Parameter uncertainty Central investment scenario

The central scenario BB model shows an attractive equity return with a positive NPV at a revenue sharing rate of 40 per cent. Equity returns are insensitive to the level of TAC reduction. The rebuilding time of the biomass is short and decreases by at most one year when the reduction in catches changes from 25 per cent to 50 per cent. In the central scenario, return on investment barely changes, while equity return increases from real 9 per cent to 10 per cent if catches are reduced by 50 per cent. Fishers’ income NPV is not sensitive to the level of TAC reduction. Given the high revenue sharing rate required to generate an adequate return, the most important risk factor for investors could be the small net operating margin, which is determined by crab prices and management operating costs. A low intrinsic growth rate has a critical impact on investment returns. Models with low r cannot generate positive equity NPV, even at high profit sharing rates. Figure 14 presents a heat map of equity present values, discounted at real 7 per cent, for a collection of model assumptions. No management option produces positive equity NPV at all revenue sharing rates and discount rates when the intrinsic growth rate is low. Medium estimates of r generate positive NPV at a 40 per cent profit sharing rate and high discount rates. However, with a high intrinsic growth rate, equity investment can be attractive even at a 35 per cent profit sharing rate. The increase in fisher income is robust to a range of bio-economic model and revenue sharing rate assumptions. The option of partial management reform followed by full management enhancement may be attractive. The full investment decision can be delayed until more data on the intrinsic growth rate is obtained. With a high intrinsic rate, the equity return can be attractive even at low revenue sharing rates. The model with the best estimates of K and high estimates of r BH shows an equity return of real 17 per cent compared with the central model BB real return of 9 per cent, and the –1 per cent of model BL. By putting a partial control system in place while data is collected, more precise estimates of K and r might be obtained. Full reform could be implemented if favourable bio-economic parameters were obtained. Figure 14 depicts equity NPV under a range of parameter values and management scenarios. For each model, equity NPV varies with the level of reduction in catches, the level of the capital grant, and the equity discount rate. Positive values are shown by green bars and negative values are shown by red bars. The chart shows: – how NPV changes with values of K and r across management scenarios; – how, within each model, equity NPV varies with levels of TAC reduction and the capital grant; – a range of real discount rates, given investor perception of the riskiness of the project and the required rate of return that might be sought by the market. The middle panel, which presents the equity NPV generated under the best estimates for both K and r model BB, shows positive values at all discount rates only when the revenue sharing rate is set at 40 per cent, when a shallow cut to catches is applied. At a 30 per cent sharing rate, equity NPV is expected to be negative. The picture is the same when a deep cut option is pursued. The chart also shows the pattern of positive NPV for a range of model parameter values. The lower panels show model outputs when the intrinsic growth rate is high. The frequency of positive NPV is higher especially for those models with the best and the low estimates of K, models LH and BH. Finally, the upper set of panels indicates the risk of a low intrinsic growth rate. In such circumstances, it could be a challenge to generate any income for prospective investors. Figure 14. Equity NPV heat map shows negative NPV when intrinsic growth rate is low Note: Equity NPV for various model parameters and assumptions. Central scenario is obtained by assuming best estimates for intrinsic growth rate and proportion of initial biomass of the carrying capacity Model BB. It also assumes that catches are cut by 50 per cent, a levy rate of 25 per cent and a discount rate of 7 per cent. Source: Vivid Economics Path Revenue sharing rate M o d el 4 5 6 7 8 9 M o d el 4 5 6 7 8 9 M o d el 4 5 6 7 8 9 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 HB 50 cut 25 cut 50 cut 25 cut HH BB LH BH LB Discount rate LL 25 cut 50 cut HL BL

4.2.2 Illegal, unreported and unregulated fishing

The level of IUU fishing plays an important role in investment returns. IUU fishing is important for fishery management for two reasons; first, it affects the bio-economic model estimates of the sustainable biomass and catches; and second, the future level of IUU affects biomass rebuilding time and the level of the cut that is needed for rebuilding. Three levels of IUU are assumed for the purpose of bio-economic model estimates: 5, 10 and 20 per cent. There are three possible management outcomes, depending on the strength of the control regime and the source of the IUU fishing. In the first instance, IUU fishing remains constant at the 2014 level. If this is the case, it may take longer for stock to be rebuilt since this lowers the effectiveness of TAC control; therefore, for the biomass to be rebuilt successfully, a deeper cut in legal catches may be needed. In the second outcome, IUU fishing is reduced at the same rate as catches but not removed completely. This also makes the transition period longer, since the MSY of biomass is expected to be larger, hence it takes a longer time period to rebuild stocks. This can be mitigated by applying deeper cuts. Finally, IUU fishing is assumed to be removed completely under a strong control regime. This does not hasten biomass rebuilding compared with the central scenario; however, because IUU fishing becomes part of legal catches, it improves legal fishing revenues, the return on investment and fishers’ income. If IUU fishing is removed, the equity return increases from real 9 per cent to 14 per cent in the central BB model when the level of IUU fishing is assumed to be 10 per cent of catches. The return on investment increases from real 6 per cent to 8 per cent, and fishers’ income NPV increases by US2 million in the reform scenario. In each panel of Figure 15, equity NPV is shown for a combination of the level of IUU fishing and management outcome for a range of inputs on the level of TAC reductions, the revenue sharing rate and finally the discount rates. Model parameters are taken from the central model estimates. Given the nature of fishing in South Sulawesi, the level of IUU fishing is likely to be high. Effective management of IUU may be essential in improving the performance of the reform programme and it may reduce the burden on legal fishers of the reduction in catches. Figure 15. Heat map for equity NPV, for central scenario at different IUU levels and management options Note: Equity NPV under various IUU assumptions and IUU management options under central scenario assumptions. Source: Vivid Economics Revenue sharing rate M o d el 4 5 6 7 8 9 M o d el 4 5 6 7 8 9 M o d el 4 5 6 7 8 9 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 Average Mode l ave rage Path 25 cut ave rage 15 20 25 30 35 40 Path 50 cut ave rage 15 20 25 30 35 40 20 IU U o p 10 IU U o p 5 IU U o p 1 10 IU U o p 1 20 IU U o p 1 50 cut 25 cut 50 cut 25 cut 50 cut Discount rate 20 IU U o p 2 10 IU U o p 2 5 IU U o p 2 5 IU U o p 25 cut