NOTICES
DEPARTMENT OF COMMERCE
[C-517-501]
Final Affirmative Countervailing Duty Determination and Countervailing Duty
Order; Carbon Steel Wire Rod From Saudi Arabia
Monday, February 3, 1986
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AGENCY: Import Administration, International Trade Administration,
Commerce.
ACTION: Notice.
SUMMARY: We determine that certain benefits which constitute bounties or grants within
the meaning of the countervailing duty law are being provided to manufacturers,
producers, or exporters in Saudi Arabia of carbon steel wire rod. The estimated net
bounty
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or grant is 5.48 percent ad valorem for all manufacturers, producers, or
exporters in Saudi Arabia of carbon steel wire rod.
We are directing the U.S. Customs Service to continue to suspend liquidation of all entries
of carbon steel wire rod from Saudi Arabia that are entered, or withdrawn from
warehouse, for consumption and to require a cash deposit on such entries equal to the
estimated net bounty or grant of 5.48 percent ad valorem.
EFFECTIVE DATE: February 3, 1986.
FOR FURTHER INFORMATION CONTACT:Jack Davies or Barbara Tillman, Office of
Investigation, Import Administration, International Trade Administration, U.S.
Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC
20230; telephone: (202) 377-1785 or (202) 377-2438.
SUPPLEMENTARY INFORMATION:
Final Determination
Based on our investigation, we determine that certain benefits which constitute bounties
or grants within the meaning of section 303 of the Tariff Act of 1930, as amended (the
Act), are being provided to manufacturers, producers, or exporters in Saudi Arabia of
carbon steel wire rod. For purposes of this investigation, the following programs are
found to confer bounties or grants:
- Government Loan to Hadeed.
- Preferential Provision of Equipment to Hadeed.
- Government Equity Infusions in Hadeed.
We determine that estimated net bounty or grant to be 5.48 percent ad valorem for all
manufacturers, producers, or exporters in Saudi Arabia of carbon steel wire rod.
Case History
On June 12, 1985, we received a petition in proper form from Atlantic Steel Company,
Georgetown Steel Corporation, North Star Steel Texas, Inc., and Raritan River Steel
Company filed on behalf of the U.S. industry producing carbon steel wire rod. In
compliance with the filing requirements of § 355.26 of the Commerce Regulations (19 CFR
355.26), the petition alleges that manufacturers, producers, or exporters in Saudi
Arabia of carbon steel wire rod receive bounties or grants within the meaning of section
303 of the Act.
We found that the petition contained sufficient grounds for initiating a countervailing
duty investigation, and on July 2, 1985, we initiated the investigation (50 FR 28231). We
stated that we expected to issue our preliminary determination by September 5, 1985.
Since Saudi Arabia is not a "country under the Agreement" within the meaning of section
701(b) of the Act, sections 303(a)(1) and 303(b) apply to this investigation. Accordingly,
petitioners are not required to allege that, and the U.S. International Trade Commission is
not required to determine whether, imports of the subject merchandise from Saudi
Arabia materially injure, or threaten material injury to, a U.S. industry.
On July 12, 1985, we presented a questionnaire to the Embassy of Saudi Arabia in
Washington, DC and requested that the response be submitted by August 12. We
presented a supplemental questionnaire on August 19 and requested a response by
October 1.
On August 6, we determined that this case is extraordinarily complicated due to the
complexity of the alleged subsidy practices and the novelty of the issues presented; we
also determined that the government of Saudi Arabia and other parties concerned were
cooperating with this investigation. Therefore, we postponed our preliminary
countervailing duty determination until not later than November 12 (50 FR 32751).
On October 1, we received responses to our questionnaires from the government of
Saudi Arabia and the Saudi Iron and Steel Company (Hadeed). On the basis of the
information contained in these responses, we made a preliminary affirmative
countervailing duty determination on November 12 (50 FR 47788).
From November 23 through December 4, we verified the responses of the government of
Saudi Arabia and Hadeed in Saudi Arabia.
In response to a November 27 request from respondents and a December 2 request from
petitioners, we held a public hearing concerning this investigation on December 20. We
received pre-hearing briefs on December 17 and post-hearing briefs on January 2, 1986.
Respondents filed a supplemental response incorporating verified information on
January 3, 1986.
Scope of Investigation
For purposes of this investigation, the term carbon steel wire rod covers a coiled,
semi-finished, hot-rolled carbon steel product of approximately round solid cross
section, not under 0.20 inch nor over 0.74 inch in diameter, tempered or not tempered,
treated or not treated, not manufactured or partly manufactured, and valued over or
under 4 cents per pound. Wire rod is currently classifiable under items 607.14, 607.17,
607.22, and 607.23 of the Tariff Schedules of the United States (TSUS).
Analysis of Programs
Throughout this notice, we refer to certain general principles applied to the facts of the
current investigation. These principles are described in the "Subsidies Appendix" attached
to the notice of "Cold-Rolled Carbon Steel Flat- Rolled Products from Argentina; Final
Affirmative Countervailing Duty Determination and Countervailing Duty Order,"
which was published in the April 26, 1984, issue of the Federal Register (49 F.R. 18006).
For purposes of this final determination, the period for which we are measuring bounties
or grants, the review period, is the 1984 company fiscal year (January 1-December 31,
1984). Hadeed is the only producer in Saudi Arabia exporting carbon steel wire rod to
the United States during the review period.
In response to a specific allegation, we have examined whether government equity
infusions in Hadeed were made on terms inconsistent with commercial considerations.
We have addressed this allegation in the section below on "Government Equity Infusions
in Hadeed."
Based upon our analysis of the petition, the responses submitted by the government of
Saudi Arabia and Hadeed to our questionnaires, our verification, and the written and
oral comments made by the interested parties, we determine the following:
I. Programs Determined To Confer Bounties or Grants
We determine that bounties or grants are being provided to manufacturers, producers, or
exporters in Saudi Arabia of carbon steel wire rod under the following programs:
A. Government Loan to Hadeed
Although not specifically alleged by petitioners, evidence in the petition indicated that
Hadeed might have received loans on terms inconsistent with commercial considerations
from the Saudi Industrial Development Fund (SIDF) or from other government agencies.
In its response, Hadeed reported that it had not received any loans from SIDF but had
received a loan from the Public Investment Fund (PIF).
The PIF was established in 1971 as one of the five specialized credit institutions set up by
the Saudi government. The other specialized credit
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institutions are the
above-mentioned SIDF, the Saudi Agricultural Bank, the Saudi Credit Bank, and the Real
Estate Development Fund. The PIF is funded completely by the Saudi government. The
PIF and the other specialized credit institutions are the only sources of long-term
financing in Saudi Arabia.
According to its by-laws, the PIF can lend to commercially productive projects in which
the Saudi government has some equity participation. There are no legal limitations on the
project size or types of products to which PIF can lend. PIF began making loans in 1973 to
PETROMIN projects involving products in short supply domestically and to Saudia
Airlines for development of the areas served by the airline. Since 1973, a number of loans
have been made from the PIF, primarily to PETROMIN, Saudia Airlines, and the Saudi
Basic Industries Corporation (SABIC). (SABIC, a part owner of Hadeed, was wholly-owned
by the government from its founding in 1976 through early 1984, when SABIC issued new
stock and became 70 percent government owned and 30 percent privately owned.) These
PIF loans have been used to finance such products as fertilizers, plastics, commercial air
transportation, pipelines, steel, construction, petrochemicals, chemical gases, electricity,
and refined petroleum products.
In determining whether PIF loans are provided to a specific enterprise or industry, or
group of enterprises or industries, we have reviewed PIF's lending activities since its
inception. We find that, despite the number of products which have received PIF
financing, these loans are given predominantly to finance projects undertaken by
PETROMIN, Saudia Airlines, and SABIC. Since 1978, PIF loans have gone exclusively to
these three companies' projects. Therefore, we determine that PIF loans are provided to a
specific group of enterprises in Saudi Arabia, and that the PIF loan to Hadeed is
countervailable to the extent that it is given on terms inconsistent with commercial
considerations.
The PIF loan to Hadeed was part of the initial investment package for constructing its
direct reduction plant, steel making plant, and rolling mill at Jubail. The PIF loan
comprised 60 percent of Hadeed's total capitalization. Repayment of the principal on the
loan will begin in 1989, 5.5 years after the October 1983 startup of production at Hadeed.
