A decision to launch the inquiry was taken in principle in secret by the 11 committee members last week; a full remit will be agreed on Wednesday.
David Howell, the Tory MP for Guildford who chairs the committee and a former minister in Mrs Thatcher's government, last week declared an interest and indicated that he would not take any part in the proceedings. His withdrawal would make the investigating body politically balanced; at present, it is divided six to five in favour of the Government.
A committee member told the Independent on Sunday last night: 'We have decided to inquire into the whole matter. We will be calling witnesses at ministerial and civil service level, and it will be in public session. There are aspects of this affair that are our responsibility.'
He added: 'David Howell declared an interest, so it looks as if he will not be chairing or taking any part in the proceedings because he is a director of Trafalgar House.' In the absence of Mr Howell, the most senior Tory on the select committee - Michael Jopling, MP for Westmorland and Lonsdale, is likely to take the chair.
The select committee's investigation will focus on issues arising from the aid budget and the use to which it has been put in the affair. The dam, which is being built on the River Pergau in a remote region of Malaysia, has swallowed pounds 234m of British taxpayers' money.
There has been concern that the allocation of aid was made in tandem with a pounds 1bn arms deal secured with Malaysia by Mrs Thatcher when she was Prime Minister in 1988.
Civil servants expressed doubts about the aid project at the time. The permanent secretary at the Overseas Development Administration (ODA), Sir Tim Lankester, described it as 'a very bad buy and a burden on Malaysian consumers', but was overruled by Mr Hurd.
John Major is among those who have answered questions about the aid project's cost and viability by pointing to the pounds 1bn of orders won by Britain in Malaysia since 1988, helping to preserve some 25,000 British jobs. Although the Tornado deal was later cancelled, Malaysia placed a pounds 400m order with British Aerospace for 28 Hawk trainers and ground attack aircraft, the first of which was delivered a few days ago.
But it is hard to explain why Malaysia deserves to absorb a fifth of Britain's aid budget from now until 2000. Demand for electricity arises from the country's inexorable economic growth - even in Kelantan, one of Malaysia's poorest states, the roads between Kota Bharu, the capital, and Jeli, the nearest town to the Pergau project, are well-paved and filled with home-produced Proton cars.
The remote region is liberally covered with the letters KBBC. They stand for Kerjaya Balfour Beatty Cementation, the Malaysian subsidiary of the two British companies building the project. Their excavators have ripped a gigantic red hole in a green Malaysian hillside. At the bottom, earth-moving machines crawl about like flies in a wound, sketching the outlines of a dam that will flood the verdant jungle behind.
The River Pergau, cannot be seen here. It has temporarily been channelled into a pipe under the earthworks, to emerge crashing through boulders further down the slope. It foams past the dark entrance to two tunnels in the hillside.
Inside the right-hand tunnel, the roar of the river is exchanged for the thunder of ventilators, so powerful that a huge steel shutter near the entrance sways in the wind. The tunnel angles steeply down through the rock, with water running underfoot, for one kilometre to the bottom, where a huge vaulted cavern opens on the right.
In two years the waters of the Pergau and seven of its tributaries, gathered by a 15-mile underground aqueduct, will thunder into this space to drive turbines capable of generating 600 megawatts of electricity.
Islamic injunctions against alcohol and bare-headed women do not trouble the 150 expatriates working on Pergau, living in an air-conditioned village of bungalows near Jeli. It has a 50-metre swimming pool, a school with two teachers and 24 pupils and a bar with a sign on the door prohibiting entry to Muslims. 'We keep very much to ourselves,' said Peter Sunderland, the deputy project manager.
For Mr Sunderland and his colleagues, the row back home is as remote as the chance of spotting a Sumatran rhinoceros, an endangered species whose habitat, according to Friends of the Earth, is threatened by the Pergau project. 'We really believe that what we are doing is benign in the extreme,' he said.
Despite claims that the British government ignored environmental considerations in its rush to finance Pergau, Mr Sunderland defended its impact. But he admitted that roads built for the project had given loggers access to fresh areas of Malaysia's tropical forests. The impact of the east- west highway can be seen in the denuded hillsides along the road and the logging trucks rumbling past. Malaysia's strict controls on logging are being defied in the dam's catchment area, threatening to shorten the life of the project by speeding up siltation.
This does not appear to have aroused local opposition to the project, however. A worker lounging in a refreshment stall opposite the main gate said it had been welcomed for the jobs it created. The only complaint he had heard was from a villager who had gone for him with a hammer because trucks had knocked down his fruit tree. 'But,' he added dismissively, 'these village people see only one day ahead.'