Publication: October 2018 [rev. edition November 2019]
Short link to this posthttp://bit.ly/2rzAZQh
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Authors: Profundo: Ward Warmerdam, Barbara Kuepper, Jeroen Walstra, Mara Werkman, Milena Levicharova, Linnea Wikström
MRAG: Daniel Skerrit, Laura Enthoven
Robin Davies Consulting: Robin Davies

Background
Title page of the study

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The aim of this study is to provide the Members of the European Parliament’s Fisheries Committee with a clear description of the corporate structure of the EU seafood industry (fishing, processing and the retail market). It provides a description of both the horizontal and vertical integration in the industry. The study, to the extent possible within the scope of the research, also explains the role of the third country operators and intermediaries.

Issues around vertical integration centre on what drives a firm to vertically integrate; why a firm will buy out one of its suppliers or customers or in some other way internalise the production of an intermediate good. In commercial fisheries there is one added dimension. The resource exploited – fish – is not always characterised by a private property rights structure. Rather, the fishing grounds are either common property or open access resources.

Some stakeholders are concerned by the increase in integration. The main concern is not based on economics but on equity and social justice. Fishing has been a family tradition in many communities. And while evidence suggests that integration can make fisheries more efficient, some find the potential gains in efficiency to be outweighed by social and other costs. These costs include the decline in independent fishermen and the disruption to coastal communities because of lost revenues and jobs.

This research is intended to document the evidence and provide an analysis of the current level of integration at the EU level.

Aim

The aim of this study is to provide a clear description of the corporate structure of the EU seafood industry. It further provides a description of the drivers and mechanisms of integration in the industry.

Methodology

The research combined both quantitative and qualitative research methodologies. For each of the EU Member States with a coastline, an analysis of the company structures of the main fish catching companies was carried out, and interviews were conducted with stakeholders. Additionally, empirical models were developed to estimate the impact of integration on employment, corporate income, vessel productivity and sector productivity.

Definition of integration

Integration could take a number of different forms. This could generally be classed as: structural and non-structural. Within these two categories integration could be vertical or horizontal.

Structural vertical integration is defined as the process of investing up or down the value chain. Structural horizontal integration could take two forms: the addition of new vessels or the acquisition of peers. A number of informal arrangements can be considered as non-structural forms of integration. These include: off-take agreements, quota swaps, or quota leasing.

Findings

Quantitative

The quantitative analysis resulted in the following findings: The number of employees is not affected by any measure of horizontal integration. However, wages and salaries of total crew decrease 5.5% on average when the average number of vessels per enterprise increase by one vessel. In terms of income, all three measures – income from landings, live weight of landings and value of landings – decrease with integration. Additionally, vessel productivity decreases with integration. These decreases may be explained by the fact that vessels which are acquired may become ‘inactive’. This affects averages calculated with the number of vessels.

Sector productivity is not affected by integration. This indicates that even though some vessels may become inactive, the fishing effort of the active vessels does not decrease. This is evidence of improved firm efficiency.

Moreover, when the average vessel capacity per enterprise increases ten tonnes, the kilowatt (KW) days of effort (or kW fishing days) increase by 1%. Indicating that increased vessel capacity, leads to increased fishing effort.

Drivers & mechanisms of integration

The degrees, mechanisms and drivers of integration vary significantly among the EU Member States. These processes are affected by a broad range of different factors, many of which are inter-linked in diverse ways.

The observed trends generally fall into three broad, inter-linked categories: regulatory environment; natural resources, and; firm performance. Under regulatory environment, key factors driving or hindering integration are ease of access, regulatory clarity and stability, and fisheries management system. Factors related to natural resources found to influence integration, include fishing segment, access to fish stock, and historical factors. Two factors related to firm performance affect the processes of integration: income and profitability, and; the supportive role of POs.

Conclusion

The empirical analysis found that the number of employees is not affected by any measure of horizontal integration. However, wages and salaries of total crew decrease 5.5% on average when the average number of vessels by enterprise increase by one vessel. In terms of income, all three measures – income from landings, live weight of landings and value of landings – decrease with integration.  Additionally, vessel productivity decreases with integration. On the other hand, sector productivity – as measured by days at sea, fishing days, or number of fishing trips – is not affected by integration. The decreases in average income, wages, and vessel productivity may be explained by the fact that vessels which are acquired may become ‘inactive’. This affects averages calculated with the number of vessels. Sector productivity does not decrease as the active vessels may be utilized more intensively.

Regarding vertical and horizontal integration, a number of trends are observed. Non-structural integration is more common where structural integration may be hindered. For example, where the development of structural vertical integration in hindered by costs, ease of access or unstable supply of raw materials, offtake arrangements are more common. Similarly, non-structural horizontal integration through quota swaps, trading, leasing and renting, takes place where legislation permits these activities, companies seek to optimize their fishing plans, and fulfil their obligations under the discard

Various factors drive or hinder structural integration. This research has found that the form of fisheries management system is not key in explaining the differences. Regulatory environment, natural resources and related firm performance are key.

Recommendations

Given that recommendations to improve the regulatory environment and access to natural resources could have impacts on legislation, and the fact that the empirical findings are based on general national level data, one key recommendation is that further econometric analysis is needed. This econometric analysis would be carried out on a company level dataset. Such a comprehensive EU-wide seafood industry detailed company level dataset does not yet exist. However, this study has already laid the groundwork for such a dataset. The suggested econometric analysis would feed into policy recommendations that mitigate the negative impacts of processes of integration and maximize their benefits. This current study has found that where structural integration has taken place companies were more able to develop financially sustainable fish plans, respond to changes in legislation, and strengthen the negotiating position towards buyers. Respondents stated that where integration has taken place, in some cases there was a negative impact on employment, however, in general the conditions in the sector improved.

A further recommendation from this study is for relevant organisations to develop comprehensive visions and coherent and reliable legislative frameworks for the fisheries sector.

Another recommendation relates to access to natural resources. In countries where there were sufficient natural resources, integration was more common. However, availability depends on several factors, not all of which are under the control of national authorities. In countries where access to natural resources was limited, particularly in the Mediterranean, aquaculture was developed. Policy frameworks incentivizing aquaculture development in resource scare jurisdictions could generate both employment and income.

A final recommendation is to foster the development of markets for non-TAC and by-catch species. In light of the discard ban and of stock restrictions in some fisheries, this could prove an effective channel for fishing companies and processing companies to maximize their financial performance while minimizing waste and overfishing.

Link to the full study: http://bit.ly/629-176

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