Kiwirail writes off $382m over scuttled ferry plans First-half surplus in service division despite Interislander setback

Kiwirail has written off $382 million in costs associated with the cancelled Interislander replacement project, and provisioned a further $60m for winding it down.

The $442m in costs, detailed in the 2024 half-year results released on Thursday, doesn’t include the cost of exiting the shipbuilding contract with South Korean shipyard Hyundai Mipo Dockyard, which was contracted to build two new ferries for $551 million. The coalition Government declined a bid by Kiwirail last December for nearly $1.5 billion in extra funding for the project, called irex, which was plagued by cost escalations largely related to the terminals and other landside infrastructure.

According to the half-year results report, Kiwirail was working with the Government on options for exiting the shipbuilding contract, including the potential for the Government to fund costs tied to ending the deal.

“Potential costs, over and above the provision recognised in the interim financial statements, that may be incurred in reaching a settlement with the counterparty to contracts cannot be estimated with any certainty at present,” the document said.

As well as the Interislander writedown, Kiwirail booked costs of $1.9m associated with severe weather events. Combined with $211m in impairments, the rail operator posted a net deficit after tax result of $407m for the half-year, a 525.2 per cent decline on the $65.1m deficit recorded in the prior comparable period.

But if the irex costs and impairment for both periods were stripped out, the result was only $12.4m down on the firsthalf result for the 2023 financial year, Kiwirail noted.

While the infrastructure side of the division was hit with write-downs, Kiwirail still reported an operating surplus for its service division, albeit a materially reduced one.

The services business, which is expected to become self-funding, includes rail freight, ferry services, property management and tourism and commuter passenger rail.

The business posted a $40.5m surplus in the six months to December 2023, down $41.1m on the previous comparable period. Kiwirail attributed the downturn to general economic conditions and higher costs, especially for insurance premiums and labour inflation.

In a statement with the report, chief executive Peter Reidy and chairman David Mclean both praised improvements to service reliability, particularly for the Interislander ferries, but conceded that economic conditions were challenging.

“We saw volatile market conditions the first six months — a challenging domestic economy, and international shipping constraints that increased freight costs,” Reidy said.

Rail freight volumes were down 15 per cent on a net tonne kilometres basis; however, revenue from freight dipped only 4.2 per cent, reflecting a favourable mix and what Kiwirail called price management discipline.

“The market is challenging for our customers, with activity in many sectors — including construction, manufacturing, retail and export — forecast to be subdued for the remaining six months,” Reidy said. “Tourism is flattening out, after recent growth, at 80 per cent pre-covid levels.

“We continue to focus on safety performance, customer service, improving asset utilisation, and controlling the total cost of operations to improve financial performance.”

Looking forward, Reidy also referenced work being undertaken by Kiwirail to conduct a strategic review of its business. As Businessdesk revealed, that work is being led by global consulting firm Mckinsey. Despite the challenging operating environment, Kiwirail made significant capital investments of $707.3m in the six months to December, including new rolling stock, completing the replacement of track between Whanga¯rei and Kauri in Northland, and practical completion of a new integrated rail management centre in Auckland.

Mclean said ongoing capital investment in the rail network would ensure Kiwirail played a vital role in the growth of commuter rail services as well as the decarbonisation of the land transport system.