Arguments regarding the finan report submitted by brazil

Arguments regarding the finan report submitted by brazil

1. Arguments of Canada

   1. 
      Canada raises a number of general criticisms of what it views as flawed analysis and assumptions, and inaccurate facts in the “Finan Report” submitted by Brazil in support of its allegations of subsidization of the Canadian aircraft industry. Canada questions ⁴⁴¹ the timeframes over which the analysis is conducting, arguing that in general the rationale for the choice of any timeframe should be explicit, and that a consistent approach should be used in determining timeframes to be used. Canada takes issue with the Finan Report's use of different timeframes for different subsidies, with no rationale provided for any timeframe used, and no explanation of why different timeframes are used. That is, for some calculations the analysis extends through 2015, while for others it ends in 2000. For Canada, these concerns over timeframes are important because of their effect on the results of the analysis, in particular, the magnitude of the alleged subsidies. Canada argues that had different timeframes been used, the aggregate subsidy amounts calculated could have been greatly reduced.
      
   2. 
      Canada further argues that the Finan Report calculates a higher value on investments that require repayment than on the equivalent amount of funds as an unencumbered grant. For Canada, such a result is nonsensical, as the repayable funds clearly are less attractive to the recipient, given their repayment obligation, than outright grants with no strings attached.
      
   3. 
      Canada also criticises the Finan Report's comparative treatment of actual and anticipated benefits. According to Canada, there should be a clear distinction between those alleged subsidies that have already been received, and those that will only be received in the future if certain other events occur as well. Canada states that one-half of the benefits alleged in the Report have already been received, and the other half may or may not occur in the future, and that the lack of distinction between those categories of alleged benefits results in a potentially misleading statement of results.
      
   4. 
      Canada argues, with respect to the CRJCI, that the “Finan Report” assumes that “EDC’s return is generated by Exinvest’s share in the residual value of the aircraft”⁴⁴², then assumes that “EDC participates in all of Bombardier’s sale of regional jets”⁴⁴³, and thirdly assumes implicitly that the EDC participates in all of Bombardier’s sales through equity infusions. Canada asserts that no evidence is adduced in support any of these “assumptions”, in spite of which the “Finan Report” declares that “EDC is clearly providing a subsidy to Bombardier.”
      
   5. 
      Canada argues the “Finan Report” observes that the Canada-Québec Subsidiary Agreement has been “previously determined to confer subsidy benefits to other companies.” [emphasis added] The “Finan Report” does not explain how such a finding is relevant to this dispute. It does not cite any evidence or authority for the assertion. It does not say when, by whom or under what circumstances any such determinations were made. Indeed, no support is offered and no evidence adduced in respect of an assertion without relevance. This is neither evidence nor argument; it is simply innuendo.
      
   6. 
      Canada states, with respect to Québec’s SDI, that the Report makes no “assumptions”; but rather an unsupported assertion of “fact”: “Projects must be aimed at markets outside Québec.”⁴⁴⁴ [emphasis added by Canada] Canada denies this (paras. 6.335-6.340). According to Canada, the SDI includes a number of programmes, only one of which is related to “exportation”, and in any event, Canada states, by “exportation” SDI refers to “exportation out of Québec”, including to the other provinces of Canada, as Brazil itself admits.
      
   7. 
      Canada recalls its argument that the conclusion of the “Finan Report” with respect to Ontario’s forgiveness of its loan to Bombardier is without foundation and false (see para. 6.275-6.276). Nevertheless, Canada notes what it terms the methodological paradox created as a result of the assertion by the “Finan Report” that the alleged forgiveness of the loan concerning the sale in 1997 should be viewed as a cash grant in 1992: if the “subsidy” element of the sale was granted in 1992, then the sale is outside the jurisdiction of this Panel. If, however, the sale is to be the subject of WTO dispute settlement, any “subsidy” would have to be found to have been granted in 1997. If this is the case, Canada submits, the “present value in 1998” of the subsidy as calculated by the “Finan Report” is inflated and, in any event, irrelevant.
      
