Industrial Phosphoric Acid From Israel: Final Results of Countervailing Duty Administrative Review

DEPARTMENT OF COMMERCE

[C-508-605]

Industrial Phosphoric Acid From Israel: Final Results of

Countervailing Duty Administrative Review

AGENCY: Import Administration, International Trade Administration,

Department of Commerce.

ACTION: Notice of final results of countervailing duty administrative

review.

-----------------------------------------------------------------------

SUMMARY: On September 10, 1997, the Department of Commerce published in

the Federal Register its preliminary results of administrative review

of the countervailing duty order on industrial phosphoric acid from

Israel for the period January 1, 1995 through December 31, 1995 (62 FR

47645). The Department of Commerce has now completed this

administrative review in accordance with section 751(a) of the Tariff

Act of 1930, as amended. For information on the net subsidy for each

reviewed company, and for all non-reviewed companies, please see the

Final Results of Review section of this notice. We will instruct the

U.S. Customs Service to assess countervailing duties as detailed in the

Final Results of Review section of this notice.

EFFECTIVE DATE: March 20, 1998.

FOR FURTHER INFORMATION CONTACT: Christopher Cassel or Lorenza Olivas,

Office of CVD/AD Enforcement VI, Import Administration, International

Trade Administration, U.S. International Trade Administration, U.S.

Department of Commerce, 14th Street and Constitution Avenue, N.W.,

Washington, D.C. 20230; telephone: (202) 482-2786.

SUPPLEMENTARY INFORMATION:

Background

Pursuant to 19 CFR 355.22(a), this review covers only those

producers or exporters of the subject merchandise for which a review

was specifically requested. Accordingly, this review covers Rotem-

Amfert Negev Ltd. (Rotem). This review also covers the period January

1, 1995 through December 31, 1995.

Since the publication of the preliminary results on September 10,

1997, (Preliminary Results), the following events have occurred.

Pursuant to section 751(a)(3) of the Tariff Act of 1930, as amended, we

extended the final results to no later than March 9, 1998. See

Industrial Phosphoric Acid From Israel; Extension of Time Limit for

Countervailing Duty Administrative Review, 63 FR 1441 (January 9,

1998). On October 10, 1997, a case brief was submitted by the

Government of Israel (GOI) and Rotem, producer/exporter of industrial

phosphoric acid (IPA) to the United States during the review period

(respondents). On October 17, 1997, a rebuttal brief was submitted by

counsel for the FMC Corporation and Albright & Wilson Americas Inc.

(petitioners). On January 26, 1998, we provided petitioners and

respondents the opportunity to address the grant calculation

methodology followed in the Final Affirmative Countervailing Duty

Determination: Steel Wire Rod from Venezuela, 62 FR 55014 (October 22,

1997) (Wire Rod from Venezuela). That methodology has direct relevance

in this proceeding and the final determination in that case was

published after the preliminary results in this proceeding were

completed. Accordingly, on February 3, 1998, comments were submitted by

respondents and petitioners. On February 6, 1996, rebuttal comments

were submitted by respondents and petitioners.

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 (URAA) effective January 1, 1995 (the

Act). The Department of Commerce (the Department) is conducting this

administrative review in accordance with section 751(a) of the Act.

Scope of the Review

Imports covered by this review are shipments of industrial

phosphoric acid (IPA) from Israel. Such merchandise is classifiable

under item number 2809.20.00 of the Harmonized Tariff

[[Page 13627]]

Schedule (HTS). The HTS item number is provided for convenience and

U.S. Customs Service purposes. The written description of the scope

remains dispositive.

Verification

As provided in section 782(i) of the Act, we verified information

submitted by the GOI and Rotem. We followed standard verification

procedures, including meeting with government and company officials,

and examining relevant accounting and financial records and other

original source documents. Our verification results are outlined 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 Review

The period for which we are measuring subsidies (the POR) is

calendar year 1995.

Allocation Period

In British Steel plc. v. United States, 879 F.Supp. 1254, 1289

(February 9, 1995) (British Steel I), the U.S. Court of International

Trade (the Court) ruled against the allocation methodology for non-

recurring subsidies that the Department had employed for the past

decade, which was articulated in the General Issues Appendix, appended

to the Final Countervailing Duty Determination; Certain Steel Products

from Austria, 58 FR 37225 (July 9, 1993) (GIA). In accordance with the

Court's remand order, the Department determined that the most

reasonable method of deriving the allocation period for nonrecurring

subsidies is a company-specific 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) (British Steel II). Accordingly, the Department has applied this

method to those non-recurring subsidies that have not yet been

countervailed.

For non-recurring subsidies received prior to the POR and which

have already been countervailed based on an allocation period

established in an earlier segment of the proceeding, it is not

reasonable or practicable to reallocate those subsidies over a

different period of time. Therefore, for purposes of these final

results, the Department is using the original allocation period

assigned to each nonrecurring subsidy received prior to the POR. This

conforms with our approach in Certain Carbon Steel Products from

Sweden; Final Results of Countervailing Duty Administrative Review, 62

FR 16549 (April 7, 1997). For additional discussion of this issue, see

Department's Position on ``Comment 6: Grants Previously Allocated

According to the U.S. IRS Depreciation Schedules, Should be Allocated

Over Rotem's Actual AUL'', below.

For non-recurring subsidies received during the POR, Rotem

submitted an AUL calculation based on depreciation and asset values of

productive assets reported in its financial statements. Rotem's AUL was

derived by adding depreciation charges for ten years, and dividing

these charges by the sum of average gross book value of depreciable

fixed assets for the related periods. We found this calculation to be

reasonable and consistent with our company-specific AUL objective.

Rotem's calculation resulted in an AUL of 24 years, and we have used

this calculated figure for the allocation period for non-recurring

subsidies which have not been previously allocated.

