The UK's rail franchising system is a complex, fragmented and "costly muddle", for which passengers will end up paying the price, MPs have warned.
The GNER franchise is struggling to make a profit
The Commons transport select committee said the system was fundamentally flawed and "past its sell-by date".
It warned the government against allowing private firms to "over-bid" for franchises and later using taxpayers' money to bail them out.
Train operators said franchising had brought improvements to rail services.
Under the system, private companies bid to run rail services on routes, with some receiving subsidies to do so but others paying the government a premium.
The system has come under the spotlight after Bermuda-based Sea Containers, the parent company of East Coast Main Line operator GNER, applied for protection against bankruptcy.
GNER, which runs services between London, north-east England and Scotland, is due to pay the government £1.3bn in premiums over 10 years under the original terms of its franchise.
But now the operator is talking to the government about renegotiating its contract - something the select committee believes should not happen with operators who have "over-bid" to win their contracts.
"Were the government to give in to such pressures, the floodgates could be open to many future claims, and taxpayers would be left to foot the bill," the committee said in a report.
It added the drive to extract premiums could result in above-inflation fare increases and a reduction in customer service, investment and innovation.
The committee urged the government to spend money received from operators directly on service improvements and to consult passengers more closely.
It said that often the franchise requirements set by the government were too rigid and hindered improvements.
The MPs said passengers must be the first priority.
The report concluded the UK has the right number and size of train companies, but said there should be better systems for ensuring companies share both the money raised in fares - and the risk of something going wrong.
Committee chairman Gwyneth Dunwoody said the current system was "unsustainable".
She said: "At the end of the day, passengers will pay the price when operators cut service levels or hike fares to pay the premiums, and taxpayers will foot the bill when operators default or walk away from their contracts."
Bob Crow, general secretary of the RMT transport union, said the report was evidence that privatisation was not working.
"The current system has handed guaranteed, risk-free profits to private operators who are demonstrably less efficient than British Rail," he said.
"The huge sums of taxpayers' and fare-payers' money already going into the railways should be spent on improving them, and bringing rail operations back in-house would be a massive step towards ensuring that that happens."
But George Muir, director general of the Association of Train Operating Companies, said franchising was responsible for improvements to rail services.
"There are still a lot of improvements that can be made to passenger services," he said.
"But our railway is the fastest growing in Europe and passenger satisfaction, at 80%, is higher than it has probably ever been."