Part 7: The contract for services and its management

Inquiry into the Saudi Arabia Food Security Partnership.

7.1
The terms of reference for our inquiry included considering the contract management practices that the Ministry and NZTE used to purchase goods and services for the Partnership. In this Part, we explain how the services were delivered and the management of the arrangements.

7.2
As mentioned in Part 4, the Ministry entered into a contract for services, dated February 2013, with Sheikh Hmood's company in Saudi Arabia, HAATT Est. The contract for services included an end date of 30 June 2014.

Implementation of Phase 1 of the contract for services

7.3
In accordance with, and in performance of, the contract for services with HAATT Est, an agri-business delegation, referred to by the Ministry and NZTE as a "study tour" or "technical visit", was planned for April 2013 in co-ordination with "the KSA interests" (which we have interpreted as the Al Khalaf Group).

7.4
In a Ministry file note of 15 March 2013 to Mr McCully, officials explained that this was a "first step in the partnership" and that the trip was to study the red-meat supply chain. Officials also noted that the purpose of this visit was "to provide a basis for a business plan for identifying the NZ technologies and expertise that can become part of the hub".

7.5
Ministry, NZTE, and MPI officials were on the study tour, as well as what is referred to as "their [the Al Khalaf Group's] NZ based advisors", and several private sector technical experts from the red meat, farming, and animal breeding industries who had experience in the Middle East (including a consultant from Deloitte engaged to prepare an indicative business plan – see paragraph ).

7.6
It was also noted that:

Given the limited number of New Zealand firms with the combination of technological expertise and GCC/Middle East market experience, it is inevitable that the potential technologies and services selected in the first instance might come from the firms/individuals on the study tour. If there is a particular technology or service identified by the group that has more than one New Zealand provider, then a robust procurement process must be undertaken ...[The Ministry] has advised the Saudi interests that the advisors and firms that have been selected on the technical visit, and the organisations that they have selected, will still need to be selected on merit for the next phase of implementing the Business Plan.

7.7
Further, the March 2013 file note said:

The partnership will contribute airfares and accommodation and appropriate related costs for private sector participants on the study tour, but will not meet fees or salaries. Other costs will be met directly by Saudi interests (such as Dammam accommodation, and ground handling in [Saudi Arabia]), or by [the Ministry] and / or NZTE (such as the costs of staff travel as part of the technical visit, and the per diems of the selected firms – particularly where the scope of work commissioned by the NZ firms is broader than the parameters of the partnership i.e. commenting on and investigating broader agri-export / food security related opportunities in [Saudi Arabia] and the [Gulf Cooperation Council] region).

7.8
The study tour took place on 9-16 April 2013. New Zealand's embassy in Riyadh explained in a report dated 23 May 2013 (the Embassy report), that the group:

  • visited "one of the massive and state-of-the-art Al Marai dairy farms (amongst the biggest in the world, 17,000 cows)", which provided the group with the opportunity to understand the "potential for world-class agricultural production in [Saudi Arabia]";
  • visited Al Khalaf Group's (HAATT Est) slaughter, tanning, feedlot, and retail butchery operations in Dammam and Jeddah, including livestock disembarkation facilities;
  • met with the Gulf Cooperation Council's Agricultural Department, the Saudi Arabian Ministry of Agriculture, and the Saudi Arabian Livestock Investment Company; and
  • attended a formal dinner to provide the delegation with an opportunity to meet senior Saudi Arabian agri-business and agricultural and food security leaders.

7.9
The Embassy report described the outcome of the study tour:

The early focus will be on establishing a breeding programme from the NZ end to export livestock into a "best in class" breeding and production programme in Saudi Arabia that would showcase NZ expertise and enable the Al Khalaf Group to demonstrate the use of superior systems and innovations through the value-chain …. The project would also assist both Al Khalaf Group and New Zealand Inc. to demonstrate commitment to assisting with food security issues in [Saudi Arabia].

