The Politics and Economics of Britain's Foreign Aid

The Pergau Dam Affair

Tim Lankester

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136271229
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

The Pergau dam in Malaysia was the most controversial project in the history of British aid. Because of its high cost, it was a poor candidate for aid funding. It was provided in part to honour a highly irregular promise of civil aid in connection with a major arms deal. After two parliamentary inquiries and intense media coverage, in a landmark judgement the aid for Pergau was declared unlawful.

Tim Lankester offers a detailed case study of this major aid project and of government decision-making in Britain and Malaysia. Exposing the roles played by key politicians and other stakeholders on both sides, he analyses the background to the aid/arms linkage, and the reasons why the British and Malaysian governments were so committed to the project, before exploring the response of Britain's Parliament, and its media and NGOs, and the resultant legal case. The main causes of the Pergau debacle are carefully drawn out, from conflicting policy agendas within the British government to the power of the business lobby and the inability of Parliament to provide any serious challenge. Finally, Lankester asks whether, given what was known at the time and what we know now, he and his colleagues in Britain's aid ministry were correct in their objections to the project.

Pergau is still talked about as a prime example of how not to do aid. Tim Lankester, a key figure in the affair, is perfectly placed to provide the definitive account. At a time when aid budgets are under particular scrutiny, it provides a cautionary tale.

1	Introduction

The Pergau River in the northern Malaysian state of Kelantan is not one of Asia’s major waterways. Rising near the Thai border, it is no more than a sub-tributary of the Kelantan River, itself a mere 250 km in length before it flows out into the South China Sea.

Until 1993, only a handful of Britons had ever heard of the Pergau. Outside Kelantan state, not many Malaysians would have heard of it either. That all changed in 1993 when details started emerging about a dam and hydro-power station that were being built on the Pergau, thanks to a massive grant from the British government. The decision to provide the grant quickly became known in Britain as the Pergau Dam Affair.

The grant in question amounted to £234 million and was provided by Britain’s Overseas Development Administration (ODA), as the government department responsible for foreign aid was then called.¹ It had been formally approved in February 1991 after more than two years of argument between government departments in London, and two years of lobbying by the British companies bidding for the project and by the Malaysian government. The Pergau grant, once agreed, was not only the largest ever made under the British aid programme for a single project; it also turned out to be the most controversial.

At the time, British aid had a good reputation with the international development community. As a proportion of Gross National Product (GNP), British aid did not rank high: in 1990 the percentage was just 0.27 (compared with the UN target of 0.7 per cent), which put Britain at fourteenth out of 20 donor countries. But in terms of quality, it was judged by the Organization for Economic Cooperation and Development (OECD) as one of the best. British aid was focused mainly on the poorest countries, and ODA was highly rated for its knowledge and technical expertise, and for its systems of project identification, appraisal, monitoring and evaluation. As with other bilateral donors, much of its aid was tied to the purchase of goods and services in Britain – which made it less cost effective than it would have been, had it been fully untied; and by no means all of its projects and programmes succeeded in meeting their objectives. Nonetheless, by the standards of aid generally, ODA was regarded as an effective and prudent provider of development assistance.

This perception was seriously dented by the Pergau affair. No project in the history of British overseas aid, with the possible exception of the ill-fated Tanganyika groundnut scheme of the late 1940s, provoked such public controversy, not to say outrage, or caused such difficulty for the government of day. (The Tanganyika scheme had as its principal aim the supply of edible oils to Britain at a time of severe post-Second World War shortages. The development of Tanganyika was a secondary consideration, and in that sense it had something in common with the aid for Pergau.)

The purpose of British aid, as stated in repeated policy documents and in the enabling legislation, was to promote the economic and social development of recipient countries and improve the welfare of their peoples. By long established policy and practice, and in accordance with standard Treasury guidelines relating to all government expenditure, this meant supporting projects and programmes that made sense economically. It was well understood that aid could and should serve other goals besides development, such as fostering trade and protecting and promoting political relations with recipient countries; but development and improving welfare had to be the main purpose.

