Proceedings of the Standing Senate Committee on
Fisheries

Issue 12 - Evidence, October 27, 1998


OTTAWA, Tuesday, October 27, 1998

The Standing Senate Committee on Fisheries met this day at 7:00 p.m. to consider the questions of privatization and quota licensing in Canada's fisheries.

Senator Gerald J. Comeau (Chairman) in the Chair.

[English]

The Chairman: This evening we will continue with our study respecting privatization and quota licensing in Canada's fisheries. Our first witness this evening is Mr. John Annala from the New Zealand Department of Fisheries. He is appearing tonight through the technology of video conferencing.

Mr. Annala joined the New Zealand Ministry of Fisheries in July 1995. He holds a Ph.D. from the University of New Hampshire and has had over 20 years of experience working in the areas of marine fisheries research, stock assessment and fisheries management in New Zealand and overseas.

During the mid-1980s, Mr. Annala was involved in the introduction of New Zealand's ITQs. Since September 1997, he has been a member of the American National Research Council committee reviewing individual transferable quotas in the United States.

Mr. Annala, you may have opening remarks, after which various members of the committee may have questions for you. Thank very much for agreeing to appear before us and sharing your knowledge of what is happening in New Zealand. It will be very useful for us.

Please proceed.

Mr. John Annala, Manager, Science Policy, Ministry of Fisheries, New Zealand: Honourable senators, it is indeed an honour and a privilege to appear before your committee.

I would like to briefly describe New Zealand's individual transferable quota system and summarize some of the lessons that we have learned over the last 12 years.

New Zealand introduced ITQs into all of their fisheries in 1986. New Zealand has arguably the longest history of ITQ management in the world, with the possible exception of Iceland. On such a broad scale, it is a very long history. More than 90 per cent of all species, in terms of total landed value, are now being managed by ITQs.

When ITQs were introduced in 1986, it was to address two very specific goals. This is one of the strengths of the system, that the goals and objectives were clearly articulated. There was a conservation goal to limit catches to levels that would result in the maximum production from the stock. There was also an allocation goal to maximize economic returns to the nation.

The ITQ system had a number of key points. The basic property right is the individual transferable quota. The ITQ is owned in perpetuity, with no return to the Crown at any stage.

Restrictions were put on foreign ownership. The level is currently 40 per cent; however, it is being reviewed. There are aggregation limits on individual owners and they depend on the fishery. In the small, inshore fisheries that are mostly owner-operated, such as lobster and abalone, the aggregation limit is as low as 2 per cent. In the big, offshore industrial fishery, it is as high as 35 per cent.

ITQs can be bought, sold or leased freely. There are a number of very flexible mechanisms to allow transfer of ITQs. The TACs are adjusted by proportional ITQs rather than the government entering the market and buying and selling quota. The main monitoring and enforcement mechanism is a computer record of catch against quota.

I will quickly cover the experience of the first 12 years, both in terms of the benefits or gains to fisheries management in the community, and also the costs and some of the problems.

There is an improved biological status of the resource. When ITQs were introduced in 1986, most of the inshore finfisheries, and to a lesser extent, shellfish were heavily overfished both biologically and economically. The initial TACs reduced catch levels by 25 per cent to 75 per cent. Therefore, the initial TACs had a substantial effect on catch levels that has resulted in stock rebuilding for these inshore finfisheries during the intervening 12 years.

ITQs also brought secure access to the resource. As I indicated, ITQs can be bought, sold and traded freely. It has given the stakeholders, particularly the commercial industry, a vested interest in the fishery and has guaranteed them secure access. There is also a flow-on effect to investment in the fishery in a number of ways that I will summarize later.

It is clear that market forces structure a market-oriented industry. It allows the ITQ holders to structure their operations, to maximize their economic return from the resource, rather than going out and racing for fish, as in the competitive TAC situation or in an effort control fishery. It has brought many benefits to the industry in that respect.

Before ITQs were introduced in the lobster fishery, most of the product was sold overseas as frozen tails. The industry has now restructured its operation and 80 per cent of the catch is sold as live lobster. They actually spread their catch out over the year to take advantage of peak market times.

A very similar situation has developed in the major inshore fishery for snapper, where a large portion of the catch is now sold as fresh chilled. The operators have restructured their operations to allow that to happen.

One of the important areas touted as being a benefit of ITQs was reduced overcapitalization in the industry. Unfortunately, we have not collected economic statistics in New Zealand to determine whether that has happened.

Another area is greater industry freedom, flexibility and responsibility. I have touched briefly on the increased flexibility to structure business operations.

The fishing industry has certainly taken increased responsibility in terms of stewardship of the resource and conservation. That is not to say there is no quota busting or poaching going on; that does occur. However, the industry is funding its own research. In the deep water fisheries, they are funding research to the tune of about $1 million to carry out their own, independent stock assessments. The same is true in our lobster fishery.

Another benefit touted at the beginning of the ITQ system was reduced government intervention. That has not occurred for a variety of reasons, one of which is the request from the industry for a flexible management system. Unfortunately, that has not resulted in reduced government regulation. Currently, the New Zealand government is conducting a fundamental review of this area, which should result in the introduction of new legislation before Christmas.

The last benefit I would like to touch on, that was also touted before ITQs were introduced, is improved industry efficiency, competitiveness and profitability. Because of the lack of economic information collected from our industry, we do not have any hard economic analyses. The perception is that all those benefits have accrued to the industry.

In terms of the multi-species fisheries, primarily the inshore trawl fisheries for bottom-dwelling fish, there have been bycatch problems. Initially, it was difficult for quota owners to balance catch against quota; however, we introduced a number of flexible mechanisms to accommodate that. Unfortunately, that resulted in a very complicated system in terms of balancing catch against quota. Again, this is an area that we are addressing at the moment.

Another problem that we experienced at the beginning was quota busting. This has been most prevalent in our high-value inshore fisheries, in particular for lobster and abalone. Some estimates had quota busting as high as 50 per cent in the early years; and 25 per cent in the lobster fishery. As you are probably aware, it is very difficult to get hard figures on the degree of quota busting in any fishery.

We have also had problems with discarding and high grading, which is really another form of quota busting. However, all the anecdotal information from surveys of industry participants suggests that the level has decreased. It is still there, but it has decreased.

Another frequently discussed area with regard to ITQ fisheries is aggregation of quota and removal of the smaller players. I think New Zealand is in a unique situation, because the engine for the fishing industry is really the deep-water, offshore fisheries, which are mostly vertically integrated concerns.

Certainly concerns have been raised by some inshore fishers of lobsters that more of the quota for those species is falling into the hands of the larger players. When you look at the quota aggregation figures going back to 1986, some 60 per cent of the quota was held then by the 10 largest concerns. That increased to 80 per cent in the early 1990s, but fell back to about 60 per cent in 1998. That does not look at the concerns of the smaller owner-operators in the inshore fisheries.

Anyone contemplating moving to an ITQ system needs to be aware of a number of ongoing problems we are trying to address in New Zealand. First is the fact that once you allocate a property right such as an ITQ to the commercial industry, it is very difficult to withdraw it. Certainly in New Zealand, the fishing industry believes that right is theirs in perpetuity. That was the initial intent of the system. Any attempt to remove that right results in claims for compensation and litigation.

Also, once property rights are allocated to the commercial sector, there is increased pressure for property rights from the aboriginal sector -- in our case, Maori -- as well as the recreational sector. The New Zealand government has settled both the commercial and the traditional harvesting rights of the Maori. We are currently discussing a recreational fisheries policy that may involve some form of tradable recreational right. We are still in the early stages of consultation on that.

Another important issue is the introduction of cost recovery. Currently, New Zealand operates a cost-recovery regime whereby 77 per cent of the entire cost of fisheries research, management, enforcement and administration is recovered through levies from the industry. This places a lot of pressure -- and I am not saying this in a negative way -- on the government organization charged with managing fisheries to operate efficiently and effectively.