Privatization

(I) Background

Israeli Chemicals Limited (ICL), the parent company which owns 100

percent of Rotem's shares, was partially privatized in 1992, 1993 and

1994. In this administrative review, the GOI and Rotem reported that

additional shares of ICL were sold in 1995. We have previously

determined that the partial privatization of ICL represents a partial

privatization of each of the companies in which ICL holds an ownership

interest. See Final Results of Countervailing Duty Administrative

Reviews; Industrial Phosphoric Acid from Israel, 61 FR 53351, 53352

(October 11, 1996) (1994 Final Results).

In this review and prior reviews of this order, the Department has

found that Rotem and/or its predecessor, Negev Phosphates Ltd.,

received non-recurring countervailable subsidies prior to these partial

privatizations. Further, the Department has found that a portion of the

price paid by a private party for all or part of a government-owned

company represents partial repayment of prior subsidies. See GIA, 58 FR

at 37262. Therefore, in the 1992 and 1993 reviews, we calculated the

portion of the purchase price paid for ICL's shares that is

attributable to repayment of prior subsidies. In the 1994 review,

respondents reported that the GOI sold less than 0.5 percent of its

shares in ICL. Because this percentage of shares privatized was so

small, the percentage of subsidies potentially repaid through this

privatization could have no measurable impact on Rotem's overall net

subsidy rate. Therefore, we did not apply our repayment methodology to

the 1994 partial privatization. See 1994 Final Results, 61 FR at 53352.

However, we are applying this methodology to the 1995 partial

privatization of ICL during the POR because 24.9 percent of ICL's

shares were sold. This approach is consistent with our findings in the

GIA and Department precedent under the URAA. See e.g., GIA, 58 FR at

37259; Certain Hot-Rolled Lead and Bismuth Carbon Steel Products from

the United Kingdom; Final Results of Countervailing Duty Administrative

Review, 61 FR 58377 (November 14, 1996); and Final Affirmative

Countervailing Duty Determination: Certain Pasta From Italy, 61 FR

30288 (June 14, 1996).

(II) Modification of the Privatization Calculation Methodology

As noted above, in the 1992 and 1993 administrative reviews of this

order, we determined that the partial privatization of ICL, Rotem's

parent company, represented partial privatization of Rotem. Therefore,

in each of those reviews, we calculated the portion of the purchase

price paid for ICL's shares that was attributable to the repayment of

prior subsidies. Under this methodology, to determine the amount of

subsidies that are extinguished due to privatization, we calculate the

net present value (NPV) of the remaining allocable subsidies at the

time of privatization. For example, if the privatization took place in

1993, the NPV calculation for that transaction would be the remaining

benefit from all unamortized subsidies in 1993. However, in past cases

involving privatization or changes in ownership we recalculated the NPV

in subsequent review periods by including only the remaining benefit

from unamortized subsidies affecting that subsequent review period. For

example, if we calculated the NPV for a privatization that took place

in 1993, in the next administrative review, 1994, we would recalculate

the NPV using only those subsidies still allocable to 1994, i.e., the

remaining unamortized subsidies still benefitting the company in 1994.

We revisited that methodology in the 1995 countervailing duty

administrative review of lead and bismuth carbon steel products from

the United Kingdom. See Certain Hot-Rolled Lead and Bismuth Carbon

Steel Products from the United Kingdom; Final Results of Countervailing

Duty Administrative Review, 62 FR 53306 (October 14, 1997). In that

review, we determined that it is

[[Page 13628]]

not appropriate to modify the calculation of the NPV of the subsidies

existing at the time of sale. The change in ownership of a company is a

fixed event at a particular point in time. Thus, the percentage of

subsidies that may be extinguished due to privatization or reallocated

due to a change in ownership in a given year is also fixed at that same

point in time and does not change. Therefore, the pass-through

percentage will no longer be altered once it has initially been

determined in an investigation or administrative review. We have

modified the ICL privatization calculations in this administrative

review to reflect the change outlined above.

Analysis of Programs

Based upon the responses to our questionnaire, the results of

verification, and written comments from the interested parties, we

determine the following:

I. Programs Conferring Subsidies

A. Programs Previously Determined To Confer Subsidies

1. Encouragement of Capital Investments Law (ECIL) Grants. In the

preliminary results, we found that this program conferred

countervailable subsidies on the subject merchandise. Our review of the

record and our analysis of the comments submitted by the interested

parties, summarized below, has led us to modify our findings from the

preliminary results for this program. In particular, we followed the

methodology set forth in Wire Rod from Venezuela to calculate the

benefit from these non-recurring grants. Under this methodology, we

converted the grant amount into U.S. dollars on the date of receipt of

the grant. The benefit in the POR was then calculated using our

standard grant allocation methodology. For a detailed discussion of the

changes to the calculation methodology for this program, see the

Department's Position on ``Comment 9: Inflation Adjustment for Non-

Recurring Grants,'' below; see also the Calculation Memorandum to the

File, dated March 9, 1998 (public version on file in the Central

Records Unit of the Department of Commerce) (``Calculation Memo'').

Accordingly, the net subsidies for this program have changed and are as

follows:

------------------------------------------------------------------------

Rate

Manufacturer/exporter (percent)

------------------------------------------------------------------------

Rotem Amfert Negev......................................... 8.85

------------------------------------------------------------------------

2. Long-term Industrial Development Loans. In the preliminary

results, we found that this program conferred countervailable subsidies

on the subject merchandise. We did not receive any comments on this

program from the interested parties, and our review of the record has

not led us to change any findings or calculations. Accordingly, the net

subsidies for this program remain unchanged from the preliminary

results and are as follows:

------------------------------------------------------------------------

Rate

Manufacturer/exporter (percent)

------------------------------------------------------------------------

Rotem Amfert Negev......................................... 1 When we determine that a

benefit is ``tied'' to a product, there is an implicit assumption that

the benefit is intended to affect only that product. See Industrial

Nitrocellulose from France; Final Results of Countervailing Duty

Administrative Review, 52 FR 833 (January 9, 1987). In this case,

however, respondents have failed to provide any evidence on the record

demonstrating that ECIL grants 1, 3, 4, 7, and 15 were intended to

affect only the inputs that received the subsidy, and only the end

products that incorporated these inputs only during the POR. Rather,

ECIL subsidies are provided to inputs that are also incorporated into

other downstream products produced by the same integrated company.

