Maritime Administration:

Weaknesses Identified in Management of the Title XI Loan Guarantee Program

GAO-03-657: Published: Jun 30, 2003. Publicly Released: Jun 30, 2003.

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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.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: Further Congress may wish to consider legislation that requires MARAD to consider, in its risk category system, the risk associated with approving projects from a single borrower that would represent a large percentage of MARAD's portforlio.

    Status: Closed - Implemented

    Comments: Senate Report 108-841 accompanying S. 1262, the Maritime Administration Authorization Act of 2003, cited our report and our findings that that MARAD had failed to provide effective oversight in receiving and approving loan guarantees and had failed to closely monitor the financial condition of borrowers during the term of a loan. S. 1262, as noted in the Senate Report 108-841, included a provision to address the issue of borrower risk: Sec. 109--Loan Guarantees Under Title XI. These provisions were designed to reform how MARAD manages the Title XI Maritime Loan Guarantee Program through increased oversight diligence and a variety of administrative and financial mechanisms.

    Matter: Congress may wish to consider discounting future appropriations for new loan guarantees under the Title XI program until adequate internal controls have been instituted to manage risks associated with the program and MARAD has updated its default and recovery assumptions to more accurately reflect the actual costs associated with the program. Congress may also wish to consider rescinding the unobligated balances in MARAD's program account.

    Status: Closed - Implemented

    Comments: Senate Report 108-841 accompanying S. 1262, the Maritime Administration Authorization Act of 2003, cited our report and our findings that that MARAD had failed to provide effective oversight in receiving and approving loan guarantees, had failed to closely monitor the financial condition of borrowers during the term of a loan; and has failed to adequately monitor the condition of projects subject to guarantees. Also, the bill cited that MARAD had been flagrant in its use of authority in granting waivers. S. 1262, as noted in the Senate Report 108-841, included a variety of provisions to address these issues: Sec. 105--Waivers of Program Requirements Under Title XI; Sec. 106--Project Monitoring Under Title XI; and Sec. 107--Defaults Under Title XI. These provisions were designed to reform how MARAD manages the Title XI Maritime Loan Guarantee Program through increased oversight diligence and a variety of administrative and financial mechanisms.

    Matter: Congress may wish to consider clarifying borrower equity contribution requirements. Specifically, Congress may consider legislation requiring the entire equity down payment, based on the total cost of the project including total guarantee fees currently expected to be paid over the life of the project, be paid by the borrower before the proceeds of the guaranteed obligation are made available.

    Status: Closed - Implemented

    Comments: Senate Report 108-841 accompanying S. 1262, the Maritime Administration Authorization Act of 2003, cited our report and our findings that that MARAD had failed to provide effective oversight in receiving and approving loan guarantees; had failed to closely monitor the financial condition of borrowers during the term of a loan; and has failed to adequately monitor the condition of projects subject to guarantees. S. 1262, as noted in the Senate Report 108-841, included a provision to address the issue of borrower equity contribution requirements: Sec. 104--Equity Payments By Obligor For Disbursement Prior TO Termination Of Escrow Agreeemnts Under Title XI. These provisions were designed to reform how MARAD manages the Title XI Maritime Loan Guarantee Program through increased oversight diligence and a variety of administrative and financial mechanisms.

    Recommendations for Executive Action

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guartantee program. Specifically, to better comply with Title XI loan guarantee program requirments and manage financial risk, MARAD should make apparent the amount of equity funds a shipowner or shipyard owner should provide.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: MARAD said that all future MARAD approvals will specify the dollar amount of the required equity.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guartantee program. Specifically, to better comply with Title XI loan guarantee program requirments and manage financial risk, MARAD should make apparent the amount of equity funds a shipowner or shipyard owner should provide.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD said that all future MARAD approvals will specify the dollar amount of the required equity.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and management financial risk, MARAD should 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.

    Agency Affected: Congress

    Status: Closed - Not Implemented

    Comments: MARAD told us that its current practice is consistent with this recommendation although in certain rare instances MARAD permitted another approach that was considered reasonable. MARAD will continue to base equity down payment requirements on its best estimate of the project cost and will always include estimated total guarantee fees.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and management financial risk, MARAD should 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.

    Agency Affected: Department of Transportation

    Status: Closed - Not Implemented

    Comments: MARAD told us that its current practice is consistent with this recommendation although in certain rare instances MARAD permitted another approach that was considered reasonable. MARAD will continue to base equity down payment requirements on its best estimate of the project cost and will always include estimated total guarantee fees.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should systematically monitor and documentn the financial condition of borrowers and link the level of monitoring to the level of project risk.

