CONFIDENTIAL
ANNEX A
Hong Kong: Cross-Harbour Tunnel
A separate background noto is attachod giving the previous history
of the schomo. This noto sets out the present position of H.M.G. and, in
the main, has not boon put formally to the Government of Hong Kong although the Financial Secretary (Mr. Cowperthwaite) is aware of the trond of our
thinking.
2. 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 whon 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 roady to
provide but which later they refused to givo. E.C.G.D. considered that, in
those circunstances, it could only continuo to participato if an unconditional guarantoo was provided by the Hong Kong Government. This has not boon put formally to the Hong Kong Government.
3. The nood for guarantoos stems from the commercial naturo of E.C.G.D.
In its fully commercial operations, under Section 1 of the Export Guarantoos
Act of 1949, E.C.G.D. is required to break oven. Under Section 2 of the Act (undor which it is now proposed to underwrite the tunnel project) E.C.G.D.
may tako "in the national interest" risks not otherwise thought commercially
accoptable. When 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 "quite 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 assots other than the insured project, commercial prudence requires then to
look for a suitablo quarantoo.
4.
-
In E.C.G.D's views (supported by the Treasury) the prosent case is onc
in which a guarantoc from the shareholders would no longer be appropriato
and a full guarantee by the Hong Kong Government is essential. In view of
H.M.G's wish for political reasons to make a gesture of support to and confidence
in the Hong Kong economy, it has boon agreed that the Commonwealth Office nay
take the oxcoptional stop of undertaking to meet half the cost of any call on
the guarantco provided that contracts for loan and the construction and supply arc such as E.C.G.D. can support (soo paragraph 7 bolow) and subject to tho further conditions in paragraph 6 bolow. H.M.C's guarantee is for 50% of a
Hong Kong Governmont guarantee of a loan of £10 million plus interest. Those
proposals have not yet bon put formally to the Hong Kong Government.
CONFIDENTIAL
/5. If E.C.G.D.