Memorandum submitted by Dr Andrew Palfreman
(W21)
1. SUMMARY
The views expressed here are personal.
The commercial analysis of the SU report is
not as strong as it could be. Insights from collective action
theory would have strengthened Annex D (analysing fisheries policies
from the fisherman's viewpoint). The important commercial role
played by Producer Organisations (POs) for many years is barely
mentioned in the SU report.
Neutrality on the costs and benefits of participation
in the CFP issue would have been a more appropriate stance because
the costs and benefits of the main positions are not at all clear
cut.
Institutions supportive of social capital are
needed to accommodate the widespread unidirectional and mutual
externalities in the industry. They exist even in countries which
have adopted ITQs (eg Australia and New Zealand).
ITQs are not a panacea. They have regressive
implications for the distribution of wealth and income. This is
a very serious issue for, amongst others, the English regions.
They are also less suitable for an industry consisting of many
small-scale operators.
The benefit cost ratio from having a viable
fishing industry is not necessarily correlated with the fisheries
dependency ratio as conventionally measured. It follows that community
quotas are important for regions that may not necessarily be "fisheries
dependent" as conventionally defined.
With appropriate support POs might still be
a suitable instrument for equitable quota management and capacity
reduction, if necessary.
POs are also likely to be central to the development
of the community quota concept, as well as other collective choices
in the industry, not least because of the protection they offer
against restrictive practices legislation and the fact that their
decisions are, in principle, enforceable.
2. INTRODUCTION
This paper does not represent the views of Yorkshire
Forward, or the fishing industry of Yorkshire and Humber. The
views expressed are entirely my own.
These comments follows the preparation of a
report for the Yorkshire and Humber Fisheries Working Group, supported
by Yorkshire Forward. [2]The
Yorkshire and Humber region has witnessed the disproportionate
decline, indeed near collapse in some ports, of the whitefish
industry in that region, with dire effects on the major ports.
In the order of catastrophe Grimsby tops the list, with Scarborough
following close behind. The survival of a significant company
has sustained Hull, together with landings from foreign vessels.
The implementation of ITQs, as recommended by the SU report, without
protection for the regions, can be predicted to result in the
continued disproportionate shrinkage of the Yorkshire and Humber
white fish subsector and the disappearance of commercial fishing
at some ports. (The SU envisages the end of fishing at some ports
in Chapter 4.)
3. THE TERMS
OF REFERENCE
AND COMMERCIAL
ANALYSIS
The SU report is intended to be a guide for
policy development by fisheries departments, but it is also intended
to assist the fishing industry in planning. A weakness of the
report stems from this double purpose. The recommendations to
businesses are not strong partly because they do not seem well
grounded in commercial reality and partly because the SU report
fails to work through the institutional implications of many of
its recommendations. [3]
The research for the Yorkshire and Humber study
showed that the white fish catching sector is in the process of
disintegrating, but the response of the individual vessel owners
and operators to this has been quite diverse. Under the circumstances
of the industry in this region the kind of advice offered in Table
6.1 is really irrelevant when businesses are just struggling to
survive. Moreover the report is virtually silent on the institutions,
set up on the initiative of producers (Fish Producer Organisations)
as required under European law, which have done something to support
the regional sector.
The risk management chapter (Chapter 5) illustrates
a similar point. There is no analysis of the institutional arrangements
that might enable the industry to adopt more risk management,
although the pooling and trade in track record by POs is a form
of risk management.
The report employs an example of a New Zealand
commercial fishing business, which has a real say in setting quotas,
to illustrate commercial risk management. In New Zealand there
is a carefully worked out institutional structure which hands
over real fisheries management decisions at a collective level
and at an individual company level to the sector—arrangements
which might be developed from the PO structure in the UK. Another
example: how can the industry aspire to Marine Stewardship Council
certification (as recommended in Chapter 6) when the institutional
mechanisms under which this might be done do not at present exist?
