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Environmental Incentives:
Australian Experience with Economic Instruments for Environmental Management

Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
Commonwealth of Australia, 1997
ISBN 0 642 26850 9

11. Tradeable resource use rights

11.1 General application

A number of Australian States have introduced tradeable rights for the use of natural resources. These rights include transferable rights for water use, and tradeable quotas for renewable resources such as forestry and fisheries.

11.2 Transferable Water Entitlements

Tradeable rights in water use are commonly described in Australia as transferable water entitlements (TWEs). The ability to transfer water use rights has a number of economic advantages, the main one being that water allocations are no longer linked with land rights, but are traded in a separate market for water as a commodity. In fact, water is traded as a range of commodities, differentiated in terms of location, quality, environmental constraints and security of supply. Transfers may be restricted to a single year, or may be multi-year leases or permanent transfers.

The main rationale for permitting trades is that water, as an input to production activities, will be allocated to the activities with the highest rates of return on water inputs (that is, the highest marginal revenue product).

Initial allocations have usually been made according to land-based entitlements. Where new rights are issued, methods employed include shelf prices, tenders and sale of rights. Equity problems may arise, as in the case of tradeable discharge rights.

Allocations of water that otherwise would not be used can be sold and put to economic use. This bestows benefits on the buyer, who is able to expand production or produce a higher value product, as well as on the seller. For temporary transfers, sellers earn a monetary return, enabling them to boost cash flows for investment, land improvement or other activities.

Permanent transfers may achieve long-term structural adjustments of production within catchments. Evidence on the price of trades (which is not always readily available) suggests that the price per megalitre for permanent trades may be of the order of 100 times the price for temporary trades. Some States, such as New South Wales, allow for trades in allocations of varying security. Thus water entitlements may be bought and sold to suit specific forms of agriculture or other activity.

Nowhere has a completely free market been allowed to function for trades in water rights. Restrictions imposed by water management agencies include spatial conditions (for example, river basins or prescribed zones), volume controls, environmental considerations (for example, preservation of river flow, control of salinity, and protection of wetlands and riverine ecosystems) and prevention of monopoly behaviour in the market for rights.

Agencies play a role of facilitation rather than direct participation in the market for rights, although they usually are empowered to veto trades if the conditions are unacceptable. Most agencies keep registers of buyers and sellers.

Water transfers have increased in most schemes since their introduction. It is evident that most trades have occurred in temporary transfers, in terms of both number and volumes traded.

The workability of markets for transferable water entitlements may be subject to a number of limitations. The prices of trades are generally not publicly revealed. Water rights constitute a valuable capital asset. They may be traded by non-landholders. Sellers reaping capital gains incurred through the buying and selling of rights would be liable for capital gains tax.

One problem that has been encountered is that of 'sleeper' allocations, although this occurs only when the allocated rights exceed the resource availability. Sleeper allocations consist of unused allocations that enter the market once an economic value for entitlements has been demonstrated. The activation of sleeper allocations may place an unexpected demand on the resource, creating new scarcities and difficulties in river management. To overcome this problem, some States have imposed a reduction percentage for trades. Reductions may also be applied on water transfers from irrigation to other economic sectors.

11.3 Australian experience with Transferable Water Entitlements

The Agriculture and Resource Management Council of Australia and New Zealand (ARMCANZ 1995) has produced guidelines for the implementation of property rights in water. A thorough review of Australia's experience with TWEs can be found in the Industry Commission report, Water Resources and Waste Water Disposal (1992). Other surveys undertaken on TWEs include those by Delforce et al. (1990) and Pigram et al. (1992). The Murray-Darling Basin Commission has described experience with water use in the Murray-Darling Basin, including trades in entitlements (1995).

As documented by Pigram et al. (1992), New South Wales, South Australia, Victoria and Queensland have introduced legislative provisions for transferable water use rights. In Western Australia, trial schemes have been established (Collie and Harvey Irrigation Districts) and temporary, permanent and intersectoral transfers are being considered for the south-west, the Carnarvon region and the Ord River Scheme. In Tasmania, a temporary transfer scheme has been introduced in the Winnaleah Irrigation Scheme, and similar schemes may be extended to other parts of the State.

11.4 Transferable Water Entitlements in Victoria

Problem Identification

The Victorian Rural Water Corporation (RWC) manages irrigation water in Victoria. Historically, irrigation water in the State has been in a situation of oversupply, due to an allocation system featuring inflexible administrative procedures, rules and regulations, and water charges at below-cost levels.

Tight budgetary conditions have now placed severe constraints on any further expansion in water supply capacity. Although water is still abundant relative to requirements, there is a foreseeable need to economise on further infrastructure investments and to encourage allocation of water to uses with the highest rates of return. In recent years there has thus been a shift in water policy away from supply augmentation to demand management by promoting more efficient water use.

Instrument Selection

Water in Victoria is allocated at two levels. First, there is a bulk allocation of water to various sectors, such as public irrigators, private diverters and rural towns. There is also an explicit allocation to protect the environment. At the second level, water is allocated within each broad sector of use. The RWC has introduced TWEs to improve water use within one of these sectors - the irrigation sector.

