Final Affirmative Countervailing Duty Determination: Steel Wire Rod from Venezuela

DEPARTMENT OF COMMERCE

International Trade Administration

[C-307-814]

Final Affirmative Countervailing Duty Determination: Steel Wire

Rod from Venezuela

AGENCY: Import Administration, International Trade Administration,

Department of Commerce.

EFFECTIVE DATE: October 21, 1997.

FOR FURTHER INFORMATION CONTACT: Christopher Cassel, Robert Copyak, or

Richard Herring, Office of CVD/AD Enforcement VI, Import

Administration, U.S. Department of Commerce, Room 1874, 14th Street and

Constitution Avenue, N.W., Washington, D.C. 20230; telephone (202) 482-

2786.

Final Determination

The Department of Commerce (the Department) determines that

countervailable subsidies are being provided to CVG-Siderurgica del

Orinoco (SIDOR), the producer and exporter of steel wire rod from

Venezuela. For information on the estimated countervailing duty rates,

please see the Suspension of Liquidation section of this notice.

Petitioners

The petition in this investigation was filed by Connecticut Steel

Corp., Co-Steel Raritan, GS Industries, Inc., Keystone Steel & Wire

Co., North Star Steel Texas, Inc., and Northwestern Steel and Wire (the

petitioners), six U.S. producers of wire rod.

Case History

Since our preliminary determination on July 28, 1997 (62 FR 41439,

August 4, 1997), the following events have occurred:

We conducted verification of the countervailing duty questionnaire

responses from August 27, 1997 through September 9, 1997. Petitioners

and SIDOR (respondent) filed case briefs on September 23, 1997, and

rebuttal briefs on September 26, 1997. A public hearing was held on

October 1, 1997.

On September 12, 1997, the GOV and the U.S. Government initialed a

proposed suspension agreement. On October 14, 1997, the U.S. Government

and the GOV signed a suspension agreement (see Notice of Suspension of

Countervailing Duty Investigation: Steel Wire Rod from Venezuela) which

is being published concurrently with this notice in the Federal

Register. On October 14, 1997, the petitioners also requested that the

Department and the International Trade Commission (``ITC'') continue

this investigation in accordance with section 704(g) of the Act. As

such, this final determination is being issued pursuant to section

704(g) of the Act.

Scope of Investigation

The products covered by this investigation are certain hot-rolled

carbon steel and alloy steel products, in coils, of approximately round

cross section, between 5.00 mm (0.20 inch) and 19.0 mm (0.75 inch),

inclusive, in solid cross-sectional diameter. Specifically excluded are

steel products possessing the above noted physical characteristics and

meeting the Harmonized Tariff Schedule of the United States (HTSUS)

definitions for (a) stainless steel; (b) tool steel; (c) high nickel

steel; (d) ball bearing steel; (e) free machining steel that contains

by weight 0.03 percent or more of lead, 0.05 percent or more of

bismuth, 0.08 percent or more of sulfur, more than 0.4

[[Page 55015]]

percent of phosphorus, more than 0.05 percent of selenium, and/or more

than 0.01 percent of tellurium; or (f) concrete reinforcing bars and

rods.

The following products are also excluded from the scope of this

investigation:

Coiled products 5.50 mm or less in true diameter with an average

partial decarburization per coil of no more than 70 microns in depth,

no inclusions greater than 20 microns, containing by weight the

following: carbon greater than or equal to 0.68 percent; aluminum less

than or equal to 0.005 percent; phosphorous plus sulfur less than or

equal to 0.040 percent; maximum combined copper, nickel and chromium

content of 0.13 percent; and nitrogen less than or equal to 0.006

percent. This product is commonly referred to as ``Tire Cord Wire

Rod.''

Coiled products 7.9 to 18 mm in diameter, with a partial

decarburization of 75 microns or less in depth and seams no more than

75 microns in depth; containing 0.48 to 0.73 percent carbon by weight.

This product is commonly referred to as ``Valve Spring Quality Wire

Rod.''

The products under investigation are currently classifiable under

subheadings 7213.91.3000, 7213.91.4500, 7213.91.6000, 7213.99.0030,

7213.99.0090, 7227.20.0000, and 7227.90.6050 of the HTSUS. Although the

HTSUS subheadings are provided for convenience and customs purposes,

our written description of the scope of this investigation is

dispositive.

The Applicable Statute

Unless otherwise indicated, all citations to the statute are

references to the provisions of the Tariff Act of 1930, as amended by

the Uruguay Round Agreements Act effective January 1, 1995 (the

``Act'').

Injury Test

Because Venezuela is a ``Subsidies Agreement Country'' within the

meaning of section 701(b) of the Act, the ITC is required to determine

whether imports of steel wire rod from Venezuela materially injure, or

threaten material injury to, a U.S. industry. On April 30, 1997, the

ITC published its preliminary determination, finding 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 Venezuela of the subject merchandise (62 FR 23485).

Verification

In accordance with section 782(i) 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, and examination of relevant accounting records and

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).

Subsidies Valuation Information

Period of Investigation: The period for which we are measuring

subsidies (the ``POI'') is calendar year 1996.

Allocation Period: In the past, the Department has relied upon

information from the U.S. Internal Revenue Service on the industry-

specific average useful life of assets in determining the allocation

period for non-recurring subsidies. See General Issues Appendix (GIA),

appended to Final Countervailing Duty Determination; Certain Steel

Products from Austria, 58 FR 37217, 37226 (July 9, 1993). However, in

British Steel plc. v. United States, 879 F. Supp. 1254 (CIT 1995)

(British Steel), the U.S. Court of International Trade (the Court)

ruled against this allocation methodology. In accordance with the

Court's remand order, the Department calculated a company-specific

allocation period for non-recurring subsidies based on the average

useful life (AUL) of non-renewable physical assets. This remand

determination was affirmed by the Court on June 4, 1996. British Steel,

929 F. Supp. 426, 439 (CIT 1996).

In this investigation, the Department has followed the Court's

decision in British Steel. Therefore, for the purposes of this final

determination, the Department has calculated a company-specific AUL.

Based on information provided by SIDOR regarding the company's

depreciable assets, the Department has determined that the appropriate

allocation period for SIDOR is 20 years.

Equityworthiness: In analyzing whether a company is equityworthy,

the Department considers whether or not that company could have

attracted investment capital from a reasonable, private investor in the

year of the government equity infusion based on information available

at that time. In this regard, the Department has consistently stated

that a key factor for a company in attracting investment capital is its

ability to generate a reasonable return on investment within a

reasonable period of time.

In making an equityworthiness determination, the Department

examines the following factors, among others:

1. Current and past indicators of a firm's financial condition

calculated from that firm's financial statements and accounts;

2. Future financial prospects of the firm including market studies,

economic forecasts, and project or loan appraisals;

3. Rates of return on equity in the three years prior to the

government equity infusion;

4. Equity investment in the firm by private investors; and

5. Prospects in the marketplace for the product under

consideration.

For a more detailed discussion of the Department's equityworthiness

criteria, see the GIA, 58 FR at 37244.

Petitioners alleged that SIDOR was unequityworthy from 1977 through

1992. (As explained below, while the GOV's conversion of SIDOR's

external debt into equity was made effective in October 1992, we

consider 1991 to be the relevant year to examine the company's

equityworthiness. Therefore, throughout this notice, we will refer to

the transaction as the ``1991 debt-to-equity conversion.'') On this

basis, petitioners claim that any equity infusions into SIDOR by the

GOV from 1977 through 1990, and the 1991 decision to convert SIDOR's

external debt into equity were inconsistent with the usual investment

practices of private investors. In addition, we examined whether land

transferred from CVG to SIDOR in 1993 and 1994 to cancel unpaid capital

subscriptions was inconsistent with the usual investment practices of

private investors.

