Final Affirmative Countervailing Duty Determination: Grain- Oriented Electrical Steel From Italy

DEPARTMENT OF COMMERCE

International Trade Administration

[C-475-812]

Final Affirmative Countervailing Duty Determination: Grain-

Oriented Electrical Steel From Italy

AGENCY: Import Administration, International Trade Administration,

Department of Commerce.

EFFECTIVE DATE: March 18, 1994.

FOR FURTHER INFORMATION CONTACT: Annika L. O'Hara or David R. Boyland,

Office of Countervailing Investigations, Import Administration, U.S.

Department of Commerce, room 3099, 14th Street and Constitution Avenue

NW., Washington, DC 20230; telephone (202) 482-4198 and (202) 482-0588,

respectively.

FINAL DETERMINATION: The Department determines that benefits which

constitute subsidies within the meaning of section 701 of the Tariff

Act of 1930, as amended (``the Act''), are being provided to

manufacturers, producers, or exporters in Italy of grain-oriented

electrical steel. For information on the estimated net subsidy, please

see the Suspension of Liquidation section of this notice.

Case History

Since the publication of the preliminary determination in the

Federal Register on February 1, 1994 (59 FR 4682), the following events

have occurred.

We conducted verification of the responses submitted on behalf of

the Government of Italy (``GOI''), ILVA S.p.A. (``ILVA''), and the

European Community (``EC'') from February 7 through February 21, 1994.

On March 22 and March 28, 1994, we received case and rebuttal

briefs, respectively, from petitioners and respondents. Neither

petitioners nor respondents requested a hearing in this investigation.

On March 29, 1994, we returned to petitioners certain factual

information submitted in their briefs because it was untimely pursuant

to Sec. 355.31(a)(i) of the Department's regulations.

Scope of Investigation

This investigation concerns the following class or kind of

merchandise: grain-oriented electrical steel (``electrical steel'')

from Italy.

The product covered by this investigation is grain-oriented silicon

electrical steel, which is a flat-rolled alloy steel product containing

by weight at least 0.6 percent of silicon, not more than 0.08 percent

of carbon, not more than 1.0 percent of aluminum, and no other element

in an amount that would give the steel the characteristics of another

alloy steel, of a thickness of no more than 0.56 millimeter, in coils

of any width, or in straight lengths which are of a width measuring at

least 10 times the thickness, as currently classifiable in the

Harmonized Tariff Schedule (``HTS'') under item numbers 7225.10.0030,

7226.10.1030, 7226.10.5015, and 7226.10.5065. Although the HTS

subheadings are provided for convenience and Customs purposes, our

written description of the scope of this proceeding is dispositive.

Injury Test

Because Italy is a ``country under the Agreement'' within the

meaning of section 701(b) of the Act, the U.S. International Trade

Commission (``ITC'') is required to determine whether imports of

electrical steel from Italy materially injure, or threaten material

injury to, a U.S. industry. On October 12, 1993, the ITC preliminarily

determined that there is a reasonable indication that an industry in

the United States is being materially injured or threatened with

material injury by reason of imports from Italy of the subject

merchandise (58 FR 54168, October 20, 1993).

Corporate History of Respondent ILVA

Prior to 1987, electrical steel in Italy was produced by Terni

S.p.A. (``Terni''), a main operating company of Finsider. Finsider was

a government-owned holding company which controlled all state-owned

steel companies in Italy. In a restructuring of the Italian steel

industry in 1982, Terni took over two plants, Lovere and Trieste, from

Nuova Italsider, another Finsider-owned steel producer.

As part of a subsequent restructuring in 1987, Terni transferred

its assets to a new company, Terni Acciai Speciali (``TAS'') which

thereafter held all the assets for electrical steel production in

Italy. As part of the restructuring, Lovere and Trieste became TAS' two

principal subsidiaries.

In 1988, another restructuring took place in which Finsider and its

main operating companies (TAS, Italsider, and Nuova Deltasider) entered

into liquidation and a new company, ILVA, was formed. ILVA took over

some of the assets and liabilities of the liquidating companies. With

respect to TAS, part of its liabilities and the majority of its viable

assets, including all the assets associated with the production of

electrical steel, were transferred to ILVA on January 1, 1989. ILVA

itself became operational on that same day. Part of TAS' remaining

assets and liabilities were transferred to ILVA on April 1, 1990. After

that date, TAS no longer had any manufacturing activities. Only certain

non-operating assets (e.g., land, buildings, inventories), remained in

TAS.

From 1989 to 1994, ILVA consisted of several operating divisions.

The Specialty Steels Division, located in Terni, produced the subject

merchandise. ILVA was also the majority owner of a large number of

separately incorporated subsidiaries. The subsidiaries produced various

types of steel products and also included service centers, trading

companies, an electric power company, etc. ILVA together with its

subsidiaries constituted the ILVA Group. The ILVA Group was owned by

the Istituto per la Ricostruzione Industriale (``IRI''), a holding

company wholly-owned by the GOI.

As of January 1, 1994, ILVA entered into liquidation and its

divisions formed three companies. ILVA's former Specialty Steels

Division is now a separately incorporated company, Acciai Speciali

Terni, which produces electrical steel.

Spin-Offs

ILVA sold several ``productive units,'' as defined in the General

Issues Appendix to the Final Affirmative Countervailing Duty

Determination: Certain Steel Products from Austria (``GIA''), 58 FR

37225, 37265-8 (July 9, 1993), from 1990 through 1992. At verification,

we established that one of the companies had been sold to a government

entity and one other company had been sold by Italsider rather than

ILVA. Our spin-off methodology does not apply in these situations. For

the other companies, i.e., those sold to private parties, we have

applied the pass-through methodology described in the GIA to calculate

the proportion of subsidies received by ILVA that ``left'' the company

as a result of the sales of these productive units.

Period of Investigation

For purposes of this final determination, the period for which we

are measuring subsidies (the period of investigation (``POI'')) is

calendar year 1992. We have calculated the amount of subsidies bestowed

on the subject merchandise by cumulating benefits provided to Terni,

TAS and ILVA from 1978 through 1992.

Analysis of Programs

Based on our analysis of the petition, the responses to our

questionnaires, verification, and comments by interested parties, we

determine the following.

Equityworthiness

Pursuant to section 355.44(e)(1) of the Proposed Regulations

(Countervailing Duties; Notice of Proposed Rulemaking and Request for

Public Comments (``Proposed Regulations''), 54 FR 23366, May 31, 1989),

we preliminarily determined that Terni, TAS, and ILVA were

unequityworthy from 1978 through 1992, except in 1979, 1983, 1988, and

1989 when equity infusions were not an issue. From the perspective of a

reasonable private investor examining the firm at the time of the

equity infusions, neither Terni, TAS, nor ILVA showed an ability to

earn a reasonable rate of return over a reasonable period of time. We

did not learn anything at verification that would lead us to reverse

this finding.

As we stated in the preliminary determination, the companies which

were restructured to form ILVA sustained losses from 1978 onward.

Although ILVA had a brief period of operating profits for 1989 through

1991, its return on equity during this period declined until there was

a negative return. Terni and ILVA's debt to equity ratios were

relatively high. Read in conjunction with other financial indicators,

such as net losses for numerous years, negative rates of return on

equity and sales, the companies' financial performance was weak. Given

this, we continue to find that Terni, TAS, and ILVA were unequityworthy

from 1978 through 1992. Because the companies received no equity

infusions during 1979, 1983, 1989, and 1990, we did not determine

equityworthiness for those years. (See also Memorandum to Director of

Accounting dated April 11, 1994 on file in Room B-099 of the Main

Commerce Building concerning the Department's evaluation of Terni's,

TAS', and ILVA's equityworthiness.)

For the preliminary determination, we did not include 1988 in our

equityworthy analysis because petitioners did not allege an infusion

had occurred in that year and we were not aware of any such investment.

However, in our review of ILVA's annual reports at verification, we

learned that IRI contributed capital to ILVA in 1988 in the form of an

equity infusion. Therefore, in accordance with Sec. 355.44(e)(2) of the

Proposed Regulations, we have considered whether ILVA was equityworthy

in that year to determine whether the equity infusion was made on terms

inconsistent with commercial considerations. As explained below, we

have determined that ILVA was not equityworthy in that year.

Creditworthiness

Pursuant to section 355.44(b)(6)(i) of the Proposed Regulations, we

preliminarily determined that Terni, TAS, and ILVA were uncreditworthy,

i.e., that they did not have sufficient revenues or resources to meet

their costs and fixed financial obligations, from 1978 through 1992. In

making that determination, we examined Terni's, TAS', and ILVA's

current, quick, times interest earned and debt to equity ratios. We

determined, for example, that the companies' times interest earned

ratios were anemic for approximately 16 years, indicating a weak long-

term solvency. Furthermore, the debt to equity ratios for both Terni

and ILVA were relatively high.

We did not learn anything at verification that would lead us to

reconsider our preliminary determination. Therefore, we continue to

find that Terni, TAS, and ILVA were uncreditworthy from 1978 through

1992. (See also Memorandum to Director of Accounting dated April 11,

1994, on file in Room B-099 of the Main Commerce Building concerning

the Department's evaluation of Terni's, TAS', and ILVA's

creditworthiness.)

Benchmarks and Discount Rates

For uncreditworthy companies, Sec. 355.44(b)(6)(iv)(A)(1) of the

Proposed Regulations directs us to use, as the benchmark interest rate,

the highest long-term fixed interest rate commonly available to firms

in the country plus an amount equal to 12 percent of the prime rate.

