# Presentation: 299817

## Assessing Fishing Capacity: Implications For Capacity Reduction Programs

**James E. Kirkley**
**College of William and Mary**
**School of Marine Science**
**Gloucester, VA 23062**
**February 23, 2005**

**Vessel Photo: Jose Corte; NOAA Photo Library**

**NOAA Photo Library**

## What Are We Going to Discuss Today?

- Introduce and discuss two concepts of excess capacity
- Present simple methods for estimating capacity without the mathematical rigor
- Discuss alternative goals and objectives for capacity reduction programs
- Using a relatively simple fishery, we are going to illustrate the potential fleet size corresponding to different goals and objectives of a capacity reduction program—specifically, a buyback program

## The obvious!

- You just cannot add anymore; the maximum amount given inputs (e.g., vessel size, days at sea, crew size, gear, etc.)

**Formally:  Capacity is the maximum output that can be produced given the available technology, capital stocks (e.g., engine and gear), customary and usual operating procedures, and no limits on the variable inputs (e.g., fuel or days)**

- Source: Louisiana Fishing Magazine

- Too Much!

## One Picture of Capacity

**Or a Real Simple Concept of Capacity**

- Effort

- Catch

- There may or may not be an absolute maximum catch

- Regardless of increased fishing effort, our fixed inputs (e.g., the vessel, engine, vessel hold, and gear) prevent us from catching more fish

- A Little Sidebar:  Our catch-effort relationship represents the relationship between technically efficient production and fishing effort; production to the interior of our graph is deemed to be inefficient (e.g., point A—two options: expand output from A to B using E1 or produce A using E2 units of effort)

- Fixed Input

- A

- B

- E1

- E2

- A physical concept of capacity

## OK, WE ARE ENTERING OVERKILL

- Capacity is really an economic concept
- It corresponds to the output level that either maximizes profits, maximizes revenues, or is the output level corresponding to cost minimization
- It can also be modified to reflect social concerns (e.g., level of employment)
- Unfortunately, few fisheries of the US have adequate economic data to estimate any economic concept of capacity—other than that corresponding to revenue maximization
- For our purposes, we estimate a “technological-economic concept;” that is, we consider the physical concept of capacity, but because we use actual data, our estimates reflect economic behavior and adjustments. We cannot, however, use our estimates to determine capacity output if output or input prices change

**OK, WE ARE ENTERING OVERKILL**

## Excess and Over-Capacity

**Excess capacity is said to exist when a vessel (firm) or fleet (industry) has the capability to harvest more than is actually being harvested using the same capital stock or platform; the difference between what could be harvested and what is actually harvested represents excess capacity**
**On the other hand, the agency (NOAA) is concerned about sustainability and desired resource levels; the agency has, thus, come up with the concept of over-capacity**
**Over-capacity is said to exist when a fleet has the capability to harvest more than is sustainable in the long-run given the desired or optimal level of the resource (e.g., MSY or some other OY)**

## More on the Concept of Over-capacity

- Long-run sustainable yield

- MSY

- Effort

- Catch

- Simple short-run yield
- Given MSY level of resource

- E1

**At E****1 ****and the MSY level of the resource, the fleet has the capability to harvest well in excess of the MSY—there is over-capacity—C****1**** - C****MSY**

- C1

- CMSY

- EMSY

**Vessels could harvest up to C****1**** using E****1**** (full variable input utilization), but fixed factors prevent firm from exceed C****1****; any level of landings less than C****1**** also indicates excess capacity**

- Fixed factors constrain output

## Capacity and Capacity Utilization

**Capacity utilization is a measure of the actual use of the capital stock (e.g., the vessel) relative to the potential use of the capital stock—for example, a fishing vessel might be useable for 200 days a year, but is only used 50 days a year**
**More formally, capacity utilization—CU– is measured in terms of the ratio of the actual output to the potential capacity output;**
**CU is typically constrained to be less than or equal to one in value; an economic based measure of CU, however, may be less than, equal to, or greater than one in value—that is, a firm may be using too many or too few inputs to produce the capacity output at a given economic level (translated—producers are paying too much or too little to produce a given output level relative to the capacity output level) **
**Often we use an inverse of CU to determine the percentage by which actual output could be increased if firms operated at full capacity utilization**

