Navigating the perils of quotas
If the department of fisheries is set on reallocating catches to newcomers, it spells trouble for companies that are not empowered or diversified enough, writes Marc Hasenfuss
The waters look set to become increasingly choppy for some local fishing companies in the run-up to the re-awarding of long-term fishing rights in 2020.
Fishing companies, especially larger enterprises that have invested heavily in vessels and processing facilities, are in the invidious position of literally having their net profits, in the form of catch quotas, put back in the hands of the Department of Agriculture, Forestry and Fisheries for reallocation in less than three years.
Long-term fishing rights are typically awarded for 15-year periods. After the award period is up, a reallocation of quotas is at the department’s discretion.
In 2020 important species like anchovy, sardines, deep-sea hake and other bigger commercial fish will be re-awarded. New rights have already been awarded in other species like squid and more recently new allocations have been made for inshore hake, West Coast lobster, horse mackerel, large pelagic and toothfish.
Judging by the defensive body language in the industry, many sense that the department is determined to spread quotas among smaller fishing enterprises and community fishing initiatives. The big quotas held by the larger fishing companies could be markedly reduced in order to spread the catch among new and marginal participants.
This would tick the boxes of transformation and bolstering black ownership and small business, but could be devastating to the top and bottom lines of larger fishing companies.
Ironically, two of the JSE’s most empowered companies — African Equity Empowerment Investments, which controls Premier Fishing, and Oceana Group — earn the bulk of their keep in the fishing industry.
Brimstone, which controls Sea Harvest and has a significant minority stake in Oceana, is one of the JSE’s most enduring empowerment companies and has rewarded community-based shareholders richly with dividends in the past 15 years.
Will the department set these strongly empowered companies apart from less empowered fishing enterprises? Or will they also need to sacrifice quota if the department is determined to spread allocations wider and bring newcomers into the net?
Some may argue that the investment parameters were set upfront and there were never guarantees that rights holders would be reallocated all, or even a good portion, of their quotas after the expiry of the 15 years. For some, 15 years is a good innings and sufficient time to adapt operational models to mitigate allocation risks in future.
Some companies appear to have hedged their bets. Oceana and Sea Harvest have moved boldly offshore, while Premier Fishing and I&J have built significant farmed abalone capacity, which falls outside the ambit of catch allocations. There have also been signs of a willingness to shift to other food categories.
But backing marked reductions in catch allocations to reinforce transformation agendas ignores certain unpleasant realities, most notably job losses, food security and the inevitable shaking of investor confidence because there are five large listed companies involved in the fishing sector.
Recently, the new quota awards for inshore hake were challenged by Viking Fishing, which won an interdict blocking the awarding of fishing rights to new entrants. Reports suggest Viking’s inshore hake allocation would have been slashed 60%, which would probably render its business model unviable.
While some fishing industry players are encouraged by Viking’s initial success in challenging the department, others regard the challenge as tantamount to "biting the hand that feeds us".
The matter, which will be in court again early in February, might be instructive in terms of what transpires in 2020.
The suggested inshore hake allocation for the next 15 years favours smaller fishing enterprises. The department’s notice from December 21 states that of the 27 commercial hake inshore trawl fishing rights, a dozen were allocated to new entrants.
"The decision confirms the department’s commitments to broadening access to the fishery on a sustainable and responsible basis while further transforming the black ownership profile of the hake inshore trawl sector," the notice read.
Viking argued that a huge cut in its quota would mean laying up three or four vessels — stranding crews without work and threatening the company’s hake and sole handling, packing and processing factory in Mossel Bay.
It is difficult to fault the argument that slashing the quotas of existing right holders — which have invested considerable capital in capacity as well as in brand building and marketing — is a sure way to destroy economic value and raise the spectre of food insecurity.
Will smaller quota holders and new entrants have the start-up capital and wherewithal to fish profitably?
Or will they become paper quota holders, leveraging a right rather than generating value and creating jobs?
Fishing rights have tangible value and perhaps the ability of smaller entrepreneurial fishing ventures to leverage a sizeable quota in order to raise capital to build a meaningful fleet or even a niche production facility should not be underestimated. Meaningful quota holders could band together to form larger and more diversified operations, or form joint ventures with larger players that could set a platform for longer-term viability.
While the Viking matter has caused waves, the share prices of fishing ventures on the JSE — traditionally an accurate gauge of investment sentiment — appear as buoyant as ever.
The share price of Oceana, by far the largest fishing enterprise in SA, has been stable over the past 90 days, while shares in African Equity Empowerment Investments, which will soon list Premier Fishing on the JSE, are up nearly 40% over the past 90 days. Rumours abound that Brimstone is weighing up a JSE listing for Sea Harvest.
It is tempting to argue that the JSE is discounting the department’s stance in the inshore hake matter as typical politicking, which will result in a compromise when economic realities set in. But the JSE’s pronouncements might be slightly misleading.
Common sense suggests that Oceana could lose considerable quotas not only because it is the biggest operator but because it has foods brand conglomerate Tiger Brands as an anchor shareholder. Although Oceana does have a commendable and very profitable staff incentive scheme in operation and Brimstone as a significant minority shareholder, it is difficult to shake off the "white capital" tag that comes with being strongly equity linked to Tiger Brands.
But Oceana has a powerful brand in Lucky Star canned pilchards — which is not quota-dependent as long as fish can be easily sourced locally and abroad — as well as a promising and potentially transformative offshore investment in Daybrook, a Louisiana-based fish meal and fish oil producer.
The willingness of empowerment groups African Equity Empowerment Investments and Brimstone to list their fishing ventures separately suggests the possibility that the heightened tensions in the run-up to the 2020 fishing rights allocations could create acquisition or partnership opportunities.
The willingness of empowerment groups African Equity Empowerment Investments and Brimstone to list their fishing ventures separately suggests the possibility that the heightened tensions in the run-up to the 2020 fishing rights allocations could create acquisition or partnership opportunities. As things stand, a fishing company with "lesser" black ownership cannot take over a competitor that is more empowered.
Well-established fishing companies such as Viking Fishing, Saldanha Group and AVI-controlled I&J enjoy only minority empowerment positions.
An executive at a large fishing company believes that while increasing black ownership is critical, the department should not place inflexible empowerment criteria on the fishing industry. He argues that job creation, training and transformation according to the black economic empowerment code should be emphasised over outright levels of black control.
Still, if the department’s stance on inshore hake is a proxy for 2020, the chances of these companies increasing quotas in their respective catches seems remote.
Should less empowered companies including smaller family-owned enterprises, seek out partnerships, joint ventures or buyout arrangements with strong, empowered fishing businesses? Possibly.
The chances of an acquisition-hungry company such as Premier Fishing, which intends to raise R600m at listing, acquiring a business in the squid sector, where long-term rights were established a few years ago, would be a distinct possibility.
But it would probably not be prudent for Brimstone/Sea Harvest or Premier Fishing to dangle bait in the anchovy, sardine or deep-sea hake sector because companies plying their trades in these sectors have little certainty about their catch allocation in 2020.
With transformation and black ownership clearly an imperative at the department, it is somewhat surprising that companies have done little to bolster their empowerment credentials. It’s too late to remedy that situation as no empowerment company will invest in a white-controlled fishing venture at this delicate juncture.