Federal Surplus Ships: Government Efforts To Address the Growing Backlog
of Ships Awaiting Disposal (Letter Report, 10/22/98, GAO/NSIAD-99-18).

Pursuant to a congressional request, GAO reviewed the status of federal
ship scrapping programs, focusing on: (1) the factors contributing to
the backlog of about 200 surplus ships waiting to be scrapped; and (2)
federal agencies' efforts to address the backlog.

GAO noted that: (1) key factors contributing to the current backlog of
surplus ships awaiting scrapping are the Navy's downsizing following the
collapse of the former Soviet Union, the unavailability of overseas
scrapping, and a shortage of qualified domestic scrappers; (2) as a
result, the backlog of Navy ships to be scrapped has increased since
1991 from 25 to 127; (3) overseas scrapping has been suspended because
of legal constraints on the export of polychlorinated biphenyls for
disposal; (4) a 1997 agreement to resume overseas scrapping has been
temporarily suspended largely because of concerns about environmental
and worker safety problems in foreign countries and the impact of
foreign scrapping on the domestic industry; (5) progress in reducing the
backlog using domestic scrappers has been limited; (6) one reason has
been domestic contractor performance difficulties; (7) a second reason
has been a shortage of qualified domestic bidders; (8) between the
beginning of 1996 and the end of 1997, the Navy and the Maritime
Administration (MARAD) requested scrapping bids on 19 ships, but only 4
were actually sold--all to the same domestic bidder--because of the
limited number of qualified bidders; (9) since then, MARAD has sold an
additional 11 ships for scrapping; (10) federal agencies have identified
and begun implementing a number of initiatives to address some of the
specific performance issues associated with domestic scrapping; (11)
since a key performance issue was contractor noncompliance with
environmental and worker safety requirements, several of the initiatives
provide for increased screening of contractors prior to award and
increased oversight of the performing contractor after award; (12) other
initiatives are intended to help attract more qualified domestic
bidders; (13) it is too early to assess the impact of these initiatives
because few ships have been scrapped since their implementation; (14)
additional recommendations for addressing both domestic and overseas
scrapping issues were made in April 1998 by an interagency panel; (15)
the panel's recommendations expand on the actions to address contracting
and oversight problems; (16) however, they only generally address key
issues relating to government actions to expand the domestic industry
and the scrapping of federal ships in foreign countries; (17) the
process for deciding whether to accept and ultimately implement the
panel's recommendations is informal; and (18) also, no procedures have
been established for implementing the recommendations that are accepted.

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

 REPORTNUM:  NSIAD-99-18
     TITLE:  Federal Surplus Ships: Government Efforts To Address the 
             Growing Backlog of Ships Awaiting Disposal
      DATE:  10/22/98
   SUBJECT:  Ships
             Surplus federal property
             Foreign military sales policies
             Property disposal
             Environmental policies
             Hazardous substances
             Scrap metals
             Foreign military sales
IDENTIFIER:  Soviet Union
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Governmental
Affairs, U.S.  Senate

October 1998

FEDERAL SURPLUS SHIPS - GOVERNMENT
EFFORTS TO ADDRESS THE GROWING
BACKLOG OF SHIPS AWAITING DISPOSAL

GAO/NSIAD-99-18

Federal Surplus Ships

(709312)


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

  DRMS - Defense Reutilization and Marketing Service
  EPA - Environmental Protection Agency
  MARAD - Maritime Administration
  PCB - polychlorinated biphenyl

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


B-278781

October 22, 1998

The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

Dear Senator Glenn: 

Federal agencies currently have a backlog of about 200 surplus ships
waiting to be scrapped.  The backlog of ships to be scrapped has
grown by about 65 percent since 1994 and little progress has been
made in reducing the backlog.  Many of the ships to be scrapped are
more than 50 years old and millions of dollars are required annually
to maintain them. 

In response to your request, we identified the status of federal ship
scrapping programs.  This report provides information on (1) the
factors contributing to the backlog and (2) federal agencies' efforts
to address the backlog.  As requested, we focused our review on the
Department of the Navy and the Maritime Administration (MARAD)
because they own most of the surplus ships. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Once a U.S.  agency determines that a ship is obsolete and no longer
useful for the purposes intended, that agency must find a way to
properly dispose of it.  Ships that are no longer needed are screened
for other uses, including transfer to another country under proper
legal authority, use by another federal agency, and donation to a
state or private recipient for appropriate public use.\1 Ships may
also be sunk as part of naval training exercises.  Ships not used for
any of these purposes are considered available for scrapping. 

