TNAG-1230-FCO40-1543-Visit-by-Richard-Luce--Minister-of-State-for-Foreign-and-Com-1983 — Page 62

CONFIDENTIAL

UK Position

4. Our aim to obtain conventional island contract for GEC. Strength

of our position rests on involvement of CLP, potential HongKong

purchase of power from project and HMG's responsibility for Hong

Kong. But we should not over-stress our influence with Hong Kong

where there is sensitivity about being used for British commercial

benefit. Chinese proposed that Hong Kong should take up 25% of equity of project and, more important, purchase 70% of station's output, thus making foreign exchange available to repay the loans. China has said it might proceed alone if satisfactory terms cannot

be agreed with Hong Kong, but we believe Hong Kong's participation

to be essential.

GEC

5.

GEC have given technical presentations to Chinese, who, though

confident of GEC's capabilities, are worried that GEC have not previously produced high speed turbo-generator of size required for project. The one they build will therefore be a prototype, which Chinese think will expose them to greater risk. Chinese objection

may be negotiating tactic to try to improve terms of financial

package.

Hong Kong Government (HKG)

6.

HKG began to examine project in detail only after Chinese

formally announced decision to proceed with project in December 1982. Following signature of UK-PRC memorandum in March, HKG

appointed Lazards to report on economic viability of project and likely price of electricity to Hong Kong. First part of report has been circulated to members of EXCO. It recommends that HKG adopt

cautious approach to project, exercising monitoring and control

function and avoiding making any investment. Unclear how long it

will take HKG to reach final view on participating in project

following receipt of rest of Lazards' report, expected late

September. However, indications are that HKG will be unable to give

final recommendation to EXCO before December 1983. HKG attribute

delay partly to failure of two electricity utilities, CLP and Hong Kong Electric Company (HEC) to hold serious talks about creation of

CONFIDENTIAL