Therefore, to the extent that ECIL grants are tied to phosphate rock

and green acid, they are also tied to the sales of all other

merchandise incorporating those inputs.

---------------------------------------------------------------------------

\1\ This position is also reflected in the Department's 1989

Proposed Rules, which define tied benefits as ``a benefit bestowed

specifically to promote the production of a particular product.''

Countervailing Duties: Notice of Proposed Rulemaking and Request for

Public Comments, 54 FR 23366, 23374 (May 31, 1989) (1989 Proposed

Rules).

---------------------------------------------------------------------------

It is also important to note that attribution is established at the

point the subsidy is bestowed, not the point at which it is used.

Otherwise, the subsidy is apportioned on a pro-rata basis in each

administrative review. Such a pro-rata apportionment contravenes our

policy of not examining the use of the subsidy to determine whether it

is countervailable. As stated in the GIA, ``nothing in the statute

directs the Department to consider the use to which subsidies are put

or their effect on the recipient's subsequent performance * * * nothing

in the statute conditions countervailability on the use or effect of a

subsidy. Rather, the statute requires the Department to countervail an

allocated share of the subsidies received by producers, regardless of

their effect.'' 58 FR at 37260; see also British Steel v. United

States, 879 F. Supp. 1254, 1298 (CIT 1995) (British Steel), appeals

docketed, Nos. 96-1401 to -06 (Fed. Cir. June 21, 1996); British Steel

Corp v. United States, 605 F. Supp. 286, 294-95 (1985) (``[I]t is

unnecessary to trace the use'' of funds), citing Michelin Tire Corp. v.

United States, 4 CIT 252, 255 (1982), vacated on agreed statement of

facts, 9 CIT 38 (1985). Such an interpretation is also supported by the

statute, as amended by the URAA. Specifically, Sec. 771(5)(C) of the

Act states that the Department ``is not required to consider the effect

of the subsidy in determining whether a subsidy exists.'' The SAA

further elaborates, noting that the ``definition of subsidy does not

require that Commerce consider or analyze the effect (including whether

there is any effect at all) of a government action on the price or

output of the class or kind of merchandise under investigation or

review.'' SAA at 256; H.R. Rep. No. 826, 103d Cong., 2d Sess., vol. 1

at 926 (1994) (SAA). As such, adoption of the attribution approach set

out in Pasta From Italy was reasonable because Rotem is also an

integrated producer, as are the pasta producers who own semolina

production facilities. In such cases, subsidies to inputs will be

attributed to the inputs and the downstream products that incorporate

the inputs.

Finally, we note that for subsidies ``tied'' to non-subject

merchandise, i.e., products that could not be inputs into IPA, such as

grants tied to fertilizers under Project 13, we did not include that

ECIL grant in calculating the subsidy rate. For the reasons set forth

above, for the purposes of these final results, the Department will

continue to allocate ECIL grants from Projects 1, 3, 4 and 7, and 15

over the sales of the inputs (phosphate rock and green acid) and the

downstream products made by Rotem during the POR (IPA, MKP, and

fertilizers).

Comment 4: ECIL Grants to Project 15

According to respondents, the input product produced by the Rotem

II facility, the plant that benefited from ECIL grant project 15, was

never intended as an input into IPA. Respondents claim that the

Department countervailed grants from project 15 on the basis of

statements by Rotem officials at verification that green acid from the

plant could chemically be used for IPA. According to respondents,

however, the relevant fact is that it is not economical to use this

green acid in the production of IPA. Therefore, respondents state, the

Department should find that grants to project 15 did not benefit IPA

during the POR.

Respondents further note that because the plant that benefited from

project 15 did not start operations until 1996, no benefit could

possibly have accrued to IPA in 1995 from these grants. This is

especially the case, since the grants to this facility were not

intended to be used in IPA production. Rather, the inputs were to be

directed to another product, not yet produced in 1995.

According to petitioners, respondents' argument that project 15

grants should not be countervailed because the facilities that

benefited from the grants were not in operation in 1995 is irrelevant.

Petitioners state that it is the potential use of the input that is

important, and not its actual use.

Department's Position. We disagree with respondents. Rotem II

produces green acid, which is an input into IPA as well as other

downstream products produced by Rotem. Respondents do not dispute that

green acid from Rotem II can be used in the production of all

downstream products, including the subject merchandise. In fact,

respondents confirmed that green acid from Rotem II could be

incorporated into IPA and Rotem's other end products. See Rotem VR.

Therefore, as explained in detail under in the Department's Position on

``Comment 3, ECIL Grants to Projects that Did Not Provide Inputs to IPA

During the POR,'' above, consistent with our policy concerning

corporate entities that produce both the inputs and the subject

merchandise, we appropriately attributed the grants provided to Rotem

II to the direct sales of green acid and all downstream products that

can be produced from green acid. Such an attribution approach is

consistent with the countervailing duty statute, and is in accordance

with the attribution approach followed in Pasta From Italy.

Respondents' argument that the Rotem II facility was not

operational in 1995 is also without merit. In light of our policy

concerning integrated producers, this fact is irrelevant. Under the

countervailing duty statute, the Department will find a countervailable

subsidy when a financial contribution has been provided and that

financial contribution has conferred a benefit upon the recipient.

