As the Government reviews the future of inter-island travel, new revelations have surfaced about contract negotiations, exit costs and whether the mega ferries would even have been able to sail the current route between Wellington and Picton. Georgina Campbell dives into the latest on the Cook Strait saga.
OPINION:
Concern is growing over the looming exit cost of cancelling the Cook Strait mega ferry contract but there may still be an opportunity to renegotiate and build smaller ships instead.
Interislander’s existing fleet of three ferries is reaching the end of its working life, making it increasingly unreliable, and in need of replacement.
A $551 million fixed-price contract was signed with Hyundai Mipo Dockyard (HMD) in 2021 to build the two new rail-enabled ferries.
However, the scheme was left dead in the water late last year after costs for the overall project, including new terminals and wharf upgrades, ballooned to almost $3b and the Government refused to plug the blowout.
Last month, KiwiRail announced it had started discussions with HMD to enter a termination agreement for the contract.
KiwiRail bosses then fronted a select committee the following day saying they were in the market for secondhand ships of which there were only 22 suitable ones in the world and none of them were for sale.
Later that same day, the Government swooped in with an announcement of its own - a Ministerial Advisory Group (MAG) was now in place to provide independent advice and assurance on the future of the ferry service.
The MAG will be looking for a creative solution to the Cook Strait problem. Nelson Airport chief executive Mark Thompson is chairing the group and is joined by two other members - Mark Cairns and Roger Sowry.
They will bring a fresh perspective to a problem that KiwiRail has insisted for several years now is best solved with two new mega ferries.
The terms of reference for the MAG show the Government is not satisfied with taking KiwiRail’s advice at face value and wants a second opinion.
The MAG will “provide additional independent assurance and advice on KiwiRail’s advice and work to operate, maintain and replace the fleet”, the terms of reference said.
The group is not to make any findings public. Ministers will decide what, if any information, will be released.
Finance Minister Nicola Willis has said the group will help ensure there are robust plans in place to support safe, resilient and reliable services in the coming years.
“The establishment of the group also recognises that the Crown has interests that may be wider than KiwiRail’s commercial interests,” she said.
A Capital Letter has spoken to multiple sources amid growing concerns about the cost of exiting the mega ferry contract and the suggestion it might be a better idea to renegotiate it instead.
KiwiRail’s 2024 half-year results show it has written off $382m in costs associated with the cancelled project and provisioned a further $60m for winding it down.
This provision excludes settlement costs relating to the termination of the shipbuilding contract.
Speculation about how much exiting the contract could amount to has already made its way into the public arena, with suggestions it could be more than $100m.
Other sources in the sector told A Capital Letter they had heard it could be more like US$200m, although stressed this was speculative and KiwiRail was still in negotiations.
There is concern that dumping the contract in its entirety may not be a financially sound decision, considering how much money could be down the drain just to walk away empty-handed.
The cost is important and should be made publicly available when it is confirmed.
In the meantime, there is no question this is genuinely commercially sensitive in terms of KiwiRail’s negotiating position. It’s also worth noting that it’s taxpayer dollars at stake.
Ministers are said to have always been open-minded about a solution for Cook Strait, including the possibility of renegotiating the contract with HMD to build smaller ships instead.
If the costs to dump the contract aren’t looking great, salvaging it to build smaller ships that aren’t rail-enabled may be emerging as an appealing option to the MAG.
It’s not clear whether HMD would entertain this.
A Capital Letter asked KiwiRail whether the state-owned enterprise or the Crown had set a budget for exiting the contract and what measures it was taking to minimise costs like selling its build slots.
KiwiRail was also asked if it is proceeding with the cancellation of the contract without delay.
KiwiRail chief financial officer Jason Dale said discussions were continuing with HMD, which included the shipyard working through any termination fees with its suppliers.
However, these discussions were “commercial in confidence”, Dale said.
The Herald asked Willis when she last met with the MAG, whether there was a budget for exiting the contract, and about speculation it could cost as much as US$200m.
Minister for State Owned Enterprises Paul Goldsmith responded.
“Engagement with the MAG is ongoing and as it traverses commercially sensitive matters, I won’t be releasing details of our discussions,” Goldsmith said.
One thing is clear - the Government is not keen on the mega ferries, even though KiwiRail claims smaller ships would only reduce the portside infrastructure costs by 7 per cent or $150m.
The Government’s position on the mega ferries was reinforced this week after Marlborough Harbourmaster Jake Oliver set limits for the maximum size of new vessels using Tory Channel to access ports at Picton and Shakespeare Bay.
The entrance to Tory Channel is narrow and tidal, making it challenging to navigate. The risk of an incident occurring increases with longer vessels.
The direction sets a maximum ship length of 187 metres. A variation to these rules will be considered on a case-by-case basis and only when safety is not compromised.
The mega ferries would have been nearly 40 metres longer and at least five metres wider than the ships in the existing Interislander fleet.
Oliver confirmed KiwiRail had previously approached the harbourmaster’s office regarding the proposed introduction of the mega ferries into Tory Channel.
“KiwiRail had engaged with the previous and current harbourmasters and commenced work to determine whether the proposed ferries would have been permitted to transit Tory Channel.
“KiwiRail had not been given a confirmation as to whether the ferries would or would not be permitted to operate in Tory Channel.”
In other words, KiwiRail ordered the mega ferries in 2021 with no confirmation the ships could use Tory Channel, meaning they would have to take what’s known as the scenic route instead.
This is a problem because it would make the overall journey longer, which could affect how many trips the ferries could make in a day, putting the business case in doubt.
Meanwhile, passenger sailings on the Kaiarahi ferry have been suspended until at least Saturday after a fault with the ship’s lifeboat system was discovered.
It’s another example of the many mechanical faults the ageing ferries have experienced in recent years and no doubt will continue to experience as they become increasingly unreliable.
To be fair to the Government and Willis, the decision to cancel the mega ferries doesn’t change the situation at sea for a few years yet.
The mega ferries were not due to arrive until 2026 (this was after KiwiRail had already delayed one of them) and there was not necessarily any guarantee the portside infrastructure would be ready in time.
Unfortunately for the Government, all is not fair in politics and often it’s the optics that count.
The decision to cancel the mega ferries with no Plan B remains a political risk.
If there are other further major incidents on Cook Strait, such as the Kaitaki mayday call, before the Government gets a new plan sorted out, ministers will wear the consequences.
Senior journalist Georgina Campbell’s A Capital Letter column takes a deeper look at issues in Wellington, where she is based. Georgina has a particular interest in local government, transport, and seismic issues. She joined the Herald in 2019 after working as a broadcast journalist.
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