Table A.2.7 Capital value and capital costs and their consequences on profit (mln Euro)............................67. Table A.2 8 Summary of the capital values ...
EVALUATION OF THE CAPITAL VALUE, INVESTMENTS AND CAPITAL COSTS IN THE FISHERIES SECTOR No FISH/2005/03
FINAL REPORT
by IREPA Onlus
In co-operation with IFREMER, France FOI, Denmark SEAFISH, United Kingdom LEI BV, Netherlands FRAMIAN BV, Netherlands October 2006
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CONTENTS SUMMARY.................................................................................................................................................................12 1.INTRODUCTION................................................................................................................................................13 2.PROPOSED METHOD ......................................................................................................................................18 2.1 PIM proposed by OECD...................................................................................................................................18 2.2 Application of PIM to fishing fleets .................................................................................................................19 2.3 Calculation of capital costs.................................................................................................................................26 2.4 Valuation model...................................................................................................................................................28 2.5 Valuation of intangible assets ............................................................................................................................34 2.6 Valuation of ‘other assets ...................................................................................................................................36 3.THEORETICAL CONSIDERATIONS...........................................................................................................38 3.1 The conceptual framework ................................................................................................................................38 3.2 Overview of measurement methods.................................................................................................................52 REFERENCES..........................................................................................................................................................56 APPENDIX A: Denmark ........................................................................................................................................58 Introduction: Data sources.......................................................................................................................................58 1. General national situation.....................................................................................................................................58 1.1 Investments in new vessels ................................................................................................................................58 1.2 Investments in fishing rights..............................................................................................................................59 1.3 Investments in 2nd hand vessels.......................................................................................................................60 1.4 Investments in shore facilities............................................................................................................................60 1.5 Approach to calculation of capital value in agriculture .................................................................................61 2. National fleet ..........................................................................................................................................................62 2.1 Description of the case study fleet....................................................................................................................62 2.2 Data and estimation of price per capacity unit ...............................................................................................62 2.3 Capital value and capital costs ...........................................................................................................................66 2.4 Evaluation .............................................................................................................................................................68 3. Fleet under 12 meters............................................................................................................................................69 3.1 Description of the case study fleet < 12m.......................................................................................................69 3.2 Data and estimation of price per capacity unit ...............................................................................................70 3.3 Capital value and capital costs ...........................................................................................................................71 4. Fleet 12 meters and over.......................................................................................................................................72 4.1 Description of the case study fleet >12m........................................................................................................72 4.2 Data and estimation of price per capacity unit ...............................................................................................73 4.3 Capital value and capital costs ...........................................................................................................................73 Appendix A.1 Account Statistics for Fisheries - Denmark .................................................................................75 APPENDIX B: France .............................................................................................................................................78 Introduction: Data sources.......................................................................................................................................78 1. General national situation – national markets for fishery assets....................................................................79 1.1 Investments in new vessels ................................................................................................................................79 1.2 Investments in fishing rights..............................................................................................................................80 1.3 Investments in 2nd hand vessels.......................................................................................................................81 1.4 Investments in shore facilities............................................................................................................................82 1.5 Approach for the calculation of capital value in agriculture and/or by statistical office .........................83 2. Estimation of value per capacity unit .................................................................................................................83 2.1 Data and estimation of price per capacity unit ...............................................................................................83 2.2 Capital value and capital costs ...........................................................................................................................87 3 Total fleet (under 30meters, NSCA coast).........................................................................................................92 3.1 Description of the case study total fleet...........................................................................................................92
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3.2 Data and estimation of price per capacity unit ...............................................................................................93 3.3 Capital value and capital costs ...........................................................................................................................93 4. Fleet under 12 meters (NSCA coast)..................................................................................................................95 4.1 Description of the case study fleet 24 m.) .................................................................................................... 175 5.1 Description of the case study vessels >1.501 hp (beam trawlers >24m.) ............................................... 175 5.2 Data and estimation of price per capacity unit ............................................................................................ 175 5.3 Capital value and capital costs vessels ........................................................................................................... 176 5.3.1Tangible capital ............................................................................................................................................... 176 6. Evaluation ............................................................................................................................................................ 178 APPENDIX E: United Kingdom ........................................................................................................................ 179 Introduction: Data sources.................................................................................................................................... 179 1. General national situation – national markets for fishery assets................................................................. 179 1.1 Investments in new vessels ............................................................................................................................. 179 1.2 Investments in fishing rights........................................................................................................................... 180 1.3 Investments in 2nd hand vessels.................................................................................................................... 182 1.4 Investments in shore facilities......................................................................................................................... 182 1.5 Approach to calculation of capital value in agriculture and/or by statistical office............................... 182 2. Total fleet ............................................................................................................................................................. 183 2.1 Description of the case study fleet................................................................................................................. 183 2.2 Data and estimation of price per capacity unit ............................................................................................ 184 2.3 Capital value and capital costs ........................................................................................................................ 188 2.4 Evaluation .......................................................................................................................................................... 190 3. Fleet under 12 meters......................................................................................................................................... 191 3.1 Description of the case study fleet................................................................................................................. 191 3.2 Data and estimation of price per capacity unit ............................................................................................ 192 3.3 Capital value and capital costs ........................................................................................................................ 193 4. Fleet 12 meters and over.................................................................................................................................... 195
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4.1 Description of the case study.......................................................................................................................... 195 4.2 Data and estimation of price per capacity unit ............................................................................................ 195 4.3 Capital value and capital costs ........................................................................................................................ 196 5. Over 40m Pelagic Fleet...................................................................................................................................... 198 5.2 Data and estimation of price per capacity unit ............................................................................................ 198 5.3 Capital value and capital costs ........................................................................................................................ 199 5.4 Evaluation .......................................................................................................................................................... 200 6. Over 24 meters Demersal Trawl Fleet ............................................................................................................ 201 6.1 Description of the case study.......................................................................................................................... 201 6.2 Data and estimation of price per capacity unit ............................................................................................ 201 6.3 Capital value and capital costs ........................................................................................................................ 202
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TABLES Table 1. Depreciation period of hull, engine and electronics applied in AER by country, 2002..................41 Table 2. Average service lives in Fishing (OECD, 1992) ....................................................................................42 Table 3 Classification of fixed assets.......................................................................................................................47 Table A.1.1 Value of land-based assets owned by commercial Danish fishing vessels ..................................60 Table A.2.1 Distribution of recently build vessels with total fleet structure (%).............................................62 Table A.2 2 Average replacement values for total fleet in 2004 (Euro)............................................................63 Table A.2.3 Distribution of asset value for the Danish commercial fishing vessels (%)................................63 Table A.2.4 Correlation coefficients between selected physical characteristics ...............................................65 Table A.2.5 Weights used to calculate price indices .............................................................................................65 Table A.2.6 Overview of assumptions made in the Danish case studies (%) ..................................................66 Table A.2.7 Capital value and capital costs and their consequences on profit (mln Euro)............................67 Table A.2 8 Summary of the capital values – comparison of approaches (mln Euro) ...................................67 Table A.2 9 Relative composition of capital (%) .................................................................................................67 Table A.3.1 Average replacement values for vessels below 12 meters in 2004 (Euro)...................................70 Table A.3.2 Capital value and capital costs and their consequences on profit for vessels below 12 meters (mln Euro)...................................................................................................................................................................71 Table A.3.3 Summary of the capital values – comparison of approaches for vessels below 12 meters (mln Euro) ............................................................................................................................................................................71 Table A.3.4 Relative composition of capital (%) for vessels below 12 meters.................................................72 Table A.4.1 Average replacement values for vessels above 12 meters in 2004 (Euro)...................................73 Table A.4.2 Capital value and capital costs and their consequences on profit for vessels above 12 meters (mln Euro)...................................................................................................................................................................74 Table A.4.3 Summary of the capital values - comparison of approaches for vessels above 12 meters (mln Euro) ............................................................................................................................................................................74 Table A.4.4 Relative composition of capital for vessels above 12 meters (%).................................................74 Table B.2.1 Reducing balance rate in the French fiscal regulatory basis...........................................................89 Table B.2. 2 Overview of assumptions made in the French case studies .........................................................90 Table B.3.1Composition of the total fleet < 30m. by main DCR sub-segment ..............................................92 Table B.3.2 Price per capacity unit – Model estimates – Total fleet (NSCA, less than 30.) ..........................93 Table B.3.3 Summary of the capital values – NSCA Fleet 40m. pelagic UK fleet .................................................................................................................................................................... 199 Table E.5.3 Correlation coefficients between purchase price (adjusted to 2004 equivalent) and selected physical characteristics, based on sample of pelagic vessels in the UK fleet................................................. 199 Table E.5.4 Capital value and capital costs and their consequences on profit (sensitivity analysis).......... 199 Table E.5.5 Summary of the capital values (€ mln) - comparison of approaches ........................................ 200 Table E.5.6 Relative composition of capital (%)................................................................................................ 200 Table E.6.1 Characteristics of population and sample vessels for the over 24m. demersal segment case study .......................................................................................................................................................................... 201 Table E.6.2 Estimated average historic price (insured value indexed to 2004) per capacity unit and estimated replacement value (insured value in money of the day) per capacity unit the UK over 24m. demersal trawl fleet ................................................................................................................................................. 202 Table E.6.3 Correlation coefficients between purchase price (adjusted to 2004 equivalent) and selected physical characteristics, based on sample of over 24m. demersal trawl vessels in the UK fleet ................ 202 Table E.6.4 Capital value and capital costs and their consequences on profit (sensitivity analysis).......... 202 Table E.6.5 Summary of the capital values (€ mln) - comparison of approaches ........................................ 203 Table E.6.6 Relative composition of capital (%)................................................................................................ 203
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FIGURES Figure 1 Application of the PIM in practice by OECD ......................................................................................19 Figure 2 PIM application to fishing fleets.............................................................................................................20 Figure 3 Presentation of the composition of a fleet.............................................................................................23 Figure 4 Procedure for interpretation and estimation of prices per capacity unit...........................................24 Figure 5 Micro / macro calculation of depreciation and interest costs in the year t, tangible assets only (vessel and equipment) ..............................................................................................................................................27 Figure 6 Valuation model..........................................................................................................................................30 Figure 7 Spreadsheet for macro calculation of replacement value, depreciation and interest costs.............31 Figure 8 Spreadsheet for micro calculation of historic value, depreciation and interest costs ......................32 Figure 9 Comparison of macro and micro approach and sensitivity analysis ..................................................33 Figure 10 Accounting for intangible assets ............................................................................................................36 Figure 11. Typical mortality and survival functions .............................................................................................44 Figure A.1.1 Age composition of the Danish commercial fleet per 1/1-2005 (% of total)...........................59 Figure A.2.1 Accounting for tangible assets – decision tree –Denmark...........................................................64 Figure A.3.1 Age distribution of vessels = 12m.................................................................................................73 Figure B.1.1 Age composition of the French total fleet at 1rst January 2005..................................................79 Figure B.1.2 Evolution of the transaction rate on the second-hand Market (Atlantic Area) ........................81 Figure B.1.3 Evolution of average price per meter in constant kEuros on the second-hand Market (Atlantic Area).............................................................................................................................................................81 Figure B.1.4 Evolution of theoretical premium to scrap vessel (Atlantic Area) ..............................................82 Figure B.2.1 Accounting for tangible assets – decision tree – France...............................................................86 Figure B.3.1 Age composition of French NSCA fleet .........................................................................................92 Figure B.4.1 Age composition of Fleet < 12m......................................................................................................95 Figure B.5.1 Age composition of fleet 12-30 m....................................................................................................99 Figure B.6.1 Age composition of Trawlers 16-24m. ......................................................................................... 102 Figure B.7.1 Age composition of Passive gears < 12m. ................................................................................... 105 Figure C.1.1 Age composition of the total Italian fleet..................................................................................... 116 Figure C.1.2 Trend in second hand vessels’ prices ............................................................................................ 119 Figure C.2.1 Age composition of the total Italian fleet, 1935 - 2004.............................................................. 123 Figure C.2.2 Production Price Heavy Machinery index (base = 1992) .......................................................... 124 Figure C.2. 3Accounting for tangible assets – decision tree – for each vintage – Italy ............................... 127 Figure C.2.4 Capital values 2004 -Comparison between the general and the Italian assumptions............ 132 Figure C.3.1 Percentage incidence by length classes of the Italian fleet......................................................... 133 Figure C.3.2 Age composition of the fleet 1.501 hp (beam trawlers >24m.) ................................................ 175 Figure E.1.1 Age composition as percent of total for vessels in the UK 2005 fleet register........................179 Figure E.2.1 Age composition of the total UK fleet..........................................................................................184 Figure E.2.2 Accounting for tangible assets – decision tree – for each vintage – United Kingdom...........187 Figure E.3.1 Age composition of the under 12m. UK fleet...............................................................................191 Figure E.4.1 Age composition of the 12m. and over UK fleet .........................................................................195 Figure E.5.1 Age composition of the UK pelagic fleet.......................................................................................198 Figure E.6.1 Age composition of the UK over 24m. demersal trawl fleet ......................................................201
ABBREVIATIONS AER EAA/EAF 97 ESA 95 FADN GCS GFCF IASCF IFRS MSY PIM
Annual Economic Report Economic Accounts for Agriculture and Forestry European Systems of Accounts Farm Accounting Data Network in agriculture Gross Capital Stock Gross Fixed Capital Formation International Accounting Standard Committee Foundation International Financial Reporting Standard Maximum Sustainable Yield Perpetual Inventory Method
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SUMMARY This study has been carried to improve the quality of assessment of economic performance of the European fishing fleets. The objectives of the study can be summarized as follows: 1. To provide exhaustive definitions of concepts related to capital value and costs 2. To outline an overview of methods to estimate capital value and capital costs 3. To propose a method to be used 4. To demonstrate the applicability of the proposed method in a representative number of case studies. The project team has reviewed approaches to capital valuation proposed by OECD and used by the national statistical offices and the Farm Accounting Data Network in agriculture. The review shows unambiguously that Perpetual Inventory Method (PIM) has become the most important international standard for valuation of tangible capital goods. This method has been exhaustively described by OECD and therefore the present report reflects only the main issues of relevance. PIM proposes to determine the aggregate value of the tangible capital goods used in the current year by aggregation of the value of all vintages (year classes). Such aggregation can be based either on historical, current or constant prices. Once the value of the capital goods in a given benchmark year has been determined, the capital value of each subsequent year is calculated by adding investments of that year (gross capital formation), revaluing the existing stock and subtracting value of capital goods taken out of operation. The capital costs (depreciation and interest) are than calculated, using agreed depreciation schedule and interest rate. It is important to stress that there is no one unique single definition of capital value and capital costs. The definition to be used depends on the analytical purpose. Two fundamentally different types of analysis are distinguished: Macro (economic) approach, which values capital at replacement (current) prices and accounts for opportunity costs. Micro (fiscal) approach, which is close to fiscal accounting, values capital at historical prices and accounts only for interest costs paid. Different schedules of depreciation can be applied in both approaches, although the linear depreciation seems most popular. The proposed method distinguishes among for components of tangible capital: vessel, engine, electronics and other equipment. These four components are valued and depreciated separately. Valuation of intangible assets has been also evaluated. It is proposed to apply the approach established by FADN, i.e. tradable intangibles should be valued at current market price (or a multi year average), independently of the question whether they have or have not been acquired or whether they are or are not linked to specific tangible (e.g. vessel). However, price information on intangibles is scarce and estimations of their value when linked to tangibles are far from simple. Further research n valuation of intangible will be essential, as their value probably exceeds the value of tangible assets in many fisheries.
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The report points out that other types of capital have traditionally not received any attention, in particular land based assets (cars, buildings, etc.) and liquidity (working capital and reserves).
1. INTRODUCTION Background The EU legislation regarding collection of data on economic performance of fishing fleets1 obliges the Member States to compile and process data on capital values, investments and capital costs. However, the definitions of the data to be collected have not been sufficiently precise to assure one common approach and analytical interpretation across the EU. Reliable and unified approach to valuation of capital and determination of capital costs is required for the following reasons: calculation of net profit; estimation of profitability of invested capital; assessment of the dynamics of the sector in terms of level of investments (renovation of capital stock) and an evaluation of the ability of the sector maintain its capital value and continue operating in the future. Objectives The main goals of the study, as specified in the ToR of this study, are the following: a) To provide an exhaustive definition of the following economic terms in the fishery sector: Capital value Investments Depreciation cost Opportunity cost The study has to define all the tangible and intangible assets that compose the capital and the investments by element. It also needs to define criteria in order to classify assets, in terms of age life and share of total capital. A thorough research has to be made as to which components of the fixed capital should be included in the calculation of depreciation. b) To outline an overview of the existing methods for the estimates of: capital evaluation (historical value, replacement value, insurance value, book value and the question of fishing rights) - Council Regulation N°1543/2000 of 29 June 2000 establishing a Community framework for the collection and management of the data, the general principles and the procedures for the content of National Programmes needed to conduct the Common Fisheries Policy (CFP). - Commission Regulation N° 1639/2001 of 17 August 2001 establishing the minimum and extended Community programmes for the collection of data in the fisheries sector and laying down detailed rules for the application of Council reg. N° 1543/2000. - Commission Regulation N°1581/2004 of 27 August 2004 amending Regulation (EC) N°1639/2001 establishing the minimum and extended Community programmes for the collection of data in the fisheries sector.
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depreciation calculation (perpetual inventory method, “straight line” method) opportunity cost calculation.
c) To propose the best methods for the evaluation of capital value, investments, calculation of depreciation and opportunity costs, from a theoretical point of view, and to list the problems connected with their implementation. The method must produce results that are comparable between and across European fishing fleets. Terms of Reference The ToR of the study formulates further the following requirements: The results of the study must be applicable to all the European fishing fleet segments as defined in appendix III of the EU regulation 1581/04. Definitions and methods must be in line with the European System of Accounts and have regard to existing regulations concerning the definition of characteristics for structural business statistics, as well as the OECD report on measuring capital. Structure of the report The structure of the report is tailored to the needs of the main users i.e. STECF/SGECA and EC in their work on the review of the data collection regulation, which should be introduced in 2008. In the following sections of the introduction several main issues of importance are discussed: OECD approach and definitions (also accepted by statistical offices) of capital, investments and capital costs; applications of Micro and Macro approach with brief definitions; choice of the basic statistical unit: vessel and/or company. Chapter two presents the proposed method for capital valuation, which is largely based on the Perpetual Inventory Method (PIM) as proposed by OECD. This method has been accepted by many national statistical offices. On certain aspects, e.g. valuation of intangibles, reference is made to FADN and IFRS. This section can be read by those readers who are primarily interested in what needs to be done and how and not so in theoretical considerations, conceptual background or alternative options. Chapter three presents the conceptual background to the proposed method. It elaborates the advantages and disadvantage of alternative approaches and it explains why certain choices have been made. It also makes some further theoretical propositions which could be of relevance in the future (e.g. relation of rent to capital value or inclusion of considerations of risk interest rate). Chapter four compares the main results of the various case studies from five countries (Denmark, France, Italy, Netherlands and United Kingdom), which are presented in detail in appendices. Its primary relevance is to show that the proposed method can be applied in different countries, where data is collected in quite different ways.
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Finally, appendices contain the case studies of the five countries participating in this study. Capital values have been estimated for the total national fleet, fleet less than 12 meters, fleet 12 meters and over and in some cases also for specific segments, mostly based on DCR definitions. Structure of the capital Capital value is in principle the sum of all assets (or liabilities) presented on the annual balance sheet. The capital value of the fishing firms is in principle composed of the following components: Fixed tangible assets – sea-based = vessel, engine, electronics, other equipment on board. Fixed tangible assets – shore based = buildings, cars and other facilities on shore. Intangible assets = licences, quota, permits, etc. Working capital = liquidity (money) required to pay regularly on-going operational expenses. Reserves, participations, shares, etc. = resources (money) ‘invested’ in assets not directly related to the fishing operations, but for example maintained to assure pension payments to the owner. Until present, capital valuation in fisheries focused primarily on the vessel and its equipment. This report demonstrates that this partial approach falls short of the realities of the fishing sector and the analytical needs of fisheries managers. In particular value of intangible assets plays an important role in operational decision of fishing companies. Other components of capital should be born in mind, but are quantitatively much less important. Capital goods can be valued on the basis of different principles. The two most important principles are: Historical value, which is the value (or price) paid at the time of the acquisition of that good. Prices of used vessels (2nd hand market) are also historical values. Replacement value is the value which would have to be paid for identical capital good now. Replacement value is also called value at current prices, i.e. prices of the most recent year. Historical values can be in principle observed and recorded. Replacement value has to be estimated. The main problem with estimating replacement values is that technology progresses and in 2006 it is not possible to build a vessel with the same characteristics as a vessel built 20-30 years earlier. In the end it must be assumed that this problem does not really exist. Valuing capital goods, it is necessary to distinguish between gross and net values. Gross value is the total historical value paid (or replacement value calculated). Net value is the cross value minus depreciation. Various approaches to depreciation can be followed. The details are elaborated in chapters 2 and 3. Although not practiced in fisheries, in other sectors capital goods are commonly leased or rented. The value of leased fixed assets should be included in the total value of capital of the firm. The costs are either the lease costs or calculated depreciation plus opportunity costs.
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OECD approach and definitions The accepted standard in relation to capital valuation is the OECD Manual ‘Measuring capital – measurement of capital stocks, consumption of fixed capital and capital services’. The main definitions used in the manual are presented below (quotation from Annex 1 of the Manual): -
Gross capital stock is the value of all fixed assets still in use when a balance sheet is drawn up, at the actual or estimated current purchasers’ prices for new assets of the same type, irrespective of the age of the assets. Gross fixed capital formation (net investment) is measured by the total value of a producer’s acquisitions, less disposals, of fixed assets during the accounting period plus certain additions to the value of non-produced assets (such as land or subsoil assets) realised by the productive activity of institutional units. Gross capital formation is measured by the total value of the gross fixed capital formation, changes in inventories and acquisitions less disposals of valuables for a unit or sector. Consumption of fixed capital (depreciation) represents the reduction in the value of the fixed assets used in production during the accounting period resulting from physical deterioration, normal obsolescence or normal accidental damage. Net capital stock is the sum of the written-down values of all the fixed assets still in use when a balance sheet is drawn up. Net fixed capital formation consists of gross fixed capital formation less consumption of fixed capital. The net (or written-down) value of a fixed asset is equal to the actual or estimated current purchaser’s price of a new asset of the same type less the cumulative value of the consumption of fixed capital accrued up to that point in time. Tangible fixed assets are non-financial produced assets that consist of dwellings; other buildings and structures; machinery and equipment and cultivated assets. Intangible fixed assets are non-financial produced fixed assets that consist of mineral exploration, computer software, entertainment, literary or artistic originals and other intangible fixed assets intended to be used for more than one year.
OECD Manual uses three definitions of prices: - Constant prices - A stock of assets is expressed at constant prices when all members of the stock are valued at the prices of a single base period. - Current prices - A stock of assets is expressed at current prices when all members of the stock are valued at the prices of the year in question. - Historic prices - The historic price is the price that was actually paid for an asset when it was first acquired by a resident user. It is a synonym for “acquisition price”. In the present document the concept of ‘constant prices’ is not considered relevant for the required application and consequently not used. The term current prices refers to the most recent year and is used interchangeably with ‘replacement price’. The term historic prices is used in the above meaning of ‘acquisition value’. Micro / Macro approach with brief definitions Various approaches to capital valuation and use of different indicators are relevant depending on specific analytical needs. From the perspective of assessment of performance of fishing vessels,
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two main approaches should be distinguished – micro and macro. Their relevance is characterized in the table below. Scope Type of analysis / application Time horizon Value used
Micro approach Individual firm level Fiscal accounting Economic life time of the capital good or firm Historical value
Macro approach Sector and macro / society level Economic valuation Indefinite Replacement value (current prices)
Micro / macro approach are further elaborated in chapters 2 and 3. Vessel or company as a basic statistical unit The above overview of the structure of capital shows that in some cases data can be collected using vessel as the basic statistical unit, but in other cases it must be the total firm. The latter case refers to shore based capital, reserves, etc. Until present fisheries statistics used fundamentally the vessel as a basic unit. This applied not only to economics, but also to biologic research or to logbook data. There are various arguments for using vessel as the basic unit also in the future: - vessel and its equipment compose the most significant part of the capital, - intangibles are often related to vessel and not to firm, - in most cases, one firm owns only one vessel, so that the link between vessel and firm related capital components is straightforward2. Consequently, capital costs of a firm which are not directly related to a specific vessel, need to be divided among the vessels belonging to that firm using some division key or assumptions. It must be stressed that this is a very common ‘problem’ in cost accounting and economics3. The only solution is to make the required assumption as realistic or acceptable as possible. In the coming years this may remain a largely artificial problem in fisheries for reasons specified above (one-man-one boat firms, vessel plus intangibles represent most of the capital value). However, should a significant concentration trend occur in the future, than the established vessel-firm accounting may have to be reconsidered. A unique value of a vessel does not exist It is important to stress that valuation of capital (and consequently calculation of depreciation, interest or opportunity costs) is fundamentally different from keeping accounting records of operational expenses like fuel or maintenance. Capital goods can be valued in different ways, which are appropriate (or not) according to the question asked. A vessel represents a so called However, in some countries (e.g. UK and NL) a significant minority of vessels is owned by fleet operators. See e.g. Robert Kaplan and W. Bruns, Accounting and Management: A Field Study Perspective (Harvard Business School Press 1987 ISBN 0-87584-186-4).
