Transcript The problem of Pass-through Funds and Capital in Transit in FDI statistics

The problem of Pass-through Funds and
Capital in Transit in FDI statistics
Gerrit van den Dool
MENA Conference, Istanbul, 9 November 2006
Objective and content of this training session
Objective
Introduction to some interpretation problems with
respect to present FDI statistics
A.
B.
C.
D.
Content
General overview of problems/possible solutions
More detailed description of the problems
More detailed description of solutions
Conclusion
A. Overview – Problems, possible solutions



The problem: users dissatisfied with current
presentation of FDI (many targets, only one bullet)
Solution: additional info/tables for different users
One of the main targets (discussed today):
Economically meaningful data on “genuine” FDI

Problems are caused by several features of current
FDI statistics
Features of current FDI statistics (1)
Directional principle
Reporting
economy
Direct
Parent
1
Affiliate
2
NETTING: 1 -/- 2 = Outward figure
(participation of affiliate in parent < 10%)
Outward FDI = assets -/- certain liabilities
Inward FDI = liabilities -/- certain assets
Features of current FDI statistics (1)
The problem
Directional principle
Reporting
economy
Direct
Parent
1
Affiliate
2
NETTING: 1 -/- 2 = Outward figure
(participation of affiliate in parent < 10%)


Some users would like to see non-netted data
Other users would like to extend the netting
Features of current FDI statistics (2)
Capital in transit *) is included
Ultimate
parent
Reporting
economy
Parent
= SPE
1
Affiliate
*) E.g. via SPECIAL PURPOSE ENTITIES
SPE - Established for fiscal or other regulatory advantages
Production and employment may be zero
Features of current FDI statistics (2)
The problem
Capital in transit *) is included
Ultimate
parent
Reporting
economy
Parent
= SPE
1
Affiliate
*) E.g. via SPECIAL PURPOSE ENTITIES
 Incoming and outgoing positions and
flows may be strongly inflated
Features of current FDI statistics (3)
Breakdown by country/industry
?
Reporting
economy
1
Affiliate
Parent
2
FDI statistics show direct counterpart countries

Breakdowns show the country or industry of the
direct counterpart (the investor or the investee)
Features of current FDI statistics (3)
The problem
Breakdown by country/industry
?
Reporting
economy
1
Affiliate
Parent
2
FDI statistics show direct counterpart countries

Present statistics do not show the ultimate origin or
destination of capital many users are interested in
Summary of some major problems



How to use financial data in economic analysis?
Which part of outward FDI really reflects the role a
country plays in the process of globalisation?
Which part of inward FDI really reflects foreign
interest in the reporting economy?
FDI figures may have nothing to do
with the reporting economy
Tables that could better meet user needs (preview)

Aggregates (excl. SPEs)
1a/2a. Outward / Inward (possibly redefined)
1b/2b. Positions ultimately controled by resident UIPs
1c/2c. Positions ultimately controled by non-resident UIPs

Breakdown by country and industry
Memo items: Total (unadjusted) assets, Assets of SPEs,
Total (unadj.) liabilities, Liabilities of SPEs
Conditions to be taken into account


Full reconciliation between different presentations
(OECD/IMF, SNA)
Balance between costs and benefits
 Costs: reporting burden, resources of compiler
 Benefits: user can easily find what he wants
B. More detailed discussion of the problems
Current problems (1) – Pass-through via SPEs



Inflation of aggregates
due to empty shells
Assets and liabilities
may be distorted by
different amounts 
netting not effective 
Exclusion is way out
Reporting economy
SPE
Empty shell
Example – The Dutch case
FDI incl. and excl. SPEs
-
-
Special reporting
requirements for SPEs
Legal framework,
special definition
Publications:
tables excluding and
including SPEs
(equity, 2005, € billion)
1.200
600
SPEs
Genuine
Outward
Inward
The problem for counterparties of the
Netherlands (NL) …
Apparent FDI relationship of Middle East
and North African countries with NL
(2005, million $)
18.000
15.000
12.000
9.000
6.000
3.000
Equity
(Assets)
Equity
(Liabilities)
Debt
(Assets)
Debt
(Liabilities)
…is far from negligible
Actual FDI relationship of Middle East and
North African countries with NL
(2005, million $)
18.000
SPE
15.000
Genuine
12.000
9.000
6.000
3.000
Equity
(Assets)
Equity
(Liabilities)
Debt
(Assets)
Debt
(Liabilities)
Current problems (2) – Treasury activities



Inflation due to treasury
centres with resident
parents (onlending,
liquidity management…)
Debt positions between
sister companies not
covered by directional
principle 
Extend the DP
TRC
Non-empty treasury centre
Current problems (3) – Example: a take-over
IIP of B
B
C
Original situation
Outward
C 500
Inward
-------
C
After take-over (in 1 step)
Outward
C 500
Inward
A 1200
500
NONSPE
A
1200
B
NONSPE
500
Interpretation problems 
Interpretation issues
A
C
1200
B
NONSPE



