Canadian Translation of Fisheries and Aquatic Sciences No. 5051 S

ISSN 0704-3716

Canadian Translation of Fisheries and Aquatic Sciences

No. 5051

The value of a purse seine license

S.D. Flam

Original title: Verdien av ein Ringnotkonsesjon

In: CMI-rapp. nr . 812510-10, Chr. Michelsens Institutt, Adv. for Naturvitenskap og Teknologi, Bergen, Norway, 1981

Original language: Norwegian

Available from:

Canada Institute for Scientific and Technical Information National Research Council

Ottawa, Ontario, Canada KlA 0S2

19871"

28 typescript pages

Secretary Secrétariat of State d'État

Into - En

English

Publisher - Editeur

CMI. Chris. Michelsens Institute, Division for Natural Sciences and Technology

Place of Publication Lieu de publication

Fantoft, Bergen, Norway

DATE OF PUBLICATION DATE DE PUBLICATION

Page Numbers in original Numéros des pages dans

l'original

Year Année

1981

Issue No. Numéro

812510- 10

21 Number of typed pages

Nombre de pages dactylographiées

26

Volume

OM.

Branch or Division

Canad'à SEC 5 -111 (Rev. 82/11)

MULTILINGUAL SERVICES DIVISION — DIVISION DES SERVICES MULTILINGUES

TRANSLATION BUREAU BUREAU DES TRADUCTIONS

LIBRARY IDENTIFICATION — FICHE SIGNALÉTIQUE

e s 5651 Translated from - Traduction de

Norwegian Author - Auteur

Sjur D. Flam

Title in English or French - Titre anglais ou français

The Value of a Purse Seine License

Title in foreign language (Transliterate foreign characters) Titre en langue étrangère (Transcrire en caractères romains)

Verdien av ein Ringnotkonsesjon.

Reference in foreign language (Name of book or publication) in full, transliterate foreign characters. Référence en langue étrangère (Nom du livre ou publication), au complet, transcrire en caractères romains.

CMI Rapport

Reference in English or French - Référence en anglais ou français

CMI Report.

Requesting Department r 0 Translation Bureau No. /c -77 Ministère-Client Notre dossier no

Translation (Initials) Direction ou Division Traducteur (Initiales)

Person requesting Demandé par

M Your Number

Votre dossier no

Date of Request c 2-1 Date de la demande

/ 2-PI

/4-

UV1

TRANSLATION BUREAU BUREAU DES TRADUCTIONS

Secretary Secrétariat of State d'État

MULTILINGUAL SERVICES DIVISION — DIVISION DES SERVICES MULTILINGUES

Client's No.-1\1 0 du client Department — Ministère Division/Branch — Division/Direction City — Ville

D Fo î fPet

Bureau No.—No du bureau Language — Langue Translator (Initials) — Traducteur (Initiales)

7 ig84

The Value of a Purse Seine License

by

Sjur D. Flàm

Chr. Michelsens Institute, Division for Natural

Sciences and Technology, Fantoftvegen 38, 5036 Fantoft, Bergen.

CMI - Report No. 812510-10. August 1981.

(Commissioned by: Norwegian Fisheries Research Council (NFFR)

VI.801.05)

Abstract

For alternative fleets, deterministic quotas and given

costs, the market value of a purse seine license is calculated

when resource interest is not being paid.

13VInDIIID TReVeKT.10 cnly

TRCrJ Wiloïïaa' Da faatilca?..on'l

SEC 5-25 (Rev. 82/11)

Canadd

20 15

21 26

Contents Page (orig) Page (trans

1. Introduction 1. 3

2. Developments in the purse seine fleet 3 5

2.1 Technological developments 3 5

2.2 Resource (stock) developments 3 5

2.3 Fleet developments 5 7

3. License market 6 9

4. Introduction to problems 7 11

5. Analyses 8 12

6. Specific problems 11 16

7. Results 13 18

19 8. Summary 14

Appendix

References

3 .

,

1. Introduction

In this report we wish to point out how the value

of a purse seine license varies with the size of the fleet.

If the fleet is reduced from today's level down to a

"necessary minimum", a development from deficit to profit

will be observed in the industry. Economic theory points

out that the pure profit that then will occur corresponds

to a resource interest. It is the interest on the renewable

capital, namely the fish stocks. Since nobody owns this

capital (in contrast to oil and water power resources), no

interest is being collected on it.

The lack of collection (payment) of the interest

on the resource results partly from the fact that ownership

or management rights have not been established, partly

from lack of understanding that the fisheries are a "basic

interest industry". The absence of interest (fee) for use

of the resource in reality represents a reduction in costs

for those that carry out fi shing. Fishing vessel owners

therefore find it profitable to expand the catching capacity

beyond the point when additional capacity has become

unprofitable from a socio-economic point of view. In this

way an unregulated fishery with free entry is characterized

by technical and economic overcapacity and often drastically

reduced stocks.

