(b) Arguments of Canada

6.121 Canada argues that CRJ Capital, Inc. ("CRJCI") does not do what Brazil argues it does, i.e., that Brazil's submission is based on a misunderstanding of the operation of the CRJCI. Canada further submits that Brazil's allegation also casts in bold relief the difficulties that could arise as a result of a failure to conform to Article 6.2 of the DSU in fashioning a request for a panel (para. 4.38 - 4.58).

6.122 Canada states that its understanding of Brazil's request for a panel has been that Brazil wished to challenge the EDC's part ownership of the CRJCI, and that it was only upon receiving Brazil's first submission that Canada understood that by "'corporations established to facilitate the export of civil aircraft'" Brazil did not mean the CRJCI, but some "'special purpose corporations'" that have never been the subject of discussion between Canada and Brazil.

6.123 For Canada, the short answer to Brazil's claim (and the answer that Brazil would have received had the claim been put to Canada over the previous two years) is that neither the EDC nor the CRJCI have invested equity in the "special purpose corporations" mentioned by Brazil.

6.124 Canada states that the CRJCI was created as a result of a joint investment by Exinvest, a wholly-owned subsidiary of the EDC and Bombardier Inc. Each shareholder owns 50 per cent of CRJCI. Canada indicates that to date, in addition to the initial equity investment, the two shareholders have in equal proportion provided interest-bearing loans to CRJCI at commercial rates. According to Canada, CRJCI offers financing services for the CRJ through either direct lending at commercial rates or loan guarantees (paid for by fees from the borrower). To reduce the EDC's risk exposure, Bombardier's investment is in a first loss position, i.e., that in the event of a loss, Bombardier takes the loss first. Canada asserts that the only financing transactions that the CRJCI has participated in were for the sale of 17 CRJs to Air Canada. Canada indicates that these are domestic transactions and that therefore the financing provided did not constitute export credits, and that this is the only activity undertaken by CRJCI to date.

6.125 Canada states that neither the EDC nor the CRJCI has made any investments in special purpose corporations, and that Brazil's challenge is therefore without foundation.

6.126 Canada argues that Brazil's allegations with respect to "equity infusions" by CRJ Capital into Special Purpose Companies rest solely on an article in a transportation financing journal (para. 6.104) which Canada asserts is inaccurate, as CRJ Capital has provided no such equity infusions. For Canada, this is a clear example of why press reports that are uncorroborated or do not otherwise contain material with an independent title of credibility and persuasiveness are insufficient to support a prima facie case.²⁶⁰

6.127 The Panel asked Canada to comment on a number of exhibits submitted by Brazil in support of the claim of EDC equity infusions: ²⁶¹1995 EDC Chairman and President's Message, which indicates, regarding Exinvest, that EDC is able to support its customers with a unique combination of debt, equity and insurance instruments, and states that Exinvest's first investment is Canadair RJ Capital, a "50-50 joint venture with Bombardier used specifically to finance the export of regional jets"; a newspaper article²⁶² stating that by forming CRJ Capital EDC "is getting into the aircraft-leasing business", that CRJ Capital "marks the EDC's first foray into equity financing", and that "CRJ Capital will buy up to 30 per cent of each new Regional Jet, syndicate the rest to private-sector lenders and lease the aircraft back to the airlines"; a newspaper article²⁶³ containing a diagram, attributed to EDC, that shows RJ Capital Corp. providing 20 per cent of the equity to a special purpose company which owns the aircraft and leases it back to the airline; a newspaper article²⁶⁴ referring to CRJ Capital as "a leasing company designed to support sales of the Canadair RJ", and stating that "CRJC's initial mandate was to support sales of 75 aircraft"

