BUYBACK - SUSTAINABLE FISHERIES ACT
The Sustainable Fisheries Act enacted provisions authorizing the Commerce Department to both carry out and finance fishing capacity reduction. NMFS intended to begin implementing these buyback provisions with an advance notice of proposed rulemaking (ANPR).
The staff draft of the buyback ANPR appears below
ANPR review revealed, however, that the staff draft had already developed buyback concepts enough to form the basis for proposed rules. NMFS intends, consequently, to propose buyback rules without an intervening ANPR. This will reduce buyback implementation time. We are now publishing the draft ANPR here both to inform the public about the present state of buyback conceptual development and solicit any comments the public thinks relevant to drafting proposed buyback rules.
We will consider any comments received on or before October 20, 1997. Send comments to: Michael L. Grable, Chief, Financial Services Division (F/SF2), National Marine Fisheries Service, 1315 East West Highway, Silver Spring, MD 20910. Mr. Grable's telephone number is (301) 713-2390. His fax number is (301) 713-1306.
__________________________________________________________________
Billing Code __________
DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric Administration
[Docket No. __________; I.D. __________]
RIN: __________
Fishing Capacity Reduction Program.
AGENCY: National Marine Fisheries Service (NMFS), National Oceanic and Atmospheric Administration (NOAA), Commerce.
ACTION: Advance notice of proposed rulemaking; request for comments.
SUMMARY: NMFS requests comments about implementing the fishing capacity reduction provisions of the Sustainable Fisheries Act (SFA). The SFA authorized fishing capacity reduction. It did this by amending section 312(b) through (e) of the Magnuson-Stevens Fishery Conservation and Management Act (Section 312 and MSA) and adding a new section 1111 to Title XI of the Merchant Marine Act, 1936 (Section 1111 and Title XI).
We want the public's guidance before proposing regulations.
DATES: Comments must be submitted by [insert date 45 days after publication in the Federal Register].
ADDRESSES: Send comments to: Michael L. Grable, Chief, Financial Services Division, NMFS, 1315 East West Highway, Silver Spring, MD 20910.
FOR FURTHER INFORMATION CONTACT: Michael L. Grable at
(301) 713-2390
SUPPLEMENTARY INFORMATION:
Excess fishing capacity decreases fisheries earnings, complicates fisheries management, and imperils fisheries conservation. A quarter century after the MSA, most fisheries have excess fishing capacity. The SFA acknowledges this by amending the MSA and Title XI to provide remedial assistance. This assistance is commonly called "buyback."
Buyback's objective is "...to obtain the maximum sustained reduction in fishing capacity at the least cost and in a minimum period of time." Buyback pays fishermen to surrender their fishing permits and either scrap their fishing vessels or subject them to title restrictions that prevent further fishing.
Buyback costs can be paid by the Federal Government, by other public or private organizations, or by the fishing industry itself. Recognizing that some or all industry-funded buybacks would require financing some portion of buyback cost, the SFA also amended Title XI to provide buyback loans.
Buyback loans may be one of the most practical ways to fund some or all buyback costs. Title XI is the lender. The borrower is everyone who, after the buyback, fishes for the buyback species. A buyback loan is repaid exclusively by a post-buyback fee that fish buyers deduct from all fishing trip proceeds involving the sale of buyback species. The loan's interest rate is 2% over the Federal Treasury's cost of money. A loan's repayment maturity can be for up to 20 years. The industry fee will be determined by the buyback loan's repayment requirements. The fee is adjustable from year-to-year, but may never exceed 5% of the ex-vessel gross value of buyback species landed.
Industry-funded buybacks require producer referenda in which in which at least two-thirds of voters vote in favor of industry fees. Government-funded buybacks require no referenda.
Buyback is available only in limited-access fisheries whose fisheries management plans (1) effectively prevent replacing bought-back capacity and (2) manage harvests by total allowable catches. Buyback must "...achieve measurable and significant improvements in the conservation and management of...[a] fishery..." or end overfishing or rebuild stocks. NMFS can neither conduct nor finance a buyback unless a Fisheries Management Council first requests it to do so.
Buyback assistance provides a way for producers in a fishery to organize and fund the retirement of their excess harvesting competition. This can make both fisheries harvesting and fisheries management and conservation more efficient and effective.
Producer-funded buyback largely involves producers, rather than Government, managing capacity in limited access fisheries. Consequently, we want, wherever possible, to defer to producers' views. We particularly want guidance from fish harvesters, fish buyers, and Fishery Management Councils (FMCs). Expressions of opinion are important, but we want to know not only what commenters want to do, but how and why they want to do it.
We welcome comments from everyone, but encourage comments representing the collective views of various fisheries groups.
We welcome comments about any aspect of buyback, but particularly want guidance about the following:
1. Who should pay for buyback?
This may be the definitive question.