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sunk investment (i.e. money involved cannot be used for anything else). Its value can be viewed in different ways (overview is not exhaustive): - Net present value of a successfully continued operation – will depend on expectations about future performance (revenues and costs) and assumed interest rate. - 2nd hand market price – depends on local and international supply of and demand for comparable vessels. It may be affected by expected decommissioning schemes, which would set a bottom price. - Book value – historical price less depreciation - Economic value 1, which would also take into account potential benefits and costs of shifting to a new and more productive technology. - Economic value 2 – from the perspective of the society it could be even desirable to include the environmental impact.
2. PROPOSED METHOD 2.1 PIM proposed by OECD On the basis of the theoretical considerations and current practices in many countries, it was decided to focus the common method to be developed on the Perpetual Inventory Method (PIM). This method is recommended by OECD as well as by various national statistical offices. Application of PIM is presented in the following figure 1 from OECD (2001a). OECD describes the Perpetual Inventory Method (PIM) as follows: The Perpetual Inventory Method (PIM) generates an estimate of the capital stock by accumulating past purchases of assets over their estimated service lives. The standard, or traditional, procedure is to use the PIM to estimate the gross capital stock, to apply a depreciation function to calculate consumption of fixed capital and to obtain the net capital stock by subtracting accumulated capital consumption from the gross capital stock. The traditional application of the PIM requires the direct estimation of depreciation from which the net capital stock is obtained indirectly. The basic requirements to apply the PIM to estimate the Gross Capital Stock are: - An initial benchmark estimate of the capital stock. - Statistics on gross fixed capital formation extending back to the bench-mark, or, if no bench-mark is available, back over the life of the longest-lived asset. - Asset price indices. - Information on the average service lives of different assets. - Information on how assets are retired around the average service life (mortality functions). Provided the capital stock series go back as many years as the longest-lived asset, it is possible to estimate the capital stock without having an initial benchmark estimate. However, as the longest lived assets, usually structures, may have service lives in excess of 100 years, most countries need to start their PIM estimates with a bench-mark estimate, at least for assets with long lives. Possible sources for benchmark estimates include: - Population censuses. - Fire insurance records.
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- Company accounts. - Administrative property records. - Share valuations. None of these sources will give an accurate estimate of precisely what is required – namely the “as new” values of assets in place at a point in time. Once the initial bench-mark of the stock has been estimated, the capital value of each following year can be updated by adding new investments (gross fixed capital formation) and subtracting depreciation and retirements. This is illustrated in figure 1. Figure 1 Application of the PIM in practice by OECD
Source: OECD Manual, p.59
2.2 Application of PIM to fishing fleets For the application to fisheries figure 1 can be slightly reformulated and simplified. Figure 1 assumes that the value of the GCS is expressed in price level of another than the current year. Therefore it is necessary to recalculate the GFCF of the current year to the base year to obtain constant prices. In the proposed application to fisheries the entire GCS is revaluated each year to the current value, because that is analytically relevant. When data on earnings and costs refer to 2005 it does not make sense to insert capital costs referring to another year. OECD proposes specific values for service lives (average life time of an asset) and mortality functions (retirement of the asset around the service life). These functions are introduced
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because for macro economic purposes there are insufficient data on the physical stock of the capital. However, in fisheries the national fleet registers give annually precise information in this respect and updating of the values of each ‘vintage’ (year class) of vessels is therefore possible. Fleet of a certain year can be measured in different points in time. The fleet registers are available on monthly basis. It is proposed to define the GCS on the basis of the average annual fleet, i.e. the arithmetic average between the situation on 1.1. and 31.12. or a comparable indicator. Consequently for the purposes of assessment of fleet performance figure 1 can be simplified into figure 2. Figure 2 PIM application to fishing fleets GFCF at current prices (1)
New vessels
Service lives (2)
Engines, electronics, equipment
PIM (3) Depreciation function (4)
Retirements (5)
Consumption of fixed capital at current prices
Gross capital stock at current prices
Net capital stock at current prices
In the figure 2 the five top items can be explained as follows. (1) Gross Fixed Capital Formation (GFCF) at current prices GFCF represents the new investments in the fleet. The investments are composed of: - the value of new vessels which entered the fleet in the current year, - replacement of engines, electronics and other equipment. The value of new vessels can be either determined on the basis of recorded new prices or on the basis of an estimation of price per capacity unit. This price can be applied to the registered new capacities. The capacity units can be expressed in kW, GT, length or any combination of these. General procedure for estimation of prices is presented in figure 4. Different approaches to the estimation of prices are illustrated in the case studies in the appendices. Value of new engines, electronics and other equipment needs to be estimated in two steps:
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numbers of replaced asset items (engines, etc.) is estimated with the assumed service lives: o engine 10 years o electronics 5 years o other equipment 7 years For example, the average fleet of 2005 indicates that X vessels built in 1995 are still in operation. This means that X engines will be replaced by new ones.
-
Average price per asset item. Usually it is not possible to obtain a sufficiently large number of observations of these prices. Therefore it is proposed to estimate the share of each asset item in the total vessel price and determine the average price on the basis of this share and the vessel price.
(2) Service lives An average service life has to be determined for each type of assets. The following service lives are generally accepted for macro (economic) analysis: - Hull – 25 years - Engine – 10 years - Electronics – 5 years - Other equipments – 7 years It is possible that different service lives should be used for micro (fiscal) analysis in different countries, depending on rules set by the national fiscal offices. (3) PIM PIM contains the details of the Gross Capital Stock (GCS) by vintage (year of construction) valued at current prices. This is the bench-mark value of GCS from each preceding year. The very first estimation of the bench-mark value is discussed in the following section. For the fishing fleet, PIM contains age structure of the active fleet (based on construction year of the hull, as recorded in the fleet register) and an age schedule of the other assets (engine, electronics and other). (See also section 2.4 Valuation model). (4) Depreciation function Various depreciation functions can be applied. It is proposed to use two different depreciation functions, according to the approach. For the macro (economic) approach a ‘degressive’ depreciation function should be used. This function leads to relatively high depreciation when the assets are still relatively new, but the value of even very old assets never becomes zero. Using ‘degressive’ function implies the following annual depreciation rate, which is applied to the net capital stock: - Hull – 7% - Engine – 25% - Electronics – 50% - Other equipments – 35%
21
For micro (fiscal) approach it is recommended to use depreciation schedules permitted by the national tax laws. This will be usually a linear function, with approximate life times stated above. Using ‘degressive’ function implies the following annual depreciation rate, which is applied to the historical value of the asset: - Hull – 2.5% - Engine – 10% - Electronics – 20% - Other equipments – 16% In case of the hull a scrap value of 2.5-5% of the historical price can be assumed after 25 years. For the EEO (Engine, Electronics and Other) the scrap value is assumed zero. (5) Retirements Retirements are the vessels (or capacity units) which have stopped operating in the course of the year. This is the difference per vintage of two subsequent fleet registers. This data is in detail available in all EU MS. Establishment of the bench-mark of gross capital stock (GCS) Estimation of the bench-mark value of GCS would be ideally achieved if historical prices of all active vessels would be available. This is evidently not the case. On the contrary, information on historical, new and second prices is relatively scarce. Therefore it is proposed to estimate the value of GCS in three steps: 1. Specification of the composition of the active fleet by age. 2. Estimation of price per unit of capacity (e.g. per GT) 3. Calculation of the value of each vintage (year of construction) of the fleet and either converting values of all vintages to current prices or to historic prices using price indices. Specification of age composition Composition of the national fleets and all distinguished DCR segments by age can be drawn from the fleet registers. Format of the table to be generated for each DCR segment is presented in figure 3.
22
Figure 3 Presentation of the composition of a fleet Year of construction Total 2004 2003 2002 … … … … … 1935
Number
GRT
GT
kW
Estimation of the prices per capacity unit depends on the availability of the data and the correctness of its interpretation. The scheme to be followed is presented in figure 3. The figure 3 is based on experiences and diversity of the countries involved in the project. It shows that different approaches can be followed to arrive at a conceptually same result. Estimation of price per capacity unit Determination of the price per capacity unit is the central theme of entire valuation of GCS in fisheries. It required careful interpretation of the collected information on values of vessels and if necessary its adaptation. The procedure is presented schematically in figure 4. First, it must be determined what value indicators can be reliably observed and collected. In principle three or four types of observable value indicators exist: - Historic prices, i.e. prices actually paid in for newly constructed vessels. - 2nd hand prices, i.e. prices actually paid for used vessels. - Insurance premiums, which are based on insurance values, and so insurance values can be derived from them. - Insurance values, collected for example from company administrations or insurance companies. - Book value as presented on the balance sheets.
23
Figure 4 Procedure for interpretation and estimation of prices per capacity unit What value indicators can be collected / observed? Insurance premiums
Historic value
Book value
2nd hand values
Insurance values Do the data refer to the tangible assets only or do they also contain value of intangibles?
Contain intangibles Estimate / separate tangible and intangible value, describe approach
Value of tangible (vessel) only
What does the available value per vessel represent?
Replacement value (RV) (3)
Historic value (HV) (4)
Book value (2) Estimate total depreciation to determine historical value
Estimate replacement price / cu Determine series of historical prices/cu
Other
Estimate RV and /or HV, describe approach
Estimate series of historic prices / cu Price index series (1)
Recent historic price = replacement price./cu
Follow columns (RV) or (HV)
Notes:
cu = capacity unit vessel refers to complete unit incl. hull, engine, electronics and all other equipment (1) Price index heavy machinery or another index related to boat building (2) Depreciated / book value will be usually based on historical price. (3) RV = Value at current price of the most recent year (4) HV= Value at historical prices, in case only one or several years available, remaining years can be extra/interpolated with the price index
24
Secondly, it must be determined whether the observed value refers only to the physical vessel (plus equipment, etc.) or whether it also contains implicitly values of intangibles like licenses, quotas or permits. This consideration must be given explicitly to all types of observable values. In many countries specific intangibles are tied to a vessel. Not only that 2nd hand vessels may contain the value of that intangible, but also newly built vessels may contain it as shipyards in some case hold the necessary intangibles to facilitate new constructions. Consequently, even insurance value may refer to the sum of tangible and intangible assets. Thirdly, subsidies and taxes need to be accounted for if necessary. Historic prices paid for new vessels may be affected by subsidies provided under the EU structural funds or otherwise. This was particularly common in the 1980ies. Also non-reimbursable taxes should be taken into account, but in practice such taxes have not occurred4. Historic cost of a new vessel to the owner amounted to price paid to shipyard minus subsidy. The following definitions should be used: - Micro approach: Historic price = price paid to shipyard + taxes – subsidies - Macro approach: Replacement price = (historic price – taxes + subsidies)*price index In case that intangibles are part of the asset value, it is necessary to separate them from the tangibles so that the determined value per capacity unit refers exclusively to physical assets. There is probably no one single way to achieve this separation. One possible approach is presented in appendix B (French case study). After it has been ascertained that the raw data contain only values referring to the tangible assets, it must be concluded which kind of value (price) it represents. There are in principle the following possibilities: - Replacement value, i.e. value in the current year. This is for example the case in countries where insurance values are determined on the basis of replacement in case of total loss. - Historic value, i.e. the originally paid price for a new vessel. - Book value, i.e. historic price less total depreciation. This value is presented on the balance sheet. 2nd hand prices could in ideal situations reflect the book values. Book value can be transposed to historic value by adding the (estimated) total depreciation costs. - Other value. In this case a further interpretation will be required to create a link either to replacement or to historic value. The observed data will refer to vessels of different sizes and ages. On the basis of this data it is necessary to estimate a price per capacity unit, using e.g. least squares or other estimation method. It is proposed that the price per capacity unit be estimated as far as possible for all major fleet segments. The segments should be homogenous in the sense that the standard variation of the estimated price per capacity unit should not be ‘excessive’. This means that for this purpose the segments do not necessarily have to be defined in terms of DCR, although it must be possible to relate the results directly to the DCR segments. Due to lack of data, not all presented case studies meet this requirement of homogeneity of the segments. Further data may have to be collected to improve the quality of the estimations in the future. The result will be either an estimation of the current (replacement) price per capacity unit or an estimation of series of historic prices. The current price can be transposed to a series of historic 4
All vessel prices must be considered excluding VAT.
25
prices by applying an appropriate index. It is proposed to use the ‘heavy machinery index’, which is available at national as well as EU level, or another suitable index which may be available or which may have been developed for this purpose5. In case that a series of historic prices has been estimated, it is likely that the number of observations for each vintage will be quite limited. Especially since 1990, when the level of investments has been rather low in most fleet segments. Consequently, there may be significant variations of the estimated price between the various years. Unless these variations can be explained, it is proposed to recalculate the series into multi-annual averages. Appendices present different approaches of estimations as developed by the members of the team in different countries. It is essential that all countries carrying out the estimation of the GCS value describe their approach in detail in terms of available data (its representativity), its meaning, concepts behind estimation, estimated relations (incl. R2, etc.), applied series of indices and specification of assumptions.
2.3 Calculation of capital costs Capital costs can be calculated in different ways, according to the analytical perspective. Two such perspectives can be distinguished: micro and macro. Micro perspective Micro perspective reflects the context of the firm. This implies that the calculations should be as close as possible to the actual monetary flows using historic prices paid (i.e. after addition of eventual taxes6 and subtraction of subsidies). The capital costs (depreciation and interest) should closely follow the national fiscal rules. This means that depreciation costs should be based on fiscally accepted life times and depreciation schemes. Usually linear depreciation based on the historic price will be used. Performance is positive when the historic investment can be recuperated. Only interest paid on loans is included in costs. In case that the data on paid interest is not available this would have to be calculated, using market interest rate for medium term loans (510 years). The interest rate must be applied to loans only, so that also information on debts or the solvability ratio (debt/total capital) is required. Macro perspective Macro perspective reflects the context of the society at large, with an indefinite time horizon. This means that the fishing sector should continue operating ‘for ever’ and its performance is
5 6
Specific index has been developed in Denmark and in the Netherlands. Except VAT.
26
evaluated accordingly. The results should allow regular replacement of capital goods beyond the current generation. Calculation of capital costs is based on replacement value. It is proposed to use degressive depreciation scheme so that the residual value never reaches zero. Interest costs should be the opportunity costs of capital. This means that the interest on government bonds (as an alternative to investment in fishing) should be applied to the net capital stock (replacement value less aggregate depreciation). It could be argued that the proposed method of calculation of the replacement value leads to an overestimation. If the physical productivity of one unit of fishing capacity is increasing (i.e. catch in tonnes per capacity unit per year) while the resource is exploited at a relatively constant MSY level, the number of required capacity units is falling at the speed of the productivity rise. Consequently the replacement value should be adjusted accordingly. The problem is that with fluctuating stocks, it is difficult to obtain a good estimate of the increase in physical productivity. The relation between micro and macro approach is presented in figure 5. Figure 5 Micro / macro calculation of depreciation and interest costs in the year t, tangible assets only (vessel and equipment) Micro approach (Fiscal)
Macro approach (Economic)
Historical value
Replacement value
Fiscal depreciation scheme
Depreciation costs
Paid interest or market interest rate * debts
Paid interest costs
Economic depreciation scheme
Total depreciation Government bonds rate
Depreciation costs
Interest costs / opportunity
As micro and macro approach lead to different figures, resulting indicators, like net profit, are also different.
27
2.4 Valuation model In order to make all calculations among the authors consistent a valuation model was developed and applied. The structure of the model is presented in figure 6. The spreadsheets are in figure 7 and 8. Input data The following data are inserted in the spreadsheet, either based on national evidence or on proposed assumptions: Estimated replacement price per capacity unit of the current year or the series of historical prices per capacity unit. Price indices, to calculate historical values from replacement values or vice versa (boat building or heavy machinery index). Selected capacity units, belonging to the estimated price per capacity. If available, price indices for engines, electronics and other equipment. This will allow a more precise estimation of the values of these asset items. If not available the above mentioned price index must be used. Relative composition of the value of the assets in the four main distinguished components of the assets: hull, engine, electronics and other. Depreciation schemes for macro and micro approach. With this data it is possible to estimate gross historic and replacement values of the four asset components and their sum, which represents the gross capital stock. The total values for each year represent the gross fixed capital formation, after accounting for the mortality which occurred in that vintage. This is the yellow area in the spreadsheet. Two depreciation schemes are used in the model as means of sensitivity analysis: degressive and linear. Applying these schemes generates the net fixed capital formation of each vintage. The sum of the vintage generates the total net capital stock and value of net capital stock by asset type. Applying the depreciation rates to the gross capital stock by asset type generates the depreciation costs of the current year. In the case of degressive depreciation, the value of the hull is continuously depreciated, without reaching zero. In the case of linear depreciation it is assumed that after 40 years the value of the hull remains at 2.5% of the replacement value (macro approach). Renovation of engines, electronics and other equipment takes place on a continuous and regular basis. Therefore engines get never older than 10 years and electronics are replaced after 5 years. To allow the calculation of the net value of the EEO assets (Engine, Electronics and Other), an appropriate age schedule must be used. The models for macro and micro approach are almost identical, with the exception of two items: Macro approach applies same price to all vintages, while micro approach uses the original historical prices (column G in figure 7 and 8).
28
-
In the micro approach prices of the EEO assets (Engine, Electronics and Other) must be adjusted to their actual age of acquisition, e.g. engine on an 11 years old vessel is only one year and therefore its price cannot be related to historic vessel price of 11 years ago. A separate price schedule has been introduced.
The spreadsheet for micro valuation also allows for two different types of depreciation. This, however, may not be relevant in many countries, where only one system of fiscal depreciation is common. Finally, the valuation model generates an overview to compare the result of the four different calculations (figure 9). It shows the details of the depreciation schemes (table A), effect on the net profit (table B) and a comparison of the gross and net capital stock values. The given example (based on data for Italy) shows that: The difference between historical (micro) and replacement (macro) gross and net capital stock is primarily caused by the different values of the hull. Values of EEO assets are not significantly different, due to their regular replacement. Using degressive depreciation leads substantially lower capital values than using linear depreciation. Linear depreciation leads to lower deprecation costs than the degressive depreciation scheme.
29
Figure 6 Valuation model Historical price / capacity unit
Historical value - hull - engine - electronics - other
Price index
Selected capacity units Price index E-E-O (5) Relative composition: hull, engine, electronics, other
Total historical value (HV) (1)
Depreciated HV value - hull - engine - electronics - other
Replacement price / capacity unit
Replacement value - hull - engine - electronics - other
Total replacement value (RV) (2)
Depreciation scheme - hull - engine - electronics - other
Depreciated RV value - hull - engine - electronics - other
Total depreciated HV (3)
Total depreciated RV (4)
Micro / fiscal approach
Macro / economic approach
(1) Gross fixed capital value at current prices (prices actually paid) (2) Gross fixed capital value at constant prices (prices to be paid in most recent year = year of analysis) (3) Net fixed capital value at current prices (4) Net fixed capital value at constant prices (5) For the calculation of historical value of engine, electronics and other, it is necessary to increase the historical value per capacity unit with a price index to account for the fact that e.g. on a 12 meters year old vessel engine and electronics are 2 years old and other equipment 5 years.
30
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34
A
F
Fleet composition per Fill in only the white area: - selected capacity units - price per capacity unit Adjust possibly assumptions in red according to national data
183
I
J
K
L
M
N
O
Hull Engine Electronics Other equipment Government bonds
P
Q
R
Deprecia- Renova-tion Share in total tion rate every X years investm. 7% 40 60% 25% 10 20% 50% 5 10% 35% 7 10% 5%
S
T
Hull Engine Electronics Other equipment Residual val. hull
U
V
W
X
Deprecia- Renova-tion Share in total tion rate every X years investm. 2.5% 40 60% 10.0% 10 20% 20.0% 5 10% 16.0% 7 10% 2.5%
111
Engine Electro-nics
2.9 2.3 3.0 1.5 0.8 0.6 0.4 7.7 3.2 2.0 1.1 0.9 0.4 0.4 6.0
111
Other
29.3 33.3 60.5 44.2 31.1 36.4 35.4 55.0 31.4 26.7 31.2 38.1 22.0 29.5 38.1
1,352
Total
17.6 21.0 40.2 31.1 23.4 25.6 26.8 38.1 23.4 21.6 17.5 22.6 14.0 20.3 23.6
719
Hull
5.9 6.4 11.3 7.9 5.2 4.9 4.2 4.6 2.0 0.9 7.8 9.4 5.3 7.0 7.3
312
2.9 2.9 4.2 2.2 0.9 4.9 4.2 4.6 2.0 0.9 3.9 4.2 2.0 2.0 1.2
172
Engine Electro-nics
2.9 3.0 4.8 2.9 1.6 1.0 0.2 7.7 4.1 3.2 2.0 1.9 0.7 0.2 6.0
149
Other
107 68 175
Hull
209
2.9 1.8 1.8 0.7 0.3 4.9 2.6 1.9 0.6 0.3 3.9 2.6 0.8 0.6 0.4
Depreciation costs Interest costs Total capital c
Total
427
5.9 5.4 7.9 4.7 2.7 2.3 1.9 2.1 1.0 0.7 7.8 7.8 3.8 4.2 3.8
177 43 220
Other
858
17.6 18.6 34.0 25.2 18.1 19.0 19.0 25.8 15.2 13.5 10.5 13.1 7.8 10.9 12.2
Depreciation costs Interest costs Total capital c
Electroni cs
282
29.3 28.1 46.7 32.2 21.9 26.7 23.9 37.5 20.0 16.5 23.3 24.4 12.8 16.1 22.5
Depreciated value (mln Euro)
Engine 282
2.9 3.6 7.1 5.6 4.3 4.9 5.3 7.7 4.9 4.7 3.9 5.2 3.3 5.0 6.0
Depreciated value (mln Euro)
Hull 564
2.9 3.6 7.1 5.6 4.3 4.9 5.3 7.7 4.9 4.7 3.9 5.2 3.3 5.0 6.0
Replacement value (mln Euro)
Total 1,691 5.9 7.2 14.1 11.2 8.7 9.8 10.5 15.4 9.8 9.3 7.8 10.4 6.7 10.0 12.1
Linear depreciation Net capital stock
2,819 17.6 21.5 42.3 33.7 26.0 29.3 31.5 46.2 29.3 27.9 23.4 31.2 20.0 30.1 36.3
Digressive depreciation Net capital stock
29.3 35.8 70.5 56.1 43.4 48.8 52.6 76.9 48.8 46.6 38.9 52.1 33.4 50.1 60.5
Gross capital stock
H
Figure 7 Spreadsheet for macro calculation of replacement value, depreciation and interest costs G
15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4 15.4
Selected Price / capacity capacity units unit 2004 (1000 Euro) (1000 GRT)
Total 1.9 2.3 4.6 3.6 2.8 3.2 3.4 5.0 3.2 3.0 2.5 3.4 2.2 3.3 3.9
Year
2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Based on data for Italy
AA
Other
AB
Z
Electronics
0 1 2 3 4 5 6 0 1 2 3 4 5 6 0
Y
Hull Engi-ne
0 1 2 3 4 0 1 2 3 4 0 1 2 3 4
Age schedule
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
31
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34
A
F
Fleet composition per 1/1/2005 Fill in only the white area: - selected capacity units - price per capacity unit
G
Adjust possibly assumptions in red according to national data
183 15.4 15.2 15.1 15.0 14.7 14.6 14.5 14.2 13.9 13.3 12.6 12.2 11.8 11.4 11.0
Price / Selected capacity unit capacity units 2004 (1000 (1000 GRT) Euro)
Total 1.9 2.3 4.6 3.6 2.8 3.2 3.4 5.0 3.2 3.0 2.5 3.4 2.2 3.3 3.9
Year
2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Based on data for Italy
H
I
J
K
L
M
N
P
Q
R
Renovation Share in total Fiscal rate 1 every X years investment 7% 40 60% Hull 25% 10 20% Engine 50% 5 10% Electronics 35% 7 10% Other equipment 5% Rest value hull 50%
O
S
U
V
Renovation Share in total Fiscal rate 2 every X years investment 2.5% 40 60% 10% 10 20% 20% 5 10% 16% 7 10% 2.5%
T
Other
1,122
Total
18 21 40 30 22 24 25 35 21 19 14 18 11 15 17
502
Hull
6 6 11 8 5 5 4 4 2 1 8 9 5 7 7
302
Engine
3 3 4 2 1 5 4 5 2 1 4 4 2 2 1
170
Electronics
2 2 4 2 1 0 5 8 4 3 2 2 1 0 6
147
Other
X
AA
AB
Other
1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.86 0.82 0.80 0.78 0.76 0.75
Engine
1.00 1.00 1.00 1.00 1.00 0.95 0.95 0.94 0.93 0.90 0.82 0.80 0.78 0.76 0.75
Electronics
1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.92 0.91 0.88 0.84 0.83 0.81 0.79 0.71
Other
AC
Electronics
0 1 2 3 4 5 6 0 1 2 3 4 5 6 0
Z
Engine
0 1 2 3 4 0 1 2 3 4 0 1 2 3 4
Y
Hull
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4
Price index
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Age schedule
W
Figure 8 Spreadsheet for micro calculation of historic value, depreciation and interest costs Hull Engine Electronics Other equipment Market rate for loans Loans as % of GCS
Electronics
110
29 32 58 42 29 34 38 52 29 24 28 33 19 24 31
100 28 128
Engine
111
2 1 2 1 0 0 5 8 3 2 1 1 0 0 6
Depreciation costs Interest costs Total capital costs
Hull
204
3 2 2 1 0 5 3 2 1 0 4 3 1 1 0
167 19 186
Total
318
6 5 8 5 3 2 2 2 1 1 8 8 4 4 4
Depreciation costs Interest costs Total capital costs
Other 742
18 18 33 25 17 18 18 24 14 12 9 10 6 8 9
Depreciated value (mln Euro)
Engine Electronics 274
28 27 45 31 21 25 27 35 18 15 21 22 11 13 19
Depreciated value (mln Euro)
277 3 4 7 5 4 5 5 8 5 5 4 5 3 5 6
Historical value (mln Euro)
Hull 537 3 4 7 5 4 5 5 8 5 4 4 5 3 5 6
Fiscal rate 2 (linear depreciation) Net capital stock
Total 888 6 7 14 11 8 9 10 14 9 9 8 10 7 10 12
Fiscal rate 1 (digressive depreciation) Net capital stock
1,976 18 21 42 33 25 28 30 43 27 24 19 25 15 22 26
Gross capital stock
29 35 69 55 42 47 50 72 45 42 35 45 28 42 49
32
Figure 9 Comparison of macro and micro approach and sensitivity analysis Table A. Background for calculation of depreciation and interest Replacement value (Macro approach) Depreciation Depreciation rate / year rate / year digressive linear Hull 7% 2.5% Engine 25% 10.0% Electronics 50% 20.0% Other equipment 35% 16.0% Rest value hull after 40 years 2.5% Interest rate government bonds 5% Market rate for loans 5% Loans as % of total capital 50%
Historical value (Micro approach) Fiscal rate 1 digressive 7.0% 25.0% 50.0% 35.0% 5.0%
Fiscal rate 2 linear 2.5% 10.0% 20.0% 16.0% 2.5%
Table B. Capital value and capital costs and their consequences on profit (sensitivity analysis) 2004 Replacement value Historical value mln Euro (Macro approach) (Micro approach) Digressive Linear depreciation depreciation Fiscal rate 1 Fiscal rate 2 Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest Net profit Gross value added
1,379.6 224.6 155.9 128.1 400.4 470.6 92.4 10.4 367.8 871.0
Capital value Profit / capital
2,202.6 16.7%
176.6 42.9 180.8
107.5 67.6 225.3
167.0 18.6 214.8
100.3 28.0 272.0
858.2 21.1%
427.0 52.8%
208.8 102.9%
111.5 244.1%
Electronics
Other
281.9 111.5 172.0
281.9 110.9 149.5
276.8 110.6 169.9
273.8 110.1 147.3
Table C. Summary of the capital values - comparison of approaches Total Hull Engine Replacement value (mln Euro) Total 2,819.0 1,691.4 563.8 Digressive depreciated 858.2 427.0 208.8 Linear depreciated 1,352.3 719.0 311.9 Historical value (mln Euro) Total 1,975.8 888.0 Digressive depreciated 742.3 318.1 Linear depreciated 1,121.6 502.3 Total = Gross fixed capital stock Digressive or Linear depreciated = Net fixed capital stock
537.2 203.6 302.1
Based on data for Italy
33
2.5 Valuation of intangible assets General considerations Implementation of the CFP in the various MS has lead to an introduction of various types of rights (licenses, ITQs, etc.). Some of these rights are freely tradable; others can be only transferred together with the vessel to which they are attached. Still other rights ore officially not transferable, but in reality they too can be transferred. In many countries the value of these intangible assets approaches or even exceeds the value of the tangible assets. Attaching value to the intangible assets faces several conceptual as well as practical problems: In theory value of total assets could be determined as net present value of the future stream of benefits. This value than should be split into tangible and intangible assets. One unique approach to this division does not exist. When intangibles are freely tradable, observation of their prices in the market is often difficult because the number of transactions is small and they are not recorded. When the intangibles are attached to vessel, direct observation of the price is impossible. The value has to be estimated. In many cases, the fishing companies have not yet acquired any intangibles, but simply hold the rights which they have received free of charge from the government, when they were introduced. In that case it is not clear if these rights should be valued as an asset, increasing substantially the total asset value of the company, or not. It is also not clear if the rights should be depreciated. Are they permanent or temporary? On what value should the depreciation be imputed and at which rate? The value of the fishing rights may fluctuate strongly with the economic performance of the fisheries concerned. This would lead to strong fluctuation of the asset value, depreciation costs and possibly profitability of capital. These questions are not unique to fisheries. Intangibles are also common in other sectors – milk quota, CO2 emission rights, patents and intellectual property rights, etc. The valuation of intangibles has been therefore on the agenda of the IASCF (International Accounting Standard Committee Foundation) and it is reflected in its IRFS (International Financial Reporting Standard). The principles have been adopted for collection and interpretation of agricultural statistics in FADN. It is proposed to adopt these principles also for the valuation of intangible assets in fisheries. Proposed approach Two types of intangibles should be distinguished: 1. Tradable intangibles Intangibles are considered tradable when the size of the market is sufficient to allow (regular) trade. This may also be the case if they are attached to tangible assets (vessel). These intangibles should be valued at market price, independently of the question whether they have been acquired or administratively received. It is assumed that these intangibles have infinite life time and consequently they are not depreciated.
