An analysis of the structural changes in the offshore demersal hake (Merluccius capensis and M. paradoxus) trawl fishery in South Africa

Marine Policy 50 (2014) 270–279

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Marine Policy journal homepage: www.elsevier.com/locate/marpol

An analysis of the structural changes in the offshore demersal hake (Merluccius capensis and M. paradoxus) trawl fishery in South Africa Rachel Cooper a,n, Anthony Leiman 1,b, Astrid Jarre 2,a a b

Marine Research Institute and Department of Biological Sciences, University of Cape Town, Private Bag X3, Rondebosch 7701, Cape Town, South Africa Department of Economics, University of Cape Town, Private Bag X3, Rondebosch 7701, Cape Town, South Africa

art ic l e i nf o

a b s t r a c t

Article history: Received 25 November 2013 Received in revised form 18 June 2014 Accepted 25 June 2014

The hake (Merluccius capensis and M. paradoxus) directed offshore demersal trawl is the most economically important fishing sector in South Africa, generating 30,000 jobs and comprising more than 50% of fisheries value. The industry changed to long term rights (LTRA), allocated in 2006 for a 15 year period. This study investigates the structure of the industry half-way between allocations. Data obtained through government and industry consultation are used to generate a structural representation of this sector, its fleet, vertical integration and horizontal consolidation (e.g. catch-share agreements and product value-adding), and heterogeneity of business models. Vertical integration is an important characteristic of the industry. Nine business clusters were identified, of which three represent 75.7% of rights and 70% of vessels. The findings indicate consolidation is likely at a higher level than rightsholder numbers imply, due to horizontal clustering. This is consistent with an economically mature industry of scale. Retirement and industry led effort-restriction in relation to MSC certification, catch-cost efficiency and a shift to frozen product, led to a decline in vessel numbers, especially wetfish vessels. Industry's response to a broadening of rights access has been to maintain efficiency and profitability through economies of scope and scale by forming clusters, retiring old vessels and engaging in MSC certification to broaden or retain market access. The trend of consolidation since the 2006 LTRA and the record of consolidations and absorptions of smaller businesses suggest that consolidation is probable to continue at a slow but steady pace. & 2014 Elsevier Ltd. All rights reserved.

Keywords: Fisheries policy Rights allocation Hake Industry structure Vertical integration Consolidation

1. Introduction Economically the hake fishery is South Africa's most important fishing sector, contributing over 50% of the overall value of SA fisheries [1,2], with landed catch valued at about ZAR2.5 billion in 2008 [3], currently estimated to be valued at approximately ZAR 5 billion, 7€342 million, as of 2014 [4], and thought to generate around 30,000 jobs [5]. Two related species are targeted; shallowwater hake, Merluccius capensis Castelnau, 1861, fished at
50–250 m, and deep-water hake, M. paradoxus Franca, 1960, fished from
250 to 600 m. The species overlap at
250–450 m [2,6,7]. South Africa's hake trawl industry was formerly dominated by a few large companies, most of which were vertically integrated, i.e. harvesting, processing and marketing their own fish products [8]. Interviews, academic studies and industry reports, concur that

n

Corresponding author. Tel.: þ 27 21 650 5454. E-mail addresses: [email protected] (R. Cooper), [email protected] (A. Leiman), [email protected] (A. Jarre). 1 Tel.: þ27 21 650 2725. 2 Tel.: þ27 21 650 5453. http://dx.doi.org/10.1016/j.marpol.2014.06.006 0308-597X/& 2014 Elsevier Ltd. All rights reserved.

‘horizontal clustering’, in which both new entrants and existing companies have merged with others (e.g. via leasing or joint ventures) also occurs in the industry [8,9]. The issue is not new; Crosoer et al. [9] suggest that the industry's historical shift to production for export during the mid-20th century and the growth of demersal fish exports towards the end of the century may also have driven concentration of ownership. More recently, Raakjær and Hara [8] suggest that rightsholders (in the demersal and pelagic industries) who held small quotas effectively shared vessels, by entering into catch, processing, or marketing agreements, including joint ventures with larger companies and sale of rights. Certainly, the number of functional ‘clusters’ and/or companies (i.e. functioning, fishing businesses or entities) within the industry has changed through time. Clustering means that the market is far more concentrated than the number of rightsholders suggests. The studies mentioned above examined the structure of the offshore hake demersal trawl in South Africa until the early 2000s and appeared in a special edition of this journal. Raakjær and Hara [8] examined the structural changes in two industrial fisheries, including hake, internal changes within companies and changes to participatory structures. Crosoer et al. [9] looked at the integration

R. Cooper et al. / Marine Policy 50 (2014) 270–279

of South African fisheries into global markets and how international market forces shaped local fisheries. Based on current and historical perspectives at that time, both studies predicted that international market forces and a changing economic climate would further concentrate ownership so as to maintain economies of scope and scale that improve profitability and allow companies to spread risk, despite government's intention to broaden the numbers of rightsholders [8,9]. This paper examines (i) whether their predictions were met, (ii) how economic and management forces have shaped the structure of the industry in the recent past, and (iii) in the structural heterogeneity between companies and clusters. One of the previous studies [8] also mentioned that at that point it was virtually impossible to determine broad ownership profiles within the industry. This study attempts to address this for the present time by including information on ownership in the structural description of the industry. The broad aim of the study is, therefore, to describe changes in company clusters through time and the overall structure of the harvest and post-harvest industry that can be contextualised within the recent history of the offshore demersal trawl hake fishery.

