66 FR 50412, October 3, 2001
C-791-810
Investigation
Public Document
DAS III/Office VII: BT/SCG/MH/JF
September 21, 2001
MEMORANDUM TO: Faryar Shirzad
Assistant Secretary
for Import Administration
FROM: Joseph A. Spetrini
Deputy Assistant Secretary
AD/CVD Enforcement III
SUBJECT: Issues and Decision Memorandum in the Final Affirmative
Countervailing Duty Determination: Certain Hot-Rolled
Carbon Steel Flat Products from South Africa
Summary
We have analyzed the comments submitted by interested parties relating to
the final determination of the above-mentioned countervailing duty (CVD)
investigation for the period of investigation (POI) July 1, 1999, through
June 30, 2000. Our review of the comments has resulted in a change to our
preliminary determination. See Notice of Preliminary Affirmative
Countervailing Duty Determination and Alignment With Final Antidumping
Duty Determinations: Certain Hot-Rolled Carbon Steel Flat Products From
South Africa, 66 FR 20261, 20267 (April 20, 2001) (Preliminary
Determination). The "Subsidies Valuation Information," "Programs
Determined to Confer Subsidies," "Programs Determined Not to Confer
Subsidies," "Analysis of Comments," "Total Ad Valorem Rate," and
"Recommendation" sections of this memorandum describe the decisions made
in this investigation with respect to Highveld Steel and Vanadium
Corporation Limited (Highveld), Iscor, Ltd. (Iscor), and Saldanha Steel
(Pty.) Ltd. (Saldanha Steel), the producers/exporters of the subject
merchandise. In the "Analysis of Comments" section, we discuss the
substantive issues raised by petitioners and respondents in their case and
rebuttal briefs. We recommend that you approve the positions we have
developed in this memorandum.
We also note that we addressed certain comments made by the Government
of South Africa (GOSA) in its case brief, and by Saldanha Steel and Iscor
in a joint letter dated August 20, 2001, regarding statements in the
Department's various verification reports in the Memorandum from Sally
C. Gannon to Barbara E. Tillman Regarding Comments on the Department's
Verification Reports, September 21, 2001 (on file in the Department's
Central Records Unit, in Room B-099).
I. Subsidies Valuation Information
A. Industrial Development Corporation
The GOSA contends that the Industrial Development Corporation (IDC) is
not an "authority"pursuant to section 771(5)(B) of the Act and, thus, did
not provide any countervailable financial contributions. The IDC is an
investment and financing entity which is wholly-owned by the GOSA. See the
GOSA's February 5th response, at Annexure F. We have treated the IDC's
actions as constituting the conferral of financial contributions by a
governmental authority in the past (see Final Affirmative Countervailing
Duty Determination: Stainless Steel Plate in Coils from South Africa, 64
FR 15553 (March 31, 1999) (SSPC Final)), and for this final determination,
in light of the GOSA's comments, are reexamining the IDC's status.
Section 771(5)(B) of the Act states that "A subsidy is described. . .in
the case in which an authority provides a financial contribution. . .to a
person and a benefit is thereby conferred." See 771(5)(B)(i), (ii), and
(iii) of the Act (emphasis added). The Act states that ". . . [t]he term
'authority' means a government of a country or any public entity within
the territory of the country." See section 771(5)(B)(iii) of the Act
(emphasis added). As stated in the Preamble to the regulations, ". . . we
intend to continue our long standing practice of treating most government-
owned corporations as the government itself." Countervailing Duties; Final
Rule, 63 FR 65348, 65402 (Nov. 25, 1998) (CVD Final Rule).
In order to assess whether an entity such as the IDC should be considered
to be the government for purposes of countervailing duty investigations,
the Department has in the past considered the following factors to be
relevant: (1) government ownership, (2) the government's presence on the
entity's board of directors, (3) the government's control over the
entity's activities, (4) the entity's pursuit of governmental policies or
interests, and (5) whether the entity is created by statute. (1) See,
e.g., Final Affirmative Countervailing Duty Determinations: Pure Magnesium
and Alloy Magnesium from Canada, 57 FR 30946, 30954 (July 13, 1992); Final
Affirmative Countervailing Duty Determination: Certain Fresh Cut Flowers
from the Netherlands, 52 FR 3301, 3302, 3310 (Feb. 3, 1987); Final
Affirmative Countervailing Duty Determination: Stainless Steel Sheet and
Strip in Coils from the Republic of Korea, 64 FR 30636, 30642-43 (June 8,
1999) (Korean Sheet and Strip).
In the instant case, the information on the record when analyzed pursuant
to these factors, supports a finding that the IDC is a public entity
providing a financial contribution (by way of its investments in, and
loans and guarantees to, industrial projects). With respect to the first
factor, the IDC's annual reports state that "The IDC is a wholly-owned
State Corporation established by Act No. 22 of 1940." See IDC 1994 Annual
Report, Corporate Profile.
With respect to the second factor, during the POI, one IDC board member
was also a government official. During 1999, this board member was the
Director General, Department of Trade and Industry ( DTI). See IDC 1999
Annual Report at 11. During 2000, this board member was the Policy Advisor
to the Minister of Trade and Industry. See IDC 2000 Annual Report at 7.
Although only one of the board's 14 members was a GOSA official during the
POI, the finding of which, and how many, board members themselves were
GOSA officials is not dispositive. Because GOSA selects and appoints the
board members, the GOSA has control over the board members and their
decisions, as shown in the following analysis of the third factor.
As to the third factor, the GOSA clearly has the ability to control the
IDC's activities. Pursuant to the Industrial Development Act No. 22 of
1940 (IDC Act), and amendments thereto, the Minister of Trade and Industry
has the right to appoint the majority of IDC's board of directors.
However, because the GOSA is, in fact, the only shareholder, it has the
right to appoint all of the board members. The Minister of Trade and
Industry also appoints the board's chairman and managing director. See the
GOSA's February 5th response, at Annexure F.
As to the fourth factor of our analysis, in addition to the GOSA
controlling the IDC's activities through board appointments, the IDC's
annual reports make clear that it operates under GOSA constraints. The
1998 Annual Report, at page 64, states that the IDC's "mandate, policy
framework and objectives are in accordance with the guidelines put forth
by its shareholder, the South African Government." The IDC pursues GOSA
interests and policies by performing tasks on behalf of the GOSA, such as
serving on the Technical Committee that granted Section 37E benefits. See
the GOSA's February 5th response, at 49. The IDC's mandate includes the
development of the South African economy, the creation of jobs, the
promotion of entrepreneurship among previously disadvantaged ethnic
groups, the financing of and investment in venture capital funds, and the
promotion of the economic development of other countries in southern
Africa. See e.g., IDC Act; IDC 1997 Annual Report; and Verification of the
Questionnaire Responses of the Government of South Africa: Countervailing
Duty Investigation of Certain Hot-Rolled Carbon Steel Flat Products from
South Africa (August 13, 2001) (GOSA Verification Report), at 2. In
addition to being wholly-owned by the GOSA, the IDC is required by the IDC
Act to transmit its financial statements and reports to the Minister who
in turn is required to table them in Parliament. See section 19 of the IDC
Act. These financial statements and reports are required to set forth the
financial details of any industrial undertaking conducted by the IDC under
section 3(a) of the IDC Act (which specifies that the IDC's objects shall
be
". . . with the approval of the Minister to establish and conduct any
industrial undertaking. . . ") See section 3(a) of the IDC Act (emphasis
added).
Finally, with respect to the fifth factor, the IDC Act provides for the
IDC's incorporation and continued operation. See the GOSA's February 5th
response, at Annexure F. According to the statute, the IDC cannot be wound
up (i.e., dissolved) except by or under the authority of an Act by
Parliament (section 20 of the IDC Act).
The GOSA argues that the IDC is not a government entity because the IDC
is financially and operationally independent from the GOSA and the IDC is
bound by statute to base its decisions solely upon commercial
considerations. Specifically, in its questionnaire responses, at
verification and in case briefs, the GOSA claimed that the IDC, along with
its operating units, functions independently of the GOSA, has independent
budget and decision-making powers, and makes investment decisions based on
the commercial considerations and economic merit of individual projects.
With respect to financial independence, although the GOSA emphasizes that
the IDC has been self-funding for many years, that factor alone is not
sufficient to find that the IDC is not a public entity. Its original
capital was provided by the GOSA. The IDC's profitability over the years
does not diminish the GOSA's ownership.
With respect to operational independence, as discussed above, the IDC is
wholly-owned by the GOSA which selects and appoints the IDC's board of
directors. In addition, the IDC Act, pursuant to which the IDC was
incorporated and continues to operate, delineates specific
responsibilities for the IDC with respect to planning, expediting and
conducting industrial development in South Africa. The fact that the IDC
is also required to conduct such development undertakings in accordance
with sound business principles does not undermine the fact that the IDC is
a governmental authority undertaking financing and investment activities
in furtherance of the industrial development objectives set forth in law.
The IDC fulfills a government mandate, and is governed by managers who
derive their authority from the state. Regardless of the fact that the IDC
takes into account the economic merit of an investment, as explained
above, the IDC is still required to consider GOSA policies and objectives.
Because we have determined that the IDC is a government entity, there is
no reason for us to examine whether GOSA "entrusts or directs" the IDC to
make financial contributions. See section 771(5)(B)(iii) of the Act.
For these reasons, for this final determination, we determine that the
IDC is a public entity, created by the GOSA, providing financial
contributions through its investments, loans, and loan guarantees.
B. Diversification of the South African Economy and Specificity of
Programs
In our Preliminary Determination, we determined that the GOSA's loan and
loan guarantee programs were de facto specific. We gathered additional
information at verification that, based on our analysis, reinforced the
conclusion that these programs were de facto specific. See Memorandum to
Barbara Tillman from Mark Hoadley, et al., Regarding Analysis of BPI
Supplementing the Decision Memorandum, September 21, 2001 (Final BPI Memo)
(public version on file in the Department's Central Records Unit, in Room
B-099). The GOSA and Saldanha Steel argue that we erred in not taking the
diversification of the South African economy into consideration when
conducting our specificity analysis. After reviewing the evidence
presented by the GOSA at verification regarding the diversification of the
South African economy, we have determined not to alter our preliminary
determination that the IDC's loan and loan guarantee programs were de
facto specific.
Although in the Preliminary Determination we found that the section 37E
program was an export subsidy, and thus the diversification of the South
African economy was irrelevant to that program, for this final
determination we have determined that 37E is a de facto specific domestic
subsidy. We assume that respondents would argue that diversification
should be considered in determining the specificity of that program as
well. Refer to Comment 2, below, and the Department's Position for a
discussion of the diversification comments, and to the "Industrial Loan
Financing Provided by the IDC and Findevco Ltd," "Loan Guarantees Provided
by the IDC," and "Section 37E Tax Allowances" sections below for a
discussion of the de facto specificity of those programs. See also Final
BPI Memo.
C. Allocation Period
Section 351.524(d)(2) of the Department's regulations states that we will
presume the allocation period for non-recurring subsidies to be the
average useful life (AUL) of renewable physical assets for the industry
concerned, as listed in the Internal Revenue Service's (IRS) 1977 Class
Life Asset Depreciation Range System, as updated by the Department of
Treasury. The presumption will apply unless a party claims and establishes
that these tables do not reasonably reflect the AUL of the renewable
physical assets for the company or industry under investigation, and the
party can establish that the difference between the company-specific or
country-wide AUL for the industry under investigation and the AUL from the
IRS tables is significant.
As explained in the Preliminary Determination, the Department used an
allocation period of 15 years, which is the AUL listed in the IRS tables
for the steel industry. See 66 FR at 20261. Although Highveld did not
argue for anything other than the IRS tables' AUL of 15 years, Iscor and
Saldanha Steel claimed that 15 years does not reasonably reflect the AUL
of their assets. Both companies submitted information regarding their
annual depreciation and book values. We have not found Iscor to be the
direct recipient of non-recurring subsidies and, therefore, have made no
determination as to the applicable AUL for its assets. We have examined
the information provided by Saldanha Steel for purposes of establishing a
company-specific AUL.
Section 351.524(d)(2)(iii) of our regulations states that a company-
specific AUL is "calculated by dividing the aggregate of the annual
average gross book values of the firm's depreciable productive fixed
assets by the firm's aggregated annual charge to accumulated depreciation,
for a period considered appropriate by the Secretary." The Department's
practice has been to use a ten-year period. To calculate its company-
specific AUL of 43 years, Saldanha Steel submitted its opening and closing
book values, and depreciation expense, for fiscal year 2000. Although a
ten-year period is not required by statute or our regulations, one year
cannot reasonably serve as a basis for calculating a company-specific AUL,
because it does not accurately reflect Saldanha Steel's AUL of renewable
physical assets. Moreover, we note that in calculating its company-
specific AUL, Saldanha Steel reduced its depreciation to account for less
than full production, and that its plant was not at full production during
the year for which information was submitted; thus, even this one year's
worth of information is not representative.
As noted in the Preliminary Determination, Saldanha Steel did not submit
other information to substantiate its claim of an AUL longer than 15
years, except for its annual report and financial statement for fiscal
year 2000, which state that plant and equipment have an estimated maximum
useful life of 25 years. During verification, Saldanha Steel officials
indicated that the 25-year AUL, provided to the Department for purposes of
this investigation, was based on the estimated useful life of a steel
plant which they had used in setting up their accounting system. They
noted that determinations of the estimated useful life of assets by the
company's auditors were subject to approval by Saldanha Steel's board of
directors and that the final useful life estimates were reviewed by an
outside auditor. See Verification of the Questionnaire Responses of
Saldanha Steel Ltd.: Countervailing Duty Investigation of Certain Hot-
Rolled Carbon Steel Flat Products from South Africa (August 13, 2001)
(Saldanha Steel Verification Report), at 3. However, even though the
proposed 25-year AUL may have been determined by company auditors and
approved by an outside auditor, Saldanha Steel did not provide supporting
calculations or sufficient documentation to substantiate in a timely
manner that 25 years appropriately reflects the average useful life of all
of the company's plant and equipment. Moreover, the annual report which
Saldanha Steel uses to support its claim states that 25 years is the
estimated maximum useful life for plant and equipment. See Saldanha
Steel's February 5, 2001, 2000 Annual Report, Notes to the Financial
Statements, at Appendix 3. Furthermore, Saldanha Steel's 1999 Annual
Report states that the expected useful life for plant and machinery ranges
from 5 to 25 years. Id., at Appendix 2. Thus, Saldanha Steel's annual
reports do not even support their claim that 25 years is representative of
the average useful life of renewable physical assets. We note that, at
verification, Saldanha Steel attempted to provide us with new information
regarding the AUL of assets in the metals industry. However, we declined
to accept this new information.
Therefore, we determine that Saldanha Steel has not satisfied the
requirements of section 351.524(d)(2)(iii) of our regulations. We find
that neither Saldanha Steel's company-specific, calculated AUL of 43
years, nor its proposed AUL of 25 years, can be used to approximate the
useful life of the company's physical assets. Thus, for purposes of this
final determination, the Department is using the 15-year allocation period
from the IRS tables, in accordance with 19 CFR 351.524(d)(2)(i), in order
to determine the AUL period to be used in allocating the benefits received
by Saldanha Steel from non-recurring subsidies.
D. Realignment of the Benefit Stream
Petitioners have reasserted the argument advanced before the Preliminary
Determination that the Department should begin the benefit stream in
fiscal year 1999 for non-recurring subsidies received prior to the
commencement of production. We determined not to do so in the Preliminary
Determination. Instead we followed our normal procedure by beginning each
benefit stream in the year in which the underlying subsidy was received.
