Report of the Governor's Aquaculture Industry Development Committee

[From the U.S. Government Printing Office, www.gpo.gov]

REPORT OF THE

GOVERNOR ~S

AQUACULTURE INYDUSTRY

DEVELOPMENT

COMMITTEE

HD
.H3 APRIL 1984
H38
1984 STATE OF HAWAII

Property of CSC LibraryU U S. DEPARTMENT OF COMMERCE NOAA
COA'SIAL SERVICES CENTER
2234 SOUTH HOBSON AVENUE

FOREWORD CHARLESTON , SC 29405-2413

Encouraging expansion of the aquaculture industry is consistent with the
State's long-term strategy for economic diversification through fostering
environmentally-sound, socially-acceptable industries. A critical review of
the history and current status of commercial activities gives reason to expect
aquabusiness to play a major role in Hawaii's economic future.

On August 31, 1983, Governor George Ariyoshi appointed a committee of
individuals from the private sector to recommend actions that would help
develop aquaculture into a successful part of Island agribusiness. The
Governor's Aquaculture Industry Development Committee tackled this important
task with enthusiasm and proceeded in a workman-like manner to identify the
relevant issues.

Aquaculture development is a complex subject which involves many environ-
mental, social and political issues in Hawaii. Thus, this report deals with
a wide variety of subjects from the availability of natural resources to the
development and application of emerging technologies; from the fundamental
management of a business to the timely sale of the final product. Pervasive
throughout this report is the question of the role of government in the encour-
agement of new industries. Regrettably, time constraints permitted only a
cursory discussion of some issue areas.

Many conclusions can be drawn from the report. Aquaculture does have
development potential for Hawaii. It is the type of multi-faceted industry
that is compatible with the local population and resources. However, the
State has constraints to larger-scale commercial aquaculture which must be
reduced or eliminated if the industry is to grow. Some of these are within
the purview of government to remedy, while others must await evolution and
the passage of time in a learning process. We are fortunate that Hawaii has
talented aquaculture researchers and aggressive entrepreneurs. We must have
a forum to permit public and private sector groups to actively carry the
industry forward.

On behalf of the Committee, I am pleased to present this report to the
Governor for his consideration and implementation. We have attempted to give
cogent directions without limiting the options open to decision-makers to
achieve the desired results. We leave to the State Aquaculture Development
Plan update the task of expanding some of the important areas which are only
touched upon in this document. Finally, the members of the Committee are
grateful for the State's continuing support of the aquaculture industry and
the privilege of having served Hawaii in this important mission.

