U.S. Food Aid and Agricultural Cargo Preference PolicyLiz Bageant, Chris Barrett and Erin Lentz
Charles H. Dyson School of Applied Economics and Management Cornell University
Presentation at Breakfast Briefing co-sponsored byCARE, Oxfam America, the Partnership to Cut Hunger and Poverty
in Africa
Capitol Visitor Center Congressional Meeting RoomWashington, DC
December 7, 2010
Cargo preference
What is Agricultural Cargo Preference (ACP)?Policy requiring 75 percent of US food aid be shipped on US-flag 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 policyRestricting competition drives up costs and generates windfall gains for eligible service providers.
Tinbergen principleNeed 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
US-flag vessels, driving up costs• Little actually “shipped” from Great Lakes: largely
just inter-modal transfers.
National security goals
70% of ACP vessels not militarily usefulDoD 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 MSP1996 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.
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.
National security goals
Inadvertently helps foreign shipping firmsAlthough 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.
“Buy American” goals
Example: 20 ACP vessels ultimately owned by A.P. Møller-Maersk Group
Policy options
Reduce costs by ending anti-competitive policy$140 mn lost due to 46% mark-up. Eliminate MSA-17.
Reallocate maritime support to more effective MSPCompared to MSP, ACP less well targeted to and less remunerative for militarily useful vessels. Could cover 40 more MSP ships, rather than older, more expensive vessels.
Use strict guidelines on corporate parentage Support only American carriers and merchant mariners.
Policy options (continued)
Improve US international food assistanceUse savings from ending ACP to help meet unfunded commitments made by Presidents Bush and Obama: double non-emergency Title II to Africa.
Even without using the savings from ACP, ending ACP would improve food aid flexibility while reducing admin (and possibly commodity) costs.
Conclusions
Agricultural cargo preference policy is antiquated As basic economic principles predict, anti-competitive practice leads to higher cost. And a single policy instrument fails to achieve its multiple, desirable goals, especially given changes in modern commercial shipping practices.
Time to end cargo preference so as to liberate US food aid from outdated rules that fail to serve their stated objectives well. There are better tools for advancing national security and “buy American” objectives.
Thank you for your time, interest and comments!
Thank you
Backup tables
FY2006 ($ millions) Costs accrued to USAID
Costs accrued to MARAD
Costs to taxpayers
Total OFD incurred due to ACP 57.6 19.5 77.1Total costs due to missing alternate bids
26.8 26.8
MARAD TPEF payment to USAID (34.8) 34.8Total payments 49.6 54.4 103.9
ACP Costs and Payments on USAID Title II Food Aid
FY2006 Tonnage Allocations Bagged BulkFOREIGN-FLAG
Percent foreign-flag winning bids
MSA-17: 24.4%22%Non-MSA-17:
0.4%
US-FLAG
Competitive ocean rate 9.6% 0.2%Non-competitive ocean rate 46.6% 52%
Missing foreign-flag bidMSA-17: 0.2%
25%Non-MSA-17: 18.8%
TOTAL 100% 100%
Great Lakes Set-Aside aggravates anti-competition
Backup tables