Our analysis of the facts on the record indicated that there existed no
extraordinary circumstances in this case comparable to those described in
section 351.524(d)(2)(iv) of the regulations that warranted realigning the
benefit stream to the year in which production began. We are upholding
this decision in our final determination. Refer to the Department's
Position on Comment 4 for a complete discussion.
E. Calculation of Discount Rates and Benchmark Loan Rates
In the Preliminary Determination, we calculated discount rates and
benchmark loan rates using an average of the "Lending" rate and
"Government Bond Yield" rate for each year as found in the International
Financial Statistics published by the International Monetary Fund (IMF).
This is the same methodology employed in the last CVD investigation of the
South African steel industry. See SSPC Final, 64 FR at 15554. In the
Preliminary Determination, we referred to language in SSPC Final to
explain our decision:
For each of the years 1993 through 1997, we have averaged
the government bond rate as reported by respondents with the
"Lending Rate" reported in International Financial Statistics,
December 1998, published by the International Monetary Fund.
This publication indicates that the "Lending Rate" represents
financing that "meets the short- and medium-term needs of the
private sector." By averaging these two rates, we believe that
we have identified a rate more appropriate than the rate used
for the purposes of the preliminary determination, a rate which
includes the necessary characteristics of both long-term
borrowing and commercially-available interest rates.
SSPC Final, 64 FR at 15554.
Because both of the loans we have determined to countervail are variable
rate loans, we find that the use of the GOSA bond rate is inappropriate to
use in calculating the benchmark for these loans, because it does not
reflect commercial considerations in South Africa. For this final
determination, we are using the lending rate by itself in calculating
benchmark rates. The lending rate is consistent with what we learned at
verification from commercial bankers about the variable rates that
commercial banks offer to corporations on long-term loans. See Final BPI
Memo.
We also determine that we should not have included the GOSA bond rate in
the calculation of the discount rate because it cannot be considered a
commercial debt instrument. At verification, with few exceptions involving
a few corporate bond issuers, we learned that there is not much of a
market for fixed-rate commercial debt. For example, one banker "explained
that there was no commercial paper market to speak of in South Africa, and
that the corporate bond and capital markets were not much better."
Memorandum for the File from Barbara Tillman, et al., Regarding Discussion
with a South African Commercial Bank's Macroeconomist, (August 17, 2001)
(Bank 2 Report), at 2.
Likewise, the South African Reserve Bank told us "that while the
government bond market is very liquid, the corporate bond market is not."
GOSA Verification Report, at 15. They also presented us with an exhibit
showing "the ratings, terms, and maturity dates for corporate bond issues,
which can be used {to examine} interest rate time series for these issues.
However, we noted that, of the "corporate" bond rates listed, most were
for government-owned companies or were not issued in the period during
which we are examining the IDC financing." Id. "They stated that corporate
bond rates are higher than the government bond rates. They characterized
the South African commercial paper market as fairly undeveloped, but
stated that there has been a drive to develop it." Id.
Another banker told us "that, for fixed rate loans, RSA 150 plus {a
premium} would be an average rate charged to top customers." Memorandum
for the File from Barbara Tillman, et al., Regarding Three Meetings with
Commercial Bankers, (August 17, 2001) (Bank 1 Report), at 2. He also told
us that a premium could be "added for long-term loan risk onto variable
rate loans." Id.
Accordingly, because there are no appropriate fixed-rate, long-term
commercial interest rates on the record, and not enough information to
construct one using rates for variable rate loans, we are using as the
discount rate the IMF rates (the "lending rate") in accordance with
section 351.524(d)(3)(c) of the regulations.
While at verification, Saldanha Steel presented us with information
regarding several loans it claimed to be long term. The longest was for a
term just over one year. For purposes of this final determination, we have
determined that these loans are not appropriate for determining a
benchmark rate. Refer to the Department's Position in Comment 5 below. In
its questionnaire responses, Saldanha Steel provided information regarding
two commercial loans as potential benchmarks for its Findevco loan. One of
these loans was obtained from a foreign government-owned development bank.
The second loan is a supplier finance loan for services provided to
Saldanha Steel. In our Preliminary Determination, we determined that
neither of these loans was acceptable under our regulations. See 66 FR at
20261. We continue to find that these loans cannot serve as benchmarks for
the Findevco and IDC loans because they are not comparable, long-term
commercial loans.
F. Creditworthiness
In the Preliminary Determination, we determined that Saldanha Steel was
uncreditworthy during its fiscal years 1998 through 2000. We based our
determination on the fact that Saldanha Steel had no unguaranteed long-
term loans from commercial lenders, and because it did not appear capable
of meeting its costs and fixed financial obligations without government
assistance. At verification, Saldanha Steel presented us with evidence
that four loans it had previously classified as short-term loans were, in
fact, for periods of just over one year. It now relies on those loans,
plus additional evidence regarding its debt obligations to argue that the
Department erred in determining that it was uncreditworthy. The additional
evidence includes its foreign currency hedging contracts, its supplier
credit, and the fact that it has never defaulted on its loans.
Based on our analysis of all of the information on the record, including
our verification and comments by the parties, we continue to find that
Saldanha Steel was uncreditworthy during its fiscal years 1998 through
2000. As discussed below under Comment 5, we determine that there is no
evidence that Saldanha Steel has had unguaranteed long-term loans from
commercial lenders. Saldanha Steel has also not demonstrated its ability
to meet its costs and fixed financial obligations without government
assistance. Accordingly, we added a risk premium to our discount and
benchmark rates. Our analysis of Saldanha Steel's ability to meet its
obligations is based in large part on business-proprietary information.
See Final BPI Memo.
Cross-Ownership and Attribution of Subsidies
Section 351.525(b)(6)(vi) defines cross-ownership as existing "between
two or more corporations where one corporation can use or direct the
individual assets of the other corporation(s) in essentially the same ways
it can use its own assets. Normally, this standard will be met where there
is a majority voting ownership interest between two corporations . . . ."
The preamble to the CVD Regulations identifies situations in which cross-
ownership may exist even though there is less than a majority voting
interest between two corporations: "in certain circumstances, a large
minority interest (for example, 40 percent) or a 'golden share' may also
result in cross-ownership." CVD Final Rule, 63 FR at 65401; See also Final
Affirmative Countervailing Duty Determination: Certain Cold Rolled Flat-
Rolled Carbon-Quality Steel Products from Brazil, 65 FR 5536, 5544 (Feb.
4, 2000).
In the Preliminary Determination, we determined that cross-ownership
exists between Iscor and Saldanha Steel. We based our decision on several
facts of a proprietary nature. For this final determination, we continue
to determine that cross-ownership exists, based on the several facts we
relied on in the Preliminary Determination and our conclusion that Iscor
can use or direct the assets of Saldanha Steel. Because of this
determination, we will allocate the total amount of any benefits deemed
countervailable across the total sales or total export sales of the two
companies, depending on whether the subsidy is classified as a domestic
subsidy or export subsidy.
In analyzing whether cross-ownership exists, we have examined all of the
facts on the record. We emphasize that these facts must, in the aggregate,
demonstrate that Iscor can use or direct the assets of Saldanha Steel; it
is not necessary for each fact to demonstrate the requisite control
independently. In aggregate, the several facts enumerated in the Final BPI
Memo, when considered in conjunction with Iscor's 50-percent ownership of
Saldanha Steel, demonstrate the requisite use or direction of Saldanha
Steel's assets as required by section 351.525(b)(6)(vi) of the
regulations. Because Iscor owns half of Saldanha Steel, nearly a majority,
the remaining facts only need demonstrate that the balance is tilted in
Iscor's favor, when determining whether Iscor is in a position to use or
direct Saldanha Steel's assets. It is not necessary to demonstrate that
Iscor's use or direction of Saldanha Steel's assets is so strong as to
relegate the IDC to an insignificantly influential position.
We also agree with petitioners' argument, discussed in Comment 6 below,
that, whereas the IDC can be accurately referred to as a financial
investor, or owner, the two shareholders have always viewed Iscor as
controlling Saldanha Steel's operations. Several facts in this case
confirm that the IDC typically pairs itself with a partner who will act as
the operational partner or shareholder in a project, while the IDC acts as
the financier, and that this case is part of that pattern. First of all,
as noted by petitioners, we stated in our verification report in SSPC
Final that the IDC was chiefly a financial investor in the Columbus
project to produce stainless steel, whereas its two partners were
experienced operators of steel mills. Recently, the IDC has joined with
Duferco International Investment Holdings Ltd., an experienced steel
producer, to create the Duferco joint venture in South Africa to produce
cold-rolled steel. See 1997 IDC Annual Report, at 30.
As noted in our Iscor verification report, Iscor stated that the idea for
the Saldanha Steel mill was its own, with respect to technology aspects,
whereas the IDC's contribution involved financing of the project. The land
for the mill was purchased by Iscor in the 1970s and the salient
technology used in the mill, the Corex and Midrex technologies, were used
solely in South Africa by Iscor. Furthermore, according to that report,
Iscor planned that Saldanha Steel would replace one-sixth of Iscor's
capacity lost in its restructuring. See Verification of the Questionnaire
Responses of Iscor Ltd.: Countervailing Duty Investigation of Certain Hot-
Rolled Carbon Steel Flat Products from South Africa, August 15, 2001
(Iscor Verification Report ), at 2-3.
According to one banker, the Department consulted with at verification,
"the IDC wanted private sector partners who could operate the projects
once they were underway." See Bank 2 Report. According to the GOSA's case
brief: the IDC chooses projects "offering real investment returns which
could be partnered with a local private sector investor with the necessary
technological support." See the GOSA's August 21, 2001 case brief, at 7.
When taken in combination with the discussion in the Final BPI Memo, these
facts indicate that, while the IDC's expertise and assets would be brought
in for financing purposes, Iscor would control the company's operations.
As such, Iscor would be in a position to use or direct the assets of
Saldanha Steel as if they were Iscor's own. Accordingly, we find that
cross-ownership exists between Iscor and Saldanha Steel and we are treating
these companies as one entity in accordance with section 351.525(b)(6)(ii)
of the regulations.
Trading Companies
Section 351.525(c) of the regulations requires that the "benefits from
subsidies provided to a trading company which exports subject merchandise
shall be cumulated with benefits from subsidies provided to the firm which
is producing subject merchandise that is sold through the trading
company," regardless of their affiliation. 19 CFR 351.525(c). As stated in
the Preliminary Determination, Highveld and Iscor indicated that they sell
subject merchandise through trading companies. We verified that the South
African trading companies, through which Iscor and Highveld exported
subject merchandise during the POI, did not receive benefits under the
programs subject to investigation. See, e.g., GOSA Verification Report;
Iscor Verification Report; and Verification of the Questionnaire Responses
of Highveld Steel and Vanadium Corp. Ltd.: Countervailing Duty
Investigation of Certain Hot-Rolled Carbon Steel Flat Products from South
Africa (August 14, 2001) (Highveld Verification Report). Therefore, for
purposes of this final determination, the subsidy rates calculated for
each producer of subject merchandise will be attributed to the merchandise
exported either directly or through a trading company by that producer.
II. Programs Determined to Confer Subsidies
A. Section 37E Tax Allowances
The GOSA enacted Section 37E of the Income Tax Act in 1991. The program
was limited to investments approved between September 1991 and September
1993. In 1991, at the time the enacting legislation for Section 37E became
part of the South African tax code, 60 percent of the output of the
approved project was required to be exported. Section 37E of the Income
Tax Act was subsequently amended. The first amendment, in July of 1992,
eliminated the original requirement that raw materials used by Section 37E
companies had to be acquired locally, thus allowing firms to import raw
materials. This amendment also required that 35 percent value be added to
raw materials used, and that 60 percent of the total value-added be
exported either directly or indirectly. This amendment was effective
retroactively to December 12, 1991.
On July 20, 1993, Section 37E of the Income Tax Act was completely
rewritten. Export requirements were deleted from the legislation, and the
creation of negotiable tax credit certificates (NTCCs) was added. The
NTCCs' provision allowed taxpayers in loss positions to receive NTCCs in
the amount of the cash value of the Section 37E tax depreciation (i.e.,
the claimed depreciation multiplied by the tax rate). Pursuant to the
amended legislation, the NTCCs can be sold to any taxpayer, who, in turn,
can use them to pay taxes. This July 20, 1993 revision, was effective
retroactively to September 12, 1992.
The advantage to users of this program is the receipt of these tax
deductions in advance, i.e., when the expenses are incurred rather than
when the equipment is put into use. The program does not provide for
accelerated depreciation, nor does it provide for additional finance
charge-related deductions beyond those available under other provisions of
the South African tax code.
According to the GOSA's questionnaire responses and information obtained
during verification, eligibility for Section 37E benefits was determined
on a project-by-project basis by a committee appointed by the Minister of
Finance, in concurrence with the Minister of Trade and Industry. The IDC
was a committee member and was charged with investigating and evaluating
applications. See the GOSA's February 5, 2001 response, at 49; see also
GOSA Verification Report.
To demonstrate that their projects qualified under Section 37E,
regardless of when an application was approved, applicants were required
to show that: (1) investments were made in new machinery, plants, or
buildings to be used in the value-added process; (2) the value-added
process must have added at least 35 percent to the value of the raw
material or intermediate product that underwent the processing; and, (3)
the investment must have been approved by a governmental committee between
September 12, 1991, and September 11, 1993. See the GOSA's February 5,
2001 response, at 47. In this case, although construction at Saldanha
Steel did not begin until early 1996, an application for the Saldanha
Steel project was submitted, and approval was granted, prior to the
September 11, 1993 deadline. The application was revised and reapproved on
February 12, 1996.
Saldanha Steel claimed all of its Section 37E allowances in the form of
NTCCs. We verified that Iscor did not apply for or receive any Section 37E
allowances, and that Highveld claimed allowances only with respect to its
investment in the Columbus Joint Venture. See SSPC Final. At verification,
we also confirmed that trading companies used by Highveld and Iscor did
not apply for or receive Section 37E allowances. Therefore, our analysis
of this program addresses only Saldanha Steel's receipt of Section 37E tax
allowances.
When determining whether the government has provided a countervailable
subsidy, we must examine whether the government has provided a financial
contribution and a benefit is thereby conferred. See Section 771(5)(B) of
the Act. In addition, we must determine whether the subsidy is specific.
See Section 771(5A) of the Act.
We find that Section 37E benefits constitute a financial contribution by
the GOSA because the GOSA has foregone revenue in allowing for these tax
deductions sooner rather than later within the meaning of Section
771(5)(D)(ii) of the Act. We further find that Saldanha Steel received a
benefit by receiving the NTCCs up to four years earlier than it could have
received deductions under the standard provisions of the income tax code,
which allow for the deductions to be made only after the relevant assets
have been put into use.
We have examined whether Section 37E benefits are specific under section
771(5A) of the Act. In the Preliminary Determination, we recognized that
the amendment removing the export requirements from the legislation had
been passed before the application was submitted for the Saldanha Steel
project (we note that even though the GOSA made this amendment effective
retroactively, the relevant date for our analysis is the date the
legislation was passed, not its retroactive effective date). However, our
analysis of one of the conditions in the approval letter led us to
conclude that Saldanha Steel's receipt of Section 37E benefits was
contingent upon export performance. See Memorandum Regarding Section 37E
Tax Allowances (September 21, 2001) (37E Memo) (public version on file in
the Department's Central Records Unit, in Room B-099).
At verification, we examined several applications and approvals for
Section 37E made both before and after the removal of the export
requirement from the statute. Based upon the totality of the information
examined and discussed at verification, we now have a more complete
understanding of this condition and determine that it is not a sufficient
basis for finding Saldanha Steel's Section 37E approval to be contingent
upon export performance. Id. Moreover, there is no other evidence on the
record upon which to base a finding that the approval of Saldanha Steel
for Section 37E was contingent upon export performance.
