This article first appeared in the New Zealand Herald.
Ever seen someone lose a billion dollars on a single roll of the dice?
We’re about to as the chickens come home to roost on the Finance Minister’s reckless single decision to cancel the iRex ferries – literally days before South Korean shipbuilders were about to cut the steel for the hulls. That decision to pull the plug on the 2021 fixed price contract for two ferries fitted out for optimal use for Cook Strait freight hauling is now shaping up to cost a half a billion dollars to pull out of.
Anyone wondering why it would cost that much just needs to imagine what would happen if they pulled out of a deal to build a house just as the foundations had been laid, the materials and equipment had been put on site and the subcontractors had been hired.
That cancellation fee will come on top of more than half a billion dollars of sunk cost in the project so far – money anyone who has passed through Wellington or Picton will have seen some of that money being spent on reclaiming land, and upgrading infrastructure ahead of the new ferries.
That’s a billion dollars or more of taxpayer’s money for nothing but dust. I don’t believe I’ve ever seen a single decision by any minister cost the country more.
Perhaps the worst part of this is that, even after the misguided decision to scrap iRex, there was a brief opportunity to come out of this OK by still building the boats and selling them. Maybe even changing some of the build specs to make them an even more attractive purchase,
Not that they would have been hard to sell. Since the deal was struck in 2021, the rest of the world has come out of the covid recession and started to shift freight again. That’s seen the price of these boats pretty much double. That’s right, we could have made some money to pay for whatever “Plan B” the government had for this critical infrastructure.
But for some reason that is frankly economically, politically, and commercially unfathomable the Finance Minister said “no”.
Throwing a billion dollars of our money on the bonfire is only the beginning of this fiscal fiasco. We still need to replace the current ferries by 2029 and that’s going to cost twice the price of the iRex ferries.
And it gets even worse. The government wants to cut costs by buying ferries that have no roll-on roll-off rail capabilities. The implications of this for our economy and our freight market are far reaching and range from longer loading times and thus reduced capacity across the strait, to eliminating rail’s competitive advantage in the market – and potentially KiwiRail’s viability as a competitive freight company altogether.
Figures we’ve worked through show that just the cost of double handling a container at each end of the strait rather than rolling it straight onto and off of a non-rail enabled will add $150 to $200 per container. Kiwi business will be paying over $10m a year more to move freight between the islands.
And nobody seems to know what the cost of removing an entire mode of freight transport from the market will be to freight customers and our economy. It would probably make sense to model that before cutting rail from the strait. I’m sure that the many New Zealand businesses that rely on domestic freight would appreciate at least that amount of due diligence and forewarning.
If they are pressed on the issue, the government will tell you that the ferries were too big and that the landside costs blew out. But here’s the thing. The majority of any landside savings that would come with their Advisory Group’s preferred option (an E-Flexer from Swedish based multinational StenaLine) won’t come from having smaller ships. In fact the smallest version of the E-Flexer is still 20m longer than our current largest ferry, the Kaitiki, with more than 50% greater tonnage. In fact, E-Flexers aren’t much smaller (and, in the 2024 market, far more expensive) than the “mega” ferries the government has been deriding as too big and too flash for months.
There will be some land-side savings but they will mostly be the result of getting rid of rail capacity and so not having to upgrade the rail infrastructure at Wellington and Picton terminals. That saving is likely to be in the low hundreds of millions of dollars – far less that is being lost on the cancellation of iRex. And to reiterate – any saving on rail enablement is coming at the expense of higher freight costs for New Zealand businesses and our economy.
Having made this astounding blunder, how does the Finance Minister and her government find a way out of it? They are about to spend the equivalent of building several provincial hospitals, or many times the cost of giving police a decent pay rise, or fixing dozens of leaking and mould ridden school buildings. For all of this money they will be getting literally nothing.
That’s why right now their favourite option is a Private Public Partnership via a Schedule 4A company – probably with StenaLine and probably including some kind of leasing arrangement. That’s the only way they can shift some of the immense cost this single stupid decision has landed on the taxpayer off their books. Or at least push it out for future taxpayers to deal with.
This is not an option that works for New Zealand. Putting a private and for-profit gatekeeper right in the middle of our main freight route will do nothing but increase costs to freight customers, see profits go offshore and probably end up costing much much more than just spending the money upfront.
The government will know this from their experience with PPPs before, but they are not promoting this model for the public good or even for the good of New Zealand businesses – including those in their own constituencies. They are doing it because they need to find a way out of the colossal fiscal and political hole they have dug for themselves. A hole that means they will be doing this deal as a price taker.
The one thing that stands in the way of them digging this hole deeper is New Zealand First. I don’t believe that NZF have any appetite for privatising strategic infrastructure at the expense of New Zealand businesses and the benefit of a multinational corporation. Don’t forget, they pulled down the Shipley government over the privatisation of Wellington airport. And selling down the main freight link between our islands is a much bigger and more economically dangerous proposition than that was.
I think the only way out for Luxon is to bite the bullet, try to salvage the iRex deal in whatever way he can, and admit the cost his Finance Minister has put on the taxpayer. She would probably have to resign, but given the commercial and fiscal arson she has committed here I don’t think even her own party would want to leave her in charge of running our economy. Let alone deciding on how we shift freight between our main islands for the next 25 years.
Carl Findlay is the National Secretary of the Maritime Union of New Zealand (MUNZ).
MUNZ has affiliations with over 200 maritime unions around the world through the International Transport Workers’ Federation.