9.273 Brazil challenges assistance provided to the Canadian regional aircraft industry under the SDI and IQ programmes. We shall examine both types of assistance in turn, considering first whether such assistance takes the form of "subsidies" within the meaning of Article 1 of the SCM Agreement. Only if we find subsidization will we consider whether such assistance is "contingent ... upon ... export performance", within the meaning of Article 3.1(a) of the SCM Agreement.

(a) Assistance provided under the IQ programme

9.274 Brazil refers to the WTO November 1998 Trade Policy Review of Canada to argue that IQ assistance to the regional aircraft industry confers a "benefit" by "provid[ing] export guarantees for projects considered too risky by private financial institutions". We note that section A(i) of the WTO Trade Policy Review Mechanism provides that the review mechanism "is not, however, intended to serve as a basis for the enforcement of specific obligations under the Agreements or for dispute settlement procedures ...." Accordingly, we attach no importance to the Trade Policy Review of Canada in considering Brazil's arguments concerning IQ assistance to the regional aircraft industry.

9.275 Brazil has failed to adduce any evidence of IQ assistance to the Canadian regional aircraft sector. Accordingly, there is no basis for a prima facie case that IQ assistance has been provided to the regional aircraft industry in the form of export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.

(b) Assistance provided under the SDI programme

9.276 In its first submission, Brazil included a claim concerning a joint SDI / DIPP conditionally-repayable contribution of $43 million made in April 1989 for the development of Bombardier's 50-seat Canadair Regional Jet ("CRJ"). However, Brazil subsequently withdrew this claim on the grounds that the contribution is not subject to the SCM Agreement because, in its view, the SCM Agreement does not apply to allegedly prohibited export subsidies granted prior to 1 January 1995.⁶¹² In these circumstances, we will not consider this contribution in resolving Brazil's claim concerning SDI assistance to the Canadian regional aircraft industry.

9.277 The SDI Annual Report 1997-1998 refers to three contributions under the Aerospace Industry Development Fund. We consider that these contributions are covered by Brazil's claim, since its claim effectively covers all SDI assistance to the regional aircraft industry.⁶¹³ We note that these contributions are described in the SDI Annual Report as "loans and shares". In its first submission, Brazil expressly cites SDI documentation that refers to "loan[s] at the market rate". Since we consider that a "loan at the market rate" would not confer a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement,⁶¹⁴ these three Aerospace Industry Development Fund contributions provide no support for Brazil's claim against SDI assistance to the Canadian regional aircraft industry.

9.278 The SDI Annual Report 1997-1998 also refers to five FAIRE transactions. However, Canada has asserted that these transactions did not relate to the civil aircraft industry. As Brazil does not contest this assertion, these transactions provide no support for Brazil's claim against SDI assistance to the Canadian regional aircraft industry.

9.279 Brazil has adduced no further evidence in support of its claim against SDI assistance to the regional aircraft industry. Accordingly, there is no prima facie case that SDI assistance has been provided to the regional aircraft industry in the form of subsidies within the meaning of Article 1 of the SCM Agreement

9.280 For the above reasons, we reject Brazil's claims that SDI and IQ assistance to the Canadian regional aircraft industry takes the form of prohibited export subsidies, contrary to Articles 3.1(a) and 3.2 of the SCM Agreement.

9.281 We recall that Brazil asked the Panel to adopt "adverse inferences" that the SDI contributions under the Aerospace Industry Development Fund were de facto export contingent. In light of the above finding, it is not necessary for us to consider whether SDI assistance to the regional aircraft industry is contingent on export. Accordingly, we decline to consider Brazil's request for "adverse inferences" on this issue.

