Why NZ needs to invest properly in rail and ferry infrastructure, for the public good

Jul 03, 2024

Fixing New Zealand’s rail and ferry infrastructure is becoming the most significant political issue of this year. Having cancelled KiwiRail’s Cook Strait ferry and portside upgrade programme in December without first establishing a Plan B, Finance Minister Nicola Willis has since been grappling, alongside her colleagues and officials, to find a cheaper way forward.

The signs are now that the cost savings might prove elusive, resulting in much inferior ferry and rail infrastructure. If so, Willis’ ferry cancelling call might have been a monumental mistake, leaving New Zealand again tinkering and underinvesting in critical infrastructure. This could be an outcome that satisfies KiwiRail’s rival trucking industry but is terrible for almost everyone else.

A Decision all about rail

KiwiRail’s iReX programme (“Inter-Island Resilient Connection”) was originally just about replacing the ageing Interislander ferries – and was estimated in 2018 to cost just $775m. By 2023, this had blown out to about $3b. But this was primarily related to a decision to expand the infrastructure upgrade to include a massive rebuild of the Wellington and Picton ports – the wharves and terminals were nearing the end of their useful lives. Such a significant expansion was especially necessitated when KiwiRail decided that the new ferries would be rail-enabled vessels.

By ordering rail-enabled ships to be built in South Korea, KiwiRail figured that it would be upgrading and ensuring its whole rail network would be complete and modernised – the ferries would allow freight to be shunted straight on and off between the two islands, allowing huge efficiencies shifting goods around the whole country. The alternative was to have ferries without train tracks on the decks. Instead, “road bridging” would be used in which freight was taken from the rail system onto trucks and then back onto trains at the other end – a significantly inferior logistical method.

The ramifications for the portside infrastructure were considerable, leading to much higher projected costs for the new wharves, terminals and freighting yards. Part of this increased cost was also due to new earthquake legislation, making port infrastructure much more complicated to build. Therefore, when Willis was given the $3b bill for this – the vast majority of which was for the portside infrastructure – she baulked and ordered a cheaper option – one without the rail capacity.

The bill for the mega ferries themselves was not that much – $551m, deemed a very good deal. As well as being rail-enabled (carrying 300 per cent more rail wagons than KiwiRail’s current rail-enabled vessel), the ferries could have taken about double the number of trucks and other vehicles, and twice as many passengers as the three ships.

Because they would have been diesel-electric hybrids, the ferries would’ve been safer and quieter in harbours, created less wake, and, most importantly, had 40 per cent lower carbon emissions. Crucially, they would also have made the rail network fully connected. The public value created from such an infrastructure investment was considerable.

The Rail and ferry infrastructure debate has been dominated by one view

There’s almost been a consensus in favour of Nicola Willis’ decision to cancel the iRex project. Certainly, the dominant voices in the debate have favoured the decision to downsize the expenditure and to ditch the rail-enabled dimension.

Notably, the main lobby group of the trucking industry, Ia Ara Aotearoa-Transporting NZ, has been backing the new Government’s management of the ferry procurement process, saying that cancelling the rail-enabling iReX programme was the right thing to do. Similarly, the Infrastructure New Zealand lobby group have also backed the cancellation of this critical infrastructure investment.

There’s also been a flurry of opinion pieces that have endorsed the new government’s general approach to the ferries. These voices have lampooned the public sector and central government’s apparent inability to run things. Such views are currently fashionable for good reason. After all, recent governments have run projects like KiwiBuild, Auckland Light Rail, Three Waters very poorly, which has given weight to the idea that governments need to step away from infrastructure projects, allowing market-based approaches to prosper instead.

Much of the narrative clearly comes from a pro-business and ideologically neoliberal perspective in favour of markets and privatisation. Epitomising this, the National Government’s “Infrastructure Tzar” Steven Joyce wrote a column entitled “The problem with government companies” in the Herald at the weekend. In it, he said the problem with the ferries is that they are run by a state-owned company and argued for them to be privatised.

Joyce believes that New Zealand’s State Owned Enterprise (SOE) model doesn’t work well because of the lack of market signals to inform management decisions – for example: “There is no share price through which to reflect shareholder satisfaction or dissatisfaction, nor a sensible way of rewarding good leadership.” In terms of KiwiRail and other companies like Transpower (which he says the last National Government should have floated on the share market), the managers “often end up doing what they like”, and politicians “make them do things that make no commercial sense.”

