(143)
SECRET S Dunen hatar
IMMEDIATE
HOFO E11/18
00 F C O
GR.900
DEDIP
CYPHER/CAT A
RECEIVED
REGISTRY No.52
21 OCT 1974
THICK10/9
FM HONG KONG 1889152
DE DIP
SECRET
ADVANCE COPY
(37) (145)
TO IMMEDIATE FCO TELNO 1837 OF 18 OCTOBER,
PERSONAL FOR SIR DUNGAN WATSON
YOUR TEL 8821 DEFENCE REVIEW.
TIMING OF ANNOUNCEMENT OF THE TERMS OF A NEW DEFENCE COSTS AGREEMENT TO TAKE EFFECT DURING THE FIINANCIAL YEAR "76/77 (YOUR PARA 3(1))-
(A) IT IS MOST IMPORTANT THAT THIS SHOULD NOT
(1) PREJUDICE DECISION TO PRESS ON WITH EXPENDITURE ON SOCIAL PROGRAMMES AND ACCEPT TAX INCREASES INVOLVED.
(11) LEAVE ROOM FOR PUBLIC MISCONCEPTION THAT TAXES HAVE BEEN INCREASED TO FUND DEFENCE LEVY FOR BENEFIT OF HMG
(B) THEREFORE I HOP NO PUBLIC ANNOUNCEMENT OF THE TERMS OF AN AGREEMENT NEED BE MADE BEFORE MAY 75, AND PREFERABLY THE DECISION
IN EX. CO. SHOULD BE DELAYED TILL THEN,
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TIMING OF INTERIM ANNOUNCEMENT THAT HONG KONG GOVERNMENT WAS
BEING CONSULTED ON THE TERMS OF A SUCCESSOR DEFENCE COSTS AGREEMENT: (A) THERE WOULD BE NO OBJECTION TO THIS BEING ANNOUNCED BEFORE MAY, PROVIDED IT WAS RESTRICTED TO A STATEMENT THAT THERE WOULD BE CONSULTATIONS WITH THE HONG KONG GOVERNMENT ABOUT LEVEL OF GARRISON APPROPRIATE IN PRESENT CIRCUMSTANCES, AND HOW THE COST SHOULD BE DIVIDED IN FUTURE, BUT OBVIOUSLY THE LATER IT WAS MADE THE BETTER SINCE IT WOULD LAY US (AND I SUPPOSE MOD) OPEN TO RENEWED QUESTIONING.
(B) BEFORE SUCH AN ANNOUNCEMENT I WOULD HAVE TO TAKE EX. CO, INTO MY CONFIDENCE ABOUT WHERE WE HAD GOT TO.
FORCE LEVELS, COST AND COST SPLIT
3. POUNDS 31 MILLION IS GETTING NEARER SOMETHING THAT MIGHT BE VIABLE HERE IN BUDGETARY AND POLITICAL TERMS, BUT I AM AFRAID NOT ON A COST APPORTIONMENT OF 75/25. IF THE LATTER APPORTIONMENT IS
IMMUTABLE I AM AFRAID THAT HONG KONG WOULD NOT BE ABLE TO PAY FOR THE GARRISON IT NEEDS, AND WOULD PROBABLY STICK AT A CEILING OF SOMETHING LIKE POUNDS 27 MILLION (E.G. SOMETHING LIKE OPTION B
IN CBF'S ORIGINAL PAPER)
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4. THE ELEMENTS OF THE PROBLEM ARE:
(A) SAFETY OF FORCE LEVELS
(B) POLITICAL PRESENTABILITY OF THE APPORTIONMENT AS AN INDICATION
OF THE DEGREE OF HMG'S COMMITMENT TO HONG KONG.
(C) THE ABILITY OF THE HONG KONG BUDGET TO ABSORB THE COMBINATION OF DECISIONS ON (A) AND (B). AS THINGS STAND IT LOOKS AS IF (C) AND (B) ARE GOING TO ERODE (A).
5. THIS MAY PROVE UNAVOIDABLE, BUT BEFORE FACING THIS UNPLEASANT CHOICE I SHOULD LIKE TO BE MUCH MORE SURE THAN I AM NOW THAT
THERE IS NO MISUNDERSTANDING BETWEEN US ABOUT THE COST FIGURES ON
WHICH WE ARE WORKING. IT WOULD BE MOST UNDESIRABLE TO FIGHT AN AGREEMENT THROUGH EX, CO, AND LEG. CO. HERE ONLY TO FIND OUT THAT THE FIGURES WHICH IT PRODUCED WERE SIGNIFICANTLY DIFFERENT FROM
THOSE WE HAD EXPECTED, IN ANY CASE WE ARE BOUND TO BE VERY CLOSEL Y QUESTIONED ON THIS SORT OF THING IN EX, CO, THE SIGNIFICANCE
OF YOUR PARA 2 MIGHT BE LARGE OR SMALL, BUT IT IS AN INDICATION
OF THE SORT OF PITFALL THERE MAY BE, IT WILL BE ESSENTIAL TO REACH AGREEMENT NOT ONLY ON THE APPORTIONMENT, BUT ALSO ON WHAT THE ACTUALS WILL BE.
6. POINTS FOR CLARIFICATION THAT PARTICULARLY CONCERN US ARE:
(A) THE BASE PERIOD USED TO WHICH THE FIGURE OF POUNDS 31 MILLION IN YOUR PARA. 1 REFERS.
(B) THE METHOD OF COSTING USED
(G) WHAT MOD EXPENDITURE IS INCLUDED IN THE SUM TO BE APPORTIONED AND WHAT IS EXCLUDED. ALSO IS THERE AN ELEMENT FOR CAPITAL COST OR DEPRECIATION OF EQUIPMENT OR ONLY MAINTENANCE?
7. NO DOUBT MUCH OF THE FOREGOING WILL BE CLEARED UP IN THE STUDY YOU REFER TO IN YOUR PARA E, BUT THIS WILL NOT BE READY UNTIL JANUARY WHEN TIME WILL BE GETTING SHORT, AND I AM MOST ANXIOUS THAT ITS RESULTS WILL NOT PROVE OUT OF LINE WITH OUR BUDGETARY POSSIBILITIES AND PUT US BACK TO SQUARE ONE.
8. | THEREFORE SUGGEST THAT BEFORE THIS WHOLE EXERCISE RELATING
TO HONG KONG IS TAKEN ANY FURTHER, A SMALL GROUP OF OUR EXPERTS SHOULD MEET AS SOON AS POSSIBLE TO MAKE SURE THAT WE ARE WORKING FROM THE SAME BASIS OF COSTS, AND HAVE A JOINT LOOK AT ITS IMPLIC- ATIONS FOR 76/77 AND AFTER AT A GIVEN FORCE LEVEL. FROM OUR POINT
OF VIEW IT WOULD BE EASIER TO HAVE SUCH A MEETING HERE, BUT WE WOULD OF COURSE FALL IN WITH WHATEVER WAS CONVENIENT TO THE MOD.
IF THEY WOULD PREFER LONDON WE WOULD WISH TO ASK DAVIES (NOW ON HOME LEAVE IN THE UK) TO STAY FOR THE DISCUSSIONS, SINCE HE
IS DUE BACK NEXT WEEK I SHOULD BE GRATEFUL FOR AN EARLY REPLY ON THIS PROPOSAL.
MACLEHOSE
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