Detailed Information on the
Maritime Administration Guaranteed Loan Program (Title XI) Assessment

Implementing a comprehensive computerized portfolio monitoring system to improve performance of the financial statement review goal to at least baseline level.

Measure: Percentage of Title XI guaranteed loan projects that have not defaulted since the implementation of credit reform in fiscal year 1993.

Explanation:This effectiveness measure tracks the ability of the Maritime Administration's (MARAD) guaranteed loan program to approve and monitor credit worthy projects as authorized under Title XI. These projects include both the construction of commercial vessels in U.S. shipyards and certain construction projects to improve the shipyards themselves. By increasing the percent of projects that do not default, the costs and risks sassociated with the Title XI program are minimized. Conversely, each default of a guaranteed loan within the portfolio results in signficant cost to the Federal Government as guarantor to pay off the remaining principal and interest. Additional costs are also often incurred to take custody of, and subsequently dispose of, collateralized assets. As of 2008, it is noteworthy that since implementation of the Federal Credit Reform Act, MARAD has issued 112 loan guarantees and had only eight loan defaults. This equates to a percentage of 92.9% (104/112). This ratio has remained constant since the last loan guarantee closed in 2005, and will remain unchanged until the next loan guarantee is executed, or until the next loan default. The static activity level is due to the limited level of subsidy funding appropriated to the program since the baseline year, and also to the absence of any loan defaults since the baseline year.

Measure: U.S. shipyard activity (measured in millions of dollars) stimulated by the Title XI program loan guarantees.

Explanation:One of the primary reasons for the program is to maintain a viable U.S. merchant marine, including efficient facilities for shipbuilding and repair. By stimulating additional U.S. shipyard activity, the Title XI program is contributing to this goal.

Measure: Amount of dollars in U.S. shipyard activity stimulated by each subsidy dollar expended by the Title XI program.

Explanation:By increasing the amount of shipyard activity stimulated by each subsidy dollar expended, the Title XI program can increase its impact without increasing the overall cost of the program to the Government. Targets have initially been set at a static $17:1 level because only one loan guarantee has been executed since the implementation of the measure (in the baseline year); and, very limited subsidy appropriations has resulted in a temporary curtailment of subsidy lending. Additionally, under a newly revised subsidy model, the shipyard activity stimulated by each subsidy dollar is dependent on the risk category assigned to the loan guarantee project. Factors that affect the assignment of project risk category include: type of project, applicant credit worthiness, project rating assigned by the Department of Transportation and by the Office of Management and Budget, and an internal project assessment performed by the Office of Shipyards and Marine Financing at the Maritime Administration. With limited experience employing this new subsidy model, program management has been challenged to determine target levels that are both attainable and appropriately ambitious. In subsequent years, as the level of lending activity increases, program targets will be reeavaluated.

Measure: Percentage of Title XI projects for which a financial review was completed and documented within 30 days of receiving the annual financial reports.

Explanation:This measure assesses MARAD's productivity in monitoring its loan guarantee portfolio in a timely manner. Both the Department of Transportation's Inspector General and the U.S. Government Accountability Office recommended that MARAD establish a formal process for continuously monitoring the financial condition of its borrowers, in order to better manage default risk and reduce the Government's costs. The timely completion of financial reviews, results in the early identification of troubled loans, thereby allowing the program more time to take remedial action to avoid defaults and minimize the overall cost of the program to the government.

Is the program purpose clear?

Explanation: The Maritime Guaranteed Loan program promotes and sustains the U.S. shipbuilding and ship repair industries and supports the preservation and maintenance of a U.S. merchant marine. This purpose is accomplished by providing enhanced financing opportunities for with a full faith and credit guarantee from the U.S. Government of private sector debt obligations incurred by U.S. shipowners for the purpose of financing vessels constructed, reconstructed or reconditioned in U.S. shipyards. In 1993, the program was extended to cover U.S. shipyard modernization projects and foreign shipowners financing vessels constructed in U.S. shipyards. The Title XI program is authorized by the 1936 Merchant Marine Act which states: Title I: Declaration of Policy SEC. 101. FOSTERING DEVELOPMENT AND MAINTENANCE OF MERCHANT MARINE (46 App. U.S.C. 1101 (2004)). It is necessary for the national defense and development of its foreign and domestic commerce that the United States shall have a merchant marine (a) sufficient to carry its domestic water-borne commerce and a substantial portion of the water-borne export and import foreign commerce of the United States and to provide shipping service essential for maintaining the flow of such domestic and foreign waterborne commerce at all times, (b) capable of serving as a naval and military auxiliary in time of war or national emergency, (c) owned and operated under the United States flag by citizens of the United States insofar as may be practicable, (d) composed of the best-equipped, safest, and most suitable types of vessels, constructed in the United States and manned with a trained and efficient citizen personnel, and (e) supplemented by efficient facilities for shipbuilding and repair. It is hereby declared to be the policy of the United States to foster the development and encourage the maintenance of such merchant marine.

Evidence: Merchant Marine Act, 1936, Title I (http://www.marad.dot.gov/Publications/Compilation%2006/Compilation%20of%20Maritime%20Law.pdf) Merchant Marine Act, 1936, Title XI Title XI website - http://www.marad.dot.gov/TitleXI/title_xi_program.html U.S. Department of Transportation, Budget Estimates, Fiscal Year 2007, Maritime Administration, pg. 51.

Does the program address a specific and existing problem, interest, or need?

