Welsh government demands £2bn compensation for costs of HS2

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The Welsh government is demanding compensation that could reach almost £2bn to offset the huge sums earmarked for the building of High Speed 2, arguing that the proposed line between London and the North will not benefit the principality.

If successful, the claim would further inflate the cost of the rail project, which has come under fire over the summer after it emerged in June that the estimated budget had jumped by £8bn to £42.6bn, excluding the £7.5bn for trains.

The Welsh government told the FT it was looking at what payment it might receive under the so-called “Barnett Formula”, the “fairness” mechanism used by the Treasury to adjust public expenditure to the different regions of the UK.

Under this system, London, when it approves spending on England-only projects, sometimes has to give sums of money – called “Barnett consequentials” – to Scotland, Northern Ireland or Wales.

One recent example was when Scotland and Wales received extra funding as a result of the £16bn Crossrail rail project, under construction in London.

Cardiff is initially basing its claim on the decision in June by the UK government to earmark £16bn in spending on HS2 between 2015 and 2021 but would expect to receive more as further funds are committed.

“We are working to ensure that Wales receives the consequential resulting from this decision and to ensure we maximise the potential benefits for Wales from this major infrastructure investment,” a spokesman for the Welsh government said.

The Welsh government said it had not yet been able to calculate the size of the compensation as it did not have all the data to make the calculation.

Based on the amount Wales received for Crossrail, FT estimates suggest the Treasury would have to pay out almost £700m to Wales for the HS2 spending up to 2021, rising to almost £1.8bn for the whole project.

Plaid Cymru, the Welsh national party, has separately calculated that Wales should receive £4bn in compensation for HS2.

The demand is likely to lead to a stand-off between Cardiff and London. A UK government official told the FT that as HS2 was a national project, which would also benefit Wales, it would not be covered by the Barnett Formula.

A Department for Transport spokesperson said: “HS2 will be a vital part of our national infrastructure, boosting regional growth across the country and providing vital capacity the UK needs to compete in the global race. Barnett consequentials will be determined at the next spending review. Under existing arrangements we would not expect the Welsh government to receive Barnett consequentials of spending on the national rail network.”

The intervention by Cardiff comes as cabinet ministers have launched a fightback against critics of HS2, which still enjoys cross-party support. David Cameron admitted at the end of last week that the government risked losing the battle.

On Monday, a committee of MPs will attack the scheme basing their argument on a critical report by the National Audit Office published in May. Margaret Hodge, chair of the Public Accounts Committee, will warn the government that it has “yet to present a convincing case” for the line. She will also question the parliamentary timetable for passing the enabling bill to build the first phase between London and Birmingham, which is due to be passed by March 2015, labelling the plans “ambitious” and “unrealistic”.

Patrick McLoughlin, transport secretary, who will on Wednesday publish a fresh economic analysis of HS2, said he did “not accept the PAC’s core conclusions”.

But Maria Eagle, shadow transport secretary, said: “The delays and increased costs that are leading to criticism of HS2 are a direct result of David Cameron’s failure to get a grip on this vital infrastructure project.”

She said Labour remained committed but only if the costs did not rise any further, warning against any “blank cheque”.

A separate report from the British Chambers of Commerce said HS2 should proceed but with a “robust” business plan and detailed cost estimates.

This article has been amended to reflect the fact that Plaid Cymru are no longer in coalition with Labour