PRESS ASSOCIATION -- Whitehall created a "moral hazard" in its handling of the termination of National Express's East Coast rail franchise, a report by MPs has said.

The Department for Transport (DfT) turned down an offer worth £150 million from National Express to give up the franchise by mutual consent, said the report by the House of Commons Public Accounts Committee.

Instead the department chose to terminate the contract in late 2009, and received £120 million from National Express. The report said the DfT judged that giving up the extra cash would reduce the risk of other train operating companies with loss-making franchises seeking similar deals, but the taxpayer forfeited £30 million.

The department allowed National Express to keep its two other franchises, and told National Express last December that the termination would not be held against the company if it were to bid for future franchises.

The report said: "Since the East Coast termination, other franchises have been in financial difficulty and their holding companies have not sought to hand them back. We are, however, concerned that the department created a moral hazard by allowing National Express to pay a lesser financial penalty through terminating a contract than they would have done by paying £150 million to exit consensually, and by choosing to not hold the termination against National Express in future bids."

The committee added: "The department have potentially incentivised other holding companies with loss-making franchises to terminate, rather than renegotiate, their contract with the department, as they know doing so will cost them less and will not affect their ability to compete for other contracts."

The report also said that the DfT "did not undertake sufficient due diligence" on National Express's bid for East Coast, which was awarded to the company in 2007.

Bob Crow, general secretary of the RMT union, said: "This shocking report once again exposes the financial and operational madness of rail privatisation. Not only were National Express allowed to waltz away from one the country's most prestigious routes without penalty but we now find that it cost the British taxpayer a fortune in the process."

Rail Minister Theresa Villiers said: "This report confirms that Labour failed to do their sums properly when they let the East Coast franchise to National Express in 2007.

They massively overestimated the income that they could expect from the franchise and failed to carry out a proper 'due diligence' check of the ability of National Express to deliver the returns they were predicting in their bid. That ended up costing the taxpayer money when the franchise failed.

"We are pressing ahead with reforms to the franchise system to get better value for money for taxpayers. The department cannot prevent any company from expressing an interest in a franchise competition, but past performance is considered when bids are assessed."