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items of greater military priority in the defence budget.
6
Against this background MOD Ministers have now agreed that the three Peacocks should in principle be retained in Hong Kong waters until 1997 subject to satisfactory financial arrangements being agreed and to the availability of manpower.
Defence Cost Arrangements
7.
The arrangements covering the procurement running costs, and
disposal of the Peacock Patrol Craft were set out in a side letter
to the 1981 Defence Costs Agreement. A side letter was necessary
because major capital purchases fall outside the terms of the DCA.
Under the agreement reached in this side letter, the Hong Kong
Government was to contribute 75% to the capital costs of purchasing
the vessels; running costs were to be shared in accordance with the
DCA current at the time; and when the vessels were withdrawn or
sold, 75% of the market value was to be credited to the Hong Kong
Government. When the DCA was renegotiated in 1988, it was agreed
after very acrimonious negotiations that the Hong Kong Government's
share of all recurrent costs should be reduced from 75% to 65%.
Consequently the Hong Kong Government currently fund 65% of the
running costs of the 3 Patrol Vessels, with the MOD funding 35%. As
the total annual running costs are estimated at about £2.5 million,
the MOD share is £875,000 a year, a very small sum in terms of the overall defence budget.
8.
The MOD initially argued that because they saw no military case for a continued naval presence after 1991, the Hong Kong Government
should meet the full costs. Despite the anxiety expressed by the
Governor that the MOD might stick to this position, this now seems E unlikely. MOD officials have already acknowledged that in view of
political sensitivity in Hong Kong over the DCA, it is unrealistic
to expect the Hong Kong Government to meet the full costs. Mr
Hatfield, the responsible Under-Secretary in the MOD, is visiting
Hong Kong early next week to explore the possibility of reaching
agreement on "pragmatic financial arrangements" which would meet
Hong Kong's political concerns and also take account of the MOD's
financial difficulties.
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