    Maritime Administration: Improved Program Management Needed to
    Address Timely Disposal of Obsolete Ships (07-MAR-05,
    GAO-05-264).

    The Maritime Administration (MARAD) has more than 100 obsolete
    and deteriorating ships awaiting disposal that pose potentially
    costly environmental threats to the waterways near where they are
    stored. Congress, in 2000, mandated that MARAD dispose of them by
    September 30, 2006. While MARAD has various disposal options
    available, each option is complicated by legal, financial, and
    regulatory factors. In this report, GAO assesses (1) whether
    MARAD will meet the September 2006 disposal deadline for these
    ships and, if not, why not; (2) the extent that MARAD has used
    alternative disposal methods other than scrapping, and barriers
    to using other methods; (3) the appropriateness of MARAD's
    methods for procuring ship disposal services; and (4) the impact
    of foreign competition and other factors on reducing disposal
    costs.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-264
        ACCNO:   A18776
      TITLE:     Maritime Administration: Improved Program Management
    Needed to Address Timely Disposal of Obsolete Ships
         DATE:   03/07/2005
      SUBJECT:   Competition
    	     Contract administration
    	     Federal procurement
    	     Foreign governments
    	     Hazardous substances
    	     Performance measures
    	     Procurement practices
    	     Property disposal
    	     Research and development contracts
    	     Schedule slippages
    	     Service contracts
    	     Ships
    	     Strategic planning
    	     Timeliness
    	     National Defense Reserve Fleet

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    GAO-05-264

    United States Government Accountability Office

    GAO	Report to the Ranking Minority Member, Subcommittee on Readiness,
    Committee

                      on Armed Services, House of Representatives

    March 2005

    MARITIME ADMINISTRATION

    Improved Program Management Needed to Address Timely Disposal of Obsolete Ships

                                           a

    GAO-05-264

    [IMG]

    March 2005

    MARITIME ADMINISTRATION

    Improved Program Management Needed to Address Timely Disposal of Obsolete Ships

      What GAO Found

    MARAD is unlikely to meet its statutory deadline of September 30, 2006. As
    of September 2004, MARAD had disposed of 18 ships from its inventory, with
    over 100 ships left to dispose of by the deadline. MARAD's current
    approach is not sufficient for disposing of these remaining ships within
    the next 2 years. MARAD's slow progress is due primarily to program
    leaders not developing a comprehensive management approach that could
    address the myriad of environmental, legal, and regulatory challenges that
    the program faces. MARAD's approach lacks an integrated strategy with
    goals, milestones, performance measures, and a mitigation plan for
    overcoming anticipated impediments. In the absence of this comprehensive
    approach, MARAD's ship disposal program lacks the vision needed to sustain
    a longterm effort. Consequently, MARAD has not been able to assure
    Congress that it can dispose of these ships in a timely manner to reduce
    the threat of a costly environmental event, nor has it clearly articulated
    what additional congressional assistance, such as funding, may be needed.

    While MARAD has considered alternative disposal methods to scrapping, it
    has made limited use of these methods because of a number of
    environmental, financial, and legislative barriers. Since fiscal year
    2001, MARAD has disposed of 17 ships through scrapping, but only 1 through
    artificial reefing. MARAD has not disposed of ships using deep-water
    sinking and donations to historic organizations. MARAD has taken positive
    steps to reduce barriers limiting its use of these methods but still may
    be years away from increasing the number of disposals using these
    alternative methods because it has not developed an overall plan for
    expanding their use. Consequently, MARAD may be losing opportunities that
    could expedite the disposal of the obsolete ships in its inventory.

    Since fiscal year 2002, MARAD has relied almost entirely on an
    inappropriate procurement method-Program Research and Development
    Announcements (PRDA)-to acquire ship scrapping services. The Federal
    Acquisition Regulation and the Competition in Contracting Act of 1984
    generally require that MARAD use other methods for acquiring these types
    of services. PRDAs may only be used to contract for research or
    development. According to MARAD, PRDAs provide greater flexibility and
    allow firms to propose innovative solutions to ship disposal. GAO found,
    however, that MARAD was not contracting for research or development but
    instead was acquiring ship scrapping services. MARAD's use of PRDAs has
    also resulted in a lack of transparency in the contract award process and
    has raised concerns among firms as to the fairness of MARAD's processes.

    While GAO was unable to isolate the specific impact of foreign competition
    and other factors on reducing ship disposal costs, MARAD attributes the
    decrease in ship disposal prices almost exclusively to foreign
    competition. However, other factors, such as larger annual program funding
    and increases in the scrap value of steel, may have also played a role.

    United States Government Accountability Office

    Contents

      Letter

    Results in Brief
    Background
    MARAD Is Unlikely to Meet 2006 Deadline
    MARAD Has Made Limited Use of Alternative Disposal Methods

    because of Several Barriers MARAD's Use of PRDAs to Scrap Ships Is
    Inappropriate Overseas Competition Just One Factor Contributing to

    Lower Prices Conclusions Recommendations for Executive Action Agency
    Comments and Our Evaluation

                                                                         1 4 7 13

    26 32

    40 43 44 45

      Appendixes

    Appendix I: Scope and Methodology 47

    Appendix II: Comments from the Department of Transportation 50

    Tables	Table 1: Table 2: Table 3: Table 4:

    Table 5: Table 6: Table 7: Table 8:

    Number of Obsolete Vessels in MARAD's Inventory,
    Fiscal Years 2001-04 15
    Projected Number of Obsolete Vessels in MARAD's
    Inventory, Fiscal Years 2005-06 17
    Differences between MARAD's Budget Requests for Ship
    Disposal and Appropriations, Fiscal Years 2001-05 21
    MARAD's Performance Targets for Removing Obsolete
    Ships from Fleet for Subsequent Disposal,
    Fiscal Years 2001-06 23
    Completed Disposals by Disposal Method for
    Fiscal Years 2001-04 27
    Current Status of Congressionally Designated Ship
    Donations 30
    Comparison of Industry Participation in PRDAs Versus
    Other Solicitation Methods 38
    Price Trends for Contracts by Fiscal Year Awarded 41

    Contents

               Figure 1: Figure  Ship during Early Stages of the Scrapping
    Figures               2: Process Partially Scrapped Ship in a Firm's 11 12
                                            Scrapping Facility
                      Figure 3:   Ship Near End of the Scrapping Process       13
                      Figure 4:  A High-Priority Ship Awaiting Disposal in
                                                    the
                                             James River Fleet                 16
                      Figure 5:  Annual Average International Scrap Steel
                                                  Prices,
                                                  1994-04                      42

    Abbreviations

    CICA Competition in Contracting Act
    DOT Department of Transportation
    EPA Environmental Protection Agency
    FAR Federal Acquisition Regulation
    GAO Government Accountability Office
    GPRA Government Performance and Results Act
    IDIQ indefinite delivery, indefinite quantity
    MARAD Maritime Administration
    PCB polychlorinated biphenyl
    PRDA Program Research and Development Announcement
    SINKEX Sinking Exercise

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    March 7, 2005

    The Honorable Solomon P. Ortiz Ranking Minority Member Subcommittee on
    Readiness Committee on Armed Services House of Representatives

    Dear Mr. Ortiz:

    More than 100 deteriorating and obsolete ships that are part of the
    National Defense Reserve Fleet1 are anchored along the East, West, and
    Gulf coasts, awaiting disposal because they are no longer needed for
    national defense. Many of them contain hazardous materials such as
    asbestos, lead, polychlorinated biphenyls (PCB), and residual oils and
    fuels that are typically found on older ships. Some of these ships have
    been associated with oil spills, with the largest in 1998 costing about
    $1.4 million to clean up. Members of Congress, the states, and
    environmental groups have expressed concerns about the environmental
    hazards posed by these ships. The Maritime Administration (MARAD), which
    is part of the Department of Transportation (DOT), is responsible for the
    disposal of these obsolete ships.

    Ship disposal is complicated by a number of factors. MARAD must comply
    with numerous federal statutes that affect ship scrapping, including those
    related to the treatment of hazardous materials. 2 To dispose of these
    ships, MARAD must also coordinate its efforts with various federal
    agencies, individual states, and foreign governments. For example, MARAD
    has to work with the states and the Environmental Protection Agency (EPA)
    to ensure that hazardous materials are removed from ships in compliance
    with federal and state environmental and worker safety laws. MARAD has a
    number of methods that it can choose from to dispose of these ships,
    including selling them to, or contracting with, domestic or foreign
    scrapping companies to dismantle them; sinking them to create artificial

    1 Established in 1946, the National Defense Reserve Fleet serves as a
    reserve that could be activated to meet shipping requirements during
    national emergencies. The fleet, which consists of more than 250 merchant
    vessels, contains some older vessels that have been designated for
    disposal (referred to as nonretention ships). In this report, we refer to
    nonretention ships as obsolete ships.

    2 Scrapping refers to dismantling the ship and recycling its components.

    reefs; donating them to private or public entities for various authorized
    uses; or transferring them to the Navy for use in its deep-sinking
    training exercises. However, each of these disposal methods has associated
    challenges. For example, the number of domestic firms that have been
    interested in scrapping has been limited. In addition, environmental,
    regulatory, and legal barriers have limited opportunities to export ships
    for scrapping, and have led to lower demand for donations and reefing.

    MARAD's ship disposal program has long been recognized as a concern. In
    the late 1990s, DOT's Inspector General and GAO both reported that MARAD
    was making little progress in selling its obsolete ships to be scrapped-at
    that time its predominate method for disposal. The reports cited several
    constraints, including a 1994 government limitation on overseas ship
    sales, a 1998 ban on overseas scrapping for environmental reasons, and a
    decline in the domestic industry's interest in buying ships. In 2000,
    DOT's Inspector General added MARAD's ship disposal program to the
    department's list of high-priority management challenges and made several
    recommendations to improve the ship disposal program, including the need
    for MARAD to develop a disposal plan. In response to the difficulties that
    MARAD was facing in selling its ships, Congress specifically authorized3
    MARAD in October 2000 to begin paying for scrapping services but also
    directed MARAD to consider other disposal methods in developing its
    disposal program. At that time, Congress extended MARAD's deadline to
    complete the disposal of its obsolete ship inventory from September 30,
    2001, to September 30, 2006.4 To accomplish this, Congress has
    appropriated almost $80 million to MARAD's ship disposal program from
    fiscal years 2001 to 2005. In addition, within 6 months after the
    enactment of the Defense Authorization Act of 2001, Congress directed
    MARAD to report on its ship disposal program and provide progress reports
    every 6 months thereafter.5 As of December 2004,

    3 Pub. L. No. 106-398, S: 3502 (2000).

    4 Congress originally required MARAD to dispose of obsolete ships in the
    National Defense
    Reserve Fleet by September 30, 1999, in The National Maritime Heritage Act
    of 1994,
    Pub. L. No. 103-451, S: 6(c)(1)(A). Congress subsequently amended the
    deadline to
    September 30, 2001, in the National Defense Authorization Act for Fiscal
    Year 1998,
    Pub. L. No. 105-85, S: 1026(c)(3) (1998). Congress set the deadline of
    September 30, 2006,
    in the Floyd D. Spence National Defense Authorization Act for Fiscal Year
    2001,
    Pub. L. No. 106-398, S: 3502(a) (2000).

    5 Pub. L. No. 106-398, S: 3502 (2000).

    MARAD had submitted to Congress its initial report and two of the progress
    reports.

    Leading organizations embrace key principles to effectively implement and
    manage programs. The Government Performance and Results Act of 1993, for
    example, embodies key principles that provide an effective management
    framework to improve the likelihood of successfully implementing programs
    and assessing results. The framework consists of a number of critical
    elements considered essential in developing an effective strategy, guiding
    resource allocations, and monitoring results. Combined with effective
    leadership, these elements provide decision makers with a framework to
    guide program efforts and the means to determine if these efforts are
    achieving the desired results.

    We were asked to review MARAD's ship disposal program and related
    contracting and procurement processes. Specifically, our objectives were
    to (1) determine whether MARAD will meet the statutory deadline of
    September 2006 to dispose of its obsolete ships and, if not, what factors
    may prevent it from doing so; and (2) assess the extent to which MARAD has
    used alternative methods, other than ship scrapping, to dispose of its
    obsolete ships and the barriers to using such alternatives. In addition,
    we were asked to examine the appropriateness of MARAD's primary
    procurement method (Program Research and Development Announcements) for
    obtaining ship disposal services and the impact of foreign competition and
    other factors on reducing ship disposal costs.

