68 FR 37125, June 23, 2003

DEPARTMENT OF COMMERCE

International Trade Administration
 
Notice of Final Modification of Agency Practice Under Section 123 
of the Uruguay Round Agreements Act

AGENCY: Import Administration, International Trade Administration, 
Department of Commerce.

ACTION: Modification of agency practice regarding privatizations.

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SUMMARY: On January 8, 2003, the Dispute Settlement Body (DSB) of the 
World Trade Organization (WTO) adopted the report of the WTO Appellate 
Body in United States-Countervailing Measures Concerning Certain 
Products from the European Communities, WT/DS212/AB/R (December 9, 
2002) (Certain Products), that recommends that the United States bring 
its administrative practice regarding privatization, both as such and 
as applied in twelve challenged administrative determinations, into 
conformity with its obligations under the WTO Subsidies and 
Countervailing Measures Agreement (Subsidies Agreement). Section 123 of 
the Uruguay Round Agreements Act (URAA) governs changes in the 
Department of Commerce's (Department's) practice when a dispute 
settlement panel or the Appellate Body of the World Trade Organization 
finds such practice to be inconsistent with any of the Uruguay Round 
agreements. Consistent with section 123(1)(g)(C), we published a 
proposed modification of the Department's privatization methodology, 
together with an explanation thereof, and provided opportunity for 
public comment. Notice of Proposed Modification of Agency Practice 
Under Section 123 of the Uruguay Round Agreements Act and Request for 
Public Comment, 68 FR 13897 (March 21, 2003). We received numerous 
affirmative and rebuttal comments submitted pursuant to this notice, as 
discussed below.

FOR FURTHER INFORMATION CONTACT: Greg Campbell, Office of Policy, 
Import Administration, U.S. Department of Commerce, Room 3712, 14th 
Street and Constitution Avenue, NW., Washington, DC 20230; telephone: 
(202) 482-2239.

SUPPLEMENTARY INFORMATION:

Applicable Statute

    Unless otherwise indicated, all citations to the statute are 
references to the Tariff Act of 1930, as amended (the Act). Citation to 
``section 123'' refers to section 123 of the URAA.

Background

    On February 2, 2000, the U.S. Court of Appeals for the Federal 
Circuit in Delverde Srl v. United States, 202 F.3d 1360, 1365 (Fed. 
Cir. 2000), reh'g granted in part (June 20, 2000) (Delverde III), 
rejected the Department's application of its change-in-ownership 
methodology, as explained in the General Issues Appendix, to the facts 
before it in that case.\1\ The Federal Circuit held that the Act, as 
amended, did not allow the Department to presume conclusively that the 
subsidies granted to the former owner of Delverde's corporate assets 
automatically ``passed through'' to Delverde following the sale. 
Rather, where a subsidized company has sold assets to another company, 
the Court held that the Act requires the Department to examine the 
particular facts and circumstances of the sale and determine whether 
the purchasing company directly or indirectly received both a financial 
contribution and benefit from the government. Delverde III, 202 F.3d at 
1364-1368.
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    \1\ Final Affirmative Countervailing Duty Determination: Certain 
Steel Products from Austria, 58 FR 37217, 37225 (July 9, 1993).
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    Pursuant to the Federal Circuit's finding, the Department developed 
a new change-in-ownership methodology, first announced in a remand 
determination on December 4, 2000, following the Federal Circuit's 
decision in Delverde III, and also applied in Grain-Oriented Electrical 
Steel from Italy; Final Results of Countervailing Duty Administrative 
Review, 66 FR 2885 (January 12, 2001). The first step under this 
methodology was to determine whether the legal person to which the 
subsidies were given was, in fact, distinct from the legal person that 
produced the subject merchandise exported to the United States. If we 
determined that the two persons were distinct, we then analyzed whether 
a subsidy was provided to the purchasing entity as a result of the 
change-in-ownership transaction. If we found, however, that the 
original subsidy recipient and the current producer/exporter were the 
same person, then that person continued to benefit from the original 
subsidies, and its exports were subject to countervailing duties to 
offset those subsidies.
    This ``same-person'' privatization methodology is currently the 
subject of appeals to the Federal Circuit in three cases: Acciai 
Speciali Terni S.p.A. v. United States, Ct. No. 01-00051; Allegheny 
Ludlum Corp. v. United States, Ct. Nos. 03-1189 and 03-1248; and GTS 
Industries, S.A. v. United States, Ct. Nos. 03-1175 and 03-1191.
    On August 8, 2001, the European Communities requested that the DSB 
establish a dispute settlement panel to examine the practice of the 
United States of imposing countervailing duties on certain products 
exported from the European Communities by privatized companies. A panel 
was established, the case was briefed and argued, and the Panel 
circulated its final report on July 31, 2002. United States-
Countervailing Measures Concerning Certain Products from the European 
Communities, WT/DS212/R (July 31, 2002) (Panel Report). The United 
States appealed certain findings and conclusions in the Panel Report, 
and the Appellate Body circulated its report on December 9, 2002. 
United States-Countervailing Measures Concerning Certain Products from 
the European Communities, WT/DS212/AB/R (December 9, 2002) (AB Report). 
The AB Report, and the Panel Report as modified by the AB Report, were 
adopted by the DSB on January 8, 2003. On January 27, 2003, the United 
States informed the DSB that it would implement the recommendations and 
rulings of the DSB in a manner consistent with its WTO obligations.
    Section 123 of the URAA is the applicable provision governing the 
actions of the Department when a WTO dispute settlement panel or the 
Appellate Body finds that a regulation or practice of the Department is 
inconsistent with any of the Uruguay Round agreements. Specifically, 
section 123(g)(1) provides that, ``[i]n any case in which a dispute 
settlement panel or the Appellate Body finds in its report that a 
regulation or practice of a department or agency of the United States 
is inconsistent with any of the Uruguay Round Agreements, that 
regulation or practice may not be amended, rescinded, or otherwise 
modified in the implementation of such report unless and until * * * 
(C) the head of the relevant department or agency has provided an 
opportunity for public

[[Page 37126]]

comment by publishing in the Federal Register the proposed modification 
and the explanation for the modification; * * *.'' Accordingly, 
consistent with section 123(1)(g)(C), we published a proposed 
modification of the Department's privatization methodology, together 
with an explanation thereof, and provided opportunity for public 
comment. Notice of Proposed Modification of Agency Practice Under 
Section 123 of the Uruguay Round Agreements Act and Request for Public 
Comment, 68 FR 13897 (March 21, 2003) (Proposed Modification). We 
received numerous affirmative and rebuttal comments submitted pursuant 
to this notice, as discussed below.

Legal Context

    To provide a context for the discussion of changes to our new 
privatization methodology, we first review the statutory provisions 
governing the Department's analysis of changes in ownership in the 
countervailing duty context, as explained in the Statement of 
Administrative Action (SAA) and interpreted by the Court. The statute 
provides, at section 771(5)(F), that ``[a] change in ownership of all 
or part of a foreign enterprise or the productive assets of a foreign 
enterprise does not by itself require a determination by the 
administering authority that a past countervailable subsidy received by 
the enterprise no longer continues to be countervailable, even if the 
change in ownership is accomplished through an arm's length 
transaction.'' The SAA explains that ``the term `arm's-length 
transaction' means a transaction negotiated between unrelated parties, 
each acting in its own interest, or between related parties such that 
the terms of the transaction are those that would exist if the 
transaction had been negotiated between unrelated parties.'' SAA, at 
258. The SAA further explains that

[s]ection 771(5)(F) is being added to clarify that the sale of a 
firm at arm's length does not automatically, and in all cases, 
extinguish any prior subsidies conferred. * * * The issue of the 
privatization of a state-owned firm can be extremely complex and 
multifaceted. While it is the Administration's intent that Commerce 
retain the discretion to determine whether, and to what extent, the 
privatization of a government-owned firm eliminates any previously 
conferred countervailable subsidies, Commerce must exercise this 
discretion carefully through its consideration of the facts of each 
case and its determination of the appropriate methodology to be 
applied.

Id.
    The Federal Circuit reviewed the statute's change-in-ownership 
provisions in Delverde III. In that decision, in striking down the 
Department's previous ``gamma'' privatization methodology on the basis 
that, inter alia, it was a per se rule, the Federal Circuit opined

    Had Commerce fully examined the facts, it might have found that 
[the respondent] paid full value for the assets and thus received no 
benefit from the prior owner's subsidies, or Commerce might have 
found that [the respondent] did not pay full value and thus did 
indirectly receive a `financial contribution' and a `benefit' from 
the government by purchasing its assets from a subsidized company 
`for less than adequate remuneration.' * * * Commerce might have 
reached the conclusion that [the respondent] indirectly received a 
subsidy by other means.

Delverde III, 202 F.3d at 1368.
    In light of the SAA and the Federal Circuit's findings, we believe 
the statute grants the Department flexibility and discretion in the 
countervailing duty context for analyzing changes in ownership, 
including privatizations.

WTO Findings and Recommendations

    We now turn to the findings of the Panel and Appellate Body. At the 
outset, the Panel clarified that its findings apply only to changes in 
ownership that involve privatizations in which the government retains 
no controlling interest in the privatized producer and transfers all or 
substantially all the property. Panel Report at para. 7.62; noted in AB 
Report at paras. 85 and 117, footnote 177. The Panel then stated that, 
``[w]hile Members may maintain a rebuttable presumption that the 
benefit from prior financial contributions (or subsidization) continues 
to accrue to the privatized producer, privatization at arm's length and 
for fair market value is sufficient to rebut such a presumption. Panel 
Report at para. 7.82, upheld at AB Report at para 126. This finding led 
the Panel to hold, inter alia, that the Department's same-person 
methodology is contrary to the requirements of the Subsidies Agreement.
    While the Appellate Body agreed with the Panel that the same-person 
methodology is contrary to the requirements of the Subsidies Agreement, 
it clarified that

[p]rivatization at arm's length and for fair market value may result 
in extinguishing the benefit. Indeed, we find that there is a 
rebuttable presumption that a benefit ceases to exist after such a 
privatization. Nevertheless, it does not necessarily do so. There is 
no inflexible rule requiring that investigating authorities, in 
future cases, automatically determine that a `benefit' derived from 
pre-privatization financial contributions expires following 
privatization at arm's length and for fair market value. (Emphasis 
in original)

AB Report at para. 127.
    The Appellate Body identified examples of circumstances where the 
conditions necessary for ``market prices'' to fairly and accurately 
reflect subsidy benefits are not present, or are ``severely affected'' 
by the government's economic and other policies

