This Fisheries Management Paper sets out the process the Australian Fisheries Management Authority (AFMA’s) follows when allocating fishing concessions if the management arrangements for a fishery have been changed and fishing concessions have been granted already.
- AFMA’s approach
- Allocation of fishing concessions
- Independent Allocation Advisory Panel
- Attachment: Re-allocation of fishing concessions where management arrangements have changed
This Fisheries Management Paper sets out AFMA’s policy and a procedural framework for the allocation of fishing concessions where a decision has been taken to change management arrangements in a fishery for which management arrangements are already in place and fishing concessions have been granted to eligible operators. For example, this could be where a move is made from:
- a non transferable input control system to a transferable unitised input control system; or
- an input to an output control (individual transferable quota) system.
This Paper does not apply to Developmental Fisheries for which separate arrangements are being developed.
Under s 7 of the Fisheries Administration Act 1991 (the Administration Act), AFMA has the function of establishing and allocating fishing concessions. In accordance with this function, the AFMA Board is responsible for determining the nature and amount of access to a fishery. However, AFMA’s supporting legislation, regulations and objectives provide no specific guidance on the allocation of fishing concessions where management arrangements are proposed to be changed, except where a management plan is revoked and a successor management plan is made. Accordingly, AFMA has developed this Fisheries Management Paper to establish the necessary policy and procedural framework for allocating fishing concessions under such circumstances.
The Background Paper at Attachment 1, prepared by Fisheries Economics, Research & Management (FERM), provides a fisheries management context for considering issues relating to the allocation of fishing concessions. The Background Paper, which identifies and discusses the role of AFMA’s objectives in allocation of fishing concessions, is included for information only and does not comprise part of this policy paper.
3.1 The legislative objectives
In the performance of its functions, AFMA must pursue the objectives of:
- implementing efficient and cost-effective fisheries management on behalf of the Commonwealth (the cost effectiveness objective); and
- ensuring that the exploitation of fisheries resources and the carrying on of any related activities are conducted in a manner consistent with the principles of ecologically sustainable development and the exercise of the precautionary principle, in particular the need to have regard to the impact of fishing activities on non-target species and the long term sustainability of the marine environment (the ESD objective); and
- maximising economic efficiency in the exploitation of fisheries resources (the economic efficiency objective); and
- ensuring accountability to the fishing industry and to the Australian community in the Authority’s management of fisheries resources (the accountability objective); and
- achieving government targets in relation to the recovery of the costs of the Authority.
3.2 Changes to management arrangements
AFMA will only make changes to fisheries management arrangements where such changes are necessary for the effective pursuit of AFMA’s objectives, in particular the cost effective fisheries management, ecologically sustainable development (ESD) and economic efficiency objectives (refer section 3.1 above). While AFMA takes all its objectives into account in any decision making process, these three objectives are considered to be fundamental to a change in management arrangements and, in making such changes, the impact on the pursuit of these three objectives must be clearly established.
In order to pursue the ESD objective it may be necessary in a fishery currently managed using a non-transferable input control system (eg Southern Shark Fishery) to reduce the catch of a particular species (ie school shark) to a sustainable level over a number of years. In this instance, a change to a closely monitored output control system could be essential to the pursuit of this objective.
Similarly, to effectively pursue the economic efficiency objective, which focuses on the economic efficiency of the aggregate fishery, it may be highly desirable to move to either unitised input controls or output controls.
Establishment of well defined, divisible, secure and transferable fishing concessions are a major factor in the successful pursuit of AFMA’s ESD, economic efficiency and cost-effective management objectives. However, it is recognised that continually changing the method of allocation of fishing concessions will weaken those concessions and make effective fisheries management difficult. Accordingly, the fishing concessions that exist in a fishery at the time that management arrangements are proposed to change, are the ones that will be taken into account under any allocation of concessions required by the move from one management regime to another.
It should also be recognised that there will be instances where, in pursuing AFMA’s legislative objectives, it is not possible to achieve an equivalent translation of the fishing concession when changing from one management regime to another. Clearly, in these circumstances, it is not possible to design an allocation formula that will have absolutely no impact on the relative economic position of individual operators.
A body of legal case history in relation to allocation of fishing concessions has been established both in Australia and overseas which demonstrates that fishing concession allocations resulting in a significant and differential economic impact on individual operators (which cannot be balanced against fisheries management objectives) run the risk of being successfully challenged. From a legal and fisheries management perspective, AFMA will explicitly endeavour to minimise any adverse differential economic impacts on individual operators.
Therefore, AFMA’s approach to allocation of fishing concessions is based on the premise that, in making any management changes, AFMA will ensure that:
- such changes are consistent with and support the pursuit of AFMA’s legislative objectives; and
- any differential economic impacts of allocations on individual fishing concession holders are minimised unless there are reasons, justifiable with respect to AFMA’s legislative objectives, that dictate otherwise.
4.1 Appeals Against Allocation
4.1.1 Statutory Management Plans
Where the allocation system is contained in a Statutory Management Plan, any appeals would be considered by the Statutory Fishing Rights Allocation Review Panel (SFRARP) established under AFMA legislation. It is worth noting that the allocation system would initially appear in the draft Management Plan which is subject to extensive consultative arrangements, consideration of submissions, determination by AFMA and acceptance by the Minister. Persons not satisfied by a decision of the SFRARP may appeal to the Federal Court on points of law.