    To determine whether MARAD will meet its September 2006 deadline and
    identify factors affecting this goal and to assess whether MARAD has
    considered alternative approaches to scrapping, we reviewed the agency's
    performance plans and program status reports and applicable laws and
    regulations. We also interviewed MARAD, Navy, and industry representatives
    to discuss barriers to program success. To assess the appropriateness of
    MARAD's acquisition methods for procuring ship disposal services, we
    interviewed MARAD program, administrative, and legal officials to identify
    what acquisition methods they used and what their rationale was for their
    use. We also reviewed contract documents, the Federal Acquisition
    Regulation, and case law. To assess the impact of foreign competition and
    other factors on disposal prices, we reviewed industry proposals and
    contracts to identify price trends and interviewed industry
    representatives to get their perspectives on factors affecting these
    trends. We determined that the data used in the report were sufficiently
    reliable for meeting our purposes. We conducted our review between

    December 2003 and November 2004 in accordance with generally accepted
    government auditing standards. A detailed description of our scope and
    methodology is provided in appendix I.

    Results in Brief	MARAD is unlikely to meet the statutory deadline of
    September 30, 2006, to complete the disposal of its obsolete ships,
    thereby increasing the risk of costly environmental contamination. From
    the time that the deadline was established in October 2000 until September
    2004, MARAD had completed the disposal of 18 ships,6 or about 12 percent
    of its total of 157 obsolete ships. It had also awarded contracts for 29
    other ships. At this pace, MARAD is unlikely to complete the disposal of
    the remaining 110 ships and the additional 30 ships it expects to receive
    within the next 2 years. MARAD's current approach, which has resulted in
    disposing of an average of about 5 ships per year, is not sufficient for
    disposing of the remaining ships over the next 2 years. MARAD's slow
    progress is due primarily to program leaders not developing a
    comprehensive management approach to better focus the program's efforts on
    meeting the myriad of challenges that the program faces in eliminating its
    inventory in a timely and efficient manner. While MARAD has adhered to
    some management principles that are compatible with the Government
    Performance and Results Act and those used by leading organizations, such
    as including the ship disposal program in MARAD's overall strategic and
    performance planning process, better progress has not been made because
    several key management elements that leading organizations usually embrace
    are missing or are inadequate. These include (1) no integrated strategy
    with goals, approaches, and milestones for meeting the 2006 deadline; (2)
    no identification of long-term funding resources to achieve program goals;
    (3) inadequate performance measures to track progress toward achieving the
    goals; (4) inadequate identification of the external factors, particularly
    those that are legal, regulatory, and environmental, which could impact
    the program's progress, and inadequate plans to mitigate these factors;
    (5) inadequate formal decision-making framework; and (6) no formal program
    evaluations. In the absence of a comprehensive management approach that
    includes all of these key elements, MARAD's ship disposal program lacks
    the vision needed to sustain a long-term effort. Moreover, while MARAD was
    required to provide Congress with an initial plan and subsequent progress
    reports thereafter, it has submitted only two out of a

    6 From October 2004 through January 2005, MARAD stated that 4 additional
    ships had been completely disposed of, for a total of 22 ships from the
    2001 inventory.

    possible seven of these required progress reports. As a result of
    weaknesses in MARAD's management approach, managers are not in a position
    to make sound decisions concerning the ship disposal program. In addition,
    MARAD has not been able to provide Congress and other interested parties
    with a reasonable timetable and the associated annual funding requirements
    needed to meet the 2006 deadline, nor has it clearly articulated the areas
    that congressional assistance may be needed to expedite the disposal of
    these deteriorating ships, which continue to pose potentially costly
    environmental threats to the waterways near the sites where these ships
    are stored.

    Since Congress directed MARAD in 2000 to consider alternative ship
    disposal methods to scrapping when developing its program, MARAD has made
    limited use of these methods-artificial reefing, deep-water sinking, and
    donation-because of a number of environmental, financial, and legislative
    barriers. From October 2000 through September 2004, MARAD had disposed of
    17 ships through scrapping services or sales contracts and only 1 ship
    through an alternative method-artificial reefing. It had not disposed of
    any ships through the Navy's deep-water sinking program7 or the ship
    donation program. With congressional support, MARAD recently took a number
    of actions to reduce the impediments that have limited its use of
    alternative methods. For example, MARAD and EPA drafted national
    guidelines for remediating ships for the artificial reefing program; MARAD
    and the Navy signed a memorandum of agreement to include MARAD's obsolete
    ships in the Navy's deep-water sinking program; and MARAD received new
    authority8 to donate ships without special legislation. Despite these
    positive steps, MARAD may be years away from increasing the number of
    disposals using these alternative methods. MARAD lacks an overall plan
    that could expand the use of these alternative disposal methods. For
    example, MARAD has not developed policies that could help guide its
    allocation of funds among all of its available ship disposal methods. As a
    result, MARAD may be losing opportunities to dispose of more of its
    obsolete ships using these alternative methods in the most cost-efficient
    and timely manner.

    7 The Navy's Sinking Exercise program uses obsolete ships for target
    practice during deepwater training exercises.

    8 Pub. L. No. 108-136, S: 3512 (2003).

    Since fiscal year 2002, MARAD has relied primarily on one procurement
    method-Program Research and Development Announcements (PRDA)- to acquire
    ship scrapping services, but this method is not appropriate for this
    purpose. Since October 2002, MARAD has awarded contracts for 34 ships
    through PRDA solicitations and only 4 through another procurement method.9
    According to MARAD, PRDAs are a variant of broad agency announcements, an
    authorized procurement process under the Federal Acquisition Regulation
    (FAR) and the Competition in Contracting Act of 1984. PRDAs are designed
    to enable federal agencies to acquire basic and applied research and that
    part of development not related to the development of a specific system or
    hardware procurement. MARAD officials told us that the PRDA method
    provides greater flexibility and allows firms to propose new or innovative
    solutions to ship disposal. In addition, they said they chose PRDAs to
    attract a larger number of responses from qualified firms and, thereby,
    increase competition and reduce costs. However, our analysis of MARAD's
    PRDAs and the contracts awarded under PRDAs through February 2004 showed
    that MARAD was not contracting for research or development but instead was
    acquiring conventional ship scrapping services. Moreover, we found that
    while the PRDA method attracted a larger number of firms, other factors,
    such as MARAD's access to increased appropriations and higher scrap metal
    prices, could have accounted for greater competition and reduced costs.
    MARAD's use of PRDAs has led to a lack of transparency in the contract
    award process and has raised concerns of fairness among industry
    participants.

    While we could not isolate the specific impact of foreign competition and
    other factors on reducing the cost of ship disposal, MARAD attributes the
    overall decrease in ship disposal costs almost exclusively to overseas
    competition. However, several other factors are likely to have played a
    role. Since MARAD received specific authority to procure scrapping
    services in fiscal year 2001, there has been a steady decline in the price
    per ton to scrap ships. In 2001, MARAD paid contractors an average of
    about $250 per ton to scrap ships; in 2004, this cost fell to about $109
    per ton-a decrease of about 56 percent. While the addition of overseas
    competition has likely been a factor, other factors, such as larger annual
    program funding and increases in the scrap value of steel, have probably
    also played a role.

    9 MARAD used the sealed bidding contracting method that employs
    competitive bids, public opening of bids, and awards primarily on the
    basis of price and other price-related factors. FAR Part 14.

    We are making recommendations that would strengthen the management of
    MARAD's ship disposal program, including developing a comprehensive,
    integrated approach and changing the method it uses to contract for ship
    disposal services. In commenting on a draft of this report, DOT did not
    directly comment on whether it agreed with our recommendations, but it
    stated that MARAD is taking some actions that may address them.
    Specifically, DOT stated that MARAD agrees that the time is right to
    ensure that its planning efforts are up to date and are appropriately
    comprehensive and MARAD will provide an updated vision of its
    comprehensive integrated approach to program management in subsequent
    reports to Congress. DOT also commented that MARAD has revised its
    contracting approach that has resulted in the termination of its use of
    PRDAs.

    Background	As part of DOT, MARAD serves as the federal government's
    disposal agent for government-owned merchant vessels weighing 1,500 gross
    tons or more.10 MARAD's ship disposal program, in the Office of Ship
    Operations, is responsible for disposing of these vessels. Historically,
    MARAD has disposed of its obsolete ships primarily by selling them to
    overseas scrapping companies. From 1983 to 1994, MARAD scrapped over 200
    vessels through overseas sales, which represented close to 100 percent of
    all of MARAD's scrapping activity. Ships were sold "as is/where is" to the
    highest bidder. The sale of vessels for overseas scrapping was curtailed
    in 1994 because of concerns raised by EPA about the presence of PCBs in
    various shipboard components. The Toxic Substances Control Act and EPA's
    implementing regulations govern the use of PCBs.11 According to MARAD, the
    act and EPA regulations limit MARAD's ability to export vessels for
    disposal without first removing regulated PCBs. Ship scrapping is also
    subject to other federal, state, and local government laws that are meant
    to protect the environment and ensure worker safety. In addition, overseas
    disposal can be more complicated and time consuming because it requires
    the involvement of foreign governmental agencies and is subject to
    additional laws related to exporting hazardous materials. Similarly,
    disposing of ships through artificial reefing also requires coordination
    with several federal agencies.

    10 40 U.S.C. S: 548.
    11 15 U.S.C. 2601 et seq. and 40 Code of Federal Regulations (C.F.R.),
    Part 761.

    After overseas sales were curtailed in 1994 and halted in 1998, MARAD had
    little success in selling its obsolete ships domestically, leading to a
    backlog of ships awaiting disposal. At the same time, the fleet had
    several well-publicized leaks, which raised concerns about the risk of
    continued storage.

    In the 2001 Defense Authorization Act, Congress extended MARAD's deadline
    for disposing of all the vessels in the National Defense Reserve Fleet
    that are not assigned to the Ready Reserve Force component of that fleet
    or otherwise designated for a specific purpose as required by section
    6(c)(1) of the National Maritime Heritage Act of 1994.12 The 2001
    Authorization Act moved the deadline from September 30, 2001, to September
    30, 2006,13 and specified that MARAD dispose of vessels:

    . . . in the manner that provides the best value to the Government, except
    in any case in which obtaining the best value would require towing a
    vessel and such towing poses a serious threat to the environment; and

    . . .through qualified scrapping facilities, using the most expeditious
    scrapping methodology and location practicable. Scrapping facilities shall
    be selected...on a best value basis consistent with the Federal
    Acquisition Regulation, as in effect on the date of the enactment of this
    Act, without any predisposition toward foreign or domestic facilities
    taking into consideration, among other things, the ability of facilities
    to scrap vessels-

    (1) at least cost to the Government;

    (2) in a timely manner;

    (3) giving consideration to worker safety and the environment; and

    (4) in a manner that minimizes the geographic distance that a vessel must
    be towed when towing a vessel poses a serious threat to the environment.

    The 2001 Authorization Act also required MARAD, within 6 months of its
    enactment, to provide Congress with a report on its program for disposing
    of ships and subsequent progress reports every 6 months thereafter. As of
    September 2004, MARAD had submitted two reports to Congress.14

    12 Pub. L. No. 103-451, S: 6(c)(1).

    13 Pub. L. No. 106-398, S: 3502(a)(1) (2000).

    14 A third report had been in draft but had not been approved. According
    to MARAD, the report was submitted to Congress in October 2004.

    In its first report15 to Congress, issued in April 2001, MARAD stated that
    its primary goal for the ship scrapping program was to meet the statutory
    deadline. The report also provided a plan to dispose of all ships that
    MARAD expected would be in its inventory through the deadline. Highlights
    from the report included that MARAD would use fiscal years 2001 and 2002
    to refine cost estimates specific to merchant type ships, and from fiscal
    years 2003 through 2006, would dispose of 35 ships per year mostly through
    domestic scrapping. MARAD, at that time, estimated that it would be able
    to scrap 140 ships at an average cost of $2.5 million per ship and donate
    or reef 15 ships by the 2006 deadline. Also, in accordance with the
    statute,16 MARAD developed milestone dates for disposal of each ship and
    developed an approach that focused disposal efforts on its highest
    priority ships (ships in the worst condition) considering the condition of
    the vessel hulls; the amount, type, and location of potential pollutants
    on board; and the vessel spill history. MARAD stated it recognized that
    the immediate threat that these high-priority ships posed at the sites, in
    all likelihood, would result in using the domestic scrapping industry in
    the near term, and stated it would continue to seek innovative solutions
    to the challenging issue of ship disposal. MARAD also stated that, while
    there was much scrapping capacity overseas, exporting ships was banned by
    the Toxic Substances Control Act because PCBs can be found in shipboard
    systems.

