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Ships' Housing Deal Is Under Scrutiny
Carnival Cruise Lines' contract to provide emergency lodging after Katrina could cost taxpayers $236 million. Many berths are empty.
By Alan C. Miller, Ken Silverstein and John Hendren
Times Staff Writers
September 24, 2005

WASHINGTON — When Carnival Cruise Lines agreed to lease three ships to the government for Hurricane Katrina evacuees, the company president portrayed it as an act of compassion to "provide desperately needed housing for thousands of individuals." Now two lawmakers are questioning the hastily negotiated deal, which could give the company as much as $236 million.

Rep. Henry A. Waxman (D-Los Angeles) sent a letter Friday to Homeland Security Secretary Michael Chertoff requesting a copy of the contract and documentation supporting its cost. Rep. Marilyn N. Musgrave (R-Colo.) said she intended to ask for an investigation of the Sept. 2 deal.

"In emergencies, strange things happen, but this raises a lot of red flags," Musgrave said. "We need to shine some light on this and see if the deal was proper."

Said Waxman: "We seem to be paying a heck of a lot of money for these ships. I'm trying to determine if this is a wise use of resources."

Carnival says it will earn no more on the deal than it would have received if the three vessels had remained in regular service.

But the pact, made by the Navy's Military Sealift Command at the direction of the Federal Emergency Management Agency, has raised questions about whether the payments are excessive.

Neither Carnival nor the government will release details about how they arrived at the contract numbers.

The deal calls for Carnival to be paid $192 million for providing about 7,100 berths, originally intended for evacuees but now being used mostly for emergency workers, for six months. Carnival is also being reimbursed for up to $44 million in operating costs, including charges assessed at ports for fuel, water, electricity and waste disposal.

In addition, Carnival's contract includes compensation to the company for corporate taxes that experts say could amount to tens of millions of dollars.

The government agreed to this because Carnival, though based in Miami, is exempt from U.S. income taxes and some other taxes because it is registered in Panama, its ships fly foreign flags and the vessels operate primarily in international waters.

The trade association that represents cruise lines is seeking a Treasury Department waiver to exempt vessels under government contract from federal corporate income taxes and withholding taxes for crews.

Carnival has said that if the waiver is approved, it will reduce the amount of its contract payment.

Navy Capt. Joseph Manna, who negotiated the contract at the Military Sealift Command, said nothing was inappropriate about the process or outcome. The Carnival deal was comparable to the cost of "a hotel and three meals a day," he said, which is "in a reasonable area of price."

But, he added, if he'd had more time "I might have been able to get a better price…. When you do it fast, sometimes you pay a little more."

The Military Sealift Command is primarily charged with arranging for private shipping companies to transport fuel and cargo to war zones. Spokeswoman Trish Larson said that "Carnival determined the price for use of their ships" under a competitive bidding process.

She said the command routinely reimbursed the port expenses included in Carnival's contract.

A Canadian company that is providing a fourth ship under the same contract is also being reimbursed for its expenses.

Less Than Half Capacity

"The deal is designed so that Carnival does not make any money beyond what it would have made if these ships had been kept in service," said Carnival spokeswoman Jennifer de la Cruz.

She said the company was being reimbursed for "any costs incurred in excess of our normal vessel operating costs."

But she added that the company might be willing to change the terms of the deal.

"The pricing was calculated based on the best information available to us in the short period of time we were given to negotiate the preliminary terms of the charters," De La Cruz said.

"Since cruise ships have never been deployed under these circumstances, many assumptions and estimates were made as to the extra costs, cost savings, possible taxes and revenues lost in connection with this operation. Subsequent events and the true experience following a period of operation of the vessels may result in adjustments to the charter hire price."

Carnival put the deal together in 36 hours and was forced to cancel about 100,000 customers' cruises, De La Cruz said.

The company's decision to make its vessels available amid a national crisis was "a huge public relations risk" and "a significant disruption to our business operations," she said.

Originally, as FEMA scrambled to catch up with the unfolding disaster in New Orleans and neighboring areas, it came up with the idea of leasing passenger ships as emergency housing for evacuees.

After those fleeing the hurricane objected to being sheltered on the water and isolated from services they needed to get back on their feet, FEMA decided to use two of Carnival's ships for police, firefighters, and other emergency and relief workers.

The third Carnival vessel, based in Mobile, Ala., is being used to house evacuees from Mississippi.

The Canadian ship, an overnight ferry now moored outside New Orleans in Chalmette, La., is also housing relief workers.

