TNAG-0426-FCO40-472-Construction-of-an-underground-railway-system-in-Hong-Kong-1973 — Page 64

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XCS(73)12

price means that the Consortium's position can now be defined with more certainty, the possibility of a ceiling price less than $5,000 million, at least within the framework of the supplementary procedure, is now excluded and the Japanese pre-emptive bid must obviously, therefore, be regarded as being more favourable.

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At the same time, the Anglo-Italian Group have put forward two vaguely defined suggestions for financing the extent to which their final contract price exceeds the maximum ceiling price which the Steering Group considers the system could bear, namely, $5,000 million. They have suggested that the rate allowed for cost escalation in the ceiling price should be 8% per annum with a threshold rate put at 10% per annum. Should the actual rate of escalation be as high as 10% an additional sum of $350 million would stand to be financed. They propose that this should be handled by a group of Hong Kong investors who would undertake an underwriting commitment in return for which they would be issued with 350 million $1 shares at the commencement of construction. If the actual rate of escalation was below 8% then, in return for their commitment, they would retain these shares free of charge. To the extent that the rate of escalation was between 8 and 10% their commitment would be invoked pari passu. In order to finance that element of the contract price in excess of $5,000 million, the Anglo-Italian Group further proposed that the Mass Transit Railway Corporation should participate with a group of investors interested in developing station sites commercially. This group of investors would be prepared to pay at market rates for the sites and hand over to the Corporation anything in excess of 15% per annum on assets employed. This proposal is similar to one sumbitted to the Mass Transit Steering Group by International Joint Venture and was not pursued because it is not thought that the Mass Transit Railway Corporation should benefit from the development of property above or alongside stations. Neither of these two suggestions really adds anything very much to the Anglo-Italian Group's counter-bid and do not, therefore, affect the evaluation; in paragraphs 14 et seq above.

Advice Scught

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Honourable Members will be invited to advise:

(a) whether the Japanese Consortium's pre-emptive

bid for the Mass Transit Railway contract should be accepted (in which case the Japanese Consortium would be invited to enter into immediate discussions with the Steering Group with a view to the issue of

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