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

9.302 On the basis of the information adduced by Brazil concerning the TPC contributions to Allied Signal and Sextant, 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.

9.303 In its response, Canada stated:

9.304 In light of Canada's refusal to provide the detailed information requested by the Panel, 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.

(c) Evaluation by the Panel

9.305 We recall that, in order for Brazil's claim against TPC assistance to the Canadian regional aircraft industry to succeed, there must be, first, at least a prima facie case that such TPC assistance takes the form of "subsidies" within the meaning of Article 1 of the SCM Agreement. In particular, there must be a prima facie case that TPC assistance to the regional aircraft industry constitutes "financial contributions" by a government or public body (Article 1.1(a)) that confer "benefits" (Article 1.1(b)).

(i) Is there a prima facie case that TPC assistance to the Canadian regional aircraft industry takes the form of subsidies?

9.306 We are in no doubt that TPC contributions constitute "financial contributions" by a public body within the meaning of Article 1.1 of the SCM Agreement, as they are direct transfers of funds by the government of Canada, in the sense of Article 1.1(a)(1)(i). Canada has not disputed this fact.

9.307 As to the question of "benefit", Brazil has adduced evidence demonstrating that at least three specific TPC contributions in the regional aircraft sector have been negotiated on terms that do not provide for a commercial rate of return. The total value of these contributions is $244 million. These contributions therefore account for approximately 68 per cent of TPC contributions to the aerospace and defence sector during the period 1996-1997.⁶¹⁷ We recall that, in our opinion, a "benefit" is conferred when a financial contribution by a public body is made on terms more favourable than those available to the recipient on the market. Accordingly, we find that Brazil's arguments concerning these three specific contributions establish a prima facie case that TPC assistance to the Canadian regional aircraft industry confers "benefits" within the meaning of Article 1.1(b) of the SCM Agreement.

9.308 In light of the above, we find a prima facie case that TPC assistance to the Canadian regional aircraft industry has taken the form of "subsidies" within the meaning of Article 1.1 of the SCM Agreement.

(ii) Has Canada rebutted the prima facie case of subsidization?

9.309 We must now consider whether Canada has rebutted the prima facie case that TPC assistance to the Canadian regional aircraft industry has taken the form of "subsidies".

9.310 We note that Canada does not challenge Brazil's claim that TPC assistance to the Canadian regional aircraft industry constitutes "financial contributions" by a public body, within the meaning of Article 1.1(a) of the SCM Agreement.

9.311 As a general matter, Canada asserts that "TPC repayment terms are negotiated so that on a net present value basis they are cost-revenue neutral or better". Furthermore, Canada asserts that "the relevant consideration for determining the rate of return for the [five] TPC contributions in question was the Government of Canada's cost of funds." With regard to the $87 million contribution to Bombardier specifically, Canada states that its estimation of the return (i.e., [X-BCI]) percent is sufficient to cover TPC's cost of funds. Canada therefore seeks to rebut the prima facie case by arguing that TPC contributions do not result in any net cost to the Canadian Government. However, we recall our earlier finding⁶¹⁸ that net cost to government is not a relevant consideration for the purpose of determining the existence of a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement. Canada's arguments concerning net cost do not, therefore, rebut the prima facie case of "benefit".

9.312 Canada has criticised the methodology behind Brazil's estimation of TPC's return on the three specific contributions discussed above. In the event that such criticisms were to demonstrate that TPC's rate of return corresponded to a commercial benchmark, these criticisms would be highly relevant in the present case. However, Canada is unable to demonstrate that this is the case.⁶¹⁹ Canada only provided detailed arguments concerning Brazil's estimation of TPC return with regard to the $87 million Bombardier contribution. Canada argues that Brazil has underestimated TPC's return on the Bombardier contribution by [X-BCI] percent. Canada does not demonstrate that TPC's return on the Bombardier contribution is actually equivalent to a commercial benchmark. In fact, in response to a Panel request for "commercial borrowing rates" for comparable investments, Canada explicitly confirms that it does not seek a commercial return, noting that "the relevant consideration for determining the rate of return for the [five] TPC contributions in question was the Government of Canada's cost of funds". In order to rebut the prima facie case of "benefit", we consider that Canada must do more than simply demonstrate that the amount of specific "benefit" estimated by Brazil may be incorrect, or that TPC's rate of return covers Canada's cost of funds. Rather, Canada must demonstrate that no "benefit" is conferred, in the sense that the terms of the contribution provide for a commercial rate of return. To the extent that Canada's criticisms of Brazil's methodology and estimates fail in this regard, and in light of Canada's admission that it has sought only to cover its cost of funds, we consider that Canada has failed to rebut the prima facie case of "benefit".⁶²⁰