Because we do not find the Section 37E program to constitute an export
subsidy with respect to Saldanha Steel, we have examined whether Section
37E constitutes a specific domestic subsidy in accordance with section
771(5A)(D) of the Act. Although the Section 37E legislation does contain
several delimiting criteria with respect to the types of projects that
were eligible for consideration (e.g., a 35 percent value added
requirement), there is no explicit limitation in the legislation under
which Saldanha Steel was approved. See section 771(5A)(D)(I) of the Act.
Thus, we must examine whether the program is de facto specific under
section 771(5A)(D)(iii).
Only 13 companies were approved for Section 37E tax allowances. Thus, on
an enterprise basis, the actual number of recipients is limited, and we
find Section 37E to be specific under section 771(5A)(D)(iii)(I). Although
this factor alone is sufficient to find Section 37E to be a specific
domestic subsidy (19 CFR 351.502(a)), we also note that the steel industry
received a disproportionate share of the Section 37E tax allowances, and,
as such, this program is also specific under section 771(5A)(D)(iii)(III)
of the Act. Because some of the information analyzed to determine
specificity with respect to this program is business proprietary,
additional discussion of the documentation and the bases for our
conclusions are set forth in the 37E Memo.
Because the Section 37E program reduces a company's capital requirements,
and because the receipt of Section 37E benefits required express
government approval, we determine that it is appropriate to treat the
benefits provided under Section 37E as a non-recurring subsidy. See 19 CFR
351.524(c)(2); see also SSPC Final, 64 FR at 15556.
To determine the benefit, we calculated the time value of obtaining the
certificates in advance of the allowance, in this case by up to four
years, by discounting the cash value of each allowance. The difference
between the value of the certificates and the discounted value of the
allowances is the benefit to Saldanha Steel. Finally, because we consider
that these Section 37E benefits should be allocated over time as a non-
recurring subsidy, we treated each year's benefit as a non-recurring grant
using our standard grant methodology. See 19 CFR 351.524(d). Because we
have determined that Saldanha Steel's Section 37E benefits constitute a de
facto domestic subsidy, we divided the benefits allocable to the POI from
this program by the combined total sales of Saldanha Steel/Iscor during
the POI. Refer to "Cross-Ownership and Attribution of Subsidies" section
above. On this basis, we determine the countervailable subsidy to be 1.03
percent ad valorem for Saldanha Steel/Iscor.
Industrial Loan Financing Provided by the IDC and Findevco Ltd.
The IDC and its wholly-owned subsidiary, Findevco, Ltd., provide
industrial loan financing geared towards the establishment of new
industrial facilities, or the expansion or modernization of existing
facilities. The IDC has been providing such financing since its inception
in 1940. Any South African company interested in obtaining loan financing
through this program may apply through the IDC.
According to its questionnaire responses and information obtained during
verification, Saldanha Steel received a loan under the Findevco program
(the Findevco Loan) in accordance with the shareholder agreement between
the IDC and Iscor. The terms of this loan in the original agreement
involved a lag between disbursement and payment, with interest
capitalized. Part of the loan amount was later modified through a separate
IDC-Saldanha Steel transaction in a manner consistent with the original
loan agreement. The remaining portion of the Findevco loan was
restructured in a manner the Department considers to constitute a new
loan, including new payment terms, and a deferral of principal and
interest as mentioned in the "Creditworthiness" section above. (Further
details of the provision of this loan, the "deferral," are mainly of a
business proprietary nature and can be found in the Memorandum from Mark
Hoadley through Sally Gannon to Barbara E. Tillman Regarding Business-
Proprietary Analysis of Saldanha Steel Ltd. (April 13, 2001) (Preliminary
BPI Memo) (public version on file in the Department's Central Records
Unit, in Room B-099)). The IDC provided Saldanha Steel with a second loan
(the IDC Loan), without the involvement of Findevco. See Preliminary BPI
Memo. We verified that Highveld and Iscor did not receive any Findevco or
IDC loans that were outstanding during the POI.
Loans constitute a financial contribution under section 771(5)(D)(i) of
the Act in the form of a direct transfer of funds from the IDC, or its
wholly-owned subsidiary Findevco, to Saldanha Steel. To determine whether
there is a benefit, we compared the interest rates charged on the
Findevco/IDC loans provided to Saldanha Steel to the benchmark rate
described in the "Calculation of Discount Rates and Benchmark Loan Rates"
section above. Because we have determined that Saldanha Steel is
uncreditworthy, we added a risk premium to the benchmark rate in
accordance with section 351.505(a)(3)(iii) of the regulations. Based on
this comparison, there is a difference between the amount paid by Saldanha
Steel on these loans and the amount Saldanha Steel would have paid on a
comparable commercial loan obtained on the South African market. Thus, the
loans provided by Findevco and the IDC provide a benefit under section
771(5)(E)(i) of the Act.
In addition to determining the existence of a financial contribution and
a benefit, when determining whether a program is countervailable, we must
examine whether it is specific under section 771(5A) of the Act. There is
no law explicitly limiting eligibility for IDC loans, or loans from the
IDC subsidiary Findevco, to exporters or to an enterprise, industry, or
group thereof. Thus, these loans are not de jure specific, and we must
analyze whether the program meets the de facto criteria defined under
section 771(5A)(D)(iii) of the Act. Because much of the information
analyzed to determine specificity with respect to loans provided by the
IDC and Findevco is business proprietary, a complete discussion of the
documentation and the bases for our conclusions are set forth in the Final
BPI Memo. Our analysis of the distribution of the IDC/Findevco loans leads
us to conclude that these loans are de facto specific, within the meaning
of section 771(5A)(D)(iii) of the Act, because a disproportionate share of
the financing is provided to the basic iron and non-ferrous metals
industry. Accordingly, we determine that loan financing provided by the
IDC and Findevco constitutes a countervailable subsidy within the meaning
of section 771(5) of the Act.
For the Findevco Loan, because we have determined that Saldanha Steel
received a deferral, we applied the allocation methodology of section
351.505(c)(3) of our regulations for the comparison of loans with
different repayment schedules. Section 351.505(c)(3)(i) of our regulations
requires that we take the difference between the net present value of
payments under the deferred schedule with the IDC interest rate and the
net present value of payments under a normal repayment schedule for a
commercial loan with the benchmark interest rate and uncreditworthiness
risk premium. We then assigned a portion of this difference to the POI in
accordance with section 351.505(c)(3)(ii) of the regulations. For the IDC
Loan, we followed the standard benefit calculation methodology of
351.505(c)(2) for long-term variable-rate loans. We summed the benefits
allocable to the POI from this program and divided this amount by the
combined total sales of Saldanha Steel/Iscor during the POI, as discussed
in the "Cross-Ownership and Attribution of Subsidies" section above. On
this basis, we determine the countervailable subsidy to be 3.22 percent ad
valorem for Saldanha Steel/Iscor.
Loan Guarantees Provided by the IDC
The IDC facilitates and guarantees foreign credits for the importation of
capital goods into South Africa. The program was established in 1989 and
was designed to facilitate foreign lending to South African firms because
the availability of foreign credit in South Africa was extremely limited
at that time. Whether the financing is arranged directly with the foreign
creditors, or with the IDC's wholly-owned subsidiary, Impofin Ltd.
(Impofin), which provides the loans using credit lines negotiated by the
IDC with foreign banks, the IDC provides the guarantees. The IDC charges a
fee for its guaranteeing and facilitating services.
According to the questionnaire responses and information obtained at
verification, Saldanha Steel began receiving IDC loan guarantees under
this program in 1995, to guarantee loans to finance purchases of foreign
capital equipment. The GOSA has reported that the export credits to
purchase this equipment are provided under the OECD guidelines for export
credits in the relevant countries. We verified that Highveld did not
receive guarantees under this program, and that the guarantees received by
Iscor were tied to production facilities that are not involved in any part
of the production process for subject merchandise. See Iscor Verification
Report, Highveld Verification Report, and 19 CFR 351.525(b)(5). Therefore,
our analysis of this program focuses on the guarantees provided to
Saldanha Steel.
There is no explicit limitation of import financing guarantees to
exporters or to an enterprise, industry, or group thereof; thus, these
guarantees are not de jure specific. Furthermore, we found no evidence
that these guarantees are de facto export subsidies. Therefore, we must
analyze whether the program meets the de facto criteria defined under
section 771(5A)(D)(iii) of the Act for domestic subsidies. Based on our
analysis, we determine that the actual number of users is not limited;
however, we determine that the iron and steel industry received a
disproportionate share of the guarantees. Because much of the information
relied upon to analyze specificity with respect to this program is
business proprietary, a complete discussion of the documentation and the
bases for our conclusions are set forth in the Final BPI Memo.
Accordingly, we determine that IDC import financing loan guarantees are de
facto specific within the meaning of section 771(5A)(D)(iii)(III) of the
Act. We note that we found IDC guarantees to be specific on these same
grounds in SSPC Final. 64 FR at 15557.
In addition, we determine that these guarantees constitute a financial
contribution in accordance with section 771(5)(D)(i) because they involve
the potential direct transfer of funds or liabilities. Pursuant to section
771(5)(E)(iii), a benefit is conferred by loan guarantees if there is a
difference, after adjusting for any difference in guarantee fees, between
the amount the recipient of the guarantee pays on the guaranteed loan and
the amount the recipient would pay for a comparable commercial loan if
there were no guarantee by the authority. In the Preliminary
Determination, we followed the approach set forth in SSPC Final for
determining the benefit, and only measured the difference in guarantee
fees. However, we indicated that we intended to reexamine the
appropriateness of that approach for the final determination. Upon
reexamination, we conclude that there is no basis for departing from the
statutory language in determining whether there is a benefit provided by
these GOSA loan guarantees. Therefore, we compared the interest that
Saldanha paid on the guaranteed loan with the interest that it would pay
for a comparable commercial loan that it could obtain on the market,
absent the government-provided guarantee, including any difference in the
guarantee fees (see, section 351.506(a)(1) of the regulations). These are
guarantees on long-term, variable interest rate, foreign currency loans;
however, we have no information on the record concerning variable interest
rates on long-term foreign currency loans in South Africa. Therefore, we
have used the foreign currency interest rates reported in the
International Financial Statistics published by the IMF in our benefit
determination. Because these IMF rates are not effective rates, we made
no adjustments to the interest amount paid by Saldanha, except for the
difference in the IDC guarantee fees and commercial guarantee fees.
At verification, we discussed guarantee fees with commercial bankers. The
information we obtained on guarantee fees is business proprietary, but
does not conflict with the information used in SSPC Final. See Bank 1
Report. In SSPC Final, we found that a firm would pay between 0.25 and
0.50 percent for comparable commercial guarantee facilities (64 FR at
15557). We also found that the price paid for the fees would vary
depending on the quality of the borrower and the size of the credit. In
this case, as in SSPC Final, the total amount of the loans guaranteed is
large, as the loans are used to purchase plant and major capital
equipment. Although we have not determined that Saldanha Steel was
uncreditworthy during any of the years in which the guarantees were
provided, information on the record illustrates that it is not a "high-
quality" borrower. Refer to the "Creditworthiness" section above.
Therefore, for this final determination, we have determined that 0.50
percent is the appropriate commercial guarantee to use in the benefit
determination.
As stated above, the interest rates from International Financial
Statistics are not "effective" interest rates. They do not reflect all of
the various charges, fees and commissions that affect the actual cost of
the loan. Section 351.505(a)(1) of the regulations directs us to compare
effective rates to effective rates where possible. If such a comparison is
not possible, as is the case here, we compare nominal interest rates to a
nominal benchmark rate. The guarantee fee is the only fee for which we
have information on the record concerning what fees and charges would be
imposed on comparable commercial loans. Thus, for purposes of our
analysis, we compared the interest and guarantee fees paid on the IDC
guaranteed loan to the interest and guarantee fees that would have been
paid on a commercial loan. Based on this comparison, we find that these
IDC loan guarantees confer a benefit. Therefore, we determine that the IDC
guarantees constitute a countervailable subsidy within the meaning of
section 771(5)(E)(iii) of the Act.
To calculate the benefit, we used the following methodology. We
subtracted the interest and guarantee fees paid by Saldanha during the POI
on each IDC guaranteed loan from the interest and guarantee fees that
Saldanha would have paid on a comparable commercial loan, The difference
equals the benefit for each loan. We summed the benefit for each loan and
divided this amount by the combined total sales of Saldanha Steel/Iscor
during the POI, as discussed in the "Cross-Ownership and Attribution of
Subsidies" section above. On this basis, we determine the countervailable
subsidy to be 1.68 percent ad valorem for Saldanha Steel/Iscor.
Wharfage Fees for Exports
The GOSA, via Portnet, charges lower wharfage fees for exports than for
imports through all ports in South Africa. The export ad valorem rate
during the POI was 0.89 percent, and the import ad valorem rate during the
POI was 1.78 percent. These rates are detailed in Portnet's SA Port
Authority Port Tariff Book. See the GOSA's March 14, 2001 questionnaire
response, at Annexure L.
At verification, government officials were unable to provide an
explanation or evidence to support a valid basis for the lower export
wharfage fee. See GOSA Verification Report, at 19. Section 351.514(a) of
the Department's regulations states that a subsidy is an export subsidy if
". . . eligibility for, approval of, or the amount of, a subsidy is
contingent upon export performance." Because exporters pay a lower
wharfage fee than importers, and the GOSA could not provide any valid
explanation with supporting evidence for the difference in rates, we
determine that the GOSA's lower wharfage fees for exports are specific as
an export subsidy, in accordance with section 351.514(a) of the
regulations, because eligibility for the lower fee is tied to exportation.
Section 351.503(b)(1) of the Department's regulations states that the
Department
". . . normally will consider a benefit to be conferred where a firm pays
less for its inputs (e.g., money, a good, or a service) than it otherwise
would pay in the absence of the government program, or receives more
revenues than it otherwise would earn." In this case, there is a financial
contribution; revenue foregone by the GOSA in the form of lower fees than
would otherwise be collected. The lower fees constitute a benefit equal to
the difference between the fee exporters pay and the fee they would
otherwise pay in the absence of the program, in accordance with section
351.503(b)(1) of the regulations.
In order to calculate the benefit, we calculated what each respondent
would have paid in export wharfage fees if the export rate had been equal
to an average of the export rate and the import rate, and then subtracted
what was actually paid for export wharfage fees. Because we have
determined that this difference in rates is an export subsidy, we divided
the benefit amount by the value of each company's total exports for the
POI, in accordance with section 351.525(b)(2) of our regulations, to
calculate the ad valorem subsidy rate. Accordingly, we determine the
countervailable subsidy to be 0.45 percent for Highveld and 0.44 percent
for Saldanha/Iscor, ad valorem.
III. Programs Determined Not to Confer Subsidies
A. The IDC's Equity Infusions in Saldanha Steel
In 1988, the IDC and Iscor together began to examine the possibility of
using the Corex process to take advantage of ore from Iscor's Sishen mine,
without incurring the costs of a blast furnace. The environmental benefits
of the Corex process were also a consideration. The IDC's feasibility
studies culminated in reports to the IDC's and Iscor's boards of directors
in the fall of 1994. Each partner's board agreed to the project in
November 1994 and Saldanha Steel was incorporated on January 25, 1995.
Environmental concerns and site location resulted in a one-year deferral
of the project's start date. As a result of these delays, the feasibility
studies were revised in the fall of 1995, revealing increased costs. In
response to these changed circumstances, Iscor withdrew from the project.
