to vigorously oppose an 
extension of the moratorium, because apparently we may 
experience the same virtual halt to the scrapping program.
    Mr. Hart. Sir, may I add one thing? On your opposition to--
opposing an extension, let me just say, and this is where the 
IG and I disagree on the scrapping issue, I am not sure that if 
we had unlimited money and/or unlimited authority to scrap 
foreign, that we could scrap enough of the ships overseas 
within 5 years. That is because we are on the back of a long 
line of both the military and also foreign shipowners who now 
have the same problem.
    The Chairman. Mr. Hart, I do not disagree with that, but 
there certainly is a dramatic difference from what was taking 
place from 1991 to 1995 and what has taken place since. That 
kind of progress, I think we would agree, would be 
unacceptable.
    Mr. DeCarli. Mr. Chairman, our problem with the legislation 
is the word, begin, because as it is currently written the 
Administration proposal says, begin scrapping within 5 years, 
and we think that it ought to be substantial, or if we cannot 
get it done completely, we ought to get quite a bit of progress 
in that 5-year period, not just a beginning.
    The Chairman. Well, I do not claim to be an expert on this, 
but from anecdotal media reporting and from information 
provided to this Committee from our sources, we have got a very 
serious environmental problem here, and what we have done in 
the last 5 years is clearly not sufficient to address it. We 
are in agreement with that. Now let us start moving forward as 
vigorously as possible.
    You know, Mr. Hart and Mr. DeCarli, please do not take my 
comments as gloating, because I am very sorry about what has 
happened here. On February 4, 1997, I wrote a letter to the 
Secretary of Transportation, Secretary Pena.
    In that letter I said, I wish to express my deep concern 
about a letter of commitment by the Maritime Administration to 
guarantee a loan for the reactivation of a shipyard in Quincy, 
Massachusetts. I am concerned that a Title XI loan guarantee 
for the Quincy Shipyard activation project will subject tens of 
millions of taxpayers' dollars to an unacceptable level of 
risk. I understand that the Maritime Administration has 
assigned a relatively low-risk factor to this project despite 
the absence of shipbuilding contracts with the shipyard. I am 
concerned that, et cetera, taxpayers' dollars should not be 
placed at undue risk.
    I guess I should ask you, Mr. Hart and Mr. DeCarli, was I 
right?
    Mr. DeCarli. I would say yes, you were right. Clearly the 
Maritime Administration was not in a position to look at 
whether or not the shipyard, once completed, would be able to 
repay the loan, and that was a problem. Without being able to 
take that into consideration, MARAD had to look to see how it 
would best protect the taxpayers' interest, and when they 
issued that letter of commitment they had 28 conditions in 
there. Some of them went probably about as far as they could 
conceivably go to protect that interest.
    Giving us first right to the property if there was a 
default was something that MHI absolutely objected to. 
Controlling all of the funds through the escrow account was 
something they objected to. Having them put up $3 million in 
operating capital they did not want to do.
    So given the constraints that MARAD was under, they did 
quite a bit to try to protect the interests, but it clearly was 
a risk. You know, Title XI loan guarantees are a risk to start 
with. If there were good commercial investments you would be 
able to go to the bank and get a loan without a guarantee, so 
you have got an inherent risk in the Title XI program, and then 
when you take the economic soundness criteria off of that, you 
obviously increase the risk.
    Mr. Hart. If I might just say that I agree with Ray's 
statement, and just to add that we knew that it would be a 
risk, so you were right.
    The Chairman. Well, I believed it was an unacceptable risk. 
I believe most objective observers agreed with that, and while 
we are not gifted with any clairvoyance on this Committee, it 
was clear to me that this was an incredibly high, if not 
unacceptable risk. I not only wrote the letter, I called and I 
consulted with people. I called directly the Secretary of 
Transportation in voicing my strong opposition to moving 
forward, and apparently the taxpayers are out about $50 
million.
    In response to Senator Gorton's question, I am not sure how 
much we are even going to get back of what is remaining.
    I guess one of my--Mr. Hart, over a period of 2 years the 
IG reported four times the risk factors for the Four Rivers 
Shipyard project were extremely high and circumstances had 
changed significantly. The IG recommended that MARAD should 
reassess the risk and adjust the subsidy rate accordingly.
    On each occasion, MARAD responded that it did not agree and 
put off a reassessment. How do you justify not even making a 
reassessment?
    Mr. Hart. Well, I did not know that at the time of those 
reports. The time when we had our first inkling that this was 
not going to bear fruit--the MHI renovation was probably the 
first clear indication--was probably in June 1999. Before then, 
we knew they were falling behind on their work. It was only May 
1999 when we were approached with a deferral of the interest 
payment that was due in June 1999 that the alarm bells started 
to sound in MARAD that this could possibly go south.
    So I am not sure of the timeframe of the IG's reports, but 
from our perspective it was May 1999 when we started to really 
look at this as not coming to fruition and us having to step 
in.
    The Chairman. So in July 1999 you granted a 7-month 
extension on the payments?
    Mr. Hart. That is right, with the concurrence of the 
lending institution, Fleet Bank. They agreed. They were on 
board with it.
    The Chairman. Did anyone at MARAD ever suspect there could 
be criminal activity associated with the project?
    Mr. Hart. Not to my knowledge, sir.
    The Chairman. In August 1999 you approved the termination 
of the general contractor on the Four Rivers Shipyard at the 
request of MHI. Why did you agree to the termination?
    Mr. Hart. Well, the information we had at the time showed 
that there was a major dispute between the two parties. In 
order to continue the work and possibly get this resolved, to 
get the work done, I thought it best to allow that termination 
so that a new general contractor could come in and perhaps 
finish the shipyard. Then Alberg & Sons would be in court, so 
we could handle it on a two-track basis but the work would 
still hopefully continue.
    The Chairman. I will submit some of these questions to you 
in writing, but obviously there was a Price Waterhouse Coopers 
audit that indicated that there were serious problems there as 
well.
    So I guess my question to you, Mr. DeCarli, is what is the 
future of the Four River project?
    Mr. Hart. I would like to see us foreclose on the yard and 
perhaps get another operator in there to try and finish the 
yard. Absent that----
    The Chairman. What are the prospects of that?
    Mr. Hart. Candidly, Senator, I would not assign a numerical 
value to it, because I am just not sure if there is a need for 
another shipyard of that type in the United States. I do not 
know the answer to that.
    The Chairman. Have you heard of anyone?
    Mr. Hart. I have not.
    The Chairman. Let us assume there is not someone to take 
over the shipyard. Then what is going to transpire?
    Mr. Hart. If we are allowed to foreclose, then we will sell 
the equipment for what we can and then sell the land for what 
we can also and recoup our moneys that way. As I said, we are 
having an appraisal done now to give us an idea on what the 
range of monetary recoupment would be.
    The Chairman. Obviously, you have some legal problems right 
now with the State of Massachusetts and other entities, but is 
there not also significant environmental cleanup that needs to 
be carried out?
    Mr. Hart. We have been informed by the EPA that there are 
environmental issues and environmental problems at the yard. I 
think the best estimate we have for cleanup right now is in the 
range of about $1 million.
    The Chairman. Mr. DeCarli.
    Mr. DeCarli. Yes, Mr. Chairman. The basic problem comes 
down to, if this thing is going to be an operating shipyard, 
which everybody hoped, certainly, that it would be when they 
made the loan, and would even hope so today, there has to be 
some interest in building ships there. Right from the beginning 
of this loan there was this six-ship deal coming out of Europe, 
dangling in front of us as a possibility, but that deal would 
have required another Maritime Administration loan of about 
$250 million, of which somebody would have had to come up with 
about $30 to $40 million in order to put up the equity in it, 
and there was nobody willing to step up to the table to put 
that money up, so this deal was always out there, but it never 
did materialize.
    In order for Quincy to become an operational shipyard we 
have to find somebody who is interested in building ships 
there. Senator Gorton just talked about the need for a ferry. 
Well, if there is some company that is willing to step forward 
and wants to build ferries up there, that is certainly a 
possibility, but the yard has a lot of work to be done to it 
before it can become operational.
    The drydocks have not been touched. The buildings are wide 
open on some ends. There is equipment there that has not been 
protected, and it is probably going to have some problems with 
it when it gets going. There are problems that we need to take 
care of regardless of what we do, so we do not know whether it 
will ever operate as such. We do not know at this point in time 
whether the bankruptcy court will give it to MHI under a Title 
XI reorganization, or whether the Maritime Administration will 
take title to it.
    There is some very good equipment there, as I understand 
it. We have a Coast Guard facility at Curtis Bay that is quite 
old. Maybe some of that equipment could be used by the Coast 
Guard at its facility, but clearly somewhere between less than 
$40 million will be the ending number, or around $40 million or 
less, because the difference between 59 and 40 we have pretty 
much covered, but we do not know where it is going to end in 
terms of loss to the taxpayers at this point.
    The Chairman. At least $40 million?
    Mr. DeCarli. Yes, sir. Well, I say at least $40 million, 
exclusive of what we end up getting out of the yard. It could 
be reduced by whatever we get out of the yard.
    The Chairman. Obviously, Mr. Hart, you have been tracking 
the Philadelphia Naval Shipyard, or former Philadelphia Naval 
Shipyard project.
    Mr. Hart. I have.
    The Chairman. What is your prognostication there?
    Mr. Hart. I know that there is a contract to build three 
vessels at the Philadelphia Shipyard. I understand that the 
State of Pennsylvania and the city of Philadelphia are quite 
happy with their position with that shipyard, and quite happy 
with those who are contracted to build those ships. I have not 
visited that shipyard in some time, but I understand it is 
going, and they are planning on building the contracted-for-
three ships.
    The Chairman. Mr. DeCarli, have you been?
    Mr. DeCarli. I have not been to the Philadelphia Shipyard, 
sir. I am not familiar with it.
    The Chairman. Would you do me a favor and check up on that 
project, both of you, and give us a report on it? I understand 
that there may be a problem with the market for those ships if 
they are constructed, and that there is not a contract for the 
purchase of those ships. Do you know if that is true or not?
    Mr. Hart. I do not know.
    The Chairman. If you could provide me with whatever 
information you can.
    I guess finally, Mr. Hart, I guess the former president, or 
former CEO of the corporation that was operating at Quincy is 
now residing in Greece.
    Mr. Hart. That is my understanding.
    The Chairman. So that obviously would complicate any effort 
we might make in order to achieve a full accounting.
    Mr. Hart. Yes sir, it might.
    Mr. DeCarli. I think that is correct, sir. We have some of 
the records from MHI. There have been two break-ins at the 
shipyard since the time that MARAD took possession of it. A 
computer has been stolen with a hard drive, and we do not know 
what was on that computer. You are right, it will be difficult 
to figure out.
    The Chairman. That is remarkable. Two break-ins, and a 
computer was stolen.
    Mr. DeCarli. Yes, sir.
    The Chairman. These are interesting times.
    Senator Kerry. Thank you, Mr. Chairman. Let me try to get 
some clarification here on some things I am a little personally 
puzzled about.
    First of all, in 1993 the Congress in the defense 
authorization bill passed something called the national 
shipbuilding initiative, did we not?
    Mr. Hart. Yes, sir.
    Senator Kerry. So Congress in that initiative declared that 
there was a forecast that commercial shipbuilding needs were 
increasing, and in order to compete with foreign yards the 
United States needed to increase capacity, is that correct?
    Mr. Hart. I believe that is correct, sir.
    Senator Kerry. I will say that I know it is. That is 
exactly what the DOD authorization set out to do, and so the 
Title XI loan guarantees were to be used according to that 
policy to either modernize or reopen shipyards.
    Mr. Hart. Correct.
    Senator Kerry. Quincy was designated in 1993 as a pilot 
project in that initiative, I believe.
    Mr. Hart. Yes, sir.
    Senator Kerry. Now, Quincy had a 100-year history supplying 
and building ships for the U.S. Navy, all the way up until 
1986. At that point in time there was a very short gap between 
its operational capacity and the new initiative to try to 
create shipbuilding.
    It is my understanding that there was some entity, prior to 
MHI, that did not work out. Then MHI appeared on the scene. 
Now, first of all, the U.S. Government is not yet out of money 
at this point in time. We have taken out a loan, but we hold 
assets, is that not correct?
    Mr. Hart. Yes, sir.
    Senator Kerry. The assets the U.S. Government holds, it is 
my understanding the yard when completed was estimated to be 
worth $100 million to $150 million at completion, and it is 80 
percent complete today.
    Mr. Hart. Yes, sir.
    Senator Kerry. Now, that estimate was based on the sale of 
other shipyards. In fact, in a letter to Senator McCain the 
Acting Maritime Administrator said, ``the fair market value of 
the currently enacted yard is $122 million.'' Once this yard is 
rebuilt, its value should be substantially higher as the most 
technologically advanced yard in the United States.
    So that was your position, or MARAD's position, at least, 
as to the evaluation and capacity of the yard.
    Mr. Hart. Yes, sir.
    Senator Kerry. Now, if it is proceeding along--and this is 
what I do not understand. If it is proceeding along, paying out 
money, and it is only up to the $40 million level, and has a 
guarantee up to $59 million, why suddenly--what was the 
problem, that suddenly it ground to a halt? Was this more of a 
dispute in the contract between the person renovating the yard, 
or what fell apart here?
    Mr. Hart. What fell apart, Senator, was the prospect of, 
after having expended $40 million and with $12 million left to 
go, when you look at what needed to be done, $12 million was 
not going to cover it. There were significant concerns--I will 
just give you one example. The drydock requires a huge set of 
doors which are very big, and need several weeks to install. 
Those doors had not been ordered. Things like that.
    There was equipment that seemed to be exposed to the 
elements rather than being covered. It just seemed--and my 
Deputy and my Chief of my Title XI program were up there 
several times and did their own inspection.
    Senator Kerry. So basically you are saying MHI was failing 
to perform, was falling short on its capacity to do what it had 
said it was going to do in that span of time.
    Mr. Hart. Yes, sir.
    Senator Kerry. Now, I have serious questions about MHI. 
Lots of representations were made, lots of analysis was made, 
and I assume the bona fides were checked out.
    Mr. Hart. Well, I will say we did check out the bona fides 
as much as we could. I cannot sit here and tell you that we had 
questions about the bona fides beyond those that have already 
been raised.
    Senator Kerry. I remember there were the six contracts on 
the ships. Were those contracts viewed?
    Mr. Hart. We never saw those contracts. That was one of the 
things that seemed wrong about that part of the project. Those 
six ships which were supposed to be built in the yard, we never 
really saw contracts, what we would call contracts.
    Senator Kerry. I understand, they were contingent upon the 
completion, contingent on the granting of the guarantee itself.
    Mr. Hart. All right, yes.
    Senator Kerry. But what I am trying to get at is, MHI's 
working capital and capacity to complete that task I assume was 
on the table.
    Mr. Hart. Yes, sir.
    Senator Kerry. Was MHI paying itself during the course of 
this process?
    Mr. Hart. There were a couple of bills that we saw where 
MHI was paying itself, or a couple of its subsidiaries.
    Senator Kerry. Does that raise any questions? I mean, it 
does to me.
    Mr. Hart. It certainly did to us also.
    Senator Kerry. When did that flag go up?
    Mr. Hart. I think that flag went up about June 1999. It 
seems to me that is the first time I remember hearing from 
anybody that MHI or a subsidiary of MHI had put itself in for 
payment.
    Senator Kerry. Now, who is being contacted? Who is one 
dealing with with respect to MHI at this point in time?
    Mr. Hart. From MARAD?
    Senator Kerry. Yes.
    Mr. Hart. The Deputy Administrator, Mr. Graykowski.
    Senator Kerry. Is dealing with MHI?
    Mr. Hart. With MHI.
    Senator Kerry. Who is it specifically that is representing 
MHI right now?
    Mr. Hart. There were several people. There is a Mr. Dunkel, 
who is, I believe, one of the lawyers. There is a list of 
people that any time we had a meeting----
    Senator Kerry. What about the principal, Mr. Emmanuel? He 
was certainly present and accounted for during the course of 
this earlier period. Is he present and accounted for now?
    Mr. Hart. No, he is not. I met Mr. Emmanuel once, I think 
in February, or January of this year for the first and only 
time.
    Senator Kerry. Well, does that raise questions at this 
point in time?
    Mr. Hart. Well, that raised questions beforehand, and 
certainly raises questions now.
    Senator Kerry. It is my understanding that the assets that 
you hold at this point in time are valued at a higher amount 
than the amount of money that has thus far been paid out.
    Mr. Hart. Sir, the problem with that, we are really not 
sure about that. That is why we are having an appraisal.
    Senator Kerry. I understand you are doing an appraisal now, 
but we are certainly not looking at the $50 million, $59 
million, quote, lost that I keep reading about in the paper.
    Mr. Hart. I do not believe so. As Mr DeCarli said, right 
now the possible high-side number seems to be $40 million, 
because we have got the $12 million that we did not disburse, 
and we have got the $6 million.
    Senator Kerry. But the $40 million you are talking about is 
without any asset sale, without any asset disposition.
    Mr. Hart. That is correct.
    Senator Kerry. So we are looking at, even if you discount 
it by 50 percent you are looking at considerably less than 
that.
    Mr. Hart. That is correct.
    Senator Kerry. There is no reason at this point in time to 
make the judgment that you have to do that discount. You do not 
know, is the simple answer.
    Mr. Hart. That is right.
    Senator Kerry. Now, is there any common sense at all in 
believing that some other builder of some kind, either for 
ferries or for smaller vessels or repair or other kinds of 
potential might, in keeping with the other--with the level of 
investment that has been made, is there some exploration going 
on with respect to other people who might have some subsidiary 
operation there that might, in fact, give value that way?
    Mr. Hart. We are looking, Senator, to see if there is 
someone or some entity who would want to take over all or part 
of the yard. I want to say we are limited in how much we can 
do, it seems, because we are in the middle of the bankruptcy 
proceeding and we do not want to taint that in any way. But we 
are looking to see what or who would be willing to take over 
all or part of the yard.
    Senator Kerry. Well, I certainly want to work with you and 
with Senator McCain to see what kind of answers we can get in 
terms of MHI, because certainly countless numbers of people, 
the mayors, the Governor of the State, all Senators, Members of 
the delegation, everybody proceeded in good faith on the 
representations that were set forth during the course of this, 
and it troubles me greatly if, indeed, MHI may not have been 
dealing on the same plateau, let us say, and I think that is 
worthy of your further analysis and of ours.
    Mr. Hart. Yes, sir.
    Senator Kerry. I intend to see that we continue to do that. 
I do not have anything to the contrary yet, I want to say that, 
but I just want to make certain that everybody is on an even 
keel here.
    Mr. Hart. If I may, as Senator McCain noted earlier, I 
understand that the U.S. Attorney up in Massachusetts is 
looking into this and I think that the Inspector General at DOT 
is also maintaining an active file on this, and of course we 
cooperate with both entities as much as possible.
    Senator Kerry. Well, that is worthy and important, because 
everybody deserves an answer as to what the facts are with 
respect to that basis.
    With respect to the contract, do you know what happened 
with the contractor who was doing the work itself? There seemed 
to be sort of a growing dispute there.
    Mr. Hart. There was a dispute by--Alberg and Sons was the 
contractor. When they were removed, they immediately went to 
court, and as I understand it they got a judgment, a default 
judgment against MHI for $2.1 million, I believe, and that is 
where that remains. My understanding is they got a default 
judgment because nobody for the other side bothered to answer 
the summons.
    Senator Kerry. But certainly the concept itself on which 
this was based, i.e., if you have six ships, and if you are 
going to have that job completed, that would, in fact, be a 
sound business venture.
    Mr. Hart. Clearly, if you have a revenue stream, and the 
building of those ships would be a revenue stream by which you 
could repay the loan for building the ships, or for 
revitalizing the shipyard, yes.
    Senator Kerry. Fair enough. Thanks.
    Mr. DeCarli. Senator Kerry, if I could add, the $55 million 
loan guarantee was originally intended to put together a fully 
operational shipyard. I visited the shipyard up there in 
December, and I think everybody would agree that in terms of 
the Alberg work that it is 80 percent done. I am not sure that 
everybody would agree that a fully operational shipyard is 80 
percent done. As I said, the drydocks have not been touched, 
and there are a lot of things that have not been done.
    As a matter of fact, when we visited the facility last 
December the pitch was really not to build a fully operational 
shipyard, but to spend the rest of MARAD's money to basically 
complete a steel fabrication and piping facility.
    Senator Kerry. Who pitched that?
    Mr. DeCarli. That was Mr. Sotiris Emmanuel at the time.
    Senator Kerry. When was that?
    Mr. DeCarli. Last December.
    Senator Kerry. I would assume that----
    Mr. DeCarli. I think that same proposal was made to MARAD.
    Mr. Hart. Yes, it was.
    Senator Kerry. No kidding. That is interesting. I would 
assume that set off some more alarm bells.
    Mr. Hart. Yes, certainly coming in December, when another 
interest payment was due in December at about the time that 
this second proposal showed up, and of course we refused to 
grant them a second loan deferral.
    Senator Kerry. So what percentage of an operational yard, 
as opposed to the work, would you say has been done?
    Mr. DeCarli. I cannot answer that. I do not know.
    Mr. Hart. I am not sure that there is a quantifiable number 
I could give you, 50 percent of a real shipyard, a complete 
shipyard is there, or 60 percent.
    Mr. DeCarli. One additional point I would make. In order to 
complete this deal to fabricate, to make a fabricating facility 
and a piping facility, one of the proposals was to get 
commercial financing and the MHI wanted to go out in the market 
and get additional financing.
    In order to do that, one of the requirements would have 
been for the U.S. Government to subordinate its first lien 
priority against the property and give equal footing to whoever 
provided that loan. That loan was for about, I think somewhere 
around $15 million.
    If the yard is, in fact, worth $100 million and the U.S. 
Government's interest in it is only $40 million at this point 
in time, that would tell somebody in the commercial market we 
have a $60 million asset out there available, and you would 
wonder why they would need first priority, why they would not 
take equal, or why they would not take second footing for the 
remaining $60 million.
    Mr. Hart. Why the new lender would not take second priority 
if there is an asset that is there net $60 million.
    Senator Kerry. I follow you completely, and obviously the 
Government will hold the position--one of the good things that 
I think we did do was put in those 28 conditions, which was 
part of the discussion back then. I think it was an important 
part of it.
    But the value of the yard in 1986 when it was sold to 
Massachusetts for sludge disposal was $49 million. That is the 
1986 price, and since 1986 there has been considerable asbestos 
and other kinds of cleanup there as well as building rehab, so 
I would assume if it had that value back in 1986, given 
appreciation, one would hope that it would be more valuable 
than $50 million today.
    Mr. Hart. If I could just--my only caveat with that is that 
there are significant items that were required in a shipyard 
that are not there. Drydocks----
    Senator Kerry. I am not talking about for a shipyard. I am 
talking about for whatever industrial use there may or may not 
be, and the point is, it is geared for industrial use, and it 
found other than shipyard use and valuation in 1986 of $49 
million.
    So, given land values and given its location and other 
kinds of industrial opportunity, I am saying I would hope--I 
have nothing to base this on except the valuation price of the 
sale in 1986--in the year 2000 you are in for $40 million and 
it is, I hope, worth more than $40 million since it was worth 
$49 million back in 1986.
    Mr. DeCarli. We would certainly hope you are right. The $49 
million was based on a specific--it was needed for a specific 
use. I think subsequently it was sold for about $10 million.
    Senator Kerry. That was the transfer to the State as a part 
of this deal, that is correct, and I think that was 
Massachusetts trying to chip in its part to try to help bring 
shipbuilding back to a community that had a long history and a 
great deal of pride in shipbuilding, so that was not, ``fair 
market value.'' That was the Massachusetts contribution to the 
effort to try to make this work.
    I think it is appropriate that the U.S. attorney is looking 
at this, and I have great confidence in Don Stearn. He will do 
it properly.
    I am concerned about MHI's role in this, and that is 
something that is harder to have control over, but I am deeply 
concerned about it, and I think we need to understand it 
better.
    Thanks, Mr. Chairman.
    The Chairman. Thank you, Senator Kerry.
    In 1997 we looked at this deal. We saw it was no good. I 
tried to stop it. It went through. $55 million of taxpayers' 
money was devoted to it, and now they are going to lose about 
$40 million. I predict again--I predict to you now, just as I 
predicted this project would fail, that they will lose at least 
$40 million on this deal. Watch. I think it is disgraceful. I 
think it is reprehensible. I think that when we allow something 
like this to happen with a project that is simply by any 
objective observer--and I am not an expert on shipbuilding.
    We looked at it and other objective observers looked at it. 
We saw it was doomed to failure, and yet we went ahead and 
earmarked $55 million. We now have pollution problems. Never in 
my experience has there been a cleanup accomplished according 
to the original estimates. You say there are $1 million in 
cleanup costs, Mr. Hart?
    Mr. Hart. That is our estimate, sir. That is our estimate 
as of right now, but it is only an estimate.
    The Chairman. I have never, ever seen a time when an 
environmental cleanup did not exceed its estimates, and never 
once have they come in under those estimates. I hope that 
another project will go there. I hope they build highrises. I 
hope they do something that will restore not only employment 
but everything else to the area.
    This was a doomed project from the beginning. It is a 
doomed project now. We are subject now to a situation where the 
former person who ran it has fled to another country, or is 
residing in another country and refusing to return to help us 
resolve this mess, and I think that all of us, including this 
Committee, bear responsibility for a huge waste, as I say, of 
tens of millions of taxpayers' dollars. I will watch with great 
interest and care as we proceed with new ideas and new ways to 
address what is clearly a debacle.
    So it is not that the signs were not there. It is not that 
there were not some of us who said this project will fail. We 
should not put $55 million in taxpayers' money into it. So this 
is one of those cases where at least some of us were fully 
appreciative of the risks here which far exceeded the prospects 
of success, and again it is my taxpayers' dollars that went 
into it as well. I will continue to do everything in my power, 
and I hope the next time one of these schemes comes up and we 
waive requirements, that the Congress will exercise its 
responsibility and not allow that to happen.
    This hearing is adjourned.
    [Whereupon, at 11:10 a.m., the hearing was adjourned.]


