Cargo Preference Requirements: Objectives Not Significantly Advanced When
Used in U.S. Food Aid Programs (Chapter Report, 09/29/94,
GAO/GGD-94-215).

"Cargo preference" is the reservation of government-financed or
-sponsored oceangoing cargos specifically for U.S.-flag ships. Due to
cargo preference requirements, the government has spent an additional
$600 million during the past 3 years to transport food aid on U.S.-flag
ships rather than on lower-cost foreign flag ships. The objective of the
cargo preference is to help maintain a U.S. merchant marine (1) to serve
as a naval and military auxiliary in times of war or national emergency
and (2) to carry a substantial portion of U.S. domestic and foreign
waterborne commerce. However, the U.S.-flag ships carrying the majority
of the food aid tonnage are not viewed as militarily useful by the
Defense Department. In addition, all domestic waterborne commerce, i.e.,
cargos shipped between U.S. ports, are required to be carried by
U.S.-flag ships. As for foreign commerce, U.S.-flag ships now carry only
about four percent of all cargo shipped into and out of the United
States, and food aid cargos account for less than one-fourth of that
four percent. GAO also found that cargo preference requirements harm the
operations of the food aid programs. GAO summarized this report in
testimony before Congress; see: Cargo Preference Requirements: Objective
Not Met When Applied to Food Aid Programs, by Allan I. Mendelowitz,
Director of International Trade, Finance, and Competitiveness Issues,
before the Subcommittee on Foreign Agriculture and Hunger, House
Committee on Agriculture. GAO/T-GGD-94-212, Sept. 29, 1994 (24 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-215
     TITLE:  Cargo Preference Requirements: Objectives Not Significantly 
             Advanced When Used in U.S. Food Aid Programs
      DATE:  09/29/94
   SUBJECT:  Federal aid to foreign countries
             Food relief programs
             Shipping industry
             Marine transportation operations
             Freight transportation operations
             Cost effectiveness analysis
             Armed forces reserves
             Defense contingency planning
             Transportation costs
             Cargo preference laws
IDENTIFIER:  UN World Food Program
             National Defense Reserve Fleet
             Trade and Development Program
             Emergency and Private Assistance Program
             Food for Development Program
             USDA Food for Progress Program
             Ready Reserve Force
             Desert Storm
             Sri Lanka
             Guatemala
             El Salvador
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1994

CARGO PREFERENCE REQUIREMENTS -
OBJECTIVES NOT SIGNIFICANTLY
ADVANCED WHEN USED IN U.S.  FOOD
AID PROGRAMS

GAO/GGD-94-215

Cargo Preference


Abbreviations
=============================================================== ABBREV

  AID - Agency for International Development
  CARE - Cooperative for American Relief Everywhere
  CDS - construction differential subsidy
  CRS - Catholic Relief Services
  DOD - Department of Defense
  DOT - Department of Transportation
  FAS - Foreign Agricultural Service
  MARAD - Maritime Administration
  mt - metric ton
  NORGRAIN - North American Grain
  ODS - operating differential subsidy
  OFD - ocean freight differential
  OMB - Office of Management and Budget
  P.L.  - public law
  PVO - private voluntary organization
  RORO - roll on/roll off
  RRF - Ready Reserve Force
  USDA - U.S.  Department of Agriculture
  WFP - World Food Program

Letter
=============================================================== LETTER


B-257842

September 29, 1994

The Honorable John B.  Breaux
Chairman, Subcommittee on Merchant Marine
Committee on Commerce, Science and
 Transportation
United States Senate

The Honorable Timothy J.  Penny
Chairman, Subcommittee on Foreign
 Agriculture and Hunger
Committee on Agriculture
House of Representatives

As you requested, we reviewed how cargo preference requirements apply
to U.S.  food aid programs.  In our report we have provided matters
for congressional consideration regarding the continued application
of cargo preference requirements to food aid programs and made
recommendations to the Secretaries of the Departments of Agriculture
and Transportation and to the Administrator of the Agency for
International Development that are intended to improve the management
of this application, should it continue. 

Copies of this report have been sent to the Secretaries of the
Departments of Agriculture, Defense, State, and Transportation; the
Administrators of the Agency for International Development, the
Foreign Agricultural Service, and the Maritime Administration; the
Director of the Office of Management and Budget; and other interested
parties.  Copies will also be made available to others on request. 

Please contact me at (202) 512-4812 if you or your staff have any
questions concerning this report.  The major contributors to this
report are listed in appendix X. 

Allan I.  Mendelowitz, Managing Director
International Trade, Finance, and Competitiveness


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Over the past 3 years, an average of about $200 million per year in
government funds has been used to pay the added cost of shipping U.S. 
food aid to foreign countries on U.S.-flag ships rather than on
lower-cost foreign-flag ships.  Since 1954 Congress has required that
a certain percentage of U.S.  food aid be transported on U.S.-flag
ships.  This requirement is known as "cargo preference." The current
requirement is that 75 percent of food aid tonnage be shipped on
U.S.-flag ships.  Although this rule results in higher transportation
costs for U.S.  food aid programs, the objective of this requirement
is to help ensure that an adequate and viable merchant marine is
maintained (1) to serve as a naval auxiliary in times of war or
national emergency and (2) to carry a substantial portion of U.S. 
domestic and foreign waterborne commerce. 

Due to the additional costs associated with transporting food aid on
U.S.-flag ships, the Chairman of the Subcommittee on Merchant Marine,
Senate Committee on Commerce, Science, and Transportation, and the
Chairman of the Subcommittee on Foreign Agriculture and Hunger, House
Committee on Agriculture, asked GAO to examine how cargo preference
requirements apply to U.S.  food aid programs.  Specifically, GAO
agreed to determine

  whether the application of cargo preference requirements to food
     aid programs is meeting the intended objectives of helping to
     maintain U.S.-flag ships (1) to serve as a naval and military
     auxiliary in time of war or national emergency and (2) to carry
     a substantial portion of U.S.  waterborne domestic and foreign
     commerce,

  how cargo preference requirements affect U.S.  food aid programs,
     and

  how practices currently used by the U.S.  Department of Agriculture
     (USDA) and the Agency for International Development (AID) in
     managing food aid transportation affect its costs. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Currently available data show that in 1991 U.S.-flag ships
transported about 4 percent of all waterborne commerce imported into
or exported from the United States (foreign commerce).  Food aid
preference cargos accounted for less than one-fourth of that
percentage. 

For the period 1990-93, 84 percent of the food aid tonnage
transported on U.S.-flag ships was bulk commodities, such as wheat or
corn, shipped on bulk carriers, tug/barge combinations, and tankers. 
These ships were typically chartered for specific voyages.  Processed
products such as cans of vegetable oil, or bags of flour or rice,
accounted for the remaining 16 percent of the food aid tonnage and
were typically transported on ships that provided a regularly
scheduled service between specific ports known as "liner" service. 

In addition to cargo preference, the Merchant Marine Act of 1936, as
amended, established subsidy programs to help support the U.S. 
merchant marine.  These subsidies help (1) offset the high costs of
constructing ships in U.S.  shipyards and (2) U.S.  shipowners
compete with their foreign competitors by offsetting higher U.S. 
operating costs.\1 Congress developed these programs in response to
general downturns in the U.S.  maritime industry, to support a U.S. 
merchant marine sufficient to meet the objectives of the Merchant
Marine Act of 1936. 

In doing its work, GAO obtained cargo preference data and related
information from AID, USDA, the Department of Defense (DOD), the
Maritime Administration,\2 the World Food Program, two private
voluntary organizations that assisted AID in distributing U.S.  food
aid, and several international shipbrokers.  GAO also obtained ship
data, as well as U.S.  shipowners' views on the cargo preference
program, through a structured interview conducted with
representatives of 18 U.S.  shipping companies.  Together, these
companies transported over 80 percent of U.S.  food aid tonnage
during the previous 3 years. 


--------------------
\1 Since 1982 no funding has been provided for ship construction
subsidies, and the Clinton administration has entered into an
agreement with the Organization for Economic Cooperation and
Development to eliminate government subsidies for shipbuilding by
January 1, 1996.  In addition, current subsidies for offsetting
operating costs will expire by December 1998, although the Clinton
administration has submitted proposed legislation to Congress that
would continue operating support by establishing a similar subsidy
program. 

\2 The Maritime Administration is an agency of the U.S.  Department
of Transportation. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The application of cargo preference to food aid programs does not
significantly contribute to meeting the intended objectives of
helping to maintain U.S.-flag ships as a naval and military auxiliary
in time of war or national emergency or for purposes of domestic or
foreign commerce.  While applying cargo preference requirements to
food aid programs does help support some U.S.-flag ships and their
crews, in the case of serving as a naval and military auxiliary, DOD
does not view the U.S.-flag ships employed to transport bulk
commodities for food aid programs as militarily useful.  As for the
crews that support those ships, DOD believes that they could be a
potential source of manpower for the Ready Reserve Force (RRF)\3 but
does not believe that applying cargo preference to food aid programs
is a cost-effective means of providing for crews. 

In the case of domestic commerce, cargo preference is not an issue
because all U.S.  waterborne domestic cargo is already reserved for
U.S.-flag ships by requirements included in the Merchant Marine Act
of 1920, commonly referred to as the "Jones Act." And in the case of
foreign commerce, GAO determined that the U.S.-flag ships that
transported the majority of food aid preference cargos were unable to
compete successfully for other foreign commercial cargos because
their operating costs were too high compared to the operating costs
of their foreign-flag competitors.  The U.S.-flag ships that DOD find
militarily useful are liners.  However, for over 75 percent of these
ships, transporting food aid cargo is not the reason that they
maintain their U.S.-flag status.  Moreover, liners are generally able
to compete for foreign commercial cargos largely due to subsidies
they receive to place their operating costs at a parity with those of
their foreign competitors. 

A principal factor contributing to the high cost of operating
U.S.-flag ships is the U.S.  laws and regulations with which a
shipowner must comply to operate a U.S.-flag ship.  For example, U.S. 
laws require that a U.S.-flag ship be crewed by U.S.  citizens.  Due
to higher wages and benefits, these crews cost several times the
amount of foreign crews.  Also, shipowners whose ships primarily
carry bulk food aid preference cargos have reduced incentives to
invest in newer and more efficient ships to lower their operating
costs.  This is because of the cost to construct ships in U.S. 
shipyards; the 3-year exclusion of foreign constructed ships from
preference cargos; and the guideline shipping rates, which are based
on the actual costs of each individual ship, irrespective of its
efficiency.  Thus, cargo preference laws make it possible for U.S. 
shipowners to maintain inefficient and commercially noncompetitive
U.S.-flag ships that do not significantly contribute to the ability
of the U.S.  merchant marine to carry foreign commerce other than
food aid. 

Additionally, cargo preference adversely affects the operation of
U.S.  food aid programs.  The most significant impact of applying
cargo preference to food aid programs is the additional costs
associated with using U.S.-flag ships to transport food aid.  As the
funds not spent on transportation may, in some instances, be used to
purchase food, using U.S.-flag ships may reduce the funds available
to purchase commodities.  Thus, the amount of commodities delivered
to recipient countries may be decreased.  Other adverse impacts
include not purchasing commodities at the lowest available price, or
purchasing a different variety of commodity than originally planned. 
These adverse impacts occur because commodity purchasing decisions
can be driven by the geographic availability of U.S.-flag ships,
rather than the geographic availability of the lowest priced or most
desired commodity. 

Finally, several of the practices USDA and AID used to manage food
aid transportation affect transportation costs.  One of these
practices is to require shipowners to accept contract terms that
require them to arrange and pay for services that are typically the
responsibility of the commodity supplier or buyer in commercial
sales.  Another is the concentration of food aid shipments into the
last half of the year, which creates a high demand for limited
U.S.-flag transportation services, thus driving up shipping rates. 


--------------------
\3 The Ready Reserve Force is a specific component of the National
Defense Reserve Fleet.  Ships in the Ready Reserve Force are kept at
a state of readiness that enables them to be activated in 4, 5, 10,
or 20 days to meet military sealift surge requirements in event of
war or emergencies. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      OBJECTIVES OF MERCHANT
      MARINE ACT OF 1936 NOT
      SIGNIFICANTLY FURTHERED BY
      FOOD AID PREFERENCE CARGOS
-------------------------------------------------------- Chapter 0:4.1

The Merchant Marine Act of 1936, as amended, established that a U.S. 
merchant marine shall be maintained that would be capable of serving
as a naval auxiliary in times of war or national emergency and of
carrying a substantial portion of U.S.  domestic and foreign
waterborne commerce.  The application of cargo preference to food aid
cargos helps maintain U.S.-flag ships and their crews.  However, DOD
does not currently view the U.S.-flag ships that transported 84
percent of food aid cargo preference tonnage--bulk carriers, tankers,
and tug/barge combinations--as militarily useful.  DOD believes that
the U.S.-flag ships that participate in the food aid programs that
are militarily useful are those engaged in providing liner service. 
DOD said these ships are an efficient way to transport ammunition and
supplies.  However, for the last 3 years, they transported only 16
percent of food aid tonnage carried on U.S.-flag ships.  Furthermore,
for over 75 percent of these ships, food aid cargo is not the reason
they maintain their U.S.-flag status.  Many of these ships are able
to secure foreign commercial cargos because they receive annual
operating subsidies from the Maritime Administration.  These
subsidies enable them to offer competitive rates and service. 

As for crews, there are currently about 21,000 mariners in the U.S. 
merchant marine labor pool.  DOD said that the mariners used on bulk
carriers, tankers, and tug/barge combinations that transport food aid
could be used as a potential source of manpower for the RRF. 
According to the Maritime Administration (MARAD), an agency of the
Department of Transportation, the mariners used on the bulk
carriers--which carry the majority of food aid cargos--number about
800.  This represents less than 4 percent of the total labor pool. 
According to DOD, the RRF currently requires approximately 3,700
mariners.  GAO believes that, given the size of the merchant marine
pool, there should not be a labor supply problem for the RRF in the
near future, even if the crew supported by the ships that carry the
majority of food aid tonnage are not counted.  Nevertheless, the size
of the labor pool has been steadily declining over the years as the
number of U.S.-flagged ships has decreased.  DOD recognizes that as
the U.S.  merchant marine continues to decline, other alternatives
for crewing the RRF may need to be considered in the future. 

U.S.-flag bulk carriers and tug/barge combinations, which do not
receive or use operating subsidies, are virtually dependent on food
aid preference cargos to operate as U.S.-flag ships because they are
unable to successfully compete for commercial cargos in foreign
commerce.  Therefore, these U.S.-flag ships contribute little to the
ability of the United States to carry its foreign commerce other than
food aid.  Almost all U.S.-flag tankers that carry bulk food aid
preference cargos receive annual operating subsidies to help them
compete for foreign commercial cargos.  However, because these
subsidies are expiring, tankers have been and will become more
dependent on food aid preference cargos.  Without operating
subsidies, U.S.-flag ships cannot successfully compete for foreign
commercial cargos, in part due to the additional costs associated
with complying with the U.S.  laws and regulations required for all
U.S.-flag ships.  U.S.  laws and regulations require that U.S.-flag
ships be constructed to U.S.  Coast Guard safety standards.  These
standards are more stringent than international standards and add to
the construction cost of U.S.-flag ships.  U.S.  law also requires
that owners of U.S.-flag ships either maintain or repair them in a
U.S.  shipyard, whose services are more expensive than those
available at a foreign shipyard, or pay a 50-percent U.S.  Customs
duty on the value of work done in a foreign shipyard.  Even with the
added cost of the 50-percent duty, U.S.  shipowners told GAO that
they still find it advantageous, in most circumstances, to have
maintenance work on their ships done in foreign shipyards.  In
addition, U.S.-flag ships are required to employ U.S.  citizen crews. 
This requirement greatly increases shipowners' operating costs
because wages and benefits paid to U.S.  crews are several times
those of a foreign crew. 

Moreover, U.S.  shipowners whose ships carry food aid preference
cargos have reduced incentives to lower their costs.  For example,
one of the primary ways that U.S.  shipowners can lower their
operating costs is to invest in newer, more efficient ships.  U.S. 
shipowners are discouraged from doing this because of the high cost
of constructing ships in U.S.  shipyards.  Also, current legislation
requires that ships constructed in less expensive foreign shipyards
be operated as U.S.-flag ships for 3 years (which, because of the
higher operating costs, makes it almost impossible to compete without
some form of assistance) before they are eligible to carry food aid
preference cargos.  Furthermore, since there is a limited number of
U.S.-flag ships available to carry these cargos, and the Maritime
Administration's "fair and reasonable" guideline rates--which
establish the maximum rates that the government should pay--are
constructed for each individual ship based on its actual costs,
shipowners are able to secure food aid preference cargos despite the
high cost of operating their older, inefficient U.S.-flag ships.  As
a result, the U.S.-flag ships and crews supported by this program
increase the cost to transport U.S.  food aid preference cargos. 


      CARGO PREFERENCE LAWS
      ADVERSELY AFFECT U.S.  FOOD
      AID PROGRAMS
-------------------------------------------------------- Chapter 0:4.2

Over the last 3 years the food aid programs have paid U.S. 
shipowners almost $600 million in ocean freight differential,
according to USDA data, which GAO understands to be the best
available.  Ocean freight differential is the difference between the
rates per ton charged by owners of U.S.-flag ships used to carry food
aid cargos and the rates that would be charged by owners of less
expensive foreign-flag ships.  Generally, USDA pays two-thirds of
this cost differential and the Maritime Administration pays
one-third.  For several of the food aid programs, the amount spent on
this differential reduces the amount available to purchase
commodities.  For example, for one of these programs, the funds
available for each country must be used to purchase both the
commodity and its transportation.  Therefore, the amount spent on
U.S.-flag transportation directly affects the amount of commodity
that can be purchased. 

Additionally, for several of the food aid programs, countries are
sometimes unable to purchase the lowest cost commodity, or the
desired variety of commodity.  This situation occurs when no
U.S.-flag ships are available at the ports where these commodities
are located, or when those U.S.-flag ships available are not
appropriate to carry the commodity.  For example, for a recent wheat
purchase for Tunisia, Tunisia was unable to take advantage of the
four lowest offers because no U.S.-flag ships were available to pick
up the wheat at the times when and locations where it was available. 
To comply with cargo preference requirements, Tunisia was forced to
obtain more expensive wheat that was available where U.S.-flag ships
were also available.  In addition, several countries have been
interested in obtaining western white wheat that is obtainable from
the West Coast of the United States.  However, the availability of
U.S.-flag ships on the West Coast is limited because food aid cargos
are not often shipped from the West Coast.  This situation has forced
the recipient countries to obtain different varieties of wheat
available in the Gulf of Mexico, where U.S.-flag ships are also more
readily available. 


      CERTAIN USDA AND AID
      MANAGEMENT PRACTICES AFFECT
      FOOD AID TRANSPORTATION
      COSTS
-------------------------------------------------------- Chapter 0:4.3

USDA and AID require shipowners to provide additional services to
food aid recipient countries through the use of contract terms in
transporting food aid cargos that are not typically required of
shipowners whose ships carry similar commercial cargos.  For example,
for most landlocked countries, USDA and AID require shipowners to
arrange and pay for transporting the commodity from the discharge
port to its final destination.  USDA and AID may also require
shipowners to arrange and pay for any fumigation services required at
the discharge port.  USDA and AID choose to provide these services
through the shipowners to give additional financial assistance to
these needy countries.  These additional services may increase
transportation costs because they place additional costs and risks on
the shipowners.  Since shipowners must estimate the cost of providing
these services before they are delivered and are paid based on their
estimates, it is uncertain whether USDA and AID are paying more or
less than the actual costs of providing these services. 