In New Zealand, we are moving toward devolving responsibility for contracting research, a large part of our fisheries administration -- which is balancing catch against quota -- and non-statutory compliance responsibilities, among other things, to the commercial sector. In this way, they can actually manage their affairs in their own way, which places a lot of pressure on the government agency to operate in an effective and efficient way.

My personal view is, that is a good outcome. It has given the industry more responsibility and involved them more in fisheries research and management. It has given them more of a stewardship concern for the resource.

I will end my opening comments there. I am happy to receive any questions at this time.

The Chairman: Senator Stewart will begin the questions, sir. He is from Nova Scotia, which as you know, has a very sizeable fishing industry, including lobster, groundfish and many other species.

Senator Stewart: Perhaps the committee will excuse me for mentioning that last week we had witnesses testifying from Iceland via the same technological miracle used by our witnesses this evening.

I was impressed by the differences between the fisheries in Iceland and the fisheries in my part of Canada. I found that interesting because I concluded that perhaps the ITQ system might be highly suitable for Iceland but, due to the nature of the fisheries in my part of Canada, it might not be suitable for at least some of the species there. That is the background for my questions.

First, I would like to ask a territorial question. What is the size of your territorial sea and are foreigners excluded from that ground? If so, is that on the basis of historical reasons, or is it a bargain or arrangement with your neighbours?

Mr. Annala: By territorial sea, do you mean the area of the sea up to the old 12-mile limit?

Senator Stewart: I mean whatever area in which your fishing regulations apply.

Mr. Annala: Offhand, I could not tell you the size of the exclusive economic zone of New Zealand, but some figures have it between the fourth- and sixth-largest exclusive economic zone in the world, after the U.S.A.

Senator Stewart: Do you allow boats or ships from Australia, for example, or perhaps from some of the French islands, to fish in your exclusive economic zone?

Mr. Annala: The current government policy is to allocate ITQ to foreign nationals if the New Zealand industry cannot catch the total TAC. Currently, there are no fisheries where foreign nationals are allowed because the entire TAC is caught by New Zealand nationals.

Senator Stewart: In terms of value of landings, what are your chief species?

Mr. Annala: In terms of value, the chief species are orange roughy and hoki, which have a landed value of about NZ$150 million each. Lobster is about NZ$80 million landed value and abalone about NZ$50 million.

Senator Stewart: In the case of the lobster and abalone, to what extent are these fisheries inshore?

Mr. Annala: The lobster and abalone fisheries are all inshore, generally within about 20 kilometres of the coastline, whereas hoki and orange roughy are very much offshore, deep-water fisheries.

Senator Stewart: I am particularly interested in the lobster, because where I live, that is, generally speaking, the most valuable species. What size are the boats? Are there limits on the size of the boats in the inshore fishery?

Mr. Annala: No. When New Zealand moved to ITQs in 1986, they removed all those controls. There are no limits on vessel size.

Senator Stewart: What is New Zealand's experience with the concentration of ownership? I live in a fishing village, and one of the fears of fishers there is what I will call "proletarianization." They now have their own boats, of which they are very proud, and they observe the rules, because it is a community and they understand that if one person violates the rules, it hurts everyone. They are afraid that with the individual transferable quotas, the fisheries will be subject to the merger phenomenon, and that the individual artisanal fishermen will gradually become mere deckhands on a ship owned by a major corporation. I do not say that it will necessarily be an international corporation but that is another cause for fear. What is your experience with transfers?

I will ask a second question on that topic, Mr. Chairman. Do you have restrictions on transfers? I was surprised to learn that, in Iceland, they pay attention to political constituencies when the question of approving a proposed transfer arises. Do you do that?

Mr. Annala: No, we do not. In line with the free market economy, the attitude in New Zealand is: willing buyer, willing seller. There are aggregation limits within the different fisheries. In the inshore fisheries for lobster and abalone, they range between 2 per cent and 5 per cent.

Senator Stewart: For the privately-owned inshore boats, or the other way?

Mr. Annala: Between 2 per cent and 5 per cent of the quota for rock lobster and abalone. No individual quota holder can own more than 2 per cent to 5 per cent of the total TAC. Within that, transfers are freely available. There is no restriction on transfers.

I am aware of the concerns on quota aggregation and the effects of transferability on fishing communities in other parts of the world. I am familiar with the system in Alaska for halibut and sablefish, where they have a five-tier system that protects the small, individual owner-operator. There are ways of constructing an ITQ system to deal with that concern.

Senator Stewart: Your experience has not raised that concern in a major way in New Zealand; is that what you are saying?

Mr. Annala: No. That concern does not exist in New Zealand, because of the nature of the economy and the fact that there are very few, if any, communities that rely solely or mainly on fishing. It is a very diversified economy. That concern has not arisen.

Senator Robertson: Dr. Annala, welcome to our discussion tonight. You come from a beautiful country. I hope I have the opportunity to return there some time.

I want to touch on, in a little more detail, some of the issues Senator Stewart has raised, and particularly the process involved in developing New Zealand's ITQ system. I believe it has been described as a comprehensive property-rights system. I would like to know how industry participants were consulted. To put it another way, were the small participants suspicious that the policy-makers had a hidden agenda favouring property-rights-based fisheries, and that the small operators would be ignored or imposed upon? I would like to know what measures you took to build the consensus. Did you use public hearings or parliamentary debate? How did you manage conflicts in extending the ITQ? What lessons can we learn from you in that regard?

Mr. Annala: We are going back to what happened in the early to mid-1980s, so my memory is a bit hazy on some of the specifics. Before the introduction of ITQs to all New Zealand fisheries in 1986, the government introduced, in 1983, what in Canada you refer to as "enterprise allocations" for the deep-water fisheries. That established the deep-water companies with allocations for the deep-water fisheries that were well outside the historical range of New Zealand's inshore fishing industry.

New Zealand had a very young fishing industry compared to Canada. There was essentially no deep-water fishing before New Zealand introduced its 200-mile limit in 1977. The New Zealand industry went from catching zero tonnage of deep-water fish in 1977 to 250,000 tonnes in 1983. It developed very quickly. That built a very solid economic basis for the industry. It was a good platform.

When ITQs were introduced, primarily to address the overfishing concerns in the inshore fishery, there was a very extensive round of consultation. One of the leading proponents of ITQs was the secretary of the commercial fishermen's association, which represents the smaller owner-operators. He had read very widely and reached the conclusion that ITQs were the best way to go. There was a joint industry-government consultative committee that directly advised the minister. There was a series of about 50 meetings around the country where all the commercial fishers were consulted.

That resulted in a straw poll. It would be fair to say that the consensus was that, although we may not be entirely happy with ITQs, it is the best management tool in our tool box.

The advice of that consultation round and the advisory committee was to introduce ITQs. Success is based on that industry buying in right from the beginning and the fact that there were industry players leading the move to ITQs.

Senator Robertson: That is interesting. From what you say, it seems to have worked well in New Zealand. I note from your paper that there are no formal systems to evaluate the benefits and costs of the ITQ system. I suppose that means that the participants have their own assessments of its effectiveness. Perhaps perceptions prevail rather than hard evaluation findings. Is that true?

Mr. Annala: Yes, it certainly is. The only rigorous assessment we have regarding the performance of the ITQ system is in the sustainable levels of fish stocks. We monitor those on a regular basis and produce an annual scorecard. We are monitoring the conservation benefits but not the socio-economic and cultural benefits or impacts.

Senator Robertson: Have your monitoring efforts on conservation been reasonably accurate? Have you had good luck with your monitoring of stocks?

