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5 Risk mitigation instruments

If at the end of any comprehensive risk assessment there is an unacceptable residual risk (e.g. of marine farm abandonment), then there is a range of mitigation instruments - financial and otherwise - to consider. These can be applied to activities that use a shared resource and present the risk of adverse effects on a site that may require remedial action to return it to its original condition, without cost to the public.

Risk mitigation instruments should accurately reflect the current knowledge of residual risk, and balance the costs and benefits to stakeholders. They should also be considered within the New Zealand aquaculture context, including the industry and regulatory environment. This section describes and assesses the risk mitigation instruments most likely to be successfully applied to aquaculture in the current New Zealand setting. The options are divided into those that are currently available:

  • permanent RMA bonds, payable in cash or surety/guarantee, or with the liability met by insurance
  • private insurance

and those that would require new industry initiatives and/or modification of council policy and process to be applicable:

  • remediation pool funds
  • mutual insurance.

There is also a discussion of non-financial risk mitigation tools.

Each option is evaluated against its ability to:

  • address risks
  • be set up and administered
  • fulfil statutory obligations
  • be acceptable to industry
  • be acceptable to stakeholders.

5.1 Risk mitigation tools currently available

5.1.1 Environmental assurance bonds/sureties

Environmental assurance bonds are used to help ensure that the costs of environmental damage are borne by the parties undertaking activities that may lead to clean-up or remediation costs. Before beginning the activity, the party purchases a bond or a surety that specifies environmental performance over a certain period. In a specified situation during or at the end of the period, the party is either refunded the bond or the bond is used to ameliorate environmental damage that has occurred. The general principle of such bonds/sureties is that the supervising government agency is guaranteed sufficient funds to cover, to an acceptable extent, the cost of rehabilitation if the enterprise concerned fails to meet the agreed conditions of consent. There are a number of differing forms of bonds/sureties, each giving a specific form of guarantee to the issuer/guarantor.

Bonds are widely understood and both councils and industry are familiar with how they work. They are simple to impose and administer through existing policies and processes, and give councils certainty as to the extent of cover for any given consent. They are best suited to situations where there is one source of potential environmental damage (or non-performance) so that the resulting costs can be reasonably estimated.13

The key challenge is to calculate bond amounts that accurately reflect the remediation costs associated with the type of production in question. Setting an appropriate bond amount in year 1 of a 20-35-year period of operation to reflect the possible remediation costs of an undesirable outcome at the end of that period, or any point within it, requires considerable data and experience. There is high confidence of the likely cost of remediation over periods of up to three years, but it decreases beyond that.

If the bond amount is highly uncertain or extremely large, direct regulation of the activity may be a better risk management tool. The bond amount should also not put an unreasonable financial burden on regulatory or industry parties, and the cumulative financial effect of the whole of the regulatory/compliance environment must be considered.

Bond regulation and setting

In the New Zealand aquaculture context, bonds can be set by councils through the consent process in accordance with section 108(1)(b) of the RMA. Provisions under the RMA give councils the freedom to deal with consents on a case-by-case basis and do not require any specific level of supporting analysis, although the consent process does require dialogue with the owner. As an example, Northland Regional Council’s financial contributions policy (also covering bonds) is as follows:

In accordance with Section 108 of the RMA, the requirement of a financial contribution, including bonds, is considered appropriate in circumstances where the Regional Council may be required to undertake any of the following actions in the event of a coastal permit holder’s failure to avoid, remedy or mitigate adverse effects of the consent holder’s activity:

  • completion of any works or structures
  • operation of any works or structures
  • alteration or removal of structures and any restoration works following any works or activity being completed or ceasing
  • completion or compliance with any other conditions of the consent granted.

Assessment criteria for whether or not to impose financial contributions, the types of contribution and their value on coastal permit applicants focus on consideration of councils’ coastal objectives, how applicants’ activity may impact on the achievement of these objectives and whether and how a financial contribution may offset potential impacts.

