909
CONFIDENTIAL
SECRETARY OF STATE
ce Minister (TCA) PUSS(Trade)
Secretary
Secretary (Trade) (o.r) Mr Denman Dep Sec (o.r) Mr Watson OPP
HONG KONG MASS TRANSIT SYSTEM
I attended this morning a meeting of the British Group, in preparation for what may be the last round of negotiations with all four consortia. The round begins tomorrow, with the British Group and continues with the Europeans in London and the Japanese in Tokyo until 12 September, After this round, the Hong Kong Government may select one, or two consortia, for the final negotiations. I found the British Group taking a poor view of their chances of success,
2. The problem is price, both the absolute level and the firmncsa with which it is being quoted. The price is higher than that of either of the two European consortia and, while lower than the Japanese, it compares unfavourably because the Japanese have quoted a fixed price. It is quite possible that the competition Gre making unrealistic quotations, cither out of ignorance of Hong Kong conditions, or cynically knowing that once the Hong Kong Government becomes committed to a particular consortium, and work is in progress, they will be able to extract a better price.
3. The British Group obviously has to make a realistic offer. The contract is too large, and the uncertainties on the civil side still too great, for them to be able to take undue risks. The Hong Kong Government's present insistence on a ceiling price is also a serious matter for them because of the inevitable cost escalation in a contract taking about 6 years to complete. The only line the British Group can take is to say:-
(a) theirs is a realistic offer based on recent experience of
the Hong Kong tunnel;
(b) the Hong Kong Government need not be concerned about cost
escalution because it will be more than matched by inflation of revenues from fares;
(c) they will remove as many uncertainties as they can from the
pricing but it will still be impossible to quote a "ceiling"; and
(d) competitors who purport to quote fixed prices in this
situation should be treated with great reserve,
1.
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