Individual Fishing Quotas: Economic Effects on Processors and	 
Methods Available to Protect Communities (25-FEB-04,		 
GAO-04-487T).							 
                                                                 
To address overfishing, the National Marine Fisheries Service	 
started using individual fishing quotas (IFQ) as a fishery	 
conservation and management tool in 1990. Under an IFQ program, a
regional fishery management council sets a maximum, or total	 
allowable catch, and allocates the privilege to harvest a certain
portion of the catch in the form of quota to individual vessels, 
fishermen, or other eligible recipients. 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, concerns have been raised about the economic effects of 
IFQ programs on fish processors and fishing communities, among	 
others. This testimony is based on two GAO reports on issues	 
related to the use of IFQs (Individual Fishing Quotas: Better	 
Information Could Improve Program Management, GAO-03- 159, Dec.  
11, 2002, and Individual Fishing Quotas: Methods for Community	 
Protection and New Entry Require Periodic Evaluation, GAO-04-277,
Feb. 24, 2004). Specifically, GAO addressed the (1) economic	 
effects of the Alaskan halibut IFQ program on processors and (2) 
the methods available for protecting communities under an IFQ	 
program.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-487T					        
    ACCNO:   A09363						        
  TITLE:     Individual Fishing Quotas: Economic Effects on Processors
and Methods Available to Protect Communities			 
     DATE:   02/25/2004 
  SUBJECT:   Fishery legislation				 
	     Fishes						 
	     Fishing industry					 
	     Marine resources conservation			 
	     Strategic planning 				 
	     Wildlife management				 
	     Economic analysis					 
	     Program evaluation 				 
	     Alaska						 

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GAO-04-487T

United States General Accounting Office

GAO Testimony

Before the Committee on Commerce, Science, and Transportation, U.S. Senate

For Release on Delivery Expected at 9:30 a.m. EST

Wednesday, February 25, 2004 	INDIVIUDAL FISHING QUOTAS

  Economic Effects on Processors and Methods Available to Protect Communities

Statement of Anu K. Mittal, Director Natural Resources and Environment

GAO-04-487T

Highlights of GAO-04-487T, testimony before the Committee on Commerce,
Science, and Transportation, United States Senate

To address overfishing, the National Marine Fisheries Service started
using individual fishing quotas (IFQ) as a fishery conservation and
management tool in 1990. Under an IFQ program, a regional fishery
management council sets a maximum, or total allowable catch, and allocates
the privilege to harvest a certain portion of the catch in the form of
quota to individual vessels, fishermen, or other eligible recipients.

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, concerns
have been raised about the economic effects of IFQ programs on fish
processors and fishing communities, among others.

This testimony is based on two GAO reports on issues related to the use of
IFQs (Individual Fishing Quotas: Better Information Could Improve Program
Management, GAO-03159, Dec. 11, 2002, and Individual Fishing Quotas:
Methods for Community Protection and New Entry Require Periodic
Evaluation, GAO-04-277, Feb. 24, 2004).

Specifically, GAO addressed the (1) economic effects of the Alaskan
halibut IFQ program on processors and (2) the methods available for
protecting communities under an

February 25, 2004

INDIVIDUAL FISHING QUOTAS

Economic Effects on Processors and Methods Available to Protect Communities

The Alaskan halibut IFQ program has had varied economic effects on
processors. The program extended the halibut fishing season to 8 months,
allowing more halibut to be processed and sold as a fresh product. This
shift to fresh product led to the emergence of the buyer broker, an
increased competition for fish, and higher halibut ex-vessel prices
(prices paid to fishermen for raw product). In addition, a net decrease of
12 shore-based plants that processed halibut occurred between 1995, when
the IFQ program was implemented, and 2001, as well as a reallocation of
market share. For the 28 companies that processed halibut in both 1995 and
2001, 15 lost market share and 13 gained market share.

Factors other than the implementation of the IFQ program, such as the
diversity and value of species processed, could also have impacted the
wellbeing of Alaskan halibut processors. For example, halibut represented
a relatively small portion of the fish processed by shore-based plants in
Alaska and of total plant value. Specifically, from 1994 to 2001, halibut
represented, on average, 2 percent to 4.1 percent of all fish processed at
a plant and accounted for 4.4 percent of total plant value in 1994 and 7.9
percent in 2001. The only estimate of the program's economic effects 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. However, GAO's analysis, as well as the analyses of
others, identified concerns about the study's assumptions,
representiveness, and potential for participant bias that raise questions
about the reliability of its estimates.

