CONFIDENTIAL LOCSEN
It was for this reason that Ian and I discussed the alternative proposal whereby the Hong Kong Government would assume responsibility for meeting the full operating costs of the Patrol Craft after the planned withdrawal date of April 1992, with the MOD agreeing to offset this by increasing to 75% the Hong Kong Government's share of the disposal of stores purchased under the 1981 agreement. So far as operating costs are concerned, we will keep you in touch with our estimates and I can assure you that they will be kept to the minimum. For all the reasons that you give, however, quantifying the cash yield of the stores offset is exceptionally difficult and I doubt whether, given the number of assumptions that have to be made, can make a significantly better assessment than you can.
Since this proposal would involve an adjustment of what was agreed in the 1988 DCA negotiations, it would give us considerable difficulty. Nevertheless, I have been able to secure agreement here on the basis that it can be justified as applying 1981 DCA arrangements to items purchased under that DCA. Your new suggestion that this should be extended to the 1988 DCA causes me two further difficulties. First, it raises the sum involved and, second, it clearly involves a fundamental breach of the 65:35 apportionment of the 1988 DCA (which you yourself wish to maintain). I do not know whether I can obtain agreement here to any increase in offsets but I am sure that this particular proposal is a non-starter because it would reopen the principles of the DCA. The only way I can think of to generate more offset without breaching these principles would be if we were to agree to apply the new rules for 1981 DCA items with effect from the date of signature of the necessary letters even though the HKG will not incur extra costs on the Patrol Craft until 1992. I do not know whether I can get this through in MOD but, if you can confirm that this would be enough to secure the agreement of HKG, I will do my best to do so.
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