According to a July 1997 MARAD study,\2 ship scrapping is a
labor-intensive industry with extremely high risks with respect to
environmental and worker safety issues.  Ships typically contain
environmentally hazardous materials such as asbestos, polychlorinated
biphenyls (PCB),\3 lead, mercury, and cadmium.  A ship is normally
dismantled from the top down and from one end to the other with
torches that cut away large parts of the ship.  Pieces of the ship
are lifted by crane to the ground where they are cut into the shapes
and sizes required by the foundry or smelter to which the scrap is to
be shipped.  Remediation of hazardous materials takes place prior to,
as well as during, the dismantling process.  If done improperly, ship
scrapping can pollute the land and water surrounding the scrapping
site and jeopardize the health and safety of the people involved in
the scrapping process. 

Ship scrapping is subject to federal, state, and local government
rules and regulations on the protection of the environment and worker
safety.  These rules and regulations implement pertinent laws in
these areas.  In the environmental area, these laws include the Toxic
Substances Control Act, the Resource Conservation and Recovery Act,
the Clean Air Act, and the Federal Water Pollution Control Act.  In
the worker safety area, the primary law is the Occupational Safety
and Health Act.  Various federal and state regulatory agencies work
to enforce these laws.  (See app.  I for more information about these
laws.)

Historically, government-owned surplus ships have been scrapped both
domestically and overseas.\4 As shown in table 1, MARAD has relied
primarily on overseas scrapping, while the Navy has relied primarily
on the domestic industry to scrap its ships.  From 1983 through 1994,
MARAD sold almost all of its ships for overseas scrapping.  Since
1982, the Navy has not directly sold any ships for overseas
scrapping. 



                                Table 1
                
                 Reported Navy and MARAD Ships Scrapped
                                Overseas

                                                          Percent of
                                          Number of     ships scrapped
                                        ships scrapped     overseas
                                        --------------  --------------
Time frame                                Navy   MARAD    Navy   MARAD
--------------------------------------  ------  ------  ------  ------
1970-82                                    533     781      10      38
1983-89                                      3     132       0     100
1990-94                                     10      81       0      99
1995-97                                     23       1       0       0
----------------------------------------------------------------------
Source:  Navy and MARAD ship scrapping program data. 

Federal agencies report that there are about 200 ships awaiting
disposal or scrapping and that they are stored at various locations
throughout the United States.  As shown in table 2, the Navy and
MARAD have the majority of ships to be scrapped, but the Coast Guard
and the National Oceanic and Atmospheric Administration also have
some.  The Navy reports that, as of August 1, 1998, it had 127
surplus ships available to be sold for scrap.  Seventy-two of these
ships are expected to be sold though the Defense Logistics Agency's
Defense Reutilization and Marketing Service (DRMS).  The remaining 55
ships are expected to be transferred to MARAD for sale.  MARAD, which
is the U.S.  government's disposal agent for surplus merchant-type
ships of 1,500 tons or more, reports that it had 63 ships available
for scrapping.  By law, MARAD is required to dispose of all obsolete
ships by September 30, 2001.\5 The combined tonnage of Navy and MARAD
surplus ships amounts to about 1 million tons--about 600,000 tons for
the Navy and 400,000 tons for MARAD. 



                                Table 2
                
                  Reported Backlog of Federal Surplus
                        Ships Awaiting Disposal

                                                             Number of
                                                               surplus
Agency                                                           ships
----------------------------------------------------------  ----------
Navy                                                               127
MARAD                                                               63
Coast Guard                                                         15
National Oceanic and Atmospheric Administration                      1
======================================================================
Total                                                              206
----------------------------------------------------------------------
Source:  Agency ship disposal program managers. 

Navy and MARAD officials have estimated that it will cost them at
least $58 million (in fiscal year 1997 dollars) for storage,
maintenance, and security of surplus ships between fiscal year 1999
and 2003 if they are not scrapped.  Some ships are in such poor
condition that they may need dry-docking for repairs to keep them
afloat until they can be scrapped.  MARAD estimates that its
dry-docking and repair costs could be as high as $800,000 per ship. 


--------------------
\1 Screening for other uses takes place under the Federal Property
and Administrative Services Act of 1949 (40 U.S.C.  471 et seq). 
Vessels over 1,500 gross tons and five specific types of Navy
warships are exempt from the screening requirement. 

\2 Environmental Assessment of the Sale of National Defense Reserve
Fleet Vessels for Scrapping, Maritime Administration, U.S. 
Department of Transportation, July 1997. 

\3 PCBs are a class of organic chemical compounds that are
nonflammable and can conduct heat without conducting electricity.  On
ships, liquid PCBs are found in transformers and large capacitors. 
Solid PCBs are found in a wide range of ship components, including
electric cables, felt gaskets, rubber mounts, adhesives, and paints. 

