66 FR 49637, September 28, 2001
C-560-813
Investigation 1999
Public Document
DAS II/Office VI: TT
September 21, 2001
MEMORANDUM TO: Faryar Shirzad
Assistant Secretary
for Import Administration
FROM: Bernard T. Carreau
Deputy Assistant Secretary
for AD/CVD Enforcement II
SUBJECT: Issues and Decision Memorandum: Final Affirmative Countervailing
Duty Determination: Certain Hot-Rolled Carbon Steel Flat Products
from Indonesia - Calendar Year 1999
Summary
We have analyzed the comment and rebuttal briefs of interested parties in
the final determination of the above-mentioned investigation for January
1, 1999, through December 31, 1999, the period of investigation (POI). As
a result of our analysis, we have made certain modifications to our
preliminary results. Below are the "Methodology and Background
Information" and "Analysis of Programs" sections of this memorandum that
describe the decisions made in this investigation with respect to PT
Krakatau Steel (Krakatau), the producer/exporter of subject merchandise
covered by this proceeding. Also below is the "Analysis of Comments"
section in which we discuss the issues raised by interested parties. We
recommend that you approve the positions we have developed below in this
memorandum.
Methodology and Background Information
I. Subsidies Valuation Information
A. Allocation Period
Under section 351.524(d)(2) of the Countervailing Duty Regulations (CVD
Regulations), we will presume the allocation period for non-recurring
subsidies to be the average useful life (AUL) of renewable physical assets
for the industry concerned, as listed in the Internal Revenue Service's
(IRS) 1977 Class Life Asset Depreciation Range System, as updated by the
Department of the Treasury. The presumption will apply unless a party
claims and establishes that these tables do not reasonably reflect the AUL
of the renewable physical assets for the company or industry under review,
and the party can establish that the difference between the company-
specific or country-wide AUL for the industry under review is significant.
In the current investigation, no interested party contested the
Department's use of the IRS tables. Therefore, in accordance with section
351.524(d)(2) of the CVD Regulations, we have allocated all of Krakatau's
non-recurring subsidies over 15 years, which is the AUL listed in the IRS
tables for the steel industry.
B. Creditworthiness and Calculation of Discount Rate
In the Preliminary Affirmative Countervailing Duty Determination and
Alignment of Final Countervailing Duty Determination with Final
Antidumping Duty Determination: Certain Hot-Rolled Carbon Steel Flat
Products from Indonesia, 66 FR 20236 (April 20, 2001), (Preliminary
Determination), the Department determined that more information was needed
in order to determine whether or not Krakatau was creditworthy in the
years in which it received loans and GOI equity infusions. The Department
stated that it would seek more information, see 66 FR at 20238. Since the
Preliminary Determination, Krakatau placed translated financial statements
on the record.
When the Department examines whether a company is creditworthy, we are
essentially attempting to determine if the company in question could
obtain commercial financing at commonly available interest rates, see 19
CFR 351.504(a)(4). To do so, the Department examines whether the company
received long-term commercial loans in the year in question, and, if
necessary, the overall financial health and future prospects of the
company. If a company not owned by the government receives long-term
financing from commercial sources without government guarantees, that
company will normally be considered creditworthy. In making a
creditworthiness determination, in accordance with section 351.505(a)(4)
of the CVD Regulations, the Department examines the following factors,
among others:
A. The receipt by the firm of comparable commercial long-term loans;
B. The present and past financial health of the firm, as reflected in
various financial indicators calculated from the firm's financial
statements and accounts;
C. The firm's recent past and present ability to meet its costs and fixed
financial obligations with its cash flow; and
D. Evidence of the firm's future financial position, such as market
studies, country and industry economic forecasts, and project and loan
appraisals prepared prior to the agreement between the lender and the firm
on the terms of the loan.
Regarding factor A, Krakatau is a state-owned company; therefore, any
loan received by the company may not be considered dispositive as to the
company's creditworthiness. See 351.505(a)(4)(ii) of the CVD Regulations.
