The case of New Brunswick, Canada :How regulations may inadvertently prevent innovation in aquaculture
by Thierry Chopin, Professor of Marine Biology and Director of the Seaweed and Marine Biology and Director of the Seaweed and Integrated Multi-Trophic Aquaculture Research Laboratory, University of New Brunswick, Canada
The way property rights are attributed by governments, and the way governments intervene in the management of these rights, may have an accelerating or became more complex over time, decelerating effect on the evolution of Licensed fishers also benefitted from small subsidies ($5,000/ an industry structure. The situation in site), help with business loans, and technical assistance. It is, the province of New Brunswick (NB) therefore, reasonable to assume that not all of those who were is used here as a case study; however, attracted to the sector were necessarily innovators or early readers will be surprised by the adopters of aquaculture technology. In the early development similarities in their own jurisdiction, particularly in the western stages, average per unit production costs were at $0.95/pound, world, and, hopefully, will be able to reflect on the unintentional whereas the farm-gate price was $6-7/pound. Therefore, some long-term consequences of enacting insufficiently thought-out aquaculture license holders essentially became land-lords, leasing regulations in periods of crises. out their sites for as much as $30,000/hectare/year, before the first
The early phase of development of the aquaculture industry in New Brunswick
Initially, part of the reasons the federal and provincial governments, of Canada and NB, wanted to foster aquaculture development were that they wanted to provide alternative employment in the wake of the decline in the ground fish fishery, brought about by a public management system that encouraged too many fishers in a fishing industry that was in a free-fall, biologically and economically, from the 1970s until the cod moratorium in 1992.
It is not clear whether those with a fishing license were required to surrender their licenses in exchange for entry into the aquaculture program. The offer of salmon site licenses in the beginning was restricted to licensed fishers. In 1989, the number of sites attributed was 15, and the number of sites grew at an average of about 10/year until 1996 (with the exception of a two- year moratorium during this period), with a total of 96 sites being allocated. There appeared to be problems early on, with back- log of requests and delays in administrative procedures, which round of consolidation in the industry.
First round of consolidation in 1996
The first round of consolidation was largely driven by competitive forces, including the declining world prices of salmon, problems with disease risk externalities, and variability in management efficiency among the incumbents.
Issues of health and disease control came to the fore during that time. It became apparent that the stocking of multiple mixed- year classes in the same environment, without a fallow season, promoted disease risk externalities, which was a contributing factor to bankruptcies of some firms during the late 1990"s, leading to the first round of consolidation. By early 2000s, the number of working sites fell to 60, with 42 companies.
Development of the Aquaculture Bay Management Areas (ABMAs) Policy and the second round of consolidation in 2006
The emergence of disease risk externalities resulted in a major regulation change, called the ABMAs Policy, in 2006. Firms were to produce single homogenous year classes of the same capacityin each of three separate bays. By the end of the third year, salmon would be harvested, and the site would remain fallow for a minimum of four months, and the AMBA for a minimum of two months, in order to minimise infections by sea lice and infectious salmon anemia.
The industry was actively involved with the federal and provincial governments in the research/search for a solution. This regulatory change provoked a wave of consolidation, because it favoured companies who were already spatially diversified, and who were large enough to accommodate the new regulation, based upon a three-year spatial rotation, from the time the smolts were put into the pens after Year One.
This regulation likely resulted in a precocious maturation of the industry. It caused some growers to apply for new sites within one or two of the new ABMAs where they were not operating previously, or to attempt to buy or swap leases from other growers. Those who were processors faced potentially unbalanced production from year to year, which may have added to the costs of production.
The rule, unintentionally, tended to favor larger and better- capitalised firms, who were ready to benefit from the economies of scale imposed by the new rule. The regulatory costs imposed by the NB Department of Agriculture, Aquaculture and Fisheries (NBDAAF) and Fisheries and Oceans Canada (DFO) may have unwittingly selected these firms.
The language of the law specifically identifies applicants, for sites or lease sales, who can prove managerial competence, who have access to accounting and legal services to draw up documents, and who are sufficiently capitalised to pay for all of Rope of sugar kelps (Saccharinalatissima) cultivated in the Bay of Fundy, New Brunswick, Canada (photo credit: Steve Backman, Magellan Aqua Farms Inc). the services offered by specialised consultants in fulfilment of the regulatory requirements, which can be substantial.
