3.1 Assessing a fisherys suitability for quota management
3.2 Assessing risks in TAC setting
3.3 Where should the TAC be set in relation to the production function?
3.1.1 Single and multispecies stocks, shared stocks and straddling stocks
3.1.2 Impacts on long-term sustainability
Perhaps the simplest situation for introducing quota management in a fisheries context is that of a single species captured by a single fishing gear. Such a situation exists in many instances, for example, the rock lobster fishery of South Australia where one species (Jasus verrauxi) is captured using only rock lobster traps. Introduction of a individual transferable quota management system in 1993 has resulted in a stabilisation of catches around the annual catch quota of some 1720t. However, there has been no economic assessment of the fishery following the introduction of the quota management system and there is also no information available regarding the impacts on individual operators financial situation. However, economic impacts have probably been small because of the limited opportunities to achieve cost effectiveness with fishing gear that is essentially passive in its operation (Lindner 1994). By contrast, quota management in the Southern Bluefin tuna fishery, where fishing methodologies are such that efficiencies in capture can be readily introduced, has resulted in significant improvements in the economic performance of the fishery and in operators profitability (Francis et al. 1993, Wesney 1989).
In the South Australian rock lobster fishery, industry reports, however, confirm that fishing activities have become more relaxed and the race to fish which was evident in the fishery no longer exists as operators choose to take their catch in a more leisurely manner throughout the season. This has had secondary effects in the small coastal communities where rock lobster is the mainstay of the local economy. Heming2 (pers. comm.) reports that in these communities many fishermen now choose not to fish on weekends, holidays etc. retail trading has increased as fishermen spend more time in the communities and the number of regulation infractions has declined. These effects were not anticipated and were certainly not considered when ITQ management was introduced.
2 Manager, Compliance Unit, South Australian FisheriesThus, in general, quota management (particularly Individual Transferable Quota Management) has resulted in biological, economic and financial impacts which were broadly consistent with property rights theory (Clark 1993). In addition, the operational aspects of establishing effective quota monitoring systems and in implementing an adequate compliance program to monitor the quotas has generally been significantly easier in single species fisheries. Quota management, whether as global quota management or as ITQs, in multispecies fisheries presents rather more problems. Problems related to multispecies fisheries are not so much those of ability to determine total allowable catches or quotas for those individual species, but rather are those associated with difficulty of enforcement and operational difficulties of setting quotas for a number of species which may be captured concurrently. In many situations, e.g. in the European Union, this has led to significant operational difficulties because the setting of quotas for such multispecies fisheries ignores the reality of the harvesting process, and are therefore often impractical. Within the fisheries of the European Union (Corten 1996) this has led to a common practice in many fisheries of illegal landings and to the discarding of otherwise saleable fish because the quota for that species had been reached. Such operational difficulties also result in often insurmountable compliance problems such as in the Dutch beamtrawl fishery which takes a mixture of cod, sole and plaice. In this fishery the 500 or so vessels had individual quotas assigned for each of the three species. Catches are landed at a large number of fishing ports often on a daily basis, and the small number of fisheries inspectors were unable to enforce the individual vessel quotas. The inability to match the compliance and enforcement practicalities to the operational aspects of the fishery and to the quota regime that was introduced, inevitably resulted in a large-scale practice of illegal landings and subsequent political crises (Corten 1996).
The essential cause of these operational and compliance difficulties in multispecies fisheries can however inevitably be traced back to inadequate institutional arrangements. For example, within the European Union the policy and quota setting mechanisms are divorced from industry input and participation. This leads to impractical quota management arrangements, particularly when the complexities of a multispecies situation are considered. In countries which have a tradition of operating in a co-management arrangement between industry and government, these operational and compliance difficulties can be more easily resolved. For example, in New Zealand, a number of demersal fish species have individual quotas even though the fishery for those species is essentially a multispecies one. In setting quotas for multi-species fisheries, the operational aspects of the fishery must be known in detail and the quota rules formulated and implemented to control and monitor the switching of fishing operations to target one species or another within the multi-species fishery. However, it is usually virtually impossible to precisely estimate appropriate quotas on each individual species that is caught in a multispecies fishery, and it is inevitable that the quota of at least one of species (most probably the species with the highest value) will be exceeded. Provided that this possibility is recognised, and a suitable conservative quota established for the more valuable species, quota management can be successfully implemented in a multispecies fisheries context. But it is unlikely that either the biological sustainability or the economic optimisation goals will be achieved for the multi-species fishery as a whole. Under such circumstances, alternative management regimes such as input controls may be successful alternatives to individual quota management.
