The government must decide whether to hand the route to its state rail arm or let Virgin Trains run it in the interim. Photograph: Christopher Thomond for the Guardian
Why has the Department for Transport scrapped the award of the west coast franchise to FirstGroup?
While gathering evidence to fight Virgin Trains' legal challenge against the decision, the DfT realised it had miscalculated the riskiness of FirstGroup's bid, which included ambitious revenue assumptions towards the end of the 15-year contract. It meant there was a flaw in "how much money bidders were then asked to guarantee as a result". FirstGroup had put up a loan of £190m to underwrite the contract, which would pay out if the franchise had failed. Virgin argued that it should have been about £600m given the ambition of FirstGroup's offer.
What was the difference between the FirstGroup and Virgin Trains bids?
There was a significant difference, although both companies bid enormous sums. FirstGroup was offering the government payments of £13.3bn through to 2027/2028, while Virgin bid £11bn. Passenger numbers were different, too. For instance, FirstGroup was predicting it would carry 66 million passengers a year by 2026, while Virgin forecast 49 million. Clearly FirstGroup was taking a bigger risk and the government has now acknowledged that it miscalculated the reliability of that bet when it awarded the franchise.
How does the franchising process work?
In order to "prequalify" for a franchise, would-be bidders have to prove their credentials as rail operators by submitting evidence of a reliable track record. A shortlist – normally of four names – emerges from this process and they are asked to bid for the contract through an invitation to tender. This bid will include assumptions on passenger numbers and, most importantly, payments to the government on bids for more lucrative routes, such as west coast. The highest bid usually wins, although ministers deny this.
Why did Virgin lose the west coast franchise?
The official line from the DfT was that the FirstGroup bid would deliver "big improvements for passengers", including new passenger satisfaction targets. In truth, a cash-strapped government appeared to settle for the biggest number.
What does this mean for west coast customers?
FirstGroup will no longer take over the London-to-Glasgow route as planned on 9 December. The DfT has assured passengers that tickets booked after then are still valid and that services will run as normal. This is what happened after the collapse of the east coast franchise in 2009 when another bidder that had made vaulting payment pledges, National Express, handed back the keys.
Who will operate the trains when Virgin's contract expires?
The government has two options and it must choose one of them quickly. It either risks public ire by handing the route to its state rail arm, Directly Operated Railways, which also runs east coast, or it takes the easier route of letting Virgin Trains run the route until the franchise is retendered. Sir Richard Branson had offered to do it for free, but there is little chance of that now. The same fate is likely for major franchises due for renewal in 2013, including east coast, Great Western and Thameslink. The government can negotiate extensions from the current operators or take a substantial chunk of the rail network in-house. The west coast fiasco has provided an unexpected fillip for nationalisation advocates.
Will this mean higher fares?
Not immediately, no. But FirstGroup had promised a 15% reduction in standard anytime fares over the first two years of the contract. That pledge has been cancelled, along with the rest of FirstGroup's bid. Longer term, this debacle could have an impact on the taxpayer because if winning franchise bids have to be much lower from now on, the DfT will have to bridge a funding gap that would have been filled by fare revenues.
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