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Summary

Introduction

This report seeks to:

  • identify risk management issues that might arise from aquaculture activities in the coastal marine area

  • explore risk management options available to both local government and the aquaculture industry.

There are knowledge gaps in risk assessment and management, and councils want to understand the potential usefulness of bonds on marine farming consents to cover the costs of clean-up if a farm is abandoned. Councils and unitary authorities (referred to here as “councils”) are likely to incur these costs only where a marine farming business has failed and the site has been abandoned, with no buyer willing to take on the consent and restore the site to operation. Industry considers the risk of abandonment to be minimal and bonds to be an unnecessary financial burden. Councils have remained open to other methods of protecting against the risk, but no workable alternative has previously been suggested.

In June and July 2007 over 60 aquaculture stakeholders from 29 organisations, including industry participants, industry bodies, research entities, councils and government departments and agencies, were interviewed. National and international best practice for risk management and risk mitigation relating to aquaculture and comparable activities was evaluated.

The industry

The New Zealand aquaculture industry includes several mature sectors characterised by well-established, well-resourced and sophisticated firms that have developed effective risk management for typical operating risks, and have shown an ability to collaborate at a regional level to manage more significant external risks. There is a robust and growing global market for aquaculture products, which has led the Government to give the industry a strong mandate and support to grow in a sustainable way.

The industry acknowledges the importance of good environmental practice to maintaining a clean and viable production space in the coastal marine area, to the public perception of its activities, and to its marketplace. Increasing collaboration has resulted in the establishment of an industry organisation, Aquaculture New Zealand, which should enable the industry to establish more and better cross-species and nationwide initiatives, and strengthen and broaden its self-regulation activities to achieve agreed environmental objectives and fulfil obligations to regulators.

The regulatory framework

Since the introduction of the aquaculture reform legislation in 2005, councils are the primary regulatory decision-makers affecting marine farming. Councils must balance environmental and economic development objectives and the competing uses and values of other users of the coastal marine area, and central government’s goal for sustainable growth of aquaculture. The new regime remains largely untested: a new aquaculture management area has yet to be created under the new provisions in the Resource Management Act (RMA), and it is unclear how the process will proceed in practice.

Despite current difficult economic conditions, in which the high value of the New Zealand dollar is eroding export revenue, there is likely to be a market premium for already-consented space, even if clean-up and structure removal are required. Councils remain concerned that there are circumstances in which they could find themselves responsible for restoring abandoned farm sites. However, industry and councils have been unable to reach a consensus on the level of risk to which councils are exposed or the possible costs of restoration.

Risk management

Managing risk is an integral part of good business practice generally. Learning how to manage risk effectively enables decision-makers (and other stakeholders) to achieve improved outcomes by identifying and analysing the wider range of issues and providing a systematic way to make informed decisions. A structured risk management approach also encourages the identification of opportunities for continuous improvement through innovation. AS/NZS 4360:2004 Risk Management is an ISO-approved, internationally recognised standard for generic risk management and should be used for all aspects of risk management.

Although many industries have implemented structured risk management programmes for over 50 years, such an approach is not consistently used in the aquaculture industry, nor in councils. There are no current risk-based approaches for determining the use of risk mitigation instruments within councils (such as bonds, pooled funds or insurance), but a very good model exists in the New Zealand Oil Pollution Fund.

Risk assessment

In the absence of data to support a robust quantitative analysis, it was agreed with the steering group for this report that a qualitative risk analysis should be used. Residual risk of abandonment (risk after the application of current controls) was assessed based on the evidence of established risk management by the industry.

A fault tree was created, demonstrating that farm abandonment is a two-stage process:

  1. a marine farming business must fail or otherwise be unable to meet its consent responsibilities at the site
  2. no owner prepared to restore the farm to viable operation within the consent conditions can be found.

If the farm site is sold to another marine farmer, abandonment is avoided.

A quantitative approach was constrained by the absence of comprehensive data from research and industry sources. It was particularly difficult to address the need for data that captures the likelihood of a site that has had a business failure being returned to operation. Therefore, a predominantly qualitative approach to risk analysis is used in this report, informed, where possible, by the available quantitative data. Controls are already in place that may prevent, detect or lower the consequences of potential undesirable events, so this risk assessment focuses on the risk after these controls have operated as designed - known as the “residual risk”.

