TNAG-2981-FCO40-1473-Guangdong-nuclear-power-station-project-1982 — Page 67

BACKGROUND NOTE

1

Constraining our negotiating position on finance is pressure to extend the Consensus to cover nuclear plant. The Americans perhaps as a delaying tactic since they are not able to take a commercial interest in the project at present are pressing hard for agreement to charge premium interest rates over long repayment periods for nuclear plant, while opposing any other concessionary measures. This pressure will increase the difficulty of offering financial concessions of any kind in the future.

2

Nevertheless, some improvement in our offer will be necessary if the project is to go forward. Recently revised assessments of the feasibility of the project confirm that at current Consensus interest rates capitalisation of pre-commissioning interest or increased investment by the Chinese Government Fould be vital to make the project viable, given the eight to nine year construction period when no revenue would be earned. The Chinese have so far refused to provide further equity investment.

3 Although at present they have no mandate to capitalise, French officials have indicated that they would be prepared to concede at least some degree of capitalisation - though not local cost cover in the course of detailed negotiations. Within Whitehall, Treasury and ECGD officials are strongly opposed to capitalisation. Department of Industry officials, however, believe that it will be necessary to concede capitalisation eventually, but in return for comprehensive guarantees for the foreign loans and agreement on a satisfactory financial structure for the operating company.

At a discount rate of 12%

capitalisation would raise the subsidy level on the ECGD financing from about 16% for our present terms to 26%

4 We should also need to be satisfied about the general viability of the project, and the undertakings from the Hong Kong authorities regarding long term off-take arrangements before we give irrevocable commitments to the Chinese.

5 If we can secure an exclusive agreement with the French my officials believe that it may be possible to hold concessions on financing terms to capitalisation and to meet further financing pressure by pushing the customer to put more equity into the project. If however, we cannot reach agreement with the French, we will undoubtedly be pressed to make further concessions, principally an input of aid. This could prove costly, would excite strong criticism in the Consensus and could in the end be matched by the French.

6 These difficult financing issues will need Ministerial