Sunk ferries and sunk costs

Former Labour ministers and their boosters probably need to sit this one out

The infamous Oak Island money pit

THE MYTH:

Among social media users and journalists, the narrative is being put about that the Labour government had everything sorted for replacing the Interislander ferries through Project iReX, and that the new National government cancelled this excellent project and expensive but necessary project just to save money in the short term.

This narrative is not only misleading but also ignores the financial mismanagement and escalating costs that plagued the project under Labour's watch​​​​​​.

THE MORE COMPLEX REALITY:

The replacement of the existing ferries was initially meant to cost $775 million when greenlighted by the Labour government in 2018. As seems to be usual, this costing was soon proved to be woefully inadequate, with costs nearly doubling to $1.45 billion by June 2021​​​​. By late 2023, the cost had surged to $2.954 billion​.

None of this was sustainable. In 2021, the project was expected to add value of about $207 million. But by 2023, this changed drastically to a projected loss in value of around $1.6 billion. Given these shocking figures, the new National government had no real choice but to reassess the project to avoid throwing more money into a failing venture.

The genesis of the fiasco

The new ferries ordered did not cause the blowout directly. The contract for them controlled costs carefully. However, that’s not the only consideration.

A critical mistake was the ambition for large, rail-enabled ferries. These larger vessels could carry trains directly, but required massive infrastructure upgrades. This included stronger port structures, more marshalling yards and extensive dredging operations​​​​

When advising the new government, the New Zealand Treasury has pointed out that the bigger ferries were not essential for maintaining service quality. Smaller, non-rail-enabled ferries, which carry cars, trucks, and passengers without needing special rail infrastructure, could have adequately met service demands without the exorbitant costs associated with the larger vessels.

At the end of the day, had a less ambitious approach of focusing on non-rail enabled smaller ferries, the ports might have been willing to play a more active role in the provision and funding of the landside infrastructure. As it was, because the initial infrastructure planned did not support the new ferry size, additional, unplanned expenditures were inevitable​​.

Labour kept the project in an undead state

The Labour government agreed to cover only some of the costs of the project, and even then, only on an in-principle basis. This means that while they expressed general support for the project, they didn't commit to firm funding. Essentially, it was a conditional promise without a definite financial commitment.

This approach allowed Labour to avoid having to make any hard decisions while also keeping the escalating costs of the project off the official books (due to the lack of commitment). This suited the government of the day as it approached the election while seeming to pull every trick in the book to obscure the deteriorating state of national finances. In short, the government presented an incomplete and overly optimistic picture of the project's financial health and the country’s economic situation.

Don’t believe me?