\4 Ships scrapped overseas are subject to the host country's
environmental and worker safety laws. 

\5 The National Maritime Heritage Act of 1994 directed MARAD to
dispose of all of its surplus ships by September 30, 1999, in a
manner that maximizes the return to the United States.  That date was
changed to September 30, 2001, by section 1026 of the National
Defense Authorization Act of 1998, Public Law 105-85. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Key factors contributing to the current backlog of surplus ships
awaiting scrapping are the Navy's downsizing following the collapse
of the former Soviet Union, the unavailability of overseas scrapping,
and a shortage of qualified domestic scrappers.  As a result, the
backlog of Navy ships to be scrapped, for example, has increased
since 1991 from 25 to 127.  Overseas scrapping has been suspended
because of legal constraints on the export of PCBs for disposal.  A
1997 agreement to resume overseas scrapping has been temporarily
suspended largely because of concerns about environmental and worker
safety problems in foreign countries and the impact of foreign
scrapping on the domestic industry.  Lastly, progress in reducing the
backlog using domestic scrappers has been limited.  One reason has
been domestic contractor performance difficulties.  For example,
between 1991 and 1996, the Navy repossessed 20 of 62 ships it had
sold to domestic firms for scrapping due to environmental pollution
and worker safety compliance problems and other performance issues. 
A second reason has been a shortage of qualified domestic bidders. 
Between the beginning of 1996 and the end of 1997, the Navy and MARAD
requested scrapping bids on 19 ships, but only 4 were actually
sold--all to the same domestic bidder--because of the limited number
of qualified bidders.  Since then, MARAD has sold an additional 11
ships for scrapping. 

Federal agencies have identified and begun implementing a number of
initiatives to address some of the specific performance issues
associated with domestic scrapping.  Since a key performance issue
was contractor noncompliance with environmental and worker safety
requirements, several of the initiatives provide for increased
screening of contractors prior to award and increased oversight of
the performing contractor after award.  Other initiatives are
intended to help attract more qualified domestic bidders.  It is too
early to assess the impact of these initiatives because few ships
have been scrapped since their implementation. 

Additional recommendations for addressing both domestic and overseas
scrapping issues were made in April 1998 by an interagency panel. 
The panel's recommendations expand on the actions to address
contracting and oversight problems.  However, they only generally
address key issues relating to government actions to expand the
domestic industry and the scrapping of federal ships in foreign
countries.  Further, the process for deciding whether to accept and
ultimately implement the panel's recommendations is informal.  For
example, the agencies have not established specific time frames for
completing their review of the recommendations.  Also, no procedures
have been established for implementing the recommendations that are
accepted. 


   FACTORS CONTRIBUTING TO THE
   BACKLOG OF SHIPS
------------------------------------------------------------ Letter :3

A number of factors have caused the current backlog of federal
surplus ships awaiting scrapping.  They include (1) reductions in the
Navy's force structure following the collapse of the former Soviet
Union and the Warsaw Pact; (2) unavailability of overseas scrapping;
(3) difficulties experienced by some domestic scrappers in complying
with environmental, worker safety, and other contract performance
provisions; and (4) a shortage of qualified domestic bidders. 


      NAVY FORCE STRUCTURE
      REDUCTIONS
---------------------------------------------------------- Letter :3.1

Navy force structure reductions following the collapse of the former
Soviet Union and the Warsaw Pact have resulted in an increased number
of ships to be scrapped.  Since 1990, the Navy has reduced its active
fleet from 570 ships to 333 ships.  The Navy's inactive fleet has
increased by 82 percent since 1990 and the number of ships to be
scrapped increased from about 25 in 1991 to 127 as of August 1, 1998. 


      UNAVAILABILITY OF OVERSEAS
      SCRAPPING
---------------------------------------------------------- Letter :3.2

Overseas scrapping by MARAD was suspended in 1994 in response to an
April 1993 Environmental Protection Agency (EPA) letter advising the
agency that the export for disposal of PCB materials with
concentrations of 50 parts per million or greater was prohibited.  In
accordance with the Toxic Substances Control Act, EPA regulates all
aspects of the manufacture, processing, distribution in commerce,
use, and disposal of PCBs.  In 1980, EPA banned the export of PCBs
for disposal.  In 1989, the Navy became aware of the presence of PCBs
in solid materials on board some of its older ships and sought EPA's
advice on how to properly handle and dispose of these materials. 
Subsequently, EPA confirmed that surplus ships could not be exported
for scrapping if they contained solid materials with concentrations
of PCBs at 50 parts per million or greater. 

