It could cost up to $3 billion to build the new Dunedin Hospital as currently planned, which the government says is simply unaffordable.

Ministers announced on Thursday the planned redevelopment would either need to be reduced, or done in stages.

A report commissioned by the government found the current plans could not be delivered within the current $1.88b budget.

Infrastructure Minister Chris Bishop said it would cost "several hundred million dollars" more than that - possibly up to $3b.

And that didn't cover costs for things that hadn't been included: a pathology lab, refurbishment of the existing site, and car parking, he said.

$3b would have made it "one of the most expensive hospitals ever built in the Southern Hemisphere", Bishop said.

"We are concerned that much needed upgrades to other regional hospitals could be at risk.

"We can't justify spending up to $3b here because that comes at the cost of (other regions) ... that is the blunt truth that there are trade offs to spending."

He called it a "problematic project" which "has been troubled since 2017."

Bishop said $1.88b was still a "big investment".

"We are now making clear the troubled nature of this project," he said.

"We are trying to do the right thing by the public, of Dunedin, but also the rest of the country.

"We're making tough decisions and being upfront and transparent."

Health Minister Shane Reti said there were problems from the very beginning and he expressed his frustrations.

He defended promises made on the campaign trail, saying they were based on the information they had at the time.

Health New Zealand's head of infrastructure delivery Blake Lepper said the outpatient building remained on track for opening in 2026 and that was a "real focus".

He couldn't say whether the scheduled dates for inpatient services would change as a result of today's announcement.

"No decisions have been made."

Changes in the region's demographics since the initial planning, including updated demand modelling, would be taken into account when deciding how to move forward, Lepper said.

Thursday's announcement

The Government has signalled plans to downgrade the Dunedin Hospital redevelopment after an independent review has found it cannot be completed as scoped within the approved budget.

Reti and Bishop - who are both in Dunedin to brief stakeholders - are warning that vital upgrades to other hospitals could be at risk if the budget blowout at Dunedin was not addressed.

The new Dunedin Hospital site in June 2024 PHOTO: RNZ/Tess Brunton

They said they had instructed Health NZ that the project was to be delivered "within its current appropriated budget of $1.88 billion".

They provided urgent advice on two options for delivering it:

1. Revision of the project's specification and scope within the existing structural envelope, such as reducing the number of floors, delaying the fit-out of some areas until they're needed, and/or identifying further services that can be retained on the existing hospital site or in other Health NZ buildings within Dunedin among other possible solutions.
2. A staged development on the old hospital site including a new clinical services building and refurbishing the existing ward tower.

The project had approved funding of $1.59 billion under the previous government.

In March this year, Cabinet agreed to authorise a further $290 million in capital funding due to cost pressures.

Bishop said the current appropriation was therefore $1.88 billion.

"We now know that the New Dunedin Hospital, as currently designed, can't be delivered within that appropriation. In fact, despite the project's original 2017 cost estimates of $1.2 - $1.4 billion, it's now possible it could approach $3 billion, which would make it one of the most expensive hospitals ever built in the southern hemisphere.

"This cost simply cannot be justified when hospitals around New Zealand are crying out for maintenance, upgrades and new facilities. Dr Reti and I are concerned that badly needed infrastructure upgrades to Whangarei, Nelson, Hawke's Bay, Palmerston North and Tauranga hospitals may be put at risk if New Dunedin continues to go so far over budget."

Earlier this year, Cabinet commissioned an independent review into the project by former chief executive of Health Infrastructure New South Wales Robert Rust.

The report, just released, found "the delivery of the NDH project as currently scoped and planned is probably not achievable within the approved budget and that there remains significant uncertainty as to the cost of the Inpatients Building".

Reti said the uncertainty was due to several factors, which also created doubt whether the new hospital could deliver the health outcomes promised.

"To make matters worse, insufficient money had been set aside for other associated costs such as a pathology lab, refurbishment of the existing facilities and car parking which are collectively estimated at an additional $400 million. No business cases have been prepared for any of these additional elements of the project.

"Compounding our concerns is the fact that recent project pricing came in several hundred million dollars over the hospital's appropriation, even without including the pathology lab, refurb of existing facilities or car parking," he said.

"Health NZ and Infrastructure Commission advice has made it clear that this project was troubled from the moment the site was selected in 2018 and has been trapped by this poor decision making ever since.

"The extraordinary cost premiums associated with the land purchase and demolition costs, contaminated ground, piling difficulty, flood level risk, and an extremely constrained construction site flanked on three sides by state highways made it an unattractive project for contractors and suppliers, further driving up construction costs. Since the 2017 Business Case, the cost per square metre to build the hospital has increased by 200 percent from $10,000 per sqm to $30,000 per sqm."

Construction had already begun on the New Dunedin Hospital, with the Outpatients' Building scheduled to be operational in 2026 and the Inpatients' Building in 2029.

Timeline:

• 2015: The Ministry of Health appoints the Southern Partnership Group to lead the redevelopment of the hospital.
• June 2017: Two options put forward for detailed business case: 1. a new hospital on a new greenfield site or 2. a new hospital on the Wakari (north Dunedin) site. In both cases, the estimated cost of the project was between $1.2 billion and $1.4 billion.
• May 2018: New Labour-led government announces new hospital to be built on the old Cadbury Chocolate Factory site and parts of surrounding blocks.
• May 2019: The 2019 Budget approves a total budget of $1.4b over the 10-year life of the project.
• August 2020: The government announces an additional $127 million to progress design, demolition, piling, project management and early contractor engagement.
• April 2021: The government approves in principle the Final Detailed Business Case for the New Dunedin Hospital Project at a total budget of $1.47b.
• December 2022: Additional funding of $110m approved to manage a cost escalation of $200m. A redesign delays work. It results in fewer beds, two fewer operating theatres, and one less MRI and PET CT.
• April 2023: Extra $10m toward an additional MRI machine and collaborative workspace, and $82m for digital infrastructure. Budget increased to $1.59b.
• November 2023: First piles driven for inpatients building.
• April 2024: New National-led government commissions independent review by Robert Rust.
• May 2024: Government approves an additional $290m to be held under contingency for the project. Budget increased to $1.88b. Budget documents note increase cost risks - "driven by construction sector inflation, scope changes, and the relative isolated location of the project coupled with a small contractor base with sufficient experience and capacity from which to draw."
• August 2024: Government increases oversight of the project through the Infrastructure and Investment Ministers Group.
• September 2024: Government releases independent review by Robert Rust. Government announces they are seeking advice from officials on options to deliver the project within the current appropriation of $1.88b.