    Markets are mechanisms for exchange. Under certain conditions 
(e.g., unfettered interplay of supply and demand, broad-based access 
to information on equal terms, decentralization of economic power, 
an effective legal system guaranteeing the existence of private 
property and the enforcement of contracts), prices will reflect the 
relative scarcity of goods and services in the market. Hence, the 
actual exchange value of the continuing benefit of past non-
recurring financial contributions bestowed on the state-owned 
enterprise will be fairly reflected in the market price. However, 
such market conditions are not necessarily always present and they 
are often dependent on government action.
    Of course, every process of privatizing public-owned productive 
assets takes place within the concrete circumstances prevailing in 
the market in which the sale occurs. Consequently, the outcome of 
such a privatization process, namely the price that the market 
establishes for the state-owned enterprise, will reflect those 
circumstances. However, governments may choose to impose economic or 
other policies that, albeit respectful of the market's inherent 
functioning, are intended to induce certain results from the market. 
In such circumstances, the market's valuation of the state-owned 
property may ultimately be severely affected by those government 
policies, as well as by the conditions in which buyers will 
subsequently be allowed to enjoy property.
    The Panel's absolute rule of ``no benefit'' may be defensible in 
the context of transactions between two private parties taking place 
in reasonably competitive markets; however, it overlooks the ability 
of governments to obtain certain results from markets by shaping the 
circumstances and conditions in which markets operate. 
Privatizations involve complex and long-term investments in which 
the seller--namely the government--is not necessarily always a 
passive price taker and, consequently, the ``fair market price'' of 
a state-owned enterprise is not necessarily always unrelated to 
government action. In privatizations, governments have the ability, 
by designing economic and other policies, to influence the 
circumstances and the conditions of the sale so as to obtain a 
certain market valuation of the enterprise.

AB Report at paras. 122-124.
    Accordingly, the Appellate Body reversed the Panel's conclusion 
that once an importing Member has determined that a privatization has 
taken place at arm's length and for fair

[[Page 37127]]

market value, it must reach a conclusion that no benefit resulting from 
the prior financial contribution continues to accrue to the privatized 
producer. AB Report at para. 161(b). However, the Appellate Body 
nevertheless found the Department's same-person privatization 
methodology to be inconsistent with the WTO obligations of the United 
States because, under that methodology, where the entity that produced 
the subject merchandise was the very same entity that received the 
subsidy, the Department is precluded from finding that an arm's-length, 
fair market value privatization transaction extinguished the pre-
privatization subsidy benefit. Accordingly, the Appellate Body 
recommended that the DSB request the United States to bring its 
measures and administrative practice (i.e., the same-person 
methodology) into conformity with its obligations under the Subsidies 
Agreement. AB Report at para. 162.

Final Modification

    The Department's final modification of its practice regarding 
privatizations of state-owned enterprises in the countervailing duty 
context is basically the same as the proposed modification, but with 
some revisions that are discussed below in the Department's response to 
the comments. This new practice is fully consistent with the statute, 
which gives the Department broad discretion in analyzing changes in 
ownership.
    The methodology is based on certain rebuttable presumptions, 
reflecting the conclusions of the Panel and Appellate Body. The 
``baseline presumption'' is that non-recurring subsidies can benefit 
the recipient over a period of time (i.e., allocation period) normally 
corresponding to the average useful life of the recipient's assets. 
However, an interested party may rebut this baseline presumption by 
demonstrating that, during the allocation period, a privatization 
occurred in which the government sold its ownership of all or 
substantially all of a company or its assets, retaining no control of 
the company or its assets, and that the sale was an arm's-length 
transaction for fair market value.
    In considering whether the evidence presented demonstrates that the 
transaction was conducted at arm's length, we will be guided by the 
SAA's definition of an arm's-length transaction, noted above, as a 
transaction negotiated between unrelated parties, each acting in its 
own interest, or between related parties such that the terms of the 
transaction are those that would exist if the transaction had been 
negotiated between unrelated parties.
    In analyzing whether the transaction was for fair market value, the 
basic question is whether the full amount that the company or its 
assets (including the value of any subsidy benefits) were actually 
worth under the prevailing market conditions was paid, and paid through 
monetary or equivalent compensation.\2\ In making this determination, 
the Department will normally examine whether the government, in its 
capacity as seller, acted in a manner consistent with the normal sales 
practices of private, commercial sellers in that country. A primary 
consideration in this regard normally will be whether the government 
failed to maximize its return on what it sold, indicating that the 
purchaser paid less for the company or assets than it otherwise would 
have had the government acted in a manner consistent with the normal 
sales practices of private, commercial sellers in that country.\3\ 
Accordingly, in determining whether the evidence presented, including, 
inter alia, information on any comparable benchmark prices as well as 
information on the process through which the sale was made, 
demonstrates that the transaction price was fair market value, the 
following non-exhaustive list of factors might be considered.

    \2\ With regard to an analysis of the transaction price, we note 
that there is no statutory definition of fair market value, nor does 
the SAA give any guidance in this area.
    \3\ Under normal market conditions, the purchaser would have 
otherwise had to pay fair market value for the company or assets.

    (1) Objective analysis: Did the government perform or obtain an 
objective analysis in determining the appropriate sales price? Did 
it implement the recommendations of such objective analysis for 
maximizing its return on the sale, including in regard to the sales 
price recommended in the analysis?
    (2) Artificial barriers to entry: For example, did the 
government impose restrictions on foreign purchasers or purchasers 
from other industries, or overly burdensome or unreasonable bidder 
qualification requirements, or any other restrictions that 
artificially suppressed the demand for, or the purchase price of, 
the company?
    (3) Highest bid: For example, was the highest bid accepted and 
was the price paid in cash or close equivalent? Why or why not?
    (4) Committed investment: For example, were there price 
discounts or other inducements in exchange for promises of 
additional future investment that private, commercial sellers would 
not normally seek (e.g., retaining redundant workers or unwanted 
capacity)? Did the committed investment requirements serve as a 
barrier to entry, or in any way distort the value that bidders were 
willing to pay for what was being sold?
    If we determine that the evidence presented does not demonstrate 
that the privatization was at arm's length for fair market value, the 
baseline presumption will not be rebutted and we will find that the 
unamortized amount of any pre-sale subsidy benefit continues to be 
countervailable. Otherwise, if it is demonstrated that the 
privatization was at arm's length for fair market value, any pre-sale 
subsidies will be presumed to be extinguished in their entirety and, 
therefore, non-countervailable.
    A party can, however, obviate this presumption of extinguishment by 
demonstrating that, at the time of the privatization, the broader 
market conditions \4\ necessary for the transaction price to reflect 
fairly and accurately the subsidy benefit were not present, or were 
severely distorted by government action (or, where appropriate, 
inaction).\5\ In other words, even if we find that the sales price was 
at ``market value,'' parties can demonstrate that the broader market 
conditions were severely distorted by the government and that the 
transaction price was meaningfully different from what it would 
otherwise have been absent the distortive government action.
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    \4\ The term ``market conditions'' is used here in a broad 
sense, not only incorporating economic and financial considerations, 
but also the legal and regulatory regime in which the market 
operates.
    \5\ We would generally be concerned here only with the actions 
of government in its role ``as government,'' and not the actions of 
the government in its role as the seller. In other words, we would 
examine here only those actions which private sellers could not take 
even if they wished to do so.
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    Some factors, inter alia, that might be considered in determining 
whether these broader market distortions exist include:

    1. Basic Conditions: For example, are the basic requirements for 
a properly functioning market sufficiently present in the economy in 
general as well as in the particular industry or sector, including 
free interplay of supply and demand, broad-based and equal access to 
information, sufficient safeguards against collusive behavior, 
effective operation of the rule of law, and adequate enforcement of 
contracts and property rights?
    2. Legal and Fiscal Incentives: Has the government used the 
prerogatives of government in a special or targeted way that makes 
possible, or otherwise significantly distorts the terms of, a sale 
in a way that a private seller could not, e.g., through special tax 
or duty rates that make the sale more attractive to potential 
purchasers generally or to particular (e.g., domestic) purchasers, 
through regulatory exemptions particular to the privatization (or 
privatizations generally) affecting worker retention or 
environmental remediation, or through subsidization or support of 
other companies to an extent that severely distorts the normal 
market signals regarding company and asset values in the industry in 
question?


[[Page 37128]]


    Where a party demonstrates that these broader market conditions 
were severely distorted by government action and that the transaction 
price was meaningfully different from what it would otherwise have been 
absent the distortive government action, the baseline presumption will 
not be rebutted and the unamortized amount of any pre-sale subsidy 
benefit will continue to be countervailable. Where a party does not 
make such a demonstration with regard to an arm's-length sale for fair 
market value, we will find all pre-sale subsidies to be extinguished by 
the sale and, therefore, to be non-countervailable.

Analysis of Public Comments

    Numerous comments and rebuttal comments were submitted in response 
to the proposed modification. We have carefully considered each of the 
comments submitted. While we have not adopted or made revisions 
reflecting all of the comments, the comments were nevertheless useful 
in helping to clarify the concepts underlying our privatization 
analysis and in refining the proposed modification. As such, we are 
grateful to those who took the time to comment on this aspect of the 
Department's countervailing duty methodology. Specific comments are 
summarized below, along with the Department's position on each. For 
more detail on the comments submitted, see the Department's Web site at 
http://ia.ita.doc.gov, where all public comments received have been 
posted in their entirety.

1. Legality of New Methodology

    Some commenters argue that the Department's methodology is 
inconsistent with the statute, the SAA, and Delverde III because it 
would find the extinguishment of subsidies solely by virtue of an 
arm's-length sale for fair market value. Specifically, the commenters 
suggest that the methodology represents a per se rule that is in 
conflict with Section 771(5)(F) of the URAA, which states that ``a 
change in ownership * * * does not by itself require [extinguishment of 
previously countervailable subsidy benefits] * * * even if the change 
in ownership is accomplished through an arm's length transaction.''
    Other commenters counter that this argument was based on a 
misunderstanding of the statutory provision and of the methodology. 
Specifically, they state that the statute in no way questions the 
fundamental criterion of fair market value; the point of Section 
771(5)(F) is that a sale by a governmental seller, even if at arm's 
length, is not necessarily a sale for fair market value. Accordingly, 
examination of a privatization must consider evidence that the 
governmental seller did not seek, and in turn the purchaser did not 
pay, fair market value.
    Department's Position: We disagree that the Department's final 
modification is contrary to the statute. The statutory provision 
regarding changes in ownership makes clear that the Department is not 
required to find extinguishment of previously bestowed subsidies on the 
sole basis that a change in ownership occurred, or that it occurred in 
an arm's-length transaction. According to the SAA, this provision is 
meant to clarify that ``the sale of a firm at arm's-length does not 
automatically, and in all cases, extinguish any prior subsidies 
conferred. Absent this clarification, some might argue that all that 
would be required to eliminate any countervailing duty liability would 
be to sell subsidized productive assets to an unrelated party.'' 
(Emphasis added.) SAA, at 258. Under our new methodology, we will not 
treat an arm's-length privatization as an exclusively dispositive 
indicator of subsidy extinguishment, but will require other evidence 
indicating that the post-sale company no longer benefits from such 
subsidies. Specifically, in addition to analyzing whether the sale was 
between unrelated parties, we will examine any evidence presented on 
whether the sale was for fair market value and/or whether there were 
broader market distortions that would be relevant to a finding of 
subsidy extinguishment.

