UK defence minister bullish on arms sales

British defence companies such as BAE Systems and Rolls-Royce should be able to boost their sales to fast-growing markets like Indonesia without becoming entangled in corruption, according to Philip Hammond, the UK defence secretary.

On a trip to Jakarta to promote the British defence industry and deepen nascent military ties with the world’s third-largest democracy, Mr Hammond told the Financial Times the risks of doing business in Indonesia, where corruption is endemic, were “manageable”.

“From the companies I have talked to, they recognise that there is a challenge but they think that it is manageable, and they can operate here successfully while observing the UK and US legal requirements to address anti-corruption issues,” he said.

Rolls-Royce is the latest major British industrial and defence group to become bogged down in graft allegations.

It asked the Serious Fraud Office to investigate accusations that the company had engaged in bribery connected with its business in China, Indonesia and other markets.

Mr Hammond sought to play down the impact of the SFO involvement on defence sales to Indonesia, noting that it was “primarily focused” on Rolls-Royce’s civil engines business in Indonesia, not its defence business.

Under pressure from prosecutors in the US and the UK, British defence companies have been trying to improve their anti-corruption efforts in emerging markets like China and Indonesia, where facilitation payments to government officials are commonplace.

Indonesia is one of the world’s more corrupt countries, according to Transparency International, a campaign group, which placed it 118th out of 176 countries, alongside Egypt and Madagascar, in its ranking of global governance.

Some executives in Indonesia have argued that the UK’s stringent bribery law of 2010, which expressly prohibits such payments, makes it very hard to win deals.

Fatahilah Class

Nonetheless, Mr Hammond said he was hopeful that defence sales could form a key part of last year’s pledge by David Cameron, the British prime minister, and Susilo Bambang Yudhoyono, Indonesia’s president, to double bilateral trade by 2015.

But that sales growth would not come without adjustments to military contractors’ business models, he said. As Indonesia and other emerging nations seek to deepen their manufacturing base, Mr Hammond said that military contractors would have to incorporate more local production and the transfer of technology.

“The days of bashing metal in the northwest of England, crating it up and shipping it off are over,” he said. “What people want to buy is the technology transfer and partnership but with local production, leveraging lower local production costs and also building an indigenous capability.”

Like the US, Japan and other developed nations with anaemic domestic economies, Britain is keen to win business in fast-growing markets like Indonesia.

Following the Obama administration’s “pivot” to Asia, Mr Hammond said the UK was “looking east in a way we have not done before”.

As its economy continues to grow rapidly, and it becomes a more prominent on the global stage, Indonesia is keen to accelerate the modernisation of its military.

It has bought F16 fighters and Apache helicopters from the US, Sukhoi 27 and Sukhoi 30 fighters from Russia and missile systems from China, underlining a multilateral defence and foreign policy that eschews alliances.

Britain has sold Starstreak anti-aircraft missiles, Hawk jets and small arms to Indonesia. Now, British companies are keen to win contracts to upgrade Indonesia’s ageing Fatahillah-class frigates and other ships.

● FT