Description of Instrument

Prior to 1886, individuals in Victoria whose property was located beside a river had full riparian rights to use river flows. The Irrigation Act 1886 abolished riparian rights and provided for the State to confer further rights by granting a permit or a licence (Mulligan & Pigram 1989).

The introduction of TWEs created a new phase in the evolution of water management in Victoria. Implementation of TWEs required a new legal framework. A new Act, the Water Act 1989 (proclaimed in December 1990) was introduced. This Act allows for licences, that is, entitlements direct from a river within an irrigation district, to be transferred.

The Act also allows for bulk entitlements, which may be held only by water authorities, to be transferred, subject to parliamentary approval. The legislation applies to permanent and temporary transfers. Permanent transfers meet the needs of farmers wishing to undertake extensive on-farm improvements, expand activities or to leave the irrigation sector. Water licences are issued for 15 years but are expected to be re-issued at the end of this period (Hill 1992). Temporary transfers serve a different market by meeting seasonal demands (Pigram et al. 1992). Temporary transfers are only permitted within seasons.

The legislation does not provide for intersectoral transfers to other non-irrigation users. Trade can occur only within the same bulk supply system, and transfers are subject to approval from the RWC (Hill 1992).

In public irrigation systems, irrigators pay for a water 'right' based on the amount of land they hold that is suitable for gravity fed irrigation and the irrigation district in which they are located. An annual charge must be paid for the right whether it is used or not (Pigram et al. 1992). The RWC allocates these rights each year. For areas outside public irrigation districts, water can be taken from requested streams under a diversion licence (Pigram et al. 1992). Finally, sales of water are available over and above the water right, with total sales dependent on availability of water each year.

Stock and station agents act as brokers for transfers and have information about previous transfers. Prices for transfers are negotiated between the buyer and seller. There are no restrictions on the volume which can be transferred, although owners must retain stock and domestic allocations of water. The RWC must approve all transactions.

Assessment Against Criteria for Evaluation

It is an important point to note that the 'commodity' for which trades are permitted is really a range of commodities, differentiated according to location, volume, environmental constraints and different levels of security. Environmental considerations require that an allocation be made to protect the riverine ecosystems, allowing trading in remaining allocations. The environment should have its own bulk allocation, leaving other water users to trade what is left.

Bulk allocations can be based on various resource attributes, such as volume, capacity shares, salinity, nutrient and pesticide levels, and location.

The effectiveness of TWEs in Victoria may be gauged by the number of transfers and volumes of water traded since the introduction of the scheme. The majority of trades have been for temporary transfers.

It is difficult to assess with any reliability the gains in economic efficiency since the introduction of TWEs. The trend in prices for trades is one indicator of the changing economic value of water to irrigators. If water were allocated to more valuable uses, it is logical to expect that the price would rise over time. The general trend in prices, however, has been downward, reflecting the conditions of oversupply.

According to Pigram et al. (1992), prices paid for temporary transfers have typically been around $18 to $20 per megalitre early in the season when there has been uncertainty concerning total seasonal supply, but they have fallen to around $8 to $10 into each season when excess allocations have been announced. These prices are consistent with figures from the RWC.

Trades have not been common for permanent transfers as irrigators have been reluctant to give up long-term rights for water. The asset price of permanent transfers in the Goulburn-Murray district was around $400 several years ago and has fallen to $270 in high availability areas and $350 in low availability areas. Prices of permanent TWEs at auction for new supplies of water have been between $100 and $775 per megalitre.

While interstate transfers are considered a natural extension of TWEs, there are a number of impediments to trade. In particular, as the States are at different stages of development of TWEs and have different water subsidy regimes, inefficient trade in water may occur.

Administrative structures were established in 1987-88 to process temporary transfers of water rights, and the RWC (1991) did not anticipate that the implementation of permanent transfers would require significant increases in staffing, workload or funding.

The introduction of TWEs is not seen as a revenue raising mechanism by the RWC, although the fee for processing transfers and issuing certificates is being increased to obtain full cost recovery (RWC 1991).

All trading is handled through brokers (such as stock and station agents), which reduces administrative costs incurred by the RWC. Costs are also minimised by achieving a high approval rate for requested transfers, which has been encouraged by a non-refundable application fee and through the availability of regional staff to advise on potential transfers.

Distributional effects of TWEs result from the allocation of water resources away from less productive uses of water to more productive uses and users. The RWC reports a movement of water entitlements away from mixed farming and towards dairy farming, away from saline to less saline areas and from poorer to more profitable farmers. Concentrations of buyers or sellers in particular areas could have broader economic impacts on rural regions.

Individual farmers might face adverse financial conditions if the sale of permanent use rights resulted in a significant decline in farm values. This could affect borrowing potential from commercial banks.

Special concerns are faced by mortgage holders such as banks. Land values generally fall after water is transferred and this may result in reduced equity on loans (Delforce et al. 1990). To safeguard the equity of mortgage holders, the RWC requires written permission from lending agencies or any parties with a financial interest in the irrigation business before the business is allowed to permanently transfer water entitlements (Pigram et al. 1992).

