The Role of IFQs in Improving Fishery Governance

February 13, 2002
By Don Leal

Mr. Chairman and members of the subcommittee thank you for the opportunity for me to testify on individual fishing quotas or IFQs in relation to re-authorization of the Magnuson Stevenson Act. Because IFQs effect both structural makeup in a fishery, the subcommittee expressed interest in hearing views on a number of issues related to their use. Before launching into these issues I would like to point out something at the outset. IFQs arose in response to significant problems plaguing many US Fisheries. Namely overharvesting, overcapitalisation, falling fishermen income, poor product quality, rising fishing costs and hazardous fishing.

These are problems that decades of traditional regulations such as restrictions on fishing vessels and gear, areas fished, fishing times, and total allowable catch have failed to solve. Indeed in a number of cases they have actually exacerbated problems associated with a race for the fish. In case after case both here and abroad fisheries that have adopted IFQs have been able to end the race for the fish. Moreover, problems of overcapitalisation have been reduced significantly.

Hence I recommend that Congress lift the moratorium on the development of implementations of IFQ programs for US fisheries. Still there are a number of issues associated with the implementations of IFQs that have to be addressed in order that we can increase the acceptability of IFQs among different interests in the fisheries. The most controversial issue is the initial allocation of IFQs. Typically IFQs are allocated to individual vessel owners on the basis of their catch history. The rational is that it provides an object and quantitative way taking into account prior investment in developing the fishery participants. Among current participants, given its near universal use, it appears to be the most acceptable approach.

There are a number of criticisms however associated with this approach. Critics charge that allocating quota on the basis of catch history amounts to a win-fall gain for current participants since no revenue is generated. In addition hired skippers and crew with no record of catch in the fishery can feel they are being treated unfairly. Processors as well may experience lower returns from their investments because of market changes that IFQs bring about.

One obvious way to address such concerns is through the use of an auction. Such an approach is not unprecedented for a public resource, for example Spectra Rights. An Auction will generate revenue for the treasury up front and allocate quota shares efficiently if shares go to the highest bidder. But an auction can also be modified so individuals who have invested in developing the fishery have a price preference in their bids over other bidders. Such an approach can be an effective way of retaining a majority of current participants in the fishery. However, given the fact that bidders will vary in their ability to access financial capital, auctions will not eliminate the perception of fairness I believe. As such, I believe that councils should have the flexibility to entertain in addition to catch history a number of other criteria for allocating IFQs in the fishery. For example, one modification is that councils could allocate a percentage of the tack to local fishing communities that suffer some employment reduction in transitioning to IFQs. These communities would have the option of either hiring displaced skippers and crews to fish their allocation or sell or lease them to their shares of the allocation. While such an approach may require current participants to give up a small fraction of their allocation, the willingness to do so should be enhanced by the potential for IFQs to change incentives for maximizing catches to maximizing profits in the fishery.

In the case of processors, there appears to be no compelling argument for mandating IFQs to processors initially. Although they should be able to hold them through purchase when IFQs are transferred in the secondary market. Evidence indicates processors impacts will differ on a case by case basis.

In cases where councils determine the processors will be adversely effected by IFQs I would leave it up to the councils to determine what forms of compensation processors would be eligible for. This can include buyouts of capital, or it could include some allocation of the total allowable catch.

Another issue is whether or not an IFQ represents a permanent or temporary right to a share of the total allowable catch. If the goal in the fishery is for fishermen to have a long term stake in conserving the resource then it is important that an IFQ represent a permanent share in the total allowable catch.

Evidence from New Zealand indicates that when fishermen have a permanent share of the total allowable catch they have a strong incentive to act collectively to research, co-manage, and enhance fish stock.

Another important issue related to IFQs is their transferability. Transferability is very important in two respects. First, transferability allows quota holders to adjust the size of their operations through the buying and selling of quotas. Second, transferability promotes efficiency in that those who lower costs and raise product value tend to buyout those who do not. Related to the efficiency aspects and the flexibility of associating with transferability of IFQs are social concerns. Should quotas be transferable across gear types, across regions, between processors and fishermen, between conservation groups and fishermen, between recreation groups and fishermen and commercial fishermen? These are all important questions. I believe from an economists stand point the less the restrictions of transferability between any of these entities the greater will be the chance for resolving demands over fish through a cooperative voluntary exchange. In other words, the fewer the restrictions the better.

Another related question, how much quota should an individual entity be allowed to hold? This questions arises out of concerns over concentration. Understand the fact that some degree of accumulation is necessary if IFQs are to resolve the overcapitalisation plaguing our nation’s fish.

Another issue is whether or not there should be a limit of the amount of quota held be an individual. i.e., a concentration limit. I believe the most important concern related to concentration of quota is in terms of the factor market such as labor. A single firm that garners most of the quota can have a strong influence on the price of labor in local markets. And should be avoided. While the importance of concentration will vary between different fisheries, I believe it is an important factor and one that councils should consider when designing an IFQ system. In cases, although I cannot give you a hard and fast rule what that limit should be.

The final issue is the cost of monitoring an enforcement. It is reasonable to expect enforcement cost to go up when IFQs are adopted in a fishery. Longer fishing seasons will mean longer man hours for monitoring and enforcement. Fishermen will also have an incentive to bust quota, therefore requiring more diligent monitoring enforcement. It should be kept in mind however, the enhance profitability of the fishery should provide the wherewith all to finance greater enforcement costs. Note that in New Zealand IFQs fisheries, fishermen pay for all the costs in managing their fisheries.

In sum, IFQs have proven superior to regulation in ending the destructive race for the fish. They can be controversial but I hope that they above suggestions can alleviate some of these concerns, so we as a nation can move forward and allow our regional councils the option of using IFQs to rebuild our nation’s fisheries.

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