There is no clear provision under the RMA for risk pooling, such as would occur in an insurance or fidelity fund scheme. Bond setting seeks to recover the full amount, or a median “worst case” amount required for remediation. Bonds can be permanently set for the length of the consent, although bond conditions can be reviewed at any time at the request of the consent-holder (section 127), or by the council if the consent conditions provide for such a review (section 128).

An approach to bonds that takes into account the probability as well as the cost of remediation would result in bonds being set at an amount less than the expected full amount required for remediation. This would require the council to accept some exposure to the risk of farm abandonment, as it would not have dedicated funds to meet the full cost of remediation. In bond setting, a risk assessment should be used only for considering risk acceptability – whether or not a bond should be imposed at all. See Figure 3 for a possible risk-based bond-setting process.

The risk-based process outlined below could be used by councils to set bonds, but requires the use of a substantial amount of hitherto invalidated data to assess both the probability and cost of remediation to a high degree of accuracy. Councils should consider what constitutes an acceptable level of risk as part of the risk assessment process (discussed in section 4).

Figure 3: Suggested process for risk-based bond setting

Meeting bond liabilities

Up-front payment to consenting authorities and unpaid security through a bank guarantee are the common options for establishing a bond. The bank guarantee option has been favoured by councils under the RMA, especially for temporary construction or site development bonds. Using unpaid guarantees for low-risk ventures (i.e. familiar technology in typical locations) is common in the mining sector in Australia. Meeting bond liabilities with a surety is a form of private insurance (discussed in section 5.1.2).

Regardless of its form, a bond is a cost to marine farmers. A bond is treated as another loan from the bank (even when it is a bank guarantee), and in tight economic periods it could affect the financial viability of some operations.

Bond use in New Zealand

Some councils are concerned about ratepayers bearing the risk of marine farm abandonment and so impose bonds, as the risk mitigation instrument available under the RMA, to ensure that marine farmers bear this risk.

Councils take a variety of approaches to imposing bonds on marine farm consents. These are only becoming apparent as new consents and consent re-applications have arisen under the RMA framework. In the light of high-profile farm failures like those in the Waikare Inlet, the appetite for bond setting has increased. Indications are that bond-setting to recover a proportion of restoration costs over the life of the consent is being used (e.g. by Northland and Auckland Regional Councils), with farms either assessed on a case-by-case basis or profiled on a species basis. However, the risk assessment and the level of risk acceptance have not been made clear. Bonds are also imposed on other marine structures, such as new wharves and marinas, but these are typically temporary and expire at the end of the construction period (i.e. when the structure is likely to form the basis for an ongoing operation).

Marlborough District Council, the regional authority for the region with the greatest amount of aquaculture activity, is comfortable with the industry’s track record and has no intention of requiring bonds for new consents for marine farming practices that are familiar or typical in the region. However, bonds have been put in place on large offshore marine farms where the structure’s technology is untested.

Other agencies in New Zealand also set bonds for the commercial use of shared resources. The Department of Conservation, for instance, applies bonds as a condition of access for mining operations on conservation land under the Crown Minerals Act. The aim of these bonds is to restore the site to a defined condition should the site be abandoned or if the operator is unable to restore the site at the end of the consent. The bond amount, usually provided as a bank guarantee, is decided by agreement between the applicant and the Department, a process that typically involves input from third party experts. The amount is recalculated each year based on the operation’s status and planning evidence in the operator’s management reports, with the Department aiming to recover by way of bond an amount equal to 80-95% of the full cost of restoration. An RMA bond payable to councils may also be required if there is activity on council-owned land.

The mining industry and its regulation are not sufficiently comparable to the current New Zealand aquaculture context to provide a suitable model for applying bonds to marine farms. In surface mining, for example, there is a long history of data collection for environmental impacts, decommissioning, restoration and catastrophic events, and, importantly, a long history of bond setting and the use of bonds to fund site restoration where operators have failed or have abandoned the site. This history allows the scope of remediation to be more tightly defined and the costs more reasonably estimated. The availability of actuarial data has allowed a surety bond market to develop where the operator is able to provide a guarantee for the resulting large bond amounts by paying a premium for the full amount of coverage to the surety provider on an actuarially determined basis.14 These conditions are significant in making mining an activity to which consenting authorities can apply bonds with a satisfactory level of confidence as to the extent of bond coverage. Section 5.1.2 notes that using surety for bonds in the New Zealand aquaculture setting is not currently viable.