While respondents may assert that green acid from Rotem II was directed

to another product not yet produced, there is no information on the

record of this proceeding indicating that green acid from Rotem II

cannot be an input into the production of IPA, or that the ECIL grants

to that facility are ``tied'' to the production of specific downstream

products. Therefore, we have appropriately attributed these grants to

Rotem's sales of green acid and to the sales of the company's

downstream products that incorporate green acid.

Comment 5: Rate of Inflation and Interest Rate To Be Used for ECIL

Grant Calculations for 1994 and 1995

Respondents contend that the interest rate used by the Department

to calculate the benefit during the POR from grants received in 1994

and 1995 under ECIL project 15 was incorrect. The interest rate in 1995

was calculated by adding the rate of inflation in 1994 to the real

interest on CPI-indexed bonds in 1995. According to respondents, the

rate of

[[Page 13632]]

inflation in 1995, not 1994 should have been added to that bond rate.

Respondents further argue that the Department selected an incorrect

inflation rate for 1995 from the Bank of Israel (BOI) Annual Report.

The Department has consistently used the average change in the rate of

inflation in its non-recurring grant benefit calculations. In 1995,

this figure was 10.0 percent. According to respondents, this is not the

actual rate of inflation during the year but the average change from

the prior year. The actual change during the period, respondents state,

was 8.1 percent, as noted in the BOI annual report.

Petitioners contend that the Department has consistently used the

average CPI change for the year in calculating the interest rate to be

used in the ECIL benefit calculations. Therefore, the Department should

not use a different CPI statistic in this administrative review, merely

because the new rate would be helpful to Rotem. Petitioners point out

that in 1994, the CPI change during the period was 14.5 percent, while

the average change was 12.3 percent. In that review, respondents did

not argue that the Department modify the CPI.

Department's Position. As explained in the Department's Position on

``Comment 9: Inflation Adjustment for Non-Recurring Grants,'' below, we

have modified the calculation methodology for ECIL grants. The new

approach does not require the use of NIS linked interest rates or the

Israeli CPI index. Therefore, this issue is now moot.

Comment 6: Grants Previously Allocated According to the U.S. IRS

Depreciation Schedules, Should Be Allocated Over Rotem's Actual AUL

Respondents argue that the Department correctly allocated non-

recurring grants received by Rotem over the company's average useful

life of assets (AUL) of 24 years. However, respondents note that the

Department erred in not applying that allocation period to all of

Rotem's non-recurring grants, including those received prior to the POR

and which had been previously allocated according to the U.S. Internal

Revenue Service depreciation schedules. According to respondents, the

benefit from these earlier grants is, therefore, overstated, and will

continue to be overstated if the allocation is not changed to reflect

Rotem's AUL. Respondents state this correction can be achieved by

taking the remaining balance in 1995 of previously allocated grants and

reallocating that amount over the number of years left in a 24-year

benefit stream that begins in the year the grant was received. This

approach avoids the possibility of over-countervailing or under-

countervailing the subsidy, because the entire benefit will be

countervailed over the 24 year period. Respondents further note that if

the Department found it reasonable to revise the ECIL grant

calculations prior to the POR with respect to the inflation adjustment,

it should also be reasonable and practicable to do so for the AUL

correction.

Petitioners contend that the CIT's decision in British Steel does

not require the Department to use a company-specific allocation period

for all subsidies. Rather, petitioners state that the Department

decided not to recalculate the AUL for subsidies received prior to the

POR because such a change could distort the allocation of the actual

benefits is fair and within the mandate of British Steel. Petitioners

further argue that nothing in British Steel or in any other decision

requires the Department to accept respondents' proposed method for

recalculating the allocation period for earlier grants. In fact,

petitioners note that the Department did not disturb previously

established allocation periods in administrative reviews of other

countervailing duty orders. See, e.g., Certain Carbon Cut-to-Length

Carbon Steel Plate from Sweden; Final Results of Countervailing Duty

Administrative Review, 62 FR 16551, 16552 (April 7, 1997), and Certain

Carbon Steel Products from Sweden; Final Results of Countervailing Duty

Administrative Review, 62 FR 16549, 16550 (April 7, 1997). Accordingly,

petitioners argue that the Department's allocation of prior subsidies

should remain unchanged.

Department's Position. Petitioners correctly note that in prior

cases we have not disturbed allocation periods established in prior

proceedings. This approach is reasonable and, as noted by petitioners,

is not in conflict with the CIT's decision in British Steel, which does

not require the Department to allocate non-recurring subsidies over a

company's AUL. Furthermore, maintaining established allocation periods

is both fair and practical, and modifying the allocation stream for

previously allocated subsidies can produce unfair results. For example,

it is conceivable that a company-specific AUL would yield a shorter

allocation period. In that case, it is possible that the subsidy may be

under-countervailed, in particular for subsidies that have reached the

point in the allocation stream beyond the total number of years in the

company-specific AUL. For these reasons, Rotem's 24-year company-

specific AUL will only be adopted for ECIL grants that have not been

previously allocated.

Comment 7: Grants Not Previously Considered in Subsidy Calculations

Should Be Allocated Over Rotem's Actual AUL

According to respondents, the Department has determined to

countervail certain grants in this administrative review that have not

been countervailed in prior reviews. Among these are grants received

prior to the POR. For these grants, respondents argue that the

Department should allocate these grants over Rotem's company-specific

AUL of 24 years, because these grants have not already been allocated

in past administrative reviews.

Department's Position. Grants from ECIL project 15, received in

1994, were not countervailed in the 1994 administrative review and

therefore have not previously been allocated. Therefore, we concur with

respondents that it is appropriate to allocate these grants over

Rotem's company-specific 24-year allocation period. However, we

disagree with respondents that there are ``numerous grants

countervailed this time that have not been countervailed in the past.''

