AN APPRAISAL OF THE OPTIONS FOR THE ALLOCATION OF FISHING OPPORTUNITIES IN SCOTLAND

2 Options Analysis

2.1. In this section the various options for allocating fishing opportunities are examined, assessed and evaluated. This options analysis is undertaken within the context set out by the Terms of Reference ( TOR) for the project. According to the TOR, the aim of the Scottish Government is to achieve both economic efficiency and community cohesion.

2.2. The objective of economic efficiency alone strongly suggests the option of allocating fishing opportunities on the basis of ITQs, while the objective of community cohesion alone could be pursued by returning to a non-rights based management system - effectively abandoning the existing FQA system. Both of these options are outlined as diametrically opposed systems of fisheries management.

2.3. The third option of trying to achieve both economic efficiency and community cohesion through reforming the existing FQA system is then explored. A number of specific proposals for reform within this third option are then assessed using a variety of quantitative analytical techniques. Some recommendations are then made on the basis of this analysis. A fourth option is simply to maintain the FQA system as it is - a do nothing option in other words.

2.4. A summary of recommendations is then provided.

Terms of Reference ( TOR)

2.5 The Concordat provides Scotland with the prospect of engineering quota allocation policy to fit with the national reality and cross cutting policy. As already noted the TOR for this study clearly sets out the Scottish Government's aim of 'sustainable economic growth through a more productive and efficient fishing sector which supports solidarity and cohesion in Scottish communities'.

2.6. Can economic efficiency be reconciled with community solidarity and cohesion? In short, is it possible for a single quota allocation option to achieve both objectives? At one level the answer is no.

2.7. Maximizing economic efficiency means letting market forces determine the size and shape of the Scottish fishing industry in the future. The likely consequence would be a more profitable but smaller fleet concentrated in a few ports and owned by a small group of companies. This is one option.

2.8. While the Scottish Government clearly wants to see a profitable and efficient fleet, it does not appear to be inclined to allow unfettered market forces determine the future of the industry. Indeed, in the invitation to tender, it is stated that 'it will not be acceptable to Ministers for the wholesale consolidation of fishing activity into a small handful of ports and the benefits of Scottish fisheries to be captured entirely by a lucky few.'

2.9. This stated Government position confirms the importance of community solidarity and cohesion as objectives for the Scottish Government. To achieve this objective strongly suggests replacing the current FQA system with a quota management approach that explicitly favours social objectives. This is a second option.

2.10. Instead of a stark choice between economic efficiency and social cohesion, an alternative option of trying to achieve some aspects of both through reforming the existing FQA system suggests itself. This is a third option.

2.11. The fourth option is to maintain the status quo and continue to operate the FQA system without any changes.

Approach

2.12. Throughout the world there are a large variety of fisheries management schemes and in a number of countries there are different approaches for individual fleet segments in recognition of the reality that given the nature of the different fisheries one-size-does-not-fit-all. Given the strong differences in the character of the individual Scottish fishery segments, such an approach is considered appropriate for Scotland. What may be appropriate for the Scottish pelagic quota, for example, may not be applicable to the demersal and nephrops fisheries.

2.13. At the same time, whatever today may be possible in the demersal sector could very well change in the medium to long term, especially if there is the hoped for recovery in the status of all stocks to maximum sustainable yield ( MSY). In considering the options for the future, fishery managers and stakeholders therefore need to remain pragmatic and flexible.

2.14. In light of the different (and potentially conflicting) aims of the Scottish Government, this options analysis reviews a number of quota management options under the following four option headings

• Introduce ITQs. Maximization of economic efficiency through the introduction of a system of ITQs
• Return to a non-rights based system. Ensuring community solidarity and cohesion through an abandonment of the FQA system and returning to a non-rights based quota management system.
• Reform the FQA system. Attempting to reconcile the two conflicting aims of economic efficiency and social cohesion by reforming the existing FQA system.
• Maintain the Status Quo. To continue to operate the existing FQA system without making any changes.

2.15. These four option headings are cross-sectorial in that each covers the three main fishing sectors of pelagic, white fish and nephrops. It goes without saying that each fishing sector is quite different and has its unique characteristics. Notwithstanding this, all three sectors operate under the same FQA system at the present time and, in looking at proposals for future changes to this system, all three sectors are considered together. Where there are sectorial differences these are however highlighted and discussed.

Introduction of ITQs

2.16. The introduction of ITQs in fisheries around the world has almost always been associated with a considerable improvement in economic efficiency and profitability. ^[1] If economic efficiency and profit maximization are the main objectives of the Scottish Government then the obvious option would be to change the current FQA system from what is a de facto ITQ scheme into a formal de jure ITQ scheme. This would bring a large number of benefits as well as presenting a clear signal that there is a new approach to fisheries management.

2.17. An ITQ scheme would be able to confirm the property right characteristics thus reducing uncertainty and potentially lowering the risk for any new investments. An ITQ system established on the basis of the New Zealand one, for example, would provide quota owners with an environment where they could maximise profits, use their quota holdings as security for funding new investments and freely buy and sell quota without any restriction. While the existing FQA system does confer some of the advantages of an ITQ system, in terms of the perceived property rights of FQAs, a move to ITQs would put beyond any doubt the actual and enduring legal title to quota assets.

2.18. The aim would be that over time the Scottish fleet would become the optimum size to generate maximum profitability from the available resource. The New Zealand model is probably most applicable to the Scottish pelagic sector given its small size and simple structure - the pelagic sector only consists of four fisheries prosecuted by 24 pelagic trawlers. A system based on the Danish model, which covers the complexity of the Danish white fish and shellfish industry, is therefore probably more suitable to the Scottish white fish and nephrops sectors.

2.19. Having said that, there is a fundamental and important difference between the two models. In New Zealand there is a legal title to fish quota without time limit, whereas in Denmark the system is time limited in that the Danish State has the right to change the quota management system subject to giving eight years notice. This so called quota retrieval model, which allows the rights to be revoked subject to Government giving eight years notice, is a significant departure from the classic ITQ model.

2.20. Given that legal title is an essential feature of the classic ITQ model, advocates of this model would argue that such a time limit (however unlikely it may be deemed that the Government would actually fundamentally alter the successful Danish system) acts as a disincentive to long-term investment decisions. Supporters, however, argue that the Danish system offers most of the advantages of ITQs but keeps open the possibility of policy change. In the New Zealand model the Government has no basis in law for interfering with the legally held quotas of individuals who hold legal title to their assets.

2.21. In this context it is interesting to recall that the Scottish Government has previously considered the possibility of providing security for FQA holders for a seven-year rolling period. ^[2] This proposal, known as stewardship rights, would have provided a much greater degree of security to quota holders than exists currently but would still not have provided the legal title to quota assets that is conferred by an ITQ system. This proposal would, in short, have provided a degree of security for FQA holders not dissimilar to that currently enjoyed by Danish fishermen.

2.22. The introduction of an ITQ based model for managing fisheries has seen the profitability of the fishing fleet increase considerably in, for example, New Zealand, Iceland, Denmark, the Peruvian & Chilean anchovy fishery and the Alaskan halibut fishery. It is therefore expected that fisheries management based on an ITQ model would also optimise profitability of the catching sector in Scotland. A further advantage, which has sometimes not been fully recognised, is the benefit that would accrue to Government.

