TNAG-0098-FCO40-134-Construction-of-a-Cross-Harbour-Tunnel-1968 — Page 125

CONFIDENTIAL

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that they wore not propared to guarantoo any part of tho loan. asked the Hong Kong Government to take the latter's 25% option ($27.5 million) and to persuade the Yaunati Forry Company to tako up tho romaining $21.5 million. Tho Governor, however, in reporting this approach, said that he might prefer to take up the whole $49 million and to offer tho Forry Company no more than would leave control in the hands of the Hong Kong Government and of tho liong Kong and Shanghai Bank.

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Rocent ovents in Hong Kong have made the tunnel project less of a good commercial risk but have greatly increased its political importance. The local Communist olements have sought by propaganda, intimidation and violonce to undormino the confidence of the pooplo of Hong Kong in our ability to maintain our authority and administration thoro. They have failed so far because the vast majority of Chinoso hevo firmly and oponly supported their

Government and the existing order. But the battle of sustaining public confidence requires that the outside world and Britain in particular should dononstrate support for Hong Kong and show confidonco in their ability to withstand theso pressures. The Hong Kong Government are concorned that indefinito postpononont of the tunnel project would bo interpreted in Hong Kong as an indication of the outside world's lack of confidence in tho Colony's futuro. It is not known whether, if Costains had to withdraw, one of the other tendering firms would still wish to procood but ovon if the project wore to be saved damage to confidonce occasioned by the with- holding of British financial support would remain and a major and probably prostigious ongincoring contract would almost cortainly be lost to Britain.

11. Costains' tender oxpired on 28th Juno but they agrood to extond it until 31st August on certain conditions ono of which was that a further £35,000 should ho paid by the Tunnol Company (the Hong Kong Government agrood to reimburso the Company 50% of this payment). Successivo oxtensions have kopt the tender opon until now. In spite of the troublos and of their retroat from their previous position on sharoholdings and on guaranroos, the Tunnol Compeny

still insist that they wish the project to prococd.

CONFIDENTIAL