                            A P P E N D I X

                              ----------                              

    Responses to Written Questions Submitted by Hon. John McCain to 
                           Raymond J. DeCarli

    Question 1a. In your statement, you note that MARAD acted 
appropriately to protect the Government's interest.
    Is there anything else you think MARAD should/could have done?
    Answer. Prior to closing on the loan guarantee, MARAD took a number 
of actions intended to protect the Government's interest. MARAD 
identified 28 significant requirements for MHI to complete, including a 
first priority lien on all assets to the Secretary of Transportation 
and establishing a MARAD-controlled escrow account for disbursing the 
proceeds from the guaranteed loan. After MHI defaulted on its June 1999 
payment, questions arose as to whether it would be able to make 
subsequent loan payments. MARAD could have denied MHI's request to 
defer its missed June 1999 loan payment, thereby triggering actions to 
protect the Government's interest sooner. In agreeing to the deferral 
of the missed payment, MARAD noted that the lender was supporting MHI's 
request for deferral. The lenders' views should have carried little 
weight because the Government guarantee assured that, regardless of the 
ultimate outcome, the lender would receive all principal as well as 
additional interest.
    Question 1b. Do you think the shipyard could be used to scrap 
vessels?
    Answer. Yes, the shipyard could be used to scrap vessels. However, 
it would have to be set up as a scrapping facility. This would involve 
accommodations for the removal and disposal of hazardous materials and 
wastes; complete dismantlement of ships; recycling and disposal of 
materials from ships; and a system to sell the scrap material and 
reusable equipment.
    Question 2a. According to your testimony, MARAD has the 
responsibility of overseeing approximately $4 billion in loan 
guarantees.
    Based on your review of their actions at Quincy, should this 
Committee be concerned about MARAD's performance in overseeing these 
loans?
    Answer. No. This loan guarantee is not a good example of MARAD's 
Title XI program. The Quincy shipyard is the only Title XI loan 
guarantee that contained an amendment which removed the economic 
soundness requirement for reactivation and modernization of closed 
shipyards.
    Question 2b. Do you have any legislative recommendations for the 
Committee to consider that would improve upon MARAD's oversight of 
Title XI loan guarantees and better protect the interest of the United 
States?
    Answer. The legislative provision that required MARAD not to 
consider economic soundness lasted for only one year and has expired. 
We would recommend that a similar provision not be adopted in any 
future legislation.