Unlike the Tanganyika scheme, which achieved only a fraction of its planned production levels, the Pergau project was completed and achieved its goal of producing electricity for the Malaysian power system. There was some cost overrun and delay in getting it completed, but by the standards of many infrastructure projects, these were relatively modest. The completed scheme produces 520 million kWh of electricity a year to meet peaking demand as designed. It has not resulted in any serious environmental damage, nor did it require any significant movement of population.

The controversy arose for other reasons. The decision to finance the project was taken in the face of a strongly negative appraisal by economists at the ODA and against the advice of the ODA minister and Accounting officer. According to the economic analysis, which was shared by Malaysia’s own power planners, Pergau was not needed until well into the 2000s; and if it was to be built in the early 1990s, it would involve a cost penalty of around £100 million. I was Permanent Secretary of ODA at the time and responsible therefore for the overall management of the aid programme and accountable to parliament, through parliament’s Public Accounts Committee, for the efficiency and effectiveness of aid spending. The economic case against the project was so overwhelming that I took the unusual step of advising ministers that, if they were to overrule official advice and approve the financing, as Accounting Officer I would require a formal direction before authorising the expenditure. The issuing of such a direction was rare: there had only been a handful of cases in recent years. It placed on record that the decision had been taken against the advice of the civil service and that ministers alone had to take responsibility for it.

The decision to back the project was taken primarily to boost Britain’s trade and political relations with Malaysia. Most controversially of all, there was an indirect linkage to an agreement between Britain and Malaysia on the sale of defence equipment to the tune of £1 billion. This linkage was contained in a secret Defence Protocol entered into by the two governments in March 1988. Although many of Britain’s aid recipients were purchasers of weapons from Britain, such purchases had previously – in accordance with international agreement – been kept formally separate from aid. The entanglement between arms sales and aid in the case of Malaysia, though described by British ministers as only temporary, caused immense trouble for the government.

The controversy was further compounded when London’s Sunday Times mounted a sharp attack on the Malaysian government and the Malaysian Prime Minister in particular for sanctioning or being party to bribery. Allegations of bribery in relation to the project were not new: several MPs had sought answers to these allegations during the negotiations that preceded the approval of the grant. The Sunday Times coverage, however, touched a raw nerve in Kuala Lumpur with the result that for seven months all new public sector contracts with British companies were banned.

Finally, to cap it all, the decision to fund Pergau through the aid budget was challenged in the British courts and found to be unlawful. This was on the grounds that, if the project was considered economically unsound by the experts, the government could not claim it was assisting in the development of Malaysia. Previously, government lawyers and most other legal experts had taken the view that aid was within the law provided ministers believed it was assisting the development of the country in question. The court ruling therefore came as a considerable surprise. Its effect was to require the continued funding of the project to be found from outside the aid budget, and it was seen – more widely – as further advancing the role of the courts in relation to government decision making in general. The ruling was a final damning conclusion to the Pergau saga.

For over a year, from the autumn of 1993 when the National Audit Office (NAO) published a critical report about the project until after the adverse court decision in late 1994, the Pergau decision and the factors that led up to it were subject to intense media coverage and extensive examination and debate in Parliament. Although the government tried hard to defend its actions, media coverage generally and the findings of two parliamentary select committees were highly critical. The controversy became a serious political embarrassment for the government. And in the short run, British–Malaysia relations – far from being improved – were severely damaged.

The government faced a barrage of criticism that essentially took two forms: that the aid programme had been wrongly, and it turned out unlawfully, used; and more broadly, that the government had shown itself to be grossly incompetent. It was the latter that was the more damaging since it resonated not just with those who positively supported British overseas aid but with the majority who were either neutral or hostile towards aid. The principal companies that were involved in the project also did not get off lightly for some of their actions.

The Pergau controversy not only raised questions about the competence of government, it also raised issues about the purpose of British aid. Should it be used only or primarily for the purpose of development and poverty alleviation; or should it be used, and if so to what extent, to promote Britain’s commercial and political interests?