International bond practice

The international experience of bonds in marine aquaculture is not significant, and there is no clear best practice that is relevant to the New Zealand context.

In the UK, the seabed is owned by the Crown Estate, which grants the leases via local authorities. No bond is required, but the lease goes back to the local authority if the lease terminates or the farm becomes inactive. If equipment remains on a site, then the farm is judged to be still active. The risk of clean-up lies with the local authority. The local authority is also liable for structure removal, but only when the consent lapses.

In the USA, the National Offshore Aquaculture Act 2005 requires that bonds be set for site remediation. Similar systems operate in parts of Canada under provincial statutes. There are no broadly standardised approaches and little up-to-date information available on how local authorities set bonds, although it appears that bond setting on a case-by-case basis is prevalent.

Analysis of aquaculture bond regimes in Australia shows that a similar stage has been reached as in New Zealand: consent authorities are interested in alternatives for residual risk management and are looking at standardised approaches at a state level. Current bond impositions are typically low. In New South Wales, the Department of Primary Industries requires a one-off bond (cash or guarantee) of AU$1,000 per hectare before issuing a lease, or AU$40 per hectare per annum as a ‘bond’ from oyster farmers only, which can be used as a last resort when all reasonable measures to get a permit holder to rectify a lease management problem have failed (around 90% of lease holders opt for the annual contribution). Annual contributions and cash payments of bonds are pooled in separate and dedicated interest-bearing trust accounts. Guarantees are cancelled and cash bonds returned at the end of the lease, but annual contributions are not refundable and are used to build the fund for any future remediation activity.

Evaluation

From a council perspective, bonds are a familiar instrument which are easy to set up and administer under the RMA, and which provide certainty to councils about the extent of coverage if remediation is required. They fulfil statutory obligations when properly defined.

In deciding whether or not to impose bonds, risk assessment (probability multiplied by cost) is used to determine the acceptability of the risk, not to establish the amount of the bond. In the example in Figure 3, the risk assessment calculation gives a risk estimate of $50/ha. If the council deems this risk unacceptable a bond may be imposed, but if the council wishes to fully cover its worst-case scenario, the bond quantum would be based on the worst case-remediation cost of $50,000/ha. This example demonstrates the potential inefficiencies of bonds compared to risk-pooling instruments, which would provide coverage at rates closer to $50/ha. Councils setting bonds should be clear about the level of risk they deem acceptable. Ongoing review of the residual risk assessment will help to ensure that bonds are not imposed on consents where the residual risk has become acceptable.

Industry buy-in to bonds is likely to be limited because bond amounts set to meet full costs of restoration are likely to be a significant financial burden, whether they are paid upfront or as a bank guarantee. Bond regimes do not offer the advantage of pooling the risk for increased efficiency of coverage. A bond regime also provides fewer direct incentives to improve risk management practices, even if there are regular reviews of residual risk. If the residual risk, as determined using the technique in Figure 3, reduces to an acceptable level, the bond liability is removed. If the residual risk remains unacceptable, the amount may not change because the amount of each bond is related to the cost of remediation. The applicant is only rewarded for improved risk management if their risk management has resulted in the residual risk from their activity becoming acceptable or has reduced the potential remediation cost.

Bonds would appear to be most appropriate for applicants with a residual risk profile that is unacceptable or unknown, such as with the use of new marine farming technologies, or atypical or speculative water space, in the absence of more efficient risk mitigation instruments. The generalised application of permanent bonds over the life of a farm in the absence of ongoing residual risk analysis appears to be a coarse instrument for managing the residual risk of abandonment in the current New Zealand aquaculture context.

5.1.2 Private insurance15

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Aquaculture is a growing market for private insurers, with demand for aquaculture insurance higher than ever before as the industry grows globally. Although the range of species and culture systems covered under aquaculture policies worldwide is diverse, aquaculture insurers retain a cautious approach to aquaculture due to the limited data available for valuation and making actuarial assessments of the risks involved, particularly to stock. This caution leads to higher premiums and excesses, as well as a limited choice of insurers.