In 1997, the Navy and MARAD, each negotiated an agreement with EPA\6
to allow for the export of ships for scrapping provided (1) all
liquid PCBs are removed prior to export, (2) items containing solid
PCBs that are readily removable and do not affect the structural
integrity of the ship are also removed, and (3) countries to which
the ships may be exported for scrapping are notified so that they
have the opportunity to refuse to accept the ships if they so
choose.\7 The Navy and MARAD sought these agreements principally
because they recognized a need to reduce their backlogs of surplus
ships and the limitations of domestic scrapping efforts. 

Despite the agreement with EPA, Navy officials decided in December
1997 to temporarily suspend any export of ships for scrapping due to
(1) continuing concerns regarding environmental pollution and worker
safety in foreign ship scrapping countries and (2) potential impacts
on the domestic ship scrapping industry.  In January 1998, MARAD also
suspended the export of ships.  As of August 1998, the voluntary
suspension on exports was still in effect. 

Specific environmental concerns revolve around the export of PCBs and
other hazardous materials that could be dumped along the shorelines
of developing nations and about the health and safety of foreign
workers.  For example, domestic industry representatives have stated
that foreign ship scrapping operations would not be in compliance
with the strict U.S.  safety and environmental regulations.  U.S. 
government officials have also stated that many of the major overseas
ship scrapping countries have less stringent laws and regulations
regarding environmental and worker safety issues than exist in the
United States. 

Domestic industry concerns are related to the history of foreign
scrappers bidding significantly higher prices to scrap ships
overseas.  This is due, in part, to a greater demand and higher
selling price for scrap metal in foreign countries and lower costs of
overseas operations because of the less restrictive environmental and
worker safety regulations and lower labor rates. 


--------------------
\6 The agreements represent an exercise of EPA's enforcement
discretion and were made in anticipation of upcoming comprehensive
rulemaking on PCBs. 

\7 On June 29, 1998, EPA issued a comprehensive revision of its rules
on PCBs.  However, the revision expressly deferred matters pertaining
to the export of PCBs for a future rulemaking. 


      DOMESTIC INDUSTRY
      PERFORMANCE DIFFICULTIES
---------------------------------------------------------- Letter :3.3

Between 1991 and 1996, the Navy repossessed\8 20 of the 62 ships it
had sold to domestic firms for scrapping due to environmental
pollution and safety compliance problems and other contractor
performance issues.  For example, the former aircraft carrier, U.S.S. 
Oriskany, and five other ships located at a contractor's facility in
the former Mare Island Naval Shipyard at Vallejo, California, were
repossessed by the Navy due to the contractor's not obtaining the
necessary environmental permits and the dissolution of the
contractor's partnership.  Some of these repossessions were costly. 
For example, according to a Navy official, it had to spend about $2
million to tow 14 ships back to federal storage facilities in
Philadelphia from North Carolina and Rhode Island when a ship
scrapping contract was terminated due to contractor noncompliance
with environmental and safety regulations.  Also, the Navy and DRMS
incurred additional costs for maintaining, storing, and reselling
these ships. 


--------------------
\8 Repossessions can occur because the Navy retains legal title to
its vessels while they are being scrapped. 


      SHORTAGE OF QUALIFIED
      BIDDERS
---------------------------------------------------------- Letter :3.4

The domestic ship scrapping industry has historically been small. 
During the 1970s, when hundreds of ships were scrapped domestically,
the industry was comprised of about 30 firms.  However, given the
small number of ships available for domestic scrapping since then,
many of the firms exited the industry.  Currently, there are four
private ship scrappers in the United States actively scrapping
federal surplus ships.  In addition, for national security reasons,
one naval shipyard is scrapping nuclear submarines.  The typical U.S. 
private sector ship scrapping site is located in an urban industrial
area coincident with other industrial and maritime related
facilities.  The facilities area is generally small, fewer than 10
acres, and most of the firms, until recently, worked on only one ship
at a time.  According to a July 1997 MARAD study, ship scrapping
companies tend to be thinly capitalized.  The study concluded that
the industry is a risky, highly speculative business. 

