Lessons Learned from Cost-Benefit Analysis.

The cost benefit analysis reported in this thesis adapted a model developed by Campbell (2006) to investigate and evaluate fisheries policy in PNG. However the model in this thesis is reflective of the situation and case of Kiribati. In analysing the different options, the cost benefit analysis for options 1 to 4, for a small to medium sized fishery industry, provided negative NPVs. However option 5, a large purse seine vessel, provided a positive and encouraging result (NPV).

Chapter five discusses in more detail the assumptions and key parameters of the above five options. The cost benefit analysis of the initial proposals and in particular options 1 and 3 implied negative NPVs, which is not what the government desires. Over the twenty (20) year lifetime of the project, the overall efficiency NPV for option 1 will be around (-) AUD$12.87 million. The net loss from investing in option 3 will be around (-) AUD$4.04 million which is closer to breakeven than the result from option 1. However while the overall efficiency NPV shows negative results, socially the labour or employment benefits gained

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are worth about AUD$2 million for both options 1 and 3. The other form of benefits identified in the CBA is the access fees paid by domestic vessels.

A sensitivity analysis (SA) is also conducted as part of the cost benefit analysis, to investigate the effect of changes in the tuna catch on the NPV. The SA indicated that the results of the cost benefit analysis will change in certain situations. A change in the tuna catch levels will have a major effect on the project’s NPVs. The main approach that is being emphasised here is to investigate the fishing level that is needed to result in a positive NPV for the project. The information in the sensitivity analysis may provide the decision-maker with sufficient information to incorporate risk in the decision making process, provided that she is satisfied that these are the only variables that are considered ‘risky’ and that all she is concerned about is knowing whether there will be a positive NPV for the project. The change in government policy can also affect the NPV of the project. We also examine how the two switches in the ‘summary sheet’ in particular the ‘Tuna Catch Switch’ and ‘Access fees Switch’ affect the NPVs of the projects. The result of conducting the SA for the two switches indicates that setting the ‘Tuna catch switch’ to 1 (high opportunity cost of fishing) will directly decrease the ‘Efficiency NPV’ indicating the importance of that parameter. The effect of setting the ‘Access fees switch’ to zero will be a decrease in the Referent Group NPV as a result of loss of government revenue. Generally speaking the results of the SA indicates that there are also some possibilities of positive NPVs for the small to medium sized options, which were negative in the initial analysis.

Option 5 implies a very different NPV result to options 1 and 3. The net benefit or the overall efficiency NPV over the 20 year lifetime of the project will be around AUD$130 million. The distribution of the benefits is also encouraging, as the government will gain around AUD$16 million and employment benefits are around AUD$5 million. The initial investment required in this project may be very large for Kiribati. However loans from foreign investors or banks may be an option to secure funding for the project.

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The projected NPV from the cost benefit analysis in option 5 indicates a positive NPV of AUD$130 million over a 20 year project lifetime. The government and decision makers would want to know how this compares with the revenue from access fees on an annual basis. Simply taking the average of the revenue from the project on an annual basis, estimated revenue of around AUD$7 million is going to be generated every year from the large purse seine project. This is lower than the revenue earned from access fees every year which ranges from AUD$19 to AUD$40 million from more than 100 vessels as in 2008. However having both the DWFNs and this domestic large purse seine vessel will boost the revenue earned from tuna fishery as a whole every year if they are not competitors for tuna. It is also important to note that the estimated AUD$7 million revenue generated from this project is the result of operating only one large purse seine vessel, and the estimated access fee revenue the government can get from only one DFWN vessel is around US$190,000 per annum for a purse seine vessel. This single vessel scenario comparison confirms that Kiribati will tend to get more benefit from developing a domestic tuna fishery industry than the revenue lost from fewer DWFN’s access fees. What makes the revenue from access fees so huge compared to the projected NPV of this project, is the number of DFWN(s) vessels involved which is can be up to 100 or more vessels per year, compared to only one large purse seine vessel as proposed in this study.

What has been learned from the cost benefit analysis and the sensitivity analysis is that the small to medium sized development options, in particular options 1 to 4, are only viable under particular conditions and in certain situations. The NPV of the initial proposals of the development options in 1 to 4 are negative. The sensitivity analysis indicate that the project’s NPV(s) will be positive only if the project can improve its fishing efficiency by increasing its tuna catch level per annum given that it operates at the least cost possible. The NPV result for option 5 is positive under a number of scenarios, given the assumptions made about logistics, prices and access to markets. The result of the CBA for option 5 also

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allows us to compare the average revenue earned from the project with the average revenue earned from one DWFN’s vessel only, and it is interesting to learn that Kiribati will be able to earn more out of domestication of the tuna fishery rather than relying on DWFN’s access fees alone.

In addition, it should also be noted that there are additional positive impacts of domestication such as employment benefits that are not available under current agreements with DWFNs. However the cost benefit analysis indicates that employment benefits are limited. The thesis assumes that social employment benefits can be improved but this may not occur in the first and second year of the project and only arise in five or ten years time as the government improves the size of the projects. It is easy to quantify the cost of domestication of the tuna fishery industry, however it is difficult to measure the real benefits of domestication. There are potential and important social benefits associated with domestication that are not counted in the CBA. This includes social benefits and well being of the locals, sustainability of fisheries resources, exposure to international or better market, exposure to international standards, and sense of ownership over their own EEZ and also the implications of a right-based fisheries management which gives the potential to create a more powerful rights-based system that can have greater flexibility and add a new commercial dimension to the existing sovereign rights.