Part 2: Live sheep trade and events before the Saudi Arabia Food Security Partnership

Inquiry into the Saudi Arabia Food Security Partnership.

2.1
In this Part, we outline:

2.2
Setting out some relevant history is crucial to understanding how the decision to commit public money to the Partnership was made. It shows how government organisations and private individuals came to be involved and their roles in the Partnership, the competing issues involved, and why these arrangements were entered into. It highlights the complexities involved as well as some of the problems we identify in this report.

2.3
Figure 1 sets out a timeline of the main events in that history.

Figure 1
Timeline of main events

DateMain event
Before 1990 New Zealand exports live sheep, including to Saudi Arabia.
1990-99 Sheikh Hmood and other Saudi Arabian nationals export live sheep from New Zealand for slaughter in Saudi Arabia.

Sheikh Hmood invests in New Zealand, including in HAATT NZ Limited, Awassi (N.Z.) Limited, and Awassi NZ Land Holdings Limited.

New Zealand continues to export live sheep to Saudi Arabia.
2003 Cormo Express incident: significant numbers of sheep die on an Australian shipment of sheep to Saudi Arabia.
2003-07 New Zealand suspends exporting sheep for slaughter while politicians and officials discuss whether the trade will resume.

Officials communicate with Sheikh Hmood and his companies' representatives and suggest that the export of sheep for slaughter will resume. Sheikh Hmood and New Zealand farmers continue to invest.
2007 Negotiations begin for a free trade agreement with the Gulf Cooperation Council.

Customs Export Prohibition (Livestock for Slaughter) Order 2007 comes into force. It prohibits the export of livestock for slaughter except with the approval of the Director-General of the Ministry of Agriculture and Forestry.
2008 Discussions resume on a Memorandum of Understanding between New Zealand and Saudi Arabia on exporting sheep for slaughter.
2009 The then Minister of Agriculture, Hon David Carter, as he was then known, publicly speaks about it being unlikely that sheep will be exported to Saudi Arabia for slaughter.

Mr Carter and the then Saudi Arabian Minister of Agriculture discuss the Memorandum of Understanding. Negotiations stop after this discussion, and the diplomatic relationship between New Zealand and Saudi Arabia deteriorates.

The free trade agreement stalls. (We were told that it was complete in late 2009 and needed only legal verification.)
2010-12 Tensions are evident in the relationship between Saudi Arabia and New Zealand.

Sheikh Hmood makes public statements in Saudi Arabia about his grievance with New Zealand. The Minister of Foreign Affairs, Hon Murray McCully, and the then Minister of Trade, Hon Tim Groser, become involved.
2012 Mr McCully and Sheikh Hmood exchange letters formalising a relationship "in the spirit of a partnership" between the Ministry and the Al Khalaf Group.

Ministry documents report an improved relationship between New Zealand and Saudi Arabia.
2013 Cabinet notes a $4 million payment to Sheikh Hmood's Saudi Arabian company and agrees a $6 million payment to New Zealand companies to provide services to Sheikh Hmood's Saudi Arabian company.

The Ministry and HAATT Est sign a contract for services that includes a $4 million payment and $6 million of services provided by New Zealand companies.

A contract is signed between the Ministry and Brownrigg Agriculture Group Limited as the lead provider to deliver the $6 million in goods and services (the funding agreement).
2014 A protocol (the Arrangement) is signed between Saudi Arabia and New Zealand on exporting live sheep – for breeding, not for slaughter.

Cabinet approves an additional $1.5 million payment to be transferred from the Ministry to NZTE to airfreight sheep for breeding as part of the Partnership. Total value of the contract for services becomes $11.5 million.

The funding agreement with Brownrigg Agriculture Group Limited is transferred from the Ministry to NZTE.

900 pregnant ewes are airfreighted to Saudi Arabia.

There are a significant number of deaths in Saudi Arabia of lambs born from the exported ewes.
2015 NZTE sends consultants to Saudi Arabia to review death of lambs.

