TNAG-0422-FCO40-468-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 12

Mr Wilford

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CONFIDENTIAL

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HONG KONG MASS TRANSIT SYSTEM

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1. I and Mr Kerr of FRD attended the Treasury meeting referred to in your minute of 16 March. Mr Kindersley has got hold of most of the wrong end of the stick.

2.

The purpose of the meeting was to consider ECGD proposals to delay capital repayments until the end of stage 4 (instead of stage by stage) and to capitalise interest, so that the Hong Kong Government would not have to start paying interest on credit provided through the ECGD, until the first two stages of the project began providing revenue from which the interest could be met. The Japanese are believed to be proposing some- thing of the kind. The Treasury, who chaired the meeting, and the Bank were doubtful about the latter proposal since the Bank calculated that this would increase the so-called "subsidy to UK exports" from 20% under the present proposals to 32% or 39% according to the concession offered. Treasury were also concerned that since the purpose of the current round of meetings in Hong Kong was to decide on the validity of the consortium approach but not to choose between the consortia, it would be dangerous to offer our last possible concession on credit, which the Japanese could then match.

The

3. The ECGD agreed that the consortium were, to some extent, trying to ride on the back of the credit terms provided by HMG. It may be that it is this remark that Mr Kindersley has got wind of. They also conceded that there was no certainty that capitalisation of interest was needed either to meet the competition of the other consortia or to clinch the Hong Kong Government's decision in favour of a consortium approach.

4. The DTI spoke of the importance of supporting the British consortium. I did the same and stressed that the immediate need was to persuade Hong Kong to decide for the consortium approach and against multi contracts. If the ECGD representa- tives went to the talks on the 19th with an inflexible brief the present likelihood was that Hong Kong would decide in favour of multi contracts. If a decision against flexibility "was taken at the Treasury meeting, I was sure that FCO Ministers

would want to know of it.

5. In the end the Treasury agreed to the need for flexibility. The deferment of capital payments to the end of stage 4 could be conceded. If it became apparent during the talks in Hong Kong that capitalisation of interest was necessary, ECGD, who will be

/represented

CONFIDENTIAL