CO
take account of real changes in cost and in the make up of the garrison 7 since
discussions started early this year. Some minor adjustments may be necessary to
bring the costs into line with the final exchange rate assumption for 1976/7
Estimates. This will not be available until, next month. The main reasons for
the increase in costs of 20% 7 in sterling (but only 10%7 in terms of Hong
Kong dollars) are the recent increases in Service Pay and Local Overseas Allowance
and the falling value of sterling against the Hong Kong dollar. With the exception
of works maintenance costs there are no significant changes in constant price terms 7.
The changes are described in more detail in Annex A.
4.
a frigate. Such a change would reduce annual costs by some m7 at Sept 75
Hong Kong now tend to favour a Naval presence of 5 patrol craft rather than
[£
prices, assuming no expenditure on replacement craft was required during the life
of the new agreement.
5.
Changing exchange rate parities make dollar/sterling conversions more than
The Hong Kong Government have proposed, and MOD has agreed,
usually difficult.
that during the negotiations garrison costs should be discussed in terms of
dollars.
6.
3.
This has two advantages:
As the majority of costs are dollar related (see para 6 below and Annex B),
the cost in terms of dollars is much less likely to fluctuate as parities
change, and
b. The use of dollars plays down the increase in costs from the earlier
figures given to the Hong Kong Government.
The draft memorandum of understanding makes provision for the Hong Kong
contribution to be increased in step with changes in the price levels ruling in
both Hong Kong and the United Kingdom. The agreed formule requires garrison costs
to be divided into 9 separate categories (the so-called "inflator" categories).
These, together with an attribution of costs to each category, ere shown in Annex E.
With the exception of equipment supplied from the United Kingdom and that proportion
of UK Servicemens basic pay not drawn locally (tax, NI contributions, savings etc),
2
CONFTANTIAL
1
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