There is no longer free access to the Norwegian purse

seine fleet. The first regulatory measures were introduced

in 1970 with a halt in registrations. In 1973 the licensing

act was implemented which makes it possible to control

developments in the purse seine fleet (number of vessels

and carrying capacity).

Below we will first look at developments in the

purse seine fleet.

Sales of licenses will first be briefly mentioned,

followed by a calculation of the value of licenses in

equilibrium. By equilibrium we mean that neither the fleet

nor the quotas will change. Chapters 6 and 7 will have the

practical analyses. This is carried out for quite extreme

fleets.

At all times we will analyze the equilibrium situation

characterized by:

Gross catch income-minimal catching costs=resource

interest=pure profit wages for superfluous (excess) unit

effort.

In an optimal fi shery, superfluous unit effort

does not exist. The whole resource interest appear as p. 2

pure profit. In a fishery with free access the pure profit

disappears and the whole resource interest is used up by

excess unit effort. The license value is in all instances

relative to the pure profit.

The value of a purse seine license is calculated as

a function of:

Gross catch income - total costs.

When the fleet is oversized, the costs are unnessesarily

high. The license value grow quickly when the fleet reduction

removes much of the excess unit effort.

Makrall —

NordsjOsild — —

Norsk sild

o

1960 1965

5.

2. Developments in the Purse Seine Fleet

This section contains background information on P. 3

technological advances, stock situation and fleet size.

The presentation must necessarily be brief and superficial.

2.1 Technologcal _developments

The power block that was introduced in the early

1960 1 s, dramatically improved the efficiency of the purse

seine fishery. It now became profitable to fish on smaller

fish concentrations and several schooling fish species were

fished down to low stock levels in a few years. Fishing

costs, although increasing, did not protect against over-

fishing.

2.2 Resource (stock) Developments

Mackerel, North Sea herring and Norwegian spring

spawning herring stocks were threatened by the cost-reducing,

technological advances (figures 1 and 2).

Mackerel

North Sea Herring

Norw. herring

,1 \

400

1200

10 00

aoo

600

• 400

200

Nordspsitd

1

1

Figure 1. (pg 5.) Estimated spawning stocks of herring

and mackerel in the years 1960-1980. Source: (6).

2000.

Norsk sild

6 .

O 1200 - C>

o 800

800

, 600 -{ • g

400

▪ 200 -

1960 1965 1970 • 1915 1980

Figure 2. Catch of herring and mackerel in the years 1960-

1980. Solid line shows total catch, the dotted line the

Norwegian catch. Source: (6).

The regulations that were introduced were either

insufficient or came too late. In the capelin fisheries

one has become more aware of the consequences of over fishing.

Quota regulations were introduced while there was still

much fish and the tragic decimation of the stocks has been avoided.

2.3 Fleet Developments

The table below shows the number of vessels and total carrying capacity for the purse seine fleet in the period 1968-1980.

7.

13•5

No. of purse seine vessels Total capacity, hekto litres (hl)

Year

1968 456 1.305.800 1969 403 1.218.300 1970 376 1.203.800 1971 359 1.344.900 1972 329 1.326.800 1973 309* 1.316.100 1974 295 1.323.950 1976 269 1.330.750 1978(1.6) 272 1.415.850 1980(31.12) 215 1.262.161

* Vessels over 80 feet, from 1973 over 90 feet.

Note that the number of vessels increased from 1976 to 1978 and that total carrying capacity generally increased up to 1978. It appears as if the effect of the Licensing Act has been weak.

There are advantages of scale in the industry (2).

This is reflected in the following developments in average

carrying capacity per vessel.

8.

Year Average carrying capacity Increase from Previous year

1968 2.860 hl 1969 3.020 u

1970 3.200 "

1971 3.740 "

1972 3.030 "

1973 4.260 u

1974 4.490 u

1976 4.989 "

1978** 5.205 "

1980 5.871 "

4- 5,6% • 6,0% +16,9% ▪ 7,8% • 5,7%

+11,1% • 4,3% +12,8%

** As of 1/6 - 1978.

9.

s

3. License Market

The government (State) issues licenses without

charge. Since permission to fish is or can be an attractive

"security", the possibilities for a market arise. The

problems connected with the sale of licenses is not

discussed here, but Anton Helles8y (1) found the following:

i) If there are large-scale operational advantages in the

fleet, the highest bid for a license will always exceed the

price which makes the license holder indifferent towards

selling or holding on to the license.

ii) Assume that the state subsidizes so that the least

profitable vessel operates in balance. State purchase of

a license gives a subsidy reduction which exceeds the highest

market bid for this license. The State can therefore bid

more than market price and still save.

