[Federal Register Volume 59, Number 74 (Monday, April 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9313]
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[Federal Register: April 18, 1994]
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DEPARTMENT OF COMMERCE
International Trade Administration
[C-475-812]
Final Affirmative Countervailing Duty Determination: Grain-
Oriented Electrical Steel From Italy
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: March 18, 1994.
FOR FURTHER INFORMATION CONTACT: Annika L. O'Hara or David R. Boyland,
Office of Countervailing Investigations, Import Administration, U.S.
Department of Commerce, room 3099, 14th Street and Constitution Avenue
NW., Washington, DC 20230; telephone (202) 482-4198 and (202) 482-0588,
respectively.
FINAL DETERMINATION: The Department determines that benefits which
constitute subsidies within the meaning of section 701 of the Tariff
Act of 1930, as amended (``the Act''), are being provided to
manufacturers, producers, or exporters in Italy of grain-oriented
electrical steel. For information on the estimated net subsidy, please
see the Suspension of Liquidation section of this notice.
Case History
Since the publication of the preliminary determination in the
Federal Register on February 1, 1994 (59 FR 4682), the following events
have occurred.
We conducted verification of the responses submitted on behalf of
the Government of Italy (``GOI''), ILVA S.p.A. (``ILVA''), and the
European Community (``EC'') from February 7 through February 21, 1994.
On March 22 and March 28, 1994, we received case and rebuttal
briefs, respectively, from petitioners and respondents. Neither
petitioners nor respondents requested a hearing in this investigation.
On March 29, 1994, we returned to petitioners certain factual
information submitted in their briefs because it was untimely pursuant
to Sec. 355.31(a)(i) of the Department's regulations.
Scope of Investigation
This investigation concerns the following class or kind of
merchandise: grain-oriented electrical steel (``electrical steel'')
from Italy.
The product covered by this investigation is grain-oriented silicon
electrical steel, which is a flat-rolled alloy steel product containing
by weight at least 0.6 percent of silicon, not more than 0.08 percent
of carbon, not more than 1.0 percent of aluminum, and no other element
in an amount that would give the steel the characteristics of another
alloy steel, of a thickness of no more than 0.56 millimeter, in coils
of any width, or in straight lengths which are of a width measuring at
least 10 times the thickness, as currently classifiable in the
Harmonized Tariff Schedule (``HTS'') under item numbers 7225.10.0030,
7226.10.1030, 7226.10.5015, and 7226.10.5065. Although the HTS
subheadings are provided for convenience and Customs purposes, our
written description of the scope of this proceeding is dispositive.
Injury Test
Because Italy is a ``country under the Agreement'' within the
meaning of section 701(b) of the Act, the U.S. International Trade
Commission (``ITC'') is required to determine whether imports of
electrical steel from Italy materially injure, or threaten material
injury to, a U.S. industry. On October 12, 1993, the ITC preliminarily
determined that there is a reasonable indication that an industry in
the United States is being materially injured or threatened with
material injury by reason of imports from Italy of the subject
merchandise (58 FR 54168, October 20, 1993).
Corporate History of Respondent ILVA
Prior to 1987, electrical steel in Italy was produced by Terni
S.p.A. (``Terni''), a main operating company of Finsider. Finsider was
a government-owned holding company which controlled all state-owned
steel companies in Italy. In a restructuring of the Italian steel
industry in 1982, Terni took over two plants, Lovere and Trieste, from
Nuova Italsider, another Finsider-owned steel producer.
As part of a subsequent restructuring in 1987, Terni transferred
its assets to a new company, Terni Acciai Speciali (``TAS'') which
thereafter held all the assets for electrical steel production in
Italy. As part of the restructuring, Lovere and Trieste became TAS' two
principal subsidiaries.
In 1988, another restructuring took place in which Finsider and its
main operating companies (TAS, Italsider, and Nuova Deltasider) entered
into liquidation and a new company, ILVA, was formed. ILVA took over
some of the assets and liabilities of the liquidating companies. With
respect to TAS, part of its liabilities and the majority of its viable
assets, including all the assets associated with the production of
electrical steel, were transferred to ILVA on January 1, 1989. ILVA
itself became operational on that same day. Part of TAS' remaining
assets and liabilities were transferred to ILVA on April 1, 1990. After
that date, TAS no longer had any manufacturing activities. Only certain
non-operating assets (e.g., land, buildings, inventories), remained in
TAS.
From 1989 to 1994, ILVA consisted of several operating divisions.
The Specialty Steels Division, located in Terni, produced the subject
merchandise. ILVA was also the majority owner of a large number of
separately incorporated subsidiaries. The subsidiaries produced various
types of steel products and also included service centers, trading
companies, an electric power company, etc. ILVA together with its
subsidiaries constituted the ILVA Group. The ILVA Group was owned by
the Istituto per la Ricostruzione Industriale (``IRI''), a holding
company wholly-owned by the GOI.
As of January 1, 1994, ILVA entered into liquidation and its
divisions formed three companies. ILVA's former Specialty Steels
Division is now a separately incorporated company, Acciai Speciali
Terni, which produces electrical steel.
Spin-Offs
ILVA sold several ``productive units,'' as defined in the General
Issues Appendix to the Final Affirmative Countervailing Duty
Determination: Certain Steel Products from Austria (``GIA''), 58 FR
37225, 37265-8 (July 9, 1993), from 1990 through 1992. At verification,
we established that one of the companies had been sold to a government
entity and one other company had been sold by Italsider rather than
ILVA. Our spin-off methodology does not apply in these situations. For
the other companies, i.e., those sold to private parties, we have
applied the pass-through methodology described in the GIA to calculate
the proportion of subsidies received by ILVA that ``left'' the company
as a result of the sales of these productive units.
Period of Investigation
For purposes of this final determination, the period for which we
are measuring subsidies (the period of investigation (``POI'')) is
calendar year 1992. We have calculated the amount of subsidies bestowed
on the subject merchandise by cumulating benefits provided to Terni,
TAS and ILVA from 1978 through 1992.
Analysis of Programs
Based on our analysis of the petition, the responses to our
questionnaires, verification, and comments by interested parties, we
determine the following.
Equityworthiness
Pursuant to section 355.44(e)(1) of the Proposed Regulations
(Countervailing Duties; Notice of Proposed Rulemaking and Request for
Public Comments (``Proposed Regulations''), 54 FR 23366, May 31, 1989),
we preliminarily determined that Terni, TAS, and ILVA were
unequityworthy from 1978 through 1992, except in 1979, 1983, 1988, and
1989 when equity infusions were not an issue. From the perspective of a
reasonable private investor examining the firm at the time of the
equity infusions, neither Terni, TAS, nor ILVA showed an ability to
earn a reasonable rate of return over a reasonable period of time. We
did not learn anything at verification that would lead us to reverse
this finding.
As we stated in the preliminary determination, the companies which
were restructured to form ILVA sustained losses from 1978 onward.
Although ILVA had a brief period of operating profits for 1989 through
1991, its return on equity during this period declined until there was
a negative return. Terni and ILVA's debt to equity ratios were
relatively high. Read in conjunction with other financial indicators,
such as net losses for numerous years, negative rates of return on
equity and sales, the companies' financial performance was weak. Given
this, we continue to find that Terni, TAS, and ILVA were unequityworthy
from 1978 through 1992. Because the companies received no equity
infusions during 1979, 1983, 1989, and 1990, we did not determine
equityworthiness for those years. (See also Memorandum to Director of
Accounting dated April 11, 1994 on file in Room B-099 of the Main
Commerce Building concerning the Department's evaluation of Terni's,
TAS', and ILVA's equityworthiness.)
For the preliminary determination, we did not include 1988 in our
equityworthy analysis because petitioners did not allege an infusion
had occurred in that year and we were not aware of any such investment.
However, in our review of ILVA's annual reports at verification, we
learned that IRI contributed capital to ILVA in 1988 in the form of an
equity infusion. Therefore, in accordance with Sec. 355.44(e)(2) of the
Proposed Regulations, we have considered whether ILVA was equityworthy
in that year to determine whether the equity infusion was made on terms
inconsistent with commercial considerations. As explained below, we
have determined that ILVA was not equityworthy in that year.
Creditworthiness
Pursuant to section 355.44(b)(6)(i) of the Proposed Regulations, we
preliminarily determined that Terni, TAS, and ILVA were uncreditworthy,
i.e., that they did not have sufficient revenues or resources to meet
their costs and fixed financial obligations, from 1978 through 1992. In
making that determination, we examined Terni's, TAS', and ILVA's
current, quick, times interest earned and debt to equity ratios. We
determined, for example, that the companies' times interest earned
ratios were anemic for approximately 16 years, indicating a weak long-
term solvency. Furthermore, the debt to equity ratios for both Terni
and ILVA were relatively high.
We did not learn anything at verification that would lead us to
reconsider our preliminary determination. Therefore, we continue to
find that Terni, TAS, and ILVA were uncreditworthy from 1978 through
1992. (See also Memorandum to Director of Accounting dated April 11,
1994, on file in Room B-099 of the Main Commerce Building concerning
the Department's evaluation of Terni's, TAS', and ILVA's
creditworthiness.)
Benchmarks and Discount Rates
For uncreditworthy companies, Sec. 355.44(b)(6)(iv)(A)(1) of the
Proposed Regulations directs us to use, as the benchmark interest rate,
the highest long-term fixed interest rate commonly available to firms
in the country plus an amount equal to 12 percent of the prime rate.
