First pays £2bn to clinch rail franchises

First Group, the bus and train operator, will pay the Government nearly £2bn over the next decade for the right to operate two new rail franchises.

The company will become Britain's biggest train operator with 260 million passengers annually when it takes over the Greater Western and Thameslink/Great Northern franchises next April.

First will make premium payments of £1.131bn over the 10-year life of the Greater Western franchise and pay a further £808m to the Department for Transport for the right to operate Thameslink/Great Northern for a maximum of nine years.

In the case of Greater Western, which will combine Inter-City and suburban services from London's Paddington station with the former Wessex Trains, premium payments will rise from £15m-£16m a year at present to £250m a year in 2013.

The premium payment for Thameslink/Great Northern, which operates the Brighton-Bedford line and services from London to Cambridge and Peterborough, will rise from £51m this year to £148m in 2012.

Rival bidders for the two franchises were stunned at the amount FirstGroup has agreed to pay. One said the amounts were "way beyond" what it had offered in its bid. FirstGroup had been competing against Stagecoach and National Express for both franchises. On Thameslink/Great Northern, it faced additional competition from a joint venture between Hong Kong's MRT and John Laing and a consortium of Danish state railways with the freight operator EWS. Stagecoach admitted last week that it had failed on both bids because the prices being offered were "a bit toppy".

Moir Lockhead, the chief executive of FirstGroup denied that he had "bet the ranch", claiming that it would only require passenger growth of 3-4 per cent on Thameslink/Great Northern and 4-5 per cent on Greater Western and reduced fare evasion for the franchises to pay their way.

If the company makes profits of more than £35m a year from Greater Western, it will share the excess evenly with the Government. On Thameslink, the Government will have the right to a quarter of any profits above £15m and three-quarters of those above £25m.

FirstGroup has agreed to invest £200m in Greater Western and help introduce a new fleet of high-speed trains from 2013. It has also reprieved the threatened London-Penzance sleeper service.

There will be no new trains on the crowded Thameslink but FirstGroup will invest £52m to refurbish its ageing rolling stock.

First, which already operates ScotRail, TransPennine, Hull Trains and the existing Great Western and Great Western Link, also said it planned to bid for the three franchises due to be re-let next year, South West Trains, Cross Country and Midland.