Original URL: http://www.theregister.co.uk/2007/09/21/bae_struggles_to_escape_the_bloodhounds/

BAE slimed from all directions

Teflon deathware colossus unable to escape own smell

By Lewis Page

Posted in Government, 21st September 2007 13:11 GMT

Brobdingnagian arms firm BAE Systems plc's recent run of luck may be coming to an end, as a flurry of bad-news revelations have emerged in recent days. The UK-headquartered multinational may soon be the focus of criminal charges in Tanzania; is the subject of a new American lawsuit; and US investigators continue to pursue the long-running Arabian corruption case which has dogged BAE for most of its history.

In recent times the outlook has seemed relatively rosy for bullet-dodging BAE. The UK's Serious Fraud Office (SFO) was made to close its files on the al-Yamamah Saudi kickbacks affair last December, on the orders of Tony Blair. Also the company managed to bail out of Airbus before the A380 assembly line traincrash became public last year, too, abandoning the last of the serious British civil aviation business to its fate. (The Airbus wing factories in the UK have since been restructured in such a way that Airbus - now under firm French control - can quite easily shed those workforces when the time comes. Which may be quite soon now.)

Having sold off wing factories which were originally gifts from the UK government, BAE sought to move this taxpayer-provided capital to the States. This move was in the wake of the enormous US crash spending on armoured trucks for the Iraq war. But SFO prosecutors, angered at being called to heel by the Blair government, made a targeted leak from their files, disclosing the details of payments from BAE to a Saudi prince via an American bank.

The SFO information was carefully chosen to draw the interest of US lawmen, and a Justice Department probe was duly begun. But BAE has a lot of friends in Washington, and the mere fact that the company was under the Justice spotlight was not allowed to impede its acquisition of American armoured-vehicles builder Armor Group. (This was in rather stark contrast to the attitude taken by US legislators to other purchases by foreigners in America.) Even as the deal went through, Armor won a $500m US order for armoured trucks.

So things were looking good for BAE; better still earlier this week, when the long-discussed sale of 72 brand new Eurofighter combat jets to Saudi Arabia finally went firm. The Saudis say that they will pay £4.43bn, putting each jet at £62m - "similar to the price of the plane when it is sold to the Royal British Air forces".

In fact, under current plans 232 Eurofighters are projected to cost the British taxpayer £20bn, or £86m per jet. In reality things are worse than that; the RAF can actually use no more than 140-odd Eurofighters, so effectively Blighty will pay £20bn for a 140-jet fleet. That makes £140m per plane, so it's clear that the Saudis are getting an excellent bargain.

What's less clear is the benefit of this deal for Britain. Eurofighter manufacture is distributed around Europe, so some large proportion of the Saudis' £4.4bn will not come to the UK. A poxy couple of billion in export revenue - spread over some years - is not significant to the British economy, with annual exports of £230bn.

Oh, but not to worry, old boy. This is a much bigger deal than it seems. The usual suspects among the biz press have been happy to repeat unsubstantiated assertions that "contracts for maintenance and training are expected to take the bill to £20bn".

For sure - Blighty pays £20bn to get a 232-jet fleet, and the Saudis will happily spend the same money for less than a third as many planes. Or maybe not.

But hey, who wants to rain on this party? £20bn of real British manufacturing/engineering exports is a good day for everyone. How nice to see someone in Blighty doing something actually technological and high-value, rather than just mucking about with money and bits of paper in the City.

If only it were true; but it's not. Actual real engineering exports, where Brits make stuff and sell it, will be confined to the UK part of the £4.4bn fighter sale. We really are talking about one or two billion of praiseworthy tech activity, tops (always assuming that you're happy to sell advanced weapons to Islamic dictators).

Let's suppose that the figure of £20bn for Blighty in this thing is vaguely kosher (bullshit, but let's assume). £16bn+ of that will be "maintenance and training," according to the Beeb.

The Saudis put it rather more honestly. Apart from the hardware, they will be buying "transference of technology and investment in the field of defense industries in Saudi Arabia, as well as training of Saudi citizens in the field of aviation".

In other words, they'll be buying not just 72 jets, but all the technology that's gone into them. It doesn't seem likely that they'll be knocking out fifth-generation fighters themselves any time soon, but they'll have full access to the knowledge base required. And there's absolutely no reason at all why they'd bother to keep all those secrets to themselves. Even though UK and Western-European taxpayers - whose money paid for the development - might prefer them to be rather closely held.

Furthermore - if the previous Saudi deals are anything to go by - at least a few billion of the Saudi oil credits, having been turned into hard currency by the British government, will then be placed into the al-Saud family's various offshore accounts. This will be part of the contract, quite above board; just like the former deals. It does mean that we aren't really talking £16bn on top of the fighters, though. Allowing for a perhaps rather inflated estimate by the biz scribes' "defence sources", then some cumshaw for the al-Sauds, we're probably looking at less than £10bn for Blighty on top of the jet deal.

So best case, the UK has landed a fairly insignificant engineering contract and a middling-size services/financial/consulting deal. Whoopee - like we didn't have a big enough service sector.

Worst case, we've sold our good names forever and our £20bn war-winning air combat tech to the wide world - all for peanuts. Smooth. The Chinese may not be able to make decent jets now, but if we keep handing out the book on how to do it, they might pick up a copy one day.

Then we'll have to go back to BAE for some kind of sixth-generation aerial deathware to get back the advantage we've spent twenty years paying through the nose for. Ouch.

Still, BAE aren't getting it all their own way. The SFO bloodhounds were only called off the Saudi trail; they were allowed to keep files open on the various other areas round the world where BAE has sold stuff. It appears that they may have made some progress, with the Financial Times reporting today that Tanzanian plods - with SFO help - are looking to charge various shady intermediaries involved in the 2002 deal where BAE sold the penniless Tanzanian government an air-search radar system that they had no need for. (The kit was, of course, paid for using international aid money. Your taxes at work, again.)

Meanwhile in America, a class-action lawsuit has been mounted by BAE shareholders against the company's directors. Pension-fund investors accuse the executives of ruining the company's reputation and trading dishonestly. Prince Bandar of the House al-Saud is also named. So is Michael Portillo, the former UK defence secretary who put lots of business BAE's way and later took a seat on the company's board.

The US Justice Department haven't given up, either. They asked the UK home office for access to the SFO's voluminous Saudi files some months ago, but thus far Gordon Brown's government has ignored them and hoped they would go away.

The request for assistance (MLA) was receiving "due consideration", the Home Office told reporters last night.

"This is certainly not an unprecedented length of time for a case of this complexity to be considered."

It seems that the federales may not be willing to hang around while the Home Office puts its fingers in its ears and mutters "la la la, I'm not listening to you". The Guardian reports this morning that the Feds have begun taking statements from British witnesses on their own initiative.

This level of stench is going to call for a truly massive can of corporate deodorant. ®