The first result is in harmony with the combining

of licenses that has been practiced. Other results show that

the State through the buying up of licenses will get more

back in the form of subsidy reduction. The pre-condition

is that the licenses are not re-issueds.

In the long term the industry adjustment is determined

by:

- quotas

- price and cost developments

- the mechanism that regulates entrance and exit

10.

from the industry

- technological developments

It can be safely assumed that there never will be

free access to the industry. It can furthermore be assumed

that at a certain catch level catching costs will increase

on the average. Marginal catching costs must then exceed

the average. If the price is not below marginal catching

costs, the industry will under these conditions achieve a

profit. This profit can be ascribed to the fact that each

vessel play a double role. It carries out fishing and is

at the same time "owner" of "quotas". The surplus (profit)

is interest on this "property". The pure profit is proceeds

from the license. In the following this will be used to

evaluate the market value of a license for various fleets.

11.

4. Introduction to Problems P. 7

Alternative purse seine fleets shall catch specified

quotas and carry the catch to present markets (buyer). In

the next section the following questions will be discussed:

After fuel expenses, wages and fixed costs including

interest are paid:

- How much raw material income remain as proceeds

from the license?

- How much is then the license worth?

Since the value of the vessel is not unambiguous,

in the following the proceeds k per vessel before interest

on capital is paid will be first calculated.

5. Analyses

p. 8 Regarding the fish stock situation, it will be

assumed that there is equilibrium e and arbitrary variation

will be ignored. It is assumed that the fleet will be

assigned the same quotas each year, and the fleet will

never be made so small that they have difficulties in

harvesting the quotas.

Assume that for a given fleet structure that a

purse semer in this equilibrium situation year after year

will have proceeds k. If, alternatively, the interest is

r x 100%, then a stable yearly proceed of k corresponds to

a capital value K given as K = k/r. These proceeds are

ascribed to the capital equipment (the vessel) and the

license.

In general let the vessel have the value V and let

L stand for the license value. We get:

=K=V-1- L

and

L = — V

It is emphasized that since the vessel value V is

not unambiguous, the license value is therefore not unambiguous

either.

Let namely B be the building costs for a corresponding

vessel. If an entrepeneur wants to get into the industry

with a new vessel, V = B. He is then willing to pay

L

for the license.

1 3.

If an entreneur wants to get out of the business

and the vessel then must be used for other purposes than,

purse-seine fishing where the alternative value V = bB,b< 1,

then he will demand a compensation:

(Not readable on my copy, Translator's note.)

in order to relinquish his license.

It can be seen that L- > L + . This has a connection

with "irreversibility" in the investments (5).

Expansion and reduction in the industry

When one enters the industry, the capital equip-

ment must be purchased at full price. However, if one

wants to leave the industry, and the specialized equipment

is not as valuable in alternative activities, a price

reduction must be accepted at an eventual sale for such

purpose. This reduction in capital value is countered by

a corresponding increase in the license value.

What we are saying is the following:

In equilibrium where vessels are kept as new, the

transactions vessel/license take on one of the following two

forms:

i) Private purchase

Vessel and license are sold to one and the same

buyer for prices B and L -1. respectively. This buyer continues

purse seine fishing with the vessel.

ii) State purchase

The license is sold separately for the price L.

14.

The buyer does not utilize the license. The vessel leaves

fishing and is sold for value bB. It is impossible to

imagine that the new license holder will be any other than

the State.

The license value L is in any case affected by many

factors. First and foremost, L is fleet dependent. L is

not necessarily in unambiguous relation to the resource

interest (basic interest) in the system. If the fleet is

of income-optimal size, will reflect user cost, i.e.

catch or license fees that should be paid in order to

prevent unneccessary expansion of the catching capacity.

Later, when the fleet has overexpanded, a part of the basic

interest is consumed by excess capacity or catch effort.

This is reflected in falling rentability of capital

(k decreases) and the license values then decrease.

As a point of reference, Table 1 shows capital

value and alternative returns (proceeds) (before investments)

per equipped vessel in various groups.

Table 1. Investment cost (=interest basis = replacement

value B) and alternative returns for gear and vessel in

various groups in 1979.

Source: Budget Committee. All values in million kroner.

Group

Capital value B

020 021 022 023

11.250 16.041 19.016 21.267

Alternative returns (mill kr/yr) 0.788 1.123 1.331 1.489

17.

from the license? How much is the license worth?

Reservations

It must be admitted that the conclusions etc.

will be strongly affected by:

- price and cost levels

- the size of the quotas

- participation in various fi sheries

Here we will only focus on how fleet-dependent the

results will be. We are looking for guiding trends and

must not expect a high precision in the numbers.

Method

We simulate the catching and transporting activity

of the fleet on a computer and thereby calculate return

on capital.

Assumptions are mentioned in the Appendix.

