The concession is contained in a Lords 'wrecking amendment' to the rail privatisation bill. Although no official decision has been taken to accept the amendment, ministers fear they will be unable to reverse it when the Commons resumes in October.
The problem has been given added urgency by the determination of the British Rail Board, under the chairmanship of Sir Bob Reid, to bid for rail franchises if the bill finally allows them to do so.
The Lords amendment, allowing the public sector as well as the private to bid for franchises to run rail services, was proposed by Lord Peyton, the former Tory transport minister. Ministers consistently maintained that such a proposal would undermine the orginal idea of the bill.
But although the Government has not given up hope of reversing the Lords amendment, fears are growing within John Major's Cabinet that it will not be able to stop up to 16 backbench Commons rebels, led by Sir Keith Speed, MP for Ashford, from voting in support of it.
The BR Board has considered simply ignoring the amendment and declining to compete for franchises. It has decided, however, that, unless John MacGregor, Secretary of State for Transport, gives orders to the contrary, it will make bids.
In its urgent drive to draw up contingency plans in the event of the amendment becoming law, the Government has:
Asked Parliamentary clerks and draftsmen to examine ways of taking the rare step of reversing the Lords amendment in the next Parliamentary session.
Considered whether it can get round the impact of the amendment by forcing BR immediately to sell off any franchises it wins.
Begun to examine ways of 'levelling the playing field' to prevent BR from winning almost every franchise it bids for because of its inside knowledge and expertise.
With a clutch of Tory conference resolutions questioning BR privatisation, some ministers are urging Mr MacGregor to proceed slowly whatever the Parliamentary outcome. One senior minister suggested that, before the next election, franchising should be limited to a single 'big experiment' - for example ScotRail.
Faced with a tight deadline - vindicating Labour's decision to avoid a guillotine - the Government is exploring whether the bill could be carried over into the next session, by delaying or through a one- clause bill seeking to reverse the amendment.
BR will have to form a separate subsidiary to bid for each franchise. Each could be offered to the private sector as a self-contained enterprise. But ministers might then be criticised for defying the will of Parliament.
In response to public fears about rising costs and declining services after privatisation, the Government is also expected to announce that it will withhold subsidies from private operators which fail to maintain required standards.
Brian Wilson, Labour's rail spokesman, claimed last night: 'Mr MacGregor is now like a cornered rabbit, looking for a hat to jump out of.'