1. 1977 through 1990 Equity Infusions

On March 18, 1997, we initiated an investigation of SIDOR's

equityworthiness for the years 1977 through 1990. See Memorandum dated

March 18, 1997, from The Team to Jeffrey P. Bialos, Re: Initiation of

Countervailing Duty Investigation: Steel Wire Rod from Venezuela

(Initiation Memo), (on file in the public record of the Central Records

Unit of the Department of Commerce, Room

B-099). In past investigations, the Department preliminarily determined

that SIDOR was equityworthy in 1977, and unequityworthy for the years

1978 through 1984. See Preliminary Affirmative Countervailing Duty

Determination; Carbon Steel Wire Rod From Venezuela, 50 FR 28234, 28237

(July 11, 1985) (1985 Wire Rod from Venezuela), and Preliminary

Affirmative Countervailing Duty Determination; Certain Steel Products

From Venezuela, 50 FR 11227, 11230 (March 20, 1985) (Steel Products

from Venezuela). The

[[Page 55016]]

Department also previously initiated an investigation of SIDOR's

equityworthiness for the period 1985 through 1990. See Initiation Memo,

and Final Affirmative Countervailing Duty Determination: Circular

Welded Non-Alloy Pipe from Venezuela, 57 FR 42964 (September 17, 1992)

(Non-Alloy Pipe from Venezuela). Although we previously found SIDOR to

be equityworthy in 1977, that decision was a preliminary finding. See

the Memorandum, dated October 15, 1991, to Eric I. Garfinkel, Re:

Initiation of Countervailing Duty Investigation: Circular Welded Non-

Alloy Steel Pipe From Venezuela, appended to the Initiation Memo. As

such, we concluded that this preliminary finding warranted

reinitiating.

In this investigation, SIDOR did not provide any new information

regarding the company's financial position for the years 1977 through

1990. Because no information has been presented in this investigation

that calls into question the Department's prior determinations that the

company was unequityworthy for the years 1978 through 1990, we continue

to find that the GOV equity investments made in those years were

inconsistent with the usual investment practices of private investors.

Moreover, with respect to the 1977 equity infusion, neither party has

provided any information beyond what the Department examined in the

prior proceeding in which we preliminarily found the company to be

equityworthy for that year (see Steel Products from Venezuela).

Therefore, because no new information has been submitted in this

proceeding to indicate that our prior preliminary decision in Steel

Products from Venezuela was incorrect, we find that it is appropriate

to follow that earlier determination, and determine SIDOR to be

equityworthy in 1977.

2. 1991 GOV Debt-to-Equity Conversion

We also initiated an investigation of SIDOR's equityworthiness with

respect to the conversion of SIDOR's external debt into equity, which

was approved by the Venezuelan Congress on May 18, 1993. See Initiation

Memo. The transaction was made retroactive to October 28, 1992, and is

reflected in SIDOR's 1992 financial statements. However, in the

questionnaire responses, the GOV stated that the decision to convert 60

percent of SIDOR's external debt into equity was reached in October

1991, and that the terms of the transaction did not change by the time

the transaction was approved by the Venezuelan Congress in 1993.

Therefore, we consider 1991 to be the relevant year for purposes of

determining whether the conversion of SIDOR's external debt into equity

was consistent with the usual investment practices of private

investors.

In our preliminary determination, we found SIDOR to be equityworthy

in 1991. Therefore, we determined that the GOV's decision to capitalize

SIDOR's external debt in 1991 was consistent with the usual investment

practices of private investors. See Preliminary Affirmative

Countervailing Duty Determination: Steel Wire Rod From Venezuela, 62 FR

41939, 41941 (August 4, 1997) (Preliminary Determination). In reaching

our preliminary finding, we evaluated SIDOR's financial ratios for the

three years prior to 1991. We also took into account respondent's claim

that a major restructuring process, begun in 1989 and aimed at

improving SIDOR's profitability and international competitiveness, had

significantly improved the company's financial position by 1991. See

Preliminary Determination, 62 FR at 41941. However, we also stated that

additional issues must be examined before reaching a final

determination with respect to the conversion of SIDOR's debt into

equity. We have reexamined our preliminary finding that SIDOR was

equityworthy in 1991, and, taking into account our findings at

verification, and the financial results in light of high inflation, we

now determine that SIDOR was not equityworthy in 1991.

In reaching our decision, we considered the specific investment

factors relied upon by Venezuelan commercial bankers to evaluate the

financial condition of potential customers. The bankers stated that in

a high inflationary economy where financial statements are not adjusted

to reflect the impact of high inflation, potential customers are

evaluated not only on the basis of their financial ratios. Rather, a

number of additional aspects of a company's operations are also taken

into account, including: (1) a company's ability to generate real,

inflation-adjusted revenue growth and cash flow, (2) the reputation of

the company, and (3) the company's competitiveness. In analyzing these

factors, the bankers stressed that a key issue for investors is whether

a company has successfully survived the crises of the economy,

including inflation, over the last years. See the September 19, 1997,

Memorandum to Barbara E. Tillman Re: Meetings with Commercial and

Investment Banks in the Countervailing Duty Investigation of Steel Wire

Rod from Venezuela (Memo Re: Meetings with Commercial Bankers) at 2-6

(on file in the public record of the Central Records Unit of the

Department of Commerce, Room B-099). Accordingly, in evaluating SIDOR's

equityworthiness in 1991, we have expanded our standard analysis to

consider these additional factors.

As petitioners correctly point out, the bankers indicated that

SIDOR did not represent a sound investment during the early 1990s.

Furthermore, in one banker's view, no private investor would have

provided SIDOR with U.S. $1.0 billion in 1991. Respondent attempts to

discount these statements by arguing that the bankers also concluded

that an inside investor ``may well have made such an investment.'' Memo

Re: Meetings with Commercial Bankers at 6. This argument is not

persuasive. The Department has never distinguished between ``inside''

and ``outside'' investors. In the GIA, we stated ``it would be

inappropriate, if not impossible, to fashion a unique inside investor

standard as a variation of the Department's reasonable private investor

standard,'' because ``the Department must render its equityworthiness

determinations on the basis of objective and verifiable evidence.'' 58

FR at 37249, 37250.

Furthermore, SIDOR's competitive position was not favorable in

1991. SIDOR's restructuring efforts were insufficient to justify the

conversion of almost U.S. $1.0 billion of the company's external debt.

As one banker noted, ``[t]he government is not able to make the

difficult restructuring changes to SIDOR. . . to make [the company a]

competitive entity.'' Memo Re: Meetings with Commercial Bankers at 7.

Our own evaluation of the restructuring process, discussed below,

reaches the same conclusion. In light of the information gathered at

verification, respondent's assertion that the bankers thought SIDOR's

long-term prospects justified the debt restructuring is not convincing.

An analysis of SIDOR's inflation adjusted revenue growth for 1988

through 1991, also an important investment criterion, shows that

SIDOR's revenue growth was not keeping pace with inflation in 1988 and

1989. While real revenue growth was 9.44 percent in 1990, in the

preceding two years it was negative 13.38 percent and negative 5.15

percent, respectively. See the October 14, 1997, Memorandum for the

File, Re: Calculations for the Final Affirmative Countervailing Duty

Determination: Wire Rod From Venezuela (POI 1996) (Final Calculations

Memo) (public version on file in the Central Records Unit of the

Department of Commerce, Room B-099).

In our preliminary finding, we noted that inflation was an

important issue

[[Page 55017]]

that we would examine prior to reaching the final decision with respect

to the 1991 transaction. Venezuelan commercial bankers discounted the

importance of an analysis of certain financial ratios because the

impact of inflation on historical financial statements is not very well

understood. See Memo Re: Meetings with Commercial Bankers at 3.

