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The Powdergate probe

By Fiona Rotherham

Saturday 1st December 2001

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Fonterra has been rocked by scandal over illegal dairy exports involving Kiwi Co-operative Dairies and the NZ Dairy Group. Where does the buck stop? Fiona Rotherham investigates.

Fonterra chairman John Roadley and deputy Greg Gent broke the news to the company's 14,000 farmer shareholders in late September: Kiwi Co-operative Dairies (one of the three dairy companies that "mega-merged" to form the $12 billion Fonterra) was under investigation for illegally exporting $50.3 million worth of milk protein concentrates between 1999 and 2001. Dubbed "Powdergate" by the industry, the inquiry centres on whether instead of selling all export-destined product through the Dairy Board, as the law required, Kiwi Dairies executives deliberately sold 9000 tonnes of milk products to related company SPD, knowing it would be illegally exported.

Don't be fooled: Powdergate is not about canny business tactics where a few tonnes of downgraded product were slipped through the back door to bypass an outdated export regime and make a few (albeit million) extra bucks. Powdergate is about executives falsifying documents (they labelled the product, which ended up as far away as Italy and Mexico, as originating from Australia), setting up a web of companies to handle the illegal shipments and apparently lying to investigating Dairy Board officials.

By selling to SPD instead of through the Dairy Board, Kiwi made an extra $4 million profit. Moreover, because Kiwi cherry-picked high-value product to sell independently, the Dairy Board was left with less lucrative product, so farmers - paid through a pooling system - got less. Gent claims the profit Kiwi made from the deals would have made only a very small difference to its own payout. After the New Zealand Dairy Group asked for confirmation in September of the net impact, a joint KPMG/Deloitte report found the Powdergate deals had made no material difference on either company's valuations.

Equally importantly, at stake is the international reputation of our biggest company and many of its top executives.

Now the story has broken, several key questions remain. First, when Roadley (then-Dairy Board chairman) first found out there was a problem in April, why did he not tell Fonterra shareholders until late September, when the controversial dairy ownership battles were nearly over? Roadley says he waited until initial investigations showed there was something worth telling shareholders about.

Second, did Kiwi Dairies chief executive Craig Norgate (appointed Fonterra's first chief executive in July) know what was going on? Even if he didn't, is he fit for the Fonterra top job? As district councillor Lachie Cameron asked at a meeting of 40 South Auckland suppliers in November, "If Norgate and Gent didn't know about it, why not? If they did, why didn't it come out earlier?" Roadley says that before ratifying Norgate as chief executive he received categoric assurances from the Kiwi Dairies boss that he had no prior knowledge of the exports. As to whether Norgate should have known what was happening, Fonterra says Norgate's job was to lead and manage the company, not sell milk powder.

Roadley implies the scandal would have made no difference to the appointment. Yet the 40 South Auckland suppliers unanimously passed a motion of no confidence in Gent and Norgate. When the news should have emerged the 36-year-old high-flyer was still battling fiercely against two Dairy Board executives for the top Fonterra job. Would he really have got the job in July if shareholders had known about the scandal sooner? And would other Kiwi and NZ Dairy Group executives, now senior figures in Fonterra, be in their jobs?

Roadley hasn't gone much further than confirming details as the media reveals them, won't be interviewed and has apparently told other executives not to talk. He assures shareholders the inquiry is being conducted without "fear or favour". However, Roadley is also conducting a witch-hunt on who leaked commercially sensitive information to the media.

So, what actually happened? It is well known in the industry that the Dairy Board turned a blind eye to dairy manufacturers bending the rules by directly exporting small amounts of low-quality product. But it seems Kiwi - or someone associated with it - got greedy. The deals under investigation are for millions of dollars' worth of high-value milk protein concentrates. This season's SPD deal alone was for 6000 tonnes, worth $39.5 million. A further 2871 tonnes, worth $10.8 million, were sold the previous year. Kiwi also sold smaller amounts in previous seasons that aren't being scrutinised. And the product sold to SPD wasn't just surplus to requirements. The Dairy Board had overseas customers that wanted to buy the products but Kiwi had already sold out.

