988 GGGROBIEREGK
HOFO030707
PP F C O
GRPS 98%
RECEIVED IN REGISTRY 0, 018
- 7 FEB 1974
Ruby/HRIOS
for COPY
CYPHER/CAT A
FM HONG KONG 877845Z
Aay
2མ་རྩཆད ༧་ ་མ-- PA
1211
CONFIDENTIAL
TO PRIORITY FCO TELNO 172 OF 7TH FEBRUARY, 1974.
379
FOR STUART (MKIOD) FROM GOVERNOR.
JEZT
YOUR LETTER OF 3137 DECEMBER' ABOUT THE UNDERGROUND RAILWAY,
AND MY TELEGRAM NUMBER 41.
AGREEMENT WAS REACHED YESTERDAY WITH THE JAPANESE ON THE TERMS
OF A LETTER OF INTENT, TEXT IN MY IMMEDIATELY FOLLOWING
TELEGRAM. IT WILL BE SIGNED ON MONDAY. PLEASE LET ME KNOW IF
THERE IS ANY PARTICULAR LINE YOU WOULD LIKE US TO TAKE IN THRE PUBLICITY THAT WILL INEVITABLY ATTEND SIGNATURE CEREMONY.
2.
3.
I SET OUT BELOW THE ANSWERS TO THE QUESTIONS IN YOUR LETTER.
YOUR PARA. 3. (PARA. 7 OF EXECUTIVE COUNCIL PAPER.) THE JAPANESE DEFINITION OF FORCE MAJEURE''. SEE PARAGRAPHS 5 - 7 OF M.L.F.T.
NORMAL COST ESCALATION IS EXCLUDED, AS ARE ADDITIONAL COSTS FROM UNFORESEEN GEOLOGICAL CONDITIONS. THE DEFINITIONS IN THESE
PARAGRAPHS ARE GUIDELINES FOR THE NEGOTIATORS OF THE ACTUAL CONTRACT. THE LETTER WILL OF COURSE BE MORE TIGHTLY DRAFTED. DISCUSSION OF "INTERNATIONAL ECONOMIC DISASTERS' (PARA. 6 OF LETTER OF INTENT) MADE CLEAR THIS WAS TO COVER E.6. CESSATION OF OIL SUPPLIES, BUT NOT INCREASES IN THE COST OF OIL. INTENTIONS ABOUT COST ESCALATION AND INTERNATIONAL DISASTERS ARE CLEARER IN THE RECORD OF THE DISCUSSION (WHICH FORMS AN INTEGRAL PART OF LETTER OF INTENT) IN MY SECOND IMMEDIATELY FOLLOWING TELEGRAM.
4. THE DEFINITION OF FORCE MAJEURE'' INCLUDED IN THE LETTER OF
INTENT IS ALONG THE LINES OF THE INDICATIONS THE JAPANESE HAD GIVEN
US BEFORE WE VALIDATED THEIR PRE-EMPTIVE BID. IT DOES NOT INCLUDE NORMAL ESCALATION OF THE SORT INCLUDED IN THE ANGLO-ITALIAN COUNTER- BID, AND WE WOULD NOT HAVE VALIDATED THE JAPANESE PRE-EMPTIVE BID IF IT HAD, THE PHRASE IN THE EX, CO. PAPER TO BE DEFINED" IN THE CONTRACT', DID NOT MEAN THAT WE HAD NO IDEA WHAT IT WOULD BE ON 11TH DECEMBER, BUT THAT THE DEFINITION WOULD BE TIGHTENED UP
AND RECORDED IN THE CONTRACT. THE ASSURANCES THAT THE JAPANESE HAD PREVIOUSLY GIVEN US ABOUT THEIR INTERPRERETATION OF FORCE MAJEURE ARE OF COURSE SET OUT IN THE RECORDS OF THE GROUP'S
DISCUSSIONS WITH THEM.
5.
YOUR PARA. 4: CREDIT TERMS:
PARAGRAPH 14V (B) OF THE EX.CO. PAPER DEALT WITH THE RATE OF
INTEREST ALONE WHILE PARAGRAPH 18 (C) WAS AN OVERALL ASSESSMENT. THE LATTER COVERED PARAGRAPHS 14V (A) TO (D) AS AA PACKAGE. } AGREE THAT IN THE PAPER AS DRAFTED, PARAGRAPH 18 (C) MIGHT APPEAR TO BE A NON SEQUITER. (LAST TWO WORDS UNDERLINED) HOWEVER,
THE RECONCILIATION WAS GIVEN VERBALLY TO THE COUNCIL. THE JAPANESE
OFFER OF EXPORT CREDIT TYPE FINANCE WAS MARGINALLY
MORE FAVOURABLE IN CASH FLOW TERMS BECAUSE OF THE LONGER GRACE AND REPAYMENT PERIODS. BUT THE ISSUE WAS A MARGINAL ONE AND DID NOT AFFECT THE DECISION EITHER WAY.