Section 312(c) authorizes four ways of paying for capacity reduction:
a. Appropriations in general (including, perhaps, any under MSA Section 312(a)),
b. Appropriation of Saltonstall-Kennedy Act revenues,
c. Other public and private contributions, and
d. Title XI financing under Section 1111.
The first two alternatives are subject to fiscal priorities. The third alternative may have limited potential. The fourth alternative may prove one of the more practical ways of paying for much of buyback's cost. The Section 312(d) term for this alternative is "industry fee system" (Fee System and Fees).
A Fee System is the way post-buyback producers service the debt portion of buyback costs. A Fee System can exist only if producers vote to fund a buyback this way. A Fee System works like this:
a. NMFS, at FMC request, conducts a Fee System referendum about a buyback plan (all affected permit and vessel owners can vote),
b. A Fee System is approved by a two-thirds majority of those voting in the referendum,
c. NMFS borrows Section 1111 loan capital from the U.S. Treasury and deposits it in a buyback fund (Fund),
d. NMFS uses the Fund to buy back permits or vessels and permits,
e. Each buyback payment is part of one Section 1111 buyback loan to the producers whose permits and/or vessels are not bought back (post-buyback producers are the borrowers who will repay the loan),
f. The principal amount of the buyback loan is the sum of all buyback payments,
g. Interest accrues on the principal of the loan to the post-buyback producers at the same rate as it accrues on the U.S. Treasury loan to NMFS, plus a two percent risk premium.
h. The loan's maturity may not exceed 20 years.
i. Fee System revenue is the exclusive statutory means by which post-buyback producers repay the loan,
j. The first ex-vessel buyers of post-buyback fish withhold Fees from fishing trip proceeds before paying producers (Fees are a percentage of the ex-vessel gross value of all buyback fish landed),
k. The fish buyers account for and forward the Fees to NMFS,
l. NMFS deposits the Fees in the Fund and uses them to repay the buyback capital it borrowed from the U.S. Treasury.
m. Fees may never exceed 5% of the ex-vessel gross value of buyback species landed (but may be less, depending on loan amortization requirements).
If producers in a limited access fishery with excessive capacity had the necessary organization and capital, one long-term strategy might be buying out some of their competitors. Section 312 affords producers the means of both organizing and financing this strategy.
Although some producers might prefer that taxpayers pay for all buyback costs, Fee Systems that help pay for buyback cost may benefit everyone.
Taxpayers will benefit from a Fee System, because they will not have to pay all buyback costs.
Equity suggests that those who will benefit most from buyback should pay most of its cost. Post-buyback producers will benefit most. Buyback should increase post-buyback production and/or decrease its variable cost. It should enable a more stable industrial future for post-buyback producers, free of excessive competition.
A Fee System may be the only practical budgetary way for producers to intervene directly in their own fishing capacity destiny. The taxpayers may well ask, "If those who will most directly benefit from buyback are not themselves willing to help pay for it, why should we be willing to pay for it all?" This is not an easy question to answer. If producers are unwilling to use the means at their disposal to help finance their own fishing capacity future, some may consider them content with whatever the capacity status quo brings.
A Fee System may be the best guarantee that buyback's benefit is consistent with its cost. As long as someone else is paying for 100 percent of something that benefits you, cost may not be your primary concern. If you are paying for some or all of it, however, cost is always one of your primary concerns.
If only the taxpayers are paying for buyback, Government might fund a buyback for which producers themselves would be unwilling to go into debt. There may, however, be no better assurance of prudent buyback than producers voting to mortgage their fisheries futures to pay some or all of buyback's cost. If buyback does not represent good value, producers will not vote to pay for it. This may be the most practical buyback quality assurance possible.
A Fee System may be the best means of encouraging producers to identify more with their collective long-term interests. If all producers are collectively servicing a common buyback debt that finances their collective will to manage their fishery's capacity future, all may act more like fisheries stockholders with a common investment.
Many circumstances may, however, justify Federal taxpayers subsidizing some portion of buyback cost. Appropriating part of the cost of a buyback might, for example, provide the incentive necessary for producers to vote for a buyback loan financing the balance of the buyback's cost. Fisheries resource disasters (like those contemplated under MSA section 312(a)) may justify greater Federal subsidies. Other circumstances may justify States or other public or private parties subsidizing buyback cost.
When should producers pay for buyback and when should others pay for it? Why?
2. Who should develop buyback plans?
This may be the second most definitive question.
If Fee Systems are a likely way of paying for some or all of buyback cost, the answer might best be approached from that standpoint.