Stocks are shared with other countries. The industry is dispersed
and technologically varied. It is probably not impossible in the
long run, and subject to many legal and institutional developments,
but at present it is impractical. A fishing vessel owner or operator
planning his own business would pay little attention to the advice
in SU Table 6.1 when looking at his own business—this is
what the SU thinks the industry should do, not what a commercial
decision maker, or even what a consultant would advise a commercial
operator to do. [4]
4. WITHDRAWAL
FROM CFP
The SU makes an issue of the costs of reaching
bilateral agreements if we were not in the CFP, as if these costs
are likely to be more than the costs of current arrangements (Chapter
9). Has it been more costly for Norway or Iceland or other countries
to reach agreements with countries whose fleets have ambitions
to operate in their waters? The appropriate stance for the SU
on this issue would have been neutrality. Assume, for the sake
of argument, that it is feasible for the UK to leave the CFP and
unable to reach agreement on access with other countries. The
advantage of being outside is that the fallback position—the
worst scenario (the Nash equilibrium) is less costly than the
fallback position when in the CFP. Outside the confines of the
CFP the UK can always walk away from the negotiation. Inside the
CFP the fallback position is a common resource, perhaps fished
by agreement, but also, quite probably, overfishing. This is what
the evidence shows. Is the SU really saying that if there were
no CFP, and the UK had full control over its own extended EEZ,
that the UK would vote to create it? There is a reason for
remaining in the CFP, and that is the UK's treaty obligations,
but to argue that participation is relatively advantageous is
implausible and tendentious, especially after the SU's criticisms
of the CFP.
5. THE ABSENCE
OF SOCIAL
CAPITAL
The Strategy Unit team travelled the world in
search of solutions and has seen examples from Iceland, New Zealand,
the USA, Faeroes, Norway and Australia. What they have come up
with is essentially a recommendation to move to an ITQ system.
What is really surprising, however, is that an essential component
of most successful systems, ITQ or otherwise, is left unanalysed,
namely implementation arrangements for different interests in
the industry to work together.
There is an economic reason why this is an important
point. It is because fishing vessels interact—in the jargon
there are mutual as well as uni-directional externalities at work.
The demise of the anchor seiner in the North Sea was not because
this fishing method was inefficient. It was a very efficient,
low cost, high returns fishing method. It disappeared because
the institutional mechanisms that might have protected this fishing
method did not exist. The structure of the cod stocks changed
because of the coexistence of other fishing methods alongside
anchor seining, leaving trawling as the main, commercially feasible,
fishing method. There was an externality at work. And this is
why any system of fisheries management has to include mechanisms
for collaboration. The industry needs some glue—social capital—to
deal with these problems.
Another example of the absence of consideration
of the collective action issue is the recommendation from the
SU encouraging the over 10m shellfish sector to work together
to jointly market and sell its products. This cannot be done in
the absence of a legitimate structure, which does not dissolve
under competitive pressures.
6. THE ITQ RECOMMENDATION
The single most important SU recommendation
is ITQs. The report agrees that ITQs are not a panacea. There
are some negative features—matching inputs with outputs
under quota uncertainty, incentives to get round restrictions,
high grading, price dumping, concentration of commercial capital,
destruction of social capital. They appear to work where there
are a relatively small number of big operators. But where there
are larger numbers of small-scale fishermen, playing a socially
important role, they run into difficulties, even in countries
where they are claimed to be a success. Is it really desirable
to permit the consequences of concentration of commercial capital
to fishing interests in Cornwall or in the North East of England?
It is regrettable that the SU report did not really face up to
this problem. The SU report does not discuss the regressive implications
of its recommended approach for the distribution of income and
wealth in the sector.
ITQ systems are by no means perfect. Fishermen
have to be able to match inputs with the outputs they are allowed
to catch. They need to know in advance what their share is going
to be, and if it changes midstream they may revert to practices
the system is designed to avoid. Moreover, ITQs would quite probably
worsen the situation of the industry in Yorkshire and Humber.
Indeed the SU report expects fishing to end at some ports, although
it is not specific on locations.
7. THE SOCIAL
FUNCTION OF
THE SECTOR
Recognition of the need for social and economic
development of the sector is included in the SU terms of reference.
But the way the SU has interpreted this is disadvantageous to
some regions and inconsistent with standard cost benefit analysis.
