Aquaculture and fisheries economic development – examples from Norway and Vietnam

Other 09:59 04/10/2018
This is the presentation of Prof. Ola Flateen (Tromso University, Norway) in the Conference “Future perspective of fisheries and aquaculture” in the framework of Vietfish 2018

Norway and Vietnam: similarities and differences

Similarities: Size (length and area), Coastal area, Fishing and aquaculture nations

Differences: Population, Economy, GDP, Natural resources, Location – N in the North and Vn in the South - and this consequently creates different climate and weather conditions

HDI: N (0.944) – ranked 1st, Vn (0.638) ranked 121st

Transparency: N - 3rd in the world, Vn ranked 107th

Disputed sea areas and fishing rights?

Norway has settled, according to the Law of the sea, all EEZ disputes, including with Russia and EU.

Annual negotiations and share agreements on Total allowable catches (TACs) and other fishing issues.

The South of China Sea disputes are still unsettled? This creates competition between nations and de facto open access fisheries.

Fisheries Management and Governance

Vietnam: Open access, Small scale, Some high-liner/intra-marginal rent (IMR), but no resource rent

Norway: Regulated, Large scale, Some resource rent and IMR in capture fishing, and very high economic rent in aquaculture (ERA)

What is a (fishery) subsidy?

WTO: ”…(i) financial contributions (ii) by a government or public body (iii) that confer a benefit”, all three conditions must be met

Why harmful in fisheries?

- Incentives for increased output, endangering fish stocks and reducing potential long term resource rent and profit

- Trade distortion through provision of advantages for one exporting country (if underdeveloped stocks)

Fuel subsidies and environmental tax exemptions

Governmental financial transfers to the fishery sector are not necessarily subsidies, nor necessarily harmful – FAO/WTO/OECD reports (Example: Research versus Trawler)

Sumaila et al. (2010): Good, bad or ambiguous (ugly) subsidies

Fishery subsidies and profitability effects

Short run (2 years) effects fuel subsidies:

Profitability when the Government’s subsidy action takes place is greater than profitability without this action.

The increased profitability of the vessels is a result of both revenue-enhancing and cost-reducing subsidy schemes

More benefits for the owners than for the crewmembers.

Positive impacts on the OCF of large vessels but negative effects on their IMR, while the positive effects on the rent of small vessels.

Key findings of Thuy et al., 2018

In Vietnam, offshore vessels are profitable even without subsidies

Higher education, more experience and type of fishing gear decide the likelihood  of vessel owners taking part in the subsidy program

Remaining questions outside the scope of this project: What are the long term effects for fish stocks and harvest?

Subsidies and politics

Finley (2017) argues that much of the overcapacity that built up in the decades after World War II came about because of government subsidies, and that these subsidies largely were instruments in Cold War politics.

On high seas fishing subsidies:

Our results suggest that fishing at the current scale is enabled by large government subsidies, without which as much as 54% of the present high-seas fishing grounds would be unprofitable at current fishing rates (Sala et al., 2018).

Dear participants, do you think such arguments play a role today for countries like China in the South of China Sea?

The world total fish production increases due to aquaculture

Aquaculture production 2015, in quantity (thousand tonnes) and value (million USD), as well as the average annual change in the period 1985–2015. 74 countries ranked according to value (Sources: see Flaaten 2018 Ch.11)

Rank

Country

Production

Average annual change (%)

   

Quantity

Value

iqty

ival

1

China

60166.82

77412.90

8.87

10.42

2

India

5061.02

10612.68

7.09

10.05

3

Indonesia

15012.30

9670.64

12.58

11.29

4

Chile

1142.55

8586.29

16.52

22.86

5

Viet Nam

3402.27

8207.86

11.03

12.72

6

Norway

1356.69

6441.34

12.70

12.44

Cost structure of three aquaculture industries, at farm gate

Cost item

Pangasius, Vietnam3, 2016

White leg shrimp Vietnam3, 2014

Salmon Norway, 2016

Cost shares %

Cost shares %

Cost shares %

Smolt/seed

10.4

11.88

9.39

Feed

81.84

41.17

42.97

Labour1

1.08

4.91

6.73

Insurance

   

0.38

Pond rental

1.05

   

Power

 

11.68

 

Other operating cost

3.474

13.065

25.722

Depreciation

0.45

17.306

5.32

Net financial cost

1.16

-7

-0.12

Operating cost, all

99.44

100

90.4

Slaughter

0.56

-8

9.63

Total cost

100

100

100

Additional info on Cost structure of three aquaculture industries. Cost and revenue per kg fish at farm gate

Table notes:

May include some management cost

Includes repair, maintenance, administration, fish health, energy, and environmental measures

Dong Thap province and South Central Vietnam for pangasius and shrimp, respectively

Includes Chemicals/pharmacy, power, pond regeneration and materials

Pond regeneration is partly included in Labour

Includes maintenance and other fixed cost

Net financial cost is very small. Some may have been included in Other

The buyer usually harvest the shrimp and carry the cost (some cost to the farmer could be included in Labour)

Three aquaculture industries, cost and revenue per kg fish at farm gate (Sources: see Flaaten, 2018 Ch.11) 

