(7) Calculation of subsidization from the government-directed $690 million loan

8.104 With respect to the government-directed $690 million loan to TPN, the United States estimates the amount of the subsidy to be 7.1 per cent in 1998, 28.95 per cent in 1998, and 5.3 per cent in 2000. The United States calculated these percentages in the following manner.

8.105 As noted above, newspaper reports indicated that the terms of the loan were 3 per cent over the 3-6 month deposit rate, a maturity of 10 years, and a grace period of 3 years. Thus, the first task is to determine the interest rate to be paid by TPN, which is based on the 3-6 month deposit rate. Because Indonesia did not provide this rate in its Annex V responses, the United States was forced to rely on other sources. The most recent information available to the United States is from The Economist Intelligence Unit Limited (April 1997) (EIU) ⁴⁵⁷,which indicates that as of the end of February 1997, the average rate on Bank Indonesia certificates was 8.75 per cent. ⁴⁵⁸ Adding 3 per cent to this figure results in an interest rate on the $690 million loan of 11.75 per cent.

8.106 The next task is to determine the "benchmark" interest rate against which TPN�s interest rate should be judged. Because the Government of Indonesia did not provide the loan to TPN directly, but instead directed banks to provide the loan, it would be inappropriate to use the Government�s cost as the benchmark. Instead, one must use the cost of the actual lender; in this case, the banks. The cost to a bank is reflected in the interest rate that it would charge a comparable commercial borrower. Again, because the Government of Indonesia refused to provide relevant information in its Annex V responses, the United States has been forced to estimate the benchmark interest rate based on the best information otherwise available to it.

8.107 The United States began with the rate on a 10-year "Yankee Bond" that the Indonesian Government began to issue in July 1996. ⁴⁵⁹ According to EIU, the rate on this US$ denominated bond was set at 7.825 per cent, 1 percentage point above the 10-year Treasury bond rate. ⁴⁶⁰ The use of a US$ denominated benchmark is appropriate, because in AV/16, p. 4, Answer 13, Indonesia referred to a US$ denominated rate.

8.108 The United States added a spread of seven percent to the Yankee Bond rate of 7.825 per cent. According to EIU, p. 28 (Exhibit 16), Indonesian bank spreads range from three to seven percentage points, depending on the reputation of the client. As discussed above, TPN was not a reasonable credit risk for a loan of the magnitude of $690 million. ⁴⁶¹ Therefore, a bank would have charged the maximum spread to a commercial borrower comparable to TPN. Adding 7 per cent to the Yankee Bond rate results in an interest rate of 14.825 per cent.

8.109 Finally, the United States added on a "risk premium" to more accurately reflect the fact that TPN was an unsound credit risk. In other words, a bank lending to a borrower comparable to TPN would have charged more than 14.825 per cent in order to cover its (the bank�s) costs. In the absence of any other information, the United States relied on the methodology used by the US Department of Commerce to calculate a risk premium under the US countervailing duty law. Under this methodology, in the case of a company considered to be "uncreditworthy," the Department of Commerce adds to the "benchmark" interest rate an amount equal to 12 per cent of the prime rate in the country in question. Here, the United States used 10.825 per cent as the prime rate. This was based on the Yankee bond rate (7.825) plus 3 per cent, 3 per cent being the low spread for bank lending. ⁴⁶² 12 per cent of 10.825 equals 1.29 per cent. Adding 1.29 per cent to the benchmark rate of 14.825 results in a final benchmark rate of 16.124.

8.110 Having determined the interest rate paid by TPN (11.75 per cent) and the cost to the banks (16.124 per cent), we next must calculate a "grant equivalent" of the benefit received by TPN from the loan. The first step in this process is to calculate the net present value of payments under the loan to TPN and the benchmark loan. The difference in payments between the two loans constitutes the subsidy.

8.111 Assuming that there will be interest-only payments during the 3-year grace period, and assuming an 11.75 per cent interest rate, the payment schedule for the loan to TPN is as follows:

8.112 Using 16.124 per cent as the interest rate, the payment schedule for the benchmark loan is as follows:

8.113 Having calculated payment schedules for both the loan to TPN and the benchmark loan, we now must calculate the net present value of the payment differentials. This results in the following schedule, using a standard net present value calculation and a discount rate of 16.124 per cent:

8.114 Having calculated a "grant equivalent" of the loan payment differential of US$122,847,850, the next step is to translate this lump sum into annual benefits. For this purpose, the United States has prorated the amount of the "grant equivalent" over a 10-year period based on the life of the loan to TPN. An amount is added to each annual allocation to account for the time value of money of the remaining unallocated portion, using a discount rate of 16.124 per cent. Using a "declining balance" formula, these two amounts are added together and divided by one plus the discount rate to obtain the amount of the "grant equivalent" allocable to any one year. This results in the following schedule of annual benefits:

8.115 The final calculation step is to translate the annual subsidy amount into an ad valorem percentage:

To continue with Like product

⁴⁵⁷ US Exhibit 16.

⁴⁵⁸ According to EIU, these certificates are the primary tools used by Bank Indonesia to control interest rates and money supply.

⁴⁵⁹ See EIU, p. 3 (US Exhibit 16).

⁴⁶⁰ Because it is highly unlikely that anyone but the US Government is in the business of issuing US$ denominated Treasury bonds, the United States assumed that the reference in EIU to the 10-year Treasury bond rate is to the 10-year US Treasury bond rate.

⁴⁶¹ In this regard, the United States emphasizes that in the Annex V process, Indonesia refused to answer questions regarding TPN�s financial situation. See AV/15, Question 12/29(d) and AV/16, Question 12/29(d).

⁴⁶² EIU, p. 28 (US Exhibit 16).

⁴⁶³ The United States has assumed that payment on the TPN loan will not begin until 1998, thus rendering 1998 "Year 1" of the loan. In addition, pursuant to paragraphs 2 and 3 of Annex IV of the SCM Agreement, the denominator in the ad valorem subsidy calculation is based on sales in the preceding year. Accordingly, the denominator for the 1998 subsidy is based on 1997 sales, the subsidy for the 1999 subsidy on 1998 sales, and the subsidy for the 2000 subsidy on 1999 sales.

The figures for 1998 and 1999 sales (Column 1999 and Column 2000) were taken from Attachment A-28, AV/14. The figure for 1997 sales (Column 1998) was estimated based on data in Attachment U-12, AV/14. The United States calculated the total sales value of cars imported during a particular year by calculating an average sales price.