In terms of community acceptability, all parties concerned agree that introduction of the instrument has been a progressive step in the reform of the water sector.

Concluding Evaluation

Although the introduction of TWEs in Victoria has the promise of improving the efficiency of water use, this case study has shown that various factors are vital to its future success. Major issues include the limits placed on transfers with other States due to different subsidy regimes, restrictions on trade between regions or between sectors, and the possibility of rural decline in some areas. Removal of some of these impediments is likely to result in greater efficiency gains than have so far been achieved.

11.5 Individual Transferable Quotas in fisheries management

Without some kind of management control, most fisheries constitute an open-access common property resource. A fundamental theory in fisheries economics is that if the fishing effort and/or catch are not controlled, the economic rent accruing to the industry (that is, the difference between total revenue and total costs from fishing) will be dissipated by excessive numbers of boats and overfishing. Stock depletion can also occur, leading in some cases to commercial extinction of the resource. These fundamental economic aspects of fisheries management are explained by Munro and Scott (1985), Clark (1976), Lecomber (1979, Fisher (1981), and many others.

Regulation of fisheries in Australian waters is usually a joint responsibility of State and Territory governments and the Commonwealth Government. Commonwealth jurisdiction applies between the 3-nautical mile and 200-nautical mile limits, although Offshore Constitutional Settlement arrangements between the States and the Commonwealth vary the 3-mile limit off every State and Territory. This variation may be by methods of fishing or for specific fish species. The Commonwealth also represents Australia in various international forums concerned with the management of fisheries in international waters.

A key agency in fisheries management is the Australian Fisheries Management Authority (AFMA), which was established under the Fisheries Administration Act 1991 as a Commonwealth statutory authority. AFMA operates at arm's length from the Government and the Department of Primary Industries and Energy (AFMA 1995).

Each fishery has a Management Advisory Committee with representatives from State or Territory governments, AFMA and relevant stakeholders. Each committee provides advice on managing the fishery to the AFMA Board of Directors, but ultimately decisions are made by AFMA in accordance with its legislative objectives.

For fisheries involving international agreements, AFMA is an important Commonwealth representative, but other Commonwealth departments may also be involved, including the Department of Primary Industries and Energy, the Department of the Environment, Sport and Territories and the Department of Foreign Affairs and Trade.

An important application of economic instruments for the management of natural resources has been the use of individual transferable quotas (ITQs) for the Southern Bluefin Tuna Fishery and South East Trawl Fishery. In general, AFMA manages ITQs within the Australian Fishing Zone, but in some cases it manages the fishery to the low-water mark in collaboration with the States.

Transferable quotas have also been used in other fisheries within Australia, including abalone fisheries in New South Wales, South Australia and Tasmania, and in the Australian pearl industry.

11.6 Individual Transferable Quotas in the Southern Bluefin Tuna Fishery

Problem Identification

Southern bluefin tuna spawn in open waters to the north-west of Australia and migrate in a southerly and south-easterly direction. Within the Australian Fishing Zone, catches are made by Australian and Japanese fleets, while outside the zone tuna are caught by fleets from Indonesia, Japan, Korea, New Zealand and Taiwan.

A number of factors influenced the need for improved management of the Southern Bluefin Tuna Fishery. First, the fishery was subject to increased fishing effort, leading to declining catches by the Australian fleet and concerns about a reduction in fish stocks. It was evident that the size of the total catch would have to be controlled. Second, earlier controls over fishing concentrated on regulation of inputs and fishing practices, such as restrictions on the type of gear and size of boats. In general, these controls were unsuccessful in regulating the catch. Third, the question of the economic efficiency of the industry was at stake, particularly in terms of profit levels in the industry and sustainable rates of exploitation of the resource.

Instrument Selection

ITQs were introduced to the Australian industry in 1984 and have operated since then. AFMA has managed ITQs for the Southern Bluefin Tuna Fishery within the Australian Fishing Zone since 1991. A new management plan for the fishery was introduced in 1995, further specifying the conditions for the transfer of quotas and the role of AFMA in administering the system of ITQs.

ITQs replaced a pre-existing system of competitive quotas that had been established under an interim management plan in 1983. The competitive quotas resulted in overfishing and overcapitalisation of the industry. Because there was also a minimum size restriction, many fishers carried out 'upgrading' (discarding smaller fish and retaining larger fish to increase the value of their quotas).

Description of Instrument

The system of ITQs for the Australian Southern Bluefin Tuna Fishery must be evaluated in the context of international agreements involving the fishery. Management plans for the fishery are complicated by the fact that the species migrates over long distances and is fished on the high seas as well as within New Zealand's 200-nautical mile limit.

International management arrangements were introduced in 1982, when concerns were expressed about the long-term sustainability of the fishery. This subsequently led to a series of agreements on catch limits by Australia, Japan and New Zealand, as shown in Table 11.1. The 1989 catch limits represent current agreements.