Because we were unable to obtain information on the highest long-term
interest rate commonly available in the country, we used the Bank of
Italy reference rate which is the highest average long-term fixed
interest rate we were able to verify. We then added to this rate an
amount equal to 12 percent of the Italian Bankers Association (``ABI'')
prime rate. We have used the resulting interest rate as the benchmark
for our long-term loans. In calculations where we have not used this
rate, we have otherwise indicated. We have also used this amount as the
discount rate for allocating over time the benefit from equity
infusions and non-recurring grants for the same reasons explained in
Final Affirmative Countervailing Duty Determination: Certain Steel
Products From Spain, 58 FR 37374, 37376 (July 9, 1993).
Calculation Methodology
In determining the benefits to the subject merchandise from the
programs described below, we used the following calculation
methodology. We first calculated the benefit attributable to the POI
for each countervailable program, using the methodologies described in
each program section below. For those subsidies received by ILVA that
were allocated over time, we then performed the pass-through analysis
discussed in the GIA at 37269. The pass-through analysis accounts for
any reduction in ILVA's subsidies that resulted from the sale of
several productive units.
For the subsidies remaining with ILVA, we divided the benefit
allocable to the POI by the sales of ILVA or the sales of the Specialty
Steels Division of ILVA, depending on which company had received the
benefit. (The program sections below indicate which denominator has
been used for each program.) Next, we added the benefits for all
programs, including the benefits for programs which were not allocated
over time, to arrive at ILVA's total subsidy rate. Because ILVA is the
only respondent company in this investigation, this rate equals the
country-wide rate.
I. Programs Determined To Be Countervailable
A. Benefits Associated With the 1988-90 Restructuring
As discussed above under the ``Corporate History'' section of this
notice, the GOI liquidated Finsider and its main operating companies in
1988 and assembled the group's most productive assets into a new
operating company, ILVA. In 1990, additional assets and liabilities of
TAS, Italsider, and Finsider went to ILVA.
In the preliminary determination, we found that a countervailable
benefit was provided to ILVA through the 1988-1990 restructuring. In
reaching this determination, we did not look at the transformation of
Finsider as a whole into ILVA. Instead, we focused on the restructuring
of TAS into the Specialty Steels Division of ILVA. We found that
although TAS' net worth was negative prior to the restructuring, ILVA
received a division with assets in excess of liabilities. In effect,
TAS' balance sheet was rewritten so as to change its equity from
negative 99,886 million lire to positive 317,836 million lire. For the
preliminary determination, we treated the difference (417,722 million
lire) as a countervailable benefit to ILVA.
We have reconsidered the methodology employed in the preliminary
determination and have revised it for the final determination. We now
believe that the approach taken in the preliminary determination
understated the benefit to ILVA from the restructuring. It failed to
take into account a portion of the liabilities not assumed by ILVA,
that would otherwise have had to be repaid, and the losses incurred by
TAS in connection with a write down of its assets in the restructuring
process.
The purpose of the 1988-90 restructuring was to create a new,
viable steel company (ILVA) by having it take over most of the
productive assets of Finsider's operating companies like TAS, but only
some of the liabilities. In April 1990, after all of TAS' manufacturing
activities had either been transferred or shut down, TAS was nothing
but a shell company in the process of liquidation, with liabilities
exceeding its assets. ILVA, on the other hand, had received most of
TAS' assets without being burdened by TAS' liabilities.
The liabilities remaining with TAS through the restructuring
process had to be repaid, assumed, or forgiven. We have identified one
specific instance of forgiveness. This occurred in 1989 when Finsider
forgave 99,886 million lire of debt owed to it by TAS. Even with this
forgiveness, TAS retained a substantial amount of liabilities after the
1990 transfer of assets and liabilities to ILVA. While no specific act
eliminated this debt--indeed some of it is still outstanding--we
believe that ILVA (and consequently the subject merchandise) received a
benefit as a result of the debt being left behind in TAS.
In addition, we learned at verification that losses had been left
behind in TAS, because the value of the assets transferred to ILVA had
been written down. TAS gave up assets whose book value was higher than
their appraised value. As a result, TAS was forced to absorb losses.
The loss from the first transfer was reflected as an extraordinary loss
in TAS' 1988 Annual Report. With respect to the 1990 transfer, TAS had
created a reserve in 1989 for the anticipated loss. At verification, we
found that this loss was included in the liabilities that were left in
TAS after the 1990 transfer.
In summary, in restructuring TAS into the Specialty Steels Division
of ILVA, liabilities and losses due to asset write downs were left
behind in TAS, a shell company. Although there was only one specific
act of debt forgiveness, which only covered a portion of the
liabilities in TAS, we believe that ILVA received a benefit when it was
able to leave the debt and losses remaining in TAS. Because this
benefit was specific to ILVA, we find a countervailable subsidy to ILVA
in the amount of the debt and losses that should have been taken by
ILVA when it took on the assets of TAS.
Treating these liabilities and losses as a subsidy to ILVA is
consistent with the Department's determination in Certain Steel from
Austria at 37221. In that case, we examined a government-owned
operating company (VAAG) which was split up into numerous operating
companies, one of which was subject to the investigation. In order to
effect this split-up, the assets and liabilities of the original
company were divided among the new companies. We determined that the
creation of the new companies was merely a redistribution of existing
assets which, in and of itself, did not give rise to any benefits.
However, we also determined that a benefit arose because losses that
had been incurred by VAAG were not distributed to the new companies.
Therefore, we determined that the company under investigation
effectively received a grant in the amount of the losses that should
have been distributed to it.
Similarly, in the case of TAS and ILVA, the transfer of assets to
ILVA is, in itself, a redistribution of assets which does not give rise
to subsidies. However, a substantial portion of the liabilities and the
losses associated with the assets were not distributed to ILVA.
Instead, they remained behind in TAS. We are countervailing these
amounts as grants to ILVA.
To calculate the benefit during the POI, we used our standard grant
methodology (see section 355.49(b) of the Proposed Regulations).
Finsider's 1989 forgiveness of TAS' debt and the loss resulting from
the 1989 write down were treated as grants received in 1989. The second
asset write down and the debt outstanding after the 1990 transfer
(adjusted as described below) were treated as grants received in 1990.
After the 1990 transfer, certain non-operating assets (e.g., land,
buildings, inventories), remained in TAS. These assets are being
disposed of in the liquidation process and the proceeds from the sale
of the assets are available to pay off TAS' remaining liabilities.
In order to account for the fact that certain assets were left
behind in TAS, we have adjusted the amount of liabilities outstanding
after the 1990 transfer. We did this by writing down the value of the
assets by taking a weighted average of the earlier write downs and
subtracted this amount from the outstanding liabilities.
We then divided the benefits by ILVA's sales in the POI. On this
basis, we determine the estimated net subsidy to be 12.10 ad valorem
for all manufacturers, producers, and exporters in Italy of the subject
merchandise.
B. Interest-Free Loans to ILVA
In 1992, ILVA received a 300 billion lire payment from IRI. At
verification, we reviewed documents which established this payment as a
``provisional'' or ``anticipated'' capital increase. The reason that
the payment was provisional was that before it could be considered as
an equity infusion, authorization was needed from: (1) The
shareholders, and (2) the EC.
IRI clearly intended that the money become share capital, as there
were no arrangements for repayment (e.g., a repayment schedule), nor
was interest to be paid. Therefore, as IRI was the sole shareholder in
ILVA, its approval was a formality and the only real condition was the
EC approval. If the EC approval was not received, the amount would have
to be repaid to IRI. Although the GOI asked for the EC's approval, it
was not granted during the POI.
ILVA's 1992 Annual Report shows that the company received a similar
payment from IRI in 1991 which was entered in its accounting records in
the same way as the 300 billion payment received in 1992. At
verification, we learned that the background to the 1991 payment was
the same as for the 1992 payment.
Because these payments were not converted to equity prior to the
end of the POI, we cannot find the payments to be equity infusions.
Thus, we have determined to treat the payments as short-term interest-
free loans, which are being rolled over until such time as they are
repaid or converted to equity upon EC approval.
The typical maturity in Italy for short-term loans is at most six
months and roll-overs are common. In accordance with
Sec. 355.44(b)(3)(i) of the Proposed Regulations, we used the 1992
International Monetary Fund's annualized ``lending rate,'' converted to
a semi-annual interest rate as the short-term benchmark interest rate.
Since ILVA paid zero interest, the benefit to ILVA was the interest it
would have owed on both payments. These benefits were then divided by
ILVA's sales in the POI. On this basis, we determine the estimated net
subsidy to be 0.49 percent ad valorem for all manufacturers, producers,
and exporters in Italy of the subject merchandise.
C. Equity Infusions
The GOI, through IRI, provided new equity capital to Terni, TAS, or
ILVA in every year from 1978 through 1991, except in 1979, 1983, 1989,
and 1990. Respondents have not provided any argument refuting our
preliminary determination that the GOI's equity investments were
provided specifically to the steel industry.
As discussed above, we have determined that Terni, TAS, and ILVA
were unequityworthy in each year that they received new equity capital.
Therefore, these provisions of equity were inconsistent with commercial
considerations and are countervailable.
To calculate the benefit for the POI, we treated each of the equity
amounts as a grant and allocated the benefits over a 15-year period.
(Our treatment of equity as grants and our choice of allocation period
is discussed in the GIA, at 37239 and 37225, respectively.)