The question of bycatch is a special situation within a multispecies fishery. Fish which are not specifically targeted and are caught incidentally to the main target species (and possibly discarded) constitute a significant potential problem in multispecies, individual quota managed fisheries. Where a quota on the primary target species exists and there is no control on bycatch species no incentive exists to minimise that bycatch. In New Zealand this issue has been addressed by establishing quotas for bycatch species as a whole and through this mechanism the quantity of bycatch which is taken can be regulated. This, however, brings the same problems as if the fishery were operating on two different species, each of which with their own individual quotas. Either the quota for the primary species is unfilled because the bycatch quota is reached first, or alternatively the bycatch quota may be exceeded as operators target on the primary species. Effective compliance issues dominate the operational practicalities of such schemes, particularly where the bycatch is not landed but discarded at sea. Under such circumstances, inspection and enforcement of bycatch quota is extremely difficult.
In summary, there are a number of significant problems in implementing individual quota management in multispecies fisheries and in fisheries where bycatch is a major issue. These problems relate principally to the operational characteristics of a fishery and to compliance issues. The problems, are not insurmountable but need to be addressed within a co-management organisational structure which brings together policy and regulatory bodies with those who have practical operational knowledge of the fishing industry. With regards to shared stocks and straddling stocks, the issue of appropriate organisational structures becomes paramount. Unless suitable arrangements exist for the adoption of a common policy position, to set individual quotas, to monitor the landings in a consistent way, and to establish an efficient and effective enforcement and compliance service, then the difficulties of implementing quota management for shared or straddling stocks will be extremely difficult. The biological and economic aspects of determining suitable individual quotas need not be any more difficult than in a single jurisdiction fishery, and hence it is the organisational structure which will determine whether the quota management system succeeds or fails. Perhaps the most significant example of such a jurisdiction is the International Commission for the Conservation of Southern Bluefin Tuna which allocates individual quotas to a number of countries in the Southern Ocean, Pacific Ocean and Indian Ocean. However, even this Commission has recently been unable to agree on quota allocation for the 1998 fishing year.
The success of individual quota management in a particular fishery in achieving long-term biological sustainability will depend on a number of requirements. First, the global quota which has been set must be appropriate. This implies that the production function is approximately known and that the quota has been appropriately set in relation to this production function. Section 3.3 examines this issue in detail. Second, the year-to-year variation in stock biomass should be considered in relation to the global quota which has been set. In fisheries where there is significant year-to-year variation (for example, in many shrimp fisheries which characteristically exploit only one year class), the year-to-year variation in biomass may be significant. Under these circumstances there is the choice either to impose a constant quota, or to adjust the year to year quota in accordance with the stock biomass. If the latter approach is adopted, it assumes that suitable research or survey programs are in place to measure this year to year variation in stock biomass in an accurate way. Section 4 examines the details of fixed and variation quotas under these circumstances.
In summary, provided that the global quota is appropriately set each year, the impacts on long-term sustainability should only be related to the interaction between the production function and the level at which the quota is set. Variable quotas can address significant year to year fluctuations in stock biomass provided such information is collected regularly and used in the quota setting process. Because of the effects of individual transferable quotas in reducing capacity, improving quality and achieving increased profitability OECD (1996), the introduction of individual quota management in a fishery should lead to improved utilisation and positive impacts on long-term sustainability of the resource. This incentive for long-term sustainability stems from the stake that the operator has, through the establishment of a form of property right in the fishery, in ensuring such long-term maintenance of the stock. The only exception to this would be where the expected rate of return from ensuring such long-term sustainability is less than the social discount rate which is acceptable operators in the fishery. Allocation of individual transferable quotas therefore becomes an important process in ensuring long-term sustainability through its effect on individual profitability. The greater the individual profitability in the fishery, the greater the incentive should be at the individual level to ensure long-term sustainability of the resource.