Several methods are available for protecting the economic viability of
fishing communities under an IFQ program. The easiest and most direct way
is to allow communities to hold harvesting quota and decide how this quota
is to be used. In addition, fishery managers can help ensure the economic
viability of communities by adopting quota management rules aimed at
protecting certain groups of fishery participants. However, protecting the
economic viability of communities is a social objective, and realizing
such an objective may undermine economic efficiency and raise questions of
equity. For example, rules that allow communities to hold harvesting quota
may result in allocations to communities that do not have the knowledge
and skills to manage the quota effectively and thus increase costs and/or
decrease revenues. Similarly, rules that appear to favor one group of
fishermen over another may result in fairness and equity challenges.
Fishery managers also face a number of challenges associated with the
methods available to protect communities. The resolution of these issues
ultimately will depend on the specific circumstances within a fishery and
the overall program objectives.

www.gao.gov/cgi-bin/getrpt?GAO-04-487T.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Anu Mittal at (202) 512-3841
or [email protected].

Mr. Chairman and Members of the Committee:

We are pleased to be here today to discuss the economic effects of
individual fishing quotas (IFQ) on processors and methods available for
protecting communities under an IFQ program.

Overfishing is a problem with far-reaching ecological and economic
consequences. About one-third of the fish stocks assessed by the
Department of Commerce's National Marine Fisheries Service (NMFS) are
overfished or will become overfished if conditions do not change. When a
fishery-composed of one or more fish stocks within a geographic area-
cannot be sustained, the marine ecosystem can be transformed, thus
threatening the livelihood of fishermen and the way of life in many
communities.

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 councils, under the direction of NMFS, have used several
types of controls to maintain the health of U.S. fisheries. In 1990, NMFS
started using IFQs as a conservation and management tool. Under an IFQ
program, a regional fishery management council sets a maximum, or total
allowable catch, and allocates the privilege to harvest a certain portion
of the catch in the form of quota to individual vessels, fishermen, or
other eligible recipients.

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, concerns
have been raised about the economic effects of IFQ programs on fish
processors and fishing communities, among others.

Our testimony is based on two reports we prepared at the request of this
Committee's Subcommittee on Oceans, Fisheries, and Coast Guard.2 The first
report focused on the consolidation and foreign holdings of quota and

1Pub. L. No. 94-265 (1976) (codified as amended at 16 U.S.C. S:S:
1801-1883.

2Individual Fishing Quotas: Better Information Could Improve Program
Management, GAO-03-159 (Washington, D.C.: Dec. 11, 2002) and Individual
Fishing Quotas: Methods for Community Protection and New Entry Require
Periodic Evaluation, GAO-04-277 (Washington, D.C.: Feb. 24, 2004).

the economic effects on processors. The second report addressed the
methods available to protect the economic viability of communities and
facilitate new entry into IFQ fisheries. For our study of the economic
effects on processors, we focused on the Alaskan halibut IFQ program,
which began in 1995. We interviewed fishery participants, visited
processing plants in Alaska, analyzed public data, and reviewed the only
study that attempted to quantify the economic effects of the program on
processors. For our study of community protection methods available under
an IFQ program, we visited domestic and foreign fishing communities in
Alaska, Maine, Iceland, Scotland, and New Zealand. In these communities
and elsewhere, we spoke with fishery managers, participants, and
researchers; reviewed literature on domestic and foreign quota-based
programs; and reviewed key regulations and studies. Our testimony today
discusses the (1) economic effects of the Alaskan halibut IFQ program on
processors and (2) the methods available for protecting communities under
an IFQ program.