    The second report17 to Congress, issued in June 2002, indicated that MARAD
    no longer expected that it could meet the statutory deadline of September
    30, 2006, if it used domestic scrapping as the predominate disposal method
    because no funds had been appropriated for the program in fiscal year 2002
    and that the prospects for future funding were considered uncertain. The
    report also discussed an additional planned procurement method to
    contracting by negotiation, which was the use of PRDAs.

    15 Department of Transportation, Maritime Administration, A Report to
    Congress on the Program for Scrapping Obsolete National Defense Reserve
    Fleet Vessels (Washington, D.C., April 2001).

    16 Pub. L. No. 106-398, S: 3502(d)(2) (2000).

    17 Department of Transportation, Maritime Administration, Report to
    Congress: Progress of the Vessel Scrapping Program (Washington, D.C., June
    2002).

    At the time the 2006 deadline was set, the reserve fleet consisted of 115
    vessels designated as obsolete and available for disposal. Of these, 40
    were considered high priority for disposal because of their deteriorated
    condition. MARAD projected that another 40 ships would enter the fleet,
    for a total of 155 ships that it expected would need disposal. These ships
    are located at MARAD's three anchorages: with the James River Reserve
    Fleet (near Fort Eustis, Virginia) having the most ships and most of the
    highest priority ships; the Beaumont Reserve Fleet (Beaumont, Texas); and
    the Suisun Bay Reserve Fleet (near Benicia, California).

    In disposing of its nonretention vessels, MARAD has usually had its excess
    ships dismantled, or scrapped-a labor intensive approach that poses
    certain environmental and worker safety risks. Ships are normally
    dismantled from the top down and from one end to the other, using torches
    and/or shears to cut away large parts of the vessel. Cranes are often used
    to move larger metal pieces to the ground where they can be cut into the
    shapes and sizes required by the foundry or smelter where the scrap will
    be sent. The scrapping process produces some products, such as steel and
    other metals, that can be sold to recyclers. Remediation of hazardous
    materials, such as asbestos, PCBs, lead, mercury, and cadmium, takes place
    before, as well as during, the dismantling process. If it is not done
    properly, ship scrapping can pollute the ground and water around the
    scrapping site and jeopardize the health and safety of the workers
    involved in the scrapping process. The following figures illustrate
    various stages of the scrapping process.

    1: Ship duriFi ng Early Stages of thgure e Scrapping Process

                                     Source: MARAD.

    2: PartiallFi y Scrapped Ship in a Firm'sgure Scrapping Facility

                                     Source: MARAD.

    3: Ship NearFi End of the Scrappgure ing Process

    MARAD is unlikely to meet the statutory deadline of September 30, 2006, to
    dispose of its inventory of obsolete ships. Since October 2000, when
    Congress established the deadline, MARAD has disposed of only 18 ships, or
    about 12 percent of its inventory. There still remain more than 100 ships
    still needing disposal. MARAD's current approach, which has resulted in an
    average of about 5 ships disposed of per year, has not been sufficient to
    meet the deadline. The ship disposal program's slow progress stems
    primarily from program leaders not establishing a comprehensive management
    approach that better focuses the program's efforts on meeting the myriad
    of challenges that the program faces in eliminating its inventory in a
    timely and efficient manner. Key elements necessary for effective program
    management that are missing or inadequate include (1) no integrated
    strategy or milestones for meeting the 2006 deadline; (2) no
    identification of funding resources needed to meet the 2006 deadline; (3)
    inadequate performance measures; (4) inadequate identification of the

                                     Source: MARAD.

      MARAD Is Unlikely to Meet 2006 Deadline

    legal, regulatory, and environmental external impediments that could
    impact progress; (5) inadequate formal decision-making framework; and (6)
    no formal program evaluations. In the absence of a comprehensive
    management approach that includes all of these key elements, MARAD's ship
    disposal program lacks the vision needed to sustain a long-term effort.
    MARAD has also not provided Congress with all of the required reports on
    the program's progress. As a result, MARAD has not been able to ensure
    Congress that it can dispose of its obsolete ships in a timely way.

        MARAD Has Made Slow Progress toward 2006 Deadline

    Since October 2000, when Congress specifically authorized MARAD to pay for
    ship disposal services and set a September 30, 2006, deadline to dispose
    of all vessels, the agency has made slow progress toward achieving this
    goal. In 2000, MARAD reported that it had 115 ships in its inventory.18
    Between October 2000 and September 2004, MARAD received 42 additional
    ships through transfers,19 bringing the total number of ships that needed
    to be disposed of to 157 (the beginning inventory of 115 plus 42
    transfers). Of these 157 ships, 18 ships, or about 12 percent of the
    inventory (as of September 2004), had been disposed of, leaving 139 still
    in the inventory (see table 1).20

    18 Three of the original 115 ships in MARAD's inventory had existing sales
    contracts when the authorization to procure scrapping services was
    provided, and were subsequently scrapped.

    19 The additional ships represent those that have been reclassified from
    MARAD's retention fleet or those transferred from the Navy.

    20 MARAD lists a ship in its inventory until it receives a destruction
    certificate from the ship scrapping company attesting to the fact that the
    disposal action has been completed.

     Table 1: Number of Obsolete Vessels in MARAD's Inventory, Fiscal Years 2001-04
                                      Fiscal year

               Obsolete vessels in inventory  2001    2002   2003   2004    Total
                      On hand, start of year  115a    134    133      132      NA
                        Transfers into fleet      20      7      2     13
                         Completed disposals       1      8      3      6
                        On hand, end of year     134  133    132      139      NA

    Legend: NA = Not available.

    Source: GAO analysis of MARAD Fleet Reserve Inventory Reports, Fiscal
    Years 2001-2004.

    aThis number includes three ships that had existing sales contracts prior
    to fiscal year 2001 but were included in the 2001 inventory.

    Of the remaining 139 ships, as of September 2004, MARAD had awarded
    contracts for the disposal of another 29, leaving 110 ships that were
    still awaiting disposal actions. The status of the 29 ships under contract
    is as follows:

    o 	Twenty ships are waiting to be moved to a scrapping company. Of these,
    9 are awaiting a court ruling on whether MARAD will be able to export them
    to the United Kingdom.

    o 	Four ships have been towed but have not begun scrapping. These ships
    were towed in October 2003 to the United Kingdom where they are waiting
    for a U.K. company to obtain the proper permits to scrap them.

    o 	Five ships are either at scrapping facilities in the process of being
    dismantled or are en route to scrapping facilities.

    Of the ships that have been part of MARAD's inventory since October 2000,
    more than 40 ships have been designated as high priority for disposal
    because of their severely deteriorating conditions. Ships in this category
    have had known holes in their underwater hulls that may or may not have
    been patched, and the potential for additional holes is considered to be
    moderate or high. Consequently, these ships are considered to pose the
    most immediate threat to the environment. Figure 4 shows (center) one of
    the high-priority ships in the James River Fleet awaiting disposal; MARAD
    awarded a contract to dispose of this ship in September 2004, but the ship
    had not yet been removed from the fleet.

    4: A Hig Flh R-Priority ShipFi A ew iaiting eDisposagure l verin tthe
    James

    Source: MARAD.

    Based on the average rate of ship disposal of about 5 per year, it is
    unlikely that MARAD will be able to get rid of the 110 obsolete ships that
    were in its September 2004 inventory by the 2006 deadline (assuming that
    all of the ships already under contract are disposed of by then). MARAD
    requested and received $21.6 million to dispose of 15 ships in the fiscal
    year 2005 budget cycle and a yet-unspecified amount in its fiscal year
    2006 budget. At the same time, MARAD expects to receive up to 30 more
    obsolete ships through transfers during the next 2 years. As table 2
    shows, we estimate that MARAD will likely have more than 100 obsolete
    ships in its inventory in September 2006.

    Table 2: Projected Number of Obsolete Vessels in MARAD's Inventory, Fiscal
    Years 2005-06

                                      Fiscal year

    Obsolete ships in inventory 2005

    On hand, start of yeara 139

    Projected transfers in 15

                    Projected disposals of ships under contract 29b

                     Projected disposals under future contracts 30c

    Projected on hand, end of year 154

    Source: GAO analysis of MARAD data.

    aThe number for fiscal year 2005 was the actual number of ships on hand
    and included one ship that had been sold but had not been completely
    disposed of. The on hand number for fiscal year 2006 is a projection. As
    of December 2004, 151 ships were on hand.

    bAssumes all ships under contract, including ships delayed by litigation,
    can be completely disposed of by end of fiscal year 2006, although some
    disposals may occur in fiscal year 2005.

    cAssumes that MARAD can meet its contract award projections in fiscal
    years 2005 and 2006 and that disposals can be completed by the end of
    fiscal year 2006, although some disposals may occur in 2005.

        MARAD's Slow Progress Is due to Lack of Comprehensive Management Approach

    Sound management principles, such as those embodied in the Government
    Performance and Results Act and used by leading organizations, include the
    need for developing approaches to meet program goals, measuring
    performance, identifying resource requirements, and reporting on the
    degree to which goals have been met. Combined with effective leadership,
    these elements provide decision makers with a framework to guide program
    efforts and the means to determine if these efforts are achieving the
    desired results. While MARAD has adhered to some of these principles, for
    example, by including the ship disposal program in its strategic and
    performance planning process, program leaders have not developed a
    comprehensive approach to better focus its efforts on overcoming the
    challenges related to eliminating its obsolete ship inventory in a timely
    manner. Key elements necessary for effective program management that are
    missing or inadequate include (1) an integrated strategy and milestones
    for meeting the 2006 deadline; (2) an identification of total resources
    needed to achieve the program's goals; (3) measures of progress toward
    achieving the goals; (4) identification of external factors, particularly
    those related to legal, regulatory, and environmental issues, which could
    impact the program's progress, and strategies to mitigate these factors;

    (5) a decision-making framework; and (6) an evaluation and corrective
    action plan. Although the 2001 Defense Authorization Act21 required MARAD
    to submit a progress report on the program to Congress within 1 year of
    its enactment and every 6 months thereafter, the agency had submitted only
    three reports through December 2004. The following discussion focuses on
    the key elements that are missing or inadequate in MARAD's management
    approach.

    o 	Integrated strategy to meet stated goals and milestones for completing
    ship disposal. Leading organizations have an integrated strategy that
    identifies program goals and specifies an approach and a timetable for
    completing the goals. While the program has a requirement to dispose of
    its entire inventory by September 2006 and MARAD has stated this
    requirement as one of its program goals, the program does not have a
    current strategy to achieve this requirement using the available disposal
    methods (e.g., domestic and overseas scrapping, sales, artificial reefing,
    deep-water sinking, or donations). In its 2001 report to Congress, MARAD
    proposed a general strategy for meeting the deadline by identifying 140
    ships that could be scrapped through service contracts and 15 ships that
    could be disposed of by donations or artificial reefing. However, MARAD
    abandoned this approach in fiscal year 2002 when the program did not
    receive any funding, and since that time, it has not developed a new
    integrated strategy for disposing of all ships. Instead, MARAD officials
    told us that their current strategy consists of a market-based approach
    that is responsive to the current proposals made by interested parties.
    Based on these proposals, specific ships are matched to the various
    available disposal methods. These officials also stated that, in the rare
    instances where competing proposals exist for the same ship, MARAD makes a
    decision based on best value/best interest to the government. However,
    because this situation occurs infrequently and because the factors that
    need to be considered, such as cost and timing, vary greatly, MARAD does
    not document this decision-making process.

