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

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 Common Property Theorem

Valuable resources held in common tend to be overexploited and wasted

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

The Sustainable Fisheries Model

The global fishery

(World Bank and FAO 2009)

0.0 20.0 40.0 60.0 80.0 100.0 120.0 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

Fishing effort (index)

Revenues and costs (B.US$)

Optimal Potential profits Current Current loss

Global Fishery Rent Loss

Sustainable global fishery: Current (2004) and profit maximizing outcomes

Current Optimal Difference (optimal –current) 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

Improved fisheries management is

needed!

So Potential rents  50 B. US$ Actual rents:  0!

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: Some Basic Principles

Fisheries Management Systems: Classification

Biological fisheries management Economic fisheries management

Direct

Taxes

Indirect

Property rights

Only property rights work!

Key Property Rights in Fisheries

Sole

• wnership

Territorial user rights TURFs Individual quotas IQs/ITQs Community rights

Rarely used Mainly sedentary species Very common Fairly common

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)

0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 500 700 900 1100 1300 1500 1700 1900 2100 2300 1974 1979 1984 1989 1994 1999 2004 2009

fishign mortality Stock (index)

Stock Fishing mortality

1991

1991-2012

Biomass: +31% Fishing mort.: -23%

Licenced vessels

(ITQ system)

200 400 600 800 1000 1200 1400 1600 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)

75 95 115 135 155 175 195 215 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Years Vísitala

1984 2004 1991

Productivity growth

1973-84: 0.2% 1984-07: 3.0% 1984-91: 5.6% 1991-07: 1.9%

• 30,0
• 20,0
• 10,0

0,0 10,0 20,0 30,0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Percent, %

Years

Profits before capital costs Profits before taxes

Fishing Industry Profitability

(Percent of revenues)

1984 1991 2004

Average EBIDTA 1980-83: 5.9% 1984-90: 14.9% 1991-03: 19.8% 2004-11: 23.3%

Market value of ITQ-shares

(B. US$; rough estimates)

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 1984 1988 1992 1996 2000 2004 2008

• B. US$

Years

Icelandic GDP  14 B. US$

1991 2009

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

0,0 0,5 1,0 1,5 2,0 2,5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 GDP index Years

Difference

After 10 years: 16.6% After 20 years: 32.8%

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

Decade Adoption of ITQs: (no. of countries) Approximate volume of harvest (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,
• cean 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

• f 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!

ITQs worldwide:

Speed of adoption

Decade Adoption of ITQs: (no. of countries) Approximate volume of harvest (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

ITQ adoption Accumulative volume of harvest

5 10 15 20 25 1970-79 1980-89 1990-99 2000-09 Million metric tonnes

ITQ’s

• Proeprty

Key steps in the evolution of the Icelandic ITQ system

1976

The herring fishery: Individual vessel quotas; IQs

1979

The herring fishery: Vessel quotas made transferable; ITQs

1980

The capelin fishery: Individual vessel quotas, IQs

1984

The demersal fisheries: Individual transferable vessel quotas, ITQs. (Small vessels (<6 brl.) exempted)

1985

The demersal fisheries: Effort quota option introduced

1986

The capelin fishery: Vessel quotas made transferable, ITQs

1991

A fairly complete, uniform ITQ system in all Icelandic fisheries. (Small boats exemption retained)

1991-04

Increasingly restrictive effort limitations on small vessels

2004

A separate ITQ system for all small vessels adopted.

2009-13

Various measures to weaken the ITQ-system (open access, small

vessel inshore fishery, ITQ-shares smaller part of TACs, heavy taxation)

Source: Ministry of Fisheries: Fisheries laws and regulations

• 30,0
• 20,0
• 10,0

0,0 10,0 20,0 30,0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Percent, % Years

Profits before capital costs Profits before taxes

Fishing Industry Profitability

(Percent of revenues)

1984 1991 2004

Average EBIDTA 1980-83: 5.9% 1984-90: 14.9% 1991-03: 19.8% 2004-11: 23.3%

Productivity in Icelandic Fisheries

(Total productivity index)

75 95 115 135 155 175 195 215 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Years Vísitala

1984 2004 1991

Productivity growth

1973-84: 0.2% 1984-07: 3.0% 1984-91: 5.6% 1991-07: 1.9%

Aggregate biomass and fishing mortality

(Cod, haddock, saithe, herring and nephrops weighed by unit value)

0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 500 700 900 1100 1300 1500 1700 1900 2100 2300 1974 1979 1984 1989 1994 1999 2004 2009

fishign mortality

Stock (index)

Stock Fishing mortality

1991

1991-2012

Biomass: +31% Fishing mort.: -23%

Icelandic ITQ system: Permanent quota values

(B. US$; rough estimates)

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 1984 1988 1992 1996 2000 2004 2008

• B. US$

Years

Icelandic ITQ system: Annual rents

(B. US$; rough estimates)

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 9,0 1984 1988 1992 1996 2000 2004 2008

• B. US$

Years

ITQs and other PRs transform natural capital into financial capital

• => additional gains. Can use natural capital to

(a) Reduce risk (to lenders) => get more savings for investment (b) Enrich fishers

• Corresponds to expansion of the market

system

– Allows division of labour – Allows more accumulation of capital.