TNAG-1059-FCO40-1309-Guangdong-nuclear-power-station-project-1981 — Page 32

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CONFIDENTIAL

The Chinese have indicated that their equity stake would take the form of the land on

h the power station would be sited and the labour they would provide for civil and other works. They would apply arms-length prime land and labour prices in Hong Kong and these valuations are therefore dubious whether, even if they are accepted as reasonable, they would cover the potential Chinese commitment of $240m has yet to be resolved. There is however some doubt as to Chinese understanding of the implications of equity participation for themselves and for off-shore interests. They may not, for example, understand the concept of limited liability nor the need for equity

related

In simple terms they assets to be realiseable in cash terms if a venture should fail.

may feel that if the joint venture company were ever to be wound up they would retain the land and leave off-shore stakeholders to retrieve value from the equipment supplied

such an arrangement would hardly be attractive to offshore interest either in principle

or in its practical realisation.

Offshore investors may be difficult to find.

Whereas a succesful venture could provide

useful returns from the sale of electricity to Hong Kong, the assets themselves would be unattractive not least because of the ultimate political control over them by the

Chinese. In the private sector China Light & Power have already indicated they would

be unwilling to contemplate a substantial investment

although a token stake by them

is probably essential in Chinese eyes. GEC's position is far from clear on this issue

but some participation by them is expected. We do not know the attitudes of Frainatome

and Westinghouse. In the public sector there would be objections to HMG taking equity (Annex D to be added) which would in all probability extend to other UK public sector participants (such as UKAEA and CEB). The attitudes of the French and American

Governments to public sector equity are not known but it is thought the Americans at

least would reject such a concept.

The potential effect of the issue on negotiations is difficult to discern until more

is known, in particular, of Chinese expectations. It does have a bearing on:-

the UK Government's commitment in a Government-to-Government deal. The Chinese

CONFIDENTIAL