William C. Rowland
~~~~~~~ ~~~~~~Chairman
� ~~~~~~~~~~~Governor's Aquaculture Industry
'N ~~~~~~~~~ ~~Development Committee
MP--

ACKNOWLEDGEMENTS

The members of the Governor's Ad Hoc Aquaculture Industry Development
Committee wish to acknowledge the hard work and dedication of the Aquaculture
Development Program, Department of Land and Natural Resources, which provided
excellent staff support for this important endeavor. This report was prepared
by John Corbin and Jane Sexton. Jane Sexton organized the meetings and accu-
rately transcribed the many pages of minutes. Richard Fassler, William Brewer,
Kendrick Lee, James Brock and Jenny Quezon also contributed many hours to
serving the Committee in various capacities.

Special acknowledgement should also be given to those resource people,
listed in Appendix B, who gave of their time and expertise by appearing before
the Committee. Brad Mossman of the Governor's Office provided valuable guidance
throughout this undertaking. In addition, the Committee wishes to note the
valuable participation of the following individuals: Roger Coryell of Marine
Culture Enterprises, Randy Day of Brigham Young University, Randy Matsumoto
of the Bank of Hawaii, John Ray and Guy Rothwell of ORCA Sea Farms, Inc.,
Edwin Teranishi and Linus Travares of the Hawaii Production Credit Association,
and Brett Wiggins of ABA International.

Finally, special acknowledgement is given to Theresa Au for exceptional
clerical support to the Committee in the face of numerous short deadlines.

TABLE OF CONTENTS

Page

FOREWORD...............................

ACKNOWLEDGEMENTS ...........................

EXECUTIVE SUMMARY ..........................iv

I. INTRODUCTION.......................... 1

II. PURPOSE AND SCOPE OF THE COMMITTEE................2

III. BACKGROUND............................3

A. History of the Industry ...................3
B. Current Industry Status................... 7
C. Analysis of Recent Disappointments............. 8

IV. ANALYSIS OF DEVELOPMENT ISSUES - MAJOR FINDINGS, PROBLEMS
AND RECOMMENDED ACTIONS ....................12

A. Management ...........................13
B. Technology and Knowledge ....................15
1. Technology.......................15
2. Knowledge........................19
C. Marketing and Economics.....................22
1. Marketing .......................22
2. Availability of Capital ................24
3. Costs of Doing Business ................28
D. Water and Land........................30
1. Fresh Water ......................30
2. Brackish and Salt Water ................32
3. Land..........................33
E. Government Activities ......................35
1. Development ......................35
2. Research and Extension.................39
3. Regulation.......................42

V. FUTURE OF THE INDUSTRY......................45

APPENDICES

A. Committee Organization and Membership
B. Invited Speakers
C. Summary of Environmental Regulatory Permits

EXECUTIVE SUMMARY

Introduction

If Hawaii wants to have a substantial aquaculture industry, it can. The
potential for aquaculture in the Islands remains very strong, despite recent
setbacks. Realizing this potential will require prompt action on key issues
and long-term cooperative commitment by members of government, business, and
labor.

Purpose and Scope of the Committee

A thirteen-member industry committee, designated the "Governor's Ad Hoc
Aquaculture Industry Development Committee," was appointed by Governor George
Ariyoshi to report on what needs to be done to develop aquaculture into a
successful and significant sector of Hawaii's economy.

This report presents the Committee's findings and recommended actions.
Background information is provided through a discussion of the history and
current status of State activities in aquaculture development. Emphasis is
then placed on an analysis of aquabusinesses that have recently ceased opera-
tions. The major portion of the report discusses the key issues influencing
State aquaculture development, with related findings and recommended actions.
Issues addressed are: 1) Management, 2) Technology and Knowledge, 3) Market-
ing and Economics, 4) Water and Land, and 5) Government Activities. The final
section of the report addresses both the near- and long-term potential for
industry expansion.

Background

The Committee reviewed the history and current status of research and
commercial developments and analyzed specific aquabusiness disappointments
to identify the key development issues facing the industry.

History - Commercial aquaculture in Hawaii, apart from the long-time
operation of a few ancient Hawaiian fishponds, is a relatively new part of
the State's economy. In 1965, investigations into techniques for farming
freshwater prawns at the State's Anuenue Fisheries Research Center (AFRC) and
experimentation with gray mullet at the Oceanic Institute (01) provided impor-
tant stimuli for accelerating commercial production and research, training,
education and consulting activities. In the early 1970's, AFRC successfully
developed a "Cooperative Agreement Program" to encourage people to try prawn
farming. Hawaii's overall research efforts were further enhanced by monies
from the National Sea Grant College Program, and as a result, the State became
known for tropical aquaculture research. By 1976, the commercial industry
consisted of 13 growers whose combined annual wholesale product value was
$200,000.

The industry continued to expand as production and research activities
increased. In 1979, State funding of aquaculture research and development
rose to approximately a half-a-million dollars a year to implement the recom-
mendations of the State aquaculture development plan. By 1980, the Commercial
Production sector was producing over $1.6 million of product (wholesale) and
a diverse Research, Training and Technology Transfer sector generated $2.4
million in project value (not including State funds). The early 1980's saw
several large firms either starting or contemplating multi-million dollar
pilot, commercial demonstration projects.

Current Status - As can be expected of a new industry pursuing growth in
a relatively-mature economy, aquaculture has experienced promising expansions,
as well as disappointing setbacks. The Commercial Production sector reached
$2.6 million in wholesale product value in 1982, but fell back to $1.6 million
in 1983 with the closure of several major pilot projects. The number of firms
involved in aquaculture (43), however, remained nearly the same in 1983 as in
1982 because of the entry of several small operations. The Research, Training
and Technology Transfer sector valued at $3.6 million in project value (exclu-
sive of State funds) in 1982 rose to $5.6 million in 1983, largely because of
the increasing success of Hawaii's private consultants.

Several major development trends are apparent in today's industry.

* The combination of excellent research and effective, international consulting
is gaining Hawaii a worldwide reputation for tropical aquaculture expertise.
* The State is attracting high-technology, brackish and saltwater commercial
aquaculture ventures that require a sophisticated and reliable infrastructure.
* Hawaii's aquaculture industry is expanding through diversification in the
species grown, the technologies utilized, and the types of commercial activi-
ties carried out.

Aquabusiness Disappointments - The Committee carefully examined local
aquabusinesses which, since 1978, have ceased operations, in order to identify
the reasons for these closures. Several small-scale prawn farms stopped pro-
duction largely because they lacked sufficient management skills and financial
resources. The large-scale aquaculture entries which ceased production were
basically "probes" by large, diversified corporations. These projects were
halted as a result of a combination of factors including: basic flaws in
management, poor initial siting, inappropriate marketing strategy and weak
financial commitment. All large-scale projects were adversely affected to
some extent by biotechnical problems which contributed to uneconomical pro-
duction. The Committee concluded that Hawaii's aquaculture industry today is
going through a period when entrants are testing the species, technologies,
and sites that can be profitably managed.

Development Issues

The number and size of successful companies will determine the contribu-
tion that aquaculture can make to Hawaii's economy. It is incumbent, there-
fore, that the people of Hawaii help establish conditions which will assure
greater probability of success to aquaculture ventures. The Committee focused
its deliberations and addressed its findings and recommendations to this end.
The recommended actions to be accomplished by the cooperative efforts of
Hawaii's aquaculture community are found under each priority issue.

Management - A major reason for the mediocre performance by aquabusinesses
to-date, has been the farmers' lack of management skills. Three major manage-
ment weaknesses have been observed: 1) poor general business management (money
and personnel), 2) an inadequate biotechnical information base, and 3) igno-
rance or misapplication of existing information. Improvement of the level of
expertise in the aquaculture industry will take time and a dedication to learn-
ing from experience.

The success of aquabusinesses in Hawaii can be increased by upgrading the
management skills of individual farmers and increasing the available management
information base through the following:

* Enhance existing extension capabilities.

* Offer programs in general business management for aquafarmers.

* Focus research on the development of practical farm management tools.

* Organize a statewide aquaculture association.

Technology and Knowledge - The issues of aquaculture technology and
knowledge are fundamental to the development of Hawaii's commercial production
and research, training, education and consulting activities. These two dis-
tinct, yet highly inter-related groups of activities, offer great opportuni-
ties for bringing revenues into the State through the sale of products and
expertise.

At the present time, worldwide, a relatively small number of aquatic
species and production systems have been proven to be technically and economi-
cally feasible for commercial production. This situation exists because the
transfer of new technology from the laboratory to a commercial situation is
a critical and difficult step.

Presently, Hawaii has a wide range of aquaculture production technologies,
i.e., low, medium, and high-intensity systems. Commercial development of medium-
and high-intensity systems offers the greatest economic impact to the State.
Moreover, a Hawaii location offers "competitive advantages" to high-intensity
aquaculture systems, because they require a reliable infrastructure.

The State has limited financial resources to apply to aquaculture tech-
nology development and expenditures should be guided by the following recom-
mendations:

* Focus on technically-feasible species with substantial development and market
potential, e.g., marine shrimp, red tilapia, and freshwater prawns.

� Determine species development priorities in close consultation with the
aquaculture industry.

* Emphasize commercial-scale developments, not subsistence-level activities.

� Concentrate on medium- and high-intensity commercial developments, and
selected use of Hawaiian fishponds.

Today's commercial aquaculture species and systems have a variety of
immediate technological constraints which are limiting profitability. These
constraints can be reduced by the following actions:

� Improve research on inventory control and harvesting technology for medium-
intensity earthen-pond prawn farming.

� Conduct research to improve management techniques for Hawaiian fishponds.

� Encourage the development of new sources of stocking material from either
the public or private sector.

� Assist in establishing virus-free marine shrimp broodstock for species of
interest to local aquaculturists.

Hawaii has a considerable opportunity to become a major world center for
aquaculture research, training, education and consulting. Food-short Third
World countries wish to utilize aquaculture as one long-term option to increase
their basic food supplies and to provide export income. The United States has
also made a long-term commitment to increasing its aquaculture production through
a variety of research and development activities. These trends are producing a
strong demand for aquaculture expertise, and Hawaii's researchers and consul-
tants are competing favorably for the increasing numbers of research, planning
and development contracts; however, greater results can be achieved.

Hawaii should organize its research, training, education and consulting
capabilities and develop the necessary infrastructure by performing the fol-
lowing:

�Hold a series of workshops for the State aquaculture community to discuss
how to make Hawaii a world center for aquaculture research, training, educa-
tion and consulting.

vii

a Examine the need, potential cost and ways to attain a large-scale aquaculture
research, education, training and demonstration facility.

Marketing and Economics - The crucial issues of marketing aquacultured
products, and the economics of their production are considered in three parts:
marketing, availability of capital, and the cost of doing business.

There is a strong feeling among aquaculture producers that the market for
competitively-priced, high-quality products is vast. The local seafood market
totals nearly 40 million pounds a year and is highly segmented. Per capita
seafood consumption in Hawaii is more than two and one-half times the national
average and this strong preference can be utilized as the base for building a
substantial aquaculture industry. The primary export markets being targeted
by local aquafarmers are Japan and the West Coast of the Mainland United
States, both of which are important importers of seafood. The changing die-
tary preferences of health-conscious Americans, and the close proximity of the
Japanese market bode well for future demand of Hawaii's aquacultured products.
Future access to these markets, however, will require creative and timely
approaches to market penetration and development.

The small size of Hawaii's aquaculture industry is limiting aggressive
market expansion because of inconsistent, unpredictable production. This
situation could be improved by the following actions:

� Form a professionally-managed marketing cooperative.

* Target outlets that can readily adjust to supply irregularities, and adjust
the farms' operations to suit the needs of the customers.

As aquaculture production grows, orderly development of local and export
markets could be fostered through the following actions:

� Concentrate on the local seafood market by focusing on import substitution.

* Develop unique market niches for local aquacultured products.

* Carry out joint State and private sector promotional campaigns for aquacul-
tured products.

The quality assurance problems occasionally experienced by fresh-chilled
and frozen freshwater prawns can be reduced by the following actions:

* Educate "middle-men" and end-consumers on the proper procedures for handling
prawns.

* Improve local capabilities for conducting the necessary processing and
handling research to extend the shelf-life of prawns.

viii

A lack of investment capital for aquaculture ventures and recent excep-
tionally high interest rates have affected the growth of Hawaii's emerging
aquaculture industry. At the present time, commercial lenders continue to
view aquaculture as a highly risky business. Commercial lenders hold this
opinion because most aquaculture ventures lack an adequate track record,
financial data and personnel with farm management skills. Other sources of
financing, e.g., venture capital or government-sponsored loan programs, are
available which accept higher risks. However, investors interested in high-
risk situations want projects with high potential earnings in order to justify
the financial risk. Today, Hawaii aquaculture entrepreneurs must aggressively
pursue high-risk capital locally and from Mainland and foreign sources. Govern-
ment and the private sector should search for ways to develop greater access to
sources of risk capital.

Commercial lenders and persons looking for high-risk investment opportuni-
ties need proven information in order to evaluate commercial aquaculture ven-
tures. Assistance could be provided in the following form:

e Develop, collect, and publicize technical and financial information necessary
to support and evaluate a loan request or investment prospectus.

Greater access to high-risk capital sources could be encouraged by the
following:

* Publicize Hawaii's interest in attracting high-risk capital for aquaculture
projects.

� Assist aquaculturists in locating and accessing high-risk capital.

The impact and effectiveness of the Department of Agriculture's Aquacul-
ture Revolving Loan Fund (ARLF) could be improved by the following:

* Review, evaluate, and modify the ARLF so that it will be utilized more for
developmental purposes and less as a "lender-of-last-resort."

� Increase the capital available through the ARLF to meet the needs of the
emerging industry.

* Utilize available State aquaculture expertise in evaluating loan requests.

Aquabusiness costs fall into two general categories: start-up and opera-
tional. Significant start-up costs include acquiring land, obtaining the nec-
essary permits, and constructing and equipping the farm. The largest opera-
tional costs are capital, labor (especially the cost of complying with the
Workmen's Compensation Law), feed and energy. High start-up and operating
costs act as a disincentive to aquaculture investment.

The costs associated with starting-up and operating a commercial aqua-
culture farm in Hawaii are generally expensive and may be reduced by taking
the following actions:

* Reduce the cost burden imposed upon an aquafarmer by various government
permits and regulations.

* Examine the Workmen's Compensation Program, especially the rate structure
and law itself to reduce the high cost of providing benefits.

* Reduce the major operating costs of production and improve farm yields
through research.

Water and Land - Hawaii's basic natural resources for aquaculture are
addressed in the following sequence: fresh water, brackish water, salt water,
and land.

Fresh water is available on all Islands, but there are regulatory restric-
tions and cost-of-development constraints associated with its use for commercial
aquaculture purposes. A statewide freshwater resource management scheme is not
clearly defined at this time. If freshwater aquaculture is to continue to ex-
pand, then a realistic balance between the preservation of freshwater resources
for future generations and the use of fresh water for economic development
must be achieved.

Presently, both State and County water resource planning and preservation
policies are not adequately considering the needs of aquaculture. Development
should be encouraged by carrying out the following actions:

, Accommodate non-degrading commercial uses of fresh water, such as aquacul-
ture, in freshwater resources planning and management.

� Encourage input by aquaculturists into the development of a statewide water
management scheme.

� Include aquaculture within the definition of agricultural water use for
government planning and development purposes.

* Re-examine the "freshwater-use ceiling" in the Kahuku area of Oahu to
increase availability.

* Emphasize recycling and multiple use of fresh water when encouraging aqua-
culture developments.

Hawaii has an extremely valuable aquaculture resource in the numerous
volcanic and limestone aquifers from which clean, naturally-filtered brackish
and salt water can be pumped. The utilization of brackish and salt water for
aquaculture will make economical use of an under-utilized resource.

Use of Hawaii's brackish and salt water aquifers for land-based aquacul-
ture, without threatening freshwater supplies and soil productivity, can be
encouraged by the following:

� Establish a policy position that land-based brackish and saltwater aquacul-
ture is acceptable in Hawaii, unless potential degradation of drinking water
is demonstrated.

� Encourage direct brackish and salt water discharges from coastal aquaculture
facilities, when nearshore uses and environments are compatible with the
activity.

Hawaii has large amounts of land suitable for commercial aquaculture,
though specific sites are not well-defined. Presently, prospective aquacul-
turists are having great difficulty in finding sites because land is expensive
to buy or lease, and water may not be readily available. Finding a good site
is also difficult because land in Hawaii is controlled by a few groups, and
these entities are not well-informed about commercial aquaculture opportuni-
ties. If aquaculture is going to expand in Hawaii, then sites must be better-
defined and made more accessible to aquaculturists.

Aquaculturists could be greatly assisted in finding and securing appro-
priate, reasonably priced sites if the State and private landholders coopera-
tively undertake the following recommendations:

* Identify land suitable for commercial aquaculture.

* Make State lands available for aquaculture at reasonable lease rates.

* Consider a statewide aquaculture park program.

Government Activities - State and County governments have major roles to
play in the encouragement of aquaculture development in Hawaii. Government
activities are considered in three areas: development, research and extension,