9.313 We note that, in conjunction with its reply, Canada submitted a number of documents concerning the $87 million Bombardier contribution, including Bombardier's application for TPC assistance, business plans, market assessments and sales forecasts. However, these documents were extensively redacted, which in our view significantly undermined their practical value for the purpose of assessing Brazil's claim of "benefit". Canada provided no specific documentation whatsoever concerning the terms of the remaining four TPC contributions identified by Brazil. As noted above, however, Canada did state in answer to the Panel's question that on all five of the contributions identified by Brazil, the goal was only to cover Canada's cost of funds. We note in addition that, more generally, Canada has provided as a business confidential document a memorandum concerning TPC's repayment policy. Canada states that, according to this policy, "TPC's repayment terms are negotiated so that on a net present value basis, they are cost-revenue neutral or better". We consider this to be an admission by Canada that TPC generally, as a matter of policy, does not seek a commercial rate of return on its contributions, including those to the Canadian regional aircraft industry. We note that Canada's admission to this effect with respect to the five contributions identified by Brazil confirms us in this view.

9.314 For the above reasons, we find that not only has Canada failed to rebut the prima facie case that TPC contributions to the Canadian regional aircraft industry constitute "subsidies" within the meaning of Article 1 of the SCM Agreement, in fact Canada has confirmed that case by admitting that TPC neither seeks nor earns a commercial rate of return on these contributions.⁶²¹

9.315 Accordingly, we find that TPC assistance to the Canadian regional aircraft industry constitutes "subsidies" within the meaning of Article 1.1 of the SCM Agreement.

(iii) Is TPC assistance to the Canadian regional aircraft industry contingent on export performance?

9.316 In order to complete our examination of Brazil's claim against TPC assistance to the Canadian regional aircraft industry, we must now consider whether such assistance is "contingent ... upon export performance" within the meaning of Article 3.1(a) of the SCM Agreement.

9.317 Brazil submits that TPC assistance to the Canadian regional aircraft industry is contingent in fact upon export since it is provided by TPC precisely because the Canadian regional aircraft industry is export-oriented and is anticipated to remain so. Brazil argues that the export-orientation of the Canadian regional aircraft industry is the condition for the grant of the subsidies, in the sense that the subsidies "would not have been granted were it not for the virtually total export orientation of the Canadian regional aircraft industry."

9.318 Brazil notes that the 1996-1997 TPC annual report itself recognizes the aerospace industry as "highly export oriented". Furthermore, Brazil refers to funding statistics in the TPC 1996-1997 annual report to allege that TPC is captive to the Canadian aerospace industry, and more specifically, the regional aircraft industry. Brazil submits that such support is, as an historical matter, par for the course. Brazil asserts that TPC's predecessor, DIPP, channelled subsidies to the aerospace sector totalling approximately $2 billion.⁶²² Brazil also asserts that statements made by the Canadian Government in announcing its $267 million in grants to the regional aircraft industry demonstrate that those grants are tied to the Canadian Government's anticipation, based on ample historical evidence, that the industry will maintain its 100 percent export orientation. Brazil refers to Industry Minister John Manley's statement that "[a]erospace is a crucial sector for Canada's economy, with exports growing at 10% per year." Brazil also refers to a statement by Mr. Herb Gray, Leader of the Government in the House of Commons and then-Solicitor General of Canada, concerning the $57 million TPC contribution to de Havilland that "[t]hese two outputs of the Dash 8-400 project -- the creation of jobs and the building of exports -- are just what the government had in mind when we established Technology Partnerships Canada earlier this year." Brazil asserts that neither these statements by senior Canadian Government officials nor the statements about the industry in TPC's promotional materials were crafted in a vacuum. According to Brazil, at the time the Canadian Government was making these statements, it was aware of the fact that every single sale of Dash 8 series aircraft made since 1992, and every single sale of the CRJ since its development and commercialization, had been for export.