Such managerial competence was not required at the beginning of the industry, which may have led to speculation by fishers who sought to cash in on the value of site leases and licenses.
The number of salmon-producing firms declined from 45 companies in the early 1990s to two at the present time.
The enactment of this regulation and technological innovation, aimed at disease control, essentially triggered two industrial responses. The first was further concentration of the industry in NB, through the buyout of lease-licenses among those who were not able to achieve the scale necessary to continue production.
The second response was that some growers began considering expanding their production outside of NB, where disease risk externalities are less of a problem, and where the regulatory environment is more propitious; Newfoundland, for example. Moreover, the number and quality of sites in NB, compared to other opportunities elsewhere, are now more limited.
In the present regulatory and technological environment, most site opportunities in NB have already been identified and are being used. Site swaps and amendments to existing sites, to optimise production, are the only remaining options.
The legal structure of Canada with regard to submerged lands
NBDAAF gets its management authority from the NB Department of Natural Resources (NBDNR), which in turn gets its authority from the federal government of Canada. The province obtains title for lands from the federal government for specific uses. However, the process of obtaining a parcel is driven by the applicant. An initially eligible applicant (someone already in the industry or a licensed fisher) would make an application for a specific site. Once the site is approved, NBDAAF requests a title transfer to NBDNR.
In the Canadian system, the producer does not hold title to the submerged land. The producer holds instead three instruments: an Aquaculture Occupation Permit, an Aquaculture License, and an Aquaculture Lease. The Permit is for a renewable fixed term of three years. The License can, in principle, be for up to 20 years; however, the NB Aquaculture Act states that it can be "for a shorter period as is specified by the Registrar".
Further, "the term of an aquaculture license shall not extend beyond the period of time during which the licensee has a right to occupy the site"; in other words, the three-year maximum of the Permit. Finally, there is the Lease, which is normally granted for a 20-year period.
A derivative market emerged very rapidly for the exchange of rights to aquaculture sites, with apparently no move on the part of NB to impose barriers to these exchanges. The title to the land stays with NB; so, what is being traded?
There is some disagreement among those involved in the industry. NBDAAF staff consider the Lease to be the tradable instrument. However, other industry members consider that the License is the instrument having value, because the Lease (along with the Permit) only authorises occupation, not production.
The lease-license bundle has, therefore, taken on the character of a title in a derivative market. This bundle can be sublet, loaned, willed, offered as collateral (and seized in the case of default), or sold to an eligible buyer. However, NBDAAF apparently takes no interest in the values of these transfers and has no public record of them.
Transfers of the bundle are effectively private, even though the public goods nature of this particular market, and the reasons for the public management in the first place, are compelling.
Consequences of the present regulatory framework and the attribution of property rights on the industry structure and its evolution
The history of the industry suggests that the objectives of DFO and the NB government were to provide fisheries license holders in failing fisheries with alternative employment, and possibly to create small family businesses. However, the unintended consequence has been that the industry is, presently, composed of two firms, that also operate in several other countries.
Producers have property rights, but these rights are circumscribed by the province and the federal government. Practically, the right extends only to producing salmon, using a configuration defined in the production plan for a particular site. Deviations from these parameters are strictly controlled, in part because the sites are still officially in the public domain and the desire is to minimise negative external effects on third parties.
The instrument of exchange is the lease-license bundle with a restrictive time horizon of three years and a longer horizon (for the lease) of 20 years. This is essentially a derivative market, because the title to the land itself stays with the NB government and the rules (as well as their costs) define the market. A production plan must be filed every three years as part of the Permit process. Approval for changes in production [for example, increasing the capacity of production, reconfiguring growing sites to allow for the use of different capital equipment, or innovating new production techniques such as integrated multi-trophic aquaculture (IMTA)] is long (up to two years) and can be expensive.
The cycle of production under the ABMAs Policy is three years. Therefore, a producer seeking to make modifications to a production plan is confronted with a six-year planning horizon on a lease that can only be exercised with certainty within three years. It is not hard to see how the current rules could engender costs that would further select for large, well-capitalised companies capable of dealing with the logistics of production.
Regulatory impediments to the development of innovative aquaculture practices
IMTA is a technological innovation that has been developing world-wide in its recent form, although some economies have practiced it in some form for more than 2000 years, both as a means of dealing with the environmental effects of nutrient release and increasing profitability through crop diversification (fish, seaweeds, and invertebrates). However, most areas where this innovation is taking place at a large scale are in countries with a high degree of centralised planning, like China, where enterprises are able to find both the scale size and the regulatory latitude to try different production models.
