TNAG-1920-FCO40-2724-Hong-Kong-water-supply-from-China-1989 — Page 4

we cannot quantify precisely the rate of increase in demand from the new scheme, and

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we cannot provide the Chinese with assurances about the rate of return on their investment. Our initial requirement from the new scheme in 1995/96 will be less than 7% of our final requirement. Although this. will increase annually, our demand for the

the full requirement, which would provide maximum revenue for the Chinese, could be reached anywhere within seven to 13 years after the scheme's completion, depending on the growth rate of future demand. This element of uncertainty for the Chinese must make а simple commercial loan unpalatable;

advance in the which in Hong charges,

the requirement for the Chinese to pay interest charges on the Hong Kong will inevitably lead to an increase price of water purchased from China will be passed on to the consumers Kong in the form of higher water water quite possibly with an added margin;

if interest charges on the Hong Kong advance become a precedent for the terms of the agreements with the other financing parties, then the Chinese Authority will need to raise water prices still higher to cover all the interest payments.

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It is not necessary for us to insist upon interest our advance to the Chinese Authority to protect revenue. Instead of levying interest charges on the Chinese Authority these charges could be levied in the Waterworks Operating Account s and would then be borne by consumers through their water bills. In practice there would be no difference between this met hod and requiring the Chinese Authority to pay interest, as in both cases the consequential increased cost of water purchased would be passed on to consumers.

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Therefore, it is not crucial that the Chinese Authority pays interest on Hong Kong's advance. In fact it would certainly be to Hong Kong's advantage to forego interest charges if by so doing the Chinese Authority's position in refusing demands for interest from the other financing parties is strengthened. We propose to st art the negotiations by restating the (theoretical) case for the charging of interest at a rate approaching commercial rates. We should invite the Chinese Authority to respond. Assuming, as

as seems likely that the Chinese Authority continues to resist, we should then develop the position that the waiving of interest would be a possibility only if -

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