34
In case that the intangible is attached to a tangible asset, its value should be estimated. A possible approach to such estimation has been developed by Ifremer7 (Appendix B). However, other methods may have to be developed, depending on the availability of the data and characteristics of the intangibles in question. Valuation of tradable intangibles is an area where substantial research effort will be required in the future. 2. Non-tradable intangibles These intangibles are either non-tradable at all, or the market is too small or fragmented to allow for regular trade8. These intangibles are valued at estimated market price, but because the life time is not certain they are depreciated. Summary Type of tangible Freely tradable, not attached Tradable, attached to other asset Not tradable
Value based on Market price Estimated value Estimated value
Depreciation No No Yes
Consequences for total capital value Accounting for the value of intangibles increases the value of the equity capital. In case that the firm has received the intangible administratively it represents a ‘hidden reserve’. This implies that when the intangible would be sold, the firm will monetize these assets, which will increase its profits in the given year. The profits will be taxed against usual tax rate on profit. This implies that the firm does not only have a ‘hidden reserve’ in assets, but also a ‘hidden liability’ to the tax office. Consequently this latent tax claim must be included among the liabilities of the firm. The overview of the capital value must distinguish intangible assets separately from other type of assets. Also depreciation and opportunity costs should be presented separately. Required data and / or estimations -
Market price of intangible, or Estimated value of intangible Profit tax rate (differs per country) Estimation of the share of the total assets which has / has not been traded. Such estimation is required to determine the aggregate tax claim for the sector or fleet segment.
Ifremer is not able to estimate directly the value of intangible asset but proposes a method based on a comparison of the price of a vessel on the 2nd hand market and the "book value" of the vessel at a certain moment of time. This indicates what could be the "maximum" value of the fishing rights. However, this difference is not exclusively explained by the implicit value of fishing rights. Furthermore, evidence shows that this "implicit" value is very variable from one year to other. 8 Example are ammonia quota which can be traded only within a small region. 7
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Figure 10 Accounting for intangible assets Define intangible asset Determine tradability
Freely tradable
Tradable linked to other assets
Non-tradable
Collect data on price / unit
Estimate price / unit
Estimate price / unit
Calculate total value, increase assets
Calculate total value, increase assets
Determine share traded Calculate latent tax liability, decrease capital value
Determine depreciation scheme
Depreciation = 0, Calculate opportunity costs of interest
Calculate depreciation, Calculate opportunity costs of interest
2.6 Valuation of ‘other assets Two other types of assets may have to be taken into account: Land based assets: cars, buildings, etc. Liquid assets (money) and reserves (incl. shares, bonds, etc.) These assets are not directly related to a vessel as a statistical unit, but rather to the firm, or the legal person who also owns the vessel(s). This creates a number of practical as well as conceptual problems: In case of a firm owning more than one vessel, the capital costs related to the ‘other assets’ will have to be allocated to the individual vessels. This implies that a division key has to be derived or assumed9. A company running in principle a land based operation, e.g. fish processing, may also own a vessel. One vessel may be owned by several owners, each also running other type of business.
9
This is a common problem when all costs have to be allocated to production units.
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-
Collection of historical information on the size of these assets seems rather tricky. It will require special surveys to determine vintages of buildings and cars. Prices indices for such assets exist.
In the current situation a large majority of EU fishing fleet is owned on a one-man-one-boat basis. A preliminary expert assessment indicates that these companies only own very limited land based assets. However, for some groups of vessels and companies ‘other assets’ do play an important role. This regards particularly companies operating the large freezer trawlers, (tuna) purse seiners and those with fleets of smaller fishing vessels. Proper evaluation of their performance requires to account for these ‘other assets’. Land based assets Land based assets can be in principle treated in the same manner as the vessel – at historical prices for the purpose of micro approach and at replacement value for the macro assessment. Depreciation rates must be selected according to the type and service life of the asset. Gross and net capital value, depreciation costs and interest costs can be added to the appropriate values of the vessel. Liquid assets Some firms may hold substantial liquid assets (incl. shares and bonds) not only as working capital, but also as reserves to pay pension to the owner or as investments of earlier profits. Working capital is part of the on-going operation and should be therefore accounted for within the overall capital valuation. Collecting data on working capital may be difficult. Therefore it is proposed to estimate the working capital as a percentage of annual operational expenses. Until concrete evidence is available, this percentage could be put at 7%. Other kinds of liquid assets are not directly related to the operation of the firm and may be disregarded as far as capital costs (depreciation and interest) are concerned. However, reserves are evidently relevant for the assessment of the survival capability of a firm, i.e. how long the firm can survive in economically difficult times. The main problem of collecting the required information is that many vessel owners are not obliged to prepare an annual balance sheet, which is the only document where the required information could be obtained in an organized manner.
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3. THEORETICAL CONSIDERATIONS 3.1 The conceptual framework This section introduces some basic concepts and definitions related to capital stock measurement, mainly sourced from the European Systems of Accounts (ESA 95), from the Economic Accounts for Agriculture and Forestry (EAA/EAF 97) and from the OECD Manual on the Measurement of Capital Stocks, Consumption of Fixed Capital and Capital Services (OECD, 2001a). In the first part we illustrate the standard equation for the value of an asset, which provides the conceptual framework for the measurement of the capital stocks. It is meant to clarify some fundamental concepts related to the capital stock measurement in order to evaluate their applicability to the fishery context. In the second part we discuss the most common methods applied to measure capital stock. The standard equation for the value of an asset The value of an asset depends primarily on the value of the rentals that is expected to earn during its lifetime. Rentals, which are the incomes earned by an asset during each accounting period, are equal to the quantity of capital services produced by the asset multiplied by the unit price of those service. Because the rentals generated by an asset are received over several years, they have to be discounted in calculating the value of an asset at any point in time. The rentals expected in future periods are discounting using a discount rate, which is often taken as the interest rate on long terms bond. The scrap value is the value of an asset at the end of its service life, when the asset is discarded or scrapped. This will be a positive amount corresponding to the value of any parts or waste materials that can be recuperated from the asset minus the cost of dismantling or removing the asset. If these costs are too high, the scrap value becomes negative. Combining these three variables, the rentals, the discount rate and the scrap value, we can obtain the economic value of an asset both when it is new and when it is at the later stages of its service life. The standard formula for the value of an asset can be written as follows:
(1) Where Vt is the value of an asset at time t, ft is the rental in period t, T is the service life of the asset,
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r is the discount rate10, S is the scrap value. The above equation indicates the present value of the expected potential cash flows of an asset. The present value is computed by discounting the expected future value to users at the cost of capital. This equation is also defined the Fundamental Equations Relating Stocks and Flows of Capital (Diewert, 2004), which provides the link between stock measures and consumption of fixed capital on the one hand, and the measurement of capital services on the other hand. It is important to realize that value is to be understood as the market price, or as the purchase price of the durable commodity. It corresponds to the investment price and, consequently, it is assumed to be equal to the discounted value of the future service flow (Hall, 1968). In considering whether to purchase an asset, rational producers will first calculate the rentals they expect to receive from an asset and will then solve equation (1) for r. They will buy the asset only if the price at which it is offered implies a rate of return – as measured by r – which is at least as high as they can earn from alternative use of their funds. If an asset is offered for sale at a price that does not seem likely to generate a satisfactory rate of return, there will be no market for that asset. If an asset is offered at a price that seems likely to generate a very high rate of return, demand for the asset will rise and bid up the price until the rate of return falls to a “normal” level. In practice, manufacturers of capital goods will themselves calculate the rates of return that assets are likely to earn and will not produce assets that are unlikely to generate rates of return that are sufficiently high to ensure that there will be a market for them. Equation (1) can, therefore, be seen as a very plausible explanation of how asset prices are determined in a market economy. Opportunity costs The capital value is related to the opportunity cost of capital or the required rate of return that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. The opportunity cost of production is the value of the firm's best alternative use of its resources. A firm’s opportunity costs can be explicit or implicit: Explicit costs are paid in money. The amount paid for a resource could have been spent on something else, so it is the opportunity cost of using the resource. A firm incurs implicit costs when it forgoes an alternative action but does not make a payment. A firm incurs implicit costs when it uses its own capital or it uses its owner's time or financial resources. Since the opportunity cost is related to the risk level of the investment, for the fishery context it should be differentiated according to different fleet’s segments and metiers. Service lives (or lifetime) of assets The discount rate is a real interest rate, than can be calculated as the difference between the nominal rate of interest and the rate of general inflation.
10
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In the standard formula for the value of a capital asset, the economic service life is defined as the total period that an asset is in productive use from the moment that it is first installed or constructed. This definition of expected service life is based on the length of time that assets are retained in the capital stock, whether in the stock of the original purchaser or in the stocks of producers who purchase them as second hand assets. This concept corresponds to the economic service life of the assets, which is not determined exclusively by the technical or physical characteristics of the assets as it depends also on expectations about the price as well the quantities of the service, either of which may fall sufficiently to cause the asset to be retired. It is worth noting that even if the lifetime of an asset can be collected from many different sources, these sources actually furnish different estimates of the service life. For example in most countries, the tax authorities specify the number of years over which the depreciation of various types of assets may be deducted from profits before calculating tax liabilities. This source provides information on the so-called fiscal lifetime, which often is shorter than its useful service life if governments adopt accelerated depreciation to encourage investment. Also company accounts can provide useful information of acquisition as well as the date of disposal of the assets. Direct sources are surveys, which ask producers about discards of assets or those which ask respondents to give the purchase dates and expected remaining lives of assets currently in use. Another approach consists in asking experts or firms that produce capital assets for the normal service lives of different sorts of equipment. In this way it is possible to take a view on the physical and technical services of the assets they produce. For some assets, government agencies maintain administrative records that can be used to determine service lives. This is the case of the shipping registers of construction and demolition. It is worth noting that since these sources provide different measures of service lives, it would be better to collect and compare this different information. It is also important that such information be adapted to the specific circumstances. Hence a recommended practice on estimating the useful lives of capital assets should take into account some important factors as the quality and the application (Gruenwald, 2002): Quality. Similar assets may differ substantially in quality, and hence in their useful lives, because of differences in materials, design and workmanship. Application. The useful life of a given type of capital asset may vary significantly depending upon its intended use. Finally, information on service lives should be collected for restrict asset groups and regularly updated in order to reflect cyclical or longer-term changes in the lengths of time that assets remain in the stock. Table 1 presents the depreciation period of hull, engine and electronics currently applied in AER.
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Table 1. Depreciation period of hull, engine and electronics applied in AER by country, 2002 Country Depreciation period (no. of years) Hull Engine Electronics Belgium 10 10 5 Denmark Finland 25 10 France 25 10 Germany Greece 25 10 Ireland 25 10 Italy 25 10/15 Netherlands 20 10/15 10 Norway 30 15 10 Portugal 25 10 Spain 25 10/15 Sweden 25 25 25 UK 10 10 10 Table 2 summarizes the average service lives for some assets of Agriculture, Forestry and Fishing for 15 OECD countries. The categories of assets considered are machinery and equipment, building and engineering construction and some types of vehicles. In some cases, as for fishing boats, the average lifetime strongly differs from a country to another. These differences are probably due to the difference approaches used to estimate the service lives.
41
45
25
Table 2. Average service lives in Fishing (OECD, 1992) Machinery and Buildings equipment
16 14 14 18 6
3
Canada United States Australia Austria Belgium Finland France Germany Iceland Italy Norway
12
13 18 15
United Kingdom
Engineering construction 25 31
60
8
Building and engineering construction 43 30 69 45
50
35 27
Other ship
25 27
15 10 22 26 37
Fishing boats
7 10 22 20 37
Ocean 15, Inland water 20
20
Hulls 40, Engines 15, Other maritime equipment 10 25
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Mortality patterns Mortality patterns consider the assumptions made about the distribution of retirements around the average service life. In the literature, “scrappings” and “discards” are employed as synonyms of retirements to mean the removal of an asset from the capital stock because it is withdrawn from service, exported, sold for scrap, dismantled, pulled down or abandoned. Retirements are hence distinguished from “disposals”, which also includes sales of assets as second-hand goods for continued use in production (OECD, 2001a). Mortality patterns assume different functions (simultaneous exit, linear, delayed linear, bell-shaped) that represent the rates of retirement over the lifetimes of the longest-lived member of a group of assets of a particular type that were installed in a given year. They are probability density functions with the area under each curve equal to unity. To each mortality function corresponds a survival function that shows what proportion of the original members of the group of assets are still in service at each point during the lifetime of the longest-lived member of the group (OECD, 2001a). Figure 2 shows typical mortality and survival functions underlying the various retirement patterns. The mortality patterns involve assumption about the distribution around the expected or average service life (L). With a linear retirement pattern, assets are assumed to be discarded at the same rate each year from the time of installation until twice the average service life L. The mortality function is a rectangle whose height – the rate of retirement – equals 1/2L. The corresponding survival function shows that the surviving assets are reduced by a constant amount each year, equal to 50/L per cent of the original group of assets. A linear retirement pattern is generally regarded as an unrealistic assumption because it assumes that a constant proportion of assets of a given vintage are discarded each year beginning in the first year that they are installed. On the contrary, assets are by definition expected to remain in use for several years and discards in the years immediately after installation are likely to be rare for most assets. A delayed linear retirement pattern makes the more realistic assumption that discards occur over some period shorter than 2L. Retirements start later and finish sooner than in the simple linear case. Suppose for example that it is assumed that the assets are retired over the period from 80% to 120% of their average service life. The rate of retirement in the mortality function is then equal to 1/L (1.2-0.8) or 250/L per cent per year during the period when the retirements are assumed to occur. With a bell-shaped mortality pattern, retirements start gradually some time after the year of installation, reach a peak around the average service life and then decrease some years after. Various mathematical functions are available to produce bellshaped retirement patterns and most provide considerable flexibility as regards skewness and peakedness (or kurtosis). They include gamma, quadratic, Weibull, Winfrey and lognormal functions. The last three are probably most widely used in PIM models. Finally, the simultaneous exit mortality function assumes that all assets are retired from the capital stock at the moment when they reach the average service life for that asset type. The survival
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function therefore shows that all assets of a given type and vintage (i.e. year of installation) remain in the stock until time L, at which point they are all retired together. The simultaneous exit model is inappropriate for the most part of the assets. In fact, assets usually are discarded before they reach the average age of death because they are overworked, poorly maintained or fall victim to accidents, while others continue to provide good service several years beyond their average life expectancy (OECD, 2001a). Figure 11. Typical mortality and survival functions
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Capital services and productive capital stock As defined before, the values of fixed assets depend on the values of the rentals that they are capable of contributing to production over their service lives. The rentals are the quantity of capital services generated by an asset multiplied by the price of those services. The price of capital services, or the rental price, are the amounts that users of the assets are prepared to pay, either implicitly or explicitly, for a unit of quantity. For example, in the case of operational leasing, the costs of leasing or of the transaction furnish an estimate of capital services. In absence of a market, the implicit rent is also defined user cost of capital. Because flows of the quantity of capital services are not usually directly observable, they have to be approximated by assuming that service flows are in proportion to the stock of assets after each vintage has been converted into standard ‘efficiency’ units (OECD, 2001b). The so computed stock is referred to as the ‘productive stock’ of a given type of asset (Triplett, 1997). This concept of capital stock is appropriate for production function and productivity analysis in which fixed capital is treated as a factor of production. The productive capital stock is obtained by multiplying the gross value (i.e. its value as if new) by its relative efficiency, a number equal to, or less than unity. Therefore, the productive capital stock will be less than the gross capital stock (Hill, 1998). The productive capital stock is meant to provide a better measure of short run productive capacity than the gross stock. The gross stock, in fact, assigns the same value to two assets of the same type but with different ages even though an asset does not usually provide a constant flow of services over its life. On the contrary, since most assets are subject to some physical deterioration due to wear and tear, it is generally assumed that the flow of services tends to decline over the life of an asset. This loss in productive efficiency as an asset ages is described as its efficiency profile or ageefficiency profile. The productive capital stock is equal to the difference between the gross capital stock and the effect of wear and tear. Efficiency and price profiles Efficiency profile and price profile of an asset refer to the two main components of the depreciation: the depreciation due to the wear and tear and the foreseen obsolescence. The efficiency (or age-efficiency) profile of an asset describes the pattern of the quantity of capital services produced by an asset. It is related to the loss in productive capacity of a capital good and so it is associated with the physical deterioration (loss of productivity), due to “wear and tear” or the ageing of the asset.
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The price (or age-price) profile of an asset describes the pattern of asset prices over its service life. It is related to the loss in value of a capital good and so it is associated with the foreseen obsolescence or economic depreciation. In general, the quantity of services will decline during the service life of the asset because the physical deterioration reduces the efficiency of assets as they age. The price of the capital services, on the other hand, may move in either direction. For example, the price may rise in line with inflation or it may fall, either absolutely or relatively to the prices of competing capital services. Obsolescence reduces the prices of capital services as newer assets become available which produce better capital services or as tastes and fashions change so that the demand for particular types of capital services falls. Efficiency and price profiles can decline linearly, at constant rate (geometric) or at hyperbolic rates, meaning that capital services fall by small amounts initially and by larger amounts at the asset ages. The two profiles are always different except for assets whose age-efficiency profiles decline “geometrically” and which have an infinite life. Even if they are not necessarily identical, they are related. Thus, they cannot be defined independently of each other. As explained previously, the efficiency profile is relevant for the calculation of productive capital stock. The price profile is relevant to the net capital stock and consumption of fixed capital (or depreciation). Following the so called Vintage accounting approach (Jorgenson et al., 1967), an estimate of consumption of fixed capital is obtained as the difference between successive values of the net stock derived from age-price profiles. Classification of assets in the ESA In the context of this ESA 95, capital refers to stocks of economic fixed assets that are included in gross fixed capital formation (GFCF). Fixed assets are goods that are used repeatedly, or continuously, over long periods of time (at least a year) in the process of producing other goods or services. The ESA makes a distinction between produced (AN1) and non-produced non financial assets (AN2) by whether the assets have come into existence from production process or not (ESA 95, 7.09-7.24). Produced assets consider tangible and intangible assets. Tangible fixed assets consist of dwellings, other buildings and structures, machinery and equipment and cultivated assets. Intangible fixed assets consist of mineral exploration, computer software, entertainment, literary or artistic originals, and other intangible fixed assets intended to be used for more than one year. A third category of economic assets are the financial assets (AF), which comprise means of payment, financial claims and other economic assets close to financial claims in nature.
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According to these definitions, the fixed capital stocks can be defined as the produced assets used as inputs into the production process. Therefore, a primary issue is to distinguish homogenous groups of physical and non physical assets in order to consider the multitude of capital goods employed in the harvesting process. Eurostat, in its Handbook on Price and Volume Measures in National Accounts (Eurostat, 2001) recommends as aggregation criterion the selection of goods with homogenous price movements. This because the accuracy of capital stock estimates depends in large part on the accuracy of the price indices used to revalue assets. With these considerations in mind and following the same distinction made in the EAA/EAF 97, we suggest five types of fixed produces assets which should be separately recorded (tab. 3). Tangible assets are distinguished in hull, engine, storage equipment, gear and electronic equipment. Intangible assets refer to the fishing rights and comprise licenses, quotas, permits, etc. Table 3 Classification of fixed assets Hull Engine Tangible assets Electronics Other (gear, deck and storage equipment) Intangible assets
Fishing rights (licenses, individual quotas, ITQ, effort rights).
Change in the value of a stock As defined in the balance sheets (ESA 95, 7.08), the value of assets in the closing balance sheet (or at the end of the period) is identical to the value of assets in the opening balance sheet (or at the beginning of the period) plus transaction which take place within the accounting period minus Consumption of fixed capital plus Other volume changes plus Revaluations: Value of assets in the closing balance =Value of assets in the opening balance + GFCF+ - Consumption of fixed capital + Other Volume changes – Revaluations Hence, the change in the value of assets (given by the difference between the value of assets in the closing balance and the Value of assets in the opening balance) is affected by four elements: -
Transactions of financial and non-financial assets, which are equal to the total value of the assets acquired less the total value of those disposed; Consumption of fixed capital (depreciation); Other volume changes, which include the value of other positive or negative changes in the volume of the assets held. For example in the case of agricultural and forestry activities, changes in volume may be due to disasters losses, higher depreciation than anticipated (caused by unforeseen obsolescence, damage deterioration or accidental events), changes in classification or structure of fixed assets.
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-
Revaluations, which are the value of the positive or negative nominal holding gains accruing during the period resulting from a change in the price of the asset.
