Hon John Luxton 

Minister of Fisheries 

Parliament Buildings 

Wellington 

4/11/97

Dear John,

Thank you for meeting with me last Wednesday (29^th Oct) morning. I appreciate the chance you have given me to make a contribution to the process of reforming fisheries management in this country. As you intend to circulate this letter within your department, I am making it an open letter so that all interested parties may be similarly informed on the debate.

The 1996 Act has two serious conceptual flaws, but before addressing them in any detail I want to touch on how they got through the process of public submission and select committee hearings.

One notion that really got in the way is that of "simplification", it kept getting confused with "simplicity". Anyone who thinks that the detail of fisheries management is simple is wrong. Understanding the finer points of fisheries management requires quite complex notions of mathematics, fisheries biology, ecology, law, politics, administration, economics, computer systems, fishing practice, and a liberal dose of common sense. Very few people have all of those. A big part of the problem was that the Act got away from setting high level objectives, and got bogged down in the detail of what is effectively operational policy. In going to that level of detail most involved were confused by the detail, and lost sight of the objectives. We need to keep the detail out of the Act, and have the Act set clear and sensible guidelines for the development of the detail.

Another aspect of this that served to confuse select committee and others was experts talking past each other. What may be very simple and sensible to one expert may be so obviously untenable to another that they simply talk past each other - neither really hearing what the other has to say. That was certainly the case with respect to the fundamental legal principles involved.

The Fisheries Act employs criminal law to enforce taking fish under the authority of quota. Criminal law typically requires "actus reus" (literally - "Action of guilt" or guilty action) and "mens rea" (literally "mind guilt" or intent to commit the crime). Sometimes legal systems adopt the notion of "strict liability", where the guilty mind is assumed to have been present simply because the guilty action has taken place. The Fisheries Act does this. From the perspective of a legal expert this makes perfect sense, it being impossible to prove what was in the mind of a fisher, other than a general intention to catch fish. In hindsight, that fact alone should have been a clear indication that the principle was not appropriate.

We have established a degree of uncertainty about the application of strict liability and criminal law as the primary tool to enforce quota responsibilities. We need now to have a closer look at the notion of quota rights in order to see if the responsibilities laid out in legislation are fair and reasonable.

There are many similarities between land rights and fisheries property rights, but there are also many differences. When a farmer makes hay from a leased paddock, he can clearly see the boundary between his land and his neighbour's. The boundaries are similarly obvious to a forester tending or cutting trees. It makes sense in both these cases to have very strict boundaries on the property rights involved. It makes sense to have strong responsibilities attached to keeping those boundaries.

When fishers put their gear in the water, regardless of the levels of technology used, they don't know exactly what they are going to catch until they have caught it. The fisher can only guess at the outcome of his or her efforts. Sure knowledge beforehand is not an option. Placing a fisher in a strict liability position in this situation is clearly unreasonable. From the perspective of a fisher, any legal system that places strict criminal liability on fishers for "taking fish for which they do not have the authority of quota" is going to catch everyone sooner or later, and smaller operators much more frequently than larger ones. This will happen purely on the basis of statistical sampling size, but is also added to by the levels of technology employed in each case.

There is no way any small or medium sized operation can mitigate the risks of fishing under the 1996 legislation - sooner or later all of them will be placed in a situation where legal or economic pressures put them out of business.

If we are to have a possibility of creating overall simplicity from this process, then we need to focus on the principles, and have the principles underlying the legislation in line with those found in the real fishing world.

The law has been constructed in a manner that assumes independence of stocks in all cases, and also assumes fishers know what they take before they take it. Neither assumption holds up when tested against reality. It is not good enough to assume independence of stocks in all cases. Not all fish live clearly in isolation from other fish (in fact most live in quite close association). Not all harvesting technologies are as selective as each other.

