the adoption of clear, simple concepts and definitions ;
the collection and compilation of data within a broader economic accounting framework. For the past 10 years this has meant both collecting and compiling the international investment position within the context of the financial accounts for the nation;
the collection of international investment data in a format which has built-in checks and balances;
for direct investment, the reliance, at least initially, on respondents to classify and value their investments.
Without suggesting that what the ABS does is relevant in all contexts, it is hoped that a discussion of the way these principles have been applied in Australia will prove useful to countries setting out to collect these data.
Before going any further, a description of the survey used to collect international investment data is provided, and the aspects particularly relevant for FDI measurement highlighted.
SURVEY OF INTERNATIONAL INVESTMENT
Australia has a long history of collecting international investment data. A detailed history is provided as Appendix 1.
The current survey which collects international investment data, including data on FDI, is the Survey of International Investment (SII). This is a quarterly survey which collects information, from end-investors and investees, fund managers and custodians as appropriate, about investment activity into and out of Australia. The SII measures:
the levels (stock) of foreign financial assets and foreign liabilities of residents;
financial transactions (investment flows) resulting in increases and decreases in the levels of these assets and liabilities;
other changes in the levels of these assets and liabilities; and
income accrued on these assets and liabilities.
The SII is specifically designed to collect data necessary to support BPM5 requirements. These requirements align closely with the needs of the economic analysts in the major government departments. The format and wording used in the collection forms, together with the wording in the detailed Explanatory Notes that are supplied to all respondents, are closely aligned to the wording in the BPM5 Manual. The Explanatory Notes provide numerous examples of what should be included (and excluded) under each type of instrument.
Although the SII is an expensive exercise (about 35 staff, including 2 computing specialists), investigation of the use of data from other sources indicated that such a direct collection from the principals or their agents is the only option to collect regular, high quality international investment data in the Australian context. The ABS considered using administrative data from the foreign investment approval authority, but came to the conclusion that the data from the authority could not meet BOP requirements. An investigation of the use of data from the foreign investment approval authority in Australia is attached as Appendix 2.
However, a direct-collection survey like the SII, conducted by the ABS, may not remain the only option. The current international environment is one of deregulation of international flows, and the related dismantling of foreign investment approval boards and the like. Coupled with this is an emphasis on the creation of stable and well-regulated investment environments within countries. This may involve the setting up of new financial supervisory mechanisms. If this is the case, it would be sensible to take advantage of the setting up of new reporting procedures to ensure that the data needs for the compilation of international investment statistics, including FDI, are met. The direct collection would still occur, but be undertaken by bodies exercising supervision as well as statistical reporting responsibilities. Extension into these "harmonised" data collections requires a clear understanding of the frameworks (including which international statistical standards to apply) and the proposed outputs. Ideally, the agency responsible for the compilation of international investment statistics would be involved in and influence the development of the reporting to ensure that it meets their needs.
THE USE OF INTERNATIONAL STANDARDS
The Australian Bureau of Statistics (ABS) compiles BOP and IIP statistics according to the recommendations of both the Balance of Payments Manual, 5th Edition (BPM5) and the 1993 System of National Accounts. These manuals are used in conjunction with the IMF's Balance of Payments Compilation Guide, 1995 (the Guide), the IMF's BPM5 Textbook and the OECD Benchmark Definition of Foreign Direct Investment (BMD).
The conceptual framework of Australia's balance of payments and international investment position statistics based on these international standards, together with the data sources and methods used to compile them, are described in the publication Balance of Payments and International Investment Position, Australia: Concepts, Sources and Methods, 1998 (Cat. no. 5331.0).
The adoption of international standards not only simplifies the collection and compilation of data, it also means that data can be compared between countries (or in some cases just between agencies, for example between the statistics office doing national accounts and the central bank doing international investment statistics). One example is the use of the 10% rule to determine direct investment. If two compilers in different countries apply this rule differently, one strictly and another more subjectively, the data will never match between counterparties. Similarly, if one country values direct investment at cost and another at market values, it will be impossible to match the data. Users of the statistics often get confused when the official statistics from different countries cannot be aligned or compared because of differing standards applied in compilation. In a way, each country has an obligation to others in the international statistical community to at least try to stick to agreed standards as diversion from these standards complicates life for everyone.
So far, attempts to reconcile data between countries have been unsuccessful, but if countries implement international standards, future reconciliations may be more useful.
THE ADOPTION OF CLEAR, SIMPLE CONCEPTS AND DEFINITIONS
This requirement is largely met by the adoption of international standards and the incorporation of these standards into reporting requirements.
In the complex world of financial investment, one of the most important principles that must be decided on is the basis of valuation of the investments.
BPM5 recommends that direct investment flows, income transactions and stocks be valued at market value. Where a current market value is not available, particularly in the case of equity investment in direct investment enterprises, it recommends that a market value proxy be used such as net asset value at current market cost. Where an indirect method of valuation is used by compilers, and it differs significantly from the reported book valuation, BPM5 recommends that where feasible countries should publish both the reported balance sheet book value and the agency-derived market value. In the ABS we do not derive an indirect valuation of direct investment equity values, indeed we consider the task would be extremely onerous and fraught with risks. Instead, we ask the businesses to provide their own market valuation, and to report the basis of calculation.
In measuring the value of equity securities, respondents are asked to adhere to the following principles:
for listed enterprises, the market value of the equity positions should be reported using a recent transaction share price. If recent transaction prices are not available, the midpoint of the quoted buy and sell prices of the shares on their main stock exchange at the reference date specified provides a useful approximation; and
for unlisted enterprises, if a market value of the shares is not available the respondent is asked to estimate the market value by one of the following methods (in descending order of preference): a recent transaction price; director's valuation; or net asset value.
