Individual Fishing Quotas: Better Information Could Improve	 
Program Management (11-DEC-02, GAO-03-159).			 
                                                                 
To assist in deliberations on individual fishing quota (IFQ)	 
programs, GAO determined (1) the extent of consolidation of quota
holdings in three IFQ programs (Alaskan halibut and sablefish,	 
wreckfish, and surfclam/ocean quahog); (2) the extent of foreign 
holdings of quota in these programs; and (3) the economic effect 
of the IFQ program on Alaskan halibut and sablefish processors.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-159 					        
    ACCNO:   A05702						        
  TITLE:     Individual Fishing Quotas: Better Information Could      
Improve Program Management					 
     DATE:   12/11/2002 
  SUBJECT:   Economic analysis					 
	     Fishing industry					 
	     Marine resources conservation			 
	     Program evaluation 				 

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GAO-03-159

                                       A

Report to the Chairman and Ranking Minority Member, Subcommittee on
Oceans, Atmosphere, and Fisheries, Committee on Commerce, Science, and
Transportation, U. S. Senate

December 2002 INDIVIDUAL FISHING QUOTAS Better Information Could Improve
Program Management

GAO- 03- 159

Letter 1 Results in Brief 3 Background 5 Consolidation of Quota Holdings
Occurred in All Three IFQ

Programs 14 No Foreign- Owned Entities Currently Hold Quota 19 Economic
Effects on Halibut and Sablefish Processors Varied and Are Difficult to
Quantify 20

Conclusions 29 Recommendations for Executive Action 30 Agency Comments and
Our Evaluation 30

Appendix I: Scope and Methodology 33

Appendix II: National Marine Fisheries Service Data on Quota Holdings 35

Appendix III: Surfclam/ Ocean Quahog Processing Sector 37

Appendix IV: Alaskan Ports and Major Transportation Networks 38

Appendix V: Comments from the Department of Commerce 41

Appendix VI: GAO Contact and Staff Acknowledgments 49 Tables Table 1:
Examples of IFQ Program Objectives 12

Table 2: Summary of Quota Allocation and Accumulation Rules, by IFQ
Program 13 Table 3: Halibut Buyers, by Category, 1995 and 1999 22 Table 4:
Changes in the Number of Plants Processing Halibut and

Sablefish, 1995 through 2001 23 Table 5: Price Margins in Selected Pre-
and Post- IFQ Years 27 Table 6: Average Product Value Percentage, by
Species, for Plants

Processing Halibut and Sablefish, 1994 and 2001 28 Table 7: Alaskan
Halibut and Sablefish Quota Holders, 1995

through 2001 35 Table 8: Wreckfish Quota Holders, 1992 to 2002 35 Table 9:
Surfclam and Ocean Quahog Quota Holders, 1990 to 2002 36

Table 10: Surfclam and Ocean Quahog Processors, 1990 and 2000 37 Table 11:
Largest Alaskan Halibut Ports, 1995 and 2001 39 Table 12: Largest Alaskan
Sablefish Ports, 1995 and 2001 40

Figures Figure 1: Halibut Being Displayed 7 Figure 2: Photograph of a
Sablefish 8

Figure 3: Drawing of a Wreckfish 9 Figure 4: Drawing of a Surfclam 10
Figure 5: Drawing of an Ocean Quahog 11 Figure 6: Fewer Surfclam Quota
Holders Than NMFS Data

Indicate 15 Figure 7: Fewer Ocean Quahog Quota Holders Than NMFS Data

Indicate 16 Figure 8: Fresh Halibut as a Percentage of Total Halibut

Production, 1984 through 2001 21 Figure 9: Ex- Vessel Halibut Prices, 1984
through 2001 26 Figure 10: Map of Alaskan Ports and Major Transportation
Networks 38

Abbreviations

IFQ individual fishing quota NMFS National Marine Fisheries Service NOAA
National Oceanic and Atmospheric Administration

Letter

December 11, 2002 The Honorable John F. Kerry Chairman The Honorable
Olympia J. Snowe Ranking Minority Member Subcommittee on Oceans,
Atmosphere, and Fisheries Committee on Commerce, Science, and
Transportation United States Senate Overfishing is a problem with far-
reaching ecological and economic consequences. When a fishery* one or more
stocks of fish within a geographic area* is unable to sustain itself, it
transforms the marine ecosystem and threatens the livelihood of many U. S.
fishermen. About 35 percent of the U. S. fish stocks assessed by the
Department of Commerce*s National Marine Fisheries Service (NMFS) are
overfished or will be overfished if conditions do not change. Furthermore,
while the

domestic commercial fish catch in the United States remained relatively
the same in 2001 as it was in 1990, U. S. consumption of domestic and
imported fish increased by 13 percent.

Fishery management practices in U. S. waters are developed primarily by
regional fishery management councils established under the Magnuson-
Stevens Fishery Conservation and Management Act (Magnuson- Stevens Act). 1
Fishery management councils, under the direction of NMFS, have used
several types of controls to maintain the health of a fishery. One set of
controls focuses on the way fishing is conducted, such as placing
restrictions on gear (e. g., type and amount), vessels (e. g., size),
areas fished, times when fishing can occur, or the number of people
allowed to fish. Another set of controls is designed to directly limit the
amount of fish caught by setting catch limits for the entire

fishery or for specific vessels, owners, or operators. In some instances,
councils may use both types of controls. These efforts have sometimes had
unintended consequences: fishermen used larger vessels and more gear to
catch the same amount of fish, and fishing conditions became unsafe when

fishermen raced to catch as much fish as they could within the time period
allowed. Such outcomes have led to the search for innovative fishery
management tools that balance the competing interests of those who depend
on fishing for their livelihoods and the health of the fish stock.

1 P. L. 94- 265, as amended (16 U. S. C. 1801 et seq.).

In 1990, NMFS started using individual fishing quotas (IFQ), a
conservation and management tool that sets catch limits for individual
vessel owners or operators. Under an IFQ program, a regional fishery
management council sets a maximum, or total allowable catch, in a
particular fishery* typically for a year* based on stock assessments and
other indicators of biological productivity, and it allocates the
privilege to harvest a certain portion of the catch in the form of quota
to eligible vessels, fishermen, or other recipients. These quota holders
may then fish their quota or lease, sell, or otherwise transfer their
quota according to program rules. These rules must be consistent with U.
S. law and regulations. For example, among other things, the Magnuson-
Stevens Act prohibits any entity from holding an excessive share of quota
in any particular fishery. In addition, the implementing regulations of
each program, in effect, generally preclude foreign individuals or
entities from holding quota.

At the time of our review, NMFS had implemented three IFQ programs: (1)
the Alaskan halibut and sablefish (black cod) program in 1995, (2) the
South Atlantic wreckfish (snapper- grouper complex) program in 1992, and
(3) the Mid- Atlantic surfclam/ ocean quahog program in 1990. In addition,
IFQ programs are being considered for several fisheries, such as the
Bering Sea crab, the Gulf of Alaska groundfish (e. g., pollock, cod, and
sole), and the Gulf of Mexico red snapper.

IFQ programs have achieved many of the desired conservation and management
benefits, such as helping to stabilize fisheries, reducing excessive
investment in fishing capacity, and improving safety. However, they have
also raised concerns about the fairness of quota allocations, the

potential for quota consolidation among a few holders, and the economic
effects of IFQ programs on the fishing industry and fishing communities.
Responding to these concerns, Congress, through the Sustainable Fisheries
Act of 1996, placed a moratorium on new IFQ programs. Congress later
extended the moratorium through September 30, 2002, and then allowed it to
expire.

To assist in deliberations on IFQ programs, you asked us to determine (1)
the extent of consolidation of quota holdings, (2) the extent of foreign
holdings of quota, and (3) the economic effect of IFQ programs on seafood
processors. Regarding the economic effect on processors, we limited our
review to the Alaskan halibut and sablefish processors because few of
these processors were eligible to hold quota under the provisions of the
Alaskan IFQ program. In contrast, processors could hold quota under the
surfclam/ ocean quahog program, and most of the wreckfish quota was not

being fished. See appendix I for additional details on our scope and
methodology.

