Kuala Lumpur, 20 June 1963
366. Confidential
Malaysia
Federal Cabinet met yesterday 19th June to discuss failure to reach agreement with Brunei and Singapore on terms for their entry into Malaysia. On Tunku’s initiative it was decided that final terms would be submitted in writing to both Governments. Tunku has made it clear there will be no more negotiations and that the two Governments are expected to reply within 48 hours.
2. Federation’s final terms to Singapore are as set out in my 340 of 7th June.1 Lee Kuan Yew’s counter proposals which are unacceptable to Federation are as follows:
(a) Principle for establishment of common market should be agreed on in advance and included in constitution. (Federation suggests establishment of two working parties to meet under the Chairman of Tariff Board and on basis of Rueff Report2 to prepare recommendations to the two Governments.)
(b) Collection of customs and excise duties in Singapore should be conferred upon Singapore Government in perpetuity in the Constitution.
(c) Federal Government share of federal revenue in Singapore should be reduced from 40% to 39%.
(d) Instead of grant of 50 million dollars during first 5 years, Singapore would make grant of 20 million dollars and loan of 30 million dollars.
3. Lee has arrived in Kuala Lumpur and will meet Tunku today. Moore told me yesterday that he thought Lee would prefer to pull the whole house down rather than give up on his demand for including common market principle in the Constitution. Rueff, on the other hand, believes that Lee will accept Federation terms and represent them in Singapore as having been forced on him. I believe Lee may eventually accept the terms (they were drafted with Goh and it would seem madness not to) but I would not be surprised if he held out until meeting with British and Tunku in London.
4. Following Federation’s ultimatum, an early agreement with Brunei seems likely:
(a) Annual contribution for 10 years of 40 million dollars has been agreed but there has been argument over terms in which it will be expressed. Problem is different meanings given to Malay words but it should be settled.
(b) Federation wanted share of revenue for new oil developments but were prepared to agree instead to review of 40 million dollars lump sum contribution after 5 years. There will probably be compromise on 7 years.
(c) No reference will be made to Federation’s rights over new minerals. This will mean that Federation Constitution will apply but at Sultan’s request no publicity will be given to this.
(d) Sultan has given in on his precedence. He wanted Federation Government to settle the question but Tunku insisted that it should be left to the rulers.
5. Irrespective of whether there is agreement with Singapore and Brunei, Tunku plans to leave for London about 25th June.3 He is unlikely to be able to leave earlier and this may rule out meeting with Sukarno.
[NAA: A1838, 3006/4/7 part 8]
1 The terms covered six issues: agreement in principle to the establishment of a common market and the establishment of an Advisory Tariff Board; authority in respect of the collection of customs and excise duties and income tax; payment of all taxes collected in Singapore into a separate fund to be divided annually in the proportion 60% to Singapore and 40% to the Federation; payment for federal developmental projects in Singapore; Singapore’s grants for development in the Borneo territories; and the dates all financial arrangements would come into force—1 September 1963—and for future review periods.
2 Findings of the World Bank mission to study the economic implications of the proposed merger of Malaya, Singapore, and the Borneo territories to form Malaysia, under the leadership of Professor Jacques L. Rueff, French Inspector General of Finance.
3 At this stage, the signing of the final agreements on the merger was set down for 27 June (see editorial note, Final Agreements on Malaysia ).