Following the Navy's experience with high rates of ship repossessions
between 1991 and 1996, both the Navy and MARAD considered fewer firms
to be technically and financially acceptable.\9 For example, in
response to MARAD's 1996 solicitation for scrapping eight ships, the
agency received only five positive bids, and only one of these was
considered technically acceptable by the agency.\10 MARAD awarded the
bidder only two ships, in part, because of the bidder's limited
scrapping capacity.  Similarly, Navy/DRMS solicitations in 1996 and
1997, for a total of 11 ships, resulted in only two technically
acceptable proposals for each solicitation and the award of only two
ships.  Both the MARAD and Navy awards were made to the same firm.\11

Recent testimony to Congress and statements made by domestic industry
officials raise doubts about the willingness of new firms to enter
the industry and current firms to substantially expand their
operations under current conditions.  Some domestic industry
representatives stated that the profits from ship scrapping have not
been commensurate with the financial risks and environmental
liabilities associated with it, and one representative stated that
his firm was no longer willing to assume such risks.  However, other
industry representatives believed that they could make a profit
scrapping ships, as long as they could get enough ships to justify
large scale and continuous production.  As discussed later, the
agencies have (1) taken action to sell ships in lots and (2)
recognized that steps are needed to minimize environmental and worker
safety risks associated with ship scrapping to make ship scrapping
more financially attractive. 


--------------------
\9 To be financially acceptable, bids have to be positive--have a
purchase price greater than $0. 

\10 There was also a "negative bid"-- a bid that would have required
the government to pay for the scrapping. 

\11 In December 1997, MARAD advertised 13 additional ships for
scrapping.  In May 1998, the agency awarded 11 ships to be scrapped,
8 of which went to the same firm that received the earlier MARAD and
Navy awards.  Three other ships were awarded to another firm.  MARAD
did not receive any domestic bids for two ships located on the west
coast. 


   AGENCIES' EFFORTS TO ADDRESS
   THE BACKLOG
------------------------------------------------------------ Letter :4

In 1996, the Navy and MARAD identified and began implementing a
number of initiatives to address domestic ship scrapping performance
problems.  Also, in 1998, an interagency panel endorsed the 1996
initiatives but recommended that a number of steps be taken to
further improve the ship scrapping process, both domestically and
internationally.  It is too early to assess the impact of the 1996
initiatives, and the agencies are still reviewing the extent to which
they will implement the panel's recommendations.  However, no
specific time frames for completing the review have been established. 
Also, no procedures have been established for implementing the
recommendations that are accepted. 


      1996 ACTIONS TAKEN TO
      ADDRESS DOMESTIC SHIP
      SCRAPPING PRACTICES
---------------------------------------------------------- Letter :4.1

In 1996, the Navy and DRMS realized that the then-existing ship
scrapping practices had contributed to the domestic contractor
performance problems previously discussed.  For example, prior to
January 1996, DRMS (1) accepted all technical proposals with the
invitation for bid, (2) relied on the high bid without seeking an
independent review of the company's business or financial background,
and (3) performed only minimal contract oversight and on-site
progress reviews.  In an effort to correct these problems, the Navy
and DRMS began taking several actions to improve their scrapping
practices, as well as to make other improvements in the ship
scrapping program.  While sufficient experience with the actions
taken is not yet available because only two Navy ships have been
scrapped since 1996, the actions appear to be reasonable approaches
to help address past contractor performance problems.  Approaches
adopted since 1996 to improve the ship scrapping practices include
the following: 

  -- Developing a two-step bid process requiring contractors to
     submit a technical proposal for approval before they can be
     considered viable candidates to place a financial bid for the
     surplus ships.  The technical proposals are to consist of an
     environmental compliance plan, an operations plan, a business
     plan, and a safety and health plan.  A technical evaluation team
     is to evaluate each plan, and those contractors found to have
     acceptable technical proposals will be asked to submit a
     financial bid. 

  -- Implementing quarterly progress reviews at each scrapping site
     to assess the contractor's progress and compliance with contract
     provisions, including environmental and safety requirements. 

  -- Awarding contracts designed to (1) provide daily on-site
     surveillance of ship scrappers, (2) conduct environmental/safety
     site assessments, and (3) evaluate ship scrapping operations. 

  -- Developing a contractor rating system for use in deciding on how
     closely to provide contract surveillance. 

Actions taken to improve the general management of the ship scrapping
program and to address contractor concerns about the profitability of
ship scrapping included

  -- advertising and selling ships by lot and allowing contractors to
     remove the ships from government storage as they are ready to be
     scrapped,

  -- holding periodic industry workshops to inform contractors of
     what is expected of them in the scrapping of federal surplus
     ships and obtain feedback from the contractors on their concerns
     and desires,

  -- evaluating the potential for removing more of the hazardous
     materials before the ships are advertised for sale, and

  -- notifying state and local regulators where the ship scrapping
     will be performed after contracts are awarded. 

The Navy and DRMS have also adopted, and are considering, other
options for disposing of ships.  For example, they obtained
legislative authority to negotiate contracts for ship scrapping to
obtain the most advantageous contract for the government rather than
awarding the contract based solely on the highest bid. 

