TNAG-1748-FCO40-2467-Visit-by-Sir-Geoffrey-Howe--Secretary-of-State-for-Foreign-a-1988 — Page 100

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CONFIDENTIAL

Background

1.

Broad agreement on apportionment of costs under a new DCA was

reached in March. The central feature is that the overall

apportionment has been adjusted in Hong Kong's favour from 75:25 to

70:30: further presentational changes will enable the Hong Kong

Government to claim that the apportionment within the new DCA is

65:35. In public it has been stated only that a new basis for

agreement, more favourable to Hong Kong, has been reached.

2.

Two problems have however emerged which have prevented the

formal conclusion of the new agreement:

3.

(a) the Hong Kong Government have insisted on concluding a

new, free-standing agreement. The MOD's initial

preference was for a briefer instrument detailing where

the new DCA differed from that of 1981;

(b) the Hong Kong Government's proposed draft agreement covers

a number of additional points not fully addressed during

the negotiations. The MOD believe that these would have significant financial and operational implications.

The MOD have now expressed willingness to negotiate a

free-standing agreement, and further exchanges on the remaining

points at issue are in hand. At least one further round of

negotiation, probably between the full teams on each side, will be

necessary. If the Hong Kong negotiators pursue all the outstanding issues, it could still be difficult to reach an agreed outcome.

4. The negotiations have been dogged by mutual mistrust. ExCo

have accepted the agreed apportionment, but with great reluctance.

The Governor believes that he can secure just enough support in the

LegCo Finance Committee. But if the end-game drags on too long

there is a growing risk that the agreement could unravel. The issue

could also come to loom larger again in the list of Hong Kong

CONFIDENTIAL