Why were the ferries cancelled? What's the result?

An extensive, factual backgrounder for journalists, social media users and other confused and befuddled New Zealanders.

NOTE: THIS ARTICLE WILL BE UPDATED FROM TIME TO TIME AS THINGS COME TO LIGHT AND THE NEWS DEVELOPS

What’s the issue in a nutshell?

The Interislander ferry replacement project, known as Project iReX, was initiated to modernise New Zealand's aging fleet with two large, rail-enabled ferries. However, costs quickly escalated from an initial estimate of $770 million to nearly $3 billion, driven by underestimation of infrastructure upgrades and additional seismic resilience requirements.

The larger ferries' need for extensive port modifications contributed significantly to the cost blowout, highlighting issues in project planning and management. The Labour government initially supported the project with substantial funding but only conditionally committed to covering the growing shortfall. This financial uncertainty led to frustration and eventual intervention by the new National government, which refused to continue approving new funding to prevent further financial waste.

As a result, the project was canceled, and alternative solutions are being explored to ensure continued ferry service across the Cook Strait.

Oka\y I don’t understand all of that. Can you break it down.

Of course. Let’s get right to the basics.

What is the Interislander?

The Interislander is a ferry service that operates across the Cook Strait, connecting New Zealand's North and South Islands. Owned by KiwiRail, it runs between the ports of Wellington and Picton.

Why do the existing ferries need to be replaced?

As ships age, they require more frequent and costly maintenance to remain safe and operational. The current ferries were built in the 1990s and are approaching the end of their operational lifespan.

Who is actually responsible for replacing the Interislander ferries when they reach the end of their economic life?

KiwiRail, a state-owned enterprise, is responsible for replacing the Interislander ferries. This involves not only acquiring new vessels but also ensuring that the necessary infrastructure at the ports is updated to accommodate these new ferries.

Who owns KiwiRail?

KiwiRail is owned by the government. It is ultimately accountable to the government as its sole shareholder but is managed by executives who answer to a board of directors.

Who appoints the board of directors?

Directors of KiwiRail are appointed by the government. These appointments are meant to ensure that the board has the expertise and guidance needed to operate successfully.

Do the directors carry out the orders of the government?

While the directors of KiwiRail are appointed by the government, they are supposed to serve the best interests of the company, not the shareholder. This is the default rule for all limited liabilities in New Zealand under the Companies Act 1993.

Does this mean the government has no influence over KiwiRail?

No, but it is indirect. The government exerts influence over KiwiRail primarily through its authority to appoint the board of directors. Additionally, if a state-owned enterprise requires an injection of shareholder funds, the government has a lot of leverage because it decides whether or not to grant the request and on what terms. Finally, under section 13 of the State-Owned Enterprises Act 1986, the government also has the power to give directions on its statement of corporate intent.

What’s a statement of corporate intent?

A Statement of Corporate Intent is created by SOEs to outline their strategic direction, objectives, and performance targets. It details the company's long-term goals, key operational plans, and financial projections, ensuring alignment with government expectations and national policies. Because the government has some influence here, it’s fair to attribute some political responsibility for what happens pursuant to it.

What did the 2021 SCI say about the Interislander?

The 2021 SCI outlined the strategic plan for the procurement of two new rail-enabled ferries, so we can say at least that the Labour government was behind the concept. However, the SCI also noted the need for substantial investment in both the vessels and the supporting port infrastructure, which later became a significant factor in the project's financial challenges.

Okay, so who made the decision to order the mega ferries?

The decision to order the mega ferries was made by KiwiRail's board of directors. This decision was based on a business case that favored two large, rail-enabled ships as the best option for enhancing the Cook Strait service.

Who made the decision to cancel the order?

KiwiRail, because it didn’t have the funds needed to complete the project as budgeted.

What was the downside of cancelling the mega ferries?

Cancelling the contracts for the ferries and associated port infrastructure led to substantial break costs payable to the manufacturer. These costs are penalties or fees incurred when ending agreements prematurely, which are significant.

What is the sunk cost fallacy?

The sunk cost fallacy is a bias where investment in a failing project is based on the amount of resources already invested, rather than on its current and future value. This leads to irrational decision-making, as they focus on past investments rather than assessing the situation objectively.

How does it apply here?

The sunk cost fallacy was avoided when KiwiRail cancelled the purchase of the ferries after the government refused to give it the funds it needed.

Does the cancellation of the mega ferries mean we will lose the ability to cross Cook Strait?

No, the cancellation of the mega ferries does not mean New Zealand will lose the ability to cross Cook Strait. While the cancellation means the original plan for new rail-enabled ferries and extensive port upgrades will not proceed, KiwiRail will either acquire second-hand ships or purchase new ones of a less ostentatious style.

Why did people call them mega ferries?

The proposed ferries were significantly bigger than the existing Interislander vessels, designed to carry more passengers, vehicles, and freight, including rail freight directly onto the ferries. The increased size and capacity were intended to enhance service efficiency.

Could such big ferries even cross into Picton safely?

The narrow and turbulent Tory Channel, through which these enormous ferries would pass, also presented an issue. Though KiwiRail rejected the contention, community and maritime safety experts expressed grave concerns. They highlighted the channel's narrowness and challenging conditions, which have historically caused numerous navigation incidents, further complicating the operational feasibility of the larger vessels.

