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APPENDIX 3

SUSTAINABILITY IMPACT ASSESSMENT OF PROPOSED WTO

NEGOTIATIONS: THE FISHERIES SECTOR

COUNTRY CASE STUDY: SEYCHELLES

Draft – not for citation

Nigel Peacock

16th March 2006 Annexes Annex 1 Seychelles seafood production data Annex 2 Seychelles trade in seafoods Annex 3 Seychelles trade data (FAO)

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Glossary ADM Anti Dumping Measures COOL Country of Origin Labeling (USA trade requirement) COP Cost of Production DDA Doha Development Agenda EC European Commission EEZ (Maritime) Exclusive Economic Zone EU European Union FPA Fisheries Partnership Agreement GDP Gross Domestic Product GPS Global Positioning System? IOTC Indian Ocean Tuna Commission IOT Indian Ocean Tuna Ltd, the cannery MCS Monitoring, Control and Surveillance MSC Marine Stewardship Council NAMA Non-Agricultural Market Access NTB Non Tariff Barrier PCC Per capita consumption (in kg/head/year) SFA Seychelles Fishing Authority SIA Sustainability Impact Assessment SMB Seychelles Marketing Board VMS Vessel Monitoring Systems

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Executive Summary The objective of this study is to assess the potential economic, social and environmental impacts of trade measures arising from the Doha Development Agenda (DDA) negotiations that have an impact on fisheries production and trade of the Seychelles. In particular, these trade measures include:

• Market access (i.e. tariff and non-tariff measures) as part of the negotiations on non-agricultural market access (NAMA);

• Subsidies to the fisheries sector in different forms, which are being discussed by the WTO Negotiating Group on Rules; and

• Other trade issues, e.g. eco-labelling. The Seychelles fishery is dominated by its industrial segment – the large pelagics (tuna) fishery and cannery which have a huge impact on the national economy in terms of exports, foreign exchange generation and domestic spin-offs. There are other significant elements though, including high value demersals caught artisanally and exported fresh or supplied to the tourism industry. Shrimp farming is now also becoming a significant contributor to exports. Seafood exports dominate the Seychelles’ visible trade, consistently contributing 97% of all Seychelles exports. Unsurprisingly, this generates a highly positive balance of trade within this sector. It is tuna – in canned and frozen forms – that provides the overwhelming majority of these exports in both quantity and value terms. The key elements of the fishery and aspects relevant to the WTO Doha Development Agenda (DDA) SIA are as follows:

o International tuna fishery – access agreements (FPAs) and licenses, o Transhipment at Mahe: employment and revenues generated o Vessel servicing in Mahe, employment and revenues generated o Seychelles fleet landing to Mahe (including flagged vessels)

o Tuna canning, viability in the face of loss of protection against low cost leader producers: effect on the wider economy and on employment,

o The artisanal and semi industrial fisheries loss of preferential access exacerbated by eventual loss of some subsidy benefits if these are outlawed by WTO

o Shrimp, an increase in competition from lower cost producers partially balanced by advantages in the USA market due to discriminatory anti dumping measures

Initial Outcomes of Seafood Market Liberalisation Changes

Tuna Canning in the Seychelles: The most important and immediate threat to the sector is that to the IOT tuna cannery posed by the loss of the competitive benefit that ACP duty derogation provides. The degree to which is a potential threat was tested by a model-based comparative analysis between the Seychelles and Thailand (which exemplifies Asian low cost leaders). The potential impacts are set out in the table below, linked to the main sustainability dimension involved in each case.

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The near term SIA implications of Doha Round tariff changes: the cannery Economic (i) Substantial loss of IOT employment in Mahe,

(ii) Reduced income for the Mahe workforce (iii) Severe hardship to support industries (iv) The reduction in frequency of cargo vessels visiting Port Victoria (v) Collapse of the regions canneries could threaten Mahe viability as a transshipment centre

Social (i) Increased poverty amongst the Mahe workforce and that of firms supplying to IOT (ii) Reduced tax receipts to pay for essential state services

Environmental Reduced commitment to the MCS activities Process Reduced national management and administration capacity.

Longer-Term Outcomes of Seafood Market Liberalisation Changes External subsidies Arguably, the EU-Seychelles FPA agreements constitute subsidies that confer an indirect benefit on the Seychelles. The analysis suggests that revenues from EU vessels may have come to exceed those from other vessels by a wide margin. Thus, if this arrangement has to be abandoned, the implications for government revenues could be severe. Direct subsidies There are two direct subsidies that benefit the Seychelles artisanal fishery – a fuel subsidy and soft loans from the Seychelles Development Bank. The former, a duty rebate scheme very approximately amounts to 10% of annual costs, whilst the credit scheme provides loans that would not be otherwise available. Both seem to have failed to achieve their policy objective of increasing artisanal landings, and so their loss seems unlikely to have a seriously negative impact. Indirect subsidies provided through government (or donor) support to the sector or the communities involved, includes assisting the artisanal fisheries, start-up support for new seafood industries or assistance with marketing. These are not seen as being threatened.

Longer term SIA implications of Doha Round tariff changes: subsidies Economic (i) Were the FPA agreement to be abandoned government receipts could be

significantly reduced. (ii) Abandoning direct subsidies would have limited impact as they appear to have failed to achieve their objectives of expanding the artisanal fishery. (iii) Indirect subsidies are unlikely to be challenged.

Social Abandoning direct subsidies on fuel and loans would have an impact on incomes of the artisanal fishermen, possibly reducing these by 5-10%.

Environmental If FPA agreements were to be discontinued then there could be an impact on resource management. As FPA compensation is partly ring fenced for fisheries management, especially MCS.

Process

Loss of government’s ability to influence the development of the artisanal and semi industrial fisheries could result.

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Mitigation and Enhancement Measures Tariffs: Tuna canning There is a fundamental constraint to mitigating the problems that reduced tariffs are likely to cause the cannery - any measures taken are likely to contravene WTO rules as much as the former protection that is being relinquished. Positive options explored include the a gradual (rather than precipitate) reduction of tariffs to allow ACP canneries to adjust, investment in appropriate infrastructure, targeting the premium product market and highlighting of the quality/speciality/environmental aspects. Subsidies: Management of the fish resources. Should FPA funding for fisheries management cease, the case is made for the wider benefits of maintaining this justifying donor support for separate management and research project funding.

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1 Introduction

1.1 Background: The Seychelles typifies a tropical oceanic island economy where remoteness and low economic critical mass have led to high costs and have undermined competitiveness. For example, a full suite of state functions has to be provided for a population of just 84,000. Consequently, providing viable economic options presents a considerable challenge. As with many such islands, tourism has provided an economic mainstay in the face of limited terrestrial alternatives, but this is a fickle business. Thus a truly viable alternative had much to recommend it. It has been fisheries that has provided this alternative, and has now become the largest contributor to the Seychelles economy, and a very substantial success.

Table 1: key economic and social parameters for the Seychelles.

General GDP at market prices: US$ 703 million (2004) GDP per head: US$ 8,400 (2004) Population 83.640 (2003) Workforce 32,382 with 3,550 unemployed Fisheries sector Fisheries output gross value $US 212 million (2003) Value of fisheries exports $US 253 million (2004) Value of fisheries imports $US 70 million (2004) Fisheries employment (direct) 4,600 (14% of workforce) Fisheries employment (ancillary) 1,000 (3% of workforce) Sources: Central Bank of Seychelles, Annual Report. Eurostat FAO Seychelles Country Profile, SFA annual reports

Table 1 shows how fisheries has come to dominate the Seychelles economy, contributing 30% to GDP, accounting for over 97% of visible exports and employing 17% of the workforce. The hugely positive balance of seafood trade is a major contributor to foreign exchange. Furthermore, some 2,200 families (involving some 9,000 people – over 10% of the population) depend upon the sector. However, it is not the artisanal but the industrial fishery that has been responsible for this development, and this now dominates the sector – with the capture and canning of tuna the central features. 1.2 Objectives of the study The overall objective of the study is to assess the potential economic, social and environmental impacts of trade measures arising from the Doha Development Agenda (DDA) negotiations that have an impact on fisheries production and trade. These trade measures include:

• Market access (i.e. tariff and non-tariff measures) as part of the negotiations on non-agricultural market access (NAMA);

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• Subsidies to the fisheries sector in different forms, which are being discussed by the WTO Negotiating Group on Rules; and

• Other trade issues, e.g. eco-labelling and services incidental to the fishery sector (i.e. outcomes of WTO GATS negotiations).

