Economic Impact of Marine Related Activities in Canada

Concluding Observations

1. Growth potential

Seafood industry

• Fishing: the commercial fisheries on the Atlantic and Pacific coasts are essentially fully utilized. This means an expansion in participation is unlikely unless there is a substantial increase in stock abundance and a relaxation of rules governing entry to the fisheries (both of which have precedents). Even without any increase in participation, there is potential for economic growth in terms of higher returns to capital and labour, though this is contingent on increased stock abundance and improved market conditions. Stock depletion (groundfish on the Atlantic coast and salmon on the Pacific) have worked against the industry over the past 10-20 years, and there is limited evidence for a turnaround in these species in the near future. On the positive side, these declines have been offset to varying degrees by increased shellfish production, generally a more valuable species group. Nonetheless, the overall size of the commercial fisheries on both coasts – number of vessels and participants – has dropped, and with limited entry and the increasing use of individual transferable quotas, a return to the participation levels of the 1980s is unlikely. In short, any improvement in economic impacts is likely to be expressed in terms of GDP and income, rather than employment.
  
  
• Aquaculture: there is considerable scope for increased finfish production based on suitable habitat (more so on the Pacific coast than Atlantic), but the industry will have to address concerns over environmental degradation including threats to wild species in order for such expansion to come to fruition. Shellfish production faces less opposition from an environmental perspective, but access to ocean space is a constraint. There is public opposition from landowners in some areas due to aesthetic concerns, from commercial fishing interests about loss of fishing grounds, and from boat owners concerned about navigation risk. Some shellfish species also face market constraints, as the industry has been more successful in producing than marketing the product (e.g., mussels on the Atlantic coast).
  
  
• Fish processing: growth potential is tied largely to availability of raw material from the commercial fisheries and aquaculture. The industry faces a considerable challenge in expanding on the basis of raw material secured on the international market. Low-cost producers in Asia have driven up prices, and Canadian processors have difficulty competing given the higher local operating costs. Also, the value of Canadian exports to the U.S. has declined due to the weakness of the U.S. dollar. In short, the industry finds itself in difficult circumstances. Industry growth in future depends on some combination of improved local raw material supply, greater efficiency, stronger markets and more favourable exchange rates.
  
  
• Offshore oil & gas: the future looks promising, but is laden with great uncertainty and high risk. Two offshore projects – Hebron (oil/Grand Banks) and Deep Panuke (natural gas/Scotian Shelf) – are in the planning stage on the Atlantic coast. Their development in the next few years will result in positive fabrication, construction and services impacts, as well as increased revenues once production comes on stream. Further developments on the east coast depend on further discoveries of economically recoverable reserves. Offshore areas in the Arctic and on the Pacific coast may hold considerable potential. Federal and provincial policy moratoria prohibiting offshore oil and gas exploration and development in BC remain in place, and there are significant regulatory uncertainties associated with potential development. In all cases, frontier areas are expensive operating environments, both for drilling and development. Whether a discovery is economic depends on several factors including pool size, geology of the structure, capital cost of the development approach and energy prices. While it is tempting to offer optimistic views on development potential given North America's thirst for petroleum, the recent events in petroleum markets underscore the great uncertainty inherent in the oil & gas industry.
  
  
• Marine transportation: growth potential is tied to the demand for commodities shipped from Canada and demand for goods shipped in containers to Canada, mainly from the Far East. Until late 2008, these sources of demand resulted in a steady increase in cargo shipped through Canadian ports on both the Pacific and Atlantic coasts. A new container terminal was completed on the west coast in 2007, and there are two proposals to build additional terminals on the east coast. There are also proposals to build LNG terminals and additional refining capacity, both of which would add to the demand for marine transportation and support services. The global recession has caused a drop in demand for commodities, as well as manufactured goods shipped by container, and could affect the timing (and possibly the viability) of these various proposals. Growth potential in the long run appears to be strong given Canada's resource potential, though it may take a few years to regain the momentum of the past few.
  