The 1996 legislation can be quite properly applied to the paua diving fishery. In this fishery the harvesting technology is very selective (the diver gets to see every animal before he picks it up). There are no other species caught in association (other than some parasites within the shell or the meat of the animal - none of which have commercial value at this time). All other fisheries have other stocks in association, and all other harvesting technologies are less selective.

The 1996 legislation works very well in this limiting case of a fishery that is independent from all others, and is harvested by a highly selective technology. In all other cases (99%+ of fisheries) the principles underlying the 1996 legislation fail. The legislation fails because it fails to acknowledge two fundamental realities of fishing.

1. Fish live in close association with other species, both spatially and in more complex ways.
2. Fishing technology, for all of its sophistication, does not allow us to select which individuals of which species we catch. We put our nets, lines, or pots in the water, with a fairly good idea of what we will get most of the time, but in the sure and certain knowledge that we will be surprised by what comes out of the water on occasion. Sometimes those occasions are all too frequent, despite our best efforts to the contrary.

The 1983/1986 legislation had section 28ZA "Fish subject to quota fishing cannot be taken for sale other than under quota" which continued into the 1996 act as "Annual Catch Entitlement Required Before Fishing": "69. Catch must be covered by annual catch entitlement". The 1983/86 Act was made practical by a large number of defences that effectively nullified the initial proposition. The 1996 Act has lost the defences in the name of simplification.

To make the 1996 Act workable, this principle needs to acknowledge that fish are found in association with other stocks.

Simply allowing for association of stocks isn't enough. The administrative overheads of trying to guess the needs of a fleet of semi-independent vessels ahead of time, only to get it wrong and have to balance up after the fact anyway, indicates that a further level of simplicity (flexibility) is required.

Instead of requiring "Annual Catch Entitlement" (ACE) before fishing, the legislation needs to be more flexible. An effective requirement would be "to demonstrate a commitment by meeting a certain minimum holding to start with, followed by balancing catch to a date with ACE for that stock, or ACE of an associated stock at certain ratios, by some date after the catch is taken". Failure to meet this commitment to result in suspension of permit until all is back in balance. Any fishing without a permit is clearly a criminal act, as is any fraud (deliberate falsification of reports required under the Quota Management System (QMS)).

Such a system is known in the industry as Associated Species Balancing. It has a sound practical, logical, and legal basis. It has evolved from the By Catch Trade Off mechanism.

The whole topic of associate species balancing has a lot of technical argument, much of which is the subject of a separate document (to follow). The detail is needed to satisfy the critical legal or administrative eye, but not for grasping the conceptual approach.

Associated Species Balancing does have several major advantages over the use of Deemed Values as a controlling regime.

• The fisher pays "Deemed Values", but economic theory requires that the "Deemed Value" removes the full economic benefit of taking that fish. Thus a rate must be set which removes the full value from the most efficient vertically integrated operation (one company owns all - catching, processing & marketing). [Note the rates under the 1996 Act will be much higher than people are used to under the 1983/86 legislation - which has different criteria for the setting of DVs.] In the case of independent fishers who are not quota owners, they end up paying a value that can exceed the value they are paid for the fish, while processors who are quota holders are put in a situation where the financial incentive is to increase the product flow through their factory by ensuring that those fishing into them have unbalanced portfolios. Under Associated Species Balancing any mismatch of ACE portfolio to catch results in a decrease in product flow. The incentive for all players is to balance their catch with appropriate ACE. If the fisher gets it wrong, the processor shares in the consequences, and also shares in the benefit of helping the fisher balance with the correct ACE
• Having "Deemed Values" set at a high level removes any incentive for fishers to land the product. The incentive for unwanted fish to find their way back to the sea (dumping) is enormous. Not only is the fisher faced with the cost of handling, processing, and carrying the unwanted catch to shore (with the forgone opportunity cost of taking something profitable instead), but must also catch even more fish to pay the "Deemed Value" bill. Unless the ACE market is fluid, and at a rate which allows reasonable profit to the fisher, there is no incentive to land, quite the opposite. Dumped fish are outside the quota management system. Dumping reduces the value of quota ownership - it serves no-ones best interest. Pretending the pressures don't exist doesn't help anyone either. All interests are served when all incentives reinforce the integrity of the system. Associated Species Balancing is far more stable from the sense of being a mathematically self-sustaining system.