In the 1994 administrative review, the Department countervailed grants

from projects that benefitted inputs that were not used in the

production of IPA during 1994. Moreover, in past administrative

reviews, ECIL grant projects to each of Rotem's phosphate rock and

green acid facilities had been countervailed. This includes grants to

the Arad and Zin mines, which Rotem claims in this review did not

benefit production of IPA. Accordingly, the allocation period for these

grants will not change in these final results.

Comment 8: The Denominator for Grants to Projects Not Tied Directly to

IPA

Respondents contend that the Department should not deviate from the

practice followed in the 1994 review of attributing grants not tied to

IPA over Rotem's total sales. This approach was modified in the

preliminary results of this review so that grants to Rotem's green acid

facilities were attributed to Rotem's total sales minus direct sales of

phosphate rock. (Grants tied to Rotem's phosphate rock facilities were

attributed to the company's total sales.) According to respondents,

this change is not justified by the Department's regulations.

Respondents state that the rationale for this change is found in

the tying provision of the 1997 Proposed Rules.

[[Page 13633]]

However, respondents note that these rules, while they provide

guidance, are not controlling in this review and are therefore not

applicable. Respondents further argue that this provision should only

be invoked for grants to an input that is essential to the production

of the downstream product. This is not the case with green acid, which,

while it has been an input into IPA, is not required for IPA

production.

Respondents further claim that under section 355.47 of the 1989

Proposed Rules, the Department is directed to attribute subsidies

either to total sales or to products to which the benefit is tied.

Therefore, if a grant is tied to several products, the Department will

allocate that grant over the sales of only those products. However,

respondents contend that where the subsidy is given to an input into

the subject merchandise, rather than directly to the subject

merchandise or several products including the merchandise under

investigation, the denominator should be the company's total sales.

Therefore, respondents argue that in the final results, the Department

should allocate all grants not tied directly to the subject merchandise

over Rotem's total sales.

Petitioners state that the Department is permitted to change its

methodologies and that the approach followed in this review is a

refinement of the methodology adopted in the 1994 proceeding. The

Department has determined that the approach with respect to ECIL

subsidies to Rotem's green acid facilities is a more precise

measurement of the benefit bestowed. According to petitioners, the

Department reasonably determined that because green acid is not an

input into phosphate rock, sales of phosphate rock cannot benefit from

a subsidy provided to Rotem's green acid facilities. Therefore,

petitioners argue, the Department's modification is a logical and

reasonable refinement of the new ``single-corporate-entity-input''

methodology.

Department's Position. Our determination that ECIL subsidies

provided to Rotem's green acid facilities are not attributable to

direct sales of phosphate rock is, as petitioners note, a logical

refinement of the attribution approach followed in the 1994

administrative review. During the course of this proceeding, we learned

that Rotem's total sales statistics include direct sales of phosphate

rock and direct sales of green acid. These are the principal inputs for

Rotem's end products. Under the approach first adopted in the 1994

final results of this order, we determined that subsidies to inputs are

appropriately attributable to the sales of the input and the sales of

downstream products that can incorporate that input. Therefore, we

excluded Rotem's direct sales of phosphate rock in calculating the

subsidy rate from ECIL grants for the green acid facilities. This is

logical given that phosphate rock is an input into green acid, but

green acid is only a downstream product of phosphate rock, and,

therefore, this approach accurately captures the universe of sales to

which the benefit applies. Subsidies to green acid production cannot

benefit the production of phosphate rock, and attributing such

subsidies to phosphate rock will understate the subsidy to green acid

and the end products that incorporate green acid.

Respondents' contention that the provision with respect to inputs

in the 1997 Proposed Rules should only be invoked for grants to an

input that is ``essential to the production of the downstream product''

is incorrect. The plain language of the proposed rules states that ``a

subsidy which is tied to the input product will be attributed to the

input and downstream products produced by that corporation.'' See 1997

Proposed Rules, Sec. 351.524(b)(5)(ii), 62 FR at 8855. Nothing in the

1997 proposed rules speaks of inputs that are ``essential to the

production of the downstream product.'' Nor do respondents provide any

justification for the rationale that subsidies tied to inputs that are

not ``essential to the production of the downstream product,'' be

attributed to a company's total production, including upstream

products. Rather, as the plain language of the proposed rules suggests,

such subsidies can only be attributed to production of the input and

the downstream products. Attributing such subsidies to upstream

products would, as noted above, understate the subsidy and attribute

the subsidy to products that did not benefit from the subsidy.

Respondents' reliance on the 1989 Proposed Rules for the

proposition that the Department is directed to attribute subsidies

either by total sales or by products to which the benefit is tied is

misguided. As a preliminary matter, we fail to see how this argument

reconciles with respondents' earlier claim that subsidies to Rotem's

green acid facilities provide competitive benefits only to green acid

and to downstream products, but only according to the exact proportion

that they were used to produce the downstream products. If this were

the case, respondents have failed to explain how these same subsidies

to green acid may also benefit a firm's total production, including

upstream production. Thus, respondents are incorrect on both accounts.

As outlined above, in order to make an apples-to-apples comparison, it

is imperative that both the numerator (the countervailable benefit) and

denominator (the universe of sales to which the benefit applies) used

in the Department's calculation of a subsidy reflect the same universe

of goods. Accordingly, this approach will remain unchanged in these

final results.

Comment 9: Inflation Adjustment for Non-Recurring Grants

Respondents argue that the inflation adjustment used by the

Department in the preliminary results to calculate the benefit from

non-recurring ECIL grants significantly overstates the benefit from

these grants. According to respondents, the Department should

``dollarize'' the grants, which would have the same effect as indexing

the grants for inflation. This approach would comport with Rotem's

actual business practices because most of the company's financing is in

U.S. dollars, and the company's financial statements are expressed in

U.S. dollars. Respondents further claim that converting the grant

amount into dollars would be consistent with the approach followed in

Wire Rod from Venezuela. Respondents suggest that the Department use

Rotem's long-term cost of U.S. dollar-denominated borrowing in 1995 to

calculate the benefit from the ECIL grants converted into dollars.

