Grayling misleading Commons on East Coast rail 'bailout', says Labour

Labour has accused the transport secretary of misleading parliament over the early termination of the East Coast rail franchise as it emerged that the operator, Stagecoach, had been due to pay the Treasury more than £2bn in the final four years of its contract.

A new rail strategy announced by Chris Grayling on Wednesday contained plans to replace the Virgin Trains East Coast (Vtec) contract running to September 2023 with a model of a partnership between track and train operators from 2020.

Although Grayling denied that he was bailing out Stagecoach, the company’s share price has risen by 15% since the plan was published.

Pressed by Labour on Thursday in the House of Commons, the minister responded: “Every time a franchisee takes up a new contract, it makes a parent company commitment to the government. That commitment will be kept in full.”

Labour said the response suggested Stagecoach would only forfeit a £232m bond, and pay relatively small premiums until 2019, rather than pay the bulk of the £3.3bn promised over the course of the eight-year franchise. The operator paid £204m in its first full year, but the annual amount was due to rise rapidly from £353m in 2020 to £645.4m in the final year.

The shadow transport secretary, Andy McDonald, said in a letter to Grayling: “It is abundantly clear that despite your assertions to the contrary, you have indeed bailed out Stagecoach/Virgin and I would urge you to confirm that the position is as I describe it.

“Without such clarification, I regret to say that your statement as it stands misleads the House of Commons and I would urge you to correct the position as a matter of supreme urgency, by placing a letter of explanation in the House of Commons library today.”

A Grayling aide said: “It is clear that the transport secretary did not mislead the house,” adding that there was no bailout and a Labour-backed nationalisation would cost more money.

Vtec, a joint venture of which Stagecoach owns 90% and Sir Richard Branson’s Virgin Group the remaining 10%, has run the service since it was reprivatised in 2015 after six years in public hands.

The former transport secretary Andrew Adonis said the bailout would undermine the rail franchising system and allow transport operators to “bid wildly, knowing that they won’t be held to any commitment for full term”.

The Labour peer condemned what he called Grayling’s bailout and urged the public accounts select committee to launch an inquiry.

“Under the guise of a cuddly Thomas the Tank Engine announcement about reopening Beeching lines yesterday, a huge bailout of private rail companies has been launched, largely, it seems, to avoid any possibility of having any state-run entity in the train operating business,” he said.

Adonis nationalised the east coast line in 2009 when the previous private operator, National Express, failed to make its promised payments, having taken over from GNER, an operator that also reneged on its contract.

Stagecoach has admitted overbidding for the franchise, on which passenger numbers have slowed, partly due to a steep rise in fares. But delays to infrastructure upgrades by Network Rail, which will affect the delivery of new Azuma trains, will also hamper growth, a factor that has given the train operator cause to renegotiate its contract.

A Stagecoach spokesman said: “The government has made clear new arrangements will be in place from 2020. We have made clear we will meet our obligations.”