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International Trade Administration
[C-475-812]
Final Affirmative Countervailing Duty Determination: Grain-Oriented
Electrical Steel From Italy
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: March 18, 1994.
FOR FURTHER INFORMATION CONTACT: Annika L. O'Hara or David R.
Boyland, Office of Countervailing Investigations, Import Administration,
U.S. Department of Commerce, room 3099, 14th Street and Constitution
Avenue NW., Washington, DC 20230; telephone (202) 482-4198 and
(202) 482-0588, respectively.
FINAL DETERMINATION: The Department determines that 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 Italy
of grain-oriented electrical steel. For information on the estimated
net subsidy, please see the Suspension of Liquidation section
of this notice.
Case History
Since the publication of the preliminary determination in
the Federal Register on February 1, 1994 (59 FR 4682), the following
events have occurred.
We conducted verification of the responses submitted on behalf
of the Government of Italy (``GOI''), ILVA S.p.A. (``ILVA''),
and the European Community (``EC'') from February 7 through
February 21, 1994.
On March 22 and March 28, 1994, we received case and rebuttal
briefs, respectively, from petitioners and respondents. Neither
petitioners nor respondents requested a hearing in this investigation.
On March 29, 1994, we returned to petitioners certain factual
information submitted in their briefs because it was untimely
pursuant to § 355.31(a)(i) of the Department's regulations.
Scope of Investigation
This investigation concerns the following class or kind of
merchandise: grain-oriented electrical steel (``electrical steel'')
from Italy.
The product covered by this investigation is grain-oriented
silicon electrical steel, which is a flat-rolled alloy steel
product containing by weight at least 0.6 percent of silicon,
not more than 0.08 percent of carbon, not more than 1.0 percent
of aluminum, and no other element in an amount that would give
the steel the characteristics of another alloy steel, of a thickness
of no more than 0.56 millimeter, in coils of any width, or in
straight lengths which are of a width measuring at least 10
times the thickness, as currently classifiable in the Harmonized
Tariff Schedule (``HTS'') under item numbers 7225.10.0030, 7226.10.1030,
7226.10.5015, and 7226.10.5065. Although the HTS subheadings
are provided for convenience and Customs purposes, our written
description of the scope of this proceeding is dispositive.
Injury Test
Because Italy is a ``country under the Agreement'' within
the meaning of section 701(b) of the Act, the U.S. International
Trade Commission (``ITC'') is required to determine whether
imports of electrical steel from Italy materially injure, or
threaten material injury to, a U.S. industry. On October 12,
1993, the ITC preliminarily determined that there is a reasonable
indication that an industry in the United States is being materially
injured or threatened with material injury by reason of imports
from Italy of the subject merchandise (58 FR 54168, October
20, 1993).
Corporate History of Respondent ILVA
Prior to 1987, electrical steel in Italy was produced by
Terni S.p.A. (``Terni''), a main operating company of Finsider.
Finsider was a government-owned holding company which controlled
all state-owned steel companies in Italy. In a restructuring
of the Italian steel industry in 1982, Terni took over two plants,
Lovere and Trieste, from Nuova Italsider, another Finsider-owned
steel producer.
As part of a subsequent restructuring in 1987, Terni transferred
its assets to a new company, Terni Acciai Speciali (``TAS'')
which thereafter held all the assets for electrical steel production
in Italy. As part of the restructuring, Lovere and Trieste became
TAS' two principal subsidiaries.
In 1988, another restructuring took place in which Finsider
and its main operating companies (TAS, Italsider, and Nuova
Deltasider) entered into liquidation and a new company, ILVA,
was formed. ILVA took over some of the assets and liabilities
of the liquidating companies. With respect to TAS, part of its
liabilities and the majority of its viable assets, including
all the assets associated with the production of electrical
steel, were transferred to ILVA on January 1, 1989. ILVA itself
became operational on that same day. Part of TAS' remaining
assets and liabilities were transferred to ILVA on April 1,
1990. After that date, TAS no longer had any manufacturing activities.
Only certain non-operating assets (e.g., land, buildings, inventories),
remained in TAS.
From 1989 to 1994, ILVA consisted of several operating divisions.
The Specialty Steels Division, located in Terni, produced the
subject merchandise. ILVA was also the majority owner of a large
number of separately incorporated subsidiaries. The subsidiaries
produced various types of steel products and also included service
centers, trading companies, an electric power company, etc.
ILVA together with its subsidiaries constituted the ILVA Group.
The ILVA Group was owned by the Istituto per la Ricostruzione
Industriale (``IRI''), a holding company wholly-owned by the
GOI.
As of January 1, 1994, ILVA entered into liquidation and
its divisions formed three companies. ILVA's former Specialty
Steels Division is now a separately incorporated company, Acciai
Speciali Terni, which produces electrical steel.
Spin-Offs
ILVA sold several ``productive units,'' as defined in the
General Issues Appendix to the Final Affirmative Countervailing
Duty Determination: Certain Steel Products from Austria (``GIA''),
58 FR 37225, 37265-8 (July 9, 1993), from 1990 through 1992.
At verification, we established that one of the companies had
been sold to a government entity and one other company had been
sold by Italsider rather than ILVA. Our spin-off methodology
does not apply in these situations. For the other companies,
i.e., those sold to private parties, we have applied the pass-
through methodology described in the GIA to calculate the proportion
of subsidies received by ILVA that ``left'' the company as a
result of the sales of these productive units.
Period of Investigation
For purposes of this final determination, the period for
which we are measuring subsidies (the period of investigation
(``POI'')) is calendar year 1992. We have calculated the amount
of subsidies bestowed on the subject merchandise by cumulating
benefits provided to Terni, TAS and ILVA from 1978 through 1992.
Analysis of Programs
Based on our analysis of the petition, the responses to our
questionnaires, verification, and comments by interested parties,
we determine the following.
Equityworthiness
Pursuant to section 355.44(e)(1) of the Proposed Regulations
(Countervailing Duties; Notice of Proposed Rulemaking and Request
for Public Comments (``Proposed Regulations''), 54 FR 23366,
May 31, 1989), we preliminarily determined that Terni, TAS,
and ILVA were unequityworthy from 1978 through 1992, except
in 1979, 1983, 1988, and 1989 when equity infusions were not
an issue. From the perspective of a reasonable private investor
examining the firm at the time of the equity infusions, neither
Terni, TAS, nor ILVA showed an ability to earn a reasonable
rate of return over a reasonable period of time. We did not
learn anything at verification that would lead us to reverse
this finding.
As we stated in the preliminary determination, the companies
which were restructured to form ILVA sustained losses from 1978
onward. Although ILVA had a brief period of operating profits
for 1989 through 1991, its return on equity during this period
declined until there was a negative return. Terni and ILVA's
debt to equity ratios were relatively high. Read in conjunction
with other financial indicators, such as net losses for numerous
years, negative rates of return on equity and sales, the companies'
financial performance was weak. Given this, we continue to find
that Terni, TAS, and ILVA were unequityworthy from 1978 through
1992. Because the companies received no equity infusions during
1979, 1983, 1989, and 1990, we did not determine equityworthiness
for those years. (See also Memorandum to Director of Accounting
dated April 11, 1994 on file in Room B-099 of the Main Commerce
Building concerning the Department's evaluation of Terni's,
TAS', and ILVA's equityworthiness.)
For the preliminary determination, we did not include 1988
in our equityworthy analysis because petitioners did not allege
an infusion had occurred in that year and we were not aware
of any such investment. However, in our review of ILVA's annual
reports at verification, we learned that IRI contributed capital
to ILVA in 1988 in the form of an equity infusion. Therefore,
in accordance with § 355.44(e)(2) of the Proposed Regulations,
we have considered whether ILVA was equityworthy in that year
to determine whether the equity infusion was made on terms inconsistent
with commercial considerations. As explained below, we have
determined that ILVA was not equityworthy in that year.
Creditworthiness
Pursuant to section 355.44(b)(6)(i) of the Proposed Regulations,
we preliminarily determined that Terni, TAS, and ILVA were uncreditworthy,
i.e., that they did not have sufficient revenues or resources
to meet their costs and fixed financial obligations, from 1978
through 1992. In making that determination, we examined Terni's,
TAS', and ILVA's current, quick, times interest earned and debt
to equity ratios. We determined, for example, that the companies'
times interest earned ratios were anemic for approximately 16
years, indicating a weak long-term solvency. Furthermore, the
debt to equity ratios for both Terni and ILVA were relatively
high.
We did not learn anything at verification that would lead
us to reconsider our preliminary determination. Therefore, we
continue to find that Terni, TAS, and ILVA were uncreditworthy
from 1978 through 1992. (See also Memorandum to Director of
Accounting dated April 11, 1994, on file in Room B-099 of the
Main Commerce Building concerning the Department's evaluation
of Terni's, TAS', and ILVA's creditworthiness.)
Benchmarks and Discount Rates
For uncreditworthy companies, § 355.44(b)(6)(iv)(A)(1) of
the Proposed Regulations directs us to use, as the benchmark
interest rate, the highest long-term fixed interest rate commonly
available to firms in the country plus an amount equal to 12
percent of the prime rate. Because we were unable to obtain
information on the highest long-term interest rate commonly
available in the country, we used the Bank of Italy reference
rate which is the highest average long-term fixed interest rate
we were able to verify. We then added to this rate an amount
equal to 12 percent of the Italian Bankers Association (``ABI'')
prime rate. We have used the resulting interest rate as the
benchmark for our long-term loans. In calculations where we
have not used this rate, we have otherwise indicated. We have
also used this amount as the discount rate for allocating over
time the benefit from equity infusions and non-recurring grants
for the same reasons explained in Final Affirmative Countervailing
Duty Determination: Certain Steel Products From Spain, 58 FR
37374, 37376 (July 9, 1993).
