Chapter 6 - The A2 Dairy Marketers project
Background
6.1
On Sunday 29
August 2004, the day the federal election was announced, the Hon
De-Anne Kelly MP, then Parliamentary Secretary to the Minister for Transport
and Regional Services, approved a $1.27 million grant under the Regional
Partnerships Program. The grant was to test herds for A2 milk-producing cows
and establish an A2 milk processing plant on the Atherton Tablelands, Qld. The funding
was to be used for a joint venture between A2 Dairy Marketers Pty Ltd (A2DM –
the proponent), Mungalli Dairy Pty Ltd and several Atherton Tablelands dairy
farmers. The grant approval was announced during the election period on 8 September 2004 and A2DM went into
voluntary administration on 4 October
2004—after only five months of trading and less than a month after
the grant was announced. Approval of the grant was then withdrawn.
6.2
This chapter examines A2DM, the history of its
applications for funding under the Sustainable Regions and Regional
Partnerships Programs, the actions taken by various bodies and individuals in
the application process, and the overall impact of the proposed A2DM project, the
grant announcement and its subsequent withdrawal, on the Atherton Tablelands
dairy industry.
6.3
The A2DM project draws out some serious concerns with
the administration of both the RPP and the SRP, including: advice from an advisory
committee being ignored or not acted upon; ministers or parliamentary secretaries
expediting projects at the expense of a full assessment being undertaken; the
role and influence of ministerial advisers on the programs; and the adequacy of
due diligence processes.
A2 milk
6.4
All cows' milk contains
a type of protein called beta-casein, two variants of which are β-casein A1 ('A1')
and β-casein A2 ('A2').
Cows usually produce milk containing both A1 and A2, although the levels of
each protein vary considerably between and within breeds and up to one in four
cows do not produce A1 at all.[367] A2
milk refers to cow's milk that does not
contain the A1 protein, and is produced by selectively milking cows that do not
produce A1.[368] Cows can be
genetically tested to determine whether they produce the A1 casein, at a cost
of about $25 per test.[369]
6.5
A2 milk patents are based on studies that suggest a
connection between consumption of A1 and type 1 diabetes, vascular disease and
neurological disorders. However, this connection has not been proven in humans
and many independent scientific and medical groups have said there is no strong
scientific evidence to back up these claims.[370]
The worldwide holder of A2 milk patents is New
Zealand company A2 Corporation Ltd.
A2 Dairy Marketers Pty Ltd
6.6
This section provides a brief outline of A2DM's
operations outside the Atherton Tablelands, from the company's
establishment until the time it went into voluntary administration.
6.7
A2 Dairy Marketers Pty Ltd (A2DM) was established by Brisbane
businessmen Mr Lindsay
Stewart and Mr
Phil Roberts.
The company was registered on 12
November 2003 and Mr Stewart
and Mr Roberts
were appointed company directors on the same day. Mr
Stewart, Mr
Roberts and
their wives were the only shareholders, and commenced the company with $2
start-up capital.[371]
6.8
In evidence given to the Committee, Mr
Stewart said the other A2DM director was Mr
Chris Saddlier,
a stock agent. However, the Committee has been unable to establish that Mr
Saddlier was ever legally appointed as a director.
Mr Stewart's
evidence indicated that Mr Saddlier
was responsible for supply of A2 milk, Mr
Roberts was
primarily responsible for the administrative and financial aspects of the
company and Mr Stewart
was the marketing specialist. Mr Greg Little, managing director of a milk
distributor, was also involved in managing the distribution and logistics
functions of A2DM.[372]
6.9
A2DM entered into a licence agreement on 22 December 2003 with A2 Corporation
Ltd to sell A2 milk anywhere in Australia
and to access patents for the testing of cows and milk. As part of the
agreement, A2DM was required to pay the A2 Corporation a royalty of 10.75 cents
per litre of A2 milk sold. [373]
6.10
In late 2003, A2DM engaged a public relations
consultant and an advertising agency. Mr Stewart told that Committee that the
advertising agency, Cooee Advertising, recommended that A2DM employ a
government liaison consultant, and suggested Mr Ken Crooke, a director of the
Asia Pacific Corporation (a government relations consulting firm).[374] Mr
Crooke's
role in relation to A2DM's applications for
funding is discussed later in the chapter.
