TNAG-0855-FCO40-1065-Construction-of-underground-railway-system-in-Hong-Kong-1979 — Page 152

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FR Barratt Esq Deputy Secretary Overseas Finance B HM Treasury Parliament Street LONDON SW1P 3AG

CONFIDENTIAL

DEPARTMENT OF INDUSTRY

ASHDOWN HOUSE

123 VICTORIA STREET

LONDON SWIE 6RB

TELEPHONE DIRECT LINE

01-212 -6904

SWITCHBOARD 01-212 7676

24 January 1979

Dear Mr Barratt

METCAM:

MTRC: HONG KONG

I mentioned to you on the telephone yesterday that we need to decide by to-day whether Metro-Cammell (METCAM) can be provided with exceptional ECGD support to enable them to secure a £75m contract for the supply of 50 railcars for Stage II of the Hong Kong Mass Transit project against stiff and unscrupulous Japanese competition.

METCAM were well in the running to obtain the contract until the Japanese at the last moment waived all interest payments during the 3-year construction and shipment period, which gave them an advantage of £5m in net present value terms. Whilst we suspect that this waiver was done with official Japanese backing, we cannot cry foul in terms of the consensus, since the Japanese are offering supplier credit and are therefore free to waive all interest payments by the buyer provided the officially supported finance to the Japanese supplier is on a normal basis at interest rates no lower than the consensus minimum.

ECGD are prepared to consider a proposal which will partially bridge the gap. The proposal- of which Joan Kelley has details - is that the ECGD guaranteed loan be fully drawn down on day 1 with interest made up being paid from this date. ECGD feel that they could so organise things that:-

(a)

(b)

(c)

They could protect their security position (e.g. by requiring the bank to invest it at their (ECGD's) direction and with the gilts assigned to them (ECGD) in some way;

No funds would be made available to METCAM until needed in respect of work already done. In other words, METCAM would not receive loan drawings before the dates they would have received them under a conventional buyer credit;

Funds would not be made available to MTRC to invest. They would simply be asked to sanction loan drawings in the usual way, paying interest from the date of the loan drawings;

CONFIDENTIAL

/Continued.