Axed Interislanders put entire Government sector on notice

Thursday, 14 December 2023

Finance minister Nicola Willis refused to sink more taxpayer money into the Interislander upgrade, effectively killing the project

OPINION: The Government has pulled its first genuinely big decision, with Finance Minister Nicola Willis effectively canning the previous Government’s iReX project for new Interislander ferries and portside facilities by refusing to give state-owned KiwiRail any more money to build them.

Willis said that the project, run by the state-owned enterprise, has blown out to a minimum of $3 billion, meaning that the Government needed to squirt in new cash urgently or walk away. Both the Ministry of Transport and Treasury advised against proceeding and Cabinet agreed. KiwiRail subsequently told the Government that without the cash it had to pull the pin.

There were other reasons Willis gave beyond the new headline price tag. The first was the the new ferries - contracted to be built for $551 million ($US369 million), were now only going to be 21% of the final cost. The second appeared to be around flexibility. Willis claimed that the new landside developments seemed unlikely to be able to be used for much more than just the new ferries. The third was a lack of confidence that the new inflated figure would be enough to get the job done.

Interislander ferry Kaiarahi struck a wharf in Wellington leaving a large hole in its hull in November.

So, the Government has tasked KiwiRail with going back to the drawing board and working out a new plan for looking after the current ferries and finding appropriate - no doubt more modest - replacements.

It appears that the overall problem with the project was that the new ferries were decided upon and approved, while not enough consideration was given to the other costs associated.

Fortunately, construction of the new boats had not yet begun , so the decision will, from the Crown’s perspective, hopefully minimise any penalty payments to the shipbuilder Hyundai Mipo Dockyard, which Willis was at pains to say was not responsible for the cost blowouts.

It was clearly a decision Willis did not want to make. She is a Wellington resident and a new ferry service with flash new terminals and big shiny boats would have been good for Wellington and popular with the public in general. The new ferries were also due to arrive in 2026 - a handy ribbon-cutting opportunity during an election year.

It is also a hit for Grant Robertson and Labour’s legacy, although a hit which he will vociferously contest over the coming months. Robertson’s grand political project was to shake the widespread narrative that Labour is bad with money and can’t run the economy.

This is the first of probably a number of decisions of this sort. The new government is determined to root out what it considered drift in both cost escalation and a lack of timely decision making in infrastructure projects.

However, only time will tell if this decision is penny wise but pound foolish. Yes there might be a big cost blowout, but whatever more cost-effective decisions the Government makes, it may end up just pushing a big bill down the road.

And regardless of the reasons for not going ahead with the new boats, it does raise a question about sovereign risk: will shipbuilders still be up for bidding for new projects from the New Zealand Government? These projects have long lead times partly because big infrastructure builders - capital intensive businesses - slot projects in years in advance in ensure they have workforces and supply chains readied to build the assets.

Governments do cancel these things, but minimising this sort of thing going forward will have to be top of mind for the new Government.

It is a big call for a new Government to make. The Interislander fleet is all but past its use by date. In late January the Kaitaki ferry broke down and came very close to drifting into Red Rocks on Wellington’s south coast. Regular break downs have led to constrained capacity for both passengers and freight.

And while Willis is laying the blame squarely at the feet of the previous Government, clearly various boards and management at KiwiRail over the past few years have questions to answer. There probably needs to be a short inquiry into how this occurred from start to finish - if only to serve as a guide of what not to do in future.

Nevertheless, it serves a valuable political purpose - albeit an unwanted one - for Nicola Willis and the wider Luxon Government. The entire state sector is now on notice that building programmes, projects, lurks and policies out of step with the new regime will be cancelled, changed, pared back.

And this isn’t the last we will hear about ferries in this government’s first term.