(a) Arguments of Brazil

6.322 According to Brazil, the Société de Dévéloppement Industriel du Québec ("SDI") provides prohibited export subsidies, in the form of loans and guarantees, to the civil aircraft industry. Brazil states that SDI has recently been "'regrouped'" for administrative purposes into a new corporation, known as Investissement-Québec ("IQ").⁴²¹ Brazil indicates that IQ maintains the resources, including the staff, of SDI.⁴²² Brazil states that IQ administers the Industrial Development Fund and the Private Investment and Job Creation Promotion Fund ("FAIRE"),⁴²³ which provides various forms of "'financial assistance'" and "'government support'" to certain focus industries, foremost among which is the aerospace industry.⁴²⁴ Brazil draws particular attention to what Brazil terms FAIRE's pledge to extend "'refundable or non-refundable contributions,'" loan guarantees, and the "'assumption of interest charges'" for eligible projects.⁴²⁵

6.323 Brazil argues that SDI funding is extended on a conditionally-repayable basis, meaning that repayment will only occur if the underlying project achieves the degree of success outlined by Brazil. Brazil asserts that because the recipient has no down-side risk - i.e., if the project is unsuccessful, SDI funds need not be repaid -- a clear benefit is conferred, within the meaning of Article 1.1 of the SCM Agreement.

6.324 Brazil draws attention to the finding in the most recent WTO Trade Policy Review of Canada that IQ "provides export guarantees for projects considered too risky by private financial institutions," and that IQ assistance "is available for export development or expansion, or purchases of foreign companies, or for contract finance." For Brazil, by offering guarantees for projects which are, in the words of the Trade Policy Review "considered too risky by private financial institutions," IQ makes a potential direct transfer of funds and confers the obvious benefit, within the meaning of Article 1.1 of the SCM Agreement, of providing resources which would otherwise simply not be available. In light of this, Brazil states, SDI funding need not be extended on a conditionally repayable basis to constitute a subsidy. Brazil also states that although the joint DIPP/SDI contribution for the development of Bombardier's 50-seat regional jet is not subject to the Panel's jurisdiction (paras. 4.74-4.78), it still considers the "'conditionally-repayable'" terms attached to it to be persuasive as evidence that funding on such terms is as a general matter available and extended to the Canadian regional aircraft industry.

6.325 Brazil maintains that it has demonstrated that funds are being and have been provided to this industry, and that they are being and have been provided under conditions constituting a subsidy within the meaning of Article 1.1 of the SCM Agreement. Brazil believes that, having come forward with this evidence, Canada should be asked by the Panel to produce the evidence placed at the disposal of the WTO Secretariat in the process of conducting the Trade Policy Review.

(b) Arguments of Canada⁴²⁶

6.326 In response to a Panel request for an explanation of, and the internal assessment documents and loan/share agreements under, Garantie Québec "ad hoc programmes" and "the financing of major projects", in particular the three "financing of major project" activities totalling $7.1 million under the Aerospace Industry Development Fund, and five FAIRE activities, during the 1997- 1998 period Canada states that Canada notes 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 agrees with Canada regarding the relevance of the principle of judicial economy to the issues to be determined in this case. Accordingly, Canada states, to the extent that any documents are produced by Canada in response to this question of the Panel, they are provided to further support Canada's submissions that the contributions at issue are not "contingent on export performance" within the meaning of Article 3 of the SCM Agreement.

6.327 Canada also states that Brazil has made no specific allegation about contributions made under the SDI, nor adduced any evidence in support of its vague and unspecific allegations concerning "benefits" under the SDI. Canada further states that Brazil has made no allegations and has adduced no evidence in respect of the Aerospace Industry Development Fund. Canada does not consider it appropriate to adduce evidence in response to allegations not made and a case that has not been established.

6.328 Finally, Canada states, most of the information requested by the Panel is sensitive business confidential information, and Canada's desire to present to the Panel such information as may help it arrive at a decision must be balanced against the commercial interests and legal rights of private parties not Party to this dispute. Accordingly, Canada indicates, with the express permission of the Government of Québec, it has provided as business confidential information the contribution agreements with les Industries Aerospatiales Mecair Inc., Héroux Inc., and Finition de Métal National N.M.F. (Canada) Ltée. relating to the three projects under the Aerospace Industry Development Fund, with the clauses relating to repayment terms blocked. Canada states that each agreement details the terms of the project, the contribution, and reimbursement.⁴²⁷

6.329 Canada also notes that the "ad hoc programmes" listed under the SDI relating to the civil aircraft sector are, in fact, activities under the Subsidiary Agreement that are administered (for Québec) through SDI, and that as a result, these programmes have already been accounted for.

