Rail operator Southeastern has been stripped of its franchise after failing to declare more than £25m of taxpayer funding.
The Department for Transport (DfT) said the money had now been reclaimed.
Transport Secretary Grant Shapps said the Operator of Last Resort would take over the running of rail services in the south east to protect taxpayers’ interests.
Passengers will see no change in day-to-day operations, Southeastern said.
Further investigations are being conducted and the government said it would consider options for more action, including financial penalties.
Mr Shapps said: “We won’t accept anything less from the private sector than a total commitment to their passengers, and transparency with taxpayers.
“Through the Operator of Last Resort we’ll prioritise the punctual, reliable services passengers deserve.”
Labour’s shadow transport secretary Jim McMahon said: “This is yet another example of the complete failure of the franchise model, which prioritises private company profits over passengers and service.”
He called on the government to bring rail franchises back into public ownership, adding that ministers “must acknowledge their previous approach just hasn’t worked.”
Chair of the Transport Select Committee Huw Merriman said he understands that the Serious Fraud Office (SFO) “will be involved”, but the SFO said it would not deny or confirm an interest in the case.
Mr Merriman, who is the MP for Bexhill and Battle, told the BBC: “If this matter is serious enough that it is just beyond someone getting it wrong in terms of accounting, and there is evidence of wrongdoing [of] a criminal nature, of course that must be looked into.
“It’s really important there is integrity in the railway system.
“We need confidence in our railways right now.”
A statement from the DfT said it had found evidence that since October 2014 historical taxpayer funding of £25m, which should have been returned, had not been declared.
The operation of all Southeastern services would transfer from London South Eastern Railway (LSER) to SE Trains Limited on 17 October, the DfT said.
Robin Gisby, chair of SE Trains Limited, said: “This decision doesn’t affect the day-to-day operations of our train services, and we will continue to work hard to provide passengers with a great experience.
“I’d like to reassure all passengers that this is very much business as usual with no immediate changes.”
“All tickets will remain valid after transfer and new tickets can continue to be purchased in the usual way,” a statement on Southeastern’s website said.
Renationalising a line is not unheard of but to do it for a breach of trust is.
Normally it is about whether services are good enough and concerns that an operator can financially honour the terms of the franchise. That’s not the government’s reasoning here.
Contracts between operators and government were in effect ripped up during the pandemic and renegotiated. It looks like this issue was discovered when they were being closely scrutinised.
The question many will have now is if this is viewed as a serious issue, why didn’t the government notice it earlier?
There are still ongoing investigations into what happened.
Rail, Maritime and Transport union general secretary Mick Lynch said: “There now needs to be a forensic examination of all the private rail contracts with those caught cooking the books called to account.
“It’s an outrage that this privatised rail system stumbles on when it could be taken directly into public ownership for public need.
“We have to ensure that the services continue to run and staff are transferred successfully.”
Manuel Cortes, general secretary of the Transport Salaried Staffs Association, said: “The days of rail franchising must now be well and truly over. Time and time again we see the private sector fail and taxpayers ride to the rescue.
“Our union will now be seeking assurances that this mess in no way impacts our members’ jobs because so many of them have been true heroes on the frontline of the pandemic since day one”.
Tony Clayton, chairman of the Sevenoaks Rail Travellers Association, voiced concerns about the long term impact for passengers.
He said: “The reaction was ‘not again’. This is the second time this has happened to us where the Operator of Last Resort has taken over the service. The last time was in 2003 when Connex lost the service.
“What we’d really like to know is what are the government going to do to keep making steady improvements to the service.
“We thought Southeastern did a pretty good job getting the service back to normal and a fantastic job during the pandemic to keep things safe.”
Southeastern, which runs services between London, Kent and East Sussex, is operated by Govia, a joint venture between transport operators Go-Ahead and Keolis.
Go-Ahead shares fell more than 22% in morning trading.
The firm announced Elodie Brian has resigned as group chief financial officer and will be standing down from the board with immediate effect.
Go-Ahead’s chairwoman Clare Hollingsworth said: “We recognise that mistakes have been made and we sincerely apologise to the DfT. We are working constructively with the DfT towards a settlement of this matter”.
Southeastern has been running services since 2006, operating one of the busiest networks in the country including the UK’s first domestic high-speed service.
In 2019 the government held a fresh competition to run the franchise, but this was cancelled over fears it would lead to additional costs “incurred to the taxpayer”.
It employs employs 4,000 workers and serves 180 stations using a fleet of almost 400 trains.
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