Reviewing the Cook Strait Ferry fiasco

I have spent some of the holidays reading various documents relating to the Cook Strait Ferries contract which was somewhat ignominiously brought to a shuddering halt in December 2023 just after National gained power.

The documents provide interesting background.

The project started well enough. A vision for an improved and more resilient and more rail sympathetic Cook Strait crossing was devised by Kiwirail and approved by the Labour/NZ First Government.

The rationale was clear. The two existing ferries were approaching the end of their useable lives and needed replacing. And the Wellington and Picton terminals were in poor shape and needed major renovations.

So through some deft negotiations two brand new ferries were contracted for, to be built by a reputable South Korean boat constructor Hyundai Mipo Dockyard.

The original project costs in November 2019 were $1.389 billion including the ships and landside costs.

The Crown allocated $400 million to the project. The balance was expected to be funded by Kiwirail itself as well as the ports companies and some of Kiwirail’s contribution was to be by way of debt.

In June 2021 Kiwirail completed the detailed business case and this suggested a slight increase to $1.45 billion. The project had a Net Present Value of $207 million, suggesting that it represented a good commercial investment. It also had a benefit cost ratio (BCR) of 4.4 which is outstanding. This included not only fiscal returns but also allowances for emissions, reliability and resilience.

As an example of the benefits getting trucks off the road through diverting freight to rail is good not only for the environment but also for road maintenance and congestion. If you really want to understand the benefits of a project these are relevant matters to include.

And the reduction in emissions were not to be sneezed at. On day one emissions would be lowered by 40% and it was anticipated that this would increase to 100% by 2050, presumably through the use of Hydrogen.

The BCR should be compared to some of the Government’s roads of National Significance. The likely BCR of the previous version of the East West Motorway in Auckland was very likely well below 1.9. And the Warkworth to Wellsford Motorway’s BCR has been estimated at just 0.7.

To add to this the ships would provide stronger performance, better reliability and a more comfortable journey for passengers across a strait that can get really rough.

In February 2023 Kiwirail went to the Government and advised that the total program cost had increased from $1.45 billion to $2.609 billion.

They requested a further $1.97 billion from the Government and proposed to repurpose other funding to cover the balance.

Some of the increase, an estimated 10%, was because of building inflation which was rampant at the time. The rest was primarily in the terminals programme which needed larger piles, stronger sea walls and greater structural rigidity that what was estimated in 2021.

Some of it was due to the need to meet higher seismic standards. 70 tonne piles that are 1.5 metres in diameter were now needed. This not only increased material costs but also required larger safety zones to ensure safety during construction.

The project still had a positive benefit cost ratio of 2.1. The overall return was twice the amount to be spent.

There was some push back from the then Labour Government to the increase.

By letter dated 19 December 2023 Grant Robertson wrote to David McLean, chair of the board, and said “[w]e note that Kiwirail under-scoped the landside infrastructure in 2021 meaning the decision to procure two large rail-enabled ships at that time was premature. To date, we are yet to see a satisfactory explanation for why this was the case.”

Robertson also expressed his disappointment at how challenging the process to get adequate information was, and that the vessel delivery terms were renegotiated at a time when the Government was considering future funding.

The Government agreed in principle to increasing the tagged capital contingency for the project by $750 million with a clear expectation that the scope and staging of the landside infrastructure would be altered to reduce costs. There were to be discussions on what form the tagged funding would take, whether by debt or equity.

Clearly Labour did not authorise or agree to the full amount of the increased spend. Instead there was a sense of concern that a project that had been sold to them on the basis the associated wharf work would cost a relatively settled amount. But they were still prepared to proceed with the project, albeit on a changed basis.

National’s election in 2023 change of Government meant that everything was up for grabs.

Treasury clearly did not support the project and adopted a cautious commercial approach to valuing benefits. In presenting to the new Government it took the opportunity to rail against the project and attempted to disrupt it.

In its report to Willis dated December 5, 2023 Treasury referred to the negative Net Present Value of the proposed investment and concluded that the project “no longer represents good value for money”.

About rail it stated:

The Crown needs to respecify its objectives for the project and ask KiwiRail to go back to the drawing board and focus on delivering a more cost-effective level of resilience, to remove rail enablement unless it is demonstrated to deliver marginal commercial benefits, and minimise, and transparently identify, connection costs (freight and road transport). KiwiRail should prepare a programme that has a positive NPV, is as commercial as possible, and minimises calls on shareholder funds.

On December 11, 2023 Cabinet effectively decided to kill the project by rescinding its previous decision increasing the available contingency. It did this knowing that the cancellation of the very beneficial ferry construction contract was almost inevitable. The Cabinet Minute also noted that Treasury “will engage with the Ministry of Foreign Affairs and Trade” to work out the diplomatic implications of the move. The Minister of Foreign Affairs had previously been warned that if the contract was cancelled then “careful and deliberate communications with the Korean Government would be required in advance of any public announcement.”

