The UK’s rail franchising system has come to an end, the government has said, as it announced an extended rescue deal for train operators.

Emergency “recovery contracts” will keep the railways running during the pandemic while the industry moves towards a long-term overhaul, in what the government called the biggest shake-up of the network in a quarter of a century.

The Department for Transport (DfT) said the new contracts, which would last six to 18 months and help operators through the Covid-19 crisis, were a better deal for taxpayers, and heralded the end of franchising. However, unions and Labour criticised the move as “papering over the cracks” and handing more money to private firms.

So far the government has spent up to £3.5bn covering train companies’ losses since the pandemic started. It in effect nationalised them in March when rail franchise agreements were suspended. Under the old system, companies bid to run services on routes on multiyear contracts. The rail operators then made payments to the state based on ticket revenue forecasts – but the pandemic has destroyed that business model.

Rail travel decreased to just 5% of pre-pandemic levels during the lockdown in late March and April. Numbers are still only at 30%-40% of those in 2019.

Under the new emergency arrangements, the DfT will continue to cover rail companies’ losses and pay them a fixed fee of up to 1.5% of the operating costs before the pandemic. This is less generous than the previous 2% and more heavily weighted towards performance, such as punctuality, passenger satisfaction and financial performance.

The transport secretary, Grant Shapps, said: “The model of privatisation adopted 25 years ago has seen significant rises in passenger numbers, but this pandemic has proven that it is no longer working.

“Our new deal for rail demands more for passengers. It will simplify people’s journeys, ending the uncertainty and confusion about whether you are using the right ticket or the right train company.”

The complex franchising system was already likely to end following an industry review led by Keith Williams, executive chairman of Royal Mail. The government said it would publish a white paper based on the review’s recommendations when the course of the pandemic becomes clearer.

The new agreements “represent the end of the complicated franchising system, demand more from the expertise and skills of the private sector, and ensure passengers return to a more punctual and co-ordinated railway”, said Williams.

Paul Plummer, the chief executive of the Rail Delivery Group, which represents train companies, said: “These transitional contracts should be a stepping stone to a better railway.”

The shadow rail minister, Tan Dhesi, said the announcement was a welcome admission that privatisation had not worked, but added: “Taxpayers are set to continue paying hundreds of millions of pounds in profit to private rail companies to run the network. This is completely unacceptable. These agreements paper over the cracks of a broken rail system.”

The former transport secretary Lord Adonis said the new regime was “the worst of both worlds: private monopolies with weak state regulation” and a “licence for rail companies to print money at the taxpayers’ expense”.

The RMT union said the deals were simply “reanimating the corpse” of privatisation. The general secretary, Mick Cash, said: “Covid-19 has proved that the private rail companies are a waste of time and money and have no place in a railway that’s fit for the future. It’s time to cut out the middleman.”

FirstGroup said the new measures came into force on Sunday for its South Western Railway, TransPennine Express and West Coast Partnership, which comprises HS2 and Avanti West Coast. Both FirstGroup and Go-Ahead, which operates Govia Thameslink Railway and Southeastern, welcomed the government’s move.