(Cite as: 54 FR 8784)

NOTICES

DEPARTMENT OF COMMERCE

[C-122-805]

Preliminary Affirmative Countervailing Duty Determination: New Steel Rail,

Except Light Rail, From Canada

Thursday, March 2, 1989

AGENCY: Import Administration, International Trade Administration, Commerce.

ACTION: Notice.

SUMMARY: We preliminarily determine that benefits which constitute subsidies within the meaning of the countervailing duty law are being provided to producers, manufacturers or exporters in Canada of new steel rail, except light rail, ("steel rail") as described in the "Scope of Investigation" section of this notice. The estimated net subsidy is 103.55 percent ad valorem for all manufacturers, producers or exporters in Canada of steel rail, except the Algoma Steel Corporation Ltd. (Algoma), which is excluded from this preliminary determination. The estimated net subsidy for Algoma is 0.05 percent ad valorem, which is de minimis. We have calculated a separate estimated net subsidy for Algoma because its rate differs significantly from the country-wide rate. If this investigation proceeds normally, we will make a final determination on or before May 9, 1989.

EFFECTIVE DATE: March 2, 1989.

FOR FURTHER INFORMATION CONTACT: Roy A. Malmrose, Office of Countervailing Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue NW., Washington, DC 20230; telephone: (202) 377-5414.

SUPPLEMENTARY INFORMATION:

Preliminary Determination

Based on our investigation, we preliminarily determine that certain benefits which constitute subsidies within the meaning of section 701 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers or exporters in Canada of steel rail. For purposes of this investigation, the following programs are preliminarily found to confer subsidies:

Federal Programs

- Debenture Guarantees Provided to Sydney Steel Corporation (Sysco).

- Forgiven Wharf Loan.

- Regional Development Incentives Program.

- Certain Investment Tax Credits.

Joint Federal-Provincial Programs

- General Development Agreements.

- Ecomomic and Regional Development Agreements.

Provincial Programs

- Operating Grants Provided to Sysco.

- Long-Term Loan Guarantees Provided to Sysco.

- Equity Infusions Provided to Sysco.

*8785 We preliminarily determine the estimated net subsidy to be 103.55 percent ad valorem for all manufacturers, producers or exporters in Canada of steel rail, except Algoma, which is excluded from this preliminary determination.

Case History

Since the publication of the Notice of Initiation in the Federal Register (53 FR 41394, October 21, 1988), the following events have occurred. On October 27, 1988, we presented a questionnaire to the Government of Canada in Washington, DC, concerning petitioner's allegations. On November 17, 1988, petitioner filed a request that the preliminary determination be postponed. Pursuant to section 703(c)(1)(A) of the Act, we postponed the preliminary determination to no later than February 23, 1989 (53 FR 49582, December 8, 1988).

On December 8, 1988, we received responses from the Government of Canada (GOC), the Provincial Governments of Nova Scotia (GONS) and Ontario, Sysco and Algoma. The response of the GOC listed five non-producer exporters of steel rail to the United States: Grand Valley Steel Ltd., Nortrack Ltd., Sessenwein Inc., C.P. Rail Ltd. and Bernard Railtrack Export Inc. We requested that these exporters answer the original questionnaire.

On December 23, 1988, we delivered a supplemental/deficiency questionnaire to the GOC. On January 13, 1989, we received responses from the GOC, GONS, and the Government of Ontario to the supplemental/deficiency questionnaires, and responses to the original questionnaire from the following three non-producer exporters: Grand Valley Steel Ltd., Nortrack Ltd. and Sessenwein Inc. On January 18, 1989, we received responses to our supplemental/deficiency questionnaire from Algoma, Sysco and Algoma Central Railway.

On February 10, 1989, we delivered an additional supplemental/deficiency questionnaire to the GOC requesting further information from the GOC, GONS and Sysco. On February 17, 1989, we received responses from the GONS and Sysco to this questionnaire. On February 21, 1989, we received the response from the GOC.

On February 21, 1989, we also received a response to our original questionnaire from C.P. Rail Ltd., the fourth non-producer exporter of steel rail. We have not received a response from Bernard Railtrack Export Inc., the remaining non-producer exporter of steel rail.

On January 17, 1989, we received further subsidy program allegations from petitioner. We declined to initiate an investigation on these additional programs and have informed all interested parties of our decision.

Scope of Investigation

The products covered by this investigation are new steel rail, except light rail, currently classifiable under HTS item numbers 7302.10.1020, 7302.101.1040, 7302.10.5000, and 8548.00.0000.

