Making distinction equal competitive edge

Predicting renewed growth, the Faroe Islanders are finding untapped competitive advantage in their distinctive community, telecommunications infrastructure and international business connections.

Before David Ricardo first enunciated his theory on comparative advantage in 1817, the Faroese had long been busy specializing in woollen socks for the Danish military; after all, Faroese sheep were abundant and exquisitely competent knitters were available (and still are). The saying, of course, soon sprang up that “Faroese wool is Faroese gold”. Would that all those warm socks were exchanged for gold in those days, but that is another story.

When the trade monopoly ended in 1856, the Faroese quickly sought out another comparative advantage and turned to yet another abundant resource—the fisheries surrounding the Faroe Islands. Outfitted with two-masted schooners and indomitable courage, Faroese fishermen soon became very adept at harvesting this new Faroese gold (and still are). The Faroese fishing fleet is formidable and is spread around the globe.

Closer to home, sea farms began to spring up in the fjords and sounds of the Faroes in the 1980s. Aquaculture became a new source of gold, as prices for farmed salmon soared and world production kept pace with increasing demand. Not to be outdone, the Faroese took steps to enhance their comparative advantage by expanding local production in a variety of ways.

Maintaining comparative advantage, however, is tricky business. The Faroese were not alone in strengthening their position as a leading producer of farmed salmon and comparative advantage became elusive. Overproduction worldwide, plummeting prices and even disease provided a strong dose of economic reality. Well-managed sea farms, backed by reorganized debt facilities, however, survived. At the same time as the aquaculture business in the Faroes was adjusting to worldwide economic reality, the Faroese fishing fleet faced its own challenges. Because more than 95 percent of the registered export of goods is fish and fish-related products, the Faroese economy is extremely vulnerable to the quixotic nature of this world encompassing industry. Diminished catches and price deflation have time and again compromised a thriving Faroese economy.  

Miniature world: Over the years, the economic swings have sometimes been dramatic. During some periods, the Faroese exchequer is flush with revenue. At other times, surpluses spiral into deep deficits. When to spend and when to save are economic conundrums faced by all trading nations. “Historically, the Faroese Parliament has been pro-cyclical in dispensing its tax revenues,” observes Zvonko Mrdalo, a senior researcher with Statistics Faroe Islands, the national statistics administration. “Any government that is pro-cyclical in the upswing will be forced to be pro-cyclical in the downswing,” he adds. Available statistical data in the Faroes conforms to this economic truism advanced by Mr Mrdalo. During economic downturns, the Faroese Government would retract spending on infrastructure and R&D and during boom times, which generated large budget and current account surpluses, the government would launch significant projects and infuse its various business investment funds with new allocations.

To mitigate the effects of these economic swings, business leaders and economists have long championed the privatisation of government-owned enterprises with concomitant investment in education and R&D. Given the pro-cyclical nature of government planning, to be most effective the sale of these assets should occur at the height of a market upswing not during depressed times, like the one currently facing the Faroese economy. “At a time when the exchequer has a surplus of revenue from profitable commercial initiatives and high employment, proceeds from privatisation sales could be allocated to R&D, public investment or external debt repayments,” Mr Mrdalo says. “Furthermore, to make financial resources available by privatisation, generates additional dynamics within the Faroese economy that could well cushion any subsequent downswing.”

Aside from privatisation, which seems to be marching to its own drumbeat, another very effective way to mitigate economic fluctuations and establish comparative advantage is to seek out and develop previously untapped competencies within the Faroese community. One such competency that has gone unappreciated for years until now is the very distinctiveness of the Faroese community itself. Although it is a tiny nation by world standards and as yet has no voice at most international fora, including the United Nations, it is a distinctive microcosm of the world’s more developed countries. What is meant by ‘microcosm’ in this sense is the fact that the Faroe Islands has all the basic political and social infrastructure of any large country, yet in miniature. It is a separate region with distinct boundaries; it has a small (under 50,000), but well-educated population; it has a parliament of at most 32 members, a separate executive and judicial system, a viable and usually thriving business community; it has a liberal share of world-recognized artists, musicians and authors; it has a competent public works administration and an excellent transport infrastructure; it has a multitude of schools, a university, a national symphony, orchestras, bands of all flavours, choral groups, service clubs and organizations.