Because we were unable to obtain information on the highest long-term

interest rate commonly available in the country, we used the Bank of

Italy reference rate which is the highest average long-term fixed

interest rate we were able to verify. We then added to this rate an

amount equal to 12 percent of the Italian Bankers Association (``ABI'')

prime rate. We have used the resulting interest rate as the benchmark

for our long-term loans. In calculations where we have not used this

rate, we have otherwise indicated. We have also used this amount as the

discount rate for allocating over time the benefit from equity

infusions and non-recurring grants for the same reasons explained in

Final Affirmative Countervailing Duty Determination: Certain Steel

Products From Spain, 58 FR 37374, 37376 (July 9, 1993).

Calculation Methodology

In determining the benefits to the subject merchandise from the

programs described below, we used the following calculation

methodology. We first calculated the benefit attributable to the POI

for each countervailable program, using the methodologies described in

each program section below. For those subsidies received by ILVA that

were allocated over time, we then performed the pass-through analysis

discussed in the GIA at 37269. The pass-through analysis accounts for

any reduction in ILVA's subsidies that resulted from the sale of

several productive units.

For the subsidies remaining with ILVA, we divided the benefit

allocable to the POI by the sales of ILVA or the sales of the Specialty

Steels Division of ILVA, depending on which company had received the

benefit. (The program sections below indicate which denominator has

been used for each program.) Next, we added the benefits for all

programs, including the benefits for programs which were not allocated

over time, to arrive at ILVA's total subsidy rate. Because ILVA is the

only respondent company in this investigation, this rate equals the

country-wide rate.

I. Programs Determined To Be Countervailable

A. Benefits Associated With the 1988-90 Restructuring

As discussed above under the ``Corporate History'' section of this

notice, the GOI liquidated Finsider and its main operating companies in

1988 and assembled the group's most productive assets into a new

operating company, ILVA. In 1990, additional assets and liabilities of

TAS, Italsider, and Finsider went to ILVA.

In the preliminary determination, we found that a countervailable

benefit was provided to ILVA through the 1988-1990 restructuring. In

reaching this determination, we did not look at the transformation of

Finsider as a whole into ILVA. Instead, we focused on the restructuring

of TAS into the Specialty Steels Division of ILVA. We found that

although TAS' net worth was negative prior to the restructuring, ILVA

received a division with assets in excess of liabilities. In effect,

TAS' balance sheet was rewritten so as to change its equity from

negative 99,886 million lire to positive 317,836 million lire. For the

preliminary determination, we treated the difference (417,722 million

lire) as a countervailable benefit to ILVA.

We have reconsidered the methodology employed in the preliminary

determination and have revised it for the final determination. We now

believe that the approach taken in the preliminary determination

understated the benefit to ILVA from the restructuring. It failed to

take into account a portion of the liabilities not assumed by ILVA,

that would otherwise have had to be repaid, and the losses incurred by

TAS in connection with a write down of its assets in the restructuring

process.

The purpose of the 1988-90 restructuring was to create a new,

viable steel company (ILVA) by having it take over most of the

productive assets of Finsider's operating companies like TAS, but only

some of the liabilities. In April 1990, after all of TAS' manufacturing

activities had either been transferred or shut down, TAS was nothing

but a shell company in the process of liquidation, with liabilities

exceeding its assets. ILVA, on the other hand, had received most of

TAS' assets without being burdened by TAS' liabilities.

The liabilities remaining with TAS through the restructuring

process had to be repaid, assumed, or forgiven. We have identified one

specific instance of forgiveness. This occurred in 1989 when Finsider

forgave 99,886 million lire of debt owed to it by TAS. Even with this

forgiveness, TAS retained a substantial amount of liabilities after the

1990 transfer of assets and liabilities to ILVA. While no specific act

eliminated this debt--indeed some of it is still outstanding--we

believe that ILVA (and consequently the subject merchandise) received a

benefit as a result of the debt being left behind in TAS.

In addition, we learned at verification that losses had been left

behind in TAS, because the value of the assets transferred to ILVA had

been written down. TAS gave up assets whose book value was higher than

their appraised value. As a result, TAS was forced to absorb losses.

The loss from the first transfer was reflected as an extraordinary loss

in TAS' 1988 Annual Report. With respect to the 1990 transfer, TAS had

created a reserve in 1989 for the anticipated loss. At verification, we

found that this loss was included in the liabilities that were left in

TAS after the 1990 transfer.

In summary, in restructuring TAS into the Specialty Steels Division

of ILVA, liabilities and losses due to asset write downs were left

behind in TAS, a shell company. Although there was only one specific

act of debt forgiveness, which only covered a portion of the

liabilities in TAS, we believe that ILVA received a benefit when it was

able to leave the debt and losses remaining in TAS. Because this

benefit was specific to ILVA, we find a countervailable subsidy to ILVA

in the amount of the debt and losses that should have been taken by

ILVA when it took on the assets of TAS.

Treating these liabilities and losses as a subsidy to ILVA is

consistent with the Department's determination in Certain Steel from

Austria at 37221. In that case, we examined a government-owned

operating company (VAAG) which was split up into numerous operating

companies, one of which was subject to the investigation. In order to

effect this split-up, the assets and liabilities of the original

company were divided among the new companies. We determined that the

creation of the new companies was merely a redistribution of existing

assets which, in and of itself, did not give rise to any benefits.

However, we also determined that a benefit arose because losses that

had been incurred by VAAG were not distributed to the new companies.

Therefore, we determined that the company under investigation

effectively received a grant in the amount of the losses that should

have been distributed to it.

Similarly, in the case of TAS and ILVA, the transfer of assets to

ILVA is, in itself, a redistribution of assets which does not give rise

to subsidies. However, a substantial portion of the liabilities and the

losses associated with the assets were not distributed to ILVA.

Instead, they remained behind in TAS. We are countervailing these

amounts as grants to ILVA.

To calculate the benefit during the POI, we used our standard grant

methodology (see section 355.49(b) of the Proposed Regulations).

Finsider's 1989 forgiveness of TAS' debt and the loss resulting from

the 1989 write down were treated as grants received in 1989. The second

asset write down and the debt outstanding after the 1990 transfer

(adjusted as described below) were treated as grants received in 1990.

After the 1990 transfer, certain non-operating assets (e.g., land,

buildings, inventories), remained in TAS. These assets are being

disposed of in the liquidation process and the proceeds from the sale

of the assets are available to pay off TAS' remaining liabilities.

In order to account for the fact that certain assets were left

behind in TAS, we have adjusted the amount of liabilities outstanding

after the 1990 transfer. We did this by writing down the value of the

assets by taking a weighted average of the earlier write downs and

subtracted this amount from the outstanding liabilities.

We then divided the benefits by ILVA's sales in the POI. On this

basis, we determine the estimated net subsidy to be 12.10 ad valorem

for all manufacturers, producers, and exporters in Italy of the subject

merchandise.

B. Interest-Free Loans to ILVA

In 1992, ILVA received a 300 billion lire payment from IRI. At

verification, we reviewed documents which established this payment as a

``provisional'' or ``anticipated'' capital increase. The reason that

the payment was provisional was that before it could be considered as

an equity infusion, authorization was needed from: (1) The

shareholders, and (2) the EC.

IRI clearly intended that the money become share capital, as there

were no arrangements for repayment (e.g., a repayment schedule), nor

was interest to be paid. Therefore, as IRI was the sole shareholder in

ILVA, its approval was a formality and the only real condition was the

EC approval. If the EC approval was not received, the amount would have

to be repaid to IRI. Although the GOI asked for the EC's approval, it

was not granted during the POI.

ILVA's 1992 Annual Report shows that the company received a similar

payment from IRI in 1991 which was entered in its accounting records in

the same way as the 300 billion payment received in 1992. At

verification, we learned that the background to the 1991 payment was

the same as for the 1992 payment.

Because these payments were not converted to equity prior to the

end of the POI, we cannot find the payments to be equity infusions.

Thus, we have determined to treat the payments as short-term interest-

free loans, which are being rolled over until such time as they are

repaid or converted to equity upon EC approval.

The typical maturity in Italy for short-term loans is at most six

months and roll-overs are common. In accordance with

Sec. 355.44(b)(3)(i) of the Proposed Regulations, we used the 1992

International Monetary Fund's annualized ``lending rate,'' converted to

a semi-annual interest rate as the short-term benchmark interest rate.

Since ILVA paid zero interest, the benefit to ILVA was the interest it

would have owed on both payments. These benefits were then divided by

ILVA's sales in the POI. On this basis, we determine the estimated net

subsidy to be 0.49 percent ad valorem for all manufacturers, producers,

and exporters in Italy of the subject merchandise.

C. Equity Infusions

The GOI, through IRI, provided new equity capital to Terni, TAS, or

ILVA in every year from 1978 through 1991, except in 1979, 1983, 1989,

and 1990. Respondents have not provided any argument refuting our

preliminary determination that the GOI's equity investments were

provided specifically to the steel industry.

As discussed above, we have determined that Terni, TAS, and ILVA

were unequityworthy in each year that they received new equity capital.

Therefore, these provisions of equity were inconsistent with commercial

considerations and are countervailable.

To calculate the benefit for the POI, we treated each of the equity

amounts as a grant and allocated the benefits over a 15-year period.

(Our treatment of equity as grants and our choice of allocation period

is discussed in the GIA, at 37239 and 37225, respectively.)

