Review of Management Options for the Landing Obligation

Section 4: International Quota Swapping

4.1 The Poseidon Report (Poseidon 2013) that appraised the potential economic impacts of the CFP discard reform on the UK fleet was based upon the assumption that current international swapping patterns and arrangements would continue. A misalignment between quota holdings and catches at a European level can contribute to discarding by national fleets. There is therefore scope for examining potential changes at a regional and European level that could help facilitate a workable Landing Obligation. One of the fundamental changes within the new CFP was the introduction of regionalised decision-making, with the new regional structures offering the opportunity for improvement.

Renegotiate TAC Allocations

4.2 The gross imbalance between national quota portfolios and catch compositions given the changing nature of relative abundances of species stems from the allocation of European fishing opportunities through the principle of Relative Stability. After several years of negotiation, agreement on the Common Fisheries Policy was finalised in 1982 and came into effect in 1983. Relative Stability was structured to award Member States fixed allocations of fishing opportunities that reflected their historical levels of fishing both in and out-with EU waters and to reflect regions of social and economic dependence (Holden, 1999). Relative Stability is often criticised for locking overcapacity into the EU fleet, working against business innovation and mitigating Europe's adaptation to marine climate change (Coelho, 2011).

4.3 One option would be to move away from the concept of Relative Stability or to renegotiate its terms with the intention of producing Member State quota holdings that more aptly reflect current patterns of abundance and distribution. This would represent a long-run objective strategy, as it would be a politically arduous and likely lengthy process. A consensus within the interviews was that, politically, Scotland would be unlikely to support a movement away from Relative Stability. It was argued by several participants that the Scottish industry and Scottish Government hold themselves as benefactors of the current system. Under any movement away from Relative Stability, Scotland is foreseen as the potential biggest net loser in carrying the costs of a new allocation framework. While in the near future this policy was regarded as unlikely, one interviewee noted growing support for a movement away from Relative Stability on the Continent, with another identifying similar support in the Baltic area, in particular in Sweden.

Increase the Efficiency of International Quota Swapping Arrangements

4.4 An alternative short-run approach would be to improve the impact of Relative Stability by increasing the efficiency of international quota swapping arrangements and moving to better international quota exchange models. A general objective within the CFP is that that if a Member State has too few quotas for some species, it should swap quotas with other Member States. Theoretically, quota swapping and leasing arrangements offer the opportunity to correct inefficiencies within initial allocations: quota is leased and swapped in a manner that transfers the quota to the more efficient operators (thereby encouraging the use of capital equipment to full capacity and the lowering of average fixed costs) while promoting the full utilisation of quotas.

4.5 A recurrent theme within the interviews was that the mechanisms in place to support international quota swaps are slow, cumbersome and inefficient. From the interviews a number of possible changes were identified with the potential to improve this process and enhance quota swapping efforts to remove some of the rigidities imposed by Relative Stability. It was commented that facilitating quota trading to improve compliance is not rocket science: a market can be created that facilitates quota exchange. This mirrors the European Commission's initial CFP reform proposal in 2011 for a movement towards tradable fishing concessions. While this was motivated by the EC's identification of fleet overcapacity and inefficiency as the two main issue threatening the EU fisheries sector in 2009, increasing the tradability of quotas has the potential to play a vital role in facilitating the landing obligation. This mechanism was however opposed by a number of countries, with Scotland fearful of Scottish quota being bought up by foreign companies. While the creation of a European ITQ system is, in the short-run, likely to be a political non-starter, alternative policies can be pursued that will aim to open up quota trading between Member States without going against the ideological grain of privatising rights.

Centralised Information Point

4.6 One issue highlighted within the interviews was that the system of quota swapping relies upon the breadth of contacts and information that POs or Marine Scotland have on quota availability and who holds it across Europe. As one PO commented, the ability to source international trades depends upon their contact book and friendships. This was reaffirmed by another industry leader. An option that received general support within the interviews was the facilitation of a centralised or regional service that provided transparent information on quota holdings and those wishing to trade in order to facilitate contact and provide a better idea of the breadth of ownership at an international level.

