Mr F W Glaves-Smith OFF
cc. Mr K W Cotterill - ECGD
Mr A C Stuart FCO(HKIOD) Mr M E Farry OFP2
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HONG KONG MASS TRANSIT SYSTEM
Mr Klein telephoned Thursday evening (27th) to report that while GEC themselves had had an extremely useful meeting on Wednesday with the Italians (Impresit) and felt that there were much common ground and complimentary strengths between them, nevertheless the possibilities of a joint bid were negatived by decisions yesterday of some of the British civil engineering companies,
The GEC approach to Impresit had been on the basis that the Italian share would be on the civil construction side and the British would be mechanical and electrical. The Italians explained that their export credit arrangements were such that these were far more favourable for the M and E than for the civil engineering. Therefore for the whole package to attract satisfactory financing terms there it would have to include an Italian M and E element. Even so the financing would still require British civil engineering participation for the sake of the ECGD terms available to them.
Accordingly on Wednesday it was tentatively agreed that the li and E side would be split 60/40 UK/Italy and the civil engineering side would be UK 30%-50% and Italy 70,-50%. GEC were very impressed with the approach to this business shown by the Italians.
These discussions on Wednesday were conducted by the GEC people though the civil engineers came in apparently towards the end, On Thursday the civils discussed the proposition among themselves and on Thursday evening put the proposals to the vote. The result was that Costain and Balfour Beatty were willing to go ahead provided the others did, but Mowlem, Taylor Woodrow, Tarmac and Cementation decided against. This decision, in GEC's view, sank all possibility of a satisfactory arrangement with the Italians and accordingly they cabled Lever in Hong Kong as in the attached copy.
I have this morning discussed this with Hugo Kindersley, believing that there might still be room for a satisfactory package to be put together based on the Italians doing the whole of the civil engineering and the M and E being split as previously agreed. He tells me that this possibility has in fact been left open with the Italians. Kindersley is looking into the financing aspects of it and is in touch with ECGD.
I learned from him that the Italian civil engineers have similar reservations about the risks of the underground work to those of the UK civils, but their approach is different. They are prepared to pursue the idea of a ceiling price in the hope that the ultimate contract will leave them with adequate protection. I understand ECGD have now learned that the Japanese have some concern about the effects of inflation and about the concept of a ceiling price contract.
/I