Fee Systems effectively mean producers are electing to, themselves, manage fishing capacity in their limited access fisheries. They do so by deciding how much they are (or are not) willing to go into debt to finance retiring what portion of their excess competition. They will use Government's organization and financing to help them, but the practical reality is that they, not Government, will effectively decide the nature, extent, and cost of all buyback investments. They will not vote to borrow money for a buyback that does not represent their best fisheries management judgment.
This credit situation is basically no different than any other. Lenders do not develop business plans and then look for parties willing to borrow the lenders' funds and effect those plans with it. Lenders seek prospective borrowers with sound business plans that lenders can evaluate and judge worthy or unworthy of credit. Prospective borrowers without sound business plans are uncreditworthy. This is the nature of credit because lenders do not know how to operate (and will not operate) borrowers' businesses. Instead, lenders only know how to evaluate the soundness of prospective borrowers' business plans and make judgments about the likelihood of loan repayment through primary and secondary means.
Ideally, then, producers (not Government) should develop buyback business plans capable of:
a. Gaining the support of at least two thirds of all producers who will later cast referenda votes,
b. Convincing Fishery Management Councils to request buybacks (and take the other actions that may be prerequisite to buybacks),
c. Convincing NMFS to implement them, and
d. Convincing Title XI to finance their cost.
This is a tall order, but it is essentially what all lenders expect of borrowers and what most successful borrowers expect of themselves.
Section 312 makes it clear that Government implements buyback, but it may also assume that Government develops buyback. Nevertheless, Section 312(b)(4) requires extensive developmental consultation with all stakeholders:
The Secretary shall consult, as appropriate, with Councils, Federal agencies, State and regional authorities, affected fishing communities, participants in the fishery, conservation organizations, and other interested parties throughout the development and implementation of any...[buyback in any limited access fishery] under this section.
Requiring producers to develop buyback business plans may be the most appropriate part of Government's buyback consultation. The alternative is a Government creditor and fisheries conservator developing buyback business plans for prospective borrowers with whom Government merely consults. This may be backwards. It may be more appropriate for producers to consult with Government in developing sound buyback business plans for which they will seek Government financing, and for Government to consult with producers and all stakeholders in evaluating, proposing, and implementing these plans.
Fee Systems require two-thirds of voters in producer referenda to approve them. Referenda voters are far more likely to approve Fee Systems for buybacks whose business plans producers (rather than Government) developed.
Should buyback require producers to first develop sound buyback business plans that have a demonstrated potential to gain most producers' support and favorable Government evaluation? If not, how should buyback development best work?
3. How could Government best help producers develop buyback business plans?
Government could help fund the cost of producers evaluating buyback potential and developing buyback business plans. A variety of Federal and State grants might be available for this purpose. Saltonstall-Kennedy grants are one example. Grants under MSA section 312(a) might be another.
Government could also assist by providing many kinds of pertinent data, as well as biological, economic, financial, and other types of consultation, information, and services.
Are there other ways Government could (or should) help producers develop buyback business plans?
4. What should a practical buyback development and implementation process include? Should business plans be the basis of implementation plans? Where in the process do referenda best fit?
Section 312(e) requires each buyback to be preceded by the proposal and adoption of a buyback implementation plan and regulations. The statutory schedule for this process is very demanding:
a. Day No 1. For each buyback, NMFS publishes proposed implementation plan (including proposed regulations) in Federal Register.
b. Day No. 60. Comment period ends.
c. Day No. 105. This is the last day by which NMFS must publish final implementation plan (including final regulations) in Federal Register.
This process must start and finish within no more than 105 days. Congress seems to have intended this implementation process to conclude a more lengthy development and planning phase. 105 days provides too little time for development and planning.
Can referenda usefully occur during these 105 days? Section 312(d) requires referenda to precede final implementation plans and include "...the amount and duration and any other terms and conditions of the proposed fee system." Section 312 does not, otherwise, specify referenda timing. If buyback chronology mirrors the statutory sequence, referenda may precede implementation plans.
A practical buyback process might, consequently, look something like this (and would separately apply to each buyback):
a. Development phase:
i. Producers' develop buyback business plan,
ii. Coordination generates producer consensus about business plan,
iii. Consultation with Government conservator/lender establishes business plan's preliminary soundness, and
iv. If existing credit authority is insufficient, NMFS requests credit authority preliminarily necessary under Federal Credit Reform Act (FCRA);
b. Referendum phase:
i. NMFS conducts referendum based on final business plan,
ii. If disapproved, process reverts to development phase, and
iii. If approved, implementation phase starts immediately;
c. Implementation phase:
i. NMFS publishes proposed implementation plan and regulations (based on business plan and referendum specifications) in Federal Register for 60-day comment,
ii. During comment period, NMFS holds public hearings in affected States and consults with the FMC or State (statutory requirements), and
iii. Within 45 days after comment period ends, NMFS publishes final implementation plan and regulations;
d. Buyback phase:
i. NMFS borrows buyback cost from U.S. Treasury, and
ii. NMFS buys back permits or vessels and permits; and
e. Repayment phase:
i. Fish buyers withhold Fees from ex-vessel sales proceeds,
ii. Fish buyers forward withheld Fees to NMFS,
iii. NMFS deposits Fees in Fund, and
iv. NMFS uses Fees to repay what it borrowed from U.S. Treasury to fund buyback.