7.10
The activities listed in paragraph 7.8 can be interpreted as evidence of HAATT Est's provision of some of the services described in Phase 1 of the contract for services.

7.11
Furthermore, HAATT Est's representative wrote on behalf of the company to the Ministry about the services HAATT Est considered it had provided in keeping with the contract for services. These were:

  • significant investment into the development of the facilities and infrastructure of the Al Khalaf Group in Saudi Arabia and New Zealand, including $80 million spent to develop the Agrihub project to help showcase New Zealand's best agricultural practice and the purchase of a ship to facilitate the commercial export of sheep and cattle for breeding;
  • hosting the technology of 16 New Zealand companies at the Agrihub;
  • facilitating interest from around the Gulf in the Agrihub;
  • lobbying and direct representation of New Zealand's interests in Saudi Arabia, including hosting members of the Saudi Arabian Government on several occasions at the Agrihub;
  • direct lobbying of Saudi Arabian Ministers and officials leading to the signing of the export for breeding protocols between New Zealand and Saudi Arabia (in 2014), helping with the removal of an issue affecting the progress of the free trade agreement with the Gulf Cooperation Council and continued lobbying in support of progress, and securing the visit of the Saudi Arabian Minister of Agriculture to New Zealand for the Joint Ministerial Commission in April 2014;
  • hosting numerous New Zealand delegations to the Agrihub, including the Minister of Primary Industries, NZTE and Ministry officials, and additional visits by businesses and officials; and
  • meeting with Gulf Cooperation Council secretariat officials and the investment company Kingdom Holdings with New Zealand delegate officials to discuss the Agrihub and how to assist with the Gulf's food security aspirations.

Implementation of Phase 2 of the contract for services

The funding agreement and project specifications

7.12
The mechanism for delivery of the $6 million of services was to be a funding agreement signed initially between the Ministry and the selected lead provider of those services (that is, the lead provider would distribute the funds and lead the subcontracting and management of the delivery of those services).

7.13
In August 2013, the Ministry partnered with NZTE to select a lead provider for delivery of Phase 2 (the $6 million) of the contract for services. BAGL was selected after the procurement process described in Part 6.

7.14
We noted in paragraph 6.35 that Awassi NZ Land Holdings Limited is now a registered shareholder of a 24.9% share in BAGL. We were told that Awassi NZ Land Holdings Limited expressed an interest in investing in BAGL in mid-2014. A loan was a precursor to its acquisition of shares, and we were told that the loan took place after the funding agreement was signed. We were told that the Ministry and NZTE were notified of the loan and potential for it to be converted to a maximum 24.9% shareholding before the acquisition of shares in January 2015. BAGL considered that the loan, and later acquisition of a shareholding interest of Awassi NZ Land Holdings Limited in BAGL, would not affect its delivery or management of the funding agreement.

7.15
BAGL signed the funding agreement with the Ministry in December 2013. The funding agreement included planned milestones and the intended structure of the project, including six components:

  • design and implement the export breeding ewe supply chain;
  • design and implement Awassi sheep breeding and genetics research programmes;
  • design and implement an appropriate forages and nutrition research programme;
  • identify appropriate new technologies available in New Zealand and integrate these into the Saudi Arabian partner's operations;
  • design, provide specialist equipment for, and support the construction and commissioning of a state-of-the-art abattoir and feedlot on the Saudi Arabian partner's land; and
  • develop people capability on site to ensure that programmes and facilities implemented are sustained.

7.16
The first task under the funding agreement included travelling to Saudi Arabia to see the Sheikh Hmood's Um Alerrad farm, scoping of each of the above listed components, and presenting a costed plan for agreement from the Governance Group. This first task – described as Milestone 1 – had a $500,000 budget (see >Figure 3 in Part 5).