The most frequently used method of market valuation for unlisted equity securities is net asset value, followed director's valuation and recent transaction prices. Net asset values are likely to be regularly revalued under Australian accounting standards and therefore this basis of valuation is likely to approximate market value
For debt securities survey respondents are asked to report transactions at the traded price at the time of the transaction, and the positions calculated at the trading price at the date specified. If that position valuation is not available, they are asked to report using (in order of preference) one of the following methods: yield to maturity; discounted present value; face value less written down value of discount; issue price plus amortisation of discount; or another mark to market basis. Appendix 3 contains a detailed discussion of the market valuation of FDI stocks.
THE COLLECTION AND COMPILATION OF DATA WITHIN A BROADER ECONOMIC ACCOUNTING FRAMEWORK
The advantage of collecting and compiling international investment data as part of a broader system of accounts is that this allows many checks for coherence and consistency. If sectoral financial accounts are compiled using the same standards as the international investment data, the international investment position is a breakdown of the foreign assets and liabilities in those accounts. This rigour of a balanced balance sheet for the FDI enterprises, rather than just the extract of cross-border positions, helps to ensure complete coverage and accuracy in reporting of the FDI components. Having the data within the full balance sheet also enables reconciliation with any published accounts of the corporations involved. Similarly, the income flows associated with FDI (including reinvested earnings) are subjected to checks when they enter into the compilation of the BOP and the national income accounts. Setting up the framework for this involves adoption of common concepts, sources and methods and the setting up of operational arrangements to ensure the sharing and reconciliation of data.
However, in practice, even the most integrated systems still experience significant discrepancies and considerable effort is needed to reconcile these.
THE COLLECTION OF INVESTMENT DATA IN A FORMAT WHICH HAS BUILT-IN CHECKS AND BALANCES
The SII reporting forms are structured so that there is a full reconciliation, for each item, between the opening and closing levels of investment; and transactions and other changes during the period. This structure not only forces respondents to consider the consistency of the data reported, it also enables collection editors to readily identify and query inconsistencies in the reported data.
Aggregated information on levels, financial transactions and other changes, obtained from the SII, are used to construct an IIP which is published in a reconciliation format.
The ABS has found that full data on transactions and other reasons for changes in stocks are usually available.
One of the advantages of collecting data on FDI and portfolio investment on the same form (in the case of the IIS, on the same page for each instrument) is that the possibility of double-counting is eliminated. As the boundary between FDI and portfolio investment is subject to different interpretations and also subject to error and mismeasurement (for example in the value of equity making up the direct investment), having both on the same form adding to a total provides a valuable check on the data. Attempts to collect FDI data separately, sometimes even by different agencies, inevitably leads to major problems with potential gaps and/ or double counting.
THE RELIANCE ON RESPONDENTS TO CLASSIFY AND VALUE THEIR FDI INVESTMENTS
A detailed set of explanatory notes is supplied to all new survey respondents. These include a detailed examination of 'direct investment' and 'direct investment relationships'. The wording used in the explanatory notes is closely aligned to that used in BPM5, while one of the diagrams used to illustrate chains of ownership is very similar to that shown on page 108 of the BPM5 Textbook.
For each instrument, respondents are generally required to record separately particulars for non-resident direct investors; direct investment groups abroad; and other non-resident investors, on the same page of the survey forms. It is felt that this helps to further emphasise the distinction and relationship between these three categories.
The explanatory notes also contain advice on valuation and lists of "includes" and "excludes" for each item. The notes aim at being descriptive rather than prescriptive, that is, they give the respondent an explanation of reasons behind the classification of data rather than attempt to list all possibilities.
This "reliance" on the businesses to report correctly does not come cheaply. The ABS must expend considerable resources in provider education and quality control to ensure that the notes and collection instruments remain effective. A regular program of company visits is maintained to ensure that the current contacts in the reporting businesses understand the requirements, that new activity that has emerged since the last visit is being appropriately classified and valued, and that no "holes" develop in the data net due to new or innovative financing arrangements.
The ABS also maintains, for the larger FDIs, updated corporate structures on its business register so that the scope and coverage of the direct investment enterprise group in Australia is known and understood by both business and the ABS.
The use of counterparty data
It must be kept in mind that while an agency in one country is trying to estimate FDI, someone somewhere else is most probably trying to estimate exactly the same thing. That is, your inward investment is another country's outward investment. This has been put elsewhere in this paper as an argument for the adoption of common standards, such as the 10% rule and the use of valuation at market prices, but it can also be used as a data source. In the absence of data collected in your own country, it is worthwhile looking at using data collected by other countries, especially the rich investing countries who can afford to devote quite a lot of resources to collecting such data, as the starting point for your estimates.
The legal environment
In Australia, the information obtained from the SII is collected under the authority of the Census and Statistics Act 1905. The Act provides the Australian Statistician with the power to issue a legal document directing a person or organisation to provide the information sought by a given date. If this legal document is not complied with and the data is still not received, the matter may be referred for prosecution through the courts. However, the emphasis is on seeking the respondent's co-operation in completing and returning survey forms by the due date. The majority of respondents recognise the importance of official statistics to the community and provide the required information without recourse to the compulsory powers available under the Act. However, when problems arise, the ABS always tries to resolve the issues in a pragmatic and cooperative manner by negotiating with the respondent. The considerable costs to the respondent of compiling and reporting data are recognised and an attempt is made to reach a compromise.