Respondents state that if the Department chooses not to dollarize,

then it should index the principal grant amounts and use a real

interest rate in the benefit calculation. In the preliminary results,

respondents argue, the Department incorrectly used a nominal interest

rate. This approach double counts inflation, once by adjusting the

principal by the inflation index, and again by accounting for inflation

in the calculation of the interest component of the benefit. Short of

making either of these adjustments, respondents contend the Department

should return to the original methodology followed in the 1994

administrative review.

According to petitioners, the Department correctly followed the

methodology adopted for the preliminary determination in Wire Rod from

Venezuela. Petitioners also reject respondents' argument that because

inflation was not as high as in Venezuela, the Department should return

to its original methodology to account for inflation if it does not

accept respondents' proposed methodology. Petitioners note that

respondents' own analysis identifies Israel as a high

[[Page 13634]]

inflation country. Moreover, petitioners point out that Israeli

companies have adjusted their financial statements throughout the

allocation period.

With respect to the methodology adopted in Wire Rod from Venezuela,

petitioners state that dollarization can be used in this case if the

Department applies exchange rates and interest rates that correctly

account for inflation. Accordingly, petitioners argue that the

Department should use a long-term, dollar-denominated interest rate as

a discount rate in the grant calculations. In particular, if the

Department is unable to locate a long-term fixed rate dollar-

denominated rate in Israel, petitioners contend that it is appropriate

to use the average long-term variable rate in dollars available to ICL,

Rotem's parent company, from private lenders during the POR. A long-

term rate, petitioners claim, reflects the economic benefit that Rotem

received from the subsidies. Petitioners reject respondents' argument

that the Department should use Rotem's long-term cost of borrowing

during the POR, because at least some of those loans are financed by

ICL and may, therefore, reflect below market interest rates.

Department's Position. We have modified the calculation methodology

for ECIL grants to conform with the approach followed in the final

determination of Wire Rod from Venezuela. This approach aligns with

respondents' proposed methodology to dollarize the grants at the time

they were received.

With respect to the discount rate to be applied to the grants, we

agree with petitioners that an interest rate reflecting the long-term,

U.S. dollar-denominated cost of borrowing to Israeli firms is most

appropriate. However, we have been unable to find such rates. While

Rotem's 1995 financial statements show the company's long-term cost of

borrowing in U.S. dollars, we are unable to segregate long-term

interest charged by Rotem's parent company, ICL, from the long-term

interest rate charged by financial institutions. As such, we have

turned to ICL's long-term cost of borrowing denominated in U.S. dollars

in each year from 1985 through 1995 as the most appropriate discount

rate. ICL's rates are shown in the notes to the company's financial

statements, which are public documents that have been placed on the

record of this proceeding. See ``Calculation Memorandum.'' For 1983 and

1984, we used the interest rate on short-term euro-dollar financing

because we were unable to locate an appropriate long-term dollar-

denominated interest rate for those years. See ``Calculation

Memorandum.'' In converting the ECIL grants into dollars, we used the

shekel/U.S. dollar exchange rates prevailing on the day the grants were

received by Rotem. This information is available from the Bank of

Israel. See the ``Calculation Memorandum'' for additional discussion of

this issue.

Comment 10: Timing of Inflation Adjustments for Non-Recurring Subsidies

According to respondents, in the preliminary results, the

Department incorrectly adjusted the ECIL subsidies to take into account

inflation for all grants dating back to 1986, the beginning of the

relevant period. Respondents argue that it is ``not appropriate to

adjust those grants that have already been adjusted by virtue of the

inflated interest, since adjusting both interest and principal for

inflation leads to a total subsidy greater than actually received.''

Therefore, respondents claim that the inflation adjustment should begin

in 1995, as ``inflation has already been captured in the interest rate

formula used for the grants prior to that year,'' and adjusting those

grants now double counts the effects of inflation.

Petitioners contend that dollarization should apply only to the

period marked by high inflation in Israel, i.e., between 1983 and 1986,

when inflation exceeded 30 percent. Petitioners state that this

conforms with the approach taken in Wire Rod from Venezuela. Starting

in 1987, petitioners argue, the remaining principal of the grants

should be reconverted into shekels and interest on the remaining amount

should be calculated using the rate of return on CPI-indexed commercial

bonds. Petitioners reject respondents' argument that adjusting the

principal of the grants received prior to 1995 would double count the

effect of inflation. According to petitioners, in previous years the

Department countervailed only the portion of the grants allocated to a

particular POR, while no allocation has been made for the portion that

will be countervailed in this review.

Department's Position. Respondents' argument that inflation has

already been captured for the grants in years prior to 1995 is

incorrect. The purpose of adjusting non-recurring grants for inflation

is to capture the impact of inflation on the nominal grant amounts.

This 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, we are taking into account the real value of the

subsidy. To accurately capture that real value, we must adjust the

nominal value from the time that inflation has a measurable impact. In

this case, inflation was significant from the beginning of the

allocation stream, with annual inflation at over 100 percent. If the

adjustment is not made at the beginning of the allocation stream, in

particular during the high inflation period of 1983 through 1986, the

real value of the grant principal is eroded significantly. Therefore,

it is essential that the ECIL grants are dollarized from the beginning

of the allocation stream to preserve the real value of the grant and

the real benefit from those grants to Rotem. Further, Rotem converts

and maintains all of its financial records in U.S. dollars. Thus,

dollarization conforms with Rotem's own business practices. It is also

consistent with the approach followed in Wire Rod from Venezuela (62 FR

at 55014).

