TRAIN companies were sent a warning yesterday that unless they improved performance they would be renationalised.

The Strategic Rail Authority stripped Connex of its last remaining rail franchise, South Eastern, after accusing the French-owned company of financial incompetence. For the first time since rail privatisation, the authority will use its powers to take over the running of trains.

The decision sent shockwaves through the industry, which has been transformed in the past two years from a wholly private sector business to one largely back under public control.

The Railway Forum, an industry lobby group, said the ruthless way in which Connex had been removed could derail the process of negotiating new franchises and make investors cautious. Adrian Lyons, the forum’s director general, said: “Companies now know there is a huge risk that the authority will step in and simply tear up the deal.”

Connex will hand the South Eastern network, which carries 120,000 commuters a day from Kent, East Sussex and Surrey to London, to the authority in December. The authority will operate the franchise for at least a year but said it intended to appoint another private operator by 2005.

Richard Bowker, the authority’s chairman, said he had been unwilling to give any more taxpayers’ money to a company which had failed to improve the way it managed its finances. Connex had already received £58 million extra subsidy in December and had been attempting to negotiate a further £150-200 million. He denied that he was making an example of Connex to deter other train companies from trying to squeeze more money from the authority.

In the past year, Mr Bowker has repeatedly stepped in to rescue struggling train companies, including giving £388 million to his old employer Virgin, £70 million to ScotRail and £45 million to Central Trains.

Passenger groups said Mr Bowker’s decision sent a signal to train companies that running a railway was not a licence to print money. Connex said it was considering seeking a judicial review of the decision.

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