Taxpayers foot up to £380m bill over rail franchise failure

But the long-awaited study into the fiasco by the National Audit Office has praised the previous Labour Government for taking a “tough line” with the struggling rail firm when it begged for financial assistance and then “acting decisively” in terminating its contract and taking the franchise back into public hands.

National Express was awarded the East Coast contract in 2007 following a promise to pay the Government £1.7bn by 2015 – the largest ever payment offered for a rail franchise. But the economic crash the following year saw passenger numbers fall and fare income drop unexpectedly, and by 2009 the firm was unable to meet its obligations. National Express was stripped of the contract in November of that year.

The new report reveals the Department for Transport (DfT) did not undertake any analysis of what might happen in the event of an economic downturn when agreeing the contract in 2007 but its authors conclude this was “reasonable” given the economic predictions of that time, with the Government having secured a contractual agreement that National Express would pay £31m in the event of any collapse.

The Audit Office report states: “At the time the DfT was evaluating bids for the franchise, economic forecasts indicated there was a very low probability that annual growth in the UK’s gross domestic product would fall below one per cent by 2010. In view of the then-economic forecasts, the DfT did not consider it necessary to stress test bids for deliverability in an economic downturn.”

The East Coast franchise has remained in public hands since November 2009, with the Government planning to re-contract it to a new private sector provider next year. The report puts the cost to the taxpayer of the switch to a state-owned service at around £15m – considerably less than the £31m payment received from National Express.

But overall losses to the DfT compared with what it had expected to receive in payments from National Express are estimated to hit between £330m and £380m by the time the franchise is re-tendered in 2012. These costs have had to be met from within the department’s own budgets.

But the authors conclude that such losses were inevitable due to the economic crash. “We estimate that the DfT will receive between £330-£380m less that expected to the end of 2012, and this has had to be accommodated in its budget.

“However, our view is that the shortfall was unavoidable following the steep fall in passenger revenues due to the economic downturn during 2008-09, which led to the termination of the contract with National Express.”

Their analysis of the original contract with National Express concludes it was a “good deal” for taxpayers and that sufficient safeguards were in place to protect their interests.

The study says National Express’s financial difficulties were picked up as early as June 2008 and the DfT did well to take a “tough line” with the rail firm when it asked to be allowed to make reduced payments.

Analysis suggests that had the Government given in to National Express’s demands for reduced payments, other rail firms facing similar difficulties may have requested similar treatment.

National Audit Office head Amyas Morse said: “In terminating the East Coast passenger rail franchise, the DfT acted decisively to protect the public interest and achieved value for money by avoiding the significant risk that other holding companies would seek negotiated exits from their loss-making franchises.”

Bob Crow, general secretary of the Rail, Maritime and Transport union, said the report proved public ownership could deliver rail services “as a clear-cut alternative to the chaos and exploitation of the private train operators.”

A spokesman from the DfT said: “We welcome this NAO report and will respond to its findings when they are considered at a future hearing of the Public Accounts Committee.”