Thatcher negotiated illegal pounds 1bn arms deal

THE Foreign Secretary, Douglas Hurd, is having to carry the can for an illegal pounds 1bn arms deal personally negotiated by Mrs Thatcher with the Malaysian Prime Minister, Mahathir Mohamad.

The Tornado jet fighter deal was lubricated with the promise of a huge aid package, in breach of the 1966 Overseas Aid Act, which expressly prohibits the use of aid as a means of securing defence sales.

It is now at the heart of a bitter Whitehall row over a hydroelectric project in Malaysia's Kalantan State that is financed by the British Government despite being condemned by the World Bank and the Overseas Development Administration as uneconomic and damaging to the economy of Malaysia.

A National Audit Office report published last week disclosed that Mr Hurd had chosen to disregard a formal warning by the most senior civil servant at the Overseas Development Administration, Tim Lankester, that the pounds 280m project was a waste of British taxpayers' money and was so uneconomic that it would cost Malaysian consumers an additional pounds 100m.

Ministers rarely reject such formal advice from their permanent secretaries against specific items of expenditure. The last one to do so was Tony Benn who, nearly 20 years ago, was sacked as Industry Secretary by Harold Wilson after he ignored a formal warning that proposed subsidies to Meriden and other co-operative ventures could not be justified in economic terms.

Mr Hurd, who is a cautious and pragmatic politician and could hardly have less in common with the radical Mr Benn, now finds himself in the same box, facing an inquiry by the House of Commons Public Accounts Committee as a result of an extraordinary train of events which threatens to cause the Government grave embarrassment.

Mrs Thatcher's determination 'to bat for Britain' led her to agree to a huge development aid package as part of an arms deal which she negotiated during a visit to Kuala Lumpur in September 1988. The deal, at that time involving the sale of Tornado jet fighters, artillery, radar, submarines and Rapier missiles, was so sensitive that civil servants were banished from the room during the final stages of the negotiation.

Downing Street subsequently denied that there was any linkage between arms and aid, claiming that the fact that a pounds 200m aid package was signed shortly after the arms deal was 'merely a coincidence'. The written arms deal with Malaysia, which is known as a memorandum of understanding, makes no mention of any aid package.

But according to authoritative sources, correspondence between the British and Malaysian governments before the signing of the agreement explicitly links the arms deal to a promise of aid.

This explicit linkage caused such embarrassment in Whitehall that attempts were subsequently made to rectify it by further correspondence with the Malaysian government for the record, pointing out that 'it would not be acceptable to Her Majesty's Government to link aid with the defence sales package'. The two main contractors on the Pergau project are Balfour Beatty and Cementation, a subsidiary of Trafalgar House.

This has come to haunt the Foreign Secretary. Mr Hurd has sought to defend his conduct, in authorising the Pergau project despite his Permanent Secretary's minute that it was 'a very bad buy and a burden on Malaysian consumers', by saying that his hands were tied by the commitment made by Mrs Thatcher.

'An undertaking had been given at the highest level that we would proceed with this project,' he told the BBC World Service. 'The damage of backtracking on that understanding reached at the highest level would have been very great.'

The Foreign Secretary, however, may find himself in some difficulty when the Public Accounts Committee holds hearings into the critical

National Audit Office report which revealed that civil servants believed the Pergau project was uneconomic.

If he says he is bound by the terms of the deal negotiated by Mrs Thatcher, he will be asked why an aid package was linked to an arms deal. If, on the other hand, he claims that there was no such linkage, he may find it difficult to explain why it was essential to proceed with such a dubious project.

'The whole thing stinks to high heaven,' said Alan Williams, Labour MP for Swansea and a member of the Public Accounts Committee. 'When you get a commercial project which increased in price nine times in 12 months and which pre-empted our aid budget for years and would cost the British taxpayer pounds 56m outside the aid budget, you start looking for an explanation.'

Ironically Malaysia, despite securing the aid package, has so far not yet delivered on its side of the bargain. The original Tornado jets deal, worth more than pounds 1bn, was cancelled when the Malaysians decided to buy instead 18 MiG-29 fighters from Russia and 18 FE-18 Hornet fighters from the United States.

The British deal has been whittled down to the sale of 28 British Aerospace Hawk aircraft worth about pounds 400m. The contract was signed more than three years ago but neither payment nor deliveries of the aircraft have yet been made.

The Malaysian aircraft deal, though complicated by the civil aid package, shared a number of features with a series of controversial British arms sales to Saudi Arabia, Jordan and Oman. All have been shrouded in intense secrecy, all involved the payment of very large commissions to agents, inflating the price of the weapons, and all required substantial subsidies from the British taxpayer despite an almost total absence of parliamentary scrutiny.

Andrew Lees, campaigns director of Friends of Earth, said last night that the Pergau project looks like becoming the worst British aid scandal to date. 'The dam will lead to extensive environmental damage, the British taxpayer has been ripped off while major British companies are going to make a bundle,' he warned.

Here is the sequence of events:

September 1988. Mrs Thatcher signs arms deal in Malaysia.

November 1988. The British Government formally offers pounds 200m in tied aid to Malaysia.

May 1990. Malaysia cancels the Tornado arms deal.

October 1990. Ann Clwyd asks for NAO investigation into Pergau.

December 1990. Malaysia signs pounds 400m contract for 28 Hawk aircraft.

June 1991. British Government announces pounds 234m aid for Pergau project.

October 1993. National Audit Office discloses that the Government rejected formal warning by the permanent secretary at the ODA that Pergau was uneconomic.

(Photograph omitted)