Building new ferries then selling them among options for KiwiRail - CEO

KiwiRail might go ahead and build its new ferries despite the government pulling the funding, its chief executive says.

Chief executive Peter Reidy told Morning Report it would be one of the options on the table as KiwiRail tries to decide what happens next.

Finance Minister Nicola Willis still expects KiwiRail to deliver new ferries despite pulling funding on a project that has had a massive cost blowout.

When announcing the decision on Wednesday she said the state owned company's plan to replace its ageing Interislander ferries with two larger, purpose-built rail ferries has almost quadrupled in cost to nearly $3 billion.

KiwiRail has spent $400 million so far but construction has not yet started on the new ships and it will now wind up spending on the project.

Willis said KiwiRail had effectively begun paying for a "Ferrari… and now we're going to go off and see whether there are any good reliable Toyota Corollas available" to cut costs.

Former Finance minister Grant Robertson said the added cost was unacceptable. However, the coalition government's decision was regrettable because funding already spent would be lost and there might be more expense in withdrawing from the project.

Reidy was asked on Morning Report about potential penalties KiwiRail might incur with the shipbuilder.

"That's a commercial factor - we've still got to sit down with our board and work through what are the options with the shipbuilder.

"Do you carry on building it and sell it? Could you sell it as it is right now? There's a number of commercial options, we've got to sit down with other players."

Regarding the budget blowout, he said there were many factors.

The design cost was $1.45 billion in June 2021 and had increased substantially since then due to changes in the seismic and flood modelling requirements, land had to be lifted 1 metre at Wellington's port and there was a lot of debate about which site to use for a terminal.

There had also been significant cost rises in infrastucture.

"It's one of the most complex marine engineering projects this country would have done for some time."

He defended millions more being added to costs just last month - it was common for budgets to be increased as the design wok reached its final stages, he said.

Even if three smaller ships were brought in it would only reduce the infrastructure costs by seven percent.

He said the construction that had already got underway would still benefit Wellington and Picton although the rest of the work would have to stop.

Reidy said KiwiRail still maintained the bigger ships with more capacity and lower carbon emissions would have been best.

The new boats would have been fit for purpose for New Zealand - connecting rail with freight and passengers across the Cook Strait.

Leasing has now become an option, he said, however, that meant rail capacity would not be catered for.

The Cook Strait is one of them most dangerous stretches of water in the world, Reidy said, and the larger ferries KiwiRail had wanted would have been most suited to handle the often stormy conditions.

"It's very difficult to go and get a ship that might have been doing the English Channel and bring it in here and that's obviously one of the risks. That's why the option we put on the table was the right solution for New Zealand to deliver a safe and resilient solution across the Cook Strait."

There was no question of KiwiRail concentrating on rail only and not running a Cook Strait ferry service.

"That's a key part of the transport connectivity and the service we offer our customers."

Billions of dollars in freight and one million passengers were carried across the Cook Strait annually.

The main trunk line across the country would be disrupted without rail freight being transported across the Strait.

He cited the Kaikōura earthquake and the cutting of the rail line to Christchurch and the extra hours truck drivers had to travel, plus the disruption to the supply chain for supermarkets.

"Certainly the rail connection is critical to the supply chain and all of our customers and exporters see that."

Government still committed to rail - Willis

Finance Minister Nicola Willis says the government remains committed to rail across the Cook Strait - despite declining to keep funding a project doing just that.

The new ferries, due to be delivered by 2026, would have taken more passengers, trucks and rail wagons.

Willis said while rail was an important consideration, there needed to be a solution that was "value for money" and suited all ferry users, including passengers and freight operators.

"We accept that we should invest in making sure there is a good resilient transport connection between our two islands and our government will."

However, it needed to be done right, without budget blowouts and delivered on time and on budget.

She was confident that smaller versions of ferries would be able to handle freight, citing the example of road bridges which involves removing freight from trains, putting it on ferries and then transferring it back on the trains at the other end.

There was also the option of having just one of three ferries being used for rail freight.

Willis was asked about the possibility of the ferries still being built and then sold. She said it was a commercially sensitive decision KiwiRail would need to make.

The Auditor-General's report published on Wednesday revealed "the shambolic job" that has been done on infrastructure projects in recent years, Willis said.

The coalition planned to establish an infrastructure agency which would ensure much sounder design and delivery of major infrastructure projects.

"We want to tidy this area up."

Unions fuming over decision

Four transport unions, the Maritime Union of New Zealand, the Rail and Maritime Transport Union, the New Zealand Merchant Service Guild and the Aviation and Marine Engineers Association have demanded Willis' resignation over the government's decision.

The Maritime Union, which represents seafarers, said the decision did not take into account the importance of having a functioning inter-island service and the upgrade needed to go ahead immediately.

Maritime Union national secretary Craig Harrison told Morning Report the problems around the ferries had been "kicked down the road" by previous governments for years and now Willis had "torpedoed" a possible solution.

While he agreed there were some questions around the board's planning for the infrastructure needed to support the much larger ferries, there was no doubt in his mind the project needed to go ahead.

He understood that the cost blowout related more to the land needed for the support infrastructure, such as the terminals in Wellington and Picton.

"We need some resilience in the Cook Strait ... Whether we like it or not we need new vessels."

He said taking the cheaper option of leasing existing ferries had led to big bills preparing them for sailing across the Cook Strait.

"You always make a compromise when you're leasing vessels."

The ferries that would have been built for KiwiRail would have catered for the specific track gauge of the KiwiRail carriages.

If KiwiRail leased ferries they would probably only be able to handle cars and trucks and no rail carriages so new ways would have been needed to move freight across the Cook Strait.

"It's such a significant part of the New Zealand economy . You either fix it now or you try and fix it later and everyone keeps pushing it down the road and it's only going to get more expensive if you keep pushing it down the road ..."

He said if KiwiRail still wanted to build replacement ferries it would go to the back of the queue at the shipbuilding yards.

Labour was also concerned over cost

Grant Robertson said the Labour government had been working with Treasury and KiwiRail to find a way forward on funding the ferry project right up to the election. The funding request made by KiwiRail was unacceptable so other options were being explored.

"This included putting a proposal to Kiwirail that would have protected the significant investment that had already been made in the project," Robertson said in a statement.

"It is highly regrettable that the funding already put in by the government will now be lost. There will also be costs from withdrawing from the project that the government may well have to meet."

He added the government needed to provide the country with some certainty on the provision of "a sustainable and reliable Cook Strait ferry service" and it needed to be done with some urgency.

Labour's deputy leader Carmel Sepuloni also said the government needs to come up with alternative plan if it refuses any additional funding to Cook Strait ferries.

"The evidence has been put in front of us with respect to the risk of safety, and the current theory that [they're] certainly near the end of their life and so all of that is fact, and something needs to be done here," she said.

However, Sepuloni acknowledged that the cost of replacing the ferries was also a concern for Labour when it was in government.

She said they couldn't make a decision at the end of their term because of cost implications.