                             SHIP SCRAPPING

    Question 3a. As you noted in your testimony, your office, in a 
report issued last month regarding scrapping of obsolete vessels in the 
NDRF recommended that MARAD seek elimination of their statutory 
requirement to maximize financial returns on the sale of obsolete 
vessels.
    Why do you believe that to be necessary?
    Answer. The current approach is not working. The Navy is paying 
contractors to scrap obsolete vessels while MARAD is asking contractors 
to pay to scrap its vessels. And, domestic capacity is very limited. 
MARAD will not be able to dispose of its obsolete vessels under the 
current legislative mandate requiring it to gain financial returns on 
the sale of these vessels. Also, MARAD's recent rate of progress in 
scrapping its vessels and the price at which its vessels are being sold 
indicates a need for a change to allow MARAD to pay for vessel 
scrapping.
    Question 3b. How would the removal of this requirement affect 
MARAD's ability to dispose of obsolete vessels?
    Answer. Removal of this requirement would allow MARAD more 
opportunities to dispose of its environmentally dangerous vessels. It 
would allow MARAD to participate with the Navy's pilot project and may 
be the incentive needed by entrepreneurs to develop additional capacity 
in the U.S. Although MARAD is currently exploring alternatives that 
have the potential to assist in disposing of some of its vessels, it is 
still constrained in the domestic market by the requirement to gain 
financial returns on its vessel sales.
    Question 3c. If Congress does not act to remove the requirement 
that MARAD maximize financial returns on the sale of obsolete vessels 
will they be prevented from disposing of all obsolete vessels within 
the time frame presented in the Administration's reauthorization 
submission?
    Answer. If that requirement stays in place, it is unlikely that 
MARAD will meet an extended deadline of September 30, 2006. MARAD would 
not be able to compete with the Navy's program, and the domestic 
scrapping capacity is very limited. Language in MARAD's authorization 
request stated that the extension would allow MARAD time to develop and 
begin implementing a plan to dispose of these vessels. However, our 
position is that it is not acceptable to simply begin disposal within 5 
years considering the condition of some of the vessels, the 
environmental risks, and the costs to maintain them. The scrapping job 
for ships currently in the inventory should be substantially complete 
or fully complete by 2006.
    Question 4. Why can't MARAD send these vessels overseas for 
scrapping?
    Answer. MARAD stopped selling vessels overseas for scrapping in 
1994 due to EPA restrictions. In 1998, the Administration placed a 
moratorium on all sales of vessels for scrapping overseas. Although the 
moratorium expired in October 1999, MARAD has refrained from exporting 
obsolete vessels. Based on a 1997 agreement between MARAD and EPA, 
MARAD is required to request EPA's approval to sell vessels to overseas 
contractors that can scrap them in an environmentally-compliant manner. 
The agreement requires MARAD to ensure that all liquid PCBs in 
transformers, capacitors, hydraulic and heat transfer fluids and that 
all ``readily removable'' solid PCBs are removed prior to exporting 
these vessels. This agreement also requires EPA to notify countries of 
import that they will be receiving vessels and that these vessels 
contain PCBs. To date, MARAD has not requested EPA approval to sell any 
of its vessels awaiting disposal to overseas scrappers. MARAD can now 
sell vessels overseas for scrapping, but it must meet the requirements 
of the EPA/MARAD agreement.
    Question 5. Since the overseas market has been basically 
unavailable, how has MARAD fared in the domestic market?
    Answer. MARAD has not fared well in the domestic market. Since the 
restrictions began on selling these vessels overseas in 1994, MARAD has 
sold only 22 vessels for scrapping. Of those, only 7 vessels have been 
scrapped. During the past year, vessel sales yielded only between $10 
and $105 per vessel. MARAD has experienced numerous problems with its 
contractors, including a recent default on a contract to scrap 5 
vessels, and continuous delays and requests for extensions for towing 
vessels (already under contract) to sites for scrapping.

        SHIP MANAGERS' CONTRACTS FOR MARAD'S READY RESERVE FORCE

    Question 6. The DOT IG participated in a nation-wide five-year 
joint cover investigation known as ``Operation Octanova,'' which was 
conducted by the Federal Bureau of Investigation (FBI), Defense 
Criminal Investigative Service, and Naval Criminal Investigative 
Service and focused on the Military Sealift Command and the Maritime 
Administration (MARAD) ship repair industry to identify fraud and 
kickbacks. The investigation was made public at a joint press 
conference in August 1999, when the initial indictments of 21 
individuals and 2 companies were announced.
    Is the investigation complete and do you expect any additional 
MARAD employees to be indicted or charged?
    Answer. The undercover phase of the investigation was concluded in 
August 1999. Since that time, the investigation has focused on leads 
generated by that operation and remains ongoing. At this time, we do 
not anticipate any additional MARAD employees being charged.
    Question 7a. Your office recently completed an audit on the ship 
managers' contracts for the RRF and concluded that MARAD implemented 
effective policies and procedures relating to the award of ship 
managers' contracts. However, you stated that this was in sharp 
contrast to its failure to implement controls for the administration of 
these contracts. What control weaknesses did you identify during your 
audit?
    Answer. We found that MARAD has not adhered to its procedures and 
practices for administering the ship managers' contracts. Specifically, 
MARAD:
     Paid contractors over $63 million before they incurred 
costs and delivered services;
     Allowed ship managers to issue numerous noncompetitive 
subcontracts without good reason; and
     Did not perform adequate reviews of invoices to ensure 
payments were for actual costs incurred; the work related to the work 
orders; and the invoices had not been already paid.
    Question 7b. What action, if any, has MARAD taken in response to 
your audit?
    Answer. In our May 12, 2000 audit report, we recommended MARAD:
    (1) Instruct regional employees on existing procedures for 
processing invoices and provide sufficient oversight to ensure that 
these procedures are followed.
    (2) Provide detailed, self-explanatory work statements, 
specifications or descriptions on all work orders.
    (3) Periodically review open and inactive work orders to identify 
those that should be closed and reprogram any remaining funds.
    (4) Re-instate periodic reviews of ship manager procurement actions 
including documentation justifying sole-source subcontractor awards and 
indications of split purchases.
    MARAD concurred with our findings and these recommendations. MARAD 
must now follow through on implementation of the recommendations.
    Question 8. On June 12, 1998, the Secretary of Transportation 
announced the award of 39 performance-based contracts to 10 American 
ship owning and operating companies to manage 89 RRF vessels which 
stand ready to support America's armed forces. The total estimated 
value of the contracts for five years was $1.1 billion. However, on 
July 2, 1998, MARAD rescinded these contracts. Why were these contracts 
rescinded?
    Answer. The ship managers' contracts that were awarded in June 1998 
were rescinded because of a technical error made by MARAD. A ship 
manager sent MARAD a letter outlining the terms for which it would 
accept a ship manager contract. This letter, however, was ``lost'' 
while MARAD determined the awards. Subsequently, MARAD made an offer to 
the ship manager that did not meet the criteria specified in the 
letter; thus, the contract was not valid. MARAD decided to rescind all 
ship managers' contracts so that awards could be re-evaluated.
    Question 9a. On April 28, 2000, MARAD awarded new ship managers' 
contracts to nine ship management companies at an estimated cost of 
$1.1 billion. This is nearly 22 months after the 1998 ship managers' 
contracts were rescinded.
    Is your office aware of the reason why there was a 22-month delay 
in awarding these contracts?
    Answer. MARAD delayed the awarding of the new ship managers' 
contracts in part because of the ongoing criminal investigation. MARAD 
was extremely concerned about issuing a contract to a ship management 
company who subsequently would be indicted as a result of the ongoing 
investigation. Legal actions against MARAD from the first contracts 
awarded also contributed to the delay.
    Question 9b. What steps, if any has MARAD taken to ensure that 
improved oversight controls were included in the new ship managers' 
contracts?
    Answer. MARAD is changing the procurement section in the new ship 
managers' contracts to include instructions to regional employees on 
administering ship managers' contracts, which should go into effect by 
June 2000. MARAD is also developing a training session for all 
headquarters and regional personnel who are responsible for 
administering the new ship managers' contracts. These sessions will 
instruct the employees on existing procedures for processing invoices 
and provide oversight to ensure that these procedures are followed.

                               __________
    Responses to Written Questions Submitted by Hon. John McCain to 
                           Clyde J. Hart, Jr.