and regulation.

The public sector has been very supportive of aquaculture development.
The formulation of a State aquaculture plan to focus private and public sector
efforts was a major step. The Department of Land and Natural Resources (DLNR)
is the lead agency for statewide aquaculture development and is responsible
for the implementation of the Aquaculture Plan. The Departments of Agricul-
ture and Planning and Economic Development also assist in State development
efforts by providing financial assistance and research support, respectively.
The University of Hawaii system provides a nucleus of personnel and facilities
to conduct aquaculture research, training and education activities. The County
governments of Kauai and Maui are in the process of preparing County aquacul-
ture development plans to guide their efforts.

Communication and coordination among governmental agencies and between
the government and the private sector are areas that need constant attention.
Steps should be taken to improve the communication of industry priorities to
government decision-makers. The private sector believes government should
concentrate its efforts on research and development activities which reduce
aquabusiness start-up and operating costs, and most importantly, investment
risks.

Hawaii's aquaculture industry should not be built on long-term subsidies;
however, short-term government assistance is essential to successful expansion.
The most economical way the State can increase its assistance efforts is to
improve the effectiveness of the programs and facilities already in place and
add appropriate new ones.

Communication and coordination between the public and private sectors
could be improved by undertaking the following:

* Communicate the State's aquaculture development policy to all levels of
government.

* Form an Aquaculture Development Coordination Council to provide a forum for
public and private sector groups to discuss development issues.

The aquabusiness development climate in Hawaii could be further enhanced
by taking action on the following:

* Update the State Aquaculture Development Plan to formulate new guidelines
for development which reflect the aquaculture industry's current development
pattern, stage of maturity and need for assistance.

* Focus government assistance programs on reducing industry's start-up and
operating costs and lowering the risk of investment.

* Identify and evaluate various aquabusiness investment incentives, e.g., tax
incentives to attract new businesses and encourage existing firms to expand.

The State of Hawaii is providing research and development support to
encourage the expansion of aquaculture. Since 1975, approximately $5 million
of State funds have been spent on research projects, and in the same period,
an estimated $7 million of Federal monies have come into the State. The State
is currently providing approximately one million dollars a year in staff and
research project support towards aquaculture development.

[lore effective utilization of existing research budgets can be achieved
through closer communication with the industry and joint determination of re-
search priorities. State support of basic and applied research has clearly
been an important incentive to encourage private investment. State-sponsored

Xii

extension efforts, particularly those of the Anuenue Fisheries Research Center,
have played a major role in development. However, extension services and other
research support must be periodically evaluated, re-programmed and enhanced to
keep pace with industry development trends.

The current State-sponsored aquaculture research and extension program
could be improved by striving to define project objectives which better reflect
the industry's production and marketing problems. Initiatives should follow
these recommendations:

* Develop a formal mechanism for the aquaculture industry to provide input into
State funding decisions.

* Direct the bulk of State support to the encouragement of medium- and high-
intensity commercial aquaculture operations.

* Enhance existing extension capabilities to accommodate the current and pro-
jected mix of commercial species and technologies, e.g., re-program Anuenue
Fisheries Research Center activities.

Federal, State and County permits and regulations have a significant impact
on commercial aquaculture development in Hawaii because of the time and cost re-
quired for permit compliance. Although some streamlining of the permit process
has occurred, aquaculture is little understood by the existing regulatory regime.
Regulations can be grouped into two broad categories: those that impact on the
start-up of aquabusinesses, and those that impact on general operations. Proper
planning and siting of aquaculture facilities, and the involvement of regulatory
personnel early in the planning process can greatly reduce regulatory problems.
From a policy perspective, government regulations should promote, not obstruct,
aquabusiness development.

Generally speaking, the regulatory regime in Hawaii governing aquabusi-
nesses was established without adequate consideration of the State's unique
environment and aquaculture's low pollution potential. Improvements in the
current situation could take the following form:

* Survey members of the industry to determine which laws, regulations or codes
are being misapplied.

* Consider reducing the time and cost of preparing Environmental Impact Assess-
ments or Statements by having certain aquaculture activities defined as an
exempt class of action and/or by carrying out "Master" EIA's or EIS's for
certain areas of the State.

* Regulate direct aquaculture effluent discharges by granting "zone-of-mixing"
variances.

xiii

* Recommend to the Environmental Protection Agency that the criteria for the
Federal National Pollutant Discharge Elimination System permit exemption for
aquaculture be raised to 500,000 pounds of production a year.

� Recommend to the U.S. Army Corps of Engineers the issuance of general or
regional permits for aquaculture activities.

* Examine Historic Site Preservation laws and regulations to determine if
ancient Hawaiian fishponds can be exempted to allow productive use.

� Resolve the jurisdictional and policy conflicts between the State and the
County over fresh water, e.g., aquaculture use of the subsurface outflow of
fresh water along the coast.

* Clearly define the statutory and policy guidelines which govern the use of
animal manures in aquaculture systems.
* Review current aquatic species importation regulations and procedures to
streamline, but not weaken, the existing system.

Future of the Industry

Aquaculture development fits into the State's overall strategy for economic
development and diversification. It is a flexible, multi-purpose industry that
can be economically viable at a wide range of scales, and produces a variety of
products and services. Moreover, commercial aquaculture has the potential to
take advantage of under-utilized resources, e.g., brackish and salt water, agri-
cultural wastes, and lava lands. This flexibility will ultimately help aqua-
culture enterprises mitigate the aggregate disadvantages of a Hawaii location
(e.g., isolation from major markets, limited sources of high risk capital, and
higher costs of doing business), while benefiting from the collective advantages
(e.g., a year-round, warm climate, abundant water supplies, sophisticated in-
frastructure, large local market, and political stability under the U.S. flag).

Aquaculture has a potentially bright future in Hawaii if existing con-
straints are reduced or eliminated and if lenders and investors begin to con-
fidently back aquabusiness development. By 1990, both commercial production
and research, training, education and consulting activities are expected to
increase significantly. Moreover, by the year 2000, substantial revenues
could be generated from production and service activities.

The worldwide focus on increasing food supplies and encouraging economic
development in Lesser-Developed Countries is expected to continue into the next
decade. This pronounced trend could allow Hawaii's Research, Training and Tech-
nology Transfer sector to generate over $10 million in annual project value by
1990. However, to take advantage of these opportunities, the State must, in
the long-term, consider the following:

xiv

� Networking of existing resources and facilities, and constructing a large-
scale research, training and demonstration facility would improve Hawaii's
competitive position.

� Developing a wide variety of aquaculture training and education curricula
would broaden the State's saleable skills.

* Marketing of Hawaii as a site for aquaculture research, training, education
and consulting activities would place the State in the forefront of the
expanding world aquaculture field.

Near-term growth for the Commercial Production sector appears more promis-
ing, despite the poor showing in 1983. Based on the estimates of those companies
with announced plans, this sector could reach $20 million in wholesale product
value by 1987. State officials strongly suggest that the Commercial Production
sector could reach over $50 million in wholesale product value by 1990. While
this is a bold projection, it is based on the State's ability to successfully
attract some of the 15 large-scale projects which are currently evaluating
Hawaii as a site for their investment. Moreover, if these projects are suc-
cessful, other new investments will follow. These 1987 and 1990 projected
values for the aquaculture industry compare favorably with the leading diver-
sified agriculture crops in the Islands.

Year 2000 projections for the growth of both the Research, Training and
Technology Transfer sector and the Commercial Production sector are more specu-
lative. The State Aquaculture Plan's projection of a $334 million Commercial
Production sector by 2000 should be re-evaluated in light of changing technolo-
gies and markets, and potentially-available resources, e.g., water and land.

Clearly, aquaculture development fits well into the State's strategy for
long-term, environmentally-sound economic development. It is capable of filling
a multitude of market niches in production and technology sales. Greater suc-
cess will depend, in the near-term, on improving the industry's level of manage-
ment skills, increasing profitability, and making the State a more attractive
place in which to invest. Long-term development will require a better infra-
structure and a more timely development of export markets. The Committee con-
cludes that the aquaculture industry should adopt the following goals:

Near-term - Strive by 1990 to make commercial aquaculture production the
StateT'slar'gest single diversified agriculture activity, and develop a sustained
source of revenue from national and international research, training, education
and consulting.

Long-term - Strive by the year 2000 to make Hawaii an important tropical
seafood production site, and a center of excellence for aquaculture research,
training, education and consulting.

If decisive action is taken now to address current problems and reduce
constraints, aquaculture can, in time, grow to become a highly significant
part of Hawaii's economy.

xvi

I. INTRODUCTION

Is aquaculture destined to become a significant part of Hawaii's economic
future, or will it remain a minor contributor to diversified agriculture?
After a very encouraging beginning, questions have arisen regarding the in-
dustry's potential to generate substantial revenues. Skeptics say that aqua-
farms cannot achieve profitability and, therefore, will not be able to attract
the private investment needed to create a major industry.

Importantly, it is not so much a question of whether or not Hawaii will
have an aquaculture industry, but rather, how large that industry will ulti-
mately be. If Hawaii wants to have a major aquaculture industry, it can.
But as in any new field, where laboratory research must be expanded to com-
mercial-scale development, and where old ways of thinking must accomodate a
new technology, major constraints exist and must be overcome. Identifying
and ultimately finding solutions to these constraints will require prompt
action on key issues and long-term cooperative commitment by members of
government, business and labor.

II. PURPOSE AND SCOPE OF THE COMMITTEE

Governor Ariyoshi, in his 1983 State-of-the-State Address, announced that
an ad hoc committee of industry representatives would be appointed to study
the problems that are presently constraining aquaculture development in Hawaii
(Appendix A). The Governor's Ad Hoc Aquaculture Industry Development Com-
mittee (GAIDC) was formed and given a mission to:

"Submit a report to the Governor on what needs to be done
to develop Hawaii's commercial aquaculture industry into
a successful and significant sector of Hawaii's economy."

Specifically, the thirteen-member committee was asked to: 1) study the problems
currently affecting the industry and those that lie ahead, 2) identify Hawaii's
major advantages and disadvantages for aquaculture development, 3) identify the
Islands' significant resources, and 4) make recommendations on how and where to
focus State efforts to make future aquaculture expansion a reality.

Report of the Governor's Ad Hoc Aquaculture Industry Development Committee
presents the Committee's findings and recommended actions. The history and
current status of State activities in aquaculture development are considered
first. Emphasis is then placed on an analysis of aquabusinesses that have
recently ceased operations in order to understand why they went out-of-busi-
ness. The major portion of the report discusses the key issues influencing
State aquaculture development, and related findings and recommended actions.
Issues addressed are: 1) Management, 2) Technology and Knowledge, 3) Marketing
and Economics, 4) Water and Land, and 5) Government Activities. Knowledgeable
individuals from the public and private sectors were asked to speak on these
issues to supplement the members' expertise (Appendix B). The final section
of the report addresses both the near-term and long-term potential for industry
expansion.

-2-

III. BACKGROUND

This section highlights the history and current status of Hawaii's aqua-
culture industry with special emphasis on recent aquabusiness disappointments.
This information provided a basis for the Committee to identify the key issues
affecting aquaculture development in Hawaii.

A. History of the Industry

The practice of aquaculture in the Islands dates back more than 600 years.
At one time, there were more than 300 man-made coastal fishponds, totaling in
excess of 6,000 acres. Most of these ancient food production systems have
deteriorated beyond use, but remnants remain on nearly every island. More-
over, at least five ponds are in active production today.

The modern aquaculture era began in 1965 when the Department of Land and
Natural Resources' Anuenue Fisheries Research Center (AFRC) began the research
and development of practical, mass-culture techniques for larval and juvenile
prawns. Also, in the early sixties, the Oceanic Institute (01) began a research
program on the culture of gray mullet. Research there focused on developing
techniques for the artificial spawning and hatchery production of mullet in
order to supply stocking material to farmers in Hawaii and in the food-short
Lesser-Developed Countries. These two activities provided the stimulus for
the eventual development of commercial aquafarms and the proliferation of re-
search, training, education and consulting activities in Hawaii.

Further research of prawn farming techniques continued in the early 1970's
at AFRC and at commercial-scale demonstration ponds on a privately-owned farm
in Punaluu. In 1974, AFRC accelerated its Cooperative Agreement Program.
Participating private prawn farmers were provided with free stocking material
and management advice for a given period of time in exchange for production
and water quality information. The program generated a great deal of interest,
and gradually more people entered into commercial prawn farming, usually on a
small-scale.

Concurrently, the State's aquaculture research activities began to expand
into other areas. In 1968, the University of Hawaii (UH) was designated a
National Sea Grant College by the United States Department of Commerce, and
the UH Sea Grant College Program made a significant commitment to aquaculture
research. Under the auspices of this program, many other species (besides
freshwater prawns) were investigated for their aquaculture potential. It was
largely due to the efforts of AFRC, the UH Sea Grant College Program and 01
that Hawaii became well-known for its expertise in tropical aquaculture
research.

-3-

By 1976, Hawaii had thirteen commercial aquafarms and the beginnings of
an aquaculture industry. The wholesale product value for that year was a
little over $200,000 (Table 1). These operations (which included six prawn
farms) were mostly small-scale, self-financed farms run by families. Severai
commercial operations utilized ancient Hawaiian fishponds and obtained their
stocking material from the surrounding ocean.

It is important to note that two potentially large operations (Fishfarms
Hawaii, which is still in business today, and Oahu Oyster Farm, Inc., which
later became the Kahuku Seafood Plantation) existed in 1976. One operation
utilized earthen ponds to grow prawns and channel catfish, while the other
developed a high-intensity, raceway system to cultivate oysters. Several
sources of capital, including the State Department of Agriculture's Aquacul-
ture Revolving Loan Fund, were utilized to finance these endeavors.

The industry continued to gradually expand with more new prawn farms
started through the Cooperative Agreement Program in the late 1970's. In
1977, Kilauea Agronomics, a C. Brewer Company, established a large-scale
prawn farm on Kauai. One hundred acres of ponds were developed in the first
phase of the farm's construction. This commitment by a major Hawaii corpora-
tion was widely hailed as a sign that prawn aquaculture had become an attrac-
tive investment.

The publication of an aquaculture development plan in 1979 signaled the
beginning of a period of new, increasingly enthusiastic state efforts to pro-
mote aquaculture. Research and development funding was increased to approxi-
mately half-a-million dollars a year, in order to begin implementation of the
Plan's recommendations. The State-funds acted as seed monies and matched
greater amounts of Federal aquaculture research funds (mostly from the National
Sea Grant Program). Most research, training, and educational activities were
carried out at UH, AFRC, and OI.

By 1980, the service-oriented Research, Training and Technology Transfer
(RT & TT) sector of the industry, as it is called in the State Aquaculture
Plan, had generated $2.4 million in annual project revenues, not including
State funds (Table 2). Importantly, a few Hawaii-based aquaculture consultants
were beginning to bid aggressively on an increasing number of overseas aquacul-
ture planning and development projects. These activities began to pay off, as
1981 RT & TT project revenues of nearly $4 million far exceeded the $1.6 mil-
lion wholesale value of commercial production (Table 1).

The beginning of the 1980's saw further increases in local commercial
production activities. Most new farms continued to be small-scale operations
with only a few employees. Local aquaculturists also began to grow a wider
variety of species. Several multi-million dollar pilot demonstration projects
(i.e., Amfac Aquatech, IKKO Hawaii Aqua Culture, Ltd., Marine Culture Enter-
prises, and Kahuku Seafood Plantation began testing the technical and economic

-4-

Table 1 Growth of the Commercial Production Sector of the
Aquaculture Industry in Hawaii 1976-1982a

1976 1977 1978 1979 1980 1981 1982 1983

Total Acreage 235 246 320 493 575 547 643 508

Prawns 26 33 107 275 310 260 306 254

Otherb 209 213 213 218 265 287 337 254

Total Production (1,000 lbs)c 94 123 179 246 320 339 551 423

Prawns 43 55 110 205 300 240 317 269

Otherb 51 68 69 41 20 99 234 154

Total Value ($1,000)e 210 281 525 1,531 1,655 1,868 2,625 1,614

Prawns 152 206 420 787 1,125 1,031 1,553 1,390

Otherb 58 75 105 744d 530 837 1,072 224d

a
Information summarized from an industry survey.

b
Includes a mixture of shrimp and post-larval prawns, oysters, brine shrimp, carp, catfish, koi, tropical fish,
trout, mullet, tilapia, marine shrimp and American lobster, depending on the year.

c
Excludes items not sold by weight.

d
Value of post-larvae estimated.

e
Wholesale product value.

Table 2 Growth of the Research, Training and Technology
Transfer Sector of the Aquaculture Industry in
Hawaii 1980-1983ab

Year Project Value (millions $)c

1980 $2.4

1981 $3.8

1982 $3.6

1983 $5.6

a
Information summarized from a survey of State research, training, education
and consulting activities.

b
Measured as gross project value, pro-rated over the year, for research,
training, education and consulting services supplied by the public and
private sectors. For example, if a consultant or a university researcher
received a $300,000 Federal contract for three years, then $100,000 of
project value was counted each year.

c
Value does not include State matching and seed monies.

-6-

feasibility of their projects at commercial-scale. The assumption was that if
the risk and return on investment proved acceptable, then millions of additional
dollars would be spent on the construction of large-scale facilities.

B. Current Status

