A controversial deal that saw $11.5 million of taxpayer money spent on a Saudi farm was not corrupt but had "significant shortcomings", the Auditor-General has found.

Auditor-General Lyn Provost has released her report into the expenditure of public money on the Saudi Arabia Food Security Partnership.

"I found no evidence that the arrangements entered into...were corrupt," Provost states in the report.

"Public money was spent within the necessary financial approvals. That said, I share many New Zealanders' concerns about the arrangements."

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The Auditor-General's concerns included that the deal's benefits to New Zealand were unclear in the paper put to Cabinet by Foreign Minister Murray McCully.

Provost also said it was not clear how the Government had settled on the amounts to pay businessman Hmood Al Khalaf.

LISTEN: Political commentator Matthew Hooton speaks with Rachel Smalley about the Saudi sheep investigation

Another concern was while Cabinet was told by McCully that Al Khalaf could sue the Government for up to $30 million, "there was no assessment by Ministry officials on the substance of that legal risk".

"In my view, settlement of a grievance was provided under the guise of a contract for services," Provost concluded.

"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.

"When public funds are involved, transparency is paramount. The public had no visibility of the other outcomes that Cabinet was seeking to achieve by this arrangement.

"We have not seen a formal assessment of the benefits to New Zealand of proceeding with the partnership. We cannot now look back on this project and accurately place a value on what New Zealand gained for the money spent."

Today's report also reveals the high death rate of lambs at the farm was because of factors including vaccination timing, housing conditions, handling and weather.

In June last year when news of the lamb deaths emerged, Brownrigg Agriculture, the Hawkes Bay company that won the tender to oversee establishment of the farm, said illness and heavy rain caused the deaths.

Government reacts

McCully said he welcomed the finding that there was no evidence of bribery or corruption - charges that had been levelled by opposition parties.

"Defamatory statements were made...some quite cruel things were said, which I of course found deeply hurtful.

"I acknowledge that greater clarity around the rationale for the partnership could have been provided."

McCully said he would "take on the chin" the criticisms of the deal contained in the report.

"There weren't any non-problematic options available to us...I am paid to get the job done, I did the best I could in the circumstances. I will take the credit and the criticism.

"The Government was faced with a situation that carried diplomatic, economic and legal risk. It required a creative solution," he said, adding that the deal had "removed the blockage" in the way of the free trade deal.

Prime Minister John Key said he had "total confidence" in McCully, although he had not yet read the report.

"I'm totally comfortable that notwithstanding we inherited a difficult situation, that the Government acted in the way we should have, that the minister did and that we stand by the statements we made at the time," he told reporters.

'Legal is not the same thing as ethical'

Green Party co-leader James Shaw said the Foreign Minister should stand down.

"I think Murray McCully has to go. We cannot tolerate this level of incompetence.

"This cavalier attitude towards public funds and this lack of transparency from Government ministers."

Despite the Auditor-General's conclusion that no corruption took place, Shaw said "legal is not the same thing as ethical".

He said the report cites numerous instances of "rogue behaviour", incompetence, an absence of business cases, and no method of measuring effectiveness.

"At one point the Auditor-General said she was surprised to learn that a contract for services to a private individual's business was used to settle a diplomatic dispute between two countries.

"That is a highly unusual practice. I think it really brings New Zealand's reputation into disrepute and that's why I'm calling on the minister to be stood down."

Speaking during an urgent debate on the report, Labour MP David Parker said the farm deal was a "stain on the record of New Zealand".

"If we have now reached the point in New Zealand that the standard of conduct expected of ministers is so low that they have to be found to be guilty of a crime before they are forced to resign, that is a terrible state of affairs."

The inquiry

Provost announced the inquiry into the expenditure of public money on the Saudi Arabia Food Security Partnership in August last year.

She had received several requests, including from members of Parliament and in a petition from over 10,000 New Zealanders, to inquire into aspects of the deal.

Provost and her office spoke to McCully, former Trade Minister Tim Groser, Speaker and former Agriculture Minister David Carter, and consulted with the Serious Fraud Office.

About $11.5 million has been spent on sending New Zealand sheep and equipment to Al Khalaf's farm in Saudi Arabia.

That included $6 million spent on establishing the farm, including equipment and technology, and a $4 million payment to the Al Khalaf Group.

A key motivation for the Government for the deal was to help progress a free trade deal with the Gulf States.

Labour Party MP David Parker has been a strong critic of the deal. New Zealand Herald Photograph by Brett Phibbs.
Labour Party MP David Parker has been a strong critic of the deal. New Zealand Herald Photograph by Brett Phibbs.