    Question 1a. Over a period of 2 years starting in 1997, the 
Inspector General (IG) reported four times that the risk factors for 
the Fore River Shipyard project were extremely high and circumstances 
had changed significantly. In the reports, the IG recommended that 
MARAD should reassess the risk and adjust the subsidy rate accordingly. 
On each occasion MARAD responded that it did not agree and put off a 
reassessment.
    Why didn't MARAD follow the Inspector General's recommendations to 
reassess the risk factor rating for MHI's application in a timely 
manner?
    Answer. MARAD initially proposed reassessing the risk factor for 
the MHI project in the last quarter of 1998, rather than immediately 
after the Title XI guarantee closing in 1997 as recommended by the IG, 
because it was reasonable to give MHI a chance to get the yard up and 
running and to finalize a shipbuilding contract before concluding that 
the project risk had increased significantly.
    MARAD did reassess the risk in July 1998, less than a year after 
closing, and concluded that there was no basis at that point to change 
the original estimate. MHI was actively pursuing the Intermare 
shipbuilding project and MARAD had engaged in discussions with 
Intermare's counsel. Although there were major outstanding issues 
regarding the Intermare project, the project was still considered 
viable.
    In August 1999, MARAD advised the IG that it agreed with the need 
for a reassessment and proposed to complete one by December 1. MARAD 
believed this would allow sufficient time for the shipyard 
modernization to be completed and for MARAD to determine whether MHI 
would be able to finalize the Intermare shipbuilding contract on a 
viable basis. On December 1, 1999, MARAD reassessed the MHI project 
risk on the basis of the greatly increased likelihood of default since 
the yard had not been completed and there had been no progress on 
finalization of the Intermare contract.
    Question 1b. When finally reassessed, did MARAD take appropriate 
action to adjust the subsidy rate and increase the amount held in 
reserve to protect against excessive loss to the Federal Government?
    Answer. In February 2000, a final reassessment of the project risk 
was determined resulting in the re-estimate subsidy rate being adjusted 
to 60.5 percent. Accordingly the additional funds were subsequently 
transferred into the reserve account.
    Question 1c. In doing the risk assessments, what factors were 
considered?
    Answer. In doing risk assessment, the following factors are used in 
every Title XI project. These factors were established in conjunction 
with and approved by the Office of Management and Budget:
     Guarantee period
     Percentage of requested financing
     Financial position of company
     Project guarantee
     Employment of equipment
     Market segment
     Collateral
     Historical experience
     Country risk
     Construction period financing
    Question 2a. We heard from Mr. DeCarli in his testimony that 
``MARAD believes the Congressional directive to waive the economic 
soundness criteria prevented it from acting on our recommendations 
related to firm contracts.'' However, the same measure that waived the 
economic soundness requirement directed [that] ``The Secretary shall 
impose such conditions on the issuance of a guarantee to a commitment 
to guarantee under this section as are necessary to protect the 
interest of the United States from risk of a default.''
    Did MARAD follow this statutory directive throughout the life of 
the project?
    Answer. MARAD did follow this statutory directive throughout the 
life of the project. MARAD ensured that strong and meaningful 
conditions attached to the commitment to guarantee that was issued on 
November 1, 1996 and to the issuance of the guarantee on December 17, 
1997. As a result of this statutory directive, MARAD required MHI to 
grant MARAD, among other things, a first mortgage on the Shipyard 
properties, a security interest in all of the shipyard equipment, and a 
co-obligee, loss payee status on the surety bond for the main 
construction contract. MARAD also protected the interests of the United 
States by binding the MHI companies and their other lenders to strong 
Inter-creditor agreements and Subordination Agreements. During the life 
of the project, MARAD exercised diligent oversight over MHI's proposed 
changes in shipyard construction plans, the release of proceeds from 
the Escrow Fund, and requests for deferrals and release of MARAD 
collateral. As Mr. DeCarli, the Deputy Inspector General of the U.S. 
Department of Transportation observed at the hearing on May 26, 2000, 
before this Committee, when MARAD ``issued that letter of commitment, 
they had 28 conditions in there, some of which went probably about as 
far as they could conceivably go to protect [the taxpayers'] 
interest.''
    Question 2b. What other shipyards have received Title XI loan 
guarantees for revitalization and what is the status of the projects?
    Answer. Section 1139 of the Coast Guard Authorization Act of 1996 
established a new temporary, 1-year Title XI program to reactivate 
closed shipyards (the ``Reactivation'' program). This is the statute 
that waived the economic soundness test and the statute pursuant to 
which MHI applied for Title XI guarantees. No other shipyards have 
received (or applied for) Title XI Reactivation loan guarantees under 
the provisions of section 1139.
    Since 1994, MARAD has had a shipyard modernization program. Section 
1112 of the Merchant Marine Act, 1936, as amended (the 
``Modernization'' program), which requires, as a precondition to the 
issuance of a commitment to guarantee, that the agency make an economic 
soundness determination.
    In 1995, MHI applied under the Modernization program and was 
informed that the agency could not approve its application because of 
the applicant's inability to demonstrate economic soundness.
    Under the Modernization program, MARAD has approved a total of 
seven shipyard Modernization projects. The approved Modernization 
applications were from National Steel & Shipbuilding Company, Avondale 
Industries, North American Shipbuilding, T.T. Barge Services, HAM 
Marine, Inc., Bender Shipbuilding & Repair, Inc., and Eastern 
Shipbuilding Group, Inc. These seven projects are all on time and 
current with their debt service payments.
    Question 2c. Has MARAD held other shipyard revitalization projects 
to the same standards as it has the Fore River project and if so, 
should we be concerned about the future of these projects?
    Answer. It is difficult to compare the Modernization projects to 
the Reactivation project. Although applicants in both programs are held 
to a high standard, to ensure protection of the interests of the United 
States, MARAD can show more flexibility in structuring collateral 
packages for companies that have a backlog of contracts and a 
demonstrated record of success in the market place. At present, we see 
no reason to be concerned with the future of any of the Modernization 
projects.
    Question 3a. In a July 20, 1999 report, the IG in expressing 
concern about the risk of default by Massachusetts Heavy Industry 
(MHI), noted that MHI still had not demonstrated that they had a source 
of income from contractual work or elsewhere that would allow them to 
repay the loan secured by the Federal Government. Yet MARAD, under your 
direction, granted what amounted to a 7-month extension on payments.
    What was MARAD's rationale for granting the extension?
    Answer. Representatives of MHI, the obligor, and Fleet Bank, the 
guaranteed obligee, requested that MARAD approve their proposal to 
defer the $1.55 million payment due on June 1, 1999, under MHI's Note 
to Fleet for 25 years. At that time, MHI was obligated to pay Fleet 
$56.55 million in principal and accrued interest under the Note. 
Representatives of MHI contended that MARAD's collateral would be 
substantially enhanced if MHI were permitted to complete the shipyard. 
In letters of July 16, 1999 and July 31, 1999, Mr. Sotiris Emmanuel, 
President of MHI and Mr. James Dunkel, MHI's Chief Financial Officer, 
on behalf of MHI, assured MARAD that it was their belief that the 
shipyard would be completed in October 1999. In conjunction with this, 
they assured MARAD that once the shipyard was a reality, they would be 
able to obtain sufficient numbers of shipyard contracts.
    In reliance on MHI's assurances, MARAD partially approved the 
deferral request, granting a deferral until December 1, 1999, the date 
of the next debt service payment. MARAD's rationale for granting the 
extension was that if the yard were completed before the December first 
payment was due, this would increase MARAD's collateral value and give 
MHI the opportunity to demonstrate the truth of its contention that 
once the shipyard was completed they would obtain the necessary 
shipbuilding contracts.
    Question 3b. What documentation was available to make MARAD believe 
MHI's financial problems would allow them to complete the shipyard?
    Answer. At the time of the MHI deferral requests in May, June and 
July 1999, MARAD had reason to believe that the money in the Escrow 
Fund (maintained by MARAD in the Treasury Department) would be adequate 
to complete the shipyard. Although MARAD was aware of some contractual 
difficulties between MHI and its contractor, O. Ahlborg & Sons, at the 
time MARAD granted approval to the deferral, August 6, 1999, there was 
no reason for MARAD to believe that MHI would not complete the shipyard 
in the October timeframe.
    Question 3c. How much was paid out of the escrow account between 
July 1, 1999 and February 28, 2000?
    Answer. Between July 1, 1999 and February 28, 2000, MARAD paid out 
$3,137,490.19 from the MHI Escrow Fund to MHI's vendors and as 
emergency payments to protect the assets at the shipyard.
    From July 1, 1999 until MARAD froze MHI's accounts on September 17, 
1999, MARAD paid out $2,805,211.13 to MHI vendors.
    Of this amount, MARAD was required by contract to release 
$720,378.13. MARAD released the remaining $2,084,833 in the belief that 
Ahlborg's Surety would complete construction of the shipyard pursuant 
to the Performance Bond. MARAD hoped that the construction would not be 
delayed. When it became obvious that the Surety was likely to study the 
issues closely, MARAD, at the recommendation of the Department's 
Inspector General, froze the Escrow Account, except as requested by MHI 
to meet exigent circumstances. After MARAD froze withdrawals from the 
Escrow Fund, MARAD released $332,279.06 from the Escrow Fund at MHI's 
request to pay for such items as insurance, security guards, and 
electricity.
    Question 3d. If MARAD had taken action earlier to foreclose on the 
loan and take possession of the shipyard, would the Federal Government 
still be out $50 million?
    Answer. Given the refusal of Fleet Bank to call on MARAD's 
Guarantee until sometime in August, MARAD would have had to pay out in 
excess of $57.25 million instead of the $59.1 million it ultimately 
paid. Pursuant to statute and contract, MHI's default of June 1, 1999, 
did not ripen into a callable Default until July 1, 1999, and the 
obligee Fleet Bank had 60 days to decide whether or not to call a 
Default and make a demand under the Guarantee. Thus, the amount of 
guaranteed interest could have continued to increase for an additional 
90 days. MARAD may not foreclose until it has paid the obligee under 
the Guarantee. Had MARAD not granted the deferral, the earliest MARAD 
could have begun foreclosure would have been in late August 1999. The 
commencement of the foreclosure at an earlier date would not have saved 
the original $55 million in principal guaranteed by MARAD.
    Question 4a. As I mentioned in my opening statement, the Committee 
is aware that the Department of Justice, as well as the U.S. Attorney's 
Office in Boston, is looking into accusations of criminal wrong doing 
associated with the project.
    Did anyone at MARAD ever suspect that there could be criminal 
activity associated with the project, and if so, what action was taken 
with regard to these suspicions?
    Answer. Yes. Referrals were made to the Department's Office of 
Inspector General.
    Question 4b. How often did officials from MARAD meet with MHI to 
review progress on the project and what was the nature of the meetings?
    Answer. There was frequent communication between MARAD officials 
and MHI officials, especially between representatives of MHI and 
MARAD's Office of Ship Construction regarding MHI's submissions of 
invoices in support of withdrawals from the Escrow Fund and information 
concerning the extent of construction. A MARAD representative 
periodically visited the shipyard to examine the extent of construction 
progress.
    Question 4c. Should MARAD have been more vigilant of its oversight 
role in light of these investigations?
    Answer. We believe that MARAD was sufficiently vigilant in its 
oversight of MHI's construction efforts.
    Question 5 a-d. In August 1999, you approved the termination of the 
general contractor (Ahlborg) on the Fore River Shipyard revitalization 
project at the request of MHI. Why did you agree to the termination? At 
that time, how far behind was the project? In approving the 
termination, how did you believe the project was going to be completed? 
After agreeing to terminate the contractor, did MARAD seek enforcement 
of the performance bond against the Surety, and if not, why not?
    Answers. The answers to these questions involve issues that are the 
subject of pending or threatened litigation by and among MHI, Ahlborg, 
MARAD, and other parties. Accordingly, MARAD believes that the answers 
to these questions should be made in the first instance to the courts 
that will address these issues.
    Nevertheless, we would be happy to provide you and your staff with 
a briefing of pending matters related to the above referenced 
questions.
    Question 6a and b. At the same time you approved the termination of 
the contractor, you froze $12.4 million that remained in the escrow 
account. What was the impact of freezing those funds? Did freezing 
those funds prevent MHI from moving forward with the project?
    Answers. The answers to these questions involve issues that are the 
subject of pending or threatened litigation by and among MHI, Ahlborg, 
MARAD, and other parties. Accordingly, MARAD believes that the answers 
to these questions should be made in the first instance to the courts 
that will address these issues.
    Nevertheless, we would be happy to provide you and your staff with 
a briefing of pending matters related to the above referenced 
questions.
    Question 7a. During the 1980's, there were a large number of 
defaults on Title XI loan guarantees. As a result, were there any 
changes made to regulations to reduce the number of defaults?
    Answer. Yes, in 1985 MARAD modified the Title XI regulations to 
strengthen the criteria for approval. For example, MARAD established 
specific objective criteria in analyzing a project's economic 
soundness.
    Question 7b. What is the overall default rate of the Title XI loan 
guarantee program?
    Answer. Since the inception of the program in 1955, MARAD has 
issued approvals for approximately $16.7 billion. The program has 
experienced defaults in the amount of approximately $2.7 billion. This 
default level does not include any money that MARAD recovered from 
selling the defaulted vessel/assets.
    Over the entire history of the program, the cost of defaults has 
been less than 2 percent of the total guarantees. Program receipts from 
recoveries, fees and other sources total $2.5 billion, which have 
helped offset the default losses of $2.7 billion.
    Question 7c. What is the total risk, in dollars, to the government 
for the whole of the Title XI loan guarantee program?
    Answer. The program's current portfolio is slightly over $4 
billion.
    Question 7d. In the case of default, does MARAD have the ability to 
sue to recover lost funds from the company involved and its parent 
company, and if not, why not?
    Answer. Yes, MARAD has the legal right to seek recovery from the 
defaulting Title XI company. Depending on the structure of the 
transaction, MARAD may also have the right to seek recovery from the 
parent of the Title XI company.
    Question 7e. As part of the risk assessment, does MARAD consider 
whether or not the Federal Government will be able to recover the 
funding in the case of default?
    Answer. Yes, In structuring the transaction MARAD seeks to obtain a 
collateral package that will minimize any loss to the government in the 
event of default. The expected recoveries from the collateral package 
are also considered in calculating the subsidy cost of the loan 
guarantee.
    Question 8a. Shortly after MARAD started foreclosure proceedings at 
the shipyard, MHI filed for bankruptcy protection under Chapter 11.
    What is the status of those proceedings?
    Answer. MARAD did not have an opportunity to start foreclosure 
proceedings before MHI filed for bankruptcy protection under Chapter 11 
. In the bankruptcy proceedings, MARAD has moved for relief from the 
stay so that it can convene foreclosure proceedings. A hearing of the 
motion took place on July 18, 2000, and the court gave MHI until August 
23, 2000 to make substantial progress toward obtaining new financing.
    Question 8b. What plan does MARAD have for the future of the 
shipyard and recovery of the Federal funds paid out on the loan 
guarantee?
    Answer. MARAD would like to work closely with the local authorities 
and investors to find a productive use for the property which would 
produce jobs and tax revenue for the communities and which would repay 
the monies paid out by MARAD under its guarantee of MHI's defaulted 
debt to Fleet Bank.
    Question 9. On April 15 , 1999 MHI was required to submit an 
audited Financial Statement. On April 12, 1999 MHI requested an 
extension for filing their audited financial statement until May 30, 
1999. On April 14, 1999 MARAD approved the extension request. MHI did 
not complete the required annual audited Financial Statement until 
August 31, 1999. MHI hired Pricewaterhouse Coopers to do the Financial 
Statement and at its completion, Pricewaterhouse Coopers said ``Further 
operations of the Company are dependent on, among other factors, 
completing the renovation of the shipyard and a customer securing the 
financing necessary to fund their orders'' (for ships). ``These matters 
raise substantial doubt about the company's ability to continue as a 
going concern.'' Pricewaterhouse Coopers further determined that MHI 
had a deficit accumulated during development stage of $2,520,615.00 as 
of December 31, 1998.
    Why didn't MARAD raise serious concerns about the financial 
stability of MHI after receiving the audit from Pricewaterhouse 
Coopers?
    Answer. None of the issues raised by the Pricewaterhouse Coopers 
audit were new. Initially, in 1995, MARAD had declined to finance MHI 
because it had insufficient customers and because it did not own a 
functioning shipyard. Congress passed a law precluding MARAD from 
taking into account the economic soundness of the venture. As a result 
of the passage of this law, MARAD issued, on November 1, 1996, a 
commitment to guarantee MHI's obligations. By the terms of this 
legislation, MARAD was unable to refuse to close on this financing 
commitment merely because the audit disclosed facts which were apparent 
to all, namely, that the shipyard had not been built and that the 
company had few, if any, genuine customers. The fact that MHI had 
invested $2,520,615 during the development stage did not in and of 
itself raise any concerns.
    Question 10. MHI officials identified Intermare shipbuilding 
projects as a potential source of revenue. Why was Intermare's 
application for a Title XI loan submitted to MARAD in January 1996 not 
approved?
    Answer. MARAD did not regard the Intermare contract to be eligible 
for Title XI financing because, among other things, (i) the Intermare 
company never demonstrated to MARAD that it possessed the minimum 
equity required to qualify for the financing (12.5 percent of the 
actual cost of the vessel), (ii) there was an absence of market data to 
support the required finding that operation of the Intermare ships, if 
built at the proposed cost of $40 million each, would be economically 
sound, and (iii) MHI proposed to build most of the Intermare ships, if 
financed under Title XI, in a Korean shipyard (MHI was repeatedly 
informed that this proposal was unacceptable as a matter of law and 
policy).
    Question 11a. The former Philadelphia Naval Shipyard has recently 
reopened and begun construction of several vessels.
    Did the Philadelphia yard receive a loan guarantee?
    Answer. No.
    Question 11b. Did the Philadelphia yard receive any other Federal 
funding and if so, what type, how much, and how was it utilized?
    Answer. Yes, both the Departments of Labor and Defense gave Federal 
funding of $50 million each to be used for job training.
    Question 12a. MARAD has a statutorily mandated deadline for the 
disposal of obsolete National Defense Reserve Fleet (NDRF) vessels. As 
part of the National Maritime Heritage Act of 1994, MARAD is 
responsible for the disposal of obsolete vessels in the NDRF, and that 
these vessels be disposed of by September 30, 2001. MARAD currently has 
114 vessels awaiting disposal, of which 91 are targeted for scrapping.
    What is MARAD's plan for disposing of its obsolete vessels?
    Answer. The DOT Inspector General's March 10, 2000 audit report 
recommends that MARAD ``develop a proposal for submission to the 
authorization and appropriations committees in Congress seeking 
approval and funding for a project to pay contractors for vessel 
scrapping.'' By memorandum dated February 29, 2000, the Maritime 
Administrator responded that he fully concurred with this 
recommendation.
    Question 12b. Does MARAD have a specific plan for disposing of its 
37 ``worst condition'' vessels?
    Answer. No. MARAD does not have any new plans for disposing of its 
37 ``worst condition'' vessels. At this time, MARAD has sold 13 of 
these ships, four of them twice (due to the failure by contractors to 
take delivery of the vessels they had purchased). MARAD is working with 
the contractors to take delivery of these ships. Depending on the 
outcome of pending legislation, MARAD will take appropriate action to 
dispose of the remaining 24 vessels. MARAD may have the option of 
disposing of the vessels either under the current sales program, or 
selling them overseas as Senator McCain's amendment proposes, or paying 
contractors as proposed in other legislative amendments.
    Question 12c. How much will MARAD spend in fiscal year 1999 to 
maintain obsolete vessels?
    Answer. MARAD spent approximately $2.7 million in fiscal year 1999 
maintaining obsolete vessels.
    Question 12d. Does MARAD currently have the authority to pay for 
scrapping of obsolete vessels?
    Answer. No. The National Maritime Heritage Act requires MARAD to 
dispose of all vessels ``in a manner that maximizes the return on the 
vessels to the United States.''
    Question 12e. Is there a market for scrapping of any of these 
obsolete vessels that would allow MARAD to maximize financial return to 
the United States as directed by Congress in the National Maritime 
Heritage Act?
    Answer. Only overseas scrapping will allow MARAD to maximize 
financial return to the United States. From 1987-94 MARAD sold 130 
ships for overseas scrapping at an average price of $108/ton. MARAD has 
tried selling ships domestically for the last 3 years and watched 
prices received plunge from $10/ton to $10/vessel.
    Question 13a. In the Administration's proposal for reauthorization, 
MARAD has asked for a 5-year extension to the statutory deadline for 
disposal of obsolete vessels. If the Committee acts on the request, 
this would be the second time the deadline has been extended.
    Why should we believe that another extension is going to result in 
MARAD addressing the problem in a decisive manner?
    Answer. MARAD has grappled with vessel scrapping since EPA applied 
the Toxic Substances Control Act to government-owned vessels in 1994. 
This action precluded MARAD from selling ships for overseas scrapping. 
The only lawful option available to MARAD at this time is to sell 
vessels for scrapping in the United States. To date, this option has 
proven unsuccessful and unsatisfactory; only nine ships have been 
removed from MARAD's fleet sites for scrapping in the United States. 
Because these circumstances, we are requesting additional time to 
develop a program to scrap an estimated 172 ships over the next 5 
years.
    Question 13b. What other alternatives to scrapping is MARAD 
currently looking at for disposal of obsolete vessels?
    Answer. MARAD has donated 51 ships to coastal states to be sunk as 
artificial reefs and plans to continue with that program. MARAD also 
donates ships to be used as museums and memorials when specific 
legislation is passed. MARAD is also working with the Navy to determine 
if any vessels would be suitable for Navy's SINKEX program, a program 
in which obsolete vessels are used as targets in live fire exercises.
    Question 14. These vessels contain hazardous materials that pose a 
threat to the environment. As they age and continue to deteriorate, the 
likelihood of an environmental problem increases, as will the costs to 
maintain them. What proactive measures has MARAD planned or implemented 
to ensure that hazardous materials from these vessels are not spilled 
into our waters?
    Answer. Various efforts have been initiated to assure that obsolete 
vessels that pose the greatest environmental risk are closely 
monitored. MARAD is putting cathodic protection on all the vessels at 
the three fleet sites to slow the deterioration of steel hulls in 
brackish water. We expect this to be completed by mid-FY 2001. In 
addition, MARAD has taken soundings of all ships' tanks to verify the 
kinds and quantities of liquids on board. MARAD has deployed oil booms 
to trap any leakage on suspect ships. MARAD has also conducted market 
research on oil consuming microbes and three vessels are being treated 
with them; the results are being monitored. MARAD has also gauged the 
higher risk vessels' hulls to determine hull metal thickness. In 
addition, since Hurricane Floyd, MARAD has spent $3 million shoring up 
the anchoring system in the James River Reserve Fleet to protect the 
ships from dragging their anchors and possibly sinking during a 
hurricane.
    Question 15a. In the 1970's, there were 30 domestic ship-scrapping 
companies. Today, MARAD considers only four companies to be viable, and 
concerns have been expressed regarding those.
    What actions has MARAD planned or initiated to draw additional 
companies to the ship scrapping industry?
    Answer. MARAD has held many meetings with ship scrappers and 
visited numerous possible ship scrapping sites, located in Oregon, 
Texas, South Carolina, Alabama, New York and Virginia. In addition, 
MARAD has conducted debriefings with unsuccessful bidders to explain 
where their technical compliance plans were deficient. MARAD maintains 
a mailing list to provide information to bidders interested in 
scrapping. MARAD advertises its vessels in the Commerce Business Daily 
and puts its Invitations for Bid on the Internet. MARAD is also working 
closely with the Navy in sharing information.
    Question 15b. Why has MARAD granted contractors numerous extensions 
for removing sold vessels from the Fleet?
    Answer. In the current environment for selling vessels for scrap, 
there are a limited number of qualified available scrappers. MARAD has 
sought to work with these scrappers by granting extensions in some 
cases in order to dispose of as many ships as possible. Nevertheless, 
of the 22 ships sold for domestic scrapping since 1997, scrappers have 
taken possession of only nine. As a case in point, when MARAD re-
offered 5 defaulted vessels for sale in September 1999, it received 
only two bids. Only one of the bidders passed MARAD's technical review, 
and only three ships could be awarded to that contractor due to its 
capacity limitations.
    Question 16a. Current law requires MARAD to sell its scrap vessels. 
The Navy, however, recently implemented a pilot project to pay 
contractors to scrap vessels.
    If MARAD is granted funding and approval for such a project, how 
does it intend to solicit contractors to scrap these vessels?
    Answer. MARAD is developing an action plan to address this issue.
    Question 16b. How does MARAD intend to implement such a project, 
i.e., through cost plus contracts, cost sharing, payment for 
remediation, etc?
    Answer. MARAD is developing an action plan to address this issue.
    Question 16c. Is MARAD coordinating with the Navy on its pilot 
project and the results?