In the preliminary determination, we treated a capital increase
received by ILVA in the amount of 205,097 million lire in 1990 as a
countervailable equity infusion because ILVA reported it as an equity
infusion in its responses. At verification, we established that the
amount reported as an equity infusion was, in fact, due to the transfer
of residual assets from Italsider, TAS, and Finsider, which were all in
liquidation. As explained in connection with the 1988-1990
restructuring, we do not consider the transfer of assets in connection
with a restructuring to be an ``equity infusion'' since the transfer
merely redistributes existing assets. Therefore, we have excluded the
amount of this capital contribution from our calculations.
For the equity infusions provided to Terni and TAS, we have divided
the benefit allocated to the POI by the sales of the Specialty Steels
Division of ILVA. We chose this sales denominator because this division
most closely resembles the former companies, Terni and TAS. For equity
infusions into ILVA, we used ILVA's sales as our denominator, as
benefits from these investments are not tied to any division of ILVA.
On this basis, we find the estimated net subsidy to be 9.71 percent ad
valorem for all manufacturers, producers, and exporters in Italy of the
subject merchandise.
D. The Transfer of Lovere and Trieste to Terni in 1982
As discussed in the ``Corporate History'' section of this notice,
Lovere and Trieste were transferred from Italsider to Terni as part of
a 1982 restructuring.
We have determined that this transaction is correctly characterized
as an internal corporate restructuring. No new equity capital was
provided to Terni through the transfer of these assets. However, just
as subsidies given to Terni and TAS continued to bestow a benefit on
ILVA when ILVA received TAS' assets, subsidies received by Italsider
flowed to Terni when Terni received Lovere and Trieste.
We determined the amount of Italsider's subsidies attributable to
Lovere and Trieste by calculating the percentage of assets these two
companies represented of the total Italsider assets. We applied this
percentage to the ``untied'' subsidies received by Italsider to
calculate the portion of the benefit that flowed to Terni when it
received Lovere and Trieste.
The benefit allocated to the POI was divided by the total sales of
the Specialty Steels Division of ILVA. On this basis, we find the
estimated net subsidy to be 0.41 percent ad valorem for all
manufacturers, producers, and exporters in Italy of the subject
merchandise.
E. Law 675/77 Preferential Financing
Law 675/77 was designed to bring industrial assistance measures
from the GOI under a single system. The program had at its core three
main objectives: (1) the reorganization and development of the
industrial sector as a whole; (2) the increase of employment in the
South; and (3) the promotion of employment in depressed areas. To
achieve these goals, Law 675/77 provided six types of benefits: (1)
grants to pay interest on bank loans; (2) mortgage loans provided by
the Ministry of Industry (``MOI'') at subsidized interest rates; (3)
other grants to pay interest on loans financed by IRI bond issues; (4)
capital grants for the South; (5) VAT reductions on capital good
purchases for companies in the South; and (6) personnel retraining
grants. (The fourth, fifth, and sixth components of Law 675/77 are
discussed below.)
As we stated in our preliminary determination, the GOI identified a
number of different sectors as having received benefits under Law 675/
77. These sectors were: (1) Electronic technology; (2) the mechanical
instruments industry; (3) the agro-food industry; (4) the chemical
industry; (5) the steel industry; (6) the pulp and paper industry; (7)
the fashion sector; (8) the automobile industry; and (9) the aviation
sector. Law 675/77 also sought to promote optimal exploitation of
energy resources, and ecological and environmental recovery.
Despite the fact that Law 675/77 benefits were available to and
used by numerous and varied industries, we preliminarily determined Law
675/77 benefits specific within the meaning of section 771(5)(A)(ii) of
the Act, and therefore, countervailable because the steel industry was
a dominant user pursuant to section 355.43(b)(2)(iii) of the Proposed
Regulations. It received 34 percent of the benefits provided under the
interest subsidy and capital grant components of the program.
The GOI has argued that the steel and automobile industries did not
receive a disproportionate share of benefits when the extent of
investment in those industries is compared to the extent of investment
in other industries.
We did not consider the level of investment in the industries
receiving benefits under Law 675/77. Instead, we followed the policy
explained in Final Affirmative Countervailing Duty Determination:
Certain Steel Products from Brazil, 58 FR 37295, 37295 (July 9, 1993),
of comparing the share of benefits received by the steel industry to
the collective share of benefits provided to other users of the
program. Consistent with our determination in Final Affirmative
Countervailing Duty Determination: Certain Steel Products from Italy
(``Certain Steel from Italy''), 58 FR 37327 (July 9, 1993), we found
that the steel industry accounted for 34 percent of the benefits and
the auto industry accounted for 33 percent of the benefits. Thus, these
two industries represented 77 percent of the assistance while the
remainder was spread among the other seven industries.
On this basis, we determine that the steel industry was a dominant
user of programs under Law 675/77 and, therefore, that benefits
received by ILVA under this law are being provided to a specific
enterprise or industry or group of enterprises or industries.
Therefore, we find Law 675/77 financing to be countervailable to the
extent that it is provided on terms inconsistent with commercial
considerations.
1. Grants to Pay Interest on Bank Loans
Italian commercial banks provided long-term loans at market
interest rates to industries designated under Law 675/77. The interest
owed by the recipient companies on these loans was offset by
contributions from the GOI. Terni received bank loans with Law 675/77
interest contributions which were outstanding in the POI.
To determine whether this assistance conferred a benefit, we
compared the effective interest rate paid on these loans to the
benchmark interest rate, described above. Based on this comparison, we
determine that the financing provided under this program is
inconsistent with commercial considerations, i.e., on terms more
favorable than the benchmark financing.
Because Terni knew that it would receive the interest contributions
when it obtained the loans, we consider the contributions to constitute
reductions in the interest rates charged rather than grants (see
Certain Steel from Italy at 37331).
Therefore, to calculate the benefit, we used our standard long-term
loan methodology as described in Sec. 355.49(c)(1) of the Proposed
Regulations. We divided the benefit allocated to the POI by the sales
of the Specialty Steels Division of ILVA. On this basis, we determine
the estimated net subsidy to be 0.03 percent ad valorem for all
manufacturers, producers, and exporters in Italy of the subject
merchandise.
2. Mortgage Loans from the Ministry of Industry Under Law 675/77,
companies could obtain long-term low-interest mortgage loans from the
Ministry of Industry. Terni received several loans which were still
outstanding in the POI.
To determine whether these loans were provided on terms
inconsistent with commercial considerations, we used the benchmark
interest rates described above. Because the interest rates paid on the
Law 675/77 loans were below the benchmark interest rates, we determine
that loans provided under this program are countervailable.
We calculated the benefit using our standard long-term loan
methodology. We then divided the benefit allocated to the POI by the
sales of the Specialty Steels Division of ILVA. On this basis, we
determine the estimated net subsidy from this program to be 0.30
percent ad valorem for all manufacturers, producers, and exporters in
Italy of the subject merchandise.
3. Interest Contributions on IRI Loans/Bond Issues
Under Law 675/77, IRI was allowed to issue bonds to finance
restructuring measures of companies within the IRI Group. The proceeds
from the sale of the bonds were then re-lent to IRI companies. The
effective interest rate on such loans was reduced by interest
contributions made by the GOI. Terni had two of these loans outstanding
during the POI. Both loans had variable interest rates.
To determine whether these loans were countervailable, the
Department used a long-term variable rate benchmark as described in
Sec. 355.44(B) of the Proposed Regulations. We compared this benchmark
rate to the effective rates paid by Terni in the years these loans were
taken out and found that these loans were provided on terms
inconsistent with commercial considerations.
To determine the benefit, we first calculated the difference
between what was paid on these loans during the POI and what would have
been paid during the POI had the loans been provided on commercial
terms. We divided the resulting difference by the sales of the
Specialty Steels Division of ILVA. On this basis, we determine the
estimated net subsidy from this program to be 0.26 percent ad valorem
for all manufacturers, producers, and exporters in Italy of the subject
merchandise.
F. Urban Redevelopment Financing Under Law 181/89
Law 181/89 was implemented to ease the impact of employment
reductions in the steel crisis areas of Naples, Taranto, Terni, and
Genoa. The program had four main components: (1) reindustrialization
projects; (2) job promotion; (3) training; and (4) early retirement.
(Early retirement under Law 181/89 was not used by ILVA and the job
promotion component has been found not countervailable (see relevant
sections below).
Because benefits under this program are limited to specific
regions, we determine that assistance under this program is limited to
a group of industries in accordance with section 355.43(b)(3).
1. Reindustrialization Under Law 181/89
Under the reindustrialization component of Law 181/89, the GOI
partially subsidized certain investments. ILVA received payments under
Law 181/89 for a training center to update the technical skills of its
workers. Training also took place at this center to improve workers'
skills for employment outside the steel industry.
Since the information provided to the Department indicates that the
center supported the training of steel workers who continued to be
employed by ILVA, we determine that ILVA received a benefit from
reindustrialization payments under Law 181/89.
In addition, we established that ILVA received payments under Law
181/89 for service centers. However, these service centers were
involved in steel processing unrelated to electrical steel. Therefore,
payments to these service centers were not included in our
calculations.
To calculate the benefit to ILVA during the POI, we used our
standard grant methodology (see Sec. 355.49(b) of the Proposed
Regulations) and the discount rate described above. It is the
Department's practice to treat training benefits as recurring grants
(see GIA at 37226).
