The Economics of Papua New Guinea's Tuna Fisheries

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Campbell, H.F. and Owen, AD., ed. 1994. The Economics of Papua few Guinea's Tuna Fisheries. AClAR Monograph No. 28, 277p.

ISBN I 86320 1149

Technical editing, typesetting and layout by Arawang Information Bureau, Canberra, Australia. Printed by Brown Prior Anderson Ply Ltd, Melbourne, Australia. Cover photographs: South Pacific Commission, New Caledonia and the Department of Foreign

Affairs and Trade, Australia.

The Economics of Papua New Guinea's

Tuna Fisheries

Editors Harry F. Campbel/ Anthony D. Owen

Canberra 1994

iv

Authors

Harry F. Campbell Professor of Applied Economics, The University of Queensland, Australia

Inge Y. Duchesne Tutor in Economics, The University of Tasmania, Australia

Ronald Kuk Senior Planning Economist, Department of Finance and Planning, Papua New Guinea

Robert B. Nicholl Principal Research Officer, Department of Treasury, Tasmania, Austral ia

Harry Landu Fishery Economist, Department of Fisheries and Marine Resources, Papua New Guinea

Inga Leaney Graduate Student, Centre for Applied Economic Research, The University of New South Wales, A ustralia

Kenneth M. Menz Research Program Coordinator (Economics and Farming Systems), Australian Centre for International Agricultural Research, Australia

Gareth W. Meyer Research Economist, Department of Treasury, Commonwealth of Australia

Kwame Mfodwo Lecturer in Law, Department of Accounting and Finance, The University of Waikato, New Zealand

Anthony D. Owen Director of the Centre for Applied Economic Research, The University of New South Wales, Australia

B. Martin Tsamenyi Professor of Law, Centre for Natural Resources Law and Policy, The University of Wollongong, Australia

David A. Troedson Research Assistant, Centre for Applied Economic Research, The University of New South Wales, Australia

Geoffrey H. Waugh Senior Lecturer in Economics, The University of New South Wales, Australia

Contents

Authors iv Foreword vii Acknowledgments viii Acronyms and Abbreviations viii

Part I Introduction and Overview 1

Chapter

1 Economic Issues in Tuna Fisheries Management and Development 3 in Papua New Guinea H.F. Campbell, K. M. Menz and AD.owen

2 Economics and Politics ofTuna Fisheries in the South Pacific 12 G.H Waugh

3 The Papua New Guinea Tuna Fisheries: an Overview 22 R. Kuk

Part 11 Harvesting Costs and Returns 37

Chapter

4 The Economics of the Japanese Tuna Fleet; 1979- 80 to 1988-89 39 H.F. Campbell and R.B. Nicholl

5 An Economic Model ofTuna Purse Seine Fishing 53 HF. Campbell and R.B. Nicholl

6 The Ability ofTuna Purse Seiners to Vary the Species Composition 63 of the Catch HF. Campbell and R.B. Nicholl

7 An Economic Model ofTuna Longlining 76 H.F. Campbell and R.B. Nicholl

8 The Tuna Longline Fishery in Papua New Guinea 87 HF. Campbell and R.B. Nicholl

9 A Financial Appraisal Model ofTuna Fishing: Purse Seine, 99 Pole-and-Line and Longline Vessel Operations t.Y. Duchesne and R.B. Nicholl

Part III Sustainability, Stock Management and Fishery Rents 109

Chapter

10 Rent Generation and Sustainable Yield in Papua New Guinea's 111 Skipjack Fishery

DA. Troedson and G.H. Waugh

11 An Economic Analysis of the Interaction Between the Purse Seine 123 and Longline Tuna Fleet in Papua New Guinea H.F. Campbell and R.B. Nicholl

12 Search Behaviour in the Purse Seine Tuna Fishery 128 H.F. Campbell, G. W. Meyer and R.B. Nicholl

v

vi

13 Japanese Tuna Fleets and Fishery Rents in Papua New Guinea: 1983-1987 H.F. Camp bell and R.B. Nicholl

Part IV Fish~ri~s Law, R~gulations and Monitoring

Chapter

14

15

16

Some Aspects of the Modern Law of the Sea: a South Pacific Fisheries Perspective f. Leaney

