Methodological framework for developing cost and revenue estimates of commercial fishing operations - summary report

Final report

Prepared for

Canada Fisheries and Oceans
Ottawa Canada

Prepared by

GSGislason & Associates Ltd.
Vancouver, BC

In Association with:

BriLev Consulting Inc., Ottawa
Edna Lam Consulting, Vancouver

Report date: May 2013

Summary

Introduction

• The financial performance and viability of fishing fleets is a critical input to a variety of important policy initiatives by the federal Department of Fisheries and Oceans.
• The Department needs a methodological framework for estimating Fishing Fleet Revenues and Costs that:
  1. can provide meaningful and reliable measures of fleet returns
  2. can do so for all commercial fisheries across Canada on a consistent basis
  3. can do so at reasonable cost.
• This report describes and assesses methodologies for estimating fishing revenues and costs, and makes recommendations as to a course of action.

Alternative approaches

• There are 3 broad approaches or methodologies available for estimating revenues and costs of commercial fishing fleets:
  1. survey approach – conduct detailed financial surveys of individual operations and weight the survey results so that the results are representative of the target fleet (this can include adjusting the survey results to match administrative data on total fleet landings, revenues, active vessels etc.).
  2. model approach – develop a model of revenue and cost items based on key “driver” variables e.g., active vessels, landings, days fished, price, etc. The modeling approach requires information such as fuel cost per day fished or crew wages as a share of revenues, based on industry knowledge, key informant interviews, or existing research.
  3. hybrid approach – use the survey approach for a reference year or period and project outside this period based on relative movements of the driver variables over time.
• All approaches require reliable data, at least for the reference year, and some understanding of how fisheries actually operate, are managed and have evolved over time. DFO administrative data – catch, price, days fished, active vessels – are also important to implementation.
• Various types of models can be constructed:
  • accounting model – using administrative data on total fleet catch, average price, days fished, active vessels etc. and assumed cost coefficients per day fished, per active vessel etc.
  • statistical model – estimate costs or cost coefficients from statistical analysis, such as multivariate regression analysis, for crew shares, fuel, repairs etc. and apply these to administrative data on catch, days fished etc.
  • simulation model – assume a statistical distribution, such as lognormal, with a mean and variance for each revenue/cost parameter of interest and do a Monte Carlo simulation to investigate the distribution of revenues, costs and net returns.
• The accounting model approach is by far the most common model approach in Canada and around the world.

Four important observations

• To the extent possible, the vessel should be the reporting unit and fishing fleets should be defined by licence category or grouped licence category – this is how fisheries are managed in Canada. That said, the definition of fleets in a particular region should reflect the management circumstances in that region

• The financial analysis should include an explicit payment to the skipper so that the returns to capital and labour interests can be isolated. There are at least 3 ways to impute a skipper return in owner-operator situations:
  1. designate a dollar return to the skipper e.g., $30,000 per year
  2. designate the skipper return as some multiple of a deckhand return e.g., 150% of the average deckhand return
  3. designate an arbitrary share of the owner-operator return e.g., operator return is 50% of owner-operator return.
• Most fishing employment in Canada is seasonal – however, it is important to develop an annual measure of fishing employment such as person-years (PYs) or full-time equivalent (FTE) employment. So doing allows comparison to other sectors of the economy and allows one to calculate fishing labour returns per annual equivalent basis.
• DFO Pacific Region has used 20 weeks fished per person as equivalent to one PY of employment to account for long hours, time spent pre and post season etc. e.g., a vessel that fishes salmon for 6 weeks with 3 crew and fishes halibut for 4 weeks with 4 crew would have 1.7 PYs of employment (0.9 PYs salmon, 0.8 PYs halibut).
• The Department’s initial focus on measuring financial performance should be the Income Statement items of revenues and expenses. As the financial performance assessment process matures, one could expand the scope of analysis to include Balance Sheet components.