Food aid transportation costs have also been increased because food
aid shipments have not been spaced evenly throughout the year but are
concentrated in the last half of the year.  For example, in 1992, 94
percent of the food aid tonnage under one food aid program was
shipped between July and December.  And for 1993, 73 percent of the
food aid tonnage was shipped between July and December.  This
concentration of food aid shipments caused increased demand for the
limited number of U.S.-flag ships available and, on average, resulted
in higher U.S.-flag shipping rates.  The higher shipping rates were
due to the entry of higher-cost U.S.-flag ships to meet the increased
demand--which raised the cost of transporting food aid preference
cargos. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:5

If Congress continues to support the objectives for which cargo
preference is applied to food aid programs and is willing to continue
to devote resources to that end, Congress may wish to consider a more
efficient alternative for achieving those objectives.  For example, a
program like the current subsidy program that offsets ship operating
costs, which will have expired by 1998, could be used to support
those ships, and their crews, that DOD finds militarily useful and
that could also successfully compete for U.S.  foreign commercial
cargos. 

If Congress decides to continue to apply cargo preference to food aid
programs, it may wish to consider giving U.S.  shipowners incentives
to invest in more efficient ships in order to reduce food aid
transportation costs. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:6

GAO makes recommendations to AID, USDA, and the Maritime
Administration focused on reducing food aid transportation costs (pp. 
44 and 66).  While these recommendations should help reduce food aid
transportation costs, they will not help achieve the intended
objectives for which cargo preference requirements are applied to
food aid programs. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7

GAO obtained written comments on a draft of this report from AID,
DOD, USDA, and the Department of Transportation (DOT).  These
comments are presented and evaluated in chapters 2 and 4, and in
appendixes VI through IX.  DOT's Maritime Administration said that it
was "...troubled by conclusions and implications which are either not
supported by verifiable data, or which mischaracterize the issues and
factors affecting the conduct of the cargo preference programs."
However, the Maritime Administration agreed with GAO's recommendation
that it revise the way it calculates allowable freight rates for
shipping food aid cargos.  AID, DOD, and USDA generally agreed with
GAO's conclusions and recommendations and suggested clarifications
which were made where appropriate. 

In their written comments, the agencies elaborated on their views of
the use of certain ocean transportation contract terms when shipping
food aid cargos, which may differ from contract terms used in the
commercial sale and shipping of similar cargos and add cost to the
transportation of food aid cargos.  AID and USDA were particularly
concerned about GAO's position on the Maritime Administration's
efforts to implement a uniform charter party.  A uniform charter
party would establish the ocean transportation contract terms to be
used by AID and USDA in shipping food aid commodities.  AID and USDA
said that the uniform charter party would greatly affect their
flexibility in negotiating shipping terms with ocean freight
transportation companies.  GAO clarified that it has not evaluated
and is not endorsing the Maritime Administration's proposed uniform
charter party.  Rather, GAO is recommending that, if the cargo
preference program is continued for food aid programs, then AID and
USDA should experiment with the use of shipping terms that are more
consistent with terms used in similar private sector commercial
transportation contracts, to determine whether they would reduce the
costs incurred in transporting U.S.  food aid cargos, while meeting
program objectives. 


BACKGROUND
============================================================ Chapter 1

Requirements to carry U.S.  government cargos on U.S.-flag ships, or
cargo preference laws, have a long history in the United States. 
Cargo preference was originally established as part of the Tariff Act
of 1789, the second law enacted by the U.S.  Congress.  This law
provided for an additional duty of 10 percent on imports carried on
non-U.S.  ships.  Since then, Congress has repeatedly reaffirmed its
intent, in response to general downturns in the U.S.  maritime
industry, to assist in the development, strengthening, and support of
the U.S.  merchant marine by enacting many cargo preference laws.\1

Cargo preference laws set aside certain U.S.  government cargos to be
exclusively carried by U.S.-flag vessels.  Cargo preference laws
currently require that at least 75 percent of the food provided to
needy countries through U.S.  food aid programs be transported on
U.S.-flag ships.  This requirement has been controversial since its
inception in 1954.  In the view of the U.S.  Department of
Agriculture (USDA), and the U.S.  Agency for International
Development (AID), which administer the U.S.  food aid programs,
cargo preference requirements limit their ability to deliver food aid
because of the additional funds needed to ship such aid on U.S.-flag
vessels. 

On the other hand, maritime interests and MARAD, an agency of the
U.S.  Department of Transportation (DOT), view the application of
cargo preference law to food aid programs as an integral part of U.S. 
maritime policy.  They believe cargo preference is vital to ensuring
that adequate U.S.-flag ships and merchant marine personnel are
available to respond to national security emergencies and to carry
the domestic and foreign waterborne commerce of the United States. 

The increased costs associated with using U.S.-flag ships to deliver
U.S.  food aid received attention in April 1993.  At that time,
President Clinton announced that $700 million in agricultural
commodity assistance would be provided to Russia to assist its
efforts to implement market reforms in the private sector.  It was
also reported that up to $200 million of this assistance would be
required to pay for the commodities' transportation, up to $100
million of which would be spent to cover the additional cost of using
U.S.-flag ships.  Appendix II contains more information on the
outcome of this special food aid assistance to Russia. 


--------------------
\1 The cargo preference laws of the United States are described in
appendix I. 


   CARGO PREFERENCE IS ONE OF
   SEVERAL PROGRAMS ESTABLISHED TO
   PROMOTE A VIABLE U.S.  MERCHANT
   MARINE
---------------------------------------------------------- Chapter 1:1

Section 101 of the Merchant Marine Act of 1936\2 required that the
U.S.  merchant marine be sufficient to carry a substantial portion of
the waterborne domestic and foreign commerce of the United States and
be capable of serving as a naval and military auxiliary in time of
war or national emergency. 

To satisfy these two objectives, the act established several programs
to support the continued operation of U.S.-flag ships.  They include
construction subsidies (title V), operating subsidies (title VI), and
preference cargos (section 901, as amended).  Although no funding has
been provided for title V since 1982, the purpose of the title V
construction differential subsidy (CDS) program is to enable U.S. 
shipyards to construct ships at a cost equivalent to that of their
foreign competitors and thus enable purchasers to obtain
U.S.-constructed ships for foreign trade at competitive world prices. 
This program is not likely to be funded in the future, as the Clinton
administration recently entered into an agreement with the
Organization for Economic Cooperation and Development to eliminate
government subsidies for shipbuilding by January 1, 1996. 

In addition, while title VI operating differential subsidies (ODS)
are intended to allow U.S.-flag ships to carry foreign commerce by
granting U.S.  shipowners a subsidy to place their operating costs on
a parity with those of their foreign competitors--based on the
difference between the fair and reasonable cost of insurance,
maintenance, repair, and wages of officers and crews and the
estimated costs of the same items if the ships were operated under a
foreign registry--no new ODS contracts have been granted, and all
current ODS contracts will have expired by December 1998.  The
Clinton administration has submitted proposed legislation to Congress
that would establish a program similar to ODS to help support
U.S.-flag ships providing liner service. 

Section 901 of the Merchant Marine Act of 1936, as amended, provides
guaranteed cargos (preference cargos) for U.S.-flag ships by
requiring that certain government-owned or financed cargos be shipped
on U.S.-flag ships.  Cargo preference requirements are applied to 100
percent of military cargos, 75 percent of food aid cargos, and 50
percent of all other U.S.  government-owned or financed cargos. 

Cargo preference does not play a role in maintaining U.S.-flag ships
to carry domestic cargos.  All domestic waterborne commerce is
reserved for U.S.-flag, U.S.-constructed ships by the Merchant Marine
Act of 1920\3 commonly referred to as the "Jones Act," which
prohibits foreign-flag ships and foreign-constructed U.S.-flag ships
from trading between U.S.  domestic ports.  In addition, the most
current data available from MARAD show that in 1991, U.S.-flag ships
only carried about 4 percent of all waterborne commerce imported into
or exported out of the United States (foreign commerce).  Food aid
preference cargos accounted for less than one-fourth of that
percentage. 


--------------------
\2 Ch.  858, 49 Stat.  1985, June 29, 1936 (46 U.S.C.  Appx.  1101). 

\3 Ch.  250, 41 Stat.  988, June 5, 1920. 


   CARGO PREFERENCE LAWS APPLY TO
   FOOD AID PROGRAMS
---------------------------------------------------------- Chapter 1:2

The Cargo Preference Act of 1954,\4 as amended by the Food Security
Act of 1985,\5 amended section 901(b) of the Merchant Marine Act of
1936 to require that at least 75 percent of U.S.  food aid tonnage be
shipped on privately owned U.S.-flag commercial ships, to the extent
that such ships are available at fair and reasonable rates.  The
applicable food aid programs include those carried out under the
Agricultural Trade Development and Assistance Act of 1954,\6 as
amended, widely known as "Public Law 480," and under section 416(b)
of the Agricultural Act of 1949,\7 as amended.  Cargo preference also
applies to assistance provided under the Food for Progress program,
which was enacted as part of the Food Security Act of 1985.\8


--------------------
\4 Ch.  936, 68 Stat.  832, August 26, 1954. 

\5 Public Law 99-198, December 23 1985. 

\6 Ch.  469, 68 Stat.  454, July 10, 1954. 

\7 Ch.  792, 63 Stat.  1051, 1058, October 31, 1949. 

\8 Public Law 99-198, December 23, 1985. 


   U.S.  FOOD AID PROGRAMS
---------------------------------------------------------- Chapter 1:3

USDA currently provides food aid through three channels:  the Public
Law (P.L.) 480 program; the section 416(b) program; and the Food for
Progress program.  The P.L.  480 program is comprised of three titles
that provide agricultural assistance to countries at different levels
of economic development.  The three primary objectives of these
programs are to expand U.S.  agricultural exports (title I), to
provide humanitarian relief (title II), and to aid the economic
development of participating countries (title III).  Figure 1.1 shows
the percentage of metric tons (mt) of food aid provided under each
U.S.  food aid program for fiscal years 1991 through 1993. 

   Figure 1.1:  Percentage of
   Metric Tons of Food Aid
   Provided Under Each U.S.  Food
   Aid Program, Fiscal Years
   1991-93

   (See figure in printed
   edition.)

Source:  USDA. 


      P.L.  480 TITLE I
-------------------------------------------------------- Chapter 1:3.1

P.L.  480's title I, which is administered by the Foreign
Agricultural Service (FAS) of USDA and is known as the "Trade and
Development Assistance Program," provides U.S.  government financing
for sales of agricultural commodities to developing countries on
"concessional" credit terms.  The sales are made at competitive U.S. 
market prices, with extended credit periods of up to 30 years, low
interest rates, and grace periods of up to 7 years on principal
repayments.  This program is targeted to countries that are having
difficulties meeting their food needs through commercial means, yet
have demonstrated the potential to become commercial markets for U.S. 
agricultural commodities.  From fiscal year 1991 through fiscal year
1993, USDA extended about $1.1 billion in credit for the purchase of
commodities for title I programs.  The types of commodities typically
financed under title I include wheat and corn for human consumption,
and soybean meal and grains for animal feed. 


      P.L.  480 TITLE II
-------------------------------------------------------- Chapter 1:3.2

AID administers title II of the P.L.  480 program.  It is known as
the "Emergency and Private Assistance Program," and it provides for
the donation of agricultural commodities to meet the pressing food
needs of the people of developing countries.  About 75 percent of the
commodities used to meet nonemergency needs are made to and
distributed by nonprofit private voluntary organizations (PVO) such
as the Cooperative for American Relief Everywhere (CARE) and the
Catholic Relief Services, or international organizations such as the
World Food Program (WFP), the humanitarian feeding organization of
the United Nations.  From fiscal year 1991 through fiscal year 1993,
over $2.1 billion in U.S.  government funds were used to provide food
and its transportation for title II programs.  The type of food aid
provided under title II includes some bulk commodities, but generally
consists of processed commodities and products such as cooking oil
and bagged rice and flour. 


      P.L.  480 TITLE III
-------------------------------------------------------- Chapter 1:3.3

Title III\9 of P.L.  480 is administered by AID and is known as the
"Food for Development Program." It provides government-to-government
donations of agricultural commodities to least developed countries. 
The revenue that the developing country generates by the sale of
these donated commodities is to be used to support economic
development programs in the country.  Priority is to be given to
countries that demonstrate the greatest need for food, the capacity
to use food assistance effectively, and a commitment to policies to
promote food security.  From fiscal year 1991 through fiscal year
1993, over $670 million in U.S.  government funds were used to
provide food and its transportation for title III programs.  The type
of food aid provided under title III includes mainly bulk commodities
such as corn, wheat, and rice. 


--------------------
\9 Before the Food, Agriculture, Conservation, and Trade Act of 1990
(P.L.  101-624, frequently referred to as the 1990 Farm Act) titles I
and III were managed together by USDA.  The 1990 Farm Act separated
the agricultural market development (now title I) and economic
development (now title III) objectives of the P.L.  480 program. 
Both titles are aimed at food aid needs of developing countries, but
title I financing is targeted to countries that offer a good chance
of becoming commercial markets, while title III is aimed at assisting
the least developed countries. 


      SECTION 416(B)
-------------------------------------------------------- Chapter 1:3.4

Section 416(b) of the Agricultural Act of 1949, which is administered
by USDA's FAS, provides for donations to foreign countries of food
and feed commodities owned by USDA's Commodity Credit Corporation. 
These donations are not permitted to reduce the amounts of
commodities that are traditionally donated to U.S.  domestic feeding
programs, prevent the fulfillment of any agreement entered into under
a payment-in-kind program, or disrupt normal U.S.  commercial sales
of agricultural commodities.  From fiscal year 1991 through fiscal
year 1993, over $1.2 billion in U.S.  government funds were used to
provide food and its transportation for section 416(b) programs.  The
type of food aid provided under section 416(b) includes bulk
commodities such as corn, wheat, and rice, and processed products
such as cooking oil and nonfat dry milk. 


      FOOD FOR PROGRESS
-------------------------------------------------------- Chapter 1:3.5

The Food for Progress program, which is administered by USDA's FAS,
provides commodities to support countries that have made commitments
to expand free enterprise in their agricultural economies. 
Commodities may be provided under the authority of P.L.  480 or
section 416(b).  Commodities furnished using title I funds may be
made available on a grant or a concessional sales basis.  From fiscal
year 1991 through fiscal year 1993, over $1.3 billion in U.S. 
government funds were used to provide food and its transportation for
the Food for Progress program.  The type of food aid provided under
this program includes bulk commodities such as corn, wheat, and rice;
and processed products such as cooking oil, flour, and nonfat dry
milk. 


   FOOD AID TONNAGE IS A SMALL
   PORTION OF ALL U.S. 
   AGRICULTURAL EXPORTS
---------------------------------------------------------- Chapter 1:4

For fiscal years 1991-93, U.S.  food aid tonnage represented 6.7
percent of all U.S.  agricultural export tonnage.  U.S.  food aid
also represented 18.1 percent of all U.S.  agricultural tonnage
exported with assistance from the U.S.  government.  The value of all
agricultural commodities exported from the United States for fiscal
years 1991 through 1993 totaled $122.4 billion, with $98.1 billion,
or 80.2 percent, in private sector commercial sales; $19.2 billion,
or 15.7 percent, in government-sponsored credit sales in which
financing was provided at "near commercial" rates and terms; and $5.1
billion, or 4.1 percent, in U.S.  food aid programs.  Figures 1.2 and
1.3 illustrate the percentage of export tonnage and value that U.S. 
food aid programs contributed to all U.S.  agricultural exports for
fiscal years 1991 through 1993. 

   Figure 1.2:  U.S.  Agricultural
   Export Tonnage, Fiscal Years
   1991-93

   (See figure in printed
   edition.)

Source:  USDA. 

   Figure 1.3:  U.S.  Agricultural
   Export Value, Fiscal Years
   1991-93

   (See figure in printed
   edition.)

Source:  USDA. 


   MARAD HAS OVERSIGHT
   RESPONSIBILITY FOR CARGO
   PREFERENCE COMPLIANCE AND
   DETERMINING FAIR AND REASONABLE
   RATES
---------------------------------------------------------- Chapter 1:5

MARAD is responsible for monitoring federal agencies' implementation
of cargo preference laws and reporting annually to Congress on agency
compliance.  For food aid programs, MARAD reports compliance for each
program and by each ship type--bulk carriers, tankers, and those
ships that provide liner service.  For calendar years 1990 through
1992, MARAD reported that while USDA and AID did not always achieve
75-percent compliance for each program and each type of ship, where
they did not comply, it was typically due to the nonavailability of
U.S.-flag ships. 

In addition to monitoring compliance, MARAD establishes guideline
rates that are used in judging whether U.S.-flag shipping rates are
fair and reasonable.  Setting guideline rates is done because federal
agencies are required to use U.S.-flag ships only if they are
available at fair and reasonable rates.  These guideline rates are
developed at the request of the federal agency that is shipping
preference cargos.  They reflect specific voyage information and
individual ship operating and capital costs; estimated port and
cargo-handling costs; and an allowance for brokerage expenses,
overhead expenses, and profit.  In determining guideline rates, MARAD
includes the cost of the round-trip voyage, as U.S.-flag ships
carrying preference cargos typically return carrying ballast,\10 not
cargo.  If a U.S.-flag ship is scrapped or sold after it discharges a
preference cargo, or obtains a return cargo, the guideline rate is
adjusted accordingly. 


--------------------
\10 Ballast is a heavy substance used to maintain a ship at its
proper draft and improve its stability when it is not carrying cargo. 


   THE STATUS OF THE U.S. 
   MERCHANT MARINE HAS DECLINED
---------------------------------------------------------- Chapter 1:6

The two principal components of the U.S.  merchant marine are (1) a
fleet of oceangoing ships and (2) their supporting workforce.  The
U.S.  merchant marine is generally comprised of bulk carriers,
tankers, general cargo ships, container ships, and passenger ships. 
These ships are engaged in providing either charter or liner service. 
The workforce that supports U.S.-flag ships includes seafaring
officers and other seafaring workers, shipyard workers, and longshore
workers. 


      U.S.-FLAG SHIPS
-------------------------------------------------------- Chapter 1:6.1

According to MARAD's 1992 annual report to Congress, as of September
30, 1992, the U.S.  merchant marine consisted of a total of 600 ships
as shown in table 1.1.  The 386 privately owned ships are those that
may carry preference cargos. 



                          Table 1.1
           
           U.S. Oceangoing Merchant Marine Fleet as
                    of September 30, 1992

                     Privately     Government
U.S.-flag ships          owned          owned          Total
---------------  -------------  -------------  =============
Active fleet               348             11            359
Inactive fleet              38            203            241
============================================================
Total                      386            214            600
------------------------------------------------------------
Note:  The fleet includes ships of 1,000 or more gross tons, but
excludes privately owned tugs and barges. 

Source:  MARAD. 

MARAD also reported that from January 1, 1982, to January 1, 1992,
the number of U.S.  privately owned ships decreased by 31.4 percent,
from 574 ships to 394 ships.  And the deadweight tonnage\11 capacity
of these ships decreased by 8.4 percent, from 21.5 million tons to
19.7 million tons.  As of January 1, 1992, the U.S.  privately owned
merchant marine ranked 17th in number of ships and 11th in deadweight
tons when compared with the world's merchant marine fleets.  The five
largest merchant marine fleets are registered in Panama (3,040
ships), Liberia (1,550 ships), China (1,359 ships), Cyprus (1,210
ships), and Japan (944 ships). 