Results in Brief All three IFQ programs have experienced some
consolidation of quota holdings, and the extent of this consolidation may
be affected by each

program*s governing rules. According to NMFS data, from 1995 through 2001,
the number of halibut and sablefish quota holders decreased by about 27
and 15 percent, respectively. From 1992 to 2002, the number of wreckfish
quota holders decreased by 49 percent. From 1990 to 2002, the number of
surfclam and ocean quahog quota holders decreased by about 17 and 34
percent, respectively. According to our analysis, however, consolidation
of surfclam and ocean quahog quota is greater than NMFS data indicate,
because different quota holders of record are often part of a single
corporation or family business that, in effect, controls many holdings.
For example, for 2002, we determined that consolidation of quota

in the surfclam program was about twice that indicated by NMFS data and
that one entity alone controlled at least 27 percent of the quota. Program
rules may affect the extent of consolidation and the information collected
in each IFQ program. In particular, the Alaskan halibut and sablefish
program has specific and measurable limits on how much quota any one
individual or entity can hold. Limits on individual halibut quota
holdings, for example, range from 0.5 percent to 1.5 percent, depending on
the fishing area, and sablefish holdings are limited to 1 percent. In
contrast, the surfclam/ ocean quahog and wreckfish programs have no
specific and measurable limits on quota holdings, relying instead on
federal antitrust laws to determine whether any quota holdings are
excessive. As a result, NMFS does not routinely gather and assess
information on who controls the use of the surfclam/ ocean quahog and
wreckfish quota. Furthermore, without defined limits set by the councils
on the amount of quota an individual or entity can hold, it is difficult
to determine whether any quota

holdings in a particular fishery would be viewed as excessive, as
prohibited by the Magnuson- Stevens Act.

We did not identify any instances where foreign entities currently hold or
control quota. In the surfclam/ ocean quahog program, however, a U. S.
member firm of a foreign business that provides financial services
recently held quota while acting as a transfer agent in the sale of the
quota, but it did not control the use of the quota. In addition, two
surfclam/ ocean

quahog processors owned by foreign companies controlled the use of quota.
In one case, a subsidiary of one foreign- owned company received quota;
however, foreign control of the quota ended when a group of

Americans bought out the foreign owners. In the other case, a foreignowned
company sold its fishing vessels with qualifying catch histories to an
individual qualified to receive quota in exchange for control over the
quota

use; control of the quota remained with the foreign- owned processing
company until the processing company was sold to a U. S.- owned firm. The
implementing regulations of each program, in effect, generally preclude
foreign entities from holding quota. The Alaskan halibut and sablefish

program explicitly prohibits foreign citizens and businesses from holding
quota and requires all quota transfer applicants to declare themselves to
be U. S. citizens or U. S. entities. In contrast, the surfclam/ ocean
quahog and wreckfish programs tie eligibility for holding quota to the
requirements for

owning a U. S.- documented vessel engaged in the fisheries of the United
States, that is, being a U. S. citizen or an entity 75 percent owned and
controlled by U. S. citizens. However, these two programs do not require

quota holders or transfer applicants to declare that they are U. S.
citizens or U. S. entities. As a result, the potential exists for the
transfer of surfclam, ocean quahog, and wreckfish quota to foreign
entities.

The economic effects of the halibut and sablefish IFQ program are not
uniform. Some processors were adversely affected by the implementation of
the program, while others benefited. It is difficult, however, to quantify
the actual effects. With respect to halibut, in particular, the IFQ
program extended the fishing season from a *race for fish* of a few days
to a season of 8 months. This resulted in a significant increase in the
fresh halibut market for some processors and a corresponding decrease in
the frozen halibut market for others. Sablefish did not undergo a similar
market change and remained primarily a frozen product sold in the Asian
market. While we can determine some general effects on processors,
information is

not available to precisely quantify these effects. The only estimate of
the IFQ program*s economic effect on processors is a 2002 study
commissioned by the state of Alaska. The study concluded that processors
were hurt significantly by the IFQ program and estimated that halibut
processors, for example, experienced a 56 percent ($ 8.7 million) loss in
gross operating margins. However, we could not validate or replicate the
study*s results, because we did not have access to the proprietary data
used. Nonetheless, our analysis of available public data and the
methodology used in the study, as well as the analyses of others, raised
several concerns about the reliability of the study*s estimates. For
example, the study used pre- IFQ processor margins for 1992- 1993* a time
period where, coincidentally, there was a dip in halibut prices* and,
therefore, a

comparison with post- IFQ margins may indicate greater economic losses to
processors than would be indicated if different base years were used.
Also,

the study did not take into account other factors that may affect profits,
such as the diversity and value of other species processed.

We are making several recommendations to the Secretary of Commerce to
collect and analyze information on quota holders, require regional fishery
management councils to define what constitutes an excessive share for the
fishery in future IFQ programs, and provide guidance to the councils on
the factors to consider when determining what constitutes an excessive
share. In commenting on a draft of this report, the department agreed in
principle

with our recommendations to collect and analyze information on quota
holders and to provide guidance for setting limits on quota holdings in
future programs. The department, however, disagreed with our
recommendation to set limits on the amount of quota an individual or
entity may hold in future IFQ programs, stating that such limits might be
warranted and necessary in certain cases, but not in all IFQ programs. The
Magnuson- Stevens Act clearly mandates that new IFQ programs prevent any
person from acquiring an excessive share of quota. We agree that market
performance and other issues should be considered and did not mean to
imply otherwise. We continue to believe that without a specific and
measurable definition, it would be difficult for the councils and NMFS to
know whether any quota holding could be viewed as excessive. We have
revised our recommendations to reflect the full range of considerations
that need to be taken into account when defining what constitutes an

excessive share and to focus on the need to provide guidance for making
this determination in future programs.

Background The Magnuson- Stevens Act granted responsibility for managing
marine resources to the Secretary of Commerce. The Secretary delegated

this responsibility to NMFS, which is part of Commerce*s National Oceanic
and Atmospheric Administration (NOAA). The act established eight regional
fishery management councils, each with responsibility for making
recommendations to the Secretary of Commerce about management plans for
fisheries in federal waters. The eight councils* consisting of fishing
industry participants, state and federal fishery managers, and other
interested parties* and their areas of responsibility are New England
covering waters off Maine, New Hampshire, Massachusetts, Rhode Island, and
Connecticut; Mid- Atlantic covering waters off New York, New Jersey,
Delaware, Maryland, Virginia, and North Carolina; South Atlantic covering
waters off North Carolina, South Carolina, Georgia, and the east coast of
Florida; Gulf of Mexico covering waters off Texas, Louisiana, Mississippi,

Alabama, and the west coast of Florida; Caribbean covering waters off the

U. S. Virgin Islands and the Commonwealth of Puerto Rico; Pacific covering
waters off California, Oregon, and Washington; North Pacific covering
waters off Alaska; and Western Pacific covering waters off Hawaii,
American Samoa, Guam, the Commonwealth of the Northern Mariana Islands,
and uninhabited U. S. territories in the Western Pacific.

The Magnuson- Stevens Act also established national standards for fishery
conservation and management. These standards deal with preventing
overfishing, using scientific information, ensuring the equitable
allocation of fishing privileges, preventing excessive accumulation of
quota, using fishery resources efficiently, minimizing bycatch, 2
minimizing administrative costs, promoting safety at sea, and considering
the

importance of fishery resources to fishing communities. The regional
councils use these standards to guide their development of plans that are
appropriate to the conservation and management of a fishery, including
measures to prevent overfishing and rebuild overfished stocks and to
protect, restore, and promote the long- term health and stability of the
fishery. These measures may include, for example, requiring permits for
fishery participants, designating fishing zones, establishing catch
limits, prohibiting or limiting the use of fishing gear and fishing
vessels, and establishing a limited access system.

Under the Magnuson- Stevens Act, three regional councils (North Pacific,
South Atlantic, and Mid- Atlantic) have developed IFQ programs to manage
the halibut and sablefish, wreckfish, and surfclam/ ocean quahog
fisheries, respectively. Each IFQ program is designed individually,
because the characteristics of each fishery differ.

Pacific halibut (see fig. 1) and sablefish (see fig. 2) are bottom-
dwelling species found off the coast of Alaska, among other areas. Halibut
weigh about 40 pounds, on average, and are found at depths of about 50 to
650 feet. Sablefish weigh less than 11 pounds, on average, and are found
at

depths of about 325 to 4,925 feet. The halibut and sablefish fishing
fleets are primarily owner- operated vessels of various lengths that use
hook- andline gear to fish for halibut and hook- and- line and pot gear
for sablefish. Some vessels catch both halibut and sablefish, and, given
the location of both species, they are often caught as bycatch of the
other. Halibut are

2 Under the Magnuson- Stevens Act, *bycatch* means fish that are harvested
in a fishery, but which are not sold or kept for personal use. Bycatch
includes fish discarded for regulatory or economic reasons.

primarily sold domestically as a fresh or frozen product, and sablefish
are primarily sold to the Asian market as a frozen product. In 2001, the
total halibut and sablefish catch was 45.2 million pounds and 21.7 million
pounds, respectively.

