Ukraine March 2014 Foreign Direct Investment statistics Implementing BPM6 and CDIS in the UK

Background In UK Office for National Statistics (ONS) collects data, compiles and publishes National Accounts and Balance of Payments statistics together by the same group of people So RoW sector identical to BoP In EU countries, usually the Central Bank compiles BoP

Background All EU countries implementing BPM6 in 2014 by BoP Regulation No regulation about collecting data in the same way, but a lot of emphasis on consistent outputs Analyses of intra-EU asymmetries, for the derivation of EU aggregates BoP quality indicators applied to each EU country: annual Quality Report by each country

Background EU countries have moved towards data collection for BoP and IIP by enterprise survey and away from bank settlement systems Mainly due to Monetary Union If they still exist, used mainly for BoP registers

Background Generally more coordination between NSO and NCB in EU countries UK never had a bank settlement system for BoP data Bank of England collects all banking data for NA and BoP/IIP and delivers them to ONS ONS collects all non-bank data

Implementing BPM6 and CDIS in the UK No new FDI survey Focus on improvements to FDI surveys: Clarifying definitions within the questionnaire Collecting some new and more detailed information New questionnaires introduced in 2013: Separate inward and outward surveys Identical questionnaires for annual and quarterly surveys Paper and Excel questionnaires

Overview Implementation of BPM6 and CDIS: Improved coverage Valuation of FDI equity Identification of ‘Special Purpose Entities’ Improvements to FDI questionnaire

Implementation of BPM6: Coverage Improving coverage: increase overall quality of FDI figures reduce international asymmetries Aim to include all inward/outward positions of UK companies that are in a direct investment relationship with foreign enterprises Therefore need to ensure positions between “Fellow Enterprises” are included

Fellow Enterprises Fellow enterprises are enterprises that have a common parent but do not hold 10% or more equity in each other

Fellow Enterprises Parent (A) Subsidiary (B) UK Abroad 100% 40% Subsidiary (C) Loan B and C are fellow enterprises

Fellow Enterprises Fellow enterprises are enterprises that have a common parent but do not hold 10% or more equity in each other Loans between fellow enterprises should be included in FDI if one is within the UK and the other abroad Fellow enterprise relationships can be recorded on either inward or outward questionnaire

Fellow Enterprises: Inward Where parent is foreign, loans between UK enterprise B and foreign enterprise C are regarded as inward direct investment Parent (A) Subsidiary (B) UK Abroad 100% 40% Subsidiary (C) Loan Abroad

Fellow Enterprises: Outward Where parent is UK based, loans between UK enterprise B and foreign enterprise C are regarded as outward direct investment Parent (A) Subsidiary (B) UK Abroad 100% 40% Subsidiary (C) Loan UK

Fellow Enterprises: Outward Many FDI respondents provide consolidated returns for their UK enterprises (e.g. A & B) In these circumstances any loans with enterprise C may already be included in overall positions so no additional information is required If separate returns are provided for A & B, enterprise B should return an FDI form, detailing positions with enterprise C

Valuation of FDI equity Key focus of BPM6 and CDIS is consistency of data between countries Therefore need to ensure that values for equity positions are comparable If the equity is quoted on a stock market use the current market price of a share multiplied by number of shares issued

Valuation of FDI equity If equity is unquoted Equity should be valued using the figures recorded in the books of enterprise in which there is direct investment When recording outward investment, figures relating to ‘net worth’ should be taken from books of foreign enterprise: key issue When recording inward investment, figures should come from books of UK company

Valuation of FDI equity Net worth includes: Paid-up capital (excluding shares enterprise holds in itself) All reserves identified as equity in enterprise’s balance sheet Cumulated reinvested earnings Revaluations Also know as Own Funds at Book Value (OFBV)

Valuation of FDI equity Equity figures should reflect values recorded in the books of enterprises B and C, taking into account % of voting ownership Parent (A) FDI Respondent Subsidiary (B) France Germany 100% 40% Associate (C) UK

Valuation of FDI equity Why use figures from the affiliate? Increases comparability and consistency of info collected between economies Books of affiliate more likely to take into account activities of enterprise e.g. Parent’s books may not reflect retained earnings of affiliate Values may differ following takeover if the value held on parent’s books includes goodwill

Special Purpose Entities The OECD Benchmark definition of FDI – 4 th Edition aims to identify direct investment to/from special purpose entities What is a special purpose entity (SPE)? OECD definition: Enterprise is a legal entity Formally registered with national authority Subject to fiscal/legal obligations of resident economy Ultimately controlled by non-resident parent Few/no employees, little/no production & little/no physical presence Almost all assets/liabilities represent investments in/from other countries Core business is group financing or holding activities

Special Purpose Entities Draft definition of SPE for UK FDI questionnaire: …a company set up for purposes of passing investments through the resident country rather than being the primary destination of such investment Treat an SPE in the same way as any other enterprise with foreign parent or affiliate, and Aim to identify SPEs on both Inward and Outward FDI forms, and show separately in survey results (if significant)

