McCully handed over $10m for Saudi farm to incentivise FTA

Foreign Affairs Minister Murray McCully committed over $10 million to a New Zealand demonstration farm in Saudi Arabia in order to address a “significant impediment in the bilateral relationship” between the two countries.

Aside from almost $1.5 million to fly 900 ewes to Saudi Arabia, a $4 million “platform” has been allocated to “Saudi investors” partly to have “access to key customer, business and influencer networks in Saudi Arabia.”

A further $6 million has been spent on an “NZTE-managed package of goods and services” from New Zealand, the procurement and selection of which required the input of its “Saudi partners.”

Released under the Official Information Act, the cabinet paper “Saudi Arabia Food Security Partnership” was written by Mr McCully in February 2013. In it, he claims that the $4 million “platform” – the contents of which remain unclear – will be a strong incentive for the “Saudi partners” to promote the ratification of a FTA between New Zealand and the Gulf states.

The paper says the strained relationship between the two countries pose a “major threat to New Zealand’s trade and economic interests,” and that for the previous three years the Ministry of Foreign Affairs had been working to resolve the “major relationship issue.”

The issues originated, Mr McCully says, when Saudi interests – encouraged by New Zealand ministers – began buying New Zealand farms in the mid-1990s in order to build businesses supplying live sheep for slaughter to the Saudi market.

Driven by animal welfare concerns, the Clark government moratorium on live sheep exports in 2003, cemented by the Customs Export Prohibition Order in 2007, created “tensions” that became a “serious irritant to the Saudi relationship” by the time John Key became prime minister in late 2008, the paper says.

Although he is not mentioned anywhere in the cabinet paper, those “Saudi interests” appear to be those of Hamood Al Ali Khalaf of the Al Khalaf Group, on whose property the demonstration farm is being built in Saudi Arabia.

New Zealand taxpayers are effectively gifting Mr Al Khalaf $10 million for the demonstration farm, as the Al Khalaf Group will retain full management and ownership of it, including the ewes and their progeny.

It is understood Mr Al Khalaf’s grievances over his inability to export his sheep from New Zealand to Saudi Arabia for live slaughter helped create the “major relationship issue” between the two countries that has contributed to the stalling of the FTA.

Deloitte format discussion into ‘business case’

According to the Companies Office, Mr Al Khalaf has a 90% shareholding in Hastings-registered Awassi NZ Land Holdings. Awassi has farmed in Hawke's Bay since the early 1990s and has nearly a quarter (that is, 24.9%) stake in Hastings-registered Brownrigg Agriculture Group.

In January, Awassi NZ Land Holdings acquired its 24.9% share in Brownrigg Agriculture - a stakeholding managing director David Brownrigg has said was disclosed to the government at the time.

Mr Al Khalaf appears to have helped select Brownrigg to develop the consortium of 30 companies to deliver goods and services for the farm – despite Brownrigg ostensibly following a public request for proposal via GETS [Government Electronic Tenders Service].

New Zealand Trade & Entreprise (NZTE) has claimed that Brownrigg was chosen to develop the farm due to its “experience in the Middle East”: NBR has revealed that it has, in fact, no direct experience of working there.

According to Mr McCully in his February 2013 paper, Deloitte was also engaged to “format discussions” between officials from Ministry for Foreign Affairs and Trade (MFAT), Ministry for Primary Industries (MPI), NZTE and those “Saudi interests” into a business case.

The cabinet paper also flies in the face of NZTE’s previous explanation for the motive of the demonstration farm being “an opportunity whereby we could showcase the good parts of the agricultural ecosystem of New Zealand, and involve New Zealand companies to go global.”

In the cabinet paper, Mr McCully also confirmed that the $10 million cost will be met from “MFAT baseline savings reallocated to NZ Inc leveraging initiatives.”

It was understood that the cost to date of the demonstration farm was about $7.5 million. The cabinet paper shows that at least $10 million will be spent on the farm, while TVNZ is reporting that Mr McCully says he "thinks the total budget is about $11.5 million over three years."

$20-30 million lawsuit

The paper also reveals the “Saudi partners would have preferred to enter discussion on the basis of seeking compensation for commercial loss as a result of government decisions (and indicated that they had received legal advice suggesting they pursue a claim for between $20-30 million).”

However, the government made it clear that it would not be a “party to such discussions,” the cabinet paper says.

It is understood that Mr Khalaf had also hired leading law firm Chen Palmer to prepare the potential lawsuit against the government.

According to the cabinet paper, it appears that Mr Al Khalaf – described by Labour MP Stuart Nash as “an extremely wealthy Saudi businessman” – had a direct input into the procurement and selection of Brownrigg for the $6 million “consortium” of agricultural goods and services.

However, this admission may prove to have significant legal ramifications for the government, partly owing to the fact that Mr Khalaf has financial interests in Brownrigg.

MFAT has claimed it “controlled” the public GETS request for proposal.

According to an MFAT spokesman, “The expression of interest was lodged on August 19,  2013 on the GETS website. It closed on September 12, 2013.  The title of the document was “Expression of Interest:  Seeking an agribusiness consortium lead and proposed partners.” 

Having initially refused to release the names of the other tenderers to NBR, MFAT revised that decision last week.

“There were three bids for the lead provider contract following the EOI.  They were Brownrigg, PGG Wrightson and Lincoln University. The short list consisted of Brownrigg and PGG Wrightson.  

“The evaluation panel members included representatives of MFAT, NZTE and an independent adviser, assisted by ministry legal and audit staff. The independent adviser was former Landcorp chief executive Chris Kelly,” the MFAT spokesman said.

It remains to be seen whether either PGG Wrightson or Lincoln University will take legal action over the transparency of the tender process, in light of the fact that Mr McCully’s cabinet paper from earlier in 2013 recommended that “the procurement and selection of New Zealand firms and services to participate in the food security partnership will be done with agreement of the Saudi partners, MFAT and NZTE.”

Feedlot farming for NZ 'demonstration' farm

NZTE has previously defended the New Zealand taxpayer investment into the demonstration farm, in part, because “New Zealand’s background and long history of agriculture production and technology has the potential to contribute to the food security solutions of the GCC [Gulf Cooperation Council] countries.

“… Currently farming systems in the Gulf are mainly based on informal techniques. This agri-hub will introduce formal techniques of farming systems, as well as highlighting New Zealand’s expertise and products,” a NZTE spokeswoman told NBR earlier this month.

However, it now transpires that although, “New Zealand’s background and long history of agriculture production and technology” has always centred on pastoral farming, the sheep at the New Zealand “demonstration farm” are being farmed exclusively in feedlots: a practice unknown to sheep farming in New Zealand.

“The sheep are farmed in a feedlot environment, with plenty of space and fed high-quality feed. Two thirds of the pens are covered, with constant access to water,” a NZTE spokeswoman confirmed on Monday.

In addition, the spokesperson confirmed that all of the 900 pregnant ewes airfreighted last year from New Zealand to the farm at an expense of $1.45 million arrived safely and in good health.

However, as of late April only “800 of the 900 breeding ewes were still on the farm and in a mating/breeding programme. NZTE understands that some ewes have been gifted, and others have died,” the spokeswoman says.

On May 4 NBR reported that following Prime Minister John Key’s visit to Saudi Arabia late last month, New Zealand is likely to be the next cab off the rank in securing a long-awaited free-trade agreement with the Gulf Cooperation Council.