The Foreign Secretary said Lord Younger signed a protocol with the Malaysian government explicitly linking pounds 1bn in arms orders with pounds 200m in aid. A memorandum of understanding guaranteed that defence contracts would be coupled with British aid at the rate of 20 per cent of the cost of the arms.
The deal was in clear breach of government policy which had been followed since the Tories came to power in 1979, but the Foreign Office and Number 10 Downing Street were not told, the Foreign Secretary said during a hearing lasting two and a half hours before the Commons Select Committee on Foreign Affairs, which is investigating the Pergau dam affair.
Mr Hurd strongly defended the aid and trade deals with Malaysia. But the spectacle of a Cabinet minister blaming a former Cabinet colleague was seen as further evidence of the turmoil in Government in the wake of a series of scandals. It followed the Scott inquiry into the arms-to-Iraq affair where, on Tuesday, Michael Heseltine left in doubt the future of the Attorney General, Sir Nicholas Lyell.
Tory MPs said they were 'almost certain' to summon to the committee Lord Younger, chairman of the Royal Bank of Scotland, who left the Cabinet in July 1989, and Sir Nicholas Spreckley, then High Commissioner in Kuala Lumpur, who accompanied Lord Younger and retired from the Foreign Service in 1986.
The MPs said they expected Lord Younger, a former close ally of Baroness Thatcher, to take the blame, which would minimise the damage to the Government. A spokesman for Lord Younger said: 'He is travelling on business and has let it be known he does not want to be contacted.'
Jack Cunningham, the Labour spokesman on foreign affairs, came close to accusing Mr Hurd of lying. He said his answers were 'inadequate, contradictory and incredible - he is not telling the whole truth'. The Foreign Secretary said that aid and arms were 'incorrectly' linked in the 1988 deal but were disentangled three months later and had not been linked since.
The deal caused a Whitehall row, which Mr Hurd described as 'a good deal of animated discussion'. Three months later, Lord Younger was forced to write to the Finance Minister of the Malaysian government explaining that the explicit link between arms and aid was not possible.
But his letter confirming the arms package was delivered on the same day as a letter from the High Commissioner confirming the separate offer of aid. Dennis Canavan, a Labour member of the committee, told Mr Hurd: 'Would you not even have the tiniest bit of suspicion there was a link between these two messages or would you just think it was Christmas?'
Lady Thatcher, then prime minister, also wrote to Mahathir Mohamad, the Malaysian Prime Minister, confirming the aid and the arms packages. Her letter mentioned aid and arms in separate paragraphs but Labour MPs last night said it was clear that the link had been re-established, and the percentage of aid to arms had been maintained.
The deal was followed by the Pergau contract involving pounds 234m of aid, which Mr Hurd approved, in spite of objections by Sir Tim Lankester, the accounting officer, and the Overseas Development Administration (ODA).
Baroness Chalker of Wallasey, Minister for Overseas Development, will be questioned by the committee today over the building of the dam by a British consortium, which soared in cost by pounds 81m within 16 days of being
The Foreign Secretary said the rules for Aid and Trade Provision (ATP), introduced under the Labour government in 1977 to boost trade and aid, had been tightened after the Pergau dam affair.
It was likely that Malaysia would lose ATP after 1995 because it was too prosperous to qualify. But John Healey, former chief economist at the ODA, told the Independent that ATP should be abolished.
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