Chapter 7 - Primary Energy Pty Ltd
Introduction
7.1
On 2 August
2004, the Hon Jim Lloyd MP, Minister for Local Government,
Territories and Roads, approved a $1.2 million RPP grant under the SONA
procedures for Primary Energy Pty Ltd to assist it to raise capital to build an
ethanol plant at Gunnedah, in the New England region of New
South Wales.
7.2
This chapter discusses the project background and
traces the grant application and approval process. The Primary Energy case
highlights concerns about the administration of applications made under one
program but funded under another, the way the SONA guidelines are employed to
circumvent eligibility restrictions and the latitude for intervention at the
ministerial level under discretionary programs such as RP.
Background
7.3
Ethanol is an alcohol which can be used for a variety
of purposes. In particular, ethanol can be blended with petrol to provide a
fuel used for transport. It can be manufactured from a range of agricultural
crops such as wheat and sugar cane.[473]
According to Primary Energy, the proposed ethanol plant (or 'bio-refinery') would
use around 300,000 tonnes of grain to produce 120 million litres of fuel grade
alcohol and 90,000 tonnes of high protein stock feed meal per annum.[474]
7.4
The grant recipient, Primary Energy Pty Ltd, describes
itself as 'an Australian renewable energy company'.[475] The company and its managing director,
Mr Matthew
Kelley, are based in the Gunnedah region, as
will be the proposed ethanol plant. Gunnedah is located in the federal
electoral division of Gwydir. The local member for this electorate is the
former Deputy Prime Minister and former Minister for Transport and Regional
Services, the Hon John Anderson MP.
Application
7.5
Primary Energy initially applied for funding for its
ethanol plant project under the Namoi Valley Structural Adjustment Package (Namoi
Valley SAP). The Namoi Valley SAP was established in September 2002 and its
purpose as explained to the Committee was to:
...enhance the ability of business and the community to deal with
the economic downturn imposed by the introduction of the New
South Wales government's water sharing plan.[476]
7.6
The New England North West Area Consultative Committee
(NENWACC) established a sub-committee, known as the Namoi Valley Structural
Adjustment Committee, to deal with applications made under the SAP.
7.7
Mr Humphries, Chairman of NENWACC explained that
funding under the Namoi Valley SAP also aimed to assist the region's traditional
agricultural enterprises to diversify, for example into tourism, horticulture
and viticulture industries.[477]
7.8
On 6 February
2003, Primary Energy submitted an expression of interest under the Namoi
Valley SAP.[478] This was followed in
June 2003 by a more detailed application seeking $1.5 million funding from the
Structural Adjustment Package.[479] In this
application, Primary Energy proposed to commence construction of the plant in
January 2004, with a completion date around January 2005.[480]
7.9
A key point to note is that the grant application was
not to fund the actual construction of the ethanol plant itself, but to assist the
project to get off the ground financially before construction started. As Dr
Dolman of DOTARS explained to the Committee:
...this project was not a project about building the ethanol
plant; it was actually to assist Primary Energy to raise capital to build the
ethanol plant.[481]
7.10
Ms Riggs
of DOTARS, likewise, clarified the purpose of the funding:
the project that we have provided funding for is not about the
capital construction of anything; it is a precursor to the possibility that
this company might secure capital to proceed with the construction of the
plant.[482]
7.11
This point was reinforced by one of Primary Energy's
advisers, Mr Josh
Carmody, a partner in the law firm Baker and
MacKenzie. Mr
Carmody explained that funding had been
sought 'essentially to take a greenfield
infrastructure project to financial close', that is, to enable Primary Energy
to arrange the financing to build the plant. Mr
Carmody said that the funding was intended
to 'relieve some of the cost burden' from Mr
Kelley as he attempted to attract financial
partners to support the project.[483]
He also put the rationale for seeking government assistance into perspective,
pointing to the difficulties facing fledgling projects in regional areas:
To take any project that is being financed on a project finance
basis to financial close is a challenging task, and for any piece of greenfield
infrastructure in regional Australia
where the capital cost is in the order of $100 million it is a challenging
task.[484]
7.12
The application suggested that the regional benefits of
the proposed ethanol plant included the creation of 50 permanent jobs and 350
