Trends in Ownership Structure in the New Zealand Fishery. Introduction James M Stewart and Peter D Callagher, UNITEC Institute of Technology, Auckland, NZ Since the New Zealand Fishing Industry has undergone significant structural change resulting largely from government regulation of the industry. saw the introduction of the Quota Management System (QMS). This put in place a system of property rights, based on Individual Transferable Quotas (ITQ), over fish species within New Zealand s 2 mile Exclusive Economic Zone (EEZ). The system had the stated objective of controlling the Total Allowable Catch (TAC) and the Total Allowable Commercial Catch (TACC) with a view to ensuring sustainable utilisation. In introducing the quota market however, a secondary vehicle was created enabling industry participants to accumulate property rights over the resource. Participation in the New Zealand fishing industry exists on two levels; quota holding and quota ownership. This study is motivated by the desire to establish whether changes to the number and concentration of quota ownership and quota holding have had an impact on the sustainability of the fishery in New Zealand. Of the 45 ITQ marine species commercially harvested in New Zealand the top 1 by volume and the top 5 by popularity are considered in this paper. The study finds that quota ownership and holding have become more concentrated since the inception of the Quota Management System (QMS), with the concentration ratios generally increasing. Measures of concentration were used based on volumes of ownership and holding, namely CR2, CR1 and CR4. The CR2 index showed consistent increase across the 15 species chosen. The CR4 index produced variable results, with some species showing a marked increase in concentration while others remained more or less constant. It is noteworthy that decreasing concentration was rare. Herfindahl-Hircshman indices (HHI) were constructed, based on aggregate quota data as an alternative measure of concentration. Additionally, concentration levels for snapper (SNA) were produced for Quota Management Areas (QMA). Secondly, this paper establishes trends in the level of TACC over the study period (Dec -Jun ). Findings show that, with one or two interesting exceptions, catch levels have remained remarkably constant. Prima facie, there appears to have been no adverse impact from structural change on overall resource sustainability based on TACC data. The trend toward increasing concentration raises important questions; what motivates incumbent firms to acquire quota from exiting firms; what prompts exit? Hypothesis Industry structure, such as the concentration ratio has a direct bearing on the conduct of firms. Conduct or behaviour, such as pricing policy and output decisions will in turn impact on industry performance and efficiency (Bain, 1956). In Scott s 1955 study, this principle was central to establishing the importance of a sole ownership structure for sustainable management of a fishery. Scott contends that...no-one will take the trouble to husband and maintain a resource unless he has a reasonable certainty of receiving some portion of the product of his management, that is he has some property right in the yield (1955, p116). With an open access resource such as a fishery, the introduction of a QMS produces a property rights structure that has the potential to change the behaviour of market participants and ultimately, efficiency. Further, given the ability to trade in quota there exists potential for ongoing structural change to occur in the industry. In particular, owned and held concentration of quota may increase or decrease with potential implications for sustainable utilisation. Structural change in the New Zealand fishery is the focus of this study.
H1 Concentration has increased in the New Zealand fishery since the inception of the Quota Management System (QMS). H2 Concentration has increased in the fishing of species that are more profitable to larger entities, and those requiring greater capital investment. H3 The number of participants in the fishery has declined, with predominantly smaller operators exiting the industry. Methodology An extensive database produced by the Ministry of Fisheries provided the base data for this research. The database contained comprehensive information on quota ownership, quota holding, TACC and trade prices for the specific periods December, August and June. In all, over 35 aquatic commercial stocks (within 45 ITQ species) and more than 45 Limited Liability Companies plus a significant number