For a private operator like Bluebridge, owned by Morgan Stanley Infrastructure Partners, the answer is straightforward: make decisions based on business fundamentals. The company runs a profitable service, commanding 56 percent of the vehicle freight market. It secured that market share through sound commercial judgment.
But when politicians play shipping magnates with taxpayers’ money, even simple business decisions become exercises in bureaucratic mismanagement. The saga of state-owned KiwiRail’s Interislander service provides a masterclass in how not to run a transport company – and why governments should think twice about running businesses at all.
The New Zealand government owns assets worth several hundred billion dollars. From banks to broadcasting, valuation services to farming, politicians control enterprises that compete directly with private companies. This creates inherent tensions between political and commercial objectives.
The ferry debacle perfectly illustrates these challenges. What began in 2018 as a NZ$775 million procurement project to replace three ageing ferries has spiralled into a multi-billion-dollar nightmare.
The cost escalation tells its own story: NZ$1.4 billion by late 2019, NZ$2.6 billion by February 2023, and NZ$3.2 billion by December 2023. When the new National government finally cancelled the project, estimates had climbed to NZ$4 billion.
Remarkably, only 21 percent of these costs were for the actual ferries. The rest would have gone into landside infrastructure – new terminals, berths and facilities in Wellington and Picton. As various stakeholders added requirements, politicians eager to create a legacy project encouraged scope creep rather than enforcing commercial discipline.
The cost of this political interference is staggering.
A year ago, Finance Minister Nicola Willis cancelled the original ferry contract, declaring the proposed vessels were like “Ferraris” when “Toyota Corollas” would suffice. Break fees for the cancelled contract could reportedly reach NZ$300 million – more than half the original vessel cost.
Twelve months later, there are still no ferries. Instead, the government has created a new Crown company to run the procurement and appointed a dedicated Minister for Rail, despite transport already having its own minister.
The existing Interislander fleet, with vessels dating from the 1990s and early 2000s, must now soldier on until at least 2029. Recent incidents highlight mounting risks. One ferry lost power in Cook Strait. Another ran aground. KiwiRail has sought 22 exemptions from maritime safety rules in three years, while its private competitor Bluebridge needed only nine.
These operational problems compound the financial challenges faced by KiwiRail, Interislander’s parent company. The state-owned enterprise has received NZ$11.67 billion in government funding over 16 years – nearly half of all receipts. In the current financial year, only 35 percent of its income comes from actual customers.
The contrast with private sector performance could not be starker. While politicians dither, Bluebridge demonstrates how ferry services should work. Its net profits increased by 64 percent to NZ$17.1 million in 2022, then rose another 59 percent to NZ$27.3 million the following year. Revenues hit a record NZ$208.2 million in 2022, up 27 percent.
Since breaking KiwiRail’s monopoly in 1992, Bluebridge has expanded steadily based on market demand. When it needed new vessels, it procured them. When terminals required upgrades, it negotiated with port companies. Most importantly, it made these decisions based on commercial imperatives rather than political considerations.
Similar patterns are visible across New Zealand’s state-owned enterprises. State-owned Kiwibank competes with private banks. State-owned Quotable Value competes with private valuers. State-owned New Zealand Post competes with private couriers. In each case, commercial objectives must be balanced against broader political and social goals. Taxpayers must ultimately pay for the resulting inefficiencies.
The government’s solution to the ferry fiasco? Create yet another Crown company with an impossibly complex governance structure. This new entity must coordinate between KiwiRail, port companies, regional councils, and various government agencies. It must evaluate both traditional procurement bids and innovative private sector proposals. Three ministers will exercise oversight and attempt to reach consensus on major decisions.
Further delays and cost increases are virtually guaranteed. Each stakeholder can effectively veto decisions. Each minister must satisfy different political constituencies. The parallel procurement tracks create uncertainty for bidders, likely leading to higher risk premiums in their proposals.
New Zealand’s experience with previous privatisations demonstrates a better path. When Telecom was sold in 1990, the sale price of NZ$4.25 billion exceeded market expectations by around NZ$1 billion. Under commercial ownership, the company cut prices substantially while reducing operation costs even more. Today, the benefits of competition and choice in telecommunications are so obvious that no one calls for a return to state monopoly.
The saddest part of the ferry saga is thus that none of this was necessary. New Zealand already has a successful private ferry operator. Instead of multiplying ministers and agencies, the government could have sold Interislander to commercial operators who know how to run a ferry service.
That would have been too sensible. Instead, New Zealand must now wait until 2029 at the earliest for new ferries while paying hundreds of millions in break fees and hoping its ageing vessels stay afloat – all because politicians could not resist playing shipping magnates with other people’s money.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.