6.128 Canada responded regarding the 1995 EDC Message that EDC has equity powers, but that these have not been used to invest in special purpose corporations. Regarding the first article, Canada states that it is incorrect in that: a) CRJ Capital is not an aircraft leasing company; b) CRJ Capital is not an equity financing vehicle; and c) CRJ Capital does not buy equity positions in aircraft. Regarding the second article, Canada states that the diagram is incorrect. Regarding the third article, Canada states that CRJ Capital is not a leasing company and has only participated in the commercial financing for the sale of 17 CRJs for Air Canada. Canada's response further indicates that neither the Canadian government nor EDC has provided through CRJ Capital or, by any other means, equity participation in any sales of Canadian produced civilian aircraft. Canada also states that that neither Exinvest, which is 100 per cent owned by EDC, nor CRJ Capital, which is 50 per cent owned by Exinvest, are special purpose corporations. Canada submits that in the civil aircraft sector, a special purpose corporation is generally utilized for the sole purpose of owning a single asset, and is predominantly used in US leveraged leases and other types of tax leveraged leases; in Canada's view, this appears to be consistent with Brazil's definition of an SPC.

6.129 Canada also disputes as incorrect Brazil's allegations that CRJ Capital acts as an aircraft leasing company, stating that CRJ Capital has not purchased aircraft and then leased them to airlines. Canada provides an officer's certificate from CRJCI²⁶⁵, and an officer's certificate for EDC's subsidiary, Exinvest, to this effect,²⁶⁶ and notes that the officer's certificate of CRJ Capital also states that CRJ Capital has not made any such equity investment, and that the officer's certificate for Exinvest also states that Exinvest has not made any equity investment in any corporation aside from its equity investment in CRJ Capital.

6.130 Canada also challenges Brazil's arguments with respect to Canadian Regional Aircraft Finance Transaction No. 1 Limited, (or CRAFT), as without foundation. Canada notes Brazil's understanding that "EDC and the Government of Québec provide equity capital and are preferred shareholders in CRAFT", which understanding Brazil appears to attribute to Standard & Poor's: "It is estimated by Standard & Poor's that EDC and the Government of Québec's combined participation could exceed US $300 million." (para. ) Canada argues that the source referenced by Brazil -- a Standard & Poor's Presale Report on CRAFT²⁶⁷ - makes no reference to participation by the EDC or the Government of Québec, and that there was no reference in Exhibits BRA-71 or 72, either. Canada submits that the figure set out in Exhibit BRA-73, however, has a prominent, bolded box listing EDC and the Government of Québec as preferred shareholders in CRAFT and that the source of this information, according to that figure, is Embraer. Canada maintains that CRAFT is a special purpose, independent company without any ties to the Government of Canada or the Government of Québec. Canada submits a letter from the Director of CRAFT Ltd. attesting to the fact that neither the Government of Canada, nor the Government of Québec, nor any agency of the Government of Canada (in particular EDC) nor any agency of the Government of Québec, have participated in the financing of CRAFT.²⁶⁸

(c) Response of Brazil

6.131 Brazil contests Canada's denial of the facts underlying its equity activities. Although Canada claims that CRJ Capital does not lease aircraft, but rather helps finance aircraft, and that it is not an SPC, Brazil argues that public statements from EDC itself state flatly that CRJ Capital is both a leasing company and an SPC.

6.132 In this regard, Brazil cites an EDC announcement of the creation of "'Structured Finance, Inc.,'" later called "'Exinvest,'" which states that Exinvest is to be "'the vehicle through which several special purpose companies,'" or SPCs, were to be created, the first of which was CRJ Capital.²⁶⁹ Brazil notes that the announcement states that CRJ Capital receives equity infusions from EDC, through Exinvest. Brazil also cites EDC's 1995 Message of the Chairman and President of EDC²⁷⁰ which states that Exinvest's first investment was CRJ Capital, as well as a quote from a former EDC President²⁷¹ that CRJ Capital was to be the model for other SPCs. For Brazil, the obvious implication of this is that CRJ Capital is an SPC itself.

6.133 Brazil also cites a quote from an EDC Vice-President²⁷² characterizing CRJ Capital as a leasing company, and stating that the plan is for it to be used in the lease or sale of as many as 75 CRJs. Brazil asserts that in interviews²⁷³, EDC officials, including EDC's president, stated that CRJ Capital purchases part of a plane, syndicates the rest to private-sector lenders, and leases the aircraft to an airline.

6.134 Brazil asserts that its factual understanding of EDC's equity financing activities is, therefore, derived directly from information issued by EDC itself, and not, as Canada argues, based "'solely on an article in a transportation financing journal.'" (para. 6.126) For Brazil, Canada's denial of facts which EDC and its officials have often and repeatedly held out to be true in public should not be considered credible.