6.11
A2DM commenced trading in south east Queensland
on 1 May 2004.[375] The launch was accompanied by a
marketing campaign that included extensive television advertising. Mr
Stewart told the Committee that A2DM could
not fulfil its supply obligations from the first day:
At the launch of the
company we were promised by one director, who was in charge of the supply of
A2, that we would have 25,000 to 30,000 litres per day. On saying that, we put
a heavy marketing campaign together to justify that. When we launched he had
6,000 litres, so the company was in a situation where we had back orders and
things like that, which I sometimes said was a good thing because it was
creating demand, but it was a panic mode. We had sales there that we could not
deliver because of promises or lies by directors.[376]
6.12
The A2 milk sold in south east Queensland
was sourced from dairy farmers located in the Gympie area. A2DM paid a farm
gate price of 50c per litre for the five months it traded, and sold the milk
for between $4.09 and $4.29 per two litre bottle. [377]
Financial situation and legal
action against A2DM
6.13
A2DM appears to have been in a tenuous financial
situation from the time it began trading in May 2004. Between June
and August 2004, A2DM was late paying its contracted southern Queensland A2
milk suppliers and could not pay its suppliers out of the operation of the
business.[378]
6.14
Mr Stewart told the Committee that several times at board meetings he had raised
concerns that the company's accounts were not accurate:
We employed a full-time
accountant and were under the directorship of Phil Roberts, who was mainly in charge of the funding and the office arrangements,
because I was travelling, launching the product and things such as that. So I
would attend the board meetings, and the minutes will show that there were a
couple of times where I did raise the question about finance and the
capabilities of the people that were running A2.[379]
6.15
Queensland Health met with A2DM in late May 2004 and
questioned the corporation's use of health
claims in its A2 milk advertising campaign. A2DM's
website and advertising campaign made claims that A2 milk reduces the risk of
heart disease, diabetes and neurological disorders such as autism that have
been linked by some studies to A1.[380]
In September 2004, A2DM was convicted and fined $15,000 by the Brisbane
Magistrate's Court for making misleading
health claims in breach of the Food Act
1981. A spokesperson for Queensland Health said that 'the
[Queensland] Government was
compelled to take action because A2 Dairy Marketers had inferred ordinary milk
was unhealthy'.[381]
6.16
A2 Dairy Marketers went into voluntary administration
on 4 October 2004 and a
liquidator was appointed on 11
November 2004. At the time it went into administration, A2DM had a
debt of $126,146.11 to the Department of Agriculture, Fisheries and Forestry
for the 11c per litre Dairy Industry Adjustment Levy (DIAL), incurred between
May and September 2004.[382] A2DM also
owed Dairy Australia $82,480.59, which probably related to an unpaid research
and development levy.[383]
A2DM's applications for SRP and RPP funding
6.17
This section outlines the events leading up to the
announcement of the RPP grant to A2DM to establish an A2 milk processing plant
on the Atherton Tablelands. It also examines the involvement of various
stakeholders, including politicians, a ministerial adviser, the Atherton
Tablelands Sustainable Region Advisory Committee (ATSRAC), the Far North
Queensland Area Consultative Committee (FNQACC) and DOTARS.
The expression of interest for SRP
funding
6.18
Evidence to the Committee suggests that Mr
Crooke (A2DM's
government liaison consultant) and the A2DM directors had some preliminary
meetings and discussions with ATSRAC members
and staff during May 2004 regarding possible SRP funding to test cows and
establish an A2 milk processing plant in the Atherton Tablelands. These meetings
and discussions are outlined in more detail below.
6.19
Although there may have been earlier contact with the
executive officer of ATSRAC,[384] the Committee received evidence that
the first time A2DM made written representations regarding the possibility of
RPP or SRP funding was in a letter from Mr
Stewart to the Hon
John Anderson
MP, then Deputy Prime Minister and Minister for Transport and Regional Services
on 10 May 2004. The letter requested information on the availability of 'government
assistance schemes' such as RPP and SRP and 'urgent
consideration of a proposal to fund the establishment of a production facility
to process A2 milk on the Atherton Tablelands'.[385]
6.20
Mr Stewart's
letter also highlighted A2DM's willingness to
pay a farm gate price of 50 cents per litre – significantly higher than the
incumbent processor and a possible boon to the drought and deregulation
affected Atherton Tablelands dairy industry. The letter referred to a
discussion between Mr Stewart
and Ms Wendy
Armstrong of the minister's
office and foreshadowed A2DM's meeting of 17
May with then ATSRAC Executive Officer, Ms
Yvonne Tunney
(as discussed below).[386]
6.21
In an email
of 6 May 2004, Mr Crooke also stated that he had scheduled a meeting on 17 May with Ms Tunney to discuss a possible application for SRP funding. The email said:
Behind the scenes I
have opened the door a little and it should be possible for us to have a
suitable letter tabled at the next meeting of the Committee (scheduled for May
28th/29th). At this stage they would only look at a brief concise description
of what A2 wants to do.[387]
6.22
On 20 May
2004, Mr Stewart sent Ms Tunney a draft letter to be presented to the ATSRAC meeting scheduled for 28 and 29 May. The
letter was almost identical to Mr Stewart's letter of 10 May to Mr Anderson. It contained background information about A2 milk and requested
support to test cows and consideration of a proposal to establish a processing
facility.[388] Ms Tunney replied to Mr Stewart on the same day, providing some feedback on
the letter and suggesting it include information about the contribution A2DM
and other project partners would make to the project.[389]
6.23
Mr Stewart
revised the letter according to Ms Tunney's
comments and sent the revised letter, dated 26 May 2004, to then ATSRAC
Chairman Mr Peter McDade.