MARAD also developed and adopted a number of new approaches similar
to those of the Navy/DRMS.  For example, MARAD has begun using
contracting procedures that include the requirement for a technical
proposal from bidders on how they would scrap ships.  MARAD, like
DRMS, is now considering only those bidders with acceptable technical
proposals as suitable for contract award. 


      1998 INTERAGENCY PANEL'S
      REPORT
---------------------------------------------------------- Letter :4.2

The Department of Defense, in December 1997, took the lead in
establishing an Interagency Panel on Ship Scrapping.\12 This panel
was tasked to review Navy and MARAD programs to scrap ships and to
recommend ways to ensure that federal ships are scrapped in the most
effective and efficient manner while protecting the environment and
worker safety.  While the 1996 initiatives and 1998 interagency panel
recommendations, if implemented, offer the potential to address
previously experienced problems, some domestic and foreign scrapping
issues remain unresolved.  They relate to whether the government
should promote the expansion of the domestic industry and whether
ships should be scrapped overseas.  The actions most often discussed
for addressing these issues have much different potential results. 
For example, federal agencies could generate higher revenues by
scrapping ships overseas, but such scrapping may involve greater
environmental and worker safety risks as well as adversely affect the
domestic scrapping industry.  Similarly, relying solely on the
domestic industry for ship scrapping would avoid overseas scrapping
concerns but would require a more prolonged approach to reducing the
backlog or greater financial incentives to achieve domestic industry
expansion. 


--------------------
\12 The panel was chaired by the Office of the Deputy Under Secretary
of Defense for Environmental Security, and its members included
representatives from the Departments of State, Navy, Justice, Labor,
and Transportation; Defense Logistics Agency; and EPA.  In addition,
the panel consulted with a number of other agencies, including the
Department of Commerce, the National Oceanic and Atmospheric
Administration, and the U.S.  Trade Representative.  The panel was
disbanded after its April 20, 1998, report was issued. 


      PANEL RECOMMENDATIONS
---------------------------------------------------------- Letter :4.3

The panel made numerous recommendations to the various agencies
participating in the panel on issues related to both domestic and
overseas ship scrapping.  While we did not do a detailed assessment
of the panel's recommendations, they do appear to address some of the
previously experienced problems.  However, the panel's report does
not resolve issues on the government's role in promoting domestic
industry expansion and the use of foreign ship scrapping.  The
agencies to whom the recommendations are made are responsible for
deciding what actions, if any, to take.  As of August 6, 1998, the
agencies were still reviewing the extent to which they will implement
the panel's recommendations.  Further, the process for deciding
whether to accept and ultimately implement the recommendations is
informal.  For example, the agencies have not established specific
time frames for completing their review of the recommendations. 
Also, once the recommendation review process is complete, lead
responsibilities, tracking systems, and milestones for implementing
the individual recommendations will be needed. 

The panel's April 20, 1998, report concluded that the Navy and MARAD
had recognized the problems identified with past contracting and
monitoring practices and taken steps to address many of them.  The
report also stated that more could be done to (1) improve the ship
scrapping contracting process, (2) encourage the development of a
viable domestic industry to handle a significant portion of the
backlog, and (3) make the use of foreign scrapping to augment the
domestic industry a more acceptable option.  More specifically, the
panel recommended that the Navy/DRMS and MARAD establish consistent
ship scrapping contracting procedures.  For example, the Navy/DRMS
and MARAD should develop standardized performance bonds to make them
equally attractive to bidders. 

To encourage development of the domestic industry, the panel
concluded that the industry needed to improve its knowledge and
understanding of the ship scrapping contracting process.  To
accomplish this, the panel recommended that EPA and the Occupational
Safety and Health Administration, in coordination with the Navy/DRMS
and MARAD, continue to educate the industry through seminars and
workshops and should develop an environmental and worker safety
compliance manual for industry use.  The panel asserted that the
industry needed additional knowledge on the techniques for scrapping
large ships and the range, types, and locations of hazardous
materials to ensure that ships are scrapped in an environmental,
safe, and economical manner.  To accomplish this, the panel endorsed
the Navy's plan to establish a pilot project that would quantify the
scope and major costs associated with ship scrapping. 