3.2.1 Biological risk associated with over-exploitation
3.2.2 Economic risks
In setting a TAC, whether that TAC is to be part of a global quota strategy or as part of an individual quota managed fishery, it is most unlikely, even with the best scientific advice that the production function and its variance will be calculated correctly. This has been a particular problem in quota managed fisheries (see Section 2.1) and, for example, in New Zealand, TACs for a number of fisheries were initially set too high because of inadequate data and scientific analysis. This continues to be a problem in many fisheries where often the problem is not fully recognised, if at all.
This section examines the impact of uncertainty associated with a generalized production function of the form Catch=constant*fishing effort-fishing efforty (and the resulting errors associated with calculated TACs) on the biological, financial and economic performance of a fishery. The uncertainties have been examined by simulating three scenarios in the estimation of the production function: first the correct production function where y=2, secondly an optimistic production function where the exponential term was set at 0.2 less than the correct function (i.e., 1.8) and thirdly, a pessimistic production function where the exponential term was set at 0.2 more than the correct function (i.e., 2.2). Log-normally distributed error density functions were associated with each of the three mean production functions.
If the estimated production function is different from the actual production function (i.e., mode mis-specification), the imposition of a TAC based on the incorrect function will entail a risk that the recommended TAC will reach a level which results in overexploitation of the resource (i.e., reducing spawning stock biomass such that it degree that it adversely affects subsequent recruitment). The size of this risk will be related to:
i. The extent of the difference between the correct and the estimated production curves;The general conclusions and implications of incorrectly calculating the production function and thereby incorrectly advising on TAC levels will depend the above three factors but general conclusions are:
ii. The degree of natural variability in stock (i.e., levels of recruitment) abundance, i.e., the variation around the correct production curve;
iii. The point on the incorrect production curve at which the TAC is set.
i. Levels of effort (and hence mortality rates) required to take the TAC will be less than expected if the production curve is under-estimated and more than expected if the production curve is over-estimated. Figure 2 shows the relationship between the target fishing effort and the actual fishing effort which needs to be exerted to take the TAC in the case where the production curve is over- or under-estimated. If the production function is overly optimistic, then the level of fishing effort required to take the TAC quickly reaches a point where it is significantly greater than the target level. However, if the production curve is conservative and under-estimates the true production curve, the actual level of fishing effort required to take the TAC will always be less than the target or expected level and actually declines at higher levels of target fishing effort. This result re-enforces the elements of the precautionary approach (FAO 1996) in situations where datas, analyses and recommended TACs are uncertain.Figure 2: The level of effort required to take a given level of TAC under conditions of (i) over-estimation of the production function (the optimistic function) and (ii) under-estimation of the production function (the conservative function) plotted against the target fishing effort based on the actual production function. If the production function is over-estimated, the actual fishing effort, and hence exploitation rate, required to take the (optimistic) TAC increases rapidly whereas with a conservative production function, this does not occur.
ii. If the production function is over-estimated (i.e., the optimistic scenario), then TACs will be set too high and hence the probability of achieving the TAC will be reduced and potential catch may be forgone. Likewise, if the production function is under-estimated, then the probability of achieving the TAC will be increased. Figure 3 shows the relationship, for the model examined, between the probability of achieving the TAC and the level at which the TAC is set. As expected, if the TAC is set at the point where the maximum yield is expected to be obtained on average, then this will achieved or exceeded 50% of the time. If the TAC is set above this level (either through errors in the production function by being too optimistic or by aiming for a higher level for some other reason) then the probability of achieving this will be reduced. Section 4 in examining the relative merits of fixed and variable quotas, also shows that the coefficient of variation of effort levels required to take a fixed TAC increases as the TAC increases. This is consistent with the conclusions of Figures 2 and 3.
Both fluctuations in stock abundance and imprecisely estimated production functions will lead to the sub-optimisation of long term economic rent generated from a fishery in addition to the risks associated with over-exploitation of the resource in question. The degree to which such sub-optimisation will occur depends on the interaction between:
i. The extent of fluctuations of the stock;The extent of interaction between these three variables may be complex. However, some generalisations are possible using the modelling approach outlined above.
ii. The level of effort required to take the TAC. This, as shown above, depends on the precision with which the production function is estimated;
iii. The actual TAC achieved, which may be different from the predicted TAC, again depending on the precision of estimation of the production function.