In summary, we found the following:

o  	The Alaskan halibut IFQ program had varied economic effects on
processors-some processors were adversely affected while others benefited.
First, the program extended the halibut fishing season to 8 months, thus
allowing more halibut to be processed and sold as a highervalue fresh
product than as a lower- value frozen product. Second, this shift to fresh
product led to the emergence of the buyer broker, generally a one-person
operation with lower overhead costs, which resulted in increased
competition for fish and contributed to higher ex-vessel prices (prices
paid to fishermen for raw product) for halibut. Third, there was a net
decrease of 12 shore-based plants that processed halibut between 1995 and
2001-68 plants stopped processing halibut and 56 started. Over
threequarters of the plants that stopped or started processing processed
less than 100,000 pounds of halibut annually. Finally, there was a
reallocation of market share. Of the 28 companies that processed halibut
in both 1995 and 2001, 15 lost market share and 13 gained market share.

o  	The economic well-being of processors may also have been impacted by
factors other than the implementation of the IFQ program, such as the
diversity and value of species processed. Our analysis indicates that
halibut represented a relatively small portion of the fish processed by
shore-based plants in Alaska. Specifically, from 1994 to 2001, halibut
represented, on average, 2 percent to 4.1 percent of all fish processed at
a plant and accounted for 4.4 percent of total plant product value in 1994
and 7.9 percent in 2001.

o  	We identified only one study that estimated the economic effects of
the IFQ program on halibut processors. This study, commissioned by the
state of Alaska, concluded that halibut processors experienced a
56-percent ($8.7 million) loss in gross operating profits, primarily
because of the IFQ. However, our analysis, as well as the analyses of
others, identified concerns about the study's assumptions,
representiveness, and potential participant bias, that raise questions
about the reliability of the study's estimates.

o  	Several methods are available to help protect the economic viability
of fishing communities under an IFQ program. The easiest and most direct
way is to allow the communities themselves to hold harvesting quota and
decide how this quota is to be used. In addition, fishery managers can
help ensure the economic viability of communities by adopting quota
management rules aimed at protecting certain groups of fishery
participants. However, it is important to recognize that protecting the
economic viability of communities is a social objective, and realizing
such an objective may undermine economic efficiency and raise questions of
equity. For example, rules that allow communities to hold harvesting quota
may result in allocations to communities that do not have the knowledge
and skills to manage the quota effectively and thus increase costs and/or
reduce revenues. Similarly, rules that appear to favor one group of
fishermen over another may result in fairness and equity challenges.
Fishery managers also face a number of challenges associated with the
methods available to protect communities. The resolution of these issues
ultimately will depend on the specific circumstances within a fishery and
the overall program objectives.

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. 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 Magnuson-Stevens Act also established national standards for fishery
conservation and management. These standards, among other things, require
the fishery management councils to consider the importance of fishery
resources to fishing communities. The act defines a fishing community as
one that is substantially dependent on, or engaged in, harvesting or
processing fishery resources to meet social and economic needs. The
definition includes fishing vessel owners, operators, and crew,

and fish processors based in the community. NMFS guidance further defines
fishing community to mean a social or economic group whose members reside
in a specific location.3

  Alaskan Halibut IFQ Program Resulted in Changes That Harmed Some Processors
  and Benefited Others

The Alaskan halibut IFQ program changed the environment in which
traditional shore-based processors operated by extending the halibut
fishing season from several days to 8 months. Before the IFQ program was
implemented, fishermen had just a few days to fish the total allowable
catch for the year. Consequently, they 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. As a
result, processors received halibut 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 figure 1 shows, increased from 15 percent of the total halibut
market in 1994 to 46 percent in 2001.

Figure 1: Fresh Halibut as a Percentage of Total Halibut Production, 1984
through 2001

                                       60

                                 50 Percent 40

                                       30

                                       20

                                      10 0

9841

                                   1986 1988

0199

                                 1992 1994 1996

9981

                                   2000 Year

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

350 C.F.R. S: 600.345(b)(3).

However, to take advantage of the fresh market and its potential for
higher wholesale prices, processors needed ready access to highways and
air transportation. As a result, 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 them. For example, one processor
estimated that the costs of transporting 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 to Seattle. Also, processors located near providers of fuel, ice,
stores, and entertainment, said that fishermen were more willing to
deliver fish to them than if these providers were not available.

The shift toward fresh product in the halibut market led to the emergence
of the buyer-broker, an intermediary 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, increased
competition for fish and contributed to the increase in ex-vessel halibut
prices. As table 1 shows, the percentage of halibut purchased by
buyerbrokers increased from 3.7 in 1995 to 17.4 in 1999.

