Politicians are failing to put the national interest first in infrastructure

Key Facts

• The last Labour Government oversaw KiwiRail’s iRex ferry procurement project, in which costs ballooned.

• National Finance Minister Nicola Willis announced in December that she was cancelling the iRex ferry procurement project.

• A report has just been delivered to the government on options for the ferry procurement project.

• The grounding of the Aratere Interisland ferry over the weekend has reignited concerns about when new ferries will arrive and whether they will be fit for purpose.

Key Analysis

• There is a growing consensus that the current ferry buying conundrum epitomises that successive governments that have deferred investment in infrastructure, running the country into the ground.

• The Government is facing a big decision on whether to repurpose the existing contract with Hyundai in South Korea to build new ferries.

• The question of ferry rail capability has been central to the procurement process and is not yet resolved.

• The ferry debacle revolves around the classic ideological questions about the extent to which government should be involved in business.

• Better infrastructure project decision-making processes are required, in which politicians must be focused more on the national interest than on their own self-interest.

Analysis in Depth

According to ASB economists, New Zealand needs to spend about $1 trillion on its infrastructure deficit. Yet there’s little public confidence that New Zealand politicians will make the right decisions on the thousands of infrastructure projects that need to be initiated.

This is because the track record of successive governments is abysmal on infrastructure. The default orientation of politicians is to ignore, defer, and then make hurried and ill-considered decisions on major projects. This can be seen most starkly in terms of recent choices on public transport (Auckland Light Rail), harbour bridges (the Bike Bridge), housing (KiwiBuild), and a variety of other roading, electricity, health and education facilities.

With the KiwiRail Interislander ferry replacement programme, we now have another case study of extremely bad and deferred infrastructure decision-making. Once more, we are seeing a crucial project that has been kicked down the road by both Labour and National-led governments, leading to some hurried decision-making, perhaps informed by vested interests. As usual, the consequences look disastrous.

The Blame game on the ferries

It’s not surprising that there’s public anger this week with politicians and officials over the state of KiwiRail’s ferries. The failures at sea have been shocking, and some search for accountability for this state of affairs is entirely appropriate.

Of course, there’s a lot of partisan finger-pointing going on. Labour partisans blame the current National-led government, and National partisans blame the last Labour government. Of course, they’re both correct in applying scrutiny to their foes, who deserve it. However, applying a dogmatic and tribal lens on the infrastructure deficit obscures the reality of what has occurred.

Labour’s part of the ferry blame

The reality is that the ferry replacement programme needed to commence a long time ago and had to be done in conjunction with other major transport infrastructure planning, especially in terms of roading, rail, and ports. However, once the issue could no longer be deferred, the incoming 2017 Labour-led Government handed the issue to just one company to sort it out — KiwiRail.

A joined-up approach wasn’t deemed necessary despite the fact that the purchase of new ferries would have major consequences for the ports and other transport systems. Instead, the KiwiRail management board was left to sort it out in isolation.

The Minister of Finance, Grant Robertson, and various Transport Ministers such as Michael Wood neglected to properly oversee the procurement process. As the procurement project ballooned, and the costs seemingly went from just $775m to eventually close to $3bn, the Government did little to check on the mission creep or whether a different process might be required.

What became apparent was that although KiwiRail had struck a deal to get two “mega ferries” built by Hyundai Mipo Dock for $551m, significant port developments in Wellington and Picton would be needed to accommodate the new ferries, and this would cost many times the price of the actual boats—possibly as much as $3bn.

National’s part of the blame

The National-led coalition of 2023 then received the hospital pass of an extremely cost-blown plan, and in December, they cancelled it without thought to putting any Plan B in place. Therefore, Labour had overseen a dysfunctional procurement process with little input from the public or industry, and National carried on with this approach but in a more knee-jerk manner, making yet another unilateral decision.

In announcing the cancellation, Finance Minister Nicola Willis’s sequencing was fraught, and it raised suspicion that it was partly driven by her search at the time for savings to deliver tax cuts in her upcoming Budget. Willis also failed to involve others in this decision-making—neither the opposition parties, the public, nor the industry. Instead, she hired consultants to devise a new plan to impose.

Those consultants delivered a new plan to the Government last week. It has been reported that the consultants recommend the Government purchase smaller new ships similar to the current ones, but without rail-enabled ferry cartage and probably without the electrification planned for the Hyundai ferries.

If Willis accepts this Plan B, procuring the new ferries will have to be urgent. She can’t be blamed for the current maintenance issues of the ferries in operation, but if the new ferries take too long to arrive, it will be seen as her fault. Under Labour’s plan, the new ferries would be here in 2026. As Heather du Plessis-Allan argued yesterday, “Every day after 2026 that we're without new ferries is a day that we legitimately can blame every ferry problem on Nicola Willis.”

