6.267 Finally, Brazil states, despite the Panel's specific request, Canada has refused to provide project assessments and funding decision documents, including a Cabinet Memorandum detailing a "'recommendation, options, communications strategy, supporting rationale and analysis,'" and a Project Summary Form. Brazil observes that Canada's decision to withhold this information is based not upon the refusal of private parties to waive their confidentiality rights, but instead upon the Canadian government's own refusal to release documents prepared for itself by itself. Brazil submits that these documents likely provide insight into the very issue central to the dispute between Canada and Brazil regarding TPC grants to the Canadian regional aircraft industry - whether those grants are "'in fact tied to actual or anticipated exportation or export earnings.'" As a result of Canada's strategic decision to withhold these documents, Brazil contends, the Panel should adopt adverse inferences, presuming that the information contained therein demonstrates that TPC grants to the Canadian regional aircraft industry are in fact tied to actual or anticipated export (paras. 4.146-4.151). Brazil recalls the evidence it has submitted supporting this conclusion (paras. 6.219-6.229), and argues that Canada's decision to withhold documentation that could cast more light on the matter requires the Panel to conclude that Canada is hiding incriminating information.

C. Sale by Ontario of Ownership Share in de Havilland

1. Subsidy

(a) Arguments of Brazil

6.268 Brazil asserts that in January 1992, Bombardier and the Government of Ontario, through the Ontario Aerospace Corporation ("OAC"), purchased 51 and 49 per cent, respectively, of the shares in Boeing's de Havilland Division, for a total purchase price of Can$100 million,³⁸⁴ and that at the same time, Bombardier reserved the option to purchase from the Government of Ontario the latter's remaining 49-per cent share in de Havilland for a total of Can$49 million. Brazil states that in January 1997, Bombardier exercised this option, issuing to the Government of Ontario and the Ontario Aerospace Corporation ("OAC") a 15-year promissory note bearing interest at seven per cent with annual principal repayments of Can$4.9 million in years six through 15.³⁸⁵ As a result, according to Brazil, increases in de Havilland's equity did not accrue to OAC, whose return was strictly limited to its initial investment in de Havilland. Brazil further argues that OAC does not even appear to anticipate payment of Bombardier's $49 million note, as according to Brazil, the Government of Ontario forgave the obligation effective 31 March 1996.³⁸⁶ Brazil argues that Bombardier therefore has at its disposal OAC's equity capital, without the prospect of ever having to pass along an equity investor's reward to OAC.

6.269 Brazil also draws attention to a statement in Bombardier's Annual Report³⁸⁷ that Bombardier's payments on the $49 million note to OAC are "'reimbursable in anticipation under certain conditions'", and submits that the Panel should request that Canada explain completely what these conditions are, and why this does not mean that Bombardier will be reimbursed by some party for its payments on the $49 million loan.

6.270 Brazil further argues that during the period 1992-1997, OAC provided to de Havilland four distinct types of subsidies which made the purchase of OAC's 49-per cent interest even more attractive to Bombardier: interest-free shareholder loans in the amount of Can$200 million; cash grants (under DIPP) of up to Can$100 million; sales financing support for de Havilland's Dash 8 aircraft, including coverage of losses; and reimbursement of restructuring costs of up to Can$370 million,³⁸⁸ and OAC's offer to forgive all loans to de Havilland, absent certain undefined events of default.³⁸⁹

6.271 For Brazil, OAC's purchase of a 49-per cent interest in de Havilland and its simultaneous granting of an option to Bombardier to purchase that interest, within five years, for the same price initially paid by OAC, amounted to a cost-free option to Bombardier; Bombardier, in effect, got to play with OAC's money. According to Brazil, if de Havilland did not prosper, then OAC was the loser, while if de Havilland did prosper, then Bombardier was the winner. Ultimately, Brazil argues, Bombardier exercised the option and took over OAC's interest, and Bombardier's note for payment of OAC's remaining 49-per cent interest was subsequently forgiven. For Brazil, the Government of Ontario, through this action alone, conferred a benefit on Bombardier.

