Rail franchise fiasco could cost taxpayer more than £100m

A Virgin train on the West Coast line in South Lanarkshire. Sir Richard and his company are being stripped of their franchise (Getty Images)

The total cost to the taxpayer of disastrous failings in the Government's rail franchise programme could exceed £100m, industry experts warned last night, as the Transport Secretary launched an urgent review into the fiasco.

The Department for Transport confirmed that three civil servants had been suspended after Patrick McLoughlin said officials had made a "terrible mistake" in the calculations for deciding who should be awarded the West Coast Main Line franchise.

Mr McLoughlin promised to refund the estimated £40m cost of the bidding process to all the companies involved and announced an urgent inquiry into what had gone wrong.

However, industry sources said the total cost could be far higher. Three more large rail franchises are due to expire in the next few months and bids for those contracts have now been suspended until the franchise review is completed. If ministers are forced to restart those competitions from scratch they will face compensation claims from the companies involved for the work they have already done.

They will also have to negotiate extensions to the existing franchises under what one industry source described as a "very weak bargaining position". "The cost to the Government is likely to be more than £100m," said one source close to the process.

i understands Mr McLoughlin was first made aware of problems in his department's handling of the bid a few days ago, but it was only after getting legal advice on Tuesday that he decided to scrap the process entirely.

However, some reports suggested his predecessor Justine Greening may have been made aware of potential problems before she was moved in the reshuffle. Mr McLoughlin said yesterday that he was "very angry" about what had happened. "The fault of this lies wholly and squarely with the Department for Transport," he said.

In August, with Ms Greening in charge at the DfT, the department announced that a new 13-year franchise for the West Coast had been awarded not to Sir Richard Branson's train company Virgin Rail, which had operated the line since 1997, but to rival transport company FirstGroup. Sir Richard described the franchise process as "flawed" and "insane", and launched a legal challenge.

Speaking yesterday, Sir Richard, above, said he was pleased that they had now acknowledged their mistakes. "We were convinced the process was flawed but despite our best efforts we were met with silence by the Department for Transport," he said.

FirstGroup said it was "extremely disappointed" and the company's chief executive Tim O'Toole said they would bid again for the franchise. "We think we will, once again, put together a winning bid," he told the BBC.