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J Butterworth Esq
H Treasury
15. Financing
Long term export credit finance at fixed interest rates for maximum amounts in Hong Kong dollars, offered in support of tenders, will be a major consideration when awarding contracts to overseas contractors. Factors to be taken into account when assessing tenders will include the size of the loan relative to the value of the contract, the rate and method of payment of interest, whether interest can be capitalised, charges and other fees and the repayment schedule.'
MTRC have already received ECGD support for Hong Kong dollar financing and the capitalisation of pre-commissioning interest plus other additional concessions for Stage II. They will certainly expect the first two items to be repeated and are confident that most if not all tenderers will comply. They will not hesitate to reject those that do not conform.
Hong Kong Dollar Financing
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In our view it is essential that we should be authorised to support HK dollar financing if UK tenderers are to have any hope of success. Any offer to support Hong Kong dollars should be subject to the condition that sufficient HK dollars were available at interest rate margins no greater than would be agreed for US dollar financing and as before no "take out" obligation for ECGD.
11.
In the previous cases where HK dollar financing has been agreed for MTRC, the contracts continued to be expressed in sterling or US dollars. MTRC was thus exposed to the risk of paying more Hong Kong dollars than were provided in the original loans where the Hong Kong dollar depreciated against sterling or the US dollar, in order to meet its contractual obligations. MTRC will try to avoid such a currency exposure on the Island Line project by asking for the contracts as well as the finance to be expressed in Hong Kong dollars. UK contractors are unlikely to agree to this which would, of course, throw the exchange risk onto them. We may, therefore, see novel financing proposals to overcome this, which we can consider on their merits as they arise. We shall resist firmly the pressure which will undoubtedly arise to provide Tender to Contract cover for Hong Kong dollars.
Length of Credit
12. We propose to offer 82 years credit for the construction and equipment contracts with repayments commencing from the appropriate commissioning date, ie from mid-1985 for work on the eastern arm of the extension and for the railcars and from mid-1986 for work on the western arm. In the case of the line of credit related to the consultancy contracts we propose to offer 5 years credit repayable from mid-1985 or earlier depending on the scope of the services.
Interest Rates
13. Since a firm commitment is required immediately for the consultancy services line of credit, we propose to offer the current interest rate for 5 years terms, ie 8%.
14. We would not, however, want to commit ourselves at this early stage to the 81% rate which currently applies to the longer credit proposed for the major contracts, given that the Consensus rates may shortly be increased, and that no firm tenders will be submitted until later this year. We propose to offer the Consensus rate current at the time when MTRC will start to receive firm tenders; this rate would then apply to all tenders made during the tendering period scheduled by MTRC.
According to the time-table proposed by MTRC this would mean offering
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