Central banks may be in a somewhat different position, with the power to force respondents to report whatever they want. However, it is worth keeping in mind that going some way towards keeping respondents happy is a good way to collect timely, high quality statistics. Two-way communication is also a good means of ensuring that the data collected remain relevant by keeping up with changes as they happen.
If data collection is to be extended from the collection of data on portfolio investment to data on FDI, it is likely new mechanisms will need to be put in place to monitor the population of enterprises from whom the data are to be collected.
While it may be possible to collect reasonable portfolio investment data from a small group of large enterprises, often situated in the financial capital of the country and often with close ties to the central bank, the collection of FDI data will involve approaching many diverse, and often small enterprises, which can be located all over the country. For instance, mining and agricultural enterprises may well have their office near their operations in far-flung corners of the country.
The identification of these units and the maintenance of a population for a survey is very difficult, especially in an environment of limited regulation of FDI, for instance if only investments above a certain value need to go through an approval process.
The International Investment Section of the ABS maintains their own register of enterprises. The Frame for the SII covers all units that undertake international investment activity. There are a number of sources of new units including:
Foreign Investment Review Board reports;
Australian Taxation Office;
Australian Securities and Investments Commission;
Stock exchange reports;
Press articles, business directories etc.;
Respondent contact; and
ABS central Business Register.
In addition, business directories, newsletters of international trading associations and publications may all have information that is useful in maintaining coverage.
Suspected new units are included in an exploratory survey. The survey questionnaire is designed to establish whether the entity has foreign financial claims or liabilities or acts as a nominee for foreign investors. A separate group of questions are designed to establish the type of enterprise involved and its equity relationship with other enterprises. Other questions establish, within broad ranges, the size of the enterprise's foreign financial assets and liabilities. On the basis of the information provided, a decision is made as to whether to add the entity to the survey frame.
However, there will always be units which are not identified, and methods must be introduced to deal with the missing data. This may be a periodic census of enterprises and the use of the information collected through this to estimate missing data, or the use of some form of sampling method.
The SII is conducted quarterly. The most likely frequencies for the collection of FDI data are annual and quarterly. A quarterly cycle has been chosen mainly to fit in with the quarterly release of the IIP and related economic accounts, in particular the BOP.
However, there are distinct advantages to a quarterly collection and these can result in improved data quality. The main advantage is that of "training the respondent". With a collection as complex as that for international investment, as noted above it is very important that the respondent be familiar with the concepts and definitions underlying the data. With a quarterly collection, it is far more likely that the same person fills out the form for several quarters in a row and that there is overlap and a training period should the person change. With annual collections, it is more likely that a different person fills out the form each year.
Changing requirements under the SDDS
One element of the ABS collection and measurement of FDI is the compilation of data on the currency and residual maturity of debt. While not a BPM5 requirement, the ABS took into account domestic and other clients' needs to include this perspective on the international indebtedness of Australia. Such requirements are now emerging for discussion under extensions to the SDDS. Any change in Australia's approach to FDI measurement will in future include these requirements as they emerge, as well as possible future requirements for transparency.
SECTION 2: DETAILED DEFINITIONS AND INTERPRETATIONS
This section reports on the experience of the Australian Bureau of Statistics (ABS) in the identification and measurement of direct investment according to the recommendations of the Balance of Payments Manual, 5th Edition (BPM5) in conjunction with the Balance of Payments Compilation Guide, 1995 (the Guide) and the OECD Benchmark Definition of Foreign Direct Investment (BMD).
The section outlines the basic principles and definitions relating to the definition of direct investment. Most definitions and concepts are readily available from BPM5, the Guide, and the BMD. This section describes the interpretation by the ABS of some issues where there may be a choice of interpretations, where the ABS has chosen a particular approach, or where the approach may not be obvious from the standard reference material.
For straightforward explanations of financial instruments and the workings of financial markets, a very good reference is the book "Fast Money" by Edna Carew, published by Allen and Unwin, Australia, ISBN 1 86448 994 4. The latest edition is titled "Fast Money 4" and was published in 1998.
The Bank of England produces an excellent Financial Terminology Database. This is available in electronic form from the Bank and can be installed for use within your organisation.
A diskette has been provided to each delegation. It contains Acrobat files of the ABS publication Balance of Payments and International Investment Position, Australia: Concepts, Sources and Methods, 1998 (ABS Catalogue No. 5331.0), a recent BOP/IIP publication and a copy of the explanatory notes which have been discussed. The concepts, sources and methods publication is available, along with many other documents on concepts and methods, in the Statistical Concepts Library on this web site. One paper of particular interest which is already available through the ABS internet site is Quality of Australian Balance of Payments Statistics 1996 (ABS Catalogue No. 5342.0). This information paper addresses the quality of balance of payments statistics published by the ABS.
THE CONCEPT OF DIRECT INVESTMENT
Direct investment is the category of international investment that reflects the objective of a resident entity in one economy (direct investor) investing capital in an enterprise resident in another economy (direct investment enterprise) with the purpose of establishing a lasting interest in the direct investment enterprise. Through acquiring a lasting interest, the direct investor implicitly establishes a long term relationship with the direct investment enterprise and is able to exercise a significant degree of influence on the management of the direct investment enterprise. Direct investment involves both the initial transaction establishing the relationship and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated (BPM5 para 359).
BPM5 recommends that an equity threshold of 10 per cent be used to establish a direct investment relationship. BPM5 uses the 'Fully Consolidated System' for identifying enterprises within a direct investment relationship. According to this system the direct investment relationship extends to all directly and indirectly owned subsidiaries (incorporated enterprises that are more than 50% owned by the direct investor), associates (incorporated enterprises that are between 10 and 50% owned by the direct investor) and branches (wholly or jointly owned unincorporated enterprises) of the direct investor. These concepts are discussed in more detail in the Explanatory Notes which have been supplied to you on diskette.