Table 11.1: International quotas for southern bluefin tuna (tonnes/year)

Year Australia Japan New Zealand
1983 21,000 no limit 10,000 fish
1984 21,000 no limit 10,000 fish
1985 14,500 no limit 10,000 fish
1986 14,500 23,150 1,000
1987 11,500 19,500 1,000
1988 11,500 19,500 1,000
1989 6,250 8,800 450
1990 5,265 6,065 420
1991 5,265 6,065 420
1992 5,265 6,065 420
1993 5,265 6,065 420
Source: Neave (1995, p. 55)

The Australian authorities issued ITQs to 136 individuals and companies in 1984. The industry undertook forced rationalisation in the ensuing three years, with the number of quota holders declining to 63. This has increased to 109 quota holders in 1996. Most of the quotas were bought by South Australian operators and Port Lincoln became the main base of the Australian Southern Bluefin Tuna Fishery.

ITQs are fully transferable among operators in the Australian fleet. The total volume of quotas has been reduced in accordance with the reductions in the total allowable catch by Australia determined by international agreement. Quotas may be used in joint venture arrangements between operators from Australia and those from other countries. Several joint ventures have been established with Japan.

Assessment Against Criteria for Evaluation

The use of ITQs for the Southern Bluefin Tuna Fishery provides interesting insights into the operation of systems of tradeable rights for natural resource management. The system has provided strong incentives for fishers to increase their returns from the resource. The system appears to have worked effectively for the Australian fleet, which has been able to adhere to its total quota, restructure its fleet by using more efficient equipment and harvesting methods, and earn higher estimated profits.

The price of quotas has increased dramatically. In 1984, quotas traded for $800-$1200 per tonne, but by 1992 they were worth $20,000 per tonne or $12,200 per tonne measured in 1984 values. Due to appreciation of the yen, lease values in joint venture arrangements have been worth $3,400 per tonne, which capitalises to a value of $34,000 per tonne, assuming a 10 per cent discount rate. The current selling price for southern bluefin tuna is $26,000 per tonne. This may reflect the higher discount rate used by banks for tuna assets, which typically is 14 per cent.

Distributional effects have been significant, with many marginal producers being forced to leave the fishery. In addition, the quotas have been consolidated within the South Australian fleet at the expense of New South Wales and Western Australia, with adverse regional economic impacts in some communities.

Allowable catches have been restricted to low levels to achieve regeneration of the stock. The long-term effects of ITQs on the fishery have yet to be assessed. It has been difficult to estimate stock levels and population dynamics. Prediction of future changes in the stock are complicated by long time lags in the response of the stock to management actions, the effects of which may last for up to 20 years.

The meeting of the Scientific Committee of Commission for the Convention of Southern Bluefin Tuna (CCSBT) in August 1996 discussed the status of the southern bluefin tuna resource. Estimates of historical stock size suggest that a minimum was reached in 1994, following which there are signs of a slow recovery. The CCSBT has set an objective of rebuilding the southern bluefin tuna stock to its 1980 level by 2020. Proposals are also being discussed for an experimental fishing program to resolve some of the uncertainty surrounding stock assessments.

Monitoring and compliance are carried out differently in the various States. For the Australian fleet, the catch is checked at the point of landing or in fish markets. Japanese boats are also subject to in-port pre- and post-fishing inspections.

An interesting side-effect of the system has been the encouragement of fish farming for tuna. Wild stock is captured and conditioned in ponds, with the Japanese sashimi market a profitable outlet.

'Free rider' behaviour could become a management problem, with other countries, particularly Taiwan, harvesting fish outside the system. In addition, there is no quota for recreational fishing, which could assume increasing importance in future years.

Concluding Evaluation

ITQs in the Australian Southern Bluefin Tuna Fishery have been successful in controlling catch levels and achieving maximum economic returns from the resource. The main difficulty with the fishery has been uncertainty about the long-term population dynamics.

11.7 Individual Transferable Quotas in the South East Fishery

Problem Identification

The South East Fishery covers a wide range of commercial fish species, harvesting more than 90 species of finfish and invertebrates. The main species include blue grenadier, blue warehou, blue-eye trevalla, eastern gemfish, eastern school whiting, jackass morwong, john dory, ling, mirror dory, ocean perch, orange roughy, redfish, royal red prawn, silver trevally, spotted warehou, tiger flathead and western gemfish. Ten species account for more than 80 per cent of the catch and one species, orange roughy, provides one-third of the catch (Staples & Tilzey 1995).

The main fishing method is demersal trawling, with Danish seining also occurring off Victoria. Other methods include drop-lining and gill-netting. The total recorded catch increased from the early 1980s - largely due to the significant increase in catches of orange roughy - reached a peak in 1990, and has continued to decline since.

Instrument Selection

Until 1992 the fishery was controlled mainly through restrictions on effort. In 1991, under the provisions of the Fisheries Act, the Minister for Primary Industries introduced the South East Fishery (Individual Transferable Quota) Management Plan 1991 (Commonwealth of Australia 1991b), which changed the management focus from input controls to output controls in the fishery. The plan provided for total allowable catches and ITQs to be applied to trawl fishing. The scheme was amended in 1992 and discontinued at the end of 1992.

