Finance Minister Nicola Willis speaks about KiwiRail cancelling its mega Cook Strait ferry contract with the South Korean shipyard Hyundai Mipo Dockyard.
Video / Mark Mitchell
Ministry of Transport officials have raised the question of KiwiRail’s suitability to run the Interislander business in the long term and have suggested it could be separated into another State-Owned Enterprise (SOE) or sold.
The decision, announced by Finance Minister Nicola Willis, sent a sharp warning to the public sector that the Government is not afraid to shake up projects that may have previously been presented as a fait accompli.
Requests made by the Herald under the Official Information Act for documents relating to the decision have previously been declined because they would soon be proactively released. These documents have been released today by the Treasury.
Documents include the letter Willis sent to KiwiRail relaying the Government’s decision.
They also reveal some of the alternative options floated and more about the question of KiwiRail’s suitability to run the Interislander business.
Questions over whether KiwiRail should run Interislander
Officials said the difficulties KiwiRail has had with the mega ferry project, along with core rail issues it faces, raised the question of KiwiRail’s suitability to run the Interislander business in the medium to long term, officials said.
“The Interislander business could be separated into another State-Owned Enterprise or sold via a trade sale, they said.
“KiwiRail would be expected to contract with this business to provide freight services across the Cook Strait, but how this is achieved would be left as a commercial decision between parties.”
Finance Minister Nicola Willis said the Government was concerned about continued significant cost blow-outs. Photo / Mark Mitchell.
Officials said KiwiRail was incentivised to make cancelling the contract for the mega ferries as unattractive as possible and had suggested the break fee to do so could be high.
“But KiwiRail have also acknowledged that ferry prices have increased significantly since they signed their fixed price contract, so it is conceivable the ferries could be sold on for a price that does not result in such high losses.”
Officials said it was plausible that if a new approach was adopted, especially by someone other than KiwiRail, then a more commercially viable option should be possible.
“Even if significant government support is required resetting, now could provide a more open and transparent process.
“This would allow all parties to access any required subsidy and for the Government to be very clear about what it is purchasing.”
In a statement this afternoon, KiwiRail chief executive Peter Reidy said the SOE remained committed to operating the Interislander service.
“We have run the service for over 60 years, and we want to continue to run it for another 60 as part of an integrated rail network supporting New Zealand businesses, passengers and our visiting tourists.
“We are working with the Government’s Ministerial Advisory Group, Ministry of Transport, Treasury and all stakeholders to continue providing a connected, safe and reliable ferry and terminal system for the benefit of New Zealand.”
Reidy said he was confident they would find a solution and that he looked forward to getting on with it.
Grant Robertson asks for options
In July 2023, after the Government was asked for a further top-up, the then-Finance Minister Grant Robertson asked the organisation to consider other options.
KiwiRail costed doing the full project, as it preferred, as well as a “big ships” option with “limited” landside infrastructure. This was costed at $2.377b compared with $2.675b for the full project.
Purchasing three second hand ships to replace the three current Interisland ferries was costed at $2.02b.
Dispute over whether rail-enabled ships are necessary
Ministry of Transport officials provided the Government with alternative options to the mega ferries.
In the short to medium term, KiwiRail would need to decide if it could or should extend the life of its two existing non-rail-enabled ferries or buy or lease second-hand ferries.
“This could buy KiwiRail time while it decides whether to purchase new ferries with reduced landside requirements. (It would likely take at least 5 years to plan, design, procure and bring into service new ferries).”
KiwiRail could consider further extending the life of its only rail-enabled ferry, Aratere, by making it a freight-only service.
In KiwiRail’s view, proceeding without rail-enabled ships was not an option it was willing to consider, officials said, while also noting KiwiRail was not prepared to pay for this.
Aratere is Interislander's only rail-enabled ship. Photo / Marty Melville
Officials did not consider this would make a material difference to the amount of freight that would move from road to rail.
A relatively small proportion of total rail freight was carried across Cook Strait and almost all of it could be done by road bridging. This is where containers are moved from trains by a vehicle that loads them onto the ferry.
This is standard practice around the world, officials said.
“Which is invisible to KiwiRail customers, and who are likely to be indifferent about how their goods are moved onto the ferry.”
KiwiRail argued this would have a major effect on ship turnaround times and reduce the number of daily sailings.
Officials lose confidence in project, advise Willis to ‘stop and reset’
The project appears to have lost the confidence of Treasury officials who briefed Willis on 29 November last year, saying it was doubtful whether the project continued to represent value for money. They said KiwiRail needed to be incentivised to explore lower cost options.
The project was at a “critical juncture”, they said. “[T]he key lever for Ministers to exercise is the amount of Crown funding deemed necessary to provide”.
“Officials are of the view Project iReX no longer represents good value for money, and that lower cost alternatives more closely aligned to KiwiRail’s current business model have yet to be fully explored.
“KiwiRail needs to be incentivised to consider such options more seriously,” they said.
Cabinet had agreed in-principle to increase the tagged contingency associated with the project by $750m. Officials recommended reversing that decision.