Accordingly, we divided the amount received in the POI by the 1992
sales of the ILVA. On this basis, we determine the estimated net
subsidy to be 0.00 percent ad valorem for all manufacturers, producers,
and exporters on Italy of the subject merchandise.
2. Worker Training
Retraining grants were provided to ILVA under Law 181/89. These
funds constituted the GOI's matching contribution to ECSC Article
56(2)(b) training grants (see ECSC Article 56 Redeployment Aid section
below).
Since information provided at verification indicates that these
funds were used to train workers remaining at ILVA, we determine that
the GOI's training contribution under Law 181/89 constitutes a benefit
to ILVA.
It is the Department's practice to treat training benefits as
recurring grants (see GIA at 37226). Accordingly, we divided the amount
received by the sales of the Specialty Steels Division of ILVA. On this
basis, we determine the estimated net subsidy from this program to be
0.10 percent ad valorem for all manufacturers, producers, and exporters
in Italy of the subject merchandise.
G. ECSC Article 54 Loans
Under Article 54 of the 1951 ECSC Treaty, the European Commission
can provide loans directly to iron and steel companies for
modernization and the purchase of new equipment. The loans finance up
to 50 percent of an investment project. The remaining financing needs
must be met from other sources. The Article 54 loan program is financed
by loans taken by the Commission, which are then re-lent to iron and
steel companies in the member states at a slightly higher interest rate
than that at which the Commission obtained them.
ILVA had outstanding Article 54 loans in the POI. These loans were
transferred to ILVA as part of the partial transfer of Terni's assets
and liabilities in 1989. Two of these loans were denominated in U.S.
dollars and two in European Currency Units (``ECU'').
Because Article 54 loans are limited to iron and steel companies,
we find these loans to be specific and, therefore, countervailable to
the extent that they were provided on terms inconsistent with
commercial considerations.
Because these loans were denominated in foreign currencies, we used
foreign currency benchmarks for our preliminary determination. However,
the Article 54 loans had exchange rate guarantees that allowed Terni to
calculate the maximum lire amount payable (see Law 796/76 Exchange Rate
Guarantee Program described below). Since these loans were effectively
insulated from any future changes in the exchange rate, we are not
using foreign currency benchmark interest rates as we did in the
preliminary determination. Rather we are using the uncreditworthy
benchmark discussed in the Benchmark and Discount Rate section above.
At verification we found that one of the U.S. dollar loans had been
assumed by Terni when it became the parent company of the original
debtor. We are using the uncreditworthy benchmark interest rate for the
year in which the loan was assumed by Terni in order to calculate the
benefit from this loan, as that was the year in which Terni incurred
the liability.
Because the interest rates paid on all the Article 54 loans were
below the benchmark interest rates, we determine that the loans
provided under this program are countervailable. We calculated the
benefit using our standard long-term loan methodology. We then divided
the benefit allocated to the POI by the sales made by the Specialty
Steels Division of ILVA. On this basis, we determine the estimated net
subsidy to be 1.02 percent ad valorem for all manufacturers, producers,
and exporters in Italy of the subject merchandise.
II. Programs Determined To Be Not Countervailable
A. Early Retirement
In Certain Steel from Italy, we determined that the threat of
strikes and social unrest prevented Italian steel companies from laying
off surplus labor. As a result, these companies were effectively
obligated to retain their workers until the workers reached retirement
age. Given this obligation, when the GOI created a program to allow for
early retirement, we determined that the steel companies had been
relieved of the burden of retaining these employees at full salary
until the normal retirement age.
In the preliminary determination of this investigation, we relied
on Certain Steel from Italy and determined that early retirement
provided a countervailable benefit which we measured as the savings to
ILVA arising from not having to pay wages to the workers who took early
retirement in the POI.
At verification in this case, the GOI provided evidence showing
that companies in Italy have the legal right to fire workers. Small
companies (those with less than 15 employees) could simply eliminate
surplus workers. Large companies, however, go through certain steps and
procedures before they can lay workers off (other than for cause). The
procedures and the benefits paid to employees laid off by these
companies are provided for in Law 223/91.
Law 223/91 provides two means of removing surplus workers: early
retirement and lay-offs under CIG-S.
1. Early Retirement
Early retirement is regulated in two separate articles of Law 223/
91, both of which were used by ILVA workers in the POI. Each article
has different eligibility criteria, but essentially the program is
available to companies in high-technologies and competitive industries
that are undergoing restructuring. Under both articles, the companies
pay 30 percent of the early retirement benefits, while the GOI pays the
rest. The GOI sets an annual cap on the number of workers that can be
retired under this provision. In 1992, 21 percent of the quota was set
aside for steel workers.
2. CIG-S
CIG-S (the extraordinary compensation fund) is also regulated by
Law 223/91. CIG-S provides for lay-offs by companies that (1) are
undergoing restructuring, (2) have more than 15 employees, and (3)
belong to a wide range of industries. The GOI must approve use of this
program, under which laid-off workers receive a certain percentage of
their wages for three years. Thereafter, they may receive further
compensation under a follow-up program (mobility). The GOI pays 80
percent and the companies 20 percent of the benefits.
In a meeting with a U.S. Embassy official at verification, we
learned that approximately 25 percent of the Italian workforce is
employed in companies eligible for the provisions under Law 223/91. The
remaining 75 percent work for companies that do not have to offer their
employees any benefits upon separation except the obligatory severance
payment that is also paid to workers who take early retirement or are
placed on the CIG-S. Employees in these smaller companies who are laid
off receive only government-provided unemployment compensation.
ILVA, on the other hand, belongs to that category of companies
(larger companies in structural and economic crisis), that have to
undertake certain specific steps before actually getting rid of surplus
labor. Therefore, the alternatives facing ILVA are early retirement and
the permanent lay offs under CIG-S, provided under Law 223/91.
In determining whether worker benefits such as early retirement
confer a subsidy on the company, we look to whether the company has
been relieved of an obligation it would otherwise incur. (See section
355.44(j) of the Proposed Regulations.) In this instance, we find that,
in the absence of the early retirement program, the obligation that
would be incurred is that imposed by the alternative available to ILVA,
the CIG-S program. We have found that large companies in a wide variety
of industries that are undergoing restructuring can use the CIG-S
program to lay off workers. Therefore, we believe that this program
establishes the benchmark for the obligations ILVA would otherwise have
towards the workers it retires early.
Based on the information we have received, we have not been able to
make an exact comparison of the financial obligations ILVA would incur
under CIG-S as opposed to the early retirement scheme. Because the
benefits paid to a worker under early retirement can extend from one to
more than ten years (whereas CIG-S payments are limited to three years)
and because the percentage paid by the company is based on different
amounts (the worker's pension, which varies from worker to worker, for
early retirement and the worker's salary for CIG-S), we are doubtful
that exact comparisons can be made. However, we have used the
information we have and made certain limited assumptions to calculate
the financial obligations on ILVA imposed by early retirement exceed
the financial obligations that would be imposed by CIG-S. (See
Memorandum from Team to Barbara R. Stafford dated April 11, 1994 on
file in room B-099 of the main Commerce Building.) Therefore, we find
that the early retirement program is not countervailable.
B. Law 796/76 Exchange Rate Guarantee Program
This program applies to foreign currency loans taken out by Italian
companies. Under the program, repayment amounts are calculated by
reference to the exchange rate in effect at the time the loan is taken
out. If the exchange rate changes over time, the program sets a ceiling
and a floor to limit the effect of the exchange rate change on the
borrower. For example, if the lire depreciates five percent against the
DM (the currency in which the loan is taken out), borrowers would
normally find that they would have to repay five percent more (in lire
terms). However, under the Exchange Rate Guarantee Program, the ceiling
would act to limit the increased repayment amount to two percent. There
is also a floor in the program which would apply if the lire
appreciated against the DM. The floor would limit any windfall to the
borrower.
In the preliminary determination (as in Certain Steel), we found
this program to be de jure specific because we believed the program was
limited to ECSC loans. However, we discovered at the verification in
this investigation that we had overlooked information in the response
which indicated that guarantees under this program were also available
for loans made by the Council of Europe Resettlement Fund (``CER''). We
attempted to learn more about the program's de facto specificity at
verification as it became clear that the program was not de jure
specific.
We established that exchange rate guarantees for CER loans are
provided for in Law 796, the same law that provides guarantees for ECSC
loans. We learned that CER loans are designed to improve social
conditions in the weakest sectors of society by providing loans to
small- and medium-sized businesses to create employment opportunities.
Officials named the following examples of areas/activities that receive
funds from the CER: agriculture, handicraft, tourism. We examined
certain loan documents and established that guarantees were in effect
on CER loans. However, given the limited time and the manner in which
the data were organized, Italian officials were not able to provide
information regarding the distribution of benefits provided to CER and
ECSC borrowers.
Based on the information we have, the exchange risk guarantees may
be non-specific. Moreover, we cannot draw adverse inferences regarding
the distribution of benefits under the program because the GOI was not
uncooperative or otherwise remiss in providing the requested data.
Therefore, we determine that the program is not countervailable.
Given the circumstances under which we have reached this
determination, i.e., lacking certain important information, this
finding of non-countervailability will not carry over to future
investigations. Therefore, until a fuller record is developed which
allows us to undertake a thorough analysis, petitioners will not have
to provide new evidence in order for us to investigate this program. In
addition, we intend to reinvestigate this program in the first
administrative review requested should this investigation result in a
countervailing duty order.