The amended letter outlined 'investment
options' for establishing an A2 milk
processing plant, including a joint venture with Cuda Brothers dairy, located
on the Atherton Tablelands.[390]
6.24
Mr McDade
told the Committee he had a
preliminary meeting with Mr Crooke, Mr Roberts, Mr Saddlier and one other A2DM representative whose name he could not recall on 26 May
2004 to discuss the
possibility of a future A2DM application for SRP funding.[391] The meeting was initiated by Mr Crooke and took place in Brisbane.[392]
6.25
Mr McDade said there was no mention of politicians during the meeting.[393] Rather, the A2DM representatives
were more interested in the processes and timeframes for SRP applications:
They were asking, ‘What
sort of time limits do we have on the processes here?’ I explained our
processes to them and said: ‘You know, we cannot rush things through. This is
government money. It is a public program. But, if you get something to my
executive officer and it is in a suitable form, then I will ask the committee to
consider whether it is appropriate to consider it as an expression of
interest.’[394]
6.26
ATSRAC
considered Mr Stewart's letter of 26 May at its meeting of 28 and 29
May and resolved that A2DM be invited to submit a detailed expression of
interest (EOI). On 11 June 2004, Ms Tunney emailed Mr Stewart and invited him to lodge an EOI by 16 July to
be considered at ATSRAC's meeting of 6 August.[395] She also provided some guidance
about the information that would need to be included:
...whilst we won't need
detailed business plans etc at EOI stage we will need to see some detailed
budget information and indication of future viability/sustainability.[396]
6.27
A2DM
completed an expression of interest form for $100,000 of SRP funding to
subsidise farmers to test cows for the A2 protein.[397] ATSRAC considered the form at its meeting of 6 August
2004 and declined
to accept it as an expression of interest for SRP funding because it did not
address the criteria of the SR program or ATSRAC's criteria for an expression of interest.[398] The ATSRAC minutes indicated the matters ATSRAC took into consideration when deciding not
to accept the expression of interest:
The Committee
considered a number of issues and aspects of the A2 Milk Marketing project
including:- Impacts of A2 Milk initiative and possible establishment of
processing facility in the Tablelands region—how would the existing processor
and industry be impacted?
Consideration of
regional dairy industry initiative—this has been developed through long-term
planning since deregulation and the Advancing Grow Malanda forum supported by ATSRAC in October 2003.
No indicated financial
input from A2 apart from in-kind—the ATSRAC criteria have always considered a
commercial entity should contribute at least 50% of future actual cash
contributions to any project.
There is no information
on what would occur past the initial testing—there are references to a
processing facility but no firm indication how this might be established.
There is no information
as to the market situation or supply chain development process.
The issues of
competitive neutrality in relation to the existing industry are not addressed.
ACTION: ATSRAC endorsed decline of the Expression of
Interest as the proposal does not address the criteria of the program. [399]
The application for RPP funding
6.28
A2DM also made an application for funding under the
Regional Partnerships Program. The suggestion of applying for RPP funding appears
to have originated from a meeting of 11
June 2004 between the parliamentary secretary, Mr
Stewart, Mr
Roberts and
Mr Crooke.
Ms Leslie
Riggs, then Assistant Secretary of the DOTARS
Regional Communities Branch, was involved in the meeting by teleconference, as
was a DOTARS project officer.[400] Mr
Stewart told the Committee that the
parliamentary secretary called the DOTARS officers and asked about appropriate
channels to provide federal government funding for an A2 milk processing plant
on the Atherton Tablelands. It appears that this was the first time DOTARS
became aware of the project. [401]
6.29
The local ACC, which is based in Cairns,
was first notified about the possibility of A2DM making an RPP application via an
email on 15 June 2004 from the
DOTARS office in Townsville. The same
email alerted FNQACC to the parliamentary secretary's particular interest in the project.[402]
The first proposal for RPP funding
6.30
In an email
to Mr Stewart dated 21 June 2004, Mr Crooke claimed that he had managed to fast-track the application process:
After some further
‘negotiation’ had been successful in cutting out the first phase of the Cairns
application, the requirement to submit a brief to the [FNQACC] board, and with
the board then considering whether to invite a full application, we have been
invited to go direct to the full application. However they have asked for it to
be in Cairns by close of business, Wednesday, 23 June.[403]
6.31
The Committee has been unable to ascertain who Mr
Crooke's 'negotiations'
were with. Neither Mr Robert Blanckensee,
FNQACC Chair or Mr Tomas Vieira, FNQACC Executive Officer could recall having
contact with Mr Crooke.[404]
6.32
Mr Stewart
sent an incomplete RPP application form to Mr
Vieira on 22 June 2004 requesting funding for a joint venture between
A2DM and Cuda Brothers Dairy for a milk processing plant at the Cuda family
dairy at Tolga. The proposal contained background information about A2 milk and
A2DM's operations, information about the
Atherton Tablelands dairy industry, the potential benefits of an A2 milk
processing plant, a brief marketing strategy and information about the company
structure. Stage one of the proposal involved testing 3,500 cows at $30 a head,
and stage two involved establishing the milk processing facility in partnership
with the Cuda family.[405]
6.33
Mr Vieira
said that he first met with Mr Stewart
on 6 July 2004. Mr
Vieira described the purpose of the meeting
as being to provide feedback and advice as to how the application might be
strengthened.[406] At the meeting, Mr
Vieira assisted Mr
Stewart to develop the application and
suggested it needed stronger regional partnership elements. It appears that
A2DM then revised the proposal and changed partners so as to broaden the project and include more local
ownership.[407]
The application
6.34
A2DM lodged an RPP application directly with DOTARS on
9 July 2004[408] for a partnership between
A2DM, Mungalli Dairy and local dairy farmers for funding to subsidise the
farmers for the testing of A2 cows and establish an A2 milk processing plant at
Mungalli Dairy. The Committee was unable to obtain evidence regarding the
reasons A2DM lodged the application directly with DOTARS rather than submitting
it to FNQACC after Mr Vieira
had provided advice on the original proposal.