To ensure international consistency and comparability of international investment statistics, BPM5 recommends that the rules relating to direct investment be strictly applied (BPM5 para 692). Compliance with the direct investment criteria is deemed to be sufficient to imply a direct investment relationship where the investor has established a long term relationship and is able to exercise a significant degree of influence on the management of the direct investment enterprise. However, BPM5 does allow for two qualifications to the 10 percent rule which countries may choose to implement, although they are not recommended because they require some degree of subjective judgement. First, if an investor owns less than 10 percent (or none) of the ordinary shares or voting stock of an enterprise but has an effective voice in the management of the enterprise then the investor may be classified as a direct investor. Second, if an investor owns 10 percent or more of an enterprise but does not have an effective voice in management the investment may be excluded from direct investment. If these qualifications are adopted, BPM5 recommends that the aggregate value of these transactions be separately identified to facilitate international comparability (see BPM5 para 363 and BMD para 9).
The ABS decided to adopt the BPM5 recommendations relating to direct investment without the optional qualifications. This is consistent with both the BPM5 and BMD preferred treatment of direct investment .
However, there is some difference between the identification of groups of related enterprises according to BPM5 and Australian practice. Providers are requested to report on behalf of their Australian enterprise group for which they compile consolidated accounts, because this is the only practical basis on which to approach the businesses. This group is made up of related enterprises defined according to Corporations Law as consisting of an Australian parent enterprise (the top Australian enterprise), its Australian branches and its Australian subsidiaries.
Australian Corporations Law defines parent enterprises and subsidiaries on the basis of control which in turn is based on a subjective judgement that is not generally related to a specified equity threshold. According to Corporations Law, in conjunction with accounting standard AASB 1024 (Consolidated Accounts), 'control' means the capacity of an entity to dominate decision making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity. The term 'parent entity' refers to an entity which controls another entity whilst a 'subsidiary' is defined as an entity which is controlled by a parent entity. In practice, the difference between the conceptual ideal and the Australian practice that is based on Corporations Law linkages is trivial.
The methodology used to collect FDI data is:
(i) request providers to report only on behalf of their Australian enterprise group,
(ii) focus providers on the concept of the direct investment relationship and ask them to report as direct investment all transactions between entities in their Australian enterprise group and non-residents which are in a direct investment relationship, regardless of whether that relationship is established through the parent entity or through other outside equity interests.
DEFINITION OF DIRECT INVESTMENT
Direct investors may be individuals; incorporated or unincorporated private or public enterprises; associated groups of individuals or enterprises; governments or government agencies; or estates, trusts, or other organisations that own direct investment enterprises in economies other than those in which the direct investor resides (BPM5 para 367). Non-resident enterprises related to the direct investor are also considered to be in a direct investment relationship (BPM5 para 359).
Direct Investment Enterprises
A direct investment relationship is deemed to exist where a direct investor, who is resident in one economy, owns 10 percent or more of the ordinary shares or voting power (for an incorporated enterprise) or an equivalent equity interest (for an unincorporated enterprise) in an enterprise which is resident in another economy (BPM5 para 362). Direct investment enterprises comprise subsidiaries, associates and branches either directly or indirectly owned by the direct investor. The BPM5 guidelines for identifying subsidiaries, associates and branches are discussed below.
Subsidiaries, Associates and Branches
The Guide and the BMD establish a series of objective 'rules' which can be used to identify affiliates (subsidiaries, associates and branches) of the direct investor and the direct investment enterprise. The two documents are fully compatible in their recommendations. The concepts they define are shown in Appendix 1 together with some examples of chains of ownership.
SPECIAL CASES OF DIRECT INVESTMENT ENTERPRISES
BPM5 recognises a number of special cases of direct investment enterprises some of which are briefly discussed below. The case that is likely to have the most impact on international investment statistics is the treatment of investment between affiliated banks and other affiliated enterprises with the sole purpose of serving as financial intermediaries.
Treatment of affiliated banks and financial intermediaries
In the case of investment between affiliated banks (depository institutions) and affiliated financial intermediaries (e.g., security dealers), including SPE's (special purpose entities) with the sole purpose of serving as financial intermediaries, only investment associated with equity and permanent debt (that is, subordinate loan capital ) are to be considered as direct investment. Other investments between affiliated banks and affiliated financial intermediaries, such as deposits and other claims and liabilities related to normal banking activity, are to be recorded as portfolio investment or other investment as appropriate (BPM5 para 372).
Australia has adopted the recommendation that only permanent debt and equity transactions between affiliated banks and affiliated financial intermediaries be classified as direct investment. All other transactions between affiliated banks or affiliated financial intermediaries are classified to portfolio or other investment as appropriate.
DIRECT INVESTMENT CAPITAL
Direct investment capital is:
capital provided by a direct investor (either directly or through other enterprises related to that investor) to a direct investment enterprise; or
capital received by a direct investor from a direct investment enterprise.
The components of direct investment capital include equity capital, reinvested earnings and other direct investment capital (or intercompany debt transactions). Equity capital comprises shares in subsidiaries and associates (excluding non-participating preferred shares which are treated as debt securities), equity in branches and other capital contributions.
The classification of non-participating preference shares as long term debt securities was a change from the former practice which classified such shares as equity. Non-participating preference shares are considered to demonstrate similar characteristics to other long term debt securities (bonds, debentures, notes etc.) which '...usually give the holder the unconditional right to a fixed money income or contractually determined variable money income. (Payment of interest is not dependent on the earnings of the debtor).' (BPM5 para 390). It is on the basis of this rationale that non-participating preference shares are classified as debt securities under BPM5.