of private persons, fall under the control of the QMS. From this extensive database a cross-section of marine species was identified and selected for analysis. Species were chosen by their commercial significance, namely their total annual catch and trade price per tonne. A second group were chosen because of their traditional importance in the domestic retail fish market and their profile as a target species by recreational fishers. This produced a sample comprised of the following fifteen species (Table One). Table One: Key Species Arrow Squid Hapuka-Bass Ling Red Cod (S) Blue Whiting Barracouta Hoki Orange Roughy Silver Warehou Stargazer Hake Jack Mackrel Oreo Dory Snapper Tarakihi The analysis sought to establish the top 2 quota holding and owning entities based on volume, producing a concentration ratio (CR2). The process of identifying a fishing entity necessitated the amalgamating of commercial interests through common directorships. Such alliances effectively produced networks of owners or holders with common commercial objectives thereby influencing how the quota is managed. Following this, concentration ratios (CR) for the top ten (CR1) and top four (CR4) were established. This enabled any trend toward dominance in a particular fishery to be established (See Appendix Two). A more intensive study was undertaken for snapper. Snapper stocks are managed through ITQ within several distinct quota management areas (QMA). Concentration ratios and HHI were calculated for each separate QMA over the three period study period (See Appendix Three and Four). Finally, changes in trade price and TACC were compared with changes in CR to investigate any possible association. Findings As stated, the primary purpose of the study was to establish changes in industry structure and whether this has impacted on resource sustainability. Appendix one reports on changes in concentration. It is noteworthy that of the 15 species studied all have exhibited an increase in concentration of ownership (CR2). The most significant changes being Snapper and Tarakihi, both are important as recreational and retail species with high commercial value. Secondly, concentration of ownership is greater in the deepwater fisheries. It should be noted that for most species CR2 at the beginning of the study period () was above 9% of the TACC, leaving little room for further increase. The pattern is similar for the trends in quota holding with only two of the species experiencing decreased concentration (Squid and Hake). Figure One portrays these findings. It is clearly evident that there has been greater overall movement in the concentration rates for quota holding. The resulting levels of holding and ownership concentration by June are virtually parallel. PAGE 2
Figure One: Rates of Change Percentage rate of change of owners and holding to 1% 8% 6% 4% 2% QO QH Oreo (Dory) Red Cod (Bastard) Silver Warehou Snapper Stargazer Tarakihi % Barracouta Hake Hapuka-Bass Hoki Ling Orange Roughy -2% Further to this, Appendix One identifies changes to the application of the QMS to incorporate species that came under the control of the system at a date subsequent to its introduction. Specifically Jack Mackrel and Squid were not controlled by quota in, although they were commercially fished at that time. The inclusion of Southern (S) Blue Whiting is noteworthy in that it is a recent addition of a previously unfished, high volume species to the QMS. CR1 continues the trend observed in the CR2 measure, although not with the same consistency. Of the 14 species, nine exhibited higher concentration rates in than for ownership, and 13 out of the 14 showed higher concentration for holding. Of those species where concentration diminished either in ownership or holding, the change in each case was less than two percent, with the exception of Stargazer, where ownership concentration reduced by five percent. Trends in CR4 ratios are in line with other CR mentioned above. Ten of the 14 species show increased concentration of quota owned and 12 of 14 for quota held. Table Two: Overall number of entities by species Species Quota Quota Dec-86 Aug-96 Jun- % Decrease Dec-86 Aug-96 Jun- % Decrease Barracouta 266 165 143 46% 274 219 155 43% Hake 96 77 7 27% 99 86 67 32% Hapuka-Bass 63 363 295 51% 62 38 288 54% Hoki 148 11 95 36% 198 149 14 48% Jack Mackrel *NR 125 191-53% NR 263 367-39% Ling 378 211 177 53% 391 262 195 5% Orange Roughy 42 31 26 38% 83 42 36 56% Oreo (Dory) 34 24 2 41% 36 43 31 13% Red Cod (Bastard) 415 268 212 49% 427 35 23 46% Silver Warehou 43 39 39 9% 45 66 53-18% PAGE 3