4.1.2 Fishing Permits
Where the allocation is effected through conditions on Fishing Permits, the allocation system will be appellable through the internal review, AAT and Federal Court process.
Evidence suggests that operators will have greater confidence in allocation outcomes where they result from an independent assessment of fishery and individual circumstances. A central principle in the development of an allocation system which is, and is seen to be, fair and credible is receipt by the AFMA Board of advice which has been based on an independent assessment. In order to achieve this, both the recommended basis of allocation and any exceptions which must be highlighted will be undertaken at arms length from AFMA management and the AFMA Board.
In relation to Commonwealth fisheries, an independent Allocation Advisory Panel (AAP) will be established to provide advice to the AFMA Board on the most appropriate allocation system within a defined fishery, or between defined fisheries (intersectoral allocation). The AAP is advisory in nature, in much the same way as existing MACs and CCs, and decisions in relation to allocation will ultimately be made by the AFMA Board in accordance with its responsibilities under s 7 of the Administration Act. To facilitate this process, AFMA will provide administrative support and briefing material to the Panel as required.
The AAP will comprise from one to three members. The actual number of members will be determined by the AFMA Board on a case-by-case basis depending on the issues to be addressed, consideration of the breadth of expertise which is both being sought and is available, and the cost-effectiveness of the process. Members will be engaged under s69 of the Administration Act which provides for AFMA to engage consultants in accordance with terms and conditions determined by the Authority.
Nominations for membership of the AAP will be sought from appropriately qualified persons and will be considered by the AFMA Board. A member or members may be a retired judge, or other qualified member of the legal profession with experience in administrative law, and/or an economist and/or an independent member of the fishing industry who is not associated with the fishery in relation to which the allocation process is being undertaken. Where it is determined that a panel should comprise two or more persons one of those persons will be a Presiding Member. Unless otherwise specified by the Board, the Presiding Member will be a retired judge or other qualified member of the legal profession.
5.2 Terms of reference
The AAP is to advise the AFMA Board on:
- the most appropriate basis for allocation of fishing concessions in a fishery or between fisheries (intersectoral allocation), in accordance with this Fisheries Management Paper; and is:
- to identify and include in that allocation system any exceptional circumstance which the AAP considers should be taken into account.
In undertaking these tasks, the AAP is required to:
- consult with relevant parties and any person/s or organisations with appropriate knowledge or experience;
- identify the data necessary to support the allocation system determined in 1 and 2 above and the most cost effective and appropriate methods of collection and verification of that data;
- explain and justify the recommended allocation system to the AFMA Board and to the relevant MACs or CCs;
- provide advice for AFMA officers appearing as witnesses before tribunals or courts in any challenge to the recommended allocation system if implemented; and
- maintain full records of all activities undertaken by the Panel.
To enable the AAP to consider allocation in or across a particular fishery/s, AFMA will provide the AAP with a brief which includes, but is not limited to:
- this Fisheries Management Paper
- any other relevant AFMA policy papers;
- factual details of the fishery;
- factual details of existing/historical management arrangements in the fishery/s;
- factual details of existing fishing concessions; and
- factual details of any past commitments made (whether by press release, correspondence or other written communication).
5.4 AAP Process
A key component of determining the most appropriate allocation system in a particular fishery or fisheries is the consultative processes which are undertaken with operators and others with an interest in the fishery/s. Whilst the level and actual process of consultation may vary according to the fishery or specific circumstances, as a general rule the AAP will consult widely with relevant parties and any person/s or organisations with appropriate knowledge, experience or expertise as appropriate. Where necessary, the AAP may obtain advice or input from relevant legal, economic or statistical experts.
5.4.2 Reporting requirements
The AFMA Board will establish an agreed timeframe by which the AAP is to have identified an appropriate allocation system for the fishery for which a change in management arrangements is proposed. The AAP will provide draft, and subsequently final, advice to the AFMA Board on a preferred allocation system in accordance with that agreed timetable.
The AFMA Board will consider the draft advice (and provide any comments to the AAP on that advice) within eight weeks of receiving the draft.
5.4.3 Administrative support
AFMA will provide administrative support to the AAP as necessary and, if requested, assistance in generating alternative allocation outcomes.
Funding for the operations of the AAP will be based on a budget agreed between the Chair of the AAP and AFMA’s Managing Director.
A background paper prepared by the Fisheries Economics, Research & Management Specialists (FERM) for the AFMA Board, June 1997
- Why Governments regulate fisheries
- The tools of fisheries management
- Re-allocation principles and issues
- Principles for the re-allocation of fishing concessions
- Future allocations of Statutory Fishing Rights
The purpose of this background paper is to provide a fisheries management context within which issues relating to the re-allocation of fishing concessions – when necessitated by the introduction of new management arrangements into a fishery – can be considered.
2.1 The South East Fishery example
In 1991 the South East Fishery moved from a management regime of input controls in which individual fishers had been allocated units of fishing capacity to management arrangements based on individual transferable quotas (ITQs). This change required the extinguishment of existing fishing concessions based on units of capacity and the re-allocation of new concessions based on quota.
