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Taxpayers Stuck With Unsold Ferries as U.S. Floats Ship Loans

Ferries Rust on Taxpayer Dime
The U.S. Maritime Administration is trying for a second time to sell two ferries it seized from now-defunct Hawaii Superferry Inc., which defaulted on $138 million in guaranteed loans in 2009. The ferries have been docked at Norfolk, Virginia, for two years. Photo: David B. Hollingsworth/The Virginian-Pilot

Two passenger ferries sit at a dock in Norfolk, Virginia, waiting for someone to take them off the government’s hands.

The U.S. Maritime Administration has taken bids for them in an attempt to recover some of the $138 million in taxpayer money paid to cover defaults on loans it guaranteed for the owners, Hawaii Superferry Inc. The company sought bankruptcy protection and defaulted in 2009.

The unwanted ferries are reminders of the defaults and oversight problems reported as recently as December in the so-called Title XI program as vessel owners have won $798 million in new loan guarantees this year, the most since 2001. As it considers two applications for an additional $712 million in guarantees, the maritime agency is trying to recover what it can on $311 million paid out to cover six defaults since 2008.

The program has survived elimination attempts because supporters in Congress “logroll” to keep funding it, said Chris Edwards, director of tax policy studies at the Cato Institute. “Some of these ships are built in their districts, and they’ll fight to the death for it,” Edwards said in an interview. His Washington-based group advocates reducing government spending and lower taxes.

Title XI has the funding to expand its loan balance to $4 billion, according to government data. Its loan balance was more than $2 billion in fiscal 2010, according to the agency.

‘Pork-Barrel Spending’

The program’s bipartisan supporters, such as former Senator Trent Lott, a Mississippi Republican, and Democratic Senator Daniel Inouye of Hawaii, credit Title XI with creating jobs and supporting national defense and the U.S. commercial fleet. The U.S. fleet shrank from 17 percent of the world’s oceangoing merchant ships in 1960 to less than 1 percent in 2008, according to the Bureau of Transportation Statistics.

Five guarantees approved since President Barack Obama took office in 2009 will create 8,000 jobs, maritime agency Administrator David Matsuda said in an e-mail.

Senator John McCain, an Arizona Republican, has dubbed the program “an egregious example of pork-barrel spending” that has wasted billions of taxpayer dollars. McCain’s office didn’t return two phone calls and two e-mails seeking comment.

“There’s been a number of instances in the past where decisions were made that, well, maybe they weren’t the best in terms of the risk that was before the administration,” Matsuda said at a House hearing March 1.

Level Playing Field

The government covers 87.5 percent of the amount of the loans it guarantees, and pays only after a default.

U.S. companies get lower interest rates with Title XI backing, “leveling the playing field” with lower-cost foreign competitors, said Lisa Barnes, project manager for Eastern Shipbuilding Group in Panama City, Florida. Eastern Shipbuilding plans to add 300 workers to build five platform-supply vessels for Brazil-based Boldini A.S., which got a $241 million guarantee March 8.

Representative Steve Southerland, a Florida Republican elected last November with the support of the Tea Party, which argues for reducing government spending, pressed Matsuda at a March 1 hearing to approve Boldini’s application before a March 10 deadline. Eastern Shipbuilding is in Southerland’s district.

“Be sensitive that the process could very well be the reason that these jobs go elsewhere in the world, OK?” Southerland said. “So there is a sense of urgency here.”

Matt McCullough, Southerland’s spokesman, didn’t immediately respond to a request for comment.

Role of Politics

Politics drove decisions to give guarantees to some companies that eventually defaulted, Clayton Cook, the maritime agency’s general counsel from 1970 through 1973, said in an interview.

He cited American Classic Voyages Co., chaired by billionaire real-estate investor Sam Zell, which received a $1.1 billion guarantee for two cruise ships under the banner of Project America. Five subsidiaries of the company accounted for $330 million of the $490 million that defaults cost the government from 1993 through 2002.