The Governance Group

7.17
The funding agreement established a Governance Group.

7.18
At its first meeting on 28 January 2014, the Governance Group agreed that its role was primarily to provide oversight, including agreeing milestones, overseeing their delivery, and managing any minor variations to milestones and activities. The Governance Group was told that NZTE had appointed a project manager. The project manager started in the role in January 2014.

7.19
The Governance Group included one Ministry representative, one NZTE representative, and two BAGL directors. The NZTE project manager attended Governance Group meetings, and there was intermittent attendance by a representative of the Al Khalaf Group in person or by telephone.

7.20
The Governance Group could vary the budget for each milestone without amending the funding agreement as long as the maximum cost of the milestone was not varied by more than 15% and the total maximum funding amount ($7.5 million) was not exceeded.40 BAGL regularly submitted project plans and individual update reports on each milestone to the Governance Group.

7.21
Governance Group minutes were sent to the Treasury periodically from January 2014. The Treasury has also been briefed periodically on the progress with the Agrihub by the NZTE project manager and the Ministry representative on the Governance Group.

Responsibilities and progress

7.22
As noted in Part 4, the funding agreement with BAGL was transferred from the Ministry to NZTE, in March 2014. The NZTE Board approved this decision in February 2014. The transfer was to be subject to the condition that the Ministry would remain responsible for relationship management at a diplomatic level. The funding agreement was varied at the same time as the transfer to NZTE to include the additional milestone of the airfreight shipment of pregnant ewes (see paragraph 7.38).

7.23
Figure 3 in Part 5 shows budgeted and actual spending against the milestone headings. Appendix 2 gives more details about the specific component projects.

7.24
BAGL produced a project plan that recommended a costed work plan to the Governance Group in March 2014. The project plan also described key changes to the original programme.

7.25
The main areas of the project were described to the NZTE Board as:

  • New Zealand Breeding Ewes
  • Awassi Genetics and Breeding (Saudi Arabia)
  • Forage and Nutrition
  • New Technologies (on farm)
  • Abattoir and Feedlot Design.

7.26
The variation to include the airfreight milestone is discussed above. A major change to the project plan has been the extension of the time frame. Several projects were delivered beyond the original end date of the contract for services of June 2014 and BAGL's project plan's stated 2015 deadline. Although we do not have evidence of explicit agreement, we infer from their actions that the parties have mutually agreed to extend the contract for services beyond June 2014.

7.27
As at June 2016, the abattoir project was the only incomplete project. The significant delay in finishing the abattoir project has prevented the completion of Phase 2 of the contract for services. Saudi Arabia has regulatory measures that apply to commercial abattoirs. Interviewees told us, and a report from NZTE records, that the Al Khalaf Group needed to obtain the necessary regulatory approval to build and operate an abattoir in Saudi Arabia.

7.28
We understand that Sheikh Hmood intends to gift the abattoir to Saudi Arabia and lease it back to the Al Khalaf Group to operate. The Governance Group was asked to commission the abattoir equipment to be built and shipped. However, it refused to do so without the Al Khalaf Group having first obtained the applicable Saudi Arabian regulatory approvals. This has caused spending to be delayed and transferred from the 2014/15 Budget to the 2015/16 Budget and, more recently, to the 2016/17 Budget (see Part 5).

Delivering live sheep to Saudi Arabia

Urgency for exporting live sheep

7.29
In December 2013, a Ministry and NZTE official travelled to the Middle East and reviewed progress on the demonstration farm. The issue of needing to fly breeding ewes to Saudi Arabia was raised because of timing issues with transporting breeding stock. Mr McCully was told that the then Saudi Arabian Minister of Agriculture's objection to the free trade agreement would not be removed until the first shipment of sheep arrived in Saudi Arabia. It appears that this urgency to deliver sheep to Saudi Arabia was caused by a lack of confidence in New Zealand's commitment to export any live animals.

