Passengers face years of overcrowded trains and dilapidated rolling stock as plans to expand and upgrade the network are cancelled or put on hold.

A series of big projects are in grave doubt after the collapse of the highest-earning franchise exposed a deepening hole in the rail budget.

National Express East Coast is to be renationalised after the parent company refused to honour a pledge to pay the Department for Transport £1.4 billion in the years to 2015.

The DfT will have to accept a much lower sum when it puts the franchise back out to tender and is likely to be forced to pay up to £500 million a year to other rail companies that have been hit by the recession and can recoup most of their losses from the taxpayer.

As a result the Government may be forced to cancel or scale back plans including the purchase of about 4,000 carriages to expand capacity on commuter routes such as Thameslink and replace ageing intercity trains.

Plans to electrify the Great Western Main Line and the Midland Main Line are likely to be put on hold. Even Crossrail, the £16 billion London project, could be delayed yet again. The Government may also have to abandon its key project to build a 200mph line between London and the West Midlands by the early 2020s.

Lord Adonis admitted to The Times that reduced income from franchises might force the Government to revise its plans but insisted that it would honour existing commitments such as Crossrail and capacity upgrades in Reading and Birmingham.

The Transport Secretary said that renationalising the East Coast service for a year would be cheaper than allowing National Express to continue running it under a revised contract. “If I had done a deal with National Express every other operator would have been outside my door wanting a similar deal,” he said.

Five operators are already exercising clauses in their contracts under which the State pays up to 80 per cent of the shortfall in projected revenues. These clauses come into effect for five more over the next two years. Several also have clauses allowing them to walk away from their franchises without penalty in the last two to three years — just as they were due to start paying very large sums to the DfT.

Professor Stephen Glaister, a transport economist, said: “This is a disaster for the taxpayer. The only reason National Express is handing back the service is because it is not financially viable. The whole sorry episode shows how flawed the rail franchise bidding system has been. It created a win-win situation for companies: bumper profits in the good times and the expectation they could walk away from their commitments in the bad times.”

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