Response to our inquiry into the Saudi Arabia Food Security Partnership
3 February 2020
John Ryan
Controller and Auditor-General of New Zealand
Office of the Auditor-General
100 Molesworth Street
Thorndon
WELLINGTON 6011
Dear John
We are writing to you in response to a request made by the previous Auditor-General as part of the October 2016 release of the results of the inquiry into the Saudi Arabia Food Security Partnership (known as the Agrihub).
While concluding that arrangements were made as part of a legally valid contract for services, the Auditor-General raised a number of serious concerns. These included: "significant shortcomings in the paper put to Cabinet in support of the decision to enter into the Saudi Arabia Food Security Partnership"; a lack of clarity on "what basis the amounts paid to the Saudi Arabian investor's company under the contract were arrived at"; and a conclusion that "settlement of a grievance was provided under the guise of a contract for services".
The Auditor-General raised concerns about a "lack of transparency, both at the time of the decision and subsequently" and noted that "[t]he contract's benefits to New Zealand were unclear in the Cabinet paper, the business case, and its subsequent implementation".
In her report, the Auditor-General noted that "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 and New Zealand Trade and Enterprise to assess and report on what the Saudi Arabia Food Security Partnership has achieved once all of the $11.5 million... has been spent."
The Government's role in the contract came to an end on 31 December 2018, when the decision was made to withdraw from the Agrihub, leaving $805,895 unspent. The decision to withdraw was made after delays in the permitting process around the final element of the project - the construction of an abattoir which would include New Zealand built equipment.
In response to the Auditor-General's request, MFAT and NZTE outline below our assessment of what has been achieved, both politically and economically, as a result of the Agrihub, as well as the sobering lessons learned from the process.
As the Auditor-General's report notes, while there were some benefits flowing from the Agrihub, including an improved diplomatic relationship and business opportunities, MFAT and NZTE are of the view that in totality this did not represent a good return on investment.
The assessment of MFAT and NZTE is that the Partnership:
- Has not generated financial returns for New Zealand; and
- Is not a mechanism the agencies would use or recommend
- And although the partnership helped to resolve a diplomatic issue - the removal of the Saudi Minister of Agriculture's objection to the New Zealand-Gulf Cooperation Council Free Trade Agreement (the FTA), the FTA has not progressed for other reasons, including a dispute between other GCC members and Qatar.
MFAT and NZTE have fully accepted the report of the Auditor-General and have incorporated the lessons learnt from the findings into our business practices.
Assessment of Impact of NZ Food Security Partnership
In very specific terms, the investment by the New Zealand Government in the Agrihub addressed Sheikh Hamoud al Khalaf's grievance with New Zealand over the Customs Export Prohibition (Live Stock for Slaughter) Order 2007 (CEPO). As the Auditor-General concluded, "the Partnership removed one barrier to finalising the free trade agreement with the Gulf Cooperation Council".
However, this was not sufficient to secure Saudi agreement to finalising the FTA, and any progress made was overtaken by the internal GCC debate on all FTAs (which resulted in the GCC freezing all FTA negotiations), the Saudi Industrial & Logistics Review which included a reassessment of Saudi Arabia's FTA priorities, and the 2017 Qatar - GCC diplomatic crisis.
Impact on Saudi-New Zealand diplomatic Relations
The Auditor-General's report outlined that, by 2010, the diplomatic relationship between New Zealand and Saudi Arabia was strained, because of the ban on livestock shipments for slaughter. In diplomatic terms, the investment provided the basis for reconvening some of the political mechanisms which brought direction and purpose to the overall relationship, particularly though the Joint Ministerial Commission.
Economic Benefits
The economic benefits anticipated under the Agrihub did not materialise. NZTE sought to leverage the Agrihub through showcasing New Zealand firms involved in the project's implementation. NZTE participated in the Saudi Agriculture Show in 2015 and 2016 to help support the two companies involved in the Agrihub that were looking for commercial opportunities in Saudi Arabia. Further to this, NZTE's platform at the 2016 exhibition included two additional companies that were not involved in the commercial implementation of the Agrihub project.
After two years of participation, no distributor in Saudi Arabia sought to purchase the products available. As a result both companies withdrew their interest and their focus on the Saudi market, and did not participate in the 2017 Saudi Agriculture Show. Another company did enter a joint venture for food safety laboratory operations in Jeddah that was later cancelled by their board. One company remains active in the market. However, NZTE does not see either company's activities in the Saudi market as directly related to their involvement in the Agrihub.
Significant delays faced by the Al Khalaf Group in obtaining the relevant regulatory approvals for the assembly of the abattoir in Saudi Arabia, led to a decision by NZTE in 2018 to terminate the contract prior to its conclusion, leaving $805,895 unspent. This decision was made in consultation with the New Zealand company contracted to construct the abattoir equipment. We understand that this company maintains an ongoing commercial relationship with the Al Khalaf Group.
There has been an increase in interest in New Zealand agricultural expertise in Saudi Arabia in recent years. The spike in interest also coincides with concerted Saudi efforts to improve its agricultural performance under their Vision 2030 reform programme. There is no information which directly attributes this to the Agrihub.
Residual Risks
In our judgement, there has been little to no negative bilateral impact arising from the withdrawal. Representatives of the Saudi Government have characterised the decision as 'understandable,' given New Zealand has tried in good faith for several years to finish the project. The Saudi business partner has indicated his understanding of the situation leading to the withdrawal and has committed to utilising the investment where possible to assist New Zealand interests.
Lessons Learnt from the Arrangements
The Agrihub did not deliver the economic benefits to New Zealand that were claimed at the time. The Agrihub also resulted in significant adverse publicity, reported both in local and international media, with criticism both in terms of how and why the Agrihub was set up and also in terms of the initial lambing loss. This did not reflect well on the New Zealand government of the time. The Agrihub was also criticised by Transparency International1.
In terms of lessons learnt, MFAT and NZTE are of the view that this is not a mechanism that should be used again. It is clear that more rigorous consideration of the options should have been undertaken in advance of setting up of the Agrihub prior to committing to an investment of this scale. As noted above, MFAT and NZTE fully accept the Auditor-General's findings.
Conclusion
The advent of the Agrihub did not translate into progress as the FTA has now been stalled for a decade. The Agrihub also failed to generate the economic benefits that had been hoped for at the time. It is MFAT and NZTE's assessment then that at the conclusion of the process, the $11.5 million Saudi Arabia Food Partnership Agreement did not provide value for money - similar arrangements should not be recommended or utilised again.
Yours sincerely
Chris Seed
Secretary of Foreign Affairs and Trade
Peter Chrisp
Chief Executive, New Zealand Trade and Enterprise
1: Transparency Times: July 2016.