  
• Ocean tourism: growth potential is tied to several factors including Canada's ability to maintain an attractive coastal environment, continued development of tourism capacity and opportunity (e.g., cruising, eco-tourism), the general economic climate, and competition from other destinations. All three forms of ocean tourism showed an upward trend over the past several years on the Pacific coast, while the opposite was true on the Atlantic coast. The short-term outlook is for weak performance resulting from the current recession, though this could be offset to some extent by the sharp drop in petroleum prices in late 2008. The long-term outlook is more promising; in an increasingly crowded world, Canada offers excellent opportunities for escape.
  
  
• Shipbuilding and boat building: Canada has seen a steady decline in its shipbuilding capacity over the past 20 years, as yards struggle to compete with yards in countries whose governments offer substantial financial support to the industry. Most of the work in Canadian yards is refit and repair, with new builds essentially limited to navy and Coast Guard vessels. The federal government has outlined major programs to replace aging vessels in both services, though the timing remains uncertain. The future of Canada's boatyards is tied to the demand for fishing vessels and pleasure craft. The fishing industry is not expanding, so demand arises essentially from the need to replace vessels. At best demand will be steady, with fluctuations linked to resource and market conditions. Several boatyards on the Pacific and Atlantic coasts have made a successful transition to the pleasure craft market. But this is a highly competitive market, and also subject to general economic trends. The short-term outlook is for weak demand.
  
  
• Marine construction: several proposed projects on the Atlantic, Pacific and Arctic coasts could result in a major increase in activity. These include container terminals, LNG facilities, bulk cargo expansions in the south, and a navy/Coast Guard re-supply facility in the Arctic. Global warming and the melting of the polar ice could eventually lead to commercial shipping through the Northwest Passage, with the possibility of port development to receive domestic shipments. Construction for the offshore will remain episodic, tied to discoveries and field developments. Otherwise, on-going port and harbour development is expected to result in steady demand for construction services.

2. Challenges and gaps

Obtaining essential economic data represents the greatest challenge in producing a report of this kind. The difficulty presents itself at the industry level for certain activities, and also at the geographic level. A summary of the status of quantifying output value and impacts for each activity is set out in Appendix H.

• At the industry level, data may be unavailable because the marine activity does not conform to an established NAICS classification; it may cut across several industries or form just part of a broadly based industry. These constraints may affect the ability to estimate impacts, but at the very least affect the approach taken and confidence in the results.
• At the geographic level, data are often unavailable for reasons of confidentiality – the number of establishments in the industry in that area may be too few to allow reporting – or because the particular area is not one well covered by Statistics Canada. This may present difficulties if, as in this case, analysis and reporting are required at a regional level.

These particular challenges do not affect all marine activities, but few activities are without at least some analytical challenge. Taking each in turn:

• Commercial fisheries: Two sources of data are available for value of output data. DFO publishes value of landings data for the commercial fisheries by province with about a one-year lag. These data are available on the DFO website: (http://www.dfompo. gc.ca/index-eng.htm). Statistics Canada uses these data for its commercial fisheries data at the provincial level, though with a 3-4 year lag (CANSIM 381-0016 http://estat.statcan.gc.ca/cgi-win/CNSMCGI.EXE). Statistics Canada relies on these data, its own surveys and also administrative (taxation) data to calibrate its input-output model and to develop annual GDP estimates.
  
  Employment estimates for the fisheries represent one area of weakness. It is possible to estimate the level of participation from employment insurance data (number of claims), but at best this gives a lower bound on the numbers because not all participants claim. DFO fisher registration data would provide an upper bound, but not all those who register to fish actually do so. There are no official data on full-time equivalents, and no reliable way to estimate this. In part this reflects the status of crewmembers – they are classified as independent contractors, not employees – and in part the seasonal nature of the fisheries. Work is not confined to the time spent fishing, but also extends to preparation time before and maintenance time at the end of the season. The employment estimates contained in the impact analysis are derived from the results of the input-output model runs. The model calculates the level of employment needed to reach a given output level based on income levels derived from administrative and survey data.
  
  
• Aquaculture: There is good reporting of aquaculture statistics (including production and value by species, number of sites and numbers employed) by provincial departments:
  • New Foundland
  • Nova Scotia
  • Prince-Edward-Island
  • New Brunswick
  • British Columbia
  
  
  Value added accounts for the industry in each province are published by DFO and Statistics Canada (CANSIM 381-0016 ). There is about a one-year lag in reporting by the province and DFO. Statistics Canada relies on production data, its own surveys and also administrative (taxation) data to calibrate its input-output model and to develop annual GDP estimates.
  
