The East Coast rail service will be temporarily renationalised, the government has decided, after operators Virgin and Stagecoach could no longer meet the promised payments in the £3.3bn contract.



The London-Edinburgh-Inverness service will be taken back into public control on 24 June, a little over three years since Virgin Trains East Coast (Vtec) started running. It will be rebranded as the London and North Eastern Railway.

The transport secretary, Chris Grayling, told the House of Commons that after a “finely balanced” assessment by civil servants, he had decided to appoint the “operator of last resort” – a group led by the firm Arup and under government control – to run the service, rather than allow Stagecoach and Virgin to continue under fresh terms.

Grayling said: “The route continues to generate substantial returns for the government. It is not a failing railway ... However, Virgin and Stagecoach got their bids wrong.”

He insisted taxpayers had not lost out, adding: “Only Vtec and its parent companies have made losses at this time ... We cannot expect companies to take on unlimited liabilities otherwise they would not bid for franchises.”

Despite the firms now avoiding up to £2bn in premium payments after the failure of the franchise, Grayling said “it would not be reasonable to place conditions” on Stagecoach or Virgin bidding for further rail services. He said: “They have paid a high financial and reputational price.”

Q&A Does the East Coast renationalisation mark a change in direction for rail policy? Show Transport secretary Chris Grayling’s decision was surprising given his vehement opposition to public control of rail. But he said the move was partly to expedite the planned east coast partnership, which would see a contract re-let to a private firm in 2020. However, several train companies – such as South Western, TransPennine Express and Greater Anglia – face similar struggles to Stagecoach and Virgin after overbidding for franchises and events may yet force his hand again. Will East Coast rail services remain nationalised? It’s not the plan, but it’s possible. The pressure to avoid any further franchise collapse – or to see Stagecoach-Virgin emerge as operators again, with a diminishing market of bidders – could see the government struggle to get a new operator in place. So who will now run the trains? Control will pass in June to the “operator of last resort” – an Arup-led group contracted on the government’s behalf. The train service will be rebranded London North Eastern Railway. What will the impact be for passengers? In the short term, little or none. New British-assembled Hitachi trains are already on order, paid for by the government. How much will it cost the public? The Department for Transport assessment was that either immediate option, a fresh Virgin Trains contract or direct control, was broadly similar in cost. Analysis by rail regulators in 2013 found East Coast required less subsidy than any other line when in public hands, while it delivered more than £1bn to the Treasury. Stagecoach promised vastly more, £3.3bn by 2023, but found it impossible to pay up. Photograph: Jack Taylor/Getty Images Europe

However, the shadow transport secretary, Andy McDonald, said it was “absolutely ludicrous” to not place conditions on Virgin-Stagecoach’s bidding passport.

He accused the government of having “cynically reprivatised” the line on the eve of the 2015 election, adding: “We’ve had bailout after bailout ... Rail companies win, passengers and taxpayers lose. Franchising remains at the heart of the alleged partnerships. No amount of tinkering can solve the failings of a broken privatised system where the public takes the risk and the companies take the profit – aided and abetted by the transport secretary.”

The chair of the transport select committee, Lilian Greenwood, said the previous transport secretary, Patrick McLoughlin, had told the Commons in November 2014 that the promised £3.3bn for the taxpayer was robust and had been subjected to rigorous, independent scrutiny. “If Virgin-Stagecoach got their figures wrong, so did the government,” said Greenwood. She said the committee would be examining the latest failure.

Greenwood asked Grayling in the Commons: “What does this decision today mean for other franchises which we know are struggling to meet their obligations?” He replied that there was no other franchise in the same position.

However, industry analysts widely believe that First Group overbid for TransPennine Express, and Abellio for Greater Anglia, while a sharp drop in passenger numbers has also left First potentially exposed to losses on its South Western franchise. Labour has also questioned the future of Arriva’s Northern Rail franchise, whose service was the subject of renewed attack by Manchester’s mayor Andy Burnham on Wednesday.



Grayling announced in November that the East Coast franchise would be terminated three years early in 2020, allowing the operators to avoid up to £2bn in payments until 2023. Lower passenger numbers and revenue than forecast have seen Stagecoach losing around £200m on the franchise to date.

Lord Adonis, who resigned as the chairman of the National Infrastructure Commission in protest at what he called the bailout of the train firms at taxpayers’ expense, said Wednesday’s decision was “vindication” of his criticisms, and that Grayling had now done the right thing.

Stagecoach’s chief executive, Martin Griffiths, said the firm was “surprised and disappointed” by the decision. He said in the last three years, Vtec had “attracted more passengers, greatly increased investment, achieved industry-leading customer satisfaction and made significant payments to the taxpayer to reinvest in public services”.

The collapse of the franchise marks the third time in a decade that a private train operator has failed to see out its contract on the east coast mainline, which was renationalised between 2009 and 2015.



Rail unions urged Grayling to keep the line in state hands. The RMT’s general secretary, Mick Cash, said: “This is the second time that the government have called upon the public sector to launch a rescue operation on the east coast and instead of being a temporary arrangement Chris Grayling should listen to his staff and the public and make it permanent.”

Grayling said he had chosen to bring in the operator of last resort to expedite his plans to introduce a partnership model for the east coast railway from 2020, where a single team including Network Rail and a private train operator would take decisions on both track and trains on the route.