SECRET
MINISTRY OF DEFENCE
SECRET UK EYES A
MO 5/14
PRIME MINISTER
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WHITEHALL LONDON SW1A 2HB
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15 / Laval forming Whit hir 1) Watson / Male.
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HONG KONG DEFENCE CONTRIBUTION
You will recall that we agreed at OPD on 22nd July that in future we should attempt to secure from Hong Kong a contribution of 75% of the cost of a reduced British garrison and that the Minister of State for Defence should go out to negotiate a new agreement on these lines to take the place of the existing agreement which expires next March. Since then we have been in touch with the Governor and it has become clear that, as a result of inflation, the cost of the reduced garrison in 1976/77, the first year of the new agreement, is likely to be of the order of £40M instead of the £33.5M which we discussed in OPD. Accordingly, Hong Kong will be faced with moving in a single step from the present contribution of £8.5M a year to £30M. This is going to be extremely difficult against the background of the Governor's consistent advice that the most we could hope to persuade the Executive Council to accept at one step would be a doubling (to £17M) of the present contribution. After consultation with me, therefore, the Minister of State wrote to the Chancellor of the Exchequer proposing a number of possible fallback positions for use if necessary. I attach copies of the correspondence.
2. You will see that the Chancellor is prepared to agree that if 75% (£30M) is not immediately attainable the Minister of State should be authorised to settle for £25M in the first year, rising to the full 75% in the second or third year.
We shall of course press as hard as possible for an immediate contribution of 75% of the garris's cost by the Hong Kong Government, But in view of the Crnor's
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