To determine whether Krakatau was creditworthy from 1988 through 1995, we
analyzed financial ratios from 1985 through 1995, consistent with the
Department's long standing practice of using three years prior to the year
under examination, to address factors B and C. The Department prepared a
memorandum in which it analyzed Krakatau's financial ratios. See September
14, 2001 "Memorandum from the Team to Melissa G. Skinner, Office Director,
Office of AD/CVD Enforcement, Countervailing Duty Investigation on Certain
Hot-Rolled Carbon Steel Flat Products from Indonesia: Credit Allegation"
(Credit Memo). For further information on this issue, see Comment 8 in the
"Analysis of Comments" section of this memorandum. Based upon the analysis
completed in the Credit Memo and consideration of the comments received,
the Department finds Krakatau creditworthy from 1988 through 1995.
Equityworthiness
In the Preliminary Determination, the Department concluded that the
equity infusions and conversions constituted countervailable subsidies.
See 66 FR 20239. The Department based this preliminary decision, in light
of the lack of an actual private investor price to compare with the GOI
equity infusions (section 351.507(a)(3)(i) of the CVD Regulations), on the
fact that there was no objective analysis completed prior to the equity
infusions, as required under section 351.507(a)(4)(ii) of the CVD
Regulations.
After the Preliminary Determination, no new evidence was provided that
private investors purchased similar, newly-issued equity at the time of
the GOI's investments. Therefore, our analysis of the equityworthiness of
Krakatau continues to focus, as a threshold matter, on the existence of an
objective analysis containing information typically examined by potential
private investors considering an equity investment, pursuant to section
351.507(a)(4)(ii) of the CVD Regulations. While the Department collected a
feasibility study at verification, we find that this study does not
constitute a timely objective analysis as required under the regulations
because it was completed after the Ministry of Finance had already
approved the provision of equity infusions to Krakatau and, therefore, was
not timely. Moreover, the analysis was conducted by Krakatau officials
and, therefore, was not objective. See 19 CFR 351.507(a)(4)(ii).
Therefore, we are determining that Krakatau was unequityworthy during the
years of the equity infusions, see Comment 5. For further information on
this issue, see Comment 6.
Analysis of Programs
I. Programs Conferring Subsidies
A. GOI Equity Infusions
In the Preliminary Determination, we found that these equity infusions
conferred countervailable subsidies on the subject merchandise.
Specifically, the Department preliminarily found that the equity infusions
Krakatau received from the GOI constitute countervailable subsidies within
the meaning of section 771(5) of the Act, see 66 FR 20239. We continue to
find Krakatau to be unequityworthy and the equity infusions given by the
GOI to be countervailable. See Equityworthy section above and Comments 2
and 3. While we continue to find that the equity infusions constitute
countervailable subsidies, the Department has altered its calculations
based on additional information submitted on the record which was
subsequently verified.
In the Preliminary Determination, the Department countervailed equity
infusions granted in 1988, 1989, 1990, 1991 and 1995 as reported in
Krakatau's and the GOI's responses. At verification the Department found
that the GOI's equity infusions were recorded in the Government
Participation account of Krakatau's financial statements. See page 5 of
the July 26, 2001 report from the Team to Melissa G. Skinner, Office
Director, Office of AD/CVD Enforcement VI, "Verification of PT. Krakatau
Steel Company in the Countervailing Duty Investigation of Certain Hot-
Rolled Carbon Steel Flat Products from the Republic of Indonesia"
(Verification Report of Krakatau). This account includes the amounts used
in the Preliminary Determination. In the preliminary calculations, we
treated as equity infusion, certain amounts reported as infusions in 1989,
1990, and 1995. At verification we discovered that the funds provided in
1989 and 1990 were actually loans that were ultimately converted into
equity in 1995. In order to avoid double counting of these funds, for our
final determination we have included as equity, the funds provided in
1995. For this final determination, the Department is using the verified
information on the change in the Government Participation account from
Krakatau's financial statements and from a worksheet collected at
verification that details the items in the Government Participation
account, rather than relying upon the amounts used in the Preliminary
Determination.
For the final determination, we find that Krakatau received equity
infusions (including a debt-to-equity conversion) in the following years:
1985, 1989, 1990, 1991, 1992, 1993, 1994 and 1995. The Department
continues to use the standard grant methodology to calculate the benefit
of each infusion. We divided the total benefits attributable to the equity
infusions by Krakatau's f.o.b. consolidated total sales value during the
POI, resulting in a subsidy rate of 9.75 percent ad valorem.
