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length of credit
ECGD have calculated that the cost of offering 15 rather
than 12 years repayments would be offset by an additional
1% on the interest rate to be offered.
Capitalisation of
pre-commissioning interest
ECGD have calculated that the additional cost of
capitalisation to the pre-commissioning stage could be
offset by making the interest rate correspond to the long-
term cost of Sterling funds (16.5%). The additional
cost would be partially offset by a compromise interest
point between the Consensus rate and the cost of funds
(eg. 13%).
These positions, if adopted, would negate the effect of the two concessions in Chinese
eyes and would serve to undermine the effectiveness of the best ab initio offer implicit
in the negotiated contract approach. It is felt that pyschologically the interest rate
is a prominent feature in any package of this kind and an attempt to negotiate higher
rates in order to reduce the cost of other concessions would be disproportionately
damaging to our negotiating position from the outset. It is therefore felt that such
a course should not be pursued unless there is clear agreement from other participants
(the French, the Americans) that they too will use the same tactics (Recommendation 4).
Length of Credit (see also Rate of Interest)
Since the credits conceded for the Castle Peak B Station extended over 12 years from
commissioning it would be unrealistic to consider terms less favourable for Guangdong.
However the Chinese are likely to expect 15 years. This period was suggested in the
feasibility study and both the French and Americans (particularly) might be prepared
to offer such terms. In a previous submission to Ministers (Annex D to be added)
in late 1980 it was acknowledged that a 10 year period could be offered. It is now
necessary to consider extending these terms of reference. (Recommendation 5).
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