Figure 1: Halibut Being Displayed

Source: International Pacific Halibut Commission.

Figure 2: Photograph of a Sablefish

Source: Commander John Bortniak, National Oceanic and Atmospheric
Administration Corps/ Department of Commerce.

Wreckfish (see fig. 3) are found in the deep waters far off the South
Atlantic coast, primarily from Florida to South Carolina. They were first
discovered in the southern Atlantic in the early 1980s by a fisherman
recovering lost gear. Wreckfish are fished using specialized gear by
vessels over 50 feet in length that are used primarily in other fisheries.
The fishing fleet is small, with only three vessels reporting wreckfish
landings totaling about 168,000 pounds* or about 8 percent of the total
allowable catch* in 2000. Wreckfish are sold fresh or frozen as a market
substitute for snapper and grouper.

Figure 3: Drawing of a Wreckfish

Source: South Atlantic Fishery Management Council.

Surfclams (see fig. 4) and ocean quahogs (see fig. 5) are mollusks found
along the East Coast, primarily from Maine to Virginia, with commercial
concentrations found off the Mid- Atlantic states. While ocean quahogs are
found farther offshore than surfclams, the same vessels are largely used
in each fishery. These vessels pump water down to the ocean floor to raise
the mollusks and then catch them in a dredge that runs over the bottom.
Surfclams and ocean quahogs are processed into strips, juice, soup,
chowder, and sauce. They must be processed generally within 24 hours of
harvest or they will spoil. In 2000, the surfclam/ ocean quahog fishery
harvested 2.6 million bushels of surfclams and 3.2 million bushels of
ocean quahogs.

Figure 4: Drawing of a Surfclam

Source: National Marine Fisheries Service, Northeast Fisheries Center
Image Archive, Woods Hole, Massachusetts.

Figure 5: Drawing of an Ocean Quahog

Source: National Marine Fisheries Service, Northeast Fisheries Center
Image Archive, Woods Hole, Massachusetts.

When designing the IFQ programs, each regional council set out specific
objectives for improving conservation and management in their respective
fisheries. These objectives differed for each program, as shown in table
1,

depending on the desired biological, social, and economic outcomes for the
fishery. Tabl e 1: Examples of IFQ Program Objectives

Halibut/ Surfclam/ Objective sablefish Wreckfish ocean quahog

Reduce overcapitalization X X a Maximize efficiencies X Stabilize fishery
X X Conserve resource a X X Improve safety X a Simplify regulation X
Protect fishing participants X a While not specified as an official
objective, this outcome is important to the program.

Source: NMFS and the National Research Council.

When designing the IFQ programs, each of the respective regional councils
also set out who was eligible to receive quota under the initial
allocation (see table 2). The regional councils based eligibility and
amount of quota to be received on, among other things, ownership and catch
history of the vessels that participated during a portion of a set of
qualifying years. Some halibut, sablefish, surfclam, and ocean quahog
processors owned fishing vessels with a catch history during the IFQ
programs* qualifying years, and therefore received quota under the initial
allocation.

Tabl e 2: Summary of Quota Allocation and Accumulation Rules, by IFQ
Program Halibut/

Surfclam/ Rule sablefish Wreckfish ocean quahog

Initial allocation based on X X X historical catch Initial allocation
based on X vessel size Quota divided by geographic X areas Specific caps
on initial

X allocation Specific caps on quota X accumulation Source: NMFS and the
National Research Council.

Consolidation of Quota Consolidation of quota holdings occurred in all
three IFQ programs, with Holdings Occurred in

much of it occurring in the early years of each program. In addition,
consolidation of surfclam and ocean quahog quota is greater than NMFS All
Three IFQ

data indicate. The governing rules of each program may have affected the
Programs extent of consolidation and the information collected. However,
without clear and accurate data on quota holders and fishery- specific
limits on quota holdings, it is difficult to determine whether any quota
holdings in a particular fishery would be viewed as excessive, as
prohibited by the Magnuson- Stevens Act.

Much of the Consolidation According to our analysis of NMFS data, from
1995 through 2001, the Occurred in Early Program

number of halibut and sablefish quota holders decreased by about 27 and
Years

15 percent, respectively. Over 46 percent of the halibut consolidation and
35 percent of the sablefish consolidation occurred by the end of the
second year of the program. From 1992 to 2002, the number of wreckfish
quota

holders decreased by 49 percent, with all of the consolidation occurring
by the end of the program*s third year. 3 Finally, from 1990 to 2002, the
number of surfclam and ocean quahog quota holders decreased by about 17
and 34 percent, respectively. About 58 percent of the surfclam quota

consolidation and 36 percent of the ocean quahog quota consolidation
occurred by the start of the second year of the program. (See app. II for
additional data on changes in quota holdings.)

Consolidation of Surfclam Surfclam and ocean quahog quota consolidation is
greater than NMFS data

and Ocean Quahog Quota Is indicate. According to NMFS officials and others
knowledgeable about the

Greater Than NMFS Data fishery, the quota holder of record (i. e., the
individual or entity under

Indicate whose name the quota is listed) is often not the entity that
controls the use

of the quota. Some families hold quota under the names of more than one
family member; some parent corporations hold quota under the names of one
or more subsidiaries; some entities hold quota under the name of one or
more incorporated vessels; and some financial institutions serve as
transfer agents and hold quota on behalf of others or in lieu of
collateral for loans.

3 According to NMFS officials, there had been very little activity in the
wreckfish program since 1995. A National Research Council study of IFQs
attributed this lack of activity to low market prices of wreckfish
compared to other species for which the same vessels can fish.

After aggregating quota controlled by the same individual or entities, we
determined that consolidation of surfclam quota holders was about twice
that indicated by NMFS data. As shown in figure 6, no more than 59 and 42
individuals or entities controlled surfclam quota in 1990 and 2002,
respectively. One entity controlled quota held in 12 different names,
accounting for 27 percent of the 2002 total surfclam quota allocated.

Figure 6: Fewer Surfclam Quota Holders Than NMFS Data Indicate 125 Number
100 75

59 50

46 42 25

0 1990 1992 1994 1996 1998 2000 2002 Year

NMFS quota holder of record GAO's estimate of controlling quota holder
Source: GAO's analysis of NMFS data. Note: Controlling quota holder of
record refers to the entity that controls the use of the quota.

Similarly, consolidation of ocean quahog quota holders was about twice
that indicated by NMFS data. As shown in figure 7, no more than 48 and 29
individuals or entities controlled ocean quahog quota in 1990 and 2002,
respectively. One entity controlled quota held in 2 different names,
representing 22 percent of the 2002 total ocean quahog quota allocated.
(See app. III for information on consolidation in the surfclam and ocean
quahog processing sector.)

Figure 7: Fewer Ocean Quahog Quota Holders Than NMFS Data Indicate 100
Number

75 50

48 33

29 25 0

1990 1992 1994 1996 1998 2000 2002 Year

NMFS quota holder of record GAO's estimate of controlling quota holder
Source: GAO's analysis of NMFS data. Note: Controlling quota holder refers
to the entity that controls the use of the quota.

The consolidation of surfclam and ocean quahog quota may be even greater
than our analysis indicates because we could not determine the individuals
or entities for whom banks hold quota. 4 According to NMFS data, banks
hold about 21 percent of the 2002 surfclam quota and 27 percent of the
2002 ocean quahog quota. However, we could not determine for whom the
banks

hold the quota and thus who controls the use of the quota. NMFS officials
stated that, in theory, they had the ability to identify the individuals
or entities for whom the banks hold quota. They explained, however, that
such an analysis would be extremely difficult and labor- intensive because

their record system is not designed for this purpose. As such, NMFS did
not provide us with this information.

Program Rules May Each program*s governing rules may have affected the
extent of

Affect the Extent of consolidation and the information NMFS collects and
monitors on quota

Consolidation and holders. To help meet the Magnuson- Stevens Act*s
prohibition of any

Information Collected individual or entity acquiring an excessive share of
the fishery, the regional fishery management councils may establish limits
on the amount of quota

any individual or entity can hold. In the Alaskan halibut and sablefish
program, for example, the council set specific limits on individual
holdings by, among others, species and area. 5 Limits on individual
halibut quota holdings, for example, range from 0.5 percent to 1.5
percent, depending on the fishing area, and sablefish holdings are limited
to 1 percent. NMFS collects the information needed to monitor and ensure
adherence to these requirements. NMFS requires halibut and sablefish
transfer applicants to identify whether they are individuals or business
entities. Business entities must also report their ownership interests at
least annually. NMFS uses this information to ensure that all potential
transfers and all current quota holdings comply with program rules. NMFS
conducts computer checks on each transfer request to ensure that the
transfer will not result in any entity, whether individually or
collectively, exceeding the limits for quota holdings.

