Fishing vessels - economic link: business and regulatory impact assessment

11. Scottish Firms Impact Test

Prior to the publishing of the consultation in August 2017, the Scottish Government met with various businesses and industry bodies in order to consider how best to facilitate greater fish landings for Scottish processing factories. This included meeting with concerned individuals in order to establish whether the desired outcome (greater landings of key commercial stocks into Scotland) could be delivered without the need for government intervention.

The objective of achieving greater landings into Scotland through non-regulatory means was not achieved and the consultation on amendments to licence conditions followed.

In April and May 2022, we undertook further consultation to inform our impact assessments and obtain feedback from industry given the passage of time since the consultation closed in 2017. Officials selected businesses and trade associations with a direct interest in the policy change in order to establish impacts on them (and where relevant any constituent businesses) in greater detail and to take account of relevant market changes since 2017.

To this end, we selected 11 interested businesses (fishers, processors, trade bodies and port authorities) and requested their views on the anticipated costs and benefits on their business that would be associated with each of the questions posed in the consultation document.

In addition, we sought feedback on the following:

• the capacity of processors to deal with the proposed changes;
• the impact of Brexit, the COVID-19 pandemic and the situation in Ukraine on the proposed changes;
• how the proposed changes would impact on various markets?

To inform this process officials spoke to:

• four processing businesses;
• four sectoral groups (groups delegated with quota management responsibilities by the Scottish Government);
• three Scottish Fishing Associations (a group (distinct form sectoral groups) which represent the interests of fishers). A fourth approached by officials pointed to its previous response and said its position had not changed); and
• two harbour authorities.

These discussions shall now be summarised.

Most of the businesses spoken to had responded to the 2017 consultation. In meetings, respondents often referred to answers they had provided in response to the 2017 consultation indicating that their views had not changed in the intervening period. Where permission was given, responses to the consultation can be viewed on the Scottish Government website.

By-and-large those who responded to the consultation had not changed their views on their support or opposition to the proposed change.

11.1 Key issues discussed

11.1.1 Processing Capacity

Those supportive of the policy change stated that Scottish processors have the capacity to deal with the additional expected produce and where necessary could scale up. However, pelagic processors spoke of the benefit of phasing in the change for pelagic stocks over a period of time to allow for a period of adjustment. One processor commented on the importance of investor confidence behind the recent announcement of a multi-million-pound capital investment to allow for modernised infrastructure, access to additional volumes of Scottish landed fish being key to that decision. Processors also highlighted the need to keep the policy change under review and amend it if necessary.

Some supporters of the change called for the landings target for pelagic stocks to be increased to 55% immediately instead of phasing in the increase – however, those expressing those views were not from the processing sector. It was recognised that there must be cooperation across industry sectors if the projected benefits are to be maximised. For example, Producer Organisations would need to actively manage the activity of fishing vessels to align with processors’ fluctuating capacity.

Those against the policy change set out concerns around processing capacity within the Scottish processing sector. In addition to concerns already set out in responses to the consultation (see accompanying consultation outcome report) – many were concerned about the impact of Brexit, the COVID-19 pandemic and the conflict in Ukraine on markets (explored below).

11.1.2 Impact of Brexit, Covid-19 pandemic and the conflict in Ukraine

As can be seen in the analysis contained in this BRIA, those most significantly impacted by the proposed change to the economic link condition are the pelagic catching and processing sectors.

There was much discussion on the impact of Brexit, the COVID- 19 pandemic and the conflict in Ukraine on the Scottish pelagic processing sector.

Many opposed to the policy, but not directly involved in processing, set out their view that Brexit and the COVID-19 pandemic had had a negative impact on pelagic processors. In particular, there were concerns over reduced access to labour and the impact that this would have on processors being able to handle additional throughput. In discussion with processors some did express concern over labour shortages, however, others did not and expressed confidence in being able to increase staff – particularly as the change for pelagic stocks would be phased in. It was noted that Brexit had seen some increase in administrative costs as a result of the UK having left the EU single market and customs union but that generally the pelagic sector was seen to have benefitted in recent years. In the case of the pelagic catching sector, this was as a result of the Additional Quota^[1] in UK and therefore Scottish quota for pelagic stocks. For processors this was due to them servicing a global market where demand remains strong thereby offsetting increased costs arising from Brexit.

Where views were shared on the conflict in Ukraine, consultees/respondents stated that this had had an initial impact given the importance of the Ukrainian market but that impact was reducing. Generally, of those who engaged with officials, the processors were more confident of their ability to find alternative export markets and there were comments that supplies into Ukraine (which is an important market for Scottish processed pelagic fish) were moving again after initially stalling. However, given the importance of the Ukrainian market to pelagic processors this remains an area of concern. The situation is being kept under close review.

The increase in the cost of materials and power with the resultant increase in manufacturing costs for processors was also raised as a concern. However, processors expressed confidence at being better able to adapt to this change if there is an increase in the supply of raw material as an increase in production would enable them to better manage these costs.

A clear topic highlighted from supporters of the policy was the need for different parts of the industry to work together to ensure the smooth operation of the landings target. This is most clearly the case for the pelagic sector. All such pelagic vessels are members of sectoral groups i.e. Producer Organisations. A key function of Producer Organisations is to manage member vessels’ activity and this will be important if those vessels which previously landed abroad now choose to comply with the landings target element of economic link rather than quota gift.

