The problem of Pass-through Funds and Capital in Transit in FDI statistics Gerrit van den Dool MENA...

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

Gerrit van den Dool

MENA Conference, Istanbul, 9 November 2006

Objective and content of this training sessionObjective and content of this training session

Objective Introduction to some interpretation problems with respect to present FDI statistics

ContentA. General overview of problems/possible solutionsB. More detailed description of the problemsC. More detailed description of solutions

D. Conclusion

A. Overview – Problems, possible solutionsA. 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):

Problems are caused by several features of current FDI statistics

Economically meaningful data on “genuine” FDI

Features of current FDI statistics (1)Features of current FDI statistics (1)

Outward FDI = assets -/- certain liabilities

Inward FDI = liabilities -/- certain assets

1

2

Directional principle

NETTING: 1 -/- 2 = Outward figure (participation of affiliate in parent < 10%)

Reporting economy

Affi-liate

Direct Parent

Features of current FDI statistics (1)Features of current FDI statistics (1)The problemThe problem

1

2

Directional principle

NETTING: 1 -/- 2 = Outward figure (participation of affiliate in parent < 10%)

Reporting economy

Affi-liate

Direct Parent

Some users would like to see non-netted data Other users would like to extend the netting


1

*) E.g. via SPECIAL PURPOSE ENTITIES

Capital in transit *) is included

Reporting economy

Affi-liate

Parent= SPE

Ultimate parent

SPE - Established for fiscal or other regulatory advantages

Production and employment may be zero


1

*) E.g. via SPECIAL PURPOSE ENTITIES

Capital in transit *) is included

Reporting economy

Affi-liate

Parent= SPE

Ultimate parent

Incoming and outgoing positions and flows may be strongly inflated


1

2

Breakdown by country/industry

?

FDI statistics show direct counterpart countries

Reporting economy

Affi-liateParent

Breakdowns show the country or industry of the direct counterpart (the investor or the investee)


1

2

Breakdown by country/industry

?

FDI statistics show direct counterpart countries

Reporting economy

Affi-liateParent

Present statistics do not show the ultimate origin or destination of capital many users are interested in

Summary of some major problemsSummary 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)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 industryMemo items: Total (unadjusted) assets, Assets of SPEs,

Total (unadj.) liabilities, Liabilities of SPEs

Conditions to be taken into accountConditions 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 problemsB. More detailed discussion of the problems

Current problems (1) – Pass-through via SPEsCurrent 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 Empty shell

Reporting economy

SPE

Example – The Dutch caseExample – The Dutch case

- Special reporting requirements for SPEs

- Legal framework, special definition

- Publications: tables excluding and including SPEs

FDI incl. and excl. SPEs (equity, 2005, € billion)

-

600

1.200

Outward InwardSPEs

Genuine

The problem for counterparties of the The problem for counterparties of the Netherlands (NL) …Netherlands (NL) …

Apparent FDI relationship of Middle East and North African countries with NL

(2005, million $)

-

3.000

6.000

9.000

12.000

15.000

18.000

Equity (Assets)

Equity(Liabilities)

Debt (Assets)

Debt(Liabilities)

Actual FDI relationship of Middle East and North African countries with NL

(2005, million $)

-

3.000

6.000

9.000

12.000

15.000

18.000

Equity (Assets)

Equity(Liabilities)

Debt (Assets)

Debt(Liabilities)

SPE

Genuine

……is far from negligible is far from negligible

Current problems (2) – Treasury activitiesCurrent 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

Non-empty treasury centre

TRC

A C1200 500 B

NON-SPE

Current problems (3) – Example: a take-overCurrent problems (3) – Example: a take-over

IIP of BOriginal situation

Outward C 500

Inward -------

After take-over (in 1 step)

Outward C 500

Inward A 1200

Interpretation problems

C500 B

NON-SPE

A C1200 500 B

NON-SPE

Interpretation issues

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

Outward C 500

Inward A 1200

A C1200 500 B

NON-SPE

IIP of BOriginal 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

500 CA

700

BNON-SPE

C500 B

NON-SPE

How to deal with indirect control?How to deal with indirect control?

1200 500

A C

Country B

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

1200

A C500

Country B

Indirect control may even distort Indirect control may even distort the data of the data of twotwo countries at the same time countries at the same time

Inflation of the data of both B and A

Further thorny issues …Further thorny issues …

1200 500

A C

Country B

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 proposedC. Solutions that have been proposed

Extend the Directional PrincipleExtend 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

Net liabilities = 1-2

Inward

1

2

a1a2

UIPA

Net assets = 2-1

Outward

1

2

a1a2

UIPA

Sort positions by resident/non-resident controlSort positions by resident/non-resident control

More can be done now: net all intra-company (= same UIP) positions and sort them by UIPs

Net liabilities = 1-2

Inward

1

2

a1a2

UIPA

a3

Outward

1

2

Net assets = 2-1

b1b2

UIPB

b3

A proposalA 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 A more detailed comparison of the current and alternative presentationsalternative presentations

Present situation - Outward = 2+4+6+8+10+14-3Present situation - Outward = 2+4+6+8+10+14-3 - - Inward = 1+5+7+9+11+13-12Inward = 1+5+7+9+11+13-12

13 14 1 2

8 7

9

3

4

5

6

12

11

10

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

New presentation: three additional dimensions New presentation: three additional dimensions 1. SPE/non-SPE, 2. Res/non-res UIP, 3. Intra/extra-company1. SPE/non-SPE, 2. Res/non-res UIP, 3. Intra/extra-company

Step 1 – Exclude SPEsStep 1 – Exclude SPEs

13 14 1 2

8 7

M2 M1 M2 and M4

12

11

10

9

3

4

5

6

EXCLUSION

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

Step 2 – Distinguish counterparties by groups Step 2 – Distinguish counterparties by groups and calculate …and calculate …

13 14 1 2

8 7

M2 M1

9

3

4

5

6

M2 and M4

12

11

10

EXCLUSION

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

… … net assets (resident UIP) – Outward net assets (resident UIP) – Outward net liabilities (non-resident UIPs) – Inwardnet liabilities (non-resident UIPs) – Inward

13 14 1 2

8 7

M2 M1 M2 and M4

12

11

10

9

3

4

5

6

EXCLUSION

SS

ADJUSTED (NET) ASSETS

SS

ADJUSTED (NET)

LIABILITIES

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

Step 3 – Classify other minority interests Step 3 – Classify other minority interests also as inward or outward also as inward or outward

13 14 1 2

8 7

M2 M1

9

3

4

5

6

M2 and M4

12

11

10

Arrows = minority interests

EXCLUSION

SS


SS

ADJUSTED (NET)

LIABILITIES

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

Outward = intra-c. Outward = intra-c. + extra-c.(wxyz)+ extra-c.(wxyz) = (4+6-3-5) = (4+6-3-5) + 2+ 2

Inward = intra-c.Inward = intra-c.+ extra-c.(wxyz)+ extra-c.(wxyz) = (9+11-10-12) = (9+11-10-12) +13+1-14(?)+13+1-14(?)

13 14 1 2

8 7

M2 M1

9

3

4

5

6

M2 and M4

12

11

10

Arrows = minority interests

EXCLUSION

SS


SS

ADJUSTED (NET) LIABILITIES

UIP A

UIP B

b3

a1

Y

b1

SPE

a2

Z X

W

a3

b2

Feasibility: “Yes/no” info to be reportedFeasibility: “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 / summaryE. 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 attentionThank you for your attention

Gerrit van den Dool

The problem of Pass-through Funds and Capital in Transit in FDI statistics Gerrit van den Dool MENA...

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