One of the conceptual difficulties is the idea
of "fisheries dependency". This appears once again in
the Cabinet Office report (Chapter 3 passim) and it is
also used on the European Commission's website and it has been
around for a long time. There is a risk that the employment of
numbers within Travel to Work areas as the denominator in dependency
calculations introduces a bias against some industrial communities,
such as Grimsby and Hull, where the industry plays an important
social role. In reality, for certain communities, the potential
for the industry to perform a social role, in terms of creating
employment and incomes in socially deprived areas, is important,
but because they are densely populated the fisheries dependency
ratio will be low. Basically I am arguing that in some cases the
benefit cost ratio from having an active fishing industry is not
correlated with the fisheries dependency ratio—demonstrated
by Freeman Street in Grimsby.
8. EXCESS CAPACITY?
The SU report claims excess capacity. The industry
might concede the notion of excess capacity relative to the current
UK quotas available to it. However, given the massive cut backs
that have taken place in recent years, many in the industry dispute
the idea that there is still excess capacity. They cite the recovery
of haddock fishing in 2004, the widespread presence of cod and
the speed with which they catch their permitted quotas. This is
important from the point of view of the assessment provided in
the current report because it implies that, according to skippers,
recovery of North Sea stocks is already underway. No view on this
is taken here except to point out that the difference of opinion
illustrates the difficulties that the RACs may face. Making use
of producer organisations to implement an equitable share out
of quota, or to reduce capacity, or whatever might be necessary,
may be a useful and practical starting point.
9. COMMUNITY
QUOTAS
According to the SU report, one means of satisfying
social objectives is to legitimise "community quotas".
The report recognises the legal problems faced by some community
schemes, but requests Government to consider the full range of
options available, and looks towards some form of "ring-fence"
idea. Once again POs are the obvious instrument.
Community quotas have been established at the
initiative of local fishermen in Shetland and Orkney as well as
in the south west. In those contexts people have seen ways, quite
reasonably, of advancing the interests of their regional sectors.
The Yorkshire and Humber report recommends that Yorkshire and
Humber fishing interests should do the same thing. In the context
of this paper, however, the important point is that all regions
throughout the UK will, quite reasonably, want to retain a viable
catching sector and they will not want to be fobbed off with what
are likely to be, in reality, very limited, and probably largely
illusory, inshore development opportunities.
The UK Government has been permissive and has
allowed transferability of quota, and thus a market for track
record and quota has developed, with official agreement. The Government
has argued in Brussels that track records and quota entitlements
should be considered as tradeable assets. It follows that providing
support through and to POs to accumulate quota for their members
is one means for improving the viability of fishing vessels in
membership. This is a lesson which the Department of Agriculture
and Rural Development for Northern Ireland and Shetland Islands
Council have both evidently appreciated in the design of their
own support mechanisms for their regional industries.
The British Government has argued in defence
of the Shetland and Orkney quota purchase schemes that aid given
for purchase of quota should be regarded as investment aid, not
operating aid. In the same submission the Government argued that
the pooling of track record following from the development of
the market is a desirable development, as it assures the existence
of viable fishing enterprises.
Although the European Commission has called
on the stakeholders in Shetland to end the Shetland scheme in
its original form, the scheme as such has not terminated and the
beneficiaries have not been required to repay the money. Indeed,
as long as a scheme is permitted the SFPO intends to continue
with it because it is a means of securing a future for the islands.
The Duchy scheme is up and running, with private sector funding,
and is seen by stakeholders as a success. The concept of the community
quota has been backed by the SU report and the Royal Society of
Edinburgh report[5]
(albeit loosely).
The Commission's decision only applies to the
original Shetland and Orkney schemes. It may be possible to design
community schemes for other regions that meet the Commission's
criticisms of the Shetland and Orkney schemes, but I have little
doubt that POs will be central to any coherent national strategy.
10. PRODUCER
ORGANISATIONS
Collaborative action is a common feature of
the sector at all levels. The SU report is shot with implicit
assumptions of collective action in the sector (eg recommendations
for the pelagic, whitefish, over 10 metres shellfish and under
10 metes sectors—6.1.2). Indeed there are institutions within
the sector that are already in place, are legally established
and are designed to facilitate it, namely POs.