Delays continue in the only incomplete project (an abattoir).

The Ministry has spent $8.7 million of the agreed maximum of $11.5 million under the contract for services (leaving $2.8 million remaining). We understand that the delivery of goods and services will be overseen by NZTE under the funding agreement.
2016 The abattoir was expected to be completed by December 2016. We now understand that it may be delayed beyond that date.

Investment and the live sheep trade before the Cormo Express incident

2.4
Before 2003, New Zealand exported live sheep for many years. In 1990, the annual export number peaked at 1.5 million sheep. We were told that, in the early 1990s, Saudi Arabian investors who wanted to export live sheep from New Zealand to Saudi Arabia either procured exports or made direct investments in New Zealand with the intention of generating returns from exporting sheep for slaughter. Saudi Arabia was particularly interested in importing live sheep at the time of the Haj. Other countries, including Australia, had similar approaches.3

2.5
We understand that Sheikh Hmood is Saudi Arabia's largest international livestock trader. We were told that he owns and operates several Saudi Arabian and international companies that are involved with livestock (farming and export trade, and, in Saudi Arabia, the sale of chilled meat). New Zealand officials refer to Sheikh Hmood's group of companies as the Al Khalaf Group. His New Zealand investments were, in part, made by:

  • his acquisition of shares in Awassi (N.Z.) Limited;
  • his establishment of Awassi NZ Land Holdings Limited; and
  • his establishment of Hmood Al Ali Al Khalaf Trading and Transportation NZ Limited (HAATT NZ Limited) in 1995.

2.6
The Al Khalaf Group's New Zealand companies are represented by Sheikh Hmood and the Al Khalaf Group's Australasian representative, as well as informally by New Zealand companies that have had business relationships with the Al Khalaf Group.

2.7
The Minister of Foreign Affairs, Hon Murray McCully, the then Minister of Trade, Hon Tim Groser, and officials told us that Ministers of successive New Zealand Governments encouraged Sheikh Hmood to invest in New Zealand. No Ministers or officials were able to say with certainty what form that encouragement took.

2.8
Records show that Sheikh Hmood clearly communicated to Ministers and officials his intentions to export sheep for slaughter before and after he invested in New Zealand. During 2009 and 2010, Sheikh Hmood and his companies' representatives told the then Minister of Agriculture, Hon David Carter, as he was then known, the Ministry of Agriculture and Forestry (MAF), and the Ministry that Sheikh Hmood had received the following encouragement:

  • The New Zealand Minister of Agriculture at the time visited Saudi Arabia in 1991 and 1995 to negotiate new protocols for the live sheep trade. Documentation states that "On the back of these protocols HAATT NZ Limited was set up in 1995 …"
  • Sheikh Hmood and his companies' Australasian representative remembered receiving "strong support and encouragement from successive New Zealand Ministers of Agriculture".
  • Awassi New Zealand4 purchased and leased farms in the Hawke's Bay and in the South Island to export sheep for slaughter to Saudi Arabia. These acquisitions were approved by the New Zealand Overseas Investment Commission.5
  • A former Minister of Agriculture strongly encouraged Awassi New Zealand to purchase a feedlot (preconditioning) farm in the South Island.
  • Awassi (N.Z.) Limited assisted New Zealand by hosting Saudi Arabian dignitaries on several occasions.
  • Sheikh Hmood received support from MAF and the Government over the years. According to Sheikh Hmood and his companies' representatives, the Government engaged constructively with Awassi (N.Z.) Limited towards the "mutual goal of high value exports". This had included visits to Saudi Arabia, co-operation on protocols, and, in recent years, advice that there was nothing standing in the way of reinstating the trade in live sheep.