The use of private insurance is patchy across New Zealand’s aquaculture sector. Insurance of stock is mainly taken up by major aquaculture enterprises, which are generally insuring growing finfish, not mussels and oysters. Around 90% of New Zealand’s farmed salmon is insured. Most medium to large marine farmers appear to have insurance for structures and equipment as part of normal business operations, often purchased as a result of pressure from banks and/or other investors. Smaller producers may not have any insurance. Interest in insurance is typically constrained by cost. Premiums are mostly in the range of 2.5 to 5% of the insured value of the farm, less for equipment alone, and typically with a 20% excess.

Private insurance is often neither available nor affordable for comprehensive cover to third parties, particularly for site remediation. The high excess also makes insurance effectiveness uncertain under the circumstances in which abandonment is most likely to occur; i.e. where a marine farming business owner is unavailable to mitigate the effects.

Finite risk insurance (multi-year insurance contracts, where the insurer bears the risk for a known loss) for businesses to cover agreed costs to councils in the case of tightly defined abandonment or forfeiture conditions, or the costs of RMA bonds to cover such conditions, have been proposed both in New Zealand and offshore. Similar to private insurance is performance surety bonding, a three-party instrument between a surety issuer, the marine farmer and the council. The agreement binds the marine farmer to comply with the terms and conditions of a contract. If they are unable to do this successfully, the surety issuer assumes the marine farmer’s responsibilities and ensures that the defined terms are completed. New Zealand firms seeking sureties are likely to have to look offshore to find specialist surety issuers.

Some councils retain a provision for insurance instruments to be used to cover bond requirements in their plans. Where insurances are used in this way, a third party (the council) has a significant role in determining if a clean-up is required as well as in determining the extent and cost of the clean-up. Councils have no real financial accountability because they pay no premium, yet they may decide what happens regarding the expenditure against the claim. There is a possibility that with such cover in place, a council could insist that businesses activate the cover when perhaps lower-cost or alternative options could be pursued, such as finding a new lease holder who might be willing to remediate and utilise the site. The council could also invoke the cover to provide backup where an inappropriate aquaculture site or project may have been approved. On the other hand, councils may encounter difficulties in accessing the cover due to problems establishing proximate cause.

Evaluation

Insurance, by its nature, is risk based and insurances are constructed to address defined residual risks of whatever nature as long as they are not solely financial risks, where the failure is caused by trade changes.

Insurance may fulfil statutory obligations when included in policy under the RMA, but from a council’s perspective insurance is uncertain: it may pay nothing if refuted, or the excess may leave the owner still liable. Insurance is not currently generally acceptable to industry at its present levels of premium, cover and excess.

There is, however, significant positive value from aquaculture enterprises having insurance: most importantly, it can facilitate the ongoing operation of aquaculture businesses within consent conditions despite various external impacts and events, thereby ensuring sites remain operationally viable.

5.2 Risk mitigation tools requiring industry and/or council changes

5.2.1 Remediation pool funds

A remediation pool fund is a very different approach to a bond. It is a dynamic, risk-based instrument which is administered in such a way that when all other remediation mechanisms fail, and a residual risk is left with a party such as a council, there is a fund that can meet the full cost.

This sort of risk treatment recognises that:

  • considerable work goes on day-by-day to minimise risk by both industry players and regulators
  • risk analysis can be used as a tool to define the residual risk to be managed
  • apportionment of the required funds for the residual risk by councils can be made in a fair manner, based on the risk contributed by the individual players in the industry
  • there is a level below which the residual risk of abandonment, pollution, etc. by an individual player or class of players is acceptable
  • there is a need to revisit both the residual risk and the levy contributions from time-to-time as risk continues to vary
  • costs may fall in an unpredictable manner (e.g. a spill may occur in one council area, but the effects of the spill are actually borne by another council due to wind and tidal effect; the same could happen in the future as aquaculture moves further offshore).