    Answer. Yes. MARAD maintains close contact with the Navy with 
respect to their ship-scrapping program. We expect to benefit from 
Navy's experience under their current scrapping pilot project.
    Question 17. In a Memorandum of Agreement between the Maritime 
Administration (MARAD) and the Department of Defense, the Ready Reserve 
Force (RRF) was established as a component of the National Defense 
Reserve Fleet to meet shipping requirements during national 
emergencies. MARAD is responsible for RRF vessel acquisition, upgrade, 
activation, maintenance, operations and subsequent deactivation. How 
much does MARAD expend annually on maintaining the RRF vessels?
    Answer. From FY 1996 through FY 2000, MARAD's budget for 
maintenance of the RRF, including ships in the NDRF, has ranged from a 
low of $262 million (FY 2000) to a high of $302 million (FY 1998). Of 
these amounts, approximately 60 percent is obligated for maintenance, 
repair and readiness of the ships; the balance of funding is assigned 
to salaries, ship management fees, berthing costs, logistics 
provisioning, vessel upgrades, and NDRF fleet maintenance. Our Program 
And Objectives Memorandum numbers for FYs 2001 through 2005 are 
similar.
    Question 18. As a result of a joint investigation by the Department 
of Transportation, Office of Inspector General (DOT-IG), Federal Bureau 
of Investigation, Defense Criminal Investigative Service and Naval 
Criminal Investigative Service involving ship managers' contracts, two 
Maritime Administration (MARAD) employees were indicted and charged 
with accepting unlawful gratuities from contractors in exchange for 
actual or promised favorable treatment on ship repair contracts. What 
action has MARAD taken to prevent future occurrences of illegal 
activity within MARAD?
    Answer. Ship Manager subcontracting procedures have been revised to 
increase requirements and controls. The revised procedures set forth 
more stringent guidelines for review and issuance of ship manager 
subcontracts, tracking of funds obligated for ship maintenance and 
repair, and de-obligation of excess funding and contract/task order 
closeout procedures. The new procedures will be incorporated into the 
2000 Ship Manager contracts upon resolution of a bid protest.
    Administrative Contracting Officers have been instructed to 
incorporate work descriptions and specifications into the task orders 
to facilitate the invoice review and tracking process.
    Implementation of the electronic contract writing system at all 
MARAD procurement centers in fiscal year 00 provides greater electronic 
oversight to ensure that procedures are followed consistently.
    The MARAD Office of Acquisition is in the process of acquiring a 
2\1/2\ day training course focused on the administration of the 2000 
Ship Manager contracts. The training will be available to all 
appropriate personnel at MARAD Headquarters and regional offices. Part 
of this course will focus on contractual controls and limitation of 
authorities for Government employees directly involved with the 
contract performance.
    MARAD's Office of Chief Counsel will conduct annual, in-person 
ethics training to all MARAD employees emphasizing, as appropriate, 
recent occurrences.
    Question 19a. The DOT-IG recently completed an audit on the ship 
managers' contracts for the Ready Reserve Force and identified 
weaknesses in the Maritime Administration's controls.
    Do you believe that the weaknesses identified contributed to the 
fraud and kickbacks found during the joint investigation?
    Answer. In Fall 1999 MARAD personnel met with investigators from 
the Department of Transportation Office of the Inspector General (DOT 
IG), the Federal Bureau of Investigation (FBI), the Defense Criminal 
Investigative Service (DCIS) and the Naval Criminal Investigative 
Service (NCIS) to discuss the ongoing investigation, and assess what 
actions MARAD could take to minimize the occurrence of fraudulent 
activity on the ship manager contracts. The FBI agent stated that in 
spite of the review processes implemented by MARAD, this type of 
wrongdoing could only have been uncovered by the sting operation and 
the inside information obtained during it. The agent further emphasized 
that the kind of fraudulent activities identified through the 
investigation could not have been identified through MARAD's review and 
approval oversight processes.
    Question 19b. What actions has MARAD taken in response to the IG's 
findings?
    Answer. Upon receipt of notification of criminal indictments 
resulting from the undercover sting operation conducted by the FBI, 
DCIS, NCIS, and the DOT IG, MARAD has consistently taken decisive 
action within the administrative remedies available under the 
regulations. In coordination with the U.S. Navy, MARAD has suspended or 
debarred eleven (11) businesses/individuals from Government contracting 
and Government-approved subcontracting for a period of up to three (3) 
years. Additionally, where improper activity did not result in 
indictments, MARAD has notified the individuals' employers in 
accordance with the contract provisions, to ensure that they could not 
work under a MARAD contract for a period of up to 3 years.
    MARAD also took action against two MARAD employees, William Martin, 
Ship Operations Maintenance Officer, and Warren Hilton. Both 
individuals resigned before termination actions by the agency. The 
agency has debarred from government contracting or subcontracting both 
individuals for a period of 3 years.
    Although MARAD has an extensive oversight system with checks and 
balances in the management of the Ship manager program, MARAD has 
decided to revise Ship Manager subcontracting procedures in light of 
the recent investigative results. The revised procedures are currently 
being reviewed and will be integrated in the recently awarded 2000 Ship 
Manager contracts.
    Question 19c. How does MARAD plan to improve controls for 
administering ship managers' contracts and general agency agreements?
    Answer. Under the recently awarded 2000 Ship Manager Contracts, 
MARAD has contracted with the Defense Contract Audit Agency (DCAA) for 
the review of ship managers' Commercial Purchasing System (CPS) 
procedures. In response to MARAD's requirement, DCAA has established a 
centralized office to coordinate and track all CPS reviews and 
incurred-cost audits.
    In order to obtain approval of their CPS, ship managers must 
demonstrate a separation of duties between the individuals tasked with 
identifying the requirement, those writing the specification, and those 
soliciting and selecting the subcontractor.
    Administrative Contracting Officers have been tasked to conduct 
periodic reviews of the ship managers' procedures to ensure compliance 
with established and approved subcontracting procedures. A complete CPS 
review will be conducted by the DCAA every three (3) years under the 
new ship manager contract.
    Subcontracting procedures have been revised to establish more 
stringent requirements and controls. The revised procedures set forth 
more stringent guidelines for review and issuance of ship manager 
subcontracts, tracking of funds obligated for ship maintenance and 
repair, and deobligation of excess funding and contract/task order 
closeout procedures. The new procedures will be incorporated into the 
2000 Ship Manager contracts upon resolution of a bid protest.
    Question 20a. The Ready Reserve Force (RRF) was established as a 
component of the National Defense Reserve Fleet in 1976. The Maritime 
Administration (MARAD) is responsible for maintaining RRF vessels in a 
heightened State of readiness so that they can be activated in 4 to 30 
days to meet shipping requirements during national emergencies. MARAD 
administers RRF vessel acquisition, upgrade, activation, maintenance, 
operations, and subsequent deactivation through ship manager contracts. 
In 1998, MARAD awarded ship manager's contracts and then rescinded them 
20 days later. The ship managers' contracts were not awarded again 
until April 28, 2000. Has the delay in awarding the new ship managers' 
contracts had a negative effect on MARAD's ability to meet its 
readiness goals?
    Answer. The impact of the delay in awarding the new ship manager 
contracts on RRF readiness has yet to be determined. Multiple temporary 
contract extensions over the past two (2) years have resulted in our 
delay of annual ship maintenance work, thereby deferring scheduled 
maintenance and upgrade items. No-notice test activations later this 
year and next year will indicate whether or not these delays have had 
adverse readiness implications.
    Question 20b. How much more, if any, did it cost MARAD as a result 
of the delay?
    Answer. Extensions to existing Ship Manager contracts were made at 
the 1998 rates. Consequently there has been no cost impact to the 
fixed-price portion of the contracts.
    We have no quantifiable data on higher maintenance costs resulting 
from the delay in Ship Manager contract awards.
    Nevertheless, we believe that doling out work in small increments, 
due to the short-term contract extensions granted over the past 2 
years, loses any economy of scale to be realized by consolidating work 
into larger repair packages. It is not possible to estimate a 
meaningful cost associated with this issue.
    Question 21a. No dry bulk vessels that would be covered by the 
waiver of the 3 year rule as proposed in the Administration's 
submission have been built in a U.S. shipyard in the past 20 years, and 
none has been built without Federal subsidies. Do you have any concern 
that enactment of this temporary amendment to Title XI would adversely 
impact U.S. shipyards?
    Answer. We do not anticipate any adverse impact on U.S. shipyards. 
In fact, enactment of this amendment will have a positive impact on 
them. The large U.S. shipyards capable of building dry bulk vessels 
have stated they are not interested in the commercial marketplace. They 
especially have no desire to build dry bulk vessels, which are the 
cheapest and most competitive type of vessel to build. One U.S. 
shipyard stated that foreign shipyards are building these type vessels 
for less than the cost of materials in a U.S. shipyard. However, U.S. 
shipyards would gain new repair business because the vessels would have 
any reflagging work and future maintenance and repair performed in U.S. 
shipyards.
    Question 21b. Do you have any concern that this amendment would 
lead to excess U.S. flag tonnage for preference cargo if food aid 
levels drop?
    Answer. It is possible that some excess U.S.-flag tonnage could 
develop if there was a major reduction in U.S. food aid levels. In such 
an event, the marketplace would drive down freight rates to a level 
where older vessels which are not designed for dry bulk carriage, such 
as single hull tankers, or older vessels whose maintenance and repair 
costs are excessive, could become non-competitive and effectively reach 
the end of their economic lives. In addition, the potential addition of 
multipurpose vessels to the U.S. could open up markets not fully served 
(i.e. PR-17) by current U.S. flag vessels.
    Question 21c. Will this amendment have any effect on the Jones Act?
    Answer. No, this amendment has no impact on the Jones Act. It only 
affects international trade for agricultural preference cargoes to 
foreign nations.
    Question 21d. Why does this amendment address only the bulk sector 
of the U.S.-flag fleet?
    Answer. Only the agricultural sector of preference cargoes is 
restricted to a 3-year waiting period before carriage by reflagged 
vessels is permitted. The amendment would put the agricultural sector 
on the same footing as the military cargoes, at least for the narrow 
limited window as proposed by the amendment.
    Question 22a. It would seem that older bulk ships could charge the 
lowest rates because their capital costs have largely been amortized. 
However, the Administration claims that newly built U.S. flag vessel 
operators will be able to offer lower rates to government shippers. How 
is this possible?
    Answer. While it is true that a newer vessel must amortize a higher 
capital cost than an older vessel, the newer vessel possesses a number 
of operating and cost advantages over the older vessel. As a vessel 
ages, it becomes increasingly more difficult to maintain the vessel's 
regulatory compliance and seaworthiness, resulting in sharply higher 
maintenance and repair costs. As an example of efficiency, the engines 
in today's new buildings are far more efficient and can easily cut fuel 
costs in half compared to many older vessels. More advanced technical 
and operating systems also allow newer vessels to operate with smaller 
crews and, in many cases, substantially reduce cargo loading and 
discharge expenses. In addition many newer vessels are more 
appropriately sized for the trade, further increasing unit efficiencies 
Lower freight rates typically follow a period of fleet upgrade. This 
occurred during the mid-1980's following the addition of several new 
bulkers to the U.S. flag fleet. At that time, freight rates to certain 
locations dropped by as much as 50 percent as newer vessels entered the 
trade.
    Question 22b. How many Federal agencies are involved in the 
shipment of government food aid to foreign countries?
    Answer. The U.S. Department of Agriculture (USDA), the U.S. Agency 
for International Development (AID), the State Department (State), and 
the Maritime Administration are the U.S. Government agencies involved 
in the shipment of government food aid to foreign countries.
    Question 22c. What is the cost to the Federal taxpayer for these 
agencies' oversight of food aid shipments under cargo preference 
restrictions?
    Answer. There is a negligible cost to the U.S. taxpayer for these 
agencies' oversight of food aid under cargo preference restrictions. 
There are 7.5 persons employed at the Maritime Administration to 
monitor the food aid cargo preference programs on a daily basis. 
Transportation personnel at USDA, AID, and State would not change since 
preference cargo is not the primary focus of their job. With respect to 
ocean freight differential costs between U.S.-flag and foreign flag 
vessels, the average annual cost for the 3-year period, 1997 through 
1999, has been $87 million per year. This is less than one-half of one 
one-hundredth of a percent (0.00461) of the value of American farm 
exports. Moreover, the average $87 million per year helps maintain a 
portion of the U.S.-flag merchant marine which contributes to the pool 
of U.S. citizen mariners who crew Government controlled ships in 
contingencies.
    Question 23a. The mission of the Maritime Administration (MARAD) is 
to ``. . . promote the development and maintenance of an adequate, 
well-balanced, United States merchant marine, sufficient to carry the 
nation's domestic waterborne commerce and a substantial portion of its 
waterborne foreign commerce, and capable of serving as a naval and 
military auxiliary in time of war or national emergency''. Since we now 
carry less than 3 percent of our total seaborne foreign trade tonnage 
on U.S. flagged vessels, and our shrinking active commercial fleet is 
one of the oldest in average age in the world, it would seem we have 
failed in fulfilling that mission. And now, it appears that we may be 
well into the beginning stages of a professional seafarer shortage in 
this country. What specific policy changes does MARAD believe are 
realistically required to save our merchant marine from disappearing 
from the seas?
    Answer. Our merchant fleet competes globally on a quality basis, 
offering premium level service to U.S. and foreign shippers The cost of 
their operations reflects the U.S. standard of living and the U.S. 
business operating environment generally, including our tax laws, 
employment standards, labor laws, environmental protection laws, and 
ship construction and operating laws and regulations. The U.S. fleet is 
frequently competing with shipowners operating in low cost countries, 
including so-called ``open registry'' or ``flag of convenience'' 
countries with little or no tax burden, and lax requirements on owners 
for vessel operations standards. Restructuring U.S. law and regulatory 
regimes to meet a ``lowest common denominator'' level of competition 
would require extreme reductions in regulatory protections that would 
be unacceptable to the American people, and compromise our protection 
of the natural environment and our national security readiness. 
However, continued full funding of the Maritime Security Program will 
help to ensure that a fleet of modern vessels will remain in the U.S. 
registry, serving their commercial customers and providing guaranteed 
sealift capacity for U.S. national security needs. Moreover, we can 
continue to implement significant regulatory reforms to conform 
outdated and burdensome U.S. laws and regulations to internationally 
accepted norms. In addition, there is merit in examining the various 
aspects of the business environment offered by competing nations to 
determine which, if any, could be adopted or adapted to the U.S. model. 
In the short run, the Maritime Security Program and our cargo 
preference programs will help preserve a core of U.S.-flag vessels and 
citizen mariners in U.S. foreign trade, while the Jones Act and 
Passenger Services Act support the domestic maritime industry. In the 
long run, the cost advantages enjoyed by ship operators in other 
countries could outpace the modest maritime programs in the United 
States.
    Question 23b. What new initiatives are required to accomplish this 
task, based upon a comparison between the present and historical 
maritime performance record of the U.S. and that of other more 
successful maritime countries?
    Answer. The merchant fleets of all traditional maritime countries 
with high living standards, regulatory standards, and tax rates such as 
those in the European Union and Japan have been in serious decline as a 
result of the same cost and regulatory disadvantages suffered by the 
U.S.-flag fleet compared to low cost ``flags of convenience.'' Some 
countries such as Denmark and Norway have successfully created national 
``second'' vessel registries that exempt or dramatically reduce tax 
burdens on their citizen vessel owners and seafarers engaged in 
international trade, in addition to other direct and indirect 
subsidies. On the other hand, some countries like Singapore have 
revamped their national registry to offer the same tax breaks to 
carriers and mariners that other countries offer through flags of 
convenience.
    Some traditional maritime countries also have lowered the 
citizenship requirement for crews on their national or second 
registry's vessels. Our international security obligations, and our 
success in any deployment of military forces, rest heavily on massive 
sealift requirements. The Congress and successive Administrations have 
underscored the importance of relying on U.S. citizen seafarers to 
perform that critical mission. Eliminating the long-term requirement 
for citizen crews on U.S. flag ships is not a viable option for the 
U.S. We note that some countries that have reduced or eliminated their 
citizenship requirements are heavily dependent on the United States for 
some of their national and international security needs. Even the 
United Kingdom relied on U.S.-flag ships and crews to move its military 
equipment for the U.N. peacekeeping mission in Bosnia.
    Question 23c. Is it not true that because of problems between MARAD 
and the U.S. Coast Guard during the past few years with collection, 
organization, coordination, and dissemination of information that we 
really do not know with any accuracy the current make-up our 
professional seagoing maritime skills base here in the United States?
    Answer. The U.S. Coast Guard (USCG) and MARAD are working 
cooperatively to improve the Merchant Mariner Licensing and 
Documentation (MMLD) system. The MMLD is the primary source of data on 
documentation status and qualifying sea service of licensed and 
unlicensed mariners. The MMLD system was originally structured as a 
system to process applications and to maintain records on U.S. merchant 
mariners; the MMLD system has only been automated since 1982 and the 
USCG recognizes that the MMLD has some data integrity problems. MARAD 
and the USCG are working together to improve the accuracy of the data. 
The data problems do not preclude the use of the data to identify 
trends and outcomes regarding the overall size and make-up of the 
mariner pool.
    Question 23d. Has MARAD done anything to identify the extent of the 
manning problem and to identify what seagoing professional maritime 
skills are at question?
    Answer. Yes, MARAD monitors the availability of U.S. seamen in 
coordination with the U.S. Coast Guard. Information from seamen's 
discharges from the U.S. Coast Guard provides the statistical basis to 
determine generic shortfalls or deficiencies in specific skill areas. 
The data indicate that at the present time there are sufficient trained 
personnel to crew the privately owned, U.S.-flag merchant fleet in 
peacetime. However, during an extended full mobilization, the actively 
sailing labor force would be hard pressed. to simultaneously meet both 
commercial and defense crewing needs in which the RRF and other sealift 
assets were activated.
    Anecdotal reports from the maritime industry indicate recruitment 
difficulties in some mid-level officer and entry-level unlicensed 
positions. MARAD is working with industry to discuss long-term 
recruitment and retention planning. In this regard, meetings have been 
recently held with key members of the National Defense Transportation 
Association. MARAD is also working closely with the Coast Guard's 
National Maritime Center to improve our capability to determine where 
specific deficiencies may first occur if an extended mobilization were 
to occur.
    Question 23e. Does MARAD know the ages and experience levels of 
licensed mariners?
    Answer. The USCG's MMLD system is MARAD's primary source of 
information on licensed and unlicensed mariners, including data on age 
and experience levels. A mariner's experience level is generally 
determined by the highest level of license held by an officer, or the 
highest rating held by an unlicensed mariner, combined with available 
information on afloat employment. Even though there are data integrity 
problems with the MMLD, MARAD can use the system to estimate the 
number, age, and qualifications (license, rating and sea service) of 
U.S. mariners with sufficient accuracy for analyzing trends and 
outcomes.
    Question 23f. Does MARAD know how many license holders are STCW 95 
certified, or how many are planning to allow their licenses to lapse 
due to the new certification requirements?
    Answer. Yes, that information is available to MARAD in the USCG 
MMLD, MARAD's primary source of information on licensed and unlicensed 
mariners. The MMLD provides information on the status of documentation 
and reported sea service of licensed and unlicensed mariners. In 
addition to maintaining grades and ratings of licensed and unlicensed 
mariners, the MMLD also contains the age of each mariner.
    All of the approximately 500 new graduates per year of the USMMA 
and six State maritime academies who receive USCG third mate or third 
assistant engineer licenses are STCW 95 compliant. All mariners sailing 
in deep-sea trades are required to have STCW 95 certification by 
February 2002. Due to the variety of opportunities to obtain 
certification, the costs and the time involved, it is not possible to 
predict the number of individuals who will allow their licenses to 
lapse because of the certification requirements.
    Question 23g. How many of the license holders are actually 
professional mariners earning their living aboard ship?
    Answer. MARAD estimates that approximately 7,100 licensed and 
11,200 unlicensed civilian merchant mariners were employed on large 
merchant ships and vessels in the DOD organic fleet in the deep-sea 
trades in 1999. These estimates represent those mariners who are 
qualified and experienced on the types of vessels that are used in 
military sealift operations and do not include mariners employed on the 
inland waterways or Great Lakes.
    Question 23h. What is MARAD doing to enhance the attractiveness of 
professional shipboard employment for the well-educated mariners who 
are making present and future career path decisions?
    Answer. MARAD's chief activity in this regard is our operation of 
the world's leading maritime academy, the U.S. Merchant Marine Academy 
at Kings Point, New York, and our assistance to the six State maritime 
academies. Employment aboard modern, technologically advanced ships is 
a demanding but rewarding occupation, with high levels of 
responsibility and excellent remuneration. Yet, as waterborne shipping 
has evolved over the past decades with increased emphasis on technology 
and speed of delivery of commodities over the water, the historic 
attraction of a career at sea has diminished for some mariners. Faced 
with a number of career possibilities in today's job market, many 
highly qualified mariners may choose shoreside employment as an 
alternative to the seafaring lifestyle. The historic attraction of a 
career at sea is not likely to return. However, MARAD is providing the 
best possible education for maritime officers and is working with 
industry to provide supplemental training. In addition, MARAD's 
participation in the Department of Transportation's Garrett A. Morgan 
Technology and Transportation Futures Program provides mentoring and 
inspiration to help interest students of all ages in marine careers. 
Through these training programs that emphasize safety and human 
performance and interest in the maritime industry, MARAD helps to 
ensure that working conditions on U.S.-flag vessels are among the best 
in the world.
    Question 23a. The current U.S. merchant marine presents a bleak 
picture of old ships and a declining billet job base. The taxation and 
regulation of companies and seafarers is now to a point that we cannot 
economically compete with our international shipping company 
competitors. In spite of this, it would appear that our maritime 
education programs have all but been ignored. As you mentioned in your 
opening statement, Mr. Hart, the U.S. Merchant Marine Academy is in 
need of major repairs. MARAD is responsible for a $450 thousand dollar 
contract with Grumman Samson Architects for a report outlining a 
Facilities Master Plan for the United States Merchant Marine Academy at 
Kings Point, NY that was due May 15, 2000. What is the status of this 
report?
    Answer. Work on the Master Plan began in 1999 and is near 
completion. The Plan will contain a prioritized list of repairs, 
building upgrades and construction with cost estimates itemized for 
each activity. It will also provide a recommended schedule for 
completion of each activity over the next several years, with an 
itemized total for each year beginning with fiscal year 2001. The Plan 
will contain a description of facility repair, renovation, and campus-
wide improvements recommended by the contractor. The Plan will also 
reflect potential new/expanded building projects.
    Question 24b. Given the very strong shore side economy, what are 
your suggestions to attract and retain Americans to a professional 
career in our present U.S. Merchant Marine?
    Answer. The decline in the number of large oceangoing U.S.-flag 
vessels and reduction in crew sizes due to increased shipboard 
automation and productivity have reduced shipboard jobs for U.S. 
mariners. This, coupled with the expansion of new technology-based 
careers, has attracted even some of those trained as mariners to seek 
careers in other industries. In addition, with unemployment at 
historically low levels due to the strong U.S. economy, many 
industries, not only maritime, have reported difficulties in finding 
the desired number of qualified employees.
    In order to attract and retain mariners, it is important to 
continue operation of the world's leading maritime academy, the U.S. 
Merchant Marine Academy at Kings Point, New York, and our assistance to 
the six State maritime academies. Employment aboard modern, 
technologically advanced ships is a demanding but rewarding occupation. 
MARAD is providing the best possible education for maritime officers 
and is working with industry to provide supplemental training. In 
addition, programs that provide mentoring and inspiration, such as the 
Department of Transportation's Garrett A. Morgan Technology and 
Transportation Futures Program, are important to help interest students 
of all ages in marine careers. Through these programs that emphasize 
safety and human performance and interest in the maritime industry, 
MARAD helps to ensure that working conditions on U.S.-flag vessels are 
among the best in the world.