After startup, the service charge on the loan varies according to the rate of return on
investment in a given fiscal year. Hadeed did not make a profit during the review period
and, therefore, did not pay any service charge on the PIF loan in that period.
In order to determine whether the PIF loan to Hadeed was made on terms inconsistent
with commercial considerations, we examined information pertaining to the two primary
sources in Saudi Arabia of medium-term (from one to five years) and long-term (over
five years) financing: the Saudi commercial banking system and the Saudi government
specialized credit institutions.
At verification, we found that Saudi commercial banks are limited in their ability and
willingness to make long-term loans. Since interest obligations on loans cannot be
enforced in Saudi courts, and because the Saudi government limits the amount of funds
which Saudi commercial banks can loan to any one individual or legal entity, Saudi
commercial banks cannot lend large amounts of funds over a long period of time for large
scale industrial construction projects. We did find, however, that Saudi commercial banks
have in recent years started to provide financing for periods of three to seven years to
cover the working capital needs of newly constructed industrial and manufacturing
companies.
Long-term financing in Saudi Arabia is available from the five specialized credit
institutions created by the Saudi government as discrete credit windows for lending
government funds in Saudi Arabia: the PIF, the SIDF, the Saudi Agricultural Bank, the
Real Estate Development Fund, and the Saudi Credit Bank. Because Islamic law prohibits
interest, these institutions cannot and do not charge any interest on their loans. Of these
institutions, only the PIF and SIDF provide funding to industrial or manufacturing
projects.
At verification, we found that the SIDF was established in 1974 to provide loans to small-
and medium-sized private industries. The SIDF is funded by the government, but, since
1980, loan repayments have been adequate to cover loan disbursements, and, thus, no
new government funds have been needed.
The SIDF can make loans for up to 15 years to any licensed company in Saudi Arabia
which is at least 25 percent domestically owned and which has some private Saudi
ownership. The level of financing available is commensurate with the level of domestic
ownership. For projects in which domestic ownership constitutes 50 percent or more of
total equity, the maximum SIDF loan amount is 50 percent of the total project costs.
During the first 10 years of its operations, the SIDF approved loans for 843 projects
located in every region of Saudi Arabia, involving numerous industrial sectors
including consumer products, chemical products, cement, building materials, and
engineered products. These loans were provided to approximately 600 companies.
Based on this information, we find the SIDF loans are available to and are used by a wide
variety of industries located throughout Saudi Arabia. Therefore, we determine that
SIDF loans are not provided to a specific enterprise or industry, or group of enterprises
or industries.
Using the two sources for medium- to long-term financing in Saudi Arabia, the
commercial banks and the SIDF, we have constructed a composite benchmark to
determine whether the PIF loan to Hadeed is on terms inconsistent with commercial
considerations. Since the PIF loan covered 60 percent of Hadeed's total project costs, the
benchmark was constructed under the assumption that Hadeed could have financed 50
percent of its total project costs with an SIDF loan (the maximum eligibility for a
company with 50 percent Saudi ownership) and the remaining ten percent of project
costs with a Saudi commercial bank loan. The SIDF loan was used because, of all of the
specialized credit institutions, it is the only fund besides the PIF which lends to industrial
or manufacturing projects and, thus, is most representative of what Hadeed would
otherwise have had to pay for long-term loans in Saudi Arabia. We used the maximum
feasibility fees and average follow-up fees applied to SIDF loans. The commercial bank
portion of the benchmark was based on the fees paid by Hadeed on its medium-term
commercial bank loan, including an average of the various bank fees charged to service
the loan and the average 1984 commission fee. We compared this composite benchmark
loan to the terms of the PIF loan taken out by Hadeed. On this basis, we determine that the
PIF loan is on terms inconsistent with commercial considerations.
To calculate the benefit to Hadeed, we applied the benchmark loan terms to the total
amount of PIF funds drawn down by Hadeed as of the end of the review period. Since
Hadeed did not pay any service charges on the PIF loan during the review period, the net
benefit to Hadeed during the review period consisted of the entire benchmark loan
charges. We divided the benchmark loan charges by the value of Hadeed's sales for the
review period to arrive at an estimated net bounty or grant of 4.91 percent ad valorem.
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B. Preferential Provision of Equipment to Hadeed
Petitioners alleged that the government of Saudi Arabia, through the Royal Commission
for Jubail and Yanbu, provides infrastructure benefits, such as roads, ports, low-cost
utilities, training centers, and plant sites, to specific enterprises and industries located in
Jubail and Yanbu.
As discussed in section II.A below, we have determined that the provision of basic
infrastructure has not conferred a bounty or grant on the production or export of carbon
steel wire rod from Saudi Arabia. Nevertheless, we have also examined whether the
government has provided any specific benefits in Jubail to the carbon steel wire rod
industry.
Under a lease/purchase arrangement, the Royal Commission for Jubail and Yanbu built
for Hadeed two bulk ship unloaders at the Jubail industrial port for unloading iron ore,
and constructed a conveyor belt system for transporting iron ore from the pier to
Hadeed's plant in the Jubail Industrial Estate. When construction of these facilities was
completed in 1982, the Royal Commission transferred custody to Hadeed under the
lease/purchase agreement.
As originally planned, the bulk ship unloader and coneyor system was built to serve both
Hadeed and an adjacent plant in the Jubail Industrial Estate. The second plant was not
built, however, leaving Hadeed as the sole user of this equipment.
Under the terms of the lease/purchase agreement, Hadeed must repay the equipment and
construction costs plus a two percent fee for cost of money in annual installments over a
20-year period. The annual payments are stepped, with the lowest payment levels
occurring at the beginning and the highest payment levels occurring at the end of the
20-year period.
At verification, we found that the Royal Commission had built a urea berthside handling
system at the Jubail industrial port for the exclusive use of another company located in
the Jubail Industrial Estate. The lease/purchase agreement on the berthside handling
system called for equal annual repayments covering equipment and construction costs
and a two percent fee for cost of money. We also found that the two percent cost of money
fee was the standard Royal Commission charge for recovery of costs on other facilities,
such as the pipeline corridor, the seawater cooling system, and the industrial potable
water plant, which were built by the Royal Commission in the Jubail Industrial Estate.
Of the projects examined, the urea berthside handling system was the most comparable to
Hadeed's ship unloader and conveyor system. Therefore, we have compared the
repayment schedule for Hadeed's ship unloader and conveyor system to the repayment
schedule for the berthside handling system to see whether the ship unloader and
conveyor system was provided on preferential terms. Although both agreements carried
the standard Royal Commission cost of money fee, Hadeed's end-loaded, stepped
repayment schedule was more advantageous than the annuity style repayment schedule
on the berthside handling system. We determine, therefore, that Hadeed's ship unloader
and conveyor system was provided on preferential terms. Moreover, because the
equipment is used exclusively by Hadeed, we find that it is provided to a specific
enterprise and, thus, confers a bounty or grant.
In order to calculate the benefit, we compared the principal and fees being paid in each
year by Hadeed to the principal and fees that would be paid under the repayment
schedule used for the berthside handling system. We allocated the sum of the present
values of the differences in the two repayment schedules over 20 years, using a two
percent discount rate. The resulting benefit for the review period was divided by the
value of Hadeed's sales during the review period to arrive at an estimated net bounty or
grant of 0.04 percent ad valorem.
C. Government Equity Infusions in Hadeed
Petitioners alleged that the government of Saudi Arabia, through the SABIC, provided
equity to Hadeed on terms inconsistent with commercial considerations. Petitioners
argued that the lack of commercial viability of the steel mill investment is demonstrated
by the fact that SABIC assumed a 90 percent equity participation share in Hadeed,
whereas SABIC's joint venture projects are usually structured with 50 percent SABIC
equity and 50 percent foreign equity. In Hadeed's case, petitioners argued that no foreign
investor was willing to assume a 50 percent equity share because such an investment
would not have been commercially sound.
We have consistently held that government provision of equity does not per se confer a
subsidy. Government equity infusions bestow countervailable benefits only when they
occur on terms inconsistent with commercial considerations. When there is no
market-determined price for equity, it is necessary to determine whether the company is
a reasonable commercial investment (i.e., equityworthy). Since there are no
market-determined prices for equity in Hadeed, we must determine whether Hadeed is
equityworty.
We examined two equity infusions by SABIC in Hadeed: the 1979-1983 cash infusions
made by SABIC pursuant to its contractual agreements to fund the construction of
Hadeed, and the 1982-1983 acquisition by Hadeed of SABIC's shares in the Steel Rolling
Company (SULB).
