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NOTE FOR EXECUTIVE COUNCIL
DEFENCE COSTS AGREEMENT
XCSI(75)2 Copy No 25 of 50
249
At the meeting on 5th August 1975 Honourable Members expressed an interest in seeing the text of the draft Memorandum of Understanding for the next Defence Costs Agreement, which has recently been provisionally agreed between officials of the two governments. The text of this draft Agreement is annexed. The most crucial aspects of the next Agreement - namely the size and compo- sition of the garrison, its cost and Hong Kong's share of that cost - have not yet been settled. Indications are, however, that in view of the United Kingdom's current economic difficulties, Ministers are likely to take a very tough line with Hong Kong,
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The draft Memorandum of Understanding differs from the present MOU in two main areas:
(a)
(b)
Inflation and Currency. It was accepted in earlier exchanges at the official level that, once Hong Kong's contribution was tied to a fixed percentage of the cost of the garrison, machinery would be required to ensure that the contribution kept pace with inflation. Paragraph 3 and Annex B of the draft Memo- randum of Understanding make provision for regular adjustments to be made to Hong Kong's payments, in line with movements in agreed indices. The component elements of cost will probably be expressed (in Annex B) in the currency in which expenditure will be met, but actual payment of Hong Kong's contribution will be made in HK$, items originally paid for in sterling being converted at the average ex- change rate for the quarter: this is in accordance with the principle that the effect of changes in exchange rates should as far as possible be neutral.
Works Programme, HMG have accepted the importance to Hong Kong of the capital works programme but are unable to say what the cost of the programme is likely to be, pending decisions on the size and composition of the eventual garrison. Minimum and maximum guidelines will be inserted in the MOU for planning purposes and the programme will be agreed between the two governments, Para- graph 5 also indicates wording intended to encourage the release of surplus land. The cost-sharing approach of the overall Agree- ment will be applied also to the capital works and maintenance programmes, although Hong Kong will meet all expenditure in the first
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