There were two views. There were many in parliament, in the NGO community, amongst academics and in the media who believed that the basic purpose of British aid – to support development and provide humanitarian relief – had been unduly downgraded during the Thatcher years, and that the shift to a more commercially oriented aid agenda was not in accord with officially declared policy. On the other side were those, particularly in industry and on the right of the Conservative Party, who argued that, since other governments supported exporters through their aid programmes, the British government must do the same; and for similar reasons, the aid programme should be used to support Britain’s political and wider foreign policy objectives.

Pergau marked a watershed. The misuse of aid to finance Pergau and the political and legal troubles that followed had a lasting effect on all who were concerned with British aid policy. The lessons from Pergau, alongside international moves to reduce the tying of aid, and then the election of a Labour government in 1997 with a mandate to increase the aid budget and strengthen aid effectiveness – these all brought about changes in British aid policy that gave greater weight to development and poverty alleviation and in due course all but eliminated the commercial influence in aid decisions.

This is a story about commercial interests being improperly entangled with development assistance – certainly to the detriment of Britain’s overall public interest and arguably to the detriment of the public interest in Malaysia too. It is a story, to borrow Daniel Moynihan’s description of the 1960s War on Poverty in America, of “maximum feasible misunderstanding”. It is a story of bad governance in Britain at a time when its ministers and officials were preaching the virtues of good governance to their partners in aid-receiving countries. And it provides an object lesson for the management of overseas aid and perhaps for public administration more generally.

From the start of the Pergau story in 1988 until the start of the parliamentary committee investigations in 1994, I was officially involved: first, as deputy head of the Treasury’s Overseas Group with responsibility – amongst other things – for overseeing ODA’s budget; and then from July 1989 until January 1994 as Permanent Secretary of ODA. I have already referred to the advice I gave to ministers against funding Pergau. My last act as Permanent Secretary was to appear in January 1994 before the Public Accounts Committee to answer questions on the National Audit Office’s report. I was not personally involved in the detailed assessments and discussions that went on within ODA and between government departments; but I received regular reports on them and I was ultimately responsible for the ODA’s position at official (i.e. non-political) level.

In the textbooks about British government, civil servants are supposed to be purely the servants of ministers, without views of their own on the aims and application of policy: their role, rather, is to advise in a dispassionate way on the pros and cons of different policy options and their implementation. If they do have views of their own on policy, they are expected to subordinate them to those of the government of the day.

My experience of working for 22 years in the British civil service was that the vast majority of civil servants did their best to comply with this ideal. In the case of my own role as Permanent Secretary of ODA, it was not too difficult. My personal views on aid and development were very much in line with the government’s stated policies as articulated in ODA policy statements and in legislation. What I soon discovered was that there were powerful forces in other parts of the government that did not fully support the official policy line. The divergence of actual policy from officially stated policy is at the heart of the Pergau affair.

Although I had come to my post at ODA from the Treasury, my interest in aid and development went back many years. It started when I was an 18-year-old volunteer teacher in Belize in 1961. There, for the first time, I was exposed to serious poverty and economic backwardness, which the British colonial government seemed unable to do very much about. (Belize, then known as British Honduras, was a Crown Colony until it became independent in 1981.) Towards the end of my year in Belize I attended an inspiring lecture by the West Indian economist Arthur Lewis. Lewis was one of the leading development economists of his day. He had been an adviser to Kwame Nkrumah at Ghana’s independence and he had written an influential book on the economics of development.²

I remember Lewis giving an optimistic account – which I later discovered was the gist of his “dual sector” model – of how under-employed surplus labour in agriculture could move into industrial employment, and how – with increased investment made possible by higher domestic savings and by foreign aid – backward countries could take-off. I was enthralled by Lewis’ message and immediately wrote to my prospective university, Cambridge, that I would like to study economics instead of law.

Far from finding economics a “dismal science”, I became fascinated and impressed – in retrospect, overly impressed – by its apparent power to explain, predict and improve economic and social conditions in rich and poor countries alike. At Cambridge I had the good fortune to attend lectures by some of the “big name” economists who had been colleagues or disciples of John Maynard Keynes, such as Richard Kahn, Joan Robinson, James Meade and Nicholas Kaldor, as well as lectures on development by the future Nobel laureate Amartya Sen. I continued my studies at Yale – macroeconomics with the great James Tobin, international finance with Robert Triffin, and economic development with an excellent group of younger scholars, including Gerry Helleiner, Werner Baer and Carlos Diaz-Alejandro. I then spent seven years as an economist with the World Bank working on Africa and India, including a spell in the Bank’s New Delhi office; and later, for two and a half years I was Britain’s representative on the World Bank’s board of directors.