Mr. Annala: Yes, that is a very good way of putting it. We have had good luck as much as good management. We also have the good fortune that in the deep-water fisheries we are dealing with the initial exploitation of virgin stock, so the fisheries were in a healthy state.

Senator Robertson: Has this ITQ system been beneficial to the owner-operator fishermen's income in the coastal communities? Have they continued to make a good living?

Mr. Annala: Again, there is no hard information, but that is the perception gained from talking with the players who have remained in the industry. There was dislocation in the beginning, but the government introduced a buy-back scheme that bought back notional quota from participants who were marginally economical. Some of the anecdotal information and perceptions indicate that there was a certain degree of displacement, particularly from rural communities, in the early stages.

Senator Robertson: I suppose your fishery has not been sufficiently developed to give you concerns on overfishing.

Mr. Annala: As I indicated in my opening remarks, most of the inshore finfisheries were biologically and economically overfished when ITQs were introduced in 1986. However, we have good stock assessment information in 1998. Many have been rebuilt to our target level under the Fisheries Act, which is a biomass that will support the MSY. For the fish stocks that are still below that target level, we have rebuilding strategies in place with time frames and performance measures.

Senator Perrault: We have been told on more than one occasion that private quotas offer fishers a powerful incentive to discard low-value and undersized fish that count against the individual quota, especially if they are too small to be economically viable for individual operators.

Is high grading a problem in the New Zealand fishery today, and is the practice legal?

Mr. Annala: High grading has certainly decreased since the quota management system was introduced in 1986. This is based on two surveys since then of people in the commercial industry.

There is a prohibition on discarding undersized fish and species in the quota management system, but there is no prohibition on discarding fish not in the system. These are commonly referred to as "trash" fish.

New Zealand introduced a very complex system to deal with bycatch, high grading and multi-species trawl fisheries issues. We introduced a flexible system to allow quota trades between species. If you are catching more of one species than you have quota to cover, you can count that against quota of another species. If you are out fishing, you can call someone on a cell phone or radio and negotiate a quota exchange -- either a sale or a lease. You are encouraged to land fish over your quota if it is a bycatch species. That discourages dumping or high grading. There are two ways of doing that. You can land the fish and surrender the denominated value of that fish to the government or pay what is called a deemed value, which allows you to go on the market to buy quota to cover it. If you have bought that quota before the end of the year, you get your money back.

Thus, there has been a flexible system built to try to deal with those high grading and dumping issues which, by and large, appears to have worked.

Senator Perrault: This committee has heard that at least some New Zealand authorities feel that high grading is a serious threat to conservation. Have measures been taken to ameliorate the situation?

We were told that high grading is especially likely where fishers have gone into debt to buy expensive quotas from other fishers in the expectation of a reasonable return on their investment. We wish to know if there are still weaknesses in this revised system.

Senator Butts: Did the process undertaken in 1986 entail an amendment to an existing Fisheries Act? What was the process that brought these ITQs into being?

Mr. Annala: The introduction of ITQs required an amendment to the existing Fisheries Act, passed only in 1983, so it was amended very soon after enactment.

The 1983 act introduced the concept of fisheries management plans similar to the process followed in the U.S. through the fishery management councils. The ITQ approach was a very different one. It was a change from primarily input controls -- controls on effort, areas fished, et cetera -- to purely output controls. It required a fundamental amendment to the legislation.

Senator Butts: Do you have what we term "part-time" fishers?

Mr. Annala: Yes, we do, because anyone can buy a quota and go fishing. There is a minimum aggregation limit of five tonnes of finfish and one tonne of lobster or abalone. You can actually buy quota and fish as a part-time fisherman, if you so choose.

Senator Butts: Could one buy quota for a community, a group of part-time fishers?

Mr. Annala: Yes. There is nothing in the New Zealand legislation to prevent that. There is an offshore island group, called the Chatham Islands, approximately 400 miles east of New Zealand. They have actually set up a local authority trading enterprise, incorporated by the local community. That community trading enterprise owns quota and they have their own internal mechanisms for allocating that quota to community members. I am not familiar with the details. They have their own voting rules and regulations, similar to a corporation.

Senator Butts: Does it cost to get an ITQ? Is there any system of government approval of transfers?

Mr. Annala: The only cost is the actual purchase cost from the existing holder. The only government approval involves limits on foreign ownership.

Senator Butts: Would the existing holder set the price himself?

Mr. Annala: Yes.

Senator Butts: I have heard some criticism of the degree of concentration of these ITQs. Do you disagree with that criticism?

Mr. Annala: As I indicated earlier, in the deep-water inshore fisheries, the fishing companies are vertically integrated. They own vector vessels right through to the processing plants, and in some cases, the marketing arm. I have not heard any criticisms about concentration in the deep-water fisheries. I have heard some criticism about concentration in the inshore fisheries. My view is that it is not very widespread, although it may become more so.

There is more criticism in the inshore fisheries of absentee owners. As the initial ITQ holders have left the fishery for retirement or other reasons, they have sold quota to other quota owners. There is no restriction in New Zealand on who buys quota. Anyone can buy quota and even have someone fish it on his behalf. There has been some criticism from inshore fishers, lobster fishers in particular, about this absentee quota ownership. Again, rules and regulations could be brought in to address that if it was a major concern.

Senator Butts: Is it correct that all your fish are consumed at home?

Mr. Annala: No, actually 90 per cent of New Zealand's fish is exported; 90 per cent of the landings.

Senator Butts: It is just lobster you keep at home?

Mr. Annala: No, lobster is even higher. Because of the high cost of lobsters on the Asian market, probably 98 per cent of lobsters are exported.

Senator Robichaud: I wish to deal a little more with lobster. You are familiar with the seasons we have on the East Coast of Canada. Different regions have different seasons and can access the market at different times to get a better value. You said when ITQ was introduced, there was a change in the pattern of lobster fishing. How did you set seasons? Are there seasons? How was that distributed through the country?

Mr. Annala: No, there are no seasons. There are no closed seasons, except in one area, and that has been done for basically social reasons. The main management mechanism in the lobster fishery is the minimum legal size and prohibition on landing females carrying eggs. The lobster fishers were competing with our good neighbours, the Australians, for the Asian markets. The time of year when lobsters command the highest price is in the New Zealand winter, which is also the time of the most difficult fishing conditions. Traditionally, the fishery had been primarily a spring, summer, autumn fishery, but because prices were higher in winter, efforts shifted to the winter to try and actually reach the markets before the Australians. It was a purely economically driven change in fishing patterns. Now most lobsters in New Zealand are landed in the wintertime.

Senator Robichaud: The fishing communities decided that on their own because of economic benefits. That is what you are saying?

Mr. Annala: Yes.

Senator Robichaud: When it comes to setting TACs, if I own a part of that TAC, I will be tempted to put pressure on the authorities to consider increasing the total allowable catch so I can benefit more. Are there pressures from the industry to increase the TACs, or prevent them from decreasing?

Mr. Annala: We operate a completely open and transparent stock assessment and TAC setting process, where all of the stakeholder groups are invited to participate. We get participation from the commercial industry, recreational groups, environmental groups and Maori organizations. This fully open consultation process produces advice to the Ministry of Fisheries and to the minister. Outside of that process, there is lobbying by various sector groups to promote their point of view, but by and large, in New Zealand the minister has taken advice from his officials in the ministry and on the side of conservation.

Senator Robichaud: Did people who wanted more quota say that probably the scientists and the officials were too cautious in assessing the resource?

Mr. Annala: That is correct. It happens in every democratic fisheries management system. The advantage of an ITQ system is that because we have been operating this very transparent system now for 12 years, a large proportion of the stakeholder groups, including the commercial industry, have confidence in the results of a stock assessment. They spend money to hire consultants from Canada and the U.S. to participate in our stock assessment meetings and to challenge the ministry stock assessments, which has resulted in a high degree of confidence. By and large, they take the responsibility to not argue for TAC increases or against quota reductions when the stock assessment indicates otherwise. This has been a positive change over the last 10 to 12 years.