## Another Concept (2):  Variable Input Utilization

**Variable input utilization (VIU) is simply a measure of the level of actual variable inputs used relative to what is necessary to produce the capacity output**
**We also typically measure VIU in terms of its inverse**
**I/VIU indicates the percentage by which the variable inputs need to be expanded (1/VIU > 1.0) or contracted (1/VIU < 1.0) to produce the capacity output—we call this the full variable input utilization**
**For the purpose of assessing capacity, we use 1/VIU to estimate the expansion or contractions in days at sea and crew size necessary for the capacity output**

**OK, ENOUGH OF THE NOISE**

## (Focusing only on Physical Concept)

**Census/Federal Reserve—sophisticated peak-to-peak approach; done with a survey; asks firms and producers what is their capacity output, and then uses a sophisticated statistical analysis to estimate capacity—not done for fisheries**
**Stochastic production frontier—requires specification and estimation of a complex catch-effort relationship, and then via mathematical manipulation, estimates capacity output—has problems for more than one output and also has some statistical limitations, but does accommodate noise**
**Third approach, and the one used for this study—data envelopment analysis or DEA (not to be confused with Drug Enforcement Administration)**

**Each method has its strengths and weaknesses, and thus far, DEA appears to be the preferred approach**

## Data Envelopment Analysis or DEA

**This is simply a mathematical approach which seeks to determine the maximum expansion of outputs or contraction of inputs, given either the level of available fixed inputs or the desired level of outputs (there is another approach—directional distance function)**

- Effort

- Catch

- Fixed Input

- A

- B

- E1

- E2

- Output Orientation

- Input Orientation

## .

- Output 1

- Output 2

**.**

- B

**.**

- A

- 0

**Graph depicts the possible combinations of two outputs given the fixed inputs—a transformation function or production possibilities frontier**

**Points along the curve represent technically efficient production; points interior to the curve represent inefficient production**

**With DEA, we seek to define the frontier or points along the possibilities function; if a firm was operating at A, its output could be increased to point B or by the distance 0B/0A**

**That is about as technical as we want to get!**

## DEA Model of Capacity Output

**We do this once, and that is enough for anybody!**

**Economists and mathematics, they just won’t go away**

## The Black Sea Bass Pot Fishery

**Initially, we thought we might finally have a nice, simple fishery to analyze—NOPE, NOT SO! **
**First, it was recognized that the pots or traps are the primary gear used to harvest black sea bass**
**We discovered, however, that there are likely to be several different pot fisheries; some based on the fact black sea bass are the only species reported as being landed and others based on landings of multiple species.  Then, there are further groupings based on different levels of activity, vessel size, engine size, and other factors**
**To address the multiple fishery nature, we conducted a cluster analysis, which provides information sufficient for determining groupings of the fisheries**

## Some Basics

**To accommodate customary and usual operating procedures, however, we assume that the number of gear (pots for this fishery), number of hauls, and time fished per gear are fixed or held constant—this may be in error since number of gear, hauls, and time fixed could be varied by the vessel operator and crew**
**We allow days at sea and crew size to be variable**
**We seek to determine an output level at which the fixed factors restrict further expansions—this is the capacity output**

**Some Basics**

## Some Basics on Our Fisheries

- Summary of Mean Trip-level Values for Ten Fisheries, 1995-2001

- Range for Days Away: Single-species—1-12 days; Multi-species—1-11 days.

## The Results: But First Some Caveats!

**The analysis is at the trip level for each year—1995,...,2001**
**Analysis is limited only to observations having complete data (information on landings, vessel characteristics, and variable input usage) for the pot fishery between 1995 and 2001, which limits the analysis**

- Percentage of Total Landings of Sea Bass and Vessel Count

- Last, we do not allow number of pots per trip, trips per year, or hauls per trap or time fished per trap to change—as such, we are likely to underestimate capacity output, but likely to depict customary and usual operating procedures

## Some Results

- Although we considered actual, mean, and median capacity levels per vessel per year, we consider here only the mean capacity output per vessel per year

- Remember that if we allow the number of trips per vessel to increase per year, which is a very realistic possibility, the number of vessels required to harvest the reported level of landings would be smaller

## Reducing Capacity in the Fishery

- This is where it gets tricky!

