SECRET
1.
It seems clear that you must now agree to ask the Treasury to arbitrate on the issue of whether the charges are proper to Defence Votes or the Hong Kong Government. This should preferably be done by the FCO and might take the form of a letter setting out, firstly, the agreed facts and then presenting, separately, the Ministry of Defence and Hong Kong Government cases for maintaining that the charges properly belong to the other. It would be best if this letter agreed in draft with the MOD but, if this causes difficulty, the FCO letter could deal only with the Hong Kong case leaving the MOD to set out their side of the story in a separate letter.
2.
If the Treasury rule that the Hong Kong Government døeliable to meet these charges you will then have to decide whether to press them for payment or to seek Treasury authority for the FCO to foot the bill instead. In the latter event it is virtually certain that the authority, if. forthcoming, would be conditional on our finding the required money from within our existing PESC provisions. This would cause us great difficulty. We have no contingency margin on our votes and we could thus only meet such condition by cutting other FCO expenditure (and this is not really a practical proposition) or if unforeseen savings should arise during the course of the 1972-73 financial year. We will, unfortunately, probably not know much before the end of 1972 whether such savings seem likely to emerge.
8 March 1972
Stephen
S Stephenson
Finance Department
SECRET
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