built in the UK. This has advantages in that the MOD would remain the design authority and supervision would be much easier in the UK. A separate tender would be invited from a wider field, including HK, for construction of the four remaining vessels.
Comment: The Captain-in-Charge's assessment is that the HK United Dockyard (HUD) is probably the only company in HK capable of constructing small warships. It is not certain whether construction in HK is feasible or economical, but this possibility is not excluded by the MOD (Navy) proposals.
The estimated cost of 5 vessels at September 1978 prices, excluding communications and weapons is £20.9m. In estimating escalation of these costs the currently falling level of inflation in the UK is calculated as being 10.1% in 1977/8 to 1978/9.
Comment: The estimated cost of communica- tions is not yet known, but seems likely to be of the order of £0.4m per vessel. The cost of weapons will depend on the choice: it seems likely to be between £0, 6m and £1.0m per vessel,
The total cost of 5 replacement vessels is of the order of £28m, exclusive of escalation, of which HK would be required to contribute 75% or £21m over the period 1980-81 to 1984-85.
Since 1st April 1978 under the Defence Costs Agreement, 75% of the assessed running and support costs of the Squadron are met by the Hong Kong Government. This division of costs will continue under the agreement until 31st March 1983, when the current agreement allows for extensions for periods of 5 years. It will not be possible to assess running and support costs until the result of the tender is known. However, it is expected that the costs will be of a similar order to those for the existing craft.
Guidance for the tender competition will be in the form of a 'Naval Staff Requirement' (NSR) paper which is being drafted in the Ministry of Defence, and forms the blueprint to
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