Experience from this process has raised the issue of how best to re-allocate fishing concessions in order to minimise the extent of perceived inequity by operators and to limit the likelihood of successful legal challenges.
In litigation, it is important to demonstrate that AFMA has both considered the implications on fishing concession holders of re-allocations, and has acted in a manner consistent with its legislated objectives; otherwise, re-allocations may be viewed as capricious and irrational.
Before examining the re-allocation issue directly, it is important first to understand why governments world-wide regulate fisheries, as well as the management tools that are employed. This context is integral to appreciating fully many re-allocation issues; and it also acts as useful background for legal challenges that often accompany re-allocation of fishing concessions.
It is generally agreed that unregulated fisheries tend toward the undesirable states of resource over-harvesting and economic inefficiency, and it is also generally accepted that lack of effective property rights in fisheries is the underlying source of these conservation and economic difficulties (Gordon 1954, Scott 1955, Anderson 1986, Hannesson 1993, FAO 1993, Arnason 1996).
The following quotes from Huppert (1987), and Arnason (1996) outline the relationship between the lack of property rights and fisheries conservation/inefficiency problems (a more detailed discussion, extracted from Pearse (1982), is provided in Appendix 1). Huppert states that:
“Commercial fishing differs from farming, small-scale retailing, and other competitive American industries in many respects; the most important is the lack of private property rights in an essential resource. Unlike farmland and mineral deposits, marine fish populations cannot be owned by the users.”
“Harvesters of an open access or common property resource often fail to take appropriate conservation action. It may not be readily apparent to an individual that his use affects the resource size and ultimately, the profits of all resource users. When there are a myriad of others fishing, a single fisherman will have difficulty even detecting the effect that his own catch has on the overall abundance of fish. Even when fishermen are aware that they affect the size of fish populations, they may take no conservation measures unless they are assured that other users will act in concert to achieve the future benefits of conservation.
Thus individual actions, based upon self-interest, cannot assure adequate conservation and cannot effectively promote long-term economic returns from common property or open-access natural resource.”
Consistent with Huppert’s observations, Arnason notes that:
“Fish stocks provide a crucial input into the fisheries process, much like physical capital in standard production processes. However, unlike physical capital, ocean fish stocks rarely constitute the private property of the producer. Usually, they are the common property of a collection of individuals (or firms) that are entitled to use the fish stocks to produce catch.
Fish stocks, however, are natural resources of limited size and capacity for sustainable yield. It follows that each fisher’s catch will normally reduce the catch opportunities (ie the production possibilities of other fishers). It is this externality, caused by the common-property arrangement of fish stocks, that is at the root of the fisheries problem.
The course of events usually runs as follows: initially, when the fishery is first being developed, the fish stock is large. As a result, catches are good, and fishers earn a high return on their investment and effort. This encourages the more enterprising of the fishers to expand the level of their fishing operations. It also attracts new fishers to the fishery. Thus, an investment in fishing capacity takes place, and fishing effort rises. This reduces the fish stocks and catch per unit of effort declines. Economic returns from the fishery are correspondingly reduced. This, however, does not put an end to the expansion of fishing capacity. That continues as long as fishers can reasonably hope to extract a positive rate of return from the fishery. Long before that happens, however, the fish stock has normally been reduced far below the level corresponding to a maximum sustainable yield.
The above analysis makes it clear that the fisheries problem is by no means inherent in the fishing activity itself. It merely derives from an inappropriate property-rights structure. The problem, however, is to define property rights that work.”
In summary, it has been widely accepted in theoretical and applied research studies, as well as in numerous policy statements by various fisheries management agencies world-wide, that the lack of effective property rights in fisheries is the underlying cause of over-harvesting and economic inefficiency in fisheries. And it is these negative outcomes that have stimulated governments to undertake a significant regulatory role in fisheries management.
Fisheries management agencies employ three broad categories of management tools to reduce over-harvesting and excess capacity; individual transferable quotas (ITQs), input controls, and competitive total allowable catches.
4.1 Individual Transferable Quotas (ITQs)
Under ITQs, management agencies attempt to minimise over-harvesting of fish stocks (ie a conservation objective) by setting a total allowable catch (TAC) for a particular stock that is consistent with sustainable exploitation. And in order to inhibit the growth of redundant harvesting capacity (ie an economic efficiency objective), management agencies, in turn, allocate the TAC amongst eligible fishing operators.
For example, for conservation purposes it may be determined that 1,000 tonnes of a particular fish can be harvested. If 10 individuals were each allocated, say 10 per cent of the allowable catch, then each individual would be provided an allocation of 100 tonnes, which could be bought and sold. By receiving a transferable concession to harvest a pre-determined level of catch, individual harvesters no longer face an incentive to invest in a economically wasteful manner in “racing for the fish”. In other words, the management instrument, by setting a TAC and assigning individual transferable quota rights, eliminates the fundamental underlying source of economic inefficiency and over-harvesting – weak harvesting rights.
4.2 Input Controls
The second major category of management instruments used by fisheries management institutions is commonly referred to as input controls. In an attempt to control the total amount of fishing capacity and the total catch, management agencies often place a number of restrictions on harvesters related to maximum vessel size, type of harvesting gear that may be used, number of trips a vessel can take per day, number of days that can be fished, seasonal openings and closings, length of nets, number of hooks, etc.
