MAFAC Meeting April 2000

NMFS Responses to Questions On Capacity

posed by the

MAFAC Fisheries Overcapacity Subcommittee

1. What is the policy underpinning the capacity reduction plan?

Our policy is to provide information to, and work cooperatively with, the Regional Fishery Management Councils (Councils) and the affected commercial and recreational groups to help them manage levels of harvesting capacity. The Councils have the initial responsibility to develop actions that reduce excess capacity to levels that conform with resource conditions, while improving the financial viability and economic efficiency of federally managed fisheries and supporting the stability of fishing communities. NMFS will provide the supporting technical analysis, in particular measures of excess capacity and assessments of how specific management regulations will affect levels of capacity.

2. What are the goals and objectives for capacity reduction? How will the goal of a reduction of 15 percent of overcapitalized fisheries be met?

The objectives of capacity reduction are stated in the NOAA Fisheries long-range strategic plan under the element Build Sustainable Fisheries (BSF), which includes the following performance measure: "By 2005, 20 percent fewer overcapitalized fisheries."

Two points should be noted: first, NMFS planners use the term "overcapitalized fisheries" to include fisheries that exhibit excess capacity; and, second, "fisheries" denotes federally managed fisheries, i.e., those subject to fishery management plans (FMPs). Hence, the BSF performance measure effectively calls for a reduction by 20 percent in the number of fisheries that exhibit excess capacity by 2005.

The categorization of fisheries according to levels of capacity/excess capacity will be conducted starting in early 2001 through a process of meetings of NMFS and non-government experts, including Council members and staff. To be specific, NMFS will develop in 2001 through the above process a list of fisheries that exhibit substantial levels of excess capacity. If it is determined that, for example, 20 fisheries (or almost half of all federally managed fisheries) suffer from substantial levels of excess capacity, the BSF performance measure calls for reducing that number by 4 fisheries, leaving 16 fisheries with substantial excess capacity in 2005.

Currently, we have not determined how many fisheries exhibit excess capacity, but I will mention that the soon-to-be-issued preliminary and qualitative report concludes that indications of excess capacity exist in more than half of the more than 70 "fisheries" (not just federally managed fisheries)studied in this report. Once we determine how many and which fisheries will be subjected to capacity reduction plans, specific targets and action steps can be identified. Obviously, these actions will vary according to the circumstances of the fishery and the decisions made by the responsible Council. In addition, the tools that will be available to NMFS and the Councils to manage capacity will depend on Congressional decisions, in particular the relevant provisions of a reauthorized MSFCMA. The NMFS role is to provide the initial analysis and ongoing guidance that will help the Councils and industries move forward effectively on capacity management.

3. How will the government identify and reduce its own role in contributing to overcapacity?

This is a two-part question that deals with identification and subsequent reduction. The first task has been largely, if not entirely, addressed with the completion in July 1999 of the Federal Fisheries Investment Task Force Report to Conqress. The legislative charge of that report was to examine the "role of the federal government in subsidizing the expansion and contraction of fishing capacity ... and otherwise influencing the aggregate capital investments in fisheries." The Congressional report reviewed a wide variety of programs administered by NMFS and other components of NOAA, and other federal agencies, and, most significantly, studied these programs as much as possible both historically and on a region-by-region basis.

Since sufficient data were not available for all the federal programs reviewed to determine precisely their contribution to the overcapacity problem, we stated in the first sentence that this task is "largely" but not "entirely" completed. Nevertheless, this report to Congress is the most detailed and comprehensive study of the governmental role in subsidizing and otherwise promoting increases in fleet capacity.

The second task, reducing the government's role in contributing to overcapacity, has been under way for several years but is obviously not completed. Several federal programs that previously may have contributed to overcapacity have already been modified and redirected. Other programs have not yet been reformed, but proposals have been developed to modify and redirect them.

Below are a few notable examples:

• the Fishing Vessel Obligation Guarantee Program, which provided loan guarantees for the purchase, construction and upgrading of fishing vessels, was replaced by the Fisheries Finance Program, which provides direct loans for a number of objectives, but not for purposes that add to levels of harvesting capacity;
• Government-funded fishing permit and vessel buybacks have been administered in several regions, signaling a reversal of the traditional federal role; and
• NOAA Fisheries has proposed changes in the Capital Construction Fund (CCF) to permit withdrawal of funds from CCF accounts for purposes other than building and rebuilding fishing vessels, including, as an example, the use of CCF funds for aquaculture projects.

4. How will capacity management be made a routine component of science-based fishery management? New FMPs should consider capacity limits up front.

