Miss J Kelley
HI Treasury
3 We are asked to repeat these arrangements for Units 3 and 4, the sterling value of which, including escalation, is £125m. GEC are contractually committed to make an offer for these units by 31 May, that offer to be valid for such time as is acceptable to the financial authorities. Thereafter GEC will be committed to maintain their prices, subject only to escalation measured by agreed formulae, until 1 November 1979 but the financial terms and conditions would then be those prevailing at the time. GEC's competitive position will be substantially weakened if cost escalation cover is not available to them and with this in mind they have asked us to make and maintain our offer of basic cover for the maximum period possible, which we consider to be six months, and to agree from the outset to a further four month extension on payment by CLP and ESSO of an irrevocable commitment fee of £125,000 payable at end November to secure the extension of the basic offer of cover until 26 March 1979 when the cost escalation scheme is due to expire unless extended.
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As you will have seen from Ken Cotterill's recent letter there has been some suggestion that the contract for Units 3 and 4 should be financed in sterling. This would help to offset the probable lack of any price subvention. Following discussions with GEC, DOI and Lazards (again appointed as Financial Advisers to DOI) we take the view that since the buyer has asked for an exact repetition of the terms agreed for Units 1 and 2 this should include dollar financing and no offer of sterling finance should be made at this stage. In adopting this line we are aware that if pressure for sterling finance were subsequently to become irresistible it could be difficult to claw back concessions such as maximum local cost financing, minimum Consensus interest rate of 72% (we would quote 81% for sterling if agreed) and the preferred cost escalation provisions all of which normally we would only be prepared to concede if the business were financed in currency. (A separate submission on cost escalation cover will follow in due course.) Nevertheless we think it inappropriate to offer sterling finance at this stage and approval is sought for a precise repeat of the terms conceded in respect of Units 1 and 2 for financing in US dollars.
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The Transmission System could present us with some difficult problems in relation to loan security but this is primarily ECGD's responsibility and we are waiting for details of the capital structure of the borrower which is expected to be a newly created wholly owned subsidiary of CLP who are already on record as not being prepared to guarantee this loan commitment. Unlike the figures for Units 3 and 4, which are kncım with a fair degree of precision, the figures for the transmission line are little more than first estimates at this stage. The tender will not be submitted until mid-August and would be valid for a three month period with the contract to be signed, say, November/December 1978. Once again CLP have indicated that they require a precise repetition of the terms conceded for Units 1 and 2, ie a loan equivalent to 100% of the UK element (including 15% for locals) with repayments over 8 years from mean commissioning with the same built-in flexibility. Again we are proposing to restrict our offer to dollar financing, and it is on this basis that authority is sought.
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6 Our present commitments on the market are represented by Stage 1 of the Mass Transit (TRC) together with Units 1 and 2 of the present power station. addition to the new business referred to in this letter we are due to sign this month a guarantee for further business with MTRC worth £20m (in Hong Kong dollars) and expect to be asked to support a further £100m for Stage II of the Mass Transit Scheme, some tenders for which are already invited. As shown in the attached schedule, our total liabilities including interest could thus approach £1,250m if all this business is secured by the UK. However, in the light of the country assessment, attached as Schedule IV, we have no hesitation in recommending both
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