      Responses to Questions Submitted by Hon. Ernest F. Hollings 
                         to Clyde J. Hart, Jr.

    Question 1. Mr. Administrator, can you tell me how much 
``carryover'' funds were available for the Title XI loan guarantee 
program? Can you tell me how much is currently available?
    Answer. The carryover funds into fiscal year 2000 were $70.8 
million. Of this amount $7.6 million is restricted due to the annual 
limitation on fiscal year 1997 funds. With the additional $6.0 million 
appropriated funds for fiscal year 2000 there was a total of $69.2 
million subsidy available for guarantee purposes at the start of fiscal 
year 2000. As of July 10, 2000 there is currently $27.9 million subsidy 
available for guarantee purposes.
    Question 2. What type of projects has MARAD approved over the last 
two fiscal years, and what shipyards are handling these projects?
    Answer. As per the attached approved list for fiscal year 1999 and 
fiscal year 2000 MARAD has approved a variety of vessels at many 
different shipyards. MARAD has also approved guarantees for two 
shipyard modification projects.
    Question 3. What is the total amount of Title XI loans pending, and 
what sort of vessels are projected to be built pending the receipt of 
approval?
    Answer. Currently MARAD has over $4 billion in pending Title XI 
projects. The attached pending list shows that the interest in the 
program is quite diverse ranging from deck barges to a large passenger 
ship.
    Question 4. Does MARAD run a risk that they will run out of funds 
for Title XI this year?
    Answer. There is always a possibility that MARAD will obligate all 
of its available subsidy by the end of the fiscal year if several 
projects come to fruition. It is MARAD's anticipation that the 
available subsidy will be sufficient to cover the rest of fiscal year 
2000 and to have a carryover of funds into fiscal year 2001.
    Question 5. Mr. Administrator, as a condition to receiving funds 
through the Maritime Security Program, U.S.-flag companies are required 
to sign an agreement to make their vessels and affiliated 
transportation equipment available to the Department of Defense. To 
implement these provisions we established the Voluntary Sealift 
Agreement, or VISA. How is the progress of this program?
    Answer. Since the implementation of the MSP, MARAD has obtained 
signed VISA agreements whereby all of the MSP vessel capacity and 
associated intermodal transportation equipment and management systems 
will be made available to the Department of Defense during a VISA 
activation. In addition to the MSP capacity, MARAD has VISA agreements 
with non-MSP U.S.-flag carriers. There are currently 48 U.S.-flag 
carriers enrolled in the VISA program. These companies have enrolled 
115 ships in the VISA program representing over 171,000 TEUs of 
committed capacity.
    Through the U.S. Transportation Command's components at the 
Military Traffic Management Command and the Military Sealift Command, 
VISA carriers have negotiated VISA contingency contracts providing the 
DOD with push-button readiness to activate VISA capacity when needed to 
support a military contingency. These contracts enumerate the terms and 
conditions for carrying military cargo and equipment. In meeting the 
terms and conditions of these contracts, VISA carriers have negotiated 
contingency compensation rates utilizing on the shelf rate 
methodologies. These pre-lodged rates will facilitate DOD's access to 
VISA capacity and provide for a seamless transition from peacetime to 
wartime operations.
    Question 6. Mr. Administrator recently MARAD's ship management 
program was investigated for criminal irregularities, as a result of 
this investigation what steps has MARAD taken to increase control over 
the program?
    Answer. Ship Manager subcontracting procedures have been revised to 
increase requirements and controls. The revised procedures set forth 
more stringent guidelines for review and issuance of ship manager 
subcontracts, tracking of funds obligated for ship maintenance and 
repair, and deobligation of excess funding and contract/task order 
closeout procedures. The new procedures will be incorporated into the 
2000 Ship Manager contracts upon implementation of the contract awards.
    Administrative Contracting Officers (ACOs) have been instructed to 
incorporate work descriptions and specifications into the task orders 
to facilitate the invoice review and tracking process.
    Implementation of the electronic contract writing system at all 
MARAD procurement centers in FY 2000 provides greater electronic 
oversight capability to ensure that procedures are followed 
consistently.
    All MARAD Headquarters and Region personnel directly involved with 
ship manager contract performance will be required to attend a 2\1/2\-
day training course focused on the administration of the 2000 Ship 
Manager contracts. Part of this course will focus on contractual 
controls and limitation of authorities for Government employees.
    MARAD's Office of Chief Counsel will conduct annual, in-person 
ethics training to all MARAD employees emphasizing, as appropriate, 
recent occurrences.
    Under the recently awarded 2000 Ship Manager contracts, MARAD has 
contracted with the Defense Contract Audit Agency (DCAA) for the review 
of ship managers' Commercial Purchasing System (CPS) procedures. In 
response to MARAD's requirement, DCAA has established a centralized 
office to coordinate and track all CPS reviews and incurred-cost 
audits.
    ACOs have been tasked to conduct periodic review of the ship 
managers' procedures to ensure compliance with established and approved 
subcontracting procedures. A complete CPS review will be conducted by 
the DCAA every three (3) years under the new ship manager contract.
    Question 7. Mr. Administrator, are MARAD, Coast Guard and MSC 
working together to implement a coherent maritime policy?
    Answer. Yes, Maritime transportation is an integral link in the 
intermodal National Transportation System, serving the national 
interest in three critical aspects: the economy, national security, and 
safety. MARAD, USCG and MSC/Department of Defense function in varying 
and complementary capacities in implementing U.S. maritime policy in 
support of the national interest.
    For example, MARAD and the U.S. Coast Guard are working together to 
ensure that the Marine Transportation System (MTS) in the 21st Century 
continues to be safe, secure, and environmentally sound, and helps the 
United States maintain its competitive position in the global economy.
    MARAD also works with MSC to assure that U.S.-flag ships and U.S.-
citizen mariners will be available to support national defense sealift 
requirements through the Maritime Security Program and the education 
and training of officers for the merchant marine.
    Question 8. Mr. Administrator, my staff has visited the United 
States Merchant Marine Academy and they indicated that the facility is 
suffering from neglect and deferred maintenance, what steps has MARAD 
taken to address this problem?
    Answer. Within the total request for fiscal year 2001 for the 
Academy, there is $1.85 million in the base for ongoing facilities 
maintenance and repair. Congress provided an additional $2 million in 
fiscal year 2000 for capital improvements at the Academy. The fiscal 
year 2001 Congressional budget continues the $2 million increase to 
continue the focus on addressing capital improvements that are a 
concern of both the Administration and Congress.
    Work on the Facilities Master Plan began in 1999 and is near 
completion. The Plan will contain a prioritized list of repairs, 
building upgrades and construction with cost estimates itemized for 
each activity. It will also provide a recommended schedule for 
completion of each activity over the next several years, with an 
itemized total for each year beginning with fiscal year 2002 for items 
that have not been addressed using funds provided in fiscal year 2000 
and anticipated to be provided in fiscal year 2001. With the assistance 
of the Master Plan, future budget requests will be based on a sound 
facility review and assessment.
    Question 9. Mr. Administrator, the Marine Transportation System 
(MTS) report identifies a critical need to conduct maritime research, 
to my knowledge the Coast Guard has a small budget of about $16 
million, and most of its research goes to help Coast Guard mission 
work, and the Maritime Administration has no budget for research. What 
are we doing to implement the MTS report recommendations for maritime 
research?
    Answer. Our budget request includes $500,000 to continue MARAD's 
efforts and support of the MTS. MARAD will also have the joint 
responsibility with the Research and Special Programs Administration 
(RSPA) for developing and managing a University Marine Transportation 
research program. A total of $2.5 million is contained in the RSPA 
fiscal year 2001 budget request for this research. This program is 
proposed as a national cooperative MTS research and technology 
development program that would be conducted at leading universities in 
the U.S. It is expected that this program would improve the 
coordination and enhance MTS-related research by government agencies 
and the private sector, and foster and support intermodal MTS 
technology requirements that are beyond the scope of individual agency 
mandates and the funding priorities and interests of the private 
sector. This program will be modeled on the successful University 
Highway Transportation research program and the University Transit 
research program.
                               __________
    The attached approved list reflects original approvals of 
transactions as of the date indicated. Approvals involving refinancing 
of existing Title XI are not listed. Information contained in this list 
is subject to change and therefore it is advisable to contact the 
Maritime Administration to get the most up-to-date information.