    Agency Affected: Congress

    Status: Closed - Implemented

    Comments: MARAD developed a systematic procedure for monitoring and documenting a company's financial condition. If a borrower's financial condition deteriorates and the risk of lossto the Government increases, MARAD will increase the level of project monitoring.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should systematically monitor and documentn the financial condition of borrowers and link the level of monitoring to the level of project risk.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: MARAD developed a systematic procedure for monitoring and documenting a company's financial condition. If a borrower's financial condition deteriorates and the risk of lossto the Government increases, MARAD will increase the level of project monitoring.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improkve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should 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.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD informed us that it has identified the means to ensure that each project will receive independent review throughout its duration. New project applications must pass through an extensive review and concurrence process that includes multiple disciplines and management officials before a project is approved. MARAD initiated a process for detailed supplemental financial review of loan guarantees that are in-force. Both semi-annual and annual financial reports must be reviewed and approved not only by the primary analyst of the project, but also by a second analyst. Default management functions utilize a team approach combining the project and company expertise of the primary analyst, MARAD in-house technical expertise and MARAD attorneys.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improkve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should 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.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD informed us that it has identified the means to ensure that each project will receive independent review throughout its duration. New project applications must pass through an extensive review and concurrence process that includes multiple disciplines and management officials before a project is approved. MARAD initiated a process for detailed supplemental financial review of loan guarantees that are in-force. Both semi-annual and annual financial reports must be reviewed and approved not only by the primary analyst of the project, but also by a second analyst. Default management functions utilize a team approach combining the project and company expertise of the primary analyst, MARAD in-house technical expertise and MARAD attorneys.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration should take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should establish a systematic process that ensures independent judgements of the technical, economic, and financial soundness of projects during loan guarantee approval.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD informed us that it has identified the means to ensure that each project will receive independent review throughout its duration. New project applications must pass through an extensive review and concurrence process that includes multiple disciplines and management officials before a project is approved. MARAD initiated a process for detailed supplemental financial review of loan guarantees that are in-force. Both semi-annual and annual financial reports must be reviewed and approved not only by the primary analyst of the project, but also by a second analyst. Default management functions utilize a team approach combining the project and company expertise of the primary analyst, MARAD in-house technical expertise and MARAD attorneys.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration should take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should establish a systematic process that ensures independent judgements of the technical, economic, and financial soundness of projects during loan guarantee approval.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD informed us that it has identified the means to ensure that each project will receive independent review throughout its duration. New project applications must pass through an extensive review and concurrence process that includes multiple disciplines and management officials before a project is approved. MARAD initiated a process for detailed supplemental financial review of loan guarantees that are in-force. Both semi-annual and annual financial reports must be reviewed and approved not only by the primary analyst of the project, but also by a second analyst. Default management functions utilize a team approach combining the project and company expertise of the primary analyst, MARAD in-house technical expertise and MARAD attorneys.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. 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.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: Jean Mckeever, MARAD Associate Administrator, informed us that MARAD organizational framework was being changed to address the separation of duties among loan application, project monitoring, and default management functions.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. 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.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: Jean Mckeever, MARAD Associate Administrator, informed us that MARAD organizational framework was being changed to address the separation of duties among loan application, project monitoring, and default management functions.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should 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.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD told us that its future disbursement records will indicate the required equity amount and disbursement will not be made until the obligor has paid this required amount.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should 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.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD's future disbursement records will indicate the required equity amount and disbursement will not be made until the obligor has paid this required amount.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should create a transparent, independent, and risk-based process for verifying and documenting the progress of projects under construction prior to disbursing guaranteed loan funds.

    Agency Affected: Department of Transportation

    Status: Closed - Not Implemented

    Comments: MARAD believes it has a transparent and risk-based process for verifying and documenting progress, which it will continue. (60-day letter)

    Recommendation: To assist and ensure that MARAD better implements credit reform, and given the questionableness of MARAD's estimates and reestimates, the Director of Office of Management and Budget should provide greater review and oversight of MARAD's subsidy cost estimates and reestimates.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: OMB disagreed with GAO's finding that it provided little review and oversight of MARAD's subsidy cost estimates and reestimates. However, OMB stated that it plans to work with MARAD to review recovery expectations for high risk loan guarantees. The Associate Administrator said that MARAD was working with OMB and DOT/Budget on credit risk analysis. (March 8, 2004)

