Fragmentation is bad for the business of fishing

30 September 2016

Felix Ratheb, Sea Harvest Chief Executive Officer (CEO), elaborates on why fragmentation is bad for the fishing business and the impact it would have on the industry should more companies be allocated fishing rights. 

The opinion held in some quarters that the fishing industry is neither transformed nor socially inclusive is predicated on the misconception that it only serves a few in the South African economy and that fragmentation of the industry (allocating rights to more companies) would be beneficial to all those who have been historically marginalised.

The deep-sea trawl fishery for hake is South Africa’s most valuable commercial fishery. With annual sales of R5 billion, it is a beacon for the performance and sustainability of a commercial fishery in a rapidly changing world. As the fishery continues to perform well in an international environment where it constitutes only 2% of global whitefish catches, there is a view that the industry requires restructuring in order to share its successes with the rest of South Africa.

What is absent from such positions is the real, current state of the fishery and its beneficial impact on the communities in which it operates, and the South African economy as a whole.

Since the mid-1990s the industry has undergone a certain degree of restructuring, either on a racial transformation or increased general participation basis − in the form of more rights-holders introduced at every re-allocation period. Structural change has been good for the industry which is more competitive today than ever before. Over the past ten years, trawling companies have expanded markets for South African hake and they are now supplying some of the most sophisticated markets in the Northern Hemisphere, largely on the strength of the certification of the industry by the Marine Stewardship Council (MSC – the world’s leading certification body for sustainable, wild-caught fish). As a result of its success, the industry has the rare distinction of providing quality sustainable jobs, wealth creation through share-schemes, other employee benefits and training to 7 050 people in coastal towns and cities where economic opportunities are often few and far between.

Underlying statements that advocate the further fragmentation of the industry is the assumption that giving more companies access to the deep sea trawl fishery will create opportunities for small- and medium-sized entities and result in long-term benefits for the fishery and the country. In fact, the opposite is true. To substantiate this point, it is appropriate to describe some of the characteristics of the current South African deep-sea trawling industry.

An economic study of the deep-sea trawling industry conducted by a University of Cape Town Honours student, Diederick Ferrandi, found that hake trawling is inherently risky and economic risk is “particularly acute for small operators”.[1] In spite of the risks, South African hake producers compete successfully in the 13 million ton global market for groundfish, even though they (and their counterparts in Namibia) produce barely 2.2 percent of the global groundfish catch. There are several reasons for their success, among them is the fact that they have succeeded in positioning Cape hake as a premium groundfish species, and the good job that the Regulator has done in managing the fishery. In 2015 the MSC certified the fishery for a third consecutive five-year period, evidence of the opinion that it is a sustainable and well-managed fishery. It is still the only fishery in Africa to have achieved the MSC’s prestigious endorsement. The MSC certification critically allows the industry to remain in markets where maximum beneficiated fish is sold and allows for maximum job creation in rural areas in South Africa. The addition of significant numbers of new rights-holders puts all of this at risk because compliance with fisheries regulations by all rights-holders will be difficult to manage and may work against the pursuit of keeping the resource healthy.

Another important reason for the industry’s success is that, in spite of fundamental changes to its structure, hake producers have succeeded in securing sufficiently large volumes of hake to remain sustainable. Volume is critically important because it allows producers to achieve economies of scale. Deep-sea trawling requires massive capital investment. The newest freezer factory trawler introduced into the South African fleet was purchased for R255 million in 2015. Similarly, the processing of hake is highly capital intensive. To make such large investments worthwhile, the volume of hake that is caught, processed and marketed needs to be sufficiently large so that the overheads (fixed costs) are spread as thinly as possible.

With large volumes acknowledged to be a critical element in the success of the deep-sea trawl fishery, why are there continued calls to allocate rights to more companies?

Three arguments generally support calls for the fragmentation of the industry. The first is that there is a common misconception that the deep-sea trawling industry is untransformed: this argument is easily disposed of by a report released by the independent economic empowerment verification and research agency, Empowerdex, in July this year. The Empowerdex report, which was compiled on behalf of the industry, shows that the ownership of South Africa’s deep-sea trawling industry is transformed: at least 62.36% of the industry is black owned.

The second argument in favour of fragmentation is based on an innate fear of monopoly power. But this fear is not relevant to an industry that exports most of its catch and where there are numerous close protein substitutes for hake and associated products on local markets. The third reason is the most difficult to overcome because it goes against the widely accepted notion that “big is bad” and that encouraging and empowering SMEs is good. In the case of the deep sea trawl fishery, the opposite is true: volume has enabled the industry to achieve the requisite economies of scale and compete globally. Reversing this trend, by introducing ever more small operators, would result in the export of more commodity hake products, less beneficiation and therefore less employment and lower returns. The result would be a lowering of corporate tax and inflows of foreign exchange.

The deep-sea trawl fishery for hake operates in a worldwide seafood industry where competition from other species is incredibly difficult to overcome. However, the fishery continues to perform in line with, if not better than its peers, owing partly to its sustainability credentials but more importantly to its ability to achieve economies of scale. The rhetoric of fragmentation that has crept into the discourse in the local fishing community should be tempered with caution because it will have dire unintended consequences on an otherwise shining jewel in South Africa’s fishing crown.

Felix Ratheb is chief executive of Sea Harvest. He writes on behalf of the South African Deep Sea Trawling Industry Association, SADSTIA, an organisation that represents the interests of 52 trawler owners and operators.

[1] Ferrandi, D.C. 2015. Industrial organisation in the South African deep sea hake trawl sector: a taxonomy. Paper submitted in partial fulfilment of the requirements for the Degree Economics Honours, School of Economics, University of Cape Town,21 pp.

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