Generally, input controls can be seen as an attempt to address the negative symptoms of open-access fishing (over-harvesting and excess capacity), as opposed to correcting the underlying source of these symptoms – weak fishing rights; fishing concessions under input controls are usually, if not always, weaker than under ITQs.
It is important to note that under input controls, fishing operators retain a financial incentive to expand catch by investing in aspects of their harvesting activity that are not restricted (eg global positioning systems, spotter planes, etc), therefore further input restrictions or buybacks are usually required over time to restrain growth in total catches and capacity. By their very nature, input controls generally impose economic inefficiency on the harvesting sector.
4.3 Competitive Total Allowable Catch (TAC)
A competitive TAC is a hybrid of ITQs and input controls. Like ITQs, under a competitive TAC the total catch of a fishery is limited by setting a total allowable catch – with the purpose of ensuring that conservation-related sustainable harvest levels are not violated. However, unlike ITQs, quota is not allocated to individual harvesters, but rather, individual operators are usually free to compete with each other until the TAC is harvested. In an effort to limit harvesting capacity and to spread the catch throughout the year, input controls (such as seasonal closures, and gear and vessel restrictions) are almost always introduced with competitive TACs.
Assuming catches are effectively monitored, competitive TACs are useful in limiting over-harvesting, however this management measure is often ineffective at controlling fishing over-capacity (and consequently economic inefficiency).
Most fisheries around the world attempt to control over-harvesting and over-capacity by first restricting the number of participants allowed to fish and second by employing one of the above major management arrangements. A result of this process is that operators are usually issued fishing concessions that acquire economic value – in terms of the income that can be earned from fishing, and if the concessions are transferable, in terms of the tradeable value of concessions.
World-wide fisheries management has not been successful in controlling over-harvesting and over-capacity, and this has necessitated the introduction of new management arrangements – for example, old input controls have been replaced by new input controls, and input controls have been replaced by ITQs. These changes require the extinguishment of existing fishing concessions and the issuance of new concessions. The manner in which old concessions are replaced by new concessions is of great concern to operators, and has attracted the attention of legal institutions.
With the above background in mind, the following section examines a number of issues related to the re-allocation of fishing concessions.
Under the Fisheries Management Act 1991, two important forms of fishing concessions issued to operators by AFMA are Fishing Permits and Statutory Fishing Rights (SFRs). Fishing Permits and SFRs may stipulate rights or conditions with respect to resource access, such as the quantity of fish that may be harvested, or the amount and type of gear that may be used.
Whether AFMA is re-allocating Fishing Permits or SFRs, when moving from input controls to ITQs or from one type of input controls to another type, AFMA is likely to be challenged in the Administrative Appeals Tribunal (AAT) and/or the Federal Court. In 1992, quota allocations in the South East Fishery were found to be “irrational” and “capricious” and were “over turned”. As well, South East Fishery allocations were recently challenged (in the AAT, Federal Court and Full Federal Court) on the basis that AFMA did not take its economic efficiency objective into consideration when allocating quota to individual operators; and while a recent AAT decision has ruled in AFMA’s favour on this issue, the decision is under appeal.
This raises the issue of how to re-allocate fishing concessions to individual operators in a manner that minimises the extent of perceived inequity by operators and is likely to withstand legal challenge. The following section examines the extent to which AFMA’s legislation provides guidance on how to re-allocate fishing concessions.
5.1 Re-allocation of fishing concessions and AFMA’s legislation
According to the Administration Act, AFMA must pursue the following objectives:
- implementing efficient and cost-effective fisheries management on behalf of the Commonwealth; and
- ensuring that the exploitation of fisheries resources and the carrying on of any related activities are conducted in a manner consistent with the principles of ecologically sustainable development, in particular the need to have regard to the impact of fishing activities on non-target species and the marine environment; and
- maximising economic efficiency in the exploitation of fisheries resources; and
- ensuring accountability to the fishing industry and to the Australian community in the Authority’s management of fisheries resources; and
- achieving government targets in relation to the recovery of the costs of the Authority.
In examining the role of AFMA’s objectives with respect to re-allocation, it is useful to consider the transition of input controls to ITQs and input controls to input controls separately. Intersectoral re-allocations and incidental re-allocations are also discussed.
5.1.1 Input controls to ITQs
In a fishery managed by input controls that is not sufficiently satisfying AFMA’s legislated ecologically sustainable development (ESD) and economic efficiency objectives, it may be appropriate to introduce ITQs. However, AFMA’s supporting legislation, regulations, and objectives are silent on how individual quota entitlements are to be allocated; in other words, they provide no guidance on how to transform input-control fishing concessions into individual quota allocation entitlement.
In an ITQ system, AFMA’s ESD objective, with respect to target species, is satisfied by setting a total allowable catch (TAC). And AFMA’s maximum economic efficiency objective is achieved, as best it can be achieved, through the allocation of transferable quota to individual operators. It is difficult to envisage how any of the above legislated objectives would be furthered by one allocation formula over another.
