The SANGCOM project negotiations

Document 1: Draft minute from H.J.L.Suffield, Ministry of Defence, to F.Cooper, Ministry of Defence, undated, DEFE 68/319, TNA

SECRET

DRAFT MINUTE FROM HDS TO PUS

 

PUS

Copies: CE(PE)

AUS(Sales)

AUS(Sales Admin)

SAUDI ARABIAN AIR DEFENCE ASSISTANCE PROJECT & SAUDI ARABIAN NATIONAL GUARD COMMUNICATIONS NETWORK – AGENCY FEES

In the context of your recent directive to me on the subject of agency fees there are two major Government-to-Government projects in fairly advanced stages of negotiation upon which I must seek your guidance. The matters discussed in the following paragraphs also have a bearing on the question of Accounting Officer responsibilities which have recently been under discussion. CE(PE) has agreed that I should approach you.

THE SADAP PROJECT

2. The Air Defence Assistance Programme is the subject of a government-to-government Memorandum of Understanding concluded in 1973, worth at that time some £250m, under which BAC Ltd. as prime contractors to HMG undertake aircraft maintenance, training and building work for the RSAF. It was accepted when the back-to-back contract with BAC was concluded that agency fees of 8% could be admitted as a specific charge to the contract but, in assessing the profit margin, it was recognised that BAC have, in fact, a comitment to meet agency fees of at least 10%.

3. The present MOU is due to expire in 1978 but the life of the Lightning and Strikemaster aircraft to which the project principally relates can be extended well into the 1980s and we have therefore been pressing the Saudis to extend the agreement to at least 1981. This would be worth a further £400m. In addition BAC have been promoting a number of further projects, principally:

(a) Strengthening the North West Defences (Tabuk Air Base)

(b) The provision of an engineering and maintenance depot to support all aircraft in service with the RSAF.

(c) The extension and modernisation of the King Feisal Air Academy (KFAA)

(d) The provision of a relief landing ground for the KFAA.

These projects could be worth as much as £1,000 million in total. Even if we are successful in getting in only two or three of them for Britain they will represent several hundreds of millions of pounds worth of exports, visible and invisible.

4. We have been informed by BAC that they will be expected to pay % in respect both of the extension of the existing programme and of the new projects. Although this appears to represent a significant increase over the earlier fees payable it is believed that these were in fact augmented by payments made to agents by BAC’s sub-contractors (eg building and catering sub-contractors). There will be considerably less work for these sub-contractors in the new programme and therefore less opportunity to conceal agency fees in their prices.

THE SANGCOM PROJECT

5. In early 1975 we were asked by the Saudis to carry out a survey and make proposals for the provision of a nationwide communication network and training facility with associated after sales operating and maintenance services. Cable and Wireless Ltd. were selected as our prime contractors and detailed proposals, prepared by them and approved by MOD(PE)[15] were submitted to the National Guard in October 1975. The estimated cost was *150m.

6. We were informed that our offer would be held in suspense until the United States had had an opportunity to submit a tender. We have now been asked to send a small team to discuss our proposals in more detail and we understand this to mean that the evaluation committee which was appointed to consider the offer has found ours superior to the American offer. A joint MOD/Cable & Wireless team is now in Saudi Arabia for talks with the Deputy Commander of the National Guard.

7. Cable and Wireless have informed us that their prices include provision for the following agency fees.

[handwritten: To be verified in detail but believed to total about 15%]

Level of Fees requested

8. In neither the SADAP nor the SANGCOM case do I consider that the fees being demanded are exceptionally large in terms of the percentage commonly charged in Saudi Arabia for the sort of service being offered, which, although described as ‘technical consultancy’, amounts is practice to the exertion of influence to sway decisions in favour of the client. However, in absolute terms the sums involved are very large and in future, as defence projects become even more ambitious, the agency fees demanded will, unless some restraint is applied, become enormous.

POSSIBLE COURSES

9. I have discarded as unthinkable the possible option of informing the Saudis that we have decided not to proceed further with any of these projects on a government-to-government basis since the firms concerned would certainly not be prepared to go it alone on projects of this size and the result would therefore be a breakdown in defence business between the UK and Saudi Arabia with repercussions spreading far wider than that, both in the fields of commercial and political relations.