1.3 Sources of data consulted The principle sources of data on the Seycheells fisheruies were the Seychelles Fisheries Authority Annual Reports 2001, 2002 and 2004, and the separate SFA Tuna Bulletin, 2001, 2004. Additional sources of data were

Production data , 2000 to 2003 FAO for fishery and aquaculture Processing sector:1994-7/8 data from ITC1999* (see below ) Trade statistics 1994-7/8 data from ITC1999 study, Eurostat 2000 to 2004 Industry economics 1994-7/8 data from ITC1999 study, DG Fisheries Tuna loins study 1999 onwards

* ITC 1999 Study: Sub Regional Trade Expansion In Southern Africa, Supply Survey On Seychelles' Fish And Fish Products, Sponsored by: International Trade Centre UNCTAD/WTO, July - August 1999

1.4 Consultation process with stakeholders The principle stakeholder bodies canvassed in the Seychelles were the Seychelles Fisheries Authority (SFA) and the Cannery (Indian Ocean Tuna, IOT). The advisor to the SFA and other senior staff were consulted on the broader fisheries sector situation as well as possible impacts upon the artisanal fisheries. Management at IOC were consulted on the specific problems that liberalisation might cause the cannery, but as the sale of the IOC and associated Heinz business was underway, what they could say was limited. Finally, to get a broader perspective, the issues were discussed with (i) David Ardill a highly respected expert on the Indian Ocean tuna industry, currently with the Indian Ocean Commission in Mauritius where he is heading up the Indian Ocean MCS project (ii) Staff at MacAlister Elliot Consultants who are implementing the regional Indian Ocean Tuna Tagging Project.

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2 The Baseline

The introduction describes how the Seychelles fishery is dominated by its industrial segment – the large pelagics (tuna) fishery – and how this has a huge impact on the national economy in terms of exports, foreign exchange generation and domestic spin-offs. There are other significant elements though, including high value demersals caught artisanally and exported fresh or supplied to the tourism industry. Shrimp farming is now also becoming a significant contributor to exports. The mix can be summarised as follows:

o The international tuna fishery • Transhipment • Vessel servicing • Seychelles fleet landings

o The tuna cannery, o The artisanal and semi industrial fisheries

• The demersal and high value pelagics fisheries • The local exporter/processors

o Shrimp farming o Minor specialities: shark fin and sea cucumbers

2.1 Overview of fisheries production The Seychelles fishery is dominated by tuna, where the four key species (skipjack, yellowfin, bigeye and albacore) account for a huge 92% of total production. The balance consists of some other large pelagics (e.g. swordfish caught by the “semi-industrial” fleet), and demersal fish. The latter include prime species like snapper and grouper, some of which are exported fresh in small quantity. Table 2: Fish production by the Seychelles fisheries, Units: tonnes

Species group 2000 2001 2002 2003 2004 est Tuna 27,600 44,523 54,580 80,093 80,175 Billfish 602 827 768 1,683 1,478 Prime demersal 692 4,992 3,770 770 2,001 Other demersal 1,378 1,304 1,344 1,450 1,457 small pelagic 2,450 1,803 2,685 1,745 2,211 Shellfish 479 367 296 1,128 640 Total 33,201 53,816 63,443 86,869 87,962

Source: FAO Fisheries Yearbook 2005. 2004 is a projection The tuna fishery is complex. There is a Seychellois flagged fleet, but the bulk of the catch is made by foreign fleets – mostly from the EU. Essentially, there are two tuna fisheries; a purse seiner fleet which provides the bulk of the production – mostly lower value fish for canning – and a longliner fleet with much lower production but of higher

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value fish. The purse seiner fleet is mostly EU owned, with access gained through an arrangement negotiated by the European Commission – an FPA or Fisheries Partnership Agreement. Some longliners are also European, but this fleet is mostly Asiatic (Taiwanese, Japanese and a few South Korean). Table 3 describes the landings made by these fleets over the past five years, where catches made by vessels licensed under these agreements throughout the western Indian Ocean are recorded. This has two implications for the Seychelles – first, a proportion of the catch is taken within Seychelles waters for which the government receives licenses. Second, the bulk of the production (81-87%) is transhipped in Mahe, contributing to the economy in diverse ways. Table 3: Tuna production by Seychelles licensed tuna vessels. Units: tonnes

Catch by species 2000 2001 2002 2003 2004 Purse seiners 330,340 295,737 379,253 408,366 358,261 Yellowfin 118,738 108,501 127,156 197,781 201,728 Skipjack 191,912 166,382 218,415 189,566 137,102 Bigeye 19,690 20,854 33,682 19,030 18,850 Longliners* 3,287 5,712 4,182 5,289 4,638 Catch by purser fleets only Spanish fleet 140,475 123,754 156,784 175,915 149,809 French fleet 84,399 68,760 96,791 108,332 107,628 Seychelles 27,295 41,917 50,677 73,780 83,304 Other 78,171 61,308 75,001 50,339 17,520 Total 330,340 295,739 379,253 408,366 358,261 Amount of tuna transhipped in Mahe All species 269,673 248,454 332,860 359,379 300,937 % transhipped 81% 82% 87% 87% 83%

Source: SFA Annual Reports 2001-2004 Table 4 describes the Seychelles fishing sector in terms of its principle segments. Four of these are related to the tuna industry; (i) landings by Seychellois and Seychelles flagged vessels, (ii) tuna canning, (iii) production of tuna loins and (iv) fishmeal production, a by-product of the cannery. There are two other significant elements – the artisanal fishery and the shrimp farm on Coetivy Island. The subsequent paragraphs deal with these segments in turn.

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Table 4: Production by Seychelles fisheries sector. Units: tonnes

Production 2000 2001 2002 2003 2004 Frozen tuna landings 27,295 41,917 50,677 73,780 83,304 Canned tuna* 44,278 42,752 53,082 56,055 55,552 Tuna loins - 3,735 3,078 2,288 585 Fishmeal ** 5,610 5,417 6,725 7,102 7,038 Farmed shrimp 425 282 234 1,084 1,175 Artisanal catch 4,768 4,290 4,914 3,852 4,177

Source: SFA Annual Reports 2001-2004, and estimates by NRI team * official data adjusted to canned product weight by 65% factor as Data appears to quote net “drained” meat weight. ** meal estimated from implied by-product and conversion rate of 4.25

(i) The tuna fishery is one of two principle sectoral contributors to the Seychellois economy. Table 5 lists the main revenues streams generated from foreign fleets activities in Seychelles waters, to which should be added both fishing companies’ expenditure and the net value of Seychellois landings. The principle contributor is the tuna fleets spending on goods and services sourced in the Seychelles, but a large proportion of this is fuel (64% in 2004) which is of course imported and so generates relatively little local benefit. Stevedoring, victualling, chandlery, repairs etc make up the balance. Fishing companies’ expenditure generates some revenue but it is licensing that is becoming an increasingly important second tier contributor. Liberalisation changes that affect licenses would clearly have a significant impact upon government finances. Table 5: Revenues from Seychelles industrial fisheries. Units: US$ million

Revenues 2000 2001 2002 2003 2004Vessels expenditure 50.2 45.9 46.5 53.2 62.6Company expenditure 0.6 0.9 0.9 1.2 1.1Licenses 4.3 6.5 6.3 6.8 10.6Total 55.2 53.4 53.8 61.1 74.4

Source: SFA Annual Reports 2001-2004 (ii) The tuna cannery. The other major fisheries contributor to the economy is the tuna cannery, Indian Ocean Tuna Ltd. This is Seychelles’ largest manufacturing industry employing 2,500 people (1,450 local, 1,000 foreign – Filipinos, Malagache, Kenyan etc). The cannery was started in 1987 as Conserverie de L’Ocean Indien, but in 1995 the US food giant H. J. Heinz acquired 60% from the Seychelles government, making the Seychelles the centre for their Indian Ocean activities. Heinz was estimated to have 21% of the world tuna market in 1999 with a turnover of approximately $US1bn in the tuna alone, and with ambitions to raise their share to 30%. The company has been migrating production away from its original Los Angeles base into lower cost developing regions, and this was a key part of that strategy.