There exists a false argument that AFMA’s economic efficiency and ESD objectives may have a role in quota allocation. First consider economic efficiency. It has been argued in court that AFMA’s economic efficiency objective requires that the economic efficiency of each operator be considered as a factor when determining quota allocations. However, as pointed out by Montgomery (1972), the initial distribution of quota only affects the allocation of wealth, and it does not affect the level of efficiency after allowing for quota trading. There are a number of arguments that illustrate quota allocation based (in whole or in part) on bureaucratic determination of the relative economic efficiency of individual operators would, in fact, be contrary to AFMA’s economic efficiency objective (see Appendix 2).
Next consider the issue of AFMA’s ESD objective. In moving from input controls to ITQs, it is possible to conceive of circumstances wherein it could be argued on ESD grounds that one particular gear sector should be favoured over another in quota allocations. For example, assume that the fishing operations of one gear sector, relative to another, resulted in unacceptably high discards or unacceptable substrate damage. It might, in this case, be suggested for ESD reasons that quota allocations should favour the more “environmentally friendly” gear sector.
However, the above argument may be flawed. This is because in this situation it is not necessary to “trade off” between equity (eg minimising wealth redistribution) and ESD, as it is possible to allocate quota on equity criteria, and then impose additional ESD-restrictions on the “offending” gear sector. For example, operators in the offending gear sector could be required to use alternative gear to harvest their quota; however it would not be necessary to impose an additional cost on these operators by redistributing additional quota to other sectors of the fishery.
While AFMA’s legislation and objectives are of little apparent value in re-allocating fishing concessions, there do exist certain principles that are of use in re-allocation, and these will be discussed below under the heading, Principles for the Re-allocation of Fishing Concessions.
5.1.2 Input controls to input controls
Next consider a situation where the introduction of new management arrangements requires the extinguishment of fishing input-control concessions and the allocation of a different form of input-control concessions.
Consider as an example a longline fishery that is managed under limited-entry licensing – in other words, the only input-control restriction on operators is the number of concession holders in the fishery. Due to over-harvesting and excess capacity problems, assume that the management authority extinguishes these fishing concessions and issues new concessions based on the amount of fishing gear that each vessel is allowed to use. The re-allocation issues discussed in the above input-control to ITQ case would apply equally here, and therefore will not be repeated.
5.1.3 Intersectoral re-allocations
This refers to the circumstance where an allocation is made between two or more sectors using different types of fishing gear to harvest the same species of fish. For example, consider a fishery in which there are two gear sectors, one using purse seine and the other using longline gear. Assume that the fishery is managed under a limited entry licensing system, and is moving to a system that limits and allocates the amount of fishing gear each vessel may use.
Unlike the input-to-ITQ and input-to-input examples cited above, it may be possible to argue that AFMA’s economic efficiency and/or ESD objectives could play a role in allocating concessions between the two sectors. A “real world” example of this possibility is provided by the inter-sectoral allocations that took place between the trawl and hook and line sectors in the Canadian west coast groundfish fishery (Halvorsen 1997). In this fishery, each sector argued that it was both more efficient in harvesting and more “environmentally friendly”, and therefore, should be favoured in the allocation. The arbitrator appointed to determine allocations took into consideration the ESD and efficiency arguments but found that there was “a lack of cogent evidence” to favour one sector over another on these grounds.
Therefore, while situations may arise where AFMA’s ESD and economic efficiency objectives could come into play in fishing concession re-allocations, it will be important for both legal and equity reasons that “cogent” and defensible evidence is available before these factors are allowed to influence re-allocations. And more importantly, as noted in the input-to-ITQ control example cited above, it may be possible to satisfy economic efficiency or ESD concerns by means other than re-allocating concessions from one sector to another, and this type of economic-damage mitigation would also be important in any litigation.
5.1.4 Incidental re-allocations
The above situations illustrate re-allocations of concessions that are required because of the replacement of one management regime with another. Implicit re-allocations may also occur as a result of changes within a management regime which incidentally disadvantage one group relative to another. This is largely an issue within input control managed fisheries.
For example, consider a fishery in which there are two gear types. One gear type can only be used in shallow water applications, and the other is primarily used in deep water. AFMA, for ESD reasons, may decide to close an inshore nursery area to fishing. This will impact on only one of the gear types. It is important to note that AFMA, in this case, has not re-allocated fishing concessions; however the nursery ground closure negatively impacts on the value of fishing concessions of the shallow water operators. And, in this sense, it could be argued that there has been an implicit re-allocation of the value of fishing concessions. However, this type of re-allocation is fundamentally different to those described above, in that it is an incidental and unavoidable consequence of AFMA pursuing its management objectives.
As illustrated above, in many cases AFMA’s legislation provides little guidance on the re-allocation of fishing concessions. The following section examines whether there are considerations outside of AFMA’s legislation which will impact on the re-allocation of fishing concessions.
Although AFMA’s objectives provide little guidance in most fishing concession re-allocation situations, court cases in both Australia and overseas provide some direction on matters to be taken into account in the concession re-allocation process.
As mentioned above, the initial quota allocation formula in the South East Fishery was found to be “irrational” and “capricious” and was “over-turned” (Austral Fisheries Pty Ltd v Commonwealth of Australia, La Macchia v Commonwealth of Australia and AFMA). In a recent federal court case in Canada involving the west coast ITQ halibut fishery, the initial quota allocations were found to be unlawful (Carpenter Fishing Corporation et al against Her Majesty the Queen et al).
