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Q. What is cargo preference?
A. Cargo preference is a law that requires at least 50 percent of the gross tonnage of all U.S. Government generated cargo, meaning cargoes procured, furnished, or financed by the U.S. Government, to be transported on privately owned, U.S.-flag commercial vessels to the extent such vessels are available at fair and reasonable rates. International food assistance provided by the U.S. Agency for International Development (USAID) and the U.S. Department of Agriculture (USDA) is included in the definition of “Government generated cargo.”
Q. In the Coast Guard and Maritime Transportation Act (HR 4005), the Congressional Budget Office (CBO) scored the impact of an increase in cargo preference to 75 percent at $44 million over five years. However, USAID is saying that the impact will be closer to $75 million annually, which translates to $375 million over five years. What accounts for the discrepancy and what is the actual cost to USAID programs?
A. The CBO scored H.R. 4005, the Coast Guard and Maritime Transportation Act of 2014, without the consultation of USAID. The CBO Scoring Estimate suggests that increasing the requirement of U.S. vessels to be used to ship food aid from 50 to 75 percent will cost a total of $44 million over five years with an average outlay of $8.8 million per year. USAID does not support the CBO estimated cost of this legislative proposal. USAID’s analysis indicates a range of probable outcomes subject to the size of the future Food for Peace program and predicts increases in USAID transportation costs of between $40 million and $80 million per year. The most plausible scenario results in an increase in USAID transportation costs of approximately $60 million per year. In addition to any costs borne by USAID, USDA concludes that the proposed increase in cargo preference would cost their Food for Progress and McGovern-Dole Food for Education and Child Nutrition (McGovern-Dole) programs an additional $13.6 million annually. Moreover, due to the lack of U.S. flag capacity, we expect there to be secondary effects adding to the cost of commodity purchases and local logistics.
While USAID has since discussed the cost estimate with CBO, CBO does not have the option to re-score the provision because H.R. 4005 has already passed the House. USAID’s calculations reflect actual savings realized due to the reduction in freight costs stemming from the decrease in the cargo preference requirement from 75 to 50 percent under the Moving Ahead for Progress in the 21st Century Act (MAP-21).
The Administration’s analysis shows that the reduction in cargo preference from 75 to 50 percent after the passage of MAP-21 conservatively reduced ocean transportation costs for the Food for Peace program by an average of nearly 30 percent. It is worth noting that the CBO score in the MAP-21 bill in July 2012 indicates a savings of $108 million per year due to the reduction in cargo preference from 75 to 50 percent. These savings stemmed from more efficient operations on both U.S. and foreign flag voyages as USAID was able to better match available cargoes with the appropriate vessels. Based upon anticipated annual ocean transportation expenditures, these savings, if reversed, would equate to an annual increase in USAID's transportation expenses of over $60 million per year. When this increase to USAID’s Food for Peace expenses is added to USDA’s anticipated cost increases to the Food for Progress and McGovern Dole programs of roughly $14 million, the combined impact is estimated at approximately $75 million per year.
Q. USAID has said that the 2014 Farm Bill and the 2014 Consolidated Appropriations Act provided additional flexibility and efficiency for the program – allowing them to collectively reach 800,000 more people with the same resources. Won’t these changes compensate for the increase in cargo preference?
A. No. USAID is appreciative of the additional flexibility and efficiency provided by the 2014 Farm Bill and the 2014 Consolidated Appropriations Act which will allow us to reach an additional 800,000 people each year. However, the proposed 75 percent cargo preference requirement, when combined with the elimination of ocean freight differential reimbursements, or reimbursements on cargo preference, in the Bipartisan Budget Act of 2013 will result in an inability to reach more than four million people, including about three million receiving Food for Peace food aid each year. The proposed changes will reverse the progress made and impede the United States’ ability to provide emergency food aid to vulnerable populations.
