Rail Minister Slams KiwiRail’s $8 Million Payment to McKinsey, Calls It Unacceptable

While Peters made it clear that the criticism was not directed at McKinsey, the amount paid to the consultancy has raised serious concerns about the national rail operator’s financial management.

In a strong statement, Rail Minister Winston Peters has condemned KiwiRail’s decision to pay a hefty $8 million to global management consultancy firm McKinsey, calling the move “unacceptable” despite the lawful and competitive nature of the tendering process. While Peters made it clear that the criticism was not directed at McKinsey, the amount paid to the consultancy has raised serious concerns about the national rail operator’s financial management.

The controversial contract was signed by KiwiRail with McKinsey on December 6, 2023, but the government was kept in the dark about the deal until February 7, 2024. The full payment value was not disclosed to Ministers until June 6, 2024, prompting significant scrutiny. The Ombudsman recently ruled that the total payment amount should be made public, further intensifying the controversy surrounding the contract.

Mr. Peters voiced his dissatisfaction with the payment, emphasizing that it was inappropriate for a state-owned enterprise like KiwiRail to spend such a large sum on consultancy services when it should instead be focusing on improving operational efficiency and service quality. “We are not criticising McKinsey, whose services were tendered in a lawful and competitive manner. We are criticising the decision to pay that sum,” Peters stated, making it clear that he believed KiwiRail’s resources could have been better allocated.

Peters pointed to the substantial investments the government has made in KiwiRail, which include the provision of new locomotives and wagons, the development of modern and efficient mechanical depots, and improvements to systems managing these assets. The government has also worked to provide long-term infrastructure certainty for KiwiRail, similar to the guarantees enjoyed by road freight operators with the State Highways.

“We have given KiwiRail the foundation it needs to succeed,” Peters said, adding that the government has also been working on resolving the issue of ferry replacements, ensuring that KiwiRail’s operations are properly supported in the long term.

In his criticism of the consultancy deal, Peters emphasized that KiwiRail’s response to financial challenges should not involve bringing in external management consultants. “This would not have happened had they told us their plans,” he remarked. The minister suggested that the rail operator’s focus should instead be on tightening spending, improving service quality, and building a stronger customer base—areas that he believes KiwiRail is now addressing.

Peters underscored that freight operations are primarily about schedule reliability. “If you can prove to customers that you turn up when you say you will, then loyalty will grow, and volumes and earnings will follow,” he explained. KiwiRail’s performance in this area has been promising, with the company achieving strong reliability, particularly for major industry customers. The Interislander ferry service has also been delivering near 100% reliability, and the company’s safety record is steadily improving.

Moreover, KiwiRail’s financial performance has been on target, with the company already having achieved $30 million in savings so far this year. The company is also making progress in attracting more volume from both existing and new customers. Peters expressed his satisfaction with the direction in which KiwiRail is heading, particularly with the recent discussions with the company’s senior management, which highlighted a solid customer strategy focused on growing its client base.

Despite these positive signs, Peters’ criticism of the McKinsey payment remains at the forefront of the debate surrounding KiwiRail’s financial practices. The situation has sparked a wider conversation about the role of external consultants in the public sector and whether the money spent on such services could be better used in directly enhancing services or reducing costs.

The ongoing scrutiny of the deal could have long-lasting implications for how state-owned enterprises engage with management consultants and how transparent they are with the government and the public about such significant expenditures. For now, KiwiRail faces the challenge of rebuilding trust with both the government and the public, while continuing its efforts to improve service reliability, safety, and financial performance.