Why identify special purpose entities? Foreign investment flows to / from some countries can be significantly affected by SPEs Identifying SPEs will allow separation of flows & positions that do not reflect genuine investment activity in/of those countries Eventual aim is to be able to ‘look through’ SPEs to see ultimate source/destination of investment This is extremely challenging and beyond scope of current FDI questionnaire

Special Purpose Entities RankOutward FDI positions end 2007 (£ billion) Inward FDI positions end 2007 (£ billion) World£918.9£ USA £212.0 (23%)USA £167.6 (27%) 2The Netherlands £128.7 (14%) The Netherlands £113.5 (18%) 3Luxembourg £72.3 (8%)Germany £70.3 (11%) 4Jersey £48.0 (5%)France £54.1 (9%) 5Canada £46.9 (5%)Switzerland £31.1 (5%) …8Guernsey £28.1 (3%)Luxembourg £18.5 (3%)

Special Purpose Entities: Inward All European investment from A is routed through SPE B Inward FDI return UK subsidiary C should report investment from immediate parent B (as normal) but identify it as an SPE Ultimate Parent Company (A) Immediate Parent (B) Special Purpose Entity Netherlands UK 70% 100% UK Subsidiary (C) USA

Special Purpose Entities: Outward Southeast Asian investment from UK parent A is routed through SPE B and then on to subsidiaries C and D Outward FDI return UK should report immediate investment position with B (as normal) but identify it as an SPE Parent Company (A) Immediate subsidiary (B) Special Purpose Entity Hong Kong South Korea 100% Subsidiary (C) UK Subsidiary (D) Japan 80%

Special Purpose Entities: Outward some investment into an economy may go through an SPE to onward destinations some may reflect genuine investment activities in that country if the vast majority of investment passes through to other countries, record as an SPE

Special Purpose Entities: Outward Parent Company (A) Immediate subsidiary (B) Special Purpose Entity Hong Kong South Korea £170m £300m Subsidiary (C) UK Subsidiary (D) Japan £120m Subsidiary (E) £10m

Special Purpose Entities in UK Apply same definition Include in inward and outward FDI survey Questionnaire identifies whether the UK enterprise is an SPE, as well as whether the parent or the affiliate is an SPE

Improvements to FDI questionnaire In addition to changes required for BPM6 and CDIS, further changes that have been made to the Electronic form include: Redesign of electronic form to improve usability Rerouting to incorporate BPM6 and CDIS Enhanced ‘Help sheet’ to improve user interaction. Change for industry classification from SIC 2003 to SIC 2007 Improved interpretation of questions to maximise clarity

Improvements to FDI questionnaire In addition to changes required for BPM6, further changes that have been made to the paper form include: Restructure of form to improve usability Rerouting to incorporate BPM6 and enhance user interaction Amended annex, including a glossary of definitions Improved interpretation of questions to maximise clarity Change for industry classification from SIC 2003 to SIC 2007

FDI survey register Main sources: NA Business Register enterprises or enterprise groups with foreign parent and/or affiliates Mergers and Acquisition continuous survey Commercial register (Dun and Bradstreet Worldbase) Press, trade associations reports about cross- border activities of enterprises Globalisation analyses, internet research

FDI survey register Register updated continuously for new enterprises and those ceasing to trade Register contains information on foreign parent and/or affiliates, industry, employment, production, direct investment net book value, etc Maintained and interrogated on a in-house database: sample drawn directly from the database

FDI survey register SPEs in UK are included in the Register as Financial Institutions with large assets and/or liabilities, few/no employees, little/no production Financial regulator has separate registers, some information on commercial registers, tax authorities have lists but separate surveys of SPEs are not made (UK not a “pass through” country)

FDI survey register Bank of England run similar FDI surveys of banks in UK Collects the same data, same timetable Same questionnaire changes and improvements Goes to all UK banks with foreign ownership and/or affiliates (around 500) Not a large proportion of UK inward or outward FDI

FDI survey sample sizes Annual outward FDI survey sample size: 1500 enterprises/groups coverage: 44% by number 84% by net book value (nbv) target response: 75% by nbv Quarterly outward FDI survey sample size: 350 enterprises coverage: 80 % by net book value target response: 50% by nbv

FDI survey sample sizes Annual inward FDI survey sample size: 2500 enterprises/groups coverage: 18% by number 90% by net book value (nbv) target response: 85% by nbv after 4 months Quarterly inward FDI survey sample size: 700 enterprises coverage: 60 % by net book value target response: 75% by nbv after 8 weeks

FDI survey sample design Annual surveys All enterprises with > £10m DI assets at nbv (outward) < £2m DI liabilities at nbv (inward) Rotated stratified random sample for other enterprises on the FDI register Stratification by net book value from previous surveys or from register information Impute non-response: gross up by net book value

FDI survey sample design Quarterly surveys All enterprises with > £50m assets or liabilities at nbv Rotated stratified random sample for other enterprises between £5m and £50m nbv on the FDI register Stratification by net book value from previous surveys or register information Impute non-response: gross up by net book value

Publication of FDI statistics Inward and outward total FDI statistics are presented in the UK BoP and IIP accounts quarterly and annually by equity, RIE and debt by broad industry, immediate geographical breakdown: no breakdown by SPE Annual FDI survey results also published separately with more detailed breakdowns