    21 Pub. L. No. 106-398, S: 3502(e) (2000).

    Moreover, while MARAD has identified the expeditious disposal of
    high-priority ships (because of their poor condition) as another program
    goal, it has not always matched its planned disposal methods to this goal.
    For example, while past MARAD reports and briefings identified domestic
    disposal as the most expeditious method and indicated that this method
    would likely be used for some of its highpriority ships to minimize towing
    distance, MARAD awarded a ship disposal contract in 2003 to an overseas
    firm that included many highpriority ships, even though export was
    considered more complicated and time consuming. To determine the
    feasibility and advisability of exporting ships overseas for scrapping, in
    2002, Congress directed MARAD to conduct at least one overseas pilot
    program for up to four ships.22 As part of this effort, MARAD worked with
    EPA to determine the circumstances under which the export of certain ships
    would be allowed. Subsequently, in 2003, MARAD awarded a scrapping
    services contract covering 13 ships,23 which was 9 more than authorized by
    the pilot program, and included 10 that were considered to be high
    priority for disposal, to a company in the United Kingdom. Prior to
    selecting the ships to be included in the overseas contract, MARAD did not
    determine the high-priority ships' suitability for being towed across the
    ocean. According to program documents, one of the high-priority ships
    initially proposed for contract inclusion sprung a leak just before the
    contract was signed and was replaced by another ship. Subsequently, a
    citizen's group lawsuit led to a U.S. court limiting the number of ships
    that MARAD could initially export to 4 (consistent with the number that
    would comprise the pilot program). MARAD selected 4 ships for export that
    were among the ships in the best condition included in the contract, in
    part, because they could be prepared for towing the quickest, according to
    a program official. As a result, 7 of the highest priority ships included
    in the overseas contract remained at the fleet. In the following year,
    from June through September 2004, MARAD included these 7 high-priority
    ships (originally part of the contract to the overseas firm) in contract
    awards to domestic companies, to hasten their departure from the fleet
    since the court had not yet determined if these ships could be exported
    overseas.

    22 16 U.S.C. S: 5405 note.
    23 The contract also included selling two unfinished ships.

    In addition, MARAD does not have specific milestones to dispose of its
    entire inventory of obsolete ships. MARAD's 2001 progress report to
    Congress outlined an approach to meet the 2006 deadline, however, in its
    2002 report to Congress, MARAD expressed concerns that it could not meet
    the deadline but did not provide a timetable for what it could achieve. In
    a 2004 progress report to Congress, MARAD proposed an alternative plan to
    meeting the statutory 2006 deadline. Instead of eliminating the entire
    obsolete ship inventory, MARAD suggested that it would dispose of the
    remaining ships in its inventory at a rate that would exceed the number of
    new vessels entering the fleet. MARAD would work toward an "end-state"
    with a target goal of eliminating the backlog of vessels that accumulated
    in the 1990s by September 30, 2006. MARAD's proposal would include
    removing all "high" and "moderate" priority ships (about 65) at a rate of
    20 to 24 ships per year and keeping only "low" priority ships at the fleet
    sites. However, for fiscal year 2005, MARAD is planning to dispose of only
    15 ships with the $21.6 million that was appropriated.

    o 	Identification of resources needed to achieve goals. Good management
    principles call for the identification of resources, including funding,
    which are needed to accomplish the expected level of performance. In its
    2001 report to Congress, MARAD provided a general estimate of costs to
    dispose of its inventory of 155 ships by the 2006 deadline, and it stated
    that it planned to further refine cost estimates as additional data
    relating to merchant-type vessels were collected during fiscal years 2001
    and 2002. However, these costs were not converted into a long-term funding
    plan linked to disposing of all obsolete ships by 2006. In addition, MARAD
    did not revise its cost estimates based on actual contracting experiences.
    For example, the 2001 report estimated that it would cost about $350
    million to scrap 140 of the 155 vessels-an average of about $2.5 million
    per ship-using ship scrapping services contracts. However, MARAD's budget
    requests for ship disposal for fiscal years 2002 through 2005 have totaled
    only $54.1 million, about one-sixth of the $350 million estimate. Congress
    has appropriated a total of $78.8 million over the same period. Table 3
    shows MARAD's annual budget requests, associated appropriations, and the
    difference between the two.

    Table 3: Differences between MARAD's Budget Requests for Ship Disposal and
    Appropriations, Fiscal Years 2001-05

                             Current dollars (in millions)

                                      Fiscal year

                                             2001a   2002   2003  2004 2005 Total
                              Budget request     NA  10.0   11.1  11.4 21.6  54.1
                        Direct appropriation     NA       0 11.1  16.1 21.6  48.8
             Appropriations provided through
                                    the Navy   10.0       0 20.0     0    0  30.0
                    Total appropriated funds   10.0       0 31.1  16.1 21.6  78.8
              Difference from budget request     NA (10.0)  20.0  4.7     0  24.7

    Legend: NA = Not applicable.

    Source: GAO analysis of MARAD funding data.

    aMARAD did not request any fiscal year 2001 appropriations because it did
    not receive authorization to pay for scrapping services until late in the
    budget cycle.

    MARAD officials said they did not incorporate the estimated costs to
    achieve the 2006 deadline into a funding plan because MARAD did not
    believe that Congress would fund the levels identified in its 2001 report
    and because they believed that environmentally sound, qualified foreign
    facilities that could scrap ships for less than the $350 million estimate
    existed. Instead, MARAD officials said that their budget requests
    reflected a consistent funding level that they believed Congress would
    support; recognized the limited capacity of the most expeditious method
    (scrapping at domestic facilities); allowed MARAD to eliminate
    high-priority ships prior to the 2006 deadline; and provided a sufficient
    disposal rate while MARAD investigated and pursued potentially more
    cost-effective overseas alternatives.

    o 	Appropriate performance measures. Although DOT's and MARAD's
    performance plans have tracked the ship disposal program's progress since
    2001, the department-level performance measures that are being used are
    not linked to the program's goal of disposing of all obsolete ships by
    September 30, 2006. For example, MARAD's 2004 performance plan links the
    ship disposal program to DOT's facility cleanup performance goal, which
    aims to ensure that DOT operations "leave no significant environmental
    damage behind." To measure progress toward the facility cleanup goal,
    MARAD's performance measure uses the number of vessels that have been
    physically removed from the fleet for subsequent disposal rather than the
    number of ships that have been

    completely disposed of as called for by statute. MARAD officials stated
    that the reason the chosen performance measure is not more directly linked
    to the statutory requirement is because of MARAD's recognition, in 2002,
    that the deadline was unachievable due to the program's inconsistent
    funding and disposal impediments. A MARAD official stated that tracking
    the number of removed ships as a performance measure is appropriate
    because removing ships contributes to the facility cleanup goal. However,
    using removal rather than disposal as a performance measure may obscure
    MARAD's actual progress toward achieving the disposal deadline cited in
    the statute. For example, MARAD counted toward meeting its fiscal year
    2004 removal target the four ships that were towed to the United Kingdom
    in October 2003, but, as of November 2004, these ships were still fully
    intact and awaiting permit approvals before scrapping could begin. In
    another example, MARAD program officials reported to senior managers in
    March 2004 that the program had exceeded its fiscal year 2004 ship
    performance target for removals by 10 ships. However, 6 months later, only
    3 of these ships had been completely disposed of. MARAD officials stated
    that they also use other measures not tracked in its performance plan. For
    example, the number of contracts awarded and ships disposed of are
    recorded continuously and frequently communicated to program officials.
    While we found that MARAD does collect the data, this information is not
    reported against established targets in its performance reports, reports
    to Congress, or budget requests making assessing program progress
    difficult.

    Finally, MARAD's performance targets are set too low to complete the
    disposal of the 155 obsolete ships in MARAD's 2001 inventory by the 2006
    deadline. As table 4 shows, MARAD's projected performance targets for the
    ship disposal program were to remove a total of 29 ships-less than 20
    percent of the inventory-from the fleet for subsequent disposal from
    fiscal year 2001 to 2005.

    Table 4: MARAD's Performance Targets for Removing Obsolete Ships from
    Fleet for Subsequent Disposal, Fiscal Years 2001-06

                                      Fiscal year

    2001 2002 2003 2004 2005 2006 Total

    Target for
    removal 3 3 4 4 15NAa

    Legend: NA = Not available.
    Source: MARAD's fiscal year 2005 performance plan.

    aMARAD's 2006 target will be submitted with the fiscal year 2006 budget
    request.

    MARAD officials acknowledged that while the targets were too low to meet
    the statutory deadline, they were more realistic and achievable given the
    program's constraints such as unpredictable funding. These officials
    stated that a more meaningful goal related to the statutory requirement
    would be to dispose of as many ships that represented the greatest risk to
    the environment, as possible, given the available resources. MARAD stated
    that it has reported this goal to focus on high-priority ships in its
    budget request and reports to Congress. While MARAD has stated this
    general goal, it has not developed specific performance measures with
    targets to track its progress toward achieving this goal.

    o 	External factors and mitigation plans. Good management practices
    include identifying external factors that may be impediments to program
    success and actions needed to mitigate these impediments. MARAD has cited
    a number of external factors that provide challenges to the ship disposal
    program in briefings and in some of its strategic planning documents.
    These challenges include domestic disposal capacity limitations;
    environmental, legal, and regulatory restrictions on export; and similar
    restrictions on other disposal options. Specifically, MARAD has stated
    that the existing domestic ship recycling capacity is very limited and
    must serve both MARAD's and the Navy's needs. Additionally, foreign
    disposal remains a challenge because of the Toxic Substances Control Act
    prohibition on the export of PCBs, the extensive regulatory requirements
    to obtain an exemption from the act, and legal challenges. As a result,
    MARAD has concluded that export is not commercially viable for ships
    containing PCBs. MARAD has stated that other options, such as artificial
    reefing, donations, and deep sinking of vessels, are also limited, in
    part, by the cost of preparing ships to meet environmental requirements.
    However, MARAD's plans do not clearly

    describe the linkage between these factors and the program goals they
    impede or specify how their impact can be reduced. For example, while
    MARAD's strategic plan cites the lack of domestic disposal opportunities
    as an impediment to the program, the plan is not clear on how this
    impediment would keep MARAD from meeting its stated goal of completing the
    disposal of all of its high-priority ships or its target of removing 4 to
    15 ships per year. Also, the plan does not specify the actions that MARAD
    might take that could increase domestic capacity or foster existing
    capacity. In addition, MARAD has taken a number of actions to address
    impediments related to overseas scrapping, artificial reefing, donations,
    and deep-water sinking, which may lead to some progress in the future.
    However, these actions do not appear to have been done in a systematic
    manner nor linked to specific program goals. Such an effort would allow
    MARAD to systematically identify and assess the factors that pose risk to
    the program, and would allow MARAD to prioritize its actions in order to
    increase the likelihood that its actions could successfully influence the
    factors that impede the program from meeting its goals. Until MARAD
    develops a process that focuses its actions on long-term program goals and
    appropriate performance measures, it will be difficult for MARAD to assess
    how external factors may impede program goals and the actions needed to
    reduce them.

    o 	Formal decision-making framework. Successful organizations establish a
    decision-making framework that encourages the appropriate level of
    management review and approval, supported by the proper technical and risk
    analyses. A well-thought-out review and approval framework can mean
    program decisions are made more efficiently and are supported by better
    information. Some leading organizations have review processes in place
    that determine the level of analysis and review that will be conducted
    based on the size, complexity, and cost of the project. Projects that are
    crucial to the program's strategy usually require more analysis, support,
    and review than projects that have less organizationwide impact.