However, there are certain areas of the financials which can be

analyzed in real terms and adjusting these for inflation results in a

less favorable picture of the company's earnings. For example, because

sales revenues are recorded during the fiscal periods and reflect the

effects of inflation, the costs related to these sales may be

understated as the value of inventory used for these sales may have

been produced and recorded prior to the sale. Adjusting ``costs of

goods sold'' to reflect the erosion of currency values shows that real

costs would increase resulting in a lower net profit or higher net

loss. If such an adjustment is made to SIDOR's cost of goods sold, the

company's net profit margin deteriorates significantly: the positive

nominal profit margin of 0.06 percent in 1988 and 3.31 percent in 1989

become negative 6.67 percent and negative 11.92 percent, respectively.

The nominal profit margin for 1990 worsens from negative 5.42 percent

to negative 11.77 percent. See Final Calculation Memo at 22. With a

negative real profit margin in each of these years, SIDOR's return on

equity similarly turns negative from 1988 through 1990.

In their case brief, petitioners constructed an inflation-adjusted

return on equity (ROE) for SIDOR by comparing the company's nominal ROE

with the rate of inflation in that year. According to this analysis,

with annual inflation rates of over 30 percent, no well-run private

company would be found equityworthy in Venezuela. This is an

unreasonable conclusion. As noted above, we calculated an adjusted

profit margin for SIDOR, based on an adjustment of the company's cost

of goods sold. This is a reasonable adjustment to the company's

financial results to account for high inflation during the 1988 through

1990 period.

Nevertheless, we recognize that the rate of return from a company

during years of high inflation would require the company to earn very

high returns, and investors would consider whether the investment would

ultimately yield a real rate of return. An analysis of SIDOR's

financial ratios clearly indicates that the company's rate of return,

in nominal terms, was very low, or negative. In the context of the high

rates of inflation during these years, the company's rate of return was

very poor, and yields an unfavorable future financial outlook.

Respondent has argued that SIDOR was worth more than its nominal

book value because the historical financial statements understated the

value of the company's assets, and because a company's fixed assets

maintain their value and increase in nominal value with inflation. See

Respondent's September 26, 1997, rebuttal brief. While we acknowledge

that this may be the case, this increase in the nominal value of the

company's real assets is not compelling for determining that SIDOR was

equityworthy during these years. An investor is investing in an on-

going operation, and the important factor is the efficient operation of

the assets in order to yield a return on those assets. As we noted in

the GIA, a reasonable investor's decision to invest in an operating

steel company such as SIDOR would be based on many factors, not just

the level of nominal value of the underlying assets. See 58 FR at

37247. The value of the corporation's underlying assets is more

important when a company is terminating and liquidating. This is not

the primary consideration of an equity investor. In any case,

respondent has failed to quantify this argument in any meaningful way.

Only in 1994 did SIDOR begin to apply inflation adjustments to the

historical figures in its financial statements, and the company has

admitted that ``there is no accurate way to retroactively adjust

[unadjusted statements] for inflation.'' SIDOR's July 3, 1997,

questionnaire response at 10 (on file in the Central Records Unit of

the Department of Commerce, Room B-099).

Another important factor during the 1988-1991 period is that little

private investment was actually taking place in Venezuela. Rather,

given the economic instability in the country, as evidenced by rising

interest rates and steady currency devaluations, private money was in

fact fleeing the country for alternative foreign currency-denominated

investments. See Memo Re: Meetings with Commercial Bankers at 1-2.

There were few exchange controls at the time, and currency was easily

invested in foreign currency-denominated assets. While it is certainly

true that some private investment was taking place in Venezuela during

the early 1990s, SIDOR would have been an unlikely recipient of such

funds, and certainly not in the magnitude of the GOV's 1991 debt

conversion.

In preliminarily finding SIDOR equityworthy, we relied upon

respondent's claim that the company's restructuring process, starting

in 1989, had significantly improved SIDOR's competitiveness. At

verification, officials from the Ministry of Finance (Hacienda) and

SIDOR again stated that the restructuring process greatly improved the

company's financial health and placed SIDOR on the path to becoming an

internationally competitive steel company. See the September 19, 1997,

Memorandum to Barbara E. Tillman Re: Verification of Information

Provided in the SIDOR Questionnaire Responses (SIDOR VR) at 3-9, and

the September 20, 1997, Memorandum to Barbara E. Tillman Re:

Verification of the Government of Venezuela Questionnaire Responses

(GOV VR) at 3-6 (public versions on file in the Central Records Unit of

the Department of Commerce, Room B-099). Respondent also claims that

the GOV's decision to convert U.S. $1.0 billion of SIDOR's external

debt into equity was in large part due to the company's commitment to

meet specific short- and long-term goals, and the projections of the

company's financial position if it met these goals. While we

acknowledge that SIDOR may have made some progress as a result of the

restructuring process, we do not agree that these changes provide a

basis for finding that SIDOR was equityworthy in 1991. In the GIA, we

stated that any projections of future earnings based on restructuring

plans would have to be reconciled with an analysis of past performance.

58 FR at 37245. As we will show, the projections do not provide a

sufficient basis to overcome SIDOR's past performance and the company's

poor reputation. Rather, but for the debt capitalization by the GOV,

SIDOR's cash flow would have become so unstable that the company would

have been unviable. See SIDOR VR at 8.

At verification, SIDOR officials explained that the 1989

restructuring process was aimed at making the company more competitive

internationally and returning it to profitability. To achieve this,

SIDOR intended to measure and improve several key indicators of the

company's performance, including:

(1) work force productivity, as measured by tons of steel produced

per worker per year;

(2) debt to equity ratio;

(3) unit cost of production and sales;

(4) the timing of deliveries; and

(5) the ratio between inventories and sales, taking into account

net sales.

See SIDOR VR at 4. SIDOR also started a cost reduction program and

determined that the company's product mix had to be reduced by

specializing in the more profitable flat products. To

[[Page 55018]]

become more competitive, SIDOR also reduced its work force. According

to SIDOR, by 1991, the company had greatly improved all of the

indicators and had released 3000 workers. An additional program to

improve SIDOR's performance was initiated in 1991, as part of the debt

restructuring that was agreed upon in principal in that year. Unlike

the 1989 restructuring program, under this program, SIDOR made specific

commitments to the GOV, and agreed to reach these performance targets

by 1993. The targets included (1) an 11.0 percent reduction in per unit

production costs; (2) an increase in labor productivity as measured by

tons of liquid steel production per man year; (3) a reduction of

inventories to 25 percent; and (4) an increase in sales volume to

2,400,000 tons per year, and capacity utilization of over 80 percent.

See SIDOR VR at 8. According to SIDOR officials, if these targets were

reached by that time, SIDOR would become competitive globally. Id.

However, we disagree with these arguments. It may be true that

SIDOR's inability to meet its commitments to the GOV was, as respondent

claims, compounded by the difficulties in the Venezuelan economy.

However, petitioners correctly note that not all of the performance

targets were linked directly to the success of Venezuela's economy or

to worsening inflation. See SIDOR VR at 8. Moreover, as the bankers

noted, a key factor in determining a company's potential was its

ability to perform adequately in spite of the worsening economic

conditions.

In conjunction with GOV's 1991 agreement to capitalize 60 percent

of the company's external debt, although SIDOR prepared a report

containing certain financial projections for the Economic Council of

the Presidential Cabinet, there were no independent evaluations of this

potential investment. See SIDOR VR at Exhibit 21 (Public Document). In

analyzing SIDOR's potential, the report details a plan of action to

improve the company's competitiveness. However, the report includes

scant projections of the company's projected financial performance,

such as profitability, and other financial indicators--important

information that a private investor would consider. Rather, the

report's focus is on SIDOR's projected cash flow, with and without the

capitalization of 60 percent of the company's external debt. The report

acknowledges that ``[d]espite implementing a cost reduction program * *

* the high debt burden impedes SIDOR from accomplishing its

modernization plans {and the capitalization of 60 percent of SIDOR's

external debt} is the minimum required to guarantee the continued

operation of the firm.'' Id. Moreover, respondent acknowledges that the

economic indicators used in the projections ``had proved to be too

optimistic.'' Respondent's September 26, 1997, Rebuttal Brief at 17.