During the 1979-1983 period when these infusions took place, SABIC itself was
wholly-owned by the Saudi government. Its Board of Directors consisted of three
government ministers and three private individuals appointed by the government. We
find, therefore, that the equity infusions by SABIC in Hadeed during this period
represented infusions of government funds into Hadeed.
At verification, we found that the amount of equity participation in Hadeed and other
SABIC joint venture projects was negotiated between the partners. SABIC's intention was
to negotiate equity participation in a given joint venture commensurate with each
partner's contribution to the project of required industrial technology, domestic and
export marketing skills, experience in the industry, and training capabilities. Purchases of
equity by SABIC and the other joint venture partners were found to have been made on
the same terms and conditions.
As part of their initial investment analysis of the Hadeed joint venture project and as
required in obtaining an industrial license and PIF funding, SABIC and Korf Stahl, the
foreign partner in the Hadeed joint venture, commissioned the World Bank to conduct
feasibility studies, first on the proposed direct reduction plant and billet mill (completed
February 1979), and later on the proposed rolling mill (completed June 1980). Based on
our analysis of these feasibility studies, we preliminarily determined that Hadeed had
been equityworthy since its inception in 1979.
On the basis of the 1979 and 1980 World Bank studies, SABIC decided to invest in the
Hadeed project and entered into joint venture agreements in 1979 and in 1981. The 1979
PIF loan on the original billet mill and the subsequently consolidated PIF loan on the
expanded Hadeed project called for staged disbursements of PIF construction funds of a 2
to 1 basis with
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disbursements of Hadeed equity capital during the construction
period. Furthermore, negotiated agreements between SABIC and its joint venture
partners in the Hadeed project called for periodic increases in Hadeed's authorized capital
over the 1979-1983 period to meet construction costs. All of these cash infusions by
SABIC consisted of cash contributions in return for new shares of Hadeed stock. All cash
infusions by SABIC between 1979-1983 were made pursuant to the 1979 and 1981 joint
venture agreements. These infusions were matched on a proportional basis by the other
joint venture partners until a predetermined cap on their paid-in capital was reached.
Therefore, we determine that the investment decisions made in 1979 and 1981 by SABIC
to provide equity to Hadeed during the 1979-83 period were not made on terms
inconsistent with commercial considerations.
In December 1982, SABIC decided to transfer its shares in SULB to Hadeed in return for
new Hadeed stock. SABIC acquired majority ownership of SULB in 1979 and purchased all
of SULB's stock in 1982. SULB has produced steel reinforcing bars using imported billets
at its Jeddah rolling mill since the mid-1960's. SULB currently obtains its billets from
Hadeed and has no facilities for producing carbon steel wire rod.
The stock transfer, through which SULB became a wholly-owned subsidiary of Hadeed,
represented a new investment decision distinct from the decision to construct Hadeed's
facilities in Jubail. Therefore, an analysis of the sale of SULB to Hadeed must be based on
information available as of December 1982. One of the key indicators used in the World
Bank studies of the Hadeed project was the world price of steel reinforcing bars. We
examined these price levels, as reported in the Metals Bulletin, for the 1979-1985 period.
We found that by late 1982 actual world prices had decreased significantly from their
levels in 1979 and 1980, when the World Bank studies were conducted. Because of the
trend in prices from 1980 through 1982, we find that a reasonable investor would not
have relied on these studies for the 1982 SULB investment decision.
Furthermore, the declining world price levels would have made it appear doubtful in late
1982 that prices, during years in which Hadeed would be operating, would reach the level
necessary to generate a sufficient rate of return on equity over the life of the project.
Therefore, we determine that the transfer of SABIC's shares in SULB to Hadeed in
exchange for additional shares in Hadeed was inconsistent with commercial
considerations.
To determine the benefit to Hadeed from the acquisition of SULB, we used the rate of
return shortfall methodology. We determined the amount of the equity infusion to be the
net book value of SULB's equity at the time of the transfer. As best available information
on the national average rate of return on equity in Saudi Arabia, we used the 1983
annual average rate of return on U.S. direct investment in Saudi Arabia. This
information, the most recent data publicly available from the U.S. Commerce
Department's Bureau of Economic Analysis, revealed that the 1983 rate of return was 5.4
percent. We computed the rate of return shortfall by taking the difference between this
figure and the 1984 rate of return on equity in Hadeed. We multiplied the rate of return
shortfall by the net book value of SULB's equity, and divided the resulting figure by the
total value of Hadeed's and SULB's consolidated sales in 1984 to arrive at an estimated net
bounty or grant of 0.53 percent ad valorem.
II. Programs Determined Not To Confer Bounties or Grants
We determine that bounties or grants are not being provided to manufacturers,
producers, or exporters in Saudi Arabia of carbon steel wire rod under the following
programs.
A. Basic Infrastructure in Jubail and Yanbu
Petitioners alleged that the government of Saudi Arabia, through the Royal Commission
for Jubail and Yanbu, provides infrastructure benefits, such as roads, ports, low-cost
utilities, training centers, and plant sites, to specific enterprises and industries located in
Jubail and Yanbu.
We have consistently held that government activities such as these constitute bounties or
grants only when they are limited to a specific enterprise or industry, or group of
enterprises or industries. Moreover, we have held that where limitations on use do not
result from government activities, but instead result from the inherent characteristics of
the good or service being provided, the government action does not confer a
countervailable bounty or grant.
Basic infrastructure facilities are, by their very nature, available only for use by
companies and individuals located in the vicinity of such facilities. Roads, ports, and
training centers established in a given location obviously benefit those located in that
area more than they benefit firms and individuals located in other areas. Nevertheless,
this does not mean that those located in close proximity to the infrastructure are
receiving countervailable bounties or grants. The provision of basic infrastructure does
not confer a countervailable bounty or grant when the following three conditions are met:
(1) The government does not limit who can move into the area where the infrastructure
has been built, (2) the infrastructure that has been built is in fact used by more than a
specific enterprise or industry, or group of enterprises or industries, and (3) those that
locate there have equal access or receive the benefits of the infrastructure on the basis of
neutral criteria.
At verification, we found that, in addition to Jubail and Yanbu, there are eight other
industrial estates in Saudi Arabia which were developed over time through the joint
efforts of a number of individual Saudi government agencies and which are administered
by the Ministry of Industry and Electricity.
We visited one of these eight industrial estates, the Second Riyadh Industrial Estate. We
found that this estate contained a number of industries engaged in manufacturing a
variety of products, such as electrical transformers, cement, food processing, clothing,
furniture, and diapers, and in providing a variety of services, such as printing,
advertising, and transportation. The estate is being developed in phases, with the first
phase completed in 1980 and the second phase in 1985. During our tour of the estate, we
saw large plots of land as yet undeveloped or under construction. Finally, we saw that the
estate had a number of infrastructure facilities, including potable and industrial water
treatment plants, an electrical power plant, a fire department, a hospital, and an
administrative center. The Ministry of Industry and Electricity administers the overall
estate, with other government agencies in charge of certain infrastructure facilities.
The Jubail and Yanbu industrial estates were planned during the oil boom years to take
immediate advantage of the natural gas feedstock available in Saudi Arabia and to
develop expeditiously new harbors needed for oil and gas exports. To meet this need, the
Royal Commission for Jubail and Yanbu was established to centralize and expedite the
planning and construction of the Jubail and Yanbu estates in a relatively short period of
time. As these two industrial estates have become operational, various functions of the
Royal Commission have been moved into the regular government agencies in charge of
administering the other eight estates.
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We toured the Jubail Industrial Estate during the verification visit and found that a
variety of industries are located there that manufacture products such as structural steel,
petrochemicals, fertilizers, heavy equipment, industrial use oxygen and nitrogen gases,
air conditioning units, and cement. In addition, numerous support industries are located
there that are engaged in many different production and service activities such as heavy
equipment maintenance and sale, lumber yard sales, soil testing laboratories, clothing
manufacturing, printing, and green house nursery sales and services. We also saw a
number of infrastructure facilities, including a hospital, a fire station, a seawater cooling
system, an electrical power plant, a desalination plant, a pipeline corridor, and the
industrial port facilities. We found that the Jubail Industrial Estate is being developed in
stages, starting with the primary industries and proceeding to the light manufacturing and
secondary industries. There also are large tracts of land in the estate which are either
undeveloped or under construction.