                                                          Approved Applications.--July 10, 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 Title XI         Date
           Company Name                    Shipyard            No. of Project        Type of Project        Project Cost       Guarantee**      Approved
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1994

Cenac Towing Company, Inc.........  NABRICO (Nashville     40...................  Double-Skin 30,000        $51,108,701.00     $44,720,000.00    5/11/94
                                     Bridge Co.).                                  Barrel Inshore Tank
                                                                                   Barge.
Penn Barge, Inc...................  Alabama Shipyard,      2....................  Integrated Tug/Barges      35,000,000.00      26,250,000.00    6/22/94
                                     Inc./Halter Marine,
                                     Inc.
Puerto Quetzal....................  McDermott Incorp.....  2....................  U.S.-Flag Power            95,000,000.00      25,000,000.00    5/11/94
                                                                                   Barges.
Global Industries, Ltd............  Aker Gulf Marine.....  1....................  Swath Dive Support         23,711,000.00      20,852,000.00     7/6/94
                                                                                   Vessel.
National Steel & Shipbuilding       National Steel &       N/A..................  Phase I and Phase II       26,000,000.00      22,700,000.00    7/15/94
 Company.                            Shipbuilding Company.                         Capital Improvement
                                                                                   Projects.
+Coastal Ship, Inc................  Trinity Marine Group.  2....................  Catamaran-hull RO/RO.     132,472,404.00     115,912,000.00    7/26/94
*Compania de Elecrticidad de        McDermott Incorp.....  1....................  Barge Mounted Power        39,551,868.00      34,293,000.00     8/8/94
 Puerto Plata.                                                                     Barge.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  48...................  .....................    $402,843,973.00    $289,727,000.00  .........

FY 1995

Avondale Industries Inc...........  N/A..................  N/A..................  Shipyard                  $20,320,000.00     $17,780,000.00   10/24/94
                                                                                   Modernization.
*Fleves Shipping Corporation......  Newport News           4....................  Product Tankers......     152,620,000.00     133,542,000.00   10/31/94
                                     Shipbuilding &
                                     Drydock Company.
Edison Chouest Offshore...........  North American         1....................  Undersea Warfare           13,659,432.00      11,658,282.00    2/01/95
                                     Shipbuilding.                                 surface Support Ship.
Bay Transportation Inc. d/b/a St.   Nashville Bridge Co..  2....................  Stern drive tractor        11,628,540.00      10,174,000.00     2/7/95
 Phillip Towing.                                                                   tugs.
American Heavy Lift Shipping        Avondale Industries,   4....................  Double-hulled Product     159,273,686.00     139,364,475.00     2/6/95
 Company.                            Inc..                                         Tankers.
Surf Express, Inc.................  Gulf Coast Yachts,     1....................  Wave Piercer                1,850,000.00       1,480,000.00    2/14/95
                                     Inc..                                         Catamaran Ferry.
Alpha Marine Service..............  North American         6....................  Tractor-Type Tugs....      13,484,704.95      11,799,000.00    2/24/95
                                     Shipbuilding.
Canal Barge Company, Inc..........  Trinty/Newpark Ship/   4....................  Steel Liquid Tank           4,982,452.00       4,359,645.00    4/13/95
                                     Conrad Ind..          1....................   Barges.
                                                           1....................  260 Deck Barge.......
                                                                                  120 Deck Barge.......
Manson Construction & Engineering   Nichols Marine-        3....................  Dump Barges..........       9,766,976.00       8,544,000.00    5/31/95
 Company.                            Portland, OR.
Maryland Marine, Inc..............  Trinity-Madisonville,  4....................  Double-skill unmanned       5,142,860.00       4,500,000.00    6/14/95
                                     LA.                                           tank barges.
Martin Gas Marine, Inc............  AMFELS-Brownsville,    2....................  Tug/Barge unit.......      17,000,000.00      14,875,000.00    7/25/95
                                     TX.
Great AQ Steamboat Company          McDermott-New          1....................  Paddhewheel Steamboat      69,424,647.00      60,746,000.00    7/26/95
 (formerly Delta Queen Steamship     Orleans, LA.
 Development, Inc.).
Alpha Marine Services, Inc........  North America-Larose,  1....................  Deepwater Supply            6,000,000.00       5,250,000.00    8/11/95
                                     LA.                                           Vessel.
Edison Chouest Offshore, Inc......  North America-Larose,  1....................  Self-sustaining            17,000,000.00      12,883,000.00    8/21/95
                                     LA.                                           breakbulk Container
                                                                                   vessel.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  36...................  .....................    $502,153,297.95    $436,955,402.00  .........

FY 1996

North American Shipbuilding, Inc..  North American-        N/A..................  Shipyard                   $7,408,519.00      $6,386,000.00   10/23/95
                                     Larose, LA.                                   Modernization.
SEAREX, Inc.......................  Gulf Coast-Lakeshore,  4....................  Self-propelled, Self-      60,197,928.00      43,961,000.00   10/28/95
                                     MS.                                           Elevating Vessels.
Great Independence Ship Co........  Newport News-Newport   1....................  Reconstruction/            46,399,628.00      33,332,000.00   11/16/95
                                     News, VA.                                     Reconditioning of
                                                                                   INDEPENDENCE.
Parker Towing Company, Inc........  Trinity Marine-        20...................  Hopper Barges........       6,709,782.00       5,570,000.00   11/22/95
                                     Nashville, TN.
                                    .....................  1....................  Rake deck barge......  .................  .................  .........
                                    .....................  1....................  Rake deck crane barge  .................  .................  .........
Tugz International L.L.C..........  Runyan-Pensacola, FL.  2....................  Tractor Tugs.........       7,426,900.00       6,498,537.00   12/19/95
*Dannebrog Rederi AS..............  Alabama Shipyard-      2....................  Double-hull 16,000         53,274,933.00      46,615,000.00   12/20/95
                                     Mobile, AL.                                   DWT Tankers.
Canal Barge Company, Inc..........  Trinity Marine-        20...................  Steel Liquid tank          20,321,280.00      17,781,000.00   12/22/95
                                     Gulfport, MS.                                 barges.
                                    Newport News.........  1....................  260 deck barge.......  .................  .................  .........
*Smith/Enron Cogeneration Limited   Trinity Marine-        2....................  Barge Mounted Power       205,000,000.00      50,000,000.00   12/22/95
 Partnership.                        Beaumont, TX.                                 Barges.
Bay Transportation Corporation....  Trinity Marine-        2....................  6700 HP Stern Drive        12,467,380.00      10,908,958.00   12/29/95
                                     Gulfport, MS.                                 Tractor Tugs.
Hvide Van Ommeren Tankers I-V       Newport News-Newport   5....................  Double Eagle Product      246,700,000.00     215,862,500.00     2/9/96
 L.L.C..                             News, VA.                                     Tankers.
Port Imperial Ferry Corp..........  Gladding Hearn-        5....................  96-foot Aluminum            6,991,980.00       5,117,000.00     3/7/96
                                     Somerset, MA.                                 Monohull Vessels.
T.T. Barge Services, Inc..........  North American-        N/A..................  Shipyard                    3,822,000.00       3,057,000.00    3/18/96
                                     Larose, LA.                                   Modernization.
Alpha Marine Services, Inc........  North American-        1....................  Deep submergence           15,640,000.00      13,000.000.00    3/21/96
                                     Larose, LA.                                   rescue vehicle
                                                                                   support ship.
Global Industries, Ltd............  Service Marine-Morgan  1....................  Launch Barge.........      24,590,000.00      19,966,375.00    3/29/96
                                     City.
                                    Bollinger Shipyards-   2....................  Lift Boats...........  .................  .................  .........
                                     Lockport, LA.
                                    .....................  1....................  Deck Barge...........  .................  .................  .........
***R.S.I. Barge Company, L.C......  Trinity Marine-        90...................  U.S.-flag Covered          28,393,940.00      24,844,000.00    4/24/96
                                     Madisonville, LA.                             Hopper Barges.
*Wak Orient Power and Light Ltd.    Marine Energy-         6....................  Electric Power            460,094,591.00     402,582,000.00    6/28/96
 (ex Maritime Power & Light (Pvt)    Charleston, SC.                               Generating Vessels.
 Ltd. and Orient Energy Ltd. &
 Energy Transportation Group, Inc).
Penn ATB, Inc.....................  Halter Marine Inc.-    2....................  Integrated Ocean Tugs      49,001,220.00      42,876,000.00    9/24/96
                                     Gulfport, MS.         2....................  Double-hull Asphalt
                                                                                   Barges.
Rowan Companies, Inc..............  LeTourneau, Inc.-      1....................  Self-elevating mobile     174,962,065.00     153,091,000.00    9/30/96
                                     Vicksburg, MS.                                offshore drilling
                                                                                   unit (Jack-up rig).
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  172..................  .....................  $1,429,402,146.00  $1,101,448,370.00  .........

FY 1997

Massachusetts Heavy Industries,     Massachusetts Heavin   N/A..................  Shipyard Reactivation     $62,857,143.00     $44,000,000.00    11/1/96
 Inc..                               Indus.-Quincy, MA.
*COSCO Line (America), Inc........  Alabama Shipyard-      4....................  1432 TEU Container        157,356,689,00     137,687,000.00   01/30/97
                                     Mobile, AL.                                   Vessels.
CPD Barge Company.................  Trinity Marine Group-  18...................  Jumbo Hopper Barges..       6,173,196.00       5,401,000.00    3/07/97
                                     Gulfport, MS.
+Trailer Bridge, Inc. (ex Coastal)  Halter Marine-         2....................  Triple Stack Box           12,018,052.00      10,515,000.00    3/26/97
                                     Pearlington, MS.                              Carriers.
HAM Marine, Inc...................  N/A..................  N/A..................  Shipyard                   28,362,434.00      24,817,000.00    5/09/97
                                                                                   Modernization.
Riverbarge Excursion Lines, Inc...  Leevac Shipyards-      2....................  Hotel River Barges...      18,218,704.00      15,941,000.00    7/01/97
                                     Jennings, LA.
Mersea Ships I, Inc...............  Bollinger Shipyard-    2....................  SWATH 300-Passenger        34,173,445.00      29,901,000.00   08/18/97
                                     Lockport, LA.                                 Commuter Vessels.
Trico Marine International, Inc...  Eastern Shipbuilding   1....................  Twinhull Crewboat....      12,858,317.00       9,643,000.00   09/29/97
                                     Group, Inc.-FL.
*Secunda Atlantic, Inc............  Halter Marine Group-   1....................  240 Anchor-Handling        19,435,000.00      17,103,000.00   09/29/97
                                     Gulfport, MS.                                 Tug/Supply Vessel.
Cashman Equipment Corporation.....  Corn Island Shipyard-  7....................  Single-skin Steel           7,563,924.00       6,612,000.00    9/29/97
                                     Lamar, IN.                                    Flat Barges.
                                    Tidewater Shipyard-
                                     Chesapeake, VA.
Trailer Bridge, Inc...............  Halter Marine-         3....................  Triple Stack Box           19,335,869.00      16,918,000.00    9/29/97
                                     Pearlington, MS.                              Carriers.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  40...................  .....................    $378,352,773.00    $329,538,000.00  .........

Sargent Marine, Inc...............  Bath Iron Works......  1....................  Asphalt Vessel.......     $18,594,877.00     $13,141,000.00   03/31/97
(approved and withdrawn duuing FY   Atlantic Marine......
 1997).