    We found that MARAD's decision-making framework lacks many of these
    elements. For example, MARAD does not have a formal decision-making
    process that specifies how program oversight is to be provided and what
    decisions need to be reviewed by senior leadership, and it has no formal
    program documents that describe how the various offices will interact.
    MARAD has some policies that generally describe roles and responsibilities
    for key offices involved with ship disposal. According to these policies,
    the MARAD Administrator is to provide

    general direction and supervision to the Associate Administrator for
    National Security, whose responsibilities include the executive direction
    of the Office of Ship Operations. Within this office is the Ship Disposal
    Program Office that, in coordination with other offices, develops and
    administers the ship disposal program. MARAD officials stated that while
    the process is not well documented, they believed that program
    participants understood their roles and responsibilities and that senior
    management is aware of issues affecting the program. MARAD does not follow
    a formal process that uses written guidance and does not have an approved
    program plan that addresses all elements of the program. In addition,
    MARAD program officials could not provide us with analytical results to
    support key program decisions. For example, MARAD did not have an analysis
    to support its position that domestic ship scrapping capacity is limited,
    which led it to consider foreign scrapping capacity to be of greater
    importance to the program. MARAD officials stated that the capacity and
    capabilities of the domestic industry were obvious through the data
    associated with the industry responses to disposal solicitations. These
    officials stated that ship disposal is not a growth industry in the United
    States and a formal capacity analysis would not have benefited the program
    because the results would have been largely theoretical. Instead, these
    officials told us that the domestic industry's cost-effective capacity is
    evident through the proposals received during disposal solicitations. We
    disagree that there would be no benefit to conducting a capacity analysis.
    Such an analysis could provide the basis to determine throughput levels
    for planning purposes in developing funding plans for the program. While
    MARAD stated that ship disposal is not a growth industry, in 2004, MARAD
    awarded contracts to two firms that had not participated in past
    solicitations.

    o 	Program evaluation and corrective action plans. Program evaluations are
    defined as objective and formal assessments of the results, impact, or
    effects of a program or policy. Such information can be used to assess the
    extent to which performance goals are met and identify appropriate
    corrective actions for achieving unmet goals. While MARAD had not
    performed an evaluation since it received its new authority in fiscal year
    2001, officials stated that the agency initiated the program's first
    evaluation in June 2004 and expects to complete it as early as January
    2005. This evaluation could identify any corrective actions that may be
    needed for the program to improve its performance.

    o 	Periodic progress reports to Congress. The 2001 Defense Authorization
    Act required MARAD, within 6 months of its enactment, to provide Congress
    with an initial report on the disposal program and to submit progress
    reports every 6 months thereafter. Since 2000, MARAD had submitted only
    three out of a possible eight reports that were required to communicate
    the program's status through December 2004. In April 2001, MARAD provided
    its initial report to Congress addressing aspects of its plan. In June
    2002, it submitted a second report updating the program's status since the
    2001 report. A third report, which had been in draft format for over a
    year, was submitted to Congress in October 2004.24 Failure to provide
    these reports has left Congress without information that could be useful
    in its decisionmaking process.

    As a result of weaknesses in MARAD's management approach, the program
    lacks a clear vision to guide program decision making concerning the ship
    disposal program. Missing management elements such as the lack of an
    integrated strategy, resource identification, and inadequate performance
    measures reflect this lack of a vision and undermine MARAD's efforts to
    sustain a long-term effort. In addition, MARAD has not been able to
    provide Congress and other stakeholders with a reasonable timetable and
    the associated annual funding requirements needed to meet the 2006
    deadline, nor has it clearly articulated the areas that congressional
    assistance may be needed to expedite the disposal of these deteriorating
    ships that continue to pose potentially costly environmental threats to
    the waterways near the sites where these ships are stored.

      MARAD Has Made Limited Use of Alternative Disposal Methods because of Several
      Barriers

    Although Congress directed MARAD in fiscal year 2001 to consider
    alternative methods in designing its ship scrapping program, the program
    has made only limited use of these methods-artificial reefing, deep-sea
    sinking, and donations-because of a number of environmental, financial,
    and legislative barriers. With the support of Congress, MARAD has recently
    taken a number of actions to address these impediments. Despite these
    positive steps, MARAD may still be years away from increasing the number
    of disposals using these alternative methods. MARAD has not developed an
    overall plan that could increase the use of alternative disposal methods.

    24 Department of Transportation, Maritime Administration, Report to
    Congress: Progress of the Vessel Disposal Program (Washington, D.C., June
    2004).

    In fiscal year 2001,25 Congress directed MARAD to consider alternative
    methods in designing its ship scrapping program. However, MARAD has used
    an alternative method for ship disposal-artificial reefing-only once since
    that time, and work on this disposal action started prior to 2001 (see
    table 5). At the same time, MARAD has not yet disposed of any ships
    through deep-water sinking or ship donations. Instead, MARAD has focused
    on ship scrapping-either by awarding contracts or selling the ships to
    scrapping firms to dismantle them-to dispose of 17 of the 18 ships for
    which it has completed disposal actions. MARAD officials told us they are
    currently reviewing applications to dispose of 5 ships through artificial
    reefing and are holding 4 ships for donations, although few of these
    actions are likely to be completed by the statutory deadline.

    Table 5: Completed Disposals by Disposal Method for Fiscal Years 2001-04

                                      Fiscal year

                           Method of disposal  2001   2002   2003   2004    Total
               Scrapping services (contracts)      1      4      3      5
                            Scrapping (sales)      0      3      0      1
                           Artificial reefing      0      1      0      0
                           Deep-water sinking      0      0      0      0
                                     Donation      0      0      0      0
                                        Total      1      8      3      6

                      Source: GAO analysis of MARAD provided data.

        MARAD Has Taken Recent Steps to Address Barriers to Use of Artificial
        Reefing, Deep-Water Sinking, and Donations

    Recently, in response to congressional direction, MARAD has taken a number
    of steps to address several barriers that have limited its use of
    alternative disposal methods. These barriers have included environmental
    factors related to the removal of hazardous materials (remediation) from
    obsolete ships, the financial costs to remediate these ships, and the
    legislative barriers to donating ships to historical organizations.
    MARAD's actions to facilitate the use of alternative methods are discussed
    below.

    Artificial Reefing Program	MARAD officials have identified artificial
    reefing as having the greatest potential for use among the alternative
    methods and are currently

    25 Pub. L. No. 106-398, S: 3502(d)(3).

    evaluating reefing applications from four states that cover five ships.
    MARAD officials are optimistic that one of the five ships being evaluated
    for reefing may be sunk as early as 2005. Under the artificial reef
    program, MARAD transfers obsolete ships to states or other jurisdictions
    to be submerged as part of a state-managed program to build artificial
    reefs that benefit marine life, commercial and sport fishing, and
    recreational diving. From 1973 to 1992, MARAD transferred 46 ships to
    coastal states to be used as artificial reefs but, since 2001, it has
    disposed of only one ship through reefing, partly because of unresolved
    environmental issues.

    MARAD has identified several obstacles that have hindered its ability to
    use reefing, and the agency has recently taken some actions toward
    facilitating the use of this method. Four of the obstacles and MARAD's
    actions include:

    o 	Lack of national environmental standards to prepare ships for
    artificial reefing. According to MARAD officials, concerns about
    environmental contamination, especially PCBs, have stifled the artificial
    reefing program in recent years, and plans for preparing vessels for
    reefing have been complicated by the lack of consistent standards for
    environmental remediation. Congress, in 2002, directed MARAD and EPA to
    jointly develop best management practices (national guidelines) for
    preparing ships for the artificial reef program.26 In June 2004, EPA
    published draft national guidelines.27 The guidelines require, among other
    things, the removal of PCBs greater than 50 parts per million throughout a
    ship and asbestos in areas of a vessel that could be disturbed by
    explosives used to sink the vessel. Once adopted, the guidelines should
    provide MARAD and the states participating in the artificial reef program
    with clear criteria for removing hazardous materials from ships.

    o 	Cost of preparing/remediating vessels. According to MARAD officials,
    the states have been reluctant to take on the responsibility of towing,
    preparing, and sinking ships for artificial reefing because of the
    potentially high costs they could incur. To address this issue, MARAD
    requested and in 2002 Congress provided it with authority to provide
    financial assistance to states to tow, prepare, and sink reef
    candidates.28

    26 Pub. L. No. 107-314, S: 3504(b)(1) (2002). 27 See
    http://epa.gov/owow/oceans/habitat/artificialreefs/guidance.html. 28 16
    U.S.C. S: 1220c-1.

    Since 2002, MARAD has received applications from four states to sink a
    total of five ships, one possibly as early as 2005. Other applications
    have been delayed, partly because of the lack of funding to prepare ships
    for reefing.

    o 	Need to streamline application process. To sink obsolete ships to form
    an artificial reef, MARAD and the states have to coordinate their efforts
    with a number of government agencies, including the U.S. Army Corps of
    Engineers, the U.S. Coast Guard, and EPA. According to MARAD, states
    typically require about 9 months to complete this coordination. MARAD and
    other agencies have been working to streamline the process. For example,
    the Navy and MARAD have established a joint reef application process for
    soliciting, receiving, and evaluating applications from interested states.
    The joint process will allow MARAD and the Navy to share resources to
    achieve common reefing goals.

    o 	Limitation of program to the United States. Prior to fiscal year 2004,
    reefing candidates were restricted to state governments within the United
    States. MARAD requested and received congressional authorization in fiscal
    year 2004 to accept applications from U.S. territories and foreign
    governments for reefing.29 MARAD has received several inquiries since it
    received this new authority. For example, MARAD has had significant
    interest from the Cayman Islands for a reefing project.

    Deep-Water Sinking Program	MARAD has taken actions that could result in it
    disposing of a few of its ships through the Navy's Sinking Exercise
    (SINKEX) program, which involves sinking ships in deep water for weapons
    development testing and evaluation and for fleet training exercises. In
    September 2003, MARAD and the Navy developed a memorandum of agreement to
    include ships in MARAD's inventory in the Navy's SINKEX program. According
    to MARAD, as with the other disposal methods, deep-water sinking requires
    the removal of environmentally hazardous materials from ships before they
    are sunk. According to MARAD and discussions with the Navy, most of
    MARAD's high-priority ships do not meet the Navy's needs because of their
    advanced deterioration. As a result, MARAD considers deep-water sinking a
    low-volume option even though the estimated costs are lower than
    scrapping. MARAD has set a goal of disposing of one or two ships a year

    29 Pub. L. No. 108-136, S: 3516(c) (2003).

    through this method. However, the one ship that was scheduled, and had
    been prepared by the Navy for deep-water sinking, had to be withdrawn when
    it was determined that the ship had historical significance and thus was
    not suitable for the Navy's program.

    Vessel Donation	As a result of recent congressional action, MARAD's use of
    a third alternative disposal method-the ship donation program-may increase
    in the future. Until 2003, MARAD could donate ships to qualified groups
    only through special congressional legislation that designated a specific
    ship, the recipient, and the conditions under which the donation would
    take place. According to MARAD officials, the agency has set aside four
    ships under this process, making them ineligible for disposal through
    other methods unless their condition deteriorates. This process has been
    lengthy, primarily because recipient groups needed time to raise money to
    acquire, restore, and operate a ship for its intended use. In some cases,
    ships that are on hold for a donation may be removed because the recipient
    group has not been able to make significant progress to complete the
    donation requirements. As table 6 shows, two ships (Hoist and Sphinx) are
    currently in this status.

    Table 6: Current Status of Congressionally Designated Ship Donations

                                               Legislation
                                       Date of expiration
                      Name of ship legislation        date      Current status of
                                                                         donation
                             Hoist   Nov. 2003  Nov. 2005  Donation hold will
                                                           likely be
                                                            removed at expiration
                                                                           due to
                                                           lack of recipient's
                                                           progress
                                     Dec. 2002  Dec. 2004  Donation hold will
                            Sphinx                         likely be
                                                            removed at expiration
                                                                           due to
                                                           lack of recipient's
                                                           progress
                           Glacier   Oct. 2000  Oct. 2002  Donation hold
                                                           maintained
                                                             based on recipient's
                                                                         progress
                                     Nov. 1998        None          Donation hold
               Hattiesburg Victory                                 maintained but
                                                              completion date not
                                                                       determined

                                     Source: MARAD.

    At MARAD's request, Congress, in 2003, gave the agency authorization to
    establish a donation program that would allow it to donate ships directly
    to groups interested in acquiring and preserving ships that have historic
    significance. This change would eliminate the time-consuming procedure of
    interested groups needing special legislation for each donation.30 MARAD
    established its donation program in July 2004 and indicated that accepted
    applications would be valid for 1 year with two 6-month extensions
    possible based on an applicant's progress in meeting the milestones
    presented in its business plan. However, the program does not have the
    authority to provide potential recipients with direct financial
    assistance-a barrier to progress in the past. MARAD officials have said
    that the high costs associated with the indefinite preservation of ships
    for historical purposes make it unlikely that the agency could provide
    significant assistance, even if the authority was provided.

