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A mess of capital proportions

By Mindo - 21st Feb 2019

Brian Turner is concerned about the effect the budget over-run for the National Children’s Hospital will have on other capital projects

There has been much coverage recently of the escalating cost of the National Children’s Hospital. While it is not unusual to see some over-run on budgets for large capital projects like this, it is the scale of the over-run in this case that seems to have caught many people by surprise.
Depending on the start and end points that are chosen, the over-run can appear to be of different magnitudes, so let’s take a brief history of the project. In 2014, the HSE approved capital spending of €650 million, which included the core elements of hospital construction (of the hospital and two outpatient and urgent care centres), but did not include equipment, educational facilities or commercial elements (such as retail or car-parking). If these additional elements were included, the cost was €790 million. In 2015, additional shared services were included in the project, bringing the cost to €800 million.
When the Government approved the investment for the project in April 2017, the costs had increased to €983 million. According to the Department of Health at the time, the increases were driven by construction inflation, the extended timeframe for the programme, and the market costs of the tenders coming in higher than forecast.
The latest estimate of the costs is €1.43 billion for the main campus, or €1.73 billion if the two satellite urgent care centres are included. A number of factors have been discussed as possible contributors to the increasing cost, including the two-stage tender process that was used to select the successful bidder, accelerating construction cost inflation, amendments to the specifications of the hospital (including a new sprinkler system) and VAT increases. A number of reports have been commissioned to examine the causes of the cost over-run, so these will prove very interesting, and I do hope that they will be published in full.
However, whatever the causes of the over-run, the effects are very worrying, most particularly the knock-on effect on other capital projects in the health sector (and indeed in other areas of the wider public sector as well). The Taoiseach has already acknowledged that some of these capital projects will be delayed, though not cancelled entirely.
One of the biggest issues facing the Irish health system is capacity constraints, including in terms of physical infrastructure (although staffing capacity is also in sharp focus these days). This has been acknowledged in the Sláintecare report and the Health System Capacity Review, which was published in 2018. One of the capital-related recommendations was to add 2,600 hospital beds to the existing stock by 2031 (this figure assumed that the Sláintecare reforms are fully implemented — if not, then the increase in capacity needed would be far higher).
In the National Development Plan, which spans the period 2018-2027, a total of €10.9 billion was earmarked for health-related projects, including expanded capacity in a number of hospitals, new elective-only hospitals in Dublin and Cork, nationwide provision of more primary care centres, community nursing units, developments under the National Maternity Strategy and National Cancer Strategy, and a number of mental health projects.
All of these are badly needed to increase the capacity of the Irish health system to cope with projected increases in demand for services in the coming years. However, the over-run on the National Children’s Hospital now means that some of these projects might be further delayed. To put it into perspective, the increase in the cost of this hospital between 2014 and 2019 (including the satellite units), which runs to around €1 billion, represents nearly 10 per cent of the total capital allocation for health under Project Ireland 2040.
The over-run also raises questions about the adequacy of the capital budget allowed for the health sector. As noted earlier, over-runs are not uncommon with large capital projects. Furthermore, construction price inflation is likely to continue, particularly given the capital requirements for both health and housing, along with ongoing commercial developments. In this context, delays to the capital projects arising from the higher-than-expected cost of the National Children’s Hospital will almost certainly lead to higher costs on these projects. It is also highly likely that many of the longer-term projects envisaged under Project Ireland are likely to cost more than expected.
It is vitally important, therefore, that lessons are learned from the National Children’s Hospital project and that tighter control of cost increases is exercised, to ensure that as many of the capital projects needed for the delivery of Sláintecare — and to increase the capacity of the health system generally — are delivered on schedule and as close to within budget as is feasible. Failure to achieve this will have implications for health service delivery for decades to come.

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