Safety by hi-tech: A recent study commissioned by Faroese business leaders revealed that major international companies viewed the advanced telecommunications infrastructure enjoyed by the Faroe Islands, in combination with its distinctiveness as a microcosm of the world at large, as advantageous for information and communications technology (ICT) innovation and showcasing. The study launched the creation of a new, privately held business development entity in the Faroes—Bitland Enterprise, which has gained the support of the Faroese business community as well as the Faroese Government.

The Faroese economy now stands at the cusp of a new era of unprecedented growth and development, as it seeks out once again a new area of comparative advantage, based on the very distinctiveness of the Faroese community and its technically advanced telecommunications infrastructure. Ólavur Gregersen, executive director of Bitland Enterprise, is full of enthusiasm for the new initiative, noting: “It is anticipated that increased collaboration in a variety of areas with international ICT companies will foster greater economic growth, greater competitiveness, greater creative imagination and greater innovation in the Faroes. All this activity would encourage and stimulate a more self-reliant economy that will, in turn, contribute to the progress and well-being of Faroese society as a whole.”

One might be prompted to view such hopefulness as mere publicity hype—that is, if it were not supported by reality.

The Bitland Enterprise promotional theme is ‘reality-tested in the Faroes’ and by all accounts there is major ‘reality-testing’ underway. For example, fish traceability initiatives are being explored. This combines ICT competencies in a number of innovative ways to enable the tracking of fish literally from the place where they are caught to the family dinner table. EU and other international legislation will soon go into effect requiring this comprehensive tracking of fish products and the Faroes may well play a role in ‘reality-testing’ the technology required.

Another area is safety at sea. This concept merges the Faroese competence in sailing upon the open seas with its growing ICT competence. Utilizing emerging EDGE and WiMax technologies, individuals lost overboard and wearing innovative safety gear could be quickly located and rescued. For instance, during crisis evacuations of oilrigs, individuals could be located and brought to safety. The uses are limitless, the economic potential of such innovation spectacular.

Economic advantage: These projects are yet in their infancy. One visionary project, however, has been successfully deployed and is attracting worldwide attention. Several years ago, when the municipal government of Tórshavn, the capital of the Faroe Islands, decided not to continue providing analogue TV for its citizens, Faroese Telecom, the leading telco in the Faroe Islands, determined to step in and capture the market with a newly developed technology, DTT, or digital terrestrial television. In essence, digital TV signals are sent wirelessly to set-top boxes that interpret the signal and feed it too a person’s television.

Although a number of countries and communities are experimenting with DTT, very few have successful and viable commercial deployments, except the Faroe Islands. Beyond using advanced DTT technology, what makes the Faroese Telecom initiative even more unique is their deployment of a sophisticated subscriber management system developed in collaboration with a local Faroese software company. As a consequence, the new company created by Faroese Telecom to manage the DTT service, known as Televarpið, has very few employees. At last count, there were two and that has really caught the imagination of companies around the world.

Ricardo postulated that countries would prosper if they focused on their inherent competencies to evolve a comparative advantage in world trade. Modern economic theory has moved on since 1817, as the world has become more interconnected and capital and labour shifts rapidly about the planet, yet each and every nation continues to focus on what it can do best. The Faroe Islands are restricted by geo-political reality, yet they are doing their best to tap and exploit their inherent potential in new and innovative ways. It may very well be that in the not too distant future many an advanced piece of technology will bear the stamp, ‘Reality-tested in the Faroes’ as a sign of its quality and durability. It will also serve as a testament to the foresight of a remote archipelago in the heart of the North Atlantic to seek out and develop its hitherto unrecognized and certainly under-appreciated economic comparative advantage.

