TNAG-1920-FCO40-2724-Hong-Kong-water-supply-from-China-1989 — Page 5

as

to

Chinese Authority undertook its agreement with Hong

with Hong Kong not the payment of interest to any financing party; and

part of accept ot her

as

we could achieve satisfactory arrangement s regards our ot her concerns, namely water prices,

technical requirement s and quality.

,

water

regard

to

the

The Chinese Authority's position in paragraph 12(a) may be

be that there is no link bet ween payment of interest on the RMB advances from the other

other two financing parties and the payment of interest on our hard currency HK dollar advance; to find additional hard currency to pay us interest represent s a real cost whereas interest on the RMB advances would be more than offset by depreciation of the currency. To counter this argument, we would offer to buy forward' in water. Repayment would thus be in volumes of water equivalent to that which could have been purchased by each instalment of the advance at the time it was paid. Nevertheless, this arrangement would almost certainly be unaccept able to the Chinese Authority because it would effectively mean

mean that the Chinese would then have to pay us back at a rate of interest equivalent the rate at which water prices increased. Assuming that response, we would be able to insist to the Chinese Authority that an acceptable solution could thus only be reached through a general agreement to forego interest on all advances.

14

In fact, satisfactory arrangements for water prices, technical requirement s and water quality are potentially at least as important as the question of interest.

Control of Water Prices

15

In 1981 and 1982, we made two interest free advances to t he Chinese Authority totalling RMB 30 million (HK$99 million at the then prevailing exchange rates). It was agreed that the advance should be recovered by deducting RMB 500,000 per month from the water charges over a period of 60 supply months from 1986/87 to 1991/92. We expect

expect that the Chinese Authority will wish to adopt the same practice for repayment of the much larger advance now proposed. The danger is that because of the monopoly supply situation the Chinese Authority could simply raise water prices at will, without regard to actual cost recovery. Thus substantial control or influence over increases in prices is an essential requirement.

CONFIDENTIAL