Individual Fishing Quotas: Better Information Could Improve Program Management
Published: 2002-12-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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). 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.
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.
subsections: section_title: Background
paragraphs: 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, 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-and- line 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  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.
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.
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.
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.
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.
section_title: Consolidation of Quota Holdings Occurred in All Three IFQ Programs
paragraphs: Consolidation of quota holdings occurred in all three IFQ programs, with  much of it occurring in the early years of each program. In addition,  consolidation of surfclam and ocean quahog quota is greater than NMFS  data indicate. The governing rules of each program may have affected the  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.
subsections: section_title: Much of the Consolidation Occurred in Early Program Years
paragraphs: According to our analysis of NMFS data, from 1995 through 2001, the  number of halibut and sablefish quota holders decreased by about 27 and  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. 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.)
section_title: Consolidation of Surfclam and Ocean Quahog Quota Is Greater Than NMFS Data Indicate
paragraphs: Surfclam and ocean quahog quota consolidation is greater than NMFS data  indicate. According to NMFS officials and others knowledgeable about the  fishery, the quota holder of record (i.e., the individual or entity under  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.
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.
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.)
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. 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.
section_title: Program Rules May Affect the Extent of Consolidation and Information Collected
paragraphs: Each program’s governing rules may have affected the extent of  consolidation and the information NMFS collects and monitors on quota  holders. To help meet the Magnuson-Stevens Act’s prohibition of any  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. 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.
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 “ 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...” 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.
section_title: No Foreign-Owned Entities Currently Hold Quota
paragraphs: We found no evidence that foreign entities currently hold or control quota  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  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. 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  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.
section_title: Economic Effects on Halibut and Sablefish Processors Varied and Are Difficult to Quantify
paragraphs: Some processors were adversely affected by the implementation of the  halibut and sablefish IFQ program while others benefited. However,  quantifying the economic effects of the IFQ program on processors is  difficult because much of the data needed to measure changes in  profitability are proprietary. Furthermore, other factors besides the  IFQ program may lead to changes in processors’ economic situation.
subsections: section_title: IFQ Program Resulted in Changes That Harmed Some Processors and Benefited Others
paragraphs: The IFQ program changed the environment in which traditional  shore-based processors operated by extending the halibut and sablefish  fishing seasons in some areas 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, 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.
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.
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.
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.  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.
section_title: State of Alaska Study Found Processors Hurt by IFQ Program, but Results Cannot Be Validated
paragraphs: 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. This was the only study  we could find that attempted to quantify the economic effect the IFQ  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  caused halibut prices to increase and processors’ market shares  to change.
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.
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 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 1992- 1993. However, when different base years, such as 1991-1992, are compared  with 1999-2000, the price increase is 22.7 percent.
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.
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.
section_title: Factors Other Than the Implementation of the IFQ Program Could Affect Processors Economically
paragraphs: Factors other than the IFQ program’s implementation could contribute to  changes in the economic well-being of processors, such as changes in the  market of other species processed and changes in the total allowable catch.  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.)
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Commerce take the following actions  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.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Commerce for  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.
section_title: Scope and Methodology
paragraphs: 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.
section_title: National Marine Fisheries Service Data on Quota Holdings
paragraphs: 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.
section_title: Surfclam/Ocean Quahog Processing Sector
paragraphs: 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. The top 4 processors handled about  74 percent of the surfclam catch in 1990 and 86 percent in 2000.
section_title: Alaskan Ports and Major Transportation Networks
paragraphs: 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.
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.
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.
section_title: Comments from the Department of Commerce
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: 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.
section_title: GAO’s Mission
paragraphs: The General Accounting Office, the investigative arm of Congress, exists to  support Congress in meeting its constitutional responsibilities and to help improve  the performance and accountability of the federal government for the American  people. GAO examines the use of public funds; evaluates federal programs and  policies; and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO’s  commitment to good government is reflected in its core values of accountability,  integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost is  through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older  products. The Web site features a search engine to help you locate documents  using key words and phrases. You can print these documents in their entirety,  including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and  correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site  daily. The list contains links to the full-text document files. To have GAO e-mail this  list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO  Mailing Lists” under “Order GAO Products” heading.
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Public Affairs