B. Two Step Loan
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise. Noting that no new
substantive information or evidence of changed circumstances was presented
in this case, we preliminarily determined that this program was
countervailable based, inter alia, upon our final determination in Final
Affirmative Countervailing Duty Determination: Certain Cut-to-Length
Carbon-Quality Steel Plate from Indonesia, 64 FR 73155, 73159 (December
29, 1999) (CTL Plate). We continue to find the program countervailable.
However, we have obtained information at verification that prompted a
modification in the benefit calculation from that in our Preliminary
Determination.
At the Preliminary Determination, the information on the record indicated
that this program provided a countervailable benefit under section
771(5)(E)(ii) of the Act in the form of a loan. We continue to find that
during the POI, Krakatau had an outstanding loan which was provided by an
Austrian bank and was guaranteed by the GOI. However, based upon
verification, we now determine that the financial contribution from the
GOI is in the form of a loan guarantee under section 771(5)(D)(i) of the
Act and that the benefit from this loan guarantee should be calculated
under the methodology set forth in accordance with section 771(5)(E)(iii)
of the Act.
We verified that under this program, the GOI acting through the Ministry
of Finance secures loans from foreign banks, including loans lent on
behalf of foreign governments, which are provided in support of specific
state-owned companies. See Comment 6. Although the recipient company is
responsible for paying back the loan, these loans are guaranteed by the
GOI. In addition to interest based on a rate set by the foreign bank, the
recipient company is also charged an 0.5 percent administrative fee by the
GOI.
Under section 771(5)(E)(iii) of the Act, the benefit from a government
loan guarantee is the difference, after adjusting for any difference in
guarantee fees, between the amount the recipient of the guarantee pays on
the guaranteed loan and the amount the recipient would pay for a
comparable commercial loan if there were no guarantee by the authority.
Therefore, in order to determine the benefit from this GOI guarantee we
compared the total costs of the guaranteed loan to the amount the company
would have paid on a comparable unguaranteed commercial loan adjusting for
differences in guarantee fees. Because the loan was in Austrian
Schillings, as our benchmark we used an Austrian Schilling interest rate
provided in Krakatau's questionnaire response. The difference in these
total amounts was then divided by the f.o.b. value of Krakatau's
unconsolidated total sales. We have continued to allocate the benefit over
Krakatau's unconsolidated total sales value because Krakatau reported that
the underlying loan was received by the producer of hot-rolled steel for
the purchase of equipment. On this basis, we determine that the
countervailable subsidy from this program was 0.46 percent ad valorem.
II. Program Determined To Be Not Used
A. Rediscount Loans from the Bank of Indonesia
No additional information or comments has been submitted since the
Preliminary Determination.
III. Total Ad Valorem Rate
The net subsidy rate for producer/exporter and all other exporters of
subject merchandise are as follows:
Producer/Exporter Net Subsidy Rate
PT. Krakatau 10.21 percent ad valorem
All Others Rate 10.21 percent ad valorem
IV. Analysis of Comments
Comment 1: Effects of Hyperinflation during 1998
Petitioners note that in the Preliminary Determination, the Department
did not account for the hyperinflation that Indonesia experienced during
1998, which petitioners argue conflicts with the Department's
determination in CTL Plate. Petitioners state that the Department's
consistent practice is to account for high inflation in a country when
quantifying the benefits received from non-recurring subsidies. See CTL
Plate, 64 FR 73159, Certain Cold-Rolled Flat-Rolled Carbon-Quality Steel
Products from Brazil, 65 FR 5536, 5546 (February 4, 2000) (Cold-Rolled
from Brazil), Certain Hot-Rolled Flat-Rolled Carbon-Quality Steel Products
from Brazil, 64 FR 38742, 38745 (July 19, 1999) (Hot-Rolled from Brazil),
and Steel Wire Rod from Venezuela, 62 FR 55014, 55019 (October 22, 1997)
(Wire Rod from Venezuela). Petitioners assert that in Cold-Rolled from
Brazil and Hot-Rolled from Brazil, the Department accounted for high
inflation where inflation was experienced in a period prior to the POI.
Petitioners further cite to CTL Plate, where it was determined that
Indonesia was experiencing high inflation and therefore the Department
converted all subsidies into U.S. dollars and then used a long-term dollar
rate as the discount rate to determine the benefit. Based upon the
previous cases, petitioners argue that the Department should apply the
same methodology in this case, accounting for the high inflation during
1998.
