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 Content A.General overview of problems/possible solutions B.More detailed description of the problems C.More detailed description of solutions D.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):  Problems are caused by several features of current FDI statistics Economically meaningful data on “genuine” FDI

Features of current FDI statistics (1) Outward FDI = assets -/- certain liabilities Inward FDI = liabilities -/- certain assets

Features of current FDI statistics (1) The problem  Some users would like to see non-netted data  Other users would like to extend the netting

Features of current FDI statistics (2) SPE - Established for fiscal or other regulatory advantages Production and employment may be zero

Features of current FDI statistics (2) The problem  Incoming and outgoing positions and flows may be strongly inflated

Features of current FDI statistics (3)  Breakdowns show the country or industry of the direct counterpart (the investor or the investee)

Features of current FDI statistics (3) The problem  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

Example – The Dutch case - Special reporting requirements for SPEs - Legal framework, special definition - Publications: tables excluding and including SPEs

The problem for counterparties of the Netherlands (NL) …

…is far from negligible

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

Current problems (3) – Example: a take-over IIP of B Original situation Outward C 500 Inward After take-over (in 1 step) OutwardC 500 Inward A 1200 Interpretation problems 

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  OutwardC 500 Inward A 1200

IIP of B Original situation Outward C 500 Inward After take-over (in 1 step) OutwardC 500 Inward A 1200 After take-over (in 2 steps) Outward Inward A 700

How to deal with indirect control? 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 Inflation of the data of both B and A

Further thorny issues …  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

Sort positions by resident/non-resident control  More can be done now: net all intra-company (= same UIP) positions and sort them by UIPs

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 = Inward =

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

Step 1 – Exclude SPEs

Step 2 – Distinguish counterparties by groups and calculate … 

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

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

Outward = intra-c. + extra-c.(wxyz) = ( ) + 2 Inward = intra-c.+ extra-c.(wxyz) = ( ) (?)

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