IT was called the London Diagonal, an enormous £1.5 billion tunnel that would whisk commuters under south London from Clapham to Oxford Street, solving at a stroke the chronic congestion on the capital’s commuter lines.

The plan was put forward four years ago by Sea Containers, the Bermuda-quoted transport group, as part of a bid to take over South West trains, Britain’s biggest rail franchise.

The turn of the century — and the one before it — was a time for swashbuckling rail entrepreneurs and ambitious grand projects.

A tunnel from Clapham wasn’t enough for First Group, Sea Containers’ rival bidder. It wanted one starting at Wimbledon. At the same time Sir Richard Branson was punting a plan to build a £3 billion high-speed line that would carry TGV-style trains up the east coast, drastically shortening journey times from London to Scotland.

Those days now seem far off. The collapse of Railtrack, the disastrous, multi-billion-pound cost overruns on the upgrade of the West Coast Main Line and the rapidly rising cost of running the existing network have put paid to the wilder flights of fancy that flourished in the early years of rail privatisation.

The industry is now firmly back under government control. The Treasury underwrites the borrowings of Network Rail, Railtrack’s successor, while the Department for Transport has abolished the Strategic Rail Authority, and taken in-house the monitoring and control of train-operating companies. The Tory ideal of “open access” with trains from different companies running on the same route and competing for passengers, has quietly been dropped on all but a few token routes.

Whitehall’s influence is pervasive. Tender documents for rail franchises stipulate everything from timetables to train-cleaning regimes. Incumbent operators have been shown little respect, having in some cases been booted out for not paying enough attention to the detail of bids.

These days train companies do not even have the freedom to choose their own train; the specification for new rolling stock to replace the venerable High Speed Train, workhorse of British intercity lines, is being drawn up not by the companies who will buy or use them, but by a Department for Transport-led committee. Last week Whitehall flexed its muscles again, saying it would take away Branson’s Cross Country franchise as it redrew the railway map.

Train bosses agree the swashbuckling days are gone, but say the government will shortly need rail entrepreneurs more than ever.

Rapidly rising passenger numbers, up 40% in the past decade and now at their highest level since the late 1950s, will require innovative thinking to cope with congestion and overcrowding, they say.

Branson said his appetite for the industry had not dimmed. “We will be bidding for the new franchise that will replace Cross Country, and we have some fairly interesting ideas to bring to the party. The last few years have not been easy, but we want to finish what we started. We are certainly not making much money out of railways at the moment — we see it as more of a public service.”

Tony Collins, Virgin Trains’ chief executive, said the government’s intervention was a natural reaction to an industry that had swung out of control.

“It has swung like a pendulum. We had too little control after privatisation, some big problems, and now we have swung the other way. It will settle back down again.”