As from 1 January 1993, AFMA became responsible for managing the fishery under the provisions of the Fisheries Management Act 1991. AFMA has managed the fishery since then by means of administrative arrangements, which rely on the issue of permits under section 32 of the Fisheries Management Act. These permits function in the same way as ITQs. The conditions applying to the permits are defined in section 32(6) of the Act. Fees and levies are collected on permits, which include an application fee, an issue fee, a general boat levy, and a research and development levy.

A new management plan is currently being prepared for the fishery, to take effect in 1997. For species such as blue-eye trevalla, blue warehou and ling taken by non-trawl methods, total allowable catches and ITQs are expected to be introduced by 1 January 1998.

The reasons for introducing ITQs in the South East Fishery were similar to those for the Southern Bluefin Tuna Fishery - overfishing of certain species, inappropriate fishing methods, stock depletion, declining catches and decreasing profits in the industry. Earlier attempts to regulate the fishery, including a boat replacement policy, restrictions on the size of vessels, limitations on entry to the industry and various kinds of input controls, failed to prevent economic deterioration of the industry and threatened stock depletion for some species.

Description of Instrument

ITQs are currently applicable to 16 species or species groups. Each fisher has been allocated a given number of quota units for each species, determined in accordance with a formula, taking into account the number of boat units (based on boat size and engine power) as well as recorded historical catches from 1985 to 1989. The total number of permits available to the South East Fishery in 1995 was 151, of which 29 were inactive. Quota units are transferable, subject to approval by the management authority.

The total number of quota units for each species is limited by its total allowable catch, which is determined annually for each species. Each quota unit represents 1 kilogram liveweight, but this is adjusted in proportion to any change that may be announced in the total allowable catch. Some of the quota species are caught by recreational fishers, but these are exempt from the quota system.

AFMA's management objectives in managing the South East Fishery are:

Assessment Against Criteria for Evaluation

Although it is too early to assess the full effects of the new management regime, there are already signs of industry restructuring and improved profitability. Fishing effort has not altered greatly since 1986, but the efficiency of operations has increased.

Monitoring and stock assessment procedures have been improved in recent years, thus predictions of population dynamics should improve and lead to better management of the fishery.

Since the introduction of ITQs to the South East Fishery, there has been considerable restructuring of the orange roughy fleet, with a number of vessels leaving the fishery and others diversifying to fish the upper slope fishery. In assessing the effects of management systems on natural resources, the possible boundaries of effect should be taken into consideration in the design phase.

Concluding Evaluation

The system of ITQs applicable to the South East Fishery is potentially an effective and economically attractive method of controlling the catch and ensuring long-run sustainability of the resource. Economic efficiency appears to be improving in the industry as a consequence of the new management approach. Although total allowable catches/ITQs are relatively successful in the South East Fishery, the multi-species nature of the fishery makes it difficult to extend the system on a species basis. More novel approaches to managing species outside the quota system may need to be considered.

11.8 Control of fishing effort in the Northern Prawn Fishery

Problem Identification

The Northern Prawn Fishery operates in an area extending from Cape York Peninsula in the east to Cape Londonderry in the west, including the Gulf of Carpentaria. The main species caught include the banana prawn, tiger prawn and endeavour prawn.

The industry began in the mid-1960s, operating from the port of Karumba. Many of the boats entering the industry came from waters off east Queensland, following a decline in catches from that area. These boats were primarily small boats, described as 'wet boats'. They were constructed of wood and stored their catches in brine. Since then, new vessel types known as 'dry boats' have entered the industry. These boats are large freezer trawlers with a capacity for large catches and product storage.

Management controls were introduced by the Australia Fisheries Council in 1977. During the 1980s the Northern Fisheries Committee managed the fishery, with representatives from Queensland, Western Australia, the Northern Territory, the Commonwealth Government, the fishing industry and CSIRO Division of Fisheries and Oceanography. Since 1991 AFMA has managed it, with advice from the Northern Prawn Fishery Management Advisory Committee.

Instrument Selection

The Northern Prawn Fishery Management Plan 1995 was introduced in February 1995 under the provisions of the Fisheries Management Act 1991. Haynes and Pascoe (1988), Pascoe (1988), Collins and Kloessing (1988), and Pascoe and Scott (1989) have described the operation of the management regime before 1991.

The primary focus for managing the fishery has been on fishing effort rather than on catch. Such an approach is common in fisheries, where it can be difficult to estimate stocks and enforce compliance with catch quotas. Conservation of the stock has not been considered to be a problem in managing the resource, as a range of management controls has been in place, such as seasonal restrictions and regulations governing gear and fishing methods.

Description of Instrument

The fishery is a limited entry fishery. Each boat operating in the industry requires a class B unit (bestowing the right to one class B unit) giving an entitlement to fish. The number of active licence entitlements has decreased from between 250 and 290 in the mid-1980s to 130 active vessels as a result of buy-back schemes introduced in the late 1980s and early 1990s, combined with a compulsory surrender of 30 per cent of units in 1993. An additional 10 licences were issued for a subsection of the fishery.

