Auditor-General's overview

In June 2015, I received letters from members of Parliament and a petition from about 10,000 New Zealanders asking for an inquiry into the Saudi Arabia Food Security Partnership. Concerns were raised about money that the Government had paid to a foreign businessman, and questions were asked about whether the payments amounted to corruption or bribery. Issues such as these go to the heart of New Zealanders' trust in government. Therefore, I decided that my Office would inquire into the matter.

The inquiry reviewed the history of why the payments were made, the actions of New Zealand Ministers and officials, the arrangements that the payments related to, and what the use of public resources has achieved.

Background

This is not a simple story. To understand the arrangements entered into as part of the Saudi Arabia Food Security Partnership, it is important to outline the background. This includes the history of Saudi Arabian investment in New Zealand farming, the development of policy and legal considerations affecting the export of live sheep, and the resulting difficult diplomatic relationship between the Kingdom of Saudi Arabia (Saudi Arabia) and New Zealand.

The background also includes the effect of these issues on the negotiation of a free trade agreement with the Gulf Cooperation Council, which includes Saudi Arabia. These factors combine to create a complex picture of competing economic, trade, and animal welfare interests.

In this report, we consider whether:

• the arrangements were made within the law;
• the business case for spending public money was robust;
• good process was followed; and
• value for money was obtained.

It is not within my legal mandate to comment on or criticise the Government's trade, diplomatic, or animal welfare policy decisions.

Main findings

I found no evidence that the arrangements entered into as part of the Saudi Arabia Food Security Partnership were corrupt. To understand whether there was corruption, we looked at whether there had been an abuse of power for private gain or an offence against the Crimes Act 1961 by a Minister or an official. The payments did not amount to bribery or facilitation payments. Instead, they were made as part of a legally valid contract for services. Public money was spent within the necessary financial approvals.

That said, I share many New Zealanders' concerns about the arrangements. I found significant shortcomings in the paper put to Cabinet in support of the decision to enter into the Saudi Arabia Food Security Partnership. The contract's benefits to New Zealand were unclear in the Cabinet paper, the business case, and its subsequent implementation.

It is not clear on what basis the amounts paid to the Saudi Arabian investor's company under the contract were arrived at. A key objective of the Saudi Arabia Food Security Partnership was to remove a perceived obstacle to a free trade agreement with the Gulf Cooperation Council. That agreement remains unsigned, although in two recent joint statements (in April and September 2016) New Zealand and Saudi Arabia have indicated progress, including towards completion of the free trade agreement.

In my view, settlement of a grievance was provided under the guise of a contract for services. The Saudi Arabia Food Security Partnership was the result of a need to resolve a diplomatic issue and, in the view of Ministers, to settle a Saudi Arabian investor's grievance. The situation was complicated by views about live sheep exports. The contract does not outline those different policy objectives or the complexities. Importantly, the contract does not specifically reflect the settlement component relating to the grievance.

This lack of transparency, both at the time of the decision and subsequently, has led to the concerns from the New Zealand public about the nature of the payments made. To date, explanations from Ministers or officials have not resolved those public concerns. Without transparency, people will speculate. This report is an opportunity for the complete story to be told.

At a lower level, but still important, we found that:

• Ministers and officials gave mixed messages to Saudi Arabia;
• there were shortcomings in the contract for services; and
• the timing of a payment was not best practice.

To date, slightly more than $8.7 million has been spent. There are some benefits, such as an improved diplomatic relationship and business opportunities, but whether those benefits are a good return on investment is unclear to me. Given the level of public interest, and that the benefits of the spending remain largely uncertain, I expect the Ministry of Foreign Affairs and Trade (the Ministry) and New Zealand Trade and Enterprise (NZTE) to assess and report on what the Saudi Arabia Food Security Partnership has achieved once all of the $11.5 million (increased from $10 million for the additional cost of exporting pregnant ewes) has been spent.

History of live sheep exports from New Zealand to Saudi Arabia

New Zealand has been involved in the trade of exporting live sheep for many years. Before 2003, the live sheep trade to Saudi Arabia focused on export for slaughter and consumption, particularly at the time of the annual Haj festival. In the 1990s, Sheikh Hmood Al Ali Al Khalaf (Sheikh Hmood) invested money in New Zealand farms and research through his group of companies (the Al Khalaf Group), with the intention of generating returns from the ongoing export of live sheep to Saudi Arabia.

In 2003, the New Zealand Government stopped the export of live sheep from New Zealand after a large number of sheep died on the Cormo Express – a ship transporting sheep from Australia to Saudi Arabia. Between 2004 and 2007, officials from Saudi Arabia and New Zealand discussed a Memorandum of Understanding to regulate veterinary protocols and other procedures for the live sheep trade. During this time, New Zealand officials suggested to Sheikh Hmood and his companies' representatives that the export of sheep for slaughter would resume. In 2006, the New Zealand Government told Saudi Arabian officials and the Al Khalaf Group that there was a policy review of the trade under way.