Calculation Methodology
In determining the benefits to the subject merchandise from
the programs described below, we used the following calculation
methodology. We first calculated the benefit attributable to
the POI for each countervailable program, using the methodologies
described in each program section below. For those subsidies
received by ILVA that were allocated over time, we then performed
the pass-through analysis discussed in the GIA at 37269. The
pass-through analysis accounts for any reduction in ILVA's subsidies
that resulted from the sale of several productive units.
For the subsidies remaining with ILVA, we divided the benefit
allocable to the POI by the sales of ILVA or the sales of the
Specialty Steels Division of ILVA, depending on which company
had received the benefit. (The program sections below indicate
which denominator has been used for each program.) Next, we
added the benefits for all programs, including the benefits
for programs which were not allocated over time, to arrive at
ILVA's total subsidy rate. Because ILVA is the only respondent
company in this investigation, this rate equals the country-
wide rate.
I. Programs Determined To Be Countervailable
A. Benefits Associated With the 1988-90 Restructuring
As discussed above under the ``Corporate History'' section
of this notice, the GOI liquidated Finsider and its main operating
companies in 1988 and assembled the group's most productive
assets into a new operating company, ILVA. In 1990, additional
assets and liabilities of TAS, Italsider, and Finsider went
to ILVA.
In the preliminary determination, we found that a countervailable
benefit was provided to ILVA through the 1988-1990 restructuring.
In reaching this determination, we did not look at the transformation
of Finsider as a whole into ILVA. Instead, we focused on the
restructuring of TAS into the Specialty Steels Division of ILVA.
We found that although TAS' net worth was negative prior to
the restructuring, ILVA received a division with assets in excess
of liabilities. In effect, TAS' balance sheet was rewritten
so as to change its equity from negative 99,886 million lire
to positive 317,836 million lire. For the preliminary determination,
we treated the difference (417,722 million lire) as a countervailable
benefit to ILVA.
We have reconsidered the methodology employed in the preliminary
determination and have revised it for the final determination.
We now believe that the approach taken in the preliminary determination
understated the benefit to ILVA from the restructuring. It failed
to take into account a portion of the liabilities not assumed
by ILVA, that would otherwise have had to be repaid, and the
losses incurred by TAS in connection with a write down of its
assets in the restructuring process.
The purpose of the 1988-90 restructuring was to create a
new, viable steel company (ILVA) by having it take over most
of the productive assets of Finsider's operating companies like
TAS, but only some of the liabilities. In April 1990, after
all of TAS' manufacturing activities had either been transferred
or shut down, TAS was nothing but a shell company in the process
of liquidation, with liabilities exceeding its assets. ILVA,
on the other hand, had received most of TAS' assets without
being burdened by TAS' liabilities.
The liabilities remaining with TAS through the restructuring
process had to be repaid, assumed, or forgiven. We have identified
one specific instance of forgiveness. This occurred in 1989
when Finsider forgave 99,886 million lire of debt owed to it
by TAS. Even with this forgiveness, TAS retained a substantial
amount of liabilities after the 1990 transfer of assets and
liabilities to ILVA. While no specific act eliminated this debt-
indeed some of it is still outstanding-we believe that ILVA
(and consequently the subject merchandise) received a benefit
as a result of the debt being left behind in TAS.
In addition, we learned at verification that losses had been
left behind in TAS, because the value of the assets transferred
to ILVA had been written down. TAS gave up assets whose book
value was higher than their appraised value. As a result, TAS
was forced to absorb losses. The loss from the first transfer
was reflected as an extraordinary loss in TAS' 1988 Annual Report.
With respect to the 1990 transfer, TAS had created a reserve
in 1989 for the anticipated loss. At verification, we found
that this loss was included in the liabilities that were left
in TAS after the 1990 transfer.
In summary, in restructuring TAS into the Specialty Steels
Division of ILVA, liabilities and losses due to asset write
downs were left behind in TAS, a shell company. Although there
was only one specific act of debt forgiveness, which only covered
a portion of the liabilities in TAS, we believe that ILVA received
a benefit when it was able to leave the debt and losses remaining
in TAS. Because this benefit was specific to ILVA, we find a
countervailable subsidy to ILVA in the amount of the debt and
losses that should have been taken by ILVA when it took on the
assets of TAS.
Treating these liabilities and losses as a subsidy to ILVA
is consistent with the Department's determination in Certain
Steel from Austria at 37221. In that case, we examined a government-
owned operating company (VAAG) which was split up into numerous
operating companies, one of which was subject to the investigation.
In order to effect this split-up, the assets and liabilities
of the original company were divided among the new companies.
We determined that the creation of the new companies was merely
a redistribution of existing assets which, in and of itself,
did not give rise to any benefits. However, we also determined
that a benefit arose because losses that had been incurred by
VAAG were not distributed to the new companies. Therefore, we
determined that the company under investigation effectively
received a grant in the amount of the losses that should have
been distributed to it.
Similarly, in the case of TAS and ILVA, the transfer of assets
to ILVA is, in itself, a redistribution of assets which does
not give rise to subsidies. However, a substantial portion of
the liabilities and the losses associated with the assets were
not distributed to ILVA. Instead, they remained behind in TAS.
We are countervailing these amounts as grants to ILVA.
To calculate the benefit during the POI, we used our standard
grant methodology (see section 355.49(b) of the Proposed Regulations).
Finsider's 1989 forgiveness of TAS' debt and the loss resulting
from the 1989 write down were treated as grants received in
1989. The second asset write down and the debt outstanding after
the 1990 transfer (adjusted as described below) were treated
as grants received in 1990.
After the 1990 transfer, certain non-operating assets (e.g.,
land, buildings, inventories), remained in TAS. These assets
are being disposed of in the liquidation process and the proceeds
from the sale of the assets are available to pay off TAS' remaining
liabilities.
In order to account for the fact that certain assets were
left behind in TAS, we have adjusted the amount of liabilities
outstanding after the 1990 transfer. We did this by writing
down the value of the assets by taking a weighted average of
the earlier write downs and subtracted this amount from the
outstanding liabilities.
We then divided the benefits by ILVA's sales in the POI.
On this basis, we determine the estimated net subsidy to be
12.10 ad valorem for all manufacturers, producers, and exporters
in Italy of the subject merchandise.
B. Interest-Free Loans to ILVA
In 1992, ILVA received a 300 billion lire payment from IRI.
At verification, we reviewed documents which established this
payment as a ``provisional'' or ``anticipated'' capital increase.
The reason that the payment was provisional was that before
it could be considered as an equity infusion, authorization
was needed from: (1) The shareholders, and (2) the EC.
IRI clearly intended that the money become share capital,
as there were no arrangements for repayment (e.g., a repayment
schedule), nor was interest to be paid. Therefore, as IRI was
the sole shareholder in ILVA, its approval was a formality and
the only real condition was the EC approval. If the EC approval
was not received, the amount would have to be repaid to IRI.
Although the GOI asked for the EC's approval, it was not granted
during the POI.
ILVA's 1992 Annual Report shows that the company received
a similar payment from IRI in 1991 which was entered in its
accounting records in the same way as the 300 billion payment
received in 1992. At verification, we learned that the background
to the 1991 payment was the same as for the 1992 payment.
Because these payments were not converted to equity prior
to the end of the POI, we cannot find the payments to be equity
infusions. Thus, we have determined to treat the payments as
short-term interest-free loans, which are being rolled over
until such time as they are repaid or converted to equity upon
EC approval.
The typical maturity in Italy for short-term loans is at
most six months and roll-overs are common. In accordance with
§ 355.44(b)(3)(i) of the Proposed Regulations, we used the 1992
International Monetary Fund's annualized ``lending rate,'' converted
to a semi-annual interest rate as the short-term benchmark interest
rate. Since ILVA paid zero interest, the benefit to ILVA was
the interest it would have owed on both payments. These benefits
were then divided by ILVA's sales in the POI. On this basis,
we determine the estimated net subsidy to be 0.49 percent ad
valorem for all manufacturers, producers, and exporters in Italy
of the subject merchandise.
C. Equity Infusions
The GOI, through IRI, provided new equity capital to Terni,
TAS, or ILVA in every year from 1978 through 1991, except in
1979, 1983, 1989, and 1990. Respondents have not provided any
argument refuting our preliminary determination that the GOI's
equity investments were provided specifically to the steel industry.
As discussed above, we have determined that Terni, TAS, and
ILVA were unequityworthy in each year that they received new
equity capital. Therefore, these provisions of equity were inconsistent
with commercial considerations and are countervailable.
To calculate the benefit for the POI, we treated each of
the equity amounts as a grant and allocated the benefits over
a 15-year period. (Our treatment of equity as grants and our
choice of allocation period is discussed in the GIA, at 37239
and 37225, respectively.)