Is this a practical order for a practical process? Are there more practical ones? What are they?
One alternative might be referenda occurring simultaneously with implementation plan proposal. Would this be better or worse than referenda preceding implementation plan proposal? Why?
Referenda could also conceivably occur during the 45 days between the end of comment periods for implementation plan proposals and final implementation plan adoptions, but 45 days could be too little time to enable meaningful referenda.
5. What should buyback business plans include and how do they relate to FMCs and Fishery Management Plans (FMPs)?
Buyback plans must demonstrate, both to producers and to the Government conservator/lender, that buyback investment prospectively enables post-buyback return sufficient to justify the investment and repay the Section 1111 loan. This is difficult, because it involves variables that cannot be known until after buyback results are known. Until buyback is actually attempted, no one can know with certainty what it will cost to buy back how much capacity. Normal business plans must also project variables, but these projections can often be assessed against comparable business experience. There is little experience with which to compare projections of buyback variables.
A buyback business plan might, consequently, proceed something like this:
a. Determining the best way to buy back the most capacity at the least cost, and in the shortest time.
The ways to do this are presumably limited only by practicality and ingenuity. Section 312(e) mentions two methods (reverse auction and fair-market assessment), but these are not exclusive. 312(b)(2) authorizes buying back either both fishing permits and fishing vessels or permits alone. Permits must always be revoked. When buyback also involves vessels, the vessels must be either scrapped or sold with a statutory fisheries exclusion running with their titles.
Other than a salmon permit buyback administered by the State of Washington, our only buyback experience so far has been with a reverse auction buyback in the Northeast Multispecies (Groundfish) Fishery. A reverse auction is one in which the successful bidders are the lowest, rather than the highest, bidders. The following describes this buyback experience.
Each applicant submitted a reverse bid in the dollar amount for which it was willing to surrender all its vessel's Federal fishing permits (not just the one for Groundfish) and scrap its vessel. At least 65% of each vessel's gross revenue during three of the most recent four years had to be from selling Groundfish.
We averaged annual gross revenue from Groundfish in the three of those four years during which Groundfish was highest. We expressed the ratio of each bid to each bidder's average annual Groundfish revenue. This was the bidder's score. A score of 1 meant that the bid's dollar amount equaled the dollar amount of an average year's Groundfish revenue. Scores less than 1 meant that bids were correspondingly less than this revenue. Scores more than 1 meant that bids were correspondingly more than the revenue.
We bought back permits and vessels with the lowest scores until the buyback funds were expended. We paid no attention to vessel age or condition (other than requiring that vessels be active and capable of fishing for Groundfish in Federal waters). We required the vessels merely to have been efficient enough to have produced a low ratio of buyback cost to Groundfish revenue in three of the four years just before buyback.
b. Determining the capacity likely to be bought back at the projected cost (or, alternatively, the likely cost of the capacity projected to be bought back).
This will be the definitive variable in every buyback business plan.
When buyback involves reverse auction, the answer to this question cannot be known until after an auction. Even when a buyback method involves more certainty (for example, when paying a known percentage of fair market value established in a known way), no one knows beforehand how many owners will choose to have their permits or permits and vessels bought back. Nevertheless, buyback business plans must knowledgeably project both buyback cost and bought back capacity. This is necessary for the next part of the buyback business plan, economic evaluation. The best projections achievable may be ranges of reasonably potential buyback costs per units of buyback. Ranges could perhaps be grouped in categories like highly acceptable, acceptable, marginally acceptable, and unacceptable.
c. Determining how buyback affects the economics of post-buyback production.
This may be the definitive question for buyback business plans. Presumably, buyback business plans must project the economic consequences to post-buyback producers of various ratios of buyback costs to bought back capacities. Presumably, these business plans must project the cost-capacity ratios at which buyback implementation either increases unit production or decreases unit variable cost (or both) sufficiently for post-buyback return on producers' investment to justify implementing buyback. The bottom line will presumably almost always be whether it is economically sensible for some producers to finance the retirement of other producers.
Are there justifications other than return on investment? What are they?
d. Determining the Fees most likely necessary to amortize the loan, the percentage of post-buyback gross revenue this would most likely represent, and whether post-buyback producers could afford this.
