Future Government rail plans have been thrown completely off track after ministers scrapped a deal which would have seen Sir Richard Branson's train company lose its West Coast franchise, which connects London with cities in the West Midlands and the North West.
Sir Richard had mounted a legal challenge to the decision by the Department for Transport (DfT) to award a new 13-year franchise for the West Coast not to Virgin Rail but to rival transport company FirstGroup.
The DfT had intended to contest the matter in court and was still hoping FirstGroup would take over the London to Scotland route as planned on December 9.
But early on Wednesday, in an embarrassing U-turn for the Government, Transport Secretary Patrick McLoughlin said he was cancelling 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".
Mr McLoughlin said the DfT would no longer contest the judicial review and had paused all outstanding franchise competitions pending two independent reviews he has set up.
Sir Richard, who had described the bidding process as "flawed" and "insane", welcomed the decision and said he was hopeful Virgin would carry on running the franchise which it has been operating since 1997. FirstGroup said it was "extremely disappointed" at the news, saying it had submitted "a strong bid, in good faith and in strict accordance with the DfT's terms".
House of Commons Transport Committee chairman Louise Ellman MP said she was "astonished" by the development and said it put the whole franchising process "in disarray". An announcement is expected to be made later on Wednesday about the suspension of Government staff while the department investigations are conducted.
Shadow transport secretary Maria Eagle MP said the West Coast franchise process had been a "fiasco" which had "yet again exposed the shambolic incompetence of this Tory-led Government". Liberal Democrat party president Tim Farron, who is MP for Westmorland and Lonsdale in Cumbria, said "people must be held accountable" for the errors.
Bob Crow, general secretary of the RMT transport union, said: "The whole sorry and expensive shambles of rail privatisation has been dragged into the spotlight this morning and instead of rerunning this expensive circus, the West Coast route should be renationalised on a permanent basis."
DfT permanent secretary 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."