In the preliminary determination, we treated a capital increase
received by ILVA in the amount of 205,097 million lire in 1990
as a countervailable equity infusion because ILVA reported it
as an equity infusion in its responses. At verification, we
established that the amount reported as an equity infusion was,
in fact, due to the transfer of residual assets from Italsider,
TAS, and Finsider, which were all in liquidation. As explained
in connection with the 1988-1990 restructuring, we do not consider
the transfer of assets in connection with a restructuring to
be an ``equity infusion'' since the transfer merely redistributes
existing assets. Therefore, we have excluded the amount of this
capital contribution from our calculations.
For the equity infusions provided to Terni and TAS, we have
divided the benefit allocated to the POI by the sales of the
Specialty Steels Division of ILVA. We chose this sales denominator
because this division most closely resembles the former companies,
Terni and TAS. For equity infusions into ILVA, we used ILVA's
sales as our denominator, as benefits from these investments
are not tied to any division of ILVA. On this basis, we find
the estimated net subsidy to be 9.71 percent ad valorem for
all manufacturers, producers, and exporters in Italy of the
subject merchandise.
D. The Transfer of Lovere and Trieste to Terni in 1982
As discussed in the ``Corporate History'' section of this
notice, Lovere and Trieste were transferred from Italsider to
Terni as part of a 1982 restructuring.
We have determined that this transaction is correctly characterized
as an internal corporate restructuring. No new equity capital
was provided to Terni through the transfer of these assets.
However, just as subsidies given to Terni and TAS continued
to bestow a benefit on ILVA when ILVA received TAS' assets,
subsidies received by Italsider flowed to Terni when Terni received
Lovere and Trieste.
We determined the amount of Italsider's subsidies attributable
to Lovere and Trieste by calculating the percentage of assets
these two companies represented of the total Italsider assets.
We applied this percentage to the ``untied'' subsidies received
by Italsider to calculate the portion of the benefit that flowed
to Terni when it received Lovere and Trieste.
The benefit allocated to the POI was divided by the total
sales of the Specialty Steels Division of ILVA. On this basis,
we find the estimated net subsidy to be 0.41 percent ad valorem
for all manufacturers, producers, and exporters in Italy of
the subject merchandise.
E. Law 675/77 Preferential Financing
Law 675/77 was designed to bring industrial assistance measures
from the GOI under a single system. The program had at its core
three main objectives: (1) the reorganization and development
of the industrial sector as a whole; (2) the increase of employment
in the South; and (3) the promotion of employment in depressed
areas. To achieve these goals, Law 675/77 provided six types
of benefits: (1) grants to pay interest on bank loans; (2) mortgage
loans provided by the Ministry of Industry (``MOI'') at subsidized
interest rates; (3) other grants to pay interest on loans financed
by IRI bond issues; (4) capital grants for the South; (5) VAT
reductions on capital good purchases for companies in the South;
and (6) personnel retraining grants. (The fourth, fifth, and
sixth components of Law 675/77 are discussed below.)
As we stated in our preliminary determination, the GOI identified
a number of different sectors as having received benefits under
Law 675/77. These sectors were: (1) Electronic technology; (2)
the mechanical instruments industry; (3) the agro-food industry;
(4) the chemical industry; (5) the steel industry; (6) the pulp
and paper industry; (7) the fashion sector; (8) the automobile
industry; and (9) the aviation sector. Law 675/77 also sought
to promote optimal exploitation of energy resources, and ecological
and environmental recovery.
Despite the fact that Law 675/77 benefits were available
to and used by numerous and varied industries, we preliminarily
determined Law 675/77 benefits specific within the meaning of
section 771(5)(A)(ii) of the Act, and therefore, countervailable
because the steel industry was a dominant user pursuant to section
355.43(b)(2)(iii) of the Proposed Regulations. It received 34
percent of the benefits provided under the interest subsidy
and capital grant components of the program.
The GOI has argued that the steel and automobile industries
did not receive a disproportionate share of benefits when the
extent of investment in those industries is compared to the
extent of investment in other industries.
We did not consider the level of investment in the industries
receiving benefits under Law 675/77. Instead, we followed the
policy explained in Final Affirmative Countervailing Duty Determination:
Certain Steel Products from Brazil, 58 FR 37295, 37295 (July
9, 1993), of comparing the share of benefits received by the
steel industry to the collective share of benefits provided
to other users of the program. Consistent with our determination
in Final Affirmative Countervailing Duty Determination: Certain
Steel Products from Italy (``Certain Steel from Italy''), 58
FR 37327 (July 9, 1993), we found that the steel industry accounted
for 34 percent of the benefits and the auto industry accounted
for 33 percent of the benefits. Thus, these two industries represented
77 percent of the assistance while the remainder was spread
among the other seven industries.
On this basis, we determine that the steel industry was a
dominant user of programs under Law 675/77 and, therefore, that
benefits received by ILVA under this law are being provided
to a specific enterprise or industry or group of enterprises
or industries. Therefore, we find Law 675/77 financing to be
countervailable to the extent that it is provided on terms inconsistent
with commercial considerations.
1. Grants to Pay Interest on Bank Loans
Italian commercial banks provided long-term loans at market
interest rates to industries designated under Law 675/77. The
interest owed by the recipient companies on these loans was
offset by contributions from the GOI. Terni received bank loans
with Law 675/77 interest contributions which were outstanding
in the POI.
To determine whether this assistance conferred a benefit,
we compared the effective interest rate paid on these loans
to the benchmark interest rate, described above. Based on this
comparison, we determine that the financing provided under this
program is inconsistent with commercial considerations, i.e.,
on terms more favorable than the benchmark financing.
Because Terni knew that it would receive the interest contributions
when it obtained the loans, we consider the contributions to
constitute reductions in the interest rates charged rather than
grants (see Certain Steel from Italy at 37331).
Therefore, to calculate the benefit, we used our standard
long-term loan methodology as described in § 355.49(c)(1) of
the Proposed Regulations. We divided the benefit allocated to
the POI by the sales of the Specialty Steels Division of ILVA.
On this basis, we determine the estimated net subsidy to be
0.03 percent ad valorem for all manufacturers, producers, and
exporters in Italy of the subject merchandise.
2. Mortgage Loans from the Ministry of Industry
Under Law 675/77, companies could obtain long-term low-interest mortgage
loans from the Ministry of Industry. Terni received several
loans which were still outstanding in the POI.
To determine whether these loans were provided on terms inconsistent
with commercial considerations, we used the benchmark interest
rates described above. Because the interest rates paid on the
Law 675/77 loans were below the benchmark interest rates, we
determine that loans provided under this program are countervailable.
We calculated the benefit using our standard long-term loan
methodology. We then divided the benefit allocated to the POI
by the sales of the Specialty Steels Division of ILVA. On this
basis, we determine the estimated net subsidy from this program
to be 0.30 percent ad valorem for all manufacturers, producers,
and exporters in Italy of the subject merchandise.
3. Interest Contributions on IRI Loans/Bond Issues
Under Law 675/77, IRI was allowed to issue bonds to finance
restructuring measures of companies within the IRI Group. The
proceeds from the sale of the bonds were then re-lent to IRI
companies. The effective interest rate on such loans was reduced
by interest contributions made by the GOI. Terni had two of
these loans outstanding during the POI. Both loans had variable
interest rates.
To determine whether these loans were countervailable, the
Department used a long-term variable rate benchmark as described
in § 355.44(B) of the Proposed Regulations. We compared this
benchmark rate to the effective rates paid by Terni in the years
these loans were taken out and found that these loans were provided
on terms inconsistent with commercial considerations.
To determine the benefit, we first calculated the difference
between what was paid on these loans during the POI and what
would have been paid during the POI had the loans been provided
on commercial terms. We divided the resulting difference by
the sales of the Specialty Steels Division of ILVA. On this
basis, we determine the estimated net subsidy from this program
to be 0.26 percent ad valorem for all manufacturers, producers,
and exporters in Italy of the subject merchandise.
F. Urban Redevelopment Financing Under Law 181/89
Law 181/89 was implemented to ease the impact of employment
reductions in the steel crisis areas of Naples, Taranto, Terni,
and Genoa. The program had four main components: (1) reindustrialization
projects; (2) job promotion; (3) training; and (4) early retirement.
(Early retirement under Law 181/89 was not used by ILVA and
the job promotion component has been found not countervailable
(see relevant sections below).
Because benefits under this program are limited to specific
regions, we determine that assistance under this program is
limited to a group of industries in accordance with section
355.43(b)(3).
1. Reindustrialization Under Law 181/89
Under the reindustrialization component of Law 181/89, the
GOI partially subsidized certain investments. ILVA received
payments under Law 181/89 for a training center to update the
technical skills of its workers. Training also took place at
this center to improve workers' skills for employment outside
the steel industry.
Since the information provided to the Department indicates
that the center supported the training of steel workers who
continued to be employed by ILVA, we determine that ILVA received
a benefit from reindustrialization payments under Law 181/89.
In addition, we established that ILVA received payments under
Law 181/89 for service centers. However, these service centers
were involved in steel processing unrelated to electrical steel.
Therefore, payments to these service centers were not included
in our calculations.
To calculate the benefit to ILVA during the POI, we used
our standard grant methodology (see § 355.49(b) of the Proposed
Regulations) and the discount rate described above. It is the
Department's practice to treat training benefits as recurring
grants (see GIA at 37226).
Accordingly, we divided the amount received in the POI by
the 1992 sales of the ILVA. On this basis, we determine the
estimated net subsidy to be 0.00 percent ad valorem for all
manufacturers, producers, and exporters on Italy of the subject
merchandise.