2. Brief history and context of the offshore demersal trawl hake fishery The hake trawl fishery is a mature, well-established industry that began in the 19th century, when hake was a bycatch species in the Agulhas sole (Austroglossus pectoralis) trawl fishery [5]. By the early 1900s the demersal trawl fishery had expanded to have a hake-focused component targeting M. paradoxus and M. capensis [10]. In 1990, a hake-focused hand-line fishery was established as an extension of an already existing hand-line fishery that used small boats [3,11]. By 1994 a longline fishery was experimentally introduced, becoming licensed and fully commercial in 1998 [3]. Of the four sectors, offshore trawl sector has accounted for 85% of the total landed catch, inshore trawl 6.5%, longline 6.5% and the handline sector 2% [5], but recent estimates suggest that only about 5% of global Total Allowable Catch (TAC) is taken by longline and o1% by handline [7] (some of the TAC remains unused at present). Regulation of this fishery has not always been forward-looking. Following World War II, catches of hake began to steadily increase and more markedly so during the 1960s to around 160,000 t with an unsustainable yield of 300,000 t reached by 1972 (see [10] for more details). In 1975 a minimum mesh size, observer monitoring system and quotas for countries were enforced [12]. In 1977 a 200 nm exclusive economic zone was established, excluding foreign vessels; in 1978 conservative total allowable catches were implemented and in 1980 individual quotas were instituted, resulting in more stable annual catches of 120–150,000 t [5,10,13]. In 1985 a commission was established to determine how marine resource rights should be awarded, concluding that investment and performance were important criteria for evaluating rights applications, and ultimately leading to the development of the Quota Board in 1990 that allocated rights on these principles [14]. Prior to 2002 short-term rights were allocated based on annual applications; in 2002 medium-term rights allocations (MTRA) took place with rights lasting until 2005, followed by the issuing of long-term rights in 2006 for up to 15 years [15,16]. These apportioned a percentage of the annual TAC to individual rightsholders (rightsholders can be natural persons or companies), and constituted 52 rightsholders including new entrants in the case of the offshore demersal hake trawl of which the five largest constituted 31.9%, 21.8%, 6.5%, 6.5% and 3.54% of the quota,

271

respectively, and the remaining 29.8% was fragmented between the other 47 rightsholders. Following the Marine Stewardship Council (MSC) certification of the majority of the hake trawl fishery as sustainable in 2004 [1], the conditions to receive and maintain on-going certification prompted species (M. capensis and M. paradoxus) disaggregated assessments and management to account for the different dynamics of the two species and due to targeting of M. capensis by the longlining fleet – and coast-combined due to the finding that South and West Coast M. capensis stocks were likely one population [5,17]. Due to the reported problem of distinguishing the hake species commercially or targeting them separately where their distributions overlap, the fisheries themselves are still managed by a combined TAC [7]. Therefore, presently the hake fisheries are regulated by individual quotas issued on the basis of a two-species Operational Management Procedure, which restricts annual changes in TAC to 7 5% although a decrease of 15% may be warranted if CPUE results are well below the recent average [17]. The four fishing sectors that presently comprise the hake fishery operate at different depths and locations and with different gear types, targeting varied sizes of shallow-water hake (Merluccius capensis), deep-water hake (M. paradoxus), or both. Bycatch species, sometimes called “joint product”, such as kingklip (Genypterus capensis) monk (Lophius vomerinus), silver kob (Argyrosomus inodorus)and snoek (Thyrsites atun) are also harvested and sold [11]. The offshore hake trawl sector makes up the bulk of the hake catch by volume [5] and export. Interviews with industry and government stakeholders have indicated that the handline and longline sectors have been particularly hard-hit by the international economic crisis of 2008 and subsequent recession in global markets, leading to decreased volumes and values of these catches in recent years (R. Cooper, unpublished data). One would expect, therefore, that the offshore trawl sector has an increasingly dominant role in the hake industry. Additionally, many of the large companies hold rights or catch-share agreements with rightsholders from the longline and particularly the inshore trawl fishery sectors. The offshore sector, which is both capital and labour intensive, employed
8600 people in the early 2000s with two thirds landbased. Offshore trawl companies owned either wetfish stern trawlers in which fish are kept refrigerated on ice, larger factory stern trawlers in which fish are highly processed and stored in onboard freezers, or a combination of both [8,11,18]. Stern trawlers may by law only fish offshore trawl rights in waters deeper than 110 m. Fish caught on these vessels is either processed at sea (in the case of factory ships), or processed in land-based facilities. It is then sold domestically or exported [18]. Changes in the vessel composition and number are expected to reflect changes in the industry structure and will also be worth investigating. The high level of vertical integration among most of the large companies within this sector has been thought to improve companies' long term viability and profitability through economies of scope and scale that reduce risk and improve profits [19]. Some authors suggest that these vertically integrated companies also pose a challenge for new companies to enter the industry and have frequently absorbed new entrants in the past [8]. Nevertheless business models within the sector are diverse, spanning from highly vertically integrated to simple catch-and-sell operations [9]. Almost all of these companies, or rightsholders have organised themselves into the South African Deep Sea Trawling Industry Association [8,20]. To understand the internal structures of companies that comprise the industry and the flow of funds through the industry, it is important to identify to what level they are currently vertically and horizontally integrated and the diversity of strategies (or behaviours) of processing, marketing and so forth, i.e. the post-harvest structure of the industry, and the industry's fleet structure.