Explanation: The Title XI program addresses the United States' need for a viable merchant marine for defense and commercial purposes, as specifically stated in the 1936 Merchant Marine Act. The presence of a viable U.S. merchant marine: (1) aids the U.S. economy by creating and preserving jobs for trained seamen and shipyard personnel, (2) improves intermodalism by providing vessels for an efficient water transportation system, (3) relieves congestion on interstate highways by through the transport of cargo by sea, and (4) ensures that the U.S. commercial fleet is prepared to meet military sealift requirements. In 1936, Congress recognized that federal assistance was required to enable the U.S. maritime industry to compete with lower cost foreign built and operated vessels. The same cost disparities that existed in 1936, and that prompted the legislation of the Merchant Marine Act, continue to this day, and for the same reasons: (1) lower foreign costs for labor and regulatory compliance, and (2) global market distortions due to foreign government subsidies for their merchant fleets. Moreover, there have been periods of global imbalances for new merchant vessel construction demand and supply as various countries make the capture of a significant share of the world shipbuilding industry a national priority. In the United States, Title XI is the only form of federal construction assistance currently in existence to promote vessel construction and shipyard modernization within the United States. The loan guarantees provided under this program are necessary because long-term financing at attractive interest rates is not generally available from commercial lending sources due of the highly cyclical nature of the shipping and shipbuilding industries. Title XI guaranteed financing permits the shipowner or shipbuilder to match the term of the financing with the service life of the vessel or shipyard asset. Many vessels and shipyard assets would not have been financed and/or would not have been constructed in the United States without the aid of the Title XI program

Evidence: OIG Report (number CR-2003-031) issued March 27, 2003. page 2, paragraph 3 (http://www.oig.dot.gov/item.jsp?id=1058) GAO Report (GAO-03-657) issued June 30, 2003. page 4, paragraph 2 (http://www.gao.gov/new.items/d03657.pdf) The U.S. Maritime Industry in the National Interest by Irwin M. Heine European Parliament Fact Sheets

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: The Title XI program fills a unique role because there is no other program that addresses the need for long-term financing on reasonable terms and conditions and with favorable interest rates to support the viability of a U.S.-flag commercial fleet supplemented by a viable ship repair and shipbuilding base. It does not compete with or duplicate any other program. There is no private financing plan that comes close to the terms and conditions of a Title XI financing. The type of marine lending being extended in the market which is at all comparable to the Title XI program is now essentially the exclusive domain of a very select group of non-U.S. financial institutions."

Evidence: Letters from Citibank and JP Morgan Chase stating their involvement and terms of their typical maritime sector loans.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The Title XI program has been redesigned several times since its inception to correct and overcome program design flaws identified in the program. Initially, the Title XI program was designed as a mortgage insurance arrangement instead of a government guarantee. This proved unworkable since only ninety percent of the mortgage balance was insured and banks would impose unreasonable terms and conditions on the shipowner and the federal government before taking the risk on the remaining ten percent. The lack of a government guarantee adversely affected interest rates and limited the number of financial institutions willing to participate in the program. These issues were addressed when the program was subsequently converted into a loan guarantee program. After a number of defaults were experienced in the 1980's, the program regulations were revised to strengthen the economic soundness criteria when analyzing potential borrowers. In 1993, the program's effectiveness was further enhanced through legislation extending the program to shipyards for modernization projects and to foreign shipowners for vessels built in U.S. shipyards. In 2003, the Title XI statute was amended to require additional collateral in certain cases in order to protect the financial integrity of projects with Title XI loan guarantees. These regulatory revisions and statutory amendments have contributed to improved program design and to the removal of barriers to the program's effectiveness by providing mechanisms to help ensure that only financially sound projects receive Title XI guarantees.

Evidence: Report to the Senate and House Committees on Appropriations on Initiatives to Improve the Management and Reduce the Risk of Department of Transportation Credit Programs dated March 1, 2006. Title XI regulations - 46 CFR Part 298 (http://www.access.gpo.gov/nara/cfr/waisidx_02/46cfr298_02.html). Title XI of the Merchant Marine Act, 1936, pg. 17

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: In approving Title XI applications, priority consideration is given to Title XI financings for vessels that are militarily useful and are documented under the laws of the United States (U.S. flag vessels). Priority is given to domestic Title XI projects involving National Defense Tank vessels and vessels that are also suitable for service as a naval auxiliary in time of war or national emergency and that meet a shortfall in sealift capacity or capability. Loan guarantees for export projects can only be made once a determination has been made that the financing will aid in the transition of United States shipyards to commercial activities or will preserve shipbuilding assets that would be essential in time of war or national emergency. Finally, the Statute places a dollar limit of $3 billion (representing twenty five percent of the maximum outstanding balance allowable) on the aggregate amount of obligations that may be outstanding on eligible export vessels. As of December 31, 2005, of an existing portfolio with 82 contracts, representing $3.1 billion in outstanding obligations, nine contracts represent export projects in accordance with the criteria above (11% or $561 million). That the Title XI program is reaching its intended target is also evidenced by the Title XI approved list. Vessels and shipyard projects supporting the needs described in question 1.2 include passenger ferries, drill rigs, power barges, containerships, ATB's, barges, service vessels, tugs, Ro/Ro vessels and several other types of vessels. These projects have directly contributed to the Unites States' ability to carry its domestic and foreign water-borne commerce, helped to modernize the U.S merchant marine, and/or enhanced U.S. sealift capacity. The wide impact of the program has also helped maintain a skilled workforce enabled to meet shipbuilding needs during times or war or national emergencies in many regions the United States.

