TNAG-0772-FCO40-976-Modernisation-and-electrification-of-the-Kowloon-Canton-Rail-1978 — Page 40

Mr M Oldham

Reference...

الله

HKK 143/2

without enclosure

Me. 5èc Mr Royce ED/DCT

Kr Friston CR£4/DCT Mr G Gill H Treasury; Miss J Kelley HIIT Mr Fishpool ZCGD

RA

OFFICEA

INDEX

PA

ution Euler"

Er Breach

Mr Thompson FCO Hr

Mr Dell M/DOI

Mr Shilson Bank of

England

Ou

HONG KONG:

KOWLOON RAILWAY

Your minute of 10 November asked about the vires on what I have called "Shadow loans". Ir Breach will be commenting separately on the Tender-to-Contract point.

2. The arrangements at 2(a) of your minute are, perhaps, not quite as simple as they might appear, given that the name of the game is getting a subsidy payment to hetcam (UK). Events have, of course, moved on since you minuted but, as far as I know, all of the proposals put forward have involved "shadow" loans but the continuance of a cash contract with the Hong Kong buyer be

it one made with Metcam UK or Metcan Hong Long. The vires point is, as I have explained, a difficult one. The problem hinges not on the guarantee giving power but on our ability to give a grant. This is the central point; the whole purpose of what is proposed is for the subsidy to be given not to the person providing the export finance but to let cam to enable them to reduce their price. Some of the points are set out in the attached copy of a minute I have received from Ir niggins (which he tells me he cleared, in principle, with ir Kerry).. I hope this is self-explanatory.

3.

But, as I have explained to you, vires is not the only issue involved here. There is the question of whether the issue of a guarantee and interest make-up grants in respect of a shadow - or "bogus" as Lazards called it - loan are - in policy and accountability terms - proper(and defensible in FAC and Farliamentary terms) uses of CGD's powers. Next, there is the problem of international repercussions in terms of what will inevitably (and rightly) be seen as a new form of export subsidy some would no doubt argue that this would be the worst possible time to introduce such a new subsidy. In addition, there is the fact that such a subsidy - whatever was said now would certainly be seen as a precedent for future contracts where British bios were out of line on price. Finally, there is the question of the necessary Treasury sanction which I am told would not be given in this case.

4.

-

None of this is to be negative or to suggest that we do not recognise or accept the importance of this contract. Essentially it reflects that this is a very difficult and shadowy crea for us and that the questions are unfortunately not as clear cut as you seem to suggest. The vires point is still not decided but

CODE 16.77

/Mr Higgins