Part 4: First steps in implementing Cabinet's decision

Inquiry into the Saudi Arabia Food Security Partnership.

In this Part, we discuss the signing of the contract for services and the different agencies involved in implementing that contract.

Signing the contract for services

As mentioned in paragraph 3.24, an exchange of letters took place between Mr McCully and Sheikh Hmood in November 2012.

Mr McCully's letter explained that the first component was the payment of a $4 million "capital contribution" to "recognise the Al Khalaf Group's [including HAATT Est] investment in the Awassi sheep breed to-date … and the expertise and customer networks that it will bring to the partnership". The second component was described as:

… a NZ$6 million contribution from the New Zealand Government to invest in the partnership, in particular in investing in research and development for the purpose of producing and exporting Awassi and New Zealand livestock for breeding and enhancing the supply of fresh meat to the Saudi market while promoting New Zealand red-meat technology and capability both in New Zealand and Saudi Arabia.

It was the arrangements detailed in these letters that were referred to in the Cabinet paper described in Part 3.

In Part 3, we explain that:

  • Ministry officials had acted urgently to prepare a contract for services based on the November 2012 exchange of letters between Mr McCully and Sheikh Hmood.
  • Ministry legal advisers were not asked for input into the Cabinet paper.
  • We saw no evidence of internal or external legal advice being sought on the extent of the risk of a claim for compensation from the Al Khalaf Group against the Government.

After Cabinet's decision, the Ministry moved to implement it by entering into a contract for services (dated February 2013) that reflected the exchange of letters with HAATT Est, which officials referred to as part of the Al Khalaf Group. HAATT Est is an "integrated livestock business comprising meat retailing, processing, feedlots, importation and transportation of live animals, and farming".

The Ministry of Business, Innovation and Employment has a set of standard conditions of contract for routine government purchases. These conditions are called Government Model Contracts. Government Model Contracts are aimed at low-value, low-risk common goods and services. The contract for services, which the Ministry drafted with the assistance of external legal representation, was based on these standard contracts. We were told that it was the Ministry's practice to use the Government Model Contract templates for procurement.

More detail was included in the contract for services than was contained in the letters. Phase 1 of the services being purchased for $4 million was described as:

  • access to the output of the research and development, capital investment and market-analysis of HAATT Est, particularly related to the Awassi breed of sheep;
  • facilitation of access to HAATT's key customer, business and influencer networks in Saudi Arabia; and
  • assistance with preparation of a New Zealand agri-business delegation to Saudi Arabia to study the HAATT Est in-market supply-chain and provide recommendations regarding the potential New Zealand intellectual property and technologies that could be used to enhance and improve the existing animal welfare standards and red-meat productivity in Saudi Arabia.

Phase 2 of the services being purchased was described as being "in the spirit of a partnership between HAATT Est and [the Ministry]" to "assist in the development and delivery of Saudi Arabia's food security programme". The services that the Ministry was purchasing in Phase 2 of the contract for services were listed as:

  • participation of key personnel and/or associates of HAATT Est in the New Zealand Agri-business study tour to Saudi Arabia in April 2013;
  • the development, in cooperation with [the Ministry], of a detailed business plan by the end of May 2013, and following the study tour in March, outlining the research and development and procurement of relevant technologies to be carried out, along with the timing of implementation. The development in the business plan, in cooperation with [the Ministry], of a project management and governance model to facilitate delivery of the objectives specified in Phase 2;
  • implementation of the business plan, in cooperation with the Buyer, between June 2013 and June 2014.

The Ministry paid $4 million to HAATT Est on 21 February 2013, before any of the services described were provided by HAATT Est.

The $6 million was later agreed by the parties to be the provision of New Zealand-sourced services26 to the demonstration farm in Saudi Arabia. Several services were to be performed by HAATT Est in return.

The contract for services achieved certain things.27 We have evidence that it:

  • purchased HAATT Est's (through Sheikh Hmood) representations of New Zealand's interests in Saudi Arabia;
  • 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;
  • purchased HAATT Est's breeding expertise and access to Awassi genetic stock;
  • purchased HAATT Est's assistance with hosting a study tour to Saudi Arabia by New Zealand companies;
  • improved the relationship so that Ministry and NZTE officials and New Zealand companies could, with permission, have access to the Agrihub (Sheikh Hmood's Um Alerrad farm); and
  • resulted in New Zealand companies installing and demonstrating their products at the Agrihub.