More than a marvellous meeting place

Only a couple of hours from continental Europe, yet far enough away to provide a sense of refuge from the stresses of metropolitan life, the Faroe Islands are, quite literally, a natural destination for meetings and incentive trips.

Not too many people are acquainted with the fresh and beautiful setting the Faroe Islands offer for meetings and incentive trips; but that could be about to change as the country appears more and more often on international meeting schedules. One probable reason: tourism marketers are out to attract business travellers to the enchanting islands in the North Atlantic.

During the past year or so, the Faroe Islands Tourist Board has been running campaigns in Germany and the United Kingdom to convey their message of enticement; adding Sweden to the list, the Tourist Board will continue campaigning during 2005.

“We are addressing the growing conference and incentive industry by promoting the Faroe Islands as an ideal venue in stimulating surroundings,” said the Tourist Board’s Director, Heri Niclasen. “The Faroe Islands can serve as the perfect meeting point, in a sense far flung, yet at the same time only two hours away from Copenhagen Airport and other key hubs in Northern Europe. We have a unique combination of peace, quiet and stunning natural beauty, with modern accomodation and high-tech conferencing facilities.”

The elements can at times turn too rough for some during the winter half of the year, which of course makes the summer-half generally preferable. However, for the Faroe-bound business traveller, or anyone looking for the special kind of adventure that is so easily available there, a memorable and refreshing experience is surely in store, whatever the season.

With dramatic land- and seascapes in an atmosphere of overwhelming harmony around the rocky islands: awesome bird cliffs rising straight out of the ocean; fjords and grottoes outline striking green pastures dotted with shaggy sheep, steep mountains and valleys, at times under a clear blue sky but just as often covered with thick, magical mist. The bright and beautiful light illuminates the islands and plays in fantastic ways on the hillsides and fjords.

“Some absolutely amazing lighting—it’s almost unreal,” as one tourist noted, realising it didn’t get dark in the night during summer. “You forget the weather was rainy quite often, because it changed so quickly back to nice and sunny.”

One feature of the Faroe Islands much appreciated by visitors is the fact that things generally feel very compact and intimate , as if everything is just around the corner which in most cases it is. Some say the Faroese people are like that, too; hierarchies are kept to a minimum, perhaps because with such a small population, many people know each other. No exception, the Faroese capital, Tórshavn, is both small and compact; virtually everything a conference delegate might need is situated within a ten-minute radius of the major hotels. And of course the stunning natural environment is literally on the doorstep.

“People are friendly and easy to talk to, and some of them are great storytellers,” Mr Niclasen added. “In between working days at the conference or whatever you’re doing, you’ll be pleasantly distracted just by talking to locals or taking some of the tours on offer.”

You don’t necessarily need to take a whole day off to experience nature at play first hand in the Faroe Islands. Just taking a short stroll and filling your lungs with the cool, fresh ocean air of the Faroes will envigorate even the hardiest of travellers.

“Whether you go trekking over a mountain in an organized group, or just take it easy walking up a hill by yourself, it will of course make a difference… You can fish trout in a lake, a perfect thing to do for a few hours; or you might prefer to discover the islands up close from the water, exploring grottoes and viewing bird cliffs along the coast line on a schooner; or you can even take a helicopter ride to see some of the spectacular sites from a bird’s eye view.”

Mr Niclasen said the Faroe Islands Tourist Board is expecting the number of visitors to rise as marketing activities continue and happy customers hopefully spread the word.

“We offer a range of conference services to high international standards, with friendly personnel and excellent communications facilities; we also have tour operators who organize corporate meetings, conferences and incentive trips, and provide information on hotels, facilities and flights. As people find out what it is that makes it worthwhile visiting the Faroes, we’ll see increasing numbers coming in; many are returning customers and they give recommendations to others. Quite simply, the Faroes strike a perfect balance between a stimulating natural experience and excellent conference facilities.”