2.9
On behalf of the Al Khalaf Group, the Government was also told that Awassi (N.Z.) Limited had, at its own cost, conducted live sheep shipping trials under the direction of MAF. Sheikh Hmood's long-term plan for investing in New Zealand was to develop the Awassi breeding stock and to export Awassi cross-breeds. Interviewees told us that the Awassi breed has characteristics valued in the Middle East market, commands a premium price in that market, and is better able than other breeds to tolerate hot climates and ship transport conditions.

2.10
Awassi sheep had first been bred in New Zealand at Flock House, a MAF research facility, using frozen embryos that had been imported into New Zealand. Sheikh Hmood bought that existing Awassi stock (through the acquisition of the shares in the company, Awassi (N.Z.) Limited, which was incorporated on 2 July 1991). Sheikh Hmood became a director of Awassi (N.Z.) Limited on 14 June 1995.

2.11
We were told that Awassi (N.Z.) Limited invested in further genetics work on the breed and that local farmers were then contracted to produce cross-bred Awassi sheep to supply livestock for the "live sheep for slaughter export trade" to Saudi Arabia. Market conditions, including the low prices farmers received for sheep for slaughter in New Zealand and excess supply, were particularly conducive to the sheep for slaughter export trade in the 1990s.

2.12
We were told that the Al Khalaf Group's trading activities in the 1990s established a valuable network of business relationships in Hawke's Bay and that Sheikh Hmood gained a high level of respect from those he worked with. Included in that network was David Brownrigg from Brownrigg Agriculture Group Limited (BAGL), who in the 1990s and early 2000s worked with the Al Khalaf Group to provide livestock and ensure that shipping consignments were fully met. We were told that, from the early 2000s, fewer live sheep were exported than in preceding years because of commercial factors, including an increase in the price offered by the meat processing industry in New Zealand.

2.13
Exporting sheep for slaughter from New Zealand to Saudi Arabia had been regulated by a verbal arrangement (the Arrangement) between New Zealand and Saudi Arabia agreed in 1991. The Arrangement included agreement on 10 veterinary, transport, and arrival procedures. In 1995, the Arrangement was recorded in a MAF document. Each shipment required an Animal Health Certificate approved by the Director-General of MAF.

2.14
In September 2003, a shipping consignment from Australia of about 60,000 sheep aboard the Cormo Express6 was rejected at a Saudi Arabian port, purportedly for sanitary reasons. We were told that the inability to offload the sheep caused the shipment to be stranded at sea for 92 days until an alternative market and port to offload the sheep was confirmed. The resultant mortality rate and general concern about animal welfare led Australia to stop exporting sheep for slaughter. New Zealand also suspended the trade until animal welfare concerns were addressed.

2.15
Australia resumed the trade under a memorandum of understanding with the Saudi Arabian Government. We were told that the primary purpose of this memorandum of understanding was to ensure that any further shipments were promptly disembarked into quarantine facilities in Saudi Arabia. That memorandum was signed in 2005.

Suspension of the export of sheep for slaughter, and animal welfare considerations, from 2004

2.16
During 2004, there were negotiations between the New Zealand and Saudi Arabia Governments towards a bilateral Arrangement. This Arrangement was later superseded and then referred to as a Memorandum of Understanding.

2.17
The Memorandum of Understanding sought "to establish clear veterinary, transport, quarantine and arrival for processing principles in order to ensure the welfare of livestock and allow trade (particularly in live sheep) to resume following suspension at the time of the Cormo Express incident". The negotiations were conducted between New Zealand (through MAF and Biosecurity New Zealand) and Saudi Arabia (through Saudi Arabia's Ministry of Agriculture).

2.18
While meetings and discussions between the two countries about the Memorandum of Understanding were under way, MAF and Biosecurity New Zealand officials started a general policy review of the export of livestock for slaughter in August 2006. It appears that there were no shipments of live sheep during the 2004-07 negotiation period.

2.19
MAF officials confirmed to representatives of the Al Khalaf Group that negotiations on the Memorandum of Understanding were progressing, and Sheikh Hmood's company considered that it had "previously received assurance from the New Zealand authorities that there was nothing standing in the way of finalising a Government to Government [Memorandum of Understanding] enabling trade to continue".

