Editorial: Saudi sheep deal leaves bitter taste

Foreign Minister Murray McCully and his officials proposed instead a "partnership" under which the Government would pay the Al Khalaf Group $4 million. Photo / Mark Mitchell

Not many New Zealanders may be satisfied by the Auditor General's report into the propriety of the Government's gift of a sheep-breeding establishment to a breeder in Saudi Arabia. The Auditor General, Lyn Provost, has found no evidence of corruption in the sense that nobody in the Government stood to gain personally and the arrangement did not amount to bribery or a facilitation payment.

The second part of that finding is somewhat surprising for the deal was to settle a grievance that stood in the way of progress toward a trade agreement with Gulf states.

Provost has found instead the payments to the Saudi enterprise, totalling $11.5 million, were "made as part of a legally valid contract for services". Yet she goes on to say, "It is not clear on what basis the amounts paid to the Saudi Arabian investor's company under the contract were arrived at. A key objective of the Saudi Arabian Food Security Partnership was to remove a perceived obstacle to a free-trade agreement with the Gulf Co-operation Council."

Her report confirms that Saudi investors in live sheep shipments from New Zealand had a grievance over the ban imposed since 2003 when a large number of sheep died in a shipment from Australia to Saudi Arabia. From 2004 to 2007 New Zealand and Saudi officials discussed veterinary protocols and other procedures under which shipments might resume. The Arabian Al Khalaf Group continued to invest in sheep farming in New Zealand, having been led to believe the ban would be lifted.

However in 2009, when the present Government had come to power, the Minister of Agriculture said shipments were unlikely to resume because he did not think Saudi Arabia could meet the animal welfare standards he would require.

By then the free-trade negotiations had been completed and the text of an agreement finalised, but by early 2010 it was clear the Saudis felt a sense of injustice over their investment and the diplomatic relationship was strained.

During subsequent discussions the Al Khalaf Group indicated it considered it should be paid compensation of $24 million, the Auditor General reports. Foreign Minister Murray McCully and his officials proposed instead a "partnership" under which the Government would pay the Al Khalaf Group $4 million and provide a further $6 million in goods and services from New Zealand, to set up an "agrihub" for New Zealand agricultural companies entering Middle East markets.

The Cabinet approved the deal early in 2013 having been told it could otherwise face a compensation claim of $20 million to $30 million. Provost has found significant shortcomings in the Cabinet's advice, which gave no proper assessment of the legal risk. She says at least one company has gained business opportunities from the partnership but a free-trade agreement has not been concluded.

She finds a lack of "transparency" rather than bribery and corruption. Certainly it was not simply a "palm-greasing" exercise for a trade deal. Potential legal liabilities were part of the motive. But it leaves an unpleasant taste. It is not the way New Zealand has been known to do business.