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Buyback Programs

Introduction
How Do Buyback Programs Work?
Who Finances Buyback Programs?
Where Have Buyback Programs Been Implemented?
Conclusion
Sources and Recommended Reading

Introduction

Buyback programs reduce fishing capacity through direct purchase. Successful buyback programs achieve multiple goals. They improve resource conservation by reducing fishing pressure on fish stocks, they provide financial assistance to participants who choose to exit the fishery, and they increase the profitability of participants who remain in the fishery by reducing competition for the resource.

Buyback programs have been used in several fisheries throughout the United States and are being considered in several others. They have been authorized under various laws, including the Interjurisdictional Fisheries Act, the American Fisheries Act, and the Magnuson-Stevens Fishery Conservation and Management Act (MSFCMA).

How Do Buyback Programs Work?

The two most common forms of buybacks include:
  1. Vessel Buyback Programs, which purchase excess capacity from a fishery in the form of fishing vessels; and
  2. License Retirement Programs, which purchase excess capacity from a fishery in the form of fishing licenses.
Some programs are designed to retire a combination of fishing vessels and licenses.

Vessel Buybacks

Most vessel buyback programs use a bidding system to determine which vessels will be purchased--purchasing those offered at the lowest bids. Some programs purchase vessels on a first-come/first-serve basis, with price based on either appraised vessel value or a non-negotiable flat fee. The value of a vessel may be estimated based on its history of landings, its length, tonnage, or engine size, or a combination of these and other factors.

Regulations governing the use of purchased vessels vary by program. Some programs may sell the vessels back to the fishing industry for use in fisheries outside the affected area. Other programs may sell the vessels, but permanently prohibit their use in any commercial fishery. Still others may require that purchased vessels be destroyed. Because the resale of purchased vessels for use in other fisheries tends to merely relocate the problem of overcapacity, either permanent withdrawal or mandatory destruction is generally the preferred method of retirement in buyback programs designed as capacity reduction tools.

The resale of vessels for non-fishing purposes can be beneficial to non-profit organizations, research institutions, and others who otherwise could not afford to purchase a vessel. But the high costs of monitoring these transactions to ensure that the vessel does not eventually return to a fishery weaken regulated resale as an option.

Mandatory destruction of purchased vessels best alleviates the threat of exporting capacity to other fisheries and also helps to reduce the threat of capital stuffing in the buyback fishery by preventing inexpensive secondhand equipment from entering the market. But this option also has drawbacks. In addition to raising strong emotions, buyback programs that require mandatory destruction can increase the price paid for vessels, reducing the number of vessels that can be purchased.

License Retirement Programs

License retirement programs are similar to vessel buyback programs. Some programs may allow license-holders to submit bids that set the purchase price of their license. Others may offer a "take-it-or-leave-it" flat payment based on the market rate or a rate designed to encourage a pre-determined capacity reduction goal. Still others may require all license-holders to sell a certain percentage of their capacity, which is measured in vessel capacity or effort units. This is known as "fractional licensing" and, under such programs, participants are then required to purchase additional units from within the fishery if they want to continue to fish.

Some license retirement programs don't restrict participants from returning to the fishery if they hold, or can purchase, another license. Other programs permanently ban participants from re-entering the buyback fishery or participating in other fisheries.

License retirement programs can offer greater capacity reduction per dollar than vessel buyback programs because licenses are less expensive to purchase than vessels. But, for the same reason, they are more likely to relocate overcapacity problems if entry into other fisheries is unrestricted.

Who Finances Buyback Programs?

Buyback programs are generally sponsored by the federal government or co-sponsored by the federal government and the fishing industry. Government-sponsored buyback programs are the most common. These programs purchase capacity directly through grants or provide government-backed loans that can be repaid over time. Co-sponsored buyback programs are generally designed to purchase some proportion of fishing capacity with public funds and then enhance the reduction with industry contributions generated through levies on the license fees or landings taxes of remaining vessels or permit owners.

Government-sponsored buyback programs are often implemented as a form of disaster relief assistance. Because their primary objective is usually to offer financial assistance rather than to improve the economic performance of the fishery, government-sponsored programs are generally not as effective as they could be in reducing capacity over the long term. On the other hand, the personal investment that industry-sponsored buybacks represent makes improved economic performance--and therefore capacity reduction--a primary objective.

