SECRET
FLAG I
5. DEFENCE COSTS
1. It was decided in the Defence Review that the garrison in Hong Kong should be reduced and that Hong Kong should be asked to contribute a greater share of the costs when the present defence costs agreement runs out in March 1976. Nothing has so far been said in public about the size of that contribution but OPD last year considered that it should be 75%. The Chiefs of Staff agreed that the garrison could be reduced to 53 major -units, costing about £40 million per annum at September 1974 prices, implying a Hong Kong contribution of £30 million, or about three times what the Colony now contributes under the present agreement. The Governor has consistently maintained that, when consulted, the Unofficial Members of his Executive and Legislative Councils (UMELCO) would not acquiesce in a contribution exceeding £17 million. At his request, negotiations on a new agreement were postponed until after the introduction of the 1975/76 budget.
2. In his minute of 20 February to the Secretary of State for Defence the Prime Minister expressed the view that it remained our firm intention to obtain 75% of the cost of the garrison from the Hong Kong Government; but that failing this, the British negotiators might agree ad referendum to a 50% contribution in the first year of a 5 or 7 year Agreement, rising by stages to 75% in the last year or any variation of this percentage pattern (e.g. a level of about 66% throughout the period) which would produce a result no less favourable to HMG. Meanwhile further work should be done to reduce the cost of the garrison further.
3. As a result, a joint UK/Hong Kong Working Party met in Hong Kong and produced a report on the possible composition and the security and political implications of a garrison costing about £35 million. Four possible options were identified costing between £34 million and £371⁄2 million. The Report
remains to be considered by the Chiefs of Staff.
SECRET
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