6. YOUR PARAGRAPH 4. WAS IT REASONABLE TO ASSUME THAT IF WE ACCEPTED THE ANGLO-ITALIAN COUNTER-BID ITS EVENTUAL PRICE WOULD HAVE BEEN NOT MUCH BELOW ITS MAXIMUM? (PARA. 20 OF THE EX.CO. PAPER): WE HAD MADE CLEAR THAT OUR PRIME CONCERN WAS TO LIMIT OUR LIABILITY. THIS MEANS WE HAD TO HAVE A CEILING PRICE, OR IF YOUR PREFER, TO DECIDE ON THE BASIS OF THE WORST CASE. IN VIEW OF THE LIMITED NATURE OF HONG KONG'S RESOURCES IN COMPARISON TO THE SIZE OF THE PROJECT, OUR REASONS FOR THIS NEED NO EXPLANATION, BUT OUR RIGIDITY ON THIS ISSUE WAS REINFORCED BY THE IMPLICATIONS OF THE VERY HIGH LOAN ELEMENT IN THE FINANCIAL ARRANGEMENTS FOR THIS PROJECT. THIS PRODUCES A MULTIPLIER OF 8. THAT IS TO SAY THAT IF WE HAD ACCEPTED A PRICE OF SAY HK DOLLARS 6,000 MILLION FROM THE ANGLO-ITALIAN GROUP INSTEAD OF HK DOLLASR 5,000 MILLION FROM THE JAPANESE, THE ADDITIONAL COST TO THE M.T. AUTHORITY WOULD HAVE BEEN NOT POUNDS 1000 MILLION BUT POUNDS BOUMILLION.
7. IF WE HAD DECIDED ON 11TH. DECEMBER TO ISSUE A LETTER OF INTENT TO THE ANGLO-ITALIAN CONSORTIUM ON THE BASIS OF THEIR COUNTER-BID, WE HAD NO ASSURANCE AT THAT TIME THAT THEIR EVENTUAL PRICE WOULD BE MUCH LOWER THAN THE CEILING PRICE THEY HAD THEN INDICATED. THEY HOOPEED IT WOULD BE, IT MIGHT HAVE BEEN, BUT THERE WAS NO ASSURANCE, AND THE SUM INVOLVED WAS ENORMOUS. MOREOVER WE COULD NOT WAIT TO00 5SEEE WHETHER THEY COULD MAKE GOOD THEIR CLAIM TO TBE ABLE TO REDUCE THEIR PRICE, BECAUSE THE JAPANESE OFFER WAS TIME-BARRED TO MIDNIGHT ON 11TH DECEMBER.
8. IF ON DECEMBER 11TH. WE HAD CLOSED WITH THE ANGLO-ITALIAN CONSORTIUM AND THEIR PRICE TURNED OUT TO BE SIGNIFICANTLY IN EXCESS OF DOLLARS 5000 MILLION, WE WOULD HAVE HAD TO JUSTIFY TO THE PUBLIC WHY WE HAD ACCEPTED IT IN PREFERENCE TO THE JAPANESE WHO SE PRICE WOULD BE PUBLIC KNOWLEDGE. IF THE DIFFERENCE HAD NOT BEEN EXCESSIVE, SAY 5 PER CENT OR SO, WE MIGHT HAVE WRITTEN IF OFF AGAINST GOODWILL, BUT 20 PER CENT OR POUNDS 100 MILLION WAS TOO MUCH TO RISK, PARTICULARLY IN VIEW OF THE IMPLICATIONS OF THE MULTIPLIER OF 8.
8. 1 REALISE THERE ARE COMPLAINTS FROM SOME IN LONDON ABOUT OUR
INSISTENCE ON ASSUMING THE WORST CASE. I AM NOT SURE THAT THESE CAN BE REGARDED AS DIS-INTERESTED. WHEN I SUGGESTED THAT H.M.G. SHOULD UNDERWRITE LIABILITY IN EXCESS OF DOLLARS 5000 MILLION, THE D.T.. ASSUMED THEIR LIABILITY TO BE THE WORST CASE, AS TELEGRAM 1264 MADE CLEAR. NATURALLY, THE PARTY WHO HAS TO PAY AND JUSTIFY THE BILL TENDS PRUDENTLY TO ASSUME THE WORST CASE.
9.
I HAVE TELEGRAPHED ALL THIS MATERIAL AS PRESUME THE SIGNATURE OF THE LETTER OF INTENT MAY PLACE YOU UNDER PRESSURE. I HOPE
THE ABOVE PROVIDES WHAT YOU NEED. IT IS GIVEN IN THE
FIRST INSTANCE FOR F.C.0. PLEASE DRAW ON IT AS YOU THINK NECESSARY FOR INTERDEPARTMENTAL PURPOSES SO LONG AS CONFIDENCE VIS-A-VIS THE OTHER CONSORTIA CAN BE RESPECTED.
19.
WE WILL TELEGRAPH IN ADVANCE THE TEXT OF ANY SPEECH OR PRESS RELEASE BY OUR PEOPLE.
11.
DISTRIBUTION ON MR STUART'S INSTRUCTIONS.
MACLEHOSE