3.11 Tunnel construction carries inherent risks to timing and cost because of the project's nature and size, and the number of relationships and interfaces involved. The Tunnel is the largest water and sewerage infrastructure project since privatisation and faces challenges owing to the physical environment in which construction takes place. The main risks in the construction phase are that works could damage surrounding high-value infrastructure, or encounter unforeseen difficulties adding time and expense to the works, as knowledge of ground conditions is imperfect. Customers of Thames Water and the taxpayer are potentially exposed if these risks materialise.
3.12 In our 2014 report, we identified a range of risks around the management of the Tunnel project, and project costs. Some risks relate to activities which have been completed since our last report, while others are still 'live' during construction and beyond:
• Delivery model risks. Delivery by a separate infrastructure provider could provide worse (or better) value for money than delivery by Thames Water. As Thames Water was not an investor in the project, it could have had limited incentive to keep the price down when procuring construction contracts. The delivery model has now been decided and put in place.
• Cost estimation risks. Thames Water may have had incentives to make a case to Ofwat for spending more than needed at the planning stage, because Thames Water receives an allowed return on investments approved by Ofwat. Ofwat and its consultants completed scrutiny of planning cost estimates during 2015.
• Financing costs and risks. The infrastructure provider might be unable to secure financing at reasonable cost, or have financing available when needed for contractual payments. Bazalgette has arranged initial finance, although it may need to access further finance during construction, and the GSP (paragraph 3.16) reflects this risk.
• Construction costs and risks. Tunnel construction involves risks of poor performance, and unexpected events (for example natural disasters, or construction causing damage to surrounding infrastructure) which are unlikely but carry very high costs which can make these risks impossible or very costly to insure. Financial incentives for contractors to complete works early may increase the probability of these risks materialising, although there are potential benefits of finishing sooner, such as reduced programme costs and risk of fines.
• Operational risk. The UK could face fines for continued breach of the Directive, and costs of remedial measures, if the completed Tunnel does not operate as intended. The £4.2 billion cost of the Tunnel does not include running costs after construction, and delivering the Tunnel to time and budget should not be achieved at the expense of excessive ongoing costs after completion.
3.13 Our previous work on major projects identifies 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.
3.14 The Tunnel project arrangements mitigate against these (paragraphs 3.19 to 3.23), for example the project benefits from the experience of the Crossrail and Lee Tunnel construction projects, as well as incentives to promote collaboration between contractors and time and cost savings. But some risks such as cost overruns and contractor failure from poor project management could materialise in the construction phase. The Department and Ofwat will need to continue to monitor the project carefully so they can discuss any evidence of these factors with those delivering the project at a sufficiently early stage.