2.20
However, there was uncertainty about the status of the Memorandum of Understanding between New Zealand and Saudi Arabia. Biosecurity New Zealand and Ministry officials recognised in a paper to the then Ministers of Agriculture and Trade that "New Zealand risks being perceived as not negotiating in good faith if it continues to negotiate a bilateral [Memorandum of Understanding] with Saudi Arabia whilst simultaneously undertaking a [policy] review with the potential to change the conditions under which any trade may subsequently occur …".

2.21
Given indications that a Memorandum of Understanding would be signed, Sheikh Hmood, through his company Awassi (N.Z.) Limited, contracted BAGL to arrange breeding contracts with local farmers to supply cross-bred Awassi sheep. A flock of cross-bred Awassi was intended to be bred in 2007 to be ready for export in 2008.

2.22
It appears that MAF was made aware in 2007 of a potential application to export live sheep in 2008. MAF's review was finalised and provided to the Cabinet External Relations and Defence Committee in October 2007.

The 2007 Customs Export Prohibition Order

2.23
A Customs Export Prohibition Order (CEPO) is a regulatory instrument enacted under the Customs and Excise Act 1996. It prohibits the export of specified goods but enables exemptions to be granted to permit the export of those goods on a case-by-case basis.7

2.24
In October 2007, the Cabinet External Relations and Defence Committee (with Hon Jim Anderton as Minister of Agriculture) was presented with a paper asking for a decision in principle to impose legal restrictions on the sheep for slaughter trade by enacting a CEPO. The paper included the results of the review of the export of live sheep for slaughter and the risks associated with various policy options.

2.25
We were told that there was considerable pressure from external stakeholders to restrict the export of live sheep for slaughter. The paper recommended consulting with exporters and industry groups before imposing a restriction. A decision in principle was made after the recommendation, and consultation with stakeholders took place. Mr Anderton announced the implementation of the CEPO on 18 December 2007.

2.26
In making the decision to impose a CEPO, the Cabinet External Relations and Defence Committee considered three options for the trade in exporting livestock for slaughter:

  • a complete ban on the trade;
  • restricted trade under a CEPO with exemptions where the risks could be acceptably managed (referred to as a "prohibition with exemptions"); or
  • a full resumption of the trade.

2.27
The CEPO was brought into effect, and the usual 28-day rule was waived.8 The CEPO was intended to be a temporary measure, but it has been renewed twice since 2007 (by a 2010 Order and a 2013 Order9). The CEPO is still in place, awaiting regulations under recent amendments to the Animal Welfare Act 1999.10 The current CEPO (2013 Order) is automatically revoked on 20 December 2016 if it is not renewed or extended.11

2.28
An official told us that, when the CEPO was implemented in 2007, MAF was genuine in its approach to allow trade to resume where animal welfare requirements were met. The Director-General would make the case-by-case assessment and would have to take agreed factors into account when considering an application under the CEPO.

New Zealand's relationship with the Kingdom of Saudi Arabia from 2007 to 2009

2.29
In 2007 and 2008, food security concerns heightened in Saudi Arabia because of world food shortages and a spike in global prices. This resulted in Saudi Arabia developing food security programmes, including "King Abdullah's Initiative for Saudi Agricultural Investment Abroad: A Way of Enhancing Saudi Food Security", which had the objectives of:

  • maintaining food security for Saudi Arabia;
  • enhancing international food security; and
  • encouraging Saudi Arabian investors to use their resource and experiences abroad.

2.30
We understand that Saudi Arabia's interest in importing livestock was also to meet high demand from Muslim pilgrims during the Haj.

2.31
New Zealand official records show that the then Saudi Arabian Minister of Agriculture expressed disappointment about the CEPO because of a lack of prior consultation, variance from Australian policy, and ill-informed value judgements.