500
Outward
Inward
C 500
A 1200
FDI economically relevant to B is 700, not 1200
Role of B as an independent “player” on the world stage is 0,
not 500
A takeover in 2 steps would give different FDI data 
IIP of B
C
500
B
A
700
NONSPE
Original situation
Outward
C 500
Inward
------After take-over (in 1 step)
Outward
C 500
Inward
A 1200
After take-over (in 2 steps)
Outward
------Inward
A 700
How to deal with indirect control?
Country B
1200
A
500
C
Incoming FDI related to activity in B itself:
700
B’s role as an (independent) player in globalisation: 0
This would suggest to net 
Outward = 0, Inward = 700
Indirect control may even distort
the data of two countries at the same time
Country B
1200
A
C
500
Inflation of the data of both B and A
Further thorny issues …
Country B
1200
A


500
C
What if 1200 represented a greenfield investment?
(500 could have been financed later on by portfolio
capital)
This would suggest to record
Inward = 1200 (Outward = 0)
C. Solutions that have been proposed
Extend the Directional Principle


Two sisters a1 and a2, same UIP A. Netting debt
seems appropriate, but in whose direction?
Proposal: let it depend on the controling UIP
Inward
UIP
A
Outward
1
1
a1
a2
UIP
A
2
Net liabilities = 1-2
a1
a2
2
Net assets = 2-1
Sort positions by resident/non-resident control

More can be done now: net all intra-company
(= same UIP) positions and sort them by UIPs
Inward
UIP
A
Outward
1
1
a1
a2
UIP
B
2
a3
b1
b2
2
b3
Net liabilities = 1-2
Net assets = 2-1
A proposal


Exclusion of SPEs
Extension of the Directional Principle



No longer limited to direct links
Net amount is no longer just an asset or a liability
It now also informs the user about the UIP:
Outward = net assets controled by resident UIPs
Inward = net liabilities controled by non-res. UIPs
A more detailed comparison of the current and
alternative presentations
Present situation - Outward = 2+4+6+8+10+14-3
- Inward = 1+5+7+9+11+13-12
X
Y
Z
W
13
12
UIP
A
14
1
UIP
B
a1
11
10
a2
2
3
b1
4
5
b2
SPE
9
6
a3
b3
8
7
New presentation: three additional dimensions
1. SPE/non-SPE, 2. Res/non-res UIP, 3. Intra/extra-company
Step 1 – Exclude SPEs
X
Y
Z
W
13
UIP
A
12
14
1
UIP
B
a1
11
a2
2
10
3
b1
4
5
SPE
a3
9
6
8
b2
b3
7
EXCLUSION
M2
M1
M2 and M4
Step 2 – Distinguish counterparties by groups
and calculate …
X
Y
Z
W
13
UIP
A
12
14
1
UIP
B
a1
11
a2
2
10
3
b1
4
5
SPE
a3
9
6
8
b2
b3
7
EXCLUSION
M2
M1
M2 and M4
… net assets (resident UIP) – Outward
net liabilities (non-resident UIPs) – Inward
X
Y
Z
W
13
UIP
A
12
14
1
UIP
B
a1
11
a2
2
10
3
b1
4
5
SPE
a3SS
9
ADJUSTED
(NET)
LIABILITIES
6
8
7
b2
b3
SS
ADJUSTED (NET)
ASSETS
EXCLUSION
M2
M1
M2 and M4
Step 3 – Classify other minority interests
also as inward or outward
Arrows = minority interests
X
Y
Z
W
13
UIP
A
12
14
1
UIP
B
a1
11
a2
2
10
3
b1
4
5
SPE
a3SS
9
ADJUSTED
(NET)
LIABILITIES
6
8
7
b2
b3
SS
ADJUSTED (NET)
ASSETS
EXCLUSION
M2
M1
M2 and M4
Outward = intra-c. + extra-c.(wxyz) = (4+6-3-5)
+2
Inward = intra-c.+ extra-c.(wxyz) = (9+11-10-12) +13+1-14(?)
Arrows = minority interests
X
Y
Z
W
13
UIP
A
12
14
1
UIP
B
a1
11
a2
2
10
3
b1
4
5
SPE
a3SS
9
ADJUSTED (NET)
LIABILITIES
6
8
7
b2
b3
SS
ADJUSTED (NET)
ASSETS
EXCLUSION
M2
M1
M2 and M4
Feasibility: “Yes/no” info to be reported



Is the UIP a resident or not?
Is the reporting entity an SPE or not?
Is the foreign counterparty a subsidiary of the
same UIP?
E. Conclusion / summary



Current situation - one bullet for different targets
The target discussed today: the economic activity
perspective; to be hit by



Exclusion of SPEs
Extension of netting approach (dir. principle)
Breakdown by resident/non-resident UIPs
Major conditions seem to be met:


Full reconciliation with IMF-manual and SNA
Additional information remains manageable
Thank you for your attention
Gerrit van den Dool