Importantly, neither the contract for services nor any later agreement achieved some things that might have been expected. It does not:

  • provide a formal legal settlement of the "long running dispute" with the Al Khalaf Group;
  • put in place clear and specific contractual obligations;
  • give the Ministry or New Zealand companies any formal legal rights to access the Agrihub (nor does it provide a mechanism for them to gain these); or
  • give the Ministry or New Zealand companies any formal legal rights to install or demonstrate New Zealand equipment at the Agrihub (nor does it provide a mechanism for them to gain these).

We discuss details of the management of the contract for services in Part 7.

Agencies involved in the contract for services

Various agencies were involved in the contract for services, including the Ministry, NZTE, the Treasury, and our Office.

Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise

The mechanism for delivery of the $6 million of goods and services, to which Cabinet agreed, was to be a funding agreement signed initially between the Ministry and the selected lead provider of those goods and services. That is, the lead provider would distribute the funds and lead the subcontracting and management of the delivery of those goods and services to Sheikh Hmood. It was envisaged that the funding agreement would be transferred from the Ministry to NZTE (referred to by agencies as a "novation" of the contract).

In March 2013, NZTE's agri-business official briefed the NZTE Board on the background and purpose of the Partnership. The paper to the Board explained:

It has been proposed that NZTE will manage the $6 [million] programme of work, as an extension of normal activity through Output Class Three. $500,000 of this project is allocated from current NZTE baseline, within the Agribusiness High Impact Programme.

The intended transfer would leave the Ministry responsible for relationship management at a diplomatic level. We understand that it was thought that the management of this particular work programme was a better fit with NZTE's core business and contract management capabilities. Beachheads is an example of both of these capabilities.28

The Treasury and the Office of the Auditor-General

In the decision on the February 2013 Cabinet paper, Cabinet directed the Ministry to work with the Treasury, the Office of the Auditor-General, and NZTE on "the execution and management of the contract".

The Treasury was contacted about the business case for the $6 million expenditure. The Treasury assessed an initial "blueprint" (see paragraphs 6.10 and 6.11) that Deloitte was asked to prepare and provide to Ministry officials. The Treasury assessed that the version officials provided to it was "very poor". The Treasury's documentation shows that it was mindful that the blueprint "specifics, tender requests etc" went beyond the Treasury's core business.

Documentation shows that the Treasury clarified its role with the execution and management of the contract given that Cabinet "agreed to the proposal, and has committed the funding" (see Part 5). The Treasury considered:

  • whether the $6 million was "not material enough to warrant close Treasury oversight";
  • whether the proposal "might turn into a significant Crown investment and/or Crown exposure to financial risk, which would be best protected by Treasury having a reasonably close oversight role from the outset"; and
  • from a legal perspective, the fact that the Treasury normally tried to ensure that the lead agency's lawyers handled the contract development unless there were Public Finance Act 1989 issues.

The Auditor-General is an independent Officer of Parliament. The Office's mandate is limited by the Public Audit Act 2001. After we were made aware that the Cabinet Minute had requested that the Ministry work with us, we clarified the limits of our role with the Ministry (on 20 August 2013). At that time, we decided it was within our mandate to independently assess whether the $4 million expenditure was within appropriation and to carry out a limited check on the quality of the business case for the $6 million planned expenditure.

In our August 2013 letter to the Ministry, we "concluded that the $4 million spend was within the scope of the appropriation" (see Part 5). Our views on the $6 million planned expenditure are set out in paragraphs 5.20 and 5.22. We noted inadequacies in the indicative business case and we expected a fuller explanation of the business proposals, risks, and benefits at the initial decision-making phase. The results of our work for this period were publicly released.

The Ministry briefed the Secretary of Foreign Affairs and Trade in response to the issues we raised about the business case. It was thought that there was "little value in elaborating the points raised by the [Office of the Auditor-General]" until the Ministry had more detail on what it would be procuring. The Secretary was also advised that the NZTE Board and the Treasury were consulted and were "comfortable with this approach, with NZTE reserving its decision to participate until it knew the nature of the deal".