4 To facilitate financial transactions such as the purchase of quota, a
bank or other financial institution may serve as a transfer agent. In this
situation, an individual sells or permanently transfers the quota to the
financial institution, which, under separate

agreement, transfers the quota to the *rightful* owner when the loan is
fully paid or in installments as loan payments are made. In addition,
these agreements establish to whom the bank leases the use of the quota
each year.

5 Program rules specify these limits as quota share use caps.

In contrast, the regional fishery councils for the surfclam/ ocean quahog
and wreckfish programs did not set specific and measurable limits on the
individual accumulation of quota. Instead, the councils let federal
antitrust laws determine whether any quota holdings are excessive.
However, NMFS officials explained that the Department of Justice would
most likely base a decision for taking an antitrust action on whether or
not an individual or entity could fix the price of fish, rather than the
amount of quota an individual or entity held. Further, NMFS officials said
that they have never referred such a case to the Department of Justice.

The National Research Council pointed out in its 1999 study that *[ a]
lack of accumulation limits may unduly strengthen the market power of some
quota holders and adversely affect wages and working conditions of labor
in the fishing industry...* 6 Establishing limits, however, is not an easy
task. Program objectives and the political, economic, and social
characteristics of each fishery may influence each council*s definition of
what limits should be placed on an individual*s or entity*s quota
holdings. In addition, fishery participants have different opinions on
what these limits should be.

Because the surfclam/ ocean quahog and wreckfish programs have no specific
limits on the amount of quota any one individual or entity can hold, NMFS
does not routinely gather and assess information on the ownership interest
of each quota holder. For example, NMFS requires transfer applicants in
the surfclam/ ocean quahog program to submit identifying information,
including the name of the quota holder, the name of the

related vessel, and the contact information for the quota holder. However,
NMFS does not verify this information or require transfer applicants or
quota holders to submit any information detailing ownership interest or
eligibility. Further, NMFS does not conduct any assessment of the amount
of quota held or controlled by an individual or entity, and NMFS records
are not kept in a manner that would readily allow such an assessment. As
such, it is difficult to determine how much quota any one individual or
entity controls. Moreover, lacking specific limits on quota holdings, we
could not

determine if any individual*s or entity*s holdings in either the surfclam/
ocean quahog or the wreckfish programs would be viewed as excessive for
the fishery, as prohibited by the Magnuson- Stevens Act.

6 National Research Council, Sharing the Fish: Toward a National Policy on
Individual Fishing Quotas (Washington, D. C.: National Academy Press,
1999), 209.

No Foreign- Owned We found no evidence that foreign entities currently
hold or control quota

Entities Currently Hold in the three IFQ programs. Furthermore, industry
participants and NMFS

officials said that they did not know of any cases in which a foreign
entity Quota

has been able to acquire quota in either the halibut and sablefish or the
wreckfish IFQ programs. However, some foreign- owned entities have held or
controlled quota in the surfclam/ ocean quahog program, as the following
examples show.

 A U. S. member firm of a foreign business that provides financial
services held about 6 percent of the surfclam quota in 2002 while acting
as a transfer agent in the sale of the quota. According to a
representative of the firm, only the buyer and the seller controlled the
quota and the

fishing of the quota. When the sale was finalized in the spring of 2002,
the quota was released to the buyer. The firm no longer holds quota in the
fishery.

 A foreign- owned processing company once controlled about 7 percent of
the surfclam and ocean quahog quota through its U. S. subsidiary. Foreign
control of the quota ended when a group of fishery participants bought out
the foreign interest in the processing company.

 On the eve of the implementation of the IFQ program, a foreign- owned
processing company sold its fishing vessels with qualifying catch
histories to a U. S. citizen eligible to hold quota. This individual then
received the quota for these vessels* nearly one- fourth of the quota
allocated under the initial allocation. 7 However, control of the quota

remained with the foreign- owned processing company until the processing
company was sold to a U. S.- owned firm.

The implementing regulations of each IFQ program, in effect, generally
preclude foreign entities from holding quota. The Alaskan halibut and
sablefish program explicitly prohibits foreign citizens and businesses
from holding quota and requires all quota transfer applicants to declare
themselves to be U. S. citizens or U. S. entities. In contrast, the

surfclam/ ocean quahog and wreckfish programs allocate quota to qualified
*persons,* defined as U. S. citizens, and tie eligibility for holding
quota to

7 In the initial allocation, quota shares could only be distributed to
owners of fishing vessels that landed surfclams or ocean quahogs during
certain years. Once the initial allocation was made, quota shares could be
transferred to entities whether they owned a fishing vessel or not.

the requirements for owning a U. S.- documented vessel engaged in the
fisheries of the United States, that is, being a U. S. citizen or in the
case of a corporate owner being 75 percent owned and controlled by U. S.
citizens. However, these two programs do not require quota holders or
transfer

applicants to declare that they are U. S. citizens or U. S. entities. In
addition, NMFS officials overseeing the wreckfish program told us that
they consider the U. S. Coast Guard*s approval of fishing vessel permits
to be sufficient for determining eligibility to hold quota, because only
vessels owned by U. S. citizens and U. S. companies are eligible for
documentation as a U. S. fishing vessel. This procedure may be sufficient
when a transfer applicant owns a permitted fishing vessel and applies for
quota under the

name used to document the vessel. However, an applicant who does not own
such a vessel will never go through the Coast Guard verification process,
because after the initial allocation, quota can be transferred to, and
held by, nonvessel owners. Without information on the nationality or
ownership of the quota holder, the potential exists for the transfer of
surfclam, ocean quahog, and wreckfish quota to foreign entities.

Economic Effects on Some processors were adversely affected by the
implementation of the

Halibut and Sablefish halibut and sablefish IFQ program while others
benefited. However, quantifying the economic effects of the IFQ program on
processors is

Processors Varied and difficult because much of the data needed to measure
changes in

Are Difficult to profitability are proprietary. Furthermore, other factors
besides the

Quantify IFQ program may lead to changes in processors* economic
situation.

IFQ Program Resulted in The IFQ program changed the environment in which
traditional Changes That Harmed Some

shore- based processors operated by extending the halibut and sablefish
Processors and Benefited

fishing seasons in some areas from several days to 8 months. Before the
Others

IFQ program was implemented, fishermen had just a few days to fish the
total allowable catch for the year. Consequently, fishermen provided
processors with large amounts of fish in a very short period of time, and

processors organized their operations to process under these conditions.
With the implementation of the IFQ program, the *race for fish* was
eliminated because fishermen had more flexibility in choosing when to
fish, and, as a result, processors received halibut and sablefish in
smaller

quantities over a longer period of time. This extended fishing season
enabled more halibut to be processed and sold as a fresh product.
Consequently, the fresh halibut market, as shown in figure 8, increased

from 15 percent of the total halibut market in 1994 to 46 percent in 2001.
Sablefish was not similarly affected, remaining primarily a frozen product
that is shipped to and sold in the Asian market.

Figure 8: Fresh Halibut as a Percentage of Total Halibut Production, 1984
through 2001

60 Percent 50 40 30 20 10

0 1984

1985 1986

1987 1988

1989 1990

1991 1992

1993 1994

1995 1996

1997 1998

1999 2000

2001 Year

Fresh halibut IFQ begins

Source: GAO's analysis of Alaska Department of Fish and Game, Commercial
Operators Annual Report data.

To take advantage of the fresh market and its potential for higher
wholesale prices, processors need ready access to highways and air
transportation. As such, processors with access to transportation systems
may have been competitively advantaged while those who were in more remote
locations may have been competitively disadvantaged because transportation
costs were higher. For example, one processor estimated that the cost to
transport fresh product from Kodiak Island, Alaska, to Seattle,
Washington, was about 20 cents a pound higher than from Seward or Homer,
Alaska, which has ready access to a major road system. (See app. IV for
more information on Alaskan ports and major transportation networks.)
Also, processors located near services, such as fuel, ice, stores, and
entertainment, said that fishermen were more willing to deliver fish to
them than if these services were not available.

The shift toward fresh product in the halibut market resulting from the
IFQ program led to the emergence of the buyer- broker, a middleman who
buys fish at a port and ships it fresh to market. Processors told us that
the emergence of buyer- brokers, generally one- person operations with
lower overhead costs, resulted in increased competition for fish and
contributed to the increase in ex- vessel halibut prices (prices paid to
fishermen for raw product). As shown in table 3, the percentage of halibut
purchased by buyer- brokers increased from 3.7 in 1995 to 17.4 in 1999.

