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Last Updated: Monday, 4 December 2006, 12:20 GMT
Defence firms fear Saudi fall-out
Robert Peston
By Robert Peston
BBC business editor

One of the largely untold stories about the cooling of relations between Saudi and the UK is the extent to which it has engendered near-panic in leading industrial and defence companies.

Image of Eurofighter seen from the front
The Typhoon deal could be at risk from the SFO inquiry

As one example, the chief executive of a leading defence contractor was all set to give me an interview last Thursday about his concerns that his company and many others were set to lose valuable Saudi business.

He pulled out at the last moment, citing pressure from heads of other defence companies to keep his mouth shut.

However, another defence executive later told me that it was the government which was putting pressure on all defence businesses to keep quiet about the potential damage to their businesses from what is increasingly perceived as a Saudi boycott of the UK in the awarding of valuable contracts and orders.

Ministers and officials have been telling him that their best chance of re-establishing some kind of entente with the Saudis depends on there being less noise in the media about the ongoing investigation by the Serious Fraud Office (SFO) into allegations of bribes paid to land a big Saudi defence contract.

Why? Because as long as the furore continues, it would be difficult for the Attorney-General to put an end to the SFO investigation without it looking as though he was responding to pressure.

BAE and the Saudi government, it should be said, absolutely deny any wrongdoing.

Safety in numbers

There has, however, been an attempt by defence company heads to seek safety in numbers when making representations to the Government, in the form of a letter to ministers.

No one is going to win any Saudi business until this SFO investigation ends
UK defence executive

The attempt falls under the umbrella of the Defence Industries Council - which is chaired by Rolls-Royce chief executive Sir John Rose, and describes itself as a forum for senior executives from defence companies and trade associations to discuss issues of strategic importance to the defence industry.

But even in this case, they have had enormous difficulty deciding what to write, when to send - and even in deciding to whom the letter should be sent.

The original intention, according to two senior defence executives, was to write to the Prime Minister.

My understanding is that the letter will now probably be sent on Monday or Tuesday to Trade and Industry Secretary Alistair Darling and copied to all the Cabinet.

The trepidation within the defence industry is matched with almost equal fear and confusion in Westminster and Whitehall. Government members who are normally helpful are being unusually taciturn. "It's very sensitive,", they say; "it's being handled at Number 10."

As for the Saudi embassy, it is saying absolutely nothing, other than referring to two lines on their website which they put out in response to a Sunday Times article of 19 November.

(For what it's worth, those two lines were: "This is an old story which has been repackaged. It is not worth a response.")

Trepidation

So what is it about this saga that is making almost anyone involved so anxious?

Saudi soldiers
Many UK firms depend on orders for the Saudi armed forces

Firstly, the value of Saudi business - in terms of cash and British jobs - is hard to overstate. The Al-Yamamah contract, into which the SFO is delving, has delivered more than 40bn to BAE Systems and its partners, and supported tens of thousands of British jobs.

The new phase in this deal - which the Saudis have put on hold pending resolution of the SFO probe - is worth 10bn just for the Eurofighter Typhoon planes being ordered, and probably a similar amount again for after-sales service and parts over the coming years.

And with 60% of the value of the order going to BAE's suppliers, hundreds of companies depend on the decisions made about the deal.

What's more, Saudi Arabia places lots of other international orders.

For example VT Group, owner of the Vosper Thorneycroft shipbuilding business, is planning to bid for a 1bn Saudi shipbuilding contract - but fears it has no chance of winning in view of Saudi estrangement from the UK.

A senior defence executive told me: "No one is going to win any Saudi business until this SFO investigation ends."

And then there is the diplomatic fallout.

Saudi Arabia is probably the UK's most important ally in the Middle East, and an alienated Saudi would bring substantial costs in respect of diminishing intelligence on Al Qaeda and potentially less support for British diplomatic initiatives in the region.

To be clear, however, this cuts both ways. British support for the ruling family is also valuable to that dynasty.

Swiss probe

So what of the SFO investigation? No businessman or politician would want to be seen to be directly interfering with its criminal investigation - although privately, executives and government members are frustrated by the longevity of the probe (two and a half years and counting).

Has the SFO uncovered devastating evidence of wrongdoing by BAE or others in the awarding of contracts? BAE suspects not - and of course vigorously protests its innocence - but can't really know.

In any case, the legal position remains unclear, since the law banning bribes paid overseas to win business only came into effect in 2002.

I am told that the SFO wishes to extend its investigation, to give it the time to gain access to relevant Swiss bank account details.

However, it could take anything up to two years for the Swiss authorities to decide whether to provide this access - and even then the chances of that access being granted are allegedly slim.

So the damage to Saudi/UK relations could become worse still.


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