The New Zealand government owns assets worth several hundred billion dollars. From banks to broadcasting, valuation services to farming, politicians control enterprises that compete directly with private companies. This creates inherent tensions between political and commercial objectives.
The ferry debacle perfectly illustrates these challenges. What began in 2018 as a NZ$775 million procurement project to replace three ageing ferries has spiralled into a multi-billion-dollar nightmare.
The cost escalation tells its own story: NZ$1.4 billion by late 2019, NZ$2.6 billion by February 2023, and NZ$3.2 billion by December 2023. When the new National government finally cancelled the project, estimates had climbed to NZ$4 billion.
Remarkably, only 21 percent of these costs were for the actual ferries. The rest would have gone into landside infrastructure – new terminals, berths and facilities in Wellington and Picton. As various stakeholders added requirements, politicians eager to create a legacy project encouraged scope creep rather than enforcing commercial discipline.
The cost of this political interference is staggering.
A year ago, Finance Minister Nicola Willis cancelled the original ferry contract, declaring the proposed vessels were like “Ferraris” when “Toyota Corollas” would suffice. Break fees for the cancelled contract could reportedly reach NZ$300 million – more than half the original vessel cost.
Twelve months later, there are still no ferries. Instead, the government has created a new Crown company to run the procurement and appointed a dedicated Minister for Rail, despite transport already having its own minister.
The existing Interislander fleet, with vessels dating from the 1990s and early 2000s, must now soldier on until at least 2029. Recent incidents highlight mounting risks. One ferry lost power in Cook Strait. Another ran aground. KiwiRail has sought 22 exemptions from maritime safety rules in three years, while its private competitor Bluebridge needed only nine.
These operational problems compound the financial challenges faced by KiwiRail, Interislander’s parent company. The state-owned enterprise has received NZ$11.67 billion in government funding over 16 years – nearly half of all receipts. In the current financial year, only 35 percent of its income comes from actual customers.
The contrast with private sector performance could not be starker. While politicians dither, Bluebridge demonstrates how ferry services should work. Its net profits increased by 64 percent to NZ$17.1 million in 2022, then rose another 59 percent to NZ$27.3 million the following year. Revenues hit a record NZ$208.2 million in 2022, up 27 percent.
Since breaking KiwiRail’s monopoly in 1992, Bluebridge has expanded steadily based on market demand. When it needed new vessels, it procured them. When terminals required upgrades, it negotiated with port companies. Most importantly, it made these decisions based on commercial imperatives rather than political considerations.
Similar patterns are visible across New Zealand’s state-owned enterprises. State-owned Kiwibank competes with private banks. State-owned Quotable Value competes with private valuers. State-owned New Zealand Post competes with private couriers. In each case, commercial objectives must be balanced against broader political and social goals. Taxpayers must ultimately pay for the resulting inefficiencies.
The government’s solution to the ferry fiasco? Create yet another Crown company with an impossibly complex governance structure. This new entity must coordinate between KiwiRail, port companies, regional councils, and various government agencies. It must evaluate both traditional procurement bids and innovative private sector proposals. Three ministers will exercise oversight and attempt to reach consensus on major decisions.
Further delays and cost increases are virtually guaranteed. Each stakeholder can effectively veto decisions. Each minister must satisfy different political constituencies. The parallel procurement tracks create uncertainty for bidders, likely leading to higher risk premiums in their proposals.
New Zealand’s experience with previous privatisations demonstrates a better path. When Telecom was sold in 1990, the sale price of NZ$4.25 billion exceeded market expectations by around NZ$1 billion. Under commercial ownership, the company cut prices substantially while reducing operation costs even more. Today, the benefits of competition and choice in telecommunications are so obvious that no one calls for a return to state monopoly.
The saddest part of the ferry saga is thus that none of this was necessary. New Zealand already has a successful private ferry operator. Instead of multiplying ministers and agencies, the government could have sold Interislander to commercial operators who know how to run a ferry service.
That would have been too sensible. Instead, New Zealand must now wait until 2029 at the earliest for new ferries while paying hundreds of millions in break fees and hoping its ageing vessels stay afloat – all because politicians could not resist playing shipping magnates with other people’s money.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.
2 comments:
Yes, but you omit to mention rail-enabled ferries. The govt does them; Bluebridge doesn't because they want the quickest path to maximum profit. Rail-enabled ferries give us a connected rail network from Kaitaia to Bluff with environmental benefits. Cheapness and profit aren't everything.
Lytellton to Wellington and return overnight was a far better service than anyting into Picton. Bluebridge is great for Picton but using the Australian mothballed rail ferries from Tasmania would be very sensible alternative between Lytellton and Wellington.
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