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Catch and beyond

The successful Faroese fishing days system may inspire fisheries management in many countries, but with structural change looming on the world markets, tough challenges remain for parts of the fishing industry.

In the aftermath of the crisis that hit the Faroes in the early 1990s, measures were taken to improve and update fisheries management, notably a new harvesting regulation known as the Faroese fishing days system. Enjoying the support of all the fisheries organisations in the country, the system soon proved successful, subsequently winning fame far and wide. The system has been credited not only for wholly preventing the problem of fish dumping, but also for striking a sound balance among ecological, social and economical interests in the Faroe Islands.

Introduced in 1996, the fishing day system is essentially a management system of individual transferable quotas, with various restrictions on transferability. Whereas quotas often are given in tonnes of individual species, in this system they are given as fishing days for various groups of fishing vessels in the Faroese fisheries zone. With five groups of vessels, the system is based on an assessment of the fishing capacity of each vessel group.

Presenting the fishing days system to audiences around the world, the former Minister of Fisheries and Maritime Affairs, Jørgen Niclasen, has been met with enthusiasm. In the UK, politicians pushing for change in EU fisheries policies, in their campaign for the Parliamentary elections in May 2005, highlight the Faroese fishing days system as an example of a working system for sustainable fisheries. In other countries, including Iceland and Chile, the response has been similarly positive, according to reports.

However, the fisheries environment is constantly changing and accordingly updates of the Commercial Fishery Act are expected in 2006. According to Bjørn Kalsø, current Minister of Fisheries and Maritime Affairs, a review committee is set to deliver a recommendation by the first of April 2006.

The value of freshness: The Faroese fishing industry had an exceptional performance from the late 1990s up until 2002-2003 when prices of haddock, coley (saithe), and salmon plunged.

With the explosive growth of China as a fish processing nation and exporter of frozen seafood, world fisheries markets are undergoing structural change, sparking discussion on the future of the industry. In the Faroes, the consensus seems to be that for highly value-added segments such as frozen-at-sea fillets of cod and haddock, there isn’t much of a problem caused by competition from low-cost countries. On the other hand, a number of exporters are feeling the heat. Still, overall harvesting was sound in 2004 and groundfish species like cod maintained a good price.

“It’s about how to get the best value out of the resources,” Sonni Kallsoy, a local daytrip fisherman in the fishery town of Eiði remarked. “That’s why we chill the fish by using icy seawater,” he added, referring to quality standard prescriptions mandated by his trading partners. Their demands include the cleaning and chilling of the fish immediately upon catching, in order to maintain the highest degree of freshness—a procedure that has proven profitable for the fishermen.

“Last year we got an average of two krones [EUR 0.27 / USD 0.36] more per kilogram than some of the other fishermen,” Mr Kallsoy added. Much of the catch was shipped straight away as fresh fish export, something that doesn’t please all. The argument against this practice is that it falls short of the normally perceived strategy for adding value to the Faroese catch by processing the fish on land and thus reducing the Faroes to a mere supplier of raw materials. Mr Kallsoy shook his head. “I’d definitely call the freshness our system supports a value-adding feature in itself,” he said.

Small fishing vessels used for a living are granted 116 fishing days per year, which turns out to be sufficient to Mr Kallsoy and his partner. “We’re doing just fine with 58 days per half-year, although in the summer season we could use a few days more,” he added. “But then again, you want some time off, too.”

Although some maintain that even scientific assessments of fisheries stocks are bound to be blurry to a certain extent, the broad consensus in the Faroes, however, is that fisheries must be properly, but not overly, regulated.