        MARAD Has Not Developed an Overall Plan to Increase Usage of Alternative
        Disposal Methods

    Despite the steps it has taken recently, MARAD faces some additional
    challenges to using alternative disposal methods. Since its first report
    to Congress in 2001, MARAD has not conducted a systematic assessment of
    its ship inventory to determine the most cost-effective and efficient
    method for getting rid of individual ships. In addition, it has not
    developed policies that would enhance the use of alternative disposal
    methods. For example, while MARAD now has authority to share artificial
    reefing costs and can provide funds to remediate ships in its inventory,
    it does not have specific policies to guide it in determining how much
    funding it should set aside for cost sharing or for remediating ships to
    make them more readily transferable as part of the artificial reefing or
    donation program. MARAD officials told us that their approach is to make
    all ships available for all disposal methods with few exceptions.
    According to these officials, this approach allows states and historical
    preservation groups to select ships according to their preferences without
    any restrictions. In the past, this approach has led to some cases in
    which recipient groups selected ships that were in the worst condition.
    For example, two of the four ships that have been placed on hold for
    donation have had poor hulls, and MARAD officials plan to remove these
    from hold status. Because of the lack of an overall approach, MARAD may be
    losing opportunities to dispose of more of its obsolete ships in the most
    cost-effective and expeditious manner.

    30 Pub. L. No. 108-136, S: 3512 (2003).

      MARAD's Use of PRDAs to Scrap Ships Is Inappropriate

    Since fiscal year 2002, MARAD has inappropriately used a procurement
    method-PRDA-to acquire most of its ship disposal services rather than
    other procurement methods that are appropriate for acquiring such
    services. According to MARAD, PRDAs are a variant of broad agency
    announcements, an authorized procurement process under the FAR and the
    Competition in Contracting Act of 1984 (CICA). PRDAs are designed to
    enable federal agencies to acquire basic and applied research and that
    part of development not related to the development of a specific system or
    hardware procurement. MARAD officials cited several reasons for using
    PRDAs, including seeking innovative solutions to ship disposal, attracting
    more industry proposals, and reducing costs. Our analysis of MARAD's PRDAs
    and contracts awarded under PRDAs through February 2004 showed that MARAD
    was not using PRDAs to acquire research or development but to procure
    conventional ship scrapping services. In addition to being inconsistent
    with CICA and the FAR, MARAD's use of PRDAs to acquire ship scrapping
    services has led to a lack of transparency and raised questions about the
    fairness of MARAD's contract award process.

        MARAD's Rationale for Using PRDAs

    According to MARAD, PRDAs are a variant of broad agency announcements31
    and meet the requirements of the FAR for the use of these announcements.
    MARAD officials explained that the agency chose to use PRDAs for a number
    of reasons. MARAD officials said that they have used PRDAs to seek
    innovative, private-sector solutions for controlling ship disposal costs
    and, at the same time, to gain insights into domestic and international
    dismantling and recycling market costs. MARAD officials pointed out that
    market cost data were particularly important when the program did not
    receive appropriated funds in fiscal year 2002. According to MARAD, the
    use of PRDAs provides greater flexibility as it allows interested parties
    to propose methodologies that are broader than those received in response
    to other solicitations. In addition, MARAD officials said that they used
    PRDAs to attract a larger number of proposals from qualified firms than
    they had received under other methods. MARAD officials also told us that
    their use of PRDAs had contributed to the significant lowering of disposal
    prices through greater industry participation and increased competition.

    31 48 C.F.R. S: 35.016. Hereinafter, all references to title 48 of the
    Code of Federal Regulations will be to ("FAR").

    Since fiscal year 2002, MARAD has used PRDAs as its primary procurement
    method. According to MARAD, the agency has used PRDAs to solicit proposals
    for the disposal of over 130 different obsolete ships and has awarded
    contracts for 34 of those ships. In addition to PRDAs, MARAD has used
    other procurement methods-contracting by negotiation, under which an
    agency issues a request for proposals,32 and sealed bidding, under which
    an agency issues an invitation for bids33-to award contracts to scrap 6
    ships in 2001 and 4 ships in 2003.

        Our Assessment of MARAD's Use of PRDAs

    Under the FAR, broad agency announcements are used to acquire basic and
    applied research and that part of development not related to the
    development of a specific system or hardware procurement.34 Agencies can
    use this method to fulfill their requirements for scientific study and
    experimentation directed toward advancing the state of the art or
    increasing knowledge or understanding.35 According to the FAR, agencies
    should use this method only when meaningful proposals with varying
    technical approaches can be expected. Although the FAR considers broad
    agency announcements a competitive procurement method, proposals do not
    have to be evaluated against one another since they are not submitted
    against a common work statement. Regardless of MARAD's stated

    32 Requests for proposals are used to solicit offers from prospective
    contractors where awardees are selected through technical evaluation and
    with negotiation permitted with prospective contractors. Part 15 of the
    FAR generally governs the use of requests for proposals.

    33 Using an invitation for bids, an agency solicits sealed bids where
    price or price-related factors are the determinative factor for award and
    when it is not necessary for the government to discuss the technical
    aspects of bids. Part 14 of the FAR generally governs the use of
    invitations for bids.

    34 According to FAR S: 2.101, basic research is research directed toward
    increasing knowledge in science. The primary aim of basic research is a
    fuller knowledge or understanding of the subject under study, rather than
    any practical application of that knowledge; according to FAR S: 35.001,
    applied research is the effort that (a) normally follows basic research,
    but may not be severable from the related basic research; (b) attempts to
    determine and exploit the potential of scientific discoveries or
    improvements in technology, materials, processes, methods, devices, or
    techniques; and (c) attempts to advance the state of the art; and
    development is the systemic use of scientific and technical knowledge in
    the design, development, testing, or evaluation of a potential new product
    or service (or of an improvement in an existing product or service) to
    meet specific performance requirements or objectives.

    35 FAR S: 35.016(a).

    purposes for using PRDAs, their use must be consistent with CICA and the
    FAR.

    Generally, CICA requires executive agencies in conducting procurements for
    property or services to "obtain full and open competition through the use
    of competitive procedures."36 Under CICA, "competitive procedures" include
    "the competitive selection of basic research proposals resulting from a
    general solicitation and peer review or scientific review (as
    appropriate)."37 This provision is implemented by FAR sections 6.102 and
    35.016. FAR section 6.102 describes "other competitive procedures" that
    meet the requirement for full and open competition. That section provides
    that:

    [c]ompetitive selection of basic and applied research and that part of
    development not related to the development of a specific system or
    hardware procurement is a competitive procedure if award results from-(i)
    A broad agency announcement that is general in nature identifying areas of
    research interest, including criteria for selection of proposals, and
    soliciting the participation of all offerors capable of satisfying the
    Government's needs; and (ii) A peer or scientific review.38

    The FAR, in this respect, implements the requirements of CICA by allowing
    agencies to use the broad agency announcement as a means to obtain
    research or development. It follows, and we conclude, that an agency may
    only use broad agency announcements, or any variant of that process, to
    acquire research or development in order to comply with CICA and the FAR.
    Our analysis indicates that MARAD is not using broad agency announcements,
    or PRDAs, to acquire research or development; rather it is inappropriately
    using them to acquire ship scrapping services.39

    An appropriate use of PRDAs would have allowed MARAD to solicit proposals
    and award contracts for research or development that sought to advance the
    state of the art or increase knowledge. In other words, MARAD could have
    sought innovation in the ship scrapping industry through research or
    development contracts. PRDAs we reviewed, however, did not

    36 41 U.S.C. S: 253(a).

    37 41 U.S.C. S: 259(b).

    38 FAR S: 6.102(d)(2).

    39 Although we reviewed the appropriateness of MARAD's contracting
    process, our review is not related in any way to the statutory bid protest
    function of the Comptroller General under CICA.

    seek proposals to perform research or development. Rather, along with
    innovative approaches for ship disposal, the PRDAs indicated that
    proposals should address environmental and worker safety considerations,
    production throughput/capacity, experience with ship disposal, and funding
    requirements. With respect to funding, the PRDAs did not ask firms to
    explain their costs to research or develop new methods or approaches for
    ship disposal; instead, the PRDAs specified that funding "must be proposed
    in sufficient detail to show all anticipated costs associated with the
    complete dismantlement of the vessel(s), including cost categories such as
    towing, remediation of hazardous materials, labor costs, etc., as
    appropriate." Thus, rather than soliciting proposals to perform research
    or to develop new methods or technologies to scrap ships, MARAD's PRDAs
    essentially contemplate the award of production contracts to firms with
    ship disposal experience.

    In addition, the results of MARAD's evaluation approach appeared to give
    greater weight to the disposal of ships rather than obtaining innovation,
    research, or development. In our review of MARAD's evaluations for more
    than 70 proposals submitted under PRDAs from November 2001 through March
    2003, we found that MARAD had not accepted proposals that were identified
    in program evaluations as having innovative approaches or research or
    development. For example, one evaluation summary stated that the proposal
    was rejected because it would not result in the disposal of ships but only
    in the testing of a hazardous material remediation technology and that
    PRDAs were not intended to solicit proposals of untested technologies.
    Another evaluation summary stated that only one ship would be disposed
    with no cost advantage to MARAD and with no guarantee of discovering
    methods or efficiencies that could be applied to the ship dismantlement
    industry to MARAD's benefit. On the other hand, proposals that MARAD
    provisionally accepted for further consideration were described in the
    evaluations as providing conventional ship dismantling or recycling
    services and in many instances acknowledged that the proposals did not
    contain innovations.

    We also found that MARAD did not award contracts that required innovation
    or research or development. Our analysis of six contracts awarded under
    PRDAs through February 2004 also showed that none of the contracts
    specifically required innovative approaches in disposing of ships.
    Instead, the contracts provided for conventional ship scrapping services,
    with requirements, time lines, schedules, costs, and objectives clearly

    spelled out, contrary to most research and development contracts.40 For
    example, a contract between MARAD and Post-SVC Remediation Partners, which
    was effective July 25, 2003, specifies that the contractor is to tow 13
    vessels from their current location (at the James River Reserve Fleet and
    Portsmouth Naval Base) to the United Kingdom and completely "dispose of,
    dismantle and remediate. . .[the] vessels by 31 December 2005."41 MARAD
    officials stated that their dismantling contracts contained performance
    schedules and outcomes as part of the government's responsibility to
    monitor contractor performance; however, these officials stated that MARAD
    did not mandate the methodology by which the contractor was to dispose of
    the vessels. MARAD officials stated that because their contracts are
    performance based, the contractors are responsible for determining how
    they will comply with the terms of the contract, thereby giving them
    flexibility during the dismantling operations. While we agree that the use
    of a research or development contract would not alleviate the government's
    responsibility for oversight, we do not believe that MARAD acquired the
    innovative service it indicated PRDAs were designed to obtain. In our
    view, the contracts were for ship scrapping.

    In addition, MARAD may not need to specifically acquire innovation to
    expeditiously scrap ships. Industry representatives told us the process of
    scrapping a ship does not require innovative approaches. Industry
    officials said that ship scrapping is a fairly straightforward activity,
    and most companies are using similar techniques to dispose of ships. They
    pointed out that the basic technology for scrapping a ship involves
    removing environmentally hazardous materials and then dismantling the ship
    with a cutting torch. They said that while companies might use different
    processes, the core technology did not change. The representatives said
    that they had not developed any innovative approaches in response to
    MARAD's PRDA process, and officials at one firm said that they had not
    responded to MARAD's first PRDA solicitation because they did not believe
    their company was eligible to participate since it had no new technologies
    or innovations to offer. However, once they learned that a competitor was
    obtaining ship scrapping contracts through the PRDA process, they too
    submitted proposals under PRDAs and were subsequently awarded contracts
    for ship disposal. MARAD officials told us that the agency has

    40 FAR S: 35.002 states that "unlike contracts for supplies and services,
    most research or development contracts are directed toward objectives for
    which the work or methods cannot be precisely described in advance."

    41 Section C1.5, Towing Schedule.

    seen several innovations from domestic and foreign contractors as a result
    of the PRDA process. Specifically, they pointed to the application of
    technological advances such as hydraulic, articulated shears and high
    pressure, water-cutting technology that have distinct advantages over the
    traditional use of cutting torches, as well as the use of the dry basin
    for dismantling of vessels, and improved business processes in the
    contract performance. However, we did not see any evidence that the use of
    these technologies was required by the terms of the contracts. More
    importantly, the use of these technologies does not make the contracts
    research or development contracts.

