TNAG-0426-FCO40-472-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 63

SECRET

XCS(73)12

10

circumstances not defined as "force majeure".

23

As regards (d), namely, returning to the main sequence: should the Government decide neither to accept the Japanese Consortium's pre-emptive bid nor to negotiate with the two consortia which have put in counter-bids, this would be the automatic course of action and would involve no difficulty, as the main sequence has been continuing in parallel with the supplementary procedure. In such circumstances it is possible, but most unlikely, that at the end of March or thereabouts the situation would be such that one or more of the consortia would be in a position to quote a ceiling price (including cost escalation) below $5,000 million. The risk that none of them would be in

a position to quote as low a price as this is, however, very considerable, having regard to the present rate of world inflation, aggravated by the uncertainties caused by the oil supply crisis. Furthermore, should the exchange value of the yen continue to fall the Japanese Consortium might well revert to their original proposal to quote in U.S. dollars.

24 It would appear more likely, therefore, that prices would then be quoted by all three consortia which could be significantly in excess of $5,000 million, although perhaps not by as much as the ceiling prices at present indicated by the two counter-bidders. In this event, the viability of the project without a further injection of Government equity would be suspect; and, on present indications, the fiscal position of the Government would not allow the injection into this project of more than the $800 million already committed. Theoretically, the cash flow position could be improved if fares were escalated at a faster rate than 4% per annum but it would be dangerous to assume that this would be possible. In addition, to adopt course of action (d) would lead to a minimum of four months' delay in the commencement of construction.

Later Developments

25

Since this memorandum was drafted, Hong Kong Metro Constructors have put in a further submission modifying their counter-bid by offering a lump sum price of $5, 976 million for the contract, subject to cost escalation over 12% per annum being regarded as "force majeure" and charged to the client's account. The amount in respect of export finance to be provided by the Consortium remains at $3, 250 million, representing 54.4% of the lump sum price. Whereas this shift over to a lump sum

SECRET

1