How KiwiRail’s Cook Strait mega-ferry project unravelled

Just one year after KiwiRail filed a business case for its new Interislander mega-ferries, the cost had escalated by $600 million. It was a sign of things to come - until Finance Minister Nicola Willis decided enough was enough.

In November 2018, KiwiRail had a business case indicating the preferred option to replace Interislander’s fleet of three ferries was two large rail-enabled ships.

At that time, the estimated cost of the project, including the new ferries themselves and the portside infrastructure, was $775m.

Kiwirail had a business case to replace its ageing ferries with two super ferries. Photo / Marty Melville

The state-owned enterprise submitted this business case in advance of Budget 2019.

The Government gave KiwiRail $35m to progress the design and the procurement of the two ferries.

A Beehive press release from June 2019 titled “Government laying down tracks for the future” said KiwiRail would also be investigating various options to pay for the ferries.

In November of that year, KiwiRail submitted another bid for more money to deliver what has come to be known as the Inter-island Resilience Connection project (iReX).

However, by this time, the cost of the project was forecast to be $1.389 billion, up from $775m.

KiwiRail’s budget bid was successful, and in May 2020 the Government announced a further $400m for the project.

The Government expected this would be the final amount of Crown funding and the remaining costs would be privately funded.

The Government was in for a nasty surprise.

KiwiRail gets a stern letter from a ‘disappointed’ Grant Robertson

KiwiRail went on to submit another bid for more money ahead of Budget 2021, this time for an additional $565m.

Treasury and Ministry of Transport officials were not happy.

Costs for the overall programme had ballooned to $1.76b in March 2021. Portside costs alone had almost quadrupled to more than $1b.

Officials raised concerns about the increasing scale and cost of the project, including that its latest business case was still in draft form at that time and yet to be finalised by KiwiRail’s board.

Ministers agreed the Budget bid should be deferred.

The decision was not without risk. KiwiRail warned that without the $565m, the arrival of the new fleet would be delayed and the Interislander service would be compromised.

In 2021, Grant Robertson asked KiwiRail to address shortcomings in the business case, work with officials to review project governance arrangements and ensure the total capital cost did not exceed $1.45b. Photo / George Heard

KiwiRail had signed a letter of intent with Hyundai Mipo Dockyard for the two new ferries, which was due to expire in a few months.

If it expired without a formal contract being signed, the terms and price could be renegotiated.

Eventually, Cabinet agreed to a contingency fund in June 2021, and by that time KiwiRail had progressed the design of the port infrastructure and estimated the cost to be $1.45b instead of $1.76b.

On July 1, KiwiRail issued a press release saying it had signed a now binding contract with Hyundai Mipo Dockyard for the state-of-the-art ferries.

But KiwiRail deputy chairwoman Sue McCormack also received a stern letter from a “disappointed” Grant Robertson, who told her significant risks regarding the project remained.

Nicola Willis meets with KiwiRail’s top brass before she’s sworn in

In October 2022, KiwiRail advised ministers there was yet another cost escalation associated with the terminals, but said the worst-case scenario was that the tagged contingency would need to increase by $280m.

As it turned out, this was not the worst-case scenario.

In February 2023, KiwiRail told the Government the overall cost had escalated to $2.6b.

Ministers wanted the state-owned enterprise to provide further information and work with officials to look at different options.

KiwiRail went on to review all aspects of the iReX project to make sure costs were being managed prudently.

In September 2023, Cabinet made an in-principle funding decision to help plug some of the cost escalation, but it was not enough to complete the full project.

The 2023 general election brought a change of Government and Willis was informed of the new $2.6b cost during coalition negotiations.

She received written briefings from KiwiRail regarding the iReX project on Thursday, November 30 and met McLean and Reidy again later that evening.

By then, the cost had escalated to $3b.

On December 13, Willis issued a statement saying the Government had declined KiwiRail’s request for an extra $1.47b for portside infrastructure.

“Ministers do not have confidence that there will not be further increases and are concerned about the continued significant cost blow-outs.”

The project was scuppered.

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.