Schedule 5 Species (45% Aggregation)

Executive Summary

225. This IPP reviews all Quota Management System (QMS) species (except paua, rock lobster and bluenose) to determine if a quota aggregation limit of 45% is warranted.
     
226. A 45% limit should be applied to those species in which enterprises catching those species are required or would benefit from holding enough quota to achieve economies of scale. The risks of unacceptable effects of quota aggregation must be low. Quota aggregation of up to 45% is permitted for species listed on Schedule 5 of the Fisheries Act 1996 (the Act).
     
227. MFish has developed an analytical process to assess the suitability of individual species for inclusion on the Schedule. Each QMS species is assessed to determine if they fit into one of three categories: substantial investment required to harvest or process; substantial science investment required to prove the fishery or market; economies of scale required to compete in an export-oriented market.
     
228. Species that fit into one of these three categories are then examined to evaluate if unwanted consequences are likely: anti-competitive behaviour, and/or disadvantage to small fishing operations in those fisheries in which access is easier. The end result is a recommendation either to list the species on the 5th Schedule, or to leave the aggregation at the default 35%. Appendix 1 provides the assessment for each species.
     
229. As a consequence of this assessment, MFish proposes that 38 species be listed on Schedule 5. This would maintain nine of the current species listed, and would remove red cod (RCO), barracouta (BAR), packhorse rock lobster (PHC), and common (blue) warehou (WAR). MFish further proposes to use the analytical process developed in this paper to assess all future QMS stocks.

Summary of Options

230. MFish’s preliminary recommendation is to:

1. Maintain the following species on the Schedule:

2. BYX Alfonsino	JMA Jack mackerel	ORH Orange Roughy
   HAK Hake	LIN Ling	SQU Arrow squid
   HOK Hoki	OEO Oreos	SWA Silver warehou

   
   
3. Add the following species to the Schedule:

   	GSP Pale ghost shark	RBY Rubyfish
   BYA Frilled venus shell	HOR Horse mussel	RIB Ribaldo
   CDL Cardinalfish	KIC King Crab	SAE Triangle shell
   CHC Red crab	LDO Lookdown dory	SBW Southern blue whiting
   DAN Ringed dosinia	MDI Trough Shell	SCI Scampi
   DSU Silky dosinia	MMI Large Trough shell	SKI Gemfish
   EMA Blue mackerel	PDO Deepwater tuatua	SPR Sprats
   FRO Frostfish	PIL Pilchards	SSK Smooth Skate
   GSC Giant spider crab	PZL Deepwater king clam	WWA White warehou
   GSH Ghost shark	QSC Queen scallop

   
   
4. Remove barracouta (BAR), red cod (RCO), packhorse rock lobster (PHC) and common (blue) warehou (WAR) from the Schedule.
5. Apply the analytical process in this paper to assess future QMS species for suitability for the 5^th Schedule.

Rationale for Management Options

231. A quota aggregation limit of 45% should be applied to those species in which enterprises are required or would benefit from holding enough quota to achieve economies of scale (refer to paragraphs to ). This is generally warranted when substantial investment is required or success in the international market requires sizeable quota holdings.
     
232. Appropriate aggregation limits give industry the discretion to arrange business affairs to suit the realities of fishing, while inhibiting monopolistic behaviour. The Commerce Commission (refer to Appendix 2) also exists to protect the competitive process.
     
233. The ‘default’ aggregation limit for the majority of species is 35%. Species listed on Schedule 5 of the Act are subject to a 45% aggregation limit. No new species have been added to the Schedule since 1996 – during the course of QMS introductions since that time, no consideration was given to the appropriateness of Schedule 5 listing.
     
234. Aggregation limits do not apply to Annual Catch Entitlement (ACE), nor do they prevent aggregation at the stock level (except with respect to rock lobster and paua).
     
235. Parliament allowed for species to be added or removed from Schedule 5 on recommendation by the Minister of Fisheries. There is no clear rationale for the species currently listed on Schedule 5. Reviewing the schedule and establishing clear and objective criteria for Schedule 5 species, creates a transparent analytical framework, and strengthens the Act.