In 2007, the Customs Export Prohibition (Livestock for Slaughter) Order 2007 (CEPO) prohibited the export of livestock for slaughter unless the Director-General of the Ministry of Agriculture and Forestry granted an exemption to the prohibition. The CEPO has been renewed twice, in 2010 and 2013, and remains in force. To date, no exemptions have been granted.

After the CEPO was implemented, the Al Khalaf Group and the Ministry of Agriculture and Forestry discussed the progress of the Memorandum of Understanding between New Zealand and Saudi Arabia. A representative of the Al Khalaf Group considered that the Memorandum of Understanding was crucial to getting an exemption to the CEPO. The Group continued to invest in farming sheep in New Zealand in the expectation that exports of sheep for slaughter would resume.

In 2009, the then Minister of Agriculture made public statements that exports of sheep for slaughter were unlikely to resume because he did not think Saudi Arabia would be able to meet the animal welfare standards he would require for the transportation and treatment of the sheep. These conflicting messages contributed to a diplomatic issue between New Zealand and Saudi Arabia.

A diplomatic issue

Between 2007 and 2009, a free trade agreement between New Zealand and the Gulf Cooperation Council was negotiated. In late 2009, negotiations were complete and the final text had been agreed, subject to legal verification by each participating state.

However, in early 2010, it became clear that the diplomatic relationship between Saudi Arabia and New Zealand was strained. The New Zealand Government was aware that Sheikh Hmood felt a deep sense of injustice. The Al Khalaf Group had invested millions of dollars into New Zealand farming on the understanding that New Zealand was negotiating in good faith to resume the trade in live sheep. The Group's view was that, on the one hand, it was being led to understand negotiation of a government-to-government Memorandum of Understanding was being carried out in good faith. On the other hand, no progress was being made.

On a trip to Saudi Arabia, the then Minister of Trade was told by a Saudi Arabian Minister that New Zealand's position on the export of sheep for slaughter was a commercial issue that was an obstacle to signing the free trade agreement. Ministry officials believed that the sheep for slaughter issue was "poisoning" trade negotiations, as well as the broader relationship with Saudi Arabia and, potentially, the other members of the Gulf Cooperation Council.

In my view, New Zealand Ministers and officials sent mixed messages about New Zealand's policy position on exporting sheep for slaughter, an issue on which people have strong and polarised views. The Government needed to balance concerns about animal welfare with the interests of an important trade partner. In this instance, trying to balance those competing interests caused complications in New Zealand's relationship with Saudi Arabia.

A commercial solution

In early 2010, Ministers and officials considered options to resolve this complex diplomatic issue. They identified that they needed to find a solution that would address the perceived obstacle to the free trade agreement, improve the relationship with Saudi Arabia, resolve the position on exporting sheep for slaughter, factor in animal welfare concerns, and meet New Zealand's international and domestic legal obligations.

Advice to Ministers from officials included several different options, including paying compensation to the Al Khalaf Group, the possibility of one shipment of sheep, or a forward-looking commercial arrangement.

In 2012, the Minister of Foreign Affairs, Hon Murray McCully, and officials discussed a food security partnership with the Al Khalaf Group that would allow the Al Khalaf Group to benefit from its investments in New Zealand and for New Zealand to benefit from trade and business activities in Saudi Arabia.

During the negotiations, the Al Khalaf Group indicated that it considered it should be paid compensation of $24 million. New Zealand Ministers and officials decided to focus on a partnership arrangement that would allow the export of sheep for breeding, together with the establishment of a joint-venture breeding operation in Saudi Arabia.

The outcome of the negotiations was an exchange of letters outlining a proposed partnership between the New Zealand Government and the Al Khalaf Group. A contract for services would be entered into under which the New Zealand Government would purchase $4 million of services directly from the Al Khalaf Group and a further $6 million of goods and services from New Zealand companies to gift to the Al Khalaf Group. These goods and services would be installed and demonstrated at Sheikh Hmood's Um Alerrad farm in Saudi Arabia (to become known as the "Agrihub") with a view to helping New Zealand agricultural companies to enter the Middle Eastern agricultural market.

The use of a contract for services to resolve these matters was a decision made by Cabinet. I comment below on the quality of the Cabinet paper process but not on the decision itself.

The Cabinet paper

The Minister of Foreign Affairs put a paper to Cabinet outlining the proposed arrangement with the Al Khalaf Group in February 2013.

Cabinet was advised that there was a need to settle a dispute between New Zealand and Saudi Arabia as well as with a Saudi Arabian investor, that the Al Khalaf Group had received legal advice that it could pursue a legal claim against the Government for $20-$30 million, and that the Gulf Cooperation Council had asserted that the sheep export issue was the only obstacle to the signing of the free trade agreement.

Cabinet was also advised that New Zealand exports to the Gulf Cooperation Council could double to $3 billion in the next five years if the free trade agreement was entered into.

