Kaiarahi's upgrades will offer improved onboard amenities, including new passenger lounges and drivers lounge along with the fitting of external stabilisers to ensure a smoother ride, engine and new navigation equipment upgrades and new gangway access, Mr Reidy said.
The owner of the vessel, Stena RoRo would manage and pay for the upgrades.
Kaiarahi is a third bigger than Arahura.
She will be able to carry close to the same amount of freight in two return sailings as the Arahura can in three.
"The new vessel will increase our overall freight and passenger capacity on a critical link for the country," Mr Reidy said.
"Interislander is an extension of the main trunk line and State Highway One across Cook Strait and vital for our economy. Her capacity gives us big efficiency gains and future proofs our fleet for increased customer demand."
KiwiRail will charter Kaiarahi rather than purchase her, as is the case with Kaitaki.
The new ferry is expected to be in service from early September.
Factbox
• Can carry 520 passengers
• It weighs in at 22,152 tonnes, is 180m long and 25m wide
• Travels up to 22 knots, or 36km/h