One interpretation of the above legal findings is that fishing concession re-allocations that have a significant and differential economic impact on operators (which cannot be balanced against fisheries management legislation and objectives) run the risk of being successfully challenged in court.
The following quote from Huppert (1987) sets the stage for the discussion on re-allocation and the avoidance of differential economic impacts on operators:
“Everyone agrees that fishing regulations should entail an “equitable” distribution of benefits. Although there is no widely recognized definition of equity, there are clear patterns in management practice. In a recent study of twelve government programs that allocate property rights, Rolph (1983) found that policy makers deal with the equity issue by designing regulations to minimize any redistribution of wealth. Where established resource users enjoy benefits of a communal resource (such as in land development, air pollution, groundwater pumping) ‘the judicial, the legislative, and the executive branches have uniformly supported the claims of historic users when allocating rights.’ This principle seems to be honored as well by the existing fishery limited-access system.”
The above quote makes explicit the link between “equity” and the avoidance of differential economic or wealth impacts on resource users. And this link is certainly consistent with court rulings that have overturned fisheries concession re-allocations.
Clearly, it is not possible to design a re-allocation formula that will have absolutely no impact on the relative economic positions of operators, but from a legal and fisheries management perspective, a conscious attempt will be made to “do the best possible” to implement this principle.
It is noteworthy that from an administrative law perspective, it is not necessary that AFMA develop the “best” quota allocation possible; but rather that AFMA develop a reasonable and justifiable approach to the issue of minimising wealth redistribution effects – in other words, if an approach that does a better job at minimising wealth redistribution was later found to exist, this would not necessarily be sufficient grounds to invalidate AFMA’s original allocation decisions.
The principle of minimising changes to the relative economic positions of operators on re-allocation of rights should only apply until such time as relatively well defined concessions exist in a fishery. For example, suppose that transferable effort SFRs were allocated in a fishery and, at a later time, it was decided to introduce ITQs. From a fisheries management perspective it is preferable to indicate, when the SFRs are first allocated, that quota would be allocated solely on the basis of SFR holdings. This would reduce the incentive for individuals to increase their fishing activity or falsify catch records with the purpose of generating a larger catch history for future allocation purposes. The above consideration would also apply if the move were to an alternative transferable (or non-transferable) effort regime, or from ITQs to an input-control regime.
A major factor in the successful pursuit of AFMA’s ESD, economic efficiency and cost-effective management objectives is the establishment of well-defined, divisible, secure and transferable access rights. However, if AFMA repeatedly reallocates access rights on the basis of changing catch history, fishing concession values, and other factors, access rights will continue to be weak – making effective fisheries management difficult. Thus, it is important that AFMA signal, on a fishery-by-fishery basis, when allocated access rights are to be the sole determinant of an operator’s share in the fishery (with respect to any possible future re-allocation purposes).
Arnason R. 1996. Property rights as an organizational framework in fisheries: the cases of six fishing nations. In Taking Ownership: Property Rights and Fishery Management on the Atlantic Coast, B. Crowley (Ed), Atlantic Institute for Market Studies. Halifax, Canada,
Anderson L.G. 1986. The Economics of Fisheries Management. Johns Hopkins University Press, Baltimore.
Boyce J. 1992. Individual transferable quotas and production externalities in a fishery. Natural Resource Modeling, Vol 6, Number 4.
FAO (Food and Agriculture Organization of the United Nations.) 1993. Marine Fisheries and the Law of the Sea: A Decade of Change. Rome, Italy.
Gordon H.S. 1954. The economic theory of a common property resource: the fishery. Journal of Political Economy, 62, 124-42.
Halvorson K. 1997. Recommendations for the Allocation of Commercial Groundfish Between Trawl and Hook & Line Gear Sectors, and Recommendations for a Groundfish Trawl Individual Vessel Quota Program. Prepared for the Minister of Fisheries and Oceans. Vancouver, Canada.
Hannesson R. 1993. Bioeconomic Analysis of Fisheries. Published by arrangement with the Food and Agriculture Organization of the United Nations by Fishing News Books.
Huppert D. 1987. Summary and postscript. Limited Access Alternatives for the Pacific Groundfish Fishery, D. Huppert (Ed). NOAA Technical Report NMFS 52. US Department of Commerce
Montgomery W. 1972. Markets in licenses and efficient pollution control programs. Journal of Economic Theory 5. Pp. 395-418
Morgan G. R. 1995. Optimal fisheries quota allocation under a transferable quota (TQ) management regime. Marine Policy, Vol 19, No. 5
Pearse P. 1982. Turning the Tide: A New Policy for Canada’s Pacific Fisheries. The Commission on Pacific Fisheries Policy. Final Report. Department of Fisheries and Oceans. Vancouver, Canada.
Rolph E. 1983. Government Allocation of Property Rights: Who Gets What? Journal of Policy Analysis Management. 3(1).
Scott A.B. 1955. The fishery: the objectives of sole ownership. Journal of Political Economy, 63, 116-24.
Appendix 1 – The relationship between property rights in fisheries and over-harvesting and economic inefficiency
The following extraction from Pearse (1982) provides a detailed and lucid description of the relationship between weak property rights in fisheries and over-harvesting and economic inefficiency.