C. Finsider Loan Guarantees
Certain loans made to Terni were assumed by ILVA, and were still
outstanding during the POI. At the time the loans were taken out they
were guaranteed by Finsider, the holding company of Terni and then TAS.
Finsider entered into liquidation in 1988. Nevertheless, ILVA continued
to pay the guarantee fees for these loans to Finsider until 1991. At
that time, ILVA ceased to pay guarantee fees to Finsider and, in
essence, ``self-guaranteed'' these loans.
Petitioners argue that the Department should countervail these loan
guarantees because: (1) The fees paid for the guarantees were less than
what would have been paid to a commercial guarantor; and (2) guarantees
to Terni, an uncreditworthy company, constitute government intervention
ensuring the extension of the loans.
Although information obtained at verification indicates that ILVA
paid Finsider less than it would have paid a commercial guarantor, we
have concluded that ILVA received no benefit. Given that Finsider was
in liquidation and presumably could not have carried out the guarantee,
ILVA was receiving nothing in exchange for its payments. Therefore, we
find that these loan guarantees are not countervailable.
D. Interest Grants for ``Indirect Debts'' Under Law 750/81
At verification, we established that Law 750/81 was passed as a
result of the 1981 Iron and Steel plan to provide interest grants to
sectors within the steel industry which were designated as strategic
sectors. The program was in place from 1981 through 1983.
One of the sectors designated as a strategic sector was forgings
and castings, as these steel products were used in the construction of
electrical power plants. Since Terni was the only producer of this type
of forgings and castings, the GOI provided assistance to Terni to allow
it to reach full production capacity.
Because these benefits were provided for the production of forgings
and castings, we determine that they do not provide a benefit to the
subject merchandise.
E. ECSC Article 56 Redeployment Aid
Under Article 56(2)(b) of the ECSC Treaty, redeployment assistance
is provided to workers affected by the restructuring of the coal and
steel industries in the ECSC member states. The assistance consists of
the following types of grants: (1) Income support grants for workers
affected by unemployment, re-employment at a lower salary or early
retirement; (2) grants to enable companies to continue paying workers
who have been laid off temporarily; (3) vocational training grants; and
(4) resettlement grants. The decision to grant Article 56 assistance is
contingent upon a matching contribution from the member state.
The portion of Article 56 redeployment grants funded by the ECSC
comes from the European Commission's operational budget for the ECSC
steel program. This budget is funded by (1) levies imposed on coal and
steel producers in the member countries; (2) income from ECSC's
investments; (3) guarantee fees and fines paid to the ECSC; and (4)
interest received from companies that have obtained loans from the
ECSC.
Because payments from the ECSC under Article 56 are sourced from
producer levies, we find them to be not countervailable (see Certain
Steel from Italy at 37336). (The matching contributions from the GOI
for the training elements of Article 56 were discussed above under Law
181/89.)
F. European Social Fund (``ESF'') Grants
The ESF was established by the 1957 European Economic Community
Treaty to increase employment and help raise the living standards of
workers.
We found in Certain Steel from Italy that the ESF receives its
funds from the EC's general budget, whose main revenue sources are
customs duties, agricultural levies, value-added taxes collected by the
member states, and other member state contributions.
The member states are responsible for selecting the projects to be
funded by the EC. The EC then disburses the grants to the member states
which manage the funds and implement the projects. According to the EC,
ESF grants are available to (1) people over 25 who have been unemployed
for more than 12 months; (2) people under 25 who have reached the
minimum school-leaving age and who are seeking a job; and (3) certain
workers in rural areas and regions characterized by industrial decline
or lagging development.
ESF grants received by Italy were used for two purposes: (1)
training laid-off employees for jobs outside the sector in which they
had previously been working; and (2) training of workers to perform new
jobs within the same company.
Every region in Italy has received ESF funds. Therefore, we
determine that this program is not regionally specific within the
meaning of Sec. 355.43(b)(3) of the Proposed Regulations. Furthermore,
we note that to the extent there is any disproportionality in the
regional distribution of ESF benefits (i.e., to the regions of southern
Italy), it has not resulted in a countervailable benefit to the
production of the subject merchandise, which is produced in northern
Italy.
G. Aid Under the National Research Plan
In 1985, the Ministry for University, Technology and Scientific
Research assigned 19 billion lire to Terni under the National Research
Plan for steel. The research funds covered costs of personnel assigned
to specific research projects in research laboratories. The research
under this plan was contracted out to Terni as the result of a
competitive bidding process.
At verification, we established that the assistance under the
National Research Plan was provided under Law 46/82. Under the same
law, the GOI has supported similar research plans for 17 other
industries or sectors. Moreover, documentation provided by the GOI
showed that the steel industry did not receive a disproportionate share
of the funds provided for research plans.
Thus, we determine that benefits under the program are not limited
to a specific enterprise or industry or group of enterprises or
industries. Therefore, we find this program to be not countervailable.
H. Job Promotion Under Law 181/89
The job promotion component of Law 181/89 involved a number of
measures designed to promote self-employment among workers in Naples,
Taranto, Terni, and Genoa. These measures included, among others,
assisting former workers in starting their own businesses, providing
specialized management training, and increasing the level of financing
available to new businesses. In general, these measures were
coordinated by an IRI-owned company, Societa Finanziaria di Promozione
e Sviluppo Imprenditoriale.
Based on the information provided at verification, we determine
that the ``job promotion'' component of Law 181/89 provides for workers
leaving the steel industry. Moreover, there is no indication that ILVA
(or other companies in Italy) had an obligation, legal or otherwise, to
provide assistance to workers leaving the steel industry. Therefore, we
determine that ILVA did not receive a benefit from assistance provided
under the job promotion component of Law 181/89.
III. Programs Which Were Not Used or Which Did Not Benefit the Subject
Merchandise in the POI
A. We established at verification that the following programs were
not used during the POI.
1. Subsidized Export Financing Under Law 227/77
2. Early Retirement Provision under Law 181/89
3. Personnel Retraining Grants under Law 675/77
B. We established at verification that loans provided under the
following programs were not outstanding in the POI.
1. Finsider Loans
2. Interest Subsidies under Law 617/81
3. Financing under Law 464/72
C. We established at verification that the following programs were
directed to the South of Italy. Since production of the subject
merchandise takes place outside the South, we determine that these
programs did not benefit the subject merchandise.
1. Law 675/77 Capital Grants
2. Reductions of the Value Added Tax (``VAT'') under Law 675/77
3. Interest Contributions under the Sabatini Law (Law 1329/65)
4. Social Security Exemptions
5. ILOR and IRPEG Exemptions
Interested Party Comments
Comment 1
Petitioners argue that the Department's preliminary decision to
measure subsidization by a comparison of TAS' equity before and after
restructuring, which they labeled the ``snapshot'' approach, was
improperly substituted for, and contrasts sharply with, the cash flow
approach the Department has historically used to measure subsidies.
Petitioners allege that by focusing only on the differences in TAS'
balance sheet at two different points in time, to the exclusion of a
review of the intermediate activities undertaken by the GOI to bestow
funds on ILVA, the Department ignored the full measure of debt
forgiveness and other assistance provided to ILVA.
Petitioners also argue that the problem with the Department's
approach is that it ignored the sizeable liabilities and negative
equity position left behind in the ``empty shell'' of TAS which were
brought about by the restructuring as a result of the artificial
separation of TAS' assets and liabilities. Petitioners maintain the
Department's approach focuses exclusively on net changes in equity,
regardless of the individual transactions that caused the changes which
would have been captured in a cash flow analysis. According to
petitioners, the only way to accurately measure the subsidies provided
to Terni/TAS is to identify and measure the value of each individual
transaction, be it a grant, equity infusion, debt forgiveness, or loss
coverage.
Respondents contend that the Department should exclude from the
calculation of any countervailable subsidy any of the TAS assets
transferred to ILVA or assets remaining in TAS. In addition,
respondents argue that changes in TAS' equity position resulting from
the official appraisal of assets and liabilities conferred no
countervailable benefit to ILVA. Furthermore, according to respondents,
assets and liabilities remaining in TAS could not have conferred a
countervailable benefit to ILVA. Finally, respondents argue that
Sec. 355.48 of the Proposed Regulations explicitly provides for a
departure from the cash flow methodology in ``unusual circumstances.''
Respondents argue that it would be unreasonable to review each of the
transactions as suggested by petitioners because of the extreme
complexity of the transactions involved in this case. Respondents
maintain the Department has performed a transaction-specific analysis
wherever practicable.
DOC Position
Insofar as our preliminary determination focused on the change in
the net equity position of TAS, it failed to account for certain
liabilities and losses left behind in TAS. In this final determination,
we have addressed this shortcoming. We recognize that the restructuring
resulted in TAS holding liabilities and absorbing losses, and that
those liabilities and losses would somehow have to be covered. As ILVA
would not be covering them, ILVA received a benefit in that amount.
However, we disagree with petitioners that the so-called snapshot
approach cannot be substituted for the cash flow approach traditionally
used by the Department. First, our approach in this final determination
is consistent with the methodology used to assess countervailable
benefits arising out of restructuring in Certain Steel from Austria.
Second, it fully and accurately measures the benefits conferred on the
production of the subject merchandise. Finally, petitioners misuse the
concept of the cash flow effect.
As explained above, in Certain Steel from Austria, when the company
producing steel was restructured, we found that a benefit to the new
company arose because the new company did not receive any of the losses
accumulated by the former company. There was no specific act of payment
or loss coverage undertaken by the Government of Austria to eliminate
those losses as part of the restructuring. Instead, the losses were
simply left behind in the former company. In Certain Steel from
Austria, these losses left in the ``shell'' company were determined to
be countervailable.