Class B licences failed to control the growth of fishing effort, as they did not allow for the increased size of vessels or for increased fishing power. It was estimated that the effective level of effort per unit of time more than doubled since 1979 and increased more than tenfold since 1970 (Buckworth 1987). The average catch per unit effort remained constant in the mid-1980s, although it decreased for tiger prawns and increased for banana prawns (Collins & Kloessing 1988).

To control fishing effort, it was decided to introduce additional controls, implemented through a system of class A units. Each class A unit is a measure of fishing effort, calculated as the sum of the engine power (in kilowatts) and hull size (in cubic metres of under deck volume).

The average size of vessels in the industry increased to around 427 class A units in the 1980s. Boats are classified in terms of two main groups: those less than or equal to 375 class A units and those above this size. By the late 1980s the estimated capacity of the fleet was 100,000 class A units.

The main provision for reducing the fishing effort was through buy-back arrangements known as the Voluntary Adjustment Scheme. This scheme was initially funded with a grant of $3 million by the Commonwealth Government, but was then funded entirely by the operators. It covered both class B and class A units. Once purchased through the Voluntary Adjustment Scheme, the units ceased to exist. Unit holders are also repaying the loan required to purchase units from the buy-back schemes, which was a total of approximately $20 million in addition to the direct government grants.

To cover the costs of administration and compliance for the management system, each operator pays a levy according to the number of class A units held. The levy rate is lower for boats equal to or smaller than 375 class A units. Contributions to the scheme have been around $4 million per year.

Assessment Against Criteria for Evaluation

The Voluntary Adjustment Scheme initially aimed to achieve a target of 70,000 class A units by 1993, a decrease of 46,000 units from the 1985 level. It also aimed to reduce the number of class B units to 160, representing a 40 per cent reduction.

Policy evaluations conducted with a linear programming model by the Australian Bureau of Agricultural and Resource Economics (ABARE) in the late 1980s indicated that the industry could earn a higher level of economic rent by reducing fishing effort below 70,000 units (Haynes & Pascoe 1988). ABARE's model simulations revealed that the feasible range of values that maximises economic rent extends to quite a low level - 24,000 class A units in some simulations; 30,000 in other baseline simulations; and 19,000 in sensitivity analyses. The upper end of the range of values extended to 48,000 units. The ABARE analyses indicated that an appropriate target to control fishing effort and increase economic rent in the industry would be 50,000 class A units.

AFMA made a policy decision in the early 1990s to cancel up to 30 per cent of class A units and reduce the number to around 50,000 units. This resulted in legal challenges by some operators in the industry, but the courts have upheld the decision as equitable.

There is strong support in the theoretical literature for this kind of policy action. Munro and Scott (1985, p. 624), for example, have stated that:

'If the authorities, i.e. the government, should intervene in the fishery to conserve the resource by imposing seasonal or yearly limits on the total harvest, but do nothing to restrict the number of fishers and vessels competing for the limited harvests, then excess capacity is almost certain to emerge in the fishery.'

The theory indicates that a significant reduction in fishing effort is generally required to restore resource rents in the industry. Furthermore, it is common for the level of effort required to achieve an economic optimum (that is, the maximisation of rent for the fishery as a whole) to be lower than the level of effort that results in the maximum biological sustained yield.

The application of models in the management of renewable resources such as fisheries is a complex task. The process involves conceptualising the problem to be addressed, identifying its main characteristics and management controls, formulating the mathematical specifications of the model, fitting the model to available empirical evidence, simulating the effects of management options, and interpreting the results for policy purposes. At each of these stages judgements are required.

Prediction of the optimal level of harvesting and fishing effort can depend on whether the underlying model is static (that is, repeats a given set of bioeconomic conditions) or dynamic (that is, takes into account changing conditions and required adaptations in management controls). Dynamic models of fisheries are largely confined to the theoretical literature. They are mathematically complex and are difficult to apply to real-world management problems. In practice, much greater reliance has been placed on static models.

The Haynes-Pascoe model is a static model. The theoretical principles underlying the model are widely accepted. Linear programming models have, furthermore, been widely applied in the management of natural resources, including fisheries.

One of the claims made against the Haynes-Pascoe analysis was that their modelling work did not specify probability distributions for costs within the industry and for other management variables such as yield-effort relationships. The management decision in relation to the Northern Prawn Fishery, however, involved uncertainty rather than risk in assessing the effect of restricting fishing effort on economic rent in the industry. 'Risk' in economic decisions is usually defined in conjunction with known probability distributions for the system variables. When uncertainty prevails, the probability distributions are unknown.

Uncertainty is endemic in nearly all natural resource management problems. Uncertainty in fisheries modelling can arise from several sources. It may refer to ignorance about the variables to include in the model; to inadequate information about the parameters or functional forms determining the interrelations of variables in the model; and to limitations in the data concerning variables that affect the model's predictions, such as costs, prices, the technology of harvesting and the biological behaviour of the fishery.

There are several ways of dealing with the problem of uncertainty in natural resource and environmental management when the relevant probability distributions are unknown (Norton 1984; Dixon, James & Sherman 1989; OECD 1994). Haynes and Pascoe applied the technique of 'sensitivity analysis'.