6.35
Mr Stewart told the Committee that the Atherton
Tablelands operation was intended to be entirely separate from A2DM and that
funding was to be conditional on transferring a cleanskin company owned by Mr Stewart and Mr Roberts, Star International Group, into the
ownership of all project partners.[409]
This funding condition is discussed below in relation to due diligence
assessment.
6.36
A meeting regarding the possible A2 grant was
held on 31 July 2004 between
the parliamentary secretary (who chaired the meeting), representatives of A2DM,
Mr Vieira
and nine or ten local dairy farmers.[410]
Mr Joe Strazzeri,
one of the dairy farmers who attended the meeting, recalled that the
parliamentary secretary:
...gave us a briefing and
promised that she would do something about it, because she wanted us to be able
to negotiate for prices and get better returns...She gave a commitment that she
would look into the grants and see what she could do. That is all we knew, as
farmers. After that, we went home.[411]
6.37
Mr Vieira
described his role at that meeting as examining the viability of the existing
Atherton Tablelands dairy industry and gauging whether A2DM's
project had the support of local farmers.[412] He told the Committee the
meeting of 31 July was the first time he became aware the application had
changed from its original form as a partnership between A2DM and Cuda Bros
Dairy:
I think that is where I
learned of the change—when we talk of the change—with Mungalli’s addition. I
thought that was a great move because at least that meant greater local
ownership in the project.[413]
6.38
As it
is unusual for a minister or parliamentary secretary to attend meetings in
relation to an RPP application, the Committee asked whether FNQACC was
encouraged to accept the project by the parliamentary secretary:
Senator O’BRIEN—Was it clear from the meeting that Parliamentary Secretary Kelly wanted the project to succeed or get up?
Mr Vieira—My understanding or my feeling was that,
yes, she would have liked to support the dairy farmers on the tablelands.[414]
Fast-tracking of the application
process
6.39
The parliamentary secretary and others have been
reported as stating that the A2DM application for RPP funding was fast-tracked.[415] Although DOTARS witnesses claimed
that all due diligence checks normally carried out at that stage had been
passed,[416] it appears that political
pressure led DOTARS to bypass the advice of the ACC and due diligence checks
that should have uncovered A2DM's financial
problems and the legal action being taken against it by a state government.
6.40
Dr Gary
Dolman, then Assistant Secretary of DOTARS
Regional Communities Branch, provided the following observations about the
fast-tracking of RPP applications:
There are...occasions when time critical projects are sought to be
fasttracked. Generally, that is at the request of the proponent, where they say
they need the money within a certain time. As the ACC said, it is the
experience of other ACCs that, where we are asked to try and fast-track an
assessment, which means doing the same amount of work on the assessment but
doing it more quickly, we do try and do that where there is seen to be a good reason,
a good case for doing so—where there is a community need to have the money
quickly.[417]
6.41
DOTARS witnesses told the Committee that the
application made by A2DM passed through the initial due diligence tests that are
applied to all projects. The due diligence process commenced on 9 July 2004, when the application was
received by the Department, and was completed on 27 August, when DOTARS
provided advice to the parliamentary secretary.[418]
6.42
In assessing the application, DOTARS sought background
information about A2DM's proposal from Mrs
Lyn O'Connor,
an independent consultant and advocate for the Atherton Tablelands dairy
industry, who in evidence to the Committee said she had provided DOTARS and
FNQACC with feedback on various RPP applications. [419]
Mrs O'Connor described to the
Committee the sense of time pressure associated with the A2DM project:
During my previous
contact with DOTARS, the dialogue and time frames around seeking and providing
input have been reasonable. With the A2 project, there was a different climate
and a sense of haste and pressure.[420]
6.43
The Committee was also concerned as to whether FNQACC
was pressured to provide comments on the application within a reduced
timeframe. DOTARS and FNQACC witnesses could not recall the date the
application was sent to FNQACC through the TRAX system for comment. Committee
members asked whether the ACC was asked to provide comments in less than the
normal timeframe, and Dr Dolman
told the Committee that the ACC was asked by the DOTARS officer that attended
the FNQACC meeting of 6 August to provide comments within the ten day timeframe
set out in the internal procedures manual. [421]
6.44
However, as discussed in relation to Tumbi Creek, the
Regional Partnerships Internal Procedures Manual states that this timeframe
does not apply to applications submitted directly to the Department and not
prepared in conjunction with the ACC.[422]
As the A2DM application was submitted to DOTARS and the revised application was
not prepared in conjunction with FNQACC, it stands to reason that the ACC
should have had a longer time frame to examine the application.