Furthermore, the 2014 Farm Bill set a precedent by calling for greater flexibility and efficiency in U.S. Government food aid programs. The potential increase in cargo preference runs counter to this precedent by decreasing the flexibility and efficiency of these programs and limiting USAID’s ability to provide lifesaving food assistance to millions of hungry people around the world on behalf of the American people.
Q. Would USAID’s ability to respond quickly to humanitarian emergencies be impacted by an increase of cargo preference to 75 percent?
A. Yes. In the case of a humanitarian emergency, USAID must be able to respond rapidly with the appropriate mix of commodities. Countless logistical and programmatic considerations are factored into our emergency response plans. Quite often, the U.S. flag fleet cannot provide the service necessary to meet the resulting transportation requirements. For example, USAID’s timely response in the aftermath of Typhoon Haiyan was carried to the Philippines from USAID’s preposition warehouse in Sri Lanka onboard foreign flag vessels as the necessary U.S. flag service did not exist. USAID’s flexibility to use the appropriate vessel for these types of emergency responses would be limited by the proposed cargo preference increase.
Further, U.S. flag service does not exist to most of USAID’s destination ports, including the entirety of Western and Southern Africa, where 80 percent of Food for Peace shipments are sent. If service does not exist, you have to charter a vessel and USAID faces significant challenges in shipping small lot sizes that do not warrant the charter of an entire vessel. USAID is often forced to contract a ship substantially larger than necessary or face delays by commingling cargoes destined for many different locations as a means to utilize the vessel’s carrying capacity. For example, while the average lifespan for a commercial vessel is 20 years, USAID currently has a 37-year-old U.S. flag vessel under contract to carry numerous parcels of food aid into seven different ports in the Canary Islands, West Africa, East Africa, and Cambodia under a single continuous voyage. Although the food destined to the latter discharge ports will sit onboard the vessel for two to three months, this combination of cargoes was the only means to use the vessel’s carrying capacity while meeting our cargo preference mandates.
Q. Would maintaining the cargo preference rate at 50 percent have any impact on military readiness?
A. According to the Department of Defense (DOD), calls to increase food aid cargo preference to 75 percent will not impact the ability of DOD to crew the surge fleet and deploy sustainment cargo.
Q. Would a 75 percent cargo preference increase mean that we would ship fewer commodities? Would this proposed cargo preference increase have an impact on U.S. ports?
A. Yes. Ocean freight costs come directly out of the Food for Peace budget and additional transportation costs will directly reduce USAID’s ability to purchase and ship domestically sourced commodities. The combined impact of the proposed increase in cargo preference and the recent loss of reimbursements would reduce the amount of commodities USAID and USDA are able to buy from U.S. farmers and ship through U.S. ports by an estimated 118,000 metric tons ($61.5 million) per year or 590,000 metric tons ($307.5 million) over five years.
This reduction in the purchasing power would mean:
- Wheat. Approximately 57,000 ($25.5 million) fewer metric tons of wheat purchased per year translating to 285,000 ($127.5 million) over five years from farmers in Kansas, Louisiana, Montana, Oregon, Texas and Washington.
- Grain and Sorghum. Approximately 44,000 ($21.8 million) fewer metric tons of grain and sorghum purchased per year translating to 220,000 ($108.8 million) over five years from farmers in Indiana, Minnesota, Missouri and Wisconsin.
- Rice. Approximately 7,000 ($4.0 million) fewer metric tons of rice purchased per year translating to 35,000 ($20.0 million) over five years from farmers in Arkansas, Louisiana and Texas.
This reduction in commodities purchased would also decrease food aid volumes through U.S. ports by nine percent per year, which would negatively impact twelve ports and transfer facilities across the United States, including in Alabama, Illinois, Louisiana, Tennessee, Texas, Virginia and Washington.
