TNAG-0276-FCO40-312-Plans-for-construction-of-underground-railway-system-in-Hong-1970 — Page 84

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2.

CONFIDENTIAL

You will recall that last year we guaranteed a loan to finance the construction by Costains of a four-lane road tunnel between Hong Kong Island and Kowloon at a cost of nearly £20 millions. The loan for 75 per cent of the contract value was repayable over 10 years from contract date, i.e. about 7 years from completion. Difficulties arose from

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a) the question of whether the Government of Hong Kong

should take any or all of the commitment for the very large fixed interest debt involved; the Government invoked Hong Kong's private enterprise approach, and did not wish to spend its own money;

b) the underlying question of Hong Kong's medium-long term

creditworthiness and the Hong Kong Government's attempt to obtain H.M.G. support (via E.C.G.D.) as evidence of the hone Government's political attitude (contrariwise, if the support were not forthcoming from the U.K. adverse conclusions would, it was said, be drawn);

•) the @ommercial interests which it was proposed would undertake

this venture without Government support intended to put up a minimum of equity capital depending on fixed interest loan funds for a very large proportion.

The risks involved were

at the time considered heavy while the long term profits to be derived from the operation of the tunnel if it were successful would have been very considerable. As seen from London therefore the commercial interests wore trying to achieve a situation in which they minimised the risk and maxinised the return at our expense.

Negotiations, arread over 2 to 3 years, were difficult and sometimes bitter. The security question was finally resolved by E.C.G.D. accepting several guarantees (not joint and several) from the shareholders of the Tunnel Company who by now included the Hong Kong Government as to 25% and the Hong Kong & Shanghai Banking Corporation as to 10%, There was an understanding, which reflected the political background to the negotiations, that these guarantees would not be called outside Hong Kong.

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Preliminary discussions on the Underground Railway Scheme suggest that certain elements in the Hong Kong Government intend to repeat their attempt at non-involvement on this case. We would certainly expect the Hong Kong Government to be committed although its capacity alone to finance on the scale proposed would have to be examined.

9. It is clearly too early to make any recommendations as to whether we should agree to offer cover for this project as a Financial Guarantee or to suggest suitable terms. We would however be grateful for the views of other Departments on the political and commercial problems which are likely to be raised.

10. I am copying this to Clement, Lambert, Thain, Harding, Beaven, D.C. Smith, Rawlings here and to lackwell in Hong Kong.

Yours sincerely,

N. J. A. Hooker