2.32
The then Saudi Arabian Minister of Agriculture also expressed disappointment because the proposed guidelines included a consideration of extraterritorial requirements. That is, when considering applications for exemption under the CEPO, the Director-General of MAF could take into account extraterritorial factors such as requiring that the slaughter of livestock exported from New Zealand would take place in commercial slaughterhouses and that inspectors nominated by MAF would carry out a pre-shipment audit of slaughter facilities in the importing country.

2.33
In this context, negotiations for a Memorandum of Understanding resumed in January 2008. In July 2008, a new version of the Memorandum of Understanding included the requirement that animals be slaughtered in commercial slaughterhouses.

2.34
A briefing paper was provided to the newly appointed Minister of Agriculture, Mr Carter, on 7 January 2009. Officials conveyed in the briefing paper that Saudi Arabia had verbally indicated that it wished to proceed with the Memorandum of Understanding and that any changes were likely to be minor. The briefing paper asked Mr Carter to approve the continuation of negotiations.

2.35
From March to May 2009, domestic and international animal welfare groups lobbied the Government to ban the trade in live sheep for slaughter, expressing animal welfare concerns and opposing any resumption of shipments. This lobbying included 5750 letters and emails received by the Prime Minister's office between 2008 and 2009 (and an additional 4551 "campaign" emails and letters).

2.36
The Ministry and MAF considered the competing issues involved in exporting live sheep, including the relationship with Saudi Arabia, animal welfare concerns, and the legality of a ban on the export of livestock for slaughter. In May 2009, the Ministry advised MAF to continue negotiations on the Memorandum of Understanding (and retain the animal welfare and monitoring requirements).

2.37
Negotiations on the Memorandum of Understanding proceeded at a slow pace. In August 2009, Mr Carter made public statements that he did not think Saudi Arabia would be able to meet the standards he would require for the transportation and treatment of sheep exported for slaughter.

2.38
The Al Khalaf Group and the Saudi Arabian Government were surprised and disappointed at what they perceived as a change in the Government's position on the export of sheep for slaughter. They considered that this change had not been communicated directly to them previously. Mr Carter told us that the Director-General of MAF had made him, as the Minister of Agriculture, aware of the Director-General's independent statutory decision-making authority under the CEPO.

2.39
On 17 November 2009, Mr Carter met with the then Saudi Arabian Minister of Agriculture in Rome during a Food and Agriculture Organisation of the United Nations World Summit on Food Security. Mr Carter outlined the conditions about animal welfare in the Memorandum of Understanding for live exports with Saudi Arabia. The then Saudi Arabian Minister of Agriculture responded that Saudi Arabia could not accept those conditions and that, accordingly, there could be no resumption of the live sheep trade. Ministry officials' records show that the diplomatic relationship between New Zealand and Saudi Arabia deteriorated after this meeting.

2.40
In 2009, Sheikh Hmood and his companies' representatives also confirmed that they were not amenable to New Zealand's imposition in the Memorandum of Understanding of what they considered unacceptable extraterritorial requirements.

Discussions with the Al Khalaf Group from 2009 to 2010

2.41
Correspondence and discussions between the New Zealand Government, the Saudi Arabian Government, and Sheikh Hmood's companies' representatives in late 2009 and early 2010 communicated that Sheikh Hmood, his companies' representatives, and the then Saudi Arabian Minister of Agriculture felt a deep sense of injustice. Their view was that, on the one hand, they were 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.

2.42
No applications were made by the Al Khalaf Group under the CEPO to export sheep for slaughter.12 BAGL told us that this was because the requirement that there be a Memorandum of Understanding between New Zealand and Saudi Arabia was crucial to a successful application under the CEPO. (The agreed factors to be taken into account by the Director-General when considering an application under the CEPO include that a bilateral agreement may need to be in place.)

