The chief executive officer of Crown Investments Corp. says Saskatchewan taxpayers are on the hook for at least $1.5 million and probably more in the wake of the failure of a government-backed agribusiness.
FarmGro Organic Foods Inc. was placed into receivership last December when one of its largest creditors, the Saskatchewan Government Growth Fund, decided it wanted to cut its losses.
CIC and SGGF are the company’s two largest secured creditors and are owed $3.8 million and $3 million respectively. The receiver said there is not enough value in the company’s assets to pay off the two government agencies in full.
Read Also
Research looks to control flea beetles with RNAi
A Vancouver agri-tech company wants to give canola growers another weapon in the never-ending battle against flea beetles.
In addition, the province will lose another $1.5 million in share equity it had invested in the company, said CIC chief executive officer Frank Hart.
Saskatchewan Party leader Elwin Hermanson said it’s another case of mismanagement of taxpayer money in the agribusiness sector, coming on the heels of the Spudco potato fiasco.
But this particular investment has an additional layer of intrigue.
Two days after Hart became CEO of CIC, the agency invested $4.4 million in FarmGro, a company that was Hart’s client while he was a partner at KPMG Consulting. That client paid KPMG $260,000 in cash and 481,500 in FarmGro shares.
KPMG’s fees rose proportionate to the size of the FarmGro project. Company founder Bob Balfour said what started as a $3 million project ended up as a $12 million facility.
Hermanson said the government’s investment in FarmGro is a clear case of conflict of interest and mismanagement of taxpayer money.
“The people on the short end of the stick are the taxpayers of the province of Saskatchewan. They’re the ones now that are out several millions of dollars because of the way the NDP government approached this deal and I think the taxpayers have a right to know how this could have happened.”
Hart said before he took the job as CEO of CIC, he informed the government of the possible conflict of interest, and was cleared by the NDP brass.
“All of that was disclosed to the government. They were aware of it.”
He said the funding arrangement with FarmGro was in place long before he was in negotiations with CIC for the agency’s top job.
Hart also objects to accusations that government money was misspent on the FarmGro project.
“There were lots of other people that put all kinds of money into the company that did their own due diligence on it and also thought it had a reasonable chance of success.”
One of those people is Keith Brown, a Gravelbourg, Sask., businessperson who was a former chair of FarmGro. He had 507,500 shares in the company when it went out of business.
“Everyone who looked at the plant thought that it would be spinning off cash left and right,” said Brown.
The business plan was built on the assumption that industry demand would rapidly take the plant to full capacity and that revenues would be produced at high margins.
“The business reality was that business was very, very difficult to get. The business reality was that the margins were nowhere near what we had imagined. The business reality was that our costs of raw materials, grain, was very, very expensive.”
Eventually the debt load got so heavy that even if the plant was running at full capacity there was no way it could keep up to the interest on its debt, never mind covering the principal or shareholder returns, said Brown.
FarmGro founder and former board member Balfour disagreed. He said the plant was about to turn the corner. FarmGro’s last quarter was by far its best.
In fact, Balfour and some of the other organic farmers who originally invested in the project want to buy the plant back.
He said with help from CIC and additional capital from shareholders, they can buy out SGGF and keep the plant a Saskatchewan-owned operation. Balfour has approached CIC about the proposal but said the agency is unwilling to listen.
Hart said he has met with Balfour several times but said Balfour’s proposal is a long way from where it has to be.
“He doesn’t have an offer that’s as good as the one on the table.”
Hart wouldn’t expand on how much that offer on the table is or who it is from, but Brown had some thoughts on the subject.
“The rumour is that the purchaser is not going to be in the organic business anymore.”
He said the mill will be turned into a conventional flour mill.
