Sasha Borissenko: How the first electric ferry contract in New Zealand came about

OPINION:

Last month a deal was announced which will see the introduction of two all-electric ferries for commuters and tourists to the Port of Auckland.

This is the first time that a government entity has purchased a ship
it would decarbonize what is currently a diesel fleet. This means environmentalists will have peace of mind, with each ferry displacing around 1,000 tonnes of carbon emissions per year.

Additionally, the complex nature of the $27 million contract is a world first in marine procurement. I spoke to EV Maritime’s lead commercial lawyer, Chris Lee of K3 Legal, to get some insight into what could be a game-changer for New Zealand.

Background

In April, the government announced plans for the 200-person ferries to be built for Auckland Transport’s domestic and intermediate services, which will launch in 2024.

The Labor government has pledged a $27 million grant to cover around 75% of the construction costs of the ferries. Although Auckland Transport does not currently own any ferries, it will own the electric fleet and lease them to an operator. (Energy Minister Megan Woods said the operator “could be Fullers, it could be AT. Fullers is backing the $27 million build, but also has its own electric ferry under construction, which will be launched before AT.)

The vessels will be built by longtime Auckland boatbuilder McMullen & Wing. Its directors, David and Terry Porter, also own two-thirds of EV Maritime (EVM). The driving force behind EVM is its Managing Director (and 1/3 owner) Michael Eaglen. EVM is responsible for the design of the vessels and will administer the construction and commissioning process.

Intellectual property elements

Exceptionally, EVM will own all the intellectual property related to the ferries – not just the design but also all the technical data that will derive from the performance of the ferries.

Lee says EVM has relative freedom to publicize the project — an untraditional move, given the government ties, but indicative of the trust and respect the parties have for each other.

However, the deal was not straightforward, as Auckland Transport needed to own the vessels (and all components) throughout construction, as well as clear access to the technical data needed to operate and maintain the vessels.

To accommodate those elements, the agreement had to specifically address principles from the outset — namely who owned the physical assets versus the intangibles, and the licensing of the intangibles, Lee said.

Uncontrollable variables

The number of contractual hurdles induced by the current state of the world is another reason why this deal is extraordinary, Lee says. Nickel is a key component of batteries and the market has been strongly impacted by the war in Ukraine and the sanctions imposed on Russian exports.

The London Metal Exchange suspended nickel trading in March after hitting a record high of US$100,000 a tonne, for example. The historic figure had almost tripled in value in a week.

The prices of other critical raw materials have been very volatile and supply chains have also been affected by Covid-19. On the issue of the pandemic, one of the questions was how to structure the force majeure clause so that it is not a deciding factor.

In light of these concerns, questions have been raised as to how the liability could be fairly apportioned between the parties while keeping the price as low as possible.

“The usual process of ordering materials and components as the project progresses can be diverted. Here it may make more sense to source the bulk of the materials and components upfront and store until needed,” Lee said.

“We had to include a level of flexibility that would accommodate that. And then there’s the issue of keeping quotes from massive overseas vendors – a startup in this case had little bargaining power.”

The negotiations

As the level of business complexity was extremely high, it took months to complete the term sheet, which clarified roles, responsibilities, allocation of risks and how these affected the schedule and price, explains Lee.

“As EVM is a start-up, it took a lot of creativity. For example, because it didn’t have the track record of other big companies, it was more difficult to guarantee its performance was safe,” said Lee.

“So another security has been created – for example, a proportion of each contractor’s fee (decreasing over time) will remain at risk until the contract is performed and all warranty obligations are fulfilled.

“It was perhaps the most comprehensive terms of reference I’ve ever seen. But it was good in the long run because once the principles were established, it meant we were through the cringe-worthy stuff and the final contract was pretty straightforward.”

However, once the principles were agreed, it was then a race to translate them into binding contractual terms to keep prices down and beat funding deadlines, he says.

“It’s amazing to help secure this deal and it will be fantastic for New Zealand. EVM’s long-term goal is to develop these electric ferries for sale throughout New Zealand and offshore. It could be a huge New Zealand success story.”

The electric ferries have a range of 40 km, so they will be able to travel the distance of about 30 km to Waiheke. The vessels will be built in carbon fiber and have a top speed of 25 knots – on par with diesel ferries.