2.43
We were told that the cross-bred Awassi that had been readied for export were in due course slaughtered in New Zealand, resulting in losses for the Al Khalaf Group. The cross-breeding supply contracts continued for three years before the lack of progress with the Memorandum of Understanding meant that the contracts were terminated. We were told that farmers with Awassi cross-breeds received a premium price over local New Zealand slaughter prices. However, the farmers' returns were described as well below what they might have received had they been able to export live sheep.

New Zealand's relationship with the Kingdom of Saudi Arabia in 2010

2.44
Documentation shows that Mr McCully and Mr Groser were advised of the outcome of Mr Carter's meeting in November 2009 (see paragraph ) and increased their level of involvement with this issue amid concerns for the diplomatic and trade relationship with Saudi Arabia.

2.45
A visit to the Gulf by the Prime Minister was planned for April 2010. Originally, the trip was for the signing of the free trade agreement between New Zealand and the Gulf Cooperation Council. Mr Groser told us that, because of unforeseen and urgent events, the Prime Minister was unable to join the trip. Mr Groser said that he represented the New Zealand Government and performed the official duties arranged by the Saudi Arabian Government for the Prime Minister, as well as the specific trade activities scheduled as part of his responsibilities.

2.46
Mr Groser met with the then Saudi Arabian Minister of Agriculture in Riyadh, Saudi Arabia, on 24 April 2010. At this meeting, Mr Groser was made aware of the tensions in the relationship between the two countries, and the obstacle to the signing of the free trade agreement, as a result of New Zealand's position on exporting live sheep to Saudi Arabia.

2.47
It was explained that the Saudi Arabian experience with New Zealand during the negotiation of a Memorandum of Understanding to resume the livestock trade led to suspicions that New Zealand had not been sincere in its negotiations. Further, for Saudi Arabia, this was a "commercial" issue because Saudi Arabian businesses had invested millions in New Zealand on the assumption that New Zealand was negotiating in good faith to resume exporting sheep for slaughter.

2.48
The next day, on 25 April 2010, Mr Groser attended, with other New Zealand delegates, a meeting of the Riyadh Chamber of Commerce and Industry. At this meeting, Sheikh Hmood publicly presented his case and tabled a letter, a translated version of which was provided to Mr Groser. This letter described how, in Sheikh Hmood's view, New Zealand's position on exporting livestock for slaughter changed without warning despite assurances from the New Zealand Government that the Memorandum of Understanding between Saudi Arabia and New Zealand was ready to be signed.

2.49
At this point, relations with Saudi Arabia deteriorated. Ministry officials told us that border transit problems began for existing trade and that Ministry officials could not access senior Saudi Arabian officials. Even though market conditions differed, Saudi Arabia made comparisons with how Australia had managed to resume the trade. MAF officials considered that New Zealand's trading profile and exposure to other markets, especially in Europe, differed from Australia's. They thought that New Zealand's reputation as a country with high animal welfare standards was critical to New Zealand's valuable export trade to Europe.

The free trade agreement and exporting live sheep

2.50
Negotiations between New Zealand and the Gulf Cooperation Council for a free trade agreement began in 2007. Negotiations were concluded in October 2009, with the final text subject to legal verification by each participating state. The New Zealand Government expected the free trade agreement to be signed in April 2010.

2.51
By April 2010, New Zealand records of diplomatic meetings indicated that Saudi Arabia regarded New Zealand's policy on exporting sheep for slaughter and its perception that New Zealand had not conducted the Memorandum of Understanding negotiations in good faith as grounds for holding up the legal verification of the free trade agreement.

2.52
Ministry officials believed that the exporting 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. Ministry officials' concerns included the potential effects on existing trade with Saudi Arabia. (We were told that, when negotiations on the free trade agreement began, trade in goods with Saudi Arabia was worth about $800 million, with significant projected growth.) Based on meetings between Ministers and senior officials, Ministry and MAF officials believed that Saudi Arabia had put a block on the agreement.

