Alex Duncan & Tom McClurg want the fishing industry to move to a more productive and sustainable future, using elements of the Fonterra model as a useful and proven pathway

By Alex Duncan and Tom McClurg*

To borrow from Dickens, reforming primary sectors from the 1980s was the “best of times and worst of times in an age of wisdom and foolishness”.  His legacy lives on.

Early in the 1980’s a Quota Management System (QMS) allocated defined harvest rights to fishing enterprises.  This occurred first in the deepwater fishery in 1982 and was extended to almost all main commercial fish species by the mid-1980s.  Owners of quota could buy and sell their rights to harvest fish by transacting Individual Transferable Quota (ITQ).  Also, under their quota, ITQ holders can sell annual catching rights, known as ACE, to enable others to harvest fish.   

The creation of the QMS in the 1980s also triggered claims by Māori under Te Tiriti o Waitangi.  As a consequence, the government facilitated the acquisition by Māori of ten percent of quota plus shares in Sealord.  These assets are now owned directly or indirectly by 58 mandated iwi organisations. 

In the 1980s fishing effort declined compared to the prior fisheries regime.  While the QMS has yielded benefits, more could be obtained for all stakeholders, including the New Zealand economy.  The QMS encouraged some quota holders to purchase new deepwater vessels.  Other quota holders have relied heavily on foreign chartered vessels.  Some boats purchased from the 1980s onwards are now financially and operationally obsolete. 

The culture of the fishing industry prior to the QMS was strongly independent and competitive and the advent of quota did not change this culture immediately.  Instead, quota owners tended to ‘go it alone’ in long-term investment decisions.  As a result, while the QMS controlled total harvest effort, it did not sufficiently encourage financial capital to be applied across the sector.  Phasing of new deepwater vessels across the whole deepwater fleet was ad hoc in the context of 15+ year useful lives. 

The decisions of forty years ago reflected an emphasis to cap total fishing effort to sustainable levels.  The issues of today are minimising the environmental footprint of harvesting and ensuring efficient energy use.  These are not issues about how much can we fish, but how we should fish.  In particular, to identify the ways by which the seafood sector delivers healthy food, along with energy efficiency, sustainable returns and satisfying jobs. 

This challenge requires new technology, new ways of deploying that technology and new investments.  This imperative is not unique to commercial fishing.  As noted by the Productivity Commission, enhanced productivity with deeper capital will yield higher returns.

The QMS provides a sound starting point from which to address this challenge in the seafood sector.  The sustainability and Treaty Settlement aspects are excellent.  What is needed are actions that strengthen the QMS, rather than seeking alternatives to it.  One approach to address these harvesting related issues could be to create a vehicle that would be owned by deepwater quota owners, much like airline Alliances.  This would address the twin issues of inefficient capital use and unnecessary overlap of harvesting effort, thereby improving both economic and environmental performance. 

Quota holders would enter the Alliance and subscribe capital to the financing vehicle, including introducing third party debt.  The capital would be used to either (a) purchase new vessels, or (b) purchase existing vessels from Alliance members at fair value to be used for the remainder of their economic lives.  Financing for a new vessel would be amortised over (say) 15 years.  Alliance members would contract harvesting services from the Alliance.  Subscribed capital would be rewarded by a “capital charge” rate that would be identical for all participants.  The annual capital charge would be recovered from individual participants depending on the vessel they contracted.  The Alliance activities would be solely engaged in optimising fleet configuration and vessel operations on behalf owners.  Existing or new members in the Alliance would be able to withdraw or enter at fair value. 

New vessels would be progressively incorporated into the programme as older vessels are retired.  Because the capital charge would recover a risk adjusted return for subscribers, Alliance members, unlike now, would have strong incentives to optimally invest in a long-term programme that would be updated regularly.  The Alliance would obtain better terms from shipyards, along with other efficiencies associated with standardisation of engines, marine systems, refrigeration systems, communication systems and the like. 

Although the deepwater sector is essentially an export industry, consolidation of investment will still raise competition issues that will need consideration.  These issues were tackled in the context of deregulating the dairy sector in the late 1990s.  A parallel in the deepwater fleet could result in substantial gains while facilitating competition.

In 2001, Parliament enabled Fonterra to retain its co-operative structure but required farmers to ‘enter and exit’ on equal terms.  Fonterra was also subject to regulations that required it to make available milk to new start-up and existing smaller milk processors.  In 2008 Fonterra commenced an auction known as GDT.  Its purpose was to determine a price that would enable Fonterra to list, which it did in 2012.  The key products were skim milk, whole milk powder and other weakly-differentiated commodities. 

There were many sceptics when GDT was introduced.  But the outcome of the auction typically discovered higher prices and new customers compared to revenue from the earlier bilateral sales channel.  The auction also reduced the time for customers to ‘haggle’ over base commodity prices.  Instead, ‘value add’ services enhanced margins.  Of equal importance, the auction enabled the cooperative to better optimise its product mix, resulting in better capital utilisation and higher earnings for members. 

In the fisheries sector, the parallel to Fonterra shares are quota shares.  A fair value for quota and ACE is essentially a residual value where harvesting costs are deducted from product values.  Currently, neither of these factors are known.  The Alliance would establish transparent harvesting costs and an auction could establish transparent product prices.  As with the dairy sector, most deepwater fish are largely sold as commodity products with little differentiation, such as hoki block.  Quota holders would commit a minimum volume to sell in each auction, but could offer more.  Like GDT, an ascending clock-auction may be preferred, since it would likely draw a wider pool of bidders.  The auction would be transparent, independent and subject to rules. 

The same approach could apply to the inshore fishery.  The fleet should not need assistance if the fishery is well managed and well capitalised.  Instead, arrangements alongside those outlined for the deepwater fishery would apply to the inshore fleet.  A combination of bank funding, investments by fishing companies and the fishers themselves could be invited to the party.  The inshore vessel owners, unlike now, should not queue to obtain their return. 

Unlike regimes elsewhere in the world without secure quota rights, under the New Zealand QMS, it should be the owners of quota, not the owners of vessels, who bear the residual volatility in the value chain for fish.  They are the ones to wrestle with the “worst and best of things”.  And that is as it should be.

*Alex Duncan was engaged in reforms of the fishing industry from 1979 through to 1987. Thereafter, he was engaged by the Treasury in tax reforms and was later a Partner in Arthur Andersen.  Between 2002 and 2020 Alex was Corporate Finance Director in Fonterra.  In 2007 he initiated what became GDT when it went live in 2008.  Alex was also instrumental in transitioning Fonterra to a listed entity in 2012.

*Tom McClurg has thirty years’ experience in the seafood sector including roles with the Ministry of Fisheries, Te Ohu Kai Moana and Aotearoa Fisheries Limited as well as more recent consulting roles locally with seafood and iwi businesses.  Since 2009, Tom has also provided international fisheries management advice to the World Bank and other clients.