“The central economic problem of the commercial fisheries is the chronic over-capacity of the fleets. As I describe in later chapters, all of our major fisheries, especially the salmon, herring and halibut fisheries, have greatly expanded their fishing power in recent years. But because the stocks of fish could not yield greater catches, most of the new capital investment in vessels and gear and the advanced technology is wasted. Our most valuable stocks could be fully harvested with only a fraction of the capital and labour now expended on fishing them. This wasteful pattern of development reflects governments’ failure, in spite of repeated attempts, to develop a policy that would encourage the industry to develop efficiently.
The perplexing phenomenon of excessive expansion of productive capacity is not limited to Canada’s Pacific fisheries; it can be observed in major fisheries throughout the world. In recent years, licensing systems in considerable variety have been designed to alleviate the problem, though few can be said to have had much beneficial effect.
A clear understanding of why commercial fleets tend to over-expand is essential in order to design effective corrective policies. Although this has been well analysed in academic and official studies during the last few years, my hearings revealed considerable confusion about the problem within the fishing community and, judging from the policies adopted, within the government as well. So a brief explanation of the general phenomenon is in order before turning to policies required to deal with it.
The perverse tendency for fishing fleets to over-expand is rooted in the way the commercial fisheries have traditionally been organised. Until very recently, fisheries throughout most of the world were open to unrestricted numbers of fishermen and fishing enterprises. Harvesting was, and still is, based on the “rule of first capture”; that is, unlike other natural resources, fish in the sea are not assigned through property rights or licences to any particular users; each user competes directly with all the others for a share of the catch, and has no right to any particular quantity until he has landed it.
In these circumstances, temporary profits will stimulate fishermen to expand their vessels’ fishing capacity in order to increase their catch, and will attract new entrants into the fishery. So the fleet will expand even it is already capable of taking the entire harvest. Thus, as we have seen repeatedly on the Pacific coast, an increase in the price of fish will set off a wave of investment in vessels and gear even when there are no more fish to catch. The result is the excess fishing capacity we observe in all of our major fisheries.
Several effects of this phenomenon should be noted. First, it threatens the stocks because constraining over-expanded fleets to the yield capabilities of the resources is difficult.
In an open-access, free-for-all fishery, competing fishermen try to catch all the fish available to them, regardless of the consequences. Unless they are checked, the usual consequence is a collapse of the fishery (Department of Environment, 1976).
Ironically, these pressures sometimes have the opposite effect: they prevent full utilisation of the available catches because fisheries managers fear that an opening of a small fishery will attract so much fishing power that the stock will be decimated.
Second, the redundant capacity raises the capital, labour and operating costs involved in fishing, and so erodes the net returns the fishery could otherwise generate. The scope for carrying the extra costs of surplus capacity is greatest in those fisheries that are capable of yielding the highest returns. Thus we find the most conspicuous over-capacity in our most valuable fisheries – salmon, roe-herring and halibut – and less in our marginal fisheries. So even the most valuable fisheries yield low returns in the long run because the effort expended tends to rise, and the costs inevitably increase to the point where they are equal to, or absorbed in, the full value of the harvests.
Third, such fisheries are unstable. Any increase in the available catch, or rise in the price of fish, or technological development that lowers the cost of fishing effort, induces fleet expansion; opposite changes force painful contraction through financial failures. This has been the dismal history of major fisheries on Canada’s Atlantic as well as Pacific coast, and indeed throughout the western world.
All of these effects – stock depletion, poor economic performance and instability – result from treating the resource (the fish) as common property until they are caught, and are normal whenever resources are treated this way. It is “The Tragedy of the Commons.”
The over-expanded fishing capacity is not the result of irrational behaviour on the part of fishermen. When an industry is profitable, the producers will usually expand their productive capacity; and as long as there are no serious barriers to new entrants to the industry, their numbers will grow. But unlike most other industries, such expansion in fisheries takes place even when no additional production is possible. The harvest is simply spread more thinly across the expanded fleet and the cost of fishing is driven upwards.
The technology of fishing becomes distorted as well. Competing for larger shares of the catch, vessel owners are driven to adopt questionable innovations to increase the speed of their vessels, to increase hold capacity, to reduce running time and to build vessels capable of working further offshore in order to intercept fish before others. These add to the cost of fishing and distort the fleet’s structure.
The potential net returns (or “resource rent,” in economists’ jargon) in the major fisheries of the Pacific coast are very high. For example, I have no doubt that our catches of salmon and roe-herring could be taken with fleets half their present size and at half the cost now expended in fishing. If this were done, the value of the landings could well exceed the costs of harvesting in these fisheries by something in the order of $75 to $100 million annually. Currently, these potential returns are not realised at all; they are dissipated in excessive costs of fishing.
Appendix 2 – Why quota allocations based on individual operator economic efficiency is contrary to AFMA’s maximum economic efficiency objective
While the control of aggregate fishing capacity is the primary focus of fisheries management institutions, AFMA’s legislation does not explicitly state that the economic efficiency objective is aimed solely at controlling aggregate fishing capacity. Therefore, there remains the question of how, and whether, AFMA should employ the economic efficiency objective when carrying out functions other than controlling aggregate fishing capacity. And in particular, in meeting its economic efficiency objective, should AFMA consider the relative economic efficiency of individual operators when re-allocating fishing concessions as a result of the introduction of a new management regime?