Table 1: Halibut Buyers, by Category, 1995 and 1999 Percentage of halibut
                                purchased 1999b

                                   Category      1995a                  1999b 
                               Buyer-broker       3.7                    17.4 
                     Shore-based processors       84.9                   73.8 
                                      Other       11.4                    8.8 
                                      Total      100.0                  100.0 

Source: NMFS.

a1995 was the earliest year for which NMFS data were available.

b1999 was the most recent year we could analyze because, starting in 2000,
buyers could identify themselves in multiple categories.

Along with an increase in buyer-broker halibut purchases, there was a net
decrease in the number of individual shore-based plants that processed
halibut. While some plants stopped processing halibut, others decided it
was beneficial to start. Between 1995, when the IFQ program was
implemented, and 2001, 68 plants stopped processing halibut and 56
started, resulting in a net decrease of 12 plants. Most of the shore-based
plants that stopped and started processing were relatively small in
comparison to other processors. 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 halibut annually.

The IFQ program alone did not necessarily cause a plant to stop processing
halibut. For example, one processor with a freezing operation bought
halibut, but its primary business was buying salmon from trollers and then
selling it. When the supply of farmed salmon increased, contributing to
price decreases, the owners decided to sell the plant. According to
industry and government officials, other plants stopped processing halibut
because plant management made poor business decisions that were unrelated
to the IFQ program, the plant burned down, or the plant was closed for
personal reasons.

In addition to changes in the number of plants processing halibut,
companies experienced some change in their market share.4 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 both years, 15 experienced a decrease in market share
and 13 experienced an increase.

Factors other than the IFQ program's implementation could also have
contributed to changes in the economic well-being of processors. For
example, according to NMFS officials and industry experts, most processors
handled other species of fish in addition to halibut, 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 represented a relatively small
portion of the fish processed by shore-based plants. Specifically, from
1994 to 2001, halibut represented, on average, 2.0 percent to 4.1 percent
of all fish processed at a plant. In terms of value, as shown in table 2,
halibut was 4.4 percent of total plant product value in 1994 and 7.9
percent in 2001. (These ranges are averages for all plants processing
halibut and a particular plant may process a higher percentage of these
fish.) In these circumstances the drop in salmon prices most likely had a
larger effect on economic well-being of processors than the halibut IFQ
program.

4The market share of a company is the amount of halibut purchased by that
processing company as a percentage of total halibut 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
process halibut.

Table 2: Average Product Value Percentage, by Species, for Plants
Processing Halibut and Sablefish, 1994 and 2001

                          Percentage 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 speciesa        25.9                       14.6 
                                 Total        100.0                     100.0 

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

aOther species include crab, flounder, greenling, herring, lingcod,
octopus, perch, prowfish, rockfish, shrimp, skate, sole, and turbot.

To determine the IFQ program's effect on processors, Alaska's Department
of Fish and Game commissioned a study to examine how halibut and sablefish
processors were affected economically.5 This was the only study we could
find that attempted to quantify the economic effect the IFQ program had on
halibut processors. Using a sample of halibut 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 preand 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 caused halibut prices to increase and processors'
market shares to change.6

While we could not validate or replicate the study's results because the
proprietary data used in the study were confidential, we identified a

5Matulich, 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.

6The 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.

number of concerns with the study's assumptions, representiveness, and
potential for participant bias that brings into question the reliability
of the study's estimates. First, we identified several issues of concern
about the assumptions used in the study. For example, the study assumes
that all costs, except labor and material inputs, remained fixed from 1992
through 2000. However, as pointed out in a critique of the study, 7 this
assumption would not be appropriate 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.

Even if the study's assumption about costs were valid, the pre- and
post-IFQ periods examined identify a greater negative change in gross
operating margins than might have been identified if different or longer
periods had been 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. 2.) Ex-vessel halibut prices in 1999-2000 were 44.5
percent higher than they were in 1992-1993. However, when different base
years, such as 1991-1992, are compared with 1999-2000, the price increase
is 22.7 percent. If these different periods had been used in the study,
the estimated loss in processor gross operating margins would have likely
been much less.

7Halvorsen, Robert, Comments on the Matulich and Clark Report, "Efficiency
and Equity Choices in Fishery Rationalization Policy Design," University
of Washington, April 2002.

             Figure 2: Ex-Vessel Halibut Prices, 1984 through 2001

$4.00

                                Price per pound

$3.00

$2.00

$1.00

$0.00

 198419851986198719881989199019911992199319941995199619971998199920002001 Year

Source: GAO 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 can also 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 table 3 shows,
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 19992000
shows a 13.0 percentage point decrease and comparing 1993-1994 with
1998-1999 shows a 1.1 percentage point increase. Again, the Alaskan
study's estimated loss in processor gross operating margins would have
likely been less if different time periods had been used.

