A much-related evolution has
been a marked transition in inshore management regimes from de facto
community-based property rights to open access and then regulated open access. Indeed, some decades ago, the exploitation of most coastal fisheries was often
subject to some degree of community-based regulations with a strong sense of
community ownership and, to a lesser extent, of management responsibility. In
other words, the modes of production and the nature of the activity have evolved
and so has the context of fisheries management (Christy, 1996). Finally, while recognizing the inherent difficulty of
effectively controlling vessel capacity, one may wonder if the relatively poor
performance of most limited entry schemes is not predominantly due to the lack
of real commitment to effective control.
Should that occur, one could anticipate that the vessel owners
themselves would engage in intra-industry buy backs, in order to enhance their
joint profits from the fisheries. That still leaves the question, of course, as
to what would happen to the vessels removed from the fishery, or
fisheries. In addition to the OECD survey, we have an extensive survey of
limited entry programmes that was undertaken a few years earlier by Ralph
Townsend (Townsend, 1990).
Examples of Overcapitalization (With Excel Template)
perspective of the DWFNs, the displaced fleets (and crews) constituted capital
that was distinctly non-malleable with respect to fishing activities. One difference between our assessment, and that of the OECD,
is that we are insistent upon including taxes, or their equivalent, among the
incentive adjusting measures. We do so in recognition of the fact that there is
evidence that taxes can be effectively applied in some countries, especially if
some kind of exclusivity is recognized. While incentive adjusting methods appear
more promising for the control of capacity, there is also evidence that these
schemes, are not readily applicable to many fisheries or countries. But there is also ample
evidence that schemes such as ITQs are not readily applicable to many fisheries
and infeasible in most developing countries. First, in order to apply taxes precisely, one has to be prepared to adjust
them continuously, due to continual shifts in resource and economic conditions.
The purpose of TACs obviously is to block fishermen in their
attempt to overexploit the resource. The OECD argues that, if TACs are
introduced to a hitherto pure open access fishery, the TAC, if it is going to do
any good, must be set below the original harvest level. The OECD predicts that
the reduced harvest level, arising from a TACs-only policy, can be expected to
force out some of the marginal vessels, because they will not be covering all of
their fixed costs.
The other category consists of those
fishery resources which are to be found both within the coastal state EEZ and
the adjacent high seas. Outside of supporting attempts to gain access to new
fisheries, the governments supporting DWFN fleets would, in light of the severe
adjustment problems that they were confronting with these fleets, be under
strong pressure to cushion the blow through subsidies. The Milazzo study does,
for example, observe that the main effect of the Japanese subsidy programme,
which is substantial, has been to cause the decline in the Japanese fishing
fleet to be less precipitous than would otherwise have been the case. It should be noted in passing, that the DWFNs would have no
incentive to conserve the high seas resources they were now seeking to exploit. These fisheries were, after all, virtually text book examples of pure open
There is indeed ample evidence that
most schemes have been implemented until recently against a sectoral policy
background of laissez-faire and of prompt compromise on socially or politically
sensitive aspects of any schemes. In North America, for example, the large
number of underutilized or inactive permits attests to rather generous initial
allocations and is now making it quite complex to implement license retirement
programmes. In more general terms, many limited entry programmes were actually
initiated against a policy framework of intensive subsidization for vessel
construction and improvement. One may also point out that limited entry schemes
have in the past seldom been implemented in partnership with the
industry, a sine qua non condition for success in our opinion.
the management of fishing capacity
In some countries and in relation to the relative dynamism of
processors and traders, growing export possibilities have constituted a definite
opportunity for this sector to develop and modernize. In others, the small-scale
sector has been marginalized or relegated to supplying the less lucrative local
market. In general, the globalisation of the market has strengthened the role of
processors and traders vis à vis independent fishermen. One further
observes that increased dependency on global markets is occurring in a context
of relatively stagnant world supply and raising prices, even if aquaculture
production continues to rise. In this part, we discuss four selected issues of direct
relevance to the overcapitalization problem or the control of fishing capacity
in general. These are subsidies, the framework of fishing capacity management,
the distribution of wealth, and transboundary resources.
- Companies may also find themselves at risk of becoming overcapitalized when they either mismanage or underutilize the capital they have at their disposal.
- Vessel catch limits restrict the amount that a vessel can
land, either on a per-trip basis, or on a per period of time basis, e.g. per
day, week, or month.
example focuses upon the famous Northern Cod resource off Atlantic
- When Canada implemented Extended Fisheries Jurisdiction (EFJ)
in 1977, 95 percent of the Northern Cod resource became subject to Canadian
control and management.
- It is now
recognized that, if nations that are jointly engaged in the exploitation of a
fishery resource refuse to cooperate, the outcome will be similar to a domestic
fishery operating under conditions of “pure” open access.
The tendency will be
particularly strong if TACs are combined with the effort quotas. It is interesting that, in both instances, measures which
individually are incentive blocking in nature, when combined, act to some degree
like incentive-altering measures. The OECD report does complain that the
combinations are less efficient than true IQs, particularly the transferable
variety. Be that as it may, given that the efficacy of IQs is not without
limits, particularly in developing countries, the “second best”
combinations remain worthy of serious consideration. Following this, a moratorium is then declared on the issuance of
further new licenses.
Why is it important to know about overcapitalization?
The consequences, in terms of making a bad situation worse, are too
obvious to have to be spelled out (McKelvey, 1984; 1987). The implication of the assumption is that one can turn the
“conventional” capital on and off like a tap. There would be no
worry about redundant capital emerging, because in these circumstances, no sane
fisherman would retain redundant vessel capital.
What is the meaning of undercapitalization?
Undercapitalization means that a company does not have enough capital to conduct ordinary business operations. Undercapitalization may also lead to the company being unable to pay its creditors.
The obvious points were made
that subsides can aggravate the problem of overcapitalization, and that the
evidence indicates that they do just that, probably on a massive scale. We now
want to return to consider subsidies in light of our discussion of the economics
of overcapitalization and possible methods of control. In so doing, we shall
draw heavily on a recent, and thorough, study of subsidies in fisheries carried
out by Matteo Milazzo, National Marine Fisheries Service (U.S.A.) (1996).
We take two examples, the first being an
investigation of alternative stock rebuilding programmes for the Georges Bank
cod stock, off New England, as set forth in an article by Andrew Rosenberg and
Solange Brault (1991). Repayment of long-term debts to reduce the interest payments may help an overcapitalized firm to relieve the problem. Acquisition of unproductive assets or buying them at inflated prices may also result in the overcapitalization of a company. In the same way, an overcapitalized company suffers from various adverse effects. Higher taxation rates may consume a large portion of earnings and, in this way, deprive shareholders of a dividend at a fair rate. Therefore, if excessive funds have been allocated to the acquisition of goodwill, a lower amount of funds will be available for use.
Indeed, property rights have the potential to
radically alter the nature of participation in fisheries, raising fear that big
business will take over fisheries – even in the USA (Greer, 1995). As shown in the countries that have undertaken extensive
transferable licence schemes and ITQ programmes, some concentration and
reallocation among user groups 5 skills every entrepreneur should have have indeed occurred under these schemes. It may
only be assumed that ‘group-based’ property rights regimes could lead
to a better control of such evolution in the sense that broader considerations
could be internalized. Moreover, there is also a tendency towards increasingly long term
ITQs, e.g. in New Zealand, where they are permanent in term.
What is an example of over Capitalisation?
Example of Overcapitalization
Assume that construction firm Company ABC earns $200,000 and has a required rate of return of 20%. The fairly capitalized capital is $1,000,000 or $200,000 ÷ 20%.