Steel rail, whether of carbon, high carbon, alloy or other quality steel, includes but is not limited to, standard rails, all main line sections (over 60 pounds per yard), heat-treated or head-hardened (premium) rails, transit rails, contact rail (or "third rail") and crane rails. Rails are used by the railroad industry, by rapid transit lines, by subways, in mines and in industrial applications.

Specifically excluded from this investigation are light rails which are 60 pounds or less per yard. Also excluded are relay rails which are used rails taken up from a primary railroad track and relaid in a railroad yard or on a secondary track.

Analysis of Programs

For purposes of this preliminary determination, the period for which we are measuring subsidies ("the review period") is calendar year 1987 for Algoma and April 1, 1987-March 30, 1988 for Sysco. These review periods correspond to the respective companies' fiscal years. Normally, we would select the calendar year as the review period for all companies if the companies under investigation had different fiscal years. We have chosen Sysco's fiscal year as that company's review period in order to measure more accurately the subsidies received over time, which have been reported to the Department on a fiscal year basis.

Petitioner alleged that Sysco is unequityworthy and uncreditworthy. We have consistently held that the government provision of equity does not per se confer a subsidy. Government equity purchases 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 was a reasonable commercial investment or, in other words, whether the company was "equityworthy."

The GONS is the sole owner of Sysco, which it purchased in 1968. Sysco has never issued shares; therefore, we must determine whether Sysco was equityworthy in each instance when the GONS made an equity infusion. We do not reach the question of whether Sysco was equityworthy in 1968. The initial purchase of Sysco by the GONS occurred prior to the 15 year period in which we are examining all the financial assistance received by Sysco which may have benefited the company during the review period. We are using 15 years because it represents the average useful life of assets in the steel industry as determined by the U.S. Internal Revenue Service's 1977 Class Life Asset Depreciation Range System. (Use of the IRS tables is in accordance with past practice and is described in detail in the "Subsidies Appendix" attached to the Final Affirmative Countervailing Duty Determination and Countervailing Duty Order: Cold-Rolled Carbon Steel and Flat-Rolled Products from Argentina, 49 FR 18006, April 26, 1984 (Subsidies Appendix).)

Although Sysco's equityworthiness in 1968 and the GONS's equity infusion in 1968 will not be examined, the GONS made additional equity infusions into Sysco in the period 1977-1988. Therefore, we have preliminarily determined Sysco's equityworthiness in each year in which it received equity capital from the GONS.

A company is considered unequityworthy if it is deemed unable to generate a reasonable rate of return within a reasonable period of time. In making our equityworthiness determinations, we assess the company's current and past financial health, as reflected in various financial indicators taken from its financial statements, and where appropriate, internal accounts. The indicators we examine include the following ratios: rate of return on equity, gross margin to sales, financial expenses to sales, the current ratio and debt to equity. We give great weight to the company's recent rate of return on equity as an indication of financial health and prospects. Based on the factors described above, we preliminarily determine that Sysco was unequityworthy in each year in which it received an equity infusion in the period from 1977-1988.

Petitioner's other broad allegation is that Sysco is uncreditworthy. We consider a company creditworthy if it appears that it will have sufficient revenues or resources to meet its costs and fixed financial obligations, absent government intervention. Like our equityworthiness test, to determine the creditworthiness of a company we analyze the company's present and past health, as reflected in various financial *8786 indicators calculated from its financial statements. We give great weight to the company's recent past and present ability to meet its financial cost obligations with its cash flow. Based on an analysis of the factors described above, we preliminarily determine Sysco to be uncreditworthy for the period from 1973 to 1988.

We have preliminarily determined that Sysco is uncreditworthy despite the fact that it has received financing from private commercial sources. We are discounting the importance of such financing because it appears that Sysco would not have recieved this financing but for the guarantees provided by the GOC and the GONS.

With respect to the calculations of benefits from grants and government loan and debenture guarantees received by Sysco, we used as the discount rate for allocating the benefits over time the benchmark interest rate calculated for purposes of analyzing the interest rate on Sysco's debentures and loans which were guaranteed by either the federal or provincial government (see sections I.A.1. and I.C.2.). We were unable to use Sysco's weighted cost of capital, which is our preferred method of deriving the discount rate, for the following reasons. In the years 1973-1976, we do not have information on the national average rate of return on equity. In the years 1977-1988, either Sysco's equity as a percent of total capitalization was negative or Sysco's capitalization in its entirety was negative. Consequently, we could not meaningfully employ our weighted cost of capital formula.