FNQACC advice on the application
6.45
The Committee was concerned to understand the rationale
for FNQACC's recommendation about the A2DM
application and the extent (if any) to which the ACC should have undertaken a
due diligence assessment.
6.46
FNQACC's Executive Officer Mr Tomas Vieira and
Chair Mr Robert Blanckensee made it clear to the
Committee that while the ACC had made a strong recommendation to DOTARS that
further research should be undertaken before the project was approved, due
diligence was not the responsibility of ACCs and they were not resourced to
undertake it. Mr Blanckensee
said the ACC believed its role was to 'provide
the reconnaissance information for the department and the minister for their
consideration'.[423]
However, Mr Blanckensee and Mr Vieira were informally aware through their
relationship with ATSRAC
that a request for SRP funding existed and that ATSRAC did not support it.[424] This prompted the ACC to delve '...a little deeper than normal into finding
out what was happening...' [425]
6.47
Both Mr Vieira
and Mr Blanckensee
commented on the 'disjunction in the
information flow' that can occur when
applications are submitted directly to DOTARS rather than developed in
conjunction with the ACC.[426] They
explained that it is preferable for the ACC to work with the proponent to address
any deficiencies in an application before it is submitted and before the ACC is
required to provide comments to DOTARS:
When the process goes
the way this one has, it has come through a different channel. When
we are working with the ACC or the proponent, we are trying to say, ‘This
project has legs but you need this, this and this.’ We are making sure all the
i’s are dotted and all the t’s are crossed so that the considerations can be
made.[427]
6.48
The FNQACC received a briefing on the A2DM application
from Mr Vieira
at its meeting of 6 August 2004.[428] At the meeting, members discussed 'the
composition and benefits of A2 milk, as well as the product's
'niche'
market and impact on current dairy farmers'.[429] Subsequent to the meeting, Mr
Vieira disseminated the application to
FNQACC members and requested their comments. The ACC made some judicious
comments about the application, as recorded in the TRAX system on 26 August. Mr
Blanckensee summarised the ACC's
concerns as follows:
...at the time, you have
to remember that the Atherton Tableland was still suffering in the grips of a
drought that had virtually crippled the area. It saw milk production sink to
probably an all-time low. The other concern we had was that, if you throw a
competitor into such an economic situation as we had there, which was very
depressed, you may have enough to sink the other organisation. I believe that
Dairy Farmers was on a knife edge with regards to the critical level of
production...I do not think that we would all be happily sitting around the table
here with the $1.3 million being given to one organisation while 134 permanent
jobs disappeared from the region. I do not think we would have been doing our
job if we had not brought that to the attention of people.[430]
6.49
Mr Blanckensee explained FNQACC's decision
to give the project a rating of 3 (medium priority) by saying that it fitted
the TRAX description of 'medium
priority' and met a number of the criteria in the
strategic plan, because it would have an overall benefit to the region. It was
not rated a high priority because ACC members thought the timing was wrong and
extra work needed to be done before the project should proceed.[431] Mr Blanckensee also observed:
At face value the
project looked as if it could have had potential for the region and could have
delivered the panacea that we needed for the dairy industry. The concern we had
was that if it went ahead it might have destroyed the dairy industry, because
we would have seen another organisation go under. [432]
6.50
FNQACC's overall
recommendation was that the project warranted further investigation by DOTARS,
but '[u]ntil the competitive neutrality issue
is clarified, FNQ ACC Inc. members cannot recommend this project any higher
than 3'.[433]
The question of due diligence
6.51
The Committee is concerned that due to political
pressures to process the application within a short timeframe, a proper due
diligence process was not undertaken by the department. The department's
explanation was unconvincing and inadequate:
It is true that the department did do the normal internal due
diligence assessment for this project. The details of that assessment involved
confirming the company’s registration, its GST registration and ABN. It
involved reviewing the business plan that was provided by A2 Milk and also cash
flow forecasts. It also involved checking the development approval.[434]
In other words, the department's assessment was superficial
and hasty.