According to the IDC's 1995 annual report:
As a consequence of the inordinate delay in the commencement of
construction and the placing of orders with suppliers of equipment, the
anticipated peak funding requirements of the project has increased
substantially and the project return has decreased.
Subsequent to the financial year end, Iscor has withdrawn from the
project in its present form and the IDC is evaluating alternative
processes and financial structures in order to facilitate the
implementation of the project.
Saldanha Steel's questionnaire response offers the following description
of the IDC's reaction to Iscor's withdrawal:
All of the environmental concerns were fully addressed and revised
investment proposals were submitted to IDC's Board and approved in
September 1995 and revised again in November 1995. These proposals
confirmed the economic viability of the project with an acceptable real
return (i.e. inflation adjusted) on IDC's and Iscor's investment.
The revised investment proposals included increased GOSA funding. At
verification, Saldanha Steel claimed costs had only increased in Rand
amounts, and Iscor claimed that there were other reasons for its temporary
withdrawal besides concerns about receiving an adequate return on its
investment. Nevertheless, after the revised investment proposals and the
November 1995 feasibility study, which incorporated the revised financial
structure, were put forth, Iscor returned to the project, a short time
after its withdrawal. The IDC and Iscor concluded a shareholders'
agreement in 1996, including the terms of the revised financial structure
agreed to in the fall of 1995. Construction began in early 1996.
The shareholders' agreement committed each of the two partners to provide
half of the initial equity investment. The IDC and Iscor provided another
equity investment in fiscal year 1999. Both of the IDC's equity
investments were through conversion of a portion of earlier loans made by
the IDC to Saldanha Steel. See Preliminary BPI Memo for details on the
dates and manner of the equity investments, loan conversions, and the
feasibility studies. Almost the entire amount of the equity contributions
is classified as "shareholders' loans" in Saldanha Steel's financial
statements, except for a nominal amount exchanged for share certificates.
The IDC and Iscor, the only two shareholders, each hold 1000 share
certificates with a par value of one Rand each.
In the Preliminary Determination, we countervailed the two IDC (i.e.,
GOSA) equity infusions into Saldanha Steel. As stated above, both of these
infusions were matched by equity investments from Iscor, the only other
equity holder in Saldanha Steel. We based our conclusion in part on the
role played by other countervailable subsidies in attracting Iscor to the
project and in generating an acceptable rate of return. We found that,
because of these other subsidies, Iscor did not provide an appropriate
private investor benchmark and that the project was not consistent with
the usual investment practices of a private investor. Saldanha Steel
argues that it was improper for the Department to consider these other
subsidies in its analysis and that the IDC's investments were made after
independent and objective feasibility studies of the project. Petitioners
respond that the Department correctly considered these other subsidies,
and that statements made at verification by respondents to the effect that
the project would have generated an acceptable rate of return even without
the other subsidies are self-serving post hoc statements.
For this final determination, we find that the two equity investments by
the IDC are not countervailable. We find that Iscor's investments do not
provide an appropriate private investor benchmark for the first of the
IDC's equity investments, but do for the second. We have also determined
that the feasibility studies conducted before the first equity investment
were objective analysis which demonstrate that at the time of the first
equity investment Saldanha Steel "showed an ability to generate a
reasonable rate of return within a reasonable period of time," and, thus,
was an equityworthy investment in accordance with the Department's
regulations. Because we find that Iscor's second equity investment
provides an appropriate private investor benchmark for the second of the
IDC's equity investments, we do not need to determine the equityworthiness
of Saldanha Steel at the time of the second investment. Refer to the
Department's Position on Comment 9 below, for a complete analysis, and to
Final BPI Memo.
B. Improvements to Saldanha Bay Port
We initiated an investigation into whether an improvement to the port of
Saldanha provided countervailable benefits to Saldanha Steel. The
improvement project was undertaken by Portnet, which is a wholly-owned
division of Transnet Ltd. (Transnet), an entity wholly-owned by the GOSA.
Transnet, via various divisions, oversees such transport systems in South
Africa as the ports, rail lines, pipelines and road transport. Portnet is
responsible for constructing, maintaining and managing South Africa's
ports and is divided into two separate divisions: Port Operations, which
collects the services tariffs related to cargo handling; and the Port
Authority, which collects the infrastructure tariffs, including wharfage
fees, for funding the maintenance of existing port infrastructure and the
provision of new port infrastructure.
The project we examined involved the expansion of the general cargo quay
at the port of Saldanha. In our initiation memorandum, we found that
petitioners had provided sufficient evidence to warrant an investigation
that the quay expansion was specific to an enterprise or industry or group
thereof and was not general infrastructure. We noted that petitioners,
after an "exhaustive search," were unable to find evidence that the GOSA
had received adequate remuneration for this program. See Memorandum for
Joseph A. Spetrini from Barbara E. Tillman: Petitioners' Additional
Allegations in the Countervailing Duty Investigation of Certain Hot-Rolled
Carbon Steel Flat Products from South Africa (C-791-810), January 29,
2001. After reviewing the GOSA' questionnaire responses, we preliminarily
determined that the GOSA received adequate remuneration for the provision
of infrastructure in the form of an extension of the general cargo quay at
the port of Saldanha. See Preliminary Determination, 66 FR at 20270.
At verification, the Department reviewed the analysis performed for the
extension of the general cargo quay which contained the following: the
total investment amount in real and nominal terms, revenues and
expenditures projected over a 30-year period, and a cash-flow analysis
over that same period. This analysis also showed the hurdle rate, as set
by Transnet, in real terms. We verified that the analysis performed by
Portnet for the quay expansion was based on projected wharfage fees and
conservative cash flow projections. The analysis projected that the
internal rate of return (IRR) would exceed the hurdle rate in real terms
and that the net present value (NPV) would be positive. Id., at 16-17. In
addition, we found at verification that the actual cost of this project
was lower than the amount budgeted for the project. Id., at 18.
At verification, the Department examined in detail the wharfage fees
which Portnet collects to fund the maintenance of existing port
infrastructure and the provision of new port infrastructure. During the
POI, the import and export ad valorem rates were 1.78 and 0.89 percent,
respectively. We verified that these wharfage fee rates had remained the
same from 1991, until changing in 2001. Because these fees are assessed on
an ad valorem basis, the revenue collected increases with the total value
of shipments. Based on company projections, Portnet expected an increase
in the volume of shipments, and, correspondingly, the total value of
shipments, the accommodation of which was one of the aims of the
improvement. To support their claim that the wharfage fees projected as
revenue for this cargo quay expansion project would be sufficient to cover
the capital expenditures for this expansion, Portnet officials also
demonstrated at verification that actual wharfage fee income collected at
all of the South African ports exceeded all of Portnet's capital
expenditures for its fiscal years ending March 1996 through March 2000.
Id., at 19.
Pursuant to section 771(5)(E)(iv) of the Act, a company receives a
benefit for the provision of goods or services if the government provides
the goods or services for less than adequate remuneration. In defining
"adequate remuneration," the statute states:
For purposes of clause (iv), the adequacy of remuneration shall
be determined in relation to prevailing market conditions for
the good or service being provided or the goods being purchased
in the country which is subject to the investigation or review.
Prevailing market conditions include price, quality, availability,
marketability, transportation, and other conditions of purchase
or sale.
In section 351.511 of our regulations, we set forth a hierarchy for
determining whether a good or service is being provided for less than
adequate remuneration. Under that hierarchy, we first examine whether
there are private providers of the same good or service. Section
351.511(a)(2)(i) of the regulations directs us to judge adequate
remuneration ". . . by comparing the government price to a market-
determined price for the good or service resulting from actual
transactions in the country in question." In this case, there are no other
operators, besides Portnet, of commercial ports in South Africa. The next
step in the regulatory hierarchy is to measure the adequacy of
remuneration ". . . by comparing the government price to a world market
price where it is reasonable to conclude that such price would be
available to purchasers in the country in question." See 19 CFR
351.511(a)(2)(ii). There is no such world market price. Thus, the
Department will normally seek to ". . . measure the adequacy of
remuneration by assessing whether the government price is consistent with
market principles." See 19 CFR 351.511(a)(2)(iii). Such an analysis can
include whether the price or fees charged by the government were
sufficient to cover all costs and to provide a rate of return which would
ensure future operations.
Applying the third step of the regulatory hierarchy, based on our
analysis of the information on the record, we determine that the GOSA did
not provide this infrastructure for less than adequate remuneration
because the price is consistent with market principles. First, the cash-
flow analysis performed by Portnet for this cargo quay expansion projected
an IRR above the hurdle rate in real terms, as well as a positive NPV.
Second, the wharfage fees used on the revenue side of the cash-flow
analysis were conservative. In addition, the actual costs of the quay
expansion came in under budget. Thus, the GOSA ensured that the fees it
would receive on this expansion were sufficient to cover the cost of
building this expansion and to provide a return which would ensure future
operations.
Improvements to the Sishen-Saldanha Rail Line
We initiated an investigation into whether an upgrade to the Sishen-
Saldanha rail line (SSR) provided countervailable benefits to the
production of subject merchandise. The upgrade was undertaken by Spoornet,
which is a subsidiary of Transnet, an entity wholly-owned by the GOSA.
Spoornet is responsible for the operation of the rail lines in South
Africa; Orex, a unit of Spoornet, is responsible for the operation of the
SSR, which runs from the Iscor-owned Sishen iron ore mine to Saldanha Bay.
The purpose of the SSR upgrade, which began in 1999 and is still
continuing, was to increase the iron ore transport capacity of the SSR.
The project involves the construction of additional crossing loops first
envisioned, but not built, when the line was constructed between 1973 and
1976. The GOSA stated in its questionnaire response that construction of
these additional loops became necessary with increased volumes of iron
ore. The project also involves the upgrade of locomotives, the purchase of
wagons, and the refurbishment (upgrade) of wagons. The iron ore
transported on this line is mined by Iscor and either exported, sold to
Saldanha Steel, or sold to other local mills not involved in the
production of subject merchandise.
In our initiation memorandum, we found that petitioners had provided
sufficient evidence to warrant an investigation that the SSR upgrade was
specific to an enterprise or industry or group thereof and was not general
infrastructure. We noted that petitioners, after an "exhaustive search,"
were unable to find evidence that the GOSA had received adequate
remuneration for this program. See Memorandum for Joseph A. Spetrini from
Barbara E. Tillman: Petitioners' Additional Allegations in the
Countervailing Duty Investigation of Certain Hot-Rolled Carbon Steel Flat
Products from South Africa (C-791-810), January 29, 2001. After analyzing
the GOSA's questionnaire responses, we preliminarily determined that the
GOSA received adequate remuneration for this program. See Preliminary
Determination, 66 FR at 20270.
At verification, we reviewed the four submissions made by Spoornet/Orex
and Portnet to the Transnet Board of Directors for approval of the
project, which encompassed the rail line (Orex) and the iron ore export
terminal at the port of Saldanha (Portnet). We verified that the overall
IRR for this project exceeded the hurdle rate and that the project also
had a positive profitability index, i.e., indicating the number of times
that capital costs can be recouped. We verified that one Transnet hurdle
rate was used in the analysis for this project and that the officials were
conservative in their projections of fee income to be generated by the
upgraded rail line. See GOSA Verification Report, at 21-22.
We found that the fee projections were based on a percentage of the net
FOB value of a conservative projection of iron ore shipments on the SSR,
with Spoornet receiving a certain percentage for the rail line and Portnet
receiving a certain percentage for the iron ore export terminal at the end
of the rail line. The officials explained at verification that they use a
computer model to calculate the average price per ton for rail users and
that it is the customer's prerogative to negotiate different rate
structures, taking into consideration such factors as distance, pay-load
per wagon, and load (turnaround) time. Thus, Spoornet (Orex) negotiates
rates with the users of the SSR in accordance with market factors and
demands. See GOSA Verification Report, at 22-23.
We also discovered at verification that Portnet built a fast-moving
conveyor belt to move iron ore, transported on the SSR and purchased by
Saldanha Steel, from a tippler to a separate Saldanha Steel stockpile. We
verified that Saldanha Steel pays for the use of this conveyor belt via a
port handling fee. We further verified that, from the stockpile, the iron
ore is transported to Saldanha Steel on a slow-moving conveyor belt, which
was built by Saldanha Steel. According to the Portnet officials, the fast-
moving conveyor belt was not part of the upgrade project for the SSR that
included the rail line upgrades and the port improvements for the export
of iron ore. At verification, the officials were unable to provide a copy
of the financial analysis for this conveyor belt. However, they
demonstrated that revenues collected to date had been sufficient to recoup
all costs of building this conveyor belt. See GOSA Verification Report, at
20 and 23-24.
As set forth under section III.A above, pursuant to section 771(5)(E)(iv)
of the Act, a company receives a benefit for the provision of goods or
services if the government provides the goods or services for less than
adequate remuneration. In defining "adequate remuneration," the statute
states:
For purposes of clause (iv), the adequacy of remuneration shall be
determined in relation to prevailing market conditions for the good or
service being provided or the goods being purchased in the country which
is subject to the investigation or review. Prevailing market conditions
include price, quality, availability, marketability, transportation, and
other conditions of purchase or sale.
In section 351.511 of our regulations, we set forth a hierarchy for
determining whether a good or service is being provided for less than
adequate remuneration. Under that hierarchy, we first examine whether
there are private providers of the same good or service. Section
351.511(a)(2)(I) of the regulations directs us to judge adequate
remuneration ". . . by comparing the government price to a market-
determined price for the good or service resulting from actual
transactions in the country in question." In this case, there are no other
operators, besides Spoornet/Orex, of rail lines in South Africa, and there
is no other port provider but Portnet. The next step in the regulatory
hierarchy is to measure the adequacy of remuneration ". . . by comparing
the government price to a world market price where it is reasonable to
conclude that such price would be available to purchasers in the country
in question." See 19 CFR 351.511(a)(2)(ii). There is no such world market
price. Thus, the Department will normally
seek to ". . . measure the adequacy of remuneration by assessing whether
the government price is consistent with market principles." See 19 CFR
351.511(a)(2)(iii). Such an analysis can include whether the price or fees
charged by the government were sufficient to cover all costs and to
provide a rate of return which would ensure future operations.
Applying the third step of the regulatory hierarchy, based on our
analysis of the information on the record, we determine that the GOSA did
not provide this rail line and port upgrade for less than adequate
remuneration because the price is consistent with market principles.
First, the overall IRR for this project exceeded the hurdle rate, and the
project had a positive profitability index. Second, the officials were
conservative in their projections of fee income to be generated by the
upgraded rail line. Thus, the GOSA ensured that the fees it would receive
on this upgrade were sufficient to cover the cost of building the upgrade
and to provide a return which would ensure future operations. We also find
that the conveyor belt built by Portnet for Saldanha Steel was not
provided for less than adequate remuneration because the GOSA demonstrated
at verification that the fees it collected were sufficient to cover the
cost of construction and ongoing operations.
IV. Analysis of Comments
Comment 1: Treatment of the IDC
Saldanha Steel argues that although the IDC is government-owned, it is
neither a public entity nor part of the GOSA. Rather, it is structured
under the Company Act, as are other South African companies. Saldanha
Steel maintains that the IDC is both operationally and financially
independent from the GOSA and does not pursue governmental interests, and
notes that the GOSA does not entrust or direct the IDC's financial
activities.
Further, Saldanha Steel points out that the IDC's investments are made
based on economic and financial principles, and adds that the GOSA has no
presence on the IDC's Board of Directors. Saldanha Steel maintains that
the IDC's board members are executives from other South African and
international corporations, adding that their decision-making abilities
are independent from the GOSA. Additionally, Saldanha Steel argues that
decisions made by the IDC's Board of Directors are done so with complete
autonomy and independence from the GOSA. Moreover, the IDC's Board of
Directors relies solely on commercial considerations and sound business
principles when making decisions.
