CONFIDENTIAL.
19 The UK'S strongest commercial prospect lies in the conventional island, while the balance of UK and non-UK goods and services on the nuclear island remains uncertai for a number of reasons, not least the need to press the Americans into a signi- ficant commercial and financing commitment. An aid input of £90m could be presen- ted to the Chinese as a reduction in the effective rate on the total cost to them of the conventional island, including escalation payments. Such an offer could be presented at the final stage of negotiations as extremely generous terms for the conventional island, close to the Chinese original expectation of 72%. Moreover, relating the aid input to the escalated price for the conventional island would give us a strong defence against pressure to reduce the provision for escalation. to unrealistic levels.
20 Our negotiating position with the Chinese would be that an offer of aid on the conventional island would be available only if the Chinese were willing to take the total package of UK goods and services which we presently plan to offer. However, we would wish to leave room to manoeuvre in response to Chinese reactions on the nuclear island proposals, and in response to any counter-bids from the French.
Presentation of aid proposals under OECD Consensus reporting arrangements
21 To meet OECD requirements on mixed credits, any offer of aid must comprise 25% of the total contract value. Thus an aid input of £90m would need to be related to a discrete part of the total package of proposals for the power station with a contract value of no more than £360m. The base price (excluding escalation) of the conventional island is likely to be of the order of £300-£350m. Therefore, basing the aid input on the conventional island would also enable us to meet our Consensus commitments.
CONCLUSION
22 The Prime Minister has taken a close interest in progress on this prestigious and potentially very valuable project for the UK. Discussions at official level with the Chinese have now reached the stage where further progress depends on .making more specific proposals on financing. Against the background of an increas-
ing willingness by our competitors to offer aid to China to secure large capital project the Chinese have pressed the UK for aid for the Guangdong project. In the Depart- ment of Industry's view an input of aid of the order of £90m, related to the con- ventional island, would greatly strengthen our negotiating position for the whole nuclear station and would put the UK in a very powerful position to secure the conventional island. Accordingly we recommend that £90 m should be allocated to the Guangdong power station project.
MEE4
Department of Industry
September 1982
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