A qualitative residual risk assessment technique was trialled in a multi-stakeholder workshop, including representatives from councils, industry, central government and research providers on 13 July 2007. The technique provides a residual risk weighting or score based on the assessed likelihood and consequence of risks identified by workshop participants. At the workshop trial, the highest scored risks identified as possibly leading to business failure were predominantly external, and included:

  • catastrophic natural disaster
  • biosecurity threats
  • exchange rate fluctuations
  • water quality changes that may result from spillages or sewage system failures.

None of the risks identified were so high that aquaculture, as practised and controlled today, is so risky that it should not be permitted.

The residual risk to councils of marine farm abandonment is further reduced by the likelihood that the site of a failed business will be bought and restored to operation by another marine farmer. Under present conditions it is economic for industry participants to buy and restore consented marine farming space if a marine farming business fails, even if remediation needs to be carried out.

Residual risk of abandonment

The key conclusions from the investigation of the New Zealand aquaculture context and workshop testing of the qualitative risk assessment process are as follows.

  • Mussels: The residual risk to councils of mussel farm abandonment in the current New Zealand aquaculture context is negligible. In other words, any risk mitigation benefits would be far exceeded by the cost of setting and collecting a levy through a risk mitigation instrument. This largely qualitative assessment is supported by the following points including some quantitative data: Zero mussel farm forfeitures from a total of 521 leases during the Ministry of Fisheries’ tenure of administrating aquaculture (1964–2004) (there is an informal report not captured in official data of a mussel farm using experimental structures being abandoned in the Kaipara harbour in the 1980s). A trial qualitative assessment completed as part of this report of the likelihood of marine farm business failure in the current New Zealand aquaculture context. The capital value of mussel farming structures makes it unlikely that structures would be left in the water.The value of consented marine farming space makes it unlikely that the space would not be restored to operation.
  • Finfish (salmon): The residual risk to councils of salmon farm abandonment in the current New Zealand aquaculture context is negligible. In other words, any risk mitigation benefits would be far exceeded by the cost of setting and collecting a levy through a risk mitigation instrument.
  • Oysters: Of a total of 337 oyster farm leases under Ministry of Fisheries regulation (1964–2004), 89 forfeiture notices were served to farmers. Most of these notices stemmed from historic management practices and regulatory regimes, meaning that a number of oyster farm were situated on unproductive sites or unable to effectively make the transition from rock oyster culture to Pacific oyster culture. Management practices and risk management through zoning and monitoring by consent authority have shown ongoing improvement. Although there are still 10 farms under outstanding forfeiture action (including those in Waikare Inlet, the site of a contamination incident in 2001), and a number oyster farms recently transferred to the jurisdiction of Northland Regional Council that pose a higher relative risk of abandonment, only one oyster farmer has failed to comply and forfeited their lease. There is an unofficial report that two small oyster farm sites were restored by the Ministry in the late 1960s. Despite some history of issues with maintaining operational viability on oyster farming sites, the residual risk to councils of oyster farm abandonment in the current New Zealand aquaculture context is low; i.e. it may be economically rational for councils to require some form of financial risk mitigation. This largely qualitative assessment is supported by the following points including some quantitative data:
    • A trial qualitative assessment of the likelihood of oyster farm business failure in the current New Zealand aquaculture context.
    • Continually improving risk management of oyster farms through industry good practice, and zoning and monitoring by councils.
    • The willingness of the oyster industry to undertake structure removal and site restoration on derelict or abandoned farms.
    • The value of consented marine farming space makes it unlikely that the space would not be restored to operation.
    • These risk assessments are sensitive to changes in the likelihood of the highest-scored risks (biosecurity events, natural hazards, exchange rate fluctuations and water-quality changes). Ongoing monitoring of all risks, especially those scoring highest in the trial assessment, will be key to future risk assessments.

Risk evaluation

There are no current guidelines for the acceptability of risk in the coastal marine area. Councils have set their own parameters through approving the ongoing operation of certain coastal marine area structures (e.g. wharves and marinas) with no bond requirements. Common law and such bodies as the Environmental Risk Management Authority use the “as low as reasonably practicable” approach to determine risk acceptability criteria.

