In March, Christopher Luxon and Dr Shane Reti arrived at McKay, an electrical firm in Whangarei. The visit from both the prime minister and the health minister to a Northland sparky in Dr Reti’s constituency was not the only reason the McKay team might have been smiling.
McKay’s website is coy: it mentions a Dunedin branch, opened in late 2023 "for an upcoming major project in the region".
The answer is yes, and it has annoyed one Dunedin sparky. It is, however, a small upset compared to the grave upset of massive delay to the long-planned 11-storey building’s construction. The primary cause in recent years has been cost-cutting redesign exercises that have failed to save the bottom line and caused confusion within contractors trying to work together to get the job done.
A redesign exercise in 2022 added about a year’s delay. This year, the new government has been considering even more drastic design changes. An announcement is expected next month and there is high anxiety about risks to health, expressed by more than 30,000 people marching in Dunedin and sending a petition to Wellington.
Meanwhile the existing hospital limps on, bursting at the seams with demand and leaking from its roof. Everyone wants to know: who will build what, and when?
Fuming in Whangarei
Tradies are partially gagged right now by confidentiality agreements. McKay major projects manager Rhys Farrand said he "prefers not to talk about this [the hospital build] right now . . . [due to] commercial conditions". However, Te Whatu Ora Health New Zealand (HNZ), the government department responsible for the inpatient build, confirmed McKay as "a preferred subcontractor".
Dr Reti was asked about the use of McKay and any concern he had about its faraway location, and his office replied that it was an operational matter for HNZ.
Other trade sources say McKay is slated to be the lead electrical firm and Paul Parsons, director and chairman of Aotea, a Dunedin-based rival, says his company would happily take McKay’s place. He has more than 100 staff in Dunedin, plus 1600 around the country, and has been working on the new outpatient building, which is well under way but a small part of the hospital build.
Mr Parsons spoke to the Otago Daily Times on the phone from — coincidentally — Whangarei. He was at a golf club event, not throwing eggs at McKay’s office, but "very grumpy" and bemused. "I can’t get my head around it. A Far North contractor doing the electrical work in Dunedin?"
Pricing and repricing by potential subcontractors for ever-changing work on the inpatient building is something the Otago Daily Times has heard about repeatedly in recent months. As an example only, Aotea general manager Warren Taylor says he is waiting to hear back after submitting a price recently for a subsidiary electrical contract — to wire up the inpatient building’s computer and security systems.
Former Naylor Love chief executive Rick Herd has strong views about use of North Island contractors and the risk they can pose to southern firms due to staff poaching.
"The sad thing is that they will move core staff down but ... canvass for staff in the existing market."
McKay describes itself as a "heavyweight" in the Northland Corporate Group, a consortium, including an oil import terminal near Whangarei, that lobbied for a multi-lane road to Auckland. The road got the green light this year in a $33billion motoring investment that includes a plan to increase speed limits. The same month Dr Reti and Infrastructure Minister Chris Bishop delivered their southern health bombshell. The Dunedin inpatient build’s costs "could approach $3b" and a cheaper option was sought — a hospital refurbishment or a smaller build.
Tertiary importance
Two letters landed on Mr Luxon’s desk in September, both signed by hundreds of health professionals and stressing the importance of hospitals. One decried the "substantial burden" on health services if speed limits rise — faster traffic mean harder collisions. Another called for the Dunedin inpatient building to be built as planned, saying further cutbacks to design would be a "significant threat" to the hospital’s role across Southland, Otago and increasingly South Canterbury.
HNZ’s director of operations Hamish Brown says Dunedin’s critical care unit serves "the largest catchment area in the country", a population of more than 300,000 people.
In 2023, 614 trauma patients arrived at the hospital, a-third by helicopter. Care for patients’ heart and lung functioning — known as cardiothoracic care — is provided 24/7 in Dunedin. Patients with brain injuries also rely on Dunedin neurosurgeons.
Some trauma patients may be taken to other hospitals, depending on weather, injuries and surgeon availability. Some children’s services are only available at Starship in Auckland and the burns unit is in Christchurch. However, Dunedin Hospital’s specialist care for the region is indisputable.