Use of remediation pool funds

There is wide international use of such funds for diverse purposes, including toxic waste site remediation in Californian schools, coal dump site remediation in the UK, revitalising industrial sites in Northwest USA, and Japanese nuclear site remediation.

Setting remediation pool funds

In discussing the setting of remediation pool funds, the approach used by the New Zealand Oil Pollution Levy Fund represents good practice risk mitigation being applied at a national level in New Zealand. It has wide acceptance by the various contributors to and users of the fund. The Oil Pollution Levy Fund is familiar to councils and its terms and conditions are administered regularly by Orders in Council. The fund is industry governed, with an industry-based committee ensuring equity of levies and payments. Triennial risk re-assessment is funded by Maritime New Zealand. The fund is capped at a limit providing for the residual risk clean-up costs determined by the risk assessment, other than those recoverable by other mitigation means such as insurances.

Such a fund could either be solely aquaculture based, or could be more widely contributed to by other present and future operators of structures in the coastal marine area (e.g. floating hotels, mining structures, wharves, jetties, marinas, wind farms, tidal and energy barriers) having similar abandonment risks. It is important to define at the outset if the fund retains the option of including other such coastal marine area users.

The primary advantage of this approach is the efficiency of risk sharing and coverage, with resulting benefits for all aquaculture stakeholders. Councils would receive an assurance that marine farm abandonment would be dealt with to its satisfaction (provided the council fulfils its clearly defined obligations). The development of a standard approach would also deliver business process efficiencies to councils. Industry could set levy contributions that reflect a range of risk variables (species, technology and location to name a few) according to their knowledge and experience. Operators would have a strong incentive to install effective risk management and have insurance, as this would probably result in reduced levy contributions. At a higher level, this would also result in reductions to the total risk from aquaculture operations nationwide.

The fund in its early days, when data for setting levies is relatively coarse, could be established using the finite risk reinsurance funded approach illustrated in Figure 4.

Figure 4: Finite risk reinsurance fund model

This image graphically represents the formation of a remediation pool fund. In comparison to applying a bond the remediation pool fund is a dynamic, risk-based instrument which is administered in such a way that when all other remediation mechanisms fail, and a residual risk is left with a party such as a council, there is a fund that can meet the full cost. Figure 4 shows that the finite risk reinsurer funds any losses that occur in the years during which the fund is built up, in return for a premium/levy payment from the fund which reduces as the reinsurer’s liability becomes smaller. If some form of industry-wide catastrophic event were deemed to be an event that should be covered by the fund (e.g. a tsunami), then some form of catastrophe risk-layered insurance would be purchased by the fund.

This image graphically represents the formation of a remediation pool fund. In comparison to applying a bond the remediation pool fund is a dynamic, risk-based instrument which is administered in such a way that when all other remediation mechanisms fail, and a residual risk is left with a party such as a council, there is a fund that can meet the full cost. Figure 4 shows that the finite risk reinsurer funds any losses that occur in the years during which the fund is built up, in return for a premium/levy payment from the fund which reduces as the reinsurer’s liability becomes smaller. If some form of industry-wide catastrophic event were deemed to be an event that should be covered by the fund (e.g. a tsunami), then some form of catastrophe risk-layered insurance would be purchased by the fund.

 

In this approach, the finite risk reinsurer funds any losses that occur in the years during which the fund is built up, in return for a premium/levy payment from the fund which reduces as the reinsurer’s liability becomes smaller. If some form of industry-wide catastrophic event were deemed to be an event that should be covered by the fund (e.g. a tsunami), then some form of catastrophe risk-layered insurance would be purchased by the fund.

Levies

The contributions to such a pool would be determined according to a set of risk-based rules, which would be independently assessed nationwide to ensure equity. As with the Oil Pollution Levy Fund, there is a pre-determined level of risk below which no levy is collected. For example, the risk of abandonment for inshore mussel farms may be deemed to be below such a level of risk of abandonment.