2. Burden of Proof

    Several commenters state that the burden of proof on the respondent 
under the new methodology is inconsistent with the requirements under 
U.S. law, and corresponding international agreements, permitting the 
imposition of countervailing duties. Specifically, they believe that 
this methodology unfairly and illegally shifts the burden of proof onto 
the respondent to demonstrate that there was a privatization at arm's 
length and for fair market value in order to rebut the presumption of a 
continuing benefit. Some commenters argue that the only burden that can 
properly be placed on the respondents is the burden of showing that 
there has been a privatization. Once this burden has been met, it is 
the petitioners' or the Department's responsibility to affirmatively 
demonstrate that the conditions exist to allow the subsidy benefit to 
continue after the privatization. One commenter suggests that once the 
petitioners have come forward with evidence to raise a genuine issue of 
current subsidization, the Department may then shift the burden to the 
respondent to counter with opposing evidence that the subsidy it 
received was extinguished.
    Department's Position: We disagree that the new methodology 
unfairly or illegally shifts the burden of proof onto any particular 
party. Our baseline presumption that subsidies may benefit the 
recipient over a number of years is entirely consistent with U.S. law. 
The Delverde III Court found the presumption to be contrary to U.S. law 
only to the extent that it was applied as a per se rule, i.e., a rule 
that precluded consideration of all of the facts and circumstances of 
the sale. Moreover, regardless of how one interprets the international 
agreements on this point, it is important to recognize that they are 
not automatically incorporated into U.S. law.\6\ WTO findings are also 
not automatically incorporated into U.S. law.\7\ In any event, the WTO 
findings here do, in fact, uphold the baseline presumption.\8\ The 
Panel and Appellate Body made it clear that it is not the mere fact of 
privatization that is sufficient to disturb the baseline presumption. 
Rather, it is the payment of fair market value in an arm's-length 
privatization that can extinguish the prior subsidies.\9\
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    \6\ 19 U.S.C. Sec.  3512(a)(1).
    \7\ See SAA at 363 (1032).
    \8\ See, e.g., AB Report at para. 84.
    \9\ As noted elsewhere, the starting point of the AB Report was 
the assumption that the privatizations in all 12 of the subject 
cases were arm's-length transactions for fair market value.
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    The implication at the heart of these commenters' arguments is that 
the occurrence of a privatization itself creates a presumption of 
subsidy extinguishment. This contention is without any support under 
U.S. law or even under the relevant WTO decisions. Neither the Federal 
Circuit nor the WTO has indicated that the baseline presumption ceases 
to apply simply because a privatization has occurred, regardless of its 
nature and terms, and that somehow it becomes the petitioners' or the 
Department's responsibility to demonstrate that such a privatization 
was not at arm's length for fair market value.\10\
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    \10\ For instance, the AB Report touches on the issue of burden 
in an administrative review when it states that `` * * * an 
investigating authority, in an administrative review, when presented 
with information directed at proving that a ``benefit'' no longer 
exists following a privatization, must determine whether the 
continued imposition of countervailing duties is warranted in the 
light of that information.'' (Emphasis added.) AB Report at para. 
144.
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    As a practical matter, we anticipate that, in most if not all of 
the privatizations we examine, one party or

[[Page 37129]]

another will raise the question of whether the sale was at arm's length 
and for fair market value. Also, in the normal course of an 
investigation or review, the Department will usually issue a 
questionnaire that solicits basic information about the privatization 
as well as the broader market conditions. As much of the necessary 
information to analyze such an issue will be in the possession of the 
respondent company and/or government, that company or government will 
necessarily bear the ``burden'' of providing the necessary information, 
as would be the case with most factual questions the Department must 
consider in the course of a countervailing duty investigation. To some 
extent, therefore, the question of who must raise the issue for it to 
be considered is of only limited practical importance.

3. Process Analysis and the Cost to Government

    Several commenters agree that an analysis of the privatization 
process is pertinent, if not central, to determining whether the sale 
was for fair market value. One commenter suggests that a price 
determined through a fair and open sales process is, by definition, the 
fair market value. Some commenters caution that merely because a fair 
and open process can result in fair market value, it does not 
necessarily follow that a process that is less than ideal cannot result 
in fair market value. In such less-than-ideal sales, all circumstances 
of the sale, including the objective analysis, must be considered.
    Other commenters argue that an emphasis on the process through 
which the government sold the company would represent an illegal cost-
to-government approach. The government's actions or motives in selling 
the company, they argue, are irrelevant to whether the purchaser 
received a benefit by paying less than fair market value (i.e., on 
terms more favorable than those in the market). They continue that any 
such examination of government motives is illegal--neither the statute 
nor the Subsidies Agreement instructs the Department to examine a 
government's motives in determining a subsidy. Moreover, some 
commenters argue, discerning the government's motives would be 
prohibitively difficult in practice.
    Likewise, the proposed ``private seller'' standard, several 
commenters contend, is illegal and impractical. One commenter argues 
that such a standard effectively and improperly collapses the financial 
contribution finding (i.e., what the government provides) with the 
benefit finding (i.e., what the recipient receives). Other commenters, 
however, strongly support such a process-oriented approach, noting that 
the government, as seller, makes all of the critical decisions 
regarding the sale and, therefore, the Department's analysis must 
remain focused upon the government.
    Department's Position: We disagree that our new methodology 
encompasses a cost-to-government standard, though we have revised the 
text to clarify any potential misunderstanding in this regard.
    For this final modification, we have concluded that a useful and 
appropriate standard for determining whether a transaction was for fair 
market value is to assess its consistency with the normal sales 
practices of private, commercial sellers in that country. Preferably, 
in making a fair-market-value determination, we will compare the price 
paid for the company or its assets to a contemporaneous, benchmark 
price actually observed in the marketplace for a comparable company or 
assets. Where clear information on such a comparable, market-benchmark 
value is available, we will normally consider it to be highly probative 
in our fair-market-value analysis (though we may still consider other 
information regarding factors, where available and appropriate).\11\ In 
our experience, however, such a clear market-benchmark price for a 
comparable sale rarely exists, and we will often have to resort to less 
conclusive benchmarks or alternative means for identifying a benefit.
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    \11\ We would not necessarily or automatically consider the 
predicted or hypothetical values cited in independent or objective 
analyses (referenced in our non-exhaustive list of factors) to 
constitute such a comparable market benchmark without further 
scrutiny of such analyses.
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    One useful alternative approach is to examine the process through 
which the sale was made. As with the direct comparison with comparable 
market benchmarks, the purpose of examining the ``process-oriented'' 
factors is to determine whether the buyer ultimately paid less for the 
company or its assets than the buyer otherwise would have had to pay in 
the marketplace. In lieu of a more concrete and directly comparable 
benchmark price, we would have to evaluate what the buyer actually paid 
by examining whether the conditions and circumstances of the sale 
reflect those that the buyer would have faced if the buyer were 
purchasing the company or its assets from a private, commercial seller 
in the marketplace. If the conditions and circumstances of the sale 
reflect those the buyer would otherwise have faced in the market, and 
absent more concrete evidence to the contrary, it is reasonable to 
determine that the price paid is what the buyer would otherwise have 
had to pay.
    While it is true that, under this approach, there is an emphasis on 
the government's actions, this does not necessarily make it a cost-to-
government standard. Rather, this emphasis merely reflects the reality 
that the seller is usually the party that determines the process and 
circumstances through which a company will be sold. In a privatization, 
the government happens to be the seller and, therefore, the one making 
those decisions.
    We have, however, revised the wording of our final modification to 
de-emphasize the importance of government motives or intent. We 
continue to believe that, in some cases, statements from the government 
about what it was attempting to achieve by structuring a sale in a 
particular way may provide useful insight into what actions the 
government actually took, and what impact those actions had on the 
purchase price. However, we are clarifying that any determination 
regarding fair market value will normally not be based primarily on the 
government's motives or intent, as those are generally difficult to 
establish precisely and, in any case, are not necessarily indicative of 
whether the transaction price was less than fair market value.
    We note that the approach we are taking in this new methodology is, 
in fact, similar in many fundamental respects to the Department's 
established equity infusion methodology. Consistent with the statute, 
we determine whether a benefit to the recipient has been conferred as 
the result of a government equity infusion by examining whether ``the 
investment decision is inconsistent with the usual investment practice 
of private investors, including the practice regarding the provision of 
risk capital, in the country in which the equity infusion is made.'' 
Section 771(5)(E)(I). Under section 351.507(a) of the Department's 
regulations, we will generally determine whether an equity infusion 
confers a benefit by reference to market prices for comparable shares.
    However, where such benchmark prices are not available, our equity 
benefit determination will depend on whether we find the infusion 
recipient to have been equityworthy. Equityworthiness will be 
determined with reference to ``the perspective of a reasonable private 
investor examining the firm at the time the government-provided equity 
infusion was made.'' Section 351.507(a)(4). In other words,

[[Page 37130]]

our benefit-to-recipient determination for equity infusions essentially 
is made by determining whether a private actor, when faced with the 
same investment circumstances and choices as those faced by the 
government, would have made the same decisions and taken the same 
actions as those of the government. Accordingly, the ``private, 
commercial seller'' standard that we have adopted for this final 
modification is consistent with our longstanding equity infusion 
practice.
    Finally, the relevance of the government's actions to whether 
subsidies are extinguished during a privatization was recognized by the 
Delverde III Court where it stated, for example, that ``[t]he 
government has different concerns from those of a private seller. 
Unlike a private seller who seeks the highest market price for its 
assets, the government may have other goals, such as employment, 
national defense, and political concerns, which may affect the terms of 
a privatization transaction.'' Delverde III, at 1369. Likewise, the 
relevance has been clearly acknowledged by the WTO and, in fact, is 
central to the Appellate Body's reasoning with regard to broader market 
distortions, as detailed elsewhere in this notice.\12\ Accordingly, the 
approach that we have adopted here is fully consistent with U.S. law 
and practice, as well as the WTO findings.
---------------------------------------------------------------------------

    \12\ See, e.g., AB Report at para. 124, where the Appellate Body 
noted that, ``[i]n privatizations, governments have the ability, by 
designing economic and other policies, to influence the 
circumstances and the conditions of the sale so as to obtain a 
certain market valuation of the enterprise.''
---------------------------------------------------------------------------

4. Arms-Length Analysis

    At least one commenter expresses a view that an arm's-length 
transaction is not, in and of itself, a criterion for determining that 
subsidy benefits are extinguished. Rather, the commenter suggests that 
the existence of an arm's-length privatization is strong evidence of--
and should create a presumption of--the payment of market value. The 
commenter notes that there are circumstances where the Department may 
find a transaction price to be fair market value even though the sale 
was not at arm's length. The commenter also suggests that where a 
private-to-private transaction is found to have occurred at arm's 
length, the sale was, by definition, for fair market value.
    Another commenter states that the Department should not apply an 
arm's-length sale analysis unless the parties to the transaction are 
truly unrelated. In particular, the commenter believes that 
reorganizations of the structure of joint ventures or similar business 
entities are not transactions to which this proposed modification 
should be applied.
    Department's Position: The Department's new methodology requires a 
finding of both an arm's-length transaction and a transaction price 
reflective of fair market value as the basis for overriding the 
baseline presumption. We note that this is entirely consistent with 
both the Panel's and Appellate Body's findings. Moreover, an arm's 
length sale is a necessary precondition for an accurate determination 
regarding the transaction price under the fair-market-value analysis we 
have adopted. Our private, commercial seller standard only makes sense 
where we first establish that the buyer's and seller's interests are 
independent of each other.

