source of funding, some of which can be international development funding with a low required rate of return. The capital grant is included to provide a cushion against biological and timing risk of the biomass
rebuilding.
Table 4. Financial model assumptions
Inputs Values
Inputs Values
Price Constant at 3 kg
Gearing ratio 50 per cent
Price mark-up in reform scenario
20 per cent Guaranteed debt interest
rate 4 per cent real
Levy on revenue 40 per cent
Interest rate 6 per cent real
Tax rate 25 per cent
Debt guarantees US1 million
Management operating costs
US1.6 million Capital grants
US1 million Social discount rate
3.5 per cent real Fisher compensation
0 per cent Source:
Vivid Economics
The best estimates of the bio-economic model suggest a real rate of return of 9 per cent on equity investment when catches are reduced by 25 per cent in the transition phase compared with their 2014
levels. In order to achieve a return at this level, equity investment requires enhancement from capital grants. A total of US6.8 million of investment is required, made up of US2.4 million in equity, US3.4
million in debt and US1 million of grants. Seventy-six per cent of funding is required for management operating costs during the fishery recovery phase; 15 per cent for capital costs; 4 per cent is capitalised
interest from debt; and 4 per cent is provisions and working capital. A capital grant can be targeted at making the project more appealing to investors, and is required as a cushion against risk involved in rebuilding the
biomass. Given the social gains accruing from the project, the government andor an international development organisation may choose to subsidise the reform project.
The total return on the investment is expected to be real 6 per cent, with debt earning 5 per cent and equity earning 9 per cent. The revenues come from a 40 per cent share of total fishing revenues, which are
estimated to be US6.2 million per annum when catches are at their MSY level, compared with US 3 million in 2012 and US 2.3 million if the fishery were to be stabilised but not rebuilt. The timing of the
biomass rebuilding is important since no revenues are generated during the transition phase. Cash flows available to equity investors are revenues net of management operating costs, interest and debt repayment,
and 25 per cent corporation tax, and are expected to be approximately US350,000 per annum for a period of 23 years from 2018. These cash flows have a present value of US2.5 million, assuming a real 7 per cent
discount rate. The present value of all equity outlays is US2.1 million, giving an NPV of US 0.43 million. Debt interest plus principal repayments start in 2018 at a level of US380,000 per annum. The lowest debt
service cover ratio over the life of the project is estimated to be 2.1.
4.1.4 Fishers’ income
The impact of the management reform on fishers may be compared with a scenario in which the fishery is stabilised at the current biomass level. In the reform scenario the total fishing effort is reduced
during the transition period and then increases. The central scenario assumes a reduction of 25 per cent in catches, with the number of fishermen required to harvest the available catch decreasing from 1,500 in 2012
to 360 in 2015. The lowest number of fishers required to harvest the available catch is estimated at approximately 4
10 in 2016, when catches are still low and fishers’ productivity improves due to stock rebuilding. When the fishery starts operating at MSY, the number of fishers required to harvest available
catch increases to 990. In the stabilised fishery scenario, the number of fishers is 1,180 from 2015, with relatively low catch per unit effort.
Fishers’ total income, which includes per fisher income and profits, has an NPV of US46 million in the reform scenario, assuming a 3.5 per cent social discount rate, compared with an NPV of US29
million under a stable current biomass.
This represents an increase in the present value of fishers’ income of US18 million. Fishers’ total annual income falls from US2.3 million in 2012 to US 0.7 million in
2015, when catches are cut. Similarly, income per fisher decreases by 38 per cent, from US 1,570 in 2010 to US 970 in 2015. When the biomass is rebuilt, fishers’ total income rises to US 3.2 million per annum,
representing an 8 per cent increase relative to 2010, and would be 180 per cent higher than income under the stabilising scenario. Per fisher income rises substantially in the reformed fishery, when it is operating at
MSY, as fishers’ overall productivity increases by 270 per cent relative to 2012. Per fisher income is expected to be US3,200 per annum when the fishery is operating at MSY. In the stabilised fishery scenario,
annual income per fisher would be much lower, at US1,400. During the transition phase the fishing fleet is assumed to operate at full capacity and surplus boats are either retired or mothballed. The impact of the
fishery reform on the number of fishers and on per fisher income can be softened by a compensation package during the rebuilding period. However, this increases the cost of the reform and requires a higher revenue
sharing rate in the latter stages of the project to sustain the rate of return to prospective investors.
4.2 Model uncertainty and option value
4.2.1 Parameter uncertainty
The uncertain biomass rebuilding rate is the main risk factor for prospective investors. The state of the current biomass and its intrinsic growth rate give a wide range for the predicted duration of the
transition phase. Two important parameters in determining the rate and scale of rebuilding are the carrying capacity, which is the maximum biomass the fishery can sustain, and the intrinsic growth rate, which
measures the recruitment of biomass. The central model scenario is populated with the best estimates of the intrinsic growth rate r and the size of the initial biomass as a proportion of the carrying capacity K. These
estimates are: – intrinsic growth rate of 1.2 for the BSC;
– size of the initial biomass as a proportion of the carrying capacity of 40 per cent for BSC; – resulting carrying capacity estimates of 5,700 t.
As well as best estimates B, low L and high H values for intrinsic growth rate and the initial biomass of the carrying capacity are also considered, making nine different combinations of model estimates
{LL,LB,LH,BL,BB,BH,HL,HB,HH}.
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
