Background

This statement has been completed in response to concern that the High Speed 2 (HS2) rail systems contracts could be unaffordable if additional funding cannot be agreed to address the expectation that cost of completing HS2 Phase 1 will exceed its current funding envelope.

Overview

Rail systems are a critical component of delivering HS2. Without rail systems, HS2 is not a railway and it will not be possible to deliver any of the benefits and the expenditure to date will have been nugatory.

Following a robust procurement process, HS2 Ltd has awarded 11 contracts for the delivery of Phase 1 rail systems.

Regularity

Expenditure on HS2 is expected to exceed its funding envelope following the commencement of the rail systems contracts. As agreement on additional funding had been aligned with the 2025 Spending Review, awarding these contracts in the absence of an agreement makes them potentially irregular.

However, the risk of irregular expenditure is minimised because both DfT and HMT expect to agree annual budgets as part of the Spending Review, which concludes in spring 2025 and a revised funding envelope as part of the programme reset.

It is highly unlikely that agreement will not be reached. The government remains committed to delivering HS2 at the lowest possible cost. At an annual level, commitment to the scheme has been demonstrated by the funding allocated for financial years 2024 to 2025 and 2025 to 2026. These annual funding allocations are assessed to be sufficient to cover any expenditure resulting from the rail systems contracts during those 2 years.

Propriety

It would be improper to award these contracts without funding cover or reasonable confidence that sufficient funding will be provided. Reasonable confidence has been demonstrated by the funding allocated to the scheme for financial years 2024 to 2025 and 2025 to 2026 as part of the Chancellor’s Budget statement. This funding would not have been agreed if there was intent to withhold funding later and/or not reach an agreement on a revised funding envelope.

The procurement was approved by the Investment, Portfolio and Delivery Committee (IPDC). Approval by IPDC was given in principle and subject to confirmation by ministers. It was also predicated on the expectation that HS2’s funding envelope would be reset through the spending review processes and the programme reset. Following IPDC, these contracts have also been approved by HMT following a Treasury approval panel and have been subject to Cabinet Office commercial controls commercial lifecycle assurance. They have then been approved by the Department of Transport (DfT) Secretary of State and Chief Secretary to the Treasury.

The propriety test is met subject to agreement by DfT and HMT ministers that the long term affordability position will be regularised through the 2025 Spending Review and programme reset, as set out above.

Value for money

The value for money of these contracts has been tested through open competition. An open competition has allowed the bids to be tested for quality and cost – leading to the selection of the most economically advantageous tenders.

Feasibility

HS2 Ltd has an assured plan to mobilise and oversee the system’s contracts with a robust contract management approach which reflects lessons from the civil contracts. Delivery remains feasible subject to securing additional funding.

The overall level of risk is lower than the civils stage as external risks on land acquisition, ground conditions, weather and large-scale consenting have been mitigated through civil delivery.

Conclusion

As the principal accounting officer for DfT group, I have considered the tests set out in managing public money and conclude that it is appropriate to award the systems contracts. The value for money and feasibility tests have been met.

Although the contracts are affordable within budgets agreed for financial years 2024 to 2025 and 2025 to 2026, HS2 Ltd has continued to assess the costs of the entire programme in light of financial pressures. However, the government remains committed to completing HS2 and annual budgets for future years will be agreed as during the 2025 Spending Review and a revised funding envelope range for the whole programme agreed as part of the wider reset currently underway.

Bernadette Kelly
Permanent Secretary – Department for Transport
December 2024