Similarly, in the case of restructuring TAS into the Specialty
Steels Division of ILVA, the liabilities and losses left behind in TAS
have been found to give rise to a benefit to ILVA. There was one
specific act of debt forgiveness between Finsider and TAS. That was
accounted for in our calculations, but only as a part of the totality
of the restructuring action.
We further believe that the snapshot approach has fully captured
the benefit to the subject merchandise. Based primarily on the annual
reports of IRI, Finsider and TAS, petitioners have developed a long
list of ``subsidies'' that include IRI's forgiveness of Finsider's debt
and numerous and varied forms of payments to TAS throughout and
subsequent to the restructuring. We have concluded that countervailing
subsidies from IRI to Finsider and from Finsider to TAS would lead to
an overstatement of the benefit. (See DOC response to Comment 2.)
With respect to the subsidies received by TAS after the second
asset transfer to ILVA (e.g., interest paid to TAS on its shares in
ILVA, capital gain on real estate received by TAS, etc.), we recognize
that these payments did, in fact, reduce the liabilities in TAS.
However, because we included in the restructuring benefit the amount of
liabilities remaining in TAS after the second transfer, we have already
captured the benefits from these subsidies.
This is similar to the situation that occurred in Certain Steel
from Austria. As discussed above, we treated as a subsidy the amount of
losses left behind in the former company, without regard to whether
there was a specific act by the government to cover those losses. In
fact, the Government of Austria did make a payment a few years later to
that company. Recognizing that the second transaction was basically to
clean up the company's books for an event that had occurred earlier
(the failure to transfer losses), we did not countervail the payment by
the Government of Austria as it would have amounted to double-counting.
Finally, petitioners misuse the concept of cash flow effect when
they argue that this concept prohibits us from using a snapshot
approach. Cash flow effects do not identify subsidies. Instead, the
cash flow concept tells us when to assign the benefit from a particular
subsidy. For example, the cash flow concept tells us to assign the
benefits received from a subsidized loan to the point in time when the
company would have made the interest payment because this is when the
company's cash flow is affected. In this case, the effect on ILVA of
not assuming TAS' liabilities and losses occurred when the assets were
transferred, in 1989 and 1990, and we have assigned the benefits to
these years.
Comment 2
Petitioners argue that the Department did not directly address the
question of the benefit to the Finsider group as a whole, and through
the Finsider group to TAS, of a multi-billion lire debt forgiveness
provided in connection with the 1988/90 steel industry restructuring.
The only debt forgiveness that was included in the Department's
preliminary calculations was the 99.9 billion lire in debt forgiveness
provided to TAS.
Petitioners claim that the Department should countervail a debt
forgiveness in the amount of 6.2 trillion lire to the Finsider Group in
1988 and allocate the resulting benefit over a sales denominator
reflecting the scope of operations of the Finsider companies that were
liquidated and merged into ILVA. Moreover, petitioners argue that the
Department should countervail the 99.9 billion lire debt forgiveness
provided specifically to TAS in 1989 as a separate benefit.
Respondents argue that petitioners have failed to establish that
the forgiveness of Finsider's debt is tied to the subject merchandise.
Respondents argue that the 1988 debt forgiveness to Finsider pre-dates
the restructuring of Finsider into ILVA by nearly one year. Thus,
Finsider at the time of the debt forgiveness was not the same company
as it was when its assets were transferred into ILVA. Respondents
maintain that Finsider and TAS existed and functioned as two separate
corporate entities and, therefore, argue that TAS was never potentially
responsible for the assumption of Finsider's debt. Respondents assert
that only the 99.9 billion lire debt forgiveness provided directly to
TAS should be treated as a countervailable debt forgiveness.
DOC Position
In the early stages of this investigation, it became clear to us
that there were two alternative approaches to addressing the
allegations in the petition regarding subsidies to the producers of
electrical steel. One approach would have been to analyze the
restructuring of the entire Finsider group into ILVA and to examine all
subsidies provided to Finsider by IRI and the GOI. Using this approach
we would, in essence, be measuring subsidies provided to the Finsider
group as a whole. Therefore, we would not have allocated subsidies to
any of the group's operating companies, such as TAS.
The second approach would measure the subsidies provided to the
producer of the subject merchandise. In other words, our analysis would
focus on subsidies such as equity infusions, loans, and grants
specifically provided to the producer of the subject merchandise, i.e.,
Terni/TAS and the Specialty Steels Division of ILVA.
We chose the second approach for several reasons. First, it is the
Department's policy to try to ``tie'' subsidies to the subject
merchandise whenever possible (see GIA at 37267). Second, since the
Finsider group was very large, consisting of numerous state-owned steel
producers, only one of which produced the subject merchandise, we
believed it would be more appropriate to focus our analysis on the
producer of the subject merchandise. Finally, due to the extremely
complex restructuring which occurred at the Finsider group level, we
felt we would be able to more accurately measure the subsidies provided
to the producer of the subject merchandise by following the second
approach.
Petitioners have argued that the Department should countervail the
subsidies emanating from the debt forgiveness provided to Finsider.
Petitioners also argue that we should countervail the 99.9 billion lire
debt forgiveness provided to TAS as well. However, countervailing both
instances of debt forgiveness would overstate the benefit to TAS
because we would then be looking at the forgiveness from two different
levels of analysis at the same time. As stated in the verification
reports, the 99.9 billion debt forgiveness to TAS was part of the
larger debt forgiveness provided to Finsider. Therefore, in order to be
consistent with the approach chosen in this investigation, i.e., to
focus on the producer of the subject merchandise, we are countervailing
only the debt and loss forgiveness provided to TAS.
Comment 3
Petitioners argue that the 300 billion lire payment from IRI to
ILVA in 1992 should be countervailed as an equity infusion and not as
an interest-free loan. Petitioners maintain that this capital
contribution in 1992 was called an ``interest free loan'' because, at
that time, it had not been expressly approved as an equity infusion.
Also, petitioners point to the fact that there was no loan agreement.
Petitioners maintain that the Department should not base its decision
on ``technicalities'' such as the EC's delayed approval and the
continued absence of a shareholders' decision approving a capital
increase. Petitioners conclude that since the Department determined at
verification that the EC has recently sanctioned this amount as an
equity infusion, the Department should treat it as such.
Petitioners also argue that the 10,900 million lire ``payment on
capital account'' to ILVA in 1991, which the Department found at
verification, should be countervailed as an equity infusion. The nature
of this payment was identical to that of the 1992 payment. Respondents
argue that the Department's verification confirmed that this 1992
infusion was a liability as opposed to an equity infusion.
Additionally, respondents state that there were two conditions which
had to be met before the 1992 capital contribution could be considered
an equity infusion: (1) Authorization from the EC; and (2)
authorization from the company's shareholder. Neither of these two
conditions was met during the POI and the amount was considered a
``provisional capital increase.'' Thus, the Department properly
recognized the legal limitations placed on this fund and, treated it as
a short-term loan.
Respondents state that EC's preliminary approval of the capital
contribution in 1993 did not occur until nearly a year and a half after
the POI. Citing Countervailing Duty Determinations: Certain Steel
Products from France (``Certain Steel from France''), 58 FR 37313 (July
9, 1993), respondents argue that it is the reclassification of debt
into equity which itself constitutes the potentially countervailable
event in this case. According to respondents, since the potentially
countervailable event took place after the POI, it is not subject to
analysis in this investigation.
DOC Position
Based on an analysis of the primary features of the 1991 and 1992
provisional capital contributions, we find that the potential
obligation to repay IRI (in the event that the EC did not approve the
capital contribution) effectively makes these contributions contingent
liabilities. To reflect their contingent nature, we have modelled the
provisional capital contributions as short-term zero-interest loans
which are rolled over every six months until such time as they are
repaid or the EC approves their conversion to equity.
We disagree with respondents that Certain Steel from France is
applicable in this instance. In the French case, we were looking at the
year the debt-to-equity conversion occurred and decided that the equity
infusion was the potentially countervailable event rather than the
loan. In this case, the provisional capital increase is being treated
as a loan throughout the POI. Therefore, there is no other potentially
countervailable event in the POI.
We disagree with petitioners that there must be a loan repayment
schedule or payment of interest in order for the Department to consider
these payments to represent liabilities. The possibility of repayment
was real. Therefore, the provisional capital increase is properly
treated as a loan.
Comment 4
Petitioners argue that the scope of operations of the various
entities that produce(d) electrical steel (i.e., Terni, TAS, and the
Specialty Steels Division of ILVA) has changed significantly over the
years as a result of a series of restructurings. Petitioners argue that
since TAS was created during the 1987 restructuring out of the assets
of Terni, I.A.I. and Terninoss, Terni between 1978 and 1986 was not the
same as the Specialty Steels Division of ILVA after 1989, which
includes the assets of I.A.I. and Terninoss. According to petitioners,
the Department must use a denominator which represents the ability to
generate sales at the time a subsidy was given.
