Foreign Minister Murray McCully cleared of corruption over Saudi deal

Wednesday 2nd November 2016

The auditor-general has cleared Foreign Minister Murray McCully of corruption over the $11.5 million Saudi Arabia Food Security Partnership but found "significant shortcomings" in the paper put to Cabinet to support the deal.

"I share many New Zealanders' concerns about the arrangements," auditor-general Lyn Provost said in her report, released this afternoon. "The contract's benefits to New Zealand were unclear in the cabinet paper, the business case and its subsequent implementation."

The partnership was established as a consequence of New Zealand's decision to ban the export of live sheep in 2003, a ban that has since been extended. In the decade prior to this, Sheikh Hmood Al Ali Al Khalaf had invested in farms and agriculture here through his business, the Al Khalaf group, in order to meet the demand for sheep in Saudi Arabia, particularly during the Haj festival.

New Zealand negotiated a free trade agreement with the Gulf States between 2007 and 2009, with the final text agreed late in 2009. The auditor-general's report makes clear that early in 2010 diplomatic relations between Wellington and Saudi Arabia were strained, with a trade minister told that NZ's position on the export of live sheep was an obstacle to the signing of the free trade agreement. Sheikh Hmood also felt a "deep sense of injustice," Provost said.

In 2010, officials started looking at options on how to deal with this, and in 2012 McCully and officials discussed a food security partnership with the Al Khalaf group. In these negotiations, Al Khalaf indicated it was looking for compensation in the region of $24 million.

The outcome of the negotiations was a contract for services under which the government would buy $4 million of services from the Al Khalaf group and a further $6 million of goods and services from NZ companies to gift to the Al Khalaf group that would be installed and demonstrated at the Um Alerrad Farm in Saudi. These proposals were put to Cabinet in February 2013.

The auditor-general said Cabinet was told it needed to settle a dispute with both the Saudi Arabian government as well as a Saudi investor, that the Al Khalaf group had been given legal advice that it could seek damages of $20 million-to-$30 million from the government and that the Gulf Cooperation Council had asserted this was the only obstacle to signing the free trade deal.

Cabinet members were also told NZ exports to the region could double to $3 billion in the next five years if a free trade deal was signed.

Provost said there were "significant shortcomings" in the Cabinet paper and she was "concerned at the lack of robust analysis and the quality of information that was provided to Cabinet on this matter."

"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 ... 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," Provost said.

In 2014, shortly after 900 ewes arrived at the Um Alerrad Farm, New Zealand Trade & Enterprise was told that about 75 percent of lambs born at the farm had died. These losses were caused by vaccination timing, housing conditions, handling and weather events.

McCully welcomed the report.

"The government was faced with a situation that carried diplomatic, economic and legal risk," he said in a statement. "It required a creative solution that demonstrated good faith and a willingness to move forward to the Saudi party."

ACT leader David Seymour said the report detailed "wasteful deal-making" that could have been avoided if "it wasn't for the on-again-off-again regulatory uncertainty over live sheep exports."

So far $8.5 million of the $11.5 million assigned to the partnership has been spent. The free trade agreement reached in 2009 remains unsigned, seven years later, although McCully indicated progress had been reached in September this year.

BusinessDesk.co.nz

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