The Legal Framework for Fisheries Management in Papua New Guinea B.M. Tsamenyi and K. Mfodwo

The Use of Logbook Data in Monitoring Catch Rates: a Comparison of the U.S., Korean and Taiwanese Purse Seine Fleets in Papua New Guinea 1983-1990 H.F. Campbell, H. Landu and R.B. Nicholl

Part V Th~ Proc~ssing S~ctor

Chapter

141

157

159

176

188

205

17 Exchange Rate Fluctuation and Comparative Competitive Advantage 207 AD. Owen

18 Cannery Costs in the Western Pacific: a Hypothetical Model 218 H. Landu, DA Troedson and G.H. Waugh

Part VI International Tuna Markm 229

Chapter

19 The Japanese Tuna Industry and Market 231 AD. Owen and DA. Troedson

20 Modelling Tuna Prices in Japan: a Vector-Autoregressive Approach 239 AD. Owen and DA. Troedson

21 The United States Tuna Market 242 AD. Owen and DA. Troedson

22 The European Market for Tuna AD. Owen and DA. Troedson

Rd~r~nc~s

251

263

Foreword

Fisheries represent an important resource for the South Pacific. In recognition of this, AClAR held a workshop in Hobart Tasmania, in March 1989 to explore possibilities for a collaborative research project Representatives from research and fishery management institutions in the South Pacific region, Australia and North America attended. A report of that workshop is available in ACIAR Proceedings No 26.

The project that subsequently emerged from the workshop and follow-up discus­sions was one titled 'Economics of the tuna fisheries industry in Papua New Guinea'. It involved collaboration between the University ofTasmania (and later the University of Queensland following the transfer of Professor Campbell), the University of New South Wales and the Papua New Guinea Department of Fisheries and Marine Resources. This publication presents the output of that project

AClAR was delighted with the spirit of cooperation that prevailed during the project and with the immediate usefulness of some of the results in policy making and negotiations regarding access fees in Papua New Guinea. Thanks are due to the researchers and administrators in all participating institutions.

While AClAR operates in a bilateral mode through projects between Australian and developing country institutions, whenever possible we seek to extend the results of projects to other countries. The work on international market demand for tuna is already of relevance beyond Papua New Guinea. We propose to implement research on tuna fisheries management in other South Pacific countries.

Kenneth M. Menz

Ac/AR Program Coordinator

Economics and Farming Systems

vii

Part 1

Introduction and Overview

Chapter

1 Economic Issues in Tuna Fisheries Management and Development in Papua New Guinea

H.F. Camp bel/

K.M. Menz

A.D. Owen

Introduction

This paper provides a summary of a research program on the economics of Papua New Guinea's tuna fisheries, funded by the Australian Centre for Interna­tional Agricu ltural Research (ACIAR Project No. 8928). The research was divided into five general areas: harvesting costs and returns; sustainability, stock management and fishery rents; fisheries law, regula­tions and monitoring; the processing sector; and inter­national tuna markets. The research is described in detail in the papers in this volume. This paper gives an overview of the research undertaken and summarises some of the results.

Harvesting costs and returns

The two areas of basic research on the supply side were on the costs of harvesting tuna by purse seine, longline and pole-and-Iine vessels, and on the technology of harvesting tuna by purse seine and longline vessels. The former work allowed conclusions to be drawn about the profitability of Japanese distant water opera­tions in the 1980s, while the latter made it possible to investigate a number of issues including: the ability of the purse seine fleet to target species; the level of the economic interaction between the purse seine and longline fi sheries; and the relative efficiency of U.S. and

Japanese purse seine search behaviour. Results from the two areas of research were combined to estimate rents from tuna fishing in Papua New Guinea and to develop a fi nancial appraisal model for purse seine, longline, and pole-and-Iine fishing.