5. Fair-Market-Value Analysis

    In General: At least one commenter urges the Department first to 
consider more broadly and develop a rationale as to why a privatization 
may extinguish prior subsidies, stating that this rationale should then 
underpin every aspect of the privatization methodology. Specifically, 
the correct rationale, this commenter suggests, is that where fair 
market value has been paid, the company no longer has inputs acquired 
at a cost artificially reduced by a government financial contribution. 
Many other commenters recognize that fair market value can be difficult 
to assess in the circumstances of particular cases. However, in looking 
at the Department's proposed approach to evaluating fair market value, 
some commenters argue that the Department should not establish a rigid 
``hierarchy'' of factors to be examined in its analysis of fair market 
value, but rather remain flexible to address the diverse factual 
scenarios that may be encountered by the agency in the future.
    Others disagree, emphasizing that a sales price consistent with the 
recommendations of an independent or objective analysis should be the 
primary consideration in analyzing the sale. Some commenters propose 
further criteria that could be included in the evaluation process, 
e.g., industrial policies of a country and stock price trends following 
the offering. Other commenters find the Department's proposed factors 
to be too vague.
    Barriers to Entry: Specifically with regard to artificial barriers 
to entry, some commenters argue that significant restrictions on stock 
purchased by the general public are inconsistent with seeking maximum 
return on the sale. Accordingly, the Department should carefully 
scrutinize any restrictions on the holding period or minimum purchase 
quantity, and examine whether different classes of stock have been 
created or whether there are any other advantages bestowed on those 
buying such stock. Additionally, some commenters urge the Department to 
scrutinize particularly closely situations where a government seeks 
``strategic'' investors or where the parties to the transaction were 
already involved in a contract (e.g., a lease), and to find any process 
that has only one or two bidders as not being truly open.
    Other commenters state that, although entry barriers may be one 
relevant factor, they cautioned that a transaction should not be ruled 
to be not at fair market value solely because there were restrictions 
on the bidders. One commenter suggests that ``overly burdensome'' and 
``unreasonable'' bidder qualifications are too ambiguous and could 
result in unpredictable determinations. Another emphasizes that 
limitations on eligibility matters only if the pool of eligible 
participants is insufficient to create a market driven transaction and 
if the limitations are not based on economic considerations. Finally, 
an additional commenter urges the Department to abandon this factor 
altogether because it would be too difficult to quantify the effect of 
such barriers on bid prices.
    Objective Analysis: Regarding objective analyses, several 
commenters agree that a sale based on an objective analysis and which 
sets a minimum price based on that analysis should be presumed to be at 
fair market value if the sale is consummated near or above the minimum 
price. Thus, the combination of an independent valuation, a sale near 
or above the amount of the independent valuation, and the fact that the 
sale occurred in an economy not designated by the Department as a non-
market economy should create a presumption that the sale was at fair 
market value. Other commenters caution against such objective analyses, 
urging that any such analysis must be compared with comments by the 
financial press as well as the stock price following privatization. One 
commenter argues that the independence of the analysis should be 
closely scrutinized, and that the absence of an independent analysis 
should be a dispositive indicator that the sale was not for fair market 
value.
    Highest Bid: Regarding the selection of the highest bid, several 
commenters contend that the fact that a government seller does not 
accept the highest price bid does not, in and of itself, warrant the 
conclusion that fair market value was not paid. In such a case, the

[[Page 37131]]

Department should not immediately determine that the price was not fair 
market value, but instead should inquire as to why the highest bid was 
rejected and whether those reasons were commercially sound. Several 
commenters contend that there are many situations where a private 
commercial seller may choose as the winning bid an offer with a lower 
cash component, but with a higher value of bonds or other securities. 
Another commenter suggests the use of the ``best-value'' approach, 
which looks not only at price but a the technical component of the 
transaction as well.
    Other commenters, however, argue that whether the highest bid was 
selected is an appropriate consideration, and suggested additional 
scenarios (e.g., where the government finances the transaction) in 
which the payment may not be considered ``cash equivalent.''
    Similarly, several commenters object to ``profit maximization'' as 
a necessary condition for determining that the government's actions 
were consistent with that of a private, commercial seller. One 
commenter believes that a focus on profit maximization is contrary to 
WTO obligations and United States law. Many argue that merely because a 
government ``repackaged'' the company's assets differently, thus 
resulting in a lower cash price, this does not mean that the purchaser 
paid less than fair market value for what it received.
    Committed Investment: As to committed investment, several 
commenters state that the fair market value of the privatized company 
should be determined in light of the overall bundle of property, rights 
and obligations involved in the privatization. So long as any 
limitations or conditions are known prior to the sale, they argue, 
those conditions become part of the bargained-for exchange between the 
parties and are factored into the fair market value of the 
privatization transaction. Accordingly, these commenters state, the 
presence of such conditions or promises of future investments are not 
per se evidence that the sale was not for fair market value.
    Several commenters note that even private sellers of companies may 
place conditions on a sale that go beyond a mere listing of assets to 
be sold. For example, these conditions may govern the timing or form of 
payment, or may involve pre-existing obligations to workers. Moreover, 
some commenters explained that in many cases, the government-imposed 
conditions or required investments do not even necessarily affect the 
sales price, particularly if the requirements are actions the purchaser 
would have taken anyway. Furthermore, one commenter recalls, the 
purpose of the countervailing duty law is not to correct market 
distortions caused by previously bestowed subsidies but, simply, is to 
provide remedial relief to offset subsidies. Accordingly, these 
commenters urge the Department to eliminate this factor from the items 
to be examined in the determination of fair market value.
    Another commenter urges the Department to retain the emphasis from 
its proposed modification on whether a benefit is actually conferred 
through committed investments. Specifically, unless there is both a 
required committed investment and a clearly demonstrable effect of that 
requirement on the price of the sale, the Department should find, 
ceteris paribus, the sale to be for fair market value.
    In response, other commenters contend that where the agency is 
confronted with behavior such as the government's imposition of 
conditions on a sale, it should find such actions inconsistent with 
those of a commercial seller. Furthermore, they urge the Department to 
recognize that by seeking such commitments from the purchaser, the 
government is accepting less than full market value for the company. 
One commenter, although agreeing generally with the inclusion of this 
factor, suggests that it should not be necessary to identify explicit 
price discounts or other inducements in order to establish that the 
committed investment was not a normal commercial selling practice.
    Additional Factors: Some commenters propose that the Department add 
to its fair-market-value analysis an examination, where appropriate, of 
the trends in stock prices of a company following its privatization. 
Specifically, the commenter suggests that a sudden run-up in post-sale 
prices due to ``flipping'' of the stock by the initial purchasers on or 
soon after the sales date strongly suggests that the sales price was 
less than fair market value. Other commenters disagree that such post 
hoc analysis of secondary prices is appropriate. Other commenters 
suggest additional criteria to consider, such as the original cost less 
depreciation of the assets, contemporaneous similar sales, and the 
presence of government industrial policies in that sector.
    Department's Position: We have carefully considered the many 
comments we received on the proposed fair-market-value analysis, and 
have decided to retain the same basic approach articulated in our 
proposed modification. We agree with those commenters who argue that no 
hierarchy should be established among the factors, and that the list of 
factors should not be considered exhaustive. We will generally not 
consider any one factor in itself to be dispositive, but will consider 
all the relevant facts and circumstances of a privatization to 
determine whether the sales price was a fair market value.\13\ For this 
reason, we disagree with other commenters' concern that the analysis is 
``too vague.'' Our fair-market-value analysis must be sufficiently 
flexible to address the diverse factual scenarios that may be 
encountered in the future.
---------------------------------------------------------------------------

    \13\ As explained below, we will normally consider the absence 
of an objective analysis to be highly probative in determining that 
the transaction was not a fair market value.
---------------------------------------------------------------------------

    With regard to barriers to entry, as we noted in the proposed 
modification, the fundamental consideration here is not necessarily the 
number of bidders, but rather whether the market is contestable, i.e., 
anyone who wants to buy the company or its assets has a fair and open 
opportunity to do so. We therefore do not believe that it would be 
useful to adopt a rigid rule with regard to how large the pool of 
bidders must be, or what would necessarily constitute ``overly 
burdensome'' or ``unreasonable'' bidder qualifications. Obviously, such 
considerations are case-specific, and we will judge them in the broader 
context of the overall privatization process and the relevant market. 
That said, we take note of the particular types of restrictions that 
some commenters argue are strongly indicative of a less-than-fair-
market-value sales process, and agree that many of these would 
constitute sufficient cause for a more probing study. For example, we 
intend to scrutinize particularly closely any privatization where there 
is only one final bidder (or a few ), particularly in those industries 
or economies where a relatively large pool of bidders for such a 
privatization would normally be expected.
    With regard to an objective or independent analysis, we disagree 
that a sales price at or above the value cited in such an analysis is 
necessarily a dispositive indicator that the sale was for fair market 
value, other aspects of the sales process notwithstanding. We do not 
believe that private, commercial sellers normally follow or adopt such 
analyses blindly without a fuller understanding of, inter alia, the 
assumptions and scope of the analyses and the broader context of other 
market indicators and industry studies.
    However, we do believe that the absence of such an analysis, in 
circumstances where private, commercial sellers would normally