Respondents state that the application of the Department's hyperinflation
methodology is not appropriate in this investigation. Specifically,
respondents argue that CTL Plate covered a different POI (i.e. 1998), and
the hyperinflation provision is not applicable to this POI, (i.e 1999).
If, however, the Department were to apply a hyperinflation provision
consistent with the methodology used in CTL Plate, respondents suggest
that a different exchange rate be used for the conversion to U.S. dollars
from the one that petitioners cited in their case briefs.
Department's Position:
We disagree with petitioners. Indonesia has not had long-term high
inflation and the Department has not determined that there was
hyperinflation in Indonesia during the instant POI. Therefore, the
Department's "high inflation" methodology is not appropriate in this
investigation. The cases cited by petitioners do not provide a precedent
for applying the high inflation methodology in this investigation. The two
Brazilian cases and the Venezuelan case do not support petitioners'
argument. Both Brazil and Venezuela experienced long-term high inflation
which necessitated using a methodology to account for the effect of
inflation on non-recurring subsidies such as equity infusions. In Wire Rod
from Venezuela, the Department found that Venezuela experienced high
inflation during a ten-year period from 1987 through 1996, years in which
the investigated company received non-recurring benefits in the form of
equity infusions. Similarly in Cold-Rolled Brazil and Hot-Rolled Brazil,
the Department found that Brazil experienced persistent long-term high
inflation for the eleven-year period, 1984 through 1994. As petitioners
noted in their case briefs, Indonesia had one year of high inflation,
which was 1998. Thus, the facts with respect to long-term inflation which
were present in Brazil and Venezuela which required the use of the
Department's inflation methodology simply are not present in this
Indonesian investigation.
In addition, petitioners' reference to CTL Plate does not support the use
of the high inflation methodology in this investigation. CTL Plate was
based upon adverse facts available and the period of investigation in CTL
Plate was 1998, the year in which Indonesia experienced high inflation. As
the POI of this investigation is not a year in which Indonesia experienced
high inflation, and because this determination is not based on adverse
facts available, the use of the high inflation methodology is not needed
to accurately measure the benefits received during the POI.
Comment 2: GOI's Equity Infusion to Krakatau
Petitioners argue that respondents misreported the amounts and dates of
their equity infusions, and that only at verification did the Department
discover information regarding these equity infusions. Additionally,
petitioners assert that the 1991 and 1995 debt-to-equity conversions were
misreported in the respondents' questionnaire responses.
Respondents request that the Department correct the values of certain
equity infusions countervailed in the Preliminary Determination.
Respondents claim that the Department double-counted certain equity
infusions in the Preliminary Determination and should correct this error
for the final, if such infusions are found countervailable.
Department's Position:
First, we disagree with petitioners position that the Department should
follow the same methodology for the equity infusions as used in CTL Plate.
CTL Plate was based on adverse facts available; thus, it would be
inappropriate to rely on the methodology used in CTL Plate for this final
determination where adverse facts available are not being employed.
While we agree with petitioners that there were errors in respondents'
questionnaire responses, as noted in the Facts Available Section below at
Comment 7, we do not believe that the use of facts available is warranted
in this investigation. We find that Krakatau and the GOI have fully
cooperated to the best of their ability in this investigation. Therefore,
although there were discrepancies with the information relied upon in the
Preliminary Determination, we are relying upon verified information for
the final determination.
As noted in the Equity Infusion section above, the Department found at
verification that Krakatau has a Government Participation account in its
financial statements for GOI equity infusions. It was also discovered at
verification that the Department double-counted some of the equity
infusions in the Preliminary Determination. Based upon these
clarifications we agree with petitioners that we should include the amount
of the change in the Government Participation account. However, we
disagree with petitioners' suggestion that we should also include the
amounts used in the Preliminary Determination, because the correct amounts
for those programs are included in the Government Participation account.
Therefore, for this final determination, we have based the equity subsidy
calculations solely upon the verified information related to changes in
the Government Participation account in the company's audited financial
statements.
Comment 3: GOI's Equity Infusion Specific to Krakatau
Respondents state that under the Government Regulation No. 12/1969 the
infusions were not specific to Krakatau, nor were the infusions limited to
the steel industry. They maintain that Regulation 12/1969 allows all state-
owned companies to receive equity infusions if: (1) the company has a plan
to expand its capacity; or (2) the company needs to execute its financial
restructuring in order to improve the health of the company. Respondents
note that there are 154 state-owned companies and that this large number
demonstrates that the equity granted to Krakatau is not specific.