IMTA in Canada is presently still at an experimental/small commercial stage. Part of the reason for this may be the transaction costs associated with getting approval for technological changes and innovations, and the opportunity cost of land engendered by these transaction costs.
In other countries, it is possible to provide habitat, capture wild larvae or provide cages for grow-out, without provoking a lot of paperwork and delays from the government. In Canada, some of these practices are not allowed as part of an overall production strategy; producers may be, in effect, limited to monocultures, in order to prevent conflicts with other users, but also, possibly, to render analysis, and approval of projects, by NBDAAF as less onerous.
Most changes in production are relatively incremental, and costly to implement. Producers must apply for such changes and approval can take several years. For example, it took eight years to modify the Canadian Shellfish Sanitation Program to make IMTA legal in Canada.
Therefore, the capacity of producers to innovate, even in areas which would yield environmental and economic improvements, is limited by the specificity of the lease and license.
More importantly, innovations may also be limited by the implied opportunity cost of the land. Once a producer goes through the administrative effort of producing a plan for salmon, the spaces allowed for that type of co-culture may not be propitious, for example, for seaweeds and invertebrates. The marginal cost of securing the land for production compared to the marginal benefit from salmon aquaculture could quickly argue against IMTA in Canada, because the marginal costs of securing land may well outweigh the private benefits.
The argument for such specificity in Canada is that producers are using multiple-use public land, of which the title cannot
be ceded under the laws of Canada. However, the trade-offs for such an institution are a slower pace of innovation, a more costly management process that favors firms that can attain monoculture economies of scale necessary to absorb these costs, and ultimately, the delocalisation of firms to other places in the world where these transaction costs are lower.
Learning from the past to, hopefully, enable more flexibility and pragmatism in the evolution of aquaculture practices
Economists have long argued that longer-term concessions to public goods - even as long as 20-25 years - prevents "short termism" in economic planning and may reduce the overall regulatory costs significantly. However, worries over environmental impacts have led many governments to opt for stricter regulations.
At the same time, these considerations need to be set against the reality that too much strictness can ultimately reduce investment and innovation. One solution is the so-called "evergreen lease", already used in the forestry sector: a longer lease (20 years) renegotiated mid-way through at ten years. Strictly adhering to science-based decision-making, rather than arbitrary rule-making, would also help reduce management costs.
The rules concerning who could get a license for aquaculture may have led to the selection of persons who were not well- adapted to the industry as it evolved. In the early years, figures of as much as US $30,000/hectare for a sub-lease was apparently not uncommon.
Eventually these individuals sold out to those remaining. However, would the trajectory of industry adjustment have been slower, and would there have been less speculation, had the program been extended to any resident of NB willing to take a basic course in aquaculture, possibly even targeting individuals of college age, with the added proviso that they have to give up their fishing license as a quid pro quo? One can suspect that, in fact, industry adjustments would have been more gradual, with less economic waste.
Responding to crises, making mid-course corrections, and solving practical problems is not unique to the Canadian aquaculture industry. Along with the regulatory structure, the attempts at controlling disease and parasites may well have pushed producers to adopt rules that further consolidated the industry. Does this mean that mono-aquaculture, by its nature, can only be done efficiently at a large scale, or is this an artefact of the regulatory structure and the rules in place?
NB may not have regulatory models that favor innovation in the industry and may need to provide itself with the regulatory means, and economic incentives (such as considering ecosystem services and nutrient trading credits), to explore different production models and remain competitive. This may require more flexibility and pragmatism in the evolution of its aquaculture practices.
Countries that are able to form large firms, with more solid guarantees over productive areas, and a more flexible and enabling regulatory framework, like China, seem more likely to adopt the IMTA concept and other technical innovations, because such firms have access to scale and something like "title" through affiliation with governments. For Canada, the conundrum is that to be competitive on the world stage it is necessary to innovate in many directions. However, the costs of innovation in Canada is presently quite high, mainly because of the regulatory environment. To be competitive and to innovate, it may be necessary for Canadian regulators to allow more of the "title" to be used by producers and not just "title to produce salmon". Striking the right balance in order to remain competitive is likely to be the next big challenge to the aquaculture industry in NB and Canada.