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R. Cooper et al. / Marine Policy 50 (2014) 270–279

Concentration in fisheries as a result of transferable quotas has been well described [21,22], but may be more important in fisheries that historically tended towards concentration [23]. The offshore hake demersal trawl has followed this historical pattern of mergers and reabsorption of entrants [9], although the fishery is not regulated through ITQs. Quotas within South Africa are de facto tradable (although they are de jure non-tradable and government approval is required for any transfer, e.g. buy-over of rightsholder company or merger of rights). As such, much of the literature on ITQs may apply in the South African instance. The main objective of such management tools is to allow economic efficiency within the industry, resulting in increased returns in the industry and more permanent jobs over temporary equivalents [24]. Several studies have examined whether economic, social and ecological goals are met under such management tools [21,23–25].

3. Methods The list of successful long term rightsholder applicants from 2006 for deep-sea trawl was downloaded from the Department of Agriculture, Forestry and Fisheries (DAFF) repository of public information. Rightsholder information was sorted to determine whether rightsholders shared any administrative detail (e.g. contact details or contact person) and whether they had any vessels in common, i.e. to determine whether several rightsholders constituted a cluster. The South African Deep Sea Trawling Industry Association (SADSTIA) webpage was consulted to assess how its members (rightsholders) might have been grouped in 2012. Possible associations between rightsholders were then used to generate a preliminary cluster diagram to represent how rightsholders in the offshore sector appear to be organised in the 2012/ 2013 period to do business together. The resulting ‘structure’ of the industry was subsequently put through qualitative review with a representative of the deep-sea trawling industry for comment and clarification. As an outcome of the consultation process, industry data were provided on quanta allocated to companies over time, associations or amalgamations of companies and company vessel ownership that was current at the time of the interview. The cluster diagram and information was updated to accurately reflect this data. For each rightsholder the quota (as % of total offshore trawl quota) was calculated and values of individual rightsholders were aggregated to represent the proportion of total offshore quota held by each of these clusters. Information on the number of vessels per cluster from the industry data was included. Changes in the number of rightsholders (i.e. participants) in the fishery through time was assessed in the context of various allocation processes, fluctuating TAC, business buy-over's, and vessel numbers through the use of the industry and DAFF data. Changes in vessel type and numbers through time were also determined. Herfindahl–Hirschman indices (HHI), providing a statistical measure of industrial concentration [26], were calculated for the time series. HHI can be used to measure concentration in a number of contexts and is valuable in analysing horizontal amalgamations because these directly affect market (or in this case quota) concentration, which is a feature of market (or in this case industry) structure and measure of competition. The HHI is calculated in this case by squaring the quota share of all firms and then summing these as follows: n

HHI ¼ ∑ ðQSi Þ2 i¼1

ð1Þ

where QSi represents the quota share of company or cluster i and there are n companies (or company clusters) in the industry [26]. Thus HHI in this instance is based on the number of individual

rightsholders and their quotas for the entire time series, and for the period 2011–2013 indices were also calculated using the quota held by the clusters identified. In all the cases, catches by foreign vessels were ignored in calculations and figures; industry data indicated that little foreign catch was allocated up until 2004 (ranging from 12,000 t in 1980 to around 1000 t in 2004, i.e. ca 10–1% of the TAC). For calculations of HHI quota percentages were represented as fractions. The HHI therefore has a maximum value of 1, where 1 indicates that a single company (cluster) has a true monopoly, owning 100% of the quota in the industry. Increases in HHI indicate an increase in concentration and decrease in competition with respect to quota. Finally, qualitative information was obtained on clusters and companies through their websites and through interviews/meetings/consultation with some of the industry's major stakeholders in 2012. This involved meeting with six of the major rightsholders that collectively accounted for 92.8% of the offshore hake trawl quota allocations, which was 78.3% of the entire hake TAC, and accounted for 88% of the industry's offshore trawl vessels (and two inshore vessels fishing offshore, see findings). These interviews provided insights into the level of vertical integration, catch-share arrangements, processing and heterogeneity in business models.