Al Khalaf's unhappiness with New Zealand's ban on live sheep exports for slaughter has been previously cited by Foreign Minister Murray McCully as a reason why Saudi Arabia cooled on a trade agreement.

The 2003 ban, implemented by the Labour Government and extended by National, had cost them hundreds of millions of dollars, including investments in New Zealand based on the assumption the ban would be lifted.

Saudi unhappiness over how the ban had been handled posed "a major threat to New Zealand's trade and economic interests", McCully told Cabinet, and the farm could remove a "source of major aggravation".

The farm - entirely owned by the Al Khalaf Group - would also act as a demonstration base for New Zealand agribusiness, McCully, and remove the threat of legal action.

McCully said Al Khalaf could have sued for up to $30 million, and during questioning in Parliament blamed the previous Labour Government for angering him to that extent.

Opposition parties say there was never a realistic threat of legal action and it has been used by the Government as justification for the "corrupt" deal.

They have labelled the deal - particularly the $4 million payment to Al Khalaf - a bribe, with Labour leader Andrew Little calling for McCully to be sacked.

Al Khalaf's business partner has told media that the farm fit-out was done to "compensate" them for the ban on sheep exports.

McCully told Cabinet that the $4 million payment recognised the intellectual property of Al Khalaf, "the services and in-market networks he will contribute, as well as the settlement of the long-running dispute".

Lambs died because of housing conditions and handling

The spending was signed-off by Cabinet in February 2013 and 900 pregnant ewes were flown from New Zealand to Saudi Arabia in October 2014.

Shortly afterwards, about 75 per cent of lambs born at the farm died. Provost's reports reveals this was because of a variety of factors, including vaccination timing, housing conditions, handling and weather events.

In June last year when news of the lamb deaths emerged, Brownrigg Agriculture, the Hawkes Bay company that won the tender to oversee establishment of the farm, said illness and heavy rain caused the deaths.

"Lambing can be hard. They were overwhelmed and unprepared for circumstances that would have challenged the best New Zealand farmers," Brownrigg's co-owner, David Brownrigg, said at the time.

Greens co-leader James Shaw has criticised the Government over the spending on the demonstration farm. New Zealand Herald Photograph by Mark Mitchell.
Greens co-leader James Shaw has criticised the Government over the spending on the demonstration farm. New Zealand Herald Photograph by Mark Mitchell.

In September this year, Trade Minister Todd McClay announced that the stalled free trade deal with the Gulf Cooperation Council (GCC) would be completed.

McClay and his Saudi Arabian counterpart agreed to work towards the early completion of the FTA.

The GCC is made up of Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain.

A free trade deal between New Zealand and the GCC was concluded in 2009 but has not been signed or ratified largely because of Saudi objections to New Zealand's ban on live sheep exports, which affected Saudi investors including Al Khalaf.

Story so far

• In 2003, publicity around the treatment of live-sheep exports led to a voluntary moratorium.

• In 2007, the Labour Government banned the export of live animals for slaughter.

• In 2009, Agriculture Minister David Carter began negotiations with Saudi Arabia for a resumption of live-sheep exports.

• In 2010, the National Government extended the ban.

• In February 2013, the Cabinet approved a proposal by Foreign Minister Murray McCully to pay $4 million to Hmood Al Khalaf's business to secure it to run an agri-hub to promote New Zealand agriculture in Saudi Arabia.

• A further $7.5 million was spent on kitting out the farm and flying over 900 pregnant sheep.

• May, 2015, after media reports on the deal, McCully's office releases Cabinet papers that reveal the full cost of the deal, including the $4 million payment to Al Khalaf. Previously, only the $6 million figure had been released.

• McCully said Al Khalaf could have sued for up to $30 million, and blames the previous Labour Government for angering him to that extent.

• June, 2015, it is confirmed that lambs born on the Saudi farm suffered an extremely high death rate. The Government initially said a sand storm could be to blame, before Brownrigg Agriculture - a Hawkes Bay company that advocated on behalf of Mr Al Khalaf and later won a tender to set-up the farm - pointed to heavy rain and illnesses.

• In August 2015, Auditor-General Lyn Provost announces an inquiry into the farm deal.

• In April this year, McCully meets Al Khalaf during a trip to Saudi Arabia, amidst significant delays to the project.

• In September this year, Trade Minister Todd McClay announces that the stalled free trade deal with the Gulf Cooperation Council (GCC) will be completed.

• Today: The Auditor-General report is released.