According to petitioners, the significant difference between 1986
sales of Terni and 1992 sales of ILVA's Specialty Steels Division
indicates that these two entities are similar in name only. Petitioners
note that, in cases involving a merger, it is the Department's practice
to perform a ``tying analysis'' in order to measure the benefits to the
entity originally receiving the subsidy. Petitioners argue that since
the 1987 restructuring of Terni cannot be separated from the overall
Finsider restructuring, the Department, as it did in the preliminary
determination of Certain Steel from Italy, should adjust ILVA's sales
denominator in order to ``reflect steel activities prior its
restructuring.'' According to petitioners, the Department should use
the sales of ILVA's Specialty Steels Divisions Terni plant (plus its
share of intercompany sales) as the denominator for Terni-specific
loans and grants, thereby excluding the stainless steel activities of
ILVA's Specialty Steels Division.
Respondents argue that, since Terni's stainless steel producing
subsidiaries (I.A.I. and Terninoss), and other Terni assets were merely
merged into a new entity, TAS, which subsequently became the Specialty
Steels Division of ILVA, the restructurings did not dramatically alter
the entity producing the subject merchandise. As such, according to
respondents, the Department should reject suggestions that stainless
steel sales be subtracted from the denominator.
Respondents further argue that the difference between Terni sales
in 1986 and ILVA's Specialty Steels Division sales in 1992 can be
explained by increased activity in areas whose production capability
was enhanced pursuant to restructuring. Moreover, respondents argue
that a company's sales cannot be expected to remain ``static'' as
petitioners suggest. Finally, respondents also argue that, according to
the Department's ``pass-through'' methodology, the Department should
find that the price paid by TAS for I.A.I. and Terninoss represented
the exchange of one ``subsidized'' asset for another asset.
DOC Position
We disagree with petitioners that the 1987 restructuring was so
fundamental that a comparison cannot be made between Terni and the
Specialty Steels Division of ILVA. We believe that it is incorrect to
characterize the merger of I.A.I. and Terninoss into TAS as the
introduction of unrelated assets to the producer of the subject
merchandise. Since I.A.I. and Terninoss were both subsidiaries of Terni
prior to the 1987 restructuring, we find no reason to eliminate
stainless steel sales from the Terni-specific denominator.
We do not disagree with petitioners that ILVA's sales have to be
adjusted to properly measure subsidies given to Terni/TAS. As noted by
petitioners, in Certain Steel from Italy the Department adjusted ILVA
sales to calculate subsidy margins for benefits accruing to Italsider
and/or Nuova Italsider. To accomplish the same results in this
investigation, we have used the sales of the Specialty Steels Division
of ILVA to calculate the subsidy margin for Terni-specific benefits,
rather than the sales of ILVA.
Finally, we agree with respondents that a company's sales cannot be
expected to remain the same over time; i.e., a comparison of nominal
sales values separated by six years does not take into consideration
inflation or the internal economies of scale resulting from
restructuring.
Comment 5
Petitioners state that the Department did not use the highest
interest rate on the record of the investigation for calculating the
benchmark in its preliminary determination. Petitioners note that the
IMF interest rates that it submitted in the petition are higher in some
instances than the interest rate used by the Department.
The GOI, on the other hand, argues that petitioners' suggestion
that the Department use the Italian ``lending rate,'' as provided by
the IMF, should be rejected since this is a short-term interest rate.
Therefore, according to the GOI, this interest rate should not be
considered representative of the highest long-term interest rate in
Italy. Respondents state that the Department, as it did in the final
determination of Certain Steel, correctly used the reference rate
provided by the Bank of Italy to calculate benchmark rates.
DOC Comment
We note that the Bank of Italy's reference rate is the highest
average long-term fixed interest rate on the record of this
investigation. Because section 355.44(b)(6)(iv)(A) of the Proposed
Regulations lists short-term interest rates as the least preferred
choice for an uncreditworthy long-term interest rate benchmark, we
cannot use the IMF ``lending rate'' as suggested by petitioners.
Accordingly, the Department has continued to use the reference rate
plus 12 percent of the ABI prime rate for purposes of constructing
benchmark and discount rates.
Comment 6
Respondents argue that in cases involving companies experiencing a
major restructuring or expansion, the Department recognizes that a
reasonable private investor's analysis may depend on the company's
prospects, rather than its past financial experience. Respondents cite
to Certain Carbon Steel Products from Sweden, 58 FR 37385 (July 9,
1993) in support of their argument.
According to respondents, the ECSC Treaty permits government
investment in a state-owned steel company only in cases where the EC
determines that such investment is provided ``under circumstances
acceptable to a private investor operating under normal market economy
conditions.'' Because of this requirement, a team of independent
experts examined the GOI's proposed restructuring plan and concluded
that the implementation of the plan afforded ILVA reasonable chances of
achieving financial viability under normal market conditions.
Respondents further argue that the Department has considered the
EC's approval of government equity investments as evidence that the
transaction confers no countervailable benefits. Respondents cite to
the administrative review of Industrial Nitrocellulose from France, 52
FR 833 (January 9, 1987), which involved the French nitrocellulose
industry.
Petitioners argue that ILVA's claim of equityworthiness in 1988 is
without merit. ILVA's predecessor companies, including Terni, incurred
losses in every year examined by the Department. In addition,
petitioners argue that nothing on the record suggests that ILVA's
prospects after 1988 were so optimistic as to overcome years of poor
financial performance and justify commercial investment by a private
investment company.
DOC Position
We agree with respondents that where a major restructuring or
expansion occurs, it may be appropriate to place greater reliance on
the future prospects of the company than would be the case where an
equity investment is made in an established enterprise (see GIA at
37244). For example, in the Swedish Steel case cited by respondents, we
considered such factors as: (1) The anticipated rate of return on
equity; (2) the extended length of time before the company was
projected to be profitable; (3) the prospects of the world steel
industry; (4) the cost structure of the company.
In this instance, the 1988 equity investment was made in ILVA, a
company which would differ from the operating companies that went into
it principally because of the substantial debt forgiveness that
occurred as part of the 1988-90 restructuring. Relieved of this debt,
ILVA's balance sheet, when it began operations in 1989, would be much
improved over that of its predecessor, Finsider.
Beyond this, however, we have little indication of ILVA's future
prospects. There is no information on expected rates of return, the
time frame for achieving profitability, or developments in the steel
market that would allow us to reach a conclusion that ILVA would yield
a reasonable rate of return in a reasonable period of time.
Respondents have discussed two indicators of the future prospects
of ILVA, the independent study undertaken by the EC and the EC's
decision allowing the investment. With respect to the study, it was not
placed on the record and we have had no opportunity to analyze it.
Without such analysis, we cannot simply accept respondents'
characterization of the study's conclusion.
We also disagree with respondents that the EC's finding on this
investment is dispositive. Our determinations of equityworthiness are
made in accordance with the Department's standards, not the EC's. In
Final Affirmative Countervailing Duty Determination: Certain Hot Rolled
Lead and Bismuth Carbon Steel Products from France, 58 FR 6221, 6232
(January 27, 1993), we explicitly rejected the EC approval of the
investment as not relevant. In Industrial Nitrocellulose from France,
cited by respondents, the Department performed its own analysis and,
contrary to respondents' assertion, did not rely on an EC finding.
Respondents' reliance on ``principles of comity'' (citing the
Restatement (Third) of Foreign Relations Law of the United States (ALI)
section 481, is also inapposite, because comity involves respecting
foreign judgments regarding the disposition of property and the status
of persons.
Finally, while indicators of past performance may be less
important, we do not believe that a private investor would ignore them
entirely. As explained in our discussion of Terni's equityworthiness
above, that company had performed poorly. Similarly, Italsider, another
company that was restructured into ILVA, had performed poorly (see
Certain Steel from Italy). Therefore, the past performance of companies
that became ILVA offered no basis to believe that the 1988 investment
in ILVA was consistent with commercial considerations.
Comment 7
Respondents argue that the Department only countervails worker
assistance when a company is relieved of an obligation it would
otherwise incur. According to respondents, because it confirmed at
verification that Italian companies have no obligation to retrain their
workers, the Department should conclude that ECSC Article 56 worker
training is not countervailable.
DOC Position
First, it should be noted that we did not countervail the portion
of Article 56 retraining grants funded by the ECSC. With respect to the
portion funded by the GOI under Law 181/89, we disagree that the
workers assistance provision of the Proposed Regulations is applicable
in this situation. There is a distinction between funds which cover the
cost of upgrading the skills of workers remaining at ILVA (which is a
cost normally born by the company to improve the efficiency of its work
force), and funds provided to train workers leaving ILVA, which we
consider a benefit solely to the worker. Only the former is properly
categorized as countervailable ``worker assistance'' under section
355.44(j) of the Proposed Regulations, to the extent that it relieves
the company of the cost of improving its workers' skills.
Since the GOI's contributions to match the ECSC Article 56 payments
were only available to steel companies and these funds were used to
cover part of ILVA's costs of training workers who remained at ILVA, we
find that a countervailable benefit is being provided.
Comment 8
The GOI states that, based on the clearer understanding gained by
the Department at verification regarding the types of loans eligible
for Law 796/76 exchange rate guarantees, this program should be found
not countervailable.
DOC Position
We note that the Department failed to send the GOI a deficiency
questionnaire indicating that more information was needed to
demonstrate the de facto use of Law 796/76. When it became evident at
verification that such information was needed, we attempted to gather
it. However, the information could not be provided in the form
necessary in the limited time available during verification.
Accordingly, we have not made the adverse inference that this
program is de facto specific to the steel industry. However, we note
that this finding of non-countervailability only relates to this
investigation and is subject to revision at the first administrative
review if a countervailing duty order is issued.