The MSFCMA does not mandate capacity management (or assessment) as components of the fishery management plan process. National Standard 5 requires that "(c)onservation and management measures shall, where practicable, consider efficiency in the utilization of fish resources ..." and this guidance could be construed as a charge to avoid overcapacity, but this is an implicit and nonspecific mandate. It remains to be seen whether the Councils and NMFS should include capacity assessments and capacity management as required elements in the management process. If the MSFCMA is amended to include such elements, NMFS will work with the Councils to meet those requirements. At present, NMFS has no position on whether FMPs should include "capacity limits up front."

5. How will the incentives that lead to overcapacity be addressed and/or remedied?

Economic incentives leading to overfishing and overcapacity are embedded in the management systems that prevail in most of our major commercial fisheries. In essence, when participation in a fishery is free and individual participants may withdraw as much as they want from a common pool, that fishery will almost inevitably attract excessive levels of effort and capital. The remedies, simply put, are restrictions on access and the establishment of rights-based management systems. In otherwords, participants in rights-based fisheries, in which fishermen "own" a specific quota or a share of a total quota, have economic incentives to efficiently use and conserve the resource. These points have been widely discussed in the technical literature, and were also made in another Congressionally mandated study, the 1999 National Research Council's report on individual fishing quotas, Sharinq the Fish. More elaborate and detailed discussions of the relationship between economic incentives and levels of harvesting capacity were offered in several papers presented at an April 1998 FAO-sponsored technical consultation on fishing capacity at La Jolla, California, a meeting attended by a number of NMFS staffers and managers and strongly supported by the United States. NMFS expects that, with the completion of the quantitative assessments of capacity in federally managed fisheries in early 2001, we will have a more refined, fishery-by-fishery grasp of the precise magnitude of the excess capacity problem in those specific fisheries.

Perverse economic incentives can be addressed and remedied through various means. The open entry problem can be addressed through limited access programs, and NMFS has worked for years with the Councils to institute progressively stricter limited access requirements in practically all our federally managed fisheries. The common pool problem, on the other hand, will probably require the establishment of rights-based management systems, or arrangements that function like rights-based systems. Examples of rights-based systems are individual fishing quotas and community development quotas; examples of arrangements that operate like rights-based systems are fishing cooperatives (as established in the North Pacific pollock fishery by the 1998 American Fisheries Act).

Obviously, rights-based remedies will require Congressional action, and NMFS awaits Congressional guidance on these issues.

6. How will spill-over effects of capacity reduction be controlled?

Capacity reduction programs, including permit and vessel buyouts, may have "spillover" effects that assume several forms: First, bought-out vessels may be redeployed in other domestic fisheries. Second, these same bought-out vessels may be exported where they operate in foreign and/or high seas fisheries. Third, fishermen who hold permits in many fisheries may use funds obtained from a buyout in one fishery to capitalize their activities in another fishery.

These negative "spill-over" effects can be addressed through various means. In one approach, the original buyout may stipulate that recipients of government funding agree to (1) scrap the vessel, (2) deploy it for purposes other than fishing, or (3) use it as a fishing vessel only in a fishery that can support additional effort and capacity. Another, long-term approach would be to manage all or nearly all fisheries with rights-based systems, in which case adverse ~spillover" effects would not occur because there would be no incentive to acquire redundant capital.

However, as long as there are substantial levels of latent or inactive permits in many of our federally managed fisheries, the "spillover" problem will probably be difficult to prevent entirely.

Obviously, the above-mentioned remedies to this problem may require Congressional assistance, whether in the legal requirements that apply to permit and vessel buyouts, or in authorization to develop rights-based systems, in particular IFQs, in our domestic fisheries.

7. How can issues of responsibility and compensation be brought into the discussion?

The issues of "responsibility" and "compensation" are unavoidable elements in any substantive discussion of the overcapacity problem in the fisheries sector. Clearly, the Executive Branch, the Congress, the Councils, and industry are responsible in one way or another for various aspects of remedies to this problem. For purposes of this short paper, we can say that NMFS, which is mainly charged with working with the Councils to ensure the consistency of FMPs with legislative requirements, has a significant role to play. Essentially, the major NMFS capacity-management roles are to:

• implement future legislative mandates, if any, that involve the assessment and management of harvesting capacity in federally managed fisheries,
• collaborate with the Councils to help them address those mandates in their regulatory activities, and
• work with the fishing industry on programs such as MSFCMA Section 312 (b-e) capacity reduction plans that deal with this issue.

