OPINION POST by Jane Wiltshire
In the midst of the complex debate about whether or not to trade in rhino horn, I would like to address one important subplot: If the international sale of rhino horn WAS legalised could it be more successful than the previous sales of elephant tusks (1999 to Japan and 2008 to Japan and China)?
In this article I do not address the tussle between those espousing that legal international trade in rhino horn is African rhinos’ best chance of dodging the bullet of extinction in the wild and those who see legal trade as the kiss of death for rhino as a viable species in the wild.
As I write this, the debates rage at the CITES (Convention on the International Trade in Endangered Species) being held in Geneva. Powerful voices argue that those ivory auctions did not reduce poaching, and nor did conservation in the selling countries benefit as it should have – due to collusion by the buyers. So, is it possible to design a sales platform that achieves the desired outcomes?
DESIRED OUTCOMES (in the rough order of importance, according to me):
• Efficacy in reducing poaching of rhino, with three sub-goals:
○ Maximising the income for conservation in the hands of rhino custodians so they have the funds to combat poaching and reap the reward for the dangers that caring for rhinos represent. This will also best benefit the South African economy and fiscus;
○ Optimising the substitution of poached horn by legal horn (crowding out the illegal product) and;
○ Reducing the opportunity for laundering poached horns through legal channels and increasing the ‘costs’ of cheating;
• Learning as much as possible about the price and demand for different rhino horn products for different end uses; and whether price will act to equilibrate legal, sustainable supply and demand;
• This should be done as efficiently and cost effectively as possible, while being accepted as broadly fair by the major players – so they are more likely to utilise the platform and stick to the rules; and
• Reduce opportunities for collusion.
There is a substantial body of research on the effects and efficacy of various trading models and the combinations and variations that are used in practice, and I have combined my practical experience in four very different types of auctions with a critical analysis of the most common auction mechanisms to produce a draft mechanism for discussion and refinement.
COMMON TYPES OF AUCTIONS
1. Ascending Bids
Bidders compete until ‘the last man standing’ or highest remaining bid gets the parcel. This has the advantages of being fairly transparent and tends to provide sellers with the best price if there is no collusion. The disadvantage is that all buyers need to be present physically or electronically at the sale time, which is disadvantageous for global trade that stretches across all time zones.
2. Descending Bids – also known as Dutch Clock, as used on the Dutch flower markets.
Each lot starts at a price determined by a rule or the auctioneer. The price ticks down until a bidder ‘stops the clock’. This tends to produce lower returns for sellers than 1. and is more susceptible to intimidation as the bidder has to ‘break ranks’ in order to bid. Again, the disadvantage is that all buyers need to be present physically or electronically at the sale time.
3. Sealed Bid Offers or Tenders
Bidders submit sealed bids (this can be electronically sealed) which are all opened at the appointed time. The opening process can be done in the presence of all bidders or only in front of an audit and tender team. The seller can specify the rules such as highest qualifying bid wins or can have sole discretion to accept any or no bids. This has advantages for global bidding and provides the seller with a large amount of information about demand and price points if there is no collusion and most bids are genuine. As the seller has time to evaluate the bids and assess who the bidders are, he has more time to figure out if there is collusion.
All three of the auction systems above allow sellers the following:
• Inserting a reserve price if desired.
• Deciding how much to sell, if any (although 1. and 2. would make this difficult as potential bidders who have registered and set aside the auction time would be annoyed if lots were to be withdrawn or withheld frequently); and
• As the lots could be closely specified – e.g. confiscated, poached, whole horn with X length and Y greatest circumference, Z weight and A1 quality grade – sellers would quickly get a sense of the price drivers and demand for various categories of horn and establish the key variables:
○ Some research has found that wild, i.e. poached horn, is more valued while other research has found that relative preference changes when price or lethality is taken into account;
○ Several researchers report differing willingness to pay points for whole horn, parts of horn, shavings and dust; and
○ Whether price fulfils its role as an equilibrating mechanism or not.
• As the selling platform would be acting as an exchange with any buyers and sellers who meet the criteria being able to sell or bid, these platforms should be classified as exchanges and therefore not fall foul of anti-trust legislation.
MY PREFERRED SALES MECHANISM
I will focus on option 3. above – Sealed Bid Offers, or Tenders – because of the disadvantages of the other two options, as described.
Key to this process would be the following:
• Only horn and horn pieces/shavings/dust from accredited legal sources would be accepted for sale. This accreditation would include:
○ A permit showing provenance and proving legality;
○ A DNA ‘fingerprint’; and
○ A quality specification that certifies state of preservation etc, verifies the weight and dimensions and photographs the item from at least two axes from an accredited rating agency (an independent facility under the aegis of Onderspoort Veterinary School?)
○ A listing fee. This would limit sellers from registering frivolous bids with unrealistic reserve prices.