Effects of quota aggregation

236. Increased aggregation benefits the firm seeking greater quota holdings, by providing greater flexibility for that company to manage its business affairs. It could also benefit other stakeholders in the fishery through the spin-offs of improved incentives for stock management and product marketing associated with the higher aggregation levels.
     
237. There are generic arguments in favour of aggregation, and the consequential improvements in efficiency in the industry associated with increasing economies of scale. The more efficient use of the capital invested in the fishing fleet of a large operator can lower harvesting costs. The additional supply of fish derived from increased quota holdings may in turn increase market or brand penetration. Processing capacity may be better used.
     
238. The greater the degree of aggregation of ownership in a fishery, the more one can expect the dominant owner to take an interest in the management of the stock. Thus, other things being equal, a dominant owner will likely take a greater interest in identifying new populations and investing in a better understanding of the biology of the known population. The benefits of this improved incentive structure accrue to all stakeholders in the fishery, not just the dominant quota owner.
     
239. Similarly, greater aggregation leads to an increased incentive on the dominant owner to develop the branding and marketing of the product. As with the incentives for improved stock management, some of the benefits may flow through to the minority quota holders.
     • On the downside, increased aggregation of quota could increase the potential for anti-competitive behaviour on the part of dominant quota holders. This could happen through:
     • A monopolisation of the supply of ACE required to cover bycatch in related fisheries (refer to paragraph to);
     • The diminishment of a possible entry point into the business of fishing generally (refer to paragraph to); and
     • A reduction of the pool of competitive buyers for the fishing rights of those minority stakeholders in a particular fishery who may choose to exit the fishery in the future, or who depend on the sale of ACE (refer to paragraph to).

Analytical Process

241. Species should be listed on Schedule 5 if significant quota holdings are required to achieve economies of scale, and that such economies of scale increase the viability or efficiency of the fishing industry. The risks must be low that unacceptable effects could emerge: anti-competitive behaviour, and disadvantage to small fishing operations in those fisheries in which access is easier.
     
242. There are three circumstances in which such economies of scale would be most beneficial, and hence warrant increased aggregation limits. These are the three categories under which a species would be added to the Schedule: extraction or processing requires substantial investment; or substantial science investment is required to demonstrate the viability of a fishery or extraction method; or competitiveness in the international market requires concentration of quota ownership.
     
243. MFish has developed an analytical process to assess the suitability of individual species for inclusion on the Schedule. Although this process will be followed for each species, MFish will also consider whether there are circumstances or information that suggests deviation from the approach is required. In addition, the evaluation is largely qualitative and therefore subjective, and the conclusions on some species are equivocal. MFish welcomes submissions on the assessments made.
     
244. Each species is assessed to determine if they fit into one of the three categories, and then examined to ensure that unwanted consequences are unlikely (see Appendix 1). The end result is a recommendation either to list the species on the 5th Schedule, or to leave the aggregation at the default 35%. Species with lower aggregation limits (paua, rock lobster and bluenose) are not considered, as the limits for these species are established in statute. The process is summarised in Figure 1; the numbers 1 to 6 on the left refer to individual steps that are discussed in the text below.

Step 1: Substantial investment for extraction or processing

245. To harvest and process some species requires significant investment (in gear, vessels or training) to successfully participate in the fishery. In this circumstance, the ability to harvest a greater proportion of a species may be required to cover the investment costs required. The incremental increase in aggregation could be the marginal increase in revenue that makes a fishery profitable.
     
246. ‘Successfully participate’ does not simply mean the ability to catch fish using simple gear or fishing in accessible areas; it means that a viable business opportunity requires significant investment to catch fish in sufficient quantities. There are a number of fish species that are occasionally caught in operations not requiring significant investment, but do require such investment to make it a viable endeavour in its own right. The jack mackerel fishery is an example.
     
