TNAG-0509-FCO40-574-Construction-of-underground-railway-system-in-Hong-Kong-1974 — Page 20

CONFIDENTIAL

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Consul-General here some time ago suggested that the share out of the somewhat inadequate cake among the various members of the Japanese consortium had caused very considerable difficulties. While it seems likely that a rough share out has been agreed, I am given to understand that there is some doubt whether the hardware manufacturers have yet been asked whether they can produce at acceptable prices, the detailed design prepared by the Japanese consultants having only just reached the stage where firm enquiries can be put to Japanese industry. Given the rate of inflation in Japan, it could well be that this will become a major problem. Another seems to be the rate of interest on the Japanese export credit.

4.

The ceiling of HK$5,000 million was established on the basis of the economics of the system calculated at a fare level which was realistic before the rise in price of oil and the resultant inflation. I gather that the higher fare level which would be realistic by 1980 would not relieve the Hong Kong Government of cash flow problems associated with its contribution from revenue towards the local costs of the scheme and that this is still a constraint which obliges the Hong Kong Government to stick to the HK$5,000 million ceiling figure, quite apart from any ethical considerations involved. To sum up, my information is that the liong Kong Government is still not out of the woods. While the going has been difficult, there is nothing yet to suggest it will not be possible to reach agreement with the Japanese and we should know one way or the other in about a month's time.

5. In the meantime, the Hong Kong Government seems to be proceeding on the assumption, as I am sure it must, that the negotiations will not fail. While it has probably given thought to the options open to it should the negotiations not succeed, it has certainly not indicated what its thinking is, even to those fairly closely associated with the negotiations.

6.

I am copying this letter to Miss Welch in CRE 2 and Stuart in IKIOD at the foreign and Commonwealth Office.

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CC:

Miss Welch, CRE 2 Mr. Stuart, HKIOD, PCO.,

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I. A. C. Kinnear

Senior British Trade Commissioner.

IACK/al

CONFIDENTIAL