Modernization of the North Pacific Fishing Fleet: Economic Opportunity Analysis
Pacific Fisheries Review
Modernizing the North Pacific commercial fishing fleet has become an increasingly important issue for Washington's maritime industry in recent years. With more than 400 federally permitted vessels over 58 feet, and an average age of 40 years, the need to replace (or refurbish) older vessels represents significant economic opportunity for the region – however, the specific nature and size of this opportunity has been uncertain. The Port of Seattle contracted with McDowell Group, a research and consulting firm based in Alaska and Washington, to conduct the following analyses:
• Profile the North Pacific fishing fleet over 58 feet.
• Identify and describe the factors that influence modernization decisions.
• Estimate the number and type of vessels likely to be replaced or substantially modified over the next decade.
• Estimate the total value of these major modernization projects and the resulting economic impact on Washington State.
An important source of information for the study was a series of 45 interviews with a wide variety of stakeholders, including vessel owners, seafood companies, shipyards, marine architects, regulatory agencies, and lending institutions. Other data sources included the National Marine Fisheries Service, North Pacific Fisheries Management Council, and the Commercial Fisheries Entry Commission, among others. Following are key findings from the study.
• The North Pacific fishing fleet consists of 414 federally permitted vessels of over 58 feet in length. These are among more than 5,000 vessels over 30 feet engaged in commercial fishing activity off the coast of Alaska. Vessels in the North Pacific fleet average 40 years old, but ages range widely.
• The North Pacific fleet represents a wide range of size (both number of vessels and vessel length) and revenue generation. Average vessel length ranges from 96 feet for smaller trawlers, to over 400 feet for floating processors. Average 2014 gross revenues ranged from $2 million for Bering Sea/Aleutian Island (BSAI) trawl vessels to $16 million for American Fisheries Act (AFA) catcher/processors.
• Current average vessel replacement costs likewise vary widely by fishery, ranging between $15 and $130 million.
• Fleet modernization is already underway. Since 2000, 19 North Pacific fishing vessels over 58 feet have been built or significantly modified. Nine of these were either Amendment 80 or freezer longline vessels.
• About one-third of these vessel projects occurred in Washington shipyards.
Key Factors Affecting Fleet Modernization
• A key impetus for modernization is the opportunity to add new, more sophisticated processing capacity, as well as increase fuel efficiency. Reducing fish waste and better utilizing harvested volume is one of the most effective ways to increase vessel earnings. Modern hull designs and propulsion equipment offer the opportunity to save more than 30 percent on fuel cost.
• The ability for individual fisheries to produce revenues needed to support the cost of a new vessel is a constraint to modernization. Significant differences exist among the various North Pacific fisheries, with some more profitable than others.
• Owners of catcher vessels with no on-board processing and limited opportunity to add value to their harvest are less motivated to modernize. In these situations, well-maintained vessels that are 50 years old or older may continue to be financially viable to operate.
• Fisheries rationalization - conversion from open access fisheries to quota allocation - has made modernization more attractive to both fishermen and commercial lenders. Vessel owners are motivated because they have a more certain stake in the fishery, and lenders are more interested because harvesting rights (typically in the form of transferable quota) make future earnings more predictable and can also be used as collateral in many instances.
• A variety of other factors influence the modernization decision. For example, costs associated with safety regulations and general maintenance are typically lower for newer vessels. The added safety and amenities of new or modified vessels make it easier to attract and retain high quality crew, especially with an aging workforce.
• Community Development Quota groups have become an increasingly important player in North Pacific fisheries. These non-profit groups, which represent 65 Alaska communities, have an ownership stake in 20 percent of active North Pacific commercial fishing vessels.
Financing Vessel Construction
• Fishing vessels represent a challenging lending environment for commercial lenders. They must assess a variety of risks associated with the borrower, the fisheries the borrower participates in, the shipyard that will build the vessel, and finally the attractiveness of alternative loans they could make with the same capital.
• The terms of commercially available financing are an impediment for many vessel owners, particularly those for which annual vessel earnings are a relatively small proportion of the cost of a new vessel. This is particularly true of crab vessels and smaller trawlers, both of which have generated little interest in modernization projects, given the costs involved. Companies that are not able to offer other assets as collateral, in addition to the vessel, are also at a disadvantage.
• The most common terms extended to a borrower interested in building a new vessel is a loan less than 12 years and an interest rate of between 5 to 7 percent as of October 2016. Some government programs or lending cooperatives can offer longer terms and lower interest rates, with some limitations.
Timeline of Fleet Modernization
• The estimated replacement value of the entire North Pacific commercial fishing fleet of vessels over 58 feet in length, including recent builds, totals approximately $11.3 billion. The cost to replace vessels in the fleet exceeding 30 years old is about $9.0 billion. Of these vessels, the replacement costs of those built over 40 years ago is $4.4 billion.
• Results of this analysis indicate $1.6 billion in modernization projects will be completed within the next ten years, assuming no significant changes in financing options. Consolidation is anticipated in every fleet. In some cases, vessels will be retired without replacement, and in others two or more vessels will be replaced with a single larger or more efficient vessel.
• For modernization of the fleet to occur at a pace greater than seen in recent years (and in addition to other factors), an approach to vessel construction other than the typical "one-off" approach may be required. For example, multiple purchasers might agree on a single hull configuration so that builders can take advantage of efficiencies of scale. One-off construction is risky for owners, shipyards and lenders, and most recent projects have experienced delays and cost overruns.
• An average of three new vessels are expected (including major refurb/retrofit) each year between 2017 and 2021. By 2022 the annual number of projects is anticipated to increase to five per year, continuing at a similar rate into the foreseeable future. This compares with less than one vessel per year over the last 15 years.
Economic Impact of Fleet Modernization on Washington
• Approximately 50 percent of all fleet modernization projects are anticipated to take place in Puget Sound. This somewhat higher rate of market capture (compared to roughly one-third for recent projects) reflects current engagement of the region's maritime industry in identifying and establishing cooperative opportunities to maximize local benefit.
• An estimated annual average of between $60 and $90 million will be spent on fleet modernization in Washington between 2017 and 2026. A total of approximately $785 million will be spent over this ten-year period.
• The total Washington State economic impact resulting from this spending is a projected 510 to 750 annual average jobs with approximately $40 to $60 million in wages, including all multiplier effects. Annual output will average between $108 million and $160 million in over the next decade, totaling $1.3 billion.
Conclusion and Recommendations
Puget Sound is the economic hub of the North Pacific commercial fishing fleet, which produces billions of pounds of sustainably harvested seafood each year. However, to maintain safety, economic viability, and a competitive edge in a global market, modernization of the fleet must occur. While this clearly represents a significant economic opportunity for the Puget Sound region, some factors could increase – or decrease – the potential size of the opportunity.
Some factors are difficult to control, such as global seafood prices, harvest volumes, and interest rates. Other factors, however, can be influenced with concerted efforts, including:
Advocacy and support for:
• preservation of Puget Sound's working waterfront
• improvement in transportation infrastructure
• workforce development and affordable housing
• collaboration among vessel owners, shipyards, and lenders maritime industry in Seattle, Olympia, and Washington, D.C.
• loan guarantees and reduced mooring rates for vessels constructed/modified in Washington
• education of the banking community on the fishing fleet
• increased dock space for the North Pacific fleet
• upgrades to Fishermen's Terminal and Pier 91
• improve services and facilities on Harbor Island
It is incumbent upon Puget Sound stakeholders to encourage leadership and participation in the fleet modernization effort, generating economic activity in the region for many years into the future.