2.23. A more profitable fleet would yield greater tax revenue than is raised under the current system. Insofar as the Scottish Government is concerned, the introduction of an ITQ system would also substantially reduce the administrative costs of managing quotas. Indeed it could be argued that, in return for securing the legal title of fish quotas at no cost ( FQAs were, of course, allocated for free in 1999), the industry should be prepared to cover all fishery management costs related to administration, enforcement and provision of scientific advice.

2.24. This is exactly the trade off which occurred in New Zealand where fishing companies were given high value quota rights for free on the condition that Government had no ongoing costs associated with fisheries management. Insofar as Scotland is concerned it is understood that the annual cost to the public purse of fisheries is currently about £25 million.

2.25. Another way of achieving this would be for Government to charge a royalty or tax on quota holders. This is done in Iceland where a resource rent of 9.5% is levied. Although the introduction of additional taxation (which is what a resource rent would effectively be) is a power that is not currently available to the Scottish Government, the situation after the 2014 Independence Referendum could be different.

2.26. Such tax raising powers would be available in an independent Scotland and might well be available in any devo max constitutional settlement. A case can be made that tax revenues could be used to offset social costs that might arise as a result of fisheries consolidation under an ITQ system. In any case the very considerable financial advantages of resource rent should not be ignored/discounted.

2.27. In summary, the introduction of an ITQ system would result in a more profitable and efficient fishing industry, while at the same time providing an opportunity for the Scottish Government to either raise an additional tax or substantially reduce its annual expenditure on fisheries. In short, it could be a win for both the private and public sectors.

2.28. It is anticipated, however, that the introduction of ITQs would give rise to a number of comments drawing attention to the inequity of privatizing a public resource, the limited number of vessels that are in the fishery, reduced employment opportunities, the disappearance of the fishing industry from many traditional Scottish fishing communities and the potential for ownership of Scottish quota by non-Scottish interests.

2.29. On the basis of the experience in other countries (including all of those fisheries referred to above which have improved their profitability as a result of introducing ITQs), an ITQ system without safeguards to reduce the potential perceived negative impacts would inevitably result in Scottish fish quotas being owned by a smaller number of fishermen and/or corporate bodies. Accordingly, it is unlikely that this option would be favoured by a Fisheries Minister who, as has been noted, is on record as stating that 'it will not be acceptable ….for the wholesale consolidation of fishing activity into a small handful of ports and the benefits of Scottish fisheries to be captured entirely by a lucky few.'

2.30. Although the introduction of an unfettered ITQ system may be politically unlikely at the moment, it is important to realise the economic advantages to both the private and public sector that would accrue from the introduction of ITQs into the Scottish fishery. For this reason and for the purposes of having the ITQ option available as a template against which to compare and evaluate other options, it is recommended that the ITQ system remains an option for the Scottish Government to consider.

Return to a non-rights based system

2.31. If the objectives of the Scottish Government are to maximize employment, maintain community solidarity and retain social cohesion within all of Scotland's traditional fishing villages and fishing communities then a radically different approach is needed. While social cohesion is of course determined by many more factors than fishing activity, this does play a very important role in fishing communities. The FQA system, which has evolved into a de facto ITQ system, could be abandoned and quotas instead allocated by the Scottish Government on whichever social and community criteria are considered appropriate. In other words, fisheries management in Scotland would return to a non-rights based system.

2.32. This option is the antithesis of the ITQ option. It would remove the sense of ownership and stewardship which FQA holders believe they have under the current system. The Scottish Government would instead assume ownership and stewardship rights. Indeed, abandonment of the FQA system would reverse the trend towards Rights Based Management ( RBM) that has characterised the development of the FQA system over the past fifteen years or so. In this way the option to abandon the FQA system can be seen as being as radical and fundamental as the option to introduce ITQs.

2.33. The vesting of ownership and stewardship in the hands of Government would return the fishing industry to a situation currently 'enjoyed' by the non-sector and 10mu group where these two groups of vessels, not in membership of a PO, are allocated monthly quotas by Marine Scotland. In contrast, under the present FQA system, each PO is able to manage its sectorial quota allocation in whichever manner best suits its membership.

2.34. The system is dynamic, to some extent regionally based and is capable of meeting the very different needs of the huge variety and diversity of fishing vessels in membership of Scottish POs. Some vessels fish to their own annual quota, others fish to monthly limits while still others work a pool system. The PO system not only allows but also successfully manages this diversity.

2.35. Abandonment of the FQA system would also remove one of the main raison d'etres for POs. Indeed, with the effective removal of market support under the Common Market Organisation, the only role that POs now have is managing their members' quotas. As a result, abandonment of the FQA system would probably result in the disappearance of most of the Scottish POs. Possibly the only POs which would have any reason to continue (in a post market support and post FQA situation) would be those organisations which have invested in fish processing activities - namely the SFO and the Shetland PO, plus Lunar and Klondyke.

2.36. If Marine Scotland were to manage all fisheries on the same basis as the non-sector and the 10mu fleet then the amount of administration that would have to be undertaken by Marine Scotland in order to manage this system would increase considerably. However, by abandoning the FQA system and thereby assuming ownership and stewardship rights, the Scottish Government does not however necessarily have to undertake management of the system itself. Quota allocations could still be awarded to new quota management groups or well defined community groups.

2.37. Globally, group-allocated catch shares are common when the goal is to promote or benefit a specified group of participants. Reflecting the issues in forming functioning groups, such quotas have generally been implemented where one or more of the following characteristics exist: discrete fishing units with strong social bonds, common interests and values; ability of group to monitor and enforce rules; or mutually agreed upon laws, norms and methods for functioning as a group.

2.38. Such community quotas should not be confused with the community quotas operated by certain POs such as the Shetland PO. These community quotas have been created by POs purchasing FQAs for a specific communal purpose. As such they are a direct consequence of the FQA system. The concept of a community quota within the context of an abandonment of the FQA system is quite different. Under these circumstances, a yet to be defined group would receive an annual quota allocation from Government. This new group would then have to manage the quota.

2.39. Such a system raises more questions than answers. What would constitute a community group to whom a quota would be allocated? Would such a group have exclusive or inclusive membership criteria? On what basis would a quota allocation be made to such groups?

2.40. With regard to which kind of community groups might be allocated fish quotas to manage, there are perhaps three possibilities. In the first place fishermen's community groups, possibly bearing some similarity to the existing regional PO structure, might be used. In the second place, quotas could perhaps be allocated to as yet undefined wider community groupings. Finally allocating quotas to the recently formed Inshore Fisheries Groups ( IFGs) could be a third possibility.

2.41. In all cases the Scottish Government would have to justify its allocation criteria to each grouping. This might either be on the basis of historical catches or else to achieve a stated policy objective such as economic regeneration of some fishing communities in certain parts of Scotland.

2.42. There are some examples of quota being allocated to community groups around the world. In the north east of the United States, for example, groups of fishermen using the same gear in the same area join together, agree to implement management regulations and are then allocated a quota that is then divided between members of the group. Although described as community quotas, the group is more sectorial (comprising like-minded individuals) rather than geographical as such.