In the preliminary determination, we treated a capital increase

received by ILVA in the amount of 205,097 million lire in 1990 as a

countervailable equity infusion because ILVA reported it as an equity

infusion in its responses. At verification, we established that the

amount reported as an equity infusion was, in fact, due to the transfer

of residual assets from Italsider, TAS, and Finsider, which were all in

liquidation. As explained in connection with the 1988-1990

restructuring, we do not consider the transfer of assets in connection

with a restructuring to be an ``equity infusion'' since the transfer

merely redistributes existing assets. Therefore, we have excluded the

amount of this capital contribution from our calculations.

For the equity infusions provided to Terni and TAS, we have divided

the benefit allocated to the POI by the sales of the Specialty Steels

Division of ILVA. We chose this sales denominator because this division

most closely resembles the former companies, Terni and TAS. For equity

infusions into ILVA, we used ILVA's sales as our denominator, as

benefits from these investments are not tied to any division of ILVA.

On this basis, we find the estimated net subsidy to be 9.71 percent ad

valorem for all manufacturers, producers, and exporters in Italy of the

subject merchandise.

D. The Transfer of Lovere and Trieste to Terni in 1982

As discussed in the ``Corporate History'' section of this notice,

Lovere and Trieste were transferred from Italsider to Terni as part of

a 1982 restructuring.

We have determined that this transaction is correctly characterized

as an internal corporate restructuring. No new equity capital was

provided to Terni through the transfer of these assets. However, just

as subsidies given to Terni and TAS continued to bestow a benefit on

ILVA when ILVA received TAS' assets, subsidies received by Italsider

flowed to Terni when Terni received Lovere and Trieste.

We determined the amount of Italsider's subsidies attributable to

Lovere and Trieste by calculating the percentage of assets these two

companies represented of the total Italsider assets. We applied this

percentage to the ``untied'' subsidies received by Italsider to

calculate the portion of the benefit that flowed to Terni when it

received Lovere and Trieste.

The benefit allocated to the POI was divided by the total sales of

the Specialty Steels Division of ILVA. On this basis, we find the

estimated net subsidy to be 0.41 percent ad valorem for all

manufacturers, producers, and exporters in Italy of the subject

merchandise.

E. Law 675/77 Preferential Financing

Law 675/77 was designed to bring industrial assistance measures

from the GOI under a single system. The program had at its core three

main objectives: (1) the reorganization and development of the

industrial sector as a whole; (2) the increase of employment in the

South; and (3) the promotion of employment in depressed areas. To

achieve these goals, Law 675/77 provided six types of benefits: (1)

grants to pay interest on bank loans; (2) mortgage loans provided by

the Ministry of Industry (``MOI'') at subsidized interest rates; (3)

other grants to pay interest on loans financed by IRI bond issues; (4)

capital grants for the South; (5) VAT reductions on capital good

purchases for companies in the South; and (6) personnel retraining

grants. (The fourth, fifth, and sixth components of Law 675/77 are

discussed below.)

As we stated in our preliminary determination, the GOI identified a

number of different sectors as having received benefits under Law 675/

77. These sectors were: (1) Electronic technology; (2) the mechanical

instruments industry; (3) the agro-food industry; (4) the chemical

industry; (5) the steel industry; (6) the pulp and paper industry; (7)

the fashion sector; (8) the automobile industry; and (9) the aviation

sector. Law 675/77 also sought to promote optimal exploitation of

energy resources, and ecological and environmental recovery.

Despite the fact that Law 675/77 benefits were available to and

used by numerous and varied industries, we preliminarily determined Law

675/77 benefits specific within the meaning of section 771(5)(A)(ii) of

the Act, and therefore, countervailable because the steel industry was

a dominant user pursuant to section 355.43(b)(2)(iii) of the Proposed

Regulations. It received 34 percent of the benefits provided under the

interest subsidy and capital grant components of the program.

The GOI has argued that the steel and automobile industries did not

receive a disproportionate share of benefits when the extent of

investment in those industries is compared to the extent of investment

in other industries.

We did not consider the level of investment in the industries

receiving benefits under Law 675/77. Instead, we followed the policy

explained in Final Affirmative Countervailing Duty Determination:

Certain Steel Products from Brazil, 58 FR 37295, 37295 (July 9, 1993),

of comparing the share of benefits received by the steel industry to

the collective share of benefits provided to other users of the

program. Consistent with our determination in Final Affirmative

Countervailing Duty Determination: Certain Steel Products from Italy

(``Certain Steel from Italy''), 58 FR 37327 (July 9, 1993), we found

that the steel industry accounted for 34 percent of the benefits and

the auto industry accounted for 33 percent of the benefits. Thus, these

two industries represented 77 percent of the assistance while the

remainder was spread among the other seven industries.

On this basis, we determine that the steel industry was a dominant

user of programs under Law 675/77 and, therefore, that benefits

received by ILVA under this law are being provided to a specific

enterprise or industry or group of enterprises or industries.

Therefore, we find Law 675/77 financing to be countervailable to the

extent that it is provided on terms inconsistent with commercial

considerations.

1. Grants to Pay Interest on Bank Loans

Italian commercial banks provided long-term loans at market

interest rates to industries designated under Law 675/77. The interest

owed by the recipient companies on these loans was offset by

contributions from the GOI. Terni received bank loans with Law 675/77

interest contributions which were outstanding in the POI.

To determine whether this assistance conferred a benefit, we

compared the effective interest rate paid on these loans to the

benchmark interest rate, described above. Based on this comparison, we

determine that the financing provided under this program is

inconsistent with commercial considerations, i.e., on terms more

favorable than the benchmark financing.

Because Terni knew that it would receive the interest contributions

when it obtained the loans, we consider the contributions to constitute

reductions in the interest rates charged rather than grants (see

Certain Steel from Italy at 37331).

Therefore, to calculate the benefit, we used our standard long-term

loan methodology as described in Sec. 355.49(c)(1) of the Proposed

Regulations. We divided the benefit allocated to the POI by the sales

of the Specialty Steels Division of ILVA. On this basis, we determine

the estimated net subsidy to be 0.03 percent ad valorem for all

manufacturers, producers, and exporters in Italy of the subject

merchandise.

2. Mortgage Loans from the Ministry of Industry Under Law 675/77,

companies could obtain long-term low-interest mortgage loans from the

Ministry of Industry. Terni received several loans which were still

outstanding in the POI.

To determine whether these loans were provided on terms

inconsistent with commercial considerations, we used the benchmark

interest rates described above. Because the interest rates paid on the

Law 675/77 loans were below the benchmark interest rates, we determine

that loans provided under this program are countervailable.

We calculated the benefit using our standard long-term loan

methodology. We then divided the benefit allocated to the POI by the

sales of the Specialty Steels Division of ILVA. On this basis, we

determine the estimated net subsidy from this program to be 0.30

percent ad valorem for all manufacturers, producers, and exporters in

Italy of the subject merchandise.

3. Interest Contributions on IRI Loans/Bond Issues

Under Law 675/77, IRI was allowed to issue bonds to finance

restructuring measures of companies within the IRI Group. The proceeds

from the sale of the bonds were then re-lent to IRI companies. The

effective interest rate on such loans was reduced by interest

contributions made by the GOI. Terni had two of these loans outstanding

during the POI. Both loans had variable interest rates.

To determine whether these loans were countervailable, the

Department used a long-term variable rate benchmark as described in

Sec. 355.44(B) of the Proposed Regulations. We compared this benchmark

rate to the effective rates paid by Terni in the years these loans were

taken out and found that these loans were provided on terms

inconsistent with commercial considerations.

To determine the benefit, we first calculated the difference

between what was paid on these loans during the POI and what would have

been paid during the POI had the loans been provided on commercial

terms. We divided the resulting difference by the sales of the

Specialty Steels Division of ILVA. On this basis, we determine the

estimated net subsidy from this program to be 0.26 percent ad valorem

for all manufacturers, producers, and exporters in Italy of the subject

merchandise.

F. Urban Redevelopment Financing Under Law 181/89

Law 181/89 was implemented to ease the impact of employment

reductions in the steel crisis areas of Naples, Taranto, Terni, and

Genoa. The program had four main components: (1) reindustrialization

projects; (2) job promotion; (3) training; and (4) early retirement.

(Early retirement under Law 181/89 was not used by ILVA and the job

promotion component has been found not countervailable (see relevant

sections below).

Because benefits under this program are limited to specific

regions, we determine that assistance under this program is limited to

a group of industries in accordance with section 355.43(b)(3).

1. Reindustrialization Under Law 181/89

Under the reindustrialization component of Law 181/89, the GOI

partially subsidized certain investments. ILVA received payments under

Law 181/89 for a training center to update the technical skills of its

workers. Training also took place at this center to improve workers'

skills for employment outside the steel industry.

Since the information provided to the Department indicates that the

center supported the training of steel workers who continued to be

employed by ILVA, we determine that ILVA received a benefit from

reindustrialization payments under Law 181/89.

In addition, we established that ILVA received payments under Law

181/89 for service centers. However, these service centers were

involved in steel processing unrelated to electrical steel. Therefore,

payments to these service centers were not included in our

calculations.

To calculate the benefit to ILVA during the POI, we used our

standard grant methodology (see Sec. 355.49(b) of the Proposed

Regulations) and the discount rate described above. It is the

Department's practice to treat training benefits as recurring grants

(see GIA at 37226).

