Britain to renationalise rail line sparking new row over ownership

* UK scraps East Coast contract with Stagecoach

* Govt to run line for 2-3 years from June 24

* New (KOSDAQ: 160550.KQ - news) franchise will be public-private partnership (Recasts, adds minister comment, union comment)

By Sarah Young

LONDON, May 16 (Reuters) - The British government is renationalising the rail route between London and Edinburgh, taking back the line from a private company after it over-estimated profits, in a step likely to reignite a debate over public ownership of the UK's railways.

The government said on Wednesday it was scrapping the contract with London-listed Stagecoach five years early and would operate the line, which carries 22 million people annually, for 2-3 years before setting up a new public-private partnership.

It is the third time since 2007 that the 393-mile (632 km) flagship route between the English and Scottish capitals has been returned to government hands after contracts failed, giving ammunition to the opposition Labour party which opposes privatisation.

The Labour party has pledged to nationalise industries like rail and water, policies which have been popular in the polls, and which helped Labour deny the pro-privatisation Conservatives a majority government at last year's election.

Transport Minister Chris Grayling tried to appeal to both parties on Wednesday with a promise that after a spell under government control, he would set up a new "partnership between the public and private sectors" to run the line.

The franchising model, also part of the reason for delays on a contract in the London area, has come under fire recently with a cross-party parliamentary committee calling it "broken" in April.

Rail union Unite called for all rail lines to be nationalised.

"It would be best for the economy, the treasury and the hard-pressed rail traveller paying through the nose for their tickets, if ministers blew the whistle on rail privatisation," Unite rail industry officer Hugh Roberts said.

CONTRACT LOSSES

Rail services in Britain were privatised in the 1990s with routes grouped into franchises and operators contracted to run services for a set number of years, promising payments to the government at the same time as making profits for themselves.

Grayling had said late last year that the East Coast franchise run since 2015 by Stagecoach, which owns 90 percent alongside Virgin, would need to end early after lower than forecast passenger numbers led to losses of about 200 million pounds for Stagecoach.

"What's gone wrong is that the parent company offered to pay government more money than it can actually afford, so it's run out of cash, the business has run out of money," Grayling told Sky News.

Grayling said that the scrapping of the contract did not mean that government had lost out, because East Coast had already delivered 1 billion pounds to the public purse, and continued to generate returns, plus passenger satisfaction was high.

The contract will end on June 24, Grayling said, adding that passengers would not be impacted by the ownership change.

Explaining the contract's difficulties in February, Stagecoach said that some of its forecasts for growth on the line were based on enhancements expected to be carried out by state-backed rail infrastructure company Network Rail, but those actions had been either delayed or abandoned.

It said on Wednesday it hoped to continue to play a role in Britain's rail network in the future, and continues to be involved in running other UK rail franchises including the West Coast line between London and Manchester.

The company's shares traded up 1.8 percent after the news.

Grayling said he would review Stagecoach and Virgin's right to operate rail services in Britain once the current East Coast contract was terminated. (Reporting by Sarah Young Additional reporting by Alistair Smout Editing by Hugh Lawson)