[Federal Register Volume 62, Number 204 (Wednesday, October 22, 1997)]
[Notices]
[Pages 55014-55024]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27983]


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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