Accordingly, we divided the amount received in the POI by the 1992

sales of the ILVA. On this basis, we determine the estimated net

subsidy to be 0.00 percent ad valorem for all manufacturers, producers,

and exporters on Italy of the subject merchandise.

2. Worker Training

Retraining grants were provided to ILVA under Law 181/89. These

funds constituted the GOI's matching contribution to ECSC Article

56(2)(b) training grants (see ECSC Article 56 Redeployment Aid section

below).

Since information provided at verification indicates that these

funds were used to train workers remaining at ILVA, we determine that

the GOI's training contribution under Law 181/89 constitutes a benefit

to ILVA.

It is the Department's practice to treat training benefits as

recurring grants (see GIA at 37226). Accordingly, we divided the amount

received by the sales of the Specialty Steels Division of ILVA. On this

basis, we determine the estimated net subsidy from this program to be

0.10 percent ad valorem for all manufacturers, producers, and exporters

in Italy of the subject merchandise.

G. ECSC Article 54 Loans

Under Article 54 of the 1951 ECSC Treaty, the European Commission

can provide loans directly to iron and steel companies for

modernization and the purchase of new equipment. The loans finance up

to 50 percent of an investment project. The remaining financing needs

must be met from other sources. The Article 54 loan program is financed

by loans taken by the Commission, which are then re-lent to iron and

steel companies in the member states at a slightly higher interest rate

than that at which the Commission obtained them.

ILVA had outstanding Article 54 loans in the POI. These loans were

transferred to ILVA as part of the partial transfer of Terni's assets

and liabilities in 1989. Two of these loans were denominated in U.S.

dollars and two in European Currency Units (``ECU'').

Because Article 54 loans are limited to iron and steel companies,

we find these loans to be specific and, therefore, countervailable to

the extent that they were provided on terms inconsistent with

commercial considerations.

Because these loans were denominated in foreign currencies, we used

foreign currency benchmarks for our preliminary determination. However,

the Article 54 loans had exchange rate guarantees that allowed Terni to

calculate the maximum lire amount payable (see Law 796/76 Exchange Rate

Guarantee Program described below). Since these loans were effectively

insulated from any future changes in the exchange rate, we are not

using foreign currency benchmark interest rates as we did in the

preliminary determination. Rather we are using the uncreditworthy

benchmark discussed in the Benchmark and Discount Rate section above.

At verification we found that one of the U.S. dollar loans had been

assumed by Terni when it became the parent company of the original

debtor. We are using the uncreditworthy benchmark interest rate for the

year in which the loan was assumed by Terni in order to calculate the

benefit from this loan, as that was the year in which Terni incurred

the liability.

Because the interest rates paid on all the Article 54 loans were

below the benchmark interest rates, we determine that the loans

provided under this program are countervailable. We calculated the

benefit using our standard long-term loan methodology. We then divided

the benefit allocated to the POI by the sales made by the Specialty

Steels Division of ILVA. On this basis, we determine the estimated net

subsidy to be 1.02 percent ad valorem for all manufacturers, producers,

and exporters in Italy of the subject merchandise.

II. Programs Determined To Be Not Countervailable

A. Early Retirement

In Certain Steel from Italy, we determined that the threat of

strikes and social unrest prevented Italian steel companies from laying

off surplus labor. As a result, these companies were effectively

obligated to retain their workers until the workers reached retirement

age. Given this obligation, when the GOI created a program to allow for

early retirement, we determined that the steel companies had been

relieved of the burden of retaining these employees at full salary

until the normal retirement age.

In the preliminary determination of this investigation, we relied

on Certain Steel from Italy and determined that early retirement

provided a countervailable benefit which we measured as the savings to

ILVA arising from not having to pay wages to the workers who took early

retirement in the POI.

At verification in this case, the GOI provided evidence showing

that companies in Italy have the legal right to fire workers. Small

companies (those with less than 15 employees) could simply eliminate

surplus workers. Large companies, however, go through certain steps and

procedures before they can lay workers off (other than for cause). The

procedures and the benefits paid to employees laid off by these

companies are provided for in Law 223/91.

Law 223/91 provides two means of removing surplus workers: early

retirement and lay-offs under CIG-S.

1. Early Retirement

Early retirement is regulated in two separate articles of Law 223/

91, both of which were used by ILVA workers in the POI. Each article

has different eligibility criteria, but essentially the program is

available to companies in high-technologies and competitive industries

that are undergoing restructuring. Under both articles, the companies

pay 30 percent of the early retirement benefits, while the GOI pays the

rest. The GOI sets an annual cap on the number of workers that can be

retired under this provision. In 1992, 21 percent of the quota was set

aside for steel workers.

2. CIG-S

CIG-S (the extraordinary compensation fund) is also regulated by

Law 223/91. CIG-S provides for lay-offs by companies that (1) are

undergoing restructuring, (2) have more than 15 employees, and (3)

belong to a wide range of industries. The GOI must approve use of this

program, under which laid-off workers receive a certain percentage of

their wages for three years. Thereafter, they may receive further

compensation under a follow-up program (mobility). The GOI pays 80

percent and the companies 20 percent of the benefits.

In a meeting with a U.S. Embassy official at verification, we

learned that approximately 25 percent of the Italian workforce is

employed in companies eligible for the provisions under Law 223/91. The

remaining 75 percent work for companies that do not have to offer their

employees any benefits upon separation except the obligatory severance

payment that is also paid to workers who take early retirement or are

placed on the CIG-S. Employees in these smaller companies who are laid

off receive only government-provided unemployment compensation.

ILVA, on the other hand, belongs to that category of companies

(larger companies in structural and economic crisis), that have to

undertake certain specific steps before actually getting rid of surplus

labor. Therefore, the alternatives facing ILVA are early retirement and

the permanent lay offs under CIG-S, provided under Law 223/91.

In determining whether worker benefits such as early retirement

confer a subsidy on the company, we look to whether the company has

been relieved of an obligation it would otherwise incur. (See section

355.44(j) of the Proposed Regulations.) In this instance, we find that,

in the absence of the early retirement program, the obligation that

would be incurred is that imposed by the alternative available to ILVA,

the CIG-S program. We have found that large companies in a wide variety

of industries that are undergoing restructuring can use the CIG-S

program to lay off workers. Therefore, we believe that this program

establishes the benchmark for the obligations ILVA would otherwise have

towards the workers it retires early.

Based on the information we have received, we have not been able to

make an exact comparison of the financial obligations ILVA would incur

under CIG-S as opposed to the early retirement scheme. Because the

benefits paid to a worker under early retirement can extend from one to

more than ten years (whereas CIG-S payments are limited to three years)

and because the percentage paid by the company is based on different

amounts (the worker's pension, which varies from worker to worker, for

early retirement and the worker's salary for CIG-S), we are doubtful

that exact comparisons can be made. However, we have used the

information we have and made certain limited assumptions to calculate

the financial obligations on ILVA imposed by early retirement exceed

the financial obligations that would be imposed by CIG-S. (See

Memorandum from Team to Barbara R. Stafford dated April 11, 1994 on

file in room B-099 of the main Commerce Building.) Therefore, we find

that the early retirement program is not countervailable.

B. Law 796/76 Exchange Rate Guarantee Program

This program applies to foreign currency loans taken out by Italian

companies. Under the program, repayment amounts are calculated by

reference to the exchange rate in effect at the time the loan is taken

out. If the exchange rate changes over time, the program sets a ceiling

and a floor to limit the effect of the exchange rate change on the

borrower. For example, if the lire depreciates five percent against the

DM (the currency in which the loan is taken out), borrowers would

normally find that they would have to repay five percent more (in lire

terms). However, under the Exchange Rate Guarantee Program, the ceiling

would act to limit the increased repayment amount to two percent. There

is also a floor in the program which would apply if the lire

appreciated against the DM. The floor would limit any windfall to the

borrower.

In the preliminary determination (as in Certain Steel), we found

this program to be de jure specific because we believed the program was

limited to ECSC loans. However, we discovered at the verification in

this investigation that we had overlooked information in the response

which indicated that guarantees under this program were also available

for loans made by the Council of Europe Resettlement Fund (``CER''). We

attempted to learn more about the program's de facto specificity at

verification as it became clear that the program was not de jure

specific.

We established that exchange rate guarantees for CER loans are

provided for in Law 796, the same law that provides guarantees for ECSC

loans. We learned that CER loans are designed to improve social

conditions in the weakest sectors of society by providing loans to

small- and medium-sized businesses to create employment opportunities.

Officials named the following examples of areas/activities that receive

funds from the CER: agriculture, handicraft, tourism. We examined

certain loan documents and established that guarantees were in effect

on CER loans. However, given the limited time and the manner in which

the data were organized, Italian officials were not able to provide

information regarding the distribution of benefits provided to CER and

ECSC borrowers.

Based on the information we have, the exchange risk guarantees may

be non-specific. Moreover, we cannot draw adverse inferences regarding

the distribution of benefits under the program because the GOI was not

uncooperative or otherwise remiss in providing the requested data.

Therefore, we determine that the program is not countervailable.

Given the circumstances under which we have reached this

determination, i.e., lacking certain important information, this

finding of non-countervailability will not carry over to future

investigations. Therefore, until a fuller record is developed which

allows us to undertake a thorough analysis, petitioners will not have

to provide new evidence in order for us to investigate this program. In

addition, we intend to reinvestigate this program in the first

administrative review requested should this investigation result in a

countervailing duty order.