We held discussions with officials of the Ministry of Industry and Electricity and the Royal
Commission, and examined documents concerning the procedures for obtaining
industrial licenses, plant site permits, and commercial registrations. The location of an
enterprise is determined by the industrial licensing procedure administered by the
Ministry of Industry and Electricity. We found that the Ministry has approved industrial
licenses to all types of enterprises and industries located in all areas of the Kingdom, both
inside and outside the ten industrial estates. We found no evidence that the Ministry has
denied or limited the entry of any enterprise or industry into any particular region or
industrial estate in Saudi Arabia.
At Jubail, we examined utility service request forms containing the terms and conditions
for receiving potable and industrial water, for disposal of sewage and industrial waste, for
use of the seawater cooling system, and for use of other infrastructure facilities available
in the Jubail Industrial Estate. We found no evidence that any of the primary, light, or
support industries in Jubail has been or is being prohibited from using any of the
infrastructure facilities in Jubail. We found that the only factors which limit use of the
infrastructure facilities in Jubail relate to the technological parameters of the enterprise
and its need for and ability to use the facilities. We also ascertained that a wide variety of
enterprises and industries use the infrastructure in Jubail.
Finally, we found that the infrastructure in Jubail is available on equal terms for use by all
companies and industries locate in that industrial estate. In section II.B below, we discuss
the land rental rates and utility rates on water, electricity, and gas available in Jubail and
compare these rates to those available in the other industrial estates.
Based on this information, we determine that the Saudi government does not limit who
can locate in any of the industrial estates, including Jubail, and that the basic
infrastructure built by the government in Jubail is not countervailable as a regional
bounty or grant. When a government decides to build industrial cities, industrial estates,
or any other type of infrastructure, the government activity is necessarily limited to
those sites. To treat this activity as a regional bounty or grant would not be reasonable.
Under such logic, the government would have to develop every square foot of the
country equally or undertake no development at all in order to avoid providing regional
bounties or grants. We cannot accept this interpretation. Insofar as the government does
not limit which industries can locate in these areas, and does not apply different criteria
for infrastructure use in different areas, then there is no governmental limitation on
companies in specific regions. The only limitation is due, again, to the inherent
characteristics of the infrastructure. Therefore, we determine that the provision of basic
infrastructure in Jubail is not limited to an enterprise or industry, or group of enterprises
or industries in a specific region.
Moreover, because restrictions on the use of the infrastructure stem from the inherent
nature and location of the facilities and not from any activity or action of the government
of Saudi Arabia, and because the infrastructure is provided on equal terms to, and is
used by, a wide variety of industries, we determine that the infrastructure in Jubail is not
limited to a specific enterprise or industry, or group of enterprises or industries within
the meaning of section 771 (5) (B) of the Act.
B. Special Benefits to the Manufacturing Sector in Saudi Arabia
Petitioners alleged that the "manufacturing sector" in Saudi Arabia represents a "group
of industries" targeted for development and provided with special incentives under the
Law for the Protection and Encouragement of National Industries in the Kingdom of
Saudi Arabia. These special incentives include: (1) Duty exemptions on imports of
machinery, tools, equipment, spare parts, raw materials, and packaging; (2) provision of
water, electricity, and gas at very low rates; and (3) land at nominal rent for factories and
employee housing.
To determine whether these incentives confer a bounty or grant, we must first determine
whether the manufacturing sector in Saudi Arabia constitutes a "group of industries" as
alleged by petitioners.
In order to establish a manufacturing facility in Saudi Arabia, a company must obtain
an industrial license. As explained in the previous section, the Ministry of Industry and
Electricity administers the licensing procedure. The Ministry does not limit or specify
which industries may apply for an industrial license, and at verification, we found that the
Ministry has approved licenses for hundreds of companies representing a wide range of
industries including the food, textile, pulp and paper, wood products, petrochemical,
pharmaceutical, rubber, steel, fabricated metal, machinery and equipment, electrical
appliance, and furniture industries. The number and diversity of manufacturing concerns
which have received industrial licenses demonstrate that the manufacturing sector in
Saudi Arabia does not represent a mere "group of industries" as alleged by petitioners.
Moreover, we determine that industries or firms within the manufacturing sector do not
receive preferential treatment under the incentives authorized by the Law for the
Protection and Encouragement of National Industries in the Kingdom of Saudi Arabia.
With respect to the first incentive (duty exemptions on imports of machinery, tools,
equipment, spare parts, raw materials and packaging), we found that all companies with
industrial licenses may apply for duty exemptions by submitting invoices to the Ministry
of Industry and Electricity. The exemptions are authorized under Article 4 (for
production machinery) and Article 5 (for raw materials) of the Law for the Protection and
Encouragement of National Industries. At verification, we found that duty exemptions
were granted to hundreds of companies for a variety of products, including spare parts,
light bulbs, insulated wire, cable packing, and laboratory equipment. In a very few cases,
the exemption was denied. In the few cases where the exemption was denied, the stated
reasons were that all exempted goods must be used in the company's production process,
there was sufficient
*4212
local supply of the good, or the good was not a "raw material."
To receive an exemption, companies apply in advance of importation and are assigned a
total exemption amount based on the stated value of the imports and the applicable duty
rates. The exemption remains in effect for a specified time period. The holder of the
exemption exhausts it by presenting invoices showing actual value of the goods and the
applicable duty. The company must reapply once its exemptions are exhausted. We found
that Hadeed's duty exemptions did not exceed the amount of duty payable on the
imported goods as specified in the Saudi Arabian tariff schedules.
Based on this information, we determine that the duty exemptions under Articles 4 and 5
are not limited within the manufacturing sector to a specific enterprise or industry, or
group of enterprises or industries, and, thus, do not confer a bounty or grant. We also
determine that Hadeed's duty exemptions did not result in a bounty or grant because they
did not exceed the amount of duty payable on the imported goods.
With respect to the second alleged incentive (provision of water, electricity and gas at
very low rates), we found at verification that companies (including Hadeed) located
within the industrial estates have equal access to, and pay the standard Kingdom-wide
rates for industrial users for, electricity, water (including sewage) and other services. In
the Jubail Industrial Estate, companies pay the standard Kingdom-wide rates except on
those infrastructure facilities where extra cost recovery charges are added to the
Kingdom-wide rate by the Royal Commission. In addition, all customers purchasing gas
from the Master Gas System (MGS) pay the same flat rate per million BTU.
The MGS is a gas purification and pipeline system which was originally developed to
transport natural gas from the oil fields to gas processing plants and then to port facilities
for export. The MGS has since been extended to serve Saudi industrial projects. MGS does
not serve households. Officials of the Arabian American Oil Company (Aramco), which
operates the MGS under a concession from PETROMIN, told us that the location of the gas
system is dictated primarily by the location of a large chain of oil fields in the Eastern
Province and by the ports on the Arabian Gulf which are equipped to export liquified
natural gas.
Aramco builds secondary transmission lines from the MGS system to its industrial
customers at no charge to the customers. Aramco will consider any request regardless of
the potential customer's distance from the system if the customer can obtain a
right-of-way and if the hookup makes economic sense; that is, it may be uneconomical to
build a long transmission line to a small customer, since Aramco recoups its costs only
through its monthly gas consumption charges.
As stated in the preliminary determination, we consider that the provision of water,
electricity or gas, like the building of infrastructure facilities, cannot be considered
countervailable unless the government limits which industries can use the water,
electricity, and gas, or unless the government does not provide equal access to the
services or does not provide the service to all users on the basis of neutral criteria.
As noted above, we verified that the government has not limited, either de jure or de
facto, which companies or industries are part of the manufacturing sector, or which
companies or industries may locate in industrial estates. Furthermore, all companies
have equal access to the water, electricity and gas services provided in their respective
industrial estates. Finally, all companies (including Hadeed) in all industrial estates pay
the same rate for their water, electricity, and gas services. Therefore, since the provision
of these services is not limited to a specific enterprise or industry, or group of enterprises
or industries, and since Hadeed has not received these services at rates that are
preferential to those charged to other companies, we determinie that the provision of gas,
water, and electricity does not confer a bounty or grant on the product under
investigation.
With respect to the last incentive (land at nominal rents), we verified that the
government, which owns all the land in the industrial estates, charges the same rental rate
to all companies in all industrial estates. Since the government has neither limited which
companies or industries constitute the manufacturing sector, nor limited which
companies or industries can locate in the industrial estates, and since all companies
(including Hadeed) which rent government-owned land pay the same rental rate, we also
determine that the rental rates for land do not confer a bounty or grant.