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Substantial investment followed with IOT’s original 50 tonne/day (raw input) capacity in 1995 raised to 350 tonne/day during the early 2000’s. Output is now around 55,000 tonnes product per year, and IOT also produces some tuna loins for its remaining European canneries in France. Would they be prepared to give up this fairly recent investment without trying to reduce their production costs. Heinz’s strategy has clearly been to supply its key European brands (e.g. John West in UK, Mareblu in Italy and Paul Paulet in France) from Mahe, and there can be little doubt that preferential ACP access has played a large part in this (all IOT exports – i.e. nearly all its production - goes to the EU). Thus, Doha Round liberalisation could have a very significant impact upon this segment. The wider knock-on effects would also be considerable – IOT sources its cans in Seychelles as well as many other inputs and so problems for the cannery would be felt well beyond IOT and its workforce. (iii) The local fish possessing and exporting industry: A small segment has grown up alongside IOT, processing and exporting fresh, frozen and filleted fish. Three companies rely upon local artisanal or semi industrial catches of prime demersals (snapper and grouper) and large pelagics (swordfish, tuna) to export the former fresh on ice to Europe and the latter frozen or filleted (as “loins”). The latter is interesting as these loins are used by European canners to maintain competitiveness (they represent the labour intensive part of tuna canning) and so allow higher cost EU canners to compete with IOT. Latterly this fishery has diversified into shark fin and sea cucumber production for the Asian market. Two companies are involved:

Sea Harvest (Pty) Ltd was formed in 1995 as a Seychelles company long lining for tuna and swordfish as well as bottom fishing. They purchase and export fish as fresh and frozen and as loins, as well as importing fishing gear/bait and other inputs for the fishing industry.

Oceana Fisheries Company Ltd Formed by the privatization of the Seychelles Marketing Board’s Fish Division in 1995, Oceana undertakes long-line fishing for tuna and swordfish, and the purchase and export of fresh and frozen fish. Oceana Fisheries also produces for the local market and some institutions.

The signs are that this segment has been under pressure for some time with exports of fresh and frozen fish static at best and that of loins falling substantially recently. Loss of ACP preferential access will certainly not help, but it could be that its viability is questionable anyway. (iv) Shrimp farming. The Seychelles Marketing Board, a parastatal set up in 1984 and probably the Seychelles’ largest commercial entity, has been operating a shrimp farm raising black tiger shrimp on Coetivy since 1989. Latterly this has expanded production to 1,000 tonnes annually most of which is exported to the EU. The viability of this farm may be threatened by the loss of preferential EU access, but on the positive side, antidumping duties applied by the USA are actively helping small producers by discriminating against the low cost leader countries

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(v) The artisanal fishery accounts for only about 4,500 tonnes annually, less than 5% of the national total. This is produced by a mixed fleet of some 270 vessels with whalers (keel boats) and lighter outboard-engined boats accounting for over 91% of production (Table 6). The fleet size is declining though, and landings have likewise been in decline in spite of government attempts to stimulate this segment The artisanal fisheries’ main importance is the employment prospects it offers for coastal and out-island communities, as well as supplying the tourism industry and the exporters of prime demersal fish. Otherwise its national significance is tiny compared with that of the industrial segments, and consequently the Doha Round changes seem unlikely to have much impact upon it. They may however lead to the questioning of some of the subsidies that the government provides, particularly that of subsidised fuel and project support (including that from international donors). Table 6: The Seychelles artisanal fisheries. Units: Vessel number and % of catch. Local fleet 2000 2001 2002 2003 2004 Whalers 95 95 96 109 93 proportion of catch 59% 67% 69% 64% 54% Outboard powered vessels 127 127 127 127 127 proportion of catch 32% 25% 25% 27% 34% Schooners 13 14 13 16 20 proportion of catch 4% 6% 5% 7% 9% Pirogues and other 74 74 70 51 37 proportion of catch 5% 2% 1% 2% 3% Source: SFA Annual Reports 2001-2004

2.2 Overview of trade Seafood exports dominate the Seychelles’ visible trade, consistently contributing 97% of all Seychelles exports, a figure that is rising (98% in both 2003 and 2004). Unsurprisingly, this generates a highly positive balance of trade within this sector. As Table 7 shows it is tuna – in canned and frozen forms – that provides the overwhelming majority of these exports in both quantity and value terms.

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Table 7: Seychelles seafood exports. Units: tonnes, product weight and €million

Source: Eurostat 2000-2004, SFA Annual Reports 2001-2004

The data concerning trade in tuna are confusing, though. Canned tuna exports appear to be calculated differently by different authorities. The conventional approach (adopted by the EU) is to take can contents – fish and filler – as the relevant weight. In contrast, the SFA apparently considers the net tuna fillet weight (i.e. “drained” weight) as the standard, and this leads to difficulties in reconciling trade data from different sources.

Table 8: Seychelles seafood imports. Units: tonnes, product weight and €million

Source: Eurostat 2000-2004, SFA Annual Reports 2001-2004

However it is the frozen trade data that cause most confusion. This is because of Seychelles’ multiple role as (i) a primary producer of tuna from its fleet, (ii) an entrepôt intermediary for transhipped tuna and (ii) consumer of raw tuna for the cannery. Transhipped tuna can be viewed as a Seychelles import from the foreign high seas fleet (as it is by the EU) and then as an export (once transhipped). Alternatively, other authorities like the SFA (and FAO) simply net out the transhipped frozen tuna, treating it as if wholly external. Suffice it to say that the resulting lack of clarity makes it impossible to reconcile IOT’s canned tuna output with the various estimates of raw tuna input.

2.3 Consumption

Making sense of the data concerning domestic seafood consumption is a challenge. The reason is partially the degree to which the industrial fishery dominates the sector – the domestic supply is only 5% of the industrial supply and so minor inaccuracies in data concerning the latter have a large effect on the former (especially as both are lumped together in the same data sets). In addition, there is the confused nature of data on frozen tuna trade mentioned above. The estimate of domestic consumption given by FAO is seen as the most reliable, and this is given in Table 9 below. In effect domestic consumption

Export tonnes 2000 2001 2002 2003 2004 2004 €mFresh fish 605 260 477 686 374 1.9Frozen tuna 4,411 15,626 19,258 20,563 42,123 40.6Tuna loins 1,661 3,573 2,713 1,565 470 1.2Other frozen fish 27 1,007 4,564 4,045 2,653 3.4Shrimp 331 230 218 899 1,111 6.1Squid - 369 911 797 705 1.3Canned tuna 45,186 45,937 57,437 52,250 54,007 132.7Total 52,221 67,002 85,578 80,805 101,443 187.2

Import tonnes 2000 2001 2002 2003 2004 2004 €mFrozen tuna 78,836 78,301 90,178 85,861 81,563 58.3Shellfish - 182 201 126 94 0.8Total 78,836 78,483 90,379 85,987 81,657 59.1

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equates to the artisanal supply of mostly demersal/reef species, and is estimated at a high 61 kg/head/year. This, though, is almost certainly an overestimate as transient tourists who of course do not appear in population estimates must account for a sizable proportion of consumption.