Relief workers and others began to use the ships Sept. 12. The delay was due to "getting the ships in port," FEMA spokesman James McIntyre said.

None are close to capacity. As of Wednesday, the Ecstasy had 1,359 on board; the Sensation, 1,388; the Holiday, 220; and the Scotia Prince, the Canadian vessel, 331.

Under the contract, Carnival is receiving $424,000 a day for 2,634 berths on the Sensation, a cruise ship based in Galveston, Texas; $383,000 for 2,634 berths on the Ecstasy, which was moved to New Orleans; and $263,000 for 1,848 berths on the Holiday in Mobile, Ala. This includes quarters, three meals daily and housekeeping services.

Those numbers amount to an average berth cost of $27,000 for six months. If Carnival is reimbursed the full $44 million allowed for expenses, the average will exceed $33,000.

McIntyre said FEMA expected to fill all the available berths.

In his letter to Chertoff, Waxman said: "Many of the berths are going unfilled, which could make the costs per person extraordinarily high." Even if all were used, he said, the cost "would appear to be far more than other options, such as providing community-based housing."

Waxman, the ranking Democrat on the Government Reform Committee, requested copies of all contracts with Carnival as well as documents used to calculate the costs and solicit bids.

Musgrave said in an interview that she was concerned about the size of the Carnival contract, the reimbursements for expenses and the request for a tax waiver. She said she intended to ask the Bush administration and congressional leaders to open an investigation into the contract next week.

Only the bids submitted by Carnival and the Canadian company for their ships met the conditions FEMA set in the competitive process, according to the Military Sealift Command.

Without details on how Carnival, FEMA and the Military Sealift Command arrived at their deal, industry insiders say, it is difficult to say how much money Carnival will make on the deal.

Reaction in the Industry

Industry insiders were split on whether Carnival would come out ahead.

Joyce Landry, chief executive of Landry & Kling, the Florida-based ship-chartering firm that recommended the Canadian ship to FEMA, said Carnival would probably not fare better than it otherwise would have. "When all is said and done, I wonder if they're going to lose money here," she said.

But a cruise industry consultant, who declined to be identified because he works with the industry, said of the reimbursements for operating expenses: "In normal commercial operations, there is no fairy godmother that pays these expenses. You pay them out of your pocket."

The consultant, and several other industry experts interviewed by The Times, also noted that the three ships Carnival chartered to the government are among the smallest, oldest and least luxurious in its fleet, and offer passengers lower-end rates.

J. Michael Crye, the president of International Council of Cruise Lines, a trade organization that includes Carnival, said the council was seeking waivers from the Treasury Department to exempt cruise lines from taxes while aiding Katrina victims. The council is also requesting that Homeland Security exempt the companies from some visa requirements for its workers, who do not require U.S. work visas while operating in international waters.

"If you treat these as international voyages and therefore U.S. corporate income taxes would not apply for the charters, then the cost would be reduced by that amount," Crye said.

He said he did not know the amounts involved.

Carnival, the Military Sealift Command and Treasury declined to disclose them.

Of the request for a tax waiver, Treasury spokesman Taylor Griffin said: "We're considering it."

Times researcher Janet Lundblad in Los Angeles contributed to this report.

Los Angeles Times

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"To critics, the price is exorbitant. If the ships were at capacity, with 7,116 evacuees, for six months, the price per evacuee would total $1,275 a week, according to calculations by aides to Sen. Tom Coburn (R-Okla.). A seven-day western Caribbean cruise out of Galveston can be had for $599 a person -- and that would include entertainment and the cost of actually making the ship move."

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I am assuming the government does not take into consideration the large amounts of lost revenues from bar sales, Casinos, shore excursions, and gift shop sales. And I am assuming that the government also knows that the $599 rate is often for the cheapest cabins in off-season and not for balconies in prime holiday busy season.

We here know how lucrative the on-board cruise operations are, and Carnival makes millions every day. Would any major hotel chain donate the use of their Hyatt, Marriott, etc.? I wonder what costs they would stand to lose if they "chartered" one of their properties and the govt. could not fill it?

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Senators seek accounting on $236 million cruise ship deal
HOPE YEN
Associated Press
September 29, 2005

WASHINGTON - Two senators on Thursday asked federal officials to explain their decision to sign a $236 million deal with Carnival Cruise Lines for Hurricane Katrina housing, saying Greece was ready to provide two ships for free.

