ITQS as collateral rightly understood: preserving commerce and conserving fisheries.

• Author: Collons, Kacy A.
• Position: Individual transferable quotas

INTRODUCTION

The number of vessels comprising the United States' fishing fleets has, in many fisheries, grown to such great numbers that their fishing capacity far exceeds fishery productivity. This excess capacity perpetuates a cycle of overinvestment and overfishing, contributing to dangerous depletion of fish stocks. In unsuccessful efforts to conserve threatened fish stocks, the United States has reduced fishing seasons and allowable harvest limits.(1) The reduction of fishing seasons has itself contributed to overinvestment in fishing fleets. As fishing seasons were shortened, purchasing equipment capable of meeting quota limits in the shortest possible time became the business strategy of choice.

A proposed alternative to these unsuccessful fishery management practices is the implementation of transferable fishing quota schemes, which may provide incentives to conserve fish stocks and simultaneously reduce the excessive numbers of active vessels within U.S. fisheries. Individual Transferable Quotas ("ITQs"), are tradable fishing rights created by the National Marine Fisheries Service ("NMFS") and local fishery management councils in an attempt to alleviate the problem of overfishing, and achieve sustainable management in the United States.(2) Under ITQ management schemes, each qualifying fisher receives an individual quota, which is a specific percentage of the annual harvest limit--or total allowable catch ("TAC")(3)--for a specific fishery. A fisher may use his percentage allocation to harvest fish himself, or he may transfer his allocation to someone else by lease or sale. "The primary feature of ITQs is the assignment of . . . property rights to harvest common property resources such as fish and shellfish . . . Usually, ITQs are fully transferable (buy, sell, lease) to allow operators to optimize their business."(4)

Critics of market-based environmental solutions point out the difficulty of applying economic models to environmental questions because "[h]umans cannot . . . impose limited notions of order on a living world that, by its very nature, will not be pinned down."(5) Regardless of the validity of this criticism, the reality is that current policies value market mechanisms as superior to other alternatives.(6) The implementation of transferable fishing quota schemes worldwide is evidence of this trend.(7)

Transferable quota systems have been implemented in various fisheries around the world with distinct consequences for the economic structure and the conservation of fisheries. For example, in the Icelandic cod fishery, the implementation of such a management system has resulted in the concentration of fishing quota among a few large market participants.(8) In fact:

This state of affairs has lead many to describe the quota system in

feudal terms, with the "quota kings" or "lords of the sea" controlling

most of the quota and profiting from renting it to "tenant"

companies, who actually do much of the fishing. After paying the

rental price, the "tenant" companies are left with only 60% of the

value of the catch, while still bearing the normal expenses of

fishing.(9)

Currently, there are three ITQ management systems in the United States. These regulate the Atlantic Surf Clam and Ocean Quahog fisheries,(10) the Wreckfish fishery,(11) and the Alaskan Halibut and Sablefish fisheries.(12) While the character of each of these three fisheries is unique, the theory behind their ITQ management is the same: to provide for more "efficient" and sustainable management of the fish stock by limiting access through tradable fishing rights--ITQs--which are a percentage share of total allowable catch.(13) In theory, transferability of the quota will encourage needed fleet downsizing by giving "marginal" actors an asset they can sell to exit the market.

Due to the nature of the initial quota allocation,(14) researchers point out that small actors, "lacking the financial backing to acquire extra permanent quota-shares," must sell out.(15) As in any industry, therefore, financing is a necessary component in the fishing industry. Financing allows for capital investment and business improvement, as well as easier market entry and exit. ITQs, which have monetary value and are transferable, could serve as a form of collateral to facilitate financing within the industry. However, interviews(16) with financial institutions, lenders, lawyers, and others involved with commercial fisheries reveal that ITQs are generally not accepted as collateral for loans.(17) Lenders are understandably hesitant towards any new form of collateral, but ITQs seem to pose certain risks which lenders appear unwilling to accept regardless of the recent creation of ITQs.