2. Worker Training
Retraining grants were provided to ILVA under Law 181/89.
These funds constituted the GOI's matching contribution to ECSC
Article 56(2)(b) training grants (see ECSC Article 56 Redeployment
Aid section below).
Since information provided at verification indicates that
these funds were used to train workers remaining at ILVA, we
determine that the GOI's training contribution under Law 181/89
constitutes a benefit to ILVA.
It is the Department's practice to treat training benefits
as recurring grants (see GIA at 37226). Accordingly, we divided
the amount received by the sales of the Specialty Steels Division
of ILVA. On this basis, we determine the estimated net subsidy
from this program to be 0.10 percent ad valorem for all manufacturers,
producers, and exporters in Italy of the subject merchandise.
G. ECSC Article 54 Loans
Under Article 54 of the 1951 ECSC Treaty, the European Commission
can provide loans directly to iron and steel companies for modernization
and the purchase of new equipment. The loans finance up to 50
percent of an investment project. The remaining financing needs
must be met from other sources. The Article 54 loan program
is financed by loans taken by the Commission, which are then
re-lent to iron and steel companies in the member states at
a slightly higher interest rate than that at which the Commission
obtained them.
ILVA had outstanding Article 54 loans in the POI. These loans
were transferred to ILVA as part of the partial transfer of
Terni's assets and liabilities in 1989. Two of these loans were
denominated in U.S. dollars and two in European Currency Units
(``ECU'').
Because Article 54 loans are limited to iron and steel companies,
we find these loans to be specific and, therefore, countervailable
to the extent that they were provided on terms inconsistent
with commercial considerations.
Because these loans were denominated in foreign currencies,
we used foreign currency benchmarks for our preliminary determination.
However, the Article 54 loans had exchange rate guarantees that
allowed Terni to calculate the maximum lire amount payable (see
Law 796/76 Exchange Rate Guarantee Program described below).
Since these loans were effectively insulated from any future
changes in the exchange rate, we are not using foreign currency
benchmark interest rates as we did in the preliminary determination.
Rather we are using the uncreditworthy benchmark discussed in
the Benchmark and Discount Rate section above.
At verification we found that one of the U.S. dollar loans
had been assumed by Terni when it became the parent company
of the original debtor. We are using the uncreditworthy benchmark
interest rate for the year in which the loan was assumed by
Terni in order to calculate the benefit from this loan, as that
was the year in which Terni incurred the liability.
Because the interest rates paid on all the Article 54 loans
were below the benchmark interest rates, we determine that the
loans provided under this program are countervailable. We calculated
the benefit using our standard long-term loan methodology. We
then divided the benefit allocated to the POI by the sales made
by the Specialty Steels Division of ILVA. On this basis, we
determine the estimated net subsidy to be 1.02 percent ad valorem
for all manufacturers, producers, and exporters in Italy of
the subject merchandise.
II. Programs Determined To Be Not Countervailable
A. Early Retirement
In Certain Steel from Italy, we determined that the threat
of strikes and social unrest prevented Italian steel companies
from laying off surplus labor. As a result, these companies
were effectively obligated to retain their workers until the
workers reached retirement age. Given this obligation, when
the GOI created a program to allow for early retirement, we
determined that the steel companies had been relieved of the
burden of retaining these employees at full salary until the
normal retirement age.
In the preliminary determination of this investigation, we
relied on Certain Steel from Italy and determined that early
retirement provided a countervailable benefit which we measured
as the savings to ILVA arising from not having to pay wages
to the workers who took early retirement in the POI.
At verification in this case, the GOI provided evidence showing
that companies in Italy have the legal right to fire workers.
Small companies (those with less than 15 employees) could simply
eliminate surplus workers. Large companies, however, go through
certain steps and procedures before they can lay workers off
(other than for cause). The procedures and the benefits paid
to employees laid off by these companies are provided for in
Law 223/91.
Law 223/91 provides two means of removing surplus workers:
early retirement and lay-offs under CIG-S.
1. Early Retirement
Early retirement is regulated in two separate articles of
Law 223/91, both of which were used by ILVA workers in the POI.
Each article has different eligibility criteria, but essentially
the program is available to companies in high-technologies and
competitive industries that are undergoing restructuring. Under
both articles, the companies pay 30 percent of the early retirement
benefits, while the GOI pays the rest. The GOI sets an annual
cap on the number of workers that can be retired under this
provision. In 1992, 21 percent of the quota was set aside for
steel workers.
2. CIG-S
CIG-S (the extraordinary compensation fund) is also regulated
by Law 223/91. CIG-S provides for lay-offs by companies that
(1) are undergoing restructuring, (2) have more than 15 employees,
and (3) belong to a wide range of industries. The GOI must approve
use of this program, under which laid-off workers receive a
certain percentage of their wages for three years. Thereafter,
they may receive further compensation under a follow-up program
(mobility). The GOI pays 80 percent and the companies 20 percent
of the benefits.
In a meeting with a U.S. Embassy official at verification,
we learned that approximately 25 percent of the Italian workforce
is employed in companies eligible for the provisions under Law
223/91. The remaining 75 percent work for companies that do
not have to offer their employees any benefits upon separation
except the obligatory severance payment that is also paid to
workers who take early retirement or are placed on the CIG-S.
Employees in these smaller companies who are laid off receive
only government-provided unemployment compensation.
ILVA, on the other hand, belongs to that category of companies
(larger companies in structural and economic crisis), that have
to undertake certain specific steps before actually getting
rid of surplus labor. Therefore, the alternatives facing ILVA
are early retirement and the permanent lay offs under CIG-S,
provided under Law 223/91.
In determining whether worker benefits such as early retirement
confer a subsidy on the company, we look to whether the company
has been relieved of an obligation it would otherwise incur.
(See section 355.44(j) of the Proposed Regulations.) In this
instance, we find that, in the absence of the early retirement
program, the obligation that would be incurred is that imposed
by the alternative available to ILVA, the CIG-S program. We
have found that large companies in a wide variety of industries
that are undergoing restructuring can use the CIG-S program
to lay off workers. Therefore, we believe that this program
establishes the benchmark for the obligations ILVA would otherwise
have towards the workers it retires early.
Based on the information we have received, we have not been
able to make an exact comparison of the financial obligations
ILVA would incur under CIG-S as opposed to the early retirement
scheme. Because the benefits paid to a worker under early retirement
can extend from one to more than ten years (whereas CIG-S payments
are limited to three years) and because the percentage paid
by the company is based on different amounts (the worker's pension,
which varies from worker to worker, for early retirement and
the worker's salary for CIG-S), we are doubtful that exact comparisons
can be made. However, we have used the information we have and
made certain limited assumptions to calculate the financial
obligations on ILVA imposed by early retirement exceed the financial
obligations that would be imposed by CIG-S. (See Memorandum
from Team to Barbara R. Stafford dated April 11, 1994 on file
in room B-099 of the main Commerce Building.) Therefore, we
find that the early retirement program is not countervailable.
B. Law 796/76 Exchange Rate Guarantee Program
This program applies to foreign currency loans taken out
by Italian companies. Under the program, repayment amounts are
calculated by reference to the exchange rate in effect at the
time the loan is taken out. If the exchange rate changes over
time, the program sets a ceiling and a floor to limit the effect
of the exchange rate change on the borrower. For example, if
the lire depreciates five percent against the DM (the currency
in which the loan is taken out), borrowers would normally find
that they would have to repay five percent more (in lire terms).
However, under the Exchange Rate Guarantee Program, the ceiling
would act to limit the increased repayment amount to two percent.
There is also a floor in the program which would apply if the
lire appreciated against the DM. The floor would limit any windfall
to the borrower.
In the preliminary determination (as in Certain Steel), we
found this program to be de jure specific because we believed
the program was limited to ECSC loans. However, we discovered
at the verification in this investigation that we had overlooked
information in the response which indicated that guarantees
under this program were also available for loans made by the
Council of Europe Resettlement Fund (``CER''). We attempted
to learn more about the program's de facto specificity at verification
as it became clear that the program was not de jure specific.
We established that exchange rate guarantees for CER loans
are provided for in Law 796, the same law that provides guarantees
for ECSC loans. We learned that CER loans are designed to improve
social conditions in the weakest sectors of society by providing
loans to small- and medium-sized businesses to create employment
opportunities. Officials named the following examples of areas/activities
that receive funds from the CER: agriculture, handicraft, tourism.
We examined certain loan documents and established that guarantees
were in effect on CER loans. However, given the limited time
and the manner in which the data were organized, Italian officials
were not able to provide information regarding the distribution
of benefits provided to CER and ECSC borrowers.
Based on the information we have, the exchange risk guarantees
may be non-specific. Moreover, we cannot draw adverse inferences
regarding the distribution of benefits under the program because
the GOI was not uncooperative or otherwise remiss in providing
the requested data. Therefore, we determine that the program
is not countervailable.
Given the circumstances under which we have reached this
determination, i.e., lacking certain important information,
this finding of non-countervailability will not carry over to
future investigations. Therefore, until a fuller record is developed
which allows us to undertake a thorough analysis, petitioners
will not have to provide new evidence in order for us to investigate
this program. In addition, we intend to reinvestigate this program
in the first administrative review requested should this investigation
result in a countervailing duty order.