2.43. There is the question as to how far a community group represents all or part of the existing fishing sector that currently holds the FQAs. An allied issue is how far fish quotas could be allocated to aspirant groups without any fishing track record. The competence of such management groups to allocate and regulate fishing opportunities between individual member vessels would need to be demonstrated in advance. Clearly the allocation of quotas in a post FQA world would be difficult to say the least.

2.44. With regard to community fishery initiatives, there are alternatives to the quota system as such. The possibility of TURFs being used to regulate access (see Annex 3) is very much a RBM approach while the alternative of Regulating Orders (such as the Shetland Regulating Order) are much less RBM based.

2.45. A logical consequence of Government allocation of fish quotas to different groups based on social and community criteria would be to maintain overcapacity. One of the main advantages of RBM is that overcapacity is taken out of the system by the private sector in order optimise efficiency and profitability. Without this driver, overcapacity would most likely be maintained in the system.

2.46. While this would ensure the employment of large numbers of fishermen (in the short term at least) many of the fishing businesses would be, at best, not as profitable as their European competitors and, at worst, would be loss making. The result could be the preservation of Scotland's traditional fishing communities but at a significant economic cost. Many fishing businesses would probably operate under sub-optimal conditions for a time.

2.47. This strategy is unlikely to be successful in the long term without the need for some ongoing subsidy. In this way, a return to a non-rights based management system would not create the circumstances for the fishing industry to thrive economically.

2.48. Even if the Scottish Government were inclined to pursue such policies, the recent outcome of the Judicial Review has made it clear that FQAs are regarded as possessions under the European Convention of Human Rights. ^[3] It has therefore been argued that, even though Government has the right to remove such possessions, there could be a strong possibility of multiple compensation claims being made to the European Convention on Human Rights. ^[4] The issue of financial compensation claims being pursued through the Courts must therefore be acknowledged as a possibility. In this way the abandonment of the FQA system could prove extremely costly to the Scottish Government.

2.49. A somewhat ignored and forgotten aspect of RBM is that the introduction of property rights actually creates wealth through the creation of property rights which rapidly acquire a value. While FQAs lack the indisputable legal title that is granted by an ITQ system, there is no doubt that most fishermen now regard FQAs as tradeable assets. A considerable number of FQA sales take place each year and FQA renting is also now a common feature of the FQA system. An example of the substantial wealth that has been created by the FQA system was the high profile sale of pelagic FQAs from a Scottish company to owners in Northern Ireland for over £80 million in 2012.

2.50. In 2010 it was estimated that the UK fish quota had the potential to produce resource rents in the order of £573 million per annum. At a discount rate of 9% the capitalised value of the UK fish quota would be about £6.4 billion. ^[5] Whether or not this rather theoretical estimate is accurate or not it is undeniable that the FQAs have, by virtue of becoming something of a de facto ITQ system, created huge value within the industry.

2.51. It is, however, possible to make a fairly accurate estimate of the current capital value of Scottish quotas. Taking the 2013 quota allocations derived from Scottish FQAs, and then applying the current price being paid to buy quota, it is estimated that the total current capital value of Scottish fish quota is around £2.5 billion.

2.52. The important point in this context is that the policy option of abandoning the FQA system would result in the current estimated value of Scotland's quota assets (around £2.5 billion) being lost. A comparison might be a Government policy change that would wipe £2.5 billion of the value of a publically quoted company. There would need to be very compelling and powerful reasons for such a policy change. In our view there are no such compelling reasons for returning to a non-rights based system.

2.53. In summary, the abandonment of the FQA system would create a whole range of new problems in terms of quota allocation, would risk compromising the economic viability of the fleet, could be subject to substantial compensation claims in the courts and would wipe upwards of £2.5 billion (at current values) of the value of the Scottish fishing industry.

2.54. Notwithstanding all of this, it has been decided to retain the option of abandoning FQAs in order to have a template against which to measure other alternatives.

2.55. Having therefore discounted both the ITQ and FQA abandonment options as viable policy options, is it possible to reform the FQA system in order to promote greater economic efficiency while at the same time maintaining fishing communities? The next section examines this option.

Reform of the FQA system

2.56. Notwithstanding the many criticisms of the FQA system, it has actually served the Scottish fishing industry well since it was introduced in 1999. The early devolution of fisheries management responsibilities to POs in 1984, and the subsequent introduction of FQAs in 1999, has created a rather unique fisheries management system. There is currently a dynamic market place for the trading of FQAs under the overall regulation and supervision of POs.

2.57. In many ways the introduction of the FQA system has been largely industry led with Fisheries Departments responding to proposals made by the industry. It has not been the case that quota trading has in any way been forced on an unwilling industry. The current FQA system has to some considerable extent been shaped by the fishing industry working together with Government over the past two and a half decades.

2.58. It would therefore seem reasonable to conclude that the FQA system is operating with some degree of efficiency and broadly commands the support of most fishermen. As already noted, while the existing FQA system is clearly not an ITQ system as such, there is now a substantial element of quota trading (buying, selling and leasing) taking place.

2.59. The role of POs is crucial here. It is not possible for an individual or company to buy, sell or rent quota units unless in membership of a PO. Once in membership of a PO, an individual fisherman, vessel owner or company can however buy, sell and lease quota units.

2.60. The administrative system of legal agreements (which remove FQAs from licences until formally reconciled at a later date), regular reconciliation exercises and domestic swaps between POs all enable quota trading to take place fairly easily. Although there is no legal title to a property right, this has not prevented fishing vessel owners and other quota holders making very considerable investments in an administrative system that confers the advantages of an ITQ system by another name.

2.61. While there may be an interesting academic debate as to how far the current FQA system fits the RBM model, in reality quota trading is now recognised as an essential and important component of the modern Scottish fishing industry.

2.62. At the same time, notwithstanding the considerable rationalisation and consolidation that has taken place, the Scottish fishing industry remains located in a large number of fishing communities throughout Scotland. The FQA system has not resulted in social dislocation and the disappearance of the fishing industry from around the Scottish coast.

2.63. Although the commercial fishing industry has indeed disappeared from a few communities, in most cases this has not happened and fishing continues to be an important activity, albeit in a very different form and structure to that which existed in the past. It is, however, the case that much of the fishing activity which still takes place around the Scottish coast is either based on the 10mu sector or that part of the Scottish fleet which fishes non-quota species.

2.64. It is undeniable, however, that pelagic and white fish FQAs are now held in fewer hands and in fewer fishing communities than before. While the holdings of pelagic quotas have been concentrated for some considerable time, the holding of white fish quotas has become more concentrated since 1999.

2.65. In 1999 when FQAs were introduced, pelagic quotas were already held by a limited number of owners in a limited number of fishing communities. The current situation continues to reflect that. With regard to the white fish sector, the concentration of white fish quota into fewer hands and fewer places is, however, probably as much a consequence of the dramatic reduction in white fish quotas since 1999 rather than a result of the FQA system as such.