Accordingly, the company's own projections and statements indicate

that, absent the debt capitalization, SIDOR's cash flow would be

insufficient for the company to meet its debt obligations, and the

company would become unviable.

We analyzed similar circumstances in Certain Steel From Mexico

which involved AHMSA, a Mexican steel producer. In that case, it

appeared that the financial projections were done to show that the

government of Mexico's assumption of AHMSA's debt could achieve a level

of cash flow to prevent the company from defaulting on its loans. Our

conclusion in that case is the same we have reached here: ``the focus

of the analysis was not to demonstrate to a reasonable investor that

[the company] was a good investment.'' GIA, 58 FR at 37245. Rather, in

this case, the focus of SIDOR's report for the Economic Council of the

Presidential Cabinet was to show that SIDOR would have been unable to

continue operations without the capitalization of 60 percent of the

company's external debt. Again, our evaluation of AHMSA's projections

in Certain Steel From Mexico, are also appropriate in this case. At

that time, we stated that the reasonable investor would weigh a

company's past performance ``far more than a financial projection done

by the company itself in an attempt to garner more financial aid from

the {government}.'' GIA, 58 FR at 37245.

The analysis above makes clear that SIDOR was not an equityworthy

company in 1991. Accordingly, we determine that the 1991 conversion of

SIDOR's external debt into equity was not consistent with the usual

investment practices of private investors.

3. 1993 and 1994 CVG Land Transfers to SIDOR

In the Preliminary Determination, we found that in 1993 and 1994,

CVG transferred land to SIDOR to cancel unpaid capital subscriptions.

We also found that SIDOR was equityworthy in each of these years. See

Preliminary Determination, 62 FR at 41941. For many of the same reasons

outlined above, we have reevaluated our preliminary determination that

SIDOR was equityworthy in these years. For example, SIDOR's real

revenue growth from 1991 to 1993 was negative 16.97 percent, negative

8.73 percent, and negative 22.48 percent, respectively. We have also

calculated SIDOR's cost of sales, adjusted for the rate of inflation,

in each year from 1990 through 1993. This adjustment yields negative

profit margins in each of the three years preceding the 1993 and 1994

land transfers, except 1991. However, even in that year, the adjusted

return was very small, 0.18 percent. See Final Calculation Memo at 22.

In each year that SIDOR experienced a loss after adjusting for

inflation, the company's return on equity would also be negative,

meaning that SIDOR was not able to generate a real return on investment

in those years. Accordingly, we now determine that SIDOR was

unequityworthy in 1993 and 1994.

Equity Methodology: In measuring the benefit from a government

equity infusion to an unequityworthy company, the Department compares

the price paid by the government for the equity to a market benchmark,

if such a benchmark exists. A market benchmark can be obtained, for

example, where the company's shares are publicly traded. See, e.g.,

Final Affirmative Countervailing Duty Determinations: Certain Steel

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

Where a market benchmark does not exist, the Department has

determined in this investigation to continue to follow the methodology

described in the GIA, 58 FR at 37239. Following this methodology,

equity infusions made on terms inconsistent with the usual practice of

a private investor are treated as grants. Using the grant methodology

for equity infusions into an unequityworthy company is based on the

premise that an unequityworthiness finding by the Department is

tantamount to saying that the company could not have attracted

investment capital from a reasonable investor in the infusion year

based on the available information.

Creditworthiness: When the Department examines whether a company is

creditworthy, it is essentially attempting to determine if the company

in question could obtain commercial financing at commonly available

interest rates. If a company receives comparable long-term financing

from commercial sources, that company will normally be considered

creditworthy. In the absence of comparable commercial borrowings, the

Department examines the following factors, among others, to determine

whether or not a firm is creditworthy:

1. Current and past indicators of a firm's financial health

calculated from

[[Page 55019]]

that firm's financial statements and accounts.

2. The firm's recent past and present ability to meet its costs and

fixed financial obligations with its cash flow.

3. Future financial prospects of the firm including market studies,

economic forecasts, and projects or loan appraisals.

For a more detailed discussion of the Department's creditworthiness

criteria, see, e.g., Final Affirmative Countervailing Duty

Determinations: Certain Steel Products from France, 58 FR 37304 (July

9, 1993); and Final Affirmative Countervailing Duty Determinations:

Certain Steel Products from the United Kingdom, 58 FR 37393 (July 9,

1993).

Petitioners have alleged that SIDOR was uncreditworthy in each of

the years the company received GOV equity infusions, i.e., 1977 through

1992 (with the exception of 1988). In Non-Alloy Pipe from Venezuela,

the Department initiated an examination of SIDOR's creditworthiness for

the years 1985 through 1990. See 57 FR at 42964. For all other years,

the Department initiated an examination of SIDOR's creditworthiness

based upon an analysis of SIDOR's cash flow and financial ratios. See

Creditworthy/Equityworthy Memo. As outlined above under the

``Equityworthiness'' section, for all the years except 1989 through

1992, SIDOR did not submit financial data beyond what was examined in

the initiation stage, stating that such information was inaccessible.

Therefore, because SIDOR has not provided any information that

undermines the Department's initiation analysis, we determine that

SIDOR was uncreditworthy from 1978 through 1987 and from 1989 through

1990.

We also now consider SIDOR to be uncreditworthy in 1991, the year

of the GOV's decision to convert 60 percent of SIDOR's external debt

into equity. The company's financial picture in the three years prior

to 1991 was erratic. As outlined under the equityworthiness section

above, in 1991, SIDOR's real revenue growth was negative in 1988 and

1989, and, after making an adjustment for inflation, the company's

profit margin was negative in each of the three years preceding 1991.

According to Venezuelan commercial bankers, this is a key factor in

evaluating a company's ability to meet its debt obligation. See Memo

Re: Meetings with Commercial Bankers at 3. While the bankers also

stated that they would lend to Venezuelan companies with a debt-to-

equity ratio of up to 300 percent, they further indicated that a key

factor would be whether the company had survived the crises of the

economy. This cannot be said of SIDOR. The company's own projections at

the time made clear that without the GOV's conversion of SIDOR's

external debt, the company would not have been able to meet its debt

obligations. See SIDOR VR at Exhibit 21 and the ``Equityworthiness''

discussion above.

We have also determined that SIDOR was unequityworthy in 1993 and

1994. Therefore, we have also examined the company's financial

statements over the period 1990 through 1993, to analyze SIDOR's

ability to obtain commercial financing at commonly available interest

rates. For the three years after 1991, SIDOR's liquidity improved

significantly, with current assets exceeding current liabilities by

over two to one. In addition, SIDOR's ability to service its long-term

debt also improved, and the cash flow to debt ratio increased to over

14 percent in 1992 and 1993. While SIDOR's financial picture remained

weak during the period 1990 through 1993, the lessened debt burden and

improved liquidity indicate that SIDOR would have been able to obtain

commercial financing at commonly available interest rates in 1993 and

1994. Therefore, we determine SIDOR to be creditworthy in each of these

years.

Discount Rates: For uncreditworthy companies, our practice is to

use as the discount 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 locate a prime

rate in Venezuela, we added 12 percent to the discount rate. See e.g.,

Final Affirmative Countervailing Duty Determination: Certain Steel

Products From Brazil, 58 FR 37295, 37298 (July 9, 1993) (Brazil Steel),

Final Affirmative Countervailing Duty Determination: Grain-Oriented

Electrical Steel From Italy, 59 FR 18357, 18358 (April 18, 1994).

(GOES).

In the Preliminary Determination, we calculated the benefit from

non-recurring countervailable subsidies received by SIDOR through 1987

by using as the discount rate the long-term corporate bond rates in

Venezuela, published by Morgan Guaranty Trust Company in World

Financial Markets. See 62 FR at 41942. For the period after 1987, we

used as the discount rate the average short-term interest rate, because

the long-term corporate bond rates were not available after 1987, and

because the primary mechanism for obtaining long-term domestic currency

financing in Venezuela has been through short-term, roll-over, loans.

