The Economics of Illegal Fishing Incentives for Investment in IUU Fishing Capacity Aaron Hatcher University of Portsmouth, UK

Is IUU fishing likely to be driven by a spillover of excess 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 at t = 0, where total operating costs c t are given by…

where the cost categories are denoted r normal running costs (fuel, ice, etc.) ccrew costs mroutine maintenance costs (repairs, safety equipment) aadministrative costs (registration, insurance, etc.) ppermit and quota (management) costs

The total expected return (ER) is where C T is the value of the capacity at time T

Taking account of the inherent riskiness of investing in fishing, the value of fishing capacity is given by ER less a risk premium R C 0 is equivalent to the willingness to pay (WTP) for an investment in capacity K In a perfect market at equilibrium, C 0 will be the (purchase) cost of capacity K For those already in the fishery, C 0 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 R E

Expected returns from IUU fishing are only lower than in a similar legal fishery if R E is high If expected returns are high, WTP for capacity is high Unless R E is high, IUU investors WTP for capacity will match normal market prices… …availability of cheap capacity is not necessary for investments in IUU fishing

C0C0 K SNSN S S 1 S S 2 0 K1K1 K2K2 Cost of capacity Quantity of capacity DNDN DSDS

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

C0C0 K SNSN S S 1 S S 2 0 K1K1 K2K2 Cost of capacity Quantity of capacity DSDS

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