[Federal Register Volume 81, Number 231 (Thursday, December 1, 2016)]
[Notices]
[Pages 86771-86774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-28863]


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DEPARTMENT OF TRANSPORTATION

Maritime Administration

[Docket No. MARAD 2015-0049]


Application of Cargo Preference Requirements to the Federal Ship 
Financing Program

AGENCY: Maritime Administration (MARAD).

ACTION: Final Policy Clarification.

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SUMMARY: On April 22, 2015, the Maritime Administration (MARAD) 
published a Notice of Proposed Policy Clarification (80 FR 22611) 
seeking comments on a proposed policy clarifying the application of the 
Cargo Preference Act of 1954 (CPA 1954), 46 U.S.C. 55305, to 
applications, commitments, and guarantees under MARAD's Federal Ship 
Financing Program (Title XI), 46 U.S.C. Chapter 537. This Notice 
finalizes MARAD's policy clarification.

DATES: This policy is effective on the date of publication, including 
for all pending Title XI applications.

FOR FURTHER INFORMATION CONTACT: Owen J. Doherty, Associate 
Administrator for Business and Finance Development, Maritime 
Administration, 1200 New Jersey Avenue SE., Washington, DC 20590, (202) 
366-9595, [email protected].

SUPPLEMENTARY INFORMATION: MARAD received ten (10) public comments in 
response to its Notice of Proposed Policy Clarification. In addition, 
on July 9, 2015, MARAD held a meeting with interested stakeholders, a 
transcript of which was published on the public docket folder at 
www.regulations.gov under docket number MARAD-2015-0049. The public 
comments ranged from full support for the Proposed Policy Clarification 
as published to complete opposition to the application of the CPA 1954 
to the Title XI program.
    Numerous comments focused on the application of the CPA 1954 to 
mortgage-period financing. Some commenters asserted that the 
application of the CPA 1954 to mortgage-period financing would result 
in such a severe administrative and cost burden that it would render 
compliance with the CPA 1954 impracticable and deter future Title XI 
applications. Commenters also asserted that the Proposed Policy 
Clarification was a significant deviation from MARAD's prior practice 
of not applying the CPA 1954 to mortgage-period financing. Relatedly, 
virtually all commenters were concerned about the timing for 
application of the CPA 1954, with

[[Page 86772]]