6.272 Moreover, the asserted extensive list of interest-free, non-repayable loans and grants provided by OAC to de Havilland during the period 1992-1997, totalling in excess of Can$300 million, confers according to Brazil a significant and obvious benefit to Bombardier. According to Brazil, the present value of these contribution is $874.7 million. For Brazil, it is inconceivable that OAC's 49-per cent share in de Havilland was worth the same in 1997, when purchased by Bombardier, as it was when initially acquired in 1992, given the extensive array of subsidies provided to de Havilland by OAC in the interim period. Brazil states that as a result of these subsidies, Bombardier received a massive windfall in 1997 when purchasing OAC's shares in de Havilland at a price fixed in 1992, before those subsidies made de Havilland a cash-rich venture. Brazil states that increases in de Havilland's equity resulting from these government contributions did not accrue to Ontario, whose return was strictly limited to its initial investment in de Havilland. Rather, the entire benefit flowed to Bombardier.

6.273 Brazil maintains that the accrual of this subsidy benefit occurred in January 1997 when Bombardier purchased OAC's remaining share of de Havilland. In response to a question from the Panel, Brazil clarified that it does not consider that the various contributions in the previous paragraph were themselves subsidies contingent upon export performance. Rather, they amplified the "benefit," within the meaning of Article 1.1 of the Subsidies Agreement, accruing to Bombardier when it purchased the remaining share of de Havilland in January 1997. Brazil maintains that contributions, the present value of which constitute $874.7 million, were made by the Canadian and Ontario Governments to de Havilland between 1992, when the $49 million price was set, and 1997, when Bombardier completed the purchase of de Havilland. Yet, the purchase price remained unchanged from that set in 1992. As a result, according to Brazil, it did not reflect the value added by these contributions.

6.274 Brazil estimates the present value in 1998 of benefits to Bombardier related to the acquisition and restructuring of de Havilland to be $874.7 million.³⁹⁰ For Brazil the amounts granted constitute both a transfer of funds and a massive benefit to Bombardier, within the meaning of Article 1.1 of the SCM Agreement.

(b) Arguments of Canada

6.275 In answer to a request from the Panel for documentation regarding the determination of the interest rate on the sale, Canada states that it has not put in a defence regarding whether these contributions are subsidies within the meaning of Article 1 of the SCM Agreement. Canada notes that Brazil is in agreement with Canada regarding the relevance of the principle of judicial economy to the issues to be determined in this case. Canada does not consider it appropriate to adduce evidence in response to what it views as baseless and false allegations and a case that has not been established, and in support of a defence Canada has not made. Accordingly, to the extent that any documents are produced by Canada in response to this question of the Panel, Canada states, they are provided to support Canada's submission that the contributions at issue are not "'contingent on export performance'" within the meaning of Article 3 of the SCM Agreement.

6.276 As a factual matter, Canada denies Brazil's allegation that "'Bombardier's note for payment of OAC's remaining 49-per cent interest was subsequently forgiven'". According to Canada, the Government of Ontario, forgave its loan to the Ontario Aerospace Corporation -- Ontario's own wholly-owned corporation -- on 31 March 1996. According to Canada, the Finan Report concludes, without any evidence whatever, that "'[i]t is clear that OAC does not expect to receive payment from Bombardier for its 49 per cent share in de Havilland.'"³⁹¹

6.277 Canada states additionally that the promissory note of Bombardier was not forgiven. Canada confirms that the sale price of $49 million, agreed to in 1992, was paid in the form of a promissory note by Bombardier to the Government of Ontario at the rate of 7 per cent; a copy of this promissory note was adduced into evidence by Canada.³⁹² Canada states that the interest rate was determined by the Ontario Financing Authority to be the appropriate market rate of interest to provide a commercial basis to the transaction. Canada submits a memorandum of January 1997 detailing the interest rate determination, in response to the Panel's request. Canada maintains that interest payments owing to date have been paid by Bombardier, indicating that the first payment of $3,430,000 was received by the Government of Ontario in January 1998. A copy of the cheque for this amount was adduced by Canada into evidence.³⁹³

