TNAG-0037-FCO40-73-Effort-to-improve-relations-with-Hong-Kong-1968 — Page 63

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CONFIDENTIAL

ANNEX A

Hong Kong: Cross-Harbour Tunnol

A separate background noto is attached giving the previous history of the scheme. This note sots out the prosent position of H.M.G. and, in the main, has not boon put formally to the Government of Hong Kong although the Financial Secretary (Mr. Cowperthwaito) is aware of the trond of our

thinking.

2.

The Tunnol Company proposed to finance about £10 million of the cost of the construction of tho tunnol by commercial credit arranged by the contractor. The background note records that whon this project was considered as a commercial proposition, E.C.G.D. asked for guarantoos which the Department wore satisfied that at that time the main cormorcial shareholders wore roady to

provido but which later they rofused to givo. E.C.C.D. considered that, in thesc circunstancos, it could only continue to participate if an unconditional guarantee was provided by the Hong Kong Govornont. This has not boon put formally to the Hong Kong Government.

3. The nood for guarantoos stems from the commercial nature of E.C.G.D,

In its fully commercial operations, under Section 1 of the Export Guarantoos

Act of 1949, E.C.G.D. is required to broak even. Under Section 2 of the Act (under which it is now proposed to underwrite the tunnel project) E.C.G.D.

may take "in the national interest" risks not otherwise thought commercially

acceptable. Whon this legislation was first introduced, the President of the

Board of Trado then Mr. Harold Wilson undertook that this would not bo

used to underwrite unduly hazardous or "quite crazy risks". E.C.G.D. are thus,

under both Sections of the Act, requirod to operato with commercial prudence.

If risks are largo, and particularly when borrowers' have no uncommitted capital

or assots other than the insured project, commercial prudonco requires then to

look for a suitable guarantee.

4.

In E.C.G.D's views (supported by the Treasury) the present case is onc

in which a guarantoc from the shareholders would no longer be appropriato

and a full guarantoo by the Hong Kong Government is essential. In view of

H.M.G's wish for political reasons to make a gesture of support to and confidence

in the Hong Kong econony, it has boon agrood that the Commonwealth Office nay

tako the exceptional stop of undertaking to meet half the cost of any call on

the guarantoo provided that contacts for loan and the construction and supply arc such as E.C.G.D. can support (sco paragraph 7 below) and subject to the further conditions in paragraph 6 below. H.M.G's guarantee is for 50% of a Hong Kong Governmont guarantoo of a loan of £10 million plus intorest. Those

proposals have not yet boon put formally to the Hong Kong Government.

CONFIDENTIAL

/5. If E.C.G.D.