2.53
Mr McCully and Mr Groser proceeded on the basis that they needed to find an alternative option to resolve the bilateral problems with Saudi Arabia.

New Zealand's World Trade Organisation obligations and trading in live sheep

2.54
New Zealand has international trade obligations as a member of the World Trade Organisation (WTO) and under the General Agreement on Tariffs and Trade (GATT). Subject to certain exemptions, GATT obliges us to not maintain non-tariff barriers to trade.

2.55
Documentation states that Ministry officials were concerned about the risk that the CEPO could have been seen to be operating as a ban. A ban would have been a non-tariff barrier. Ministry officials advised on the possibility of WTO action because of the CEPO. Mr Groser, in particular, considered that how the CEPO had been interpreted and the relationship problems with Saudi Arabia needed to be resolved to mitigate the risk of action against New Zealand in the WTO.

The development of a "commercial solution"

2.56
After the April 2010 meeting (see paragraph 2.56), Ministry officials considered that a "commercial solution" to the blockage of the free trade agreement was needed.

2.57
In June 2010, Ministry officials sought guidance from Mr McCully and Mr Groser on the possible options for unblocking progress with the free trade agreement. sThe options were:

  • accepting the CEPO as a prohibition on exporting sheep for slaughter, with resultant risks to New Zealand's trading and diplomatic relationships; or
  • concluding the Memorandum of Understanding to allow one annual shipment of sheep for slaughter under appropriate animal welfare conditions, including strict conditions about transport and that slaughter of imported New Zealand livestock would occur in commercial slaughterhouses.

2.58
In August 2010, Mr McCully, Mr Groser, and Mr Carter met with two industry experts to discuss the export of livestock to Saudi Arabia and resulting issues. A record of that meeting indicates that the three Ministers "agreed that the negotiation (on the [Memorandum of Understanding]) had been dilatory and likely perceived by Saudi Arabia as not conducted in good faith or even as duplicitous".

2.59
Mr McCully and Mr Groser also agreed that New Zealand's wider trading interests needed to be protected. Mr McCully and Mr Groser discussed the potential for one shipment after 2011 of only Awassi sheep. This would be under World Organisation for Animal Health (OIE) standards for live shipments. Mr McCully intended to take an oral item to Cabinet on this issue, but it did not proceed to Cabinet.

2.60
In documentation, Ministry officials referred interchangeably to a commercial solution, a compensation-based solution, and compensation. Officials did not think a compensation-based solution would deal with the breadth of the Government's bilateral relationship problems.

2.61
Our interviews and documents highlighted that Ministers and officials instead sought a solution that would address the following:

  • the Gulf Cooperation Council relationship – in particular, the free trade agreement;
  • the current and future bilateral relationship with Saudi Arabia;
  • the effect of exporting sheep for slaughter on other trading relationships;
  • animal welfare concerns;
  • international and domestic legal obligations;
  • the concerns of domestic and offshore investors in New Zealand; and
  • Saudi Arabia's food security concerns.

2.62
We understand that Mr McCully and officials were aware that the Al Khalaf Group was in contact with a private stakeholder. That private stakeholder proposed what it viewed to be solutions to diplomatic and commercial issues between Saudi Arabia and New Zealand, including offshore livestock breeding in a third country (that is, not New Zealand or Saudi Arabia). We are also aware that Mr McCully and officials met with this private stakeholder.

2.63
Officials advised the Prime Minister, Mr McCully, Mr Groser, and Mr Carter that a "compensation-based approach holds no promise of unlocking the Saudi reservations to the [free trade agreement] and in fact there remains a risk of rupture in the bilateral relationship which could spread to other [Gulf Cooperation Council] states".

2.64
Our evidence also shows that:

  • Officials understood that the overriding priority for Sheikh Hmood and his companies' representatives was "a resumption of the trade, rather than compensation".
  • Compensation could have carried its own considerable risks and difficulties, especially in relation to the overriding goal of unblocking the free trade agreement negotiations and resetting the relationship with the relevant parties.