6.278 Canada further indicates that that on January 28, 1997, Ontario announced the sale of its 49 per cent interest in de Havilland Holdings Inc. to Bombardier. The sale took place on the basis of a "put/call" option on the purchase of de Havilland Holdings Inc. by Bombardier and Ontario in 1992. The exercise period for this option was 1 February 1996, to 31 January 1997. Contrary to Brazil's assertion,³⁹⁴ Canada asserts, the option of selling its interest in de Havilland was exercised by Ontario.³⁹⁵

6.279 Regarding the $49 million sale price of de Havilland determined in 1992, Canada argues that whether or not de Havilland was solvent, whether or not its equity had increased, whether or not the restructuring loans would add value to de Havilland, the sale price in 1997 would be what had been agreed to in 1992. Canada explains that the Government of Ontario agreed to the sale price in 1992 because Boeing had poured $1.3 billion in de Havilland, only to sell it for $100 million after 6 years of operation. According to Canada, Ontario's participation in the project to revive de Havilland in 1992 was conditional on ensuring that at the very least Ontario would get its purchase money back.

6.280 Regarding the equity value of de Havilland at the time of the 1997 sale to Bombardier, in request to a question from the Panel, Canada submits a letter from the Vice President Legal Services of Bombardier. According to the letter, at the point of its sale to Bombardier by Ontario, de Havilland's audited statements showed that it had a negative equity value. The Panel requested copies of the audited statements and accompanying notes, and in response Canada states that the information requested by the Panel - detailed audited statements of de Havilland along with all accompanying notes and any other relevant documentation - is highly sensitive business confidential information that is not in the possession of the Government of Canada or the Government of Ontario, and that Canada's desire to present to the Panel such information as may help it to arrive at a decision must be balanced against the concerns of private parties not Party to this dispute.

6.281 Canada further asserts that Brazil has adduced no evidence in support of its assertions about the increase in de Havilland's value as a result of alleged subsidies between 1992 and 1997. In Canada's view, Brazil's unfounded and incorrect allegations about the alleged forgiveness of the $49 million promissory note show that Brazil's assertions about de Havilland suffer from a fundamental lack of credibility, and that Brazil's allegations about the rise in value of de Havilland should be viewed in that light.

(c) Response of Brazil

6.282 Regarding Canada's citation to Brazil's belief in the principle of "judicial economy", Brazil notes that in a letter to the Panel dated 13 December, reacting to the list of questions presented to Canada by the Panel, Brazil stated that in the course of these proceedings, Canada had made a deliberate decision not to present evidence rebutting Brazil's claims. In light of that decision, Brazil stated, the Panel could, consistent with the principle of judicial economy, have decided the issues raised in this case on the basis of the facts before it, rather than offer Canada yet another chance to present information in its defense.

6.283 Brazil disagrees with Canada's argument that "'Brazil's central allegation'" is that Ontario forgave Bombardier's $49 million loan to Bombardier for the purchase in 1997 of Ontario's remaining share in de Havilland. According to Brazil, paying this $49 million debt will not bring Bombardier anywhere close to offsetting the tremendous benefits that accrued to Bombardier when it purchased the remaining shares of de Havilland in 1997, given the contributions with a present value of $874.7 million made by the Canadian and Ontario Governments to de Havilland between 1992, when the $49 million price was set, and 1997, when Bombardier completed the purchase of de Havilland (paras. 6.271)³⁹⁶. Yet, the purchase price remained unchanged from that set in 1992, accruing a massive benefit to Bombardier when it completed the transaction in 1997.

