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