She must also prove that any new ferry procurement programme is considerably cheaper than the one she ditched. Willis claimed that she was foregoing the plans for a Ferrari-type ferry service in favour of a “Toyota Corrola ferry”. But so far, it seems such a difference might be illusionary. And certainly, KiwiRail reports that there are no apparent bargains in the second-hand market for ferries.

Can the Government get Hyundai to repurpose its KiwiRail contract?

Most people assume that KiwiRail has now cancelled its $551m contract with South Korea’s Hyundai Mipo Dock to build the two mega ferries. All indications are that although KiwiRail has been negotiating with Hyundai about cancelling the project, this hasn’t appeared to have occurred yet. Instead, according to Parliamentary Questions, the boat builder has already built the engines and other parts and started preparing the metals for the build.

Journalist Richard Harman reported yesterday that “government ministers have persistently refused to confirm that the contract to build them has been cancelled.” He also reports that government insiders say that KiwiRail has decided not to cancel the order, given that the “break fee” is so hefty, but is instead investigating the sale of the ships once they are finished.

Therefore, the question arises as to whether the Government should just continue with KiwiRail’s initial plan but significantly modify the extensive and expensive harbourside infrastructure that the railway company wanted. Alternatively, the Government could negotiate with Hyundai to modify the existing order to make it more compatible with existing infrastructure and needs.

The other option is to cancel the project with Hyundai entirely, lose what is rumoured to be a $300m break fee, and start the project again with another shipbuilder. Yet surely, this option has minimal appeal. It will produce more expensive ferries, which will be delivered many years too late.

In this regard, Richard Harman reports that “Starting from scratch to design and build new ferries – as Luxon said yesterday, that was what could happen – means that the first might not arrive for at least another five years.”

Should new Interislander ferries be rail-enabled?

The question of rail capability has been central to the whole ferry procurement project, and it’s still not resolved.

Under Labour’s iRex “mega ferry” project, the new ferries would take trains on board, and the portside infrastructure would be significantly increased to make KiwiRail’s inter-island operations more significant. The train company had previously told the Labour Government that its South Island rail network could cease to be viable without rail ferries being part of the plan.

According to Oliver Lewis, writing for BusinessDesk today, if the Government goes with non-rail enabled ferries, there will still be the ability to transport rail freight “using road-bridging”, but according to those in the industry, “say this requires double-handling that results in increased turnaround times compared with bespoke rail ferries.”

Some are arguing that two of the parties in the coalition government – National and Act – are “ideologically opposed” to rail, which is why this element of the procurement project is being significantly downgraded. Green Party transport spokesperson Julie Anne Genter said yesterday, “The Act Party and the National Party have it on an ideological crusade to kill rail freight in this country… This whole thing is a pretext for a privatisation of the ferries, to break up rail, and make rail freight less competitive with trucks”.

Similarly, leftwing political commentator Gordon Campbell has argued today that any downgrading of rail capacity will have significant consequences for the nation’s transport systems: “This means that firms will be faced with the extra costs of the double handling of goods, and/or will have an incentive to put more goods onto trucks that will (a) generate more carbon emissions, and (b) cause further costs in road maintenance and (c) pose added safety risks to motorists who will now be forced to share the country’s roads with an ever-increasing number of large trucks, for decades to come.”

If such arguments seem like leftwing dogmatism, then it’s also worth looking at the views of Richard Prebble, a former Railways and Transport Minister and a former Act Party leader. Yesterday, he told RNZ that without proper rail-enabled ferries, rail might become much less viable throughout the country, which would negatively impact the economy. He said: “The country's roads cannot take the heavy trucks that would be needed to shift freight from the North to South Island. It would cost hundreds of millions of dollars in extra funding for our roading network… From an ordinary motorist's point of view, if you think it's hard being behind a heavy truck today, you're going to be stuck behind a queue of heavy trucks all the way from Auckland to Christchurch.”

Big questions about the role of government in providing ferry services

The current ferry dilemma revolves around the classic ideological issue about the extent to which the state should be actively involved in the economy. Many are now asking whether the government should even run ferries across the Cook Strait, especially because the private firm StraitNZ is already successfully operating the Blue Bridge ferry service.

Of course, for many decades, the Interislander ferry service has been operated by the state-owned railways – until the company was privatised in 1993 until it was brought back into public hands in 2008 after it nearly collapsed. And now KiwiRail has raised the idea of pulling out of the ferry business. Treasury officials told the Labour Government last year: “KiwiRail has indicated that if Ministers do not provide funding in full, it may look to exit the Interislander business altogether”.

Trucking lobbyists appear to be particularly keen on KiwiRail’s demise. Yesterday lobbyist James Smith from the National Road Carriers Association was reported saying that the state should get out of operating transport: “Get out of running ferries, stick to regulation and policy settings and let commercial operators take over.”

