The Economics of Illegal Fishing

Incentives for Investment inIUU Fishing Capacity

Aaron HatcherUniversity of Portsmouth, UK

Is IUU fishing likely to be driven by a “spillover” ofexcess capacity from regulated (EEZ) fisheries?

Focus of the paper

• FAO definition of IUU as “Illegal, Unreported and Unregulated” is inclusive

• Focus on vessels with no access rights, operating outside any normal regulatory environment, e.g., FONC vessels

in international waters

• In the absence of management, fishing effort is (only) determined by market forces, e.g, the supply of fishing capacity

What do we mean by “capacity”?

• Capacity is a measure of output, not capital stock

• Fishery managers generally use “capacity” to refer to physical capital and its output

• All else equal (technology, prices, etc.), physical capital and (unconstrained) output are closely related

• Capacity ≈ physical capital

Analysis of the question

• Consider investment in IUU fishing as a normal investment decision

• The decision to invest depends upon (expected) benefits and costs

• Assume, e.g., no non-pecuniary motivation against (or for) illegal fishing

A simple investment model

T

tttt

tT

tt

t KKqpKPV11

c

at t = 0, where total operating costs ct are given by…

KcKcKcKcKcK pt

at

mt

ct

rtt c

where the cost categories are denoted

r normal running costs (fuel, ice, etc.)

c crew costs

m routine maintenance costs (repairs, safety equipment)

a administrative costs (registration, insurance, etc.)

p permit and quota (management) costs

T

tT

Tt

t CKER1

The total expected return (ER) is

where CT is the value of the capacity at time T

RCKCT

tT

Tt

t 1

0

Taking account of the inherent riskiness of investing in fishing,the value of fishing capacity is given by ER less a risk premium R

• C0 is equivalent to the willingness to pay (WTP) for an investment in capacity K

• In a perfect market at equilibrium, C0 will be the (purchase) cost of capacity K

• For those already in the fishery, C0 is the opportunity cost of capacity K

Benefits and costs of IUU fishing

• high-value species, therefore high revenues if there is access to markets?

• running costs: fuel, ice, etc., at normal prices?

• crew costs: mostly low cost labour?

• maintenance: lower (weak flag requirements)?

• administrative costs: lower (weak flag requirements)?

• management costs: zero?

Benefits and costs of IUU fishing

• Revenues: the same or higher than in a legal fishery?

• Operating costs: the same or lower than in a legal fishery?

• Assume the end value of capacity is independent of its mode of use

• Difference in WTP for legal and IUU capacity depends on costly enforcement events…

• …an “excess risk premium” RE

ELI RCC 00

• Expected returns from IUU fishing are only lower than in a similar legal fishery if RE is high

• If expected returns are high, WTP for capacity is high

• Unless RE is high, IUU investors’ WTP for capacity will match normal market prices…

• …availability of “cheap” capacity is not necessary for investments in IUU fishing

C0

K

SN

SS 1

SS 2

0 K1 K2

Costof

capacity

Quantity of capacity

DN

DS

• Secondhand capacity prices are not determined by demand from IUU investors (why?)

• Demand for capacity by IUU investors is price inelastic

• Availability of cheap capacity has only marginal impact on total IUU capacity…

• … but delivers a “windfall gain” to IUU operators

IUU capacity demand and supply: scenario 1

C0

K

SN

SS 1

SS 2

0 K1 K2

Costof

capacity

Quantity of capacity

DS

• Secondhand capacity prices might be determined (in part) by demand from IUU investors

• Demand for capacity by IUU investors is price elastic

• Availability of cheap capacity has a significant impact on total IUU capacity…

• … and so is a key “driver” of IUU fishing

IUU capacity demand and supply: scenario 2

Conclusions

• Available evidence suggests that IUU fishing is profitable

• A “spillover” effect from overcapacity in regulated fisheries is unlikely

• Key to reducing profitability of IUU fishing is increased likelihood of costly enforcement events and/or denial of access to markets

• Only then would “cheap” capacity be a significant driver of IUU fishing