POs have been around for a long time. There
is a reason for this. The UK fishing industry in England as well
as in Scotland welcomed them way back in 1973 because they gave
vessel owners and operators legal protection from restrictive
practices legislation—competition law, most recently embodied
in the Enterprise Act. This Act actually explicitly forbids a
range of cartel offences, such as price fixing and agreements
between companies to restrict supply. That was why The Fish Producers'
Organisation was formed in 1973, to permit fish producers, in
those days the company sector trawling industry, to engage in
restrictive practices. No one has explained to me why that argument
has become invalid.
The fish industry abounds in situations where
the strategic choice for individual businesses is to compete or
collaborate, or a mixture of the two.
What are the key ingredients of successful collective
action?
(1) The operating rules have to be known
by the participants if the collective action is going to be sustainable.
This point is implicitly recognised in European Community legislation
because it requires producers (ie catchers or fish farmers) who
wish to have their PO recognised to conform to quite detailed
requirements in their rules. [6]
(2) Because mutual gains can arise in a
variety of different ways the economics of collective action requires
the benefit delivery mechanism to be explicit. Fishermen will
not participate on the strength of vague promises of some gains
in the future which might (or might not) accrue to them if they
follow this or that path. They want to know with some precision
how the PO is going to set about delivering benefits to them as
individual businesses.
(3) The third key element is the magnitude
of the expected benefits. Paltry gains are not likely to induce
much enthusiasm among potential participants, hence the substantial
interest in mechanisms for compensation for fish failing to attract
buyers at the minimum price among the fishermen of applicant countries
to the EU.
(4) The fourth issue concerns risk and uncertainty.
Expected gains from collective action may be substantial but if
outcomes are uncertain they lose their value to participants,
especially if the time horizons of participants are short.
None of these criteria are met by the RACs initiative.
The industry is encouraged to seize the opportunity presented
by the RACs. The danger, however, is that the RACs will become
another layer of bureaucracy—another talking shop. They
will just breed cynicism unless decisions taken by them actually
feed back into real commercial outcomes for individual fishermen.
POs are one of the success stories of the EU's
Common Fisheries Policy. By and large they meet the criteria needed
for sustainability: rules-based for appropriations and contributions,
visible benefits to members, clear evidence of the benefit delivery
systems, exclusion mechanisms. Moreover there is no obligation
on them to operate in the commercial areas where there are no
visible collective benefits from collaboration. The regulations
governing them have been redesigned to give them the powers to
undertake quota management. Shetland has shown how they can be
used to strengthen the architecture of fisheries management through
various positive initiatives. Strengthening the PO structure would
provide a mechanism for securing regional interests, such as Yorkshire
and Humber, as well as meeting many of the other objectives of
the SU report.
16 November 2004
2 Palfreman, Andrew. Steps towards the recovery of
the fishing industry in Yorkshire and Humber. A Report Prepared
for the Yorkshire and Humber Fisheries Working Group Funded by
Yorkshire Forward. June 2004. Back
3
This point appears to be acknowledged by Departments insofar
as they have put on the DEFRA website a number of consultation
papers seeking stakeholder views on the various issues raised
in the SU report. Back
4
In practice he (or she) would exercise his judgement on the business
environment as it evolves, and ask himself how he can best use
what is going on for the survival of his own company. He tries
to predict what government and other stakeholders are going to
do and how that might influence his own enterprise. He works out
the benefits to his own business of following this or that course
of action in the light of this. He asks himself about the advantages
and disadvantages of participating in larger, collective activities
such as trade associations and producer organisations. He asks
himself how, in practice, the flow of profits to his own business
is going to be delivered. He looks at the context of his business,
and evaluates how it is changing over time. Perhaps he can contribute
to that change by pushing his trade association one way or the
other. Back
5
The Royal Society of Edinburgh. Inquiry into The Future of the
Scottish Fishing Industry. March 2004. Back
6
Article 5 of Regulation 104/2000. Back
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