2.66. In the decade after FQAs were introduced in 1999, the quotas of most staple white fish species were reduced considerably. The decline in cod and haddock were particularly marked. By 2009 the UK haddock quota had fallen to only 26,687 tons - only 46.8% of its level in 1999. The situation regarding cod was even more dramatic with the UK quota having fallen to only 11,217 tons in 2009 - only 19.9% of its level ten years previously. While now improving, most white fish quotas are still well below 1999 levels.

2.67. With substantial reductions in white fish quotas since 1999, the fleet would have contracted in size regardless of the management system in place. To that extent it is somewhat misleading to explain the contraction in fleet size, and associated concentration in quota holdings, as simply a consequence of the FQA system.

2.68. The FQA system has enabled the economic advantages of quota trading to take place while at the same time managing to preserve the basic community structure of the Scottish fishing industry. To that extent, the FQA system has been a success in terms of delivering both economic efficiency and maintaining fishing communities.

2.69. It would therefore seem prudent not to abandon nor radically change the system. Instead, it is more appropriate to examine the option of how the FQA system might be modified in order to promote greater economic efficiency while maintaining fishing communities.

2.70. This is examined within the context of three subsections, dealing in turn with the questions of economic efficiency the issue of maintaining fishing communities followed by a general section dealing with other aspects of the FQA system.

Promote greater economic efficiency

2.71. There are a number of possible changes to FQAs that would promote greater economic efficiency, by further embedding the rights based nature of the allocation system, without actually progressing to a full ITQ system as such.

Remove the link between the licence and the FQA and record real time FQA transfers.

2.72. There is a strong case to abandon the condition that FQAs must be tied to licences.

2.73. In 1999 it was agreed that FQAs should be linked to active vessel licences in order to prevent the development of a market in FQAs. At best this was a naive hope; at worst it was muddled thinking. Before long, an active trade in FQAs had developed. While quota units must continue to be attached to vessel licences (insofar as all four Fisheries Administrations are concerned), this bureaucratic restriction is overcome by the buyers and sellers signing a legal agreement which commits both parties and their respective POs to transferring the quota units concerned.

2.74. As far as the industry is concerned, quota units can now be readily traded by utilizing these legal agreements that have become standard. In those cases where the sellers and buyers belong to different POs, an annual quota swap is required in order to give effect to legal agreement and actually transfer the quota units purchased.

2.75. Fisheries Departments still maintain the link between FQAs and active licences but have recognized the reality of quota trading insofar as they undertake regular reconciliation exercises so that quota units can be attributed to new licence holders (the buyer of quota units) rather than the original licence holder (the seller of quota units). This removes the need for quota swaps, underpinned by legal agreements, to continue indefinitely. The last reconciliation exercise took place in 2010.

2.76. Since these reconciliation exercises in effect confirm the transfer of quota units (which have been sold) between licences there is a powerful argument that there should be real time transfers of quota units between licences whenever quota units are purchased. To some extent the need for legal agreements, the consequent quota swaps and the delay before a reconciliation exercise confirms that the quota sale has indeed taken place are the last remaining bureaucratic restrictions within a system that has otherwise allowed a fairly sophisticated quota trading market to develop.

2.77. If it is accepted that FQAs are traded between licence holders is there then any need to link FQAs to licences at all? Since this linkage was initially an attempt to prevent quota trading, the rationale for the linkage has now disappeared. FQAs are currently a tradeable commodity and the FQA system should not maintain complicated rules that were originally intended to limit quota trading but which are now clearly ineffective and pointless.

Public Record of FQA Holders

2.78. On 19 December 2013, The Fixed Quota Allocation Register ( https://www.fqaregister.service.gov.uk) was launched by all four Fisheries Departments. This is a very user-friendly database that shows to which licence or dummy vessel (see 3.1.4) the 8 million plus FQA's in circulation across the UK are attached. However, this only shows the licences to which FQA's are attached. In those cases where quota units have been bought or sold (and the transfer of FQAs secured through the standard legal agreement), these transactions are not be reflected in the record of FQA holders until such time as a future reconciliation exercise takes place.

2.79. In other words, commendable as the public record of FQA holders is in terms of transparency, it only goes so far. It only shows which licence the FQAs are attached to and not the current owner of the FQAs if a recent quota trade has taken place.

2.80. The public record of FQA holders should show who actually holds the FQAs, not which licence the FQA is attached to. This can only be done if real time quota transfers are recorded.

An Online Trading Platform

2.81. The market in FQAs will operate most efficiently if it is truly comparative and transparent. If the link between the FQA holder and the licence is broken and real time FQA transfers are publically recorded, then there would be an opportunity for an online trading platform to be set up. This would ensure complete transparency in quota trading - all buyers, sellers, lessors and leasees would be identified, as would the prices paid to buy and lease FQAs.

2.82. At the present time the market in FQAs is shrouded in some mystery. The link between FQA holder and licence prevents transparency, the role of POs in making swaps adds to the confusion (only the PO executives, as a rule, know the reasons behind the annual swaps) and there is no public knowledge of prices paid. In other words, the current FQA market is not efficient, competitive or transparent.

2.83. This probably inflates the prices paid to buy and lease FQAs. Indeed, it is envisaged that the establishment of an online trading platform of this nature will apply a welcome downward pressure on lease prices.

2.84. The establishment of an online trading platform, or at the very least, an online public record of FQA sales and prices, would therefore greatly improve the operation of the FQA market. It would make sense to add the public record of FQA sales and prices on to the public record of who the FQA holders are (as proposed below). An online trading platform, on the other hand, is probably best established by the private sector - an FQA e-bay perhaps?

Remove Dummy Licences

2.85. In order to enable certain holders of FQAs who do not hold an active licence to operate within the FQA system, POs are allowed to have up to two dummy licences in membership. These dummy licences are the mechanism for POs to hold their own FQAs (as in the case of the community held quotas held by some POs), for fish selling companies to hold quota for vessels operating through their offices and for individuals who own FQAs but not a licence.

2.86. If the link between the licence and FQAs was to be removed, with all quota trading documented in real time and all FQA holders recorded on a public register, then the need for having the somewhat artificial construct of dummy licences is removed.

Fully integrate the 10mu sector into the FQA system

2.87. The principal exception to the FQA system is the allocation of a pool of quota to vessels in the 10mu sector, which is managed by Government on the basis of monthly quotas. The Scottish 10mu sector is not as large (in relation to the over 10 metre fleet) as it is in England. Moreover, within Scotland the 10mu sector principally fishes for non-quota shellfish species.

2.88. With regard to quota species, the fishery of most importance to the 10mu fleet is nephrops.

2.89. There is also a relatively important 10mu sector fishery for Western mackerel (around 300 vessels catching between 400 and 500 tons per annum) and, to a much lesser extent cod.

2.90. The 10mu sector is often a starting point for young fishermen acquiring their first vessel. Vessels operating in this sector are, however, denied the benefits of the FQA system in terms of quota trading because individual track records were never attributed this sector and they continued to fish out of the so called 10mu pool.

2.91. There may have been at one time good reasons to create a 10mu pool outwith the FQA system but it is increasingly seen as rather arbitrary and unfair that vessels of 10 metres and under are denied the undoubted advantages of quota trading that are available to all vessels over 10 metres. The integration of the 10mu fleet into the FQA system would probably result in some consolidation of that part of the fleet, although the most likely outcome will be the improved profitability of this sector.