Petitioners disagree with respondents' argument that the equity infusions
were not specific to Krakatau. Petitioners state that the equity infusions
are de jure specific under 771(5A)(i) of the Act, because according to
respondents' own argument, the infusions were limited to state-owned
enterprises. Petitioners maintain that in Certain Steel Products from
Belgium, 58FR 37273 at 37280 (July 9, 1993) (Certain Products from
Belgium), the Department determinated that state-owned companies are a
specific group of enterprises under section 771(5A)(D) of the Act, and
that subsidies limited to such enterprises are specific as a matter of
law. Petitioners also argue that the infusions were also de facto
specific, pursuant to section 771(5A)(D)(iii) of the Act because the
record evidence indicates that only respondents received the equity
infusions and conversions. Petitioners claim that the GOI failed to
provide any information that would establish that the equity infusions
were not de facto specific. Petitioners recommend that the Department
continue to find the equity infusions granted to Krakatau from the GOI to
be specific.
Department's Position:
Consistent with our Preliminary Determination (66 FR 20239), and
information on the record, including Ministry Decrees and Government
Resolution No. 12/1969, we find that the equity infusions provided by the
GOI were de jure specific to Krakatau under section 771(5A)(D)(i) of the
Act. As noted in Certain Products from Belgium, any "program" limited to
state-owned enterprises, is by definition limited to a specific group of
enterprises as determined under section 771(5A)(D) of the Act. Therefore,
the Department finds that the GOI's equity infusions were specific to
Krakatau as it is a state-owned company.
Comment 4: Use of Consolidated Total Sales as the Denominator
Petitioners argue that the Department should use the consolidated sales
figure that was collected at verification rather than the sales figure
from respondents' audited financial statements to calculate the ad valorem
rates for the equity infusions and the debt-to-equity conversions.
Respondents disagree with the figure that petitioners recommended using.
Respondents claim that the sales figure from verification is incorrect and
they assert that the Department should use the sales figure used in the
Preliminary Determination (i.e., the consolidated sales figure from the
audited financial statement).
Department's Position:
At verification we collected a revised unconsolidated sales chart based
upon the 1999 calendar year. As noted in the Verification Report of
Krakatau at page 3, we verified the unconsolidated sales figure. The
worksheet also provided a summary of consolidated sales. The Department
did not verify these values and we agree with the petitioners that they
differ from the values used by the Department in the Preliminary
Determination. We disagree with petitioners, however, that this value
should be used in our final calculation. Rather, the Department has relied
on the sales figures from the company's consolidated audited financial
statements as the denominator to calculate the subsidy ad valorem rate for
the equity infusions.
Comment 5: Feasibility Study and Equityworthiness
Petitioners state that the Department should continue to find all equity
infusions and debt-to-equity conversions provided from the GOI to Krakatau
as countervailable subsidies, as was the case in the Preliminary
Determination. Petitioners cite to the Preliminary Determination, in which
we stated that Krakatau did not prepare any objective studies prior to the
GOI's investment decisions on which the GOI could have based its
investment decisions for equity infusions and debt-to-equity conversion.
Under section 351.507(a)(ii) of the CVD Regulations a study must be
prepared prior to provision of the equity infusions or conversion.
Petitioners suggest that the feasibility study collected at verification
should be rejected for the following reasons. First, the study was
prepared after the date of the equity infusion to which it relates. In a
letter dated May 30, 1990, the Minister of Finance approved the funding;
however, the study was prepared on June 20, 1990. Secondly, the
feasibility study does not represent an objective, independent analysis.
The study was prepared by Krakatau company officials and therefore lacks
the validity of an independent consultant without a direct interest in the
project. Petitioners state that the Department rejected a feasibility
study in Certain Corrosion-Resistant Carbon Flat Products from New Zealand
based on almost identical facts. Due to the reasons listed above,
petitioners suggest the Department should reject the feasibility study and
continue to find the equity infusions from the GOI countervailable.
Respondents claim that the company did prepare a proposal/study for the
company's chairman commissioner and that the study was prepared before the
equity infusion.