Risk mitigation tools

The following residual risk financial mitigation tools have been examined in the current New Zealand aquaculture regulatory context, with a focus on farm abandonment:

  • RMA bonds
  • private and mutual insurances
  • remediation pool funds
  • voluntary approaches by industry.

RMA bonds

RMA section 108(b) provides for bonds to be required from parties before they begin consentable activities. The bond is imposed to provide the council with sufficient funds to cover, to an acceptable extent, the cost of any required remediation. Bonds are widely understood and the mechanism is familiar to both councils and industry. They are simple to administer through existing policies and processes, and give councils certainty as to the extent of cover for any given consent.

However, they don’t provide for pooling of risk: the bond must remain tied to the consent on which it is imposed. Therefore, a “best estimate of worst case” of restoration costs would be the only way for councils to ensure that bonds provide acceptable coverage in the event of abandonment requiring restoration. This is likely to require setting large bonds, which could affect business viability and/or growth prospects across the industry.

Bond setting is based on a residual risk assessment process, as detailed in this paper. Councils should carefully consider the risk level they deem acceptable and apply bonds only to those applicants that exceed this risk level. Where bonds are used, consent conditions should set periods for reviewing the residual risk appropriate to the nature of the activity. Reviews would ensure that bond liabilities can be retained if necessary, or removed once conditions of profitable or stable operation are demonstrated (i.e. the residual risk from the operation is acceptable). Councils should consider clearly defining the performance conditions for site restoration.

However, bonds can only be imposed when consent conditions are being set or reviewed, so there is likely to be a long lead-time during which a significant number of marine farms would not be covered by bonds, or any other risk mitigation instrument that can be imposed as a consent condition. Bond review conditions also need to be carefully crafted, and may present difficulties for councils by increasing bond liabilities where remediation costs are expected to rise.

Bonds would appear to be most appropriate for applicants with a residual risk profile that is unacceptable, such as those using new marine farming technologies, or atypical or speculative water space, in the absence of more efficient risk mitigation instruments.

Insurance

The use of private insurance for abandonment or bond costs is constrained by the limited data available for making actuarial assessments of the risks involved. Insurers are therefore likely to be cautious, insisting on high premiums and high excess levels - or not offering insurance at all. From a council’s perspective, insurance is uncertain: it may pay nothing if refuted, or the excess may leave the policy holder still liable. Insurance is not currently generally acceptable to industry at its present levels of premium, cover and excess.

Pooled funds

A remediation pool fund is a dynamic risk-sharing instrument which can be used when all other remediation mechanisms fail (i.e. restoration by owner or sale of site) and a residual risk is left with a party (such as a council). The fund enables the full cost to be met.

Such a fund would finance a defined response to set conditions of abandonment under a binding contract between the fund operator and participating councils. It would require levy contributions from marine farmers, determined by an industry committee based on a risk assessment, updated triennially. The fund would be capped at a limit providing for the residual risk restoration costs determined by the risk assessment, other than those recoverable by other mitigation means such as insurances. The fund level would be topped up with reinsurance until it had built up sufficient reserves to provide for all expected costs. Reinsurance could also be used to cover catastrophe risk.

A risk-based pool fund provides efficient cost of cover and limits the financial burden on individual marine farmers to a sum that reflects their share of the total risk. This approach also provides incentives to industry for ongoing reduction of operating risks, which would reduce the total risk from aquaculture activity nationwide, thereby reducing the fund’s levy requirements.

The key features of such a fund include:

  • establishing the residual risk every three years with a detailed-as-possible quantitative analysis
  • fund governance by the industry (the pooled fund would preferably be industry driven and operated)
  • a detailed set of fund rules
  • an efficient means of contribution recovery and establishment of a threshold below which those not adding to the risk do not contribute to the fund.

These could be captured under current legislation by a voluntary pool fund established by the industry. Bonds could still be required from high-risk marine farmers, or those that decide not to contribute to the fund. This type of fund could be established initially on a regional basis, starting in one region where unacceptable residual risk is an issue. A regional fund could serve as an intermediate step to a national fund.