Snapper 243 162 131 46% 256 198 158 38% Squid NR 138 14-1% 11 166 177-1,59% (S) Blue Whiting **NSF NSF 1 - NSF NSF 34 - Stargazer 243 162 131 46% 256 198 158 38% Tarakihi 513 37 26 49% 528 337 249 52% * Species landed but not recorded ** New Species Fished Table Two records the actual number of entities who own and hold quota. Consistent with the concentration ratio findings the overwhelming trend is a reduction in the number of participants in the New Zealand Fishing Industry with most species showing about half of the number of participants by the end of the study period. Table Three: Herfindahl-Hirschman Index (HHI) Arrow Squid 1655 1482 1522 1819 1632 Barracouta 932 875 1467 1118 123 2473 Hake 943 1913 1829 274 1869 1734 Hapuka-Bass 589 289 394 797 433 479 Ling 97 149 1311 1232 1633 136 Orange Roughy 87 1633 1851 1287 1674 1759 Red Cod 34 485 558 557 538 646 Snapper 1171 145 1939 1279 11 1263 Tarakihi 324 29 835 377 59 555 Stargazer 594 37 339 3151 395 411 Silver Warehou 1311 1694 2258 1494 1846 1813 Hoki 1222 1381 1356 4261 1514 151 Oreo Dory 223 2268 197 296 271 228 Jack Mackeral 126 123 1234 1587 Sthn Blue Whiting 1794 1899 Table Four: Prices per tonne (NZ$) Species Species Barracouta 372 1,363 1,166 Red Cod 96 1,953 1,742 Hake 951 4,178 6,763 Silver Warehou 53 4,396 3,235 Hapuka-Bass 3,4 13,61 8,363 Snapper 6,542 43,22 31,562 Hoki 126 2,674 1,98 Squid NR 1,238 1,216 Jack Mackrel NR 37 32 (S) BlueNSF NSF 1,35 Whiting Ling 1,469 6,441 6,658 Stargazer 2,156 6,829 3,957 Orange Roughy 2,779 13,153 9,324 Tarakihi 1,136 5,946 4,526 Oreo (Dory) 483 3,35 2,559 * Species landed but not recorded ** New Species Fished Table four presents price movements at the three data points. In all instances nominal trades prices exhibit an overall upward trend, but with fluctuations for most species. Table Five: Total Allowable Commercial Catch (TACC) Species Species Barracouta 31,5 33,22 32,41 Red Cod 15,29 16,66 16,56 Hake 4,61 13,997 13,987 Silver Warehou 8,1 9,884 9,52 Hapuka-Bass 1,83 2,178 2,171 Snapper 6,54 6,884 9,139 Hoki 25,1 24,1 25, Squid NR 123,332 123,332 PAGE 4
Jack Mackrel NR 32,547 6,536 S. Blue Whiting NSF NSF NSF Ling 18,73 22,18 22,13 Stargazer 4,15 5,352 11,277 Orange Roughy 58,82 25,569 2,344 Tarakihi 5,16 5,991 5,981 Oreo (Dory) 24,1 26,16 23,933 Table five shows trends in TACC for the 15 species sampled. Four species stand out, namely, Orange Roughy, which shows a consistent decline (65.4%) in TACC, Snapper, Stargazer and Hake which all show increases in TACC (39.7%, 171.7% and 23.4% respectively). Discussion of Findings Clearly the New Zealand fishing industry has become more concentrated since the inception of the QMS. Consistent with this, the number of holders and owners has declined substantially. These trends are all the more significant given that they have occurred over only fifteen years. Any association between this trend in concentration, and the TACC would be of significant interest. Studies (O Connor, Owen and Rhymer, ; Hutchings, ) suggest that there is a relationship between TACC and prudent resource management. Whilst conclusive empirical evidence is unavailable to test this, recent events in the Hoki fishery suggest that prudent resource management exists. The Marine Stewardship Council 1 (MSC) recently awarded New Zealand s Hoki fishery the first whitefish fishery environmental certification, which recognises that the fishery is sustainably managed in all facets of its operation (Oliver, 21). This is significant given that Hoki is one of the more highly concentrated property rights structures and is New Zealand s largest single fishery by tonnage and dollar value. A contributing factor in the prudent management of Hoki is found in the predominant bycatch species Hake. In the Southern Zone fisheries a relatively small TACC for Hake exist (a ratio of 2:1) effectively limiting the quantity of Hoki landed. Appendix one indicates that 99.7% of Hoki quota is owned by 2 entities and 97.9% of Hoki is caught by 2 fishers. More significantly, 96.8% of Hoki quota is owned by the top 1 firms, with the top four firms owning 71.2%. There appear to be both structural (motivated by the quota relationship) and behavioural (motivated by property rights) factors at play in the prudent management of the Hoki fishery. In the case of Orange Roughy we observe that the TACC has reduced significantly, from 58,82 to 2,344 tonnes. In this instance the increasing concentration rates may be indicative of the exit of smaller fishing entities due to unsustainable yields. Interestingly, trends