Because that decision was only in-principle, it meant the $750m was not included in the Government’s forecast and effectively lurked as a hidden cost.
Because of this, reversing the decision did not allow Willis to bank the $750m.
The $750m given to KiwiRail was actually $450m less than the $1.197b requested by KiwiRail.
Treasury’s paper recommended reversing the $750m tagged contingency decision and keeping funding for the project where it had been set prior to that decision.
They said a “fundamental reset on how to address aging ferry and landside assets is required to provide a more affordable and commercially sustainable solution”.
Officials said the Government needed to send KiwiRail “back to the drawing board and focus on delivering a more cost-effective level of resilience”.
The paper warned the decision would mean the winding down of large parts of the project and that KiwiRail may threaten to stop providing an ferry service. They reckoned this was a bluff.
“We believe this risk is overstated as we have not seen any substantive evidence that not progressing KiwiRail’s preferred big ship approach to Project iReX would materially impact KiwiRail’s ability to continue with its current Interislander operating model,” officials said.
The paper ultimately recommended the Government “stop and reset” the project.
KiwiRail told Ministers they would run out of cash in a month
KiwiRail briefed new Government ministers about its “very difficult position” on November 30 and said it would run out of cash for the mega ferry project in less than a month
Chairman David McLean said it was not possible to pause the project and stopping it would have serious financial and reputational implications.
KiwiRail insisted the mega ferries were the only option and studies dating back to 1993, and extensive questioning by Treasury over the project life, had confirmed this.
“No matter how many times we have revisited the questions posed by officials, the scenario of two large rail-enabled ships still produces much greater benefits than any other combination of more, smaller, or older vessels”, McLean said.
KiwiRail wanted to submit a request to draw down enough money for the project to continue until the end of February, allowing the new Government time to get up to speed.
KiwiRail information accused of ‘lacking veracity’
The situation became tense as ministers learned more about the problems.
On December 6, KiwiRail chairman David McLean wrote to ministers about claims that information the SOE had provided “lacked veracity”.
“We were not aware before our meeting last week of any concerns by Treasury about the veracity of any of the information we have provided, and we take very seriously the suggestion that it lacked veracity.
“I will be meeting with the Secretary of the Treasury next week and intend to raise our concerns about this advice directly with her.”
On December 12, Willis wrote to McLean saying she would not be providing additional cash and was rescinding an “in-principle decision” made by Labour to increase tagged contingency funding by $750 million.
This meant Cabinet had confirmed that Crown funding was “limited to $435.1m in appropriated funding (of which approximately $63 million remains), she said.
Willis said she understood this decision meant the “KiwiRail Board may likely decide that the only viable way to proceed is to exit Project iRex” [the technical name given for the ferry replacement project]”.
She said KiwiRail would need to engage with the Ministry of Foreign Affairs and Trade and Treasury on negotiating any potential exit from ferry contracts.
Willis said the Government was concerned about the “continued significant cost blow-outs” and the “changing nature of the investment” the Crown was being asked to make.
“The cost has since escalated to be projected at approximately $3 billion - around four times its original cost,” Willis wrote.
She added her concern that “only 21 per cent of these costs related to the core project of replacing ageing ferries. The project has become more of a landslide infrastructure project than a new ferries project”.
She said the risk of cost escalations had “reduced our confidence” in the project.
KiwiRail warns existing ferries may not be able to serve for much longer
McLean wrote back on December 15, saying the Government would “wind down” the iRex project “as we cannot proceed without further Government funding”.
McLean said KiwiRail was making arrangements to exit iRex although he did not detail what this may entail. He appeared to ask for some distance between KiwiRail and the Minister.
“These are commercial contractual matters between KiwiRail and other parties.
“We do not wish to implicate the ministries in a contractual relationship, and it is important that we maintain good faith relationships between contractual partners by allowing these parties to negotiate directly,” he said.
“We will be guided by our primary legal duty as directors to act in the best interests of the company, which should be congruent with the interests of you as shareholder and New Zealand taxpayers,” he said.
The board would meet in future to discuss future options, McLean said.
KiwiRail chief executive Peter Reidy, left, and chairman David McLean. Photo / Mark Mitchell
These options would need to “incorporate investment in both replacement ferries and necessary landside infrastructure” to “accommodate projected future growth in freight and passenger demand over the life cycle of the assets” and to “recognise that the existing ferries, and existing wharf infrastructure, must be replaced in the near term”.
The letter warned the existing ferries may not be able to serve for much longer.
“We will be assessing the potential length of service for the existing ships as part of the forward options assessment,” Mclean said.
“We had planned to continue using the existing fleet for another 2-3 years, until new ferries arrive. While we plan to do what we can to enable these aged vessels to continue to operate safely and reliably, it is important that this 2-3 year period is used to plan for a long-term replacement fleet.”
Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
Georgina Campbell is a Wellington-based reporter who has a particular interest in local government, transport, and seismic issues. She joined the Herald in 2019 after working as a broadcast journalist.