Table 9: Seychelles seafood consumption. Units: tonnes, live and product weight

Tonnes live weight Production Imports Exports Industrial usage

Net Supply

PCC Kg/head/yr

Supply balance 86,869 87,174 76,457 ↓ 92,647 4,938 61 Canned fish (product weight) ↓ 55,588 Byproducts fishmeal (dry weight) 8,720

Source: FAO Seychelles Country Profile. 2005. PCC: Per Capita Annum Consumption

2.4 Conclusions: aspects sensitive to Doha Round changes The objective of this baseline assessment of Seychelles fisheries sector has been to identify the issues that will be raised by the changes implied by Doha Round trade liberalisation. These have been noted above, segment by segment and can be summarised as follows.

o International tuna fishery – access agreements (FPAs) and licenses, o Transhipment at Mahe, revenues generated and employment o Vessel servicing in Mahe, revenues generated and employment o Seychelles fleet landing to Mahe (including flagged vessels)

o Tuna canning, viability in the face of loss of protection against low cost leader producers, the implications for the economy in general and for employment

o The artisanal and semi industrial fisheries loss of preferential access exacerbated by eventual loss of some subsidy benefits if these are outlawed by WTO

o Shrimp, an increase in competition from lower cost producers partially balanced by advantages in the USA market due to discriminatory anti dumping measures

The subsequent sections focus narrowly on these key issues and attempt to forecast the potential impact of Doha Round liberalisation in each of these sensitive areas.

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3 Changes in Trade Measures as a Result of WTO Negotiations The purpose of this section is to identify the specific implications of the trade related issues raised in the foregoing discussion about the baseline. Accordingly, these implications are analysed in the context of key restraints and distortions to trade that are likely to be reduced or wholly barred. This then sets the scene for the subsequent sections where near and long term effects of the changes are assessed. The scenarios envisaged below are then taken up in the subsequent sections where they are explored in detail.

3.1 Non-agricultural market access (NAMA) 3.1.1 Tariff measures The most dramatic impact of trade liberalisation could turn out to be its effect upon the Seychelles canned tuna industry. This is analysed in detail in the subsequent section, where the prospects of a decline of the IOT cannery in the face of a complete global derogation of import duties are assessed. Frozen tuna exports may also be affected, but only if the duties were to be re-imposed (they are currently suspended on an autonomous basis indefinitely). Even so, the Seychelles’ highly strategic location and advanced ability to service fleets provide powerful competitive advantages as a transhipment centre. In fact, the change anticipated would be an indirect effect related to frozen tuna trade with the EU, because trade liberalisation is expected to put even more strains on the EU canneries. These already find it hard to compete with developing country producers, and may either abandon tuna canning or increasingly depend upon loins (from low-cost suppliers). EU demand for raw tuna from the Seychelles would then decline. That said, the tuna will still be canned, and so the implication is more that there will be a change of market (towards the low cost Asian canners) rather than a reduction in demand. Finally, small exports of fresh and frozen shrimp could lose some competitive advantage as loss of the benefit of preferential ACP access erodes their competitiveness vis a vis suppliers currently denied this benefit. The effect will have limited economic impact though, compared with the tuna segment. Table 10 sets out the tariffs currently applied to seafood imported to the EU from the Seychelles. All are currently EU imported items with the exception of processed shrimp which could become an EU import. The table gives the conventional duty rates, and the point here is that these are the duties applied to non ACP producers – i.e. they are a measure of the competitive advantage Seychelles (which is exempt) currently has vis a vis these countries in Europe. It is this advantage that liberalisation threatens.

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Table 10: EU tariffs generally applying to products imported from the Seychelles Item* CN Code (Eurostat) Conventional duty Notes Fresh marine fish (nei) 0302 69 99 15% Ad valorem throughout Frozen albacore tuna 0303 41 22% Suspended Frozen yellowfin tuna 0303 42 20-22% Suspended Frozen skipjack tuna 0303 43 22% Suspended Frozen bigeye tuna 0303 44 22% Suspended Other tuna (nei) 0303 49 80 22% Quota applies Frozen swordfish 0303 79 87 7.5% Frozen other fish (nei) 0303 79 98 15% Frozen Penaeid shrimp 0306 1350 12% Frozen squid 0307 49 6-8% Various quotas @ 3-3.5%

Frozen tuna loins 1604 14 16 24% 4,000tn quota @ 6% Canned tuna in oil 1604 14 11 24% Canned tuna in brine 1604 14 18 24% Canned tuna “flake pack” 1604 20 70 24%

Annual quota of 25,000 tonnes for Asian producers @12% duty

Processed shrimps 1605 20 20% Source: Commission Regulation (EC) No 1719/2005 to Annex 1 of Council Regulation No 2658/87. Also Council regulations No 975/2003 and 379/2004 for reduced duty quotas * categories that apply to Seychelles exports as defined by Eurostat. nei = not elsewhere indicated (i.e. a general category) One other change that will logically follow on from trade liberalisation is a reduction in the importance of “rules of origin”, i.e. the need to demonstrate that preferred access states have sourced a defined majority of their product from appropriate origins. The purpose is to ensure that exports from non-preferred states cannot be “laundered” through ACP or GSP states. This has little relevance to the Seychelles as rule of origin are apparently not an issue for them, according to local stakeholders. 3.1.2 Non-tariff measures The principle NTBs faced by Seychelles seafood exports are the EU’s sanitary and hygiene requirements. These apply to canned tuna, fresh and frozen fish and frozen shrimp, and they are being met by the Seychelles authorities in concert with the companies. In fact, the processors generally maintain rather more stringent standards than the authorities of the western importing nations, and this is especially true for a global giant like Heinz, well aware of the huge damage to markets that even a few contaminated cans will cause. Thus, even if there were to be WTO orchestrated changes and/or stricter implementation and enforcement, they would have little impact as the industry is effectively the arbiter of sanitary standards. The minor export orientated segments may face greater challenges in the future, though. Requirements, especially concerning traceability and the associated bureaucracy, are becoming ever more stringent and so are imposing increasing burdens of suppliers, especially those small in scale. This will be true for the Seychelles’ current principle seafood trade partner, the EU, but even more so should they opt for the USA where

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adherence to COOL (country of origin labeling) and bio-terrorism requirements are mandatory. 3.2 Subsidies Subsidy is a vexed and complicated issue in the fisheries sector, with the question of what is a subsidy often hard to answer. In this context there appear to be three types of intervention that affect the Seychelles fisheries industry:

(i) Direct subsidies by the government to the fisheries sector, expressed in cash or kind, or in the forgiveness of tax, and the easiest form of subsidy to define as such. (ii) Indirect subsidies to the sector through government (or donor) support to the sector or the communities involved. This might include projects assisting the artisanal fisheries, start-up support for new seafood industries or assistance with marketing. (iii) External subsidies: Another form of indirect subsidy typified by EU FPA agreements negotiated on behalf of the EU high seas fleet where “compensation” payments by the EU could have the effect of inflating license receipts.

The ways in which these affect the Seychelles are discussed below, and then the specific issues they raise are expanded upon subsequently in the sections discussing the near and long term impacts of trade liberalisation. 3.2.1 Direct subsidies: There are two direct subsidies to the Seychelles fishery – (i) a fuel incentive scheme, based upon a subsidy to the artisanal fleet (ii) subsidised credit to local artisanal and small scale fishermen. The policy justification for both is the perceived need to encourage more entrants to this segment of the industry and so increase production of high value demersals for export and the domestic supply (especially to the tourism industry). 3.2.2 Indirect subsidies Indirect subsidies are more difficult to identify with certainty. The problem is that the question of where legitimate government activity stops and where subsidy starts is a matter of opinion. For instance, some administrations see even ministerial management functions (e.g. a fisheries department) as directly chargeable to the industry, but this is an extreme position. There are two broad areas where support to the fisheries sector could be regarded as subsidy: (i) Fisheries sector specific support, defined as services provided by the Seychelles government that could be deemed to go beyond the state’s normal role. Assisting with supply and installation of engines and other equipment for fishing vessels might be a case in point. State ownership of, and start-up support for, new industries such as that by the Seychelles Marketing Board’s investment in shrimp farming might also qualify.

