JULY 2, 2003

GAO report identifies Title XI weaknesses.
In a report published June 30, the GAO (General Accounting Office) identifies weaknesses in the management of the Title XI Loan Guarantee Program.

The GAO report finds that 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, says GAO, 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, says GAO. 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.

GAO recommends that Congress consider providing no new funds for new loan guarantees under the Title XI program until certain controls have been instituted and MARAD has updated its default and recovery assumptions to more accurately reflect costs. GAO also recommends that MARAD undertake several reforms to help improve program management. In written comments, the Department of Transportation disagreed with some report findings, however, it recognized that program improvements were needed.

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