Why cancellation of Cook Strait mega ferry contract is taking so long

An artist's impression of the rear view of one of Interislander's now cancelled mega ferries.

KiwiRail is expected to meet with Government ministers imminently to provide a cost range for exiting the now cancelled Cook Strait mega ferry shipbuilding contract.

A scheme to replace the current ageing Interislander fleet with two larger rail-enabled ships was left dead in the water in December after costs for the overall project, including new terminals and wharf upgrades, ballooned to almost $3 billion and the new Government refused to fund the blowout.

However, KiwiRail took until February 14 to announce it was terminating the $551 million fixed-price contract with Hyundai Mipo Dockyard, based in South Korea, to build the ferries.

It only did so after receiving a letter from Finance Minister Nicola Willis, which has not been made public.

KiwiRail’s half-year report to the end of December said the wind-down of the mega ferry project was underway and expected to be “substantially completed” by the end of March this year.

It is now the end of June and the contract is yet to be settled.

The Herald asked KiwiRail chief executive Peter Reidy in an exclusive interview this week why it had taken so long to exit the contract.

KiwiRail chief executive Peter Reidy said maritime legal experts were going through Hyundai Mipo Dockyard's claim line by line to assess what is fair and reasonable. Photo / Mark Mitchell

Reidy said KiwiRail had repudiated the contract and HMD had put a claim on the table.

“There’s a lot of complexity to it so, there are a number of elements of the claim. We’ve got international experts, maritime legal experts, just going through the claim with us line by line - assessing what’s reasonable, what’s fair.

“There are certainly elements we’ve already recommended that we settle, there are also other elements that we’re going through now and having discussions with Hyundai.”

KiwiRail needed a lot of information from HMD which in turn needed information from the more than 140 suppliers involved in the mega ferry build, Reidy said.

“I think it’s just taking longer because it’s all about getting information and assessing information but we’re making good progress, we’re talking regularly with them, we’re working closely with Treasury and we’re progressing as fast as we can.”

Asked what the new timeframe was for finally getting the contract wrapped up, Reidy said KiwiRail’s internal commitment was to have a “recommended range” finalised by the end of this month and to then sit down with ministers to discuss the cost.

Industry sources have speculated the cost could be between $200m and $300m. KiwiRail maintains the details of the negotiations are commercially sensitive.

Reidy said they were trying to separate the claim from any other discussions KiwiRail and the Government might want to have with HMD.

Earlier this week, Willis revealed there were considerations as to whether HMD would be appropriate to build smaller ships for KiwiRail in the future.

Reidy said HMD had asked for the two matters to be kept separate and he had established a separate workstream within KiwiRail to accommodate this.

“You can imagine at times it might get a bit murky but we try and keep that very separate.”

Reidy travelled to South Korea in April this year with KiwiRail ships programmes director Massimo Soprano, Treasury projects, financial and commercial director Chris White and ferry Ministerial Advisory Group chairman Mark Thompson.

Reidy said the trip was to sit down with HMD and visit the shipyard to understand their claim.

It was also important to discuss the cancellation of the mega ferry contract face to face with HMD, specifically to explain that it wasn’t about their relationship, or the ships, but rather, the cost blowout associated with the portside infrastructure.

The Herald has reported Ministry of Foreign Affairs and Trade officials advised the Government on the risk to New Zealand’s relationship with Korea if the contract was cancelled.

Reidy said they also met with a shipbroker in South Korea to discuss the market for second-hand ships.

KiwiRail has previously reported shipbrokers estimated just 22 such ships in the world would be suitable to traverse the Cook Strait and none of them were for sale. Reidy said they wanted to reconfirm that while on the trip to South Korea.

KiwiRail is firming up the cost to exit the ship-building contract as the Ministerial Advisory Group tasked with assessing alternative options to replace the Interislander fleet has provided its report to ministers.

Ministry of Transport officials investigating how the market might respond to the hypothetical exit of KiwiRail from Interislander have also delivered their report.

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.