Table 3: Price Margins in Selected Pre- and Post-IFQ Years

                        Pre-IFQ                      Post-IFQ 
                 Years             Price margina    Years       Price margina 
             1991-1992                      37.1  1998-1999              31.4 
            1992-1993b                      47.3  1999-2000b             24.1 
             1993-1994                      30.3  2000-2001              23.3 

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

aThe 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.

bYears used in the Alaska study.

Second, the study's results may not be representative of the industry as a
whole. Responses were used from processors representing only 52 percent of
all halibut purchased in the pre-IFQ years and 61 percent of all halibut
in the post-IFQ years.8 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.

Third, the survey the study's authors used to request economic information
from processors may have biased participant responses. In the preamble to
the survey, 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 because they
can influence the results.

8In total, 53 halibut processors, representing 88 percent of all halibut
purchased in the study years, were asked to participate in the survey.

  Several Methods Are Available for Protecting Communities

We identified several methods that could be used to protect communities.
First, allowing communities to hold harvesting quota is the easiest and
most direct way under an IFQ program to help protect fishing communities.
According to fishery experts and participants, fishery managers can give
each community control over how to use the quota in ways that protect the
community's economic viability, such as selling or leasing quota to
fishermen who reside in the community. Community quota could be held by
municipalities, regional organizations, or other groups representing the
community-unlike traditional individual fishing quota, which is generally
held by individual boat owners, fishermen, or fishing firms.

Second, fishery managers can establish rules governing quota transfers-
i.e., quota sales-to protect certain groups of fishery participants. We
identified the following approaches used in foreign IFQ programs that were
aimed at protecting communities:

o  	Prohibiting quota sales. Fishery managers in Norway prohibited all
quota sales to protect fishing communities in certain locations.

o  	Placing geographic restrictions on quota transfers. Iceland and New
Zealand fishery managers have set limits on where quota can be sold or
leased to protect certain groups, such as local fishermen and the
communities themselves. The Icelandic IFQ program, in which individuals
own vessels with associated quota rather than the quota itself, adopted a
"community right of first refusal" rule to provide communities the
opportunity to buy vessels with their quota before the vessels are sold to
anyone outside of the community. New Zealand's Chatham Islands community
trust has, in effect, used residence in the Chatham Islands as a
requirement to lease its quota.

Finally, according to fishery managers and experts we spoke with, fishery
managers can help protect fishing communities by (1) setting limits on the
amount of quota an individual or entity can hold, (2) requiring quota
holders to be on their vessels when fish are caught and brought into port,
and (3) restricting the ports to which quota fish can be landed.

However, in designing and implementing community protection methods,
fishery managers face multiple issues/challenges. How these
issues/challenges are met depends on the fishery's circumstances and the
program's objectives. First, fishery managers face an inherent tension
between the economic goal of maximizing efficiency and the social goal of
protecting communities. According to fishery experts we spoke with, this

tension occurs because a community often may not be the most efficient
user of quota. For example, according to Icelandic fishery experts, some
communities did not have the knowledge and skills to manage their quota
effectively and eventually sold it, reducing the communities' economic
base. Adopting rules that constrain the free trade of quota, such as those
designed to protect communities, would likely limit the efficiency gains
of the IFQ program. Therefore, fishery managers have to decide how much
economic efficiency they are willing to sacrifice to protect communities.

Methods for protecting communities may also raise concerns about equity.
In the United States, community quotas or rules aimed at protecting
certain groups may not be approved because they are not allowed under the
Magnuson-Stevens Act. For example, National Standard 4 of the
Magnuson-Stevens Act prohibits differential treatment of states. A rule
that proposes using residence in one state as a criterion for receiving
quota may violate the requirements of National Standard 4. Furthermore,
methods that propose allocating quota to communities can appear unfair to
those who did not benefit and could result in legal challenges. Moreover,
allowing communities to purchase quota may be considered unfair or
inequitable because relatively wealthy communities would more readily have
the funds needed to purchase quota, while relatively poor communities
would not.

