LONDON -- The U.S. sale to Saudi Arabia five years ago of an air defense network was intended to be a model of a new system of defense procurement in the kingdom. The old ways of the 1970s, when multimillion-dollar commission payments were made to arms dealers, was to be replaced by above-board joint ventures between Saudis and Western defense companies.

The Saudi arms business has indeed been restructured, and shady commission payments by U.S. firms are now illegal. But the people who are making money from the defense of the kingdom -- and stand to make millions more as the Bush administration readies a new round of multibillion-dollar arms sales to Saudi Arabia -- still include many old-line Saudi businessmen and financiers, some of them members of the royal family, according to U.S. and Saudi defense executives, consultants, bankers and traders.

Few ordinary Saudis have been drawn into the process, even though the transformation of the arms procurement system was in part intended to involve more Saudis, the sources said. Yet the new system may eventually prove a start at spreading the riches.

One U.S. defense executive who has sold arms to the kingdom for more than a decade said: "In effect, {the new approach does} some of the things the commissions did, but it force{s} more of the money into the local economy, rather than into Swiss bank accounts or yachts."

An example of how the new system works is Alsalam Aircraft Co. Ltd. It is one of the joint-venture deals, known as "offsets," created as part of Boeing's $1.2 billion sale in 1985 of the "Peace Shield" program to equip Saudi Arabia with a ground-based air defense command, control and communication system.

Primed with soft loans from the Saudi government and high technology from Boeing Corp., Westinghouse Corp. and ITT Corp., Alsalam expects a virtual monopoly on maintenance of heavyweight civilian and military aircraft in the kingdom. As planes roar into Saudi Arabia to participate in the U.S.-led buildup against Iraq, the effort looks like a lucrative franchise for the company and its backers, including giant U.S. defense contractors, Saudi businessmen and royal family members.

Alsalam's profit outlook "is almost unheard of in this industry," said Larry Warfield, Alsalam's acting president. "There are imponderables -- war in the gulf, shortages of {trained} people. But given those, everything will be coming up roses here."

Alsalam and four other joint ventures were created in the aftermath of the Peace Shield deal because of Saudi Arabia's insistence that Boeing and its U.S. partners, including General Electric Co., Westinghouse, ITT and others, reinvest 35 percent of the "technical portion" of their contract in joint business ventures with Saudi business partners. The final amount of these investments is subject to negotiation, but it may eventually exceed $200 million. A Boeing spokeswoman declined comment about Peace Shield.

Once they begin operations, the joint ventures are supposed to have their profits virtually guaranteed by preferential access to Saudi government contracts, such as the one Alsalam expects to win for heavy aircraft maintenance when its facilities in Riyadh are completed. After being launched with government work, the new firms -- half-owned by Western corporations, half-owned by Saudi partners -- are then supposed to seek private-sector markets and spread Western technologies around the kingdom.

Prince Fahd bin Abdullah, Saudi Arabia's deputy defense minister and head of the offset project, originally said he wanted to involve a wide range of Saudi businessmen and small investors in ownership of the new companies -- in contrast to the narrow circle of middlemen who benefited from the old system of commission payments.

The goal, Fahd said in a 1987 interview with Arab News, was to create a system wherein any foreign arms seller would be "helping our economy as he helps himself."

But three years after that hopeful prediction, U.S. executives and Saudi consultants involved in Peace Shield say the results have been mixed. One disappointment has been the apparent failure of the Saudi government -- which ultimately controls the structuring of joint ventures and the selection of Saudi participants -- to include large numbers of ordinary Saudis in ownership of the newly formed companies.

Instead, Saudi participation has been dominated by a handful of banks, investment companies and the state-owned airline -- most of which have close ties to the Saudi royal family.

A special Saudi investment group formed in Riyadh to participate in the Boeing deals -- Saudi Advanced Industries Co. or SAIC -- was organized as a Saudi Arabian joint stock company able to sell ordinary shares to the public. But it has never done so, according to a knowledgeable Saudi businessman.

Instead, SAIC raised money by selling blocks of 5,000 shares via private subscription to 155 "founders," including four Saudi princes, an entire family from a branch of the royal clan, and a host of prominent businessmen, according to the Saudi source. The chairman of SAIC is a retired chief of the Saudi air force and its board members include representatives from several of the kingdom's oldest and best-known business families.

The web of family and business connections on the Saudi side of the Peace Shield deals is complex, but the potential profits for those involved are considerable.

SAIC, for example, owns a 10 percent stake in Alsalam Aircraft. One of SAIC's directors, Omar Binladen, belongs to a prominent Saudi business family that has won Alsalam's $63 million contract to build the firm's aircraft maintenance facility in Riyadh. One British banking consultant described the Binladen firm as "King Fahd's personal contractor" because it frequently does work for the royal family.

The Binladen firm secured the big contract without participating in a competitive bidding auction sponsored by Alsalam and approved by the Saudi Defense Ministry. Warfield said that in the United States, in similar circumstances, he would recommend a new competitive bid to his directors and the Defense Ministry, but that in this instance there was not time.

"There have been some problems in that tendering process but I'm convinced it was a fair bid," Warfield said in a phone interview from Riyadh. A Binladen spokesman declined to comment on details about how the Alsalam contract was obtained. But the spokesman said, "Binladen is very strong financially and that is an advantage."

SAIC and its 155 Saudi investors appear to have staked their business on Saudi defense-related contracts such as the ones involving Alsalam, the largest of five companies born so far from the Peace Shield deal. Besides its 10 percent stake in Alsalam and an investment in another Boeing-sponsored joint venture, SAIC's only other major investment is in a new company that has made arrangements to sell uniforms under government contract to the Saudi military, sources said.

