Bob Sercombe. Credit:Mario Borg The exemption was signed off by then water minister Tim Holding, based on a recommendation from his department. It was one of a string of federal and state decisions that have been favourable to the company. It occurred as the Brumby government pursued its controversial $2 billion irrigation upgrade - a project that will be the focus of an Ombudsman's report to be tabled this week. The report is expected to propose sweeping changes to the so-called food bowl modernisation project. One possibility could be the scrapping of the Northern Victorian Irrigation Renewal Project, whose chief executive, Murray Smith, resigned yesterday, citing family reasons and a desire to return home to Queensland.

Neil O'Keefe. Credit:Mike Bowers Sustainable Soils - and in particular its relationship with state bureaucrats, officers of the renewal project and consultants - is expected by industry insiders to feature in the Ombudsman's report. Exemptions to the cap on water trading can be made for a variety of reasons, including to facilitate the food bowl program and to enable irrigators to leave the industry during extreme drought. However, the rule change of June 24 last year was the only exemption to date to have benefited a single company. Yesterday, Mr Holding said that at the time he signed off on the change, he was unaware that Mr O'Keefe's company was to be the beneficiary.

''The project was a water recovery project previously approved by the Murray Darling Basin Authority. I was not aware, and nor would it have been necessary for me to be aware, of the ownership of the company when granting such an exemption,'' he said. Mr Holding said the exemption was necessary so that Victoria could meet its commitments to water recovery under the federal-state Living Murray program. Earlier in June last year, The Age reported that Sustainable Soils had begun buying drought-stressed farms in northern Victoria, beginning with five farms at Leitchville, near Echuca. Backed by Chinese partners, the company's plan included using brown coal fertiliser to transform irrigation-dependent dairy properties into water-efficient organic dairy farms and to sell milk products to China. Important to the company's strategy appears to be the harnessing of state and federal government funds, both from the former Brumby government's $2 billion food bowl modernisation project and from the federal water buy-back and irrigation upgrade schemes. In June last year, Sustainable Soils was in negotiations with the Murray Darling Basin Authority to sell the rights to more than 3 billion litres of water under the federal-state Living Murray program. However, Victoria's 4 per cent trading cap was an obstacle to the deal.

The Age has learnt that at least one senior state bureaucrat was lobbied about the proposed exemption in the lead-up to Mr Holding granting it. In July this year, The Age revealed that Sustainable Soils was behind a newly formed agricultural firm given in-principle approval for a $32 million grant under a Gillard government assistance program for irrigation upgrades. Industry insiders were surprised when a company unknown to them, Irrigation Efficiency Partners Pty Ltd, won the second largest of nine grants, most of which went to public or industry bodies to oversee the modernising of farms. Irrigation Efficiency Partners was registered in March, just days before grant applications were due. At the time, Shepparton-based Liberal MP Sharman Stone queried the grant, describing it as ''rather odd''. Sustainable Soils' receipt of favourable government decisions and funds is complicated by Mr O'Keefe's continuing role as the Victorian government's representative on Water for Rivers, a joint Commonwealth-state company charged with recovering water from farmers for the Murray and Snowy systems. In July, federal Water Minister Tony Burke denied the company's Labor connections had helped it secure government support. He said he had acted on the recommendations of his department, which had conducted an independent, competitive and rigorous assessment of applications.

Sustainable Soils declined to comment for this story.