Evidence: Pages 5-9 of Title XI of the Merchant Marine Act Pages 9-19 of Title XI of the Merchant Marine Act Approved List (Title XI website) Title XI Guarantee Contracts in Force

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The Maritime Guaranteed Loan (Title XI) program has two specific long-term performance measures that meaningfully reflect the purpose of the program. The first long-term measure is the percentage of Title XI projects in the loan portfolio that have not defaulted on their guaranteed loans. All vessels built with the assistance of the Title XI program contribute to the viability of the U.S. merchant marine; however, the program is able to achieve this objective with very little cost when no Title XI defaults occur. The second long-term measure is the level of activity in U.S. shipyards that is directly stimulated by the Title XI program. Maximizing the amount of activity financed by the Title XI program increases the program effectiveness in meeting its purpose. Once again, more vessel construction and shipyard modernization activity contributes to the viability of the U.S. merchant marine, including the maintenance of skilled maritime workforce, as well as the Nation's ability to able to transport commercial cargo and to respond to national emergencies or defense sealift needs.

Evidence: U.S. Department of Transportation Fiscal Year 2007 Budget submission to the Office of Management and Budget, page 83 Draft measures for Title XI Program dated 8/12/2005. Although the draft measure for shipyard activity has a goal of stimulating $2 billion in shipyard activity, the final goal was reduced to $500 million in stimulated shipyard activity to account for the reduced funding and staffing levels of the program.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: For the first performance measure, the percent of projects that have not defaulted, the target for FY 2008 and beyond is 92%. This is an ambitious target because the percent is determined on a cumulative basis since the passage of federal credit reform in FY 1993. The Title XI program has since incurred eight defaults and therefore the remaining portfolio and future loans must be closely monitored to ensure continued success. To maintain the 92% success rate the program cannot incur any additional defaults unless more Title XI projects are approved. The program has recently approved very few applications and the only way to maintain the target success rate is to maintain the current portfolio without any defaults given the cumulative total of defaults the program has previously incurred. For the second performance measure, the target is that the Title XI program will stimulate a total of $500 million in U.S. shipyard activity between FY 2008 and FY 2012. This is also an ambitious goal for the Title XI program since the level of activity stimulated over the past two fiscal years (FY 2004 and FY 2005) has only totaled $356 million and the amount of funding available for new guaranteed loans has continually decreased. For fiscal years 2005-2007, no subsidy funds were requested as Budget requests have been limited to administrative expenses. If subsidy funding is provided for the 2008-2012 fiscal years, program managers believe that this target will be achieved.

Evidence: Table cumulative number of approvals and defaults since FY 1993 List of approved projects by Title XI program

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The Title XI program has two annual performance measures. The first annual measure is how much U.S. shipyard activity is spurred by each subsidy dollar expended by the Title XI program. This goal can be most efficiently accomplished by approving projects that have a lower risk profile and expected cost to the Government since projects with a lower risk profile require less subsidy funds to be set aside for potential defaults. Stated another way, approving lower risk projects allows each dollar of subsidy expended by the Title XI program to support more shipyard activity. Another way to spur more shipyard activity with less subsidy funds is to approve projects that have a lower percent financing. As a shipowner or shipyard puts more equity into a project, the requested loan amount is lower and the resulting subsidy cost is lower to the program. Maintaining a high leverage ratio is key to meeting the program's long term goal of spurring shipyard activity. Since funding for the program has been significantly reduced, to spur the most shipyard activity with the resources available, the program must strategically leverage the funding it receives. The second annual measure is the percentage of Title XI projects for which a financial review was completed and documented within 30 days of receiving the annual financial reports. The quicker that financial reviews are completed, the quicker that troubled loans can be identified. Achieving this annual performance measure will directly support and demonstrate progress toward the long-term goal of maintaining 92% of Title XI projects without a default. Identifying troubled loans has early as possible will allow the program has more time to take remedial action to avoid defaults and minimize the overall cost of the program to the government. The more efficient the program becomes in reviewing the financial data, the better equipped the program will be to maintain a successful portfolio.

Evidence: U.S. Department of Transportation Fiscal Year 2007 Budget submission to the Office of Management and Budget, page 84 Table of subsidy expended for each dollar of shipyard project directly financed Table with number of companies reviewed and documented within 30 days for FY 2005

Does the program have baselines and ambitious targets for its annual measures?

Explanation: The first annual measure is that in FY 2008 $17 in U.S. shipyard activity will be spurred by each subsidy dollar expended by the Title XI program. This is an ambitious target. In FY 2005, $1 in Title XI subsidy funding spurred $4.6 in shipyard activity. In FY 2004, $1 in Title XI subsidy funding spurred $23.8 in shipyard activity. In FY 2005, the Title XI program only approved one project for financing. This project's estimated subsidy amount was much higher than the average Title XI project and therefore the overall subsidy leverage was extraordinarily low for the fiscal year. The $17 leverage goal was selected as an ambitious target by using the historical leverage ratio of the Title XI program. Since the implementation of Credit Reform, the program has averaged a leverage ratio of $18. However, the $17 goal is still ambitious because in FY 2005 the program underwent a significant change in the methodology of determining the subsidy amount for each new project to increase the average subsidy rate. These changes will require that the program make improvements to the risk level of loans approved or to reduce the percent of financing to meet this annual goal. The second annual measure is that the financial review for 75 percent of Title XI projects will have been completed and documented within 30 days of receiving the annual financial reports. FY 2005 was the first year of compiling data on the time it takes the staff of the Title XI program to complete and document the annual financial reviews of the borrowers in the loan portfolio. This first year of data showed that financial reviews for 25% of Title XI projects were completed and documented within 30 days of receiving the financial information. By FY 2008, the target is to increase this percent to 75%, resulting in a 200% increase in our efficiency rate. The Title XI program expects that this goal will continue to improve as focus has been placed on creating a more efficient portfolio monitoring system. However, this target is particularly ambitious in view of the planned decreases in Title XI staff.

