Foreword

Summary

Acknowledgments

Introduction

Economics of fisheries management

Production, trade and costs

The fisheries

Large fisheries

Small fisheries

Commercial fishing and regional communities

Appendices

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2 Economics of fisheries management

Importance of economics

Resources in fisheries have characteristics which make them different from the resources and inputs used in most other industries. The major differences lie in how property rights are defined. In most industries it is common for rights to be specified so the holder of a right accrues the full costs and rewards of their action or inaction relating to the right. Rights specified in this way are exclusive. When rights are exclusive, the costs and benefits of decisions taken are exclusive to the individual business. Because of this, the owners of the rights can manage resources optimally over time. However, in a typical uncontrolled open access fishery, rights are not exclusive. Whenever a fisher catches another tonne of fish, two costs are incurred that are separate from the traditional and exclusive fishing input costs of fuel, labour and capital. First, catching an extra tonne of fish reduces the fish stock, making the next tonne more expensive to catch for all fishers. Second, the potential for these fish to reproduce is lost to all fishers in the future. However, because the fish stock is an unpriced input to the production process, these costs are spread across all fishers and the individual fisher incurs only a fraction of the total cost of their actions. In other words, when a fisher is weighing up the costs and benefits of catching the next tonne, they are not considering the total cost to the fishery. They therefore catch more than they would if all inputs were priced, thus diverting more fuel, labour and capital from more valuable uses elsewhere in the economy. This is the open access problem which can lead to what has been called the ‘tragedy of the commons’ and the reason why intervention by a fisheries manager is needed to ensure fishers optimally manage their collective resource. Making property rights perfectly exclusive for most fisheries is usually not feasible. A second option — vesting all rights to the fishery in a sole owner — would solve the problem; but is not a practical policy option in most cases because existing fisheries are exploited by multiple operators. Instead, fisheries managers limit the extent of the problem by restricting effort or catch. This determines the level to which effort or catch should be restricted, while also impacting on the management regulations effect on fishing costs and revenues. Managers’ choices on these aspects are guided by AFMA’s economic efficiency objective, which implies effort should be restricted to the point where the difference between fishing costs and fishing revenues is greatest (box 2). This is where net economic returns are maximised.

box 2 Maximum economic yield and the open access equilibrium The total revenue curve in figure 1 is derived from a biological stock–recruitment relationship, translated into effort units, showing the relationship between effort and catch in dollar amounts. Every point along this curve represents a sustainable effort and catch combination. Setting effort at Emsy means the maximum sustainable yield (MSY) is harvested, generating the largest total revenue. The total cost curve gives the cost of applying each effort level. Although total revenue is maximised at Emsy this is not where total profits are maximised. Maximum economic yield (MEY) is the level of catch which maximises profit, the difference between total revenue and total cost. In figure 1, this occurs at effort level, Emey, with a corresponding catch value of $mey. This is where net economic returns are maximised. It is also where the optimal amount of society’s scarce resources are allocated to the fishery, including fishing vessels, labour etc. Typically, a fishery will not gravitate to the effort level associated with maximum economic yield without intervention from a management authority. Instead, in an unmanaged fishery, effort is most likely to settle at a point known as the open access equilibrium (EOA in figure 1). In an open access fishery, all fishers, acting in their own interest, are induced to fish more, but because they do not take into account the effect of their fishing activity on other fishers in the fishery — including the increased cost of harvesting because of stock depletion — all fishers are eventually worse off. There is no incentive for one fisher to reduce effort because the profits this would create will be dissipated by another fisher expanding effort. At EOA the difference between costs and revenue is zero so there is no net economic return made from the fishery. Note also fish stocks are thinner at the open access equilibrium than stocks at MEY. MEY and Emey are influenced by changes in fish prices (which stretch or compress the total revenue curve) and the costs of fishing, which pivot the total cost curve about the origin. Higher fish prices would shift MEY to the right and vice versa, while higher fishing costs per unit of effort would shift MEY to the left and vice versa. In most cases, reducing effort to Emey will not lead immediately to an increase in revenues and profits. However, as the growth in the fish stock in each period begins to outstrip the rate of harvest, the underlying stock will grow making the costs of catching a tonne of fish lower in the future. The length of time it takes for the fish stock to settle at a new equilibrium population depends on the biology of the stock. In figure 1, a discount rate of zero is assumed. While a case can be made for a zero discount rate in common property resources, it is an accepted practice to assume some positive discount rate to account for the fact that a harvest at some time in the future is worth less than a harvest today. The effect of a positive discount rate is to move MEY closer to MSY. That is, if current harvest is valued more highly than future harvest, it pays to work the fishery harder today, resulting in smaller equilibrium stocks at MEY. However, if the cost of catching a tonne of fish depends on the size of the stock, then even with a relatively high discount rate, the optimal size of the stock in most cases will be larger than the size of the stock at MSY. It should also be noted figure 1 is a simplified representation of the true process, useful for explaining the general principles of fisheries economics. A real bioeconomic model would account for complex factors such as uncertainty and changes in biological and economic variables over time.