The profitability of the Japanese tuna fleets

The Japanese Ministry of Agriculture, Forestry and Fisheries publishes annual data on the costs and returns of purse seine, longline, and pole-and-Iine vessels in its offshore and distant water tuna fleets. A sample of cost and returns data is taken for each size class of vessel in each category and the sample averages are published. Since the published data are in the form of averages they do not necessarily reflect the economics of tuna fis hing in a particular area such as Papua New Guinea's fishing zone. In particular, while fishing costs might not be expected to vary greatly between distant water locations, the returns from fishing would reflect signifi cant differences in produc­tivi ty between one area and another. Thus the data are useful in providing reasonable estimates of fishing costs in an area such as Papua New Guinea, and a general picture of overall profitability.

The Ministry of Agriculture, Forestry and Fisheries data for 1979-89 were analysed to calculate the costs and profitability of the various classes of vessel. In analysing the data, certain costs, such as licence fees or

3

The Economics of Papua New Guinea's Tuna Fisheries

the imputed return on non fixed assets such as goodwill, were excluded on the grounds that they repre­sented current or capitalised fishery rent rather than fishing costs. The cost of the fixed assets was estimated on the basis of reported depreciation, and using the average required rate of return on capital in Japanese industry. Alternative required rates of return, one ignoring and one taking account of cross equity holdings, were employed but the results were similar. In calculating daily fishing costs the annual cost of owning and operating a vessel was divided by the number of days fished per annum. In this way allowance is made for time spent provisioning, travelling and unloading.

The cost estimates are average cost per fishing day for longliners in the SO- lOO, 100- 200, and 200- S00 gross registered tonne (GRT) classes; pole-and-line vessels in the SO-1 00, and 200-S00 GRT classes; and group purse seiners in the SO- lOO, and 100- 200 GRT classes. The published data do not include information about single purse seiners. As an example of the results obtained, Table 1.1 gives estimates of cost per day fished in 1988-89 at current prices.

Table 1.1 . Cost per day fished by Japanese tuna vessels, 1988-89.

Type of vessel Size of vessel Cost per day fished (GRn (V'OOO)

Longliners 50-100 441

100-200 654

200-500 1017

Pole-and-liners 50-100 470

200-500 1002

Group purse seiners 50-100 1865

100-200 2990

The rate of return and economic profit and loss calculations indicated that virtually no size or type of vessel was making the required rate of retu rn or an economic profi t over the period 1979- 89. It should be remembered that these results are based on sample averages and do not imply that no vessels in the fl eet were making a profit in the course of a year, or in certain fishing grounds. The categories of vessels for which a zero or positive average economic profi t was estimated were: medium and large longliners in 1979-

4

80; large longliners in 1987-89; and small group purse seiners in 1979- 80 and 1984-8S. These results raise the question of why the fleet continued to operate over this period.

Vessels will continue to operate in the short term, even if they are making a loss, provided that they are covering their variable costs. Operating under these circumstances reduces the size of the economic loss. In the long run, however, vessels making a loss would be expected to leave the fishery. The reason the Japanese fleets continued to operate at a loss during the decade of the 1980s appears to be the subsidies paid by the government, apparently to slow down the pace of adjustment to economic and fishing conditions. The research indicated that, even if the entire Japanese offshore and distant water flee t had incurred annual losses on the scale experienced by the average vessels in the tuna fleets, the total amount of assistance provided to the industry was sufficient to more than offset these losses. This assistance made it possible for the tuna fleets to continue operating at a loss over an extended period.

Technology of purse seining and longlining

The purse seine and longline tuna fisheries are multi­. species fisheries: purse seiners catch mainly skipjack and juvenile yellowfin, while longliners catch yellowfin, bigeye albacore, billfish and swordfish. Studies were undertaken to determine how much control vessels fish ing in Papua New Guinea in the period 1983- 86 had over the species composition of their catch. Using a revenue fu nction framework, it was found that U.S. purse seine vessels had targeted juvenile yellowfin tuna in response to changes in the price of yellowfin relative to skipjack, whereas Japanese vessels had apparently not changed the species mix of their catch. The U.S. vessels are larger and more technologically advanced than the Japanese vessels and this may account for a difference in targeting ability.

