Britain to renationalise East Coast rail line as profits fall short

LONDON (Reuters) - The British government is renationalising the rail route between London and Edinburgh, taking back the line from private operator Stagecoach after the company over-estimated the profits it could make on the route.

It is the third time since 2007 that the 393-mile (632 km) route has been returned to government hands, highlighting the difficulties for private companies of accurately bidding to run services on the privatised train network.

Stagecoach said on Wednesday that the government had scrapped the contract, three months after Transport Minister Chris Grayling said he was considering taking back control of the line which it has run since 2015.

Passenger and freight rail services in Britain were privatised in the 1990s, when routes were grouped into franchises and operators bid to run services for a set number of years.

Those companies have run the lines on a for-profit basis, but the government has been forced to step in when those contracts have failed, and the government-owned Directly Operated Railways ran the East Coast service from 2009-2015.

The failure of the current East Coast contract under the pro-privatisation Conservative government plays into the hands of the opposition Labour party who have pledged to nationalise industries like rail and water.

Grayling told parliament on Wednesday that the new railway would be a partnership between public and private operators after the Stagecoach contract ends on June 24, five years earlier than planned.

The government said in February that Stagecoach had overbid for the contract, meaning that its profits were below forecast, resulting in a financial covenant breach, and costing it 200 million pounds.

Stagecoach owns 90 percent of the East Coast franchise alongside Virgin.

Explaining the contract’s difficulties in February, Stagecoach said that some of its forecasts for growth on the line were based on enhancements expected to be carried out by state-backed rail infrastructure company Network Rail, but those actions had been either delayed or abandoned.

It said on Wednesday it hoped to continue to play a role in Britain’s rail network in the future.

“Despite today’s news, we believe that we can continue to make a positive contribution to the UK rail market, delivering long-term customer benefits and sustainable returns for taxpayers and investors,” Stagecoach CEO Martin Griffiths said.

Stagecoach continues to be involved in running other UK rail franchises including the West Coast line between London and Manchester.

Additional reporting by Alistair Smout; editing by Stephen Addison