Thorolfur Ma+hiasson, University of Iceland Mo#va#on •  How did the ITQ system mi#gate shocks created by the rise and fall of the Icelandic financial sector in the first decade of 2000? •  Did the ITQ system amplify or damp down the shock? •  What alterna#ons are being made to the ITQ system as a result of the collapse of the financial sector in Iceland in October 2008? Overview •  Development of ex-­‐vessel price, lease price and price of permanent quotas –  Law of one price, does it hold? •  Balance sheet items through boom and bust •  Crisis reac#on: Share the resource rent –  Recent aPempts •  Will rent sharing hurt equity of fishing firms? PRICING THE RIGHT TO FISH AND THE EX-­‐VESSEL PRICE OF FISH Theory meets facts of live •  Sophis#cated theories for rela#onship between lease price and asset price of produc#ve assets (Asset value of ITQs, value of publicly traded fishery companies) •  Rental price equal to net income for holding or opera#ng an asset •  Asset price equal to discounted expected net income accruing from holding or opera#ng the asset Sources of vola#lity •  Lease price: Product price, TAC, cost of inputs •  Asset price: Lease price, interest rate (influences discount rate and rental cost of equipment), expected poli#cally mo#vated changes of the system, expected changes of cost of inputs, expected changes of price of outputs •  Some above parameters subject to herd mentality! 4000
1000
2000
3000
ITQ Permanent Quota Price
400
300
200
0
100
0
1996m1 1998m1 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1
time
Cod price direct sale
ITQ Lease Price
Cod price market
ITQ Permanent Quota Price
Law of one price, cod? •  Lease price=ex-­‐vessel price – opera#on costs – compensa#on for capital •  But: –  Lease price higher than ex-­‐vessel price in direct sales for long periods –  Lease price some#mes higher than ex-­‐vessel price at fish markets •  Rem: Monthly averages…… but •  Price of permanent quotas jumpy! 400
300
200
100
0
1996m1 1998m1 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1
time
Cod price market
ITQ Lease Price
400
300
200
100
0
1996m1 1998m1 2000m1 2002m1 2004m1 2006m1 2008m1 2010m1 2012m1
time
Haddock price market
Haddock lease price
Haddock price direct sale
Haddock, law of one price! •  Seems more likely •  Pictures for other demersal species more like haddock than cod….. Price in two markets for ITQs •  The ra#o A/L=Asset price/Lease price bounded –  Somewhere between 5 and 20 •  Asset price at quota market and asset price at the stock market should be (almost) the same if buyers and sellers in both markets process informa#on in similar manner University of Iceland
15
In the range of 9 to 13
10
Learning?
5
In the range of 3 to 14
0
1990m1
1995m1
2000m1
month
2005m1
2010m1
Asset price over lease price, cod, Iceland
Assetprice over lease price, snapp
University of Iceland
Markets for ITQs, forecasters make different forecasts •  Publicly traded fishing companies –  Buying a share implies that the buyer indirectly buys part of the permanent (long term) quota holdings of the company •  The stock market must indirectly evaluate the value of permanent ITQ that a company has University of Iceland
Management buyouts 30-1
Stock market undervalued 1400
1200
1000
800
600
400
200
0
Qouta market
University of Iceland
ne
4
Ju
04
20
03
/2
00
3
20
02
/2
00
2
20
01
/2
00
1
20
00
/2
00
0
20
99
/2
00
9
19
19
98
/1
99
8
99
/1
97
19
19
96
/1
99
7
The two series should be equal
Weighted average
More irregulari#es •  Law of one price does not hold in two markets for the same product •  Does that mean that the quota market is immune to herd mentality? •  Look at comparison with other Icelandic asset markets 800
600
400
200
0
1996m1
1998m1
2000m1
2002m1 2004m1
Year and month
Real estate prices
ITQ price index
2006m1
2008m1
Stockmarket index
University
Iceland
Sources: Central Bank
of Iceland,of
Icelandic
Stock Exchage, FMR
2010m1