A slightly different approach to funding is being proposed for use in the North Sea by the UK Government. This involves a decommissioning fund for offshore energy operators of wind and tidal farms, whereby the fund is only contributed to in the mid-life operational period of the installation when it is making profits and before the end-of-life phase where risks might be greater. Again, much of the analytical work is risk based to determine appropriate levels of the fund.16

Operation

A pool fund could operate as follows. If a business failure occurs and a coastal marine area structure is left in an abandoned state, a first approach would be made to the industry to assist according to its code of practice or by a takeover of responsibilities by another operator. Failing this, the fund would be invoked by a council making a claim on the fund, according to fund operating rules. If the cost of remediation and removal exceed the fund, then the finite risk reinsurer would top up the claim. The fund may then have to make some adjustments on an actuarial basis for future levies.

There would be no good reason, other than the cost of overheads being more concentrated, why such a fund could not operate in a region that has a concentration of residual risks. This regional approach may be attractive in Northland, where oyster farms consented under previous regimes present a unique challenge to industry and regulators.

Ownership of and responsibility for a remediation pool fund is a critical issue in fund establishment and operation, and there are several options for how such a fund could be structured. A nationwide, industry-based fund with input from central government, like the Oil Pollution Levy Fund, has been proven to meet stakeholder requirements for cover and efficiency. A pooled fund with similar features could be operated under the auspices of a sub-sector or regional industry group.

The key features of the New Zealand Oil Pollution Levy Fund that could be replicated are:

  • establishing the residual risk every three years with a detailed-as-possible quantitative analysis
  • fund governance by the industry
  • a detailed set of fund rules
  • an efficient means of recovering contributions
  • a threshold below which those not adding to the risk do not contribute to the fund.

Under current legislation, contributions to a pool fund could be required as a consent condition. To meet this requirement, a voluntary remediation pool could be established and operated by the industry. Contributions would have to be voluntary, but a bond could be required from high-risk marine farmers who decide not to contribute to the fund. This sort of fund could be established initially on a regional basis, starting in a region where bonds are an issue (e.g. the Northland or Waikato regions).

Use of such a fund by councils would require policy changes to recognise the fund and to develop alternative conditions for farmers not contributing to the fund. Councils would also have to be involved in mutually determining the risks to be pooled and the details of fund responses to abandonment conditions. Although this approach shares many of the above features and benefits, it does not provide the extent of certainty of cover because it lacks statutory powers to require contributions. It could, however, serve as an intermediate step to a national fund, or serve as the basis for a future, legislated fund if desired.

Evaluation

Pool funds are by nature risk based and are constructed to address defined residual risks of whatever nature is decided (e.g. abandonment). They are initially complex to set up and administer from the councils’ and industry’s perspective, but efficiencies would result in better ongoing risk management. They also require risk analysis to be updated frequently.

Pool funds are generally acceptable to all stakeholders when they have sufficient input and involvement in determining the funds operating parameters. They fulfil statutory obligations when properly legislated for.

Establishing a nationwide remediation pool fund presents an opportunity to efficiently mitigate the residual risks to councils from aquaculture (or, potentially, a wider range of activities in the coastal marine area) while achieving a reduction in total risk as a spill-over benefit. A voluntary approach under current legislation would rely on industry buy-in, but could be integrated with judicious use of bonds for an efficient risk mitigation scheme providing coverage for councils. A legislated approach may prove to be more efficient and robust and should remain a consideration over the longer term. It may also facilitate the expansion of the pool fund to cover other structures in the coastal marine area.

Industry mutual insurance schemes

A mutual fund is an insurance-based financial instrument in which there is mutual accord and membership of the fund, and where any benefits are shared solely among the members. It is rules bound and uses a wide variety of top-up/finite risk insurance mechanisms to get the fund established against losses in the early days of the fund. Mutual insurance is still insignificant in the global aquaculture industry, although some frameworks are being developed, such as a Chinese regional scheme covering risks to vessels, gear and stock.17

A New Zealand industry “protection and indemnity club” approach (a mutual fund, covering third-party liability for the risk of adrift farm structures) was investigated by the industry several years ago but was not pursued by industry or councils. This may have been due to a lack of demand for security covering adrift structures alone. Large adrift structures, such as mussel lines and salmon pens, are infrequent occurrences and are expected to be rapidly dealt with by marine farmers. Adrift debris from farms should be retrieved under codes of practice and industry initiatives developed by regional and species-specific industry groups.

