The manner in which Southeastern joined the ranks of the train services under direct state control – a £25m accounting breach and a possible fraud investigation – came as some shock. But the eventual arrival into public hands of another troubled rail franchise is less surprising.
The transport secretary, Grant Shapps, announced on Tuesday that the government would take over the Southeastern network from Go-Ahead in mid-October, after “clear, compelling and serious evidence” that the operator had for years “breached the trust that is absolutely fundamental to the success of our railways”.
While the £25m has now been repaid, further investigations were being conducted into historical contract issues and fines could follow, and the matter has been referred to the Serious Fraud Office.
For passengers, not much will change. The Department for Transport’s operator of last resort, however, now has to manage one of Britain’s most populous commuter services, along with the geographically biggest network, Northern, and the main London-Edinburgh long-distance operator, LNER.
The death of franchising was long foretold, then officially declared in 2020, and more or less enacted. But the multimillion-pound discrepancies at Southeastern show that its spirit fully haunts the current setup, and it remains unclear how and when the government will achieve the systemic reforms it has promised.
Southeastern was operated by Govia, a joint venture between Go-Ahead and France’s Keolis, that also runs GTR, the mega-franchise whose seven years to date include staffing crises and strikes at Southern, the timetabling debacle at Thameslink and the collapse of the Gatwick Express. For all that, Go-Ahead had largely remained a trusted and respected transport operating group, and GTR was a useful shield for the government when a highly specified franchise led to unworkable chaos.
In comparison, Southeastern had largely ticked along. But it still posed headaches for the DfT. In 2018, followingthe Virgin East Coast collapse, ministers said all bids to win the next Southeastern franchise were non-compliant with the terms of the competition. The process was re-run – but scrapped a year later. Go-Ahead got an extension, and another in 2020 when Covid hit.
Now, less than three weeks before that contract was due formally to end or renew at the DfT’s discretion, ministers have pulled the plug. Within the DfT and Govia, investigations continue into how the £25m went astray, a month after the first “discussions regarding the historic calculation of Southern profit” were disclosed in an anodyne note to investors. Go-Ahead’s chief financial officer, Elodie Brian – in direct charge of finance and contracts at Southeastern from 2014-19 – has quit, and the group has not contested the back payment.
Whatever the exact nature of the breach, it came at a time when rail operators were staking ever larger sums to run franchises, putting many under pressure to meet over-ambitious financial targets. Annual revenues at Govia’s two franchises were £2.8bn in the year leading in to the pandemic. But with profit margins at 1-2%, an extra £4m or £5m each year from the taxpayer would influence bonuses and dividends, as the spectacular 25% drop in the Go-Ahead share price suggests.
Unions are asking whether similar accounting practices could have occurred elsewhere; the RMT said the investigation should be widened into “a forensic examination of all the private rail contracts”.
Questions may be asked of Southeastern’s auditors, Deloitte, who took over from EY in 2015, and were last year fined £15m for failures relating to the sale of tech firm Autonomy. The accounting firm yesterday declined to comment.
But the fact that £25m could slip down the back of Southeastern’s sofa serves to highlight the complex way money sloshes back and forth around the railway. While the neighbouring commuter service South Western paid large premiums to the government, Southeastern was generally in receipt of subsidy, on top of the network grant to cover track access charges.
In Southeastern’s case, that included a hefty whack required to run trains on the HS1 high-speed track to the Channel tunnel now owned by a consortium of investment funds. Net government support to Southeastern approached £400m in 2019, considerably more per passenger kilometre than comparable commuter services. It is understood that the financial irregularities were buried deep within this taxpayer-reliant high speed part of the business.
Establishing who owes what – for delays, compensation, and meeting franchise obligations – has occupied small armies of lawyers and accountants throughout rail’s privatised era. Past Go-Ahead results have included multimillion-pound question marks as the reckonings with the DfT over GTR’s contract played out.
One objective in the Williams-Shapps rail review has been that money will flow directly to and from a new Great British Railways, with contracts simplified. Whether the “significant breach of good faith” at Southeastern turns out to be an isolated mistake or deliberate concealment, the missing £25m will amplify calls to speed up reform, as well as calls for full rail renationalisation.