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(ii) Wider industry support such as that for foreign exchange generating export industry which is absolved from paying some taxes excused (??) taxes and adherence to social legislation. Export marketing assistance has also been provided and both of these state interventions could be deemed to be subsidies. 3.2.3 External subsidies The EU-Seychelles FPA agreement allows EU tuna fleets access to tuna within the Seychelles EEZ in return for an annual payment based upon the amount of tuna caught by the EU fleet. The agreement is a two part arrangement where the EU Commission pays annual “compensation”, some of which is ring-fenced for spending on the sector, whilst the industry buys licenses and accepts various conditions (e.g. reporting, allowing observers on board etc.). Arguably this is a subsidy to the EU fleet, and so may have to be reduced or abandoned eventually under WTO terms. The relevant point here is that this could be inflating license receipts by the Seychelles Government (as fishermen are prepared to pay more than they would if they had to cover the entire license cost) and so the Seychelles’ receipts could reduce in the event of these arrangements being outlawed. This is explored further below as a possible long term effect of trade liberalisation. 3.3 Other Major Trade Issues There are three other trade issues that may have an effect on Seychelles seafood trade. The first is the anti-dumping measures introduced by some key importing nations, particularly the USA. The reason for the campaigns is ostensibly predatory action by a producer, exporting at prices below production costs or at prices lower than for home sales. There are also temporary “safeguard” measures, allowed where an importing country claims that a rapid increase in imports is threatening domestic industry, allowing it no chance to adapt. One Seychelles product that is currently subject to a US antidumping campaign is shrimp, where six of the world’s most competitive producers (i.e. Brazil, Ecuador, India, Thailand, China, Vietnam) currently face penal import duties. Arguably this should buoy import prices, so helping exporters not covered by the US action, including the Seychelles. However, should a similar campaign target canned tuna, then this could obviously be highly damaging. Trade liberalisation is likely to lead to more such campaigns generally as this increasingly will be the only option left to protect domestic producers in industrialised countries (AGREED). That said, there is no reason to believe that such a campaign is likely, as mainland USA has largely exited the tuna industry, and its importance in the EU is declining. Thus the political pressures that usually generate these campaigns are mostly absent. The other issue that is growing in importance is the ethical, environmental and organic factor. Whilst this still accounts for a minority of the market, some major retail and foodservice players are beginning to promote it, especially the environmental responsibility aspects. Certification by organisations such as the Marine Stewardship

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Council (MSC) is consequently becoming more important, alongside the well established dolphin-friendly issue. Finally, the related question of heavy metal contamination (mercury for tuna and cadmium for swordfish) remain high profile concerns, the latter leading to an EU restriction in the past that damaged the semi-industrial fleet. Currently, the strongly positive aspects of tuna consumption are still losing out to negative lobby groups in the media.

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4 Initial Outcomes of Changes in Trade Measures

4.1 Tuna Canning in the Seychelles The proceeding sections have highlighted the potential risk to the IOT tuna cannery that is posed by the loss of the competitive benefit that ACP duty derogation provides. This would not only be severe, but could manifest itself rapidly, and so is seen as the principle near term threat to the sector. Table 11 highlights the reasons for this view. The table summarises the findings of a DG Fisheries study of the global tuna industry in 1999, which, inter alia, looked at the competitiveness of various segments of the industry. As the table shows, production costs varied significantly between producer regions, with South East Asia (typified by Thailand) very much the low cost leader. One conclusion was that the high cost base of the ACP island producers (exemplified here by the Solomon Islands) was largely offset by the EU tariff advantages. The obvious corollary was that loss of this advantage would put these producers’ viability in jeopardy. This section then concentrates on exploring whether this is still the case, and if so, what level of reduced tariff advantage would allow survival.

Table 11: Canned tuna production cost comparisons (1999) Costs for a standard product (yellowfin solid pack in vegetable oil) delivered to Europe from key producers. Key comparable figures in bold

Producer Cost per case Cost adjusted Cost EU duty paid for case size* euro/case euro/case euro/case Spain €22.5 €25.9 Italy €31.2 €35.9 ACP: Solomon Islands €24.0 GSP S. America: Ecuador €22.2 S E Asia: Thailand €17.6 €21.8 Source: Tuna Loins Supply and Demand Study, DG Fisheries Tender XIV/1999/one, Lot 4, Landell Mills Ltd *Cost adjusted for the relatively smaller weight per case produced in Europe Heinz clearly took a strategic decision to move a large proportion of their production to the Seychelles in the mid 1990s. There were three possible reasons for this: first, to assure reliable access to the resource, second to locate processing adjacent to the resource so reducing raw material transport costs (though this is a minor factor) and third to gain ACP duty free access to the EU market. Their cannery investment in Ghana is underpinned by similar logic. This was evidently all part of a wider strategic initiative by Heinz to migrate labour-intensive processing out to low cost developing countries, with its OECD activities mainly concerned with marketing and brand maintenance. As the trade advantage was so important in this, the tariff changes implied in WTO could be very damaging. The fact that Heinz is apparently currently in the process of selling its share in IOT would suggest they support that view.

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The key question is then obviously can the IOT cannery remain viable in the face of the possible loss of the advantage of preferential access. As this is crucial for the Seychelles, it merits in depth analysis. However, corporate production data is confidential, and so understandably not available to a study that could be viewed widely. Accordingly, the approach adopted here has been to model tuna production costs on known tuna cannery parameters coupled with Seychellois costs for key items. A comparative analysis is then made with an Asian low cost leader, Thailand. This is done in Table 12 below, where costs of producing both the canned tuna and loins are estimated. It should of course be pointed out that this is illustrative, based on 2005 costs although some costs do relate to earlier years. The approach taken has been to assess the production cost for two similar sized canneries – the IOT plant and its Thai equivalent. Costs are given in €uro per standard case, that being the normal measure used. Cost of raw fish is assumed to be identical for both plants, and allowance is made for by-product revenues (fishmeal and petfood). Two product categories are compared – a high quality item (“solid” yellowfin in oil) and a lower quality item (chunk skipjack in brine). The reason that the analysis has also estimated the cost of loin production is that this is undertaken in the Seychelles.

Table 12: Production cost estimates for canned tuna and loins in Seychelles and Thailand

Product Fish cost Other cost Total cost Seychelles Yellowfin in vegetable oil, 185gm can Canned from frozen tuna 13.5 12.4 25.9 €/case Loins 2,558 686 3,244 €/tonne Seychelles Skipjack in brine, 185 gm can Canned from frozen tuna 19.9 8.8 19.8 €/case Loins 2,066 651 2,717 €/tonne Thailand Yellowfin in vegetable oil, 185gm can Canned from frozen tuna 12.9 10.0 22.6 €/case Loins 2,388 593 2,981 €/tonne Thailand Skipjack in brine, 185 gm can Canned from frozen tuna 10.1 6.9 16.9 €/case Loins 1,907 627 2,535 €/tonne

Source: Model analysis by Napfisheries Put simply, this analysis suggests that Thai costs of production (COP) are somewhere between €3 and €3.5 per case lower than those of the Seychelles (i.e. a 13-14% discount). So what implication does this have for a reduction of the tariff advantage? Table 13 adjusts the Thai COPs upwards to include duty payable at the current rate (24%) and at a possible future rate of 10%, comparing both with Seychelles COP. This shows that current tariff differentials of €4-€6/case provide a significant cushion of advantage for the Seychelles. This cushion would vanish were the tariff to be reduced to 10% with

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resulting differentials of around €2/case, less than the COP differential between the two countries. In short, even below a 10% tariff rate, Seychelles would struggle to compete. Table 13: Comparative COP for Seychelles and Thai production and effect of tariffs

Country Seychelles Thailand Units: €/case CIF Current rate Proposed rateDuty rate 0% 0% 24% 10% Yellowfin in oil €25.9 €23.0 €28.5 €25.3 Skipjack in brine €19.8 €17.3 €21.4 €19.0 IOT product mix €21.3*

Source: Model analysis by Napfisheries *weighted average COP for 20:80 Oil:brine pack by IOT estimated on basis of balance of Seychelles exports in 2004 The average price received by IOT in 2004 was €23 per case suggesting that, at current COP levels of €21.3, IOT would have an average profit of €1.7/case. At 10% tariff rates this would turn to a loss of €0.8/case if Thai COP comes to set the price. The conclusion must be that loss of the current tariff advantage could present a serious challenge to the viability of canning tuna in the Seychelles. Table 14: Average EU CIF prices for imported Seychelles tuna into the EU (2004)

