The approach is concerned with a methodology for management decision-making in small pelagic fisheries and the use of techniques, criteria and data in such a way as to present solutions for the rational, financial and economic management of capital investment. This approach commences with an investigation of the operating characteristics of each of the fisheries. Operational analysis is then used to take proper account of factors which govern the ways a particular fishery system will respond to proposed improvements. The outcome from the operational analysis forms the best possible basis for calculating financial and economic results, which are expressed in a form suitable for presentation to an Investment Centre, International Bank or Aid Agency.
The basic technique for this investment appraisal work is the computer model. In each case for the countries considered, linked models combine to represent vertically integrated operations throughout the marketing chain, i.e., from fishing operations through to sales.
For rapid programme development, and ease of investigating alternative assumptions, the computer models take the form of modular spreadsheets written in Multiplan on an Apple MacIntosh microcomputer. Just as the marketing chain extends from fishing activities through processing to distribution, so the chain of spreadsheet modules represents them, with links provided for automatic transfer of information. Within the modules, very efficient analytical mechanisms are provided to calculate, e.g., the utilization of processing or transport capacity under both seasonal and random daily variation in supply. The effects of buffer storage are explicitly examined under the same conditions. When it is necessary to determine an optimal value, such as the best number of trucks to purchase, this is found automatically by iterative solution. In short, the computer models provide realistic operational analyses using the full power of the spreadsheet technique. Further information is given in Appendix 1.
(i) Financial Rate of Return
The cash flow estimates, apart from expressing the financial liquidity of the project, form the basis for the calculation of the financial profitability. This, in turn, is used to measure the absolute (whether to reject or accept a project), as well as the relative (whether Project A is better than Project B, etc.) profitability of a project. The most commonly used indicator of financial profitability used by international development banks is the financial rate of return. This is the rate at which the present value (this calculation implies use of a discounting technique which takes into account that a unit of money earned in the future is worth less than a unit of money earned today) of future operational cash surpluses equals the cost of the investment. When a project is said to have a return of, for example, 20%, it usually means that the average earning power of the money used over the project's life period is 20 %. This is the same as saying that the project could afford to pay up to 20 % interest on capital (if all capital required were borrowed) and still break even.
(ii) Economic Rate of Return
The same discounting cash flow technique that is used for the Financial Rate of Return can also be used to calculate the return to the national economy of a project. While the financial calculations are based on prices of goods and services on the open market, economic calculations are (at least in principle) based on social opportunity costs (or the value to the economy of employing a unit of a certain resource in the best alternative usage). In developed and diversified economies with almost perfect competition, market prices usually do not differ much from the social opportunity costs. In developing economies, however, “imperfections” in the market (price controls, monopoly elements, import restrictions, minimum wage laws, subsidies in credit systems, etc.) tend to make market prices less suitable as guides for resource allocation. This tendency is also aggravated by the custom of levying taxes on certain goods. These taxes are measures used by the governments to transfer resources from one sector of the economy to another. To overcome the deficiencies of market prices in relation to allocation of capital resources for development purposes, some central planning agencies and development banks have introduced the concept of “shadow prices” in project evaluation.
The calculation of shadow prices is a cumbersome and costly undertaking. Therefore, for typical fisheries projects it is hardly worthwhile going into the process of producing shadow prices of most of the goods and services employed. For the calculation of Economic Rate of Return it is usually sufficient to use market prices and make the following adjustments:
deduct government taxes and duties included in market prices for major cost items (vessels, gear, plant machinery, fuel, electricity, etc.);
add subsidies paid by the government to promote fish consumption (consumer price subsidies, subsidies for ice production, subsidies for inland transportation, etc.);
recalculate the cost of imported goods and revenues of exported goods;
recalculate the cost of capital;
while it is often maintained that shadow prices should be employed for labour used in fishery projects, there seem to be widely differing opinions on how to construct these prices. The argument that the labour costs should be zero, which implies that the value of the alternative production is nil, does not seem to coincide well with the conditions of such projects, which are dependent upon the availability of trained personnel (skippers, engineers, service staff, accountants, etc.). It appears that from the comparatively few cases where shadow prices for labour have been employed in fisheries projects, these shadow prices have been applied only for the unskilled personnel and at rates somewhat lower than the going wage rate.
(iii) Sensitivity Analysis
Fisheries projects, particularly those in pelagic fisheries, are by their nature subject to a high degree of uncertainty inthe estimate of basic information such as catch rates, prices, etc. The data used in the financial and economic analyses are the best or most likely estimates of these important variables. It is very important to known what effect departures from these values will have on the project. Sensitivity analysis provides a method that will give a guide in this area. The method is simply to recalculate the rates of return using changed values for the parameters whose sensitivity are important for the project. In the analyses in this report, the use of Switching Values automatically provides this facility in the case of Revenue, Operating Costs, and Investment Cost. A Switching Value is simply the percentage change in one of these factors which will reduce the rate of return to a point at which an investor might switch his attention to a standard safe alternative, e.g., a bank deposit at 10 per cent per year interest. When determining a switching value on one of three factors, the other two remain unchanged.