Tabl e 3: Halibut Buyers, by Category, 1995 and 1999 Percent of halibut
purchased Category 1995 a 1999 b

Buyer- broker 3.7 17.4 Shore- based processors 84.9 73.8 Other 11.4 8.8

Tot al 100.0 100.0 a 1995 was the earliest year for which NMFS data were
available. b 1999 was the latest year we could analyze because, starting
in 2000, buyers could identify

themselves in multiple categories. Source: NMFS.

Along with an increase in buyer- broker halibut purchases, there was a
decrease in the number of individual shore- based plants that processed
halibut and sablefish. While some plants stopped processing halibut and
sablefish, others decided it was beneficial to start. Between 1995 and
2001, as shown in table 4, 68 plants stopped processing halibut and 56
started, resulting in a net decrease of 12 plants. Similarly, 54 plants
stopped processing sablefish and 40 started, resulting in a net decline of
14 plants.

Tabl e 4: Changes in the Number of Plants Processing Halibut and
Sablefish, 1995 through 2001

Plant status Halibut Sablefish

Processing in 1995 a 84 57 Stopped processing between 1995 and 2001 (68)
(54)

Started processing between 1995 and 2001 56 40

Processing in 2001 72 43 a 1995 was the earliest year for which NMFS data
were available.

Source: GAO*s analysis of NMFS data.

Most of the shore- based plants that stopped or started processing were
relatively small in comparison to other processors in that they purchased
less than 100,000 pounds of halibut or sablefish annually. About 80
percent of the shore- based plants that stopped processing halibut and 75
percent of those that started purchased less than 100,000 pounds of fish.
Similarly, about 81 percent of the plants that stopped processing
sablefish and

70 percent of those that started were also small plants. The IFQ program,
however, did not necessarily cause a plant to stop processing halibut or
sablefish. According to industry and government officials, some plants
stopped processing halibut or sablefish because the plant was sold to
another processor, the plant closed for personal reasons, plant management
made poor business decisions that were unrelated to the IFQ program, or
the plant burned down. For example:

 One processor with a freezing operation bought halibut and sablefish,
but it primarily bought and sold salmon off trollers. When the supply of
farmed salmon increased, contributing to price decreases, the owners
decided to sell the plant.

 One company that owned several plants consolidated its halibut
production under fewer plants.

 One plant went out of business because its owner paid too much for fish*
10 to 15 cents a pound more than others* and then resold it for less than
he paid.

 One plant burned down and the processor now uses the site to offload
fish from vessels and then transport it to another site for processing.

In addition to changes in the number of plants processing halibut and
sablefish, companies experienced some change in their market share. 8 Some
processing companies lost market share, while others gained market share.
Comparing market shares for 1995 and 2001, we found that of 28

companies that processed halibut in 1995, 15 experienced a decrease in
market share and 13 experienced an increase. Similarly, of the 17
companies that processed sablefish in 1995, 7 experienced a decrease in

market share while 10 experienced an increase. State of Alaska Study Found

To determine the IFQ program*s effect on processors, Alaska*s Department
Processors Hurt by IFQ

of Fish and Game commissioned a study to examine how halibut and sablefish
processors were affected economically. 9 This was the only study Program,
but Results

we could find that attempted to quantify the economic effect the IFQ
Cannot Be Validated

program had on halibut and sablefish processors. Using a sample of halibut
and sablefish processors, the study assessed the change in processors*
gross operating margins (revenues minus variable costs of processing). The
study used the periods 1992- 1993 for pre- IFQ margins and 1999- 2000 for
post- IFQ margins. According to the study*s principal author, these years
were chosen because they provided the longest possible length of time
between the pre- and post- IFQ years for which data were available. The
study estimated that halibut processors suffered a 56 percent, or $8. 7
million, loss in gross operating margins because the IFQ program

8 The market share of a company is the amount of fish purchased by that
processing company as a percentage of total fish purchased by all
processing companies. Processing companies, in this context, are those
companies that own one or more of the individual shore- based plants that
are processing halibut or sablefish. 9 Matulich, Scott C., and Michael
Clark, Efficiency and Equity Choices in Fishery Rationalization Policy
Design: An Examination of the North Pacific Halibut and Sablefish IFQ
Policy Impacts on Processors, Washington State University, January 2002.

caused halibut prices to increase and processors* market shares to change.
10

While we could not validate or replicate the study*s results because the
proprietary data used in the study were confidential, we identified a
number of problems with the study*s methodology and scope that brings into
question the reliability of the study*s estimates. These problems include
(1) the pre- and post- IFQ time periods do not provide an accurate measure
of processors* economic welfare, (2) the study*s results may not be
representative of the industry as a whole, and (3) the document requesting
economic information from processors may have biased

participant responses. Further, the study*s authors acknowledged that
examining the pre- and post- IFQ impacts on the processing sector does not
necessarily imply that the IFQ program alone caused these effects.

The pre- and post- IFQ time periods used to assess changes in processors*
gross operating margins do not provide an accurate measure of changes in
processors* economic welfare over time. First, the study*s methodology
makes the assumption that all costs, except labor and material inputs,
remain fixed from 1992 through 2000. However, as pointed out in a critique

of the study, assuming that all of these other costs remain the same would
not be adequate for a period as short as a year, and is clearly
unjustified for the 7 year period evaluated, because the longer the time
period assessed, the more likely costs will change. 11

Even if the study*s assumption about costs were valid, the pre- and
postIFQ periods examined identify a greater negative change in gross
operating margins than may be identified if different or longer periods
were used. The changes in gross operating margins and the estimated
economic effects are influenced by the fact that ex- vessel halibut prices
dipped in the period 1992- 1993 and were near their peak in 1999- 2000
(see fig. 9). Real ex- vessel halibut prices in 1999- 2000 were 44. 5
percent higher than they were in 19921993. However, when different base
years, such as 1991- 1992, are compared with 1999- 2000, the price
increase is 22. 7 percent.

10 The study also estimated that gross operating margins for sablefish
processors decreased by 75 percent, on average. However, we did not review
the sablefish estimates because the methodology and adjustments used in
the study were not clear to NMFS economists or us.

11 Halvorsen, Robert, Comments on the Matulich and Clark Report,
*Efficiency and Equity Choices in Fishery Rationalization Policy Design,*
University of Washington, April 2002.

Figure 9: Ex- Vessel Halibut Prices, 1984 through 2001 4. 00 Price per
pound 3. 50 3. 00 2. 50 2. 00 1. 50 1. 00 0. 50 0. 00

1984 1985

1986 1987

1988 1989

1990 1991

1992 1993

1994 1995

1996 1997

1998 1999

2000 2001

Year

Fresh halibut IFQ begins

Source: GAO's analysis of Alaska Department of Fish and Game, Commercial
Operators Annual Report data.

Note: Ex- vessel halibut prices were adjusted to 1996 dollars using the
Bureau of Economic Analysis's Gross Domestic Product implicit price
deflator.

The influence of the choice of base years and the corresponding ex- vessel
prices also can be demonstrated by looking at the difference between the
price a processor pays for raw fish and the price a processor receives for
the processed fish* the processor*s price margin. We calculated a
simplified version of the price margin to demonstrate the sensitivity of
the margin to the choice of the time period examined. As shown in table 5,
comparing the study*s pre- and post- IFQ price margins of 47.3 percent and
24. 1 percent, respectively, shows a 23.2 percentage point decrease in

margins. However, comparing the price margins for 1991- 1992 with 1999-
2000 shows a 13. 0 percentage point decrease and comparing 1993- 1994 with
1998- 1999 shows a 1.1 percentage point increase.

Tabl e 5: Price Margins in Selected Pre- and Post- IFQ Years Pre- IFQ
Post- IFQ Years Price margin a Years Price margin a

1991- 1992 37.1 1998- 1999 31.4 1992- 1993 b 47.3 1999- 2000 b 24.1 1993-
1994 30.3 2000- 2001 23.3 a Price margin is the percentage by which real
wholesale price exceeds real ex- vessel price, excluding other variable
costs. We did not incorporate recovery rates (the amount of raw product
required to produce the finished product) or product mix in price margin
calculations. b Years used in the state of Alaska study.

Source: GAO*s analysis of Alaska Department of Fish and Game, Commercial
Operators Annual Report data.

Moreover, the study*s results may not be representative of the industry as
a whole. In total, 53 halibut processors and 46 sablefish processors,
representing 88 percent of all halibut purchased and 96 percent of all
sablefish purchased in the study years, were asked to participate in the
survey. Responses were used from processors representing only 52 percent
of all halibut and 54 percent of all sablefish purchased in the pre- IFQ
years

and 61 percent of all halibut and 59 percent of all sablefish purchased in
the post- IFQ years. The study does not provide the actual number of
participants whose data were used. Without knowing the number of

participants or the characteristics of the respondents whose data were
used, we cannot determine whether the study*s estimates are representative
of the industry as a whole.

