-2-
6.
The Department's offer is in respect of a loan of £8,115,625 from Lloyds Bank. This represents almost 64% of the contract price of about £13 million. It was estimated on the basis of 85% of the U.K. element (64.5% of the total price) plus 20% of this 85% for local costs. Repayment is over seven years from completion for the U.K. element, five years from completion for the local element (At an early stage in negotiations it was learned that Japanese tenderers were prepared to offer seven, or possibly eight, years credit, which E.C.G.D. agreed to match.)
7.
Costains have tendered on this basis (in association with U.S. consultants and a Hong Kong construction company). Tenders have also been submitted by a Japanese company, a German-Swedish-British consortium and possibly one other. Costains and the British Trade Commissioner in Hong Kong have now been told by the Chairman of the Tunnel Company that the Costain tender is favoured by the Tunnel Company, but that its acceptance may depend on an increase in the credit portion of the price and on the removal of the requirement for a joint and several guarantee.
In acknowledging Costains' offer the Tunnel Company have referred to these two conditions. They suggest that if the loan could be increased to 75% of the contract value "this would give your tender an added financial advantage which could be decisive". They state that a joint and several guarantee by the two participant companies cannot be provided.
9.
In E.C.G.D.'s view if an increase in the size of the loan were to ensure that Costains got the contract this would be justified, up to 70% or even possibly 75% of the contract value. The U.K. element is almost 65% and under existing authorities E.C.G.D. could insure the whole contract on a credit basis (requiring say 20% by completion) if two-thirds of the contract value represented British goods and services. The Trade Commissioner in Hong Kong has been confidentially informed that the Japanese tender is based on a loan of 80% of the price. Judging by experience elsewhere this is entirely credible.
•
10. The proposal that we dispense with the joint and several guarantees from Wheelock Marden and Hutchisons is much more difficult. It is a fundamental and long-established principle of Financial Guarantees that there shall be reasonably adoquate security for loans made to buyers independent of the capital created by the loan (Buyer Credits necessarily follow F. G. principles and practice in this matter).
The Department recognises that the creation through the instrument of the loan of a revenue-earning capital asset might in some casos, provided that the asset is properly managed and operated, provide good secondary security, but this must remain incidental to the borrower's basis commitment, in any circumstances to repay the loan.
11.
Otherwise guaranteed loans would be performing the function of risk capital without control of management; and would involve E.C.G.D. in speculative trading risks at fixed interest rates well bolow the return such risks would justify.
12. The effect of agreeing to dispense with guarantees from the shareholders would be that we would be guaranteeing a loan of some £10 million on the sole security of the successful operation of the Tunnel. During the three years the tunnel will take to build the loan would be totally unsecured.
2
13. E.C.G.D. asked for the companies' joint and several guarantees only because the Hong Kong Government and banks insisted that they were unwilling to support the schome with theirs. The participating parties evidently wish strictly to limit their commitment until they see whether it is a success. It would be odd if E.C.G.D. took risks on the viability of the project which are unacceptable to local beneficiaries. The major risk must remain with the interested Hong Kong parties.
/If