The government has fined the owner of the former Southeastern franchise a total of £23.5 million after it found that the company had hidden £25 million of lower costs from its HS1 rail service.
Last September, the Department for Transport (DfT) unexpectedly stripped the franchise from London & South Eastern Railway Limited (LSER) and took over operations of the service under its Operator of Last Resort scheme after it said the company had been in a serious breach of its obligations.
The DfT says that it had identified evidence showing that, between October 2014 and March 2020, LSER had deliberately concealed over £25 million of historic taxpayer funding relating to HS1, which should have been returned to the taxpayer. The review also identified evidence of similar behaviour by LSER during its previous franchise agreement that ran from April 2006 to October 2014.
In total (including amounts already recovered), DfT is recovering £64 million from LSER in relation to the franchise agreement contraventions outlined in the penalty notice, other balances identified, adjustments to profit share payments and interest owed.
The latest £23.5 million penalty notice comes on top of the overpaid money that has been recovered.
The £23.5 million fine was going to be higher, at £29.7 million, but the subsequent actions of the company to clean up the mess was considered to be a mitigating factor.
The specifics of the breach relate to the costs of running the HS1 service out of St Pancras station.
To run the service, Southeastern had to pay for track access charges and the HS1 train depot. These were in fact paid by the DfT and the costs passed to Southeastern. Errors in calculating the amounts resulted in the DfT paying £20.5 million more than it should for the track access charges, and £6.5 million for the rail depot.
The franchise operator seems to have known about the mistakes as early as late 2014, and should have reported the correct figures and repaid the money. According to the DfT, they didn’t do this, and in fact, took actions to hide the extra money the company was earning by reallocating it to other areas of the business so that it could report lower profits to share with the DfT.
The whole thing came to light when an error was detected in the accounts by the DfT in July 2020, although at the time they thought it was a minor error that would be recovered anyway due to the way the earlier contracts were structured. However, subsequent investigations by both sides, and an independent committee found far more serious breaches of the franchise agreements, and a later report uncovered even more breaches.
On 28th September, the DfT announced that it was stripping the company of its franchise, and moved it to the government’s Operator of Last Resort (OLR) from the middle of last October.
The OLR maintains the continuity of passenger rail services if a passenger rail franchise terminates and is not immediately replaced. Since OLR took over Southeastern, services have continued as normal and further passenger benefits, including the rollout of Citybeam trains, has continued at pace.
The franchise was operated by a joint venture between Go-Ahead (65%) and Keolis (35%), which also operates Govia Thameslink Railway, consisting of Southern, Thameslink, Great Northern and Gatwick Express services.
The company’s Chief Financial Officer, Elodie Brian resigned over the affair.