In a letter, Sens. Tom Coburn, R-Okl., and Barack Obama, D-Ill., asked Homeland Security Secretary Michael Chertoff to explain why Federal Emergency Management Agency officials chose Carnival and turned down the Greek offer.

The six-month deal with Carnival for three full-service cruise ships - which now sit mostly empty in the Gulf Coast - has been criticized by lawmakers of both parties as a prime example of wasted spending in Hurricane Katrina-related contracts.

The two have proposed legislation that would create a chief financial officer to oversee and approve Katrina spending.

"Even if the Carnival contract were a good one - and it almost certainly is not - it is inexplicable why FEMA would fail to implement the Greek governments offer of free cruise ships," the senators wrote.

Greece on Sept. 4 offered to donate two cruise ships to the United States as part of humanitarian aid for Katrina evacuees, according to the European Union.

Butch Kinerney, a spokesman for FEMA, said the agency signed an initial deal with Carnival by Sept. 3 - before the Greek offer. He said he did not know when FEMA officials subsequently became aware of it.

Once FEMA officials did find out, they chose to move forward with the Carnival deal because it was not known how quickly Greece could provide the ships, Kinerney said.

John Hart, a spokesman for Coburn, said the senators want to know exactly when FEMA became aware of Greece's offer and why the agency hasn't tried to back out of the Carnival deal, particularly since the ships are hardly being used.

The Miami Herald

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Troubled waters over cruise ships for storm victims
September 30, 2005

WASHINGTON: An investigation has begun into the Bush administration's payment of $US236 million ($310 million) to rent three cruise ships to house victims of Hurricane Katrina.
The payment means that every week each evacuee on the three ships, which now sit more than half empty in the Mississippi River, cost taxpayers more than twice the cost of a seven-day Caribbean cruise.

The six-month contract, awarded to Carnival Cruise Lines without a bidding process, is the latest of dozens now under investigation by government auditors amid claims of price hiking and political favouritism.

On Capitol Hill, government auditors from six federal agencies told a congressional committee that hundreds of millions of dollars in contracts were being investigated, particularly those alleged to have been awarded to companies with ties to the White House and Republican Party.

The cruise line contract appears to have been made in the panic that gripped the Federal Emergency Management Agency (FEMA) in the chaos after Katrina struck, rather than a case of political payback.

Republicans and Democrats have expressed disbelief at the price. Tom Coburn, a Republican senator from Oklahoma, calculated that if the ships were full, with 7116 evacuees, for six months, the price per evacuee would be $US1275 a week. A seven-day Caribbean cruise could be bought for $US599 a person.

The inspector-general of the Homeland Security department announced this week that he was investigating how several companies were awarded contracts.

The largest contract so far awarded - $US568 million for debris removal - went to a Florida company with ties to the Republican Governor of Mississippi.

More than 80 per cent of the $US1.5 billion of contracts already signed were awarded without bidding, or under limited competition. Fluor Corporation of California, and Bechtel National Inc, major donors to the Republican party, have also been awarded contracts to provide temporary housing.

New Orleans Mayor Ray Nagin launched a plan yesterday to repopulate his hurricane-wrecked city by next week, as hundreds of thousands remained homeless along the Gulf of Mexico.

"Come in, inspect your property, if you want to stay, you're free to stay," Mr Nagin said. "We're also allowing people to come in to look and leave, and those areas will be the areas that are flooded."

If the first phase went well, he said, residents in the rest of the city, except the twice-flooded Lower Ninth Ward, would be allowed back home on October 5, more than one month after Hurricane Katrina struck the Gulf Coast.

Mr Nagin wanted to start repopulating his city last week, but was forced to suspend his program as Hurricane Rita swirled across the Gulf of Mexico.

The Katrina death toll rose to 1132 yesterday as 11 more fatalities were confirmed in Louisiana, authorities said. There are 10 confirmed deaths from Rita.

In Washington, Louisiana Governor Kathleen Blanco pleaded with US legislators in a congressional hearing to speed up aid for her state, which has suffered devastating damage from the two hurricanes.

The double blows of hurricanes Katrina and Rita are likely to shave up to one percentage point off US third-quarter economic growth, but not cause a recession, a senior White House adviser said yesterday.

"There are various estimates about the third quarter ... numbers between half and 1 per cent," said Ben Bernacke, chairman of White House economic advisers.