in property rights for Orange Roughy reflect closely the trend in Hoki. Both are deepwater fisheries requiring high capital investment. TACC for Orange Roughy, a recently discovered (commercially fished for only two decades) deepwater fish species, were initially set at unsustainable levels. This was due to an underestimation of the age of the fish and its regeneration cycle (approximately 2 years). Subsequent TACC levels have been significantly reduced to allow for regeneration. Given the long regeneration period, and return on investment, smaller fishers appear to have chosen exit as the preferred option. New Zealand s QMS takes primary responsibility for setting sustainable yields and much of the credit for the positive condition of the New Zealand fishery. Recent changes to the QMS have transferred the risks of excessive harvesting from government to the industry itself (Batstone & Sharp, 1999). In the past the government has bought excessive quota rights if the TACC exceeded sustainable harvest levels. This mechanism created incentives to fully harvest the TACC because government would provide compensation through its buying activities in the quota market for any reductions (Batstone & Sharp, 1999, p179). Removal of this compensation arrangement vested risk of over-harvesting with fishers. Thus within this regulatory structure, fishers may now behave in ways which either enhance or compromise sustainable outcomes according to their own strategic objectives. 1 The Marine Stewardship Council, formed in 1997, is a joint venture between the World Wide Fund for nature and Unilever. Is has since become a stand-alone entity. PAGE 5
Although the 15 fisheries sampled have increased in concentration over the fifteen year study period none possess a sole ownership structure not possible under the Fisheries Act which limits the percentage of any given fish stock that a single fisher can own or hold. However, of the species studied 11 possess CR4 of over 5% and 1 over 6% indicating that significant control is vested with a small number of firms in these fisheries. In the snapper sub-study, the CR4 results show a significant increases for QMA 1. The fact that the HHI results were unremarkable (See Appendix Two) is not surprising given the limitations on quota agglomeration. H2 holds that concentration is increasing in species that are more profitable to the larger entities. Whilst trade price is not a measure of profitability in itself, the trend towards stable or increasing prices (Table Four) and the possibility of economies of scale through increased concentration, point to improved financial conditions for larger operators 2. Correlation coefficients determined between rate of change in trade prices and rate of change in concentration (CR 2) for holding, indicate only a weak association between these variables (-,.187: -,.317). Due the nature of the fishery, incumbents are far more likely to acquire the quota of exiting fishers than are new entrants. In many fisheries a portfolio of quota is required since a mix of species will be landed in any given trawl, set-net or long-line. Therefore a new entrant must possess an appropriate portfolio of holdings prior to entry. In addition to this, industry sources have suggested that incumbents are far more likely to possess information of potential exits, and thus an opportunity exists for them to take the lead in acquisition (H3). This fact may help explain the trend toward concentration. Conclusion Given the shift from a competitive fisheries model toward a sole ownership model, and the subsequent concentration in property rights, in conjunction with the sanction against depletion through TACC management, the long run outcome for the fishery is directed towards enhancement of harvest levels, in line with market demand. This paper supports Scott s contention that as long as the user of the fishery is sure that he will have property rights over the fishery for a series of periods in the future, he can plan to use the fishery in such a way as to maximise the present value of his enterprise. (1955, p122) Thus, the QMS together with increasing concentration promote this outcome. Movement towards a sole ownership model, together with the QMS control model creates a best-case scenario where depletion is not an option and returns to regeneration are vested with property right holders. Hence this study concludes that the trend towards increasing concentration has positive outcomes for the New Zealand Fishery. 2 Sanford Limited, New Zealand s oldest publicly listed company and second largest fisher, (the only entity in this industry with public reporting requirements) has consistently reported healthy profits and an increasing Return on Average Equity for the last 5 years. PAGE 6