Of all AFMA’s objectives in the Fisheries Management Act 1991, the economic efficiency objective (or maximum net economic return objective) is probably the most contentious and poorly understood. Traditionally, fisheries managers have aimed to maximise the sustainable catch of a fishery, the maximum sustainable yield (MSY), because it maximises the gross value of production of a fishery. However, at MSY, revenues are not increasing at as great a rate as fishing costs, so profits are lower than if fishing effort was limited to that associated with maximum economic yield (MEY). Furthermore, fish stocks are denser when economic efficiency is maximised, so conservation concerns are met. At the same time, the fishery earns the greatest profits it can over time, because a target level of harvest is less costly to catch when a fish stock is dense. A profitable fishery is also more resilient to changes in key variables which affect all industries, such as exchange rates and fuel prices. An economically efficient fishery will have the following three characteristics: Total catch and effort are restricted to the point where net economic returns over time are maximised allowing for the future costs of fishing and the impact of current catch on future stocks and catches. This prevents rational fishers from expanding their effort until all profits are dissipated. This is known as fishery level efficiency. Revenues are maximised and catching costs are minimised for a given quantity of catch. This can be referred to as vessel level efficiency. While fishers can be relied on to choose the combination of inputs which minimises costs and maximises revenue for their particular operation (given the constraints imposed by fisheries management), the management measures used in a fishery can have a significant impact on the costs and revenues of fishing. Fisheries management services are provided effectively and at least cost for the given level of management (not necessarily at lowest cost overall) — this is management efficiency.

Fisheries management options

For net economic returns to be maximised, effort must be restricted to EMEY. Fisheries’ managers have two categories of control for this purpose: input controls — the aim of these controls is to prevent catch and effort from gravitating to the open access equilibrium by placing restrictions on fishing gear, limiting the number of vessels operating in a fishery, setting the number of days the fishery is open or controlling any other type of fishery input. output controls — the aim of these controls is also to limit catch and effort, but do so by restricting the size of the harvest. Setting a total allowable catch (TAC) can provide biological protection for the fishery — once the predetermined catch level has been reached, the fishery is closed. A TAC system is most effective when the total catch is split among operators through a system of individual transferable quotas (ITQs). ITQs work best in high-value single-species fisheries with stable abundance. If there is good information about fish stocks, fishing costs, revenues and production relationships, landings and discarding, the efficiency of ITQ management is enhanced. Effective enforcement is also important (Rose 2002). However, a number of problems have been identified with the implementation of ITQs in some fisheries. Some of these include the difficulty in setting TACs for species with variable abundance, and highgrading. For a more in-depth discussion of the benefits of ITQs in fisheries management, see Rose (2002) and Squires, Kirkley and Tisdell (1995). Of course, the benefits of a system of output controls only accrue when the targets are appropriately set. A system of output controls which does not restrict effort (because TACs are set well above historical catch levels) is not preferred to an input control that restricts effort effectively without significantly increasing the costs of fishing. This is because an output controlled fishery with TACs set too high is likely to gravitate to the open access equilibrium where profits are very low. Table 3 briefly outlines the advantages and disadvantages of input and output controls.