In balance of payments and international investment position statistics, reinvested earnings represents the proportion of the undistributed income of a direct investment enterprise that is attributable to the equity of its foreign direct investor.
The concept of direct investment is broadly one of capital invested in an enterprise (called a direct investment enterprise) by an investor (called a direct investor) having a significant influence, either potentially or actually exercised, over the key policies of the direct investment enterprise.
In accordance with international statistical standards, BOP and IIP statistics include as imputed transactions the reinvested earnings of resident direct investment enterprises attributable to their foreign direct investors, and the reinvested earnings of foreign direct investment enterprises attributable to their Australian direct investors. It is considered analytically useful to include reinvested earnings of direct investment enterprises in flows of international investment because of the substantial contribution that these earnings make to the stock of foreign investment in a country. As the influence of direct investors is considered sufficient to determine the income distribution policy of a direct investment enterprise, in effect, there is a conscious decision by the direct investor to forego income in the current period in order to increase investment in the direct investment enterprise. Reinvested earnings are therefore also included in international investment income payable or receivable.
Time of recording and valuation of reinvested earnings
Reinvested earnings are recorded in respect of the period in which the income is earned, and are based on the after tax operating profits recorded in enterprises' accounts adjusted to add exempt income and to exclude capital and foreign exchange gains and losses and any special taxation provisions which have the effect of distorting income calculated for taxation purposes as a measure of operating profit or loss.
Collection of reinvested earnings data
Renivested earnings data are calculated from data on profits, tax and dividends of FDI enterprises collected on the Survey of International Investment SII omnibus form. The largest single problem in maintaining the quality of the reinvested earnings series is the tendency for businesses to incorporate capital gains and losses in their profits measures. When reporting quarterly, particularly for smaller to medium sized businesses that do not have the sophisticated accounting and reporting systems of larger businesses, the only data readily to hand may be the totals taken to profit and loss, including capital gains and losses on financial and other investments. Removing these amounts on a quarterly basis can be an arduous exercise for the compiler.
Classification and presentation in IIP and BOP statistics
Reinvested earnings is not strictly an instrument of investment, but rather a component of the level of direct investment in corporate equities and equity in branches. However, because of its importance, it has traditionally been shown separately in statistics classifying investment transactions by instrument.
In IIP statistics reinvested earnings which result from foreign investment in Australia (FIA) and Australian investment abroad (AIA) appear as capital transactions. Their offsets, FIA and AIA reinvested earnings, appear as price changes in IIP presentations.
In BOP statistics reinvested earnings resulting from FIA are recorded in the income debits item in the current account and reinvested earnings is recorded as an offsetting entry (maintaining balance within the accounts) in the financial account. Similarly reinvested earnings resulting from AIA are recorded in the income credits item in the current account and its offsetting entry, reinvested earnings, is recorded as a transaction in the financial account.
Other direct investment capital consists of the borrowing and lending of funds (including debt securities and trade credits) between direct investors and direct investment enterprises. BPM5 only requires direct investment capital to be divided into two broad categories of investment: 'equity capital and reinvested earnings', and 'other capital'. However, to conform with additional SNA requirements, the ABS collects a full instrument dissection for direct investment other capital, similar to the instrument splits for portfolio investment and other investment.
Direct investment transactions include those that create or dissolve investments as well as those that serve to maintain, expand or reduce investments. Thus, when a non-resident who previously had no equity in an existing resident enterprise purchases 10 percent or more of the shares or voting power of that enterprise from a resident, the market value of equity holdings acquired and any other capital invested should be recorded as direct investment. When a non-resident holds less than 10 percent of the shares of an enterprise as a portfolio investment and subsequently acquires additional shares resulting in a direct investment interest, only the purchase of additional shares is recorded as direct investment. The holdings that were previously acquired are not recorded in the balance of payments but rather reflected in a reclassification from portfolio investment to direct investment in the international investment position (BPM5, para 374).
Valuation of direct investment flows and stocks
BPM5 recommends that direct investment flows, income transactions and stocks be valued at market value. Where a current market value is not available, particularly in the case of equity investment in direct investment enterprises, it recommends that a market value proxy be used such as net asset value at current market cost . Where an indirect method of valuation is used BPM5 recommends that, where feasible, countries should publish both book value and the derived market value if the two types of data differ. However, it was been decided not to adopt this recommendation in Australian statistics as this requirement would introduce unnecessary provider load and possibly erode some of the progress already made with providers towards establishing reporting on a market value basis. A detailed discussion of market price valuation is attached as Appendix 3.
APPENDIX 1: COLLECTION HISTORY
International investment statistics (IIS) were developed with the principal objectives of providing data for balance of payments estimates and meeting specific policy needs. The earliest published data appeared in the 1931 edition of the Official Yearbook of the Commonwealth of Australia. This publication included limited annual details of capital transactions and investment income as part of the balance of payments estimates. The 1932 edition of the Official Yearbook contained more detailed estimates of capital and investment income transactions and, for the first time, presented annual estimates of the levels of foreign financial assets and liabilities and net liabilities in the form of a Balance of International Indebtedness. Estimates of international investment activity continued to be published with balance of payments statements until the mid 1950s.
A major deficiency in the first published estimates of international investment activity was the absence of comprehensive information on capital raisings by private sector enterprises. To overcome this deficiency a new annual data collection was introduced in 1948. The survey obtained details of investments by foreign interests in Australian companies, investments by Australian companies in companies abroad, and income flows between Australian and foreign companies. The information collected also enabled estimates to be made of the levels of foreign financial assets and liabilities of the private sector. The survey was extended in 1962 to include a quarterly collection.