I. Technology Partnerships Canada and DIPP

9.282 Brazil asserts that prohibited export subsidies have been provided to the Canadian regional aircraft industry⁶¹⁵ under the TPC programme and its predecessor programme, DIPP,⁶¹⁶ contrary to Articles 3.1(a) and 3.2 of the SCM Agreement. Brazil is not challenging the TPC or DIPP programmes per se. Rather, Brazil is challenging the actual application of the TPC and DIPP programmes in the Canadian regional aircraft sector. We will first consider Brazil's claim against TPC assistance in the regional aircraft sector, and then Brazil's claim against the DIPP as applied. Furthermore, in reviewing the TPC programme as applied, we shall first address Brazil's arguments concerning subsidization. Only if we find in favour of Brazil on this issue will we consider whether TPC assistance to the regional aircraft industry is contingent on export.

1. Does the application of the TPC programme result in subsidies for the Canadian regional aircraft industry?

(a) Arguments of the parties

9.283 Brazil states that, according to TPC documentation, TPC was created in 1996 "to address the need by established companies in specific industrial segments to ensure that near-market products -- those with a high potential to stimulate economic growth and job creation -- actually reach the marketplace." Brazil notes that the specific sectors eligible for assistance from TPC are environmental technologies, enabling technologies, and aerospace and defence industries. Brazil submits that TPC's predecessor was the Defense Industry Productivity Program ("DIPP"). Brazil cites to a press report that suggests that DIPP "had been used primarily by aerospace companies." Brazil asserts TPC funding "is intended to cover outstanding commitments under the DIPP."

9.284 According to Brazil, TPC explicitly targets conditionally repayable investments in projects that result in a high technology product for sale in export markets. Brazil submits that such investments are conditionally repayable on a royalty basis, meaning that repayment will only occur if the underlying project achieves a certain degree of profitability. Brazil asserts that the provision of funds on such terms confers a "benefit" within the meaning of Article 1.1 of the SCM Agreement because the recipient has no down-side risk. If the project is unsuccessful, TPC and DIPP loans need not be repaid. Brazil also submits that, even if the Canadian government recovers its investment, its anticipated rate of return is well below that expected by a reasonable market investor, and does not compensate the lender for either the risk that it would have received no payment or the extended repayment period during which neither principal nor interest are due. According to Brazil, a reasonable market investor would expect a rate of return of 16.91 - 21.92 percent for airframe development expenses. Brazil also refers to the November 1998 WTO Trade Policy Review of Canada, which identifies TPC as a "subsidy" in the form of "grants".

9.285 Brazil has adduced evidence with regard to a number of specific alleged TPC contributions. In particular, Brazil has adduced evidence with regard to: a $87 million contribution to Bombardier for the development of the CRJ-700 (1996); a $57 million contribution to de Havilland for the development of the Dash 8-400 (1996); a $100 million contribution to Pratt & Whitney for the development of the PW150 turboprop engine used in the Dash 8(1997); a portion of a $12.7 million contribution to Allied Signal that concerns the development of power management generating system for the Dash 8-400 (1997); and a $9.9 million contribution to Sextant for the development of avionics systems for the Dash 8 and a flight control system for the CRJ (1998).

(i) $87 million to Bombardier

9.286 Brazil challenges a 1996 $87 million TPC contribution granted to Bombardier to assist the development of Bombardier's 70-seat CRJ project, known as the CRJ-700. Brazil asserts that this contribution is conditionally repayable on a royalty basis. Brazil asserts that TPC would only receive a return on its investment upon the sale of the 401st aircraft. Assuming a royalty rate of $580,000 per aircraft, with 25 aircraft sold annually, Brazil submits that TPC's expected rate of return on this loan is 1.76 percent. Brazil submits that a commercial investor would expect to make a return of 16.91 - 21.92 percent for such an investment. Brazil asserts that an Article 1.1 "benefit" is conferred because the contribution was made to Bombardier on terms more favourable than those available to Bombardier from a private investor.