As can be expected of a new industry pursuing growth in a relatively-
mature economy, aquaculture has experienced promising expansion, as well as
disappointing setbacks.

By the end of 1982, the Commercial Production (CP) Sector of the industry
was valued at $2.6 million in wholesale product value (Table 1). This sector
consisted of 44 operations, 21 of which were prawn farms. The remaining farms
grew a wide variety of fresh, brackish and saltwater species. The majority of
farms were small to medium-sized operations and family businesses (under 30
acres). Several potentially major companies continued their commercial feasi-
bility tests in 1982, e.g., ORCA Sea Farms and !larine Culture Enterprises.
Several other large companies ceased operations.

The 1983 State industry survey revealed a major drop in the value of the
commercial production. A wholesale product value of $1.6 million, from 43
operations, was a result of a number of factors including loss of production
from the several failed pilot-demonstration operations the previous year, i.e.,
IKKO Hawaii Aqua Culture, Ltd. and Amfac Aquatech, as well as the bankruptcy
of the Kahuku Seafood Plantation. The value of freshwater prawn production,
despite the closure of the Amfac operation, remained relatively stable due to
increases in farm production and wholesale price, and expansion by several
farms. When asked in the 1983 industry survey whether or not they made money
in 1983, 51% of the farmers said "yes", 39% said "no" and 10% said they "broke
even" or "did not know."

The Research, Training and Technology Transfer (RT & TT) sector reached
a project value of $3.6 million in 1982. In the private sector, at least ten
consultants were actively bidding on local and international aquaculture plan-
ning and development jobs, and feasibility studies. Scientists from UH and 01
also continued to attract research funds from a variety of public and private
sources.

Internationally, in 1983 various Asian-Pacific countries, international
assistance agencies and regional development banks continued to emphasize aqua-
culture as an economic development strategy to increase basic food production.
Hawaii's research, training, education, and consulting activities benefited
significantly, indicated by the $5.6 million of project value generated by
this sector during the year. A large portion of this value came from several
private sector consultants who were successful in landing major development
projects in Asia.

-7-

Review of the current situation indicates that both the RT & TT sector
and the CP sector are generating substantial revenues, with potential for
future expansion. The combination of excellent research and effective inter-
national consulting services are establishing Hawaii as a center of tropical
aquaculture expertise. The State continues to be known as a world-leader in
freshwater prawn research and is also becoming well-known for its work with
other tropical marine species (e.g., marine shrimp and mahimahi). Technical
improvements to local aquaculture activities, and employment of skilled local
people are direct benefits of Hawaii's increasing world role.

In the commercial production area, a wide diversity of species, scales
of production and technologies are developing in the State. Notably, Hawaii
is attracting high-technology brackish and saltwater aquaculture ventures
which proceed through a "proof of concept" stage before expanding to commer-
cial scale. These energy-intensive and capital-intensive systems do not
locate in Lesser-Developed Countries because they need sophisticated, reliable
infrastructure, skilled labor, and politically-stable governments to secure
their investments. This interest from "leading edge," high technology projects,
in combination with the increasing numbers of small- and medium-sized farms,
form the foundation for a Hawaii seafood production industry to service both
local and export markets.

C. Analysis of Recent Disappointments

Expansion of Hawaii's commercial aquaculture industry has occurred, but
progress has not been made without disappointments and well-publicized failures.
Nationally, two-thirds of all small businesses fail within their first five
years. Since 1978, approximately six small and four large, local aquabusinesses
have ceased operations (Table 3). This loss rate, when compared with the forty-
three commercial operations which exist today, seems much better than the aver-
age. However, though no exact figures are available, the investment by the four
large firms previously mentioned appears to represent nearly two-thirds of the
estimated $20 million to $30 million invested in commercial aquaculture in the
past five years. An analysis of these disappointments was carried out to deter-
mine if common problems could be identified.

The six small aquabusinesses which withdrew from the industry all grew
freshwater prawns. These farms, which participated in the State's Cooperative
Agreement Program, averaged between one-quarter acre and two acres in size.
In many cases, prawn production was supplemented by, or integrated into, agri-
cultural activities. These small farms had very little impact on the overall
prawn supply.

There were a variety of reasons for the termination of the small fresh-
water prawn operations. Low yields and high production costs occurred due to
poor farm management. Other reasons given by the farmers included: 1) loss
of interest, 2) more time needed to be devoted to agricultural crops, 3) poor

Table 3 Brief Descriptions of Commercial Aquaculture Projects Which Have Recently Ceased Operation

Operation Operation Reasons Given
Firm Size Scale Species Begun Ceased By Companies

A. Small farms (6) less than 2 acres Small Prawns 1977 to 1979 1980 and 1981 Lost interest; unavailability of
each Commercial post-larvae; poor site; could not
negotiate long-term lease.

B. C. Brewer and Company 100 acres of ponds, Large Prawns 1978 Dec., 1981 Site was too cold; uneconomical
(Kilauea Agronomics) (planned for Commercial, production.
Kilauea, Kauai 300 acres) with hatchery
and processing
plant.

C. Amfac 35 acres of ponds, Pilot Prawns 1980 Sept., 1982 Mainland United States market was
(Amfac Aquatech) (planned for Demonstration, thought to be insufficient to
Kekaha, Kauai 350 acres) with hatchery justify major corporate investment;
and processing questionable product acceptance.

D. IKKO Hawaii Aqua Culture 13 acres of ponds, Pilot Japanese 1979 Dec., 1982 Inability of the technical support
Company, Ltd. (planned for Demonstration, Tiger group to deliver results; harass-
Kahuku, Hawaii 50 acres) with hatchery. Shrimp ment by regulatory agencies.

E. Kahuku Seafood Plantation 4-acre site, Pilot Oysters 1975 Jan., 1983 Unavailability of seed oysters from
Kahuku, Hawaii raceways Demonstration the Mainland; poor production due
and ponds. to technical problems; damage from
Hurrican Iwa; poor personnel
45-acre site, Commercial Oysters Nov., 1981 Jan., 1983 management.
raceways and Scale
ponds.

siting of ponds (e.g., excessive water leakage), and 4) problems in lease nego-
tiations. In addition, several farmers stopped production during 1981 and 1982
because the State hatchery was having critical production problems and could
not suppi.1 stocl-,irg materials or. 1 consisternt basis.

The multi-million dollar, large-scale aquaculture ventures which failed
also had a number of characteristics in common. Most were "probes"' by large
diversified corporations to determine if aquaculture could be a profitable
part of their business. Though the species differed, i.e., prawns, shrimp
and oysters, most ventures began as pilot-demonstration projects to determine
the basic technical and economic feasibility of a production system at a par-
ticular site. The C. Brewer operation was an exception, as they moved directly
into the construction and operation of a 100-acre freshwater prawn farm. This
farm was, at the time, the largest prawn farming operation ever attempted.
The withdrawal of these large-scale ventures from aquaculture caused major
impacts on the credibility of the industry.

The four ventures publicly cited a variety of reasons for ceasing opera-
tions (Table 3). Unmanageable siting difficulties were emphasized by C. Brewer
and IKKO. Persistent technical problems which contributed to uneconomical
production were cited by C. Brewer, IKKO and the Kahuku Seafood Plantation.
Amfac pointed to a questionable U.S. market for frozen freshwater prawns as
being of crucial importance in the decision not to invest additional millions
in full-scale corporate expansion. IKKO, a ~Japanese company, experienced con-
tinual disputes with the U.S. Fish and Wildlife Service and the City and County
of Honolulu Board of Water Supply which, they claimed, caused large cost over-
runs and left them with a very negative impression of Hawaii's aquabusiness
climate.

In addition to the well-publicized reasons given by the four companies
for discontinuing these large-scale projects, other factors clearly affected
their decisions. Broad corporate objectives may have changed during the pilot
project, either from personnel changes in top-level management or from poor
performance in other areas of the company's business. Diversification into
aquaculture may not have fit into the company's new objectives. Moreover,
corporate managers must have a constant profit picture, and internal politics
tend to pressure management decisions to favor traditional, proven crops. It
is also apparent that the patience necessary to help a new technology through
the initial "start-up" and market development stages was not present in these
companies.

Significantly, three of the large-scale aquabusiness ventures which probed
into the technical and economic feasibility of aquaculture, were backed by
varying degrees of corporate commitment. Reportedly, technical advice, when
needed, was not sought or, when it was obtained, was not applied. A breakdown
in communication between parent company officials and the production unit staff
was apparent in some instances. Poor management and resource allocation deci-

-10-

sions resulted, and project feasibility and profit projections suffered. In
the final analysis, senior management did not have confidence in the project's
profitability and made a management decision to discontinue the operation.

All of the failed ventures had certain problems in common. Small-scale
farmers generally appeared to lack sufficient management skills and financial
resources. The large-scale aquaculture attempts had problems in basic manage-
ment, poor initial siting, inappropriate marketing strategy, and weak financial
commitment. All large-scale projects were adversely affected to some extent
by biotechnical problems, which contributed to uneconomical production. In
some respects, the lack of success was, in large part, the project's own fault.

Aquaculture in Hawaii is going through an initial "shake-out" period.
The industry is still searching for the species and technologies that will
work consistently and profitably. Moreover, every venture is somewhat unique
since every production system and every site is different. Each company is
organized differently according to its technical resource base, management
style, capital and overhead structure and marketing strategy. Most impor-
tantly, each will execute its business plan with varying degrees of effec-
tiveness.

IV. ANALYSIS OF DEVELOPMENT ISSUES

The contriution that aquaculture can make to the Hawaiian economy wiil
be determined by the number and size of successful companies. It is incum-
bent, therefore, that the people of Hawaii help establish conditions which
will assure greater probability of success to aquaculture ventures. The
Governor's Committee focused its deliberations and addressed its report to
this end.

The key development issues identified by the Committee are: 1) Manage-
ment, 2) Technology and Knowledge, 3) Marketing and Economics, 4) Water and
Land, and 5) Government Activities. Major findings are highlighted in the
following sections, and provide the basis for the problems and recommended
actions discussed below.

-12-

A. Management

Most problems in commercial aquaculture in Hawaii today are due to poor
management. in general, aquabusinesses have exhibited three major management
weaknesses: 1) poor general business management, 2) inadequate biotechnical
information base, and 3) ignorance or misapplication of existing information.

Poor general business management is more prevalent in commercial aquacul-
ture than it is in most other business endeavors. A critical examination of
aquabusinesses suggests that aquaculturists are often lacking in basic busi-
ness skills, such as task management, money management, and marketing. Aqua-
businesses, particularly small-scale operations, tend to rely on very informal
and unplanned management rather than well thought-out programs.

The basic biotechnical information available for managing an aquaculture
farm is also inadequate in some instances, and tends to magnify the adverse
effects of poor general business management. Commercial aquaculture relies
a great deal on the farmer's practical or "green thumb" experience. Detailed
scientific understanding of the biology and chemistry of many production
systems has not been fully developed and further study in this area is nec-
essary. Moreover, aquaculture is lacking in farmer-usable management tools,
technologies and techniques. The beginnings of improvement in this area lie
in research and extension.

Farm management and skillful application of available "know-how" have
figured greatly in the measure of success and failure in Hawaii's aquaculture
industry, particularly in the case of freshwater prawns. Production inconsis-
tencies can be attributed in many instances to the lack of application or poor
application of well-known, state-of-the-art information, rather than unknown
factors related to a species or production system. Human error and human
ignorance are major contributors to an aquafarm's failure to meet production
goals. These are basically problems in farm operations, personnel management,
and extension education of the farm operators.

In conclusion, a major reason for mediocre performance in aquabusinesses
has been the poor management skills of farmers. Good management is utilizing
accurate information at the right time and learning from experience the proper
techniques necessary to increase production. It should be emphasized that
improvement in the overall expertise of the aquaculture industry will take
time and a dedication to learning from past mistakes.

Aquafarmers will profit a great deal from mastering farm operation and
general business management skills. Hawaii, in general, must improve the
quality of its attempts at aquabusiness by developing pools of experienced
personnel, conducting research to supplement the existing data base and pro-
viding adequate extension education opportunities. General aquabusiness
performance can be improved through the following actions:

-13-

� Existing aquaculture extension assistance provided through the State of
Hawaii and joint Federal/State programs should be given the resources
(manpower and funds) to carry out projects and programs to increase the
farm management skills of commercial aquaculturists.

* Special programs and practical training in general business management,
as applied to aquafarming, should be offered by the University of Hawaii
and the Community College System.

* State research efforts should be balanced between development of practical
farm management tools and techniques, and fundamental scientific under-
standing of the production system.

* Commercial aquaculturists should consider organizing into a statewide
association which could provide an industry focus, as well as a forum
for the exchange of ideas and information. This association could also
serve as a collective voice to present the industry's concerns to the
Administration and the Legislature and input these concerns into govern-
ment decisions.

-14-

B. Technology and Knowledge

The issues of aquaculture technology and knowledge are fundamental to
the develcpment of the industry's commercial production and rE�earch, train-
ing, education and consulting activities. Technology is considered, for the
purposes of this report, to encompass those species and systems which are
being commeftcially developed in Hawaii, while knowledge refers in broad terms
to the diverse activities of research, training and technology transfer.
These two distinct, yet highly inter-related groups of activities, offer
great opportunities for bringing revenues into the State through the sale of
products and expertise.

1. Technology

Around the world, a relatively small number of aquatic species have been
shown to be technically and economically feasible for commercial aquaculture
(Table 4). Many other economically important species are about to begin com-
mercial demonstration or are being extensively researched in numerous labora-
tories. Finfish constitute most of the world's commercial aquaculture produc-
tion, while relatively little is derived from crustacea (e.g., shrimps, prawns
and crabs), despite the very large world market for these species. Most
Hawaii firms have targeted prawns and shrimps for commercial development.

Aquaculture as it is practiced around the world is a diverse, multi-
purpose activity which can take a variety of physical forms, depending on the
species and production system used. Most aquaculture is associated with the
production of food for direct human consumption; however, aquaculture can also
be utilized to replenish commercial and recreational fisheries, treat wastes,
and produce industrial chemicals, ornamental fish and baitfish.

Technical information is extensive for a few species (e.g., trout, cat-
fish and oysters) though there are no comprehensive "how-to" manuals as yet.
For such other species as Hawaiian prawns and marine shrimp, the technical
information base is sufficient to attempt commercial-scale development, but
the risk of failure is much greater. For those species which have been suc-
cessfully cultured in the laboratory, but not yet at commercial-scale (e.g.,
mahimahi and opihi), the biotechnical information available is limited and
the degree of risk in achieving a profitable commercial venture is very high.
This situation exists because the translation of a technology from the labo-
ratory to a commercial situation is a critical and often difficult step.

While it is difficult to characterize every possible aquaculture system
into a precise category, in general, systems can be classified as being of
low, medium or high-intensity (Table 5). Each system has its own peculiar
development problems. Hawaii has opportunities for commercial operations in
all forms, though the greatest economic impact will be from medium and high-
intensity systems.

Table 4 Significant Commercially Aquacultured Species and
Species Groups From Several Countries

Japan Taiwan Israel USA

Mullet Freshwater Prawn Freshwater Prawn Freshwater Prawn

Oysters Tilapia Tilapia Tilapia

Clams Mullet Mullet Oysters

Common Carp Oysters Common Carp Clams

Koi Carp Clams Silver Carp Trout

Trout Carp Grass Carp Catfish

Sweet Fish Milkfish Crayfish

Salmon Japanese Eel Salmon

Japanese Eel Marine Shrimp Freshwater Game Fish

Yellow Tail Lobster Freshwater Aquarium
Fish

Sea Bream Seaweed Mussels

Horse Mackeral

Puffer

Filefish

Marine Shrimp

Abalone

Seaweed

Crabs

-16-

Table 5 Generalized Characteristics of Low, Medium and
High-Intensity Aquaculture as Practiced in Hawaii

Intensity

Characteristic Low Medium High

Yield/Acre low medium high
(lbs/acre) (100's lbs) (1,000's lbs) (10,000's lbs)

Land Used large in between small

Direct Employment small in between large

Employment/Acre small in between large
(jobs/acres) (1 job/50 acres) (1 job/10 acres) (1 job/acre)

Initial Capital Investment small in between large
(dollars/acre) ($100's acre) ($1,000's/acre) ($10,000's/acre)

Water Use low medium high
(gallons/day) (0 to 1,000's GD) (20,000-50,000 GD) (1 M - 20 M GD)

Water Use salt salt, brackish and salt and brackish
fresh
Manageability easy difficult very difficult

Hawaii's Competitive Edge none small substantial

-17-

Ancient Hawaiian fishponds, managed by traditional methods, are examples
of low-intensity aquaculture. They do, however, offer limited management
options because of their size and construction.

Medium-intensity aquaculture is represented by the earthen pond culture
of Hawaiian prawns. Ponds, usually one acre in size, are often constructed
on primary agricultural land. Earthen ponds offer greater control of the
growing environment.

High-intensity systems are typified by concrete and wooden raceway
systems which reportedly can produce hundreds of thousands of pounds of
animals per acre of water per year. High-intensity systems are capital- and
labor-intensive on a per-acre basis. Since total control of the system is
possible, management options are numerous, but these are generally considered
difficult and expensive to implement. Moreover, the operational costs (e.g.,
for pumping water, feed and labor), are large in comparison to the other sys-
tems, but the total profit potential is greater.

Species selection is a crucial question for Hawaii's aquaculturists.
There is a limited number of economically-important indigenous and native
species suitable for major-scale commercial development (e.g., opihi, mahi-
mahi', ogo, and mullet), therefore, diversification and expansion of the in-
dustry will rely on selected importation. Importation of exotic species
carries with it the risk of introduction of aquatic diseases, as well as the
