SECRET
should not be delayed so long. The Governor may, however, have revised his view on timing. The Defence Review statement has elready publicly revealed that Hong Kong will be asked to pay more for less, and off the record statements by the Ministry of Defence have led to fairly accurate estimates being made in public about the likely size of the reduction in forces. be that the best way of avoiding a continuing build-up of opposition and speculation in Hong Kong would be to launch the formal negotiations as soon as possible.
11.
It may
When agreement has been reached on the right size of forces, and on the proportion of their cost to be paid by Hong Kong, it will still be necessary to decide how the costs are to be divided in practice. The Ministry of Defence have hitherto taken the line that Hong Kong should pay the agreed proportion of the actual costs assessed from year to year. But this would be likely to lead to substantial disputes throughout the life of the agreement. Particularly if they are to pay more than half the cost, Hong Kong would understandably claim the right to a running voice in every item of expenditure and in its allocation to Hong Kong. It would seem preferable from the point of view of both parties to agree on a schedule of notional costs and on an escalation clause to take account of inflation. Hong Kong would then pay only its agreed share of this calculated cost. Marginal costs would then continue to fall on the MOL. But this would leave day to day decisions in UK hands and would seem preferable.
Hong Kong & Indian Ocean Department 13 December 1974
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