Based on our findings at verification, we now determine that it is

not appropriate to use long-term corporate bond rates as the discount

rate. Central Bank of Venezuela officials stated at verification that

``[c]ommercial banks in Venezuela have never given long-term loans. The

general practice is to give one-year loans at a short-term rate and

roll it over each year with a new short-term rate.'' GOV VR at 3.

In the Preliminary Determination, we also stated that it was

appropriate to adjust the discount rate to take into account inflation

because Venezuela has experienced intermittent periods of high

inflation over the past twenty years, and because SIDOR has adjusted

its financial statements to take into account the effects of inflation

since 1994. See Preliminary Determination, 62 FR at 41942. We have

modified our approach for this final determination and no longer

consider it appropriate to make such an adjustment to the short-term

discount rate. In addition, we now determine that, in calculating the

benefit from non-recurring subsidies, it is appropriate to account for

inflation only for the period 1987 through 1996. Therefore, for the

years 1978 through 1986, we are using, as the discount rate, the short-

term bolivar interest rates described above. As noted above, these

rates represent the primary mechanism for obtaining long-term domestic

currency financing in Venezuela.

We have determined that the most reasonable way to account for

inflation for the is to convert the equity infusions into U.S. dollars,

and to then apply, as the discount rate, a long-term dollar lending

rate. Therefore, for our discount rate, we used data for U.S. dollar

lending in Venezuela for long-term non-guaranteed loans from private

lenders, as published in the World Bank Debt Tables: External Finance

for Developing Countries. This conforms with our practice in Brazil

Steel. See 58 FR at 37298. The changes to our calculation methodology

are discussed more fully below under the GOV Equity Infusions into

SIDOR and Interested Party Comment sections of the notice. Because we

determine SIDOR to be uncreditworthy for the years 1978 through 1991

(except 1988), we added to the discount rates a risk premium equal to

12 percent of the discount rate in each of those years.

Based upon our analysis of the petition and the responses to our

questionnaires, we determine the following:

[[Page 55020]]

I. Programs Determined To Be Countervailable

A. GOV Equity Infusions into SIDOR

SIDOR received GOV equity infusions in every year from 1977 through

1991, except 1988. SIDOR is a 100-percent government-owned company. Its

parent company is Corporacion Venezolana de Guayana (CVG), a holding

company owned by the GOV charged with promoting industrial development

in the Guayana Region. The majority of the equity infusions were made

by the Fondo de Inversiones de Venezuela (FIV), a GOV investment fund.

The remaining funds were provided by the Hacienda, primarily as

interest payments on loans. According to the response of the GOV, the

government equity infusions into SIDOR were provided pursuant to

special laws adopted with respect to government-approved expansion

projects of SIDOR. Thus, these equity infusions were specific under

section 771(5A)(D) of the Act.

The first law, published in the Gaceta Oficial No. 30,587 on

January 2, 1975, authorized SIDOR's 1974-79 ``Plan IV'' expansion. This

expansion was aimed at increasing SIDOR's steel production by 3.6

million tons as well as increasing the company's rolling capacity for

flat and non-flat products. The government equity infusions under Plan

IV were not disbursed in the amounts or at the time originally

projected in this plan. However, the amounts received by SIDOR were

recorded in the company's annual financial statements in the year they

were received. Equity funds also were provided to SIDOR in accordance

with a 1987 law passed by the Venezuelan Congress. This law was

published in the Gaceta Oficial No. 33,771 on December 21, 1987. The

FIV received both preferred and common shares for these equity

investments into SIDOR.

As noted above, funds were also provided to SIDOR by the Hacienda.

Funds provided by the Hacienda between 1977 and 1981 were authorized

under Article 11 of a 1976 Special Law for Public Credit and were also

made pursuant to a June 26, 1977, agreement between the Hacienda, FIV,

CVG and SIDOR. Under this agreement, the Hacienda agreed to pay SIDOR's

interest on loans from the FIV in return for shares in the company.

Equity payments made between 1984 and 1986 were provided pursuant to

government Decree 390 of December 1984, authorizing the Hacienda to

help SIDOR service its foreign debt. Finally, a 1987 loan from the

Hacienda to SIDOR was converted into equity, but recorded as an advance

for future capital increase.

SIDOR records all Hacienda equity funds in the years the funds were

received. However, the capital investments appeared in SIDOR's annual

financial statements as ``Advances for Future Capital Increase.'' In

1989, all advances were converted into shares issued to Hacienda, the

delay stemming from a disagreement between the Hacienda and CVG as to

who should take ownership of the shares. The issue was resolved in

1989, and on the same day the shares were issued to Hacienda, they were

transferred to CVG, SIDOR's parent company. We have treated these

Hacienda funds as capital investments in each year in which they were

received by SIDOR.

According to the agreement under which the Hacienda funds were

provided, the funds are to be treated as capital infusions.

In 1991, following several years of restructuring by SIDOR, the GOV

agreed to convert 60 percent of SIDOR's debt and the interest accrued

on the debt into equity which was converted into shares provided to

Hacienda. This debt related to SIDOR's pre-1986 foreign currency loans

that had been restructured in accordance with government Decree 1261 of

November 15, 1990. As a result of this conversion, the Hacienda now

holds 39.68 percent of SIDOR's shares. As of December 31, 1996, the

remaining 60.32 percent were held by SIDOR's parent company, CVG.

In 1993 and 1994, also in connection with SIDOR's Plan IV expansion

project, CVG transferred some of the land on which the company

constructed the Plan IV expansion. The land was used as payment for

unpaid capital subscriptions from CVG. At the time, CVG purchased only

about half of the 1,860,000 shares in SIDOR it had subscribed to. We

consider the land transfers to be capital investments in each year in

which they were received by SIDOR.

We determine that the equity infusions into SIDOR in the years 1978

through 1987, 1989 through 1991, 1993 and 1994 confer a benefit under

section 771(5)(E)(i) of the Act because the GOV investments were not

consistent with the usual investment practice of private investors. See

the discussion on ``Equityworthiness'' above. Also, these equity

infusions are specific within the meaning of section 771(5A)(D) because

they were limited to one company.

As explained in the ``Subsidies Valuation Information'' section, we

have treated equity infusions in unequityworthy companies as grants

given in the year the capital was received. We have further determined

these infusions to be non-recurring subsidies. Therefore, we have

allocated the benefits over 20 years.

Venezuela experienced periods of high inflation during the period

1978 through 1996 (the rates ranged from 7 percent to 103 percent). In

the Preliminary Determination, we found that it was appropriate to take

into account the effects of inflation to accurately value the benefit

from GOV equity infusions. See 62 FR at 41943. We did this by adjusting

the principal component of the benefit by the inflation index, using

the year of receipt as the reference year to measure inflation. We also

adjusted the interest component by adding the rate of inflation in each

year to the discount rate.

Based on our verification and comments from interested parties, we

find that the methodology used in the preliminary determination to

account for inflation should be changed. First, prior to 1987,

inflation was relatively low and, as such, we do not consider it

appropriate to adjust for inflation prior to 1987. In 1987, inflation

increased to 40 percent and thereafter remained consistently high,

reaching 103 percent in 1996. The period after 1986, therefore, can

clearly be distinguished from the prior years as marked by consistently

high inflation. Accordingly, when calculating the benefit to SIDOR

during the POI from the GOV equity infusions, we adjusted the nominal

values of the equity infusions to account for inflation from 1987

through 1996. See the Interested Party Comment section of this notice

for a more detailed discussion of this adjustment.

