DOT INSPECTOR GENERAL: MARADÆS TITLE XI NEEDS IMPROVED MANAGEMENT
The U.S. Transportation Department’s inspector general concluded in an audit that the Maritime Administration must improve its management “in all phases” of the ship financing guarantee program.
The program, which is part of Title XI of the 1936 Merchant Marine Act, is designed to help private companies obtain financing for the construction of U.S.-flag ships or to modernize U.S. shipyards. Title XI was amended in 1972 to provide government guarantees to commercial debt obligations, with the government holding a mortgage on the equipment financed.
The Title XI program has recently experienced an increase in loan defaults. During the past five years, nine loans have defaulted, totaling about $490 million. Six of the loan defaults occurred since December 2001.
One of the largest Title XI loan defaults, which raised eyebrows in Congress, was American Classic Voyages Co.’s bankruptcy filing on Oct. 19, 2001. “AMCV’s bankruptcy affected over one quarter ($1.3 billion out of $4.9 billion at the time of default) of the value of MarAd’s Title XI loan guarantee portfolio,” said DOT Inspector General Kenneth M. Mead in a March 27 memo to Maritime Administrator William G. Schubert.
The inspector general’s audit of the Title XI program was initiated on November 2001 at the request of the Senate Commerce, Science and Transportation Committee and House Subcommittee on Commerce, Justice, State and Judiciary.
At the end of 2002, MarAd’s Title XI portfolio was estimated to be $4.3 billion, including $3.4 billion in executed loan guarantees and $849 million in loan guarantee commitments.
The $3.4 billion in executed loan guarantees covers 103 projects for 818 vessels and four shipyard modernizations. The Title XI program also includes eight projects valued at $226 million in commitments that MarAd approved for fiscal year 2002. The agency has another 26 Title XI applications, valued at $5.7 billion, pending.
To help prevent further Title XI loan defaults, the DOT inspector general recommended that MarAd:
* Require a “rigorous analysis” of the risks from changing any loan approval criteria and set compensating provisions on the loan guarantee to mitigate those risks.
* Create an external review process “as a check” on MarAd in internal loan application review and to help in crafting loan conditions and covenants.
* Establish a formal process to continuously track the financial condition of borrowers, including requirements for financial reporting over the term of the guarantee as a condition for loan approval.
* Create a formal process to continuously monitor the physical condition of guaranteed assets over the term of the loan guarantee.
* Develop an improved process to monitor the physical condition of foreclosed assets and to recover the maximum amount of funds from their disposal.
DOT also ordered MarAd to provide “milestones” of actions taken by the agency for the first four recommendations within 30 days.
In a memo to the DOT inspector general on Feb. 25, Schubert said his agency was “in complete agreement with your overall recommendations, which reflect sound business practices.”
However, Schubert said that some instances of the program’s failure were due to “political pressure brought upon MarAd to overlook underwriting requirements.”
“For example, the default of the Quincy Shipyard project is directly attributed to the specific direction by Congress for MarAd to approve the guarantee without regard to economic soundness,” Schubert said.
Schubert said at the beginning of his administration that it was his priority to build more commercial U.S.-flag vessels in the nation’s shipyards.
U.S. shipyards continue to face stiff competition from shipyards in Japan, China and South Korea, which can build cargo ships at nearly one-third of the cost. However, in recent years, some U.S. shipyards have picked up commercial shipbuilding business as U.S.-flag carriers begin to modernize their fleets.