4. Results 4.1. Clusters From the interviews and analysis nine clusters were identified for the 2012 financial year. These comprised 49 rightsholders from the offshore demersal hake trawl sector with an additional two rightsholders from the inshore sector converted to offshore fishing in recent years (Fig. 1). Five of these were medium to large clusters (45% each), two of which landed over 60% of the entire industry catch (i.e. two large), and a further three smaller clusters (o5% each). The ninth ‘cluster’ was a complex association which could be considered a super-cluster made up of three smaller cluster units that collectively constituted 5.9% of the offshore quota. Altogether these rights,
84.4% of the overall hake TAC in South Africa, were caught on 50 vessels. The three largest rightsholder clusters collectively held 75.7% of the offshore quota (i.e. the threefirm concentration index was 0.76) and owned 70% of the active vessels, while the smaller clusters had one or two vessels each. The two-firm concentration index was already 0.63, indicating two of the largest firms took more than half the quota. During 2012– 2013 one of the clusters was undergoing a sale of all of its offshore rights to another cluster. In the course of writing this sale has been finalised reducing the number of clusters to eight and increasing concentration in the industry. It has also recently emerged (late 2013) that another possible consolidation of rights of two medium-sized clusters is under discussion, which if successful will reduce cluster numbers to seven and result in a noticeable change in Herfindahl–Hirschman consolidation index. The larger clusters tended to be owned by shareholders, investment companies, or parent companies (Fig. 2), while the smallest clusters appeared to be owned privately or through a private and employee–shareholder mix. These conclusions were reached through consulting the public webpages and reports of the various companies in early 2013. One of the important drivers in the industry has been transformation and the introduction of a broad-based black economic empowerment (B-BBEE) policy. B-BBEE has been legislated by the South African government as the B-BBEE Act, No. 53 of 2003 with the objective of transforming the economy to redress past social, political and economic inequalities in the country and enhancing the economic participation of black people in the South African economy [27]. Most of the

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Company Clusters 2012/13

A

B

C

D

E

32.1% (27.0%), 11 vessels

30.7% (25.9%), 9 vessels

12.9% (10.9%), 15 vessels

6.4% (5.4%), 3 vessels

1.90%

A1

B1

C1

29.9%

30.7%

0.4%

A2

C2

2.1%

0.4%

E1

D1 0.59%

G

F

E2 D2 4.77%

3.4% (2.9%), 2 vessels

7.3% (6.2%), 4 vessels

F1 3.3%

F2 0.1%

I 7.0% (5.9%), 5 vessels

G1 0.2%

H1 0.1%

G2 1.2%

I1

I2

I3

3.7%, 2 vessels

1.7%

1.5%, 1 vessel

H2 0.2%

I1.1 0.1%

C3

G3 1.1%

E3

1.8%

H 0.3% (0.2%), 1 vessel

D3 0.38%

I1.2 1.7%

G4 0.2%

C4 1.6%

D4 0.22%

E4

D5 0.40%

E5

I1.3 1.8%

G5 0.1%

C5 0.4%

I1.4

I3.2 1.17%

I2.3 0.6% I2.4 0.1%**

0.1%** E1 0.4%

E7

C8 1.2%

I2.2 0.4%

I2.5

E6

C7 1.0%

I3.1 0.36%

0.1%

G6 0.6%

C6 0.4%

I2.1 0.5%

E2 0.9%

E8

C9 0.5%

E3 0.4%

C10 1.2%

E4 0.1%

C11 0.6%

E5 1.3%

C12 0.4%

E6 0.4%

C13 2.0%

E7 0.1%

C14 1.1%

E8 0.3%

Fig. 1. A schematic representation of the structure of the offshore hake demersal trawling industry, showing how rightsholders operate as clusters. The proportion of the total hake quota for the offshore trawling industry is indicated (along with the proportion of the entire hake TAC) and the number of vessels per cluster is given. Data courtesy of Mr. Roy Bross (SADSTIA). In the case of two rightsholders (nn), the rights have been moved from inshore trawl fishery to be caught in the offshore trawling sector. Company G absorbed company E and its rights as indicated (‡) and this was completed in 2013.

Brimstone Investment Corporation Limited

58.1%

Kagiso Trust Investments SH management & staff

Suiderland Dev Corp

0.95% 16.8%

Tiger Brands Ltd. Oceana Empowerment trust

41.9% 11.8%

Others

African Pioneer Ltd 50%

Employee 40% share option

Foodcorp (traded)

AVI

29.6%

Sea Harvest (private company, variety of investors)

Oceana

I&J Pioneer

MarPro

(subsidiary, private company investors, employee shares)

SimPlot (Australia) Pty Ltd)

Viking

Other Clusters…

Fig. 2. A schematic representation of company ownership within the industry, as extracted from company websites. Viking and other clusters were assumed to be private companies due to unavailability of information.