Figure 3: The probability of achieving a given TAC level for the simulation model. The TAC which produces the maximum sustainable yield is 100t and this may be expected to be achieved 50% of the time. If the TAC is set above this level through being overly optimistic regarding the production function, then the probability of achieving the TAC will be reduced. Likewise, a more conservative TAC (either deliberate or by adopting a more conservative production function) will be achieved a greater number of times.
Long term rent generation from the fishery can be sub-optimal if any one of the following occur:
i. Revenues (i.e. TAC) are accurately predicted but costs are imprecise. Apart from imprecision in initially estimating operational costs, this can occur because fishing effort required to take the TAC may be different to that expected. This can occur for a number of reasons including imprecise estimation of the production function. If the production function is over-optimistic, Figure 2 shows that the actual fishing effort required to take the TAC departs dramatically from the expected fishing effort level as fishing effort increases. This leads to an equally dramatic decline in economic rent generated from the fishery.
If the calculated production function under-estimates the real production function, then costs of fishing will consist of (a) the operational costs of less-than-expected fishing effort (ie. an under-estimation of costs) and (b) the costs associated with production forgone because of the conservative nature of the TAC.
Combining these two sets of costs, Figure 4 shows the relationship between the actual fishing effort required to take the TAC at the point of real maximum economic rent (in this case, a TAC of 93.75 tonnes at a value of fishing effort of 7.5, at which point net long term discounted economic rent is $46.25 million) and the losses in economic rent resulting from errors in the TAC and hence fishing effort required to take the TAC.
Figure 4: Rent forgone as a result of errors in estimating the TAC (and hence fishing effort) which optimises economic yield. If the TAC which produces maximum economic rent is under-estimated (eg. through the use of a conservative production function), then the fishing effort required to take that TAC will also be less than anticipated, with a small net loss of rent. However, if the TAC is over-estimated, then the potential losses of long term economic rent increase rapidly as fishing effort required to take the (optimistic) TAC increase rapidly (Figure 2) and the TAC is increasingly unable to be taken. This eventually reaches a point where economic rent losses equal the value of the fishery in perpetuity as the overly optimistic TAC can never be taken.
ii. Revenues (i.e. TAC) are imprecise but fishing effort (and costs) are accurately predicted. This situation can occur when there is difficulty in enforcing the TAC although the production function is known accurately. In this case, any over (or under) runs of the TAC will result in changes in actual fishing effort expended to take the TAC in accordance with the shape of the (actual) production function. Losses which accrue as a result are then due to the sub-optimal level of economic rent generated from the fishery. The relationship between these losses and fishing effort expended will be identical to those shown in Figure 4. Hence the importance of adequate enforcement of TACs is just as important as correctly estimating those TACs from a knowledge of the production function. However, in making any assessment as to the degree of enforcement required to ensure adherence to a TAC, the cost of that enforcement to achieve a given level of compliance must be considered in much the same way as the costs of research required to achieve a given level of precision in the estimation of the production function needs to be taken into account.
iii. Both revenues (catch taken) and costs (fishing effort) are imprecisely known. This situation is probably the most common in practical management of quota fisheries. The errors involved can relate to both an imprecise knowledge of the production function and the inability to enforce the TAC. However, as indicated above, the level of precision operationally possible (and the cost of achieving that level of precision) are important practical considerations in estimating the total costs of the fishery in achieving a given TAC. In some instances, it may be a better option to aim for a more conservative TAC and a lesser level of compliance to the TAC than strict adherence to a more precisely defined (in terms of achieving the maximum economic benefits) TAC. In practice, both scenarios result in the same outcome but the conservative TAC/reduced enforcement option will most likely result in the least cost in achieving that outcome. Whatever the combination of errors in setting the TAC and/or estimating or measuring the fishing effort, the result will be described by the graph Figure 4 in terms of the losses resulting from the sub-optimisation of economic performance of the fishery.
3.3.1 Methods for determining the production function
3.3.2 Effects on economic rent generation
3.3.3 Environmental and other impacts and the real costs of fishing
3.3.4 Impacts on operational costs and the affordability of cost reduction
3.3.5 Maximising incentives for operational efficiency
In establishing a total allowable catch for a particular fishery, one of the first steps is to establish the production function. Because a fishery is being managed under a quota or individual quota management regime does not imply that a different methodology needs to be adopted for establishing the relationship between catch (i.e., total allowable catch) and the fishing effort which is expected to take that catch. The usual fisheries population dynamics techniques can be utilised to establish the production function, using either a surplus production model or dynamic pool analysis. Where size limits are also utilised in the management of the resource, production modelling based on historical data should be used cautiously to ensure that they refer to the same size limits or size or first capture throughout the time series.