In response to concerns about the volume of funds flowing into Australia at the time, a new quarterly survey was introduced in 1971 to provide more timely and detailed information than was available from the existing survey.
In 1973, the quarterly Survey of International Trade Credit was started to provide information on trade credit between Australian enterprises and unrelated enterprises abroad. Until then, this component of international investment had not been measured in either international investment or balance of payments statistics.
Further improvements to concepts and methodology were implemented in 1985, including data to compile statistics on Australia's gross and net foreign debt. Where it was not possible to provide a consistent series over the whole period, statistical bridging series were provided which quantified the impact of the series break. Other major changes to published international investment statistics occurred with the introduction of the measurement of levels of investment in corporate equities at market valuation and the introduction of comprehensive statistics on the international investment activities of banks. The introduction of market valuation for levels of investment in corporate equities enabled publication of Australia's international investment position with all components measured, in principle, on a consistent basis. In order to assist users, wherever possible annual series were provided on a consistent basis at least as far back as 1979-80.
To improve the accuracy and reliability of quarterly and annual estimates of reinvestment of earnings, a new quarterly collection of reinvested earnings commenced in respect of September quarter 1993. Estimates from the collection were published with a lag of two quarters with extrapolated estimates being used in the interim; previously, data were only sought annually. The survey was discontinued from the September quarter 1996 with the incorporation of the required data into the new survey forms needed to support BPM5.
In order to support the introduction of revised international statistical standards, namely the System of National Accounts 1993 (SNA93) and the Fifth Edition of the International Monetary Fund's Balance of Payments Manual (BPM5) the statistical collection underwent significant changes. The collection of the full range of statistics to support BPM5 requirements commenced with the September quarter 1996 quarterly collection. During September 1997, an information paper, Implementing New International Statistical Standards in ABS International Accounts Statistics (Cat. no. 5364.0) was released to provide users with a brief description of revisions to international standards and to address the reasons for the revisions and the benefits to Australia as a result of their adoption. In November 1997, shortly before the first release of balance of payments and international investment position data on a BPM5 basis, a second information paper titled Upgraded Balance of Payments and International Investment Position Statistics (Cat. no. 5365.0), was released to provide users with data up to the June quarter 1997 compiled and presented in accordance with the new standards. It included an analysis of the nature and extent of some of the more significant changes being made.
During the December quarter 1997, Australia participated in the conduct of the IMF's Coordinated Portfolio Investment Survey (CPIS). Although Australia already collected much of the relevant data required through the quarterly SII, to improve the quality of the geographical detail of portfolio investment assets that were to be obtained from the December quarter 1997 SII, the existing sample survey was supplemented by additional resident enterprises that were known to have relevant portfolio investment activity. Due to differences in the treatment of securities lending and repurchase agreements in the SII and CPIS, three supplementary questions were also added to the December quarter 1997 SII to separately identify the impact of securities lending and repurchase agreements. For further details concerning the CPIS, see the article, Measuring Portfolio Investment, in the June quarter 1998 issue of Cat. no. 5302.0.
During the September quarter 1998, a new full quarterly sample survey was introduced. This replaced the quarterly partial coverage collection which had been used up to that point. The partial coverage collection comprised a quarterly census of significant units, measured in terms of their international investment activity, with an additional annual survey covering that part of the population not covered in the quarterly survey. The introduction of the full quarterly sample survey dispensed with the need to conduct further annual surveys.
APPENDIX 2: THE RELATIONSHIP BETWEEN ABS INTERNATIONAL INVESTMENT STATISTICS AND FOREIGN INVESTMENT REVIEW BOARD APPROVALS STATISTICS
The Australian Bureau of Statistics (ABS) produces statistics on actual (or realised) international investment activity between residents of Australia and residents of the rest of the world (non-residents). The Foreign Investment Review Board (FIRB) produces statistics on proposed investment in Australia by foreign interests that has been approved by the Board.
There are very substantial differences between FIRB investment approvals statistics and ABS international investment statistics. The two sets of statistics are not close substitutes and cannot be used interchangeably.
FIRB INVESTMENT APPROVALS STATISTICS
The FIRB was established in April 1976 to assist the Government in administering foreign investment policy. "The Board examines proposals by foreign interests to undertake investment in Australia and makes recommendations to the Government on whether those proposals are suitable for approval under the Government's policy."1
As a by-product of this process, the FIRB produces and publishes in its annual report, statistics on the number of proposals received and approved and the expected value of investments associated with those proposals.
The statistics on proposals approved by the Government are classified by the State or Territory in which the investment is to be made, the industry of investment and the country of the investor. In the statistics on investment proposals a distinction is made between "consideration" and "total expected expenditure". The consideration is what is expected to be spent on the purchase of the Australian asset, while total expected expenditure is the sum of the consideration plus future expected development expenditure.
It is important to note that FIRB approvals statistics:
only relate to proposals for investment that require Commonwealth Government approval; and
measure the "expected" value of investments (as opposed to actual expenditure) associated with those proposals, irrespective of whether the investment is to be made or financed by residents or non-residents.
ABS INTERNATIONAL INVESTMENT STATISTICS
ABS international investment statistics measure actual investment activity between residents of Australia and residents of the rest of the world (non-residents). International investment activity is defined to include:
the levels (stock) of Australia's foreign financial assets and liabilities at a particular date;
capital transactions (investment flows into and out of Australia) which cause changes in the levels of these assets and liabilities;
other factors which affect the level of investment such as valuation and price changes and exchange rate variations; and
the income receivable and payable on these foreign financial assets and liabilities.
