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Tuesday, 19 August 1980
Page: 411

Mr Willis asked the Treasurer, upon notice, on 31 March 1980:

(1)   What were the apparent earning rates of (a) overseasowned companies and (b) Australian-owned companies, as calculated for earlier years in Table 24 of Treasury Economic Paper No 1 (Overseas Investment in Australia), presented to the House on 16 May 1972, for each year since 1969-70.

(2)   On what basis are these figures calculated.

Mr Howard - The answer to the honourable member's question is as follows:

(1)   (a) and (b), and (2) The apparent earning rates of companies operating in Australia for each year since 1 969-70 were as follows:

Table 1

Apparent earning rates of companies operating in

Year Australia (a)

Per cent

1969- 70........... 6.1

1970- 71........... 6.0

1971- 72........... 6.1

1972- 73........... 6.6

1973- 74........... 6.2

1974- 75........... 5.7

1975- 76........... 6.1

1976- 77........... 6.5

1977- 78........... 6.6

1978- 79........... n.a. n.a. not available.

(a)   The apparent earning rates shown above are derived from data published in the Reserve Bank's Statistical Bulletin, Company Supplement. These data cover non-finance public companies operating mainly in Australia, other than those engaged in mining or primary industry, and include the foreign operations of Australian-owned companies and the Australian operations of foreign-owned companies. Data that would enable estimates to be made of the apparent earning rates of Australian-owned companies only are not available.

The figures in the table represent the ratio of net profit to shareholders' funds, debentures, mortgages, other secured borrowings, unsecured notes, deposits and other unsecured borrowings of this group of companies. These data are an aggregation of the companies' published financial statements and are therefore subject to the limitations inherent in accounting reports. In particular, conventional financial statements draw on a mixture of historic costs and valuation data- individual transactions being recorded at prices prevailing at the time of the transaction which may be later revalued. The statements generally do not record transactions, in a consistent manner, in terms of current prices.

Insofar as the financial statements are based on historic costs, they may not adequately reflect the effects of movements in the general level of prices. Thus, the apparent earning rates shown above may not be an accurate indication of the actual earning rates of the companies.

The usefulness of the earning rates calculated from these data would be further limited by the degree to which the companies included in the survey are representative of all companies operating in Australia. In this regard it should be particularly noted that the survey includes only public companies operating mainly in Australia and exludes companies in the finance, mining and primary production sectors.

Estimates of the apparent earning rates of overseas-owned companies can be derived from data contained in the ABS Bulletins 'Foreign Investment 1977-78' and 'Foreign Investment 1 978-79 ( Preliminary) ' and represent, for each year and all industry sectors, the ratio of income payable (excluding interest on foreign investment in direct investment enterprises in Australia (as defined by the ABS) to the level of foreign investment in those enterprises at the beginning of each year.

The degree of reliance that can be placed on earning rates so calculated, however, is questionable, mainly because the amount of corporate equities included in the level of direct investment in enterprises in Australia is recorded by the ABS at paid-up value only and excludes share premium, reserves, provisions and retained earnings. The recorded corporate equities figures would, therefore, be substantially lower than the actual level of foreign equity funds over which foreign investors have claims and the extent of under-representation would be compounded by the effects of inflation. By contrast, the statistics on income payable on foreign investment in enterprises in Australia are prepared for each year to reflect a particular set of current transactions between Australians and foreigners and, generally, would not be as susceptible to distortion as a result of inflation. For these reasons, the apparent earning rates shown below for overseas-owned companies will be higher than the actual earning rates.

The apparent earning rates of overseas-owned companies for each year 3) nee 1969-70, calculated in accordance with and subject to the qualifications of the foregoing, were as follows:

Table 2

Apparent earning rates of overseas-owned companies

Year percent

1969- 70........... 8.9

1970- 71........... 8.2

1971- 72........... 7.1

1972- 73........... 9.2

1973- 74........... 11.6

1974- 75........... 9.3

1975- 76........... 14 4

1976- 77........... 16.2

1977- 78........... 15 5

1978- 79........... 15 5

In order to make the estimates in Table 2 more comparable with those in Table 1 for companies operating in Australia, the data used to derive the estimates in Table 2 can be adjusted by the average of the paid-up capital to shareholders' funds ratio for all companies reported on by the Reserve Bank's Statistical Bulletin, Company Supplement. The general effect of this adjustment (which raises the value of equity funds to around three times the value reported by the ABS) on the apparent earning rates is shown in Table 3:

Table 3

Adjusted apparent earning rates of overseas-owned

Year companies (a) per cent

1969- 70........... 5.9

1970- 71........... 5.4

1971- 72........... 4.6

1972- 73........... 5.9

1973- 74........... 7.1

1974-75........... 5.4

1975- 76........... 8.2

1976- 77........... 8.6

1977- 78........... 8.0

1978- 79........... 7.8

(a)   The corporate equities components of the data used to produce these figures have been adjusted by the factor described above. (Some notes on the use and limitations of the adjustment factor may be found in Appendix A to the Treasury Submission to the Campbeell Committee, The Role of Foreign Capital and Foreign Investment Policy.)

Given the limitations of the statistics, differences in the financial structures of the groups of companies involved, differences in the coverage of the two series of data, including the industry coverage, and the effects of inflation on the data, no meaningful conclusions can be drawn from a comparison of the apparent earning rates calculated for companies operating in Australia with those calculated for overseasowned companies.

The apparent earning rates shown in Tables 2 and 3 differ from those provided in the answer to Question No. 5768 because the earning rates shown above relate to foreign direct investment enterprises (excluding foreign portfolio investment), whereas those for Question No. 5768 relate to total foreign investment in enterprises in Australia. In addition, in accordance with the methodology adopted in Treasury Economic Paper No I , interest is excluded from the calculations above.

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