Sysco received grants or equity infusions, which we are treating as grants (see section I.C.3.), in every year during the period 1974-1988. In accordance with past practice (see Final Affirmative Countervailing Duty Determination: Oil Country Tubular Goods from Canada, 51 FR 15037, April 22, 1986 (OCTG)), for all the programs which provided non-recurring grants and for all the benefits received by Sysco which we treated as non-recurring grants, we first determined if the benefit amount received by Sysco, in each of the years in which the benefit was received, was more than 0.50 percent of the company's total sales for that year. In every year, the benefit amount exceeded the 0.50 percent rate; therefore, for all of the grants and equity infusions received by Sysco, unless otherwise specified, we allocated the benefit over the average useful life of equipment in the steel industry which is 15 years. Using the above methodology, we also allocated over 15 years, unless otherwise specified, the benefit from the grants received by Algoma.

Consistent with our practice in preliminary determinations, when a response to an allegation denies the existence of a program, receipt of benefits under a program, or eligibility of a company or industry under a program, and the Department has no persuasive evidence showing that the response is incorrect, we accept the response for purposes of the preliminary determination. All such responses, however, are subject to verification. If the response cannot be supported at verification, and a program is otherwise countervailable, the program will be considered a subsidy in the final determination.

As mentioned in the "Case History" section above, we have received questionnaire responses from two producers and four non-producer exporters. Each of the respondent non-producer exporters has denied the direct receipt of benefits from the programs under investigation. Therefore, the steel rail exports of each respondent non-producer exporter will be subject to the estimated net subsidy of the producer from which it purchased the steel rail. As the best information available, we are assigning the estimated net subsidy rate of Sysco to the non-respondent non-producer exporter, Bernard Railtrack Export Inc.

I. Programs Preliminarily Determined to Confer Subsidies

We preliminarily determine that subsidies are being provided to manufacturers, producers or exporters in Canada of steel rail under the following programs:

A. Federal Programs

1. Debenture Guarantees Provided so Sysco

Petitioner alleged that the federal and provincial governments have provided loan guarantees to Sysco. (Provincial loan guarantees are discussed in sections I.C.2. and II.A.). According to Sysco's questionnaire response and its financial statements, in the years 1974-1976, Sysco issued two debenture series; one was guaranteed by the Cape Breton Development Corporation (Devco), a crown corporation of the GOC, and the other was guaranteed by the GONS. The series guaranteed by Devco was denominated in Canadian dollars; the series guaranteed by the GONS was denominated in U.S. dollars. (Both guarantees will be discussed in this section). No fee was paid for these guarantees.

These guarantees were provided to a specific enterprise, therefore, we preliminarily consider that they are countervailable for the following reasons. According to the questionnaire responses, a fee would not have been charged for a commercial guarantee similar to the guarantees provided by the federal and provincial governments. However, we are skeptical that a firm in the same financial position as Sysco would have been able to obtain such a guarantee. Therefore, for purposes of this preliminary determination, we analyzed the extent to which Sysco was able to issue the debentures on terms more favorable than the benchmark financing.

As described in the "Analysis of Programs" section above, we have preliminarily determined that Sysco has been uncreditworthy throughout the period 1973-1988. In the case of uncreditworthy companies, we assume that private lenders either would not provide loans to such companies or would require a premium interest rate. In selecting an appropriate benchmark, we must formulate an approximation of the premium interest rate a commercial source of financing would charge an uncreditworthy company (see the Subsidies Appendix). The first step in the formulation of such an interest rate is to determine the highest commonly-available commercial interest rate a creditworthy borrower would have to pay in order to receive a loan. This interest rate is the rate that would be charged a marginally creditworthy company.

The next step is the calculation of a risk premium. This amount represents the difference in risk between a marginally creditworthy company and an uncreditworthy company. In previous cases (See Certain Carbon Steel Products from Brazil; Final results of Countervailing Duty Administrative Review, 52 FR 829, January 9, 1987), we have derived this risk premium by examining the difference between Moddy's Aaa and Baa corporate bond rates and calculating the percentage this difference represents of the prime interest rate in the United States. We have found that the risk premium as calculated by this approach is 12 percent. If the financing is not in U.S. currency, this percentage is then applied to the prime interest rate in the country concerned to get a comparable measure of the risk premium in the local economy. The final step in our calculation of the appropriate benchmark for an uncreditworthy company is to add the risk premium to the highest long-term commercial *8787 interest rate commonly-available to companies in the country in question.

