UK cash aided princes' firm: 49m pounds given without proper checks on water supply scheme backed by Malaysian royal family

BRITAIN made an advance aid payment of pounds 49m to Malaysia's government in 1986 to pass on to a company controlled by members of one of Malaysia's nine royal families. The scheme it was destined for was scaled down but no repayment made.

The money was given without proper investigation of what it was for or whether it was justified. Its existence will fuel claims that British state aid was being used as a sweetener for arms deals with Malaysia.

The money was handed over to Antah Biwater Berhad, a company owned by Antah Holdings of Malaysia, the investment vehicle of the wealthy Negri Sembilan royal family. Jaffar, the next king under Malaysia's system of rotating the monarchy, heads the family. His sons Imran and Naquiyuddin run Antah Holdings.

In a joint venture with Biwater, the British water treatment company, Antah Biwater was set up to win a pounds 489m order from the Malaysian government to complete the supply of drinking water. Antah Biwater, 51 per cent owned by the royal family and 49 per cent by Biwater, was awarded the contract in March 1986 without competitive tendering.

Mahathir Mohamad, the Malaysian Prime Minister, saw the project involving 174 separate small schemes across 13 states as a vote-winner. He was also believed to be keen to stay on friendly terms with the family.

The pounds 49m Overseas Development Administration (ODA) advance to Antah Biwater was followed by pounds 13m. It was the largest such award before Pergau, the dam now the subject of two Commons select committee inquiries and of news coverage that has led to the ban on trade with Britain announced by Malaysia yesterday.

The rural water project has been scaled down from 174 schemes. Only 134 have been completed but there has been no shortfall repayment to the ODA. Biwater's local representatives referred inquiries to the Ministry of Public Works. There an official said only nine states were now included, but would not say how many individual schemes have been built.

In Britain, a Biwater statement said: 'The contract took account of the fact that more effective solutions could be achieved when more detailed investigations of local distribution arrangements, ground conditions etc were carried out . . . By combining small schemes into larger regional schemes, redefining schemes . . . which reduced the number from 174 to 134, it was possible to increase the population served without affecting the overall contract sum.'

The contract was the subject of a little-noticed, highly critical report from the National Audit Office. The public spending watchdog found ODA officials had not had enough time to process the aid application properly, so 'the appraisal was limited and no economic rate of return was calculated'.

Antah, a conglomerate involved in insurance, stockbroking, shipping, aviation, pharmaceuticals and oil, was described yesterday by a Malaysian government spokesman as 'a specialist in supply water'. Apart from Antah Biwater, the company's entries in Malaysian business directories reveal no water expertise.

One reason given by Malaysian sources for the ODA's apparent eagerness to assist the royal family was the determination of Margaret Thatcher, then prime minister, to end Dr Mahathir's 'Buy British Last' campaign. In April 1985, he set out two main demands: more Heathrow slots for Malaysian Airlines, and greater assistance with developing the infrastucture. In return, 'Buy British Last' would end and Britain would be preferred in any arms deals.

Malaysian Opposition MPs will raise the Antah Biwater affair when their parliament reconvenes shortly. Dr Kua Kia Soong, of the Democratic Action Party, said: 'The whole thing could have been done by local water engineers.' He said there was no justification for Antah to have been awarded the contract or to have received British state aid.