Post-buyback income reliably sufficient to reasonably absorb the cost of a Fee System would most likely equate to buyback creditworthiness. Buyback costs exceeding what 5% of projected ex-vessel value over 20 years can amortize have, however, no chance of Section 1111 financing.
e. FMCs and FMPs.
Buyback must always be consistent with FMPs, but Section 312(b)(1)(B) makes buyback impossible unless FMPs:
(i) will prevent the replacement of fishing capacity removed by the program through a moratorium on new entrants, restrictions on vessel upgrades, and other effort control measures, taking into account the full potential fishing capacity of the fleet; and
(ii) establish a specified or target total allowable catch or other measures that trigger closure of the fishery or adjustments to reduce catch....
These statutory buyback conditions are essential to preserving buyback benefits.
In addition to these statutory FMP preconditions for buyback, most buyback plans will involve other circumstances requiring FMP amendment. Although the buyback process is separate from the FMP amendment process, each buyback will presumably require an FMP amendment involving all fisheries management and conservation circumstances upon which the buyback depends.
Before NMFS can begin the buyback process, FMCs (or Governors, in State fisheries) must first request it to do so. Later, in any buyback process involving a Fee System, FMCs also first request referenda before NMFS can conduct them. Buyback business plans that do not first convince FMCs and comply with whatever requirements FMCs might impose will never have a chance to convince NMFS. If FMCs do not first request buyback, NMFS has no buyback authority. If FMCs do not first request Fee System referenda, NMFS has no referenda authority. FMCs and FMPs should be one of the first considerations in all buyback business planning.
Should other elements be included in buyback business plans? What are they? What should a buyback business plan consider, and how should it do it? Should we specify the content of buyback business plans? If so, should we be general or specific? Are there better ways to approach buyback's development phase? What are they? How should buyback business planning best relate to FMCs and FMPs?
6. What should referenda procedures be?
Section 312(d)(1)(A) provides, in part:
Prior to the referendum, the Secretary, in consultation with the Council, shall--
(i) identify, to the extent practicable, and notify all permit or vessel owners who would be affected by the...[buyback]; and
(ii) make available to such owners information about the industry fee system describing the schedule, procedures, and eligibility for the referendum, the proposed...[buyback], and the amount and duration and any other terms and conditions of the proposed fee system.
(B) The industry fee system shall be considered approved if the referendum votes which are cast in favor of the proposed system constitute a two-thirds majority of the participants voting.
Should the general buyback regulations be more specific than the statute about referenda procedures? How? Should all referenda procedures be the same, or could different ones be required for different buybacks?
7. What happens if buyback implementation results do not conform to referenda specifications?
Consider this example.
A buyback business plan involves a reverse auction like the Groundfish buyback described above. The business plan first specifies cost-capacity ranges within which buyback is economically productive for post-buyback producers and capable of being amortized in 20 years. A referendum next approves a Fee System if buyback implementation produces results conforming to business plan specifications. NMFS then implements buyback and conducts a reverse auction. The auction's bid results do not conform to the referendum specifications.
What happens?
Implementation would presumably cease. One possible reaction might be a second referendum seeking producers' approval of the nonconforming implementation results. Another reaction might be a new or modified business plan, based on the nonconforming implementation results, followed by another referendum. Another might be postponing further buyback activity until economic performance in the fishery further deteriorates, and then trying the buyback process all over again. One of the more draconian buyback aspects is that worsening economic performance presumably makes buyback cheaper. If conservation makes less production available for a constant capacity, permit and vessel value presumably decreases.
Should referenda involve precise specifications to which buyback implementation results must precisely conform? Would this be impractical? Should referenda specifications be more general, with margins for contingent implementation results? What is the best way to handle this?
8. If initial buyback implementation results do conform to referenda specifications, what ensures that final implementation results also do?
Consider the following example.
A buyback business plan involves a reverse auction like the Groundfish buyback described above. The plan referendum approves a Fee System specifying that permits and vessels responsible for at least 25% of the fishery's gross revenue be bought back at an average score of 1 or less. A reverse auction produces bids initially conforming to the referendum specification. NMFS begins validating bidders' eligibility and scores, determining ability to satisfy lienable vessel debt, and otherwise preparing to execute buyback contracts. The longer this process requires, the greater the chance of bidders withdrawing their bids. Moreover, NMFS' investigation of applications may reveal real scores considerably higher than application scores.
NMFS executes contracts with half the selected bidders (and makes the initial disbursements that are often required for pre-scrapping satisfaction of vessel liens). Some of the remaining bidders then begin withdrawing their bids. This, and real scores higher than application scores, rapidly increases the average score required to buy 25% of capacity from 1 to 1.3. This buyback is no longer consistent with the referendum specifications.
This example suggests that, at least in buyback implementation involving bids, each bid must be contractually enforceable against the bidder upon NMFS' determination that the bidding results fulfill referendum specifications. Allowing bids to remain executory too long may jeopardize buyback's ability to conform to referendum specifications.
