TNAG-0423-FCO40-469-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 48

148

SECRETARY OF STATE

cc Minister(TCA)

PUSS(Trade)

Secretary(Trade)

Mr Denman Dep Scc Mr Preston Dep Sec Mr Fell ECGD

Hr Edwards CRE2

Mr Homan M

Mr Watson OFP Miss Eyles OFP

HONG KONG MASS TRANSIT SYSTEM

PA

3018

The negotiations for the first four stages of the major Hong Kong Underground Railway project for which a British consortium is bidding have reached a crucial stage. Discussions took place in Hong Kong last week and the Steering Committee of the Hong Kong Government will decide within the next few days which of the four bidders (British, Cerman-French-British, Italian and Japanese) will be selected for the final round. The problem is that we understand that at least two of our competitors have offered terms which are better than ours and if we are to stay in the bidding we must be ready to match their terms.

The points at issue are the credit terms. The schedule enclosed shows the comparative terms so far as we know them. Our judgement is that we need to improve our offer on two points, (1) the starting date of repayment of principal and (ii) capitalisation of interest. On the first point the British Group proposal is to allow repayment to start after completion of the four s tages instead of at the completion of each stage. Similar repayment terms are being offered by the Italians and Japanese and the British Group's proposal is already known to the Hong Kong Government. All of our competitors are prepared to provide for capitalisation of interest, and two have already offered it.

It is ECGD's view, with which I agree, that we must match our competitors' terms on these two points if we are to secure this contract. As you know, this contract is of outstanding importance to British industry. There is an enormous market for urban rapid transit business all over the world and it is vital to our future prospects of winning a share in this business that we should succeed in Hong Kong. Treasury officials are not however prepared to agree to the proposals. They say that they will involve a preference of 36% and that the subsidy to the tax-payer would amount to £60m on an export value of about £250m. We are by no means satisfied that these figures or their comparison with the terms previously agreed last autumn are valid; indecă we think that the whole basis of their calculations is comewhat phoney. They make various assumptions, including alternative uses of resources and discount rates, which are debatable. It is clear however