indirect jobs in the region, as well as an injection of around $1.083 billion into
the region over a five year period. The application also claimed that, among
other things, the ethanol plant would be a 'catalyst' for construction of a
natural gas pipeline in the region.[485]
However, the committee subsequently heard that the viability of the pipeline
was not contingent on the Primary Energy ethanol plant. Indeed, construction of
the pipeline recently started in the absence of the ethanol plant.[486]
7.13
The application provided a business plan and other
materials, including correspondence providing documentary support for the
project. However, the NENWACC declined to provide the business plans and these
other materials to the Committee. Mr Kelley
subsequently provided in camera
information containing details of the Primary Energy business model.[487]
7.14
The Committee notes the application also listed a
number of highly placed government figures as referees willing to express
support for the project. These included a member of the Prime Minister's Office,
the head of the Prime Minister's energy taskforce and three federal ministers,
including the local member, the then Deputy Prime Minister and Minister for
Transport and Regional Services, Mr Anderson.[488]
Mr Kelley
informed the Committee that he had not contacted any of these individuals to
seek their permission to list them as referees for the project. It appears that
he had met them all in connection with briefings he gave various ministerial
offices on the project. He told the Committee that he had had more contact with
Mr Anderson
due to Primary Energy's base in his electorate.[489]
7.15
At a meeting on 24
June 2003, the Namoi Valley Advisory Committee considered the application
and proposal. Primary Energy also gave a presentation to that committee at this
meeting.[490] The subcommittee recommended
that Primary Energy be offered $1 million.[491]
The application was also endorsed by the NENWACC on 26 June 2003.[492]
7.16
Mr Humphries,
in his capacity as Chair of the Namoi Valley Advisory Committee,[493] wrote to the Hon Wilson Tuckey MP, who
was then Minister for Regional Services, Territories and Local Government. The
letter, dated 26 June 2003,
recommended that Primary Energy be given $1 million under the Namoi Valley SAP.
This recommendation was 'contingent on a positive financial "due
diligence" exercise'. At the same time, the letter also stated that:
The "due diligence" investigation of Primary Energy Pty
Ltd has been managed by the Department of Transport and Regional Services and
no obvious financial risks were identified in providing this funding.[494]
7.17
The consideration of the application and Mr
Humphries's letter to the minister occurred
on the eve of the termination of the Namoi Valley SAP. As is discussed later in
the chapter, the impending termination of the program and the implications for
the application do not appear to have been taken adequately into account at
this point of the process.
Adequacy of due diligence
7.18
The Committee's concerns mentioned in Chapter 2 about
the adequacy of due diligence testing of applications are manifest in the
Primary Energy case. No evidence was provided to corroborate Mr
Humphries' claim to the minister that the
department had 'managed' a due diligence investigation of Primary Energy at
this stage.
7.19
The extent to which the department did investigate the
company seems limited to background checks on Mr Kelley and his co-developers,
but these checks apparently occurred well after Mr Humphries's letter to the
minister, when the department was under ministerial pressure to process the
application. (This is discussed below.) The checks showed, according to Dr
Dolman, that Mr
Kelley and his associates had 'extensive
experience in developing greenfields infrastructure assets and operating and maintaining
renewable fuel facilities'.[495] The
department also sought additional information about the project from the
applicant and his advisers.[496]
7.20
The confusion about the responsibility for conducting
due diligence, also mentioned in Chapter 2, seems apparent in this case. The department's
evidence suggested that the checking of the applicant's bona fides and the
project's viability and risk was done at the advisory committee level. Dr
Dolman told the Committee that the Namoi
Valley SAP committee put the project through a 'process of checking' and that
it had also been considered by NENWACC.[497]
Mr Humphries,
the chair of both the Namoi Valley SAP committee and NENWACC, in his letter to
the minister said the department had 'managed' the due diligence process. In
this case, it seems the left hand did not know what the right hand had done.