9.319 Brazil argues that the Canadian regional aircraft industry is devoted to exports. Brazil acknowledges that TPC assistance may be granted to other industries with domestic sales. Brazil asserts, however, that such assistance is not relevant to its claim concerning TPC assistance in the regional aircraft sector. According to Brazil, the Canadian Government has made it very clear that it maintains massive amounts of support to the Canadian regional aircraft industry precisely because it is an export industry and precisely because they anticipate that it will continue to be an export industry. According to Brazil, export orientation and performance are central to TPC's decision-making processes in the aerospace and defense sector, since maintaining exports is identified as a key factor to consider in awarding TPC grants and evaluating TPC projects, and since information about a project's export performance is requested and maintained by TPC. Brazil submits that this represents further evidence that TPC grants to the industry are "in fact tied to actual or anticipated exportation or export earnings" within the meaning of Article 3 of the Subsidies Agreement.

9.320 Brazil asserts that TPC practices embody precisely the meaning of the term "export subsidies in fact." Brazil submits that to fail to apply the de facto export subsidy provision in these circumstances would be to reduce the prohibition of de facto export subsidies to inutility, and to give WTO Members a license to provide export subsidies with abandon, subject only to the limitation that they avoid using the word "export" in their laws and regulations.

9.321 Canada asserts that TPC is not contingent upon export performance. Canada submits that TPC provides support to a broad base of sectors and technologies that touch on virtually all industrial sectors of Canada. Specifically, eligible sectors and technologies include the aerospace and defence sector (including defence conversion), environmental technologies and "enabling" technologies, which include biotechnologies, information and communication technologies, and advanced materials and advanced manufacturing technologies. Canada states that, as of September 30, 1998 TPC has approved 65 projects representing a total of $582 million in multi-year investments; of these, 48 projects ($174.5 million) involved environmental and enabling technologies, with the balance going to the aerospace and defence sector. Canada submits that the basic objectives of the TPC programme are set out in its Charter, according to which TPC aims, among other things, "to maintain and build the industrial technology and skill base essential for internationally competitive products and services". Canada asserts that the basic objectives of TPC are to:

9.322 Canada asserts that TPC does not have "export performance" as a condition, in law or in fact, of project support. According to Canada, nothing in the application documents or the contribution agreements of TPC identifies export performance as a condition for eligibility for or approval of contributions. Canada submits that there is no requirement, in law or in fact, that the products resulting from the research and development investment by the Government of Canada be exported. The recipient does not suffer additional penalties because it did not sell into export markets. If additional contributions by the government are due, they are not terminated because exports do not take place. And royalties payable to the government are not increased on domestic sales if export sales are not made. Canada asserts that recipients' repayment obligations are not in anyway affected by whether the sales are made in Canada or outside Canada.

9.323 Canada argues that TPC contributions are simply conditional on success - and on presenting a successful business plan. Canada provides the example of a prospective recipient, such as the developer of a water-treatment facility for aircraft, in support of this argument. Canada hypothesises that the recipient comes to the administrators of TPC with the project, and suggests that it can sell 10,000 units, in export markets. According to Canada, the questions that the administrators of the programme will put to the proponent of the project will not concentrate on the export aspects of the project. Rather, they will ask whether the project is going to be viable. That is, whether the business plan makes sense so that the contribution is not wasted. Canada submits that the same questions will be asked of a project proponent who asks for a contribution for the development of arctic flight navigation equipment that can be used only in Canada. That is to say, is the project viable?