Senator Robichaud: Have there been any significant reductions in TACs in some particular stocks where the industry would then come to the government and ask for compensation?

Mr. Annala: That certainly has happened in the past, in the early days of the ITQ system. When ITQs were introduced in New Zealand in 1986, they were based on a fixed tonnage, so the government had to buy back ITQ in order to reduce quota. It quickly became apparent in the late 1980s that we had overestimated the sustainable yield of orange roughy, the biggest deep-water fishery, and we had to reduce the TAC from 60,000 tonnes to 20,000 tonnes very rapidly. The government moved to a proportional TAC system that did not compensate the industry for reductions, but then negotiated a $100 million compensation pool to take that into account. That smoothed the reductions in the TACs, or compensated quota holders during that period of substantial reduction. That was a political decision.

Senator Robichaud: It has not happened in the latter years of your regime?

Mr. Annala: No, it has not happened since 1990. It has not happened in the last eight years.

The Chairman: We will go on now to our eastern most province, the furthest away from New Zealand, but one of the friendliest. You are probably aware of some of the problems they have had in the fishery. I am speaking, of course, of Newfoundland. Senator Cook has a few questions for you.

Senator Cook: My questions are of a general nature. First, how important is the fishery to the economy of your island?

Mr. Annala: New Zealand depends primarily on the export of various goods and services. Obviously it is an export-oriented country. The fishing industry is the fifth-largest earner of export income, so it is a very important part of the economy. It follows the sheep and meat industry, dairy and forestry industries. As well, tourism is now one of the most important industries.

Senator Cook: Is your industry unionized?

Mr. Annala: There is what is called the Fishing Industry Guild. They provide crew members to the large, company-owned vessels. The small, individual owner-operated vessels are not unionized. The company-owned vessels are unionized.

The Chairman: I have a question regarding amendments to your Fisheries Act in 1986. New Zealand is a Commonwealth country, very much like Canada. Your constitution is based on British parliamentary common law, which is similar to Canada. We had to accept provisions that dated back to the Magna Carta of 1215 wherein the minister had to recognize the fishery resource as common property. I assume this is what happened in New Zealand, and I would like it confirmed. The minister had to go to your Parliament to seek the right to hand out ITQs. Is that what the legislation of 1986 was all about?

Mr. Annala: New Zealand has no constitution, but obviously the legislation is based on British common law. I cannot remember the details of when the legislation was introduced in 1985. I do not believe the minister did.

One of the overriding guidelines for legislation in New Zealand is the Treaty of Waitangi between the British Crown and the Maori, which was signed back in 1840. Reference has to be made to that. It resulted in prolonged negotiations for settlement of Maori fishing rights that concluded in 1992.

The Chairman: We can probably get this information from another source. It is a legal question as to why the legislation was introduced.

Do you have factory freezer trawlers in New Zealand that process fish at sea?

Mr. Annala: Yes, we do.

Senator Stewart: Do you not use the concept of bona fide fishers? We do in Canada. That works to prevent lawyers and doctors from owning fish traps, nets and quotas.

Mr. Annala: The initial allocation of quota in 1986 was based on catch history and dependence on and commitment to the industry. It recognized bona fide fishermen.

Since then, quota can be sold to anyone. It can be sold to doctors, lawyers or accountants as long as there is no conflict of interest.

Senator Stewart: You referred to vertical integration. How many of your companies would engage seriously in a vertically integrated version of the fisheries?

Mr. Annala: I consider that about 10 or 12 major companies are vertically integrated. They harvest probably 80 per cent of the deep-sea quota.

Senator Stewart: You referred to a high degree of export. I was particularly interested in the high degree of export of lobsters to Southeast Asia and other parts of that continent. Have you seen an impact of the financial crisis in that part of the world on your trade? Has the demand for lobsters declined at all?

Mr. Annala: My understanding is that the demand has declined and so has the price. Lobster exporters are having to find other markets. They have had to find them very quickly within the last three to six months.

Senator Stewart: What species? Lobsters and what else?

Mr. Annala: The higher-value species such as abalone.

Senator Robertson: You seem to look upon the system very favourably, sir. What would be the basic criticism of ITQs in New Zealand?

Mr. Annala: The basic criticism of those who are not in the system concerns the alienation of what they regard as a public resource in the hands of private ownership. It is a philosophical, political opinion.

Senator Robertson: Do you have some idea of what your fishery would look like today had you not gone to some variation of the quota system?

Mr. Annala: That is a very difficult question to answer. When New Zealand introduced ITQs in 1986, there were very few controls on fisheries. There were very few TACs and very limited controls on effort. It was mostly an open-access approach. We had to do something. It was either introduce very stringent effort controls or ITQs.

If ITQs had not been introduced, we would be facing many of the same issues most western countries face in fisheries management in terms of overcapitalization and overcapacity of the fishing fleet. Unless we actually had controls on fishing effort and our total catch through competitive quotas or trip limits, the resource would be in much worse condition than it is now.

Senator Perrault: Mr. Annala's biography indicates a long experience in the industry, and he probably supports the concept of research. We have been told here that contrary to expectations, holders of ITQs are not producing the funds necessary for first-rate research in New Zealand. Is there any truth in that? One witness told us the system did not provide the incentives for research that fisheries managers in New Zealand had expected.

Mr. Annala: I think that was certainly true in the beginning. When we first moved to cost recovery in New Zealand, 78 per cent of the costs of all research and management reinforcement were recovered from the industry. This was introduced in 1994.

Because we are very transparent in the research that we are funding, the industry argued very strongly for much less research or no research. We have just finished our latest research consultation round last week, where we had support from the industry for about 75 per cent of the research proposals we put forward.

There has been an improvement, a progressive change to increased support for research. It is not by any means perfect at this stage.

Senator Perrault: A statement was made to us that in 1993, the three largest companies owned more than 50 per cent of the quota. Is that trend continuing, or is concentration developing even more rapidly than before?

Mr. Annala: As I indicated, the figures for 1986 and 1998 were the same. About 60 per cent were in the hands of the top 10 companies. I am not sure where that figure of the top three came from. I cannot vouch for its accuracy, but these are figures published by the Seafood Industry Council.

The Chairman: Honourable senators, if you agree, we will take into consideration the brief presented by Professor Annala prior to his appearance. Is that agreed?

Hon. Senators: Agreed.

The Chairman: Dr. Annala, thank you. Your contribution will form part of our detailed assessment here in Canada of the whole question of ITQs and privatization. We wish you well in the future.

Mr. Annala: It has been a privilege to be here.

The Chairman: Our next witness is Ms Catherine Wallace. She is a senior lecturer in public policy and economics at the School of Business Administration and Public Management at the Victoria University of Wellington, New Zealand. Since 1987, Ms Wallace has taught economics and public policy, focusing primarily on environmental law. She is a well-known economist, active in various environmental issues in New Zealand and internationally. Ms Wallace heads the Environment and Conservation Organization of New Zealand Inc. -- more popularly known as the ECO -- a coalition of environmental, community and health non-governmental organizations. In 1981, she received the Goldman Prize for her efforts and achievements.

We have received your brief. Please proceed.

Ms Catherine Wallace, School of Business Administration and Public Management, Victoria University of Wellington, New Zealand: Thank you for your obviously very thorough study. There is some contrast between what you are doing and what our jurisdiction does. I am most impressed.

I am not sure if your introduction said I was involved in environmental law. I am not a lawyer; I am an economist. I would like to make that clear.

In the New Zealand university system, I am not known as a professor but as a senior lecturer. I take it that that is the North American usage.