7.21
As to the risk assessment of the project, Dr
Dolman observed:
I guess also that,
while there is a degree of risk associated with any project, this in essence
was a fairly high risk project. It also had very significant benefits for the
community.[498]
7.22
Under
the department's procedures at the time, the level and nature of due diligence
depended on the size and nature of the project, with private enterprises
subject to more extensive checks than public entities such as councils. The
assessment of financial risk of applicants and the commercial risk of projects was
also meant to be conducted by external consultants. For a 'fairly high risk
project' like Primary Energy involving over $1 million in funding, a high level
risk assessment conducted by external consultants should have been automatic.
However, the department was unable to satisfy the Committee that adequate due diligence
for a project of the size and level of risk of Primary Energy had been
conducted or that departmental procedures had been followed. The Committee
considers that the Primary Energy case is one example of possible systemic
weaknesses in the administrative procedures around due diligence of funding
grants (other examples are discussed in Chapters 6 and 10).
7.23
Two
further factors that might account for the inadequate due diligence with this
application relate to the way the application was handled within the
department, where the application appears to have been sidelined for a year and
then processed under urgent pressure from ministers' offices. These are
discussed in the next section.
Transfer to Regional Partnerships Program
7.24
Shortly after the application was sent to the minister,
the RPP commenced on 1 July 2003.
The Namoi Valley SAP ceased to exist and was brought under the umbrella of the
RPP.[499]
7.25
Primary Energy's application did not progress any
further for another year. The applicants themselves were not informed of the
reason for the delay. In Mr Carmody's
view:
The application was submitted and there was an inordinate amount
of delay. We subsequently learnt that there was this rolling over of the Namoi
Valley package into a successor
funding arrangement. From the applicant's perspective, to some extent it [was]
a mystery of the machinery of government... .[500]
7.26
Ms Riggs
of DOTARS explained her understanding that the application, along with a number
of other projects related to the Namoi Valley SAP, was 'put on hold until it
became clearer how NSW might be proceeding with its water sharing arrangements'.[501] The relevance of the water sharing
arrangements to these projects remains unclear. It seems strange to the
Committee, however, that a concern of such magnitude as to delay consideration
of several projects for a lengthy period time was not flagged earlier on in the
application process by the regional DOTARS officer with the local ACC. It also
seems an extraordinary administrative oversight by the department that the
applicant was not informed of the reason for the delay during this time.
7.27
Then, on 5 July 2004, over one year later, Senator Ian Campbell,
then Minister for Local Government, Territories and Roads, wrote to the Acting Deputy
Secretary of DOTARS declaring that 'sufficient progress had been made by the
company on the project to warrant its [the application] now being assessed'.[502] In sharp contrast to the 'inordinate
delay' over the previous year, Senator Campbell
requested the department 'progress the application so that the funds can be
provided within the next two weeks'.[503]
7.28
The Committee received little other evidence about the reasons
for the minister's intervention at this point in time, nor the reasons the
application was then required to be dealt with urgently (within two weeks),
when it had been on hold for the past year. The Committee does observe, however,
that the minister's request to expedite the application occurred in the lead up
to the announcement of the federal election when there was a surge in funding
approvals. As was shown in Chapter 2, over half of the total RPP funding was
approved during this period.
7.29
On 9 July 2004,
the law firm, Baker and McKenzie, provided a
letter and supplementary information to DOTARS on behalf of Primary Energy. This
letter indicated that an oral briefing had been given by Baker and McKenzie
to Mr Peter
Langhorne, a senior adviser to the then Minister
for Transport and Regional Services, John
Anderson.[504]
In view of Mr Langhorne's
subsequent intervention in the process on this matter (discussed below), this
briefing may also have been a factor in the apparently sudden interest in the
project within government circles.
7.30
According to the evidence from DOTARS, the
supplementary information from Baker and McKenzie included:
...advice on the nature of the project and it also included
reference to the fact that capital reserves were not a significant issue for
this project given that it was about raising funds to build a plant.[505]
7.31
This advice helped to inform the department's
assessment of the application and its subsequent brief to the minister on
approving funding for the project, which is discussed in the next section.
