5.1 The allocation of TAC between participants in the fishery
5.2 The allocation of economic rent
5.3 The impact of allocation approaches on resource ownership and property rights
OECD (1996) identified the initial allocation of quota or TAC as the single greatest problem (together with enforcement and compliance) in the implementation of ITQ management in fisheries in the OECD countries. In their study, they identified the initial allocation of individual quota as one of the most difficult, time consuming and costly aspects of implementing an ITQ management scheme. The initial allocation is often difficult and controversial because it determines who will receive many of the benefits from the program, creating a valuable asset for some and excluding others. Initial allocations are commonly done on the basis of catch history, but the allocation formula used can result in very different allocations for individual and segments of the fishery.
Because of the way in which most allocation decisions are determined, the allocation process usually results in an (often substantial) windfall gain to those who are successful in the allocation process (Morgan 1995). With substantial rewards at stake, it is not surprising, therefore, that difficulties in the initial allocation of TACs have often lead to severe discontent and legal action over the allocation process (e.g., National Fisherman 1994a, 1994b).
5.1.1 Taking previous catch history into account
Once a TAC has been established, the question of the allocation of that TAC becomes important. There are basically two levels to the allocation problem; the first is the allocation between the participants in the fishery and the regulating agency/community and the second is the way in which the TAC is allocated among the participants.
The first level of this allocation problem involves a division of the resource rent generated from the fishery between the participants and the community, for whom the (usually Government) regulating agency acts. To address this issue, a knowledge of what resource rent is being generated is required and often this is not available. Therefore the practice has been for the government to impose an initial minimal resource rent levy (in the form of a management fee or tax) with a commitment to increase such fees over time so that the government is eventually the major beneficiary of the resource rent generated. For example, the management fee for the Australian bluefin tuna fishery was initially set so as to recover 38% of attributable management costs (Wesney 1989) but with a commitment to move towards full management and partial research cost recovery (Anon 1994). Thus, without a detailed knowledge of the resource rent being generated (or how it was changing over time in response to quota management) an incremental approach was adopted which presumably could be halted when it was seen that the allocation process was optimised. During this process, economic rent from the fishery might be expected to increase as the incentives for operational cost reduction take effect. As a result, an incremental approach to resource rent allocation will constantly re-adjust itself to changing circumstances without a knowledge of how that rent was generated. Rent generated by use of the community resource will be treated in the same way as rent generated through operational cost reduction by the fishermen. Such an approach will therefore have significant impact on the affordability of future cost reductions (see above) and may either hinder the process of cost reduction or lead to increased market turnover of quota.
In most fisheries to date, the initial quota fee or price has been set so low that quota holders have enjoyed a windfall gain. This may be useful in initially encouraging the acceptance of the concepts of quota management but it has also had unfortunate consequences such as encouraging speculation and, where a secondary market exits, of dissipating resource rent in subsequent transaction fees. In addition, initially low fees can attract and retain inefficient firms within the industry since the windfall profits are capitalised into the value of the original quota holder company. This problem was recognised as a significant one in the allocation of airport slots at US airports (Grether et al. 1981) and influenced the final design of the allocation system.
Morgan (1995) has examined the various forms of allocation of resource rent both within the fishing industry and in other industries which have had to deal with the problem of allocation of scarce resources. In all quota managed fisheries to date, the allocation of the resource rent generated from the fishery between the participants and the government has been done by administrative decision. Morgan (1995) also showed that such an allocation method is inevitably economically inefficient since it is highly unlikely that the regulatory authority would have sufficient detail of the demand structure for quotas to optimise the quota price and the rent accruing to the regulatory authority. It was interesting to note that, in all other industries examined by Morgan (1995), an evolution had taken place whereby resource rent allocation by administrative decision had been replaced by allocation through an auction or tender system. In these other industries (which covered communications, airlines and the financial industry) both theory and practice had shown that:
i. Allocation of resource rents by auction or tender was the only method which maximised economic efficiency in the allocation process, provided that the design of the auction or tender process was correct.As a result of the evolution which had taken place in these industries Morgan (1995) suggested that resource rent allocation issues in fisheries would eventually follow the same path once the need to provide incentives for fishermen to adopt the concepts of quota management had diminished. Since that time, Western Australia has moved to examine a process of tendering for quota in some of its quota managed fisheries although, to date, no such process has been implemented. However, the ability to adopt a tender process in quota allocation exists in most fisheries legislation in Australia and elsewhere.
ii. Allocation by a suitably designed auction or tender process was able to address a wide range of both economic and public policy objectives and brought out the real costs of non-economic policy goals. This is an important point since the usual view of the auction process is that it addresses revenue goals only which, in the case of natural resource allocation, is generally not the primary goal.