2.92. It is therefore suggested that all vessels in the 10mu sector should be allocated an FQA based on their individual track record, which would be calculated from the most recent three representative years' fishing. All those vessels in the 10mu sector would then be given the opportunity to join the FQA system and become full members of POs. This would not be obligatory but would be an option open to all 10mu vessels.

2.93. Some of the proposals made under the following section (Maintain Fishing Communities) would provide additional quota to the 10mu sector (thereby improving their individual FQA allocations) and so encouraging as many as possible to opt into the FQA system. Indeed, the option of an additional allocation to the 10mu sector (as outlined below) could be used as a policy tool to encourage the integration of this sector into the FQA system. This could be achieved by allocating a share of the additional quota only to those 10mu vessels prepared to fully integrate into the FQA system.

2.94. The possibility of encouraging integration of the 10mu sector into the FQA system by means of additional FQAs is feasible within Scotland given the relative small size of the 10mu sector in relation to the FQA sector as a whole. This is probably not the case in England where the 10mu sector is comparatively large in relation to the FQA sector as a whole. By integrating the 10mu sector into the FQA system, a large number of fishermen, in a large number of small fishing communities, would become FQA holders thereby reversing the trend towards FQAs being concentrated into fewer hands and fewer ports.

2.95. The possibility of integrating the 10mu fleet into the FQA system has already been considered in England ^[6] . It was not however possible to achieve consensus on such a proposal, mainly as a result of size of the 10mu sector in England allied to the fact that most had very poor track record fishing performances. In Scotland, such a proposal is much more likely to command wide support given that the 10mu fleet is much smaller and given the various options for providing additional fish to the 10mu sector as outlined earlier.

Maintain Fishing Communities

2.96. There are a number of possible changes that would ensure that the improved efficiency of the FQA system outlined above does not take place at the expense of community cohesion and the maintenance of fishing communities. Indeed, these changes go even further in that they would, if implemented, result in a substantial increase the number of FQA holders.

Changing FQA allocations when sold

2.97. One of the main arguments against the FQA system is that those individuals who had the good fortune to have been fishermen when the FQA system was introduced in 1999 were given valuable assets for free. Even though there is no legal title, it is clear that substantial sums have been paid for FQAs since this time. Many fishermen have subsequently invested heavily in acquiring additional quota, but the fact remains that what is regarded as a public resource has provided substantial private profit for those who have sold their FQAs and a potential substantial private profit for those fishermen yet to sell their FQAs.

2.98. In order to address this issue it is suggested that the Scottish Government retain a small share of a FQA whenever it is sold. In this way it can be argued that society at large is recouping some small share of the FQA value. This share (possibly around 5% of the FQA) could then be used by the Scottish Government for a variety of purposes including topping up the quota allocation made available to the 10mu sector and/or a scheme to help new entrants acquire FQAs - something that might be coordinated by the various POs.

2.99. Some POs have already purchased FQAs and have used the resulting quota allocations to create community quota pools. These could be used as a repository for quota for new entrants to the industry who do not yet have the financial resources to buy their own FQA share. It is understood that the Shetland PO operated such a new entrants' scheme in the late 1990s and is currently investigating how this can best be re-established.

2.100. This option would provide additional quota for reallocation which would be taken from those electing to sell their assets and leave the industry. In many ways this is a more rational option than "top slicing" an entire sector (an alternative option which is fully outlined below), which in effect means taking fish from all those fishermen who are continuing to fish and can therefore be seen as impinging on the economic opportunity of all those who have elected to remain in the industry and not sell their FQAs.

2.101. By making an additional allocation in this targeted way, all additional fish comes from those who are making private profit out of what is regarded as a public resource. In some ways such a policy can be regarded as a non-financial tax on those who sell the assets which were awarded to them for free.

FQAs can only be sold as segments

2.102. One of the great fears is that the operation of the FQA system will inevitably result in fewer and fewer individuals and companies holding more and more FQAs. As already noted, this has been the case for some time in respect of pelagic quotas and is now happening in the white fish sector. The process has also occurred to some extent in the nephrops fleet although quota pressures have been much less in this sector.

2.103. The excessive concentration of FQAs in the hand of a few is seen as socially divisive within many fishing communities.

2.104. It is also seen as somewhat risky in that these large quota allocations may at some stage be sold on to non-Scottish companies. As already noted, this danger was recently highlighted by the sale of Scottish pelagic FQAs to a fishing company in Northern Ireland.

2.105. It is increasingly the case that young fishermen cannot aspire to become holders of FQAs in their own right. This reflects the fact that FQAs are now very valuable commodities. It also reflects the fact that FQAs are generally sold as a single unit, the total value of which is beyond the means of most young fishermen. Established fishery groupings or companies generally purchase these FQAs, thereby further exacerbating the problem of excessive concentration of FQA holdings.

2.106. The Scottish Government cannot artificially reduce the market price of FQAs but it can determine how an FQA is sold. If, for example, an FQA were to be split into 10 or 20 segments of equal size, with no individual or grouping able to buy more than one or two segments, the price of FQA segments could be within the reach of younger fishermen aspiring to acquire FQAs in order to establish their own fishing business. The limitation on how many segments an individual or grouping can buy is arbitrary and could be set at any level but the point of such a limitation is to prevent whole FQAs being bought by the larger operators - as is the case currently.

2.107. If the link between the licence and the FQA were then broken, many fishermen would be able to become holders of small FQAs segments. If the 10mu sector were then integrated within the FQA system, many small vessel owners could aspire to move from the 10mu sector to full membership of a PO by acquiring an additional small FQA segment. Other fishermen, already employed as crew on board larger pelagic and demersal vessels, would be able to rent out their FQA segment until such time as they could aspire, probably in partnership with other FQA segment holders, to accumulate sufficient FQAs in order to acquire and operate their own vessel.

2.108. A system very similar to this operates in the US Pacific halibut fishery. All halibut quotas have to be sold as small discrete segments, thereby enabling a new generation of quota holders to emerge. Excessive concentration of ownership of halibut quota has consequently been avoided.

2.109. The vision behind this particular option is to widen the number of individuals who can become holders of FQAs and thereby prevent the inexorable process of concentration of FQAs in the hands of a small number of holders. Such a scheme could also reinvigorate the fishing industry as a new generation of fishermen could aspire to become holders of FQAs. In other words, the ownership of fish quota would be dispersed rather than concentrated. In the same way as integrating the 10mu sector into the FQA system would reverse the trend towards FQAs being concentrated into fewer hands and ports, so would the segmentation of FQAs encourage a new generation of young fishermen to climb onto the FQA ladder.

Increase allocations to assist the 10mu fleet

2.110. A consultation is currently underway by Marine Scotland that proposes that around 1,000 tons of Western mackerel be taken from the Western mackerel sectorial quota and given to the 10mu sector in order to improve the fishing possibilities for these small vessels. The same principle of re-allocation could be applied to other stocks such as nephrops and cod.

2.111. As already noted, this particular method takes a little from all vessels whereas the proposal to reallocate a portion of FQAs when sold only takes FQAs from those choosing to sell.

