4.1 Absorb the Risk
4.2 Organization, Industrial Standards, and Codes of Practice
4.3 Divert the Risk
The third activity in the risk management process, after identification and quantification of the business and pure risks, is managing and controlling the risks.
There are three main techniques for managing and controlling risk. These are:
- finance the farm and its operations to cater for risk, and absorb the consequences and cost of risk in its profitability,- organize the farm and its operations in such a way as to eliminate risk as much as possible; and
- divert or spread the risk, for example, through insurance.
Absorbing a risk is one management technique appropriate to certain types of risks. The financial investment behind a farming enterprise should therefore be sufficient to withstand the occurrence and financial consequences of most risks. Typical pure risks which fall into this category are the normal fluctuations in market prices of products, changes in international currency rates, and increases in labour costs, etc. There are also a number of business risks, such as increases in the price of feed due to (say) sudden shortages of fish meal, and breakdown of machinery.
However, absorbing risks requires positive action on the part of management and not simply acceptance that the enterprise can withstand the loss should it occur. This may require a certain level of financial liquidity by reserving a fixed percentage of the profits in a sinking fund, or strict regard to specific practices. Investors in the industry, and more by default than planned strategy, continue to absorb potential risks without maintaining the required liquidity, and pay the consequences. Others, so far, have been lucky.
In view of the high risk category of the aquaculture industry it is important to have a business plan and management strategy which anticipate absorbing certain risks.
Managing and controlling risks are the responsibility of the industry as a whole. This is brought about by individuals recognizing the specific responsibilities within their own particular branch of the industry, and by professional associations and groups of individuals working together to improve organization, to set appropriate standards, and to adopt codes of practice.
The following examples illustrate only some of the issues currently of concern to the industry which can alleviate some of the high risks.
(i) Selection of the site
The basic organization of the farm and its subsequent operations begin with the selection of the site. Unfortunately there is considerable misconception about the site selection process, which is clearly very important. With almost certain probability, no site is perfect. The prospective farmer is not able to select a site which meets all the criteria which he or others might have assembled. The farmer has to compromise different criteria and, in practice, the farm site selects itself.
The location of the majority of farms is determined by the principal factors which govern the availability of appropriate land and access to suitable water. Land ownership or water rights are therefore the two main criteria. Consequently most farms are sited by Individuals who already own potentially suitable land, or have access to potentially suitable water; or, alternatively, are the only locations for which a sale or lease can be made.
By far the minority of farm sites were developed on the best sites and under the best conditions. Consequently the majority of farm sites are a compromise of factors. Depending on what those factors are introduces the first element of risk to the business. For example, the land might be flat and less costly to develop, and provides opportunity for expansion; however, it is not as close to the water as it should be. As a result, larger pumps have to be installed, the water delivery system is lengthier, and (possibly) the water line crosses a road requiring substantial protection. Although the costs might compensate each other, the risk of mechanical failure is increased, including an added risk of fracture of the life support system as it crosses the road.
(ii) Pilot scale projects
A procedure important to the development of a particular farm or enterprise, but not necessarily considered a standard procedure, is the pilot-scale project. If the investment is in a farming practice which has been well established and proven in the area, then a pilot-scale project is probably not economically justified as a number of the risks have been identified, reduced, or eliminated. On the other hand, if the investment is in a new technology, with little or no prior practice in the area, then the pilot project should be used to assist in identification of unknown risks, and to provide the real quantification of those risks. Expansion of the pilot-scale project does not take place until the risks are manageable and controlled economically, and farm operations are trouble-free to the trained employees.
There is always a considerable element of risk inherent in the process of expansion, no matter how well prepared the process might be. However, there is a considerable difference between the well-researched calculated risk, and pure chance. The farm designed around the built-in risk management approach has a far better chance of achieving organized and profitable expansion than one which expands on the strength of a good financial statement.
(iii) Engineering standards
Professional engineers have been slow in entering the business of aquaculture. Civil and mechanical engineers have rightly been used by many farmers for the design of facilities, but agricultural and marine engineers have not recognized the aquaculture field as one to which their backgrounds can readily be applied to the research and development needs of the industry. Consequently the industry has been slow in producing the fundamental engineering information from which standards and codes of practice are set.
