CONFIDENTIAL
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Background and Argument
3.
In July the Prime Minister decided that three patrol
craft should be retained in Hong Kong until 1997. The MOD suggested during August (ie before the PES round) that we should continue to press HKG for a larger contribution to the cost. Correspondence rests with PS/No 10's letter of
31 July. This leaves the ball in our court.
4. Hong Kong have always argued, with our support, that the
funds should be met under the normal Defence Costs Agreement
(DCA) cost-sharing arrangements, ie they should pay 65% and
MOD 35%. On this basis retention of the three vessels will cost the MOD about £3m per annum, a figure they say they have not budgeted for. During the summer, we duly pressed
the Hong Kong Government again to look at alternative sources of funding, which would not require an approach to
Finance Committee, to try to bridge the gap.
5. We had hoped that the re-provisioning of naval facilities from HMS Tamar might provide some scope for manoeuvre eg creative accounting, but this is not a starter given Hong Kong's rigorous audit procedures. The only
possible solution that the Chief Secretary could come up
with was to divert funds from the Joint Scholarship Scheme
operated by the FCO and Hong Kong Government. (This runs to
just over £2 million per annum, half being contributed by
each side). However, after looking into this, both we and
the Hong Kong Government have concluded that public
accounting principles and procedures make it impossible to divert scholarship funds for military purposes. In any case significant amounts of money could only become available
after some years when existing scholarship recipients had
finished their courses. (We are pursuing separately whether
scholarship money for Hong Kong could be better spent
elswhere in Asia.)
TICACP/2
CONFIDENTIAL