Department's Position:
In determining whether a company is equityworthy, the Department under 19
CFR 351.507(a)(4)(ii), will request and normally require from the
respondents the information and analysis completed prior to the infusion,
on which the government based its decision to provide the equity
infusions. Absent the existence or provision of an objective analysis, the
Department will normally find that any government-provided infusions were
inconsistent with the usual investment practice of private investors.
Although at verification, we received a copy of a study prepared by
Krakatau, as noted in the Verification Report of Krakatau at page 5, the
study was prepared on June 20, 1990; however, the Ministry of Finance
approved the equity infusion on May 30, 1990, as reported in respondents'
responses. Consistent with the Department's determination in Final Results
of the First Countervailing Duty Administrative Review of Stainless Steel
Plate in Coils from Belgium, 66 FR 45007 (August 27, 2001) and
accompanying "Decision Memorandum at Comment 1: GOB Equity Infusion,"
which found that a company was unequityworthy because an objective
analysis was not provided prior to the government's decision to provide
equity infusions, the Department agrees with petitioners that the post
feasibility study was not a timely analysis. Moreover, the feasibility
study was prepared by a Krakatau official. Though GOI officials at
verification state that the Ministry of Industry and Trade conducted its
own internal evaluation of the study, the Department officials were not
allowed to review this evaluation, despite their request to do so. Thus
there is no verified evidence establishing the feasibility study as an
objective analysis. Therefore we find Krakatau unequityworthy during the
years of the equity infusions in 1985, 1989 through 1995.
Comment 6: Two-Step Loan Program
Respondents claim that the two step loan program is not countervailable.
First, Krakatau claims that there was no financial contribution by the GOI
to Krakatau. Respondents maintain that since this investigation relates
only to alleged subsidies offered by the GOI, this program is not relevant
to the investigation. Additionally, respondents argue that the interest
rate was determined by the Austrian Bank and not the GOI, and that the
Austrian government controlled the borrowing program. The GOI merely
charged an additional interest rate to cover administrative fees for its
role as the arranger of the loan. Further, respondents note that the
principal and interest payments were paid in Austrian schillings and not
Indonesian rupiah as noted in the Preliminary Determination. Therefore,
the proper interest benchmark is the Austrian loan borrowing rate and not
an Indonesian borrowing rate. Respondents claim that at the time, the
interest rate charged for the two-step loan was comparable to the Austrian
borrowing rate.
Second, respondents argue that the loan program was not specific to
Krakatau. The GOI claims that it did not have the capacity to determine
the recipient of the loan. The Ministry of Finance and the National
Development Planning Board establish the procedures of planning,
implementation/administration and monitoring of these foreign loans. The
National Development Planning Board also publishes the "Blue Book" which
sets forth the list of projects eligible for foreign financing. The GOI
declares that all enterprises in Indonesia have the opportunity to apply
and approvals were not limited to Krakatau. Respondents argue that this
system provides objective criteria for application and approval and
therefore is not specific to Krakatau.
Third, respondents claim that the two-step loan did not benefit Krakatau.
This assertion is based on the argument that the nature of this program is
to promote environmental protection and not to improve Krakatau's product.
Petitioners argue that the Department should continue to find this
program countervailable. With respect to the issue of specificity,
petitioners state that the GOI refused to provide the Department with the
specificity data requested by the Department in its questionnaires. In
addition, they argue that the program is specific because it applies only
to state-owned companies. Petitioners also argue that the Department must
reject the GOI's claim that the two-step loan is a non-countervailable
environmental subsidy.
Department's Position:
Under section 771(5)(D)(i) of the Act, a government loan guarantee is
included within the definition of a financial contribution. Therefore,
because the GOI guaranteed a loan to Krakatau under this program, the GOI
has provided a financial contribution to Krakatau under the CVD law. We
disagree with respondents' claim that no subsidy was provided to the
company because the loan was provided by a foreign bank and that the
Austrian government controlled the provision of the loan. We are not
countervailing the provision of the foreign loan; we are only
countervailing the provision by the GOI of the loan guarantee, in
accordance with the statue and regulations.
With respect to the issue of specificity, the loan guarantee (unlike the
loan itself) was provided by the GOI. Information on the record in this
investigation indicates that the Ministry of Finance provides guarantees
for loans provided only to state-owned companies. In addition, the GOI
also specifically designates those projects which are eligible for foreign
financing.
