commencement of the Agreement which might have provided a basis for settlement it around $50M which we privately thought a not unreasonable compromise. Once this possibility was eliminated we sought a formula based on the funds unspent when the cost index reached the 150 level. Deciding on when this took place and the amount then unspent provided room for discussion.
Although it was known that $92M were unspent at 1st January 1974, and that the price index reached 153 in late December 1973 there was room for some give and take over the assessment of precisely when the index reached 150 and the unspent balance at that moment. We argued for 1st November as the date and eventually Hong Kong conceded this, partly at least because it helped to bridge the gap between their early offer of about $24M and the final figure of 830M, as described below.
To calculate future inflation depended on agreeing the percentage rate and here some difficulty developed. Clearly it was in the nature of things impossible to forecast the rate precisely, but whereas we considered that ample evidence existed to indicate that a rate of 2% per month or even marginally more was within the range of strong possibility Hong Kong, for political and presentational reasons as well as financial reasons, was extremely reluctant to accept such a high rate as being realistic. The lump-sum equivalent of 13% per month was 824-28M depending on the arithmetical basis of the calculation whereas 2% would have given $36-38M.
As a
Hong Kong made an offer to settle for 12% per month, which they first equated to about $24M, with additional cover if inflation exceeded 12%, but within a limit of 2% per month. We felt unable to accept less than $30M plus inflation in the 11-2% range. After internal reference to higher authority the Hong Kong team was able to make such an offer, which we accepted, subject to ratification. final thought we suggested that a lump sum credit of $35M might be preferable to $30M and inflation over 12% in order to remove uncertainty from both sides, and this Hong Kong undertook to consider. We left to be resolved between the PSA Regional Office and Hong Kong representatives the exact arithmetical basis for calculating the monetary equivalent of inflation between 13% and 2%.
No great difficulty is likely as the method will probably be similar to that already applied to determine increased costs caused by inflation.
In all the circumstances the UK team felt that a provisional agreement within these terms was the best achievable. It represented the outcome of five meetings,
We took often lengthy, with hard but not unfriendly discussion across the table. note that Hong Kong was under no absolute obligation to provide any additional funds;
also that a deficit Budget has just been introduced for the first time in Hong Kong's history. Early agreement was desirable since the UK's case would tend to grow weaker as uncertainty arising from the Defence Review affected thinking in Hong Kong.
On the conclusion of our discussions we were encouraged by the view of CBF who said that he considered us to have reached the most satis- factory provisional agreement within current practicability.
With additional funds of this order the works programme will continue though at a much lower level; some 20 projects will probably have to be deferred until further funds become available, hopefully in 1976.
I am sending copies of this letter to the two other members of our team and to Thorp, Lloyd-Jones (both MOD) and Scholar, Treasury. Both MOD and PSA have indicated agreement to the terms proposed, and I trust that Treasury will now do so immediately, if they have not already done so.
Myers sincerely
Aggleton
PC AGGLETON DS (0 & 1.
2.
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