For the debentures denominated in Canadian dollars, we calculated the benchmark interest rate as described below. According to the federal government response, the Canadian government does not maintain statistics on the highest long-term commercial interest rate commonly-available to companies. Therefore, for purposes of the first step of our calculations we chose a surrogate interest rate using the following approach. If the national average short-term interest rate in the year the debenture was issued, as represented by the interest rate on 90-day commercial paper, was greater than the national average long-term interest rate in the year the debenture was issued, as represented by the average yield on long-term corporate bonds, we used the national average short-term rate in 1987. If the national average short-term interest rate in the year the debenture was issued was less than the national average long-term interest rate in the year the debenture was issued, we used the national average long-term interest rate in the year the debenture was issued.

We added to the chosen interest rate the risk premium, which we calculated according to the methodology described above as 12 percent of the Canadian prime rate. We used the resulting interest rate as our benchmark for the debentures denominated in Canadian currency.

With respect to the debentures denominated in U.S. dollars, we followed the same general approach described above in constructing a benchmark. We used the rates on Baa corporate bonds as the highest long-term commercial rate commonly available to companies and 12 percent of the U.S. prime rate for the calculation of the risk premium. Based on this methodology, we derived a benchmark for the debentures denominated in U.S. dollars.

We compared the two benchmarks formulated above to the interest rates received on the two series of debentures issued by Sysco and found that the interest rates on Sysco's debentures were lower than the respective benchmarks. Therefore, we preliminarily determine that the guarantees provided to Sysco by the GOC and the GONS are countervailable.

To determine the benefit, we calculated the payment differential between the banchmark financing and the guaranteed debentures using our loan methodology for long-term loans which is described in the Subsidies Appendix and has been described in numerous previous cases (See Final Affirmative Countervailing Duty Determination; Certain Granite Products from Spain, 53 FR 24340, June 28, 1988). We allocated the benefit over time using as the discount rate the benchmark interest rates described above. (We were not able to base the discount rate on Sysco's weighted cost of capital for the reasons discussed above in the "Analysis of Programs" section). We then divided the benefit attributable to the review period by Sysco's total sales and calculated an estimated net subsidy of 1.45 percent ad valorem for Sysco.

2. Forgiven Wharf Loan

According to Sysco's questionnaire response, in 1974, the federal government provided Sysco with a loan to construct a loading wharf. In 1981, the federal government announced that the loan would be forgiven. In 1982, Sysco removed this loan from its long-term liabilities as shown in its financial statements.

We preliminarily determine that the benefit provided by the loan forgiveness is countervailable because it was provided to a specific enterprise. Furthermore, we preliminarily determine that the outstanding principal and accrued interest as of 1982 should be treated as a grant received in 1982 because the loan has been forgiven.

Using the declining balance methodology and the benchmark interest rate described in the previous section as the discount rate, we allocated the benefit over 20 years, which represents the average useful life of a wharf according to the U.S. Internal Revenue Service's 1977 Class Life Asset Depreciation Range System. We then divided the benefit attributable to the review period by Sysco's total sales and calculated an estimated net subsidy rate of 1.16 percent ad valorem for Sysco.

3. Regional Development Incentive Program (RDIP)

The RDIP was administered by the Department of Regional Economic Expansion (DREE) until its replacement with the Industrial Regional Development Program (IRDP) in 1983. It was established in 1969 for the purpose of creating stable employment opportunities in areas of Canada where employment and economic opportunities are chronically low, namely the Atlantic provinces. The DREE offered incenties based on a case-by-case evaluation of capital investment projects. Projects that could proceed without RDIP assistance were ineligible. Assistance was provided in the form of grants or loan guarantees.

Although the program was terminated in 1983, RDIP grants were provided to both Sysco and Algoma, prior to its termination. We preliminarily determine that the RDIP grants are countervailable because the benefits are limited to companies located within specific regions.

Sysco received four RDIP grants; Algoma received two RDIP grants. According to Algoma's questionnaire response, one of its grants was specifically tied to the production of products not under investigation. Therefore, consistent with past practice (see OCTG), we did not include this grant in our calculations. Algoma's other grant was approved in 1972.

To calculate a benefit we used the declining balance methodology. We used as the discount rate for Algoma the national average long-term interest rate in Canada in 1972. (We were unable to use our weighted cost of capital formula because we do not have information on the rate of return on equity in Canada in 1972). We used as the discount rate for Sysco the interest rate benchmark discussed in section I.A.1. On this basis, we calculated the benefits attributable to the review period and allocated them to the respective total sales of Algoma and Sysco. We calculated the estimated net subsidy to be 0.03 percent ad valorem for Algoma and 1.01 percent ad valorem for Sysco.