Regardless of the buyback method chosen, actual buyback transactions must be contractually undertaken in a way that allows reasonable certainty about conforming to referendum specifications.
How can we best deal with this?
9. Should the general buyback regulations prescribe certain buyback methods and proscribe others?
Presumably, buyback business plans would choose the most appropriate buyback methods. If these were not acceptable, FMCs might not request buybacks and NMFS might not implement them. If they were, the regulations required to implement each buyback would presumably incorporate each business plan's method. Buyback methods appropriate in one fishery might be entirely inappropriate in other fisheries. Some buyback methods may not even have been conceived yet.
What should the general regulations provide in this area?
10. What buyback methods might be productive, and what are their relative merits?
Section 312(b)(2) specifies buyback's objective:
The objective...shall be to obtain the maximum sustained reduction in fishing capacity at the least cost and in a minimum period of time.
This section also restricts buyback payments to either vessels and permits or permits alone. Where buyback pays for both vessels and permits, vessels must either be scrapped or subjected to vessel title restrictions that preclude future fishing.
Our only direct buyback experience was the Groundfish reverse auction described above.
11. When is it appropriate to buy back permits alone?
It is easier and cheaper to buy back permits alone, rather than both permits and vessels. Buying back permits effectively removes from the buyback fishery the capacity associated with the previously permitted vessels. The problem, however, is that those vessels may then cause capacity problems in other fisheries. If all other suitable fisheries were limited access fisheries, this would not be a problem. Buying back permits alone may be appropriate where this problem does not exist.
Buying back permits alone might also be appropriate in fisheries where permitted vessels hold multiple permits for multiple fisheries, particularly if the vessels' continued operation in fisheries other than the buyback fishery remained economic.
In the Groundfish reverse auction described above, NMFS bought back all Federal permits associated with the Groundfish vessels involved. Each vessel with a Groundfish permit characteristically held permits in multiple fisheries. Some vessels, for example, held permits for Groundfish, scallops, squid/mackerel/butterfish, scup, lobster, surf clams, ocean quohogs, and Atlantic tuna. Because the taxpayers paid for the Groundfish buyback, it was perhaps appropriate to buy back all Federal permits associated with these vessels.
Had Groundfish producers, however, financed this buyback with a Section 1111 loan, they might have objected to potentially subsidizing other fisheries by including permits for those fisheries in a buyback whose debt post-buyback Groundfish producers alone would service. If, however, it would not have been economic for the vessels involved to fish for the other permitted species without also fishing for Groundfish, then presumably little or no subsidy would have been involved.
12. When buyback involves both permits and vessels, is the statutory title restriction enough, or should we attempt to further restrict and control the post-buyback use of buyback vessels?
Section 312(b)(2)(A) states that we are authorized to pay:
...the owner of a fishing vessel, if such vessel is (i) scrapped, or (ii) through the Secretary of the department in which the Coast Guard is operating, subjected to title restrictions that permanently prohibit and effectively prevent its use in fishing, and if the permit authorizing the participation of the vessel in the fishery is surrendered for permanent revocation....
Vessels 5 net tons or over must be documented under Federal law. If these vessels are to fish in the U.S. exclusive economic zone (EEZ), the Coast Guard must endorse their titles for the fisheries trade. Section 312(b)(2)(A) provides adequate statutory authority for the Coast Guard to permanently restrict these vessels' titles from ever again being endorsed for the fisheries trade. This statutory restriction runs with the vessels' titles. It affects all parties to whom the vessels' post-restriction titles might, while in domestic registry, be transferred.
Vessels under 5 net tons are registered under State, rather than Federal, law. The U.S. Coast Guard is unable to subject the titles of these vessels to the statutory fishing restriction. Vessels under 5 net tons have, consequently, no alternative to scrapping.
Although the nonfishing market for used fishing vessels may be limited, buyback will presumably be cheaper if buyback recipients can sell their Federally documented vessels for nonfishing uses rather than absorbing the expense of scrapping them. This both avoids buyback recipients spending buyback proceeds to scrap their vessels and provides some return additional to the buyback proceeds. In producer funded buybacks, cost will always be a prime consideration. The Section 312(b)(2) objective is the maximum capacity reduction at the least cost.
The disposition most consistent with the statutory objective is allowing buyback recipients to dispose of Federally documented buyback vessels any way they wish, and for whatever return they can get for them, as long as the vessels' titles are first restricted to prevent their future endorsement for the domestic fisheries trade. There are three potential problems with this:
a. Although these vessels could never again fish in the U.S. EEZ, they could presumably fish in international waters as long as they did not land their fish in the U.S.,
b. Vessels admeasuring reasonably close to 5 net tons could be:
i. Reconfigured to remove them from Federal documentation, ii. Redocumented under State law, and
iii. Thus, possibly no longer subject to a fisheries restriction running with subsequent title transfers, and
c. Vessels could be sold into foreign registries (but the foreign countries would have to allow this), where the U.S. fisheries restriction might no longer run with subsequent transfers of the foreign title. These vessels could then fish in the foreign country's EEZ (but only if the foreign countries allowed them to do so).