particular focus on mortgage-period applications, contending that cargo 
preference would add costs without any assurance of an application's 
approval.
    MARAD has revisited the text of the CPA 1954 and its regulations at 
46 CFR 381.7 and determined that cargo preference will not be applied 
to mortgage-period financing. This decision required conscientious 
consideration of all public input and is focused on the project scope 
under Title XI mortgage-period financing and that of construction-
period financing. MARAD bases its decision upon the statutory text, 
which provides in relevant part that the CPA 1954 applies when the U.S. 
Government ``provides financing in any way for . . . equipment, 
materials, or commodities . . . which may be transported on ocean 
vessels.'' 46 U.S.C. 55305(b). In mortgage-period financing, separate 
and distinct from construction-period financing, MARAD is only 
providing financing for the completed, delivered vessel. Financing is 
not provided for any actual vessel construction activities or vessel 
components prior to the completed vessel's delivery, which in turn are 
privately financed. It is further compelling that in admiralty, a 
vessel, once completed and delivered, is a distinct legal entity that 
is, for example, ``treated in other connections as an entity capable of 
entering into relations with others, of acting independently and of 
becoming responsible for her acts.'' Piedmont & George's Creek Coal Co. 
v. Seaboard Fisheries Co., 254 U.S. 1, 9 (1920). This position is also 
consistent with MARAD's existing regulations, applying the CPA 1954 to 
``cargoes . . . which are generated by U.S. Government Grant, Guaranty, 
Loan and/or Advance of Funds Programs.'' 46 CFR 381.7. Thus, it is 
MARAD's conclusion that because no financing is provided for equipment 
or materials which may be transported on ocean vessels, the CPA 1954 is 
not applicable to mortgage-period financing.
    Consistent with the above analysis, MARAD notes that a narrow 
exception to the inapplicability of the CPA 1954 to mortgage-period 
financing may exist. Specifically, the CPA 1954 may apply if a vessel 
is financed with a mortgage-period guarantee and the completed vessel 
is to be delivered at a location other than the shipyard. For example, 
if MARAD provides a mortgage-period guarantee for a completed vessel 
and the shipyard places that vessel on a heavy lift ship for final 
delivery to the Title XI recipient, the ocean transportation for that 
final delivery may be subject to the CPA 1954. MARAD will review this 
exceptional circumstance on a case-by-case basis and may apply the 
contents of this Notice as appropriate.
    Separate from mortgage-period financing, and consistent with the 
project scope analysis described above, the CPA 1954 does apply to all 
cargoes under Title XI construction-period financing, without regard to 
the timing of the Title XI application or approval. In construction-
period financing, when an application is approved, MARAD is providing 
financing based upon the ``Actual Cost'' of the vessel as defined by 46 
CFR 298.2 and further described in 46 CFR 298.13(b). In providing 
construction-period financing, MARAD is therefore financing all 
discrete equipment and materials that will be incorporated into the 
vessel and included in the Actual Cost, regardless of when an 
application is submitted or approved. In this manner, equipment and 
materials purchased and transported prior to the approval and issuance 
of a Title XI guarantee but included in Actual Cost is akin to using 
Federal assistance to finance pre-award costs. See 2 CFR 200.458 
(``Pre-award costs are those incurred prior to the effective date of 
the Federal award directly pursuant to the negotiation and in 
anticipation of the Federal award where such costs are necessary for 
efficient and timely performance of the scope of work. Such costs are 
allowable only to the extent that they would have been allowable if 
incurred after the date of the Federal award and only with the written 
approval of the Federal awarding agency.''). Therefore, all equipment 
and materials that are transported by ocean and included in the Actual 
Cost of a vessel built with Title XI construction-period financing will 
be included in determining compliance with the CPA 1954.
    It is further noted that the above analysis regarding construction-
period financing will also generally apply to Title XI financing for 
vessel reconstruction or reconditioning. Therefore, absent evidence to 
the contrary for a particular project, the CPA 1954 is applicable in 
the same manner to cargoes for vessel reconstruction or reconditioning 
projects financed through a Title XI guarantee.
    Beyond the applicability to different types of financing, MARAD 
also received multiple comments asserting that the submission of bills 
of lading was overly burdensome. Bills of lading are the sole basis by 
which MARAD can assess what cargo has been transported and whether 
program participants have complied with the CPA 1954. The requirement 
to submit bills of lading under Federal acquisitions and Federal 
financing agreements is long established. See 48 CFR 52.247-64; 46 CFR 
381.3; and 46 CFR 381.7. The requirement to submit bills of lading 
within thirty (30) days is consistent with MARAD's existing regulations 
and is routinely met by shippers across all industries, often with 
little expertise of marine transportation. Administrative requirements 
found in Section 2 of this Final Policy Clarification therefore remain 
unchanged.
    Commenters also expressed concern regarding the submission of 
transportation plans, specifically that there was a lack of clarity for 
what needs to be contained in a transportation plan. In response, MARAD 
has included example transportation plan contents below in Section 3 of 
this Final Policy Clarification. It is also noted that while a 
transportation plan is required to be submitted at the time of 
application, MARAD views transportation plans as cooperative documents 
that should be updated as construction progresses. This process ensures 
that all parties, including MARAD, the Title XI participant, and the 
shipyard have a continuing understanding of the participant's CPA 1954 
compliance as the project evolves.
    A number of commenters also expressed concern regarding the process 
used to determine U.S.-flag vessel availability and the related issue 
of determining when an offered rate is fair and reasonable. The 
comments often incorrectly cited the cost differential between U.S.-
flag and foreign-flag vessels. The statute unambiguously states that 
availability is based upon ``fair and reasonable rates for commercial 
vessels of the United States.'' 46 U.S.C. 55305 (emphasis added). See 
also Administration of Cargo Preference Act [50-50 Law: Hearing on 
Public Law 664 Before the H. Comm. on Merchant Marine and Fisheries, 
83d Cong. 178 (1955) (``It may be noted at the outset that only rates 
`for United States-flag commercial vessel' are considered in 
determining a fair and reasonable rate, so that foreign-flag rates do 
not enter into the determination.''). The comments generally go beyond 
the scope of this policy clarification to the general administration of 
the CPA 1954; however, understanding that there are significant 
commercial concerns, MARAD has expanded Section 4 of this Final Policy 
Clarification to provide additional insight into the criteria that 
MARAD may consider in determining vessel availability and fair and 
reasonable rates. Furthermore, it is anticipated that coordination and 
regular dialogue between MARAD and

[[Page 86773]]

vessel reconstruction, reconditioning, or construction-period financing 
applicants, which typically submit applications early in the vessel 
construction, reconstruction, or reconditioning process, will alleviate 
many of the concerns expressed by the commenters.
    Finally, some commenters disagree with the potential remedies 
listed in Section 5 of the Notice of Proposed Policy Clarification and 
expressed doubt that MARAD possesses the requisite authority to impose 
such remedies. MARAD disagrees and affirms that it possesses the 
discretion to impose the remedies in Section 5. If MARAD chooses to 
impose civil penalties under 46 U.S.C. 55305(d) as a result of a 
violation of the CPA 1954 by a Title XI participant, MARAD would also 
follow applicable procedures to afford all protections under the 
Administrative Procedure Act. See 5 U.S.C. 554-558. Therefore, Section 
5 is unchanged; however, MARAD remains of the view that early planning 
and close coordination by vessel reconstruction, reconditioning, or 
construction-period financing participants will ensure that no CPA 1954 
violations will occur.