The U.S.-flag privately owned merchant marine fleet is engaged in
providing either charter or liner service to transport goods.  When
providing charter service, a ship is contracted by the exporter or
importer to transport goods from one point to another.  The ships
that typically provide charter service are bulk carriers, tankers,
and tug/barge combinations capable of carrying bulk goods.  U.S. 
food aid programs generally use charter service to transport bulk
commodities such as wheat or corn from the United States to needy
foreign countries.  Ships engaged in providing liner service offer
exporters or importers a set schedule of arrivals and departures at
specified ports in regions of the world.  The type of ships typically
used to provide liner service are container ships, which carry 20- or
40-foot containers, or LASH ships\12 that carry watertight barges. 
Ships engaged in providing liner service, no matter what the ship
type is, are commonly referred to as "liners." U.S.  food aid
programs generally use liners to transport processed or packaged
commodities such as bagged rice or flour. 


--------------------
\11 Deadweight tonnage is the total carrying capacity of a ship
expressed in tons of 2,240 pounds.  Carrying capacity is the
difference between the displacement of the empty ship and the
displacement of the ship fully loaded. 

\12 LASH is an acronym for lighter-aboard-ship vessels. 


      U.S.  MERCHANT MARINE
      WORKFORCE
-------------------------------------------------------- Chapter 1:6.2

In fiscal year 1992, the average monthly U.S.  seafaring employment
decreased 11.3 percent, from 16,308 in fiscal year 1991 to 14,466. 
In addition, the average monthly workforce in U.S.  commercial
shipyards and longshore employment also decreased during that time. 
Table 1.2 summarizes the average monthly maritime workforce for
fiscal years 1991 and 1992. 



                          Table 1.2
           
             U.S. Merchant Marine Average Monthly
            Workforce, Fiscal Years 1991 and 1992


Type of work                          FY 1991        FY 1992
------------------------------  -------------  -------------
Seafaring shipboard jobs               16,308         14,446
Commercial shipyard jobs               93,982         90,890
Longshore jobs                         26,698         25,220
============================================================
Total                                 136,988        130,556
------------------------------------------------------------
Source:  MARAD. 


   U.S.  MERCHANT MARINE
   PARTICIPATION IN FOOD AID
   PROGRAMS
---------------------------------------------------------- Chapter 1:7

From cargo preference years\13 1991 through 1993, 144 privately owned
U.S.-flag ships carried food aid preference cargos.  These 144 ships
included 99 liners, 25 tankers, and 20 bulk carriers.  In addition,
71 tug/barge combinations, which MARAD does not include in its count
of
U.S.-flag ships, also carried food aid preference cargos during this
time.  These privately owned U.S.-flag ships and tug/barge
combinations carried about 17.1 million tons of food aid from cargo
preference years 1991 through 1993.  As illustrated by figure 1.4,
the majority (84 percent) of food aid tonnage transported by
U.S.-flag ships was carried by those capable of carrying bulk
commodities--bulk carriers, tug/barge combinations, and tankers. 

   Figure 1.4:  Food Aid Tonnage
   Carried by Type of U.S.-Flag
   Ship, Cargo Preference Years
   1991-93

   (See figure in printed
   edition.)

Note:  Total metric tons carried during this 3-year period were 17.1
million. 

Source:  USDA food aid shipment database. 


--------------------
\13 The cargo preference year spans from April 1 of one year to March
31 of the next year and was created to measure compliance of food aid
cargos with the cargo preference requirements spelled out in the Food
Security Act of 1985.  The act required that the amount of food aid
tonnage transported on U.S.-flag ships be gradually increased from 50
percent of all food aid tonnage shipped in 1985 to 75 percent by
April 1988.  The act also required MARAD to fund the additional cost
of using U.S.-flag ships--the ocean freight differential (OFD)--for
the additional 25 percent of food aid shipped on U.S.-flag ships. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:8

At the request of the Chairman of the Subcommittee on Merchant
Marine, Senate Committee on Commerce, Science, and Transportation,
and the Chairman of the Subcommittee on Foreign Agriculture and
Hunger, House Committee on Agriculture, we reviewed the application
of cargo preference laws to U.S.  food aid programs.  In discussions
with their offices, we agreed to determine

  whether the application of cargo preference requirements to food
     aid programs is meeting its intended objectives of helping to
     maintain U.S.-flag ships (1) to serve as a naval and military
     auxiliary in time of war or national emergency and (2) to carry
     a substantial portion of U.S.  waterborne domestic and foreign
     commerce,

  how cargo preference requirements affect U.S.  food aid programs,
     and

  how practices currently used by USDA and AID in managing food aid
     transportation affect its costs. 

In addition, we were asked to develop information on the status of
food aid being provided to Russia under the Food for Progress program
and on why U.S.-flag ship transportation costs for agricultural
commodities to Israel under the "side letter agreement" are lower
than similar voyages made under U.S.  food aid programs to the former
Soviet Union.  This information is provided in appendixes II and III,
respectively. 

Our review considered information and agency data for fiscal years
1991 through 1993. 

We did our work at the Washington, D.C., offices of AID, the
Department of Defense (DOD), MARAD, and USDA as well as the New York
offices of several international shipping brokers, the World Food
Program, CARE, and the Catholic Relief Services.  At these agencies
we obtained and reviewed pertinent documents including
correspondence, regulations, procurement files, and reports.  In
addition, we developed and used a structured interview instrument to
collect standardized information from 18 U.S.  shipping companies. 
All these companies either owned or operated U.S.-flag ships that
carried food aid preference cargos sometime during cargo preference
years 1991 through 1993.  These 18 companies were judgmentally
selected to cover a majority of food aid tonnage carried during this
time and to represent a cross-section of the companies engaged in
carrying these cargos.  These 18 companies include the 10 companies
that carried the most bulk food aid tonnage from cargo preference
years 1991 through 1993, and 5 liner companies and 3 smaller bulk
companies suggested by MARAD.  Together these 18 companies carried
over 81 percent of the U.S.  food aid tonnage shipped during this
time.  A copy of our U.S.  shipowner structured interview instrument
is reproduced in appendix IV. 

To determine whether the application of cargo preference requirements
to food aid programs helped maintain a viable U.S.  merchant marine
for times of war or national emergency, we obtained the views of
cognizant DOD officials, including representatives of the Military
Sealift Command.  In response to our questions, the Assistant Deputy
Under Secretary of Defense for Transportation Policy expressed DOD's
official view on this matter in a March 17, 1994, memorandum. 
Because this is the first such definitive statement made by DOD on
this matter, a copy of this memorandum is reproduced in appendix V of
this report. 

To determine whether the application of cargo preference to food aid
programs helps maintain a viable U.S.  merchant marine that can carry
a significant portion of the U.S.' domestic and foreign commerce, we
used responses from our structured interview to establish how
dependent each participating U.S.-flag ship was on food aid
preference cargos and how the ships would be affected by a
modification in or the elimination of the application of cargo
preference requirements to food aid programs.  We also used the
structured interview to determine whether U.S.-flag ships could
compete for foreign commercial cargos and what items affect their
costs.  In addition, we interviewed MARAD officials and international
ship brokers to understand the differences between the U.S.  shipping
market and the international shipping market. 

To determine how cargo preference requirements affect food aid
programs, we obtained the views of USDA, AID, PVO, and World Food
Program officials, examined food aid commodity and freight
procurement files and other agency records, and observed USDA and AID
officials procure food aid commodities and their transportation.  To
develop examples of how cargo preference requirements affect food aid
purchasing decisions, we examined a sample of commodity and freight
procurement files judgmentally selected by USDA and AID officials. 
These files were selected to illustrate each of the significant ways
food aid programs were affected by cargo preference requirements that
we identified. 

To determine whether USDA and AID's management practices affect food
aid transportation costs, we examined (1) the use of shipping
contract terms that are not considered commercial by the shipping
industry and (2) the timing of food aid purchases and shipments. 
Through the structured shipowner interview and interviews with USDA,
AID, PVOs, and MARAD officials, and international ship brokers, and
our review of commercial and food aid shipping contracts, we
identified the differences between typical international commercial
contracts and food aid contracts for shipping bulk agricultural
commodities.  We discussed these differences with USDA, AID, MARAD,
and international ship brokers to understand why these differences
exist and their impact on transportation costs. 

We also analyzed USDA's food aid shipment database to determine how
shipping rates are affected by the timing of food aid shipments.  We
discussed our analysis with USDA and AID officials to obtain their
views on why a majority of food aid is shipped at the end of the
calendar year.  We did not assess the reliability of the information
contained in the database but did corroborate some of its information
with information from other sources to determine whether its accuracy
was reasonable.  USDA officials said that the information included in
USDA's food aid shipment database is the best and most complete
available on food aid shipments and is used by USDA for external
reporting purposes. 

We did our work between August 1993 and July 1994 in accordance with
generally accepted government auditing standards.  We obtained
written comments on a draft of this report from AID, DOD, USDA, and
DOT (MARAD).  These comments are presented and evaluated in chapters
2 and 4, and in appendixes VI through IX. 


APPLYING CARGO PREFERENCE
REQUIREMENTS TO FOOD AID PROGRAMS
DOES NOT SIGNIFICANTLY FURTHER
OBJECTIVES OF 1936 MERCHANT MARINE
ACT
============================================================ Chapter 2

Cargo preference requirements are applied to food aid programs to
help meet the objectives of the Merchant Marine Act of 1936, as
amended.  While these requirements produce several benefits, as
explained in chapter 1, the objectives of the act are to maintain a
U.S.-flag merchant marine to serve as a military or naval auxiliary
in times of war or national emergency and to carry a substantial
portion of the waterborne domestic and foreign commerce of the United
States.  The types of U.S.-flag ships that carry a majority of food
aid tonnage and are most dependent on food aid preference cargos to
maintain their U.S.  flag status are those bulk carriers, tankers,
and tug/barge combinations that transport bulk commodities.  DOD
currently does not consider these types of ships militarily useful. 
In addition, most of these same U.S.-flag ships are virtually
dependent on food aid preference cargos, are unable to successfully
compete for foreign commercial cargos, and do not contribute to the
ability of the United States to carry its own foreign commerce other
than food aid.  This situation is due to the limited options
available to operate U.S.-flag ships and to U.S.-flag shipping rates
that are significantly higher than their foreign competitors'.  These
higher rates reflect the additional construction, maintenance, and
operating costs caused by the U.S.  laws and regulations that
shipowners must comply with to be U.S.  flagged, and the reduced
incentives for shipowners who primarily carry food aid preference
cargos to lower their costs by investing in newer and more efficient
ships. 


   APPLYING CARGO PREFERENCE
   REQUIREMENTS TO FOOD AID
   PROGRAMS DOES LITTLE TO HELP
   MAINTAIN A U.S.  MERCHANT
   MARINE AS MILITARY AND NAVAL
   AUXILIARY
---------------------------------------------------------- Chapter 2:1

According to DOD, while the types of U.S.-flag ships that carry a
majority of food aid preference cargos may have been militarily
useful at one time, it does not view them as militarily useful now. 
DOD officials explained that this view has changed because of their
changing national security needs, the shift in the shipping industry
to the use of containers, and the increase in the size and weight of
their equipment.  The ships that carry a majority of food aid
preference cargos include the bulk carriers, tankers, and tug/barge
combinations that transport bulk commodities and that carried 84
percent of all food aid tonnage shipped on U.S.-flag ships for cargo
preference years 1991 through 1993.  According to DOD, if the
U.S.-flag ships that carry bulk commodities were no longer available,
which would likely happen if cargo preference requirements were no
longer applied to food aid programs, DOD believes there would be no
significant impact on military readiness.  However, DOD does consider
liners to be militarily useful, since the containers used on liners
are an efficient way to transport ammunition, equipment, and
supplies.  For cargo preference years 1991 through 1993, liners
carried approximately 16 percent of all food aid tonnage transported
by U.S.-flag ships. 

DOD's view on the military usefulness of the ships that carry cargo
preference food aid was confirmed by the military sealift activities
of U.S.-flag ships associated with Operations Desert Shield/Desert
Storm.  According to DOD, none of the bulk carriers, tankers, or
tug/barge combinations that have carried food aid preference cargos
participated in Operations Desert Shield/Desert Storm because they
were not the most appropriate type of ships to transport required
equipment and supplies.  The U.S.-flag ships that participated in
Operations Desert Shield/Desert Storm were those that are typically
engaged in liner service, and roll-on/roll-off (RORO) ships.\1 DOD
officials explained at a GAO workshop\2 on Ready Reserve Force
(RRF)\3 crewing requirements that DOD is increasing its reliance on
the types of ships that provide liner service as it increases its use
of containerization. 

As for crews, DOD said that the crews used to support the
bulk-carrying ships that transported the majority of food aid tonnage
could be a potential source of manpower for the RRF but DOD does not
believe that applying cargo preference to food aid programs is a
cost-effective means of providing for crews.  According to DOD,
current RRF crew requirements are approximately 3,700 mariners but
should increase to about 4,800 mariners as the number of ships in the
RRF increase.  DOD's currently policy is to fill this need from the
pool of U.S.  merchant mariners.  There are currently about 21,000
merchant mariners in the labor pool available for approximately 9,300
shipboard jobs (each shipboard job supports about 2.2 merchant
mariners).  According to information provided by the Maritime
Administration, the dry bulk ships in the U.S.  merchant marine
provide employment for about 800 mariners, or less than 4 percent of
the 21,000 mariners that are currently in the merchant marine labor
pool.  Given the size of the merchant marine pool and the estimated
need for the RRF, it does not appear there should be a labor supply
problem for the RRF in the near future, even if the crew supported by
the ships that carry the majority of food aid tonnage are not
counted.  Nevertheless, the size of the labor pool has been steadily
declining over the years as the number of U.S.-flag ships has
decreased. 

DOD also recognizes that as the number of U.S.-flag commercial ships,
and their crew, continue to decrease and the number of ships in the
RRF increase, it may need to consider options such as a merchant
marine reserve program to ensure that adequate crew are available for
the RRF in the future. 

MARAD officials disagree with DOD's assessment of its need for the
types of ships that carry bulk commodities and the crews supported by
food aid preference cargos.  MARAD believes that food aid preference
cargos are very important to the support of a significant number of
U.S.-flag ships and crews that they view as militarily useful because
they were built to DOD specifications in order to fulfill some
military purpose.  DOD officials agreed that the ships in question
could be used for military purposes.  However, they also said that
given their current needs, these ships would only be used as a last
resort to transport military equipment because (1) the ships would
require a substantial investment to modify them to carry military
supplies and heavy equipment and (2) the ships are not
self-sustaining in that additional gear would be required for loading
and unloading the military cargos, and loading and unloading could
only be done in modern ports where such gear is available.  In
addition, while DOD recognizes it may have a need for additional
crews for the RRF in the future, it does not believe that supporting
U.S.-flag ships through a food aid cargo preference program is the
most efficient way to provide for this need. 


--------------------
\1 RORO ships are used to transport motorized vehicles and wheeled
containers and trailers and are designed so that no gear is required
for loading and unloading cargo. 

\2 Strategic Sealift:  Summary of Workshop on Crewing the Ready
Reserve Force (GAO/NSIAD-94-177, June 6, 1994). 

\3 The Ready Reserve Force is a specific component of the National
Defense Reserve Fleet.  Ships in the Ready Reserve Force are kept at
a state of readiness that enables them to be activated in 4, 5, 10,
or 20 days to meet military sealift surge requirements in event of
war or emergencies.  MARAD maintains these ships for DOD use. 


   APPLYING CARGO PREFERENCE
   REQUIREMENTS TO FOOD AID
   PROGRAMS DOES NOT SIGNIFICANTLY
   CONTRIBUTE TO THE ABILITY OF
   U.S.  -FLAG SHIPS TO CARRY
   FOREIGN COMMERCE
---------------------------------------------------------- Chapter 2:2


      THE DEPENDENCE OF U.S.-FLAG
      SHIPS ON FOOD AID PREFERENCE
      CARGOS VARIES
-------------------------------------------------------- Chapter 2:2.1

The Jones Act restricts domestic waterborne commerce to
U.S.-constructed, U.S.-flag ships and ensures that U.S.-flag ships
carry all the domestic waterborne commerce of the United States. 
Operating differential subsidies help U.S.-flag ships carry foreign
commerce by placing their operating costs on a parity with those of
their foreign competitors.  Preference cargos also help U.S.-flag
ships carry foreign commerce by guaranteeing them a certain
percentage of government cargos.  However, even with the support
provided through these programs, in 1991 U.S.-flag ships carried only
about 4 percent of all waterborne commerce imported into or exported
from the United States, i.e., foreign commerce.  Food aid preference
cargos accounted for less than one-fourth of that percentage. 
Nevertheless, some types of U.S.-flag ships are heavily dependent on
food aid preference cargos. 

The types of U.S.-flag ships that carry the majority of food aid
preference tonnage on average spend more than half of their time
transporting food aid preference cargos.  The 18 bulk carriers, 25
tankers, and 21 tug/barge combinations that were either owned or
operated by the 18 shipping companies we interviewed, and that
carried food aid preference cargos, carried 66 percent of all food
aid tonnage transported by U.S.-flag ships for cargo preference years
1991 through 1993.  During this time, these ships spent an average of
187 days each year carrying food aid preference cargos.  The average
number of days spent carrying food aid preference cargos varied by
ship type--272 days for bulk carriers, 183 days for tug/barges, and
131 days for tankers. 

Besides carrying food aid preference cargos, these ships carried
amounts of commercial cargos that also varied by ship type.  These
commercial cargos were either domestic cargos transported by Jones
Act ships or foreign cargos transported by U.S.-flag ships under ODS
contracts.  The ODS contracts helped the U.S.-flag ships to be more
price competitive by subsidizing their higher insurance, maintenance,
repair, and wage expenses.  The 18 bulk carriers owned or operated by
the shipping companies we interviewed, on average carried commercial
cargos about 4 percent of the time.  The 21 tug/barge combinations
owned or operated by the shipping companies we interviewed
transported commercial cargos on average about 30 percent of the
time.  These were primarily domestic commercial cargos carried within
the Gulf of Mexico or transported to Puerto Rico.  The 25 tankers
owned or operated by the shipping companies we interviewed that
carried food aid preference cargos also carried commercial cargos on
average 62 percent of the time.  All but 1 of these 25 tankers either
carried foreign commercial cargos with an ODS contract or was a Jones
Act tanker and carried domestic commercial cargos. 

The shipping companies we interviewed that operate tankers with ODS
contracts said they generally use food aid preference cargos to fill
in when they are unable to get foreign commercial cargos.  For
example, they often carry food aid preference cargos from the United
States and return with a traditional tanker cargo, such as oil or
other petroleum products, with the help of their ODS contract. 
Additionally, they explained that as ODS contracts for U.S.-flag
tankers are expiring, tankers have become and will become more
dependent on food aid preference cargos to continue operating as
U.S.-flag ships.  When U.S.-flag ships under ODS contracts, except
liners,\4 are contracted to carry food aid preference cargos, they
may not collect ODS subsidies. 

Jones Act tankers, which are ineligible for ODS contracts, also use
food aid cargos to fill in when they are unable to get domestic
cargos.  Since U.S.-flag ships that carry domestic cargos under the
Jones Act are too costly to operate to successfully compete for
foreign commercial cargos, they do not contribute to the ability of
the United States to carry its foreign commerce. 

U.S.-flag ships that provide liner service also carry some food aid
tonnage but are able to successfully compete for foreign commercial
cargos because they either operate with ODS contracts, operate as
part of an ocean liner conference,\5 or do both.  Ninety-nine U.S. 
liners transported only 16 percent of all food aid tonnage carried by
U.S.-flag ships for cargo preference years 1991 through 1993. 
Ninety-five of these liners were either owned or operated by shipping
companies we interviewed, and 88 of these 95 liners, which carried
food aid preference cargos, transported 15 percent of all food aid
tonnage carried by U.S.-flag ships during this period.  In addition,
for a majority (about 75 percent) of these 88 liners, food aid
preference cargos made up no more than 4 percent of their cargos. 
For the others, food aid preference cargos made up between 5 percent
and 40 percent of their cargos.  In addition to food aid preference
cargos, these 88 liners carried other U.S.  government preference
cargos, or domestic or foreign commercial cargos. 