6.52
Mrs O'Connor,
the local dairy industry expert who provided DOTARS with some advice about the
A2DM application, expressed some concerns about the lack of information DOTARS
had regarding the application:
Was it to be directed towards shares, testing, purchase of plant
and equipment? How does that fit within the guidelines? I certainly have a lot of
questions which I believe the department should have had time to consider
fully. I do not need the answers to them, but the department certainly should
have them.[435]
6.53
It appears
that A2DM provided little in the way of financial data to support its
application for RPP funding, and the information provided was restricted to
internally generated cash flow projections and forecasts for the Atherton
Tablelands operation.[436] Mr
Stewart said the company was not required to provide current financial
statements and the only financial information he can recall being requested to
provide by DOTARS was '...the financial spreadsheets and our projection on supply of, I think,
40,000 litres per day up here'.[437]
6.54
DOTARS told the Committee that it wrote to A2DM on 28
July 2004 to request further information, including information relating to
processing equipment, details of the 40 jobs that were claimed to be created by
the project, competitive neutrality information relating to the processing
plant at Malanda, development approvals for the processing plant, and the guarantee
they would provide to farmers regarding the farm gate price. DOTARS received
the additional information on 5 August
2004.[438]
6.55
Mr Stewart
told the Committee that DOTARS did not ask any questions about the referees for
the project in A2DM's application.[439] The referees were listed as Mr
Saddlier, Mr
Dick Schroder,
owner of Cooloola Milk (A2DM's south east Queensland
milk processing agent) and Mr Kevin
Kelly, owner of Cooee Advertising. None of
the referees was independent of A2DM.[440]
The Committee also heard that A2DM did not have a written agreement regarding
the A2 milk processing plant with Mungalli Dairy at the time the grant was
applied for or announced.[441]
6.56
Mr Stewart
told the Committee that DOTARS had not asked any questions about A2DM's
operations in southern Queensland,
its inability to pay farmers or its supply problems. Mr Stewart's evidence was that it was not necessary for
DOTARS to seek information about A2DM's current financial status, because the
Atherton Tablelands A2 milk processing plant was to be an entirely separate operation:
I always believed that
the operation up here in Cairns or in the tableland region was seen as a
different operation so, with the financials and things, alarm bells did not go
off—it was projections as well as a new identity that was commencing this. [442]
6.57
The
Committee believes A2DM's
financial situation and operations in south east Queensland were highly relevant to the viability of the
RPP project and should have been investigated by DOTARS. For example, the
proponent was A2DM and the managers of the new company proposed to receive the
funding, Star International Group, were to be the same as the directors of A2DM.
The new company was also to use the same marketing strategy and produce the
same product as A2DM's
southern Qld operation. The fact that much of the proponent's contribution was to be in-kind management
expertise also made the directors'
record in running other companies relevant.
6.58
As
outlined above, FNQACC submitted its comments on the project to DOTARS on 26
August 2004, with
an overall recommendation of 3 but with the caveats that the project was worthy
of further research and that competitive neutrality issues in particular should
be investigated before the project proceeded.[443]
DOTARS witnesses told the Committee that the due diligence process was
completed on 27 August 2004. This suggests that the ACC's recommendation was ignored.
'After the fact' due diligence
6.59
The Committee is concerned that in relation to this and
other grants, proper due diligence checks were not carried out prior to grants
being approved or announced. The 'due
diligence' assessment carried out prior to the department making its
recommendation to the minister appears to only be a compliance check, and meant
that the department neglected to provide fundamental information to the
decision maker about the viability of the project.
6.60
DOTARS appeared to suggest to the Committee that such
neglect was appropriate. The rationale given was that no public funds had been
expended because the actual funding of the project was conditional on a full
due diligence assessment of the new company that was to be created to accept
the grant.[444] For example, Mr
Yuile told the Committee that:
...funding was conditional
on the confirmation of cofunding, an independent viability assessment of the
project and the establishment of the new company, Star International Group,
which was partially owned by local dairy farmers. As committee members would be
aware, the proponents of the application recently went into liquidation and, as
the conditions attaching to the grant were not met, no grant moneys have or
will be paid.[445]
6.61
This 'after the fact'
due diligence, by making funding subject to conditions to be met after the
approval, has allowed applications to be expedited so that the political
benefits of announcements can be achieved. This practice has damaging effects
not only on the proponent, but also on project partners, the local industry and
community. As discussed below, this is particularly relevant in this case where
dairy farmers assumed that the announcement of project approval meant that the
project would proceed.
6.62
The
Committee was also concerned by evidence from Mrs O'Connor that suggested DOTARS was still undertaking investigation into the
application on the day of the grant announcement—nine days after the
application had been approved:
My last contact with
the department, when they were still asking relevant questions in the process
of rigour and due diligence, was actually around midday on 8 September. The media alert went out
that afternoon.[446]
6.63
If the treatment of the A2DM application
represents normal practice as claimed by DOTARS, the Committee is extremely
concerned about the laxity of evaluation processes.
DOTARS lack of awareness of legal action
6.64
It is of concern to the Committee that funding was
approved for a project where the proponent had legal action pending against it,
particularly considering the action was being taken by a state government body.