Inouye sponsored a provision in a defense bill called the U.S. Flag Cruise Ship Pilot Project, he said at a hearing in 1999. The project gave American Classic Voyages exclusive rights to operate cruise ships in Hawaii, the company said in a Securities and Exchange Commission filing in 2000. The ships were to be built at Ingalls Shipbuilding in Pascagoula, Mississippi, Lott’s hometown. Lott declined to be interviewed.

American Classic Voyages filed for Chapter 11 bankruptcy in October 2001. The default cost taxpayers $187 million, according to the maritime agency.

Hawaii Connections

“The project, while proceeding with considerable difficulty, including delays and increased costs in construction, ultimately became a victim, like many other industries, of the September 11 attack on our nation,” Inouye said in a floor speech in 2003.

Inouye didn’t respond to a question about the default, saying in an e-mail that “loan-guarantee programs are one of the many ways that government can partner with the private sector to create jobs and expand the economy.”

Hawaii Superferry, chaired by former Navy Secretary John Lehman, spent up to $20,000 a year lobbying Congress, the maritime agency, the Environmental Protection Agency and other agencies on Title XI and “vessel financing issues” between 2004 and 2006, according to federal lobbying disclosures. The loan guarantees helped the firm finance the ferry purchases from shipbuilder Austal USA, based in Mobile, Alabama.

The Superferry’s default occurred because a Hawaii court ruled the state shouldn’t have let the company skip an environmental impact study, said William Schubert, maritime administrator from December 2001 to February 2005. “The people of Hawaii wanted the service, and when it went to the state Supreme Court it pretty much put an end to the program,” Schubert said in a phone interview.

Economic Benefits

Title XI guarantees of sound loans “support economic activity at virtually no cash cost to the taxpayer, at a time when we really need that,” Michael Roberts, general counsel at Jacksonville, Florida-based Crowley Maritime Corp., said in an interview. Crowley subsidiary Vessel Management Services Inc. has received $845 million in backing since 1998, including a $346 million guarantee in July.

Houston-based Rowan Cos., which has received $878 million in guarantees for building six oil rigs, will pay off its loans on time because the guarantees “enabled us to grow and be very successful,” said Bill Wells, chief financial officer.

“Not only did it support U.S. employment, but it also enabled us to become a stronger company,” Wells said in an interview.

‘Unwarranted Corporate Subsidy’

President Ronald Reagan and Congress suspended the program in 1987 after 129 defaults from fiscal 1985 through 1987. President George W. Bush’s administration called Title XI an “unwarranted corporate subsidy,” and the program stopped issuing guarantees again in 2005. Both times the program was revived.

A 2003 inspector general’s audit found the maritime agency was ignoring financial weaknesses in some applications. The agency in response set up an evaluation process that included sending applications to a new department-wide credit council.

“These changes are working,” Matsuda, who took office in July 2009, said by e-mail. No defaults have occurred on guarantees approved during the Obama administration, he said.

In December, another inspector general’s report said the agency hadn’t implemented recommendations made in 2003 to improve borrower oversight. The agency is “well on our way to implementing the recommendations outlined in the OIG report,” Matsuda said.

The agency says it has recovered $142 million, or 18 percent, of the $801 million it has paid out on 15 defaults since 1993.

Application Slowdown

Applications have declined since the mid-2000s because of a sluggish economy and more rigorous screening, said Darrell Conner, a former staffer at the now-defunct House Merchant Marine and Fisheries Committee and now government relations counselor at Washington-based K&L Gates LLP. The amount of new guarantees this year is the highest since 2001 because the three new applications approved are worth $100 million or more each.

The agency seeks to speed up the application process with stricter deadlines from applicants, who are responsible for most delays in processing time, Matsuda said by e-mail.

The credit council is an “unmitigated disaster” because it doesn’t have maritime experts and has made applying slower and more difficult, said John Graykowski, maritime agency deputy and acting administrator from 1994 through 2000.

“I used to get the crap beat out of me because it took nine months to 11 months to get a deal done, which drove me nuts,” Graykowski said in an interview. “Now it’s two years.”

With assistance from Lisa Caruso in Washington.

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