The elephant in the room: The hidden costs of leasing individual transferable fishing quotas
Evelyn Pinkerton, Danielle N. Edwards
4.1. Factor 1. There are large wealth effects from the initial allocation of quota
Vessels that were not granted quota in the initial granting process must recover their fixed costs, trip costs and lease fees. Since quota owners retain 70% of the catch value, fishing costs must be recovered from the 30% of catch value that remains for the skipper, crew, and vessel share. Vessels granted quota can cover both their fixed and variable costs from the full 100% of landed value, and can then afford to pay higher lease prices for additional quota, needing only to cover trip costs. Those vessels operating with granted quota are therefore more financially viable than new entrants and can afford to pay higher quota lease fees by virtue of the wealth effects accrued through the initial granting process.This eventually had the effect of bidding up the lease price.
4.2. Factor 2.
Many quota owners prefer to lease their quota out through a processor as a broker because the processor is in a better position to get the highest price and because, as several fishermen stated, they do not want to be "guilted by other fishermen" about the high lease price they are asking. Similarly, many lessee fishermen do not wish to deal directly with the quota owner because of their hostility toward the high lease prices. High lease prices violate the previous norms of the share system in which license-owning skippers and crew were considered co-venturers and both rental skippers and crew took a far higher percentage of the catch value. Because a "moral economy" persists in the Heel, and because reputation matters in securing the best arrangements, quota owners prefer to keep their leasing arrangements secret. Processors compete to secure quota at the beginning of the season because of their desire to guarantee delivery of fish to themselves [20, interviews].5 Securing a large amount of quota pre-season also puts processors in the best bargaining position to re-lease the quota in tum under the most advantageous conditions and to maintain relationships with reliable fishermen. Even when fishermen make leasing arrangements directly with quota owners, these leases are normally financed by a processor and, therefore, the fish is delivered to this processor as part of vthe bargain. Processors are brokers of most of the leases because they can afford to pay more upfront, both because of their access to capital and because of their power In allocating fishing opportunity through control of a large amount of quota. It is advantageous for fishermen to have ready access to additional quota during the season if they happen upon more fish than they currently hold quota for. The price of quota when it is leased out to fishermen by the processors is confidential; it varies with arrangements and the bargaining power of the lessee. The lessee usually agrees to deliver catch from other fisheries to the processor as part of the arrangement.There is, therefore, asymmetric information between buyers and sellers of quota leases (considered a transaction cost by economists, along with search and information costs, bargaining and decision costs 12.1]), which confers market power to quota owners and to a lesser extent to the processors who buy up and reallocate quota leases. Processors may not charge a fee for this transaction, but the guaranteed delivery of the fish to them gives them leverage over the price of the catch. This may be an even more important form of market power. The resulting allocation of quota leases, and the stated and unstated terms under which they are allocated, are not the product of a freely operating market with open competition.
Economists have generalized from a few cases in the trawl fishery in which lease transactions operate transparently and without appreciable cost, and have assumed that this is the rule in the halibut ITQ fishery: "To facilitate the clearing of the ITQ market, private quota trading companies have emerged. The companies have become so efficient that fishermen can call from their vessels, immediately after realizing the need for additional quota, and arrange for and complete the transfer of ITQ by the time that they reach port to off load their catch" [17]. While this practice may occur in the trawl fishery,1 it normally occurs in halibut between a lessee and the processor who leases to them or finances their lease.
4.3. Factor 3.Capital markets are not functioning well and there is market distortion
The initial fishermen grantees of quota, the processors, the investors, and new fishermen who have purchased quota distort the leasing market because they have far more access to capital than the lessees.This situation is exacerbated by expected future capital investment by the federal government, which leads to speculative investment in quotas. Unresolved aboriginal claims to access rights were not included in the initial allocationof quota, although the Nisga'a Treaty had been under negotiation since the 1970s and both federal policy and court decisions pointed to the fact that aboriginal people would end up with access rights recognized. Therefore, once ITQI; had been created and became transferable, the expectation of federal buy-back of quotas from funds coming from outside the industry to settle aboriginal claims had an inflationary effect on price. This caused other sectors to reinvest in the fishery because they had extra capital, and could gain certain tax advantages [22].Investors in halibut quota expected a 10% return on their investment in 2002 and treated quota as stock market investments [20]. Future federal investments in aboriginal ITQI; is the one factor which has been identified as a problem by economists [22], although it is not seen as a significant threat to the system.
Yep... nothing wrong with that system IF you are a "processor" or "slipper skipper"!