Changes in departmental advice to
the minister
7.32
On 23 July
2004, DOTARS provided advice to Minister Lloyd's
office, who became Minister for Local Government, Territories and Roads on 18 July 2004, on the application from
Primary Energy ('the original advice'). The junior minister, Minister
Lloyd, was the relevant decision-maker in
this case, rather than the former Minister for Transport and Regional Services,
the Hon John Anderson MP. This was because, as noted earlier, the project is
located in the electorate held by the former Minister Anderson.
As DOTARS explained to the Committee:
...it was established practice in the portfolio that if a project
were in a minister’s electorate then one of the other ministers or the
parliamentary secretary would become the decision maker, even if it was
otherwise common for that program to be the subject of the first minister. So
that was common and established practice in the portfolio. It was also
established practice in the portfolio that any briefing to either the junior
minister or the parliamentary secretary was copied to the portfolio minister.[506]
7.33
Witnesses from DOTARS refused to reveal the nature of
the recommendation made in this original advice to the Minister, on the ground
that it constituted advice to the minister.[507]
In the introduction to the report, the Committee has commented on the
illegitimacy of this ground as a basis for a claim to withhold information from
the Senate or one of its committees.
7.34
Subsequent events, as outlined below, suggest that the department's
original recommendation may have been to reject the funding application from
Primary Energy.
7.35
A few days after the original advice was sent to
Minister Lloyd, on either the 26 or 27 July 2004, the then Acting Secretary of DOTARS, Ms Lynelle Briggs, took a
call from Mr Langhorne, chief of staff to Minister Anderson, in relation to the
Primary Energy application. According to evidence from Ms
Briggs, Mr
Langhorne drew her attention to the department's
original advice, and said to her that it 'failed to take regard of a letter
that Ms Riggs
had received from Senator Campbell'.[508] The Committee queried whether Mr
Langhorne asked for the recommendations in
the minute to be altered:
Senator O’BRIEN—Following,
you suspect, the receipt of a copy [of the department's advice] in Minister
Anderson’s office, Mr
Langhorne rang you as the acting secretary
to ask you to have the recommendations altered?
Ms Briggs—He
rang me, as I said, to ask me whether I had seen Senator Campbell’s
letter. He did not think the minute accurately reflected that. Clearly, his
intent was to see if I agreed with that and to take it from there. I would
hasten to add that he did not put me under any duress to change the minute nor
would he have, because we operated on some quite clear operating environments
in that office around the department’s advice being the department’s advice.[509]
7.36
The department's original advice of 23 July 2004 was then withdrawn at
the request of the acting secretary of DOTARS. Ms
Lynelle Briggs
explained to the Committee:
I read the correspondence from Senator Campbell
and the minute that had gone across to the office [of Minister Lloyd].
I formed the view, in doing so, that the minute was inadequate. It did not give
due regard to Minister Campbell’s
correspondence and it may therefore have misled the new minister, Minister
Lloyd, about the chain of events and the
circumstances at that stage.
When I met with the officials concerned, I said to them that
that was my view and that I thought that the department’s brief did not
responsibly and rigorously deal with a request that Minister Campbell had made
in that letter. For that reason, I thought the minute was inadequate; that is
probably the description I would use. When a minister makes a request of his
department—and it is very rare that a minister does that in writing—then it is
my professional view that it is the department’s responsibility to see that
that request is implemented. That was, in effect, what I said to the staff.
I then asked that the minute be withdrawn.[510]
7.37
Minister Lloyd's
office also returned the original brief to the department, with the annotation
'As discussed, please provide replacement brief'.[511]
7.38
Ms Briggs
was at pains to point out to the Committee that, although the Minister's office
had received the original advice, the advice had not actually been read by Minister
Lloyd.[512]
Ms Briggs
explained that, in her view, her role in the process was:
...to ensure that the minister’s request was implemented and that
the department operated professionally at all times in its handling of the
issue. It was also to ensure that Minister Lloyd
was advised on the outstanding issues.[513]
7.39
DOTARS revised the advice in relation to the Primary
Energy project, and provided the new advice to Minister Lloyd
on 28 July 2004. On 2 August 2004, just weeks before the
2004 federal election was announced, Minister Lloyd
approved $1.2 million in RP funding for the project.[514]
7.40
Before examining the progress with the project to date,
the Committee outlines its concerns about three aspects of the assessment of
the Primary Energy application: the intervention in the department's assessment
and advice on the application by ministers and their staff; conflicting
evidence to the Committee from departmental officers; and the use of the SONA
guidelines to bypass the eligibility criteria of the RP program.