6.135 In Brazil's view, Canada's arguments simply fail to respond to Brazil's claims. Canada states, in response to a question from the Panel, that EDC, Exinvest and CRJ Capital have not "provided . . . equity participation in . . . sales of Canadian produced civilian aircraft." According to Brazil, this is not, and has never been, Brazil's claim. Rather, Brazil's claim is that EDC, directly or indirectly, has made equity infusions into CRJ Capital which have facilitated CRJ Capital's ability to lease or sell Canadian regional aircraft at a reduced price.

6.136 Brazil, it is irrelevant whether or not CRJ Capital leases, or helps finance, aircraft, and whether or not CRJ Capital is, or is not, an SPC. In Brazil's view, the distinction is not relevant to the question whether EDC, through its direct or indirect equity investments in CRJ Capital, provides a "benefit." The point is that EDC's direct or indirect equity investment in CRJ Capital frees CRJ Capital up to accept a lower lease or loan payment from a lessor or purchaser of a Canadian regional aircraft than it would be able to accept in the absence of that equity investment, or to facilitate the ability of another SPC to do so. CRJ Capital is designed not to earn a profit during the term of the lease; therefore, only the debt portion of the capital used to finance the lease needs to be serviced during this period. According to Brazil, no payment is made to equity investors. Thus, the greater the percentage of equity capital in CRJ Capital, the lower the percentage of debt capital that must be serviced. The benefit, in short, is lower lease or debt payments for the airlines. As support, Brazil cites an Industry Canada official's statement that EDC's equity vehicle meets "[t]he challenge . . . to provide low cost financing to airlines with lower credit ratings," by permitting airlines with double-B credit ratings to lease new planes at interest rates normally offered to double-A credit risks.

6.137 Brazil argues that all of the information submitted by it regarding CRJ Capital is based upon undisputed and undenied public statements by EDC officials and public announcements issued by EDC itself. The statements regarding the benefits of EDC's equity vehicle remain unanswered "'statements against interest,'"²⁷⁴ to which Brazil argues the Panel should attach "'superior credibility.'" For Brazil, these statements illustrate both the nature and the degree of the "'benefit'" provided by EDC's equity investments, and demonstrate why those efforts constitute a subsidy under Article 1.1 of the Agreement.

5. Residual value guarantees

(a) Arguments of Brazil

6.138 Brazil asserts that at the end of an aircraft lease, in certain instances EDC also offers a "residual value guarantee," protecting against the risk that the residual value of the used aircraft will be lower than anticipated, with the guarantee further reducing the cost of financing.²⁷⁵ According to Brazil, such guarantees generate savings due to the reduced risk of having to absorb a loss from a lower-than-expected residual value, which savings can be passed along to the airline customer in the form of lower lease payments, essentially increasing the amount of direct financing beyond 85 per cent.

6.139 Brazil argues that although a higher residual value would normally mean a higher return for the SPC's equity investors, that benefit does not accrue to EDC, since EDC underwrites the cost of maintaining the higher residual value in the first place. According to Brazil, an inflated residual value does enhance Bombardier's return on its equity investment in CRJ Capital, and the residual value guarantee also benefits the airline customer -- the SPC is relieved of the burden of absorbing a loss from a lower-than-expected residual value, and can pass any savings along to the airline customer in the form of lower lease payments. According to Brazil, residual value guarantees thereby confer a clear benefit under Article 1.1 of the SCM Agreement.

6.140 In response to Panel questions regarding the coverage of Brazil claim in respect of residual value guarantees, Brazil states that its claim includes the grant by EDC of residual value guarantees per se as de jure export subsidies, and thus in all instances.

