A GOVERNMENT official says that the costs of the airport project are rising steeply, driven partly by the rise in world interest rates. Giving a broad confirmation of a Business Post investigation into escalating airport costs, the Deputy Secretary of the Treasury Stephen Selby said that a changed contracting environment, inflation, higher interest costs and contract compression - when work has to be carried out in a shorter time - had probably hit costs. He said that interest costs had risen steeply and that the borrowing environment had changed, although he added that ''the world is not coming to an end by any means; there is still lots of investment capital waiting for Hong Kong''. ''These are all valid lines of argument,'' he said. Mr Selby disputed the cost impact of the changes to the contracting and borrowing environments. ''I cannot say you are wrong,'' he said. ''I dispute your figure but, on the other hand, I am not going to give a substitute.'' Mr Selby contacted Business Post after it revealed that costs for the airport had risen by at least $6 billion. The total could be far higher and excluded the economic impact on Hong Kong of delays which Mr Selby said could be even more serious. Mr Selby said costs could have risen on contracts already awarded - an area which the Business Post report did not examine. ''When we took the decision in April 1993 to proceed with the project, awarding contracts as we met the critical path, when delays would push costs up, we had to balance public interest,'' he said. ''Obviously, a full agreement with China was the best outcome, but we had to judge if there was going to be a domino effect from holding back on the contract,'' he said. The Government decided to split contracts up in different ways, he said. ''Where we may have planned to have one large contract for design, provision and commissioning of equipment - say for some airport electronics - we split the contract up into three. ''It is my gut feeling that if these were done in one piece they would be cheaper. ''You lose out on economies of scale from a bigger package, but it did mean we got as much out as we could.'' Mr Selby said he would not speculate on how much more that method of tendering had cost. ''Apart from anything else, it is commercially sensitive,'' he said. ''It is a card our negotiators would like to keep up their sleeve when talking to contractors. If they know how much we expect things to go up, they will drive a harder bargain.'' Since last year, the Government has sought funds from Legislative Councillors on a ''needs-be'' basis. Recently. it asked Legco to approve $15 billion in funding to keep vital contracts moving. ''Each time we went to Legco seeking finance, we said that if we didn't [get financing], then when we came back the bill would be higher,'' he said. Mr Selby said in spite of this technique some projects were still being delayed. ''It is a matter of months, I would hope, but for the time being there are no substantial delays. It is a month here or there [which] we should be able to make up one way or another.'' Reacting to Business Post calculations of the extra cost of debt, he said it was ''absolutely true'' that costs had risen. ''But there is still lots of investment capital waiting for Hong Kong,'' he said. ''We still have sovereign risk ratings of investment grade. Moody's and the Japan Bond Research Institute have followed the conservative policy of saying there is no reason why Hong Kong's sovereign rating should exceed China's after 1997.'' Mr Selby said that now broad agreement had been reached on the airport project with the Chinese side, there would have to be a waiting period while the Chinese studied the agreements between the Government and the Provisional Airport Authority and Mass Transit Railway Corp. ''These documents are very detailed, a hundred or more pages long,'' he said. ''Both sides have to be sure the Chinese side understands them.'' On the debate between the two sides on the ratio of debt to equity, Mr Selby said the changes to the projected level of reserves, which would be left to the Special Administrative Region (SAR) government, made the present proposals more sensible than earlier plans. ''In the normal financial world, if people offer you their money at a reasonable rate, you would be a fool not to take it, though there are risks on both sides,'' he said. ''The Chinese do not fear debt in absolute terms but [fear] that somehow, come 1997, Britain will somehow or another have arranged things so Hong Kong's interests are harmed,'' he said. Because Hong Kong limits increases in public spending in line with gross domestic product growth, removing debt and having a larger share of the project paid for out of the public purse did not mean there would be less money to spend on schools and hospitals, he said, or that the people of Hong Kong would have to pay for the airport instead of the users - as would be the case with higher debt levels. ''We are putting in net additional cash of $40.3 billion after you offset half of the $40 billion to be raised from airport railway land disposals. We can easily afford that,'' he said. ''We have undertaken to leave $25 billion to the SAR in reserves, but the forecast is now that there will be substantially more - something in the region of $100 to $130 billion. ''The likelihood is that the money will be sitting there. Why not invest it in a project which will produce excellent returns?'' he said.