A specific example is the marine engineering associated with the construction and moorage of floating cages and rafts, particularly in the open sea. The engineering principles and practices relevant to the construction of floating piers, floating breakwaters, buoys and navigational lights, etc., in the marine environment are well established. However, so far, this information is not readily accessible in the type of engineering databooks which are published for the agriculture industry.
Consequently the farmer has to call on experienced individuals in the maritime industry to give him specific guidance, or to advise where the appropriate data might be found. Typical individuals are master mariners, marine engineers, marine surveyors, coast guards, and meteorologists. As a last resort, the farmer may have to undertake experimental studies himself.
Under these circumstances, the risk management task for much of the relevant aquaculture engineering is one of research. It is research for specific experimental site studies, and research for information which must be pieced together.
In recent years, the manufacturers of large marine facilities, such as floating cages, rafts, and breakwaters, have taken the initiative to provide engineering services. They supply expert services to analyse the proposed location and to recommend the appropriate configuration of the facilities and the moorage system recommended. In doing so they accept the responsibility of the failure of the system, thus releasing the farmer from one small group of risks. It is therefore a valid risk management action on the part of the farmer to purchase his facilities from a manufacturer who provides these fundamental and probably repeated services.
In their own turn, of course, the manufacturers are taking a risk. This risk they will have analysed and costed, and will have decided that they can withstand the liability in the event of any occurrence, and indemnify the farmer for the loss of equipment and stock.
(iv) Professional standards
For many reasons, a farmer has inevitably to seek professional assistance either to plan the farm, or throughout its subsequent operations. Although not readily recognized as such, expert consultation is a risk to the farmer, and it is essential that this risk is managed like any more obvious one.
There are many professionals in the industry, predominantly technical people who provide professional services to the farmer either individually, or through companies. Most adopt high standards in the services they give to their clients, but there are also many who are totally unqualified to provide certain services. For example, the majority of professional experts have not been in the business themselves as farm owners and producers; the majority are scientists and technical individuals, who have probably worked on a government research farm at the most, yet many are quite prepared to sell services to a farmer which may include production programming, the recommendation of harvesting schedules, and even financial planning.
Although there are professional associations of scientists and engineers which maintain qualifications and standards, there are no such associations among the professional aquaculture experts. Few individuals, if any, carry liability insurance coverage. The exceptions are the large professional companies, usually in developed countries, which provide a range of services, such as design engineering. In some countries, design engineers are required to carry liability insurance by law. Other professionals in the company, similarly, should be insured.
Unfortunately many investments in the aquaculture sector have been lost as a result of professional individuals greatly overstepping their ability to provide the services required. Investments were therefore made in projects which were ill-conceived, inadequately researched and planned, and poorly implemented. However, the investor must share the responsibility as much as the incompetent professional. A sound risk management approach by the investor would have determined that the professional was not capable of giving the services required.
It is an important part of the risk management approach not only for the investor to research the background and experience of the professional thoroughly but, like the medical profession, obtain a second opinion of the recommendations being made by the professional.
The solution to competence and professionalism is not easy. Aquaculture, in many respects, is an "emotional" industry, with considerable pulling power for both producers and professionals. Many people enter the industry irrationally, deceived by its apparent simplicity as a result of shortcomings of many so-called experts. The investors are in many ways to blame. Although possibly anticipating a substantial loan for the construction and operation of the farm, the entrepreneur invariably has to pay from his own resources the cost of pre-feasibility and feasibility studies. The project might be substantial, but the investor spares little money of his own in preparation. Consequently he gets the preliminary services which he pays for.
The professionals are also to blame, particularly if they avoid responsibility for their mistakes. Enforcing liability, where it does exist, is not always practical or feasible. Some professionals do not carry liability insurance, but, when they do, it is probably unreachable as they are resident in other countries.
However, in the long term, it will be important for the professionals in the industry to police their ranks through accredited associations. The associations will be required to set standards and codes of practice for their members, and to ensure that each carries professional indemnity insurance. Such associations would be an attraction to the farmer as they would alleviate many of the risks of seeking professional help by offering him a chance of redress in the case of the professionals' malpractice.