The Times, AFP

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Carnival CEO defends cruise ship deal for hurricane refugees
JOHN PAIN
Associated Press
September 30, 2005

FORT LAUDERDALE, Fla. - Carnival Corp. CEO Micky Arison defended his company's $236 million contract with the federal government to use cruise ships to house hurricane victims, denying reports Friday that the vessels were mostly empty.

U.S. Sens. Tom Coburn, R-Okla., and Barack Obama, D-Ill., called it a "sweetheart" deal in a letter Thursday asking Homeland Security Secretary Michael Chertoff to explain the contract with the Miami-based company.

The senators alleged the contract guaranteed the Carnival Cruise Lines brand rates that were much higher than market levels. The company has said it doesn't expect to make a profit on the deal.

"What we asked for was to be kept whole basically. And to make up for the revenue that we would have made had the ships been operated. And to pay for the expense of canceling 100,000 people and protecting travel agent commissions," Arison said at a cruise industry convention.

The Sensation and Ecstasy have been used to house emergency workers in New Orleans. Each ship can hold 2,052 people, and Arison said one had only 50 empty cabins and another had 150 vacancies. He said 1,000 evacuees were in Mobile, Ala., on the Holiday, which can hold 1,452 people.

The senators also asked Chertoff to explain why the U.S. didn't accept Greece's offer to send two ships for free. Gov. Jeb Bush's office said those ships wouldn't have arrived until Oct. 10.

Bush said the contract might be an example of government waste. He applauded Carnival's willingness to cancel cruises to aid relief efforts and said "no good deed goes unpunished."

Arison said he was "extremely proud" of Carnival Cruise Lines for taking the ships out of normal service on short notice for hurricane victims. Workers rushed to cancel the cruises for 100,000 passengers, but it was worth it to help first responders, he said.

"Before those ships arrived, those guys had lost their homes, they were trying to police New Orleans without water, without food, without roofs over their head and they're now living on board the Carnival ships," he said.

The Miami Herald

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Under the Waterline of Cruise Ship Deal
A federal pact to provide post-Katrina housing gives Carnival more benefits than previously disclosed. A clause on excess profits is added.

By Ken Silverstein and Alan C. Miller, Times Staff Writers
October 5, 2005

WASHINGTON — The government's controversial agreement to lease three ships from Carnival Cruise Lines for emergency housing after Hurricane Katrina provided more benefits to the company than had previously been disclosed, according to contract documents obtained by The Times.

But it also includes a clause — inserted late last week at the company's request — that calls for returning any excess profit. The clause provides for Carnival to determine voluntarily and "on a good faith basis" whether it has made too much money on the deal and should offer the government a refund.

Among the new disclosures, the deal requires the government to pay any additional costs the company incurs by having to hire American workers instead of the foreigners it usually employs.

As previously reported, the contract will give Carnival $192 million over six months for providing about 7,100 berths, originally intended for evacuees but now being used mostly for emergency workers. And the company will be reimbursed for up to $44 million in operating costs to cover its fuel, waste removal and piloting expenses.

Amid mounting criticism from lawmakers, Carnival has maintained that it will make no additional profit beyond what it would have earned from the three ships under normal operations. This week, for the first time, Carnival spokeswoman Jennifer de la Cruz said that a provision in the contract called for the company to return "any excess profit" above that amount.

She said the concept "was part of our discussions with the government from the outset" leading to the Sept. 2 deal. But she said final negotiations, including the "profit neutrality clause," were completed only last week.

Timothy M. Boulay, a spokesman for the Navy's Military Sealift Command, which negotiated the deal with Carnival at the direction of the Federal Emergency Management Agency, confirmed that the repayment clause was broached by the company as far back as Sept. 2 and, after specific language was worked out, was inserted into the contract Sept. 30 that "finalized all the elements of the original deal."

The original contract documents, which include the award notice and Carnival's "final offer," make no mention of the clause.

On Monday, Carnival Chief Executive Bob Dickinson sent a letter to members of Congress saying that after the completion of the charter, Carnival would "review the expenses incurred and will return monies … if necessary to achieve the goal of profit neutrality."

With evacuees fleeing New Orleans and elsewhere, the deal was put together in about 36 hours, Carnival and the government have said.

In the wake of Katrina, the Sealift Command approached 75 companies or brokers of ships seeking bids on ships with at least 1,000 berths to be available within 10 days. Only Carnival and a Canadian company that provided a single ship met the terms established by FEMA.

"Carnival determined the price for the use of its ships and FEMA ultimately approved the funding for the contracts," Boulay said. "Under the circumstances, it was the best deal the government could get."