6.330 In addition, Canada states, the five FAIRE activities in the 1997-98 period were not in the civil aircraft sector: one project was in the wood products sector, one in the heavy vehicles (trucks) sector, one in the tourist industry sector, and two in the computer sector. Accordingly, Canada states, these FAIRE activities do not fall within the jurisdiction of the Panel.

(c) Comments of Brazil

6.331 Regarding Canada's citation to Brazil's belief in judicial economy, Brazil recalls its reference to judicial economy in its letter to the Panel dated 13 December 1998 (see para. 6.281).

6.332 Brazil also argues that although Canada has provided the contribution agreements for the three Aerospace Industry Development Fund projects identified by the Panel, it has redacted the sections regarding repayment terms, as well as certain of the "conditions préalables." Brazil submits that these sections likely provide insight into whether the contributions are "in fact tied to actual or anticipated exportation or export earnings." Brazil argues that as a result of Canada's strategic decision to withhold this information, the Panel should adopt adverse inferences, presuming that the information suggests that the contributions are in fact tied to actual or anticipated export (paras. 4.146-4.151).

2. Export contingency

(a) Arguments of Brazil

6.333 For Brazil, SDI loans and guarantees (as well as those of Investissement-Québec) confer direct benefits on Québec businesses for the express purpose of assisting those businesses with "'[l]a conquète de marchés à l'exportation,'"⁴²⁸ and to support transactions "'à l'étranger.'"⁴²⁹

6.334 Brazil asserts that under SDI, the Government of Québec sponsors export programmes "'designed to promote the export of Québec-produced goods and services.'"⁴³⁰ According to Brazil, SDI was formed with the objective "'to promote economic development in Québec, particularly by encouraging the development of businesses, the growth of exports, research and the development of new techniques.'"⁴³¹ Brazil states that SDI provides Québec businesses with "'guarantee[s] of payment or repayment of a financial obligation'" and "'loan[s] at the current market rate'"⁴³² for the purpose of assisting those businesses with "'[l]a conquète de marchés à l'exportation,'"⁴³³ and to assist with "'tout projet d'exportation'" or "'de démarrage à l'exportation.'"⁴³⁴ According to Brazil, SDI does not fund only exports to other of the Canadian Provinces, but specifically supports transactions "'à l'étranger.'"⁴³⁵ Brazil asserts that every CRJ sale benefiting from the Can$43 million SDI loan for the development of the 50-seat CRJ has been for export,⁴³⁶ and that accordingly, SDI funding to the civilian aircraft industry constitutes an export subsidy in law or in fact prohibited by Article 3 of the SCM Agreement.

6.335 Brazil does not contest that some SDI/IQ funds may well have gone to other industries with sales in domestic markets. Brazil states that its claim that SDI/IQ assistance constitutes a prohibited export subsidy under Article 3 of the SCM Agreement is unrelated to these incidences of SDI/IQ funding. For Brazil, when SDI/IQ assistance goes to the Canadian regional aircraft industry, it goes to an industry that is totally export oriented, precisely because it is an export industry and the Government of Québec anticipates that it will remain so. For Brazil, the ordinary meaning of Article 3.1(a) of the SCM Agreement prohibits such assistance.

(b) Arguments of Canada

6.336 Canada maintains that the SDI is not contingent upon export performance. Canada observes that Brazil admits that the programme is available for goods destined for domestic as well as export market.

6.337 According to Canada, the SDI was established by the Loi sur la société de développement industriel du Québec⁴³⁷ (the SDI Act). In June 1996, the Garantie Québec programme replaced most operations under the SDI. Canada states that this programme is designed to guarantee loans, lines of credit or other forms of financing offered through a financial institution, and indicates that the programme supports projects dealing with start-up, expansion or modernisation, in the manufacturing or tourist sectors and in certain service industries; research, development or design, as well as marketing and financing of tax credits for scientific research or experimental development; marketing, acquisition of a company in another country, and financing of a line of credit; and business mergers, regrouping of common activities and take-over of one firm by another in the manufacturing and tourist sectors, and in certain service industries.

6.338 Canada states that according to Article 2 of the SDI Act, the objective of the SDI is to '�favoriser le développement économique du Québec, notamment en encouragent le développement des entreprises, la croissance des exportations et les activitiés de recherche et d'innovation.�' Canada notes that Brazil acknowledges that '�exportation�' in this context means exports outside Québec, including the other provinces of Canada. Therefore, for Canada, SDI has as a general objective the enhancement of Québec's competitiveness and, as a desirable but not necessary result, an increase in Québec's exports. Canada maintains that export performance is not a criterion of success for either the programme as a whole or its activities;⁴³⁸ and that export performance is manifestly not a condition for receiving contributions.

