The 13-year four-month franchise was awarded to First Group on August 15, and was due to take over from Virgin Trains on December 9, but was subsequently challenged by unsuccessful bidder Virgin Group. The Department for Transport (DfT) confirmed that it will no longer contest the judicial review of the franchise brought by Virgin Group which was due to start tomorrow in the High Court.

The DfT says the flaws were uncovered during preparation for the High Court hearing and relate to the way the procurement of the franchise was conducted by its officials. Specifically there were flaws in the evaluation of the level of risk in each bid, and mistakes in the assessment of inflation and passenger forecasts, and how much money bidders were asked to guarantee.

"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," McLoughlin says. "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."

The DfT will make an announcement later today regarding the suspension of staff. In the meantime, McLoughlin says he will examine whether Virgin Trains should be asked to continue to operate the franchise or whether the DfT's own team will be brought in to run the West Coast franchise.

McLoughlin confirmed that the four bidders for the franchise – First Group, Virgin Group's joint venture of Virgin and Stagecoach, Abellio, and Keolis/French National Railways – will have their bidding costs reimbursed. McLoughlin told the BBC that this is likely to cost around £40m, with Virgin's share expected to be about £14m. McLoughlin says he has apologised to the bidders and says they were not in any way to blame for the cancellation.

McLoughlin has paused the competitions for the franchises currently underway for Great Western, Essex Thameside and Thameslink, and ordered two independent reviews. The first, which will be overseen by two DfT non-executive directors, Mr Sam Laidlaw, CEO of Centrica, and Mr Ed Smith, former strategy chairman of PricewaterhouseCoopers, will examine what went wrong, with an initial report due by the end of October. The second review will be conducted by the chairman of Eurostar, Mr Richard Brown, who will report by the end of December on whether changes are needed to the way risk is assessed in franchise bids, the bidding and evaluation process, and how to resume passenger rail franchising.

Virgin Group founder Sir Richard Branson appears to have been more than vindicated in his criticism of the way in which the West Coast franchise was assessed and awarded, which he had described as flawed. Up to now, the DfT has insisted that it would fight Branson's claims and stick with its decision to award the contract to First Group. On September 12, McLoughlin told Parliament that he was satisfied that all bids had been considered fairly and with due diligence.

First Group shares plummeted by 20% this morning reducing their value by around £230m and the company says it is considering its position. The DfT could face further claims for compensation if First Group's profitability is affected by not winning the franchise.