Transport Secretary Lord Adonis said he had set up a publicly-owned company which will take over the East Coast line when National Express ceases to operate the franchise - probably later this year.
Lord Adonis added that the Government may have grounds to terminate National Express's other rail franchises - East Anglia and the London to Tilbury and Southern franchise c2c.
The announcement of the takeover came as National Express announced its chief executive Richard Bowker, a former boss of the now-defunct Strategic Rail Authority, was leaving to take up a Middle East rail job.
The problem with the East Coast franchise was that National Express had to pay back to the Government a total of £1.4 billion in premiums over the life of the franchise.
But passenger growth has stalled in the recession and the company has failed to renegotiate the franchise with the Department for Transport.
Today, National Express said it was no longer willing to provide financial support for the franchise.
Lord Adonis said today: "I have therefore established a publicly-owned company, which will take over this franchise from the point at which National Express East Coast ceases to operate.
"We will agree an orderly handover with National Express. Until that date, National Express will operate services on the current basis; after that date the new public company will do so."
He went on: "There will be no interruption of services. Existing operational staff - who continue to provide a good service - will transfer to the new East Coast Main Line company; so will the assets necessary for the continuation of the service. I can assure the travelling public that services will continue without disruption and all tickets will be honoured."
Lord Adonis said National Express had said that it did intend to default on its obligations in respect of its other rail franchises.
He went on: "Notwithstanding this, the Government believes it may have grounds to terminate these franchises, and we are exploring all options in the light of the (National Express) group's statement this morning. In the meantime, we expect National Express to meet its obligations on these franchises in full.
"A company which had defaulted in the way National Express now intends would not have pre-qualified for any previous franchises let by the Department (for Transport).
"It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."
Lord Adonis said it was the Government's intention to tender for a new East Coast franchise operator from the end of 2010.
He added: "The specification of the new franchise will reflect my concern to secure better passenger services and facilities."
National Express could be on course for a legal battle with the Government over its decision to walk away from the East Coast deal.
The company has taken "clear and detailed" legal advice and believes the Department for Transport would not have the right to recover losses from the breach of the franchise agreement, or take over its other rail contracts.
National Express believes the Government would have "no grounds" to do this because its other rail franchises are performing strongly.
Keith Norman, leader of the Train Drivers Union Aslef said: "Rail franchising started off as a pantomime, then became a farce and has now become a folly.
"It is clear that this system is not working and it is no way to treat a public service.
"Private franchises lead to short-term solutions rather than the long-term rail strategy we need."
Bob Crow, general secretary of transport union the RMT said: "We welcome this denationalisation of the East Coast route but this shouldn't be a short-term, crisis measure.
"It should be a long-term solution to the chaos that privatisation has brought to the UK's most lucrative rail franchise.
"RMT's national conference will send a clear message to the Government today that they should strip National Express of their other franchises and use this opportunity to begin the process of denationalising the rail network."
Liberal Democrat transport spokesman Norman Baker backed the takeover but said the line should remain permanently in public hands to act as a comparator for privately-run services.
And he called for National Express to be stripped of its other two rail franchises.
"I believe it is in the passenger interest for the East Coast franchise, now that it has been returned to the public sector, to stay there as a public interest franchise so we can have a new kind of railway.
"I would like to see a railway where the outputs are not simply Treasury-driven, to get the maximum price - because that's the consequence of what we've seen today - but also takes far greater account of what passengers want to see on their railway.
"I think a public sector comparator... would be useful in driving up standards across the whole industry."
Mr Baker said the firm should not be allowed to run any other train services.
He told BBC Radio 4's Today: "It doesn't seem to me right that the taxpayer should pick up the loss from one and leave the profits from the other two with National Express."
Comments