247. Such investment is typical of middle depth and deepwater species, and some inshore species requiring bulk fishing methods (e.g. purse seines). Generally speaking, if there is any substantial recreational or customary catch, then by definition no substantial investment is required to catch significant quantities. MFish recommends consideration for listing on the Schedule only of those stocks in which non-commercial allowances comprise <3% of the total catch. Species are considered individually to evaluate the specific circumstances.

Step 2: Substantial investment for science

248. Many species now being introduced into the QMS are new or exploratory fisheries – the fisheries resources themselves or a market into which they are sold have not been developed or ‘proven’. The catch limits for these stocks (usually reflecting the absence of historical catch) are low, pending additional research to demonstrate viability. Under these scenarios, the opportunity to control a greater proportion of a species’ future catch limit may be required to warrant the investment costs in research required. In the absence of that certainty, the risks inherent in exploratory work of this nature may be uneconomic.
     
249. General indicators of the investment required would be species with nominal TACs/TACCs and little current catch. The species would likely also not be considered by the Working Group/Plenary process (or if it was, only to say that no information is available). MFish therefore proposes to recommend all species with nominal catch levels and little current catch (subject to the analysis in Step 4, 5 and 6) for listing on the Schedule.

Step 3: International competitiveness

250. Some species are export products requiring some investment in (or access to) overseas marketing infrastructure if the full value is to be extracted from the fishery. The fixed investment in marketing infrastructure suggests the benefits of economies of scale. The export market may be niche (requiring specialised product development and cultivation of export markets) or bulk (a non-distinguished product that operates as a global market with competing sources). In the case of bulk products, New Zealand producers may be competing with enterprises operating overseas that have access to subsidies, lower labour costs, reduced transportation costs or other advantages that reduce the per unit cost of production. In both instances, the ability to harvest a greater proportion of a species may be required to cover the investment costs.
     
251. The analysis is rarely clear-cut. Some niche market products, for instance, command premium prices, but enjoy established international markets and brands. These would not require large economies of scale to access the market, and therefore smaller operators can be profitable.
     
252. General indicators of international competitiveness would be species with an export focus, or an export species with a domestic market that cannot produce similar economic returns. The product may either be a specialised niche product, or a bulk product with a global network of suppliers.

Step 4: Monopolising the supply of bycatch ACE

253. At the extreme, a dominant owner of the quota commonly caught as bycatch in another target fishery could extract considerable value from that target fishery. For example, if target species A inevitably caught bycatch species B, controlling the quota for B to some extent controls the value of quota for A. However, there are a number of checks on the extent to which this could adversely affect other fishers.
     
254. First, an aggregation limit at any level means that the dominant owner can never be the sole source of ACE for those requiring it to cover bycatch. As quota is transferred from Te Ohu Kai Moana (TOKM) to iwi (who are then unable to on-sell that quota), further ACE may become available as iwi look to maximise revenue generate from their quota asset. This would be particularly the case in fisheries where quota is distributed to iwi on a population basis, meaning that there will be many small packages of quota that are uneconomic as individual holdings.
     
255. Second, the potential for a dominant player to benefit from its dominance is limited by the deemed value (DV). The DV is a substitute for ACE – a fisher who take the stock as a bycatch has the option of paying DVs. Therefore, the DV rate provides a cap on the price of ACE – should ACE price rise above the DV, then fishers would simply pay the DV and choose not to acquire ACE.
     
256. Given this concern, MFish proposes that no species be listed on the 5^th Schedule that is considered to be a significant bycatch species only (not itself a significant target fishery that otherwise falls into one of the three categories), or is one target species in a multi-species target fishery, unless in either instance all major species in the catch mix are included on the Schedule. The analysis in this step would assess the candidate species, and reject inclusion on the Schedule if it matched these characteristics.