I was involved in the New Zealand fisheries management situation at the time that the New Zealand quota management system was being debated and when New Zealand extended its exclusive economic zone. We had a big debate about fisheries management. My impression then was that quota management would not work well. I looked at the economics of it.

I spent some time within the fisheries area but then moved off to other areas and returned. I was struck by the fact that the observed behaviour of the fishing companies, as they sat in policy meetings and so on, did not seem to coincide with the theoretical prediction that once fishers owned quota, they would be very capable stewards of the resource.

I became interested in that. I decided it was a good idea to have a look at the operation of the New Zealand quota management system, partly because there were a lot of claims that it was working well.

I worried that perhaps that was really based on the blackboard economics and that we should look at what was really happening.

For that reason, I wrote a number of papers, including the paper I sent to you which, I regret, was not written specifically for you but was written for an International Covenant on Civil and Political Rights and Trade Conference in Norway in July of this year. It canvasses issues assuming that people know about the essence of quota systems. Clearly you have done a lot of examination of that and you do know the area. It was, however, limited in space, so that some of the empirical information I had could not be put into the paper.

My impression of the New Zealand system is that it is less successful than we thought it would be back in the early to mid-1980s. One must look at it from a number of angles. If you measure the success on a range of criteria, one is clearly the issue of profitability and economic efficiencies. In any open fishery, it is essential to move from open access to controlled access, and to limit the total take. I fully support the idea of setting that quota.

I am not so sure about doing that without a lot of other controls as well. In New Zealand, the system has worked well for the big fishing companies. Some of the smaller fishing companies have been squeezed out of the industry. That may be economically efficient; however, one must say that the other interests in fishing have been substantially marginalized for a number of reasons. First, if you give well-defined property rights to one group, other groups may suffer by comparison in that situation.

The rights of the wider community to an environment that is intact, of recreational fishers, of, in our case, customary Maori fishers and, for that matter, of the scientific community to see some areas protected from fishing, have suffered substantially. I am troubled about this. However, this is, in part, because of the quota management system, not just because fishers and the fishing industry are large and powerful members of the community. Their relative power and dominance in decision making has been quite strongly accentuated by the fact that they own quota.

It is also true that the incentive for quota holders to look after the stock has not been nearly as strong as we had predicted in the early to mid-1980s. We thought that if they owned the quota, if they had that property right to harvest the resource -- it is not the direct right to the fish, but the right to access -- that they would look after those stocks.

First, we do not see much of that behaviour. We see strong pressure to keep catch limits high, and that pressure has actually become more intense as the property right has become more defined.

It is striking that the industry has been very keen to have quota that is bankable. That is, something that they can have on their balance sheet and obtain loans against and so on. One effect of that is that they are doubly resistant to reductions in catch limits because that is an asset against which they have a loan.

That seems to be something that is a real bind for fisheries managers. If you want to look after the stocks, you really must have a system that is adjustable and that can respond when it seems that stocks are being overfished.

Fishers have continued to have a strong ratcheting effect on the catch limits. There has been strong pressure to keep the catch limits high, even when the stock data militates against it.

One issue in the design of these systems, when we look at them from the point of view of blackboard economics, is we think the catch limit is set by some scientific process. In New Zealand, it is highly politicized. It is not set by independent experts. It is the subject of pressure from all the stakeholders. The industry very much wants to obtain profits now, with high discount rates, rather than waiting to collect the benefits of that stock growth later. They have consistently pushed for time horizons of receiving paybacks within three or four years, certainly not the 10 years that we might have expected. That will be driven by their interest in getting money to pay off vessels, et cetera, but certainly the quota management system has not cured that problem as we thought it would.

One must look at a whole assembly of other controls as well as catch limits. There must also be strong-minded people in the institutions that set those catch limits. There must be controls in place to protect the marine invertebrates, the areas damaged by trawling, dredging or whatever it might be, and the various seabirds and others.

When the quota management system was introduced, the idea of other controls was largely discredited as being economically inefficient.

Little or no attention was paid to how to protect the environment. It is essential that a quota system have careful area limitations, a strong environmental impact assessment, and consideration of the impacts of different methods on different kinds of sea floors and marine mammals, seabirds, or whatever they might be. We have done too little of that.

In saying that, our whole system has evolved a great deal. We have moved from setting quotas as an absolute tonnage to setting quotas as a percentage of the total share. This takes the risk off the government and puts it on the fishers. That was useful, but it had another effect, which was that the industry became even more resistant to having those limits scaled back, since any reduction in catch limit had an immediate impact on their proportionate share.

The pressure on decision makers is difficult to anticipate. We did not sufficiently anticipate the impact of that dynamic on decision making and where the relative power lay.

My view is that you would be well advised to ensure that well-defined, clear rights are given to other parties, and that there is a foolproof system for protecting the environment. Other parties must be enabled to take part in decision making.

One of the difficulties we have had is that we have not made any resources available to recreational fishers, environmental organizations or other stakeholders. Environmental organizations here are particularly poorly funded because we do not have tax breaks, foundations and so on. People like me, who have other jobs, must participate while trying to do other work. Inevitably, that means that the effort and preparation that we can make is never as well resourced as the industry's. Typically, there will be one or two environmental people and 20 or so industry people and maybe one or two recreational people at any decision-making meeting. The sheer weight of numbers skews decisions toward the commercial industry and against the other interests.

The problem is that while we did eventually pass some reasonable legislation with the 1996 Fisheries Act, the Ministry of Fisheries simply has not implemented that legislation or allocated votes in the budget. The reason is not some inherent incompetence of government, but rather because of a very unsympathetic minister who holds the ideological view that you should get government out of people's lives and give everything to the industry.

This situation is also a result of the ministry being greatly pressured by the industry. Industry's demands have been met first because they are the most likely to be backed up with legal action. They know that other people do not have the money to take that legal action. The result is that quite good environmental controls have not been implemented.

For this current year, the ministry has budgeted only NZ$73,000 for the entire operational policy advice regarding the impact of fishing on the aquatic environment.

That is an area 15 times the size of the New Zealand land area, and that is just derisory. They are beginning to realize they should have done better, but constantly the industry is saying, "But we want these institutional reforms. We want co-management. We want these other things." The ministry has been dealing with that first.

It is an issue on which I cannot be definitive, but it is true that because they have quota, their arguments are listened to much more than those of other people. There is a sense in which that legitimacy, the political and legal power that that quota gives them, means that they become very dominant players.

Within the industry, the large companies have very much dominated the smaller ones. It has been an issue here.

We have substantial, mixed problems because there is a system of cost recovery in place whereby the fishing industry is asked to pay the costs of fisheries management. That is reasonable in the sense that the whole point of exclusivity in fisheries management is to increase the profitability in the industry with huge overcapacity, improve the economic rents, and at the same time, improve the biological system.

One of the effects is that the industry has been extremely reluctant to see money spent on fisheries research, environmental protection, or any of the work to do with protecting the public interest. They are paying 70 per cent of the costs for the ministry does or commissions. We have had quite savage cuts in fisheries research funding, which was always quite small. I gave you the figures in my paper. At the same time, we have large gaps in our information. We know very little about some of these stocks.

I am not sure whether you have the English or the French version, and whether your pagination is the same as mine, but in the second column of page 7, you will see the heading "Annual Stock Assessment Documentation."

The Chairman: Yes.

Ms Wallace: The point I am trying to make here is that despite many claims that New Zealand's quota management system is highly successful, when we actually look at the information about the fish stocks, we find that actually we have no idea what those stocks are, what their yield is, how that compares with maximum sustainable yield, what the original biomass was, and so on.

The striking thing about the New Zealand story is how many claims are being made and how little information we actually have. We do know that something like 50 per cent to 60 per cent of the total allowable commercial catches are risky, either because we do not know what the yield is, or because the catch limits are set at least twice the size of the sustainable yield. That is a big overrun. We actually only have fish stock information for a few of our stocks. We know some of them are in real trouble. Some of them are not.