We and the Treasury received a final business case in November 2013. On 3 December 2013, the Treasury communicated that it was generally comfortable with the final business case and discussed its possible involvement on the Governance Group to monitor the performance of the contract to deliver the $6 million goods and services (the funding agreement).

Ministry officials discussed with the Treasury the complexities of introducing the Treasury into the Governance Group because of relationship sensitivities between the parties. The Treasury and the Ministry agreed that the Treasury would receive regular reports and agendas relating to the Governance Group, be consulted on any reporting back to Ministers, and discuss issues as required with the Ministry. (We discuss the Treasury's later involvement in paragraph 7.21.)

On 10 December 2013, we wrote to the Ministry again. We provided additional comment to our 20 August letter, stating that:

  • The final business case sets out only where potential commercial benefit might lie (as opposed to what we expect from a business case, which is where commercial benefit will need to be realised).
  • The resolution of the relationship with Saudi Arabia and the Gulf Cooperation Council is mentioned in the business case. We noted the stated importance of this relationship in not only assisting progress with a free trade agreement but also for mitigating the risk to New Zealand's existing trade (as per the February 2013 Cabinet Paper).
  • We were told by Ministry officials that MPI criteria would be applied to the export of any sheep.
  • We also commented that the sustainability of the Agrihub would rely on the future investment by New Zealand agri-businesses and Saudi Arabian interests.
  • We clarified the limits of our work in the 10 December letter, stating that "our comments do not provide assurance of any nature and neither do they constitute an endorsement of government policy, which is outside of the Auditor-General's mandate".

Our comments on the contract for services

As outlined in Parts 2 and 3, a diplomatic issue had arisen that, in Ministers' minds, needed to be resolved. The contract for services, and the Partnership it formed, was seen as a commercial solution to that issue.

We were surprised that, in these circumstances, it was decided to use a contract as a means to resolve a diplomatic issue between governments. We have been told that contracts with private individuals and companies for diplomatic objectives are not unusual but it has raised questions in this case. Even if the commercial dispute between Sheikh Hmood and New Zealand needed to be addressed before that diplomatic issue could be resolved, the use of a contract was problematic.

The contract does not outline the different policy objectives or the complexities of this situation. Importantly, the contract does not specifically reflect the settlement component relating to the grievance.

In paragraphs 4.12 and 4.13, we set out what the contract for services achieved and, importantly, what it, nor any later agreement, did not achieve.

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 signature of the free trade agreement. These are not reflected in the contract, which focuses instead on the purchase of services from HAATT Est and a contribution to HAATT Est as an "investment in the partnership". 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.

Because the wider objectives are not articulated in the contract, it is not clear to the public what the contract ultimately achieves for the $10 million (and ultimately up to $11.5 million) being spent. As discussed in Part 8, it is not an easy task to identify or measure how those wider objectives have been met and how the amounts paid under the contract have contributed towards meeting those objectives. We also note that the payments were made upfront, before the services were provided by HAATT Est. This is not best practice for a contract for services.

Given it was decided to use a contract for services, we question that the contract for services was based on a Government Model Contract template. We do not consider the contract for services was low value or low risk. We expected a more comprehensive document that would have placed clearer and more specific obligations on both parties. This would have helped to clarify what was to be given and received, and would also have allowed a more transparent assessment of the benefits.

Negotiations on the free trade agreement with the Gulf Cooperation Council were concluded in 2009. Even though the contract for services was effective from 19 February 2013, the free trade agreement has still not been signed, 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.

26: The contract for services specifies services. However, we have referred to the supply of goods and services because this is our understanding of what was supplied.

27: These achievements are not set out explicitly in the contract for services, but we have evidence that they were part of its effect.

28: "The objective of the Beachheads programme is to use private sector executives to work with New Zealand exporting firms in order to accelerate their entry and growth in offshore markets … Some advisers may facilitate contact between firms and other individuals in their personal business networks. Good advisers are able to add value by drawing on their working knowledge of the market, are able to relate well to New Zealand firms, and have a clear understanding of their role." Ministry of Economic Development, Evaluation of New Zealand Trade and Enterprise's Beachheads Programme, Final Report, May 2012, page 3 paragraphs [3] and [4]. We were told that an example of offshore relationship management was that the Ministry pays Honorary Consuls to represent New Zealand's interests in certain circumstances.