As a result, with the usual precautions related to the establishment of production functions, there is no essential difference in establishing a production function for use in a quota managed fishery than for a fishery which might be managed by other means such as input controls.
Given the uncertainties in establishing production functions (see Section 3.2), the rent which may be generated on average from the fishery can be related in the usual way to the difference between the steady state revenue streams as established by the production function and the costs of fishing. Such costs of fishing may include not only the operational and capital costs involved in taking the fish, but also the natural capital costs of externalities due to environmental and other impacts (see Section 3.3.3). After these costs have been taken into account, the long-term average rent from the fishery will usually be maximised at a point significantly less than the maximum sustainable yield. In addition, at this point the value of access rights to the fishery (whether those access rights are in the form of the value of tradeable quota or in the form of licence values to operate in the fishery) will be maximised. Therefore, it may be useful in a situation where access rights are freely traded to monitor such trade so as to provide a proxy for the economic rent being generated from the fishery. The allocation of the rent that is generated is the subject of Section 5.
In assessing the costs of fishing operations, it is not only the direct operational costs of fishing operations (including the cost of capital) which need to be considered, but also the various indirect costs. These indirect costs can be related to either periodic events (ie. fluctuate around a constant mean value) or directional events (ie. trend in one direction over a long period of time, often years or decades).
Periodic indirect costs will tend to add to the real costs of fishing operations by introducing uncertainty (depending on the degree of volatility of the parameter in question) into future revenue streams. However, in situations where access rights to the resource are purchased in an open market (eg. by the purchase of quota entitlement or of a fishing licence in a limited entry fishery), periodic indirect costs can also reduce the real costs of fishing somewhat by lowering the price of access to the resource for new entrants. Among the periodic indirect costs are:
· Those related to natural year to year fluctuation in stock abundance (and hence the volatility of catches),Many periodic indirect costs will be related to fishing effort. For example, Morgan (1985) has shown that with increasing effort natural fluctuations in catch rates are increasingly translated into fluctuations in catches so that the standard deviation of catches is linearly related to fishing effort. For a given level of volatility this results in a linear relationship between discounted costs due to this volatility and fishing effort. Likewise, the probability of stock collapse (i.e., the probability of random fluctuations in abundance leading to a low enough abundance to adversely affect subsequent recruitment) is also related to fishing effort. However, in this case, the relationship is non-linear with the probability of achieving a given value of stock abundance, or below, increasing exponentially with increasing fishing effort (Figure 5).
· Those related to market price volatility or to volatility in costs of inputs (e.g., for fuel),
· Those related to the probability of a stock collapse brought about by fishing operations.
However, the expected cost of such an occurrence involves both the probability that it occurrs together with potential loss of revenues if such a collapse occurs which is, itself, related to fishing effort in a non-linear way through the production function. This leads to the important conclusion that the real indirect costs related to the possibility of stock collapse can be significant even when the probability of such a collapse is small (Figure 5).
Indirect costs which are directional, on the other hand, will generally be independent of fishing effort but will change over time, either increasing or decreasing the costs of fishing in a systematic way. Often these trends may go unrecognised (e.g., see for example Walters and Hilborn 1995) and will not necessarily be factored into resource access values through licences etc. These types of indirect costs are, perhaps, the most difficult to deal with since management arrangements for the fishery in question will generally be unable to influence them. It is important to recognize, however, as compensatory measures (such as reducing fishing effort) may be possible to counteract their influence on exploitation levels and consequently on periodic costs. Examples of directional indirect costs are:
· Changes in efficiency of fishing units through technological improvementThe various environmental impacts (including the probability of stock collapses) and influences of fishing operations are analogous to the natural capital concepts which have been pioneered by Costanza et al. (1997) and which seek to establish values of various ecosystem processes for integration into conventional economic modelling. Using these concepts, they established that natural capital costs of ecosystem processes (including those related to global fishing operations) amount to approximately 1.8 times the direct costs. Because they comprise a significant proportion of the total costs such indirect ecosystem costs must be included in cost considerations for a full understanding of the real costs involved in fishing activities.