Respondents' claim that adjusting for inflation for years prior to

1995 overstates the countervailable benefit because the adjustment has

already been captured in prior reviews, is also without merit. As

explained above, the real benefit in 1995 will be significantly

understated if the adjustment is not made from the beginning of the

allocation stream. Further, the inflation adjustment used in prior

administrative reviews of this order 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. Therefore, if anything, the impact of inflation

was underestimated in prior reviews because inflation was only

accounted for in the interest component of the benefit, while the

principal amount remained in constant terms during the entire

allocation period. Furthermore, petitioners correctly note that no

allocation has yet been made for the portion that will be countervailed

in this review, and therefore, the 1995 benefit has not yet been

adjusted and is not overstated. For these reasons, we determine that

dollarization is the most appropriate approach to capture the impact of

inflation on ECIL grants received by Rotem. As noted above, we also

determine that the grants should be dollarized throughout the entire

allocation period.

Comment 11: Privatization of ICL

Respondents allege that the Department's privatization methodology

[[Page 13635]]

is flawed. First, respondents state that each partial privatization of

ICL between 1992 and 1995 was at fair value, and that the privatization

process was highly competitive. Therefore, the stock price of ICL at

the time of privatization reflected all publically available

information about the company, including the fair value of the

subsidies bestowed upon Rotem up to privatization. This means that

investors who form expectations about ICL's projected cash flows would

include the full benefits of the subsidies Rotem received. Accordingly,

respondents argue that because the privatization price reflected the

fair value of ICL, including the fair value of Rotem's subsidies, those

subsidies are fully repaid to GOI with the sale of the company.

Respondents further claim that while ICL was only partially privatized

(51.48 percent of the company has been sold), the private party that

purchased ICL has gained control over the company, including control

over Rotem's business decisions. Thus, the effect on the pricing of

Rotem's products is ``as if none of the subsidies awarded to Rotem

prior to the privatization remain countervailable after the

privatization.''

Petitioners dispute respondents' claim that market forces have

adjusted the selling price of ICL to reflect the full value of Rotem's

subsidies. Even if this were the case, petitioners state that in 1995,

only 24.9 percent of ICL's stock was sold, and therefore, only a

portion of the subsidies could have been reflected in the sale price.

Petitioners also dispute respondents' contention that the issue of

control is a relevant factor in the privatization analysis. Again, even

if control were germane, petitioners note that the GOI still enjoys

``special rights'' to make business decisions, including (1) sales of

company assets, (2) structural changes such as voluntary liquidation,

reorganizations, or mergers that would impair the GOI's special rights,

and (3) investments or holding in shares of subsidiaries. Moreover, the

GOI retains over 48 percent ownership in the ICL.

Department's Position. The issue of whether a fair market value

privatization eliminates previous subsidies has already been addressed

by the Department. Respondents in the certain steel investigations made

similar arguments, stating that, since the fair market price of a

government-owned company must include any remaining economic benefit

from the subsidies, privatization extinguishes all remaining

unamortized subsidies. At the time, we disputed this assertion because

it rests on the assumption that subsidies must confer a demonstrated

benefit on production in order to be countervailable. As we stated,

[T]his is contrary to the CVD law, in which is embedded the

irrebuttable presumption that nonrecurring subsidies benefit

merchandise produced by the recipient over time. In sum, the

countervailable subsidy (and the amount of the subsidy to be

allocated over time) is fixed at the time the government provides

the subsidy. The privatization of a government-owned company, per

se, does not and cannot eliminate this countervailability.

GIA, 58 FR at 37263. This conclusion is also permitted under the change

in ownership provision of the Act, as amended by the URAA. The SAA

specifically states that the Department retains ``the discretion to

determine whether, and to what extent, the privatization of a

government-owned firm eliminates any previously conferred

countervailable susidies.'' SAA at 258. This is the conclusion we

reached in a recent countervailing duty proceeding, where we noted that

the Act ``purposely leaves the Department with the discretion to

determine the impact of a change in ownership on the countervailability

of past subsidies.'' Certain Hot-Rolled Lead and Bismuth Carbon Steel

Products from the United Kingdom, 61 FR 58377, 58379 (November 14,

1996).

We also disagree with respondents contention that, while ICL was

only partially privatized, by virtue of the private party's control

over the company, all of Rotem's prior subsidies are extinguished. As a

preliminary matter, the Department has always applied it's

privatization methodology to changes in ownership which resulted in the

transfer of control from one party to another. See e.g., Final

Affirmative Countervailing Duty Determination; Certain Steel Products

From the United Kingdom, 58 FR 37393 (July 9, 1993) and Final

Affirmative Countervailing Duty Determination: Steel Wire Rod From

Trinidad and Tobago, 62 FR 55003 (October 22, 1997).

Furthermore, respondents claim that the transfer of control has an

effect on the pricing of Rotem's products, so that none of the

subsidies awarded to Rotem prior to the privatization remain

countervailable after the privatization, is also without merit. As we

noted in the GIA, the Department does not, and is not permitted to

undertake an analysis of the effect of subsidies. In particular, we

stated `` the Department does not take account of subsequent

developments that may reduce any initial cost savings or increase in

output from a subsidy.'' GIA, 58 FR at 37261; see also, SAA at 256.

Therefore, whether and to what extent the pricing of Rotem's products

changes as a result of ICL's partial privatization is irrelevant for

determining whether Rotem's previously bestowed subsidies remain

countervailable. In any case, the Department's determination that

previously bestowed subsidies may continue to benefit the privatized

company during an arm's length transaction, has been upheld by the

Court of Appeals of the Federal Circuit. See Saarstahl AG v. United

States, 78 F.3d 1539, 1544 (Fed. Cir. 1996). For these reasons, our

preliminary finding with respect to ICL's partial privatization will

remain unchanged in these final results.

