Fisheries Rents: A Source of Development capital? A presentation at - PowerPoint PPT Presentation

Ragnar Arnason * Fisheries Rents: A Source of Development capital? A presentation at the meeting May 16 2013 * Department of Economics University of Iceland

Global Fishery: Basic Observations • Major economic activity in the world – Produce  15% of animal protein consumed – Employ  1-2% og the global workforce • Specially important in the developing world – Vital food source in many developing countries – Relatively more important compared to other industries • Generates little economic surplus (rents/profits) – Although based on rich, renewable resources. Why?

The Fisheries Problem The Common Property Theorem Valuable resources held in common tend to be overexploited and wasted In ocean fisheries this problem appears as 1. Excessive fishing fleets and effort 2. Overexploited fish stocks 3. Poor profitability, low personal incomes 4. Little or no contribution to GDP 5. A threat to biological sustainability 6. A threat to economic (habitation) sustainability

The Sustainable Fisheries Model Costs Value, $ Sustainable revenues (yield) Effort OSY CSY Sustainable Biomass biomass

The global fishery (World Bank and FAO 2009) 120.0 100.0 Current Revenues and costs (B.US$) Potential loss profits 80.0 60.0 40.0 20.0 0.0 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 Fishing effort (index) Optimal Current

Global Fishery Rent Loss Sustainable global fishery: Current (2004) and profit maximizing outcomes Difference (optimal – current) Current Optimal Fishing effort 13.9 m. GRT 7.3 m. GRT -6.6 m. GRT Harvest 85 m. mt 81 m. mt. -4 m. mt. Biomass 148 m. mt 314 m. mt. +165 m.mt. Profits -5 b. USD 44 b. USD 49 b. USD 50 b. USD  Global Development Assistance in 2004

So Potential rents  50 B. US$ Actual rents:  0 ! Improved fisheries management is needed!

Fisheries Management: Some Basic Principles Fisheries management is not about finding “best” utilization paths Fisheries management is about getting people to act in the “desired” manner  Fisheries management is human management !

Fisheries Management Systems: Classification Biological Economic fisheries fisheries management management Only property Direct Indirect rights work ! Property Taxes rights

Key Property Rights in Fisheries Territorial Individual Sole Community user rights quotas ownership rights TURFs IQs/ITQs Rarely Mainly Fairly Very used sedentary common common species

Individual Transferable Quotas: ITQs • The most widely applied rights-based fisheries maangement system in the world • Adopted as a major part of the FMS by at least 22 major fishing nations ─ New-Zealand, Australia, USA, Canada, Greenland, Iceland, Holland, Norway, Denmark, Sweden, Estonia, Germany, UK, Portugal, Spain, Russia, Morocco, Namibia, South Africa, Chile, Peru, Falkland • Close to 25% of global catch taken under ITQs!

Outcomes of ITQs - General pattern around the world - Economically very successful ! (1) Reduction in fishing effort (immediate) (2) Fishing capital declines (but usually slowly) (3) Biomass recovers (slowly) (4) Unit price of landings quickly increases (often greatly) (5) Quotas become valuable (quickly!) (6) Enhanced resource stewardship by fishers (7) Discarding often reduced

The Icelandic ITQ system • One of the first in the world • Evolved in stages • Key steps – 1976: Herring fishery – 1984: Most important demersal fisheries – 1991: All fisheries (small vessels (<8 m.) exempted) – 2004: small vessels in a separate ITQ-system – 2009-13: Significant weakening of the system + very high taxation

Aggregate biomass and fishing mortality (Cod, haddock, saithe, herring and nephrops weighed by unit value) 1991 2300 0,45 2100 0,40 1900 0,35 fishign mortality 1700 Stock (index) 0,30 1500 1300 0,25 1100 0,20 900 0,15 700 500 0,10 1991-2012 1974 1979 1984 1989 1994 1999 2004 2009 Biomass: +31% Stock Fishing mortality Fishing mort.: -23%

Licenced vessels (ITQ system) 1600 1400 1200 1000 800 600 400 200 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average annual reduction: 8%

Productivity in Icelandic Fisheries (Total productivity index) 215 2004 1984 1991 195 175 155 Vísitala 135 115 95 75 Productivity growth 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Years 1973-84: 0.2% 1984-07: 3.0% 1984-91: 5.6% 1991-07: 1.9%

Fishing Industry Profitability (Percent of revenues) 1984 1991 2004 30,0 20,0 10,0 Percent, % 0,0 -10,0 -20,0 Average EBIDTA -30,0 1980-83: 5.9% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Years 1984-90: 14.9% 1991-03: 19.8% Profits before capital costs Profits before taxes 2004-11: 23.3%

Market value of ITQ-shares (B. US$; rough estimates) 1991 2009 9,0 8,0 7,0 6,0 5,0 B. US$ 4,0 3,0 2,0 1,0 0,0 1984 1988 1992 1996 2000 2004 2008 Years Icelandic GDP  14 B. US $

Icelandic ITQ system Current annual profits (rents): 550 m. US$ Fraction of Icelandic GDP: 4,4% ….and the rents are still growing!