Mr Stewart
told the Committee he never advised the department or the ACC that A2DM was the
subject of legal action over misleading advertising and DOTARS never asked
about the legal action.[447]
6.65
The
Committee considers it highly inappropriate that Mr Stewart or the other A2DM directors did not advise DOTARS of the legal action,
particularly given that it impacted on the viability of the media strategy on
which the project's cash flow projections were based.[448] The Committee is also concerned that
the department's routine compliance checks did not reveal legal
action pending against the proponent.[449]
The offer of funding
6.66
The letter of 2
September 2004 from Parliamentary
Secretary Kelly
to Mr Stewart,
advising A2DM that its application for RPP funding had been approved, is
somewhat ambiguous in relation to the actual recipient of the funding. The
letter is addressed to Mr Stewart
as Director of A2DM and states:
I am pleased to advise you that I have approved partial funding
under Regional Partnerships of $1,268,300 (GST Inclusive) to the A2 Dairy
Marketers Pty Ltd for your A2 Milk Processing project.[450]
6.67
There is no mention of the other project
partners - Mungalli Dairy and the several dairy farmers – other than to say
that funding for the project had been approved subject to confirmation of
additional cash support from A2DM and other partners, and 'satisfactory resolution of company structure
between Mungalli Dairy, yourself and individual dairy farmers'.[451]
6.68
DOTARS witnesses explained this by saying the
full conditions of the grant were outlined in a follow up letter on 24
September from DOTARS to Mr Stewart,
and would have been outlined in the funding agreement.[452] The Committee suggests that the letter of offer may have more
appropriately addressed to all project partners, indicating that their joint
application had been approved subject to the satisfactory resolution of a
company structure.[453]
6.69
Given that A2DM was the proponent but a separate
company was intended to be the grant recipient also raises the question of
whether there was a breach of the RPP guidelines, which state that third
parties seeking funding on behalf of others are not eligible to apply for
funding.[454]
Timing of the grant approval and announcement
6.70
DOTARS gave evidence that the A2DM application was
approved by the parliamentary secretary on 29 August and announced on 8 September 2004. However, when Mrs
O'Connor
met with Minister Anderson
and Senator Boswell on 3 September 2004 at a National Party
dinner in Innisfail, she raised the issue of the A2DM grant to, in her own
words, check:
That they look at the
whole picture and that they address any of the weaknesses or concerns in the
application or the environment around it very carefully...My whole aim in the
discussion was saying, ‘Are you are aware of it? Please be careful and please help us
manage the impact.’[455]
6.71
Mrs O'Connor told the Committee that Senator Boswell and Mr Anderson took note and said they would follow the issue up. The following week Mrs O'Connor received a call from a person claiming to
be from Mr Anderson's office, who said that A2DM had not made an
application for RPP funds.[456] Mrs O'Connor said:
Personally, I was aware
of the application being in the system. Why else is DOTARS communicating with
me regarding regional impacts and concerns? Why am I being involved in their
due diligence in providing industry background if there is not an application?
We are all obviously very disillusioned about that. The advice provided back to
me, early in the week after 3 September, was that there was no application.[457]
6.72
This
suggests that the grant was, in fact, approved after the election had been announced—during the caretaker period. If
this is the case, it would be contrary to the government's guidance document on caretaker conventions,
which counsel that the government avoids entering major contracts or
undertakings, particularly those that require ministerial approval, during the
period preceding an election.[458] It would
also contradict the department's evidence
to the Committee.[459]
The role of Mr
Crooke
6.73
As noted previously, Mr
Crooke arranged meetings between A2DM and
members of the Queensland Government and the Australian Government. Mr
Crooke also liaised with FNQACC and ATSRAC
on A2DM's behalf. However, he later took a
position as media adviser to the parliamentary secretary, giving rise to
allegations of conflict of interest.
6.74
Mr Stewart
described Mr Crooke's
role as initially being to explain to members of the government: '...the story of
A2, the benefits to Dairy Australia and those types of things'.[460] One of Mr
Crooke's
objectives, as set out in the Asia Pacific Corporation's
Proposal for A2 Corporation – Government
and media relations strategy signed by Mr
Crooke and dated 18 February 2004, was:
... To explore the
prospect for financial assistance from industry support schemes offered by
State and Federal Governments e.g. Research and Development Grants; assistance
under the Federal Government Sustainable Regions Programme.[461]
6.75
Mr Stewart
told the Committee that Mr Crooke
organised and attended several meetings between A2DM and members of the
Australian Government, including a meeting in early April 2004 with the Hon
Warren Truss MP, then Minister for Agriculture, Fisheries and Forestry. Mr
Stewart described the purpose of this
meeting as being '...just to explain the way we were going to go about A2 and promote it. It
was to advise the government out of courtesy'.[462]
6.76
As discussed earlier in the chapter, Mr
Stewart, Mr
Roberts and
Mr Crooke
met with the parliamentary secretary in her Brisbane
electorate office on 11 June 2004.
The meeting was organised by Mr Crooke.
Mr Stewart
said that Mr Crooke
advised him approximately three weeks after the 11 June meeting that he was
going to work for Parliamentary Secretary
Kelly as her media adviser.[463]
6.77
Concerns have been raised in other forums because Mr
Crooke was not asked to provide a written
statement of personal interests or a declaration of conflict of interest form
when commencing employment on the parliamentary secretary's
staff. However these matters were not pursued in evidence to this Committee. The
parliamentary secretary also faced allegations in the House of Representatives
on 2 December 2004 of
conflict of interest and breaching the Ministerial Code of Conduct by approving
a grant for a company that had employed a member of her staff as a political
lobbyist.[464] Indeed, the Prime
Minister acknowledged in the House of Representatives that Parliamentary
Secretary Kelly
did breach the Ministerial Code of Conduct.[465]
6.78
The Committee is unable to make an assessment of the
conflict of interest allegations on the evidence before it. However, it would
be highly inappropriate had Mr Crooke
continued his involvement with the proponents after he became an adviser to the
parliamentary secretary.