Petitioners counter that the IDC is a government authority and that
financing provided by the IDC should be regarded as a countervailable
subsidy conferred by the GOSA. In support of their argument, petitioners
note that the IDC is wholly-owned by the GOSA, and that it was created by
statute. Petitioners assert that in the Preliminary Determination, as in
several prior cases, the Department considered the following five factors
when assessing whether the IDC provided subsidies via government action:
(1) government ownership, (2) the government's presence on the IDC's board
of directors, (3) the government's control over the IDC's activities, (4)
the IDC's pursuit of governmental policies or interests, and (5) whether
the IDC was created by statute. Petitioners submit that information on the
record indicates all five factors are present in the instant case.
Petitioners add that the IDC's involvement in Saldanha Steel evidences
the GOSA's support, and, therefore, prompted Iscor's continued financing
of Saldanha Steel. Further, petitioners point to the Preliminary
Determination holding that the IDC's self-funding is not a factor in an
analysis of whether the IDC is a government entity. Additionally,
petitioners assert that neither the statue nor prior cases direct the
Department to consider the financial independence of the IDC in
determining whether the IDC is a government entity.
Department's Position:
We agree with petitioners that the IDC is a government authority as
described in section 771(5)(B)(iii) of the Act. As stated in this section,
a subsidy exists when an "authority" provides a financial contribution to
a person and a benefit is thereby conferred. Further, the statute defines
"authority" as "a government of a country or any public entity within the
territory of the country." Information on the record demonstrates the IDC
is a public entity of the GOSA providing a financial contribution through
its investments in South African companies, and is, therefore, an
authority of the GOSA. While the IDC may be self-financing, it is not
independent of government control. The fact that the IDC was created by
statute, and that the GOSA's Minister of Trade and Industry appoints the
board's chairman and managing director, clearly demonstrates that the
IDC's authority is derived from the GOSA. Additionally, DTI's annual
reports include information on the IDC's development activities. Refer
to "Industrial Development Corporation" (section I.A.) above, for
additional discussion.
We agree with petitioners that, for this final determination, as in the
Preliminary Determination, the fact that the IDC is now self-financing is
not a sufficient basis for determining whether the IDC is a public entity.
On these grounds, therefore, we reject Saldanha Steel's argument that the
IDC is not a government authority, and, therefore, find that its actions
do constitute the actions of the GOSA. As such, the IDC's financial
contributions to Saldanha Steel constitute the conferral of subsidies from
an authority "to a person and a benefit is thereby conferred." See 19 USC
section 1677(5)(B).
Comment 2: Diversification of the South African Economy and Specificity
of Programs
The GOSA and Saldanha Steel argue in this case, as the GOSA did in SSPC
Final, that the Department failed to take into consideration the
diversification of the South African economy in conducting its de facto
specificity analysis, in accordance with Article 2.1(c) of the Agreement
on Subsidies and Countervailing Measures, Final Act Embodying the Results
of the Uruguay Round of Multilateral Trade Negotiations (April 15, 1994).
The GOSA argues that the disproportionate amount of funding provided to
the basic metals and steel industry is mirrored by the proportion that
these industries represent of total tradeable goods in the South African
economy. According to the GOSA, the South African economy is critically
dependent upon the "beneficiation" of local raw materials for its economic
growth; therefore, its development initiatives favor the resources
available for development in South Africa. Saldanha Steel adds that, in
its view, the GOSA demonstrated at verification that mining and metals
comprise 47 percent of South Africa's fixed capital stock of tradeable
goods, and that failing to take this lack of diversification into account
when performing the specificity analysis "would imply, inter alia, that
payments under the 'Byrd Amendment' to mining and metals company are de
facto specific, as would be all U.S. agricultural programs."
Furthermore, argues the GOSA, given the economic situation it faces, not
only does its funding inevitably tend to favor projects beneficiating
natural resources, but its funding is inevitably dominated by various
large projects. According to the GOSA:
Given the relatively small size in international terms of the South
African economy and the particular local resources available to the South
African industrialist, it is clear that only a few of these large scale
projects can be established at any particular time. Depending on market
forces, different industries would, from time to time, indicate the most
favourable returns at different times. As IDC, (and the South African
economy) has not in the past had the benefit of a range of investment
opportunities to choose from, its investment choice was limited to those
projects offering real investment returns which could be partnered with
a local private sector investor with the necessary technological support.
Petitioners claim that the GOSA and Saldanha Steel have not demonstrated
that the South African economy has limited diversification. They argue
that statements in the Department's verification report pertaining to a
meeting with the consultancy firm that compiled the charts submitted by
the GOSA at verification show that those charts were unverifiable. They
further argue that the 47 percent figure cited by Saldanha Steel is not
apparent on those charts.
They also refer to the fact that, according to these charts, the basic
iron and steel products sector accounted for 19.39 percent of the fixed
capital stock of all manufacturing industries financed by the IDC, but
received 52 percent of IDC financing. Thus, they argue, even if the charts
were verified, the metals sector accounted for a disproportionate share of
IDC financing. Finally, petitioners refer to the large number of
industries funded by the IDC as an indication that the economy of South
Africa is diverse.
Department's Position:
In evaluating whether a subsidy is de facto specific, section
771(5A)(D)(iii)(IV) of the Act states that "the administering authority
shall take into account the extent of diversification of economic
activities within the jurisdiction of the authority providing the subsidy,
and the length of time during which the subsidy program has been in
operation." According to the Statement of Administrative Action (SAA) at
section B.2.c.(3), "The Administration intends that these additional
criteria serve to inform the application of, rather than supersede or
substitute for, the enumerated specificity factors. (That is, while they
are not additional indicators of whether specificity exists, these
criteria may provide a clearer context within which the de facto factors
would be analyzed). Thus, for example, with respect to economic
diversification, in determining whether the number of industries using a
subsidy is small or large, Commerce could take account of the number of
industries in the economy in question."
The Department has not addressed this issue frequently in the past and
the parties did not cite any past decisions regarding the Department's
analysis of the relevance of economic diversification to its specificity
analysis. In SSPC Final, the GOSA argued that the Department should
consider the economic diversification of the South African economy in
determining whether Section 37E benefits were de facto specific. We
decided not to address the issue after determining that Section 37E
benefits constituted an export subsidy.
However, because the arguments on diversification in this case focus on
IDC loans and loan guarantees, which are not export subsidies, it is
necessary to address this issue. After considering the evidence given to
the Department at verification regarding the diversification of the South
African economy and the arguments submitted by the parties, we find no
basis for altering our conclusions involving the specificity of the IDC
programs under investigation in this case. As petitioners note, we were
unable to completely verify the accuracy of the chart on capital stock
provided by the IDC. The IDC referred us to a consultancy firm as the
source of the data used in the chart. That firm, however, was unable to
reconcile the IDC data with its own data within the time available. The
firm speculated that the discrepancies might be the result of data
manipulation or of using different versions of the data, which is
periodically updated. See Memorandum for the File from Barbara Tillman, et
al., Regarding Discussions with DRI/WEFA, August 14, 2001. However,
assuming that the data on capital stock may inform us about
diversification in an economy, we have analyzed the GOSA's and Saldanha's
arguments based on the information provided at verification.
The charts provided by the GOSA are apparently intended to prove that the
fixed capital stock of the metals and mining industries accounts for a
large part of the total fixed capital stock in those industries which
produce tradeable goods in South Africa. Regarding the 47 percent figure
calculated by Saldanha Steel, it seems incontestable that the basic metals
and mining industries accounted for nearly one half of the fixed capital
stock of the "tradable goods" portion of the South African economy
throughout the period 1990 through 1999. As noted in our verification
report, the basic iron and steel products sector by itself accounted for
19.39 percent in 1999. We do not believe, however, that, at least by
itself, these are relevant points.
As petitioners note, although the basic metals industry accounts for
19.39 of the fixed capital stock in the manufacturing industries, it
received, by several measures, over half of IDC financing. Likewise, our
specificity analysis of the programs under investigation reveals the basic
metals industry, the steel industry, or Saldanha Steel in particular,
received benefits well in excess of 19.39 percent. See Final BPI Memo. We
have not calculated how much of the funding provided under the various IDC
programs was provided to the "metals and mining" industries. We do not
find this to be relevant, considering that we are investigating
merchandise in the basic iron and steel products sector, as opposed to the
mining and metals industries.
Respondents appear to be arguing that GOSA funding flows to projects
involving natural resources because beneficiation is part of the IDC's
mandate, industries involving natural resources make up such a large
portion of the South African economy, and South Africa has a comparative
advantage in the beneficiation of natural resources that makes such
industries ripe for profitable investments. However, according to
respondents' arguments, because they can only fund a limited number of
large projects at a time, funding often will be skewed in favor of a
particular industry, or even a particular project, even when examined
relative to that industry's share of the fixed capital stock of the
manufacturing industries. Thus, the reason that the basic metals industry
has received over half of IDC funding although it accounts for only 19.39
percent of the fixed capital stock of the manufacturing industries might
be explained by the IDC's decision to concentrate on the Columbus and
Saldanha Steel projects during those years.
Although these arguments might provide an accurate description of the
situation, we do not believe they provide relevant information for our
analysis. We believe that the proper question to ask is what portion of a
program's funding was provided to a specific enterprise or industry, or
company, relative to all possible opportunities available for funding.
Thus, while the IDC has decided, or has been mandated, to provide funding
only to industries producing tradeable goods, and to concentrate on the
beneficiation of natural resources, the analysis of diversification should
not also be so limited. For example, the fixed capital stock of the
industries other than those manufacturing tradeable goods accounted for
approximately 70 percent of South Africa's total fixed capital stock
throughout the period 1990 through 1999. Some of these industries appear
to be industries that are traditionally the target of development
programs, such as electricity and communications. When measured against
this broader background, the basic iron and steel products industry
accounts for between only 1.8 to 2.6 percent of fixed capital stock during
the relevant years. As already noted, however, the basic metals industry
received over half of IDC funding. See Final BPI Memo.
Likewise, if the IDC chooses, or is mandated, to fund such large projects
that its funding will be skewed towards one industry or project, we do not
have to accept that the universe of possible funding opportunities for the
GOSA is not diverse. This is a choice made by the GOSA; it is not an
inevitable result of the lack of diversification of the South African
economy.
Finally, we are not sure we see the relevance of the fixed capital stock
figures. We do not understand why the amount of capital stock in an
industry indicates the amount of investment that should be flowing into
that industry. In fact, it seems logical to assume that industries with
large amounts of capital stock represent opportunities for development
that are already relatively well exploited, although such industries
might require more investment to replace depreciated capital.
Comment 3: Average Useful Life of Assets
Saldanha Steel asserts that the Department incorrectly used 15 years as
the average useful life (AUL) of assets in its Preliminary Determination,
and argues that it should instead use a 25-year allocation period, as is
used by Saldanha Steel for internal accounting purposes. Saldanha Steel
maintains that the 25-year AUL used by Saldanha Steel is consistent with
19 CFR 351.524(d)(2)(iii) of the Department's regulations, and cites to
Industrial Phosphoric Acid from Israel: Preliminary Results and Final
Partial Rescission of Countervailing Duty Administrative Review, 65 FR
53984 (September 6, 2000) (IPA from Israel) as an example of a previous
case in which the Department accepted the use of a company-specific AUL.
Saldanha Steel further argues that no factors indicate Saldanha Steel's
company-specific calculation of a 25-year AUL is unreasonable, and that it
calculated its company-specific AUL in accordance with South African
generally accepted accounting practices (GAAP).
Petitioners counter that the Department's regulations provide that the
IRS tables apply when determining a company's AUL, unless a company-
specific AUL is more appropriate. Petitioners assert that although it
complies with South African GAAP, Saldanha Steel has provided no statutory
information substantiating its calculation of a company-specific AUL, nor
does its calculation meet the standards set forth in the Department's
regulations. Petitioners refer to Certain Cut-to-Length Carbon Quality
Steel Plate from Italy, 64 FR 73244 (December 29, 1999) in arguing that
Saldanha Steel's company-specific AUL does not accurately represent
Saldanha Steel's AUL of assets, because Saldanha Steel reduced its
depreciation in order to account for less than full production. Further,
petitioners maintain that no information on the record indicated that the
company-specific AUL calculated by the respondent in IPA from Israel was
distorted. However, Saldanha Steel's company-specific AUL is distorted and
should, therefore, not be used by the Department in making its final
determination.
Department's Position:
Pursuant to 19 CFR 351.524(d)(2), the Department presumes that the AUL
set out in the IRS's 1977 Class Life Asset Depreciation Range System is
the appropriate allocation period by which to allocate non-recurring
subsidies, and the burden is placed on the party contesting these AULs to
establish that the IRS tables do not reasonably reflect the company-
specific AUL. As stated in the Preamble to the Department's countervailing
duty regulations, "In our experience, we have found that for most
industries and most types of subsidies, the IRS tables have provided an
accurate and fair approximation of the AUL of assets in the industry in
question." See CVD Final Rule, 63 FR at 65396.
As even Saldanha Steel agrees, the company-specific AUL of 43 years
calculated by Saldanha Steel is not useable because it is based on
insufficient information on asset values and depreciation and the
depreciation figure has been reduced. We also disagree that the estimated
life of 25 years for steel making equipment used in Saldanha Steel's
accounting system and approved for their accounting system by an outside
auditor overcomes the presumption of using the IRS tables as the AUL. As
the regulations clearly state, there are two means by which the
presumption can be overcome, the calculation of a company-specific AUL, or
a country-specific AUL. See section 351.524(d)(2)(i) of the Department's
regulations.
The figure used for accounting purposes, even if it is in accordance with
GAAP guidelines, does not overcome the presumption. GAAP guidelines are
for accounting systems; they do not reflect an alternative basis for
determining the AUL of a company's assets. It is also important to note,
that, even Saldanha Steel's financial statements do not support a
conclusion that 25 years is a reliable estimate of the average useful life
of Saldanha Steel's plant and equipment. Saldanha Steel's 1999 financial
statement states that the estimated useful life ranges from 5 to 25 years.
Its 2000 financial statement notes that 25 years is the estimated maximum
useful life for "plant and equipment" (emphasis added). See Saldanha Steel
Verification Report at 3.
Respondent's cite to IPA from Israel is inappropriate because, in that
case, the company calculated the AUL in accordance with the methodology
described in the regulations, and did not use, as Saldanha Steel has, a
useful life estimated by accountants. For these reasons, we find that
Saldanha Steel has not overcome the presumption of using the IRS tables to
determine the AUL.
Comment 4: Realignment of the Benefit Stream
Petitioners have reasserted their argument advanced before the
Preliminary Determination that the Department should begin the benefit
stream in fiscal year 1999 for non-recurring subsidies received prior to
the commencement of production by Saldanha Steel. Petitioners claim that
there is a link, embedded within legislative history, between the
allocation of subsidies, and the manufacture, production, or export of
merchandise. In their words, there is a "statutorily-mandated link between
subsidization and production." Furthermore, they quote the Preamble, where
the Department states that it attributes subsidies "to the extent
possible, to the sales for which costs are reduced (or revenues
increased)." Final Rule; Countervailing Duties, 63 FR at 65400 (CVD Final
Rule). Petitioners argue that the Department's Preliminary Determination
was incorrect even by its own language, which required novel technology
and an unusually large project.
Saldanha Steel responds that the product produced by Saldanha Steel is
not a new product, and that despite the fact that the production process
is relatively new, Iscor has had extensive experience with the Corex
process. Thus, argues Saldanha Steel, there are no extraordinary
circumstances in this case warranting the use of section
351.524(d)(2)(iv). Saldanha Steel also argues that any delay in the mill's
startup was the result of Rand depreciation, not research and development
issues. Finally, Saldanha Steel argues that although the mill project was
large, greenfield steel mill projects are typically large investments.