• Under a "Deemed Value" regime, the incentive for quota holders who are not fishers is to maximise their return from their investment in quota. The obvious strategy is to delay releasing their ACE for key bycatch stocks onto the market until the fishers are in an over-catch situation and are facing Deemed Value demands. These quota holders can them extract a huge premium, in a very artificial manner. Under an Associated Species Balancing Regime there will still be a premium available for bycatch stocks, but the premium will be limited to 20%-30% over the true market value.
• Another major advantage of ASB over DV is the ability to easily and automatically adjust the ratios for individuals dependent upon their past behaviour and personal circumstance. Penalty ratios for those that make consistent use of the mechanism will increase. The ratios can be similarly automatically adjusted to take account of identified concerns over the relationship of the current stock size to that which will support the independent MSY. Managers can also factor in concerns over using quota that would not otherwise be caught (reducing the trade off value of such quota to zero for individuals in extreme cases). The beauty and power of the mechanism is that once the trigger points are decided upon, the operation is completely automatic, and requires no action by fishers or administrators. The balancing system in the computer handles it all, and it just shows up on the monthly balance report (or on the fisher's own version of the system). Balancing ratios are based upon port prices for the fisheries concerned.

There are many issues of detail with ASB which need to be addressed. The paper that will follow makes a good first cut at addressing the detailed issues that have arisen thus far.

The next conceptual hurdle is quite closely related to the last. It is the notion of Maximum Sustainable Yield (MSY). MSY is very tightly defined in the 1996 Act as `Maximum sustainable yield'', in relation to any stock, means the greatest yield that can be achieved over time while maintaining the stock's productive capacity, having regard to the population dynamics of the stock and any environmental factors that influence the stock. This definition has two faults.

1. It fails to acknowledge the real association that occurs in fisheries due to behaviour of the fish and/or behaviour of the fishing technology employed. Most fisheries occur as Associated Stocks. All that is required is the addition of "or group of associated stocks" after the first occurrence of the word "stock".
2. The economic notion of "Maximum Yield", and the biological notion of "Sustainability" are mixed. In a single species fishery, such as paua, this mixing has no ill affect - maximum yield and sustainable yield sit very well together. In complex associated species fisheries, this over-simplification can have huge costs for little or no gain. Explaining how this is so is one of those "detail things" that requires some concepts from fisheries biology, and is a paper in itself.

To solve these problems, the maximum sustainable yield for stocks that occur in association needs to be calculated for the group of stocks, in the full knowledge of the technologies employed and the prevailing market conditions. This will result in some stocks being held at a level above that which would support their independent MSY and others at a level below. Provided that no stock is allowed to go to a level where its sustainability is seriously threatened, we do not have a problem. Setting that sustainability cut-off point will depend upon the biology of the stock concerned, but would typically be set at 20% of B_msy (the Biomass which will support the Maximum Sustainable Yield). In very few cases would it approach anywhere near that low level - most variations would be relatively small. Penalty trade-off ratios need to increase substantially as this point is approached (TACC would automatically be set to zero by this point).

Setting an incentive to move stocks toward a biomass that supports the "MSY independent of all others" is a good idea as it will encourage development of more selective harvesting technologies. Again it pays to keep a couple of things in mind when thinking about the size of those "incentives". Firstly, how far is the selectivity of existing technology from that employed by Paua divers? Secondly, it may take a few decades before technology closes that gap.

All of this sounds good in theory, and assumes that we know what these optimal values are. The reality is that, in many cases, fisheries science is more of an art than a science at present. We simply lack sufficient information to make many of these assessments accurately. We do however have a number of indicators that do not tell us the size of the stocks, but do indicate their general health.

