TNAG-1060-FCO40-1310-Mass-Transit-Railway-in-Hong-Kong-1981 — Page 138

M V Hawtin Esq

ong Kong Dollars

5. It would not be appropriate for me to enter into a detailed discussion in this letter of all the points you raise although I would say that I feel your concern with the volume of Hong Kong dollar lending may be exaggerated in that you may not have fully taken into account the time scales over which the dollars will actually be drawn, both in the Island Line project and for Castle Peak. I am not sure how one assesses the possible effects on Hong Kong interest rates; Malcolm Bremner to whom I am copying this letter may wish to comment, and I believe that David Durie is also interested in this aspect of the discussion. I would strongly question the contention that Hong Kong dollar commitments for these projects would increase Hong Kong dollar interest rates sufficiently to have a marked effect on Hong Kong's economy.

Whatever the pros and cons of the more theoretical considerations, I have no doubt whatsoever that MTRC will reject bids which exclude provision for Hong Kong dollar finance. If I am right then our refusal to support finance in this currency will preclude UK contractors from any possibility of winning the business; it would not, however, prevent our competitors from offering HK$ either by supplier credits, taking the exchange risk themselves, or with buyer credit support of HKS finance, in which case there would, presumably, be the same undesirable effects for the economy which you fear. MTRC are stipulating HKS contract prices in addition to HKg finance and in the absence of Tender to Contract cover UK contractors will have further disadvantage to overcome.

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7. If, however, you feel that it is quite impossible to make an offer of support for HKS at this stage for the whole project, perhaps we could agree a more limited commitment. I would therefore suggest that we should agree to support HK for the railcars, the E & M equipment and tracklaying, where our overall commitment would be in the region of £100m £120m. I imagine that these will be the areas where the strongest industry case arises, particularly regarding MetCam. They are the identical areas of work for which the same UK companies bid successfully in the earlier stages of the Mass Transit project, and they will expect and in my view be entitled to similar support from HMG on this occasion. If you agree, we would at this stage offer only US dollars or sterling financing for the construction contracts and the line of credit for consultancy services.

8. Roy Holloway and I shall be leaving for Hong Kong next Tuesday, 19 May. Although this gives little time for important decisions, I hope that you will be able to agree to our discussing the project on the basis of the terms set out above. A decision before we depart would be helpful, otherwise I would hope your decision could be given in time for a telex to be sent to the BTC by, say, noon on Thursday 21 May. (Hong Kong time)

Ce Birch

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CC

Mr K W Cotterill

ECGD

Mr M G Stephens

11

Mr R T Kemp ECGD

Mr M S Bremner

11

Mr G E Breach

17

Mr DRC Durie

PEP

Mr G G Leader

ODA

Mr T JH Downing

...BOE

Mr M Haworth

MOD

Mr G M Gowlland Mr R Mathrani

RCO

Mr J Priston

DOT

DOT

Mr J Woolmer

DOT

2.