To determine the importance of food aid preference cargos to
U.S.-flag ships, we asked the 18 shipping companies we interviewed
what might happen to their U.S.-flag ships that carry these cargos if
cargo preference were no longer applied to food aid programs.  They
responded as follows: 

  None of the 18 U.S.-flag bulk carriers would remain U.S.  flagged
     due to their heavy dependency on food aid preference cargos. 

  Fourteen of the 25 U.S.-flag tankers would remain U.S.  flagged
     because they can either carry Jones Act cargos or foreign
     commercial cargos with an existing ODS contract. 

  Nine of the 21 U.S.-flag barges would remain U.S.  flagged because
     they can carry Jones Act cargos. 

In addition, the owners we met with who controlled the majority of 88
U.S.-flag ships that provided liner service explained that because
food aid preference cargos represent such a small portion of their
total cargos, the deletion of food aid preference cargos alone would
have little impact on the status of their U.S.-flag ships.  They
said, however, that given that (1) their current ODS contracts are
expiring and (2) the availability of future operating subsidies is
uncertain, they are now considering reflagging as many as 54 of their
88 ships.  They said the remaining 34 ships that would continue to
fly the U.S.  flag could be supported by carrying either Jones Act
cargos or foreign commercial cargos under existing ODS contracts. 


--------------------
\4 U.S.-flag liners with ODS contracts may carry food aid preference
cargos and still receive their ODS subsidy because food aid cargos
typically represent such a small portion of the total cargo. 

\5 Liner companies that serve the United States may be members of
cartels, called "ocean freight-rate conferences." Members of such
conferences often have agreements on (1) the freight rates they
charge (as a way to restrict competition), (2) their sailing
schedules and ports of call, and (3) the pooling of cargos or
revenues.  Conferences that serve the United States must file tariffs
with the Federal Maritime Commission that state their rates, terms,
and conditions of transport covering all commodities they propose to
carry for the general public. 


      U.S.-FLAG RATES ARE
      SUBSTANTIALLY HIGHER THAN
      FOREIGN- FLAG RATES FOR FOOD
      AID PREFERENCE CARGOS
-------------------------------------------------------- Chapter 2:2.2

U.S.-flag ships have difficulty competing for international
commercial cargos because their rates are substantially higher than
those of their foreign-flag competitors.  For food aid preference
cargos, U.S.-flag rates can be as much as twice foreign-flag rates. 
When food aid cargos are shipped on U.S.-flag ships, the difference
between U.S.-flag and foreign-flag rates is paid by USDA, AID, and
MARAD.  Chapter 3 provides more information on the difference between
U.S.-flag and foreign-flag shipping rates for food aid cargos.  This
difference is called the ocean freight differential. 

Recognizing that U.S.-flag shipping rates would be higher than
foreign-flag shipping rates, the law only requires federal agencies
to use U.S.-flag ships if they are available at "fair and reasonable"
rates.  U.S.-flag shipping rates for food aid preference cargos are
considered fair and reasonable if they are within MARAD's guideline
rates.  As described in chapter 1, MARAD establishes these guideline
rates for ships carrying bulk commodities based on individual ship
cost information and specific voyage information.  Ships that provide
liner service and carry processed goods for food aid programs are
paid their tariff rates, which are filed with, and approved by, the
U.S.  Federal Maritime Commission.  According to MARAD officials,
these approved rates are inherently fair and reasonable.  Yet, in
many cases, these approved rates for U.S.-flag liners are still
higher than rates obtainable from foreign-flag ships providing liner
service. 

Figure 2.1 illustrates the differences between U.S.-flag and
foreign-flag shipping rates by ship type for food aid preference
cargos shipped for cargo preference years 1991 through 1993. 

   Figure 2.1:  Average U.S.-Flag
   and Foreign- Flag Shipping
   Rates per Metric Ton for U.S. 
   Food Aid Cargos by Ship Type,
   Cargo Preference Years 1991-93

   (See figure in printed
   edition.)

Notes:  No foreign-flag tug/barge combinations were used for U.S. 
food aid cargos during this time.

Average shipping rates reflect per ton weighted averages. 

Source:  USDA food aid shipment database. 


      U.S.  LAWS AND REGULATIONS
      RESULT IN HIGHER COSTS FOR
      U.S.-FLAG SHIPS
-------------------------------------------------------- Chapter 2:2.3

The primary reason why U.S.-flag shipping rates are so much higher
than those of their foreign competitors is the added costs U.S.-flag
ships incur in complying with U.S.  laws and regulations.  While the
benefits that accrue from these U.S.  laws and regulations--U.S. 
citizen employment, protection of the environment, and support of
U.S.  shipyards--can be significant, their cost impedes the
competitiveness of U.S.-flag ships.  This fact was cited in the
responses we received from the 18 shipping companies we interviewed,
as well as in discussions we held with MARAD officials and
international ship brokers.  In fact, 16 of the 18 shipping companies
we interviewed told us that having to comply with U.S.  laws and
regulations is so costly that they cannot compete with foreign-flag
ships.  According to these shipping companies, the requirements in
U.S.  laws and regulations that have the greatest impact on their
shipping rates are ship construction, ship maintenance and repair,
and crewing requirements. 


         SHIP CONSTRUCTION
         REQUIREMENTS
------------------------------------------------------ Chapter 2:2.3.1

To support the U.S.  shipbuilding industry, U.S.-flag ships must be
constructed in a U.S.  shipyard in order to carry domestic cargos
under the Jones Act.  A further incentive to construct U.S.-flag
ships in U.S.  shipyards is the exclusion of foreign constructed
U.S.-flag ships from carrying preference cargos for 3 years.  Several
of the shipping companies we interviewed stated that due to the cost
of U.S.  wages and the physical condition of U.S.  shipyards,
building a ship in a U.S.  shipyard is about twice as expensive as
building it in a foreign shipyard.  In addition, to be registered as
a U.S.-flag ship, whether built in a U.S.  or foreign shipyard, ships
must be constructed to U.S.  Coast Guard standards.  These standards
are more stringent than international standards and thus add to ship
construction costs.  Foreign-flag ships, which carry 96 percent of
U.S.  waterborne foreign commerce into and out of U.S.  ports and
territorial waters, are generally built to international standards in
foreign shipyards at a much lower cost.  Twelve of the 18 shipping
companies we interviewed stated that ship construction costs greatly
increased their total costs.  Since the early 1980s, no newly
constructed U.S.-flag ships have entered the food aid cargo
preference trade. 


         U.S.-FLAG SHIP
         MAINTENANCE AND REPAIR
         REQUIREMENTS
------------------------------------------------------ Chapter 2:2.3.2

To increase the use of U.S.  shipyards, U.S.-flag shipowners are
encouraged to use U.S.  shipyards for maintenance and repair.  If
they use a foreign shipyard for any maintenance or nonemergency
repair work, they must pay a 50-percent U.S.  Customs duty on the
cost of the work performed.  Eleven of the 18 shipping companies we
interviewed stated that these requirements greatly affect their
operating costs.  According to the shipping company officials we
interviewed, despite the added costs these requirements are not
helping U.S.  shipyards.  In many instances, shipping companies find
it less expensive to use foreign shipyards to maintain and repair
their U.S.-flag ships and pay the 50-percent duty than to have the
same work performed in U.S.  shipyards.  However, the duty is a cost
that owners of foreign-flag ships do not incur. 


         U.S.  CITIZEN CREWS
------------------------------------------------------ Chapter 2:2.3.3

U.S.-flag ships are required to employ crews composed of U.S. 
citizens.  Sixteen of the 18 shipping companies we interviewed stated
that the requirement to use U.S.  citizen crews is one of the most
costly components in operating a U.S.-flag ship.  These crews have
wages and benefits that generally far exceed those provided to crews
of foreign-flag ships.  For example, according to a November 1993
article in the Journal of Commerce, monthly crew costs for a
U.S.-flag liner can top $310,000, with the captain receiving $44,000
a month in wages and benefits.  A similar foreign-flag ship spends
about $100,000 a month for its crew, with the captain receiving about
$10,000.  In addition, the shipping companies we interviewed who have
foreign-flag ships similar to the U.S.-flag ships they use to carry
food aid preference cargos stated that the daily crew costs for their
U.S.-flag ships are at least three times that of their foreign-flag
ships.  Moreover, many of these 16 shipping companies said that
health insurance, retirement, and other benefits required for U.S. 
citizen crews cost almost as much as the wages paid to these crews. 


      INCENTIVES FOR U.S. 
      SHIPOWNERS WHO CARRY FOOD
      AID PREFERENCE CARGOS TO
      REDUCE COSTS ARE LIMITED
-------------------------------------------------------- Chapter 2:2.4

In addition to the high compliance costs imposed on U.S.-flag ships
by U.S.  laws and regulations, little incentive exists to encourage
the shipowners who carry food aid preference cargos to reduce their
costs, and therefore their shipping rates, by investing in new
U.S.-flag ships.  In fact, U.S.  shipowners are faced with two large
disincentives to invest in new U.S.-flag ships.  These are (1) the
requirement for foreign-built ships to be documented as U.S.-flag
ships for 3 years before they are eligible to carry preference cargos
and (2) MARAD's method of using individual ship costs to calculate
fair and reasonable guideline rates. 


         FOREIGN BUILT U.S.-FLAG
         SHIPS MUST WAIT 3 YEARS
------------------------------------------------------ Chapter 2:2.4.1

The Merchant Marine Act of 1936, as amended, states that all
privately owned U.S.-flag commercial ships are eligible to carry
preference cargos unless they are built or rebuilt outside of the
United States or documented under any foreign registry.  If either of
these conditions applies, the ship must be documented under the laws
of the United States for 3 years before it is eligible to carry
preference cargos.  This requirement discourages U.S.  shipowners
from investing in new ships.  If a U.S.  shipowner were to purchase a
foreign-built or rebuilt bulk carrier, it would be almost impossible
to operate that ship as a U.S.-flag ship for 3 years without food aid
preference cargos because their costs would be too high to be price
competitive against foreign-flag competition.  In addition, while
this requirement should have the effect of helping to maintain U.S. 
shipyards, that has not been accomplished.  U.S.  shipowners reported
that they are discouraged from constructing new bulk carriers in U.S. 
shipyards because, as several of the shipowners we interviewed
explained, their cost is at least twice that of a similar ship
constructed in a foreign shipyard.  Therefore, U.S.  shipowners said
they have not been investing in either U.S.  or foreign-built new
bulk carriers to carry food aid cargos. 

In 1981, however, the Merchant Marine Act of 1936 was amended to
allow an exception until September 30, 1983, to this 3-year
requirement.  Under this exception, ships constructed in foreign
shipyards were permitted to be considered built in U.S.  shipyards
for the purpose of carrying preference cargos.  This exception was
granted due to a lack of funding for the construction differential
subsidy program, which provided funds to help offset the additional
costs associated with constructing ships in U.S.  shipyards.  Under
this limited exception, seven U.S.-flag foreign-built bulk carriers
began carrying food aid preference cargos in the early 1980s.  As a
result of the entry of these new ships, in 1990 we reported that the
average OFD cost per metric ton had decreased by 50 percent.\6

Since the early 1980s, no newly constructed ships have entered the
food aid preference cargo trade.  As a result of the limited number
of U.S.-flag bulk ships available, combined with the requirement that
at least 75 percent of food aid tonnage be shipped on U.S.-flag
ships, more old U.S.-flag tankers and U.S.-flag tug/barge
combinations have entered the food aid cargo preference trade.  This
is especially true for tankers whose ODS contracts have expired. 
These new entrants are typically not the most cost-efficient and have
resulted in increased shipping costs for U.S.  food aid programs. 
For example, according to a MARAD official, if a shipowner has a
25-year-old tanker that can no longer compete for foreign commercial
cargos because it no longer has an ODS contract, cargo preference
requirements enable the shipowner to continue to operate this
inefficient ship because it is U.S.  flagged. 


--------------------
\6 Cargo Preference Requirements:  Their Impact on U.S.  Food Aid
Programs and the U.S.  Merchant Marine (GAO/NSIAD-90-174, June 19,
1990). 


         MARAD'S GUIDELINE RATES
         ARE BASED ON ACTUAL SHIP
         COSTS
------------------------------------------------------ Chapter 2:2.4.2

To ensure that U.S.-flag rates are fair and reasonable, MARAD
calculates a guideline rate for each U.S.-flag ship food aid
preference voyage.  To calculate a guideline rate, MARAD uses actual
cost data for the U.S.-flag ship planning the voyage, estimates port
and cargo-handling costs based on the past experiences of U.S.-flag
ships, and provides an allowance for brokerage expenses and overhead. 
In addition, MARAD builds in a profit factor based on a 5-year
average of the profitability of Fortune's top 50 U.S.  transportation
companies.  For 1993, this profit factor was about 13 percent. 
Guideline rates are only calculated for ships chartered to carry bulk
commodities.  Ships that provide liner service are paid their tariff
rates, which, according to MARAD officials, are inherently fair and
reasonable. 

MARAD's guideline rates represent the ceiling for what is considered
fair and reasonable.  For the majority of food aid preference cargo
voyages, the actual shipping rate paid to the U.S.  shipowner is
below MARAD's calculated guideline rates.  In fact, for 1993 the
actual shipping rates paid to U.S.  shipowners whose ships carried
bulk commodities averaged 85 percent of their MARAD-calculated
guideline rates.  For tug/barge combinations and tankers, this
average was 80 percent, and for bulk carriers it was 94 percent. 

Since guideline rates are based on actual costs for each individual
ship, they reduce the incentives for ships to become more efficient. 
According to MARAD officials, the percentage of profit allowed under
guideline rates is the same for all U.S.-flag ships regardless of
their efficiency.  While we were told that the more efficient ships
will always get food aid preference cargos before less efficient
ships, the limited number of U.S.-flag ships available means that
when the demand is high, cargos are available for the less efficient
U.S.-flag ships.  This situation results in the food aid programs
paying higher shipping rates since less efficient ships are more
costly. 

To reward efficient U.S.-flag ship operators and eventually force
inefficient U.S.-flag operations out of the food aid cargo preference
trade, MARAD officials and many of the U.S.  shipping companies we
interviewed advocated modifying how MARAD calculates its guideline
rates.  They suggested averaging operating costs for ships of similar
sizes and using that average cost to calculate guideline rates,
rather than using actual costs for each individual ship.  They
explained that over time, averaging guideline rates will lower U.S. 
shipping rates for food aid preference cargos.  MARAD officials also
said that rate averaging should only be implemented if foreign-built
ships are allowed to enter the trade to take the place of the
inefficient operators that are forced out of the program. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

The U.S.-flag ships that are most dependent on food aid preference
cargos are not currently viewed as militarily useful by DOD.  While
the crews that support those ships could be used to help crew the
RRF, DOD does not believe that providing for such crews through the
food aid cargo preference program is the most cost-effective means. 
In addition, food aid preference cargos do not contribute to ensuring
U.S.-flag ships carry a substantial portion of either U.S.  domestic
or foreign waterborne commerce.  All domestic waterborne commerce is
already reserved for U.S.-flag ships by the Jones Act, and food aid
preference cargos account for a very small portion (less than 1
percent) of all waterborne foreign commerce.  Therefore, the
application of cargo preference requirements to food aid programs
contributes little to helping achieve the objectives of the Merchant
Marine Act of 1936, as amended. 

Furthermore, the U.S.-flag ships that DOD currently views as
militarily useful--those that provide liner service--are either
supported by Jones Act trade or are largely dependent upon ODS
contracts, which are expiring, to successfully compete for foreign
commercial cargos because their costs are substantially greater than
their foreign competitors.  The higher costs of U.S.-flag ships are
primarily due to U.S.  laws and regulations that increase U.S.-flag
ships' construction, maintenance and repair, and operating costs.  In
addition, U.S.  shipowners are discouraged from taking the necessary
steps to reduce their costs by investing in new ships because it is
possible to successfully operate inefficient ships in the food aid
cargo preference trade. 

One way to give U.S.  shipowners incentives to invest in more
efficient ships would be to waive the 3-year waiting period currently
imposed on cargo preference eligibility for foreign-built U.S.-flag
ships.  Congress, in effect, waived this requirement for a short
period in the early 1980s.  A result was new ships entering the
market and a decrease in operating costs. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 2:4

If Congress continues to support the objectives for which cargo
preference is applied to food aid programs and is willing to continue
to devote resources to that end, Congress may wish to consider a more
efficient alternative for achieving those objectives.  For example, a
program like the current ODS program, which will be expiring by 1998,
could be used to support those ships, and their crews, that DOD finds
militarily useful and that could also successfully compete for U.S. 
foreign commercial cargos. 

If Congress decides to continue to apply cargo preference to food aid
programs, it may wish to consider giving U.S.  shipowners incentives
to invest in more efficient ships in order to reduce food aid
transportation costs.  One possible incentive would be to allow new,
foreign-built, U.S.-flag ships to immediately participate in the food
aid cargo preference trade. 


   RECOMMENDATION
---------------------------------------------------------- Chapter 2:5

If Congress chooses to continue the application of cargo preference
laws to food aid programs and acts to permit U.S.-flag foreign-built
ships to immediately carry food aid preference cargos, we recommend
that the Secretary of Transportation instruct the Administrator of
the Maritime Administration to promote the efficiency of the ships
that carry food aid preference cargos.  One way this can be done is
by changing the method of calculating guideline rates so that
"average" operating costs for all similar-sized ships, instead of
"actual" operating costs for each individual ship, are considered. 
While implementing this change will not help the application of cargo
preference laws to food aid programs achieve its intended objectives,
it should reduce food aid transportation costs. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:6

MARAD said that it was "...troubled by conclusions and implications
which are either not supported by verifiable data, or which
mischaracterize the issues and factors affecting the conduct of the
cargo preference programs." Regarding our conclusions in this
chapter, MARAD disagreed that U.S.-flag shipowners that participate
in the food aid cargo preference programs are discouraged from
improving the efficiency of their shipping operations.  MARAD's views
are that "U.S.-flag shipowners do not lack incentives to lower costs,
regardless of whether they carry commercial or preference cargo.  Any
owner operating in a high capital cost, competitive and highly
critical market has substantial incentives to lower costs." As a
general statement applicable to the shipping industry at large, we
agree with MARAD's views.  However, we continue to believe that in
the specific case of U.S.-flag shipowners who transport food aid
preference cargos, those U.S.-flag shipowners have little incentive
for reducing their costs because they are guaranteed by law to obtain
75 percent of the cargo tonnage.  The main cost-controlling factor
under this circumstance is the upper-limit rates that the shipowners
can charge (guideline rates) that are calculated by MARAD based on
the actual operating expenses of the individual U.S.-flag ships. 

Despite MARAD's comments on incentives, MARAD agreed with our
recommendation to promote the efficiency of the ships that carry food
aid cargos.  MARAD said that averaging costs for similar-sized ships
or developing some other efficiency standard could reduce guideline
rates and has testified to Congress that it would consider a change
in the method of calculating guideline rates. 

AID, DOD, and USDA generally agreed with our conclusions and
recommendation in this chapter and offered clarifications which we
made where appropriate. 


CARGO PREFERENCE REQUIREMENTS
ADVERSELY AFFECT U.S.  FOOD AID
PROGRAMS
============================================================ Chapter 3

Applying cargo preference laws to food aid programs requires that at
least 75 percent of food aid commodity tonnage be shipped on
U.S.-flag ships, to the extent that such ships are available at fair
and reasonable rates.  Each food aid program experiences some adverse
impacts from complying with these laws.  The most significant impact
is the additional cost associated with shipping food aid on U.S.-flag
ships.  This additional cost reduces the amount of funds that might
otherwise be available to purchase food.  The requirement to ship
food aid on U.S.-flag ships can also cause the purchase of a
commodity at a higher price, or the purchase of a different variety
of commodities than originally planned.  This occurs because
decisions to purchase commodities can be driven by the availability
of U.S.-flag ships, rather than the availability of the commodities. 