6.284 Regarding the letter from Bombardier concerning de Havilland's equity value at the time of the 1997 sale to Bombardier, Brazil comments first that even if de Havilland's net equity value was negative at the time of its sale in 1997, this does not change the fact that it would have been even more negative if government contributions, the present value of which constitute $875 million, had not been made to de Havilland between 1992 and 1997. According to Brazil, these contributions increased the value of Ontario's equity beyond the price set in 1992, but Ontario was given no share in this increase.

6.285 Second, Brazil states, a negative net equity value does not give the complete picture of the value of a shareholder's equity. For Brazil, it does not mean that de Havilland was worth nothing - or less than nothing - to Ontario and Bombardier when purchased in 1997, noting for example that de Havilland's book of orders at the time of the sale³⁹⁷, although not factored into net equity value, represented value which an equity investor selling its shares could reasonably expect to be captured in the selling price of its shares.

6.286 Regarding Canada's response to the Panel's request for the audited financial statements of de Havilland, Brazil argues that Canada has failed to supply the background documents supporting the statements in the letter submitted as evidence in support of its defense, and that Canada has failed effectively to rebut evidence submitted by Brazil from the Public Accounts of Ontario detailing contributions, the present value of which constitute $875 million, made by the Canadian federal and Ontario governments to de Havilland between 1992, when the $49 million purchase price for Ontario's share in de Havilland was set, and 1997, when Bombardier completed the purchase of Ontario's share. For Brazil, Canada's argument that this injection of capital did not affect the value of Ontario's equity lacks credibility.

(d) Comments of Canada

6.287 Canada comments regarding Brazil's argument concerning de Havilland's order book that Brazil has adduced no evidence as to what the value of the de Havilland order book was on the date of sale, nor demonstrated that the value would have been sufficient to compensate the purchaser for the negative net equity value of de Havilland at the time. Thus, Canada submits, Brazil has not demonstrated that a benefit was conferred by the sale. Second, for Canada, any such valuation would have to reflect the possibility that orders might not result in actual sales. Third, according to Canada an order book does not indicate the viability of an aircraft manufacturer: Fokker's order book just prior to its bankruptcy in early 1996 contained firm orders for 81 aircraft, according to a table submitted by Canada on "Fokker Orderbook - As of December 1995", source: Lundkvist.

To continue with Export contingency

³⁸⁴ Bombardier press release, dated 29 January 1997 (Exh. BRA- 48).

³⁸⁵ Id. See also Bombardier 1996-1997 Annual Report, pgs. 49 (note 2), 55-56 (note 9) (Exh. BRA- 49).

³⁸⁶ Ontario Public Accounts, 1995-96, re. Ontario Aerospace Corporation, note 4 (Exh. BRA- 50). See also Exhibit B, Table B.8 of Finan Report.

³⁸⁷ Exh. BRA-49

³⁸⁸ Ontario Public Accounts, 1992-93, re. Ontario Aerospace Corporation (Exh. BRA- 51). See also Exhibit B, Table B.8 of Finan Report.

³⁸⁹ Ontario Public Accounts, 1992-93, re. Ontario Aerospace Corporation, note 4 (Exh. BRA- 51).

³⁹⁰ Exhibit B, Tables B.9 and B.10 of Finan Report.

³⁹¹ See also Section VI.F for the parties' comments on the Finan Report regarding the de Havilland sale. TPC Annual Report 1996-1997, p. 5 (Exh. BRA- 5); Industry Canada, News Release, 17 Dec. 1996 (Exh. BRA- 4).

³⁹² Exh. CDN-49

³⁹³ Exh. CDN-51

³⁹⁴ Brazil asserts that:

³⁹⁵ Government of Ontario, News Release, "Ontario Recoups Taxpayer Investment in De Havilland" (28 January 1997) (Exh. CDN-34).

³⁹⁶ Finan Report, pg. A.9-A.10.

³⁹⁷ The Clark Report notes that at the time of the sale, de Havilland had firm orders for the sale of 61 Dash 8 series aircraft. Clark Report, pgs. 39-40.