The Economics of Illegal Fishing
Incentives for Investment in
IUU Fishing Capacity
Aaron Hatcher
University of Portsmouth, UK
Is IUU fishing likely to be driven by a “spillover” of
excess capacity from regulated (EEZ) fisheries?
Focus of the paper
• FAO definition of IUU as “Illegal, Unreported and
Unregulated” is inclusive
• Focus on vessels with no access rights, operating outside
any normal regulatory environment, e.g., FONC vessels
in international waters
• In the absence of management, fishing effort is (only)
determined by market forces, e.g, the supply of fishing
capacity
What do we mean by “capacity”?
• Capacity is a measure of output, not capital stock
• Fishery managers generally use “capacity” to refer to
physical capital and its output
• All else equal (technology, prices, etc.), physical capital
and (unconstrained) output are closely related
• Capacity ≈ physical capital
Analysis of the question
• Consider investment in IUU fishing as a normal
investment decision
• The decision to invest depends upon (expected)
benefits and costs
• Assume, e.g., no non-pecuniary motivation against (or
for) illegal fishing
A simple investment model
T
T
PV     t K     pt qt K   ct K 
t
t 1
t
t 1
at t = 0, where total operating costs ct are given by…
c t K   c K   c  K   c K   c K   c K 
r
t
c
t
m
t
a
t
p
t
where the cost categories are denoted
r
normal running costs (fuel, ice, etc.)
c crew costs
m routine maintenance costs (repairs, safety equipment)
a administrative costs (registration, insurance, etc.)
p permit and quota (management) costs
The total expected return (ER) is
T
ER     t K    CT
t
T
t 1
where CT is the value of the capacity at time T
Taking account of the inherent riskiness of investing in fishing,
the value of fishing capacity is given by ER less a risk premium R
T
C0     t K    CT  R
t
T
t 1
• C0 is equivalent to the willingness to pay (WTP) for an
investment in capacity K
• In a perfect market at equilibrium, C0 will be the
(purchase) cost of capacity K
• For those already in the fishery, C0 is the opportunity
cost of capacity K
Benefits and costs of IUU fishing
• high-value species, therefore high revenues if there is
access to markets?
• running costs: fuel, ice, etc., at normal prices?
• crew costs: mostly low cost labour?
• maintenance: lower (weak flag requirements)?
• administrative costs: lower (weak flag requirements)?
• management costs: zero?
Benefits and costs of IUU fishing
• Revenues: the same or higher than in a legal fishery?
• Operating costs: the same or lower than in a legal
fishery?
• Assume the end value of capacity is independent of its
mode of use
• Difference in WTP for legal and IUU capacity depends
on costly enforcement events…
• …an “excess risk premium” RE
C  C  RE
I
0
L
0
• Expected returns from IUU fishing are only lower than
in a similar legal fishery if RE is high
• If expected returns are high, WTP for capacity is high
• Unless RE is high, IUU investors’ WTP for capacity
will match normal market prices…
• …availability of “cheap” capacity is not necessary for
investments in IUU fishing
C0
Cost
of
capacity
DN
DS
SN
SS 1
SS 2
0
K1
K2
Quantity of capacity
K
IUU capacity demand and supply: scenario 1
• Secondhand capacity prices are not determined by
demand from IUU investors (why?)
• Demand for capacity by IUU investors is price inelastic
• Availability of cheap capacity has only marginal impact
on total IUU capacity…
• … but delivers a “windfall gain” to IUU operators
C0
Cost
of
capacity
SN
SS 1
DS
SS 2
0
K1
K2
Quantity of capacity
K
IUU capacity demand and supply: scenario 2
• Secondhand capacity prices might be determined (in
part) by demand from IUU investors
• Demand for capacity by IUU investors is price elastic
• Availability of cheap capacity has a significant impact
on total IUU capacity…
• … and so is a key “driver” of IUU fishing
Conclusions
• Available evidence suggests that IUU fishing is profitable
• A “spillover” effect from overcapacity in regulated
fisheries is unlikely
• Key to reducing profitability of IUU fishing is increased
likelihood of costly enforcement events and/or denial of
access to markets
• Only then would “cheap” capacity be a significant driver
of IUU fishing