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The Government was warned that loaning Westland Milk Products $10 million may set a precedent to other companies that they could turn to the Government when they could not get a loan from the bank.
In a briefing to Finance Minister Grant Robertson in September last year, released on the Treasury's website this afternoon, Treasury officials said the decision to loan Westland the money should be deferred.
Despite this, two months later Regional Economic Development Minister Shane Jones announced that $9.9 million would be allocated to the South Island dairy co-op.
Jones and Robertson have been approached for comment.
In the briefing, Treasury officials said the proposal should be deferred until more consideration had been given to when the Crown should act as a lender of last resort to a private company.
"Agreeing to this proposal may set a precedent, with other private companies also requesting loans from the PGF where they cannot get credit on acceptable terms from a bank."
The advice said the justification for the proposed loan is that value-add dairy is one of the few industries on the West Coast with growth potential.
"This criterion of 'growth potential' alone would not exclude similar loan requests from other companies seeking to establish themselves on the West Coast."
National economic development spokesman Paul Goldsmith said Jones was playing fast and loose with $3 billion of taxpayer money.
"The public haven't been given enough detail to know how much of a subsidy is being doled out.
"This kind of loose spending is why the Government is looking at an enterprise-destroying new Capital Gains Tax."
Last month, it was revealed that the Government had a get out clause which allows it to exit the deal in the event of a major change in ownership.
This came as Westland's Chairman Peter Morrison confirmed the co-op had "entered into a strictly confidential discussion with a select number of interested parties."
Jones said at the time that although the contract between the Crown and Westland was still being finalised, the PGF reserves the right to revisit any funding decision prior to a contract being entered into.
"[The contract] will include conditions that will give the Crown the right to exit the contract in cases of major ownership changes, should that be deemed appropriate.
After a $100m contestable fund was set up to fund Māori to develop land in their regions, Goldsmith said the Government should be wary of becoming the banker of last resort.