1 The Vessel Buyback Program and its Impact on the Offshore Fishery in Taiwan Jenny Chin-Hwa Sun, Ph.D. Professor and Director Institute of Fisheries Economics, National Taiwan Ocean Univ. INTERNATIONAL WORKSHOP ON FISHING VESSEL AND LICENSE BUY-BACK PROGRAMS March 22-24, 2004, La Jolla, California Southwest Fisheries Science Center and the Office of Science and Technology, NOAA Fisheries (NMFS); CERUM and Department of Economics, Univ. of California, San Diego

2 I. Introduction In 2002, the total marine fish landing in Taiwan reached 1 million metric tons with a total value around US$2 billions. Around 72.7% of the total landing value is generated by the distant water fishery with only 1,297 vessels, which are mostly greater than 100 gross tons and account for only 4.8% of the total fishing vessels in Taiwan (Table 1). The total number of fishing vessels in 2002 is 26,994 and there are 15,741 fishing rafts (built with plastic pipelines) and sampans (small boat without fixed engine), which are mostly equipped with gill net, are the major fishing gears in the coastal region.

3 By excluding the fishing rafts and sampans, there are only 9,453 vessels left and 86% of the vessels are less than 100 gross tons, which are devoted to offshore fishery.

4 Most of the vessels operated as tuna long line fishery, trawl, and torch light net.

5 The offshore and coastal fisheries only account for 19.9% and 7.3%, respectively, of the total landing value in Since 1978, the offshore harvests follows a downward trend, but the number of fishing vessels, the total vessel tonnage, and the total horsepower follow an steady increasing trend until 1992 when the overall restriction on the construction of fishing vessels was imposed. With a great number of fishing vessels competing in the same area, overfishing occurred both in the offshore and coastal fisheries.

6 In order to maintain the sustainability of Taiwan’s offshore fisheries stocks and to avoid overfishing, the government has implemented a fisheries management policy which regulates harvests by suspending fishing licenses, restricting construction of fishing vessels, and buying back used vessels in order to reduce the offshore fleet size. Furthermore, a major revision of the Fisheries Act in 1991 gave the government the explicit right to adjust the fishing effort according to resource abundance. Four amendments that regulate the number of offshore fishing vessels in Taiwan were enacted in 1967, 1980, 1989, and 1991.

7 The most recent measure, announced on Dec. 24, 1991, which is still in effect, restricts the construction of all fishing vessels, except for fish transport vessels over 2,000 tons. The government adopted two voluntary vessel buy back programs in and , respectively. 2,319 vessels with 118, 354 gross tons were bought back during and the total government expenditure reaches NT$1,721 million (US$52.16 million).

8 Restricts the construction of all fishing vessels in 1991 Buy back programs in and

9 2,319 vessels with 118,354 gross tons were bought back during and the total gov’t expenditure reaches NT$1,721 million (US$52.16 million). The purchase price of the vessel is based on price per gross ton which is around NT$14,552 per vessel tonnage (US$441/ton) in Even though the second phase buyback program initiated in 2000 which offers NT$18,000 (US$545) to buy back the vessel per ton, only 5 vessels accept the offers.

10 Hence, a new scheme in the 2001 buyback program was to set up a scheme to increase the price per gross ton to NT$50,000 for vessels less than 5 gross ton. (1) NT$50,000 for vessels less than 5 tons; (2) NT$40,000 for vessels between 6 to 10 vessel ton; (3) NT$30,000 for vessels between 11 to 20 vessel ton; (4) NT$20,000 for vessels between 21 to 100 vessel ton, (6) NT$18,000 for each gross ton for vessels over 100 vessel ton.

11 However, the second stage buy back program implemented in 2001 was still not very successful as fishermen under rational expectation were holding out in waiting for higher payment scheme to be introduced in the near future. Only 28 vessels were bought back in This prompted the government to announce a new payment scheme in 2002 designed to speed up the buy back by offering a higher amount in 2002 but the amount would decrease in the subsequent years as follows:

12 For example, if purchased as the year indicated, then it follow different price scheme as follows, NT$70,000 in 2002, NT$60,000 in 2003, NT$50,000 in 2004 for each gross ton for vessels less than 5 tons;

13 (2)NT$60,000 if purchased in 2002, NT$50,000 in 2003, and NT$40,000 in 2004 for each gross ton for vessels between 6 to 10 vessel ton; (3) NT$50,000 if purchased in 2002, NT$40,000 in 2003, and NT$30,000 in 2004 for each gross ton for vessels between 11 to 20 vessel ton; (4) NT$40,000 if purchased in 2002, NT$40,000 in 2003, and NT$25,000 in 2004 for each gross ton for vessels between 21 to 50 vessel ton; (5) NT$40,000 if purchased in 2002, NT$30,000 in 2003, and NT$20,000 in 2004 for each gross ton for vessels between 51 to 100 vessel ton. (6) NT$40,000 if purchased in 2002, NT$30,000 in 2003, and NT$18,000 in 2004 for each gross ton for vessels over 100 vessel ton. (7) The total payment per vessel will not exceed 9.5 million for any vessel purchased, in 2002, NT$8.5 million, in 2003, NT$ and 7.9 million, in 2004.