Angela Styles, a Republican political appointee who headed the Office of Federal Procurement Policy between 2001 and 2003, questioned the government's handling of the contract. She said she had never heard of a refund clause like the one inserted in the contract, which she described as weak.

Even under circumstances requiring great haste, she said, the government has mechanisms to obtain goods and services at a fair price. For example, she said, a contract can be concluded with the final price to be determined during subsequent negotiations.

"In this case, they executed a contract without ensuring that they had a fair price," she said.

Congressional calls for an investigation of the contract have increased, with Republicans as well as Democrats seeking action.

Three conservative Republicans, Reps. Marilyn N. Musgrave of Colorado, Jeff Flake of Arizona and Todd Tiahrt of Kansas, sent a letter to House Speaker J. Dennis Hastert (R-Ill.) last week calling for "an immediate investigation into all matters related to the contract."

"We have concerns about a broad range of issues," the letter said, citing the price tag, the economics of housing evacuees under the contract terms and the speed with which the deal was negotiated.

Moreover, two industry experts who reviewed the contract documents for The Times said Carnival received a high rate to lease the ships and would save significantly on expenses through reimbursements for items it would normally have paid for itself and through lower-than-normal operating costs.

That includes reduced expenses for food, crew and entertainment, the experts said.

However, one of the experts, who spoke on the condition of anonymity because of his ties to the industry, said that the inserted clause made it hard to level blame at Carnival.

"There may have been less expensive ways to house evacuees, but Carnival simply responded in good faith to a request by the government," he said.

The Sealift Command said provisions such as the one authorizing $44 million for Carnival to cover reimbursable items were standard in its contracts with private shipping companies; such a provision was also included in the deal with the Canadian company. Carnival factored this savings into its overall price, De la Cruz said.

Carnival and other cruise industry companies are normally exempt from U.S. labor law, such as minimum wage rules, because they operate under foreign flags.

Under the government charter, Carnival might have to pay higher wages to some workers than it does to its regular crew, many of whom are from poor countries and work for relatively low wages. However, the contract requires the government to reimburse Carnival for any such difference in wages.

The amount involved is unknown, De la Cruz said.

She said that though Carnival faced some reduced costs, it also had to make up for "more than 120,000 displaced guests as a result of the canceled cruises," lost commissions for travel agents and the "loss of onboard revenues such as shore excursions, casino, spa, alcoholic beverages [and] gift shops."

Los Angeles Times

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US official calls ship charters ‘cost effective’
October 6, 2005

The daily cost of housing workers and evacuees on a cruise ship is less than the federal per diem expense for New Orleans, a Department of Homeland Security official testified today.

The cost per person for housing and meals on a chartered Carnival Cruise Lines vessel is $168 per day, compared to the federal per diem of close to $200 and rising, testified David Paulison, DHS acting undersecretary for emergency preparedness and response. ‘So right now, it’s becoming very cost effective’ to use cruise ships, Paulison told a Senate Committee hearing on the Federal Emergency Management Agency’s hurricane response.

FEMA has been criticized by some lawmakers for paying too much for the ships, which have not been used at full occupancy.

But Paulison told the Senate hearing that the ships now are ‘almost completely full.’ He acknowledged the vessels were half full a few days ago, but noted that federal workers are moving on board and will rotate through on 30- and 60-day timeframes.

Paulison testified that of 3,000 cabins available, 2,641 are occupied. Under questioning, he could not give an exact figure for the number of people on board, however he said the occupancy rate is now more than 90%.

Cruise ships are ‘a very essential piece in this whole public policy issue of how we’re going to house people,’ Paulison said. An estimated 400,000 to 600,000 people are in need of housing.

Paulison also told the Senate hearing that the cruise charters will be part of DHS’s review of FEMA’s contracting procedures.

Seatrade Insider

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"Sen. Tom Coburn (R-Okla.) again assailed FEMA's $236 million contract with Carnival Cruise Lines, which has provided three ships to house evacuees and relief workers. Under that contract, Senate investigators have determined that Carnival will earn nearly 50 percent more per berth than the company would have normally.

"Carnival spokeswoman Jennifer de la Cruz said Carnival's contract price includes the cost of canceling the cruises of more than 120,000 passengers; paying travel agents' commissions on those lost cruises; loss of onboard revenues such as shore excursions, casinos, spas, alcoholic beverages and gift shops; loss of tips for crew members; and the cost of income taxes that otherwise would not have been paid.

If anyone sees anything maybe they could post it or, alternatively, a link.