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 [email protected] or Dave Schmitt, Assistant
Director, at (757) 552-8124 or [email protected]. 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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