Entry value L+ for license in group

23 (mill. kr ) 15 56

7. Results

18.

Table 3 gives k = returns (yield) including capital

interest per vessel in group 023 for alternative fleets.

Simultaneously do we indicate the license value for interest

factor r = 0.07.

L (r,10) = bB

for b = 1 and b = 0.5.

b=1 corresponds to value before investment (ex ante), b = 0.5

corresponds to value after investment (ex post) when the

alternative value of invested capital is halved.

Note that the smallest fleet named in Table 3 can

manage all quotas.

p. 13

Table 3: Value of a purse seine license in group 023

for extreme fleets.

The fleet in 1979

Reduced fleets

No. of trawlers in group 18 107 107 107

No. of purse seiners in group 20 31 0 0 It It It tt 21 68 0 0 It Il It tt 22 49 49 15 II It tt It 23 44 44 44

Return on Capital per vessel in group

23 (mill. kr ) -0.25 2.57 5.43

Exit value L- for license in group 23

(mill. kr ) 26 66

1 9.

8. Summary

From Table 3 it can be seen that the market value

for a license becomes very high when many "surplus" p. 14

(superfluous) vessels are taken out of the purse seine

fleet. If we expand the smallest fleet we have listed

above with one vessel in group 23, that vessel owner would

demand over 60 million kroner to leave the flow of income

he could foresee.

This indicates the high socio-economic cost of

giving out too many licenses. It also emphasizes that

under absence of resource tax the state will be under strong

pressure to issue more licenses even if the fleet is

somewhat over-dimensioned. Only a tax on the catch or

licenses corresponding to the resource interest can prevent

wasteful capacity expansion.

We strongly exphasize that our analyses and the results

in Table 3 only mean something when quotas remain unchanged

and the fleet structure is stable. If permanent changes

in fleet or quotas are expected, the evaluation of the

licenses will be affected by that.

It todays situation, there seems to be socio-economic

benefits to be gained through a vitalization of the license

market. Through sales of licenses, the industry can go

through some of the capital reduction that is needed. (7)

f.

20.

Appendix p. 15

Assumptions

Each fishery is carried out in a "typical" area

and within "usual" seasons. Table 4 below lists duration,

typical seasons and the positions of various fisheries.

Table 4: Data on typical seasons and durations in various

fisheries.

Positions Catch No. Fishery Start Duration Latitute Longitude Probabilit

1. Ocean Sprat-1 1.0 3.0 55.0 6.0 40 55.0 -1.0 60

2. Norway Pout 1.0 50.0 63.3 5.5 5 58.3 4.5 65 60.8 2.5 20 58.8 1.5 10

3. Winter Capelin- 5.0 1.0 72.8 25.0 West 1.0 72.0 24.0

2.0 71.5 23.0 . 4.0 70.8 21.5

4. Winter Capelin- 6.0 1.0 71.5 35.0 East 1.0 70.9 34.0

5.0 70.4 32.0

4.0 71.0 30.0

5. Winter Cape1in- 8.0 5.0 70.4 32.0 Trawl 4.0 71.0 30.0

6. Sand lance 10.0 35.0 60.7 2.5 30 58.0 2.5 30 55.0 2.5 40

7. Blue Whiting 13.0 9.0 61.5 -12.5 30 58.0 -9.5 30 61.5 -5.5 40

8. Mackerel - 1 3.0 2.0 60.6 3.0 35 61.6 1.0 35 68.5 4.2 20 60.0 -5.0 10

9. Jan Mayen -capelin 31.0 5.0 71.0 -11.0 100

10. Summer capelin 34.0 9.0 77.2 26.0 100

11. Ocean Sprat-2 45.0 6.0 55.0 6.0 50 55.0 -1.0 50

21.

Explanation for Table à

The ocean sprat fishery opens at the end of week 53,

the start of week 1 and lasts 3 weeks. The catch is

distributed with 60% in positions 55°N, 6°E, and 40% in

position 55°N, 1° W.

The winter capelin fishery, westerly migration starts

early in week 5 in position 72.8°N, 25oE and lasts one

week before moving to 72°N, 24°E, etc. p. 16

Table 5; Data on quotas, catch and search times, storage

ability and prices for raw material.

Translation of Table 5: (table on page 22.)

1. Ocean sprat-1

2. Ocean pout

3. Winter capelin - west

4. Winter capelin - east

5. Winter capelin - trawl

6. Sand lance

7. Blue whiting

8. Mackerel-1

9. Jan Mayen-Capelin 10. Summer capelin 11. Ocean sprat - 2 12. Mackerel - 2

a. Mill hl. total quota

b. Search/catch

c. Trawler

d. Purse seine

e. Storage ability

f. From

g. To

h. Keeping time

i. Basic raw material price

j. Basic fat % k. Rate

1. Basic dry matter % m. Rate