Aid agreed before 500m pounds jet order: Loan denounced as sweetener for Indonesian fighter deal

BRITAIN agreed to provide state aid to Indonesia shortly before clinching a pounds 500m military aircraft order.

In his Budget last year, Norman Lamont, the then Chancellor of the Exchequer, announced extra export credits for Indonesia. This was because an impending pounds 500m order for Hawk jet fighters from British Aerospace threatened to eat up the Export Credit Guarantee Department's allocation for the Far Eastern country.

Then, in April last year, Douglas Hurd, the Foreign Secretary, visited Indonesia and agreed to make a preferential loan of pounds 65m for a power station. Barely two months later, the Hawk contract was signed.

The deal has since attracted criticism because of the Indonesian government's bombing of rebels in East Timor. Indonesia's civil rights record has also been attacked.

Last month, after a visit from Air Chief Marshal Sir Michael Graydon, chief of Britain's air staff, Indonesia said it wanted to buy a further 16 Hawks. Earlier this month, Kenneth Clarke, the Chancellor, also visited Indonesia as part of a Far East trade mission.

The World Development Movement, a Third World pressure group, yesterday claimed Indonesia was another example, after Malaysia, of Britain using state aid as a 'sweetener' to win arms orders.

Ben Jackson, of WDM, said: 'The Government says it uses aid to tackle poverty and promote good government. But when arms deals are in the air, these commitments go by the board.'

The Foreign Office denied Indonesia had received aid in return for arms. A spokesman said the pounds 65m was not aid as such - it was not a gift but a loan, 'albeit at lower than commercial rates'.

Further evidence emerged yesterday linking aid to the Pergau dam project in Malaysia to arms sales. Rais Yatin, the country's former foreign minister, claimed that payments of pounds 234m from Britain were 'undeniably linked' to weapons purchases and military construction contracts.

Mr Yatin's comments, made to journalists in Malaysia, were the first confirmation from anyone close to the Malaysian government that the British money was given as a 'sweetener' for arms deals.

Mr Yatin also described Pergau as a 'gross irregularity' - a view that echoed the remarks made by Sir Tim Lankester, former permanent secretary of the Overseas Development Administration, to MPs last week when he condemned the project as 'an abuse' of the aid system.

Jack Cunningham, the shadow Foreign Secretary, said that Mr Yatin's intervention illustrated the need for a 'rigorous inquiry' into Pergau. The Independent has revealed the dam was related to the building of a secret special forces base in Malaysia and that Stephan Kock, an intelligence adviser who also played a part in the Iraq 'Supergun' affair, was involved. Mr Cunningham said: 'Quite clearly, ministers have been concealing the real nature and content of their dealings with Parliament for some considerable time.'

The Prime Minister attempted to play down Mr Yatin's remarks. Replying to a letter from Sir David Steel, the Liberal Democrat foreign affairs spokesman, John Major said Mr Yatin 'left office in 1987, well before agreement was reached on the Memorandum of Understanding on defence sales' between the two countries.