possible ecological consequences of escape. Another species selection factor
is the Island's subtropical climate which provides a cooler temperature regime
than may be desirable for the optimal culture of certain tropical warmwater
species. Mild seasonality (winter/summer temperature fluctuations) can cause
variable growth rates in pond production systems. It should be noted that
controlled environment, highly intensive culture systems are not affected by
ambient temperature fluctuations.

Hawaii has a variety of aquaculture development opportunities for a wide
range of species and technologies. Limited availability of State funds neces-
sitates prioritization of aquaculture development initiatives. Prioritization
should be guided by the following considerations:

� The State should concentrate its development efforts on technically-feasible
species with substantial development and market potential, e.g., marine
shrimp, red tilapia and freshwater prawns. Other candidate species, such
as trout, channel catfish, Chinese catfish, Chinese carp and mullet, are
suitable for small, family-run operations that would service the local
market.

* The State should develop its species development and funding priorities in
close consultation with the aquaculture industry.

-l 8-

* The State, should emphasize the development of commercial-scale aquaculture
over subsistence or backyard aquaculture, since commercial-scale aquacul-
ture has a far greater economic impact.

o The State and the private sector should concentrate on medium and high-
intensity commercial aquaculture systems with the exception of the resto-
ration of appropriate ancient Hawaiian fishponds.

Commercial aquaculture species and systems presently utilized in Hawaii
have a variety of biotechnical constraints limiting profitability. These con-
straints can be reduced by the following actions:

* The State should improve current research efforts aimed at developing
cost-effective inventory control methods and improving harvesting effi-
ciency for medium-intensity earthen-pond prawn farming. More imagina-
tive approaches to solving problems and intensification of selected
efforts could more effectively utilize limited funding.

* The State should conduct research to improve management techniques for
Hawaiian fishponds. These fishponds are an under-utilized resource
which could be brought into productive and profitable use.

0 The State should encourage the development of new sources of stocking
material in the public and private sector. State facilities, such as
the Anuenue Fisheries Research Center, should be primarily utilized
to carry out research on hatchery technology for existing and new
commercial species.

The State should assist in establishing virus-free marine shrimp brood-
stock for species of commercial interest to local aquaculturists. Virus-
free stocks are needed by both researchers and commercial aquaculturists
to further expand marine shrimp farming in the Islands.

2. Knowledge

Aquaculture has been identified as one long-term means of improving the
protein supply in food-short Third World countries. There are numerous job
opportunities for qualified aquaculture consultants today, as organizations
such as the Asian Development Bank and the World Bank have devoted large sums
to aquaculture planning and development around the world. Often these large
country-wide development programs have large training and education components.

Hawaii's Research, Training and Technology Transfer sector, particularly
the private consultant segment, is very active in competing for international
planning and development jobs. In addition, the United States has also made
a long-term commitment to increasing its aquacultured seafood production
through a variety of research and development activities. Though competition

-19-

is keen, Hawaii has a great opportunity to establish itself as a major inter-
national center for aquaculture research, training, education and consulting.
The components of such a major center are largely present (w.,ith some kp,'! excer-
tions), but they are currently not well-organized.

There is general concern that exporting Hawaii 's aquaculture knowledge
to other countries will be fostering future competition. It is clear that
this is an issue that should be carefully examined periodically. However,
there are many reasons why this may not have a great impact on developments
in Hawaii: 1) knowledge is a dynamic field that is always improving upon
itself, hence, it is a renewable market, 2) often, knowledge must be exten-
sively modified for use in a particular country, and 3) sociological and polit-
ical attitudes in foreign countries may be unworkable for a sophisticated aqua-
business. In short, Hawaii has much to gain in pursuing technology transfer
activities, and potential competition from Third World aquaculture production
does not appear to be of serious concern at this time.

One important component of State efforts to attract aquabusiness in the
Research, Training and Technology Transfer sector is a research and demonstra-
tion facility. A tropical aquaculture center, to be located at Waialee on
Oahu's Northshore, has been in the planning stages since 1978 by the University,
DLNR and DPED. Presently, a preliminary design is nearly complete; however,
State funds are not available to finish the design and begin first-phase con-
struction. The preliminary estimate of the cost of a complete facility is
$18 million. At this "price tag," private and public sector support for the
facility has been weak.

In concept, a multi-purpose, multi-use, multi-user group facility where
research, training, education and demonstration activities can be carried out
by public and private sector groups is desirable. It could be a place where
training of local and out-of-state aquaculturists could take place, where
production improvement research could be carried out, where new technologies
could be demonstrated and spun-off to commercialization and where extension/
education activities could occur. The "Tropical Aquaculture Center" represents
one way of implementing this multi-purpose facility concept; however, other
joint public/private sector or private sector approaches should be examined to
achieve a flexible and cost-effective result.

Hawaii has a great opportunity to gain economically from international,
national and local aquaculture research, training, education and consulting.
To realize these benefits, Hawaii should: 1) develop the necessary infrastruc-
ture, 2) maintain a high standard of professional conduct, and 3) develop a
highly successful Commercial Production sector. Hawaii has much to gain by
aggressively seeking research and consulting dollars and a coordinated approach
could be fostered by the following actions:

-20-

* The State should sponsor a series of small workshops for all groups
interested in the further development of the Research, Training and
Technology Transfer sector. These workshops would focus on developing
a coordinated approach to making Hawaii a center of excellence for
aquaculture research, training, education and consulting.

* The State and the private sector should jointly examine the need, cost
and potential benefit of a large-scale multi-purpose, multi-use and
multi-user group facility. This would make Hawaii more competitive in
attracting research, training, education, and demonstration activities.

C. Marketing and Economics

The crucial issues of marketing aquacultured products, and the economics
of their production were considered in three parts: 1) marketing, 2) avail-
ability of capital, and 3) the cost of doing business.

1. Marketing

The local seafood market is substantial and highly diversified, with a
large tourist component. A recent survey indicated that seafood consumption
in the State is nearly 40 million pounds annually. Per capita seafood con-
sumption in Hawaii is more than two and one-half times the national average.
Approximately 55% of the fishery products consumed locally are imported and
nearly 40% are sold in frozen form. Significant opportunities exist for sub-
stituting fresh, locally-grown fish and shellfish for frozen imports. It has
been estimated that the total value for the fishery products market in the
Islands is upwards of $150 million a year.

Primary export markets which have been targeted for Hawaii's aquacultured
products are Japan and the mainland United States, particularly the West Coast
where 1.5 million residents of Asian-Pacific descent live. While these markets
appear to be large and potentially lucrative, access will be constrained by a
variety of factors including: 1) low or inconsistent volumes available for
sale, 2) limited and expensive transportation options, 3) tight control of
points-of-access by a few companies, 4) difficulties involved with transport-
ing perishable products, and 5) traditional business practices that are often
cumbersome and unfamiliar. The costs required to develop and maintain export
markets, may be a formidable constraint to market expansion, particularly for
products such as freshwater prawns that are relatively unknown to the consumer.
Moreover, Hawaii's seafood distributors are not export-oriented, as illustrated
by the fact that only 12 of 105 wholesale businesses exported their products
in 1979.

Hawaii's aquaculturists have, with the assistance of State promotional
funds, gained considerable marketing experience with freshwater prawns. Although
some individual producers may disagree, most prawn aquaculturists are readily
selling their product locally or on the M'ainland. Demand far exceeds supply
for competitively-priced prawns, with certain ethnic groups purchasing sub-
stantial quantities of product. Unfortunately, supply limitations have pre-
vented penetration of large volume Japanese and Mainland export markets.
Despite this situation and the reported poor results of Amfac Aquatech's test
marketing on the Mainland, State personnel and prawn farmers continue to re-
ceive numerous requests to purchase freshwater prawns.

The knowledge gained from marketing freshwater prawns can be applied to
other aquacultured products. Fresh-chilled and frozen prawns can occasionally
experience quality control problems (e.g., product mushiness) after the product

-22-

has left the farm. This strongly suggests that certain aquacultured products
may require modified handling procedures and furthermore, it may be necessary
to educate distributors and consumers. Extending the shelf-life of fresh and
frozen products is another important aspect of market development and expan-
sion. Furthermore, in the early stages of the industry's development, sup-
plies are likely to be inconsistent, and sales channels that can adjust to
irregularities in supply must be identified. Finally, the prawn marketing
experience indicates that aquaculture producers should attempt to harvest
and sell products to conform to the market's needs and schedules.

The present problems encountered in marketing aquacultured products stem
primarily from production problems, i.e., inconsistent and inadequate supplies.
Demand for fresh, high quality seafood products is very strong. The diverse
local seafood market, with its large number of seafood eaters, should not be
under-rated because it can readily support the development of a substantial
aquaculture industry. Moreover, the changing dietary preferences of health-
conscious Americans and the close proximity of the J3apanese market bode well
for the demand for Hawaii's aquacultured products, though access to these
markets will require creative and determined approaches. Finally, by filling
in gaps in seasonal supplies, increased aquaculture production will more than
likely complement rather than compete with fresh capture fishery products.

The small size of Hawaii's aquaculture industry is limiting aggressive
market expansion because of inconsistent, unpredictable production. This situ-
ation could be improved by the following actions:

* Though this action may be premature, aquaculture producers should consider
joining together to form a professionally-managed marketing cooperative in
order to achieve the volume of product necessary to service the existing
market and open new segments.

* Aquaculture producers should target distribution channels and sales outlets,
e.g., specialty outlets, that can readily adjust to supply irregularities
caused by unpredictable or seasonal production.

As aquaculture production grows, orderly development of local and export
markets to keep pace with supply is desirable. Today, certain producers are
not adequately utilizing local seafood distributors. Moreover, most of
Hawaii's aquaculture farmers have neither the time nor the resources to
carry out extensive market development programs. Improvement in the situa-
tion could be fostered by the following actions:

* Before pursuing an export market, aquaculture producers should concentrate
on the local seafood market by focusing on import substitution. In par-
ticular, substitution of fresh "Hawaii grown" seafood for frozen imports
should be emphasized.

-23-

* Aquaculture producers should strive to develop unique market niches for
locally-grown products to reduce opportunities for future competition
from local capture fisheries or imports.

* The State and the private sector should jointly provide promotional and
market development assistance to open new markets and relieve competitive
pressure as greater amounts of product become available.

Freshwater prawns, both fresh-chilled and frozen, have had quality con-
trol problems frequently brought on by poor handling after the product leaves
the farm. These problems could be reduced by the following actions:

* The State should assist the prawn industry in formulating a strategy to
educate "middle-men" and end-consumers as to the proper handling of fresh-
water prawns and systematically investigate causes of complaints about the
product.

* The State should improve local capabilities for conducting research on
techniques for processing and handling freshwater prawns. For example,
innovative mechanical processing methods to reduce the potential for
"mushiness" and extend shelf-life should be developed.

2. Availability of Capital

A lack of investment capital for aquaculture ventures and recent excep-
tionally high interest rates have affected the growth of Hawaii's emerging
aquaculture industry. At the present time, commercial lenders continue to
view aquaculture as a highly risky business, and loan officers must see a
clear potential for repayment to justify the loan. Commercial lenders hold
this opinion because most aquaculture ventures lack an adequate track record,
financial data, and personnel with farm management skills. Furthermore, recent
articles in the popular press have given the misimpression that commercial aqua-
culture in Hawaii is a failure. These have tended to make loan officers hesi-
tant to offer financing. In actuality, there are aquaculture species and
technologies that have proven their profitability in Hawaii and on the Main-
land, and many more are attempting to "make the leap" from the research and
commercial demonstration stage to full-scale commercial development.

Fortunately, at this stage of the industry's development, other sources
of financing are available which accept the higher-risk element (Table 6).
The development of the United States agriculture industry demonstrated that
the public sector provides the majority of funding for species/technology
development through basic and applied research. Once a species has been iden-
tified as having commercial potential, higher-risk capital, e.g., R&D limited
partnerships and venture capital, is available for pilot demonstration and
commercialization. In addition, government lending agencies also provide a
mixture of financing vehicles to carry an unproven technology to commercializa-
tion, since these agencies are better able to assume the risk of a lengthy re-
payment time (Table 6).

-24-

Table 6 Financing Alternatives Typically Used for Various
Stages of Commercial Aquaculture Development

Stage of Commercial Development Type of Financing

Basic Research > Public Research Grants

Applied Research > Public Research Grants

Pilot Demonstration > Limited Partnerships
FVenture Capital (Institutions)
'-Venture Capital (Individuals)

Comeria
ComercalFeasibility - -Public Low-Interest Loans
(First Farm) - Commercial Lenders
- Small Business Investment
Companies
- Certified Development
Companies
- Public/Private Participation
Loans
- Public Loan Guarantees
-Limited Partnerships

Commercial Expansion - Commercial Lenders
(Emerging Industry) - Public/Private Participation
Loans
-Venture Capital
Limited Partnerships

Established Business > Commercial Lenders
(Mature Industry)

-25-

Sources of high risk and venture capital exist both in Hawaii, on the
Mainland, and in foreign countries. The State government has provided an
Aquaculture Revolving Loan Fund, located in the Department of Agriculture
(DOA), which acts as a "lender-of-last-resort" and offers a lower-than-market
interest rate of 5% to aquaculturists.

The DOA Aquaculture Loan Program, initiated in the early 70's, is geared
towards helping the new, small-scale aquafarmer who cannot obtain conventional
financing. The applicant must be turned down by two outside sources. The
Program, capitalized at $700,000, has made 19 loans since its inception. In
1983, 20 requests for loans were received and there is currently a balance of
approximately $155,000.

High-risk investors want projects with high potential earnings in order
to justify the financial risk. In contrast, well-known (lower-risk) agribusi-
nesses, e.g., macadamia nuts or nursery products, are expected to have pre-tax
return-on-investment of 20%-25% or more before more conservative commercial
lenders will consider a loan. On the other hand, with existing high interest
rates, the high-risk investor may require higher potential pre-tax earnings
before offering financing to a commercial aquaculture venture. It is diffi-
cult to generalize, but a successful well-run aquabusiness (medium- and high-
intensity) can have pre-tax rates of return in the 15% to 30% range, and some
high-value products yet to be commercially-grown in Hawaii may have even
higher returns. Small-scale or family-run operations may also offer returns
of this scale or higher, but this is primarily due to their failure to account
for all the costs of production.

In conclusion, most aquaculture technologies do not appear to be eligible
for commercial loans; however, other sources of capital which accept higher
risks are available. If an aquaculture company wants to utilize sources of
high-risk capital, such as venture capital, then it has the option of pursuing
local, Mainland, or foreign investors. The continued expansion of the aqua-
culture industry would be facilitated if government and the private sector
searched for ways to spread the risk among those involved in the financing.

Commercial lenders and high-risk investors need proven information in
order to evaluate commerical aquaculture ventures. At its current stage of
maturity, the industry does not have a lengthy track record and financial data
from successful operations are not widely available. Assistance could be
provided in the following form:

� The State, in cooperation with the private sector, should develop, collect
and publicize the technical and financial information needed by commercial
lenders and high-risk investors to evaluate aquaculture projects.

-26-

At the present stage of development of the aquaculture industry, entre-
preneurs need greater access to more sources of high-risk capital. Local, as
well as Mainland and foreign sources should be exploited. Availability and
access to high-risk capital can be encouraged by the following:

* Private- and public-sector aquaculture developers should join forces to
publicize Hawaii's interest in attracting high-risk capital for aquaculture
projects. For example, the State should study the desirability of estab-
lishing a state clearinghouse for inquiries from venture capital firms and
entrepreneurs with projects which need funding.

* The State should provide aquaculturists assistance in locating and accessing
sources of high-risk capital, including providing advice in how to write
and package aquabusiness proposals.

Though the Department of Agriculture's Aquaculture Revolving Loan Fund
has assisted many aquafarmers since its inception, major improvements could
be made to make the program more effective. Actions to be considered should
take the following form:

* The State should review and evaluate the present Aquaculture Loan Program
so that it will have a more developmental role, rather than serve as a
"lender-of-last-resort." One possibility would be to make access easier;
for example, there could be, with the consent of local banks, a simple
"assets and income" test to qualify for a loan rather than the present
procedure which requires that the applicant be turned down by two outside
sources. This has resulted in a "facade of rejection." Another sugges-
tion would be to encourage program administrators to aggressively seek
participation capital from outside sources, and search for novel ways to
share the risk of development. For example, State funds may be used to re-
duce interest rates on conventional bank loans or to provide loan guarantees.

* The DOA loan program, based upon its success, should be capitalized at a
level to allow for the development of a more flexible aquaculture loan
system to meet the needs of the industry. In concert with this increase
in available funds, increases in loan limits should be instituted so that