Can this success be replicated in developing countries? • Only to a certain extent – Not many developing nations have the administrative capacity to run ITQs in all fisheries • Industrial fisheries (large, high tech vessels, off-shore) – Possible to operate ITQs in most cases • Artisanal fisheries (small, low tech vessels, inshore) – ITQs generally too costly to enforce  Must look for alternatives Community rights seem most promising

Community rights • Based on TURFs, community quotas or both • N.B. It is not a fisheries management system !! – The community has to do the fisheries management  It may or may not work • Odds of success are increased if (1) Homogenous membership (2) Closed shop (can exclude others) (3) Inclusive (all fishers in the area) (4) Decision-making process is well designed

Improved fisheries management Source of development capital Assumptions: Capital output ratio =2 Fisheries rents 1% of GDP(0) , all invested 50% of increase in GDP reinvested 2,5 2,0 1,5 GDP index 1,0 0,5 Difference After 10 years: 16.6% 0,0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 After 20 years: 32.8% Years

What should the Commission do? 1. Member nations decide on fisheries management 2. Commission should: • Encourage adoption of rights-based methods • Offer technical and expert advice • Offer financial support (adjustment, regional etc.) - loans rather than grants. • Beef up enforcement especially for landings

ITQs worldwide: Speed of adoption Approximate Adoption of ITQs: volume of harvest Decade (no. of countries) (m. metric tonnes) 1970-79 2 0.2 1980-89 5 2.8 1990-99 8 9.0 2000-09 7 11.0 Total 22 23.0* *Global marine catch  85 m.mt

Property Rights – Based Management Purpose: Reduce or eliminate the common property problem Method: Implement some sufficiently high quality property rights  Private incentives coincide with social objectives! But, practical limitations 1. Property rights technology (marking individual fish, ocean habitat, ecosystem, migrations etc.) 2. Administrative ability (to enforce rights)  Must use imperfect property rights!

ITQs: Essential description • Two basic structural components – Total allowable catch: TAC – Individual quota shares:  ( i ), all i • The quota shares,  ( i ) – Constitute the basic property right of the ITQ system • Some permanence, tradability, security and exclusivity – Shares in TAC (much superior to quantity quotas) If the  ( i )s have permanence, the firms can plan and • adjust its capital structure accordingly.

ITQ: Essential description (cont.) • The  ( i ) yields annual harvest quotas for firm i : h ( i )=  ( i )  TAC • The h ( i ), being a property right, will be fished in the most efficient manner • Nota Bene: ITQ property rights are not property rights in what really counts; the fish stocks themselves. – Unlike e.g. a farm property right – No stock enhancement, genetic improvements, feeding, spawning assistance etc. will be undertaken by individual ITQ holders

ITQs and ITQ prices • There will arise a market and a price for both h ( i ) and  ( i ) . (Why?) • These prices will faithfully reflect the marginal benefits of using (and holding) these quotas. (Why?) • Price of h ( i ) will be approximately marginal variable profits of using these annual quotas. (Why?) • Price of  ( i ) will approximately equal the expected present value of using the expected quotas for fishing. (Just as the value of any productive asset) • It follows that the price of  ( i ) will provide a measure of the appropriateness of the TAC-policy.

Adoption of ITQs Worldwide • Since the late 1970s, ITQs have been adopted in the world’s fisheries at an increasingly fast rate. – Currently, ITQs are employed in hundreds of fisheries worldwide. – At least 22 fishing nations employ ITQs as a major component of their fisheries management. (New-Zealand, Australia, USA, Canada, Greenland, Iceland, Holland, Norway, Denmark, Sweden, Estonia, Germany, UK, Portugal, Spain, Russia, Morocco, Namibia, South Africa, Chile, Peru, Falkland) – Close to 25% of the global catch is taken under ITQs!