Ministerial intervention in
departmental assessment
7.41
The Committee has four concerns about the intervention
by either ministers or their staff in the department's consideration of the
application. First, the direction from Senator Campbell
on 5 July 2004 'to progress
the application so that the funds can be provided within the next two weeks'[515] seemed to pre-empt any assessment of
the project under the RPP. Instead, as discussed later in the chapter, the
application had to be assessed under the (then) unpublished SONA guidelines.
7.42
Second, the Committee is equally concerned with the
degree of intervention on the part of a ministerial staffer that caused the
department to revise its advice on the project. Although the Committee was not
provided with a copy of either the original advice or Minister Campbell's
letter, there can be little doubt based on Ms
Briggs's words that the revised brief
differed significantly from the original brief tendered to Minister
Lloyd. According to evidence received from Ms
Briggs, the revised advice was 'consistent
with the request from Minister Campbell
and the agreed programme guidelines'.[516]
When questioned about the changes, Dr Dolman
indicated:
Senator O’BRIEN—I
think we can take it that the brief would have had to have been changed
substantially as a result of that interception and intervention.
Dr Dolman—It
is probably fair to say there was a change in nuance.[517]
7.43
Dr Dolman's claim that the difference between the two briefs
was merely a 'change in nuance' is difficult to reconcile with Ms Briggs's
description of the original advice as 'inadequate' in that it 'did not
responsibly and rigorously deal with' Minister Campbell's direction that
funding for the project proceed.
7.44
That said, it is hard to accept that the original
advice 'did not give due regard' to Minister Campbell's
letter, in the way that Ms Briggs
suggested. Dr Dolman, the DOTARS officer who signed the original advice to the
Minister, gave evidence to the Committee that he was aware of Minister
Campbell's letter when the original advice was prepared, and indeed that the
letter was appended to the original advice.[518]
It seems to the Committee more likely that the original advice placed different
weight on factors relevant to the eligibility and viability of the project than
did the minister's letter, and that the department initially came to a quite different
conclusion to Minister Campbell
as to whether the project should be funded.
7.45
The involvement of Mr Langhorne, the chief of staff in
Minister Anderson's office, raises two further concerns about the decision
making process in relation to this grant. The first is the growing tendency of
ministerial staff to act as proxies for their ministers by inserting themselves
into the internal decision making of departments or – as was seen in the Tumbi
Creek case in Chapter 5 – administration of programs.[519]
7.46
The other, arguably greater, concern in this case is
that Mr Langhorne's involvement in the formulation of the departmental advice
to the minister transgressed the department's practice of quarantining
ministers from decisions related to projects from their own electorates. As Minister
Anderson's chief of staff, Mr
Langhorne was effectively acting in his
minister's name, even if the minister had not been personally privy at that
stage to the detail of the application. Because the application concerned a
project in Minister Anderson's
electorate, neither the minister nor any of his staff should have been involved
in any way with the decision making on the project. By intervening to have an
advice from the department to another minister changed, Mr
Langhorne gave rise to a possible conflict
of interest.
7.47
As this example illustrates, the department's practice
of copying all briefs to the senior portfolio minister (in this case, Mr
Anderson) is at cross purposes with the practice of keeping ministers at arm's
length from applications originating in their own electorate. The Committee
believes that in cases such as the Primary Energy application, the portfolio
minister and his office should be
quarantined from all departmental briefs until after a decision has been made.
Conflicting evidence
7.48
The Committee is concerned about a marked disparity in
the evidence presented by departmental officers during its examination of the
two briefs that went to the minister. The Committee examined this matter with
departmental officers over two hearings, on 12 and 17 August 2005.
7.49
At the 12 August hearing, departmental officers
indicated that the department had received a letter from Mr
Langhorne in relation to the Primary Energy
application. When asked about the letter, Ms
Riggs stated:
Senator O’Brien – can you confirm that you did
receive a letter from Mr Langhorne
– the senior adviser to the former Minister for Transport and Regional Services
– in relation to this application?