Impact of the A2DM grant announcement
6.79
The announcement of the $1.27 million dollar grant to
A2DM and its subsequent withdrawal had a negative
impact on the already fragile Atherton Tablelands dairy industry. Following
sustained drought and the deregulation of the dairy industry in 2004, the
Atherton Tablelands dairy industry was in a tenuous position. It had one major
processor, which bought the majority of milk from the estimated 105 local dairy
suppliers.[466] One submission to the
inquiry said:
No doubt you are now well
aware of the hardship & stress experienced by dairy farmers & their
families with the advent of deregulation and the subsequent price wars between
processors resulting in unsustainable farm gate milk prices & greater
profits for the processors & retailers, more particularly, the main super
markets, so it is not surprising that a number of Atherton Tableland dairy
farmers strongly supported the concept of another processor coming into play
especially as they were being offered 40c—50c / litre...[467]
6.80
The announcement of the grant with its implication of
government support for the project had instilled confidence in local farmers
that the project was viable and would go ahead. This encouraged a number of
farmers to invest in testing their herds for, or purchasing, A2 cows. Several
more spent time and money adjusting their business plans towards producing A2
milk.[468] Mrs
O'Connor
articulated the influence perceived government support can have on business
decisions:
I assume, perhaps wrongly, that, when strong government support
is being provided to a project, or is perceived to be being provided to a
project, farmers may be less careful than perhaps they otherwise would be.[469]
6.81
This led to an inflated market price for A2 cows, which
sold for approximately $400-$500 more than their usual price. Mr
Strazzeri, a local dairy farmer for the past
32 years, told the Committee that, after attending an auction in May 2004 and
seeing A2 tested cows sell for $1,100 - $1,200 that would normally be worth
$600-$700, he and his son had paid a premium for A2 tested cows:
One fellow who had been
tested—Mr John Jones—had his cows for sale...So we purchased 34 head of dairy cattle from him,
which were A2 tested. I have all the proof here, with the numbers of the cows
and so on.
Senator CARR—How much did they cost?
Mr Strazzeri—They cost $1,000 each.
Senator McLUCAS—How would that compare with the going price
of an A1 cow?
Mr Strazzeri—The same fellow sold the rest of them for
$600.
Senator McLUCAS—So you paid a premium of $400?
Mr Strazzeri—I paid $400 more than I should have.[470]
6.82
The Committee received evidence about the effects of
the grant withdrawal:
Some farmers spent considerable sums of money on the strength of
the proposed grant. De-anne Kelly was adamant
that the money was available and that we could confidently go ahead with our
preparations for supplying A2 milk. One farmer went straight out and spent $30,000
[p]urchasing A2 positive cows. These people should be compensated for the
expense incurred on the strength of a political promise of funds that in
hindsight were only ever intended to be used for political purposes.[471]
6.83
In evidence to the Committee, Mrs
O'Connor
made a recommendation aimed at avoiding these market distorting effects by
making it clear that the announcement of a grant does not necessarily mean that
the grant will be awarded:
Firstly, at the announcement of a grant, especially when it
involves other stakeholders, it should be clearly stated that the announcement
is only a step in the process. Further due diligence should continue and the
project should not be a goer until contracts have been executed by both the
applicant and the minister. [472]
Conclusion
6.84
The Committee
believes the government must consider delaying grant announcements until all
conditions of the grant have been met in full. A2DM's
application was received by DOTARS on 9
July 2004, FNQACC's advice was provided
to DOTARS on 26 August, DOTARS provided advice to the parliamentary secretary
on 27 August and the project was approved on 29 August. This stands in stark
contrast to the many projects that remain unconsidered by DOTARS or the
minister several months after an application has been received and
recommendations passed on by the ACC.
6.85
The case of A2DM raises serious concerns about the
administration of the Regional Partnerships Program. In particular, it exposes
the risks inherent with fast-tracking applications and failing to heed an area
consultative committee's warning that a
project application required more investigation and development. The Committee
is also extremely concerned that A2DM funding was approved and the announcement
was made before proper probity and due diligence checks were undertaken.
6.86
The Committee believes that the government must accept responsibility
for expressing support for projects that are ultimately doomed to fail, and the
consequences that reach beyond the proponent throughout the local community and
industry—even in cases where no public funding was expended.
6.87
The Committee is appalled that projects of
questionable merit and sustainability are fast-tracked at the expense of
regionally-worthwhile projects supported and developed by local ACCs, which are
often rejected by the delegate with little explanation or simply stuck at the
departmental or ministerial level for months.
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