9.324 Canada acknowledges the phrase "maintain and build upon the technological capabilities and production, employment and export base [of Canada]" in the TPC eligibility criteria for the aerospace and defence sector. Canada asserts, however, that the export base can be maintained and built-upon in different ways. Subsidies that develop a country's global competitiveness and thus maintain and build upon its export base are not inconsistent with the SCM Agreement for that reason alone. To so argue would be to suggest that the SCM Agreement permits only subsidies that are, at best, neutral as to competitiveness and productivity. According to Canada, that would render illegal just about every industrial and labour adjustment programme the world over.

9.325 Canada understands Brazil to argue that TPC is inconsistent with Article 3 because some of its contributions have been made in a sector that is export-oriented and to companies that export. Canada asserts that this is not the test in Article 3. According to Canada, official acknowledgements of the importance of the aerospace sector to the Canadian economy, and the fact that the creation of jobs and building of exports are objectives of TPC, are irrelevant to the issue of export contingency. Furthermore, Canada submits that the "export propensity" of the aerospace sector is a fact of the market rather than a condition or requirement of the programme. Canada asserts that the world aircraft industry is one of the most globalized industries, with few countries producing all the necessary technology domestically and all relying on economies of scale for profitability. Canada submits that the Canadian aerospace sector is no different. In addition, Canada argues that in view of the small size of the Canadian market, the significant dependence of the Canadian economy in general and the manufacturing sector in particular on exports, it would not be unusual if a large proportion of the sales of Canadian manufacturers are made in markets other than Canada. Canada notes that Brazil acknowledges that TPC funding is also available for projects that result in sales in domestic markets. Canada understands Brazil to argue that the mere fact that companies in the civil aviation sector engage in exports turns a programme that is also available for domestic markets into an export contingent subsidy. In this regard, Canada also denies Brazil's argument that every single sale of Dash 8 series aircraft made since 1992, and every single sale of the CRJ since its development and commercialization, had been for export.⁶²³

9.326 Canada suggests that Brazil, by emphasising the term "anticipated" in footnote 4, is advocating a pure "intent" test. Canada criticises such an approach because it would render the general objective of a subsidy determinative of whether that subsidy is "contingent ... in fact ... upon export performance". Canada argues that any prospective analysis inherent in the term "anticipated" cannot undermine the conditionality of the phrase "tied to". Canada argues that conditionality must be read into the phrase "tied to" because (1) this is the ordinary meaning of "tied to", and (2) the phrase "tied to" elaborates on the term "condition" in the main text of Article 3.1(a). Thus, Canada argues that "'tied to ... anticipated exportation' cannot and does not translate into 'granted with the general intent that exports somehow increase'. Rather, it means that 'one of the conditions for the grant of the subsidy is the expectation that exports will flow thereby'." Canada also expressed this approach using the phrase "but for", whereby a subsidy is "contingent ... in fact ... upon export performance" or "tied to ... anticipated exportation or export earnings" if the subsidy "would not [have been] paid but for the expectation that exports would ensue" (emphasis in original). In response to a question from the Panel whether a subsidy would be "tied to ... anticipated exportation or export earnings ... when one of the reasons for the grant of the subsidy is the expectation that exports will flow thereby, or when the subsidy is granted because of the expectation that exports will flow thereby", Canada acknowledged that the reason why a subsidy is granted could be relevant to the extent that it "establishes the condition for the grant of the subsidy".

9.327 On the basis of the information adduced by Brazil, we asked Canada to provide inter alia the "project assessments and funding decisions by TPC" for each of the five TPC subsidies in issue. We recall that Canada refused to provide the Panel with this material. Canada asserts that the relevant material constitutes "cabinet confidence" or "Ministerial advice" that cannot be divulged. The Panel also asked Canada to provide the full TPC Interim Reference Binder, which provides guidance to TPC employees on the administration of the TPC programme. Canada complied with this request.

9.328 Reacting to Canada's refusal to provide "cabinet confidence" or "Ministerial advice", Brazil asserted that "[t]he decision to withhold these documents, which are exclusively within the possession and control of the Canadian government, must carry adverse consequences for Canada, or the good faith obligation contained in Article 3(10) of the DSU will become meaningless. The Panel should presume that these documents contain information prejudicial to Canada's position."

