TNAG-0475-FCO40-540-Contributions-of-Hong-Kong-for-costs-on-maintaining-military-1974 — Page 24

C.S. 166

CONFIDENTIAL

XCC(74)41

Hong Kong's position

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Hong Kong's contribution under the Defence Costs Agreement is just that, a contribution unrelated to any specific proportion of the actual costs of maintaining the garrison in Hong Kong. For that reason, the Hong Kong Government has never sought to exercise any control over or even be consulted on the building programme, which is administered by the Property Services Agency on behalf of the Ministry of Defence and executed in the main by the Public Works Department as an agent of Property Services Agency. Therefore, although the programme is a rolling one and is assumed to extend well beyond the current Agreement period, the point at issue at present is simply one of deciding how far Hong Kong is willing to top-up the unspent balance of the original £17 million in recognition of rising building costs.

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The view taken by the Hong Kong team in the discussions was that, since clause 3(i)(a) specifies that a review will take place only when costs increase or decrease by 50% or more, the implication is that possible cost variations either way up to that amount were allowed for in the original £17 million contribution : in other words, had prices decreased by up to 50% HMG would have obtained that much more work for the same contribution; the fact that prices increased simply meant that the contribution did not buy as much work as might have been envisaged in 1971. The view firmly adhered to by the Hong Kong team therefore was that a possible obligation to meet cost increases arose only when the cost index reached 150. The UK team had hoped originally to be able to persuade Hong Kong to share all cost increases from April 1971, but it was pointed out that Hong Kong was having to trim its own public works programme, partly because of inflation, within the guidelines established by the Financial Secretary in his recent budget speech, and therefore the Hong Kong team felt bound to insist on the more rational interpretation of Hong Kong's obligations under the review clause. It was further pointed out that, in Hong Kong's present budgetary circumstances, any additional defence contribution would perforce be at the expense of other items in agreed programmes. This point was explained in some detail and the UK team eventually accepted this situation.

Method of calculating supplement

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There appear to be basically two ways for Hong Kong to meet cost increase of 50% and above: one is to accept the principle as stated and then calculate in due course and in retrospect actual increases from the time the 150 index was triggered up to 31st March 1976; the other is to estimate, by the application of an assumed rate of increase, the amount that would be payable by the end of the Agreement and make that amount available in advance.

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