59 FR 18357
NOTICES
DEPARTMENT OF COMMERCE
International Trade Administration
(C-475-812)
Final Affirmative Countervailing Duty Determination: Grain-Oriented
Electrical
Steel From Italy
Monday, April 18, 1994
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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
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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
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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
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(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.)
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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
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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.
*18363
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.
*18364
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 Subjectgu
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
*18365
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
*18366
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
*18367
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
*18368
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 *18369
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.
*18370
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
(Cite as: 59 FR 18357, *18370)
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