An important factor taken into consideration in interpreting the results of the Haynes-Pascoe modelling work is the prospect of technological change in fishing methods, resulting in an increase in fishing power in the future. This is an additional source of uncertainty in interpreting the model results. It suggests that, to maintain effective control over fishing effort in the future, the fleet size should be even smaller than that predicted by the model. The required compensation for this effect, in terms of reduced fleet size, is a matter of judgement, but the direction of required change in fleet size is clearly downward. This does not take into account additional input controls imposed by AFMA that are being used to restrict effort, including area and time closures, where the current fishery operates for just over six months of the year.

Concluding Evaluation

Use of restrictions on harvesting effort as a means of regulating the Northern Prawn Fishery has been well suited to the particular characteristics of the natural resource. In this case, where the level of economic rent earned by the industry rather than sustainability of the resource has been the major issue, it has been more effective to apply restrictions on inputs rather than on outputs of the industry.

The system of class B and class A units has enabled management authorities to control both the number and size of vessels. The case study provides an interesting example of how formal economic modelling, in this case the use of linear programming, can be used to facilitate the formulation of management targets. Uncertainties over the appropriate level of input control originally created some difficulties in achieving acceptance of the management policies by all operators in the industry, when the process was implemented in 1993. In 1996, industry acceptance and support for the approach is markedly different, with significant economic improvements resulting for both the fishery as a whole and individual operators.

11.9 Log pricing and allocation

Pricing forest products involves complex considerations affecting management of the forest estate, harvesting strategies, environmental protection, the development of plantations, the financial performance and future development of the wood processing industry, and the economic and social aspects of communities dependent on forest resources.

Pricing and allocating logs from publicly owned forests are essentially the responsibility of the States and Territories. The Commonwealth, however, is involved in processes such as approvals of prices and volumes for export woodchips. The Commonwealth can also influence the pricing practices of the States and Territories by way of nationally agreed principles and policy statements. The National Forest Policy Statement, for example, which has been endorsed by the Commonwealth and all States and Territories, includes recommendations on log pricing and allocation (Commonwealth of Australia 1992c). The commitment of the Australian Government to the National Forest Policy Statement was reaffirmed in a recent statement by the Minister for the Environment (Commonwealth of Australia 1996).

In the past, forest agencies adopted pricing policies described as 'administrative pricing', under which log prices were determined almost unilaterally by the agencies themselves. This led to perceptions of financial inefficiency and subsidisation of forest products supplied from public lands, loss of opportunity to achieve high value adding in the timber industry, and impediments to the development of plantations, particularly those dependent on private investment.

Markets for timber are inherently competitive. While logs themselves are not generally traded interstate or internationally because of high transport costs, the intermediate and final products produced from logs and thinnings are vigorously traded commodities. There is competition also between sawn timber and other construction materials, such as steel, house bricks and concrete. Within sawlog markets, it is possible to substitute hardwood and softwood timbers; this is already occurring at a rapid rate.

Over the last few years there has been a move towards market-based mechanisms for pricing forest products from publicly owned native forests and plantations. Several important inquiries, reports and policy processes have led to these changes, which are briefly discussed below.

Pricing must be considered simultaneously with volume and the duration of contract periods over which supplies are guaranteed. The price that industry is prepared to pay for wood will depend on the degree of confidence that is placed in the capacity of the forest agency to guarantee delivery of contracted volumes. Investment in the industry, job creation and value adding all depend critically on industry perceptions of security of supply.

In conjunction with pricing reforms, governments have made strong commitments to meet forest-related environmental objectives. The Commonwealth Government and State governments are proceeding with Comprehensive Regional Assessments, agreed under the National Forest Policy Statement, to establish a world-class system of conservation reserves. Governments are also implementing stringent codes of management practice and other regulations to ensure ecologically sustainable management of areas available for timber production.

An important principle is that the full costs of forest management should be incorporated in log prices, including research and development costs, external environmental damage costs (for example, those related to off-site sedimentation of streams or adverse impacts on water supply or quality) and the costs of meeting environmental regulations. Many environmental costs are already incorporated in pricing regimes. As noted by the Resource Assessment Commission in its Forest and Timber Inquiry (RAC 1992), if satisfactory performance is achieved in meeting codes of forest practice and other environmental regulations, the compliance costs will automatically be included in the cost structure for wood production. Agencies frequently incur additional costs not related to timber production, such as maintenance of roads and fire management, and these are being met largely through direct appropriations from State Treasuries as community service obligations.

Ecologically Sustainable Development Forest Use Working Group

The Ecologically Sustainable Development (ESD) Forest Use Working Group made five major recommendations on ways of optimising economic benefits of forestry within ecological constraints (Commonwealth of Australia 1991b). Recommendations 18 and 19 relate to pricing and allocation functions.

Recommendation 18 is that wood harvesting rights and wood volumes from public forests be allocated to wood processors through a system which is based on:

Resource Assessment Commission

The RAC made the following key recommendations in relation to log pricing and allocation (RAC 1992).

National Forest Policy Statement

The National Forest Policy Statement recommended the following principles for wood allocation and pricing.

