The $85m spend to revive KiwiRail workshops that officials recommended against

The Government has pushed ahead with an $85m investment in the revival of KiwiRail's heavy-engineering workshops in Dunedin. Photo / Peter McIntosh.

Officials recommended against an $85m government investment in the revival of KiwiRail's heavy-engineering workshops in Dunedin in the 2021 budget, but Ministers pushed ahead with the spending last year regardless. The promise to revive Hillside workshops was a Labour Party Manifesto commitment.

Advice of January, 2021, recently released by the Ministry of Transport, is heavily redacted on the grounds that it is confidential to the government.

The single reason for the recommendation against the spending that was not redacted was that the cost of rail wagon assembly anticipated for the revitalised workshops is estimated at 30 per cent higher than assembly of the wagons abroad.

The Labour Government said it has a vision for the Hillside workshops that is larger than the simple cost of wagon assembly as it compares to services procured in countries like China and Indonesia. KiwiRail is a state-owned enterprise.

Transport Minister Michael Wood cast the funding as an investment in "wider benefits" such as emissions reduction aims in light of man-made climate change and job creation in regional New Zealand.

Transport Minister Michael Wood. Photo / NZME

"Supporting our railways by revitalising the Hillside Workshops will not only contribute to our climate change goals by reducing transport emissions, it will also create jobs and boost our economy by acting as a magnet for private sector investment in the region, and supporting the development of a skilled workforce."

"I note that we carefully made the decision to proceed with local assembly, but not full [wagon] manufacture," Wood said.

David Gordon, KiwiRail chief operating officer: capital projects and asset development, said demolition of buildings is underway to build a new mechanical workshop and wagon assembly facilities. Assembly itself is expected to begin in late 2023.

Opposition parties are unconvinced that the plan is prudent. "Michael Wood should park his ideology at the shed door and think about how to address a cost of living crisis and a debt crisis," Act Party leader David Seymour said.

Act leader David Seymour. Photo / Mark Mitchell

"If Michael Wood knew what sort of engineering technology to invest in he probably wouldn't be in his current job."

The Hillside workshops are emblematic of New Zealand's more vibrant industrial past, which includes the manufacture of both rail locomotives and wagons. Following the Second World War, when the Hillside workshops and foundry were turned additionally to machining weapons components, they employed some 1200 people.

In 2012, the workshops were all but closed under a National-led coalition government that included the ACT Party.

KiwiRail contracted cheaper suppliers overseas, particularly in China, for wagon assembly and Australian company Bradken leased the Hillside foundry. It shuttered operations in 2020 citing a need to specialise in mining and resources equipment.

The $85m spend for Hillside (allocated over five years) is part of a much larger $1.3m envelope of funding for Kiwirail signed off in the last budget.

The majority of the funds are earmarked for the purchase of new locomotives and wagons and the completion of upgrades to maintenance facilities, incuding a new mechanical hub at Christchurch.

KiwiRail estimated that the Dunedin wagon assembly will create 45 operational jobs, including apprentices.

The new funds follow a previous $20m spend on the Hillside workshops buildings and mechanical plant in Labour's first-term (in coalition with the New Zealand First Party) through the 'Provincial Growth Fund'.

Whether Wood's hope that the $105m now committed to Hillside eventuates in more private sector revitalisation in the region remains to be seen.

Many of the country's traditional users of such engineering facilities, including the oil and gas sector and mining, are under heavily increased regulatory constraints and in deep decline.

Meanwhile, there is mounting pressure on the Crown to commit further funding to KiwiRail in a variety of other areas.

The inter-islander ferry upgrade is a notable example. About $435.1m in Crown equity was appropriated for the programme through budgets 2019 and 2020 and $400.1m was appropriated in Budget 2020 on the understanding that this would be the final Crown contribution to the full programme.

It's not likely to be.

In early 2021 KiwiRail requested a further $565m from the Crown to fund the new inter-islander ferries.

Deciding fresh funding was deferred by Ministers because of escalating costs and KiwiRail's incomplete business case. At the time the Treasury noted that committing funding at that juncture would effectively commit KiwiRail to a project cost estimated at $1.76b, including over $1b in portside facilities costs.

KiwiRail returned to shareholding ministers (Grant Robertson, Finance Minister and David Clark, Minister for State Owned Enterprices) again in June, 2021 seeking a total of $257m for the project, having revised some elements.

Ministers signed off on the contract with South Korean shipbuider Hyundai Mipo Dockyard (HMD) to purchase two large rail-enabled ferries, but Treasury documents suggest they deferred committing funds at the time, and instead created a tagged contingency to fund future sums. The total for the contingency is redacted.

Future costs to the Crown are likely to be considerable. KiwiRail is committed to pay HMD $551m for ferries, some $150m more than the funding committed in 2020. KiwiRail is expected to ask the Crown to cover either all or most of the more than $1b cost for port facilities at Picton and Wellington.