As we noted under the ``Discount Rate'' section above, in

calculating the benefit from equity infusions received prior to 1987,

we have used the short-term bolivar interest rates. For the period 1987

through 1996, we have accounted for inflation in our benefit

calculation by converting the equity infusions into U.S. dollars after

1986. This conforms with our past practice and with business practices

in Venezuela. See Brazil Steel, 58 FR at 37298. For example, a

principle source of funding for capital investment in Venezuela was

``overseas foreign currency-denominated financing.'' See Memo Re:

Meetings with Commercial Bankers at 2. Also, SIDOR's long-term loans

were denominated in foreign currency. Accordingly, for equity infusions

received prior to 1987, we converted the remaining face value of the

grant in 1987 into U.S. dollars using the bolivar/dollar exchange rate

[[Page 55021]]

prevailing in that year. For the remaining allocation period, we then

applied the long-term U.S. dollar interest rate described in the

``Discount Rate'' section of this notice. For equity infusions received

after 1986, we converted the infusion into U.S. dollars at the exchange

rate in effect on the day the infusion was received by SIDOR. The

discount rate used was the same described above.

To calculate the total benefit from the infusions to SIDOR, we

summed the benefit allocated to the POI from each equity infusion.

After converting the benefit from U.S. dollars into bolivars, we then

divided that total benefit by SIDOR's total sales of all products

during the POI. On this basis, we determine the net subsidy for this

program to be 23.61 percent ad valorem for SIDOR.

B. Dividend Advances From the Hacienda

Between 1977 and 1981, pursuant to a June 26, 1977, agreement among

the Hacienda, FIV, CVG and SIDOR, the Hacienda paid dividends on behalf

of SIDOR on the preferred shares held by FIV. These were recorded in

SIDOR's accounting records as ``Dividend Advances.'' These dividend

advances are still reported in SIDOR's 1996 financial statement.

According to the 1996 financial statement, the final treatment of these

dividend advances has not been decided. Because the payment by the

Hacienda of dividends on behalf of SIDOR is based on an agreement

signed by the Hacienda, FIV, CVG and SIDOR, the payment of dividends by

the Hacienda, a government agency, is limited to one company, SIDOR,

and is, thus, specific under section 771(5A)(D) of the Act. To

determine whether a benefit has been provided, the Department must

determine whether SIDOR was obligated to pay dividends to FIV on the

preferred shares. If the Hacienda relieved SIDOR of a payment

obligation, then the payment of dividends by the Hacienda on behalf of

SIDOR constitutes a countervailable subsidy.

According to its supplemental questionnaire response, SIDOR had

fiscal losses in the years the dividend payments were made. Therefore,

SIDOR stated that it was not obligated to pay any dividends. To

determine whether SIDOR was obligated to pay the dividends to FIV on

the preferred shares, we examined the 1977 agreement among the

Hacienda, FIV, CVG and SIDOR. We verified that under this agreement,

the preferred shares yielded a fixed yearly dividend equivalent to

seven percent of their nominal value. Therefore, SIDOR was obligated to

pay fixed yearly dividends to FIV. Because the payment of dividends by

the Hacienda to FIV relieved SIDOR of a financial obligation, we

determine that the outstanding balance of the ``Dividend Advances''

constitutes a benefit under section 771(5)(E) of the Act.

In order to calculate the benefit from this program, we treated the

dividend advances as interest-free short-term loans because the

advances appear to be liabilities of SIDOR. The 1977 agreement under

which these dividends were paid does not state that these are capital

infusions into SIDOR by the Hacienda. In addition, neither the GOV or

SIDOR has treated these dividend advances as capital infusions. Thus,

it appears, that SIDOR is still liable for repayment of the dividend

advances.

To calculate the benefit in the POI, we took the amount of the

dividend advances reported in SIDOR's 1996 financial statement and

calculated the amount of interest the company would have paid in 1996

if it had received an interest-free loan equal to the amount of the

dividend advances. We used as our benchmark interest rate the annual

average short-term interest rate reported by the GOV in its

supplemental response. We used this as the benchmark because we

verified that SIDOR did not have short-term bolivar lending during the

period of investigation. The calculated interest savings was then

divided by SIDOR's total sales in the POI. On this basis, we determine

the net subsidy for this program to be 0.08 percent ad valorem for

SIDOR.

II. Programs Determined To Be Not Countervailable

A. GOV Loan to SIDOR in 1990

We initiated an investigation of this program based upon

petitioners' allegation that the GOV replaced a $1,507 million

commercial loan to SIDOR with a 15-year loan from the government. We

verified that this 1990 GOV loan to SIDOR was part of a debt

restructuring program which was examined and found not countervailable

in the Final Affirmative Countervailing Duty Determination:

Ferrosilicon From Venezuela; and Countervailing Duty Order for

Ferrosilicon From Venezuela, 58 FR 27539 (May 10, 1993). Because

petitioners have provided no new information or evidence of changed

circumstances to warrant a reconsideration of that determination, we

continue to find this GOV debt restructuring program, under which this

1990 loan was received, not countervailable.

B. Government Provision of Electricity

Electricity is provided to SIDOR by EDELCA, a government-owned

utility company. Both SIDOR and EDELCA are part of the CVG Group.

EDELCA is the largest utility company in Venezuela and generates 70

percent of the electricity consumed in Venezuela. Electricity rates

between EDELCA and its industrial customers are not regulated. Tariff

rates are set by EDELCA for a one-year period corresponding to the

calendar year.

Almost all of EDELCA's clients are industrial customers or other

utility companies in Venezuela. The rates between EDELCA and the other

utility companies are regulated by the Regulatory Commission of

Electric Energy (RCEE), while the rates charged by EDELCA to its

industrial clients are not regulated. In 1990, EDELCA began using

dollar per-unit rates rather than bolivar per-unit rates for its

industrial rates in order to protect its tariff structure against the

effects of inflation. In that year, EDELCA also changed its rate

structure to one based upon its costs plus a return on its capital. To

calculate its costs, EDELCA divided capital costs by capacity and

factored in general operating costs, transmission costs, administrative

costs, and a ten percent return on capital. To calculate its base

industrial tariff rate, it then determined how much higher a price the

company would need to charge in order to generate enough income to

service its debt and maintain a profit. This base rate then served as

the basis for the industrial rates set in subsequent years. Because

this base rate was calculated in dollars, it has generally been

increased in each subsequent year by the U.S. Consumer Price Index.

EDELCA makes small adjustments to this base rate to take into

account different transmission and transformation costs for its

customers. We verified that certain industrial clients with higher

transmission costs due to the distance from the generation site paid

slightly more than the basic rate in order to account for EDELCA's

increased cost of transmission. In addition, some other industrial

clients, such as SIDOR, maintained their own substations and

transformers. These customers received a slightly lower rate.

According to section 771(5)(E) of the Act, the adequacy of

remuneration with respect to a government's provision of a good or

service ``* * * shall be determined in relation to prevailing market

conditions for the good or service being provided or the goods

[[Page 55022]]

being purchased in the country which is subject to the investigation or

review. Prevailing market conditions include price, quality,

availability, marketability, transportation, and other conditions of

purchase or sale.'' Particular problems can arise in applying this

standard when the government is the sole supplier of the good or

service in the country or within the area where the respondent is

located. In this situation, there may be no alternative market prices

available in the country (e.g., private prices, competitively-bid

prices, import prices, or other types of market reference prices).

Hence, it becomes necessary to examine other options for determining

whether the good has been provided for less than adequate remuneration.

This consideration of other options in no way indicates a departure

from our preference for relying on market conditions in the relevant

country, specifically market prices, when determining whether a good or

service is being provided at a price which reflects adequate

remuneration.

With respect to electricity, some of the options may be to examine

whether the government has followed a consistent rate-making policy,

whether it has covered its costs, whether it has earned a reasonable

rate of return in setting its rates, and/or whether it applied market

principles in determining its rates. Such an approach is warranted

where it is only the government that provides electricity within a

country or where electricity cannot be sold across service

jurisdictions within a country and there are divergent consumption and

generation patterns within the service jurisdictions.