C. Finsider Loan Guarantees
Certain loans made to Terni were assumed by ILVA, and were
still outstanding during the POI. At the time the loans were
taken out they were guaranteed by Finsider, the holding company
of Terni and then TAS. Finsider entered into liquidation in
1988. Nevertheless, ILVA continued to pay the guarantee fees
for these loans to Finsider until 1991. At that time, ILVA ceased
to pay guarantee fees to Finsider and, in essence, ``self-guaranteed''
these loans.
Petitioners argue that the Department should countervail
these loan guarantees because: (1) The fees paid for the guarantees
were less than what would have been paid to a commercial guarantor;
and (2) guarantees to Terni, an uncreditworthy company, constitute
government intervention ensuring the extension of the loans.
Although information obtained at verification indicates that
ILVA paid Finsider less than it would have paid a commercial
guarantor, we have concluded that ILVA received no benefit.
Given that Finsider was in liquidation and presumably could
not have carried out the guarantee, ILVA was receiving nothing
in exchange for its payments. Therefore, we find that these
loan guarantees are not countervailable.
D. Interest Grants for ``Indirect Debts'' Under Law 750/81
At verification, we established that Law 750/81 was passed
as a result of the 1981 Iron and Steel plan to provide interest
grants to sectors within the steel industry which were designated
as strategic sectors. The program was in place from 1981 through
1983.
One of the sectors designated as a strategic sector was forgings
and castings, as these steel products were used in the construction
of electrical power plants. Since Terni was the only producer
of this type of forgings and castings, the GOI provided assistance
to Terni to allow it to reach full production capacity.
Because these benefits were provided for the production of
forgings and castings, we determine that they do not provide
a benefit to the subject merchandise.
E. ECSC Article 56 Redeployment Aid
Under Article 56(2)(b) of the ECSC Treaty, redeployment assistance
is provided to workers affected by the restructuring of the
coal and steel industries in the ECSC member states. The assistance
consists of the following types of grants: (1) Income support
grants for workers affected by unemployment, re-employment at
a lower salary or early retirement; (2) grants to enable companies
to continue paying workers who have been laid off temporarily;
(3) vocational training grants; and (4) resettlement grants.
The decision to grant Article 56 assistance is contingent upon
a matching contribution from the member state.
The portion of Article 56 redeployment grants funded by the
ECSC comes from the European Commission's operational budget
for the ECSC steel program. This budget is funded by (1) levies
imposed on coal and steel producers in the member countries;
(2) income from ECSC's investments; (3) guarantee fees and fines
paid to the ECSC; and (4) interest received from companies that
have obtained loans from the ECSC.
Because payments from the ECSC under Article 56 are sourced
from producer levies, we find them to be not countervailable
(see Certain Steel from Italy at 37336). (The matching contributions
from the GOI for the training elements of Article 56 were discussed
above under Law 181/89.)
F. European Social Fund (``ESF'') Grants
The ESF was established by the 1957 European Economic Community
Treaty to increase employment and help raise the living standards
of workers.
We found in Certain Steel from Italy that the ESF receives
its funds from the EC's general budget, whose main revenue sources
are customs duties, agricultural levies, value-added taxes collected
by the member states, and other member state contributions.
The member states are responsible for selecting the projects
to be funded by the EC. The EC then disburses the grants to
the member states which manage the funds and implement the projects.
According to the EC, ESF grants are available to (1) people
over 25 who have been unemployed for more than 12 months; (2)
people under 25 who have reached the minimum school-leaving
age and who are seeking a job; and (3) certain workers in rural
areas and regions characterized by industrial decline or lagging
development.
ESF grants received by Italy were used for two purposes:
(1) training laid-off employees for jobs outside the sector
in which they had previously been working; and (2) training
of workers to perform new jobs within the same company.
Every region in Italy has received ESF funds. Therefore,
we determine that this program is not regionally specific within
the meaning of § 355.43(b)(3) of the Proposed Regulations. Furthermore,
we note that to the extent there is any disproportionality in
the regional distribution of ESF benefits (i.e., to the regions
of southern Italy), it has not resulted in a countervailable
benefit to the production of the subject merchandise, which
is produced in northern Italy.
G. Aid Under the National Research Plan
In 1985, the Ministry for University, Technology and Scientific
Research assigned 19 billion lire to Terni under the National
Research Plan for steel. The research funds covered costs of
personnel assigned to specific research projects in research
laboratories. The research under this plan was contracted out
to Terni as the result of a competitive bidding process.
At verification, we established that the assistance under
the National Research Plan was provided under Law 46/82. Under
the same law, the GOI has supported similar research plans for
17 other industries or sectors. Moreover, documentation provided
by the GOI showed that the steel industry did not receive a
disproportionate share of the funds provided for research plans.
Thus, we determine that benefits under the program are not
limited to a specific enterprise or industry or group of enterprises
or industries. Therefore, we find this program to be not countervailable.
H. Job Promotion Under Law 181/89
The job promotion component of Law 181/89 involved a number
of measures designed to promote self-employment among workers
in Naples, Taranto, Terni, and Genoa. These measures included,
among others, assisting former workers in starting their own
businesses, providing specialized management training, and increasing
the level of financing available to new businesses. In general,
these measures were coordinated by an IRI-owned company, Societa
Finanziaria di Promozione e Sviluppo Imprenditoriale.
Based on the information provided at verification, we determine
that the ``job promotion'' component of Law 181/89 provides
for workers leaving the steel industry. Moreover, there is no
indication that ILVA (or other companies in Italy) had an obligation,
legal or otherwise, to provide assistance to workers leaving
the steel industry. Therefore, we determine that ILVA did not
receive a benefit from assistance provided under the job promotion
component of Law 181/89.
III. Programs Which Were Not Used or Which Did Not Benefit the
Subject Merchandise in the POI
A. We established at verification that the following programs
were not used during the POI.
1. Subsidized Export Financing Under Law 227/77
2. Early Retirement Provision under Law 181/89
3. Personnel Retraining Grants under Law 675/77
B. We established at verification that loans provided under
the following programs were not outstanding in the POI.
1. Finsider Loans
2. Interest Subsidies under Law 617/81
3. Financing under Law 464/72
C. We established at verification that the following programs
were directed to the South of Italy. Since production of the
subject merchandise takes place outside the South, we determine
that these programs did not benefit the subject merchandise.
1. Law 675/77 Capital Grants
2. Reductions of the Value Added Tax (``VAT'') under Law 675/77
3. Interest Contributions under the Sabatini Law (Law 1329/65)
4. Social Security Exemptions
5. ILOR and IRPEG Exemptions
Interested Party Comments
Comment 1
Petitioners argue that the Department's preliminary decision
to measure subsidization by a comparison of TAS' equity before
and after restructuring, which they labeled the ``snapshot''
approach, was improperly substituted for, and contrasts sharply
with, the cash flow approach the Department has historically
used to measure subsidies. Petitioners allege that by focusing
only on the differences in TAS' balance sheet at two different
points in time, to the exclusion of a review of the intermediate
activities undertaken by the GOI to bestow funds on ILVA, the
Department ignored the full measure of debt forgiveness and
other assistance provided to ILVA.
Petitioners also argue that the problem with the Department's
approach is that it ignored the sizeable liabilities and negative
equity position left behind in the ``empty shell'' of TAS which
were brought about by the restructuring as a result of the artificial
separation of TAS' assets and liabilities. Petitioners maintain
the Department's approach focuses exclusively on net changes
in equity, regardless of the individual transactions that caused
the changes which would have been captured in a cash flow analysis.
According to petitioners, the only way to accurately measure
the subsidies provided to Terni/TAS is to identify and measure
the value of each individual transaction, be it a grant, equity
infusion, debt forgiveness, or loss coverage.
Respondents contend that the Department should exclude from
the calculation of any countervailable subsidy any of the TAS
assets transferred to ILVA or assets remaining in TAS. In addition,
respondents argue that changes in TAS' equity position resulting
from the official appraisal of assets and liabilities conferred
no countervailable benefit to ILVA. Furthermore, according to
respondents, assets and liabilities remaining in TAS could not
have conferred a countervailable benefit to ILVA. Finally, respondents
argue that § 355.48 of the Proposed Regulations explicitly provides
for a departure from the cash flow methodology in ``unusual
circumstances.'' Respondents argue that it would be unreasonable
to review each of the transactions as suggested by petitioners
because of the extreme complexity of the transactions involved
in this case. Respondents maintain the Department has performed
a transaction-specific analysis wherever practicable.
DOC Position
Insofar as our preliminary determination focused on the change
in the net equity position of TAS, it failed to account for
certain liabilities and losses left behind in TAS. In this final
determination, we have addressed this shortcoming. We recognize
that the restructuring resulted in TAS holding liabilities and
absorbing losses, and that those liabilities and losses would
somehow have to be covered. As ILVA would not be covering them,
ILVA received a benefit in that amount.
However, we disagree with petitioners that the so-called
snapshot approach cannot be substituted for the cash flow approach
traditionally used by the Department. First, our approach in
this final determination is consistent with the methodology
used to assess countervailable benefits arising out of restructuring
in Certain Steel from Austria. Second, it fully and accurately
measures the benefits conferred on the production of the subject
merchandise. Finally, petitioners misuse the concept of the
cash flow effect.
As explained above, in Certain Steel from Austria, when the
company producing steel was restructured, we found that a benefit
to the new company arose because the new company did not receive
any of the losses accumulated by the former company. There was
no specific act of payment or loss coverage undertaken by the
Government of Austria to eliminate those losses as part of the
restructuring. Instead, the losses were simply left behind in
the former company. In Certain Steel from Austria, these losses
left in the ``shell'' company were determined to be countervailable.
