CONFIDENTIAL
ANNEX A
thi
Hong Kong: Cross-Harbour Tunnel
A separate background note is attached giving the previous history
of the schomo. This note sots out the prosent position of H.M.G. and, in
the main, has not boon put formally to the Government of Hong Kong al though the Financial Secretary (Mr. Cowperthwaite) is aware of the trond of our
thinking,
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The Tunnel Company proposed to finance about £10 million of the cost of
the construction of the tunnol by commercial credit arranged by the contractor.
The background note records that when this project was considered as a
commercial proposition, E.C.G.D. asked for guarantees which the Department
wore satisfied that at that time the main commercial shareholders were ready to
Provide but which later they refused to givo. E.C.G.D. considered that, in
these circumstances, it could only continue to participate if an unconditional
guarantoo was provided by the Hong Kong Government. This has not boon put
formally to the Hong Kong Govornnant.
3. The nood for guarantoos stems from the commercial nature of E.C.G.D.
In its fully commercial operations, under Section 1 of the Export Guarantocs
Act of 1949, E.C.G.D. is required to broak even. Under Section 2 of the Act (undor which it is now proposed to underurito the tunnel project) E.C.G.D.
nay take "in the national interest" risks not otherwise thought commercially acceptable. Whon this legislation was first introduced, the President of the
Board of Trade thon Mr. Harold Wilson undertook that this would not bo
used to underwrite unduly hazardous or "quito crazy risks". E.C.G.D. are thus, under both Sections of the Act, required to operate with commercial prudence. If risks are large, and particularly when borrowers' have no uncommitted capital or assets other than the insured project, commercial prudence requires thon to look for a suitable guarantoo.
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4. In E.C.G.D's viows (supported by the Treasury) the prosont case is onc in which a guarantoc from the sharoholders would no longer be appropriato
and a full guarantoo by the Hong Kong Govornment is essential. In view of
H.M.G's wish for political roasons to make a gesture of support to and confidence
in the Hong Kong economy, it has been agreed that the Commonwealth Office may tako the oxceptional stop of undertaking to meet half the cost of any call on the guarantee provided that contacts for loan and the construction and supply are such as E.C.G.D. can support (soo paragraph 7 below) and subject to the further conditions in paragraph 6 bolow. H.M.G's guarantee is for 50% of a
Hong Kong Government guarantoc of a loan of £10 million plus interest.
proposals have not yet been put formally to the Hong Kong Government.
/5. If E.C.G.D.
Those
CONFIDENTIAL