Allocation of TAC between participants in a fishery can either be done together with, or separate from, the allocation of economic rent between participants and the regulatory authority. If done together, the regulatory authority becomes one more stakeholder in the allocation process and under these circumstances Morgan (1995) has shown that an auction or tender process will not only allocate resource rent in an economically efficient way (with revenues being generated which can offset the costs of management, research and development of the fishery as well as providing, if needed, a return to the wider community) but will also identify those potential users of the resource with the highest use-values for the fishery in question.
The design of the auction or tender process can be arranged so as to address a variety of non-economic goals. These non-economic goals in a fisheries context might be the protection of existing rights in a fishery, matching quota to capacity and avoiding collusive practices and monopoly situations. The extensive theory of auctions and tenders which has been developed in response to similar problems in other industries (e.g. McAfee and McMillan 1987, Riley and Samuelson 1981) provide guidance as to appropriate designs in a fisheries context to address these problems. For example, providing designated bidders with a price preference4 in an otherwise conventional auction design will increase the quota won by the designated bidders (who could be pioneers or existing operators in the fishery) while at the same time increasing revenues generated from the auction. Price preferences are therefore an efficient means for protecting existing or implied rights to the resource to whatever degree is considered appropriate. Similarly, Morgan (1995) showed that matching quota to capacity can be achieved in an economically efficient way by an auction design which incorporates simultaneous bidding on small quota units together with multiple rounds of sealed bids.
4 Price preferences, which are essentially a premium applied to the bid or tender price (so that, for example, a $10 bid with a 20% price preference becomes a $12 bid for the purpose of the tender or auction) are an important tool in this regard.If the allocation of TAC between participants is done separately from the allocation of economic rent between participants in the fishery and the regulatory authority, this implies that administrative decisions regarding the sharing of resource rent between the regulator and the regulated would have been carried out first. Under such circumstances, it is difficult to envisage a process whereby an auction or tender process with two bidders (the regulator and the group of potential participants in the fishery) would first take place to determine allocation of resource rent. The resource rent allocation process is therefore restricted to allocation by administrative decision which, as shown by Morgan (1995) and above is inevitably economically inefficient and results in dissipation of resource rent. To date, this process has been the norm in quota managed fisheries, particularly in Australia, with resource rent allocation being done through a process of cost recovery for specified management, compliance and research costs related to the fishery. Such cost recovery principles have also been applied to non-quota managed fisheries as a means of allocation of economic rent. In the fishery for the western rock lobster, which is Australias largest fishery, management by effort limitation (input controls) has been estimated by Lindner (1994) to result in significant dissipation of economic rent. Moreover, under the present management arrangements for that fishery, economic rent is unlikely to exceed 69% of the potential rent able to be generated under alternative (i.e., transferable quota) management arrangements.
The allocation of the TAC between participants in quota managed fisheries has been the subject of significant ingenuity to take into account previous history in the fishery. Perhaps the most successful of these methods is the Adjusted Preferred Method pioneered in South Australia, which essentially gives participants the choice of how they want previous catch history in the fishery to be taken into account (average catch over the last x years, catch in the best y of x years, catch in the previous season etc) and then adjusts the total back to the established TAC, resource rent allocation issues having been previously and separately addressed through a cost recovery process. At the other extreme, in fisheries such as the Western Australian abalone fishery, allocation between participants is based simply on an equal share of the TAC for all participants with, again, resource rent allocation being separately dealt with through a cost recovery process.
The most efficient method of taking previous catch history into account (Morgan, 1995) has been shown to be an auction or tender system which is suitably designed so that a price preference is given to individuals in accordance with their previous catch history. Such allocation processes effectively and efficiently increase the amount of quota which can be run by a designated bidder in an auction or tender process, while at the same time increasing revenues generated from the auction or tender process. Even with such a process, however, the question remains of which catch history is to be taken into account. In practical situations, this has been the subject of significant dispute where operators variously argue for the best of the last x number of years, the average of a number of years or other variations on catch history. These questions cannot simply be resolved objectively and are essentially a political and sociological issue to be dealt with by negotiation within each fishery.