  
• Fish processing: Annual output value and other key manufacturing statistics from Statistics Canada is available for 2004-2006 online through CANSIM 301-0006, and for earlier years from CANSIM 301-0003 and 301-0005. Export statistics are available online from the Industry Canada Strategis website.
  
  Other industry data such as number of plants and employment are also compiled by some provinces, but there is a lack of consistency in the provincial approaches. One issue with the output data is inclusion of imported raw material in the production and export statistics. This is a concern if the rationale for including seafood processing is its linkage with domestic fisheries. Otherwise it is not an issue (this study does not consider this an issue). The contribution to output of imported raw material can be substantial, e.g., New Brunswick lobster processors rely heavily on Maine lobster as a source of raw material.
  
  
• Oil & gas: GDP and output data for the offshore oil & gas industry in Newfoundland and Labrador and Nova Scotia are suppressed by Statistics Canada due to confidentiality restrictions. Value of output can be estimated using published production data (quantity) applied to average market prices. Monthly production data can be obtained from the CNSOPB. Value can be derived by using monthly average natural gas import prices (U.S. northeast) obtained from the U.S. EIA and adjusted for the Canada-U.S. exchange rate and netting out the pipeline toll (to obtain the producer's net-back revenue). The derivation of the output values used in this report is set out in Appendix A.
  
  For the Newfoundland and Labrador offshore, this means obtaining monthly production data (from the CNLOPB) and deriving revenue by using monthly average oil prices based on a benchmark crude with similar specifications (e.g., Brent) and adjusting for the Canada-U.S. exchange rate (oil is traded in U.S. dollar terms). For Nova Scotia, this means obtaining monthly production data (from the CNSOPB) and deriving revenue by using monthly average natural gas import prices (U.S. northeast) adjusted for the Canada-U.S. exchange rate and netting out the pipeline toll (to obtain the producer's net-back revenue).
  
  Other data on the offshore industry tends to be reasonably well reported by the offshore boards, though expenditure data on project development vs. operations are not distinguished in CNSOPB reports. Unless the analyst has access to this detail (which is the case for this analysis), impacts could only be reported with wide confidence limits.
  
  
• Marine transportation: GDP and output data for marine transportation (NAICS 4831) are available at the national level, but are suppressed by Statistics Canada for some provinces in some years due to confidentiality restrictions. These data only cover the "for-hire" segment of the industry, not the marine transportation activity of companies that ship using their own vessels (referred to as "own-account" shipping). Though Statistics Canada has developed a satellite account for "own-account" activity, for reasons having to do with definitional purity, the value of this activity is not included in the analysis and impact results of this report. Since the satellite account analysis concluded that the value of own-account activity is actually greater than that of for-hire, the results set out in this report must be considered highly conservative.
  
  Another serious issue is that no data at all are available for Support Services for Water Transportation (NAICS 4883) because Statistics Canada incorporates this activity in the broader grouping, Support Services for Transportation (NAICS 488). If a complete picture of the water transportation sector is to be developed, then it is necessary to estimate the contribution of support activities using indirect methods. The estimate contained in this report is based on historical data (1997-2000) that distinguished NAICS 48311 and 4883 and allowed the relative contribution to GDP of the activities to be determined (the ratio of 4883/48311 is 1.5:1.0). This ratio is confirmed by current U.S. data for these industries.
  
  
• Tourism and recreation: Comprehensive data on the tourism sector are not systematically compiled in Canada. This study relies on three secondary sources. Two are focused on specific marine related tourism activities, cruise ship travel and recreational fishing, with expenditure data available on a provincial basis. The third – the Travel Survey of Residents of Canada conducted quarterly by Statistics Canada – addresses tourism generally, but allows the analyst to extract participation data (days and expenditures) on specific activities including several with an oceans focus (coastal hiking, diving, kayaking, sailing, visiting beaches). Ideally, the analyst would obtain electronic files of the recreational fishing and TSRC survey databases from DFO and Statistics Canada in order to extract the relevant data (these were obtained for this analysis).
  
