Build delays to cost $27m: Treasury

Many of the piles are in at the new Dunedin hospital site, between Castle and Cumberland Sts in...
Many of the piles are in at the new Dunedin hospital site, between Castle and Cumberland Sts in central Dunedin. PHOTO: STEPHEN JAQUIERY
The government was left in the dark as delays for the new Dunedin hospital project ballooned during a controversial redesign, a new document shows.

A Treasury email recently obtained by the Otago Daily Times revealed Health New Zealand Te Whatu Ora (HNZ) did not keep the department updated as the predicted delay quadrupled from three months to a year.

The email also revealed the estimated cost impact of the unexpected construction delay to be $27 million.

HNZ said it had since changed the project’s governance model in response to input from Treasury, the Infrastructure Commission and the Ministry of Health.

The December 2022 Treasury email raised concerns about delays caused by the redesign, which the government carried out in a bid to deal with a $200m budget blow-out.

"We note that all options have at least a nine-month delay to cover the time used for value management.

"It wasn’t clear through the value management process that the delay would be this significant."

Ministers had the opportunity to discuss the delay later that month, and the email suggested "seeking assurance that the reporting structure is suitable for articulating these risks".

The redesign option preferred by the ministry and HNZ, had a construction start delay of 12 months, the email said.

This included nine months of value management and three months of further redesign.

The cost impact of the delay appeared to have been quantified at $27m.

Treasury also noted funding pressures on the health capital envelope and said HNZ was reviewing the scale of cost escalations and possible options for reprioritisation.

It would work to provide advice on pressures and possible funding options in the new year, the email said.

About two weeks after it was written, the government announced $90m worth of cuts to the new hospital — although some of these were reversed last year following backlash.

Treasury was not the only one expressing concern — late in the process, government ministers appeared to have cold feet.

An October 2022 email from a parliament staff member to HNZ detailed concerns of ministers, as reported by the ODT last year.

"When ministers were looking for some scaling, they did not have in mind that this would require redesign at the level proposed," the email said.

Ministers believed a "design lite" option to keep cuts to $35m merited a serious look.

In early 2022, former health minister Andrew Little and former finance minister Grant Robertson were advised to endorse a redesign option expected to cut $89m from the inpatient building.

This was expected to delay the opening of the building by less than three months.

Ministers had believed that it was the best option to address the price increase as it would avoid a major redesign.

However, a report to ministers in September 2022 warned the approach would no longer be possible — they would need to make more cuts than anticipated to achieve the savings goal and dip into project contingency funds.

HNZ head of infrastructure delivery Blake Lepper told the ODT the new hospital governance model had been updated since the redesign, at the advice of the Treasury, the Infrastructure Commission and the Ministry of Health.

The new governance model was appropriate for what was the largest health infrastructure project under way in the country.

Mr Lepper said there was a thorough reporting system in place for raising awareness of risks or potential risks of all capital projects.

"More significant projects have a project steering group that will be made aware of any initial risks.

"Monthly updates are provided to a Capital and Infrastructure Committee and the HNZ board.

"A monthly report is also provided to ministers.

HNZ refused to comment on the $27m cost delay figure.