Abellio is to be stripped of its ScotRail franchise in 2022, three years early.
The offshoot of Dutch state railways will have its ten-year contract ended three years early in March 2022 after failing to get more money to run the service.
The Scotsman understands Abellio sought a “very substantial uplift” in annual subsidies of some £250 million a year because of the poor economy and major problems such as late-delivered new trains.
Despite complaints about poor punctuality, performance does not appear to have been a factor in the decision, and it is slowly improving.
Transport secretary Michael Matheson said he would now “examine the options” for a new operator, which are uncertain because of the UK government’s ongoing review of the rail franchising system.
Unless that leads to changes, Mr Matheson is likely to have to invite bids for a new franchise, albeit this time the public sector would be allowed to compete against train firms for the first time.
It is the Scottish Government’s single biggest contract.
Abellio UK managing director Dominic Booth condemned Mr Matheson’s decision as the “wrong choice” and warned further improvements were likely to be "delayed or put at risk".
These include new, longer trains on the Glasgow to Gourock, Wemyss Bay, East Kilbride and Barrhead routes, and Edinburgh to Fife and the Borders.
A planned new station at East Linton in East Lothian could be delayed, along with more frequent trains on the Glasgow to Dumfries and Oban/Mallaig line.
Abellio has lost tens of millions of pounds since taking over ScotRail in 2015 and hoped to make a small profit in its revised offer.
New trains delayed
It has been hit by setbacks such as major delays to two new fleets of trains because of problems with manufacturers and refitters.
Only a third of one fleet is in service, a year after it should have been fully operating.
By contrast, the punctuality figure on which ScotRail is measured by ministers has been improving since summer 2018, albeit it is more than 4 percentage points below target, which is not expected to be reached until 2022.
However, punctuality over the latest four-week period – traditionally poor because of fallen leaves which cause slippery rails – is the best for that period for five years.
An industry source told The Scotsman: “It’s clear from this news that Abellio ScotRail had bigger issues with its finances than performance.
"The business has lost tens of millions of pounds and it would be unsustainable for both Abellio and Transport Scotland to see it through its full ten-year term.”
'We must focus on our mission'
In a message to staff, ScotRail managing director Alex Hynes said: “The key reason given by the [Scottish] Government was that, in its view, revising the current contract and carrying it on until 2025 wouldn’t provide value for money for the taxpayer.
“I know this news creates uncertainty for us all, but we must remain focused on our mission.
"There’s no impact on your job or your pay.”
Almost all of ScotRail’s 5,200 staff are expected to transfer to whoever takes over, on their current conditions, as happened when Abellio took over from First in 2015.
Mr Matheson told MSPs: “Any changes to the level of subsidy paid by the government must deliver new benefits for passengers and taxpayers, and whilst there have been improvements in recent years, the proposed changes were not sufficient to justify additional subsidy.
“Of course, the Scottish Government must plan for the future of our rail services, beyond 2022, and work is already under way to examine the options open to us in this regard.”
Scottish Conservatives transport spokesman Jamie Greene said: “Pulling the rug from under the feet of the current operator will do nothing to improve performance, deliver better value for money or encourage future investment in our railways.”
“There are serious questions to be asked of SNP ministers as to how they came to this conclusion and why they think this provides stability or makes financial sense to the taxpayer.”
Scottish Labour transport spokesman Colin Smyth said: “What we now must know is if the Scottish Government intend to make a serious public sector bid for control of ScotRail or whether our railways will be flogged off once more to a foreign-based private company focused only on profit.”
But Mr Booth said: “We are hugely disappointed by this decision and believe it’s the wrong choice for Scotland’s railway and its customers.
“Abellio has invested more than £475million in new and upgraded trains, added 23 per cent more seats for customers and created more than 500 extra jobs in Scotland since the start of the franchise in 2015 - the biggest investment in trains and stations in over 150 years.
“Our offer to Transport Scotland would have delivered an improved service for our customers at a reduced cost to the taxpayer.
“We will remain fully committed to running a safe and reliable service until the end of the contract in 2022.
"While this decision creates unnecessary uncertainty for more than 5,200 staff and our customers, we will maintain our focus on delivering vital projects for Scotland’s Railway and seeing through the delivery of significant customer benefits until 2022.”
Transport Scotland said the current franchise agreement required ministers and Abellio to revisit the level of government subsidy provided for the remaining five years of the contract and to determine whether additional subsidy should be paid, which is known as "rebasing".
It said that following "considerable analysis and careful consideration of the information provided by Abellio ScotRail", ministers had decided the "significant increase in subsidy proposed would not secure delivery of commensurate benefits to passengers, communities and the economy".
It said ministers had served a "no rebasing notice" on Abellio ScotRail.
'Passengers will judge'
Robert Samson, senior stakeholder manager in Scotland for passenger watchdog Transport Focus said: "Over the next two years, passengers will expect a more punctual and reliable railway that improves passenger satisfaction as tracked by our national rail passenger survey.
“It is good to see the government seeking value for money on behalf of passengers, but any change must not result in disruption for them.
“Passengers will judge the success of any future changes to the structure of the railway on how far it meets their priorities for improvement: more punctual and reliable services, more chance of getting a seat and better value for money.”
Kevin Lindsay, Scotland organiser for train drivers' union Aslef, said: ‘We are delighted by the decision announced today because we have argued for a long time that Abellio has been letting down passengers and staff here in Scotland.
"We also welcome the opportunity for a public service provider to bid to run the franchise in two years' time
"We have been campaigning for years for the [Scottish] government to do something about the plight of passengers who use the ScotRail services provided by Abellio.
"Those of us on the front line – ScotRail train drivers and other railway staff – can see every day how the company comes up short.
‘But we are disappointed that the SNP government has not grasped the real problem - and the solution to that problem - and simply taken this opportunity to bring Scotland's railway back into public ownership."