It was a great day for Richard Bowker, the chief executive of National Express. In the morning, his company won a multi-billion pound, eight-year contract to run the east coast main line, the blue-riband train service from London to Edinburgh that is the home of The Flying Scotsman. In the afternoon, his wife gave birth to their second child.

That was just under two years ago — August 14, 2007. To win the east coast, National Express promised to pay back £1.4 billion in premiums to the government over the life of the franchise. Bowker was adamant he hadn’t overpaid.

“There is no point in being a hero for one day and then a villain for the next seven years,” he told The Sunday Times. “If we sign up to something, we will deliver it. The deal is good value for our shareholders and good value for the taxpayer. . . we were not prepared to win at any price and that guided our bidding strategy.”

Bowker’s words have come back to haunt him. Last week, after months of mounting losses and tense negotiations with the government, National Express’s east coast contract finally blew up.

It was a messy end. The company said in a stock exchange announcement first thing on Wednesday that it would give up the contract later this year. This would not affect its other two UK rail franchises, East Anglia and C2C. Bowker, it added, had resigned.

Lord Adonis, the transport secretary, snapped back terrier-like, rushing on to the Today programme to insist that he was in fact taking the service off National Express by renationalising it, and warning that the company might yet lose the other two operations. National Express executives were furious, pointing out that the franchise had not been taken off them and that Adonis’s officials had been negotiating with them behind the scenes.

It was an unedifying affair, one that obscured deeper questions about the root cause of the debacle and the wider state of the railways.

While National Express may have overpaid, the row with the government exposed the shortcomings of a system that judged companies only on the amount of money they were prepared to pay back to the exchequer.

Industry insiders said it was a recipe for just the kind of turmoil experienced on the east coast and ensured that companies ran routes only for the short term, not putting in the investment that would ensure long-term improvements.

Sir Richard Branson, founder of Virgin Rail, said ministers should use the re-letting of the east coast contract “as an opportunity to look again at the franchise system and ensure that some level of innovation, financial robustness and quality is built in.” Stagecoach’s Brian Souter, Branson’s partner in Virgin Rail, accused the Department for Transport (DfT) of being “either dysfunctional or deceitful”.

As for National Express, it now faces an uncertain future. A much-needed £400m rights issue to rebuild its balance sheet remains blocked by the continued uncertainty over its remaining rail businesses. Its rivals have already scented blood, with FirstGroup, another quoted bus and rail company, lodging an informal bid a fortnight ago. Much now depends on the attitude of Spain’s Cosmen family, the group’s biggest single shareholders, with a near 20% stake.

When John Major decided to press ahead with the controversial break-up and privatisation of British Rail in 1996, most thought it an industry in decline and BR simply a black hole for money.

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