Gross Fixed Capital Formation Gross fixed capital formation (GFCF) consists of resident producers’ acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets (ESA 95, 3.102). Acquisitions of fixed assets comprise new or existing fixed assets, which have been purchased, acquired through barter; received as capital transfers in kind or acquired as a financial lease; retained by their producers for their own use. Hence, they comprise new used assets that are traded on second-hand markets. They cover also any renovations, reconstruction or enlargements that significantly increase the productive capacity or extend the service life of an existing asset. On the contrary, changes which take place routinely as part of ordinary maintenance and repair programmes, are excluded. These acquisitions, undertaken to keep fixed assets in good working order, count as intermediate consumption. Disposals of fixed assets comprise the sale, demolition, scrapping or destruction of fixed assets by the owner. These disposals should normally lead to a change in ownership and have a direct economic purpose. Therefore, fixed assets that are demolished, scrapped or destroyed in order to be put to no further economic use are not include in these disposals (EAA 97). Major improvements to non-produced assets include: reclamation of land from the sea by the construction of dykes or sea walls; clearance of forests to enable land to be used; draining of marshes; prevention of flooding or erosion by the sea or rivers. There is substantial diversity in the different type of GFCF that may take place. The following main types may be distinguished (ESA 95, 3.105): Acquisitions less disposals, of new or existing tangible fixed assets (dwellings; other buildings and structures, machinery and equipment; cultivated assets) Acquisitions, less disposals, of new and existing intangible fixed assets (Mineral exploration; Computer software, Entertainment; literary or artistic assets) Major improvements to tangible non-produced assets including land Cost associated with the transfers of ownership on non-produced assets such as land and production rights For the EAA/EAF 97, a distinction is made between agricultural assets (plantations and animals) and fixed assets other than agricultural assets (machine and other capital goods, transport equipment, farm building and other).
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Valuation of fixed assets Three kinds of valuation are generally used: 1. Historical prices, when assets are valued at the prices at which they were originally acquired. The term acquisition price is used as synonym for historic price and is usually used in business accounts. 2. Current prices, when assets are revaluated at the prices of the current year. Valuation at current prices has been referred as valuation at ‘current replacement costs’ in the ESA 95. 3. Constant prices, when assets are revaluated at the prices of a selected base year. In the ESA 95 valuations at constant price is referred as valuation at ‘constant replacement costs’ The valuation at historical prices is the most widely used form of setting accounting book values since it can be objectively verified by examining the invoices relating to asset purchases. Commercial accountants also prefer historic prices because they give a conservative valuation of assets. These advantages are offset by the fact that assets that have been acquired at different dates are being valued at different prices so that when prices are rising/falling assets acquired more recently are implicitly given a higher/lower weight than those acquired in earlier periods (OECD, 2001a). In other words, this method understates the economic value of assets during times of high inflation and overstates the economic value of assets during times of rapid technological change. Valuation at current prices values assets on the basis on what it would cost to replace them if they were acquired today11. This method overcomes the most serious deficiency of the valuation at historic price, namely the understatement of depreciation during periods of inflation and it also takes account of the technological change. In the EEC Regulation on The Form of Farm Return to Be Used for the Purpose of Determining Incomes of Agricultural Holdings, the replacement value is required both for the opening and closing valuation of goods subject to depreciation (Commission Regulation No 2237/77). Both valuation at current prices and valuation at constant prices require inflating or deflating asset values. Adopting the valuation at current prices implies that assets acquired in earlier periods have to be revaluated each year to bring them to the prices of the current year. In the second case, assets are valued at the prices of a single base period. Since this latter procedure is clearly less laborious than the former, a method for calculating the assets at current price consists in estimating the assets at constant prices and then inflating with price indices (OECD, 2001a) Aggregating assets to obtain stocks The capital stock may be calculated on a “gross” or “net” basis. Gross valuation is generally thought to be more appropriate for measuring the contribution of capital assets to production, while net valuation is appropriate for measuring the wealth of assets holders.
11
A method similar to the replacement value is the “recoverable” value, that measures what the company could obtain by selling the asset on the market.
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Gross Capital Stock is the value of all fixed assets still in use when a balance sheet is drawn up, at the actual or estimated current purchasers’ prices for new assets of the same type, irrespective of the age of the assets. Net Capital Stock is defined as the value, at a point in time, of assets at the prices for new assets of the same type less the cumulative value of consumption of fixed capital accrued up to that point. It is derived from the gross capital stock by deducting accumulated consumption of fixed capital on the assets purchased in the previous years. The Gross Capital Stock expresses the value of assets on the assumption that there has been no decline in their productive efficiency due to age. Each asset in the stock is therefore valued at the price at which it would be purchased if it were still new. Wear and tear are assumed to be made good through repair and maintenance until the assets reach the end of their service life, i.e. the point at which they are discarded either because of obsolescence or because repair and maintenance costs become too high. In contrast, for the Net Capital Stock the same assets are valued at the prices at which they would be purchased if they were put on the market in their present state. These will be lower than ‘‘as new’’ prices even if the assets are just as productive now as when they were originally purchased. The reduction in price over an asset’s lifetime reflects the fact that each year there is an inexorable decline in the future income stream that the asset can be expected to generate. Since ‘‘present state’’ prices are not generally observable, they are estimated by assuming that asset values decline in some regular fashion over their lifetimes. In practice, countries usually assume either that prices decline by an equal amount each year (straight-line depreciation) or that they decline by an equal percentage (declining balance depreciation). It should be noted that even if the gross capital stock is not a part of the System of National Accounts, it is an important element and starting point for the calculation of consumption of fixed capital and net capital stock. The usual procedure in practice is to obtain current price estimates of consumption of fixed capital and the net capital stock by first calculating them at constant prices and inflating to current year prices using the relevant price indices. The year-average prices are the correct ones to use for valuing consumption of fixed capital, both at current and constant prices. The Perpetual Inventory Method (PIM) requires an estimate to be made of the stock of fixed assets in existence and in the hands of producers. Gross capital stock is also used as a broad indicator of the productive capacity of a country. The gross capital stock for a sector or the economy as a whole is often compared with value added to calculate capital-output ratios. The operating surplus, usually on a gross basis, is divided by the gross capital stock to give measures of profitability for a sector or the economy as a whole. Consumption of fixed capital In the ESA (ESA 95, 6.02), consumption of fixed capital is defined as the decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage.
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The “physical deterioration” refers to wear and tear that is not made good by repairs or by replacing worn components. For the assets that don’t suffer any physical deterioration through careful maintenance, the fall in asset value over time will be due only to foreseen obsolescence or to normal accidental damage. This definition excludes the value of fixed assets destroyed by acts of war or exceptional events such as major natural disasters, which occur very infrequently. Such losses are recorded in the System in the account for ‘Other changes in the volume of assets’. It also excludes the “abnormal” or unforeseen obsolescence that may occur either because of unexpected technological breakthroughs or because of sudden changes in the relative prices of inputs (ESA 95, 6.25). It should be noted that this definition is identical with depreciation as economists usually understand this term. In the capital stock literature, the two terms are often used interchangeably. The consumption of fixed capital should hence be distinguished from the depreciation calculated for fiscal purposes or that appearing in company accounts (ESA 95, 6.04). Consumption of fixed capital should be evaluated on the basis of the stock of fixed assets and the probable average economic life of the different categories of those goods. If no information on the stock of fixed assets is available, it is recommended that it be calculated using the perpetual inventory method (PIM) and it should be valued at the purchasers' prices of the current period (i.e. the replacement value of the assets during the reference period and not the historic values). In the EAA/EAF 97 it is underlined that consumption of fixed capital cost must be calculated using a straight-line depreciation method, i.e. by attributing a constant amount per period over the lifetime of an asset. The rate of depreciation is equal to 1/Lth of the initial value of the asset, where L is the average service life for that type of asset. It implies a linear decline in efficiency that falls by the same absolute amount in each period. The rate of the depreciation can, in certain cases, be geometric (EAA/EAF 97, 3.36.6). With geometric (declining balance) depreciation, the market value in constant prices is assumed to decline at a constant rate in each period. The depreciation factor can be written as R/L where R is known as the declining balance rate. A particular geometric rate is the “double declining balance” formula, where R= 2/L. For example an asset with an average lifetime of ten years declines in the value at rate of 20% per year. While the straight-line method assumes that the asset depreciates by an equal percentage of its original value for each year that it's used, the declining balance method assumes that the asset depreciates more in the earlier years. Geometric depreciation is therefore appropriate for assets whose efficiency declines by the largest absolute amount in the first year of their service lives. On the contrary, it is not appropriate for assets that require an increasing amount of maintenance as they get older or that consume more energy and other inputs with age. Another depreciation function commonly used is the sum-of-the-digits method, which assumes that the market value in constant prices fall by an amount which declines linearly over the lifetime of the asset. Sum-of-the-years-digits depreciation implies that the largest efficiency losses occur at the
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beginning of the asset's service life. The main difference with the geometric depreciation is that the sum-of-the-years-digits exhausts the initial outlay on the asset by the end of its service life. All these methods are based on the assumption that asset prices decline in a systematic way over the course of the asset’s service lives. They estimate consumption of fixed capital by the application of a depreciation function to the gross value of assets In addition to these conventional approaches, an alternative way consists in deriving consumption of fixed capital indirectly as the difference between successive values of the net capital stock. This procedure uses the relationship between the efficiency profile and the price profile of an asset, but it is for now applied only by the Australian Bureau of Statistics (OECD, 2001a). Obsolescence Obsolescence can be defined as the loss in value of an old asset because a newly introduced asset of the same class contains improvements in productiveness or efficiency or suitability for production. It occurs when an asset is retired before its physical capability is exhausted and it can occur due to technical innovation or to changes in demand. Obsolescence affects only the prices at which capital services can be sold. It does not affect the quantities of services that a capital asset is capable of producing. The quantities are affected only be wear and tear as the asset ages or, in the case of a group of assets, by losses of individual assets through accidental damage. There are two types of obsolescence: foreseen and unforeseen. Foreseen obsolescence refers to obsolescence that the purchaser was expecting to occur when the asset was acquired and it is included in consumption of fixed capital. The terms ‘expected obsolescence’ and ‘normal obsolescence’ are also used as synonyms for foreseen obsolescence. As pointed out in the 1993 SNA paragraph 6.187 normal, or foreseen, obsolescence is included in consumption of fixed capital in the national accounts because it is an expected cost of production. Unforeseen or abnormal obsolescence is the loss in value of an asset due to a fall in demand for that type of asset that could not have been foreseen when the asset was acquired. It is not included in consumption of fixed capital but in the ‘Other volume changes in non-financial assets (ESA 95, 6.25).
3.2 Overview of measurement methods Measurement methods can be classified in those which estimate gross capital stock and those which estimate net capital stock. The difference depends on the fact that some sources, as the insurance value and the market value, estimate directly the net value of the assets. On the contrary, the most
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part of the sources give the gross valuation of the assets. Net capital stock is successively obtained by subtracting Consumption of fixed assets to the Gross capital stock. Gross capital stock measures The gross capital stock can be estimated in a direct or indirect way. Direct estimates of gross capital stock can be obtained using the administrative records on the numbers of assets together with price information obtained by the statistical agency. Administrative registers are often available for maritime shipping, even if in some countries, vessel register does not report detailed information about equipment, gears, and etc. These registers usually give the numbers rather than values of the assets concerned, but if the records give additional information on their technical specifications they can be valued either at current values to obtain the net capital stock or at historic values updated to the current year to obtain the gross stock. Also survey methods are often used, which ask enterprises to report historic values of all assets still in use and the dates of installation. In this case, the historical values cannot be aggregated to obtain estimates of the capital stock, but they have to be revaluated to current or constant prices using revaluation coefficients. Another problem is that unincorporated enterprises are not generally required to keep accounts for their capital assets. The commonest method to estimate (indirectly) gross capital stock is the Perpetual Inventory Method (PIM), which involves adding gross fixed capital formation to an initial estimate of the capital stock and subtracting capital assets that are withdrawn. It is a cheap and convenient method and it is the most used in several countries and for several economic sectors. In order to apply the PIM, four types of information are required: the value of the capital stock in an initial period (benchmark estimate); data on gross fixed capital formation for each year after the starting year; the length of time that the assets remain in the capital stock before being retired and the changes in the prices of capital assets. The standard, or traditional, procedure is: to estimate the gross capital stock, to apply a depreciation function to calculate consumption of fixed capital, to obtain the net capital stock by subtracting accumulated capital consumption from the gross capital stock. As already illustrated, the alternative approach of applying the PIM starts by estimating ageefficiency profiles for each type of asset which are then used to generate age-price profiles for the assets. The age-price profiles are used to directly estimate the net capital stock from which depreciation is obtained indirectly.
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The theory of hedonic prices provides another approach to directly measuring the capital stock. This method basically hypothesises that the price of a commodity or product is influenced by its characteristics. The assumption is that the economic agents value the product for their attributes and that the implicit or hedonic prices exist as a function of the attributes. In this framework, the individual capital goods are viewed as bundles of characteristics rather than as discrete physical entities. The “inputs” to the production or fishing power function are the amount of each characteristic rather than the amount of each physical good. The hedonic approach is especially useful when there are many varieties of capital embodying a few characteristics. For unique capital goods, such as ships, it is promising method of calculating capital stock (FAO, 1999). It offers one solution to the problem of accounting for a wide variety and number of capital goods, such as the vessel hull, engine, gear, equipment, and even varying characteristics such as hold capacity (Hulten, 1990). A few studies have considered the application of hedonic models to fisheries. Kirkley and Squires (1988) presented an approach for estimating capital stock and investment in the New England fishery. In recent years, Guyader et al. (2003) applied the hedonic theory for the estimation of the access rights of the French fleet operating in Atlantic coast. Using a hedonic pricing model, they tested the hypothesis that the price of the exchanged vessels can be broken up into two components: a tangible value explained by the technical characteristics and the age of the fishing units, and an intangible value representing the access rights to the fisheries. These harvesting rights may to some extent capitalise the value of the rent or quasi-rent flows exhausted from the fishing activity. Their results confirmed the assumption that vessel prices do not only value tangible capital but also intangible capital. In fact, while the size of the vessels and their age significantly influence vessel prices, operation permits and licenses account for a weighty part of vessel prices on the second hand market. This share increases with vessel ageing because tangible capital depreciated with wear and tear. Another interesting result of the French study is related to the economic depreciation. In fact, through the record of transactions on the second hand fishing vessel market, it was possible to gather some empirical results about the real model of depreciation of the French fleet. For example, in the case of 12 meters vessels, the market value exhibited a non-linear trend, especially at the beginning and at the end of the vessel’s life. In particular, in the first years (4-10 years) there is an increase in vessel capital value mainly due to the renewal of engines, electronic equipments and hull. Around 30 years old, vessel values are fairly constant. The minimum value of these oldest vessels might be bounded by the residual value of their equipments.
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Net capital stock measures In the company balance sheets, assets are commonly recorded on a net basis that is at the prices at which they would be purchased if they were put on the market in their present state. Unfortunately, company accounts use a variety of depreciation methods in calculating net asset values which render them unsuitable for national accounts purposes. Another problem is the use of historic valuation, which means that the stock of assets is valued at a mixture of prices. Two other sources based on a direct observation of net capital stock are: 1. Insurance companies, which record the current values of commercial properties insured against damage by fire or other catastrophes. However, properties are sometimes under-insured so that insurance values will understate the net stock. This because insurance value is not changed every year, but rather mostly once new equipment has been installed or a major repair has occurred. Under-insurance is less likely to happen with assets exposed to a high risk of loss, such as ships. Insurance values for assets of this kind may provide a realistic estimate of net stocks and could be used as a cross-check on net asset stocks estimated by other methods, even if it is not compulsory in all countries. 2. The market values of a company can provide the net value too. In the fishery context, this kind of information can be gathered form the second hand vessel market.
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REFERENCES Ball V.E. et al. (1992) - The Stock of Capital in European Community Agriculture, European Review of Agricultural Economics, 20, pp. 437-50. Boncoeur, J. et al. (1998). Enquête économique sur la pêche professionnelle française en Manche. CEDEM (UBO), 81 p. Brest (France). Commission Regulation (EEC) No 2237/77 of 23 September 1977 amending Regulation No 118/66/EEC on the form of farm return to be used for the purpose of determining incomes of agricultural holdings. Concerted Action (FAIR PL97-3541) Promotion Of Common Methods For Economic Assessment Of Eu Fisheries (1999) - Economic Performance of selected European fishing fleet. Second annual economic report. Diewert W.E. (1980) - Aggregation Problems in the Measurement of Capital, in Usher D. (ed.), The Measurement of Capital, Chicago, The University Press, pp. 433-528. Diewert, W. E. (2004) - Measuring Capital. Department of Economics, Discussion Paper 04-10, University of British Columbia, Vancouver, B.C., Canada. Eurostat (2000) - Manual of the Economic Accounts for Agriculture and Forestry (EAA/EAF 97). Rev.1.1. Luxemburg. Eurostat (2001) - Handbook on Price and Volume Measures in National Accounts. Luxemburg. FAO. (1996) - A system of economic accounts for food and agriculture. Rome FAO. (1999) - Managing Fishing Capacity: Selected Papers on Underlying Concepts and Issues. FAO Fisheries Technical Paper, 386. Rome. Gruenwald, P. E. (2002) - Estimating useful lives for capital assets. GAAFR Review. Guyader, O. et al. (2003). A hedonic analysis of capital stock in fisheries: the case of second hand market of the French fishing vessels. XVth EAFE Conference Proceedings. Ifremer, Brest. Hall, R.E. (1968) - Technical Change and Capital from the Point of View of the Dual. Review of Economic Studies. Harper M.J. (1982) - The Measurement of Productive Capital Stock. Washington, DC, US Department of Labour, June.
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Hill, P. (1998) - Gross, Productive and Net Capital Stock. Second meeting of the Canberra group on capital stock statistics. OECD, Paris. Hulten, C.R. (1990) - The Measurement of Capital. Income and Wealth, Vol. 54, University of Chicago Press. Jorgenson D.W. et al. (1967) - The explanation of productivity change. Review of Economic Studies. Vol. 34. Jorgenson D.W. (1989) - Capital as a factor of Production, in Jorgenson D.W., Landau R. (eds.), Technology and Capital Formation, Cambridge, Massachusetts, The Mit Press, pp 1-35 Kirkley, J.E. and D. Squires. (1988) - A Limited Information Approach for Determining Capital Stock and Investment in a Fishery. Fishery Bulletin, Vol. 86, No. 2, pp. 339-349. LEI-DLO, SEAFISH, SUC, IFREMER (1993) Costs and earnings of fishing fleets in four EC countries. Onderzoekverslag 110. OECD. (1993) - Methods Used By OECD Countries To Measure Stocks Of Fixed Capital. Paris. OECD. (2001a) - Measuring Capital. OECD Manual. Measuring of capital stock, consumption, of fixed capital and capital services. Paris. OECD. (2001b) - Measuring Productivity Manual: A Guide to the Measurement Of IndustryLevel And Aggregate Productivity Growth. Oulton, N. (2001). Measuring Capital Services in the United Kingdom, Bank of England Quarterly Bulletin. Raknerud, A., D. Ronningen and Terje Skjerpen. (2003). A method for improved capital measurement by combining accounts and firm investment data. Statistics Norway, Research Department. Triplett, J.E. (1997) - Concepts of Capital for Production Accounts and for Wealth Accounts: the Implications for statistical Programs. International Conference on Capital Stock Statistics. Australia, Canberra. U.S. BUREAU OF LABOUR STATISTICS. (1983) - Trends in Multifactor Productivity, 1984-81. Bulletin 2178, Washington.
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APPENDIX A: Denmark Introduction: Data sources Two primary data sources are utilised in the Danish analysis of capital valuation being the Directorate of Fisheries (DF) database and the Institute of Food and Resource Economics (FOI) fisheries account statistics. The Directorate of Fisheries hosts the official Danish fleet-database, which contains a range of physical information about the vessels in the Danish fishing fleet. The FOI database has only information about a representative selected part of the Danish commercial fleet.12 Extensive economic information is collected for these vessels, and by calculation of weights to each account, it is possible to obtain estimations covering the economics for the whole commercial Danish fishing fleet. The DF data is as mentioned official data, and thus for the variables used here considered to be reasonable reliable in general. The FOI data is based on voluntary participation of fishermen and their accountants. It is not available for the authorities to investigate any illegal behaviour, and is therefore considered very reliable, given the assumptions made in order to obtain comparable information. Also several interviews with insurance firms and ship brokers have been made in order to obtain insights into the practical approaches for capital valuation of Danish fishing vessels. In Appendix A.1, a short description of the current FOI approach to capital valuation is given for reference. 1. General national situation 1.1 Investments in new vessels The Danish fleet totally consists of 3,407 vessels at the end of 200413 of which 1,181 were considered as commercial. With exclusion of the vessels conducting specialized fisheries after mussels, horse shrimps and fishing in Greenland waters, the age composition of the remaining commercial fleet (called the total fleet in the following) of 1,035 vessels is displayed in Figure A.1.1 with respect to number of vessels and tonnage.
12 13
A commercial vessel is one with a catch value above the FOI limit, which in 2004 was approximately 30,000 €. Based on information from the Directorate of Fisheries database 1 March 2006.
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Figure A.1.1 Age composition of the Danish commercial fleet per 1/1-2005 (% of total)
Besides interviewing ship brokers no information is available about the cost of building a new vessel. The price can of course vary a lot depending on the equipment onboard the new vessel and so forth.
1.2 Investments in fishing rights At the moment, several types of fishing rights, i.e. intangible assets, exist in Danish fisheries. These are all linked to the individual vessel: Fishery
Type of right
Definition
All
Fishing permit
All
Capacity license
Herring and mackerel
Individual Transferable Quotas Individual Quotas Share of quota
Sprat
Every vessel must be registered in the Directorate of Fishery, if they wish to conduct commercial fishing Tonnage (GT) and engine power (kW) Share of quota
Tradability
Year of introduction
No
Running process in the 80’ies
Possible within certain limits
Running process in the 80’ies 2003/2004
Free Not possible, except if it is sold with the vessel
2005
Approximate price per unit in 2005 Unknown
Tonnage 400€/GT Engine power 70100€/kW Herring 1.31.6€/kg. Mackerel 7-8€/kg. Unknown
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North Sea, Number of days at Skagerrak, sea Kattegat, eastern part of English Channel and Irish Sea
Maximum Free within 2003 number of days gear/mesh sizeat sea allocated groups based on used mesh size
Unknown
The intangible assets have been allocated to the vessels without any cost for them, and they are not included in the book value of the intangible assets before they are bought and sold the first time, if tradability is possible. In context of the regulation, it is not required that fishermen inform the authorities about the selling or buying prices of rights except for herring and mackerel quotas (the latter was obligatory from 2006). Only traded quantities have to be informed for control purposes. A revision of the Danish regulation within the demersal fishery will from 2007 give the majority of fishermen individual vessel shares on the most important species. Restricted tradability with these shares will afterwards become possible.
1.3 Investments in 2nd hand vessels It is possible to obtain some information about the prices of second hand vessels from ship brokers.14 However, it is not possible to validate whether the initial requested price is equal to the actual price, because no official collection of these prices are made. In conclusion it is therefore not considered possible to obtain general information in relation to the price of second hand vessels useable for research purposes.
1.4 Investments in shore facilities The Directorate of Fisheries does not collect information about the value of land-based facilities, i.e. gear sheds, offices, vans, trucks etc. However, in the Account Statistics for fisheries (FOI, 2005), the asset value of land-based facilities is estimated, cf. Table A.1.1. Table A.1.1 Value of land-based assets owned by commercial Danish fishing vessels 1996 Total value (1,000€) Average value per fishing firm (€)
1997
1998
1999
2000
2001
2002
2003
2004
9,366
7,691
7,733
10,049
10,962
10,112
11,345
12,870
10,690
5,349
4,780
5,348
6,659
7,174
6,675
8,052
10,346
8,607
The total value of land-based assets is seen to be around 10 mln. €. However, the average value of land-based assets per fishing firm is seen to increase. The number of fishing firms has been reduced from 1996 to 2004, thus leading to increased concentration of on-shore facilities. The new Danish regulation starting in 2007 is expected to further concentrate the on-shore facilities in the Danish fleet. 14
See for instance www.westship.dk.
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1.5 Approach to calculation of capital value in agriculture The Danish Agricultural Account Statistics is based on data collected from a stratified sample of approximately 2,000 annual accounts for Danish farms with more than 10 ha of land or a Standard Gross Margin (SGM) that exceeds 8 European Size Units (ESU). Land and buildings are assessed according to the latest public valuation. The valuation is supposed to reflect market prices and is based on price statistics for real estate. Newly acquired estate without a public valuation is set to the expected value at the first coming valuation. Machinery and equipment are set to the technical reacquisition price, which is determined as the acquirement price corrected for price changes, net investments and depreciation, cf. the approach within fisheries. The same yearly depreciation rate is used, and the standard depreciation rate is set to 15%. Livestock is valuated by using market based prices. Each year a set of recommended prices is determined. These can be used by the accountants, but this is not required. Goods such as for instance corn, fertiliser and fuel on stock are valuated at the current price. This also applies for those that have been brought out on the fields. Lifetime of assets is determined individually on farm level in dialogue between the farmer and the account consultant. Within the RICA/FADN system, the recommended lifetime for different types of buildings and so forth has been set. According to the RICA/FADN approach, a distinction is made between the following assets: 1) Land and buildings; 2) Machinery and equipment; 3) Delivery rights; 4) Livestock; 5) Stocks in ground; 6) Stocks in store; 7) Dwelling; 8) Other physical assets; and 9) Financial assets. Several intangible assets exist within Danish agriculture. These include: 1) Milk quotas; 2) Delivery rights to starch potatoes; and 3) Delivery rights to sugar beets. The Danish Ministry of Food, Agriculture, and Fisheries has authorized the so-called Milk Board15 to administer the quota scheme in order to ensure full utilization of the Danish national milk quota and secure that all Danish milk producers have equal terms within the quota system in relation to payment of additional levy and allocation of additional quota. As a consequence the Milk Board has two main functions - to purchase/sell milk and to administer the quota system. Through the collected accounts, information is obtained about the stock of milk quota for each farm. Valuation of the milk quotas is done by setting a price equal to 80% of the actual price milk quota price. Furthermore the value is corrected by taking the fat percentage into consideration, where this is on average assumed to be 4.36%. Thus the same standard price is used by every farm Quotas on milk, sugar beets and starch potatoes etc. are tradable. Prices of milk quotas are available on the Danish Milk Board, while prices on quotas on potatoes and sugar beets are not publicly available and not known by FOI. 15
See www.maelkeudvalget.dk/dmb/ for further information.