The panel indicated that the U.S.  government could do more to
promote better environmental and worker safety controls in foreign
ship scrapping countries.  To that end, the panel recommended, among
other things, that (1) the Navy, MARAD, and EPA expand the
notification to foreign countries of the materials commonly found on
specific types of ships so that the countries could object to the
import of a ship with unacceptable environmental risks and (2) the
Navy, MARAD, EPA, the Departments of State and Labor, and the Agency
for International Development evaluate how meaningful technical
assistance could be provided to interested importing countries,
including whether current statutory authorities and funding are
adequate for this purpose.  Another recommendation was for DRMS and
MARAD to examine the use of enforceable contract terms that promote
environmental protection and worker safety measures overseas,
including requirements that foreign bidders submit technical plans to
demonstrate how they intend to comply with applicable local rules and
regulations, obtain information from the State Department on the
qualifications and past performance of foreign scrappers, and require
a performance bond as an incentive for foreign scrappers to comply
with contractual requirements.  The panel recognized, however, that
environmental and worker safety issues would have to be balanced
against the economic realities of the countries doing the scrapping. 

The panel also recommended to the Under Secretary of Defense for
Acquisition and Technology that it or a similar panel be reconvened 1
year after the report's issuance to evaluate the results of
implementing the recommendations and to consider whether any
additional modifications should be made. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

The interagency panel's specific recommendations generally represent
steps directed toward correcting previously experienced problems. 
The effectiveness of these initiatives, if adopted, will not be known
until some implementation experience has been gained.  Two key issues
relating to whether the government should involve itself in promoting
the expansion of a domestic industry and whether to utilize the
foreign ship scrapping industry are only generally addressed. 
Further, the process for deciding whether to accept and ultimately
implement the panel's recommendations is informal.  For example, the
agencies have not established specific time frames for completing
their review of the recommendations.  Also, no procedures have been
established for implementing the recommendations that are accepted. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretaries of Defense and Transportation take
the lead and work with other agencies involved in ship scrapping such
as the EPA and the Departments of State and Commerce to establish a
specific time frame for completing the review of the interagency
panel's recommendations.  Further, we recommend that, once the review
is complete, each agency establish milestones for implementing those
recommendations that are adopted and that the Secretaries of Defense
and Transportation designate lead responsibilities within their
respective organizations for addressing individual panel
recommendations. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

The Department of Defense provided comments on a draft of this
report, which are presented in appendix III.  The Department
concurred with both of our recommendations.  It also provided some
technical comments, which we have incorporated as appropriate.  We
also requested comments from the Department of Transportation and
EPA.  Neither agency had provided comments prior to report issuance. 

We conducted our review between November 1997 and September 1998 in
accordance with generally accepted government auditing standards. 
The scope and methodology for our review are discussed in appendix
II. 


---------------------------------------------------------- Letter :7.1

We are sending copies of this report to the Chairman of the Senate
Committee on Governmental Affairs, the Chairmen and Ranking Minority
Members of the House and Senate Committees on Appropriations, the
Senate Committee on Armed Services, and the House Committee on
National Security.  We are also sending copies of this report to the
Secretaries of Defense and the Navy; the Secretaries of Commerce,
Transportation, Labor, and State; the Administrators of MARAD, EPA,
the National Oceanic and Atmospheric Administration, and the
Occupational Safety and Health Administration; and the Directors of
the Defense Logistics Agency and the Office of Management and Budget. 
We will make copies available to others upon request. 

If you have any questions about this report, you may contact me on
(202) 512-8412.  Major contributors to this report are listed in
appendix IV. 

Sincerely yours,

David R.  Warren, Director
Defense Management Issues


FEDERAL ENVIRONMENTAL AND SAFETY
LEGISLATION
=========================================================== Appendix I


   TOXIC SUBSTANCES CONTROL ACT
--------------------------------------------------------- Appendix I:1

The Toxic Substances Control Act provides the Environmental
Protection Agency (EPA) with the authority to regulate substances
that pose a risk to human health or the environment.  Asbestos and
polychlorinated biphenyls (PCB) are among the more common substances
regulated.  Ship scrapping contractors are required to comply with
the applicable regulations promulgated by EPA under this legislation,
including regulations for the proper removal, storage,
transportation, and the disposal of materials containing asbestos and
PCBs at concentrations of 50 parts per million or greater. 


   RESOURCE CONSERVATION AND
   RECOVERY ACT
--------------------------------------------------------- Appendix I:2

The Resource Conservation and Recovery Act of 1976, as amended, is a
comprehensive authority for all aspects of managing hazardous wastes. 
The act and the Hazardous and Solid Waste Amendments of 1984 protect
human health and the environment from the potential hazards of waste
disposal, promote energy and natural resource conservation, reduce
the amount and toxicity of waste generated, and ensure that wastes
are managed in an environmentally sound manner.  It places "cradle to
grave" responsibility for hazardous waste on those personnel or units
handling the waste.  Waste oil, paints, and solvents are among the
types of substances regulated under the act.  The act is generally
administered by the states under delegation of authority from EPA. 