10. I gave also assumed that we would not wish to follow the recently introduced American practice in government-to-government agreements of informing the foreign government in the preamble to the letter of offer of the amount, and beneficiary if known, of any fees included in the price. The Americans appear to be powerful enough to get away with this “take-it-or-leave-it” approach but I do not believe we could afford to adopt this attitude. The French are certainly unlikely to adopt it. I have, moreover, concluded that it would be unhelpful to consult the Saudi government on the subject in any way, since they would certainly not officially approve the payment of fees, although they undoubtedly expect appropriately discreet arrangements to be made. Statements to this effect are made by senior Saudis to visiting senior businessmen in somewhat elliptical language whenever a suitable opportunity occurs, for example by HRH Crown Prince Fahd ibn Abdul Aziz during a recent audience granted to Mr. Greenwood[16], Chairman of BAC, in the resence of D.Sales 1 and our Defence Attache.

11. I believe, therefore, that we are left with the alternatives of either:

(a) accepting the proposed levels of fees as legitimate charges to the projects, or

(b) of seeking to limit them to a level which would indicate to the beneficiaries that unreasonable sums, in absolute terms, are not available from this country, while not reducing them to a level which would permit the French, or others, easily to outbid us.

RECOMMENDATION

12. I would therefore recommend the acceptance of fees of 10% as a charge to the projects. However, to permit industry a degree of flexibility to meet other minor charges in respect of consultants or agents with whom they might have legitimate and long-standing arrangements, I would also recommend that the profit margins allowed on projects of this nature be significantly more generous than on contracts for the supply of equipment or services to HMG. I would suggest that a profit margin be accepted of, say, 15% or even 17% on costs, the reckonable costs to exclude the approved agency fees. This would acknowledge the greater risks and difficulties associated with operating in an overseas market and would leave it open to the contractor to make the most sensible commercial arrangements within the limits of his profit margin. It would also provide an incentive to the contractor to resist excessive demands. I do not believe that there is anything in the argument that an increase in the profit margin on overseas projects would lead contractors to expect similar treatment on a British contracts. Were they to do so, their claims could be very easily withstood.

12. As I mentioned in para.7 we are now in the final stages of negotiating the SANGCOM project and an early resolution of these matters is, therefore, imperative.

 

Document 2: Minute from H.J.L.Suffield, Ministry of Defence, to F.Cooper, Ministry of Defence, 23 June 1976, DEFE 23/149, TNA

S E C R E T

LOOSE MINUTE

PUS

Copy to:

CE(PE)

AUS(Sales)

AUS(Sales Admin)

SAUDI ARABIAN AIR DEFENCE ASSISTANCE PROJECT & SAUDI ARABIAN NATIONAL GUARD COMMUNICATIONS NETWORK – AGENCY FEES

In the context of your recent directive to me on the subject of agency fees there are two major Government-to-Government projects in fairly advanced stages of negotiation upon which I must seek your guidance. The matters discussed in the following paragraphs also have a bearing on the question of Accounting Officer responsibilities which have recently been under discussion. CE(PE) has agreed that I should approach you.

THE SADAP PROJECT

2. The Air Defence Assistance Programme is the subject of a Government-to-Government Memorandum of Understanding concluded in 1973, worth at that time some £250M, under which BAC Ltd as prime contractors to HMG undertake aircraft maintenance, training and building work for the RSAF. It was accepted when the back-to-back contract with BAC was concluded that agency fees of 8% could be admitted as a specific charge to the contract but, in assessing the profit margin, it was recognised that BAC have, in fact, a commitment to meet agency fees of at least 10%.

3. The present MOU is due to expire in 1978 but the life of the Lightning and Strikemaster aircraft to which the project principally relates can be extended well into the 1980s and we have therefore been pressing the Saudis to extend the agreement to at least 1981. This would be worth a further £400M. In addition BAC have been promoting a number of further projects, principally:

(c) Strengthening the North West Defences (Tabuk Air Base)

(d) The provision of an engineering and maintenance depot to support all aircraft in service with the RSAF.

(e) The extension and modernisation of the King Feisal Air Academy (KFAA)

(f) The provision of a relief landing ground for the KFAA.

These projects could be worth as much as £1,000M in total. Even if we are successful in getting in only two or three of them for Britain they will represent several hundreds of millions of pounds worth of exports, visible and invisible.

4. We have been informed by BAC that their agreed fees will be 15% in respect of both the extension of the existing programme and of the new projects. Although this appears to represent a significant increase over the earlier fees payable it is believed that these were in fact augmented by payments made to agents by BAC’s sub-contractors (eg building and catering sub-contractors).