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The value of tradable quotas is not included in other tangible assets. In general quotas are not depreciated.
2. National fleet 2.1 Description of the case study fleet The Danish commercial fleet is considered to by a very flexible fleet, which can relatively easy adjust to different fishing conditions with respect to species and fishing areas. In 2004, there were 1,035 vessels in total, when the vessels in specialised fisheries are excluded. The vessels are regulated using various instruments. These range from Individual Transferable Quotas to monthly and yearly rations. Furthermore there are technical restrictions, in form of mesh sizes and closed periods and areas. Also vessels in the North Sea are subject to effort limitations in form of allowed days at sea. The age composition of the Danish fleet can be seen in Figure A.1.1, and the average age is around 30 years with the oldest being from 1910.
2.2 Data and estimation of price per capacity unit In the Directorate of Fisheries database there is information about the insurance value of each vessel for approximately all vessels. The vessel owners are obliged to inform about changes in insurance value, if changes occur for instance because of modernisation. Generally, the current insurance value of a vessel can therefore only be expected to depict the historical building price to some extent, unless the vessel is build within recent years. This is also supported by personal communication with insurance companies and ship brokers. Combined with the fact that there is no registration of historical building prices in Denmark, it can therefore be concluded that it is impossible to obtain specific knowledge of the historical building price of the vessels in the Danish fleet register. Based on the insurance value of the recently build vessels, an approximation to the current building price can be obtained instead, i.e. replacement price. Considering the Danish fleet register, Table A.2.1 shows the number of vessels built within the last four years, and their distribution on length groups compared to the total fleet. Table A.2.1 Distribution of recently build vessels with total fleet structure (%) 40m. Vessels build from 2001-2004 19.44 22.22 16.67 25.00 11.11 5.56 Total fleet 33.72 22.22 14.11 14.30 11.50 4.15 "Difference" -14.28 0.00 2.56 10.70 -0.39 1.40 Note: Total fleet includes the 1,035 vessels considered as commercial and not conducting specialized fisheries.
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An acceptable difference between the distribution of the vessels in the total fleet and the vessels build from 2001-2004 is observed. However, vessels below 12 meters are underrepresented, while the opposite is the case for vessels between 18 and 24. The building price of a new vessel does of course not solely depend on the vessel size. Other factors also influence this value including type of vessel, amount of electronic equipment and so forth. However, it has not been possible to obtain useable information about the price of building a new vessel from ship yards, and furthermore, the number of vessels build within recent years in Denmark is rather limited, thus excluding the possibility of taking for instance vessel type into consideration. In order to estimate the replacement value of the Danish fleet, it will thus be based on the insurance value of the 36 vessels build in one of the years from 2001 to 2004. The insurance value of a vessel build in 2001 is furthermore converted to 2004 value using an index based on the price development in iron, electronic equipment and wages. With these figures, it can therefore be approximated, what the price/cost of building a vessel in 2004 would be, and with this figure in hand, the replacement value of the total Danish fleet can be calculated. Table A.2.2 shows the estimated replacement values for different types of vessel characteristics. Table A.2 2 Average replacement values for total fleet in 2004 (Euro) Tonnage (GT) Engine power (kW) Estimated replacement value 11,901 4,595
Length (meters) 94,815
These replacement values does not as mentioned consider the composition of capital value on different groups. Such information cannot be obtained from the insurance values in the DF database. It is however possible to obtain some information about the distribution from the FOI database. The distribution of insurance value for a limited number of vessels (28) is found in the FOI database. In 2004, the insurance value for these vessels was distributed with 55% to Vessel, hull etc., 33% to Engines and winches and 12% to Electronic equipment. Based on the collected account statistics for fisheries, FOI calculates the asset value for the complete Danish commercial fishing fleet. A distinction is made between assets onboard the vessels, land-based assets, stocks and financial assets. The land-based assets were discussed previously, while stocks and financial assets excluded. Thus only the distribution of tangible assets directly related the vessels fishing activities on the sea is presented in Table A.2.3. Table A.2.3 Distribution of asset value for the Danish commercial fishing vessels (%) Vessel, hull etc. Engines and winches Electronic equipment Other equipment (fishing gear)
1996 1997 1998 1999 2000 2001 2002 2003 2004 62 62 63 63 62 62 64 65 67 26 26 25 25 26 26 25 24 22 9 9 8 8 8 8 7 8 7 4
4
4
4
4
4
4
3
4
Average 96-04 63 25 8 4
Comparing the distribution of asset and insurance value shows that the former has a higher proportion of vessel and hull, but a lower share of engines and winches, when comparing to the latter. In order to get an overview of the approach to estimate the value per capacity unit and thus the total capital value of tangible assets (done in section 3, 4 and 5) is in the Danish case approached as shown in Figure A.2.1.
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Figure A.2.1 Accounting for tangible assets – decision tree –Denmark What value indicators can be collected / observed? Insurance premiums
Historical value
Paid 2nd hand values / vessel
Insurance values / vessel Do the data refer to the tangible assets only or do they also contain value of intangibles?
Contain intangibles Estimate / separate tangible and intangible value, describe approach
Value of tangible (vessel)
What does the available value per vessel represent?
Replacement value (RV) (3)
Historical value (HV) (4)
Depreciated / book value (2) Estimate total depreciation to determine historical value
Estimate replacement price / cu Determine series of historical prices/cu
Price index series (1)
Other
Estimate RV and /or HV, describe approach
Estimate series of historical prices / cu Most recent historical price = replacement price./cu
Follow columns (RV) or (HV)
The replacement price for tonnage (GT) is used in the calculations, because this is considered to be the most suitable measure. Previous regression analysis has found that tonnage is the best physical characteristic to explain the insurance value compared to engine power and length. This is also supported by the correlation
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coefficients shown in Table A.2.4. Vessel type is also important, but due to the lack of information, this has not been considered further here. Table A.2.4 Correlation coefficients between selected physical characteristics Insurance value Tonnage Engine power Tonnage (GT) 1.00 1.00 Engine power (kW) 0.91 0.90 1.00 Length (meters) 0.97 0.97 0.93
Length 1.00
Having estimated the replacement price per capacity unit, the next step is to estimate the historical building price of the individual vessels. This is done by taking the current 2004-replacement value and by adjusting this for price changes over the period from 1910, where the first vessel was build, to 2004. The price adjustment is done for hull, engine, electronics and other assets separately using different price indices. In the FOI account statistics, the price indices for hull, engine and electronics is dependent on up to four individual whole sale price indices. These are: 1) 2) 3) 4) 5)
iron and steel goods of iron and steel machines, instruments and mechanical tools electronic machines and instruments hourly wages
In order to obtain an index for each of the three asset types, these five indices are weighted together using the share distribution shown in Table A.2.5. Table A.2.5 Weights used to calculate price indices Hull Iron and steel Goods of iron and steel Machines, instruments and mechanical tools Electronic machines and instruments Hourly wages
Engine 15 20 25 0 40
Electronics 0 0 65 0 35
0 0 0 100 0
It is possible from Statistics Denmark to obtain information on the five indices back until 1981. In order to have indices dating back to the building year of the first included vessel, i.e. 1910, the development in each price index is expected to follow the development in the consumer price index, which is available from 1900. The consumer price index is also used to adjust the value of other assets. Using the consumer price index is of course an approximation, which may to some extend be wrong. With further investigations it may be possible to obtain better price indices from 1981 and back, but Statistics Denmark could not supply these with out significant costs. However, the expected error in the long run is considered to be acceptable. Having adjusted the replacement value using these price indices, the historical building price per capacity unit can be approximated for each of the three case studies 1) whole fleet, 2) vessels below 12 meters and 3) vessels above 12 meters, consider in the forthcoming sections.
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The general assumptions made regarding depreciation rates, interest and loans made in the Danish case studies are shown in Table A.2.6. The interests are taken from the Danish National Bank statistics and the share of loans is based on the FOI Fisheries Statistics 2004. Table A.2.6 Overview of assumptions made in the Danish case studies (%) Depreciation Assumed fiscal Depreciation rate - rate/year rate/year rate/year - degressive linear degressive Hull 7.0 2.5 5.5 Engine 25.0 10.0 13.5 Electronics 50.0 20.0 20.0 Other equipment 35.0 16.0 37.5 Rest value hull after 40 years 2.5 Interest rate government bonds 4.3 4.3 4.3 Market rate for loans 6.0 6.0 6.0 Loans as % of total capital, total fleet 25.0 25.0 25.0 Loans as % of total capital, vessels below 12 meters 51.0 51.0 51.0 Loans as % of total capital, vessels above 12 meters 23.0 23.0 23.0 Regarding the assumed fiscal rates, it has not been possible to identify this for Denmark. However using the average figures from the FOI recommendations to the accountants participating in the statistics, some ad hoc rates have been set.
2.3 Capital value and capital costs Based on the values and approach presented in section 2.2, the capital value including depreciation and interests is calculated using the replacement and historical value. The figures are in Table A.2.7 compared to the figures from FOI’s Fisheries Account Statistics 2004. It is observed that the replacement value under degressive depreciation result in a very similar level of depreciation costs, but that the interests are underestimated compared to the FOI figures. This is also the case for the capital value, which is only half of the FOI figures, and because the net profit in this case is higher than FOI’s, a much higher profit/capital level is observed. With linear depreciation imposed when calculating the replacement value, depreciation costs are reduced to approximately half of the FOI figures, while the calculated figures are also lower. This results in a higher net profit, and also a higher profit/capital ratio, despite that the capital value is increased compared to the one calculated with degressive depreciation.
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Table A.2.7 Capital value and capital costs and their consequences on profit (mln Euro) Replacement value Historical value (Macro / economic approach) (Micro / fiscal approach) Degressive Linear 2004 depreciation depreciation Fiscal rate 1 Value of landings 349.0 Fuel costs 3.5 Other running costs 40.8 Vessel costs 74.2 Crew share 88.0 Gross cash flow 142.4 Depreciation 58.8 53.1 30.4 38.4 Interest 29.2 12.0 18.2 4.3 Net profit 54.4 77.3 93.8 99.7 Gross value added 230.5 Capital value 585.8 279.7 423.4 287.2 Profit / capital 9.3% 27.6% 22.1% 34.7% Looking finally at the micro approach and thus calculation of historical value, it is observed that depreciation costs are again lower that the FOI figures, and interests are significantly lower. Therefore a high net profit is observed. Combined with an estimated historical capital value at the similar level as the replacement value with degressive depreciation, the highest profit/capital ratio is observed. The absolute and relative distribution of capital values is displayed in Table A.2.8 and Table A.2.9. The total replacement value is estimated to be 1001 mln Euro of which the primary part is placed in the hull. The degressive replacement value amounts to 28% the total replacement value, while the linear replacement value sums to 42%. However, comparing the relative composition of the capital values, the degressive and linear values are very similar. However, compared to the composition observed in the FOI statistics, the share for hull is lower, but higher for engine. Table A.2 8 Summary of the capital values – comparison of approaches (mln Euro) Total Hull Engine Electronics Replacement value (constant prices) Total 1001.1 645.7 242.8 75.1 Degressive depreciated 279.7 145.1 89.0 31.4 Linear depreciated 423.4 234.4 124.3 44.6 Historical value (current prices) Total 640.9 299.6 232.5 52.2 Degressive depreciated 287.2 118.2 114.8 22.5 Table A.2 9 Relative composition of capital (%) Total Replacement value (constant prices) Total 100.0 Degressive depreciated 100.0 Linear depreciated 100.0 Historical value (current prices)
Hull 64.5 51.9 55.4
Engine 24.3 31.8 29.4
Electronics 7.5 11.2 10.5
Other 37.5 14.1 20.1 56.6 31.7
Other 3.8 5.1 4.7
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Total Degressive depreciated
100.0 100.0
46.8 41.1
36.3 40.0
8.1 7.8
8.8 11.0
The total historical value is estimated to be 641 mln Euro, while the degressive depreciated historical value is calculated to be 287 mln Euro. The composition of the capital value is to some extend to similar, but compared to the replacement values, the relative share of hull with historical value is lower than for the replacement value, while engine is higher. 2.4 Evaluation Assumptions In the Danish analysis only commercial vessels not conducting specialised fisheries are included. In order to estimate the capital price and capital value several assumptions have been made. These include: -
-
replacement value/cost is based on the insurance values for vessels build in the period from 2001-2004 corrected for price changes; vessels built in 2001-2004 is assumed to follow the general distribution of the Danish fishing fleet with respect to size (has been verified with reasonable success) and also vessel type in form of onboard equipment. The latter has not been verified due to the limited amount of new vessels, and is therefore assumed; the distribution of capital on asset types is assumed to generally follow the one observed in the FOI account statistics for fisheries; historical prices are corrected using price indices for iron, steel, electronic equipment, wages, etc; at the macro-level, lifetimes and depreciation rates are assumed to follow the general values agreed to within this project; at the micro-level, lifetimes and depreciation rates has been set on the basis of the values recommended by FOI to be used by accountants delivering economic information for the fisheries statistics.
All these assumptions are of course questionable, but because the complexities involved, necessary in order to obtain some credible estimations, which can consider the different aspects of capital valuation, and which are comparable between countries. Strength and weaknesses of the approach The primary strength of the approach is that it is simple to use. The data requirement is moderate and can generally be assumed credible. However, at least compared to the FOI account statistics, there are discrepancies (as expected), amongst other things because of the different ways the values are produced. Where the FOI statistics is based on the individual judgement of the accountants, the present approach is based on simple calculations based on the replacement value. The Danish approach have part been weakened by the possibility to obtain information regarding the vessel prices. Information about historical building prices is not available, while the number of vessels build in Denmark is low, thus leading to a troublesome process of estimating these. Interviews with ship brokers and ship builders revealed this to be, as expected, a complex issue, and despite the dependency on size and equipment, several other factors influenced the building price.
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The difficulties related to obtaining useful information about building prices therefore weakens the estimations of replacement prices and thus also the historical prices, because these are based on the replacement prices. Within the estimated replacement prices, the ones related to vessels below 12 meters should be considered with caution, because the number of vessels build within recent years is limited to a few vessels. For the vessels above 12 meters, the number of new vessels is higher, however this fleet is also more diversified with respect to size and type of vessel. Generally, the limited number of new vessels is related to the strict enforcement of the capacity restrictions for the Danish fleet. However, a new regulatory framework will be installed from 2007 covering the major part of Danish fisheries. This framework is expected to first of all reduce the number of vessels in the fleet, but also in a longer term result in an increase of new vessels due to the expected improvement of the economic situation for the remaining vessels. Collection of information related to the historical building price of a vessel is of course possible, but primarily for vessels build in the future. Collecting the information for vessels already build in Denmark is problematic for several reasons including that the vessel may have had new owners, been bought abroad, be so old that nobody knows this etc. However, it may also be troublesome to collect for vessels build in the future, especially if these are bought second hand from foreigners. The lifetimes and depreciation rates are also problematic to use. At an overall level, these have at the macrolevel in this analysis been fixed at some reasonable level. However, in future analysis is necessary to investigate these further in order to either verify these or come up with “more correct” values. At the microlevel, the values used are based on the recommendations giving by FOI to the accountants participating in the collection of Danish economic data. Because there is a certain amount of flexibility within these recommendations, the values are given in form of intervals, within which the individual accountant must be. This therefore makes it problematical to fixed specific values, also because the tax regulation also facilitates flexibility. Setting the lifetimes and depreciation rates to be used could be addressed by investigating this topic even further together with the accountants. Using their expertise, it may be possible to come up with some more precise figures, which can be used in future calculations. Also for the calculations, several price indices have been utilised. These are of course debatable, but previous analysis performed by FOI has recommended these as being the best ones to use, including the shares used to weigh these together in order to have a measure for each asset type. The assumptions made about the indices for the years before 1981 is simply that they follow the development in the consumer price index. This may lead to some miscalculations, but the importance hereof is reduced as the individual vessel gets older. The consumer price index was used, because this was the only available price indices for such long time periods.
3. Fleet under 12 meters 3.1 Description of the case study fleet < 12m. The Danish vessels below 12 meters are primarily fishing in the coastal waters around Denmark due to their limited size and thus ability to go far ashore. Their catches primarily consist of consumption species, cod, plaice etc. As mentioned in section 2.2, the fleet consisted in 2004 of 349 commercially active vessels, of
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which the primary part is netters (67%), while dinghies, multi-purpose vessels, Danish seiners and trawlers make up the rest. Most of the vessels have only one crew member, i.e. the skipper, and the capital intensity is generally low for these vessels. Figure A.3.1 shows the age distribution of the vessels below 12 meters. The oldest vessel is from 1910, but the major part of the fleet was built in 70’ies and 80’ies. Some new vessels have come into the fleet since then, but as mentioned previously, this is a very moderate number.
Figure A.3.1 Age distribution of vessels 12m. The Danish commercial fishing fleet above 12 meters is a diversified fleet with high capital intensity. First of all, their physical characteristics ranging from vessel size to gear type used. Furthermore, the vessels also conduct different types of fisheries. The smaller vessels primarily catches consumption species, cod, plaice, lobster, the middle size vessels also catches consumption species, but has furthermore catches of industrial species. The large vessels catch industrial species and pelagic species, herring and mackerel. The fleet is thus characterized by generally being flexible, but the recent regulatory changes have facilitated a trend towards specialization on a limited number of fisheries. Several gear types is utilized including net, Danish seine, purse seine, beam trawl and common trawl. Furthermore, a range of vessels is rigged to use several gear types. A total of 686 commercial vessels make up the group above 12 meters in 2004. The oldest vessel is from 1913, but as it was also the case with the vessels below 12 meters, the major part of the fleet was built in 70’ies and 80’ies. However, compared to the number of new vessels coming in to the small vessel group, the number is larger for the vessels above 12 meters. The distribution of number and tonnage on building year is shown in Figure A.4.1.
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Figure A.4.1 Age distribution of vessels >= 12m. 12,0% 10,0% 8,0% Number
6,0%
GT
4,0% 2,0%
20 04 19 98 19 92 19 86 19 80 19 74 19 68 19 62 19 56 19 50 19 44 19 38 19 32 19 26 19 20 19 14
0,0%
Construction year
4.2 Data and estimation of price per capacity unit In the period from 2001 to 2004, a total of 29 vessels were build. Based on the insurance value of these vessels and approach described in section 2.2, the replacement value can be calculated, giving the figures in Table A.4.1. Table A.4.1 Average replacement values for vessels above 12 meters in 2004 (Euro) Tonnage (GT) Engine power (kW) Length (meters) Estimated replacement value 11,762 4,696 102,798 The price per capacity unit shows a higher insurance value per meter and kilowatt for the vessels above 12 meters compared to the vessels below 12 meters. However, measured in gross tonnage, the value is higher for the smaller vessels compared to those above 12 meters. The distribution of capacity price on asset components for the vessels above 12 meters is as previously approached using the information available in the FOI database. There 22 vessels which have delivered detailed information on the distribution of insurance value. In 2004, 55% of the insurance value was related to Vessel, hull etc. for these vessels, 33% to Engines and winches and 12% to Electronic equipment. Based on FOI’s asset values, the distribution for vessels above 12 meters is 67% to Vessel, hull etc., 22% to Engines and winches, 7% to Electronic equipment and 4% Fishing gears. For the beam trawlers, the figures are, 68%, 23%, 6% and 3%, purse seiners 70%, 18%, 8% and 4% and multi-purpose vessels 55%, 31%, 10% and 4%. 4.3 Capital value and capital costs Logically, the vessels above 12 meters make up the bulk of activity in Danish fisheries, and also the dominant part of the physical characteristics. FOI estimates the value of these large vessels capital value to be 552 mln Euro. The replacement value based on degressive depreciation and the historical value results in capital values at about half of the FOI level, while the linear depreciated replacement value sums to three-fourths of the
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FOI value. Given that the depreciation and interest is also calculated to be lower, the profit/capital ratios are much higher than FOI. Table A.4.2 Capital value and capital costs and their consequences on profit for vessels above 12 meters (mln Euro) Replacement value Historical value (Macro / economic approach) (Micro / fiscal approach) Degressive Linear 2004 depreciation depreciation Fiscal rate 1 Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest Net profit Gross value added Capital value Profit / capital
322.5 1.8 37.5 67.7 85.8 129.8 54.5 28.0 47.3 215.6 551.5 8.6%
48.6 11.4 69.7
27.9 17.3 84.6
37.7 3.9 88.1
264.9 26.3%
401.5 21.1%
281.8 31.3%
The composition of the capital values is shown in Table A.4.3 and Table A.4.4. Comments to this are in line with the previous ones made for the total fleet and vessels below 12 meters. Table A.4.3 Summary of the capital values - comparison of approaches for vessels above 12 meters (mln Euro) Total Hull Engine Electronics Other Replacement value (constant prices) Total 958.4 642.1 210.8 67.1 38.3 Degressive depreciated 264.9 144.8 77.5 28.1 14.5 Linear depreciated 401.5 233.1 108.1 39.8 20.6 Historical value (current prices) Total 631.3 311.2 210.9 48.7 60.4 Degressive depreciated 281.8 122.8 104.2 21.0 33.8 Table A.4.4 Relative composition of capital for vessels above 12 meters (%) Total Hull Engine Electronics Replacement value (constant prices) Total 100.0 67.0 22.0 7.0 Degressive depreciated 100.0 54.7 29.3 10.6 Linear depreciated 100.0 58.0 26.9 9.9 Historical value (current prices) Total 100.0 49.3 33.4 7.7 Degressive depreciated 100.0 43.6 37.0 7.5
Other 4.0 5.5 5.1 9.6 12.0
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Appendix A.1 Account Statistics for Fisheries - Denmark The current practice to estimation of capital value in the Danish Account Statistics for Fisheries produced by the Danish Institute of Food and Resource Economics is described in this appendix. Source of data The Danish Account Statistic for Fishery is compiled on the basis of collected accounts from 311 fishing firms, owning approximately one vessel each. These 311 firms corresponds to about 25 per cent of the Danish fishing firms, with a total output from the fishery in 2004 of at least 224,342 DKK16 measured in Standard Catch Value (SCV). The sample represents 98 per cent of total output of the sector and gives full coverage of the Danish fishery. Information is collected about activity, earnings, costs, assets and vessel characteristics. Each firm/vessel has attached a weight, which reflects its importance in the representation of the statistics. This factor is found by using a restricted least squares regression model. In the model, a restriction is included to secure that the number of vessels within each length category is equal to the number of vessels in the total population. Furthermore, the deviation from other restrictions such as distribution on homeports, fishermen’s age and catch revenues is sought to be minimised. The statistic therefore reflects the commercial fleet with respect to key characteristics in the best possible way, given the included vessels. Description of method and assumptions - Tangible assets In the Danish accounting form for fishery, a deduction is made between several tangible assets utilised in the fishery production. The information given in the accounts for a fishing firm/vessel is shown in the table below.
Vessel, hull etc. Engines and winches Electronic equipment Fishing gears Vehicles (cars, trucks etc.) Buildings etc. Other assets (stocks etc.) Total value
Primo
Price regulation
A
B
0
0
Investments (cash value) C
0
Depreciation
Ultimo
D
E
0
0
Having determined the primo value of the tangible assets, these are regulated with changes in prices, new investments and depreciation, thus giving the ultimo value of the tangible asset. The calculation of each figure in the statistics is calculated as follows, cf. the letter attached to each column in the table above:
16
1 Euro is approximately equal to 7.53 DDK.
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A. The first time a firm/vessel is included in the statistics, the primo value of the assets are determined together with the vessel accountant. For a new firm/vessel, the values of the tangible assets are relatively easy to determine, because the depreciation costs are of minor importance. It is generally the case that the value is closely related to the insurance value. For an older firm/vessel, it is often more difficult to determine the tangible asset value, because the depreciation related to taxation is much larger than the physical depreciation. For these firms/vessels, the insurance value is often used as starting point, and adaptations are afterwards made. B. The price regulation for vessel, engine and electronic equipment are determined using fixed indexes calculated by FOI. Wholesale price indexes and wage indexes from Statistics Denmark is used. These are used to calculate an index for 1) vessel, hull etc., 2) engines and winches and 3) electronic equipment. C. The allocation of vessel expenses between maintenance and investment (including improvements and renovation to prolong operational lifetime) has been given special attention from the start of the Account Statistic for Fishery. Especially the cost on fishing gear, which were usually set as an operational cost before FOI started collecting data for the account statistic. Now the purchase of new fishing gear is activated on the balance and depreciated according to expected lifetime. D. Depreciation is individually calculated for each vessel (firm) in the accounts. Individually set depreciation percentages based on the expected (operational) lifetime of the physical assets (scrap value set to 20%) are used in the calculations for each type of fishery asset: Lifetime (years) Vessel, hull etc > 20 Engines and winches 7-23 Electronic equipment 5-15 Fishing gear 2-5 Other operative assets* Depends on the asset type * Land based like buildings, trucks or other vehicles
Depreciation percentage 3% - 8% 7% - 20% 10% - 30% 25% - 50% 4% - 30%
In the individual accounts, depreciation is calculated using the method of diminishing balance, where a fixed percentage is multiplied on the sum of tree items: • The book value at the beginning of the year • An adjustment for price trends is made for vessel, engine and electronic equipment • The net investment (purchase minus sale) for that type of asset for the year E. Adjusting the primo asset value with price changes, net investments and depreciation, the ultimo book value of the assets is finally obtained. Description of method and assumptions - Intangible assets In the account statistics, it is possible to register the value of these intangible assets. However, it is in reality only the sale and purchase of quotas on herring and mackerel that is registered. It is problematic to estimate the value of these assets, because it is primarily only the vessels buying quota that stays within the fishery, while vessels selling quota leaves. Furthermore the bought quota shares are valuated, while the rest of the vessels catch “rights” are not valuated.