When lenders consider accepting collateral as a guarantee for a loan, a main concern is whether the collateral will be sufficient to cover the value of the loan should the borrower default. "[I]n every situation . . . underwriting goals remain the same: making sure the borrower is both able and willing to repay the . . . debt, and making sure the property would provide sufficient security . . . in the event of default."(18) The greater the risk of loss, the lower the loan-to-value ratio on the loan.(19)

ITQ management seems a promising approach to long-term conservation. ITQs, as an exclusive right, may create an incentive for quota holders to fish responsibly to maintain a sustainable fish stock, or even increase the fish population, and to increase the value of their quota. For others, the creation of exclusive rights may bar their participation in the industry or encourage the growth of fishing monopolies. Access to financing is key, however, because the incentive to fish responsibly is linked to the ability to fish profitably. For many small fishing outfits, financing is needed to purchase the requisite equipment. The large and typically over-quipped fishing outfits need financing to purchase the additional quota shares necessary for the outfits' vessels to make profitable use of their catch capacity, and thus remove the incentive to fish illegally. The inability of fishers to obtain loans on ITQs decreases the value of the fishers' quota rights (particularly when they lack the capacity to exercise them), and may frustrate the incentive-based management scheme. Financing is also essential to conservation efforts predicated on downsizing the fishing fleets, because even successful fishing outfits may require additional capital to buy out fishers wishing to exit the industry. Therefore, the acceptance of ITQs as collateral is important for conservation goals.

This comment explores the history and present use of ITQs as collateral, and attempts to explain the difficulty that some fishers have had in obtaining loans on ITQs. Additionally, this comment explores possible changes to current ITQ management to make ITQs more attractive as a form of collateral, while still maintaining the flexibility of the system for conservation purposes.(20) Finally, the comment makes the case that if ITQs are easier to use as collateral, ITQ systems will be fairer, and have fewer negative impacts.

The comment first provides an overview of the law governing secured transactions to establish a point of reference for analyzing the issue of lending and ITQs as collateral. The comment illustrates the necessity of establishing a national registry to facilitate lending on ITQs, and provide some possibilities for what such a registry might look like.(21) In addition to examining the need for a national registry, the comment discusses several other risks that lenders associate with ITQs. This comment asserts that the use of ITQs as collateral is beneficial for perpetuating ITQ management, for assisting smaller actors within a fishery, and as a tool for economic development. Finally, the comment asserts that a national registry system, while helpful, cannot be expected to guarantee lenders' acceptance of ITQs as collateral because the quality and character of the borrower is just as important as the quality and character of the collateral.

HISTORY OF ITQS AND THE PRESERVATION OF FISHERIES

The seafood industry is big international business. In 1992, U.S. commercial fisheries and their processing sectors earned $3.7 billion in ex-vessel revenue after fishing for 4.8 million metric tons of fish and shellfish.(22) In 1943, the U.S. exported five times more fish than it imported.(23) However, following WWII, foreign governments, in an effort to develop export markets, heaviliy subsidized their fishing fleets. As a result, by 1974, the U.S. was importing 13 times more fish than it exported.(24)

As foreign fleets descended upon U.S. waters in the 1970's, the United States Congress passed the Magnuson Act,(25) a protectionist policy excluding foreign actors from fishing in U.S. waters (up to 200 nautical miles offshore, termed an Exclusive Economic Zone (EEZ)). Furthermore, in an effort to compete with foreign fleets, the NMFS provided large subsidies to the domestic fishing industry. These subsidies resulted in overcapitalization and advanced technology. These factors, in addition to the failure to consider long-term objectives, have caused overfishing and depletion of fish stocks. Currently, in the United States, about 40% of managed fish populations are overexploited; in the world, about 70% of the world's fish stocks are "depleted" or "almost depleted."(26)

Due to the existing crisis in stock depletion, even some environmental interests conclude that without the implementation of ITQ management, fish stocks and fishing communities face a dim future. In the late 1970's and early 1980's, the government gave large subsidies to the fishing industry, leading to overcapitalization. Overcapitalization, or overinvestment, is the excessive investment in high-capacity fishing gear resulting in high cost and oversized--in terms of the number of vessels--fishing fleets with enormous excess capacity to...