In the instant case, we verified that during the period of

investigation EDELCA set its industrial rates, including the rate

charged to SIDOR, based upon market principles, including adjusting its

standard industrial rate for differences in transmission and

transformation costs and for level of consumption. In addition, we note

that EDELCA's rate making policy incorporates a return on its costs and

that the return earned by EDELCA on it sales to SIDOR was higher than

the average return of its industrial clients. We verified that EDELCA's

pricing policies with respect to SIDOR and its industrial customers are

consistent with the pricing policies of private utility companies in

Venezuela. Therefore, we find that the rates charged by EDELCA to SIDOR

are not countervailable under section 771(5)(E) of the Act.

Adequacy of remuneration is a new statutory provision which

replaced ``preferentiality'' as the standard for determining whether

the government's provision of a good or service constitutes a

countervailable subsidy. The Department has had no experience

administering section 771(5)(E) and Congress has provided no guidance

as to how the Department should interpret this provision. This case and

the other concurrent wire rod cases mark the first instances in which

we are applying the new standard. We anticipate that our policy in this

area will continue to be refined as we address similar issues in the

future.

III. Programs Determined To Be Not Used

A. Government Guarantees of SIDOR's Private Debt in 1987 and 1988

In 1987 and 1988, the GOV guaranteed loans provided to SIDOR by

Credito Italiano and Kreditanstalt Fuer Wiederaufbau (KfW),

respectively. Both of these loans were Deutschmark-denominated loans

linked to the London Interbank Offering Rate (LIBOR).

We verified that the 1987 and 1988 loans were specifically applied

for and authorized as part of a program to finance the expansion of

SIDOR's pipe mill. The approval documents specify that the loans were

for the expansion of SIDOR's pipe mill, in particular for purchasing

equipment. These were authorized under the December 10, 1987, ``Law for

the Contracting and Financing of the First Stage of the Project to

Expand and Modernize SIDOR's Pipe Mill.'' Because we verified that the

KfW and Credito Italiano loans were tied to financing the expansion of

SIDOR's pipe mill, we determine that the loans and the government

guarantees of the loans are tied to non-subject merchandise and, thus,

do not provide a benefit to wire rod. Therefore, we determine that the

GOV loan guarantees did not confer countervailable benefits on the

production and/or exportation of subject merchandise, and that this

program was not used during the POI.

B. Government Provision of Iron Ore

Iron ore is a bulky, low-priced commodity that is traded on the

international market and is used in the production of steel.

Petitioners alleged that Ferrominera, a government-owned company,

provided iron ore to SIDOR for less than adequate remuneration. SIDOR

and Ferrominera are two of the 37 companies which comprise the CVG

Group, a holding company owned by the GOV. SIDOR purchases all of its

iron ore from Ferrominera. Ferrominera is the only producer of iron ore

in Venezuela, and 99 percent of its domestic sales are to the steel

industry.

As explained in our preliminary determination, SIDOR and

Ferrominera maintain two separate contracts--one for the supply of iron

ore and one for its transportation. SIDOR and Ferrominera have a multi-

year supply contract under which Ferrominera sets SIDOR's iron ore

prices on an annual basis. The unit price (i.e., the price per ``metric

ton natural iron unit'') is set in U.S. dollars, and the terms of sale

are FOB, place of loading. When Ferrominera announced a new price for

1996, SIDOR objected and tried to renegotiate the price. Because of

this objection, Ferrominera did not apply the new price. After

negotiations failed, SIDOR and Ferrominera entered into arbitration

conducted by the CVG Group.

For the preliminary determination, we calculated a program rate by

comparing the price of iron ore that Ferrominera charged SIDOR during

1996 with a benchmark price constructed from published price

information on the record. However, at verification we learned that the

CVG arbitration decision was not made until March 1997; thus the price

that SIDOR had to pay for the iron ore was not finally set until after

our period of investigation. Because the 1996 price of iron ore was not

finalized until after the period of investigation and final payment was

not made by SIDOR until July 1997, we consider it inappropriate to

assess the countervailability of Ferrominera's provision of iron ore to

SIDOR for purposes of this final determination.

We have taken this approach in light of our practice to countervail

subsidies based on the timing of the receipt of the subsidy. See, e.g.,

Final Affirmative Countervailing Duty Determination: Certain Pasta From

Italy, 61 FR 30288 (June 14, 1996), and Certain Welded Carbon Steel

Pipes and Tubes and Welded Carbon Steel Line Pipe From Turkey: Final

Results of Countervailing Duty Administrative Reviews, 62 FR 43984

(August 18, 1997). Because the final price for the iron ore was not set

and paid until 1997, the receipt of any potential benefit under this

program is 1997, which is outside the period of investigation.

Moreover, because the standard for adequate remuneration specifies that

transportation is one of the factors to consider in determining whether

the provision of a good is for less than adequate remuneration, we do

not consider it appropriate in this case to analyze the transportation

services for the delivery of iron ore separately from the pricing

contract of such ore.

[[Page 55023]]

Therefore, the issue of whether iron ore is provided to SIDOR for less

than adequate remuneration will be examined in an administrative review

conducted under section 751 of the Act, if a countervailing duty order

is issued.

We note that the interested parties submitted comments on whether

iron ore was provided to SIDOR for less than adequate remuneration.

These comments dealt with the methodology which should be employed in

analyzing whether iron ore was provided for less than adequate

remuneration. Because we are not making a determination with respect to

the countervailability of this program, and because none of the

comments were related to the issue of the timing of the potential

benefit, it is not necessary to address the comments submitted by the

interested parties for purposes of this final determination.

C. Preferential Tax Incentives Under Decree 1477

Petitioners alleged that Decree 1477 provides partial or total

income tax exemptions and other tax credits to companies in

disadvantaged regions, including Bolivar, where SIDOR is located.

According to petitioners, companies that relocated or commenced an

expansion after March 23, 1976, qualify for tax incentives. We verified

that SIDOR never applied for or received benefits under this program.

Therefore, we determine that this program was not used by SIDOR during

the POI.

IV. Program Determined To Be Terminated

Special Permissive Regulations for Exporters (REFE)

The REFE program was enacted September 9, 1994, to enable companies

and individuals to access foreign currency more easily. Prior to 1994,

companies and individuals were not allowed to maintain foreign currency

accounts. Rather, they had to make specific requests for access to

foreign currency from the Office of Technical Exchange Administration

(OTAC, Officina Technica de Administration de Combina). In 1994,

Venezuela endured a banking crisis. In response to this crisis, the GOV

halted all exchange of bolivars for foreign currency, leaving companies

and individuals with virtually no access to foreign currency. During

July and August, 1994, companies in Venezuela were unable to service

foreign currency-denominated debt. In response to this situation, the

GOV initiated the REFE program. The REFE program allowed companies and

individuals to use directly their foreign currency receipts. Under the

program, a company could maintain a foreign account with which it could

directly service its foreign currency debts or directly pay for

imported inputs.

We verified that on April 17, 1996, the GOV terminated the REFE

program with the enactment of Decree 1,292, which established the free

convertibility of currency in Venezuela and removed the exchange

control regulations then in place. With the establishment of the free

convertibility of currency, we also determine that there are no

residual benefits from the REFE program. Thus, we determine that the

REFE program is terminated.

Interested Party Comment

Comments not already addressed in the ``Subsidies Valuation'' and

program sections above, are addressed separately below:

Comment: Issues regarding the equity methodology. Both petitioners

and respondent argue that the methodology the Department used in the

preliminary determination to calculate the benefit arising from equity

infusions into SIDOR incorrectly accounts for inflation. Petitioners'

position is that the Department should not have used variable short-

term interest rates as discount rates. Rather, they argue that the

Department should account for inflation by dollarizing (i.e.,

converting the grant amount into dollars and using a discount rate

denominated in dollars) for both the amounts of the subsidies and the

interest rates used to allocate them across time. They contend that, at

a minimum, the Department should dollarize the period 1987 to 1996.