11.1.3 Other issues raised during discussions included:

• A desire for Additional Quota obtained as a result of Brexit to be used to incentivise landings into Scottish ports.
• Costs on businesses of landing into Scotland (such as harbour dues and ‘steaming’ costs).
• Strong views from some that not all species should be covered by the landings target.
• Whether the terms of the Trade and Cooperation Agreement with the EU allowed for the change.
• A general view that the policy would not impact on the makeup of crewing.
• A view that alternative measures should be considered to achieve the goal of increasing landings into Scotland. Even those most strongly opposed agreed with the general aim of achieving greater landings into Scotland. However, they opposed the proposed method being consulted upon.
• That a much longer transition period was required, to allow for the pelagic sector to adjust to the proposed change.
• That the introduction of the proposed change could make some Scottish (family) owned businesses susceptible to takeover by multinational companies.
• General support for the continuation of quota gifting as an alternative means of meeting the economic link licence condition but with views expressed that the quota gifted should be more widely distributed (that is, beyond the 10 metre and under vessels) and, that quota gifting should be restricted to key commercial species.

At the firm or business level, it is expected that the catching sector will see the highest costs per firm, while many of the benefits per firm will be seen in the up- and down-stream sectors. However, depending on the level of quota gifting, a number of vessels in the catching sector may also benefit from these proposals by receiving gifted quota. Based on 2015 to 2019 data, it is estimated that around 31 vessels would be non-compliant with the new economic link licence condition per year. In expected 2023 prices, each of these vessels land on average around £4.1 million of the 8 key species per year (total annual average of £127 million), of which around £3.4 million is landed outwith Scotland (total annual average of £105 million). Of the 31 that would be non-compliant, 12 are pelagic vessels landing around £9.6 million (of which £8.1 million is outwith Scotland) and 19 are demersal vessels are landing around £490,000 per year (of which £350,000 is outwith Scotland).

11.2 Impact on fishing vessels (catching)

Of the 31 non-compliant vessels, the individual impacts will vary, though the extent of this will depend upon their business decisions. In particular, whether they choose to increase landings or gift quota and keep their landing patterns unchanged.

First, the largest impact is likely to be on pelagic vessels that tend to land a high proportion of their catch abroad and comply with the economic link licence condition on the basis of their UK resident crew. Second, there are a small number of Scottish registered vessels, owned by non-Scottish companies that routinely comply with the economic link licence condition by gifting quota who will be affected. The revised quota gifting formula could require them to provide larger quota gifts, but it is expected that for most of these vessels, they will pay less in quota gifts due to their primary fishing species not being part of the 8 key species. Third, a small number of Scottish demersal catchers may have to change landing patterns.

Table 10 shows the 8 year annual average impact on individual affected vessels once the transitional period has ended in the third year (year 3-10). This varies between the different fleet segments (vessels targeting demersal or pelagic species) as well as scenarios.

The pelagic fleet tends to have a higher individual impact due to landing greater tonnage and value abroad, as well as having fewer but larger vessels. The cost to an affected pelagic vessel in scenario 2 is on average £750,000 while the cost to a demersal or Nephrops vessel is around £32,000.

The costs for vessels calculated above is different than the main analysis as it includes costs that act as redistributions between groups in Scotland, namely port landing dues and quota gifting. While these are costs to the individual vessels, they are expected to remain in the Scottish economy and so are not losses for the economy as a whole.

The cost of landing dues for the pelagic fleet has been included assuming that the due required to land in Norway is 0.65% per tonne, while assuming the due required to land in Scotland is 2.5% based on Lerwick and Peterhead’s base rates. As such an average extra landing cost of 1.85% of the landing value is used. The cost of landing dues for demersal and Nephrops vessels has not been included due to the wider range of ports used and the corresponding myriad of port dues with many similar to those seen in Scotland.

The quota gift costs noted in table 10 consist entirely of transfers within the Scottish fleet, although the net benefit would likely be shared amongst a greater number of vessels and thus the average benefit per vessel would be lower than the average cost per vessel. There would still be costs associated with the quota gifts in the form of lower prices and increased landing dues relative to the vessel that gifted the quota, which is represented in the Pelagic price differential column.

The average cost per vessel in table 10 has been noted as lower than the average profits seen by the vessels in question in the Seafish Economics of the Fishing Fleet report. However, due to the commercially confidential nature of the pelagic fleet’s data, and the wide variety of demersal and Nephrops vessels this has not been presented within the BRIA.

11.3 Impact on fish processors (downstream)

The proposal is expected to impact both demersal and pelagic processors. Some of these may handle only one species group, however many will handle mixed-species, making it difficult to disentangle individual impacts. The degree to which specific processors will be affected will depend on whether vessels choose to comply with the landings target or gift back some quota and which stocks are involved.

Pelagic processors are likely to be most impacted due to the fact that 93% of the estimated value of additional landings are from pelagic species. Based on industry engagement, most of these processors are expected to welcome the increased supplies of fish. Demersal processors are also likely to gain, albeit to a smaller extent, and are expected to welcome the proposals.

The annual average benefit expected for the fish processors that work with that stock (excluding mixed processors), is shown in expected 2023 prices for year 3 onwards once the transitional period has ended. This applies to 5 purely pelagic processors and 25 purely demersal processors (if mixed processors were included this would be 40 and 49 respectively), and is taken by dividing the downstream benefits by their respective species processor.

11.4 Impact on ports, market operators and onshore services (upstream)

The proposals are anticipated to have a positive impact on ports, market operators and onshore services particularly in areas such as Peterhead, Fraserburgh and Lerwick where fishing and seafood processing are important industries. For example, ports and harbours need to make regular infrastructure investments as well as maintain facilities so increased landings resulting from the proposals will help provide economic stability and confidence.

As the beneficiaries in this sector are likely to be disparate, it is not possible to give a per firm estimate of the likely benefits.