TNAG-0937-FCO40-1156-Visits-of-Sir-Murray-MacLehose--Governor-of-Hong-Kong--to-th-1980 — Page 144

CONFIDENTIAL

and that a system of target costing would be adopted projecting five years ahead and subject to review each Autumn to update the garrison. assumptions and adjust for prevailing prices. The methods and princi- ples to be used in the costing would be detailed in the DCA. The target could be updated at the beginning of each financial year by applying forecast inflation factors to convert to estimated outturn prices, and would be monitored throughout the year. Changes in the garrison in the course of each year would only affect the costing if they exceeded set tolerances. The arrangements would in this way.

be able to cope with any future reinforcements.

19. HKG welcomed the concept of a trigger mechanism which would allow the DCA to cover reinforcements, but had reservations about the proposed revaluation at the beginning of each financial year. They would prefer costs to be expressed in current prices and not inflated to estimated outturn prices. MOD explained that this had been suggested to minimise the variation between initial target and outturn for HKG's benefit; it could be dispensed with if HKG wished. HKG would have liked a trial run for the proposed system, but it was accepted that there was not enough time. A decision was required by the end of July if plans for the build-up were to be met; a later decision could affect the recruitment plans and formation date for the fifth battalion. HKG pointed out that their Unofficials would need to be given figures showing HKG's financial liability under the new arrangements and an explanation of the difference from the existing DCA before they could be invited to endorse them.. They suggested that the target costing should be undertaken as the basis on which the Unofficials could be consulted. MOD explained that this would take too long if a decision was to be made before the Autumn. It was therefore agreed that:

a.

the 1979/80 costing should be revalued to 1980/81 prices as a means of providing HKG with an early assessment of the financial implications of a new DCA. The existing assumptions would be used unless any were clearly wrong; where MOD and нKG had not reached agreement on the appropriate accounting con- vention, the costs would be shown both ways..

b. the full target costing should also be set in hand. This would demonstrate how the system would work.

Charging policy

20.

HKG drew a distinction between the costs revealed by the latest exercise and the charges to be raised, and took the view that it would represent a change of policy from the present DCA for future charging to be linked to a comprehensive costing of this nature. MOD's proposition was for charges to be based on this sort of costing; MOD did not regard this as a change in the policy enshrined in the 1975 DCA. There had been a few changes in the normal accounting conventions since 1975, but the underlying principles of both costings were the same. The present costing was consistent with the coverage of the 1975 DCA except for the items which had been excluded in 1975 on the assumption that they were broadly self-cancelling. MOD and HKG took note of each other's positions.

CONFIDENTIAL