(v) The treatment of disease
Disease of the stock is one of the main risks to the profitability of the farm. Diseased animals and plants are often unsaleable. Invariably they require costly treatment, and the costs are not always recoverable once the disease is eliminated. Moreover, the stock may still not be marketable until all residual chemicals have been cleaned from the body.
Many countries have laws and regulations regarding the movement, handling, and marketing of diseased stock to reduce the risk of spreading disease. Few, if any, compel total destruction of all stock on the farm as governments have no provision to pay compensation to the producers.
For some of the most common diseases, effective vaccines have been developed and are commercially available. This is the most prudent management option for the producers to avoid or minimize all the risks associated with disease on the farm. However, in view of the incidence and frequency of disease in the industry, government research remains equally important as part of its supporting services.
(vi) Workers' health and safety
Aquaculture is an industry which has attracted the participation of a large number of individuals, the majority of whom have never received any basic education or training in its systems or practices. Only in the last five years has there been a steady stream of trained individuals entering the industry to join those whose training was received "on the job". However, both groups are quite clearly dedicated to the emerging industry. The majority of the work force in the industry is comparatively young.
The low average age of the work force is probably fortunate. On the whole farming aquatic animals and plants, like agriculture, is a hard way of life, requiring attention seven days each week, fifty-two weeks of the year. Compared with agriculture, working conditions in the industry are not good. The work is hard, at times boring, and often dangerous. For example, operating complexes of floating cages in isolated coastal areas in winter is not appealing. Fortunately the "frontier spirit" of the industry makes many of these hardships endurable.
Of course the benefit of the frontier spirit will not go on for ever. Already, in fact, there is evidence that the production and profitability of farms have been reduced by social problems often associated with working in remote locations or on offshore sites. There is also evidence that lives of employees have been lost, both through accidents at sea with heavy lifting equipment, and in gun-fights with poachers (e.g. in the Philippines).
One of the priority tasks for the industry at the present time is a set of standards for the health and safety of its work force. From the point of view of the risk management process, there is the need for a group of professional individuals to set standards specifically for the aquaculture industry. It is not sufficient to rely on the standards of other industries (such as agriculture, or fisheries) to serve the industry. With new standards, the industry will develop a core of dedicated and disciplined men and women on whom the farmer can rely.
Most of the risks identified and analysed by a farmer for his enterprise can be reduced by varying degrees, yet few can be entirely eliminated. Thus they have the option to absorb these risks themselves (see 4.1) or to divert them.
An important option available to the farmer is to insure the welfare of his aquatic animals or plants against the risk. This is one of the most well-used and practical techniques for handling risk. Insurance provides the best option for the farmer to divert his risk, or to share it with others. It is a satisfactory and reliable means of managing risks.
There are a few risks, and parts of certain risks, which are not worth insuring. These are important for the farmer to know as it is not necessary to reduce the farm's profitability by paying premiums to an Insurance underwriter to cover risks which will Inevitably and frequently occur. Insurance underwriters level their premiums to cover the cost of ordinary losses, allowing also for a profit, and an "uncertainty" margin to enable them to establish a reserve for disasters and catastrophes which occur from time to time.
The role of insurance, as the principal method for diverting or sharing the farmer's risk exposure of his enterprise, is an important one which merits examination and explanation. Insurance is already the established mechanism for managing the risks of many existing enterprises. The presence of an active insurance industry in the aquaculture industry provides the lending institutions with the confidence to make loans to farmers, and it is important to the future of the industry that both continue. However, because of the high risk of the industry, and plenty of evidence that the industry lacks all the right technology, many underwriters are being extremely circumspect about providing insurance, or are severely restricting their cover. Unfortunately this is coincidental with a time of great need for capital investment in the industry, both privately and by lending institutions. The confidence of the insurance companies in the industry at this time is vital, as their role is important.
Insurers are skilled risk assessors. Their attitude to the aquaculture industry is therefore indicative of the inherent risk level in farming at the present time, which should be taken by the collective aquaculture industry as a warning that many things are far from satisfactory.