• Only accredited buyers would be allocated an anonymous bidding number. This accreditation would include:
○ A sizeable non-refundable deposit that could be offset against a purchase if desired. This would dissuade buyers who were not serious;
○ The specification of the warehouse/s where product will be stored;
○ Tax clearance and police clearance from their home countries;
○ Their acceptance of random, unannounced checks of these specified premises to dissuade the laundering of illegal horn;
○ Their acceptance of the sanction of being permanently blacklisted from legal auctions if any illegal horn is found or can be proved to have been traded;
○ Bidders should only be natural persons and they should sign personal undertakings with permanent barring from auctions and mandatory prison terms;
○ A short amnesty period for traders wishing to become legal could be considered on payment of a fine and submitting the formerly illegal horn to the accreditation process could be considered as it could encourage traders to become legal. Former ‘bootleggers’ could prove to be a formidable bulwark against new or existing, illegal traders. In addition, by providing a route to legality, illegal traders might not be as motivated to disrupt the legal system; and
○ The accreditation should be open to as many buyers as possible in order to maximise revenue, make collusion more difficult and tip the balance of power in the trading platform’s favour as relative concentration confers benefits.
• As the attraction of the legal platform will be reliability, convenience, quality assurance and therefore a lower stockholding and hassle factor against the risks and uncertainties of illegal horn, the auction cycles should be short – say, weekly. This would also allow the managers of the platform to adjust the type and quantity of horn offered to maintain the revenue realisation reasonable while not ‘starving’ the market and so opening the door, once again to illegal horns.
• It will be key to the early success of the platform to have as many as possible of the larger holders and producers of horn committed to a regular supply. It is likely there will be an oversupply so a quota system will need to be instituted to not oversupply the market which would drive down price and also possibly attract new buyers.
• Professional, experienced, accountable management and a tough, rotating auditing oversight body together with a board that includes producers, conservationists and businessmen experienced in (particularly biological asset) auctions would be essential. The platform might be a body instituted by statute, such as the South African Sugar Association, but it must not be a state owned enterprise vulnerable to political cadre deployment, unethical behaviour and mismanagement.
HOW IT WILL WORK
From the available, accredited horn that the platform has ‘on its books’ management will decide on the type and quantity of product to be offered for sale, establish whether the sellers still want to sell and if they wish to impose any reserve price. Sellers will then be responsible for procuring all the necessary documentation and delivering papers and product to the secure facility. The platform management will then compile that week’s catalogue and dispatch it electronically to registered bidders in a secure format that prevents anything except an individual computer displaying the data.
Bidders will be given a few days to register a ‘sealed offer’ electronically for those lots in which they are interested. Management will unseal the bids at the appointed hour, analyse the bids and inform the successful bidders, who will have 24 hours to deposit the funds and register a valid import permit. Should they fail to do this, the management reserves the right to offer to another bidder.
The successful bidders will be sent a secure electronic key which they can present at the secure storage facility and, together with the platform’s secure electronic key for that week, open the locker and remove the parcel. They will have the right to examine the parcel in the secure facility in the presence of a manager and an auditor to satisfy themselves that they are receiving the goods they bid on. Possession and risk will then pass from the seller to the buyer. Sellers will be paid within the week less a small broking fee. It is likely that a small charge for inspections and enforcement will also be levied.
Management will analyse the results of the previous week’s sales (and, as time goes by, trends and anomalies) and compile the next week’s catalogue and the cycle will begin again.
DEALING WITH UNSALEABLE HORN
Some researchers worry that there would be differential demand for the various types of rhino horn, leaving the platform with surplus unsaleable types of horn. The following model has been proposed to deal with this problem.
SMART TRADE – based on the diamond or CSO model where buyers (termed sightholders) are each presented with a few parcels of mixed types and qualities of product at a given a price in a separate room at the same time. The sightholder then can either buy one or more of the parcels he has been presented with on a ‘take it or leave it’ basis. There is no negotiation.
This system has worked very well for De Beers for over a century but has run into problems with US anti-trust law and being associated with ‘blood diamonds’. It also requires the physical presence of buyers and the storage of considerable stock securely.
It has some added disadvantages for rhino horn:
• The parcels are likely to very highly priced if each sightholder is to be presented with a parcel containing a whole horn which is likely to limit the buyers and so make collusion easier;
• The value of the various types and qualities of rhino horn are not known so assembling the parcels will be problematic;
• As there seems to be so many different uses for rhino horn and it must be expected that there will be differing specialities among the sightholders, parcels are likely to contain types of horn that he does not want and will have to dispose of at a discount. This is likely to lead to a bias towards lower prices overall;
• It will be difficult to determine from the results of each sale the demand for each type of horn, its price points and whether the preferences researchers have posited actually exist.
• Additionally, it will be difficult to prove or disprove whether price is likely to equilibrate legal supply with demand.
AVAILABLE TOOLS INCREASE THE CHANCE OF SUCCESS
• The internet has opened up more avenues for selling at greater convenience and lower costs (e.g. buyers do not have to be present physically or at a certain time);
• Rhino horn can be profiled and presented on open or closed web platforms that identify the product being sold uniquely via photographs, dimensions, DNA ‘fingerprinting’, and certification as to quality and provenance;
• Viewers and/or buyers can be restricted to those pre-qualified by any number of criteria – including non-refundable deposits;
• Successful bidders can be required to produce whatever authentication is required before paying and then being given one part of an electronic, mathematical key;
• The selling organisation does not have to store or deliver the product – South Africa has some of the most sophisticated storage facilities for high value items at O.R Tambo Airport – developed for gold, diamonds, platinum, etc. The buyer or his agent can arrive with the electronic key, meet the seller’s representative where they can both input their keys, inspect the contents to ensure they are as was represented, sign a receipt and leave with the product.