FY 1998

Noble Drilling Corporation........  HAM Marine-..........  1....................  Semi-Submersible         $110,733,817.00     $96,892,000.00   10/09/97
                                                                                   Mobile Offshore
                                                                                   Drilling Unit.
Tugz International L.L.C..........  Marco Shipyard-        3....................  Twin Z-drive Reserve       16,033,560.00      14,029,000.00   02/13/98
                                     Seattle, WA.                                  Tractor Harbor/
                                                                                   Escort/Tpwing Tugs.
Canal Barge Company, Inc..........  Trinity Marine Group,  30...................  Steel Open Hopper          13,319,076.00      11,654,000.00   02/26/98
                                     Inc.-Madisonville,                            Barges.
                                     LA.
                                    Halter Marine, Inc.-   2....................  260 Deck Barges......  .................  .................  .........
                                     Gulfport, MS.
                                    Offshore Ship          10...................  120 Deck Barges......  .................  .................  .........
                                     Builders, Inc.-
                                     Houma, LA.
Attransco, Inc....................  National Steel &       3....................  Tank Vessels.........      71,523,779.00      48,819,622.00   03/16/98
(Refinancing of Title XI Debt)....   Shipbuilding-San
                                     Diego, CA.
Western Power Co. (fka Ghana        Halter Marine-         2....................  Power Barges.........      68,500,000.00      67,009,000.00   03/19/98
 National Petroleum Corp.).          Gulfport, MS.
Marine Cranes (A Washington         Gunderson Marine,      1....................  Split-hull ABS              4,667,364.00       4,083,000.00   04/23/98
 General Partnership).               Inc.-Portland, OR.                            Loadline Hopper
                                                                                   Barge.
Maybank Navigation Company, LLC...  Conrad Industries,     1....................  Warehouse Barge......       5,107,765.00       4,000,000.00    6/17/98
                                     Inc.-Morgan City, LA.
Vessel Management Services, Inc...  Nicols Brothers-       10...................  Medium-High                86,237,530.00      75,536,000.00    7/02/98
                                     Freeland, WA.                                 Horsepower Tugboats.
*Perforadora Central, S.A. de C.V.  TDI Halter-Orange, TX  1....................  Jack-Up Mobile             94,365,698.00      70,774,000.00   07/31/98
                                                                                   Offshore Drilling
                                                                                   Unit.
Astro Offshore Corporation........  Halter Marine Group,   2....................  Platform Supply            35,936,857.00      31,468,000.00    7/31/98
                                     Inc.-Gulfport, MS.                            Vessels.
Rowan Companies, Inc..............  LeTourneau, Inc.-      1....................  Self-Elevating Mobile     195,437,532.00     171,007,000.00    9/25/98
                                     Longview, TX.                                 Offshore Drilling
                                                                                   Unit.
Lightship Tankers III-V, LLC......  Newport News           3....................  46,095 DWT Tank           158,886,035.00     139,023,000.00    9/25/98
                                     Shipbuilding &                                Vessels.
                                     Drydock-Newport
                                     News, VA.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  70...................  .....................    $860,749,013.00    $734,294,622.00  .........

FY 1999

*Empresa Energetica Corinto, Ltd..  Todd Shipyard-         1....................  Power Barge..........     $68,700,000.00     $50,000,000.00   12/28/98
                                     Seattle, WA.
Bender Shipbuilding & Repair Co.,   Bender Shipbuilding &  N/A..................  Shipyard                   16,684,127.00      14,598,000.00    2/02/99
 Inc..                               Repair-Mobile, AL.                            Modernization.
Cashman Equipment Company.........  Corn Island Shipyard-  5....................  Steel Deck Barges....       9,038,931.00       7,887,000.00    2/10/99
                                     Lamar, IN.
*Petrodrill Offshore, Inc.........  TDI Halter-            2....................  Semi-submersible          342,638,238.00     299,808,000.00    3/11/99
                                     Pascagoula, MS.                               Drilling Rigs.
Trico Marine International, Inc...  Eastern Shipbuilding   2....................  230 Supply Vessels...      21,501,005.00      18,867,000.00    4/05/99
                                     Group-Panama, FL.
Torch Deepwater, Inc..............  Dakata Creek-........  1....................  300  75           51,948,280.00      45,454,000.00    4/08/99
                                                                                   Multi-Purpose.
                                                                                  DP Vessel............
Project America, Inc. (ex Great     Ingalls Shipbuilding-  2....................  U.S.-flag Cruise        1,233,744,415.00   1,079,525,000.00    4/08/99
 Hawaiian).                          Pascagoula, MS.                               Ships.
Ensco Offshore Company............  TDI Halter-Orange, TX  1....................  Semi-submersible          222,556,179.00     194,736,000.00    6/21/99
                                                                                   Drilling Rig.
                                                                                  EMSCP 7500...........
*Secunda Marine Atlantic Ltd......  Halter Marine Group-   1....................  Multi-Purpose Supply       27,544,232.00      23,963,000.00    7/23/99
                                     Escatawpa, MS.                                Vessel.
                                                                                  (THEBAUD SEA)........
Canal Barge Company, Inc..........  Trinity Marine Group-  7....................  Asphalt Tank Barges..      28,922,307.00      26,004,000.00    8/31/99
                                     Ashland City, TN.     15...................  Liquid Tank Barges...
                                    Newpark Shipbuilding-  2....................  180 Deck Barges......
                                     Galveston, TX.
                                    Conrad Industries,
                                     Inc.-Morgan City, LA.
                                    Newpark Shipbuilding
                                     & Repair-Houston, TX.
Eastern Shipbuilding Group, Inc...  Eastern Shipbuilding   N/A..................  Shipyard                    6,898,349.00       6,036,000.00    9/30/99
                                     Group-Panama City,                            Modernization.
                                     FL.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  39...................  .....................  $2,030,176,063.00  $1,766,878,000.00  .........

FY 2000

Rowan Companies, Inc..............  LaTourneau, Inc.       1....................  Jack-Up MODU-GORILLA     $211,695,000.00    $185,398,000.00   10/28/99
                                     Vicksburg, MS.                                VII.
Global Industries, Ltd............  Atlantic Marine Inc.-  1....................  Heavy Lift-Pipelay        120,312,000.00      99,000,000.00   12/17/99
                                     Mobile, AL.                                   Barge.
                                    Ham Marine, Inc.-
                                     Pascagoula, LA.
                                    Carliss Facility-
Manson Construction Company.......  Nichols Marine-        1....................  Hydraulic Pipeline         10,200,000.00       8,690,000.00   12/28/99
                                     Portland, OR.                                 Dredge.
Coastal Queen East, LLC/Coastal...  Atlantic Marine-       2....................  U.S. Flag Cruise           89,533,448.00      78,341,767.00    3/24/00
Queen West, LLC                      Jacksonville, FL.                             Boats.
Port Imperial Ferry Corp..........  Allen Marine, Inc.-    3....................  Coast Guard Certified       6,170,048.00       5,398,000.00    4/06/00
                                     Stika, Alaska.                                Passenger Catamarans.
Penn Tug & Barge, Inc.............  The Red Fox Companies  2....................  Double-Hull Asphalt/       24,328,052.00      21,287,045.00    4/24/00
                                     of Iberia, Inc..                              Residual Oil Barges.
Pasha Hawaii Transport Lines LLC..  Halter Marine Group-   1....................  Pure Car/Truck             80,126,521.00      70,110,000.00    6/06/00
                                     Gulfport, MS.                                 Carrier.
Cal Dive I-Title XI, Inc..........  Amfels-Brownsville,    1....................  Ultra Deepwater Semi-     155,941,542.00     136,448,000.00    6/16/00
                                     TX.                                           Submersible Multi-
                                                                                   Service Vessel.
Maybank Navigation Company, LLC...  Bollinger Shipyards    1....................  Roll On/Roll Off            5,903,064.00       5,000,000.00    7/10/00
                                     Lockport, LLC-                                Warehouse Barge.
                                     Lockport, LA.
                                   ---------------------------------------------------------------------------------------------------------------------
  Total...........................  .....................  13...................  .....................    $704,209,675.00    $609,672,812.00  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
+Original approval in FY 1994 amended approval in FY 1997
*Export
**Reflects adjustments to originally approved amount as applicable
***Reflects withdrawal in subsequent fiscal year

    The attached pending list reflects information contained in 
applications submitted to the Maritime Administration requesting Title 
XI financing. Information contained in this list is subject to change 
and therefore it is advisable to contact the Maritime Administration to 
get the most up-to-date information.

                                                       Maritime Administration.--September 6, 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Types of                          Actual Cost to    Orig. Amount of       Terms of        Arrival
            Owner                No. of Ships    Vessels/Projects      Shipyard            Owner               Loan            Guarantee         Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2000

Shibley Marine Services        1...............  ITB (Oceangoing   Trinity Marine       $25,000,000.00     $21,875,000.00  25 yrs..........      8/01/95
 Corporation.                                     Tug/Barge Unit).  Group-Harvey,
                                                                    LA.
*Schahin Engenharia e          1...............  Semi-submersible  Friede Goldman       216,900,000.00     189,787,000.00  12 yrs..........      2/18/99
 Comercio Ltda.                                   Drilling Rig.     Offshore-
                                                                    Pascagoula, MS.
*PQP Limited.................  1...............  Power Barge.....  Cascade General-     119,388,000.00      73,598,000.00  12 yrs..........      4/12/99
                                                                    Portland, OR.
Sea Hotel Company, LLC.......  1...............  Seagoing Barge..  Bay Shipbuilding     150,812,000.00     131,960,000.00  25 yrs..........      5/07/99
                                                                    Co.-Sturgeon
                                                                    Bay, WI.
Great Lakes Dredging & Dock    1...............  Trailing Suction  To be determined      51,822,000.00      45,344,250.00  25 yrs..........      6/17/99
 Company.                                         Hopper Dredge.
McAllister Maritime Holdings,  1...............  Passenger/        Eastern               14,941,119.00      13,073,000.00  25 yrs..........      7/14/99
 LLC.                                             Automobile        Shipbuilding
                                                  Ferry.            Group-Panama
                                                                    City, FL.
FastShip Atlantic, Inc.......  4...............  High-Speed        National Steel     1,715,000,000.00   1,501,000,000.00  Const. Period         9/22/99
                                                  Container         and                                                     +25 yrs.
                                                  Vessels.          Shipbuilding-
                                                                    San Diego, CA.
Sterling Equipment, Inc......  10..............  Steel Deck        ................       8,661,000.00       7,386,655.00  15 yrs..........     11/01/99
                                                  Barges.
*Geomar Enterprises S.A......  3...............  Passenger         Halter Marine        189,000,000.00     165,000,000.00  25 yrs..........     11/08/99
                                                  Vessels.          Group, Inc.-
                                                                    Gulfport, MS.
ACF Acceptance Barge I, LLC..  11..............  Semi-Integrated,  Trinity Marine        16,756,686.00      14,662,100.25  25 yrs..........      1/11/00
                                                  Double-Skin       Products, Inc.-
                                                  Tank Barges.      Ashland, TN.
Vessel Management Services,    3...............  10,000 HP         Dakata Creed          45,813,000.00      36,697,000.00  25 yrs..........      3/21/00
 Inc..                                            Specialized       Industries,
                                                  Tugboats.         Inc..
                               2...............  Line Handling     ................  .................  .................  ................  ...........
                                                  Boats.
World City America Inc.......  1...............  6,200 Passenger,  American           1,508,851,840.00   1,320,245,224.00  25 yrs..........     11/30/99
                                                  Siemens' SSP      Flagship
                                                  Propulsor-        Construction
                                                  driven, GE Gas    Co.- Cape
                                                  Turbine-Powered   Canaveral, FL.
                                                  Passenger Ship-
                                                  American World
                                                  City-The Westin
                                                  Flagship.
Chiles Rig #14 LLC and Chiles  2...............  350-foot Ultra-   AMFELS, Inc.-        235,247,000.00     164,476,000.00  Const. Period         5/22/00
 Rig #15 LLC.                                     Premiun           Brownsville, TX.                                        +18 yrs.
                                                  Cantilever Jack-
                                                  up Rigs.
Kvaemer Shipholding, Inc.....  1...............  2600 TEU          Kvaemer               80,966,444.00      70,845,000.00  25 yrs..........      5/30/00
                                                  Container         Philadelphia
                                                  Carrier Vessel.   Shipyard-
                                                                    Phila., PA.
Drilling Productivity          2...............  Submersible       Conrad                25,852,000.00      21,000,000.00  25 yrs..........      8/16/00
 Realized, L.L.C..                                Drilling Rigs.    Industries,
                                                                    Inc.-Morgan
                                                                    City, LA.
Great Pacific NW Cruise Line,  1...............  U.S.-Flag Cruise  Leevac                45,600,000.00      39,900,000.00  25 yrs..........      8/23/00
 L.L.C..                                          Boat.             Industries, LLC-
                                                                    Jennings, LA.
                                                                   Nichols Brothers
                                                                    Boat Builders,
                                                                    Inc-Freeland,
                                                                    WA.
                                                                   Cascade General,
                                                                    Inc.-Portland,
                                                                    OR.
Alter Barge Line, Inc........  106.............  Covered Hopper    Trinity Marine        29,093,500.00      24,834,000.00  25 yrs..........      8/29/00
                                                  Barges.           Products, Inc.-
                                                                    Caruthersville,
                                                                    MO.
                                                                   Jeffboat LLC-
                                                                    Jeffersonville,
                                                                    IN.
Stolt Marine Tankers II, LLC.  1...............  Chemical Tanker.  To be determined      25,000,000.00      21,750,000.00  20 yrs..........      8/30/00
                              --------------------------------------------------------------------------------------------------------------------------
  Total......................  153.............  ................  ................      $4,504,589.00  $3,863,433,229.25
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Export

     Responses to Written Questions Submitted by Hon. Max Cleland 
                         to Clyde J. Hart, Jr.
    Question 1. As I remarked in my opening statement, I am interested 
to hear about the State of the Academy's barracks and the ongoing 
effort to restore them to livable conditions. Can you tell me if MARAD 
considers this a priority, and if so, how much money did the 
Administration request to be appropriated for the renovation of the 
Academy's physical facilities?
    Answer. The Maritime Administrator and the Academy Superintendent 
consider the barracks to be a high priority. This and all facility-
related needs are the subject of the Facilities Master Plan currently 
being developed. The fiscal year 2001 Congressional budget contains the 
increase of $2 million the Appropriations Committees added in fiscal 
year 2000 to address capital improvements. MARAD anticipates presenting 
facility needs with the completed and final Master Plan to the 
Department in the initial round of the 2002 budget process.
    The Academy's most pressing infrastructure problems that require 
immediate attention are related to the physical plant that 
significantly impacts on the health and welfare of the Regiment of 
Midshipmen.
    Question 2. It is my understanding that much of the potable water 
at the Academy does not meet EPA's minimum standards under the Safe 
Drinking Water Act. Can you tell us how many of these buildings fail to 
meet minimum safety standards? Has the Administration proposed funding 
to bring the Academy's drinking water infrastructure up to compliance 
with current law?
    Answer. Six Academy buildings fail to meet the EPA's drinking water 
standards. Approximately $5,000 for piping and replacement has been 
used this fiscal year to replace coolers which were constructed using 
lead based solder. Some coolers were also replaced in fiscal year 1999. 
All new coolers installed meet EPA standards. The repairs have not 
completely alleviated the problem for several reasons. Some coolers and 
water fountains still have lead-based solder that must be replaced. In 
one building the piping was replaced all the way to the water main and 
the water testing still shows water conditions in some areas that are 
below the standards. All lead-based solder throughout the facilities 
will have to be replaced. Approximately $11,000 will be spent during 
fiscal year 2000 for bottled water for affected areas so that all 
facilities have safe drinking water. The Facilities Master Plan will 
address the full scope of the problem and estimate repair costs. 
Continued testing and monitoring of water conditions will continue 
until the problem is resolved.
    Question 3. I have heard much about the deplorable state of the 
furniture in the Barracks. I further understand that this furniture--
desks, bunks, chairs--was acquired from surplus stocks over a decade 
ago. I hope you share my views for the need to provide adequate 
furniture in order to support a decent environment to study, learn, and 
live. Has the Administration proposed funding to replace the outdated 
furniture?
    Answer. The Academy requires approximately $3.2 million for 
midshipmen furniture. The increase requested in the Congressional 
budget includes $400,000 for furniture replacement. However, it should 
be noted that the Academy had planned to allocate this fiscal year to 
purchase furniture, but other critical needs presented themselves, 
precluding this initiative.
  
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