Evidence: Table of subsidy expended for each dollar of shipyard project directly financed Table with number of companies reviewed and documented within 30 days for FY 2005 Documentation of baseline data

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: The Title XI program does not have "partners" in the context of this question.

Evidence:

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: Between FY 2003 and FY 2005, the Title XI program has undergone two evaluations by the Department of Transportation's Inspector General (DOT IG) and one evaluation by the U.S. Government Accountability Office (GAO). These reviews were completely independent of any internal reviews that Title XI program management performs to improve its assess operations and effect program improvements. The scope of both the initial DOT IG and GAO evaluations encompassed the whole program starting from application review, through loan monitoring, and ending with recovery on defaulted assets. In each case, these program evaluations included specific recommendations to program management to support program improvements and increase program effectiveness.

Evidence: IG Report (number CR-2004-095) issued September 28, 2004 (http://www.oig.dot.gov/item.jsp?id=1419) GAO Report (GAO-03-657) issued June 30, 2003 IG Report (number CR-2003-031) issued March 27, 2003

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: In recent years, the Title XI program has requested only administrative funds to assist in managing and monitoring the current portfolio. These requests clearly link the need for administrative funding to maintain the proper level of management of the portfolio of outstanding guaranteed loans and to enable the program to comply with the Federal Credit Reform Act. Effective monitoring and timely corrective actions on underperforming loans are examples of how administrative funds are utilized to achieve both annual and long-term performance goals. They are also tied into the long-term improvements of the Title XI program administration as MARAD continues to identify ways to improve both the loan monitoring and new loan application review processes. Administrative funding is also utilized for processing new Title XI loan guarantee applications when loan subsidy funding is appropriated for the program. When anticipated budget requests for subsidy funds are made in future years, they will link the amount of new loan guarantees that can be approved with the requested level of subsidy funding. Future new loan guarantee activity will enable MARAD to directly stimulate shipbuilding and shipyard modernizations within U.S. shipyards in accordance with the purpose of the program and in response to domestic industry needs due to market failures and inequities with foreign competitors.

Evidence: FY 2006 President's budget request submitted to Congress 2/7/05, Title XI FY 2005 President's budget request submitted to Congress 2/2/04, Title XI

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: Following the assertion by the Government Accountability Office that MARAD needed to operate the Title XI program in a businesslike fashion, program management has put a priority on strategic planning. The program has established plans to improve the management of the program and minimize the Government's fiscal exposure over the long term. This includes the adoption of the long-term performance goals and continuous assessment of associated baselines, targets and timeframes, as well as annual performance goals that demonstrate progress towards achieving the long-term goals. In addition, the Department of Transportation (DOT) has created a senior level review board responsible for the coordination of all credit programs within DOT to insure that the Title XI program objectives and actions are consistent with the overall goals of the Department. Ensuring that the Title XI program is consistently and strategically aligned with other DOT credit programs further enhances the program's ability identify and correct its strategic planning deficiencies.

Evidence: Memos from Director, Office of Ship Financing Order establishing Credit Council

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: MARAD collects unaudited financial statements on a quarterly or semi-annual basis in addition to collecting audited financial statements annually from shipowners and shipyards that have outstanding guaranteed loans. This information is used to (1) monitor the financial and operating performance, (2) assure that companies are observing their financial and operating covenants, and (3) provide a basis for follow-up/corrective actions. MARAD also receives insurance confirmations on a regular basis from insurance brokers and underwriters to assure that the vessel or shipyard asset is adequately insured with satisfactory underwriters. MARAD reviews regular information on the credit ratings of underwriting companies insuring Title XI vessels or assets. MARAD receives documentation on the classification of a vessel and uses this information to verify that a vessel is being properly maintained throughout the life of the loan guarantee. During the construction period, when Title XI construction period financing is being utilized, MARAD monitors the construction progress of the vessel and only permits the release of Title XI escrowed funds to the extent that construction progress is verified. Based on the information submitted, MARAD prepares both written financial reviews and credit watch reports, and prepares quarterly reports on the status of the program. The information is assembled and disseminated on a quarterly basis to the Department of Transportation Credit Council and various offices throughout MARAD, profiling the companies by risk category, and presenting the current status of all loan guarantees. MARAD currently performs the comprehensive oversight as described above. However, when the computerized monitoring system is implemented in FY 2007, MARAD will be able to perform its financial and other monitoring responsibilities more quickly.

Evidence: MARAD collected financial statements from a Title XI company and determined the company was experiencing operating and financial difficulties. MARAD acted on this information and enforced its rights under the loan guarantee documentation which requires the company to provide additional collateral for the loan guarantee. Copy of request for a construction progress payment Copies of insurance confirmations Copies of classification information

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: All personnel assigned to the Title XI program, from the senior level Associate Administrator for Marine Asset Development, to the Director, Office of Marine Financing, and finally to the analysts assigned to the Title XI program, have performance elements and measures addressing key aspects of Title XI. Elements and measures cascade from broad policy and promotional objectives to the day to day review and processing of loan applications and contract monitoring. Such elements and measures serve to ensure that all Title XI agency personnel are held accountable for their performance in achieving Title XI annual and long-term performance goals. Every company that is approved for Title XI financing agrees to be accountable to MARAD in accordance with MARAD's Title XI Reserve Fund and Financial Agreement (RFFA). The RFFA contains several restrictions on a company's activities. These restrictions include paying dividends, entering charters, selling assets, and entering into related party transactions. If a company violates any provision, MARAD may call a default on the loan. Being held accountable to the RFFA requires companies to act in a manner that is consistent with the performance goal of the program to minimize defaults. Shipowners and the shipyards are also held accountable to each other and to MARAD through the provisions of the shipyard contract and related documents, which specify the details of the total cost, progress payments and construction and delivery schedule. The shipyard and its major vendors are also held accountable for the successful completion of the vessel, free of defects through the issuance of post delivery warranties and guarantees of workmanship and quality. During construction, in addition to the oversight of the shipowner, the classification society, often the American Bureau of Shipping (ABS), will review the plans and specifications of the proposed vessel and oversee its construction. Many vessels are also inspected by the U.S. Coast Guard.