(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt & Whitney

9.287 Brazil also claims that a 1996 TPC $57 million contribution to de Havilland to develop a 70-seat "stretch" version of the Dash 8 is inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement. Brazil estimates that this contribution would provide TPC a return of 3.02 percent. A similar claim is advanced by Brazil against a $100 million TPC contribution to Pratt & Whitney Canada, for work on the firm's 6,500 SHP PW150 turboprop engine. Brazil estimates a 3.31 percent return for TPC on this contribution. Brazil asserts that the rates of return for both contributions are "well below that which would be expected by a market investor", i.e., 16.91 - 21.92 percent, and therefore confer a benefit.

(iii) $12.7 million TPC contribution to Allied Signal; and $9.9 million TPC contribution to Sextant Avionique

9.288 Brazil also made specific claims against a 1997 $12.7 million TPC contribution to Allied Signal, a portion of which is for the development of the power management generating system for the Dash 8-400, and a 1998 $9.9 million contribution to Sextant Avionique Canada Inc. (hereinafter "Sextant") to be used for the development of the avionics system for the Dash 8-400 and the flight control system for the CRJ-700. However, Brazil stated that it was unable to analyse the precise rates of TPC return on these contributions because of insufficient information in the public project announcements.

9.289 While expressly denying that TPC transactions constitute subsidies within the meaning of Article 1 of the SCM Agreement, Canada did not put in a defence regarding whether TPC contributions are subsidies. Canada's argues primarily that TPC is not contingent upon export performance. However, Canada made a number of comments concerning the terms on which TPC assistance is provided. Canada states that TPC contributions usually constitute a portion - on average less than 30 per cent - of the eligible costs of a project incurred by the recipient. Canada asserts that TPC contributions are repayable, generally on a royalty basis tied to the market success of a project. Canada considers that TPC contributions constitute investments rather than loans, since TPC shares in the rewards of successful projects, and TPC returns are not limited to a fixed amount. Canada asserted that TPC royalty-based repayment is not tied to profits, but to sales. Royalties can either be tied to sales of a specific product to be developed under the project, to sales of a family of products to be developed under a project, or to total sales of the recipient enterprise.

9.290 Canada objects to Brazil's reliance on the November 1998 WTO Trade Policy Review of Canada. Canada asserts that the Trade Policy Review was conducted pursuant to the WTO Trade Policy Review Mechanism, section A(i) of which provides that the review mechanism "is not, however, intended to serve as a basis for the enforcement of specific obligations under the Agreements or for dispute settlement procedures ...."

9.291 Canada confirmed that each of the specific contributions identified by Brazil were made under the TPC programme.

(b) Additional information on the specific TPC contributions identified by Brazil

(i) $87 million to Bombardier

9.292 On the basis of the information adduced by Brazil concerning the $87 million TPC contribution to Bombardier, we asked Canada to provide inter alia: complete details of, and to comment on, the terms and conditions of the $87 million Bombardier contribution; copies of all application documents (including any pre-screening submissions, application forms, supporting business plans, sales and/or export projections including "expected clients, units, prices and timing", repayment plan of the applicant, etc.); and assessments and funding decisions by TPC pertaining to that contribution. We also asked Canada to specify commercial borrowing rates in Canada for debt of comparable size, risk level and maturity prevailing at the time the contribution was made by TPC. Furthermore, we asked Canada to comment on the estimated rate of return calculated by Brazil for the $87 million Bombardier contribution.

9.293 In its response, Canada stated:

9.294 Regarding our request for internal TPC project assessments for the $87 million contribution, Canada stated:

In an effort to comply to the greatest extent possible with the Panel's request, Canada will briefly summarize the basis for its investment in the CRJ-700 project. The key considerations were as follows:

• the timing of the project coincided with planned Canadair workforce reductions and would create or maintain 1,000 jobs during the development phase alone.
• the CRJ-700 was planned to advance the state-of-the-art in regional jet operating performance and would provide tangible benefits to operators in Canada and abroad.
• the project would offer real opportunities for participation by domestic aerospace sub-contractors to expand their sales base and enhance their technical capabilities.
• project risk was considered manageable in light of Bombardier's proven track record and because the technical risk was mitigated by the fact this aircraft was a stretch version of an existing platform - the CRJ50.
• market risk was also manageable given the CRJ50's strong position in the regional jet market, and the preference by airlines to utilize families of aircraft to reduce part inventories and training requirements.
• independent market forecasts and Industry Canada's sectoral experts confirmed that the size of the potential market for a 60-90 seat regional jet to be in excess of 1,000 units through 2010.

