A report by Sir John Bourn, head of the National Audit Office (NAO), discloses that the franchising director, Roger Salmon, made the recommendation to Sir George Young, Secretary of State for Transport, in May 1995 but it was ignored.
Mr Salmon, who has been ordered to appear before the Commons Public Accounts Committee on Monday, urged ministers to insert a clause in the sale agreements allowing taxpayers to share in any "abnormally high profits".
This, he considered, would provide better value for money for the public, the NAO says. The report goes on to say ministers took the view that there might be "drawbacks in presentational and value-for-money terms in not being able to claw back super-profits".
Nevertheless, his advice was rejected on the grounds that it might deter bidders from competing for franchises and encourage them to bid for more subsidy to compensate.
The report on the sale of the first three franchises, Great Western Trains, SouthWest Trains and the London-Tilbury- Southend Line, also shows the Government spent pounds 40m on advisers' fees without complying with Treasury guidelines for competitive tendering.
Last night, Labour said Sir George had "bulldozed" the advice of Mr Salmon out of the way in his haste to speed privatisation. Labour also pointed out that in ignoring Mr Salmon it was technically disregarding the advice of a government-appointed accounting officer. Andrew Smith, Labour's frontbench transport spokesman, said: "In forcing through rail privatisation at any cost, bulldozing the profit-sharing proposals of his own accounting adviser, the Secretary of State gave the green light for super-profits at the taxpayers' expense."
The NAO report shows four of the bidders for the first three franchises raised the issue of revenue risk-sharing themselves. Under this proposal they would have shared super-profits with the taxpayer if they exceeded 15 per cent of turnover. But the franchising director would have had to provide extra subsidy if revenues fell by 10 to 20 per cent.
The LTS franchise was finally taken over by Prism, a consortium of four bus companies, after the management buy-out team which had originally been awarded the franchise was caught up in a fraud investigation.
Stagecoach, another bus company, won the auction for SouthWest Trains, the biggest commuter railway in Europe, operating services from Waterloo Station. Since the award of the franchises, shares in Prism have leapt fourfold, netting its seven founder investors a personal fortune of pounds 26m. Shares in Stagecoach have risen by more than 25 per cent.
The other franchise, Great Western Trains, was acquired by a management buy-out team, Great Western Holdings.
For Labour, Mr Smith added: "This is a clear sign that ministers allowed privatisation to proceed on a nod and a wink behind closed doors before proper instructions had been issued. This behaviour flies in the face of public accountability." Business comment, page 19Reuse content