2.112. It has been argued that the 10mu sector, which is, to all intents and purposes, a group of vessels outwith the FQA system dependent upon management decisions made by Government, functions well and that a transfer of additional quota from the FQA sector would further improve the operation of this sector. There is no evidence that would support such a contention.

2.113. Fishermen operating in the 10mu sector are unable to plan their annual fishing activity. Every month Government makes the decision as to how much each vessel in the 10mu sector is allowed to catch. This does not lead to economic efficiency.

2.114. By planning their annual fishing pattern, fishermen can land fish when prices are best, can take holidays and arrange vessel repairs and maintenance without losing quota and can generally manage their businesses. The conclusions from the Ramsgate quota pooling trial confirm that this group of 10mu vessels in England have indeed enjoyed all these benefits. They can also better align quota to fishing operations by buying, selling or leasing FQAs. Management of the 10mu sector by Government, outwith the FQA sector, does not enable any of these rational business decisions to take place.

2.115. The 10mu fleet is now the mainstay of most of Scotland's small fishing villages. The objective of maintaining this fleet of small vessels underpins many of the arguments for improving the prospects for the 10mu fleet by providing additional quota from the FQA sector.

2.116. Providing additional quota to the 10mu sector, without improving the management arrangements of this sector, however, is neither rational nor efficient. The economic efficiency of the 10mu sector would be improved by affording these small vessels all the same advantages as those operating in the FQA sector. Integrating the 10mu vessels into the FQA sector would improve the profitability of this sector and thereby enhance the long-term social and economic contribution of this fleet to many small fishing communities.

2.117. Transferring quota from the FQA sector could be the means to assist integration of this very important 10mu fleet into the sector. In this way an additional FQA allocation is perhaps best viewed as a possible policy tool to encourage integration of the 10mu fleet into the FQA sector rather than a stand-alone policy option. To simply allocate additional quota to the 10mu fleet without addressing the inefficiencies of the current management arrangements for this sector is a wasted opportunity.

2.118. The whole issue of moving quota from the FQA sector to the 10mu sector will always be controversial, as it will be seen by many as robbing Peter to pay Paul. It clearly makes no sense to create a problem in one sector to help out another sector. This can only be rational when the sector that gives up quota can afford to lose quota. This is currently the case in respect of the mackerel fishery (although it may not always be the case) but is clearly not currently the case in respect of many white fish fisheries. One option for providing additional white fish quota might be to identity an agreed proportion of any future quota increase as being reserved for an additional allocation to 10mu vessels. In this way Peter is not robbed - instead Peter just gets slightly less of an increase.

2.119. As already noted the robbing Peter to pay Paul problem can also be avoided if the additional quota is taken from FQAs when they are sold as opposed to transferring quota from the FQA sector as a whole.

2.120. There is a danger that there may be a regular call for quota transfer in order to subsidise the many inefficiencies of the current management arrangements for the 10mu sector. As suggested the alternative is to use the opportunity of a one off quota reallocation to secure the integration of the 10mu fleet into the FQA sector.

Concentration Caps on FQA holdings

2.121. Following on from the concerns about excessive concentration of FQAs in the hands of a few individuals or companies, another very simple method of limiting this would be to introduce a cap on what percentage of FQAs any individual or company could hold in their own right or through associated businesses. Such caps have been introduced in Iceland for example where no company can own more than 15% of the cod quota. In contrast, no such caps have been introduced in New Zealand with the result that only three large companies now own most of the ground fish quota.

2.122. The concentration of quota ownership has already progressed further in the pelagic sector than any other sector. The largest fishing company in Scotland, the Lunar Group, already holds 18.7% of the Scottish mackerel quota, 19.1% of the Scottish North Sea herring quota and 16.5% of the Scottish West of Scotland herring quota. The Klondyke fishing company holds almost the same share of the Scottish mackerel and North Sea herring quota and slightly more of the Scottish West of Scotland herring quota.

2.123. One option may be therefore to consider imposing a limit of, say, 20% or 25% on how much Scottish pelagic quota can be held by a single business.

2.124. FQA holdings are not yet so concentrated with regard to demersal stocks. However, even here the Lunar Group already holds around 5% of the Scottish quota of North Sea cod, whiting and saithe and almost 8% of the Scottish quota of North Sea haddock. It may therefore be appropriate to consider imposing a limit of, say, 10% on how much Scottish demersal quota may be held by a single business.

2.125. It has only been possible to ascertain what proportion of quotas are held by the Lunar and Klondyke companies because these two companies operate single company POs and their quota allocations are therefore readily available from the weekly quota uptake sheets issued by Marine Scotland. Neither company is involved in catching nephrops.

2.126. With the publication of the FQA register (updated to reflect real time ownership of licences) it will be possible for public scrutiny of what proportions of quotas are held by which companies/individuals.

2.127. The quotas of those companies specializing in fishing for nephrops are contained within the various overall PO quota allocations. No suggestion can therefore be made at the moment on a possible limit on how much Scottish nephrops quota could be held by a single business.

2.128. It is understood that the Scottish Government has looked at this possibility before and a number of problems were identified including that of how to define a quota holder. The possibility of several companies or operations being set up under a common holding company was one potential problem that was highlighted. Notwithstanding this, it would be a very important message to send out to the industry that concentration of FQA holdings will not be allowed to continue and an upper limit will eventually be set.

Other issues

2.129. This section examines four issues related to the ongoing operation of the FQA system. These are in turn the problem of leasing costs, the possibility of changing track reference periods, the future role of POs and the possible impact of the discard ban on the future of the FQA system.

Leasing Costs

2.130. A shortage of quota means that many fishermen have to rent quota at high cost. It has been pointed out that this is an operating cost that was unknown prior to the introduction of FQAs. In some ways this is the downside to the capital value that is created by RBM systems. These new operating costs are leading, some argue, to a new class of tenant fishermen .

2.131. This is in contrast to the traditional structure of the Scottish fishing industry that, apart from the trawling ports of Aberdeen, Granton and Dundee, was always characterised by fishermen who were also vessel owners. Although the ownership of quota is a new concept, many would argue that a fisherman being both a vessel owner and a quota owner is very much in keeping with the tradition, culture and social mores of Scottish fishing communities.

2.132. Are leasing costs an inevitable consequence of a RBM system such as FQAs? Is it possible to reduce leasing costs by public policy intervention or are leasing costs a normal and indeed welcome consequence of a competitive and transparent free market?

2.133. There are some references to the issue of leasing costs in relation to the halibut and black cod fishery in British Columbia in the literature. ^[7] While leasing costs are probably always unpopular amongst those who lease, this particular academic disagreement over lease costs appears to be somewhat of proxy for a more fundamental philosophical disagreement between those who believe in RBM and those who do not.

2.134. Turning to the situation in Scotland, it has been argued that leasing costs are higher than they might otherwise be because of the holding of FQAs by two groups of non active fishermen - the so called "slipper skippers" and corporate entities such as fish selling companies.

2.135. This is a somewhat confused argument. The main complaint appears to be that the individuals/fish selling companies who are leasing out FQAs are not active fishermen. Why should this be an issue? The cost of leasing quota will be dictated by the normal market forces of supply and demand and should be no different whether or not the lessor is an active fisherman or not.