Evidence: Copy of Security Agreement Copy of Title XI Reserve Fund and Financial Agreement

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Program funds are obligated in a manner that is consistent with the overall purpose and objectives of the Title XI program. Funds are committed once a determination is made that an applicant meets the program requirements and policy objectives. MARAD has a legislative requirement that a decision on a new loan guarantee application be determined within a specified period of time. After a determination is made to guarantee a loan, MARAD links disbursement of Title XI guaranteed funds to progress in ship construction after assuring the shipowner's equity funds are disbursed first. MARAD technical staff physically reviews the construction progress of a vessel by making site visits to the shipyard to inspect the vessel. These actions ensure that funds are spent in accordance with the legislation and regulations governing the program.

Evidence: Page 19 of Title XI of the Merchant Marine Act Example of obligation of funds in LC, page 6, paragraph XXX Hawaii Superferry LC

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: In coordination with the Department of Transportation's Credit Council, MARAD has obligated $2 million in subsidy appropriations for the acquisition of a computer-based Credit Program Portfolio Management System which would enable MARAD to more effectively manage MARAD's $3.4 billion Title XI portfolio. The acquisition of this system will enable MARAD to more efficiently track the financial condition and compliance of the companies in its portfolio, identify trends in the program, and gather data and prepare management reports on a more timely and cost efficient basis. The computerized program will also help increase the percent of projects that have a financial review completed and documented within 30 days, one of the annual performance measures for the program. The system will improve the process of analyzing each company, better track the overall review process, and enable MARAD to determine the percent of projects that have not been reviewed in a timely manner. In FY 2005, the first year data was collected on the program's efficiency in reviewing and documenting the financial statements, MARAD reviewed and documented 25% of the financial statements within 30 days of being received. In 2006, prior to the computer software implementation, the goal for MARAD is to have 50% of the reviews completed within 30 days. The goal will increase after the computer software implementation; however the first years of results will not be optimum as MARAD maintains both systems. Nevertheless, even during the transition period to full computerization, information will be available more timely than before, thus enhancing program management decision-making on portfolio management issues.

Evidence: IG Report (number CR-2004-095) issued September 28, 2004 IG Report (number CR-2003-031) issued March 27, 2003 Report to Congress

Does the program collaborate and coordinate effectively with related programs?

Explanation: Over the last 30 years, the Title XI program has worked closely with MARAD's Capital Construction Fund (CCF) program and the Construction Reserve Fund (CRF). These programs allow ship operators to accumulate their own capital to build, acquire or reconstruct vessels thought the deferral of Federal income taxes. The three programs have complemented each other with the CCF or CRF programs often providing the private equity funds for the Title XI applicant's share of the construction cost of certain new vessels and the Title XI program providing the debt financing portion. The shipowner can then use the CCF on an ongoing basis to pay the principal portion of Title XI debt service payments. In many cases, the Title XI vessel is a CCF agreement vessel whose earnings are placed in a tax sheltered CCF fund to build future vessels. In other cases, the Reserve Fund of the Title XI vessel, which is a "rainy day" fund, is held in the CCF fund, under a "Dual Use" agreement, for Title XI and CCF purposes. The Title XI program has also collaborated effectively with government entities outside the U.S. Department of Transportation in the co-financing of export vessel projects, including the Export-Import Bank, the Overseas Private Investment Corporation (OPIC), and the International Finance Corporation (IFC).

Evidence: CCF Regulations, 46 CFR Part 390 (http://www.washingtonwatchdog.org/documents/cfr/title46/part390.html) Maybank Navigation Company, LLC has used CCF funds for equity funds in the Title XI program. A copy of the action approving Maybank Navigation Company for a CCF fund is attached. Smith Enron Cogeneration Limited Partnership participated in a co-financing with Title XI, IFC and CDC (formerly Commonwealth Development Corporation, which is the UK government's instrument for investing in the private sector in developing economies).

Does the program use strong financial management practices?

Explanation: The Title XI Financing Account transactions are posted in the financial system in accordance with the Federal Credit Reform Act, FASAB, OMB Circular A-11 and the U.S. Standard General Ledger. To ensure the utmost fiscal integrity, the balances in all Title XI Financing Account proprietary and budgetary balances are reconciled to the Subsidiary Ledger on a monthly basis. The 2nd Quarter and the 4th Quarter reconciliations are reviewed by independent auditors in support of the year end financial statement audit. MARAD has received an unqualified opinion on its year end financial statements every year since Fiscal Year 1999. In the most recent audit for FY 05, the DOT IG stated that the MARAD financial statements were presented fairly in all material respects. The Title XI Program did not have any identified material internal control weaknesses or instances of non-compliance with federal law or regulations. The MARAD Accounting Office is separate and independent from the Title XI program office. Within the Office of Accounting, there internal control policies and procedures to ensure proper recording of transactions and that payments are made for the intended purpose. The MARAD Office of Accounting provides the program office with data and reports that are necessary to support strong operational management of the Title XI program. These reports include guaranteed loan portfolio balances, the report of periodic guaranteed loan payments to the respective loan trustees, and a listing of any overdue fee payments to aid in prompt collection. The Office of Accounting maintains a subsidiary record showing a detailed history of guaranteed loan payments, outstanding balances and fee collections for each Title XI loan contract. The current balance and historical loan information is also maintained in a special Title XI section in the DOT financial system. In the event MARAD is called upon to honor the Government guarantee due to a default on a Title XI loan, MARAD commences aggressive collection procedures. MARAD immediately refers the matter to the Commercial Litigation Department of the Department of Justice. Collection of this type of secured mortgage debt requires extensive litigation and foreclosure through DOJ. These debts are not subject to Debt Collection Improvement Act, pursuant to Section 3711 (2)(A)(i), since collection through DOJ litigation is the most aggressive form of collection available to Government agencies.