Product €/kg €/case Vegetable oil pack €2.95 €26.1 Brine pack €2.49 €22.0 Weighted average €2.58 €22.9

Source: Eurostat. One case = 8.85kg. The situation in the Seychelles is similar to that faced by a number of other ACP states whose tuna canneries have benefited from tariff derogation. However, the impact differs between the ACP countries involved, For example, in the Maldives: the problems that would be faced by the cannery could be magnified by a knock on effect to the artisanal pole and line (dhoni) fleet, because the Maldives are unique in having a dedicated artisanal fleet as well as a cannery. There could then be a reduction in demand for the artisanally caught tuna which may be less easy to sell on the open market. However, relatively low labour costs may mean that the cannery is less threatened than some. Other islands like Solomon Islands and Papua New Guinea would face a situation similar to that in the Seychelles with high cost economies. Madagascar, Ghana, Senegal and Ivory Coast have much lower labour costs and so are more likely to be able to compete in a lower cost market, and strong connections with the French market provide an additional advantage. However, all these producers will clearly face significant problems should the lower tariffs become the norm.

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4.2 The Near Term SIA implications Table 15 below sets out the implications that a decline or closure of the Seychelles cannery could have in economic, social, environmental and institutional terms. This concentrates on the cannery as that is seen as both the most important and most immediate issue.

Table 15: Near term SIA implications of fisheries trade liberalisation: the cannery Sustainability dimension

Core indicators Second tier indicators

Economic Real income Employment Fixed capital formation

(i) Substantial loss of IOT employment in Mahe, though the direct impact would be mitigated by much of the workforce being foreign – i.e. the impact may be felt in the Philippines as much as in the Seychelles. (ii) Reduced income for the Mahe and associated lower spending power (iii) Severe hardship to support industries, especially the can fabricating plant and other subsidiary industries supplying to the cannery (iv) The reduction in frequency of cargo vessels visiting Port Victoria would lead to an overall lowering of economic activity. (v) There could also be an indirect effect on tuna transshipment. Were similar difficulties to affect the Mauritian and Malagache canneries, then regional demand would slump (300,000 tonnes/year are transshipped of which 80,000 tonnes is destined for IOT, 40,000 tonnes for Mauritius and 10,000 tonnes for Madagascar). Loss of this regional demand could undermine some of the case for transshipping in the Seychelles, so severely reducing the sector’s economic “critical mass”.

Social Poverty Health and education Equity

(i) The knock-on effects of the reduction in employment would be lower earnings/increased poverty amongst the Mahe workforce and that of firms supplying to IOT. (ii) The reduction in overall economic activity and thus in tax receipts by government would lead to lowered capacity to provide key state services: healthcare, education etc.

Environmental Natural resource stocks Environmental quality Biodiversity

The tuna fishery is managed by regional bodies in concert with the Seychelles authorities. The loss of the cannery might reduce commitment to the MCS activities essential to enforce the agreed management regimes

Process

Consistency Institutional capacity

As the premier manufacturing and exporting entity in the Seychelles, IOT provides a

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substantial context for the development of both commercial management skills and their matching state administration counterpart

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5 Sustainability Impact Assessment (SIA) of Longer-Term Effects The principle longer term effect of the trade liberalisation would also be its impact upon the cannery, already explored in detail in the preceding section. Though the largest, this will not be the only effect. Other effects are seemingly much less draconian than the effect on the cannery, and will also take longer to emerge. This section then looks at these, ranked in order of perceived importance. The change that would have most impact is believed to be that of the indirect subsidy implied by the EU FPAs. This could reduce license receipts and damage the Seychelles commitment and ability to manage the resources. Then there are the direct subsidies provided by the government to the artisanal fishery, and the wider trade promotion subsidies by the Government to all export orientated industry. These are discussed in turn below 5.1 External subsidies Arguably, the EU-Seychelles FPA agreements which allow EU tuna fleets access to tuna within the Seychelles EEZ have a subsidy element which may have to eventually be reduced or abandoned. Table 16 summarises the broad parameters of the FPA schemes (and their earlier equivalents) over the past 5 years. Payments are made by both the EU and the commercial fleets, as follows:

EU payments o a blanket multi-annual payment, based on an implied payment per tonne caught o A top up payment per tonne caught above an agreed annual limit Vessel owner payments o An annual license fee based upon an implied catch o A top up payment per tonne caught above an agreed annual limit

Table 16: EU tuna fleet licensing agreements for Seychellois waters, summarised Period Jan 1999-Jan 2002 Jan 2002-Jan 2005 Jan 2005-Jan 2011* Licensed EU fleet Seiners 47 40 40 Longliners (surface) 15 32 12 Catch allowed 46,000 tonnes 46,000 tonnes 55,000 tonnes Blanket EU payment €9.9m €10.35m €24.75m Of which, payment p.a. €3.3m/year €3.45m/year €4.125m/year Implied payment/tonne €71.7/tonne €75/tonne €75/tonne Vessel charge/tonne €20/tonne €25/tonne €25/tonne Licenses: seiners €7,500/yr €10,000/yr €15,000/yr Longliners <150>GRT €1,000-1,375/yr €1,500-2,000/yr €2,250-3,000/yr * Actually signed 11/2005. Source EU parliament protocol: PE 309.186 A5-0086/2002 Both purse seiners and long liners participate, but it is the seiners that account for the bulk of the volume of tuna caught. In Table 17 we make an attempt to assess whether a reduction in payments under these arrangements would be likely to have an impact on

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government license receipts. This is done by estimating the effect of the subsidy by comparing actual license yield from EU fleet per seiner with those from “private” seiners. Table 17: Estimate of overall actual payments by EU fleet vs other pursers

License source 2002 2003 2004 EU Commission $million 2.452 2.300 4.675 EU fleet/vessel owners $million 1.163 0.678 2.211 EU payment total $million 3.615 2.977 6.885 Per EU vessel $000s 95.1 82.7 196.7 Per other vessel $000s 93.5 63.7 56.6 Other/EU vessel 98% 77% 29%

Source SFA Annual Reports 2001-2004 This estimate makes some broad assumptions – e.g. assuming that the vessels catch approximately the same amount of tuna, and so its conclusions are clearly tentative. However it does suggest that the revenues from EU vessels have come to exceed those from other vessels by a wide margin. Thus if this arrangement has to be abandoned, the implications for government revenues could be severe. The departure of the EU fleet, were this to occur, would not lead to a reduction on effort – other fleets would fill the vacuum, as the global demand for tuna would so dictate. As a result of this level of license fees might fall. 5.2 Direct subsidies There are two direct subsidies that benefit the Seychelles artisanal fishery – a fuel subsidy and soft loans from the Seychelles Development Bank. (i) The fuel incentive scheme This scheme, which was initiated in 1991 for full time Seychellois fishermen, operates on a fuel voucher system that allows rebates on fuel costs (petrol for outboards and diesel of inboard engines). In fact it is a discriminatory reduction in fuel tax, and a supporting argument put forward is that this tax is targeted on road vehicles to pay for road maintenance and so is unjustified for fishermen. The scheme is managed by the SFA and its key characterises are:

Total cost to the Government since 1991 has been US$ 4.9 million Involves the purchase of 2.34 m litres worth US$3.0m/year Cost to the government:US$0.75m in 2003 Cost to the government:US$0.67m in 2004. Rebate rates (2004)

Rebate of US$0.27 per $1.43/litre petrol Rebate of US$0.31 per $1.02/litre diesel