- NOAA Fisheries and the Councils have no clearly specified goals or objectives for reducing capacity.
- It is important to understand that there are many possible options (e.g., maximize technical efficiency, maximize capacity utilization, maximum number of vessels allowed in fleet, maximize revenue, maximize profit, minimize costs, etc., etc.!)
- Past buyouts in New England have attempted to purchase the most capacity given a fixed budget.
- For our analysis, and since we do not have a specified biological TAC, we consider arbitrary TACs of 250,000, 500,000, 750,000, 1,000,000, 1,250,000, and 1,500,000 pounds per year and the maximization of technical efficiency and the maximization of capacity utilization

## Summary of Range of Vessels

| TAC | Maximize TE | Maximize CU | Maximize # | Full-time | Potential # |
| --- | --- | --- | --- | --- | --- |
| 250,000 | 47 | 34 | 81 | 1 | 151
 |
| 500,000 | 57 | 43 | 101 | 2 | 151 |
| 750,000 | 72 | 64 | 113 | 3 | 151 |
| 1,000,000 | 79 | 83 | 122 | 5 | 151 |
| 1,250,000 | 87 | 91 | 130 | 7 | 151 |
| 1,500,000 | 102 | 100 | 135 | 10 | 151 |

**Based on mean values per vessel**

| Year | # Vessels | Landings |
| --- | --- | --- |
| 1995 | 54 | 298,770 |
| 1996 | 73 | 463,014 |
| 1997 | 81 | 493,676 |
| 1998 | 71 | 468,163 |
| 1999 | 65 | 460,462 |
| 2000 | 68 | 333,698 |
| 2001 | 51 | 360,831 |

## Including Buyout Costs

- Structure of Post-buyout fleet has not included estimates of buyout cost
- Four strategies compared
- 1) Maximum TE of remaining vessels
- 2) Maximum CU of remaining vessels
- 3) Maximize number of vessels
- 4) Buyout based on bid to capacity ratio until TAC is met
- Bid Prices for each vessel were assumed to equal one year of revenue--Snowden, R.  1994.  "The Complete Guide to Buying a Business"
- The analysis is only for vessels that were included in our sample. Buyout costs are therefore a lower bound on what a buyout would actually cost.

## Slide 22

## Slide 23

## Summary and Conclusions

**The analysis indicates there is excess capacity. The fleet operating between 1995 and 2001 could have harvested about 2.1 times the level actually harvested.**
**Estimates are conditional on the biomass that exists during the period 1995-2001, and the customary and usual operating conditions that existed during the same time period. Our estimates are, thus, likely to be biased downwards relative to the capacity of the entire fleet.**
**The analysis also reveals that it is quite important to have well-specified goals and objectives for a capacity reduction program, and to include buyout costs when choosing among goals. **

## Food for Future Thought

**Our black sea bass fishery was a relatively simple fishery**
**Many fisheries, however, involve not only numbers other species and gear types, they also involve the harvesting of undesirable outputs (e.g., juveniles, non-marketable species, sea turtles, etc.)**
**This can easily be accommodated using a directional distance vector approach—DEA or stochastic multiple output distance function**
**The directional distance function approach can also be used to estimate efficiency and capacity relative to essential fish habitat concerns**
**Despite all the fancy methods, we still, however, need to really start focusing on economic-based measures of capacity**

## Lets Close on the Issue of Buybacks

**Should the U.S. government let fishermen fail?**
**OR should the government force taxpayers to subsidize companies?**
**Why should taxpayers keep a vessel owner in business?**
**These questions are from a Cato Policy Analysis report, January 15, 1980—change fisher, fishermen, etc. to Chrysler**
**FAST FORWARD: 09/11—Airlines needing assistance**
**Chrysler bailout was $1.5 billion in 1980 ($3.0 billion in 2004), but Chrysler repaid the loan**
**Airlines not asking for loan**