Transcript Slide 1

U.S. Food Aid and Agricultural
Cargo Preference Policy
Liz Bageant, Chris Barrett and Erin Lentz
Charles H. Dyson School of Applied Economics and Management
Cornell University
Presentation at Breakfast Briefing co-sponsored by
CARE, Oxfam America, the Partnership to Cut Hunger and Poverty in Africa
Capitol Visitor Center Congressional Meeting Room
Washington, DC
December 7, 2010
Cargo preference
What is Agricultural Cargo Preference (ACP)?
Policy requiring 75 percent of US food aid be shipped on USflag vessels, regardless of whether these vessels offer a
competitive bid for the service. ACP coverage increased from
50% in 1985 Farm Bill.
Desirable objectives
ACP’s desirable primary objectives
According to Maritime Administration (MARAD):
• Provide essential sealift capability in wartime
• Maintain skilled jobs for American seafarers
• Maintain the financial viability of US-flag vessel operators
• Protect US ocean commerce from foreign domination
Since this adds costs to food aid, MARAD provides transfer
payments to USAID/USDA to partly pay for these goals.
Basic ACP economics
Anti-competitive policy
Restricting competition drives up costs and generates windfall
gains for eligible service providers.
Tinbergen principle
Need one specific policy instrument for each policy objective.
Blunt tools with multiple objectives are, at a minimum, quite
inefficient and usually ineffective at attaining their goals.
By construction, ACP is an anti-competitive policy
with multiple objectives. Key empirical questions:
- How much does it drive up costs?
- Who pays for the extra cost?
- How far short of its objectives does ACP fall?
Data
Data
• Obtained full year (FY2006) of USAID food aid shipments
data.
• For each of 1,741 shipments: commodity, tonnage, vessel
name and flag status, ocean freight costs, and the value of
or absence of alternate bids for the shipment.
• Supplemented with:
• MARAD ACP and MSP vessel eligibility lists
•Publicly available information on vessel corporate
parentage and crew sizes.
Methods
Analytical methods
• Compute ACP costs and allocate between MARAD and
USAID using guidelines in 1987 MARAD-food aid agencies
MOU.
• Compare ACP vessels against militarily useful, US-owned
criteria.
ACP costs
Anti-competitive mark-up: ~46% and $140 mn/year
• ACP resulted in a 46% markup over competitive freight
costs.
• Cost to taxpayers on USAID FY06 shipments: $104 mn
• Adjust for USAID’s 74% share of FY2006 US food aid
and estimated total cost to taxpayers of ACP is $140 mn
• Much ACP cost shouldered by USAID because:
• ACP discourage foreign flag bids – so no reimbursement
• OFD reimbursement rule uses average on vessels < 25
years old, but older vessels 48-64% more expensive.
Great Lakes set-aside
(MSA-17)
Great Lakes Set-Aside aggravates anti-competition
• Maritime Security Act of 1996 (MSA-17) requires 25% of all
bagged food aid pass through Great Lakes ports, exempt from
ACP
• Implications:
• MSA-17 absorbs the 25% foreign-flag shipment allowable
under ACP
• Effectively limits shipments from all other ports to USflag vessels, driving up costs
• Little actually “shipped” from Great Lakes: largely just
inter-modal transfers.
National security goals
70% of ACP vessels not militarily useful
DoD defines “militarily useful” as container vessels (not bulk or
tanker vessels) <15 years old and offering liner service. By this
definition, 100/142 ACP vessels were not militarily useful.
Wasteful duplication of more targeted MSP
1996 Maritime Security Program (MSP) pays owners of
militarily useful vessels $2.9 million/year for a call option on
vessels and crews.
47/60 MSP eligible vessels qualify for ACP, although only 25
of them carried USAID food aid cargo in FY2006.
Just 7% of ACP costs went to these 25 ($7/140mn). MSP
payments to militarily useful vessels 10 times larger than ACP.
National security goals
Notional reserve of mariners not used
In theory, ACP maintains a pool of mariners for call-up. But
no documented mobilization of ACP citizen mariners since
program began in 1954, spanning 7 major military operations.
The cost of maintaining this pool of ~1,400 mariners on the
vessels that carried ACP food aid in FY2006?
About $100,000/mariner.
“Buy American” goals
Inadvertently helps foreign shipping firms
Although the law requires ACP vessels be “owned” by an
American company, those companies are, in turn, commonly
owned by foreign shipping firms. Almost 40% of the tonnage
hauled by vessels for which we could trace corporate
parentage was ultimately owned by foreign corporations.
Example:
20 ACP vessels
ultimately owned
by A.P. MøllerMaersk Group
Policy options
Reduce costs by ending anti-competitive policy
$140 mn lost due to 46% mark-up. Eliminate MSA-17.
Reallocate maritime support to more effective MSP
Compared to MSP, ACP less well targeted to and less
remunerative for militarily useful vessels. Could cover 40
more MSP ships, rather than older, more expensive vessels.
Use strict guidelines on corporate parentage
Support only American carriers and merchant mariners.
Policy options
(continued)
Improve US international food assistance
Use savings from ending ACP to help meet unfunded
commitments made by Presidents Bush and Obama: double
non-emergency Title II to Africa.
Even without using the savings from ACP, ending ACP would
improve food aid flexibility while reducing admin (and
possibly commodity) costs.
Conclusions
Agricultural cargo preference policy is antiquated
As basic economic principles predict, anti-competitive
practice leads to higher cost. And a single policy instrument
fails to achieve its multiple, desirable goals, especially given
changes in modern commercial shipping practices.
Time to end cargo preference so as to liberate US food aid
from outdated rules that fail to serve their stated objectives
well. There are better tools for advancing national security
and “buy American” objectives.
Thank you
Thank you for your time,
interest and comments!
Backup tables
ACP Costs and Payments on USAID Title II Food Aid
FY2006 ($ millions)
Costs
accrued to
USAID
Total OFD incurred due to ACP
57.6
Total costs due to missing alternate bids 26.8
MARAD TPEF payment to USAID
(34.8)
Total payments
49.6
Costs
Costs to
accrued to taxpayers
MARAD
19.5
77.1
26.8
34.8
54.4
103.9
Backup tables
Great Lakes Set-Aside aggravates anti-competition
FY2006 Tonnage Allocations
FOREIGN- Percent foreign-flag
FLAG
winning bids
US-FLAG
MSA-17: 24.4%
Non-MSA-17: 0.4%
Bulk
22%
Competitive ocean rate
9.6%
0.2%
Non-competitive ocean rate
46.6%
52%
Missing foreign-flag bid
TOTAL
Bagged
MSA-17: 0.2%
Non-MSA-17: 18.8%
100%
25%
100%