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R. Cooper et al. / Marine Policy 50 (2014) 270–279

industry has complied with this and has become fairly well transformed. Companies themselves have a varied ownership profile, as described in their public profiles. The Sea Harvest Corporation (Pty) Limited was held by its management and staff and a consortium of investors [28]. One, Brimstone Investment Corporation Limited, was a managed investment company incorporated and based in South Africa [29], which also has holdings in Oceana and Tiger Brands. Brimstone and Kagiso both included a diversity of shareholdings apart from food, in sectors such as healthcare and finance, infrastructure and power [30–32]. Oceana was owned by Tiger Brands, Brimstone, an empowerment trust and other shareholders [33]. Tiger Brands Limited, a multi-national company traded on the Johannesburg Stock Exchange (JSE) held shares in food, home and personal care businesses [34]. Pioneer fishing, a trawling and fish processing business, was owned by Suiderland Dev Corp, African Pioneer Ltd and an employee share option [35]. MarPro belonged to FoodCorp, South Africa's third largest food company producing a wide range of products and brands, such as peanut butter, bread, outdoor barbeque equipment and pet food [36]. Irvin & Johnston (I&J), with a long history in the hake fishery and formerly a public company in its own right, became a subsidiary of AVI [37]. AVI had a large portfolio of over 50 brands including food products (snacks, beverages, fresh and convenience

foods), household products, clothing, accessories, shoes and cosmetics. I&J, a chilled and frozen convenience food subsidiary, was one of the core brands of the business. Within this context I&J also partook in a joint venture with SimPlot (Australia) Pty (Limited) during 2012 [38]. Viking and other companies appeared to be privately owned, or ownership was not explicit. The largest clusters had a similar strategy of producing a mix of fresh and frozen product (for product types see Fig. 3) through use of a mix of wetfish and freezer trawler vessels [28,38]. These company clusters were highly vertically integrated so that most products, apart from prime quality whole fresh fish, were quite highly processed and value added leading to a higher price paid per kilogram. The high level of land-based processing meant a higher labour cost and more jobs on land. Because of this, interviewed company managers indicated that their profit margin did not increase with processing, but rather processing was necessary to meet the present consumer demand that had shifted from whole fish to value-added products. Some of the frozen products were processed at sea on board of ‘factory’ freezer ships at a slightly lower cost than land-based processing, due to crew processing fish on-board vessels. Freezer trawled product (from factory and non-factory trawlers) appeared to be slightly more important than wetfish vessel product in terms of volume, according to interviewees. The high levels of processing represented

export fresh, whole, HOGO (head on & guts out) Prime Quality export-quality fillets for export mainly

headed and gutted (H & G) fresh

Wetfish

Chilled landings, higher quality fresh fillets, loins, and other cuts, sold fresh or specially frozen

value added products e.g. crumbed and breaded, generally sold frozen Chilled, processed baby hake, small hakes, H & G frozen (less commonly done) whole, H & G fish to be defrosted and sold on ice by retailers

whole, H & G frozen, sold for reprocessing further down value chain here or abroad

Freezer trawled high value fillets and other cuts produced at sea

frozen fish H & G for defrostring and reprocessing on land to various value added products (crumbed, breaded, sauced, etc.)

Fig. 3. Overview of the variety of hake products produced from both freezer trawled (i.e. seafrozen) and wetfish trawled (i.e. land frozen or fresh) hake.

R. Cooper et al. / Marine Policy 50 (2014) 270–279

a larger expenditure and capital investment by these companies. In both cases companies focused largely on the domestic retail and wholesale export sectors. The three medium clusters had similar strategies with only slight variations between them. Primarily they focused on freezer trawled catch, with one cluster taking a small amount of wetfish catch. Two did almost all processing of product at sea, where it was frozen, and their land-based operations served mainly as a distribution/storage centre from which orders were collected shortly or immediately after landing or sent directly for export. The third, which had some wetfish operations, did some processing and freezing of product at sea, while other chilled product was processed in land-based facilities. All three clusters produced high quality (value) product of largely frozen fillets and some headed and gutted (fresh and chilled or frozen) or PQ (premium quality, fresh, chilled) fish. Their catch supplied the wholesale market, largely export and only a smaller percentage (5–33%, depending on company) for the domestic wholesale market. They were fairly vertically integrated, but did not appear to do their own exporting or distribution, in contrast to the two larger companies. Only the largest (3.3% of offshore quota) of the small clusters was consulted. It did only freezer trawling and minimal processing of fish. The remaining small rightsholder clusters and the ‘supercluster’ of small rightsholders were not consulted or could not be reached, but represent only a small proportion (7.3%) of offshore quota. Very little information could be found from their websites, where such websites existed. 4.2. Vessels and participants A claim of those promoting ITQs is that they increase industry efficiency. However, such efficiency can still occur when quota is non-tradable. This becomes evident in the trend of decreasing fleet capacity in offshore trawl observed from the late 1980s