Step 5: Reduced opportunity to enter into the fishery

257. Increased aggregation should not remove an important entry point for new fishers getting into the business of fishing generally. If this was the case, the aggregation of ownership could affect the vibrancy of competition and the efficiency of the fishing industry. In this regard it is worth noting that the Select Committee in its consideration of the Fisheries Bill (which became the 1996 Act) recommended a regime with lower aggregation limits for species that could be “nursery fisheries where new fishers can enter the industry”, or “the stepping-stone part of the fishing industry for many people”.
     
258. In general, MFish considers ‘nursery’ or ‘stepping-stone’ fisheries are those that require a relatively low initial investment. They are therefore likely to be characterised by being inshore, or relatively sedentary (as is the case of paua and rock lobster), or are pelagic but do not require significant investment to enter. The fishery themselves are proven, and do not require substantial science investment to ‘prove up’. Generally, these fishers do not require economies of scale and have a readily available local market for product (or established and easily accessible export network).
     
259. The cost of acquiring quota is often a significant component of the initial investment required (and would in fact remove both paua and rock lobster from this category). Therefore, those species with a particularly high cost of quota cannot be considered ‘nursery’ or ‘stepping-stone’ fisheries, as it is this cost that removes an entry point for new fishers getting into the business.
     
260. MFish proposes that no species be listed on the 5th Schedule that is considered to be a ‘nursery’ or ‘stepping-stone’ fishery. These are established fisheries characterised by relatively lower input costs (including quota/ACE price), coupled with established markets for products readily accessible by new entrants. The analysis in this step would assess the candidate species, and reject inclusion on the Schedule if it was considered to be a ‘nursery’ or ‘stepping-stone’ fishery.

Step 6: Reducing the pool of competitive buyers

261. Aggregation of ownership may affect the dynamics of the quota and ACE markets with respect to those choosing to exit the fishery, those wishing to sell a portion of their quota holdings, or those quota owners who don’t fish and instead sell ACE. This could occur in two ways.
     
262. First, if the ownership in the fishery becomes concentrated to the extent that it is difficult for others to build a commercially viable stake in the fishery, it may be difficult for the departing minority quota holders or the ACE seller to find a selection of prospective buyers prepared to compete to enter the fishery. A lack of competition for quota/ACE in turn may make it difficult for departing fishers or ACE sellers to get fair market value for their fishing rights.
     
263. Second, the absence of any viable alternative bidders could provide the opportunity for the exercise of market power on the part of the dominant owner at the time minor players choose to leave the fishery, sell a portion of their quota, or sell their ACE. In particular, such fishers may have no alternative but to sell at below market prices to the dominant owner of quota in the fishery.
     
264. However, there are also mitigating factors. First, if the highly aggregated stock is a bycatch species, then there will always be some demand for fishing rights outside the target fishery itself. (However, if the bycatch requirements are small, then the market for ACE to cover bycatch requirements may be small, that therefore the pool of potential buyers may be limited). Second, aggregation limits still apply, limiting the ability of a dominant owner to exploit its position as a buyer of additional quota.
     
265. The analysis in this step would assess the candidate species, and reject inclusion on the Schedule if an increase of aggregation from 35% to 45% at the species level would result in a markedly reduced pool of willing purchasers. In this regard, the appropriate assessment is whether an aggregation of 45% is materially different from aggregation at 35%.

Consultation

266. MFish is seeking stakeholder views on the proposed analytical framework to assess suitability for the Schedule. Input is sought on the analytical steps and the indicators. Once this analytical process is finalised, then all new QMS stocks will be assessed for inclusion on the Schedule at the time of introduction.
     
267. MFish is also seeking stakeholder views on the list of proposed species for listing on the Schedule. Stakeholder submissions on individual species will be considered before proposing a final list of species to the Minister in the Final Advice Paper. In particular, the assessment for ANC, BAR, PHC, PIL, EMA, SPR, RSK and WAR are equivocal.
     
268. Under s 59 of the Fisheries Act, the Minister of Fisheries may recommend adding or deleting any species to the Fifth Schedule of the Act, following consultation with such persons or organisations who are representative of those classes of persons the Minister considers have an interest. The proposed list and the feedback sought from stakeholders constitutes this consultation.