4. Certain Investment Tax Credit (ITCs)

There are a number of categories of ITCs in Canada and varying tax credit percentage levels within some of the categories. Based on our previous examination of all types of ITCs in Canada (see OCTG and Final Affirmative Countervailing Duty Determination: Certain Fresh Atlantic Groundfish from Canada, 51 FR 10041, March 24, 1986 (Groundfish)), we initiated an investigation on the following four types of ITCs: (1) tax credits of three and 13 percent, above the basic seven percent rate which we have previously found non-specific, for investment in "qualified property" located in certain regions of Canada; (2) tax credits for investment in "certified property"; (3) tax credits for large companies of 10 percent above the basic twenty percent for investment in capital equipment used for scientific research; and (4) tax credits for investment in transportation and construction equipment.

Canadian tax law provides that ITCs may be subtracted from taxes owed, but if no taxes are owed (either because a company is initially in a tax loss position or because only some of the *8788 ITCs have been used to satisfy all tax liability), those excess ITCs earned after April 19, 1983 have a refundable, one-time cash value equal to 20 percent of the initial, face value of the ITC (40 percent for small businesses).

According to its questionnaire response, Sysco, as a provincially-owned corporation, is not liable for federal tax. During and prior to the review period, Sysco made numerous capital investments and experienced large losses. However, because the company is not liable for federal taxes, it was not eligible for a refund of taxes under the ITC law.

Algoma, in its questionnaire response, stated that it benefited from the three percent tax credit, above the basic rate of seven percent, for investment in "qualified property" because it is located in northern Ontario and that it did not use the other ITCs under investigation. Furthermore, because Algoma did not owe taxes on the tax return filed in the review period, it received a refund under the procedures described above.

We preliminarily determine that the three percent tax credit, above the basic rate of seven percent, for investment in "qualified property" is countervailable because it is limited to companies located in certain regions of Canada.

To calculate the benefit from the "qualified property" ITC, we followed our standard tax methodology. Under our tax methodology, we allocate an income tax benefit to the year in which the tax return was filed. Algoma received a refund on the tax return filed during the review period. Therefore, we consider the amount of the refund attributable to the three percent in excess of the basic rate of seven percent, to be the benefit Algoma received during the review period. We divided this benefit amount by Algoma's total sales for the review period and calculated an estimated net subsidy of 0.02 percent ad valorem.

B. Joint Federal-Provincial Programs

1. General Development Agreements (GDA)

GDAs provided the legal basis for various departments of the federal and provincial governments to cooperate in the establishment of economic development programs. The GDAs were umbrella agreements which stated general economic development goals. Ten-year GDAs were signed with most provinces in 1974.

Subsidiary agreements were signed pursuant to the GDAs. The subsidiary agreements were generally between particular federal and provincial government departments and addressed economic development and infrastructure needs. These agreements established various individuals types of economic development programs, delineated administrative procedures and set out the relative funding commitments of the federal and provincial governments. Subsidiary agreements were typically directed at establishing traditional government economic assistance programs, developing infrastructure, providing for economic development assistance for certain regions within the province, and providing financial assistance to specific regions, industries or enterprises.

Three such subsidiary agreements were signed between the federal government and the government of Nova Scotia. Two agreements were specifically designed to provide assistance to Sysco. The third provided for the funding of industrial development projects throughout the province.

We preliminarily determine that funds provided to Sysco under the first two agreements are countervailable in their entirety because they provided grants to a specific enterprise. With respect to the funds provided under the Industrial Development Subsidiary Agreement, we preliminarily determine that the portion of funds provided by the GONS are not countervailable because the assistance is not limited to a specific enterprise or industry or group of enterprises or industries in Nova Scotia. However, we also preliminarily determine that the portion of funds provided by the GOC are countervailable because they are limited to companies in a particular region of Canada (i.e., the Province of Nova Scotia).

With respect to the Industrial Development Subsidiary Agreement, we note that although the agreement provided benefits to a wide range and number of industries, an amendment was made to the agreement, subsequent to its implementation, providing specific funds for Sysco. We will examine this amendment and whether it constitutes a discretionary governmental action which provided a benefit to a specific enterprise.

No assistance to Algoma was provided under the Canada/Ontario GDA or corresponding subsidiary agreements.

We calculated the benefit conferred by the grants using the discount rate for Sysco referred to above (see section I.A.1.), and our declining balance methodology. We divided the benefit attributable to the review period by Sysco's total sales and calculated an estimated net subsidy of 24.72 percent ad valorem for Sysco.

2. Economic and Regional Development Agreements (ERDA)

1. Operating Grants to Sysco

The GONS has provided Sysco with "operating grants" to cover interest on long- term debentures and other operating costs.

