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CONFIDENTIAL
ANNEX A
Hong Kong: Cross-Harbour Tunnel
A separate background note is attached giving the previous history
of the schono. This note sets out the prosent position of H.M.G. and, in
the main, has not been put formally to the Government of Hong Kong although the Financial Secretary (Mr. Cowperthwaite) is aware of the trend of our
thinking.
2. The Tunnel Company proposed to finance about £10 million of the cost of
tho construction of the tunnel by commercial credit arranged by the contractor. The background note records that when this project was considered as a
commercial proposition, E.C.G.D. asked for guarantees which the Department
wore satisfied that at that time the main commercial shareholders were roady to
provide but which later they refused to give. E.C.G.D. considered that, in these circumstances, it could only continue to participato if an unconditional
guarantee was provided by the Hong Kong Government. This has not been put
formally to the Hong Kong Governnant.
3. The need for guarantoos stems from the commercial nature of E.C.G.D.
In its fully commercial operations, under Section 1 of the Export Guarantees
Act of 1949, B.C.G.D. is required to broak oven. 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. When this legislation was first introduced, the President of the
Board of Trado then Mr. Harold Wilson undertook that this would not be
used to underwrite unduly hazardous or "quito crazy risks". E.C.G.D. are thus, under both Sections of the Act, requirod to operato with connorcial prudence. If risks are large, and particularly when borrowers have no uncommitted capital
or assets other than the insurod project, commercial prudence requiros then to look for a suitable guaranteo.
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4. In E.C.G.D's views (supported by the Treasury) the present case is one in which a guarantoc from the shareholders would no longer be appropriate and a full guarantoo by the Hong Kong Government is essential. In view of H.M.G's wish for political roasons to make a gesture of support to and confidonco in tho Hong Kong economy, it has boon agreed that the Commonwealth Office may
take the oxcoptional stop of undertaking to meet half the cost of any call on the guarantee provided that contacts for loan and the construction and supply are such as E.C.G.D. can support (soc 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 interest. Those proposals have not yet bon put formally to the Hong Kong Government.
/5. If E.C.G.D.
CONFIDENTIAL
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