3 Comparison of input and output controls
type of control	advantages	disadvantages	comments
Output controls
Individual transferable quotas (ITQs)
Shares of a Total Allowable Catch (TAC). Can be traded, permanently or temporarily. Usually issued at the start of the fishing season. Used in the southern bluefin tuna fishery, the Bass Strait central zone scallop fishery, the Heard and McDonald Islands, the Macquarie Island toothfish fishery and the Commonwealth trawl, gillnet hook and trap and Great Australian Bight trawl sectors of the southern and eastern scalefish and shark fishery. To be adopted by the western tuna and billfish fishery, northern prawn fishery, the small pelagic fishery and in some Torres Strait fisheries.	- Provides individual fishers with a share of the TAC - Quota flows to fishers that are more efficient, creating autonomous adjustment. - Costs are minimised for a particular level of catch and returns are maximised	- Establishment costs can be high as consultation is needed for new rights must be issued to eligible concession holders. - Can encourage discarding when the TAC of one species in a multispecies fishery has been met. May also promote highgrading (returning caught fish to the sea in the hope that higher value product will be caught in the future) if price differentials and fishing costs are conducive. - Inaccurate estimates of discarding cause an inefficient TAC to be set. - Ongoing monitoring and compliance may be more costly than for input controls.	- The Minister has issued a direction to AFMA that each Commonwealth fishery be managed using output controls by 2010 unless a case can be made for why they are not appropriate for a particular fishery. - Implementing a TAC/ITQ system is not sufficient. Catch levels must be set appropriately for it to be an effective control. - Where uncertainty in stocks is smaller than uncertainty in catch per unit effort (CPUE), output controls allow for higher and less variable net economic returns than input controls. - Spatial controls and gear restrictions may be needed to protect other aspects of the environment.
Competitive Total Allowable Catch (TAC)
TAC is set and the fishery is closed once the TAC is reached. Individual shares are not granted.	- Provides management with assured maximum catch. - Avoids negotiation over allocation of individuals’ shares.	- There is strong incentive for fishers to compete to maximise their catch. This promotes overcapitalization as fishers attempt to increase their relative fishing power. - May be seen as unfair as large smaller scale fishers find it difficult to compete with large scale fishers.	- As with ITQs, spatial controls and gear restrictions may be needed to protect other aspects of the environment. - Catch levels must be set appropriately for it to be an effective control.
Input controls
Examples of input controls include: - limited entry - boat size restrictions - gear restrictions (e.g. limits on the size of nets or number of hooks that can be used) - individual transferable effort units. Used in many Commonwealth fisheries, including: - Eastern tuna and billfish fishery - Northern prawn fishery - Torres Strait prawn fishery	- Initial management costs may be lower than an ITQ system - Unlikely to be any management induced highgrading and/or discarding.	- There is a strong incentive for fishers to compete to maximise their catch resulting in overcapacity and a reduction in overall returns. - Fishers will substitute unrestricted inputs for restricted inputs which pushes up the cost of fishing. This ‘effort creep’ forces managers to periodically adjust input control. This can make some gear redundant. - Requires a two-stage process where first the targeted level of catch is identified and then the level of effort required is determined. - Costs associated with initial allocation of transferable effort units if these are adopted.	- Prevents fishers from using the least cost combination of inputs for a given level of catch. - Almost always involves some level of effort creep. Rather than the community benefiting from improved fishing techniques, gear controls are frequently adjusted to limit the amount of effective effort applied in a fishery. - Can be successful in fisheries where no input substitution is possible. - Where uncertainty in stocks is larger than uncertainty in CPUE, the variability of net economic returns is likely to be lower in an effort controlled fishery. - May be appropriate in small fisheries where the costs of implementing and maintaining a system of output controls may not be feasible.

Economic performance indicators

In general, assessment against the economic efficiency objective is complex. This is because it requires a comparison between the potential net economic returns available from the fishery and those realised under the prevailing management system (Gooday and Galeano 2003). The difficulty is, for most fisheries there is a great deal of uncertainty surrounding both the estimate of potential net economic returns and the returns that are actually generated in a fishery. No single indicator or methodology is universally appropriate for assessing the economic performance of all fisheries. The range of indicators that are available include simple indicators of efficiency, such as changes in the number of unused permits and the value of licences and quota, to more advanced techniques, such as economic surveys and bioeconomic models that require more information. ABARE has been conducting economic surveys of major Commonwealth fisheries since the early 1990s. The economic data collected during these surveys provide input to a number of indicators. For example, economic survey data are used to calculate net economic returns, productivity indexes and profit decompositions and to provide input to the construction of bioeconomic models (box 3). For more information on these indicators, see Gooday and Galeano (2003).