Assessment of potential approaches and data requirements

• Attachment 1 summarizes some of the advantages and disadvantages of the modeling approach relative to the survey approach.
• The key advantage of the survey approach is that it uses real data from a variety of industry participants to generate the estimates of financial returns. However, the survey approach requires substantial industry cooperation, especially if a wide variety of fleets are surveyed at the same time, and substantial resources and time to execute and analyze. Experienced practitioners in Canada and abroad suggest that direct face-to-face interviews are the best way to implement a survey.
• The key advantage of the model approach is that it is user-specified, can be developed relatively quickly for a single fishery, requires less formal industry cooperation and data than a survey, and can be replicated for a reasonable period of years. However, the upfront development costs, if many fisheries are to be modelled, could be in the same order of magnitude as a major survey – but, once built, models should be relatively easy and inexpensive to update.
• One approach is not unambiguously better than the other. In our opinion, the deficiencies of one approach relative to the other, to a large extent can be overcome by using a hybrid approach – the hybrid approach appears to be the preferred method for other advanced fishing nations such as the UK and Australia.
• All 3 approaches – survey, model, hybrid – depend on timely and accurate DFO administrative data on fleet landings, prices, days fished, etc. It is important to benchmark survey, model or hybrid results to known DFO administrative data on the dimensions of the fishery of interest. So doing enhances the accuracy, consistency, and credibility of the financial results.
• Attachment 2 presents what we believe are the important revenue and cost items in financial reporting. The financial template has operations, revenue and variable cost items specified by fishery. For combination fishing vessels, this necessitates separating certain costs by fishery.
• Our experience is that over 80% of cost items – fuel, labour, gear, licence fees, monitoring etc. – are cost items that, in many cases, can be attributable to each type of fishing for combination fishing vessels. The residual 20% comprise fixed repairs and maintenance, insurance, moorage, etc. can be prorated to individual fishing returns.
• DFO could also focus survey or modeling efforts on a combination fleet as a whole. In close to half of fishing vessels across Canada, the vessel only participates in one fishery.

Limited current experience

• Current DFO personnel generally:
• have not conducted Revenues and Costs surveys recently (most of their survey experience was in the 1990s or the first years after the millennium), and
• have not constructed financial models.
• In short there is limited current experience with any approach to estimating fishing fleet revenues and costs.

The hybrid approach is recommended in principle

• a hybrid survey-model approach should be adopted to measure financial performance of Canadian fishing fleets.

A pilot study is needed

• At this time, we do not believe that there is enough concrete information to provide specific details on implementation of the hybrid approach – therefore we propose a pilot study for each region to provide the information.
• The pilot study – using a hybrid approach – for each region would involve:
• a financial survey of owners of 10-20 vessels in a fleet of say 40-100 vessels.
• analyze and report on the survey results.
• build a financial model over time and, using the survey, administrative and other data, extrapolate financial results to a future year.
• evaluate and assess the overall exercise in a report.
• Finally DFO Ottawa could bring the Regions together on a one-day workshop to report on and discuss the pilot study results.

Attachment 1: Advantages of the survey approach and the modeling approach

Attachment 2: Financial reporting template – key data elements

Long text description

Form containing the following fields:

Activity (table header)

• Licenced fishery #1
• Licenced fishery #2
• Licenced fishery #3
• Licenced fishery #4
• Fishing packing/charters
• Non-fishing

A. Vessel operations

• Vessel - average length
• Vessel - average GRT
• Crew inc. skipper
• Weeks fished/worked
• Days fished/at sea
• Licenses fished
• Catch kg

B. Income statement

Revenues
• Fishing and non-fishing
• Leases - vessel and gear licenses and quota

Total

Fisheries-specific costs

• Marketing Levy, Assessment Fees
• Fuel, oil, grease
• Bait, ice, salt
• Monitoring
• Logbooks
• DFO licence/quota fees
• Leases - vessel and gear
• Leases - licenses and quota
• Food
• Crew Share exc. Skipper
• Skipper share/payment
• Nets and gear
• Non-fishing labour
• Other

Total

Fixed Costs

• Moorage/harbour fees
• Repairs and maintenance
• Accounting and legal
• Insurance
• Other

Total

Annual capital charge^{Footnote 3}

Net return^{Footnote 3}

C. Capital measures

• Capital costs - vessel and gear
• Capital costs - licenses and quota
• Vessel useful life
• Capital interest rate
• Annual capital charge^{Footnote 3}

D. Labour measures

• Person week per PY
• Employee PYs^{Footnote 3}