Leak reveals transport funding crisis as east coast mainline nationalised

The full scale of the funding crisis facing Britain’s transport system was exposed today as the country’s most expensive rail contract was nationalised, while details emerged of a potential £30bn spending gap.

A leaked industry memo seen by the Guardian warned of “looming spending cuts” on major transport projects after Department for Transport officials described the consequences of restoring order to public finances. There are now fears that major schemes could be delayed, reduced or scrapped in an expenditure freeze. They include:

• The £16bn Crossrail scheme linking Heathrow airport to Canary Wharf and Essex, which could be delayed.

• A £6bn road building programme including the extension of the hard shoulder on Britain’s motorways, which could be cut.

• A proposed high-speed rail route could be pushed back by a decade.

• The rail fare cap of inflation plus 1% could be lifted, raising fares.

The DfT’s financial constraints were exacerbated as National Express announced it will hand back its £1.4bn east coast contract at the end of the year, the second time in three years that a company has bid more than £1bn for the route and then quit after admitting that it could not afford it. GNER gave up its £1.3bn contract in 2006, only for National Express to place a higher bid less than a year later.

The east coast withdrawal marked a new low in the tense relationship between struggling train operators, who are battling to honour expensive contracts signed before the recession, and the transport secretary, Lord Adonis. He warned that National Express would be barred from the rail market amid uproar that the company was preparing to avoid fulfilling its £1.4bn pledge.

“It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging,” he said. The heavily indebted group also rejected claims by Adonis that it had financial problems and that they had contributed to the sudden departure of its chief executive, Richard Bowker, who shocked colleagues with his resignation shortly before announcement.

It also emerged that the DfT is braced for a reduction in its capital expenditure plans that could total £28.9bn over the next decade. The permanent secretary to the DfT, Robert Devereux, told a private industry conference recently that the chancellor, Alistair Darling, expected the public finances to be brought into line over the next 10 years.

In a presentation described as “very stark” by one person familiar with its contents, Devereux indicated that future growth in capital expenditure would be flat and would no longer include a 1.25% annual increase, limiting the outlay on new projects to £7.4bn per year. A transport industry memo produced after the seminar calculated that without the 1.25% escalator, the DfT would have £28.9bn less to spend than expected on new projects over the next 10 years.

The memo added: “We have been expressing concern for sometime now that spending cuts post-2010 could be significant. What was said at this meeting confirms our worst fears.”

Transport experts said the constraints on capital expenditure could force the government to delay the completion of the £16bn Crossrail project, which will build twin rail tunnels under London, and also to consider road pricing as a means of funding new road schemes.

Stephen Glaister, professor of transport and infrastructure at Imperial College London, said: “Transport is always the department that tends to get the tough end of the cuts because it is capital intensive and you can do short-term cuts without the results being visible for quite a while. And that’s against the picture of a growing market in road and rail. Just to stand still we have to spend a lot of money and that is looking quite unlikely.”

The Office of Rail Regulation, which monitors expenditure on Britain’s rail networks, has admitted that putting together the next five-year budget for the railways will be “tough” due to the state of the public finances.

There is also speculation within the industry that the £3bn-a-year rail budget will have to be propped up by an increase in rail fares above the current regulated limit of inflation plus 1%.

The DfT said the calculations in the memo referred to the department’s “long-term funding guideline” and not to actual budgets, which will be set in the next comprehensive spending review.

“These calculations in no way represent final budgets for the periods referred to and therefore it would be misleading to make assumptions about future spending based on them in isolation,” said a DfT spokesperson. The department added that its £6bn roads programme was “progressing”.

The industry memo warned, however, that a new comprehensive spending review by a Labour or Conservative government will almost certainly target the DfT. It said: “It has historically often seemed less painful to target transport spending, rather than more ‘sensitive’ programmes such as health, education and social security.”

There is widespread speculation within the rail industry that a legal row between the DfT and one of the largest operators, Stagecoach, is driven by the need to conserve funding within the department. Stagecoach is claiming that it is owed at least £200m from its South West Trains contract and has accused officials of behaving inconsistently over the dispute.