C. Finsider Loan Guarantees

Certain loans made to Terni were assumed by ILVA, and were still

outstanding during the POI. At the time the loans were taken out they

were guaranteed by Finsider, the holding company of Terni and then TAS.

Finsider entered into liquidation in 1988. Nevertheless, ILVA continued

to pay the guarantee fees for these loans to Finsider until 1991. At

that time, ILVA ceased to pay guarantee fees to Finsider and, in

essence, ``self-guaranteed'' these loans.

Petitioners argue that the Department should countervail these loan

guarantees because: (1) The fees paid for the guarantees were less than

what would have been paid to a commercial guarantor; and (2) guarantees

to Terni, an uncreditworthy company, constitute government intervention

ensuring the extension of the loans.

Although information obtained at verification indicates that ILVA

paid Finsider less than it would have paid a commercial guarantor, we

have concluded that ILVA received no benefit. Given that Finsider was

in liquidation and presumably could not have carried out the guarantee,

ILVA was receiving nothing in exchange for its payments. Therefore, we

find that these loan guarantees are not countervailable.

D. Interest Grants for ``Indirect Debts'' Under Law 750/81

At verification, we established that Law 750/81 was passed as a

result of the 1981 Iron and Steel plan to provide interest grants to

sectors within the steel industry which were designated as strategic

sectors. The program was in place from 1981 through 1983.

One of the sectors designated as a strategic sector was forgings

and castings, as these steel products were used in the construction of

electrical power plants. Since Terni was the only producer of this type

of forgings and castings, the GOI provided assistance to Terni to allow

it to reach full production capacity.

Because these benefits were provided for the production of forgings

and castings, we determine that they do not provide a benefit to the

subject merchandise.

E. ECSC Article 56 Redeployment Aid

Under Article 56(2)(b) of the ECSC Treaty, redeployment assistance

is provided to workers affected by the restructuring of the coal and

steel industries in the ECSC member states. The assistance consists of

the following types of grants: (1) Income support grants for workers

affected by unemployment, re-employment at a lower salary or early

retirement; (2) grants to enable companies to continue paying workers

who have been laid off temporarily; (3) vocational training grants; and

(4) resettlement grants. The decision to grant Article 56 assistance is

contingent upon a matching contribution from the member state.

The portion of Article 56 redeployment grants funded by the ECSC

comes from the European Commission's operational budget for the ECSC

steel program. This budget is funded by (1) levies imposed on coal and

steel producers in the member countries; (2) income from ECSC's

investments; (3) guarantee fees and fines paid to the ECSC; and (4)

interest received from companies that have obtained loans from the

ECSC.

Because payments from the ECSC under Article 56 are sourced from

producer levies, we find them to be not countervailable (see Certain

Steel from Italy at 37336). (The matching contributions from the GOI

for the training elements of Article 56 were discussed above under Law

181/89.)

F. European Social Fund (``ESF'') Grants

The ESF was established by the 1957 European Economic Community

Treaty to increase employment and help raise the living standards of

workers.

We found in Certain Steel from Italy that the ESF receives its

funds from the EC's general budget, whose main revenue sources are

customs duties, agricultural levies, value-added taxes collected by the

member states, and other member state contributions.

The member states are responsible for selecting the projects to be

funded by the EC. The EC then disburses the grants to the member states

which manage the funds and implement the projects. According to the EC,

ESF grants are available to (1) people over 25 who have been unemployed

for more than 12 months; (2) people under 25 who have reached the

minimum school-leaving age and who are seeking a job; and (3) certain

workers in rural areas and regions characterized by industrial decline

or lagging development.

ESF grants received by Italy were used for two purposes: (1)

training laid-off employees for jobs outside the sector in which they

had previously been working; and (2) training of workers to perform new

jobs within the same company.

Every region in Italy has received ESF funds. Therefore, we

determine that this program is not regionally specific within the

meaning of Sec. 355.43(b)(3) of the Proposed Regulations. Furthermore,

we note that to the extent there is any disproportionality in the

regional distribution of ESF benefits (i.e., to the regions of southern

Italy), it has not resulted in a countervailable benefit to the

production of the subject merchandise, which is produced in northern

Italy.

G. Aid Under the National Research Plan

In 1985, the Ministry for University, Technology and Scientific

Research assigned 19 billion lire to Terni under the National Research

Plan for steel. The research funds covered costs of personnel assigned

to specific research projects in research laboratories. The research

under this plan was contracted out to Terni as the result of a

competitive bidding process.

At verification, we established that the assistance under the

National Research Plan was provided under Law 46/82. Under the same

law, the GOI has supported similar research plans for 17 other

industries or sectors. Moreover, documentation provided by the GOI

showed that the steel industry did not receive a disproportionate share

of the funds provided for research plans.

Thus, we determine that benefits under the program are not limited

to a specific enterprise or industry or group of enterprises or

industries. Therefore, we find this program to be not countervailable.

H. Job Promotion Under Law 181/89

The job promotion component of Law 181/89 involved a number of

measures designed to promote self-employment among workers in Naples,

Taranto, Terni, and Genoa. These measures included, among others,

assisting former workers in starting their own businesses, providing

specialized management training, and increasing the level of financing

available to new businesses. In general, these measures were

coordinated by an IRI-owned company, Societa Finanziaria di Promozione

e Sviluppo Imprenditoriale.

Based on the information provided at verification, we determine

that the ``job promotion'' component of Law 181/89 provides for workers

leaving the steel industry. Moreover, there is no indication that ILVA

(or other companies in Italy) had an obligation, legal or otherwise, to

provide assistance to workers leaving the steel industry. Therefore, we

determine that ILVA did not receive a benefit from assistance provided

under the job promotion component of Law 181/89.

III. Programs Which Were Not Used or Which Did Not Benefit the Subject

Merchandise in the POI

A. We established at verification that the following programs were

not used during the POI.

1. Subsidized Export Financing Under Law 227/77

2. Early Retirement Provision under Law 181/89

3. Personnel Retraining Grants under Law 675/77

B. We established at verification that loans provided under the

following programs were not outstanding in the POI.

1. Finsider Loans

2. Interest Subsidies under Law 617/81

3. Financing under Law 464/72

C. We established at verification that the following programs were

directed to the South of Italy. Since production of the subject

merchandise takes place outside the South, we determine that these

programs did not benefit the subject merchandise.

1. Law 675/77 Capital Grants

2. Reductions of the Value Added Tax (``VAT'') under Law 675/77

3. Interest Contributions under the Sabatini Law (Law 1329/65)

4. Social Security Exemptions

5. ILOR and IRPEG Exemptions

Interested Party Comments

Comment 1

Petitioners argue that the Department's preliminary decision to

measure subsidization by a comparison of TAS' equity before and after

restructuring, which they labeled the ``snapshot'' approach, was

improperly substituted for, and contrasts sharply with, the cash flow

approach the Department has historically used to measure subsidies.

Petitioners allege that by focusing only on the differences in TAS'

balance sheet at two different points in time, to the exclusion of a

review of the intermediate activities undertaken by the GOI to bestow

funds on ILVA, the Department ignored the full measure of debt

forgiveness and other assistance provided to ILVA.

Petitioners also argue that the problem with the Department's

approach is that it ignored the sizeable liabilities and negative

equity position left behind in the ``empty shell'' of TAS which were

brought about by the restructuring as a result of the artificial

separation of TAS' assets and liabilities. Petitioners maintain the

Department's approach focuses exclusively on net changes in equity,

regardless of the individual transactions that caused the changes which

would have been captured in a cash flow analysis. According to

petitioners, the only way to accurately measure the subsidies provided

to Terni/TAS is to identify and measure the value of each individual

transaction, be it a grant, equity infusion, debt forgiveness, or loss

coverage.

Respondents contend that the Department should exclude from the

calculation of any countervailable subsidy any of the TAS assets

transferred to ILVA or assets remaining in TAS. In addition,

respondents argue that changes in TAS' equity position resulting from

the official appraisal of assets and liabilities conferred no

countervailable benefit to ILVA. Furthermore, according to respondents,

assets and liabilities remaining in TAS could not have conferred a

countervailable benefit to ILVA. Finally, respondents argue that

Sec. 355.48 of the Proposed Regulations explicitly provides for a

departure from the cash flow methodology in ``unusual circumstances.''

Respondents argue that it would be unreasonable to review each of the

transactions as suggested by petitioners because of the extreme

complexity of the transactions involved in this case. Respondents

maintain the Department has performed a transaction-specific analysis

wherever practicable.

DOC Position

Insofar as our preliminary determination focused on the change in

the net equity position of TAS, it failed to account for certain

liabilities and losses left behind in TAS. In this final determination,

we have addressed this shortcoming. We recognize that the restructuring

resulted in TAS holding liabilities and absorbing losses, and that

those liabilities and losses would somehow have to be covered. As ILVA

would not be covering them, ILVA received a benefit in that amount.

However, we disagree with petitioners that the so-called snapshot

approach cannot be substituted for the cash flow approach traditionally

used by the Department. First, our approach in this final determination

is consistent with the methodology used to assess countervailable

benefits arising out of restructuring in Certain Steel from Austria.

Second, it fully and accurately measures the benefits conferred on the

production of the subject merchandise. Finally, petitioners misuse the

concept of the cash flow effect.

As explained above, in Certain Steel from Austria, when the company

producing steel was restructured, we found that a benefit to the new

company arose because the new company did not receive any of the losses

accumulated by the former company. There was no specific act of payment

or loss coverage undertaken by the Government of Austria to eliminate

those losses as part of the restructuring. Instead, the losses were

simply left behind in the former company. In Certain Steel from

Austria, these losses left in the ``shell'' company were determined to

be countervailable.