Joyce, who was appointed by the new government to advise on the creation of a new infrastructure agency and is paid $4,400 a day, also complains that the directors on state-owned company boards “are regularly appointed for their political fealty rather than commercial nous.”

Many political editors and press gallery journalists have also been writing their commentaries on rail and ferry infrastructure from a pro-market perspective. The Post’s political editor Luke Malpass wrote in the weekend about how poorly KiwiRail sold their infrastructure project to the incoming Nicola Willis: “the hamfisted attempt to sandbag the new Government into proceeding with iRex showed a serious lack of political aptitude from the SOE.”

He also focused on KiwiRail’s Blue Bridge competitor as showing the way forward, with “no taxpayer subsidies whatsoever”. But Malpass warned that it would be problematic if the taxpayer was to fund the mega ferries because that would mean Blue Bridge ferries would be unfairly disadvantaged in the Cook Strait competition.

Also in the weekend, Stuff’s libertarian political commentator Damien Grant argued that the SOE model hasn’t worked for KiwiRail, which he claims has been dominated by Treasury and the Ministry of Transport: “The political and bureaucratic class were using a State-Owned Enterprise to pursue a wider economic program. They were trying to run a trucking business when they should just have built the road.” He concludes: “KiwiRail should be sold. Again. For good this time.”

The Act Party also took a similar line last week, with spokesperson Cameron Luxton saying that KiwiRail should be partially privatised and made to operate as a purely commercial business without the current infrastructure and transport imperatives demanded by politics.

Criticisms emerging of vested interests in transport

A number of different perspectives on the KiwiRail infrastructure issue are now emerging. On Monday, Newstalk ZB broadcaster Andrew Dickens gave a strong endorsement of the original KiwiRail iReX programme, explaining that the Cook Strait connection is just too important to be left in its current “disrepair”. He points out that KiwiRail’s iReX programme was expensive because it involved necessary wharf redevelopment that needs to occur regard of which ferries are purchased: “these wharves have remained unchanged for 50 years and needed an upgrade. Particularly the Kaiwharawhara port in Wellington. It's seismically vulnerable, so no matter what boats we eventually order, there will be a huge costs in earthquake proofing.”

His more pointed argument is that transport infrastructure is being purposefully disregarded by the new government, because of allegiances to the trucking industry: “National is no friend of railways. This is the party that sold the railways to Toll, who then asset stripped it to such an extent we bought it back for $1. They stopped the electrification of the Main Trunk line and stood in way of the CRL until they no longer could. They also gave way to the trucking lobby allowing trucks of more than 44 tonnes on our road. Killing rail freight and causing potholes that they're now spending $4 billion to fix.”

Others have also argued that the National-led Government’s decision to cancel the mega ferries is based on their antagonism to publicly-owned railways in favour of privately-owned trucking industry. Car enthusiast and road safety campaigner Clive Matthew-Wilson has written on his Dog & Lemon car reviewing website that the Government decision to downgrade the ferry purchase is designed to provide the trucking industry an advantage over rail transport.

Matthew-Wilson argues that New Zealand’s transport system is “rigged in favour of trucks” due to a “cosy historical arrangement between the trucking industry and the government, which allows the trucking companies to grow rich at the taxpayers’ expense.” He points out that the bulk of the cost of New Zealand’s roads and their maintenance is due to the cost of trucks, which don’t pay for their proper share.

The downgrading of the ferry procurement programme is simply an attempt to keep the trucking industry dominant, according to Matthew-Wilson. Because National want to remove the rail capacity from the new ferries, this will essentially make the rest of the rail network less economical – the advantage of having a rail network which easily crosses between the two islands means that freight can be shifted from one end of the country to the other quite quickly. KiwiRail had been attempting to create infrastructure to enable this, but with the cancellation of the iReX project, rail will now be a less efficient form than trucking. Hence, according to Matthew-Wilson, this will cause a dramatic increase in the volume of trucks on the roads throughout the country.

Environmentalist Gary Taylor made similar arguments yesterday on Newsroom in his opinion piece titled “$3b a small price to pay for future of Interislander ferries”. He points out that the cost of iRex is relatively small compared to the budget for roading ($40b announced in the latest Government Policy Statement for the next six years).