Similarly, in the case of restructuring TAS into the Specialty
Steels Division of ILVA, the liabilities and losses left behind
in TAS have been found to give rise to a benefit to ILVA. There
was one specific act of debt forgiveness between Finsider and
TAS. That was accounted for in our calculations, but only as
a part of the totality of the restructuring action.
We further believe that the snapshot approach has fully captured
the benefit to the subject merchandise. Based primarily on the
annual reports of IRI, Finsider and TAS, petitioners have developed
a long list of ``subsidies'' that include IRI's forgiveness
of Finsider's debt and numerous and varied forms of payments
to TAS throughout and subsequent to the restructuring. We have
concluded that countervailing subsidies from IRI to Finsider
and from Finsider to TAS would lead to an overstatement of the
benefit. (See DOC response to Comment 2.)
With respect to the subsidies received by TAS after the second
asset transfer to ILVA (e.g., interest paid to TAS on its shares
in ILVA, capital gain on real estate received by TAS, etc.),
we recognize that these payments did, in fact, reduce the liabilities
in TAS. However, because we included in the restructuring benefit
the amount of liabilities remaining in TAS after the second
transfer, we have already captured the benefits from these subsidies.
This is similar to the situation that occurred in Certain
Steel from Austria. As discussed above, we treated as a subsidy
the amount of losses left behind in the former company, without
regard to whether there was a specific act by the government
to cover those losses. In fact, the Government of Austria did
make a payment a few years later to that company. Recognizing
that the second transaction was basically to clean up the company's
books for an event that had occurred earlier (the failure to
transfer losses), we did not countervail the payment by the
Government of Austria as it would have amounted to double-counting.
Finally, petitioners misuse the concept of cash flow effect
when they argue that this concept prohibits us from using a
snapshot approach. Cash flow effects do not identify subsidies.
Instead, the cash flow concept tells us when to assign the benefit
from a particular subsidy. For example, the cash flow concept
tells us to assign the benefits received from a subsidized loan
to the point in time when the company would have made the interest
payment because this is when the company's cash flow is affected.
In this case, the effect on ILVA of not assuming TAS' liabilities
and losses occurred when the assets were transferred, in 1989
and 1990, and we have assigned the benefits to these years.
Comment 2
Petitioners argue that the Department did not directly address
the question of the benefit to the Finsider group as a whole,
and through the Finsider group to TAS, of a multi-billion lire
debt forgiveness provided in connection with the 1988/90 steel
industry restructuring. The only debt forgiveness that was included
in the Department's preliminary calculations was the 99.9 billion
lire in debt forgiveness provided to TAS.
Petitioners claim that the Department should countervail
a debt forgiveness in the amount of 6.2 trillion lire to the
Finsider Group in 1988 and allocate the resulting benefit over
a sales denominator reflecting the scope of operations of the
Finsider companies that were liquidated and merged into ILVA.
Moreover, petitioners argue that the Department should countervail
the 99.9 billion lire debt forgiveness provided specifically
to TAS in 1989 as a separate benefit.
Respondents argue that petitioners have failed to establish
that the forgiveness of Finsider's debt is tied to the subject
merchandise. Respondents argue that the 1988 debt forgiveness
to Finsider pre-dates the restructuring of Finsider into ILVA
by nearly one year. Thus, Finsider at the time of the debt forgiveness
was not the same company as it was when its assets were transferred
into ILVA. Respondents maintain that Finsider and TAS existed
and functioned as two separate corporate entities and, therefore,
argue that TAS was never potentially responsible for the assumption
of Finsider's debt. Respondents assert that only the 99.9 billion
lire debt forgiveness provided directly to TAS should be treated
as a countervailable debt forgiveness.
DOC Position
In the early stages of this investigation, it became clear
to us that there were two alternative approaches to addressing
the allegations in the petition regarding subsidies to the producers
of electrical steel. One approach would have been to analyze
the restructuring of the entire Finsider group into ILVA and
to examine all subsidies provided to Finsider by IRI and the
GOI. Using this approach we would, in essence, be measuring
subsidies provided to the Finsider group as a whole. Therefore,
we would not have allocated subsidies to any of the group's
operating companies, such as TAS.
The second approach would measure the subsidies provided
to the producer of the subject merchandise. In other words,
our analysis would focus on subsidies such as equity infusions,
loans, and grants specifically provided to the producer of the
subject merchandise, i.e., Terni/TAS and the Specialty Steels
Division of ILVA.
We chose the second approach for several reasons. First,
it is the Department's policy to try to ``tie'' subsidies to
the subject merchandise whenever possible (see GIA at 37267).
Second, since the Finsider group was very large, consisting
of numerous state-owned steel producers, only one of which produced
the subject merchandise, we believed it would be more appropriate
to focus our analysis on the producer of the subject merchandise.
Finally, due to the extremely complex restructuring which occurred
at the Finsider group level, we felt we would be able to more
accurately measure the subsidies provided to the producer of
the subject merchandise by following the second approach.
Petitioners have argued that the Department should countervail
the subsidies emanating from the debt forgiveness provided to
Finsider. Petitioners also argue that we should countervail
the 99.9 billion lire debt forgiveness provided to TAS as well.
However, countervailing both instances of debt forgiveness would
overstate the benefit to TAS because we would then be looking
at the forgiveness from two different levels of analysis at
the same time. As stated in the verification reports, the 99.9
billion debt forgiveness to TAS was part of the larger debt
forgiveness provided to Finsider. Therefore, in order to be
consistent with the approach chosen in this investigation, i.e.,
to focus on the producer of the subject merchandise, we are
countervailing only the debt and loss forgiveness provided to
TAS.
Comment 3
Petitioners argue that the 300 billion lire payment from
IRI to ILVA in 1992 should be countervailed as an equity infusion
and not as an interest-free loan. Petitioners maintain that
this capital contribution in 1992 was called an ``interest free
loan'' because, at that time, it had not been expressly approved
as an equity infusion. Also, petitioners point to the fact that
there was no loan agreement. Petitioners maintain that the Department
should not base its decision on ``technicalities'' such as the
EC's delayed approval and the continued absence of a shareholders'
decision approving a capital increase. Petitioners conclude
that since the Department determined at verification that the
EC has recently sanctioned this amount as an equity infusion,
the Department should treat it as such.
Petitioners also argue that the 10,900 million lire ``payment
on capital account'' to ILVA in 1991, which the Department found
at verification, should be countervailed as an equity infusion.
The nature of this payment was identical to that of the 1992
payment. Respondents argue that the Department's verification
confirmed that this 1992 infusion was a liability as opposed
to an equity infusion. Additionally, respondents state that
there were two conditions which had to be met before the 1992
capital contribution could be considered an equity infusion:
(1) Authorization from the EC; and (2) authorization from the
company's shareholder. Neither of these two conditions was met
during the POI and the amount was considered a ``provisional
capital increase.'' Thus, the Department properly recognized
the legal limitations placed on this fund and, treated it as
a short-term loan.
Respondents state that EC's preliminary approval of the capital
contribution in 1993 did not occur until nearly a year and a
half after the POI. Citing Countervailing Duty Determinations:
Certain Steel Products from France (``Certain Steel from France''),
58 FR 37313 (July 9, 1993), respondents argue that it is the
reclassification of debt into equity which itself constitutes
the potentially countervailable event in this case. According
to respondents, since the potentially countervailable event
took place after the POI, it is not subject to analysis in this
investigation.
DOC Position
Based on an analysis of the primary features of the 1991
and 1992 provisional capital contributions, we find that the
potential obligation to repay IRI (in the event that the EC
did not approve the capital contribution) effectively makes
these contributions contingent liabilities. To reflect their
contingent nature, we have modelled the provisional capital
contributions as short-term zero-interest loans which are rolled
over every six months until such time as they are repaid or
the EC approves their conversion to equity.
We disagree with respondents that Certain Steel from France
is applicable in this instance. In the French case, we were
looking at the year the debt-to-equity conversion occurred and
decided that the equity infusion was the potentially countervailable
event rather than the loan. In this case, the provisional capital
increase is being treated as a loan throughout the POI. Therefore,
there is no other potentially countervailable event in the POI.
We disagree with petitioners that there must be a loan repayment
schedule or payment of interest in order for the Department
to consider these payments to represent liabilities. The possibility
of repayment was real. Therefore, the provisional capital increase
is properly treated as a loan.
Comment 4
Petitioners argue that the scope of operations of the various
entities that produce(d) electrical steel (i.e., Terni, TAS,
and the Specialty Steels Division of ILVA) has changed significantly
over the years as a result of a series of restructurings. Petitioners
argue that since TAS was created during the 1987 restructuring
out of the assets of Terni, I.A.I. and Terninoss, Terni between
1978 and 1986 was not the same as the Specialty Steels Division
of ILVA after 1989, which includes the assets of I.A.I. and
Terninoss. According to petitioners, the Department must use
a denominator which represents the ability to generate sales
at the time a subsidy was given.
According to petitioners, the significant difference between
1986 sales of Terni and 1992 sales of ILVA's Specialty Steels
Division indicates that these two entities are similar in name
only. Petitioners note that, in cases involving a merger, it
is the Department's practice to perform a ``tying analysis''
in order to measure the benefits to the entity originally receiving
the subsidy. Petitioners argue that since the 1987 restructuring
of Terni cannot be separated from the overall Finsider restructuring,
the Department, as it did in the preliminary determination of
Certain Steel from Italy, should adjust ILVA's sales denominator
in order to ``reflect steel activities prior its restructuring.''