Respondent argues that, contrary to prior practice, the Department

adjusted the benefit derived from the allocated principal for periods

which were not consistently hyperinflationary. They argue that

hyperinflation is defined as 50 percent inflation or higher, and that

therefore the Department's methodology should include inflation

adjustments only for the period 1994-1996. Second, they argue that, in

adjusting the interest benefit derived from the outstanding balance of

the equity infusion, the Department double-counted the effects of

inflation by combining the benchmark rate from the year of receipt of

the equity infusion and the inflation rate for 1996. Finally, they

contend that, in calculating the risk premium for an uncreditworthy

company, the Department used an incorrect basis in certain years which

overstated the risk premium. They propose that national average short-

term interest rates should be used to calculate the risk premium for

all years in which countervailable equity infusions were received.

Department's position: As outlined above, for this final

determination, we have altered our methodology for calculating the

benefit to SIDOR from GOV equity infusions. Some of the modifications

to the calculation methodology reflect our agreement with arguments

made by both respondent and petitioners. For example, we agree with

respondent that it is not appropriate to account for inflation over the

entire allocation period. Also, we accept petitioners argument that, to

capture the impact of inflation on the nominal benefit to SIDOR in the

years 1987 through 1996, it is appropriate to convert the subsidy

amounts into U.S. dollars. Additional changes, in particular the use of

short-term discount rates through 1986 and U.S. dollar discount rates

from 1987 through 1996, reflect our findings at verification and the

practices in Venezuelan financial markets.

During the period 1978 through 1986, the annual inflation rates in

Venezuela ranged from 7 to 21 percent. In 1987, however, the annual

inflation rate increased to 41 percent. Since then, it has not fallen

below 30 percent and has reached levels as high as 100 percent by 1996.

The period after 1986, therefore, can clearly be distinguished from the

prior years, because the latter period was marked by consistently high

and rising inflation.

According to respondent, inflation in Venezuela only reached

``hyperinflationary'' levels from 1994 to 1996, when the rates ranged

between 57 and 103 percent. Therefore, respondent argues that in

calculating the benefit from GOV equity infusions, inflation should be

taken into account only during the period 1994 through 1996. In support

of this, respondent cites certain steel products from Mexico, where the

Department found that Mexico was hyperinflationary from 1983 through

1988, when inflation ranged between 57 and 131 percent. See Final

Affirmative Countervailing Duty Determination: Certain Steel Products

From Mexico, 58 FR 37352, 37355 (July 9, 1993). We did not account for

inflation in that case when the rate was between 19 and 29 percent.

Accordingly, respondent implies that the methodology used in Steel From

Mexico stands for the proposition that the Department only takes into

account inflation during periods in which annual inflation is 50

percent or higher.

We disagree with respondent's interpretation of the approach used

in that case. In Steel From Mexico, we did not specify that an economy

must reach

[[Page 55024]]

a certain level of annual inflation before we will account for

inflation in the benefit calculation. Adopting a threshold would miss

the point of adjusting for inflation. Rather, in Steel From Mexico, our

concern was how to treat a period of high inflation that was in the

middle of the allocation stream and clearly anomalous with respect to

the periods before and after. As respondent noted, the inflation rate

in Mexico dropped from 114 percent in 1988 to 20 percent in 1989,

bringing to an end the period of anomalous rates. In contrast,

inflation in Venezuela has been consistently high from 1987 onwards,

reaching 81 percent in 1989, and topping 100 percent in 1996, the POI.

At no time after 1987 did inflation return to the lower levels

experienced during the period prior to 1986. Petitioners correctly note

that, during periods of consistently high inflation, as experienced by

Venezuela after 1986, the nominal value of a company's non-monetary

assets increases with inflation. Therefore, untied subsidies that are

allocated over time and which benefit a company's productive activities

also increase in real terms because of inflation. Adjusting for

inflation during anomalous periods of high inflation merely recognizes

this fact, and the adjustment takes into account the value, in real

terms, of the subsidy. With respect to this, the methodology used in

the Preliminary Determination to calculate the interest component of

the benefit, was incorrect. In particular, we incorrectly added the

rate of inflation to the discount rate. This approach treats inflation

as a benefit in each year. However, as explained above, inflation

increases the real value of non-monetary assets, such as machinery,

over time, and is not a benefit in each year. In any case, we have

modified our approach by converting the equity infusions into dollars

after 1986, so that an adjustment to the interest component is no

longer necessary.

As explained in the ``GOV Equity Infusions into SIDOR'' section

above, we determine that, for periods of high inflation in Venezuela

(i.e., 1987 through the POI) it is appropriate to convert non-recurring

subsidies into dollars. This approach is consistent with the

Department's past practice, in particular when no appropriate long-term

domestic discount rate exists for use in our grant calculation.

Further, as petitioners correctly note, this approach conforms with

SIDOR's actual business practices and commercial practices in

Venezuela. See Memo Re: Meetings with Commercial Bankers at 2.

Respondent argues that inflation was not a constant phenomenon in

Venezuela. For this reason, respondent claims that other cases in which

the Department adopted a dollarization methodology, such as Brazil

Steel, are not relevant because, in that case, inflation was

consistently above 350 percent. We disagree with respondent because,

once again, the issue is not whether annual inflation reaches a certain

threshold level in a country. Rather, as noted above, adjusting the

benefit for inflation merely accounts for the fact that, when inflation

is consistently high, the value of non-monetary assets increases, and

the value of the subsidy that benefits the non-monetary assets also

increases. By converting the subsidy into dollars at the beginning of a

high inflation period and later converting the benefit allocable to the

POI back into domestic currency at the exchange rate prevailing in the

POI, we are taking into account that increase in the real value of the

subsidy.

Respondent claims that the risk premium used by the Department for

the 1978 through 1986 period is overstated, and that the Department

should use the short-term interest rates, with a risk premium, to

calculate the benefit. Because we are now using the rate advocated by

respondent for the 1978 through 1986 period, the issue is now moot.

Suspension of Liquidation

In accordance with section 705(c)(1)(B) of the Act, we have

calculated a subsidy rate for SIDOR, the one company under

investigation. This subsidy rate is 23.69 percent ad valorem. This rate

would also be applicable to any companies not investigated or any new

companies exporting the subject merchandise.

We have concluded a suspension agreement with the Government of

Venezuela which eliminates the injurious effects of imports from

Venezuela (see, Notice of Suspension of Investigation: Steel Wire Rod

from Venezuela being published concurrently with this notice). As

indicated in the notice announcing the suspension agreement, pursuant

to section 704(h)(3) of the Act, we are directing the U.S. Customs

Service to continue suspension of liquidation. This suspension will

terminate 20 days after publication of the suspension agreement or, if

a review is requested pursuant to section 704(h)(1) of the Act, at the

completion of that review. Pursuant to section 704(f)(2)(B) of the Act,

however, we are not applying the final determination rate to entries of

subject merchandise from Venezuela; rather, we have adjusted the rate

to zero to reflect the effect of the agreement.

We will notify the International Trade Commission (ITC) of our

determination. In addition, we are making available to the ITC all non-

privileged and non-proprietary 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 Import Administration.

If the ITC's injury determination is negative, the suspension

agreement will have no force or effect, this investigation will be

terminated, and the Department will instruct the U.S. Customs Service

to refund or cancel all securities posted (see, section 704(f)(3)(A) of

the Act). If the ITC's injury determination is affirmative, the

Department will not issue a countervailing duty order as long as the

suspension agreement remains in force, and the Department will instruct

the U.S. Customs Service to refund or cancel all securities posted

(see, section 704(f)(3)(B) of the Act).

This notice is issued pursuant to section 704(g) of the Act.

Return or 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.

Dated: October 14, 1997.

Robert S. LaRussa,

Assistant Secretary for Import Administration.

[FR Doc. 97-27983 Filed 10-21-97; 8:45 am]

BILLING CODE 3510-DS-P