Thatcher directed arms crusade

THE SCOTT REPORT Oil-rich states targeted by 'can-do' businessmen

THE BRITISH

BACKGROUND

It was an infectious time. Britain was booming, the Lawson credit explosion was well under way, the stock market was surging, business was in the grip of a new, can do, will do breed of leader.

The Government was buoyant; the unions had been crushed, the City had been given a lift with Big Bang, the property market was racing ahead. Anything was possible, nothing impossible.

Nowhere was this euphoria more apparent than in the defence industry. In Margaret Thatcher, weapons manufacturers suddenly found they had a Premier who spoke their language, understood their fears and shared their aspirations.

She made it her priority and that of her ministers to go out, ''batting for Britain'', bringing them huge orders and guaranteeing thousands of British jobs. Businessmen, arms dealers, wealthy Mr Fixits, foreign potentates were all given unprecedented access to a British Prime Minister.

Her list of achievements for the industry was awesome: the Al Yammamah arms deal - the biggest ever - and huge defence programmes with countries that had never before bought from Britain. Then there was Saddam Hussein - known in Whitehall as ''the big prize''. By 1989, Iraq had called a truce with Iran; Saddam was looking to to re-arm; and Britain was to be his supplier.

For Whitehall officials and defence company bosses, who had worked hand in hand on previous export packages, this was to be the culmination of years of joint effort. Saddam had oil, he had cash and he wanted arms.

For Mrs Thatcher, he would be the latest in a line of buyers stretching back to Oman in 1981. Since she took office, in 1979, she was determined that the British economy would revive. Her chosen vehicle was the defence sector. Never again, she promised, would Britain's weapons suppliers lose out to the likes of the United States and France.

For years, British defence companies had been losing out to their bigger American rivals and their state-subsidised French counterparts. She would tour the world, ''batting for Britain'' she called it, and put the Americans and French in their place.

The Ministry of Defence and the Department of Trade and Industry were given green lights. From now on they were made to feel that virtually anything goes. Two backroom organisations at the MoD were given an unexpected prominence: International Military Services, set up to help the state- owned Royal Ordance sell arms to Iran and the Defence Export Sales Organisation, operating from an office in Soho Square, central London.

''Can do'' businessmen like Peter Levene and James Blyth were drafted in to the previously moribund sales side of the MoD to head the great push. Later, they were succeeded by Colin Chandler, now the chairman of Vickers.

Leading players in the industry, British Aerospace, GEC and Westland, were given the run of Whitehall. No official obstacles were to be put in their way.

In the City, banks were put on a virtual war footing, setting up departments especially to cash-in on this new, dynamic approach to the arms trade. Instead of operating in isolated splendour in the Square Mile, they had consultants with close ties to government, men such as Stephan Kock, an intelligence adviser cum banker, and Sir John Cuckney, formerly of MI5, now sitting on several boards.

A former executive of Midland Bank tells how Mr Kock, who was retained by the bank, returned breathless with excitement from a meeting in Whitehall, carrying a shopping list of requirements from another country's government. The country was Malaysia, and included on the list, alongside the weapons systems, was overseas aid for a dam at Pergau in the north of the country. In years to come, Pergau, with all its implications of state aid being used as a sweetener for arms sales, would come to haunt what became John Major's government.

Huge government-to-government contracts signed by Mrs Thatcher were landmarks of her reign: Oman in 1981; the two-part Jordan package, in 1985 and 1987; Al Yammamah with Saudi Arabia in 1986; Malaysia in 1988. Indonesia was also lined up as another customer by the time she quit in 1990. In total the arms deals were worth more than pounds 30bn and guaranteed tens of thousands of jobs in Britain

The Saudi Arabian deal had been triumphantly snatched away from the French at the last minute, but there was an even bigger prize in Whitehall.

