U.K. Seizes Failed Rail Line, Amping Up Nationalization Row

(Bloomberg) -- The U.K. Government will take control of a key rail artery linking London with Edinburgh in a move that escalates a debate over whether Britain’s wider rail network should be re-nationalized.

Stagecoach Group Plc and ally Virgin Trains will be stripped of the East Coast Main Line contract on June 24, with the route placed under the control of an “operator of last resort,” Transport Secretary Chris Grayling said Wednesday in a statement to the House of Commons.

The collapse of a franchise awarded only in 2014 marks the third time in a decade that private companies have bailed out of running the 400-mile-route, fueling an argument over the future of the railway almost 25 years after the network was privatized. Grayling said that while there’ll be no nationalization, East Coast will be recast as a partnership between public and private sectors.

“The route has its challenges but it is not a failing railway,” the minister said, adding that Perth, Scotland-based Stagecoach and Virgin, owned by billionaire Richard Branson, “got their bid wrong and are now paying the price.”

The opposition Labour Party favors taking the U.K. network back into public ownership, with its lawmakers immediately challenging Grayling and saying the latest failure shows that the franchise model is fundamentally flawed.

Arup, Ernst & Young

East Coast staff will transfer to a new company, London and North Eastern Railway or LNER , which will initially be overseen by “last resort” advisers comprising engineering firm Arup Group and accountants Ernst & Young, recruited earlier as potential emergency operators for failed franchises.

LNER will have a new board and an independent chairman, and in a departure from past practice will feature representatives of both the train operating team and state-backed track owner Network Rail Ltd., Grayling said.

“When it is fully formed the new LNER operation will be a partnership between the public and private sectors,” he said, while adding that the final structure remains to be determined.

Labour’s transport spokesman, Andy McDonald, said the government was seeking to create a “smokescreen” by touting closer state-corporate ties and that the proposal does not amount to nationalization. The Conservatives “are still handing these services back to the private sector because they are wedded to a broken free-market ideology,” he said.

Public Support

Polls have consistently shown high public support for re-nationalization, making the issue problematic for Prime Minister Theresa May and a Conservative Party for which a privately run economy has been a ruling doctrine since Margaret Thatcher began selling state assets in the early 1980s.

Stagecoach, which had a 90 percent stake in the East Coast franchise, has blamed its woes on a challenging economic environment and Network Rail, saying the infrastructure operator failed to deliver agreed track upgrades.

Shares of Stagecoach, which has lost at least 200 million pounds ($270 million) on the route, were trading 1.3 percent higher as of 3:02 p.m. in London. The stock fell almost 6 percent when Grayling said in February that the company would be ejected from a franchise originally due to run until 2023 after breaching a key financial covenant. Virgin, which lent its branding to the venture, is closely held.

To contact the reporters on this story: Christopher Jasper in London at cjasper@bloomberg.net, Kaye Wiggins in London at kwiggins4@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Andrew Noël

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