5.2.1 Minimising rent dissipation
5.2.2 Taxes, levies and cost recovery
5.2.3 The effects of separating economic rent allocation from TAC allocation
The allocation of economic rent generated from a fishery between the participants in the fishery and the regulatory authority is most efficiently dealt with when the two processors are considered together (see Section 5.1). The proportion of the economic rent which is generated from a fishery which is allocated to the regulatory authority will depend not only on the socio-political context in which the fishery is operating, but often also on the total rent generated and the profitability of the fishery. Regulatory authorities often find it easier to extract a proportion of the rent from a profitable fishery than what they do from a marginally profitable one.
In considering the relative proportion of rent which accrues to the regulatory authority and that which is retained by the operators of the fishery as profit, an important consideration is to ensure that the fishery remains sufficiently profitable for the operators to encourage reinvestment of profits when required. In Section 3.3.3 it was shown that the incentives for reducing operational costs in the fishery depend, as one would expect, on the rent which has been generated from the fishery in terms of profits to the operators. If, in the allocation process, a significant part of the rent generated is claimed by the regulatory authority, then the profitability of the fishery will suffer and the overall economic benefits one might expect from an individual transferable quota management system may not result.It is therefore in the interests of both the operators in the fishery and the regulatory authorities to allocate rent so as to ensure a profitable fishery whereby profits can be reinvested in cost saving measures. This reinvestment inevitably needs, as was shown in Section 3, to increase the total rent generated, to the benefit of both the operators and the regulatory authority.
It is important that the rent which is generated from a fishery is allocated between the participants in the fishery and the regulatory authority in an economically efficient manner. This means that measures need to be implemented to minimise rent dissipation in the allocation process. Rent can be dissipated in a number of ways during the allocation process. Perhaps the most important is for the access rights to the fishery to be inappropriately valued so that the true market price of that access right is not reflected in the price and hence, rent that is generated. An extreme example is where quotas have been allocated to operators in the fishery at low cost, resulting in a significant windfall gain to those operators. In Section 5.1 it was shown that a suitably designed auction or tender process was the only mechanism which resulted in the minimisation of rent dissipation through this process. Another important source of rent dissipation in an Individual Transferable Quota managed fishery is the transaction costs where secondary markets exist. For example, in New Zealand the initial design of the quota exchange was such that transaction costs were significant. Partly as a result of this most transactions bypass the official quota exchange and were done on an informal basis. The cost of administering and operating the quota exchange was significant, and eventually led to its ceasing effective operations. An effective secondary market for quotas in an individual transferable quota managed fishery is usually necessary to correct inefficiencies in the initial allocation process. The transaction costs and the efficiency of operation of the secondary market need to be considered to ensure that its operation does not result in significant rent dissipation.
The various ways in which regulatory authorities allocate part of the rent which is generated from a fishery to themselves varies between countries. In countries of the European Union and in Iceland a levy is placed on landings so as to secure for the regulatory authority part of the rent that is being generated from the fishery. In Mauritania, a tax is levied on the lucrative squid fishery which essentially achieves the same effect. In cases where levies or taxes are imposed, the charges made by the regulatory authority are simply a fee for access to what is generally perceived as a common property resource. The level of such tax levy or access fee varies significantly between countries and is generally related to the profitability of the fishery in question. In New Zealand and Australia, where individual transferable quota management now has a significant history, the methods of allocating a proportion of the generated economic rent is usually based on a charge for services via the regulatory authority to the fishery. The rationale behind this approach is that the beneficiaries of the fishery (i.e. generally the commercial operators) should be expected to pay for the Governments cost of managing the fishery, enforcing regulations and undertaking research. This approach has also been used in Australia where the full government costs of servicing many of the major fisheries in Australia are now recovered from industry through licence fees.
But, this cost recovery process has been difficult to implement in practice and has often resulted in significant disagreement as to the level of service which is required for the management of the fishery and which industry is expected to pay. The difficulty arises because the incentives under a cost recovery process are for those costs to be minimised since the benefits of such cost reductions or service cost flow immediately back to the operators in the fishery through reduced licence fees. Morgan (1997) suggested that a solution to this problem would be a cost recovery process whereby cost savings which are achieved by the provider of the management regulatory or research services are shared equally between the beneficiaries (i.e. the operators) and the regulatory authority. In this way, there then exists a shared incentive to reduce service costs to the fishery.