Q. If cargo preference was at the 75 percent level from 1985 to 2012, why is it such a problem to change it back?
A. The 1985 Food Security Act increased cargo preference to 75 percent and introduced the provision for ocean freight reimbursements in order to offset the impact on cargo volumes. Since the change in cargo preference in 2012, the landscape has changed for the U.S. food aid programs. The Bipartisan Budget Act, which was enacted in December 2013, eliminated the Department of Transportation ocean freight reimbursements that were specifically built into the Food Security Act of 1985 that raised USAID and USDA food aid cargo preference from 50 to 75 percent. The 1985 Act change in cargo preference was predicated on the principle that the increased cargo preference requirement should not reduce food aid shipments and included ocean freight reimbursement provisions to offset the higher costs of the increased cargo preference requirement. In 2013 these reimbursements totaled about $60 million for the food aid programs; historically these reimbursements averaged between $100 to $150 million per year. Moreover, rising commodity and distribution expenses coupled with a growing number of complex humanitarian emergencies have since placed additional pressures on the food aid programs.
Q. What is the difference between the Jones Act and Cargo Preference?
A. The Merchant Marine Act of 1920, commonly referred to as the Jones Act, contains provisions requiring that commodities transported between two U.S. ports (e.g., New York to Baltimore) must be carried onboard a U.S. flag vessel (46 App. U.S.C. § 883). The Cargo Preference Act of 1954 (46 U.S.C. § 55305), which H.R. 4005 seeks to modify, requires that civilian agencies utilize U.S. flag vessels for at least 50 percent of government-impelled ocean borne cargoes sent internationally, computed by type of vessel used and by geographic area.
The Jones Act annually directs over a billion tons of various commodities to U.S. flag vessels ranging from coastal barges to oil tankers. In contrast, the combined volumes represented by food aid programs typically average between one to two million tons. As Jones Act volumes are up to a thousand times larger than that of the food aid volumes, U.S. flag services are far more robust in servicing the coastwise trade between US ports than in providing transportation into the developing world. As the U.S. economy continues to grow, so does Jones Act trade.
Q. Does the Administration oppose the proposed increase? What about the international NGOs who implement these programs?
A. Yes. The Administration opposes the proposed increase in cargo preference. The Department of Homeland Security sent a letter to Senate Commerce Committee Chairman Jay Rockefeller on April 17, 2014 outlining concerns with the proposed cargo preference provision. The letter specifically states that the Administration strongly opposes section 318 of H.R. 4005, which would increase from 50 to 75 percent the tonnage of U.S. agricultural commodities from the Department of Agriculture-appropriated McGovern-Dole and Food for Progress food aid programs, and highlights that the requirement would prevent 2 million people to receive life-saving food each year. Additionally, 30 international NGOs recently signed a letter opposing the potential changes to cargo preference, calling attention to the impact on vulnerable populations who are food insecure around the globe.
Q. What is the Administration’s position on Section 316 of H.R. 4005, which would eliminate the need for the Secretary of Transportation to seek public or expert advice on cargo preference enforcement regulations?
A. The Administration strongly opposes section 316 of H.R. 4005, which would amend 46 U.S.C. § 55305 (commonly known as the “cargo preference” statute) to eliminate critical expert consultation and public comment requirements. By eliminating required consultation with programmatic experts (i.e., the other departments, agencies, organizations, and persons that fund, furnish, procure and deliver cargoes), the provision needlessly risks programmatic inefficiencies and on-the-ground operational problems. In addition, by explicitly authorizing the Secretary of Transportation to forego public comment in drafting the implementing regulations, the provision ignores the input of business, non-profit, and other stakeholders affected by the regulations. As advanced by President Obama’s Executive Order 13563, the Federal Government greatly benefits from public input in the rulemaking process. Under the Administrative Procedure Act, the Secretary already has authority to directly issue final rules where appropriate, so this change only serves to undermine the principles of public participation and transparency. In light of the potential adverse impact this could have on U.S. Government agencies and their humanitarian and other programs, including life-saving emergency food aid programs, the Administration urges the Senate to strike section 316 in its entirety.
Last updated: June 05, 2014