the program will be applicable to larger, medium-intensity aquaculture
operations.

* Loan program administrators should strive to utilize all available public-
sector aquaculture expertise, particularly that found in the DLNR, to
evaluate the technical and economic feasibility of projects applying for
State aquaculture loans.

-27-

3. Costs of Doing Business

The costs of starting-up and operating a commercial aquaculture farm in
Hawaii ara generally1 D7?rceved as eiqhigher than for similar types of farms
on the Mainland. There is often a tendency to compare these costs with those
in Lesser-Developed Countries (LDC); however, this is very misleading and in-
appropriate because of the extreme differences in government objectives, basic
resources, social structure, culture and political stability. Commercial aqua-
culture endeavors in LDC's are, for the most part, low-intensity operations
which are generally not suitable for Hawaii (Table 5).

Significant start-up costs include the acquisition of land (most frequently
by a long-term lease), obtaining the necessary permits, and constructing and
equipping the farm (e.g., earth-moving in the case of pond construction and
the purchase of pumps and pipes). The costs of materials and equipment tend
to be high because of shipping distances for the raw materials, and the costs
of certain critical transportation and storage infrastructure. As a general
statement applicable to all businesses, average construction costs are 5% to
10% higher in Hawaii than on the Mainland, though for some projects costs can
be lower.

The largest operational costs for aquafarming are capital, labor (espe-
cially the cost of Workmen's Compensation), feed and energy. For medium-
intensity aquaculture, labor and feed are the dominant cost items. Small-
scale or family-farm operations often do not account for all costs such as
labor ("sweat-equity"); therefore, while they theoretically should have a
negative cash-flow, they can instead return a profit. In actuality, Hawaii's
labor rates are 50 cents/hour lower than the national average, making the
State very competitive in the production of some exportable goods (excluding
shipping costs). The cost and availability of appropriate feeds and feed
ingredients will continue to be major concerns as the industry diversifies,
since the State has few local sources of ingredients.

Start-up and operating costs for aquaculture farms will generally be
higher than comparable farms on the Mainland. Many cost categories can be
managed and will, no doubt, be reduced as research constantly improves farm
management and new technologies are developed. Other cost categories are
characteristic of doing business in Hawaii, e.g., transportation and energy,
and offer less hope of being reduced in the future. High start-up and oper-
ating costs act as a disincentive to aquaculture investment.

The costs associated with starting up and operating a commercial aqua-
culture farm in Hawaii are generally high. Some costs can be addressed by
government actions, while others are inherent in doing business in the State.
The cost-burden on commercial aquaculture projects may be reduced by taking
the following actions:

-28-

a The State should immediately take steps to reduce the burden of cost
imposed by permits and regulations for starting and operating commer-
cial aquaculture facilities. For example, unnecessary permit require-
ments should be eliminated and delays caused by inefficient and slow
processing of applications for approvals (e.g., for zoning, roads, water
lines, telephone lines, setbacks, wells, and discharges) can signifi-
cantly reduce start-up costs.

* The State should examine the Workmen's Compensation Program rate struc-
ture and the law itself in an effort to reduce the high cost of providing
benefits. The Committee is aware that the 12th State Legislature autho-
rized a comprehensive study of the entire program and suggests that
changes in the aquaculture situation be-considered in the context of
modifications in the entire program.

* The State and the private sector should initiate cooperative research,
development and demonstration projects directed at reducing the major
costs of production and improving the yields from existing aquaculture
technologies in order to improve industry profitability.

-29-

D. Water and Land

Hawaii's basic natural resources of water and land are addressed in the
following sequence: fresh water, brackish and salt wrater, and land. The Com-
mittee focused on the characteristics and availability of these resources
around the State.

1. Fresh Water

Freshwater availability, for aquaculture purposes, varies a great deal
in the Hawaiian Islands. The northeastern side of the chain receives the
most rainfall. The majority of the perennial streams are also found on the
northeastern side of the Islands. Neighbor Islands generally have excess
ground water, though certain regions may be drier than others. Oahu, where
80% of the State's population lives, has freshwater limitations and supplies
are highly regulated.

Oahu's freshwater supply is very constrained. Approximately 99% of all
fresh water consumed on Oahu is from groundwater sources. About 25% of the
total water used is for domestic purposes and about two-thirds for agricul-
tural usage. Notably, agriculture on Oahu and all other Islands consumes a
large percentage of the total water used.

On Oahu, use projections indicate that the freshwater supply will equal
demand in the year 2000 if the level of agricultural activities remains con-
stant. Since the economically-troubled sugar and pineapple industries are
the primary crops utilizing water, as time goes on both industries will, no
doubt, be taking significant amounts of acreage out of production, and thereby
releasing water for other uses. Water resource planners have not taken this
possibility into their calculations, and have limited freshwater usage for
aquaculture developments.

Hawaii's leading aquaculture crop is freshwater prawns. The majority of
prawn aquaculture farms utilize two to three times the amount of fresh water
used by furrow-irrigated sugar production, i.e., 20,000 to 30,000 GPD/crop
acre vs. 10,000 GPO/water acre. It is important to note that freshwater aqua-
culture production systems, e.g., the type used by freshwater prawns, can be
designed as recirculating or multiple-water use systems and integrated with
agriculture operations. Moreover, aquaculture systems can recharge the fresh-
water aquifer if they are appropriately designed and placed. M1ost freshwater
aquaculture in Hawaii today, however, is in the coastal plains where there is
limited opportunity for recharge.

Public management and control of Hawaii's freshwater resources is a com-
plex issue. A 1978 Constitutional Convention amendment suggested that one
State agency should control all surface and groundwater resources. Currently,
regulation and control of fresh waters is shared by the State Department of

-30-

Land and Natural Resources and the various County Boards of Water Supply. This
leads to confusing and sometimes contradictory policies. As a general assess-
ment, fresh water is difficult to obtain in Hawaii and it is practically impos-
sible to get permission for new uses from the water authorities on Oahu. It is
strongly emphasized that government restriction of freshwater use is not a
good management philosophy because there is no flexibility or room for growth.

Hawaii possesses some of the finest freshwater resources in the world.
Fresh water is available on all Islands, but there are regulatory restrictions,
as well as cost-of-development constraints associated with its use for com-
mercial aquaculture purposes. The State does not have a clearly defined over-
all freshwater resources management scheme. Finally, if freshwater aquaculture
is to continue to expand in Hawaii, then a realistic balance between preserva-
tion of freshwater resources for future generations and use of fresh water for
economic development must be achieved.

Presently, State and County freshwater resource planning and preservation
policies are not adequately considering the needs of aquaculture. In particular,
freshwater availability is restricted on Oahu and commercial aquaculture is not
a recognized priority in allocation decisions. Aquaculture development should
be encouraged by carrying out the following actions:

* Prevailing government attitudes toward strict preservation of fresh water
for future, vaguely-defined domestic consumption should be changed in
favor of policies which adequately protect Hawaii's freshwater resources,
while permitting their use for economically-beneficial and non-degrading
uses such as freshwater aquaculture.

* State and County governments should encourage input by aquaculturists into
the development of a statewide water management scheme. The Committee is
aware that such a management scheme or water code is presently under de-
velopment and will be presented to the 1985 State Legislature.

* Fresh water used for aquaculture should be included within the definition
of agricultural water use for government planning and development purposes
and should receive the same benefits and policy considerations as agricul-
tural usage.

* The freshwater usage "ceiling" in the Kahuku area should be carefully re-
examined by State DLNR and County Board of Water Supply experts to deter-
mine if additional fresh water is available for expansion of commercial
aquaculture activities.

* Freshwater aquaculturists, particularly those on Oahu, and the State
should encourage aquaculture production systems that recycle water, or
utilize the discharged water for agricultural crops (multiple use).

-31-

2. Brackish and Salt Water

Commercial aquaculture development is not tied exclusively to fresh water,
but can also utilize Hawaii's abundant brackish and saltwater resources.
Brackish water, a mixture of salt water and fresh water, is defined as water
with more than 250 parts per million (ppm) of salt (chloride). Salt water
has approximately 18,000 ppm of salt. It is important to note that brackish
water is not independent of the freshwater supply, but is the result of the
constant mixing of fresh water with sea water.

Hawaii has a very valuable aquaculture resource in the numerous volcanic
and limestone aquifers from which clean, naturally-filtered brackish and salt
water can be pumped. Useable volcanic aquifers occur throughout the Islands
near the coast. Limestone aquifers are located along the coast, but are more
selectively distributed around the State. Because of these aquifers, brackish
water is abundant and exists almost everywhere along the edges of the Islands.
The supply of salt water is independent of the brackishwater supply and is, of
course, in infinite supply.

Proper placement of brackish and saltwater ponds is an important consid-
eration for both the private and public sectors. Hawaii has two broad cate-
gories of soil: gray and red. Generally, gray soils overlie dense caprock
along the coast, and hence brackish or saltwater ponds would not percolate
into and contaminate the freshwater aquifer present beneath them. Red soils
are found upland, above the coastal plain and are loose in structure. They
would, therefore, be susceptible to downward percolation from brackish and
saltwater ponds. A related consideration in the placement of brackish and
saltwater ponds is the likely increase in salt content of the underlying
soils. Once a saltwater pond is placed on the land, it would take some time
for rains and irrigation systems to make the soils salt-free again.

In conclusion, the use of brackish and saltwater aquaculture would tend
to relieve the pressure on available freshwater supplies and make economic
use of an underutilized resource. Hawaii's brackish and saltwater aquifers
offer very significant potential aquaculture development; however, site selec-
tion will be important.

Increased utilization of Hawaii's brackish and saltwater resources for
land-based aquaculture can be encouraged, without threatening freshwater sup-
plies and soil productivity, through the following actions:

* State and County governments should, after careful study, take a policy
position that land-based brackish and saltwater aquaculture is acceptable
on all the Islands, unless potential degradation of drinking water is
clearly demonstrated.

-32-

* State and County governments should encourage direct brackish and salt-
water discharges from coastal aquaculture facilities when nearshore uses
and environments are compatible with this activity, as aquaculture efflu-
ents are relatively benign discharges. Moreover, the effluents in most
instances will benefit selected nearshore environments by increasing
their overall productivity through the addition of valuable nutrients.

3. Land

Hawaii has large amounts of land that are suitable for various types of
aquaculture development. A gross inventory of lands suitable for aquaculture
has identified 135,000 acres of primary lands and 500,000 acres of secondary
lands throughout the Islands. Primary and secondary lands are those outside
the Urban District and below 3,000 feet in elevation and are less than 5%/1 in
slope, have fresh, brackish or salt water potentially available, and average
air temperatures generally above 200C. Primary lands also have clay, loam or
clay-loam soils which can easily be compacted into ponds. Secondary lands
have less suitable soils and include lava lands. These gross assessments do
not, however, catalog the existing land use and availability for future develop-
ment.

Though apparently many acres of land are available, commercial aquacul-
turists are currently having great difficulties finding appropriate sites be-
cause land is expensive to buy or lease, and water may not be readily avail-
able. One reason for this situation is the imposition of land-use restrictions
for purposes of preserving wetlands, coastal lands and other prime aquaculture
areas. These restrictions have limited commercial use of highly desirable
areas, despite widespread acceptance of the concept that aquaculture is a com-
patible use. Moreover, attitudes toward the preservation of fresh water for
future vaguely-defined domestic use have prevented expansion of existing aqua-
culture operations and will preempt future developments.

Another reason for difficulties in locating sites is that land in Hawaii
is under the control of a relatively few entities and their attitudes towards
aquabusiness have been cautious. This is, in large part, due to several fac-
tors: 1) large landholders are not aware that certain of their holdings are
suitable for selected types of aquaculture, 2) landowners are not interested
in aquaculture because of its negative business image and the perceived risk,
and 3) landowners are looking for a higher return on investment.

The State of Hawaii is the largest landholder in Hawaii, though much of
its holdings are watershed, forest reserves and parks which are not suitable
for commercial aquaculture. The State has increased the availability of sites
for diversified agriculture development by instituting the Agricultural Park
Program. In this program, the State prepares the site and develops the in-
frastructure, e.g., water and roads, and then leases it to qualified farmers
at preferred rates. The development of agricultural parks is a long-range

-33-

program to bring more land into agricultural use. Planning and budgeting for
parks takes a long lead time. Presently, aquaculture is a permitted use in
agricultural parks under the statutes; however, there are currently no aqua-
culture operations in agricultural parks.

The park concept has direct applicability to commercial aquaculture
development. The State and/or the private sector could develop freshwater
or brackish/saltwater aquaculture parks for aquafarmers. In addition, fresh-
water aquaculture could theoretically be integrated into agricultural opera-
tions to gain a multi-use of the water resource. These small farms could be
the nucleus for further expansion of the industry and would inherently lower
the costs and risks involved in commercial development.

The final consideration in land availability is the fate of the sugar
and pineapple industries. There are approximately 250,000 acres of land in
sugar and pineapple production and much of this land is also suitable for'
aquaculture. However, it is clear that commercial aquaculture activities
will not replace sugar and pineapple production on an acre-for-acre basis.
This situation is largely due to the differing modes of production, opera-
tional inputs (e.g., water, energy, and labor), and outputs (e.g., product
and market conditions of the two activities).

Prospective commercial aquaculturists are having great difficulties in
finding appropriately-sized, reasonably-priced sites with adequate water sup-
plies. Large landholders need more exposure to successful aquaculture ventures
to be convinced of their viability. Aquaculturists can be greatly assisted in
finding and securing appropriate, reasonably-priced sites by having State and
private landholders cooperatively undertake the following actions:

* The State and major private landholders should exchange information and
cooperate to identify private lands that are suitable and available for
aquaculture. This could be achieved, for example, through a joint analysis
of a proposed site and the project's feasibility, as well as referral of
potential aquaculture projects to land managers.

� The State should assess State-owned lands, particularly those in unprofit-
able sugar production, to determine their suitability for aquaculture
development and then, to encourage private investment, offer the lands
identified at reasonable rates.

* The State should develop aquaculture parks to increase the availability
and accessibility of sites for commercial aquaculture activities. This
program could be modeled after the State Agriculture Park Program which
identifies and plans a site, develops the necessary infrastructure, and
leases the lots to qualified farmers at reasonable rates.

-34-

E. Government Activities

State and County governments have major roles to play in the encourage-
ment of aquaculture development in Hawaii. Local government activities are
considered in three areas: development, research and extension, and regula-
tion.

1. Development

Historically, the public sector has provided a great deal of support and
encouragement for the development of an aquaculture industry. Aquaculture
development policies are included in the State Plan, as well as in County
development plans. Notably, Hawaii's congressional delegation has taken a
leadership role in fostering the national aquaculture development initiative.
As a result of these efforts, the State has gained a national and international
reputation for its accomplishments in aquaculture planning and development.

In November, 1978, Hawaii became the first state in the nation to publish
a State aquaculture development plan. AquacuZture Development for Hcwaii
helped focus State, County and orivate-sector efforts on a dual goal of:

"the realization of commercial aquaculture production as a
major economic activity and the establishment of the State
as a national and international center of aquaculture
expertise."

State funding for aquaculture development activities increased to implement
the recommendations of the Plan. The Aquaculture Development Program (ADP),
then situated in the Department of Planning and Economic Development (DPED),
was given implementation responsibility (Table 7).

The Department of Land and Natural Resources (DLNR) was made the perma-
nent lead agency for aquaculture development when the ADP was transferred from
DPED in January, 1981. The ADP functions in three broad areas: 1) statewide
planning, coordination and communication, 2) provision of support services in
the areas of information collection and dissemination, permit acquisition,
species and site selection, marketing and economics, and disease diagnosis and
prevention, and 3) funding and co-funding research, development and demonstra-
tion projects. These functions assist in creating a pro-aquabusiness invest-
ment climate, reducing site evaluation and start-up costs, and helping individual
aquabusinesses to solve problems and improve production technologies.

Principal government agencies involved in non-regulatory areas of aqua-
culture development, in addition to the DLNR (the lead agency), are the Depart-
ment of Agriculture (DOA), the DPED, and the University of Hawaii (UH) (Table 8).
The Departments of Agriculture and Planning and Economic Development assist in
State development efforts by supplying financial assistance and research sup-
port, respectively. The University of Hawaii system provides a nucleus of

-35-

Table 7 Expenditures by the State Aquaculture Development Program,
Fiscal Years 1977-1978 to 1982-19831

Fiscal Year Amount ($1,000)

1977-1978 $ 425

1978-1979 702

1979-1980 678

1980-1981 709

1981-1982 627

1982-1983 1,1082

TOTAL: $4,249

1
Includes staffing, operation, and research and development projects.

2
Includes a one-time $300,000 legislative appropriation for an aquaculture
and livestock feeds program.

-36-

Table 8 Current State Aquaculture Activities (non-regulatory)

Department of Agriculture -- Agriculture Loan Division

-- Aquaculture Revolving Loan Fund

Department of Planning and Economic Development -- Energy Division is lead
organization

-- OTEC-Mariculture R & D

University of Hawaii System -- College of Tropical Agriculture is lead
organization

-- Research

-- Education

-- Training

-- Cooperative-Extension with Other State Agencies

Department of Land and Natural Resources -- Lead agency for State aquaculture
