CONFIDENTIAL
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In 1976 total defence payments for the agreed garrison were £25m. In 1976 prices it is expected that 1977-78 will cost £18.75m and subsequent years £12.5m. The use of UK resources in this activity is not large and is planned to diminish.
3. The advantage to UK civil aviation as a result of the constitutional relationship are extremely complex. In consultation with the Civil Aviation Authority it has been possible to estimate the revenue raised by those parts of air services agreements which would not normally hold between sovereign states. Put briefly half the direct scheduled traffic between the UK and Hong Kong, presently the cabotage monopoly of British Airways, would be lost to a Hong Kong based carrier. The loss of the existing monopoly would also affect rights on through traffic to third country destinations, in this case to Australia. Loss of revenue as a result of the rescheduling of flights previously operating through Hong Kong would be experienced. UK independent airlines operating charter and cargo flights would lose revenue and there would be revenue lost on those routes now operated by British Airways which have been gained in exchange for access to Hong Kong. The revenue lost for the first four categories has been estimated at £62.4m for 1976 which would represent a profit of £9.4m assuming a 15% rate of profit.
The Department of Trade estimates the worth of the fifth at £22m, a profit of £3.3m. Given that the application of resources to this air traffic would not be diminished in the UK as a result of the transfer of activity to another operator based in Hong Kong, profit on the application of those resources is the correct indicator of change. If it were the case that transfer took place to Cathay Pacific Airways only two-thirds of the profit transferred would actually be lost since that airline is approximately one-third UK owned. Implicit in this calculation is the belief that Cathay Pacific and British operators are of equal ! efficiency. Profit oregone by the United Kingdom if more unusual state to state relations held with Hong Kong would be £8.4m, which is two-thirds of the total profit of £12.7m. That is the measure of the advantage of air traffic rights to the UK.
4. In 1976 the Government of Hong Kong purchased coinage of value £2m from the Royal Mint under the terms of a 1936 Order-in- Council which obliges purchase exclusively from the Royal Mint. It is possible that there would be no loss to the UK if the Royal Mint, or some other British mint, proved capable of retaining the financiers by competitive tender. Loss of this trade to the UK is increased by value added. One quarter of the total expenditure, or £0.5m is an appropriate sum.
5.
Saving on representation in Hong Kong is approximately £1.5m er annum. This figures has been calculated after discussion with P.O.D. on a hypothetical mission size and structure and with other FCO departments and the P.S.A. on costs.
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CONFIDENTIAL
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