Michael Forsyth, Secretary of State for Scotland, and William Hague, Secretary of State for Wales, have combined in an attempt to block the move which would strip their regional departments of key powers to attract foreign investors.
The row erupted when it emerged that the Welsh Office and the Scottish Office are bidding against each other to win a pounds 1bn plant from the South Korean electronics giant LG (formerly Lucky Goldstar).
Mr Hague is offering a generous subsidy of - according to unconfirmed estimates - up to pounds 150m for the project, which could create 4,000 jobs.
A premature announcement that Newport in Gwent had won the project upset LG, which was later visited by Mr Forsyth who had also sought the project. LG expects to reach a decision next month but might still locate in Ireland instead.
In the wake of the competition for LG, William Waldegrave, Chief Secretary to the Treasury, proposed that all future inward investment subsidy should be channelled through a central agency for the UK which would be under the control of the Department of Trade and Industry.
Mr Forsyth and Mr Hague are threatening to take the issue to Cabinet if it cannot be resolved in bilateral meetings with the Treasury. They are likely to press for a reform of the inducements that can be offered to investing companies. One possibility is a Budget concession allowing exemptions from corporation tax for some overseas investors for specified periods, like those offered by the Irish government.
At present the territorial departments, as well as some English regions, receive generous grants under the Regional Selective Assistance (RSA) programmes to entice foreign firms.
The Treasury argues that the territorial departments in particular bid against each other, forcing up the amount of subsidy required. It believes that there is unnecessary duplication in the regional and national development agencies' offices overseas and that the English regions get a raw deal in comparison with the better-funded Scottish and Welsh bids.
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