The Department for Transport launches two independent inquiries to investigate mistakes made in managing InterCity West Coast franchise
The UK Government has scrapped the multi-billion pound West Coast rail contract awarded to FirstGroup in August.
The Department for Transport (DfT) has admitted making “completely unacceptable mistakes” in how the bidding process was managed.
In a statement released just after midnight, Transport Secretary Patrick McLoughlin said the mistakes uncovered relate to how procurement processes were conducted by officials, and government staff are expected to be suspended as a result.
McLoughlin has now ordered two independent reviews as a result of the fiasco - which he estimates has cost around £40 million – and said his department was entirely at fault.
The inquiries will cover “what went wrong and lessons to be learned” and the wider rail franchise system.
Three other franchises currently up for renewal - Great Western, Essex Thameside and Thameslink – are now on hold pending the outcome of those independent reviews.
McLoughlin said: “I have had to cancel the competition for the running of the West Coast franchise because of deeply regrettable and completely unacceptable mistakes made by my department in the way it managed the process.
“A detailed examination by my officials into what happened has revealed these flaws and means it is no longer possible to award a new franchise on the basis of the competition that was held.
“I have ordered two independent reviews to look urgently and thoroughly into the matter so that we know what exactly happened and how we can make sure our rail franchise programme is fit for purpose.”
He added: “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.
“The tickets that people have booked will continue to be valid and passengers will be able to make their journeys as planned.”
FirstGroup's share price dropped more than 15 per cent in early trading today on the news the West Coast franchise will be re-tendered.
The Aberdeen-based transport group also saw its share price fall more than 12 per cent when it announced it had won the bidding process for the West Coast line in August.
The DfT was blocked from finalising the franchise contract to FirstGroup in August after incumbent Virgin Trains launched legal proceedings to force a judicial review.
In its statement posted in the early hours, the DfT admitted it had uncovered “significant flaws” whilst gathering evidence relating to those High Court proceedings.
The DfT said: “These flaws stem from the way the level of risk in the bids was evaluated.
“Mistakes were made in the way in which inflation and passenger numbers were taken into account, and how much money bidders were then asked to guarantee as a result.
“The department cannot be confident that these flaws would not have changed the outcome of the competition or that any of the four bidders would not have chosen to submit different offers.
"The DfT has spoken to the four bidding companies to inform them of the flaws that the department discovered.
“The DfT will reimburse their bid costs and has assured them that a fresh competition will be started as soon as the lessons of this episode are learned.”
In a statement today, FirstGroup said it was unaware of any problem with the franchising process prior to the DfT's statement.
"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.”
The DfT was due to give evidence in court on Thursday in response to Virgin Trains' application for a judicial review of the bidding process, which the government had publicly contested.
A Virgin Rail Group spokesman said: “We welcome today’s frank announcement by the Secretary of State, acknowledging the flaws in the way the InterCity West Coast competition was assessed and launching a review into franchising more widely.
“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.
“In the meantime, we will assist the Department for Transport in ensuring continuity of service for the millions of customers who depend on train services on the West Coast mainline.”
FirstGroup bid £5.5billion for the rights to run the West Coast line from December 2012 until 2026, rising to £6.1 billion if the franchise carried on through a 20-month extension.
First offered guarantees totalling £265 million to secure the franchise, including £190 million to forfeit if it walked away from the franchise early.
Virgin Rail, a joint venture between Stagecoach and Virgin Group, has run the franchise since 1997.
It bid £4.8 billion to renew its franchise, rising to £5.4 billion for the full term.
The National Union of Rail, Maritime and Transport Workers (RMT) had warned the bid from First would be "an action replay of GNER and National Express", both of which failed to see out their franchise terms on the East Coast line after tabling huge bids to secure the franchises.
First, which agreed to pay premiums of £390 million a year for the West Coast line in comparison to £160 million paid by Virgin Rail, said it would add 12,000 seats and an extra 11 trains to increase services.
Chief executive Tim O'Toole said First's expansion plans for the West Coast line would raise seating capacity by 35 per cent within five years, though the group's bid for the franchise was based on passenger growth of 5.8 per cent each year.
The group said in a trading update on Tuesday like-for-like passenger revenues across its UK rail division are up 8.1 per cent in the first half of the year.