Evidence: Title XI financial audit opinion

Has the program taken meaningful steps to address its management deficiencies?

Explanation: The operations of the Title XI program were extensively audited by the Department of Transportation's Inspector General (DOT IG) in 2003 and 2004. At the conclusion of the first of these audits, the DOT IG issued a report of deficiencies and recommendations with respect to the programs operations. MARAD took corrective measures to comply with those recommendations. In the area of risk mitigation, MARAD now has a solid set of procedures for the review and approval of new loan guarantee applications. MARAD also presents the results of its risk analysis and review for each application to the DOT Credit Council, which acts as a Board of Directors and makes recommendations to the Maritime Administrator for consideration in approving or disapproving each new application. MARAD also has new procedures to obtain an external review of start up companies and others involving new services or technologies. MARAD has a new formalized process for monitoring the financial conditions of Title XI portfolio companies. This includes review by the Title XI staff of financial statements submitted by borrowing companies and the assignment of Title XI companies to the appropriate categories in the Credit Watch report to provide closer monitoring and attention to companies with higher risk. MARAD more closely monitors vessels/assets for compliance with Coast Guard inspections and classification society certifications, has strengthened its monitoring of vessels/assets that have defaulted, and utilizes the services of outside organizations to maintain, market and dispose of foreclosed assets. At the conclusion of the second follow up audit, the DOT IG report stated that MARAD had developed policies and procedures that addressed each of the recommendations in the first audit report in a satisfactory manner. Additional follow up evaluation will be important to document full implementation of those recommendations. The Title XI program has also had its work processes compared to other Government credit programs and private sector institutions to assess its operations. The XI program has also studied how Export-Import Bank utilizes consultants for outside reviews of applications and recognized the benefits that consultants would add to reviewing Title XI applications where MARAD does not have the in-house expertise for specific markets, vessel types, or financial structures.

Evidence: Order establishing Credit Council Memos from Director, Office of Ship Financing IG Report (number CR-2004-095) issued September 28, 2004 GAO Report (GAO-03-657) issued June 30, 2003 IG Report (number CR-2003-031) issued March 27, 2003 Report to Congress Independent reviews of Hawaii Superferry, Lake Express and Petrodrill

Is the program managed on an ongoing basis to assure credit quality remains sound, collections and disbursements are timely, and reporting requirements are fulfilled?

Explanation: Each outstanding loan guarantee is assigned to a specific analyst, who analyzes and monitors the quarterly, semi-annual and annual financial statements, together with the no default certification from a company officer. If a company is unable to have its audited financial statements completed on time, the company is typically required to submit its unaudited financial statements while the audit process is being finalized. The analyst updates a risk report for any changes in the company's status. If a company is experiencing financial difficulty that could lead to a potential payment default, the analyst prepares an analysis and report for MARAD and DOT top management. If a company fails to make a debt service payment or other related requirement, the analyst notifies MARAD management while preparing to take actions that will protect and preserve the loan guarantee collateral. During the construction period, MARAD oversees and verifies the construction progress against schedule and controls the disbursement of escrowed Title XI funds against approved progress costs. After delivery, MARAD monitors the placement of adequate insurance on the vessel or asset and that required class certificates are maintained. For additional detail on program management policies and procedures to ensure that disbursements are timely, see the explanation to question 3.3 supra. The Title XI program is in the process of developing a computerized portfolio monitoring process. This system will track the financial condition and covenant compliance of companies with outstanding loan guarantees. This enhanced monitoring ability will enhance MARAD's ability to identify problems within the Title XI loan guarantee portfolio. In the event MARAD is called upon to honor the Government guarantee due to a default on a Title XI loan, MARAD commences aggressive collection procedures. MARAD immediately refers the matter to the Commercial Litigation Department of the Department of Justice (DOJ). Collection of this type of secured mortgage debt requires extensive litigation and foreclosure through DOJ. These debts are not subject to Debt Collection Improvement Act, pursuant to Section 3711 (2)(A)(i), since collection through DOJ litigation is the most aggressive form of collection available to Government agencies.

Evidence: Construction progress report Report to Congress Memos from Director, Office of Ship Financing in response to the IG report

Do the program's credit models adequately provide reliable, consistent, accurate and transparent estimates of costs and the risk to the Government?