According to petitioners, the Department should use the sales
of ILVA's Specialty Steels Divisions Terni plant (plus its share
of intercompany sales) as the denominator for Terni-specific
loans and grants, thereby excluding the stainless steel activities
of ILVA's Specialty Steels Division.
Respondents argue that, since Terni's stainless steel producing
subsidiaries (I.A.I. and Terninoss), and other Terni assets
were merely merged into a new entity, TAS, which subsequently
became the Specialty Steels Division of ILVA, the restructurings
did not dramatically alter the entity producing the subject
merchandise. As such, according to respondents, the Department
should reject suggestions that stainless steel sales be subtracted
from the denominator.
Respondents further argue that the difference between Terni
sales in 1986 and ILVA's Specialty Steels Division sales in
1992 can be explained by increased activity in areas whose production
capability was enhanced pursuant to restructuring. Moreover,
respondents argue that a company's sales cannot be expected
to remain ``static'' as petitioners suggest. Finally, respondents
also argue that, according to the Department's ``pass-through''
methodology, the Department should find that the price paid
by TAS for I.A.I. and Terninoss represented the exchange of
one ``subsidized'' asset for another asset.
DOC Position
We disagree with petitioners that the 1987 restructuring
was so fundamental that a comparison cannot be made between
Terni and the Specialty Steels Division of ILVA. We believe
that it is incorrect to characterize the merger of I.A.I. and
Terninoss into TAS as the introduction of unrelated assets to
the producer of the subject merchandise. Since I.A.I. and Terninoss
were both subsidiaries of Terni prior to the 1987 restructuring,
we find no reason to eliminate stainless steel sales from the
Terni-specific denominator.
We do not disagree with petitioners that ILVA's sales have
to be adjusted to properly measure subsidies given to Terni/TAS.
As noted by petitioners, in Certain Steel from Italy the Department
adjusted ILVA sales to calculate subsidy margins for benefits
accruing to Italsider and/or Nuova Italsider. To accomplish
the same results in this investigation, we have used the sales
of the Specialty Steels Division of ILVA to calculate the subsidy
margin for Terni-specific benefits, rather than the sales of
ILVA.
Finally, we agree with respondents that a company's sales
cannot be expected to remain the same over time; i.e., a comparison
of nominal sales values separated by six years does not take
into consideration inflation or the internal economies of scale
resulting from restructuring.
Comment 5
Petitioners state that the Department did not use the highest
interest rate on the record of the investigation for calculating
the benchmark in its preliminary determination. Petitioners
note that the IMF interest rates that it submitted in the petition
are higher in some instances than the interest rate used by
the Department.
The GOI, on the other hand, argues that petitioners' suggestion
that the Department use the Italian ``lending rate,'' as provided
by the IMF, should be rejected since this is a short-term interest
rate. Therefore, according to the GOI, this interest rate should
not be considered representative of the highest long-term interest
rate in Italy. Respondents state that the Department, as it
did in the final determination of Certain Steel, correctly used
the reference rate provided by the Bank of Italy to calculate
benchmark rates.
DOC Comment
We note that the Bank of Italy's reference rate is the highest
average long-term fixed interest rate on the record of this
investigation. Because section 355.44(b)(6)(iv)(A) of the Proposed
Regulations lists short-term interest rates as the least preferred
choice for an uncreditworthy long-term interest rate benchmark,
we cannot use the IMF ``lending rate'' as suggested by petitioners.
Accordingly, the Department has continued to use the reference
rate plus 12 percent of the ABI prime rate for purposes of constructing
benchmark and discount rates.
Comment 6
Respondents argue that in cases involving companies experiencing
a major restructuring or expansion, the Department recognizes
that a reasonable private investor's analysis may depend on
the company's prospects, rather than its past financial experience.
Respondents cite to Certain Carbon Steel Products from Sweden,
58 FR 37385 (July 9, 1993) in support of their argument.
According to respondents, the ECSC Treaty permits government
investment in a state-owned steel company only in cases where
the EC determines that such investment is provided ``under circumstances
acceptable to a private investor operating under normal market
economy conditions.'' Because of this requirement, a team of
independent experts examined the GOI's proposed restructuring
plan and concluded that the implementation of the plan afforded
ILVA reasonable chances of achieving financial viability under
normal market conditions.
Respondents further argue that the Department has considered
the EC's approval of government equity investments as evidence
that the transaction confers no countervailable benefits. Respondents
cite to the administrative review of Industrial Nitrocellulose
from France, 52 FR 833 (January 9, 1987), which involved the
French nitrocellulose industry.
Petitioners argue that ILVA's claim of equityworthiness in
1988 is without merit. ILVA's predecessor companies, including
Terni, incurred losses in every year examined by the Department.
In addition, petitioners argue that nothing on the record suggests
that ILVA's prospects after 1988 were so optimistic as to overcome
years of poor financial performance and justify commercial investment
by a private investment company.
DOC Position
We agree with respondents that where a major restructuring
or expansion occurs, it may be appropriate to place greater
reliance on the future prospects of the company than would be
the case where an equity investment is made in an established
enterprise (see GIA at 37244). For example, in the Swedish Steel
case cited by respondents, we considered such factors as: (1)
The anticipated rate of return on equity; (2) the extended length
of time before the company was projected to be profitable; (3)
the prospects of the world steel industry; (4) the cost structure
of the company.
In this instance, the 1988 equity investment was made in
ILVA, a company which would differ from the operating companies
that went into it principally because of the substantial debt
forgiveness that occurred as part of the 1988-90 restructuring.
Relieved of this debt, ILVA's balance sheet, when it began operations
in 1989, would be much improved over that of its predecessor,
Finsider.
Beyond this, however, we have little indication of ILVA's
future prospects. There is no information on expected rates
of return, the time frame for achieving profitability, or developments
in the steel market that would allow us to reach a conclusion
that ILVA would yield a reasonable rate of return in a reasonable
period of time.
Respondents have discussed two indicators of the future prospects
of ILVA, the independent study undertaken by the EC and the
EC's decision allowing the investment. With respect to the study,
it was not placed on the record and we have had no opportunity
to analyze it. Without such analysis, we cannot simply accept
respondents' characterization of the study's conclusion.
We also disagree with respondents that the EC's finding on
this investment is dispositive. Our determinations of equityworthiness
are made in accordance with the Department's standards, not
the EC's. In Final Affirmative Countervailing Duty Determination:
Certain Hot Rolled Lead and Bismuth Carbon Steel Products from
France, 58 FR 6221, 6232 (January 27, 1993), we explicitly rejected
the EC approval of the investment as not relevant. In Industrial
Nitrocellulose from France, cited by respondents, the Department
performed its own analysis and, contrary to respondents' assertion,
did not rely on an EC finding. Respondents' reliance on ``principles
of comity'' (citing the Restatement (Third) of Foreign Relations
Law of the United States (ALI) section 481, is also inapposite,
because comity involves respecting foreign judgments regarding
the disposition of property and the status of persons.
Finally, while indicators of past performance may be less
important, we do not believe that a private investor would ignore
them entirely. As explained in our discussion of Terni's equityworthiness
above, that company had performed poorly. Similarly, Italsider,
another company that was restructured into ILVA, had performed
poorly (see Certain Steel from Italy). Therefore, the past performance
of companies that became ILVA offered no basis to believe that
the 1988 investment in ILVA was consistent with commercial considerations.
Comment 7
Respondents argue that the Department only countervails worker
assistance when a company is relieved of an obligation it would
otherwise incur. According to respondents, because it confirmed
at verification that Italian companies have no obligation to
retrain their workers, the Department should conclude that ECSC
Article 56 worker training is not countervailable.
DOC Position
First, it should be noted that we did not countervail the
portion of Article 56 retraining grants funded by the ECSC.
With respect to the portion funded by the GOI under Law 181/89,
we disagree that the workers assistance provision of the Proposed
Regulations is applicable in this situation. There is a distinction
between funds which cover the cost of upgrading the skills of
workers remaining at ILVA (which is a cost normally born by
the company to improve the efficiency of its work force), and
funds provided to train workers leaving ILVA, which we consider
a benefit solely to the worker. Only the former is properly
categorized as countervailable ``worker assistance'' under section
355.44(j) of the Proposed Regulations, to the extent that it
relieves the company of the cost of improving its workers' skills.
Since the GOI's contributions to match the ECSC Article 56
payments were only available to steel companies and these funds
were used to cover part of ILVA's costs of training workers
who remained at ILVA, we find that a countervailable benefit
is being provided.
Comment 8
The GOI states that, based on the clearer understanding gained
by the Department at verification regarding the types of loans
eligible for Law 796/76 exchange rate guarantees, this program
should be found not countervailable.
DOC Position
We note that the Department failed to send the GOI a deficiency
questionnaire indicating that more information was needed to
demonstrate the de facto use of Law 796/76. When it became evident
at verification that such information was needed, we attempted
to gather it. However, the information could not be provided
in the form necessary in the limited time available during verification.
Accordingly, we have not made the adverse inference that
this program is de facto specific to the steel industry. However,
we note that this finding of non-countervailability only relates
to this investigation and is subject to revision at the first
administrative review if a countervailing duty order is issued.