Finally, the document requesting economic information from processors may
have biased participant responses. In the preamble to the survey document,
participants were told, among other things, that the purpose of the study
was to test the theory that a harvester- only quota allocation

transfers wealth from processors to harvesters and that the survey*s
results would be used to assist in designing future IFQ or other fishery
rationalization programs. Such statements leave little doubt as to how
responses could benefit or harm processors with economic interests in
other fisheries. According to standard economic research practice, these
types of statements are to be avoided when designing a survey as they can
influence the results.

Factors Other Than the Factors other than the IFQ program*s implementation
could contribute to

Implementation of the IFQ changes in the economic well- being of
processors, such as changes in the

Program Could Affect market of other species processed and changes in the
total allowable catch.

Processors Economically According to NMFS officials and industry experts,
most processors

handled other species of fish in addition to halibut and sablefish, and
the relative proportion and value of these species will affect the
economic condition of processors. According to our analysis of data from
the Alaska Commercial Operators Annual Report, halibut and sablefish were
relatively small portions of the fish processed by shore- based plants
that processed halibut and/ or sablefish. Specifically, from 1994 to 2001,
halibut production ranged, on average, from 2. 0 percent to 4.1 percent of
all fish processed at a plant, while average sablefish production ranged
from 1.4 percent to 2.3 percent. In terms of value, as shown in table 6,
halibut was 4.4 percent of total plant product value in 1994 and 7.9
percent in 2001. Sablefish was 4.7 percent of total plant product value in
1994 and 5.3 percent in 2001. (These ranges are averages for all plants
processing halibut and/ or sablefish and a particular plant may process a
higher percentage of these fish.)

Tabl e 6: Average Product Value Percentage, by Species, for Plants
Processing Halibut and Sablefish, 1994 and 2001

Percent of product value Species 1994 2001

Halibut 4.4 7.9 Sablefish 4.7 5.3 Cod 5.7 9.5 Pollock 12.6 27.6 Salmon
46.7 35.1 Other species a 25.9 14.6

Tot al 100.0 100.0

a Other species include crab, flounder, greenling, herring, lingcod,
octopus, perch, prowfish, rockfish, shrimp, skate, sole, and turbot.
Source: GAO*s analysis of Alaska Department of Fish and Game, Commercial
Operators Annual Report data.

Another factor that affects processors economically is a change in the
total allowable catch* limits on the amount of fish that can be caught
annually. Such limits were used for halibut and sablefish long before the
introduction

of the IFQ program. Since the introduction of the IFQ program, the total

allowable catch for halibut has increased by 56.4 percent and the total
allowable catch for sablefish has decreased by 36.2 percent. In its 1999
report, Sharing the Fish, the National Research Council said that changes
in the total allowable catch may affect the supply of fish available to
processors and therefore the price they pay. 12

Conclusions Individual fishing quotas are one of many tools available for
conserving and managing fishery resources on a sustainable basis. Concerns
have been raised about the possibility of quota holdings becoming
concentrated among a few individuals or entities, which, among other
things, might lead to control of fish prices and/ or might adversely
affect wages and working conditions in the fishing industry. Moreover,
there is a need to ensure that

program rules on foreign holdings and quota concentration levels are
complied with. NMFS collects the necessary data on halibut and sablefish
quota holders and periodically monitors it to provide these assurances.
However, NMFS does not gather sufficient information or periodically

analyze the data it does collect on surfclam/ ocean quahog and wreckfish
quota holders to determine (1) who actually controls the use of the quota
and (2) whether the holder is a foreign individual or entity. Furthermore,
while each fishery is different, the regional councils have not defined
the amount of quota that constitutes an excessive share in the surfclam/
ocean quahog and wreckfish IFQ programs. Different program objectives and
the political, economic, and social characteristics of each fishery make
it difficult to define excessive share. However, without the information
on

who controls quota and defined limits on quota accumulation, NMFS cannot
determine whether eligibility requirements are being met or raise
questions as to whether any quota holdings are excessive.

12 Sharing the Fish, 403.

Recommendations for We recommend that the Secretary of Commerce take the
following actions

Executive Action to improve the management of IFQ programs:

 To ensure that quota holders meet eligibility requirements, such as
being a U. S. citizen or entity, we recommend that the Secretary of
Commerce direct the Director of NMFS to collect and analyze information on
quota

holders, including who actually holds and controls the use of the quota
and for whom financial institutions hold quota.

 To help prevent an individual or entity from acquiring an excessive
share of the quota in future IFQ programs, we recommend that the Secretary
of Commerce require regional fishery management councils to define what
constitutes an excessive share for the fishery.

 To assist the regional fishery management councils in defining excessive
share for a particular fishery, we recommend that the Secretary of
Commerce direct the Director of NMFS to provide guidance to the councils
on the factors to consider when determining what constitutes an excessive
share in future IFQ programs.

Agency Comments and We provided a draft of this report to the Department
of Commerce for

Our Evaluation review and comment. In the Secretary*s response, the
Department*s National Oceanic and Atmospheric Administration provided
written comments. NOAA*s comments and our detailed responses are presented
in

appendix V of this report. NOAA generally agreed with the accuracy and
conclusions of our report. NOAA agreed in principle with our
recommendation to collect and analyze information on quota holders,
disagreed with our recommendation to set limits, and agreed with our
recommendation to provide guidance for setting limits on quota holdings in
future programs. NOAA also provided technical comments that we
incorporated in the report as appropriate.

NOAA agreed in principle with our first recommendation, to collect and
analyze information on quota holders. While NOAA stated that it would
place greater emphasis on collecting this information in its IFQ programs,
it noted that its ability to collect economic information might be
constrained by provisions of the Magnuson- Stevens Act that protect
certain economic and proprietary data. NOAA believed that existing IFQ
programs provide adequate information on quota holders, citing, for
example, the Alaskan halibut and sablefish program, but stated it would be
difficult to

collect information on who actually controlled the quota. However, our
recommendation is aimed at requiring all IFQ programs to collect
information similar to the information collected in the Alaskan halibut
and sablefish program. We do not believe that information on the identity
of quota holders and their ownership interests involves economic data

protected by the Magnuson- Stevens Act, and, in fact, the Alaskan program
requires that such information be provided. We also believe that without a
requirement to collect similar information in all IFQ programs, it will be
difficult, if not impossible, to monitor for compliance with eligibility
requirements. Such information is especially important where banks hold
quota on behalf of others, such as in the surfclam/ ocean quahog program.

NOAA disagreed with our second recommendation, to set limits on the amount
of quota an individual or entity may hold in future IFQ programs. NOAA
acknowledged that avoiding excessive shares was a serious

mandate and that fishery management councils should analyze the projected
impacts of various levels of ownership on market performance,
distributional issues, and equity considerations. NOAA stated, however,
that councils should have flexibility to deal with preventing excessive

shares according to the circumstances of each IFQ program and that limits
on quota holdings might be warranted and necessary in certain cases, but
not in all IFQ programs. NOAA cited the wreckfish program* a program where
there has been little activity* as an example where limits should not be
required. We agree with NOAA*s position that circumstances vary from
fishery to fishery and that councils need to analyze the various issues
when determining how to prevent excessive shares. We continue to believe,

however, that fishery management councils need to define what constitutes
excessive share for future IFQ programs. The Magnuson- Stevens Act clearly
mandates that new IFQ programs prevent any person from acquiring an
excessive share of quota. Without a specific and measurable definition, it
would be difficult for councils and NMFS to know whether

any quota holding could be viewed as excessive. A similar conclusion was
reached by the National Research Council, which recommended the creation
of fishery- specific limits on the accumulation of quota share by
individuals or firms in each new IFQ program. We have revised our

recommendation to reflect the full range of economic, social, and
political considerations that need to be taken into account and the need
for guidance to assist councils in determining excessive share.

Finally, NOAA agreed with our third recommendation, to provide guidance to
fishery management councils on factors to consider when setting limits on
quota holdings in future IFQ programs. NOAA agreed that limits should

be based on factors that are appropriate to the fishery. These factors
include market effects, distributional issues, and equity considerations.
We have revised this recommendation, however, from *providing guidance for

setting limits* to *providing guidance for defining what constitutes an
excessive share* to take into account NOAA*s comments and make it
consistent with our second recommendation.

We conducted our review from April 2002 through October 2002 in accordance
with generally accepted government auditing standards.