development

-- Aquaculture Development Program Office (Chairman's Office)

- Planning, Coordination and Communication
- Support Services
- State Funding Research, Development and Demonstration Projects

-- Division of Aquatic Resources

- Natural Stock Enhancement
- Baitfish Development
- Prawn Research and Cooperative-Extension Services
- Hatchery Activities for Recreational Fishing and Development
Commercial Prawn Farming

-37-

personnel and facilities to conduct aquaculture research, training and educa-
tion activities. In addition, the Counties of Kauai and Maui are in the
process of preparing County aquaculture development plans to guide their
efforts.

Communication and coordination among agencies within government, and
between government and the private sector are areas that need constant atten-
tion. Ad hoc mechanisms to enhance coordination and communication have been
instituted in recent years, e.g., the State Aquaculture Advisory Council, the
Hawaiian Prawn Research Steering Committee and the Hawaii Prawn Producers
Association; however, formal mechanisms should be developed. One major bene-
fit of this action would be greater industry access to, and influence on, gov-
ernment funding decisions.

Another important area in need of immediate attention is the implementa-
tion of State policy to encourage commercial aquaculture development. In con-
trast to the very positive, pro-aquaculture development attitudes of policy-
makers in State government, the lower levels of government can be unsupportive
of environmentally-sound and socially-acceptable aquaculture projects. Inci-
dents were noted where State staff obstructed worthwhile aquaculture projects
for reasons of personal hostility, gross ignorance, excessive conservatism or
protection of "turf." Such a situation, in the regulatory area for example,
acts as a strong disincentive to the prospective aquaculturist in carrying
out the difficult task of planning, organizing and financing the venture.

In general, the public sector in Hawaii has been very supportive of aqua-
culture development. However, as the industry matures, government should allow
industry to assume more of the financial burden for research and development.
The public sector should focus its efforts on areas which reduce business
start-up and operating costs, as well as investment risks. The public sector
should not assume a long-term, major role in financing commercial operations
but should concentrate on research, development and demonstration of new tech-
nology and the provision of extension/education services. Hawaii's aquaculture
industry should not be built on a foundation of long-term subsidies; however,
short-term government assistance is essential to "get the industry off the
ground." The most economical way the State can do this is to improve the
effectiveness of the programs and facilities already in place and add appro-
priate new ones.

Too frequently, lower levels of government act as obstructionists, rather
than facilitators, in carrying out the State policy to encourage aquaculture
development. Communication and coordination between the public and private
sectors could be improved by undertaking the following actions:

* State aquaculture development policy should be communicated to all levels
of government to reduce the bureaucratic problems encountered by commercial
developers.

-38-

* The State should designate a permanent "Aquaculture Development Coordination
Council" to advise on matters related to statewide aquaculture development,
as well as coordinate State activities, review the progress and status of
State programs, and provide a forum for discussion of development issues.
The Council should be composed of representatives from all sectors of Hawaii's
aquaculture community, including key State and County government agencies.

A favorable aquabusiness development climate is a necessity if aquaculture
is going to grow to become a major contributor to Hawaii's economy. Appropriate
aquabusiness investment incentives to attract new ventures and encourage expan-
sion of established firms are needed. Enhancement of the existing climate for
aquaculture development can be achieved by the following:

* The DLNR should update the State Aquaculture Development Plan to formulate
new guidelines for development which reflect the industry's current de-
velopment pattern, stage of maturity and need for assistance. The update
would provide State aquaculture development goals and objectives which
are based on a realistic, up-to-date assessment of resources, opportuni-
ties, constraints, costs and potential benefits.

* The State should focus government programs on reducing industry's start-
up and operating costs and lowering the risk of investment. These de-
velopment efforts can require direct financial support, e.g., research
and extension work, or non-monetary assistance, e.g., regulatory relief.

The State should identify and evaluate various aquabusiness investment
incentives to attract new business and encourage firms to expand. For
example, a tax moratorium or credit could be given on all exported
aquacultured products.

2. Research and Extension

The State of Hawaii has provided significant financial support for aqua-
culture development. From 1965, when prawn research began, to 1975, approxi-
mately $.87 million of State funds and $1.3 million of Federal funds were
spent on a variety of research projects. Since 1975, approximately $5 million
in State funds have been spent on research projects and, in the same period,
an estimated $7 million of Federal monies have come into the State. It is
important to note that State expenditures have increased since 1978. In broad
terms, these research projects have focused on improving yields and reducing
production costs for commercialized species, e.g., freshwater prawns, and
fostering the development of new species and systems. These efforts have been
partially responsible for private sector investments of between $20 million
and $30 million since 1977.

Commercial aquaculturists in Hawaii have access to a wide array of exten-
sion/information assistance located throughout the State. Three categories of
services can be distinguished: 1) Production and Farm Management, 2) Project

-39-

Development and Commercialization, and 3) General Aquaculture Information.
Many of these highly effective services are provided on a temporary basis
through year-to-year project funds, while a few services are provided through
permanent State or County employees.

Production and Farm Management extension services are provided by full-
time specialists in the areas of production and hatchery management, aqua-
culture engineering assistance, and disease prevention and diagnosis. The
production and hatchery personnel (the ADP/Sea Grant Aquaculture Extension
Specialist and AFRC staff) and the aquaculture engineering personnel (the
ADP/Sea Grant Aquaculture Engineering Specialist) deal primarily with the
freshwater prawn industry, while the Aquaculture Disease Specialist (ADP)
addresses all species. All individuals are based on Oahu but have statewide
responsibilities.

Project Development and Commercialization assistance is provided, for
the most part, by temporary staff located on Oahu and in the three Neighbor
Island Counties. The Aquaculture Development Program, as part of its planning
and development mandate, provides statewide assistance to potential farmers in
the areas of species and site location counseling, permit assistance, general
and specific aquaculture information and marketing assistance. The ADP staff
work closely with individuals in the County (Neighbor Island) offices charged
with economic development who generally have responsibility for aquaculture
activities. The ADP, in general, provides a government liaison, as well as
an advocacy function to aquaculturists.

In the area of General Aquaculture Information, a combination of State
and Sea Grant-supported individuals spend some portion of their work time
providing aquaculture information to interested individuals. The Sea Grant
Marine Advisory Program has agents in all four Counties of the State. The
Department of Land and Natural Resources has fisheries biologists on every
island but Lanai. These individuals generally work closely with the Aquacul-
ture Development Program and the Anuenue Fisheries Research Center staff to
provide on-site aquaculture information, as needed.

The State is currently providing approximately one million dollars a year
in staff and research project support for aquaculture development, with approxi-
mately $500,000 a year to the DLNR for research, development and demonstration
projects. Federal funds, often for joint projects, add an equivalent amount
towards research. By comparison, the agriculture industry reportedly has
a $15 million-a-year research program through the University of Hawaii, and
the Hawaii Sugar Planters Association has a $5 million to $7 million-a-year
research budget. With 1984 State fiscal constraints, it may be difficult and
of questionable merit to recommend increasing the financial commitment to
aquaculture development. Nonetheless, greater effectiveness can be accom-
plished through examination of existing expenditures and refocusing program
objectives to meet the current needs of the emerging industry.

-40-

The extension services provided by the State are generally considered
"good quality" and have been clearly effective in helping the industry grow
and develop. However, while existing services have been effective, there is
a need to expand the range of services available to keep pace with develop-
ment in such areas as marine shrimp extension, stocking material for other
species, and analytical services.

The staff of DLNR's Anuenue Fisheries Research Center (AFRC) has performed
a key role in developing the freshwater prawn industry. AFRC developed prawn
hatchery and growout technology, and then provided stocking material and exten-
sion services to encourage commercial investment through a "Cooperative Agree-
ment Program." Presently, AFRC continues to serve the prawn industry; however,
the DL[NR is planning to terminate the Cooperative Agreement Program at the end
of 1985. With the hatchery no longer in use for prawn production, it would
be possible to re-program the facility to assist with the research and develop-
ment of other species, e.g., marine shrimp.

In conclusion, the State of Hawaii is providing significant amounts of
research and development support for aquaculture in a number of areas. Re-
quests for additional funds may not be warranted at this time. More effec-
tive utilization of existing research budgets can be achieved by allowing
research priorities to be jointly determined by the State and industry. State
support of basic and applied research has clearly been an important incentive
to encourage private investment. State-sponsored extension efforts have had
a major role in the development of the industry to-date. However, extension
services and research support must be periodically re-programmed and enhanced
to keep pace with industry development trends.

Current State-sponsored aquaculture research and extension efforts could
be improved by striving to define project objectives which better reflect the
industry's production and marketing problems. Initiatives should take the
following form:

� The State should develop a formal advisory mechanism, such as an "Aquacul-
ture Development and Coordination Council," for the aquaculture industry
to provide input into funding decisions. This mechanism would assure
that adequate funds are directed at solving the highest priority problems
and developing species of greatest commercial interest. In addition, a
committee of industry representatives should be formed to specifically
advise the Anuenue Fisheries Research Center on the direction of current
activities and new program initiatives that would benefit commercial
aquacul ture.

* The State should direct the bulk of its support to encourage the develop-
ment of medium- and high-intensity commercial aquaculture because these
operations will provide the greatest impact on the State's economy.

-41-

*The State should enhance existing extension capabilities to accommodate
the current and projected mix of commercial species and technologies.
For example, a broader range of services in the areas of water quality
analysis and pathology could be provided. The Anuenue Fisheries Researcr.
Center could be re-programmed to support the development of the emerging
commercial marine shrimp farming sector. An initial area of focus may
be production problems.

3. Regulation

Federal, State and County regulations and permits have a great impact on
commercial aquaculture development in Hawaii (Appendix C). The regulatory
process strongly influences such areas as siting, species choice, system
design and most importantly, profitability. The uncertainties associated
with permit compliance, both on the part of aquaculturists in understanding
a complex and often confusing system, and regulators in understanding new,
often complex technologies, can be a major constraint to aquaculture develop-
ment. The time and cost of permit compliance impacts directly on the commer-
cial aquaculturist.

Today, government is generally aware that the regulatory burden on busi-
nesses should be reduced. Though efforts have been made, problems still exist.
The State of Hawaii has an on-going battle with the Federal government over
Federally-mandated regulatory programs. These often do not recognize the
Islands' unique environmental situation, and require variances in interpreta-
tion and application, e.g., the Underground Injection Control Program (Appen-
dix C).

Aquaculture developers complain that Federal, State and County government
regulations are cumbersome and confusing, and often give the regulating agency
too much room for interpretation, particularly in the area of environmental
impacts. Developers also contend that aquaculture is an environmentally sound
use of resources, with very low pollution potential and should be considered
a form of agriculture for purposes of regulatory interpretation.

Federal, State and County regulations can be grouped into two broad cate-
gories: 1) those that impact upon the start-up of an aquabusiness, e.g., siting
and construction, and 2) those that affect the general operation of the aqua-
businesses, e.g., labor laws. Troublesome areas encountered in starting an
aquaculture operation include Environmental Impact Statement and Assessment,
endangered species, historic site preservation, freshwater source development
and disposal, brackish and saltwater source development and disposal , and con-
struction approvals. Burdensome areas in operating a commercial aquaculture
facility include Workmen's Compensation, unemployment insurance, effluent dis-
charge monitoring, exotic species importation and disease control.

-42-

Though problem areas still remain, Hawaii has made significant strides
in streamlining the regulatory process for aquaculture development. Proper
planning and siting of aquaculture facilities, and the involvement of requla-
tory personnel early-on in the planning process can greatly reduce problems.
Nonetheless, aquaculture is a new, commercial technology that is little under-
stood by the existing regulatory regime and changes must be made in this situa-
tion if the industry is to develop further. One important change would be a
shift in government attitude towards making and interpreting regulations in
ways which promote rather than obstruct aquabusiness development.

The regulatory regime in Hawaii governing aquabusiness generally was
established without adequate consideration of the State's unique environment
and the industry's low pollution potential. The time and cost of regulatory
compliance impact directly on the commercial aquaculturist and can act as a
strong disincentive to investment. Improvements in the current situation
could take the following form:

� The State should survey members of the aquaculture industry to determine
which laws, regulations, rules and codes are being misapplied so that
appropriate policy and statutory changes can be implemented to relieve
the regulatory burden on commercial aquaculture.

* The State should consider reducing the time and cost of preparing an
Environmental Impact Assessment or Statement by having certain aquacul-
ture ventures defined as an exempt class of action and/or by carrying
out "Master" EIA's or EIS's (e.g., for ocean intakes and outfalls) in
certain areas of the State. In the latter instance, private aquaculture
developers could simply amend the Master EIS for the area, thus reducing
their site-development costs.

* The State should allow direct aquaculture discharges by establishing,
when appropriate, a "zone of mixing variance," similar to those used
to regulate municipal sewage and thermal effluents. Current policies
are overly restrictive considering the State's aquaculture development
policy and the relatively benign, or even positive, nature of aquacul-
ture effluents.

* The State should strongly recommend to the Environmental Protection Agency
that the National Pollutant Discharge Elimination System permit exemption
criteria (Appendix C) be raised to 500,000 pounds of product a year.

The State should recommend to the U.S. Army Corps of Engineers that
certain classes of aquaculture activities could qualify for a General
or Regional Permit, thereby simplifying the permit procedure.

-43-

* The State should examine Historic Site Preservation laws and regulations
to determine if exemption could be granted so that ancient Hawaiian fish-
ponds could be modernized for commercial aquaculture production. Presently,
structural modifications to revitalize and bring ponds into productive
use are prohibited.

� Jurisdicational and policy conflict problems between State and County
freshwater management agencies should be resolved to clarify water
availability and use questions. As a case in point, the City and County
of Honolulu Board of Water Supply's "Pass/No Pass Line" should conform
to the pending Underground Injection Control line on Oahu (Appendix C).
Also, a consistent, positive policy regarding the availability for aqua-
culture of subsurface freshwater outflows to the ocean should be adopted.

* Federal and State governments should clearly define the statutory and
policy guidelines used to regulate the application of animal manures to
aquaculture food production systems.

* Hawaii's aquatic species importation regulations and procedures should
be reviewed by the State to identify ways to streamline, but not weaken,
the current review process, e.g., consider shortening the 90-day review
period.

-44-

V. FUTURE OF THE INDUSTRY

If Hawaii wants to develop a substantial aquaculture industry, it can.
Hawaii possesses the natural resources necessary for aquaculture development
and, most importantly, Hawaii's government and citizens favor its further
expansion. Aquaculture also fits the State's overall strategy for economic
development and diversification which encourages: 1) the production of items
which can cost-effectively substitute for current imports or can be exported,
and 2) the development of small businesses. The following highlights the
Committee's discussions regarding the existing business climate in Hawaii and
the potential growth of the aquaculture industry if the issues discussed in
Section IV are effectively addressed.

A. Hawaii's Business Climate

"Business climate" refers to the sum total of the fundamental disadvan-
tages and advantages that a particular location conveys on a commercial activity.
For Hawaii, the most important factors impacting on the success of all forms of
business stem primarily from geographical, geological, level-of-development and
political-status considerations. Ultimately, if the State's economy is to con-
tinue to flourish, industries must be found which would mitigate the disadvan-
tages and profitably exploit the advantages.

As part of its mandate from the Governor, the Committee identified and
discussed the general disadvantages of a Hawaii location for major export-
oriented businesses. These disadvantages are briefly discussed below:

* Hawaii's central Pacific location tends to isolate companies from new
technological developments, multiple sources of investment capital , and
major markets.

* The Island's rugged terrain and level of urban/agribusiness development
make finding suitable, reasonably-priced land difficult, and competition
for prime sites intense.

* The unique subtropical island environment and the desire to preserve agri-
cultural lands from development have contributed to instilling a strong
protectionist attitude in the State.

* The costs of doing business in Hawaii are generally higher than for Main-
land United States' locations because of the limited industrial resource
base available and the cost of labor.

-45-

9 The size of the resident population presents limitations on the avail-
ability and cost of certain skilled labor. Moreover, the resident and
tourist population combined represents only a "pocket market" for many
forms of business and, therefore, may restrict substantial production
initiatives.

Fortunately, the aggregate advantages of a Hawaii location can signifi-
cantly outweigh the disadvantages for many forms of business. These advan-
tages, some of which can also appear as "disadvantages" in another context,
are highlighted as follows:

* The subtropical location of the Hawaiian Islands offers a year-round,
warm climate and mild seasonal temperature fluctuations. This tempera-
ture regime is suitable for the growth of a wide variety of tropical