Owners of redundant vessels who decide to leave fisheries suffering from overcapacity may seek financial compensation, another unavoidable element in this debate. Although there is no formal United States or NMFS policy on this issue, we can say generally that compensation could be provided in several ways:

• from public funds, in the case of government-financed permit and vessel buyouts,
• from private funds, prospectively in the case of MSFCMA

Section 312 (b-e) capacity reduction programs, and

• through private transactions, in the case of sales of quota shares in IFQ fisheries.

8. How can questions of fishing diversification and flexibility be addressed?

This is another complex issue for which there is no formal government policy. To begin with, there already exists in our federally managed fisheries a considerable amount of "diversification" and "flexibility." That is, in fisheries that often suffer from overfishing, overcapacity, and unpredictable stock fluctuations, operators understandably seek to minimize risks and uncertainties by holding multiple permits and switching gears, seasons, and grounds as conditions dictate.

In our efforts to manage capacity, "diversification" and "flexibility" of fleets operating in federally managed fisheries will be decided on a case-by-case, or FMP-by-FMP, basis by the Councils and the affected industry groups. Simply put, these kinds of issues are addressed primarily within the context of the management environment in specific fisheries. That said, it is equally clear that various government programs that deal with overcapacity will have some implications for diversification and flexibility. As examples, permit and vessel buyouts that prohibit the use of bought-out vessels in other federally managed fisheries will reduce that diversification and flexibility. Rights-based systems, especially if they provide for transferability of quota shares, will tend to enhance flexibility, because fishermen can enter new fisheries by purchasing quota shares.

9. What are some alternative (e.g. non-vessel) ways to define capacity? For example, could capacity be defined by ports or regions?

All the measures of fishing capacity reviewed by the NMFS working group that studied this issue are firm-based in the sense that they all assess inputs or outputs of individual operators in physical and/or economic terms. Essentially, the NMFS group recommended that, ideally (if sufficient data were available), the most useful measure (1) is output-based (defined in terms of amounts of fish that can be caught by fishing vessels) and (2) accommodates economic considerations (most frequently, in terms of cost minimization). In passing, it may be worth mentioning that NMFS economists who dealt with this question noted significant differences between the applications of the concept "capacity" by general economists and fisheries specialists.

NMFS has begun to take the additional step of applying these measures to federally managed fisheries, and, in so doing, has relied on agency economists in the field who are measuring capacity levels on a region-by-region basis. In fact, NMFS will produce seven such regional capacity reports: one for each of the five NMFS Regions and separate reports on Atlantic Highly Migratory Species and the Western Pacific (essentially, Hawaii, American Samoa, and Guam). Although we have just completed a preliminary, qualitative report, it does appear that there are some regional differences in the incidence and magnitude of the overcapacity problem in federally managed fisheries.

Other measures of capacity in the fisheries sector could, in theory, be developed, but NMFS has not used them because the agency has decided that we need definitions and measures of harvestinq capacity in specific fisheries. However, alternative measures could be used. As examples, capacity could be measured (1) by ports, (2) for processing capacity, most of which is shore-side, or (3) relative to resource limits, such as a biological carrying capacity, or Long Term Potential Yield.

If MAFAC and industry representatives have suggestions about definitions and measures of capacity in fisheries that differ from those we have chosen, NMFS would be pleased to hear about them.

10. How will links between management programs (e.g., permit systems) and capacity increases be made?

This question, like others, is complicated and complex, and NMFS does not have a formal and detailed national policy that addresses this linkage. Rather, the implications of specific management programs for capacity increases will be assessed and dealt with in conformity with our legal mandates and in cooperation with the Councils, probably on a fishery-by-fishery basis.

Hence, "permit systems" are a good example of an issue with potential implications for capacity management that the agency has not yet entirely sorted out. "Permit systems" have some bearing on, for example, the spillover of excess capacity and latent capacity, to cite just two obvious links. As a general observation, we are almost certainly moving toward increasingly restrictive permit systems for a number of management-related reasons, including the need to reduce overcapacity.

The links between specific management programs and capacity levels can be more clearly understood through careful policy assessments, including the use of bioeconomic models that employ statistical analyses and simulation techniques to determine these links. As with all these questions, NMFS welcomes the views of MAFAC, the Councils, and affected industry groups on how the administration of fishing permits can support capacity management.

11. What public education on capacity and capacity reduction will be conducted?

As we have made clear in our responses to many of these questions, NMFS has thus far focused mainly on analytical issues, and has not yet developed a detailed implementation plan on capacity management. In moving forward on this sensitive issue, the agency will obviously have to reach out to all the affected constituencies and to the general public. A first step in this process is our offer to FhAFAC that it host an experts meeting on this issue, to which Council members and staff will also be invited. In addition, NMFS will make presentations on capacity management to the Councils and, as appropriate, to industry groups and meetings.