The amendment, which would allow BR to bid for franchises when the privatisation process starts in 1994 or 1995, was passed by a large majority last month. Ministers have not said whether they would try to reverse it in the Commons, although the Lords transport minister, Lord Caithness, has said that the amendment goes to the heart of the Bill.
Ministers have now found that the amendment would effectively kill the purpose of the Bill, which is to attract the private sector. However they are not announcing their decision because of the importance of the issue in the forthcoming Christchurch by-election. Ministers have also rejected compromises, such as allowing BR to bid on some lines only.
If BR were allowed to bid, it would deter managers, an essential component of any bid, from bidding against their own bosses. BR's knowledge and experience would deter the private sector from bidding.
The Government is also worried that it would be impossible for the private sector to compete against BR because BR can make up any losses with government subsidy.
More than a dozen Tory MPs are thought to be prepared to support the amendment - enough to overturn the Government's majority - when the Bill returns to the Commons in October.
The BR chairman, Sir Bob Reid, is prepared to ensure that BR is a serious contender in bids should the amendment be kept. However, he has taken a neutral stance on the amendment.
The Government is facing the prospect of another defeat this Wednesday in the Lords when it discusses the Bill's effect on BR's pension fund. Lord Peyton, the former Tory transport minister, has tabled an amendment to ensure that pensioners retain all their existing rights.