Lessons? •  ITQ index slower to jump than the stock market (which consisted mainly of financial firms at the #me of jump) •  ITQ index more vola#le than real estate •  The bubble in stock prices infects the ITQ price •  Note that miscalcula#on of future prices not uncommon, see next slide… Lessons •  Asset price of ITQs vola#le and prone to same sort of overshoo#ng as share prices •  Law of one price does not hold across different means to buy quota rights (firm vs quota market) •  How to adjust, tune and arrange the balancesheet: Fishing firm operators biggest worry? University of Iceland
BALANCE SHEETS OF THE FISHING SECTOR (EXCL. PROCESSING) Value of ITQs 1997-­‐2010, running prices, millions of ISK Value of ITQs 800000 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total assets of fishing firms, running prices ISK, authors es#mate 1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total debt, millions of ISK, from the accounts 500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Equity, authors es#mate 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 SHARING THE RESOURCE RENT A long prelude •  A rudimentary ITQ system introduced in 1983, along with effort restric#ons for some vessels •  The ITQ part of the system lost weight un#l 1990 when a “comprehensive” system (with smaller loopholes) was introduced •  All opinion polls taken have shown a 67-­‐70% majority for some form of rent sharing –  See my papers: Closing the open sea, Rent collec#on, MMR poll Feb 2011 The 2002 Catch Fee •  Catch fee was supposed to become 9,5% of calculated rent •  Rent was calculated by deducing price adjusted 2000 costs from the revenue the previous year •  Did subs#tute some older fees •  Not a considerable source of new revenue •  Double dividend related to fixing a low ex-­‐vessel price of catch The 2002 Catch Fee ⎡
⎤
P
CPI
catch catch
t−1
(⎢ 1−0.398)Pt−1 Qt−1 −6218 −17568 ⎥
P
CPI
⎣
2000 ⎦
CEfeet =0.095
catch
Et−1 Qt
oil
t−1
oil
2000
( )
The 2012 catch fee •  General fee: A fixed value per Cod-­‐Equivalence kilo, cost-­‐recovery •  Special fee (rent sharing) •  Small quota holders pay less special fee than those holding 100 CE tons or more •  Catch fee is considered a cost when income tax of fishing corpora#ons is calculated •  Amor#za#on of quotas is deducible from the fee-­‐
base The 2012 catch fee •  52% = 80%*65% of computed rent calculated separately for demersal and pelagic fisheries •  Computed rent given as: –  Value added in fishing and fish processing minus labor costs minus imputed rental cost of capital The 2012 catch fee •  Will generate 3-­‐4 #mes more income for the public purse than the 2002 fee •  Is constructed to reduce incen#ves to fix the ex-­‐vessel price of fresh fish at an extraordinary low level Other proposed changes •  Abolish perpetuity of quotas –  Offer 20-­‐year renewable contracts •  Transfer of quota at a cost –  3% of transferred quota back to Ministry of Fisheries •  Half of increase in TAC will be rented at market price •  MofF has set a side a share to distribute to temporarily endangered villages SHARING THE RESOURCE RENT, WILL IT HURT EQUITY? What if? •  Assume that the catch fee had been implemented in its newest variety as soon as the year 2000. •  How would that have affected the balance sheets of Icelandic fishing firms? •  Look at the fishing sector as one Total assets (lower line=with fee) 1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 2003 Heildareignir án gjaldtöku 2004 2005 2006 Heildareignir með gjaldtöku 2007 2008 2009 2010 Value of quotas (lower line=with fee) 800000 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 2003 Veðrmæ# kvóta án gjaldtöku 2004 2005 2006 Verðmæ# kvóta, gjaldtaka 2007 2008 2009 2010 Total debt (lower line=with fee) 500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0 1997 1998 1999 2000 2001 2002 2003 Heildarskuldir án gjaldtöku 2004 2005 2006 Heildarskuldir með gjaldtöku 2007 2008 2009 2010 Total debt (blue line=with fee) 700000 600000 500000 400000 300000 200000 100000 0 1997 1998 1999 2000 2001 2002 Eiginfé (endurme#ð) án gjaldtöku 2003 2004 2005 2006 2007 Eiginfé (endurmeturið) með gjaldtöku 2008 2009 2010 Lessons •  A fee would not have affected equity badly •  The reason that equity is reduced is due to effect of the exchange rate on ISK denomina#on of debt •  Would have entered the crash with 5 #mes less debt than they did •  Fee would foster financially more resilient fishing firms!