Explanation: In June 2003 the GAO issued a report on the Title XI program. Within the report, GAO identified a weakness in MARAD's methodology for calculating the subsidy cost of a loan guarantee. Specifically, the audit stated that MARAD uses a simplistic cash flow model which does not reflect recent default experience. In FY 2005, in response to recommendations in the GAO report, MARAD, in coordination with OST and OMB, completely updated its subsidy credit methodology to better estimate the cost of loans to the Government. In response to recommendations in the March 2003 Department of Transportation Inspector General (DOT IG) report Title XI has updated and strengthened its procedure for review and approval of loan guarantee applications. Program management has also followed the DOT IG recommendation to establish an external review process to provide an independent external financial analysis of the applicant's business plan and capitalization, and where appropriate, an independent external market analysis with market research and a review of demand analysis. In addition, Title XI and the DOT Credit Council have worked out guidelines wherein Title XI would utilize an external review of applications that involve: companies starting a new service, start up operations, new technologies, more complex finance transactions and large dollar transactions representing a significant portion of the potential borrowers debt. Also Title XI and the DOT have developed a list of qualified entities that can perform external reviews and provide independent, reliable and transparent estimates of cost and risk to the government. Program management has also implemented a process to better document the basis for key cash flow assumptions, such as defaults, recoveries, and fees. Program analysts regularly update estimated default cash flows using historical default information from Moody's Investors Services. Title XI analysts have also updated the recovery estimates to reflect the recent actual recoveries on Title XI defaulted assets. Additionally, the factors utilized in determining the risk categories have been modified to improve the assessment of the risk of each loan guarantee. New elements in determining the risk of a project were established to account for portfolio concentration by a single borrower or a specific market representing a large percentage of the total portfolio. As required by statute, these factors are reviewed annually to determine if any additional changes are needed.

Evidence: GAO Report (GAO-03-657) issued June 30, 2003 IG Report (number CR-2003-031) issued March 27, 2003 Report to the Senate and House Committees on Appropriations on Initiatives to Improve the Management and Reduce the Risk of Department of Transportation Credit Programs dated March 1, 2006 External review guidelines Page 7 of Title XI of the Merchant Marine Act, 1936

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: Since the program's last IG audit in September 2004, significant strides have been made to meet the long term goal of minimizing the number of approved Title XI projects that default. The most notable effort has been improved portfolio monitoring including more thorough analysis and better documentation. Additionally the Title XI program has increased the reporting requirements for newly approved companies from semi-annual to quarterly. Increased monitoring and more frequent review of company reports Title XI analysts to more effective manage credit portfolio risk and to take corrective action with individual borrowers when deemed necessary. To further improve the monitoring of the Title XI program, MARAD and the Department of Transportation have worked together to develop a comprehensive computerized monitoring system. The approach taken to acquire the computerized monitoring system has consisted of several distinct phases. In the first phase, from January through June, 2005, system requirements were identified via a comprehensive review of current processes and documents. In the second phase, MARAD researched how other government agencies were using different software to meet their monitoring requirements, using the Federal Enterprise Architecture Management System, and companies were requested to respond to a Request for Information by submitting proposals by October 2005 on how their product could be used to meet DOT requirements. Numerous commercial vendors responded, and the responses were narrowed down to three commercial vendors, who demonstrated their products in February, 2006. MARAD has chosen a combination of an off-the shelf system and a customized solution. The program is scheduled to be operational at the beginning of FY 2007, with additional capabilities being added throughout the fiscal year. In addition, the creation of the DOT Credit Council has provided a valuable level of oversight to ensure that new projects and significant amendments to existing loan guarantees are creditworthy. The program has not experienced a default in three fiscal years. With respect to the second long-term goal, the program has stimulated U.S. shipbuilding and contributed to the addition of new vessels to the U.S. merchant marine. Many of these vessels could be used for national defense or in national emergencies. In the most recently completed fiscal year (2005) the program directly stimulated U.S shipyard activity by over $178 million.

Evidence: Title XI Default list Title XI Approved List Title XI Guarantee Contracts in Force 12/31/05 IG Report (number CR-2004-095) issued September 28, 2004 Memorandum dated February 10, 2004 from Director, Office of Ship Financing. Subject: Inspector General's Report - Recommendation #3 Report to the Senate Committee on Appropriations on the Maritime Administration Title XI Guaranteed Loan Program Computer-Based Financial Management Monitoring System, March, 2006

Does the program (including program partners) achieve its annual performance goals?

Explanation: During the most recent completed fiscal year (2005), the Title XI program spurred approximately $5 in shipyard activity for each dollar of Title XI subsidy expended. This low leverage was because only one project was approved and it had an unusually high subsidy cost. In FY 2004, the Title XI program spurred $19 in shipyard activity for each dollar of Title XI subsidy expended. In the future, MARAD expects to consider more projects that have a lower expected cost to the government to better the Government's leverage in spurring shipyard activity. As for the Title XI program achieving its goal of completing financial reviews within 30 days of receiving the audited financial statements, the Title XI program has just begun collecting data and it expects to continue to improve the process. The program achieved a 25% review completion rate within 30 days for all FY 2005 Title XI financial reviews. Now that the program is placing an emphasis on timely reviews, the program expects to increase this percentage to 50% or more in FY 2006. The computerized monitoring software system that will be implemented in FY 2007 will position MARAD to maximize the percent of projects that are timely reviewed over the next several years. Although the Title XI program did achieve its annual performance goals in 2005, partial but notable achievement toward target performance was demonstrated. The program's comprehensive response to both the GAO and IG audits has better positioned the program to achieve these goals in subsequent years.