Evaluation

In the long term a robust mutual insurance scheme that deals with specific aquaculture risks may become viable under the umbrella of Aquaculture New Zealand. However, it is not feasible with the current lack of actuarial data. Industry demand for a mutual scheme is also limited.

Mutual funds are similar to pooled remediation funds. If a voluntary pooled fund is pursued, it is unlikely that a mutual fund option would be required to address the residual risk of abandonment.

5.3 Non-financial voluntary approaches

Non-financial voluntary approaches include standards and agreements that require voluntary adoption by industry participants as part of their business practices. They may increase the capacity of the aquaculture industry to manage environmental impacts and other foreseeable situations, and can augment or even replace some regulatory approaches.

Buy-in from industry must be established by identifying clear benefits to firms from their participation. These may be least-cost ways to meet regulatory requirements, increased market acceptance and/or access to shared knowledge resources. Voluntary approaches are more likely to be taken up where there is:

  • established collaboration within the industry or sector that allows tapping into the existing knowledge and relationship base
  • clearly defined and quantified jurisdiction-wide objectives.

The former of these conditions is certainly present in New Zealand aquaculture. The condition of having clearly defined objectives is being developed through the concerted efforts of a range of stakeholders, and should be further assisted by the Government’s aquaculture implementation team and the establishment of Aquaculture New Zealand.

Industry management agreements

Industry management agreements shift the responsibility for the resource in question to producers, subject to achieving environmental objectives agreed to with regulators. This arrangement is best suited to a homogeneous or regionally focused sector with few participants and sufficient commonality of conditions and production methods to make co-operative management viable.

These conditions favour species groups developing and enforcing management agreement conditions which now may fall under Aquaculture New Zealand branding and administration. Higher-level undertakings, such as commitments to biosecurity monitoring, are currently in development. There are excellent incentives for New Zealand’s aquaculture industry to self-regulate using industry management agreements, given both the production and reputation impacts on marine farms of poor aquaculture practices in the coastal marine area.

Codes of practice

A code of practice is a document that provides information and guidance to industry participants about ways to achieve best management practice. Documents vary from guidelines to detailed checklists, and range from whole-of-operation to specified environmental impacts.

A potential extension of a code of practice is for regulators to allow operators to be “deemed to comply” with regulations if they follow the practices outlined in their code. This is a flexible partnership approach to regulation which:

  • can be updated more easily than government regulations
  • incorporates the expertise of those being regulated, which may build industry acceptance and willingness to comply
  • offers industry well-defined consent requirements, eliminating grey areas around the implementation of requirements.

The effectiveness of a code of practice is ultimately determined by the extent and coverage of the code and its rate of adoption by industry participants. In the New Zealand setting, codes of practice developed by mussel and oyster farmers’ associations have been integrated into council monitoring regimes in Marlborough district, for example. The development of existing and further codes of practice is underway in partnership with public sector stakeholders, including Biosecurity New Zealand, an approach which is to be encouraged.

Evaluation

Voluntary approaches would not give councils sufficient assurance that the residual risk of abandonment has been entirely mitigated. However, the increasing breadth of voluntary approaches reinforces the readiness of the New Zealand aquaculture industry to reduce risks by undertaking self-regulation. Voluntary approaches must be considered as an overall part of the risk mitigation mix as councils assess what constitutes satisfactory assurance that its residual risk is “as low as is reasonably practicable”. This approach permits councils to consult with industry to identify where regulation can effectively be shifted from councils to industry.

5.4 Other regulatory approaches

Literature on risk management tools for shared resource use lists a number of other instruments, including demerit schemes for consent breaches, offsets for environmental impacts, and market-based approaches such as tradable permits and auctions for shared resource use.18 These are incompatible with the aquaculture regulation context in New Zealand for a variety of reasons, such as insufficient data and/or hard science regarding industry activities and their interaction with the environment, and the expense and complexity of setting, establishing and operating the proposed regulatory instruments. However, the main reason for not considering these alternative tools is that they primarily seek to minimise the environmental impacts from activities rather than address business failure and mitigate the subsequent impacts.