The New Zealand Oil Pollution Levy Fund is a good model for such a fund. It also has the additional advantage of being able to enforce contributions from all risk contributors from the time of fund establishment. Specific legislation would be necessary to require contributions from marine farmers. A voluntary fund could form the basis for a legislated approach, if such an approach were found to be desirable.

If an industry-based voluntary pool fund approach is pursued, the industry group running the pool fund could test industry willingness to make contributions to the fund prior to contributions being required to meet conditions of their specific resource consents. In this way, a voluntary pool fund could quickly achieve broader coverage and greater efficiency (but probably not complete coverage) than the imposition of bonds. Councils would need to develop policies and processes that recognise the fund and set out related consent conditions and responses.

There are challenges and lead times involved in establishing any form of remediation pool fund, including establishing a suitable structure and ownership, and agreement on risk assessment and response mechanisms that satisfy councils. A remediation pool fund is seen as the optimal approach for managing the residual risk of marine farm abandonment due to the greater certainty of coverage for councils and higher efficiency achieved by the sharing of risk.

Industry voluntary approaches

New Zealand aquaculture conditions suit a large measure of industry self-regulation. It is important for councils to familiarise themselves with the range of current industry-led voluntary approaches for risk reduction and management, including codes of practice, working groups and voluntary initiatives. Councils and industry are encouraged to foster a partnership approach to identifying mutual objectives and assessing where and how self-regulation can meet these objectives, especially those that reduce the residual risk of abandonment. Industry voluntary approaches could extend to mechanisms for site remediation at a local or species level, further reducing the residual risk of abandonment.

Legacy issues

A number of Northland oyster farms have recently been transferred from the Ministry of Fisheries regime, in moderate or poor condition, to the responsibility of the Northland Regional Council under the RMA. These farms have ongoing consent compliance issues that may threaten business or even short-term site viability, and thus represent an ongoing risk management issue. Northland Regional Council is concerned that these farms pose an unacceptable residual risk of abandonment.

The best option for managing the risk of these farms is for regulatory parties and industry to intervene to re-establish their ongoing viability. Only once this has been achieved should farms be included under any pooled risk scheme. If business re-establishment cannot reasonably be achieved, or a farm continues to pose an abandonment risk, then bond setting should be used as an incentive for the business owner to comply or exit the business.

Recommendations

Following are the recommended next steps for councils, industry and government agencies. Where one or more groups are involved, the recommendations are repeated. They are grouped under the following standard risk management steps:

  • risk reduction

  • risk assessment

  • risk evaluation

  • risk mitigation

  • risk communication.

Risk reduction

Councils and the aquaculture industry are the key stakeholders for ensuring that risk management activities continue to be developed so that risk is reduced to “as low as reasonably practicable”. To do this the following actions are suggested.

1 Councils

  1. Ensure consent conditions establish a clear specification standard and permitted process for site restoration in the event that consents are not re-issued.
  2. Recognise the higher risks involved in aquaculture research and development and early stage commercialisation activities by giving consideration, during the development of aquaculture management areas, to suitable areas where such activities could take place with minimum risk.
  3. Work with industry to develop, promote and monitor adherence to codes of practice that reduce risks.

2 Industry

  1. Continue to develop codes of practice, in conjunction with relevant agencies and councils, which will reduce both the likelihood and impact of events on individual farms, and promote these as the best practice for all marine farmers.
  2. Establish Aquaculture New Zealand as the data repository of the industry. Data could include:
  • number of entrants and exits by participants
  • number of business failures/bankruptcies
  • farm profitability
  • farm capital costs
  • farm operating costs
  • insurance cost and claim data
  • incidents and their causes
  • levels of industry threat/risk
  • industry codes of practice and risk reduction measures
  • representative costs of structure removal and site clean-up.
  1. Support the development of quantitative risk models for aquaculture by collecting data at an individual farm level and making this available to Aquaculture New Zealand.

3 Government agencies

Support the development, enhancement and integration of risk management tools for the aquaculture industry and its regulators, especially:

  • systems model-based tools for coastal planning
  • bio-indicators for ongoing monitoring of contaminants and pollutants in the coastal marine area
  • ecological effect tools for evaluating new species and/or new technologies
  • qualitative tools for determining the achievement of goals and objectives
  • natural hazard effects tools as an extension to those NIWA is developing for the land-based effects of natural disasters.1

Risk assessment

To better determine the residual risks in the aquaculture industry, or in certain sectors/ locations, regular risk assessments should be carried out using both qualitative and quantitative tools (when these are developed). This work would be led by councils with the following specific roles and involvement of the other stakeholders.

