Schott

Kerry Schott, the subject of a smear campaign, told the hearing of her warning to AWH chairman Arthur Sinodinos. Photo: Ben Rushton

Liberal Party heavyweight Arthur Sinodinos was warned by top public servants to be careful of the company he was keeping as chairman of Obeid-linked company Australian Water Holdings because ''they may be dishonest'', a corruption inquiry has heard.

Former Sydney Water chief executive Kerry Schott told the Independent Commission Against Corruption on Monday that she cautioned him that AWH was charging expenses to the utility that were ''not appropriate''. Despite the warnings, Senator Sinodinos remained as chairman of the company for another year.

The commission is investigating allegations AWH secretly charged millions of dollars in expenses to Sydney Water, including for limousines, donations to the NSW Liberal Party and legal fees. ''Too much money was being spent,'' Dr Schott said. ''We were not aware what it was being spent on.''

The inquiry heard Dr Schott and the head of Sydney Water's audit committee, John Brown, met Senator Sinodinos ''shortly after'' he was appointed chairman of AWH in 2010.

''Did you … raise with Mr Sinodinos on a personal level the effect that his association with the company might have?'' counsel assisting the ICAC, Geoffrey Watson, SC, said. ''We suggested to Mr Sinodinos he might be careful with the company he was keeping,'' she said. ''We thought that they may be dishonest.''

Asked how Senator Sinodinos responded, Dr Schott said: ''There was no reaction to that.''

Senator Sinodinos, who denies any wrongdoing, stood aside as Assistant Federal Treasurer last week pending the ICAC inquiry.

He joined the AWH board in 2008 and became chairman in November 2010 on a salary of $200,000 a year, plus bonuses. He resigned a year later to take up a Senate position.

The inquiry has heard Senator Sinodinos stood to make up to $20 million if AWH entered into a lucrative public-private partnership with the incoming Liberal state government, and he was recruited to ''open lines of communication with the Liberal Party''.

Dr Schott told the inquiry former NSW premier Nathan Rees, who was then water minister, ''used to refer to them [AWH] as a bunch of crooks'', apparently based ''on advice from Sydney Water … that the company was over-charging him, over-charging us''.

The commission has heard allegations the family of corrupt former Labor minister Eddie Obeid had a 30 per cent ''secret shareholding'' in AWH and that Mr Obeid corruptly lobbied colleagues on behalf of the company.

Senator Sinodinos has consistently denied he was aware the Obeids were financially involved in the company.

Sydney Water contracted AWH to manage the installation of water and sewerage infrastructure in the city's north-west and agreed to cover administrative costs under an agreement Dr Schott said was ''very sloppily drafted''.

Dr Schott said ''the expense claims did moderate somewhat'' after the meeting with Sinodinos.

The inquiry has heard a cabinet minute supporting a PPP between Sydney Water and AWH was doctored by Mr Obeid's political allies, Labor MPs Tony Kelly and Joe Tripodi, to favour the company.

Dr Schott said the 2010 minute ''read as though it was written by Nick Di Girolamo'', a prominent Liberal Party fund-raiser and associate of the Obeid family who joined the AWH board in 2005.

She agreed this was ''tantamount to a fraud'' and added it was a ''terrible abuse of government process''.

The PPP would have been ''very bad'' for NSW in terms of the risk Sydney Water would have borne and the cost to taxpayers, she said.

The inquiry has heard her opposition to the PPP allegedly led Mr Obeid to tell a colleague to ''sack that bitch''.

Mr Obeid allegedly predicted a corruption complaint would be made against her by Liberal MP Chris Hartcher.

An anonymous and false complaint was made, the source of which is not yet clear but it has been linked to Mr Hartcher's office.

''Are you corrupt?'' Mr Watson said. ''No,'' Dr Schott replied.

''I'm glad to hear it,'' Mr Watson said.

Earlier, the inquiry heard that former NSW Labor treasurer Michael Costa, who replaced Senator Sinodinos as chairman of AWH, was ''acutely aware'' the company was running up huge bills and made efforts to rein in costs. He is not accused of any wrongdoing.

Peter Canaway, a current director of AWH, said Mr Costa ''started to get very active in cutting [directors'] salaries back''.

Mr Canaway brought in auditors to examine the books. They noticed an AWH director had written two cheques to himself in late 2010, totalling $57,000.

There were no receipts for these payments and the inquiry has heard that AWH also submitted these bills to Sydney Water.

with Jonathan Swan

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