International investment activity is classified in a number of ways. The main classifications used are: direction of investment, which refers to the basic distinction between inward and outward investment that underlies the categories foreign investment in Australia (FIA) and Australian investment abroad (AIA); resident institutional sector; type of capital; instrument of investment; industry of investee; and country of immediate debtor/creditor.
DIFFERENCES BETWEEN ABS INTERNATIONAL INVESTMENT STATISTICS AND FIRB INVESTMENT APPROVALS STATISTICS
There are numerous differences between ABS international investment statistics and FIRB approvals statistics. To begin with, FIRB approvals statistics only measure proposals for inward investment that require Commonwealth Government approval. They do not cover investment levels, investment income, or actual transactions and other changes in inward or outward investment; all of these aspects are covered by ABS international investment statistics.
In terms of inward investment, what the FIRB approvals statistics measure is substantially different from what is measured by ABS statistics on capital transactions that increase or decrease the level of foreign investment in Australia. The main differences are discussed below.
Coverage and concepts
Intended versus actual investment
FIRB approvals statistics measure intended investment. Some of the investments approved may never eventuate. Where investments proceed we can expect that some "consideration" will occur but the "total expected expenditure" is only an approximate guide to further injections of funds into the project. ABS international investment statistics, on the other hand, measure actual transactions; expected expenditure of any kind is not included.
A further difference in coverage results from the application of a threshold by the FIRB, whereby investment proposals below certain thresholds do not require approval. As such, these proposals are not included in FIRB approvals statistics. However, actual expenditure eventuating from these proposals are included in ABS international investment statistics.
On occasions the FIRB receives and approves more that one application for the same investment target. FIRB statistics include all of these approvals whereas ABS international statistics only include transactions eventuating from the proposal that proceeds.
Withdrawals of investment
Withdrawals of investment in Australia by non-residents (eg. sale of shares in an Australian company back to a resident) are out of scope of FIRB approvals statistics. In ABS international investment statistics, such withdrawals of investment (capital outflows) are netted off injections of investment (capital inflows).
Expansion of existing business
Once a foreign interest has established a business in Australia, it is generally not necessary to seek approval from the FIRB for expansion of the business. ABS international investment statistics do measure such expansions to the extent that they are funded by non-residents through equity or borrowing. ABS international investment statistics will also measure the change in the market value of the business over time (included in "other changes" in levels).
Transactions between two foreign interests
Should a foreign interest seek to purchase an investment or part of an investment in Australia already owned by another foreign interest, FIRB approval will be necessary and the intended investment will be measured in FIRB statistics once it has been approved. There will only be an effect upon ABS international investment statistics if the country of the foreign investor changes (ie. there will be no change to the total stock of foreign investment in Australia).
Money borrowed overseas by entities in Australia to finance investments not subject to FIRB approval will not be included in FIRB approvals statistics. However, these borrowings will be measured in ABS international investment statistics.
The financing actually used for the investment may differ in source (ie. off-shore and/or domestic) or type (ie. equity and/or borrowing) compared with what was stated in the approvals process.
Concept of foreign interest/non-resident
The FIRB employs a concept of "foreign interest" which it defines as:
a natural person not ordinarily resident in Australia; and
any corporation, business or trust in which a single foreigner (and any associates) has a 15 per cent or more ownership or in which several foreigners (and any associates) have 40 per cent or more of the ownership.
The ABS, however, employs a concept of "non-resident" which it defines as:
any individual, enterprise or other organisation ordinarily domiciled in a country other than Australia.
The following examples illustrate the differences which arise as a result of the practical application of these different concepts.
If an Australian subsidiary of a foreign company were to purchase an Australian hotel from a wholly Australian owned enterprise using funds sourced within Australia, the FIRB would include the full amount in their approvals statistics as they would regard the subsidiary as a "foreign interest". However, this transaction would be excluded from ABS international investment statistics as both the subsidiary and the selling enterprise would be regarded as Australian resident entities and the financing of the purchase would not involve changes in foreign assets or liabilities. Had the Australian subsidiary borrowed the funds from abroad (eg. from its foreign parent), the amount borrowed would appear as borrowing in ABS international investment statistics.
In general, foreign branches and subsidiaries of Australian companies will not be regarded as "foreign interests" by the FIRB and so their investments in Australia are excluded from FIRB approvals statistics. However, for the purposes of ABS international investment statistics, foreign branches and subsidiaries of Australian companies are regarded as non-residents and therefore their transactions with Australian residents (including their parents) will be included in ABS international investment statistics.
In ABS international investment statistics, a direct investment relationship is deemed to exist between residents and non-residents connected by an equity link of 10 per cent or more. Where such relationships exist, the direct investment by the direct investor in the direct investment enterprise group is recorded net of any investment by the direct investment enterprise group in the direct investor. In FIRB approvals statistics, claims of the Australian investee on the foreign interest are not netted off claims of the foreign interest on the Australian investee.
Reinvestment of earnings
The retained earnings of direct investment enterprises attributable to their direct investors are included in ABS international investment statistics but excluded from FIRB approvals statistics.
In FIRB approvals statistics, investment proposals are recorded at the time of approval, while in ABS international investment statistics transactions are recorded at the time the transaction takes place. The period in which an approval is granted may well be different from the period in which the transaction takes place.
FIRB approvals statistics also include the future expected development expenditure in the period approval is granted, even if the expenditure is expected to occur over subsequent periods.