275

onwards and particularly since 2005 (Fig. 4). Although the presently available DAFF time series ended in 2011, industry data indicated that the number of vessels had further declined to 50 vessels that were actively catching as of early 2013 (industry meetings/interviews indicated that vessels were preferentially not held in reserve, but this fact was not entirely clear for all companies meaning that some may have had extra unused vessels for a time). From 2005 the decreasing number of vessels mirrored the declines in TAC and number of participants. The decline in vessels predominantly reflected decreased wetfish vessels and a few multipurpose (wetfish/freezer) vessels, while freezer trawler numbers remained relatively constant from the early 1990s, with a slight upsurge in numbers in the early 2000s, corresponding to the Medium and Long Term Rights Allocation Periods (M- and LTRA; Fig. 5). During industry meetings all participants stated that they had been eliminating excess vessel capacity, the fleet was aging and old vessels were being retired. They indicated no investment in new or imported second-hand vessels in recent years. Though some felt that wetfish was important to their product mix, there was consensus among the majority of interviewed industry stakeholders that freezer trawling was at the time the preferred fishing method as it had a lower cost per ton of landed fish and less fuel needed to be spent on steaming to and from port to deliver chilled fish within a few days of catching. They indicated that this allowed the industry to remain profitable in the face of rising costs, such as fuel price increases. In short the choice of fishing technique (wetfish versus freezer) is dependent upon a number of interacting factors: fuel price (US$), foreign exchange rates and the condition of the European (largely Spanish) market. The higher the fuel price the less profitable it is to use wetfish trawlers, a weak exchange rate (R/US$) may compound on the fuel price. Conversely, the R/€ exchange rate may make wetfish profitable when the rand is weak and the Spanish demand for fresh hake is high. However, the recent switch

Fig. 4. Changes in number of participants and vessels in the offshore demersal hake trawl in South Africa from 1978 to present in relation to the total allowable catch (TAC) for the entire hake fishery and the proportion of that allocated to only the offshore demersal hake trawl sector. Significant managerial changes are indicated as DTI (under the jurisdiction of the Department of Trade and Industry, 1978), DAF (Department of Agriculture and Fisheries, 1981), DEAT (Department of Environmental Affairs and Tourism, 1983), QB (Quota Board Allocations, 1991), MTRA (Medium Term Rights Allocations, 2002), LTRA (Long Term Rights Allocations for subsequent 15 years, 2006), and DAFF (under jurisdiction of Department of Agriculture, Forestry and Fisheries, 2010). Generated with DAFF data and Mr. Roy Bross' (SADSTIA) data, generously put at my disposal in 2013.

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180 160

Number of Vessels

140 120 100 80 60 40 20

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

Unknown

Wetfish

Wetfish/Freezer

Freezer

Fig. 5. Changes in the number of vessels, by type, in the offshore demersal hake trawl sector, according to data courtesy of Dr. Deon Durholz (DAFF, 2013).

0.40

60 MTRA LTRA

0.35

0.30 40 0.25

0.20

30

0.15 20 0.10

Number of deep-sea participants

Herfendahl-Hirschman index

50

herfindahl index cluster herfindahl deep-sea hake participants

10 0.05

0 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.00

Fig. 6. Changes in the consolidation of rights (quota) in the offshore trawling industry shown through changes in Herfindahl–Hirschman concentration index (HHI; calculated according to allocated quota per individual rightsholder) in relation to the number of participants from 1979 to present. For the years 2011–2013 a comparative HHI is computed based on the allocation of rights by cluster. Generated with DAFF data and Mr. Roy Bross' (SADSTIA) data generously put at my disposal in 2013. MTRA is medium term rights allocation and is from 2002 to 2006 when the LTRA or long term rights allocation was applied and rights were awarded for 15 years.

of Spanish consumers to frozen fish (R. Cooper, unpublished data) and reluctance to pay a premium for fresh product in combination with a weaker Euro during 2008–2012 made the export and therefore catching of fresh hake on wetfish vessels unprofitable. Thus the relationship of fuel price, exchange rate and market demand is quite intricate and has far reaching effects on fleet structure. From the late 1970s there has been an increased broadening of access to the fishery, i.e. an increasing number of participants.

This translates to an increase in competition in the fishery, i.e. decreasing concentration represented as Herfindahl–Hirschman index (HHI) values for the allocation of quota per individual rightsholder (Fig. 6). This trend sharpened from 1994 onwards as the number of participants in the industry rapidly expanded, from 28 in 1994 to 56 by 2000, in the post-apartheid era. Following MTRA and LTRA in 2002 and 2006, respectively, the number of participants once again declined, from 53 in 2002 to 52 in 2006 and 45 in 2013, as did HHI, from 0.28 in 1994 to 0.18 in 2002 and

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0.16 in 2006. However, from about 2008 onwards despite declines in the number of participants, the HHI (i.e. concentration of quota) increased slightly and slowly to 0.19 and 0.20 as of 2013. For the years 2011–2013 a comparative HHI was calculated by cluster and these indices were slightly higher than for single rightsholders, 0.23. This suggests that there is less competition and more concentration of quota in the industry than would be assumed purely on judging the numbers and rights-holdings of individual participants.