The letter to Mr Luxon about the inpatient building said trying to achieve more savings through redesign at this late and time-pressured stage could "risk . . . a clinically and operationally precarious state, and we will fail to realise those savings".
It urged "extreme caution" regarding any attempt to revive the 50-year old ward block. There had been a "cascade of knock-on adverse clinical ramifications" when modest refurbishments had been attempted.
Early becomes late
Back in August 2021, the Sydney-based construction giant CPB was contracted by the Ministry of Health (MoH) to work on the inpatient build.
The contract — called an Early Contractor Engagement (ECE) — was to plan and price the inpatient building in partnership with "preferred" subcontractors, not build it.
Any building contracts would be dependent on winning tenders in compliance with government rules. Three government departments are meant to provide oversight and monitor HNZ’s work — the Treasury, the Ministry of Health and the Infrastructure Commission (IC). They are helped by rules called the Government Procurement Rules which aim to achieve fairness in contracting and standards — including value for money.
The ECE stage was expected to finish around the end of 2022. It is now nearly the end of 2024 and HNZ has indicated that no further contract has yet been issued to CPB to build. CPB’s arrangement to subcontract electrical work to McKay is "under the only current contract Health NZ holds with CPB, the early contractor engagement (ECE) contract". HNZ also says McKay is "not yet contracted".
CPB’s ECE contract for the hospital is not CPB’s first New Zealand rodeo and it has a somewhat chequered history of delay and price increases on public projects, including the Transmission Gully motorway north of Wellington, Christchurch’s acute services hospital building and the Parakiore sports centre.
CPB tried to wriggle out of its contract to build the Parakiore sports centre last year, but the High Court ruled it could not.
One Dunedin tradie, who wishes not to be named, takes offence at the employment of CPB and says there should have been a consortium of New Zealand building companies doing the job. The government "never gave anybody a chance".
Mr Herd, formerly of Naylor Swift, says he did not bid for the job because he knew it "would be fraught with issues ... we sort of prophesied it would be where it is".
CPB efforts to plan and price the Dunedin inpatient building between August 2021 and the end of 2022 must have been challenging, due to a parallel planning exercise led by a different team and called value management.
Value management is a euphemism for cost-cutting and in this case was led by a design team reporting to HNZ, not CPB. It comprised architects Warren and Mahoney, engineering consultants Holmes Consulting and Beca, plus surveyors RLB and project management management company RCP.
By February 2022, the then-ministers of finance and health, Grant Robertson and Andrew Little, got an internal briefing that there was a $200m "cost escalation" from $1.47b to $1.67b, due to "construction cost volatility" with an option to reduce the bill by making $100m in design cuts, mostly achieved through removal of an entrance hall called the Pavilion building and two bridges connecting the outpatient and inpatient buildings.
In July 2022, an internal email exchange shows that Mr Little’s press secretary sought an update from the Treasury about the build in order to answer a media query. The Treasury went to HNZ, which advised that the media should be told the project was "on track" to be delivered by 2028 and had a $1.4b budget.
The exchange suggested an effort to whitewash value management outcomes. It said the minister should only talk about any possible design changes "if pushed". Meanwhile, major redesign was well under way.
Cuts, then more cuts and secrecy
By December 2022, an HNZ briefing confirmed it had proven "not possible" to achieve enough savings through cutbacks indicated in February and outlined more, including reductions to numbers of operating theatres and scanners. Pathology services were reduced to an "acute clinical function".
In a process known as "cold shelling", there would be 12 fewer beds for mental health care for older people — down from 24 — with space provided for them to be added later.
An option of removing 32 more beds had been rejected. Ministers had objected to bed loss and a "clinical impact report" had warned of "high risk of patient harm". One bridge was reinstated.
By March 2023, HNZ’s delivery director Monique Fowler said the government had agreed to pay $110m more to "manage market cost escalation and to complete the project", with the rest of the $200m escalation cost tackled through redesign. The building would start to go up in the first quarter of 2024 and be done by 2029.