FIRB approvals statistics classify investment proposals on the basis of the country of residence of the foreign interest (ultimate creditor), whereas ABS foreign investment statistics are classified according to the country of immediate creditor or debtor. Therefore, where investment in Australia is undertaken via a third country, FIRB approvals statistics will record the investment as being sourced from the country of residence of the foreign interest rather than the third country. ABS international investment statistics will record the investment as being sourced from the third country.
While both the FIRB approvals statistics and ABS international investment statistics are classified according to the Australian Standard Industry Classification (ASIC), the FIRB show approvals to acquire real estate separately. In ABS foreign investment statistics, real estate is regarded as a type of asset not as an industry. Only those units whose predominant activity is holding, developing and/or managing real estate are classified to the property industry classification in ABS statistics.
In addition, FIRB approvals statistics classify approvals to the industry in which the investment funds are expected to be used. ABS international investment statistics, on the other hand, classify investment to the industry of the enterprise group receiving the investment based on the predominant activity of the group.
This appendix has highlighted the very substantial differences between FIRB approvals statistics and ABS international investment statistics. The broad conclusion is that the two sets of statistics measure different concepts and are therefore, not directly comparable and certainly not interchangeable.
There is a need to distinguish between the two types of statistics and determine which is most appropriate. The differences noted above between Australia's approvals statistics and its international investment statistics generally also apply to those of other countries.
APPENDIX 3: MARKET VALUATION OF DIRECT INVESTMENT STOCKS IN AUSTRALIAN STATISTICS
The information contained in this Appendix was put together some years ago and some references are out of date. However, it provides a useful description of the move to valuation of FDI assets and liabilities at market prices.
This approach was subsequently confirmed in BPM5. BPM5 recommends that direct investment flows, income transactions and stocks be valued at market value. Where a current market value is not available, particularly in the case of equity investment in direct investment enterprises, it recommends that a market value proxy be used such as net asset value at current market cost. Where an indirect method of valuation is used BPM5 recommends that where feasible countries should publish both book value and the derived market value if the two types of data differ. However, it was been decided not to adopt this recommendation in Australian statistics as this requirement would introduce unnecessary provider load and possibly erode some of the progress already made with providers towards establishing reporting on a market value basis.
This appendix concludes "In Australia's experience, market value reporting has improved progressively over time and this trend is expected to continue." This has proved to be the case. Market valuation has been well accepted by respondents and most data are now reported on that basis.
This paper discusses the experience of the Australian Bureau of Statistics (ABS) in the implementation and use of the principle of market valuation for measuring the stock of its foreign direct investment assets and liabilities. Direct investment has been measured at market value in Australian statistics since 30 June 1980 in the case of equity and since 31 December 1991 in the case of other instruments. Prior to these dates, measurement was largely at paid-up value for corporate equities, at book value for net equity in branches, and at face value for other instruments.
The paper outlines the background to the implementation of the market valuation principle. It then describes how market value data is collected for use in compiling Australia's statistics on inward and outward direct investment. Issues associated with the measurement of equity investment as well as non-equity components are considered. The paper concludes with some observations about the practical issues that were encountered in implementing market valuation of direct investment stocks.
In December 1982 the ABS released its Framework for Foreign Investment Statistics which reflected the prevailing international statistical standards (the Fourth Edition of the IMF's Balance of Payments Manual and the 1968 Edition of the UN's System of National Accounts) and emerging domestic accounting standards. It also reflected the analytical requirements of key users of these statistics, elicited during an extensive consultative process. The Framework, among other things, embraced market prices, as recommended in the SNA, not only as the guiding principle for international investment statistics but also as the practical measure to be pursued in the collection of stock and flow data in the ABS Survey of Foreign Investment (SFI).
At around the same time there was increasing recognition by Australian accounting bodies of the need for improved accounting methods to cope with the effects of changing prices. In 1983 the two main bodies issued a Statement of Accounting Practice, 'Current Cost Accounting' (SAP1), which strongly recommended that ".. all entities present CCA (current cost accounting) supplementary financial statements in addition to their conventional financial statements. The CCA statements may, alternatively, be presented as the prime financial statements." The recommendations contained within SAP1 were compatible with International Accounting Standard IAS15 'Information Reflecting the Effects of Changing Prices', which requires the disclosure of information reflecting the effects of changing prices on the measurements used by economically significant entities in determining the results of operations and financial position.
The ABS considered that the valuation of direct investment stocks at market value was important in order to produce consistent statistics with other stock values of international investment and thereby enable aggregates to be published in respect of the total stock of foreign investment in Australia, Australian investment abroad and Australia's net international investment position. Furthermore, market valuation was viewed as the only useful basis for relating capital flows to the corresponding stock of direct investment to enable meaningful reconciliation of the international investment position at different points in time. Market valuation was also considered desirable to avoid distortions in implied income yields, derived by relating direct investment income to stock positions.
As part of a comprehensive plan for implementation of the Framework's recommendations and following a detailed feasibility study, the ABS changed its SFI to collect direct investment stocks data on a market value basis. This was achieved in two stages. First, from September 1985 data providers were asked to report direct investment in equity at market value or an acceptable proxy value. Second, from March 1992, data providers were asked to report debt securities at market value. For other non-equity instruments (essentially loans, deposits and accounts receivable or payable) face value continues to be regarded as a reasonable approximation of market value as these instruments can be realised on demand or at short notice, or cannot be transferred readily from one transactor to another.
COLLECTION OF MARKET VALUE DATA
Definition of market value
The SFI collects data on a market value basis directly from resident direct investors and resident direct investment enterprises. The largest enterprises report quarterly and a sample of the remainder report annually. The same methods of valuation are applied to both inward and outward direct investment stocks. Data providers are asked to report their foreign financial assets and liabilities at current market price at the reference date. Market price is
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