5. Discussion This study provides an understanding of the basics of the structure and patterns of aggregation within the offshore demersal trawl sector of the hake fishery in South Africa at the beginning of 2013. This represents the fundamental structure of the entire hake fishery, since the offshore sector accounted for the bulk of the industry and hake quota allocations (86.8%) in South Africa and an even larger proportion of the catch in the years up to and including 2012. Furthermore, large companies within the offshore fishery also held rights or were otherwise publically affiliated to rightsholders in other hake sectors. That clustering, i.e. aggregation, of rightsholders in the fishery was an important behaviour was predicted from anecdotal evidence [39–41] and allusions in the literature [9]. This was confirmed through consultation with industry and analysis of quantitative data. Decreasing vessel numbers coupled with historical increases in rightsholder numbers suggested that they must share vessels. Indeed both industry data and data on companies and vessel ownership from the 2006 LTRA showed this. Subsequent to the LTRA participant numbers in the industry had decreased which may be equated to consolidation. Therefore, despite a surge in rightsholder numbers in 1995/1996, since the 2006 LTRA the numbers have once again begun to decline as rights or companies have been bought over. Consolidation is regulated legislatively but it has been allowed, as outlined briefly in the court case Surmon Fishing (Pty) Ltd v Compass Trawling (Pty) Ltd (162/2008) [2008] ZASCA 142 (27 November 2008); pooling of rights has been allowed, and according to this court case was encouraged, subject to the approval of the relevant minister (presently the minister of DAFF). Catch share, processing, joint partnership and other agreements that represented horizontal clustering were also commonplace, meaning consolidation may have been effectively at a higher level than participant numbers implied. Indeed the present structure of the industry suggested that the effective number of fishing company entities was much lower than the number of rightsholders suggested. A higher HHI, indicating a higher level of consolidation, by cluster versus by rightsholder also suggested that there may be less competition and more consolidation than a simple glance at the number of participants would reveal. Many larger clusters (companies) were owned in part or whole by parent companies. This means that these companies were, in some cases, indirectly traded on the stock exchange, potentially widening the availability of ownership in the fishery and therefore beneficiaries. Conversely, it meant that a few investment companies and their executive boards had a large influence on the entire fishery, its profits and indirectly (or directly) on its operation through economic tools as well as stood to benefit the most. Vertical integration as previously found [8,19,42] was an important characteristic of the industry with at least 89.4% of offshore quota caught and processed in vertically integrated companies. The two largest clusters of companies (collectively 62.8% of offshore quota) were highly vertically integrated, performing everything from fishing to marketing and distribution.

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Only one of the interviewed companies sold most of its product as unprocessed. It is important to note that the industry is mature i.e. that there are no resource rents to be had from harvesting the resource below sustainable levels (as has happened in many fisheries in an early or immature phase). In economic terms, there are only normal profits available unless a cost saving or marketing edge can be obtained by companies. It is this need for an ‘edge’ that has driven the industry's high level of vertical integration and a fairly stable structure where the main changes have been in the direction of rights consolidation, at least within the present context of long term rights. The previous major change to the number of participants and therefore industry structure occurred when the MTRA and LTRA processes were begun 2002–2006 and there was a gradual decline in participants thereafter. Based on the historical perspective of this post-LTRA consolidation, it seems probable that some re-shuffling of structure may occur after the rights are reviewed at the end of 2020. In the context of management it is important that regardless of future rights allocations that a functional dialogue be continued between the management agency, industry and research [7]. It is to be expected that the heavy capital investment in the offshore hake trawl industry's present participants will maintain the long term view of this industry. Long term rights and thus investment security for companies certainly will have benefits in this regard, as does having an organising agency such as SADSTIA that acts as a unified communicator for this dialogue in the face of changing numbers of participants and mergers. There have also been gradual structural changes in the fleet and industry operations, largely increased vertical integration and value-adding to products. In the years directly preceding 2013 much fleet downsizing was driven by the establishment of an industry-led effort restriction (number of allowed sea days) based on trawler engine horsepower in 2006 [41], and motivated by MSC certification initiatives. Throughout the time series the removal of fishing vessels was said to represent the removal of excess capacity from the fleet which necessitated extra maintenance costs. The majority of removed vessels in recent years were wetfish trawlers, while freezer trawler numbers remained more consistent. This matched with the quantitative trends observed in export product displacement (R. Cooper, unpublished data) and with qualitative information provided by industry in a favouring (by most clusters) of sea-frozen product due to a lower catch cost per ton of landed fish, particularly in the face of rising fuel costs in the last decade. The two largest clusters in offshore demersal trawl (60.7%) continued to have large land-based processing facilities and produced products that were highly value-added and processed. While 2/3 medium-sized companies processed fish on-board of freezer vessels and only 1 company owned a wetfish vessel and land-based processing facilities. From meetings with the largest of the small clusters it would appear that processing on freezer vessels was the main strategy. From this and the fact that wetfish vessels had declined to numbers almost as low as freezer trawlers by 2011, and given the slightly lower capacity but a faster turnaround time of wetfish trawlers, an estimate of about 40% that were land-processed in the trawl industry seems a reasonable estimate for the present time. This is contrary to what Sumaila and Steinshamn [43] found most economically efficient for the vessel composition of the hake trawl fishery in neighbouring Namibia, which targets the same hake species with similar vessels. They suggested that 100% of quota to wetfish vessel allocation would be the most economically efficient allocation of TAC and would generate a high level of employment. However, they cautioned against a policy that followed this allocation as it might have unintended environmental impacts and the

