Why has National Express defaulted?

The recession has resulted in thousands of business travellers a day trading down from first to standard class and many other passengers are travelling off-peak to get cheaper fares. This has resulted in National Express failing to hit its target of 10 per cent revenue growth each year. Revenue grew by only 1 per cent in the first six months of the year. National Express has found it cheaper to walk away from the franchise than to carry on with its commitment to pay £1.4 billion spread over seven and a half years

Why did the Government refuse to renegotiate?

Because it would have sent a message to all the train companies that they could also expect bailouts from the taxpayer. No other franchise is in quite such dire financial trouble as East Coast, although Arriva CrossCountry and Stagecoach South West Trains are also facing big losses. The Government is hoping that, by acting tough with one company, the others will realise they have to weather their losses or risk being kicked out of the rail industry. The risk is that other companies start handing back the keys and the Government ends up having to renationalise half the railway.

How damaging is this for the Government?

It is actually quite a popular move – already welcomed by rail unions and the Liberal Democrats. The alternative of bailing out National Express with taxpayers’ money would have contradicted the Government’s oft-repeated line that it “does not renegotiate franchises”. However, over the longer term, the failure of the franchise raises serious questions about the sustainability of the rail franchising system. Labour inherited the system from the Tories but failed to change it substantially even after repeated failures, including the withdrawal of Connex and the collapse of GNER.

Will the franchise be hard to re-sell?

All the other main operators – First Group, Arriva, Stagecoach and Go-Ahead – will be interested in bidding for a franchise which still has potential for big growth in passengers once the economy begins to recover. However, they are likely to bid much less than National Express.

How much will nationalisation cost the taxpayer?

This will only be known when the franchise has been re-let and we discover how much the new operator is willing to pay to run it. The only certainty is that the winning bid will be much lower than the £1.4 billion National Express had promised to pay. The likelihood is that, over the period to 2015, that the Government will receive at least £500 million less from the East Coast franchise than it had previously assumed. This means there will be less money for investment in the network and plans for electrification of main lines may be put on hold.

National Express says it has not defaulted. The Government says it has. What's the row about?

This is jockeying for position ahead of a potential legal battle between the Government and National Express over whether it should surrender its two other franchises - East Anglia and C2C - which remain profitable.

Under what is known as the "cross-default" clause in rail franchise contracts, a parent company which defaults on the terms of one contract with the Department for Transport can be stripped of all its franchises.

National Express is claiming that it was abiding by its contractual terms even though it was no longer willing to pay the DfT the £1.4 billion. The contract does allow for a company to hand back a franchise in return for surrendering a performance bond, which in the case of East Coast is £32 million.

What is not clear is whether the cross-default clause is triggered simply by the act of handing back one franchise.

This issue could end up being settled in the High Court. If National Express is right, the Government faces the embarrassing prospect of a company holding on to two profitable franchises after having refused to carry on sustaining losses on another. It would suggest that rail companies can enjoy the good times without having to weather the bad times - challenging the whole idea that rail privatisation has resulted in a significant transfer of risk to the private sector.

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