Operational flexibility is required. If fish are not taken from the sea this year, then generally they remain in the stock and add to its health and reproductive capacity. Some level of carry forward right is essential for a variety of economic, environmental, and operational reasons (the subject of numerous other papers). Setting the carry forward right at 20% of holdings has proven to be neutral in terms of fisheries biology, and to give sufficient flexibility to meet most needs. The cost of losing this flexibility is too high, for no discernible gain. The purpose of the ACE system was to simplify the administration of these carry forward rights. Somehow we ended up with ACE without its "raison d'être" (its reason for being).

Research is another area of much contention at present. Innovation in data collection technology is desperately needed. Cost effective research is coming closer, but is not always a priority in research institutions with their own bureaucratic and organisational issues to contend with. Research appears to be an area where competitive pressures do not necessarily produce desired outcomes, but can produce more justifications for further research. The approach needs more thought. More automation, and use of technology to tag, measure and release fish in place (at the depth where they normally live) is required. Development of such remote sensing and remote handling equipment is progressing rapidly and when it is cost effective needs to be employed in most fisheries.

More effective use of satellite data to assess primary productivity (via chlorophyll levels) will give us advance warning of major changes (such as recruitment reduction or failure) in many fisheries, and can be used to target research effort more productively.

A major issue facing us now is the amount of money being spent on the implementation of the 1996 Act, when it is obvious to most in industry that the Act as it stands is unworkable. This massive cost in consultants is being wasted, and is being paid for by an industry that has no control over it.

There is a need to produce efficiencies from the administrative systems.

The greatest efficiencies available in the short term will come from moving the responsibility for data input and validation from the ministry to the users, requiring all users to submit all of their documents, returns and trading documents in electronically verifiable format. Each user will directly meet the costs of getting documents into electronic format. Competitive markets will develop. Automated computer systems can then handle all receipt, registration, and processing of these various documents. Such a move requires more powers than are given under section 296 of the 1996 Act. Specifically the section needs to empower electronic transmission of funds, and electronic registration of documents. One might want to seriously consider if any crown funds are involved in any registry services, the alternative being that the entire cost is funded by industry, and recovery is therefore an industry responsibility.

When considering a move to electronic submission, the major issues are ones of evidence, authentication and non-repudiation ("is this what you sent", and "are you who you claim to be"). Standards for verification and non-repudiation are well defined in the international community, and do not need to be re-invented by the New Zealand fishing industry. Electronic Data Interchange (EDI) is a maturing technology, widely employed both locally and internationally. The move from closed "Value Added Networks" (VANs) to secure use of open networks (like the Internet) are happening worldwide, with significant cost savings.

While the 1996 legislation contains some significant advances in some areas, it is has a framework that is operationally impossible to work within.

As an evolutionary step, and as a matter of general principle, the Act should focus on setting effective principles for fisheries management, and establish the ministry as an outcome-focused, high-level standards setting, and top-level auditing, body.

Details of implementation of operational policy should not be specified in the Act, as inevitably details arise in the implementation of any project that were not considered at the outset. If any legislative intervention is required, it should be by regulation made under the Act. Again I stress that regulations, if used, should set high-level standards for outcomes, and not define details of operational systems.

I believe it is possible to turn the 1996 Act into something containing the legislative principles described here. The modification required to the front end of the bill is relatively minor, and affects only the definition of MSY in relation to related stocks. The primary objective remains "to provide for the utilisation of fisheries resources while ensuring sustainability."

Most of the detail of the Act can be left out. Sections can be added that promote the concept of Associated Species Balancing (as an evolution from By Catch Trade Off) and empower the making of regulations to define standards if required.

With these changes I believe we can produce a system which will meet the requirements of all involved. Achieving these changes will require political will, and close cooperation from Ministry staff. It is my intention that this letter help to clarify and speed debate on the issues and processes described.

Yours truly,

Ted Howard

Managing Director, Solution-Multipliers Ltd