7.30
A NZTE official's report from this December 2013 trip described significant infrastructure development since his last visit on (what he refers to as) Sheikh Hmood's "NZ Demonstration Farm". The official describes the planning and construction of new pivots and bores, a significant feed mill for processing crops onsite, a breeding farm with capacity for 160,000 sheep, a fattening feedlot for 40,000 lambs, and an abattoir.

7.31
The official's summary of the key risks at this time included:

  • shipment time for sending breeding ewes to Saudi Arabia; and
  • the expectation among Saudi Arabians for further shipments, balanced against Cabinet's requirement that "no industry is formed" as a result of the project.41

7.32
A meeting between a Ministry representative, an NZTE representative, two BAGL representatives, and one other was held on 19 December 2013. At this meeting, the Ministry official advised that:

… a shipment by sea in 2014 was no longer supported in Wellington, and following a discussion around the reaction expected from the Saudi partner to a delay in shipment, and the alternative of freighting a smaller number of animals by air, it was agreed to proceed if possible with an airfreight of approx. 1,000 in-lamb ewes in 2014, with a commitment to be made by the relevant officials that a sea freight shipment of approximately 50,000 animals would be approved in advance for 2015 shipment.

7.33
On 31 January 2014, a submission by the Secretary of Foreign Affairs and Trade to the Minister of Foreign Affairs (with recommended referral to the Ministers of Trade, Primary Industries, and Economic Development) included the requests that he:

  • note that the Saudi Arabian Minister of Agriculture has reiterated his condition that New Zealand sheep arrive in Saudi Arabia before he lifts his objection to the conclusion of the free trade agreement between New Zealand and the Gulf Cooperation Council;
  • agree that sheep be airfreighted in an attempt to remove this objection earlier than November 2015; and
  • agree that $1.5 million should be allocated to allow this to occur and that funds should be transferred from the Ministry to NZTE for this purpose.

7.34
The submission explained the timing issues with sending sheep by sea freight, stating that "a shipment this year would not be in the interest of a longer term breeding programme and food-security partnership between New Zealand and Saudi Arabia". The Cabinet External Relations and Defence Committee was updated on the Partnership in a paper during February 2014. We discussed Cabinet's approval of the $1.5 million transfer in paragraph 5.18.

Protocols for exporting sheep for breeding

7.35
In Part 2, we talked about the need for a Memorandum of Understanding or Arrangement (the agreed protocols) to govern the export of sheep for slaughter from New Zealand to Saudi Arabia. Agreed protocols were still sought for exporting sheep for breeding (as opposed to slaughter).

7.36
The New Zealand and Saudi Arabian Governments signed the Arrangement on 4 March 2014. The Arrangement includes provisions on the health, welfare, and safety of livestock for export (and import in Saudi Arabia). This is available on MPI's website, www.mpi.govt.nz.

7.37
The then Saudi Arabian Minister of Agriculture notified New Zealand that his objection to the free trade agreement with New Zealand was removed after the Arrangement was signed.

The airfreight of pregnant ewes and events after lambing

7.38
As noted above, there was growing urgency for sheep to arrive in Saudi Arabia. Animal welfare "technical standards" governing the transport of pregnant animals, seasonal factors affecting animal welfare on arrival, and shipping logistics then made airfreight the preferred solution. Funding for the airfreight decision is explained in Part 5.

7.39
The airfreight milestone (agreed by the Governance Group), and the $1.5 million spent on this project, included buying and mating ewes and hoggets and cross-breeding with Awassi rams to produce appropriate breeding stock for export to Saudi Arabia, selecting 900 healthy and pregnant ewes to be exported (some purchased from Awassi (N.Z.) Limited ), and transporting the sheep by air. The 900 sheep were gifted to Sheikh Hmood when they arrived in Saudi Arabia and formed part of New Zealand's contribution to the Partnership.

7.40
An issue arose about the ability to import sheep by airfreight into Saudi Arabia. Sheikh Hmood urgently worked with the Saudi Arabian Government to resolve this issue. The airfreight went ahead on 11 October 2014. The 900 pregnant ewes arrived in Saudi Arabia on 12 October 2014, with correspondence from BAGL noting that the ewes "travelled well and arrived in good order".

