to appreciate in terms of sterling. You explained your reasons for thinking that such default and appreciation were unlikely to co-exist.
As far as security for the project was concerned, you made it clear that ECGD would look for the same sort of Hong Kong government guarantee as ECGD had received for the HK mass-transit and tunnel project. You would not be willing to let your security depend upon the expected viability of the project, or the availability of coal supplies from mainland China, as Sir L Kadoorie appeared to be suggesting during his discussion with the Prime Minister on 26 July.
We discussed the arguments for charging a higher premium for this project, partly because of its unusual nature, but also to provide a bit of fat against the expected subsequent approaches to shade the price downwards wherever possible. The general feeling was that this course was probably not desirable, as premiums were governed by market considerations, and not something to be bargained over. Possible variations in premium were not in any event all that significant in a negotiated contract of the sort envisaged, where costs generally were being pared down to the bone.
We discussed also the role of Lazards, which had been mentioned on the last page of the letter dated 26 July from No 10. As you pointed out, the circumstances are very unusual in that DOI are leading negotiations as if they were themselves contractors, while the precise identity of the borrower is not yet known, and it is only the borrower who can nominate the leader of the syndicate of lending banks. Lazards and Schroder Wagg's involvement in the project makes them front runners to lead the syndicate. But as you pointed out, other banks are also interested in this contract, and until such time as the borrower decides whom to nominate as leader, ECGD needs to take an impartial. line with other enquirers. Lazards for their part should clearly put
up their offer.
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Mr Gemmill told us that he would be investigating two other methods of making our offer attractive to the customer cost escalation cover, and separate, cheap, short-term, financing so that ECGD's credit support would begin only after the fifth year. We shall look forward to hearing the outcome.
I am sending copies of this letter to David Shilson (Bank of England), Alastair Macdonald (DOI), P G F Bryant (DOT) and F R C Thompson (FCO).
Yours sincerely
Joan Kelley.
MISS J KELLEY