ROBAJR(3)
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
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