I found some significant shortcomings in the Cabinet paper, including that it:

• did not clearly explain that the Al Khalaf Group would own the goods and services costing the New Zealand Government $6 million;
• did not identify how the $10 million figure was arrived at (a figure that has since risen to $11.5 million);
• signalled the risk of a claim against the Government based only on the $20-$30 million figure that the Cabinet paper said was suggested by the Al Khalaf Group (there was no assessment by Ministry officials of the substance of that legal risk);
• did not include any analysis about whether there were any other potential obstacles to the signing or ratification of the free trade agreement, apart from the concerns of the Al Khalaf Group about the export of live sheep or the assertion by the Gulf Cooperation Council that this was the only obstacle to the free trade agreement; and
• identified that New Zealand exports could double to $3 billion in five years if a free trade agreement was signed with the Gulf Cooperation Council, without including any analysis.

Based on these significant shortcomings, I am concerned at the lack of robust analysis and the quality of information that was provided to Cabinet on this matter.

A contract for services

After Cabinet approval, a contract for services was signed between the Ministry and the Al Khalaf Group. According to the Ministry, the contract has achieved certain things, including that it has:

• addressed Sheikh Hmood's sense of grievance about New Zealand's policy change on exporting sheep for slaughter;
• facilitated the removal of the then Saudi Arabian Minister of Agriculture's opposition to the free trade agreement between New Zealand and the Gulf Cooperation Council; and
• resulted in New Zealand companies installing and demonstrating their products at the Agrihub.

I was surprised that it was decided to use a contract with a private individual's business interests to resolve a diplomatic issue between governments. It is difficult to reconcile the words of the contract with the unstated objectives, which included resolving a complex diplomatic issue and removing a perceived obstacle to the signing of the free trade agreement. The contract for services was a convenient mechanism by which the allocated $10 million, later $11.5 million, was put towards achieving those unstated objectives. It does not tell the full story.

Procurement process and contract management

As part of my inquiry, I looked at the procurement practices the Ministry used, as well as the management of the arrangements by the Ministry and NZTE. I found that the procurement processes complied with the relevant rules that government departments were required to follow at the time. I also found that both agencies have had an ongoing and active role in the management and performance of the contracts.

Exporting sheep for breeding

In 2014, the project plan for the Saudi Arabia Food Security Partnership was amended to include exporting breeding sheep to Saudi Arabia by air. Cabinet agreed to spend an additional $1.5 million to send sheep to the Um Alerrad farm as part of the Partnership. Shortly after the 900 ewes arrived, NZTE was made aware of significant losses of lambs born at the farm – about 75% of lambs died.

New Zealand consultants were sent, with the agreement of the Al Khalaf Group, to help determine what had happened. Reports show that the losses were caused by a variety of factors, including vaccination timing, housing conditions, handling, and weather events. The New Zealand consultants provided recommendations, and lambing at the farm was improved in 2015.

Results achieved

When we published this report, the Saudi Arabia Food Security Partnership was an ongoing arrangement, and about $8.7 million of the agreed maximum of $11.5 million had been spent.

Cabinet sought to achieve several objectives when it agreed to enter into the contract for services. Many of the benefits of the Saudi Arabia Food Security Partnership depend on the quality of the relationship between New Zealand, Saudi Arabia, and Sheikh Hmood.

There is evidence that there has been an improvement in New Zealand's relationship with the Al Khalaf Group and the Saudi Arabian Government. However, the free trade agreement with the Gulf Cooperation Council remains unsigned, although in two recent joint statements (in April and September 2016) New Zealand and Saudi Arabia have indicated progress, including towards completion of the free trade agreement. At least one New Zealand company has gained ongoing business opportunities as a consequence of the Partnership.

However, many uncertainties remain about what will be achieved as a result of spending up to $11.5 million of public money. As I said earlier, I expect the Ministry and NZTE to assess and report on what the Saudi Arabia Food Security Partnership has achieved once all of the goods and services that are covered by the contract for services have been provided.

My final thoughts

I thank those organisations that assisted us with this inquiry and all those who we interviewed or sought information from during this inquiry.

I am aware that many people hold strong views on this matter. It is a complex story that has taken us more than a year to put together. My hope is that this report will help people understand the facts and appreciate the competing interests, and that it will provide an insight into the complexity of government decision-making.

There are undoubtedly things to be learned from the report, and everyone will take away their own lessons.

My final thought relates to transparency. New Zealand has worked hard to have an ethical and transparent public sector. Accusations of corruption and bribery should be of concern to us all. During my time as Auditor-General, I have seen an increase in these accusations.

None of my inquiries has upheld those accusations. However, complacency is not an option. We should all continue to demand transparency in how our public resources have been used and what was achieved with our money. Transparency is the best foil for corruption.

Lyn Provost
Controller and Auditor-General

26 October 2016