Do these potential problems justify requirements inconsistent with the statutory objective of obtaining the greatest capacity reduction at the least cost?
Alternatives to the title restriction alone all appear problematic. The nature and amount of conditions and controls necessary to reliably avoid these three potentials might all but destroy the nonfishing market for these vessels. Most buyback recipients might be left with little practical alternative to scrapping their vessels. This would presumably be inconsistent with the statutory objective.
13. What is the likely FCRA cost of Section 1111 financing?
Section 1111 involves direct Federal loans. Under the FCRA, Congress need appropriate only the "subsidy" cost of these loans. Federal lenders borrow the balance of all authorized loan capital from the U.S. Treasury, relend it, and use the repayment of these loans to repay the Treasury credit.
FCRA subsidy cost is the net present value of all estimated credit outlays (excluding administrative costs), less all estimated credit inlays, over credit term. Appropriation of this subsidy cost is the basis of annual Federal credit authority.
If estimated subsidy cost equals 1% of loan principal, for example, a $100 million credit authority requires appropriating a $1 million subsidy cost. Federal credit authority must be annually authorized in appropriation acts. Even if a credit activity has a zero subsidy cost, its credit authority must still be annually authorized in appropriation acts. The difference between a 1% subsidy cost and a zero subsidy cost is that the latter needs no subsidy cost appropriation. Instead, appropriation acts merely specify the amount of credit authorized.
Advance estimates of long-term subsidy are speculative, but Section 1111 loans will be far more dependable than most. For at least the following reasons, it is difficult to conceive that any Section 1111 loans would ever have any subsidy cost:
a. Credit inlays include a 2 percent risk premium added to loan principal,
b. Administrative outlays are excluded from subsidy cost calculation,
c. Loan repayment funds are:
i. Involuntary,
ii. The first 5% of an entire fishery's gross revenue, and iii. Withheld in advance by third parties, and
d. Although producer economics may fluctuate, the Government conservator must. by law. do whatever is required to sustain fish yields.
Effectively, then, the security for each buyback loan is the first 5% of the gross landed value of all fish in each buyback fishery until the loan is repaid. Even if economic events leave some portion of a Section 1111 loan still outstanding at the end of 20 years, the statutory security remains in place until Fees fully repay the loan. Other than the remote possibility of a buyback fishery's biological extinction, we should never have to write off any portion of any Section 1111 loan. Subsidy cost estimates do not contemplate this kind of remote contingency. The FCRA provides a mechanism for later re-estimating subsidy cost if previously remote contingencies later become reasonably less remote.
14. How can we best ensure that the FCRA availability of Section 1111 credit authority meets buyback demand?
The Federal budget cycle is about two years. All FCRA credit authorities not obligated in the budget year authorized expire at the end of that year. This may create a real mismatch between the time that maturing buybacks need Section 1111 credit and the availability of sufficient FCRA credit authority in any given budget year.
Each buyback can conceivably involve a very large amount of credit authority ($100 million is the maximum loan for each buyback). Federal budgetary practice may not well accommodate advance budgetary authority for buybacks that may or may not materialize (or may materialize in a year different than the year in which the budgetary authority was made available). This will, however, be easier if no FCRA subsidy cost appropriation is involved. Multi-year credit authority might be an alternative (if this is possible under the FCRA). Requesting buyback credit authority in supplemental appropriation requests may be another alternative.
15. How should we assess and adjust Fees?
There are two relevant statutory constraints. Section 312(d)(2)(B) provides that Fees may not exceed 5% of ex-vessel value. Section 1111 provides that the maturity of buyback credits shall not exceed 20 years. Otherwise, Section 312(d)(2)(A) provides that Fees shall "...be determined by the Secretary [of Commerce] and adjusted from time to time as the Secretary considers necessary to ensure the availability of sufficient funds to repay...[the Section 1111 loan]."
Ex-vessel value depends both on ex-vessel landings and ex-vessel prices. Both fluctuate. Fees may, over term, have to be adjusted both upward and downward to compensate for these fluctuations. Fee adjustments might, however, best be kept to the minimum necessary to avoid confusion and disruption.
