Interislander replacement: Government makes significant announcement on future funding

Here's what the Government has announced.
Here's what the Government has announced. Photo credit: Newshub.

The Government won't contribute significant new funding to KiwiRail to address cost escalations involved in the replacement of the Interislander ferry fleet.

In light of that decision, KiwiRail will now wind down the project and review plans for the Cook Strait connection. An alternative long-term solution could take years to develop, the agency said.

The current Interislander fleet is currently nearing the end of its working life and two new ferries were expected to come into operation in 2026 alongside upgrades to terminal infrastructure. 

It was considered a "transformational investment in critical infrastructure" that was expected to "generate significant tourism, economic and environmental benefits".

In a statement on Wednesday afternoon, Finance Minister Nicola Willis said KiwiRail had asked for an additional $1.47 billion – some of which had been agreed to in principle by the previous Government – to address cost escalations associated with harbourside infrastructure.

While Willis said the Government remained committed to a resilient, safe and reliable connection for the Cook Strait, the cost of the project had quadrupled since 2018 to about $3 billion overall. In 2018, the indicative business case prepared for the project estimated the total cost, including landside expenses, at $775 million. 

The Finance Minister said five years on, only 21 percent of the costs are now associated with the core project of replacing the ageing ferries and the decision to decline funding wasn't a reflection on the shipbuilder Hyundai Mipo Dockyard.

The bulk of the cost escalation was related to upgrading harbourside infrastructure in Wellington and Picton to accommodate the new ferries.

"Ministers do not have confidence that there will not be further increases and are concerned about the continued significant cost blow-outs and the changing nature of the investment they are being asked to make."

Agreeing to the funding would reduce the Government's ability to address cost pressures impacting Kiwis, fund other projects and get the Crown books back into order, Willis said.  

"Ministers have made clear to KiwiRail that we expect KiwiRail to prioritise providing reliable, safe and enduring ferry services. Ministers, including State Owned Enterprises Minister Paul Goldsmith, will engage with the Board and with officials about alternative options to ensure an enduring connection. The Government will also be taking advice on how best to understand how this situation unfolded in order to inform future decisions."

She said that in the meantime KiwiRail should focus on providing a reliable ferry service and to prioritise existing services appropriately.

KiwiRail chair David McLean said the project cannot proceed without Government funding.

"We respect the Government’s role as shareholder and funder to make this decision. The Board will now oversee the wind-down of the project and review our plans for the Cook Strait connection," he said.

"The Board acknowledges the disappointment of our team and stakeholders involved in this project. We sought a strong outcome for New Zealand through this project for a more resilient State Highway 1 across Cook Strait for exporters, domestic freight forwarders, tourism and domestic commuters. 

"We will work with the Government, our customers, ports and other stakeholders on the way forward. An alternative suitable long-term solution could take years to develop.

"In the interim, KiwiRail will continue to invest in the safety and reliability of the existing Interislander fleet, through strong asset management practices."

The current three ferries were expected to be replaced with two new rail-enabled and more environmentally friendly ferries. They were expected to be larger than the current vessels and able to take more people, cars and freight.

To date $435.1 million of Crown funding has been appropriated for the project, of which approximately $63 million remains, the Government said. 

In 2021, a tagged contingency was established for the project. The size of this remains commercially sensitive and will support exit negotiations as required, the Government said.

The previous Cabinet made an in-principle decision in September to establish another funding contingency to support the project.