At the end of the Iran-Iraq war, Iran, with its mullahs was the enemy; Saddam, for all his volatility and murderous intentions toward his citizens, was the lesser of two evils. Iran had issued a fatwa against Salman Rushdie and was patently hostile. Saddam was flushed with oil and Britain was ideally placed to cash-in. We had good diplomatic links, Iran was close to the Soviets, the Americans were nowhere. The prize was there for the taking.

''I doubt if there was any future market of such a scale anywhere where the UK is potentially so well placed if we play our diplomatic hand correctly, nor can I think of any major market where the importance of diplomacy is so great on our commercial position," wrote William Waldegrave, the Foreign Office minister, in October, 1989.

And, Mr Waldegrave warned: "We must not allow it to go to the French, Germans, Japanese, Koreans, etc..."

Saddam, though, needed careful handling. Only a year previously he had gassed 5,000 Kurds and outraged public opinion in Britain. A month before Mr Waldegrave advocated the great push towards Iraq, Saddam had been at it again, arresting Farzad Bazoft, an Observer journalist, for spying.

By the time Bazoft was hanged, in March 1990, efforts to accommodate Saddam's requirements were well under-way. Iraq, though, had special needs, which went well beyond the usual supply of Tornados and Hawk aircraft, and a few frigates. He wanted conventional weapons, of course, but he really wanted something truly spectacular.

While the Foreign Office, DTI and MoD pondered how best to sell him huge tranches of weapons, other officials, the murky world of intelligence, were keeping tabs on his master-plan. He was building a gun, a gun so large it could hit surrounding countries, a gun with such a massive payload it could devastate a large area of Tel Aviv. Worse, he was also looking to buy or build a nuclear capability.

These were terrifying prospects for the strategists in the security and intelligence services. Iraq had become a sort of friend, but Saudi Arabia, which would be vulnerable to Iraqi attack, was a bigger friend. Israel would surely retaliate if attacked, a maelstrom beckoned.

Into this conundrum walked some besuited, typically British, fringe players in the arms industry - men, such as Gerald James, whose Astra company bought PRB, the Belgian outfit that was to supply the propellant for the supergun and Paul Henderson, whose machine tool company, Matrix Churchill, was owned by the Iraqis.

While they and their companies found themselves targeted by the security services, they found other officials in Whitehall, anxious to please.

It was a double-handed effort. A desire to accommodate Saddam on the one hand; the need to keep him in check on the other.

Everything had to be kept secret. As one of Sir Geoffrey Howe's officials at the Foreign Office wrote: ''It could look very cynical if, so soon after expressing outrage about the treatment of the Kurds, we adopt a more flexible approach to arms sales.''

Plus, at that stage, there were supposed to be guidelines in place forbidding the sale of weapons to Iraq. In truth, they were secretly relaxed in late 1988 but no one was to know. Britain was still a signatory of a UN embargo. In time, that embargo would be lifted and big business could move in. For now, officials were left skirting round the edges, putting all the right diplomatic niceties in place.

At the Department of Trade and Industry, ministers told the companies how best to play the system, how they could avoid the guidelines.

Nicholas Ridley, the Secrateary of State for Trade, exhorted his colleagues to keep Hussein sweet, to do nothing to upset him. It was good for business. Over-enthusiastic Customs officers, reasoned Ridley, were in danger of upsetting the apple cart entirely if they persisted in making awkward inquiries about the supergun and Matrix Churchill.

No one, however, anticipated what Saddam would do next. On 2 August 1990 Iraqi troops invaded Kuwait. Saddam went from friend - albeit one to be viewed with suspicion - to outright enemy. The picture had changed entirely.Suddenly, Matrix Churchill found itself on a hit list.

Years of carefully-nurtured policy went out of the window. Customs and prosecutions were the order of the day. Businessmen who, until then, had enjoyed good contacts with the Government were frozen out, isolated. Worse, they found themselves on the way to jail.

Distinctions between business and politics that had been allowed - encouraged, even - to become blurred, became distinct again. Whitehall pulled down the shutters and turned in on itself.

Chris Blackhurst