   HOW CARGO PREFERENCE COMPLIANCE
   IS MEASURED VARIES BY PROGRAM
---------------------------------------------------------- Chapter 3:1

Table 3.1 shows how commodity and transportation costs are funded and
how cargo preference compliance is generally measured for each food
aid program. 



                          Table 3.1
           
              Food Aid Program Funding and Cargo
                    Preference Compliance

                      Commodity and       Measurement of
                      transportation      cargo preference
Food aid program      funding             compliance
--------------------  ------------------  ------------------
P.L. 480 title I      USDA signs          Seventy-five
                      agreements with     percent of tonnage
                      countries to        purchased under
                      purchase            each purchase
                      commodities with    authorization--
                      concessional        which specifies
                      loans. USDA and     commodity,
                      MARAD pay OFD,      approximate
                      country pays        tonnage, and
                      equivalent of       maximum dollar
                      foreign-flag        amount--is shipped
                      transportation      on U.S.-flag
                      costs.              ships, to the
                                          extent practical.

P.L. 480 title II     AID signs           Seventy-five
emergency aid         agreements with     percent of total
PVO agreements        PVOs or recipient   food aid tonnage
                      countries to        provided under any
                      provide set         part of title II
                      tonnages of         is shipped on
                      specified           U.S.-flag ships,
World Food Program    commodities. USDA   to the extent
                      and MARAD pay all   practical.
                      transportation
                      expenses.

                      Biennial pledge
                      from United States
                      covers both
                      commodity and
                      transportation
                      expenses.

P.L. 480 title III    AID signs           Seventy-five
                      agreements with     percent of food
                      recipient           aid tonnage
                      countries to        provided to each
                      provide a set       country is shipped
                      dollar amount of    on U.S.-flag
                      aid, which          ships, to the
                      typically covers    extent practical.
                      all commodity and
                      transportation
                      expenses.

Section 416(b)        U.S. government     Seventy-five
                      donates             percent of food
                      commodities. USDA   aid tonnage
                      and MARAD cover     provided to each
                      all transportation  country must be
                      expenses.           shipped on U.S.-
                                          flag ships.

Food for Progress     Concessional loans  Seventy-five
                      under title I or    percent of food
                      donated             aid tonnage
                      commodities under   provided to each
                      section 416(b) can  country must be
                      be used, depending  shipped on U.S.-
                      on the agreement.   flag ships.
                      Transportation and
                      OFD expenses may
                      be covered by
                      importing country
                      or USDA and MARAD.
------------------------------------------------------------

   OFD IS A SIGNIFICANT PORTION OF
   U.S.  FOOD AID PROGRAM AND
   TRANSPORTATION COSTS
---------------------------------------------------------- Chapter 3:2

According to data obtained from USDA, from fiscal years 1991 through
1993 U.S.  food aid programs have paid almost $600 million in OFD to
U.S.  shipowners.\1 OFD is calculated for each food aid cargo
preference shipment and is based on the difference between U.S.-flag
rates and foreign-flag rates bid for that particular food aid
shipment.  As illustrated in figure 3.1, the almost $600 million in
OFD costs represented 34 percent of all program funds spent on
transportation from fiscal years 1991 through 1993.  For this same
period, the almost $600 million in OFD represented 41 percent of the
program funds spent on transporting food on U.S.-flag ships. 

   Figure 3.1:  Food Aid
   Transportation Expenditures,
   Fiscal Years 1991-93

   (See figure in printed
   edition.)

Source:  USDA. 

The amount spent on OFD also represented 9 percent of all funds spent
on food aid programs for fiscal years 1991 to 1993, as shown in
figure 3.2. 

   Figure 3.2:  Food Aid Commodity
   and Transportation
   Expenditures, Fiscal Years
   1991-93

   (See figure in printed
   edition.)

Note:  Total U.S.-flag transportation costs are equal to U.S.-flag
transportation costs and OFD costs. 

Source:  USDA. 


--------------------
\1 USDA or AID pays OFD for the first 50 percent of food aid tonnage
shipped on U.S.-flag ships; MARAD pays OFD for the next 25 percent of
tonnage shipped on U.S.-flag ships. 


   OFD EXPENDITURES CAN REDUCE THE
   AMOUNT OF COMMODITY PURCHASED
---------------------------------------------------------- Chapter 3:3

For some food aid programs, the amount spent on OFD directly reduces
the funds available to purchase commodities.  This fact applies to
title III and to U.S.  contributions to the World Food Program.  Both
of these programs provide food aid to the least developed countries
for humanitarian and economic development purposes, and both have a
set dollar amount from which both the commodities and their
transportation must be purchased.  For other food aid programs, the
amount spent on OFD affects the budgeted amount available for the
program and may reduce the amount of funds available to purchase
food. 


      TITLE III
-------------------------------------------------------- Chapter 3:3.1

The purpose of the title III program is to provide resources to least
developed countries to promote broad-based, equitable, and
sustainable economic development.  The commodities provided through
this program, or the revenue generated from their sale, are used to
support economic development projects to enhance food security\2 and
the privatization of food and agricultural distribution systems,
among other activities.  AID negotiates multiyear commitments with
title III recipient countries.  Agreements that specify how the
resources provided will be used to support these projects, and a
funding level to purchase both the desired commodity and its
transportation, are signed each year during the multiyear commitment. 

Under title III's funding arrangement, amounts spent on OFD directly
reduce the funds available to purchase commodities.  For example, Sri
Lanka received $58.9 million to purchase wheat and its transportation
under title III for the cargo preference year ending March 31, 1994. 
With these funds, Sri Lanka purchased and shipped seven lots of
wheat, ranging from 42,000 mt to 52,500 mt, from July to December of
1993.  Thirty-five percent, or $20.6 million, of the program was
spent on transportation and therefore was not available to purchase
wheat.  About $10.8 million, or 52 percent of the transportation
costs, was spent on OFD resulting from the higher rates charged by
U.S.-flag ships. 

Sri Lanka's experience is significant, according to AID officials,
because the money spent on OFD was much more than expected and
reduced the amount of wheat Sri Lanka had hoped to purchase.  AID
officials said that they believe the reason that OFD expenditures
were so high for Sri Lanka was because Sri Lanka's shipments were
competing for the U.S.-flag ships capable of carrying 50,000 metric
tons with those shipments sent to Russia under USDA's Food for
Progress program in the last quarter of the fiscal year.  This
competition required Sri Lanka to split its wheat shipments between
smaller U.S.-flag ships at higher and increasing rates.  In fact, for
the two U.S.-flag ships that Sri Lanka used to carry about 22,000 mt,
the rates increased from $66.81 per metric ton in August to $122.82
per metric ton in October, while the rate for a similar-sized
foreign-flag ship used by Sri Lanka in October was $35.67 per metric
ton.  AID officials added that there is a limited number of U.S.-flag
ships available, and individual shipping companies own or operate the
majority of U.S.-flag ships of the same size.  They said that this
limits the amount of competition among shipowners for similar-sized
cargos and provides little incentive to keep rates low.  They
suggested that if there were more competition, the amount of funds
spent on OFD would not be as dramatic, and more funds would be
available to purchase commodities. 

AID's goal when arranging for the purchase of commodities and
transportation for title III programs is to minimize the amount of
funds spent on transportation, in order to maximize the amount of
commodity AID is able to purchase.  AID attempts to do this by
placing no more than the required 75 percent of tonnage on U.S.-flag
ships.  AID officials said that the size of U.S.-flag ships that are
available also affects the amount of funds spent on transportation. 
Thus, the more ships AID has to use to get to 75-percent U.S.-flag
participation, the greater the transportation costs because smaller
ships generally charge higher rates. 

For example, during the cargo preference year ending March 31, 1994,
Mozambique received $15 million under the title III program to
purchase corn and its transportation.  At AID's Transportation
Division, we observed AID officials determine what corn and commodity
transportation would be procured for Mozambique and noted that the
amount of corn that was purchased for Mozambique was determined by
the U.S.-flag ships available.  To comply with cargo preference
requirements and maximize the funds available to purchase corn, AID
placed exactly 75 percent of the 70,217 metric tons of corn purchased
on U.S.-flag ships by using four ships--three U.S.-flag and one
foreign flag--with the U.S.-flag rates almost twice the rate of the
foreign-flag ship.  If AID could have reduced the number of ships it
used to three--two U.S.-flag and one foreign-flag--instead of four,
only 70 percent of the tonnage would have fit on the two U.S.-flag
ships.  However, the savings in OFD from using one less U.S.-flag
ship would have allowed the purchase of an additional 3,083 metric
tons of corn.  AID officials explained that without any cargo
preference requirements, they would have used the two ships with the
lowest rates regardless of flag.  We estimated that if they would
have done so, they would have been able to purchase about 14,000 more
metric tons of corn. 


--------------------
\2 Food security includes assuring (1) a safe and nutritionally
adequate food supply both at the national and household levels, (2) a
reasonable degree of stability of food supply between and within
years, and (3) access of each household to enough food to meet its
needs. 


      THE WORLD FOOD
      PROGRAM--TITLE II
-------------------------------------------------------- Chapter 3:3.2

The World Food Program is the primary multilateral provider and
transporter of food aid for development and disaster relief.  It is
also the largest source of food grant assistance for developing
countries in the United Nations' system.  WFP's purpose is to assist
poor and food-insecure people throughout the developing world to help
them become self-reliant and to provide relief food in times of
natural or manmade disasters.  The U.S.  government's 1991-92
biennial contribution to WFP equaled about one-third of all
contributions to the program during that 2-year period.  U.S. 
contributions to WFP are given through the P.L.  480 title II
program.  Therefore, the U.S.  government requires WFP to comply with
its cargo preference requirements for all commodities that WFP
purchases with the U.S.  contribution.  As a result, WFP was affected
by cargo preference requirements in a manner similar to countries
receiving food aid through title III.  Beginning with the 1991-92
U.S.  contribution, the contributed amount was to cover both the
commodity value and the associated transportation costs, including
OFD.  Previously, the U.S.  government had refunded to WFP the OFD
costs of complying with U.S.  cargo preference laws. 

While the U.S.  contribution was increased in consideration of this
new arrangement, at the same time over the last several years WFP
officials have observed a steep rise in U.S.-flag rates with no
similar increase in foreign-flag rates.  For example, the difference
between the cost of transporting commodities on chartered U.S.-flag
ships instead of less expensive foreign-flag ships available for
charter was almost 100 percent in 1991 and more than 150 percent in
1992.  This resulted in WFP spending $19.7 million to cover the
additional cost of using U.S.-flag ships out of the $200-million
1991-92 regular pledge portion of the U.S.  contribution.  WFP
estimates this differential will require up to $44 million of the
$225-million 1993-94 U.S.  regular pledge portion of the U.S. 
contribution.  World Food Program officials stated that this
ever-widening differential will continue to substantially reduce the
commodity component of U.S.  contributions to the program. 


   COMMODITY PURCHASING DECISIONS
   CAN BE DRIVEN BY THE
   AVAILABILITY OF U.S.-FLAG SHIPS
---------------------------------------------------------- Chapter 3:4

USDA views title I as a means to develop future markets for the
commercial purchase of U.S.  agricultural commodities and believes
that cargo preference requirements interfere with its ability to
develop such markets for U.S.  agricultural products.  It is
difficult to develop a market for a particular product when recipient
countries are unable to purchase it because U.S.-flag ships are not
available to transport that product.  USDA officials also say that
they believe that recipient countries that have had an unfavorable
experience with the title I program because of the consequences of
using U.S.-flag ships may choose to not purchase agricultural
products from the United States commercially in the future. 


      THE LOWEST-COST COMMODITY
      CANNOT ALWAYS BE PURCHASED
-------------------------------------------------------- Chapter 3:4.1

When food aid recipients are unable to purchase the lowest-cost
commodity, it is typically because no U.S.-flag ships are available
to pick it up at the loading port.  This situation forces the
recipient countries to either purchase the commodity at a more
expensive price in order to comply with cargo preference
requirements, or to not purchase any commodities.  For title I,
USDA's policy is to purchase commodities and their transportation in
a way that minimizes the total cost (lowest landed cost) to meet
cargo preference requirements.  Depending on the availability of
U.S.-flag ships and their rates, commodities cannot always be
purchased at their lowest price.  For example, for a 1992 title I
wheat purchase for Tunisia, the four lowest offers specified loading
facilities in ports on the Columbia River and in Stockton,
California.  Since no U.S.-flag ships offered to transport wheat from
these ports, Tunisia was unable to take advantage of these low wheat
prices. 

Tunisia offered to purchase the next lowest wheat offer, which
restricted loading to only one ship, and place all the
tonnage--approximately 54,000 metric tons--on one U.S.-flag ship. 
USDA would not approve this alternative because over 80 percent of
the tonnage previously purchased under this purchase authorization
had been shipped on U.S.-flag ships.  Therefore, sending 100 percent
of this purchase on a U.S.-flag ship would have cost USDA close to
$730,000 in additional OFD.  Eventually, Tunisia was forced to
purchase wheat offered in the Gulf of Mexico at the seventh and
eighth lowest price and use one U.S.- flag and one foreign-flag ship. 
While not necessarily resulting in a higher landed cost, these prices
were over $4 higher per mt for the almost 55,000 mt Tunisia finally
purchased than the lowest priced wheat obtainable regardless of the
availability of U.S.-flag ships. 

Food aid recipients are sometimes not able to purchase the
commodities at their lowest price even if a U.S.-flag ship is
available because it may not be the appropriate type or size to
transport the commodity.  For example, in a 1992 title I purchase
Estonia wanted to place both its corn and wheat purchases on one
U.S.-flag ship.  The only U.S.-flag ship that offered to carry these
cargos was too large to be accommodated at the loading facilities
that offered the lowest wheat prices.  In order to use this U.S.-flag
ship, Estonia purchased higher-priced wheat (19 cents more per metric
ton) from a supplier with loading facilities that could accommodate
this ship. 


      A DIFFERENT VARIETY OF
      COMMODITY THAN DESIRED MAY
      BE PURCHASED
-------------------------------------------------------- Chapter 3:4.2

Cargo preference requirements have also forced some countries to
purchase varieties of commodities that differ from those desired due
to the unavailability of U.S.-flag ships on the West Coast of the
United States.  According to MARAD officials, U.S.-flag ships are
typically unavailable on the West Coast because of the limited number
of U.S.-flag ships, the infrequent availability of cargos on the West
Coast, and the port charges on the West Coast that are much higher
than those in the Gulf of Mexico.  This situation can preclude
countries from purchasing commodities available on the West Coast. 
For example, during the cargo preference year ending March 31, 1994,
for title I both El Salvador and Guatemala were not able to purchase
the western white wheat they wanted because no U.S.-flag ships, or no
U.S.-flag ships at a reasonable shipping rate, were available on the
West Coast. 

According to Guatemala's agent, the purchasers were a private group
of Guatemala millers that sell their products in Guatemala's domestic
market.  To minimize their commodity costs, they wanted to purchase
less-expensive western white wheat.  However, Guatemala's agent
explained that because of cargo preference laws, when Guatemala puts
together a purchasing plan to present to USDA it must first consider
the availability of U.S.-flag ships, not what type of wheat it wants
to buy. 

The first time Guatemala tried to purchase wheat, no U.S.-flag ships
were available on the West Coast.  Therefore, the Guatemalans
proposed purchasing only a total of 18,000 metric tons of
wheat--12,000 metric tons of western white wheat using a foreign-flag
ship and 6,000 metric tons of a different type of wheat available in
the Gulf of Mexico, using a U.S.-flag ship.  As only 33 percent of
the purchase would have gone on a U.S.-flag ship, USDA would not
approve the purchase.  Instead, Guatemala chose to purchase only the
6,000 metric tons from the Gulf of Mexico and purchase the balance
later in the year. 

We were able to observe Guatemala's next attempt to purchase wheat. 
For this purchase, Guatemala was still interested in purchasing
western white wheat.  It had many offers for this variety of wheat
that were lower than the price for wheat available out of the Gulf of
Mexico.  In addition, one U.S.-flag ship did offer to transport wheat
from the West Coast, but at a prohibitive rate.  Therefore, in order
to comply with cargo preference requirements, Guatemala was not able
to purchase the less expensive western white wheat, but was forced to
purchase more expensive wheat from the Gulf of Mexico because that
was where U.S.-flag ships were available. 

El Salvador's wheat purchases were similarly affected by cargo
preference requirements.  The first two times El Salvador attempted
to purchase wheat, it received offers for and was interested in
purchasing western white wheat.  But because no U.S.-flag ships were
available on the West Coast and USDA would not allow it to use
foreign-flag ships, El Salvador chose not to purchase any wheat.  On
El Salvador's third attempt to purchase wheat, western white was
again available, but there were still no viable U.S.-flag offers from
the West Coast.  In order to break this impasse, USDA allowed El
Salvador to purchase western white wheat and ship all of it on a
foreign-flag ship. 

However, El Salvador had to agree that future purchases under this
purchase authorization would maximize the use of U.S.-flag ships. 
Subsequent wheat purchases by El Salvador were shipped out of the
Gulf of Mexico because that is where U.S.-flag ships were available. 
For some of these purchases, El Salvador had to forgo purchasing less
expensive western white wheat because no U.S.-flag ships were
available on the West Coast. 

USDA officials added that both Guatemala and El Salvador were further
disadvantaged by the requirement to comply with cargo preference for
title I wheat purchases because of the cost of shipping the small
amount of wheat available for shipment on foreign-flag ships.  USDA
officials explained that when U.S.-flag ships are used to carry the
majority of a purchase and the remaining balance is shipped on a
foreign-flag ship, the remaining balance is such a small amount that
the foreign-flag rate can be more than twice what it would have been
if the entire amount had been shipped on one foreign-flag ship.  This
is significant for title I recipient countries because they usually
incur this expense. 


USDA AND AID MANAGEMENT PRACTICES
AFFECT FOOD AID TRANSPORTATION
COSTS
============================================================ Chapter 4

Several practices USDA and AID use to manage the transportation of
food aid affect transportation costs.  First, USDA and AID require
shipowners to use contract terms in transporting food aid cargos that
are not typically required of shipowners for commercial cargos. 
These terms, which are applied to food aid cargos shipped on either
U.S.-flag or foreign-flag ships, may increase transportation costs
because they place additional costs and risks on shipowners that are
then passed back to the food aid programs through higher shipping
rates.  Second, food aid shipments are concentrated into the last
half of the year.  This concentration creates a high demand for the
limited number of U.S.-flag ships available during that period, which
increases U.S.-flag shipping rates and the cost to transport food
aid.  Finally, the administration of cargo preference for food aid
programs is shared by three separate agencies--USDA, AID, and
MARAD--which adds to the overall cost of its administration. 


   USDA AND AID CONTRACT TERMS MAY
   RAISE TRANSPORTATION COSTS
---------------------------------------------------------- Chapter 4:1

In arranging for the transportation of food aid cargos, USDA and AID
have chosen to provide and pay for additional services through the
shipowners to give additional financial assistance to these needy
countries.  Both USDA and AID require both U.S.-flag and foreign-flag
ships to provide and pay for these additional services.  For those
U.S.-flag ships that carry bulk commodities, these additional
services are reflected in increased shipping rates, which may
increase the total cost to transport U.S.  food aid.  Due to the
uncertainty U.S.  shipowners encounter in estimating the cost of
providing these services when developing shipping rates for food aid
preference cargos, they would like USDA and AID to adopt contract
terms for these cargos that are more consistent with those used for
similar commercial cargos.  The U.S.  shipowners we interviewed
believe that adopting these terms would reduce this uncertainty and
result in lower U.S.-flag shipping rates.  In response to complaints
from U.S.  shipowners, MARAD is pursuing a rule-making to require
that food aid cargos be transported under a uniform charter party
based on commercial terms that would provide a set of consistent
commercial contract terms for food aid cargos. 


