Taxpayers helped fund rail buyout

Senior railway executives used British Rail money to buy a maintenance and engineering depot, according to a confidential Whitehall document which officials sought to conceal from the National Audit Office (NAO), the public-spending watchdog. Brian Wilson, Labour's transport spokesman, last night demanded a full investigation by the NAO and called for a halt to further BR sales until it was completed.

The internal DoT memorandum, headed "Restricted - No Copies to be Taken, Not for NAO Eyes", was leaked to Mr Wilson and passed to the Independent. Dated 19 October last year, it reflects anxiety among officials that a confidential departmental report by the accountants Price Waterhouse had uncovered evidence that the management team which bought BR's Eastleigh maintenance depot, near Southampton, had been able to do so using taxpayers' money.

The management buy-out team, Wessex Traincare, paid pounds 7m for the depot, whose accounts showed pounds 5.4m cash reserves, which may not have been known to a rival bidder.

The Price Waterhouse report said: "This is an area where the MBO team had a clear advantage over other bidders who did not appear to have had access to the forecast balance sheet ... It is possible, therefore, that the bids submitted by the other interested parties did not fully take account of the potential cash benefit and provides some grounds for concluding that higher bids could have been achieved."

In June last year, managers at Eastleigh won the battle to buy the depot. It was one of BR's biggest maintenance plants. The only other bidder for Eastleigh was Babcock, which offered pounds 500,000.

Price Waterhouse was commissioned by the department to check the sale had been handled properly. The leaked memo from Mike Fuhr, an official in the department's Railways Privatisation Directorate, is a candid analysis of the auditors' report, including the disclosure that most of the pounds 7m paid for the depot could be funded "from Eastleigh's own current account with [British Railways Board]". Price Waterhouse's report makes clear that while the management team knew of the existence of the cash reserves while the negotiations were being carried out, that "critical issue . . . may not have been known to all bidders". Mr Fuhr accuses BR Vendor Unit of operating "without satisfactory conduct guidelines". He says neither "BR nor West MB [its financial advisers] adequately documented the sales".

In particular, he notes:

"Absence of detailed minutes of discussions with bidders or advisers, a cornerstone of sound commercial practice;

"The decision process in shortlisting the management bid inadequately documented;

"Provision of information to prospective purchasers - audit files incomplete;

"Assessment of bids largely undocumented."

Mr Fuhr writes that the sell-off unit did not follow guidelines covering BR privatisations. He ends by asking "some key questions". These include: "Why were negotiations not completed adequately?" and "Any similar skeletons in other completed sales?"

Jonathan Gibbs, commercial director for Wessex Traincare, said he could not discuss the report and memo.

Mr Wilson said he would today send all the papers marked "Not for NAO Eyes" to the NAO and would be calling for a suspension of all privatisation projects and a full inquiry.

An NAO spokesman said the documents marked "Not for NAO Eyes" would be studied closely. "We intend to do a number of reports into the privatisation of British Rail."

The last time documents emerged from Whitehall headed "Not for NAO Eyes" was during the Pergau dam affair, when officials had grave reservations about the Government's granting of state aid for the dam in Malaysia.