Source: SFA Annual Reports

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If the value of the artisanal fisheries catch is set at, say, US$9 million (4,500 tonnes @ $2000/tonne) and so costs are, say, $7m, then this subsidy very approximately amounts to 10% of annual costs. (ii) Credit subsidies Soft loans through the Seychelles Development bank amounted to US$ 2.29m in 2004 down from US$ 2.89m in 2003. There is a discretionary interest rate, but the main advantage is said to be the possibility of obtaining loans that would not otherwise be forthcoming. Whether these subsidies would be challenged in a more liberalised market is questionable, as they apply mostly to a disadvantaged segment of the population of a developing country, and impact marginally on trade (the small export of fresh fish). Even so, the effect of their removal would probably be marginal anyway. They demonstrably appear to have failed to achieve their policy objective of increasing artisanal landings, and so their loss seems unlikely to have a seriously negative impact. 5.3 Indirect subsidies Two categories of indirect subsidy have been identified – support specifically to the fisheries sector and that to the wider economy that also benefits the fishery (mainly export trade related). In both cases, the question of where legitimate government activity ends, and where possibly questionable subsidy to the industry starts, is moot. (i) Fisheries sector specific support The government provides services to the fisheries sector, mainly directed towards the artisanal fishery. The extension service is a case in point, helping with the installation of line haulers and diesel inboard engines supplied by Japanese aid (itself another subsidy issue). The service also assists with the ordering of spare parts and electronics such as GPSs for the fleet. There is also support for the industrial fleet – the government is providing 150 Inmarsat transceivers as part of a VMS system – a cost usually borne by the vessel owner. Another area of support that could be deemed to be subsidy is government capital investment in potentially commercial fisheries activities. The Seychelles Marketing Board’s long term investment in a commercial shrimp farm is a case in point, especially as the farm has been repeatedly scaled up. More tenuously there are infrastructure investments that could be construed as industry responsibilities such as refurbishment and extension of the tuna port. (ii) Wider industry support. The government has had a longstanding policy of maximizing the foreign exchange generation by industry, including the fisheries sector. To this end, exporting companies have been granted concessions through two legal instruments: the Investment Promotion Act and the International Trade Zone Act. The Investment Promotion Act, allows duty

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free imports of capital equipment and raw materials, including fuel, as well as relief from some taxes and social security charges for foreign and local labour. There are also lower corporate taxes and other tax allowances. The International Trade Zone Act also exempts qualifying companies from a range of social, commercial and fiscal obligations. An initiative that has come out of this strategy has been a special fund, set up with EU assistance to encourage investment in semi-industrial long-line fishing and other type of fishing in order to increase fish production for the export market. Other assistance includes trade promotion (e.g. participation in trade fairs and buyers/sellers meetings). 5.4 The Longer Term SIA implications As above, the implications of trade liberalisation changes are assessed in economic, social, environmental and institutional terms. This is done in tabular form below.

Table 18: Longer term SIA implications of fisheries trade liberalisation: subsidies Sustainability dimension

Core indicators Second tier indicators

Economic Real income Employment Fixed capital formation

(i) Were the FPA agreement to be abandoned or changed significantly, then the principle effect would be upon government receipts which could be significantly reduced. (also see above P26) (ii) Abandoning direct subsidies is seen as unlikely, but even if it were to occur, the impact would be limited as they appear to have failed to achieve their objectives of expanding the artisanal fishery. (iii) Similarly, indirect subsidies are unlikely to be abandoned, and again even were this to occur, the impact is seen as being marginal in relation to cannery-related issues.

Social Poverty Health and education Equity

Abandoning direct subsidies on fuel and loans would have an impact on incomes of the artisanal fishermen, possibly reducing this by 5-10%. The other measures described above mainly impact upon government receipts, and so arguably would reduce funds for the government’s social obligations.

Environmental Natural resource stocks Environmental quality Biodiversity

If FPA agreements were to be discontinued then there could be an impact on resource management. Part of the FPA compensation paid to the Government is ring fenced for fisheries management, e.g. MCS. Were this FPA funding to cease, then there would

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probably be a reduced commitment and ability to maintain MCS regimes and research programmes essential for stock management . Apart from this, the impact upon the fish resource would be unlikely to change materially – the tuna will be caught, the question being by whom and with what benefit to the Seychelles. Thus the departure of all or part of the EU tuna fleet in itself would probably not have a great impact upon the level of exploitation of the tuna resource

Process

Consistency Institutional capacity

Direct and indirect subsidies provide one of the few mechanisms for the government to influence the development of the artisanal and semi industrial fisheries. These would be lost if the subsidies were outlawed, but as these interventions seem to have been ineffective so far, presumably their loss would be marginal

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6 Prevention, Mitigation and Enhancement (P, M and E) Measures

6.1 Tuna canning The threat to the cannery is the most significant and immediate problem that market liberalisation will pose for Seychelles fishery, and so mitigation efforts need to focus on this. However, there is a fundamental problem in that most mitigation measures are likely to contravene WTO rules every bit as much as the former protection that is being relinquished. The whole point of the trade liberalisation exercise is to allow the most competitive producer to succeed, and this is exactly what will undermine the Seychelles canning industry (along with that of several other small islands). Thus recommendations will necessarily tend towards the palliative, but that said there are some options that could be explored. These are noted below: • Slowing down the lowering of tariffs to maintain Seychelles’ advantage would

provide a breathing space for IOT. This would not overturn the underlying economic logic of the threat to the cannery, but would allow the industry to adjust. Possible alternative options are set out below, and given the industries importance to the Island, assistance in this direction would clearly be justified

• Taking this further, canned tuna could perhaps be designated as a “highly sensitive”

product central to some economies that have very limited alternative recourse. This would then justify maintenance of higher protective duties against the low-cost leaders. However this would of course directly contravene the underlying thrust of the Doha Round WTO liberalisation measures

• Alternatively, there are some measures that could help to reduce the Seychelles

competitive disadvantage. Improved port facilities were mentioned by stakeholders as one measure that could help “level the playing field” in their eyes. However, the disadvantages of small scale, of high operating costs driven by import reliance and of relatively high labour costs will be hard to counter.

• Another approach would be the highlighting of the quality/speciality aspects of

Seychelles tuna to justify the premium needed. This may be a viable approach for the Mediterranean market (Spain, Italy and, to a degree, France) where canned tuna is a respected premium product for which consumers will pay well for quality. This entails producing yellowfin “solid pack” in olive oil. The IOT cannery does have an advantage here in that it has been equipped with Italian canning equipment able to produce the small 70gm cans favoured in the quality market, as well as being able to produce a wide range of other can sizes.

• However, quality-wise, the situation in Northern Europe and North America is very

different. Here canned tuna is a low status, price sensitive product mainly used as a sandwich filler or salad ingredient. Quality premia are thus not a prospect in these major markets.

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• In a similar vein there is also the potential to highlight Seychelles tuna environmental benefits. The aesthetic dimension is gaining ground in OECD markets generally, with environment, social responsibility and organic origin the three key arenas. It is environment that is important in this case with the “dolphin friendliness” and sustainable fish stocks to the fore. In both cases there is a good message to promote concerning Seychelles tuna and this would indeed be worth promoting, possibly within a generic campaign for the Indian Ocean. The fact that retail and foodservice giants like Walmart and Dardens (Red Lobster US restaurant chain) are now opting for certificated sustainable seafood suggests that this is becoming a substantive issue. Eco-labelling, media campaigns and accreditation perhaps with the Marine Stewardship Council (MSC) or similar environmental accreditation organisation) would then be worth exploring.

However, it is important to make the point clearly that it is possible that the cannery may have to scale down or even close if the global tuna market is liberalised as anticipated. Thus, perhaps the most realistic approach would be economic diversification, e.g. a renewed focus upon tourism. This is perhaps rather a council of despair, but it does suggest that the tourism-oriented aspects of fisheries (e.g. supplying the domestic market with prime fish, preserving the inshore resource for divers etc) may become more important. 6.2 Non tariff barriers There is a widely perceived need to counter the negative publicity that seafood seems to attract now. Heavy metal contamination of large pelagics has received both extensive adverse publicity and has led to trade bans; in spite of contamination generally being way below levels that could cause concern. The alternative health benefits (especially those of omega 3 fatty acids) seem to get much less publicity. Assistance to redress this balance could then be justified on a generic basis to assist all the ACP countries with threatened tuna industries. 6.3 Subsidies: management of the fish resources and support for the artisanal fishery The principle threat posed by pressure to abandon subsidies is seen as the possible eventual loss of the FPAs. This would reduce government’s receipts in various ways, and one damaging aspect would be the loss of what are in effect hypothecated funds for fisheries management, especially MCS and resource research. There is a very strong case for ensuring that these measures are maintained, because:

(i) They provide a global “good” in helping to maintain an important global resource, and

(ii) They ensure availability of a resource that is important to OECD countries (especially the EU) both as a fishery and as a popular food source.

