TNAG-1059-FCO40-1309-Guangdong-nuclear-power-station-project-1981 — Page 159

CONFIDENTIAL

Because of the promoters' risks it is unlikely that there will be any parties interested in investing in the project other than those who can expect other benefits to be gained from the Project (HMG, HK Government, UK suppliers, China Light and possibly the lenders). These parties will only provide equity to secure their other interests and will therefore wish to minimise their equity contribution; at the same time it is not in their interests that outside investors, incurring only the limited liability described in Section 2 above, should take a high yielding equity stake in the project particularly when the equity contribution is not significant in relation to the whole. We regard the proposal that dividends be paid at 25 per cent per annum and be rolled up during the construction period as being unrealistic for a project which is sc under-capitalised and is potentially detrimental to the viability of the project and the interests of the lenders and guarantors.

Consideration should also be given to whether UK interests might be able to persuade the Chinese to wholly own the station and to take on all the promoters' risks with UK interests providing generous but a limited amount of additional loans on attractive terms which would cover a reasonable proportion of the costs of the risks that in normal circumstances would be borne by equity shareholders. Such loans could be dressed up for outside purposes as being similar to equity, say subordinated loans perhaps not guaranteed by the Bank

of China.

6. CONCLUSION

If the PRC view equity as desirable as either a symbol of commitment to the project or as a method of apportioning risks and obligations, then those objectives can be achieved in other ways. Equity might then be apportioned on the basis of commitment and risks as a form of reward for those taking such

responsibilities.

The objectives of the Chinese are however unclear and it would be necessary to enter into direct negotiations with them to determine both how they see the contractual responsibilities and liabilities falling and the purpose they envisage for equity.

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