C. Certain Tax Benefits to Hadeed
Petitioners alleged that SABIC, as a government agency, is exempt from the obligation to
pay Zakat, a religious tax for which all Saudi corporations are liable.
At verification, we learned that a corporation's Zakat liability is based on its net worth at
the end of the year. For joint ventures with foreign partners, the Zakat liability attaches
only to the Saudi-owned portion of the company's equity. The foreign partner pays
income tax, not Zakat, on its pro- rata share of the joint venture's net profits at a
progressive rate from 25 to 45 percent. Moreover, under Article 7 of the Foreign Capital
Investment Law, there is a 10-year income tax holiday for industrial projects with foreign
capital. This tax holiday applies only to income taxes that would be owed by foreign
owners. It does not apply to the Zakat liability of the Saudi owners.
At verification, we reviewed a letter from the Ministry of Zakat and Income Tax to SABIC
stating that SABIC is liable for Zakat owing to its part ownership of Hadeed. SABIC
requires its affiliates, including Hadeed, to pay their individual Zakat liabilities and
reimburses them. We found that Hadeed had paid the Zakat attributable to SABIC's share
of its net worth, and that SABIC had reimbursed Hadeed for that amount.
We also sought to find out whether the foreign shareholding in Hadeed diminishes SABIC's
Zakat obligation. Examination of the Zakat regulations and discussions with SABIC's
accountants revealed that SABIC's Zakat obligation attaches to 100 percent of the shares
it owns in Hadeed. SABIC's Zakat liability is not determined based on the total equity in
Hadeed, but only on that portion of Hadeed's equity owned by SABIC. Therefore, SABIC's
Zakat obligation is not diminished or otherwise affected by the amount of foreign
ownership in Hadeed.
Because SABIC was not exempted from its Zakat obligation during the review period, we
determine that Hadeed received no bounty or grant with respect to Zakat.
With regard to the income tax holiday for foreign owners, we verified that Hadeed's
German owner was eligible for the tax holiday during the review period. However, since
Hadeed was not profitable during its first year of production, there was no income tax
liability. Therefore, even if this program could confer a benefit on Hadeed, it was used.
III. Programs Determined Not To Be Used
Based on our verification, we determine that manufacturers, producers, or exporters in
Saudi Arabia of carbon steel wire rod did not use the
*4213
following programs which
were listed in our notice of initiation.
A. Special Benefits to Joint Ventures in Saudi Arabia
Petitioners alleged that Hadeed, a 90 percent Saudi-owned joint venture, enjoys benefits
under the Foreign Capital Investment Code and the Saudi Arabian Tenders Regulations
which are not available to other joint venture enterprises with lower percentages of Saudi
ownership. Petitioners contend that various equity "participation" levels define "groups of
industries." The alleged benefits consist of income tax holidays, government procurement
preferences, exemptions from posting of tender and performance bonds, and exemptions
from payment retentions. The allegation on income tax holidays was discussed in section
II.C above.
We preliminarily determined, based on statements in the responses, that Hadeed did not
use these programs. At verification, we found that Hadeed did not sell to the Saudi
government or any quasi-governmental organization during the review period, and
therefore did not take advantage of the preference available to Saudi individuals and
businesses under the government procurement code. We also ascertained that the
procurement code contains no provisions exempting any government contracts from
certain payment retention or performance bond requirements. The code provides that
the requirement of a final performance bond of 5 percent of the contract price may be
waived if the subject of the contract is consulting work, direct purchase, or purchase of
spare parts. However, since Hadeed did not sell to the government, it did not take
advantage of this waiver provision.
We, therefore, determine that alleged exemptions from bonding and payment retention
and procurement preferences do not confer a bounty or grant because Hadeed did not
use them during the period of review.
B. SABIC Loan Guarantees to Hadeed
Petitioners alleged that SABIC may have provided loan guarantees to SULB, a subsidiary
of Hadeed.
At verification, we examined the financial statements of Hadeed and SULB and
correspondence with SULB's major creditors and found that neither SULB nor Hadeed had
received loan guarantees from SABIC. We, therefore, determine that loan guarantees were
not used by Hadeed or its subidiary during the period of review.
Petitioners' Comments
Comment 1: Petitioners contend that PIF lending is limited by statute to a specific group
of industries: those owned wholly or partly by the government. In practice, the
requirement of government ownership assures that PIF loans are extended only to those
industries which further government policies. Furthermore, PIF loans also have been
limited to industries which are based on Saudi Arabia's oil and natural gas resources.
DOC Position: As discussed above, we determined that PIF loans are limited to projects
undertaken by a specific group of enterprises, PETROMIN, Saudia Airlines and SABIC.
Therefore, we do not reach the issue of whether "firms in which the government has an
equity position" or "industries based on oil and natural gas resources" constitute a specific
enterprise or industry, or group of enterprises or industries.
Comment 2: Petitioners contend that the Department should reject respondents'
argument that the specialized credit institutions administered by the Saudi government
be considered jointly in determining whether PIF loans are provided to a specific
enterprise or industry, or group of enterprises or industries. The precedents cited by
respondents are inapposite, in petitioners' view.
DOC Position: We have not aggregated the activities of the Saudi government specialized
credit institutions in evaluating whether PIF loans are provided to a specific enterprise or
industry, or group of enterprises or industries. See DOC position to respondents'
Comment 1.
Comment 3: Petitioners argue that, in measuring the benefit conferred by Hadeed's PIF
loan, the commercial considerations standard in section 771(5)(B)(i) of the Act requires a
commercially-determined benchmark rate. The Department's reliance on SIDF rates in
constructing a benchmark is inappropriate because the SIDF program is non-commercial.
SIDF loans are restricted to ventures with all least 25 percent Saudi ownership, projects
which are capital or power intensive, and projects which offer opportunities for
employing and training Saudi citizens. Furthermore, the granting of SIDF loans is
discretionary, and the fees charged are so low that they flout commercial considerations.
The appropriate commercial benchmark, in petitioners' view, would be the fee charged on
the one medium-term loan received by Hadeed from commercial banks, adjusted upward
to reflect the large amount and longer terms of the PIF loan. Alternatively, use of an
international benchmark would be consistent with Cabot Corp. v United States, Slip Op
85-102 (C.I.T., Oct. 4 1985) (Cabot).
DOC Position: In countries where long-term loans or the terms of long- term financing are
controlled by the government, it has been the Department's practice to use direct
government loans as benchmarks when those loans are provided to more than a specific
industry or group of industries (see, e.g., Cold-Rolled Carbon Steel Flat-Rolled Products
from Korea, 49 FR 47284, and Certain Textile Mill Products and Apparel from Colombia,
50 FR 9863). In our view, this benchmark is the best measure of the benefit to the
recipient of the subsidized loan because it reflects what the recipient would otherwise
have paid for a comparable loan.
The "commercial" benchmark suggested by petitioners would not be an appropriate
measure of what Hadeed would otherwise pay. The commercial banking sector in Saudi
Arabia is not sufficiently capitalized to supply a loan of the magnitude of the PIF loan.
Nor would we use world market interest rates to measure the cost of borrowing riyals in
Saudi Arabia.
As discussed above, we found that SIDF loans have been available to, and used by, a wide
variety of Saudi industries. We do not consider that the 25 percent minimum Saudi
ownership requirement or the domestic materials and training provisions constitute or
define a specific enterprise or industry, or group thereof. Furthermore, while SIDF may
have diminished its lending to certain sectors, we did not find any evidence that SIDF has
channeled its lending into any specific enterprise or industry, or group thereof.
Finally, in light of the Court of International Trade's decision in Carlisle Tire & Rubber Co.
v. United States (564 F. Supp. 834 (CIT 1983)) (Carlisle), we are not following the standard
adopted by the Court in Cabot.
Comment 4: Beyond the use of the SIDF rate, petitioners raise two specific objections to
the composite used by the Department for the PIF loan to Hadeed. First, the rate on the
commercial bank loan received by Hadeed is too low because it does not reflect the risk
inherent in lending a large sum of money. Second, the fact that SIDF financing is available
for up to 50 percent of the project cost does not justify a 50 percent weight for the SIDF
component of the benchmark.