To give you one of the most dramatic examples, one of the orange roughy stocks that was first opened in 1994, and entirely within the quota management system, this year's stock assessment suggests that that stock has gone down to 4 per cent of the original biomass. Yet that is supposedly managed within an orange roughy quota-holder association that deals with those problems. We do not know whether there was a biotoxin that killed everything, whether it has been overfished, or whether the estimate was wrong, but it does not look good. We still have a number of stocks that are well below the MSY, which is the target in the legislation. The pressures for overfishing continue, despite this evidence.

We are not convinced that setting up quota-holder associations will necessarily protect the stocks, although one would have expected, from the theory, that it should. The club theory and similar theories suggest that it would hold, but it is not obvious from the evidence that it does.

In part, the lack of information is endemic to the system. It has to do with cost recovery and the dominance of the fishers. Somehow, giving the quota has not been enough, at the very least, and it may have made some things worse.

I do not think for a moment that anyone should retain an open access arrangement; I also do not think you should have excessive input controls that just dissipate the economic rents through inefficiency. In all honesty, I could not say that the quota management system here has solved even the problem of looking after stocks, and I know that it is not looking after the environment. We have areas for the marine invertebrates that are being consistently trashed.

We have a huge marine mammal catch and seabird population declines, and we have carefully documented information about differences in reporting by government observers and industry observers. I do not have the figures here with me, but if you want them you can have them. We have had situations where the government observers were on some boats, the industry observers were on others, and then the boat owners themselves, the fishers, reported marine mammal catches. The discrepancies between what the government observers report and what the industry observers report on catches of some of our rarest marine mammals has been as high as 59 per cent reported by the industry compared to what the government reported. Most recently, that figure has dropped to 10 per cent. They are only reporting one in 10 of the marine mammal catches, and it is supposed to be mandatory to report them.

All of this makes us uneasy about handing over to the industry, as is intended here, the running of the quota databases and the vital information systems. Also, we are uneasy about their managing research, and about a recent suggestion that they should actually write the fisheries sustainability management plans. We have real concerns that that is a risky strategy. It would certainly put other interests in the marine environment -- especially the environment itself, the recreational fishers, the customary Maori fishers -- at a considerable disadvantage.

There is a much more that I could say here, but perhaps it is time to let you ask some questions if you want other information that I have not given you.

The Chairman: Thank you very much, Ms Wallace. That was a powerful presentation. New Zealand is fortunate to have you to look after the areas of environment and so on that the QMS did not foresee would be needed. Hopefully, in time, there may be changes that will provide you, and others, with this valuable way of monitoring this most important area. We will be in contact with you to get the reports that you have agreed to pass on to us. That would be very useful.

Our committee members are anxious to ask questions, so we will begin.

Senator Stewart: The fact that two very knowledgeable and candid experts differ so much is highly revealing. It points out the enormous complexity of the problem. I was going to ask if the present witness had an explanation for the contrast in what we have heard just now, but I will refrain.

I do not know much about the New Zealand economy. Let me ask about the direct or indirect participation of large fishing companies in other industries. Do you have fishing companies that also, perhaps as a subsidiary, are in the mutton industry; or are there people who are directors of big fishing companies who are involved in some other aspect of the economy in an important way?

Ms Wallace: Yes. I happen to know that a number of the major players are involved in other things as well; but I could not give you a systematic and detailed piece of research on that because I have not done it.

For the benefit of all the members of the committee, I should say that I did not sit in on the presentation by Mr. Annala, so I will not be able to comment on what he said unless you tell me.

However, I will say that he works for the government. I have considerable respect for him, but we differ on the issue of the track record of the ministry in looking after the environment and in being fair to other stakeholders.

Senator Stewart: It might be useful if you would tell us specifically what you teach in the school of business and public management. I ask that because when I hear about a professor from the school of business, I assume that she or he will take a position quite different from the one you have taken. However, it may be that your specialty is peculiar.

Ms Wallace: As with most people, I do specialize. I teach anything from first year economics, both macro and micro, to advanced public policy, in particular, environmental and resource economics. Fisheries are a particular area of mine.

What I am interested in is seeing the natural asset as a whole, seeing efficient treatment of the entire environment, and not just looking at the financial flows. I guess many economists are doing that today.

Senator Stewart: You made some reference to the different record of the different classes of observers. To what do you attribute this difference? Is it that the companies' observers are sleepier than, let us say, the government's observers? We have heard it said in Canada that once the observers go out to sea, they cannot leave their bunks for long. To what do you attribute the difference of the records?

Ms Wallace: The joke is that somehow the marine mammals are only attracted to the boats of the government observers.

There is clearly a difference in reporting. The reality is that for some reason or another, they do not report. We do not know why. Are they asleep? Does the crew respect them? Do they tell lies? We do not know. What we do know is that there is a significant statistical difference between the reporting rates, and we do not know why.

Senator Stewart: You have given us a scathing analysis of the consequences of the individual transferable quota system as it operates in New Zealand. You have also said that open access is not a good approach.

Do you have in mind a better approach than the ITQ system? I think it would be unfair at this point to ask you to spell it out, but could you at least give us intimations as to what the principles of such a better system would be?

Ms Wallace: I appreciate that in your jurisdiction, there may be a polarization between those who are for and those who are against quota management systems. I thought it would work and I have supported it. However, I feel that it did not work as well as the economists predicted. That is my approach.

I then ask myself: What is it about the institutional arrangement? What is it about the way in which decisions are made? What is it about the definitions of property rights? What is it about the other controls you have or have not put on and have or have not worked?

If anyone is to have rights, then everyone should have rights. Otherwise, those without clearly defined rights become marginalized. If the environment is to be properly protected, that needs to be unequivocally spelled out right at the beginning. It needs to be set up in such a way that it is enforceable, which means that someone has the incentive and the money to deal with it.

In New Zealand, we need some sort of ministry of marine impact management that will be a counterweight against the pressure that the industry puts on, in order to protect the environment. It might be that our Department of Conservation should formally own the seabed and the marine invertebrates. It is an issue we are still wrestling with and talking about to see what will work.

What we are doing, which is heading down the road of what is called co-management but is in fact industry capture of fisheries management at the expense of everyone else, will almost certainly not work. It is a highly risky strategy. We should have very clear rights for the recreational fishers and for the customary Maori fishers, which should have been set up at the same time as the quota management system for the commercial people.

Senator Perrault: In your view, is there a basic problem facing the entire planet, such as the decreasing ozone layer and the effect it has on plankton and the systems which sustain the fishery? Is that danger overdramatized?

Ms Wallace: There are some signs of global trends and the reduction in the ozone layer at the stratospheric level is problematic. What the marine scientists have told us is, "If you are worried about the sea, it is the impact on fishing that you should be worried about first and foremost."

Certainly, there is, potentially, global climate change, loss of the ozone layer, and in New Zealand at any rate, invasive species from other places. These are all matters of concern; but the real issue for fisheries managers is managing the fishers, making sure that they do not damage more than they need to, and that any harvesting is sustainable, both in terms of its impact and in terms of the amount taken.

Senator Perrault: You talked about the roughy association and the fact that in this certain area of New Zealand, only 4 per cent of the original biomass remains. That is a disastrous scenario. What does the roughy association do, if they are apparently not concerned about the dramatic decline in the harvest?

Ms Wallace: Their first impulse is to dispute the validity of the stock assessments. That tends to happen. You tend to argue about the stock assessment for three or four years after it has expired. By that time, you cannot do anything about it and it has got much worse.

I do not know what the roughy people are doing. They are not doing anything dramatic to try to ease the situation. No one understands why it has happened.

Senator Perrault: It has been a popular import into Canada, as perhaps you know, but there seems to be less of it on the market here. Does that reflect the state of the industry?