Comment 9
The GOI notes that exports of the subject merchandise to the U.S.
were not financed using Law 227/77. According to the GOI, this
financing should not be considered countervailable because it is not
limited to a particular industry and is also consistent with the
Organization for Economic Cooperation and Development Understanding on
official export credits. The GOI argues that since this financing is
permitted by a multilateral agreement binding both the U.S. and Italy,
it should not be considered countervailable.
DOC Position
We found no countervailable benefits under this program because
ILVA did not use this financing for exports to the United States. With
respect to the other arguments raised by the GOI, since this program
provided export financing, its availability to a large number of
industries is not relevant. For export subsidies, we need only find,
pursuant to 355.43(a)(1) of the Proposed Regulations, that the
financing for exports is provided at preferential rates. Second,
although the U.S. and Italy participate in the OECD arrangement which
establishes the interest rates that can be charged on export loans,
nothing in that arrangement would preclude the application of
countervailing duties on merchandise entering the U.S. which received
subsidized financing.
Comment 10
Respondents note that at verification, the Department determined
that Law 181/89 actually had three components: (1) the creation of
alternative employment opportunities; (2) the development of new
industrial initiatives (``reindustrialization''); and (3) worker
retraining. Respondents state that the Department further determined
that ILVA only received funds under the reindustrialization provision
of Law 181/89.
Of the three reindustrialization projects, respondents claim that
two were tied to non-subject merchandise. Therefore, they are not
countervailable pursuant to section 355.47 of the Proposed Regulations.
The third reindustrialization project was a ``retraining center.''
Respondents argue that the Proposed Regulations state that ``worker
assistance'' is only countervailable to the extent that it relieves a
company of an obligation that it would otherwise incur (see section
355.44(j) of the Proposed Regulations). Since there is no obligation in
Italy to retrain workers, this project does not provide a
countervailable benefit.
DOC Position
As a matter of clarification, we found that Law 181/89 has four
components, the fourth being early retirement. However, the early
retirement component expired prior to the POI. Since early retirement
is typically considered a recurring benefit and, therefore, allocable
to the year in which received, we did not establish the extent to which
it had or had not been used by ILVA.
Regarding the reindustrialization component, we agree that two of
the projects involved the further processing of non-subject
merchandise. Therefore, we have found them not countervailable.
However, with respect to the training center, we disagree that this
amounted to worker assistance within the meaning of the Proposed
Regulations. As discussed in Comment 7 above, there is a distinction
between worker assistance and funds that are being used to cover the
costs that ILVA would incur to train its work force. Although not
exclusively, the training center in question is used to upgrade the
technical skills of ILVA workers. Therefore, we have determined that
the GOI payments to cover part of the cost of building a training
center provide a countervailable benefit to ILVA.
Comment 11
The GOI argues that the early retirement program would only be
countervailable if companies had no choice but to keep surplus workers
on the payroll. However, companies can carry out large-scale lay-offs
under Italian law. Thus, the GOI contends that early retirement is an
alternative to lay-offs and not an alternative to maintaining excess
workers. The GOI contends that because companies are required to
contribute to the costs for early retirement, the program is a burden,
not a benefit, to them. The only beneficiaries under the early
retirement program are the workers.
Moreover, according to respondents, early retirement is available
to workers in a broad range of industries. The Department should,
therefore, find that there is no selective treatment under the program.
According to petitioners, verification confirmed that early
retirement is only available to a limited group of industries.
Moreover, because use of early retirement under Article 27 is
contingent upon approval from a government committee, the GOI exercises
discretion in determining which industries can use the program.
Petitioners also argue that Italian companies have an obligation to
provide early retirement benefits once the workers have opted for the
program. The benefit should, therefore, be calculated as the GOI's
contribution to the program because if government funds had not been
provided, ILVA would have been legally responsible for the entire cost,
according to petitioners.
DOC Position
We agree with the GOI that, by law, companies in Italy can carry
out large-scale lay-offs. Moreover, we have no evidence that Italian
companies have a legal obligation to keep workers on the payroll until
they reach normal retirement age. However, based on verification, we
have found that some companies, including ILVA, belong to a category of
firms that must go through certain ``steps and procedures,'' in the
form of the provisions under Law 223/91 before they actually can reduce
the workforce. In practice, therefore, large companies are obligated to
use Law 223/91 to deal with surplus workers.
Regarding the general availability of early retirement, the
structure of Law 223/91 is such that the early retirement option is
available to a smaller group of companies than the lay-off option, CIG-
S. Because the GOI was not able to provide evidence showing that the
steel producers did not receive a disproportionate share of the quota
granted under the early retirement option, we have used CIG-S as our
``benchmark.'' Since the financial obligations imposed on the company
under early retirement are more onerous that the obligations under CIG-
S, we have determined that ILVA did not receive a benefit under the
early retirement program.
Comment 12
Petitioners argue that the shares in ILVA owned by Italsider (in
liquidation) were transferred to TAS free-of-charge in 1990.
Respondents argue that ILVA did provide an invoice from Italsider
requesting payment from TAS but that ILVA was unable to locate the
payment record during verification. Moreover, respondents argue that
the Department never posed the question of payment to TAS (in
liquidation), nor did the Department verify the records of TAS (in
liquidation). Therefore, respondents argue, ILVA should not be
penalized for any missing information over which it has no control.
DOC Position
As discussed above in connection with the 1988-90 restructuring,
petitioners alleged several subsidies to TAS after the second asset
transfer and receipt of Italsider's shares by TAS was among them. As we
explained, we believe that we have captured the full benefit to the
subject merchandise from the restructuring without analyzing these
individual transactions. Therefore, TAS' payment or non-payment to
Italsider is irrelevant to our analysis.
However, although we did not verify that TAS (in liquidation) paid
Italsider for the shares, we do not believe that TAS kept the proceeds
from the sale. This is because the proceeds were so large (1,563
billion lire) that they would have been more than enough to pay off all
of TAS' outstanding liabilities and to return the company to a positive
equity position. However, as TAS' books indicate, this did not happen.
Comment 13
Petitioners maintain that although evidence presented at
verification may demonstrate that Terni received Law 750/81 funds based
on its identity as a producer of forgings and castings, the Department
nevertheless found that Terni's accounting records did not reflect that
these grants were designated only for the production of forgings and
castings. Therefore, petitioners argue that Terni treated and accounted
for these grants as general funds, and did not specifically allocate
them to its forgings and castings operations.
DOC Position
We find these grants to be not countervailable since they applied
to merchandise not subject to this investigation. We disagree with
petitioners' argument that Terni's treatment of these funds as
``general funds'' demonstrates that they were not specifically
allocated to the production of forgings and castings. We stated in the
GIA that when a company receives a general subsidy, the Department does
not attempt to ``trace'' or establish how the subsidy was used.
Conversely, if the subsidy is tied to the production of merchandise
other than the merchandise under investigation, the Department also
does not attempt to trace or establish how the subsidy was ultimately
used. Furthermore, we believe that respondents provided sufficient
documentation, which is fully discussed in the ILVA verification
report, that grants under this program specifically applied to the
production of forgings and castings. As stated in the GIA at 37267, if
the benefit is tied to a product other than the merchandise under
investigation, the Department will not find a countervailable subsidy
on the subject merchandise.
Verification
In accordance with section 776(b) of the Act, we verified the
information used in making our final determination. We followed
standard verification procedures, including meeting with government and
company officials, examination of relevant accounting records and
examination of original source documents. Our verification results are
outlined in detail in the public versions of the verification reports,
which are on file in the Central Records Unit (room B-099 of the Main
Commerce Building).
Suspension of Liquidation
In accordance with our affirmative preliminary determination, we
instructed the U.S. Customs Service to suspend liquidation of all
entries of electrical steel from Italy, which were entered or withdrawn
from warehouse for consumption, on or after February 1, 1994, the date
our preliminary determination was published in the Federal Register. If
the ITC issues a final affirmative injury determination, we will
instruct Customs to require a cash deposit for entries of the
merchandise after that date in the amounts indicated below.
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Electrical Steel
Country-Wide Ad Valorem Rate.............................. 24.42
------------------------------------------------------------------------
ITC Notification
In accordance with section 705(d) of the Act, we will notify the
ITC of our determination. In addition, we are making available to the
ITC all nonprivileged and nonproprietary information relating to this
investigation. We will allow the ITC access to all privileged and
business proprietary information in our files, provided the ITC
confirms that it will not disclose such information, either publicly or
under an administrative protective order, without the written consent
of the Deputy Assistant Secretary for Investigations, Import
Administration.
If the ITC determines that material injury, or threat of material
injury, does not exist, these proceedings will be terminated and all
estimated duties deposited or securities posted as a result of the
suspension of liquidation will be refunded or cancelled. If, however,
the ITC determines that such injury does exist, we will issue a
countervailing duty order directing Customs officers to assess
countervailing duties on electrical steel from Italy.
Return of Destruction of Proprietary Information
This notice serves as the only reminder to parties subject to
Administrative Protective Order (APO) of their responsibility
concerning the return or destruction of proprietary information
disclosed under APO in accordance with 19 CFR 355.34(d). Failure to
comply is a violation of the APO.
This determination is published pursuant to section 705(d) of the
Act and 19 CFR 355.20(a)(4).
Dated: April 11, 1994.
Susan G. Esserman,
Assistant Secretary for Import Administration.
[FR Doc. 94-9313 Filed 04-15-94; 8:45 am]
BILLING CODE 3510-DS-P