Ms Riggs – yes, I believe I did.[520]
7.50
Ms Riggs
went onto say that she was on leave when the letter was sent to the department,
and then commented:
But I have seen it since. I believe there is such a letter.[521]
7.51
A little later in her evidence Ms
Riggs qualified her knowledge of such a
letter, saying that her answers were made on the basis of 'the presumption of
the accuracy of my memory that such a letter exists'.[522]
7.52
Dr Dolman
also told the Committee he recalled seeing the letter from Mr
Langhorne about the Primary Energy
application:
Senator O’Brien
– You saw Mr Langhorne’s
letter, didn’t you?
Dr Dolman – I did see Mr Langhorne’s
letter. I am not sure I can recall the
full details, but I know the brief we provided did address the issues raised in
that letter and in the letter that Minister Campbell
had written.[523]
7.53
This evidence left the impression that the letter from Mr
Langhorne had influenced, if not been
instrumental in causing, the revision of the original brief to the minister on
the Primary Energy application.
7.54
However, at the hearing on 17 August Ms Riggs told the
committee that following her evidence on 12 August a search of departmental
files had failed to locate any letter from Mr
Langhorne concerning the Primary Energy
application. Ms
Riggs instead pointed to the letter the
department had received from the law firm, Baker and McKenzie,
on behalf of Primary Energy. Ms
Riggs said she believed that it was the
Baker and McKenzie letter she had had in mind when responding
to the Committee's questions about a letter from Mr
Langhorne.[524]
7.55
Dr Dolman,
on the other hand, at the hearing on 17 August told the Committee that he had
been referring to the letter from Minister Campbell
to the department when responding to questions about the Langhorne letter. Dr
Dolman went onto suggest that he thought that he and Ms Riggs had between them
mixed up the letters from Baker and McKenzie and from Minister Campbell when
answering questions at the earlier hearing.[525]
7.56
The Committee finds these explanations unconvincing. Ms
Riggs told the Committee on 12 August in
response to questioning that she had seen a letter from Mr
Langhorne. She did not seek to take the
matter on notice as would normally be the case, particularly if a senior
departmental witness had some doubts about the existence of a letter from a
senior minister's chief of staff. Dr Dolman, who on 12 August did not qualify
the 'accuracy of his memory', had a clear recollection of the letter as he
advised that the issues it raised were addressed in the second, revised brief
that went to the minister on the Primary Energy application. At the earlier
hearing he also referred to a separate letter from Minister Campbell.
His later claim on 17 August that he was referring to the minister's letter
when answering questions about a letter from Mr
Langhorne is therefore not a satisfactory
explanation for the shift in his evidence.
Funding eligibility and the SONA procedures
7.57
Another aspect of particular concern about the Primary
Energy application is the processing of it under the SONA guidelines. A number
of the Committee's general concerns about the use of these guidelines,
discussed in Chapter 2, are thrown into sharp relief in this case.
