Reference......................
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SECRET
Mr Martin Mr O'Keeffe
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HONG KONG: DEFENCE COSTS AGREEMENT
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1. On 26 June Mir Jackson and I attended a meeting in the office of Mr Andrew, AUS (GS), to discuss the draft OPD paper circulated by DS 6 on 23 June.
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2. On the initial suggestion of Mr Fitzhew (Treasury) it was agreed after discussion that, especially in light of the deterioration in the UK economy since April and continuing Ministerial pressure to prune Defence expenditure, we should recommend to Ministers that in the forthcoming negotiations with Hong Kong the opening UK position (in) line with the Frime Minister's minute of 20 February) should be to ask for a 75% Hong Kong contribution from the beginning of the new Agreement. However, Ministers should be warned that this would probably not be attainable and should be asked to confirm that the UK negotiators could, if necessary, settle for a graduated contribution, again on the lines already suggested by the Prime Minister.
3. After failing to obtain agreement to another amendment, Mr Fitzhew said that the Treasury would reserve its position on the link between the Brunei battalion and the 4-unit Hong Kong garrison. We and the Treasury also proposed various drafting amendments; and DS 6 undertook to circulate a further draft paper (which we may need to clear with Mr Male or Sir D Watson) as soon as possible.
Turning to the Memorandum of Understanding, Mr Andrew said that paragraph 2 would clearly have to be left completely open for the time being. On Hong Kong's proposal that the Memorandum should include a provision for review of the Hong Kong contribution should the Hong Kong economy get into serious difficulty, it was agreed that this could probably be conceded ultimately, but not at once. The Hong Kong suggestion that a material change in the composition (and not merely the size) of the garrison should also trigger a review, could also be conceded.
5. The Army Department said that it was already necessary to start contingency planning for withdrawal of the artillery battery in case Hong Kong were unwilling to pay for (the full cost of) this. (He added that he presumed similar considerations might apply to the patrol boats). Such planning could probably be kept secret only until about late July.
It was agreed that it ould be necessary to inform the Governor of the UK stance on the size of the garrison at the very beginning of the negotiations; and that we should try to settle as early as possible the question of whether Hong Kong would wish the artillery battery and the patrol boats to remain.
6. It was agreed that the draft Memorandum of Understa: ding (and the Governor's telegrams numbers 592-594) should be more fully discussed at a further meeting between HKIOD, DS 6,F 1 (Air)
CODE 18-77
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/Treasury