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The value of the bought quota share is obtained through the obtained account schemes. It is difficult to investigate whether the intangible assets are included in the value of the tangible assets. An approach could be to compare the development in the value of the tangible and intangible assets in order to see whether a lower value of the tangible assets is outweighed by an increase for the intangible assets. Considering that only the value of bought herring and mackerel is currently included in the statistics, it is not possible to investigate in more detail. Within the account statistics, no depreciation is made of the intangible assets. Some accountants consider this to be possible within the tax laws, but this is more related to taxation issues.
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APPENDIX B: France Introduction: Data sources The primary data used for this study are belonging to four databases: - The national fleet register of the Ministry of Agriculture and Fisheries, - The data base of the IFREMER Fisheries Observatory Network for individual data on fishing vessel's activity and economic situation - The second hand market transactions database - The accounting and balance sheets database of the Brittany Regional Observatory of Fisheries The national fleets register of the Ministry of Agriculture and Fisheries Some agreements exist between the ministry and Ifremer to make the French annual fleet register available for all the research projects where this public body is involved. In addition with the fishing fleet register downloadable from the EU databases, the ministry transmits annually to Ifremer a picture of the fleet at the 31/12/YearN (or 01/01/YearN+1). This picture is very useful to build time series of the French fleet without the bias linked with the entry and exit of vessels in the fleet register all over one given year. This table contains for each vessel of the French fleet its technical characteristics (size in length, kW, GRT, age...), the geographical location of the owner and other information like gears used by the vessel each year. The data base of the IFREMER Fisheries Observatory Network This database contains two kinds of information: - the detailed fishing activity of each vessel registered in the Fleet Register in terms of gear, target species and so on (census); - the individual economic situation of some fishing vessels registered in the Fleet Register (sample). It has been proved that in many cases, the reliability of the fleet register to characterize the fishing activity of each vessel through the gears declared is doubtful. Additionally, the exhaustivity of logbooks data files, even for vessel over 10 m., is not proved. Then, Ifremer has developed a collection of data on individual fishing activity through its Fisheries Observatory Network. Each year since 2000, information regarding the monthly fishing activity (métiers, fishing areas...) for each vessel present in the Fleet register has been collected through exhaustive surveys. This information, complementary to logbooks, allows affecting each vessel present in the Fleet Register to a specific "fleet" taking account of the "metier" it practised during a given year. Parallel to this census, the Ifremer Fisheries Observatory Network makes yearly surveys on a sample of 800 vessels (around 600 vessels from the Atlantic coast) to collect individual data on costs, earnings but also capital and employment devoted to the commercial fishing activity. The "economic sample" made available for this study is composed by 3500 individual data collected from 2000 to 2004. The vessel owners are questioned on their costs and earnings in detailed but also on the features of their fishing vessel (s) and its components (hull, engine, gear and winches, electronics, storage) and their related prices (historical, replacement, insurance or market value). The second hand market transaction database A complementary database exists at Ifremer and consists in the record of around 70% of the second hand market transactions occurred from 1985 to 2003 along the French NSCA coast. These data come from the so-called Affaires Maritimes districts and were collected with the support of the French Ministry of Fisheries. The date and the price of each transaction are available. This data set contains around 4600 observations from 1985 to 2004 which were used for an assessment of the second hand market vessel prices through hedonic method. Results on depreciation method and value of intangible assets in the French sector are deduced for this model.
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The Brittany Regional Observatory of Fisheries Finally, the Brittany Regional Observatory of Fisheries database has also been made available for this study. This database contains yearly accounting and balance sheets data for a large part of Brittany fishing vessels, the major fishing region of the Atlantic coast (representing almost 50% of the fleet).The commercial fishing fleet of the French region of Brittany is well informed by the Regional Economic Observatory of Fisheries which is a NGO created in 1992 by a professional fishermen organization. This Observatory collects bookkeeping from a network of 12 local accounting agencies and landings data from three producer organizations by individual units. 1. General national situation – national markets for fishery assets 1.1 Investments in new vessels The French total fleet (excluding Corsica and Overseas territories) is composed at the 1rst January 2005 of 5216 vessels for a total of 830,099 kW and 148,337 GRT. The total fleet that we will consider here is composed with 3640 vessels below 30 meters and belonging to fishing harbors of the North Sea, Channel and Atlantic coast. This fleet accounts for 550,445 kW and 74,695 GRT and is called now "French NSCA fleet". Figure B.1.1 Age composition of the French total fleet at 1rst January 2005 Age com position total fleet
10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%
36
44
40
19
19
19
52
48 19
56
19
60
Construction year
19
68
64
19
19
19
76
72 19
84
80
19
19
92
88
19
19
00
96
19
19
20
20
04
0.0%
Num ber (%) GRT (%)
Source: IFREMER At the 1rst January 2005, the French NSCA fleet is composed with vessels building since the 30's but the large majority of the vessels (95%) have been built after 1970. The percentage of vessels which have entering the fleet each year increases regularly from the 1970's to 1985. This is consistent with the public policies during this period which aiming at the development of the fishing fleet in the country. The GRT curve shows that sometimes, the entry in number is not consistent with the real fishing capacity entering the fleet. The graph shows that the middle of 80's has corresponded with investments in relative large vessels. This strategy increased the fishing capacity directed to EU fishing stocks already overexploited for some of them.
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In total, the two curves show an increasing trend of entries and fishing capacities from the 70's to the second part of the 80's, following by a large decrease. In five years, the rate of new entry went from 9% to 1%. For more than 10 years now, the entry of new vessels in the fleet is stable at a constant rate by 1% - 2% per year. 1.2 Investments in fishing rights Different types of fishing rights have been implemented to limit entry into the French fishing industry or to specific fisheries. The first is an operation permit attached to each vessel, namely “permis de mise en exploitation” enforced in 1988. This system aimed at limiting entry flows to the French commercial fleet and became the main regulatory tool on the basis of which Multi-Annual Guidance Programs were implemented. Each new capacity project has been subject to an operation permit issuing. Capacity projects consist of: new buildings, importations of vessels, entries of vessels previously used for non-commercial fishing activity, change of the fishing capacity by an increase in vessel tonnage or increase in engine power, readmitted vessels which were not active for a transitory period. Based on this regulation, the ministry of fisheries defines the annual allowance of engine power and more recently, of tonnage that could be issued for each year. This allowance is shared between two vessel categories, more or less 25, with a split by region for the last category. The fleet segment criterion has been added to the sharing rules since 2000. The second types of fishing rights are licences aimed at limiting entry and controlling effort into specific fisheries. Each licence is attached to a vessel and its owner. The number of licence systems is growing and the system is mainly managed by the so called “interprofessional organisation” at national or regional levels. The most common examples are the scallop inshore fisheries which are mainly regulated by individual licences with a "numerus clausus" and constraints on days or hours at sea (Guyader, Daurès and Fifas 2004). Fishery
Type of right
Definition
Tradability
Fishing industry (and segment since 2000)
Operation permit
kW, GRT
Dependent on fisheries (ex: Scallop fisheries in coastal areas, nephrops fisheries in the bay of Biscay, gillnet in the Brittany region etc...)
Fishery licence
Access to a stock or/and area with a specific gear, effort limitation in some cases
Forbidden by the Law, implicit market in practice through the sale of vessel Forbidden by the Law, implicit market in practice through the sale of vessel
Year of Approximate introduction price / unit in 2005 1988
Varies from fisheries to fisheries (First in 1974)
These fishing rights are, however, not transferable by themselves on the market, because of the national law on fisheries, which explicitly forbids the exchange of rights between owners (JORF 1997). In most of the
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cases, these fishing rights attached to the vessel are in practice tradable through the sale of the boat on the second-hand market. 1.3 Investments in 2nd hand vessels Since the beginning of the 90s, the second-hand market for vessels has been the main way to enter the fishing industry, mainly because of the strong limitation of new entries, especially buildings. Because of these constraints and the change in the economic environment of the fleet (improvement in the performance of the fleets, decrease in the cost of capital because of the decline in real interest rate) the activity on the second hand market increased. As illustrated on the figure B.1.2, the rate of transaction rose from 5.0% in 1992 to 10.2% in 1999. The consequence was a gain in the average value of the vessels on the market despite the global ageing of the vessels exchanged, from a minimum of 9,000 Euros per meter in 1994 to around 20,000 per meter in 2002 (figure B.1.3). Figure B.1.2 Evolution of the transaction rate on the second-hand Market (Atlantic Area) 11.0% 10.5%
Transaction Rate (Atlantic Area)
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Figure B.1.3 Evolution of average price per meter in constant kEuros on the second-hand Market (Atlantic Area) 21 19
KEuros per meter
17 15 13 11 9 7 5 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Note: Transaction rate: Number of transaction (t) / Number of vessels in the Fleet (t-1) Source: IFREMER Vessel prices on the second hand market seem to value not only the material capital (i.e. the value of the vessel) but also the intangible capital (i.e. operation permits and licence). While the size of the vessel and their
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age significantly influence vessels prices, these access rights account for a weighty part of vessels prices on the second hand market (Guyader and Daurès, 2003). A series of decommissioning schemes have been implemented nearly every year since 1991. These schemes were regularly implemented to fulfill the MAGPs intermediate and final MAGPs targets or when delays appeared (Guyader, Berthou and Daurès 2004). In the application of decommissioning schemes, the government adjusted the premium levels to scrap vessels according to E.U. rules and to the second hand market prices evolution. This is rational because vessels owners decide or not to scrap their fishing unit by comparing the price of their fishing units on the second hand market and the premium offered by decommissioning schemes. Figure B.1.4 Evolution of theoretical premium to scrap vessel (Atlantic Area)17 16
Premium in KEuros per meter
14 12 10 8 6 4 2 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: based on DPMA regulations 1.4 Investments in shore facilities Little information exists on this topic and the only available source for this study is the annual economic surveys conducted by Ifremer. Based on a standardized questionnaire, the vessel owner is questioned on the number of in shore assets he owns and their type. Moreover, if the investment in this type of assets occurred recently, the price of the asset is asked in order to constitute time series of prices. Four categories of in shore assets are considered: - vehicles (cars, vans), - buildings (only storage buildings or "fish wells"...), - computers and other electronic assets (not installed on the vessel), - equipment for commercialization at land. In some cases where the interviewer is able to give more details, these categories can be divided into more precise subcategories. Based on the economic sample from 2001 to 2004 of the Ifremer Fisheries Observatory Network, around 42% of vessel owners are in possession of at least one "in shore" facility. This percentage is slightly higher for 17 Premium is considered as theoretical because it does consider the effective premium received for decommissioned vessels but what vessel owners could receive according decommissioning regulations. In 2003, for a 100% level of the premium allocated to vessels targeting species under recovering plans or stocks in bad state.
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large vessels (over 12 meters). Based on a sub sample where the information is more detailed, the van is the "in shore" facility mostly declared (37%), then the car (17%), the storage building (12%) and the computers (10%). Very preliminary treatments of the data lead to an assessment of the replacement value of in shore facilities in the fishing sector at 34 000 € on the average. However, this amount is generally excluded from the calculation of the traditional indicator of capital value in the fishing sector which considers exclusively vessel. The concentration of the fishing sector has not been proved with statistical measures. The owning property system of the French fishing sector is still deeply characterized with the individual ownership. Then, the owner of a fishing vessel is still an individual ownership and precisely the captain of the vessel. A recent study on the Brittany fleet made by Ifremer showed that the ownership remains in a large majority individual even if the number of societies has increased for the last 15 years (Talidec at al. 2006). This is confirmed by the FIDAL and PWHC report (2005) which underlines the difficulty in this case to operate a clear distinction between family and firm assets. 1.5 Approach for the calculation of capital value in agriculture and/or by statistical office 1.5.1 Agriculture Source: CE – DG Agriculture RI/CC 1256, rev.3, "FADN Data definition..." based on EC Regulation N° 2253/2004. This document specifies all the items which have to be included in the calculation of the capital value and the way to proceed. The depreciation calculation is based on the replacement value and is linear for the French case. 1.5.2 Statistical office The French method implemented by INSEE (Institut National de la Statistique et des Etudes Economiques) is described in the OECD 2001 reference book on the measurement of capital. It recalls that "the PIM method is used with the hypothesis that fixed assets are discarded according to a lognormal mortality function and that depreciation is assumed to be straight line". The difference between closing and opening capital stocks in gross terms based on company accounts is used to estimate GFCF in current prices. Then an index procedure (Chain Laspeyres price indexes) is used to obtain series of GFCF in constant price by type of asset. Coefficients of mortality and depreciation are also depending on the type of asset and industry.
2. Estimation of value per capacity unit 2.1 Data and estimation of price per capacity unit Using its Fisheries Observatory Network data base, IFREMER runs in 2006 some models for the estimation of gross capital stock indicators per vessel per year (Daurès et al. , 2006). A sample of 420 observations is used for the "Historical price" model which is corresponding to the number of vessels for which the building year and the related building price are available. Note that the difficulty to have information on large vessels makes this model only applicable to less than 30 vessels. According to the age and the DCR segment composition of the total fleet the sample appears well representative. Moreover,
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the sample composition according to hull material allows taking account of this feature in the historical price of a vessel. Sample distribution per building year
Sample distribution per Fleet segment: Fleet1: Trawler 152
Fleet2: Seiner 7
Fleet3: Dredger 41
Fleet4: Passive 176
Age structure of the sample
Fleet5: Other 44
50 45 40
Sample distribution per hull material
35
Metal
Wood
Plastic
Other
30
155
61
201
3
25 20 15
Source: IFREMER
10 5 1985 ante
1987
1989
1991
1993
1995
1997
1999
2001
2003
0
Historical prices used for this model are building prices collected through the annual economic surveys conducted by the Ifremer Fisheries Observatory Network. These data refer exclusively to tangible assets. The methodology refers to the hedonic approach and to the hypothesis that the historical price of a new vessel will be a function of its characteristics. The following specification is then considered: NVP = f (LGTH, Dev_GRT, Dev_kW, Fleet, Hull, Year) where NVP is the historical price of the vessel, LGTH is the length, Dev_GRT is the deviation of the vessel GRT from the mean GRT of the group of vessel belonging to the same length classes (8 length classes are considered), Dev_kW is the deviation of the vessel kW from the mean kW of the group of vessel belonging to the same length classes, Fleet are 5 dummy variables characterizing the fishing activity (Trawler, Seiner, Dredger, Passive gears, Other), Hull are 4 dummy variables characterizing the type of hull (Wood, Plastic, Metal, Other) and Year are 19 dummy variables equal the building year from 1985 to 2003. The equation is estimated using a semi logarithmic functional form where the dependant variable is the logarithm of the price of the vessel measured in the real term (taking account of the inflation rate).
log(Yi ) = α + βK +
2003
∑δ
T
I T + ε t ,T
T =1985
Where T = Building year K = Technical characteristics (length, deviation from GRT and from kW, Type of hull) YT=Acquisition price IT=1 if the building year equals T, 0 else The expected parameter signs are obtained and the increase in the size of the vessel (length) leads to increase in prices. Moreover, the vessel price in the same length category is positively linked with the fact that the vessel is bigger or smaller compared to the average of its category. This using of relative variable allows not
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facing the problems of multi co linearity of variables where length, kW and GRT must all be considered in a regression. The parameter estimates are given in annex. Regarding the fishing activity of a vessel, it seems that the item prices for new trawlers are significantly superior to other fleets. Considering the type of hull, the price of a vessel made with metal are generally lower that for other type of hull. Nevertheless, the parameters are not significant for the "other type of hull" category. Regarding the influence of the year, there are very few significant years (1990, 1991, 1998 and 2003). One main conclusion is that there are no big changes in building price of fishing vessels from year to year over the concerned period, if we take account of the inflation rate and every thing equal elsewhere. The model allows the calculation of an historical value for each vessel registered in the fleet at the 01/01/2005 given its specific characteristics. This deflated value was converted in current value for the purpose of this study based on consumption price index. Based on the knowledge of the capacity of each vessel, a price per capacity is then deduced from the estimates. Three capacity units are generally considered (kW, GRT, meter) and the trends of the different values per capacity unit (based on current values) are generally increasing with the time. The recent years are also characterized with high variability of the value per capacity which is less accentuated if we consider the value per GRT. The reliance of the kW as a capacity unit is very low. As far as the kW is the control variable in the fishing sector, large incentives exist for the fishermen to increase their real engine power. In this context, the analysis of reference prices has focused on the values per GRT and value per meter. The value per GRT per vessel deduced from the model is a little bit bigger for over 12 meters vessel, it depends on the size category of the vessel but in a less extent than the value per meter. For the value per meter, the distinction between the less than 12 meters vessels and the over 12 meters fleet is necessary. In the context where the GRT is replaced now by the GT and the obsolescence of the GRT as a capacity measure in the fishing sector will generate an inevitable cut in the time series values per capacity unit, the value per meter was considered as the best price per capacity measure for this study. This price per capacity measure will be retained for all the calculations at the finest level (less and over than 12 meters fleets, segments...). However, the price per GRT was retained for the calculation at the level of the total fleet even if it is obvious that the measure will be underestimated due to the largest weight of the small vessels for the calculation of a unique price per GRT per vessel. The small vessels (less than 12 meters) represented 71% of the total fleet in 2005. For each vessel i (1,.., N) present in the fleet register at 01/01/2005, built the year y (1,...,2004), belonging to the segment s, with X capacity unit and with an estimated cost P through the model, a historical price per X per building year is deduced. For the replacement price, we take account of the historical price of the recent years (2000-2004). The French method for estimation of prices per capacity unit is summarized in figure B.2.1.
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Figure B.2.1 Accounting for tangible assets – decision tree – France What value indicators can be collected / observed? Insurance premiums
Paid 2nd hand values / vessel
Historical value
Insurance values / vessel Do the data refer to the tangible assets only or do they also contain value of intangibles?
Contain intangibles Estimate / separate tangible and intangible value,
Value of tangible (vessel)
What does the available value per vessel represent?
Replacement value (RV) (3)
Historical value (HV) (4)
"Historical price" model (Daurès et al., 2006)
Estimate replacement price / cu Determine series of historical prices/cu
Price index series (1)
Depreciated / book value (2) Estimate total depreciation to determine historical value
Other
Estimate RV and /or HV, Describe approach
Estimate series of Historical Prices/ cu Most recent historical price = replacement price/cu
Follow columns (RV) or (HV)
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2.2 Capital value and capital costs 2.2.1
Tangible capital
The assessment of tangible capital is primary based on the estimates resulting from the "Historical price model" applied to each vessel present in the Fleet register at the 01/01/2005. Only the results of vessels less than 30 registered in fishing harbors of North Sea, Channel and Atlantic coast are considered. As said before, historical price series of new vessels are used for the calculation of historical value of capital (micro or business approach) and the average price per capacity for the vessels build over the five recent years (20002004). In order to apply an evaluation per components, the results of the Ifremer economic surveys have been used for the evaluation of the share of each component in this tangible capital. Globally, the surveys confirm the assumptions of the common methodology proposed: Hull (60%) Engine (20%) Electronics (10%) Equipment and Other (10%) Some minor differences are observed if we split the vessels between length categories but they are considered as marginal. Depreciation methods: The most ancient work existed in France aiming at the definition of a depreciation method for the tangible capital was conducted by Boncoeur et al. (2000). In this method, three components of fixed capital were separated: Hull, engine and electronic materials. The depreciation of the vessel is supposed to be the sum of the depreciation of each component: - Depreciation for hull: Based on a linear regression made between vessels’ life span and the ratio insurance value / purchase price (sample of 62 vessels, with historical prices), the following relationship was concluded. Insurance value ≈ Purchase price x (-0.02 x vessel life span + 1.034) Consequently, a straight Line Depreciation by 2% a year was applied in this report (a rate very close to as estimated result computed for the UK English Channel fleet – Pascoe, Robinson and Coglan. 1996). Depreciation hull = 0.02 x Capital Value for vessel t0 - Depreciation for engine: Based on the economic life span estimated to 8 years from the survey Depreciation engine = 0.125 x Capital Value for enginet1. Capital value for engine was estimated from a sample of 100 individual data through an economic survey of fishermen (exploiting fisheries in the Channel). A log-linear regression was tested between engine power (kW) and available capital value for engine. Finally, the following estimation was used: Capital Value for enginet1= 0.5 x kW 1.16. Hence, Depreciation engine = 0.0625 x kW 1.16. -Depreciation for electronics: Life span considered for electronics was 5 years. Depreciation electronics = 0.2 x Capital Value for electronicst1 Capital Value for electronics t1 can be given from a face to face questionnaire or from a historical procedure based on market prices for standard materials. Depreciation vessel = 0.02 x Capital Value for vesselt0 + 0.0625 x kW1.16 + 0.2 x Capital Value for electronicst1
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In the recent context where the fleet is ageing, the degressive method for depreciation seems more appropriate than linear ones. The degressive method is more convenient because there are no strong assumptions on the life duration of the vessel. More recently, some works have been conducted on the basis of data on the second hand market vessels price (Guyader and Daurès, 2003). Based on a price model aiming to measure the influence of vessel features as length, age, fleet... as well as the date of the transaction (t) on the vessel price on the second hand market, a depreciation curve of the vessel price in relation with its age is deduced, every thing equals elsewhere.
300 275
Vessel Price in k€
250 225 200 175 150 125 100 75 50 25 0
>36 years
30-36 years
28-30 years
26-28 years
24-26 years
22-24 years
20-22 years
18-20 years
16-18 years
14-16 years
12-14 years
10-12 years
8-10 years
6-8 years
4-6 years
2-4 years
≤ 2 years
Age Categories
Source: IFREMER Some preliminary results are summarized based on the example of a vessel of 12 meters from Guilvinec (Brittany famous fishing harbor): - The trend is not linear, especially at the beginning and at the end of the vessel’s life. - For age ranging from 4 to 10 years, a stabilization or slight increase in vessel capital value occurs. It is consistent with the fact that most of the vessels have to renew their engines, electronic equipments, or to renovate the hull over the period. - For the period from 10 to 22 years old, a 21k€ average loss is observed every two years. Then, the decrease drops to 13 k€ per age class when the vessel age is between 22 and 28 years old. - After 28 years old, vessel values are fairly constant. The minimum value of these oldest vessels might be bounded by the residual value of their equipments. The recent works on depreciation tried to investigate the depreciation at the beginning of the vessel life through the integration of new vessel price data in the model (Daurès et al., 2006). The results are still preliminary but seem in a favor of a degressive method with different depreciation rates according to the age class of the vessel. In other terms, at the very beginning of the vessel life, the depreciation rate of the tangible capital (all components included) should be very higher than over the rest of its life. These questions about the consistency of a constant rate over the period were already investigated by Levy (1978). Finally, the fiscal regime was examined through Le Floch et al. (2006). The French fiscal regulation is based on two depreciation methods, the linear and the geometric system. If the former is considered as the usual case, the latter is admitted only to a few capital assets. Fishing companies can use the reducing balance rate for new vessels and second hand vessels too. From a fiscal perspective, fishing vessel’s life time is 6 years minimum. In these conditions, a company can fully depreciate its vessel in 6 years, whereas estimated economic lifetime overtakes usually 20 years. As indicated in the following table, showing fiscal computation for capital depreciation according to the French regulatory basis, a coefficient is applied to straight line depreciation rate for obtaining the
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appropriated reducing balance. New and second hand vessels bought before 01/01/2001 could be depreciated in applying a 33.33 or a 37.5 coefficient (respectively 29.17 and 33.75 since 01/01/2001). Table B.2.1 Reducing balance rate in the French fiscal regulatory basis Life time Straight line Before Since 01/01/2001 01/01/2001 Coefficient Reducing Coefficient Reducing balance rate balance rate 3 33.33 1.5 50 1.25 41.67 4 25 1.5 37.5 1.25 31.25 5 20 2 40 1.75 35 6 16.67 2 33.33 1.75 29.17 6 2/3 15 2.5 37.5 2.25 33.75 8 12.5 2.5 31.25 2.25 28.13 10 10 2.5 25 2.25 22.5 12 8.33 2.5 20.83 2.25 18.75 15 6.67 2.5 16.67 2.25 15 20 5 2.5 12.5 2.25 11.25 Source : Mémento pratique Francis Lefebvre (p165) – Fiscal - 2003 The adoption of the geometric method in the French case can be explained in term of investment incentives in the sector. Main aftermath due to fiscal life time for depreciating fishing vessels (6 years) is to generate a high gain capital for sellers. Every time a fishing vessel is sold, capital gain results from the difference between the amount of second hand value and worth value (or depreciated historic price). Consequently, capital gain is equal to second hand value if fishing capital is fully depreciated from a fiscal point of view (worth value being equal to zero). In this case, the French fiscal regulation considers capital gain as a short run gain and is liable for income tax, close to 60% (FIDAL, 2005). According to the cited study, the amount of tax burden on capital gain is the reason why prices on the fishing vessels second hand market have reached very high levels. However, a tax avoidance regime was implemented through the Fishing Guidance Act adopted in 1997, following the “fishing crisis” in 1993-1994. Under a few conditions, fishing vessel’s owners can benefit from partial tax exemption on capital gain. They have to reinvest fully the amount of sold asset in fisheries in a period of 18 months following transaction. In this case, capital gain is spread on the following seven fiscal years, whereas capital gain is taxed to 60% during the last fiscal year if there is not reinvestment in fisheries sector. For instance, consider a capital gain by 150 000 €, linked to a fishing vessel sold on the French second hand market. If the skipper-owner reinvest 100 000 € in a new fishing vessel (new or a second-hand one), a fraction of capital gain (50 000 €) will be taxed to 60 % on the current fiscal year, and the other part (100 000 €) will be spread on the next 7 fiscal years. This measure was decided in 1997 in the Fishing Guidance Act and should be ended in 2003, but finally has been extended. A distinction must be made between short term and long term capital gain. The former represents cumulated fiscal depreciation and the latter is the gap between second hand price and cumulated fiscal depreciation (equal to historical price if fully depreciated).