2.136. The issue of slipper skippers is particularly emotive. There is a view that because slipper skippers no longer go to sea (although most used to be active fishermen) they no longer have a right to be quota holders. Many in the industry have called for the holding of FQAs by slipper skippers to be banned.

2.137. Many would argue that leasing and renting are essential and desirable features of all markets. In the property market, for example, some people buy while others lease. Some move from leasing to buying while others prefer to continue to lease. The market for FQAs is no different. Indeed the market for leasing quota provides valuable flexibility in fisheries management by allowing individuals to acquire additional quota when it is needed and lease out surplus quota when it is not needed.

2.138. Renting can therefore be regarded as a positive feature of the FQA system and should be retained. The suggestion that a particular group of individuals be debarred from holding and renting FQAs because they are no longer active fishermen is not persuasive. The banning of slipper skippers will not result in any reduction in the rental price of quota. Indeed, banning these individuals from holding FQAs may very well exacerbate the trend towards FQAs becoming owned by a smaller and smaller group of individuals who are active fishermen.

2.139. The issue of leasing costs is, however, wider than just the question of slipper skippers . The largest holders of FQAs, outwith active vessel owners, are the fish selling companies. Several of these companies have acquired FQA pools in order to further their business interests as agents for fishing vessels. In some cases these FQAs are used as repositories for quota that will eventually be purchased by fishermen working through their office. In other cases these FQAs are used as a pool of quota that is leased to vessels, again operating through their offices.

2.140. It is argued that these sales offices are driving lease prices up. This may indeed be the case but, if it is, then it is an argument against FQAs being held by a small number of players. It is not an argument to reduce the number of players who can hold FQAs by limiting this to active fishermen.

2.141. In many fisheries around the world there have been restrictions introduced which limit quota holding to active fishermen. In most of these cases this reflects deeply held social and cultural values that only active fishermen should hold quota. Many within the Scottish fishing industry probably share similar views.

2.142. To translate these social and cultural attitudes into public policy is not straightforward, however. How to define an active fisherman, for example? Does he/she need to be on board the vessel at all times and, if so, how to prove this? With the shift patterns most fishermen now work, few fishermen are now at sea at all times.

2.143. What time at sea would then be required - months or weeks? What about illness that may keep some otherwise active fishermen ashore? Is it enough to be a vessel owner as distinct from a full time crew member? If so, what about vessels that are owned, and quotas that are held, by companies as opposed to individuals?

2.144. What about the sons and daughters of fishermen - can they inherit FQAs? Could this FQA inheritance continue for several generations or could it be limited in some way? It is clear that a definition of what constitutes an active fisherman is not easy and raises some very difficult issues.

2.145. The Scottish Government will have to take a view as to whether or not it restricts the holding of FQAs to active fishermen on the basis of social and cultural values. That is a political decision it must take. It is however important to emphasise that there is no evidence that such a decision would lead to a reduction in the cost of leasing.

2.146. It has been argued that if more quota was held by the active fleet there would be a reduced demand for leasing and hence lower lease prices. There is no doubt that lease costs are a function of supply and demand and, to that extent, the more quota available, the lower the cost of leasing will be. However, the cost of leasing is also related to the fact that the more fish quota a fisherman can catch the greater his profit. In this way, even if quota availability increases, lease costs may not necessarily reduce.

2.147. For example, it will be interesting to see if the cost of leasing pelagic quota is reduced as a result of the expected increase in mackerel quota in 2014. The fact of the matter is that active fishermen are as capable of driving up lease costs as other players. In short, the argument that limiting the holding of FQAs to active fisherman (however defined) will somehow reduce lease costs is not persuasive.

2.148. The kernel of the issue here are lease costs and not who is doing the leasing. If the trading of FQAs were made more open and transparent (as outlined below) then it is expected that lease costs would reduce.

2.149. In summary, as with all other markets, the larger the number of players the more competitive the leasing market should be. If holding FQAs is restricted to a limited group - such as active fishermen (however defined) - the easier it will be to "rig" the market and form cartels. It is therefore argued that the best means of reducing the lease price is to maximise the number of FQA holders (as proposed below, for example) and to accept that this may include non-active fishermen and corporate bodies such as fish selling agents. In other words to focus on policy options which encourage greater numbers of fishermen to become FQA holders rather than focusing with the very difficult and complex issue of prohibiting certain groups of society from holding FQAs.

Changing the FQA reference period

2.150. It has been suggested that a re-basing of allocations to take account of catches in a more recent reference period would result in a larger percentage of quotas being made available to vessel licensees, thus reducing the amount of quota that those vessels might have to source in in-year trading.A certain sector of the fleet regularly has to lease quota every year in order to augment their fishing opportunities.

2.151. By recalculating FQAs based on a more recent reference period, these vessels would all receive increased FQAs (based on actual catches) thereby eliminating or reducing their need to lease quotas. These increased FQA units would of course be effectively taken from those FQA holders who did not catch their allocations during this new reference period, choosing instead (for whatever reason) to lease their quotas. In other words there would be winners and losers if the FQA reference period were to be changed.

2.152. The main problem with this option is not surprisingly, the losers. Many FQA holders, who for whatever reason do not fish their allocations, would lose out in such a recalculation of FQA entitlement. The losers will be a large and diverse group. Not only will it include the corporate entities (such as the fish selling companies) that hold, but do not fish, FQAs but it will also include many active fishermen who have bought, in good faith, additional FQAs but may not have been able to fish their entitlement during the new reference period.

2.153. The fact is that a considerable proportion of FQAs have been used for renting - by individuals waiting to get a new boat built, by fish selling offices providing additional fish to boats operating through their offices, by POs operating community quota pools and by individuals who have developed a business based on renting quota allocations. If the FQA reference period were changed then all of these FQA allocations would be lost, as the vessels that rented the FQAs would have caught the fish and thereby have acquired the track record.

2.154. This particular group of losers would be able to argue with some considerable degree of justification that they had invested in additional FQAs in order to improve their economic viability and that the Scottish Government was taking away the result of this investment and giving it to a group of fishermen who had refused to buy FQAs. The losers would also include the community quotas that some POs have built up.

2.155. Some POs purchased these FQAs in order to create a pool of community held quota. As already noted these quota pools are now being used for innovative new entrant schemes in some cases. In the event of FQAs being re-based on a revised reference period, these unique pools of community quota would be lost.

2.156. As already noted, the outcome of the recent Judicial Review has confirmed that FQAs are possessions that cannot simply be taken away without at least the possibility of a legal claim for compensation. ^[8] There could therefore be a huge demand for financial compensation from all those losers who could demonstrate that they had lost FQAs as a result of a change to the reference period.

2.157. Another drawback of such a change is that it would result in FQA holders being unwilling to lease quota as the expectation would be that a further change to the reference period might result in a loss of FQAs if the fish were not caught. FQA holders then make sub optimal decisions to catch their FQAs in order to preserve future rights instead of economically rational decisions to lease quota. In this way the only way a fisherman could augment his catching opportunity would be to buy FQAs - something that not all can afford to do.

