West coast mainline rail contract halted in shock move

The future running of one of Britain's most prestigious and lucrative rail services, the west coast mainline, was thrown wide open after the transport secretary, Patrick McLoughlin, announced that the competition had been cancelled following the discovery of significant technical flaws in the franchise process.

The news could potentially put other franchises due to be settled in the next two years on hold and will raise questions over the whole system, with unions and Labour considering calling for renationalisation.

The shock move means that the Department for Transport will no longer be awarding a franchise contract when Virgin's current one expires on 9 December, and will not contest the judicial review that Sir Richard Branson's firm sought in the high court.

In a climbdown that appears to vindicate Virgin's angry reaction to losing the franchise on 15 August, the DfT has indicated key staff will be suspended, apparently for incorrectly calculating the risk involved in the winning bid.

A spokesman for FirstGroup, which had been awarded the franchise, said: "We are extremely disappointed to learn this news and await the outcome of the DfT's inquiries. The DfT have 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.

"Our bid would have delivered a better deal for west coast passengers, the taxpayer and an appropriate return for shareholders."

The DfT said it had uncovered serious flaws in the procurement process. FirstGroup's winning bid, with payments heavily loaded towards the back end of the 13-year franchise, offered premiums far in excess of the bond it was offering as security. Virgin had described the winning bid as a recipe for bankruptcy.

An investigation will be conducted by the department, which is likely to speed ahead with plans to pass the running of the west coast line into the hands of state-owned company Directly Operated Railways to ensure that train services continue uninterrupted.

McLoughlin said passengers would continue to be served by the same trains and frontline staff. The transport secretary has ordered two independent reviews to be undertaken urgently: the first into what went wrong with the West Coast competition and the lessons to be learned, the second into the wider DfT rail franchise programme.

McLoughlin has asked officials to examine the options for the operation of the service after 9 December taking into account procurement and competition law. Meanwhile he has frozen all other outstanding franchise competitions – Great Western, Essex Thameside and Thameslink – pending the independent reviews, which the Dft hopes will ensure future competitions are robust.

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."

The most senior civil servant at the department, Philip Rutnam, said: "The errors exposed by our investigation are deeply concerning. They show a lack of good process and a lack of proper quality assurance.

"I am determined to identify exactly what went wrong and why, and to put these things right so that we never find ourselves in this position again."

The first independent review will be overseen by Centrica chief executive Sam Laidlaw and former PricewaterhouseCoopers strategy chairman Ed Smith, to work out what went wrong with the award of the west coast franchise. The second review, to be undertaken by Eurostar chairman Richard Brown, will examine the wider rail franchising programme and look in detail at whether changes are needed to the way risk is assessed and to the bidding and evaluation processes, and at how to get the other franchise competitions back on track.

The Dft said it found evidence of significant flaws as its officials were gathering evidence in preparation for legal proceedings.

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 said it could not 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 four bidding companies – First, Virgin, Keolis-SNCF and Abellio – will all be compensated, and have been assured a fresh competition will be started.