   8. 
      Canada notes that the Finan Report in Table B4 estimates the alleged benefits received by Bombardier as a result of “equity infusions” from the EDC into the CRJCI. According to Canada, these alleged benefits are estimated on the presumption that private sector investors require a 15 per cent to 20 per cent pre-tax return on similar aircraft leasing deals, reflecting a misunderstanding of the nature of US leveraged leasing transactions. According to Canada, US leveraged leases are driven by tax considerations: because of the tax benefits received, private equity investors are prepared to earn very low pre-tax returns; indeed, pre-tax returns may be zero or even negative. This is because, Canada submits, their after-tax returns, incorporating the tax benefits associated with leveraged leasing, reach acceptable levels. ⁴⁴⁵ Accordingly, in Canada's view, the “Finan Report” grossly over-estimates the value of the alleged benefit from these transactions. In these circumstances, Canada maintains, even assuming that all other assumptions are correct, EDC’s alleged pre-tax return on equity of 2.75 per cent would, in view of the after-tax returns that EDC would expect in a leveraged lease transaction, be consistent with what private sector investors would expect.
      

2. Response of Brazil

   1. 
      In response to Canada’s general argument that the Finan Report overstates or improperly calculates the present value in 1998 of the benefits received by the Canadian regional aircraft industry from subsidies, Brazil emphasizes that whether the benefit is $1 or $1 billion is in large part irrelevant. According to Brazil, the fundamental point established by Brazil and the Finan Report is that whatever the value, and whether the test is “benefit to recipient” or “cost to government,” the Canadian programs confer a benefit and constitute a subsidy within the meaning of Article 1 of the SCM Agreement.
      
   2. 
      In responding to Canada's specific comments, Brazil notes generally that the Finan Report performed two separate calculations: first, the aggregate present value in 1998 of benefits received by Bombardier in the past as well as those expected to be received in the future.⁴⁴⁶ second, benefits per 50-seat jet delivered in 1998.⁴⁴⁷ Brazil states that the per-aircraft benefits relate only to benefits which have already been received and do not include benefits relating to the development of 70-seat aircraft.
      

1. The Time Frames Over Which Subsidies are Quantified and Aggregated

   1. 
      Brazil states that it does not disagree with KPMG's proposed tests for evaluating the timeframes used in the Finan Report, but emphasizes the importance of applying the correct time-frame consistent with the facts and circumstances of the case. Brazil argues that since each of the different Canadian Government subsidies analysed in the Finan Report involve different facts and circumstances, it correctly applied different time frames in calculating the benefits to Bombardier appropriate to the facts:
      

1. EDC Equity Infusions

   1. 
      Time-frame: Benefits calculated for each of 20 years from fiscal 1996 through 2015.
      
   2. 
      Rationale: The EDC is presumed to participate in the financing of every jet sold by Bombardier, beginning in January 1996 and continuing for the estimated 20-year economic life of the product.⁴⁴⁸ Brazil notes that extending the analysis out 20 years does not significantly alter the analysis of aggregate benefits, because benefits received in the future are discounted back to the present at 16.9 per cent. Thus, 75 per cent of the net present value of benefits relating to EDC equity infusions are generated in the first 10 years of the analysis, i.e. through 2005.
      

2. Can$87 Million “Investment” in the 70-seat CRJ-700

   1. 
      Time-frame: For the purpose of calculating an aggregate benefit to Bombardier, the analysis extends to 2019. However, no per-aircraft benefit relating to this subsidy is calculated, since deliveries of the 70-seat jet have not yet commenced.
      
   2. 
      Rationale: Brazil notes that the government expects repayment, plus receipt of a modest profit, through per-aircraft royalties commencing with the 250^th jet sold. Therefore, the analysis is extended through the estimated life of the 70-seat jet, 20 years.
      

3. Can$57 Million “’Investment‘” in the Dash 8-400

   1. 
      Time-frame: For the purpose of calculating an aggregate benefit to Bombardier, the analysis extends to 2019. However, no per-aircraft benefit relating to this subsidy is calculated, since deliveries of the Dash 8-400 have not yet commenced.
      
   2. 
      Rationale: As in the case of the Can$87 million “investment”, Brazil argues that the government expects repayment, plus receipt of a modest profit, through per-aircraft royalties. Therefore, again the analysis extends through the estimated life of the product, 20 years.
      