5.5 Summary

A summary of risk mitigation tools and their implications for stakeholders is given in Table 6. The table has been divided into two sections:

  • risk mitigation tools that are available under current legislation, with current council policies and processes and current industry structures
  • risk mitigation tools that require new industry initiatives and/or modification of council policies and processes.

Table 6: Summary of risk mitigation tools and implications for stakeholders

Options Description Implications for councils Implications for industry Where used
A) Under existing legislation and within current aquaculture context

RMA bonds paid up front

A monetary instrument paid up front by the owner to the council against a future event.

The council has certainty of level of coverage, but there may be difficulties maintaining adequacy of the bond over time.

Legislation exists to enable implementation.

Requires assessment of the residual risk to ensure imposition of reasonable costs only.

Requires ongoing reassessment of residual risk acceptability.

Contestable by industry in Environment Court.

Imposes higher costs relative to options that share risk across sites.

Review conditions may reward good risk management practice through removal or reduction of bond liability.

NSW oyster farms.

Regional councils.

RMA bonds paid by guarantee

A monetary instrument paid by the owner to the council by means of a bank, or some other guarantee against a future event.

As above.

Possible uncertainty over the security of the guarantee in the long term.

As above.

Limited market for guarantees may lead to high transaction costs.

Prevalent in mining.

NSW oyster farms.

Regional councils.

Private insurance

A liability insurance or special risk policy covering a defined event, held by council as the beneficiary, from a private. insurance company.

The claim is contestable by the insurer.

May not know security of insurer long term.

Additional cost in a very limited market.

Council could seek to invoke policy inappropriately.

Large-scale environmental liabilities (e.g. mining, oil, civil).

B) Under existing legislation but requiring industry and/or council changes

Voluntary pooled fund

A cash fund operated by industry, probably regionally, to pool particular risks.

May not know security of industry commitment long term.

Risks and responses have to be satisfactory to councils and recognised in policy.

Requires increased engagement with industry to monitor the fund and practices.

Non-covered operators will require a separate risk mitigation process.

Council could seek to invoke a response inappropriately.

Ongoing commitment to lead set-up and administration.

Marine farmers choosing to operate outside industry norms may require special treatment.

Residual risk reduction is incentivised through reduction in levies.

Trade associations to protect members.

Mutual insurance

A liability insurance or special risk policy covering a defined event, held by the council as beneficiary, from a mutual insurance company (e.g. industry or council owned).

The claim is contestable by the mutual company.

May not know security of industry commitment long term.

Requires tightly defined event to occur.

The council could seek to invoke the policy inappropriately.

The cost of mutual set-up and administration.

Pooled risk concept, based on an event the council defines.

Large-scale environmental liabilities (e.g. mining, oil, civil especially government schemes).

Aquaculture levy fund

A legislated pool fund, like the New Zealand Oil Pollution Levy Fund, into which all farmers are required to contribute on a risk basis and which councils claim from.

Pool of risks needs tight definition.

Fund responses need tight definition.

Involved in set-up and administration.

Identify areas of acceptable risk (e.g. in- shore mussel farming).

Residual risk reduction incentivised through reduction in levies.

New Zealand Oil Pollution Levy Fund.

Offshore Renewable Energy Installation Decommissioning Fund (UK).


13 Victorian Environment Protection Authority 1994. Victoria’s environment protection system: Innovative approaches and economic instruments. In: Environmental Economics Update. Environment Protection Authority: NSW.

15 Data mainly comes from private correspondence with Sunderland Marine Mutual Insurance, Nelson.

15 Data mainly comes from private correspondence with Sunderland Marine Mutual Insurance, Nelson.

16 Climate Change Capital, Offshore Renewable Energy Installation Decommissioning study, 2006.

17 van Anrooy R, Secretan PAD, Lou Y, Roberts R, Upare M. 2006. Review of the Current State of World Aquaculture Insurance. FAO Fisheries Technical Paper.