Section 1: What is Cargo Preference?

    The CPA 1954 mandates that shippers use U.S.-flag vessels to 
transport a portion of Government-impelled, ocean borne cargoes. 
Through statutory amendments in 2008 to 46 U.S.C. 55305(b), the CPA 
1954 was clarified to state that the statute applies whenever the U.S. 
Government provides financing in any way with Federal funds for the 
account of any person. MARAD, as the agency charged with implementing 
and overseeing compliance administration of the CPA 1954, previously 
determined that ``financing in any way'' includes Federal loan 
guarantee programs, such as Title XI.

Section 2: What are the Cargo Preference requirements?

    There are both transportation and administrative requirements 
associated with the CPA 1954:
    Transportation: For vessel reconstruction, reconditioning, or 
construction-period financing, at least 50 percent of the gross tons of 
the equipment or materials which are transported by ocean and included 
in the Actual Cost of vessel in accordance with 46 CFR 298.13(b) must 
be transported on privately-owned commercial vessels of the United 
States, to the extent those vessels are available at fair and 
reasonable rates. To ensure a fair and reasonable participation of 
U.S.-flag vessels, MARAD's established definition of the undefined term 
``gross ton'' means a revenue ton (metric ton or cubic meter of cargo, 
by whichever measure the number is greater). This greater number is the 
standard by which compliance with the CPA 1954 will be evaluated.
    Administrative: For each covered shipment, consistent with 46 CFR 
381.3, within thirty (30) days of the foreign export loading, the 
shipper (Title XI participant or its representative) must submit a 
legible copy of a rated on-board ocean master bill of lading to MARAD. 
This requirement exists whether the particular shipment was transported 
aboard a U.S.-flag or a foreign-flag vessel to establish a correct 
denominator on which CPA 1954 compliance is calculated. The bills of 
lading must be submitted to the Office of Cargo and Commercial Sealift, 
Maritime Administration, 1200 New Jersey Avenue SE., Washington, DC 
20590 or via email to [email protected]. The bills of lading or the 
transmittal cover must clearly state the Title XI project to which they 
apply and must contain the following information: (1) The name of the 
vessel carrying the cargo(s); (2) The carrying vessel's International 
Maritime Organization (IMO) number; (3) The carrying vessel's flag of 
registry; (4) The date of cargo loading; (5) The port of loading; (6) 
The port(s) of trans-shipment (if any); (7) The port of final 
destination; (8) A description of the cargo(s); (9) The gross weight of 
the cargo(s) in kilograms and the volume of the cargo(s) in cubic 
meters; and (10) The total ocean freight revenue in U.S. dollars.

Section 3: To what cargoes does Cargo Preference apply?

    For vessel reconstruction, reconditioning, or construction-period 
financing, the cargo preference requirements apply to all foreign 
components that are transported by ocean and included in the ``Actual 
Cost'' of the project in accordance with 46 CFR 298.13(b). Consistent 
with the statutory mandate, given that MARAD is providing financing for 
all equipment included in Actual Cost, including equipment transported 
prior to approval, the total revenue tonnage of all foreign equipment 
transported by ocean will serve as the denominator from which the at-
least-50-percent-U.S.-flag transportation calculation will be made.
    At the time of application, all vessel reconstruction, 
reconditioning, or construction-period financing applicants are 
required to submit a transportation plan for review by MARAD to ensure 
that sufficient planning has occurred to meet the CPA 1954 
requirements. This requirement will be discussed with each applicant 
and potential applicant at the earliest possible time. A transportation 
plan generally contains a description of each shipment cargo including 
weight and volume, country of origin, date of shipment, the flag of the 
vessels that will carry the cargo, and, to the extent known, the vessel 
and/or carrier that will be engaged for future shipments. Ideally, the 
U.S.-flag portion is shipped first under a transportation plan to 
ensure compliance with the CPA 1954; however, a plan that does not 
conform to this principle may still be acceptable. Furthermore, 
understanding that schedules will change as the project develops, MARAD 
anticipates that the Title XI participant and the shipyard constructing 
the vessel will continuously engage with MARAD to update the 
transportation plan as necessary. By reviewing the shipping plan early 
in the application process, or prior to submission of any application 
if possible, MARAD can work with Title XI participants and their 
respective shipyards to help identify and work with them to mitigate 
challenges to CPA 1954 compliance.