But the communication to the Korean Government was shambolic and appears to have comprised two text messages. From Radio New Zealand:

New Zealand officials notified their Korean counterparts they were scrapping the Interislander ferry project via text message less than an hour before the public announcement.

That’s despite the Ministry of Foreign Affairs and Trade (MFAT) earlier warning ministers cautious talks with South Korea would be required.

…

Asked for evidence of that communication under the Official Information Act, MFAT provided two text messages.

The decision to reject KiwiRail’s funding request had been made by Cabinet on Monday 11 December, KiwiRail was informed on the 12th, and it was publicly announced at 3.30pm on Wednesday 13 December. Ministers had been warned it would likely mean the end of the contract with Korean company HMD to build the large new rail-enabled ferries.

Despite the warnings the handling of the announcement was ham fisted. The damage to the country’s relationship with South Korea is not currently clear but it cannot have helped. And the negotiations with Hyundai Mipo Dockyard cannot have been advanced by the ham fisted way that the contract was cancelled.

The Government promised that a cheaper and better solution would be found.

It appointed a Ministerial Advisory Group dominated by road interests and recommendations were reported back in June 2024.

MUNZ National Secretary Carl Findlay said this about the Group:

Given the advisory group’s antagonism of key players in the freight and shipping industry, and their dismissal of the importance of a rail system that delivers $3.3 billion in worth to NZ Inc each year, it’s not surprising their recommendation has stalled. It is surprising they still seem to be on the payroll although nobody seems to know what they are doing. The rumour in the sector is someone from the Government is talking to Chinese shipyards on the quiet.

Despite repeated promises no announcements were made about the future of the project until December last year when an announcement of sorts was made.

Three details were provided.

• Winston Peters became Minister for Rail
• A company would be set up to buy two new medium sized ships to replace the ageing fleet of three ferries.
• The ports would be asked to bear more of the cost of the port build.

But we were not told where the ferries were coming from, how much they will cost, who will pay for them, how the port infrastructure will be delivered or what the fiscal or economic impact would be.

We also do not know if they will be rail enabled. Although Christopher Luxon’s use of the phrase rail compatible hints strongly at a walk back from the original commitment to rail.

The issue has opened up fissures between NZ First and Act.

Shortly after the December announcement there was this incredible attack on David Seymour’s credibility by Winston Peters over the issue. About Seymour Peters said:

He’s wrong on the figures that he’s used, he’s wrong on the question of privatisation and he’s wrong on the question of what it’s going to cost”.

From the article:

The new Minister of Rail Winston Peters has poured scorn on ACT leader David Seymour’s hopes of privatising the Cook Strait ferry service, and says Seymour was “wrong” about the cost of the new project.

On Wednesday, Seymour said indicative costings were “approximately half the at least $3 billion cost” of Labour’s proposal.

He shared that information despite Minister of Finance Nicola Willis’ caution about disclosing costs.

Asked on Morning Report if the government had a sum in mind, Peters said it would be “stupid” and “imprudent” to name the price.

“I said [on Wednesday] it would be most imprudent, politically and business-wise, stupid, to start saying what you’re going to buy them for, because that’s the bottom line. They’ll start from there and up it will go.”

As I said previously this is going to get sticky. National’s and Act’s reflexive opposition to rail is going to meet head on with NZ First’s realisation that rail has a major role to play in the issue. Winston has previously agreed strongly with Mainfreight’s Don Braid view that not having rail-enabled ferries will be inefficient and more costly for businesses like his and could lead to 10,000 more trucks on the country’s roads.

I predict that Peters, who supported the original decision to commence IREX, will insist that the ferries are rail enabled, despite National’s and Act’s complete indifference to rail.

And this is a good issue for NZ First. It lets them differentiate themselves from National and Act, will embarass the hell out of Nicola Willis and will attract working class support.

And we should remember that back in 1998 Winston Peters led NZ First back into opposition when he rebelled against the privatisation of Wellington Airport.

At a time where the country is scrambling to meets its climate change goals cancellation of the ferries contract is unforgiveable. The new ferries had the potential to run on 100% renewable energy. These opportunities should be seized.

And the ferry contract was a really, really good one. As pointed out by Mountain Tui Nicola Willis has engineered a situation where we are replacing next generation, size appropriate, and full functionality Mercedes for a Toyota price and is now trying to buy a basic, no-frills Toyota Corolla for the price of a Mercedes.

The issue is a nightmare for the Government and especially for Nicola Willis. She could have costed the country $1 billion dollars through her anti rail impulse.

Time will tell if this is a coalition ending issue.