It was the Dairy Board that eventually raised the alarm in April. Investigation of Kiwi-made rennet casein (discovered by its Italian partner) and other milk protein concentrates in plain paper bags (stumbled across in Mexico) found the products had been sourced from Kiwi's wholly owned Australian subsidiary Australasian Dairy Ingredients and its other 75%-owned subisidary Cottee Dairy Products (see flow chart page 19).

Ross Cottee, a shareholder/director of Cottee Dairy Products, has ceased any day-to-day management role but "because of the potential for legal action" Roadley will not elaborate further. Two other Kiwi executives have been suspended on full pay. Fonterra won't name them, but international publication the Dairy Industry Newsletter said they are Cottee directors: Food Solutions boss Paul Marra and Malcolm McCowan, general manager of Kiwi Milk Products.

It is hard to see how senior Kiwi executives could not know the products were going to be exported - 9000 tonnes is too much for the domestic market to absorb. The questions, then, are who at Kiwi authorised the deals, how far up the ladder are they, and whether the deals were for personal or company gain. Roadley appointed KPMG (auditor to the Dairy Board and Kiwi) to investigate Kiwi's dealings with SPD and to find out if there had been any other instances of illegal exporting from other dairy companies. The NZ Dairy Group then advised KPMG that its subsidiary New Zealand Dairy Ingredients had also illegally exported 794 tonnes of dairy product to Biocorp this season. This transaction subsequently became part of the inquiry.

The results of the latest inquiry - by KPMG, Deloitte and private investigator John Hughes - into who was behind the transactions are due out as Unlimited hits the streets. Still ongoing is the Ministry of Agriculture and Fisheries' investigation into alleged illegal labelling and certification. MAF has asked for help from the Australian Quarantine and Inspection Service to investigate the potentially fraudulent rebranding of the Kiwi dairy products as Australian. MAF briefed New Zealand's Serious Fraud Office early on in its inquiries because of the extent of the alleged offences.

Industry deregulation and Fonterra's formation means there can be no reoccurence of the wrongdoing. But the ramifications of Powdergate may not go away as soon as top executives would like. The scandal Fonterra has desperately tried to downplay has taken the gloss off powerful new alliances with two of Europe's huge food groups, Nestlé and Arla Foods, and also with two Mexican dairy companies. These deals have boosted Fonterra's world ranking from ninth-largest dairy company to fourth.

Fonterra's farmer shareholders, while divided in their view of how serious the scandal is, want a transparent investigation, concluded quickly so Fonterra's international reputation is not sullied. Critically, they want heads to roll if necessary. Dairy Farmers of New Zealand chairman Charlie Pedersen says the important point is that this type of corporate behaviour is not carried over or condoned in the new co-op. Fonterra has said it will act quickly to construct new policy structures if there has been any failure in governance. But the board has not yet said whether full details of the investigation will be released.

"The end result I seek from this investigation is the ability to stand before any shareholder, any official from any government in the world, any joint venture partner, any employee and any customer, and say that Fonterra, its board and its executives practise high standards of integrity," said Roadley in his latest newsletter to shareholders. They and the world will be watching.


Curiouser and curiouser

Just before the scandal broke, some odd behaviour went down at Promak Technology, the vehicle through which Kiwi held Cottee. Company Office records show that Promak is owned by Food Solutions Group 2000 and two other companies, Xenex Resources and York Concepts, owned by Tauranga-based William Geoffrey Winchester. In an unexplained move, Promak issued 21,600 new shares (26.5% of the total issued capital) for $3 million on August 21.

The directors' certificate relating to the share issue is signed by three Promak directors and Kiwi employees Paul Marra, Malcolm McCowan and Bernie Radford. There are also three other non-director signatories: William Ross Cottee (the Cottee Dairy Products director, relieved of his day-to-day duties), his wife Vivienne Sandra Cottee (general manager at Cottee) and Terence Walter (Cottee chief executive and SPD owner).

Who bought the shares and who pocketed the $3 million, if it was ever paid? Fonterra (who now owns the companies) refused to comment on this share deal.


Fiona Rotherham
fiona@unlimited.net.nz



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