9.329 Concerning the TPC Interim Reference Binder which Canada did provide, Brazil identified the following extracts which, in its view, demonstrate that TPC's funding decisions for the aerospace and defense industry are tied to export:

• Section 3.2.3 of TPC's "Terms and Conditions" states that "[c]ontributions under the Aerospace and Defence component will be directed to projects that will maintain and build upon the technological capabilities and production, employment and export base extant in the aerospace and defence sector";
• Section 3.3 of the TPC Charter, entitled "Aerospace and Defence (including Defence Conversion)" states that "[i]nvestments will be directed to projects that build on and maintain technological capabilities and the production, employment and export base of the sector";
• Part B of Schedule B of the TPC Aerospace and Defense Generic Model Agreement specifically calls for any representations by an applicant regarding "export markets penetration through marketing partnership agreements with foreign companies";
• Schedule C from the same Model Agreement, representing a form for "Report[s] on Estimated & Actual Sales and Royalties" requires the reporting of export sales revenues;
• Page 10 of the 1996-1997 TPC Business Plan notes that TPC's "approach" in the aerospace and defense sector is to "[d]irectly support the near market R & D projects with high export market potential";
• Page 12 of the 1996-1997 TPC Business Plan records the proportion of the aerospace and defense industry's revenue allocable to exports.

9.330 We note that Brazil does not claim that the TPC programme is de jure export contingent. Rather, Brazil asserts that TPC contributions in the regional aircraft sector are "contingent ... in fact ... upon exportation", within the meaning of Article 3.1(a) of the SCM Agreement. We recall that, according to note 4 of the SCM Agreement, the "contingent ... in fact ... upon exportation" standard is met when:

To continue with Interpretation of "contingent ... in fact ...

⁶¹⁷ TPC Annual Report 1996-1997. The TPC programme was launched in 1996.

⁶¹⁸ See Section C above.

⁶¹⁹ We note that Canada does not dispute Brazil's argument that a commercial investor would expect a rate of return of 16.91 - 21.92 percent on TPC's $87 million contribution to Bombardier. With regard to the $87 million TPC contribution to Bombardier, Canada's own estimate of TPC's return on that contribution is [X-BCI] percent. Thus, even Canada's own estimate of TPC's return is substantially below the commercial investor benchmark proffered by Brazil and not rebutted by Canada. In this context, we recall as well the statement by a Canadian official in the context of EDC (see para. [135] above), that commercial investors demand a return on equity of between 15 and 20 percent. We find this statement to be useful corroboration of Brazil's estimated commercial rates of return, as in our view, TPC contributions are similar to equity investments in that, as with equity investments, TPC contributions will only be repaid if the funded projects are commercially successful.

⁶²⁰ For this reason, we do not consider it necessary to address the merits of Canada's criticisms of the methodology behind Brazil's estimates of TPC's rate of return.

⁶²¹ In light of this finding, we do not consider it necessary to address Brazil's request that the Panel adopt "adverse inferences" in examining the question of whether the TPC financing at issue constitutes a "subsidy". We regret, however, that Canada chose not to provide the Panel with the full details requested by the Panel concerning this financing, and we believe that had it been necessary to do so, the Panel may have been required to make inferences on the basis of the information available.

⁶²² Canadian Taxpayers Federation study, "Corporate Welfare - A Report on Sixteen Years of Industry Canada Financial Assistance," April 16, 1998.

⁶²³ Canada's principal argument is that Brazil has overlooked a domestic transaction involving one Dash 8, and that Brazil has misclassified one transaction concerning 26 CRJs as for export, when in fact the transaction was domestic. We do not consider it necessary to make findings on the accuracy of Brazil's argument, since in this paragraph Canada effectively acknowledges the "export propensity" of the aerospace sector, and that a "large proportion" of Canadian civil aircraft are exported.

⁶²⁴ Article 31.1 of the Vienna Convention on the Law of Treaties provides that a treaty shall be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."