Similarly, in the case of restructuring TAS into the Specialty

Steels Division of ILVA, the liabilities and losses left behind in TAS

have been found to give rise to a benefit to ILVA. There was one

specific act of debt forgiveness between Finsider and TAS. That was

accounted for in our calculations, but only as a part of the totality

of the restructuring action.

We further believe that the snapshot approach has fully captured

the benefit to the subject merchandise. Based primarily on the annual

reports of IRI, Finsider and TAS, petitioners have developed a long

list of ``subsidies'' that include IRI's forgiveness of Finsider's debt

and numerous and varied forms of payments to TAS throughout and

subsequent to the restructuring. We have concluded that countervailing

subsidies from IRI to Finsider and from Finsider to TAS would lead to

an overstatement of the benefit. (See DOC response to Comment 2.)

With respect to the subsidies received by TAS after the second

asset transfer to ILVA (e.g., interest paid to TAS on its shares in

ILVA, capital gain on real estate received by TAS, etc.), we recognize

that these payments did, in fact, reduce the liabilities in TAS.

However, because we included in the restructuring benefit the amount of

liabilities remaining in TAS after the second transfer, we have already

captured the benefits from these subsidies.

This is similar to the situation that occurred in Certain Steel

from Austria. As discussed above, we treated as a subsidy the amount of

losses left behind in the former company, without regard to whether

there was a specific act by the government to cover those losses. In

fact, the Government of Austria did make a payment a few years later to

that company. Recognizing that the second transaction was basically to

clean up the company's books for an event that had occurred earlier

(the failure to transfer losses), we did not countervail the payment by

the Government of Austria as it would have amounted to double-counting.

Finally, petitioners misuse the concept of cash flow effect when

they argue that this concept prohibits us from using a snapshot

approach. Cash flow effects do not identify subsidies. Instead, the

cash flow concept tells us when to assign the benefit from a particular

subsidy. For example, the cash flow concept tells us to assign the

benefits received from a subsidized loan to the point in time when the

company would have made the interest payment because this is when the

company's cash flow is affected. In this case, the effect on ILVA of

not assuming TAS' liabilities and losses occurred when the assets were

transferred, in 1989 and 1990, and we have assigned the benefits to

these years.

Comment 2

Petitioners argue that the Department did not directly address the

question of the benefit to the Finsider group as a whole, and through

the Finsider group to TAS, of a multi-billion lire debt forgiveness

provided in connection with the 1988/90 steel industry restructuring.

The only debt forgiveness that was included in the Department's

preliminary calculations was the 99.9 billion lire in debt forgiveness

provided to TAS.

Petitioners claim that the Department should countervail a debt

forgiveness in the amount of 6.2 trillion lire to the Finsider Group in

1988 and allocate the resulting benefit over a sales denominator

reflecting the scope of operations of the Finsider companies that were

liquidated and merged into ILVA. Moreover, petitioners argue that the

Department should countervail the 99.9 billion lire debt forgiveness

provided specifically to TAS in 1989 as a separate benefit.

Respondents argue that petitioners have failed to establish that

the forgiveness of Finsider's debt is tied to the subject merchandise.

Respondents argue that the 1988 debt forgiveness to Finsider pre-dates

the restructuring of Finsider into ILVA by nearly one year. Thus,

Finsider at the time of the debt forgiveness was not the same company

as it was when its assets were transferred into ILVA. Respondents

maintain that Finsider and TAS existed and functioned as two separate

corporate entities and, therefore, argue that TAS was never potentially

responsible for the assumption of Finsider's debt. Respondents assert

that only the 99.9 billion lire debt forgiveness provided directly to

TAS should be treated as a countervailable debt forgiveness.

DOC Position

In the early stages of this investigation, it became clear to us

that there were two alternative approaches to addressing the

allegations in the petition regarding subsidies to the producers of

electrical steel. One approach would have been to analyze the

restructuring of the entire Finsider group into ILVA and to examine all

subsidies provided to Finsider by IRI and the GOI. Using this approach

we would, in essence, be measuring subsidies provided to the Finsider

group as a whole. Therefore, we would not have allocated subsidies to

any of the group's operating companies, such as TAS.

The second approach would measure the subsidies provided to the

producer of the subject merchandise. In other words, our analysis would

focus on subsidies such as equity infusions, loans, and grants

specifically provided to the producer of the subject merchandise, i.e.,

Terni/TAS and the Specialty Steels Division of ILVA.

We chose the second approach for several reasons. First, it is the

Department's policy to try to ``tie'' subsidies to the subject

merchandise whenever possible (see GIA at 37267). Second, since the

Finsider group was very large, consisting of numerous state-owned steel

producers, only one of which produced the subject merchandise, we

believed it would be more appropriate to focus our analysis on the

producer of the subject merchandise. Finally, due to the extremely

complex restructuring which occurred at the Finsider group level, we

felt we would be able to more accurately measure the subsidies provided

to the producer of the subject merchandise by following the second

approach.

Petitioners have argued that the Department should countervail the

subsidies emanating from the debt forgiveness provided to Finsider.

Petitioners also argue that we should countervail the 99.9 billion lire

debt forgiveness provided to TAS as well. However, countervailing both

instances of debt forgiveness would overstate the benefit to TAS

because we would then be looking at the forgiveness from two different

levels of analysis at the same time. As stated in the verification

reports, the 99.9 billion debt forgiveness to TAS was part of the

larger debt forgiveness provided to Finsider. Therefore, in order to be

consistent with the approach chosen in this investigation, i.e., to

focus on the producer of the subject merchandise, we are countervailing

only the debt and loss forgiveness provided to TAS.

Comment 3

Petitioners argue that the 300 billion lire payment from IRI to

ILVA in 1992 should be countervailed as an equity infusion and not as

an interest-free loan. Petitioners maintain that this capital

contribution in 1992 was called an ``interest free loan'' because, at

that time, it had not been expressly approved as an equity infusion.

Also, petitioners point to the fact that there was no loan agreement.

Petitioners maintain that the Department should not base its decision

on ``technicalities'' such as the EC's delayed approval and the

continued absence of a shareholders' decision approving a capital

increase. Petitioners conclude that since the Department determined at

verification that the EC has recently sanctioned this amount as an

equity infusion, the Department should treat it as such.

Petitioners also argue that the 10,900 million lire ``payment on

capital account'' to ILVA in 1991, which the Department found at

verification, should be countervailed as an equity infusion. The nature

of this payment was identical to that of the 1992 payment. Respondents

argue that the Department's verification confirmed that this 1992

infusion was a liability as opposed to an equity infusion.

Additionally, respondents state that there were two conditions which

had to be met before the 1992 capital contribution could be considered

an equity infusion: (1) Authorization from the EC; and (2)

authorization from the company's shareholder. Neither of these two

conditions was met during the POI and the amount was considered a

``provisional capital increase.'' Thus, the Department properly

recognized the legal limitations placed on this fund and, treated it as

a short-term loan.

Respondents state that EC's preliminary approval of the capital

contribution in 1993 did not occur until nearly a year and a half after

the POI. Citing Countervailing Duty Determinations: Certain Steel

Products from France (``Certain Steel from France''), 58 FR 37313 (July

9, 1993), respondents argue that it is the reclassification of debt

into equity which itself constitutes the potentially countervailable

event in this case. According to respondents, since the potentially

countervailable event took place after the POI, it is not subject to

analysis in this investigation.

DOC Position

Based on an analysis of the primary features of the 1991 and 1992

provisional capital contributions, we find that the potential

obligation to repay IRI (in the event that the EC did not approve the

capital contribution) effectively makes these contributions contingent

liabilities. To reflect their contingent nature, we have modelled the

provisional capital contributions as short-term zero-interest loans

which are rolled over every six months until such time as they are

repaid or the EC approves their conversion to equity.

We disagree with respondents that Certain Steel from France is

applicable in this instance. In the French case, we were looking at the

year the debt-to-equity conversion occurred and decided that the equity

infusion was the potentially countervailable event rather than the

loan. In this case, the provisional capital increase is being treated

as a loan throughout the POI. Therefore, there is no other potentially

countervailable event in the POI.

We disagree with petitioners that there must be a loan repayment

schedule or payment of interest in order for the Department to consider

these payments to represent liabilities. The possibility of repayment

was real. Therefore, the provisional capital increase is properly

treated as a loan.

Comment 4

Petitioners argue that the scope of operations of the various

entities that produce(d) electrical steel (i.e., Terni, TAS, and the

Specialty Steels Division of ILVA) has changed significantly over the

years as a result of a series of restructurings. Petitioners argue that

since TAS was created during the 1987 restructuring out of the assets

of Terni, I.A.I. and Terninoss, Terni between 1978 and 1986 was not the

same as the Specialty Steels Division of ILVA after 1989, which

includes the assets of I.A.I. and Terninoss. According to petitioners,

the Department must use a denominator which represents the ability to

generate sales at the time a subsidy was given.

