Issue 814, 28 September 2007

Eurofighter confirmed, disputes rumble on

The Saudi government’s announcement that it had signed the contract to purchase 72 Typhoon aircraft from the Eurofighter consortium was intended to draw a line in the sand under the protracted talks prior to King Abdullah Bin Abdelaziz’s official visit to the United Kingdom in early October.

The King himself was required to approve and sign the so-called Al-Salam (Peace) contract. It is widely believed that Abdullah was instrumental in putting in governance clauses effectively banning middlemen from any participation and avoiding an over-inflation of prices for the planes. But signalling continued sensitivities, it was decided not to publicly sign the deal during the 30 October-1 November visit; a number of bilateral trade agreements will be signed.

The deal’s future, subject of a 2005 memorandum of understanding, was placed in some jeopardy by the UK Serious Fraud Office (SFO)’s investigation of an alleged slush fund operated on behalf of main contractor BAE Systems under the Al-Yamamah deal, negotiated in the 1980s (GSN 809/16). Pressure in late 2006 from then prime minister Tony Blair to wind up the SFO’s two-year investigation, with the UK government citing national security risks, saved further embarrassment – for Riyadh.

Despite Blair making this move – which did not play well with many British voters – it was widely reported in the UK that Saudi Arabia waited for Gordon Brown to take over from Blair as prime minister before finalising the deal. The lessons of Al-Yamamah, and the marked change of style ushered in by King Abdullah, seem to have been reflected in the contract signed this month, which will be subject to Saudi Ministry of Finance audit controls. But others are unhappy – notably in the United States, which feels its defence contractors have lost out. British officials are said to have been unco-operative in their attitude to an ongoing Department of Justice investigation into BAE’s compliance with US anti-corruption laws.

In a separate development, The Wall Street Journal on 21 September reported that BAE Systems faced a lawsuit filed in a US District Court in Washington DC by The City of Harper Woods Employees’ Retirement System, which sought to recover losses BAE sustained in connection with more than $2 billion in alleged bribes paid to Saudi officials and others. A BAE spokesman said the firm “intends vigorously to defend” itself. The Saudi Ministry of Defence and Aviation statement announcing the contract’s signature specified the price of Al-Salam at £4.43bn ($8.9bn), which is similar to that charged to the UK’s Royal Air Force – £61.5m.

Now awaited are details of Al-Salam’s services contracts, which – like Al-Yamamah, still to this day a cash-cow for BAE – are likely to be much larger than the basic aircraft order. The maintenance, support and training contract has been estimated at around £10bn. In all, the Al-Salam package should be worth more than four times the basic 72 aircraft order; along with the maintenance, support and training element, an estimated £5bn contract is expected for munitions and weapons systems. This has also still to be signed.

Also of note is BAE Systems’ commitment to create some 10,000 jobs in new manufacturing facilities in the Kingdom. While the first 24 Typhoons will be taken complete from the Warton, Lancashire production line, the next 48 will be assembled from kits in Saudi Arabia, where some components will also be made. There may be more to come. The Royal Saudi Air Force wants to upgrade its Tornado aircraft in a deal that has been put at up to £3bn, and the sale of two British-built destroyers, put at £600m each, is also on the agenda.