DOC Position: We disagree with both points. With respect to the charge assigned to the
commercial loan
*4214
component of the benchmark, the incremental financing needed
by Hadeed would not exceed the amount of the loan Hadeed has already received from
commercial banks. Therefore, no upward adjustment to that charge is warranted. With
respect to the second point, the level of Saudi ownership in Hadeed exceeds 50 percent.
Therefore, Hadeed would be entitled to borrow 50 percent of the project's cost from SIDF.
Comment 5: Petitioners contend that in determing the benefit conferred on Hadeed by its
PIF loan, the Department should perform its caclulations on a year-by-year basis.
Petitioners argue that this methodology is correct since the charges Hadeed pays on the
loan in a given year are contingent on Hadeed's profitability for that year.
DOC Position: We agree. See DOC Position to Respondents' Comment 4.
Comment 6: Petitioners argue that the ship unloader and conveyor system provided to
Hadeed by the Royal Commission should be considered a countervailable benefit because
it is available only to industries located in Jubail. Alternatively, petitioners argue that
Hadeed's lease/purchase agreement bestows a countervailable benefit on Hadeed because
the terms of repayment are far more favorable to Hadeed than the terms of the
lease/purchase agreement on the urea berthside handling system. Moreover, the
benchmark for measuring the benefit should not reference the SIDF rate because SIDF
does not fund ongoing operations or the purchase of used machinery or equipment.
Finally, petitioners ask that the Department deny respondents' claim for proportioning
the benefit to reflect less than full-time utilization of the equipment by Hadeed.
DOC Position: We determined that the provision of the ship unloader and conveyor
system to Hadeed confers a bounty or grant because the repayment terms of Hadeed's
lease/purchase agreement were preferential when compared to the repayment terms of
the lease/purchase agreement for the urea berthside handling system. Also, we have used
the difference in those terms to measure the benefit to Hadeed. Therefore, SIDF charges,
which were used as best information available in our preliminary determination, have not
been used for the final determination on this equipment. Finally, we have not
proportioned the benefit as requested by respondents.
Comment 7: Petitioners argue that the test for finding Hadeed equityworthy is whether a
reasonable commercial investor would be attracted to the investment. No reasonable
investor, in their view, would have committed funds to Hadeed because (1) the World
Bank's feasibility study, used to justify the Saudi government's equity investments in
Hadeed, was flawed since information critical to a complete evaluation of the project was
missing, and (2) the project's projected real rate of return was low and was qualified by
"major risks." Also, the "feasibility" of the Hadeed project, as analyzed in the World Bank
report, was dependent on concessional financing and the provision of infrastructure.
DOC Position: We disagree. As discussed in section I.C. above, we analyzed the World
Bank study on Hadeed's direct reduction plant and billet mill and the later World Bank
study on Hadeed's rolling mill and found that Hadeed was a reasonable commercial
investment. Moreover, the fact that Korf Stahl, an independent private company, decided
in 1979-1980 to invest in Hadeed is further evidence of the commercial viability of the
Hadeed project.
Comment 8: Petitioners contend that by 1982 and 1983, when a large part of the equity
investment was made, the economic situation had changed so that reliance on the earlier
studies for investments in 1983 was unwise. Thus, post-1983 investments in Hadeed
cannot be considered consistent with commercial considerations.
DOC Position: We agree. Particularly by late 1982, actual world prices of rebar were much
lower than the corresponding prices forcast in the 1979-1980 World Bank studies on
Hadeed; therefore, an investment decision made in 1982 should not have been based on
these outdated price forcasts. See our discussion in section I.C. above.
Comment 9: Petitioners argue that SABIC's equity position in Hadeed gave rise to yet
another bounty or grant: the provision of services from SABIC to Hadeed at concessional
rates. Petitioners argue that since overhead costs were not included in SABIC's billing
charges to Hadeed, a bounty or grant equal to the amount of staff salaries and fringe
benefits billed, multiplied by a reasonable overhead factor, was bestowed on Hadeed.
DOC Position: Under a service contract between Hadeed and SABIC, SABIC performs
certain services for Hadeed in Riyadh such as obtaining work permits and visas for foreign
workers and arranging for customs clearances. Documents obtained at verification show
that Hadeed was charged, and paid, for fees covering the salaries, fringe benefits, and
overhead allocated to the SABIC employees working on its behalf.
Comment 10: Petitioners claim that the infrastructure, natural gas, utilities, and other
benefits provided in Jubail are limited to a specific type of industry because Jubail was
planned as a city with primary industry based on oil and natural gas complemented by
downstream and supporting industries.
DOC Position: We disagree. There are three broad categories of industries located in
Jubail. These are (1) primary: Energy-intensive petroleum and natural gas-based
industries; (2) secondary: Downstream industries, particularly those able to use locally
produced feedstocks; and (3) support/light manufacturing. We verified that these groups
encompass a wide variety of firms and activities. Therefore, any alleged benefits received
by virtue of location in Jubail are provided to more than a specific enterprise or industry,
or group of enterprises or industries. Moreover, the Saudi government has provided
infrastructure in a number of industrial estates throughout the Kingdom, and this
infrastructure is used by a wide variety of industries without limitation.
Comment 11: Petitioners contend the Jubail infrastructure confers a regional bounty or
grant. In their view, the infrastructure test (stated in full in section II.A of this
determination), if intended to address the issue of regional subsidiaries, is inconsistent
with Michelin Tire Corp. v. United States (2 C.I.T. 143 (1980)) (Michelin) because it
ignores the differences between the subsidized areas and the rest of the country. That the
form of benefit, infrastructure, is different from the benefits in Michelin (grants) is
irrelevant because regional subsidies are presumptively countervailable. Moreover, the
Department's standard ignores the doctrine reaffirmed in Cabot that the focus of the
inquiry should be on actual, as opposed to nominal, benefits.
DOC Position: We disagree that the Jubail infrastructure provides a regional bounty or
grant. Under petitioners' logic, every time a government builds a road or harbor it is
providing a regional subsidy to those located in the vicinity of the road or harbor. Our
three-part test was developed to avoid this extreme result. Furthermore, the form of the
benefit is relevant. In the case of infrastructure, the government is providing goods or
services which, by their nature, will benefit firms and individuals located in proximity to
the infrastructure. Moreover, Michelin, which has been vacated as moot, Slip. op. 85-11
(Ct. Int'l. Trade), is distinguishable because grants, loans
*4215
and tax benefits are not
by their nature limited in use, and, hence, are countervailable if provided on a regional
basis. Finally, with respect to actual and nominal benefits, we have found that the ability
to locate in Jubail and the other industrial estates is not limited de jure or de facto. As
noted above, in light of the C.I.T.'s decision in Carlisle, we are not following the standard
adopted by the Court in Cabot. Moreover, even assuming arguendo that Cabot constitutes
a correct interpretation of the law, we do not think that this decision results in finding
infrastructure to be a subsidy. To the contrary, Cabot suggests that the provision of
infrastructure is a so-called "general benefit" which is not countervailable.
Comment 12: Petitioners contend that SABIC, the majority shareholder in Hadeed and a
wholly-owned government entity until 1984, was exempt from Zakat. In their view, while
the exemption formally benefitted SABIC. Hadeed's majority shareholder, a benefit was
effectively conferred on Hadeed and should be countervailed.
DOC Position: We disagree. The Department verified that the Zakat was paid on Hadeed's
net worth in 1984.
Comment 13: Petitioners contend that respondents have not denied the allegation that
enterprises with over 50 percent Saudi ownership are given preference in government
procurement and have refused to acknowledge that government agencies (such as
pre-1984 SABIC) are part of the Saudi government; thus, respondents' statement that
Hadeed does not sell to the government is without substance. The Department should
conclude, therefore, that Hadeed received benefits which constitute subsidies from
preferences in government procurement.
DOC Position: We disagree. Department officials verified, and petitioners have provided
no documentation to the contrary, that Hadeed did not sell in 1984 to the Saudi
government, SABIC, PETROMIN, Saudia Airlines, or other quasi- government entities.
Therefore, it could not have benefitted from any government procurement preferences.
Comment 14: Petitioners contend that Saudi prohibition on the export of scrap metal
confers a countervailable benefit on Hadeed by lowering Hadeed's input costs on scrap
metal.
