Italy is set to pay the UK £140m to avoid being kicked off Britain’s railways – despite running the nation’s most punctual train service.

State-owned Trenitalia, which operates the c2c network linking Essex and the City, is understood to have struck a deal in principle with the UK Government. It will pay the penalties to “stay in the game” as a curtain falls on 25 years of rail franchising.

The finer details of an agreement are currently being thrashed out in tightly-guarded talks, according to industry sources. A Government announcement will be made by the end of January.

Rail franchising, where rail operators pay a fee to the Exchequer in return for collecting fares, was scrapped by Grant Shapps, the Transport Secretary, in September.

Fixed fee contracts will be gradually introduced in their place, along with an outsourcing model similar to that used by the NHS and schools

However, Treasury officials feared that by swapping franchise agreements for outsourcing contracts, loss-making operators could be let off the hook for additional payments owed to the Exchequer. They instructed counterparts in the Department for Transport to collect deposits from the train companies.

The Sunday Telegraph revealed in October that ministers were demanding £500m in so-called “termination payments” from five operators to move onto new contracts called “Ermas”.

The demands sparked anger among some operators, which felt they were being unfairly penalised by the Department for Transport using arbitrary projections of what they owed.

The c2c network has repeatedly been rated Britain’s most punctual train line, a fact that Trenitalia officials felt Whitehall was overlooking. Prior to the pandemic, 83pc of services arrived within one minute of the scheduled time.

Last autumn Trenitalia enlisted Raffaele Trombetta, the Italian ambassador to London, to intervene in the row to find a compromise.

However, insiders said that Trenitalia has now agreed to pay the money in return for the slate to be wiped clean in the future. Replacement contracts will guarantee the Italian operator turns a profit as long as it meets a series of criteria. While returns will be lower, so will the risk, a facet that often favours state-backed operators.

It is understood that Trenitalia has viewed the row over c2c more broadly. The Italian firm is in a joint venture with FirstGroup, the FTSE 250 bus and rail company, to run Avanti west coast, the line previously operated by Sir Richard Branson’s Virgin Group and one of Britain’s few lucrative networks.

FirstGroup was the first to strike a deal on termination payments, agreeing to pay £33m for the troubled South Western Railway network that runs into London Waterloo.

The UK firm is still negotiating with officials over TransPennine Express, however, the train line that runs east to west across the north of England and has suffered similar difficulties to Northern. The latter was brought into direct state-control a year ago after a litany of problems.

Tensions also remain high between Abellio, the Dutch-state operator, and UK Government officials, over termination payments believed to be worth tens of millions of pounds for the Greater East Anglia and West Midlands networks.

A spokesman for the Department for Transport said: “As the Erma termination process is ongoing, it would be inappropriate to comment further on commercial matters at this stage.”

Trenitalia declined to comment.