Under the Waterline of Cruise Ship Deal

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

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.”