There are cost blow-outs and delays as building costs rise at three times the rate of inflation in some regions, ministers will be told at this week’s big infrastructure conference
Aaron Hockly oversees 42 healthcare investment properties on both sides of the Tasman, but it is in Wellington and Hawke’s Bay that he has seen the biggest cost blow-outs on hospital construction projects. “Issues range from general supply chain to labour supply, and that construction charges in New Zealand are priced as a percentage of cost, which isn’t the case in Australia and causes dramatic cost escalation,” he says.
This week, as Jacinda Ardern and Grant Robertson address a big infrastructure conference, economists and construction bosses say cost pressures are worsening, especially in provincial New Zealand. In the regional North Island, building costs are running at nearly three times the rate of headline inflation.
Hockly is chief executive of NZX-listed Vital Healthcare, and says supply chain difficulties have combined with seismic strengthening regulations to cause costs at the company’s Wakefield Hospital project to blow out from $80 million to $140m. In Hastings, the company has suffered 10 percent over-runs on its big extension to Royston Hospital.
Infometrics principal economist Brad Olsen, who speaks at the conference after Robertson, is warning the industry of specific disparities in skills shortages and supply chain delays – especially in the provinces.
Residential building costs are rising at 15.1 percent a year in the regional North Island. And in the South Island outside Christchurch, they’re rising at 11.4 percent a year – more than twice the headline regional inflation rate.
“Essentially, intense labour market pressures and sustained supply chain disruptions are combining with high levels of economic demand and pushing prices higher,” Olsen said.
“The swift further ramp-up in construction activity across areas with strong economies means that resource allocations become even more difficult, with greater competition for goods and labour putting the heat further on prices.”
He pointed to Taranaki, Hawke’s Bay, Bay of Plenty and Northland, in particular. And it’s in provinces like those that local leaders have been expressing their frustration most loudly. Mayors have met with Robertson several times this year to voice their concern about infrastructure.
Whangārei mayor Sheryl Mai told Newsroom this week: "We've got a hospital that's leaking sewage down the walls, we've got the threat of Three Waters reforms taking control of those assets, we've lost our promised four-lane highway. Our infrastructure is crumbling and the Government isn't flavour of the month at the moment."
The February announcement of $7 billion set aside over 10 years for capital spending, and more in the Budget, was not enough to allay concerns about a lack of a national vision for major infrastructure and a fear that decisions were being made by shortsighted politicians competing for votes.
In transport, especially, provincial mayors like Mai have been angered by the cancellation of big roading projects.
"There’s real pressures in terms of the supply chain delays, access to materials, labour shortages and cost increases – it means good project planning is vital. More than ever there’s a need for innovation, agility and commitment to get these projects completed."
– Sandra Hazlehurst, Hastings Mayor
Hastings mayor Sandra Hazlehurst said her district was experiencing growth across its commercial and residential construction, and infrastructure sectors.
There were rising levels of private activity across the district, as well as big council infrastructure projects like the redevelopment of the Municipal Building, water storage and treatment upgrades, and other civil works.
"There’s real pressures in terms of the supply chain delays, access to materials, labour shortages and cost increases – it means good project planning is vital," she said.
"More than ever there’s a need for innovation, agility and commitment to get these projects completed.
"Despite the pressures, it’s really positive to see the large amount of investment happening across the region and our business community’s resilience to manage through these challenging times."
"Wellington is by far our most challenging market but Hastings is also challenging. Hawke's Bay has the benefit of good, quality labour for construction but being smaller and more remote than the bigger centres, any supply chain issues (including any highly specialised trades) are more pronounced."
– Aaron Hockly, Vital Healthcare
Aaron Hockly said Vital Healthcare had five major projects underway in New Zealand, with a total construction value of around $200m. And the company has another $50m planned to start soon. The later projects have been the hardest-hit by cost pressures.
The company has three times as many projects underway in Australia, which Hockly said allowed them to compare cost pressures and shortages across cities in both countries.
"Wellington is by far our most challenging market but Hastings is also challenging," he said. "Hawke's Bay has the benefit of good, quality labour for construction but being smaller and more remote than the bigger centres, any supply chain issues (including any highly specialised trades) are more pronounced.
"Anything coming from offshore is particularly difficult in the regions and it slows down the whole programme."
It's not enough to just blame Covid-19 – Hockly says the problems pre-date the coronavirus supply delays and shutdowns.
Earlier this year, a Stats NZ survey on the impact of Covid-19 found six out of 10 developers had difficulty sourcing materials or equipment for their building projects, in Auckland. Supply issues and price increases were the most frequent complaints from survey respondents, who were especially hit by increasing sea and air freight charges.
Brad Olsen said cost pressures were building unevenly across the economy, as strong demand encountered severely stretched supply chains. "Businesses are being forced to raise prices to consumers as their own suppliers hike input costs," he said. "Provincial areas of the North Island are seeing the highest price rises, as strong economic intentions hit capacity constraints.
"It’s increasingly difficult to source some goods, which is piling on cost pressures time and time again for distributors. It now costs more than 10 times more to send a container on a ship than what it did pre-pandemic, and frequent compounding price rises are common topics of conversations for our economists."