Section 4: What if an available U.S.-flag vessel cannot be found or the 
total ocean freight rate appears too expensive?

    Only MARAD can issue a determination that no U.S.-flag vessels are 
available at fair and reasonable rates. If a Title XI participant, 
through demonstrably diligent efforts, is unable to find U.S.-flag 
service, without MARAD's issuance of a determination of the non-
availability of qualified U.S.-flag carriage, the participant's due 
diligence alone will not excuse that applicant from CPA 1954 
requirements. Title XI participants must communicate with U.S.-flag 
carriers at the earliest possible time to ensure the greatest degree of 
coordination and to obtain the best freighted rates. In the event that 
a Title XI participant experiences difficulty obtaining U.S.-flag 
service, or if it can only find partial U.S.-flag service, the 
participant must contact MARAD without delay at [email protected] or 
(202) 366-4610, so as to provide MARAD with an undiminished opportunity 
to assist in locating U.S.-flag service. Ideally, MARAD will be able to 
locate available U.S.-flag service, for the Title XI participant's 
potential engagement to meet its U.S.-flag carriage requirement. 
Alternatively, if MARAD is unsuccessful in locating available U.S.-flag 
service, a determination of non-availability will be issued. With 
proper

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planning, U.S.-flag service can generally be obtained at fair and 
reasonable rates. Early planning and coordination are the key factors 
to meeting cargo preference requirements in Title XI, as in all Federal 
programs.
    In evaluating whether U.S.-flag vessels are available at fair and 
reasonable rates, MARAD may consider, at its discretion: (1) U.S.-flag 
rates offered in response to the shipper's solicitation; (2) U.S.-flag 
commercial rates being offered on the same trade route under similar 
circumstances taking into account, as available, information obtained 
from interviews with U.S.-flag carriers, historic rates, published 
rates, and applicable index rates; (3) As available and applicable, 
guideline rates calculated under 46 CFR part 382; and (4) Whether the 
shipper has made a demonstrably diligent effort to obtain U.S.-flag 
service, including evidence of advanced planning and requests for 
proposals for ocean transportation issued by the shipper. Vessel 
availability is assessed in consideration of shipper's reasonable 
required laycan and delivery dates.

Section 5: What if non-compliance with Cargo Preference requirements 
occurs?

    At MARAD's direction, as the administrator of the Title XI program, 
non-compliant parties may be denied a letter commitment or, consistent 
with 46 U.S.C. 55305(d)(2)(B), may be required to provide make-up 
cargoes for carriage aboard U.S.-flag vessels to offset the lost cargo 
carriage supporting work under the Title XI financing application. 
Where knowing and willful violations occur, consistent with 46 U.S.C. 
55305(d)(2)(C), MARAD may issue a civil penalty of not more than 
$25,000 for each violation, with each day of a continuing violation 
following the date of shipment counting as a separate violation. 
Additionally, CPA 1954 requirements are incorporated into Title XI 
letter commitments; therefore, failure to properly adhere to cargo 
preference requirements could impact MARAD's ability to close on a 
Title XI guarantee because the recipient has not met its obligations 
under the letter commitment. However, with early planning and 
coordination with MARAD, no CPA 1954 violations need occur.

Section 6: What is the purpose of Cargo Preference?

    The CPA 1954 provides cargo that helps to retain and encourage a 
privately-owned and operated U.S.-flag merchant fleet. The U.S.-flag 
fleet is a vital resource, providing essential sealift capability to 
globally project and sustain the U.S. Armed Forces or support other 
national emergencies, maintaining a cadre of skilled seafarers 
available in time of national emergencies, and helping to protect U.S. 
economic interests. The U.S. maritime industry also supports thousands 
of sea-going, shore-based, and secondary, associated jobs, supporting 
the Nation's economic growth. It is imperative that Federal programs, 
such as Title XI, and beneficiary Title XI applicants and shipyards, as 
members of the U.S. maritime industry, support this national priority 
through proper adherence to cargo preference requirements. Therefore, 
while the use of U.S.-flag vessels to carry 50 percent of the gross 
tons of ocean borne cargoes is the statutory minimum, MARAD, as the 
agency charged with administering both Title XI and the CPA 1954, 
encourages the use of U.S.-flag vessels for greater than the minimum 
whenever possible.

    Authority:  46 U.S.C. 55305; 46 U.S.C. Ch. 537.

    By Order of the Maritime Administrator.
T. Mitchell Hudson, Jr.,
Secretary, Maritime Administration.
[FR Doc. 2016-28863 Filed 11-30-16; 8:45 am]
 BILLING CODE 4910-81-P