We preliminarily determine that these operating grants are countervailable because they provide funds to a specific enterprise. We also determine that these grants are non-recurring grants because of their exceptional nature and the uncertainty that they will continue. Furthermore, we note that these operating grants have not been provided under any particular long-standing *8789 provincial program. Instead, it appears from the information in the questionnaire responses that the funds are provided by the GONS to Sysco according to the irregular financial needs of the company in a particular year.

To calculate the benefit, we used the same methodology described in the previous section. The estimated net subsidy is 29.61 percent ad valorem for Sysco.

2. Long-Term Loan Guarantees Provided to Sysco

The province of Nova Scotia guarantees all of the long-term loans made to Sysco by banks and trust companies. These guarantees were provided to a specific enterprise; therefore, we preliminarily consider that they are countervailable for the following reasons. According to the questionnaire responses, a fee would not have been charged for a commercial guarantee similar to the guarantees provided by the GONS. However, we are skeptical that a firm in the same financial position as Sysco would have been able to obtain such a guarantee. Therefore, for purposes of this preliminary determination, we analyzed the extent to which Sysco was able to obtain the long-term loans on terms more favorable than the benchmark financing.

We used as our benchmark for the long-term loans guaranteed by the GONS, the benchmark interest rate calculated in section I.A.1. pertaining to the debentures denominated in Canadian dollars guaranteed by the federal government. We compared this benchmark to the interest rates on long-term loans received by Sysco and found that the interest rates on Sysco's long-term loans were lower than the benchmark. Therefore, we preliminarily determine that the guarantees provided to Sysco by the GONS on Sysco's long-term loans are countervailable.

To determine the benefit, we calculated the payment differential between the benchmark financing and the guaranteed long-term loans using our loan methodology for long-term loans described in section I.A.1. We then divided the benefit attributable to the review period by Sysco's total sales and calculated an estimated net subsidy of 14.11 percent ad valorem for Sysco.

3. Equity infusions

The province of Nova Scotia has made several equity infusions into Sysco. These equity infusions consisted of the conversion of outstanding debt to equity, and the provision of money for redemption of loans and capital construction. As noted in the "Analysis of Programs" section above, we have preliminarily found Sysco to be unequityworthy.

We normally calculate the benefit conferred by government equity infusions inconsistent with commercial considerations by determining the difference between the national average rate of return on equity and the rate of return on equity of the company under investigation. However, Sysco's financial statements indicate that the entire amount of the GONS's equity capital has been consumed. Therefore, the calculation of any rate of return on equity for Sysco would not be a meaningful measure. Furthermore, we believe that even if we could somehow calculate a rate of return on equity for Sysco, the difference between Sysco's rate of return, presumably a negative value, and the national average rate of return would be so great that the "grant cap" would be exceeded. We therefore treated all the equity infusions received by Sysco as grants.

We calculated the benefit from the equity infusions using the grant methodology described in previous sections (see, for example, section I.B.1.). We divided the benefit attributable to the review period by Sysco's total sales and calculated an estimated net subsidy of 26.63 percent ad valorem for Sysco.

II. Programs Preliminarily Determined Not To Confer Subsidies

We preliminarily determine that the following programs do not confer subsidies:

A. Short-Term Loan Guarantees.

The GONS also guarantees all of the demand loans made to Sysco by banks. We consider these loans to be short-term loans because they are listed under current liabilities in Sysco's financial statements.

The guarantees on these demand loans were provided to a specific enterprise; therefore, we preliminarily consider that they are countervailable for the following reasons. According to the questionnaire responses, a fee would not have been charged for a commercial guarantee similar to the guarantees provided by the GONS. However, we are skeptical that a firm in the same financial position as Sysco would have been able to obtain such a guarantee. Therefore, for purposes of this preliminary determination, we analyzed the extent to which Sysco was able to issue the loans on terms more favorable than the benchmark financing.

We used as our benchmark, the interest rate on 90-day commercial paper in Canada. (According to the GOC questionnaire response, this rate represents the national average short-term interest rate in Canada). We compared this benchmark to the interest rates received on the demand loans received by Sysco and found that the interest rates on Sysco's loans were higher than the benchmark. Therefore, we preliminarily determine that the guarantees provided to Sysco by the GONS on Sysco's demand loans are not countervailable.

B. Iron Ore Freight Subsidy to Alogoma

Algoma ships sintered iron ore pellets from its mine in Wawa, Ontario to its steel mill at Sault Ste. Marie by rail on the Algoma Central Railway (ACR). The ACR also operates the Agawa Canyon Tour Train which is an important tourist attraction in Northern Ontario.

In 1986, Algoma reconsidered its use of Wawa iron ore because the delivered cost of Wawa ore was not competitive when compared to the delivered cost of ore from alternative sources. In order to make the delivered cost of Wawa ore competitive, Algoma sought a reduction in ACR's freight rates.

