FSO Spin-off more delays?
A newspaper report this morning.
The Times December 18, 2006
Eurofighter delay may win better conditions for the Saudis
DAVID ROBERTSON
The completion of a £20 billion deal to sell Typhoon Eurofighters to Saudi Arabia will be postponed until the middle of next year, The Times has learnt.
While the Government’s intervention last week to abort a related investigation into fraud allegations has saved the contract, tying up all the loose ends will still take months. That will almost certainly delay staged revenue payments to BAE Systems, analysts say, and could enable Saudi Arabia to squeeze better terms from the British arms company.
When the UK and Saudi governments signed the memorandum of understanding to sell 72 Typhoons in September it was agreed that contract negotiations should take three months.
However, these negotiations ground to a halt because of the Serious Fraud Office’s investigation into an earlier deal in which Britain sold Tornado jets to the Saudis.
BAE is alleged to have set up a slush fund to pay bribes to Saudi officials to win the £40 billion al-Yamamah contract during the 1980s. The SFO’s investigation is understood to have deeply embarrassed members of the Saudi royal family.
Downing Street last week closed the SFO investigation, claiming it was not in the interest of national security. The investigation had soured relations between the two countries and the Saudis had threatened to ditch the deal.
Defence industry sources said negotiations towards completing the Typhoon contract were likely to restart soon but would probably take until next summer to complete.
The contract, which was to be called al-Yamamah II until blocked by the Saudis because of connotations with the alleged bribery scandal, will safeguard work at BAE’s Wharton factory in Lancashire until 2014. BAE’s shares jumped 6.5 per cent on Friday.
Pressure to stop the SFO is understood to have been put on the Government by parties linked to BAE, including its unions and defence industry associations. BAE itself claims it was not involved. The biggest push to drop the case is thought to have come from the Saudis. Talks between the two governments preceded the decision to stop the investigation.
Defence analysts praised the Government’s stance. One said: “For the first time in a long time we are standing up for national interests. This is good news for BAE and good news for the Saudis.”
http://business.timesonline.co.uk/article/0,,13130-2509729,00.html
Just a few points on the above and a little background why Saudi was not pleased with the situation.
Because the SFO induced row caused contract negotiations to be suspended and the forthcoming holiday period, it is recognised that, the negotiations will be extended.
The current Saudi position is that in the new climate the negotiations will take up to six months. This is in order that the resulting contract can be seen to have been one fairly.
Note that this is essentially a UK/Saudi government deal rather than a Eurofighter deal.
The Typhoon aircraft will be purchased from Eurofighter by the UK government on behalf of Saudi. In turn each of the manufacturing companies will be paid by Eurofighter. If the order had been cancelled then it could have been argued that the UK would be liable to pay Eurofighter and hence the partner companies leaving UK to seek compensation from Saudi.
In additional there will be support contracts for BAE Systems for work carried out in the UK and in Saudi; including arrangement for Saudi pilots to be trained at RAF Coningsby. These support contracts will have elements that would be linked to logistic support provided Eurofighter.
Note that BAES have over 5,000 employees in Saudi, both locals and other nationalities.
The situation in Saudi is different from the four Eurofigther partner countries. Each of these European countries has well defined military branches of the forces and ministry of defence organisations. These interests are co-ordinated by NETMA who is the customer for Eurofighter.
Essentially the UK is acting as the link between Saudi and Eurofighter bypassing NETMA.
BAE Systems have been brokering the deal on behalf of the UK government, trying to put together a complete package for Saudi.
The approach goes back well before Al-Yamamah, even before the UK supplied Lightings to Saudi. Must of this was based on personal relationship and trust. In those days the country did not have the expertise required to know what they required. Many of the important posts in the country were held by members of the ruling family, who had visited Britain for part of their education and in some cases attended military colleges with RAF officers who subsequently joined BAES (and the previous companies). It was the same with the UK MoD and other large UK defence companies.
At that time organisations in Saudi were not well established. So in order to specify the requirements for what they needed they had to rely on members of the UK companies that they trusted. This is the old problem that you can only procure that you can specify. If you have insufficient knowledge to specify what you want then you consult someone you can trust.
Also because the in country situation was not very well defined, it was difficult to know who to talk to get anything done. Inerrably it was some relation of a relation of the Prince in charge of an aspect of the overall deal that was the key man to get the problem sorted. (There are thousands of royal princes in Saudi). Such in-country services were rewarded with appropriate levels of commission.