4. Can$100 Million “Investment” in Turboprop Engines

   1. 
      The time-frame and rationale are identical to those relating to the Can$57 million "'investment'".
      

5. The Acquisition and Restructuring of de Havilland

   1. 
      Time-frame: Benefits are amortized over 13½ years, beginning in the year in which funds were received.
      
   2. 
      Rationale: Amortization is based on the depreciable life of Bombardier fixed assets for the period 1994-1998.⁴⁴⁹ This is appropriate since the subsidies relate to the acquisition of the assets of the de Havilland business. Amortizing the benefits based on the average depreciable life of fixed assets anchors the duration of benefit to the life of the underlying assets.
      

1. The Comparative Treatment of Repayable and Non-Repayable Contributions

   1. 
      Brazil concedes that the value of a grant should exceed the value of a repayable contribution, and that any statement to the contrary would be silly. Brazil states that its “low estimate” correctly computes the value of the repayable contributions, as noted by KPMG, but acknowledges a spreadsheet error made in calculating the “high estimate” for benefits relating to the Technology Partnerships Canada subsidies. Correcting this technical error does not change the low estimate of the present value of benefits received by Bombardier, and reduces the high estimate from US$2.4 billion to US$2.3 billion.
      

2. The Comparative Treatment of Actual and Anticipated Benefits

   1. 
      Brazil does not object to making the distinction between benefits already received and those that may be received in the future. Brazil asserts that its calculation of the benefits per 50-seat jet delivered in 1998 relate entirely to benefits received in 1998 and prior years, and that the 1998 per-aircraft benefit excludes EDC benefits generated in later years and ignores benefits relating to the development of 70-seat aircraft.
      
   2. 
      In separating past vs. future benefits in the calculation of the aggregate present value of benefits, Brazil states that the only “anticipated” benefits are EDC benefits for 1999 and beyond. Brazil disagrees with the percentages calculated of the percentage of EDC benefits which may be considered “anticipated”. Brazil argues that the number of planes actually sold is not the relevant benchmark to be used in distinguishing between actual and anticipated benefits, but rather the present value of benefits relating to deals consummated in or before 1998 vs. deals which are expected to take place in the future. Brazil calculates the present value of benefits relating to deals taking place in or before 1998 at between US$215 million and US$236 million. Brazil's estimate of the present value of benefits relating to future deals is between US$679 million and US$743 million. Thus, Brazil states, the portion of the total present value of benefits relating to anticipated benefits is roughly 30 per cent.
      

1. Rebuttal by Canada

   1. 
      Canada submitted a report by KPMG in support of Canada's criticisms of the Finan Report. In the report, Canada notes, first, that for EDC equity infusions, extending the timeframe of analysis increases the amount of the aggregate alleged benefits, because most of the alleged benefits identified were to be received in the future, as aircraft are sold. For the other funds for the development of airplanes and engines, Canada asserts, the alleged benefit has already been entirely received up front; extending the timeframe, be increasing the estimated repayments or royalties, diminished the magnitude of the alleged benefit.
      
   2. 
      Canada notes that Brazil acknowledges a spreadsheet error with respect to only one calculation. Canada submits that the same error is equally applicable to the calculations pertaining to TPC.
      
   3. 
      In response to Brazil’s assertion that the Can$87 million TPC contribution in 1996 would have a net present value, in 1998, of Can$119 million, Canada notes first, that the Finan Report assumes that the TPC contributions are all paid in lump sum, which according to Canada is not the case. Canada states that as of the date of its First Written Submission, only about Can$22 million had been disbursed. Canada also indicates that the rate of inflation in Canada over the previous two years was only about 1.5 to 2 percent. Thus, for Canada, even if the Can$87 million had been disbursed in lump sum in 1996, a 25 percent inflation in two years in the “net present value” of the contribution was unjustified and again highlighted the difficulties in the methodology of the Finan Report. Canada also argues that the Finan Report is unduly pessimistic about the market prospects of the CRJ700, in view of the market forecasts by independent and highly respected forecasters that Canada has submitted in response to a Panel question.
      

7. 
   
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