Queensland

Queensland has extensive native forest resources and a rapidly expanding plantation estate. The Forest Service was recently transformed into a commercial agency, with its policy and regulatory functions being transferred to a separate management unit in the Department of Primary Industries.

Market mechanisms (auctions and negotiations between the Forest Service and wood purchasers) have been used for some years to price plantation products. This is consistent with the aim of having the agency function according to commercial principles.

More commercial pricing practices have been difficult to implement for native forest products. The native forest sector has an inherited industry structure with small-scale producers, strong socioeconomic links with regional communities, traditional approaches and mechanisms for pricing and allocation, and prospects of a shrinking resource base.

Stumpage values are estimated in the usual way by subtracting extraction costs from the value of the mix of timber products supplied to final markets. Extraction costs include the costs of harvesting, snigging, environmental protection, labour on-costs, infrastructure and mill processing. The aim is to produce a single price for sawlogs within each predetermined supply zone.

New South Wales

New South Wales is moving rapidly towards a commercial approach in its wood pricing policies. Since 1988, State Forests has been required to be self-funding. The Government has made it clear that the timber industry should not be subsidised.

To date, quota quality logs have been allocated under annual and long-term wood supply agreements, with other logs being offered on a tender basis. State Forests recently attempted to introduce a competitive tendering process, including clawbacks, in the Casino Supply Area. The proposed system featured tradeable rights for specified volumes over agreed time intervals, roll-over provisions and no restrictions on end uses of logs. The proposal was met with strong resistance by industry, and was abandoned.

Conditions relating to contracts for log allocations, including pricing, volumes and length of contract, are currently under review, in parallel with assessments being undertaken as part of the process to implement the National Forest Policy Statement.

Victoria

In Victoria, industry development is a stated aim of government policy. The main guidelines for implementation of pricing and allocation policies are contained in the 1986 Timber Industry Strategy (Victorian Government 1986).

Allocations are 15 years and upwards, with provisions for renewal. Conditions are re-negotiated after 10 years. Contracts must satisfy the requirements of the Value Adding Utilisation system. Allocations are put to tender if forfeited, with matching bids by the holder allowed.

Separate fees are payable for access (under licence conditions) and for timber extracted. The 'price' of timber on nearly all logs sold consists of a royalty payment, determined under the royalty equation system. In principle, the royalty rates are fixed so that the royalty (stumpage price) plus transport costs will be equal for all areas supplying a particular market.

Royalties are based on agreements, some have automatic indexing arrangements and others may be referred to arbitration. Prices are determined for different grades of logs, with price differentials designed to encourage buyers to take the lower grades.

Tasmania

Tasmania became a signatory of the National Forest Policy only recently. The focus of its policy on pricing and allocation is transparency and reliance on market signals. Policy requires that a fair rate of return be earned on public assets employed, and that any subsidies should be identified and publicly reported. Community service obligations are funded directly on an annual basis.

Allocations comprise a mix of administered, closed and open tenders. The system allows free entry and exit from the industry with tradeable quotas. There will be a progression from historical allocations to roll-over evergreen contracts in the near future.

Prices take the form of royalty payments. Where royalties are established by direct negotiation or under a review process, market factors are taken into account, such as changes in the consumer price index, state of the market, industry's capacity to pay, comparative royalties on the mainland, import parity and export product values.

South Australia

South Australia has an extensive plantation estate, and virtually no native forests. The State supplies 50 per cent of the softwood trade in Australia. Approximately 30 per cent of the resource is privately owned.

South Australia is the only State in Australia where the Government owns and operates downstream processing plants as well as managing the raw resource. All of its operations are managed on commercial lines, with an acceptable rate of return being one of the management objectives. Total quality management principles are adopted.

Allocations are given with terms of 10 to 20 years and are transferable, but only with departmental approval. Most of the wood from plantations is sold to the department's own processing plants. Licences are granted to other buyers, with conditions relating to volume and quality of logs. The Government has indicated its willingness to enter into long-term supply agreements with pulp mills.

Prices for both sawlogs and pulp logs are determined by negotiation, based on what the market will bear.

Western Australia

Western Australia has an integrated system of logging, whereby the Department of Conservation and Land Management (CALM) delivers all softwood and hardwood to the mill door. The department organises and manages contracting teams to conduct harvesting operations. The two main management objectives are to maximise profit and to encourage industry development.

Allocations are made in terms of volume. The length of contracts varies from 5 years for small firms to 15 years for larger firms. Some contracts are backed by legislation under the State Agreements Act. Special consideration is given to purchasers who can demonstrate value adding and efficient marketing (for example, producers of Valwood).

Auctions and tenders are being used to top up allocations, and all new resources becoming available are sold through tender.

Prices are determined as royalties, based on the highest price industry can afford to pay. The target price varies according to the particular class of log. Prices are indexed annually to maintain the real value of logs.

Prices are required to cover the basic costs of production and ensure a reasonable rate of return. An important principle underlying pricing in Western Australia is that royalties/stumpages should be high enough to make each forest rotation financially viable in its own right. That is, the discounted value of all costs required to establish and manage a forest stand over one rotation should equal the discounted value of revenues over the same rotation.


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