Borders rail plan rocked as top firm pulls out

The move by construction giant Carillion could leave a sole group bidding for the 230 million order to build and maintain the line – the longest new route in Britain.

It comes seven months after one of the other two shortlisted consortia for the project quit the contest following the loss of a key member – American rail firm Fluor.

One source close to the scheme said it would be a "challenge" for Carillion's partners to find a replacement with just months to go before the deadline for final bids.

Another said Carillion was thought to have quit because of "governance issues" with Transport Scotland, the Scottish Government agency in charge of the project.

Labour's Shadow cabinet secretary for infrastructure and capital investment, Lewis Macdonald MSP, said the news was "a major blow" for the project.

It is the latest in a string of setbacks for the 295m project to reopen a 30-mile stretch of the former Waverley line from Edinburgh to Tweedbank, south of Galashiels.

• Scottish government considering options over Borders rail replacement

The planned opening of the route has already been delayed by three years to 2014, which has been blamed on the poor economic climate.

Ministers had also previously promised work would start before last month's Holyrood election, but it will now not get underway until this winter.

There have been lingering doubts about the novel method of funding the project, which has not been used before on the railways.

It will involve the Scottish Government's "non-profit distributing model", a version of the private finance initiative with capped profits.

Unlike almost the entire British rail network, the winning group will be responsible for funding, building and maintaining the line, with ScotRail paying charges for running trains over it.

However, with just 30 miles to cover, the consortium will not benefit from the economies of scale enjoyed by Network Rail, which owns the rest of the rail system.

Opposition parties expressed alarm at the latest development.

Mr Macdonald said: "The more bidders you have got the more chance you have got of getting value for taxpayers' money, so to lose yet another bidder is a real setback. Rail infrastructure operation firms don't come ten-a-penny so these are worrying developments for all those who hoped to benefit from the new service.

"The Scottish Government must make clear how it plans to get the project back on track."

Borders Conservative MSP John Lamont said: "This is clearly very worrying news and could ultimately lead to the cost of this project increasing yet again. Ultimately this extra cost will fall to the taxpayer.

"Many local residents have expressed concerns to me about the viability of this project and fear that it is taking resources away from other public transport, like investment in roads and bus services.

"The news that another contractor is considering withdrawing must suggest that the bidders have concerns about its viability too."

Liberal Democrat transport spokesman Jim Hume said: "We need clarity over where this latest development leaves the project. "This project is vital for the Borders and the SNP has a responsibility to ensure that it is delivered on time."

A source close to the project said: "It is not unusual for joint ventures to change shape through the bidding process, but it is not ideal this close to the end. It would be a challenge for the consortium to find another partner, but it is not insurmountable."

The Scottish Government's Transport Scotland agency, which is in charge of the project, insisted last night that it remained on course for completion in 2014and that such changes were "not uncommon".

However, the agency gave a similar response when Fluor pulled out last year – which led to the consortium it was part of withdrawing from the competition.

Transport Scotland is understood to have "benchmarked" the bids by working out how much Network Rail would have charged for building and maintaining the line, with the target being to undercut this.

However, if the agency is faced with just one bid, this is far less likely to be achieved because of the lack of competition.

The M74 extension contract also saw only one bid being lodged, by a consortium of four major firms – Morrison Construction, Balfour Beatty, Morgan Sindall and Sir Robert McAlpine – clubbing together rather than competing.

For that contract, Transport Scotland is also understood to have calculated a benchmark price, but the final contract value of 445m is thought to have been slightly above this, with the agency paying above the odds in return for a contract it was happy with that transferred all the risks to the contractors.

This appears to have paid off because the Scottish Government announced on Tuesday that the contract would be completed early and up to 20m under budget.

The Borders Railway was a project championed by the Liberal Democrats, for whom the area has been a traditional heartland, and approved with Labour, their former Holyrood coalition partners.

SNP ministers have not reviewed the scheme so far because it is bound by a special clause in the law. A so-called "Mastermind" clause – also known as "I've started so I'll finish" – in the act approving the line was triggered last year when preliminary work started.

In addition, the "non-profit-distributing" approach will see the winning consortium providing funding that will be repaid by the Scottish Government over 30 years rather than requiring the up-front payment of previous schemes.

Carillion has been involved in a range of major Scottish rail projects, such as the Airdrie-Bathgate line, which opened on time and on budget in December. It was part of the IMCD consortium for the Borders contract along with Sir Robert McAlpine and Spanish firm Iridium Concesiones de Infrastructuras.

The other remaining bidder is BAM, which was also involved in the Airdrie-Bathgate line and built the new Riverside Museum in Glasgow, which opens next week.

The third consortium, New Borders Railway, abandoned the race after Fluor quit last November. Its other members were Miller Construction and Uberior Infrastructure Investments, part of Lloyds Banking Group.

A Transport Scotland spokeswoman said: "We remain on target to announce our intention to award the contract to a preferred bidder and for works to be under way in winter 2011. Expected construction completion, with passenger services running, continues to be 2014.

"IMCD has made us aware that one of its consortium members, Carillion, has decided not to continue in the tender competition for the Borders Railway. We await formal confirmation of any proposed changes to its consortium."

The spokeswoman added: "Changes to groupings and consortia during procurement are not uncommon, particularly on large-scale projects where the timescales for tendering and construction are lengthy.

"Our procedures are designed to accommodate this and any changes will ensure, consistent with procurement law, that any restructured group has the requisite capability to remain in the competition."