The catch and effort data for the Japanese longli ne fleet operating in Papua New Guinea in the period 1979- 87 were also analysed by means of the revenue function framework to determine the relationships among the species harvested. It was found that small vessels « 1 00 GRT) used different technology to that of large vessels in that certain pairs of species were substi­tutes in production. This means that when the price of

Economic Issues in Tuna Fisheries Management and Development in Papua New Guinea

one species rises, thereby inducing an increase in effort targeting that species, the catch of the other species falls. The substitution relationships were between yellowfin and albacore, yellowfin and billfish, bigeye and albacore, and bigeye and swordfish. These relationships may be explained by the depth at which the various species are commonly found; each substi­tute pair tends to consist of a shallow and a deep-water species. No such relationships were detected for the large vessel sample, which accounted for 24% of the longline catch in Papua New Guinea, indicating that those vessels do not influence the species mix of the catch in response to relative price changes. This result may reflect the greater depth at which the larger vessels typically fish.

Financial appraisal model for tuna vessels

The Japanese cost estimates, together with catch and price data, are used to generate a simulation model of the fi nancial performance of various kinds of tuna fishing. The model estimates the cash flow, payback period, return on investment net present value, and internal rate of return for various sizes of longline, purse seine, or pole-and-Iine vessels operating under specified circumstances. The model can be used to conduct a sensitivity analysis of financial performance when inputs such as the number of trips per year, days fishing per trip, daily catch, and species prices are varied. It can be used by both domestic and foreign investors to plan and assess tuna fishing ventures.

As an example, the Financial Appraisal Model (FAM) is used to assess the likely performance of a small longliner (50- 100 GRT) operating in Papua New Guinea's fishing zone. According to the analysis of fishery rents discussed earlier, this size of vessel was the most profitable Japanese longline operation in the 1980s. The results of the F AM are not encouraging: the payback period is 13 years and the internal rate of return 0.03% which is not high enough to justify investment by Papua New Guinea or another foreign nation. Since the FAM is based on Japanese costs and returns data it may be that some of the inputs should be adjusted to reflect the particular circumstances being considered. Japanese labour costs, for example, might be significantly higher than those in Papua New Guinea. The LOTUS 123 spreadsheet format of the model makes it easy to amend the inputs as required.

Sustainability, stock management and fishery rents

The sustainability of the current level of purse seine skipjack catch is not in question, but the purse seine yellowfin catch may impact on the longline yellowfin fis hery. The question of the optimal allocation of the yellowfin stock between the two gear types was analysed within a benefit-cost framework Another stock management issue considered was the sharing of information among purse seine vessels during the search process for schools of tuna. The different approaches of the U.S. and Japanese fleets to informa­tion sharing are analysed and the benefits of coopera­tion are explored. The generation of fishery rents in Papua New Guinea's purse seine, pole-and-Iine, and longline fisheries is also analysed.

Interaction between the purse seine and longline fisheries

Around 25% by weight of the catch of the purse seine fleet consists of juvenile yellowfin tuna, while adult yellowfin constitute around 40% by weight of the longline catch. There is clearly the potential for the purse seine fishery to have a significant impact on the longline fishery through its yellowfin catch. A benefit­cost analysis was conducted to determine whether a small decline in the purse seine yellowfin catch would generate sufficient benefits in the longline fishery to offset the costs to the purse seine fishery. The benefit to the longline fishery results from a higher yellowfin catch per unit effort This generates higher effort levels in the longline fis hery and results in changes in the catches of other species as well. The extent to which yellowfin catch per unit effort rises depends on the relative importance of growth and natural mortality among the additional juvenile yellowfin that escape the purse seine fishery, and the importance of the adult biomass in determining catch per unit effort. In addition to the biological effects, the higher price obtained for longline as compared with purse seine caught yellowfin is an important determinant of the benefi t of a reduction in purse seine catch.

