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2. The military contribution paid in respect of the last three years and the estimated contribution calculated on the existing basis for the current year are:-

1925 1926

1927

1928 (estimated)

$

4,178,249.87

3,484,772.33

3,842,041.80

3,662,630.00

the average contribution for 1925, 1926, and 1927 being $3,835,021.33 and for 1926, 1927, and 1928, $3,663,148.04.

3. The table of annual valuations made during the years 1924 onwards is as follows:-

1924 1925

1926

1927 1928

$

22,147,951

27,287,862

27,998,237

29,016,439

30,395,447

and the military contribution based on 12 per cent. of the annual valuation made during the previous year would be:-

1925

1926

1927

1928

1929

..

$

2,657,754

3,274,543

3,359,788

3,481,973

3,647,454

4. The three years prior to 1926 were for this Colony years of plenty while the immediate future seems likely to be, for some years to come, one of difficulty. The surplus funds accumulated in the last decade are becoming exhausted and recourse is now being made to loans for financing urgent public works. There have previously been many requests for consideration with a view to reduction of the contribution and I would refer you to Sir F. Lugard's despatch of 3rd August, 1911*, asking for relief over certain items. In Mr. Harcourt's Confidential despatch of 17th May, 1912†, it was stated that the question of military contribution paid by the Eastern Colonies would be further con- sidered and that a Committee had been appointed to inquire into the operation of the methods upon which the military contributions paid by Crown Colonies were being assessed. In Mr. Winston Churchill's despatch No. 233 of 13th August, 1921†, it was stated that the Committee reported to the Treasury in 1914, but the war intervened to prevent any further action and the matter has since been in abeyance.

5. The hope of relief through the deliberations of this Committee now no longer exists, and it is therefore necessary again to bring before your attention certain points, over which you will no doubt agree that relief is justified and that if the proposed new method of assessment does not meet with the approval of the Treasury certain modi- fications of the existing practice are necessary and long overdue.

6. The existing Ordinance No. 1 of 1901 (The Defence Contribution Ordinance No. 1 of 1901) is not altogether satisfactory, and various differences of opinion frequently arise. In the first place Colonial revenue includes the gross receipts from all sources of revenue, but does not include proceeds of land sales. Contributions to the Widows' and Orphans' Pension Scheme and sale of condemned stores have also been excluded and only the net receipts from the Opium Monopoly are assessable. There is also the question which has recently arisen as to whether military contribution should be paid on the increase in the book values of sterling securities, when sold, owing to the fall in exchange. These securities form part of the surplus balance of the Colony, they are due greatly to proceeds of land sales, and may be considered as part of the Colony's capital. Under Colonial Regulation 309 the "profit "has to be carried to Current Revenue. It is not considered that any such increased dollar value of sterling securities is revenue for the purposes of the Defence Contribution Ordinance, though it may be necessary according to Colonial Regulations, which do not deal specifically with exchange difficulties, to place any difference on the revenue or expenditure side of the accounts.

7. Section 3 of the Ordinance is now out of date, in so far as in the last paragraph the percentage of 4 per cent is taken. The Colony's previous loans are funded at 34 per cent, and 4 per cent, at the time the Ordinance was drafted, was a proper percentage to include

+33574/21: not printed.

29033/11: not printed.

† 14436/12: not printed.

interest and sinking fund on loans. Times have now altered and 6 per cent. would now be more accurate and should be taken for all expenditure from revenue since the beginning

of 1915.

8. Under this Ordinance relief is given in the case of railways and telephones and other productive undertakings of a similar character, and in Mr. Harcourt's despatch No. 250 of 19th August, 1911*, a request was made that in the event of reproductive undertakings other than railways or telephones, the principle of assessment of net receipts shall not be extended to them without previous reference to the Secretary of State. Under this clause I shall be compelled to press, if the Treasury will not agree to the new proposed method of assessment, that various further undertakings be included among those upon which only net receipts are taken for calculation of military contribution. I refer for example to the following:-

(a) Wireless Telegraphy. This obviously comes under the heading "Telephones

and-similar undertakings."

(b) Waterworks. These are productive undertakings, and the Colony has now to

invest large sums in such undertakings.

(c) Aerodrome. This is as necessary for transit by air as is a railway station for

transit by rail,

(d) Harbour Dredging. Allowances should be made for interest on loan or revenue

used on capital expenditure.

(e) Post Office operations.

(f) Ferries. The question of establishing a vehicular ferry across the harbour is

under consideration.

(g) Operations which might properly be charged to municipal rates.

9. It is sought to avoid raising difficult questions of this nature by the suggestion for the new method of assessing the military contribution; and at the same time the existence of such claims for withdrawing revenue from the military contribution assess- ment provides good reason for accepting the rate of 12 per cent. for future assessment in accordance with the new scheme, in preference to any higher rate. Twelve per cent. would provide at least as large a sum as His Majesty's Government is entitled to expect if the present system were worked in a way considered equitable by this Government.

I have, &c.,

C. 52802/28 [No. 10].

No. 57.

W. T. SOUTHORN,

Officer Administering the Government.

HONG KONG.

THE OFFICER ADMINISTERING THE GOVERNMENT

(Confidential (2).)

SIR,

to

THE SECRETARY OF STATE.

(Received 30th August, 1928.)

Government House, Hong Kong, 28th July, 1928.

With reference to my despatch Confidential (1) of to-day's date†, I have the honour to state that for the purpose of obtaining a settlement of the vexed question of the assess- ment for military contribution I should be inclined, if necessary, to go one step further than the proposal made in the despatch referred to above.

2. The suggested rate of 12 per cent. on the annual valuation brings in for the year 1929, as you will see from the figures quoted, slightly less than the average contribution for the years 1926, 1927, and 1928, and considerably less than that for the years 1925, 1926, and 1927. Although I consider that a substantial deduction should properly be made from the revenue now assessed for military contribution and that the averages. mentioned above might therefore be regarded as being too high to be taken as the basis

(C 38051)

26608/11: not printed.

† No. 56.

C.2

PUBLIC RECORD OFFICE

Reference :-

EPEEC.O.882/11

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PUBLIC RECORD OFFICE, LONDON