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17 2. Economic Performance of Offshore Fisheries and Aquaculture Since the offshore Fishing vessels are mostly smaller than 100 tons, which are mostly owned by individual. Some of these small- scale, individual vessels switch back and forth between two or more types of fishing gear, according to season and target species. The cost and revenue data for the different tonnage classes of offshore fishing vessels were obtained from the database released by the Annual Economic Survey of Offshore Fisheries and Aquaculture (Taiwan Fisheries Bureau, 2001). The revenue and cost data are used to approximate the revenue-cost ratios for fishing vessels in the different tonnage classes.

18 Table 2a. Offshore Fisheries Production, Revenue,and Cost in Taiwan, 1992

19 Table 2. Offshore Fisheries Production, Revenue, and Cost in Taiwan, 2002 Average Yield per Vessel Ton (Kg./Ves. Tons) (O) Average Revenue per Vessel Ton (NT$/Vessel Tons) (A) Average Cost per Vessel Ton (NT$/Vessel Tons) (B) Average Variable Cost per Ves. Ton (NT$/Vessel Tons) (C) Reven ue- Cost Ratio (D) Short Term Revenue -Cost Ratio (E) Percenta ge of Total Ton (F) under 5 Tons 1,506259,600196,000136, % Tons 2,276183,467157,333124, % Tons 1,342146,600134,600109, % Tons 1,612126,000116,85791, % Tons 1,86789,64080,30764, % Weighted Average 1,726117,883105,99183,

20 3. Estimates of Optimal Number of Fishing Vessels What's the optimal number fishing vessels to regulate? How's the effectiveness of vessel reduction program? How's the impact on the long term wealfare of fishermen? Sun, C.H Optimal Number of Fishing Vessels for Taiwan’s Offshore Fisheries: A Comparison of Different Fleet Size Reduction Policies. Marine Resource Economics 14: to build a empirical production function to estimate the MSY and to investigate the operating cost and per unit price of production in order to estimate the MEY, and OY. to simulate the short, intermediate, and long run policy effect of the limit license and vessel retirement program.

21 III. Model Specification This study specifies a generalized harvest function which permits the estimation of an unconstrained Cobb-Douglas production function (Comitini and Huang 1967; Hannesson 1983; Tomkins and Butlin 1975; Tsoa, Schrank and Roy 1984): (1) where : offshore fisheries harvest in period t, : offshore fisheries technological effeciency in period t, : offshore fisheries fishing effort, which is defined as total vessel tonnage of the offshore fisheries in period t, : an assessment of offshore fisheries resource stock,, and are parameters,,,.

22 The dynamic movement of the fisheries resource stock is, (2) where r is the intrinsic growth rate, and K is the environmental carrying capacity. Suppose the error term is multiplicative normal, then the empirical model is specified as follows: (5)

23 Estimating Maximum Economic Yield and Optimal Yield Suppose that the offshore industry net benefit is specified as: (6) The problem of maximizing industry net benefits over time becomes: (9) with a current value Hamiltonian as defined by: (10) where u is the shadow price which represents the marginal return of the slackness of the resource constraint.

24 Under a steady-state equilibrium, the first order conditions of the optimal yield solution, XOY and EOY, are defined to satisfy the following two equations: (11) and (12) The implicit function which defines XOY and EOY in (11) and (12) can be simplified as: (13)

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27 (1) Evaluation of the Effectiveness of the Vessel Retirement and Buy Back Program Scenario 1. If the government did not apply the vessel retirement and buy back program in 1991, which serves as a base Scenario. Scenario 2. Assume that the government applies the vessel retirement and buy back program from 1991 to Both the fisheries stock and fisheries harvests decline steadily under the base case. A passive vessel retirement and buy back program is determined to be an ineffective resource stock recovery program. Policy Simulations

28 (2). Evaluation of Long-run Equilibrium Vessel Reduction Scenarios Suppose that starting in 1994, the government had implemented a vessel reduction program aimed at maintaining fisheries harvests at MSY levels. Suppose that fishing effort and total vessel tonnage are fully adjusted to effort under MSY level giving that horse power is held at 1993 levels. Five different long-run equilibrium vessel reduction scenarios present themselves:

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30 The government in Taiwan had instituted a comprehensive program to remunerate fishermen for voluntarily reducing fishing effort in accordance with the bulletin of “In reward for closing fishery season procedure” since Sep The program has been running with an annual budget of approximately US$12 million. All kinds of fishing vessels that covers all ocean fisheries in Taiwan with valid fishing licenses, except illegal recreational and over 30 years vessels. The vessels shall have 100 days of fishing activities and sum 120 days of suspending fishing activities in the fiscal year. The reward will be even higher if the vessels have 100 days of fishing activities and continue 60 days of suspending fishing activities in the fiscal year.

31 To date, the program has not been very successful, as the payments offered to fishermen for curbing fishing activities are so low which are not sufficiently attractive and there are only 21% of the vessels are voluntary to fulfill the requirement. With a great number of fishing vessels from Mainland China competing in the same area, we believe that one way to make the program work is to restrict it to a few selected fisheries with special environmental and resource considerations. By concentrating rewarding on certain few species, the program could be redesigned to provide sufficient incentives to reduce the effort further.