Nicola Willis says KiwiRail’s spend on McKinsey consultant report is unjustifiable

Former KiwiRail chairman David McLean and Finance Minister Nicola Willis.

Finance Minister Nicola Willis told KiwiRail’s chairman a week before announcing his early retirement that the state-owned enterprise had spent an “excessive and not justifiable” amount on consultants.

KiwiRail recently engaged global management consultants McKinsey & Company to undertake a strategic review intended to lift performance across its rail freight and ferry business.

Willis told the Herald she was made aware of the cost of that review on June 9 when she read a Treasury report.

“I was immediately concerned by the magnitude of this cost. I view it as excessive and not justifiable.”

Treasury also advised Willis the cost was considerably higher than it had expected KiwiRail to spend, she said.

The Herald asked Willis about the cost after KiwiRail would not disclose the amount due to commercial sensitivity.

Willis sought advice to publicly release the figure but was told by KiwiRail that this would breach their contract with McKinsey.

On June 11, Willis and Minister for State Owned Enterprises Paul Goldsmith met with KiwiRail chairman David McLean and three other members of the KiwiRail board.

They discussed KiwiRail’s business planning documents including the draft Statement of Corporate Intent.

“I relayed early in this meeting my deep concern with the amount of money being paid by KiwiRail for McKinsey’s advice and I asked why the management team couldn’t do the work itself”, Willis said.

“I did not find the answers to be satisfactory.”

Willis told McLean the cost was a large amount of money to pay a consultant for advice and that she would have problems defending it in public.

One week later, McLean advised ministers of his intention to retire early as KiwiRail chairman at the end of July. His current term on the board was due to finish at the end of October.

This happened in the days before the Aratere ferry ran aground on Friday evening.

Interislander's Aratere ferry ran aground on Friday and was refloated the following night. Photo / Tim Cuff

Willis said McLean’s reasons for his early retirement were “as he has outlined in his own statement” and it was unrelated to the Aratere grounding.

Ministers were also considering additional changes to further refresh the board, she said.

In his statement on Sunday, McLean said he was stepping aside from the start of the new financial year because that was best for KiwiRail as it entered a new phase of its development.

“I understand the Government intends to announce my retirement today, so I have brought my announcement forward.”

The Herald asked KiwiRail for the cost of the McKinsey report but was told: “The cost of consultants is commercially sensitive”.

Asked to justify the unknown cost of the McKinsey report, McLean said the board expected KiwiRail to lift its performance.

“KiwiRail currently moves around 18 million tonnes of freight a year and we want to grow our share of the freight market by improving our reliability and competitiveness.

“Similarly, we want Interislander to take a bigger share of the Cook Strait market.”

McLean said achieving both goals depended on delivering a better customer experience, which will become the focus of KiwiRail’s growth ambition, and “certainly justify the cost of our investment in consultants”.

The Ministry of Transport is currently considering the possibility KiwiRail is not best-placed to run an Interislander ferry service in the medium to long term.

Officials are considering how the market might respond to the hypothetical exit of KiwiRail, including whether rival operator Bluebridge could provide more capacity across Cook Strait.

McLean said that despite the difficult economic conditions currently affecting KiwiRail, the board and management expected to see the company performing at its full potential in the coming years.

However, he said turning around long-established complex companies with old infrastructure, like KiwiRail, required transformation.

“McKinsey brings global expertise and insights to this work, including significant experience working with similar organisations around the world to help them realise their full potential.”

McLean said McKinsey’s findings were commercial and in confidence to KiwiRail.

“McKinsey has supported the KiwiRail management team to assess the full potential of the business to drive customer experience and financial sustainability, as well as to develop a robust plan to realise the value.

“McKinsey’s support has involved bringing global and local subject matter expertise, benchmarks and analysis.”

McLean said McKinsey’s work was one part of KiwiRail’s broader transformation strategy and plan.

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.