How much to spend on performance monitoring

An issue fundamental to the development of fishery management policies is the appropriate amount of information needed by decision makers to make informed decisions. This issue applies equally to both the scientific and economic aspects of fishery management. While a range of indicators have been presented in the previous section, for many fisheries, most indicators cannot be generated because there is limited data. This does not necessarily mean significant expenditure should be incurred to construct indicators for all fisheries. While more information is valuable, the collection, interpretation and dissemination of information are not costless. The optimal expenditure on management (including performance monitoring) occurs where the last dollar spent on the management of a fishery generates an extra dollar of profit. Of course, this point is very difficult to determine. A problem for managers of small value fisheries in particular is making decisions with sometimes very limited information. Compiling economic and biological data on a fishery may cause management costs to quickly outweigh the benefits of management (that is, profits to fishers). When management costs exceed profits over a period of time, a case could be made for closing the fishery under the precautionary principle. As such, in some cases, collecting a large amount of information may not be justifiable on benefit–cost grounds, especially in very small fisheries. In other cases, fishers may not be willing to supply the data, or the data simply may not exist. However, it is still possible for a fishery to have useful performance indicators. Even a very simple measure of the degree of latent effort, or quota sale and lease prices, can give an indication about the efficiency of management arrangements. In some cases, managers will already have the information available so the measures can be calculated with little effort.

box 3 Economic performance indicators and tools Indicators Net economic returns Using economic survey data, net economic returns can be calculated to provide an indication of the level of profit generated in a fishery. Very low (or negative) net economic returns can suggest the fishery is operating at close to the open access equilibrium described in figure 1. While net returns provide an indication of the current returns in a fishery, they provide no indication of the potential returns from a fishery. Productivity indexes A productivity index shows whether more or less output is being produced over time with a unit of input. The index is calculated by combining changes in total output (fish) to changes in total inputs such as fuel, labour and capital. Most recently these have been derived for the Torres Strait prawn fishery in Hanna, Hogan and Tedesco (2006) and in the gillnet, hook and trap sector of the southern and eastern scalefish and shark fishery (SESS) in Newton and Wood (2008). A profit decomposition study has been undertaken in the eastern tuna and billfish fishery in Kompas and Che (2008) explaining the contribution of productivity to fishery operators profits. Profit decomposition studies are an extension of productivity index studies and provided more detailed information regarding the inputs and outputs. Latent effort Economic surveys of small fisheries are usually not justified, precluding many other indicators available. As an alternative, one indicator that is particularly important in smaller fisheries is the level of latent effort. This is a measure of the inactive rights which could be used in the fishery at relatively short notice. Generally, a permit is left inactive only when the holder determines the profits available in the fishery are low. Therefore, latent effort reveals permit holders’ assessment of a fishery’s profitability. But high latent effort is more than a sign of low profits. It is also an impediment to achieving high net economic returns in the long run. If profits start to be generated, idle effort is drawn into the fishery and profits are competed away at a higher level of catch. Stocks could be fished down relatively quickly if enough inactive effort is triggered. In a limited entry fishery, latent effort is indicated by inactive permits. In a quota managed fishery it manifests as unfilled quota. Both are common in Commonwealth fisheries. As would be expected, estimates of net economic returns and latent effort are highly correlated — low net economic returns are associated with high latency and vice versa. Value of quota Estimates of the traded value of quota is another relatively inexpensive indicator of the economic value of a fishery managed by output controls. Given reasonable certainty of title and a competitive market, the price at which quota is traded will reflect the present value of all future expected net returns from the fishery. Prices of permanent quota not only reflect expected net returns in the current period, but also perceived uncertainties by market participants about the role of returns and discount rates used thereafter. In fisheries for which quota constraints are binding only intermittently, market value of quota may represent an option value rather than the full value expected from the catch. A major difficulty in using quota lease or sale prices as an indicator of fishery profits is that market prices are not easy to observe because there is no formal mechanism currently in place to collect quota sale and lease prices. Tools Profit decompositions Productivity gains have the potential to contribute to an increase in business profit. Also, factors such as stock size and the rising price of outputs and declining costs of inputs can contribute to an increase in business profit. A profit index decomposition approach enables decomposition of profit into its components: productivity, the prices of outputs and inputs, and vessel capital. This method offers important advantages over traditional measures of productivity in fisheries because it provides individual firm-level measures and quantifies the contribution of productivity, inputs, and outputs to relative profits. Stochastic frontier analysis Stochastic frontier analysis is used to estimate vessel level efficiency and is particularly useful in comparing efficiencies before and after a change in management arrangements. This measure can be used to estimate whether or not there are losses to vessel level efficiency when input controls are introduced. For example, a study of the northern prawn fishery fleet estimated vessel level efficiency fell from 75 per cent in 1994 to 68 per cent in 2000 (Kompas, Che and Grafton 2004). The study attributed this partly to fishers resorting to inefficient (but unrestricted) inputs to circumvent restrictions on vessel size and power. While this action may have been profit maximising for an individual fisher, overall fishery efficiency was reduced. Bioeconomic models Productivity indexes, profit decompositions and stochastic frontier analysis are partial indicators of the economic performance of a fishery, in that they only assess vessel level efficiency. In order to assess both vessel level efficiency and fishery level efficiency, a bioeconomic model is required. Bioeconomic models integrate scientific and financial information to determine the levels of effort and catch which maximise net economic returns (see, for example Kompas and Che (2004)).The results can be used to help managers set efficient effort and harvest levels, or to estimate the net economic returns forgone under the prevailing management regime.