7.58
The application process relating to Primary Energy was
complicated by the fact that the funding application from Primary Energy was
assessed under the RPP, even though the application was initially made and assessed
under the Namoi Valley SAP. Ms Riggs
explained to the Committee that, with the lapsing of the SAP, the only
mechanism available to progress the application at the time was through the Regional
Partnerships appropriation:
...the Namoi Valley Structural Adjustment Package had not been
allocated discrete funding by the government, so if the application was to be
progressed it had to proceed under the funding envelope of the Regional
Partnerships Program. The initial assessment was under the Namoi Valley
Structural Adjustment Package guidelines which had been separate and had
different elements from those of Regional Partnerships.[526]
7.59
DOTARS used the application made under the Namoi Valley
SAP and some additional material, including the information provided by Baker and
McKenzie, to assess the project under the RPP.[527]
7.60
However, Primary Energy's application did not meet the
RPP guidelines. In particular, the RPP guidelines provide that commercial enterprises
requesting funding for planning, studies or research are not eligible for RPP
funding.[528] The evidence to the
Committee shows that the grant to Primary Energy has been expended on, among
other things, a CSIRO study, research on a production life cycle analysis and project
planning.[529] The RPP guidelines also
provide that projects will be ineligible where they are requesting funding for
'seed funding for the development of prospectuses'.[530] When asked to confirm that the grant
had been spent on activities ineligible under the RPP, Dr
Dolman replied:
That is correct. Both the planning aspects of it and the fact
that it involved a prospectus were outside the Regional Partnerships
guidelines, but they were not outside the Namoi Valley Structural Adjustment Package
guidelines.[531]
7.61
Because the Primary Energy application fell outside the
RPP guidelines, the department resorted to considering it under the SONA
procedures instead. As outlined in Chapter 2, the SONA procedures can be used:
...where a project or initiative would require the waiver of some
specific part of the guidelines or eligibility criteria.[532]
7.62
In the case of Primary Energy, Dr
Gary Dolman
informed the Committee that:
The reason this [project] was considered under the SONA
procedures was that it was an application under the Namoi Valley Structural
Adjustment Package. The reason for that was that it was for a prospectus, which
is precluded from funding under Regional Partnerships eligibility guidelines.
Those eligibility restrictions did not apply under the Namoi
Valley Structural Adjustment Package. I guess that was the reason why this was
put forward under the SONA procedures: that it would have been unfair to judge
the project against criteria that did not apply at the time the application was
made.[533]
7.63
Given the apparently different criteria under the Namoi
Valley SAP and the RPP, the Committee questions the appropriateness of DOTARS'
use of the original application made under the Namoi Valley SAP to assess the
project under the RPP. There was an apparent absence of any appropriate
transitional arrangements to deal with an application such as in the Primary
Energy case where a decision was pending. The Committee considers that it may
have been appropriate for DOTARS to request that Primary Energy provide a fresh
application under the RPP, particularly given the fact that the application was
over a year old by the time DOTARS considered it again and the project
timetable was out of date. This option appears to have been precluded, however,
due to the urgency required for approving the application at the ministerial
level.
7.64
In this regard, there is a strong sense from the
evidence that a decision was made at a senior ministerial level to get funding
for the project regardless of program criteria or constraints and that the
department was left to find the vehicle to achieve this end.
7.65
The Committee considers that the funding granted to
this project illustrates the way in which the SONA procedures can circumvent,
and even undermine, the RPP guidelines and eligibility criteria. Indeed, the
SONA criteria appear to be so broad that the government can, as it has in this
case, apply the SONA procedures arbitrarily to fund almost any project the
government feels inclined to fund.
Project progress and outcomes
7.66
For the Committee, the fact that construction of the
ethanol plant has yet to be confirmed, let alone started, casts further doubts
on the merits and viability of the funding grant to Primary Energy. The
Committee sought to identify the progress made with the project, what the grant
money had been expended on and when construction on the plant will start and
production begin.
7.67
Following the minister's approval of the grant on 2 August 2004, DOTARS and Primary
Energy entered into a funding agreement in relation to the ethanol plant
project on 28 September 2004.
Grant payments of just over $1 million have now
been paid to Primary Energy for meeting various milestones under the funding
agreement.[534] Payments have been made
as follows:
-
the first payment, on 29 September 2004, of $426,800,
made on signing of the funding agreement;
-
a second payment, on 27 January 2005, of $342,100
for meeting milestone one of the agreement; and
-
a third payment, on 11 May 2005, of $235,400 for
meeting milestone two of the agreement.[535]
7.68
According to the department, these initial milestones
involved:
...work on plant design and specifications, further legal fees,
further project management and project development, further office expenditure
and travel, some promotional activities, some tax-structuring advice and
project accounting.[536]
7.69
The Committee was concerned to discover that the first
payment of $426,800 was simply for signing of the contract between the
department and Primary Energy. This is in contrast to the milestones other
projects have had to achieve, even in cases involving lower amounts of grant
funding. The department indicated that the first payment reflected a direction
in Minister Campbell's letter
for an instalment to be paid as soon as possible on approval of the application
due to some urgency with the project.[537]
However, in the Committee's view the urgency with the first payment may have as
much reflected the year long delay in the processing the application as
anything else.