[[Page 37132]]

require such information, would be a very important consideration in 
our examination of the sales process. Accordingly, when examining fair 
market value, we will normally require from the respondents the 
information and analysis upon which the government relied in 
determining how, and for what price, to sell the company or its assets. 
Such analysis must be objective, timely (i.e., completed prior to 
agreement on the final transaction price), and complete (i.e.,contain 
the information typically considered by private, commercial sellers 
contemplating such a sale). The absence of such information and 
analysis would normally be highly probative (though not necessarily 
dispositive) in determining that the transaction was not for fair 
market value.
    We wish to clarify, however, that though such objective analysis 
can serve as one useful benchmark for the sales price and can provide 
useful information about whether the process the government pursued was 
consistent with that of a private, commercial seller, we must exercise 
caution in how we use such an analysis given that it is often 
speculative and subjective in nature. The Department has experience in 
considering similar types of independent studies and objective analyses 
in the related context of government equity infusions, and we intend to 
follow a similar approach here, to the extent appropriate. We discussed 
this issue at length in the preamble to our equity infusion 
regulations, wherein we stated,

    We will closely examine such studies. In order to be considered 
in our equityworthiness analysis, any study must have been prepared 
prior to the government's approval of the infusion and must be 
sufficiently objective and comprehensive. We intend to review such 
studies carefully to determine whether the government acted like a 
reasonable private investor, subjecting both the assumptions and the 
analysis to scrutiny. This will enable us to decide whether the 
decision to invest was commercially sound given the information at 
the disposal of the government.
    Some independent studies commissioned to analyze the merits of a 
given investment may present an assessment of the company's expected 
returns and risks that is predicated on certain future actions by 
the company in question. For instance, a study might conclude that 
the investment in a company planning to close one outmoded plant and 
construct a new one in a different location is commercially viable 
so long as the company also reduces its workforce by half. In this 
case, the Department would take into consideration whether the 
downsizing will actually occur. If the company has known for a long 
time that a reduction in its workforce was a necessary condition for 
improved financial performance, but has consistently shown itself 
unwilling or incapable of making that reduction, this may prove 
sufficient cause to believe that the projected return is 
unattainable.
    Some commenters cautioned the Department about relying too 
heavily on independent studies given their inherently speculative 
and subjective nature. We are well aware of the potential 
difficulties in using independent analyses, not least of which is 
the fact that independent experts often fundamentally disagree about 
the prospects of a given investment. In other instances, the 
objectivity of some studies is called into question. However, 
private investors are likewise usually faced with a similar variety 
of competing views and must exercise their own judgement with 
respect to the objectivity of information before them. When 
considering the suitability of a submitted study, we will seek to 
ensure the study is accurate and reliable, and exercise our own 
judgement with respect to a study's objectivity. Specifically, we 
will take into consideration the extent to which the study's 
premises and conclusions differ from those of other independent 
studies, accepted financial analysis principles, or market sentiment 
in general (e.g., industry-specific business publications or general 
industry market studies).

Preamble to the CVD Regulations, 63 FR 65348, 65372 (November 25, 
1998).
    With regard to the acceptance of the highest bid, we disagree that 
this is not an important factor when considering whether the sale was 
for fair market value. This factor goes hand-in-hand with our ``primary 
consideration'' of whether the government maximized its return on what 
it sold, and is an important consideration in whether the government 
acted like a private, commercial seller. We recognize that there may be 
situations where a private, commercial seller will accept something 
other than cash or close equivalent as payment in a sale, but we 
believe those circumstances are exceptional and not the norm. We will, 
however, examine any information a party presents in demonstrating that 
the government's acceptance of non-cash or close-equivalent payment is 
consistent with private, commercial selling practice in the relevant 
market (e.g., that country and/or industry).
    We clarify that the phrase ``cash or close equivalent'' is intended 
to include normal types of payment that may take the form of a variety 
of financial instruments other than cash (e.g., other shares or bonds). 
To the extent that these or similar forms of payment are used in 
transactions between private, commercial parties, there is generally no 
problem. What we would primarily be concerned with are forms of payment 
to which the government ascribes a value that is different from the 
monetary value that a private, commercial seller would ascribe to the 
payment. Examples of this might include illiquid forms of payment, or 
payments that have little or no tradeable value in the marketplace. As 
a general rule, we will carefully scrutinize any sale where the face or 
exchange value of a financial or other instrument given as payment 
differs from its market value.
    We believe that the criterion of profit maximization is an 
appropriate consideration in our fair-market-value analysis. It is a 
basic principle of corporate finance and management that the primary 
function of a commercial enterprise is to maximize the financial return 
on its owners' investment.\14\ Moreover, such a ``profit maximization'' 
standard is supported by the Federal Circuit:
---------------------------------------------------------------------------

    \14\ To the extent that a commercial firm may have goals other 
than profit maximization, those non-commercial pursuits are 
generally reflected in the company's market value to the extent they 
enhance or detract from the company's ability to generate a profit.

    The government has different concerns from those of a private 
seller. Unlike a private seller who seeks the highest market price 
for its assets, the government may have other goals, such as 
employment, national defense, and political concerns, which may 
affect the terms of a privatization transaction. Thus a case 
involving privatization does not necessarily govern a private-to-
---------------------------------------------------------------------------
private situation.

Delverde III, at 1369. Any of the government's actions in selling a 
company that do not maximize the financial return to the government on 
the sale are, therefore, legitimate and important areas of scrutiny 
under our fair-market-value analysis as they may indicate that the 
government has acted in a manner that is not consistent with the normal 
practices of private, commercial seller.
    The profit-maximization standard is also fully consistent with the 
WTO findings. For example, the Panel noted that ``* * * in a market-
based economy, the value of a company depends on its ability to 
generate returns for its shareholders.'' Panel Report at para. 7.51. 
The Panel further noted that, ``[f]ollowing privatization and 
consistent with commercial principles, the owners of the privatized 
company should be profit-maximizers, set on obtaining a market return 
on the entirety of their investment in the privatized company.'' Panel 
Report at para. 7.60. Although the Panel here was referring explicitly 
to the purchasers of the company (and not the seller), it is clear that 
in order for the sales price to be considered fair market value, both

[[Page 37133]]

parties--the seller and the buyer--must be profit maximizers.
    Regarding committed investment, we note that this appears to have 
been one of the most complicated and controversial parts of the 
proposed modification. In general, the numerous comments we received on 
this issue can be roughly divided into those that consider any 
committed investment to disqualify the sale automatically from being 
found to be at fair market value, and those arguing that any committed 
investment will be fully reflected in the purchase price. For this 
final modification, we have not adopted either argument as a per se 
rule, but find that our determination in a particular instance of 
committed investment must be based on the specific facts of that case, 
analyzed in their totality.
    We would first like to clarify that by the term committed 
investment, we are referring to a range of possible restrictions or 
requirements that the government, as the seller, imposes on the future 
operation of, or investment in, the company or its assets. Some 
commenters noted that there are some practices which, on their surface, 
may appear to be committed investment, but are in fact actions which 
are sometimes taken by private, commercial sellers as well. As a 
threshold issue, therefore, we will first examine any evidence 
presented by parties that purports to demonstrate that a particular 
action is fully consistent with the normal sales practices of private, 
commercials sellers in the relevant market, even if that action would 
otherwise appear to fall within the scope of typical committed 
investment practices that the Department has encountered. Where such a 
demonstration is made, we normally will not regard such a practice as 
evidence that fair market value was not paid.
    With regard to the impact a committed investment has on a sale, we 
disagree with the proposition that the presence of any committed 
investment necessarily means the sale is not for fair market value. As 
noted elsewhere in this notice, our analysis of fair market value under 
this new methodology is based on a benefit-to-recipient standard. The 
key question is whether, in purchasing the company or its assets, the 
buyer got something of value for which the buyer did not pay. In the 
relatively straightforward, hypothetical case of a requirement to 
maintain the workforce size at current levels for three years, we agree 
that, normally, a potential buyer will incorporate the cost (if any) of 
that restriction into the price the buyer offers to pay. Although this 
price may be lower than what the buyer would have been willing to pay 
absent the requirement, this does not necessarily mean that the buyer 
is receiving any net value that has not already been reflected in the 
transaction price.
    In this hypothetical example, all other things being equal, our 
analysis and reasoning regarding this straightforward committed 
investment would resemble that of our analysis and approach to 
concurrent subsidies. Similar to concurrent subsidies, when making a 
finding that the value of the committed investment was fully reflected 
in the transaction price of an arm's-length privatization and, 
therefore, is fully extinguished in such a transaction, we will require 
the following criteria to be met: (1) The precise details of the 
committed investment were fully transparent to all potential bidders 
and, therefore, reflected in the final bid values of the potential 
bidders, (2) there is no implicit or explicit understanding or 
expectation that the buyer will be relieved of the requirement or 
commitment after the sale, and (3) there is no evidence otherwise on 
the record indicating that the committed investment was not fully 
reflected in the transaction price.
    We also disagree, however, that a lowering of bid prices in the 
face of committed investments is necessarily a result of an increase in 
anticipated costs. In the hypothetical case above, our analysis and 
findings would likely be different if, for example, it were also shown 
that the government offers bidders an automatic discount \15\ in the 
sales price for buyers who make certain promises regarding future 
operation of or investment in the plant. In this more complex scenario, 
the buyer is very possibly getting a discount for doing something the 
buyer might have otherwise done without the discount, i.e., the 
commitment or requirement does not impose any additional cost--and in 
fact may be viewed as revenue-enhancing. Possibly, under this scenario, 
the buyer has paid less for the company or assets than it otherwise 
would have paid had the government acted in a manner consistent with 
the normal sales practices of private, commercial sellers.
---------------------------------------------------------------------------

    \15\ For example, a credit towards the bid value keyed to the 
amount of the investment.
---------------------------------------------------------------------------

    This hypothetical case can be further expanded to reflect a 
situation where the bidding pool begins with relatively few potential 
bidders, e.g., three bidders. A requirement to maintain the workforce 
at a certain level for a specified number of years may affect the three 
bidders' assessments of expected costs and revenues differently. For 
example, assume the first bidder would have maintained or even 
increased the workforce regardless of the stipulation; therefore, the 
requirement would likely have only a limited impact on that bidder's 
expected future profitability. The second bidder, however, has been 
very public in stating that the company has too many redundant 
employees, and that any minimum employment levels would negatively 
impact the future cost competitiveness of the plant. Likely, that 
bidder will lower his or her bid value accordingly. Assume the third 
bidder intended all along to purchase and then dismantle the plant, 
perhaps in order to shift the productive assets to another location or 
to eliminate competition from the marketplace. Very likely, such a 
minimum employment requirement would lead the third bidder to 
drastically reduce his or her bid amount, or even to drop out of the 
bidding process altogether. If the first bidder was generally aware of 
the business plans of the other two bidders, the first bidder could 
lower his or her bid amount, even though the requirement will impose no 
additional cost on him or her, and still win the bidding contest.
    We recognize that these scenarios just presented are complex and 
hypothetical (though they are not necessarily unusual). They are useful 
illustrations, however, of possible instances where, as a result of the 
government's imposition of requirements or restrictions that private, 
commercial sellers would not normally impose, a buyer might pay a lower 
price for a company or its assets than that buyer would otherwise pay 
even though such requirements or restrictions impose no additional cost 
on the buyer. This shows why any fixed rule one way or the other, as 
suggested by many of the commenters, would be inappropriate when 
analyzing committed investment. Accordingly, we will examine, on a 
case-by-case basis, whether the presence of committed investment 
resulted in the buyer paying less-than-fair-market-value for the 
company or its assets.
    As to the additional factors some commenters suggested, we have not 
incorporated any of them explicitly into our non-exhaustive list at 
this time because we do not expect that they will have broad 
applicability across most of the privatizations we examine. However, we 
may consider these and any other relevant factors on a case-by-case 
basis where they are pertinent to the analysis of a particular 
privatization.