According to petitioners, the significant difference between 1986

sales of Terni and 1992 sales of ILVA's Specialty Steels Division

indicates that these two entities are similar in name only. Petitioners

note that, in cases involving a merger, it is the Department's practice

to perform a ``tying analysis'' in order to measure the benefits to the

entity originally receiving the subsidy. Petitioners argue that since

the 1987 restructuring of Terni cannot be separated from the overall

Finsider restructuring, the Department, as it did in the preliminary

determination of Certain Steel from Italy, should adjust ILVA's sales

denominator in order to ``reflect steel activities prior its

restructuring.'' According to petitioners, the Department should use

the sales of ILVA's Specialty Steels Divisions Terni plant (plus its

share of intercompany sales) as the denominator for Terni-specific

loans and grants, thereby excluding the stainless steel activities of

ILVA's Specialty Steels Division.

Respondents argue that, since Terni's stainless steel producing

subsidiaries (I.A.I. and Terninoss), and other Terni assets were merely

merged into a new entity, TAS, which subsequently became the Specialty

Steels Division of ILVA, the restructurings did not dramatically alter

the entity producing the subject merchandise. As such, according to

respondents, the Department should reject suggestions that stainless

steel sales be subtracted from the denominator.

Respondents further argue that the difference between Terni sales

in 1986 and ILVA's Specialty Steels Division sales in 1992 can be

explained by increased activity in areas whose production capability

was enhanced pursuant to restructuring. Moreover, respondents argue

that a company's sales cannot be expected to remain ``static'' as

petitioners suggest. Finally, respondents also argue that, according to

the Department's ``pass-through'' methodology, the Department should

find that the price paid by TAS for I.A.I. and Terninoss represented

the exchange of one ``subsidized'' asset for another asset.

DOC Position

We disagree with petitioners that the 1987 restructuring was so

fundamental that a comparison cannot be made between Terni and the

Specialty Steels Division of ILVA. We believe that it is incorrect to

characterize the merger of I.A.I. and Terninoss into TAS as the

introduction of unrelated assets to the producer of the subject

merchandise. Since I.A.I. and Terninoss were both subsidiaries of Terni

prior to the 1987 restructuring, we find no reason to eliminate

stainless steel sales from the Terni-specific denominator.

We do not disagree with petitioners that ILVA's sales have to be

adjusted to properly measure subsidies given to Terni/TAS. As noted by

petitioners, in Certain Steel from Italy the Department adjusted ILVA

sales to calculate subsidy margins for benefits accruing to Italsider

and/or Nuova Italsider. To accomplish the same results in this

investigation, we have used the sales of the Specialty Steels Division

of ILVA to calculate the subsidy margin for Terni-specific benefits,

rather than the sales of ILVA.

Finally, we agree with respondents that a company's sales cannot be

expected to remain the same over time; i.e., a comparison of nominal

sales values separated by six years does not take into consideration

inflation or the internal economies of scale resulting from

restructuring.

Comment 5

Petitioners state that the Department did not use the highest

interest rate on the record of the investigation for calculating the

benchmark in its preliminary determination. Petitioners note that the

IMF interest rates that it submitted in the petition are higher in some

instances than the interest rate used by the Department.

The GOI, on the other hand, argues that petitioners' suggestion

that the Department use the Italian ``lending rate,'' as provided by

the IMF, should be rejected since this is a short-term interest rate.

Therefore, according to the GOI, this interest rate should not be

considered representative of the highest long-term interest rate in

Italy. Respondents state that the Department, as it did in the final

determination of Certain Steel, correctly used the reference rate

provided by the Bank of Italy to calculate benchmark rates.

DOC Comment

We note that the Bank of Italy's reference rate is the highest

average long-term fixed interest rate on the record of this

investigation. Because section 355.44(b)(6)(iv)(A) of the Proposed

Regulations lists short-term interest rates as the least preferred

choice for an uncreditworthy long-term interest rate benchmark, we

cannot use the IMF ``lending rate'' as suggested by petitioners.

Accordingly, the Department has continued to use the reference rate

plus 12 percent of the ABI prime rate for purposes of constructing

benchmark and discount rates.

Comment 6

Respondents argue that in cases involving companies experiencing a

major restructuring or expansion, the Department recognizes that a

reasonable private investor's analysis may depend on the company's

prospects, rather than its past financial experience. Respondents cite

to Certain Carbon Steel Products from Sweden, 58 FR 37385 (July 9,

1993) in support of their argument.

According to respondents, the ECSC Treaty permits government

investment in a state-owned steel company only in cases where the EC

determines that such investment is provided ``under circumstances

acceptable to a private investor operating under normal market economy

conditions.'' Because of this requirement, a team of independent

experts examined the GOI's proposed restructuring plan and concluded

that the implementation of the plan afforded ILVA reasonable chances of

achieving financial viability under normal market conditions.

Respondents further argue that the Department has considered the

EC's approval of government equity investments as evidence that the

transaction confers no countervailable benefits. Respondents cite to

the administrative review of Industrial Nitrocellulose from France, 52

FR 833 (January 9, 1987), which involved the French nitrocellulose

industry.

Petitioners argue that ILVA's claim of equityworthiness in 1988 is

without merit. ILVA's predecessor companies, including Terni, incurred

losses in every year examined by the Department. In addition,

petitioners argue that nothing on the record suggests that ILVA's

prospects after 1988 were so optimistic as to overcome years of poor

financial performance and justify commercial investment by a private

investment company.

DOC Position

We agree with respondents that where a major restructuring or

expansion occurs, it may be appropriate to place greater reliance on

the future prospects of the company than would be the case where an

equity investment is made in an established enterprise (see GIA at

37244). For example, in the Swedish Steel case cited by respondents, we

considered such factors as: (1) The anticipated rate of return on

equity; (2) the extended length of time before the company was

projected to be profitable; (3) the prospects of the world steel

industry; (4) the cost structure of the company.

In this instance, the 1988 equity investment was made in ILVA, a

company which would differ from the operating companies that went into

it principally because of the substantial debt forgiveness that

occurred as part of the 1988-90 restructuring. Relieved of this debt,

ILVA's balance sheet, when it began operations in 1989, would be much

improved over that of its predecessor, Finsider.

Beyond this, however, we have little indication of ILVA's future

prospects. There is no information on expected rates of return, the

time frame for achieving profitability, or developments in the steel

market that would allow us to reach a conclusion that ILVA would yield

a reasonable rate of return in a reasonable period of time.

Respondents have discussed two indicators of the future prospects

of ILVA, the independent study undertaken by the EC and the EC's

decision allowing the investment. With respect to the study, it was not

placed on the record and we have had no opportunity to analyze it.

Without such analysis, we cannot simply accept respondents'

characterization of the study's conclusion.

We also disagree with respondents that the EC's finding on this

investment is dispositive. Our determinations of equityworthiness are

made in accordance with the Department's standards, not the EC's. In

Final Affirmative Countervailing Duty Determination: Certain Hot Rolled

Lead and Bismuth Carbon Steel Products from France, 58 FR 6221, 6232

(January 27, 1993), we explicitly rejected the EC approval of the

investment as not relevant. In Industrial Nitrocellulose from France,

cited by respondents, the Department performed its own analysis and,

contrary to respondents' assertion, did not rely on an EC finding.

Respondents' reliance on ``principles of comity'' (citing the

Restatement (Third) of Foreign Relations Law of the United States (ALI)

section 481, is also inapposite, because comity involves respecting

foreign judgments regarding the disposition of property and the status

of persons.

Finally, while indicators of past performance may be less

important, we do not believe that a private investor would ignore them

entirely. As explained in our discussion of Terni's equityworthiness

above, that company had performed poorly. Similarly, Italsider, another

company that was restructured into ILVA, had performed poorly (see

Certain Steel from Italy). Therefore, the past performance of companies

that became ILVA offered no basis to believe that the 1988 investment

in ILVA was consistent with commercial considerations.

Comment 7

Respondents argue that the Department only countervails worker

assistance when a company is relieved of an obligation it would

otherwise incur. According to respondents, because it confirmed at

verification that Italian companies have no obligation to retrain their

workers, the Department should conclude that ECSC Article 56 worker

training is not countervailable.

DOC Position

First, it should be noted that we did not countervail the portion

of Article 56 retraining grants funded by the ECSC. With respect to the

portion funded by the GOI under Law 181/89, we disagree that the

workers assistance provision of the Proposed Regulations is applicable

in this situation. There is a distinction between funds which cover the

cost of upgrading the skills of workers remaining at ILVA (which is a

cost normally born by the company to improve the efficiency of its work

force), and funds provided to train workers leaving ILVA, which we

consider a benefit solely to the worker. Only the former is properly

categorized as countervailable ``worker assistance'' under section

355.44(j) of the Proposed Regulations, to the extent that it relieves

the company of the cost of improving its workers' skills.

Since the GOI's contributions to match the ECSC Article 56 payments

were only available to steel companies and these funds were used to

cover part of ILVA's costs of training workers who remained at ILVA, we

find that a countervailable benefit is being provided.

Comment 8

The GOI states that, based on the clearer understanding gained by

the Department at verification regarding the types of loans eligible

for Law 796/76 exchange rate guarantees, this program should be found

not countervailable.

DOC Position

We note that the Department failed to send the GOI a deficiency

questionnaire indicating that more information was needed to

demonstrate the de facto use of Law 796/76. When it became evident at

verification that such information was needed, we attempted to gather

it. However, the information could not be provided in the form

necessary in the limited time available during verification.

Accordingly, we have not made the adverse inference that this

program is de facto specific to the steel industry. However, we note

that this finding of non-countervailability only relates to this

investigation and is subject to revision at the first administrative

review if a countervailing duty order is issued.