    While MARAD officials claimed that more firms had responded to PRDA
    solicitations than to other solicitation methods, we found that MARAD did
    not consider several other factors that could have affected participation.
    MARAD officials said that between 2001 and 2004, the agency received
    proposals from 71 firms (57 from October 2001 to March 2003 and 14 from
    January 2004) through PRDA solicitations, compared with 13 firms (8 in
    2001 and 5 in 2003) through invitations for bid and requests for proposals
    (see table 7). However, the higher responses may have been due to the
    number of ships offered and their condition. For example, while the PRDA
    solicitations included around 100 ships and were open to domestic and
    foreign firms, solicitations by other methods were limited to a few
    highpriority ships and were open only to domestic firms because of
    concerns about long tows to the scrapping sites. Other factors, such as
    the ship disposal program's larger appropriations in 2003 and 2004 and a
    rise in the price of scrap metal (making scrapping more profitable for the
    industry), could also have affected participation. In addition, there is
    no evidence to suggest the response that other procurement methods might
    have received would have been any different, since most ships were only
    offered under PRDAs. Moreover, several firms we contacted said that PRDAs
    had not positively influenced their decision to make offers to scrap ships
    over other procurement methods.

    Table 7: Comparison of Industry Participation in PRDAs Versus Other
    Solicitation Methods

                            2001 Invitation
                                              Oct. 2001
                                   for bid/          to
                              Request for    March 2003 2003 Invitation Jan. 2004
                                   proposal        PRDA         for bid      PRDA
            Number of ships
                    offered              12         131               4
               Total number
                   of firms               8          57               5       14a
               Domestic
               proposals                  8          34               5
                    Foreign
               proposals                  0          23               0

    Source: MARAD.

    aThe sum of domestic and foreign proposals is greater than the total
    number of firms because some firms submitted both domestic and foreign
    proposals.

    In addition to being inconsistent with CICA and the FAR, MARAD's use of
    PRDAs has provided less transparency than other available solicitation
    methods. For example, under an invitation for bids, bids are publicly
    opened and typically are available for examination by competing vendors.42
    Under a request for proposals, competing vendors are given written notice
    of the reason they are excluded from the competition and are given an
    opportunity for a debriefing explaining the agency's award decision.43 By
    contrast, proposals submitted under PRDAs are often difficult to compare
    with other proposals because they do not generally cover a specified
    statement of work or a set number of ships. Consequently, firms are often
    unable to determine why their proposal was not selected over another
    proposal. Moreover, MARAD officials were not able to tell us what criteria
    they used to award the six contracts we reviewed. For example, when they
    conditionally accepted proposals from two different firms, they could not
    explain what criteria they used to ultimately award a contract to one firm
    rather than the other. The domestic ship scrapping contractors with whom
    we spoke agreed that there was no way to determine why a particular
    company got a contract.

    42 FAR S: 14.402-1.
    43 FAR S:S: 15.503, 15.505, and 15.506.

    This lack of transparency confuses and can alienate ship scrapping
    contractors. In discussing their experience with MARAD's PRDA process,
    several ship scrapping contractors told us that although they had received
    contracts, they perceived inconsistencies in MARAD's use of PRDAs. For
    example, they said that often a long time passes between the acceptance of
    a proposal by MARAD and the award of a contract. Industry officials said
    that although MARAD had informed them that their firm's proposal was
    acceptable, MARAD took no further action on their proposal for more than a
    year. During this time, MARAD conducted negotiations with other firms over
    disposal issues, including the number of ships, the specific ships, and
    the cost. Some firms questioned MARAD's ability to assess the best
    proposal if it is negotiating only with selected firms. Delays in awarding
    contracts affect the ship scrapping contractors because of the volatile
    nature of the scrap metal market.

        Other Procurement Methods Could Provide Similar Benefits

    At the beginning of the ship scrapping program in fiscal year 2001, MARAD
    had planned to use another procurement method-contracting by
    negotiation-in which an agency issues a request for proposals. MARAD
    expected to use requests for proposals to dispose of vessels that were in
    the worst condition and designated as high priority. It planned to use
    this method to award multiple contracts to various ship scrapping
    companies in different locations, using long-term, indefinite delivery,
    indefinite quantity (IDIQ) contracts. These contracts were to specify a
    minimum initial quantity of high-priority ships to be scrapped but could
    subsequently be used to award additional ships to the same firms within a
    certain time period. MARAD expected to award contracts to a minimum of
    three companies to scrap at least one ship, and these companies would have
    the opportunity to scrap additional ships. However, MARAD officials said
    that when the agency did not receive any fiscal year 2002 appropriations
    for the ship disposal program, it shelved these plans. Instead, it turned
    to PRDAs for almost all of its contracts.

    While MARAD stated that other acquisition methods, such as requests for
    proposals and invitations for bids, do not allow offerors to submit
    solutions outside of the defined government requirements as could be done
    with PRDAs, MARAD did not provide a convincing case as to why these
    solutions were necessary to dispose of the ships that were in the worst
    condition as quickly as possible. In fact, MARAD stated in its briefing
    documents, PRDA solicitations, and reports to Congress, that it
    anticipated that it would use methods other than PRDAs to address the
    worst ships. While MARAD has also said that requests for proposals and
    invitations for

    bids do not accommodate numerous proposals of varied solutions based on
    each offeror's business model, we found that they can provide some
    flexibility for both the government and the offeror. For example, in a
    2003 invitation for bids for four ships, MARAD stated that it could award
    each ship separately or make multiple awards for any combination of ships.
    As noted earlier, MARAD could also use a request for proposals to select
    from a pool of qualified firms to propose on an indefinite quantity of
    ships as funding became available. Moreover, other federal agencies have
    used IDIQ contracts as a flexible procurement tool when funding is
    uncertain. For example, Navy officials told us that they used this method
    to gain flexibility in awarding contracts for the Navy's ship disposal
    program when unanticipated end-of-year money became available. Since
    fiscal year 1999, the Navy has used requests for proposals to award IDIQ
    contracts to scrap 36 ships.

      Overseas Competition Just One Factor Contributing to Lower Prices

    While we could not isolate the specific impact of foreign competition and
    other factors on reducing the cost of ship disposal, MARAD attributes the
    overall decrease in ship disposal costs almost exclusively to overseas
    competition. However, other factors, such as larger annual program funding
    allowing for more ships per contract and increases in the scrap value of
    steel, may have also played a role. As table 8 indicates, the price of
    contracts that MARAD has awarded since 2001 has generally decreased. These
    decreases included an instance where solicitations were geographically
    restricted to domestic firms only-because of the deteriorated condition of
    some ships. In 2001, MARAD paid contractors an average of about $250 per
    ton to scrap ships. This average price fell to about $109 per ton in
    2004-a decrease of about 56 percent.

               Table 8: Price Trends for Contracts by Fiscal Year Awarded

                                2001        2003       2003      2003        2004
                            Domestic  Domestic    Domestic  Domestic     Domestic
                                only and foreign       only      only and foreign
                           proposals  proposals  proposalsa proposals   proposals
                 Number of
             ships offered        12         131          1         4
                 Number of
                     ships
                   awarded         6          22          1         3
             Price per ton
                 (of ships
                  awarded)      $250        $102       $762      $179        $109

    Source: MARAD.

    aThe ship involved in this proposal was unique in that it required
    disposal in place.

    In its 2004 report to Congress, MARAD attributed the drop in contract
    prices to increased competition due to the inclusion of foreign firms
    since it had received more proposals when international firms have been
    included. However, while the overall price dropped from 2001 for two
    solicitations that included both domestic and international companies, it
    also decreased for one of the domestic solicitations that excluded foreign
    competition. According to industry officials, however, other factors, such
    as the condition of the ship, the amount of remediation that is required,
    and the potential recovery from recyclable material, can affect bid
    prices; thus, average prices based on tonnage alone may not be very
    meaningful if the amount of hazardous materials present on the ships
    varies.

    An increase in appropriations for the ship disposal program since 2003 may
    also have contributed to lower contract prices by allowing larger
    contracts that can benefit from a greater economy of scale. As table 3
    shows, the program received $10 million in fund transfers from the Navy in
    fiscal year 2001 and no appropriated funding in fiscal year 2002. However,
    since fiscal year 2003, MARAD has received an annual average of about $23
    million. This level of funding has likely attracted new interest among
    firms. According to MARAD officials, they have received proposals from
    companies that had not participated previously and have awarded contracts
    to some firms for the first time in 2004. Several industry representatives
    told us that MARAD's higher funding levels allowed them to offer proposals
    that represented greater economies of scale, thus lowering costs. For
    example, one firm we visited was awarded a contract in 2003 to dispose of
    five ships, and three other firms received contracts to dispose of

    three ships each in 2004. By contrast, only one firm received a contract
    to dispose of two ships in 2001.

    A rise in scrap metal prices since 2003 has also contributed to lower bid
    prices. Representatives from firms we contacted said that higher scrap
    metal prices contributed to a large degree to their ability to offer lower
    prices for scrapping ships in recent proposals because they could expect
    to recover more of their costs from recycling the metal. Figure 5 shows
    the increase in average yearly international scrap steel prices since
    about 2002.

    Figure 5: Annual Average International Scrap Steel Prices, 1994-04

    Dollars per ton

    250 204 200

    150

    100

    50

    0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

    Calendar Year

    Source: GAO analysis of data from Iron Age Scrap Price Bulletin.

    While several firms' representatives said that the participation of
    foreign companies did not have an affect on their offers, in at least one
    case domestic prices seem to have been influenced by foreign competition.
    According to MARAD officials, one domestic firm reduced its previous
    proposal by about 50 percent when it learned that MARAD was in the latter
    stages of contract negotiations to export several ships to a foreign firm.
    The domestic company made its new offer about 6 months after its original
    offer, and it included many of the ships that were under negotiations with
    the foreign firm. MARAD officials told us that subsequent offers from this
    and other domestic firms have been lower since MARAD awarded the contract
    for foreign export.

    Conclusions	Although MARAD's ship disposal program has made some strides
    in reducing its inventory of obsolete and deteriorating merchant ships in
    the National Defense Reserve Fleet, it has managed to dispose of only 12
    percent of its original 2001 inventory, and it is unlikely to meet the
    already extended deadline of September 30, 2006, to get rid of the entire
    inventory. The strides that MARAD has made have been facilitated by
    congressional appropriations of almost $80 million-almost $25 million
    higher than requested-to procure ship scrapping services during fiscal
    years 2001 through 2004 and by congressional support that helped
    streamline the ship donation program and encouraged the development of
    environmental standards for the artificial reefing program.

    However, these steps have not been enough to better ensure long-term
    program success. MARAD's program currently does not have an overall,
    comprehensive management approach that focuses specifically on the ship
    disposal program and on meeting the statutory deadline of 2006. In the
    absence of a comprehensive management approach, MARAD's ship disposal
    program lacks the vision needed to sustain a long-term effort. In
    addition, the program has not been able-and will likely continue to be
    unable-to obtain, on a consistent and predictable basis, the funding
    resources that it needs to efficiently and expeditiously reduce its
    obsolete ship inventory. Moreover, MARAD has not undertaken an overall
    assessment of its obsolete ship inventory, which is needed to determine
    what disposal methods (e.g., domestic or foreign scrapping, artificial
    reefing, deep-water sinking, or donations to organizations) are the most
    appropriate one for each vessel. It has also failed to set reasonable
    milestones for completing disposal and has not established relevant
    performance measures to periodically measure progress toward meeting the
    deadline. Similarly, MARAD has not established a formal decisionmaking
    framework that would clearly delineate roles and responsibilities and
    formalize program guidance and procedures. Further, MARAD has not
    established a process to systematically identify and assess the risk that
    external factors pose to the program, nor has it laid out plans that would
    prioritize its actions to mitigate these risks. In addition, MARAD has not
    submitted to Congress on a timely basis the semiannual progress reports
    that the 2001 statute requires. Finally, MARAD has predominately used a
    procurement method that is not appropriate for acquiring ship scrapping
    services and that has led to concerns about the lack of transparency in
    the way that ship scrapping contracts have been awarded. As a result of
    these many weaknesses, MARAD has not been able to ensure Congress that it
    can dispose of the obsolete ships in a timely and cost-effective manner.

    Without an improved management approach, MARAD's ship disposal program
    will be limited in its ability to dispose of-in a timely manner-the more
    than 100 obsolete ships currently in its inventory, as well as the
    additional ships that the program expects to receive each year. As a
    result of its slow progress, MARAD will continue to have a backlog of
    obsolete and deteriorating ships that pose a threat to the coastal
    waterways where they are anchored because of the toxic materials that they
    contain. If this hazardous material should spill out, as it has already in
    a number of cases, the ships could cause a costly environmental disaster
    in some of the nation's sensitive waterways.