AFMA maintains that it would be operating in a manner inconsistent with its maximum efficiency objective if it attempted to use the relative economic efficiency of individual harvesters as a criteria when re-allocating concessions in the situation described above. There are a number of operational realities that would produce an irrational outcome, namely economic inefficiency, if concessions were re-assigned to individual operators based on estimated individual economic efficiency.
First, consider for a moment what would actually be involved in determining the economic efficiency of each operator. Calculating individual efficiency would require detailed information on skipper and crew skills, operating and capital expenditures, fish prices received, debt structure, and a number of other important financial considerations for each potential entrant in the fishery. It would also be necessary to factor in the impact of random environmental factors on individual catches, as such factors would mask underlying individual economic efficiency levels; this important adjustment would be impossible in a practical sense. As well, the personal satisfaction that fishing provides each harvester would have to be determined, as this should enter into the efficiency calculations (for example, an operator may accept a lower financial return from fishing than another operator due to “psychic income” received from the life style). These data are simply not available. And the costs of acquiring such information for fisheries management (assuming away any questions related to individual privacy) would be very high. In maximising economic efficiency all costs, including the costs of management, must enter into the calculation of economic efficiency in the harvesting sector. Therefore it would be prohibitively expensive, and thus contrary to AFMA’s maximum economic efficiency objective, to attempt to allocate quota on the basis of assessed individual economic efficiency.
Secondly, different types of gear are often used in the same fishery and in many cases management imposes different types of restrictions on the various gear types. Therefore the true efficiency of each harvester is masked by these restrictions. In order to allocate quota based on individual efficiency, it would be necessary to calculate the efficiency of each harvester (and each potential harvester) under the assumption that all restrictions were lifted – an expensive and analytically impossible exercise.
Thirdly, the incentive for individual harvesters to supply data illustrating a high degree of efficiency in harvesting fish would weaken the database used for fisheries management and stock assessment, thus requiring the need for improved data validation. And this in turn would increase management costs.
An additional problem with using AFMA’s maximum economic efficiency objective to link individual harvester economic efficiency and quota relates to the importance of establishing secure and well-defined fishing rights in fisheries. As noted in the main text, it is widely accepted by professionals in the fisheries management field, that the existence of weak fishing rights is the underlying cause of both over-exploitation and economic inefficiency (ie too much aggregate fishing capacity) in fisheries.
Insisting that AFMA’s economic efficiency objective implies the need to base, in part or in whole, quota allocation on individual harvester economic efficiency would significantly weaken the fishing concessions of harvesters. In particular, the allocation of quota through bureaucratic determination of the relative economic efficiency of individual harvesters would greatly increase the uncertainty and risk associated with holding such concessions. And in light of the fact that there exists no cost effective, defensible methodology for bureaucratic institutions to calculate individual economic efficiency, the legal challenges under any such allocation process would only serve to further weaken fishing rights. And given that strengthening harvesting rights associated with fishing concessions is fundamental to achieving AFMA’s objectives of maximising economic efficiency, reducing over-exploitation and providing cost-effective management, such an interpretation and application of AFMA’s economic efficiency objective would undermine AFMA’s ability to satisfy any of its legislated objectives.
An analogy may help to explain why AFMA’s maximum economic efficiency objective would dictate not using individual harvester efficiency as a criteria in determining quota allocations. Assume for the moment that government, through bureaucratic institutions, was responsible for determining who had access to farm land for the production of wheat. Further assume that maximising economic efficiency in the production of wheat was a government objective. Basing access (ie. determining who grows wheat, and how much they grow) on bureaucratic calculation of which individual farmers were the most economically efficient would not maximise economic efficiency in wheat production. The lessons from command and control economies, such as Cuba, China and the previous Soviet Union, provide substantial empirical evidence supporting this observation. And the conclusion holds equally well for fish production.
Is investment a measure of economic efficiency?
One additional point is worth noting with respect to economic efficiency. It is wrong to associate economic efficiency with the magnitude of an operator’s investment in a fishery. Along this line, it has been argued by some that boat units reflect investment, and investment is a measure of relative efficiency.
Put simply, the argument is that the more boat units an individual possesses, the greater the size and power of that individual’s vessel (and investment) and the greater their relative efficiency. This line of reasoning is based on an inappropriate definition of economic efficiency. Investment (whether proxied by boat units or not) is quite different from the concept of economic efficiency. Investment refers to the magnitude of one’s financial commitment in an economic venture, whereas economic efficiency refers to effectiveness of one’s investment. In any given sector of the economy, many large firms are inefficient in using capital, labour and other inputs and do not survive, while at the same time many small firms are quite profitable. Efficiency and profitability are concepts unrelated to the magnitude of investment. Even if investment (or the possible proxy, boat units) were used in determining quota allocation, this would only coincidentally result in allocations being based on the individual economic efficiency of operators.
In summary, it is AFMA’s position that re-allocating fishing concessions through bureaucratic estimation of the economic efficiency of individual harvesters would be operationally impossible, weaken concessions (and therefore be contrary to AFMA’s economic efficiency and ESD objectives) prohibitively expensive (and thus contrary to AFMA’s cost-effective management objective), and be more equivalent to re-allocating quota via a lottery process than a principle-based approach founded on the avoidance of differential economic impacts on operators .