6.339 Canada maintains that the SDI comprises four sets of eligibility criteria, one of which is for 'export development', which includes credit insurance, financing for foreign direct investment by Québec companies, and inventory financing. Canada argues that 458 activities were authorised in 1997-1998, of which 53 per cent involved loans or loan guarantees of less than Can$200,000. One out of 39 financing activities and 96 out of 419 guarantees authorised was for exportation.⁴³⁹ According to Canada, the activities covered a wide range of industrial, transportation, resources and agricultural sectors (278 authorisations) and services (180 authorisations),⁴⁴⁰ but none were related to the civil aircraft sector.

6.340 Canada submits that in individual projects there are no rewards if exports take place and no penalties if they do not. More important, in Canada's view, is that SDI is not in law or in fact contingent upon export performance.

6.341 According to Canada, the sole basis for Brazil's allegation that SDI is inconsistent with SCM Agreement Article 3 appears to be that one of the objectives of the programme is "the growth of exports," although Brazil admits that Québec counts sales to Canada's other provinces as export sales. (para. 6.333) Accordingly, in Canada's view, there is no prima facie case for Canada to answer.

6.342 Canada also objects, for the reasons identified in its arguments concerning TPC (paras. 6.197- 6.199) to what it views as the inappropriate use by Brazil of Canada's trade policy review. Canada asks the panel to ignore Brazil's arguments about SDI that are based on that document.

F. Arguments Regarding the Finan Report Submitted by Brazil

1. Arguments of Canada

6.343 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.

6.344 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.

6.345 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.

6.346 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."

6.347 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.

6.348 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.

6.349 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.

6.350 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.

To continue with Response of Brazil

⁴²¹ Materials from SDI/Investissement-Québec website, at 1 (Exh. BRA- 65).

⁴²² Id. at 1, 3.

⁴²³ Id. at 2, 4-6.

⁴²⁴ Id. at 7-9, 10-11.

⁴²⁵ Id. at 5.

⁴²⁶ See also Section VI.F for the parties' comments on the Finan Report regarding SDI.

⁴²⁷ See BCI Tab 4.

⁴²⁸ SDI Website at 2 (Exh. BRA- 63).

⁴²⁹ Gouvernement du Québec, Ministère de L'Industrie, du Commerce, de la Science et de la Technologie, Répertoire des services offerts à l'exportation, p. 53 (Exh. BRA- 64).

⁴³⁰ Government Assistance Programmes - A Practical Handbook (15th ed., 1995), para. 135.230 (emphasis added) (Exh. BRA- 61).

⁴³¹ An Act Respecting the Société de Développement Industriel du Québec, para. 2 (Exh. BRA- 62).

⁴³² Id. at para. 135.240.

⁴³³ SDI Website at 2 (Exh. BRA- 63).

⁴³⁴ Gouvernement du Québec, Ministère de L'Industrie, du Commerce, de la Science et de la Technologie, Répertoire des services offerts à l'exportation, p. 53 (Exh. BRA- 64).

⁴³⁵ Id.

⁴³⁶ Clark Report, at pgs. 7-8, 13, 50-51, and Tables 1, 5 and 6.

⁴³⁷ Lois Révisées du Quebéc, c. S-11.01 (Codification administrative 94-09-16) (Exh. CDN-36).

⁴³⁸ Société de développement industriel du Québec, 1997-1998 Annual Report (Québec: Gouvernement du Québec, 1998) at 36-37, 40 (Exh. CDN-37).

⁴³⁹ Id.. at 22, Table 1 (Exh. CDN-37).

⁴⁴⁰ Id.. at 24, Table 2 (Exh. CDN-37).

⁴⁴¹ The comments in paras. 6.343 and 6.346 are contained in a document prepared by KPMG LLP submitted as an attachment to Canada's first submission.

⁴⁴² Finan Report, at A.1.

⁴⁴³ Id.. at A.2.

⁴⁴⁴ Id.. at A.3.

⁴⁴⁵ Andrew Littlejohns and Stephen McGairl, eds., Aircraft Financing, 3rd ed. (New Jersey, US: Euromoney Books, 1997) at Chapter 8 (Exh. CDN-48) and Appendix 1 (Exh. CDN-75).