2.65
In a 2012 discussion, Mr McCully clarified with Sheikh Hmood and his companies' representative that any exemption under the CEPO was granted by the Director-General of MAF – independently of the Minister of Agriculture or other Ministers. Mr McCully expressed his opinion that the bar for approvals was set very high. Further, it would be difficult to get an exemption to export sheep for slaughter and there was a high chance any application would be turned down.

2.66
However, Mr McCully also stressed that it was "the investors' right to lodge an application and have it subject to judicial review". Although evidence indicates that the Al Khalaf Group did take legal advice, our interviews indicate that Sheikh Hmood wished to maintain a long-term trading relationship with New Zealand and considered legal action to be a last option. We are not aware of any application, or challenge to a decision made, under the CEPO.

Our comments on these matters

2.67
The history set out in this Part is crucial to understanding how the Partnership arose and why particular arrangements were put in place. There were factors that combined to create a complex picture of competing economic, trade, and animal welfare interests.

2.68
In our view, between 2003 and 2009, there were mixed messages from Ministers and officials in New Zealand to Ministers and businessmen in Saudi Arabia. This was a major contributor to subsequent complications in New Zealand's relationship with Saudi Arabia. The contradictory and mixed messages were:

  • putting in place the CEPO, which prohibited the export of livestock for slaughter except on a case-by-case basis;
  • continuing negotiations on a Memorandum of Understanding to regulate the export of live sheep; but
  • at the same time, Mr Carter's public statements that the trade was unlikely to resume.

2.69
We are not aware of any applications made or exemptions granted under the CEPO.

2.70
The CEPO clearly states that the Director-General makes decisions about granting exemptions, and Mr Carter knew this. However, it might not have been clear to the public or stakeholders between 2009 and 2012 that the Minister of Agriculture's opinion did not determine the matter.

2.71
Officials in MAF and Biosecurity New Zealand appear to have been negotiating the Memorandum of Understanding with Saudi Arabia under direction from Ministers and senior officials that exports of live sheep were likely to resume once agreement was reached. The reality was that a decision to resume was far from certain. We do not have evidence that successive Ministers of Agriculture clearly communicated this uncertainty to officials.

3: See Parliament of Australia website (www.aph.gov.au), Parliamentary Business, The export of live sheep from Australia. We understand that Western Australian farmers depend more than New Zealand farmers on the sheep for slaughter trade because without it there would be transport and processing shortfalls.

4: Records are not clear. This could refer to Awassi (N.Z.) Limited, Awassi NZ Land Holdings Limited, or HAATT NZ Limited.

5: The Commission was later replaced by the New Zealand Overseas Investment Office.

6: The Al Khalaf Group had a connection with the Cormo Express, but we do not consider that the Al Khalaf Group's involvement with that shipment is relevant to this inquiry.

7: Customs Export Prohibition (Livestock for Slaughter) Order 2007, clause 4.

8: According to the Cabinet Manual, "It is a requirement of Cabinet that legislative instruments must not come into force until at least 28 days after they have been notified in the New Zealand Gazette. The 28-day rule reflects the principle that the law should be publicly available and capable of being ascertained before it comes into force." (see Cabinet Manual 2008, paragraph 7.91.)

9: CEPO 2010 came into effect on 21 December 2010. CEPO 2013 came into effect on 20 December 2013.

10: Animal Welfare Amendment Act (No 2) 2015 (www.legislation.govt.nz). We were told by MPI that the CEPO will be revoked on 20 December 2016, and the Animal Welfare (Export of Livestock for Slaughter) Regulations 2016 will come into force on 21 December 2016.

11: Customs Export Prohibition (Livestock for Slaughter) Order 2013, clause 6.

12: No applications for exemptions have ever been made under the CEPO – see MPI's website, www.mpi.govt.nz/exporting/overview/general-requirements/live-sheep-and-cattle-exports/.