7.41
On 30 November 2014, the Al Khalaf Group told BAGL that there was concern about poor survival rates for the lambs. In December 2014, BAGL was informed of a high lambing mortality rate (about 75%) at the Agrihub. The Governance Group arranged to send the NZTE project manager, together with an experienced New Zealand veterinarian and stockman, to the Agrihub to evaluate the situation. The Project Report records that:

… [at Sheikh Hmood's] request an expert team from NZ visited the NZ Saudi Agri Hub demonstration farm to: assist him to better understand the reasons for a high mortality rate amongst new born lambs; provide support, guidance and suggestions on best practice sheep management.

7.42
As well as the above report written by the NZTE project manager, the veterinarian wrote a report that was shared with the Governance Group. The high mortality was reported as being the result of a combination of yarding, feedlot management, and stock-handling issues; problems with vaccination rates; and unseasonal and excessive rainfall (increasing sanitary problems). A range of improved farm management measures were identified and recommendations made. The Governance Group meeting minutes of 5 January 2015 said that the Group:

… acknowledged that the project team is privileged to be able to retain ongoing access to the animals at [the Agrihub] as it is very rare in the Saudi system that such visibility is allowed following the arrival of animals in the Kingdom. The Governance Group agreed that despite the fact that the sheep had been gifted to the Al Khalaf Group on arrival in [Saudi Arabia], it was important to continue providing support to the Al Khalaf Group with the objective of a successful future lambing.

7.43
The NZTE project manager's report says that:

This report is outside the scope of Brownrigg Agriculture's contract obligations as lead provider… and is being undertaken in good faith on behalf of NZ Inc. to continue and foster ongoing relationships with [HAATT Est], the Kingdom of Saudi Arabia, and to ensure the success of the overall NZ Saudi Agri Hub project.

7.44
A later report of the NZTE project manager explains that:

The team identified that the poor lamb survival had resulted from a combination of environmental and management factors. Solutions and a calendar of operations were recommended which [Sheikh Hmood] actioned immediately. The ewes have now been re-mated and the breeding program is back on track. While this outcome of the trial shipment was not expected it has provided very valuable findings from which to move forward.

7.45
The main lessons described in the report are:

  • export breeding ewes from New Zealand at an earlier stage in pregnancy or mate them after arriving at the Agrihub;
  • have feedlot facilities, design, and layout more suitable for sheep breeding operations;
  • not keep in-lamb ewes in yard and vaccinate them multiple times immediately before lambing;
  • have appropriate ewe density for each pen, particularly during the lambing period;
  • work to a planned sheep management calendar of operations for a ewe breeding programme; and
  • ensure that staff operational structure, knowledge, and capabilities are suited for breeding New Zealand sheep.

Our comments on these matters

7.46
We have produced guidance on public entities' management of contracts. Our expectation is that public entities have "an ongoing and active role" in managing and monitoring the performance of the supplier to assess risk and value for money. Based on the evidence we have reviewed, the Ministry and NZTE have had an ongoing and active role in the management and performance of the contract for services and the funding agreement.

7.47
We expected to see better documentation of how the Governance Group was managing conflicts of interest – in particular, the ownership interest that the Al Khalaf Group had in BAGL from January 2015. We were told that BAGL informed the Ministry and NZTE about the potential conflict in writing in August 2014. However, we found no evidence of how the Governance Group actively turned its mind to managing it.

7.48
We comment on the Ministry and NZTE's management and monitoring value for money in Part 8.

40: The total maximum funding amount was $6 million under the original funding agreement and $7.5 million in March 2014, when the funding agreement was transferred to NZTE.

41: Our interpretation of the phrase "no industry is formed" is that no ongoing trade in exporting sheep for breeding would be established.