Approaches for determining compensation in commercial fisheries

This report reviews the range of approaches currently being used in Australia and internationally, with particular emphasis on small scale fisheries in Western Australia (WA). Small scale fisheries have a unique set of characteristics that tend to make compensation challenging – these being the limited or no trade in fishing rights (resulting in a paucity of traded market values for licences on which to base compensation), limited public information about fishing activities and financial performance, and fishers being motivated by lifestyle factors over profit.

The Issue

Increasingly, commercial fishers are being called on to surrender their fishing rights (in part or in full). Historically, compensation schemes have been used to improve the sustainability and economic viability of a fishery through reducing the number of licenced fishers. More recently, compensation schemes have arisen out of a need to meet other objectives, such as making way for offshore wind farms, port infrastructure, marine parks or reallocation of fish stocks to recreational fishers.
In this report, both process aspects of compensation and methods for determining payments are examined. The objective is to develop an understanding of how various approaches have worked in the past, lessons learned and what improvements may be warranted.

The study found that past compensation schemes conducted in WA have experienced a range of issues that have given rise to concerns and frustrated the process of determining fair and reasonable compensation. These include:

Lack of transparency – it was often the case that insufficient information was provided to fishers about how compensation offers were determined, which made it difficult for participants to understand and appraise initial offers and engage in negotiations.

Timing – some processes reviewed were arguably triggered later than they should have been and took too long, running for two or more years, consuming resources, and creating significant uncertainty.

Data challenges – for small fisheries, limited or no trade in fishing rights has made it difficult to use market-based approaches to estimate licence values. Application of income-based valuations is limited by a lack of detailed economic data, while reliance on gross value of production (GVP) approaches is complicated by potential inaccuracies in beach prices. The lack of data has generated debates about values that cannot easily be resolved.

Planning issues – in some cases, the broader purpose of the compensation scheme has not been completely clear to fishers. There has been confusion around when a process was voluntary versus compulsory.

Mistrust – compensation processes that were not transparent with clear accountability led to a level of mistrust in the scheme, which was amplified in cases where compensation offers were well below initial industry expectations.

Reliance on industry leadership – schemes were demonstrated to benefit from having industry input as part of the design phase. However, there was mixed evidence on what form of governing structure works best for harnessing industry input.

Compensating for the impact of marine parks is found to present some special challenges under current legislative settings. In WA, compensation to fishers that affected by the formation of a marine park is guided by the Fishing and Related Industries Compensation (Marine Reserves) Act 1997 (FRICMA). This legislation requires compensation to be based on the loss of market value for fishery licences, which is often problematic due to the lack of traded values for licences in many smaller fisheries and the difficulty of using a market value metric to determine compensation for partial loss (as opposed to full loss) of rights to fish.

The Solution

Based on the findings of this study, much can be done to improve compensation processes and valuation methodology. The overarching need is for systems that have greater clarity, predictability of outcomes, consistency in treatment of individual licensees (while maintaining flexibility adjust for unique cases situations) and fairness.

The report makes it clear there is no ‘one size fits all’ solution. Much depends on the specific circumstances in the fishery, the nature of the policy change affecting the fishery, and what data is available for establishing the value of rights and/or impairment of those rights.

In establishing a process, managers will have several considerations. First, what is the objective of the scheme – is it to achieve a sustainable harvest or to compensate for the impact from a marine project (e.g. wind farm) or a marine event (e.g. oil spill)? Second, is the compensation for a complete or partial loss of a right and is it permanent or temporary? Third, will the scheme be voluntary or compulsory and what exact process will be followed?

The report sets out a decision framework for working through these criteria and guidance on how compensation should be determined under different situations.

The Benefits

The study makes a number of recommendations that will provide greater certainty of process, improve process efficiency and result in more equitable outcomes. The recommendations are as follows:

• Each compensation scheme needs to begin with clear criteria to guide the triggering of the compensation process.
• Schemes should have comprehensive guidance available to participants on the compensation process planning and implementation, including time frame for completion.
• Schemes should provide guidance on how compensation amounts are to be determined, including specified compensation formulas for licence acquisition processes, requirements to use external valuers to determine the market value element, and decision criteria to guide the choice of methods to determine a right’s market value.
• Schemes should be designed such that critical elements (time frame, formula, valuers etc) can be agreed early in the process by representatives of the Government and the fishers.
• Provision should be made for individuals to appeal the outcome based on their individual circumstances

Appropriate legislative change will be required to effectively implement the above recommendations. In addition, the report identifies a number of non-statutory reforms that could assist to improve fishery compensation processes.