TNAG-2240-FCO40-3219-Future-of-Hong-Kong-Royal-Navy-presence-1991 — Page 57

CONFIDENTIAL

K M

A

B

C

Background and Argument

3.

In July the Prime Minister decided that three patrol

craft should be retained in Hong Kong until 1997. The MOD suggested during August (ie before the PES round) that we should continue to press HKG for a larger contribution to the cost. Correspondence rests with PS/No 10's letter of

31 July. This leaves the ball in our court.

4. Hong Kong have always argued, with our support, that the

funds should be met under the normal Defence Costs Agreement

(DCA) cost-sharing arrangements, ie they should pay 65% and

MOD 35%. On this basis retention of the three vessels will cost the MOD about £3m per annum, a figure they say they have not budgeted for. During the summer, we duly pressed

the Hong Kong Government again to look at alternative sources of funding, which would not require an approach to

Finance Committee, to try to bridge the gap.

5. We had hoped that the re-provisioning of naval facilities from HMS Tamar might provide some scope for manoeuvre eg creative accounting, but this is not a starter given Hong Kong's rigorous audit procedures. The only

possible solution that the Chief Secretary could come up

with was to divert funds from the Joint Scholarship Scheme

operated by the FCO and Hong Kong Government. (This runs to

just over £2 million per annum, half being contributed by

each side). However, after looking into this, both we and

the Hong Kong Government have concluded that public

accounting principles and procedures make it impossible to divert scholarship funds for military purposes. In any case significant amounts of money could only become available

after some years when existing scholarship recipients had

finished their courses. (We are pursuing separately whether

scholarship money for Hong Kong could be better spent

elswhere in Asia.)

TICACP/2

CONFIDENTIAL