West Coast Main Line deal with FirstGroup scrapped
The decision to award the West Coast Main Line rail franchise to FirstGroup has been scrapped and the government says the bidding process must be rerun.
Ministers say there were "significant technical flaws" in the way the risks for each bid were calculated.
They have also ordered two independent reviews into what happened.
FirstGroup, which beat current operator Virgin Trains to win the 13-year deal, said it had submitted its bid correctly and was "disappointed" at the news.
Writing on his blog, Virgin founder Sir Richard Branson welcomed the move, adding that he was hopeful ministers would "now accept that Virgin Trains should carry on running the West Coast Main Line".
BBC transport correspondent Richard Westcott said the implications of the decision to scrap the deal went much further than just the West Coast Main Line.
There were about 15 rail franchises due to be decided before the next general election and the whole franchising process could now be thrown into doubt, he added.
The August announcement that FirstGroup would take over train services on the line - one of Britain's busiest - in December had sparked a legal challenge from Virgin, which has run the franchise since 1997.
The Department for Transport said because of the decision to rerun the bidding process it would no longer be contesting the judicial review launched by Virgin Trains in the High Court.
And it said an announcement would be made about the suspension of staff while investigations were carried out.
Transport Secretary Patrick McLoughlin described the mistakes made by his department as "deeply regrettable and completely unacceptable".
He said: "A detailed examination by my officials into what happened has revealed these flaws, and means it is no longer acceptable to award a new franchise on the basis of the competition that was held.
"West Coast passengers can rest assured that while we seek urgently to resolve the future arrangements the trains that run now will continue to run with the same drivers, the same staff and timetables as planned."
He said one review would examine how the West Coast franchise competition went wrong, and what lessons could be learned.
The other review would look into the wider Department for Transport rail franchise programme, he added.
'Frank announcement'
FirstGroup said that it had had "no indication" of any problems with the franchising process until it was contacted by the Department for Transport.
"We are extremely disappointed to learn this news, and await the outcome of the DfT's inquiries," the company said.
"The DfT has made it clear to us that we are in no way at fault, having followed the due process correctly. We submitted a strong bid, in good faith and in strict accordance with the DfT's terms."
In a statement, Virgin Trains welcomed what it described as the transport secretary's "frank announcement" that the contest was flawed.
It said: "We are ready to play a full part in assisting the review to help deliver a franchising system that better serves passengers, taxpayers and the interests of all bidders."
Labour MP Louise Ellman, who is chairman of the Commons Transport Select Committee, described it as "absolutely astonishing".
he said: "I'm going to recall the secretary of state and the permanent secretary to the Transport Select Committee, to question them about just what has gone wrong.
"This is really a major issue and a major catastrophe for them."
After learning that his firm had lost the bid in August Sir Richard said he was convinced that civil servants had "got their maths wrong."
He asked that the signing of the contract could be delayed so that the process could be reviewed.
But Justine Greening, who was Transport Secretary at the time, defended what she described as the "robustness of the process".