4.7 In Denmark, New Zealand, the US and Canada this has been a role recently take up by private firms who provide a neutral point of contact and help facilitate the transfer. POs or individual vessels wishing to conduct international trades and swaps would sign up to the service and provide information on what quota they are willing to swap and what quota or price would be required. As in the countries aforementioned, the process could take place online. The effect of such a service is reported to be a reduction in transaction costs as the costs of searching and brokering quota are reduced. While the POs interviewed commented that this would be helpful, another argued that it would make little difference as it believed Scotland had little to swap with other nations. While money could be traded, a perception of the industry is that most international quota holders prefer quota for quota swaps. Overall, improving transparency, information efficiency, quota trading and reducing transaction costs have the potential to facilitate international swaps, which are a useful tool to aid compliance and alleviate choke species.

Create a Centralised European/Regional Trading Platform

4.8 While increasing the information efficiency of EU swapping arrangements was generally held as beneficial, most of those interviewed also supported a further movement towards the creation of a central European trading platform. A 'trading platform' refers to software used by investors and traders to place trades and monitor accounts. They are most commonly associated with finance, wherein trading arrangements developed over time from being based on manual transactions between brokers to traders, to now being carried out by electronic systems that investors use to place orders over a network between financial intermediaries. These systems have evolved to allow for live price streaming and near real-time execution of trades.

4.9 Under this scenario, all transactions would be processed through one point, with this possibly reflecting a regional sea-basin level. In addition to the creation of centralised, accessible information on where particular species quota was available and what swap composition or price was required, the service could facilitate and broker the trades. The key benefit highlighted, alongside potential reductions in transaction costs, was increased transparency. It was pointed out by a PO interviewed that while fisheries policy tends to be administrative, vessels and firms operate in the free-market where business decisions are made. Transparency is one of the theoretical conditions required for a free-market to be efficient and overall it is likely that increased transparency will not hurt. However, the view of one PO was that an open transparent system would undermine their long standing swaps already in operation, as if this information was made available the possibility of hijacking would occur- other firms using under-table deals to disrupt the swaps and undermine their competitors. This perception was based upon a voiced perception that within quota swapping arrangements there existed a high level of dishonesty and malintent- that a handshake on a deal is no guarantee. In response to this, it is evident that any sort of trading platform would have to be tightly regulated in order to ensure maximum transparency across all participants. Secondly, in line with basic economic theory regarding markets, it is likely that this lack of trust between firms and POs comes from the initial lack of transparency within the system.

4.10 An obstacle to the creation of a trading platform at a European level is the variance across Europe as to how quota is managed. Some Member States such as France do not have an internal management structure to facilitate this, while others such as Denmark operate ITQs. This situation would require a period of rationalisation. The view within the interviews, particular amongst some industry representatives, was that if this obstacle could be overcome increased transparency in trading would be a positive contribution.

Unlocking systematic aversion to swapping

4.11 From the interviews, it is evident that a lack of information and transparency are not the only constraints impeding international quota swaps. A tendency is for many Member States to hold on to quota that remains unused, rather than engaging in international swaps. This is often driven, it is claimed, by the economic motivation to influence the price of fish, for example, if Spain was to swap hake quota with Scotland this might work to drive down prices. Politically-influenced management decisions will also factor into this as countries such as France, or indeed individual POs, operate non-tradable and non-flexible internal distribution mechanisms that restrict how quota can be accessed and traded internationally.

4.12 Since much of the detail regarding the big picture of how the landing obligation will work at a regional level is on-going (such as how the inbuilt flexibilities will operate), the ability to predict behaviour patterns over the next few years if difficult. However, in terms of how the landing obligation will affect individual Member States attitude towards quota swapping, there are two broad possibilities. The first is that quota swaps between Member States will become more difficult to achieve as States that were previously willing to swap away quota, or that held on to unused quota, will now need to use this in order to prevent the species from becoming a choke species. Alternatively, the landing obligation and the new regional structures could offer a potential route to overcoming these rigidities, as if other Member States are getting a truly mixed catch, international swaps will therefore be in their interest.