    Recommendation: To ensure that the reformed Title XI program is carried out effectively and in conformity with program and statutory requirements, MARAD should conduct a comprehensive assessment of its human capital and other resource needs. Such analysis should consider the human capital needs to improve and strengthen credit reform data collection and analyses.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Not Implemented

    Comments: Jean Mckeever, Associate Administrator, MARAD, stated that they were working with a contrator on a MARAD-wide human capital effort. (March 8, 2004)

    Recommendation: To better implement federal credit reform, MARAD should consider, in its risk category system, the risk associated with approving projects from a single borrower that would represent a large percentage of MARAD's portfolio.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: MARAD worked with the OST Budget Office and OMB to develop new elements for estimating each project's subsidy, which reflect historical results under Federal Credit Reform. MARAD plans to review and revise as necessary its documentation process for cash flow assumptions. The elements developed include recognition of the concentration of guaranteed amounts with a single borrower.

    Recommendation: To better implement federal credit reform, MARAD should review its risk category system to ensure that it appropriately classifies projects into subdivisions that are relatively homogenous in cost, give the facts known at the time of designation, and that risks and changes to risks are reflected in annual reestimates.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD worked with the OST Budget Office and the President's Office of Management and Budget to develop new elements for estimating each project's subsidy, which reflect historical results under Federal Credit Reform. MARAD will review and revise as necessary its documentation process for cash flow assumptions. The elements developed include risk categorization.

    Recommendation: To better implement federal credit reform, MARAD should establish and implement a process to document the basis for each reestimate, including an analysis of a borrower's financial condition and a market analysis.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: MARAD informed us that it will incorporate and document each project's latest financial review into the re-estimate process together with any changes in market condition.

    Recommendation: To better implement federal credit reform, MARAD should establish and implement a process to document the basis for each key cash flow assumption--such as defaults, recoveries, and fees--and retain this documentation in accordance with applicable records retention requirements.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD worked with the OST Budget Office and the President's Office of Management and Budget to develop new elements for estimating each project's subsidy, which reflect historical results under Federal Credit Reform. MARAD will review and revise as necessary its documentation process for cash flow assumptions.

    Recommendation: To better implement federal credit reform, MARAD should establish and implement a process to annually compare estimated to actual defaults and recoveries by risk category, investigate any material differences that are identified, and incorporate the results of these analyses in its estimates and reestimates.

    Agency Affected: Department of Transportation

    Status: Closed - Implemented

    Comments: MARAD informed us that this analysis and appropriate follow-on action will be performed as data becomes available. Due to the low number of project defaults, it is not expected that adequate data will be available on an annual basis.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and management financial risk, MARAD should establish minimum requirements for the management and disposition of defaulted assets, including a requirement for an independent evaluation of asset value.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD modified its guidelines for actions to be taken in the event of a default to ensure that custodial and insurance arrangements commence immediately unless precluded by legal action. Also, MARAD will obtain appraisals of defaulted assets in appropriate cases.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and management financial risk, MARAD should establish minimum requirements for the management and disposition of defaulted assets, including a requirement for an independent evaluation of asset value.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Implemented

    Comments: MARAD modified its guidelines for actions to be taken in the event of a default to ensure that custodial and insurance arrangements commence immediately unless precluded by legal action. Also, MARAD will obtain appraisals of defaulted assets in appropriate cases.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should review risk ratings of loan guarantee projects at least annually.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Not Implemented

    Comments: MARAD stated that it already reviews all project risk annually as part of its subsidy re-estimation process. MARAD said that they will continue to perform this annual review.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should review risk ratings of loan guarantee projects at least annually.

    Agency Affected: Department of Transportation

    Status: Closed - Not Implemented

    Comments: MARAD stated that it already reviews all project risk annually as part of its subsidy re-estimation process. MARAD said that they will continue to perform this annual review.

    Recommendation: The Secretary of Transportation should direct the Administrator of the Maritime Administration to take immediate action to improve the management of the Title XI loan guarantee program. Specifically, to better comply with Title XI loan guarantee program requirements and manage financial risk, MARAD should create a transparent, independent, and risk-based process for verifying and documenting the progress of projects under construction prior to disbursing guaranteed loan funds.

    Agency Affected: Department of Transportation: Maritime Administration

    Status: Closed - Not Implemented

    Comments: MARAD believes it has a transparent and risk-based process for verifying and documenting progress, which it will continue. (60-day letter)

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