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