DOC Position: This allegation was first raised by petitioners shortly before the preliminary
determination, when they brought to our attention a reference to the law restricting scrap
exports. We did not investigate this allegation because petitioners did not show how this
type of export prohibition constitutes a bounty or grant. In particular, we have found
export taxes to be not countervailable in other cases. (See: "Final Result of Administrative
Review; Non-Rubber Footwear from Argentina", (March 16, 1984, 49 FR 9922);
"Preliminary Results of Administrative Review; Leather Wearing Apparel from Argentina,"
(May 14, 1984, 49 FR 20348); "Final Negative Countervailing Duty Determination;
Anhydrous and Aqua Ammonia from Mexico", (June 22, 1983, 48 FR 28523); and "Final
Affirmative Countervailing Duty Determination; Certain Carbon Steel Products from
Brazil", (April 26, 1984, 49 FR 17988") Furthermore, petitioners offered no arguments
that the Saudi law was distinuishable from the earlier situations or that the export tax had
resulted in lower domestic prices for scrap.
Respondents' Comments
Comment 1: Respondents contend that Hadeed's long-term loan from the PIF, one of
Saudi Arabia's five specialized credit institutions, is not countervailable since the
Department should consider the lending programs of the specialized credit institutions in
the aggregate. Respondents argue that these credit institutions are complementary parts
of an overall government lending program which makes loans available to commercial
ventures in virtually every industry in Saudi Arabia.
DOC Position: We disagree. The government of Saudi Arabia has established five distinct
specialized credit institutions, one of which is the PLF. There is no evidence that PIF loans
and loans provided by the other institutions are linked in any way to an overall
government lending policy to provide loans on comparable terms to the various groups
serviced by these institutions. Therefore, in order to determine whether or not the
specificity test is satisfied, we consider each government program saparately. In support
of their arguments, respondents cite precedents from Cold-Rolled Carbon Steel Flat-
Rolled Products from Korea (49 FR 47284, 47289 (December 3, 1984)); Prestressed
Concrete Steel Wire Strand from France (47 FR 47031, 47032 (Oct. 22, 1982)); and
Certain Textile Mill Products and Apparel from Colombia (50 FR 9863, 9865 (March 12,
1985)). In the Korea case, we examined government loan programs in the aggregate in
response to a specific allegation by petitioners that the government was directing credit
to the steel industry through government banks and loan programs. However, as
specifically stated in the Korea case, we also examined each government program
separately in order to determine if the individual programs conferred a subsidy. In the
France case, we examined loans provided through all regional development agencies in
France to determine whether they were limited to a specific region. However, we also
made a separate determination that the loans themselves were not limited to specific
enterprises or industries. In the Colombia case, we examined a specific program and
found that it was limited to a specific enterprise or industry, or group or enterprises or
industries. We aggregated loan programs, in the Colombia case only after we determined
that those programs were not limited in order to determine the appropriate benchmark
with which to compare the loans given under the program that was limited. Accordingly,
the specificity test still applies to individual loan programs.
Comment 2: Respondents argue that Hadeed's long-term loan from the PIF is not
countervailable because PIF loans are not limited to a specific enterprise or industry, or
group or enterprises or industries. Respondents maintain that PIF loans are available for
investment in any project of a commercial nature in which there is some public
ownership. Respondents dispute petitioners' contention that PIF loans are limited to
hydrocarbon-based industries, since some of the PIF loans which have been made were
extended to Saudia Airlines, a commercial transportation company.
DOC Position: As discussed above, we determined that PIF loans were provided to finance
for projects undertaken by three specific enterprises. While the Fund may be open to
investment in any project in which there is some public ownership, the loans, in fact, have
been provided only to three companies. See DOC Position to petitioners' Comment 1.
Comment 3: Respondents contend that, because Saudi religious law prohibits interest
charges on loans, there are no long-term commercial lending rates against which to
measure the terms and conditions of Hadeed's PIF loan. Therefore, respondents argue
that PIF loans are not countervailable because there is no alternative source of long-term
financing in Saudi Arabia. To support this contention, petitioners argue that the
Kingdom's five specialized credit institutions (of which the PIF is one) are the only
sources of long-term financing in the country, and all offer long-term financing on
substantially similar terms. Respondents further state that Saudi commercial banks did
not have sufficient resources in 1979 to extend a loan comparable (in amount or
duration) to Hadeed's PIF loan.
*4216
DOC Position: While we agree with respondents that the Sharia has had a
fundamental impact on Saudi Arabia's commercial lending practices and that long-term
project financing is, for the most part, not available from commerical banks in the
Kingdom, we do not agree with respondents that government long-term lending is the
only appropriate benchmark against which to measure the terms and conditions of
Hadeed's PIF loan. Department officials verified that medium-term loans from
commercial banks do exist in Saudi Arabia. Furthermore, since the government's SIDF
loan program has a lending limitation of 50 percent of project costs, it was necessary to
assume that commercial banks would have loaned the remaining funds (i.e., that amount
in excess of 50 percent SIDF statutory limit) required for Hadeed's project.
Comment 4: Respondents argue that if the Department finds Hadeed's PIF loan to be
countervailable, the benefits must be allocated over the life of the loan, rather than a
"snapshot" approach (i.e., a year-by-year approach to the benefits received), as argued by
petitioners.
DOC Position: We disagree. In accord with its Subsidies Appendix, the Department
allocates subsidies over the life of the loan when the terms of the loan have a "readily
identifiable effect on the company over time." (See Cold- Rolled Carbon Steel Flat-Rolled
Products from Argentina, 49 FR at 18019). the terms of Hadeed's PIF loan, however, are
not readily identifiable since Hadeed's future payments on the loan depend on future
profitability. Computation of the "effect" of the PIF loan on Hadeed, therefore, is not
possible except on a year-by-year basis.
Comment 5: Respondents argue that if the Department constructs a benchmark against
which to measure any benefit from the PIF loan, it should consider using either a
weighted-average composite of the cost of all government loans, or an SIDF loan rate
without a maximum percentage limitation. Respondents argue that since Hadeed's PIF
loan accounted for less than half of the project's total costs (in 1983), it is inappropriate to
compare the PIF loan to a composite SIDF-commercial loan benchmark.
DOC Position: As discussed in Section 1.A above, we used a composite SIDF-commercial
loan benchmark in evaluating Hadeed's PIF loan. We chose the SIDF loan because SIDF is
the only Saudi specialized credit institution, other than PIF, which provides industrial
loans, and we verified that SIDF has provided loans to hundreds of companies in a wide
variety of industries. Since the other Saudi specialized credit institutions do not provide
industrial loans, we did not use a composite benchmark based on the other credit
institutions. Furthermore, the composite SIDF-commercial loan benchmark consists, not
of the maximum SIDF feasibility and follow-up fees, but of the maximum feasibility charge
pro-rated over the life of the PIF loan and the 1981-1985 average SIDF follow-up fees.
Respondents' claim that the PIF loan covered less than half of project costs is based on
year-end 1983 cost figures. While the 50 percent cost figure may be correct for 1983, the
Department, when evaluating a loan decision, reviews the actual circumstances and
information available when the decision was made. As acknowledged in Hadeed's PIF loan
agreement, the amount of the PIF loan comprised 60 percent of Hadeed's total estimated
project costs. Thus, we used the 60 percent figure as the basis for our benchmark
calculations.
Comment 6: Respondents argue that, in general, the annualized cost of all charges
associated with an SIDF loan is less than one percent, a fact which was confirmed by
Department officials duiring verification. Therefore the two percent SIDF financing rate
used to calculate the composite SIDF-commercial benchmark for the preliminary
determination was incorrect. Respondents argue that, for the final determination, the
verified SIDF rate should be used with respect to all calculations involving SIDF loans.
DOC Position: We agree. At verification, we ascertained the maximum allowable charge
for the SIDF feasibility study fee, obtained annual follow-up charges actually paid during
1981-1985 on a sample of large SIDF loans, and examined the actual terms and charges
paid on a specific SIDF loan. In constructing our composite SIDF-commercial benchmark
on Hadeed's PIF loan, we used the verified maximum SIDF feasibility fee, pro-rated over
the life of Hadeed's PIF loan, and the average annual SIDF follow-up charge derived from
the SIDF loan sample.
Comment 7: Respondents contend that the Department erred in its preliminary
determination when it characterized the lease/purchase agreement between Hadeed and
the Royal Commission for Jubail and Yanbu as a long-term loan. Respondents further
argue that the Department based its preliminary determination concerning Hadeed's
lease/purchase agreement on incorrect figures since, as shown at verification, the cost of
an SIDF loan is less than two percent per year. Finally, respondents submit that the terms
on which the lease/purchase agreement is based (i.e., full cost recovery plus two percent
finance charge) do not confer a countervailable benefit because two percent is the
standard fee charged by the Royal Commission for the cost of money.