[[Page 37134]]

6. Safe Harbor

    Some commenters argue for the Department to consider identifying a 
``safe harbor'' with explicit guidelines for when a privatization will 
be deemed to eliminate the continuing benefit of past nonrecurring 
subsidies. Such a safe harbor, these commenters continue, would be 
desirable not only to simplify proceedings before the Department, but 
also to advance the U.S. policy of encouraging privatization, 
especially in developing countries. One approach, for example, would be 
to develop a clear rule that a privatization carried out under 
independent private advisors through commercial auction procedures, 
and/or that used post-privatization audits, would normally be deemed to 
be for fair market value. Other commenters suggest additional ``safe 
harbor'' rules, including a simple safe harbor for private-to-private 
sales.
    In response to these suggestions, other commenters state that it is 
important that the Department maintain flexibility in its privatization 
methodology to consider the facts and circumstances of each case before 
it determines whether subsidies have been extinguished following a 
privatization. They find, therefore, that it would be premature for the 
Department to attempt to define ``safe harbors'' at this point without 
reviewing the various factual scenarios that accompany privatization. 
At least one commenter objects strongly, arguing that a safe harbor 
would merely become a ``roadmap'' for subsidization.
    Department's Response: We disagree that any explicit ``safe 
harbor'' per se, as envisioned by certain commenters, is warranted. The 
new methodology described in this notice is sufficiently detailed and 
articulated to provide parties with a good understanding of how the 
Department will approach analyzing privatizations, and with a 
reasonable basis for forming expectations about how the Department will 
rule when examining a particular fact pattern. As discussed elsewhere 
in this notice, where we have refrained from detailing specific rules 
regarding various aspects of this methodology, we have done so either 
because such issues did not lend themselves to defined rules, or 
because we wanted to gain further experience in a particular facet of 
the methodology before establishing a defined rule.

7. Broader-Market-Distortions Analysis

    In General: Several commenters state that the Department should not 
attempt analyzing broader market or economic conditions, but should 
instead focus its analysis solely on the benefit to the purchaser. 
Specifically, these commenters believe that the proposed analysis of 
broader market distortions would effectively allow the Department to 
ignore the fundamental importance of an arm's-length, fair-market-value 
privatization and impose countervailing duties against a company's 
products without determining the existence or amount of any 
countervailable benefit currently enjoyed by the company. A related 
comment is that this analysis of broader market distortions should not 
be a separate analysis, but should be included as part of the fair-
market-value analysis because the issues are fundamentally the same.
    Moreover, several commenters find the Department's proposed market 
distortion criteria in general to be too vague and sweeping, and 
therefore, unpredictable and impractical. Other commenters suggest that 
the macroeconomic distortions contemplated under this analysis would be 
too general to meet the specificity requirements of a countervailable 
subsidy, and that only those actions that specifically affect the value 
of the privatized entity may be relevant.
    Some commenters also view the Department's ``reasonable basis for 
believing'' in regard to proof of severe market distortion as too low a 
standard. Instead, one commenter proposes that the Department restate 
the standard so that the presumption of extinguishment could only be 
rebutted with clear and convincing evidence that severe market 
distortion exists; in the absence of such evidence, the Department 
should not overturn the presumption of extinguishment that follows an 
arm's length sale at fair market value. Some commenters further argue 
that such distortions must be quantified in order to prove that such 
distortions are material.
    Some commenters supported the Department's proposed approach to 
market distortions, but urged the Department to leave itself discretion 
to adapt its analysis to the circumstances of each case. Another 
commenter suggested that the distortion factors be preceded by a 
preamble allowing for general consideration of market distortion issues 
that may not be covered by the specific factors listed. One commenter 
also suggests that post-sale conditions be added to the proposed list 
of factors in evaluating market distortions.
    Basic Conditions: With regard to the ``basic conditions'' 
criterion, although this proposed criterion was lifted from language in 
the WTO Appellate Body opinion, several commenters found it too vague 
and sweeping to provide any meaningful guide to parties. Several 
commenters suggested that the Department should determine that the 
``basic conditions'' necessary for an undistorted market are present if 
the economy is a market economy, and that those conditions are not 
present if the economy is a non-market economy. Accordingly, the 
proposed analysis of these basic market conditions is not necessary 
where the Department has already deemed the country to be a market 
economy for countervailing duty purposes.
    Related Incentives: Because they find this factor to be overly 
broad, several commenters think that the Department should amend the 
``related incentives'' criterion to reflect the economic reality that 
all governments engage in activities that affect market transactions. 
Instead, they believe that the Department should focus on the question 
of whether the government action was intended to facilitate the sale 
for less than fair market value with a view to later reversing the 
action so as to effectively provide the buyer the asset or entity at 
less than fair market value. Other commenters, however, support 
consideration of this factor as it provides further insight into 
whether the government acted like a private, commercial seller.
    Legal Requirements: Some commenters suggest that while legal 
requirements imposed by governments do affect the market price, they 
would have to be extremely restrictive (such as requiring a level of 
employment far in excess of what is economically justifiable) in order 
to vitiate the fair market value of the sale. Because of this, these 
commenters believe that this criterion is overly broad and should not 
be considered in the Department's analysis. Several other commenters 
argue that any such legal requirements would be fully reflected in the 
purchase price of the company so long as that price was a fair market 
value.
    Creation/Maintenance: With specific reference to the effect on the 
market of subsidization of other companies, several commenters argue 
that the fact that other companies are subsidized is not evidence that 
the privatization in question does not ``fairly and accurately 
reflect'' the market value for the privatized asset but, rather, that 
such creation/maintenance effects are fully reflected in the fair 
market value. One commenter notes that the countervailing duty law is 
meant to offset the benefits to specific recipients, not to remove 
market distortions to an industry generally. Several commenters also 
query whether this analysis would include subsidization outside of the

[[Page 37135]]

country in question, suggesting that such a ``cross border'' analysis 
would be inappropriate. Some commenters further argue that this factor 
would fall particularly heavily on developing countries--precisely 
those countries where the United States is encouraging privatization--
because they are more likely to have numerous companies and industries 
that are subsidized.
    Department's Position: For this final modification, we have kept 
the analysis of broader market distortions separate and distinct from 
the arm's-length, fair-market-value analysis. We recognize that this 
distinction may appear somewhat formalistic, given that where there are 
broader market distortions, any conclusions regarding market value are 
necessarily implicated. Nevertheless, the overall emphases of the two 
inquiries are distinguishable.\16\ The former focuses on the government 
in its capacity as seller, and whether its actions are consistent with 
those of a private, commercial seller. The analysis of broader market 
distortions, on the other hand, focuses on the government in its 
capacity as regulator and policymaker.\17\ Such an analysis is 
appropriate because it takes into account the unique power of a 
government to institute a basic market regime, as well as to create 
particular laws, regulations, economic incentives and unique conditions 
that impact the purchasers' decisions.\18\ The use of such governmental 
powers may be distortive where they make a particular sale possible 
that would not otherwise be possible, or at least not possible under 
the same terms as those of the transaction that actually took place, 
under normal market, legal, and regulatory conditions.\19\
---------------------------------------------------------------------------

    \16\ This distinction is also clearly reflected in the AB 
Report, and was the basis for the finding that an arm's-length, 
fair-market-value privatization does not necessarily extinguish 
prior subsidies.
    \17\ A loose, but helpful analogy here may be that of a game. 
Our analysis of government ``as seller'' examines whether the 
government was playing, like a normal player, to win (i.e., to 
maximize its winnings). Our analysis of government ``as government'' 
examines the rules of the game, to determine whether they were 
sufficient to ensure a meaningful game to begin with and whether 
they favor a particular outcome to the game.
    \18\ In this final modification, we have combined the four 
originally proposed criteria into two, to clarify and emphasize 
these two basic thrusts of the market-distortion analysis.
    \19\ The presence of severe market distortions can render 
inoperative the presumption that fair market value ``is deemed to 
include (de facto) the value of the advantage or benefit already 
received'' (Panel Report, at para. 7.72), or that ``the privatized 
producer paid for what he got and thus did not get any benefit or 
advantage from the prior financial contribution bestowed upon the 
state-owned producer.'' Panel Report, at para. 7.82.
---------------------------------------------------------------------------