In common with many economists trained in the 1960s, I started out believing in the merits of state planning and public intervention; but gradually I came to realise that in many developing countries the “statist” approach had to a large extent failed and that there should be a much greater emphasis on markets and the private sector. By the time I became Permanent Secretary of ODA in 1989 I favoured a mixed economy approach – reliance wherever possible on well-functioning markets, combined with public interventions to offset and correct market failure and undertake activities such as education and health provision where markets typically were unable to deliver.

I believed that wealthier countries had a moral duty to help people in poorer countries achieve a decent standard of life, and that it was in their political and economic interests to do so. As a child of the British colonial state – at times benevolent but more often arrogant and exploitative – I felt that Britain had a particular obligation to our former colonies. I was a believer in aid as an instrument for assisting development and poverty alleviation, in the need for aid volumes to be increased, and in the importance of ensuring that aid resources were used to optimum effect.

I accepted that, as a political reality, British aid policy could not be constructed on a purely technocratic basis and that it had to take into account commercial and wider foreign policy objectives as well. This was clearly a complicating factor. However, I had no difficulty with aid being used to support wider policy objectives provided this was not at the expense of the key objective of maximising aid’s development and poverty alleviating impact. With care and imagination, I felt these multiple objectives could be reconciled. Maximising the development impact of Britain’s aid was to my mind all the more important in view of its relatively small size.

I have spelt out my own views on aid and development in some detail, and how I had come to them, so that the reader can better understand my attitude to the Pergau project and to the linking of aid to defence sales. The fact that these views in nearly every respect chimed with officially stated policies made me all the more determined to ensure that ministers were given the “correct” advice, even though it might mean rowing against powerful voices inside and outside the government, which, without admitting it, sought to use British aid in ways that contradicted these policies.

It may be objected that, if ministers decide to pursue a policy that is different from their declared policy, they have every right to do so. This of course is true constitutionally. It cannot be for officials to prevent them from doing so – even though parliament and the public may object. What officials have to do is to advise on the consequences of departing from declared policy. This is exactly what ODA attempted to do with Pergau.

Finally, in view of the intense spotlight in this book on the issues surrounding the funding of Pergau, it is worth emphasising that these were amongst a host of other – and for most of the participants much more important – policy issues that British ministers and officials had to address at the time. This is the nature of modern government, and one of the features of good policy-making is to decide how much time and priority to give to particular issues. For the senior ministers involved, such as Mrs Thatcher, Douglas Hurd and John Major, Pergau will have ranked very low amongst all the other issues they were dealing with. In retrospect, Hurd for one certainly regretted that he had not given it more attention.

Certainly, there were mistakes that should and could have been avoided. But many of the difficulties arose simply from the fact that the principal “players” were operating on the basis of different policy agendas. In the end, as the following chapters will explain, it was the dominance of political and commercial considerations over the development objective that led to the decision to fund Pergau a decade or more before it was needed.

2	British overseas aid

By the time the Pergau project became a candidate for ODA financing in late 1988, Britain’s overseas aid programme in its modern, post-colonial form had been in existence for nearl...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of tables
• Preface
• List of abbreviations
• 1 Introduction
• 2 British overseas aid
• 3 The Pergau hydroelectric scheme
• 4 Politicians and bureaucrats
• 5 Dr Mahathir and the politics of Malaysia
• 6 Arms and aid entangled
• 7 Mrs Thatcher’s offer
• 8 ODA entrapped
• 9 Crunch time in Whitehall
• 10 Parliament steps in
• 11 Legal challenge
• 12 The British media and trouble with Malaysia
• 13 ODA objections: Right or wrong?
• 14 A fairish nightmare
• Appendix I: Pergau chronology
• Appendix II: The economics of Pergau: technical note
• Appendix III: Dramatis personae
• Glossary
• Notes
• Bibliography
• Index