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Long term capital gain(2) (G) = (E)– (F) 100 50 50 120 70 50 20 100 80 20 120 100 80 20 100 100 0 120 120 100 20 (1) The French fiscal law taxes short term capital gain at 59.09% (a maximum income tax at 48.09% and social deductions at 11%) (2) The law taxes long term capital gain at 27% (a flat rate of tax at 16% and social deductions at 11 %) Historical price (A)
Cumulated fiscal depreciation (B)
Residual value (C) = (A)– (B)
Second hand price (D)
Capital gain (E) = (D)– (C)
Short term capital gain(1) (F) = (B)
Two fiscal regimes are applied every time a fishing vessel is sold on the second-hand market. If a capital gain is expected, meaning a second-hand price higher than residual value, cumulated depreciation (B) defines short term capital gain (F) and long term capital gain is derived from the difference between capital gain and the short term side (G). Usually, fishing vessels are sold once capital is fully depreciated, as the third example in the table. Hence, taxes concern essentially short term capital gain, for which the level of taxes is the highest (59.09%). For this reason, the French authority decided a tax regime by installments if a reinvestment in the fishery sector is made. It appears that fishing companies in France can use the degressive system for new and second hand vessels too. In these conditions, a company can fully depreciate its vessel in 6 years, whereas estimated economic lifetime usually is above 20 years. Some comparisons of the results from the proposed methodology and real accountings data were made at the level of case studies on a common sample of vessel (Trawlers 16-24m., Passive gears less than 12m) where detailed accounting data exists. Data sources for loans as a % of total capital are also Ifremer annual economic surveys. Notice that these estimates are based on a sample of 453 vessels over the period 2002-2003. The loans as a % of total capital refer exclusively to the financing plan of the vessel at the date of the acquisition (new building or acquisition on the second hand market). The estimation is not taking account of the financing of investment occurring over the vessel's life. Moreover, this rate is given by the vessel owner without any possibility to check if the reference portfolio is the family one or the firm. Data sources for the interest rate of government bonds and market rate for loans (long term loans): Insee (http://www.insee.fr/fr/home/home_page.asp:Institut National de la Statistique et des Etudes Economiques -) Finally, for the assessment of capital value and capital costs for all the French case studies, the degressive and linear methods with the above depreciation rate per components presented in the following tables have been applied both for the macro approach and the business approach. Table B.2. 2 Overview of assumptions made in the French case studies Economic Economic depreciation depreciation Fiscal Fiscal rate / year - rate / year - depreciation depreciation degressive linear Degressive Linear Hull 7% 4% 7% 4% Engine 25% 10% 25% 10%
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Electronics Other equipment Rest value hull after 25 years Interest rate government bonds Market rate for loans Loans as % of total capital (Total Fleet) Loans as % of total capital (12 meters Fleet)
50% 35%
20% 16% 2.5%
50% 35%
20% 16% 2.5%
4.1% 4.1% 68% 67% 72%
2.2.2 Intangible capital The French context is characterized by access rights to fisheries which have increasingly been implemented to control the fishing capacity of fleets facing the problem of common-pool resources. An important point is that these rights to harvest are not tradable except through the sale of the vessels. Using a hedonic pricing model, the hypothesis that the price of the exchanged vessels can be broken up into two components was tested: a tangible value explained by the technical characteristics and the age of the fishing units, and an intangible value representing the access rights to the fisheries. These harvesting rights may to some extent capitalize the value of the rent or quasi-rent flows exhausted from the fishing activity. This valuation of non-tangible assets is done based on record of transactions on the second hand fishing vessel market data (3500 prices from 1985 to 2003 with 1988 the year of implementation of PME). The equation was estimated using semi logarithmic functional forms where the dependant variable is the logarithm of the price of each item measured in the real term (taking account of the inflation rate) log(Yi ) = α + βK + λ t +
2003
∑δ
I + εi
T T
T =1985
t = Age of the vessel i the transaction year T = Transaction year K = Technical characteristics (length, deviation from GRT and from kW, Type of hull) Yi = Market price of the vessel i
I T =1 if the transaction occurs the year T, 0 else On the contrary to the historical price model, the "year" variable has a great influence for the vessel price in the second hand market and seems to capture implicit fishing right value within the vessel value. In 2000, this value accounts for 50% of the vessel value on the second hand market. This value drops to a minimum in 1993, when the economic situation of the fleets was considered to be very bad.
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3 Total fleet (under 30 meters, NSCA coast) 3.1 Description of the case study total fleet The French NSCA fleet (excluding all Overseas and Mediterranean vessels and over 30 meters Atlantic vessels) is a significant fleet at European level. A large part of the vessels is built in the middle of the eighties and the average age of the fleet at the 01/01/2005 is 21 years old. Figure B.3.1 Age composition of French NSCA fleet Age com position total fleet
9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0%
Construction year
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
1.0% 0.0% Num ber (%) m eter (%)
Source: IFREMER The NSCA fleet of less than 30 meters is diversified in term of fishing activity but the most important segment is the "bottom trawl and seine" segment which is composed by 879 vessels but develop an important fishing capacity measured on the basis of kW and GRT. Beside, the vessels using passive gears represent a non negligible part of the French fleet (156,000 kW and 16,000 GRT). Table B.3.1Composition of the total fleet < 30m. by main DCR sub-segment DCR Fleet Number GRT kW Average Age Beam Trawler 18 752 4 362 21 Bottom Trawl and Seine 879 37 591 223 591 21 Pelagic Trawl and Seine 124 6 949 36 684 19 Dredgers 267 5 751 46 508 24 Other mobile gears 265 958 15 124 22 Polyvalent mobile gears 97 2 016 14 712 23 Hook 372 3 133 37 054 21 Netters 686 10 860 94 887 19 Pots and Traps 372 2 997 34 306 18 Other passive gears 92 256 4 834 16 Polyvalent passive gears 145 763 10 240 17 Polyvalent mobile and passive 207 1 850 20 891 23 Inactive 116 819 7 252 25 TOTAL NSCA < 30m. 3 640 74 695 550 445 21
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The average age of vessel is variable from fleet segment and goes from 16 years old for "Other Passive gears" to 24 years old for the dredgers. 3.2 Data and estimation of price per capacity unit Based on the historical price model, the price per GRT was around 8,500 € (in average for all the vessels present in the fleet at the 01/01/2005) and is around 13,500 € in the recent years. Table B.3.2 Price per capacity unit – Model estimates – Total fleet (NSCA, less than 30.) €/GRT €/GRT €/m. €/m. < 12m. 12– 30m. < 12m. 12– 30m. Replacement value (2000-2004) 12,810 14,666 8,965 55,906 Historical value (average over the period) Source: IFREMER
7,729
9,996
5,754
30,263
The historical value per capacity increases continuously until 1991, corresponding to the period of high level of new entries. Since 1991, the historical prices per capacity fluctuate around the replacement prices. 3.3 Capital value and capital costs 3.3.1 Tangible capital Table B.3.3 Summary of the capital values – NSCA Fleet 10 years of age). At present, the Ministerial decree 29 September 2005 is in force which has introduced a buy back measure for a period of two months and has modified a previous decree dated 5 February 2003 that had reduced the amounts of premiums and hence also the requests. The amount of subsidy allowed in case of permanent withdrawal are established on the basis of the CE Regulation 2792/99 (art. 7, annex IV). This criterion considers the Gross Tonnage (Table C.1.3) and the age of the vessel. According to article 7.5, the scrapping premiums listed in table C.1.3 are decreased by 1.5 % per year over 15 years for vessels from 16 to 29 years old. For vessels of 30 years old or more, the rates are equal to the scales in table C.1.3 less 22.5%. Table C.1.2 Scales of assistance relating to fishing fleets (Euro) GT classes Scales 024 meter
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Using the estimated insurance value per hp-class and per fleet segment, average prices per unit capacity per hp-class can be given. The insurance value can be considered roughly as a mix of replacement value and historical value, including the value for nautical equipment and electronics etc. In 2004, for all vessels, 80% of the insurance value was related to the hull and engine, 10% to electronic equipment en 10% to gear, catch and some other assets. The data on insurance value (and also on replacement value) do not include values for intangible assets. In table D.2.11 and D.2.12, the estimated average price per unit capacity is shown for the whole fleet amounting 7,729 per GT, 2,198 per kW and 55,034 per meter. Table D.2.11 Estimated average insurance value per capacity unit by hp-class Hp-class GT kW 0-260 hp 7,252 1,738 261-300 hp 9,963 3,705 301-800 hp 9,871 3,676 801-1500 hp 5,516 1,478 1501-2000 hp 7,647 2,272 2001 hp and more 6,280 1,382 Total 7,729 2,198
Length (m) 13,565 36,272 54,332 39,945 80,857 69,900 55,034
Table D.2.12 Estimated average insurance value per capacity unit by fleet segment Length GT kW Length (m) 12-24 meter 9,941 3,334 31,694 >24 meter 7,261 2,001 69,953 Total 7,729 2,198 55,034
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Figure D.2.2 Accounting for tangible assets- decision tree- Netherlands What value indicators can be collected / observed? Insurance premiums
Paid 2nd hand values / vessel
Historical value
Insurance values / vessel Do the data refer to the tangible assets only or do they also contain value of intangibles?
Contain intangibles Estimate / separate tangible and intangible value, describe approach
Value of tangible (vessel)
What does the available value per vessel represent?
Replacement value (RV) (3)
Historical value (HV) (4)
Depreciated / book value (2) Estimate total depreciation to determine historical value
Estimate replacement price/cu Determine series of historical prices/cu
Price index series (1)
Other
Estimate RV and /or HV, describe approach
Estimate series of historical prices / cu Most recent historical price = replacement price./cu
Follow columns (RV) or (HV)
cu = capacity unit vessel refers to complete unit incl. hull, engine, electronics and all other equipment (1) price index heavy machinery or another index related to boat building (2) Depreciated / book value will be usually based on historical price. (3) RV = Value at constant price of the most recent year (4) HV= Value of current prices, in case only one or several years available, remaining years can be extra/interpolated with the price index
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2.2 Data, prices and estimation value of intangible capital 2.2.1 Licenses The Dutch Ministry of Agriculture keeps register of owners and keepers of licenses in the Dutch fishing fleet. The number of licences/total GT and kW in the Netherlands is limited since mid 1980. Fishing licenses are considered as the most important intangible assets for fishery companies. A vessel without license is not allowed to take part of fisheries and in that case the vessel does not represent much value in the market for fishing vessels. Licenses in the Netherlands are tradable and related to tonnage and power of the vessels. Only some transactions (GT and/or hp/kW) have been observed in the last few years. It is considered that these observed prices are not representative for the whole fleet because of quantities of the (partly) traded licenses were very small. Paid prices in 2005 amounted approximately € 1.250 per GT and € 100 per kW. Taking these figures into account, the estimated value of licenses for the Dutch cutter fleet, being 75,762 GT and 266,082 kW, would be € 94,702,400 (for GT) and € 26,608,200 (for kW). Total value would be in this case € 121,310,600. Some licenses are not in use by fishermen at this moment. Owners reserve the license, awaiting developments in fisheries. Taking the above mentioned figures into account, an average value of €331,450 per vessel for the license can be estimated. 2.2.2 Shrimp licenses, list I and list II licenses In table D.2.13 and D.2.14 an overview is given of shrimp, list I and list II licenses in the Dutch cutter fleet. In the Netherlands owners of shrimp fishing vessels need these licenses to fish shrimp. Just vessels 24 meter 1 1 21 23 2 Total 79 1 113 204 49
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Lack of information about prices paid for shrimp licenses, list I and list II licenses (because of no trade in 2004 and 2005) makes valuation of capital for these assets very difficult. It is estimated that shrimp licenses at the moment do have a value of approximately € 30,000 each. In that case total value for the fleet (193 licenses) could amount to € 5,790,000. Estimations for list I and list II licenses can not be given. 2.2.3 Fish quota The Dutch Ministry of Agriculture keeps register of owners of fishing quota in the Dutch fishing fleet. Analysis of the list of quota owners active in the Dutch fleet (exclusive the pelagic sector) resulted in the following tables D.2.15 and D.2.16. Table D.2.15 Total quota for sole, plaice, cod and whiting sorted by hp-class (2004) Hp-class Sole Plaice Cod 0-260 hp 24,981 17,957 6,359 261-300 hp 1,429,338 2,511,122 446,257 301-800 hp 32,190 124,588 253,945 801-1500 hp 209,803 538,437 44,519 1501-2000 hp 5,979,048 10,439,489 87,637 2001 hp and more 2,713,414 4,413,039 92,981 Total 10,388,774 18,044,632 931,698
Whiting 1,976 137,939 87,755 14,456 27,370 31,536 301,032
Table D.2.16 Total quota for sole, plaice, cod and whiting by fleet segment (2004) Length Sole Plaice Cod 12-24 meter 1,243,449 2,133,996 360,016 >24 meter 9,145,325 15,910,636 571,682 Total 10,388,774 18,044,632 931,698
Whiting 106,238 194,794 301,032
Share in total EU quota of the Netherlands for all species is higher than the sum of assigned quota to the active fishermen by the government. This gap between total quota rights for the Netherlands and the distribution of quota to the fisherman is caused by quota owners (some of them temporary) without having a vessel. These quota owners are called ‘sofa fishermen’. As a result of the above tables, the average quota per vessel can be shown in tables D.2.17 and D.2.18. Table D.2.17 Average quota for sole, plaice, cod and whiting by hp-class (2004) Hp-class Sole Plaice Cod 0-260 hp 2,082 1,496 530 261-300 hp 13,235 23,251 4,132 301-800 hp 3,577 13,843 28,216 801-1500 hp 23,311 59,826 4,947 1501-2000 hp 68,725 119,994 1,007 2001 hp and more 79,806 129,795 2,735 Total 40,111 69,670 3,597
Whiting 165 1,277 9,751 1,606 315 928 1,162
Table D.2.18 Average quota per vessel for sole, plaice, cod and whiting by fleet segment (2004) Length Sole Plaice Cod Whiting 12-24 meter 12,191 20,922 3,530 1,042 >24 meter 58,250 101,342 3,641 1,241 Total 40,111 69,670 3,597 1,162
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In 2004 and 2005 trade in quota was very slow. LEI observed just a few transactions. The observed prices for quota were not representative for the whole fleet as the concerned transactions covered small quantities. Most of the flatfish vessel owners did lease quota from each other. Prices for cod and whiting are not known. If using the observed prices for sole and plaice and multiplying these by total quota for these species, the following figures in table D.2.19 would count for fleet and per vessel: Table D.2.19 Estimated values of quota sole and plaice active vessels in the Netherlands Quota (€) Sole Plaice
Total cutter fleet
Average per vessel
23,50
€ 244,136,189
€ 667,039
5,50
€ 99,245,476
€ 271,163
€ 343,381,665
€ 938,202
Total flatfish
Valuation of other licenses like List I, List II, Channel licenses and other fishing rights is not possible because of lack of price information. Valuation of all intangible capital together in fact can not be calculated for the Dutch cutter fleet due to lack of (price) information. Just some information about quota and licences is available. However, on the basis of the scarce information careful estimations can be made, in order to approach at least total value. In table D.2.20 a summary is given of estimated values of intangibles for the active fleet, totalling at least Euro 470,5 mln. Table D.2.20 Estimated value intangible capital active cutter fleet Intangible capital Estimated value in € m Licenses 121,3 Shrimp licenses 5,8 Other licenses pm Other intangibles pm Fish quota 343,4 Total 470,5
3. Total cutter fleet the Netherlands 3.1 Description of the case study total cutter fleet (all vessels >12 m.) The active commercial fishing fleet of the Netherlands consists of 6 segments and can be divided into the cutter fleet (landing fresh fish) and the pelagic freezer trawler fleet. The cutter fleet consists of 5 segment with an hp range between 150 - 2.800 hp. This fleet depends highly on flatfish fishery in the first place and shrimp fishery is the second important fishery for the fleet. The pelagic freezer trawler fleet is the 6th segment and hp ranges from 2.890- 13.382 hp. In this report, the segment pelagic freezer trawlers is not taken into account and excluded from analysis. At 1-1-2005 the Dutch cutter fleet consisted of 366 commercial vessels. The oldest vessel is built in the year 1899 but the major part of the fleet was built in the 1980’ies. All vessels are larger than 12 meters and average length of the vessels is around 29 meters. Average power is 727 kW and average size of the vessels is 207 GT. The age composition of the fleet is shown in figure D.3.1. The smallest, and often also the oldest vessels, primarily catch just shrimp. The biggest vessels depend on flatfish fishery.
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Figure D.3.1 Age distribution of vessels entire cutter fleet
Age composition of the cutter fleet Netherlands
% 14,0 12,0 10,0
number GT
8,0 6,0
kW
4,0 2,0 0,0 20
1 1 1 1 1 1 1 1 1 1 1 1 1 1 04 999 994 989 984 9 79 97 3 967 962 957 949 938 927 921 909
year
Table D.3.1 shows the main segments of the Dutch cutter fleet. All vessels are larger than 12 meters. Both hp classes 0-260 and 261-300 contain mainly vessels smaller than 24 meters with an average length of 22 meters per vessel. Both hp classes 1.501-2.000 and 2.001 and more contain mainly vessels larger than 40 meters with an average length of 42 meters per vessel. Table D.3.1 Technical variables by hp-class Hp-class N Length 0-260 hp 53 1,007 261-300 hp 167 3,674 301-800 hp 9 252 801-1500 hp 11 363 1501-2000 hp 92 3,772 2001 and more hp 34 1,462 Total 366 10,530
GT 1,908 13,694 1,368 2,662 39,836 16,150 75,618
kW 8,056 36,740 3,663 9,944 134,136 73,372 265,911
3.2 Data and estimation of price per capacity unit Table D.3.2 shows the average price per unit capacity for the whole fleet based on insurance value. Table D.3.2 Estimated average insurance value per capacity unit GT kW 0-260 hp 7,252 1,738 261-300 hp 9,963 3,705 301-800 hp 9,871 3,676 801-1500 hp 5,516 1,478 1501-2000 hp 7,647 2,272 2001 hp and more 6,280 1,382 Average 7,729 2,198
Length (m) 13,565 36,272 54,332 39,945 80,857 69,900 55,034
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3.3 Capital value and capital costs 3.3.1 Tangible capital Based on the insurance value of vessels (as prescribed in chapter 2) the value can be calculated for the entire cutter fleet. Assumptions regarding depreciation of the different elements of physical capital are shown in table D.3.3. For the national case studies these standard rates are used because of, the more or the less, they match with the balance sheets of Dutch firms. In the tables below figures are given of capital value of the cutter fleet amounting € 425.8 mln. This is an estimated value used in Annual Economic Reports (AER) assuming that capital value of the fleet is around 50 times the insurance premiums paid by the vessel owners. The replacement value based on degressive depreciation results in approximately 53% of this calculated value while linear depreciation results in approximately 66% of the value. Profit/capital ratios are all higher than LEI calculations. The composition of the capital values is shown in tables D.3.6 and D.3.7. Table D.3.3 Background for calculation of depreciation and interest entire Cutter fleet
Hull Engine Electronics Other equipment Rest value hull after 40 years Interest rate government bonds Market rate for loans Loans as % of total capital
Depreciation rate / year Depreciation degressive rate / year - linear 7% 4,0% 25% 10,0% 50% 20,0% 35% 16,0% 2,5% 2,04% 4,26% 50%
Fiscal rate 1 7,0% 25,0% 50,0% 35,0% 4,3%
Fiscal rate 2 4,0% 10,0% 20,0% 16,0% 2,5%
Table D.3.4 Capital value and capital costs and their consequences on profit for entire cutter fleet 2004 Replacement value Historical value (Macro / economic mln Euro approach) (Micro / fiscal approach) Linear Degressive deprecia depreciation tion Fiscal rate 1 Fiscal rate 2 Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest Net profit Gross value added
248,8 61,7 41,0 33,4 66,5 46,2 40,8 5,1 0,3 112,7
40,6 4,6 0,9
24,9 5,7 15,6
39,9 4,6 1,7
24,8 5,9 15,5
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Capital value Profit / capital
425,8 0,1%
226,2 0,4%
279,6 5,6%
216,7 0,8%
279,0 5,5%
Table D.3.5 Summary of the capital values - comparison of approaches entire cutter fleet Total Hull Engine Electronics Other Replacement value (constant prices) Total 584,5 350,7 116,9 58,5 58,5 Degressive depreciated 226,2 132,3 48,8 22,8 22,2 Linear depreciated 279,6 142,2 70,3 36,1 31,0 Historical value (current prices) Total 584,5 350,7 Degressive depreciated 216,7 123,4 Linear depreciated 279,0 142,2 Total = Gross fixed capital stock Degressive or Linear depreciated = Net fixed capital stock
116,9
58,5
58,5
48,8 70,3
22,8 36,1
21,8 30,3
Table D.3.6 Relative composition Total Replacement value Total 100,0% Degr. Depreciated 100,0% Linear depreciated 100,0%
60,0% 58,5% 50,9%
20,0% 21,6% 25,2%
10,0% 10,1% 12,9%
10,0% 9,8% 11,1%
Historical Total Degr. Depreciated Linear depreciated
60,0% 56,9% 51,0%
20,0% 22,5% 25,2%
10,0% 10,5% 12,9%
10,0% 10,0% 10,9%
100,0% 100,0% 100,0%
Hull
Engine Electronics
Other
Table D.3. 7 Level of depreciation Total
Hull
Engine Electronics
Other
Replacement value Total Degr. Depreciated Linear depreciated
100% 39% 48%
100% 38% 41%
100% 42% 60%
100% 39% 62%
100% 38% 53%
Historical Total Degr. Depreciated Linear depreciated
100% 37% 48%
100% 35% 41%
100% 42% 60%
100% 39% 62%
100% 37% 52%
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3.3.2 Intangible capital Total value of intangible capital of the fleet can not be calculated due to lack of (price) information. Just some information about quota and (some) licences is available and just on the basis of this information careful estimations (but incomplete) are made. According to information prescribed in chapter 2, value of intangible capital can be estimated to at least approximately Euro 470,5 mln. 4. Vessels 261-300 hp (beam trawlers over 24 meters) 4.1 Description of the case study vessels 261-300 hp (beam trawlers 1.501 hp (beam trawlers >24 m.) 5.1 Description of the case study vessels >1.501 hp (beam trawlers >24m.) The Dutch commercial fishing fleet >1.501 hp consists of 126 vessels being in number 34% of the cutter fleet. The oldest vessel is built in 1973. Many vessels (43%) are built in the period 1986-1990. In 2004 only 2 new vessels were built. The average age of the vessels is 15 years and average length of the vessels around 41 meters. Average power is 1.647 kW and average size of the vessels is 444 GT. The distribution of number of vessels and tonnage on building year is shown in figure D.5.1. This part of the fleet is 100% depending on flatfish fishery (beam trawl) and is not flexible. Economically, this is the most important part of the fleet and accounting for 67% of the revenues. In this segment capital investment is rather high (capital intensive). Figure D.5.1 Age distribution of vessels >1.501 hp (beam trawlers >24m.) %
Age composition of the >1,501 hp fleet Netherlands
18 16 14 12 number
10
GT kW
8 6 4 2 0 2. 2. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 00 00 99 99 99 99 99 98 98 98 98 98 97 97 4 2 9 7 4 2 0 8 6 4 2 0 5 3
5.2 Data and estimation of price per capacity unit Based on the insurance value, the price per unit capacity of vessels can be calculated, giving the figures in table D.5.1. The price per unit capacity for these vessels shows rather the same value per GT (94%) and kilowatt (89%) compared to the average of all vessels in the Dutch fleet. However, measured in meters, the value is much higher (141%) compared to the average of the whole fleet.