  Taken together, the three sources provide a good approximation of the economic impact of ocean tourism, though results should be regarded as conservative because the criteria for what constitutes a "trip" lead to an under-estimation of local residents' participation in ocean activities, and also because non-residents are not included in the survey.
  
  With the data, the next step is to run the expenditures through the input-output model. But tourism is not one of the 303 industries for which input and output vectors have been developed in Statistics Canada's model. This means expenditures have to be sorted by industry (the surveys provide a breakdown of expenditures by category) and province, entered into a template provided by Statistics Canada, and submitted to run the model.
  
  
• Marine construction: GDP and output data are not available for this activity. This is because it is not an exclusively marine activity. For purposes of running the input-output model, marine construction would fall under a broad construction category: other heavy and civil engineering construction (NAICS 2379), which includes both marine- and landbased construction activity. Expenditure data to run the model must be compiled from several sources including individual port authorities (not just for their own data, but for construction expenditures generally in each port), DFO for small craft harbours, DND for naval base capital expenditures, provinces and ferry companies for terminal expenditures and offshore boards for oil & gas development expenditures. These sources would exclude capital spending at private facilities and hence would underestimate overall construction impacts.
  
  
• Shipbuilding and boat building: Output value is published by Statistics Canada, though data are suppressed in some years due to confidentiality restrictions. Output value from Statistics Canada (subject to confidentiality) is available online through CANSIM 301-0006 (for 2004-2006) and for earlier years from CANSIM 301-0003 and 301-0005. For the years under consideration in this study, the data are confidential. Output data was obtained from Statistics Canada by special request.
  
  Though only data from coastal provinces is used in the impact analysis, it is possible that yards in these provinces may manufacture for freshwater use, and conversely, that manufacturers in inland provinces may build for marine use. This source of error is likely to be small.
  
  Beyond ship and boats, navigation and research equipment is also manufactured for ocean uses. But the manufacturers do not fall into a unique NAICS marine manufacturing industry. They fall under a broader industry grouping that includes mainly companies producing for aeronautical applications. Consequently, output value, the key statistic that would allow industry impacts to be determined, is unavailable.

3. Emerging issues

Although valuation of non-market goods and services has been underway for decades, the importance and policy-relevance of this work was brought to prominence in 1997 when Robert Costanza led a team of researchers that published estimated values for the world's ecosystem services and natural capital. The estimates spurred deliberation regarding methodology and accuracy, but consensus began to emerge in support of the finding that non-market values in aggregate exceeded market values at the global level. Arguably, this suggested that efforts to maintain maximum value and long-term sustainability of resource use and ecosystem services might be equally if not better informed by appreciating non-market goods and services. This was followed by an upsurge in ecological valuation work including many studies pertaining to oceans and coastal marine ecosystems.

The main subjects of non-market valuation research for oceans and marine ecosystems include:

• ocean physical resources (real estate value, shoreline protection, aesthetics, ambient and facilities temperature moderation, geological features);
• aspects of marine tourism and recreation;
• ecosystem services (biodiversity, waste assimilation, life support, climate regulation); research and education, culture and heritage, health (air and water quality); and
• investment (bequest and option values).

Valuation of non-market goods and services is most commonly carried out within a total economic value framework (market and non-market). Values are classified into use and non-use. Use values include direct, indirect, and option values, while non-use values include existence, bequest, and altruism values. The methodologies for determining non-market value include:

• revealed preference (hedonic and travel cost methods);
• stated preference (contingent valuation and choice modeling);
• benefits transfer; and
• cost methodologies (replacement, avoided, and opportunity cost).

The most significant challenges to building comprehensive total economic valuations for oceans and coastal marine resources involve: the inherent complexity of ecosystems and ability to identify non-market goods and services, difficulties integrating interdisciplinary research that characterizes oceans, the need for primary data collection, delineating the boundaries for valuation work, double counting, and distributional issues (who bears costs and benefits that are identified).

It is clear that non-market values are important and significant; policy and decision-making would be greatly improved with the availability of total economic value estimates. Methods and capacity exist to undertake the work required, but some ranking of priorities would be required given the challenges and long-term view to building the data required.