We also disagree with respondents' argument that the two-step loan
program is not countervailable because the loan was used for environmental
protection. The provision in the statute defining some environmental
subsidies as non-countervailable (i.e. 771(5B)(D)) has expired. (See
771(5B)(G) of the Act) As such, the Department finds that respondents'
argument which relies on this provision is without merit. Thus, the
Department determines that these loan guarantees are countervailable.
We do, however, agree with respondents that the principal and interest
payments were made in Austrian shillings. Therefore, we have used as our
benchmark an interest rate from an Austrian bank which was provided by
Krakatau in its response, and was suggested by petitioners.
Comment 7: GOI Equity Infusions applying Adverse Facts Available
Petitioners argue that the Department should apply adverse facts
available in determining the subsidy rate for the equity infusions
pursuant to sections 776(a) and (b) of the Act. Petitioners argue adverse
facts available is warranted in this case because at verification the
Department discovered several equity infusions and debt-to-equity
conversions which were not reported in the questionnaire and supplemental
questionnaire responses. Petitioners state that the GOI and Krakatau did
not provide the Department with the requested information, and only at
verification was information found regarding the equity programs being
investigated. Petitioners also assert that the Department was unable to
verify the information that was provided in the questionnaire response.
Petitioners also note that there were some discrepancies found between the
information in the responses and documents at verification which
respondents could not explain. Based upon these events, petitioners urge
the Department to apply adverse facts available under section 776(b) of
the Act.
Respondents argue that the Department should not apply adverse facts
available. Instead, they state that the final determination should be
based upon respondents' submitted and verified responses. The GOI
responded in its rebuttal brief that, to the best of its knowledge,
Krakatau reported properly all of the requested information on the equity
infusions and debt-to-equity conversion. The GOI also maintains that
Krakatau's information could be verified. Krakatau specifically argues
that it reported all equity infusions and debt-to-equity conversions.
Krakatau also asserts that it properly provided the Department with the
requested information, and that this information could be verified.
Therefore, under 351.308(a) of the CVD Regulations, respondents claim that
information was timely, the information was verified, the information was
complete, and that the company and government acted to the best of their
abilities to submit the requested information to the Department. Thus,
they argue, the Department should not apply adverse facts available;
rather it should use the information provided by respondents.
Department's Position:
Section 776(a)(2) of the Act requires the use of facts available in
reaching a determination if the following events occur: (A) respondents
withhold information that has been requested by the Department; (B) they
fail to provide such information in a timely manner or in the form or
manner requested; (C) they significantly impede a proceeding under the
countervailing duty law; or provide such information but the Department is
unable to verify the information. In addition, under section 776(b) of the
Act, if the Department finds that an interested party "has failed to
cooperate by not acting to the best of its ability to comply with a
request for information," the Department may use an inference that is
adverse to the interest of that party in selecting from the facts
otherwise available.
Prior to verification the Department found discrepancies between the
narrative, supporting documents and financial statements. After the
Preliminary Determination and prior to verification, Krakatau placed on
the record its translated financial statements. At verification the
Department was able to clarify most of these issues. Based upon the
information obtained prior to and clarification gained at verification,
the Department was able to determine that Krakatau accounted for its
equity infusions from the GOI in its government participation account. See
Comment 2. While the Department did find some minor discrepancies for
1995, between the decree, the general ledger, and the financial statement,
the Department has no reason to conclude that respondents did not comply
to the best of their abilities to provide the information requested by the
Department. More importantly, the Department was able to ascertain the
accurate values for infusions of equity or debt-to-equity conversions
based upon our examination of the company's financial statements during
verification. These documents are on the record of this investigation, and
were on the record of this investigation prior to verification. Finally,
the Department notes that both the GOI and Krakatau represented themselves
throughout this investigation. Therefore, the Department concludes that
the use of facts available under section 776 of the Act is not
appropriate. Instead, we have based the equity benefit on the information
provided in the company's verified financial statements.
Comment 8: Krakatau's creditworthiness
Petitioners disagree with the Department's preliminary finding that
Krakatau was creditworthy from 1986 through 1995. First, in their comments
on this issue petitioners claim that the data which the Department relied
upon was flawed. They state that the return-on-equity ratios for 1993 and
1994 were incorrect. Petitioners suggest that the Department's use of the
financial data as reported by Krakatau was incorrect, and that comparing
Krakatau's unconsolidated audited financial statements for 1993 and 1994
with other financial data shows discrepancies between what the Department
calculated and what petitioners calculated.