As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to the
Secretary of Commerce and the Director of the National Marine Fisheries
Service. We will also provide copies to others upon request. In addition,
the report will

be available at no charge on the GAO Web site at http:// www. gao. gov. If
you or your staff have any questions about this report, please call me at
(202) 512- 3841 or Keith Oleson at (415) 904- 2218. Key contributors to
this report are listed in appendix VI.

Barry T. Hill Director, Natural Resources

and Environment

Appendi x I

Scope and Methodology To assist in deliberations on individual fishing
quota (IFQ) programs, we reviewed the Alaskan halibut and sablefish,
wreckfish, and surfclam/ ocean quahog programs to determine (1) the extent
of consolidation of quota holdings, (2) the extent of foreign holdings of
quota, and (3) the economic effect of IFQ programs on seafood processors.

For all three objectives, we interviewed agency officials at the
Department of Commerce*s National Marine Fishery Service*s (NMFS)
headquarters office and the Northeast, Southeast, and Alaska regional
offices; representatives of the Mid- Atlantic, South Atlantic, and North
Pacific Fishery Management Councils; officials from the Alaska Department
of Fish and Game; and fishery participants, researchers, and other
industry experts. We visited Easton, Maryland; Cape May and Atlantic City,
New Jersey; and Sitka, Petersburg, Juneau, Homer, Seward, and Kodiak,
Alaska, where we interviewed quota holders, processors, and industry
representatives and viewed processing plants. We selected these sites in
accordance with suggestions from program managers and industry

representatives to obtain IFQ program and geographic coverage. In
addition, to determine the extent of consolidation of quota holdings, for
each IFQ program, we reviewed pertinent laws, rules, and regulations; the
fishery management plan; processes and procedures; and relevant program
documents that NMFS used to track quota holdings. We analyzed NMFS data on
quota allocations and transfers, searched public corporate ownership and
U. S. Coast Guard vessel documentation records, and interviewed NMFS
officials, industry experts, and fishery participants to identify who
controlled the use of the quota. As agreed with the requesters, we did not
review the Maine mahogany quahogs as part of the surfclam/ ocean quahog
IFQ program because of the fishery*s small size and unique
characteristics.

To determine the extent of foreign holdings of quota, we reviewed federal
laws, regulations, and IFQ program rules pertaining to foreign individuals
holding quota in U. S. fisheries. We also reviewed the U. S. Coast Guard*s
requirements for documenting U. S. fishing vessels. We searched public
records on corporate ownership for foreign interest in, and affiliation
with,

entities holding quota. To determine the economic effect of IFQ programs
on seafood processors, we limited our assessment to the economic effects
on Alaskan halibut and sablefish processors because few of these
processors were eligible to hold quota under the IFQ program. In contrast,
processors in the surfclam/ ocean

quahog and wreckfish programs were eligible to hold quota. We analyzed (1)
NMFS data on registered buyers, landings by port, and total allowable
catch; (2) Alaska Department of Fish and Game, Commercial Operators Annual
Report data on fish production, ex- vessel prices, and processing at
shore- based plants; and (3) public records on ownership of seafood
processing companies. We interviewed fishery participants, including NMFS
and regional management council officials, seafood processors, quota
holders, researchers, and other experts on IFQ programs, to identify

changes in the processing sector after the IFQ program*s implementation.
We searched the economic literature on the Alaskan halibut and sablefish
IFQ program and reviewed the only study that quantified the economic
effect of the IFQ program on processors, interviewed the study*s principal
author, and obtained the views of other economists who had reviewed the
study. We could not verify the study*s results because the data used in
the study were proprietary.

National Marine Fisheries Service Data on

Appendi x II

Quota Holdings NMFS data on quota holdings show that consolidation
occurred in all three IFQ programs* Alaskan halibut and sablefish (see
table 7), wreckfish (see table 8), and surfclam/ ocean quahog (see table
9)* with much of the consolidation occurring in early program years.

Tabl e 7: Alaskan Halibut and Sablefish Quota Holders, 1995 through 2001
Year Item 1995 1996 1997 1998 1999 2000 2001

Number of halibut quota holders 4,828 4,227 3,913 3,795 3,677 3,610 3,532
Cumulative percent change (12.4) (19.0) (21.4) (23.8) (25.2) (26.8) Number
of sablefish quota holders 1,051 994 940 919 902 890 889 Cumulative
percent change (5.4) (10.6) (12.6) (14.2) (15.3) (15.4)

Note: For 1995, NMFS reported the number of holders who received quota
during the initial allocation. Thereafter, NMFS reported the number of
holders as of December 31 of each year.

Source: GAO*s analysis of NMFS data.

Tabl e 8: Wreckfish Quota Holders, 1992 to 2002 Year Item 1992 1993 1994
1995 1996 1997 1998 1999 2000 2001 2002

Number of wreckfish quota holders 49 35 26 25 25 25 25 25 25 25 25
Cumulative percent change (28.6) (46.9) (49.0) (49.0) (49.0) (49.0) (49.0)
(49.0) (49.0) (49.0)

Source: GAO*s analysis of NMFS data.

Tabl e 9: Surfclam and Ocean Quahog Quota Holders, 1990 to 2002 Year Item
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Number of surfclam quota holders 111 100 100 102 99 104 103 103 102 98 98
94 92

Cumulative percent change (9.9) (9.9) (8. 1) (10.8) (6.3) (7.2) (7. 2)
(8.1) (11.7) (11.7) (15.3) (17.1) Number of ocean quahog quota holders 82
72 73 70 59 63 61 58 60 58 57 55 54

Cumulative percent change (12.2) (11.0) (14.6) (28.0) (23.2) (25.6) (29.3)
(26.8) (29.3) (30.5) (32.9) (34.1) Note: Quota allocations held under the
same name were aggregated to obtain a unique count of quota holders.

Source: GAO*s analysis of NMFS data.

Appendi x III

Surfclam/ Ocean Quahog Processing Sector Major holders of surfclam and
ocean quahog quota include seafood processors that are vertically
integrated-- owning both processing plants and fishing vessels. Processing
companies that owned fishing vessels were eligible to receive quota under
the initial quota allocation and some have held quota from the beginning
of the IFQ program. The IFQ program also allows processing companies to
purchase and transfer surfclam/ ocean quahog quota. According to NMFS
data, three- fourths of the companies that processed surfclams and all of
the companies that processed ocean quahogs in 2000 were quota holders. In
addition, our analysis of NMFS quota allocation data for 2000 showed that
seafood processors held about one- third of the total surfclam quota and
almost one- half of the total ocean quahog quota.

Further, NMFS data indicate that fewer processors processed surfclams and
ocean quahogs since the IFQ program was implemented and that several
small- and mid- sized processors left the fishery. The number of surfclam
processors decreased by more than 40 percent and the number of ocean
quahog processors decreased by more than two- thirds from 1990 to

2000 (see table 10), with the same key companies processing both surfclams
and ocean quahogs. 13 The top 4 processors handled about 74 percent of the
surfclam catch in 1990 and 86 percent in 2000.

Tabl e 10: Surfclam and Ocean Quahog Processors, 1990 and 2000 Number of
processors Processor type 1990 2000

Surfclams 15 8 Ocean quahogs 14 4 Source: GAO*s analysis of NMFS data.

13 NMFS was only able to provide processor data through the year 2000.

Alaskan Ports and Major Transportation

Appendi x IV

Networks Ready access to highways and air transportation makes it easier
for processors and buyer- brokers to take advantage of the fresh fish
market and its potential for higher wholesale prices because they can get
their products to market more quickly and at a lower cost than processors
or other buyers in more remote locations. Figure 10 shows the location of
major Alaskan halibut and sablefish ports in relation to major
transportation networks leading to the lower 48 states and international
destinations.

Figure 10: Map of Alaskan Ports and Major Transportation Networks

Canada United States

Anchorage Cordova

Juneau Seward

Yakutat Hoonah

Bering Sea Homer Pelican

Gulf of Alaska Sitka

Kodiak Petersburg

Ketchikan Unalaska/ Dutch Harbor Adak

Highways Alaska Southcentral & Southwest Ferry International Airport

Source: Prepared by GAO using data provided by the Alaska Department of
Community and Economic Development.

The Alaskan port with the greatest amount of halibut landed changed
between 1995 and 2001, as shown in table 11. NMFS and industry officials
attribute much of the change in port rankings to the increase in the fresh
halibut market and the need for ready access to transportation networks.
While ports may have access to air and ferry service to the lower 48
states, the number of flights and ferries may be limited and subject to
weather delays or cancellations.