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industry itself may be prone to fluctuations in the face of a changing social and ecological setting [44]. According to the results here for South Africa and the industry interviews the situation has changed from a primary focus on the formerly very profitable wetfish market in Spain (the same chief export market for Namibia [43]) until 2008, to a largely processed and frozen fish product market. A large quantity still went to Spain, but France, Germany, the UK, Australia, Italy and Portugal featured in the frozen value-added product market (R. Cooper, unpublished data), following an international market change with the Leeman brothers 2008 financial crisis and the on-going recession and banking crisis that was precipitated in Europe, particularly the downturn in the Spanish economy. Many companies cite a reduced market for fresh fish in Spain, the unwillingness of buyers there to pay a premium for fresh fish, preferring instead a cheaper frozen product, and the resulting lower value of fresh fish (due to a lower demand), along with the high fuel cost at present and the fuel-intensive nature of wetfish trawlers, as the reasons for the preference of freezer trawlers and sale or decommissioning of some of their wetfish trawlers. South African companies have had the freedom to apportion their quota between wetfish and freezer trawlers at will, as opposed to the Namibian situation with specifically allocated quota. In Namibia 70% of quota is allocated to wetfish vessels and 30% of quota is allocated to freezer trawlers [45]. This has allowed them to remain profitable and flexible in a changing political and economic climate, as well as presumably an environmental one [46,47], since they could change their catch and process operations to meet changing international consumer preferences, fuel prices and overall markets. The ability of the South African industry to be able to apportion its quota to freezer and wetfish vessels freely is important for maintaining company viability in a changing economic situation. A potential future area of study would be to examine the influence of exchange rate and fuel price and their interactive effects on fleet structure with regard to vessel type (freezer vs. wetfish) in the context of economic efficiency and (model) scenarios with different catch rates or spatial distribution of catch.

impact on the long term viability of rights. It will also help to inform whether management objectives, particularly social ones competing with economic efficiency, will realistically ever be met. Consolidation along with industry-led effort limitations is reducing the vessel capacity and no new vessels have been purchased in the last decade. There has been a preference towards freezer trawling since 2008, evidenced in a reduction in wetfish vessel numbers in the situation of an aged fleet. Following the rights allocation, industry's response to maintain efficiency and profitability through economies of scope and scale has been to form clusters, to retire old vessels and to engage in MSC certification to broaden or retain market access. There is a need for further studies on the interplay of economic, social and environmental drivers on fleet composition and resulting economic efficiency, e.g. modelling studies in a systems context.

Acknowledgements Industry data, which was invaluable to this chapter, was kindly provided by Mr. Roy Bross from data he had personally gathered since the late 1970s and we are very grateful to him for sharing these. Data was also kindly provided by the Department of Agriculture, Forestry and Fisheries, with particular assistance from the Demersal Scientific Working group members Dr. Deon Durholtz and Mrs. Tracey Fairweather. We would like to thank the Andrew W. Mellon Foundation and the National Research Foundation (NRF) for providing funding that made this research possible. Opinions expressed and conclusions arrived at are those of the authors and are not necessarily to be attributed to the NRF. Support by the South African Research Chair Initiative, funded by the Department of Science and Technology, Republic of South Africa and administered by the NRF, through the Research Chair in Marine Ecology and Fisheries is gratefully acknowledged.

References 6. Conclusion In conclusion, the qualitative and quantitative data in this study complemented and agreed with each other and with information previously stated by stakeholders or alluded to in the literature, indicating that the data were fairly reliable. Consolidation, both vertical integration and horizontal clustering (i.e. catch, processing or other joint agreements), in the industry appeared to be high, as consistent with an economically mature industry of scale. Further consolidation has occurred since and as predicted by earlier studies, and continues to take place. The recent trend in industry participants and in company buy-over's since the 2006 LTRA and the historical record of consolidations and absorptions of new entrants imply that consolidation is probable to continue at a slow but steady pace until the next rights allocation. It is possible that it may begin to slow towards the rights allocations in 2016 and 2021 due to concerns in investment in the face of uncertain future allocations. Merely examining the number of industry participants is a poor indicator of the actual consolidation level, for example in the 2012–2013 period there were between 48 and 45 participants, but only 9 and 8 effective entities (clusters), respectively. Overarching ownership by investment corporations or other bodies make overall ownership even less clear. As such, it would be a useful exercise for management to have a full analysis of structure of fisheries and to understand how management and a changing economic climate have led to structural changes prior to allocating rights, as the context of the industrial structure could have an

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