DEVIVE AND
5.
We have questioned the Ministry of Defence experts on whether, with this possibility in mind, it would be appropriate or desirable to go ahead with a review of the defence contribution under the cost escalation cause. Their answer has been three-fold. First they say that planning of the capital works must continue if there is not to be a serious hiatus in the programme; that decisions have to be taken by June for the reasons I have explained; and that conclusions in the Defence Review are unlikely to be reached until several months later. Second, they say that if the outcome of the Defence Review was to affect any item in the works programme significantly, the letting of contracts for capital works could be stopped before any new money had actually been spent (i.e. the middle of next year). Thirdly they estimate that whatever the results of the Defence Review, it would be unlikely, if only for practical reasons, to result in the removal of significant numbers on the ground until 1976. They argue therefore that it would be very late in the current agreement before the second trigger point could anyway be reached.
6.
In view of this there would seem to be no technical reason against a review now, under the cost escalation clause, and some harm in delay. The tenor of your informal discussions with QMG has led us to believe that you support this reasoning. But, given the general sensitivity of the defence contribution question, we would be grateful for your confirmation (after discussing with CBF if you think it desirable) that this is the right moment to begin.
7.
A
On the assumption that you areprepared for discussions to go ahead the next question is how we settle on a figure or formula, bearing in mind the various options already considered as well as other possibilities such as linking expenditure to price indices. PSA estimate that to carry out the existing programme an extra HK 480 m. will be needed by 31 March 1976 assuming that inflation continues at its recent rate whereas we understand that about HK #30 m. was regarded as a minimum contribution which Hong Kong might be prepared to consider.
There It was recognised that other formulae were open for discussion. is a good deal of complexity in the arithmetic and logic of these various approaches and if you are agreeable we would be happy for representatives of MOD and PSA who will be visiting Hong Kong on 2 May under arrangements already made between MG and CBF to review the capital works programme, to enter into discussions with members of the Hong kong Government with the aim of reaching a provisional agreement which would be subject to ratification between us.
8.
I
Incidentally, on looking through the files it appears that no final copy of the Memorandum of Understanding was sent to you. attach one now, with apologies for the omission. A copy in draft was originally sent to Sir Hugh Norman Walker on 11 November 1971 (our reference HKK 10/9) by Michael Laird. Peter Lloyd accepted it on
SECRET AND PERSON AL
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