Yet this morning, Nicola Willis told RNZ that she was committed to keeping KiwiRail in the Cook Strait service, and that it was in the nation’s interest that BlueBridge has competition and that there is additional capacity. And over the weekend, Prime Minister Christopher Luxon and Transport Minister Simeon Brown indicated they were committed to keeping the government in the ferry business.

However, Richard Harman reported yesterday that not everyone is convinced by this: “there are suspicions within the opposition and New Zealand First that Luxon might try to use the current ferry situation to break KiwiRail up so that bits (like the ferries) could be partly privatised.”

Today’s Otago Daily Times newspaper editorial argues that this shouldn’t happen. They say that this would be to “ignore both the importance of the state-owned service, and the economic vulnerability of the country should Bluebridge encounter similarly choppy seas and have its road traffic only services hindered in any way. We are an island nation, and a sea link between those islands is not a ‘nice to have’ — to use a current expression.”

New Zealand needs better ways to decide upon infrastructure projects

The country is clearly not well served by how politicians and governments make decisions on crucial infrastructure projects. The ferry procurement story again illustrates that the country has been left with crumbling infrastructure due to short-term thinking by all the political parties involved in recent governments (from National, to Labour, to the Greens, NZ First, and Act).

Notably, none of these parties even pushed infrastructure as an election issue last year, indicating once again that politicians don’t see this as a vote winner. This illustrates why they give such issues virtually none of their attention. Our current political system's culture is too focused on power rather than policy.

This point was very well made by the editorial in the most recent Sunday Star Times, which said the problem of the ferries debacle is bigger than individuals: “That’s not the fault of one government, but successive governments; it’s the product of years of underinvestment, of infrastructure projects being politicised, and politicians who take shortcuts to power with hip-pocket promises rather than doing the hard yards finding bipartisan agreement on projects that have no immediate pay-off. They avoid it because there are no votes in it. So we have bike lanes, or motorways; road tunnels or light rail. And each year the priorities change; hundreds of millions of dollars sunk into scoping projects goes nowhere. When are our politicians actually going to start leading, and talk sensibly about what the country needs, not what will buy them votes?”

This is also discussed well in today’s Front Page podcast by the Herald’s Chelsea Daniels, who interviews Infrastructure NZ’s policy director, Michelle McCormick, who points to how infrastructure decisions are made in Denmark, where there’s a more thorough political process: “All the parties in government get to decide and are involved in developing the projects right from the beginning. So they have buy-in about what Denmark needs, and then as these up-to-70-year plans are put into place, there’s political agreement and support right across the board from the planning right into the development and implementation.”

Similarly, the engineering collective ACE has also spoken out about the way New Zealand governments make infrastructure decisions. Their chief executive, Helen Davidson, was reported yesterday saying that rather than having new governments chopping and changing infrastructure projects, there needs to be a more thorough development of what needs to be done, and then a commitment to an “infrastructure pipeline”.

Here in New Zealand, the consultation predominantly occurs via consultants in the private sector. The Herald’s Georgina Campbell reports today that Finance Minister Nicola Willis has told off KiwiRail for its overuse of management consultants. Willis said: “I was immediately concerned by the magnitude of this cost. I view it as excessive and not justifiable.”

Yet the current government will likely keep utilising consultants and private sector interests in developing infrastructure projects. BusinessDesk’s Oliver Lewis reports today that Treasury has seconded a consultant, Karen Mitchell from KPMG, to lead the work on the ferry procurement. Lewis writes that Mitchell, who used to work for the Infrastructure Commission, “held senior roles in several private-public partnership (PPP) projects, including as PPP project manager for Transmission Gully.”

Therefore, the signs are that the status quo in infrastructure will probably continue.

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

Georgina Campbell (Herald): Nicola Willis says KiwiRail’s spend on McKinsey consultant report is unjustifiable (paywalled)

Georgina Campbell (Herald): Interislander ferry Aratere grounding: Government to come under pressure (paywalled)

Gordon Campbell: On the Great Ferries Cancellation Disaster of ’23

Chelsea Daniels (Herald): NZ’s infrastructure woes: how do we fix a $1 trillion problem?

Heather du Plessis-Allan (Newstalk ZB): Nicola Willis is having a ferry problem

Richard Harman: KiwiRail aground while Government obfuscates (paywalled)

Ruth Hill (RNZ): Aratere ferry failure final straw for residents, farmers and truckies

Oliver Lewis (BusinessDesk): Treasury turns to KPMG principal for ferry advice (paywalled)

Glenn McConnell (Stuff): What politicians would do to save the Interislander

Glenn McConnell (Stuff): Increased urgency to fund Interislander, with issues set to become more common

Otago Daily Times: Editorial Ferry buyers needed, not tyre kickers (paywalled)

Jessica Roden (1News): Govt advised to replace Cook Strait ferries with new, smaller boats

RNZ: Finance Minister Nicola Willis responds to ferry decision criticism after ship runs aground

Tracy Watkins (Sunday Star Times): How long till the next disaster? (paywalled)