· Environmental impacts of fishing operations (eg., the impact of trawling operations on by-catch species abundance and biodiversity)
· The impact of environmental degradation on fishing operations (eg. the impact of various types of marine pollution on catches)
Figure 5: The probability of stock collapse (i.e., probability of falling to a defined level of stock abundance or below) as a function of fishing effort. The real (expected) costs attributed to the possibility of stock collapse can be significant even when the probability of its occurrence is small. This is a result of the costs being a combination of the probability of a collapse occurring and the significant loss of revenues accruing if such a collapse occurs.
Combining both the various types of indirect costs with the direct operational costs of fishing leads to the identification of the total cost of fishing. For the model fishery being examined, these total costs are shown in Figure 6 together with the revenues which might be expected to accrue from fishing operations. This cost relationship is somewhat different from the cost curve produced when considering operational costs alone and results in rapidly escalating real costs at higher levels of fishing effort. This is a result of the increasing importance of the various indirect costs at higher fishing effort levels.
Figure 6: Changes in the total cost of fishing with fishing effort together with changes in revenues. Note that total costs increase rapidly at higher fishing effort levels as indirect costs (such as costs related to overfishing or environmental risk) become more important than direct operational costs. The precise form of the revenue and total costs relationships will vary with individual fisheries but should follow the same general functions as those above.
In fisheries where access rights are traded in an open market system (eg. the trading of quota entitlements in a quota managed fishery or of fishing licences in a limited entry fishery) the value of the right of access to the resource will reflect the present discounted and future economic rent generated from the fishery. This rent is equivalent to the discounted revenues from the fishery less the total fishing costs. Because the relationship between total costs of fishing and fishing effort is non-linear (Figure 6) then the value of the access right (such as quota or licence value) will be asymmetrically related to fishing effort (Figure 7). The asymmetry of the relationship implies that the value of access rights to the resource will decline much more rapidly as indirect costs become important. In cases where the value of the right of access can be monitored, these data may therefore provide valuable information on the total costs of fishing and the real economic rent being generated from the resource.
Figure 7: The implied value of access rights to a fishery, based on the discounted economic rent generated, at various fishing effort values. Note that, because the relationship between total costs and fishing effort is non-linear, the relationship is asymmetrical. In fisheries where access rights are traded (eg. quota entitlements in a quota managed fishery), these values will represent the free market price at which such entitlements are traded. The market price of entitlements will not be maximised at the point of maximum yield from the resource but at a lower value of fishing effort near to the point which produces maximum economic rent.
In establishing TACs, a prime associated requirement is to provide the economic and regulatory climate for inducing minimal operational costs within the constraints of stock sustainability. Morgan (1997) examined this aspect for a hypothetical fishery under quota management with a fixed number of operators and a cost curve which was assumed to consist of a fixed cost for each operator and a variable cost which was linearly related to the level of fishing effort. Operational cost reduction was undertaken in 10 steps, each representing a 10% reduction from the original costs. The cost of achieving each step of operational cost reduction was assumed to be an exponential relationship where initial cost reductions were easier (and cheaper through technological innovation) to achieve than subsequent cost reductions.
The incentive for achieving cost reductions was measured in two ways. First a long term benefit/cost ratio was established where the long term, undiscounted resource rent generated per operator was compared with the immediate costs of achieving each step of operational cost reduction. Second, the short term affordability of the cost reduction process was determined by calculating the proportion that the cost of each step of operational cost reduction bore to the overall resource rent generated per operator.
The principle conclusions of the analysis were:
i. The incentive for each step of operational cost reduction (measured as the long term benefit/cost ratio) was independent of the level of the TAC. The cost reduction incentive was also independent of the level of the TAC. The cost reduction incentive was also independent of the precise form of the operational cost/fishing effort relationship.Figure 8: Incentives for achieving operational cost reductions at various levels of fishing effort for 3 different steps in the cost reduction process. The incentive is maximized at the point of Maximum Economic Yield for all cost reductions steps. This implies that financial incentives for achieving operational cost reductions will be reduced as one moves away from the point of Maximum Economic yield.
ii. The short term affordability of cost reduction was greatest at the original (i.e., before the cost reduction) Maximum Economic Yield and declined moving away from that point (Figure 8).
iii. The incentive for operational cost reduction increased with each step in the cost reduction process, reached a maximum and then declined (Figure 9). This implies that operational cost reduction in a quota managed fishery will at first be an increasingly attractive process before the costs of technology of achieving further reductions make those reductions increasingly unattractive.