Department's Position:
We disagree with petitioners. We do not see how our Preliminary
Determination broke the link between subsidies, and the manufacture,
production, or export of merchandise. We allocated the benefits for the
POI over the sales for the POI for which costs were reduced or revenues
enhanced, i.e., export or total sales, as applicable. The issue is, for
non-recurring subsidies, what portion of each program's total benefit must
be allocated to sales during the POI. Thus, we see no conflict between our
Preliminary Determination and the statute or the Preamble to our
regulations. Petitioners argument appears, however, to be in direct
conflict with section 351.524(d)(2)(iv) of the Department's regulations,
which states that under "certain extraordinary circumstances," the
Department "may consider" realigning the benefit stream. If greenfield
projects automatically met the "extraordinary circumstances" threshold set
forth in the regulations, the regulations would have addressed such
projects explicitly.
Petitioners make an alternative argument that the technology is novel and
the size of the project is large enough to be considered extraordinary.
Regarding the issue of novel technology, in our commentary discussing the
degree of innovation required for subsection 351.524(d)(2)(iv) to apply,
we stated: "The assets needed to develop new technologies, or to produce a
new product may not even have been designed yet, and certainly the product
is not yet developed. " CVD Final Rule, 63 FR at 65397. In our Preliminary
Determination, we concluded that, although the production technology used
by Saldanha Steel (by which we were referring to its ability to smelt iron
ore without a blast furnace) may be relatively new, it had already been
developed and was merely being transferred to a new company in South
Africa. Petitioners, citing the November 1994 feasibility study for the
Saldanha Steel project, state that the Department was incorrect in this
conclusion, and they refer to two new technologies detailed in the study
as "major unproven innovations." Citing Iscor's 2000 Annual Report,
petitioners note that ". . .during fiscal year 2000 Iscor 'seconded' a
team of 40 production engineers to Saldanha, to conduct a four-month study
of 'process constraints' and 'to eliminate technical problems encountered
during ramp-up.'"
The record evidence indicates that the technology used by Saldanha Steel
to smelt ore was already in use by Iscor, as well as Posco in Korea. See
Iscor's 1997 Annual Report, at 28. In addition, we do not believe that the
transfer of a technology from one manufacturer to another negates the need
for additional assistance by production engineers in order to eliminate
technical problems as the technology is put into use. Furthermore, we note
that there is no other record evidence on a second novel technology, first
referred to by petitioners in their case brief; thus, we have no
information that supports a finding that this technology meets the
standard for innovation discussed in the commentary to our regulations.
Petitioners also cite to record references that indicate that Saldanha
Steel is one of the largest projects in South Africa as evidence of the
large size of the Saldanha Steel project. The language in the Preamble
concerning funding of development projects states, in relevant part,
subsidies ". . . to fund extraordinarily large development projects that
require extensive research and development . . ." The Saldanha Steel
project may be quite large in South Africa, but it did not entail, as
discussed above, extensive research and development. Petitioners do not
cite any evidence on the record of extensive research and development,
although they do point to the fact that the project had been envisioned by
Iscor as far back as the 1970s. We think that the record indicates other
explanations for the lag between conception and construction for this
project, including the need to find financing, as well as the
environmental concerns mentioned in various documents submitted by
respondents. Moreover, from the date the first subsidies were provided to
the date production began was only a matter of a few years which does not
represent the type of significant lead time envisioned by the regulations.
Obviously, any new mill, or project involving manufactured goods, will
require some amount of research and development and other planning before
construction begins on production facilities, and more time before those
facilities are completed and sales commence.
Comment 5: Creditworthiness
Saldanha Steel argues that it has demonstrated its creditworthiness in
the period from 1998 through 2000. The company contends that it presented
the Department with the details of four loans at verification that it had
previously classified as short-term loans, but which it now argues should
be considered long-term loans. It argues that, because these loans are
unguaranteed and from commercial lending institutions, they demonstrate
its creditworthiness under section 351.505(a)(4)(ii) of the regulations.
Next, Saldanha Steel argues that it "had no difficulties in meeting its
financial obligations with respect to any of its loans from commercial
banks, including its extensive hedging contracts." It argues that the
Department incorrectly relied on a deferral of payment on one of Saldanha
Steel's loans in reaching the conclusion that Saldanha Steel has been
unable to meet it debt obligations. Saldanha Steel refers to the fact that
the Department verified that deferrals of payments are consistent with
commercial considerations in the South African banking industry. It also
faults the Department for admitting the necessity of taking into account
difficulties of startup organizations in the first years of operation, but
then expecting Saldanha Steel to have been able to meet its obligations
without difficulty by 1998, the year in which Saldanha Steel began
production. Finally it states that the Department's consideration of the
deferral violates section 351.505(a)(4)(iii) of the regulations, which
states that "In determining whether a firm is uncreditworthy, the
Secretary will ignore current and prior subsidies received by the firm."
Petitioners argue that Saldanha Steel has been uncreditworthy since its
inception. They respond to Saldanha Steel's arguments by first objecting
to the fact that Saldanha Steel waited until verification to reclassify
its short-term loans as long-term loans. According to petitioners, they
were denied the opportunity to submit deficiency comments on information
regarding these loans. Specifically, petitioners claim that they were
deprived of an opportunity to comment upon why exactly the loan periods
were extended by a few days beyond a year. They speculate that most of the
extensions can be explained by the need to avoid having the repayment
deadline coincide with a Sunday or a holiday. They also emphasize that
these loans had been explicitly classified by Saldanha Steel as short-term
loans.
Petitioners, citing the Preamble to the Department's regulations, further
argue that, even if the loans can be classified as long-term loans,
Saldanha Steel is a government-owned corporation, and, thus, unlike non-
government-owned corporations, the presence of commercial loans is not
dispositive of its creditworthiness. See CVD Final Rule at 65367.
Petitioners also cite the Preamble in asserting that long-term loans must
be significant to prove creditworthiness. Likewise they refer to what they
consider the insignificant nature of the foreign currency hedge contracts.
Finally, they take issue with Saldanha Steel's assertion that the
Department verified its ability to meet its financial obligations.
Department's Position:
We agree with petitioners, in part. Section 351.505(a)(4)(i) of the
Department's regulations states that the Department may consider, among
other factors, the following in determining the creditworthiness of a
firm: "the receipt by the firm of comparable commercial long-term loans,
and the firm's recent past" and "present ability to meet its costs and
fixed financial obligations with its cash flows" (subsections
351.505(a)(4)(i)(A) and (C)). Section 351.505(a)(4)(i) specifies that a
creditworthiness determination must be based on the receipt of comparable
long-term commercial loans.
The evidence submitted by Saldanha Steel is insufficient to demonstrate
that it is creditworthy. Regarding the four "long-term" loans, Saldanha
Steel clearly believed that they were short-term loans until verification.
We noted in our Preliminary Determination that Saldanha Steel confirmed in
one of its supplemental questionnaire responses that all of its
unguaranteed "credit exposure," except for a small number of loans
specifically identified in the notes to its financial statements, was
short term, and it is impossible to reconcile these loans to Saldanha
Steel's financial statements without considering them to be short-term
loans. The number of days by which these loans exceed one year is
insignificant, and we confirmed that one of the banks which provides such
facilities considers them to be short-term. See Bank 3 Report. Likewise,
verification exhibits suggest that these loans would be classified as
short-term loans by the lending banks. See Saldanha Loan/Equity Exhibits
1a-1d. As petitioners note, the Preamble to the regulations states that
"if, for example, the firm has obtained a single commercial loan in the
year in question for a relatively small amount, and the loan has a short
repayment term (e.g., less than two years), or has unusual aspects,
receipt of that loan will not be dispositive of the firm's
creditworthiness . . . ." We find that exercising this discretion is
appropriate in this case, considering the evidence that both Saldanha
Steel and its lenders considered these loans to be short-term debt.
Likewise, if we examine these four loans, the exchange contracts, and the
supplier credit, we do not believe that this evidence is sufficient to
overcome the fact that a significant portion of Saldanha Steel's long-term
debt had to be restructured. This restructuring included a significant
deferral, in response to what the Department considers Saldanha Steel's
difficulties in meeting some of its debt obligations. See Final BPI Memo.
The Department does not need to demonstrate that Saldanha Steel was unable
to repay every obligation it had. Moreover, in determining whether to add
a premium onto long-term debt obligations for uncreditworthiness, or to
the discount rate which we use to allocate non-recurring benefits, it is
appropriate to place primary emphasis on Saldanha Steel's ability to
manage and repay its long-term debt obligations. The amount of funds due
under the four loans, the exchange contracts, and the supplier credit is
short-term debt, and is minor compared to Saldanha Steel's long-term debt.
We note that we agree with petitioners that the Department did not, as
Saldanha Steel claims, verify that "Saldanha Steel had no difficulties in
meeting its financial obligations with respect to any of its loans from
commercial banks." We verified that Saldanha Steel did meet its financial
obligations, but our report also includes statements from Saldanha Steel
staff that a portion of its debt had to be restructured in order to
provide cash for repayments of other loan obligations. There is other
information on the record suggesting this is the case. See Final BPI Memo.
Finally, we do not agree that section 351.505(a)(4)(iii) of the
regulations applies to the facts of this situation. In the section of this
memorandum discussing the GOSA's equity investments, we discuss the
applicability of the Department's prohibition against double-counting
subsidies. While the deferral was factored into the calculation of the
benefit from a government loan, we are not basing our uncreditworthiness
determination on Saldanha Steel's receipt of the deferral. As Saldanha
Steel notes, the Department verified that deferrals are not an uncommon
banking practice in South Africa, and standing alone are not evidence of
uncreditworthiness. However, the purpose behind the deferrals is
significant to the determination: Saldanha Steel needed the deferral to
meet its debt obligations.
We do not agree with petitioners' suggestion in footnote 121 of its case
brief that the Department should extend its uncreditworthiness
determination to include the period before Saldanha Steel's fiscal year
1998. See Petitioners' Rebuttal Brief, at page 31. While Saldanha Steel
did not have any loans during those years that the Department would
classify as being unguaranteed and from a commercial lender, we believe
this is more a result of Saldanha Steel's greenfield nature rather than a
proven ability to manage debt. Because we have not based this
determination of creditworthiness for the years before 1998 on the four
loans referred to by Saldanha Steel, we do not need to address
petitioners' argument that the significance of these loans should be
considered under a separate standard for government-owned companies. We
also disagree with Saldanha Steel that we should have extended the
greenfield allowance period to beyond 1998, the year in which Saldanha
Steel first began production. Saldanha Steel's difficulties in meeting
its obligations by this point in time demonstrate not just a problem with
obtaining credit, which would arguably be typical for a greenfield
project, but with managing the debt it already had.
Comment 6: Cross-Ownership
Iscor argues that the Department erred in its Preliminary Determination
that cross-ownership exists between it and Saldanha Steel. It asserts that
the facts demonstrate that Iscor cannot use or direct Saldanha's assets or
alleged subsidy benefits in the same way that Iscor can use or direct its
own assets. It first notes that it is not the majority owner of Saldanha
Steel, and does not have a controlling voting interest. Iscor describes
the rationale for attributing subsidies as a "commonality of interest,"
citing the Preamble to the Department's regulations. It then states that
the proprietary facts relied on by the Department to depart from the
"normal" standard used to determine cross-ownership, in which one party
owns a majority interest in the other, are not relevant to the underlying
rationale for attributing subsidies, which it states is a "commonality of
interests, " citing the Preamble to the Department's regulations. While
the details of the facts relied on by the Department are proprietary, as
well as the details of Iscor's discussion of them in its case brief, Iscor
argues the following regarding the irrelevancy of those facts: its
ownership rights are matched by the IDC's; any transactions made between
itself and Saldanha Steel involving either goods or services are at market
prices; and, there is no conflict between Iscor's sales and Saldanha
Steel's sales because Iscor has no marketing rights regarding Saldanha
Steel's export sales, and because Iscor does not produce the thin or ultra-
thin gauge steel produced by Saldanha Steel.
Petitioners respond that the facts demonstrate that Iscor does exercise
its shareholders' rights, whether or not equal to those of the IDC, in
such a manner as to use or direct Saldanha Steel's assets, at least to the
point of protecting its interests in Saldanha Steel. They, like Iscor,
examine each of the proprietary facts relied on by the Department in the
Preliminary Determination, in addition to Iscor's half ownership of
Saldanha Steel, and conclude that each of these facts supports the
conclusion that Iscor controls Saldanha Steel's assets. They also assert
that Iscor acts as the managing or controlling shareholder of Saldanha
Steel, and that the IDC is merely a financial owner of Saldanha Steel.
They cite an SSPC verification report, placed on the record of this
investigation, to support the conclusion that the IDC is chiefly a
financial investor.
Department's Position:
We agree with petitioners. When viewed in the aggregate, the several
facts discussed in the Final BPI Memo demonstrate that Iscor is in a
position to use or direct Saldanha Steel's assets. Refer to Section I.G
above for a complete discussion and to the Final BPI Memo.
Comment 7: Section 37E and Specificity as an Export Subsidy
The GOSA contends that none of the projects rejected for Section 37E
status were rejected on the basis of low or inadequate exports, and adds
that at least one project rejected was for the export of the applicant's
entire production. The GOSA further notes that Section 37E cannot be
regarded as export-specific because several approved projects were not
export-oriented. The GOSA states that the initial export requirement was
removed from the South African Tax Code and that, after the amendment to
the law, none of the approval letters contained an export requirement. The
press release issued to discuss the program's success, the GOSA maintains,
does not make any reference to exports. The GOSA further argues that
Section 37E participants were not restricted to or discouraged from
selling products in the domestic market for domestic consumption.
Saldanha Steel argues that, unlike the Columbus Joint Venture in SSPC
Final, the application for Section 37E treatment submitted on behalf of
Saldanha Steel was made after the export requirement was removed from the
Section 37E legislation. Saldanha Steel asserts that some of the
information contained in the approval letter for Section 37E treatment
deals with stimulating downstream production in the domestic market,
rather than preferential treatment with respect to exports. Saldanha Steel
also claims that, at verification, GOSA officials explained that not all
successful applicants exported. It further argues that political and
economic conditions in South Africa make export-oriented companies
attractive to private South African investors because export earnings are
viewed positively by potential investors. Such export-oriented companies
provide the investor with a hedge against the Rand's depreciation.
Petitioners argue that information on the record, as well as information
obtained during the GOSA's verification, indicates that approval for
Section 37E benefits was contingent upon exports and export earnings.
Petitioners add that, although the export requirement criteria was removed
from the Section 37E legislation prior to the application for benefits on
behalf of the Saldanha Steel project, information contained in the
approval letter for the Saldanha Steel project clearly indicates that
exports were a significant consideration in the granting of benefits under
this program.
Department's Position:
We disagree with petitioners that the Section 37E tax allowances for
Saldanha Steel constitute an export subsidy. An export subsidy, as
described in Section 771(5A)(B) of the Act, "is a subsidy that is, in law
or in fact, contingent upon export performance, alone or as 1 of 2 or more
conditions." Saldanha Steel's application for benefits under this program
was submitted after the export performance requirement was removed from
the enacting legislation. In our Preliminary Determination, we found
Section 37E to be an export subsidy based upon our analysis of Saldanha
Steel's approval documentation. However, the information discussed and
examined at verification supports the respondents' argument that there is
another interpretation of this condition, and that exporting was not a
requirement for approval. See GOSA Verification Report at 12. At
verification, we discovered no evidence to indicate that anticipated
exportation or export performance was considered as one of the factors
upon which Saldanha Steel's approval was based. Our review of the minutes
of the technical committee meeting at which the application for Saldanha
Steel was discussed did not reveal any indication that the committee
considered exportation as one of the bases for its approval
recommendation. As a result, we do not find that the provision of Section
37E approval to Saldanha Steel was contingent, in law or in fact, upon
export performance. See 37E Memo.