(b) Arguments of Canada

6.141 According to Canada, a residual value guarantee, which may take the form of an insurance policy, will guarantee to the lessor that, if the equipment is returned at the location and in the condition required by the lease or the guarantee, the equipment will be worth not less than a stated sum. Canada states that the residual value guarantor's sole recourse is to the equipment and its risk is entirely dependent on equipment value, not the credit of another person.²⁷⁶

6.142 Canada denies Brazil's allegations regarding residual value guarantees, arguing that Brazil's "'evidence'" with respect to "'residual value guarantees'" is based on an article that notes a "'suggestion'" that a deal completed in 1992 "'may have'" involved a residual value guarantee. The suggestion of a possibility in respect of a deal made prior to the entry into force of the WTO Agreement does not, in Canada's submission, amount to a prima facie case. In Canada's view, this is an example of a press report which is uncorroborated or does not otherwise contain material with an independent title of credibility and persuasiveness. Canada argues that Neither the EDC nor the Government of Canada has provided residual value guarantees through CRJ Capital²⁷⁷ or any other means in support of civil aircraft. Canada provides, in support of its argument, an officer's certificate from CRJCI ²⁷⁸ and an officer's certificate for EDC's subsidiary, Exinvest, to this effect.²⁷⁹

(c) Response of Brazil

6.143 Brazil argues that although Canada has submitted "officer's certificates" claiming that CRJ Capital and Exinvest have not issued a residual value guarantee, no such document has been submitted with regard to EDC itself. Brazil quotes from Exhibit CDN-54 to argue that Canada's "'failure to deny news stories published on the subject'" (paras. 5.18-5.21) - such as, in Brazil's view, the statements in an article included in Exhibit BRA-13 regarding EDC's provision of residual loan guarantees - constitutes a valid reason to infer that Canada's failure to include a similar certificate for EDC itself constitutes an admission of the practice.

6.144 Brazil believes that the circumstances of this case make this rule all the more applicable. Brazil states that when estioned by the Panel regarding its statements that "'EDC does not use any loan guarantees to supplement its financing activities,'" Canada defended itself by stating that it does not consider EDC loan guarantees to supplement EDC's other financing activities (para. 6.99). In light of Canada's tendency, in Brazil's view, to employ semantics to reveal less than the full and complete truth about EDC's operations, Brazil believes that the Panel should find the omission of a sworn statement regarding EDC's issuance of residual value guarantees to constitute an admission of the practice. Brazil states that it stands by its claim, therefore, that EDC has issued a residual loan guarantee on one or more occasions.

To continue with Canada Account

²⁶⁰ Keith Highet, (Exh. CDN-54).

²⁶¹ Exh. BRA-7

²⁶² Exh. BRA-8 (also included in Exh. BRA- 17)

²⁶³ Exh. BRA-18

²⁶⁴ Exh. BRA-20

²⁶⁵ See Officer's Certificate, CRJCI, 3 December 1998 (Exh. CDN-94).

²⁶⁶ Officer's Certificate, Exinvest, 10 December 1998 (Exh. CDN-93).

²⁶⁷ Exh. BRA-70

²⁶⁸ Letter from Timothy R. Myers, Director, Canadian Regional Aircraft Finance Transaction No. 1 Limited to Robert Greenhill, Bombardier Inc., dated 10 December 1998; letter from Charles Hyatt, Director, Greenwich NatWest Limited to Richard Sloan, Bombardier, dated 10 December 1998 (Exh. CDN-91).

²⁶⁹ Exh. BRA-17

²⁷⁰ Exh. BRA-7

²⁷¹ Exh. BRA-8

²⁷² Exh. BRA-20

²⁷³ Exh. BRA-8

²⁷⁴ Exh. CDN-54

²⁷⁵ "A Very Tactical Regional Response," Airfinance Journal, November 1994, at pgs. 18-20 (Exh. BRA- 13).

²⁷⁶ Milbank, Tweed, Hadley and McCloy, Re Residual Value Guarantees, 17 November 1998 (Exh. CDN-59); also, H. Ruda, Asset-Based Financing: A Transactional Guide, Vol. 4 (New York: Matthew Bender, 1998) at 38-20 to 38-21 (Exh. CDN-60).

²⁷⁷ Officer's Certificate, CRJCI, 3 December 1998 (Exh. CDN-58).

²⁷⁸ Officer's Certificate, CRJCI, 3 December 1998 (Exh. CDN-58).

²⁷⁹ Officer's Certificate, Exinvest, 10 December 1998 (Exh. CDN-93)