4.13 One of the ways in which the latter can be encouraged is through creating pressure upon MS to implement the landing obligation on a level playing field. A tool to achieve this is to build upon the current work being under taken by the regional Discards Atlas Project that is attempting to identify discarding patterns across the different MS and fleets. Currently, there is a significant degree of uncertainty as to what species will constitute a choke species for other fleets and at what point each species will act as a bind. MS government could be pressured into improving their engagement with international swaps by creating transparent information on what quota compositions each MS will need for its fleets to stay at sea for specific durations. Effectively, it is known that a MS is likely to be unable to cover catches for a species after a specific month, if the fleet is not tied up this would suggest that discarding is still occurring or else catch is being landed illegally. This sort of transparency could pressurise national governments into making the hard decisions required, such as trading target species quota for fish that on paper has less value.

Identifying Choke Species on a European Fleet by Fleet Basis

4.14 For each commercial quota species where discards occur that do not have high survivability:

Figure 4. Identifying Choke Species on a European Fleet by Fleet Basis

4.15 An exercise of this sort, creating information on choke species on an EU fleet-by-fleet basis will be required when drawing up the advanced trading agreements within the regional plans. One the choke species of each fleet was identified it could be assessed: whether the uplift will be sufficient; if there is enough spare quota nationally to cover previously discarded catch; if international quota swaps are sufficient; if additional international swaps can be facilitated; and then if the flexibilities allowed in the legislation will be sufficient to cover the previously discarded catch. The information required for this at fleet levels includes: effort, landings composition, discard composition and individual fleets quota allocation.

Publicised Record of EC Infractions

4.16 The extent to which the mixed catches of other Member States will facilitate better conditions for international swaps will depend upon a level-playing field approach to the implementation and enforcement of the landing obligation. One idea put forward by a PO representative was that the public record of EC sanctions taken against Member States should be actively publicised. It was argued that this could improve the transmission of this information across fleets and facilitate a high degree of public pressure upon governments to implement strong enforcement measures.

Ring-fencing Scottish Quota for Trading Agreements

4.17 In interviews with the industry, the ability to open up and increase the efficiency and transparency of international swaps was typically welcomed. However, the sticking point was a perception that even if these mechanisms could be improved, it would help little as the Scottish fleet does not possess enough 'spare' quota to swap with other Member States. It was commented that while some international operators will accept an in-year transfer of quota for money, this is generally quite rare.

4.18 Examining the Scottish POs average uptake of allocated quotas 2008-2012, it is evident that for the key target species in the North Sea (cod, haddock, whiting and saithe) the uptake rate is almost 100 per cent. Table 2 indicates slightly more flexibility amongst the West Coast of Scotland stocks; however these may need to be used in the future to cover previously discarded catch.

4.19 It seems apparent that if Scotland does need to access international quota swaps, valuable quotas that are currently targeted may have to be sacrificed to alleviate choke species problems. One option is for POs or the government to ring-fence amounts of quota for species they know to be in demand internationally, and use this pool to conduct trades as and when the need arises. Mechanisms for ring-fencing Scottish quota to be used to secure quota for choke species are discussed in subsequent chapters.

Figure 5. Scottish PO Uptake of Allocated Quota in the North Sea. Source: Marine Scotland

Figure 6. Scottish PO Uptake of Allocated Quota on the West Coast. Source: Marine Scotland

Section Summary

4.20 Discarding by the Scottish fleet is often influenced by a misalignment between quota holdings and catch compositions at a national level. An option discussed within the interviews was to move away or renegotiate Relative Stability. This was, at best, identified as a long-term strategy as it was perceived that Scotland would be a net loser of any re-allocation.

4.21 An alterative that received a high level of support across the board was the option of improving the practical impact of Relative Stability by improving international quota swapping conditions. An option that received a high level of support was for the creation of a centralised European information point and/or trading platform as it was identified that is may improve the efficiency, proficiency and cost of international trading.

4.22 Several obstacles were identified in the realisation of this option: increased transparency may undermine long-term swap deals, the ability for Member States to facilitate international swaps is inhibited by variance in internal management mechanisms (French administrative system vs Danish ITQs), and political aversion to swapping unused national quota exists. Analysis and publication of choke species at a European-wide fleet level was put forward as a way to make quota swapping in the interests of Member States. A perception put forward by some in the industry was that while increased transparency was beneficial, the issue was that Scotland had little to offer other countries. One option is to ring-fence portions of Scottish quota for international swaps.