References Bain, J. (1956). Barriers to New Competition. Harvard University Press. Batstone, C., and Sharp, B. (1998). New Zealand s quota management system: the first ten years. Marine Policy. Vol. 23 (2). pp 177-19. Clement & Associate Limited. (). Changes in Quota Ownership 1982-. A report commissioned by the New Zealand Fishing Industry Association. Fisheries Task Force. (1992). Sustainable fisheries. Report of the Fisheries Task Force to the Minister of Fisheries on the Review of Legislation. Ministry of Agriculture and Fisheries, Government of New Zealand, Wellington. In, Batstone, C., and Sharp, B. (1998). New Zealand s quota management system: the first ten years. Marine Policy. Vol. 23 (2). pp 177-19. Hutchings, J. (). Collapse and recovery of marine fishes. Nature. Vol 49 (6798) p 882. O Connor, R., Owen, R., and Rhymer, J. (). Best practice in endangered species recovery planning: Lessons for the conservation of Maine s Atlantic salmon. Maine Policy Review. Vol. 9 (2). pp 72-91. Fall. Oliver, P. (21). Environment award big catch for Hoki industry. NZ Herald, C3, 15 March. Scott, A. (1955). The Fishery: The Objective of Sole Ownership. The Journal of Political Economy. Vol. 63 (2). pp 116-124. PAGE 7
Appendix One: Concentration ratios Species Concentration Quota Quota Ratio Dec-86 Aug-96 Jun- Dec-86 Aug-96 Jun- Barracouta CR2.91.957.967.951.888.92 CR1.795.838.915.767.699.778 CR4.59.625.72.558.523.574 Hake CR2.985.994.996.844.994.996 CR1.972.954.963.795.947.952 CR4.818.793.773.522.776.775 Hapuka-Bass CR2.579.642.67.536.49.585 CR1.468.532.558.425.362.448 CR4.341.33.358.297.23.295 Hoki CR2.996.999.997.885.956.979 CR1.987.952.968.829.815.879 CR4.873.717.712.69.651.676 Jack Mackrel CR2 NR.979.983 NR.949.965 CR1 NR.897.947 NR.85.882 CR4 NR.62.743 NR.595.675 Ling CR2.91.943.951.797.912.99 CR1.874.854.871.728.849.83 CR4.652.675.661.57.665.67 Orange Roughy CR2.95.985.995.868.995.995 CR1.874.899.919.767.958.949 CR4.684.717.725.561.79.777 Oreo (Dory) CR2.983.999 1..917.995.998 CR1.972.988.995.96.979.977 CR4.81.826.856.745.856.814 Red Cod (Bastard) CR2.651.831.888.533.772.853 CR1.53.713.796.49.619.978 CR4.351.43.485.235.369.42 Silver Warehou CR2.985.999.998.77.976.993 CR1.978.983.981.76.922.952 CR4.749.775.764.548.718.77 Snapper CR2.53.82.827.552.835.98 CR1.448.718.744.464.756.863 CR4.349.534.573.346.564.764 Squid CR2 NR.98.98 1..961.944 CR1 NR.916.893 NR.874.817 CR4 NR.739.75 NR.634.652 Southern Blue CR2 NSF NSF 1. NSF NSF 1. Whiting CR1 NSF NSF 1. NSF NSF.969 CR4 NSF NSF.77 NSF NSF.632 Stargazer CR2.869.852.95.75.779.793 CR1.78.677.733.577.579.613 CR4.651.377.394.369.343.342 Tarakihi CR2.67.779.817.648.617.781 CR1.532.637.687.53.461.658 CR4.32.45.439.289.272.478 PAGE 8
Appendix Two Herfindahl-Hirschman Indices 3 3 25 25 15 15 1 1 5 5 Barracouta Barracouta Barracouta Arrow Squid Arrow Squid Arrow Squid 3 3 25 25 15 15 1 1 5 5 Hapuka-Bass Hapuka-Bass Hapuka-Bass Hake Hake Hake 3 3 25 25 15 15 1 1 5 5 Ling Ling Ling Orange Roughy Orange Roughy Orange Roughy PAGE 9
3 3 25 25 15 15 1 1 5 5 Tarakihi Tarakihi Tarakihi Silver Warehou Silver Warehou Silver Warehou 45 4 35 3 25 15 1 5 Stargazer Stargazer Stargazer 45 4 35 3 25 15 1 5 Hoki Hoki Hoki 3 3 25 25 15 15 1 1 5 Oreo Dory Oreo Dory Oreo Dory 5 JackMackeral JackMackeral JackMackeral PAGE 1
Appendix Three: Snapper Concentration Ratios per QMA Zone Concentration Quota Quota Ratio Dec-86 Aug-96 Jun- Dec-86 Aug-96 Jun- QMA 1 CR2.4933.8532.9351.4867.8174.8398 CR1.397.7674.8993.3946.758.7612 CR4.2625.5593.812.2725.4831.5565 QMA 2 CR2.8475.9628.9947.8623.9633.9953 CR1.6551.8362.9621.6615.8796.9626 CR4.4672.4667.7578.46.5937.7582 QMA 3 CR2 1 1 1 1 1 1 CR1 1.9842.9826 1.9969 1 CR4.971.868.8799.9733.8916.9124 QMA 4 CR2 n/a n/a n/a n/a n/a n/a CR1 n/a n/a n/a n/a n/a n/a CR4 n/a n/a n/a n/a n/a n/a QMA 5 CR2 n/a n/a n/a n/a n/a n/a CR1 n/a n/a n/a n/a n/a n/a CR4 n/a n/a n/a n/a n/a n/a QMA 6 CR2 n/a n/a n/a n/a n/a n/a CR1 n/a n/a n/a n/a n/a n/a CR4 n/a n/a n/a n/a n/a n/a QMA 7 CR2.898.9448.9772.7912.9499.9825 CR1.663.823.958.6342.8239.981 CR4.4136.5493.6959.49.5114.6214 QMA 8 CR2.9684.9841.9933.975.9828.9868 CR1.896.9267.967.994.9578.9653 CR4.7428.7812.8412.7737.8151.8171 PAGE 11
Appendix Four: Herfindahl-Hirschman Indices QMA 1 QMA 2 3 3 1 1 Snapper Snapper QMA 3 QMA 7 1 8 6 4 25 15 1 5 Snapper Snapper QMA 8 5 4 3 1 Snapper PAGE 12
Snapper Management Areas PAGE 13