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The solution would then be to isolate funding for these functions and make this the subject of direct, specifically targeted, donor support (nationally and regionally, and alongside the considerable donor investment in this sector already). Then the element of the current “compensation” payment made by the EU that is hypothecated for resource management would become a donor funded project with the same objectives. This then presumably would not be deemed to be a subsidy but legitimate state action to maintain a global asset as well as protecting a resource valuable to EU interests. The other subsidies, such as they are, are believed to be (i) under little threat of challenge and (ii) only marginally beneficial to either their recipients or to government policy objectives anyway. In short there is little point in taking action to mitigate what will be at worst minimal effects. The implications of the mitigation measures are summarised in Table 19, where the measures are assigned to the four categories used throughout these analyses – economic, social, environmental and process.

Table 19: Potential Prevention, Mitigation and Enhancement Measures Sustainability dimension

Mitigating and Enhancement Measure

Economic Assuming that a “special case” scenario where canned tuna remains a high tariff protected import is not an option five measures are proposed: (i) Assistance in upgrading the Port Victoria facilities to reduce some of the Seychelles competitive disadvantages. (ii) Targeting the “high-end” quality market for canned tuna (iii) Assistance with marketing to convey messages about the quality and ethical (environmental) respectability of Seychelles product as well as their health benefits to the OECD markets. (iv) Delaying the onset of the liberalised market for tuna so that ACP canneries can adjust. Due to high labour and transaction costs, the scope for cost reduction is not good in the Seychelles. (v) Economic diversification

Social Economic diversification Environmental EU or other donors to fund stock management directly as a global “good” in

place of the FPA compensation funds dedicated to this. Process

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7 Conclusions The preceding analysis comes to some clear conclusions: first, it is evident that the potentially most damaging and most immediate threat that trade liberalisation poses to the Seychelles fishery is that to the cannery. The fact that this is in the process of being sold by Heinz suggests that they may share this view. This is a threat posed by global reduction in trade tariffs, so undermining the value of ACP derogation of these tariffs. The other key area for change – subsidies – could also have an impact upon the Seychelles’ fisheries, but this will be both less severe and less immediate. Thus, it appears that there is a correlation between tariff measures and both immediacy and damage, whilst subsidies are a longer term matter. Given this dichotomy, perhaps the best way of defining the situation is in terms of tariffs and subsidies, and this we do below. 7.1 Tariff-related Issues: Tuna Canning in the Seychelles The analysis attempted to quantify the level of threat posed to the Seychelles tuna canning industry by tariff reductions. Thailand was taken as the low cost leader (though this role may come to be assumed by the Philippines, Indonesia or China). This suggested the following:

• Thai costs of production are somewhere between €3 and €3.5 per case lower than those of the Seychelles

• This represents a 13-14% competitive advantage.

• Current 24% tariff differentials of €4-€6/case then obviously provide a significant

cushion of advantage for the Seychelles.

• This advantage would obviously vanish were the tariff to be reduced to 10% with differentials of only around €2/case, ie less than the Thai competitive advantage.

• In short, at 10% tariff rates, Seychelles would struggle to compete, and at 0%

tariff the cannery would be unviable. 7.2 Subsidies-related Issues: FPAs and Support to the Artisanal Fishery Three types of subsidy were identified, and these were in order of importance: (i) external subsidies (EU FPA agreements), (ii) direct subsidies (fuel and credit) to the artisanal fisheries and (iii) indirect subsidies through government support for export industries and fisheries sector investments that could be deemed to exceed normal government interventions. External subsidies: The concern about the EU-Seychelles FPA agreements is that these could be deemed to be subsidies to the EU industry, and so outlawed eventually. The damage to the Seychelles would be the loss of an indirect benefit, in that these FPAs have

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helped generate increased license fees from the EU fleets. The analysis suggests that overall revenues from EU vessels may have come to substantially exceed those from other vessels. Thus if this arrangement has to be abandoned, the implications for government revenues could be severe. The impact upon the resource otherwise will probably be marginal – this is because the tuna will be caught – whether by an EU or 3rd country fleets. The advantage of the current arrangement is that it does allow funding and commitment for establishing a proper management regime, and it is this that could be lost Direct subsidies: direct subsides effect the small artisanal fishery and have apparently failed to achieve their objectives of prompting expansion. Their enforced abandonment is seen as unlikely as their international trade “footprint” is absolutely miniscule and anyway this is arguably support to a disadvantaged segment of the developing community, so hard to challenge. Nevertheless, even if these subsidies were to be removed, the impact would be marginal given their lack of positive effect. Indirect subsidies: Similar arguments apply to these, i.e. pressure for their abandonment seems highly unlikely, especially as some lie in that grey area between legitimate state action and genuine subsidy. In fact, the greater threat probably lies in the risk of a reduced government ability/commitment to fund them – especially if the more damaging measures described above do lead to a reduction in government receipts from the fisheries. 7.3 The SIA implications of fisheries trade liberalisation Table 20 below summarises the anticipated impacts from seafood trade liberalisation, combining that attributable to tariff measures and that due to subsidy reduction. The most important issues are shown in bold, and in each case the key factor (tariff or subsidy) is highlighted in bold.

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Table 20: Summary of the SIA implications of fisheries trade liberalisation Sustainability dimension

Key liberalisation factor

Second tier indicators

Economic Tariff Subsidy

(i) Substantial loss of IOT employment in Mahe, (ii) Reduced income for the Mahe workforce (iii) Severe hardship to support industries (iv) The reduction in shipping frequency (v) Knock-on effects on transhipment (i) If FPA agreements discontinued, government receipts could be significantly reduced. (ii) Subsidies to artisanal fishery likely to continue

Social Tariff Subsidy

(i) Increased poverty amongst the Mahe workforce (ii) Reduced tax receipts for essential state services. (i) Even if artisanal subsides removed, result marginal

Environmental Tariff Subsidy

(i) Reduced commitment to the MCS activities (i)If FPA agreements discontinued, impact on FPA supported resource management and research

Process Tariff Subsidy

(i) Reduced national management and administration capacity (i) Loss of government ability to influence the development of artisanal and semi industrial fisheries.

7.4 Mitigation and Enhancement Measures Tuna canning There is a fundamental problem in attempts to mitigate the problems that reduced tariffs are likely to cause the cannery: any measures taken are likely to contravene WTO rules every bit as much as the former protection that is being relinquished. They would then be either self defeating from the WTO’s viewpoint – or disallowed. That said, there are some positive options that can be considered (assuming that the option of designating canned tuna as a protected “highly sensitive” product central to some economies that have very limited alternative recourse will be unacceptable): • Gradual lowering of tariffs to allow ACP canneries to adjust. . • Investment to reduce the Seychelles infrastructural competitive disadvantage. • Targeting the premium product market to justify the premium needed. • Highlighting of the quality/speciality/environmental aspects of Seychelles tuna

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However, the fact is that the threat to the cannery is real and serious and cannot be ignored, and thought should also be given to alternative diversification, with a renewed focus on the former economic mainstay, tourism. At the same time, action to maintain the benefits of the frozen tuna transhipment and licensing segments will be crucial – bolstering the Seychelles natural advantages through maintaining efficient and cost effective facilities. Appropriate infrastructure investments might again be important here. Management of the fish resources. There is a much clearer and more positive option should FPA funding for fisheries management cease. The proposal is that the wider benefits involved would justify donor support for a long term management and research project. The EU, with its fishing and sourcing interests in the region, might be approached to ask if they would be prepared to support this – alongside the range of regional projects they already fund in this sector.