DOC Position: At the time of our preliminary determination, we did not have complete
information on the terms of the lease/purchase agreement and, therefore, we treated it as
a long-term loan. During verification, we obtained information on fees charged by the
Royal Commission to recover the cost of money for facilities provided to companies. We
have compared the repayment terms of Hadeed's lease/purchase agreement to the
repayment terms on a lease/purchase agreement for a similar piece of equipment, and
found the terms of Hadeed's agreement to be preferential. Accordingly, we determined
that Hadeed's lease/purchase agreement conferred countervailable benefits because the
equipment was provided for the use of only one company and it was provided on
preferential terms.
Comment 8: Respondents argue that if the lease/purchase agreement had not been
available to finance the unloader/conveyor system, Hadeed would have either leased the
equipment or developed a less expensive transport alternative. Respondents further
argue that if the Department does not accept full cost recovery plus two percent as the
commercial norm for the lease/purchase agreement, a "proportionality factor" should be
included in the Department's benefit calculations. This "proportionality factor" should
reflect the fact that in 1984, Hadeed used only a fraction of the conveyor's capacity (see
Carbon Steel Wire Rod from Trinidad and Tobago, 49 FR 482). Finally, respondents state
that the unloader/conveyor system was not provided on preferential terms to Hadeed
because the cost of the system is disproportionate to its economic benefit.
DOC Position: We disagree. The end results of a firm's economic decisions are irrelevant to
the Department's analysis of whether or not a bounty or grant exists. The Department
assumes that all contracts or agreements which a company enters into are done so based
on the assumption that an economic benefit will ensue. Therefore, the Department, in
making its subsidy determinations, must evaluate the actual terms and conditions agreed
upon in the contract.
We would not, and did not, proportion the benefit based on Hadeed's actual
*4217
use of
the unloader/conveyor system because Hadeed is the only user of this equipment.
Finally, respondents' argument that Hadeed may not be receiving an economic benefit
equal to the cost of the system is irrelevant since that is not the standard for determining
whether a good or service has been provided at perferential rates
Comment 9: Respondents argue that the Saudi government does not limit who may locate
in industrial estates and that there are ten industrial estates located throughout the
country; therefore, infrastructure development does not confer a bounty or grant.
DOC Position: We have determined that the provision of infrastructure does not confer a
bounty or grant. See our discussion in section II.A above.
Comment 10: Respondents argue that land rental rates and utility rates on gas, water, and
electricity do not confer special benefits to the manufacturing sector because land rental
and water, electricity, and gas are available at standard Kingdom-wide rate to all
industrial users.
DOC Position: We have determined that the provision of land and utility rates are not
countervailable. See our discussion in section II.B above.
Comment 11: Respondents contend that the Department's verification team confirmed
that Hadeed did not receive any special joint-venture benefits, and that some of the
benefits, alleged by petitioners, do not exist.
DOC Position: We Agree. Department Officials verified that Hadeed did not benefit from
any income tax holidays since, due to operational losses, it did not incur any tax liability.
Department Officials also verified that Hadeed did not receive benefits from government
procurement preferences or any exemptions from bonding and payment retention
requirements. Based on this verified information, we determined that Hadeed did not
receive any special joint-venture benefits.
Comment 12: Respondents argue that the commercial viability of the Hadeed investment
has been demonstrated through feasibility studies which satisfied the Ministry of Industry
and Electricity, the PIF, and Korf, the independent commercial investor. Furthermore,
respondents argue that SABIC's decision to invest in Hadeed, based on its projected
economic viability, has been justified because Hadeed's rate of return compares favorably
with other SABIC projects. For these reasons, respondents state that Hadeed should be
found to be continuously equityworthy since 1979.
DOC Position: We agree that these factors provided a reasonable basis for SABIC's initial
decisions in 1979 and 1981 to invest in the construction of Hadeed's steel making facilities
and rolling mill in Jubail. However, actual prices during the 1982-1984 period were
significantly lower than the price assumptions for rebar the initial feasibility studies. We
determined that by late 1982 these feasibility studies no longer constituted a reasonable
basis for future investment in Hadeed. Thus, we determined that as of late 1982, Hadeed
was unequityworthy.
Comment 13: Respondents argue that SABIC's continuing capital contributions to Hadeed
were reasonable commercial investments, since these contributions were made to
construct and operate the Jubail rolling mill, a separate project, and to purchase SULB, a
wholly-owned subsidiary of Hadeed. Resondents argue that based on precedent (e.g.,
Carbon Steel Wire Rod from Trinidad and Tobago, 49 F.R. 484), a project "must have lost
all measure of commercial reasonableness" before subsequent investments are deemed
inconsistent with commercial considerations. Based on this standard, the Department
should not countervail SABIC's two equity infusions to Hadeed.
DOC Position: We have consistently held that each decision pertaining to equity
investment must be examined on its own merits and on the available facts and market
conditions prevailing at the time of the investment decision. For this reason, we did not
find SABIC's initial 1979-1981 investment decisions to be inconsistent with commercial
considerations based on price declines in the 1979-1984 period. However, price
decreases through 1982 and any revisions to expectations of future price levels caused by
these declines were relevant to SABIC's 1982 decision to transfer its shareholding in SULB
to Hadeed. See our discussion in section I.C. above.
Comment 14: Respondents argue that Hadeed's commercial viability was also confirmed
by the fact the Korf Stahl, an independent private investor, decided to invest in the
project.
DOC Position: We agree. As an independent private investor, Korf Stahl's 1979-1980
decisions to invest in the construction of the Hadeed project were relevant in considering
whether the project was made on terms consistent with commercial considerations.
Comment 15: Respondents contend that duty exemptions are available to all "industrial
establishments" in Saudi Arabia, and that Department officials confirmed that these
duty exemptions are available both nominally and de facto.
DOC Position: We agree. See our discussion in section 11.B above.
Comment 16: Respondents argue that the Department should determine that Saudi
Arabia's "industrial establishments" are not a "specific group of enterprises or
industries," since the Department has previously determined that identifiable groups of
industries, both smaller and less varied than the Kingdom's "industrial establishments,"
fail to constitute specific groups of enterprises or industries.
DOC Position: We have determined that the manufacturing sector in Saudi Arabia does
not constitute a specific enterprise or industry, or group of enterprises or industries. See
our discussion in section II.B above.
Comment 17: Respondents contend that neither SABIC nor Hadeed is exempt from paying
Zakat. In addition, Department officials verified that Hadeed's Zakat obligations were paid
in full, as required by the Zakat regulations. Hence, this program is not countervailable.
DOC Position: We agree. See our discussion in section II.C above.
Comment 18: Respondents maintain that SABIC has never guaranteed any of Hadeed's or
SULB's government or commercial loans.
DOC Position: We agree. At verification, we found no evidence to substantiate petitioners'
allegation.
Verification
In accordance with section 776(a) of the Act, we verified the information and data used in
making our final determination. During verification, we followed normal verification
procedures, including meeting with government officials and inspection of documents as
well as on-site inspection of the accounting records of Hadeed, the company producing
and exporting the merchandise under investigation to the United States.
Administrative Procedures
In response to a November 27, 1985, request from respondents and a December 2
request from petitioners, we held a public hearing concerning this investigation on
December 20. We received pre-hearing briefs on December 17 and post-hearing briefs on
January 2, 1986.
Suspension of Liquidation
The suspension of liquidation ordered in our preliminary affirmative countervailing
duty determination will remain in effect until further notice. The
*4218
estimated net
bounty or grant is 5.48 percent ad valorem.
In accordance with section 706(a)(3) of the Act, we are directing the U.S. Customs
Service to require a cash deposit for each entry of this merchandise which is entered, or
withdrawn from warehouse, for consumption on or after the date of publication of this
notice in the Federal Register and to assess countervailing duties in accordance with
sections 706(a)(1) and 751 of the Act.
This notice is published pursuant to section 705(d) of the Act (19 U.S.C. 1671d(d).
William T. Archey,
Acting Assistant Secretary for Trade Administration.
January 27, 1986.
[FR Doc. 86-2306 Filed 1-31-86; 8:45 am]
BILLING CODE 3510-DS-M