7.70
The Committee notes also that the funding agreement was
varied on 6 July 2005,
among other things, to specifically refer to funding for a CSIRO study.[538] Ms
Riggs explained to the committee:
...the approved project includes work under contract by the CSIRO.
I am advised that Primary Energy approached CSIRO in September 2003 with a
request to undertake the study. However, work on the study did not commence
until 14 October 2004
after the signing of the funding agreement and the first payment.[539]
7.71
A payment of $155,100 was due to be paid on 1 August 2005 for meeting milestone three
of the funding agreement. Evidence to the committee did not indicate whether
Primary Energy had met this milestone, or whether the payment had been made. A
final payment of $50,600 is to be paid on 1 March 2006 on meeting milestone four of the funding
agreement.[540]
7.72
Mr
Kelley, the managing director of Primary
Energy, told the Committee that 'we have gone the extra step and we have had
each milestone payment externally audited in accordance with the [funding]
agreement'.[541] The department
confirmed that it had received detailed reports on project activity against the
first two milestones.[542]
7.73
In discussing the project's progress, Ms Riggs reminded
the Committee that the milestones relate not to plant construction but are
'about doing the necessary work in order for this company to then approach the
capital market in order to attract funds, which would then facilitate the
construction of an ethanol plant'.[543]
7.74
In terms of the project's timetable, on 15 September 2005 Mr
Kelley told the Committee that:
We have 12 to 18 months of build time, so that is why we are not
producing ethanol now. We are aiming to financially close this project this
year, which does not give us long, but it is possible and we are hoping to be
in production by the first quarter of 2007.[544]
7.75
The Committee also took confidential evidence from Mr
Kelley and Mr
Carmody about the structure of the project
finance for the plant and the identity of the financial partners (or equity
investors) who intend to invest in the project. Mr
Carmody told the Committee in public
evidence that Primary Energy's financial partners 'have not made any financial
contribution as we speak today' but that
Those entities we have disclosed to you today have every
intention of becoming equity investors... .[545]
7.76
The Committee remains concerned about the progress and
viability of the Primary Energy project. It considers that DOTARS should
monitor the project closely. The Committee also believes that to satisfy the
Parliament that the project is on track and that public money has been expended
appropriately the department should table in the Senate future external
auditor's reports on progress against milestones.
Conclusion
7.77
As the Primary Energy ethanol plant is not expected to
start production until 2007, it is impossible for the Committee to determine
whether grant funding of $1.2 million in this case represents value for money.
However, the Committee is concerned at the approach and decision making
associated with this project which the department classified as high risk. The
evidence to the Committee raises more questions than it answers about the
adequacy of the due diligence checks on the project, the reason for truncated
time given to the department to assess the application and the role of
ministerial staff in prompting the department to revise its original advice to
the minister. The year long delay in processing the Primary Energy application
also reveals shortcomings in transitional arrangements for applications under
consideration when a program lapses.
7.78
The Committee is particularly struck by the parallels
this case shares with case studies relating to Tumbi Creek and A2 Dairy
Marketers discussed in Chapters 5 and 6. As with those cases, the Committee was
unable to examine relevant evidence to explain why the minister at the time
sought to have the assessment of the project rushed through the department.
Similarly, Primary Energy adds a further example to those two cases and others of
the expansion in power of ministerial staff and their ability to directly
intervene in the provision of advice from departments to ministers. The cases
of Primary Energy and A2 Dairy Marketers also point to possible systemic
weaknesses in the RPP procedures for due diligence testing of applications. In
all three cases, ministerial direction to fast-track the departmental
assessment of applications occurred during the surge in funding approvals prior
to the announcement of the federal election.
7.79
The Primary Energy case also demonstrates the degree to
which the SONA procedures provide almost unlimited discretion for ministers to
approve projects even when confronted with restrictions under the RPP
guidelines. In the chapter that follows, the Committee examines another case –
the funding for the National Centre of Science, Information and Communication
Technology, and Mathematics Education for Rural and Regional Australia – which also
reveals the scope under the SONA procedures for ministers to approve projects
otherwise ineligible under RPP.
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