    With regard to the comment that the factors we have listed as 
potentially relevant are too broad, we disagree. We believe that it is 
important to leave room for flexibility in this analysis and not to 
circumscribe artificially or prematurely the nature of the factors that 
could be found to distort a market. Such distortions can be specific to 
the unique circumstances of particular countries or markets, and it is 
especially difficult for the Department to foresee at this time all of 
the factors that may be relevant to this analysis, particularly without 
obtaining more experience in this area. Therefore, we intend that this 
analysis will be conducted on a case-by-case basis, and that we will be 
able to refine such analysis over time building on our accumulated 
experience.
    That said, we recognize that perfect markets seldom exist outside 
of economics textbooks. We do not intend to ``fail'' a privatization 
merely because the broader environment in which it took place did not 
perfectly conform to some market paradigm. Rather, we will be balanced 
and realistic in our analysis, focusing on those severe distortions 
that would have a meaningful impact on the transaction in question.
    We further disagree with the suggestion that our ``basic 
conditions'' analysis and our market distortions analysis should 
generally be limited to those countries that have non-market or 
transitional economies. First, to limit this analysis to non-market 
economies would reduce this aspect of our new methodology to redundancy 
and irrelevance given that the Department's practice is not to 
countervail subsidies in countries it finds to have non-market 
economies. Moreover, we will not necessarily limit the basic-conditions 
analysis to economy-wide distortions, but may, where appropriate, 
examine distortions that primarily affect particular industries or 
sectors of the economy. Furthermore, there is no indication that the 
Appellate Body's reasoning in this regard was limited solely to the 
circumstances of a non-market or transitional economy.
    After consideration of the comments regarding the standard of proof 
in this analysis, we have removed the reference to ``reasonable basis 
for believing'' when demonstrating that the transaction price is 
meaningfully different from what it otherwise would have been. Such 
language unnecessarily complicated and confused the standard. It will 
take more than mere speculation to demonstrate that market distortions 
exist. That said, we are mindful of the fact that it may be very 
difficult to identify ``hard data'' that conclusively demonstrates the 
extent of such distortions or their impact on the transaction price. It 
is inherently difficult to show and, more so, to quantify precisely 
what the price would otherwise have been had there been a properly 
functioning market and regulatory regime.\20\ Therefore, we will guard 
against an interpretation of our evidentiary standard that is so high 
as to be unattainable in practice.
---------------------------------------------------------------------------

    \20\ Accordingly, parties will not normally be required to 
quantify the difference between the actual transaction price and the 
``undistorted market value.''
---------------------------------------------------------------------------

8. Privatization of Parent or Holding Companies

    Several commenters state that this new privatization methodology 
should not be applied where the privatization at issue occurs at the 
level of a holding company or parent company several levels removed 
from the actual respondent in the case. Some commenters argue that such 
privatizations do not extinguish subsidies provided to the subsidiary 
company that is the respondent in the case. Another commenter argues 
that the Department should carefully analyze the facts of each 
transaction and determine whether a particular subsidiary is 
benefitting from assistance received at the parent company level.
    Department's Position: We are not adopting any specific rule at 
this time with regard to how we will examine privatizations that occur 
at levels several times removed from the particular company under 
investigation, but will make such a determination on a case-by-case 
basis. We have learned from past experience that such an analysis is 
highly case-specific, and should take into consideration the context 
and all the facts surrounding a particular privatization.

9. Other Changes in Ownership

    In the proposed modification, the Department invited comment on 
what percentage of shares or assets sold should be the threshold for 
triggering application of the methodology and, similarly, how 
incremental sales should be treated. Some commenters state that the 
partial sale of shares or assets does not provide any basis for 
reexamining an allocated benefit stream, noting that nothing in the 
WTO's decisions addresses partial sales and, therefore, the agency is 
not required to revise its methodology to address this situation.
    Other commenters argue that restricting the circumstances in which 
the baseline presumption can be rebutted to full privatizations 
represents an arbitrary limitation that violates the fundamental 
principle that countervailing duties can only be imposed upon a 
company's products if

[[Page 37136]]

it is shown that the company is receiving a benefit from a financial 
contribution. By ignoring other circumstances under which the 
presumption may be rebutted, such as a partial privatization, the 
Department would, contrary to the Subsidies Agreement, impose 
countervailing duties at a level exceeding the actual benefit to the 
recipient.
    Turning to the issue of control, some commenters believe that the 
Department should apply its methodology when a government has 
relinquished effective control, even if the privatization has not been 
completed. Several commenters, however, argue that the mere fact that 
the government retains some control in a privatized company cannot 
automatically justify the imposition of countervailing duties based 
upon the full amount of subsidies bestowed on the state-owned 
enterprise prior to privatization.
    Assuming that the release of control is relevant to when the 
Department should apply its methodology, several commenters suggested 
that the ``use or direct'' standard in the Department's cross-ownership 
regulations might be applicable. Another commenter suggested that the 
nature and relevance of control should be determined by the Department 
on a case-by-case basis, taking into account all of the various means 
by which parties may exercise control over the corporation--the inquiry 
may well require the Department to examine factors beyond the level of 
share ownership.
    Other commenters disagreed, stating that the issue should not be 
whether the government has relinquished control of a company, but 
instead the Department should require that the government has no 
ownership whatsoever of the company and no right in any way to exert 
control over the company in order for the prior subsidies to be 
considered extinguished. Moreover, the ``use or direct'' standard of 
cross ownership is not necessarily appropriate because cross-ownership 
issues are very different from privatization issues.
    Finally, some commenters argue that any final modification should 
not be applicable to private-to-private sales as well as government-to-
private sales (i.e., privatizations) because private-to-private sales 
were not addressed in the WTO decisions. Some commenters state that in 
the private-to-private context, an arm's-length transaction is 
necessarily one in which fair market value is paid and, as a result, 
the purchaser receives no benefit from past subsidies. Another 
commenter states that while a private-to-private sale can extinguish 
pre-sale subsidy benefits, an analysis to determine whether the price 
paid for the private assets reflects the current market conditions 
would be appropriate.
    Department's Position: We are not making a decision at this time as 
to whether or how we will apply this new methodology to types of 
changes in ownership and factual scenarios (e.g., partial and gradual 
privatizations, private-to-private sales) other than the privatization 
of all or substantially all of a state-owned enterprise. Rather, we 
wish to provide the public with an additional opportunity for further 
comment on the applicability of the new methodology in those 
circumstances.\21\ Although we have received some comments to date on 
such issues, as summarized above, we believe that with the benefit of 
seeing our final modification, parties will be in a position to provide 
more informed and precise arguments as to how and why this final 
modification might be applied to these other types of sales.
---------------------------------------------------------------------------

    \21\ The Panel and Appellate Body explicitly refrained in their 
findings from addressing these alternative fact patterns. Therefore, 
deferring a decision on how this new methodology might apply to 
these other changes in ownerships in no way detracts from the United 
States' implementation of the Dispute Settlement Body's 
recommendations in this dispute.
---------------------------------------------------------------------------

    In this regard, we encourage parties to address whether, if the 
government remains in a position of control over a privatized company, 
that company may continue to be operated in a manner that furthers the 
government's agenda. Further, at what point does a change away from 
government ownership cause the subsidy recipient to become a full 
profit maximizer? Is it where the government holds only a minority 
ownership in the company? Where the government retains only latent 
control (e.g., a ``golden share'')? Or where it retains no control 
whatsoever? How should control even be defined in this regard?
    Moreover, parties might wish to explain why becoming a profit 
maximizer is relevant to the extinguishment of prior subsidies in a 
sale. How does this logic apply, if at all, to a private-to-private 
sale where, presumably, the seller was already a profit maximizer? 
Would the application of this final modification to private-to-private 
sales be consistent with the Delverde III Court statement that

    [t]he government has different concerns from those of a private 
seller. Unlike a private seller who seeks the highest market price 
for its assets, the government may have other goals, such as 
employment, national defense, and political concerns, which may 
affect the terms of a privatization transaction. Thus a case 
involving privatization does not necessarily govern a private-to-
private situation.

Delverde III, at 1369.
    We ask that any additional comments on these specific issues be 
submitted to the Department within 60 days of publication of this final 
modification.\22\ Parties should submit four written copies and an 
electronic copy (in WordPerfect, MS Word, or Adobe Acrobat format) of 
their comments to Room 1870, Import Administration, U.S. Department of 
Commerce, 14th Street and Constitution Avenue, N.W., Washington, D.C. 
20230. Attention: Greg Campbell, Office of Policy. Re: Privatization 
Comments. Comments should be double-spaced and limited to 10 pages. All 
comments will be made available for public viewing in the Department's 
Central Records Unit, which is located in room B-099 of the main 
Department building. The Department also intends to post on Import 
Administration's Web site, shortly after the comment deadline, all 
public comments received pursuant to this request.
---------------------------------------------------------------------------

    \22\ This additional comment period is separate and distinct 
from the current proceeding in which we are modifying our practice 
pursuant to section 123 of the URAA.
---------------------------------------------------------------------------

10. Concurrent Subsidies \23\
---------------------------------------------------------------------------

    \23\ For the purposes of this final modification, we consider 
``concurrent subsidies'' to be subsidies given to facilitate, 
encourage, or that are otherwise bestowed concurrent with a 
privatization.
---------------------------------------------------------------------------

    Regarding subsidies that may have been provided to encourage or 
facilitate privatization, some commenters argue that an analysis should 
be undertaken to determine the role of that subsidization in the 
transaction in question. Specifically, they state that the new 
methodology should recognize that the provision of subsidies prior to 
or during privatization proves that the market was distorted and that 
the privatization did not occur at fair market value. At a minimum, 
subsidies provided in the context of privatization are new subsidies to 
the new company and are therefore countervailable. Another commenter 
proposes that any subsidies provided within two years of a company's 
privatization should be considered as subsidies to the new owners, 
since they were, or may presumed to have been, provided to benefit the 
new owners at the time of sale. One commenter cited to Article 27.13 of 
the Subsidies Agreement to support its contention that concurrent 
subsidies are a unique type of subsidy that is not necessarily 
extinguished in a fair market value sale. Any failure to countervail 
concurrent subsidies, some

[[Page 37137]]

commenters argue, would merely encourage governments to heavily 
subsidize companies that they intend to privatize.
    Other commenters disagree, stating that the Department should make 
clear that the fact that a government provides companies with subsidies 
to make them marketable should not prevent the extinguishment of the 
subsidy by an arm's-length sale at fair market value. As the WTO and 
U.S. courts have recognized, when a party pays fair market value for an 
asset (even if the asset is a whole company), all prior subsidies, 
regardless of when given, are extinguished. Several commenters maintain 
that as long as the assistance, such as debt forgiveness, is negotiated 
by the parties as part of the privatization transaction, any value of 
the assistance will be reflected in the purchase price paid by the new 
owners and there would therefore be no countervailable benefit accruing 
to the newly privatized company from the assistance. However, if the 
government provided the debt forgiveness after the bids were finalized, 
according to one commenter, the debt forgiveness would not necessarily 
have been reflected in the bid price, and therefore the debt 
forgiveness should be treated as a new subsidy.
    Another commenter states that, where the government offers certain 
inducements (e.g., debt forgiveness) to encourage buyers, these 
inducements would be expected to increase the transaction price above 
market value. Although these may constitute new subsidies, the 
commenter maintains, such inducements generally cannot be considered 
evidence that the sale was for less than fair market value.
    Department's Position: As we noted in the proposed modification, 
the Department has long wrestled with the issue of subsidies given to 
encourage, or that are otherwise concurrent with, a privatization.\24\ 
However, based on our considerable experience to date with analyzing 
these subsidies and on the comments received, we are now prepared to 
provide more definitive guidance on how we intend to analyze these 
types of subsidies.
---------------------------------------------------------------------------