9.295 With regard to our request for commercial borrowing rates, Canada responded that:

9.296 Brazil provided a number of comments on Canada's replies to our questions. Brazil states inter alia that Canada "has wholly or selectively redacted any and all information which could be at all informative to the Panel." For this reason, Brazil asks the Panel to "adopt adverse inferences, presuming that all information withheld by Canada is inculpatory", and that the $87 million Bombardier contribution is an export subsidy prohibited by Article 3 of the SCM Agreement.

9.297 Brazil also submits that only if CRJ-700 meets the most optimistic market forecasts would TPC reach the maximum rate of return estimated by Canada. In any event, Brazil asserts that even Canada's own estimate of TPC's rate of return on the $87 million Bombardier contribution is below market, i.e., below 16.91 - 21.92 percent.

(ii) $57 million TPC contribution to de Havilland; and $100 million TPC contribution to Pratt & Whitney

9.298 On the basis of the information adduced by Brazil concerning the TPC contributions to de Havilland and Pratt & Whitney, we asked Canada to provide inter alia: complete details of, and comment on, the terms and conditions of these contributions; copies of all application documents (including any pre-screening submissions, application forms, supporting business plans, sales and/or export projections including "expected clients, units, prices and timing", repayment plan of the applicant, etc.); and assessments and funding decisions by TPC pertaining to those contributions. We also asked Canada to specify commercial borrowing rates in Canada for debt of comparable size, risk level and maturity prevailing at the time the contribution was made by TPC. Furthermore, we asked Canada to comment on the estimated rate of return calculated by Brazil for these contributions.

9.299 In its response, Canada stated:

9.300 In response to our request for comments on the rates of return estimated by Brazil, Canada relied on the same arguments as for the aforementioned $87 million TPC contribution to Bombardier. Thus, Canada asserted that a number of assumptions supporting Brazil's estimation "have no basis in fact". Canada also asserted that the methodology of Brazil's estimation of TPC's return is "less than credible", and that the estimation contained a number of "fundamental problems" that have led to "fantastical estimates". Unlike the Bombardier contribution, however, Canada did not provide specific arguments seeking to rebut the rates of return estimated by Brazil.

9.301 As with Brazil's reaction to Canada's refusal to provide detailed information concerning the $87 million Bombardier contribution, Brazil asks the Panel to "adopt adverse inferences, presuming that all information withheld by Canada is inculpatory", and that the two TPC contributions in issue are subsidies prohibited by Article 3 of the SCM Agreement.

To continue with $12.7 million TPC contribution to Allied Signal;

⁶¹² See para. 9.43 above.

⁶¹³ WTO document WT/DS70/2.

⁶¹⁴ We recall our interpretation of the meaning of "benefit" at para. 9.120 above.

⁶¹⁵ We note that Brazil's request for establishment of a panel (WT/DS70/2) refers to various alleged prohibited export subsidies provided to the "Canadian industry producing civil aircraft". Our terms of reference, therefore, relate to assistance provided to the Canadian civil aircraft industry. With the exception of its first written submission, however, all findings requested by Brazil concerning TPC refer to the "regional aircraft industry". Similarly, all arguments and evidence adduced by Brazil concerns the regional aircraft industry. For this reason, we only examine Brazil's claim against TPC assistance insofar as such assistance relates to the Canadian regional aircraft industry.

⁶¹⁶ In response to a question from the Panel, Brazil confirmed that the phrase "predecessor programs" in its request for establishment is restricted to the DIPP.