THE SANGCOM PROJECT

5. In early 1975 we were asked by the Saudis to carry out a survey and make proposals for the provision of a nationwide communication network and training facility with associated after sales operating and maintenance services. Cable and Wireless Ltd were selected as our prime contractors and detailed proposals, prepared by them and approved by MOD(PE) were submitted to the National Guard in October 1975. The estimated cost was £150M.

6. We were informed that our offer would be held in suspense until the United States had had an opportunity to submit a tender. We have now been asked to send a small team to discuss our proposals in more detail and we understand this to mean that the evaluation committee which was appointed to consider the offer has found ours superior to the American offer. A joint MOD/Cable and Wireless team is now in Saudi Arabia for talks with the Deputy Commander of the National Guard.

7. Cable and Wireless have informed us that their prices include provision for the following agency fees:

Engineering and Trading Operations Company Beirut 10%

Cable and Wireless Middle East 2%

SIMEC International 3%

 

Level of Fees requested

8. In neither the SADAP nor the SANGCOM case do I consider that the fees being demanded are exceptionally large in terms of the percentage commonly charged in Saudi Arabia for the sort of service being offered but in absolute terms the sums involved are very large and in future, as defence projects become even more ambitious, the agency fees demanded will, unless some restraint is applied, become enormous.

POSSIBLE COURSES

9. I have discarded as unthinkable the possible option of informing the Saudis that we have decided not to proceed further with any of these projects on a Government-to-Government basis since the firms concerned would certainly not be prepared to go it alone on projects of this size and the result would therefore be a breakdown in defence business between the UK and Saudi Arabia with repercussions spreading far wider than that, both in the fields of commercial and political relations.

10. I believe, therefore, that we are left with the alternatives of either:

(g) accepting the proposed levels of fees as legitimate charges to the projects, or

(h) of seeking to limit them to a level which would indicate to the agents that unreasonable sums, in absolute terms, are not available from this country, while not reducing them to a level which would permit the French, or others, easily to outbid us.

RECOMMENDATION

11. I would therefore recommend the acceptance of fees of 10% as a charge to the projects. However, to permit industry a degree of flexibility to meet other minor charges in respect of consultants or agents with whom they might have legitimate and long-standing arrangements, I would also recommend that the profit margins allowed on projects of this nature be significantly more generous than on contracts for the supply of equipment or services to HMG. I would suggest that a profit margin be accepted of, say, 15% or even 17% on costs, the reckonable costs to exclude the approved agency fees. This would acknowledge the greater risks and difficulties associated with operating in an overseas market and would leave it open to the contractor to make the most sensible commercial arrangements within the limits of his profit margin. It would also provide an incentive to the contractor to resist excessive demands. I do not believe that there is anything in the argument that an increase in the profit margin on overseas projects would lead contractors to expect similar treatment on a British contract. Were they to do so, their claims could be very easily withstood.

12. As I mentioned in paragraph 6 we are now in the final stages of negotiating the SANGCOM project and I need an early resolution of these matters.

(signed)

HEAD OF DEFENCE SALES

23 June 1976

 

Document 3: Minute from F.Cooper, Ministry of Defence, to H.J.L.Suffield, Ministry of Defence, 23 June 1976, DEFE 23/149, TNA

SECRET

PUS/76/355

9/23

Copy 6 of 6 copies

HEAD OF DEFENCE SALES cc CE(PE)

AUS(Sales)

AUS(Sales Admin)

Thank you for your minute of 23 June. I agree with your recommendation in paragraph 11.

2. As regards agency fees, I think our responsibility in both these are first to satisfy ourselves that they are no more than the going rate for the area and second to ensure that, except in the most special circumstances, they are a matter for the firms concerned and not for HMG.

3. Given the putative size of some of the contracts it seems to me in everyone’s interests that agency fees are kept down as much as possible and that British firms have their own interest in seeing that this occurs.

4. As regards profit margins, the general rule is that we should earn as much as we can on sales to non-Exchequer customers and I see no difficulty about what you propose provided that we do not at any time get into a situation where we have undertaken to any purchaser to try and place any contract on the kind of terms that would be obtained by HMG.

F.C.

FRANK COOPER

23 June 1976

 

Document 4: The following extract is from page 213 of Annuaire Des Societes Libanaises A Responsabilite Limitee (Year-Book of the Lebanese Limited Liability companies), 3ème edition 1977, MECICO (Middle East Commercial Information Centre).

ENGINEERING & TRADING OPERATIONS CO. S.A.R.L.

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