Evidence: Table showing level of subsidy expended and direct shipyard activity spurred by Title XI program Table showing percentage of company reviews completed within 30 days

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: The program has recently instituted a performance measure to determine how efficiently the staff is reviewing and documenting its financial reviews for the entire guaranteed loan portfolio. The first year in which data was collected for this efficiency measure was FY 2005 for the reviews applicable to the audited year-end financial reports for 2004. The level of efficiency is expected to improve from this base year as an emphasis has been placed on timely and accurate documentation within the program. By decreasing the amount of time it takes the staff to complete the financial reviews, the whole monitoring process will become more efficient and the expected result is a more cost effective program since more timely analysis will allow MARAD to respond more timely when necessary to protect the Government's interest in Title XI-financed projects and minimize the occurrence of loan defaults. While the result in the baseline year for the program's efficiency measure is low, the primary reason was that the program staff was not properly documenting its reviews although the reviews themselves had been completed. The lack of sufficient documentation was identified as a weakness in a Department of Transportation Inspector General (DOT IG) audit of program operations. In response to the IG's recommendations, new procedures for documenting and reviewing financial statements has significantly increased the percent of annual reviews to be completed timely. Once the computerized monitoring software is fully operational, the efficiency of the financial reviews should be even further increased. However, in the first couple years with the new monitoring software, the efficiency results will not be optimal as the program staff continues to maintain the current process along with the new computerized process. After the computerized system has adequately demonstrated required reliability, the duplication of processes will be unnecessary and the efficiency of financial reviews will increase further. Increasing the percent of timely reviews above 75% for FY 2008 is an unreasonable proposition at this time given the constraints of maintaining two systems and the minimal level of staff. However, after 2008, when the computer system is fully operational, MARAD expects to further increase the percentage of reviews that are completed on a timely basis.

Evidence: Table showing percentage of company reviews completed within 30 days U.S. Department of Transportation Fiscal Year 2007 Budget submission to the Office of Management and Budget, page 83

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: Based on the performance measures described in section two supra, comparative program performance must be viewed from two perspectives: (1) how well the program performs in the area of enhancing the U.S. merchant marine the economic impact the program has one the domestic maritime industry, and (2) credit management. With regard to the first perspective, the purpose and goals of the Title XI program are not comparable to any other program administered by the Government or private sector. No other loan or loan guarantee program has been established with the purpose or goal of sustaining the U.S. merchant marine. Private sector lending institutions have the overall goal of maximizing profit; therefore, their reasons and processes for lending money are significantly different from the Title XI program. The Title XI program was designed to fulfill a unique role in maintaining the U.S. flag fleet by leveraging the creditworthiness of the Government to address the specific national interest and need as described in question 1.2 supra. With regard to the second perspective, During 2001 and 2002 the Title XI program experienced a high level of loan defaults. These defaults were identified as a program (credit) management deficiency that needed improvement before the Title XI program could be considered to be effective utilizing its resources by both the Government Accountability Office (GAO) and the Department of Transportation's Inspector General (DOT IG). As discussed in the question following (4.5), Title XI has satisfactorily address DOT IG concerns. GAO has yet to evaluate the program again since its report issued in 2003. The not applicable response is therefore based on the above explanation of the uniqueness of the program, and the absence of any other comparable Federal, state or local government program. It is also based on the absence of private sector programs with a comparable purpose and comparable goals, an assertions supported by statements from private sector lenders referenced in the evidence that they view the Title XI as a complimentary rather than a competitive program. Finally, a not applicable response is appropriate here because the credit management issue is sufficiently explained in questions 3.7, 3.CR1, and 3.CR2, surpra, and question 4.5 below.

Evidence: Letters from Citibank and JP MorganChase

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: The Title XI program has undergone periodic Inspector General audits. The GAO has also recently conducted an independent audit of the program. All of these audits were independently performed and involved every aspect of the Title XI program. These audits indicated areas of weakness and inefficiencies and MARAD has implemented all the recommendations to improve the effectiveness of the program. As a direct result of these audits, the program has improved credit analysis, portfolio monitoring, and default recovery processes. The program's new policies and procedures have been reviewed and determined by the auditors to satisfactorily meet their recommendations and have positioned the program to better manage the portfolio. The most recently completed audit of the program is the September 2004 IG audit. This was a follow-up audit to their March 2003 audit. The September 2004 audit report recognized that MARAD developed the policies and procedures in a satisfactory manner to address the recommendations from the earlier report, but distinguishes addressing in a satisfactory manner from full implementation. Significant work remains for Title XI to attain full implementation and program management and staff analysts must remain focused so that future program evaluations can report a more conclusive affirmation that the program is effective and achieving results. The follow up IG audit also contained three additional recommendations for the Title XI program's continued improvement. MARAD has finalized two of the recommendations in the required timeframes. The third recommendation requires MARAD to have a suitable financial monitoring software system implemented by September 2006 and MARAD is also on schedule to meet this requirement. MARAD's computerized portfolio monitoring system will be implemented prior to the start of FY 2007. The Office of Inspector General report stated that the Title XI program has contributed to preserving a U.S. commercial fleet and modernizing U.S. shipyards which directly ties into the program's purpose and goals. The IG and GAO have both indicated that additional follow-up audits will occur. Neither provided a specific timeframe for when they will confirm that their recommendations were properly resolved by MARAD. The new policies and procedures have significantly improved the management and oversight of the existing Title XI portfolio. Since the recommendations of both the IG and GAO audits have been incorporated into the Title XI review process, the Title XI program has not experienced any defaults. Due to the absence of regularly appropriated funding for new loan guarantees since the audits, MARAD has had only limited opportunities to demonstrate that it has followed through and fully implemented all program management recommendations. However, the program has positioned itself to be effective and Title XI loan guarantee funding should be considered in collaboration with other MARAD and DOT programs to both sustain a domestic merchant marine and to support future maritime transportation system needs and initiatives.

Evidence: IG Report dated March 27, 2003 page 2 IG Report dated September 28, 2004 GAO Report dated June 30, 2003