and temperate plants and animals.

* Hawaii's central Pacific location makes the Islands a potentially active
crossroads for technology exchanges and business development initiatives
with Asia and the Pacific.

* The Islands have ample flat areas with good topsoil and many areas with
large amounts of fresh water. ~Ioreover, abundant supplies of unpolluted
brackish and salt water can be pumped from aquifers around the State.

* Hawaii offers an urban, modern location with reliable transportation and
communications systems. Technologically advanced, Hawaii has the sophis-
ticated infrastructure and skilled labor force necessary to support high-
technology developments.

* A resident population of one million people and the four-million-plus
tourists who visit Hawaii every year, offer a significant start-up
market for goods and services.

* Hawaii offers political stability and protection under the U.S. flag
and a predictable, relatively simplified government environment for
major capital investments.

Aquabusiness produces a variety of products and services that can supply
both local and export markets. It is a flexible, multi-purpose activity that
can be economically viable at a wide range of scales. Moreover, commercial
aquaculture has the potential to take advantage of under-utilized resources,
e.g., brackish and salt water, agricultural wastes and lava lands. This
flexibility and diversity will help local aquaculture entreprises mitigate
the disadvantages of a Hawaii location and benefit from the collective
advantages.

-46-

B. Future Developments

Aquaculture has a potentially bright future in Hawaii if existing con-
straints are reduced or eliminated (see Section IV), and investors begin to
confidently choose aquabusiness development. Two time-frames for industry
development were considered by the Committee: the near-term (by 1990) and
the long-term (by the year 2000).

The worldwide focus on increasing food supplies and encouraging economic
development in Lesser-Developed Countries is expected to continue into the
1990's. Aquaculture will continue to be targeted as an environmentally-sound,
energy-efficient means of increasing protein production. Opportunities for
aquaculture training, education and consulting will increase, though the
field may become increasingly competitive. In addition to international
activity, the United States is expected to make a major commitment to national
aquaculture development. This is illustrated by the recent publication of
the National Aquaculture Plan, and the pending reauthorization of the National
Aquaculture Act. Today, Hawaii clearly has an excellent reputation, and a
substantial amount of aquaculture expertise to further develop this area.

The limits of expansion in the RT & TT sector are extremely difficult to
project due to the rapidly changing mix of available technologies, research
and development priorities, personnel and competition. If current trends con-
tinue, the potential exists to generate an annual project value of around
$10 million by 1987 (Table 9). However, major improvements in the current
situation would have to occur, such as the networking of existing resources
and facilities, constructing a large-scale research and demonstration facility,
developing appropriate aquaculture curricula, and aggressive marketing of
Hawaii as a site for aquaculture research, training, education and consulting.

Potential near-term growth appears more promising for the Commercial
Production sector, despite the poor showing in 1983. Though several major
firms withdrew, several other firms have continued pilot demonstration projects,
and several new ventures have announced intentions to begin production. These
projects, if they expand to full-scale production, have indicated that they
would add the following near-term wholesale value to the industry: 1) Marine
Culture Enterprises (the W.R. Grace and F.H. Prince project which had a formal
groundbreaking on January 20, 1984)--$12.5 million, 2) ORCA Sea Farms, Inc.--
$5 million, 3) the Kaluanui Farmers Association--$I million (estimated), and
4) Project X (not public)--$10 million. In addition to these projects, the
Farms of Kapua on the Big Island is in the process of finalizing their site,
but has made no official revenue projections. Numerous small and medium-scale
projects are also being planned. Based on these announced plans, the potential
for the Commercial Production sector of the industry to reach $20 million
annually by 1987 is very great (Table 9).

-47-

Table 9 Growth Projections for Hawaii's Aquaculture Industry

Commercial Production Sector

1983 1987 1990

$1.6 M greater than $20 Ma greater than $50 Mb

Research, Training and Technology Transfer Sector

1983 1987 1990

$5.5 M greater than $10 Mc greater than $10 M

a
Based on announced plans by those companies with sites that will expand to
full-scale production, if pilot projects are economically viable.

b
Based on achieving the confidential commercial plans of some of the 15 companies
that are currently expressing a strong interest in locating in Hawaii.

c
Based on improved networking of existing resources and facilities, achieving
the construction of a large-scale facility, developing curriculum, and aggres-
sive marketing of Hawaii as a site for education, training and consulting.

-48-

Furthermore, State officials suggest that by 1990, the annual wholesale
value of the Commercial Production sector may be greater than $50 million.
This optimistic projection, which adds $30 million to the 1987 value, is
based on the confidential commercial plans of some of the 15 large projects
that are currently expressing strong interest in locating in Hawaii. Many
of these companies are already involved in aquaculture, either through the
development of unique technologies or by commercial use of existing technolo-
gies in other locations (the desire of most is to transfer proven technologies
to Hawaii). The systems being proposed generally involve medium-intensity
earthen ponds or high-intensity raceways. Their land requirements range from
20 acres to several hundred acres. The species contemplated include marine
shrimp, Spirulina, American lobster, freshwater prawns, red tilapia, eels and
abalone. It is optimistic to speak with certainty of achieving this level of
development in lieu of the recent industry track record; however, it is appro-
priate for planning purposes to speculate that this level of development could
very well be realized.

It is apparent that a successful aquaculture industry can contribute
millions of dollars in revenue to Hawaii's economy through the generation of
jobs, taxes and export income. This conclusion is even more evident when the
near-term potential revenues from aquaculture are compared with those of the
current contributors to the State's economy (Table 10). In terms of agribusi-
ness, sugar and pineapple production and diversified agriculture totaled over
$700 million in 1981. Currently, however, the sugar and pineapple industries
are declining due to severe problems with profitability and foreign competi-
tion. Diversified agriculture offers opportunities for selected expansion,
but competition from out-of-state sources may seriously limit production
volumes. Aquaculture is a form of-diversified agriculture which will not,
within the foreseeable future, be stifled by out-of-state competition.

The projected growth of the aquaculture industry by the year 2000 is more
uncertain. The State Aquaculture Plan set a long-term goal of $334 million
(wholesale) of commercial production by the year 2000. The Plan also projected
that the RT & TT sector could reach $6 million to $10 million annually. Only
the most optimistic members of Hawaii's aquaculture community would envision
the aquaculture industry becoming as large as the sugar or pineapple industries
by the end of the century; however, the possibility should not be ruled out.
Both these long-range industry goals need to be re-evaluated in light of de-
veloping technologies and markets, and potentially available resources. With
changes in the State's business climate--particularly in the regulatory area,
an improved industry track record, and continued encouragement from govern-
ment, aquaculture has the potential to make a major impact on Hawaii's economy.

Aquaculture fits into the State's strategy for economic development and
diversification. With its dual orientation of production for local and export
markets, and technology sales to those groups requiring research, training,
education and consulting services, it is capable of filling a multitude of
market niches. The Commercial Production sector's efforts should be focused

-49-

Table 10 Comparative Values of Industry in Hawaii in 1981

Industry 1981 Value ($1,000,000)

Tourism Industry $3,200

Federal Spending $3,700

Sugar Revenues $ 328

Pineapple Revenues $ 221

Diversified Agriculture Revenues $ 192

Leading Diversified Agriculture Crops

Dairy (lilk) $30.3

Beef $28.4

Macadamia Nuts $26.5

Poultry and Eggs $20.5

Papaya $12.3

on medium and high-intensity systems which achieve high yields per acre, and
grow high value, exportable species. Overall, near-term success will depend
on improving the industry's management skills, increasing profitability, and
making the State a better place to invest. Meeting long-term development goals
will require improvement in the State infrastructure and the active development
of export markets. The Committee concludes that the aquaculture industry should
adopt the following goals:

Near-term - Strive by 1990 to make commercial aquaculture production the
State's largest single diversified agriculture activity, and
develop a sustained source of revenue from national and inter-
national research, training, education and consulting.

Long-term - Strive by the year 2000 to make Hawaii an important tropical
seafood production site and a center of excellence for aqua-
culture research, training, education and consulting.

The Governor's Aquaculture Industry Development Committee believes that
a diversity of aquascience and aquabusiness activities can be achieved through
the dedicated, cooperative efforts of the industry and the State. If decisive
action is taken now to address current problems and reduce constraints, aqua-
culture can grow to become a highly significant part of Hawaii's economy.

APPENDIX A

COMMITTEE ORGANIZATION AND MEMBERSHIP

Organization

In August, 1983, Governor George Ariyoshi appointed a thirteen-member
committee, chaired by William Rowland of the Oceanic Institute. The member-
ship represented all facets of the State's aquaculture community and possessed
a wide variety of experience in planning and conducting aquabusiness activities
in Hawaii and around the world.

The first meeting of the Governor's Ad Hoc Aquaculture Industry Develop-
ment Committee (GAIDC) was held on September 7, 1983. The Committee focused
on the following issues:

1. Management

2. Technology and Knowledge

3. Marketing and Economics

4. Water and Land

5. Government Activities

The Committee explored specific topics by inviting individuals with special
expertise to speak before the Committee (Appendix B). Meetings were held on
a weekly basis.

Membership

The membership of the GAIDC was as follows:

1. Mr. William Rowland, Chairman
President
The Oceanic Institute

2. Mr. Gilbert Ayres
President
Hawaii Production Credit Association

3. Mr. Neal Hicks
Director of Aquaculture Research
Marine Culture Enterprises

4. Mr. Hideto Kono
Private Citizen

5. Prof. T. Aaron Lim
Director of Agriculture Programs
Brigham Young University - Hawaii Campus

6. Dr. Ed McSweeny
Vice President
Amorient Aquafarm, Inc.

7. Dr. Ronald Nolan
President
ORCA Sea Farms, Inc.

8. Mr. Robert Ota
Vice President
Bank of Hawaii

9. Mr. Wayne Richardson III
Executive Vice President
ABA International

10. Mr. Bruce Smith
President
Kahuku Prawn Company

11. Mr. Cyrus Tamashiro
Vice President
Tamashiro Market

12. Mr. Glenn Tanoue
President
Tropic Fish and Vegetable

13. Dr. James Wyban
President
Northshore Fish and Produce

APPENDIX B

INVITED SPEAKERS

1. Mr. Robert Chuck
Chief Engineer/Manager
Division of Water and Land Development
Department of Land and Natural Resources
State of Hawaii

2. Mr. Takuji Fujimura
Private Consultant
Aquacon Hawaii

3. Mr. David Heenan
President
Theo H. Davies

4. Mr. Kent Keith
Director
Department of Planning and Economic Development
State of Hawaii

5. Mr. Chester Lao
Head, Hydrology and Geology Section
Board of Water Supply
City and County of Honolulu

6. Mr. Tim Lyons
Executive Director
Hawaii Business League

7. Dr. James Maragos
Chief, Environmental Branch
U.S. Army Corps of Engineers

8. Mr. Herbert Minakami
Chief, Planning and Engineering Division
Board of Water Supply
City and County of Honolulu

9. Mr. John Mink
Hydrologist
Private Consultant

10. Mr. Sam Pooley
Industry Economist
National Marine Fisheries

11. Dr. David Ramsour
Chief Economist
Bank of Hawaii

12. Mr. Shinji Soneda
Division Chief
Environmental Protection and Health Services Division
Department of Health
State of Hawaii

APPENDIX C

SUMMARY OF MAJOR ENVIRONMENTAL REGULATORY PERMITS

Federal

A. Federal Environmental Impact Statement

* Legal Authority: National Environmental Policy Act of 1969 (NEPA),
Public Law 91-190 (42 U.S.C. 4321 et seq.); Council on Environmental
Quality Guidelines (40 CFR 1500); Executive Order 11514 of March 5,
1970, Protection and Enhancement of Environmental Quality, as amended
by Executive Order 11991 of May 24, 1977.

* Administered by: Various Federal agencies.

� Applicability: Generally required for major projects involving Federal
funds or permits and for projects affecting registered historic sites.

B. U.S. Department of the Army, Corps of Engineers Permit

* Legal Authority: Section 10 of the Rivers and Habors Act of March 3,
1899 (33 U.S.C. 403); Section 404 of the Clean Water Act (33 U.S.C.
1344)--formerly known as the Federal Water Pollution Control Act.

* Administered by: Corps of Engineers, Fort Shafter, Hawaii.

* Applicability: Generally required for projects involving dredging or
filling in navigable waters, stream diversion or impoundment, and for
projects affecting swamps, marshes and wetlands.

Federal/State

A. National Pollutant Discharge Elimination System (NPDES) Permit

� Legal Authority: Clean Water Act of 1977 (33 U.S.C. 1344); Chapter 342,
Part III, HRS.

* Administered by: State Department of Health.

* Applicability: Recent statutory amendments now provide a general exemp-
tion from permit requirements for effluent discharges from aquaculture
facilities producing up to 100,000 pounds of aquatic animals per year
and for facilities discharging less than 30 days/year.

B. Floodplain Management

o Legal Authority: National Flood Insurance Act of 1968, as amended
(42 U.S.C. 4001 et seq.); Flood Disaster Protection Act of 1973, P.L.
93-234 (87 Stat. 975); Executive Order 11988, Floodplain Management,
May 24, 1977 (43 FR 6030); State of Hawaii, Chapter 179 HRS, and County
ordinances under HRS 62-34(18).

* Administered by: County Planning Department/Federal Insurance
Administration.

* Applicability: Statewide Federal program requiring floodproofing of
structures in defined flood and tsunami inundation areas and Federal
flood insurance.

C. Introduction of Non-Indigenous Species

* Legal Authority: Chapter 150A, HRS; Regulation No. 2 of the Division
of Plant Industry; Department of Agriculture Policy PI-8, Amended
December 2, 1976; Lacey Act (18 U.S.C. 42); Presidential Executive
Order 11987 of May 24, 1977, Relating to Exotic Organisms.

* Administered by: State Department of Agriculture.

* Applicability: State Board of Agriculture permit required for importation
of certain non-indigenous species.

D. Hawoaii Coastal Zone Management Act

* Legal Authority: Coastal Zone Management Act of 1972, as Amended, Public
Law 92-583, (16 U.S.C. 1451 et seq.); Hawaii Coastal Zone Management Act,
as Amended, Section 205A, HRS.

* Administered by: Hawaii Coastal Zone Management Office, DPED, Honolulu,
Hawaii.

* Applicability: Administrative review for "consistency" with CZM goals
and objectives, for major Federal actions/permits in CZM area.

E. Underground Injection Control Regulations (pending implementation in 1984)

* Legal Authority: Safe Drinking Water Act of 1974, P.L. 93-523; Under-
ground Injection Control Rules, Department of Health, Chapter 23, Title
II, Administrative Rules.

* Administered by: State Department of Health.

� Applicability: Controls the underground injection or emplacement of
wastewaters; establishes "no pass" boundaries statewide.

State

A. Hawaii Environmental Impact Statement

* Legal Authority: Chapter 343, HRS and Environmental Quality Commission--
Environmental Impact Statement Regulations.

a Administered by: State/County Agencies in Hawaii.

* Applicability: Generally required for major projects significantly
affecting the quality of the environment; for actions involving State
or County lands or funds, historic sites, and for project impacting
shoreline or coastal ecosystems.

B. Instream Use Standards Regulation (pending implementation in 1984)

* Legal Authority: Chapter 176D, HRS; Title 13, Sub-title 7, Chapter 167,
Administrative Rules, Department of Land and Natural Resources.

* Administered by: State Department of Land and Natural Resources.

* Applicability: Withdrawal of water from streams, modification of stream
channels (on Windward Oahu only).

C. Shellfish Sanitation Certificate

* Legal Authority: Chapter 328-9 and Chapter 321-11, HRS, and Hawaii
Public Health Regulations, Chapter 4A, and consistency with the National
Shellfish Sanitation Program, U.S.P.H.S. Publication No. 33.

* Administered by: State Department of Health.

* Applicability: Required for growing, harvesting, packing or shipping of
oysters, clams and mussels.

D. Historic Site Review

� Legal Authority: Chapter 6E, HRS, Historic Objects and Sites, Memorials;
National Historic Preservation Act of 1966, as Amended (P.L. 89-665);
Presidential Executive Order 11593, "Protection and Enhancement of the
Cultural Environment" (May 13, 1977).

� Administered by: State Department of Land and Natural Resources.

� Applicability: Allows for review of projects which may affect designated
(or eligible for designation) State or Federal historic sites.

E. Permit for Work in Shorewaters of State

* Legal Authority: Chapter 266, HRS, Harbors; State of Hawaii Department
of Transportation; Harbors Division, Rules and Regulations and Tariff
No. 4.

* Administered by: State Department of Transportation.

* Applicability: Requires a permit for filling/dredging, construction, or
placement of structures in shorewaters of State. Recent statutory changes
now allow joint processing of DOT and Conservation District Use Permits.

F. Conservation District Use Permit

* Legal Authority: Chapter 205, HRS, as Amended, "Land Use Commission";
Regulation No. 4, Department of Land and Natural Resources, pursuant to
Chapter 183-41, HRS, as Amended; Chapter 183-44, "Fishponds" (pertains
to permit requirements for repair, reinforcement, or maintenance of
traditional fishponds).

� Administered by: State Department of Land and Natural Resources.

� Applicability: Generally required for projects within areas zoned Con-
servation District. Aquaculture/mariculture is defined as a permitted
use in Resource (R) and General (G) subzones of Conservation Districts.

G. Designated Groundwater Control Area Use Permit

� Legal Authority: Chapter 177, HRS, "Groundwater Use Act"; Regulation
No. 9, Department of Land and Natural Resources (June, 1979).

* Administered by: State Department of Land and Natural Resources.

� Applicability: Required for use of groundwaters in Ewa and Wahiawa
Districts of Oahu only, at this time.

County

A. Special Management Area Permit

* Legal Authority: Hawaii Coastal Zone Management Program, Chapter 205A,
HRS, as Amended. Rules and Regulations adopted by the respective Counties.

* Adminstered by: Department of Land Utilization, City and County of
Honolulu (Oahu); Planning Commissions on Neighbor Islands.

*Applicability: Recent statutory amendments exclude most aquaculture/
mariculture facilities from permit requirements unless determined to
result in significant environmental impact. Federal projects or permit
actions must demonstrate consistency with Coastal Zone Management goals
and objectives.

B. Shore line Setback Variance

� Legal Authority: Chapter 205, Part II, HRS, "Shoreline Setbacks"; also,
"Rules and Regulations Relating to Shoreline Setbacks" of the respective
Counties.

* Administered by: County Planning Departments; Department of Land Utiliza-
tion (City and County of Honolulu).

* Applicability: Required for projects involving disturbances or construc-
tion in the zone beginning at the highest wash of the waves and extending
20 or 40 feet inland.

C. Grading Permit

* Legal Authority: Chapter 180C, HRS. Also, County Grading, Stockpiling
and Grubbing Ordinances (County of Hawaii, Ordinance No. 168; City and
County of Honolulu, Ordinance No. 3968; County of Kauai; Ordinance No.
262; Permanent Ordinances of the County of Maui, Ordinance No. 639).

* Administered by: County Public Works Departments.

* Applicability: Required for major land clearing projects.

D. Well Permit

� Legal Authority: Chapter 54-33, HRS, as Amended. Rules and Regulations
of the Board of Water Supply, City and County of Honolulu (May 10, 1976).
Section 7-105(j) of the Revised Chapter of the City and County of Honolulu.

* Administered by: City and County of Honolulu (not applicable on other
islands).

* Applicability: Required for construction of or modification to fresh-,
brackish- or saltwater wells.