Ms Wallace: What happens in the industry here is that they tend to go to one area, fish it out and then move on. New Zealand only declared its exclusive economic zone in 1978, and we have been moving, with the process of pulse fishing, to one stock, fishing it down and then moving on to another stock and fishing it down. That is where the supernormal profits have come from, in economic terms. They simply move around from one place to another. They wipe out one stock and then move on to the next.

Senator Perrault: Critics of the New Zealand system here point to the degree of concentration that has taken place, and you touched upon that. Large corporations, vertically integrated companies, are now said to control virtually all fishing activity. In 1993, the three largest companies -- Sealord, Sanford and Amaltal -- reportedly owned more than 50 per cent of the quota. Is the figure staying at 50 per cent or is it declining or increasing?

Ms Wallace: I tried to look at that, but it is difficult because there are a lot of other companies and a lot of interlinked ownership. Even the Ministry of Fisheries does not track it, although they are supposed to have an aggregation limit by law. I have not found out how to track it, so I do not know the answer to that.

The anecdotal evidence is that it is continuing to increase, but I have not seen any clear data that gives a definitive answer.

Senator Robertson: Your comments have been very helpful and have answered some of the questions I had. I was somewhat amused with your frustration over theory and practice. We have all experienced that theory and practice often walk on different sides of the street.

When New Zealand was developing the quota management system, were the environmentalists involved at that time or did the environmental issues evolve later?

Ms Wallace: I was involved but not as an environmentalist. I was involved as an economist. I could answer that in a number of different ways. Yes, I was involved. Yes, there were some concerns, but for the most part, I, and others, probably brushed them aside. We thought that these people did not understand how useful the property-rights regime would be and how important it was to reduce the amount of fishing effort and have some exclusion of people and to put in strong, quantitative catch limits. I still think that is important.

It is true that I, with others, have become more involved now from an environmental angle, looking at the natural world as natural capital that you have to be just as careful about, if not more careful about, than, say, financial capital. Ultimately, the marine environment provides a lot of different services, and if we do not look after it, then we lose things rather irrevocably.

Senator Robertson: I wish to return to the issue of overfishing mentioned by some of my colleagues. When catch limits in New Zealand are exceeded, what penalties are there?

Ms Wallace: Individual fishers, if they get caught, incur penalties. However, the whole system of tracking what people have caught against what they are supposed to catch is poor.

The system is supposed to be subject to an audit, but the New Zealand audit team has more or less disintegrated and even the senior fisheries managers now agree that they might audit a fish-receiving house once every 50 or 150 years. It is that low in terms of the likelihood of detection. The idea of setting up these quota-holder associations has some merit if they can police each other, but it still does not deal with the fact that, if they all stand to benefit from overfishing, they can all collude to conceal it. The basic environmental economics of renewable resources says that if you have slow-growing fish, with low rates of reproduction and a relatively high value, and if they are relatively easy to catch or if the costs of catching them do not markedly increase, then they are likely to be overfished. It makes economic sense to harvest them, mine the resource, and put the money in the bank.

There is nothing in the new institutional arrangements to stop that. It just means that they will do it together rather than not do it.

Senator Robertson: Mr. Annala indicated that the coastal communities and perhaps part-time fishers were not negatively impacted too much by this TAC system. We have found the opposite in our country. How would you describe the impact of your quota system on your coastal communities, where very often the smaller fishery is established?

Ms Wallace: It has varied quite a lot according to who else is in the industry. Where you have communities that are relatively static -- they are all in one place and quite committed to that place and to that stock -- then they have tended to look after that stock within the quota management system. In situations where there are fishers in those local communities, but there are also other companies that are quite footloose, can move around, go into one area, clean it out and go into another, those communities have suffered quite badly. They have seen the big trawlers just arrive, take the fish and go, leaving those small communities without the resource. This is one of the areas where the quota management system needs to be matched or complemented by other controls to limit localized depletion and damage where there are local communities or environments that are sensitive to the take.

It has been variable, according to how homogeneous the fishery is and how local the people are and how committed they are to keeping that stock together.

Senator Butts: Professor Wallace, if I understand you correctly, I do not think you are against ITQs per se. Could you tell me what, in your opinion, would have to be added specifically to the ITQ system to make it viable?

Ms Wallace: I can only take a stab at this. I cannot be sure, because it is a difficult problem, as you well know.

I do not know whether I am against ITQs or not. I would like to be clearly on one side or the other of this debate, but I am not. I have moved from being very much in support of them to having increasing doubts. I feel that they have caused some major problems of their own.

If you were to introduce ITQs and you wanted to avoid some of those problems, then I would say that you should ensure that the other extractive and non-extractive uses of the marine environment are carefully recognized, legitimated and given property rights. They should be given the resources to engage in any necessary bargaining with the industry. Any system that says, "Well you people can all sit down and bargain with each other," will result in the domination of the industry by the big players.

Any system that leaves the recreational fishers to organize themselves without some sort of resources would fail, because the transaction costs of doing that are very high. If there are very many of them and they are not closely involved with each other, it can be very difficult. Any system that does not protect the customary extraction rights of people will also create serious difficulties.

Much more problematic is the issue of how to protect the environment. There must be very robust decision-making rules, and the environmental, scientific and other communities with an interest must be funded for negotiations or discussions. I believe that you have much more in the way of intervener funding. We have none of that here.

There must be robust systems, with independent experts who have a lot of say about what is happening to the fish stocks, and that must be separated from the other processes. Otherwise, the political power of the industry will crank those stock limits up, remove the environmental controls, diminish the environmental research, and so on. You must realize that the more rights the industry has, the more they will use that to be a dominating force in decision making.

I wish I could give you a clearer answer than that.

Senator Butts: Are the small owners and small communities and sports fishermen the big losers?

Ms Wallace: Yes, I think they are, except where the only players are relatively small fishers. If you have a mix of small fishers and big fishers, the small people tend to lose out.

New Zealand did a terrible thing. Before we even introduced the quota management system, we kicked out of the industry, by sheer administrative fiat, anyone earning less than $10,000 or 80 per cent of their income from fishing. We just kicked those people out of the fishery before the quota management system was even set up. That was to save the transaction costs of managing them. It was very unfair and caused a huge amount of hardship.

My point is that we did some of the damage before the quota management system was implemented. We can also say that the environment will be a big loser if you do not control the impacts of trawling, dredging, and various other practices.

Senator Butts: Do you have any aquaculture industry in the small communities?

Ms Wallace: We have aquaculture in a number of places. It is growing very fast. It is not particularly well controlled at the moment, or well administered in terms of dealing with its cumulative impact.

Senator Butts: Is the information that you would like to have access to available anywhere? Does the government have any of it? If it does, do you have a freedom of information law that would enable you to obtain it?

Ms Wallace: We do have a freedom of information act. The difficulty is that when you try to get this information, they charge you $700 to $900 to access it. It is there, but it is not there.

At the moment, the stock assessment process is quite open with regard to the stakeholders talking about what is happening. What is not available is the information about the economics, the ownership structure and so on. That does not exist in any easily discernible way.

Our main information concern is that the quota management system depends crucially on an understanding of what is the stock, what is the yield, what is the catch and effort, and what is that catch per unit. If any of those things is in any way contaminated or biased, your whole decision making is in trouble. Our concern is that our government is running all those quota systems and the stock assessment research through the industry. They have strong incentives for bias and contamination of that data. We do not regard it as likely to be reliable, given the other information we have about their lack of honesty in reporting over the observers and bycatch.

From that point of view, we are worried about the future if, in the name of co-management, we give the information systems and data and research to the industry to manage.

The argument in favour of it is that if they are doing it, they will understand it and buy into it more, but the problem is that if they contaminate it, the whole system falls apart.

