Transport secretary ‘was not told of plan to settle rail dispute’

Department for Transport officials did not tell the then transport secretary about a plan that could have prevented a costly legal dispute between rail operators and the government, the high court has heard.

Stagecoach and other rail firms are seeking tens of millions of pounds in compensation in a claim that could have far-reaching implications for a privatised rail system that lawyers acting for the firms said was “in crisis”.

The rail company Arriva settled with the government over the East Midlands franchise on the eve of the trial but the case went ahead on Monday. A court heard that the DfT was responsible for a “long series of missteps and mistakes” when it was run by Chris Grayling between July 2016 and July 2019.

Stagecoach had been bidding for the Southeastern, East Midlands and West Coast franchises, the latter in partnership with Virgin and the French state rail firm, SNCF.

The lawsuit revolves around the department’s decision to exclude the bids last year because the rail companies would not promise to fund enough of any future increase in the railways pension scheme deficit, currently estimated at £7.5bn.

Lawyers for the West Coast Partnership said the DfT realised the government needed to shoulder more financial risk to make the franchises financially viable for private firms.

Jason Coppel QC, acting for the train operators, said the Treasury had initially refused to agree to a DfT proposal that the government share the cost of multiple future pension scheme revaluations. Because the train companies would not agree to share risks they could not predict, their bids were deemed non-compliant with the franchise process.

DfT officials realised at this point that they had “non-compliant bids that were believable and compliant bids that were unbelievable”, the court heard.

The Treasury subsequently agreed to share the risk of more potential pension deficit increases, said Coppel, but officials from the DfT did not tell Grayling.

Coppel also criticised the DfT over the volume of trial evidence that has been declared a commercial secret, accusing the department of hiding information that was “embarrassing” rather than confidential.

He said DfT officials were used to a culture that was “highly resistant to openness and accountability”.

The combination of a broken rail franchising system, the rail pension deficit and secrecy in the DfT had been an “accident waiting to happen”, he said.

A spokesperson for Arriva UK Trains said: “We can confirm that we have agreed a settlement on terms confidential to both parties and, as a result, have withdrawn our claim.”

The outcome of the case could potentially lead to multimillion-pound compensation payouts and two completed franchise competitions being declared invalid, threatening awards to Abellio on East Midlands and First-Trenitalia on West Coast.

The DfT said it could not comment on an active legal case.