Since the 1970s, the main fish stocks in the Faroese fisheries zone have been assessed annually, with assessments undertaken by the Faroese Fisheries Laboratory in conjunction with its working group system and the advisory process of the International Council for the Exploration of the Sea (ICES). While the assessments have generally been considered of a high standard, it is, however, understood that accurate predictions are not possible with the present knowledge, as assessments occasionally turn out to be quite wrong. This is where the Committee on Fishing Days comes in as an advisory board to the Ministry of Fisheries and Maritime Affairs.  The committee scrutinizes in detail the annual assessments and the recommendations based on the research assessments. Considering the socio-economic consequences, the Committee from time to time has declined to make drastic proposals for changing the number of fishing days on the sole basis of one year’s assessment.

Noting the complexity of the issue, the American marine biologist Gary D. Sharp once observed: “The principal reasons why fisheries management has been so unsuccessful have never really been addressed in the fuller contexts of (...) politics and shore side industry interests, or with regard to the interplay of various market and economic processes. In contrast, placing the blame exclusively on the at-sea sector of the industry has become a theme, resulting in a continued decline in the status of fishermen and fishing cultures. This latter group is only one of many important influences on the fisheries situation, and all groups need to be evaluated in this much larger perspective.”

Mr Sharp added: “Similarly, seafarers have learned that every year is unique, within certain seasonal limits. Over a span of 60-80 years, there will be at least two periods of distinct ocean current and wind field patterns that lead to specific changes in the naturally-occurring populations of fishes, mammals, and birds that appear within the bounds of fairly well-defined coastal and offshore regions.

“These are not new concepts. They have been the basis for survival of hunters, fishers, and farmers since the beginning of humanity. We need to incorporate such factors into our own understanding and resource management practices. Indeed, it is exceedingly strange that we have not yet done so.”

More holistic: Faroese fishermen are known to willingly supply accurate catch data, and unlike in many of the neighbouring countries, there are no discards to skew stock assessments in the Faroes. This provides for quality information on which to fine tune the fishing day system, which also includes closing of certain fishing grounds for limited periods.

Regulating all fisheries in the Faroese fisheries zone (FFZ), while also encompassing Faroese fishing vessels operating outside this zone, the 1994 Commercial Fishery Act states that the living marine resources in the FFZ and Faroese allocations in waters outside the FFZ are “the property of the Faroese people” and that these fisheries should be sustainable in biological, economic and socio-economic terms.

From a certain viewpoint, whenever there is a deficiency in food supply for a fish stock, be it because of industrial fishing or natural phenomena, the correct way to deal with it is, counter-intuitively, to increase fishing efforts and thus thin out the stock, bringing it into balance with its food supply. Not without controversy, this view is often advocated in fisheries communities, although regulators have been reluctant to accept it as scientifically viable.

Whereas organisations such as ICES have become de facto standard setters on fisheries management, providing regulators with annual recommendations on quotas and TAC (total allowable catch), sceptics point out that assessments predictions have proved unrealistic more than once. As to the policies of the Ministry of Fisheries and Maritime Affairs, the approach is not merely to seek some sort of golden middle road, but rather to address the issues in a more holistic way and—quite significantly—gain the fishing industry’s trust.

Fishing fleet facing rougher seas

With oil prices hurting and catches down one-tenth from 2003 levels, the Faroese fisheries retraction continued for a second straight year through 2004, following two years of all-time high yields.

Figures from Statistics Faroes, together with other information from industry sources, indicate Faroese fisheries had an overall acceptable performance in 2004, although the downturn from the previous year continued with both prices and costs going opposite and mostly unfavorable directions.

The country’s five groundfish factory trawlers, operating in distant and middle distant waters such as East of Greenland, the Barents Sea and the Irminger Sea, did well as usual. “The filleting trawlers have been a stable business for many years now,” said Árni Joensen, long time trader and former Fishing Vessels Association chairman. “My impression is 2004 was fine, too, for all of them.”