Senator Robichaud: Does this problem of stock assessment exist to the same degree in the offshore and the inshore fisheries?

Ms Wallace: In all of them there are considerable arguments about what are the stocks. We know much less about the deep-water stocks, the offshore ones, because the information has been available for a much shorter time. On the other hand, in the inshore area, there are more groups of extractor fishers involved and they tend to argue about the data more. The number of disputes about the inshore information tends to be higher, simply because there are really only commercial fishers in deep-water fishing.

New Zealand's information is very uncertain. As I was saying, the budget for research has been cut by well over one-quarter since 1990, and there was a relatively small amount of money for that to begin with.

Senator Robichaud: What is the reaction of the fishing community to this lack of data for stock assessment? Are those who see what is happening with certain stocks afraid that this lack of stock assessment will affect them in a negative way when it hits the stocks that they are exploiting?

Ms Wallace: It stands to reason that they should be. I have sat in these meetings for the last five years and I have never heard a fishing company representative, or the scientists they hire, say that a particular stock may be in trouble and perhaps we should ease up. I have never heard that. I have listened to 1,001 reasons why the data may be showing that the stock is in decline, but that is not really what is happening. It is because the fish were hiding somewhere, or because the fishers did not know how to fish, or because the water temperature was wrong. After five years, I realized that I had never heard these people admit that perhaps we have a problem and perhaps we should spend some money on it.

I am as amazed as anyone that people who own quota would behave like that. Yet that is what I am seeing. Given that sort of behaviour, what has happened to our knowledge of the fish stocks -- and the fact that, for all New Zealand's boasts about the quota management system, we do not have that information -- the cutbacks in research, you must conclude that the incentives to look after those stocks cannot be that powerful. Although you and I might expect that they would be, it just does not seem to have happened. I do not know why. It must be that those discount rates are much higher than we ever thought, and are driving them to take that money now, regardless of the consequences.

Senator Robichaud: Therefore, if I were a New Zealander and owned part of that stock, I might not necessarily do my best to protect it?

Ms Wallace: That is what we thought would happen, but it is not. The conundrum we have is, why not? I do not know. Looking at the information, and the lack of it about the stocks, looking at the way the industry is constantly trying to push up catch limits and push down the research budget, it just means that there is something else driving them. You would expect them to look after it, since they own these quotas, but they do not. You must bite that bullet and say that something is going on here that we could not anticipate, it has not worked, and we should be extremely careful because of that. I have no explanation. I expected it as much as you did.

Senator Robichaud: If there is a large-scale collapse of the fishing industry, I suppose the government will be on the hook?

Ms Wallace: The fishing industry tends to migrate from one stock to another in New Zealand's exclusive economic zone -- and now increasingly in Antarctica -- therefore the industry does not collapse.

Senator Perrault: Has there ever been an in-season reduction in a quota or a closure of a quota fishery in mid-season?

You say that perhaps more weapons will be required to perfect this system of quotas, but a law is only as good as its enforcement. Have you seen enforcement in New Zealand?

Ms Wallace: I am not aware of one that has been reduced in season, but I could not be definitive. Typically, what has happened is the setting of the catch limit is subject to considerable upward pressure. That is potentially adjusted each year. For instance, this year some of us said that one of the issues that should be looked at is the impact of fishing for scallops by dredging right at the tip of New Zealand in a place called Spirit's Bay. Scientists there have discovered very unusual assemblages of marine invertebrates particularly, including 15 species that are not found anywhere else. They are being totally damaged by scallop dredging and trawling. The government absolutely refuses to talk about it, let alone engage in a remedy.

That sort of thing happens under the pressure from the industry. Enforcement is poor but could be improved, I believe. It has to do with the dynamics of the power the quotas give the industry to bully the government so much. You must somehow limit and control that power.

For instance, we had a major die-off of the New Zealand sea lion, which is an endemic and endangered species. Earlier this year, because there was a biotoxin killing the sea lions, we tried to get the fishing industry to move away and not target squid, where they were drowning these animals as well. The industry was extremely reluctant to do that, even though a sudden die-back is quite rare. They fished on up to the limits that had been set for the season, and then, under significant pressure from ministers, they finally moved off. However, they did not show much forebearance towards the species that was then suffering a considerable catastrophe.

The Chairman: You indicated that you were initially quite supportive of the whole concept of QMS, but now that you have seen it in operation for a number of years, the blackboard economics just does not work. Are there an increasing number like you, Ms Wallace, who are realizing that there are some problems with the blackboard?

Ms Wallace: An Australian economist colleague commented at a conference of economists last year that of all the co-management systems that have been set up, probably none of them are still satisfactory five years down the road. It is ultimately a question of the way you design them, and of understanding what other mix of incentives is better. Just dropping a property-rights template on the problem will not, in itself, provide a solution. You must have a mix of policy instruments, and all of the stakeholders, scientists and those in power, must be vigilant during the system. I wish I could give you a pat answer. I know many New Zealanders do give you a pat answer, but we have had the system for 12 years now and I would say it is not nearly as successful as we had hoped. It has been profitable for the industry, but not good for the environment and the other stakeholders.

The Chairman: Many Canadian witnesses have promoted the New Zealand fishery, the QMS, as an ideal for Canada to emulate, to endorse and to embrace wholeheartedly. You are suggesting that we might need to go back to some of these people who offered New Zealand as the model for us to adopt and question them again?

Ms Wallace: You should look at the empirical basis of the claims made. There have been many New Zealanders saying that what has happened here has been absolutely wonderful. Most of it has been based on theory and hope, not on actually looking at what do we know about the stocks, about the yields, and how robust this information is. There are plenty of people here who claim that it is wonderful. I say to them, "Have you looked at the stock figures?" Mostly they have not. It is all based on faith.

The Chairman: You noted that the industry has been able to bully the minister on some occasions. On page 9 of your brief, you refer to the industry having been able to impose a series of injunctions on the minister's request for reduction in the TAC. In fact, the industry was able to overturn the fisheries minister's decision to reduce the TAC. We would take a jaundiced view of that in Canada. This in fact happened, that the industry was able to have a TAC reduction annulled?

Ms Wallace: The case was interesting in that it went from the high court to the court of appeal. What happened was, the decrease in the catch was overturned essentially on a technicality -- prices for the cost/benefit analysis had not been done. The essence, though, of the court of appeal decision was quite useful in that it made it clear that industry might have property rights, but they were always subject to social control.

There is something that the industry forgets. The difficulty that we have here is that none of the environmental or recreational organizations, or customary Maori organizations, has money to take cases to court and get the environmental side of the law implemented. Usually, the industry does bully the ministry. The minister is rather happy to be bullied -- it suits him ideologically. The industry is currently bullying the ministry and saying that if they do not go through with the co-management proposals that are before the government, they will take legal action once again and sue these people as far as they can.

It is a problem. I believe the fact that they are so wealthy has something to do with the way that they were grand-parented so much quota. They were given it by society. It was approximately $1.8 billion worth. That is quite a lot of money by New Zealand standards, but not by yours, no doubt. That is something you should consider, whether you have strong, robust resources, or something of that kind, to provide money for the other players and for society.

The Chairman: Ms Wallace, I wish to take this opportunity, on behalf of the committee, to extend our appreciation to you for spending your valuable time helping us in our quest to learn more about the question of privatization and the New Zealand experience. It has been an honour for us.

Ms Wallace: Mr. Chairman, I am most impressed by the thoroughness of what you are doing. I look forward to reading your report. Perhaps you can tell me when you are reporting?

The Chairman: We will be reporting on December 2, 1998, if everything goes according to plan. We must report by December 10. There will definitely be a section in the report referring to your testimony.

I ask that the brief presented by Ms Wallace become part of the record of the proceedings of the committee. Is it agreed, honourable senators?

Hon. Senators: Agreed.

The committee adjourned.