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the negotiations is under examination within the Ministry of Defence. Meanwhile forward costings are being based on your proposal that the full budgetary costs of the I/S forces are to be repaid from April 1971.
Revision of Present Contribution
US of S (Army) suggested after his visit to Hong Kong last year that as our costs have risen since the current agreement was signed, we should attempt to negotiate an increase in the contribution up to March 1971. This proposal is still under examination within the Ministry of Defence but the preliminary view so far arrived at is that we do not have adequate grounds for seeking an increased contribution under the present agreement. The reasons for this conclusion are:
a. The 1966 negotiations with Hong Kong were extremely tough and at one time it seemed that the only way to secure an increased contribution would be an imposed settlement which might have led to the resignation of the unofficial members of the Executive and Legislative Councils;
b. We do not consider we could profitably use de- valuation as an argument, not only because it is not mentioned in the 1966 Memorandum (the current agreement) but also because it is a boomerang; the Hong Kong Government lost heavily over devaluation and were considerably embittered by it and could well under the terms of the Memorandum request consultations with us because their financial position had worsened;
C. Negotiations are already in progress locally with the Hong Kong Government about the recovery of our extra costs due to the reinforcement of the garrison following the disturbances of summer, 1967.
In the light of the foregoing points any proposal to re- negotiate the current Agreement would probably be strongly resisted by the Foreign and Commonwealth Office.
8. There is one aspect which may be worth pursuing and this concerns the capital works expenditure. It is expected that the total of £M2.4 which the Hong Kong Government agreed to pay during the four year period for major works services will be spent by April 1970. The money will not cover other necessary building works during the period up to 31st March 1971 when the agreement ends, costing some £700,000. over it is likely that MPBW will build married quarters for Gurkhas coming to Hong Kong from Malaysia and Singapore and the cost will be about £350,000 for the period up to 31st March 1971. Treasury previously took the view that
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