Recent management initiatives

Securing our Fishing Future adjustment package

From late 2005, the Australian Government provided a $220 million structural adjustment package for the fishing industry to address overfishing and rebuilding of overfished stocks in targeted Commonwealth fisheries. The package included a $149 million fishing concession buyback involving a voluntary tender process to allow individual fishing businesses to leave the industry. The buyback concluded in December 2006. The target fisheries for the buyback were the eastern tuna and billfish fishery, southern and eastern scalefish and shark fishery, the Bass Strait central zone scallop fishery and the northern prawn fishery. The buyback consisted of two rounds. The first closed at the end of June 2006, costing almost $90 million. The remaining $60 million was allocated in the second round, which closed in late November 2006. In total more than 550 boat concessions were purchased. Commonwealth and state fishers affected by the declaration of marine protected areas in the South-East Marine Region were also eligible for business exit assistance. Additional elements of the package include $30 million for business restructuring, assistance for onshore and fishing related businesses affected by the reduction in fishing activity, and up to $20 million for fishing community grants to help generate economic activity in ports affected by the adjustment. A further $15 million is being provided over three years to offset likely increases in the average management cost paid by each remaining fisher. To improve the management of Commonwealth fisheries, $6 million has been allocated to fund science, compliance measures and data collection.

Harvest strategy policy

In September 2007, the Australian Government Department of Agriculture, Fisheries and Forestry (DAFF) released the Commonwealth Fisheries Harvest Strategy: Policy and Guidelines. The policy was a collaborative work between DAFF, CSIRO, AFMA, the Australian Government Department of Environment and Water Resources, the Bureau of Rural Sciences, ABARE and numerous industry representatives. It was a direct result of the Ministerial Direction to AFMA of December 2005. The policy will help managers develop actions which assess biological and economic conditions in a fishery so that defined objectives can be achieved. Strategies will seek to maintain stocks at the biomass associated with maximum economic yield and to ensure that they remain above a biomass where the risk to the stock is regarded as too high. Stock rebuilding or ‘fish down’ strategies will be developed to ensure that target biomass levels are reached. Where estimates of key variables such as the biomass at maximum economic yield are not known, proxies based on the best available data will be used instead. More information is available at: www.daff.gov.au/fisheries/domestic/harvest_strategy_policy