The picture looks different for the other group of factory trawlers, namely the shrimp trawlers. That fleet has shrunk in recent years by more than half and today comprises only six trawlers, most of them struggling. “Last year wasn’t much different from the year before,” said the Shrimp Trawlers chairman, Jóhan Joensen. Most of the shrimp fleet has had a hard time since the turn of the millennium, with a host of circumstances pulling to their disadvantage. These include lost fishing rights in several areas, plummeting shrimp prices and skyrocketing fuel costs. “We hope to see raised quotas East of Greenland and a new arrangement in Canada,” Mr Joensen said.

The seven Faroese purse seiners are known to have made good money in recent years, catching pelagic fish including blue whiting, mackerel and herring. “We shouldn’t complain, but 2004 turned out a little weaker than the year before,” said Atli Hansen, chairman of the Purse Seiners Industrial Association. “Not all of the fleet had a profit, and the chief reasons are increasing oil prices and decreasing prices for industrial fish. But the fleet had been doing very well in the years before so we have had huge investments—new ship construction, refurbishments, lots of new equipment—and luckily most of the ships have been readied to take advantage of hopeful good fisheries for the next 20 years or so.”

As to the smaller trawlers, longliners, gillnetters and jigging reelers, all of which operate mostly in coastal and middle distant waters, the total annual catch of 2004 was down 122,000 tonnes, a ten percent drop compared to the year before, according to information from Statistics Faroes. In landed value, the decline was even more serious: down DKK 165 (EUR 22 / USD 30) million, to approximately DKK 1 (EUR 0.134 / USD 0.180) billion.

“The fleet landed almost 12,000 tonnes less in 2004 than in 2003,” a news release from Statistics Faroes read. “In value, the decrease was approximately 165 million krones. This is the second year in a row that the total landed quantity decreased and last year the quantity equalled 2001 figures. However, the decrease in value is higher because, in addition to lesser catch, we have had descending prices of all essential fish species including cod, haddock and saithe. For this reason, the total value of landed fish has fallen back to the level of 1999.”

Since 1993, longline, otter trawl and pair trawl have on average caught around 90 percent of the harvest in the Faroese fisheries zone, both in terms of quantity and value. However, when comparing fishing gear, the longliners have had most of the progress since then. In 2004, the longliners caught one-third of the total quantity of fish landed while receiving about 40 percent of the overall value, according to Statistics Faroes.

“I won’t call the year 2004 a bad year after all,” Rolant Poulsen, chairman of the 19-member vessels Longliners Association, remarked. “But it sure wasn’t as good as 2003, and definitely nothing like 2002 and 2001; but then again those years were incredible. The prices of haddock and coley [saithe] have fallen considerably and for the best performing longliners, individual crew member salaries shrunk by as much as 300,000 krones.”

Otter trawlers, pair trawlers and smaller trawlers—in total 30 vessels—in general told a similar story, although it varies depending on the size and type of the trawler. Most of the small 20 to 55 tonnes hold capacity vessels are licensed to fish in inshore waters, focusing on flat species, usually of higher market value than demersal fish; still, these are relatively vulnerable to weather and sea conditions. For the bigger otter trawlers, the effects of higher prices of oil have been severe. “I’d say only half the vessels in this group had a profit in 2004,” the chairman of the Otter Trawlers Association, Jósup Henriksen, noted. “These trawlers landed an annual average value of somewhere between 13 and 21 million krones, which would have been fine, if it wasn’t for the cost of oil.”

The chairman of the Small Coastal Fishing Vessels’ Association, Auðunn Konradsson said the average performance of this large group of more than 200 vessels was acceptable albeit the prices of saithe and haddock made 2004 weaker than the year before. “Those who caught relatively more cod were better off than the others,” he said, referring to the high value of cod. “If you compare the fewer but bigger and fatter cod we’ve seen now, with the many but smaller and thinner cod we had a few years ago, you’ll see that we were right back then in recommending that we didn’t stop fishing because the cod were small. They were small because their food supply was low; we brought down their numbers, which left more food to those we didn’t catch—and now they look just great.”