The Ministry of Transport is considering the possibility of KiwiRail exiting the Cook Strait ferry market entirely, according to a new briefing document to government.

The ministerial briefing, released under the Official Information Act, said the cancellation of KiwiRail’s multi-billion-dollar Interislander replacement project leads to the possibility the state-owned enterprise may not be best placed to provide an inter-island service in the future.

KiwiRail’s project looked to replace the current ageing Interislander fleet with two larger ships.

Finance Minister Nicola Willis declined KiwiRail’s request for more money after the project ballooned to almost $3 billion.

Last year the government announced it will set up an expert advisory group to provide independent assurance on how to proceed with the ferry service.

The Ministry of Transport was also asked to lead an assessment of the long-term requirements for a resilient connection across Cook Strait.

According to the briefing, officials will investigate how the market might respond to the hypothetical exit of KiwiRail, including whether rival operator Bluebridge could provide more capacity across Cook Strait. They will also look at whether the Government could subsidise ferry operations.

“The cancellation of Project iRex [the mega ferries] leads to the possibility that KiwiRail may not want to, or may not be best placed to, provide an inter-islander ferry service over the medium to longer term,” the document said.

Market forces have been relied on to provide a resilient Cook Strait connection in recent times, the briefing said. KiwiRail, as a state-owned enterprise, is required to run commercially.

However, the experience with KiwiRail’s mega ferry project suggests it may need a government subsidy to operate ferry services.

According to the document this means there is a risk KiwiRail may exit the interisland business without one.

“Therefore we need to explore the market dynamics underpinning inter-island services, to understand whether the current arrangements (including ownership and governance of KiwiRail’s ferry services) are optimal,” it said.

“This work would also inform whether any subsidy is required, if supported by a robust value for money analysis, and to whom and how this subsidy could apply.”

Officials will assess the ability of StraitNZ, which owns Bluebridge, or other potential operators to provide more capacity across Cook Strait in the hypothetical event of KiwiRail’s exit.

Kiwirail chief executive officer Peter Reidy said Interislander was run as a commercial entity and has not required a subsidy to operate.

“We are incredibly proud of our Interislander team, who move on average $14 billion of freight and more than 800,000 passengers between the islands each year, and are an essential part of the New Zealand supply chain.”