Comment 9

The GOI notes that exports of the subject merchandise to the U.S.

were not financed using Law 227/77. According to the GOI, this

financing should not be considered countervailable because it is not

limited to a particular industry and is also consistent with the

Organization for Economic Cooperation and Development Understanding on

official export credits. The GOI argues that since this financing is

permitted by a multilateral agreement binding both the U.S. and Italy,

it should not be considered countervailable.

DOC Position

We found no countervailable benefits under this program because

ILVA did not use this financing for exports to the United States. With

respect to the other arguments raised by the GOI, since this program

provided export financing, its availability to a large number of

industries is not relevant. For export subsidies, we need only find,

pursuant to 355.43(a)(1) of the Proposed Regulations, that the

financing for exports is provided at preferential rates. Second,

although the U.S. and Italy participate in the OECD arrangement which

establishes the interest rates that can be charged on export loans,

nothing in that arrangement would preclude the application of

countervailing duties on merchandise entering the U.S. which received

subsidized financing.

Comment 10

Respondents note that at verification, the Department determined

that Law 181/89 actually had three components: (1) the creation of

alternative employment opportunities; (2) the development of new

industrial initiatives (``reindustrialization''); and (3) worker

retraining. Respondents state that the Department further determined

that ILVA only received funds under the reindustrialization provision

of Law 181/89.

Of the three reindustrialization projects, respondents claim that

two were tied to non-subject merchandise. Therefore, they are not

countervailable pursuant to section 355.47 of the Proposed Regulations.

The third reindustrialization project was a ``retraining center.''

Respondents argue that the Proposed Regulations state that ``worker

assistance'' is only countervailable to the extent that it relieves a

company of an obligation that it would otherwise incur (see section

355.44(j) of the Proposed Regulations). Since there is no obligation in

Italy to retrain workers, this project does not provide a

countervailable benefit.

DOC Position

As a matter of clarification, we found that Law 181/89 has four

components, the fourth being early retirement. However, the early

retirement component expired prior to the POI. Since early retirement

is typically considered a recurring benefit and, therefore, allocable

to the year in which received, we did not establish the extent to which

it had or had not been used by ILVA.

Regarding the reindustrialization component, we agree that two of

the projects involved the further processing of non-subject

merchandise. Therefore, we have found them not countervailable.

However, with respect to the training center, we disagree that this

amounted to worker assistance within the meaning of the Proposed

Regulations. As discussed in Comment 7 above, there is a distinction

between worker assistance and funds that are being used to cover the

costs that ILVA would incur to train its work force. Although not

exclusively, the training center in question is used to upgrade the

technical skills of ILVA workers. Therefore, we have determined that

the GOI payments to cover part of the cost of building a training

center provide a countervailable benefit to ILVA.

Comment 11

The GOI argues that the early retirement program would only be

countervailable if companies had no choice but to keep surplus workers

on the payroll. However, companies can carry out large-scale lay-offs

under Italian law. Thus, the GOI contends that early retirement is an

alternative to lay-offs and not an alternative to maintaining excess

workers. The GOI contends that because companies are required to

contribute to the costs for early retirement, the program is a burden,

not a benefit, to them. The only beneficiaries under the early

retirement program are the workers.

Moreover, according to respondents, early retirement is available

to workers in a broad range of industries. The Department should,

therefore, find that there is no selective treatment under the program.

According to petitioners, verification confirmed that early

retirement is only available to a limited group of industries.

Moreover, because use of early retirement under Article 27 is

contingent upon approval from a government committee, the GOI exercises

discretion in determining which industries can use the program.

Petitioners also argue that Italian companies have an obligation to

provide early retirement benefits once the workers have opted for the

program. The benefit should, therefore, be calculated as the GOI's

contribution to the program because if government funds had not been

provided, ILVA would have been legally responsible for the entire cost,

according to petitioners.

DOC Position

We agree with the GOI that, by law, companies in Italy can carry

out large-scale lay-offs. Moreover, we have no evidence that Italian

companies have a legal obligation to keep workers on the payroll until

they reach normal retirement age. However, based on verification, we

have found that some companies, including ILVA, belong to a category of

firms that must go through certain ``steps and procedures,'' in the

form of the provisions under Law 223/91 before they actually can reduce

the workforce. In practice, therefore, large companies are obligated to

use Law 223/91 to deal with surplus workers.

Regarding the general availability of early retirement, the

structure of Law 223/91 is such that the early retirement option is

available to a smaller group of companies than the lay-off option, CIG-

S. Because the GOI was not able to provide evidence showing that the

steel producers did not receive a disproportionate share of the quota

granted under the early retirement option, we have used CIG-S as our

``benchmark.'' Since the financial obligations imposed on the company

under early retirement are more onerous that the obligations under CIG-

S, we have determined that ILVA did not receive a benefit under the

early retirement program.

Comment 12

Petitioners argue that the shares in ILVA owned by Italsider (in

liquidation) were transferred to TAS free-of-charge in 1990.

Respondents argue that ILVA did provide an invoice from Italsider

requesting payment from TAS but that ILVA was unable to locate the

payment record during verification. Moreover, respondents argue that

the Department never posed the question of payment to TAS (in

liquidation), nor did the Department verify the records of TAS (in

liquidation). Therefore, respondents argue, ILVA should not be

penalized for any missing information over which it has no control.

DOC Position

As discussed above in connection with the 1988-90 restructuring,

petitioners alleged several subsidies to TAS after the second asset

transfer and receipt of Italsider's shares by TAS was among them. As we

explained, we believe that we have captured the full benefit to the

subject merchandise from the restructuring without analyzing these

individual transactions. Therefore, TAS' payment or non-payment to

Italsider is irrelevant to our analysis.

However, although we did not verify that TAS (in liquidation) paid

Italsider for the shares, we do not believe that TAS kept the proceeds

from the sale. This is because the proceeds were so large (1,563

billion lire) that they would have been more than enough to pay off all

of TAS' outstanding liabilities and to return the company to a positive

equity position. However, as TAS' books indicate, this did not happen.

Comment 13

Petitioners maintain that although evidence presented at

verification may demonstrate that Terni received Law 750/81 funds based

on its identity as a producer of forgings and castings, the Department

nevertheless found that Terni's accounting records did not reflect that

these grants were designated only for the production of forgings and

castings. Therefore, petitioners argue that Terni treated and accounted

for these grants as general funds, and did not specifically allocate

them to its forgings and castings operations.

DOC Position

We find these grants to be not countervailable since they applied

to merchandise not subject to this investigation. We disagree with

petitioners' argument that Terni's treatment of these funds as

``general funds'' demonstrates that they were not specifically

allocated to the production of forgings and castings. We stated in the

GIA that when a company receives a general subsidy, the Department does

not attempt to ``trace'' or establish how the subsidy was used.

Conversely, if the subsidy is tied to the production of merchandise

other than the merchandise under investigation, the Department also

does not attempt to trace or establish how the subsidy was ultimately

used. Furthermore, we believe that respondents provided sufficient

documentation, which is fully discussed in the ILVA verification

report, that grants under this program specifically applied to the

production of forgings and castings. As stated in the GIA at 37267, if

the benefit is tied to a product other than the merchandise under

investigation, the Department will not find a countervailable subsidy

on the subject merchandise.

Verification

In accordance with section 776(b) of the Act, we verified the

information used in making our final determination. We followed

standard verification procedures, including meeting with government and

company officials, examination of relevant accounting records and

examination of original source documents. Our verification results are

outlined in detail in the public versions of the verification reports,

which are on file in the Central Records Unit (room B-099 of the Main

Commerce Building).

Suspension of Liquidation

In accordance with our affirmative preliminary determination, we

instructed the U.S. Customs Service to suspend liquidation of all

entries of electrical steel from Italy, which were entered or withdrawn

from warehouse for consumption, on or after February 1, 1994, the date

our preliminary determination was published in the Federal Register. If

the ITC issues a final affirmative injury determination, we will

instruct Customs to require a cash deposit for entries of the

merchandise after that date in the amounts indicated below.

------------------------------------------------------------------------

Percent

------------------------------------------------------------------------

Electrical Steel

Country-Wide Ad Valorem Rate.............................. 24.42

------------------------------------------------------------------------

ITC Notification

In accordance with section 705(d) of the Act, we will notify the

ITC of our determination. In addition, we are making available to the

ITC all nonprivileged and nonproprietary information relating to this

investigation. We will allow the ITC access to all privileged and

business proprietary information in our files, provided the ITC

confirms that it will not disclose such information, either publicly or

under an administrative protective order, without the written consent

of the Deputy Assistant Secretary for Investigations, Import

Administration.

If the ITC determines that material injury, or threat of material

injury, does not exist, these proceedings will be terminated and all

estimated duties deposited or securities posted as a result of the

suspension of liquidation will be refunded or cancelled. If, however,

the ITC determines that such injury does exist, we will issue a

countervailing duty order directing Customs officers to assess

countervailing duties on electrical steel from Italy.

Return of Destruction of Proprietary Information

This notice serves as the only reminder to parties subject to

Administrative Protective Order (APO) of their responsibility

concerning the return or destruction of proprietary information

disclosed under APO in accordance with 19 CFR 355.34(d). Failure to

comply is a violation of the APO.

This determination is published pursuant to section 705(d) of the

Act and 19 CFR 355.20(a)(4).

Dated: April 11, 1994.

Susan G. Esserman,

Assistant Secretary for Import Administration.

[FR Doc. 94-9313 Filed 04-15-94; 8:45 am]

BILLING CODE 3510-DS-P