4 Councils

Use the qualitative approach to risk analysis, trialled in this study and described in section 4.5 of this report, to determine the residual risks of structures in the coastal marine area under consideration.

5 Industry

Participate in risk analyses with councils to ensure proper communication of industry practices, controls and responses to incidents, and provide relevant data not kept by councils related to the risks under consideration.

6 Government agencies

Work with industry and councils to ensure that risk assessment skill and capacity development are resourced.

Risk evaluation

Once risk assessments have been made, councils need to determine if the residual risks are acceptable and can be borne by the council or society at large, or whether they require further mitigation measures to be put in place.

7 Councils

Develop policies for risk acceptability to be used by council officers when making decisions about consentable aquaculture activities. Such policies should be consistently applied, no matter what structures are being considered.

8 Government agencies

Develop national guidance documents for risk acceptability criteria for aquaculture activities.

Risk mitigation

If a current residual risk is determined to be unacceptable, councils need to have a number of options to further reduce the risk or finally mitigate its effects if all other controls and mitigations fail.

9 Councils

  1. Ensure that any risk reduction measures established in consent conditions are related to the residual risk determined using the recommended risk assessment approach for the particular farm or groups of marine farms.
  2. Use a process such as that shown in Figure 3 (section 5.1), acknowledging council policies for risk acceptability, to identify any residual financial risks from aquaculture activities that are deemed to be unacceptable.
    1. Where an unacceptable residual risk of abandonment is deemed to exist, require evidence of a risk mitigation instrument that satisfies the council (such as contribution to a pooled fund) as a consent condition for each such consent applicant.
    2. iWhere a pooled fund approach is not available, a bond can be applied with time-bound review conditions to ensure the bond only applies while the residual risk is unacceptable. Bonds should be applied on the condition that they are removed if a pooled fund option becomes available.
  3. Ensure that risk mitigation provisions for aquaculture are not inconsistent with risk mitigation provisions for other structures in the coastal marine area.

10 Industry

  1. a) Lead, with key council stakeholders, the establishment of a regional/national pooled fund for mitigating possible abandonment of marine farms, recognising that such an establishment should probably commence as a pilot (e.g. for oyster farms in Northland).
  2. b) Make provision for the proper establishment, operation and maintenance of the fund. An industry-led pooled fund should be developed that:
    1. recognises the actuarial likelihood of calling on the fund across a group of structures sharing an industry subsector or geographical/location profile; or failing that, uses an individual approach that attributes the specific risk of abandonment to the farm, or other structure in the coastal marine area, where it cannot be grouped actuarially for the purpose of a pooled fund (e.g. an experimental new species farm in the outer regions of the coastal marine area)
    2. builds the fund to a size that is directly related to the agreed cost of remediation of the structure(s) by the most efficient means, as it is reviewed from time to time (Note: If the available technology changes and the financial risk reduces/increases, then the size of the fund or security must also change. It has been determined in the report that in the current New Zealand aquaculture context such a pooled fund approach is only necessary for oyster farms. A regional fund in the order of $50,000 may need to be built up over a period of the half life of typical consents.)
    3. is satisfactory to and accessible by councils for funding a defined response to a defined abandonment event.

11 Government agencies

  1. Confirm to councils the level of the Government’s response to the effects of low-frequency, high-impact natural hazard and catastrophic biosecurity events whose effects are likely to transcend regional marine boundaries or be of such magnitude of impact (including the possible abandonment of structures in the coastal marine area) that they attract a national response.
  2. Support the initiation and facilitation of an industry-led remediation pool fund through all stages (i.e. pooled funds at regional or national level, and, potentially, a legislated model).

Risk communication

This is a significant component of risk management, which helps build robust frameworks for risk management decision-making and implementation.

12 Councils

Ensure that risk assessments are well communicated to stakeholders, and are revisited - preferably once every three years, or as key circumstances change.

13 Industry

Regularly communicate risk-based advice to participants that ensures best practice risk management is widely recognised and implemented.