What are rail-enabled ferries?

A rail-enabled ferry is a type of vessel specifically designed to transport trains across bodies of water. These ferries have rail tracks built into their decks, allowing train carriages to be rolled on and off directly. Rail-enabled ferries require specialised infrastructure at both departure and arrival ports, including rail tracks and loading ramps, which can be expensive and complex to install and maintain.

Does no rail-enabled ferries mean no rail freight between the islands?

Yes, without rail-enabled ferries, rail freight would need alternative methods to be transported between the islands.

What are the alternatives?

Roll-on/Roll-off (Ro-Ro) ferries transport vehicles, including trucks and trailers, which can then be transferred to rail or road networks at the destination ports. This method is flexible and widely used globally. Cargo is transferred from trains to trucks or trailers at the port of departure and then back onto trains at the arrival port. This requires efficient logistics but avoids the need for specialised rail-enabled ferries.

What’s preferred globally?

The global trend is away from rail-enabled ferries due to the extensive and much more expensive port upgrades needed, as well as the superior flexibility and efficiency of Ro-Ro ferries, which can accommodate a variety of vehicles and cargo types without the need for specialised infrastructure.

What would be the issue with just buying the mega ferries even if the docks weren’t fully funded?

Purchasing the mega ferries without fully funding the necessary dock upgrades would have been a serious risk. Without the unfunded port upgrades, the new ferries would not operate safely or as intended. This would, of course, have made the existing situation even worse.

Did the then Labour government give firm and unconditional approval to the purchase?

In 2021, the government of the day approved the concept, approved some funding, and set up a special fund to cover extra costs. It was made clear KiwiRail would have to find additional funds to finance the project on a commercial basis. Despite this uncertainty, KiwiRail went ahead and signed a fixed-price contract for the mega ferries. Subsequent to this, Finance Minister Grant Robertson expressed great frustration at this commitment, which he described as premature given the costs for the necessary port upgrades had been underestimated.

How were the port upgrades underestimated?

There were several factors. Initially, the scope of the necessary port upgrades was not fully accounted for in the early planning stages. This included the extensive infrastructure needed to accommodate the larger, rail-enabled ferries, such as stronger port structures, expanded marshalling yards, and significant dredging operations. Unforeseen seismic reinforcement costs and escalating construction prices further contributed to the cost underestimation.

So was the size of the ferries an issue or not?

The earthquake resilience requirements also played a role but there’s no doubt the decision to opt for larger ferries necessitated extensive and costly upgrades to port infrastructure, such as stronger port structures, expanded marshalling yards, and significant dredging operations. This was directly related to accommodating the bigger vessels.

Can you explain that even more simply?

Larger ferries required extensive upgrades to port facilities, including stronger docks, expanded marshalling yards, and significant dredging to accommodate their size and weight. The larger the ferries, the greater the costs.

Is that just an excuse National has made up?

No. In an 18 September 2023 letter to KiwiRail, Grant Robertson stated KiwiRail's decision to procure large, rail-enabled ferries was made prematurely and without fully accounting for the extensive port infrastructure upgrades required to accommodate vessels of that size.

Did KiwiRail have enough money to complete the upgrades?

The significant cost escalations related to port upgrades were not fully anticipated in the initial budget, which meant KiwiRail started to run out of money. As costs continued to rise, KiwiRail repeatedly sought additional funding from the government as shareholder.

Did the Labour government commit to meeting the shortfall?

The Labour government did commit to helping with the financial shortfall on a limited and conditional basis. However, as the costs kept rising, the government’s commitment became less clear. In September 2023, they agreed in principle to make up to $750m available. This money was supposed to help KiwiRail buy the new ships and handle some of the port upgrades, but it wasn't a blank cheque. The government wanted KiwiRail to also find other ways to cover costs and manage the project more efficiently. KiwiRail complained bitterly about how this very tentative support did not give it the commercial or legal certainty needed to continue.

Didn’t Winston Peters support the mega ferries in 2020?

Yes, in 2020, Winston Peters, as the Minister for State-Owned Enterprises, announced the government had approved significant investment in new rail-enabled ferries for KiwiRail. However, this was based on the same low-ball costings that Robertson later complained about. Not that one should leap to defend Winston Peters, but this is quite weak as a “gotcha” even by media standards.

Is there a risk of reading too much into this in terms of an overall narrative around infrastructure in New Zealand?

There is a risk of over-interpreting the challenges faced here as indicative of broader issues with infrastructure projects in New Zealand. While the project's cost blowouts, mismanagement, and the subsequent decision to cancel it highlight specific governance and planning deficiencies at KiwiRail, the world does not conform to prepackaged narratives.

What’s it called when this happens?

When news events are interpreted and presented within a pre-existing narrative or framework, it's often referred to as "framing." Framing involves selecting certain aspects of a perceived reality and making them more salient in a communication text, thereby promoting a particular interpretation that the facts may not, on the whole, actually support.

Okay well looking at all the actual facts, it looks like KiwiRail may have signed up the ferries first and then assumed the government would have no choice but to pay whatever was needed to get the project completed. Is that possible?

You might think that. I couldn’t possibly comment.