Algoma considered closing its Wawa mine, if ACR did not reduce the freight rate to a competitive level. Such an action would have forced ACR to cease all operations, including its tour train operation.

To preserve the continued operation of ACR, the Ontario and the Federal Governments provided grants to the ACR. The grants were made under a joint federal-provincial program established under the "Canada-Ontario Subsidiary Agreement for Tourism Development" (COTDA), which is a subsidiary agreement under ERDA. The purpose of COTDA is to stimulate the development of tourism in Ontario.

Petitioner alleges that the grants received by ACR confer a benefit to Algoma since ACR reduced the freight rate charged to Algoma after receiving the grants from the two governments. Algoma states in its questionnaire response that since it could have bought iron ore from other sources at a cost lower than mining and transporting its own ore, it did not receive a benefit from the grants received by ACR.

We preliminarily determine that the grants provided to ACR do not confer a countervailable benefit to Algoma. Algoma has provided documentations indicating it was able to purchase iron ore at a cheaper price than the cost of mining its own ore at the Wawa mines and transporting it through ACR. Thus, the grants received by ACR do not *8790 provide a countervaliable benefit to Algoma.

III. Programs Preliminarily Determined Not to be Used

We preliminarily determine that the following programs were not used by manufacturers, producers or exporters in Canada of steel rail during the review period:

A. Federal Programs

1. Industrial and Regional Development Program (IRDP).

The IRDP was established in 1983, replacing the RDIP. The program was designed to promote indistrial development in all regions of Canada through financial support in the form of grants, loans and loan guarantees. The IRDP program terminated on June 30, 1988. According to the responses, no financial assistance under this program was provided to the respondent companies under this program.

2. Loans under the Enterprise Development Programs (EDP)

The EDP was established in 1977 and terminated in 1983. It was designed to assist individuals, companies and corporations to enhance productivity in the manufacturing and processing sectors of the Canadian economy. According to the responses, the respondent companies did not receive any assistance under this program.

3. Program for Export Market Development (PEMD) and Promotional Projects Program (PPP)

The PEMD was consolidated and restructured in 1987 and now includes the former PPP. Support provided under the new program is either industry-initiated (former PEMD) or government-initiated (former PPP). Under the industry- initiated component, interest-fee loans are provided to industries requesting assistance in export market development. Under the government-initiated component, the GOC organizes and sponsors international trade fairs and missions. According to the responses, the respondent companies did not receive assistance under this program for sales to the United States.

4. Federal Expansion and Development/Northern Ontario (FEDNOR)

FEDNOR, established in 1987 with a five-year mandate, was designed to promote economic development in Northern Ontario. The CORE Industrial program, as part of FEDNOR, provides assistance through loan insurance and grants for various projects. According to the responses, the respondent companies did not receive assistance under this program.

5. Community-Based Industrial Adjustment Program (CIAP) Grants

CIAP was established in 1981 as part of the Industrial and Labor Adjustment Program. It was terminated in 1984. Assistance under the CIAP was provided for capital projects to commercial enterprises located in areas affected by serious industrial dislocations. According to the responses, no assistance under this program was provided to the respondent companies.

6. Export Credit Financing

The Export Development Council (EDC) was created to facilitate Canada's export trade within the framework of the Canadian Export Development Act. The EDC, a self-sustaining Crown Corporation, insures and finances Canadian export sales. According to the responses, EDC did not finance or insure the sale of steel rail to the United States during the review period.

7. Defense Industry Productivity Program

The DIPP, administered by the Department of Regional and Industrial Expansion (DRIE) has several purposes. Among these purposes is the stimulation of exports of military hardware and the provision of assistance to upgrade equipment processes and facilities to make companies more competitive in bidding for military hardware contracts.

Algoma applied for DIPP grants for the installation of hot metal desulphurization facilities. DIPP funds were paid to Algoma in 1980 and 1981. We examined these grants in OCTG. Although the Department may determine that DIPP grants serve as export subsidies in other cases, we determined in OCTG that there were no conditions in the Algoma DIPP grant which were tied to export performance or which made the grant contingent on exports. Algoma has a large home market for desulfurized steel and products made from desulfurized steel. This DIPP grant benefits Algoma's entire production, and not exports alone. Thus, we preliminarily determine that this grant was not an export subsidy.

