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in their desire to carry out this improvement, which they also consider necessary to the consolidation of the Company's business with Australia, the Directors offered the Government such terms as could not but be found financially satisfactory; but in doing this the Directors simply offered the same conditions which they would have submitted to the Imperial Government had this service been combined with the India and China contract. The Directors would ask the favour of your transmitting a copy of this letter and its enclosure to the Treasury and the Colonial Office. I have, &c, A. M. Bethune, The Secretary, General Post Office. Secretary.

Sub-Enclosure 3 to Enclosure in No. 4. The Peninsulae and Oeiental Company to the Agent-General for Victoria. Peninsular and Oriental Steam Navigation Company, Sie,— 122, Leadenhall Street, London, 8.C., 12th February, 1879. In compliance with the invitation of the Government of Victoria, the Directors of this Company now request me to submit for consideration the accompanying tender to perform a fortnightly mail service between Colombo and Melbourne for a period of eight years, commencing on the Ist February, 1880, for the annual subsidy of £85,000. 2. In submitting this tender the Directors deem it advisable to explain their reasons for confining themselves to this single offer instead of availing themselves of the opportunity of putting forward alternative proposals, which your Government have notified their willingness to consider. 3. In the first place the Directors would state that, having regard only to the present position of the Company's business in connection with the Australian Colonies, it would be more to their interest simply to maintain the existing monthly mail service upon fair terms of remuneration than to aim at the immediate extension of the Company's operations. But, in looking forward to a contract of eight years' duration, the Directors must necessarily consider many future contingencies, and in doing so it appears to them, sufficiently clear that the Company cannot hope to maintain their present revenue and prestige by means of a monthly communication only. Under these circumstances, if their invitation to tender had been limited to that point, the Directors would have found it extremely difficult to decide what would have been in the future a suitable subvention for the present monthly service. On the other hand, the Directors may reasonably hope that by converting the monthly into a fortnightly communication the Company will command increased receipts ; and it is under this expectation that the Directors have framed the estimates upon which the tender now before you is based. In the very low price which the Directors ask for the new service it will at once be seen that in their calculations they have credited your Government by anticipation with a very considerable share of the additional income which they hope to realize by doubling the line. In availing themselves, therefore, of the permission accorded by the conditions of tender to offer for a fortnightly service, the Directors venture to believe that they are doing their utmost to afford the colonies the most efficient and economical service which it is in their power to obtain. 4. In giving the preference to the route from Colombo instead of Aden the Directors have carefully considered the question of connecting tho mail service directly with the latter port. They admit that geographically there is a saving of distance (though not important in proportion to the length of the voyage from Australia to England) ; but this saving would practically be only in favour of the run from Australia, while the advantage thus gained would be neutralized by the fact that the mails would not arrive any sooner at Brindisi than if they were carried vid Ceylon. As regards the outward service, the steamers leaving Aden during the south-w rest monsoon would shape a course so close to Ceylon that their calling at Colombo would then hardly amount to a deviation; while by lying at Aden some three weeks the steamers would certainly become covered with grass to such an extent as would considerably affect their rate of speed. It must be remembered there is no dry dock at Aden in which to clean and repair steamers; and, though the same may be said of Colombo, yet from that port the steamers can, if necessary, proceed to Bombay for the purpose of being docked, as you are aware they do at present, so that the mails may be delivered in Australia as quickly as possible. 5. The Directors have therefore no hesitation in saying that Aden would not be so advantageous a termination as Colombo for the Australian mail service. But, apart from the reasons for this opinion just expressed, they fear that the additional expense of such an arrangement would be a fatal disadvantage. The Directors estimate that the additional cost of the Aden as compared with the Colombo line, if carried out once a fortnight, w*ould amount to something like £55,000 per annum, and the subsidy would therefore not only require to be increased by that amount, but by the sum which would be necessary to compensate for the loss of the present Indian traffic, as that traffic would certainly not be secured by the Aden route. This would add an additional £25,000 to the cost of the Aden line. Opinions seem to differ in Australia as to the advantage of a direct connection between that country and so important a part of the Empire as India; but the Directors feel confident that the intercourse arising between those countries by means of a convenient postal communication must prove of the utmost value to both. Moreover, should any contingency arise involving the mother-country in war, the mail line would certainly prove of the highest political importance to both India and Australia. In expressing their opinion on this subject, the Directors do not imply that a connection with India should be allowed to overpower the advantage of the speediest communication with Great Britain, but they submit that the Colombo route possesses both advantages. Equal celerity, infinitely greater cheapness, and the advantage of close contact with India can, in the opinion of the Directors, bo claimed for the Colombo line when compared with a service to Aden ; and these advantages are not diminished when the comparison is made with the other route by which your Government has invited tenders. 6. The questioii of tendering for a through mail liue between Great Britain and Australia is one to which the Directors have devoted the greatest consideration for some time past, and it may be