Comment 8: Section 37E and Specificity as a Domestic Subsidy
In addition to arguing that the Section 37E program is not an export
subsidy, Saldanha Steel argues that benefits received under this program
cannot be regarded as a domestic subsidy. According to Saldanha Steel, the
very nature of this program, the provision of tax deferrals to large
beneficiation projects, dictates that only a limited number of projects
will be approved.
Petitioners counter that even if Section 37E benefits are deemed not to
be export- contingent, they are a de facto domestic subsidy because of the
limited number of applicants approved for benefits under this program.
Petitioners refer to the Preliminary Determination, in which we found that
the Section 37E program was provided to a limited number of recipients, in
support of this argument. Petitioners further argue that in making its
final determination, the Department should not take into account the
possibility that the number of recipients of a particular program was
limited because of characteristics inherently present in the program.
Department's Position:
As discussed in the "Section 37E Tax Allowances" section above, we have
determined that the Section 37E program is a de facto domestic subsidy.
Although there is no language in the law that expressly limits Section 37E
benefits to an enterprise or industry or group thereof, there are certain
delimiting criteria which applicants were required to meet, including a
requirement of 35 percent value added. Although these criteria alone are
not sufficient to find the program de jure specific, they necessitate an
analysis of the program's specificity on a de facto basis. See Section
771(5A)(D)(ii) of the Act. A total of 24 applications were received, and
17 projects from 13 companies were approved for benefits under Section
37E. See GOSA Verification Report at 12. With only 13 companies approved,
there can be no question that Section 37E was specifically provided to a
group of enterprises. The fact that only 24 total applied and 13 companies
were approved is indicative that the legislation indirectly limited the
potential universe of applicants, and that the approval process winnowed
the group of recipients even further. Although a determination that a
program was provided only to a limited number of enterprises is a
sufficient basis for finding a specific domestic subsidy under section
771(5A)(D)(iii)(I) of the Act, we also find that the steel industry
received a disproportionate share of the Section 37E tax allowances, and
as such, this program is also specific under section 771(5A)(D)(iii)(III).
See also 19 CFR 351.502; 37E Memo.
We also agree with petitioners that a program cannot be found non-
specific because of the nature of projects, companies, or industries it
funds. See SAA at 931-32, see also CVD Final Rule, 63 FR at 65357; and
section 351.502 of the regulations. Furthermore, as discussed above in
Comment 2, on "Diversification of the South African Economy and
Specificity of Programs," we do not find that the respondent's arguments
on diversification alter our specificity conclusions. Accordingly, we
determine that Section 37E is a specific domestic subsidy pursuant to
Section 771(5A)(D)(iii)(I) of the Act because it is limited in number to
an enterprise or group of enterprises. Although we were not required to
undertake additional analyses (19 CFR 351.502), we also determine that
Section 37E is a specific domestic subsidy pursuant to Section
771(5A)(D)(iii)(III) of the Act because the steel industry received a
disproportionately large share of Section 37E tax allowances.
Comment 9: Equity Infusions
Saldanha Steel argues that both of the IDC's equity investments were
consistent with those of Iscor, and thus that they are not countervailable
under section 771(5)(E)(i) of the Act and section 351.507(a)(2) of the
Department's regulations. Saldanha Steel emphasizes that the IDC's and
Iscor's investments were for the same Rand amount, made at the same time,
and provided the same rights, benefits, and type of shares to the
shareholders. Saldanha Steel also argues that none of the exceptions to
section 351.507(a)(2) of the regulations apply in this case; i.e., non-
contemporaneous investments, insignificant private investments, or
different shares purchased. See section 351.507(a)(2)(ii)-(iv).
Saldanha Steel also argues that other programs deemed countervailable
"cannot also be the basis for determining that the equity investments made
by IDC are countervailable." To do so would be "double-counting." To
support its position, it cites to Final Affirmative Countervailing Duty
Determinations; Certain Carbon Steel Products from Sweden, 50 FR 33375
(Aug. 19, 1985) (Swedish Steel). Specifically, Saldanha Steel notes that
in that case we stated: "we {the Department} already account for
subsidies, other than equity, which the company received from the
government by using methodologies specifically designed by the Department
to calculate the benefit from these subsidies. If we countervailed these
subsidies again when measuring the benefits to the company from an equity
investment by the government, we would be double counting." Id., at 33380.
Saldanha Steel also argues that there is no comparison to be made between
the facts of this case and those of Final Affirmative Countervailing Duty
Determination: Certain Corrosion-Resistant Carbon Steel Flat Products from
New Zealand, 58 FR 37366 (July 9, 1993) (New Zealand CORE), relied on by
the Department in the Preliminary Determination to support the proposition
that equity infusion analysis should take into consideration the effects
of other subsidies on a private investor's decision to participate in a
project and on feasibility studies conducted for the project. According to
Saldanha Steel, the difference lies in the fact that the IDC is renowned
for the accuracy of its economic analysis and considers solely the
economic merits of a project, whereas the Government of New Zealand
considers other principles.
Finally, Saldanha Steel argues that, if the Department continues to
conclude that Iscor does not provide an appropriate private investor
benchmark, Saldanha Steel's equityworthiness at the time of the two equity
investments is proven by "an objective financial analysis in the form of
four separate feasibility studies (November 1994, September 1995, November
1995 and April 1998)." It notes that the steel prices used in these
studies were from independent sources. It suggests that two documents
provided in the petition give independent assessments of the project's
rate of return and confirm the rates predicted in the feasibility studies.
Saldanha Steel also notes that data in the verification reports suggests
that, absent section 37E benefits, the shareholders' rate of return in the
November 1995 study still would have been above Iscor's hurdle rate, and
that the IDC and Iscor would have gone forward with the project without
37E status.
Petitioners respond that Saldanha Steel has misinterpreted Swedish Steel,
which, according to petitioners, actually provides support for the
Department's position in the Preliminary Determination that equity
infusions should be examined in the context of other subsidies provided.
They argue that Saldanha Steel's attempt to distinguish New Zealand CORE
from the present case fails. According to petitioners, the fact that the
IDC might be solely concerned with the economic merits of its investments,
and the Government of New Zealand might have other concerns, is
irrelevant. The central point of New Zealand CORE, they argue, is that the
returns projected in the feasibility studies were predicated on receipt of
subsidies. Finally, they assert that statements made at verification by
Iscor and the IDC suggesting that they would have gone forward with the
project even if Saldanha Steel had not received 37E status are self-
serving post hoc assertions.
Department's Position:
Section 351.507(a)(1) provides that a benefit from an equity infusion
exists "to the extent that the investment decision is inconsistent with
the usual investment practice of private investors, including the practice
regarding the provision of risk capital, in the country in which the
equity infusion is made." Section 351.507(a)(2) provides for the use of
private investor prices as benchmarks in certain situations in applying
section 351.507(a)(1). Section 351.507(a)(3) provides that, if appropriate
private investor prices are not available, the Department will determine
whether the firm funded by the government-provided equity was
equityworthy. Section 351.507(a)(4) states that a firm is equityworthy if
"from the perspective of a reasonable private investor. . . the firm
showed an ability to generate a reasonable rate of return within a
reasonable period of time."
For this final determination, we do not find that the IDC's equity
investments constitute countervailable equity infusions. We continue to
find that Iscor does not provide an appropriate private investor benchmark
for the first equity infusion. However, the record indicates that Saldanha
Steel "showed an ability to generate a reasonable rate of return within a
reasonable period of time." We also find that, for the second equity
infusion, Iscor does provide an appropriate private investor benchmark,
and, thus, that the IDC's second equity infusion is not countervailable.
While we do have the precedents of New Zealand CORE, which we relied on
in our Preliminary Determination, and Swedish Steel, we find that both
cases were decided prior to the adoption of our current statute and new
regulations and therefore, neither case is determinative of the outcome of
this case. Swedish Steel stands for the proposition that, when measuring
the amount of the benefit from a countervailable equity infusion, the
Department cannot compare a benchmark rate against an actual rate of
return reduced by the amount of other subsidies. As petitioners note,
however, that point is now moot, given that the Department no longer
measures the benefit from an equity infusion by comparing a benchmark rate
against an actual rate of return. Pursuant to the new regulations, the
entire amount of the infusion is treated as a grant. However, other
statements in Swedish Steel suggest the conclusion was intended to have
broader applicability: e.g., "In determining the equityworthiness of the
company, the Department analyzes the operations of the company as a
private investor would at the time the investment was made without
considering the sources of the funds received." 50 FR at 33380 (emphasis
added).
Section 351.507(a)(4)(iii) states, "In determining whether a firm was
equityworthy, the Secretary will ignore current and prior subsidies
received by the firm." According to the Preamble, "it would be too
difficult and speculative a task to determine what the company's
performance would have been had it not previously benefitted from a
subsidy." CVD Final Rule, 63 FR at 65374. Thus, the Department is
generally unwilling to speculate what parties might have done absent
"other subsidies." Although New Zealand CORE does indicate that when a
new plant or company is being created it may be appropriate to examine
all of the commitments (whether or not countervailable) which the
government may make to ensure that the project will go forward regardless
of its projected return, that case was decided prior to the Department's
current regulations, and, thus, we do not believe it provides the best
guidance on this particular issue.
With regard to the first equity infusion, the Department determines that
the first equity contributions made by the IDC and Iscor were not made on
comparable terms or in a comparable form, and thus that Iscor's
contribution cannot be used as a benchmark for the IDC's. The terms of the
IDC's first equity investment are business-proprietary information. See
Final BPI Memo for a comparison of the IDC's and Iscor's contributions.
Because no private investor benchmark is available for the first equity
infusion, we have to determine the equityworthiness of Saldanha Steel
under the four factors listed in section 351.507(a)(4)(i) of the
regulations. Two of those factors involve analysis of past performance
(351.507(a)(4)(i)(B) and (c)) and are not relevant because Saldanha Steel
was a greenfield mill at the time of the investments. Another factor
refers to investments by private investors, which is also not applicable
in this situation given our determination regarding Iscor and the fact
that there were no other private investors. See 19 CFR
351.507(a)(4)(i)(D). The remaining factor refers to "objective analyses of
the future financial prospects of the recipient firm or the project . . .
." Id., at 351.507(a)(4)(i)(A).
The GOSA submitted four feasibility studies in its initial questionnaire
response. These reports stated rates of return and a hurdle rate that
needed to be met in order for the project to go forward. Iscor submitted
internal memoranda regarding the Saldanha Steel project that stated
similar rates of return along with its hurdle rate. As discussed in the
GOSA verification report, the IDC explained how it derived the hurdle rate
figure noted in its feasibility studies. As noted in the verification
report, at the outset of the project, outside parties were consulted to
project the costs of various options for outfitting the plant. The
partners also consulted outside experts to project the future of steel
prices and market opportunities. The IDC also explained at verification,
and Iscor confirmed this point, that it had made its model for calculating
the rate of return available to Iscor. It also explained that the general
model, although not the particular model used for the Saldanha Steel
project, had been examined by the representative of a banking consortium
in earlier years. Finally, at verification, independent confirmation of
the appropriateness of the hurdle rate used by the IDC was provided by a
firm that provides advice in South African investments. Experts with whom
we met at verification also stated that the IDC in general conducts sound
equity investment analyses. Although this information does not demonstrate
that the IDC's conclusions in this case were sound, it does support the
conclusion that the IDC's methodology is sound and respected.
There was never a comprehensive examination, by a party other than a
shareholder, of the combined elements of the study. However, the major
components of the study, including steel sales revenue, plant costs,
operational costs, the hurdle rate, and the rate of return calculation
model and methodology, were examined by independent outside parties. While
these studies show some wavering of the project's return to points above
and below the hurdle rate, the final study conducted before the first
equity contribution demonstrates that the project and shareholders' rates
of return were both above the hurdle rate.
In making their allegations of post hoc, self-serving statements,
petitioners cite three examples: statements made by Iscor officials
concerning the size of Iscor's hurdle rate, statements made by Iscor
regarding the effect of other subsidies on the project's rate of return,
and statements by both investors regarding their willingness to proceed
with the project absent other subsidies. We have not relied on these
statements in making our determination. We did not rely on Iscor's
statements that its hurdle rate was comparable to the IDC's. Rather, we
found that the IDC's construction of its hurdle rate appeared reasonable,
and it was a rate that a consultant on investments indicated was
appropriate for a project like Saldanha Steel. Likewise, we have not
attempted to determine what the project's rate of return would be absent
other subsidies, and, thus, did not consider the parties opinions on this
matter.
Regarding the second equity infusion, we find that there are no
differences between the terms or the form of the IDC's and Iscor's
investment. See 19 CFR 351.507(a)(2). Furthermore, there is no evidence on
the record that indicates that Iscor's second equity contribution is not
an appropriate private investor benchmark. Therefore, we have used Iscor's
contribution as our benchmark (see Final BPI Memo), and determine that the
IDC's investment is consistent "with the usual investment practice of
private investors," and that the equityworthiness analysis of section
351.507(a)(4) does not need to be addressed.
Comment 10: Loan Guarantees Provided by the IDC
The GOSA asserts that Impofin Ltd. (Impofin) does not provide any import
finance guarantees, but instead only provides import finance credit
facilities, further adding that the IDC provides all import finance
guarantees where facilities are taken up directly by the importer from the
foreign bank. With respect to guarantees provided by the IDC, the GOSA
asserts that, for the majority of import finance facilities where the IDC
provides a guarantee, borrowers' guarantee fees are comparable with
commercial guarantee fees, regardless of the industry. The GOSA stresses
that no evidence exists to illustrate that preferential guarantee fees are
given to borrowers under this program, and adds that only smaller
facilities are charged higher rates, in order to recover the unit costs of
structuring the facility. The GOSA maintains that the IDC's ability to
provide loan guarantees to Saldanha Steel is a result of the IDC's status
as a financial institution rather than its position as an investor in
Saldanha Steel. The GOSA further stresses that import credit facilities
provided by the IDC should be viewed in totality as they are one finance
scheme, whether as a conduit loan handled by Impofin or a direct loan
guaranteed by the IDC.
Saldanha Steel argues that loan guarantees provided by the IDC through
its wholly-owned subsidiary Impofin, cannot be countervailed because the
guarantee fee charged by the IDC for the provision of loan guarantees is
consistent with commercial considerations, and that these loans are
negotiated as a group of facilities. Saldanha Steel further asserts that,
because the Department has established a commercial guarantee fee, only
the difference between the Impofin fee and the commercial fee, if any,
may be considered in terms of determining a benefit, rather than
calculating the difference in interest rates that the respondent would
have paid absent the government guarantee.
Petitioners argue that loan guarantees provided to Saldanha Steel were
done so at preferential rates, and that Saldanha Steel would have been
unable to obtain foreign loans without such guarantees. Petitioners also
argue that, unlike the respondent in SSPC Final, Saldanha Steel is
uncreditworthy, and that the interest rates charged to Saldanha Steel by
the foreign lenders were affected by the IDC's provision of guarantees.
Petitioners further argue that the Department should countervail not only
the preferential guarantee fee charged by the IDC, but also the
preferential interest rate the IDC secured for Saldanha Steel.