Within a cost recovery environment there is a significant danger that the servicing of the fishery becomes entirely cost-driven and the quality and extent of management compliance and research services suffering accordingly. Recent advances in both Australia and New Zealand are addressing this issue, either by establishing minimum core services that are necessary to service a particular fishery (e.g., Western Australia), or in establishing formal service agreements (e.g., as in New Zealand and South Australia) which specify not only the level and cost of service to be provided but also establish minimum quality standards for these services. But, it remains to be seen if a process based on the recovery of costs attributable to the management of a commercial fishery can be efficiently and cost-effectively administered. Some of the more difficult problems in this area arise where a resource is captured by both the commercial operators in the fishery and, for example, recreational fishermen. In such cases the attribution of management, compliance and research costs to the commercial fishery becomes the subject of significant negotiation and often disagreement. If a process based on the recovery of fees for specified services cannot be satisfactorily resolved, then it is likely that the allocation of a proportion of the rent to the regulatory authority will revert to an access fee levy or tax with those charges being loosely related to the extent of services provided.
The separation of the allocation processes leads to a situation where allocation of economic rent must be done by administrative decision although it is conceivable that the allocation of the TAC between participants in the fishery may be done by tender or auction. The overall process will therefore be economically inefficient despite the efforts that may be made to make the allocation between participants efficient and equitable through processes such as the adjusted preferred method. If overall allocation of resource rent is to be done in the most economically efficient and equitable manner the two components of the allocation process need to be addressed together preferably through a well designed auction or tender process.
The process of allocation of fisheries quotas confers upon the individual or group receiving the allocation a right of harvest of the resource in question. More importantly, quota allocation (as opposed to input controls) separates the functions of harvesting from that of resource management so that the property rights implied in catch quota allocation can be recognised and valued according to the efficiency with which those harvesting rights are utilised. This right of access is generally a bankable commodity (Townsend 1992) with its value depending not only on the proportion of economic rent that can be derived from the right of access but also on other less tangible factors such as the confidence in the long term management arrangements for the fishery (security of tenure to the access right), volatility of stock abundance, market prices, etc. The present value of the right of access is usually reflected in the price at which the access rights are sold in the open market or, if the rights are not traded, in the long term discounted economic rents generated from the fishery.
There has been much discussion on the issue of resource ownership and property rights in fisheries and the identification of access rights (through quota allocation) as one form of property right to the resource should be viewed in the context of a continuum ranging from no implied property rights in the case of open access fisheries through to exclusive collective territorial rights (e.g., as in Japanese villages - Asada et al. 1983) to well defined individual property rights in the case of leased areas of ocean for ranching purposes or monopoly rights to exploitation of specific stocks (e.g., some shrimp stocks of Madagascar and Australia). This situation is therefore analogous to the evolution of land-based property rights which occurred in most western countries over the past 400-600 years and, most importantly, which evolved in response to the same general type of use pressures, overexploitation and resource and environmental degradation which is common in fisheries today. This evolution in land-based property rights also proceeded, over several centuries, from open access to forest and other areas through controlled group access for specific purposes (e.g. grazing stock) to the well defined individual freehold title concepts of property ownership which exist today. The situation of property rights through either common property or the allocation of catch quota in fisheries is analogous to the medieval practice of allocating user rights to areas of forest or grazing land.
However, it is important to recognise that resource ownership and the conferring of property rights in whatever form do not, in themselves, guarantee sustainable resource use. Individual investment, exploitation and development decisions will still be made, even under a well defined system of property rights, by reference to the economic returns available from alternative uses of the resource (i.e., the commercial discount rate). If the opportunity rates of return are such that better returns can be achieved by the non-sustainable exploitation of the resource and investment of the profit in other activities, then this may be done. This has occurred in a number of land-based activities, such as forest resources in former Yugoslavia where the transfer of forest areas to private citizens often resulted in their rapid destruction since it was more attractive for individuals to sell the trees to large forest logging companies and purchase timber than it was to sustainable manage their piece of forest. Clark (1975) demonstrated that the most economically rational use of southern ocean whale stocks was non-sustainable exploitation over a short period and investment of the profits in non-fisheries activities.
Troadec (1995) has also pointed out the importance of the geographical scale of property rights in fisheries. If resources are to be managed in such a way that economic incentives exist for the long term sustainability of those resources, then the ownership of the resource (as well as the institutions that govern that ownership) needs to be on approximately the same geographical scale as the resource itself (this is often referred to as the exclusivity of the rights). It is no use, for example, in establishing individual property rights over a small geographical part of a stock since activities in the area subject to property rights will not determine who can exploit the stock as a whole and consequently, will not result in economic incentives for long term sustainable management.