      FOOD AID TRANSPORTATION
      CONTRACT TERMS DIFFER FROM
      COMMERCIAL TERMS
-------------------------------------------------------- Chapter 4:1.1

According to MARAD officials and the U.S.  shipowners we talked to,
the most widely used contract for bulk commodity cargos is the North
American Grain (NORGRAIN) charter party.  NORGRAIN contains typical
commercial contract terms that are used as a start for the final
terms agreed to between the parties for the shipment of commercial
cargos.  These terms differ from those used by USDA and AID for
carrying food aid cargos.  From our discussions with MARAD and the
responses of the U.S.  shipping companies that participated in our
structured interview, we determined that some of the most contentious
differences are the use of "full berth" terms, the timing of freight
payments to shipowners, and the requirements for inland
transportation and fumigation.  In its provisions related to these
terms, the NORGRAIN charter party places most of the financial risk
on the importer of the cargos, while USDA and AID's terms place most
of the financial risk on the shipowners. 


         FULL BERTH TERMS
------------------------------------------------------ Chapter 4:1.1.1

Full berth terms require a shipowner to pay the full cost of loading
and unloading the cargo.  They also require the shipowner to absorb
the full costs associated with any delays in loading and unloading
the cargo.  Financial incentives for the timely loading and unloading
of cargo, known as "demurrage" and "despatch,"\1 are not part of full
berth terms, but are included in commercial charter parties like
NORGRAIN.  Without these incentives, shipowners must factor into
their shipping rates any expected delays.  MARAD estimates that this
use of full berth terms can add up to $15 per metric ton to the cost
of a 50,000-metric ton food aid preference cargo. 

Although they are moving toward contract terms that are more
consistent with those used for similar commercial cargos when
possible, both USDA and AID use full berth terms to some extent.  For
title I cargos, a USDA official explained that USDA requires the
shipowner to pay for cargo loading and the importing country to pay
for its discharge and that there is despatch and demurrage at both
the loading and discharging port.  But full berth terms are still
used for donated commodities provided under section 416(b) and Food
for Progress because the recipient countries typically do not have
the resources to pay demurrage.  AID officials explained that for
titles II and III bulk cargos, AID has moved from full berth terms to
terms that are more consistent with those used for similar commercial
cargo for some shipments.  AID recognizes that this practice lowers
shipping rates.  But because the countries that receive food aid
under these programs are the neediest, the extent to which these
terms can be used depends on the country.  AID's current arrangement
for all bulk cargos is to have the commodity supplier pay to load the
ship, have demurrage and despatch terms apply to the loading, and
have any demurrage or despatch payments that may be required settled
between the commodity supplier and the shipowner.  For the recipient
countries that have the resources, the country pays to unload the
ship, and demurrage and despatch terms apply to the unloading; any
demurrage and despatch payments required are settled between the
recipient country and the shipowner.  For those recipient countries
that do not have the resources, cargos are unloaded under full berth
terms. 


--------------------
\1 Demurrage is paid to the shipowner by the charterer to compensate
for any delay in loading or unloading the cargo.  Despatch, typically
set at one-half the demurrage rate, is paid by the shipowner to the
charterer for a faster-than-expected cargo loading or unloading. 


         TIMING OF FREIGHT
         PAYMENTS TO SHIPOWNERS
------------------------------------------------------ Chapter 4:1.1.2

Standard practice for commercial shipments is to pay the shipowner
100 percent of the freight charges due when cargo loading is
complete.  However, for food aid preference cargos, shipowners are
not paid until the ship has arrived at its destination; then they
receive 95 percent of the amount due.  The remaining 5 percent is
paid once the ship is on its return voyage, but only if there do not
appear to be any claims against the shipowner, and no despatch is
owed.  Delaying payment until the cargos arrive at their destination
requires the shipowner to finance the cost of the most expensive part
of the voyage.  These costs are reflected in the shipping rates
quoted by the shipowners.  MARAD estimates that this delay in payment
can add as much as $50,000 in interest expense to the cost of a
voyage for a U.S.  shipowner.  USDA officials explained that this
practice may increase shipping rates, but they feel it must be done
to ensure that the cargo gets to its specified destination.  They are
concerned that if shipowners receive payment before their ships
arrive at the discharge port and then encounter some type of problem
enroute, the shipowners may unload the cargo somewhere other than the
specified destination.  In that case, the U.S.  government would have
no way to get the cargo to its intended destination.  USDA believes
that such a situation could greatly harm its relations with the
recipient countries. 


         INLAND TRANSPORTATION
------------------------------------------------------ Chapter 4:1.1.3

For a commercial bulk cargo, any required inland transportation is
arranged and paid for by the charterer.  For food aid cargos, the
charterer would be either the importing country itself or one of the
responsible agencies.  Over the last few years, however, shipowners
have been required to arrange and pay for inland transportation of
food aid cargos to their final destination and to incorporate this
cost into their shipping rates.  As shipowners must estimate the cost
of providing inland transportation before it is delivered and are
paid based on their estimate, it is uncertain whether USDA and AID
are paying more or less than the actual cost of this service.  This
situation could be avoided if USDA and AID did not require shipowners
to provide this service and reimbursed the recipient countries for
providing this service based on actual cost (assuming the recipient
countries have the necessary experience and could make the initial
outlay of funds.) It seems reasonable to expect that some landlocked
countries should be familiar with transporting goods inland, and
should be able to make these arrangements at lower cost than
shipowners who are less familiar with making these arrangements. 

Although AID and USDA could reimburse the recipient country for any
costs associated with transporting food aid to an inland destination,
an AID official explained that for landlocked countries receiving
food aid under title III, they believe requiring the shipowner to
arrange and pay for this service is the best option available.  This
is because with the recent closing of many AID missions, AID has no
one on site to make these arrangements, and AID believes it is not
practical to make these arrangements from Washington, D.C. 
Therefore, AID's preferred means to provide these services is through
the shipowners, who factor the cost of providing these services into
their shipping rates.  AID has not tried reimbursing the recipient
countries for providing these services to determine whether this may
be a more cost-effective way to provide these services.  A USDA
official explained that USDA also requires the shipowner to arrange
and pay to transport food aid to landlocked countries receiving food
aid under section 416(b) or Food for Progress when the U.S. 
government pays for the transportation of these cargos.  USDA would
consider reimbursing the recipient country for providing this
service, but has found few countries interested in this option.  For
title I cargos, any required inland transportation is almost always
arranged and paid for by the importing country. 


         FUMIGATION
------------------------------------------------------ Chapter 4:1.1.4

Both USDA and AID also consistently require shipowners to arrange and
pay for needed fumigation services because the agencies' goal is to
provide a pest-free product, and some recipient countries do not have
the funds to pay for this service.  Bulk agricultural commodity
cargos are typically fumigated when they are loaded on board ship. 
If a commercial cargo is infested when it arrives at its destination,
fumigation would typically be paid for by the supplier or the
receiver of that cargo.  For food aid cargos, however, these costs
are paid for by the shipowner.  As shipowners do not know whether or
not the cargo will be infested when it arrives at its destination,
they must build the possibility of an infestation into their shipping
rates for every food aid preference cargo.  As fumigation at the
discharge port is not often required, USDA and AID's requirement for
shipowners to build this possibility into their shipping rates
results in USDA and AID paying for a service that is not always
provided.  MARAD estimates that the cost and time required to
fumigate a food aid cargo can add up to $200,000 to the cost of a
voyage. 


      MARITIME INTERESTS BELIEVE
      ADOPTING COMMERCIAL TERMS
      WILL REDUCE FOOD AID
      TRANSPORTATION COSTS
-------------------------------------------------------- Chapter 4:1.2

MARAD and the U.S.  shipowners who participated in our structured
interview and who carry bulk food aid preference cargos said that
adopting contract terms that are more consistent with those used for
similar commercial cargos would reduce transportation costs.  Using
these terms would eliminate items like those previously discussed for
which the actual costs are difficult to project and that increase
shipping rates for U.S.  food aid preference cargos.  MARAD and the
U.S.  shipowners we interviewed also believe that the adoption of
contract terms for food aid preference cargos that are more
consistent with those used for similar commercial cargos would reduce
shipping rates and U.S.-flag transportation costs for these cargos. 

For example, when a shipowner is carrying a cargo under full berth
terms, the amount of time it would take to unload the cargo is
uncertain because there is no demurrage to encourage timely
unloading.  For full berth term voyages, MARAD's guideline rate
calculation estimates the number of days required to unload the cargo
based on cargo discharge rates stated in the contract terms.  MARAD
does not factor in any additional days for potential delays at the
destination port before unloading.  Therefore, shipowners increase
their rates (meaning they are closer to MARAD's guideline rate than
they would be for voyages with despatch and demurrage) for full berth
voyages to compensate for the uncertainty of, and lack of
compensation for, delays. 

This same uncertainty arises when shipowner responsibility for inland
transportation is part of the contract terms.  USDA and AID require
shipowners to include the cost of inland transportation in their
shipping rates.  To estimate this cost, shipowners explained that
they get bids from rail or truck companies in the recipient country
for this service and include that amount in their shipping rates.  In
determining the total guideline rate for these cargos, MARAD includes
an allowance for inland transportation based on the shipowner's
estimate of these costs.  But if actual costs end up being higher,
shipowners are not compensated for the difference.  Due to the
uncertainty associated with estimating the cost of providing inland
transportation services, some U.S.  shipowners have chosen to no
longer bid on those food aid preference cargos that require inland
transportation because they view the risk of losing money as too
great. 

While MARAD and all the U.S.  shipowners we interviewed who carry
bulk food aid preference cargos agreed that adopting contract terms
for food aid preference cargos that are more consistent with those
used for similar commercial cargos would result in some reduction in
U.S.-flag shipping rates, their estimates of the size of this
reduction differed.  MARAD estimated that adopting these terms could,
on average, reduce U.S.-flag shipping rates by at least $5 per metric
ton.  Given that about 6.1 million tons of food aid was moved on
U.S.-flag ships in the cargo preference year ending March 31, 1993,
using the $5 estimate, the savings from using these terms could have
been almost $31 million.  The U.S.  shipowners we talked to agreed
that there would be some reduction in U.S.-flag shipping rates, with
most estimating a potential savings of up to 10 percent.  Given that
USDA and AID spent $592 million to transport food aid on U.S.-flag
ships in the cargo preference year ending March 31, 1993, using this
estimate this change could have meant a savings of up to $59.2
million in U.S.-flag transportation costs. 

While USDA and AID agree that their contract terms add to food aid
transportation costs, they do not agree that adopting terms more
consistent with terms used for similar commercial cargos would
significantly reduce U.S.-flag shipping rates.  This belief is based
on their observations that little reduction in U.S.-flag shipping
rates has occurred in response to the few changes they have already
made to move to more typical commercial terms.  They also point out
that services such as fumigation and inland transportation would
still have to be paid for from food aid budgets even if they were not
paid for through U.S.  shipowners. 

Given that the estimated cost of these additional items is built into
food aid shipping rates, we believe that a potential may exist for
some savings in food aid transportation costs, and potentially food
aid program costs, by removing these terms and the uncertainty
associated with estimating their actual cost, and adopting more
consistent commercial terms.  We believe that USDA and AID should
experiment with more consistent commercial terms that would cover
only the actual costs for such items as fumigation and inland
transportation.  This would allow a determination to be made with
greater certainty about which is the best approach. 


      MARAD'S PROPOSED RULE-MAKING
      WOULD REQUIRE USE OF
      COMMERCIAL TERMS
-------------------------------------------------------- Chapter 4:1.3

In response to U.S.  shipowner complaints that contract terms for
food aid cargos are "discriminatory and noncommercial, increase
shipowner costs and risks, and result in higher U.S.-flag shipping
rates and unnecessary expenditures of U.S.  government funds," MARAD
is working toward promulgating a rule to require (1) the preapproval
by MARAD of all freight tenders (i.e., bid solicitations) for
preference cargos and (2) the utilization of a uniform charter party
by all agencies in arranging for preference cargo shipments.  The
uniform charter party proposed by MARAD is based on the NORGRAIN
charter party that MARAD officials said is used for a majority of
commercial bulk agricultural commodity cargos.  The purpose of
MARAD's proposed rule is to reduce the gap between U.S.-flag and
foreign-flag shipping rates by lowering shipowner costs and risks
caused by inconsistent charter party terms. 

MARAD transmitted a draft notice of proposed rule-making to the
Office of Management and Budget (OMB) for prepromulgation clearance
on December 29, 1992.  Due to the objections by USDA and AID over
MARAD's authority to issue the rule-making, OMB did not clear the
draft notice.  Both USDA and AID argued that MARAD's authority does
not extend beyond ensuring that 75 percent of food aid tonnage is
shipped on U.S.-flag ships.  As both USDA and AID have consistently
complied with this requirement, these agencies believe that MARAD's
proposed rule is not justified. 

In response to these objections, DOT asked the Department of Justice
to determine whether MARAD had the authority to promulgate rules
establishing mandatory uniform charter terms.  The Department of
Justice concluded that MARAD's statutory authority is broad enough
for it to establish and require the use of charter term regulations. 
Two significant points made by the Department of Justice in its
ruling were that (1) regulating charter parties to eliminate terms
that adversely affect U.S.-flag carriers would further the
competitive interest of the U.S.  merchant marine fleet and (2)
having erratic charter party terms increases costs and risks for
U.S.-flag carriers that interfere with their ability to calculate and
offer rates that are fair and reasonable. 

As of June 1994, MARAD was completing a new notice of proposed
rule-making to be submitted to OMB for consideration.  A MARAD
official explained that MARAD is unsure whether OMB will allow it to
be published, even with the Department of Justice ruling, because
this situation involves one agency making a rule that must be
followed by another agency.  Moreover, AID disagrees with the
Department of Justice's conclusion and has formally requested Justice
to reconsider its conslusion. 


   TIMING OF FOOD AID SHIPPING
   INCREASES U.S.-FLAG SHIPPING
   RATES
---------------------------------------------------------- Chapter 4:2

Beginning with fiscal year 1991, title I and title III regulations
required that food aid purchases be made by September 30 of each year
and that all food aid cargos be loaded by December 31.  Previously,
food aid had to be purchased and loaded by September 30 which, as we
reported in 1989,\2 heavily skewed title I shipments to the last 2
quarters of the fiscal year to satisfy cargo preference requirements. 
This practice resulted in higher freight costs because of the
increased demand for the limited number of U.S.- flag ships
available. 

As shown in table 4.1, from our review of USDA's food aid shipment
database for cargo preference years 1992 through 1993, we found that
for titles I and III, between 55 percent and 94 percent of annual
food aid tonnage was shipped between July and December; only 8
percent or less was shipped between January and March.  We also found
that the average U.S.-flag shipping rates for January through March
were consistently lower than the average U.S.-flag shipping rates for
July through December. 



                          Table 4.1
           
             Average U.S.-Flag Shipping Rates and
           Food Aid Tonnage Shipped by Time of Year


                             Percent                 Percent
Cargo            Average          of     Average          of
Preference     U.S. rate        tons   U.S. rate        tons
Year              per mt      lifted      per mt      lifted
------------  ----------  ----------  ----------  ----------
1992
------------------------------------------------------------
Apr.-June         $52.13       41.87      $39.85        2.16
July-Dec.          54.94       54.30       74.36       93.57
Jan.-Mar.          48.00        3.83       68.43        4.27

1993
------------------------------------------------------------
Apr.-June          72.09       10.69       65.05       25.28
July-Dec.          63.64       81.22       62.65       72.71
Jan.-Mar.          63.33        8.09       47.55        2.01
------------------------------------------------------------
Source:  GAO analysis of USDA food aid shipment database. 

As USDA and AID officials explained to us, there is no one reason why
the majority of food aid tonnage is shipped in the last half of the
calendar year.  An often-cited reason is that recipient countries
delay signing their annual agreements.  Both USDA and AID officials
said that while signing agreements earlier may result in some
countries shipping their food aid purchases sooner, there are other
factors unrelated to the signing of agreements that also affect the
timing of shipments, e.g., the amount of commodity storage available
in the country.  Therefore, USDA officials explained they are
reluctant to place a lot of pressure on the countries to sign
agreements earlier because they feel such pressure may discourage the
countries from participating in the title I program. 

Since food aid purchasing cannot occur until it is requested by the
recipient country, USDA and AID have limited influence over when food
aid purchasing and shipping take place.  AID officials explained that
title III recipient countries consider such things as commodity
prices and the condition of their food stocks and harvests in
determining when to request food aid.  The tendency of these
countries is to wait until their alternative food sources are running
low to request that food aid be purchased.  For title I, USDA
officials explained that they believe one of the main reasons why
countries wait until the end of the fiscal year to purchase food is
because of the difficulties the countries encounter in getting
agreements signed and purchases approved by their governments.  In
addition, both USDA and AID officials said that they are reluctant to
place a lot of pressure on the countries to request food aid
purchases earlier because they believe it may discourage them from
participating in their programs. 

Because the majority of food aid tonnage is being purchased and
shipped during the last half of the calendar year instead of more
evenly throughout the year, on average U.S.-flag shipping rates are
increased.  This is due to the increased demand placed on U.S.-flag
ships and the entry of higher-cost ships to meet this increased
demand.  On average, U.S.-flag shipping rates would be lower if these
cargos were spread more evenly throughout the calendar year. 


--------------------
\2 P.L.  480 Title I Transportation Issues (GAO/T-NSIAD-90-08, Nov. 
7, 1989). 


   THE COST TO ADMINISTER THE
   APPLICATION OF CARGO PREFERENCE
   TO FOOD AID PROGRAMS
---------------------------------------------------------- Chapter 4:3

Both USDA and AID have specific offices set up to procure food aid
cargos and their transportation.  These offices spend a significant
amount of time dealing with cargo preference requirements.  MARAD's
Office of National Cargo and Compliance monitors the shipping
activities of USDA and AID and assures that they comply with cargo
preference laws.  Based on estimates prepared by agency officials, we
provide the annual cost and full-time equivalent positions required
to administer the application of cargo preference to food aid cargos
for each of these agencies in table 4.2. 



                          Table 4.2
           
             Annual Operating Costs and Personnel
            Required to Administer the Application
             of Cargo Preference Laws to Food Aid
                           Programs

                                             Number of full-
                        Annual operating     time equivalent
Agency                             costs           personnel
--------------------  ------------------  ------------------
USDA                            $365,625                8.55
AID                              738,450                8.25
MARAD                            598,000                8.16
============================================================
Total                         $1,702,075               24.96
------------------------------------------------------------
Sources:  USDA, AID, and MARAD. 

One way to reduce the costs of administering cargo preference would
be to consolidate the administration of cargo preference within one
agency.  However, responsible officials from both USDA and AID
believe that there would be little reduction in personnel and program
costs if the activities associated with contracting for
transportation of food aid preference cargos were consolidated. 
Although USDA and AID officials said that some benefits would occur
through the use of consistent charter terms and consolidation of
cargos, they also believe that it is important to retain the
transportation arrangements for food aid cargos within their
respective agencies.  They believe each agency understands the
specific goals of the programs it administers and therefore the
constraints faced in dealing with developing countries. 