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Table D.5.1 Average values for vessels >1.501 hp in 2004 (Euro) Tonnage (GT) Engine power (kW) Estimated value 7,253 1,957
Length (m.) 77,813
5.3 Capital value and capital costs vessels 5.3.1 Tangible capital LEI estimated the capital value of these large vessels to be Euro 310 mln in 2004. The replacement value based on degressive and linear depreciation results in capital values 53% and 66% compared to LEI calculations. Profit/capital ratios vary, some are higher and some are lower than LEI calculations. Table D.5.2 Background for calculation of depreciation and interest >1.501 hp
Hull Engine Electronics Other equipment Rest value hull after 40 years Interest rate government bonds Market rate for loans Loans as % of total capital
Depreciation rate / year degressive 7% 25% 50% 35%
Depreciation rate / year linear 4,0% 10,0% 20,0% 16,0% 2,5%
Fiscal rate 1 7,0% 25,0% 50,0% 35,0% 4,3%
Fiscal rate 2 4,0% 10,0% 20,0% 16,0% 2,5%
2,04% 4,26% 50%
Table D.5.3 Capital value and capital costs and their consequences on profit >1.501 hp 2004 Replacement value (Macro / economic mln Euro approach)
Historical value (Micro / fiscal approach)
Degressive Linear depreciation depreciation Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest Net profit Gross value added
165,1 49,9 26,3 20,2 39,0 29,7 28,0 3,5 -1,8 68,7
Capital value
310,0
Fiscal rate 1
Fiscal rate 2
29,2 3,4 -2,8
17,9 4,2 7,6
29,1 3,5 -2,9
17,9 4,3 7,5
164,2
203,9
164,1
203,8
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Profit / capital
-0,6%
-1,7%
3,7%
-1,8%
Table D.5.4 Summary of the capital values - comparison of approaches >1.501 hp Total Hull Engine Electronics Replacement value (constant prices) Total 406,1 243,7 81,2 40,6 Degressive depreciated 164,2 97,6 34,7 16,6 Linear depreciated 203,9 106,5 49,7 26,2 Historical value (current prices) Total 406,1 243,7 Degressive depreciated 164,1 97,6 Linear depreciated 203,8 106,5 Total = Gross fixed capital stock Degressive or Linear depreciated = Net fixed capital stock
81,2 34,7 49,7
40,6 16,6 26,2
3,7%
Other 40,6 15,3 21,6
40,6 15,2 21,4
Table D.5.5 Relative composition Total Replacement value Total 100,0% Degr. Depreciated 100,0% Linear depreciated 100,0%
Hull
Engine
Electronics
Other
60,0% 59,4% 52,2%
20,0% 21,2% 24,3%
10,0% 10,1% 12,9%
10,0% 9,3% 10,6%
Historical Total Degr. Depreciated Linear depreciated
60,0% 59,5% 52,3%
20,0% 21,2% 24,4%
10,0% 10,1% 12,9%
10,0% 9,3% 10,5%
100,0% 100,0% 100,0%
Table D.5.6 Level of depreciation Total
Hull
Engine
Electronics
Other
Replacement value Total Degr. Depreciated Linear depreciated
100% 40% 50%
100% 40% 44%
100% 43% 61%
100% 41% 65%
100% 38% 53%
Historical Total Degr. Depreciated Linear depreciated
100% 40% 50%
100% 40% 44%
100% 43% 61%
100% 41% 65%
100% 37% 53%
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6. Evaluation 6.1 Assumptions In this study just commercial (active) vessels of the Dutch cutter fleet are included. The pelagic sector (only 17 vessels) was excluded because of lack of information. In order to estimate prices and value of capital, several assumptions have been made. These include: 1. calculations with respect to depreciation in fisheries, usually the LEI construction index method is used, which is based on prices and price-indices for the hull and engine (steel and labour costs) 2. replacement value is based on the insurance values for vessels in this study and results with respect to capital costs are analyzed and compared to results calculated using the LEI- construction index method 3. the estimated insurance value is considered a mix of replacement value and historical value 4. historical prices and second hand prices of vessels are not known 5. the distribution of capital on asset types is assumed to follow the one observed in the LEI panel account statistics for fisheries 6. at micro-level, lifetimes and depreciation rates has been set on the basis of values which are generally used by accountants 7. intangible capital is estimated as far as possible but need to be more investigated Valuation of the price per capacity is derived from the insurance value elaborated on the basis of the LEI panel observations. The capital value of the whole fleet by using the insurance value and depreciating degressive gives 53% of the value using the LEI construction index method. However, depreciation costs are almost the same (99.5%) and results do not differ very much from each other.
Insurance value method LEI construction method
Replacement Value (€ mln) 584,5 913,1
Book value(€ mln) 226,2 296,0
% 39 32
Depreciation(€ mln) 40,8 40,6
6.2 Strength of the approach The primary strength of the approach is that data can be collected rather easy by LEI every year and information is always up to date. Assumptions made are consistent with the features of the Dutch fishery context and furthermore the insurance value method is simple to use and to apply. The LEI construction index method is also simple to use but indexes need to be revised every year in order to keep calculations up to date. 6.3 Weaknesses of the approach Insurance value can be used to estimate the replacement value but it is considered that the value is in fact a mix of replacement value and historical value. Owners of vessels can vary in premiums to be paid for insurance and as a result of this also in insurance value.
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APPENDIX E: United Kingdom Introduction: Data sources Data sources for this paper were the UK National Fleet Register, sets of audited vessel accounts collected by Seafish Economics from vessel owners and other data collected by Seafish Economics direct from vessel owners. The UK National Fleet Register is held by the Marine Fisheries Agency, part of the Department for Environment, Food and Rural Affairs. This contains information on the physical characteristics of the vessel and the power of the main engine. This is officially held data and can be considered accurate. Vessel financial accounts, collected by Seafish to give information on balance sheets and depreciation practices, come from the major fleet segments. These are supplied to Seafish on a voluntary basis and there is therefore an element of self selection in the sample. Sample sizes for the recent UK-wide data collection exercise were on the whole good however so these balance sheets can be considered to be reasonably representative of the UK fleet. Seafish staff conducted short interviews in person and by telephone to collect a data set of around 125 vessels from a range of fleet segments to provide information on insured value and insurance premiums. This data, along with the results of interviews with insurance companies, led to the conclusion that for UK vessels, insured value is not a very good proxy for historic price. 1. General national situation – national markets for fishery assets The UK fleet consisted of 6,966 registered vessels on 1st January 2005, according to official government records. Of the vessels registered in 2004 only around 40% were deemed active, which means they had declared landings of any value to the government. A very large majority of the inactive vessels are under 10m. length. 1.1 Investments in new vessels The age composition of the fleet is shown in figure E.1.1, showing the number of vessels and total gross tonnage built in each calendar year of vessels which are still in the UK fleet. Figure E.1.1 Age composition as percent of total for vessels in the UK 2005 fleet register A g e co m p o sitio n to tal fleet
8 .0 % 7 .0 % 6 .0 % 5 .0 % 4 .0 % 3 .0 % 2 .0 % 1 .0 %
C o n s tru ctio n year
30
35
19
45
40
19
19
19
50 19
60
65
70
75
55 19
19
19
19
19
80 19
90
95
00
85 19
19
19
20
20
05
0 .0 %
N u m b er (% ) G T (% )
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The only way to obtain data on build price of new vessels is to survey the vessel owners. The price of new vessels depends on construction material and method and the level of equipment included in the vessel. Successful vessel owners are increasingly likely to order a vessel which is set up to handle the catch in such as a way as to maximize its market value, for example, to enable storage of live nephrops on board for smaller west coast vessels or to enable freezing at sea for larger, north sea vessels. 1.2 Investments in fishing rights Several different kinds and types of fishing right exist in the UK, some relating to the right to operate a fishing boat (of a given capacity), some to the area of sea which can be fished and some to the volume of fish (of a given species) which can be caught. Fixed Quota Allocation units and associated quota These quota units were distributed at no cost to vessel owners based on the fishing history of the vessel over a three year period in the mid 1990s. A Fixed Quota Allocation unit is for a certain species in a certain area and relates to a proportion of the total UK quota for the species / area. They are no longer linked to vessels permanently. The units are still only allocated to vessel owners and are not legally owned by them. The government reserves the right to distribute the UK quota in another way if it chooses and indeed in 2006, this happened with nephrops, as the government allocated a slightly higher proportion of quota to the 10m. & under vessels – which means that the proportion of the UK quota allocated to each FQA unit will be lower than in previous years. This caused great upset because vessel owners show FQA units as assets and borrow money against them, buy and sell them – in other words they behave as though they hold legal title to the units even though the government has repeatedly stated that they do not. In cases of vessel businesses going into liquidation, the lender (bank) has ended up “holding” FQA units. FQA units have been sold to POs, community quota schemes, vessel agents, other fishermen and recently, processing firms. FQAs are traded, either permanently (equivalent to selling a right in perpetuity) or within the quota year (leasing out the tonnage of fish which the units give right to in the current year). Prices vary greatly between species, area and from year to year, depending on the total UK TAC, fish sales prices, availability of FQAs for sale or to lease, level of uncertainty among the fleet and success of the quota enforcement regime. A recent dramatic improvement in the effectiveness of quota enforcement has lead to a sharp increase in the prices being paid for purchase of FQAs. Example lease costs in 2005: £80,000 for 1,136 tonnes of mixed white fish (mostly haddock). In 2006: £68,000 to lease 550 tonnes mixed whitefish (most haddock). An example noted was of mixed whitefish quota leased in 2005 at a price of £40,000 for 104 tonnes. Licences Licences are set for a certain number of kilowatts and GRT (just changing over from VCUs). i.e. a fisherman has a licence to apply x number of kW and tonnes to that fishery. Licences match the vessel which they related to at the time these regulations came into force. Licences do not have to remain with the original vessel however. If the licence is transferred to another vessel it must be to a vessel of equal or smaller size. Licences give entitlement to catch and land certain species groups (eg. pelagic licence, whitefish) (with various subsets eg. A category = all species, B and C have limitations on species and sometimes on areas). A scallop entitlement is an add-on to a licence, and it permits catching of certain types of scallop by certain methods. Also, a shellfish entitlement, entitles the licence holder to land crabs and lobsters
180
beyond a certain level. If the vessel has no entitlement, then they are restricted to catch levels per week that are largely for personal use only. These entitlements sit on top of any white fish licence. Also, whitefish licences are split by size of vessel –10m. and under and over 10m for whitefish. Only over 10m. vessel licences can split into A, B and C. 10m. and under is always category A. The scallop entitlement fits with the 10m.+ fleet only. The shellfish entitlement is available to both size groups. The UK imposed an entitlement to use beam trawl gear in Area 4 and Area 7 (for over 10m licences). Not all licences allow vessels to use beam trawl to land certain species (eg. Sole) in Areas 4 and 7. (A vessel may not use the gear commercially in these areas if it does not have this entitlement). The cod recovery programme has cut across UK licensing and added an extra dimension to over 10m whitefish licences and affected their value. Only licences with a track record of fishing in CRZ between 2001 and 2005, using a regulated gear, can now fish in the CRZ. The gears were actually used at any point during those years, determine entitlement to use certain gear types in the CRZ now. The value of a over 10m. licence is hugely affected by its ability to fish in the CRZ – because if the licence cannot fish in the CRZ then there is a smaller market for the licence. Licences are tradable and entitlements (scallop and shellfish) enhance the value of the licence but cannot be traded separately. Recent pelagic licence sales have been of the order of £1,400 per Vessel Capacity Unit21. Typically, prices of around £300 - £400 per VCU for whitefish have been noted recently. Fishing rights in the UK Fishery Type of right Definition
Tradability
Year of introduction
Quota Stocks
Fixed quota allocation (FQA) units
Share of UK TAC
Yes, in practice but there is no legal title to FQAs
1998
All
Capacity license
Based on GRT and kW. Also associated with species group, e.g. pelagic, whitefish.
Not known
Scallops
Scallop entitlement
Not known
Not known
Shellfish
Shellfish entitlement
Permits catching of certain types of scallop by certain methods Entitles the licence holder to land crabs and lobsters beyond a certain level.
Yes, but if combining licenses for a new build, must lose % of capacity Not known
Approx price per unit 2005 Not known. Varies hugely per species, per area of sea, per year. Not known
Not known
Not known
Not known
Vessel capacity unit = (length x breadth) + (0.45 x Kw). This unit is being phased out for licences and replaced with Kw and GT
21
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1.3 Investments in 2nd hand vessels There is no central UK data set of 2nd hand vessel sales prices, so the only way to obtain data is by survey. There is no time trend data therefore to compare the number and value of sales of 2nd hand vessels in the UK. Vessels without licences can only be sold to a limited market within the UK, eg. if someone already holds a licence but has no vessel, either to replace a vessel they have sold or their vessel sank. Larger vessels for sale are usually sold out of the UK, because the owner retains the licence and quota units for his next new vessel.
1.4 Investments in shore facilities Analysis of balance sheets of UK fishing companies, collected by survey, shows that there are some features in onshore facilities for one-vessel businesses. Most own a motor vehicle suitable for carrying and spreading nets or towing smaller boats. The majority of the need for onshore facilities is purchased by one-vessel companies from a range of suppliers. For example, office space is not directly required as administrative functions are conducted by the vessel agent, which may be a minority shareholder in the vessel. General onshore storage space may be rented or shared or in some cases owned. Multi-vessel owning companies may own or rent office space, own other vehicles, own fuel storage and dispensing facilities, and other onshore assets, as these companies carry out for their own vessels the full range of administrative and marketing services. There is no UK data set which can be analysed to estimate the total value of onshore assets owned by fishing vessel companies.
1.5 Approach to calculation of capital value in agriculture and/or by statistical office The Scottish Executive Environment & Rural Affairs, Aggregate Policy & Incomes has designed methodologies for the estimation of Gross Fixed Capital Formation (GFCF) with regards to the estimation of GFCF for buildings and works, plant and machinery, and vehicles and farm cars. Plant and Machinery A measure of the numbers of types of agricultural machinery used on Scottish holdings is collected in the annual agricultural census carried out each December. From this information SEERAD derives a gross stock at 1995(Mid year) prices. The agricultural census carried out in December measures the numbers of different types of machinery and tractors used on Scottish holdings. Then to convert the GFCF at 1995 (mid year) constant prices to current prices we use a weighted average of the price series for ‘Other Agricultural and Forestry Machinery’ and ‘Agricultural Tractors’ published by the Office of National Statistics. Depreciation of Plant and Machinery Depreciation is estimated within a Perpetual Inventory Model (PIM) over a 25 year period using a depreciation method using variable factors for specific years. The factors are derived from calculations of capital retirements based on Gross Fixed Capital Formation at 1995 prices. The factors used to calculate capital retirements used the following percentages applied to GFCF. These represent the different retirement rates for separate assets within the total (no information is available on how the original factors were calculated).
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Table E.1.1 Depreciation rates for different time periods for agricultural plant and machinery. 8 year 10 year 12 year 15 year 18 year 20 year 3% 25% 33% 27% 3% 9% Source: SEERAD
For the 2000 calculation, the first calculation of depreciation is for 1976 and is calculated from the 20 year capital retirement proportion of GFCF only. The calculations for each year in the 2000 cycle for Scotland are shown in table E.1.2. The calculation is rebased to a value at the current price using a weighted average of the price series ‘Other Agricultural and Forestry Machinery’ and ‘Agricultural Tractors’ published by the Office of National Statistics. Buildings and Works Investment in Buildings and Works is split into two types – Grant Aided and Non-Grant Aided. The value of Grant Aided Investment is obtained from the Land Use and Rural Policy division in SEERAD. The Grant Aided Investment is estimated from Gross Value Added (Output-Input). The yearly percentage change in GVA is applied to a historic value for Non-Grant Aided Investment. Depreciation of Buildings and Works Depreciation is estimated within a Perpetual Inventory Model (PIM) over a 38 year period using a depreciation method using variable factors for specific years. The factors are applied to the Gross Capital Formation for specific years and the sum of the values equals the amount of depreciation recorded at a 1995 constant price. The value for the earliest year represents the 2000 depreciation for the depreciation cycle beginning in 1964. The calculation is rebased to a value at the current price using the price series ‘Buildings and Works: Private Sector Industrial’ published by the Department of Trade and Industry Lessons to be learned? An example of non-tangible assets in agriculture is the milk quota. This is valued through market demand and can either be permanently transferred or leased. The value of milk quota is not included in the calculation of any other tangible asset.
2. Total fleet For the whole fleet estimates, the initial data set was collected by survey asking for insurance value, rather than historic price, in accordance with expectations among the research group, although for some vessels both figures were available. Once data was collected and insurance companies were interviewed, it became clear that insured value of vessels is not a particularly good proxy for historic price. However, this was the only data available for use in this estimate, so the estimates are based on the relationships between insured value and various physical attributes of the vessels in the UK fleet. 2.1 Description of the case study fleet Figure E.2.1 below shows the distribution of age and gross tonnage by year of build within the UK registered fishing fleet.
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Figure E.2.1 Age composition of the total UK fleet Age composition total fleet 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%
20 05 20 00 19 95 19 90 19 85 19 80 19 75 19 70 19 65 19 60 19 55 19 50 19 45 19 40 19 35 19 30
0.0%
Construction year
Number (%) GT (%)
Table E.2.1 shows the main segments of the UK fleet in line with the EU Data Collection Regulation, split to show the total number of registered vessels and the total number of active, or commercial, vessels. Table E.2.1 Registered and active vessels in the UK fleet as at 1 January 2005, split by DCR segment * Total number of registered vessels 12-24 m 24-40 m >40 m
40 m
40m. pelagic vessels. Two cases were rejected because they were vessels being built in 2006. The total size of the segment is currently 33 vessels (excluding the two on order) in the UK fleet, so this sample was almost half of the segment. A comparison of the average physical characteristics of the UK whole fleet and the sample vessels used for this study is given in table E.5.1 below. Our sample averages are slightly higher than the averages for the fleet population. This sample bias is a result of the untargeted approach that had to be adopted due to time constraints in the survey. The calculations based on this sample are therefore likely to slightly over state the capital value of this segment. Table E.5.1 Characteristics of population and sample vessels for the >40m. pelagic UK fleet case study Pelagic segment Average GT Average kW Average length (m) Population 1,631.7 3,951.6 62.5 Sample 1,864.5 4,582.2 64.7
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Table E.5.2 below shows the average estimated historic price per unit of length, tonnage and engine power for the sample of the UK pelagic fleet. Table E.5.2 Estimated average historic price (insured value indexed to 2004) per capacity unit and estimated replacement value (insured value in money of the day) per capacity unit for the >40m. pelagic UK fleet Length (m)
Tonnage (GT)
Engine Power (kW)
Estimated historic price
€235,001
€8,256
€3,519
Estimated replacement value
€219,650
€7,743
€3,343
Historic prices were converted to 2004 values using the steel price index to give an adjusted purchase price for each vessel built before 2004. Correlations between adjusted purchase price and physical characteristics showed relationships of strengths shown in table E.5.3, not especially strong. For the pelagic vessels, engine power (kW) has the strongest relationship with purchase price, and was therefore selected for estimating historic value for the whole segment. Table E.5.3 Correlation coefficients between purchase price (adjusted to 2004 equivalent) and selected physical characteristics, based on sample of pelagic vessels in the UK fleet Purchase Price Tonnage (GT) Engine Power Length (m) (kW) Tonnage (GT) 0.737** 1.00 Engine Power (kW) 0.746** 0.705** 1.00 Length (m) 0.649* 0.957** 0.617* 1.00 ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
5.3 Capital value and capital costs 5.3.1 Tangible capital Table E.5.4 Capital value and capital costs and their consequences on profit (sensitivity analysis) 2004 Replacement value mln Euro (Macro / economic approach)
Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest
Historical value (Micro / fiscal approach)
Degressive depreciation
Linear depreciation
Fiscal rate 1
Fiscal rate 2
44.9 14.5
25.8 16.7
40.5 6.6
23.4 7.6
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Net profit Gross value added Capital value Profit / capital
290.0
334.1
263.8
305.7
There are no cost and earnings tables available yet for the UK pelagic fleet in 2004 so the 2004 capital costs column in the above table has been left blank. Therefore it is not possible to compare the effect on profit in relation to capital value of the different methods of estimating total capital value for the segment. Table E.5.5 Summary of the capital values (€ mln) - comparison of approaches Total Hull Engine Electronics Replacement value (constant prices) Total 458.9 275.3 91.8 45.9 Degressive depreciated 290.0 196.8 45.7 21.0 Linear depreciated 334.1 210.7 60.1 31.1 Historical value (current prices) Total 417.3 250.8 Degressive depreciated 263.8 180.6 Linear depreciated 305.7 194.8 Total = Gross fixed capital stock Degressive or Linear depreciated = Net fixed capital stock Table E.5.6 Relative composition of capital (%) Total Hull Replacement value Total 100.0% 60.0% Degr. Depreciated 100.0% 67.9% Linear depreciated 100.0% 63.1% Historical Total Degr. Depreciated Linear depreciated
100.0% 100.0% 100.0%
60.1% 68.5% 63.7%
85.5 41.5 54.6
39.8 19.0 27.4
Other 45.9 26.5 32.1
41.2 22.7 28.8
Engine
Electronics
Other
20.0% 15.8% 18.0%
10.0% 7.2% 9.3%
10.0% 9.1% 9.6%
20.5% 15.7% 17.9%
9.5% 7.2% 9.0%
9.9% 8.6% 9.4%
5.4 Evaluation This case study benefited from better quality data on which to base estimates for the whole segment: good sample size; actual historical price paid by the current owner; all vessels relatively new so less distortion by indexing prices.
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6. Over 24 meters Demersal Trawl Fleet 6.1 Description of the case study Figure E.6.1 below shows the distribution of age and engine power (kW) by year of build within the over 24m. demersal trawl segment of the UK registered fishing fleet. Figure E.6.1 Age composition of the UK over 24m. demersal trawl fleet Age composition >24m Whitefish fleet 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0%
20 05 20 00 19 95 19 90 19 85 19 80 19 75 19 70 19 65 19 60 19 55 19 50 19 45 19 40 19 35 19 30
0.0%
Construction year
Number (%) kW (%)
A comparison of the average physical characteristics of the UK whole fleet and the sample vessels used for this study is given in table E.6.1 below. Our sample averages are only slightly lower than the averages for the fleet population. This sample bias is a result of the untargeted approach that had to be adopted due to time constraints in the survey. The calculations based on this sample are therefore likely to slightly under state the capital value of this segment. Table E.6.1 Characteristics of population and sample vessels for the over 24m. demersal segment case study >24m. Demersal Average GT Average kW Average length (m) trawl segment population 338.4 833.3 32.1 sample 326.9 768.9 28.2
6.2 Data and estimation of price per capacity unit Data collected by Seafish survey as described in section 5.2. The total size of the over 24m demersal trawl segment is currently 97 vessels in the UK fleet, so this sample was around 14% of the segment. Table E.6.2 below shows the average estimated historic price per unit of length, tonnage and engine power for the sample of the UK over 24m demersal trawl fleet.
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Table E.6.2 Estimated average historic price (insured value indexed to 2004) per capacity unit and estimated replacement value (insured value in money of the day) per capacity unit the UK over 24m. demersal trawl fleet Length (m.)
Tonnage (GT)
Engine Power (kW)
Estimated historic price
€81,946
€7,203
€3,070
Estimated replacement value
€75,732
€6,562
€2,807
Correlations between insured value and physical characteristics showed the following relationships. For the over 24m. demersal trawl vessels, engine power (kW) has the strongest relationship with purchase price. Table E.6.3 Correlation coefficients between purchase price (adjusted to 2004 equivalent) and selected physical characteristics, based on sample of over 24m. demersal trawl vessels in the UK fleet Purchase Price Tonnage (GT) Engine Power Length (m.) (kW) Tonnage (GT) 0.778** 1.00 Engine Power (kW) 0.894** 0.822** 1.00 Length (m) 0.728** 0851** 0.780** 1.00 ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
6.3 Capital value and capital costs 6.3.1 Tangible capital The landings, gross cash flow and capital value estimates for the segment in 2004 are based on recent Seafish survey of the UK fleet for the EU data collection programme. The Seafish estimate of capital value is somewhat lower than the historic value estimated by this study. Table E.6.4 Capital value and capital costs and their consequences on profit (sensitivity analysis) 2004 Replacement value mln Euro (Macro / economic approach)
Value of landings Fuel costs Other running costs Vessel costs Crew share Gross cash flow Depreciation Interest
Historical value (Micro / fiscal approach)
Degressive depreciation
Linear depreciation
Fiscal rate 1
Fiscal rate 2
18.6 4.9
10.9 6.0
17.5 2.3
10.1 2.8
74.3
5.0
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Net profit Gross value added Capital value Profit / capital
-2.1 27.5
-18.5
-11.9
-14.8
-8.0
71.0 -3.0%
98.9 -18.7%
120.7 -9.9%
91.7 -16.2%
113.3 -7.0%
Table E.6.5 Summary of the capital values (€ mln) - comparison of approaches Total Hull Engine Electronics Replacement value (constant prices) Total 248.1 148.9 49.6 24.8 Degressive depreciated 98.9 57.7 17.7 12.5 Linear depreciated 120.7 62.5 26.8 16.8 Historical value (current prices) Total 202.5 112.0 Degressive depreciated 91.7 52.5 Linear depreciated 113.3 59.5 Total = Gross fixed capital stock Degressive or Linear depreciated = Net fixed capital stock Table E.6.6 Relative composition of capital (%) Total Hull Replacement value Total 100.0% 60.0% Degressive depreciated 100.0% 58.3% Linear depreciated 100.0% 51.8% Historical Total Degressive depreciated Linear depreciated
100.0% 100.0% 100.0%
55.3% 57.2% 52.5%
46.6 16.3 24.6
22.1 11.8 15.4
Other 24.8 11.0 14.5
21.8 11.1 13.8
Engine
Electronics
Other
20.0% 17.9% 22.2%
10.0% 12.7% 13.9%
10.0% 11.1% 12.0%
23.0% 17.8% 21.7%
10.9% 12.9% 13.6%
10.8% 12.1% 12.2%
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