Figure 9: Incentive for operational cost reduction at different steps in the cost reduction process. The incentives for cost reductions first increase and then decline as the long term benefits become less attractive compared with the increasing incremental price of achieving operational cost reductions.
iv. For the case studied, the short term affordability was relatively flat over a wide range which encompassed both MEY and MSY. This indicates that TACs set anywhere within this range will have little effect on short term affordability of operational cost reduction.
v. The short term affordability of operational cost reduction decreased rapidly as the (original) point of zero economic rent generated is approached and a discontinuity existed at the point of zero economic rent (Figure 10).
vi. Year to year variation in fishing effort required to take a fixed quota under a scenario of variable recruitment increased rapidly as the TAC level approached MSY (see below and Figure 11) although at MSY, this variability declined as quota could not to be taken in all years.
Figure 10: Changes in the incentives for achieving operational cost reduction measures at different levels of fishing effort. The incentives for achieving operational cost reduction measures are maximised and are most affordable when the TAC is set around Maximum Economic Yield (MEY).
In summary, if quotas are to achieve the aim of maximising economic efficiency, there needs to be both a long term incentive for achieving cost reductions and those cost reductions need to be affordable in the short term. Long term incentives for cost reduction have been shown to be independent of fishing effort levels while the affordability of those reductions is maximum at initial MEY. Year-to-year variability in fishing effort required to take a quota is high at MEY and may be higher than at the point of MSY. Therefore, given that biological risk of stock reduction is also greater at MSY than at lower levels, quota levels might best be set near MEY and be adjusted upwards to new MEYs as costs are reduced. It is unlikely that optimal quota levels will ever be at MSY.
As has been seen above, the incentives for achieving operational cost reductions are maximised at the point where economic rent from the fishery is maximised. However, as the effects of individual quota management become apparent, and operational costs are reduced, the point at which economic rent from the fisheries maximised will change. In general, this change will be in the direction of the maximum sustainable yield so that as total costs are reduced, the point of maximum economic yield will approach the point of maximum sustainable yield.
Therefore, it is important in any fishery managed with individual quotas to not only monitor the economic performance of the fishery, but also to ensure that incentives for continuing the operational cost minimisation process are maintained. The most effective way of achieving this is to make periodic adjustments to the Total Allowable Catch so that the annual TAC remains at the point of, or near, maximum economic rent. In this way, the incentives for achieving operational cost efficiency will continue to be maximised and the process of minimising costs in the fishery will continue. In the absence of such adjustment to the TAC as operational cost efficiencies are achieved, incentives to reduce costs will diminish and the economic effects of individual quota management will gradually be diluted. At the present time, there are no known examples where a system such as this is in place. This is not surprising considering the general lack of economic and financial monitoring of quota managed fisheries that is presently undertaken.
If operational cost reduction is to be funded from retained profits from the industry, those retained profits need to be sufficient to generate acceptable returns on capital invested as well as to allow funding of future cost reduction initiatives. Figure 10 shows that the affordability of cost reduction initiatives decrease the further away from MEY the quota is set. This result has significant implications if quota is freely transferable through an efficient market process and potential buyers of quota are not constrained by funding through retained profits from the quota managed fishery. J. Penn3 (pers. comm) has pointed out that, in such cases, it would be expected that the rate of transfer of quota units would follow the same relationship as that shown in Figure 9 with an increase in turnover of quota units being expected the further away from MEY the quota was set. New entrants bringing new capital to the fishery may not be so constrained by decreased affordability of operational cost reduction and could therefore benefit from the increased profits such reduction in costs would generate. Established quota holders within the fishery would be subject to such funding constraints and increasingly, as quotas were established further away from MEY, would be unable to fund further cost reductions. Turnover in quota would therefore be expected to increase.
3 Fisheries Department of Western Australia, Weterman, PerthLikewise, quota turnover might be expected to increase as the relatively inexpensive cost reductions are made and further operational cost reductions become not only less affordable to existing quota holders (Figure 8) but also less attractive as long term benefit:cost ratios decline (Figure 9). This process is obviously also important in vertical integration within the industry and in the common observed trend (as in New Zealand, Clark 1993) towards quota purchase by processors etc.