A few industry-sponsored buyback programs have been implemented in other countries, but none has yet been employed in the United States. The poor economic condition of most U.S. fisheries makes it difficult for participants to finance buyback programs on their own. In addition, without some form of right to the resource or assurance that a certain percentage of capacity will be removed from the fishery, fishermen have little incentive to invest in capacity reduction.

Where Have Buyback Programs Been Implemented?

Since 1976, buyback programs have been implemented in five U.S. fisheries, including:
  1. Pacific Northwest salmon;
  2. New England groundfish;
  3. Texas shrimp;
  4. Glacier Bay Dungeness crab; and
  5. Bering Sea groundfish.
Together these programs have totaled about $160 million, including $80.3 million in grants and $75 million in loans. They have retired 2,907 permits and either destroyed or permanently retired 597 fishing vessels. The average cost of license and/or vessel purchased under these programs is estimated at $10,000 for salmon and small vessel fleets, $250,000 for mid-sized trawlers, and $10 million for factory trawlers used in the Bering Sea groundfish fishery.

The effectiveness of buyback programs is rarely evaluated. However, in response to a congressional mandate, the U.S. General Accounting Office recently reviewed buyback programs implemented in the New England groundfish, Washington salmon, and Bering Sea pollock fisheries. The resulting report notes that the long-term effectiveness of buyback programs in reducing fishing capacity depends on whether restrictions are in place to prevent re-entry into the fishery, whether previously inactive participants return to the fishery, and also on whether the participants who remain in the fishery have an incentive to increase their capital investment. (Click here to read about market-based management tools designed to eliminate such incentives).

Conclusion

Program design ultimately determines the effectiveness of buyback programs as capacity reduction tools. While all buyback programs are generally effective in removing some proportion of capacity from the fishery in the short term, restrictions on re-entry into the target fishery or other fisheries and the use of purchased vessels, as well as limitations on the capacity of remaining active and inactive fishery participants, determine whether these reductions will erode over the long-term.

Sources and Recommended Reading

Bell, D.M. 1978. Gear Reduction/Buyback Programs in British Columbia and Washington State. Pp. 353-357. In: Limited Entry as a Fishery Management Tool, R. B. Rettig and J.J.C. Ginter, eds. University of Washington Press, Seattle, WA.

Congressional Research Service. 1997. Commercial Fishing: Economic Aid and Capacity Reduction, 14 April 1997.

Federal Fisheries Investment Task Force. 1999. Report to Congress, July 1999.

Government Accounting Office. 2000. Commercial Fisheries: Entry of Fishermen Limits Benefits of Buyback Programs. RCED-00-120, June 14.

Gates, J., D. Holland and E. Gudmundsson. 1997. Theory and Practice of Fishing Vessel Buyback Programs. Pp. 71-114. In: Subsidies and Depletion of World Fisheries: Case Studies, Scott Burns, ed. World Wildlife Fund, Washington, DC.

Greboval, D. and G. Munro. 1997. Overcapitalization in World Fisheries: Underlying Economics and Methods of Control. Food and Agricultural Organization of the United Nations. Prepared as report for FAO Expert Consultancy, Rome.

Kitts, A. and E. Thunberg. 1998. Description and Impacts of Northeast Groundfish Fishery Buyout Programs. Northeast Fisheries Science Center. Reference Document 98-12. National Marine Fisheries Service, Woods Hole, MA.

Muse, B. 1999. Washington State Commercial Salmon Fishery Buyback Programs, 1995-1998. CFEC 99-1N. Alaska Commercial Fisheries Entry Commission, Juneau, AK.

Pacific Fishery Management Council. 2000. Overcapitalization in the West Coast Groundfish Fishery: Background, Issues and Solutions (Draft report for review). Prepared by the Economic Subcommittee of the PFMC's Scientific and Statistical Committee, 16 March 2000.

Schelle, K., and B. Muse. 1986. Buyback of Fishing Rights in the U.S. and Canada: Implications for Alaska. 114th Annual Meeting of the American Fisheries Society, New York, NY.

Washington Department of Fish and Wildlife. 1995. Northwest Emergency Assistance Plan: Vessel Permit Buy Out Program. Seattle, WA.

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