TNAG-0475-FCO40-540-Contributions-of-Hong-Kong-for-costs-on-maintaining-military-1974 — Page 25

C.S. 166

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E

3

XCC(74)41

There are practical drawbacks to the former approach, from both Hong Kong's and HMG's point of view, principally because without knowing the specific sum in advance, it is difficult to plan and to budget. Both sides felt therefore that there would be advantage in agreeing a specific sum in advance, which would then be added to the outstanding balance of the £17 million and which could be drawn upon as required depending on progress in the building programme, until the end of the Agreement period.

6

Expert advice available to the Hong Kong side on the cost inflation rate to use in the formula, in order to produce the lump sum figure, suggested that a rate of 1.5% per month compound for the next two years would be reasonable, though possibly a little on the high side. The UK team, however, felt that an even higher figure was justified. After careful consideration of all factors, including trends over the past few months and likely developments in the local construction industry in the foreseeable future, the Hong Kong officials confirmed their view that there was insufficient reason to anticipate an inflation rate higher than 1.5% per month.

7

Since it was throughout the talks recognised that it was in the interests of both Hong Kong and the UK that agreement should be reached on the review question, before the Services programme ground to a virtual halt, the two sides eventually agreed that a compromise solution should be put to the respective governments for ratification. Under this solution, Hong Kong would guarantee a minimum payment based on the 1.5% compound rate (even if the cost index did not in fact increase at that rate) and in addition would meet actual increases above the 1.5% rate up to a maximum of 2% per month. This would mean on the one hand that Hong Kong would have a known minimum and a known maximum commitment, and on the other hand that HMG would have a guaranteed range of assistance to plan against. The amount payable under this formula is calculated as follows:

(i) starting date: 1st November 1973. It is known that the

150 index was actually reached some time during November: by adopting the first day of that month as the effective date for the calculation, the benefit of the doubt has deliberately been given to HMG;

(ii) inflation rate : 1.5% per month compound (over the period

to 31st March 1976);

(iii)

(iv)

unspent balance at 1st November 1973 - £8.766 million;

the unspent balance is assumed to be disbursed evenly over the period;

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