Instead, 2024 has been a year of further secrecy and worry, culminating in the public march last month.
On May 30, the new National-led government had received a review of the inpatient build from health infrastructure guru Robert Rust. The review expressed concern about the project’s ability to be built to budget but said three documents, due between May and August, would give clarity; cost estimates from RLB and CPB and the findings of a risk assessment.
The government kept the report under wraps. It also then did not release the cost estimates and risk assessment.
Four months later, when the government made its September announcement about the hospital’s cost hike to $3b, it finally released Mr Rust’s report.
The ODT asked to see the cost estimates and risk assessments. Some old Treasury reports that discuss the projects’ delays — mostly under the previous government’s leadership — were released to the media, but the request to see the latest documents was refused.
In response to a recent parliamentary question from Labour health spokesperson Tracey McLellan, Mr Bishop said the project had approved funding of $1.59b under the previous government and Cabinet had now authorised $1.88b to meet further "cost pressures". The "main contractor" pricing — presumably CPB’s estimate — had come in "several hundred million dollars over the budget of $1.88b".
The $3b figure was "informed by advice from Health NZ indicating that ... $1.88 billion is not enough to deliver the project as currently designed, even without including the costs for the pathology lab, refurbishment of existing facilities, and carparking".
The answer has left Ms McLellan fuming. "How can anyone trust the government when they won’t prove their claims by releasing important information to back up their $3b price tag?"
Items such as refurbishment of abandoned facilities had not been in the original scope of costings.
Whispers in the subcontractor space are getting louder. They talk of requests — from consultants and CPB — for pricing, and then repricing, for possible tenders that chops and changes in scope. There is general unhappiness, due to the time it is taking and the project’s uncertainty.
The Rust review had recommended a "delay to the execution of the construction contract in order to obtain stronger cost certainty". The price predictions and risk review would provide that.
The government has now promised that documents about the build, including from the Treasury, the Ministry of Health and the Infrastructure Commission, will be published by HNZ in coming weeks.
Plan for the future, but build Dunedin now
Some people have theorised that a smaller build in Dunedin could reduce construction risk and release funds for expenditure elsewhere across a large region, reducing travel time in an emergency.
There is private interest. Wanaka property developer Mike Saegers is leading a pitch for a private hospital in his town, with the option of space for an emergency department. The Queenstown Lakes region has limited acute healthcare but a growing population.
There is political enthusiasm for private investment. Mr Luxon cut the ribbon of a private hospital extension in Ormiston, Auckland last month. Dr Reti was also there.
Back in the South Island, Nelson is tackling the challenge of building big by planning a public hospital in six bite-sized stages, over 10 years. Former Naylor Swift boss Mr Herd says this approach "makes a hell of a lot of sense as it opens up the work to small subcontractors locally and also, I believe, ultimately gives better value for money".
He argues that this approach reduces government risk of being at legal loggerheads with large contractors if a job gets behind schedule and over budget.
In 2020, a Treasury review of the Dunedin hospital build warned it would be "paramount that sufficient commercial expertise exists both within the MoH procurement team and across industry" to complete the build.
Pete Hodgson, former Labour health minister who previously led a committee advising the new Dunedin hospital, believes the government’s capability to manage big builds is improving thanks to the setup of an Investment and Infrastructure Group (IIG) within HNZ. Establishing the IIG has taken time, he says, but it is now "starting to hit its straps well ... I am hopeful it will enable NZ to start building hospitals again".
Consultant anaesthetist at Dunedin Hospital Dr Claire Ireland was one of the co-signatories of the letter to Mr Luxon warning against further cutbacks or delays. She says discussions about planning and staging hospital builds are valuable, but draws a firm line between that thinking and the need for the Dunedin inpatient building right now.
"Dunedin Hospital provides ... safe specialist emergency and elective care for the largest geographical area of any Health NZ region. It is physically isolated from other tertiary hospitals. Splitting the hospital between sites, or delaying the new hospital, threatens the function and safe delivery of hospital and specialist services for people in the South."