Here's the crucial part of his argument that the investment cost of the iRex programme is worthwhile: “surely the ferry costs are not out of whack – $3b to connect our two main islands with all of the economic and social benefits that will follow is a reasonable quantum. Surely if we are to learn from the mistakes of our past, it’s that we always underinvest in public good infrastructure and then play catch-up. The project still has a positive cost-benefit ratio. Then there are the environmental and climate change implications. It’s vital for our future emissions profile that we retain rail links across the country. Having rail-enabled ferries is part of that. It would be tragic if we lost that capacity, especially as we are transitioning to a low carbon economy and transport network.”

Interestingly, some of the big players in the transport industry back up much of this. For example, Mainfreight chief executive Don Braid has said that if rail-enabled ferries aren’t purchased, then his own logistics company will be forced to stop using train transport so much, and he calculates that his company would add a further 5700 more truck and trailer journeys onto the road each year.

Some commentators are also taking issue with the comparisons between KiwiRail and Blue Bridge operations, pointing out that the iReX upgrade programme was about much more than just ferries, as the bulk of the spending was going on the rail network component, which Blue Bridge doesn’t deal with.

In this regard, the NBR’s Tim Hunter asked last week: “Was the $3b ferry capex really rail freight capex in disguise? If your business is rail freight, wouldn’t you tend to see ferries as part of a rail network?” He, therefore, suggests that the scale of the proposed iReX spending was possibly quite warranted, also saying, “There’s a good argument for rail freight as diversified transport infrastructure and alternative to road”.

Hunter also doesn’t entirely trust the Government when SOE Minister Paul Goldsmith says there are “no current plans” for ferry or rail privatisation, commenting: “This is exactly what you’d expect them to say.” He suggests the privatisation agenda may still creep in. The NBR columnist points out this would probably be a big mistake: “The first thing to acknowledge here is KiwiRail has been in private hands before and it didn’t go well.” The various private owners stripped the company's assets and ran rail into the ground, which meant the state had to take it over again at significant cost.

Nicola Willis’ false economies

Has the new Government been “penny-wise and pound-foolish”? There’s a growing sense that in cancelling KiwiRail’s $3b iReX infrastructure project to save money, Nicola Willis may ultimately cost the country much more. By trying to get ferries on the cheap, cancelling portside infrastructure upgrades, and effectively creating a gap in the rail network, New Zealand might pay a much higher price, and accelerate the notion of the country being “broken”.

Last week, The Post’s Tom Hunt reported that the costs of cancelling the ferries and obtaining inferior ones might well add up to nearly $2b. This is because the Government has already sunk $424m into the iReX programme, they would be forced to pay a “break fee” for cancelling the ordered ferries (said to be about $300m), the smaller new ships being considered are likely to cost about $900m, and the cost of maintenance over the next five years for the current ageing ferries would be about $325m.

Hunt concludes: “That took the cost to nearly $2b. For that, the country would get one less ferry than it currently had, neither would be able to take trains, and no work would be done to the tired ports at Marlborough and Wellington.”

Unsurprisingly, government ministers now seem unwilling to say that their new ferry-procuring programme will save much money or result in cheaper boats than mega ferries being cancelled.

It's not too late to invest properly in rail and ferry infrastructure

Perhaps it’s time for those interested in the country’s infrastructure crisis to examine whether KiwiRail’s iReX programme was as terrible as Willis insisted when she pulled the plug last December. While KiwiRail’s management of this programme under the previous government was clearly flawed, it now looks like the proposal was significantly preferable to what National is proposing as a replacement, which threatens to take the country backwards.

The problem with this retrogressive step is that it will be hard to reverse it once it is committed. The country will lose its ability to run a comprehensive and modern rail network while becoming much more reliant on sending more trucks onto the roads, with all the consequences this entails.

While there has seemed an inevitability about National’s cancellation of the ferries, it’s clear that, for the moment, nothing is decided. Even the original mega ferry contract with Hyundai in South Korea hasn’t yet been cancelled – in fact, much of the construction work has already begun.

In contrast, within Government, there are signs that National is struggling to find an alternative to KiwiRail’s plans that stack up better. Willis initially set up a Ministerial Advisory Group to give some options. This has now been expanded into a more extensive inter-departmental programme named “Project Orange”, which seems set to be embarking on a lengthy process, as it’s turning out that simply buying a second-hand Toyota Corolla instead of the so-called gold-plated Ferrari ferry purchase hasn’t proved to be as sensible as the Finance Minister expected.