Second, petitioners explain that the Department neglected to consider
other factors necessary to determine Krakatau's creditworthiness.
Petitioners state that the Department under section 351.505(a)(4)(i)(A)
and (C) is required to consider Krakatau's receipt of comparable
commercial long-term loans in the year or years at issue and the company's
past and present ability to meet its costs and fixed financial obligation.
Petitioners cite Krakatau's questionnaire response as stating that it was
unable to obtain any commercial long-term loans during the years at issue.
Petitioners also cite the Memorandum from the Team to Melissa G. Skinner,
Office Director, Office of AD/CVD Enforcement, "Verification Report for a
Private Commercial Bank" Verification Report of Private Bank) (July 26,
2001), where officials stated that they would not have lent money to
Krakatau. Third, petitioners claim that Krakatau was unable to meet its
costs and fixed financial obligations during the period from 1985 through
1995.
Department's Position:
The Department did not use flawed data from Krakatau's response; rather,
it based its financial ratios on Krakatau's 1993, 1994 and 1995 audited
financial statement, as audited by Price WaterHouse. The numbers that
petitioners relied upon for their argument were from financial statements
audited by a State Auditor, whereas the Department relied upon the Price
WaterHouse audited financials as collected at verification. As the
Department discussed in the Verification Report of Krakatau at page 3, "an
official of Price WaterHouse explained that prior to 1996, Krakatau's
financial statements were audited by state auditors because it was a state
company. However, in 1996, Price Waterhouse was hired to conduct the
audit. The official said that for the company to be in compliance with
international accounting standards, the 1993 through 1995 financial
statements were revised and some items reclassified." Based upon this
clarification, the Department used this set of financial statements in its
ratio calculations.
As discussed above, in the "Creditworthiness and Calculation of Discount
Rate" section of this memorandum, we have considered the factors
enumerated in section 351.505 for this final determination.
We believe that, petitioners statement that Krakatau explicitly
acknowledged that it could not obtain any commercial long-term loans
during the years at issue is inaccurate. Krakatau in its January 31, 2001,
questionnaire response stated that it "has never obtained loans ......";
it did not say that it could not have obtained any commercial long-term
loans. In addition, petitioners statement that the private commercial
bankers in Indonesia stated that they would not have lent money to
Krakatau, presumably because of the credit risk, is also not accurate. The
bankers did not have specific financial data on Krakatau. However, they
pointed out several reasons that they would not have lent money to
Krakatau: (1) the company was not involved in a targeted sector; and (2)
general perception of mismanagement of government entities.
We disagree with petitioners' arguments that Krakatau was uncreditworthy
because it clearly was unable to meet its costs and fixed financial
obligations during the period 1985 through 1995 and, hence, was required
to obtain debt-to-equity conversions from the GOI in both 1991 and 1995.
An examination of the company's audited financial statements shows that
because the company primarily used equity financing in lieu of debt
financing, it would have been able to cover its costs and fixed financial
obligations.
In addition, with respect to petitioners' second argument, we have
determined that the company's financial ratios indicate that the company
is creditworthy. The fact that a company may have little or no long-term
loans in certain years is not indicative that a company is uncreditworthy.
The Department has articulated a policy that long-term commercial loans
are, in most instances, dispositive of a company's creditworthiness. We
have never held a policy that the absence of long-term lending is
dispositive that a company is uncreditworthy. If a company does not have
long-term commercial loans, then the Department will examine the company's
financial ratios to determine the creditworthiness of a company.
The Department preliminary found that based on Krakatau's financial
ratios (e.g., debt to equity ratios) that a commercial source could have
reasonably provided Krakatau with a loan. As discussed above, the
Department continues to find that the financial ratios it preliminarily
calculated are correct. Moreover, the Department continues to believe that
these ratios are a reasonable indication of whether a commercial source
would provide Krakatau with a loan. As such, the Department continues to
find that Krakatau is creditworthy for purposes of this investigation.
Recommendation:
Based on our analysis of the comments received, we recommend adopting all
of the above positions and adjusting all related subsidy calculations
accordingly. If these recommendations are accepted, we will publish the
final determination of the investigation.
_________ _________
Agree Disagree
______________________
Faryar Shirzad
Assistant Secretary
for Import Administration
______________________
Date