The entire buyback process (from business plan development through Section 1111 credit evaluation) requires projecting the annual, ex-vessel, gross revenue of all post-buyback landings of buyback species. Presumably, Fees must initially be based on these revenue projections. Dividing the annual Fees required to amortize the Section 1111 loan by these annual revenue projections equals the annual Fees rate ($3 annual amortization requirement divided by $100 annual revenue equals 3% Fees rate). Subsequent rate adjustments could reflect the difference between projected and actual revenues over credit term.
16. How soon after a Fee System buyback should we start collecting Fees?
Fees could begin immediately after completing buyback. Alternatively, regulations could be flexible enough to defer Fees for limited initial periods that might be more consistent with the post-buyback dynamics of each fishery. Which is best?
17. How best can we provide for fish buyers withholding Fees and forwarding them to us?
Buyback should, in the longer term, benefit fish buyers and other secondary producers as well as primary producers. In Fee System buybacks, primary producers will pay some or all of buyback's full cost. The first ex-vessel buyers of primary producers' fish will, however, also contribute. Their contribution will be withholding the Fees from ex-vessel sales proceeds, accounting for the Fees, and forwarding them to NMFS. This is not a negligible task. It is another statutory withholding obligation that will take additional time and effort. Noncompliance will subject fish buyers to penalty.
We need fish buyers to advise us about how best to provide for this. Here, however, is one alternative.
Fish buyers could deposit all Fee withholdings in a depository account (lock box) we establish at a central commercial bank. Wire transfer deposits might be unwarranted, because of the potential confusion that a large number of small wire transfers unaccompanied by settlement sheets could cause. Settlement sheets (on our form) could accompany each fish buyer's deposit checks. The settlement sheet could establish the basis of each deposit (what percentage of how many pounds of buyback fish purchased over what period) and identify the subaccount number assigned to each buyback. Deposit frequency could be monthly or quarterly, with a reasonable premium over collected Fees to offset pre-deposit floats.
18. What Fee System records should we require fish buyers to keep?
Record keeping requirements should be reasonably sufficient to enable compliance audits. Audit needs might require fish buyers to keep records of data something like the following for all buyback fish subject to a Fee System:
a. Pounds (by species) bought,
b. Ex-vessel price per pound (by species) paid,
c. Total paid,
d. To whom paid,
e. Producing vessel,
f. Date bought, and
g. Date paid.
Fish buyers could be required to maintain these records for three to five years.
19. What kind of Fee System compliance efforts are appropriate?
Fee withholding could be similar to tax withholding. We could rely on an honor system, but with sufficient audit
and enforcement to maintain system integrity.
20. What remedies and penalties are appropriate for Fee System noncompliance, fraud, and conversion?
We must be able, where, necessary, to compel withholding compliance and punish noncompliance. Regulations must provide reasonable remedies and penalties. They must provide a process for recovering Fees that fish buyers should have, but did not, withhold and forward. They must establish penalties sufficient to deter noncompliance, fraud, and conversion.
What should these be?
21. How should we define "ex-vessel value".
Fees will be a percentage of ex-vessel value.
Ex-vessel value may vary with regional and local practice. We need one definition that applies equally to all producers everywhere. In some practice, for example, ex-vessel value may be discounted by the amount of broker or shipping fees. We envision no discounting of ex-vessel value. Vertically integrated producers present another quandary. How do we guard against these producers centering profits at the secondary level, and, thus, avoiding paying Fees on the same basis as independent primary producers? Do we need to treat production from catcher-processor vessels any differently than the production of catcher vessels?
22. Should we attempt contractually to require a nominally conventional Section 1111 borrower?
Section 1111 credits are Title XI loans. They are not, however, conventional loans.
Lenders make conventional loans to specific borrowers who contractually promise to repay the loans and generally provide security for doing so. Section 1111 loans are not contractual. These are statutory loans whose statutory borrowers include entire classes of producers. There are no promissory notes, no loan agreements, no mortgages. Sections 312 and 1111 provide an exclusive statutory repayment means. Post-buyback producers repay Section 1111 loans through Fees that third parties involuntarily withhold from the ex-vessel value of producers' fish landings. Functionally, every post-buyback producer is a Section 1111 borrower--but by statute, rather than contract.
We perceive nothing to be gained by trying to force a contractual face, in the form of a nominally conventional borrower, upon this statutory surrogate for conventional loans. Sections 312 and 1111 have statutorily superseded conventional loans' normal contractual content.
23. What should buyback's regulatory framework be?
Section 312(e) requires proposing and adopting regulations for each buyback. The particulars of each buyback will differ, but some general buyback aspects will be the same for all buybacks. One alternative is putting common provisions in general regulations applying to all buybacks, while putting specific provision that apply to each fishery's buyback in fishery-specific subparts of the general regulations.
We welcome all comments on any other Registry aspects.
This advance notice of proposed rulemaking has been determined to be not significant for purposes of E.O. 12866.
Dated:
National Marine Fisheries Service.