Although we have preliminarily determined that this program is not an export subsidy, we must still determine whether any benefits were received during the review period and if so whether this program is limited to a specific enterprise or industry or group of enterprises or industries. Consistent with the Subsidies Appendix, we divide the sum of all grants received in each year by the total sales of the company in the same year. Algoma received no other grants in 1980 and 1981. The calculated benefits in OCTG were de minimis;, i.e., less than 0.50 percent. Therefore, as in OCTG, we expensed them in the year of receipt. Because the DIPP grants received by Algoma were expensed prior to the review period and because no DIPP grants were received by Algoma during the review period, we preliminarily determine that Algoma did not use this program. According to its questionnaire response, Sysco did not receive any grants under this program.

B. Joint Federal-Provincial Programs

Mineral Development Agreement (MDA) Benefits to Algoma

The MDA agreement is a subsidiary agreement pursuant to the Economic Regional Development Agreement between Canada and the Province of Ontario effective November 2, 1984. The MDA Subsidiary Agreement was implemented on June 17, 1985 with a five-year mandate. Its purpose is to aid and encourage Ontario's mineral industry. According to the responses, Algoma has not received assistance under the MDA subsidiary agreement.

C. Provincial Programs

1. Ontario Development Corporation (ODC) Export Support Loans, Other Loans and Loan Guarantees

This program was established to assist in the development and diversification of industries in Ontario. According to the responses, Algoma and Sysco have not received assistance under this program.

2. Provision of Electricity by Ontario Hydro to Algoma

Petitioner alleged that the government-owned power company in Ontario, Ontario Hydro, provides incentive rates for large industrial customers in off-peak hours. According to the response, Algoma did not purchase electricity from Ontario Hydro.

3. Income Tax Exemption for Sysco

As a crown corporation owned by the GONS, Sysco is exempt from the payment of federal taxes. According to Sysco's financial statements, the company has incurred losses throughout the 1980s. As a result, Sysco would have incurred no federal income tax liability before or during the review period. Therefore, Sysco did not benefit from its tax exemption during the review period.

*8791 Verification

In accordance with section 776(b) of the Act, we will verify the information used in making our final determination.

Suspension of Liquidation

In accordance with section 703(d) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all entries of steel rail from Canada which are entered, or withdrawn from warehouse, for consumption, on or after the date of publication of this notice in the Federal Register, and to require a cash deposit or bond for all entries of this merchandise, except entries by Algoma, equal to 103.55 percent ad valorem. Algoma is excluded from this preliminary determination. This suspension will remain in effect until further notice.

Entries of the subject merchandise by all non-producer exporters, except Bernard Railtrack Export Inc., will not be subject to suspension of liquidation and a cash deposit or bond equal to the estimated net subsidy if it can be demonstrated to the U.S. Customs Service that the entries of the subject merchandise were produced by and purchased from Algoma. Entries made by Bernard Railtrack Export Inc. will be subject to suspension of liquidation and a cash deposit or bond equal to the estimated net subsidy shown of 103.55 percent ad valorem.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In addition, we are making available to the ITC all nonprivileged and nonproprietary information relating to this investigation. We will allow the ITC access to all privileged and business proprietary information in our files, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Assistant Secretary for Import Administration.

If our final determination is affirmative, the ITC will make its final determination 45 days after the Department makes its final determination.

Public Comment

In accordance with s 355.38 of the Commerce Department's regulations published in the Federal Register on December 27, 1988 (53 FR 52306) (to be codified at 19 CFR 355.38), we will hold a public hearing, if requested, on April 21, 1989 at 10:00 a.m. in room 3708, to afford interested parties an opportunity to comment on this preliminary determination. Interested parties who wish to request or to participate in a hearing must submit a request within 10 days of the publication of this notice in the Federal Register to the Assistant Secretary for Import Administration, U.S. Department of Commerce, Room B-099, 14th Street and Constitution Avenue NW., Washington, DC 20230.

Requests should contain: (1) The party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the arguments to be raised at the hearing. In addition, ten copies of the business proprietary version and five copies of the nonproprietary version of case briefs must be submitted to the Assistant Secretary no later than April 14, 1989. Ten copies of the business proprietary version and five copies of the nonproprietary version of rebuttal briefs must be submitted to the Assistant Secretary no later than April 19, 1989. An interested party may make an affirmative presentation at the public hearing only on arguments included in that party's case brief, and may make a rebuttal presentation only on arguments included in that party's rebuttal brief. Written argument should be submitted in accordance with s 355.38 of the Commerce Department's regulations published in the Federal Register on December 27, 1988 (53 FR 52306) (to be codified at 19 CFR 355.38), and will be considered if received within the time limits specified in this notice.

This determination is published pursuant to section 703(f) of the Act (19 U.S.C. 1671b(f)).

Jan W. Mares,

Assistant Secretary for Import Administration.