TNAG-0475-FCO40-540-Contributions-of-Hong-Kong-for-costs-on-maintaining-military-1974 — Page 29

Department of the Environment

DSO 1112/30

A C Stuart Esq.,

Hong Kong & Indian Ocean Dept., Foreign & Commonwealth Office, London SW1.

Dear Stuart,

HONG KONG DEFENCE AGREEMENT

PSA

Property Services Agency

Mr Crowson 'se

speak

Directorate of Defence Services 1

Whitgift Centre Wellesley Road Croydon Surrey CR9 3LY

Telephone 01-686 8710

Telegrams Travauxcroy Croydon

28 May 1974.

WORKS CONTRIBUTION

LAST

REF.

14

NEXT

REF.

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Following your letter of 29th April the Governor agreed to a review of the works contribution in the light of para 3(i)(a) of the Defence Agreement. A UK team consisting of Mr F T Lockwood, DDQ(A), Col R Kendrick and myself met a Hong Kong Government team on five occasions between 7th May and 13th May inclusive. We were supported by the Regional Director PSA and Lt Col G Alderman, together with others as required by the nature of the discussions. As you already know from the signal sent by the Governor we were eventually able to reach provisional agreement on terms which Hong Kong felt able to put to the Executive Council. MOD have already confirmed to you their acceptance of the terms and have requested ratification. This letter outlines the course of the discussions.

The provisional agreement is as follows:-

(1) Hong Kong will provide an additional $30M to meet part of the increase in the cost of the works programme caused by inflation; this is a rounded up figure based on inflation at 1% per month compound applied to the unspent balance at the time when the building cost index reached 50% above the base level of 1st April 1971.

(2) If the average rate of inflation between now and 31st March 1976 exceeds 11% per month, but within a ceiling of 2% per month, an addition will be made to the 830M representing such extra inflation.

(3) Alternatively, for simplicity and to avoid uncertainty an additional $35M in

all will be made available in place of the $30, without the liability for any further adjustment for inflation over 1.

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We approached the discussions in the first instance with optimism that a more generous settlement might be possible, bearing in mind that to continue the

Two factors programme as at present constituted would require an extra $80-100m. quickly became apparent: first, that the economic situation in Hong Kong was less buoyant than a little while ago and in particular a hard budget was hitting their own public works programme; second, that they could not contemplate any agreement which depended on a formula reaching back before the 150% cost index level was reached. They argued that if costs had not reached the 150% level there would have been no review. Therefore the UK stood to lose (or gain) by any movement within the 50% margin, and Hong Kong could only be held responsible for costs in excess of this amount. This was undoubtedly a logical interpretation of the Agreement and we were unable to shift them towards a formula involving a sharing of inflation from the

1.