Thatcher 'arranged aid and arms link in secret': PM came to understanding after meeting

MARGARET THATCHER held a secret meeting with the Malaysian Prime Minister to discuss aid and arms, it emerged yesterday.

Until now, it has been widely assumed that after Lord Younger, the then Secretary of State for Defence, made an embarrassing gaffe on a visit to Malaysia in March 1988 and tied overseas aid to future arms sales to the country, the deal was quickly overturned or, to quote the present government, 'disentangled'.

It was this initial linkage, the Government's critics allege, that led to the granting of pounds 234m in aid to the Pergau dam project, condemned as an 'abuse' by the former permanent secretary of the Overseas Development Administration and a waste of money by the National Audit Office, the public-spending watchdog.

Under Whitehall rules, tying aid to arms deals was improper and may have been illegal. News of the Younger offer caused panic when it was relayed back to Whitehall. The unscrambling was achieved by two letters from the Government to the Malaysians in June 1988, formally distancing aid from arms.

Three months later, so the accepted version of events goes, Baroness Thatcher met Mahathir Mohamad and concluded a memorandum of understanding supplying the Malaysians with pounds 1bn worth of arms. The granting of state aid was not mentioned in the document. Aid was raised later still in March 1989, when, during an official visit to Britain, the two premiers met privately at Downing Street and Lady Thatcher agreed to fund Pergau.

But a Parliamentary answer to Stephen Byers, Labour MP for Wallsend, puts a different gloss on the chronology. Yesterday, John Major said that in June 1988 - at the same time as the Government was formally writing to scrap the Younger formula - 'my predecessor decided to visit Malaysia on her return from Australia'.

During a two hour stop-over in Kuala Lumpur on 6 August 1988, Lady Thatcher and Mr Mahathir, together with a few officials, had a meeting. 'A wide range of subjects was discussed, including aid, air services (a reference to air landing rights at Heathrow, a bone of contention with the Malaysians), Cambodia, defence sales and arrangements for the Commonwealth Heads of Government meeting in Malaysia in 1989.'

No mention of this meeting has appeared until now - Mr Byers only asked the question, specifically about 6 August, because he had received a tip-off. Details of the two-hour session - why it was arranged at such short notice at a time when officials and ministers were trying to keep aid and arms apart - will form a crucial line of questioning if Lady Thatcher agrees to give evidence to the Foreign Affairs select committee looking into Pergau.

'This is possibly the last piece of the Pergau jigsaw,' Mr Byers said. 'It is obvious from this answer that Lady Thatcher 're-entangled' aid and arms in the meeting and ignored the advice of her officials and ministers.'