Title XI was created to help promote growth and modernization of the U.S.  merchant marine and U.S. shipyards by enabling owners of eligible vessels  and shipyards to obtain long-term financing on terms and conditions that  might not otherwise be available. MARAD Has Not Fully Complied with Some Key Title XI Program Requirements

MARAD has not fully complied with some key Title XI program  requirements. We found that MARAD generally complied with  requirements to assess an applicant’s economic soundness before issuing  loan guarantees. While realizing that  MARAD does not operate for profit, it could benefit from the internal  control practices employed by the private sector to more effectively utilize  its limited resources and to enhance its ability to accomplish its mission. Also, MARAD may not have the resources to properly  implement credit reform. If the overall pattern of recent default and recovery  experiences were to continue, MARAD would have significantly  underestimated the costs of the program. Consequently, the Title XI program could be vulnerable to  waste, fraud, abuse, and mismanagement. Specifically, to better comply with Title XI loan guarantee program  requirements and manage financial risk, MARAD should    establish a clear separation of duties among the loan application, project  monitoring, and default management functions;   establish a systematic process that ensures independent judgments of the  technical, economic, and financial soundness of projects during loan  guarantee approval;   establish a systematic process that ensures the findings of each  contributing office are considered and resolved prior to approval of loan  guarantee applications involving waivers and exceptions made to program  requirements;   systematically monitor and document the financial condition of borrowers  and link the level of monitoring to the level of project risk;   base the borrower’s equity down payment requirement on a reasonable  estimate of the total cost of the project, including total guarantee fees  expected to be incurred over the life of the project;   make apparent the amount of equity funds a shipowner or shipyard owner    establish a system of controls, including automated controls, to ensure  that disbursements of loan funds are not made prior to a shipowner or  shipyard owner meeting the equity fund requirement;    create a transparent, independent, and risk-based process for verifying and  documenting the progress of projects under construction prior to  disbursing guaranteed loan funds; review risk ratings of loan guarantee projects at least annually; and   establish minimum requirements for the management and disposition of  defaulted assets, including a requirement for an independent evaluation of  asset value. In addition, MARAD did  not appropriately incorporate these higher default rates and lower  recovery rates into its cash flow models. To determine how MARAD’s practices of managing financial risk compare  to those of selected private-sector maritime lenders, we interviewed two  leading worldwide maritime lenders, and one leading maritime lender in  the Gulf Coast region. To assess MARAD’s implementation of credit reform, we analyzed  MARAD’s subsidy cost estimation and reestimation processes and  examined how the assumptions MARAD uses to calculate subsidy cost  estimates compare to MARAD’s actual program experience.
Why GAO Did This Study

Title XI of the Merchant Marine Act of 1936, as amended, is intended to help promote growth and modernization of the U.S. merchant marine and U.S. shipyards by enabling owners of eligible vessels and shipyards to obtain financing at attractive terms. The program has committed to guarantee more than $5.6 billion in ship construction and shipyard modernization costs since 1993, but it has experienced several large-scale defaults over the past few years. Because of concerns about the scale of recent defaults, GAO was asked to (1) determine whether MARAD complied with key program requirements, (2) describe how MARAD's practices for managing financial risk compare to those of selected private-sector maritime lenders, and (3) assess MARAD's implementation of credit reform.

What GAO Found

The Maritime Administration (MARAD) has not fully complied with some key Title XI program requirements. While MARAD generally complied with requirements to assess an applicant's economic soundness before issuing loan guarantees, MARAD did not ensure that shipowners and shipyard owners provided required financial statements, and it disbursed funds without sufficient documentation of project progress. Overall, MARAD did not employ procedures that would help it adequately manage the financial risk of the program. MARAD could benefit from following the practices of selected private sector maritime lenders. These lenders separate key lending functions, offer less flexibility on key lending standards, use a more systematic approach to loan monitoring, and rely on experts to estimate the value of defaulted assets. With regard to credit reform implementation, MARAD uses a simplistic cash flow model to calculate cost estimates, which have not reflected recent experience. If this pattern of recent experience were to continue, MARAD would have significantly underestimated the cost of the program. MARAD does not operate the program in a businesslike fashion. Consequently, MARAD cannot maximize the use of its limited resources to achieve its mission, and the program is vulnerable to fraud, waste, abuse, and mismanagement. Also, because MARAD's subsidy estimates are questionable, Congress cannot know the true costs of the program.