The extent of the cost of restraining the purse seine catch depends on whether purse seiners can target individual species. If they can target as indicated by the analysis of U.S. purse seine data described earlier, they

5

The Econo mics of Papua New Guinea's Tuna Fisheries

can substitute skipjack for yellowfin in their catch. The cost will be approximately the relatively small differ­ence in price between yellowfin and skipjack multiplied by the reduction in juvenile yellowfin catch. If purse seiners are unable to target as indicated by the analysis of the Japanese data, purse seine effort will need to be restrained to secure a reduction in yellowfin catch. This will also cause a reduction in skipjack catch, thereby making the cost of the policy higher than in the targeting case. The benefit- cost ratio of a policy involving a 1 % decline in the purse seine juvenile yellowfin catch in Papua New Guinea's fishing zone was approximately 9 in the no-targeting case and around 30 in the targeting case. These ratios are subject to substantial error because they are based on estimated variables, but even taking account of the standard errors involved there seems to be a case for considering a reduction in the purse seine yellowfin catch. The present value of the net benefit of reducing the purse seine yellowfin catch in Papua New Guinea waters by 1 % was estimated to be around $3 million. It should be noted that these results are based on the level of activity and the prices and costs experienced in the 1980s.

Search behaviour of purse seine tuna vessels

It has been suggested that the Japanese purse seine fleet adopts a cooperative approach to locating schools of tuna, whereas U.S. vessels behave in a competitive manner. Information sharing would be expected to increase the efficiency of the search process, thereby improving the returns to tuna fi shing and the potential returns to the host nation. A sample of Japanese and U.S. purse seine vessels fishing in Papua New Guinea's fishing zone in the period 1983-86 was used to investi­gate this issue. It was found that at any particular time, the Japanese fleet tended to be more concentrated by area than the U.S. fleet, suggesting a more cooperative approach to fishing. Japanese vessels also had a greater tendency to shift location when higher catch rates were being achieved elsewhere than did U.S. vessels. Statis­tical tests supported the hypothesis that Japanese vessels, unlike U.S. vessels, were moving in response to information on catch rates in other parts of the fish ing zone. Since the analysis tends to support the hypoth­esis of greater infonnation sharing by the Japanese,

6

there should be objective evidence of greater efficiency of the Japanese search process. An analysis of the proportion of trip time consisting of days on which sets were made revealed thatjapanese vessels made sets on between 90 and 95% of days as compared with 77-84% for the U.S. fleet. At least some of the difference could be attributed to the efficiency of the search process.

Fishery rents in Papua New Guinea's exclusive economic zone

The cost estimates for the Japanese fleet can be combined with the catch data for Japanese vessels operating in Papua New Guinea's fishing zone to obtain an estimate of the rents which were generated in the tuna fishery. In view of the evidence presented above on the profitability of the Japanese offshore and distant water tuna fleets it is not surprising that the rent estimates for some categories of vessels fishing in Papua New Guinea are negative in some years. Positive rents, expressed as a percentage of the gross value of the catch, were observed for small longliners (50- 100 GRT) in the following years: 1983 (30.3%), 1984 05.4%), 1985 (33.7%) and 1986 (5.2%); medium sized longliners 000-200 GRT) earned positive rents in 1983 0 3.2%) and broke even in 1986; and large longliners (200- 500 GRT), pole-and-line vessels and group purse seiners made consistent and substantial losses in Papua New Guinea in the period covered by the analysis. This performance may explain why the Japanese withdrew from the Papua New Guinea tuna fisheries after 1987. The rent estimates also provide a guide to Papua New Guinea as to the appropriate level of access fees as a percentage of expected catch. Clearly, small and medium longliners could have paid access fees of more than 6% of gross revenue in the period studied.

Rent generation and sustainable yield

The decision on how best to develop and manage a nation's tuna resource is difficu lt to make, since it embraces a range of social, poli tical and biological factors. In this study, the question of management is analysed on the baSIS of fishery rent and the level of effort applied to the fishery. Controlling the level of effort in order to maximise rent from the fishery is assumed to be the operative goal of management.