Prime Minister Jacinda Ardern is shrugging off criticism that her Government is "tearing itself apart," after New Zealand First killed any hope that light rail in Auckland would get underway this term.

"This is an MMP Government," Ardern said this afternoon.

"This just happens to be one [area] where we were unable to form a consensus."

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Just hours earlier, Transport Minister Phil Twyford announced the Auckland Light Rail process had "ended" after New Zealand First failed to back the policy at Cabinet level.

This means light rail in Auckland will become an election issue.

Greens co-leader James Shaw said NZ First's light rail moves were a "slap in the face of Aucklanders".

But he insisted the policy was not dead.

Ardern admitted she was frustrated that the project won't get underway before the election.

"That was a policy that we campaigned on that we have worked really hard on because we believe it will make a difference to congestion issues in Auckland."

But she said ultimately "this is a democracy" and there were three parties that make up the Government.

Despite this, National leader Todd Muller said the split in Cabinet shows the Government was "tearing itself apart".

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"Any substantive policy piece that gets announced, by the time it gets to the House they [NZ First and Labour] are at war with each other and they can't seem to sing off the same song sheet."

Transport Minister Phil Twyford on the decision to end the Auckland Light Rail process. Video / Mark Mitchell

Asked about the comments before going into the House, NZ First leader Winston Peters said Muller's comments were "desperate".

He denied he was blocking light rail – "we're just making sure the policy is a sound, commercial proposition in fairness to the contractual laws in this country".

One of the proposals was for the light rail project was a joint venture between the New Zealand Super Fund and a Canadian pension fund.

When pressed, Peters revealed the issue with the light rail process was the fact that the Canadian firm was involved.

"As a fiscal proposition, with offshore proprietorship, it did not work," he told reporters.

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"The reality is that every programme has got to stack up, has got to be fiscally sound and it's got to work."

Meanwhile, the Green Party – which was a major proponent of the light rail project – is not happy.

Shaw pointed out light rail is in the Government Policy Statement 2018, which NZ First voted for.

That fact was confirmed by Twyford in the House this afternoon.

But that process would have to wait until after the election.

Deputy Prime Minister Winston Peters. Photo / Mark Mitchell
Deputy Prime Minister Winston Peters. Photo / Mark Mitchell

Before going into the House, Shaw said NZ First killing of the light rail project this term was a "slap in the face of Aucklanders".

He added that it also breached the Labour/NZ First coalition agreement.

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"I do find it ironic that a party that has been using the cover of the sanctity of contract law to protect property investors from small businesses can't even uphold its coalition agreement.

"I think that any party should be mindful about that going into Government next term."