In the early days this was the only way to proceed. It was a matter of honour that one did not rip-off those who trusted us. (That is not to say that a few individuals made a killing and that some in-country commissions were paid for not much contribution).
Overall all parties were generally satisfied with the results.
You also have to bear in mind that in the early days the Saudi royal family owned Saudi and that essentially it was all their money.
With Al-Yamamah things became more regularised, the organisations better established and they had more expertise available to specify what was required. However this deal was set up largely on the basis of trust.
Over the years many of the BAES in country support jobs have been taken over by local employees, originally ex-RAF staff working for BAES filled these posts. The situation was similar with the aircrews, with many ex-RAF pilots, initially working alongside and training Saudi pilots.
Again the deal worked well.
Meanwhile in the US and the West, rules were drawn up on corporate governance etc, and the “rules of engagement” began to change.
Saudi was upset by the SFO because they regarded this as changing the rules after the game had been played. Effectively retrospectively accusing them of cheating. As the earlier deals were set on the basis of trust (some deals closed on just a handshake), this was perceived to impinge on their honour.
It was recognised by both Saudi and UK governments that the new Typhoon contracts (and the follow-up Tornado and Hawk deals) would have to be set up in a more regular fashion and be much more transparent than the earlier arrangement.
So from the Saudi point of view having part of the UK government (the SFO), with whom you are trying to negotiate, besmirch your integrity and honour, was an insult will which they could not tolerate.
We have to remember that for all practical purposes the Saudi royal family is the Saudi government.
The UK defence industry, the Department of Transport and Industry, the Ministry of Defence and the Foreign Office knew the situation, but someone from the Home Office was not keeping the SFO on side.
The result is that the contract negotiations will extend into the Spring/early Summer next year.
I think Saudi will argue that they will have to undertake more work themselves to increase the transparency of the deal, and hence will press for a better price.
It is possible that they will purchase some aircraft from France just to make a point, but I doubt it.
However, the UK government will have to bear the cost of the extended contract negotiations that BAES will have to under take; perhaps they should recover these funds by cutting the budget of the SFO.
Chris
A newspaper report this morning.
The Times December 18, 2006
Eurofighter delay may win better conditions for the Saudis
DAVID ROBERTSON
The completion of a £20 billion deal to sell Typhoon Eurofighters to Saudi Arabia will be postponed until the middle of next year, The Times has learnt.
While the Government’s intervention last week to abort a related investigation into fraud allegations has saved the contract, tying up all the loose ends will still take months. That will almost certainly delay staged revenue payments to BAE Systems, analysts say, and could enable Saudi Arabia to squeeze better terms from the British arms company.
When the UK and Saudi governments signed the memorandum of understanding to sell 72 Typhoons in September it was agreed that contract negotiations should take three months.
However, these negotiations ground to a halt because of the Serious Fraud Office’s investigation into an earlier deal in which Britain sold Tornado jets to the Saudis.
BAE is alleged to have set up a slush fund to pay bribes to Saudi officials to win the £40 billion al-Yamamah contract during the 1980s. The SFO’s investigation is understood to have deeply embarrassed members of the Saudi royal family.
Downing Street last week closed the SFO investigation, claiming it was not in the interest of national security. The investigation had soured relations between the two countries and the Saudis had threatened to ditch the deal.
Defence industry sources said negotiations towards completing the Typhoon contract were likely to restart soon but would probably take until next summer to complete.
The contract, which was to be called al-Yamamah II until blocked by the Saudis because of connotations with the alleged bribery scandal, will safeguard work at BAE’s Wharton factory in Lancashire until 2014. BAE’s shares jumped 6.5 per cent on Friday.
Pressure to stop the SFO is understood to have been put on the Government by parties linked to BAE, including its unions and defence industry associations. BAE itself claims it was not involved. The biggest push to drop the case is thought to have come from the Saudis. Talks between the two governments preceded the decision to stop the investigation.
Defence analysts praised the Government’s stance. One said: “For the first time in a long time we are standing up for national interests. This is good news for BAE and good news for the Saudis.”
http://business.timesonline.co.uk/article/0,,13130-2509729,00.html
Just a few points on the above and a little background why Saudi was not pleased with the situation.