Comment 9
The GOI notes that exports of the subject merchandise to
the U.S. were not financed using Law 227/77. According to the
GOI, this financing should not be considered countervailable
because it is not limited to a particular industry and is also
consistent with the Organization for Economic Cooperation and
Development Understanding on official export credits. The GOI
argues that since this financing is permitted by a multilateral
agreement binding both the U.S. and Italy, it should not be
considered countervailable.
DOC Position
We found no countervailable benefits under this program because
ILVA did not use this financing for exports to the United States.
With respect to the other arguments raised by the GOI, since
this program provided export financing, its availability to
a large number of industries is not relevant. For export subsidies,
we need only find, pursuant to 355.43(a)(1) of the Proposed
Regulations, that the financing for exports is provided at preferential
rates. Second, although the U.S. and Italy participate in the
OECD arrangement which establishes the interest rates that can
be charged on export loans, nothing in that arrangement would
preclude the application of countervailing duties on merchandise
entering the U.S. which received subsidized financing.
Comment 10
Respondents note that at verification, the Department determined
that Law 181/89 actually had three components: (1) the creation
of alternative employment opportunities; (2) the development
of new industrial initiatives (``reindustrialization''); and
(3) worker retraining. Respondents state that the Department
further determined that ILVA only received funds under the reindustrialization
provision of Law 181/89.
Of the three reindustrialization projects, respondents claim
that two were tied to non-subject merchandise. Therefore, they
are not countervailable pursuant to section 355.47 of the Proposed
Regulations. The third reindustrialization project was a ``retraining
center.'' Respondents argue that the Proposed Regulations state
that ``worker assistance'' is only countervailable to the extent
that it relieves a company of an obligation that it would otherwise
incur (see section 355.44(j) of the Proposed Regulations). Since
there is no obligation in Italy to retrain workers, this project
does not provide a countervailable benefit.
DOC Position
As a matter of clarification, we found that Law 181/89 has
four components, the fourth being early retirement. However,
the early retirement component expired prior to the POI. Since
early retirement is typically considered a recurring benefit
and, therefore, allocable to the year in which received, we
did not establish the extent to which it had or had not been
used by ILVA.
Regarding the reindustrialization component, we agree that
two of the projects involved the further processing of non-subject
merchandise. Therefore, we have found them not countervailable.
However, with respect to the training center, we disagree
that this amounted to worker assistance within the meaning of
the Proposed Regulations. As discussed in Comment 7 above, there
is a distinction between worker assistance and funds that are
being used to cover the costs that ILVA would incur to train
its work force. Although not exclusively, the training center
in question is used to upgrade the technical skills of ILVA
workers. Therefore, we have determined that the GOI payments
to cover part of the cost of building a training center provide
a countervailable benefit to ILVA.
Comment 11
The GOI argues that the early retirement program would only
be countervailable if companies had no choice but to keep surplus
workers on the payroll. However, companies can carry out large-
scale lay-offs under Italian law. Thus, the GOI contends that
early retirement is an alternative to lay-offs and not an alternative
to maintaining excess workers. The GOI contends that because
companies are required to contribute to the costs for early
retirement, the program is a burden, not a benefit, to them.
The only beneficiaries under the early retirement program are
the workers.
Moreover, according to respondents, early retirement is available
to workers in a broad range of industries. The Department should,
therefore, find that there is no selective treatment under the
program.
According to petitioners, verification confirmed that early
retirement is only available to a limited group of industries.
Moreover, because use of early retirement under Article 27 is
contingent upon approval from a government committee, the GOI
exercises discretion in determining which industries can use
the program. Petitioners also argue that Italian companies have
an obligation to provide early retirement benefits once the
workers have opted for the program. The benefit should, therefore,
be calculated as the GOI's contribution to the program because
if government funds had not been provided, ILVA would have been
legally responsible for the entire cost, according to petitioners.
DOC Position
We agree with the GOI that, by law, companies in Italy can
carry out large-scale lay-offs. Moreover, we have no evidence
that Italian companies have a legal obligation to keep workers
on the payroll until they reach normal retirement age. However,
based on verification, we have found that some companies, including
ILVA, belong to a category of firms that must go through certain
``steps and procedures,'' in the form of the provisions under
Law 223/91 before they actually can reduce the workforce. In
practice, therefore, large companies are obligated to use Law
223/91 to deal with surplus workers.
Regarding the general availability of early retirement, the
structure of Law 223/91 is such that the early retirement option
is available to a smaller group of companies than the lay-off
option, CIG-S. Because the GOI was not able to provide evidence
showing that the steel producers did not receive a disproportionate
share of the quota granted under the early retirement option,
we have used CIG-S as our ``benchmark.'' Since the financial
obligations imposed on the company under early retirement are
more onerous that the obligations under CIG-S, we have determined
that ILVA did not receive a benefit under the early retirement
program.
Comment 12
Petitioners argue that the shares in ILVA owned by Italsider
(in liquidation) were transferred to TAS free-of-charge in 1990.
Respondents argue that ILVA did provide an invoice from Italsider
requesting payment from TAS but that ILVA was unable to locate
the payment record during verification. Moreover, respondents
argue that the Department never posed the question of payment
to TAS (in liquidation), nor did the Department verify the records
of TAS (in liquidation). Therefore, respondents argue, ILVA
should not be penalized for any missing information over which
it has no control.
DOC Position
As discussed above in connection with the 1988-90 restructuring,
petitioners alleged several subsidies to TAS after the second
asset transfer and receipt of Italsider's shares by TAS was
among them. As we explained, we believe that we have captured
the full benefit to the subject merchandise from the restructuring
without analyzing these individual transactions. Therefore,
TAS' payment or non-payment to Italsider is irrelevant to our
analysis.
However, although we did not verify that TAS (in liquidation)
paid Italsider for the shares, we do not believe that TAS kept
the proceeds from the sale. This is because the proceeds were
so large (1,563 billion lire) that they would have been more
than enough to pay off all of TAS' outstanding liabilities and
to return the company to a positive equity position. However,
as TAS' books indicate, this did not happen.
Comment 13
Petitioners maintain that although evidence presented at
verification may demonstrate that Terni received Law 750/81
funds based on its identity as a producer of forgings and castings,
the Department nevertheless found that Terni's accounting records
did not reflect that these grants were designated only for the
production of forgings and castings. Therefore, petitioners
argue that Terni treated and accounted for these grants as general
funds, and did not specifically allocate them to its forgings
and castings operations.
DOC Position
We find these grants to be not countervailable since they
applied to merchandise not subject to this investigation. We
disagree with petitioners' argument that Terni's treatment of
these funds as ``general funds'' demonstrates that they were
not specifically allocated to the production of forgings and
castings. We stated in the GIA that when a company receives
a general subsidy, the Department does not attempt to ``trace''
or establish how the subsidy was used. Conversely, if the subsidy
is tied to the production of merchandise other than the merchandise
under investigation, the Department also does not attempt to
trace or establish how the subsidy was ultimately used. Furthermore,
we believe that respondents provided sufficient documentation,
which is fully discussed in the ILVA verification report, that
grants under this program specifically applied to the production
of forgings and castings. As stated in the GIA at 37267, if
the benefit is tied to a product other than the merchandise
under investigation, the Department will not find a countervailable
subsidy on the subject merchandise.
Verification
In accordance with section 776(b) of the Act, we verified
the information used in making our final determination. We followed
standard verification procedures, including meeting with government
and company officials, examination of relevant accounting records
and examination of original source documents. Our verification
results are outlined in detail in the public versions of the
verification reports, which are on file in the Central Records
Unit (room B-099 of the Main Commerce Building).
Suspension of Liquidation
In accordance with our affirmative preliminary determination,
we instructed the U.S. Customs Service to suspend liquidation
of all entries of electrical steel from Italy, which were entered
or withdrawn from warehouse for consumption, on or after February
1, 1994, the date our preliminary determination was published
in the Federal Register. If the ITC issues a final affirmative
injury determination, we will instruct Customs to require a
cash deposit for entries of the merchandise after that date
in the amounts indicated below.
------------------------------------------------------------------------------
| Percent
------------------------------------------------------------------------------
|
Electrical Steel |
Country-Wide Ad Valorem Rate ................................ | 24.42
------------------------------------------------------------------------------
ITC Notification
In accordance with section 705(d) 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 Deputy Assistant Secretary
for Investigations, Import Administration.
If the ITC determines that material injury, or threat of
material injury, does not exist, these proceedings will be terminated
and all estimated duties deposited or securities posted as a
result of the suspension of liquidation will be refunded or
cancelled. If, however, the ITC determines that such injury
does exist, we will issue a countervailing duty order directing
Customs officers to assess countervailing duties on electrical
steel from Italy.
Return of Destruction of Proprietary Information
This notice serves as the only reminder to parties subject
to Administrative Protective Order (APO) of their responsibility
concerning the return or destruction of proprietary information
disclosed under APO in accordance with 19 CFR 355.34(d). Failure
to comply is a violation of the APO.
This determination is published pursuant to section 705(d)
of the Act and 19 CFR 355.20(a)(4).
Dated: April 11, 1994.
Susan G. Esserman,
Assistant Secretary for Import Administration.
[FR Doc. 94-9313 Filed 04-15-94; 8:45 am]
BILLING CODE 3510-DS-P
The Contents entry for this article reads as follows:
International Trade Administration
NOTICES
Countervailing duties:
Grain-oriented electrical steel from-
Italy, 18357