The project was sanctioned by Baroness Thatcher and Douglas Hurd, despite opposition from the World Bank and the Overseas Development Administration.
MPs on the Public Accounts Committee intend to ask Whitehall officials if Lady Thatcher's son played any part and may take the rare step of asking ministers to explain their behaviour.
In 1991, Mr Hurd, the Foreign Secretary, over-ruled official advice and agreed to pump up to pounds 234m of overseas aid into a pounds 400m plan to build a dam and power station at Pergau in northern Malaysia. He was effectively rubber-stamping a formal offer made by Mrs Thatcher in April 1989.
A report by the National Audit Office into the waste of taxpayers' money which is published today says that by the time Mrs Thatcher had made her offer the ODA was already up in arms. An internal appraisal concluded that 'the economic viability of the project . . . was marginal.'
Two years later, according to the spending watchdog, ODA opposition had hardened.
A senior official, says the Audit Office, 'emphasised to ministers that his responsibility was to ensure that aid funds were administered in a prudent and economic manner and believed that providing aid funds for Pergau would not be consistent with this.'
Nevertheless, Mr Hurd ignored the advice. Pergau was part of an aid-arms package negotiated between Mrs Thatcher and the Malaysian Prime Minister, Mahatir Mohamad, in the late 1980s.
In a thawing of relations between the two countries, Britain, in the form of British Aerospace, agreed to sell 28 Hawk combat trainers to Malaysia.
Mrs Thatcher's offer was based on a proposal made by two British companies, Balfour Beatty and Cementation International.
Between 1979 and 1992, Trafalgar House, which owns Cementation, gave the party pounds 590,000 - making it the 11th largest donor of funds.
Mark Thatcher helped Cementation to secure contracts in Oman and Saudi Arabia and was paid as a consultant. His mother helped to win a pounds 300m university contract on a visit to Oman in 1981.
Ann Clwyd, Labour's former overseas development spokeswoman, tabled an early day motion three years ago stating: 'I am told by a well informed source that the cost of the pounds 400m project includes pounds 35m in bribes (or 'fees'). It is alleged that 'bribes' and 'backhanders' are going to local officials, landowners, politicians and certain members of the Malaysian royal family.'
Ms Clwyd and Dale Campbell- Savours, Labour MP for Workington, asked the Audit Office to launch an inquiry but its remit was to look only into the granting of state aid.
Alan Williams, MP for Swansea West and a senior member of the PAC, said he was extremely disturbed by the findings. The Government had ignored ODA advice and had gone against a recommendation of the World Bank in 1987 that Malaysia should concentrate entirely on gas-fired electricity until the turn of the century.
A much cheaper alternative, a gas-fired power station to be built by Northern Engineering Industries, had been rejected.
Sir Robert Sheldon, PAC chairman, said his committee would look into Pergau as soon as possible: 'A lot of money is involved and we will be taking evidence as to how this occurred.'
Mr Williams said last night: 'Trafalgar House is among the largest contributors to the Tory party and Cementation has been using Mark Thatcher in the Middle East. Pergau is a thoroughly disturbing story - I cannot see what was so overwhelming to merit the Foreign Secretary's intervention and such a waste of our precious overseas aid resources.'
Cementation said that Mark Thatcher had been involved in construction schemes in Oman and Saudi Arabia but not with Pergau. The fact the agreement was signed at the time of the arms sale did not mean they were linked. 'This was a stand alone contract,' the spokesman said.
Sir Tim Bell, Mrs Thatcher's favourite public relations adviser, who also assists her son, did not return a call on the subject.Reuse content