Even with only 155 private investors, SAIC represents a wider distribution of potential profits from defense procurement than was typical in Saudi Arabia 15 years ago, when a single agent could pocket millions of dollars from a single arms deal -- without investing his own money, enduring ordinary business risks or assisting in the transfer of Western technologies to the kingdom, as participants in the Peace Shield ventures do.

The goals originally spelled out by Fahd may yet be achieved, some evidence suggests. One of the Peace Shield joint ventures, for example, is a computer firm called International Systems Engineering Co. or ISE. It has attracted local investment from entrepreneurial Saudi software firms, not from big banks or financial holding companies. Such collaborations are the wave of the future in the kingdom, Saudi officials say.

But while ISE may represent the future, it does not appear to be typical of the present. The Saudi owners in the other Peace Shield joint ventures are behemoths of the business establishment with long ties to the royal family.

Riyadh-based Advanced Electronics Co., for example, which hopes to win Saudi government contracts to service civilian and military avionics systems, is half-owned on the U.S. side by a subsidiary of the Boeing-led Peace Shield consortium, and half-owned on the Saudi side by National Commercial Bank or NCB; Gulf Investment Corp.; National Industrialization Co., whose vice chairman is a Saudi prince; and Saudi Arabian Airlines, the state-owned carrier whose chairman is Defense Minister Sultan, the king's brother.

National Commercial Bank, the kingdom's largest bank, is owned by the Bin-Mahfouz family, who have been the bankers to the Saudi royal family for decades. Details of NCB's finances are not routinely published, but the bank's Saudi accountants have issued qualified audits of its books in recent years because of loan problems.

Stephen Timewell, editor of Arab Banker, wrote in a recently published analysis of the bank that the "role of the {Saudi} government in relation to NCB is puzzling" because while the bank and the government are closely linked, the kingdom's bank regulatory agency "appears to be turning a blind eye to loan problems at the bank."

Another investor in the Peace Shield deals, Gulf Investment Corp., which owns a share of both Alsalam and Advanced Electronics, is largely owned by members of the ruling families of Saudi Arabia, Kuwait and the United Arab Emirates.

Alsalam's Warfield says the backgrounds of the owners of the new defense-related joint ventures created under Peace Shield matter less than the fact that the ventures have been created after painstaking work by the Saudi government. He and others predict that the new companies will eventually create thousands of skilled jobs and introduce advanced technologies to the kingdom's economy.

But some U.S. executives complain that some of the Saudis who have invested in the joint ventures are not serious about participating fully in managing the projects.

"They do want their cake and to eat it, too," said a U.S. executive closely involved in Peace Shield. "They don't want to do any work and they want to reap the benefits of the little money they put up front."

The view that some Saudi partners in joint ventures with U.S. firms in defense-related work and other fields are not interested in active management as much as in collecting easy dividends is "a very common complaint {and} by and large it's true," said Gilbert E. Dwyer, a New York management consultant and president of a U.S.-Saudi Arabian business round table.

But Dwyer and a broad range of U.S. defense executives interviewed nonetheless lauded the goals of the new Saudi approach to arms purchases, saying they believed the kingdom is sincerely attempting to parlay its $14 billion annual defense budget into opportunities and benefits for ordinary Saudi Arabians.

Some U.S. defense executives whose companies tried to win a piece of the Peace Shield contract said they were free to find their own Saudi partners -- regardless of their relationship with the royal family -- while proposing the required joint ventures to the Saudi Defense Ministry.

But executives involved in the Boeing-led joint ventures said lists of acceptable Saudi partners were prepared by the Defense Ministry, under princes Sultan and Fahd, and that ownership of the newly formed companies was negotiated with a Saudi government committee that included representatives from several ministries, which are headed by royal family members.

A U.S. executive involved in Peace Shield said that business practices common in many developing countries -- payoffs to secure government contracts, conflicts of interest between the public and private sectors -- do remain a problem in the Saudi defense procurement system. But he added that the situation is improving.

"They play a few games. We can't do business that way. These guys are driving me crazy," this executive said. "I've met {Deputy Defense Minister} Prince Fahd and he's a gentleman and I think he's sincere about what he's doing. But is it working? I'm not sure."

The old system of U.S. arms sales to Saudi Arabia, involving big commission payments to Saudi middlemen, effectively ended during the late 1970s, when congressional hearings exposed the questionable payments, ushering in passage of the Foreign Corrupt Practices Act, which bans overseas bribes by U.S. corporations in many circumstances.

British and French arms makers, who sell billions of dollars' worth of hardware to Saudi Arabia, face no comparable legal restrictions on commission payments. But in the present atmosphere, European governments risk acute political embarrassment if their companies are caught making shady deals to sell weapons to the kingdom now.

The British government is investigating charges that large commissions were paid by British Aerospace to smooth an estimated $15 billion sale of fighter jets and other equipment to Saudi Arabia, a deal inked in two stages in 1985 and 1988. That transaction, the largest arms purchase in Saudi history, involved British pledges to sink more than $1 billion into offset joint ventures such as the ones in Peace Shield.

Hardly anyone in the defense business thinks that a big government-to-government arms sale such as the one now being worked on by the Bush administration will be tainted by commissions or under-the-table payoffs. But any such sale will be supplemented by a host of private deals between Western corporations, Saudi investors and the kingdom's government to provide maintenance, support, construction and supply.

Staff writer Sandra Sugarawa contributed to this report.