Tabl e 11: Largest Alaskan Halibut Ports, 1995 and 2001 Percent of 1995
Percent of 2001 Port 1995 a ranking landings 2001 ranking landings

Kodiak b 1 23. 0 2 15.3 Homer 2 9.7 1 24.0 Sitka b 3 8.8 5 4.6 Unalaska/
Dutch Harbor b 4 8.6 3 11.1 Seward 5 8.5 4 11.0 Petersburg b 6 7.2 7 4.0
Hoonah b 7 2.8 9 2.5 Cordova b 8 2.8 10 2.5 Pelican b 9 2.7 19 0.4 Ya k u
t a t b 10 1.9 12 1.9

Note: Juneau ranked number 13 with 1.4 percent of the landings in 1995 and
number 6 with 4.2 percent in 2001. Adak had no reported landings in 1995
and ranked number 8 with 3.8 percent of the landings in 2001. a 1995 was
the earliest year for which NMFS data were available.

b Ports with limited access to major transportation networks. Source:
GAO*s analysis of NMFS data.

While sablefish remained primarily a frozen product, sablefish ports
experienced a similar change in rankings (see table 12), because,
according to processors, many fishermen sell their catch of both halibut
and sablefish to the processor who pays the most for the halibut.

Tabl e 12: Largest Alaskan Sablefish Ports, 1995 and 2001 Percent of 1995
Percent of 2001 Port 1995 a ranking landings 2001 ranking landings

Seward 1 22. 5 1 19.7 Sitka b 2 14. 6 3 12.6 Unalaska/ Dutch Harbor b 3
14. 3 2 15.0 Kodiak b 4 11. 4 4 9.9 Ya k u t a t b 5 5.8 10 3.6 Pelican b
6 5.2 15 1.0 Petersburg b 7 4.2 9 4.0 Cordova b 8 3.7 6 5.1 Homer 9 3.1 5
7.0 Hoonah b 10 2.0 8 4.3

Note: Juneau ranked number 20 with 0.4 percent of the landings in 1995 and
number 7 with 5.0 percent in 2001. a 1995 was the earliest year for which
NMFS data were available.

b Ports with limited access to major transportation networks. Source:
GAO*s analysis of NMFS data.

Comments from the Department of

Appendi x V

Commerce Note: GAO comments supplementing those in the report text appear
at the end of this appendix.

See comment 1. See comment 2. See comment 3.

See comment 4. See comment 5.

See comment 6. See comment 7. See comment 8.

See comment 9. See comment 10.

See comment 11.

GAO Comments The following are GAO*s comments on NOAA*s written comments
provided by the Secretary of Commerce*s letter dated November 21, 2002.

1. We revised the text to reflect that the domestic commercial fish catch
remained relatively the same as in 2001 as it was in 1990.

2. We revised the text to reflect that the IFQ program extended the
halibut and sablefish fishing seasons in some areas.

3. We changed the text to make it clear that the cost differential was due
to the fact that Homer and Seward had access to a road system.

4. We revised the legend for figure 10 to show that the airports are
international airports.

5. NOAA commented that the report*s treatment of wreckfish would have
benefited from consulting a 1994 wreckfish article. We reviewed the
article and determined that generally only the article*s discussion of
consolidation and control of quota holdings was pertinent to our
objectives. The article explained that the wreckfish program did not set
limits on quota holdings, in part, because it would be difficult to
determine who actually controlled the use of the quota. We believe that
our report had already adequately addressed this issue. By not defining
limits, the information needed to determine who controls the use of quota
is not collected and monitored. For this reason, we did not revise

our report. 6. Our point was that banks hold quota for someone else who
controls its

use. As such, consolidation may be greater than NMFS data indicate.
Nonetheless, we revised the text to make it clearer that financial
institutions held, but did not control the use of quota in IFQ programs.

7. Although our definition was technically correct, we revised footnote 2
by providing the definition of bycatch under the Magnuson- Stevens Act.

8. We revised the title of table 1 to make it clear that the table listed
examples of objectives for the IFQ programs we reviewed.

9. We revised the text to remove some of the redundancy.

10. We added a footnote to explain that the rules of the Alaskan halibut
and sablefish program specify limits on quota holdings as quota share use
caps.

11. We added a note to tables 3, 4, and 11 to indicate that 1995 was the
earliest year for which NMFS data were available.

GAO Contact and Staff Acknowledgments

Appendi x VI

GAO Contact Keith W. Oleson, (415) 904- 2218 Acknowledgments In addition
to the name above, Charles W. Bausell, Jr., Susan J. Malone,

Mark R. Metcalfe, Rebecca A. Sandulli, and Tama R. Weinberg made key
contributions to this report.

(360198)

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GAO United States General Accounting Office

All three IFQ programs have experienced some consolidation of quota
holdings. Further, consolidation of surfclam and ocean quahog quota is
greater than National Marine Fisheries Service (NMFS) data indicate,
because different quota holders of record are often part of a single
corporation or family business that, in effect, controls many holdings.
Program rules may affect the extent of consolidation in each IFQ program.
While the Alaskan halibut and sablefish program set specific and
measurable quota limits, the surfclam/ ocean quahog and wreckfish programs
did not, relying instead on federal antitrust laws to determine whether
any quota holdings are excessive. Without defined limits on the amount of
quota an individual or entity can hold, it is difficult to determine if
any holdings would be viewed as excessive.

GAO did not identify any instances where foreign entities currently hold
or control quota. While NMFS requires transfer applicants in the halibut
and sablefish program to declare themselves to be U. S. citizens or U. S.
entities, there is no similar requirement for the surfclam/ ocean quahog
and wreckfish programs. As a result, in these programs, the potential
exists for the transfer of quota to foreign entities.

The economic effects of the halibut and sablefish IFQ program are not
uniform. Some processors were adversely affected by the IFQ program, while
others benefited; however, it is difficult to quantify the actual effects.
The only estimate of the program*s economic effect on processors is a 2002
study commissioned by the state of Alaska. This study estimated that
halibut processors experienced a 56 percent loss in gross operating
margins. While GAO could not validate or replicate the study*s results,
its analysis of public data and the study*s methodology raised several
concerns about the reliability of the study*s estimates. Also, the study
did not take into account other factors that may affect profits, such as
the diversity and value of other species processed.

Fewer Surfclam Quota Holders Than NMFS Data Indicate

INDIVIDUAL FISHING QUOTAS

Better Information Could Improve Program Management

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 159. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Barry Hill at (202) 512- 3841 or hillb@ gao. gov or
Keith Oleson at (415) 904- 2218 or olesonk @gao. gov. Highlights of GAO-
03- 159, a report to the

Chairman and Ranking Minority Member, Subcommittee on Oceans, Atmosphere,
and Fisheries, Committee on Commerce, Science, and Transportation, U. S.
Senate

December 2002

To assist in deliberations on individual fishing quota (IFQ) programs, GAO
determined (1) the extent of consolidation of quota holdings in three IFQ
programs (Alaskan halibut and sablefish, wreckfish, and surfclam/ ocean
quahog); (2) the extent of foreign holdings of quota in these programs;
and (3) the economic effect of the IFQ program on Alaskan halibut and
sablefish processors.

GAO recommends that the Secretary of Commerce require  the National
Marine Fisheries

Service to collect and analyze information on quota holders, including who
actually controls the use of the quota;  the regional fishery

management councils to define what constitutes an excessive share for a
particular fishery in future IFQ programs; and  the National Marine
Fisheries

Service to provide guidance to the regional councils on the factors to
consider when determining what constitutes an excessive share.

Page i GAO- 03- 159 Individual Fishing Quotas

Contents

Contents

Page ii GAO- 03- 159 Individual Fishing Quotas

Page 1 GAO- 03- 159 Individual Fishing Quotas United States General
Accounting Office Washington, D. C. 20548

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Appendix I

Appendix I Scope and Methodology

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Appendix II

Appendix II National Marine Fisheries Service Data on Quota Holdings

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Appendix III

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Appendix IV

Appendix IV Alaskan Ports and Major Transportation Networks

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Appendix IV Alaskan Ports and Major Transportation Networks

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Appendix V

Appendix V Comments from the Department of Commerce

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Appendix V Comments from the Department of Commerce

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Appendix V Comments from the Department of Commerce

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Appendix V Comments from the Department of Commerce Page 45 GAO- 03- 159
Individual Fishing Quotas

Appendix V Comments from the Department of Commerce Page 46 GAO- 03- 159
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Appendix V Comments from the Department of Commerce

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Appendix V Comments from the Department of Commerce

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Appendix VI

United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested

Presorted Standard Postage & Fees Paid

GAO Permit No. GI00
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