Second, fishery managers face several definitional issues in allowing
communities to hold and trade quota, and communities must decide how to
best use the quota.

o  	Fishery managers need to define the community. However, fishery
managers and experts told us that communities can be defined
geographically, such as island communities, and nongeographically, such as
fishermen who use the same type of fishing gear (e.g., hook-and-line or
nets) for a particular species.

o  	Once fishery managers define the community, they must then determine
who represents it and thus who will decide how the quota is used. More
than one organization (e.g., government entity, not-for-profit
organization, private business, or cooperative group) may claim to
represent the interests of the community as a whole. For example, rural
coastal communities in Alaska, which are geographically distinct, could
have several overlapping jurisdictions, including a local native
corporation, a local municipality, and a local borough.

o  	Fishery managers also need to define what constitutes economic
viability, which is likely to differ by community because the fishery has
different economic significance in each community. Some communities
primarily rely on fishing and fishing-related businesses, while others may
have a more diverse economic base. Moreover, the balance of industries
making up a community's economy may change over time when the area becomes
more modernized or a new industry enters.

o  	Community representatives have to decide whether to keep their quota,
sell it, or lease it to others. If they keep their quota, they also have
to decide how to allocate it. Similarly, if they sell or lease their
quota, they have to decide how to allocate the proceeds. Unless
communities can decide how to allocate quota or the proceeds, the
community quota may go unused and thus prevent the community from
receiving its benefit. For example, the quota New Zealand's Maori people
received from the government in 1992 has not been fully allocated to the
Maori tribes, largely because the commission responsible for distributing
the quota and the tribes could not agree on the allocation formula.9

Third, along with these definitional challenges, fishery managers and
communities have to consider issues associated with quota transfers.

o  	Prohibiting quota sales may not allow fishing communities or
businesses to change over time as the fishing industry changes. According
to fishery experts we spoke with, rules that prevent change essentially
freeze fishing communities at one point in time and may create "museum
pieces." For example, prohibitions on quota sales prevent the fishery from
restructuring, thus forcing less efficient quota holders and fishing
businesses to remain in the fishery. Consequently, prohibitions on quota
sales may actually undermine the economic viability of the fishing
communities they were designed to protect.

o  	Geographic restrictions on quota transfers can be easily circumvented.
For example, Icelandic officials told us that in their IFQ program, where
individuals own vessels with associated quota rather than the quota
itself, companies holding quota easily avoided the "community right of
first refusal" rule by selling their companies as a whole to an outside
company, rather than just selling their vessels and associated quota. As a
result, communities could not use this rule to prevent the sale.
Furthermore,

9In December 2003, legislation was introduced in the New Zealand
Parliament that, among other things, sets out the allocation formula to be
used to allocate quota to the Maori tribes.

communities that could benefit from such a rule may not have the money to
purchase the quota, while those communities that can afford to purchase
the quota may not need the rule's protection.

Finally, fishery managers also face challenges associated with (1) setting
limits on the amount of quota an individual or entity can hold, (2)
requiring quota holders to be on their vessels when fish are caught and
brought into port, and (3) restricting the ports to which quota fish can
be landed. Monitoring and enforcing quota accumulation limits can be
extremely difficult when fishermen create subsidiaries and complicated
business relationships that enable them to catch more than the quota limit
for an individual quota holder. Requiring quota holders to be onboard
their vessels can be impractical, especially for small businesses where
the same person would have to be on board at all times. According to
fishery experts we spoke with, an onboard rule would require so many
exceptions, such as for emergencies and illness, that it would be
meaningless. Requiring fishermen to bring their catch into ports in a
particular geographic area may not be healthy for a community's economy in
the long term. Such a requirement may subsidize inefficient local fish
processors that cannot compete on the open market. With reduced
competition, these processors may offer less money for the catch, thus
reducing the fishermen's income and ultimately harming the community.
According to Shetland Islands fishery managers we spoke with, had
fishermen been required to land their catch in the Shetland Islands, they
would have received a price far below the market value, and the processor
would have had no incentive to restructure into the competitive business
it is today.

Mr. Chairman, this completes my prepared statement. I would be pleased to
respond to any questions that you or other Members of the Committee may
have at this time.

Contacts and Staff For further information about this testimony, please
contact me at (202) 512-9846. Keith Oleson, Susan Malone, Mark Metcalfe,
and Tama WeinbergAcknowledgments also made key contributions to this
statement.

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