Ministers warned over GNER deal

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Ministers ignored warnings from senior officials that the Great North Eastern Railways' (GNER) bid to retain its flagship east coast franchise was flawed, according to sources close to the Department for Transport (DfT).

Economists at the Department told ministers that it was highly unlikely that the train operator could fulfil its promise to pay the Government £1.3bn over 10 years.

Despite the assertions of their own analysts, a minister has decided to award the licence to GNER which had tabled a bid at least £300m bigger than any of their rivals.

The news emerges within weeks of the operator telling the DfT that it wants to renegotiate the terms of its franchise, little more than a year after it signed the contract. Government analysts registered particular concern about the fifth year of the franchise when they considered that GNER would default on payments due to the Exchequer. However, the fragility of the bid has been exposed much earlier because of the seeming inadequacy of provisions for contingencies.

Bob MacKenzie, chief executive of the New York-listed Sea Containers, GNER's parent company is in talks with the DfT in an attempt to reduce the payment promised to the Government.

Mr MacKenzie has told ministers that at the time of the refranchising process early last year, GNER could not know that revenue would be seriously undermined by the bombings in London during July. Around 70 per cent of GNER journeys begin or end at London's King's Cross.

The Sea Containers' chief has pointed out that the company's financial predictions were undermined by the increase in electricity prices and the Office of Rail Regulation's decision to allow increased competition on the route from two rival operators.

Mr MacKenzie has told ministers that during the final phase of franchise talks senior officials insisted that the operator remove from the bid a contingency clause covering the possibility of such competition.

Recently the company lost a high court battle to have the Rail Regulator's decision overturned.

GNER lawyers are arguing that a force majeure provision in the contract would allow the company to renegotiate the £1.3bn it had promised the Treasury. They argue that the agreement allows for negotiations to be reopened where "acts of Government instrumentality" undermine profitability and therefore the operator's ability to pay the premium. It is being argued that decisions made by the regulator are explicitly covered in the clause.

Meanwhile, the train operator has imposed a freeze on new recruitment and is expected to announce hundreds of job losses in an attempt to cut costs. The company insists that no figure has yet been put on any possible redundancies, but the RMT rail union has warned it will resist any such decisions.

GNER's discussions with the Government come amid severe financial problems for the Bermuda-registered Sea Containers. Mr MacKenzie spent much of last week in New York attempting to placate share owners and bond-holders.

A spokesman for the DfT said yesterday: "We do not renegotiate franchise agreements. The franchise agreement is the final negotiated position."