Overseas aid system open to corruption, adviser says: Allegation of hidden pay-offs in Pergau-style contracts shocks Chalker

ONE OF the Government's special advisers raised the stakes in the Pergau dam affair last night with allegations that government aid for overseas trade projects was open to financial corruption.

The allegations - by Professor John Toye, a special adviser to Baroness Chalker of Wallasey, Minister of State for Overseas Development, in a memorandum to the Commons committee investigating the affair - will intensify the controversy surrounding the project.

Baroness Chalker appeared shocked when confronted with the allegations at the end of a two-and- a-half hour session. The memo, read by Mike Gapes, a Labour member of the Commons select committee on foreign affairs, said some projects under Aid and Trade Provision (ATP) by the Overseas Development Administration (ODA) included hidden pay-offs by companies to local officials.

Such projects sought to maximise the private interests of local agency officers and shareholders in the British company, rather than the interests of the country getting aid. In one case of corruption the chief executive of Willowbrook, a company involved in exporting buses to Zambia, later paid pounds 50,000 to the Tory party. Professor Toye, of the Institute of Development Studies at Sussex University, said 55 per cent of ATP expenditure for 1977 to 1985 went to five companies - Biwater, Balfour Beatty, GEC, NEI and Davy McKee.

Baroness Chalker yesterday faced further pressure from two former Cabinet ministers, Lord Prior, chairman of GEC, and Lord Young of Graffham, chairman of Cable and Wireless, for the ATP budget to be switched to the Department of Trade and Industry. Lord Young, who was on a trade mission with Mr Major and Lord Prior to Japan and Malaysia in September, said on BBC Radio that aid was to 'oil the wheels' of industry.

The select committee last year recommended ATP's transfer to the department, and further pressure is expected from Michael Heseltine, President of the Board of Trade. Lady Chalker is fighting to hold on to the provision, which accounts for pounds 90m a year of the pounds 2.1bn ODA budget. She said she wanted to ensure ATP would be used for the development of recipient countries.

Lady Chalker confirmed the pounds 1bn arms package for Malaysia was 'a wider factor' when the Pergau project was granted pounds 234m in aid.

Lord Younger of Prestwick, the former Secretary of State for Defence, said last night on Channel 4 that he had been 'fully briefed' that there should be no arms-for-aid link in the deal he signed with the Malaysians in 1988. At the last moment, and at the Malaysians' request, he included their hope of aid in the memorandum of understanding on arms.

Yesterday Andrew Neil, editor of the Sunday Times, assured Malaysia his newspaper had no vendetta against the country or its Prime Minister, Mahathir Muhamad. Anwar Ibrahim, Deputy Prime Minister, had been reported as saying the trade ban against Britain would not be lifted until the newspaper apologised for alleging Dr Mahathir took a bribe. Mr Neil said it had not made such a charge.

Professor's warnings, page 2

Leading article, letters, page 17

Andrew Marr, page 19