17 Construction of the Tunnel carries inherent risks due to the project's size, and the number of stakeholders involved. Our previous work on major projects indicates a number of common causes of project failure or cost overruns, including: over-optimistic assumptions; technical challenges not recognised; limited understanding of interdependencies and related projects; short-term financial decisions adding to longer-term costs; and failures in relationships with contractors or in the contractor delivery model. Some Tunnel project arrangements mitigate against these, for example the project can benefit from experience of similarities with the Crossrail and Lee Tunnel construction projects. But some of these risks could materialise during construction, for example knowledge of ground conditions is imperfect, and contractors will need to work well together to deliver to time and minimise costs. Public bodies will need to monitor the project carefully so they can discuss any evidence of risks materialising with those delivering the project at a sufficiently early stage (paragraphs 3.11, 3.13 and 3.14).
18 Government has provided Bazalgette with a contingent financial support package which seeks to mitigate some risks, transferring liability to the taxpayer if those risks materialise. The Department concluded that private delivery of the project would not be financially viable without some form of government support, because of the scale of the project risks and the implications for financing costs that customers would ultimately fund. The Department considers that a call on the support package is highly unlikely, although it estimates that the impact could be very large (£6.6 billion in its 'reasonable worst case' scenario), if several risks materialise. Until the project has been fully commissioned and has completed testing (expected by February 2027), the Department has agreed to:
• either provide an equity injection to Bazalgette if its cost overruns exceed 30% or discontinue and pay compensation;
• lend to Bazalgette if economic or political events make it unable to access debt capital markets as planned;
• indemnify property and liability claims above insurance limits specified in Bazalgette's existing insurance cover, or where insurance is unavailable;
• provide compensation to investors in the event that the project is discontinued; and
• make an offer to purchase Bazalgette or provide compensation to investors if it goes into special administration and remains there for 18 months (paragraphs 3.8 and 3.15 to 3.17).
19 Arrangements have been established aimed at risk mitigation and early identification of potential calls on the support package. Contractual arrangements for costs and payments (including 'pain and gain-sharing') provide Bazalgette and its contractors with financial incentives to deliver on time, or before, and manage the risks of cost overruns. Independent assessors will provide quarterly reviews on Bazalgette's reported progress and project costs. These assessments fulfil a dual role, enabling Ofwat to identify and disallow expenditure which has not been agreed, and providing advance warning of a call on the support package so the Department can make appropriate preparations. The Department's arrangements should provide it with evidence of any risks materialising and sufficient means to intervene where necessary, and we will consider the operational effectiveness of these arrangements in future reviews (paragraphs 3.19 to 3.23).
20 Despite construction work starting and the prospect of the UK leaving the European Union, the European Commission could yet seek fines against the UK for a continuing breach of the Directive. The timescale in which it would do so is uncertain, and the Commission told us it has not yet made a decision (paragraph 3.24). We have not audited or considered the effects on this project of leaving the European Union.