    \24\ The Department spoke to this issue in the Preamble to the 
CVD Regulations (63 FR 65348, 65355):
    [w]hile we have not developed guidelines on how to treat this 
category of subsidies, we note a special concern because this class 
of subsidies can, in our experience, be considerable and can have a 
significant influence on the transaction value, particularly when a 
significant amount of debt is forgiven in order to make the company 
attractive to prospective buyers. As our thinking on changes in 
ownership continues to evolve we will give careful consideration to 
the issue of whether subsidies granted in conjunction with planned 
changes in ownership should be given special treatment.
---------------------------------------------------------------------------

    For the purposes of this new methodology, the Department intends to 
scrutinize very carefully any instances of concurrent subsidies, and 
will normally determine that the value of a concurrent subsidy is fully 
reflected in the fair market value price of an arm's-length change 
privatization and, therefore, is fully extinguished in such a 
transaction, if the following criteria are met: (1) The nature and 
value of the concurrent subsidies were fully transparent to all 
potential bidders and, therefore, reflected in the final bid values of 
the potential bidders, (2) the concurrent subsidies were bestowed prior 
to the sale, and (3) there is no evidence otherwise on the record 
demonstrating that the concurrent subsidies were not fully reflected in 
the transaction price.
    We believe that this approach is consistent with analyzing a 
privatization from the point of view of the purchaser. All other things 
being equal, in a normally functioning and transparent market, we would 
expect that potential investors would be willing to increase the value 
of their offer prices to reflect the additional value that such 
concurrent subsidies are expected to contribute to the overall value of 
the company or its assets. Such additional value is therefore properly 
considered to be ``paid for'' in the purchase price, barring clear 
evidence to the contrary.
    We are sympathetic to the argument that concurrent subsidies may be 
special in the sense that, in certain cases, without such subsidies, 
bidders may not be willing to purchase the company or its assets, and 
that capacity which would otherwise cease to exist is thereby allowed 
to continue producing. This is a particularly important consideration 
for industries characterized by chronic overcapacity and excess 
production. It is for this reason, among others, that we intend to 
scrutinize very closely all instances where subsidies are given to 
facilitate or induce a privatization.\25\
---------------------------------------------------------------------------

    \25\ The special treatment for certain privatization-related 
subsidies in developing countries under Article 27.13 also suggests 
that these subsidies are distinguishable under the Subsidies 
Agreement.
---------------------------------------------------------------------------

    We recognize, however, that most concurrent subsidies are given in 
an effort to increase the attractiveness of the company or assets as an 
investment. In other words, normally these subsidies increase the value 
and, therefore, in a normally functioning market, increase the price 
the purchaser pays over what he or she would otherwise pay. Thus, 
normally, there would be no reason to believe that a concurrent subsidy 
would lead to a purchaser paying less than fair market value.
    With regard to the suggestion that concurrent subsidies be 
considered to be new subsidies to the new owners, we have not adopted 
that approach at this time because, for the purposes of this final 
modification, we are not distinguishing between a company and its 
owners.\26\
---------------------------------------------------------------------------

    \26\ This approach is consistent with the WTO's findings. See, 
e.g., AB Report at para. 115.
---------------------------------------------------------------------------

    We caution that our rationale for addressing concurrent subsidies 
should only be understood to apply to the circumstances of concurrent 
subsidies in the privatization context. If pushed to an extreme beyond 
these circumstances, such reasoning may lead to absurd conclusions that 
undermine the very effectiveness of the countervailing duty remedy. The 
Department would not consider the extreme argument, for example, that 
because the bid of a new owner reflected a recurring tax benefit that 
the company is expected to receive indefinitely into the future, that 
those future tax benefits are not countervailable. Any actionable 
subsidy bestowed subsequent to the privatization will be countervailed 
in full.

11. Continuing Benefit Amount

    In instances in which the privatization was for less than fair 
market value and, therefore, did not result in the extinguishment of 
the benefits of pre-privatization subsidies, the Department sought 
comments on how it should quantify the amount of the benefit from those 
subsidies the company continues to enjoy. Some commenters state that, 
in such circumstances, the unallocated portion of the subsidy must 
continue to be countervailed at the same level as if no privatization 
had occurred. This is the only logical result where the baseline 
presumption of continuing benefit has not been rebutted. Other 
commenters propose formulas, e.g., the difference between what the 
purchaser actually paid and the ``fair market value'' of the company or 
assets purchased, while still others proposed that such calculations 
should be made on a case-by-case basis with no set formula. One 
commenter proposes that the quantification of the amount of continuing 
benefit should, at the very least, take into account both the normal 
allocation period for the original assets and the price paid for the 
assets.
    Department's Position: Where the Department determines that the 
baseline presumption has not been rebutted

[[Page 37138]]

because, inter alia, the transaction was not at arm's length and for 
fair market value or because there were severe market distortions, we 
will find that the company continues to benefit from the prior 
subsidies in the full amount of the remaining unallocated balance of 
the subsidy benefit. This is fully consistent with the logic of our 
baseline presumption, i.e., that subsidy recipients can benefit from 
subsidies over a period of time unless the intervening event of an 
arm's-length, fair-market-value sale extinguishes such subsidies.
    This approach is also fully consistent with the WTO findings.\27\ 
As we have noted elsewhere in this notice, neither the Panel nor the 
Appellate Body elaborated on the issue of how to determine fair market 
value. Likewise, neither body opined or ruled on how payment of less-
than-fair-market-value would bear on existing subsidy benefits; in 
fact, they explicitly refrained from making any decision on this issue. 
AB Report at footnote 177.
---------------------------------------------------------------------------

    \27\ The baseline presumption was upheld by the Appellate Body. 
See, e.g., AB Report at para. 84.
---------------------------------------------------------------------------

    We also note that there are practical reasons for finding that 
subsidy benefits continue in their entirety under such circumstances. 
For example, some commenters suggested that we determine that the 
amount of continuing benefit is the difference between the actual 
transaction price and the (higher) fair market value. However, in 
circumstances where our analysis is focused on the process through 
which the company or its assets were privatized, such a ``shortfall'' 
approach could be impossible because there may not be any precise 
``fair market value'' available for such a calculation.
    Moreover, the shortfall approach resembles more an analysis of a 
new subsidy, with an identification of financial contribution (e.g., 
government provision of a good or service), and a new identification 
and quantification of a new benefit (e.g., in the amount of the 
shortfall). Though we do not preclude the possibility of the 
privatization transaction giving rise to a new subsidy, we address 
above whether the privatized company continues to benefit from prior 
subsidies, not from new subsidies starting at the beginning of their 
allocation stream.

12. Previous Remand Determinations

    Several commenters note that the Department made arm's-length, 
fair-market-value findings in certain recent CIT remands involving some 
of the same privatizations currently before the WTO. Many commenters 
raise case-specific facts and analysis, arguing for a particular result 
in a specific case when this new methodology is applied to the case 
facts. Other commenters object to the argument that any earlier 
determinations by the Department are now binding on the Department's 
implementation of the new methodology.
    Department's Position: In the proposed modification we noted that, 
in the context of several recent remand redeterminations in 
privatization cases before the CIT, the Department has applied a 
process-oriented approach to analyzing the facts and circumstances of 
particular privatizations and the resulting value paid.\28\ Our 
approach and findings in those remand redeterminations, however, may or 
may not reflect the full extent of the analysis of the transaction 
appropriate under this new methodology. Moreover, our position with 
regard to those redeterminations is unaffected by this notice.
---------------------------------------------------------------------------

    \28\ See, e.g., Results of Redetermination Pursuant to Remand, 
Allegheny Ludlum Corp. v. United States, CIT No. 99-09-00566 
(January 4, 2002); Results of Redetermination Pursuant to Remand, 
GTS Industries, S.A. v. United States, CIT No. 00-03-00118 (January 
4, 2002).
---------------------------------------------------------------------------

    As to commenters' arguments regarding the application of this new 
methodology to the particular facts of specific cases, we do not 
believe that this notice is the appropriate context for considering and 
responding to particular claims regarding particular determinations. 
Rather, as noted elsewhere in this notice, we intend to apply this new 
methodology in separate ``section 129'' proceedings for each case 
before the WTO. In the context of those proceedings, we will provide 
all interested parties opportunity to present evidence and argument as 
to the appropriate determination in each case given the case-specific 
facts and the application of this methodology.

13. Timetable for Application

    One commenter urged that the final modification clarify that, as a 
general matter, the new privatization methodology would apply 
immediately to any pending investigations and reviews, except to the 
extent that the privatization issues have already been resolved by 
court decisions interpreting the current U.S. statutory provisions. In 
addition, in order to ensure that countervailing measures are not 
improperly imposed on merchandise that is not benefitting from 
subsidies, this commenter urged the Department to consider self-
initiation of changed circumstance reviews of any countervailing duty 
orders in which the alleged subsidy recipient had been privatized after 
the subsidies were received.
    Department's Response: We intend to implement this final 
modification according to the timetable discussed below. Our approach 
to implementation here is consistent with the approach we took in 
implementing the WTO's findings in U.S. Antidumping Measures on Certain 
Hot-Rolled Steel Products from Japan. See Antidumping Proceedings: 
Affiliated Part Sales in the Ordinary Course of Trade, 67 FR 69186, 
69197 (November 15, 2002) (Japan Hot Rolled Implementation). Our 
reasons for why this approach to implementation is fully consistent 
with the statute and our WTO obligations are fully explained in that 
notice.

Implementation Timetable

    This methodology will be used in implementing the WTO's findings in 
European Certain Steel Products pursuant to section 129 of the URAA. 
The Department intends to make such ``section 129'' determinations in 
the relevant segments of each of the 12 proceedings before the WTO on 
or before November 8, 2003. To the extent that the relevant segment of 
such proceeding establishes a cash deposit rate going forward, in 
accordance with section 129(c)(1) of the URAA, these section 129 
determinations will establish new cash deposit rates for all producers 
for whom the rates from the relevant segments of the proceedings are 
still applicable and will apply with respect to unliquidated entries of 
the subject merchandise which are entered, or withdrawn from warehouse, 
for consumption on or after the date on which the United States Trade 
Representative directs the Department to implement that determination. 
With respect to other proceedings, as well as other segments of the 
Certain Products proceedings that are not included in the dispute, the 
new methodology will be applied in all investigations and reviews 
initiated on or after June 30, 2003.

    Dated: June 17, 2003.
Joseph Spetrini,
Acting Assistant Secretary for Import Administration.
[FR Doc. 03-15795 Filed 6-20-03; 8:45 am]