Interislander ferry fleet project to wind down after being denied further government funding

A project to replace the Interislander ferry fleet will now not go ahead as the coalition government has declined KiwiRail's request for further funding.

KiwiRail had requested an additional $1.47 billion, a component of which had been agreed to in-principle by the previous government, to address cost escalations related to associated harbourside infrastructure in Wellington and Picton, including to accommodate new larger ferries.

To date, $435.1 million of Crown funding has been assigned for the Inter-Island Resilient Connection (iReX) project of which about $63 million remains.

The project was set to deliver two rail-enabled ferries by 2026, but construction had not yet started on those.

In a statement, KiwiRail chairperson David McLean said the board was advised of the government's decision on Tuesday.

"The board will now oversee the wind-down of the project and review our plans for the Cook Strait connection."

While McLean said they respected the government's role, they acknowledge the disappointment of the team and shareholders involved.

"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."

In a statement, Finance Minister Nicola Willis said ministers, including State Owned Enterprises Minister Paul Goldsmith, would engage with the board and officials about alternative options.

"Let me give you a sense, what we are talking about here is boats and there are options for how we replace those boats," Willis told Checkpoint.

"The Ferrari is not the only car in the garage, and at the moment, the option that KiwiRail has had on the table, is the equivalent of the Ferrari, and now we're going to go off and see whether there are any good reliable Toyota Corollas available ... and maybe then we won't need to spend so much on a really big hangar of a garage."

But McLean said an alternative long-term solution could take years to develop.

Marlborough Mayor Nadine Taylor said she was shocked and disappointed by the news, adding that it would impact the country's long term inter-island infrastructure

"This will come as a particular shock to the Picton community who are most directly affected by this decision. The town has been very engaged in the new ferries project and have been a great supporter of it," Taylor said.

"A large number of workers had been expected to work on the iReX project over the coming years."

The mayor wanted to talk with the new government about what the future could look like in terms of inter-island infrastructure.

"There is no doubt that we need to invest in this national transport connection for the long term. The question now is how and when we will do that."

Port Marlborough, which is wholly owned by Marlborough District Council, had robust agreements in place with KiwiRail which required the completion of early works at the port of Picton and the reinstatement of any affected assets, Taylor said.

Cost blow-out went from $775m to about $3bn

Willis said ministers were concerned about the cost blow-out of the project, which had nearly quadrupled from $775 million to about $3 billion since 2018.

"It is also now the case that only 21 percent of these costs are associated with the core project of replacing ageing ferries.

"Furthermore, agreeing to KiwiRail's request would reduce the government's ability to address the cost pressures that are impacting on New Zealanders, fund other essential projects and get the Crown's books back in order."

But even if the project continued, it would not have jeopardised the government's tax cut plans, Willis said.

But the government remained committed to a "resilient safe and reliable Cook Strait connection", Willis said.

"In the meantime, we expect KiwiRail to continue focusing on providing a reliable ferry service and to prioritise existing services appropriately."

The government would not reveal the size of the tagged contingency set aside for the project in 2021, saying it was commercially sensitive, but it said it would be used to support exit negotiations.

Willis made clear the decision was not a reflection on the shipbuilder, Hyundai Mipo Dockyard, which was awarded the contracts.

She said KiwiRail would have to work to resolve any residual contractual obligations, but she did not want to comment further on that as to avoid prejudicing those discussions.

The government said it would be taking advice on understanding how the situation unfolded to inform future decisions.