CONFIDENTIAL
CONFIDENTIAL
FM HONG KONG
TO IMMEDIATE FCO
TELNO 3740
OF 281115Z NOVEMBER
HKB 182/3
ان
168
035252
MDHIAN 3928
YOUR TELNO 2058: HONG KONG AIRPORT PROJECT.
1.
CRITICISMS OF OUR USE OF FIXED PRICE LUMP SUM CONTRACTS FOR THE LANTAU FIXED CROSSING ARE NOT NEW. CONCERN FROM CONSORTIA IS NATURAL: THEY ARE BEING ASKED TO ACCEPT THE RISK OF PRICE FLUCTUATIONS AND QUANTITIES OF MATERIALS. BUT THE USE OF FIXED PRICE CONTRACTS FOR LARGE PROJECTS IS NOT UNPRECEDENTED: OUR EASTER HARBOUR CROSSING WAS CONSTRUCTED AT DOLLARS 2.8 BILLION AT 1985 DOLLARS UNDER A FIXED PRICE CONTRACT.
2.
IT IS OF THE GREATEST IMPORTANCE TO US TO HAVE CERTAINTY ABOUT THE EVENTUAL COST OF THE ACP. FIXED PRICE CONTACTS GIVE US THIS COMFORT. THE FOLLOWING POINTS EXPLAIN WHY:
(A) WITHOUT FIXED PRICE CONTRACTS, WE CANNOT KNOW COSTS FOR MATERIALS SOURCED OVERSEAS DURING THE CONSTRUCTION PERIOD. (MASSIVE QUANTITIES OF STEEL ARE REQUIRED FOR THE BRIDGE). THE BIDDERS ARE IN THE BEST POSITION TO ESTIMATE COST FLUCTUATIONS AMONG THEIR LOCAL SOURCES AND TO NEGOTIATE FIXED PRICE AGREEMENTS WITH THEIR SUPPLIERS:
(B) ALTHOUGH A SIGNIFICANT RISK IS PASSED TO THE CONSORTIA, THEY CAN MITIGATE THE RISK BY PROPOSING A SCHEDULE OF PAYMENTS WHICH IS TO THEIR ADVANTAGE. THEY HAVE CONSIDERABLE FLEXIBILITY UNDER OUR TENDER TERMS TO SET PAYMENT SCHEDULES WHICH, WITHIN LIMITS, PROVIDE THEM WITH CASH IN ADVANCE OF WORKS. DISPUTE RESOLUTION PROCEDURES HAVE ALSO BEEN MADE SIMPLER THAN UNDER OUR TRADITIONAL CONTRACT CONDITIONS:
(C) THE MOST SIGNIFICANT LOCAL COST FLUCTUATION RISK OVER THE CONTRACT PERIOD, THE LABOUR SHORTAGE, HAS BEEN ADDRESSED BY GRANTING LABOUR IMPORTATION PRIVILEGES TO ACP CONTRACTORS:
(D) THREE OUT OF FOUR PREQUALIFIED CONSORTIA CONTAIN AT LEAST THREE MAJOR INTERNATIONAL CONTRACTORS. (THE FOURTH, THE KOREANS, ARE A VERY DIVERSIFIED NATIONAL BUSINESS GROUP). THE TOTAL PROJECTS RISKS WILL THEREFORE BE SHARED BETWEEN A NUMBER OF
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