Items

Pangasius, Vietnam3, 2016

White leg shrimp Vietnam3, 2014

Salmon Norway, 2016

Total cost, national currency

21 440.00

108 832.40

33.86

Revenue, national currency

22 600.00

120 336.06

50.59

Profit

1 160.00

11503.66

16.73

Exchange rate, per USD

22 368.25

21 193.08

8.4

Total cost, USD

0.96

5.14

4.03

Revenue, USD

1.01

5.68

6.02

Profit margin

5.1

9.5

33.1

Pangasius production and export, Vietnam 2000-2017

 

Atlantic salmon export, Norway 1981-2016

 

Antibiotics used in Norwegian aquaculture and the production of salmonids, 1975-2016

The tradeoff between wild and farmed salmon

Wild salmon: Used to be additional income for small scale fishermen; Now, mainly recreational fishing. Use and non-use values

Aquaculture production: Huge export value; Salmon lice, surplus feed, feces and escapees are the main externalities, including effects on wild fish

Economic rent in aquaculture (ERA)

Economic rent in aquaculture (ERA) is any payment to a farm and site owner, on land or sea, in excess of the costs needed to bring that farm into production. For analytic and policy purposes it may be useful to distinguish among different types of ERA, including oligopoly rent from access regulation (licensing) and hampered output

Atlantic salmon (Salmo salar) in Norway and white leg shrimp  (Litopenaeus vannamei) in Vietnam, two successful aquaculture cases.

Analyses indicate very high profit and ERA rates in the Norwegian salmon industry and positive, but lower rates in the Vietnamese white leg shrimp farming.

Aquaculture rent (ERA) can be calculated from costs and earnings data. Concepts, and Norway 2016

Concept

Explanation

ERA for salmon and trout in Norway, 2016 Million NOK (million USD)

Revenue

Farm gate value of sale of fish.

50,072.31

(5,961.0)

-          Total operating expenses

Including depreciation of farm, license and permit.

32,035.0

= Operating profit (EBIT)

Earnings before interest and tax.

18,037.3

+    Total financial revenue

Financial income and currency gains.

530.7

-          Total financial expenses

Financial cost and currency rate losses.

495.4

= Profit on ordinary activities before tax (EBT)

 

18,072.6

+ Depreciation on intangible capital

Intangible capital includes licenses and permits.

-12.52

+ Financial cost of intangible capital

Financial cost (interests, fees) of license and permit purchases.

226.53

-          Calculated interest on equity

Equal to what is paid on long term loans, or government bonds (opportunity cost).

917.63

= Economic rent in aquaculture (ERA) unadjusted

The residual for the aquaculture industry owners, without deduction of environmental and management cost.

17,369.0

(2,067.7)

Economic rent per kg

ERA divided by quantity sold at farm gate – per kg

18.22

(2.17)

Operating margin

EBIT in percent of revenue

36.0

Profit margin4

EBT in percent of revenue

36.1

Economic rent margin

ERA in percent of revenue

34.7

Aquaculture rent (ERA) can be calculated from costs and earnings data. Concepts.

Concept

Explanation

Revenue

Farm gate value of sale of fish.

-          Total operating expenses

Including depreciation of farm, license and permit.

= Operating profit (EBIT)

Earnings before interest and tax.

      +    Total financial revenue

Financial income and currency gains.

-          Total financial expenses

Financial cost and currency rate losses.

= Profit on ordinary activities before tax (EBT)

 

       + Depreciation on intangible capital

Intangible capital includes licenses and permits.

       + Financial cost of intangible capital

Financial cost (interests, fees) of license and permit purchases.

-          Calculated interest on equity

Equal to what is paid on long term loans, or government bonds (opportunity cost).

Aquaculture rent (ERA) can be calculated from costs and earnings data. Concepts and Norway 2016

= Economic rent in aquaculture (ERA) unadjusted (USD)

The residual for the aquaculture industry owners, without deduction of environmental and management cost.

17,369.0

(2,067.7)

Economic rent per kg (USD)

ERA divided by quantity sold at farm gate – per kg

18.22 (2.17)

Operating margin

EBIT in percent of revenue

36.0

Profit margin4

EBT in percent of revenue

36.1

Economic rent margin

ERA in percent of revenue

34.7

Aquaculture rent (ERA) for salmon in Norway and white leg shrimp in Vietnam 

 

 

Norway-salmon,

2016

Vietnam-white leg shrimp 2014 (4 provinc)

= Economic rent in aquaculture (ERA) unadjusted

The residual for the aquaculture industry owners, without deduction of environmental and management cost.

mill. NOK       17,369.0

(mill. USD)     (2,067.7)

mill. VND     1,492,106.3

(mill. USD)              (69.8)

Profit margin4

EBT in percent of revenue

36.1

9.6

Economic rent margin

ERA in percent of revenue

34.7

7.2

Lessons learned (fisheries and aquaculture)

From the Law of the Sea – establish internationally agreed national rights and obligations in previous disputed seas, and then avoid domestic rent dissipating competition.

Get rid of national capacity and effort expanding government financial transfers (GFT) (Bad subsidies)

GFT to for example infrastructure, safety measures, social security, as well as to monitoring, control and surveillance can be Good subsidies 

User and property rights in aquaculture

Environmental control (feed and medicine remains, disease, escapee…)

Food safety

Utilise branding (VASEP, Norwegian Seafood Council) and market power 

The presentation of Prof. Ola Flateen (Tromso University, Norway) in the framework of Vietfish 2018

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