Page last updated at 16:55 GMT, Wednesday, 1 July 2009 17:55 UK

East Coast rail to be state-run

Gordon Brown: "It was the right thing to do in the situation"

The government says it intends to take the East Coast rail service, run by National Express, into state ownership.

The troubled rail franchise, which is expected to have lost £20m in the first half of the year, is suffering from falling passenger numbers.

Ministers have refused National Express's requests for its contract with the government to be renegotiated.

The Department for Transport said that all East Coast services would continue and that tickets would be honoured.

BBC business editor Robert Peston said that National Express had tried to buy itself out of the franchise with an offer of "well over £100m".

However, Transport Secretary Lord Adonis decided to reject the approach "on principle".

A National Express-operated East Coast line train
The East Coast rail service has suffered falling passenger numbers

"They might well have wanted to pay a certain sum of money, in return for an agreement that they don't have to meet much larger obligations over a long period of time," Lord Adonis said.

"If I had agreed to that, the rail franchising system as it now exists, and is broadly running successfully, would have collapsed."

New buyer

The franchise is operated by a subsidiary of National Express, NXEC, which is a stand-alone company.

National Express dismissed suggestions that NXEC had already defaulted on payments or that the parent company was suffering any financial difficulties.

The terms of its franchise mean National Express would not lose more than £72m if it walked away.

Alienating Lord Adonis and the government turns out to be less of a concern for National Express than the burden of the east coast payments
Robert Peston, BBC business editor

The government said it would take over the franchise when this missed payment occurred - though this may not be for some months.

The franchise would then be put out for tender to a new buyer from late next year.

Existing operational staff would transfer to a new state company which has been set up to operate the route.

Separately, Virgin Trains told the BBC's You and Yours programme that it would bid for the East Coast service.

Virgin said it wanted to operate the service "in principle", depending on the details of the new contract.

'No bail-out'

National Express won the franchise in 2007, after it was surrendered by GNER. It agreed to pay the government £1.4bn to run the East Coast main line, which runs between Edinburgh and London, until 2015.

National Express franchises

At the time, many rail analysts said it had paid too much for the franchise.

In a trading statement, the company said that the "challenging economic environment" meant it was seeing fewer passengers on the East Coast main line and "significant" levels of people downgrading from first-class and full fares.

National Express indicated that it would walk away from the loss-making route, and not put further money into it, after failing to alter the terms of its franchise agreement.

The firm's chief operating officer, Ray O'Toole, later told the BBC it was possible that it would continue to operate the route if economic conditions improved.

However, BBC transport correspondent Tom Symonds said it was generally accepted that the franchise would return to the government at some point after National Express failed to alter the terms of its agreement.

Lord Adonis told the BBC: "The government is not prepared to renegotiate rail franchises, because I'm simply not prepared to bail out companies that are unable to meet their commitments.

National Express chief operating officer Ray O'Toole said he wanted to ensure passengers were not disrupted

"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."

In a statement, the government added that it believed it also had grounds to end National Express's two other rail franchises - East Anglia and c2c.

But the company said it felt the government had "no grounds" to do this and would challenge any such attempt in court.

'Not right'

Shadow transport secretary Theresa Villiers said the move showed the extent of Labour's "failure and incompetence" in running the rail franchising system.

"This Labour government has used the franchising process to push the train operators to make wildly optimistic bids, which has meant squeezing passengers for higher and higher fares. Now the chickens are coming home to roost," she said.

Liberal Democrat transport spokesman Norman Baker said that National Express should not be allowed to run any other train services.

The entire network should be state run including the infrastructure
James, Southminster

"It doesn't seem to me right that the taxpayer should pick up the loss from one and leave the profits from the other two with National Express," he told the BBC.

He added that leaving the East Coast line in public hands would provide a comparator which would be "useful in driving up standards across the whole industry".

The transport union, the RMT, welcomed the development and called for the franchise to remain in government hands permanently.

"It should be a long-term solution to the chaos that privatisation has brought to the UK's most lucrative rail franchise," said RMT general secretary Bob Crow.

Debt pile

National Express also announced that its chief executive, Richard Bowker, the former Strategic Rail Authority (SRA) chief, would be leaving the firm to become boss of Union Railway in the United Arab Emirates.

It denied that his departure was owing to financial problems at National Express.

The company is trying to reduce a debt pile that stood at nearly £1.2bn at the end of 2008.

Cuts have been made in dividend payouts to shareholders, while 750 jobs have also been lost.

Last month, National Express started charging passengers for reserving a seat on the East Coast and East Anglia franchises, while it has also removed its online ticket sale discounts.

Earlier this week, rival transport company FirstGroup said a takeover approach it had made for National Express had been rejected.

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