2.158. The option of changing the FQA reference period would also create huge uncertainty and would substantially remove the RBM benefits of the current FQA system. Instead of FQAs being tradeable fishing rights, FQAs would simply be a reflection of recent fishing history to secure future fishing opportunity. The catching of quota would become a means of ensuring future FQA allocations as opposed to an economically rational decision in itself. This would run the real risk of diluting the very considerable capital value of Scottish fish quotas - estimated at upwards of £2.5 billion.

2.159. Others have suggested that a rolling reference period, instead of a more recent reference period, should be introduced. This would simply confirm the expectation that future FQA entitlement would depend on maintaining current catches regardless of economic logic. As already noted, such a change would remove the RBM benefits of the FQA system and would forever link future FQA allocations to recent fishing history. A rolling reference period actually existed immediately prior to the fixing of the current three year track record period (of 1994 to 1996) in 1997. One of the main reasons for fixing the track record period was that ghost fishing (the recording of fish landed that were not actually caught) was becoming widespread.

2.160. A rolling reference period would almost certainly increase leasing costs as the decision to lease, as opposed to catching, quota would inevitably result in a reduced track record and thereby a permanent reduction in FQAs. Indeed, the spectre of permanently loosing FQAs would probably result in the end of the FQA leasing market as such.

2.161. The fact that current FQAs are based on a reference period of almost 20 years ago should not, however, be seen as a problem but as a reflection of how well the FQA system has worked. The quota trading (purchase and leasing) which has taken place since 1999, as a result of the opportunities afforded by the FQA system, has enabled the Scottish fleet, together with the benefit of publically funded decommissioning schemes, to consolidate and adjust to changed circumstances.

2.162. It is estimated that between £200 and £300 million was spent on quota purchases within the UK up to 2007. It would be a conservative estimate that at least the same, if not more, quota has been bought in the last six years. Another indicator of how prevalent quota purchase has become is the fact that there are around 1,500 quota swaps between POs within the UK each year, the majority of which are consequent upon giving effect to the legal agreements to transfer FQAs between licences following a quota purchase. ^[9]

2.163. While further analysis would be required to update these figures, and to determine the separate Scottish element, there is no question that quota purchases have continued apace since 2007. There are probably few vessels now operating in the Scottish fleet that are fishing the original FQA allocation attributed to their licence. Most FQAs have been augmented through the process of quota trading. This is the great strength of the FQA system and having real time recording of the sale of FQAs (as already suggested) would further enhance it.

2.164. The reference period of 1994-96 was simply an arbitrary starting point. Some 14 years of quota trading have now taken place since the FQA system was introduced in 1999. During that time the original FQAs have been very significantly changed as a result of this trading.

2.165. In summary it is believed that changing the FQA reference period would be an unnecessary complication that could very expensive for the Scottish Government. The greatest drawback would, however, be that it would change the FQA system from RBM model to an allocation model - thereby losing all the economic advantages which such RBM systems confer.

Maintain and enhance the central role of POs in managing the FQA system.

2.166. As already noted POs are central to the operation of the FQA system. Indeed, over the past twenty years, the principal role of POs has changed from operating the EU Marketing Regulation to that of quota manager. In this role POs ensure the optimum operation of the FQA system with quota swaps to ensure maximum uptake of the Scottish quota, enabling individual vessel uptakes to be maximised and generally undertaking much of the detailed quota management responsibilities that would otherwise have to be undertaken by Marine Scotland.

2.167. All POs operate dummy licences in order to facilitate ownership of FQAs that are not linked to a licence. In some cases POs operate very successful community quota schemes. It is understood that the Shetland PO is currently trialling a scheme whereby some of its community quota will again be used to help new entrants get a start into the white fish sector.

2.168. Another advantage of POs is that each PO has adopted different quota management strategies depending on the needs and wishes of its membership. While most POs allocate individual annual quotas to vessels based on their individual FQAs, others continue to operate a pooled quota system whereby the FQAs of white fish and nephrops are pooled together then allocated to all vessels on a monthly basis. Others operate an amalgam of individual and pooled quotas.

2.169. POs are the ideal quota management bodies in that they are organisations that represent vessel owners - the individuals who are at the centre of the FQA system. They are also, to a large extent, regionally based organisations and therefore reflect the regional as well as the sectorial diversity of the modern Scottish fishing fleet.

2.170. The success of the POs in becoming quota managers lies in the fact that each PO has the autonomy to determine its own fisheries management policy. For example, the detailed quota management arrangements adopted by the West of Scotland PO will be quite different from the Fife PO and different again in Shetland. This diversity and regional/sectorial autonomy is a source of great strength for the successful delivery of the FQA system and should be maintained.

2.171. In the event of the Scottish Government changing the FQA system on the basis of some or all of the suggestions made in this report, the role of POs will become even more important. They will be essential in helping manage the integration of the 10mu sector into the FQA system, developing community quota schemes, implementing new entrant programmes and enabling individuals holding small FQA segments to hold these within the PO structure. It is therefore essential that the Scottish POs remain fully engaged with Marine Scotland in discussing possible future changes to the FQA system.

2.172. In summary the Scottish PO structure is already fundamental to the successful operation of the FQA system and will become even more important should some or all of the proposals made for reforming the FQA system be adopted by Scottish Government.

Impact of the discard ban on the FQA system

2.173. The introduction of the landing obligation (or the discard ban as it is known) will take effect in 2016 for most species. Depending on exactly how the discard ban is managed, there could be very significant implications for the FQA system.

2.174. The landing of species, which would otherwise have been discarded, will cause serious problems for quota management in those cases where there is no quota allocation for those species. How can it be possible for a vessel to legally land a species for which it has no FQA allocation? Clearly the detailed rules, which are introduced to manage the landing obligation, could have profound implications for the management of the FQA system.

2.175. It is understood that discussions on the implementation of the landing obligation between Fisheries Administrations and the fishing industry are at an early stage. Until there is greater clarity on how the landing obligation is going to be introduced and administered there is little more that the consultants can add at this time.

Status Quo

2.176. The option or retaining the status quo and continuing to operate the existing FQA system as is should not be dismissed. The system has operated since 1999 and is fully understood by the fishing industry. It has had to operate under conditions of real stress, particularly in the white fish sector in recent years with all the problems of severe TAC reductions and the cod recovery programme. The fact that the FQA system has remained the vehicle for delivering Scottish fisheries management during such very difficult times has shown that the system is robust. To that extent it has therefore been a success.

2.177. There are of course many criticisms and many critics. One the one hand the FQA system could be modified to ensure that it delivers greater economic efficiency and vessel profitability. On the other hand, the system could be changed to deliver greater benefits to those who believe the FQA system has not worked for them. These and other reforms to the FQA system are of course fully discussed under Section 3 of this chapter.

2.178. Any reforms will need to be carefully evaluated and discussed with the industry to ensure that they are able to deliver the benefits suggested. At the same time, the FQA system clearly is not broken so there is no need to rush to fix it. In other words there should be no pressure whatsoever that change is urgently required because the FQA system is in crisis. It is not in crisis, it works, it is understood by the industry and it has demonstrated that it is robust so the option of retaining the status quo, without reform, is therefore a viable and justifiable option.