UK government to take control of Southeastern rail franchise

Southeastern rail franchise will be taken over by the UK government.

The UK government will from next month take over all services of London and Southeastern Railway after an investigation identified “serious breaches” of the group’s franchise agreement.

Transport secretary Grant Shapps said on Tuesday that a probe found that Southeastern had not declared more than £25m in taxpayer funding that should have been returned since October 2014.

The company, which is operated by Govia, a joint venture between Go-Ahead and France’s Keolis, self-referred itself to the Serious Fraud Office, which is considering whether to pursue the matter further, someone with knowledge of the investigation told the Financial Times.

The SFO said: “We are aware of the matter but can neither confirm nor deny interest.”

Go-Ahead said the funds had been repaid and that it was conducting an internal investigation. The group’s annual results, which were due on Thursday, have been postponed, and its chief financial officer Elodie Brian resigned on Tuesday with immediate effect.

The undeclared funding, uncovered by a Department for Transport official, relates to unreturned government support to cover track access fees for High Speed 1, which connects London with the Channel Tunnel, according to two people familiar with the matter.

Shapps said in a statement that “there is clear, compelling and serious evidence that for years, LSER have breached the trust that is absolutely fundamental to the success of our railways”.

“The decision to take control of services makes unequivocally clear that we will not accept anything less from the private sector than a total commitment to their passengers and absolute transparency with taxpayer support,” he said. “When trust is broken, we will act decisively.”

Southeastern runs key commuter lines and trains across South East England including London, Kent and East Sussex.

About three-quarters of Go-Ahead’s 2020 revenues of £3.9bn came from rail operations, which also include the Govia Thameslink Railway, as well as German and Norwegian operations, which are unaffected. The group’s share price was down 22 per cent in early afternoon trading on Tuesday.

“We recognise that mistakes have been made and we sincerely apologise to the Department for Transport,” said Go-Ahead’s chair Clare Hollingsworth.

Both Deloitte, Go-Ahead’s current auditor, and EY, the former auditor, declined to comment.

Control of operations will be transferred to the government’s Operator of Last Resort on October 17. Officials have said there should be no impact on passenger services or on LSER’s frontline staff.

Huw Merriman, chair of the House of Commons transport select committee, said a need for “confidence in our railways” led the government to take action.

The nationalisation of Southeastern is the latest sign of turmoil in the industry, which has seen two lines taken into public control even before the Covid-19 pandemic created a fresh crisis.

Despite the aversion of the ruling Conservative party to state control, the East Coast Mainline franchise — run by Stagecoach and Virgin Group — was taken over by the OLR in 2018. The private companies had overestimated passenger growth on the flagship rail line.

Then in March 2020 the Northern franchise was seized from Arriva, part of German state-owned railway company Deutsche Bahn, raising questions about the sustainability of the franchise system. The Northern operator had been dogged by delays to infrastructure improvements and a long-running dispute with unions.

Just weeks later the government was forced to bail out the entire railway system, underwriting all losses in the industry, at a cost of about £20m a day, as passenger numbers plunged due to the first state-imposed coronavirus lockdown. That led to the Office for National Statistics technically classifying the move as nationalisation.

Since then the government announced plans to end the rail franchising system once the crisis is over.

Under Shapps’ plan, announced in September 2020, taxpayers will continue to make up any shortfall in revenue until March 2022 before franchises are swapped for a new contracts-based system under which companies will no longer be exposed to the risk of falling passengers.

Manuel Cortes, general secretary of the Transport Salaried Staffs Association, said the government needed to accelerate those plans. “The days of rail franchising must now be well and truly over. Time and time again we see the private sector fail and taxpayers ride to the rescue.”

Mick Whelan, general secretary of ASLEF, the train drivers’ union, called for the company to be banned from running any lines in future. “While we welcome LSER coming back under public control it should be permanent at a time when the industry is in flux due to post-pandemic uncertainty,” he said.

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