MARAD officials said there is a lack of centralization of government
contracting for food aid programs that has resulted in higher than
normal U.S.-flag shipping rates.  MARAD said that consolidating the
transportation arrangements for preference cargos within MARAD would
yield personnel and cost savings to the U.S.  government and
eliminate the inconsistent practices of USDA and AID in contracting
with the U.S.  merchant marine fleet for transportation of food aid
cargos.  MARAD said this consolidation would also produce savings, as
MARAD would no longer have to monitor the compliance of other
agencies with cargo preference requirements. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:4

The contract terms used by USDA and AID for the transportation of
food aid cargos on both U.S.-flag and foreign-flag ships places
additional costs and risks on shipowners.  This practice results in
higher shipping rates and may or may not increase food aid
transportation costs.  USDA and AID have developed these contract
terms as a means to provide additional services to recipient
countries.  The terms USDA and AID use have the most impact on those
shipowners whose ships carry bulk food aid cargos and who reflect the
estimated costs of these additional services in their shipping rates. 
We believe that some potential may exist for savings in food aid
transportation costs through removing the uncertainty associated with
estimating the actual costs of these services by adopting contract
terms that are more consistent with those used for similar commercial
cargos.  However, we recognize that the savings may be offset by
other increases in food aid program costs and understand that USDA
and AID have other concerns about the adoption of commercial terms. 
To determine whether any potential exists to reduce food aid
transportation costs, and food aid program costs, through the use of
more consistent commercial terms, which would cover only the actual
costs for such items as fumigation and inland transportation, we
believe that USDA and AID should experiment with them to determine
which is the best approach. 

Food aid transportation costs are also increased because a majority
of food aid shipments occur in the last half of the calendar year
instead of being more evenly spaced throughout the year.  This
situation increases demand for the limited number of U.S.-flag ships
available and, on average, raises shipping rates due to the entry of
more costly U.S.-flag ships.  While we found no conclusive reason why
food aid shipments are clustered into the last half of the calendar
year, it is clear that food aid transportation costs could be reduced
if food aid shipments were more evenly spaced throughout the year. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 4:5

If Congress chooses to continue the application of cargo preference
laws to food aid cargos, we recommend that the Secretary of
Agriculture and the Administrator of the Agency for International
Development take the following steps because of their potential to
reduce food aid transportation costs: 

  Experiment with the use of contract terms for the transportation of
     food aid cargos that are more consistent with contract terms
     used for similar commercial cargos to determine whether their
     use will reduce food aid transportation costs. 

  Encourage recipient countries to more evenly space their food aid
     shipments throughout the year. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:6

AID said it agrees with our recommendation to experiment with the use
of contract terms for the transportation of food aid cargos that are
more consistent with contract terms used for similar commercial
cargos to determine whether their use will reduce food aid
transportation costs.  However, AID's preference is for a
collaborative interagency effort in this regard to experiment with
different terms under controlled conditions in selected shipments. 
We believe that this approach could meet the objectives of our
recommendation. 

USDA agrees that the use of contract terms more consistent with terms
used for similar commercial cargos might reduce food aid
transportation costs.  However, they believe a primary factor that
influences shipping rates is not the terms, but the degree of
competition.  USDA also believes that forcing commercial terms, such
as NORGRAIN, on foreign countries that are not commercial buyers can
defeat the purpose of the food aid provided.  We agree that the
degree of competition should be a major factor that affects shipping
rates.  However, the degree of competition among U.S.-flag ships
seeking to carry food aid cargos is often limited.  U.S.-flag
shipowners are generally guaranteed at least 75 percent of food
tonnage by law, and we would expect that the most cost-efficient
U.S.-flag ships would obtain those food aid cargos before less
cost-efficient U.S.-flag ships.  However, when demand for U.S.-flag
ships is high, competition among the limited number of U.S.-flag
ships is greatly reduced, and the less cost-efficient ships are able
to obtain food aid cargos despite their high rates.  Regarding
foreign countries' reactions to the use of shipping terms more
closely aligned with NORGRAIN, we believe that the best approach for
USDA is to simply experiment with the terms and evaluate the overall
effects, including the effects on foreign countries as well as on
transportation and program costs. 

MARAD supports the use of transportation contract terms that are more
closely aligned with those used in transporting similar cargos made
under commercial sales transactions.  In fact, MARAD believes that
the adoption of their proposed uniform charter party for food aid
preference cargos--which will principally impose such shipping terms
on AID and USDA--will reduce transportation costs by removing what
MARAD considers unnecessary risks and cost from the shipowners.  AID
and USDA told us that they do not support a uniform charter party
because they believe the shipping terms that would be included in
such an arrangement would reduce the flexibility they currently have
to set shipping terms.  We have not fully evaluated MARAD's proposed
uniform charter party nor the potential implications it could have on
the food aid programs and therefore do not have a position on the
matter.  We continue to believe that the appropriate course of action
now is to experiment with shipping terms. 

USDA agreed with our recommendation directed at reducing food aid
transportation costs by more evenly spacing food aid shipments
throughout the year.  USDA identified several reasons why this
occurs, and said it will continue its efforts to more evenly space
food aid shipments by obtaining early signing of agreements and
prompt purchasing of food aid. 

AID did not comment on this recommendation. 


U.S.  CARGO PREFERENCE LAWS
=========================================================== Appendix I

The U.S.  Congress has enacted several cargo preference laws.  The
current primary laws are the Cargo Preference Act of 1904, the
Merchant Marine Act of 1936, and the Cargo Preference Act of 1954. 
In addition, the Food Security Act of 1985 contains significant cargo
preference requirements that apply specifically to U.S.  food aid
programs. 


   THE CARGO PREFERENCE ACT OF
   1904
--------------------------------------------------------- Appendix I:1

The Cargo Preference Act of 1904 (10 U.S.C.  2631, ch.  1766, 33
Stat.  518, Apr.  28, 1904), as amended, states that only vessels of
the United States may be used in the transportation by sea of
supplies bought for the Army, Navy, Air Force, or Marine Corps. 
However, if the President finds that the freight rate charged by
those vessels is excessive or otherwise unreasonable, contracts for
transportation may be made as otherwise provided by law.  In effect,
this law requires that 100 percent of Department of Defense (DOD)
cargo be shipped on U.S.-flag vessels. 


   THE MERCHANT MARINE ACT OF 1936
--------------------------------------------------------- Appendix I:2

The Merchant Marine Act of 1936 (46 U.S.C.  1101 et seq., ch.  858,
49 Stat.  1985, June 29, 1936) was enacted to recognize the need to
develop a U.S.  merchant marine for national defense and to carry a
substantial portion of our domestic and foreign commerce.  Section
901 of the act requires government employees traveling on official
business overseas to use ships registered under U.S.  laws when
available.  Section 901 of the act was later amended by the Cargo
Preference Act of 1954 and the Food Security Act of 1985 to specify
the percentage of cargo tonnage that is required to be transported on
U.S.-flag vessels. 


   THE CARGO PREFERENCE ACT OF
   1954
--------------------------------------------------------- Appendix I:3

The Cargo Preference Act of 1954 (46 U.S.C.  1241(b), ch.  936, 68
Stat.  832, Aug.  26, 1954) amended section 901 of the Merchant
Marine Act of 1936 to require that at least 50 percent of all U.S. 
government cargo tonnage be transported on privately owned, U.S.-flag
commercial vessels, to the extent that such vessels are available at
fair and reasonable rates. 


   THE FOOD SECURITY ACT OF 1985
--------------------------------------------------------- Appendix I:4

The Food Security Act of 1985 (P.L.  99-198, December 23, 1985)
further amended section 901 of the Merchant Marine Act of 1936 by
requiring that by April 1988, and for each year thereafter, an
additional 25 percent of food aid tonnage exported under Public Law
(P.L.) 480, section 416, of the Agricultural Act of 1949 (Ch.  792,
63 Stat.  1051, 1058, Oct.  31, 1949), as amended, and the Food
Security Wheat Reserve Act of 1980 (title III of P.L.  96-494, Dec. 
3, 1980), be transported on privately owned, U.S.-flag commercial
vessels.  The Department of Transportation (DOT), through the
Maritime Administration (MARAD), is required to fund the ocean
freight differential (OFD) for the additional 25 percent of food aid
tonnage shipped on U.S.-flag vessels. 


RUSSIA FOOD FOR PROGRESS PROGRAM
========================================================== Appendix II

Perhaps the most publicized food aid package in recent years was the
U.S.  pledge of $700 million in commodities to Russia announced in
April 1993.  As with all food aid shipments, cargo preference
requirements applied to these sales.  However, because much of this
food aid was shipped at the time of year when most other U.S.  food
aid was being transported, the unavailability of U.S.-flag ships
prevented the U.S.  Department of Agriculture (USDA) from shipping 75
percent of this tonnage on U.S.-flag ships. 


      THE U.S.-RUSSIA AGREEMENT
------------------------------------------------------ Appendix II:0.1

President Clinton pledged $700 million in agricultural aid to Russia
at a summit conference with Russian President Yeltsin in Vancouver,
Canada, in April 1993.  The aid was to be extended primarily under
USDA's Food for Progress program, which provides commodities to
countries making commitments to expand free enterprise in their
agricultural economies.  Of the $700 million available, $500 million
was pledged for commodities and $200 million was set aside for
transportation. 

Approximately $430 million of the aid was credit extended to Russia
under Food for Progress to purchase various U.S.  agricultural
commodities.  An additional $70 million provided was in the form of
U.S.  commodity donations provided under Food for Progress and
section 416 of the Agricultural Act of 1949.  Cargo preference laws
required that at least
75 percent of the commodities sent to Russia be shipped on U.S.-flag
vessels.  As a result of this requirement, total transportation costs
for these commodities were estimated at $200 million.  Russia agreed
to pay the estimated $100-million cost of transporting the Food for
Progress-financed commodities at foreign-flag rates, while the
remaining $100 million in transportation costs--the additional cost
of using U.S.-flag ships for Food for Progress shipments and all
transportation costs for section 416 shipments--was to be paid by the
United States. 


   PROBLEMS ENCOUNTERED IN FOOD
   FOR PROGRESS SHIPMENTS TO
   RUSSIA
-------------------------------------------------------- Appendix II:1

U.S.  shipowners faced problems in delivering commodities to Russia
under this agreement both because of specific contractual terms as
well as the nature of port infrastructure in Russia.  According to
USDA officials, the agreement between the United States and Russia
allowed for Food for Progress cargos to be unloaded at Russian
discharge ports according to the "custom of the port." Under these
terms, Russian ports do not pay demurrage to shipowners for delays in
unloading commodities. 

In addition, for some cargos USDA required shipowners to arrange and
pay for inland transportation of the commodities to their final
destination and to reflect this cost in their shipping rates. 


      "CUSTOM OF THE PORT"
------------------------------------------------------ Appendix II:1.1

Under "custom of the port" terms, there are no despatch payments to
the Russian discharge port if the cargo unloading is completed
earlier than agreed to, and the port pays the shipowner no demurrage
if the cargo unloading is completed later than agreed.  According to
MARAD officials and U.S.  shipowners, "custom of the port" terms
place them at a disadvantage compared to foreign-flag ships since
many have had limited experience in delivering to Russian ports. 
While U.S.  shipowners face greater uncertainty as to how to adjust
their rates to account for possible delays in unloading cargo, an
international shipbroker we spoke to stated that foreign-flag ships
have had more consistent business in these ports and are in a better
position to make arrangements at the ports for cargo discharge.  In
addition, U.S.  shipowners are limited in providing for these
uncertainties in the rates they set because no detention days are
allowed for these cargos and are therefore not considered in MARAD
guideline rate calculations.  Nevertheless, as pointed out by USDA,
Russia's terms did not prohibit the payment of detention at
discharge. 

The absence of despatch and demurrage payments at the discharge port
has special significance in Russian ports, given the extensive delays
in cargo unloading experienced there in the past.  A U.S. 
interagency review of overall port infrastructure in Russia
undertaken in the summer of 1993 confirmed the existence of
congestion for almost all types of cargos.  As a result, delays of
between 20 and 40 days were experienced.  The report attributed the
congestion to institutional, managerial, and financial limitations,
rather than to an insufficiency of port facilities.  However,
specific features of Russia's ports limit their capacity and
efficiency, such as the reliance on an insufficient railroad system,
and the absence of port bulk storage.  Nevertheless, according to
MARAD, for the shipments made under the Russia Food for Progress
program, no discharge of a U.S.-flag vessel took longer than 27 days. 

Without meaningful port storage, railcar availability becomes a
primary determinant of port capacity.  Limitations in railcar supply
have traditionally been a problem in Russian ports.  In fact, a June
1993 joint MARAD and Agency for International Development (AID) study
found that limits on the number of railcars available were the major
impediment to grain-handling at Russian ports.  However, this was not
a significant problem for shipments made under the Russia Food for
Progress program.  Furthermore, Russian ports have not been able to
enforce agreements with railroads regarding railcar supply.  Given
that this key variable in their ability to unload cargo is beyond
their control, the ports are reluctant to accept terms that include
demurrage. 


      INLAND TRANSPORTATION
------------------------------------------------------ Appendix II:1.2

USDA generally requires shipowners to arrange and pay for
transportation of food aid to inland destinations of recipient
countries.  While this is not a typical practice for commercial bulk
commodity cargos shipped internationally, USDA requires shipowners to
arrange and pay for inland transportation to relieve foreign
countries from paying this cost.  Shipowners are required to
incorporate the costs of providing this service into their shipping
rates. 

In Russia, U.S.-flag shipowners are heavily reliant on the
performance of the railroads in arranging for transportation of food
to inland destinations.  This dependency on railroads arises because
other modes of inland transportation in Russia are generally scarce. 
According to recent U.S.  studies of Russian transportation modes,
the railroads are the only mode of transportation exempt from the
drive toward privatization in Russia.  Competition is limited, with
ports usually having no choice in the selection of the railroad
handling its cargos. 

As previously noted, recent U.S.  studies of the railroad system in
Russia have pointed to problems with the adequacy and reliability of
railcar supply in handling cargos discharged at ports.  While the
availability of railcars is traditionally a problem for Russian
ports, according to USDA, only two Russian Food for Progress cargos
required inland transportation, and no problems were experienced. 

The complexity of Russian railroad tariffs adds to the uncertainty
U.S.  shipowners face when charged with inland transport
responsibilities.  Rate increases can be implemented at any time
without advance notice.  Furthermore, there is a wide range of added
charges that can be imposed for special services such as storage and
handling.  As a result, USDA is not able to assure that these
railroad rates are based on actual market costs and do not instead
provide an indirect subsidy to Russia. 


   THE STATUS OF THE AGREEMENT
-------------------------------------------------------- Appendix II:2

As of June 14, 1994, most of the commodities included in the Russia
Food for Progress agreement had been purchased at amounts equal to or
greater than in the original agreement.  USDA officials explained
that the commodity mix in the original agreement was amended several
times at Russia's request and that unused funds slated for ocean
freight differential were used to increase commodity funding.  The
amounts purchased as of June 14, 1994 are shown in table II.1. 



                          Table II.1
           
              Status of Russia Food for Progress
                          Agreement

                              Amount per
                           agreement (in    Amount purchased
                             millions of     (in millions of
Commodity                       dollars)            dollars)
--------------------  ------------------  ------------------
Corn                              $227.5              $257.5
Soybean meal                       105.0               134.2
Butter                              66.5                54.4
Wheat                               56.0                56.0
Rice                                 7.0                None
Refined soybean oil                 18.0                None
Peanuts                              8.0                 7.4
Poultry                              7.0                None
Sugar                                5.0                 4.7
============================================================
Total                             $500.0              $514.2
------------------------------------------------------------
Source:  USDA. 

According to USDA officials, most of the actual shipping of the Food
for Progress commodities to Russia occurred during the last quarter
of fiscal year 1993 and the first quarter of 1994, a time when most
other U.S.  food aid shipments took place.  These food aid shipments
are also subject to cargo preference requirements.  The demand for
transportation for all food aid commodities led to increased
competition during these months for the U.S.-flag ships available to
carry food aid.  As a result, the 75-percent cargo preference
requirement for commodities shipped to Russia was not met, although
(except in three instances) all U.S.-flag ships that bid were awarded
cargos. 

While 100 percent of the wheat purchased was shipped on U.S.-flag
ships, for corn and soybean meal, for which the most tonnage was
shipped, only 28 percent and 18 percent, respectively, were
transported on U.S.-flag ships.  Several other offers by U.S. 
shipowners to transport these commodities were rejected because the
difference between the rates they quoted and foreign-flag rates was
excessive.  Still, if these offers had all been accepted, they would
have added only another 3 percent to the corn tonnage and 4 percent
to the soybean meal tonnage shipped on U.S.-flag vessels. 


SHIPPING RATES FOR GRAIN UNDER THE
ISRAELI SIDE LETTER AGREEMENT ARE
SIGNIFICANTLY LOWER THAN FOOD AID
SHIPMENTS TO RUSSIA
========================================================= Appendix III

Under the Israeli cash transfer program, an agreement with AID was in
effect from fiscal years 1980 through 1988, and again for fiscal
years 1991 through 1994.  The agreement, commonly referred to as the
"side letter agreement," stated that for the portion of the U.S. 
cash transfer assistance that Israel used to purchase U.S. 
agricultural commodities, 50 percent of the tonnage purchased would
be shipped on U.S.-flag ships.  Each fiscal year, Israel purchases
about 1.6 million metric tons of grain, of which 800,000 metric tons
are shipped on U.S.-flag ships. 


   A COMPARISON OF AGRICULTURAL
   COMMODITY SHIPMENTS TO ISRAEL
   AND RUSSIA
------------------------------------------------------- Appendix III:1

According to MARAD and a U.S.  shipowner who has carried grain to
Israel under this program, U.S.-flag shipping rates to Israel were in
the low $30 per metric ton range, which is just a few dollars more
than foreign-flag rates, while U.S.-flag shipping rates for food aid
shipments to Russia were in the mid-$40s to mid-$60s per metric ton
range.  They also explained that grain shipments to Israel are made
with no Israeli or U.S.  government involvement.  Therefore,
privatized Israeli entities and the U.S.-flag shipowners have
negotiated commercial arrangements that include consecutive voyage
charters with terms and conditions that provide incentives to move
the cargos quickly and efficiently.  U.S.-flag shipowners are able to
offer a low rate because they know they will immediately discharge
their cargos in Israel with no unexpected port charges.  In addition,
the use of consecutive voyage charters, which guarantee employment
for a U.S.-flag ship for a specified period of time, also
significantly lowers shipping rates.  Israel is interested in keeping
U.S.-flag shipping rates as low as possible, because it pays the cost
of using more expensive U.S.-flag ships. 

According to this same U.S.-flag shipowner who has also carried food
aid shipments to Russia, there are no incentives for the Russian
government to minimize its costs for using U.S.-flag ships to
transport Food for Progress cargos.  This is primarily due to the
fact that under the Food for Progress program, USDA pays the
additional cost of using U.S.-flag ships, not Russia.  USDA also has
approved shipping charters that include terms like "custom of the
port" discharges.  These terms allow U.S.-flag ships to be delayed in
Russian ports with no compensation to the shipowner.  Russia's
charters require the U.S.-flag shipowners to be responsible for all
port costs.  In addition, no consecutive voyage charters were used
for the food aid tonnage shipped to Russia.  The uncertainty about
how much these items would cost led shipowners of U.S.-flag ships to
quote higher shipping rates for food aid cargos to Russia.  Appendix
II provides additional information on food aid shipments to Russia. 