    Recommendations for We recommend that the Secretary of Transportation
    direct the MARAD Executive Action Administrator to take the following
    three actions.

    o 	Develop a comprehensive approach to manage MARAD's ship disposal
    program that would

    o

    o   o   o   o

    identify a strategy and an implementation plan to dispose of all existing
    obsolete ships and future transfers in a timely manner, maximizing the use
    of all available disposal methods;

    determine the needed resources, the associated funding plan, and specific
    milestones for this disposal;

    establish a framework for decision making that would delineate roles and
    responsibilities and establish guidance and procedures;

    identify external factors that could impede program success and develop
    plans to mitigate them; and

    annually evaluate results and implement corrective actions.

    o 	Regularly communicate MARAD's plan, required resources, and any
    impediments that require congressional assistance in the mandated reports
    to Congress.

    We also recommend that MARAD change its contracting approach for acquiring
    ship scrapping services from the use of PRDAs to an appropriate method.

      Agency Comments and Our Evaluation

    In commenting on a draft of this report, DOT did not directly state
    whether it agreed with our recommendations but noted that MARAD is taking
    some actions that may address them. DOT's comments stated that MARAD will
    provide an updated comprehensive, integrated approach to program
    management in subsequent reports to Congress and MARAD has terminated its
    usage of PRDAs. DOT's comments are included in appendix II of this report.

    DOT stated that despite the complex challenges that MARAD's ship disposal
    program faces, through its efforts and actions, much has been achieved
    including the disposal of 26 vessels. DOT also commented that MARAD built
    a comprehensive disposal plan when the program was authorized and provided
    that plan to Congress in 2001, and also acknowledged that MARAD agrees
    that the time is right to ensure that its planning efforts are up to date
    and are appropriately comprehensive. However, MARAD does not believe that
    effective planning will change the fundamental external legal,
    environmental, and regulatory challenges that limit the number of ships
    that can be processed and the speed at which the program can proceed.

    We recognize that the ship disposal program faces a number of complex
    challenges and that MARAD has taken a number of actions to address them.
    However, we do not believe that these actions have been taken in an
    integrated manner. That is why we continue to believe that a comprehensive
    management approach could better focus program efforts and lead to better
    program results. Specifically, we believe that the program could benefit
    from clearly stated goals, planned approaches consistent with these goals
    and with timetables, resource identification that could support these
    approaches in identifying, appropriate performance measures, and a process
    to systemically identify and assess the program's external factors and
    determine the related mitigation actions that could improve MARAD's
    chances of meeting its program goals. While MARAD developed a plan that
    contained some of these elements in 2001, the plan was not followed or
    revised. We believe that MARAD's acknowledgment that it needs to ensure
    that its planning efforts are up to date and comprehensive is a good first
    step. However, MARAD's comments do not provide enough detail for us to
    determine if these actions are sufficient.

    DOT commented that MARAD has revised its contracting approach, which
    resulted in the termination of its use of PRDAs. It stated that MARAD had

    consistently provided fair treatment to contractors and that contract
    awards were made on the basis of best value to the government. We were not
    provided the details of MARAD's revised contracting approach and thus
    cannot comment on it.

    DOT also provided technical comments, which were incorporated as
    appropriate.

    We are sending copies of this report to Senators George Allen and John
    Warner; Representative Jo Ann Davis; the Secretary of Transportation; the
    Director, Office of Management and Budget; and other interested parties.
    We will also make copies available to others upon request. In addition,
    the report will be available at no charge on the GAO Web site at
    http://www.gao.gov.

    If you or your staff have questions regarding this report, please contact
    me at (202) 512-8365 or Solisw@gao.gov or Dave Schmitt, Assistant
    Director, at (757) 552-8124 or Schmittd@gao.gov. Other major contributors
    to this report were Rodell Anderson, Harry Jobes, Vijay Barnabas, Kenneth
    Patton, and Nancy Benco.

    Sincerely yours,

    William M. Solis Director, Defense Capabilities and Management

    Appendix I

    Scope and Methodology

    To assess whether the Maritime Administration (MARAD) is likely to meet
    the statutory deadline of September 2006 and, if not, what factors may
    prevent it from doing so, we reviewed MARAD's 2001 report to Congress, in
    which it presented its plan to meet the deadline, and its subsequent 2002
    and 2004 status reports to Congress. We also reviewed the Department of
    Transportation's (DOT) and MARAD's strategic and performance plans and
    applicable laws and regulations pertaining to the ship disposal program.
    To assess the adequacy of these plans and reports for managing the ship
    disposal program, we compared the elements used in MARAD's ship disposal
    management approach with those developed from sound management principles
    as embodied in the Government Performance and Results Act (GPRA) of 1993
    and further refined in GPRA user guides, our guide for leading practices
    in capital decision-making, and our prior reports. To measure progress
    that MARAD was making toward the 2006 deadline, we determined the number
    of awarded contracts, ships removed from the storage sites, and the number
    of ships disposed of by reviewing program documents. We also obtained data
    to reflect impediments that were impacting the program. During our review,
    MARAD officials in Washington provided us with briefings on the program's
    funding, fair market value of obsolete ships, domestic and foreign ship
    scrapping capacity, and ship scrapping performance bond cost
    determination. We reviewed and analyzed National Defense Reserve Fleet
    inventory reports for fiscal years 2000 to 2004 to determine the number of
    ships entering and leaving the inventory. We also reviewed reports that
    categorized the condition of ships in the inventory and assessed whether
    ships in the worse condition were given the highest priority for disposal.
    We also reviewed and analyzed funding data for the MARAD ship disposal
    program for fiscal years 2001 through 2004 to identify funding trends and
    examined a number of publications that had focused on ship disposal
    issues.1

    In addition to talking with MARAD officials in Washington, D.C., we met
    with MARAD representatives and conducted on site visits at the James River
    Reserve Fleet near Fort Eustis, Virginia, and the

    1 Interagency Panel, Report of the Interagency Panel on Ship Scrapping,
    April 1998 (the panel was chaired by the Office of the Deputy Under
    Secretary of Defense for Environmental Security with representatives from
    the Departments of State, Justice, Labor, and Transportation; the Navy,
    Defense Logistics Agency, and Environmental Protection Agency); GAO,
    Federal Surplus Ships, Government Efforts to Address the Growing Backlog
    of Ships Awaiting Disposal, GAO/NSIAD-99-18 (Washington, D.C.: Oct. 22,
    1998); Rand Corporation, Disposal Options for Ships, 2001; Commission of
    the European Communities, Technological and Economic Feasibility Study of
    Ship Scrapping in Europe, February 2001.

    Appendix I Scope and Methodology

    Suisun Bay Reserve Fleet, Benicia, California. During these visits, we
    talked with officials about their methodology for determining ship
    condition, discussed past instances of oil spills, and observed the
    condition of the ships by touring selected obsolete ships. We selected
    these two sites because they had the largest number of ships and included
    the ones considered to be of highest priority for disposal.

    To gain the perspective of domestic scrapping companies, we conducted
    on-site visits at four domestic firms that had submitted proposals for
    scrapping ships and had been awarded scrapping contracts. These companies
    were Bay Bridge Enterprises LLC, Chesapeake, Virginia; and International
    Shipbreaking Limited, LLC, Marine Metals, Inc., and ESCO Marine, Inc., all
    of Brownsville, Texas. At each location, we met with company managers to
    obtain their views on MARAD's ship disposal program and also toured their
    facilities. We also interviewed officials at a fifth firm-All Star Metals,
    Brownsville-that we had identified as having the potential capacity to
    scrap MARAD ships.

    To determine to what extent MARAD has used alternative disposal
    approaches, other than ship scrapping, to dispose of its inventory of
    obsolete ships, we interviewed officials in MARAD's Office of Ship
    Operations and Ship Disposal Program Office and obtained and reviewed
    MARAD's 2001 plan for ship disposal and MARAD's 2002 and 2004 reports to
    Congress on plan implementation. We reviewed a list of alternative
    approaches considered by MARAD and documented the priority that MARAD
    placed on each alternative and the trade-offs associated with each
    alternative in terms of costs, time, and barriers to implementation. In
    addition, we interviewed officials in the U.S. Naval Sea Systems Command
    program office responsible for managing the Navy's ship disposal program
    in Washington, D.C., to discuss their program.

    To assess the appropriateness of MARAD's procurement methods for
    contracting for the disposal of surplus ships, we interviewed responsible
    MARAD headquarters officials in their ship disposal program office and
    their acquisition office, listened to briefings, and reviewed documents
    related to the acquisition process. We also compared MARAD's acquisition
    methods for ship disposal services with those used by the Navy. We
    submitted a series of written questions to MARAD to obtain the agency's
    legal position on the appropriateness of using Program Research and
    Development Announcements (PRDA) as an acquisition method for ship
    disposal. We reviewed MARAD's responses and reviewed the criteria in the
    Competition in Contracting Act of 1984 and the Federal Acquisition

    Appendix I Scope and Methodology

    Regulation. We also examined MARAD's contract files containing recent ship
    disposal industry proposals received in response to PRDAs and reviewed the
    criteria and process that MARAD used to evaluate industry proposals. We
    also reviewed the first six contracts that MARAD awarded under PRDA to
    determine if they were consistent with the Federal Acquisition Regulation.
    These contracts were awarded from August 2002 to February 2004.

    To assess the impact of foreign competition on reducing the cost of ship
    disposal, we compared bid prices for solicitations that were restricted to
    domestic firms only versus those that included domestic and foreign firms.
    We also interviewed officials at MARAD and industry representatives at the
    five domestic ship scrapping firms mentioned previously to obtain their
    perspectives on factors contributing to lower ship scrapping costs. In
    addition, we visited the Institute of Scrap Recycling Industries,
    Washington, D.C., and obtained historical data on world prices for
    recycled steel.

    We determined that the data used in this report were sufficiently reliable
    for the purposes of this report. We performed our audit from November 2003
    through November 2004 in accordance with generally accepted government
    auditing standards.

    Appendix II

    Comments from the Department of Transportation

    Note: GAO's comments supplementing those in the report's text appear at
    the end of this appendix.

    Appendix II
    Comments from the Department of
    Transportation

                                     See comment 1.

    Appendix II
    Comments from the Department of
    Transportation

                                     See comment 2.

                                     See comment 3.

    Appendix II
    Comments from the Department of
    Transportation

                                     See comment 4.

                                     See comment 5.

    Appendix II
    Comments from the Department of
    Transportation

                                      Appendix II
                            Comments from the Department of
                                     Transportation

    GAO's Comments	The following are GAO's comments on the Department of
    Transportation's letter dated February 15, 2005.

    1.

    2.

    3.

    4.

    We do not agree that MARAD has made substantial progress since 2001,
    considering less than 12 percent of the ships that have been in its
    inventory had been disposed of through September 2004-4 years later. While
    MARAD has made more progress in disposing of ships in the past 2 years,
    much of this progress can be attributed to Congress providing about $25
    million more than was sought in the fiscal years 2003 and 2004 budget
    requests and the rising scrap metal market that has kept contract prices
    low. We also do not agree that the number of ships awarded is a good
    measurement of program progress since contract award has not always led to
    ships being removed and disposed of.

    MARAD has no way of determining how successful exporting ships could be in
    reducing the number of its ships because it has not systematically
    identified and assessed potential impediments to export and determined
    actions to mitigate them.

    As our report points out, while DOT states that domestic capacity is
    limited, our report notes that MARAD has not done an analysis to determine
    the potential domestic capacity nor thought such an analysis was
    necessary. The recent increase in the number of domestic firms being
    awarded contracts would indicate that MARAD underestimated domestic
    capacity in the past.

    We believe that MARAD lacks an integrated strategy for disposing of all of
    its ships using its available disposal methods. Lacking such a strategy
    contributed to MARAD's decision to award an export contract that included
    10 of its worst-conditioned ships before the advisability and feasibility
    of exporting was demonstrated. As a result, almost half of the $31 million
    that Congress appropriated in fiscal year 2003 has been tied up, pending
    the resolution of issues related to the exporting of these ships, and the
    disposal of these 10 deteriorated ships has been delayed.

    Appendix II
    Comments from the Department of
    Transportation

    5.	We agree that plans must be flexible. However, successful programs must
    have a road map to guide its efforts. While DOT states that its strategy
    emphasizes disposing of ships in the worst condition first, neither its
    reports to Congress nor its strategic planning documents have identified
    the amount of funding needed to accomplish this strategy based on its
    available disposable methods nor given a timetable for accomplishing these
    disposal actions.

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