Additionally, petitioners argue that the transnational subsidies rule (19
CFR section 351.527) does not apply to loans obtained by Saldanha Steel
from foreign banks because Saldanha Steel could not have obtained these
loans without guarantees provided by the IDC. Thus, the provision of loan
guarantees by the IDC meets the statutory criteria for a countervailable
subsidy. Petitioners further argue that the Department should consider
Saldanha Steel to be uncreditworthy and "high risk," and, thus should use
a guarantee fee of 0.5% (the high end of range) as our benchmark fee.
Department's Position:
We agree with petitioners, in part. Section 351.506(a)(1) of the
regulations states that
". . . [a] benefit exists to the extent that the total amount a firm pays
for the loan with the government-provided guarantee is less than the total
amount the firm would pay for a comparable commercial loan that the firm
could actually obtain on the market absent the government-provided
guarantee, including any difference in guarantee fees." See 771(5)(E)(iii)
of the Act; see also CVD Final Rule, 63 FR at 65410. As outlined in the
"Loan Guarantees Provided by the IDC" section above, we have examined the
terms of the guarantees provided to Saldanha Steel by the IDC, and
determine that the IDC's provision of loan guarantees to Saldanha Steel,
regardless of the fact they are negotiated as a group, constitutes a
benefit within the meaning of section 771(5)(E)(iii) of the Act and
section 351.506 of the regulations. Furthermore, we have included in our
analysis of this program the direct loans to Saldanha that are guaranteed
by the IDC, and the conduit loans provided by Impofin to Saldanha which
are also guaranteed by the IDC.
Although we verified that some of the guaranteed loans were provided
under OECD guidelines for export credits, we disagree with respondents
that all of these guaranteed loans were provided under OECD guidelines for
official export credits. See GOSA Verification Report, at 8. Respondents
argue that we cannot countervail these loans because they are
transnational or cross-border subsidies; however, we are not
countervailing these loans. Rather, we are only determining whether there
is a benefit from the IDC's guarantee of these loans. As the Act clearly
directs, we must examine the difference in the amount paid on the loan and
the amount that would be paid on a comparable commercial loan, including
any adjustment for differences in guarantee fees (see section 771(5)(E)
(iii) of the Act).
We also disagree with both petitioners' and respondents' arguments
concerning the appropriate guarantee fee to use in the calculation. Using
other guarantee fees charged by the IDC, as petitioners appear to be
arguing, would not be appropriate unless there were no information on the
record regarding guarantee fees charged by commercial banks. However, we
do have information on the record concerning the guarantee fees charged by
commercial banks. Additionally, we disagree with respondents that the fee
charged by the IDC on these guarantees is consistent with commercial
considerations. The information on the record shows that commercial
bankers would charge a higher guarantee fee than the IDC. Finally, we
disagree with petitioners that Saldanha Steel was uncreditworthy when it
received these guarantees (refer to "Creditworthiness" section above).
Comment 11: Rates for Loan Guarantees
The GOSA and Saldanha Steel have argued that the commercial guarantee
rate chosen by the Department in SSPC Final is not a valid comparison with
the IDC guarantees because of Iscor's role in the provision of loan
guarantees to Saldanha Steel by the IDC, while the rate quoted in SSPC
Final was, apparently, for a single guarantor. Therefore, according to the
GOSA and Saldanha Steel, the IDC was only liable for half the value of the
guaranteed loans, while the benchmark guarantor would be liable in full.
Additionally, Saldanha Steel argues that in SSPC Final, the Department
determined that it was inappropriate to compare interest rates charged by
foreign banks to commercial interest rates, when determining if there is a
financial contribution from loan guarantees provided by the IDC.
Department's Position:
We disagree with the GOSA's and Saldanha Steel's argument, because,
regardless of Iscor's role in the guarantees provided to Saldanha Steel,
the IDC's liability does not appear to be limited. Nothing on the record
indicates that Saldanha Steel's debtors are obligated to seek only half of
their repayment from the IDC, and the other half from Iscor. Rather,
during verification, GOSA officials explained that the IDC is the first-
line guarantor. See GOSA Verification Report. Moreover, the standard for
determining whether a benefit exists is not the net cost to the guarantor,
but rather the benefit to the recipient that can only be determined by
examining what Saldanha Steel would have to ". . . pay for a comparable
commercial loan if there were no guarantee by the authority. . . " See
section 771(5)(E)(iii) of the Act. Therefore, we determine that the
commercial guarantee rate chosen by the Department in SSPC Final is a
valid comparison with guarantees provided by the IDC and in this final
determination.
Comment 12: Wharfage fees
The GOSA argues that (1) it is not correct to regard the difference in
import and export wharfage fees as "revenue foregone" and, (2) there is no
basis for the Department to conclude that the lower export wharfage fees
amount to anything less than the full recovery of cost plus a market-
related profit.
Petitioners argue that the GOSA has never explained why the export rate
is lower than the import rate and that no such explanation was offered at
verification. Accordingly, petitioners contend, the GOSA has provided no
basis for the Department to conclude that the lower fee for exports was
not an export subsidy.
Department's Position:
We agree with petitioners that the GOSA has not provided an acceptable
explanation for the difference between the export wharfage fee and the
import wharfage fee. Further, the GOSA was unable to provide an
explanation or supporting evidence at verification with regard to the
basis for the difference in the import and export rates. Therefore, as
detailed above in Section II.E, we continue to find that the GOSA's lower
wharfage fees for exports constitute a countervailable export subsidy
pursuant to section 771(5A)(B) of the Act and section 351.514(a) of the
regulations.
Comment 13: Saldanha Bay Port Expansion Project, the Sishen-Saldanha Rail
Line Upgrade and General Infrastructure
Saldanha Steel contends, with regard to the improvements to the Saldanha
Bay port and the SSR, that the Department correctly determined in the
Preliminary Determination that investments and services provided by
Transnet constitute "general infrastructure," in accordance with the
exception set forth in section 351.511(d) of the Department's regulations.
The company notes, in the context of its argument regarding Portnet's
improvements to the Saldanha Bay port, that this regulation provides that:
A financial contribution does not exist in the case of the government
provision of general infrastructure. General infrastructure is defined as
infrastructure that is created for the broad societal welfare of a
country, region, state or municipality.
In the context of its argument regarding Spoornet's improvements to the
SSR, Saldanha Steel maintains that Transnet provides general
infrastructure in several sectors throughout South Africa.
Petitioners did not comment on this issue.
Department's Position
We do not agree with respondent's contention that the Department
preliminarily determined that the expansion at the port of Saldanha, or
the upgrade of the SSR, constituted "general infrastructure," which was
therefore subject to the exception for finding a financial contribution
provided in section 351.511(d) of the regulations. The Department did not
determine, for purposes of the Preliminary Determination, that these
infrastructure projects constituted general infrastructure for the "broad
societal welfare" of the country, region, state or municipality. Section
351.511(d) of the regulations states that, for goods and services, a
financial contribution does not exist in the case of government provision
of general infrastructure. The Preamble of the regulations describes the
types of goods and services that might be considered infrastructure,
including "interstate highways, schools, health care facilities, sewage
systems or police protection." CVD Final Rule, 63 FR at 65378. According
to the regulations, if we find that these types of infrastructure were
provided for the broad societal welfare, they would be considered general
infrastructure. However, in the Preamble to the regulations, we note that
even infrastructure of the types described may not constitute general
infrastructure if it does not satisfy the public welfare concept. Id.
The services at issue here (port services and rail transport services)
are not being provided for the broad welfare of society even in the region
in which they are located. As noted above, in Section III.A, the
Department has found that the expansion of the general cargo quay at the
port of Saldanha was provided for the purpose of facilitating the imports
and exports of a limited number of companies who were, or would be,
utilizing the port. In addition, in Section III.B above, the Department
has found that the upgrade of the SSR was provided for the purpose of
increasing the capacity for transporting iron ore and a few other
minerals. Therefore, neither the expansion at the port of Saldanha, nor
the upgrade of the SSR, meet the concept of "broad societal welfare" of
the country, region, state or municipality set forth in the regulations,
and neither project qualifies for the exception provided in section
351.511(d) of the regulations. Because these two projects do not
constitute general infrastructure, we examined, in both the Preliminary
Determination and in this final determination, whether they were provided
for less than adequate remuneration.
Comment 14: Improvements to the Sishen-Saldanha Rail Line
Saldanha Steel contends that Spoornet's improvements to the SSR were
consistent with market principles and that there is no evidence supporting
a change in the Department=s Preliminary Determination that the upgrade of
the SSR was not countervailable. The company notes that Spoornet is a
profitable Transnet subsidiary that follows normal commercial practice
when deciding which investments to make in South Africa. It further notes
that Spoornet is the only provider of rail services in South Africa and
that its potential investments are reviewed by Transnet, which provides
general infrastructure in several sectors throughout South Africa.
Saldanha Steel argues that the Department acknowledged in its Preliminary
Determination that Spoornet "set prices for this infrastructure
consistently with market principles, i.e., that it planned to recover the
costs of its investments plus an amount for profit, in accordance with
section 351.511(a)(2)(iii) of the regulations." See Saldanha Steel=s
August 21, 2001 case brief, at 29. Saldanha Steel further contends that
the Department verified that Spoornet undertook a rigorous economic study
of the financial feasibility of the SSR expansion and that Spoornet
demonstrated that its projected return from the expansion exceeded its
hurdle rate.
Department's Position:
We agree with Saldanha Steel's contentions, as verified by the
Department, that Spoornet undertook an analysis of the financial
feasibility of the SSR upgrade, in accordance with market principles, and
that the projected return exceeded the hurdle rate. We also found at
verification that the project had a positive profitability index and that
the officials were conservative in their projections of fee income to be
generated by the upgraded rail line. Therefore, as detailed above in
Section III.B, we have found that this upgrade was not provided for less
than adequate remuneration.
Comment 15: Improvements to Saldanha Bay Port
Saldanha Steel argues that Portnet's improvements to the port of Saldanha
were consistent with market principles and that there is no evidence
supporting a change in the Department's Preliminary Determination that the
expansion of the general cargo quay was not countervailable. The company
notes that Portnet is a profitable Transnet subsidiary that follows normal
commercial practice when deciding which investments to make in South
Africa.
Saldanha Steel argues that the Department acknowledged in its Preliminary
Determination that Portnet "'set prices for this infrastructure
consistently with market principles, i.e., that it planned to recover the
costs of its investments plus an amount for profit, in accordance with
section 351.511(a)(2)(iii) of our regulations.'" See Saldanha Steel's
August 21, 2001 case brief, at 28. Saldanha Steel further contends that
the Department verified that Portnet undertook a rigorous economic study
of the financial feasibility of the expansion at the port of Saldanha and
that Portnet demonstrated that its projected return from the expansion
exceeded its hurdle rate. According to Saldanha Steel, the Department
verified that the projected cost of the extension, used in the model,
turned out to be higher than the actual cost of the expansion and that the
total actual expenditures came in under budget.
Department's Position:
We agree with Saldanha Steel's contentions, as verified by the
Department, that Portnet undertook an economic study of the financial
feasibility of the port expansion and that the projected IRR exceeded the
hurdle rate in real terms. We also found that actual wharfage fees
collected at all of the South African ports exceeded all of Portnet's
capital expenditures in the years we examined, supporting Portnet's claim
that wharfage fees projected as revenue for this cargo quay expansion
project were sufficient to cover the capital expenditures for the
expansion. Therefore, as detailed above in Section III.A, we have found
that this expansion was not provided for less than adequate remuneration.
Comment 16: Saldanha Steel's Sales Values
Petitioners argue that the Department should deduct a certain loss
provision of Saldanha Steel from the sales values used to calculate
Saldanha Steel's ad valorem subsidy rate. They contend that, at
verification, the Department discovered that Saldanha Steel's financial
records contain a loss provision for certain amounts being held in a type
of escrow. Petitioners note that the Department discussed the proper
treatment of returned sales in the General Issues Appendix of the final
determination in Certain Steel Products from Austria, 58 FR 37217 (July 9,
1993) (Certain Steel Products), by stating:
According to our longstanding practice, the value of returned
merchandise, regardless of whether it is of first or second
quality, is subtracted from the value of a company's total
sales. The reason for this practice is that the return of a
previously sold good indicates that the sale has been cancelled.
Such sales should not be included in a company's total sales.
In comparing Saldanha Steel's 2000 financial statements to Exhibit Sales-
4 in the Saldanha Steel Verification Report, petitioners conclude that
Saldanha Steel included the loss provision amounts in the sales values
reported to the Department. They argue that Saldanha Steel recalculated
its sales values during verification with the amount of the loss provision
excluded, referencing Exhibit Sales-2B in the Saldanha Steel Verification
Report, and that the Department should use the recalculated values in the
final determination.
Saldanha Steel responds that the sales at issue should be included in the
sales denominator. It argues that, at the Department's request at
verification, Saldanha Steel recalculated its sales values to reflect a
potential change in value as a result of the sales at issue. However,
Saldanha Steel contends that the Department did verify that these amounts
were being held in a type of escrow.
Department's Position:
We agree with petitioners. We discovered at verification that Saldanha
Steel had a loss provision that might need to be deducted from the sales
totals reported to the Department; thus, we requested that Saldanha Steel
provide a recalculation of its sales totals less these amounts
corresponding to the loss provision. See Saldanha Steel Verification
Report, at 2 and Exhibits Sales-2A, -2B, and -4. In comparing the
verified, recalculated total sales amount to Saldanha Steel's fiscal year
2000 Income Statement, we conclude that it is appropriate to deduct the
loss provision from Saldanha Steel's total sales for purposes of
calculating its subsidy rate. Further business proprietary details can be
found in the Memorandum from Sally C. Gannon to Barbara E. Tillman,
Regarding Saldanha Steel's Sales Totals, September 21, 2001 (public
version on file in the Department's Central Records Unit, in Room B-099).
We base our conclusion, in part, on our view that a company's audited
financial statement is representative of its actual financial picture at a
given point in time. We also base this conclusion on the arguments
regarding returned sales put forth in Certain Steel Products, i.e., that
it is the Department's practice to subtract the value of returned
merchandise from the value of a company's total sales because the return
of a previously-sold good indicates that the sale has been cancelled.
Likewise, in the instant case, certain loss provision amounts are being
held in escrow, thus indicating the potential for Saldanha Steel to
recognize a loss on these amounts. Therefore, in light of the information
received at verification and the Department's prior practice, we have
adjusted Saldanha Steel's total sales figure to account for this loss
provision.
V. Total Ad Valorem Rate
We have revised the net subsidy rate that was calculated in the
Preliminary Determination. The revised subsidy rate for Saldanha
Steel/Iscor is 6.37 percent ad valorem. The rate for Highveld is 0.45
percent ad valorem, which is de minimis. With respect to the "all others"
rate, section 705(c)(5)(A)(i) of the Act requires that the "all others"
rate equal the weighted-average countervailable subsidy rates established
for exporters and producers individually investigated, excluding any zero
and de minimis countervailable subsidy rates. Therefore, because
Highveld's rate is de minimis, we are using the Saldanha/Iscor rate
as the "all others" rate.
VI. Recommendation:
Based on our analysis of the comments received, we recommend adopting all
of the above positions. If these recommendations are accepted, we will
publish the final results of the determination in the Federal Register.
Agree Disagree
Faryar Shirzad
Assistant Secretary
for Import Administration
Date
_________________________________________________________________________
footnote:
1. We note that these factors are consistent with Black's Law Dictionary
which defines a "public entity" as including "a nation, state, county,
city and county, city, district, public authority, public agency, or any
other political subdivision or public corporation, whether foreign or
domestic." See Black's Law Dictionary (6th edition, at 1228-29). Further,
it defines "public corporation" as "Instrumentalities created by state,
formed and owned by it in the public interest, supported in whole or part
by public funds, and governed by managers deriving their authority from
state." Id.