   THE APPLICABILITY OF THE
   ISRAELI EXPERIENCE TO RUSSIA IS
   UNCERTAIN
------------------------------------------------------- Appendix III:2

According to MARAD officials, the extent to which the terms similar
to those used for Israeli grain shipments could be used to lower
rates for food aid shipments to Russia is uncertain.  They explained
that Israel and Russia have two very different types of business
environments.  Israel is an established and stable country with
modern port facilities that has been arranging these shipments for
the past 15 years; Russia is unstable, is just beginning to privatize
its operations, and is not experienced in this type of a program.  In
addition, U.S.-flag ships are not experienced in how Russian ports
operate and do not know what to expect in terms of delays and port
and handling charges.  MARAD predicts that the use of commercial
terms would lower U.S.-flag shipping rates.  But due to the economic
condition of Russia, MARAD also predicts it will be some time before
many of the terms and conditions used in Israeli shipments, which
allow lower U.S.-flag shipping rates, can be successfully applied to
food aid shipments to Russia. 




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SHIPOWNER STRUCTURED INTERVIEW
========================================================= Appendix III



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(See figure in printed edition.)Appendix V
MARCH 17, 1994, MEMORANDUM FROM
THE OFFICE OF THE UNDER SECRETARY
OF DEFENSE FOR TRANSPORTATION
POLICY
========================================================= Appendix III



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(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
AGRICULTURE
========================================================= Appendix III



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The following are GAO's comments on the Department of Agriculture's
letter dated September 22, 1994. 


   GAO COMMENTS
------------------------------------------------------- Appendix III:3

1.  We agree that in some instances the rate differences between
U.S.-flag and similar-sized foreign-flag ships can be greater than
the amount we state in the report.  We chose to use a more
conservative difference in conducting our analyses.  We also added a
note to figure 2.1 to reflect our use of weighted averages. 

2.  The report language has been revised as suggested. 

3.  Language was added to chapter 3 of the report to more accurately
reflect the impact of "lowest landed cost" on the ability of
countries to purchase the lowest cost commodity. 

4.  Language was added to chapter 3 of the report to describe this
additional impact caused by complying with cargo preference
requirements for title I recipient countries. 

5.  According to MARAD officials, they intend to pursue the
implementation of their uniform charter party for food aid preference
cargos. 

6.  The report language was revised to include that for the specific
Russia Food for Progress program according to USDA, no discharge
exceeded 27 days and the availability of railcars was not a
significant problem. 

7.  The report language was revised as suggested. 

8.  This point was added to the report. 

9.  The report language was revised to include this information. 

10.  While according to MARAD officials and the U.S.  shipowners we
talked to, NORGRAIN is the most widely used contract for bulk
commercial cargos, we agree that it is only a start for the final
terms agreed to between parties for the shipment of commercial
cargos.  (The blank copy of the NORGRAIN contract referred to in
USDA's comment was not reproduced in this appendix.)

11.  The report attributes these views to MARAD and the U.S. 
shipowners that carry food aid preference cargos, not GAO.  They are
provided so the reader can understand why MARAD is pursuing a rule to
require MARAD preapproval of freight tenders and a uniform charter
party for food aid preference cargos. 

12.  See our response to agency comments at the end of chapter 4. 

13.  As stated in our response to agency comments in chapter 4, it is
our intention that USDA and AID experiment with the use of terms that
are more similar to those used for commercial cargos.  By its nature,
this recommendation asks USDA and AID to consider these terms and
conduct experiments where they see a potential to reduce
transportation costs.  It is not our intention that reductions in
food aid transportation costs increase total program costs.  We also
modified the text to reflect that some countries lack the necessary
experience and financial resources to pay for inland transportation
services. 

14.  Typical charter parties used for commercial shipments include
provisions to ensure the delivery of a cargo to its intended
destination and provide legal remedies if it is not. 

15.  The report language has been modified to reflect this comment. 

16.  The report language has been clarified as suggested. 

17.  USDA's agreement with our recommendation is reflected in the
report. 




(See figure in printed edition.)Appendix VII
COMMENTS FROM THE AGENCY FOR
INTERNATIONAL DEVELOPMENT
========================================================= Appendix III



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The following are GAO's comments on the U.S.  Agency for
International Development's letter dated September 21, 1994. 


   GAO COMMENTS
------------------------------------------------------- Appendix III:4

1.  We believe we have demonstrated that the application of cargo
preference requirements to food aid programs can adversely affect the
operations of those programs and not significantly help achieve the
objectives of the Merchant Marine Act of 1936, as amended. 
Nevertheless, the continuance of this application of cargo preference
requirements is a matter of policy which, we believe, can be best
determined by Congress.  Chapter 2 contains a matter for
congressional consideration related to this issue. 

2.  We agree that direct subsidies would offer a more efficient
alternative for achieving the objectives of the Merchant Marine Act
of 1936, as amended, by providing support to those ships that (1)
could best serve as a naval auxiliary in times of war or national
emergency and (2) could be competitive in carrying a substantial
portion of the foreign commerce of the United States. 

3.  We agree and have made the appropriate addition to the matter for
congressional consideration in chapter 2. 

4.  Our recommendation in chapter 2 is not intended to endorse
MARAD's proposed "uniform charter terms." In chapter 4 of the report,
we describe MARAD's efforts to establish such terms, but we do not
take a position on the matter.  Rather, we point out that there is a
potential for food aid transportation cost savings if terms used for
contracting food aid shipments were more consistent with those used
for contracting commercial shipments of agricultural commodities. 
Furthermore, our recommendation in chapter 4 on this matter is
limited to experimenting with such terms by the agencies responsible
for shipping food aid. 

5.  MARAD's guideline rates are addressed in chapter 2 because we
discuss the rate-determination process in terms of its being a
disincentive for shipowners to reduce their operating costs.  We do
not believe that the discussion takes away from the main message of
the chapter.  Rather, we believe it buttresses the message by
indicating that this disincentive to improving the efficiency of
U.S.-flag ships helps keep the second objective of the Merchant
Marine Act of 1936--i.e., the carrying by U.S.-flag ships of a
substantial portion of U.S.  domestic and foreign waterborne
commerce--from being achieved. 

6.  We agree that the best chance for shipping rate reductions would
be if Congress were to permit U.S.-flag foreign-built ships to
immediately carry food aid preference cargos and MARAD were to
include these new entrants in its average cost calculations.  Our
recommendation to MARAD is premised on Congress allowing the entry of
U.S.-flag foreign-built ships into the food aid cargo preference
trade.  This provision would be the key difference from MARAD's
previous "fleetwide average" approach. 

7.  See our response to agency comments presented at the end of
chapter 4. 

8.  As stated in our response to agency comments in chapter 4, it is
our intention that USDA and AID experiment with the use of terms that
are more similar to those used for commercial cargos.  By its nature,
this recommendation asks USDA and AID to consider those terms and
conduct experiments where they see a potential to reduce
transportation costs.  In conducting these experiments, we assume
that USDA and AID will collect and track any cost data they believe
are necessary to provide meaningful results.  It is also not our
intention that any reduction in food aid transportation costs
increase total food aid program costs. 

9.  We appreciate that commercial agricultural exporters and
government food aid programs may have different objectives and that
not all commercial terms and practices will meet government needs. 

10.  The report language has been revised so it does not imply that
AID's terms are noncommercial. 

11.  The report language has been revised to clarify that we are
concerned with a reduction in food aid transportation costs, but only
if it does not increase food aid program costs.  This clarification
is also included in the agency comments section at the end of chapter
4. 

12.  The report language has been clarified as suggested. 

13.  The report language was revised to remove its reference to 50
percent of cargos are unloaded under full berth terms. 

14.  We believe that it is reasonable to expect that some landlocked
food aid recipient countries are capable of handling arrangements for
inland transportation. 

15.  AID's proposal for a "two-tier" rate system to cover fumigation
expenses is exactly the type of experiment we are suggesting be
applied to food aid cargos. 

16.  The estimates for potential savings in food aid transportation
costs through the adoption of terms that are more consistent with
those used for similar commercial cargos presented in the report are
based on MARAD and shipowner estimates.  While these estimates may
overstate potential savings, they are presented to illustrate that
some cost reduction may be achieved through the use of contract terms
more consistent with those used for similar commercial cargos. 

17.  We agree that competition is an important factor in reducing
food aid transportation costs, which is why we include matters for
congressional consideration and recommendations in chapter 2 directed
at improving the efficiency and number of U.S.-flag ships that carry
food aid preference cargos. 

18.  Regardless of whether or not MARAD includes financing expenses
in its guideline rate calculations, the U.S.  shipowners we talked to
said that when they incur this expense, they factor it into their
shipping rates. 

19.  Shipowners are reimbursed for the cost of inland transportation
through their shipping rates.  The amount allowed by MARAD to cover
the cost of inland transportation is based on the shipowner's
estimate of these costs.  Given that these estimates can vary
significantly among shipowners bidding on the same cargo, the actual
cost of this service may not be accurately captured through the
amount included in the shipping rates. 

20.  No change is being made since the current language reflects that
the direct tradeoff between using funds for food aid versus its
transportation is not present for all food aid programs. 

21.  Additional adverse impacts are noted in chapter 3. 

22.  We believe the report sufficiently implies that these additional
services are not optional but are part of the total package that USDA
and AID provide to food aid recipient countries.  The word "choose"
is used to describe the method by which these services are being
provided. 

23.  AID's views on the problems associated with securing inland
transportation are included in chapter 4. 

24.  It is not our intention to imply that something is wrong with
fixed-price contracting.  We are merely stating that handling the
delivery of these services in a way that is more consistent with how
commercial cargos are handled may result in USDA and AID paying
something closer to the actual costs of these services. 

25.  We agree and have made the suggested change. 

26.  We say "reduce the incentives" because there are factors other
than the method used by MARAD in establishing guideline rates that
may also provide disincentives to more efficient operations.  For
example, the current requirement that U.S.-flag foreign-built ships
must wait 3 years before being allowed to participate in the food aid
cargo preference program also reduces shipowners' incentives to
increase efficiencies. 

27.  We agree that shipping rates can be affected by the degree of
competition among shipowners for particular food aid cargos.  As
noted in the report, there was a corresponding decrease in the
amounts of ocean freight differential incurred in the food aid
programs following the entry of seven new, foreign-built, U.S.-flag
ships in the food aid cargo preference trade in the early 1980s. 
These seven new ships were more efficient than some of the older
U.S.-flag ships participating in the program and, through
competition, were able to acquire food aid cargos that might have
otherwise been carried by less efficient U.S.-flag ships at higher
shipping rates. 

28.  Table 3.1 represents how cargo preference compliance is
generally measured for each food aid program.  AID may measure and
report compliance to MARAD for the title III program by (1) total
program tonnage, (2) for each year, and (3) by type of vessel.  But
in practice, MARAD provides funding for each title III country
separately and requires that 75 percent of the food aid tonnage
purchased for each country be shipped on U.S.-flag ships.  Table 3.1
has been revised to state that 75-percent compliance by country is a
practice, not a requirement, for title III. 

29.  The report explains that MARAD's uniform charter party is based
on North American Grain (NORGRAIN).  We agree that NORGRAIN is only a
start for the final terms agreed to between parties for the shipment
of commercial cargos.  In addition, as stated in our response to
agency comments presented at the end of chapter 4, we have not
evaluated MARAD's uniform charter party and do not take a position on
it. 

30.  AID's opposition to MARAD's uniform charter party is noted in
the report. 

31.  We are reflecting U.S.  shipowners views. 




(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE DEPARTMENT OF
TRANSPORTATION
========================================================= Appendix III



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The following are GAO's comments on the Department of
Transportation's letter dated September 21, 1994. 


   GAO COMMENTS
------------------------------------------------------- Appendix III:5

1.  The sentences that DOT referenced in its comment have been
revised based on DOT's comments and technical comments made by DOD on
these same sentences.  DOD's amendments were aimed at clarifying
DOD's position on crew needs for the Ready Reserve Force (RRF). 

We disagree that we misstate the national security requirement for
seafarers employed on U.S.-flag bulk ships.  According to information
previously provided to us by the MARAD: 

  Sixteen to 18 dry bulk carriers transported food aid cargos during
     the last 3 cargo preference years.  These ships supported
     approximately 800 mariners.  It is these ships, and their crews,
     that transported the majority of food aid cargos and are the
     main focus of the report. 

  The overwhelming majority of the 190 bulk ships that DOT refers to
     in its comment are tankers.  Only 25 of those tankers have
     carried food aid preference cargos during the last 3 cargo
     preference years, and those instances generally occurred when
     traditional petroleum cargos were not available. 

2.  We have not evaluated the use of merchant mariners being used in
Operation Maintain Democracy. 

With the revisions made to the sections of the report regarding DOD's
position on crews, the report is consistent with the GAO reports
referred to by DOT. 

3.  We continue to believe that the current application of cargo
preference requirements to food aid tonnage contains disincentives to
lower costs for those U.S.-flag shipowners who contract to transport
such tonnage.  However, we concur with DOT that the proposed Maritime
Security Program would help U.S.-flag shipowners achieve operating
efficiencies. 

4.  We are recommending that USDA and AID experiment with contract
terms that are more consistent with those used for similar commercial
cargos.  This recommendation does not endorse MARAD's uniform charter
party as contract terms we expect USDA and AID to adopt.  As we have
stated in our response to agency comments presented at the end of
chapter 4, while it is our intention that USDA and AID experiment
with these terms to reduce food aid transportation costs, it is not
our intention to recommend adoption of changes that result in an
increase in food aid program costs. 

5.  In contracting for food aid cargos, we found that both USDA and
AID use consistent terms for U.S.-flag and foreign-flag ships. 
Therefore, a comparison of U.S.-flag and foreign-flag rates for food
aid cargos should accurately represent the difference (the OFD) in
these rates.  It would not be appropriate to compare U.S.-flag rates
for food aid cargos with either U.S.-flag or foreign-flag rates for
commercial cargos.  But since all discussions in the report of the
differences in U.S.-flag and foreign-flag rates are based on food aid
cargos, the OFD amounts presented appropriately represent the
difference between U.S.-flag and foreign-flag shipping rates for
these cargos. 

In addition, the report language has been modified to clarify that
inland transportation costs are not part of the guideline rate
determination, but an allowance, based on the shipowner's estimate,
is added to the calculated guideline rate to cover these costs. 

6.  This issue can be pursued under our recommendation that USDA and
AID experiment with the use of contract terms that are more
consistent with those used for similar commercial cargos. 

7.  Using terms for the Russian Food for Progress program that more
closely resembled those used for grain shipments to Israel under the
side-letter agreement may have resulted in lower transportation
costs.  However, as presented in appendix III, MARAD stated the
extent to which the terms similar to those used for Israeli grain
shipments could be used to lower rates for food aid shipments to
Russia is uncertain. 

8.  This point was made in chapter 1, but was added to chapter 3 for
clarification. 

9.  As explained in appendix II, almost all U.S.-flag ships that bid
on Russia Food for Progress cargos were awarded those cargos. 
Although 75 percent of these cargos were not shipped on U.S.-flag
ships, it was due to the nonavailability of U.S.-flag ships.  While
cargo preference may not have impeded commodity purchasing for this
program, it is clear, as we describe in chapter 3, that there are
instances where U.S.-flag ships are not available and commodity
purchasing decisions are affected. 

10.  Chapter 3 states those factors that cause U.S.-flag ships to
typically not be available on the U.S.  West Coast.  It is true that
if a U.S.-flag ship had been available on the West Coast, its
shipping rate may have more than offset the savings available from
purchasing the lowest-priced wheat.  But because no U.S.-flag ships
were available on the West Coast, Tunisia did not have the
opportunity to consider this option. 

11.  We disagree that we ignore the legislative intent of cargo
preference.  We carefully reviewed all relevant legislation,
including the legislation DOT refers to in its comment and its
attachment, and have concluded that the intent of cargo preference is
to help support the objectives of the Merchant Marine Act of 1936, as
amended.  We also recognize in the report that cargo preference does
support some U.S.  ships and crews and that Congress has repeatedly
reaffirmed its support for maritime industry subsidies. 

12.  As explained in chapter 1, cargo preference is one of several
programs established by Congress to support the U.S.  merchant
marine.  In applying cargo preference to food aid programs, we agree
Congress understood that it would increase food aid transportation
costs, which is why it required that U.S.-flag ships only be used if
they are available at "fair and reasonable rates." In addition, to
pay for this requirement, food aid program budgets include estimated
food aid transportation costs.  Yet, because of (1) how each food aid
program is funded, (2) how cargo preference compliance is measured,
and (3) how limited the availability is of efficient U.S.-flag ships
to carry these cargos, the operation of U.S.  food aid programs is
adversely affected. 

In addition, as discussed in chapter 2, the application of preference
cargos to food aid cargos does not significantly contribute to
ensuring that an adequate and viable U.S.  merchant marine is
maintained to meet the objectives of the Merchant Marine Act of 1936,
as amended. 

13.  Our estimate of almost $600 million spent on ocean freight
differential over the last 3 years was based on data provided by
USDA.  USDA's data are derived for each food aid shipment from the
actual shipment "bill of lading." We had asked for these data from
MARAD officials but were informed that they were uncomfortable with
the accuracy of their data for a portion of the time period included
in the scope of our work.  We had also asked AID for these data, but
AID referred us to USDA, since USDA keeps all the official records on
the total amount of OFD paid for the food aid programs.  We accepted
USDA's data as the best available. 




(See figure in printed edition.)Appendix IX
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================= Appendix III


The following is GAO's comment on the Department of Defense's letter
dated September 23, 1994. 


   GAO COMMENT
------------------------------------------------------- Appendix III:6

1.  DOD suggested several technical changes to the specific wording
of sentences in the draft report.  The most significant changes
involved sentences that reflected DOD's position on its need for
crews supported by the bulk carriers that transported the majority of
food aid tonnage.  Based on DOD's suggestions, we revised the
appropriate sentences to more accurately reflect DOD's position. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix X

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Phillip J.  Thomas, Assistant Director
N.  Scott Einhorn, Senior Evaluator
Susan S.  Westin, Senior Economist
Stuart M.  Kaufman, Senior Social Science Analyst
Rona Mendelsohn, Evaluator (Communications Analyst)

OFFICE OF THE CHIEF ECONOMIST,
WASHINGTON, D.C. 

Loren Yager, Assistant Director

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Sheila K.  Ratzenberger, Assistant General Counsel
Herbert I.  Dunn, Senior Attorney

NEW YORK REGIONAL OFFICE

John Tschirhart, Core Group Manager
Susan Hoffman, Senior Evaluator
Allen Gendler, Evaluator
Christina Porche, Evaluator




RELATED GAO PRODUCTS
============================================================ Chapter 1

Public Law 480 Title I:  Economic and Market Development Objectives
Not Met (GAO/T-GGD-94-191, Aug.  3, 1994). 

Strategic Sealift:  Summary of Workshop on Crewing the Ready Reserve
Force (GAO/NSIAD-94-177, June 6, 1994). 

Foreign Assistance:  Inadequate Accountability for U.S.  Donations to
the World Food Program (GAO/NSIAD-94-29, Jan.  28, 1994). 

Former Soviet Union:  Agricultural Reform and Food Situation in Its
Successor States (GAO/GGD-94-17, Nov.  19, 1993). 

U.S.  Food Aid Exports:  The Role of Cargo Preference
(GAO/T-GGD-93-34, June 17, 1993). 

Food Aid:  Management Improvements Are Needed to Achieve Program
Objectives (GAO/NSIAD-93-168, July 23, 1993). 

Foreign Assistance:  Non-Emergency Food Aid Provided Through Private
Voluntary Organizations (GAO/NSIAD-90-179, July 24, 1990). 

Cargo Preference Requirements:  Their Impact on U.S.  Food Aid
Programs and the U.S.  Merchant Marine (GAO/NSIAD-90-174, June 19,
1990). 

Status Report on GAO's Reviews of P.L.  480 Food Aid Programs
(GAO/T-NSIAD-90-23, Mar.  21, 1990). 

P.L.  480 Title I Transportation Issues (GAO/T-NSIAD-90-08, Nov.  7,
1989). 