   FEDERAL CLEAN AIR ACT
--------------------------------------------------------- Appendix I:3

The Federal Clean Air Act forms the basis for the national air
pollution control effort.  Basic elements of the act include
establishing national ambient air quality standards for air
pollutants and regulating hazardous air pollutants such as lead.  EPA
and the states administer the act. 


   FEDERAL WATER POLLUTION CONTROL
   ACT
--------------------------------------------------------- Appendix I:4

The Federal Water Pollution Control Act of 1972 bans facilities from
discharging pollutants such as metals and acids into lakes, rivers,
streams, and coastal waters.  Regulation is accomplished by means of
discharge permits issued by the states and EPA. 


   OCCUPATIONAL SAFETY AND HEALTH
   ACT
--------------------------------------------------------- Appendix I:5

The Occupational Safety and Health Act of 1970 was enacted to ensure
safe and healthful working conditions for workers.  Federal standards
developed under the act cover shipyard work and the ship scrapping
industry.  The Occupational Safety and Health Administration's
regions, along with state and local regulatory agencies, are
responsible for enforcing these worker safety standards. 


SCOPE AND METHODOLOGY
========================================================== Appendix II

To identify the factors contributing to the backlog of federal ships
available for scrapping, we performed relevant work at the principal
agencies identified to possess and dispose of federal surplus ships
for scrapping--the Departments of Defense, Navy, and Army; the
Defense Logistics Agency and its Defense Reutilization and Marketing
Service (DRMS); the Department of Transportation, including the
Maritime Administration (MARAD) and the Coast Guard; the Department
of Commerce's National Oceanic and Atmospheric Administration; and
the General Services Administration.  This work included discussing
and obtaining information on the size and scope of the domestic ship
scrapping industry, the historical data and current backlog of ships
to be scrapped and factors contributing to the backlog, studies
analyzing the domestic industry and its capabilities, visits to
selected surplus ship storage locations, and identification of recent
performance problems.  We also made visits and inquiries to selected
current and former ship scrapping contractors to obtain their
comments and views on issues such as the state of the domestic ship
scrapping industry and its capacity to handle the federal backlog of
surplus ships. 

To review the federal agencies' efforts to address the backlog, we
examined the federal ship marketing and sales functions at each
agency selling federal surplus ships and discussed with program
personnel, the various options for disposing of the ships.  At each
agency, we identified their legislative authorities to dispose of and
sell ships for scrapping; reviewed their policies, procedures, and
practices for selling surplus ships; evaluated the most recent
contracts used in the sale of these ships; and identified the actions
taken to address ship scrapping problems and improve the agencies'
respective programs.  We also visited and requested information from
selected ship scrapping contractors concerning the agencies' efforts
to address the past performance problems.  Further, we attended
meetings of the federal joint ship disposal conference and other
workshops held by Navy and DRMS personnel.  In addition, we visited
the regulatory agencies, EPA and the Occupational Safety and Health
Administration, and met with agency program and legal representatives
to discuss and obtain information on the standards used to regulate
environmental and worker safety matters and the enforcement of their
respective regulations within the ship scrapping industry. 
Furthermore, we reviewed the Department of Defense led interagency
panel's April 20, 1998, report on ship scrapping, focusing primarily
on its conclusions and recommendations. 

We also reviewed the agreements between EPA and the Navy and MARAD
for the export of ships for scrapping and various studies that
include information on the overseas ship scrapping industry.  We also
held discussions with the agencies' program managers responsible for
ship sales to identify the scope of the foreign market, the potential
for reducing the backlog of surplus ships and the associated
maintenance and storage costs, and the advantages and disadvantages
of overseas scrapping.  Furthermore, we asked for feedback from
members of the domestic industry on the potential impact of the
foreign scrapping on the domestic industry.  We visited the State
Department to discuss and obtain information on its involvement in
the export of ships for overseas scrapping.  At EPA, we also
discussed and obtained information on the agency's proposed
rulemaking on PCBs and the agreements the agency had made with other
agencies for the export of ships for scrapping. 




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


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

James F.  Wiggins, Associate Director
George A.  Jahnigen, Assistant Director
Nancy T.  Lively, Senior Evaluator

NORFOLK FIELD OFFICE

Joseph F.  Murray, Core Group Leader
J.  Larry Peacock, Evaluator-in-Charge
Willie J.  Cheely, Jr., Evaluator

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

Margaret L.  Armen, Senior Attorney

*** End of document. ***