And once KiwiRail’s iRex proposal includes the “public good” calculations rather than just the commercial cost-benefits, the idea of a proper rail-enabled and modernised port project makes a lot more sense to transport analysts.

It might still be possible to change direction. Transport Minister Simeon Brown maintains that the Government still has $7.5b of infrastructure funding that is not yet committed and that much of it can be allocated to the rail and ferries upgrade if necessary.

A Crucial political fight in the coalition government

Behind the scenes, the New Zealand First party in government are apparently arguing in favour of a re-think on the ferry cancellation. After all, Winston Peters was the minister in 2018 who ordered the original iReX programme incorporating rail into the ferries upgrade. Last week, Peters said that rail-enabled ferries were badly needed to keep “the highly-productive export wealth creating South Island... in the loop” and that he was going to make sure this was maintained.

The question is now whether his coalition party will deliver on this and whether the public would back him to do so. A lot is riding on this now. It concerns whether the country wants a roading or rail-centred transport system. At the moment, the pro-roading interests are winning the public debate. Or, to put it more starkly, rail is under attack, and the roading and trucking lobby are winning the fight, resulting in New Zealand being a less joined-up nation.

But suppose Peters and NZ First take a strong stand in favour of saving rail. In that case, they will get some support from across the political spectrum, including from those in business who see the need to avoid the roading lobby getting their way in undermining their rail competitor. For instance, former Railways Minister Richard Prebble has been one of the most radical voices advocating for the KiwiRail proposals, saying New Zealand needs to “save rail”. He says that in a decade, KiwiRail’s $3b will seem like a bargain and that Nicola Willis needs to get used to the idea that funding essential infrastructure adequately isn’t something you can avoid without causing economic catastrophe.

When Willis originally came out against the rail ferries, Prebble pleaded with her to reconsider via an opinion piece for the Herald, which is still a must-read. Here’s his key point: “Nicola Willis must not let her rage at Labour leaving reckless fiscal hand grenades, like the rail ferry blowout, cloud her judgment. The decision to cancel the new rail ferries is a decision to cancel having a railway. I am a former minister of railways. The world-famous consultants, Booz, Allan and Hamilton modelled New Zealand railways. The modelling revealed the key to a sustainable railway is the rail ferries. The ferries extend the main trunk railway line making sending freight by rail economic.”

Like Peters, Prebble understands that having a rail system with proper rail ferries is essential to the national economy: “The economic, environmental, and social impact on the South Island, on exporters, importers, industry, tourism, indeed the whole country, of not having an inter-island rail service will be profound… Without new, larger, roll-on roll-off ferries, the railway losses will be colossal. The cost to the taxpayer will rapidly exceed the $3 billion cost of the ferries and dockside improvements that have an estimated life of 60 years.”

If Peters successfully pushes back against Willis in Cabinet – insisting that the Cook Strait infrastructure should be regarded as a RONS (Rail/Road link Of National Significance) – then the $3b cost of the original iReX programme could be sold as “value for money”. As when roading costs are calculated, the value of this ferry-rail infrastructure investment could include the public value benefits outside of the commercial business profits. It’s astounding that this hasn’t already occurred – governments should consider broader national strategic interests rather than just what it means for the sale of ferry tickets.

The way forward on the ferry question will epitomise much about New Zealand politics and the country's future. Politicians like Peters know that nation-building and modernisation, especially regarding climate-friendly infrastructure, sometimes depend on pushing back against vested interests and those in boardrooms who want governments to cut spending on projects, regardless of the vast public good they achieve.

Dr Bryce Edwards

Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington

This analysis is supplied exclusively to Democracy Project Substack subscribers and the New Zealand Herald.

Key Sources

Thomas Coughlan (Herald): Welcome Project Orange: the new name for project to replace ferries

Andrew Dickens (Newstalk): The ferry saga is a pox on both National and Labour

Damien Grant (Stuff): KiwiRail should be sold for good this time

Tom Hunt (The Post): Claims new ferry project will hit iRex price, for much less ship (paywalled)

Tim Hunter (NBR): Let’s privatise Interislander (paywalled)

Steven Joyce (Herald): The problem with government companies (paywalled)

Luke Malpass (The Post): KiwiRail, iRex and how not to get a minister to agree with you (paywalled)

Thomas Manch (The Post): Luxon assures he 'knows how to deliver economics' as Cook Strait ferry saga boils over (paywalled)