The Government has been forced into a humiliating climbdown over its plans to strip Virgin Trains of the franchise to run the West Coast MainLine, which connects the North West to London and Scotland.
The cancelling of the controversial franchise award to FirstGroup was "wholly and squarely" down to a Whitehall fault,Transport Secretary Patrick McLoughlin said today.
Taxpayers will now be forced to fund the £40 million cost of scrapping the process.
Mr McLoughlin pulled the plug on the proposed change early this morning, saying "unacceptable mistakes" were made by the Department for Transport (DfT) in the way it managed the franchise bids from FirstGroup, Virgin and two other companies.
Describing the bidding process as "flawed" and "insane", Sir Richard had launched a legal challenge to the FirstGroup decision.
Having intended to contest the challenge, Mr McLoughlin is now dropping his opposition, cancelling the West Coast franchise competition and ordering two independent inquiries into what went wrong with the West Coast process.
Speaking today, Mr McLoughlin said he was "very angry" about what had happened.
He went on: "The original model didn't take into account inflation and also some elements of the passenger number increases over a number of years," he said.
"I want to make it absolutely clear that neither FirstGroup nor Virgin did anything wrong. The fault of this lies wholly and squarely with the DfT. Both of those two companies acted properly on the advice that they were getting from the Department."
Mr McLoughlin has put on "pause" the bidding process for three other rail franchises.
He added: "I want to make sure what lessons need to be learnt from what went wrong with this have not been repeated in those particular franchises."
Asked how much it would cost to reimburse the costs of the four companies who entered into the bidding process, he replied: "We estimate that to be in the region of about #40 million."
He went on: "I'm not going to apologise for the terrible mistake that has been made by the Department. We need to get to the bottom of what went wrong as far as that is concerned."
He revealed that he had spoken to the parties involved last night, including Sir Richard, saying that what had been found was "deeply regrettable"