Comment 12: The Privatization Methodology

According to respondents, the Department's gamma methodology is

flawed. In particular, respondents state that the gamma is incorrectly

based on the average ratio of annual subsidies to Rotem's net worth.

Therefore, the Department is considering the annual flow of subsidies

to Rotem. However, the net worth in a given year reflects the

accumulated value of Rotem's equity. According to respondents, this

results in an undervalued gamma ratio. Therefore, respondents contend

the gamma calculation should consider the stock of countervailable

subsidies at the time of the privatization. This would be done by

dividing the total bestowed subsidies accumulated up to the

privatization by Rotem's equity capital just prior to ICL's

privatization.

Respondents also contend that the Department's gamma percentage is

understated because the denominators used in the gamma calculation are

expressed in adjusted U.S. dollars while the numerators are nominal

Shekel values. According to respondents, because the denominators (the

net worth amounts) are expressed in adjusted U.S. dollars, they reflect

inflation, while the grant amounts, the numerators, are expressed in

nominal terms. Therefore, respondents suggest the Department use Rotem

nominal net worth amounts submitted in the case brief. Alternatively,

respondents assert that the Department should convert the ECIL grants

into dollars at the exchange rate on the day of receipt of the grants.

Petitioners argue that the Department's gamma calculation used

Rotem's audited financial statements, which are an accurate tool for

this calculation. Petitioners further state that Rotem should not be

permitted to submit new net worth figures, after the Department has

conducted verification.

[[Page 13636]]

Department's Position. The gamma calculation attempts to derive a

reasonable historic surrogate for the percent that subsidies constitute

of the company's net worth in the year prior to privatization.

Respondents' proposed modification of the gamma calculation is flawed

because it incorrectly compares the value of Rotem's accumulated

subsidies in the year before privatization to the company's net worth

in that year. Such a comparison overstates the value of the subsidies

in relationship to the company's net worth because it assumes that a

company's net worth increases in direct proportion to the value of the

subsidies received by that firm. However, this is not the case, as

those values are depreciating from year to year. Simply stated,

respondents comparison ignores the fact that the value of subsidies is

eroding over time, i.e., a subsidy received in 1986 does not have the

same relative value as a subsidy received in 1994. Therefore,

respondents' approach overvalues the subsidies and thus grossly

overstates the ratio of Rotem's subsidies to net worth in the year

prior to privatization.

Although we also disagree with respondents' argument that the gamma

percentage is understated because the denominator is expressed in

adjusted U.S. dollars and the numerator in nominal shekels, this issue

is now moot because we have dollarized the ECIL grants.

Final Results of Review

In accordance with 19 CFR 355.22(c)(4)(ii), we calculated an

individual subsidy rate for each producer/exporter subject to this

administrative review. For the period January 1, 1995 through December

31, 1995, we determine the net subsidy for Rotem to be 8.93 percent ad

valorem.

We will instruct the U.S. Customs Service (``Customs'') to assess

countervailing duties as indicated above. The Department will also

instruct Customs to collect cash deposits of estimated countervailing

duties in the percentages detailed above of the f.o.b. invoice price on

all shipments of the subject merchandise from reviewed companies,

entered, or withdrawn from warehouse, for consumption on or after the

date of publication of the final results of this review.

Because the URAA replaced the general rule in favor of a country-

wide rate with a general rule in favor of individual rates for

investigated and reviewed companies, the procedures for establishing

countervailing duty rates, including those for non-reviewed companies,

are now essentially the same as those in antidumping cases, except as

provided for in Sec. 777A(e)(2)(B) of the Act. The requested review

will normally cover only those companies specifically named. See 19 CFR

355.22(a). Pursuant to 19 CFR 355.22(g), for all companies for which a

review was not requested, duties must be assessed at the cash deposit

rate, and cash deposits must continue to be collected at the rate

previously ordered. As such, the countervailing duty cash deposit rate

applicable to a company can no longer change, except pursuant to a

request for a review of that company. See Federal-Mogul Corporation and

The Torrington Company v. United States, 822 F.Supp. 782 (CIT 1993) and

Floral Trade Council v. United States, 822 F.Supp. 766 (CIT 1993)

(interpreting 19 CFR 353.22(e), the antidumping regulation on automatic

assessment, which is identical to 19 CFR 355.22(g)). Therefore, the

cash deposit rates for all companies except those covered by this

review will be unchanged by the results of this review.

We will instruct Customs to continue to collect cash deposits for

non-reviewed companies at the most recent company-specific or country-

wide rate applicable to the company. Accordingly, the cash deposit

rates that will be applied to non-reviewed companies covered by this

order are those established in the most recently completed

administrative proceeding, conducted pursuant to the statutory

provisions that were in effect prior to the URAA amendments. See 61 FR

28841. These rates shall apply to all non-reviewed companies until a

review of a company assigned these rates is requested. In addition, for

the period January 1, 1995 through December 31, 1995, the assessment

rates applicable to all non-reviewed companies covered by this order

are the cash deposit rates in effect at the time of entry.

This notice serves as a reminder to parties subject to

administrative protective order (APO) of their responsibility

concerning the disposition of proprietary information disclosed under

APO in accordance with 19 CFR 355.34(d). Timely written notification of

return/destruction of APO materials or conversion to judicial

protective order is hereby requested. Failure to comply with the

regulations and the terms of an APO is a sanctionable violation.

This administrative review and notice are in accordance with

section 751(a)(1) of the Act (19 U.S.C. 1675(a)(1)).

Dated: March 9, 1998.

Robert S. LaRussa,

Assistant Secretary for Import Administration,

[FR Doc. 98-7352 Filed 3-19-98; 8:45 am]

BILLING CODE 3510-DS-P