Because the SFO induced row caused contract negotiations to be suspended and the forthcoming holiday period, it is recognised that, the negotiations will be extended.
The current Saudi position is that in the new climate the negotiations will take up to six months. This is in order that the resulting contract can be seen to have been one fairly.
Note that this is essentially a UK/Saudi government deal rather than a Eurofighter deal.
The Typhoon aircraft will be purchased from Eurofighter by the UK government on behalf of Saudi. In turn each of the manufacturing companies will be paid by Eurofighter. If the order had been cancelled then it could have been argued that the UK would be liable to pay Eurofighter and hence the partner companies leaving UK to seek compensation from Saudi.
In additional there will be support contracts for BAE Systems for work carried out in the UK and in Saudi; including arrangement for Saudi pilots to be trained at RAF Coningsby. These support contracts will have elements that would be linked to logistic support provided Eurofighter.
Note that BAES have over 5,000 employees in Saudi, both locals and other nationalities.
The situation in Saudi is different from the four Eurofigther partner countries. Each of these European countries has well defined military branches of the forces and ministry of defence organisations. These interests are co-ordinated by NETMA who is the customer for Eurofighter.
Essentially the UK is acting as the link between Saudi and Eurofighter bypassing NETMA.
BAE Systems have been brokering the deal on behalf of the UK government, trying to put together a complete package for Saudi.
The approach goes back well before Al-Yamamah, even before the UK supplied Lightings to Saudi. Must of this was based on personal relationship and trust. In those days the country did not have the expertise required to know what they required. Many of the important posts in the country were held by members of the ruling family, who had visited Britain for part of their education and in some cases attended military colleges with RAF officers who subsequently joined BAES (and the previous companies). It was the same with the UK MoD and other large UK defence companies.
At that time organisations in Saudi were not well established. So in order to specify the requirements for what they needed they had to rely on members of the UK companies that they trusted. This is the old problem that you can only procure that you can specify. If you have insufficient knowledge to specify what you want then you consult someone you can trust.
Also because the in country situation was not very well defined, it was difficult to know who to talk to get anything done. Inerrably it was some relation of a relation of the Prince in charge of an aspect of the overall deal that was the key man to get the problem sorted. (There are thousands of royal princes in Saudi). Such in-country services were rewarded with appropriate levels of commission.
In the early days this was the only way to proceed. It was a matter of honour that one did not rip-off those who trusted us. (That is not to say that a few individuals made a killing and that some in-country commissions were paid for not much contribution).
Overall all parties were generally satisfied with the results.
You also have to bear in mind that in the early days the Saudi royal family owned Saudi and that essentially it was all their money.
With Al-Yamamah things became more regularised, the organisations better established and they had more expertise available to specify what was required. However this deal was set up largely on the basis of trust.
Over the years many of the BAES in country support jobs have been taken over by local employees, originally ex-RAF staff working for BAES filled these posts. The situation was similar with the aircrews, with many ex-RAF pilots, initially working alongside and training Saudi pilots.
Again the deal worked well.
Meanwhile in the US and the West, rules were drawn up on corporate governance etc, and the “rules of engagement” began to change.
Saudi was upset by the SFO because they regarded this as changing the rules after the game had been played. Effectively retrospectively accusing them of cheating. As the earlier deals were set on the basis of trust (some deals closed on just a handshake), this was perceived to impinge on their honour.
It was recognised by both Saudi and UK governments that the new Typhoon contracts (and the follow-up Tornado and Hawk deals) would have to be set up in a more regular fashion and be much more transparent than the earlier arrangement.
So from the Saudi point of view having part of the UK government (the SFO), with whom you are trying to negotiate, besmirch your integrity and honour, was an insult will which they could not tolerate.
We have to remember that for all practical purposes the Saudi royal family is the Saudi government.
The UK defence industry, the Department of Transport and Industry, the Ministry of Defence and the Foreign Office knew the situation, but someone from the Home Office was not keeping the SFO on side.
The result is that the contract negotiations will extend into the Spring/early Summer next year.
I think Saudi will argue that they will have to undertake more work themselves to increase the transparency of the deal, and hence will press for a better price.
It is possible that they will purchase some aircraft from France just to make a point, but I doubt it.
However, the UK government will have to bear the cost of the extended contract negotiations that BAES will have to under take; perhaps they should recover these funds by cutting the budget of the SFO.
Chris
