Scrapping the HS2 rail project will cost at least £12 billion in write-offs and compensation and plunge major construction companies into financial peril, ministers are being warned.
Sources close to the beleaguered scheme told the Observer that extra costs of £3bn-£4bn would be incurred even if it were scrapped immediately. £9bn has been spent already. With the issue causing tension inside the Conservative party, Whitehall insiders said that Boris Johnson could decide on the fate of the project as soon as this week as concerns grow that costs are spiralling out of control. Billions have already been spent on the first leg of the line linking Birmingham and London.
In an attempt to rescue the scheme, Andy Street, the Tory mayor of the West Midlands, said “very senior and influential business people have been in contact with the PM” before an imminent decision. He said it was “Narnia-land” to believe the project could be scrapped without huge costs.
“Businesses have invested billions of pounds in the commitment of the British government from 2015,” Street said. “If you suddenly welch on that, where does it leave us as an international power where our word is our bond? I think that could be incredibly damaging. There would be a huge write-off. We are already committed to things that wouldn’t go ahead. There is also the question of how those who invested in good faith would respond to that.” He added: “We went into paralysis while we sorted out how we were going to sort out Brexit. We are just coming through that, making our great statements about Global Britain open to the world, and what’s the next thing we do? We lose our nerve on probably the best demonstration of our self-confidence.”
The intervention comes after a torrid week for high-speed rail project. A government review, leaked in draft form, found the costs of the high-speed rail link could reach £106bn. The National Audit Office also warned of further cost rises, admitting that it was “impossible to estimate with certainty” the eventual bill.
It is understood that HS2 Ltd, the state-funded body responsible for delivering the line, has spent about £9bn on the project. However, sources said that, in the event of cancellation, billions more would have to be spent on ceasing “enabling works” such as site clearance, ecology surveys and ground improvements, as well as contract terminations and safely dismantling construction sites.
Internal assessments of the risks of scrapping the project have warned of the impact on “potentially vulnerable primes” in the construction sector – a reference to the economic blow that cancelling HS2 would have on major companies. Kier, Balfour Beatty and Costain are among those involved. Large contractors have already written to the prime minister, warning of the damage done by cancellation.
Noble Francis, economics director at the Construction Products Association, said: “The average pre-tax margin of the top-10 UK contractors was -0.1% in 2018-19 and average margins have been negative for the last three years. As we have seen from large contractors such as Carillion, Kier and Amey in recent years, it only takes one or two big contracts to cause them financial problems.”
Sources close to HS2 Ltd warned that compensation schemes and purchases in progress would have to continue even if the project were cancelled – while it could take more than a decade to recoup just a fraction of the money spent on land and property. Insiders said this would also result in an avalanche of legal action.
Officials are examining the ripple effect on other companies should the project be cancelled. The direct supply chain currently consists of about 2,000 companies, 70% of which are small or medium-sized businesses, while 98% are based in the UK. At peak construction, 30,000 jobs will be supported by the project, including 2,000 apprentices. Meanwhile, significant funds have been spent by local authorities on development corporations related to HS2, such as the Urban Growth Company in the West Midlands.
The London to Birmingham link was due to open in 2026, but could be delayed until 2031. The second phase, to Leeds and Manchester, was to open in 2032-33. However, those sections may not be completed until 2040.
A spokesperson for HS2 Ltd said: “Phase one of HS2 is the only shovel-ready major transport project in the UK. It has taken 10 years of expert design and development, parliamentary scrutiny and public consultation to get to this point. No other major projects are within at least five years of being where HS2 is today, and upgrades to the existing network cannot deliver the same benefits.
“The UK construction sector, the companies working on the project and those relocating to cities along the route, and the civic leaders in the Midlands and north eager to benefit from the investment HS2 will bring to their regions are all united in support for HS2 being built as soon as possible.”
