Southeastern’s state takeover will amplify calls for rail reform

Analysis: The shock is bigger than the surprise at the arrival of another troubled franchise into public hands

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.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

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.

Contributor

Gwyn Topham Transport correspondent

The GuardianTramp

Related Content

Article image
Southern rail owner says service has improved despite ongoing strikes
Go-Ahead’s annual profits drop as long-running staff dispute takes its toll

Julia Kollewe

08, Sep, 2017 @6:15 AM

Article image
How the end of the rail franchise system will affect Britain's trains
The government says its rescue deal is the biggest shake-up of the industry in 25 years

Gwyn Topham

21, Sep, 2020 @12:26 PM

Article image
CBI calls on Labour to publish nationalisation plans
Group releases breakdown of its own £196bn-cost estimate and asks party to ‘fill in gaps’ if it disagrees

Richard Partington Economics correspondent

17, Oct, 2019 @6:15 PM

Article image
Southeastern is latest rail franchise taken over by UK government
Few immediate benefits likely for commuters as DfT takes over day-to-day running of latest service stripped of franchise

Joanna Partridge

17, Oct, 2021 @11:31 AM

Article image
Govia Thameslink Railway boss quits over timetable fiasco
Charles Horton departs as Network Rail executives forfeit annual bonuses

Gwyn Topham Transport correspondent

15, Jun, 2018 @11:41 AM

Article image
The Southeastern train arriving on platform 3 is £25m late
Latest rail franchise to hit the buffers at least arrived at the destination via an unconventional route

Nils Pratley

28, Sep, 2021 @6:15 PM

Article image
Labour calls for contactless payment across rail network
Industry criticised for lack of reform as ministers demand overhaul of ticketing system

Gwyn Topham Transport correspondent

11, Feb, 2019 @6:01 AM

Article image
Northern rail could be renationalised, says transport secretary
Grant Shapps says it is not OK for trains to fail to arrive or for Sunday services to be lost

Gwyn Topham Transport correspondent

16, Oct, 2019 @3:56 PM

Article image
An overhaul of Britain's railways was long overdue even before Covid-19
Permanent abolition of old-style franchising was always the best bet. Now can we just get on with it?

Nils Pratley

18, Jun, 2020 @6:40 PM

Article image
Industry chiefs weigh up Network Rail privatisation, new minutes show
Labour warns against possible ‘return to dark days of Railtrack’ as meeting minutes show rail industry leaders exploring utility-style sell-off

Gwyn Topham Transport correspondent

31, Jan, 2016 @3:33 PM